Internal Revenue Bulletin 2019-31 (PDF rendition): IRS Notices

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Bulletin No. 2019–31
July 29, 2019
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.
EMPLOYEE PLANS
NOT 2019-44, page 489.
This notice sets forth updates on the corporate bond month-
ly yield curve, the corresponding spot segment rates for July
2019 used under § 417(e)(3)(D), the 24-month average seg-
ment rates applicable for July 2019, and the 30-year Trea-
sury rates, as reflected by the application of § 430(h)(2)(C)
(iv).
INCOME TAX
T.D. 9862, page 477.
The final regulations adopt proposed regulations providing
that if a corporation makes a tax-free distribution of the stock
of another corporation and the property of one of the cor-
porations becomes the property of a real estate investment
trust, gain must be recognized, and taxed at the corporate
level, in an amount approximating the amount that would
have been recognized if the corporation had disposed of the
property in a taxable sale, exchange, or distribution. The final
regulations also adopt a proposed limitation providing that
the gain immediately recognized by a corporation engaging
in certain tax-free distributions and a later conversion trans-
action will be limited to gain on property traceable to the
distribution.
NOT 2019-27, page 484.
This Notice provides methods for calculating W-2 wages
for purposes of section 199A(g)(1)(B)(i), which, for certain
specified agricultural or horticultural cooperatives provides
a limitation based on W-2 wages to the amount of a deduc-
tion under section 199A(g)(1)(A) of 9 percent of the lesser of
qualified production activities income or taxable income of a
Specified Cooperative.
NOT 2019-43, page 487.
Beginning of Construction for Sections 45 and 48; Tolling
and Extension of Continuity Safe Harbor to Mitigate Signif-
icant National Security Concerns. This notice updates and
clarifies the guidance provided in prior IRS notices regarding
the beginning of construction for sections 45 and 48. Spe-
cifically, the notice provides that the Continuity Safe Harbor
may be tolled and extended in certain limited circumstances
involving significant national security concerns.
REG-105474-18, page 493.
These proposed regulations provide rules regarding the
determination of ownership in a passive foreign investment
company (“PFIC”) and the treatment of certain income re-
ceived or accrued by a foreign corporation and assets held
by a foreign corporation for purposes of determining wheth-
er it is a PFIC, including guidance concerning the qualifying
insurance corporation rules. The regulations affect United
States persons with direct or indirect ownership interests in
certain foreign corporations.
REG-118425-18, page 539.
The proposed regulations provide guidance: (1) to a patron of
a cooperative to which subchapter T applies on the income
from that cooperative the patron can use to calculate the pa-
tron’s qualified business income deduction under § 199A(a),
(2) on a patron’s reduction under § 199A(b)(7) of the patron’s
§ 199A(a) deduction in a taxable year in which the patron
receives a specific type of payment from a specified agricul-
tural or horticultural cooperative, and (3) on the deduction for
domestic production activities under § 199A(g) available to
specified agricultural or horticultural cooperatives and their
patrons. The proposed regulations also define patronage and
nonpatronage under § 1388.
Finding Lists begin on page ii.

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Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing of-
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This part includes rulings and decisions based on provisions
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July 29, 2019 Bulletin No. 2019–31

Part I.
26 CFR 1.337(d)-7
T.D. 9862
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Certain Transfers of Property to Regulated
Investment Companies [RICs] and Real
Estate Investment Trusts [REITs]
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains
final regulations effecting the repeal of
the General Utilities doctrine by the
Tax Reform Act of 1986 and preventing
abuse of the Protecting Americans from
Tax Hikes Act of 2015 (PATH Act). The
final regulations impose corporate-lev-
el tax on certain transactions in which
property of a C corporation becomes the
property of a REIT. The final regulations
affect RICs, REITs, C corporations the
property of which becomes the property
of a RIC or a REIT, and their sharehold-
ers.
DATES: Effective Date: These regulations
are effective on June 7, 2019.
Applicability Dates: For dates of applica-
bility, see §1.337(d)-7(g)(2)(ii).
FOR FURTHER INFORMATION CON-
TACT: Austin Diamond-Jones, (202) 317-
5363 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to 26 CFR part 1 under section 337(d) of
the Internal Revenue Code (Code).
In General Utilities & Operating Co.
v. Helvering, 296 U.S. 200 (1935), the Su-
preme Court held that corporations gener-
ally could distribute appreciated property
to their shareholders without the recogni-
tion of any corporate-level gain (General
Utilities doctrine). Beginning with legis-
lation in 1969 and culminating in the Tax
Reform Act of 1986, Public Law 99-514
(100 Stat. 2085), Congress repealed the
General Utilities doctrine by enacting sec-
tion 336(a) to apply gain and loss recog-
nition to liquidating distributions. Section
337(d) directs the Secretary of the Trea-
sury (Secretary) to prescribe regulations
that are necessary or appropriate to carry
out the purposes of General Utilities re-
peal, including “regulations to ensure that
such purposes may not be circumvented
through the use of any provision of law or
regulations (including . . . part III of this
subchapter) or through the use of a regu-
lated investment company, real estate in-
vestment trust, or tax exempt entity. . . .”
On June 8, 2016, the Department of the
Treasury (Treasury Department) and the
IRS published temporary regulations (TD
9770) under section 337(d) (Temporary
Regulations) in the Federal Register (81
FR 36793) effecting the repeal of the Gen-
eral Utilities doctrine as applied to certain
transfers of property to RICs and REITs.
A notice of proposed rulemaking (REG-
126452-15) was published in the Federal
Register (81 FR 36816) on the same day
(2016 Proposed Regulations). The text of
the Temporary Regulations served as the
text for part of the 2016 Proposed Reg-
ulations, which also included an amend-
ment not included in the Temporary Reg-
ulations. A correction to the Temporary
Regulations was published in the Federal
Register (81 FR 41800) on June 28, 2016.
In response to the 2016 Proposed Reg-
ulations, the Treasury Department and the
IRS received one written comment and
a letter addressed to the Secretary by the
Chairmen and Ranking Members of the
Ways and Means Committee of the U.S.
House of Representatives and the Finance
Committee of the U.S. Senate (Letter).
The comment requested a public hearing,
which was held on November 9, 2016.
After consideration of the written com-
ment, the Letter, and comments made at
the public hearing, the Treasury Depart-
ment and the IRS adopted the 2016 Pro-
posed Regulations, in part, in final regula-
tions (TD 9810) published in the Federal
Register (82 FR 5387) on January 18,
2017 (2017 Final Regulations). The 2017
Final Regulations adopted a definition of
the term “recognition period” consistent
with the definition used in section 1374(d),
regarding S corporations, and amended
and removed corresponding provisions in
the Temporary Regulations. The preamble
to the 2017 Final Regulations indicated
that the Treasury Department and the IRS
would continue to study other issues ad-
dressed in the Temporary Regulations and
the 2016 Proposed Regulations.
Executive Order 13789 (E.O. 13789),
issued on April 21, 2017, instructed the
Secretary to review all significant tax
regulations issued on or after January 1,
2016, and to take concrete action to al-
leviate the burdens of regulations that (i)
impose an undue financial burden on U.S.
taxpayers; (ii) add undue complexity to
the Federal tax laws; or (iii) exceed the
statutory authority of the IRS. E.O. 13789
further instructed the Secretary to submit
to the President within 60 days an interim
report identifying regulations that meet
these criteria.
Notice 2017-38 (2017-30 I.R.B. 147
(July 24, 2017)) included the Temporary
Regulations in a list of eight regulations
identified by the Secretary in the interim re-
port as meeting at least one of the first two
criteria specified in E.O. 13789. In partic-
ular, Notice 2017-38 mentioned a concern
raised by commenters that the Temporary
Regulations “could result in over-inclu-
sion of gain in some cases, particularly
where a large corporation acquires a small
corporation that engaged in a Section 355
spinoff and the large corporation subse-
quently makes a REIT election.” See also
Executive Order 13789—Second Report
to the President on Identifying and Re-
ducing Tax Regulatory Burdens (Second
Report), 82 FR 48013 (October 16, 2017)
(stating that the Treasury Department and
the IRS “agree that the temporary regula-
tions may produce inappropriate results in
some cases”). In response to comments re-
ceived addressing the Temporary Regula-
tions and the 2016 Proposed Regulations,
Bulletin No. 2019–31 477 July 29, 2019

the Treasury Department and the IRS pub-
lished a notice of proposed rulemaking
(REG-113943-17) addressing the poten-
tial over-inclusion of gain in the Feder-
al Register (84 FR 11259) on March 26,
2019 (2019 Proposed Regulations). A cor-
rection to the 2019 Proposed Regulations
was published in the Federal Register (84
FR 18999) on May 3, 2019. One substan-
tive comment was received in response to
the 2019 Proposed Regulations.
Summary of Comments and
Explanation of Revisions
This Summary of Comments and Ex-
planation of Revisions discusses the com-
ments received in response to the 2016
Proposed Regulations, Notice 2017-38,
and the 2019 Proposed Regulations. How-
ever, certain comments received in re-
sponse to the 2016 Proposed Regulations
and Notice 2017-38 were addressed in the
Explanation of Provisions in the preamble
to the 2019 Proposed Regulations and are
not repeated in this Summary of Com-
ments and Explanation of Revisions.
I. Consideration of Limitation for
Planned Transactions
Under proposed §1.337(d)-7(c)(6), a
C corporation described in paragraph (f)
(1) of that section would be treated as hav-
ing made an election under §1.337(d)-7(c)
(5) (deemed sale election) with respect to
a conversion transaction if (i) the conver-
sion transaction occurs following a relat-
ed section 355 distribution (as defined in
paragraph (f)(1)(i) of that section), and
(ii) the C corporation has not made such
election (automatic deemed sale rule).
Proposed §1.337(d)-7(f)(1) would provide
that the automatic deemed sale rule (or the
corresponding rule in paragraph (b)(4) of
that section) applies to a C corporation if
(i) the C corporation engages in a conver-
sion transaction involving a REIT during
the twenty-year period beginning on the
date that is ten years before the date of a
related section 355 distribution and (ii) the
C corporation engaging in the related sec-
tion 355 distribution is either the distribut-
ing corporation or the controlled corpora-
tion (as those terms are defined in section
355(a)(1)), or a member of the separate af-
filiated group (as defined in section 355(b)
(3)(B)) (SAG) of the distributing corpora-
tion or the controlled corporation. A con-
version transaction occurs through (i) the
qualification of a C corporation as a RIC
or a REIT, or (ii) the transfer of property
owned by a C corporation to a RIC or a
REIT. Section 1.337(d)-7(a)(2)(ii).
One commenter recommended that the
automatic deemed sale rule apply only if
the conversion transaction and the related
section 355 distribution are carried out
as part of the same plan. To facilitate the
identification of such a plan, the comment-
er requested a two-year presumption rule.
Under that rule, (i) a conversion transac-
tion completed within two years of a relat-
ed section 355 distribution would be pre-
sumed to have been carried out as part of a
plan that included the related section 355
distribution, and (ii) a conversion transac-
tion not completed within two years of a
related section 355 distribution would be
presumed not to have been carried out as
part of such a plan. The commenter also
recommended additional provisions simi-
lar to the section 355(e) safe harbor rules
and the section 707(a)(2)(B) disguised
sale rules.
The Treasury Department and the IRS
agree that the automatic deemed sale rule
could apply to a conversion transaction
and related section 355 distribution car-
ried out as part of the same plan, but they
have determined that the text and purpos-
es of sections 355(h) and 856(c)(8) do
not require the existence of a plan. Those
provisions, as added by section 311 of the
PATH Act, enacted as Division Q of the
Consolidated Appropriations Act, 2016,
Public Law 114-113 (129 Stat. 2422),
prevent the circumvention of General
Utilities repeal and apply without regard
to the existence of a plan that includes
both a related section 355 distribution
and a conversion transaction. Under sec-
tion 355(h), a distribution of the stock of
a controlled corporation does not qualify
for tax-free treatment under section 355(a)
if either the distributing corporation or the
controlled corporation (but not both) is a
REIT. The section 856(c)(8) limitation on
eligibility for REIT elections focuses on
the ten-year period (rather than a two-year
period) beginning on the date of a distri-
bution to which section 355 (or so much
of section 356 as relates to section 355)
applies. In addition, the Treasury Depart-
ment and the IRS have determined that
the introduction of a plan concept (as well
as the recommended safe harbor and an-
ti-abuse rules) into the automatic deemed
sale rule would substantially increase the
rule’s complexity, and thereby reduce its
effectiveness and predictability.
II. Time Period between Conversion
Transaction and Related Section 355
Distribution
As described in part I of this Sum-
mary of Comments and Explanation of
Revisions, application of the automat-
ic deemed sale rule depends in part on
whether a C corporation engages in a
conversion transaction involving a REIT
during the twenty-year period beginning
on the date that is ten years before the date
of a related section 355 distribution. See
proposed §1.337(d)-7(c)(6). A comment-
er requested that these final regulations
reduce that twenty-year period to a ten-
year period. The commenter relied upon
§1.337(d)-7(b)(2)(iii), which incorporates
the five-year recognition period described
in section 1374(d)(7)(A) specifically for
purposes of applying the rules of section
1374 and the regulations thereunder. The
commenter noted that the PATH Act had
reduced the ten-year period historically
required under section 1374(d)(7)(A) to
the current five-year period, and asserted
that the automatic deemed sale rule should
employ a five-year recognition period,
both before and after a related section 355
distribution, to maintain consistency with
the recognition rules specific to section
1374.
The Treasury Department and the IRS
recognize the commenter’s preference for
consistency. However, they have conclud-
ed that section 1374 treatment does not ad-
equately implement the purposes of Gen-
eral Utilities repeal if a taxpayer effects a
tax-free separation of REIT-qualifying as-
sets from non-qualifying assets in a section
355 distribution and the REIT-qualifying
assets become the assets of a REIT. See
preamble to the Temporary Regulations
(81 FR at 36795). As an example, the REIT
and its shareholders may realize the ben-
efit of appreciation on converted property
without a transaction that is taxable at the
corporate level. See id. at 36795-6. More-
over, without a section 355 distribution, a
July 29, 2019 478 Bulletin No. 2019–31

Bulletin No. 2019–31 479 July 29, 2019
taxpayer generally could not separate RE-
IT-qualifying assets from non-qualifying
assets and cause one corporation to hold
the REIT-qualifying assets and another cor-
poration to hold the non-qualifying assets
except by means of a taxable transaction.
See id. at 36796. Consequently, the Trea-
sury Department and the IRS have con-
cluded that a five-year recognition period
provided specifically for section 1374 and
its underlying regulations should not affect
the length of the recognition period for the
automatic deemed sale rule.
The Treasury Department and the IRS
have concluded that the ten-year eligibil-
ity limitation regarding REIT elections
under section 856(c)(8) provides a more
appropriate safeguard for General Utili-
ties repeal, and supports the twenty-year
recognition period in proposed §1.337(d)-
7(f)(1)(i). In general, section 856(c)(8)
provides that a corporation may not elect
REIT status during the ten-year period
following a distribution qualifying under
section 355 if such corporation was the
distributing corporation or the controlled
corporation in that distribution. When
describing existing law prior to the en-
actment of section 856(c)(8), the staff of
the Joint Committee on Taxation observed
that, following a section 355 distribu-
tion, “income from the assets held in the
REIT is no longer subject to corporate
level tax (unless there is a disposition of
such assets that incurs tax under the built
in gain rules).” See Staff, Joint Commit-
tee on Taxation, Technical Explanation of
the Protecting Americans from Tax Hikes
Act of 2015, House Amendment #2 to the
Senate Amendment to H.R. 2029, JCX-
144-15, at 170 (2015). Consequently, to
ensure the continuing integrity of Gener-
al Utilities repeal, the Treasury Depart-
ment and the IRS have concluded that the
twenty-year period described in proposed
§1.337(d)-7(f)(1)(i) would provide a more
appropriate recognition period.
III. Application of Automatic Deemed
Sale Rule to Predecessors and
Successors
Proposed §1.337(d)-7(f)(2) would pro-
vide that, for purposes of identifying C cor-
porations to which the automatic deemed
sale rule could apply, “any reference to a
controlled corporation or a distributing
corporation includes a reference to any
predecessor or successor of such corpora-
tion.” The terms “predecessor” and “suc-
cessor” would “include corporations which
succeed to and take into account items
described in section 381(c) of the distrib-
uting corporation or the controlled corpo-
ration, and corporations having such items
to which the distributing corporation or the
controlled corporation succeeded and took
into account.” Proposed §1.337(d)-7(f)(2).
Commenters have expressed concern that
the word “include” will create uncertainty
regarding the scope of the terms “prede-
cessor” and “successor” and consequently
would cause difficulties in performing due
diligence. As a result, these commenters
have requested that the word “include” be
clarified or otherwise limited.
The Treasury Department and the IRS
acknowledge these concerns, particularly
those regarding due diligence burdens, but
have determined that proposed §1.337(d)-
7(f)(2) strikes an appropriate balance be-
tween providing sufficiently predictable ap-
plication of the automatic deemed sale rule
and preventing avoidance of that rule. The
application of predecessor and successor
concepts to distributing corporations and
controlled corporations in the 2016 Pro-
posed Regulations, extended to members
of the SAGs of those corporations in the
2019 Proposed Regulations, limits the po-
tential avoidance of the automatic deemed
sale rule. The Treasury Department and the
IRS have determined that the language of
proposed §1.337(d)-7(f)(2) will provide
sufficient certainty regarding the scope of
the terms “predecessor” and “successor,”
particularly in light of the 2019 Proposed
Regulations’ policy of ensuring that gain
will be recognized “only on property that
is traceable to the section 355 distribution.”
Preamble to 2019 Proposed Regulations
(84 FR 11261). Moreover, the distribution
property limitation will reduce uncertainty
as to the consequences of a determination
that a corporation is a predecessor or suc-
cessor.
IV. Application to SAG Members
of Distributing and Controlled
Corporations
One commenter contended that the
2016 Proposed Regulations should not
apply to a member of the SAG of the dis-
tributing corporation or the controlled cor-
poration because corporate-level taxation
would not be avoided in such a situation
unless the stock of the SAG member itself
were distributed in a section 355 distri-
bution. The Treasury Department and the
IRS have determined that corporate-level
taxation could be avoided regardless of
whether the stock of the SAG member
were distributed.
As an example, a distributing corpora-
tion owns all of the stock of a controlled
corporation, the sole assets of which
consist of all of the stock in a subsidi-
ary that owns only real estate assets. The
distributing corporation distributes all of
the controlled corporation stock in a dis-
tribution qualifying under section 355.
Within ten years thereafter, the subsidi-
ary elects REIT status. During the year
following the election, the controlled
corporation merges downstream into the
subsidiary in a reorganization described
in section 368(a), with the subsidiary
surviving. Section 856(c)(8) would not
apply to that transaction because the
subsidiary was not a distributing corpo-
ration, a controlled corporation, or a suc-
cessor to either corporation at the time of
the REIT election (although the subsidi-
ary subsequently becomes a successor to
the controlled corporation as a result of
the merger). Accordingly, the Treasury
Department and the IRS have determined
that the application of the automatic
deemed sale rule to SAG members of the
distributing corporation or a controlled
corporation would further the intent of
Congress to prevent avoidance of Gener-
al Utilities repeal.
V. Scope of, and Exclusions to, the
Automatic Deemed Sale Rule
A. Two-Year Requirement for Post-
Distribution Distributing and
Controlled REITs
Proposed §1.337(d)-7(f)(3)(i) would
preclude application of the automatic
deemed sale rule if the distributing corpo-
ration and the controlled corporation are
both REITs immediately after the related
section 355 distribution and at all times
during the two-year period thereafter.
Commenters have requested the elimina-
tion of the two-year requirement.

July 29, 2019 480 Bulletin No. 2019–31
The Treasury Department and the
IRS have concluded, however, that the
two-year requirement would appropri-
ately limit potential avoidance of pro-
posed §1.337(d)-7(f)(3)(i). The two-year
requirement is designed to protect the
purposes of the PATH Act, and therefore
General Utilities repeal, by ensuring that
distributing corporations and controlled
corporations that pursue the exception
provided by section 355(h)(2)(A) contin-
ue to operate for a substantial duration
as REITs. The Treasury Department and
the IRS acknowledge concerns raised by
commenters regarding the risk of inadver-
tent terminations of REIT status during
this initial two-year period. However, sec-
tion 856 provides opportunities for a REIT
to cure an inadvertent technical failure to
comply with that section’s requirements
without loss of REIT status. See, for ex-
ample, sections 856(c)(6), (c)(7), and (g)
(5) (election of REIT status terminates for
failure to meet REIT requirements unless
failure is due to reasonable cause and not
due to willful neglect). Consequently, the
Treasury Department and the IRS do not
believe that the two-year requirement
would cause the distributing corporation
or the controlled corporation to recognize
gain as a result of inadvertent noncompli-
ance.
B. Consideration of Exclusion Involving
REITs and Qualified REIT Subsidiaries
A commenter requested that the auto-
matic deemed sale rule not apply to certain
section 355 distributions within corporate
groups, after which the corporate parent of
the distributing corporation and the con-
trolled corporation elects REIT status, and
the distributing corporation, the controlled
corporation, or both become qualified
REIT subsidiaries (QRS).
The Treasury Department and the IRS
decline to adopt this proposed exception
to the automatic deemed sale rule based
on the determination that such excep-
tion would create opportunities for cir-
cumventing General Utilities repeal. For
example, a section 355 distribution of a
controlled corporation that will be a QRS
following the parent’s election of REIT
status could be used to reduce the value
of the distributing corporation in order
for such corporation to be a taxable REIT
subsidiary following its parent’s election
of REIT status, even though, without such
a reduction, the value of the distributing
corporation would cause the parent to fail
the requirement of section 856(c)(4)(B)
(ii). In addition, the Treasury Department
and the IRS note that, if the distributing
corporation or the controlled corporation
had liquidated (or had been deemed to
liquidate) prior to the parent’s REIT elec-
tion, the parent would be a successor to
the liquidated corporation and therefore
ineligible to elect REIT status as a result
of section 856(c)(8).
C. Consideration of Knowledge Standard
for Automatic Deemed Sale Rule
A commenter requested the incorpo-
ration of a knowledge standard into the
automatic deemed sale rule. Specifically,
the commenter recommended that the au-
tomatic deemed sale rule should not ap-
ply to a REIT that receives property from
a C corporation if the REIT (i) receives a
representation that the C corporation (in-
cluding specified predecessors and SAG
members) has not engaged in a related
section 355 distribution, and (ii) has no
actual knowledge contrary to such repre-
sentation. The commenter contended that,
without a knowledge component, the level
of diligence necessary to apply the auto-
matic deemed sale rule could prove bur-
densome (for example, in situations that
involve predecessors of SAG members
or significant time lapses between rele-
vant transactions). For similar reasons,
the commenter asserted that the absence
of a knowledge component could limit the
practical utility of the distribution proper-
ty limitation under proposed §1.337(d)-
7(c)(6)(ii), which would require the REIT
to establish through such diligence that a
subject property is not distribution prop-
erty.
The Treasury Department and the IRS
acknowledge the concerns expressed by
the commenter, but have decided not to
adopt this recommendation. The Treasury
Department and the IRS have concluded
that adoption of a knowledge component
would reduce, rather than increase, cer-
tainty regarding the application of the au-
tomatic deemed sale rule because a knowl-
edge component would inject subjectivity
into the rule. Moreover, as the commenter
noted, REITs ordinarily undertake ex-
tensive due diligence in connection with
corporate transactions, such as mergers
with C corporations, to ensure that the
transaction will not terminate REIT sta-
tus. For example, a REIT would routinely
conduct an earnings and profits study of
the C corporation. As a result, the Trea-
sury Department and the IRS believe that
REITs generally will possess adequate
data to determine the appropriate tax con-
sequences of a conversion transaction and
make use of the distribution property lim-
itation, particularly because this limitation
will apply on a property-by-property basis
and thereby apply even if a REIT possess-
es incomplete records. In addition, a con-
temporaneous documentation of property
owned at the time of a related section 355
distribution generally will provide suf-
ficient records for establishing that any
property not listed in such documentation
is not distribution property.
VI. Definition of the Term “Converted
Property”
The 2016 Proposed Regulations would
define the term “converted property” as
“property owned by a C corporation that
becomes the property of a RIC or a REIT
and any other property the basis of which
is determined, directly or indirectly, in
whole or in part, by reference to the basis
of the property owned by a C corporation
that becomes the property of a RIC or a
REIT.” Proposed §1.337(d)-7(a)(2)(vii).
A commenter requested that the definition
be clarified to confirm the commenter’s
interpretation that the phrase “any other
property” refers only to property of a RIC
or a REIT. The Treasury Department and
the IRS agree with the commenter’s inter-
pretation and have clarified the definition
accordingly.
VII. Interaction of 2016 Proposed
Regulations with Section 856(c)(8)
A commenter inquired whether the
Treasury Department or the IRS intended
the 2016 Proposed Regulations to over-
ride section 856(c)(8) (described in part
I of this Summary of Comments and Ex-
planation of Revisions). The 2016 Pro-
posed Regulations do not override section
856(c)(8). Accordingly, if section 856(c)

Bulletin No. 2019–31 481 July 29, 2019
(8) would prevent a distributing corpo-
ration or a controlled corporation from
electing REIT status, no gain would be
recognized, absent further action (for ex-
ample, a merger of the distributing corpo-
ration or the controlled corporation into a
REIT).
VIII. Application of 2016 Proposed
Regulations to RICs
The Treasury Department and the IRS
requested comments on whether the rules
set forth in the 2016 Proposed Regulations
(other than the definition of the term “con-
verted property”) should apply to RICs.
No recommendations were received in
response to this request. The Treasury
Department and the IRS have not become
aware of a need to extend the rules to RICs
and therefore decline to extend such rules
to RICs at this time.
Effective/applicability dates
The 2019 proposed regulations includ-
ed a proposal to issue the final rule with a
30-day delayed effective date. The Trea-
sury Department and the IRS have con-
cluded, however, that a 30-day delay in
the effective date of these final regulations
would be unnecessary and contrary to pub-
lic interest. Specifically, the Treasury De-
partment and the IRS have determined that
any duration between the expiration of the
Temporary Regulations and the effective
date of these final regulations could cause
significant confusion regarding the current
state of the law. In addition, the Treasury
Department and the IRS have concluded
that the benefit of public notice ordinarily
provided by such 30-day delay is signifi-
cantly reduced in this particular instance
because these final regulations adopt the
proposed regulations without substantive
change. In addition, the Treasury Depart-
ment and the IRS note that these final reg-
ulations adopt the distribution property
limitation under proposed §1.337(d)-7(c)
(6)(ii), which provides an exception to the
general automatic deemed sale rule.
Special Analyses
This regulation is not subject to re-
view under section 6(b) of Executive Or-
der 12866 pursuant to the Memorandum
of Agreement (April 11, 2018) between
the Treasury Department and the Office
of Management and Budget regarding
review of tax regulations. Pursuant to
the Regulatory Flexibility Act (5 U.S.C.
chapter 6), it is hereby certified that these
final regulations will not have a significant
economic impact on a substantial number
of small entities. These final regulations
would affect transactions in which proper-
ty of a C corporation becomes the property
of a REIT following a section 355 distri-
bution of controlled C corporation stock.
Generally, these section 355 distributions
involve publicly traded C corporations,
which typically are not small entities as
defined by the Regulatory Flexibility Act.
Transactions in which the property of
such C corporation becomes the property
of a REIT generally involve the transfer
of all of the assets of the C corporation.
Therefore, the transferee REIT likely also
would not be a small entity, as defined by
the Regulatory Flexibility Act. As a result,
this certification is based on the conclu-
sion that these final regulations would
primarily affect large C corporations and
REITs that have substantial numbers of
shareholders. Therefore, a regulatory flex-
ibility analysis is not required. Pursuant to
section 7805(f) of the Code, the proposed
rule preceding this final regulation was
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness and no comments were received.
Drafting Information
The principal author of these regula-
tions is Austin Diamond-Jones, Office
of Associate Chief Counsel (Corporate).
However, other personnel from the Trea-
sury Department and the IRS participated
in their development.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amend-
ed as follows:
Part 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.337(d)-7 is amended
by:
1. Revising paragraphs (a)(1) and (a)(2)
(vi) through (vii).
2. Adding paragraph (a)(2)(viii).
3. Revising paragraphs (b)(4), (c)(1)
and (6), (f), and (g)(2)(ii).
The revisions and additions read as fol-
lows:
§1.337(d)-7 Tax on property owned by
a C corporation that becomes property of
a RIC or REIT.
(a) General rule—(1) Property owned
by a C corporation that becomes property
of a RIC or a REIT. If property owned by
a C corporation (as defined in paragraph
(a)(2)(i) of this section) becomes the prop-
erty of a RIC or a REIT in a conversion
transaction (as defined in paragraph (a)
(2)(ii) of this section), then section 1374
treatment will apply as described in para-
graph (b) of this section, unless the C cor-
poration elects, or is treated as electing,
deemed sale treatment with respect to
the conversion transaction as provided
in paragraph (c) of this section. See para-
graph (d) of this section for exceptions to
this paragraph (a).
(2) * * *
(vi) Section 355 distribution. The term
section 355 distribution means any distri-
bution to which section 355 (or so much
of section 356 as relates to section 355)
applies, including a distribution on which
the distributing corporation recognizes
gain pursuant to sections 355(d) or 355(e).
(vii) Converted property. The term
converted property means—
(A) Property owned by a C corporation
that becomes the property of a RIC or a
REIT; and
(B) Any other property of a RIC or a
REIT the basis of which is determined,
directly or indirectly, in whole or in part,
by reference to the basis of property de-
scribed in paragraph (a)(2)(vii)(A) of this
section.
(viii) Distribution property. The term
distribution property means—
(A) Property owned immediately after a
section 355 distribution by the distributing
corporation, a controlled corporation (as
those terms are defined in section 355(a)
(1)), or a member of a separate affiliated
group (as defined in section 355(b)(3)(B))
of which the distributing corporation or a
controlled corporation is the common par-

July 29, 2019 482 Bulletin No. 2019–31
ent (but no formulation of the step trans-
action doctrine will be used to determine
whether property acquired after the distri-
bution is distribution property pursuant to
this paragraph (a)(2)(viii)(A)); and
(B) Property with a basis determined,
directly or indirectly, in whole or in part,
by reference to property described in para-
graph (a)(2)(viii)(A) of this section.
(b) * * *
(4) Section 355 distribution following
a conversion transaction—(i) In general.
If a REIT is described in paragraph (f)(1)
of this section and the related section 355
distribution (as defined in paragraph (f)(1)
(i) of this section) follows a conversion
transaction, then for the taxable year in
which the related section 355 distribution
occurs, §1.1374-2(a)(1) and (2) (as modi-
fied by paragraph (b)(2)(i) of this section)
do not apply, and the REIT’s net recog-
nized built-in gain for such taxable year
is the amount of its net unrealized built-in
gain limitation (as defined in §1.1374-2(a)
(3)) for such taxable year.
(ii) Basis adjustment—(A) In general.
If a REIT recognizes gain under paragraph
(b)(4)(i) of this section, the aggregate ba-
sis of the converted property held by the
REIT at the end of the taxable year in
which the related section 355 distribution
occurs shall be increased by an amount
equal to the amount of gain so recognized,
increased by the amount of the REIT’s
recognized built-in loss for such taxable
year, and reduced by the amount of the
REIT’s recognized built-in gain and rec-
ognized built-in gain carryover for such
taxable year.
(B) Allocation of basis increase. The
aggregate increase in basis by reason of
paragraph (b)(4)(ii)(A) of this section
shall be allocated among the converted
property in proportion to their respective
built-in gains on the date of the conversion
transaction.
* * * * *
(c) Election of deemed sale treat-
ment—(1) In general. Paragraph (b) of
this section does not apply if the C corpo-
ration that qualifies as a RIC or a REIT
or transfers property to a RIC or a REIT
makes the election described in paragraph
(c)(5) of this section or is treated as mak-
ing such election under paragraph (c)(6)
of this section, except to the extent per-
mitted by paragraph (c)(6)(ii) of this sec-
tion. A C corporation that makes, or that
is treated as making, such an election
recognizes gain and loss as if it sold the
converted property to an unrelated party
at fair market value on the deemed sale
date (as defined in paragraph (c)(3) of this
section). See paragraph (c)(4) of this sec-
tion concerning limitations on the use of
loss in computing gain. Paragraph (c) of
this section does not apply if its applica-
tion would result in the recognition of a
net loss. For this purpose, net loss is the
excess of aggregate losses over aggregate
gains (including items of income), with-
out regard to character.
* * * * *
(6) Conversion transaction following
a section 355 distribution—(i) In gener-
al. Except as provided in paragraph (c)
(6)(ii) of this section, a C corporation de-
scribed in paragraph (f)(1) of this section
is treated as having made the election un-
der paragraph (c)(5) of this section with
respect to a conversion transaction if the
conversion transaction occurs following
the related section 355 distribution (as de-
fined in paragraph (f)(1)(i) of this section)
and the C corporation has not made such
an election.
(ii) Limitation. A C corporation treated
as having made the election under para-
graph (c)(5) of this section as a result of
paragraph (c)(6)(i) of this section is not
treated as having made the election with
respect to property that the taxpayer es-
tablishes is not distribution property with
respect to the related section 355 distribu-
tion. For purposes of this paragraph (c)(6)
(ii), any property with an adjusted basis in
excess of its fair market value as of the
date of the conversion transaction will not
be treated as distribution property unless
the taxpayer establishes that it owned such
asset immediately after the related section
355 distribution. Paragraph (b) of this sec-
tion will apply to property with respect to
which the taxpayer is not treated as having
made the election under paragraph (c)(5)
of this section as a result of this paragraph
(c)(6)(ii).
* * * * *
(f) Conversion transaction preceding
or following a section 355 distribution—
(1) In general. A C corporation or a REIT
is described in this paragraph (f)(1) if—
(i) The C corporation or the REIT en-
gages in a conversion transaction involv-
ing a REIT during the twenty-year period
beginning on the date that is ten years be-
fore the date of a section 355 distribution
(the related section 355 distribution); and
(ii) The C corporation or the REIT en-
gaging in the related section 355 distribu-
tion is either—
(A) The distributing corporation or the
controlled corporation, as those terms are
defined in section 355(a)(1); or
(B) A member of the separate affiliated
group (as defined in section 355(b)(3)(B))
of the distributing corporation or the con-
trolled corporation.
(2) Predecessors and successors. For
purposes of this paragraph (f), any ref-
erence to a controlled corporation, a dis-
tributing corporation, or a member of the
separate affiliated group of a distributing
corporation or a controlled corporation
includes a reference to any predecessor
or successor of such corporation. Succes-
sors include corporations which succeed
to and take into account items described
in section 381(c) of the distributing cor-
poration or the controlled corporation.
Predecessors include corporations having
such items to which the distributing cor-
poration or the controlled corporation suc-
ceeded and took into account.
(3) Exclusion of certain conversion
transactions. A C corporation or a REIT
is not described in paragraph (f)(1) of this
section if—
(i) The distributing corporation and
the controlled corporation are both REITs
immediately after the related section 355
distribution (including by reason of elec-
tions under section 856(c)(1) made after
the related section 355 distribution that
are effective before the related section
355 distribution) and at all times during
the two years thereafter;
(ii) Section 355(h)(1) does not apply to
the related section 355 distribution by rea-
son of section 355(h)(2)(B); or
(iii) The related section 355 distribu-
tion occurred before December 7, 2015,
or is described in a ruling request referred
to in section 311(c) of Division Q of the
Consolidated Appropriations Act, 2016,
Public Law 114-113, 129 Stat. 2422.
(g) * * *
(2) * * *

Bulletin No. 2019–31 483 July 29, 2019
(ii) Conversion transactions occurring
on or after June 7, 2019, and certain prior
conversion transactions. Paragraphs (a)
(1), (a)(2)(vi), (vii), and (viii), (b)(4), (c)
(1) and (6), and (f) of this section apply
to conversion transactions occurring on
or after June 7, 2019, and to conversion
transactions and related section 355 distri-
butions for which the conversion transac-
tion occurs before, and the related section
355 distribution occurs on or after, June
7, 2019. For conversion transactions that
occurred on or after June 7, 2016, and be-
fore June 7, 2019 (other than conversion
transactions and related section 355 distri-
butions for which the conversion transac-
tion occurs before, and the related section
355 distribution occurs on or after, June 7,
2019), see §§1.337(d)-7 and 1.337(d)-7T
as contained in 26 CFR part 1 in effect on
April 1, 2019.
* * * * *
§1.337(d)-7T [Removed]
Par. 3. Section 1.337(d)-7T is removed.
Kirsten Wielobob,
Deputy Commissioner for Services
and Enforcement.
Approved: May 29, 2019.
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).

July 29, 2019 484 Bulletin No. 2019–31
Part III.
Methods for Calculating
W-2 Wages for Purposes of
Section 199A(g)
Notice 2019-27
SECTION 1. PURPOSE
This notice (Notice) contains a pro-
posed revenue procedure that provides
computational guidance on methods and
appropriate sources of data for calcu-
lating W-2 wages for purposes of sec-
tion 199A(g) of the Internal Revenue
Code and proposed §§1.199A-8 through
1.199A-12 of the Income Tax Regula-
tions (26 CFR part 1), which are con-
tained in a notice of proposed rulemak-
ing (REG-118425-18) being published
contemporaneously with this Notice.
Specifically, this Notice provides three
methods for calculating W-2 wages for
purposes of section 199A(g)(1)(B)(i),
which limits the amount of the deduc-
tion available to specified agricultural
or horticultural cooperatives (Specified
Cooperatives) under section 199A(g)(1)
(A) to 50 percent of the Specified Coop-
erative’s W-2 wages for the taxable year.
The guidance contained in this notice is
necessary because changes may be made
to the underlying Form W-2, Wage and
Tax Statement) on a more frequent basis
than updates to the regulations under sec-
tion 199A(g). The three methods in this
Notice are substantially similar to the
methods provided in Rev. Proc. 2006-47,
2006-2 C.B. 869, used to calculate W-2
wages for purposes of the section 199
deduction and provided in Rev. Proc.
2019-11, 2019-09 I.R.B. 742, used to
calculate W-2 wages for purposes of the
section 199A(a) deduction.
SECTION 2. BACKGROUND
Section 199A was enacted on De-
cember 22, 2017, by section 11011 of
An Act to provide for reconciliation pur-
suant to titles II and V of the concurrent
resolution on the budget for fiscal year
2018, Public Law 115-97, 131 Stat. 2054,
2063 (TCJA). Parts of section 199A were
amended on March 23, 2018, as if includ-
ed in TCJA, by section 101 of Division T
of the Consolidated Appropriations Act,
2018, Public Law 115-141, 132 Stat. 348,
1151 (2018 Act). Unless otherwise indi-
cated, all references to section 199A are
to section 199A as amended by 2018 Act.
Section 199A applies to taxable years
beginning after December 31, 2017, and
before January 1, 2026. Section 199A(g),
as amended by 2018 Act, provides that
Specified Cooperatives may claim a spe-
cial deduction that is substantially similar
to the domestic production activities de-
duction under former section 199, which
was repealed by the TCJA. Specifically,
section 199A(g) provides a deduction
for a Specified Cooperative in an amount
equal to 9 percent of the lesser of qualified
production activities income (QPAI) of
the Specified Cooperative for the taxable
year determined under section 199A(g)(3)
(A), or the taxable income of the Specified
Cooperative for the taxable year deter-
mined under section 199A(g)(1)(C). Sec-
tion 199A(g)(1)(B)(i) limits the amount
of this deduction to 50 percent of the W-2
wages of the Specified Cooperative for the
taxable year.
Section 199A(g)(1)(B)(ii) provides
that W-2 wages are determined in the
same manner as under section 199A(b)
(4), without regard to section 199A(b)
(4)(B) (which excludes from the defini-
tion amounts not properly allocable to
qualified business income for purposes
of section 199A(c)(1)) and after appli-
cation of section 199A(b)(5) (concern-
ing acquisitions, dispositions, and short
taxable years), except that such wages do
not include any amount that is not prop-
erly allocable to domestic production
gross receipts (DPGR) for purposes of
section 199A(g)(3)(A). Section 199A(b)
(4)(A) defines the term W-2 wages to
mean, with respect to any person for any
taxable year of such person, the amounts
described in section 6051(a)(3) and (8)
paid by such person with respect to em-
ployment of employees by such person
during the calendar year ending during
such taxable year. Proposed §1.199A-11
further defines W-2 wages for purposes
of section 199A(g). The proposed rev-
enue procedure included in this Notice
would provide guidance on the meth-
ods for calculating the amount of W-2
wages (as defined in section 199A(g)
(1)(B)(ii) and proposed §1.199A-11) for
purposes of determining the deduction
limitation in section 199A(g)(1)(B)(i).
Section 1.199A-11(c) of the proposed
regulations provides the Internal Reve-
nue Service with authority to issue com-
putational guidance providing the meth-
ods that may be used for calculating W-2
wages, as defined in section 199A(g)(1)
(B)(ii) and proposed §1.199A-11(c).
SECTION 3. REQUEST FOR
COMMENTS
The Department of the Treasury (Trea-
sury Department) and the Internal Reve-
nue Service (IRS) request comments on
the proposed revenue procedure contained
in this Notice. All materials submitted
will be available for public inspection
and copying. Public comments should
be submitted no later than August 19,
2019. Comments should include a refer-
ence to Notice 2019-27. Comments may
be submitted electronically via the Fed-
eral eRulemaking Portal at www.regu-
lations.gov (type IRS-2019-0013 in the
search field on the www.regulations.gov
homepage to find this notice and submit
comments.) Alternatively, submissions
may be sent to: CC:PA:LPD:PR (Notice
2019-27), Room 5203, Internal Revenue
Service, P.O. Box 7604, Ben Franklin Sta-
tion, Washington, D.C., 20044. Submis-
sions also may be hand-delivered Monday
through Friday between the hours of 8
a.m. and 4 p.m. to CC:PA:LPD:PR (No-
tice 2019-27), Courier’s Desk, Internal
Revenue Service, 1111 Constitution Ave-
nue, N.W., Washington, D.C. 20224. All
recommendations for guidance submitted
by the public in response to this notice
will be available for public inspection and
copying in their entirety.
SECTION 4. EFFECT ON OTHER
REVENUE PROCEDURES
Rev. Proc. 2006-47, 2006-2 C.B. 869,
is obsoleted.

Bulletin No. 2019–31 485 July 29, 2019
SECTION 5. EFFECTIVE DATE AND
IMMEDIATE RELIANCE
This Notice is effective on June 18,
2019. The proposed revenue procedure
is proposed to apply generally to taxable
years ending after December 31, 2017.
Until such time that the proposed rev-
enue procedure is published in final form,
Specified Cooperatives may use the meth-
ods described in the proposed revenue
procedure in calculating W-2 wages (as
defined in section 199A(g)(1)(B)(ii)) for
purposes of determining the limitation in
section 199A(g)(1)(B)(i).
SECTION 6. DRAFTING
INFORMATION
The principal authors of this Notice are
Andrew Holubeck and Mikhail Zhidkov of
the Office of the Associate Chief Counsel
(Employee Benefits, Exempt Organiza-
tions, and Employment Taxes) and Theresa
Melchiorre of the Office of the Associate
Chief Counsel (Passthroughs and Special
Industries). However, other personnel from
the Treasury Department and the IRS par-
ticipated in its development. For further
information regarding this Notice, contact
Andrew Holubeck or Mikhail Zhidkov at
(202) 317-4774, or James Holmes at (202)
317-4137 (not toll-free numbers).
SECTION 7. FORM OF PROPOSED
REVENUE PROCEDURE
Set forth below is the form of the pro-
posed revenue procedure that is proposed
in this Notice:
FORM OF PROPOSED REVENUE
PROCEDURE
Part III
Administrative, Procedural,
and Miscellaneous
26 CFR 1.199A-11: Wage
limitation for the section
199A(g) deduction
(Also: [XX, XXX, XXX])
Rev. Proc. 2019-XX
SECTION 1. PURPOSE
This revenue procedure provides meth-
ods for calculating W-2 wages as defined
in section 199A(g)(1)(B)(ii) and §1.199A-
11 of the Income Tax Regulations for pur-
poses of the W-2 wage limitation provided
in section 199A(g)(1)(B)(i) of the Internal
Revenue Code. Specified agricultural
or horticultural cooperatives (Specified
Cooperatives) are permitted a deduction
under section 199A(g)(1)(A) equal to the
lesser of 9 percent of qualified production
activities income (QPAI) or taxable in-
come of a Specified Cooperative, but not
to exceed the W-2 wage limitation.
SECTION 2. BACKGROUND
Section 199A(g)(1)(B)(i) limits the
amount of the deduction under sec-
tion 199A(g)(1)(A) to 50 percent of the
W-2 wages of the Specified Coopera-
tive (as defined in §1.199A-8(a)(2)) for
the taxable year. Section 199A(g)(1)
(B)(ii) provides that W-2 wages are de-
termined in the same manner as under
section 199A(b)(4), without regard to
section 199A(b)(4)(B) (which excludes
from the definition amounts not proper-
ly allocable to qualified business income
for purposes of section 199A(c)(1)) and
after application of section 199A(b)(5)
(concerning acquisitions, dispositions,
and short taxable years), except that such
wages do not include any amount which is
not properly allocable to domestic produc-
tion gross receipts (DPGR) for purposes
of section 199A(g)(3)(A).
Section 199A(b)(4)(A) defines the
term W-2 wages to mean, with respect
to any person for any taxable year of
such person, the amounts described in
section 6051(a)(3) and (8) paid by such
person with respect to employment of em-
ployees by such person during the calen-
dar year ending during such taxable year.
Section 199A(b)(4)(C) provides that W-2
wages shall not include any amount that is
not properly included in a return filed with
the Social Security Administration (SSA)
on or before the 60th day after the due date
(including extensions) for such return.
Section 1.199A-11(c) of the regula-
tions provides the Internal Revenue Ser-
vice with authority to issue guidance pro-
viding computational methods that may
be used to calculate W-2 wages.
This revenue procedure provides
three methods for calculating W-2 wag-
es (as defined in section 199A(g)(1)(B)
(ii) and §1.199A-11) for purposes of sec-
tion 199A(g) and the regulations there-
under. The first method (the unmodified
Box method) allows for a simplified cal-
culation, while the second and third meth-
ods (the modified Box 1 method and the
tracking wages method) provide greater
accuracy.
W-2 wages calculated under this rev-
enue procedure are not necessarily the
W-2 wages that are properly allocable to
DPGR and eligible for use in computing
the section 199A(g) limitations. Under
§1.199A-8(b)(5)(ii)(B) a Specified Coop-
erative that is not qualified as a farmer’s co-
operative organization under section 521
(nonexempt Specified Cooperative) must
use only patronage W-2 wages that are
properly allocable to patronage DPGR to
compute its section 199A(g)(1)(B)(i) W-2
wage limitation. Under §1.199A-8(c)(2) a
Specified Cooperative that is qualified as
a farmer’s cooperative organization under
section 521 (exempt Specified Cooper-
ative) must calculate separate patronage
and nonpatronage deductions under sec-
tion 199A(g)(1)(A) and apply separate
patronage and nonpatronage W-2 wage
limitations. Under §1.199A-11(b)(2) the
Specified Cooperative must determine the
amount of wages that is properly alloca-
ble to DPGR for purposes of calculating
QPAI (as defined in section 199A(g)(3)
(A)). The Specified Cooperative may use
any reasonable method that is satisfactory
to the Secretary based on all of the facts
and circumstances. The chosen reasonable
method must be consistently applied from
one taxable year to another and must clear-
ly reflect the wages allocable to DPGR for
purposes of QPAI. The books and records
maintained for wages allocable to DPGR
for purposes of QPAI must be consistent
with any allocations. Then, the amount
of W-2 wages that are properly allocable
to DPGR is used in determining the W-2
wage limitation under section 199A(g)(1)
(B)(i) as determined under §1.199A-8(b)
(5)(ii)(B) or §1.199A-8(c)(2) depending
upon whether the Specified Cooperative is
nonexempt or exempt, respectively.

July 29, 2019 486 Bulletin No. 2019–31
SECTION 3. RULES OF
APPLICATION
.01 In general. In calculating W-2
wages for a taxable year under the meth-
ods described in this revenue procedure,
include only wages properly reported on
Forms W-2 that meet the applicable rules
of §1.199A-11(a), §1.199A-8(b)(5)(ii)
(B), and §1.199A-8(c)(2), as applicable.
Specifically, §1.199A-11(a)(2) provides
that, except as provided in §1.199A-11(d)
(2)) (concerning short taxable years that
do not include December 31), the Forms
W-2, Wage and Tax Statement, or any
subsequent form or document used in de-
termining the amount of W-2 wages are
those issued for the calendar year ending
during the taxable year of the Specified
Cooperative for wages paid to employees
(or former employees) of the Specified
Cooperative for employment by the Spec-
ified Cooperative. Section 1.199A-11(a)
(1) also provides that, for purposes of
§1.199A-11, employees of the Specified
Cooperative are limited to employees of
such Specified Cooperative as defined in
section 3121(d)(1) and (2) (that is, officers
of a corporate taxpayer and employees
of the taxpayer under the common law
rules). Therefore, Forms W-2 provided
to statutory employees described in sec-
tion 3121(d)(3) (that is, Forms W-2 in
which the “Statutory Employee” box in
Box 13 is checked) should not be included
in calculating W-2 wages under any of the
methods described in this revenue proce-
dure.
.02 No application in determining
whether amounts are wages for employ-
ment tax purposes. The discussions of
“wages” in this revenue procedure and
in the regulations under section 199A(g)
are for purposes of section 199A(g)
only and have no application in deter-
mining whether amounts are wages un-
der section 3121(a) for purposes of the
Federal Insurance Contributions Act,
under section 3306(b) for purposes of
the Federal Unemployment Tax Act, or
under section 3401(a) for purposes of
the Collection of Income Tax at Source
on Wages (federal income tax withhold-
ing), or any other wage-related deter-
mination. See §1.199A-11(a)(1) of the
regulations.
SECTION 4. DEFINITION OF W-2
WAGES AND CORRELATION WITH
BOXES ON FORM W-2
.01 Definition of W-2 wages. Sec-
tion 199A(g)(1)(B)(ii) provides that W-2
wages are determined in the same man-
ner as under section 199A(b)(4) (without
regard to section 199A(b)(4)(B)). Sec-
tion 199A(b)(4)(A) provides that W-2
wages means, with respect to any person
for any taxable year of such person, the
sum of the amounts described in sec-
tion 6051(a)(3) and (8) paid by such person
with respect to employment of employees
by such person during the calendar year
ending during such taxable year. Thus,
as also provided in §1.199A-11(b)(1),
W-2 wages include: (i) the total amount
of wages (as defined in section 3401(a));
(ii) the total amount of elective deferrals
(within the meaning of section 402(g)
(3)); (iii) the compensation deferred under
section 457; and (iv) the amount of des-
ignated Roth contributions (as defined in
section 402A).
.02 Correlation with Form W-2. On the
2018 Forms W-2, the elective deferrals
under section 402(g)(3) and the amounts
deferred under section 457 directly cor-
relate to coded items reported in Box 12
on Form W-2. Box 12, Code D is for elec-
tive deferrals to a section 401(k) cash or
deferred arrangement plan (including a
SIMPLE 401(k) arrangement); Box 12,
Code E is for elective deferrals under a
section 403(b) salary reduction agreement;
Box 12, Code F is for elective deferrals
under a section 408(k)(6) salary reduction
Simplified Employee Pension (SEP); Box
12, Code G is for elective deferrals and
employer contributions (including non-
elective deferrals) to any governmental or
nongovernmental section 457(b) deferred
compensation plan; Box 12, Code S is for
employee salary reduction contributions
under a section 408(p) SIMPLE (simple
retirement account); Box 12, Code AA
is for designated Roth contributions (as
defined in section 402A) under a sec-
tion 401(k) plan; and Box 12, Code BB
is for designated Roth contributions (as
defined in section 402A) under a sec-
tion 403(b) salary reduction agreement.
However, designated Roth contributions
are also reported in Box 1, wages, tips,
other compensation and are subject to in-
come tax withholding.
SECTION 5. METHODS FOR
CALCULATING W-2 WAGES
For any taxable year, a Specified Co-
operative must calculate W-2 wages for
purposes of section 199A(g)(1)(B)(i) us-
ing one of the three methods described in
section 5.01, 5.02, and 5.03 of this reve-
nue procedure. For a Specified Coopera-
tive with a short taxable year, see section 6
of this revenue procedure. In calculating
W-2 wages for a taxable year under the
methods below, the Specified Cooperative
includes only those Forms W-2 that are for
the calendar year ending with or within
the taxable year of the Specified Coopera-
tive and that meet the rules of application
described in section 3 of this revenue pro-
cedure.
.01 Unmodified Box method. Under the
unmodified Box method, W-2 wages are
calculated by taking, without modifica-
tion, the lesser of—
(A) The total entries in Box 1; or
(B) The total entries in Box 5
of all Forms W-2 filed with SSA by the
Specified Cooperative with respect to em-
ployees of the Specified Cooperative for
employment by the Specified Coopera-
tive.
.02 Modified Box 1 method. Under the
modified Box 1 method, the Specified Co-
operative makes modifications to the total
entries in Box 1 of Forms W-2 filed with
respect to employees of the Specified Co-
operative. W-2 wages under this method
are calculated as follows—
(A) Total the amounts in Box 1 of all
Forms W-2 filed with SSA by the Speci-
fied Cooperative with respect to employ-
ees of the Specified Cooperative for em-
ployment by the Specified Cooperative;
(B) Subtract from the total in para-
graph .02(A) of this section amounts in-
cluded in Box 1 of Forms W-2 that are not
wages for Federal income tax withhold-
ing purposes, including amounts that are
treated as wages for purposes of income
tax withholding under section 3402(o)
(for example, supplemental unemploy-
ment compensation benefits within the
meaning of Rev. Rul. 90-72, 1990-2 C.B.
211); and

Bulletin No. 2019–31 487 July 29, 2019
(C) Add to the amount obtained after
paragraph .02(B) of this section the total
of the amounts that are reported in Box 12
of Forms W-2 with respect to employees
of the Specified Cooperative for employ-
ment by the Specified Cooperative and
that are properly coded D, E, F, G, or S.
.03 Tracking wages method. Under
the tracking wages method, the Specified
Cooperative actually tracks total wages
subject to Federal income tax withholding
and makes appropriate modifications. W-2
wages under this method are calculated as
follows—
(A) Total the amounts of wages sub-
ject to Federal income tax withholding
that are paid to employees of the Specified
Cooperative for employment by the Spec-
ified Cooperative and that are reported on
Forms W-2 filed with SSA by the Spec-
ified Cooperative for the calendar year;
and
(B) Add to the amount obtained after
paragraph .03(A) of this section the total
of the amounts that are reported in Box 12
of Forms W-2 with respect to employees
of the Specified Cooperative for employ-
ment by the Specified Cooperative and
that are properly coded D, E, F, G, or S.
SECTION 6. APPLICATION IN
CASE OF SHORT TAXABLE YEAR
.01 Special rule for Specified Coop-
erative with a short taxable year. In the
case of a Specified Cooperative with a
short taxable year, subject to the rules of
application described in section 3 of this
revenue procedure, the W-2 wages of the
Specified Cooperative for the short tax-
able year shall include only those wag-
es paid during the short taxable year to
employees of the Specified Cooperative,
only those elective deferrals (within the
meaning of section 402(g)(3)) made
during the short taxable year by employ-
ees of the Specified Cooperative, and only
compensation actually deferred under
section 457 during the short taxable year
with respect to employees of the Spec-
ified Cooperative. See §1.199A-11(e) of
the regulations.
.02 Method required for a short tax-
able year and modifications required in
application of method. The W-2 wages
of a Specified Cooperative with a short
taxable year shall be determined under
the tracking wages method described in
section 5.03 of this revenue procedure. In
applying the tracking wages method in the
case of a short taxable year, the Specified
Cooperative must apply the method as
follows—
(A) For purposes of section 5.03(A),
the total amount of wages subject to Fed-
eral income tax withholding and reported
on Form W-2 must include only those
wages subject to Federal income tax with-
holding that are actually or constructively
paid to employees during the short taxable
year and reported on Form W-2 for the
calendar year ending with or within that
short taxable year (or, for a short taxable
year that does not contain a calendar year
ending with or within such short taxable
year, wages subject to Federal income tax
withholding that are actually or construc-
tively paid to employees during the short
taxable year and reported on Form W-2
for the calendar year containing such short
taxable year); and
(B) For purposes of section 5.03(B),
only the portion of the total amounts re-
ported in Box 12, Codes D, E, F, G, or S
on Forms W-2, that are actually deferred
or contributed during the short taxable
year are included in W-2 wages.
SECTION 7. EFFECTIVE DATE
This revenue procedure applies to tax-
able years ending after December 31, 2017.
SECTION 8. DRAFTING
INFORMATION
The principal authors of this revenue
procedure are Andrew Holubeck and
Mikhail Zhidkov of the Office of the
Associate Chief Counsel (Tax Exempt
and Government Entities) and Theresa
Melchiorre of the Office of the Associate
Chief Counsel (Passthroughs & Special
Industries). However, other personnel
from the Department of the Treasury and
the Internal Revenue Service participat-
ed in its development. For further infor-
mation regarding this revenue procedure
contact Andrew Holubeck or Mikhail
Zhidkov at (202) 317-4774, or James
Holmes at (202) 317-4137 (not toll-free
numbers).
Beginning of Construction
for Sections 45 and 48;
Tolling and Extension of
Continuity Safe Harbor
to Mitigate Significant
National Security Concerns
Notice 2019-43
SECTION 1. PURPOSE
This notice modifies the guidance pro-
vided in Notice 2013-29, 2013-1 C.B.
1085; Notice 2013-60, 2013-2 C.B. 431;
Notice 2014-46, 2014-2 C.B. 520; No-
tice 2015-25, 2015-13 I.R.B. 814; Notice
2016-31, 2016-23 I.R.B. 1025; Notice
2017-04, 2017-4 I.R.B. 541; and Notice
2018-59, 2018-28 I.R.B. 196 (collective-
ly, the prior IRS notices) to provide that
the continuity safe harbor (as defined be-
low) may be tolled and extended in certain
limited circumstances involving signifi-
cant national security concerns.
SECTION 2. BACKGROUND
Section 38 of the Internal Revenue
Code (the Code) allows certain business
credits against the tax imposed by Chap-
ter 1 of the Code. Among the credits al-
lowed by § 38 are the investment credit
determined under § 46 and the renewable
electricity production credit under § 45(a).
The investment credit includes the energy
credit under § 48. The credits under §§
45(a) and 48 generally are referred to as
the production tax credit (PTC) and the
investment tax credit (ITC), respectively.
To qualify for the PTC, electricity
must, among other things, be produced
by the taxpayer at a qualified facility as
defined in § 45(d). The PTC for any tax-
able year is calculated by multiplying an
inflation-adjusted credit rate by kilowatt
hours of electricity produced and sold by
the taxpayer to an unrelated person. The
ITC is calculated as a percentage of the ba-
sis of energy property, as defined in § 48(a)
(3), placed in service during the taxable
year. A taxpayer may elect under § 48(a)
(5) to treat a certain qualified facilities un-
der § 45(d) as energy property and claim
the ITC rather than the PTC with respect
to the facility.

July 29, 2019 488 Bulletin No. 2019–31
On December 18, 2015, the Consol-
idated Appropriations Act, 2016, Pub.
L. No. 114-113, Div. P and Q, 129 Stat.
2242, (CAA) enacted amendments to the
PTC and the ITC for certain renewable
energy facilities and energy properties.
The CAA extended the PTC for two years
with respect to certain facilities the con-
struction of which began before January
1, 2017, and further extended the PTC for
wind facilities the construction of which
begins before January 1, 2020. The CAA
also modified the PTC for wind facilities
by providing that the credit will phase out
over four years and extended the election
to claim the ITC in lieu of the PTC with
respect to certain renewable energy fa-
cilities if construction of such facility be-
gan before January 1, 2017 (or January 1,
2020, in the case of wind facilities).
On February 9, 2018, the Bipartisan
Budget Act of 2018, Pub. L. 115-123,
Div. D, 132 Stat. 64, (BBA) modified the
ITC under § 48 by replacing the require-
ment to place energy property in service
by a certain date with a requirement to
begin construction by a certain later
date. As modified, construction of ener-
gy property must begin before January 1,
2022. This modification has the effect of
retroactively extending by five years the
ITC for fiber-optic solar energy property,
qualified fuel cell property, qualified mi-
croturbine property, combined heat and
power system property, qualified small
wind energy property, and geothermal
heat pump property the construction of
which begins before January 1, 2022.
The BBA amendments also phase out the
ITC for fiber-optic solar energy property,
qualified fuel cell property, and qualified
small wind energy property over five
years. For these energy properties, re-
gardless of when construction begins, the
projects must be placed in service before
January 1, 2024.
Notice 2013-29 provides two meth-
ods to establish beginning of construc-
tion under § 45: starting physical work
of a significant nature or incurring five
percent or more of the total cost of the
facility. Both methods require a taxpay-
er to make continuous progress towards
completion once construction has begun
(under either the Continuous Construc-
tion Test of section 4.06 or the Continu-
ous Efforts Test of section 5.02 of Notice
2013-29).
Notice 2013-60 provides a safe har-
bor (Continuity Safe Harbor) that allows
a taxpayer to be deemed to satisfy the
Continuous Construction Test or the Con-
tinuous Efforts Test based on the date the
facility is placed in service. If a facility is
not placed in service before the required
date, whether the facility satisfies the
Continuous Construction or Continuous
Efforts Tests is determined by the relevant
facts and circumstances.
Section 3 of Notice 2016-31 modifies
and extends the Continuity Safe Harbor by
providing that if a taxpayer places a facility
in service by the later of (1) a calendar year
that is no more than four calendar years af-
ter the calendar year during which construc-
tion of the facility began or (2) December
31, 2016, the facility will be considered to
satisfy the Continuity Safe Harbor.
Section 3 of Notice 2017-04 further
modifies and extends the Continuity Safe
Harbor by providing that if a taxpayer
places a facility in service by the later of
(1) a calendar year that is no more than
four calendar years after the calendar year
during which construction of the facility
began or (2) December 31, 2018, the facil-
ity will be considered to satisfy the Conti-
nuity Safe Harbor.
For purposes of the beginning of con-
struction requirement under § 48, section
6.05 of Notice 2018-59 also provides a
Continuity Safe Harbor. If a taxpayer plac-
es energy property in service by the end of a
calendar year that is no more than four cal-
endar years after the calendar year during
which construction of the energy property
began, the energy property will be consid-
ered to satisfy the Continuity Safe Harbor.
A plan to develop or construct a facil-
ity or energy property (Plan) includes the
construction of the electricity generat-
ing equipment, but may also include the
construction or installation of additional
equipment that is not part of the facili-
ty or energy property itself but which is
necessary to connect the facility or energy
property to the energy grid or to customers
(including, but not limited to, a distribu-
tion or transmission line or other intercon-
nection equipment).
The Treasury Department and the In-
ternal Revenue Service recognize that, in
some situations, a Plan may raise signif-
icant national security concerns for the
Department of Defense (DOD). Any ef-
forts to mitigate these significant national
security concerns by pursuing a modifi-
cation to the Plan may delay the devel-
opment and construction of the facility
or energy property. This notice therefore
provides that, with respect to any Plan
that satisfies the requirements provided
in section 3.01, the Continuity Safe Har-
bor may be tolled and extended in certain
limited circumstances involving signif-
icant national security concerns. Except
as otherwise specified in this notice, the
guidance provided in the prior IRS notic-
es continues to apply.
SECTION 3. TOLLING AND
EXTENSION OF THE CONTINUITY
SAFE HARBOR
.01 Tolling and Extension of Continu-
ity Safe Harbor To Mitigate Significant
National Security Concerns. This notice
provides that if all of the requirements set
forth in this section 3.01 are satisfied, for
purposes of §§ 45 and 48, the Continuity
Safe Harbor will be tolled and extended
for a period of time to account for delays
that result from pursuing a modification
to a Plan to mitigate significant nation-
al security concerns raised by the DOD
(Tolling Period). On the date that the
Tolling Period ends the Continuity Safe
Harbor resumes. The Continuity Safe
Harbor will be tolled and extended if all
of the following requirements are satis-
fied:
(1) Construction has begun (within the
meaning of the prior IRS notices) with re-
spect to the facility or energy property that
will generate the credits under §§ 45 or 48
pursuant to the Plan;
(2) Parties holding an ownership in-
terest in property that is part of the Plan
(or that will hold an ownership interest in
property that is part of the Plan after such
property is constructed), including (a)
the facility or energy property, or (b) the
additional equipment that is not part of
the facility or energy property itself but
which is necessary to connect the facility
or energy property to the energy grid or
to customers (including, but not limited
to, a distribution or a transmission line or

Bulletin No. 2019–31 489 July 29, 2019
other interconnection equipment) have
received one or more government per-
mits or approvals necessary to implement
the Plan;
(3) The DOD provides written notice
directly to one or more of the parties de-
scribed in paragraph (2) of this section
3.01 that one or more aspects of the Plan
raises significant concerns related to na-
tional security and that modification of the
Plan would be in the best interests of na-
tional security objectives;
(4) Such parties pursue a modification
of the Plan acceptable to DOD to mitigate
these significant national security con-
cerns and to further the national security
objectives; and
(5) The modification of the Plan re-
quires the parties to obtain new or addi-
tional permits or licenses, which delays
placing the facility or energy property in
service.
.02 Calculation of Tolling Period. The
Tolling Period will result in a day-for-day
extension of the Continuity Safe Harbor.
The first day of the Tolling Period is the
date on which the DOD provides the writ-
ten notice described in requirement (3) of
section 3.01 of this notice. The last day
of the Tolling Period is the date on which
the parties described in requirement (2) of
section 3.01 of this notice:
(1) obtain all new or additional permits
or licenses (and any potential administra-
tive appeals or potential judicial review
by the applicable federal or state courts
are finally resolved) described in section
3.01(5) of this notice;
(2) obtain written confirmation that the
new or additional permits or licenses de-
scribed in section 3.01(5) of this notice to
be completed will not be issued; or
(3) notify the relevant federal or state
regulatory, permitting, and/or licensing
authorities in writing that the modification
of the Plan will no longer be pursued.
In no event shall the Tolling Period ex-
ceed a period of four years.
.03 Example. X has an ownership in-
terest in a facility. In September 2016,
X begins construction of the facility. As
part of a Plan to connect the facility to
the energy grid, a new transmission line
must be constructed. Y will develop,
own, and operate the new transmission
line. The route for the proposed transmis-
sion line runs adjacent to a DOD facili-
ty. In June 2018, Y receives all permits
necessary for constructing the transmis-
sion line, although during the permitting
process the DOD raised concerns with
permitting authorities regarding the lo-
cation of the proposed transmission line.
Y identifies an alternative route for the
transmission line and proposes to build
the transmission line over this alterna-
tive route rather than over the original
route. On December 1, 2018, Y receives
a written notice from the DOD stating
that the Plan raises significant concerns
related to national security and that the
proposed alternative route for the trans-
mission line would be in the best in-
terests of national security objectives.
Constructing the transmission line along
this alternative route requires that certain
new permits and licenses be granted by
various federal and state permitting and
licensing agencies. On June 30, 2021, af-
ter any potential administrative appeals
or potential judicial review of the per-
mitting and licensing process have been
resolved, Y obtains from the relevant
federal and state agencies the new per-
mits and licenses required to allow the
transmission line to be completed.
The Tolling Period is calculated to run
from December 1, 2018, through June
30, 2021 (943 days). The Continuity Safe
Harbor will resume on July 1, 2021 and
will be satisfied if the facility is placed in
service by August 1, 2023 (943 days after
December 31, 2020, which would have
been the placed in service deadline under
the Continuity Safe Harbor had it not been
tolled and extended).
SECTION 4. EFFECT ON OTHER
DOCUMENTS
Notice 2013-29, Notice 2013-60, No-
tice 2014-46, Notice 2015-25, Notice
2016-31, Notice 2017-04, and Notice
2018-59 are modified.
SECTION 5. NO RULE
The Internal Revenue Service will not
issue private letter rulings or determina-
tion letters to a taxpayer regarding the
application of this notice, the prior IRS
notices, or the beginning of construction
requirement under §§ 45 and 48.
SECTION 6. DRAFTING
INFORMATION
The principal author of this notice
is Jennifer Bernardini of the Office of
Associate Chief Counsel (Passthroughs
& Special Industries). For further infor-
mation regarding this Notice, contact Ms.
Bernardini at (202) 317-6853 (not a toll-
free number).
Update for Weighted
Average Interest Rates,
Yield Curves, and
Segment Rates
Notice 2019-44
This notice provides guidance on the
corporate bond monthly yield curve, the
corresponding spot segment rates used
under § 417(e)(3), and the 24-month aver-
age segment rates under § 430(h)(2) of the
Internal Revenue Code. In addition, this
notice provides guidance as to the interest
rate on 30-year Treasury securities under
§ 417(e)(3)(A)(ii)(II) as in effect for plan
years beginning before 2008 and the 30-
year Treasury weighted average rate under
§ 431(c)(6)(E)(ii)(I).
YIELD CURVE AND SEGMENT
RATES
Section 430 specifies the minimum
funding requirements that apply to sin-
gle-employer plans (except for CSEC
plans under § 414(y)) pursuant to § 412.
Section 430(h)(2) specifies the inter-
est rates that must be used to determine
a plan’s target normal cost and funding
target. Under this provision, present val-
ue is generally determined using three
24-month average interest rates (“seg-
ment rates”), each of which applies to
cash flows during specified periods. To
the extent provided under § 430(h)(2)
(C)(iv), these segment rates are adjusted
by the applicable percentage of the 25-
year average segment rates for the period

July 29, 2019 490 Bulletin No. 2019–31
ending September 30 of the year preced-
ing the calendar year in which the plan
year begins.
1
However, an election may
be made under § 430(h)(2)(D)(ii) to use
the monthly yield curve in place of the
segment rates.
Notice 2007-81, 2007-44 I.R.B. 899,
provides guidelines for determining the
monthly corporate bond yield curve, and
the 24-month average corporate bond
segment rates used to compute the tar-
get normal cost and the funding target.
Consistent with the methodology spec-
ified in Notice 2007-81, the monthly
corporate bond yield curve derived from
June 2019 data is in Table 2019-6 at the
end of this notice. The spot first, second,
and third segment rates for the month of
June 2019 are, respectively, 2.41, 3.51,
and 4.16.
The 24-month average segment rates de-
termined under § 430(h)(2)(C)(i) through
(iii) must be adjusted pursuant to § 430(h)
(2)(C)(iv) to be within the applicable mini-
mum and maximum percentages of the cor-
responding 25-year average segment rates.
For plan years beginning before 2021, the
applicable minimum percentage is 90%
and the applicable maximum percentage is
110%. The 25-year average segment rates
for plan years beginning in 2018 and 2019
were published in Notice 2017-50, 2017-
41 I.R.B. 280, and Notice 2018-73, 2018-
40 I.R.B. 526, respectively.
24-MONTH AVERAGE CORPORATE
BOND SEGMENT RATES
The three 24-month average corporate
bond segment rates applicable for July
2019 without adjustment for the 25-year
average segment rate limits are as follows:
24-Month Average Segment Rates Without 25-Year Average Adjustment
Applicable Month First Segment Second Segment Third Segment
July 2019 2.76 3.95 4.43
Based on § 430(h)(2)(C)(iv), the
24-month averages applicable for July
2019, adjusted to be within the applicable
minimum and maximum percentages of
the corresponding 25-year average seg-
ment rates, are as follows:
Adjusted 24-Month Average Segment Rates
For Plan Years
Beginning InApplicable MonthFirst SegmentSecond SegmentThird Segment
2018July 20193.925.526.29
2019July 20193.745.356.11
30-YEAR TREASURY SECURITIES
INTEREST RATES
Section 431 specifies the minimum
funding requirements that apply to multi-
employer plans pursuant to § 412. Section
431(c)(6)(B) specifies a minimum amount
for the full-funding limitation described in
§ 431(c)(6)(A), based on the plan’s current
liability. Section 431(c)(6)(E)(ii)(I) pro-
vides that the interest rate used to calculate
current liability for this purpose must be
no more than 5 percent above and no more
than 10 percent below the weighted aver-
age of the rates of interest on 30-year Trea-
sury securities during the four-year period
ending on the last day before the beginning
of the plan year. Notice 88-73, 1988-2 C.B.
383, provides guidelines for determining
the weighted average interest rate. The rate
of interest on 30-year Treasury securities
for June 2019 is 2.57 percent. The Service
determined this rate as the average of the
daily determinations of yield on the 30-
year Treasury bond maturing in May 2049.
For plan years beginning in July 2019, the
weighted average of the rates of interest on
30-year Treasury securities and the permis-
sible range of rates used to calculate current
liability are as follows:
Treasury Weighted Average Rates
For Plan Years Beginning In
30-Year Treasury
Weighted Average
Permissible Range
90% to 105%
July 20192.932.63 to 3.07
1
Pursuant to § 433(h)(3)(A), the 3
rd
segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amount
of the full funding limitation under § 433(c)(7)(C)).

Bulletin No. 2019–31 491 July 29, 2019
MINIMUM PRESENT VALUE
SEGMENT RATES
In general, the applicable interest rates
under § 417(e)(3)(D) are segment rates
computed without regard to a 24-month
average. Notice 2007-81 provides guide-
lines for determining the minimum pres-
ent value segment rates. Pursuant to that
notice, the minimum present value seg-
ment rates determined for June 2019 are
as follows:
Minimum Present Value Segment Rates
Month First Segment Second Segment Third Segment
June 2019 2.41 3.51 4.16
DRAFTING INFORMATION
The principal author of this notice is
Tom Morgan of the Office of the Asso-
ciate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment
Taxes). However, other personnel from
the IRS participated in the development
of this guidance. For further information
regarding this notice, contact Mr. Morgan
at 202-317-6700 or Paul Stern at 202-317-
8702 (not toll-free numbers).

July 29, 2019 492 Bulletin No. 2019–31
Table 2019-6
Monthly Yield Curve for June 2019
Derived from June 2019 Data
MaturityYieldMaturityYieldMaturityYieldMaturityYieldMaturityYield
0.52.3820.53.9840.54.1860.54.2680.54.29
1.02.3721.03.9941.04.1961.04.2681.04.29
1.52.3721.54.0041.54.1961.54.2681.54.29
2.02.3622.04.0142.04.1962.04.2682.04.30
2.52.3722.54.0242.54.1962.54.2682.54.30
3.02.3823.04.0243.04.2063.04.2683.04.30
3.52.4023.54.0343.54.2063.54.2683.54.30
4.02.4424.04.0444.04.2064.04.2684.04.30
4.52.4924.54.0444.54.2064.54.2784.54.30
5.02.5525.04.0545.04.2165.04.2785.04.30
5.52.6225.54.0645.54.2165.54.2785.54.30
6.02.6926.04.0646.04.2166.04.2786.04.30
6.52.7826.54.0746.54.2166.54.2786.54.30
7.02.8627.04.0747.04.2167.04.2787.04.30
7.52.9527.54.0847.54.2267.54.2787.54.30
8.03.0428.04.0948.04.2268.04.2788.04.30
8.53.1228.54.0948.54.2268.54.2788.54.30
9.03.2029.04.1049.04.2269.04.2789.04.30
9.53.2829.54.1049.54.2269.54.2889.54.30
10.03.3530.04.1150.04.2370.04.2890.04.30
10.53.4230.54.1150.54.2370.54.2890.54.31
11.03.4831.04.1251.04.2371.04.2891.04.31
11.53.5431.54.1251.54.2371.54.2891.54.31
12.03.5932.04.1352.04.2372.04.2892.04.31
12.53.6432.54.1352.54.2372.54.2892.54.31
13.03.6833.04.1353.04.2473.04.2893.04.31
13.53.7233.54.1453.54.2473.54.2893.54.31
14.03.7534.04.1454.04.2474.04.2894.04.31
14.53.7834.54.1554.54.2474.54.2894.54.31
15.03.8135.04.1555.04.2475.04.2995.04.31
15.53.8335.54.1555.54.2475.54.2995.54.31
16.03.8636.04.1656.04.2476.04.2996.04.31
16.53.8836.54.1656.54.2576.54.2996.54.31
17.03.8937.04.1657.04.2577.04.2997.04.31
17.53.9137.54.1757.54.2577.54.2997.54.31
18.03.9238.04.1758.04.2578.04.2998.04.31
18.53.9438.54.1758.54.2578.54.2998.54.31
19.03.9539.04.1859.04.2579.04.2999.04.31
19.53.9639.54.1859.54.2579.54.2999.54.31
20.03.9740.04.1860.04.2680.04.29100.04.31

Bulletin No. 2019–31 493 July 29, 2019
Part IV.
Withdrawal of Notice of
Proposed Rulemaking;
Notice of Proposed
Rulemaking
Guidance on Passive
Foreign Investment
Companies
REG-105474-18
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Withdrawal of notice of pro-
posed rulemaking; notice of proposed
rulemaking.
SUMMARY: This document contains
proposed regulations under sections
1291, 1297, and 1298 of the Internal
Revenue Code (“Code”) regarding the
determination of ownership in a passive
foreign investment company within the
meaning of section 1297(a) (“PFIC”) and
the treatment of certain income received
or accrued by a foreign corporation and
assets held by a foreign corporation for
purposes of section 1297. The regula-
tions provide guidance regarding when a
foreign corporation is a qualifying insur-
ance corporation (“QIC”) under section
1297(f) of the Code and the amounts of
income and assets that a QIC excludes
from passive income and assets pursuant
to section 1297(b)(2)(B) (“PFIC insur-
ance exception”) for purposes of section
1297(a). The regulations also clarify the
application and scope of certain rules that
determine whether a United States per-
son that directly or indirectly holds stock
in a PFIC is treated as a shareholder of
the PFIC, and whether a foreign corpo-
ration is a PFIC. The regulations affect
United States persons with direct or indi-
rect ownership interests in certain foreign
corporations.
DATES: Written or electronic comments
and requests for a public hearing must be
received by September 9, 2019.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG-105474-18), room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station, Wash-
ington, 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-105474-18),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washing-
ton, DC 20224, or sent electronically via
the Federal eRulemaking Portal at www.
regulations.gov (IRS REG-105474-18).
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Josephine Firehock at (202) 317-
4932 (for the PFIC Insurance Exception)
or Jorge M. Oben at (202) 317-6934 (for
general rules, including indirect owner-
ship and look-through rules); concerning
submissions and requests for a public
hearing, Regina L. Johnson at (202) 317-
6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
I. In General
This document contains proposed
amendments to 26 CFR part 1 under
sections 1291, 1297, and 1298. Sections
1291 through 1298 set forth tax regimes
for shareholders that own stock of a PFIC.
Under section 1297(a), a foreign corpo-
ration (“Tested Foreign Corporation”)
qualifies as a PFIC if it satisfies either of
the following tests: (i) 75 percent or more
of the Tested Foreign Corporation’s gross
income for a taxable year is passive (“In-
come Test”); or (ii) the average percentage
of assets held by the Tested Foreign Cor-
poration during a taxable year that produce
(or that are held for the production of) pas-
sive income is at least 50 percent (“Asset
Test”). Section 1297(b)(1) generally de-
fines passive income as any income of a
kind that would constitute foreign person-
al holding company income (“FPHCI”)
under section 954(c), and section 1297(b)
(2) provides exceptions to this general
definition. Income of a kind not described
in section 954(c)(1) (for example, premi-
ums on insurance and annuity contracts) is
excluded from passive income.
In addition, section 1297(c) provides a
look-through rule that applies when deter-
mining the PFIC status of a Tested For-
eign Corporation that directly or indirectly
owns at least 25 percent of the stock (de-
termined by value) of another corporation.
Section 1298(b)(3) provides an excep-
tion from PFIC status for certain Tested
Foreign Corporations that change from
one active business to another active busi-
ness. Section 1298(b)(7) provides that cer-
tain stock (“qualified stock”) in a domestic
C corporation owned by a Tested Foreign
Corporation through a 25-percent-owned
domestic corporation is treated as an asset
generating non-passive income for pur-
poses of section 1297(a), provided that the
Tested Foreign Corporation is subject to
the accumulated earnings tax or waives
any treaty protections against the imposi-
tion of the accumulated earnings tax.
Section 1298(a) sets forth special rules
applicable to shareholders of PFICs, in-
cluding attribution rules that treat a United
States person as the owner of PFIC stock
that is owned by another person (other
than an individual). For instance, section
1298(a)(2) sets forth the attribution rules
for ownership through a corporation, and
section 1298(a)(3) sets forth the attribu-
tion rules for ownership through a part-
nership, estate, or trust. In addition, sec-
tion 1298(a)(1)(B) provides that, except
to the extent provided in regulations, sec-
tion 1298(a) will not apply to treat stock
owned (or treated as owned) by a United
States person as owned by another United
States person.
The Department of the Treasury (“Trea-
sury Department”) and the IRS announced
their intention to issue regulations that ad-
dress the operation of the Income Test and
Asset Test in Notice 88-22, 1988-1 C.B.
489 (“Notice 88-22”).
II. PFIC Insurance Exception
Before its amendment by section 14501
of the Tax Cuts and Jobs Act, Pub. L. 115-
97, 131 Stat. 2234 (2017) (the “Act”), for-
mer section 1297(b)(2)(B) provided that

July 29, 2019 494 Bulletin No. 2019–31
passive income generally did not include
investment income derived in the active
conduct of an insurance business by a cor-
poration that is predominantly engaged
in an insurance business and that would
be subject to tax under subchapter L if it
were a domestic corporation. Congress
was concerned about a lack of clarity and
precision in the PFIC insurance excep-
tion, and in particular about the lack of
precision regarding how much insurance
or reinsurance business a company must
do to qualify under the exception, which
made the exception difficult to enforce.
H.R. Report 115-409 at 409-410. To ad-
dress these concerns, the Act modified the
PFIC insurance exception to provide that
passive income does not include invest-
ment income derived in the active conduct
of an insurance business by a QIC. Thus,
for taxable years beginning after Decem-
ber 31, 2017, the PFIC insurance excep-
tion provides that a foreign corporation’s
income attributable to an insurance busi-
ness will not be passive income if three
requirements are met. First, the foreign
corporation must be a QIC as defined in
section 1297(f). Second, the foreign cor-
poration must be engaged in an “insur-
ance business.” Third, the income must be
derived from the “active conduct” of that
insurance business.
On April 24, 2015, the Federal Reg-
ister published a notice of proposed
rulemaking at 80 FR 22954 (the “2015
proposed regulations”) under former
sections 1297(b)(2)(B) and 1298(g). The
2015 proposed regulations addressed the
PFIC insurance exception and provided
guidance regarding the extent to which a
foreign corporation’s investment income
and the assets producing that income are
excluded from passive income and pas-
sive assets for purposes of the passive
income and passive asset tests in section
1297(a). Comments were received on the
previously proposed regulations. A public
hearing was requested and was held on
September 18, 2015.
This document withdraws the 2015
proposed regulations and proposes new
regulations with respect to the insurance
exception as amended by the Act. Accord-
ingly, this preamble does not address the
comments received regarding the 2015
proposed regulations unless the comment
relates to these new proposed regulations.
Explanation of Provisions
I. General Rules
A. Overview
These regulations provide guidance
with respect to a number of issues that are
not specifically addressed in the current
regulations and resolve some of the com-
plexities that arise in the determination of
the ownership of a PFIC and in the appli-
cation of the Income Test and Asset Test
in cases in which the look-through rule of
section 1297(c) applies to a Tested For-
eign Corporation.
Specifically, these regulations provide
guidance on the application of the corpo-
rate attribution rules when a partnership
indirectly holds a Tested Foreign Corpo-
ration through a corporation that is not a
PFIC. These regulations also clarify the
scope of the section 1297(b)(1) cross-ref-
erence to section 954(c) for purposes of
defining passive income, and they set forth
rules that address certain computation-
al and characterization issues that arise
in applying the Asset Test. In addition,
these regulations provide rules concern-
ing the treatment of income and assets of
a 25-percent-owned subsidiary under sec-
tion 1297(c). These regulations provide
guidance on the application of the section
1298(b)(3) change of business exception
and also propose a new rule analogous to
the section 1298(b)(3) change of business
exception that takes into consideration
the assets of the Tested Foreign Corpo-
ration. Finally, these regulations provide
guidance on the application of the section
1298(b)(7) qualified stock exception and
provide a rule for waiving treaty benefits
that would exempt a Tested Foreign Cor-
poration from the accumulated earnings
tax.
B. Determination of ownership and
attribution through partnerships
Section 1298(a) provides attribution
rules that apply to the extent that the effect
is to treat stock of a PFIC as owned by a
United States person. Except as provided
in regulations, the attribution rules do not
apply to treat stock owned or treated as
owned by a United States person as owned
by any other person.
Section 1298(a)(2)(A) provides that if
50 percent or more in value of the stock
of a corporation is owned, directly or indi-
rectly, by or for any person, that person is
considered to own the stock owned direct-
ly or indirectly by or for the corporation
in proportion to the person’s ownership of
the corporation. However, under section
1298(a)(2)(B), the 50 percent ownership
threshold does not apply in the case of
stock held through a PFIC or a corpora-
tion that would be a PFIC if it were not a
controlled foreign corporation within the
meaning of section 957(a) (“CFC”). Sec-
tion 1298(a)(3) provides that stock owned,
directly or indirectly, by a partnership, es-
tate, or trust is considered owned propor-
tionately by its partners or beneficiaries.
The current rules in §1.1291-1(b)(8) are
consistent with these statutory provisions.
Comments have inquired whether the
attribution rules are intended to be applied
to a tiered ownership structure on a “top-
down” basis, by starting with a United
States person and determining what stock
is considered owned at each successive
lower tier on a proportionate basis. Alter-
natively, the comments have posited, the
rules could be applied on a “bottom-up”
basis, by starting with a PFIC and attrib-
uting ownership of its stock upwards to
each successive upper tier until the Unit-
ed States person whose ownership in the
PFIC is being tested is reached.
The two approaches can have different
ownership consequences when a partner-
ship indirectly owns stock of a Tested For-
eign Corporation through a corporation
that is not a PFIC. A United States person
not treated as a shareholder of PFIC stock
indirectly held by a partnership through a
non-PFIC corporation under a “top-down”
approach may be treated as a shareholder
under a “bottom-up” approach as a result
of the application of section 1298(a)(3)
and §1.1291-1(b)(8)(iii), which provide
that holders of interests in a pass-through
entity are considered to proportionately
own stock owned directly or indirectly
by the pass-through entity. Consider, for
example, the following fact pattern. A, a
United States citizen, owns 50 percent of
the interests in Foreign Partnership, a for-
eign partnership, the remainder of which
is owned by an unrelated foreign person.
Foreign Partnership owns 100 percent of
the stock of FC1 and 50 percent of the

Bulletin No. 2019–31 495 July 29, 2019
stock of FC2, the remainder of which is
owned by an unrelated foreign person.
Both FC1 and FC2 are foreign corpora-
tions that are not PFICs (determined with-
out applying section 1297(d)). FC1 and
FC2 each own 50 percent of the stock of
FC3, a foreign corporation that is a PFIC.
Under a “bottom-up” approach, Foreign
Partnership could be treated as owning
75 percent of the stock of FC3 indirectly
through FC1 and FC2, and accordingly, A
could be treated as owning 37.5 percent
of the stock of FC3. Under a “top-down”
approach, however, A would be treated
as owning 50 percent of the stock of FC1
and 25 percent of the stock of FC2, and
the only stock of FC3 that would be at-
tributed to A would be the 25 percent of
the FC3 stock treated as indirectly owned
by A through FC1. Comments have not-
ed that a “top-down” approach produces
the same result as if the partnership were
disregarded and partners were treated as
if they directly or indirectly owned a part-
nership’s direct and indirect interests in
a non-PFIC foreign corporation; it could
thus be viewed as consistent with an ag-
gregate theory of partnerships.
Under the proposed regulations, the
attribution rules apply consistently wheth-
er a United States person owns stock of
a non-PFIC foreign corporation through
a partnership or directly, as they would
under the “top-down” approach. This en-
sures that ownership of a foreign corpora-
tion that is a PFIC through a partnership
will not change the amount of the stock of
the PFIC that the United States person is
treated as owning. Accordingly, under the
proposed regulations, for purposes of de-
termining whether a partner, S corporation
shareholder, or beneficiary in a partner-
ship, S corporation, estate, or nongrantor
trust is considered under §1.1291-1(b)
(8)(ii)(A) to own a portion of stock of a
PFIC owned indirectly by the partnership,
S corporation, estate, or trust through a
non-PFIC foreign corporation, the partner,
shareholder, or beneficiary will be consid-
ered to own 50 percent or more in value
of the stock of the non-PFIC foreign cor-
poration through the partnership, estate,
or trust only if the partner, shareholder, or
beneficiary directly or indirectly owns 50
percent or more of the ownership interests
in the partnership, estate, or trust. See pro-
posed §1.1291-1(b)(8)(iii).
If, in the previously posited example,
Foreign Partnership were replaced with
another foreign corporation, FC4, the pro-
posed regulations would not apply. It may
seem less appropriate for the amount of
FC3 stock that is treated as owned by A to
be limited to the 25 percent of FC3 indi-
rectly owned by A through FC4 and FC1.
Instead, FC4 could be treated as owning
25 percent of the stock of FC3 indirectly
through FC2, and thus A could be treat-
ed as owning 12.5 percent of the stock of
FC3 indirectly through FC4 and FC2 in
addition to the 25 percent owned indirect-
ly through FC4 and FC1. The Treasury
Department and the IRS request com-
ments as to whether a “top-down” attri-
bution analysis or some alternative anal-
ysis should apply under section 1298(a)
in a purely corporate structure such as
this one, such that A would not be treat-
ed as owning any stock of FC3 indirectly
through FC4 and FC2.
C. Income test
1. In General
In the Technical and Miscellaneous
Revenue Act of 1988 (Pub. L. 100-647,
102 Stat. 3342), Congress amended sec-
tion 1297(b)(1) to define the term pas-
sive income generally as any income of a
kind that would constitute FPHCI under
section 954(c). FPHCI, and thus passive
income, includes interest income that
would be tax-exempt under section 103.
See §§1.954-2(b)(3), 1.952-2(c)(1). Nei-
ther the rules under subtitle A, chapter 1,
subchapter N, part III, subpart F of the
Code (“subpart F”) nor rules under sec-
tion 1297, however, address the treatment
for purposes of FPHCI or the Income
Test of other types of income that are
otherwise excluded from gross income,
such as intercompany dividends that are
excluded from the income of a recipient
under the consolidated return regulations.
See §1.1502-13(f)(2)(ii). As discussed in
more detail in Part I.F of this Explanation
of Provisions, a Tested Foreign Corpora-
tion may be treated under section 1297(c)
as receiving directly income received by
a 25-percent-owned subsidiary, includ-
ing a domestic corporation. As discussed
in more detail in Part I.H of this Expla-
nation of Provisions, a Tested Foreign
Corporation could own a second domestic
corporation through a 25-percent-owned
domestic corporate subsidiary and could
thus be treated under sections 1297(c)
and 1298(b)(7) as receiving intercompa-
ny dividends from the lower-tier domestic
corporation that would be excluded from
the income of the upper-tier domestic
corporation under the consolidated return
regulations. Accordingly, the operation
of the statutory rules under sections 1297
and 1298 indicate that the Income Test is
intended to take into account all income
of a Tested Foreign Corporation, without
regard to reductions or exclusions that
might apply for purposes of determining
the U.S. Federal income tax imposed on
such income. Consistent with those rules,
the Treasury Department and the IRS have
concluded that intercompany dividends
received by a corporation from a mem-
ber of its consolidated group and treated
as received under section 1297(c) by a
Tested Foreign Corporation that directly
or indirectly owns stock in the corporation
should be taken into account for purpos-
es of the Income Test. Thus, the proposed
regulations indicate that income for pur-
poses of the Income Test includes all divi-
dend income, including dividends that are
excluded from gross income under sec-
tion 1502 and §1.1502-13. See proposed
§1.1297-1(b). The Treasury Department
and the IRS welcome comments on this
approach. However, see Part I.F.3 of this
Explanation of Provisions for a discussion
of rules that could eliminate such divi-
dends.
2. Exceptions from Passive Income
Furthermore, there are a number of
exceptions to the definition of FPHCI in
section 954(c), as well as in section 954(h)
and (i), and special rules and definitions
in section 954(c) that affect the determina-
tion of FPHCI. Specifically, in addition to
the exceptions contained within the gen-
eral definition of FPHCI in section 954(c)
(1), section 954(c)(2) provides three ex-
ceptions: (i) an active rents and royalties
exception; (ii) an export financing excep-
tion; and (iii) a dealer exception. Section
954(c)(3) provides two additional excep-
tions: (i) a related person, same country
dividend and interest exception; and (ii)
a related person, same country rents and

July 29, 2019 496 Bulletin No. 2019–31
royalty exception. In addition, for taxable
years of foreign corporations beginning
after December 31, 2005, and before Jan-
uary 1, 2020, section 954(c)(6) excludes
from FPHCI certain dividends, interest,
rents, and royalties received or accrued
from a related corporation that is a CFC.
Moreover, section 954(h) provides rules
that apply for purposes of section 954(c)
(1) pursuant to which income derived in
an active banking or financing business
is excluded from FPHCI. Additionally,
under section 954(i), income from an ac-
tive insurance business is excluded from
FPHCI for purposes of section 954(c)
(1). Finally, section 954(c)(4) contains a
look-through rule that applies in the case
of a sale of certain partnership interests,
and section 954(c)(5) contains definitions
and special rules applicable to commodity
transactions.
Separately, section 1297(b)(2) provides
explicit exclusions to the general defini-
tion of passive income set forth in section
1297(b)(1). Specifically, section 1297(b)
(2) provides four exceptions: (i) an active
banking exception; (ii) an active insurance
business exception; (iii) a related person
interest, dividends, rents, and royalties ex-
ception; and (iv) an export trade financing
exception.
Questions have been raised regarding
the scope of the cross-reference to section
954(c) in section 1297(b)(1) for purposes
of defining passive income for PFIC pur-
poses. Comments have inquired whether
the section 954(c) reference in section
1297(b) incorporates all of the exceptions
to FPHCI that are in section 954(c). In ad-
dition, by their terms, certain exceptions
to FPHCI apply only to a foreign corpo-
ration that is a CFC. If these exceptions
apply for PFIC purposes, the comments
also question whether a Tested Foreign
Corporation must also be a CFC in order
to benefit from the exceptions.
The Treasury Department and the IRS
understand that Congress did not intend
for all of the exceptions in section 954(c)
to apply for purposes of determining pas-
sive income under the PFIC provisions.
In particular, the exceptions in section
954(c)(3) (relating to certain income re-
ceived from related persons) and 954(c)
(6) (relating to certain income received
from related CFCs) were not meant to be
taken into account for PFIC purposes. The
legislative history indicates that Congress
intended for the section 1297(c) look-
through rules or the section 1297(b)(2)(C)
exception to apply to income items that
otherwise would be entitled to the section
954(c)(3) exception. It indicates:
The bill conforms the PFIC definition
of passive income to the definition of pas-
sive income under subpart F (sec. 954(c)).
This change, in conjunction with the look-
through rule for certain 25-percent-owned
corporations and the lookthrough rules
added by the bill (described below),
makes it explicit that earnings of certain
related foreign corporations organized in
the same country as its shareholder that,
if distributed to the shareholder would be
excluded from foreign personal holding
company income under the same-coun-
try exception of subpart F (sec. 954(c)
(3)), are subject to either the section
[1297(c)] look-through treatment or the
look-through treatment for amounts paid
by related parties that are not 25 percent
owned (described below).
H.R. Rep. No. 100-795, at 271-272
(1988); S. Rep. No. 100-445, at 285-286
(1988).
Thus, the proposed regulations do not
incorporate the section 954(c)(3) excep-
tion for purposes of determining passive
income for PFIC purposes. Similarly, un-
der the proposed regulations, the section
954(c)(6) exception also does not apply
for determining PFIC status because the
section 1297(b)(2)(C) related-person ex-
ception is intended to be the sole relat-
ed-person exception applicable for deter-
mining passive income under the PFIC
rules.
Additional questions are raised with
respect to the FPHCI exceptions for ac-
tive banking, financing, and insurance
income because section 1297(b) does
not specifically cross-reference section
954(h) and (i). As with section 1297(b)(2)
(C), it is possible that sections 1297(b)(2)
(A) and (B) were intended to be the sole
exceptions for active banking, financing,
and insurance income applicable for de-
termining passive income under the PFIC
rules because section 1297(b) has specific
exceptions for active banking, financing,
and insurance income. Alternatively, the
section 1297(b) cross-reference to section
954(c) could be read to include the excep-
tions provided in section 954(h) and (i),
which apply for purposes of section 954(c)
by their terms. It may be appropriate for
income that satisfies the requirements in
section 954(h) and (i) to be excluded from
passive income because Congress gener-
ally defined passive income by reference
to FPHCI, and when section 954(h) and
(i) were enacted, each with a cross-refer-
ence to section 954(c), Congress did not
provide that section 954(h) or (i) should
not apply for PFIC purposes. Moreover,
the fact that the PFIC provisions are more
generally not intended to apply to foreign
corporations engaged in active businesses
supports the application of rules exclud-
ing active banking, financing, and insur-
ance income from the definition of passive
income.
However, with respect to section
954(i), Congress recently amended the
exclusion for income derived in the ac-
tive conduct of an insurance business in
section 1297(b)(2)(B) to require that in-
come be earned by a QIC, as discussed in
Part II of the Background section of this
preamble. Given this statutory change
and the tests contained in the definition
of QIC in section 1297(f), the Treasury
Department and the IRS have determined
that the exception for insurance income
in section 954(i) should not apply in ad-
dition to the newly modified exception in
section 1297(b)(2)(B). Accordingly, the
proposed regulations provide that the sec-
tion 954(i) exception to FPHCI does not
apply in addition to the PFIC exception.
See proposed §1.1297-1(c)(1)(i)(B). By
contrast, given that no final regulations
under the PFIC regime provide rules con-
cerning an exclusion of active banking
and financing income, these proposed
regulations provide that the FPHCI ex-
ception for banking and financing income
under section 954(h) applies for purposes
of determining PFIC status. See proposed
§1.1297-1(c)(1)(i)(A). The application of
section 954(h) is in addition to the PFIC
exception. The Treasury Department and
the IRS request comments about whether,
when regulations are in force under sec-
tion 1297(b)(2)(A), the corollary FPHCI
exclusion should also continue to apply.
Comments have noted that the applica-
tion of section 954(c) for PFIC purposes
can be uncertain when a Tested Foreign
Corporation is not also a CFC. For in-
stance, the application of section 954(h)

Bulletin No. 2019–31 497 July 29, 2019
for PFIC purposes could be interpreted to
apply only to amounts received by a Test-
ed Foreign Corporation that also is a CFC.
Passive income for PFIC purposes is de-
fined by cross-reference to section 954(c)
because the income items that comprise
FPHCI are generally passive in nature.
The CFC status of the recipient of an item
of FPHCI does not affect the passive na-
ture of the item, and thus is not relevant for
purposes of determining whether an item
is passive under the PFIC rules. Therefore,
it is appropriate for income derived by any
Tested Foreign Corporation, and not just
Tested Foreign Corporations that also are
CFCs, to be eligible for the exceptions to
FPHCI, including the section 954(h) ex-
ception.
For the reasons discussed in this Part
I.C.2, the proposed regulations provide
that for purposes of section 1297(b)(1),
passive income is determined by refer-
ence to the items of income listed in sec-
tion 954(c)(1), subject only to the excep-
tions found in section 954(c)(1), section
954(c)(2)(A) (relating to active rents and
royalties), section 954(c)(2)(B) (relating
to certain export financing interest), sec-
tion 954(c)(2)(C) (relating to dealers),
and section 954(h) (relating to entities
engaged in the active conduct of a bank-
ing, financing, or similar business). See
proposed §1.1297-1(c)(1)(i) and (c)(1)(i)
(A). In addition, the rules in section 954(c)
(4) (relating to sales of certain partnership
interests) and 954(c)(5) (relating to certain
commodity hedging transactions) apply
for PFIC purposes. See proposed §1.1297-
1(c)(1)(i)(C). However, for the reasons
stated in this Part I.C.2, the exceptions in
section 954(c)(3) (relating to certain in-
come received from related persons), sec-
tion 954(c)(6) (relating to certain amounts
received from related controlled foreign
corporations), and section 954(i) (relating
to entities engaged in the active conduct of
an insurance business) are not taken into
account for purposes of section 1297(b)
(1). See proposed §1.1297-1(c)(1)(i)(B).
The proposed regulations also provide that
an entity is treated as a CFC for purposes
of applying an exception to FPHCI and for
purposes of determining whether a person
is a related person with respect to the en-
tity. See proposed §1.1297-1(c)(1)(i)(D).
Comments are requested as to whether
regulations should provide any additional
special rules concerning the definition of a
related person under section 954(d)(3) for
purposes of applying an FPHCI exception
to a Tested Foreign Corporation that is not
a CFC.
3. Income and Gains from Certain
Transactions
The Income Test is computed based
on a Tested Foreign Corporation’s gross
income. However, pursuant to section
954(c), certain categories of income are
FPHCI only to the extent that gains ex-
ceed losses with respect to the category.
For instance, under section 954(c)(1)(B)
only “the excess of gains over losses from
the sale or exchange” of certain property
is treated as FPHCI. Similar rules apply
to income from commodities transac-
tions under section 954(c)(1)(C), foreign
currency gains under section 954(c)(1)
(D), and income from notional principal
contracts under section 954(c)(1)(F). The
proposed regulations provide that for pur-
poses of the Income Test, items of income
under section 954(c) that are determined
by netting gains against losses are taken
into account by a corporation on that net
basis, so that only net gains in a particular
category of FPHCI are taken into account.
See proposed §1.1297-1(c)(1)(ii). Howev-
er, the net amount of income in each cat-
egory of FPHCI is determined separately
for each relevant corporation, such that net
gains or losses of a corporation, at least 25
percent of the value of stock of which is
owned, directly or indirectly, by a Test-
ed Foreign Corporation (“Look-Through
Subsidiary”) may not be netted against net
losses or gains of another Look-Through
Subsidiary or of a Tested Foreign Corpo-
ration.
4. Income Earned Through Partnerships
The proposed regulations provide
guidance on the treatment of a corpora-
tion’s distributive share of partnership
income for purposes of the Income Test.
The Treasury Department and the IRS
have determined that income earned by
a Tested Foreign Corporation through
a partnership should be treated similar-
ly to income earned through a corporate
subsidiary. As discussed in more detail in
Part I.F of this Explanation of Provisions,
if a Tested Foreign Corporation owns
a Look-Through Subsidiary, the Tested
Foreign Corporation is treated as if it di-
rectly received its proportionate share of
the income of the Look-Through Subsidi-
ary, and certain items of income received
from the Look-Through Subsidiary are
proportionately eliminated. If a corpora-
tion is not a Look-Through Subsidiary,
income received from the corporation is
characterized in accordance with the gen-
eral rules described in Part I.C.2 of this
Explanation of Provisions, under which
dividends generally will be passive. Ac-
cordingly, the proposed regulations pro-
vide that a Tested Foreign Corporation’s
distributive share of any item of income of
a partnership is treated as income received
directly by the Tested Foreign Corpora-
tion, provided the Tested Foreign Corpo-
ration owns, directly or indirectly, at least
25 percent of the value of the partnership,
in which case the partnership is referred
to as a “Look-Through Partnership,” and
income elimination rules similar to those
for Look-Through Subsidiaries apply. See
proposed §1.1297-1(c)(2)(i). If the Test-
ed Foreign Corporation owns less than
25 percent of the value of a partnership,
the corporation’s distributive share of any
item of income of the partnership is pas-
sive income. See proposed §1.1297-1(c)
(2)(ii).
As a result of these rules, in cases in
which the Tested Foreign Corporation
owns at least 25 percent of the value of
the partnership, the exceptions to passive
income contained in section 1297(b)(2)
and the relevant exceptions to foreign per-
sonal holding company income in section
954(c) and (h) that are based on whether
income is derived in the active conduct
of a business generally apply if, and only
if, the partnership engages in the relevant
business activities. The focus on partner-
ship activities is consistent with the prin-
ciples applicable to partnership interests
under the regulations under subpart F.
See §1.954-2(a)(5)(ii)(A); §1.954-3(a)(6).
However, as described in Part I.F.5 of this
Explanation of Provisions, these proposed
regulations also include rules that, in cer-
tain circumstances, allow the character of
income to be determined at the level of the
Tested Foreign Corporation, taking into
account activities performed by the Tested
Foreign Corporation and certain subsid-

July 29, 2019 498 Bulletin No. 2019–31
iaries of the Tested Foreign Corporation,
whether such subsidiaries are in corporate
or partnership form.
Although the subpart F regulations
provide rules concerning the classification
of a CFC’s distributive share of partner-
ship income that, absent these proposed
regulations, would generally be applica-
ble by virtue of section 1297’s adoption
of FPHCI as the basis for passive income,
the Treasury Department and the IRS have
determined that the differing policies of
the subpart F and PFIC regimes warrant
different rules for partnerships. Specif-
ically, the Treasury Department and the
IRS have concluded that it is appropriate
to generally characterize a corporation’s
distributive share of partnership income
as passive when the corporation owns less
than 25 percent of the value of the part-
nership, consistent with the treatment of
Look-Through Subsidiary income, not-
withstanding the fact that under the sub-
part F regulations, such income could
have been excluded from FPHCI by virtue
of the partnership’s activities regardless
of the corporation’s level of ownership.
The different treatment is warranted be-
cause of the flexibility that entities have
in their characterization for U.S. Federal
income tax purposes under §301.7701-3
and because of the fact that treating a sub-
sidiary as a partnership may not have U.S.
income tax consequences for a Tested For-
eign Corporation, as it could for a CFC.
However, the Treasury Department and
the IRS request comments as to wheth-
er a 25 percent threshold for the Tested
Foreign Corporation’s percentage owner-
ship in the partnership is the appropriate
threshold for distinguishing between a
distributive share of partnership income
that is automatically treated as passive and
a distributive share that is characterized in
accordance with the activities undertak-
en by the partnership (or, as applicable
under the rules described in Part I.F.5 of
this Explanation of Provisions, the Tested
Foreign Corporation and certain subsid-
iaries of the Tested Foreign Corporation),
or whether an alternative threshold should
be considered. Furthermore, the Treasury
Department and the IRS request com-
ments as to whether different rules should
apply with respect to partners in general
partnerships than with respect to partners
in limited partnerships, or with respect to
partners that materially participate in the
activities of the partnership.
5. Income from a Related Person
The proposed regulations provide ad-
ditional guidance on the application of
the section 1297(b)(2)(C) related-person
exception to dividends, interest, rents,
and royalties. The proposed regulations
provide that the determination of whether
the payor of an item of income is a related
person should be made on the date of re-
ceipt or accrual, as applicable based on the
recipient’s method of accounting, of the
item of income. See proposed §1.1297-
1(c)(3)(iv).
Under §1.904-5(c)(2)(ii)(C) (the
“cream-skimming rule”), interest paid to a
related person is treated as passive income
to the payee to the extent that the payor has
passive income. Under this rule, if a for-
eign corporation had $200 of passive gross
income and $200 of non-passive gross in-
come, and that foreign corporation made
an interest payment of $100 to a related
foreign corporation, for purposes of deter-
mining the nature of the interest income in
the hands of the payee foreign corporation,
the entire $100 of interest would be treat-
ed as passive income rather than as ratably
allocable between passive and non-passive
income. Although the Treasury Depart-
ment and the IRS considered applying a
cream-skimming rule for purposes of sec-
tion 1297(b)(2)(C), the Treasury Depart-
ment and the IRS have concluded that the
PFIC regime does not raise the policy con-
cerns addressed by the cream-skimming
rule in the foreign tax credit and subpart F
contexts. In those contexts, because interest
expense can reduce a foreign corporation’s
subpart F income or otherwise affect the
calculation of foreign tax credits, an inter-
est payment could otherwise be used to try
to reduce the passive income of the payor
and convert it into non-passive income of
the payee. However, because the Income
Test is applied on the basis of gross income,
an interest payment cannot be used in the
same fashion for purposes of the Income
Test. Accordingly, under the proposed
regulations, for purposes of the section
1297(b)(2)(C) exception, interest is proper-
ly allocable to income of the related person
that is not passive income based on the rel-
ative portion of the related person’s income
for its taxable year that ends in or with the
taxable year of the recipient that is not pas-
sive income. See proposed §1.1297-1(c)(3)
(i). Dividends are treated as properly allo-
cable to income of the related person that
is not passive income based on the portion
of the related payor’s current-year earnings
and profits for the taxable year that ends in
or with the taxable year of the recipient that
are attributable to non-passive income. See
proposed §1.1297-1(c)(3)(ii). Comments
are specifically requested concerning alter-
native methods of determining the portion
of dividends treated as properly allocable
to income of a related person (including
if the payor has no current earnings and
profits), including by reference to accumu-
lated earnings and profits, and if so, how
to address concerns about the availability
of information. The proposed regulations
further provide that rents and royalties are
allocable to income of the related person
which is not passive income to the extent
the related person’s deduction for the rent
or royalty is allocated to non-passive in-
come under the principles of §§1.861-8
through 1.861-14T. See proposed §1.1297-
1(c)(3)(iii). Comments are specifically re-
quested regarding any concerns about the
availability of information and alternative
methods of determining the portion of rents
and royalties treated as properly allocable
to income of a related person that would
address any such concerns.
D. Asset test
1. Methodology of Application of Asset
Test
Section 1297(a)(2) provides that a
Tested Foreign Corporation is a PFIC if
the average percentage of assets held by
the corporation during a taxable year that
produce passive income or are held for the
production of passive income is at least 50
percent. Notice 88-22 provides that the av-
erage percentage of assets of a Tested For-
eign Corporation is calculated by averaging
the value of the assets of the corporation,
determined as of the end of each quarterly
period of the corporation’s taxable year.
These regulations clarify that the aver-
age percentage of a Tested Foreign Corpo-
ration’s assets is determined using the aver-
age of the gross values (or adjusted bases)
at the end of each quarter of the foreign

Bulletin No. 2019–31 499 July 29, 2019
corporation’s taxable year. See proposed
§1.1297-1(d)(1)(i) and (d)(1)(ii)(A). Al-
ternatively, the assets of a Tested Foreign
Corporation can be measured for purpos-
es of the Asset Test more frequently than
quarterly (for example, weekly or month-
ly). The quarter or shorter interval used by
a Tested Foreign Corporation is referred to
as its “measuring period.” Applying the As-
set Test based on a period that recurs more
frequently than a quarter provides a more
precise measurement of “average,” but the
more frequently recurring basis is not re-
quired because of the potential administra-
tive burden that it could impose on a share-
holder of a Tested Foreign Corporation.
The same measuring period must be used
for the Tested Foreign Corporation for the
initial year (including a short year) that for
which the shareholder elects to use the al-
ternative measuring period and any and all
subsequent years unless the election to use
the more frequently recurring measuring
period is revoked. See proposed §1.1297-
1(d)(1)(ii)(B).
If a Tested Foreign Corporation has a
short taxable year, the quarterly measur-
ing dates for purposes of the Asset Test
are the same as they would be for a full
taxable year, except that the final quarterly
measuring date will be the final day of the
short taxable year. See proposed §1.1297-
1(d)(1)(ii)(C). Thus, for instance, if a
Tested Foreign Corporation for which the
election for a shorter period has not been
made has a short year of eight months,
the corporation would have two quarters
ending on the foreign corporation’s nor-
mal quarterly measuring dates and a third
quarter ending on the final day of the short
taxable year. The asset amounts for those
three quarterly measuring dates would be
averaged to determine the average per-
centage of a Tested Foreign Corporation’s
assets that are passive for the year. The
Treasury Department and the IRS have
determined that applying the Asset Test
based on the taxable year quarters that
ended during the short year properly ac-
counts for the administrative difficulties
of calculating quarterly measurements
with respect to a short year.
Under section 1297(e), the assets of a
Tested Foreign Corporation are required
to be measured based on (i) value, pursu-
ant to section 1297(e)(1), if it is a publicly
traded corporation for the taxable year, or
if section 1297(e)(2) does not apply to it
for the taxable year; or (ii) adjusted basis,
pursuant to section 1297(e)(2), if it is a
CFC, or elects the application of section
1297(e)(2). The statute does not speci-
fy whether a corporation that is publicly
traded during only part of the taxable year
is publicly traded “for the taxable year,”
and thus whether such a corporation’s as-
sets should be measured for the taxable
year based on value or on adjusted basis
or whether, if the corporation is a CFC for
the remainder of the year, a combination
of the two should be used. For instance,
a Tested Foreign Corporation that is a
CFC at the beginning of its taxable year
and became publicly traded during the last
month of its taxable year could be required
under section 1297(e) to have its assets
measured based on either adjusted basis
or value for all four quarterly measuring
periods or based on adjusted basis for its
first three quarterly measuring periods and
value for its fourth quarterly measuring
period. The proposed regulations provide
that the Asset Test should apply on the ba-
sis of value for the entire year if the corpo-
ration was publicly traded on the majority
of days during the year or section 1297(e)
(2) did not apply to the corporation on the
majority of days of the year. Otherwise,
the Asset Test should apply on the basis of
adjusted basis for the entire year. See pro-
posed §1.1297-1(d)(1)(v). The Treasury
Department and the IRS have determined
that allowing a shareholder the option of
choosing either method with respect to a
Tested Foreign Corporation could facili-
tate the avoidance of the PFIC rules, and
that the rule in the proposed regulation
imposes the least administrative burden.
The Treasury Department and the IRS
welcome comments on these rules.
Under the proposed regulations, the
rules described in this Part I.D.1 for mak-
ing or revoking an election for an alterna-
tive measuring period also apply for pur-
poses of the election provided in section
1297(e)(2)(B) to use adjusted bases of
assets for purposes of the Asset Test. See
proposed §1.1297-1(d)(1)(iii)(B) and (d)
(1)(iv). Both elections may be made by a
United States person that is eligible under
§1.1295-1(d) with respect to the Tested
Foreign Corporation or that would be el-
igible if the Tested Foreign Corporation
were a PFIC. See proposed §1.1297-1(d)
(1)(iv)(A). Thus, in the case of a Tested
Foreign Corporation owned by a domes-
tic partnership in which U.S. individuals
are partners, only the domestic partner-
ship and not its partners may make the
elections, ensuring that the Tested Foreign
Corporation is treated consistently for all
of the partners, which would facilitate
reporting by the partnership if the Tested
Foreign Corporation were a PFIC. How-
ever, the Treasury Department and the
IRS request comments as to whether ei-
ther election should be available to any
United States person that is a shareholder
(within the meaning of §1.1291-1(b)(7) or
(8)) of the Tested Foreign Corporation or
that would be a shareholder of the Tested
Foreign Corporation if it were a PFIC.
If the person is required to file the Form
8621 (or successor form) with respect to
the Tested Foreign Corporation, the elec-
tions may be made in the manner provided
in the instructions to the Form 8621; until
such instructions are provided, the elec-
tions may be made by attaching a written
statement to the Form 8621 providing for
the election to a return for the year for
which the election is made. If the person
is not required to file the Form 8621 with
respect to the Tested Foreign Corporation
(for example, because the Tested Foreign
Corporation is not a PFIC), the person may
make the elections by attaching a written
statement providing for the election to a
return for the year for which the election
is made. Id. The elections are revoked in
a similar manner. See proposed §1.1297-
1(d)(1)(iv)(B). A new election for an alter-
native measuring period or under section
1297(e)(2)(B) may not be made until the
sixth taxable year following the year for
which the previous such election was re-
voked, and such subsequent election may
not be revoked until the sixth taxable year
following the year for which the subse-
quent election was made. See id.
2. Characterization of Dual-Character
Assets
Pursuant to section 1297(a), an asset is
considered passive for purposes of the As-
set Test if it produces passive income or is
held for the production of passive income.
Notice 88-22 states that an asset that pro-
duces both passive income and non-pas-
sive income during a Tested Foreign Cor-

July 29, 2019 500 Bulletin No. 2019–31
poration’s taxable year is treated partly as
a passive asset and partly as a non-passive
asset in proportion to the relative amounts
of income generated by the asset during
the year. Proposed §1.1297-1(d)(2) gener-
ally adopts the rule set forth in Notice 88-
22, and provides that an asset that produc-
es both passive income and non-passive
income during a taxable year is treated as
two assets, one of which is passive and
one of which is non-passive. Consistent
with the rule in Notice 88-22, for purposes
of applying the Asset Test, the value (or
adjusted basis) of the asset is allocated be-
tween the passive assets and non-passive
assets based on the ratio of passive income
produced by the asset during the taxable
year to non-passive income.
The proposed regulation also provides
a specific rule for stock of a related per-
son with respect to which no dividends are
received or accrued, as applicable based
on the recipient’s method of accounting,
during a taxable year but that previously
generated dividends that were character-
ized as non-passive income, in whole or
in part, under section 1297(b)(2)(C). See
proposed §1.1297-1(d)(2)(iii). The stock
is characterized based on the dividends re-
ceived or accrued, as applicable based on
the recipient’s method of accounting, with
respect thereto for the prior two years. Id.
The Treasury Department and the IRS
have determined that it may also be appro-
priate to bifurcate an asset that in part pro-
duces income and in part does not produce
income between a passive and a non-pas-
sive asset for purposes of the Asset Test
in order to provide a more accurate mea-
sure of the Tested Foreign Corporation’s
passive assets. For example, if a Tested
Foreign Corporation uses a portion of a
building, which is depreciable real prop-
erty, in its trade or business that generates
non-passive income, while renting a por-
tion of the building in exchange for rents
that are treated as passive, it would be ap-
propriate for the portions of the building
to be considered separately as non-passive
and passive assets, respectively. Accord-
ingly, the proposed regulations provide
that for purposes of applying the Asset
Test, if an asset in part produces income
and in part does not produce any income,
the asset must be bifurcated pursuant to
the method that most reasonably reflects
the uses of the property. See proposed
§1.1297-1(d)(2)(ii). A similar approach
applies to characterize gain for subpart F
purposes. See §1.954-2(e)(1)(iv).
The Treasury Department and the IRS
welcome comments on these rules, in-
cluding suggestions for how to minimize
the burden associated with determining
how to bifurcate the relevant assets.
3. Characterization of Partnership
Interests
The proposed regulations provide
guidance on the characterization of a part-
nership interest for purposes of the Asset
Test. As discussed in Part I.C.4 of this
Explanation of Provisions, the Treasury
Department and the IRS have determined
that it is appropriate to treat a partnership
in a manner similar to a corporate subsid-
iary for purposes of determining whether
a Tested Foreign Corporation is a PFIC.
Accordingly, the proposed regulations
provide that for purposes of the Asset Test,
a Tested Foreign Corporation that directly
or indirectly owns an interest in a partner-
ship is treated as if it held its proportion-
ate share of the assets of a partnership,
provided the Tested Foreign Corporation
owns, directly or indirectly, at least 25
percent, by value, of the interests in the
partnership. See proposed §1.1297-1(d)
(3)(i). A corporation’s proportionate share
of a partnership asset is treated as pro-
ducing passive income, or being held to
produce passive income, to the extent the
asset produced, or was held to produce,
passive income in the partnership’s hands,
taking into account only the partnership’s
activities, unless the rules described in
Part I.F.5 of this Explanation of Provisions
apply to allow the character of the income
to be determined at the level of the Tested
Foreign Corporation, taking into account
activities performed by certain subsidiar-
ies of the Tested Foreign Corporation. If a
Tested Foreign corporation owns less than
25 percent of the value of the partnership,
its interest in the partnership is treated as a
passive asset. See proposed §1.1297-1(d)
(3)(ii).
4. Characterization of Dealer Property
For purposes of the Asset Test, an asset
is considered passive if it produces pas-
sive income or is held for the production
of passive income. Under the dealer ex-
ception in section 954(c)(2)(C), gain from
the disposition of certain dealer property
is treated as non-passive income for pur-
poses of the Income Test. However, cer-
tain other income derived with respect to
the dealer property (such as dividends and
interest) is treated as passive income. The
exception from passive income for dealer
property in section 954(c)(2)(C) is pred-
icated on the fact that a dealer holds the
property as part of its trade or business
and not for the production of passive in-
come. Accordingly, the Treasury Depart-
ment and the IRS have determined that,
given that the PFIC regime is concerned
with whether the asset is part of an active
business, it is appropriate to characterize
dealer property for purposes of the As-
set Test based solely on the character of
the gain derived from the disposition of
the property. Accordingly, the proposed
regulations provide that property that is
subject to the dealer exception is charac-
terized as a non-passive asset for purposes
of the Asset Test, notwithstanding the du-
al-character asset rules discussed in Part
I.D.2 of this Explanation of Provisions.
See proposed §1.1297-1(d)(4).
E. Treatment of stapled entities
The Treasury Department and the IRS
understand that, in certain situations, equi-
ty interests in two or more foreign entities
must be sold together as stapled interests
within the meaning of section 269B(c)
(3). Stapled entities (as defined in section
269B(c)(2)) may be structured in such a
way that income and the assets generating
the income are in one entity, while the ac-
tivities generating the income are engaged
in by the other entity. For example, two
stapled entities might jointly carry on a
real estate business, with one stapled en-
tity owning real property that is leased to
third parties to generate rental income,
while the other stapled entity provides
management services with respect to the
real property that, if engaged in by the
first stapled entity, would allow the rent-
al income received by it to be character-
ized as non-passive income pursuant to
section 954(c)(2)(A) and these proposed
regulations. However, if the PFIC status
of the stapled entity receiving the rental
income were determined on a stand-alone

Bulletin No. 2019–31 501 July 29, 2019
basis, the income might be treated as pas-
sive income. Given that stapled interests
represent a single economic interest to
their shareholders, the Treasury Depart-
ment and the IRS have determined that it
is appropriate, for purposes of determin-
ing whether a stapled entity is a PFIC, to
treat them as such. This is consistent with
the treatment of stapled entities in section
269B(a)(3) for purposes of determining
whether a stapled entity is a regulated in-
vestment company (“RIC”) or a real estate
investment trust (“REIT”). Accordingly,
the proposed regulations provide that for
purposes of determining whether any sta-
pled entity is a PFIC, all entities that are
stapled entities with respect to each oth-
er are treated as one entity. See proposed
§1.1297-1(e). Comments are requested
as to whether similar treatment should
be provided for purposes of the subpart F
rules.
F. Look-through rule for 25-percent-
owned subsidiaries
As noted in Part I.C.4 of this Explana-
tion of Provisions, in determining PFIC
status, section 1297(c) applies when a
Tested Foreign Corporation owns, direct-
ly or indirectly, at least 25 percent of the
value of the stock of another corporation,
a Look-Through Subsidiary. In such in-
stance, the Tested Foreign Corporation
is treated as if it directly held its propor-
tionate share of the assets and directly
received its proportionate share of the
income of the Look-Through Subsidiary.
Section 1297(c) was enacted to prevent
“foreign corporations owning the stock of
subsidiaries engaged in active businesses
[from being] classified as PFlCs.” H.R.
Rep. No. 99-841, at II-644 (1986) (Conf.
Rep.).
1. Determining a Tested Foreign
Corporation’s Ownership of a Look-
Through Subsidiary and Proportionate
Share of a Look-Through Subsidiary’s
Assets and Income
Neither the statute nor the regulations
provide guidance on how to calculate a
Tested Foreign Corporation’s indirect
ownership in another corporation for pur-
poses of determining whether the corpora-
tion is a Look-Through Subsidiary under
section 1297(c). In addition, the statute
and regulations do not provide a method-
ology for determining a Tested Foreign
Corporation’s proportionate share of a
Look-Through Subsidiary’s income and
assets for purposes of section 1297(c).
Under section 1297(c), the determina-
tion of whether a Tested Foreign Corpo-
ration owns, directly or indirectly, at least
25 percent of the stock of another corpora-
tion is based on value. The proposed reg-
ulations provide that indirect stock own-
ership for purposes of section 1297(c) is
determined under the principles of section
958(a) applicable for determining owner-
ship by value. See proposed §1.1297-2(b)
(1). The section 958(a) principles apply
without regard to whether entities are do-
mestic or foreign, and thus indirect owner-
ship includes corporate ownership through
intermediate corporations, partnerships,
trusts, and estates, regardless of whether
such intermediate entities are foreign or
domestic. Id. In addition, stock considered
owned by reason of applying the section
958(a) indirect ownership rules is general-
ly considered actually owned for purposes
of reapplying the indirect ownership rules.
See §1.958-2(f)(1).
Section 1297(c) provides that a Tested
Foreign Corporation is treated as holding
its proportionate share of the assets of the
Look-Through Subsidiary, and receiving
its proportionate share of the income of
the Look-Through Subsidiary. The pro-
posed regulations provide guidance on
the meaning of “proportionate share” for
purposes of section 1297(c). Specifically,
proposed §1.1297-2(b)(2) provides that
a Tested Foreign Corporation is treated
as owning a share of each asset, and re-
ceiving a proportionate share of each item
of income, of a Look-Through Subsidi-
ary proportionate to the Tested Foreign
Corporation’s percentage ownership (by
value) of the Look-Through Subsidiary.
Comments are requested concerning al-
ternative methods that might better de-
termine a Tested Foreign Corporation’s
proportionate share of income of a Look-
Through Subsidiary that has multiple
classes of stock outstanding.
Changes in stock ownership may cause
fluctuations in a Tested Foreign Corpora-
tion’s ownership in a Look-Through Sub-
sidiary during a taxable year. For purposes
of the Asset Test, ownership of a Look-
Through Subsidiary is determined on each
measuring date. See proposed §1.1297-
2(b)(2)(i). If the requisite 25-percent own-
ership is not met with respect to a corpora-
tion on the last day of a measuring period,
as defined in Part I.D.1 of this Explanation
of Provisions, the stock of the corporation
would be a passive asset for purposes of
that measuring period, absent the applica-
tion of a special rule, such as the new rule
for dealer property in proposed §1.1297-
1(d)(4), described in Part I.D.4 of this Ex-
planation of Provisions. For purposes of
the Income Test, a subsidiary is considered
a Look-Through Subsidiary if the Tested
Foreign Corporation owns an average of
25 percent of the value of the subsidiary
for the year, taking into account its owner-
ship on the last day of each measuring pe-
riod of the Tested Foreign Corporation’s
taxable year. See proposed §1.1297-2(b)
(2)(ii)(A). If the Tested Foreign Corpo-
ration does not maintain, on average, at
least 25-percent ownership of the subsid-
iary for the taxable year, the Tested For-
eign Corporation is not, under the general
rule in the proposed regulations, treated as
receiving its proportionate share of the in-
come of the subsidiary for that year under
section 1297(c). However, the Tested For-
eign Corporation may be treated as receiv-
ing directly its proportionate share of the
income of the subsidiary for each measur-
ing period in a taxable year for which the
25-percent ownership requirement is met
on the relevant measuring date, provided
the taxpayer can establish gross income
for each of those measuring periods. See
proposed §1.1297-2(b)(2)(ii)(B). Com-
ments are requested concerning appro-
priate methods for a taxpayer to establish
gross income for a measuring period.
2. Overlap Between Section 1297(c) and
Section 1298(b)(7)
Section 1298(b)(7) provides a special
characterization rule that applies when a
Tested Foreign Corporation owns at least
25 percent of the value of the stock of a
domestic corporation and is subject to the
accumulated earnings tax under section
531 (or waives any benefit under a trea-
ty that would otherwise prevent imposi-
tion of such tax). In such instance, sec-
tion 1298(b)(7) treats the qualified stock
held by the domestic corporation as a

July 29, 2019 502 Bulletin No. 2019–31
non-passive asset, and the related income
as non-passive income. By its terms, the
section 1297(c) look-through rule also
could apply to the qualified stock, which
is stock in a domestic C corporation that is
not a RIC or REIT, and look through to the
assets of the corporation that issued the
qualified stock for purposes of the Income
Test and Asset Test. For example, assume
a Tested Foreign Corporation owns 50 per-
cent of the value of the stock in a domestic
corporation, US1, which, in turn, owns 50
percent of the stock of a lower tier domes-
tic corporation, US2 (which is not a RIC
or a REIT). US2 wholly owns the stock
of a foreign corporation, FC. The section
1297(c) look-through rule applies to treat
the Tested Foreign Corporation as if it
held its proportionate share of the assets,
and received a proportionate share of the
income, of US1. Both the section 1297(c)
look-through rule and the section 1298(b)
(7) characterization rule, by their terms,
would apply to the stock of US2. The
section 1297(c) rule would look through
to the assets of US2 and FC. The section
1298(b)(7) characterization rule would
treat the stock of US2 as a non-passive as-
set, and the income derived from the stock
as income as non-passive income.
The Treasury Department and the IRS
have determined that the special character-
ization rule of section 1298(b)(7) should
generally take precedence over the section
1297(c) look-through rule when both rules
would apply simultaneously because the
characterization rule of section 1298(b)(7)
is the more specific rule where the Tested
Foreign Corporation owns a domestic cor-
poration. Thus, the proposed regulations
provide that the look-through rule of sec-
tion 1297(c) does not apply to a domestic
corporation, and any subsidiaries of the
domestic corporation, if the stock of the
domestic corporation is characterized, un-
der section 1298(b)(7), as a non-passive
asset producing non-passive income. See
proposed §1.1297-2(b)(2)(iii). However,
these proposed regulations provide certain
limitations on the application of section
1298(b)(7), including a new anti-abuse
rule, in which case section 1297(c) would
apply. The limitations and anti-abuse rule
are described in Part I.H of this Explana-
tion of Provisions. The Treasury Depart-
ment and the IRS welcome comments on
these rules.
3. Elimination of Certain Assets and
Income for Purposes of Applying
Section 1297(a)
Section 1297(c) aggregates the income
and assets of a Tested Foreign Corpora-
tion and a Look-Through Subsidiary for
purposes of testing the PFIC status of the
Tested Foreign Corporation. However,
there are no statutory or regulatory rules
that prevent the double counting of income
and assets arising from contracts and other
transactions among a Tested Foreign Cor-
poration and one or more Look-Through
Subsidiaries. Intercompany items that are
not eliminated for purposes of determin-
ing a Tested Foreign Corporation’s PFIC
status may result in a duplication of pas-
sive income or passive assets attributed
to the Tested Foreign Corporation. For in-
stance, if a wholly-owned Look-Through
Subsidiary earned $100x of passive in-
come during a taxable year, and distrib-
uted the $100x as a dividend to a Tested
Foreign Corporation, the Tested Foreign
Corporation would have a total of $200x
of passive income ($100x of passive in-
come under section 1297(c) and a $100x
dividend) for purposes of the Income
Test, even though only $100 of passive in-
come was earned economically. Any dou-
ble-counting of intercompany income and
assets distorts the effect of section 1297(c)
on the Income Test and Asset Test.
The legislative history to the PFIC rules
provides an approach that would eliminate
certain assets and income in order to pre-
vent double-counting. See H.R. Rep. No.
100-795, at 268 (1988) (“Under this look-
through rule, a foreign corporation that
owns at least 25 percent of the stock of
another corporation is treated as owning
a proportionate part of the other corpora-
tion’s assets and income. Thus, amounts
such as interest and dividends received
from foreign or domestic subsidiaries are
eliminated from the shareholder’s income
in applying the income test and the stock
or debt investment is eliminated from
the shareholder’s assets in applying the
asset test.”); Staff, Joint Committee on
Taxation, General Explanation of the Tax
Reform Act of 1986, JCS-10-87, at 1026
(1987). The Treasury Department and the
IRS have determined that it is appropriate
to follow that approach. Thus, the pro-
posed regulations provide that intercom-
pany payments of dividends and interest
between a Look-Through Subsidiary and
the Tested Foreign Corporation and stock
and debt receivables are eliminated in ap-
plying the Income Test and the Asset Test.
See proposed §1.1297-2(c)(1) and (2). In
the case of dividends, in order to qualify
for elimination, the payment must be at-
tributable to income of a Look-Through
Subsidiary that was included in gross in-
come by the Tested Foreign Corporation
for purposes of determining its PFIC sta-
tus. See proposed §1.1297-2(c)(2). Thus,
dividends attributable to income of the
Look-Through Subsidiary earned in a
year before the Tested Foreign Corpora-
tion owned, on average, at least 25% by
value of the Look-Through Subsidiary
would generally not qualify for elimina-
tion. As a result of the elimination rule, for
example, interest and dividends received
by a Tested Foreign Corporation from a
wholly owned Look-Through Subsidiary
are eliminated from the Tested Foreign
Corporation’s gross income for purpos-
es of applying section 1297(a)(1), except
to the extent that dividend amounts are
attributable to income that has not been
treated as received directly by the Tested
Foreign Corporation under the section
1297(c) look-through rule. Additionally,
the proposed regulations extend this treat-
ment to intercompany payments between
two Look-Through Subsidiaries of a Test-
ed Foreign Corporation and the associat-
ed stock and debt receivables. Similarly,
stock and debt investments in a lower-tier
Look-Through Subsidiary are eliminated
for purposes of applying the Income Test
and Asset Test to the Tested Foreign Cor-
poration. In the case of a Tested Foreign
Corporation that owns less than 100 per-
cent of a Look-Through Subsidiary, the
proposed regulations provide that while
stock and dividends are eliminated in their
entirety, eliminations of debt receivables
and interest are made in proportion to the
shareholder’s direct and indirect own-
ership (by value) in the Look-Through
Subsidiary. The proposed regulations also
provide for eliminations under these prin-
ciples for ownership interests in a Look-
Through Partnership, as well as intercom-
pany debt receivables and interest paid or
accrued thereon between a Tested Foreign
Corporation and a Look-Through Partner-
ship. See proposed §1.1297-2(c)(3). Com-

Bulletin No. 2019–31 503 July 29, 2019
ments are requested on the application of
the elimination rule if the Tested Foreign
Corporation owns less than 100 percent
of the Look-Through Subsidiary or Part-
nership. Comments are also requested as
to whether the Treasury Department and
the IRS should consider the elimination of
rents, royalties, or any other types of inter-
company income, and any related assets,
and if so, how to effectuate the elimina-
tion.
4. Section 1297(b)(2)(C) Related
Person Determination with Respect
to Interest, Dividends, Rents, and
Royalties Received by Look-Through
Subsidiaries and Certain Partnerships
Section 1297(c) provides that a Tested
Foreign Corporation is treated as receiv-
ing directly its proportionate share of the
income of a Look-Through Subsidiary for
purposes of applying the Income Test to
the Tested Foreign Corporation. Section
1297(b)(2)(C) provides that, for purposes
of the Income Test, passive income does
not include interest, dividends, rents or
royalties received or accrued from a relat-
ed person (within the meaning of section
954(d)(3)) to the extent such amount is
properly allocable to income of the re-
lated person that is not passive income.
The statute and current regulations do not
address the level at which the “related
person” determination is made if a Look-
Through Subsidiary receives or accrues an
item of income that is treated as directly
received by a Tested Foreign Corporation
pursuant to section 1297(c). Thus, the in-
teraction and application of the two rules
is unclear in cases in which the payor of an
item of income is a “related person” with
respect to either the Look-Through Sub-
sidiary or the Tested Foreign Corporation,
but not with respect to both.
The Treasury Department and the IRS
have determined that, because section
1297(c) generally applies by classifying
an item at the level of Look-Through
Subsidiary and then carrying that classi-
fication up to the Tested Foreign Corpora-
tion, it is appropriate to determine wheth-
er the section 1297(b)(2)(C) exception
applies (and, thus, determine the passive
or non-passive character of an item of
income) at the Look-Through Subsidi-
ary level, and then flow up the passive or
non-passive character of the item to the
Tested Foreign Corporation for purposes
of applying the Income Test. Accordingly,
proposed §1.1297-2(d)(1) provides that,
in applying section 1297(b)(2)(C), “relat-
ed person” status is tested with respect to
the payor of the item of income and the
Look-Through Subsidiary. The same rule
applies for items of income received by a
partnership and treated as received direct-
ly by a Tested Foreign Corporation pur-
suant to proposed §1.1297-1(c)(2). The
Treasury Department and the IRS wel-
come comments on these rules.
5. Attribution of Activities of a Look-
Through Subsidiary and Certain
Partnerships
The interaction of section 1297(c) and
certain exceptions from passive income
also raises issues that require a threshold
determination of whether an exception
should apply at a Look-Through Subsid-
iary level or a Tested Foreign Corpora-
tion level. For instance, under proposed
§1.1296-4 in the notice of proposed
rulemaking (INTL-0065-93) published
in the Federal Register (60 FR 20922)
on April 28, 1995, the banking exception
in section 1297(b)(2)(A) applies only if
a number of requirements are satisfied,
including a deposit taking requirement,
a lending requirement, and a license re-
quirement. See proposed §1.1296-4. In a
bank holding company structure, in which
a Tested Foreign Corporation wholly
owns a Look-Through Subsidiary that
separately satisfies the section 1297(b)(2)
(A) requirements, the banking exception
would apply to the income derived by the
Look-Through Subsidiary in its banking
business if an approach that applied the
exception at the Look-Through Subsidiary
level were adopted, but would not apply
if an approach that applied the exception
at the Tested Foreign Corporation level
were adopted because the Tested Foreign
Corporation would not literally meet all
of the banking exception requirements.
Similarly, the character of assets held by
a Look-Through Subsidiary that is a deal-
er in property in the ordinary course of its
trade or business as a dealer would depend
on whether an approach that applied the
exception in section 954(c)(2)(C) at the
Look-Through Subsidiary level were ad-
opted, or whether an approach were ap-
plied that determined the character at the
level of a Tested Foreign Corporation that
was not itself a dealer.
A corollary issue arises with respect to
the application of other exceptions to pas-
sive income under section 954(c). For in-
stance, under §1.954-2(c)(1)(ii), the active
rental income exception in section 954(c)
(2)(A) applies if certain activities are per-
formed with respect to real property by the
lessor’s own employees. In a structure in
which a Tested Foreign Corporation holds
real estate assets directly and employees
of its Look-Through Subsidiary conduct
the activities related to the Tested Foreign
Corporation’s real estate business neces-
sary to satisfy the exception, the exception
would apply if the character of the income
were determined at the level of the Tested
Foreign Corporation and the activities of
the managers and employees of the Look-
Through Subsidiary were attributed to the
Tested Foreign Corporation. However, the
exception would not apply if the activities
were not attributed to the Tested Foreign
Corporation, because in such case the
relevant activities are not performed by
employees of the Tested Foreign Corpo-
ration, as literally required in the regula-
tion. Additional complexities arise when
the Tested Foreign Corporation owns less
than 100 percent of the Look-Through
Subsidiary.
Under current law, the character of in-
come or assets is determined at the level
of the entity that directly earns the income
or holds the assets based on the activi-
ties of that entity. However, the Treasury
Department and the IRS understand that
active businesses in foreign jurisdictions
generating rent and royalty income are of-
ten organized with assets and income, on
the one hand, and activities, on the other
hand, contained in separate entities for
various business reasons. The Treasury
Department and the IRS have determined
that if assets are held and activities under-
taken in separate entities within a group
of wholly-owned Look-Through Subsid-
iaries headed by a Tested Foreign Corpo-
ration, the activities of the Look-Through
Subsidiaries should be taken into account
for purposes of determining whether
an item of rent or royalty income of the
Tested Foreign Corporation is passive in-
come, as they would if the Look-Through

July 29, 2019 504 Bulletin No. 2019–31
Subsidiaries were disregarded as separate
from the Tested Foreign Corporation for
U.S. Federal income tax purposes.
Accordingly, the proposed regulations
provide that an item of rent or royalty in-
come received or accrued by a Tested For-
eign Corporation (or treated as received
or accrued by the Tested Foreign Corpo-
ration pursuant to section 1297(c)) that
would otherwise be passive income under
the general rule is not passive income for
purposes of section 1297 if the item would
be excluded from passive income, deter-
mined by taking into account the activities
performed by the officers and employees
of the Tested Foreign Corporation as well
as activities performed by the officers
and employees of certain Look-Through
Subsidiaries and certain partnerships in
which the Tested Foreign Corporation or
one of the Look-Through Subsidiaries is a
partner. See proposed §1.1297-2(e)(1). In
some cases, a Look-Through Subsidiary
or Look-Through Partnership may have
more than one unrelated owner owning
at least 25 percent of the entity’s value.
Activities, unlike income or expense, are
qualitative in nature and cannot be easily
allocated between owners based on their
percentage ownership. If activities are
attributed to any owner of 25 percent or
more of the Look-Through Subsidiary or
partnership, then up to four owners could
potentially be able to take into account the
same activities. Because it may be diffi-
cult to allocate activities among multiple
entities but inappropriate to allow dou-
ble-counting of the activities by attributing
the activities of a Look-Through Subsidi-
ary or a partnership to multiple unrelated
entities, the proposed regulations provide
that a Tested Foreign Corporation may
take into account the activities performed
only by those Look-Through Subsidiaries
or partnerships with respect to which the
Tested Foreign Corporation owns (direct-
ly or indirectly) more than 50 percent of
the value, because at this level of owner-
ship the activities of the Look-Through
Subsidiary or Look-Through Partnership
could be attributed to only another foreign
corporation within the same chain of own-
ership as the Tested Foreign Corporation
and not an unrelated entity.
The Treasury Department and the IRS
request comments on the application of the
activity attribution rules to Look-Through
Subsidiaries that are not wholly owned by
a Tested Foreign Corporation, including
whether it is appropriate for a Tested For-
eign Corporation to take into account all
activities of a Look-Through Subsidiary
in which the Tested Foreign Corporation
owns more than 50 percent of the value of
the stock, and whether a different owner-
ship threshold for attribution of activities
would be appropriate.
The Treasury Department and the IRS
also request comments on whether the
ability to apply an exception to passive
income at the Tested Foreign Corporation
level taking into account the activities of
certain subsidiaries should apply for pur-
poses of other exceptions, such as for pur-
poses of the exception in section 1297(b)
(2)(A). Comments should consider the
interaction of the rules for elimination
of intercompany assets and income de-
scribed in Part I.F.3 of this Explanation of
Provisions with the rules for taking into
account the activities of certain Look-
Through Subsidiaries and Look-Through
Partnerships.
6. Gain on the Disposition of Stock of a
Look-Through Subsidiary
Section 1297(c) does not address the
treatment of a Tested Foreign Corpora-
tion’s gain from the disposition of stock of
a Look-Through Subsidiary for purposes
of the Income Test. Questions have been
raised as to whether such a disposition
should be treated as a disposition of stock
or a deemed disposition of the assets of
the Look-Through Subsidiary, and how
gain on the disposition should be charac-
terized for purposes of the Income Test.
The proposed regulations provide that,
for purposes of the Income Test, the dis-
position of a Look-Through Subsidiary
is treated as the disposition of stock, and
gain is computed accordingly. However,
the proposed regulations limit the amount
of the gain taken into account for purposes
of the Income Test in order to avoid dou-
ble-counting any income that the Tested
Foreign Corporation takes into account
under section 1297(c) in determining the
PFIC status of the Tested Foreign Corpo-
ration during the year of the disposition
or took into account for such purpose in a
prior year that has not been distributed as
a dividend to the Tested Foreign Corpora-
tion. Thus, the amount of gain taken into
account for purposes of the Income Test
(“Residual Gain”) is equal to the total gain
recognized by the Tested Foreign Corpo-
ration on the disposition, reduced (but
not below zero) by the amount (if any) by
which (A) the aggregate income (if any)
of the Look-Through Subsidiary (and any
other Look-Through Subsidiary, to the
extent stock in such other Look-Through
Subsidiary is owned indirectly through the
Look-Through Subsidiary) taken into ac-
count by the Tested Foreign Corporation
under section 1297(c)(2) with respect to
the disposed Look-Through Subsidiary
stock exceeds (B) the aggregate dividends
(if any) received by the Tested Foreign
Corporation from the Look-Through
Subsidiary with respect to the disposed
stock (including dividends attributable to
stock of any other Look-Through Subsid-
iary owned indirectly through the Look-
Through Subsidiary). The Residual Gain
is computed on a share-by-share basis
with respect to income of a Look-Through
Subsidiary that was taken into account
by the Tested Foreign Corporation and
dividends received from a Look-Through
Subsidiary. See proposed §1.1297-2(f)
(1). Comments are requested on the cal-
culation of Residual Gain for purposes of
section 1297(a).
Gain from the disposition of stock gen-
erally is treated as FPHCI under section
954(c)(1)(B)(i). However, section 954(c)
does not contain a look-through rule com-
parable to section 1297(c). In order to
comport with the policy underlying sec-
tion 1297(c), the Treasury Department and
the IRS have determined that the character
of the gain from the disposition of a Look-
Through Subsidiary should correspond to
the character of the underlying assets of
the Look-Through Subsidiary. Accord-
ingly, proposed §1.1297-2(f)(2) provides
that the Residual Gain taken into account
by the Tested Foreign Corporation will
be characterized as passive income or
non-passive income in proportion to the
passive assets and non-passive assets of
the disposed-of Look-Through Subsidiary
(and any other Look-Through Subsidiary,
to the extent owned indirectly through the
Look-Through Subsidiary) treated as held
by the Tested Foreign Corporation pursu-
ant to section 1297(c) on the date of the
disposition, measured using the method

Bulletin No. 2019–31 505 July 29, 2019
(value or adjusted bases) that is used to
measure the assets of the Tested Foreign
Corporation for purposes of the Asset Test.
Pursuant to proposed §1.1297-1(c)(1)
(i)(C), section 954(c)(4) applies with re-
spect to the disposition of interests in a
Look-Through Partnership. Comments
are requested concerning whether any ad-
ditional guidance is needed concerning the
disposition of interests in a Look-Through
Partnership.
G. Change-of-business exception
(including dispositions of stock of a
Look-Through Subsidiary)
Section 1298(b)(3) provides an ex-
ception from PFIC status (the “Change-
of-Business Exception”) for a Tested
Foreign Corporation that is “in transition
from one active business to another ac-
tive business.” H.R. Rep. No. 99-841, at
II-644 (1986) (Conf. Rep.). Under section
1298(b)(3), the Change-of-Business Ex-
ception applies for a taxable year of the
Tested Foreign Corporation if (i) neither
the Tested Foreign Corporation nor a pre-
decessor of the Tested Foreign Corpora-
tion was a PFIC in a prior taxable year;
(ii) it is established to the satisfaction of
the Secretary that (A) substantially all of
the passive income of the Tested Foreign
Corporation for the taxable year is attrib-
utable to proceeds from the disposition of
one or more active trades or businesses,
and (B) the Tested Foreign Corporation
will not be a PFIC for either of the two
taxable years following such taxable year;
and (iii) the Tested Foreign Corporation is
not, in fact, a PFIC for either of such two
taxable years. Thus, notwithstanding the
legislative history and the title of section
1298(b)(3), a Tested Foreign Corporation
may qualify for the Change-of-Business
Exception even if it does not engage in an
active business after a disposition.
The proposed regulations provide gen-
eral guidance with respect to the Change-
of-Business Exception. First, the proposed
regulations provide that for purposes of
section 1298(b)(3)(B), the existence of
an active trade or business and the deter-
mination of whether assets are used in an
active trade or business is determined by
reference to Treas. Reg. §1.367(a)-2(d)
(2), (3), and (5), except that officers and
employees do not include the officers
and employees of related entities as pro-
vided in §1.367(a)-2(d)(3). See proposed
§1.1298-2(c)(3). If, however, the activity
attribution rules described in Part I.F.5 of
this Explanation of Provisions or section
954(h)(3)(E) would apply to cause the ac-
tivities of another entity to be taken into
account, they are taken into account for
purposes of determining the applicability
of the Change-of-Business Exception. Id.
In addition, the proposed regulations pro-
vide that income attributable to proceeds
from the disposition of an active trade
or business means income earned on in-
vestment of such proceeds but does not
include the proceeds themselves. See pro-
posed §1.1298-2(c)(1). The regulations
also provide that section 1298(b)(3) may
apply to either a taxable year of the dispo-
sition of the active trade or business or the
immediately succeeding taxable year, but
in any event may apply to only one year
with respect to a disposition. See proposed
§1.1298-2(e). Thus, a Tested Foreign Cor-
poration that receives proceeds from a
disposition in more than one taxable year
may apply the Change-of-Business Ex-
ception to only one year. A Tested Foreign
Corporation can choose which year it ap-
plies the Change-of-Business Exception if
the exception can apply in more than one
year.
Several comments have inquired re-
garding the application of the Change-
of-Business Exception to the sale or
exchange of stock of a Look-Through
Subsidiary that conducts an active trade
or business. Specifically, these comments
have questioned whether, by reason of
section 1297(c), the Tested Foreign Cor-
poration should be treated as disposing of
an active trade or business conducted by
a Look-Through Subsidiary for purpos-
es of the Change-of-Business Exception.
The Treasury Department and the IRS
have determined that, given that section
1297(c) applies “for purposes of deter-
mining whether [a] foreign corporation
is a [PFIC],” the Change-of-Business
Exception should, in appropriate circum-
stances, apply to a Tested Foreign Cor-
poration’s disposition of its interest in a
Look-Through Subsidiary that is engaged
in an active trade or business. Thus, the
proposed regulations provide that, for
purposes of the Change-of-Business Ex-
ception, a disposition of stock of a Look-
Through Subsidiary is treated as a dispo-
sition of a proportionate share of the assets
held by the Look-Through Subsidiary on
the date of the disposition. See proposed
§1.1298-2(d). Therefore, the portion of
the proceeds attributable to assets used by
a Look-Through Subsidiary in an active
trade or business is considered for purpos-
es of the Change-of-Business Exception
to be proceeds from the disposition of an
active trade or business.
The Treasury Department and the IRS
also understand that Tested Foreign Cor-
porations may not be able to satisfy the
requirements of the Change-of-Business
Exception provided in section 1298(b)
(3) in certain situations in which proceeds
from the disposition of an active trade or
business cause the Tested Foreign Corpo-
ration to qualify as a PFIC pursuant to the
Asset Test. The Treasury Department and
the IRS have determined that if a Tested
Foreign Corporation has historically en-
gaged in an active trade or business and
proceeds from the disposition of such
business cause it to qualify as a PFIC, it
may be appropriate in certain circum-
stances to which section 1298(b)(3) does
not apply to treat the Tested Foreign Cor-
poration as not a PFIC. Accordingly, the
proposed regulations expand the Change-
of-Business Exception in section 1298(b)
(3) to apply if, on the measuring dates that
occur during the taxable year to which
the Change-of-Business Exception is pro-
posed to apply and after the disposition,
on average, substantially all of the passive
assets of a corporation are attributable to
proceeds from the disposition of one or
more active trades or businesses. See pro-
posed §1.1298-2(b)(2)(ii).
Furthermore, the Treasury Department
and the IRS understand that in certain cir-
cumstances, the Change-of-Business Ex-
ception could apply to the liquidation of a
Tested Foreign Corporation if it were not
for the fact that foreign law restrictions
make it difficult to complete the liquida-
tion within the year for which the excep-
tion applies. The Treasury Department
and the IRS have determined that it is ap-
propriate to allow the Change-of-Business
Exception to be relied upon when such a
liquidation is completed within a reason-
able period of time after the disposition.
Accordingly, in the case of a corporation,
substantially all of the passive assets of

July 29, 2019 506 Bulletin No. 2019–31
which are attributable to proceeds from the
disposition of one or more active trades or
businesses, proposed §1.1298-2(c)(4) pro-
vides that a Tested Foreign Corporation
will be deemed to satisfy the requirement
that the Tested Foreign Corporation not
be a PFIC for the two years following the
year for which it relies on the Change-of-
Business Exception if it completely liqui-
dates by the end of the year following the
year for which it relies on the Change-of-
Business Exception. U.S. Federal income
tax principles apply to determine whether
a Tested Foreign Corporation has com-
pletely liquidated. See Rev. Rul. 54-518,
1954-2 C.B. 142 (concluding that if a cor-
poration ceases business operations, has
retained no assets, and has no income, the
mere retention of a charter does not pre-
vent it from being treated as completely
liquidated).
The Treasury Department and the IRS
request comments concerning whether
any other guidance is necessary concern-
ing the application of section 1298(b)(3),
including concerning the conditions under
which the requirements of section 1298(b)
(3)(C) will be considered satisfied.
H. Domestic subsidiary stock rule
As discussed in Part I.F.2 of this Ex-
planation of Provisions, section 1298(b)
(7) provides a special characterization rule
that applies if a Tested Foreign Corpora-
tion owns at least 25 percent of the value
of the stock of a domestic corporation and
is subject to the accumulated earnings tax
under section 531 (or waives any benefit
under a treaty that would otherwise pre-
vent imposition of such tax). The pro-
posed regulations clarify that stock of the
25-percent-owned domestic corporation
and the qualified stock generally must be
owned by the Tested Foreign Corporation
and the 25-percent-owned domestic cor-
poration, respectively, either directly or
indirectly through one or more partner-
ships. See proposed §1.1298-4(b)(1) and
(c).
The Treasury Department and the IRS
have determined that the accumulated
earnings tax need not actually be imposed
on a foreign corporation in a taxable year
in order for it to qualify for section 1298(b)
(7). Furthermore, a Tested Foreign Corpo-
ration’s ability to rely on section 1298(b)
(7) in a given year should not depend on
whether it has U.S. source income in that
year, as it would if §1.532-1(c) applied to
determine whether the Tested Foreign Cor-
poration was subject to tax under section
531. Accordingly, the regulations provide
that a Tested Foreign Corporation is con-
sidered subject to the tax imposed by sec-
tion 531 for purposes of section 1298(b)
(7) regardless of whether the tax actually is
imposed on the corporation and regardless
of whether the requirements of §1.532-
1(c) are met. See proposed §1.1298-4(d)
(1). Additionally, comments have raised
questions concerning the waiver of trea-
ty benefits that would prevent imposition
of the accumulated earnings tax. The pro-
posed regulations provide that a Tested
Foreign Corporation must waive any ben-
efit under a treaty by attaching to its U.S.
Federal income tax return for the taxable
year for which it applies section 1298(b)
(7) a statement that it irrevocably waives
treaty protection against the imposition of
the accumulated earnings tax, effective for
all prior, current, and future taxable years.
See proposed §1.1298-4(d)(2)(i). If a Test-
ed Foreign Corporation is not otherwise
required to file a U.S. Federal income tax
return, the waiver can be made in a resolu-
tion (or other governance document) to be
kept in the entity’s records or, in the case
of a publicly traded corporation, in a state-
ment in the corporation’s public filings.
See proposed §1.1298-4(d)(2)(ii).
The Treasury Department and the IRS
understand that foreign corporations may
be relying on section 1298(b)(7) to avoid
being treated as PFICs notwithstanding
their direct and indirect ownership of pre-
dominantly passive assets by ensuring that
a sufficient amount of such assets are held
indirectly through two tiers of domestic
subsidiaries. For example, a Tested For-
eign Corporation might hold stock of an-
other foreign corporation that is PFIC, but
rely on a two-tiered domestic chain hold-
ing passive assets to avoid being treated as
a PFIC; as a result, a United States person
holding stock of the Tested Foreign Cor-
poration would generally not be treated as
a shareholder of the PFIC stock owned by
the Tested Foreign Corporation. Accord-
ingly, the proposed regulations provide
that, notwithstanding the general coordi-
nation rule between section 1297(c) and
section 1298(b)(7) in proposed §1.1297-
2(b)(2)(iii), section 1298(b)(7) does not
apply for purposes of determining if a for-
eign corporation is a PFIC for purposes of
the ownership attribution rules in section
1298(a)(2) and Treas. Reg. §1.1291-1(b)
(8)(ii). See proposed §1.1298-4(e). Thus,
if a Tested Foreign Corporation would
qualify as a PFIC if section 1298(b)(7) did
not apply, either because section 1297(c)
applied to treat the Tested Foreign Cor-
poration as owning directly the assets of
a domestic corporation in which it indi-
rectly held qualified stock, or because the
qualified stock was treated as a passive
asset, then persons that held stock of a
PFIC through the Tested Foreign Corpo-
ration would be considered under section
1298(a)(2)(B) and Treas. Reg. §1.1291-
1(b)(8)(ii)(B) to own a proportionate
amount (by value) of the stock of the PFIC
regardless of the level of their ownership
interest in the Tested Foreign Corporation.
To address the possibility of passive
assets – particularly non-stock assets that
could not themselves be eligible for the
special treatment of section 1298(b)(7) –
being held through a two-tiered chain of
domestic subsidiaries in order to avoid
the PFIC rules, the proposed regulations
further provide anti-abuse rules under
the authority of section 1298(g), one of
which provides that section 1298(b)(7)
will not apply if the Tested Foreign Cor-
poration would be a PFIC if the qualified
stock or any income received or accrued
with respect thereto were disregarded. See
proposed §1.1298-4(f)(1). Furthermore,
under a second anti-abuse rule, section
1298(b)(7) will not apply if a principal
purpose for the Tested Foreign Corpo-
ration’s formation or acquisition of the
25-percent-owned domestic corporation
is to avoid classification of the Tested
Foreign Corporation as a PFIC. A princi-
pal purpose will be deemed to exist if the
25-percent-owned domestic corporation
is not engaged in an active trade or busi-
ness in the United States. See proposed
§1.1298-4(f)(2). No inference is intended
as to the application of section 1298(b)
(7) under prior law. The IRS may, where
appropriate, challenge transactions under
the Code, regulatory provisions under pri-
or law, or judicial doctrines. The Treasury
Department and the IRS welcome com-
ments on these rules.

Bulletin No. 2019–31 507 July 29, 2019
II. PFIC Insurance Exception Rules
The proposed regulations provide
guidance regarding whether the income
of a foreign corporation is excluded
from passive income pursuant to section
1297(b)(2)(B) because the income is de-
rived in the active conduct of an insurance
business by a QIC. Part II.A of this Ex-
planation of Provisions describes the rules
in proposed §1.1297-4 for determining
whether a foreign corporation is a QIC.
Part II.B of this Explanation of Provisions
describes the rules in proposed §1.1297-
5(c)(2) defining the term insurance busi-
ness. Part II.C of this Explanation of Pro-
visions describes the rules in proposed
§1.1297-5(c) regarding the active conduct
of an insurance business. Part II.D of this
Explanation of Provisions describes the
rules in proposed §1.1297-5(f) regarding
the application of the section 1297(b)(2)
(B) exception to items of income treated
as received or accrued or assets treated as
held by a QIC pursuant to section 1297(c).
Part II.E of this Explanation of Provisions
describes the rules in proposed §1.1297-
5(d) regarding the treatment of income
and assets of certain domestic insurance
corporations owned by a QIC as active for
purposes of 1297(a). Part II.F of this Ex-
planation of Provisions describes the rule
in proposed §1.1297-5(g) prohibiting the
double counting of any item for purposes
of proposed §§1.1297-4 and 1.1297-5.
A. QIC status requirement
Generally, section 1297(f) provides
that a QIC is a foreign corporation that (1)
would be subject to tax under subchapter
L if it were a domestic corporation and (2)
has applicable insurance liabilities that
constitute more than 25 percent of its total
assets. Proposed §1.1297-4 provides guid-
ance regarding the requirements under
section 1297(f)(1) that a foreign corpora-
tion must satisfy to qualify as a QIC.
1. Insurance Company Requirement
Proposed §1.1297-4(b)(1) provides
guidance regarding when a foreign cor-
poration would be the type of corporation
that would be taxable under subchapter
L (that is, an insurance company) if the
corporation were a domestic corporation.
See section 1297(f)(1)(A). It provides that
a foreign corporation would be subject to
tax under subchapter L if it were a domes-
tic corporation if it is an insurance compa-
ny as defined in section 816(a) (generally
requiring more than half of the corpora-
tion’s business during the taxable year to
be the issuing of insurance or annuity con-
tracts, or the reinsuring of risks underwrit-
ten by insurance companies).
2. 25 Percent Test
In addition to the insurance company
requirement, generally a foreign corpo-
ration’s “applicable insurance liabilities”
(defined in section 1297(f)(3)(A) and
proposed §1.1297-4(f)(2)) must exceed
25 percent of its “total assets” (defined
in proposed §1.1297-4(f)(7) to be a QIC.
Section 1297(f)(1)(B); see also proposed
§1.1297-4(c). This determination is made
on the basis of the foreign corporation’s li-
abilities and assets as reported on the cor-
poration’s applicable financial statement
for the last year ending with or within the
taxable year. This test hereinafter is re-
ferred to as the “25 percent test.” Proposed
§1.1297-4(c) provides guidance regarding
the application of the 25 percent test.
3. Alternative Facts and Circumstance
Test
If a foreign corporation fails the 25
percent test, section 1297(f)(2) permits a
United States person to elect to treat stock
in the corporation as stock of a QIC un-
der certain circumstances. Specifically, to
make the election, the foreign corporation
must be predominantly engaged in an in-
surance business, and its applicable insur-
ance liabilities must constitute 10 percent
or more of its total assets, hereinafter the
“10 percent test.” A United States person
may only make this election if the foreign
corporation fails the 25 percent test solely
due to runoff-related or rating-related cir-
cumstances involving its insurance busi-
ness, as further described in Part II.A.3.b
of this Explanation of Provisions.
a. Predominantly engaged in an insurance
business
Proposed §1.1297-4(d)(2) provides
guidance regarding the circumstances
under which a foreign corporation is pre-
dominantly engaged in an insurance busi-
ness. In the case of a foreign corporation
that fails the 25-percent test, Congress
included the predominantly engaged re-
quirement as part of the alternative facts
and circumstances test to ascertain wheth-
er a foreign corporation is truly engaged
in an insurance business despite the low
ratio of applicable insurance liabilities to
assets. See H.R. Rep. No. 115-466, at 671
(2017) (Conf. Rep.) (“Facts and circum-
stances that tend to show the firm may
not be predominantly engaged in an in-
surance business include a small number
of insured risks with low likelihood but
large potential costs; workers focused to
a greater degree on investment activities
than underwriting activities ; and low loss
exposure. Additional relevant facts for de-
termining whether the foreign corporation
is predominantly engaged in an insurance
business include: claims payment patterns
for the current year and prior years; the
foreign corporation’s loss exposure as cal-
culated for a regulator or for a rating agen-
cy, or if those are not calculated, for in-
ternal pricing purposes; the percentage of
gross receipts constituting premiums for
the current and prior years; and the num-
ber and size of insurance contracts issued
or taken on through reinsurance by the
foreign corporation. The fact that a foreign
corporation has been holding itself out as
an insurer for a long period is not deter-
minative either way.”). The proposed reg-
ulations clarify that each of these factors
is intended to be tested based on whether
the particular facts and circumstances of
the foreign corporation are comparable to
commercial insurance arrangements pro-
viding similar lines of coverage to unre-
lated parties in arm’s length transactions.
As noted in Part II.A.1 of this Expla-
nation of Provisions, to qualify as an in-
surance company, more than one half of
a corporation’s business must be the is-
suing of insurance or annuity contracts
or the reinsuring of risks underwritten by
insurance companies. See sections 816(a)
and 831(c). Although such a corpora-
tion might otherwise be considered to be
“predominantly engaged” in an insurance
business (where predominantly means
“for the most part”), the predominantly
engaged requirement of the alternative
facts and circumstances test in section

July 29, 2019 508 Bulletin No. 2019–31
1297(f) is separate from, and in addition
to, the requirement that a corporation
would be subject to tax under subchapter
L if the foreign corporation were a do-
mestic corporation. Therefore, in order to
give effect to this predominantly engaged
requirement, proposed §1.1297-4(d)(2)
incorporates the specific factors enumer-
ated in the legislative history as a part of a
foreign corporation’s analysis of whether
it is predominantly engaged in an insur-
ance business under the alternative facts
and circumstances test, while retaining
the requirement that “more than half” of
the business be of a certain type, because
the foreign corporation must separately
satisfy that threshold with respect to the
character of its insurance business under
section 1297(f)(1)(A).
The Treasury Department and the IRS
request comments regarding whether this
proposed test appropriately determines
whether a foreign corporation is predom-
inantly engaged in an insurance business
and invite comments on whether the pro-
posed test would have material effects
upon the way in which entities engaged in
the provision of insurance are structured.
b. Runoff-related or rating-related
circumstances
To qualify for the alternative facts and
circumstances test, proposed §1.1297-4(d)
(3) and (4) clarify the circumstances under
which a foreign corporation fails to satis-
fy the 25 percent test solely due to run-
off-related or rating-related circumstances
involving its insurance business.
Proposed §1.1297-4(d)(3) provides that
runoff-related circumstances occur when
a corporation has adopted a plan of liqui-
dation or termination of operations under
the supervision of its applicable insurance
regulatory body. Additionally, the corpo-
ration may not issue or enter into any new
insurance, annuity, or reinsurance con-
tracts during the taxable year (other than
contractually obligated renewals of ex-
isting insurance contracts or reinsurance
contracts pursuant to and consistent with
the corporation’s plan of liquidation or
termination of operations) and must make
payments during the annual reporting pe-
riod covered by the applicable financial
statement to satisfy the claims under in-
surance, annuity, or reinsurance contracts
issued or entered into before the corpora-
tion ceased entering into new business.
Proposed §1.1297-4(d)(4) provides
that rating-related circumstances occur
when a generally recognized credit rating
agency requires a foreign corporation to
maintain a surplus of capital to receive or
maintain a minimum credit rating for the
foreign corporation to be classified as se-
cure to write new insurance business for
the current year. The Treasury Department
and the IRS understand that it is possible
that the minimum credit rating required
to be classified as secure to write new in-
surance business may be higher for some
lines of insurance business than for other
lines of insurance business. For this pur-
pose, the proposed rule is intended to ap-
ply to the highest minimum credit rating
required to be classified as secure to write
new insurance business for any line of in-
surance business.
The Treasury Department and the IRS
understand that there may be certain lines
of insurance business, such as financial
guaranty insurance, where market real-
ities require a credit rating in excess of
the minimum credit rating for a foreign
corporation to be classified as secure to
write new insurance business in the rele-
vant business line for the current year. The
Treasury Department and the IRS request
comments regarding this fact pattern and
how best to address these lines of business
in the context of the rating-related circum-
stances test.
c. Election to apply the alternative facts
and circumstances test
Proposed §1.1297-4(d)(5)(i) generally
requires that the foreign corporation with
respect to which the election is made di-
rectly provide the United States person
a statement or make a publicly avail-
able statement (such as in a public fil-
ing, disclosure statement, or other notice
provided to United States persons that
are shareholders of the foreign corpora-
tion) that it satisfied the requirements of
section 1297(f)(2) and §1.1297-4(d)(1)
during the foreign corporation’s taxable
year and certain information relevant to
that statement. A United States person,
however, may not rely upon any state-
ment by the foreign corporation to make
the election under section 1297(f)(2) if
the shareholder knows or has reason to
know that the statement made by the
foreign corporation was incorrect. Be-
cause the foreign corporation possesses
the information necessary to make an
election under the alternative facts and
circumstances test, the Treasury Depart-
ment and the IRS have determined that it
is appropriate to require a United States
person to obtain that information from
the foreign corporation in order to make
the election. Comments are requested
regarding the form and content of the
statement provided by the foreign cor-
poration to United States persons as set
forth in proposed §1.1297-4(d)(5)(i)-(ii),
and whether there are alternative ways of
satisfying the requirements of 1297(f)(2).
Proposed §1.1297-4(d)(5)(iii) de-
scribes the time and manner for making
the election. To make the election before
final regulations are published, a United
States person that owns stock of a foreign
corporation electing to treat that stock as
stock of a QIC under the alternative facts
and circumstances test must file a limit-
ed-information Form 8621 (or successor
form). For this purpose, a United States
person must file a Form 8621 with the box
checked regarding the QIC election and
must provide the identifying information
of the shareholder and the foreign corpo-
ration. The United States person is not re-
quired to complete any other part of Form
8621 if that person is only filing the Form
8621 to make the QIC election under the
alternative facts and circumstances test.
The Treasury Department and the IRS
request comments on ways to reduce bur-
den on small shareholders with respect to
the alternative facts and circumstances
test.
4. Limitations on the amount of
applicable insurance liabilities
When applying the 25 percent test to
a foreign corporation, section 1297(f)(3)
(B) provides that the amount of the for-
eign corporation’s applicable insurance
liabilities cannot exceed the lesser of (i)
the amount that the foreign corporation
reported to its “applicable insurance reg-
ulatory body” (defined in section 1297(f)
(4)(B) and proposed §1.1297-4(f)(3)), (ii)
the amount required by applicable law or
regulation, or (iii) the amount determined

Bulletin No. 2019–31 509 July 29, 2019
under regulations prescribed by the Trea-
sury Department and the IRS.
Proposed §1.1297-4(e) provides addi-
tional guidance regarding the limitation
on the amount of applicable insurance
liabilities for purposes of the 25 percent
test and the 10 percent test. Specifically,
the proposed regulations provide that the
amount of applicable insurance liabili-
ties may not exceed the lesser of (1) the
amount shown on the most recent applica-
ble financial statement; (2) the minimum
amount required by applicable law or reg-
ulation of the jurisdiction of the applica-
ble insurance regulatory body; and (3) the
amount shown on the most recent finan-
cial statement made on the basis of U.S.
generally accepted accounting principles
(“US GAAP”) or international financial
reporting standards (“IFRS”) if such fi-
nancial statement was not prepared for fi-
nancial reporting purposes. The Treasury
Department and the IRS have determined
that the additional limitations are neces-
sary to clarify which financial statements
are used to apply the 25 percent test and
the 10 percent test, and that it is appropri-
ate to limit the amount of applicable in-
surance liabilities to the minimum amount
of liabilities required to be reported by an
insurance regulator, even if the foreign
corporation’s regulator would accept a
higher liability amount for regulatory pur-
poses. In addition, under section 1297(f)
(4), an applicable financial statement only
includes financial statements made on the
basis of US GAAP or IFRS if such a state-
ment has been prepared for financial re-
porting purposes. If a foreign corporation
prepares a financial statement on the basis
of US GAAP or IFRS for a purpose oth-
er than financial reporting, the Treasury
Department and the IRS have determined
that the amount of applicable insurance li-
abilities under this financial statement, if
lower than the amount on the applicable
financial statement, is an appropriate lim-
it on the amount of applicable insurance
liabilities. This limitation is appropriate
because Congress has expressed a prefer-
ence for widely used standards of finan-
cial accounting through its references to
such standards in section 1297(f)(4)(A).
Under the proposed regulations, a spe-
cial rule applies with respect to applica-
ble financial statements that are neither
prepared under US GAAP nor IFRS. To
the extent that such an applicable finan-
cial statement does not discount losses
on an economically reasonable basis, the
foreign corporation must reduce its appli-
cable insurance liabilities to reflect dis-
counting that would apply under either US
GAAP or IFRS. The Treasury Department
and the IRS have determined that a meth-
od of determining insurance liabilities that
fails to provide for a reasonable discount-
ing rate does not take into account a fac-
tor that is necessary to appropriately and
accurately report the amount of applicable
insurance liabilities. For this purpose, the
question of whether losses are discounted
on an economically reasonable basis is de-
termined under the relevant facts and cir-
cumstances. However, in order for losses
to be discounted on an economically rea-
sonable basis, discounting must be based
on loss and claim payment patterns for
either the foreign corporation or insurance
companies in similar lines of insurance
business. In addition, a discount rate based
on these loss and claim payment patterns
of at least the risk free rate in U.S. dollars
or in a foreign currency in which the for-
eign corporation conducts some or all of
its insurance business must be used. A loss
discounting methodology consistent with
that used for US GAAP or IFRS purposes
is considered reasonable for this purpose.
Finally, a special rule applies for cer-
tain foreign corporations that change their
method of preparing their applicable fi-
nancial statement by ceasing to prepare
this statement under either US GAAP or
IFRS and have no non-Federal tax busi-
ness purpose for preparing a statement
that is not consistent with US GAAP or
IFRS. Under the proposed regulations, ab-
sent a non-Federal Tax business purpose,
a foreign corporation must continue to
prepare its applicable financial statement
under either US GAAP or IFRS. If the for-
eign corporation fails to do so, the foreign
corporation will be treated as having no
applicable insurance liabilities for purpos-
es of the QIC test. Absent this proposed
rule, the Treasury Department and the IRS
are concerned that a foreign corporation
may change its method for preparing its
financial statement to benefit from certain
elements of a local regulatory accounting
regime, such as a more expansive defini-
tion of insurance liability or a method of
calculating a larger amount of insurance
liabilities, solely for purposes of qualify-
ing as a QIC. Comments are requested on
this proposed rule.
B. Insurance business
For purposes of the PFIC insurance ex-
ception, proposed §1.1297-5(c)(2) defines
an insurance business as the business of
issuing insurance and annuity contracts
or reinsuring risks underwritten by other
insurance companies (or both). Under the
proposed regulations, an insurance busi-
ness also includes the investment activi-
ties and administrative services required
to support (or that are substantially related
to) those insurance, annuity, or reinsur-
ance contracts issued or entered into by
the QIC. Proposed §1.1297-5(h)(2) pro-
vides that investment activities are any
activities that generate income from assets
that a QIC holds to meet its obligations
under insurance and annuity contracts is-
sued or reinsured by the QIC.
C. Active conduct
To give effect to the active conduct
requirement, the 2015 proposed regu-
lations differentiated between activities
performed by a corporation through its
officers and employees and activities per-
formed by other persons (for example,
employees of other entities or indepen-
dent contractors) for the corporation. The
2015 proposed regulations accomplished
this separation by defining the term “ac-
tive conduct” in section 1297(b)(2)(B) to
have the same meaning as in §1.367(a)-
2T(b)(3) (now §1.367(a)-2(d)(3)), except
that officers and employees would not
have included the officers and employees
of related entities. Hence, under the 2015
proposed regulations, only insurance in-
vestment business activities performed
by a corporation’s officers and employees
would be included in the corporation’s ac-
tive conduct of its insurance business. Ac-
cordingly, under the 2015 proposed reg-
ulations, investment income would have
qualified for the PFIC insurance exception
only if the corporation’s own officers and
employees performed the insurance busi-
ness activities that produce the income.
Proposed §1.1297-5(c)(3)(i) provides
that the term active conduct is based on
all of the facts and circumstances and that,

July 29, 2019 510 Bulletin No. 2019–31
in general, a QIC actively conducts an in-
surance business only if the officers and
employees of the QIC carry out substan-
tial managerial and operational activities.
For this purpose, active conduct is intend-
ed to be interpreted consistently with the
active conduct standard in §1.367(a)-2(d)
(5). The proposed regulation further pro-
vides that a QIC’s officers and employees
are considered to include the officers and
employees of another corporation if the
QIC satisfies the control test set forth in
proposed §1.1297-5(c)(3)(ii). Generally,
to satisfy the control test, (i) the QIC must
either own, directly or indirectly more
than 50 percent of the vote and value (for
a corporation) or capital and profits inter-
est (for a partnership) of the entity whose
officers or employees are performing ser-
vices for the QIC or (ii) a common par-
ent must own, directly or indirectly, more
than 80 percent of the vote and value or
capital and profits interest of both the QIC
and the entity performing services for the
QIC. In addition, the QIC must exercise
regular oversight and supervision over
the services performed by the other enti-
ty’s officers and employees for the QIC.
The QIC must also either (i) pay directly
all the compensation of the other entity’s
officers and employees attributable to ser-
vices performed for the QIC for the pro-
duction or acquisition of premiums and
investment income on assets held to meet
obligations under insurance, annuity, or
reinsurance contracts issued or entered
into by the QIC; (ii) reimburse the other
entity for the portion of its expenses, in-
cluding compensation and related expens-
es (determined in accordance with section
482, taking into account all expenses that
would be included in the total services
costs under §1.482-9(j) and §1.482-9(k)
(2)) and add a profit markup, as appro-
priate, for these services performed for
the QIC by the other entity’s officers and
employees; or (iii) otherwise pay arm’s
length compensation in accordance with
section 482 on a fee-related basis to the
other entity for the services provided to
the QIC. For example, it is common to
charge for investment advisory or man-
agement services via a fee calculated as a
percentage of the underlying assets under
management (AUM), and a fee calculated
on this basis may be arm’s length under
section 482 principles.
Under proposed §1.1297-5(c)(4), a
QIC determines the annual amount of its
income that is derived in the active con-
duct of an insurance business (the active
conduct test) and excluded from passive
income under section 1297(b)(2)(B) for
purposes of section 1297(a). To make this
determination, the QIC must determine its
active conduct percentage.
If the QIC’s active conduct percent-
age is greater than or equal to 50 percent,
then all of the QIC’s passive income (as
defined in §1.1297-1, taking into ac-
count the exceptions in section 1297(b)
(2) other than section 1297(b)(2)(B) and
§1.1297-5) is excluded from passive in-
come pursuant to the exception in section
1297(b)(2)(B) for the active conduct of
an insurance business. If the QIC’s active
conduct percentage is less than 50 per-
cent, then none of its income is exclud-
ed from passive income pursuant to the
exception in section 1297(b)(2)(B) for
the active conduct of an insurance busi-
ness. In response to comments made to
the 2015 proposed regulations, the active
conduct percentage is based on the QIC’s
expenses to provide a bright-line test for
measuring the QIC’s active conduct. The
Treasury Department and the IRS deter-
mined that the amount of expenses for
insurance activities performed by the
QIC (or by a related party) as compared
to the total expenses of the QIC indicates
the extent to which the QIC conducts the
business itself and therefore, actively en-
gages in an insurance business.
The Treasury Department and the IRS
request comments on the following topics:
1. Whether the relative amount of ex-
penses for insurance activities per-
formed by the QIC accurately assess-
es whether a QIC is engaged in the
active conduct of an insurance busi-
ness.
2. The contours of the control test,
which allow for a QIC to benefit from
a higher active conduct percentage
based on activities (paid for by the
QIC) of an entity in which a common
parent, but not the QIC itself, owns
more than 80 percent of the interests.
The Treasury Department and IRS
propose this standard based on an
understanding of common ownership
structures in the insurance industry,
and note that the attribution of ac-
tivities described in Part I.F.5 of this
Explanation of Provisions (regarding
the active rent or royalty exception)
is more limited as it provides that a
Tested Foreign Corporation may take
into account the activities performed
only by those Look-Through Subsid-
iaries or partnerships with respect to
which the Tested Foreign Corporation
owns (directly or indirectly) more
than 50 percent of the value.
3. The active conduct percentage calcu-
lation in general, including whether
this test should be the only test for de-
termining whether income is derived
in the active conduct of an insurance
business or whether such a percent-
age would better serve as an objective
safe harbor alongside a facts and cir-
cumstances test.
D. Treatment of income and assets of
certain Look-Through Subsidiaries
and Look-Through Partnerships held
by a QIC
Proposed §1.1297-5(f) provides that
certain items of income and assets that
are passive in the hands of a look-through
subsidiary or look-through partnership
may be treated as active by a QIC. Under
this provision, a Tested Foreign Corpora-
tion is treated as if it directly holds its pro-
portionate share of the assets and as if it
directly receives its proportionate share of
the income of the Look-Through Subsidi-
ary or Look-Through Partnership. Gener-
ally, if the income or assets are passive in
the hands of the Look-Through Subsidiary
or Look-Through Partnership, the income
or assets are treated as passive income and
passive assets of the Tested Foreign Cor-
poration. However, if the Tested Foreign
Corporation is a QIC, the income and as-
sets are tested under section §1.1297-5(c)
and (e) to determine if they qualify for
the section 1297(b)(2)(B) insurance ex-
ception to passive income. However, for
this rule to apply, the Look-Through Sub-
sidiary or Look-Through Partnership, as
the case may be, must have its assets and
liabilities included in the applicable finan-
cial statement of the foreign corporation
for purposes of the 25 percent test and the
10 percent test. This rule does not change
the character of the items of income or
assets as passive income or passive assets

Bulletin No. 2019–31 511 July 29, 2019
to the Look-Through Subsidiary or Look-
Through Partnership.
E. Qualifying domestic insurance
corporations
Proposed §1.1297-5(d) provides that
income of a qualifying domestic insur-
ance corporation is not treated as passive
income. Similarly, proposed §1.1297-5(e)
(2) provides that assets of a qualifying do-
mestic insurance corporation are not treat-
ed as passive assets. A qualifying domestic
insurance corporation is a domestic corpo-
ration that is subject to tax as an insurance
company under subchapter L of chapter
1 of subtitle A of the Code and is subject
to Federal income tax on its net income.
This rule is intended to address situations
where a Tested Foreign Corporation owns
a domestic insurance corporation through
a structure to which section 1298(b)(7)
does not apply.
F. No double counting rule
Proposed §1.1297-5(g) provides that
nothing in proposed §1.1297-4 or §1.1297-
5 permits any item to be counted more
than once (for example, for determining a
reserve or an applicable insurance liabili-
ty for purposes of the 25 percent test and
the 10 percent test). Including this gen-
eral principle is consistent with subchap-
ter L provisions that do not allow double
counting. For example, section 811(c)(2)
provides that the same item may not be
counted more than once for reserve pur-
poses, section 811(c)(3) provides that no
item may be deducted (either directly or
as an increase in reserves) more than once,
and section 832(d) prohibits the same item
from being deducted more than once.
Applicability Dates
These regulations are proposed to
apply to taxable years of United States
persons that are shareholders in certain
foreign corporations beginning on or af-
ter the date of publication of the Treasury
decision adopting these rules as final reg-
ulations in the Federal Register. How-
ever, until these regulations are finalized,
taxpayers may choose to apply these
proposed regulations (other than the pro-
posed regulations under §§1.1297-4 and
1.1297-5) in their entirety to all open tax
years as if they were final regulations pro-
vided that taxpayers consistently apply the
rules of these proposed regulations. Until
finalization, United States persons that are
shareholders in certain foreign corpora-
tions may apply the rules of §§1.1297-4
and 1.1297-5 for taxable years beginning
after December 31, 2017, provided those
United States persons consistently apply
the rules of §§1.1297-4 and 1.1297-5 as
if they were final regulations. In addition,
taxpayers may continue to rely on Notice
88-22 until these regulations are finalized.
Special Analyses
I. Regulatory Planning and Review –
Economic Analysis
Executive Orders 13771, 13563, and
12866 direct agencies to assess costs and
benefits of available regulatory alterna-
tives and, if regulation is necessary, to se-
lect regulatory approaches that maximize
net benefits, including potential economic,
environmental, public health and safety
effects, distributive impacts, and equi-
ty. Executive Order 13563 emphasizes
the importance of quantifying both costs
and benefits, reducing costs, harmonizing
rules, and promoting flexibility. The Ex-
ecutive Order 13771 designation for any
final rule resulting from the proposed reg-
ulation will be informed by comments re-
ceived. The preliminary Executive Order
13771 designation for this proposed rule
is regulatory.
The proposed regulation has been des-
ignated by the Office of Information and
Regulatory Affairs (OIRA) as significant
under Executive Order 12866 pursuant to
the Memorandum of Agreement (MOA,
April 11, 2018) between the Treasury De-
partment and the Office of Management
and Budget regarding review of tax reg-
ulations.
A. Background
Various provisions of the tax code al-
low tax on certain sources of income to be
deferred, which means that the income is
not taxed when it is earned but at some
later date, based on specific events or con-
ditions. Tax deferral is advantageous to
taxpayers because the taxpayer can in the
meantime earn a return on the amount that
would otherwise have been paid as tax.
Prior to the Act, income earned abroad
generally was not taxed until it was re-
patriated to the United States. After the
Act, income earned abroad by a CFC is
generally taxed immediately to the Unit-
ed States shareholders of the CFC, but
income earned by foreign corporations
that are not CFCs, particularly where the
owners of the foreign corporations are
individuals or other entities not eligible
for the dividends received deduction un-
der section 245A, may still be eligible for
deferral. However, deferral is not avail-
able with respect to income of foreign
corporations that earn primarily certain
kinds of passive income, which in gener-
al includes dividends, interest, royalties,
rents, and certain gains on the exchange
of property, commodities, or foreign cur-
rency. Limiting deferral of foreign source
income discourages U.S. taxpayers from
holding mobile, passive investments, such
as stock, in a foreign corporation in order
to defer U.S. tax.
A particular set of rules limiting de-
ferral applies to U.S. persons who own
interests in passive foreign investment
companies (“PFICs”). In general, a PFIC
is a foreign corporation that, in a giv-
en year, has income that is 75 percent or
more passive income or that owns, on av-
erage, assets that are 50 percent or more
passive-income-producing. Taxpayers
subject to another set of rules limiting de-
ferral, the subpart F rules, are not subject
to the PFIC rules.
Long-standing sections 1291 through
1298 provide rules regarding the tax treat-
ment of income from PFICs. The PFIC
itself is not subject to U.S. tax under the
PFIC regime; rather, only the U.S. own-
er of the PFIC is required to determine
whether he or she has invested in a PFIC,
and if so, what tax is due as a result. The
U.S. owner is responsible for getting the
appropriate information from the foreign
corporation to determine if the corpora-
tion is a PFIC.
Before its amendment by the Act, the
PFIC provisions provided an exception
from passive income for any income (in-
cluding investment income) earned in the
active conduct of an insurance business by
a foreign corporation that (i) was predom-
inantly engaged in an insurance business

July 29, 2019 512 Bulletin No. 2019–31
and (ii) would be taxed as an insurance
company if it were a domestic corpora-
tion. Congress determined that this excep-
tion enabled U.S. owners of some foreign
insurance companies to escape the PFIC
regime. This exception, (the “PFIC insur-
ance exception”), was established because
insurance companies must hold signifi-
cant amounts of investment assets (which
generate income that would otherwise be
classified as passive under the PFIC rules)
in the normal course of business to fund
obligations under the insurance contracts
they issue. Staff, Joint Committee on
Taxation, General Explanation of the Tax
Reform Act of 1986, JCS-10-87, at 1025
(1987); IRS, Corporate Income Tax Re-
turns Complete Report, 2013, Table 1).
The Act modified and narrowed the
PFIC insurance exception by requiring
that the excepted income be derived in the
active conduct of an insurance business
by a “qualifying insurance corporation”
(“QIC”). To be a QIC, a foreign insurance
corporation must be an entity that would
be taxed as an insurance company if it
were a domestic corporation (consistent
with prior-law requirements) and, in addi-
tion, be able to show that its “applicable
insurance liabilities” constitute more than
25 percent of its total assets. The Act spe-
cifically defines applicable insurance lia-
bilities for this purpose as including a set
of enumerated types of insurance-related
loss and expense items. Failing this test,
the Code provides that U.S. owners of the
foreign corporation may elect to treat their
stock in the corporation as stock of a QIC,
provided the corporation can satisfy an
“alternative facts and circumstances test.”
However, once a corporation has been
identified as a QIC, only income that is
derived in the active conduct of an insur-
ance business qualifies as income eligible
for the PFIC insurance exception.
Congress modified section 1297 under
the Act out of concern that the active in-
surance company exception to the PFIC
rules lacked clarity and precision. This
lack of clarity with respect to how much
insurance business the company must do
to qualify under the exception raised con-
cerns that certain companies with U.S.
shareholders were structuring themselves
to take advantage of the exception but
conducting a token insurance business
while focusing primarily on investment
activities. Such strategies erode the U.S.
tax base, and reflect inefficient investment
incentives for U.S. taxpayers. As a result,
the Act adopted a more formulaic rule
that is easier to enforce and apply, while
still allowing a facts and circumstances
approach for showing insurance activity.
See Senate Budget Explanation of the Bill
(2017-11-20) at p. 397.
B. Need for the proposed regulations
The Treasury Department and the IRS
view the Act modifications regarding
PFIC determination as generally self-ex-
ecuting (although regulatory guidance is
needed in order for U.S. owners to elect
QIC status under the facts and circum-
stances test), which means that the stat-
ute is binding on taxpayers and the IRS
without further regulatory action. The
Treasury Department and the IRS recog-
nize, however, that the statute provides
interpretive latitude for taxpayers and the
IRS that could, without further guidance,
prompt inefficient investment patterns due
to divergent interpretations. Consequent-
ly, many of the details behind the relevant
terms and necessary calculations required
for the determination of PFIC status
would benefit from greater specificity. The
proposed regulations provide details and
specifics for the definitions and concepts
described in sections 1291, 1297, and
1298 so that taxpayers can readily and ac-
curately determine if their investment is in
a PFIC, given the significant consequenc-
es of owning a PFIC, which may continue
to be treated as such even after the foreign
corporation ceases to satisfy the Income
Test or Asset Test. See section 1298(b)(1).
The regulations further resolve ambigu-
ities in determining ownership of a PFIC
and in the application of the Income Test
and Asset Test under the statutory provi-
sions that existed prior to the Act.
The Treasury Department and the IRS
have also identified actions that foreign
companies might take to qualify for QIC
designation even though the nature of their
active insurance business would not mer-
it QIC designation under the intents and
purposes of the statute. The proposed reg-
ulations are needed to avoid the inefficient
economic decisions that would arise from
those tax avoidance actions. For example,
in the absence of the proposed regulations,
taxpayers may be incentivized to adopt
accounting methods that inappropriately
inflate applicable insurance liabilities or
exaggerate the degree to which income of
a QIC is derived in the active conduct of
an insurance business.
C. Overview of the proposed regulations
The proposed regulations can be di-
vided into two parts. The rules described
in Part I of the Explanation of Provisions
section of this preamble provide general
guidance regarding PFICs (the “Gener-
al Rules”). See Part I.D.2 of this Special
Analyses section. The rules described in
Part II of the Explanation of Provisions
section of this preamble relate specifical-
ly to the implementation of the PFIC in-
surance exception (the “PFIC Insurance
Exception Rules”). See Part I.D.3 of this
Special Analyses section. Among other
things, the General Rules (1) describe and
clarify how assets are measured for the as-
set test; and (2) clarify attribution rules for
determining some forms of active income.
The PFIC Insurance Exception Rules
provide guidance regarding qualification
for the PFIC insurance exception, define
statutory terms relevant to QIC status, and
provide instructions on electing QIC sta-
tus under the alternative facts and circum-
stances test.
D. Economic analysis
1. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of the
proposed regulations relative to a no-ac-
tion baseline reflecting anticipated Feder-
al income tax-related behavior in the ab-
sence of these proposed regulations.
2. Summary of Economic Effects
The proposed regulations provide cer-
tainty and consistency in the application
of sections 1291, 1297, and 1298 with
respect to PFICs and QICs by providing
definitions and clarifications regarding
the statute’s terms and rules. In the ab-
sence of such guidance, the chances that
different U.S. owners (or potential own-
ers) of foreign companies would interpret
the statute differentially, either from each

Bulletin No. 2019–31 513 July 29, 2019
other or from the intents and purposes of
the statute, would be exacerbated. This
divergence in interpretation could cause
U.S. investors to choose investment ve-
hicles based on different interpretations
of, for example, whether particular in-
come would avoid qualifying as passive
income and thus avoid the less favorable
tax treatment applied by the PFIC regime.
If economic investment is not guided by
uniform incentives across otherwise sim-
ilar investors and across otherwise simi-
lar investments, the resulting pattern of
investment is generally inefficient, condi-
tional on the Code’s provisions governing
passive income.
1
In the context of U.S.
investment in foreign insurance corpora-
tions, the proposed regulations help to en-
sure that similar economic activities, rep-
resenting similar passive and non-passive
attributes, are taxed similarly. Thus, the
Treasury Department and the IRS expect
that the definitions and guidance provided
in the proposed regulation will lead to an
improved allocation of investment among
taxpayers contingent on the overall Code.
The Treasury Department and the IRS
have not quantified the expected econom-
ic benefits or the costs to the U.S. econo-
my, or the scope of taxpayers benefitting
from or burdened by the proposed regu-
lations. The Treasury Department and the
IRS request comment on these issues and
particularly solicit comments that provide
data, evidence, or models that would en-
hance the rigor by which the non-revenue
economic effects might be determined and
quantified for the final regulations.
The following sections describe the
economic effects of specific major provi-
sions of these proposed regulations rela-
tive to possible alternative provisions. The
Treasury Department and IRS solicit com-
ments on each of the items discussed sub-
sequently and on any other provisions of
the proposed regulations not discussed in
this section. The Treasury Department and
the IRS particularly solicit comments that
provide data, other evidence, or models
that could enhance the rigor of the process
by which these or further provisions might
be developed for the final regulations.
3. Economic Analysis of Specific
Provisions of the General Rules
a. Averaging period for the Asset Test
A foreign corporation is considered a
PFIC if it satisfies either of the following
tests: (i) 75 percent or more of the corpo-
ration’s gross income for a taxable year is
passive (“Income Test”); or (ii) the aver-
age percentage of assets held by the cor-
poration during the year producing pas-
sive income is at least 50 percent (“Asset
Test”). If a foreign corporation is a PFIC,
the U.S. owner of the PFIC is subject to
tax under the PFIC regime. Regarding
the Asset Test, section 1297(e) provides
rules for how to determine the value of
assets using either the fair market value
or the adjusted basis, but does not indicate
what period should be used to determine
the “average percentage.” Notice 88-22,
which was issued following the enactment
of the PFIC regime to provide guidance
on a number of issues related to the In-
come and Asset Tests pending regulations,
required taxpayers to determine value at
the end of each quarter and average those
numbers on an annual basis for the test.
See Part I.D.1 of the Explanation of Provi-
sions section of this preamble. Notice 88-
22 announced the intention of the Treasury
Department and IRS to issue regulations
addressing this and other issues under the
PFIC regime; however, no regulations ad-
dressing the Asset Test were issued until
the proposed regulations.
To remedy this omission and specify
the period over which the average per-
centage would be calculated, the Treasury
Department and the IRS considered three
alternatives: (i) semi-annual measurement,
(ii) quarterly measurement, and (iii) daily
measurement.
2
The Treasury Department
and the IRS also considered, once a default
measuring period was set, offering flexibil-
ity to shareholders to determine their own
measurement period as long as the period
was shorter than the default period. In each
respective case, the Asset test would be
based on the annual average of the semi-an-
nual, quarterly, or daily asset values.
The first option, to require taxpayers to
determine the average value of assets that
produce passive income on a semi-annual
basis, has lower costs than the other sug-
gested approaches since calculations have
to be done just twice a year and these costs
(or cost-savings) are borne directly or in-
directly by the owners of the corporation.
The benefit of these lower costs to U.S.
taxpayers must be balanced against the
projected accuracy of semi-annual mea-
surement. Because the period examined is
long, semi-annual amounts are relatively
easy for the corporation to manipulate so
as to avoid having 50 percent or more pas-
sive-income producing assets as measured
by value over the averaging period dis-
cussed here (the Asset Test) and therefore
avoid PFIC treatment, even in cases where
the company held significant amounts of
passive-income-producing assets during
the year.
The third option, to require taxpayers
to average daily asset values for the asset
test, provides a more exact measure of the
assets of the company but the costs for the
company to provide such information to
their owners can be significant and some
companies might choose not to provide
such calculations to their small U.S. own-
ers.
3
On the other hand, daily measure-
ment would make it costly for the entity to
avoid PFIC determination by “removing”
assets generating passive income at mea-
surement times.
The proposed regulations, consistent
with the second option, require at least
quarterly measurement and further allow
taxpayers to elect to use a shorter period,
such as monthly or daily measurement of
asset values. Shorter period alternatives
(relative to a semi-annual period) curtail
the ability of foreign corporations to avoid
PFIC designation through asset manage-
ment strategies that would be tax-driven
rather than market-driven. The Treasury
Department and the IRS project that the
increase in compliance costs of quarterly
measurement over semi-annual measure-
ment would be minor, because quarterly
measurement aligns with general account-
ing practices, and because many taxpay-
1
General economic principles do not clearly prescribe the efficient relative tax treatment of passive income versus non-passive income and therefore do not indicate whether a shift in in-
vestment from passive-income-producing activities to non-passive-income-producing activities is economically beneficial. This economic analysis draws conclusions about the efficient tax
treatment of different investments by evaluating incentives in light of the intents and purposes of the underlying statutes.
2
Other units could have been considered, such as months or weeks, but these three options span the reasonable possibilities.
3
It would further generally be difficult for a U.S. owner to calculate, on his or her own, the value of PFIC assets on a daily basis, especially if the owner were a minority shareholder.

July 29, 2019 514 Bulletin No. 2019–31
ers were likely already relying on the
provision in Notice 88-22 that provided
for quarterly measurement. The election
to choose monthly or daily measurement
allows U.S. persons who own interests
in foreign corporations to use even more
precise measurement of asset holdings
if, based on business-specific accounting
practices and the availability of that infor-
mation to the U.S. person, the U.S. person
deems that any higher compliance costs
they might incur are warranted.
The Treasury Department and IRS so-
licit comments on this proposal, particu-
larly comments that provide data, other
evidence, or models that could enhance
the rigor of the process by which the aver-
age percentage period might be developed
for the final regulations.
b. Attribution of activities
For purposes of determining whether
a corporation is a PFIC, section 1297(c)
treats a foreign corporation (FC1) that
owns 25 percent or more of another for-
eign corporation (FC2) as owning and
earning the proportional amount of FC2’s
income and assets under the so called
Look-Through Subsidiary rules.
4
Howev-
er, the statute is silent on whether the ac-
tivities of FC2 can be attributed to FC1 for
purposes of determining whether the in-
come of FC1 qualifies as being treated as
non-passive income. Under current prac-
tice, some businesses structure their orga-
nization for legal or commercial reasons
to have all employees for a business in one
corporation, say FC2, while the rents and
royalties are received by FC1. Without at-
tribution of activities, FC1 could not qual-
ify for an exception that treats these rents
and royalties as active, as opposed to pas-
sive, income. This could result in FC1 be-
ing treated as a PFIC even though, on the
whole, its income and economic activities
were related to active business operations
and not comparable to the passive income
generating activities generally undertaken
by PFICs.
To address the attribution of activities
in foreign businesses in structures similar
to those described, the Treasury Depart-
ment and the IRS considered three alter-
natives: (1) do not allow any attribution of
activities; (2) allow attribution of activi-
ties to multiple U.S. owners; or (3) allow
attribution only if there is greater than a
50 percent ownership percentage; that is,
if the foreign corporation owns more than
50 percent of the other foreign corpora-
tion.
Under the first alternative (no attribu-
tion), a foreign corporation that separated
activities and income could satisfy the
passive income exception only if it reor-
ganized such that the entity being tested
as a PFIC received both the active rents
and royalties as well as had the employees
that performed the related activities. This
is potentially costly or even infeasible, de-
pending on local requirements. The Trea-
sury Department and the IRS determined
that this alternative would potentially lead
to costly reorganization, a cost that would
either be passed on to U.S. investors or
that, in the absence of such reorganization,
would inhibit U.S. investment in a foreign
corporation that was otherwise similar to
corporations that were not PFICs. These
are economically undesirable outcomes
in light of the intents and purposes of the
statute, relative to the proposed regula-
tions.
Under the second alternative, activi-
ties could be attributed similarly to how
the Look-Through Rule attributes in-
come and assets. In general, because the
Look-Through Rule requires ownership
of only 25 percent of a foreign corpo-
ration in order to apply, the income and
assets of a foreign corporation may be
attributed to multiple owners. The statute
specifies that this be done on a pro rata
basis — for example, if a U.S. person
owns 100 percent of foreign corporation
(FC1) that owns 60 percent of FC2, 60
percent of the income and assets of FC2
could be attributed to FC1 for purposes
of applying the Income and Asset tests,
and 40 percent of the income and assets
could be allocated to another shareholder
of FC2. This alternative generates signif-
icant difficulties, however, in the context
of attribution of activities. While income
and assets can be allocated between own-
ers based on percentage ownership, ac-
tivities are not measured by a numerical
amount and thus are not easily separated
between two owners. Additionally, al-
lowing multiple shareholders to use the
activities of a single corporation to treat
income as non-passive could result in
double counting of activities (i.e., attrib-
uting the same activity to multiple parent
companies). The Treasury Department
and the IRS determined that potential
double counting of activities could result
in less tax revenue being raised than in-
tended by Congress.
Under the third alternative, the activ-
ities of a foreign corporation could only
be attributed to one shareholder. The pro-
posed regulations adopt this third alterna-
tive, specifically by allowing attribution if
there is an ownership percentage greater
than 50 percent. Thus, where FC1 owns
60 percent of FC2 and another shareholder
owns the remaining 40 percent, only FC1
could get credit for the activities of FC2
for purposes of applying the active rents
and royalties test. No other shareholder
of FC2 would qualify for attribution. The
Treasury Department and the IRS project
that this proposed regulation would allow
entities to satisfy the passive income ex-
ception under conditions consistent with
the intents and purposes of the statute
without requiring potentially substantial
reorganization costs.
The Treasury Department and the IRS
solicit comments on this proposal and in
particular solicit data, evidence, or models
that could enhance the rigor of the process
by which the ownership percentage might
be developed for the final regulations.
c. Look-Through Partnerships
As discussed in Part I.D.3.b of this Spe-
cial Analyses, for purposes of determining
whether a corporation is a PFIC, section
1297(c) treats a foreign corporation (FC1)
that owns 25 percent or more of another
foreign corporation (FC2) as owning and
earning the proportional amount of FC2’s
income and assets under the so called
Look-Through Subsidiary rules. Absent
this rule, any distributions from FC2 to
FC1 would generally be treated as passive
income to FC1 for purposes of the Income
Test, and the stock of FC2 would general-
4
For purposes of the rest of this discussion, FC1 can be considered the parent corporation with U.S. owners that is tested as to whether it is a PFIC or not. FC2 is a subsidiary of FC1.

Bulletin No. 2019–31 515 July 29, 2019
ly be treated as a passive income-produc-
ing asset for purposes of the Asset Test.
The statute does not provide any specific
rule for the treatment of a partnership in-
terest owned by a foreign corporation for
purposes of determining whether the for-
eign corporation is a PFIC.
In order to provide guidance on the
treatment of partnership interests owned
by foreign corporations for purposes of
the Income and Asset Tests, the Treasury
Department and the IRS considered three
principal alternative thresholds regarding
when to treat the income and assets of a
partnership as earned or held directly by
the foreign corporation. These thresholds
are: (1) apply no threshold; (2) apply a 10
percent threshold; or (3) apply the same
25 percent ownership threshold to partner-
ship interests as is applied to interests in
corporations.
Under the first alternative, a propor-
tionate share (based on the foreign cor-
poration’s capital or profits interest in the
partnership) of the income and assets of the
partnership would be considered as earned
or held directly by the foreign corporation
for purposes of determining whether the
foreign corporation is a PFIC, no matter
how much of the partnership was owned
by the foreign corporation. A similar rule
to this applies for purposes of the subpart
F regime, and thus there could be bene-
fits in applying consistent rules across
the two regimes. However, the purpose
of the Income and Asset Tests is to deter-
mine whether the foreign corporation has
a primarily active or passive business. An
ownership interest of less than 10 percent
is unlikely to give the foreign corporation
significant control over the partnership
activities such that it represents an active
business interest. Additionally, providing
a lower threshold for partnership interests,
by contrast to the threshold applicable
to corporate interests, creates incentives
for foreign corporations to hold minority
interests in partnerships rather than cor-
porations, and in some cases, because of
the U.S. entity classification rules, the
classification of the entity as a partnership
may be solely for U.S. tax purposes. This
means that the same investment that Con-
gress determined could only be active if
it accounted for 25 percent of the value
of the entity would now qualify as active
even though the nature of the investment
has not substantially changed. This latter
case is economically undesirable since it
can result in differential tax treatment of
corporations and partnerships. Moreover,
this outcome is less consistent with the
intents and purposes of the statute, than
the approach taken in the proposed reg-
ulations. Under the second alternative, a
proportionate amount of the income and
assets of the partnership would be con-
sidered as earned or held directly by the
foreign corporation only if the foreign
corporation owned 10 percent or more
of the partnership. Existing rules under
section 904, which relates to the foreign
tax credit limitation, utilize a 10 percent
threshold for purposes of determining
whether to characterize income and as-
sets of a partnership as passive category
income and assets. There could be benefits
in applying an existing threshold from the
foreign tax credit regime to PFICs since
taxpayers would be familiar with this re-
gime. However, similar to the no thresh-
old option, because section 1297(c)(2)
requires a 25 percent ownership for cor-
porations to apply for the Look-Through
Subsidiary rules, this alternative would
still lead to differing treatment of minori-
ty interests in subsidiary corporations as
opposed to partnerships. Again, this could
lead to similarly situated entities being
treated differently and resultant economic
distortions.
Under the third alternative, the same 25
percent ownership threshold is applied to
partnership interests as is applied to inter-
ests in corporations. The Treasury Depart-
ment and IRS project this will maintain
parity between the treatment of minority
interests in corporations and partnership
interest for purposes of the Income and
Asset test, and it gives effect to the 25 per-
cent limitation in section 1297(c)(2). The
Treasury Department and the IRS proj-
ect that this proposed regulation would
achieve consistent treatment across entity
types as well as the appropriate treatment
of minority interests in corporations and
partnerships under conditions consistent
with the intents and purposes of the stat-
ute.
The Treasury Department and the IRS
solicit comments on this proposal and in
particular solicit data, evidence, or models
that could enhance the rigor of the process
by which the treatment of partnership in-
terests might be developed for the final
regulations.
4. Economic Analysis of PFIC Insurance
Exception Rules
Under the statute, the income of a qual-
ifying insurance corporation (QIC) de-
rived in the active conduct of its insurance
business is not treated as passive income
for purposes of deciding whether the cor-
poration is a PFIC. The test for a QIC un-
der section 1297(f) is based on the ratio of
the foreign insurance company’s “applica-
ble insurance liabilities” to its total assets.
The statute limits the applicable insurance
liabilities to the smallest: of: (1) the insur-
ance liabilities shown on the company’s
most recent applicable financial statement
(“AFS”); (2) the amount of such liabilities
required by applicable local law or regu-
lation, and (3) as provided under Treasury
regulations.
Under the statute, the AFS is the fi-
nancial statement used by the foreign
corporation for financial reporting purpos-
es that is: (i) made on the basis of U.S.
generally accepted accounting principles
(“US GAAP”); (ii) made on the basis of
international financial reporting standards
(“IFRS”), if there is no statement that is
made on the basis of US GAAP; or (iii)
the annual financial statement required
to be filed with the applicable insurance
regulatory body (“local accounting”), if
the company does not prepare a statement
for financial reporting purposes based on
US GAAP or IFRS. Thus, the statute has
a preference for financial statements pre-
pared on the basis of US GAAP or IFRS,
which are rigorous and widely-respected
accounting standards, but will permit a
foreign corporation to use a local account-
ing AFS if it does not do financial report-
ing based on US GAAP or IFRS.
The statute creates an incentive for
foreign insurance companies (FCos) to
inflate applicable insurance liabilities in
order to qualify as QICs and avoid PFIC
status. This strategy (inflating applicable
insurance liabilities to qualify as a QIC)
could make the FCo more attractive to
U.S. investors relative to investing in a
domestic company or a company that is
a PFIC, which could potentially lead to
investment patterns that are inefficient.
Although the statutory caps on applicable

July 29, 2019 516 Bulletin No. 2019–31
insurance liabilities provide a check on
this behavior, FCos (and thus their U.S.
owners) might look for options under
their financial reporting rules to increase
the amount of insurance liabilities report-
ed on their AFS, or even shift to a differ-
ent financial reporting standard with more
favorable rules. The proposed regulations
address this issue in a number of ways.
a. Change in accounting rules used for an
AFS
The statute may, in some circumstanc-
es, introduce an incentive for an FCo to
change its method of preparing its AFS
to benefit from certain elements of a local
accounting regime, such as a more expan-
sive definition of insurance liability or a
method of calculating a larger amount of
insurance liabilities, solely for purposes
of increasing its applicable insurance lia-
bilities in order to qualify as a QIC. This
strategy, by allowing a company to avoid
being characterized as a PFIC and thus
providing an incentive for U.S. investors
to route their investment dollars through
foreign corporations that otherwise would
fail the QIC test, yields a potential tax ad-
vantage to U.S. investors relative to other
investments they might make, an outcome
that is economically inefficient in light of
the intents and purposes of the statute.
To address this issue, the proposed reg-
ulations provide a special rule for FCos
that change their method of preparing their
AFS by ceasing to prepare this statement
under either US GAAP or IFRS without a
non-Federal tax business purpose for the
change. Under the proposed regulations,
an FCo must continue to prepare its AFS
under either US GAAP or IFRS and if it
fails to do so, it will be treated as having
no applicable insurance liabilities for pur-
poses of the QIC test.
The Treasury Department and the IRS
considered as an alternative not provid-
ing regulations to address a change in the
method of preparing an AFS. The Trea-
sury Department and the IRS do not have
readily available data to allow estimation
of the tax advantage or volume of invest-
ment that might be drawn to such compa-
nies (and away from others) in the absence
of regulations to address a change in the
method of preparing an AFS. The Trea-
sury Department and the IRS further have
not estimated the benefit that arises from
the improved integrity of the tax system
under the proposed regulations relative to
not providing regulations to govern chang-
es in the FCo’s AFS method. The Treasury
Department and the IRS solicit comments
on all aspects of these proposed regula-
tions, including comments on (1) the de-
termination of a “non-Federal tax business
purpose,” and (2) how an FCo that chang-
es its AFS method should be treated. The
Treasury Department and the IRS particu-
larly solicit comments that would provide
data, other evidence, or models that would
enhance the rigor of evaluating FCos that
change their AFS method, for purposes of
developing the final regulations.
b. Cap on applicable insurance liabilities
Under the statute, a foreign corporation
that does not prepare an AFS using US
GAAP or IFRS may use an AFS prepared
under local accounting rules to determine
the amount of its applicable insurance li-
abilities. However, it is possible that local
accounting rules in some foreign jurisdic-
tions may permit reporting of insurance
liabilities in a way that is economically
unreasonable and inconsistent with the
intent of the QIC rules. For example, US
GAAP and IFRS both require discount-
ing of insurance liabilities to determine
the present value of an insurance com-
pany’s liabilities. However, the Treasury
Department and the IRS understand that
local accounting rules in some foreign ju-
risdictions might not require discounting
or might not adequately discount reserves
(or other applicable insurance liabilities).
This would make it easier for a foreign
corporation that uses local accounting to
qualify as a QIC. This could provide an
incentive for U.S. investors to route their
investment dollars through foreign corpo-
rations that otherwise would fail the QIC
test, yielding a potential tax advantage
to U.S. investors relative to other invest-
ments they might make, an outcome that
is economically inefficient.
To address this issue, the proposed
regulations provide that, if a foreign in-
surance company prepares its AFS under
a local accounting standard that does not
require discounting of unpaid losses and
other loss reserves on an economically
reasonable basis, for purposes of the QIC
test, the company’s AFS insurance liabil-
ities must be reduced using US GAAP or
IFRS discounting principles. Local ac-
counting rules will otherwise continue to
apply for determining amounts relevant
to the QIC test. Applicable insurance li-
abilities may not exceed the discounted
amount. As a point of reference, the dis-
counting of unpaid losses is required by
all domestic insurance companies that are
taxed on their underwriting income or that
file US GAAP-based financial statements.
The question of whether losses are dis-
counted on an economically reasonable
basis is determined under the relevant
facts and circumstances. However, in or-
der for losses to be discounted on an eco-
nomically reasonable basis, discounting
must be based on loss and claim payment
patterns for either the foreign corporation
or insurance companies in similar lines of
insurance business. In addition, a discount
rate based on these loss and claim pay-
ment patterns of at least the risk free rate
in U.S. dollars or in a foreign currency in
which the foreign corporation conducts
some or all of its insurance business must
be used. A loss discounting methodology
consistent with that used for US GAAP or
IFRS purposes will be considered reason-
able for this purpose.
The Treasury Department and the IRS
considered as alternatives (i) issuing no
regulations to govern discounting of in-
surance losses for purposes of determining
whether applicable insurance liabilities
exceed the statutory cap, and (ii) capping
the amount of applicable insurance liabili-
ties at the amount that would be permitted
to an insurance company subject to the
insurance reserve calculation rules under
Subchapter L of the Code.
Under the first approach, U.S. investors
would have an incentive to seek out those
corporations that do not file US GAAP or
IFRS statements, an outcome that would
provide an economically inefficient tax
advantage to U.S. investors in those com-
panies.
The second approach would be con-
siderably more burdensome to a foreign
corporation because, as a practical matter,
it would require foreign corporations to
apply complex U.S. tax rules with which
they are likely not familiar. An excessive
compliance burden on foreign corpora-
tions not subject to U.S. taxation would

Bulletin No. 2019–31 517 July 29, 2019
make it less likely that they would do the
work necessary to enable their minority
U.S. owners to determine if the corpora-
tion is a PFIC. Thus, this alternative was
rejected because it could unduly inhibit
U.S. investors from placing their funds
in profitable foreign corporations that are
legitimate active insurance companies, an
economically desirable activity in light of
the intents and purposes of the statute, rel-
ative to the proposed regulations.
The Treasury Department and the IRS
do not have data available and models
sensitive enough to estimate the additional
volume of U.S. investment that might be
drawn under this alternative approach to
QICs that did not discount insurance loss-
es in an economically reasonable manner,
relative to the proposed regulations. The
Treasury Department and the IRS also do
not have data available and models sen-
sitive enough to estimate the benefit that
arises from the improved integrity of the
tax system arising from the proposed reg-
ulations relative to not issuing such regu-
lations. Further, the Treasury Department
and the IRS do not have data available to
estimate the additional accounting burden
that would fall on FCos under the pro-
posed regulations, relative to not issuing
such regulations, a cost that would poten-
tially be passed on to U.S. investors.
The Treasury Department and the IRS
also do not have data available to estimate
the increased loss to minority U.S. share-
holders if the second alternative approach
(capping liabilities to the amount that
would be permitted under Subchapter L)
were adopted.
The Treasury Department and the IRS
solicit comments on all aspects of these
proposed regulations and particularly so-
licit comments that would provide data,
other evidence, or models that would en-
hance the rigor by which conditions on the
cap on applicable insurance liabilities will
be developed for the final regulations.
II. Paperwork Reduction Act
The collections of information in these
proposed regulations are in proposed
§1.1297-1(d)(1)(ii)(B), (d)(1)(iii)(B), and
(d)(1)(iv), proposed §1.1297-4(d)(5)(i)
and (iii), and proposed §1.1298-4(d)(2).
The information in all of the collections of
information provided will be used by the
IRS for tax compliance purposes.
A. Collections of information under
existing tax forms
The collections of information in pro-
posed §1.1297-1(d)(1)(ii)(B), (d)(1)(iii)
(B), and (d)(1)(iv) are required to be pro-
vided by taxpayers that make an election
or revoke an election to use an alternative
measuring period or adjusted bases to
measure assets for purposes of the Asset
Test with respect to a foreign corporation.
These collections of information are sat-
isfied by filing Form 8621 or attachments
thereto. For purposes of the Paperwork
Reduction Act, 44 U.S.C. 3501 et seq.
(“PRA”), the reporting burden associat-
ed with the collection of information in
the Form 8621 will be reflected in the
Paperwork Reduction Act Submission
associated with that form (OMB control
number 1545-1002). If a Form 8621 is
not required to be filed, the collections of
information under proposed §1.1297-1(d)
(1)(ii)(B), (d)(1)(iii)(B), and (d)(1)(iv) are
satisfied by attaching a statement to the
taxpayer’s return. For purposes of the Pa-
perwork Reduction Act, the reporting bur-
den associated with these collections of
information will be reflected in the Paper-
work Reduction Act Submissions associ-
ated with Forms 990-PF and 990-T (OMB
control number 1545-0047); Form 1040
(OMB control number 1545-0074); Form
1041 (OMB control number 1545-0092);
Form 1065 (OMB control number 1545-
0123); and Forms 1120, 1120-C, 1120-F,
1120-L, 1120-PC, 1120-REIT, 1120-RIC,
and 1120-S (OMB control number 1545-
0123).
The collection of information in pro-
posed §1.1297-4(d)(5)(iii) is required to
be provided by taxpayers that make an
election under section 1297(f)(2). This
collection of information is satisfied by fil-
ing Form 8621. For purposes of the Paper-
work Reduction Act, the reporting burden
associated with the collection of informa-
tion in the Form 8621 will be reflected in
the Paperwork Reduction Act Submission
associated with Form 8621 (OMB control
number 1545-1002).
The following table displays the num-
ber of respondents estimated to be re-
quired to report on Form 8621 or, in the
case of individual filers, on attachments to
Form 1040, as applicable, with respect to
the collections of information in these reg-
ulations. Due to the absence of available
tax data, estimates of respondents required
to attach a statement to other types of tax
returns, as applicable, are not available.
Number of Respondents
(Estimated)
Form 104035,000-45,000
Form 862150,000-55,000
Source: RAAS:CDW
The numbers of respondents in the ta-
ble were estimated by the Research, Ap-
plied Analytics and Statistics Division
(‘‘RAAS’’) of the IRS from the Compli-
ance Data Warehouse (‘‘CDW’’).
Data for Form 1040 represents esti-
mates of the total number of taxpayers
that may attach a statement to their Form
1040 to make or revoke the elections in
proposed §1.1297-1(d)(1)(ii)(B), (d)(1)
(iii)(B), and (d)(1)(iv). The lower bound
estimate reflects the CDW-based estimate
of unique individual taxpayers filing Form
8621 between 2014 and 2017. The upper
bound estimate reflects the CDW-based
estimate of unique individual taxpayers
that filed Form 8938 between 2016 and
2017 indicating that they owned an in-
terest in a foreign partnership or corpora-
tion.
5
Accordingly, the difference between
the lower bound and upper bound esti-
mates reflects an estimate of the possible
change in the number of respondents as a
result of the changes made by the Act and
the proposed regulations.
Data for Form 8621 represent estimates
of the total number of taxpayers that may
be required to file Form 8621. The lower
bound estimate reflects the CDW-based
estimate of unique taxpayers filing Form
8621 between 2014 and 2017. The upper
bound estimate reflects an estimated 10
percent increase in the amount of taxpay-
5
While PFICs are corporations, partnerships are included in our count given taxpayers may own an interest in a foreign corporation through a foreign partnership. More robust reporting on
Form 8938 started in 2016 so we do not include prior years in our estimate.

July 29, 2019 518 Bulletin No. 2019–31
ers that may file to make or revoke the
elections in proposed §1.1297-1(d)(1)(ii)
(B), (d)(1)(iii)(B), and (d)(1)(iv) and pro-
posed §1.1297-4(d)(5)(iii). Accordingly,
the difference between the lower bound
and upper bound estimates reflect an esti-
mate of the possible change in the number
of respondents as a result of the changes
made by the Act and the proposed regu-
lations.
The current status of the PRA submis-
sions related to the tax forms on which
reporting under these regulations will be
required is summarized in the following
table. The burdens associated with the
information collections in the forms are
included in aggregated burden estimates
for the OMB control numbers 1545-0047
(which represents a total estimated bur-
den time for all forms and schedules for
tax-exempt entities of 50.5 million hours
and total estimated monetized costs
of $3.59 billion ($2018)), 1545-0074
(which represents a total estimated bur-
den time for all forms and schedules for
individuals of 1.784 billion hours and to-
tal estimated monetized costs of $31.764
billion ($2017)), 1545-0092 (which rep-
resents a total estimated burden time for
all forms and schedules for trusts and
estates of 307.8 million hours and total
estimated monetized costs of $9.95 bil-
lion ($2016)), and 1545-0123 (which
represents a total estimated burden time
for all forms and schedules for corpora-
tions of 3.157 billion hours and total esti-
mated monetized costs of $58.148 billion
($2017)). The burden estimates provided
in the OMB control numbers in the fol-
lowing table are aggregate amounts that
relate to the entire package of forms as-
sociated with the OMB control number,
and will in the future include, but not iso-
late, the estimated burden of only those
information collections associated with
these proposed regulations. These num-
bers are therefore unrelated to the future
calculations needed to assess the burden
imposed by these regulations. To guard
against over-counting the burden that in-
ternational tax provisions imposed prior
to the Act, the Treasury Department and
the IRS urge readers to recognize that
these burden estimates have also been
cited by regulations (such as the foreign
tax credit regulations, 83 FR 63200) that
rely on the applicable OMB control num-
bers in order to collect information from
the applicable types of filers.
In 2018, the IRS released and invit-
ed comment on drafts of Forms 990-PF
(Return of Private Foundation or Sec-
tion 4947(a)(1) Trust Treated as Private
Foundation), 990-T (Exempt Organiza-
tion Business Income Tax Return), 1040
(U.S. Individual Income Tax Return),
(U.S. Income Tax Return for Estates and
Trusts), 1065 (U.S. Return of Partnership
Income), 1120 (U.S. Corporation Income
Tax Return), and 8621 (Return by a Share-
holder of a Passive Foreign Investment
Co. or Qualified Electing Fund). The IRS
received comments only regarding Forms
1040, 1065, and 1120 during the comment
period. After reviewing all such com-
ments, the IRS made the forms available
on December 21, 2018 for use by the pub-
lic.
No burden estimates specific to the
forms affected by the proposed regula-
tions are currently available. The Treasury
Department and the IRS have not estimat-
ed the burden, including that of any new
information collections, related to the
requirements under the proposed regula-
tions. The Treasury Department and the
IRS request comments on all aspects of in-
formation collection burdens related to the
proposed regulations, including estimates
for how much time it would take to com-
ply with the paperwork burdens described
above for each relevant form and ways for
the IRS to minimize the paperwork bur-
den. In addition, drafts of IRS forms are
posted for public review at https://apps.
irs.gov/app/picklist/list/draftTaxForms.
htm. Comments on these forms can be
submitted at https://www.irs.gov/forms-
pubs/comment-on-tax-forms-and-publi-
cations. These forms will not be finalized
until after they have been approved by
OMB under the PRA.
FormType of Filer
OMB Num-
ber(s)
Status
Forms 990-PF,
990-T
Tax exempt entities
(NEW Model)
1545-0047Published 60-day Federal Register notice on 8/22/18.
Link: https://www.federalregister.gov/documents/2018/08/22/2018-18135/proposed-collection-comment-re-
quest-for-forms-990-990-ez-sch-b-br-br-990-ez-sch-l-lp-990-ez-990-pf
Form 1040
Individual (NEW
Model)
1545-0074
Limited Scope submission (1040 only) approved on 12/7/18. Full ICR
submission for all forms in 3/2019. 60 Day Federal Register notice not
published yet for full collection.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031
Form 1041
Trusts and estates1545-0092Submitted to OMB for review on 9/27/18.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201806-1545-014
Form 1065
Business (NEW
Model)
1545-0123
Published in the Federal Register on 10/11/18. Public Comment period
closed on 12/10/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-re-
quest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd

Bulletin No. 2019–31 519 July 29, 2019
FormType of Filer
OMB Num-
ber(s)
Status
Forms 1120,
1120-C, 1120-F,
1120-L,
1120-PC,
1120-REIT,
1120-RIC,
1120-S
Business (NEW
Model)
1545-0123
Published in the Federal Register on 10/11/18. Public Comment period
closed on 12/10/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-re-
quest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd
Form 8621
Share-
holders
1545-1001Approved by OMB on 12/19/2018.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201805-1545-007
B. Collections of information generally
not included on existing forms
The collection of information in pro-
posed §1.1298-4(d)(2) is required for
a foreign corporation that relies on the
rule in section 1298(b)(7) and proposed
§1.1298-4(b)(1). This collection of infor-
mation is satisfied by filing a statement at-
tached to the foreign corporation’s return.
For purposes of the Paperwork Reduction
Act, the reporting burden associated with
this collection of information will be re-
flected in the Paperwork Reduction Act
Submissions associated with Form 1120-
F (OMB control number 1545-0123). The
number of affected filers, burden esti-
mates, and Paperwork Reduction Act sta-
tus for this OMB control number are dis-
cussed in connection with the Form 1120
in Part II.A of the Special Analyses.
Alternatively, if a foreign corporation is
not required to file a return, the collection
of information in proposed §1.1298-4(d)
(2) is satisfied by the foreign corporation’s
maintaining a statement in its records or
including it in its public filings.
The collection of information in pro-
posed §1.1297-4(d)(5)(i) is required for a
foreign corporation for which a taxpayer
makes an election under section 1297(f)
(2). This collection of information is sat-
isfied by a foreign corporation providing a
statement to a shareholder.
The collection of information con-
tained in proposed §1.1298-4(d)(2) (for
foreign corporations that are not re-
quired to file Form 1120-F) and proposed
§1.1297-4(d)(5)(i) will be submitted to
the Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act. Comments on the collections
of information should be sent to the Of-
fice of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and Reg-
ulatory Affairs, Washington, DC 20503,
with copies to the Internal Revenue Ser-
vice, Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of in-
formation should be received by Septem-
ber 9, 2019.
Comments are specifically requested
concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the duties of the IRS, in-
cluding whether the information will have
practical 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 en-
hanced;
How the burden of complying with
the proposed collection of information
may be minimized, including through the
application 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
purchases of services to provide informa-
tion for the collections discussed in Part
II.B of this Special Analyses.
Estimated total annual reporting bur-
den: 200 hours.
Estimated total annual monetized cost
burden: $19,000.
Estimated average annual burden hours
per respondent: one hour.
Estimated number of respondents: 200.
Estimated annual frequency of re-
sponses: once.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
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 re-
quired by 26 U.S.C. 6103.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby certi-
fied that the proposed regulations will not
have a significant economic impact on a
substantial number of small entities within
the meaning of section 601(6) of the Reg-
ulatory Flexibility Act (“small entities”).
The statutory provisions in sections
1291 through 1298 (the “PFIC regime”)
generally affect U.S. taxpayers that have
ownership interests in foreign corpora-
tions that are not controlled foreign corpo-
rations (“CFCs”). The reporting burdens
in proposed §1.1297-1(d)(1)(ii)(B), (d)
(1)(iii)(B), and (d)(1)(iv) and proposed
§1.1297-4(d)(5)(iii) generally affect the
described U.S. taxpayers that elect to
make or revoke certain elections related
to the PFIC regime. The reporting bur-
dens in proposed §1.1297-4(d)(5)(ii) and
proposed §1.1298-4(d)(2) affect only

July 29, 2019 520 Bulletin No. 2019–31
foreign corporations. In general, foreign
corporations are not considered small en-
tities. Nor are U.S. taxpayers considered
small entities to the extent the taxpayers
are natural persons or entities other than
small entities. Data estimating the num-
ber of filers for the PRA section indicate
that individuals (Form 1040 filers) make
up approximately 70 percent of those who
report PFIC income while U.S. business-
es of all sizes make up approximately 20
percent of Form 8621 filers. Most of these
U.S. businesses are partnerships that do
not pay entity level taxes. Accordingly,
only small entities that have ownership
interests in foreign corporations that are
not CFCs and that wish to make or revoke
an election pursuant to proposed §1.1297-
1(d)(1)(ii)(B), (d)(1)(iii)(B), and (d)(1)
(iv) and proposed §1.1297-4(d)(5)(iii) are
affected by the proposed regulations.
The data to assess the number of small
entities potentially affected by proposed
§1.1297-1(d)(1)(ii)(B), (d)(1)(iii)(B), and
(d)(1)(iv) and proposed §1.1297-4(d)(5)
(iii) are not readily available.
Regardless of the number of small en-
tities potentially affected by the proposed
regulations, the Treasury Department and
the IRS have concluded that there is no
significant economic impact on such enti-
ties as a result of the proposed regulations.
Data on U.S. businesses that invest in
a PFIC is limited. To get a sense of the
magnitude of the taxes currently collect-
ed by businesses that invest in PFICs, the
ratio of PFIC regime tax to (gross) total
income was calculated for 2012 through
2017 for C corporations that filed the
Form 8621. Total income was deter-
mined by matching each C corporation
filing the Form 8621 to its Form 1120.
Ordinary QEF income was assumed to
be taxed at 37 percent while QEF cap-
ital gains and mark-to-market income
was assumed to be taxed at the lower 20
percent capital gains rate. The section
1291 tax and interest charge tax were in-
cluded as reported. Only those corpora-
tions where a match was found and that
had positive total income were included
in the analysis.
6
While the number was
small, approximately 150 to 250 C cor-
porations per year, the ratio of the tax to
total income was less than 0.01 percent
even when $100 million of the additional
tax estimated by the Joint Committee on
Taxation was included each year. Look-
ing only at the approximately 50 to 150
C corporations per year with $25 million
or less of total income resulted in the tax
to total income percentage increasing to
at most 1.39 percent in 2017.
201220132014201520162017
($ millions)
All C corporations
Tax 99108118126110121
Total Income6,487,8674,205,12714,154,78919,935,84516,443,07316,888,107
Tax to Total Income0.002%0.003%0.001%0.001%0.001%0.001%
C corporations with total income of $25 million or less
Tax***335
Total Income302463563627562348
Tax to Total Income0.039%0.068%0.008%0.516%0.524%1.390%
Source: RAAS, CDW. * indicates less than $1 million.
Thus, even if the economic impact of
the proposed regulations is interpreted
broadly to include the tax liability due
under the PFIC regime, which small en-
tities would be required to pay even if the
proposed regulations were not issued, the
economic impact should not be regarded
as significant under the Regulatory Flex-
ibility Act.
Additionally, the economic impact of
the proposed regulations when considered
alone should be minimal. Any economic
impact of the final regulations stems from
the collection of information requirements
imposed by proposed §1.1297-1(d)(1)(ii)
(B), (d)(1)(iii)(B), and (d)(1)(iv) and pro-
posed §1.1297-4(d)(5)(iii). The Treasury
Department and the IRS have determined
that the average burden is 1 hour per re-
sponse. The IRS’s Research, Applied An-
alytics, and Statistics division estimates
that the appropriate wage rate for this
set of taxpayers is $95 per hour. Thus,
the annual burden per taxpayer from the
collection of information requirement is
$95. Furthermore, these requirements ap-
ply only if a taxpayer chooses to make an
election or rely on a favorable rule.
Accordingly, it is hereby certified that
the proposed rule would not have a sig-
nificant economic impact on a substantial
number of small entities. Notwithstanding
this certification, the Treasury Department
and the IRS invite comments from the pub-
lic on both the number of entities affected
(including whether specific industries are
affected) and the economic impact of this
proposed rule on small entities.
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 businesses.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) requires
that agencies assess anticipated costs and
benefits and take certain other actions be-
6
To be conservative, C corporations reporting more than $6 billion of total income are excluded since we suspect these amounts are improperly reported.

Bulletin No. 2019–31 521 July 29, 2019
fore issuing a final rule that includes any
Federal mandate that may result in expen-
ditures in any one year by a state, local, or
tribal government, in the aggregate, or by
the private sector, of $100 million in 1995
dollars, updated annually for inflation.
In 2018, that threshold is approximately
$150 million. This rule does not include
any Federal mandate that may result in ex-
penditures by state, local, or tribal govern-
ments, or by the private sector in excess of
that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive Order. This proposed rule
does not have federalism implications and
does not impose substantial direct compli-
ance costs on state and local governments
or preempt state law within the meaning
of the Executive Order.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
timely submitted to the IRS as prescribed
in this preamble under the “Addresses”
heading. The Treasury Department and
the IRS specifically request comments on
all aspects of the proposed rules. All com-
ments will be available for public inspec-
tion and copying at www.regulations.gov
or upon request. A public hearing will be
scheduled if requested in writing by any
person that timely submits written com-
ments. If a public hearing is scheduled,
notice of the date, time and place for the
public hearing will be published in the
Federal Register.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, notices, and other guidance cit-
ed in this document are published in the
Internal Revenue Bulletin (or Cumula-
tive Bulletin) and are available from the
Superintendent of Documents, U.S. Gov-
ernment Printing Office, Washington, DC
20402, or by visiting the IRS website at
www.irs.gov.
Drafting Information
The principal drafters of these regula-
tions are Josephine Firehock, Rose E. Jen-
kins, and Jorge M. Oben of the Office of
Associate Chief Counsel (International).
Other personnel from the Treasury De-
partment and the IRS also participated in
the development of these regulations.
Withdrawal of Proposed Regulations
Accordingly, under the authority of
26 U.S.C. 7805, the notice of proposed
rulemaking (REG-108214-15) that was
published in the Federal Register on
April 24, 2015, (80 FR 50814) is with-
drawn.
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 for §§
1.1297-1, 1.1297-2, 1.1297-4, 1.1298-2,
and 1.1298-4 in numerical order to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1297-1 also issued under 26
U.S.C. 1298(g).
Section 1.1297-2 also issued under 26
U.S.C. 1298(g).
* * * * *
Section 1.1297-4 also issued under 26
U.S.C. 1297(b)(2)(B) and 1298(g).
* * * * *
Section 1.1298-2 also issued under 26
U.S.C. 1298(b)(3) and (g).
Section 1.1298-4 also issued under 26
U.S.C. 1298(g).
* * * * *
Par. 2. Section 1.1291-0 is amended
by revising the heading for §1.1291-1
and adding entries for §1.1291-1(b)(8)(iv)
(A) and (B), (b)(8)(iv)(B)(1) and (2), (b)
(8)(iv)(C), and (b)(8)(iv)(C)(1) and (2) to
read as follows:
§1.1291-0 Treatment of shareholders
of certain passive foreign investment com-
panies; table of contents.
* * * * *
§1.1291-1 Taxation of United States
persons that indirectly own PFIC stock.
* * * * *
(b) * * *
(8) * * *
(iv) * * *
(A) Example 1.
(B) Example 2.
(1) Facts.
(2) Results.
(C) Example 3.
(1) Facts.
(2) Results.
* * * * *
Par. 3. Section 1.1291-1 is amended by:
1. Revising the section heading.
2. Revising the second sentence of para-
graph (b)(8)(ii)(B).
3. Revising paragraphs (b)(8)(iii)(A),
(B), and (C).
4. Designating Example 1 in paragraph
(b)(8)(iv) as paragraph (b)(8)(iv)(A).
5. Adding paragraphs (b)(8)(iv)(B) and
(C).
6. Revising paragraph (j)(3).
7. Adding paragraph (j)(4).
The revision and additions read as fol-
lows:
§1.1291-1 Taxation of United States
persons that indirectly own PFIC stock.
* * * * *
(b) * * *
(8) * * *
(ii) * * *
(B) * * * Sections 1297(d) and 1298(b)
(7) and §1.1297-4(b)(2) and (f)(2) do not
apply in determining whether a foreign
corporation is a PFIC for purposes of this
paragraph (b)(8)(ii)(B).
* * * * *
(iii) Ownership through pass-through
entities—(A) Partnerships. Except as
otherwise provided in this paragraph (b)
(8)(iii)(A), if a foreign or domestic part-
nership directly or indirectly owns stock,
the partners of the partnership are consid-
ered to own such stock proportionately in
accordance with their ownership interests
in the partnership. Solely for purposes of
determining whether a person satisfies the

July 29, 2019 522 Bulletin No. 2019–31
ownership threshold described in para-
graph (b)(8)(ii)(A) of this section with
respect to a foreign corporation that is
not a PFIC (determined without applying
sections 1297(d) and 1298(b)(7)), the first
sentence of this paragraph (b)(8)(iii)(A)
applies only in the case of a partner that
owns 50 percent or more of the ownership
interests in the partnership that directly or
indirectly owns the stock of the foreign
corporation.
(B) S Corporations. Except as oth-
erwise provided in this paragraph (b)
(8)(iii)(B), if an S corporation directly
or indirectly owns stock, each S corpo-
ration shareholder is considered to own
such stock proportionately in accordance
with the shareholder’s ownership interest
in the S corporation. Solely for purpos-
es of determining whether a person sat-
isfies the ownership threshold described
in paragraph (b)(8)(ii)(A) of this section
with respect to a foreign corporation that
is not a PFIC (determined without apply-
ing sections 1297(d) and 1298(b)(7)), the
first sentence of this paragraph (b)(8)(iii)
(B) applies only in the case of a S corpo-
ration shareholder that owns 50 percent
or more of the ownership interests in the
S corporation that directly or indirectly
owns the stock of the foreign corporation.
(C) Estates and nongrantor trusts.
Except as otherwise provided in this
paragraph (b)(8)(iii)(C), if a foreign or
domestic estate or nongrantor trust (oth-
er than an employees’ trust described in
section 401(a) that is exempt from tax
under section 501(a)) directly or indi-
rectly owns stock, each beneficiary of
the estate or trust is considered to own a
proportionate amount of such stock. For
purposes of this paragraph (b)(8)(iii)(C),
a nongrantor trust is any trust or portion
of a trust that is not treated as owned by
one or more persons under sections 671
through 679. Solely for purposes of de-
termining whether a person satisfies the
ownership threshold described in para-
graph (b)(8)(ii)(A) of this section with
respect to a foreign corporation that is
not a PFIC (determined without apply-
ing sections 1297(d) and 1298(b)(7)),
the first sentence of this paragraph (b)(8)
(iii)(C) applies only in the case of a ben-
eficiary whose proportionate share of the
estate or trust that directly or indirectly
owns the stock of the foreign corporation
is 50 percent or more.
* * * * *
(iv) * * *
(B) Example 2—(1) Facts. A, a United States cit-
izen, owns 50% of the interests in Foreign Partner-
ship, a foreign partnership, the remaining interests
in which are owned by an unrelated foreign person.
Foreign Partnership owns 100% of the stock of FC1
and 50% of the stock of FC2, the remainder of which
is owned by an unrelated foreign person. Both FC1
and FC2 are foreign corporations that are not PFICs
(determined without applying sections 1297(d) and
1298(b)(7)). FC1 and FC2 each own 50% of the
stock of FC3, a foreign corporation that is a PFIC.
(2) Results. Under paragraph (b)(8)(iii)(A) of
this section, for purposes of determining whether A
is a shareholder of FC3, A is considered to own 50%
(50%x100%), or 50% or more, of FC1, because A
owns 50% or more of Foreign Partnership, but 25%
(50%x50%) of FC2. Thus, under paragraph (b)(8) of
this section, A is considered to own 25% of the stock
of FC3 (50%x100%x50%) indirectly through FC1,
and thus is a shareholder of FC3 for purposes of the
PFIC provisions, but is not considered to own any
stock of FC3 indirectly through FC2.
(C) Example 3—(1) Facts. The facts are the same
as in paragraph (b)(8)(iv)(B)(1) of this section (the
facts in Example 2), except that A owns 40% of the
interests in Foreign Partnership.
(2) Results. Under paragraph (b)(8)(iii)(A) of this
section, for purposes of determining whether A is a
shareholder of FC3, A is not considered to own 50%
or more of FC1 or FC2 because it does not own 50%
or more of the interests in Foreign Partnership. Thus,
under paragraph (b)(8) of this section, A is not con-
sidered to own any stock of FC3 indirectly through
FC1 or FC2.
* * * * *
(j) * * *
(3) Except as otherwise provided in
paragraph (j)(4) of this section, para-
graphs (b)(2)(ii) and (v), (b)(7) and (8),
and (e)(2) of this section apply to taxable
years of shareholders ending on or after
December 31, 2013.
(4) Paragraphs (b)(8)(ii)(B), (b)(8)(iii)
(A), (B), and (C), and (b)(8)(iv)(B) and
(C) of this section apply to taxable years
of shareholders beginning on or after the
date of publication of a Treasury decision
adopting these rules as final regulations in
the Federal Register.
Par. 4. Section 1.1297-0 is amended
by revising the introductory text and add-
ing entries for §§1.1297-1, 1.1297-2, and
1.1297-4 in numerical order to read as fol-
lows:
§1.1297-0 Table of contents.
This section contains a listing of
the headings for §§1.1297-1, 1.1297-2,
1.1297-3, 1.1297-4, and 1.1297-5.
§1.1297-1 Definition of passive foreign
investment company.
(a) Overview.
(b) Dividends included in gross in-
come.
(1) General rule.
(2) Example.
(i) Facts.
(ii) Results.
(c) Passive income.
(1) Foreign personal holding company
income.
(i) General rule.
(ii) Determination of gross income or
gain on a net basis for certain items of for-
eign personal holding company income.
(iii) Dividends.
(2) Treatment of share of partnership
income.
(i) Look-through partnership.
(ii) Less-than-25-percent-owned part-
nership.
(3) Exception for certain interest, divi-
dends, rents, and royalties received from a
related person.
(i) Allocation of interest.
(ii) Allocation of dividends.
(iii) Allocation of rents and royalties.
(iv) Determination of whether amounts
are received or accrued from a related per-
son.
(d) Asset test.
(1) Calculation of average annual value
(or adjusted bases).
(i) General rule.
(ii) Measuring period.
(A) General rule.
(B) Election to use alternative measur-
ing period.
(C) Short taxable year.
(iii) Adjusted basis.
(A) [Reserved]
(B) Election.
(iv) Time and manner of elections and
revocations.
(A) Elections.
(B) Revocations and subsequent elec-
tions.
(v) Change in method of measuring as-
sets.
(A) General rule.
(B) Example.
(1) Facts.
(2) Results.
(2) Dual-character assets.
(i) General rule.

Bulletin No. 2019–31 523 July 29, 2019
(ii) Special rule when only part of an
asset produces income.
(iii) Special rule for stock that produced
income that was excluded from passive
income under section 1297(b)(2)(C).
(iv) Example.
(A) Facts.
(B) Results.
(3) Partnership interest.
(i) Look-through partnership.
(ii) Less-than-25-percent-owned part-
nership.
(4) Dealer property.
(e) Stapled stock.
(f) Definitions.
(1) Look-through partnership.
(2) Measuring date.
(3) Measuring period.
(4) Non-passive asset.
(5) Non-passive income.
(6) Passive asset.
(7) Passive income.
(8) Tested foreign corporation.
(g) Applicability date.
(1) [Reserved]
(2) In general.
§1.1297-2 Special rules regarding
look-through subsidiaries.
(a) Overview.
(b) General rules.
(1) Tested foreign corporation’s owner-
ship of a corporation.
(2) Tested foreign corporation’s pro-
portionate share of the assets and income
of a look-through subsidiary.
(i) Proportionate share of assets.
(ii) Proportionate share of income.
(A) General rule.
(B) Special rule.
(iii) Coordination of section 1297(c)
with section 1298(b)(7).
(3) Examples.
(i) Example 1.
(A) Facts.
(B) Results.
(ii) Example 2.
(A) Facts.
(B) Results.
(iii) Example 3.
(A) Facts.
(B) Results.
(c) Elimination of certain intercompa-
ny assets and income.
(1) General rule for asset test.
(2) General rule for income test.
(3) Partnerships.
(4) Examples.
(i) Example 1.
(A) Facts.
(B) Results.
(ii) Example 2.
(A) Facts.
(B) Results.
(iii) Example 3.
(A) Facts.
(B) Results.
(d) Related person determination for
purposes of section 1297(b)(2)(C).
(1) General rule.
(2) Example.
(i) Facts.
(ii) Results.
(e) Treatment of activities of certain
look-through subsidiaries and look-
through partnerships for purposes of sec-
tion 954(c)(2)(A) active rents and royal-
ties exception.
(1) General rule.
(2) Examples.
(i) Example 1.
(A) Facts.
(B) Results.
(ii) Example 2.
(A) Facts.
(B) Results.
(f) Gain on disposition of stock in a
look-through subsidiary.
(1) Amount of gain taken into account.
(2) Characterization of residual gain as
passive income.
(3) Examples.
(i) Example 1.
(A) Facts.
(B) Results.
(ii) Example 2.
(A) Facts.
(B) Results.
(iii) Example 3.
(A) Facts.
(B) Results.
(g) Definitions.
(1) Look-through subsidiary.
(2) LTS debt.
(3) LTS stock.
(4) Residual gain.
(5) Unremitted earnings.
(h) Applicability date.
* * * * *
§1.1297-4 Qualifying insurance corpo-
ration.
(a) Scope.
(b) Qualifying insurance corporation.
(c) 25 percent test.
(d) Election to apply the alternative
facts and circumstances test.
(1) In general.
(2) Predominantly engaged in an insur-
ance business.
(i) In general.
(ii) Facts and circumstances.
(iii) Examples of facts indicating a for-
eign corporation is not predominantly en-
gaged in an insurance business.
(3) Runoff-related circumstances.
(4) Rating-related circumstances.
(5) Election.
(i) In general.
(ii) Information provided by foreign
corporation.
(iii) Time and manner for making the
election.
(e) Rules limiting the amount of appli-
cable insurance liabilities.
(1) In general.
(2) General limitation on applicable in-
surance liabilities.
(3) Additional limitation on amount of
applicable insurance liabilities for a for-
eign corporation that does not prepare a
financial statement based on a financial
reporting standard.
(i) In general.
(ii) Choice of accounting method.
(4) Changes to financial statements
prepared.
(f) Definitions.
(1) Applicable financial statement.
(2) Applicable insurance liabilities.
(3) Applicable insurance regulatory
body.
(4) Financial reporting standard.
(5) Generally accepted accounting
principles or GAAP.
(6) Insurance business.
(7) Total assets.
(g) Applicability date.
§1.1297-5 Exception from the defini-
tion of passive income for active insur-
ance income.
(a) Scope.
(b) Exclusion from passive income of
active insurance income.
(c) Income derived by a QIC in the ac-
tive conduct of an insurance business.
(1) In general.
(2) Insurance business.
(3) Active conduct of an insurance
business.
(i) In general.
(ii) Control test.

July 29, 2019 524 Bulletin No. 2019–31
(A) Ownership.
(1) Ownership by or of a corporation.
(2) Ownership of a partnership.
(B) Control and supervision.
(C) Compensation.
(4) Active conduct percentage.
(i) In general.
(ii) Related expense determination.
(iii) Ceding commission.
(d) Income of qualifying domestic in-
surance corporation.
(e) Exclusion of assets for purpos-
es of the passive asset test under section
1297(a)(2).
(f) Treatment of income and assets
of certain look-through subsidiaries and
look-through partnerships for purposes of
the section 1297(b)(2)(B) exception.
(1) General rule.
(2) Applicable statement for tested for-
eign corporations applying paragraph (g)
(1) of this section.
(g) No double counting.
(h) Definitions.
(1) Insurance services.
(2) Investment activity.
(3) Qualifying insurance corporation or
QIC.
(i) Applicability date.
Par. 5. Sections 1.1297-1 and 1.1297-2
are added to read as follows:
§1.1297-1 Definition of passive foreign
investment company.
(a) Overview. This section provides
rules concerning the income test set forth
in section 1297(a)(1) and the asset test
set forth in section 1297(a)(2). Paragraph
(b) of this section provides a rule relat-
ing to the definition of gross income for
purposes of section 1297. Paragraph (c)
of this section sets forth rules relating to
the definition of passive income for pur-
poses of section 1297. Paragraph (d) of
this section provides rules relating to the
asset test of section 1297. See §§1.1297-
2 and 1.1298-4 for additional rules con-
cerning the treatment of the income and
assets of a corporation subject to look-
through treatment under section 1297(c).
Paragraph (e) of this section sets forth
rules relating to the determination of pas-
sive foreign investment company (PFIC)
status for stapled entities. Paragraph (f)
of this section sets forth definitions appli-
cable for this section, and paragraph (g)
of this section sets forth the applicability
date of this section.
(b) Dividends included in gross in-
come—(1) General rule. For purposes
of section 1297, gross income includes
dividends that are excluded from gross in-
come under section 1502 and §1.1502-13.
(2) Example—(i) Facts. USP is a domestic cor-
poration that owns 30% of TFC, a foreign corpora-
tion. The remaining 70% of TFC is owned by FP,
a foreign corporation that is unrelated to USP. TFC
owns 25% of the value of USS1, a domestic cor-
poration. USS1 owns 80% of the value of USS2, a
domestic corporation. USS1 and USS2 are members
of an affiliated group (as defined in section 1504(a))
filing a consolidated return. USS2 distributes a divi-
dend to USS1 that is excluded from USS1’s income
pursuant to §1.1502-13 for purposes of determining
the U.S. Federal income tax liability of the affiliated
group of which USS1 and USS2 are members.
(ii) Results. Although the dividend received by
USS1 from USS2 is excluded from USS1’s income
for purposes of determining the U.S. Federal income
tax liability of the affiliated group of which USS1
and USS2 are members, pursuant to paragraph (b)
(1) of this section, for purposes of section 1297,
USS1’s gross income includes the USS2 dividend.
Accordingly, for purposes of section 1297, TFC’s
gross income includes 25% of the dividend received
by USS1 from USS2 pursuant to section 1297(c)
and §1.1297-2(b)(2)(ii). See section 1298(b)(7) and
§1.1298-4 for rules concerning the characterization
of the USS2 dividend.
(c) Passive income—(1) Foreign per-
sonal holding company income—(i) Gen-
eral rule. For purposes of section 1297,
except as otherwise provided in section
1297(b)(2), this section, and §1.1297-4,
the term passive income means income
of a kind that would be foreign personal
holding company income as defined under
section 954(c)(1). For the purpose of this
paragraph (c)(1)—
(A) The exceptions to foreign person-
al holding company income in section
954(c)(1), 954(c)(2)(A) (relating to active
rents and royalties), 954(c)(2)(B) (relating
to export financing income), 954(c)(2)(C)
(relating to dealers), and 954(h) (relating
to entities engaged in the active conduct of
a banking, financing, or similar business)
are taken into account;
(B) The exceptions in section 954(c)
(3) (relating to certain income received
from related persons), 954(c)(6) (relating
to certain amounts received from relat-
ed controlled foreign corporations), and
954(i) (relating to entities engaged in the
active conduct of an insurance business)
are not taken into account;
(C) The rules in section 954(c)(4) (re-
lating to sales of certain partnership in-
terests) and 954(c)(5) (relating to certain
commodity hedging transactions) are tak-
en into account; and
(D) An entity is treated as a controlled
foreign corporation within the meaning of
section 957(a) for purposes of applying
an exception to foreign personal holding
company income in section 954(c) and (h)
and for purposes of identifying whether a
person is a related person with respect to
such entity within the meaning of section
954(d)(3).
(ii) Determination of gross income on
a net basis for certain items of foreign
personal holding company income. For
purposes of section 1297, the excess of
gains over losses from property trans-
actions described in section 954(c)(1)
(B), the excess of gains over losses from
transactions in commodities described in
section 954(c)(1)(C), the excess of foreign
currency gains over foreign currency loss-
es described in section 954(c)(1)(D), and
positive net income from notional princi-
pal contracts described in section 954(c)
(1)(F) are taken into account as gross in-
come. The excess of gains over losses and
positive net income is calculated separate-
ly with respect to the tested foreign cor-
poration and each look-through subsidiary
(as defined in §1.1297-2(g)(1)).
(iii) Dividends. For purposes of sec-
tion 1297, the term dividend includes all
amounts treated as dividends for purposes
of this chapter, including amounts treat-
ed as dividends pursuant to sections 302,
304, 356(a)(2), 964(e), and 1248.
(2) Treatment of share of partnership
income—(i) Look-through partnership. A
tested foreign corporation is treated as if it
received directly its share of any item of
income of a look-through partnership, and
the exceptions to passive income in section
1297(b)(2) and the relevant exceptions to
foreign personal holding company income
in section 954(c) and (h) that are based on
whether income is derived in the active
conduct of a business or whether a cor-
poration is engaged in the active conduct
of a business apply to such income only if
the exception would have applied to ex-
clude the income from passive income or
foreign personal holding company in the
hands of the partnership, determined by
taking into account only the activities of
the partnership. See §1.1297-2(e) for rules
that allow the activities of certain other
entities to be taken into account for pur-

Bulletin No. 2019–31 525 July 29, 2019
poses of determining the characterization
of a tested foreign corporation’s share of
partnership income. See also §1.1297-2(d)
for rules determining whether a person is
a related person for purposes of applying
section 1297(b)(2)(C) in the case of in-
come received or accrued by a partnership
that is treated as received directly by a
tested foreign corporation pursuant to this
paragraph (c)(2).
(ii) Less-than-25-percent-owned part-
nership. For purposes of section 1297, a
tested foreign corporation’s share of any
item of income of a partnership in which
the corporation owns, directly or indi-
rectly, less than 25 percent of the value is
treated as passive income.
(3) Exception for certain interest, div-
idends, rents, and royalties received from
a related person—(i) Allocation of inter-
est. For purposes of section 1297(b)(2)
(C), interest that is received or accrued,
as applicable based on the recipient’s
method of accounting, from a related
person (as defined in section 1297(b)) is
allocated to income of the related person
that is not passive income in proportion
to the ratio of the portion of the related
person’s non-passive income for its tax-
able year to the total amount of the relat-
ed person’s income for the taxable year
that ends with or within the taxable year
of the recipient.
(ii) Allocation of dividends. For pur-
poses of section 1297(b)(2)(C), dividends
that are received or accrued, as applicable
based on the recipient’s method of ac-
counting, from a related person are allo-
cated to income of the related person that
is not passive income based on the rela-
tive portion of the related person’s current
earnings and profits for its taxable year
that ends with or within the taxable year
of the recipient that are attributable to
non-passive income.
(iii) Allocation of rents and royalties.
For purposes of section 1297(b)(2)(C),
rents and royalties that are received or
accrued, as applicable based on the recip-
ient’s method of accounting, from a relat-
ed person are allocated to income of the
related person that is not passive income
to the extent the related person’s deduc-
tion for the rent or royalty is allocated to
non-passive income of the related person
under the principles of §§1.861-8 through
1.861-14T.
(iv) Determination of whether amounts
are received or accrued from a related
person. For purposes of section 1297(b)
(2)(C), the determination of whether in-
terest, dividends, rents, and royalties were
received or accrued from a related person
is made on the date of the receipt or accru-
al, as applicable based on the recipient’s
method of accounting, of the interest, div-
idend, rent, or royalty.
(d) Asset test—(1) Calculation of av-
erage annual value (or adjusted bases)—
(i) General rule. For purposes of section
1297, the calculation of the average per-
centage of assets held by a tested foreign
corporation during its taxable year that
produce passive income or that are held
for the production of passive income is
determined based on the average of the
fair market values (or the average of the
adjusted bases) of the passive assets and
total assets held by the foreign corpora-
tion on the last day of each measuring
period (measuring date) of the foreign
corporation’s taxable year. The average
of the fair market values (or the average
of the adjusted bases) of the foreign cor-
poration’s passive assets or total assets
for the taxable year is equal to the sum
of the values (or adjusted bases) of the
passive assets or total assets, as applica-
ble, on each measuring date of the for-
eign corporation’s taxable year, divided
by the number of measuring dates in the
taxable year.
(ii) Measuring period—(A) Gener-
al rule. Except as otherwise provided in
paragraph (d)(1)(ii)(B) of this section, the
measuring periods for a tested foreign cor-
poration are the four quarters that make up
the foreign corporation’s taxable year.
(B) Election to use alternative mea-
suring period. The average percentage of
assets held by a tested foreign corpora-
tion during its taxable year that produce
passive income or that are held for the
production of passive income may be cal-
culated using a period that is shorter than
a quarter (such as a week or month). The
same period must be used to measure the
assets of the foreign corporation for the
first year (including a short taxable year)
that this alternative measuring period is
used, and for any and all subsequent years,
unless a revocation is made. An election
to use an alternative measuring period or
a revocation of such an election must be
made in accordance with the rules of para-
graph (d)(1)(iv) of this section.
(C) Short taxable year. For purposes of
applying section 1297 to a tested foreign
corporation that has a taxable year of less
than twelve months (short taxable year),
the average values (or adjusted bases) are
determined based on the measuring dates
of the foreign corporation’s taxable year
(determined as if the taxable year were
not a short taxable year), and by treating
the last day of the short taxable year as a
measuring date.
(iii) Adjusted basis. (A) [Reserved]
(B) Election. An election under section
1297(e)(2)(B) with respect to an eligible
tested foreign corporation or a revocation
of such an election must be made in accor-
dance with the rules of paragraph (d)(1)
(iv) of this section.
(iv) Time and manner of elections and
revocations—(A) Elections. An owner (as
defined in this paragraph (d)(1)(iv)) of a
foreign corporation makes an election de-
scribed in paragraph (d)(1)(ii)(B) or (d)(1)
(iii)(B) of this section for a taxable year
in the manner provided in the Instructions
to Form 8621 (or successor form), if the
owner is required to file a Form 8621 (or
successor form) with respect to the for-
eign corporation for the taxable year of the
owner in which or with which the taxable
year of the foreign corporation for which
the election is made ends. If the owner is
not required to file Form 8621 (or succes-
sor form) with respect to the foreign cor-
poration for the taxable year, the owner
makes such an election by filing a written
statement providing for the election and
attaching the statement to an original or
amended Federal income tax return for
the taxable year of the owner in which or
with which the taxable year of the foreign
corporation for which the election is made
ends clearly indicating that such election
has been made. An election can be made
by an owner only if the owner’s taxable
year for which the election is made, and
all taxable years that are affected by the
election, are not closed by the period of
limitations on assessments under section
6501. Elections described in in paragraphs
(d)(1)(ii)(B) and (d)(1)(iii)(B) of this
section are not eligible for relief under
§301.9100-3 of this chapter. For purpos-
es of this paragraph (d)(1)(iv), an owner
of a foreign corporation is a United States

July 29, 2019 526 Bulletin No. 2019–31
person that is eligible under §1.1295-1(d)
to make a section 1295 election with re-
spect to the foreign corporation, or would
be eligible under §1.1295-1(d) to make a
section 1295 election if the foreign corpo-
ration were a PFIC.
(B) Revocations and subsequent elec-
tions. An election described in paragraph
(d)(1)(ii)(B) or (d)(1)(iii)(B) of this sec-
tion made pursuant to paragraph (d)(1)
(iv)(A) of this section is effective for the
taxable year of the foreign corporation for
which it is made and all subsequent tax-
able years of such corporation unless re-
voked by the Commissioner or the owner
(as defined in paragraph (d)(1)(iv)(A) of
this section) of the foreign corporation.
The owner of a foreign corporation may
revoke such an election at any time. If an
election described in paragraph (d)(1)(ii)
(B) or (d)(1)(iii)(B) of this section has
been revoked under this paragraph (d)(1)
(iv)(B), a new election described in para-
graph (d)(1)(ii)(B) or (d)(1)(iii)(B) of this
section, as applicable, cannot be made
until the sixth taxable year following the
year for which the previous such election
was revoked, and such subsequent elec-
tion cannot be revoked until the sixth tax-
able year following the year for which the
subsequent election was made. The owner
revokes the election for a taxable year in
the manner provided in the Instructions
to Form 8621 (or successor form), if the
owner is required to file a Form 8621 (or
successor form) with respect to the for-
eign corporation for the taxable year of the
owner in which or with which the taxable
year of the foreign corporation for which
the election is revoked ends, or by filing
a written statement providing for the re-
vocation and attaching the statement to an
original or amended Federal income tax
return for the taxable year of the owner
in which or with which the taxable year
of the foreign corporation for which the
election is revoked ends clearly indicating
that such election has been revoked, if the
owner is not required to file Form 8621 (or
successor form) with respect to the foreign
corporation for the taxable year.
(v) Change in method of measuring
assets—(A) General rule. For purposes
of section 1297, when stock of a foreign
corporation is not publicly traded for an
entire taxable year, the assets of the for-
eign corporation must be measured for all
measuring periods of the taxable year on
the basis of value if the corporation was
publicly traded on the majority of days
during the year or section 1297(e)(2) did
not otherwise apply to the corporation on
the majority of days of the year, and on the
basis of adjusted basis otherwise.
(B) Example. The following example
illustrates the application of this para-
graph (d)(1)(v).
(1) Facts. TFC is a controlled foreign corpora-
tion, 90% of the stock of which is wholly owned by
USP at the beginning of its taxable year ending De-
cember 31 and throughout the year. The remaining
10% of its stock has historically been regularly trad-
ed on a national securities exchange that is registered
with the Securities and Exchange Commission and
continues to be until September 1 of the taxable year,
when USP acquires all of it pursuant to a tender offer.
(2) Results. Because TFC was publicly traded
on the majority of days during the year, the assets
of the foreign corporation must be measured for all
measuring periods of the taxable year on the basis
of value.
(2) Dual-character assets—(i) Gener-
al rule. Except as otherwise provided in
paragraph (d)(2)(ii) of this section, for
purposes of section 1297, an asset (or
portion of an asset) that produces both
passive income and non-passive income
during a taxable year (dual-character as-
set) is treated as two assets for each mea-
suring period in the taxable year, one of
which is a passive asset and one of which
is a non-passive asset. The value (or ad-
justed basis) of the dual-character asset is
allocated between the passive asset and
the non-passive asset in proportion to the
relative amounts of passive income and
non-passive income produced by the asset
(or portion of an asset) during the taxable
year. See paragraph (d)(2)(iii) of this sec-
tion for a special rule concerning stock
that has previously produced dividends
subject to the exception provided in sec-
tion 1297(b)(2)(C).
(ii) Special rule when only part of an
asset produces income. For purposes of
section 1297, when only a portion of an
asset produces income during a taxable
year, the asset is treated as two assets,
one of which is characterized as a passive
asset or a non-passive asset based on the
income that it produces, and one of which
is characterized based on the income that
it is held to produce. The value (or adjust-
ed basis) of the asset is allocated between
the two assets pursuant to the method that
most reasonably reflects the uses of the
property. In the case of real property, an
allocation based on the physical use of the
property generally is the most reasonable
method.
(iii) Special rule for stock that pro-
duced income that was excluded from
passive income under section 1297(b)
(2)(C). Stock with respect to which no
dividends are accrued or received, as ap-
plicable based on the recipient’s method
of accounting, during a taxable year but
with respect to which dividends accrued
or received, as applicable based on the re-
cipient’s method of accounting, during a
prior taxable year were in whole or in part
excluded from passive income under sec-
tion 1297(b)(2)(C) and paragraph (c)(3)
(ii) of this section is treated as two assets,
one of which is a passive asset and one
of which is a non-passive asset. The value
(or adjusted basis) of the asset is allocat-
ed between the two assets in proportion to
the average percentage of dividends that
were characterized as passive income,
and the average percentage of dividends
characterized as non-passive income, for
the previous two taxable years pursuant to
section 1297(b)(2)(C) and paragraph (c)
(3)(ii) of this section.
(iv) Example. The following example
illustrates the application of this para-
graph (d)(2).
(A) Facts. (1) USP is a domestic corporation
that owns 30% of TFC, a foreign corporation. The
remaining 70% of TFC is owned by FP, a foreign
corporation that is unrelated to USP. TFC owns 20%
of the value of FS1, a foreign corporation, and FP
owns the remaining 80% of the value of FS1. FP,
TFC, and FS1 are not controlled foreign corporations
within the meaning of section 957(a), and each has
a calendar year taxable year. For purposes of section
1297(b)(2)(C), FP is a “related person” with respect
to TFC because FP owns more than 50% of the vote
or value of TFC, and FS1 is a “related person” with
respect to TFC because FP owns more than 50% of
the vote or value of both TFC and of FS1.
(2) During Year 3, FP has only passive income,
and FS1 has passive income of $200x and non-pas-
sive income of $800x. FS1 does not pay dividends
during Year 3, but did pay $100x of dividends in Year
2 and $300x of dividends in Year 1. In Year 2, FS1
had current earnings and profits of $1000x, attribut-
able to passive income of $100x and non-passive in-
come of $900x; and, in Year 1, FS1 had current earn-
ings and profits of $1000x, attributable to passive
income of $500x and non-passive income of $500x.
Throughout Year 3, TFC holds an obligation of FS1
with respect to which FS1 pays $100x of interest.
(3) In addition to the stock in FS1 and the FS1
obligation, TFC holds an office building, 40% of
which is rented to FP throughout Year 3 for $100x
per quarter. For the first two quarters of Year 3,

Bulletin No. 2019–31 527 July 29, 2019
60% of the office building is used by TFC in a trade
or business generating non-passive income. For
the last two quarters of Year 3, 60% of the office
building is rented to an unrelated person for $300x
per quarter, and TFC’s own officers or staff of em-
ployees regularly perform active and substantial
management and operational functions while the
property is leased.
(B) Results. (1) Under paragraph (c)(3)(ii) of
this section, the dividends paid by FS1 in Year 2
were characterized as 10% passive income and 90%
non-passive income. Under paragraph (c)(3)(ii) of
this section, the dividends paid by FS1 in Year 1
were characterized as 50% passive income and 50%
non-passive income. Accordingly, the average per-
centage of dividends for the previous two taxable
years that were characterized as passive income is
40% (((10% x $100x) + (50% x $300x))/($100x +
$300x)), and the average percentage of dividends
characterized as non-passive income is 60% (((90%
x $100x) + (50% x $300x))/($100x + $300x)). Thus,
under paragraph (d)(2)(iii) of this section, 60%
of each share of stock of FS1 is characterized as a
non-passive asset and 40% is characterized as a pas-
sive asset for each quarter of Year 3 for purposes of
applying section 1297(a)(2) to determine whether
TFC is a PFIC.
(2) Under paragraph (c)(3)(i) of this section, the
interest received by TFC from FS1 is characterized
as 20% ($200x/($200x+$800x)) passive income and
thus 80% non-passive income for purposes of apply-
ing section 1297(a)(1) to determine whether TFC is
a PFIC. Accordingly, under paragraph (d)(2)(i) of
this section, 20% of the obligation of FS1 is charac-
terized as a passive asset and 80% as a non-passive
asset for each quarter of Year 3 for purposes of ap-
plying section 1297(a)(2) to determine whether TFC
is a PFIC.
(3) Under paragraph (c)(3)(iii) of this section,
the rent received from FP throughout Year 3 is
characterized as 100% passive income. Under para-
graph (c)(1)(i)(A) of this section and section 954(c)
(2)(A), the rent received from the unrelated person
during the last two quarters is characterized as 100%
non-passive income. Accordingly, under paragraph
(d)(2)(i) of this section, 40% (($100x x 4)/(($100x
x 4)+($300x x 2))) of the office building is a passive
asset, and 60% (($300x x 2)/(($100x x 4)+($300x x
2))) is a non-passive asset for purposes of applying
section 1297(a)(2) to determine whether TFC is a
PFIC. Paragraph (d)(2)(ii) of this section does not
apply because both portions of the office building
generate income during Year 3.
(3) Partnership interest—(i) Look-
through partnership. A tested foreign
corporation is treated as holding directly
its proportionate share of the assets held
by a look-through partnership. The rules
and principles of sections 701 through 761
apply to determine the corporate partner’s
proportionate share of the value of the
partnership assets, as well as the propor-
tionate share of the partnership’s adjusted
basis in the partnership’s assets (taking
into account any adjustments to such basis
with respect to such partner under section
743). A tested foreign corporation’s pro-
portionate share of a partnership asset is
treated as producing passive income, or
being held to produce passive income, to
the extent the asset produced, or was held
to produce, passive income in the hands
of the partnership under the rules in para-
graph (c)(2) of this section.
(ii) Less-than-25-percent-owned part-
nership. For purposes of section 1297,
a tested foreign corporation’s interest in
a partnership in which the corporation
owns, directly or indirectly, less than 25
percent of the value is treated as a passive
asset.
(4) Dealer property. For purposes of
section 1297(a)(2), an asset that produc-
es, or would produce upon disposition,
income or gain that is, or would be, ex-
cluded from passive income pursuant
to section 954(c)(2)(C) is treated as a
non-passive asset.
(e) Stapled stock. For purposes of de-
termining whether stapled entities (as de-
fined in section 269B(c)(2)) are a PFIC,
all entities that are stapled entities with re-
spect to each other are treated as a single
entity that holds all of the assets of the sta-
pled entities, conducts all of the activities
of the stapled entities, and derives all of
the income of the stapled entities.
(f) Definitions. The following defini-
tions apply for purposes of this section:
(1) Look-through partnership. The
term look-through partnership means,
with respect to a tested foreign corpora-
tion—
(i) For purposes of section 1297(a)(2),
a partnership at least 25 percent of the val-
ue of which is owned (as determined un-
der §1.1297-2(b)(1) as if the partnership
were a corporation) by the tested foreign
corporation on the measuring date; and
(ii) For purposes of section 1297(a)(1),
a partnership for which the value owned
(as determined under §1.1297-2(b)(1) as
if the partnership were a corporation) by
the tested foreign corporation on the date
on which income is received or accrued by
the partnership is at least 25 percent of the
value of the partnership.
(2) Measuring date. The term measur-
ing date has the meaning provided in para-
graph (d)(1)(i) of this section.
(3) Measuring period. The term mea-
suring period means a quarter or an alter-
native measuring period, as determined in
accordance with paragraph (d)(1)(ii) of
this section.
(4) Non-passive asset. The term
non-passive asset means an asset other
than a passive asset.
(5) Non-passive income. The term
non-passive income means income other
than passive income.
(6) Passive asset. The term passive as-
set means an asset that produces passive
income, or which is held for the produc-
tion of passive income, taking into ac-
count the rules in paragraphs (c) and (d)
of this section.
(7) Passive income. The term passive
income has the meaning provided in para-
graph (c)(1) of this section.
(8) Tested foreign corporation. The
term tested foreign corporation means
a foreign corporation the PFIC status
of which is being tested under section
1297(a).
(g) Applicability date. (1) [Reserved]
(2) In general. The rules of this section
apply to taxable years of shareholders be-
ginning on or after the date of publication
of the Treasury decision adopting these
rules as final regulations in the Federal
Register.
§1.1297-2 Special rules regarding
look-through subsidiaries.
(a) Overview. This section provides
rules concerning the treatment of income
and assets of a look-through subsidiary
for purposes of determining whether a
tested foreign corporation (as defined
in §1.1297-1(f)(8)) is a passive foreign
investment company (PFIC) under sec-
tion 1297(a). Paragraph (b) of this sec-
tion provides guidance for purposes of
section 1297(c) on how to determine a
tested foreign corporation’s ownership
in a corporation and how to determine a
tested foreign corporation’s proportionate
share of a look-through subsidiary’s assets
and income. Paragraph (c) of this section
provides rules that eliminate certain in-
come and assets related to look-through
subsidiaries and look-through partner-
ships (as defined in §1.1297-1(f)(1)) for
purposes of determining a tested foreign
corporation’s PFIC status. Paragraph (d)
of this section sets forth a rule to deter-
mine whether certain income received or
accrued by look-through subsidiaries and
look-through partnerships is received or
accrued from a related person for purpos-

July 29, 2019 528 Bulletin No. 2019–31
es of section 1297(b)(2)(C). Paragraph
(e) of this section sets forth rules con-
cerning the attribution of activities from
a look-through subsidiary or look-through
partnership. Paragraph (f) of this section
provides rules for determining the amount
of gain from the sale or exchange of stock
of a look-through subsidiary that is taken
into account under section 1297(a) and for
determining the passive or non-passive
character of the gain. Paragraph (g) of this
section sets forth definitions applicable
for this section, and paragraph (h) of this
section sets forth the applicability date of
this section.
(b) General rules—(1) Tested foreign
corporation’s ownership of a corporation.
For purposes of section 1297(c) and the
regulations in this section, the principles
of section 958(a) and the regulations in
this chapter under that section applicable
to determining direct or indirect owner-
ship by value apply to determine a tested
foreign corporation’s percentage owner-
ship (by value) in the stock of another cor-
poration. These principles apply whether
an intermediate entity is domestic or for-
eign.
(2) Tested foreign corporation’s pro-
portionate share of the assets and income
of a look-through subsidiary—(i) Propor-
tionate share of assets. For each measur-
ing period (as defined in §1.1297-1(f)(3)),
a tested foreign corporation is treated as
if it held its proportionate share of each
asset of a look-through subsidiary, deter-
mined based on the tested foreign corpo-
ration’s percentage ownership (by value)
(as determined under paragraph (b)(1) of
this section)) of the look-through subsid-
iary on the measuring date (as defined in
§1.1297-1(f)(2)).
(ii) Proportionate share of income—
(A) General rule. A tested foreign corpo-
ration is treated as if it received direct-
ly its proportionate share of each item
of gross income of a corporation for a
taxable year if the corporation is a look-
through subsidiary with respect to the
tested foreign corporation for the taxable
year of the tested foreign corporation. In
such case, a tested foreign corporation’s
proportionate share of a look-through
subsidiary’s gross income is determined
based on the corporation’s average per-
centage ownership (by value) of the
look-through subsidiary.
(B) Special rule. When a corporation
is not a look-through subsidiary with re-
spect to a tested foreign corporation for a
taxable year of the tested foreign corpo-
ration, the tested foreign corporation may
be treated as if it received directly its pro-
portionate share of the gross income of the
first corporation for each measuring peri-
od in the year for which the first corpora-
tion is a look-through subsidiary, provided
that the gross income of the first corpora-
tion for each such measuring period can
be established. In such case, a tested for-
eign corporation’s proportionate share of
a look-through subsidiary’s gross income
is determined based on the tested foreign
corporation’s percentage ownership (by
value) (as determined under paragraph
(b)(1) of this section) of the look-through
subsidiary on the relevant measuring date.
(iii) Coordination of section 1297(c)
with section 1298(b)(7). A tested foreign
corporation is not treated under section
1297(c) and this paragraph (b) as holding
its proportionate share of the assets of a
domestic corporation, or receiving di-
rectly its proportionate share of the gross
income of such corporation, if the stock
of the corporation is treated as an asset
that is not a passive asset (as defined in
§1.1297-1(f)(6)) that produces income
that is not passive income (as defined in
§1.1297-1(f)(7)) under section 1298(b)(7)
(concerning the treatment of certain for-
eign corporations owning stock in certain
25 percent owned domestic corporations).
See §1.1298-4 for rules governing the ap-
plication of section 1298(b)(7).
(3) Examples. The following examples
illustrate the rules of this paragraph (b).
For purposes of the examples in this para-
graph (b)(3), for TFC’s and LTS’s entire
taxable years, USP is a domestic corpora-
tion; USP owns 30% of TFC; TFC owns
the amount of stock of LTS provided in
each example; LTS owns 25% of the only
class of FS stock; and TFC, LTS, and FS
are foreign corporations that are not con-
trolled foreign corporations within the
meaning of section 957(a).
(i) Example 1—(A) Facts. TFC directly owns
80% of the only class of LTS stock for TFC’s and
LTS’s entire taxable year. Pursuant to the principles
of section 958(a), TFC owns 80% of the value of
LTS, LTS owns 25% of the value of FS, and TFC
owns 20% of the value of FS.
(B) Results. Under paragraph (b) of this sec-
tion, in determining whether LTS is a PFIC under
section 1297(a), LTS is treated as if it held 25% of
each of FS’s assets on each of the measuring dates
in its taxable year, and received directly 25% of the
gross income of FS for the taxable year. In determin-
ing whether TFC is a PFIC under section 1297(a),
TFC is treated as if it held an 80% interest in each
of LTS’s assets on each of the measuring dates in
its taxable year, and received directly 80% of the in-
come of LTS for the taxable year. However, TFC is
treated as if it held a 20% interest in the stock of FS
(and not the assets of FS), and received 80% of any
dividends paid from FS to LTS (and not any income
of FS).
(ii) Example 2—(A) Facts. TFC directly owns
25% of the only class of LTS stock on the last day of
each of the first three quarters of its taxable year, but
disposes of its entire interest in LTS during the fourth
quarter of its taxable year. Pursuant to the principles
of section 958(a), on each of its first three measuring
dates, TFC owns 25% of the value of LTS and 6.25%
of the value of FS.
(B) Results. Under paragraph (b) of this section,
in determining whether TFC is a PFIC under section
1297(a), TFC is treated as if it held 25% of LTS’s
assets on each of the first three measuring dates in its
taxable year. However, because it held an average of
18.75% of the value of LTS on the measuring dates
in the taxable year, it is not treated as receiving di-
rectly the gross income of LTS for the taxable year.
If information about the gross income for LTS for
each of the first three quarters of its taxable year is
available, TFC may be treated as receiving directly
25% of the income of LTS for each of those quar-
ters, because it owned 25% of the value of LTS on
the measuring dates with respect to those measuring
periods. For each of its first three quarters, TFC is
treated as if it held a 6.25% interest in the stock of
FS (and not the assets of FS) and may, if information
about the income for LTS for each of the first three
quarters of its taxable year is available, be treated as
receiving 25% of any dividends paid from FS to LTS
(and not any income of FS).
(iii) Example 3—(A) Facts. TFC directly owns
100% of the only class of LTS stock for TFC’s and
LTS’s entire taxable year. Pursuant to the principles
of section 958(a), TFC owns 100% of the value of
LTS, and TFC owns 25% of the value of FS. TFC
earns $5x of rents from renting a building to LTS, a
related person with respect to TFC within the mean-
ing of section 954(d)(3). TFC also sells one item
of property described in section 954(c)(1)(B)(i) for
a gain of $25x and another for a loss of $10x, and
no exception from passive income applies to either
amount. LTS has $100x of revenues from selling
property described in section 1221(a)(1) to unrelated
persons, but $150x of cost of goods sold with respect
to such property. None of LTS’s deduction for the
rent paid to TFC is allocated to non-passive income
under the principles of §§1.861-8 through 1.861-
14T. During the taxable year, FS sells one item of
property described in section 954(c)(1)(B)(i) for a
gain of $50x and another for a loss of $100x, and
no exception from passive income applies to either
amount.
(B) Results. Under paragraph (b) of this sec-
tion, in determining whether TFC is a PFIC under
section 1297(a), TFC is treated as if it held 100%
of LTS’s assets on each of the measuring dates in

Bulletin No. 2019–31 529 July 29, 2019
its taxable year, and received directly 100% of the
gross income of LTS for the taxable year. According-
ly, TFC is treated as receiving directly $0x of gross
income from the sale of property by LTS given that
LTS revenues are fully offset by costs of goods sold.
Furthermore, TFC is treated as if it held a 25% in-
terest in FS’s assets, and received directly 25% of
the gross income of FS. Pursuant to §1.1297-1(c)(1)
(ii), only the excess of gains over losses from prop-
erty transactions described in section 954(c)(1)(B)
is taken into account as gross income for purposes
of section 1297. Accordingly, TFC is treated as re-
ceiving directly $0x of gross income from the sales
of property by FS. TFC’s rental income constitutes
passive income pursuant to §1.1297-1(c) and section
954(c)(1)(A), the exception in section 954(c)(2)(A)
does not apply, and, taking into account §1.1297-1(c)
(3)(iii), section 1297(b)(2)(c) does not apply to char-
acterize any of the rental income as non-passive in-
come. TFC’s income from its sales of property con-
stitutes passive income pursuant to §1.1297-1(c) and
section 954(c)(1)(B), although, pursuant to §1.1297-
1(c)(1)(ii), only the excess of gains over losses is
taken into account as gross income for purposes of
section 1297. As a result, TFC’s income, all of which
is passive income, equals $20x ($5x + ($25x-$10x))
of gross income.
(c) Elimination of certain intercompa-
ny assets and income—(1) General rule
for asset test. For purposes of section
1297, a tested foreign corporation does
not take into account the value (or ad-
justed basis) of stock of a look-through
subsidiary (LTS stock) or its proportionate
share of an obligation of a look-through
subsidiary (LTS debt) that it owns on a
measuring date, including LTS stock and
LTS debt that it is treated as owning pur-
suant to section 1297(c) and paragraph
(b)(2) of this section or §1.1297-1(c)(2).
The tested foreign corporation’s propor-
tionate share of a LTS debt is the value (or
adjusted basis) of the debt multiplied by
the tested foreign corporation’s percent-
age ownership (by value) in the debtor
look-through subsidiary. Furthermore, for
purposes of section 1297, a tested foreign
corporation does not take into account the
value (or adjusted basis) of stock or ob-
ligations of the tested foreign corporation
that it is treated as owning pursuant to sec-
tion 1297(c) and paragraph (b)(2) of this
section or §1.1297-1(c)(2).
(2) General rule for income test. For
purposes of section 1297, a tested foreign
corporation does not take into account
dividends derived with respect to LTS
stock or its proportionate share of interest
derived with respect to LTS debt, includ-
ing amounts that it is treated as receiving
pursuant to section 1297(c) and paragraph
(b)(2) of this section or §1.1297-1(c)(2),
other than dividends that are attributable
to income that was not treated as received
directly by the tested foreign corporation
pursuant to paragraph (b)(2) of this sec-
tion. The tested foreign corporation’s pro-
portionate share of interest is the amount
of interest multiplied by the tested foreign
corporation’s percentage ownership (by
value) in the debtor look-through subsid-
iary. Furthermore, for purposes of section
1297, a tested foreign corporation does
not take into account dividends or interest
with respect to stock or obligations of the
tested foreign corporation that it is treated
as receiving pursuant to section 1297(c)
and paragraph (b)(2) of this section or
§1.1297-1(c)(2).
(3) Partnerships. For purposes of sec-
tion 1297, the principles of paragraphs (c)
(1) and (2) of this section apply with re-
spect to ownership interests in and debt
of a look-through partnership and with
respect to distributions by a look-through
partnership, other than distributions that
are attributable to income that was not
treated as received directly by the tested
foreign corporation pursuant to §1.1297-
1(c)(2), and interest derived with respect
to the debt of a look-through partnership.
(4) Examples. The following examples
illustrate the rules of this paragraph (c).
For purposes of the examples in this para-
graph (c)(4), USP is a domestic corpora-
tion; USP owns 30% of TFC; TFC, LTS1,
and LTS2 are foreign corporations that are
not controlled foreign corporations within
the meaning of section 957(a); FPS is a
foreign partnership; and TFC, LTS1, and
LTS2 measure assets for purposes of sec-
tion 1297(a)(2) based on value.
(i) Example 1—(A) Facts. TFC directly owns
40% of the value of LTS1 stock on each of the mea-
suring dates, and thus is treated under paragraph (b)
(1) of this section as owning 40% of LTS1 on each of
the measuring dates. TFC’s assets include a loan to
LTS1 with a balance of $1,000x on each of the mea-
suring dates. During the first quarter of the taxable
year, TFC received $20x of dividends from LTS1,
which were attributable to income of LTS1 treated as
received directly by TFC pursuant to paragraph (b)
(2) of this section, and $30x of interest on the loan,
both of which were paid in cash.
(B) Results. Under paragraph (c) of this section,
for purposes of applying section 1297(a), TFC’s
assets do not include the stock of LTS1, and TFC’s
income does not include the $20x of dividends re-
ceived from LTS1. Similarly, TFC’s assets include
only $600x ($1,000x loan – (40% x $1,000x)) of the
loan to LTS1, and TFC’s income includes only $18x
($30x interest – (40% x $30x)) of the interest from
LTS1. However, TFC’s assets include the entire $50x
of cash ($20x of dividends and $30x of interest) re-
ceived from LTS1.
(ii) Example 2—(A) Facts. The facts are the
same as in paragraph (c)(4)(i)(A) of this section (the
facts in Example 1), except that TFC also directly
owns 30% of the value of LTS2 stock on each of
the measuring dates, and thus is treated under para-
graph (b)(1) of this section as owning 30% of LTS2,
and LTS1’s assets also include a loan to LTS2 with
a balance of $200x on each of the measuring dates.
During the first quarter of the taxable year, LTS1 re-
ceived $5x of interest on the loan, which was paid
in cash.
(B) Results. The results are the same as in para-
graph (c)(4)(i)(B) of this section (the results in Exam-
ple 1), except that TFC’s assets also do not include
the stock of LTS2. Similarly, although TFC would
be treated under paragraph (b)(2) of this section as
owning $80x (40% x $200x) of the LTS1 loan to
LTS2, under paragraph (c) of this section, TFC does
not take into account $60x (30% x $200x)) of the
loan to LTS2, and accordingly, its assets include only
$20x ($80x-$60x) of the loan to LTS1. Furthermore,
although TFC would be treated under paragraph
(b)(2) of this section as receiving $2x (40% x $5x)
of the interest received by LTS1 from LTS2, under
paragraph (c) of this section, TFC does not take into
account $1.5x (30% x $5x) of the interest received
by LTS1, and accordingly, its income includes only
$0.5x ($2x-$1.5x) of the interest from LTS2. Fur-
thermore, TFC’s assets include $2x (40% x $5x) of
LTS1’s cash received from LTS2.
(iii) Example 3—(A) Facts. TFC directly owns
80% of the value of LTS1 stock on each of the mea-
suring dates, and thus is treated under paragraph (b)
(1) of this section as owning 80% of LTS1 on each
of the measuring dates. TFC also directly owns 50%
of the value in FPS on each of the measuring dates.
LTS1’s assets include the remaining 50% of the val-
ue in FPS and a loan to FPS with a balance of $500x
on each of the measuring dates. FPS’s assets include
a loan to TFC with a balance of $1000x on each of
the measuring dates. During the first measuring peri-
od of the taxable year, FPS received $30x of interest
from TFC, and LTS1 received $15x of interest from
FPS, both of which were paid in cash. During the last
measuring period of the taxable year, FPS received
$80x of income from an unrelated person in cash and
distributed $60x of such income in cash to TFC and
LTS1 in proportion to their interests in FPS.
(B) Results. Under paragraph (c) of this section,
for purposes of applying section 1297(a), TFC’s as-
sets do not include the stock of LTS1, the interests
in FPS owned by TFC directly and through LTS1,
any of the loan by FPS to TFC, or any of the loan
by LTS1 to FPS. Similarly, TFC’s income does not
include any of the $30x of interest received by FPS
from TFC, any of the $15x of interest received by
LTS1 from FPS, or any of the $60x of distributions
received by TFC and LTS1 from FPS. However, on
each of the measuring dates, TFC’s assets include
$27x ((50% x $30x) + (80% x 50% x $30x)) of the
$30 of cash received by FPS from TFC and $12x
(80% x $15x) of the $15 of cash received by LTS1
from FPS. Moreover, on the last measuring date of
the taxable year, TFC’s assets include $18x ((50%

July 29, 2019 530 Bulletin No. 2019–31
x $20x) + (80% x 50% x $20x)) of the $20x ($80x
- $60x) of cash received by FPS from the unrelated
person and retained and $54 ((50% x $60x) + (80% x
50% x $60x)) of the $60x cash received by FPS from
the unrelated person and distributed. Furthermore,
TFC’s income includes $72x ((50% x $80x) + (80%
x 50% x $80x)) of the $80x of income received by
FPS from an unrelated person.
(d) Related person determination for
purposes of section 1297(b)(2)(C)—(1)
General rule. For purposes of section
1297(b)(2)(C), interest, dividends, rents,
or royalties received or accrued by a
look-through subsidiary (and treated as
received directly by a tested foreign cor-
poration pursuant to section 1297(c) and
paragraph (b)(2) of this section) are con-
sidered received or accrued from a related
person only if the payor of the interest,
dividend, rent or royalty is a related person
(within the meaning of section 954(d)(3))
with respect to the look-through subsidi-
ary, taking into account §1.1297-1(c)(1)
(i)(D). Similarly, for purposes of 1297(b)
(2)(C), interest, dividends, rents, or royal-
ties received or accrued by a look-through
partnership (and treated as received di-
rectly by a tested foreign corporation pur-
suant to §1.1297-1(c)(2)) are considered
received or accrued from a related person
only if the payor of the interest, dividend,
rent or royalty is a related person (with-
in the meaning of section 954(d)(3)) with
respect to the look-through partnership,
taking into account §1.1297-1(c)(1)(i)(D).
(2) Example. The following example
illustrates the rule of this paragraph (d).
(i) Facts. USP is a domestic corporation that
owns 30% of TFC. TFC directly owns 30% of the
value of FS1 stock, and thus under paragraph (b) of
this section is treated as owning 30% of FS1. FS1
directly owns 60% of the vote of FS2 stock and 20%
of the value of FS2 stock. The remaining vote and
value of FS2 stock are owned by an unrelated foreign
person. TFC, FS1, and FS2 are foreign corporations
that are not controlled foreign corporations within
the meaning of section 957(a). FS1 receives a $100x
dividend from FS2.
(ii) Results. Pursuant to section 1297(c) and para-
graph (b)(2) of this section, TFC is treated as receiv-
ing directly $30x of the dividend income received by
FS1. FS2 is a “related person” with respect to FS1
for purposes of section 1297(b)(2)(C) because FS1
owns more than 50% of the vote of FS2. FS2 is not
a “related person” with respect to TFC for purposes
of section 1297(b)(2)(C). Under paragraph (d) of this
section, for purposes of determining whether the div-
idend income received by FS1 is subject to the ex-
ception in section 1297(b)(2)(C) for purposes of test-
ing the PFIC status of TFC, the dividend is treated as
received from a related person because FS1 and FS2
are related persons within the meaning of section
1297(b)(2)(C). Therefore, to the extent the dividend
income received by FS1 would be properly allocable
to income of FS2 that is not passive income, the div-
idend income that TFC is treated as receiving under
section 1297(c) is treated as non-passive income (as
defined in §1.1297-1(f)(5)).
(e) Treatment of activities of certain
look-through subsidiaries and look-
through partnerships for purposes of
section 954(c)(2)(A) active rents and
royalties exception—(1) General rule.
An item of rent or royalty income re-
ceived by a tested foreign corporation
(including an amount treated as received
or accrued pursuant to section 1297(c)
and paragraph (b)(2) of this section or
pursuant to §1.1297-1(c)(2)) that would
be passive income in the hands of the en-
tity that actually received or accrued it is
not passive income pursuant to §1.1297-
1(c)(1)(i)(A) and section 954(c)(2)(A) if
the item would be excluded from foreign
personal holding company income under
section 954(c)(2)(A) and §1.954-2(b)(6),
(c), and (d), determined by taking into ac-
count the activities performed by the of-
ficers and staff of employees of the tested
foreign corporation as well as activities
performed by the officers and staff of em-
ployees of any look-through subsidiary
in which the tested foreign corporation
owns more than 50 percent by value (as
determined under paragraph (b)(1) of this
section) and any look-through partner-
ship in which the tested foreign corpo-
ration owns, directly or indirectly, more
than 50 percent.
(2) Examples. The following examples
illustrate the rule of this paragraph (e).
(i) Example 1—(A) Facts. USP is a domestic cor-
poration that directly owns 20% of the outstanding
stock of FS1. The remaining 80% of the outstanding
stock of FS1 is directly owned by a foreign person
that is not related to USP. FS1 directly owns 100% of
the value of the outstanding stock of FS2 and directly
owns 80% of the value of the outstanding stock of
FS3. The remaining 20% of the outstanding stock of
the value of the FS3 is directly owned by a foreign
person that is not related to USP. FS2 directly owns
80% of the value of the outstanding stock of FS4.
The remaining 20% of the value of the outstanding
stock of FS4 is directly owned by a foreign person
that is not related to USP. FS1, FS2, FS3 and FS4
are all organized in Country A and are not controlled
foreign corporations within the meaning of section
957(a). FS4 owns real property that is leased to a per-
son that is not a related person, but does not perform
any activities. FS1 and FS2 also do not perform any
activities. Officers and employees of FS3 in Country
A perform activities with respect to the real property
of FS4 that, if performed by officers or employees of
FS4, would allow the rental income in the hands of
FS4 to qualify for the exception from foreign person-
al holding company income in section 954(c)(2)(A)
and §1.954-2(b)(6) and (c)(1)(ii).
(B) Results. Under this paragraph (e), for purpos-
es of determining whether the rental income treated
under section 1297(c) and paragraph (b)(2) of this
section as received directly by FS1 with respect to
the real property owned and rented by FS4 is passive
income for purposes of section 1297, the activities
of FS3 are taken into account as a result of FS1’s
ownership of 80% by value (as determined under
paragraph (b)(1) of this section) of FS3. Thus, the
exception in section 954(c)(2)(A) would apply, and
the rental income treated as received by FS1 would
be treated as non-passive income for purposes of de-
termining whether FS1 is a PFIC. Because FS2 and
FS4 do not own more than 50 percent by value (as
determined under paragraph (b)(1) of this section)
of FS3, the activities of FS3 are not taken into ac-
count for purposes of determining whether the rent-
al income treated as received by FS2 and actually
received by FS4 with respect to the real property
owned and rented by FS4 is passive income for pur-
poses of section 1297. Thus, the exception in section
954(c)(2)(A) would not apply, and the rental income
treated as received by FS2 and actually received by
FS4 would be treated as passive income for purposes
of determining whether FS2 and FS4 are PFICs.
(ii) Example 2—(A) Facts. The facts are the
same as in paragraph (e)(2)(i)(A) of this section (the
facts in Example 1), except that FS2 also owns real
property that is leased to a person that is not a re-
lated person, and the officers and employees of FS2
in Country A engage in activities that would allow
rental income received by FS2 with respect to its
real property to qualify for the exception in section
954(c)(2)(A) and §1.954-2(b)(6) and (c)(1)(iv), re-
lying on the rule in §1.954-2(c)(2)(ii) that provides
that an organization is substantial in relation to rents
if active leasing expenses equal or exceed 25 per-
cent of adjusted leasing profit. However, the active
leasing expenses of FS1 are less than 25 percent of
its adjusted leasing profit, which includes the rental
income of FS4 treated as received directly by FS1 as
well as the rental income of FS2 treated as received
directly by FS1.
(B) Results. Because FS2’s rental income consti-
tutes non-passive income as a result of the applica-
tion of §1.1297-1(c)(1)(i)(A) and section 954(c)(2)
(A), it is treated as non-passive income treated as re-
ceived by FS1 for purposes of determining whether
FS1 is a PFIC, and accordingly, it is not necessary to
rely on paragraph (e) of this section.
(f) Gain on disposition of stock in a
look-through subsidiary—(1) Amount of
gain taken into account. The amount of
gain derived from a tested foreign cor-
poration’s direct disposition of stock of
a look-through subsidiary, or an indirect
disposition resulting from the disposi-
tion of stock of a look-through subsidiary
by other look-through subsidiaries or by
look-through partnerships, that is taken
into account by the tested foreign corpo-
ration for purposes of section 1297(a)(1),
section 1298(b)(3), and §1.1298-2 is the
residual gain. The residual gain equals the

Bulletin No. 2019–31 531 July 29, 2019
total gain recognized by the tested foreign
corporation (including gain treated as rec-
ognized by the tested foreign corporation
pursuant to section 1297(c) and paragraph
(b)(2) of this section or §1.1297-1(c)(2))
from the disposition of the stock of the
look-through subsidiary reduced (but not
below zero) by unremitted earnings. Un-
remitted earnings are the excess (if any)
of the aggregate income (if any) taken into
account by the tested foreign corporation
pursuant to section 1297(c) and paragraph
(b)(2) of this section or §1.1297-1(c)(2)
with respect to the stock of the disposed-of
look-through subsidiary (including with
respect to any other look-through subsidi-
ary, to the extent it is owned by the tested
foreign corporation indirectly through the
disposed-of look-through subsidiary) over
the aggregate dividends (if any) received
by the tested foreign corporation from
the disposed-of look-through subsidiary
with respect to the stock. For purposes of
this paragraph (f)(1), the amount of gain
derived from the disposition of stock of
a look-through subsidiary and income of
and dividends received from the look-
through subsidiary is determined on a
share-by-share basis.
(2) Characterization of residual gain
as passive income. For purposes of sec-
tion 1297(a)(1), section 1298(b)(3), and
§1.1298-2, the residual gain is charac-
terized as passive income or non-passive
income based on the relative amounts of
passive assets and non-passive assets (as
defined in §1.1297-1(f)(6) and (4), respec-
tively) of the disposed-of look-through
subsidiary (and any other look-through
subsidiary to the extent owned indirect-
ly through the look-through subsidiary)
treated as held by the tested foreign cor-
poration on the date of the disposition of
the look-through subsidiary. For the pur-
pose of this paragraph (f)(2), the relative
amounts of passive assets and non-passive
assets held by the look-through subsidiary
are measured under the same method (val-
ue or adjusted bases) used to measure the
assets of the tested foreign corporation for
purposes of section 1297(a)(2).
(3) Examples. The following exam-
ples illustrate the rules of this paragraph
(f). For purposes of the examples in this
paragraph (f)(3), USP is a domestic cor-
poration, TFC and FS are foreign corpo-
rations that are not controlled foreign cor-
porations within the meaning of section
957(a), and USP, TFC, and FS each has
outstanding a single class of stock with
100 shares outstanding and a calendar tax-
able year.
(i) Example 1—(A) Facts. USP owned 30% of
the outstanding stock of TFC throughout Years 1,
2, 3, and 4. In Year 1, TFC purchased 5 shares of
FS stock, representing 5% of the stock of FS, from
an unrelated person. On the first day of Year 3, TFC
purchased 20 shares of FS stock, representing 20%
of the stock of FS, from an unrelated person. TFC
owned 25% of the outstanding stock of FS through-
out Years 3 and 4. Prior to Year 3, TFC did not in-
clude any amount in income with respect to FS under
section 1297(c)(2). During Years 3 and 4, for purpos-
es of section 1297(a)(1), TFC included in income, in
the aggregate, $40x of income with respect to FS un-
der section 1297(c) and paragraph (b)(2) of this sec-
tion. TFC did not receive dividends from FS during
Year 1, 2, 3, or 4. For purposes of section 1297(a)(2),
TFC measures its assets based on their fair market
value as provided under section 1297(e). On the last
day of Year 4, TFC recognizes a loss with respect to
the sale of 5 shares of FS stock, and a $110x gain
with respect to the sale of 20 shares of FS stock. On
the date of the sale, FS owns non-passive assets with
an aggregate fair market value of $150x, and passive
assets with an aggregate fair market value of $50x.
(B) Results. For purposes of applying section
1297(a)(1) to TFC for Year 4, TFC must take into
account $78x of residual gain, as provided by para-
graph (f)(1) of this section, which equals the amount
by which the $110x gain recognized on the sale of
20 shares exceeds the aggregate pro rata share of
$32x income ($40x x 20/25) taken into account by
TFC with respect to the 20 shares in FS under section
1297(c) and paragraph (b)(2) of this section during
Years 3 and 4. There is zero residual gain on the sale
of 5 shares of FS stock because they were sold at a
loss. Under paragraph (f)(2) of this section, $58.50x
of the residual gain is non-passive income ($78x
x ($150x/$200x)) and $19.50x is passive income
($78x x ($50x/$200x)).
(ii) Example 2—(A) Facts. The facts are the
same as in paragraph (f)(3)(i)(A) of this section (the
facts in Example 1), except that in Year 1, TFC pur-
chased 15 shares of FS stock, representing 15% of
the stock of FS, from an unrelated person, and on the
first day of Year 3, TFC purchased an additional 15
shares of FS stock, representing 15% of the stock of
FS, from an unrelated person, and on the last day of
Year 4, TFC recognizes gain of $10x of the sale of
15 shares of FS stock purchased in Year 1, and gain
of $60x on the sale of the other 15 shares of FS stock
purchased in Year 3.
(B) Results. For purposes of applying section
1297(a)(1) to TFC for Year 4, TFC must take into
account $40x of residual gain, as provided by para-
graph (f)(1) of this section, which equals the amount
by which the $60x gain recognized on the sale of the
15 shares acquired in Year 3 exceeds the pro rata ag-
gregate share of $20x income ($40x x 15/30) taken
into account by TFC with respect to the 15 shares in
FS under section 1297(c)(2) during Years 3 and 4.
There is zero residual gain on the sale of the other 15
shares of FS stock because the $10x of gain does not
exceed the aggregate pro rata share of $20x income
taken into account by TFC with respect to the other
15 shares of FS under section 1297(c) and paragraph
(b)(2) of this section. Under paragraph (f)(2) of this
section, $30x of the residual gain is non-passive in-
come ($40x x ($150x/$200x)) and $10x is passive
income ($40x x ($50x/$200x)).
(iii) Example 3—(i) Facts. The facts are the same
as in paragraph (f)(3)(ii)(A) of this section (the facts
in Example 2), except that TFC received, in the ag-
gregate, $20x of dividends from FS during Year 2.
(B) Results. The results are the same as in para-
graph (f)(3)(ii)(B) of this section (the results in Ex-
ample 2), except that the residual gain is $50x, which
equals the $40x of residual gain attributable to the 15
shares acquired in Year 3, as computed in paragraph
(f)(3)(ii)(B) of this section (the results in Example
2), plus the $10x of gain recognized on the 15 shares
acquired in Year 1 reduced by $0x, the amount by
which the pro rata share of aggregate income ($20x)
taken into account by TFC with respect to those 15
shares of FS stock under section 1297(c) and para-
graph (b)(2) of this section exceeds the aggregate
pro rata amount of dividends with respect to those
15 shares of FS stock ($20x) received by TFC from
FS. Under paragraph (f)(2) of this section, $35x of
the residual gain is non-passive income ($50x x
($150x/$200x)) and $15x is passive income ($50x
x ($50x/$200x)).
(g) Definitions. The following defini-
tions apply for purposes of this section:
(1) Look-through subsidiary. The term
look-through subsidiary means, with re-
spect to a tested foreign corporation—
(i) For purposes of section 1297(a)(2)
and paragraph (b)(2)(i) of this section, a
corporation at least 25 percent of the value
of the stock of which is owned (as deter-
mined under paragraph (b)(1) of this sec-
tion) by the tested foreign corporation on
the measuring date;
(ii) For purposes of section 1297(a)
(1)—
(A) For the taxable year, a corpora-
tion with respect to which the average
percentage ownership (which is equal to
the percentage ownership (by value) (as
determined under paragraph (b)(1) of this
section)) on each measuring date during
the taxable year, divided by the number of
measuring dates in the year) by the tested
foreign corporation during the tested for-
eign corporation’s taxable year is at least
25 percent; or
(B) For a measuring period, a corpora-
tion at least 25 percent of the value of the
stock of which is owned (as determined
under paragraph (b)(1) of this section) by
the tested foreign corporation on the mea-
suring date, provided all items of gross
income of the corporation for each of the
measuring periods in the taxable year for

July 29, 2019 532 Bulletin No. 2019–31
which the tested foreign corporation owns
at least 25 percent of the value (as deter-
mined under paragraph (b)(1) of this sec-
tion) on the relevant measuring dates can
be established; and
(iii) For purposes of paragraph (f) of
this section and §1.1298-2, a corporation
at least 25 percent of the value of the stock
of which is owned (as determined under
paragraph (b)(1) of this section) by the
tested foreign corporation immediately
before the disposition of stock of the cor-
poration.
(2) LTS debt. The term LTS debt has the
meaning provided in paragraph (c)(1) of
this section.
(3) LTS stock. The term LTS stock has
the meaning provided in paragraph (c)(1)
of this section.
(4) Residual gain. The term residual
gain has the meaning provided in para-
graph (f)(1) of this section.
(5) Unremitted earnings. The term un-
remitted earnings has the meaning provid-
ed in paragraph (f)(1) of this section.
(h) Applicability date. The rules of this
section apply to taxable years of share-
holders beginning on or after the date
of publication of the Treasury decision
adopting these rules as final regulations in
the Federal Register.
Par.6 Sections 1.1297-4 and 1.1297-5
are added to read as follows:
§1.1297-4 Qualifying insurance corpo-
ration.
(a) Scope. This section provides rules
for determining whether a foreign cor-
poration is a qualifying insurance cor-
poration for purposes of section 1297(f).
Paragraph (b) of this section provides the
general rule for determining whether a
foreign corporation is a qualifying insur-
ance corporation. Paragraph (c) of this
section describes the 25 percent test in
section 1297(f)(1)(B). Paragraph (d) of
this section contains rules for applying
the alternative facts and circumstances
test in section 1297(f)(2). Paragraph (e)
of this section contains rules limiting the
amount of applicable insurance liabil-
ities for purposes of the 25 percent test
described in paragraph (c) of this section
and the alternative facts and circumstanc-
es test described in paragraph (d) of this
section. Paragraph (f) of this section pro-
vides definitions that apply for purposes
of this section. Paragraph (g) of this sec-
tion provides the applicability date of this
section.
(b) Qualifying insurance corporation.
For purposes of section 1297(b)(2)(B),
this section and §1.1297-5, a qualifying
insurance corporation (QIC) is a foreign
corporation that—
(1) Is an insurance company as defined
in section 816(a) that would be subject to
tax under subchapter L if the corporation
were a domestic corporation; and
(2) Satisfies—
(i) The 25 percent test described in
paragraph (c) of this section; or
(ii) The requirements for an election
to apply the alternative facts and circum-
stances test as described in paragraph (d)
of this section and a United States person
has made an election as described in para-
graph (d)(5) of this section.
(c) 25 percent test. A foreign corpo-
ration satisfies the 25 percent test if the
amount of its applicable insurance liabil-
ities exceeds 25 percent of its total assets.
This determination is made on the basis of
the liabilities and assets reported on the
corporation’s applicable financial state-
ment for the last year ending with or with-
in the taxable year.
(d) Election to apply the alternative
facts and circumstances test—(1) In gen-
eral. A United States person that owns
stock in a foreign corporation that fails to
qualify as a QIC solely because of the 25
percent test may elect to treat the stock of
the corporation as stock of a QIC if the
foreign corporation—
(i) Is predominantly engaged in an
insurance business as described in para-
graph (d)(2) of this section;
(ii) Failed to satisfy the 25 percent test
solely due to runoff-related circumstanc-
es, as described in paragraph (d)(3) of this
section, or rating-related circumstances,
as described in paragraph (d)(4) of this
section; and
(iii) Reports an amount of applicable
insurance liabilities that is at least 10 per-
cent of the amount of the total assets on its
applicable financial statement for the last
annual reporting period ending with or
within the corporation’s taxable year (the
10 percent test).
(2) Predominantly engaged in an insur-
ance business—(i) In general. A foreign
corporation is predominantly engaged
in an insurance business in any taxable
year during which more than half of the
business of the foreign corporation is the
issuing of insurance or annuity contracts
or the reinsuring of risks underwritten by
insurance companies. This determination
is made based on whether the particular
facts and circumstances of the foreign
corporation are comparable to commercial
insurance arrangements providing similar
lines of coverage to unrelated parties in
arm’s length transactions. The fact that a
foreign corporation has been holding itself
out as an insurer for a long period is not
determinative of whether the foreign cor-
poration is predominantly engaged in an
insurance business.
(ii) Facts and circumstances. Facts and
circumstances to consider in determining
whether a foreign corporation is predom-
inantly engaged in an insurance business
include—
(A) Claims payment patterns for the
current year and prior years;
(B) The foreign corporation’s loss ex-
posure as calculated for a regulator or for
a credit rating agency, or, if those are not
calculated, for internal pricing purposes;
(C) The percentage of gross receipts
constituting premiums for the current and
prior years; and
(D) The number and size of insurance
contracts issued or taken on through rein-
surance by the foreign corporation.
(iii) Examples of facts indicating a
foreign corporation is not predominantly
engaged in an insurance business. Exam-
ples of facts that may indicate a foreign
corporation is not predominantly engaged
in an insurance business include—
(A) A small overall number of insured
risks with low likelihood but large poten-
tial costs;
(B) Employees and agents of the for-
eign corporation focused to a greater de-
gree on investment activities than under-
writing activities; and
(C) Low loss exposure.
(3) Runoff-related circumstances.
During the annual reporting period cov-
ered by the applicable financial statement,
a foreign corporation fails to satisfy the 25
percent test solely due to runoff-related
circumstances only if the corporation—
(i) Was actively engaged in the process
of terminating its pre-existing, active in-
surance or reinsurance underwriting op-
erations pursuant to an adopted plan of

Bulletin No. 2019–31 533 July 29, 2019
liquidation or a termination of operations
under the supervision of its applicable in-
surance regulatory body;
(ii) Did not issue or enter into any in-
surance, annuity, or reinsurance contract,
other than a contractually obligated re-
newal of an existing insurance contract
or a reinsurance contract pursuant to and
consistent with the plan of liquidation or a
termination of operations; and
(iii) Made payments during the annual
reporting period covered by the applicable
financial statement to satisfy the claims
under insurance, annuity, or reinsurance
contracts, and the payments cause the cor-
poration to fail to satisfy the 25 percent
test.
(4) Rating-related circumstances. A
foreign corporation fails to satisfy the 25
percent test solely due to rating-related
circumstances only if—
(i) The 25 percent test is not met as a
result of the specific requirements with
respect to capital and surplus that a gen-
erally recognized credit rating agency im-
poses; and
(ii) The foreign corporation complies
with the requirements of the credit rating
agency in order to maintain the minimum
credit rating required for the foreign cor-
poration to be classified as secure to write
new insurance business for the current
year.
(5) Election—(i) In general. A United
States person may make the election un-
der section 1297(f)(2) if the foreign corpo-
ration directly provides the United States
person a statement, signed by a responsible
officer of the foreign corporation or an au-
thorized representative of the foreign cor-
poration, or the foreign corporation makes
a publicly available statement (such as in
a public filing, disclosure statement, or
other notice provided to United States per-
sons that are shareholders of the foreign
corporation) that it satisfied the require-
ments of section 1297(f)(2) and paragraph
(d)(1) of this section during the foreign
corporation’s the taxable year. However,
a United States person may not rely upon
any statement by the foreign corporation
to make the election under section 1297(f)
(2) if the shareholder knows or has reason
to know that the statement made by the
foreign corporation was incorrect.
(ii) Information provided by foreign
corporation. In addition to a statement
that the foreign corporation satisfied the
requirements of section 1297(f)(2) and
paragraph (d)(1) of this section, the state-
ment described in paragraph (d)(5)(i) of
this section also must include:
(A) The ratio of applicable insurance
liabilities to total assets for the taxable
year; and
(B) A statement indicating whether
the failure to satisfy the 25 percent test
described in paragraph (c) of this section
was the result of runoff-related or rat-
ing-related circumstances, along with a
brief description of those circumstances.
(iii) Time and manner for making the
election. The election described in para-
graph (d)(1) of this section must be made
by a United States person who owns stock
in the foreign corporation (directly or in-
directly) by completing the appropriate
part of Form 8621 (or successor form) for
each year in which the election applies. A
United States person must attach the Form
8621 (or successor form) to its Federal
income tax return for the taxable year to
which the election relates on or before
the due date (including extensions) for
the filing of the return. The United States
person must attach to the Form 8621 the
statement provided by the foreign corpo-
ration described in paragraph (d)(1) of this
section. If the foreign corporation makes
a publicly available statement instead of
providing a statement to the United States
person, the United States person must at-
tach a statement to the Form 8621 incor-
porating the information provided in the
publicly available statement.
(e) Rules limiting the amount of appli-
cable insurance liabilities—(1) In gener-
al. For purposes of determining whether
a foreign corporation satisfies the 25 per-
cent test described in paragraph (c) of this
section or the 10 percent test described in
paragraph (d)(1)(iii) of this section, the
rules of this paragraph (e) apply to limit
the amount of applicable insurance liabili-
ties of the foreign corporation.
(2) General limitation on applicable
insurance liabilities. The amount of appli-
cable insurance liabilities may not exceed
the lesser of:
(i) The amount of applicable insurance
liabilities shown on the most recent appli-
cable financial statement;
(ii) The minimum amount of applicable
insurance liabilities required by the appli-
cable law or regulation of the jurisdiction
of the applicable regulatory body; or
(iii) For a foreign corporation that
prepares a financial statement on the ba-
sis of a financial reporting standard for a
purpose other than financial reporting, the
amount of the applicable insurance liabili-
ties on that financial statement.
(3) Additional limitation on amount of
applicable insurance liabilities for a for-
eign corporation that does not prepare a
financial statement based on a financial
reporting standard—(i) In general. If a
foreign corporation has an applicable fi-
nancial statement described in paragraph
(f)(1)(iii) of this section and the applicable
financial statement does not discount in-
curred but unpaid losses and loss reserves
on an economically reasonable basis, the
amount of applicable insurance liabilities
may not exceed the amount of applicable
insurance liabilities on the applicable fi-
nancial statement reduced in accordance
with the discounting principles that would
have applied under a financial reporting
standard, if the foreign corporation had
prepared a financial statement under a fi-
nancial reporting standard for the last year
ending with or within the taxable year.
(ii) Choice of accounting method. The
foreign corporation may choose whether
to apply generally accepted accounting
principles or international financial report-
ing principles to calculate the discounted
amount of its applicable insurance liabili-
ties for purposes of paragraph (e)(3)(i)(B)
of this section. If the foreign corporation
does not choose between these financial
reporting standards, generally accepted
accounting principles will apply.
(4) Changes to financial statements
prepared. Any foreign corporation that
has prepared a financial statement on the
basis of a financial reporting standard for
an annual reporting period that included
December 22, 2017, or any subsequent
annual reporting period, must continue to
prepare its applicable financial statement
using a financial reporting standard unless
the foreign corporation has a non-Federal
tax business purpose for using the annu-
al statement described in paragraph (f)
(1)(iii) of this section. If a foreign cor-
poration has no non-Federal tax business
purpose for using the annual statement
described in paragraph (f)(1)(iii) of this
section and does not continue to prepare

July 29, 2019 534 Bulletin No. 2019–31
an applicable financial statement using a
financial reporting standard, its applicable
insurance liabilities are treated as $0 for
purposes of this section.
(f) Definitions. For purposes of this
section, the following terms have the
meanings described in this paragraph (f).
(1) Applicable financial statement. The
term applicable financial statement means
the financial statement that is used by the
foreign corporation for financial reporting
purposes and that is—
(i) Made on the basis of generally ac-
cepted accounting principles;
(ii) Made on the basis of international
financial reporting standards, if there is no
statement that is made on the basis of gen-
erally accepted accounting principles; or
(iii) The annual statement required
to be filed with the applicable insurance
regulatory body, as defined in paragraph
(f)(3) of this section, if there is no state-
ment made on the basis of either gener-
al accounting principles or international
financial reporting standards. The annual
statement required to be filed with the ap-
plicable insurance regulatory body must
provide complete information regarding
the foreign corporation’s operations and
financial condition for the annual report-
ing period ending with or within the tax-
able year.
(2) Applicable insurance liabilities.
With respect to any life or property and
casualty insurance business of a foreign
corporation, the term applicable insur-
ance liabilities means—
(i) Occurred losses for which the for-
eign corporation has become liable but has
not paid before the end of the last annual
reporting period ending with or within
the taxable year, including unpaid claims
for death benefits, annuity contracts, and
health insurance benefits;
(ii) Unpaid expenses (including rea-
sonable estimates of anticipated expenses)
of investigating and adjusted unpaid loss-
es described in paragraph (f)(2)(i) of this
section; and
(iii) The aggregate amount of reserves
(excluding deficiency, contingency, or un-
earned premium reserves) held for future,
unaccrued health insurance claims and
claims with respect to contracts providing
coverage for mortality or morbidity risks, in-
cluding annuity benefits dependent upon the
life expectancy of one or more individuals.
(3) Applicable insurance regulatory
body. The term applicable insurance regu-
latory body means the entity that has been
established by law to license or authorize
a corporation to engage in an insurance
business, to regulate insurance company
solvency and to which the applicable fi-
nancial statement is provided.
(4) Financial reporting standard. The
term financial reporting standard means
either GAAP or international financial re-
porting standards.
(5) Generally accepted accounting
principles or GAAP. The term generally
accepted accounting principles or GAAP
means United States generally accepted
accounting principles.
(6) Insurance business. Solely for pur-
poses of this section, insurance business
has the meaning described in §1.1297-
5(c)(2).
(7) Total assets. For purposes of sec-
tion 1297(f) and this section, a foreign
corporation’s total assets are the aggre-
gate end-of-period value of the real prop-
erty and personal property that the foreign
corporation reports on its applicable fi-
nancial statement for the last annual ac-
counting period ending with or within the
taxable year.
(g) Applicability date. This section
applies to taxable years of United States
persons that are shareholders in certain
foreign corporations beginning on or af-
ter the date of publication of the Treasury
decision adopting these rules as final reg-
ulations in the Federal Register.
§1.1297-5 Exception from the defini-
tion of passive income for active insur-
ance income.
(a) Scope. This section provides rules
pertaining to the exception from passive
income under section 1297(b)(2)(B) for
income derived in the active conduct of
an insurance business and rules related
to certain income of a qualifying domes-
tic insurance corporation. Paragraph (b)
of this section provides a general rule
that excludes from passive income cer-
tain income of a qualifying insurance
corporation (QIC) and certain income of
a qualifying domestic insurance corpora-
tion. Paragraph (c) of this section provides
rules for determining the amount of in-
come derived by a QIC in the active con-
duct of an insurance business. Paragraph
(d) of this section defines income of a
qualifying domestic insurance corporation
that is not treated as passive for purpos-
es of section 1297. Paragraph (e) of this
section provides rules excluding certain
assets for purposes of the passive asset test
under section 1297(a)(2). Paragraph (f)
of this section provides rules concerning
the treatment of income and assets of cer-
tain look-through subsidiaries and look-
through partnerships of a QIC. Paragraph
(g) of this section provides a rule prohib-
iting the double counting of any item for
purposes of this section. Paragraph (h) of
this section provides definitions applica-
ble to the rules of this section. Paragraph
(i) of this section provides the applicabili-
ty date of this section.
(b) Exclusion from passive income of
active insurance income. For purposes of
section 1297 and §1.1297-1, passive in-
come does not include—
(1) Income that a QIC derives in the
active conduct of an insurance business
as determined under paragraph (c) of this
section; and
(2) Income from a qualifying domestic
insurance corporation as determined un-
der paragraph (d) of this section, except
that this exclusion does not apply to deter-
mine whether a tested foreign corporation
(as defined in §1.1297-1(f)(8)) is a PFIC
for purposes of section 1298(a)(2) and
§1.1291-1(b)(8)(ii).
(c) Income derived by a QIC in the ac-
tive conduct of an insurance business—
(1) In general. Income that a QIC derives
in the active conduct of an insurance busi-
ness is an amount equal to the QIC’s pas-
sive income (as defined in §1.1297-1(c)
and taking into account the exceptions in
section 1297(b)(2) other than the excep-
tion provided in section 1297(b)(2)(B)
and this section) earned with respect to
assets of a QIC that are available to satisfy
liabilities of the QIC related to its insur-
ance business (as described in paragraph
(c)(2) of this section), multiplied by—
(i) 100 percent if the active conduct
percentage determined under paragraph
(c)(4) of this section equals or exceeds 50
percent; or
(ii) Zero if the active conduct percent-
age determined under paragraph (c)(4) of
this section is less than 50 percent.
(2) Insurance business. Solely for pur-
poses of §1.1297-4 and this section, an
insurance business is the business of is-

Bulletin No. 2019–31 535 July 29, 2019
suing insurance and annuity contracts and
the reinsuring of risks underwritten by
insurance companies, together with those
investment activities and administrative
services that are required to support (or
that are substantially related to) those in-
surance, annuity, or reinsurance contracts
issued or entered into by the QIC.
(3) Active conduct of an insurance
business—(i) In general. For purposes of
determining whether a QIC engages in the
active conduct of an insurance business,
active conduct is determined based on all
the facts and circumstances. In general, a
QIC actively conducts an insurance busi-
ness only if the officers and employees
of the QIC carry out substantial mana-
gerial and operational activities. A QIC’s
officers and employees are considered to
include the officers and employees of an-
other entity only if the QIC satisfies the
control test described in paragraph (c)(3)
(ii) with respect to the officers and em-
ployees of the other entity. In determining
whether the officers and employees of the
QIC carry out substantial managerial and
operational activities, however, the activ-
ities of independent contractors are disre-
garded.
(ii) Control test. A QIC’s officers and
employees are considered to include the
officers and employees of another entity
when the requirements of paragraphs (c)
(3)(ii)(A) through (C) of this section are
satisfied.
(A) Ownership—(1) Ownership by or
of a corporation. If the other entity is a
corporation—
(i) The QIC owns, or is considered
to own within the meaning of section
958(a), determined without regard to
whether an intermediate entity is domes-
tic or foreign, more than 50 percent of
the total combined voting power of all
classes of stock of the other corporation
entitled to vote, and more than 50 percent
of the total value of the stock of the other
corporation; or
(ii) A common parent owns, or is con-
sidered to own within the meaning of sec-
tion 958(a), determined without regard to
whether an intermediate entity is domestic
or foreign, more than 80 percent of the to-
tal combined voting power of all classes
of stock entitled to vote and more than 80
percent of the total value of the stock of
each of the QIC and the other corporation.
(2) Ownership of a partnership. If the
other entity is a partnership—
(i) The QIC owns, directly or indirect-
ly, more than 50 percent of the interests in
the capital and profits in the entity; or
(ii) A common parent owns, directly
or indirectly, more than 80 percent of the
interests in the capital and profits in the
entity and owns, or is considered to own
within the meaning of section 958(a),
determined without regard to whether an
intermediate entity is domestic or foreign,
more than 80 percent of the total com-
bined voting power of all classes of stock
entitled to vote and more than 80 percent
of the total value of the stock of the QIC.
(B) Control and supervision. The QIC
exercises regular oversight and supervi-
sion over the services performed by the
other entity’s officers and employees for
the QIC.
(C) Compensation. The QIC either—
(1) Pays directly all the compensation
of the other entity’s officers and employ-
ees attributable to services performed for
the production or acquisition of premiums
and investment income on assets held to
meet its obligations under the insurance,
annuity, or reinsurance contracts issued or
entered into by the QIC (insurance ser-
vices);
(2) Reimburses the other entity for the
portion of its expenses, including compen-
sation and related expenses (determined
in accordance with section 482 and taking
into account all expenses that would be
included in the total services costs under
§1.482-9(j) and (k)(2)) for the insurance
services performed for the QIC or by the
other entity’s officers and employees; or
(3) Otherwise pays arm’s length com-
pensation in accordance with section 482
on a fee-related basis to the other entity
for the insurance services provided.
(4) Active conduct percentage—(i) In
general. A QIC’s active conduct percent-
age for a taxable year is the percentage
calculated (to the nearest percent) by di-
viding—
(A) The aggregate amount of expens-
es, including compensation (or reim-
bursement of compensation) and related
expenses, for services of the officers and
employees of the QIC (or another entity
under an arrangement that satisfies the re-
quirements of paragraph (c)(3)(ii) of this
section) incurred by the QIC for the tax-
able year that are related to the production
or acquisition of premiums and invest-
ment income on assets held to meet its
obligations under the insurance, annuity,
or reinsurance contracts issued or entered
into by the QIC, by;
(B) The aggregate of—
(1) The amount described in paragraph
(c)(4)(i)(A) of this section; and
(2) The amount of all expenses paid for
the taxable year by the QIC to a person
other than a person whose services for the
QIC are covered by the expenses included
in paragraph (c)(4)(i)(A) of this section
for the production or acquisition of premi-
ums and investment income on assets held
to meet obligations under the insurance,
annuity, or reinsurance contracts issued or
entered into by the QIC.
(ii) Related expense determination. For
purposes of determining the amount in-
cluded in the numerator under paragraph
(c)(4)(i)(A) of this section, the cost of
compensation and related expenses in-
clude all costs in cash or in kind (includ-
ing stock-based compensation) that, based
on analysis of the facts and circumstances,
are directly identified with, or reasonably
allocated in accordance with the princi-
ples of §1.482-9(k)(2) to, the services of
the officers and employees of the insur-
ance company (or related party, as appro-
priate). In general, costs for the purpose
of this paragraph (c)(4)(ii) include all re-
sources expended, used, or made available
to achieve the specific objective for which
the service of the officer or employee is
rendered. For the purpose of this para-
graph (c)(4)(ii), reference to generally
accepted accounting principles or Federal
income tax accounting rules may provide
a useful starting point but will not neces-
sarily be conclusive regarding inclusion
of costs, and such costs do not include
interest expense, foreign income taxes (as
defined in §1.901-2(a)), or Federal income
taxes.
(iii) Ceding commission. For purpos-
es of paragraph (c)(4)(i) of this section,
ceding commissions are not taken into
account in either the numerator or denom-
inator of the active conduct percentage.
(d) Income of qualifying domestic in-
surance corporation. The income of a do-
mestic corporation is income of a qualify-
ing domestic insurance corporation if the
domestic corporation is subject to—

July 29, 2019 536 Bulletin No. 2019–31
(1) Tax as an insurance company under
subchapter L of chapter 1 of subtitle A of
the Internal Revenue Code; and
(2) Federal income tax on its net in-
come.
(e) Exclusion of assets for purpos-
es of the passive asset test under section
1297(a)(2). For purposes of section 1297
and §1.1297-1, passive assets (as defined
in §1.1297-1(f)(6)), do not include—
(1) Assets of a QIC available to satisfy
liabilities of the QIC related to its insur-
ance business (as described in paragraph
(c)(2) of this section), if the active conduct
percentage of the QIC equals or exceeds
50 percent; and
(2) Assets of a qualifying domestic
insurance corporation that meets the re-
quirements described in paragraph (d)
of this section, except that this exclusion
does not apply to determine whether a
tested foreign corporation (as defined in
§1.1297-1(f)(8)) is a PFIC for purposes
of section 1298(a)(2) and §1.1291-1(b)
(8)(ii).
(f) Treatment of income and assets of
certain look-through subsidiaries and
look-through partnerships for purposes of
the section 1297(b)(2)(B) exception—(1)
General rule. An item of income treated
as received or accrued or an asset treat-
ed as held by a QIC pursuant to section
1297(c) and §1.1297-2(b)(2) or pursuant
to §1.1297-1(c)(2) or (d)(3) that would be
passive income or a passive asset is treat-
ed as an item of income or an asset of the
QIC for purposes of paragraphs (c) and (e)
of this section.
(2) Applicable statements for tested
foreign corporations applying paragraph
(f)(1) of this section. For purposes of para-
graph (f)(1) of this section, an item of pas-
sive income or passive asset in the hands
of an entity other than a QIC (subsidiary
entity) may only be treated as an item of
income or an asset used in the active con-
duct of an insurance business by a foreign
corporation treated as a QIC for purposes
of paragraphs (c) and (e) of this section if
the applicable financial statement used to
test the QIC status of the foreign corpora-
tion includes the assets and liabilities of
the subsidiary entity.
(g) No double counting. Nothing in this
section or §1.1297-4 permits any item to
be counted more than once.
(h) Definitions. For purposes of this
section, the following terms have the
meanings described in this paragraph (h).
(1) Insurance services. The term insur-
ance services has the meaning provided in
paragraph (c)(3)(ii)(C)(1) of this section.
(2) Investment activity. The term in-
vestment activity means any activity en-
gaged in by a QIC to produce income of
a kind that would be passive income (as
defined in §1.1297-1(c)). Investment ac-
tivities include those activities that are
required to support or are substantially
related to insurance and annuity contracts
issued or reinsured by a QIC only to the
extent that income produced by the ac-
tivities is generated by assets available to
satisfy liabilities of the QIC related to the
insurance business, as described in para-
graph (c)(2) of this section.
(3) Qualifying insurance corporation
or QIC. The term qualifying insurance
corporation or QIC has the meaning de-
scribed in §1.1297-4.
(i) Applicability date. This section
applies to taxable years of United States
persons that are shareholders in certain
foreign corporations beginning on or af-
ter the date of publication of the Treasury
decision adopting these rules as final reg-
ulations in the Federal Register.
Par. 7. Section 1.1298-0 is amended by:
1. Revising the introductory text.
2. Adding entries for §§1.1298-2 and
1.1298-4 in numerical order.
The revision and additions read as fol-
lows:
§1.1298-0 Passive foreign investment
company—table of contents.
This section contains a listing of the
paragraph headings for §§1.1298-1,
1.1298-2, 1.1298-3, and 1.1298-4.
* * * * *
§1.1298-2 Rules for certain corpora-
tions changing businesses.
(a) Overview.
(b) Change of business exception.
(c) Special rules.
(d) Disposition of stock in a look-
through subsidiary.
(e) Application of change of business
exception.
(f) Examples.
(1) Example 1.
(i) Facts
(ii) Results.
(2) Example 2.
(i) Facts
(ii) Results.
(g) Applicability date.
* * * * *
§1.1298-4 Rules for certain foreign
corporations owning stock in 25-per-
cent-owned domestic corporations.
(a) Overview.
(b) Treatment of certain foreign cor-
porations owning stock in a 25-per-
cent-owned domestic corporation.
(1) General rule.
(2) Qualified stock.
(c) Indirect ownership of stock through
a partnership.
(d) Section 531 tax.
(1) Subject to section 531 tax.
(2) Waiver of treaty benefits.
(i) Tested foreign corporation that files,
or is required to file, a Federal income tax
return.
(ii) Tested foreign corporation that is
not required to file a Federal income tax
return.
(e) Interaction of section 1298(b)(7)
and section 1298(a)(2).
(f) Anti-abuse rules.
(1) Classification as PFIC excluding
qualified stock.
(2) Avoidance principal purposes.
(g) Applicability date.
Par. 8. Section 1.1298-2 is added to
read as follows:
§1.1298-2 Rules for certain corpora-
tions changing businesses.
(a) Overview. This section provides
rules under section 1298(b)(3) and 1298(g)
that apply to certain foreign corporations
that dispose of one or more active trades
or businesses for purposes of determining
whether a foreign corporation is treated
as a passive foreign investment company
(PFIC). Paragraph (b) of this section sets
forth a rule that applies to certain foreign
corporations that dispose of one or more
active trades or businesses. Paragraph
(c) of this section provides special rules.
Paragraph (d) of this section sets forth a
rule for the treatment of the disposition
of the stock of a look-through subsidiary
(as defined in §1.1297-2(g)(1)). Paragraph
(e) of this section provides guidance on
the application of the rules in this section.
Paragraph (f) provides examples illustrat-
ing the application of the rules in this sec-
tion. Paragraph (g) sets forth the applica-
bility date for this section.

Bulletin No. 2019–31 537 July 29, 2019
(b) Change of business exception. A
corporation is not treated as a PFIC for a
taxable year if—
(1) Neither the corporation (nor any
predecessor) was a PFIC for any prior tax-
able year;
(2) Either—
(i) Substantially all of the passive in-
come of the corporation for the taxable
year is attributable to proceeds from the
disposition of one or more active trades or
businesses; or
(ii) Following the disposition of one or
more active trades or businesses, substan-
tially all of the passive assets of the corpo-
ration on each of the measuring dates that
occur during the taxable year and after the
disposition are attributable to proceeds
from the disposition; and
(3) The corporation is not a PFIC for
either of the first two taxable years follow-
ing the taxable year.
(c) Special rules. The rules in this para-
graph (c) apply for purposes of section
1298(b)(3) and this section.
(1) Income is attributable to proceeds
from the disposition of one or more ac-
tive trades or businesses to the extent the
income is derived from the investment of
the proceeds from the disposition of assets
used in the active trade or businesses.
(2) Assets are attributable to proceeds
from the disposition of one or more active
trades or businesses only to the extent the
assets are the proceeds of the disposition
of assets used in the active trade or busi-
nesses, or are derived from the investment
of the proceeds.
(3) The determination of the existence
of an active trade or business and wheth-
er assets are used in an active trade or
business is made under §1.367(a)-2(d)
(2), (3), and (5), except that officers and
employees do not include the officers and
employees of related entities as provided
in §1.367(a)-2(d)(3). However, if activi-
ties performed by the officers and staff of
employees of a look-through subsidiary of
a corporation (including a look-through
subsidiary with respect to which para-
graph (d) of this section applies) or of a
look-through partnership would be taken
into account by the corporation pursuant
to §1.1297-2(e) if it applied, or if activi-
ties performed by a related person would
be taken into account by the corporation
pursuant to section 954(h)(3)(E), such ac-
tivities are taken into account for purposes
of the determination of the existence of
an active trade or business and the deter-
mination of whether assets are used in an
active trade or business.
(4) In the case of a corporation that
satisfies the condition in paragraph (b)(2)
(ii) of this section, the condition in para-
graph (b)(3) of this section is deemed to
be satisfied if the corporation completely
liquidates by the end of the taxable year
following the year with respect to which
the shareholder applies the exception in
paragraph (b) of this section.
(d) Disposition of stock of a look-
through subsidiary. For purposes of para-
graph (b) of this section, the proceeds
from a tested foreign corporation’s dispo-
sition of the stock of a look-through sub-
sidiary are treated as proceeds from the
disposition of a proportionate share of the
assets held by the look-through subsidiary
on the date of the disposition, based on
the method (value or adjusted bases) used
to measure the assets of the tested for-
eign corporation for purposes of section
1297(a)(2). The proceeds attributable to
assets used by the look-through subsidiary
in an active trade or business are treated as
proceeds attributable to the disposition of
an active trade or business.
(e) Application of change of business
exception. A shareholder can apply the
exception in paragraph (b) of this section
with respect to a taxable year of a dispo-
sition of an active trade or business or an
immediately succeeding taxable year, but
cannot apply the exception with respect to
more than one taxable year for a disposi-
tion.
(f) Examples. The following examples
illustrate the rules of this section. For pur-
poses of the examples in this paragraph
(f): USP is a domestic corporation; TFC
and FS are foreign corporations that are
not controlled foreign corporations (with-
in the meaning of section 957(a)); each
corporation has outstanding a single class
of stock; USP has owned its interest in
TFC since the formation of TFC; each of
USP, TFC, and FS have a calendar taxable
year; and for purposes of section 1297(a)
(2), TFC measures the amount of its assets
based on value.
(1) Example 1—(i) Facts. (A) USP owns 15% of
the outstanding stock of TFC. TFC owns 30% of the
outstanding stock of FS. FS operates an active trade
or business and 100% of its assets are used in the
active trade or business. The value of FS’s non-pas-
sive assets (as defined in §1.1297-1(f)) is $900x; the
value of FS’s passive assets (which include cash and
accounts receivable) is $100x. TFC has not been
treated as a PFIC for any taxable year prior to Year
1 and has no predecessor corporations. In addition to
holding the FS stock, TFC directly conducts its own
active trade or business. The value of TFC’s non-pas-
sive assets (other than FS stock) is $50x; the value
of TFC’s passive assets (other than FS stock and as-
sets received during Year 1) is $30x. TFC earns $1x
of non-passive income (as defined in §1.1297-1(f))
from its directly conducted active trade or business.
(B) On January 1, Year 1, TFC sells all of its FS
stock for $300x. The residual gain computed under
§1.1297-2(f)(1) on the sale of the FS stock is $10x.
Under §1.1297-2(f)(2), $9x of residual gain is char-
acterized as non-passive income and $1x of residual
gain is characterized as passive income. During the
first quarter of Year 1 and apart from the sale of the
FS stock, TFC earned $20x of passive income from
the investment of the proceeds from the disposition
of the FS stock, and TFC maintained such earnings
as well as the disposition proceeds in cash for the
remainder of the year. TFC reinvests the proceeds of
the FS stock sale in an active trade or business during
Year 2, and, thus, TFC is not a PFIC in Year 2 and
Year 3. Less than 75% of TFC’s gross income in Year
1 is passive income (($20x + $1x)/($10x + $20x +
$1x) = 68%). However, subject to the application of
section 1298(b)(3) and this section, TFC would be a
PFIC in Year 1 under section 1297(a)(2) because the
proceeds from the sale of the FS stock ($300x) to-
gether with TFC’s other passive assets ($30x + $20x)
exceed 50% of TFC’s total assets ($300x + $30x +
$20x + $50x).
(ii) Results. (A) Under paragraph (d) of this sec-
tion, for purposes of applying section 1298(b)(3)(B)
(i) in Year 1, TFC’s proceeds from the disposition of
the stock of FS that are attributable to assets used by
FS in an active trade or business are considered as
from the disposition of an active trade or business.
Because 100% of FS’s assets are used in its active
trade or business, all of TFC’s proceeds are consid-
ered as from the disposition of an active trade or
business. Therefore, under paragraph (c)(1) of this
section, the passive income considered attributable
to proceeds from a disposition of one or more ac-
tive trades or businesses is $20x (from investment
of disposition proceeds). Because TFC reasonably
does not expect to be a PFIC in Year 2 and Year
3, and TFC is not, in fact, a PFIC for those years,
TFC will not be treated as a PFIC in Year 1 by rea-
son of section 1298(b)(3) and paragraph (b) of this
section, based on the satisfaction of the condition in
paragraph (b)(2)(i) of this section, assuming that the
95% (($20x/($20x + $1x)) of TFC’s passive income
for Year 1 that is attributable to proceeds of the dis-
position of FS’s active trade or business constitutes
substantially all of its passive income.
(B) TFC would also not be treated as a PFIC in
Year 1 by reason of section 1298(b)(3) and paragraph
(b) of this section, based on the satisfaction of the
condition in paragraph (b)(2)(ii) of this section, as-
suming that the 91% (($320x x 4)/(($320x + $30x) x
4)) of TFC’s passive assets on the quarterly measur-
ing dates during Year 1 following the disposition of
the stock of FS that is attributable to proceeds of the

July 29, 2019 538 Bulletin No. 2019–31
disposition of FS’s active trade or business consti-
tutes substantially all of its passive assets.
(C) Under paragraph (e) of this section, TFC can-
not claim the section 1298(b)(3) exception in rela-
tion to the income attributable to the proceeds of the
FS stock sale in Year 2.
(2) Example 2—(i) Facts. The facts are the same
as in paragraph (f)(1)(i) of this section (the facts in
Example 1), except that during the first quarter of
Year 1, TFC earned only $10x of passive income
from the investment of the proceeds from the dis-
position of the FS stock and $10x of passive income
from its other passive assets and maintained such
earnings in cash for the remainder of the year.
(ii) Results. The results are the same as in para-
graph (f)(1)(ii) of this section (the facts in Example
1), except that under paragraph (c)(1) of this section,
the passive income considered attributable to pro-
ceeds from a disposition of one or more active trades
or businesses is $10x. Because 48% ($10x/($10x
+ $10x + $1x)), and not substantially all, of TFC’s
passive income for Year 1 is attributable to proceeds
of the disposition of FS’s active trade or business,
TFC does not qualify for the exception from treat-
ment as a PFIC in section 1298(b)(3) for Year 1.
However, under paragraphs (b)(2) and (d) of this
section, $310x ($300x disposition proceeds + $10x
from investment of disposition proceeds) of TFC’s
passive assets held on each quarterly measuring date
after the disposition is considered attributable to the
disposition of an active trade or business. Because
TFC reasonably does not expect to be a PFIC in Year
2 and Year 3, and TFC is not, in fact, a PFIC for those
years, TFC will not be treated as a PFIC in Year 1
by reason of paragraph (b) of this section, based on
the satisfaction of the condition in paragraph (b)(2)
(ii) of this section, assuming that the 89% (($310x
x 4)/(($310x + $10x + $30x) x 4)) of TFC’s passive
assets on the quarterly measuring dates during Year
1 following the disposition of the stock of FS that
is attributable to proceeds of the disposition of FS’s
active trade or business constitutes substantially all
of its passive assets.
(g) Applicability date. The rules of this
section apply to taxable years of share-
holders beginning on or after the date
of publication of the Treasury decision
adopting these rules as final regulations in
the Federal Register.
Par.9. Section 1.1298-4 is added to
read as follows:
§1.1298-4 Rules for certain foreign
corporations owning stock in 25-per-
cent-owned domestic corporations.
(a) Overview. This section provides
rules under section 1298(b)(7) that apply
to certain foreign corporations that own
stock in 25-percent-owned domestic cor-
porations (as defined in paragraph (b) of
this section) for purposes of determining
whether a foreign corporation is a pas-
sive foreign investment company (PFIC).
Paragraph (b) of this section provides the
general rule. Paragraph (c) of this section
sets forth rules concerning ownership of
25-percent-owned domestic corporations
or qualified stock (as defined in paragraph
(b)(2) of this section) through partnerships.
Paragraph (d) of this section sets forth
rules for determining whether a foreign
corporation is subject to the tax imposed
by section 531 (the section 531 tax) and
for waiving treaty benefits that would pre-
vent the imposition of such tax. Paragraph
(e) of this section sets forth a rule gov-
erning the interaction of section 1298(b)
(7) and section 1298(a)(2). Paragraph (f)
of this section sets forth anti-abuse rules
for the application of section 1298(b)(7).
Paragraph (g) sets forth the applicability
date for this section.
(b) Treatment of certain foreign cor-
porations owning stock in a 25-per-
cent-owned domestic corporation—(1)
General rule. Except as otherwise provid-
ed in paragraphs (e) and (f) of this section,
when a tested foreign corporation (as de-
fined in §1.1297-1(f)) is subject to the sec-
tion 531 tax (or waives any benefit under
any treaty that would otherwise prevent
the imposition of the tax), and owns (di-
rectly or indirectly under the rules in para-
graph (c) of this section) at least 25 per-
cent (by value) of the stock of a domestic
corporation (a 25-percent-owned domestic
corporation), for purposes of determining
whether the foreign corporation is a PFIC,
any qualified stock held directly or indi-
rectly under the rules in paragraph (c) of
this section by the 25-percent-owned do-
mestic corporation is treated as an asset
that does not produce passive income (and
is not held for the production of passive
income), and any amount included in
gross income with respect to the qualified
stock is not treated as passive income.
(2) Qualified stock. For purposes of
paragraph (b)(1) of this section, the term
qualified stock means any stock in a C
corporation that is a domestic corpora-
tion and that is not a regulated investment
company or real estate investment trust.
(c) Indirect ownership of stock through
a partnership. For purposes of paragraph
(b)(1) of this section, a tested foreign cor-
poration that is a partner in a partnership is
considered to own its proportionate share
of any stock of a domestic corporation
held by the partnership, and a domestic
corporation that is a partner in a partner-
ship is considered to own its proportionate
share of any qualified stock held by the
partnership. The rules and principles of
sections 701 through 761 apply to deter-
mine the corporation’s proportionate share
of the stock of the domestic corporation or
of the qualified stock. An upper-tier part-
nership’s attributable share of the stock
of a domestic corporation or of qualified
stock held by a lower-tier partnership is
treated as held by the upper-tier partner-
ship for purposes of applying the rule in
this paragraph (c).
(d) Section 531 tax—(1) Subject to
section 531 tax. For purposes of para-
graph (b) of this section, a tested foreign
corporation is considered subject to the
section 531 tax regardless of whether the
tax is imposed on the corporation and of
whether the requirements of §1.532-1(c)
are met.
(2) Waiver of treaty benefits—(i) Test-
ed foreign corporation that files, or is re-
quired to file, a Federal income tax return.
For purposes of paragraph (b) of this sec-
tion, a tested foreign corporation that files,
or is required to file, a Federal income tax
return waives the benefit under a treaty
that would otherwise prevent the impo-
sition of the section 531 tax by attaching
to its original or amended return for the
taxable year for which section 1298(b)(7)
and paragraph (b)(1) of this section are ap-
plied or any prior taxable year a statement
that it irrevocably waives treaty protection
against the imposition of the section 531
tax, effective for all prior, current, and
future taxable years, provided the taxable
year for which the return is filed and all
subsequent taxable years are not closed by
the period of limitations on assessments
under section 6501.
(ii) Tested foreign corporation that is
not required to file a Federal income tax
return. For purposes of paragraph (b) of
this section, a tested foreign corporation
that is not required to file a Federal in-
come tax return waives the benefit under
a treaty that would otherwise prevent the
imposition of the section 531 tax by a date
no later than nine months following the
close of the taxable year for which section
1298(b)(7) and paragraph (b)(1) of this
section are applied by—
(A) Adopting a resolution or similar
governance document that confirms that it
has irrevocably waived any treaty protec-
tion against the imposition of the section

Bulletin No. 2019–31 539 July 29, 2019
531 tax, effective for all prior, current,
and future taxable years, and maintaining
a copy of the resolution (or other gover-
nance document) in its records; or
(B) In the case of a tested foreign cor-
poration described in section 1297(e)(3),
including in its public filings a statement
that it irrevocably waives treaty protection
against the imposition of the section 531
tax, effective for all prior, current, and fu-
ture taxable years.
(e) Interaction of section 1298(b)(7)
and section 1298(a)(2). Section 1298(b)
(7) does not apply to determine wheth-
er a tested foreign corporation is a PFIC
for purposes of section 1298(a)(2) and
§1.1291-1(b)(8)(ii).
(f) Anti-abuse rules—(1) Classification
as PFIC excluding qualified stock. Para-
graph (b) of this section does not apply
when—
(i) 75 percent or more of the gross in-
come of the tested foreign corporation
for the taxable year (taking into account
§1.1297-2 and excluding any amount in-
cluded in gross income with respect to
qualified stock) is passive income (as de-
fined in §1.1297-1(c)(1)); or
(ii) The average percentage of assets
held by the tested foreign corporation
(taking into account §1.1297-2 and ex-
cluding qualified stock) that are passive
assets (as defined in §1.1297-1(f)) is at
least 50 percent.
(2) Avoidance principal purpose.
Paragraph (b) of this section does not
apply when a principal purpose for the
tested foreign corporation’s formation
or acquisition of the stock of the 25-per-
cent-owned domestic corporation that
holds the qualified stock is to avoid clas-
sification of the tested foreign corporation
as a PFIC. A principal purpose to avoid
classification of the tested foreign corpo-
ration as a PFIC is deemed to exist when
the 25-percent-owned domestic corpo-
ration is not engaged in an active trade
or business in the United States. The ex-
istence of an active trade or business is
determined under §1.367(a)-2(d)(2) and
(3), except that officers and employees
of the 25-percent-owned domestic cor-
poration do not include the officers and
employees of related entities as provided
in §1.367(a)-2(d)(3). However, activities
performed by the officers and staff of em-
ployees of a look-through subsidiary of
the 25-percent-owned domestic corpora-
tion or a partnership that would be taken
into account by the corporation pursuant
to §1.1297-2(e) if it applied are taken into
account for purposes of the determination
of the existence of an active trade or busi-
ness.
(g) Applicability date. The rules of this
section apply to taxable years of share-
holders beginning on or after the date
of publication of the Treasury decision
adopting these rules as final regulations in
the Federal Register.
Kirsten Wielobob,
Deputy Commissioner for Services
and Enforcement

Section 199A Rules for
Cooperatives and their
Patrons
REG-118425-18
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing; withdrawal of notice of proposed
rulemaking.
SUMMARY: These proposed regulations
provide guidance to cooperatives to which
sections 1381 through 1388 of the Inter-
nal Revenue Code (Code) apply (Coop-
eratives) and their patrons regarding the
deduction for qualified business income
(QBI) under section 199A(a) of the Code
as well as guidance to specified agricultur-
al or horticultural cooperatives (Specified
Cooperatives) and their patrons regarding
the deduction for domestic production ac-
tivities under section 199A(g) of the Code.
These proposed regulations also provide
guidance on section 199A(b)(7), the rule
requiring patrons of Specified Cooper-
atives to reduce their deduction for QBI
under section 199A(a). In addition, these
proposed regulations include a single defi-
nition of patronage and nonpatronage
under section 1388 of the Code. Finally,
these proposed regulations propose to re-
move the final regulations, and withdraw
the proposed regulations that have not
been finalized, under former section 199.
These proposed regulations affect Coop-
eratives as well as patrons that are individ-
uals, partnerships, S corporations, trusts,
and estates engaged in domestic trades or
businesses.
DATES: Written (including electron-
ic) comments and requests for a public
hearing must be received by August 19,
2019. As of June 19, 2019, the proposed
rule published on August 27, 2015 (80 FR
51978), is withdrawn.
ADDRESSES: Submit electronic sub-
missions via the Federal eRulemaking
Portal at www.regulations.gov (indicate
IRS and REG-118425-18) by following
the online instructions for submitting
comments. Once submitted to the Federal
eRulemaking Portal, comments cannot be
edited or withdrawn. The Department of
the Treasury (Treasury Department) and
the IRS will publish for public availability
any comment received to its public dock-
et, whether submitted electronically or in
hard copy. Send hard copy submissions
to: CC:PA:LPD:PR (REG-118425-18),
Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, D.C., 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-118425-
18.), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue, N.W.,
Washington, D.C., 20224.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, James Holmes at (202) 317-
4137; concerning submissions of com-
ments and requests for hearing, Regina L.
Johnson at (202) 317-6901 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) under sections 199A
and 1388 of the Code.
Section 199A was enacted on De-
cember 22, 2017, by section 11011 of
“An Act to provide for reconciliation

July 29, 2019 540 Bulletin No. 2019–31
pursuant to titles II and V of the con-
current resolution on the budget for fis-
cal year 2018,” Public Law 115-97, 131
Stat. 2054, 2063 (TCJA). Parts of sec-
tion 199A were amended on March 23,
2018, as if included in TCJA, by sec-
tion 101 of Division T of the Consolidat-
ed Appropriations Act, 2018, Public Law
115-141, 132 Stat. 348, 1151 (2018 Act).
Section 199A applies to taxable years
beginning after 2017 and before 2026.
Unless otherwise indicated, all referenc-
es to section 199A are to section 199A as
amended by the 2018 Act.
In addition, section 13305 of the TCJA
repealed section 199 (former section 199),
which provided a deduction for income
attributable to domestic production activ-
ities (section 199 deduction). Public Law
115-97, 131 Stat. 2054, 2126. The repeal
of former section 199 is effective for all
taxable years beginning after 2017. This
notice of proposed rulemaking therefore
proposes to remove the final regulations
under former section 199, and withdraws
proposed regulations under former sec-
tion 199.
Section 199A(a) provides taxpayers a
deduction of up to 20 percent of QBI from
a domestic business operated as a sole
proprietorship or through a partnership,
S corporation, trust, or estate, and up to
20 percent of qualified real estate invest-
ment trust (REIT) dividends and publicly
traded partnership (PTP) income (sec-
tion 199A(a) deduction). Section 199A(b)
(7) requires patrons of Specified Coop-
eratives to reduce their section 199A(a)
deduction if those patrons receive certain
payments from such cooperatives. Sec-
tion 199A(g) provides a deduction for
Specified Cooperatives and their patrons
(section 199A(g) deduction) that is based
on the former section 199 deduction. Be-
fore the amendments of the 2018 Act,
section 199A(g) provided a modified ver-
sion of the section 199A(a) deduction for
Specified Cooperatives.
The Treasury Department and the IRS
published proposed regulations (REG-
107892-18) providing guidance on the
section 199A(a) deduction in the Feder-
al Register (83 FR 40884) on August 16,
2018 (August 2018 NPRM). The final
regulations were published in the Fed-
eral Register (84 FR 2952) on February
8, 2019 (TD 9847).
TD 9847 did not address patrons’ treat-
ment of payments received from Cooper-
atives for purposes of section 199A(a) or
the section 199A(g) deduction for Speci-
fied Cooperatives, though it did restate the
reduction required under section 199A(b)
(7). See §1.199A-1(e)(7). The August
2018 NPRM preamble stated that the
Treasury Department and the IRS would
continue to study the area and intended to
issue separate proposed regulations de-
scribing rules for applying section 199A
to Specified Cooperatives and their pa-
trons. This notice of proposed rulemaking
sets forth those proposed regulations and
provides additional guidance to patrons
calculating their 199A(a) deduction.
Explanation of Provisions
The purpose of these proposed reg-
ulations is to provide guidance regard-
ing the application of sections 199A(a),
199A(b)(7), and 199A(g) to Cooperatives
and their patrons as well as to Specified
Cooperatives and their patrons. Where-
as section 199A(a) is generally available
to patrons of all Cooperatives, sections
199A(b)(7) and 199A(g) apply only to
Specified Cooperatives and their patrons.
These proposed regulations are or-
ganized into six sections: proposed
§§1.199A-7 through 1.199A-12. Proposed
§1.199A-7 describes rules for patrons
of Cooperatives to calculate their sec-
tion 199A(a) deduction and rules for pa-
trons of Specified Cooperatives to calcu-
late the reduction to their section 199A(a)
deduction as required by section 199A(b)
(7). Unless otherwise provided in these
proposed regulations, all of the rules
set forth in TD 9847 relating to the sec-
tion 199A(a) deduction apply to Coop-
eratives and their patrons. Specified Co-
operatives are a subset of Cooperatives;
therefore, the requirements of proposed
§1.199A-7 also apply to Specified Coop-
eratives.
Proposed §1.199A-8 sets out the cri-
teria that Specified Cooperatives must
satisfy to qualify for the section 199A(g)
deduction, and sets forth four steps nec-
essary to calculate this deduction. These
proposed regulations provide that the
section 199A(g) deduction available to
Specified Cooperatives and their patrons
is generally computed only with respect
to patronage gross receipts and related de-
ductions. Exempt Specified Cooperatives
(those that qualify under section 521) may
compute their section 199A(g) deductions
with respect to both patronage and nonpa-
tronage gross receipts and related deduc-
tions.
Proposed §§1.199A-9 through 1.199A-
11 provide additional guidance, based on
the regulations under former section 199,
regarding the four steps set forth in pro-
posed §1.199A-8. Proposed §1.199A-9
provides additional rules for determining
a Specified Cooperative’s domestic pro-
duction gross receipts (DPGR). Proposed
§1.199A-10 provides additional rules for
calculating costs (including cost of goods
sold (COGS) and other expenses, losses,
and deductions) allocable to a Specified
Cooperative’s DPGR. Proposed §1.199A-
11 provides additional rules for deter-
mining the W-2 wage limitation in sec-
tion 199A(g)(1)(B). Proposed §1.199A-12
details rules for applying section 199A(g)
in the context of an expanded affiliated
group (EAG) and other special rules con-
tained in section 199A(g)(5) that are not
otherwise addressed in these proposed
regulations.
These proposed regulations also in-
clude, under section 1388, a single defi-
nition of patronage and nonpatronage in
proposed §1.1388-1(f), which is intended
to reflect the current case law under sec-
tion 1388. This Explanation of Provisions
describes each section of the proposed
regulations in more detail.
I. Proposed §1.199A-7, Rules for Patrons
of Cooperatives
A. In General
As noted in the Background, sec-
tion 199A(a) may allow a taxpayer a de-
duction of up to 20 percent of QBI from
a domestic business operated as a sole
proprietorship or through a partnership,
S corporation, trust, or estate, and up to
20 percent of qualified REIT dividends
and PTP income. A section 199A(a) de-
duction is not available for wage income
or for business income earned through a
C corporation.
C corporations are not eligible for the
section 199A(a) deduction. Cooperatives
are C corporations for Federal income tax

Bulletin No. 2019–31 541 July 29, 2019
purposes and, therefore, are not eligible
for the section 199A(a) deduction. Simi-
larly, patrons that are C corporations are
also not eligible for the section 199A(a)
deduction. However, patrons that are indi-
viduals are eligible for the section 199A(a)
deduction. Section 1.199A-1(a)(2) pro-
vides that, for purposes of applying the
rules of §§1.199A-1 through 1.199A-6,
a reference to an individual includes a
reference to a trust (other than a grantor
trust) or an estate to the extent that the
section 199A(a) deduction is determined
by the trust or estate under the rules of
§1.199A-6. These proposed regulations
apply this same usage of the term individ-
ual.
The benefits of section 199A(a) are
limited to individuals with income from
a trade or business as defined in sec-
tion 199A(d)(1) and §1.199A-1(b)(14)
(trade or business) with QBI. To the ex-
tent a patron operating a trade or business
has income directly from that business
(as opposed to receiving a patronage
dividend from a Cooperative), the pa-
tron must follow the rules of §§1.199A-1
through 1.199A-6 to calculate the section
199A deduction. However, to the extent
a patron receives patronage dividends or
similar payments from a Cooperative, the
patron must follow the additional spe-
cial rules and clarification in proposed
§1.199A-7 to calculate the section 199A
deduction.
For these purposes, patronage divi-
dends or similar payments include money,
property, qualified written notices of allo-
cations, and qualified per-unit retain certif-
icates for which an exempt or nonexempt
Cooperative receives a deduction under
section 1382(b), and nonpatronage dis-
tributions paid in money, property, qual-
ified written notices of allocation as well
as money or property paid in redemption
of a nonqualified written notice of alloca-
tion for which an exempt Cooperative re-
ceives a deduction under section 1382(c)
(2) (hereinafter collectively referred to as
patronage dividends or similar payments).
Section 1.199A-7(c) and (d) of these
proposed regulations provide that these
patronage dividends or similar payments
may be included in the patron’s QBI: (i)
To the extent that these payments are re-
lated to the patron’s trade or business, (ii)
are qualified items of income, gain, de-
duction, or loss at the Cooperative’s trade
or business level, (iii) are not income
from a specified service trade or business
(SSTB), as defined in section 199A(d)
(2), at the Cooperative’s trade or business
level (except as permitted by the thresh-
old rules, see §1.199A-5(a)(2)), and (iv)
provided the patron receives certain infor-
mation from the Cooperative about these
payments (see proposed §1.199A-7(c)(3)
and (d)(3)). Proposed §1.199A-7(e) pro-
vides that in situations in which a patron
conducts a trade or business that receives
patronage dividends or similar payments
from a Cooperative, the W-2 wages and
unadjusted basis immediately after acqui-
sition (UBIA) of qualified property con-
sidered are those of the patron’s trade or
business and not of the Cooperative that
directly conducts the trade or business
from which the payments arise. All of
these proposed rules are discussed further
in this section.
B. QBI of Patrons
Although Cooperatives are C corpo-
rations for Federal income tax purposes,
section 1382(b) and (c) allow Coopera-
tives to determine taxable income after
deducting distributions of patronage divi-
dends or similar payments to patrons. The
effect of these deductions is to remove
the distributions from income taxed at the
Cooperative level leaving it subject to in-
come tax only at the patron level. Exempt
and nonexempt Cooperatives are both per-
mitted to deduct patronage distributions if
they satisfy the requirements described in
section 1382(b). Only exempt Coopera-
tives are permitted to also deduct nonpa-
tronage distributions if the requirements
under section 1382(c) are met. Coopera-
tives are subject to Federal income tax on
income for which no deduction may be
taken under section 1382(b) or (c), in the
same manner as any C corporation.
Section 1.199A-3(b) contains the gen-
eral rules regarding QBI. QBI is the net
amount of qualified items of income,
gain, deduction, and loss with respect to
any trade or business as determined under
those rules. While income from the own-
ership of a C corporation is generally not
QBI, section 199A provides a special rule
for patrons receiving patronage dividends
from a Cooperative.
Section 199A(c)(3)(B)(ii) provides that
any amount described in section 1385(a)
(1), which concerns patronage dividends,
is not treated as an exclusion to a patron’s
QBI. The Joint Committee on Taxation
Report (JCX-6-18, released March 22,
2018) (Joint Committee Report) states that
QBI includes any patronage dividend (as
defined in section 1388(a)), per-unit retain
allocation (as defined in section 1388(f)),
qualified written notice of allocation (as
defined in section 1388(c)), or any other
similar amount received from a Cooper-
ative, provided such amount is otherwise
a qualified item of income, gain, deduc-
tion, or loss (that is, such amount is (i) ef-
fectively connected with the conduct of a
trade or business within the United States,
and (ii) included or allowed in determining
taxable income for the taxable year). Joint
Committee Report, pages 24-25. As a re-
sult, the rules of proposed §1.199A-7(c)
provide that patronage dividends or simi-
lar payments (as previously discussed) are
included in calculating QBI for purposes
of the patrons’ section 199A(a) deduc-
tion provided the amounts are otherwise
qualified items. To be otherwise qualified,
these amounts must be qualified items of
income, gain, deduction, and loss under
section 199A(c)(3).
Unlike nonexempt Cooperatives, ex-
empt Cooperatives are permitted to de-
duct nonpatronage distributions under
section 1382(c). As a result, this income
is subject to taxation only at the patron
level. The rules of proposed §1.199A-7(c)
provide that a patron’s QBI can include
payments to patrons for which the exempt
Cooperative receives a deduction under
section 1382(c)(2) in addition to payments
for which the exempt Cooperative receives
a deduction under section 1382(b). That
is, amounts paid under section 1382(c)(2)
are treated by a patron as equivalent to pa-
tronage dividends under section 1382(b)
for purposes of QBI. Amounts paid under
section 1382(c)(1) (dividends on capital
stock), however, are dividends from own-
ership of C corporations, which are not
included in QBI.
TD 9847 generally provides that in-
come is tested at the trade or business lev-
el where it is directly generated. Accord-
ingly, these proposed regulations provide
that patronage dividends or similar pay-
ments are considered to be generated from

July 29, 2019 542 Bulletin No. 2019–31
the trade or business the Cooperative con-
ducts on behalf of or with the patron, and
are tested by the Cooperative at its trade or
business level.
A patron must determine QBI for each
trade or business it directly conducts.
However, in situations where the patron
receives a distribution from a Coopera-
tive that is a patronage dividend or simi-
lar payment, the Cooperative determines
whether that distribution contains qual-
ified items of income, as defined under
section §1.199A-3(b) , and reports that
information to the patron. The patron
needs this information to determine its
section 199A(a) deduction, and the Co-
operative directly conducting the trade
or business from which the distribution
is derived is in the best position to know
whether the patronage dividend or simi-
lar payment contains qualified items. The
Cooperative must report this information
regardless of whether the patron’s taxable
income does not exceed the threshold
amount ($315,000 in the case of joint re-
turns and $157,500 for all other taxpay-
ers for any taxable year beginning before
2019). For taxable years beginning after
2018, see Rev. Proc. 2018-57, 2018-49
IRB 827, or its successor (relating to infla-
tion adjustments).
A patron must use that information
when determining the patron’s section
199A(a) deduction. For example, if the
Cooperative determines an entire distri-
bution does not contain any qualified item
of income, gain, deduction, and loss be-
cause it is not effectively connected with
the conduct of the Cooperative’s trade or
business within the United States, the Co-
operative does not include such amount
when reporting qualified items to the pa-
tron, and the patron does not include the
distribution in the patron’s QBI. In addi-
tion, to the extent the distribution includes
interest income that is not properly alloca-
ble to the Cooperative’s trade or business
on behalf of, or with, its patrons, the dis-
tribution is not a qualified item of income,
gain, deduction, and loss. As a result, the
Cooperative does not include such amount
when reporting qualified items to the pa-
tron, and the patron does not include the
income in the patron’s QBI.
Proposed §1.199A-7(c)(3) provides
that the Cooperative must report the
amount of qualified items of income, gain,
deduction, or loss in the distributions
made to the patron on an attachment to
or on the Form 1099-PATR, Taxable Dis-
tributions Received From Cooperatives
(Form 1099-PATR) (or any successor
form), issued by the Cooperative to the
patron, unless otherwise provided by the
instructions to the Form. The Cooperative
does not include any items from an SSTB
in reporting the amount of qualified items
of income, gain, deduction, and loss and
must instead follow the rules in proposed
§1.199A-7(d) for income from an SSTB.
If a patron does not receive such infor-
mation from the Cooperative on or before
the due date of the Form 1099-PATR, the
amount of distributions from the Coop-
erative that may be included in the pa-
tron’s QBI is presumed to be zero. This
presumption does not apply to amounts
of qualified items of income, gain, deduc-
tion and loss to the extent that they were
not reported on the Form 1099-PATR or
attachment thereto before the publication
of these proposed regulations in the Fed-
eral Register. These rules apply to both
exempt and nonexempt Cooperatives as
well as patronage and nonpatronage distri-
butions. The Treasury Department and the
IRS request comments on these reporting
requirements and whether any additional
information from Cooperatives that make
distributions to their patrons is needed
for their patrons to determine their sec-
tion 199A(a) deduction.
C. Specified Service Trade or Business
Section 199A(c)(1) provides that only
items attributable to a qualified trade or
business are taken into account in deter-
mining the section 199A(a) deduction for
QBI. Under section 199A(d)(1) a “qual-
ified trade or business” excludes (A) an
SSTB or (B) the trade or business of per-
forming services as an employee. TD 9847
provides that, unless an exception applies,
if a trade or business is an SSTB, none of
its items are to be taken into account for
purposes of determining a taxpayer’s QBI.
Under section 199A(d)(3), individu-
als with taxable income not exceeding
the threshold amount ($315,000 in the
case of joint returns and $157,500 for all
other taxpayers for any taxable year be-
ginning before 2019), are not subject to
a restriction with respect to SSTBs. For
taxable years beginning after 2018, see
Rev. Proc. 2018-57, 2018-49 IRB 827,
or its successor. Therefore, if an individ-
ual has taxable income not exceeding the
threshold amount, the individual is eligi-
ble for the section 199A(a) deduction with
respect to qualified items of income, gain,
deduction, and loss from the SSTB not-
withstanding that the trade or business is
an SSTB. The inapplicability of the SSTB
rules, W-2 wage limitation, and UBIA of
qualified property limitation in computing
the section 199A(a) deduction is subject
to a phase-in for individuals with taxable
income within the phase-in range. See the
rules in §1.199A-5 for the rules relating
to SSTBs.
The rules in proposed §1.199A-7(d)
clarify that a patron (whether the patron
is a relevant passthrough entity (RPE) or
an individual) must determine whether
the trades or businesses it directly con-
ducts are SSTBs. These proposed rules
also provide that in the case of a patron’s
trade or business that receives patronage
dividends or similar payments distribut-
ed from a Cooperative, the Cooperative
must determine whether the distributions
from the Cooperative include items of in-
come, gain, deduction, and loss from an
SSTB directly conducted by the Cooper-
ative, and whether such items are quali-
fied items with respect to such SSTB. The
Cooperative must report to the patron the
amount of qualified items of income, gain,
deduction, and loss from an SSTB directly
conducted by the Cooperative. The patron
then determines if the distribution may be
included in the patron’s QBI depending
on the patron’s taxable income and the
statutory phase-in and threshold amounts.
Because the Cooperative may not know
whether the patron’s taxable income ex-
ceeds the threshold amount, the Coopera-
tive must report this information to all pa-
trons. Without this information, a patron
with taxable income within the phase-in
range or below the threshold amount
would not have the information necessary
to take into account the amount of quali-
fied items of income, gain, deduction, and
loss from an SSTB in determining the pa-
tron’s section 199A(a) deduction for QBI.
The rules in §1.199A-5 are applied by the
Cooperative to determine if the trade or
business is an SSTB. For example, the Co-
operative will apply the gross receipts de

Bulletin No. 2019–31 543 July 29, 2019
minimis rules in §1.199A-5(c)(1) to deter-
mine if the trade or business is an SSTB.
Proposed §1.199A-7(d)(3) provides
that the Cooperative must report to the
patron the amount of SSTB income, gain,
deduction, and loss in distributions that
is qualified with respect to any SSTB di-
rectly conducted by the Cooperative on an
attachment to or on the Form 1099-PATR
(or any successor form) issued by the Co-
operative to the patron, unless otherwise
provided by the instructions to the Form.
If the Cooperative does not report the
amount on or before the due date of the
Form 1099-PATR, then only the amount
that a Cooperative reports as qualified
items of income, gain, deduction, and loss
under §1.199A-7(c)(3) may be included
in the patron’s QBI, and the remaining
amount of distributions from the Coop-
erative that may be included in the pa-
tron’s QBI is presumed to be zero. This
presumption does not apply to amounts
of qualified items of income, gain, deduc-
tion and loss to the extent that they were
not reported on the Form 1099-PATR or
attachment thereto before the publication
of these proposed regulations in the Fed-
eral Register. These rules apply to both
exempt and nonexempt Cooperatives as
well as to patronage and nonpatronage
distributions. The Treasury Department
and the IRS request comments on these
reporting requirements and whether any
additional information from Cooperatives
that make distributions to their patrons is
needed for their patrons to determine their
section 199A(a) deduction.
D. Determination of W-2 Wages and
UBIA of Qualified Property
Section §1.199A-1(d) addresses the
calculation of the section 199A(a) deduc-
tion for individuals with taxable income
exceeding the threshold amount and pro-
vides guidance on the application of these
limitations. All of the rules relating to the
REIT dividends and qualified PTP in-
come component of the section 199A(a)
deduction applicable to individuals with
taxable income not exceeding the thresh-
old amount also apply to individuals with
taxable income exceeding the threshold
amount. The QBI component of the sec-
tion 199A(a) deduction, however, is sub-
ject to limitations for individuals with
taxable income exceeding the threshold
amount. These include the limitations
based on the W-2 wages of the trade or
business or a combination of the W-2
wages and the UBIA of qualified property.
Under §1.199A-2, W-2 wages and
UBIA of qualified property are deter-
mined by the individual or RPE that di-
rectly conducts the trade or business. Sec-
tion 199A(f)(1)(A)(2)(iii) requires that
S corporations and partnerships allocate
W-2 wages and UBIA of qualified proper-
ty to their owners in accordance with each
owner’s applicable share, and §1.199A-6
contains additional information regard-
ing these reporting requirements. Sec-
tion 199A does not provide a similar rule
for Cooperatives.
Section 199A(c)(3)(B)(ii) provides
that patronage dividends or similar pay-
ments may be treated as qualified items
of income. Only the Cooperative knows
the origin and character of the patronage
dividends or similar payments. As a result,
the Cooperative must determine if these
payments meet the statutory requirements
in section 199A(c)(3), and must provide
information to the patron for it to compute
its section 199A(a) deduction. In contrast,
section 199A contains special rules for
W-2 wages and UBIA of qualified prop-
erty. To provide that Cooperatives allocate
their W-2 wages and UBIA of qualified
property to their patrons would be to treat
the Cooperatives as RPEs when they are
C corporations. Therefore, the rules in pro-
posed §1.199A-7(e) provide that patrons
directly conducting trades or businesses
that receive patronage dividends or simi-
lar payments from a Cooperative calculate
the W-2 wage and UBIA of qualified prop-
erty limitations at the patron level based
on the patrons’ trades or businesses, with-
out any regard to the Cooperative’s W-2
wages or UBIA of qualified property.
In summary, a Cooperative must report
to patrons: (i) Whether the patronage div-
idends or similar payments include quali-
fied items of income, gain, deduction, and
loss from a non-SSTB and (ii) whether
the distributions from the Cooperative in-
clude qualified items of income, gain, de-
duction, and loss from an SSTB directly
conducted by the Cooperative, but a Co-
operative does not report any W-2 wages
or UBIA of qualified property to patrons.
The Treasury Department and the IRS re-
quest comments on these proposed rules
regarding W-2 wages and UBIA of quali-
fied property and whether it would be ap-
propriate for Cooperatives to be required
to report such amounts to patrons to de-
termine their section 199A(a) deduction.
E. Special Rules for Patrons of Specified
Cooperatives
Section 199A provides special rules
for patrons of Specified Cooperatives.
Because patrons of Specified Coopera-
tives may be eligible to take both a sec-
tion 199A(a) and section 199A(g) deduc-
tion, section 199A(b)(7) provides that if a
trade or business of a patron of a Specified
Cooperative receives qualified payments
(as defined in section 199A(g)(2)(e) and
proposed §1.199A-8(d)(2)(ii)) from such
Specified Cooperative that are included
in the patron’s QBI, the patron must re-
duce its section 199A(a) deduction by the
lesser of (i) 9 percent of so much of the
QBI with respect to such trade or busi-
ness that is properly allocable to qualified
payments from the Specified Cooperative,
or (ii) 50 percent of so much of the pa-
trons’ W-2 wages (determined under sec-
tion 199A(b)(4)) with respect to such trade
or business as are so allocable. This re-
duction is required by section 199A(b)(7)
whether the Specified Cooperative passes
through all, some, or none of the Specified
Cooperative’s section 199A(g) deduction
to the patron in that taxable year.
Section 1.199A-3(b)(5) provides an
allocation method for items of QBI at-
tributable to more than one trade or
business. That allocation method also
applies to patrons with multiple trades
or businesses. The rules in proposed
§1.199A-7(f)(2) provide an additional
similar allocation method in situations
where a patron receives qualified pay-
ments and income that is not a qualified
payment in a trade or business. The pa-
tron must allocate those items using a
reasonable method based on all the facts
and circumstances. Different reasonable
methods may be used for different items
of income, gain, deduction, and loss. The
chosen reasonable method for each item
must be consistently applied from one
taxable year to another and must clearly
reflect the income and expenses of each
trade or business. The overall combina-

July 29, 2019 544 Bulletin No. 2019–31
tion of methods must also be reasonably
based on all the facts and circumstances.
The books and records maintained for a
trade or business must be consistent with
any allocations. The Treasury Depart-
ment and the IRS are open to considering
whether a permissible “reasonable meth-
od” should be specified in regulations or
permitted to include methods based on
direct tracing, allocations based on gross
income, or other methods, within appro-
priate parameters. The Treasury Depart-
ment and the IRS request comments on
possible reasonable methods for the al-
location of items not clearly attributable
to a single trade or business, and whether
any safe harbors may be appropriate.
Because the section 199A(b)(7) re-
duction applies to the portion of a pa-
tron’s QBI that relates to qualified pay-
ments from a Specified Cooperative,
these proposed rules provide a safe har-
bor allocation method for patrons with
taxable income not exceeding the thresh-
old amounts set forth in section 199A(e)
(2) to determine how to calculate the
section 199A(b)(7) reduction. The safe
harbor allocation method is intended to
provide a straightforward method for pa-
trons if their trade or business receives
qualified payments from a Specified Co-
operative in addition to other income. To
calculate the required section 199A(b)
(7) reduction, the patron must allocate
the aggregate business expenses and
W-2 wages between qualified payments
and other gross receipts. The safe harbor
allocation method allows patrons to al-
locate by ratably apportioning business
expenses and W-2 wages based on the
proportion that the amount of qualified
payments bears to the total gross receipts
used to determine QBI. The Treasury De-
partment and the IRS request comments
on this safe harbor rule and whether there
are additional or alternative safe harbors
that may be appropriate.
Further, to make the calculation re-
quired by section 199A(b)(7), the patron
will need to know the qualified payments
allocable to the patron that were used in
calculating a Specified Cooperative’s sec-
tion 199A(g) deduction. In order to enable
the patron to make this calculation, pro-
posed §1.199A-7(f)(3) requires the Spec-
ified Cooperative to report the amount of
such qualified payments on an attachment
to or on the Form 1099-PATR, (or any
successor form) issued by the Cooperative
to the patron, unless otherwise provided
by the instructions to the Form.
F. Transition Rule
Congress provided a special transition
rule relating to qualified payments under
former section 199 made by Specified
Cooperatives in section 101 of the 2018
Act. Under this transition rule, the repeal
of former section 199 for taxable years
beginning after December 31, 2017, does
not apply to former section 199 quali-
fied payments received by a patron from
Specified Cooperatives in a taxable year
beginning after December 31, 2017, to
the extent such qualified payments are
attributable to qualified production activ-
ities income (QPAI) with respect to which
a deduction is allowable to the Specified
Cooperatives under former section 199 for
a taxable year of the Specified Coopera-
tives beginning before January 1, 2018.
Such qualified payments remain subject
to former section 199, and any deduction
under former section 199 allocated by the
Specified Cooperatives to their patrons
related to such qualified payments may
be deducted by such patrons in accor-
dance with former section 199. In addi-
tion, no deduction is allowed under sec-
tion 199A(a) and (g) with respect to such
qualified payments. See Pub. L. 115–97,
title I, §13305(c), Dec. 22, 2017, 131 Stat.
2054, 2126 (codified as amended at I.R.C.
§74 Note), as amended by Pub. L. 115–
141, div. T, §101(c), Mar. 23, 2018, 132
Stat. 348, 1151, providing a transitional
rule for qualified payments of patrons of
Cooperatives.
Proposed §1.199A-7(h)(3) and
§1.199A-8(h)(3) provide that the Coop-
erative must identify in a written notice
to its patrons that a section 199A(a) de-
duction cannot be claimed for qualified
payments that otherwise would consti-
tute QBI in the patron’s trade or business
in a taxable year in which the qualified
payments remain subject to former sec-
tion 199. The Cooperative must report
this information on an attachment to or
on the Form 1099-PATR (or any succes-
sor form) issued by the Cooperative to
the patron, unless otherwise provided by
the instructions to the Form.
II. Proposed §1.199A-8, Deduction for
Income Attributable to Domestic
Production Activities of Specified
Cooperatives
A. In General
Section 199A(g) provides a deduction
for Specified Cooperatives and their pa-
trons that is similar in many respects to
the deduction under former section 199.
Proposed §1.199A-8 provides definitions
relating to the section 199A(g) deduction,
establishes the criteria that a Specified
Cooperative must satisfy to be eligible to
claim the section 199A(g) deduction, and
sets forth the necessary steps for a Spec-
ified Cooperative to calculate the sec-
tion 199A(g) deduction.
B. Definitions
Proposed §1.199A-8 defines the terms
patron, Specified Cooperative, and agri-
cultural or horticultural products. In de-
fining patron, the Treasury Department
and the IRS sought consistency with the
rules under subchapter T of chapter 1 of
subtitle A of the Code. Thus, the rules in
proposed §1.199A-8 cross-reference the
definition of patron found in §1.1388-1(e).
The definition of Specified Cooperative
is consistent with the definition set forth
in section 199A(g)(4). This definition is
different from the definition of Specified
Cooperative as originally provided by
section 11011(a) of the TCJA (former sec-
tion 199A(g)(3)), as it no longer includes
a Cooperative solely engaged in the pro-
vision of supplies, equipment, or services
to farmers or other Specified Cooperatives
(former section 199A(g)(3)(C)).
Proposed §1.199A-8(a)(4) defines
agricultural or horticultural products
as agricultural, horticultural, viticultur-
al, and dairy products, livestock and the
products thereof, the products of poultry
and bee raising, the edible products of
forestry, and any and all products raised
or produced on farms and processed or
manufactured products thereof within
the meaning of the Cooperative Market-
ing Act of 1926, 44 Stat. 802 (1926). Ag-
ricultural or horticultural products also
include aquatic products that are farmed
whether by exempt or nonexempt Speci-
fied Cooperatives. See Rev. Rul. 64-246,

Bulletin No. 2019–31 545 July 29, 2019
1964-2 C.B. 154. In addition, agricultural
or horticultural products include fertilizer,
diesel fuel, and other supplies used in ag-
ricultural or horticultural production that
are manufactured, produced, grown, or
extracted (MPGE) by the Specified Co-
operative. See Joint Committee Report, at
23, footnote 120.
Agricultural or horticultural products
do not include intangible property. For
example, an agricultural or horticultural
product includes a seed that is grown, but
does not include an intangible property
right to reproduce a seed for sale. This
exclusion of intangible property does
not apply to intangible characteristics of
any particular agricultural or horticultur-
al product. For example, gross receipts
from the sale of different varieties of or-
anges would all qualify as DPGR from
the disposition of agricultural or horti-
cultural products (assuming all other re-
quirements of section 199A(g) are met).
However, gross receipts from the license
of the right to produce and sell a certain
variety of oranges would be considered
separate from the tangible oranges them-
selves and therefore not gross receipts
from an agricultural or horticultural
product. This exclusion is consistent
with former section 199, which excluded
intangible property other than computer
software, any property described in sec-
tion 168(f)(4) (sound recordings), and
qualified film products.
The Treasury Department and the IRS
considered a similar but alternative defi-
nition of agricultural or horticultural
products as agricultural, horticultural, vi-
ticultural, and dairy products, livestock
and poultry, bees, forest products, fish
and shellfish, and any products thereof,
including processed and manufactured
products, and any and all products raised
or produced on farms and any processed
or manufactured product thereof within
the meaning of the Agricultural Market-
ing Act of 1946, 60 Stat. 1091 (1946).
While very similar to the definition set
forth in these proposed rules, the Treasury
Department and the IRS proposed using
the definition based on the Cooperative
Marketing Act of 1926, which specifical-
ly concerns cooperatives, unlike the Ag-
ricultural Marketing Act of 1946, which
concerns the marketing and distribution of
agricultural products.
The Treasury Department and the IRS
also considered an alternative definition
of agricultural or horticultural products
based on general regulations under the
Commodity Exchange Act. The Com-
modity Futures Trading Commission de-
fines agricultural commodities as wheat,
cotton, rice, corn, oats, barley, rye, flax-
seed, grain sorghums, mill feeds, butter,
eggs, Solanum tuberosum (Irish potatoes),
wool, wool tops, fats and oils (including
lard, tallow, cottonseed oil, peanut oil,
soybean oil and all other fats and oils),
cottonseed meal, cottonseed, peanuts,
soybeans, soybean meal, livestock, live-
stock products, and frozen concentrated
orange juice, but not onions; other com-
modities that are, or once were, or are
derived from, living organisms, including
plant, animal and aquatic life, which are
generally fungible, within their respective
classes, and are used primarily for human
food, shelter, animal feed or natural fiber;
tobacco, products of horticulture, and
such other commodities used or consumed
by animals or humans. 17 CFR 1.3. The
Treasury Department and the IRS con-
cluded that this definition was too narrow,
because it is limited to products that can
be commodities.
The Treasury Department and the IRS
are considering alternative definitions of
agricultural or horticultural products to
address concerns that the definition could
be interpreted inconsistently with the or-
dinary meaning of agricultural or horti-
cultural products. A clarification of the
definition that is under consideration is
the limitation of agricultural or horticul-
tural products to products acquired from
original producers, such as farmers, plant-
ers, ranchers, dairy farmers, or nut or fruit
growers, and products thereof that are
MPGE by Specified Cooperatives. The
Treasury Department and the IRS request
comments on whether the original pro-
ducer approach being considered would
be appropriate, as well as other approach-
es to defining agricultural or horticultural
products. The Treasury Department and
the IRS also request comments on the im-
pact, if any, of the proposed definition on
which products are MPGE by Specified
Cooperatives.
A Specified Cooperative’s gross re-
ceipts from the disposition of agricul-
tural or horticultural products qualify as
DPGR if the products were MPGE by the
Specified Cooperative in whole or signif-
icant part within the United States. The
proposed regulations define in whole or
significant part for these purposes in pro-
posed §1.199A-9(h) and provide a 20 per-
cent safe harbor for such determination in
proposed §1.199A-9(h)(3).
The definition of gross receipts in pro-
posed §1.199A-8(b)(2)(iii) is essentially
the same as in §1.199-3(c) issued under
former section 199, except that this defi-
nition has been modified by removing
references to section 1031 (exchange of
real property held for productive use or
investment) and tax-exempt interest with-
in the meaning of section 103 (interest
on State and local bonds). The reference
to section 1031 is removed because that
provision now applies only to real prop-
erty. The section 199A(g) deduction is
based on gross receipts derived from the
disposition of agricultural or horticultur-
al products and section 199A(g)(3)(D)(i)
expressly excludes gross receipts derived
from the disposition of land from DPGR.
The reference to tax-exempt interest un-
der section 103 is removed because it is
appropriate for the definition of gross re-
ceipts to include only gross receipts that
are taken into account in computing gross
income under the Cooperative’s methods
of accounting used for Federal income tax
purposes for the taxable year.
The Treasury Department and the IRS
welcome comments regarding all aspects
of these proposed definitions, including
whether there is an alternative or more
appropriate definition of Specified Co-
operative or agricultural or horticultur-
al products, and clarification of when
MPGE is performed in whole or signifi-
cant part in the United States that would
provide greater certainty for taxpayers in
complying with, and the IRS in adminis-
tering, the requirements for claiming the
section 199A(g) deduction. The Trea-
sury Department and the IRS also wel-
come comments on the appropriateness
of the 20 percent safe harbor in proposed
§1.199A-9(h)(3).
C. Steps for Calculating Section 199A(g)
Deduction
Proposed §1.199A-8 sets forth four re-
quired steps to determine the amount of a

July 29, 2019 546 Bulletin No. 2019–31
nonexempt Specified Cooperative’s sec-
tion 199A(g) deduction and provides rules
to determine the amount of an exempt
Specified Cooperative’s section 199A(g)
deduction.
i. Patronage/nonpatronage Split
The first step under the rules of pro-
posed §1.199A-8 for calculating the
section 199A(g) deduction requires non-
exempt Specified Cooperatives to iden-
tify the gross receipts and related de-
ductions (other than a deduction under
section 199A(g)) that are from patronage
sources and from nonpatronage sources.
Specified Cooperatives must separate their
patronage and nonpatronage gross receipts
and related deductions when determining
taxable income and allocating expenses
between patronage and nonpatronage in-
come to claim the tax deductions under
section 1382(b) and (c). Cooperatives that
have gross receipts only from patronage
sources will be unaffected. Accordingly,
the proposed regulations’ requirement to
divide patronage/nonpatronage gross re-
ceipts and related deductions should not
significantly impact the existing alloca-
tion requirements applicable to Specified
Cooperatives.
This step is expressly included in
these proposed rules because proposed
§1.199A-8 provides that for all purposes
of the section 199A(g) deduction, non-
exempt Specified Cooperatives may use
only patronage gross receipts and related
deductions to calculate DPGR, QPAI (in-
cluding oil-related QPAI), taxable income,
and the W-2 wage limitation.
Separating a nonexempt Specified
Cooperative’s patronage items from its
nonpatronage items is consistent with
the structure and intent of section 199A.
Section 199A in its entirety is structured
to give businesses that are not operating
as C corporations a deduction that cor-
responds to the TCJA’s reduction of the
top corporate rate of tax under section 11.
C corporations are expressly prohibit-
ed under section 199A(a) from claiming
a section 199A(a) deduction, and under
section 199A(g)(2)(D)(i) from claiming
a section 199A(g) deduction. Although
section 199A(g) provides a deduction for
Specified Cooperatives, the statutory pro-
hibitions preventing C corporations from
benefiting under section 199A(g) (which
were absent from the statutory text of
former section 199) are in conflict with
permitting a section 199A(g) deduction
for the nonpatronage business of a nonex-
empt Specified Cooperative. Instead, non-
patronage source income of a nonexempt
Specified Cooperative receives an alter-
nate benefit shared by other C corpora-
tions: the TCJA’s reduction of the top rate
of tax under section 11 from 35 percent to
21 percent.
Moreover, the 2018 Act amended sec-
tion 199A to address concerns that the
TCJA created an unintended incentive for
farmers and other producers to sell their
agricultural or horticultural products to
Cooperatives over independent buyers.
The amendment to section 199A was in-
tended to ensure a level playing field be-
tween Cooperatives and independent buy-
ers. Without the split between patronage
and nonpatronage businesses, Specified
Cooperatives that may benefit from both
a section 199A(g) deduction (from which
taxpayers other than Specified Coopera-
tives cannot benefit) and the reduced cor-
porate tax rate on nonpatronage business
would be significantly advantaged over
independent buyers who could benefit
only from the reduced corporate tax rate
under section 11.
Accordingly, the Treasury Depart-
ment and the IRS have determined that
it is appropriate to limit the source of the
gross receipts and related deductions tak-
en into account for purposes of the sec-
tion 199A(g) deduction for nonexempt
Specified Cooperatives to items prop-
erly allocated to a nonexempt Specified
Cooperative’s patronage business. The
Treasury Department and the IRS request
comments regarding these proposed rules,
including comments explaining any poli-
cy rationale that would justify treating the
nonpatronage business of a nonexempt
Specified Cooperative differently from the
business operations of any other C corpo-
ration subject to the tax imposed under
section 11.
ii. Identifying Patronage DPGR
The second step set forth in proposed
§1.199A-8 is for nonexempt Specified
Cooperatives to identify patronage gross
receipts that qualify as DPGR. The rules
in proposed §1.199A-8 point nonex-
empt Specified Cooperatives to proposed
§1.199A-9 for additional information on
DPGR. The rules in proposed §1.199A-9
do not refer to gross receipts from patron-
age or nonpatronage business because the
rules only provide additional informa-
tion supplementing the determination of
DPGR from dispositions of agricultural
or horticultural products. When applying
§1.199A-9, which occurs after step 1 in
§1.199A-8, the only gross receipts of a
nonexempt Specified Cooperative consid-
ered would be those derived from patron-
age sources. Proposed §1.199A-9 is essen-
tially the same as §§1.199-1 and 1.199-3
issued under former section 199, adjusted
to apply to Specified Cooperatives.
iii. Calculating Patronage QPAI
The third step set forth in proposed
§1.199A-8 is for nonexempt Specified
Cooperatives to calculate QPAI (including
oil-related QPAI) from only their patron-
age DPGR. To do this, nonexempt Spec-
ified Cooperatives must determine COGS
and other expenses, losses, or deductions
that are allocable to patronage DPGR.
Nonexempt Specified Cooperatives are di-
rected to consult proposed §1.199A-10 for
additional information on making these
allocations. Proposed §1.199A-10 does
not refer to patronage or nonpatronage
QPAI or DPGR because it only provides
additional information supplementing the
QPAI calculation. Proposed §1.199A-10
is essentially the same as §1.199-4 issued
under former section 199, adjusted to ap-
ply to Specified Cooperatives.
iv. Calculating Patronage
Section 199A(g) Deduction
The fourth and final step set forth in
proposed §1.199A-8 is for nonexempt
Specified Cooperatives to calculate their
section 199A(g) deduction, which is equal
to 9 percent of the lesser of QPAI or tax-
able income, and subject to the W-2 wage
limitation. Nonexempt Specified Coop-
eratives are directed to consult proposed
§1.199A-11 for additional information
on the W-2 wage limitation. Proposed
§1.199A-11 does not refer to patronage
or nonpatronage QPAI, taxable income, or
W-2 wages because it only provides addi-

Bulletin No. 2019–31 547 July 29, 2019
tional information supplementing the W-2
wage limitation. Proposed §1.199A-11 is
essentially the same as §1.199-2 issued
under former section 199, adjusted to ap-
ply to Specified Cooperatives.
v. Exempt Specified Cooperatives
Proposed §1.199A-8(c) provides that
exempt Specified Cooperatives calculate
two separate section 199A(g) deductions,
one based on gross receipts and related de-
ductions from patronage sources, and one
based on gross receipts and related deduc-
tions from nonpatronage sources. Like a
nonexempt Specified Cooperative, an ex-
empt Specified Cooperative earns patron-
age income that is not taxed to the extent
of any section 1382(b) deduction for pa-
tronage distributions made to patrons. Ex-
empt Specified Cooperatives are also not
taxed on any nonpatronage income to the
extent of any section 1382(c) deduction
for nonpatronage distributions. Unlike
the usual taxation of C corporations, the
section 1382 deductions allow an exempt
Specified Cooperative to be treated more
like a passthrough entity by reducing the
exempt Specified Cooperative’s patronage
and nonpatronage income. It is therefore
appropriate that the exempt Specified Co-
operatives may take a section 199A(g) de-
duction on both patronage and nonpatron-
age income that could be deducted under
section 1382(b) and (c)(2).
As described earlier, calculating two
section 199A(g) deductions is consis-
tent with the administration of former
section 199. To calculate the two sec-
tion 199A(g) deductions, an exempt
Specified Cooperative is required under
proposed §1.199A-8 to perform steps two
through four twice, first using only its pa-
tronage gross receipts and related deduc-
tions and second using only its nonpatron-
age gross receipts and related deductions.
An exempt Specified Cooperative cannot
combine, merge, or net patronage and non-
patronage items at any step in determining
its patronage section 199A(g) deduction
and its nonpatronage section 199A(g) de-
duction.
D. Special Rule for Oil-Related QPAI
Section 199A(g)(5)(E) contains a
special rule for Specified Cooperatives
with oil-related QPAI, which requires
a reduction by 3 percent of the least of
oil-related QPAI, QPAI, or taxable in-
come of the Specified Cooperative for the
taxable year. The language of this rule is
the same as the language used in former
section 199(d)(9). Former section 199(d)
(9), which applied to taxable years begin-
ning after December 31, 2008, was added
by section 401(a), Division B of the En-
ergy Extension Act of 2008, Public Law
110–343, 122 Stat. 3765 (2008). These
proposed rules include rules for oil-related
QPAI that are similar to those contained
in proposed regulations (REG-136459-
09) relating to the section 199 deduction
published in the Federal Register (80 FR
51978) on August 27, 2015 (2015 Pro-
posed Regulations).
The 2015 Proposed Regulations in-
cluded rules related to a taxpayer’s deter-
mination of oil-related QPAI (with respect
to which no comments were received).
Although not finalized, the 2015 Proposed
Regulations are the only existing guidance
concerning a taxpayer’s determination of
oil-related QPAI. The preamble to the
2015 Proposed Regulations includes an
explanation of the reasons supporting the
proposed provisions, and these reasons
continue to apply. These include the de-
termination that gross receipts from trans-
portation and distribution of oil are not
included in the calculation of oil-related
QPAI, unless the gross receipts are con-
sidered DPGR under the de minimis rule
or an exception for embedded services
now contained in proposed §1.199A-9.
Gross receipts from transportation and
distribution are not included in QPAI and
DPGR (unless an exception applies), and
therefore it is appropriate to exclude such
gross receipts when calculating oil-related
QPAI.
E. Rules for Passing Section 199A(g)
Deduction to Patrons
Once a Specified Cooperative cal-
culates the section 199A(g) deduction,
it may pass on the section 199A(g) de-
duction to patrons who are eligible tax-
payers as defined in section 199A(g)(2)
(D), that is, (i) a patron that is other than
a C corporation or (ii) a patron that is a
Specified Cooperative. Section 199A(g)
(2)(A) requires the Specified Coopera-
tive to identify the amount of the sec-
tion 199A(g) deduction being passed to a
patron in a notice (required by proposed
§1.199A-8(d)(3)) mailed to the eligible
patron during the payment period de-
scribed in section 1382(d). The amount
of the section 199A(g) deduction that a
Specified Cooperative can pass through
to an eligible taxpayer is limited to the
portion of the section 199A(g) deduction
that is allowed with respect to the QPAI
to which the qualified payments made
to the eligible taxpayer are attributable.
Section 199A(g)(2)(E) defines quali-
fied payments as those that are included
in the eligible taxpayer’s income under
section 1385(a)(1) and (3) (referencing
patronage dividends and per-unit retain
allocations). Proposed §1.199A-8 further
provides that a Specified Cooperative that
receives a section 199A(g) deduction as
an eligible taxpayer can take the deduc-
tion only against patronage gross income
and related deductions, or pass on the de-
duction to its patrons that are eligible tax-
payers. The proposed rules do not allow
an exempt Specified Cooperative to pass
through any of the section 199A(g) deduc-
tion attributable to nonpatronage activities
because no QPAI is attributable to any
qualified payments. The rules of proposed
§1.199A-8 are essentially the same as the
rules of §1.199-6, adjusted to include oth-
er provisions of the section 199 final regu-
lations as well as proposed rules set forth
in the 2015 Proposed Regulations.
F. Cooperative as a Partner in a
Partnership
Proposed §1.199A-8(f) provides guid-
ance regarding circumstances in which
a Specified Cooperative is a partner in
a partnership as described under sec-
tion 199A(g)(5)(B). The proposed rules
provide that the partnership must sepa-
rately identify and report on the Sched-
ule K-1 to the Form 1065, U.S. Return
of Partnership Income, (or any successor
form) issued to its partner, unless other-
wise provided by the instructions to the
Form, the Specified Cooperative’s allo-
cable share of gross receipts and related
deductions. This allows the Specified Co-
operative partner to apply the four steps
in proposed §1.199A-8 required to calcu-
late its patronage section 199A(g) deduc-

July 29, 2019 548 Bulletin No. 2019–31
tion (or patronage and nonpatronage sec-
tion 199A(g) deductions in the case of an
exempt Specified Cooperative).
III. Proposed §1.199A-9, Domestic
Production Gross Receipts
A. In General
Section 199A(g)(3)(D) defines the
term domestic production gross receipts
to mean gross receipts of a Specified Co-
operative derived from any lease, rental,
license, sale, exchange, or other disposi-
tion (collectively, a “disposition”) of any
agricultural or horticultural product which
was MPGE (determined after application
of section 199A(g)(4)(B)) by the Spec-
ified Cooperative in whole or significant
part within the United States. Such term
does not include gross receipts of the
Specified Cooperative derived from a dis-
position of land or from services. These
proposed regulations are based on §1.199-
3 issued under former section 199, but re-
move provisions that would not apply to
the disposition of agricultural or horticul-
tural products.
DPGR includes the gross receipts that
a Specified Cooperative derives from
marketing agricultural or horticultural
products for patrons. Section 199A(g)(4)
(B) treats marketing Specified Coopera-
tives as having MPGE any agricultural or
horticultural product in whole or signifi-
cant part within the United States if their
patrons have done so. The Treasury De-
partment and the IRS considered whether
this rule should apply between Specified
Cooperatives and patrons taxed as C cor-
porations. These proposed regulations
allow attribution to apply as provided in
section 199A(g)(4)(B) because the stat-
ute does not distinguish between types of
patrons. However, these proposed regula-
tions do not allow a Specified Cooperative
to pass through to a C corporation any
of the section 199A(g) deduction of the
Specified Cooperative attributable to the
disposition of such agricultural or horti-
cultural products. This is because, under
section 199A(g)(2)(D), taxpayers taxed as
C corporations are not eligible to claim a
section 199A(g) deduction from the Spec-
ified Cooperative. These proposed regula-
tions incorporate the rules from §1.199-
1(d)(1) through (3) and (e), issued under
former section 199, as applicable. These
rules relate to the allocation of gross re-
ceipts between DPGR and non-DPGR,
and the determination of whether an al-
location method is reasonable. Further,
the rules include provisions permitting
Specified Cooperatives to treat de mini-
mis gross receipts as DPGR or non-DPGR
without allocating such gross receipts, and
a provision permitting the use of historical
data to allocate gross receipts for certain
multiple-year transactions. The Treasury
Department and the IRS welcome com-
ments regarding all aspects of these pro-
posed rules. When incorporating these
concepts from the former section 199
regulations, the Treasury Department and
the IRS determined that the appropriate
section of these proposed regulations in
which to include such guidance was pro-
posed §1.199A-9. This is not a substantive
change, but rather a reorganization to im-
prove clarity.
B. Definition of Manufactured, Produced,
Grown, Extracted
The definition of the term MPGE is
included in proposed §1.199A-9 and is
generally consistent with the definition in
§1.199-3(e)(1). However, these proposed
regulations revise the rule in §1.199-3(e)
(2) by removing the concept of minor as-
sembly. In the 2015 Proposed Regulations,
the Treasury Department and the IRS re-
quested comments on defining the term
minor assembly because of the difficulty
in identifying a widely applicable objec-
tive test. Based on the comments received
and the restriction on the section 199A(g)
deduction to agricultural or horticultural
products, proposed §1.199A-9 does not
include the term minor assembly includ-
ed in §1.199-3(e)(2). This exclusion does
not impact a taxpayer’s obligation to meet
all of the other requirements to qualify
for the section 199A(g) deduction. The
Treasury Department and the IRS request
comments on whether the concept of mi-
nor assembly should be retained and, if so,
how this term should be defined.
C. By the Taxpayer
With respect to the phrase “by the tax-
payer” as used in section 199A(g)(3)(D)
(i), these proposed regulations adopt the
rule from §1.199-3(f)(1) as applicable,
rather than the rule in the 2015 Proposed
Regulations. In a contract manufacturing
arrangement, this means that a Specified
Cooperative must have the benefits and
burdens of ownership of the agricultural
or horticultural product during the pe-
riod in which the MPGE activity occurs
in order for the Specified Cooperative
to be treated as engaging in such MPGE
activity. The 2015 Proposed Regulations
provided a different rule for contract
manufacturing arrangements. The 2015
Proposed Regulations provided that if a
qualifying activity is performed under a
contract, then the party that performs the
qualifying activity is the taxpayer for pur-
poses of section 199(c)(4)(A)(i). Under
the rule in the 2015 Proposed Regulations,
a Specified Cooperative that contracts
with another party for the MPGE of an
agricultural or horticultural product would
never qualify as “the taxpayer” for pur-
poses of the section 199A(g) deduction.
This result fails to provide any incentive
for Specified Cooperatives to retain the
benefits and burdens of ownership and to
ensure that production occurs within the
United States. Therefore, to maintain such
an incentive, the proposed regulations
maintain the rule from §1.199-3(f)(1). The
Treasury Department and the IRS request
comments on the continued use of the rule
from §1.199-3(f)(1).
D. Other Provisions in Proposed
§1.199A-9
The remainder of the rules in proposed
§1.199A-9 are based on the existing reg-
ulations in §1.199-3. These rules should
be interpreted in a manner consistent
with the interpretation under former sec-
tion 199. The Treasury Department and
the IRS request comments on any concep-
tion or definition that in application would
be over or under-inclusive under the pro-
posed regulations, or any instances where
they should interpret the rules differently
from the interpretation under former sec-
tion 199.
IV. Proposed §1.199A-10, Costs
Allocable to DPGR
Proposed §1.199A-10 provides guid-
ance on the allocation of costs to DPGR.

Bulletin No. 2019–31 549 July 29, 2019
This section provides rules for allocating
a taxpayer’s COGS, as well as other ex-
penses, losses, and deductions properly
allocable to DPGR. These proposed reg-
ulations are based on and follow the sec-
tion 199 regulations in §1.199-4.
V. Proposed §1.199A-11, Wage
Limitation
Proposed §1.199A-11 provides guid-
ance regarding the W-2 wage limitation on
the section 199A(g) deduction. A notice
of proposed revenue procedure, Notice
2019-27, 2019-31 IRB, which proposes
a draft revenue procedure providing three
proposed methods that Specified Cooper-
atives may use for calculating W-2 wag-
es, is being issued concurrently with this
notice of proposed rulemaking. The guid-
ance contained in the notice of proposed
revenue procedure is necessary because
changes may be made to the underlying
Form W-2, Wage and Tax Statement, on
a more frequent basis than updates to the
regulations under section 199A(g), for
regulatory and statutory reasons inde-
pendent of section 199A. The three pro-
posed methods for calculating W-2 wag-
es in the notice are substantially similar
to the methods provided in Rev. Proc.
2006-47, 2006-2 C.B. 869 (relating to the
section 199 deduction), and Rev. Proc.
2019-11, 2019-09 IRB 742 (relating to the
section 199A(a) deduction). The Treasury
Department and the IRS propose these
methods in a notice of proposed revenue
procedure rather than in the notice of pro-
posed rulemaking to maintain consistency
with the rules under former section 199
and the rules under section 199A. The no-
tice of proposed revenue procedure invites
comments from the public.
Under the proposed regulations, W-2
wages for the purpose of the wage lim-
itation in section 199A(g) are generally
determined in a manner that is similar to
the manner in which W-2 wages are de-
termined for the purpose of the deduc-
tion under section 199A(a) (that is, using
the definition of W-2 wages under sec-
tion 199A(b)(4)), with three significant
differences. First, section 199A(g)(1)(B)
(ii) provides that W-2 wages are deter-
mined without regard to section 199A(b)
(4)(B), which excludes from the definition
amounts not properly allocable to QBI
for purposes of section 199A(c)(1). Sec-
ond, W-2 wages under section 199A(g)
do not include any amount that is not
properly allocable to DPGR. Finally, W-2
wages under section 199A(g) do not gen-
erally include any remuneration paid for
services in the commonwealth of Puer-
to Rico and other United States territo-
ries. Specifically, section 199A(g)(1)(B)
(ii) provides that W-2 wages are deter-
mined in the same manner as under sec-
tion 199A(b)(4), and section 199A(b)(4)
(A) defines wages as amounts described in
section 6051(a)(3) and (8). The amounts
described in section 6051(a)(3) are “wag-
es as defined in section 3401(a).” Sec-
tion 3401(a)(8) generally excludes from
the definition of wages in section 3401(a)
wages paid with respect to employment
in the commonwealth of Puerto Rico and
other United States territories. Therefore,
wages paid with respect to employment
in the commonwealth of Puerto Rico and
other United States territories are gener-
ally not W-2 wages within the meaning
of section 199A(b)(4)(A). This contrasts
with the section 199A(a) deduction for
which section 199A(f)(1)(C)(ii) allows
certain taxpayers with QBI from sources
within the commonwealth of Puerto Rico
(section 199A(f)(1)(C)(ii) applies only to
Puerto Rico and not to other United States
territories) to compute section 199A(b)
(4) W-2 wages without regard to sec-
tion 3401(a)(8). Since the section 199A(g)
deduction is determined based on QPAI,
not QBI, section 199A(f)(1)(C)(ii) does
not apply to the deduction under sec-
tion 199A(g). Given the distinction be-
tween QBI and QPAI on which the section
199A(a) and section 199A(g) deductions
are respectively provided, and the absence
of a provision similar to 199A(f)(1)(C)
(ii) with respect to QPAI, the Treasury
Department and the IRS have determined
that remuneration paid with respect to em-
ployment in the commonwealth of Puerto
Rico cannot be used in determining W-2
wages for purposes of section 199A(g).
The Treasury Department and the IRS re-
quest comments with respect to this deter-
mination.
VI. Proposed §1.199A-12, EAG Rules
Proposed §1.199A-12 provides guid-
ance on the application of section 199A(g)
to an EAG under section 199A(g)(5)(A)
(iii) that includes a Specified Coopera-
tive. Unlike the section 199 deduction, the
section 199A(g) deduction is limited to
Specified Cooperatives. These proposed
regulations address how the rules separat-
ing patronage and nonpatronage income
and deductions apply in the context of an
EAG. Proposed §1.199A-12 provides that
in the case of nonexempt Specified Coop-
eratives, attribution between the members
of an EAG is allowed provided the DPGR
and related deductions are patronage. In
the case of exempt Specified Coopera-
tives, attribution is allowed in all events
because exempt Specified Cooperatives
are allowed to take a separate 199A(g) de-
duction on both their patronage and non-
patronage income.
Proposed §1.199A-12 also provides
certain rules for partnerships owned by an
EAG as described in section 199A(g)(5)
(A)(ii).
VII. Proposed §1.1388-1(f)
Proposed §1.1388-1(f) sets forth a defi-
nition of patronage and nonpatronage
that is consistent with the current case law
under section 1388. Specifically, the pro-
posed definition adopts the directly related
test, which is a fact specific test for deter-
mining whether income and deductions
of a Cooperative are patronage or nonpa-
tronage. The Treasury Department and the
IRS request comments with respect to this
definition.
VIII. Proposed Removal of Section 199
Regulations and Withdrawal of
2015 Proposed Regulations
In light of the TCJA, the Treasury De-
partment and the IRS propose to remove
the section 199 regulations (§§1.199-0
through 1.199-9) and withdraw the 2015
Proposed Regulations because the regula-
tions interpret a provision of the Code that
has been repealed for taxable years begin-
ning after December 31, 2017.
The proposed removal of these regula-
tions is unrelated to the substance of the
rules in the regulations, and no negative
inference regarding the stated rules should
be made. Such regulations are proposed
to be removed from the Code of Federal
Regulations (CFR) solely because they

July 29, 2019 550 Bulletin No. 2019–31
have no future applicability. Removal of
these regulations is not intended to alter
any non-regulatory guidance that cites to
or relies upon these regulations. These
regulations as contained in 26 CFR part
1, revised April 1, 2019, remain applica-
ble to determining eligibility for the sec-
tion 199 deduction for any taxable year
that began before January 1, 2018. The be-
ginning date of the taxable year of a part-
nership, S corporation, or a non-grantor
trust or estate, rather than the taxable year
of a partner, shareholder, or beneficiary
is used to determine items that are taken
into account for purposes of calculating a
section 199 deduction. This is consistent
with the initial application of section 199
in 2005. Items arising from a passthrough
entity that had a fiscal year beginning be-
fore 2005 were not taken into account by
calendar-year partners for purposes of the
section 199 deduction. Public Law 109-
135, section 102(a) (Gulf Opportunity
Zone Act of 2005). Further, when sec-
tion 199 was amended to narrow the defi-
nition of W-2 wages, the amendment was
effective for taxable years beginning after
May 17, 2006. See Public Law 109-222,
section 514(a) (Tax Increase Prevention
and Reconciliation Act of 2005). Under
the transition rule in §1.199-5(b)(4), part-
ners and partnerships used the taxable
year of the partnerships to determine the
applicable definition of W-2 wages, and
there are similar rules in §1.199-5(c)(4)
for S corporations and §1.199-5(e)(3) for
non-grantor trusts and estates.
Proposed Effective/Applicability Date
Section 7805(b)(1)(A) and (B) of the
Code generally provide that no temporary,
proposed, or final regulation relating to the
internal revenue laws may apply to any
taxable period ending before the earliest
of (A) the date on which such regulation
is filed with the Federal Register, or (B)
in the case of a final regulation, the date on
which a proposed or temporary regulation
to which the final regulation relates was
filed with the Federal Register.
Consistent with authority provided by
section 7805(b)(1)(A), the proposed reg-
ulations are proposed to apply to taxable
years beginning after the date of publi-
cation of a Treasury decision adopting
these rules as final regulations in the
Federal Register. Taxpayers may rely
upon these proposed regulations, in their
entirety, before the date of publication
of the Treasury Decision adopting these
rules as final regulations in the Federal
Register.
Special Analyses
I. Regulatory Planning and Review –
Economic Analysis
Executive Orders 13563 and 12866
direct agencies to assess costs and ben-
efits of available regulatory alternatives
and, if regulation is necessary, to select
regulatory approaches that maximize net
benefits (including potential economic,
environmental, public health and safety
effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, of reducing costs, of harmoniz-
ing rules, and of promoting flexibility.
These proposed regulations have been
designated by the Office of Management
and Budget’s Office of Information and
Regulatory Affairs (OIRA) as subject to
review under Executive Order 12866 pur-
suant to the Memorandum of Agreement
(April 11, 2018) between the Treasury
Department and the Office of Manage-
ment and Budget regarding review of tax
regulations. OIRA has determined that the
proposed rulemaking is significant and
subject to review under Executive Order
12866 and section 1(b) of the Memoran-
dum of Agreement. Accordingly, the pro-
posed regulations have been reviewed by
the Office of Management and Budget.
In addition, the Treasury Department
and the IRS expect the proposed regula-
tions, when final, to be an Executive Order
13771 regulatory action and request com-
ment on this designation.
A. Background and Overview
The TCJA repealed section 199, which
provided a deduction for income attribut-
able to domestic production activities. In
its place it created section 199A, which
provides a deduction for qualified busi-
ness income derived from passthrough
businesses – such as sole proprietorships,
partnerships, and S corporations – en-
gaged in domestic trades or businesses.
While the repealed section 199 deduction
was generally available to all taxpayers,
the section 199A deduction is available
only to taxpayers other than C corpora-
tions. On March 23, 2018, the 2018 Act
modified section 199A(g) to provide de-
ductions for Specified Cooperatives and
their patrons that are substantially similar
to those under the repealed section 199
deduction. Accordingly, these regulations
generally formalize prior and current
practices based on the rules under former
section 199. The 2018 Act also added sec-
tion 199A(b)(7), which requires patrons
of Specified Cooperatives to reduce their
section 199A(a) deduction if those patrons
receive qualified payments from Specified
Cooperatives.
The estimated number of Coopera-
tives affected by the 2018 Act and these
proposed regulations is 9,000, including
approximately 2,000 Specified Coopera-
tives, based on 2017 tax filings.
B. Need for the Proposed Regulations
The proposed regulations provide
guidance regarding the application of sec-
tions 199A(a), 199A(b)(7), and 199A(g)
to Cooperatives, Specified Cooperatives,
and their patrons. The proposed regula-
tions are needed because the 2018 Act
introduced a number of terms and calcu-
lations. Patrons, Cooperatives, and Spec-
ified Cooperatives would benefit from
greater specificity regarding these and
other items.
C. Economic Analysis
1. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of the
proposed regulations relative to a no-ac-
tion baseline reflecting anticipated Feder-
al income tax-related behavior in the ab-
sence of these proposed regulations.
2. Economic Rationale for Issuing
Guidance for the 2018 Act
The Treasury Department and the IRS
anticipate that the issuance of guidance
pertaining to sections 199A(a), 199A(b)
(7), and 199A(g) of the 2018 Act to Coop-
eratives, Specified Cooperatives, and their

Bulletin No. 2019–31 551 July 29, 2019
patrons will provide a net economic bene-
fit to the overall U.S. economy.
The proposed regulations clarify a
number of concepts related to the sec-
tion 199A(a) deduction for patrons of Co-
operatives, provide guidance to patrons
of Specified Cooperatives who may be
required to reduce their section 199A(a)
deduction under section 199A(b)(7), and
provide guidance to Specified Coopera-
tives on the section 199A(g) deduction
on income attributable to their domestic
production activities. In the absence of
guidance, affected taxpayers would have
to calculate their tax liability without the
definitions and clarifications provided by
the proposed regulations, a situation that
is generally considered more burdensome
and could lead to greater conflicts with tax
administrators. Thus, the Treasury Depart-
ment and the IRS project that the proposed
regulations will reduce taxpayer compli-
ance burden and the costs of tax admin-
istration relative to not issuing any such
guidance.
This guidance also ensures that section
199A deductions are calculated similar-
ly across taxpayers, avoiding situations
where one taxpayer receives preferential
treatment over another for fundamentally
similar economic activity. For example, in
the absence of these proposed regulations,
a Specified Cooperative may have uncer-
tainty over what type of income is eligi-
ble for the section 199A(g) deduction. If a
Specified Cooperative claimed the section
199A(g) deduction on income that already
benefits from a lower corporate tax rate,
this would confer an unintended economic
benefit to the Specified Cooperative over
other C corporations performing identical
activities that only benefit from a lower
corporate tax rate. As discussed further
below, this guidance prevents the intro-
duction of distortions of economic deci-
sions in the agricultural or horticultural
sector.
In the absence of these proposed reg-
ulations, uncertainty over statutory inter-
pretation could lead to economic losses
to the extent that taxpayers interpret the
statute in ways that are inconsistent with
the statute’s intents and purposes. For
example, a Specified Cooperative may
pursue a project involving a certain prod-
uct that is only profitable if that product
is deemed “agricultural or horticultural”
and thus eligible for the section 199A(g)
deduction. If, in fact, this product is in-
eligible for the deduction based on the
intents and purposes of the statute, then
the project should not have been pursued
and this results in an economic loss. Al-
ternatively, without a definition of “ag-
ricultural or horticultural,” a Specified
Cooperative may incorrectly assume that
a project is not eligible for the deduction
and not pursue the project, which could
also result in an economic loss. In such
cases, guidance provides value by bring-
ing economic decisions closer in line with
Congress’ intent or, when such intent is
broad, with decisions that are economi-
cally efficient contingent on the overall
Code. While no guidance can fully curtail
all inaccurate interpretations of the statute,
the proposed regulations significantly mit-
igate the chance for such interpretations
and thereby increase economic efficiency.
Due to the lack of readily available data,
the Treasury Department and the IRS have
not estimated the increase in United States
economic activity that would arise from
the proposed guidance.
The Treasury Department further proj-
ects that the issuance of guidance will
reduce taxpayer compliance burden and
the costs of tax administration relative to
a no-action baseline. Due to the lack of
readily available data, the Treasury De-
partment has not estimated the decrease
in taxpayer compliance burden nor tax
administration costs arising from the is-
suance of guidance. The Treasury Depart-
ment and the IRS request comments and
information that can allow estimation of
economic impacts and any changes in tax-
payer compliance burden resulting from
the proposed guidance.
3. Economic Analysis of Specific
Provisions
The proposed regulations embody cer-
tain regulatory decisions that reflect nec-
essary regulatory discretion. These deci-
sions specify more fully how the 2018 Act
is to be implemented.
The Treasury Department and the IRS
solicit comments on the economic im-
pacts of each of the items discussed in
this section and of any other items of the
proposed regulations not discussed in this
section. The Treasury Department and the
IRS particularly solicit comments that
provide data, other evidence, or models
that could enhance the rigor of the process
by which provisions might be developed
for the final regulations.
i. Determining Section 199A(g)
Deduction
Specified Cooperatives are taxed dif-
ferently depending on whether they are
exempt (qualified as a cooperative under
section 521) or nonexempt (qualified un-
der rules elsewhere in the Code) and also
whether their income is from patronage
(generally related to the cooperative’s
marketing, purchasing, or services activ-
ities) or nonpatronage sources. In the case
of exempt Specified Cooperatives patron-
age and nonpatronage source income is
subject to a single level of tax at the pa-
tron level. Whereas, for nonexempt Spec-
ified Cooperatives only patronage source
income is subject to a single level of tax
at the patron level; nonpatronage source
income is subject to a double level of tax,
similar to other C corporations. Because
the Code does not define patronage and
nonpatronage source income, proposed
§1.1388-1(f) sets forth a definition of pa-
tronage and nonpatronage that is consis-
tent with the current state of federal case
law. Specifically, the proposed definition
adopts the directly related test, which is a
fact specific test for determining whether
income and deductions of a Cooperative
are patronage or nonpatronage. Speci-
fying a definition that is consistent with
current case law will help to minimize the
economic impacts of these proposed regu-
lations. The Treasury Department and the
IRS request comments with respect to this
definition.
The TCJA reduced the corporate tax
rate for C corporations under section 11
and provided the section 199A deduction
for domestic businesses operated as sole
proprietorships or through partnerships, S
corporations, trusts, or estates. The TCJA
also repealed section 199, which did not
preclude deductions on income earned by
C corporations. The 2018 Act amended
section 199A to address concerns that the
TCJA created an unintended incentive for
farmers to sell their agricultural or horti-
cultural products to Specified Coopera-
tives over independent buyers. Specifical-

July 29, 2019 552 Bulletin No. 2019–31
ly, the 2018 Act amended section 199A(g)
to allow Specified Cooperatives and their
patrons a deduction similar to the former
section 199 deduction. Because the sec-
tion 199A(g) deduction is not intended
to benefit C corporations and their share-
holders in general, the proposed regu-
lations specify that the section 199A(g)
deduction can be claimed on income that
can be subject to tax only at the patron
level. Under the proposed regulations,
non-exempt Specified Cooperatives may
not claim the section 199A(g) deductions
on income that cannot be paid to patrons
and deducted under section 1382(b) and
exempt Specified Cooperatives may not
claim section 199A(g) deductions on
income that cannot be paid to patrons
and deducted under sections 1382(b) or
1382(c)(2).
In the absence of these proposed regu-
lations, a Specified Cooperative may have
uncertainty as to whether non-patronage
source income, which would be taxed in
the same manner as a C corporation, could
receive both the lower corporate tax rate
and be further offset by a section 199A(g)
deduction. Other C corporations perform-
ing identical activities would only benefit
from the lower corporate tax rate.
The Treasury Department and the IRS
have determined that this potential un-
certainty as to tax treatment could distort
economic decisions in the agricultural or
horticultural sector. The proposed regu-
lations avoid this outcome, promoting a
more efficient allocation of resources by
providing more uniform incentives across
taxpayers.
ii. Definition of Agricultural or
Horticultural Products
Proposed §1.199A-8(a)(4) defines
agricultural or horticultural products
as agricultural, horticultural, viticultur-
al, and dairy products, livestock and the
products thereof, the products of poultry
and bee raising, the edible products of
forestry, and any and all products raised
or produced on farms and processed or
manufactured products thereof within the
meaning of the Cooperative Marketing
Act of 1926. Agricultural or horticultur-
al products also include aquatic products
that are farmed as well as fertilizer, diesel
fuel, and other supplies used in agricul-
tural or horticultural production that are
MPGE by the Specified Cooperative. Ag-
ricultural or horticultural products, how-
ever, do not include intangible property,
since agricultural or horticultural products
were considered a subset of tangible prop-
erty under former section 199. Intangible
property (defined in §1.199-3(j)(2)(iii))
was a separate category of property and
gross receipts from intangible property
did not qualify as DPGR.
The Treasury Department and the IRS
considered other definitions of agricultur-
al or horticultural products but determined
that taxpayer burden and tax administra-
tion costs would be lowest under a defi-
nition that was consistent with extant law.
For example, the Treasury Depart-
ment and the IRS considered a similar
but alternative definition of agricultural
or horticultural products as agricultur-
al, horticultural, viticultural, and dairy
products, livestock and poultry, bees, for-
est products, fish and shellfish, and any
products thereof, including processed and
manufactured products, and any and all
products raised or produced on farms and
any processed or manufactured product
thereof within the meaning of the Agri-
cultural Marketing Act of 1946. While
very similar to the definition in these
proposed rules, the Treasury Department
and the IRS proposed using the defini-
tion based on the Cooperative Marketing
Act of 1926, which specifically concerns
cooperatives and with which Specified
Cooperatives are familiar, unlike the Ag-
ricultural Marketing Act of 1946, which
concerns the marketing and distribution of
agricultural products without reference to
Cooperatives. The Treasury Department
and the IRS looked to the United States
Department of Agriculture (USDA) for
definitions because there is no definition
of agricultural or horticultural products
in the Internal Revenue Code or Income
Tax Regulations and because the USDA
has expertise concerning Specified Coop-
eratives and because Specified Coopera-
tives are likely familiar with USDA law.
The Treasury Department and the IRS
also considered an alternative definition
of agricultural or horticultural products
based on the definition of agricultural
commodities within the meaning of gen-
eral regulations under the Commodity
Exchange Act. The Treasury Department
and the IRS concluded that this definition
was too narrow, because it is limited to
products that can be commodities. The
use of this narrow definition would have
restricted the range of products for which
the section 199A(g) deduction would be
otherwise be available.
The Treasury Department and the IRS
request comments on other approaches
to defining agricultural or horticultural
products. The Treasury Department and
the IRS did not attempt to provide quan-
titative estimates of the revenue effects
or economic consequences of different
designations of agricultural or horticultur-
al products because suitable data are not
readily available at this level of detail. The
Treasury Department and the IRS request
comments that can inform such estima-
tion.
iii. De Minimis Threshold
In general, proposed §1.199A-9 re-
quires that Specified Cooperatives allocate
gross receipts between domestic produc-
tion gross receipts (DPGR) and non-DP-
GR. However, proposed §1.199A-9(c)
(3) includes a de minimis provision that
allows Specified Cooperatives to allo-
cate total gross receipts to DPGR if less
than 5 percent of total gross receipts are
non-DPGR or to allocate total gross re-
ceipts to non-DPGR if less than 5 percent
of total gross receipts are DPGR. The
Treasury Department and the IRS chose to
include a de minimis rule to reduce com-
pliance costs and simplify tax filing rela-
tive to an alternative of no de minimis rule.
The de minimis threshold modestly reduc-
es compliance costs for businesses with
relatively small amounts of non-DPGR or
DPGR by allowing them to avoid allocat-
ing receipts between DPGR and non-DP-
GR activities. The de minimis threshold is
unlikely to create any substantial effects
on market activity because any change in
the ratio of DPGR to non-DPGR will be
localized around the threshold, meaning
that the movement will be a small fraction
of receipts to get below the de minimis
threshold.
The thresholds provided in the pro-
posed regulations are based on the thresh-
olds set forth in §1.199-1(d)(3). The Trea-
sury Department and the IRS maintained
the de minimis rule from the final regu-

Bulletin No. 2019–31 553 July 29, 2019
lations under former section 199 because
the 2018 Act directed that regulations con-
cerning the section 199A(g) deduction be
based on the regulations applicable to Co-
operatives and their patrons under former
section 199. The Treasury Department
and the IRS considered changes in the de
minimis provisions but determined that
changing these from provisions that were
previously available would lead to tax-
payer confusion. Because the de minimis
provision exempts taxpayers from having
to perform certain allocations, the Trea-
sury Department and the IRS do not have
sufficient information on taxpayers’ use of
this exemption under former section 199
to perform a quantitative analysis of the
impacts of the de minimis provision.
The Treasury Department and the
IRS solicit comments on the de minimis
thresholds and particularly request com-
ments that provide data, other evidence,
and models that can enhance the rigor
of the process by which such thresholds
might be determined for the final regula-
tions while maintaining consistency with
the statute’s directive that the thresholds
be based on regulations issued under for-
mer section 199.
iv. Reporting Requirements
Proposed §1.199A-7(c) and (d) pro-
vide that, when a patron conducts a trade
or business that receives distributions
from a Cooperative, the Cooperative is
required to provide the patron with quali-
fied items of income, gain, deduction, and
loss and specified service trade or busi-
ness (SSTB) determinations with respect
to those distributions. This increases the
compliance burden on such Cooperatives.
However, in the absence of these proposed
regulations, the burden for determination
of the amount of distributions from a Co-
operative that constitute qualified items of
income, gain, deduction, and loss from a
non-SSTB and an SSTB would lie with
the patron. Because patrons are less well
positioned to acquire the relevant infor-
mation to determine whether distributions
from a Cooperative are qualified items
of income, gain, deduction, and loss and
whether items that would otherwise qual-
ify are from an SSTB, the Treasury De-
partment and the IRS expect that these
proposed regulations will reduce overall
compliance costs relative to an alternative
approach of not introducing a reporting
requirement.
v. Allocation Safe Harbor
If a patron receives both qualified pay-
ments and payments that are not qualified
payments in a qualified trade or business,
the patron must allocate those items and
related deductions using a reasonable
method based on all of the facts and cir-
cumstances. The proposed regulations
provide a safe harbor that allows patrons
who receive qualified payments in ad-
dition to other income to use a simpler
method to allocate business expenses and
W-2 wages between qualified payments
and other gross receipts to calculate the
section 199A(b)(7) reduction to the sec-
tion 199A(a) deduction. The safe harbor
allocation method allows patrons to al-
locate by ratably apportioning business
expenses and W-2 wages based on the
proportion that the amount of qualified
payments bears to the total gross receipts
used to determine QBI. This safe harbor is
available to patrons with taxable incomes
below the threshold amounts set forth in
section 199A(e)(2).
The Treasury Department and the IRS
considered an alternative of not allowing
a safe harbor but determined that a safe
harbor could reduce compliance costs and
simplify tax filing. The threshold was set
at amounts set forth in section 199A(e)
(2) to avoid a proliferation of thresh-
olds applicable to taxpayers claiming a
section 199A(a) deduction. Because the
threshold amounts are relatively low, the
Treasury Department and the IRS expect
that the safe harbor would not distort busi-
ness decisions or reduce revenue to any
meaningful extent.
II. Paperwork Reduction Act
The collections of information in these
proposed regulations are in proposed
§1.199A-7(c)(3), (d)(3), (f)(3), and (h)
(3), as well as proposed §1.199A-8(d)(3),
(f), and (h)(3). The collections of infor-
mation in proposed §1.199A-7(c)(3), (d)
(3), (f)(3), and (h)(3), as well as proposed
§1.199A-8(d)(3) and (h)(3) will be con-
ducted through Form 1099-PATR, while
the collection of information in proposed
§1.199A-8(f) will be conducted through
Schedule K-1 to Form 1065. In 2018, the
IRS released and invited comments on
the draft of Form 1065, Schedule K-1.
The IRS received no comments on the
form during the comment period. Con-
sequently, the IRS made the form avail-
able December 6, 2018 for use by the
public. On February 26, 2019, the IRS
invited comments on Form 1099-PATR
and the comment period closed on April
29, 2019. The IRS plans to issue in the
near term an additional notice with a thir-
ty-day comment period on Form 1099-
PATR. The IRS is contemplating making
additional changes to those two forms as
discussed below in these proposed regu-
lations .
A. Collections of information conducted
through Form 1099-PATR
The collection of information in pro-
posed §1.199A-7(c)(3) requires the Coop-
erative to inform its patron of the amount
of any distribution to the patron that con-
stitutes qualified items of income, gain,
deduction, and loss from a non-SSTB con-
ducted directly by the Cooperative. Not all
distributions to patrons are qualified items
of income, gain, deduction, and loss be-
cause the source of the distribution may
not be effectively connected with the con-
duct of a trade or business within the Unit-
ed States or may include interest income
that is not properly allocable to the pa-
tron’s trade or business. The Cooperative
directly conducting the trade or business
from which the distribution to the patron
originates is in the best position to know
how much of the distribution is qualified
items of income, gain, deduction, and
loss. The Cooperative is also in the best
position to know if it is generating income
from an SSTB. Accordingly, the collec-
tion of information is necessary for the
patron to calculate correctly the patron’s
section 199A(a) deduction for the patron’s
trade or business.
The collection of information in pro-
posed §1.199A-7(d)(3) requires the
Cooperative to inform its patron of the
amount of any distributions to the patron
that constitutes qualified items of income,
gain, deduction, and loss from an SSTB
conducted directly by the Cooperative.
Accordingly, the collection of information

July 29, 2019 554 Bulletin No. 2019–31
is necessary for the patron to correctly
calculate the patron’s section 199A(a) de-
duction for the patron’s qualified trade or
business.
The collection of information in pro-
posed §1.199A-7(f)(3) is essential for
the eligible taxpayer’s calculation of
the reduction in the eligible taxpayer’s
section 199A(a) deduction for the eli-
gible taxpayer’s trade or business that
is required by section 199A(b)(7). Sec-
tion 199A(g)(2)(A) requires the Speci-
fied Cooperative to identify the amount
of qualified payments being distribut-
ed to an eligible taxpayer and identify
the portion of the deduction allowed in
a notice mailed to the eligible taxpay-
er during the payment period described
in section 1382(d). Section 199A(b)(7)
provides that an eligible taxpayer who
receives qualified payments from a Spec-
ified Cooperative must reduce the eligi-
ble taxpayer’s section 199A(a) deduction
by an amount set forth in this section.
Without the notice described in proposed
§1.199A-7(f)(3), the eligible taxpayer
cannot calculate the reduction required
by section 199A(b)(7).
The collection of information in pro-
posed §1.199A-8(d)(3) is necessitated by
section 199A(g)(2)(A). Section 199A(g)
(2)(A) permits a Specified Cooperative
to pass through an amount of its sec-
tion 199A(g) deduction to an eligible tax-
payer. The amount of the section 199A(g)
deduction that the Specified Cooperative
is permitted to pass through is an amount
that is allocable to the QPAI generated
from qualified payments distributed to the
eligible taxpayer and identified by such
cooperative in a written notice mailed to
such taxpayer during the payment period
described in section 1382(d). Without the
notice required in proposed §1.199A-8(d)
(3) the eligible taxpayer would not know
that the Specified Cooperative is passing
a portion of its section 199A(g) deduction
to the eligible taxpayer.
The collections of information in pro-
posed §§1.199A-7(h)(3) and 1.199A-8(h)
(3) are necessitated by a special transi-
tion rule in section 101 of the 2018 Act.
Under this transition rule, the repeal of
former section 199 for taxable years be-
ginning after December 31, 2017, does
not apply to a qualified payment received
by a patron from a Specified Cooper-
ative in a taxable year beginning after
December 31, 2017, to the extent such
qualified payment is attributable to QPAI
with respect to which a deduction is al-
lowable to the Specified Cooperative un-
der former section 199 for a taxable year
of the Specified Cooperative beginning
before January 1, 2018. Such qualified
payment remains subject to former sec-
tion 199 and no deduction is allowed un-
der section 199A(a) or (g) with respect
to such qualified payment. Without these
collections of information by the Speci-
fied Cooperative, the patron has no way
of knowing that the patron is barred by
the transition rule from using a qualified
payment received that is QBI for the pa-
tron’s trade or business to claim a sec-
tion 199A(a) deduction for the patron’s
trade or business.
The collections of information in pro-
posed §1.199A-7(c)(3), (d)(3), (f)(3), and
(h)(3) as well as proposed §1.199A-8(d)
(3) and (h)(3) are satisfied by providing
information about qualified items of in-
come, SSTB determinations, qualified
payments, the section 199A(g) deduction,
and the use of qualified payments tied to
the former section 199 deduction, as ap-
plicable, on an attachment to or on the
Form 1099-PATR (or any successor form)
issued by the Cooperative to the patron,
unless otherwise provided by the instruc-
tions to the Form.
For purposes of the Paperwork Re-
duction Act of 1995, (44 U.S.C. 3507(d))
(PRA), the reporting burden associat-
ed with proposed §1.199A-7(c)(3), (d)
(3), (f)(3), and (h)(3) as well as proposed
§1.199A-8(d)(3) and (h)(3) will be reflect-
ed in the PRA Submission associated with
Form 1099-PATR (OMB control number
1545-0118). As further discussed in this
section, the estimated number of respon-
dents for the reporting burden associat-
ed with these information collections is
9,000 based on 2017 tax filings.
B. Collections of information conducted
through Schedule K-1, Form 1065
The collection of information in pro-
posed §1.199A-8(f) is required by sec-
tion 199A(g)(5)(B). This section allows
a Specified Cooperative that is a partner
in a partnership to use its allocable share
of gross receipts and related deductions
to calculate its section 199A(g) deduc-
tion. The proposed rules provide that the
partnership must separately identify and
report the allocable share of gross receipts
and related deductions on or attached to
the Schedule K-1 to the Form 1065 (or
any successor form) issued to a Specified
Cooperative partner, unless otherwise
provided by the instructions to the Form.
Without this reporting, the Specified Co-
operative partner would not have the in-
formation necessary to calculate its sec-
tion 199A(g) deduction from its activities
with the partnership.
The Schedule K-1 to the Form 1065
will be modified to include a mechanism
to report the Specified Cooperative part-
ner’s allocable share of gross receipts
and related deductions. The collection of
information in proposed §1.199A-8(f) is
satisfied when the partnership provides
the required information to its Specified
Cooperative partners on or attached to the
Schedule K-1 of Form 1065 (or any suc-
cessor form), unless otherwise provided
by the instructions to the Form. For pur-
poses of the PRA, the reporting burden
associated with proposed §1.199A-8(f)
will be reflected in the PRA Submission
associated with Form 1065 (OMB control
number 1545-0123). As provided in this
section, the estimated number of respon-
dents for the reporting burden associated
with these information collections is 407
based on 2017 tax filings.
C. Revised tax forms
The revised tax forms are as follows:
NewRevision of existing formNumber of respondents
Form 1099-PATR

9,000
Schedule K-1 (Form 1065)

407

Bulletin No. 2019–31 555 July 29, 2019
The current status of the PRA submis-
sions related to the tax forms that will
be revised as a result of the information
collections in the proposed regulations is
provided in the accompanying table. As
described previously, the burdens associ-
ated with proposed §1.199A-7(c)(3), (d)
(3), (f)(3), and (h)(3) as well as proposed
§§1.199A-8(d)(3) and (h)(3) will be in-
cluded in the aggregated burden estimates
for OMB control number 1545-0118,
which represents a total estimated burden
time of 509,895 hours and total estimat-
ed monetized costs of $44.733 million
($2018). The burdens associated with
the information collection in proposed
§1.199A-8(f) will be included in the ag-
gregated burden estimates for OMB con-
trol number 1545-0123, which represents
a total estimated burden time for all forms
and schedules of 3.157 billion hours and
total estimated monetized costs of $58.148
billion ($2017). The overall burden esti-
mates provided for 1545-0118 and 1545-
0123 are aggregate amounts that relate to
all information collections associated with
the applicable OMB control number.
No burden estimates specific to the
forms affected by the proposed regula-
tions are currently available. The Trea-
sury Department and the IRS have not
estimated the burden, including that of
any new information collections, related
to the requirements under the proposed
regulations. Those estimates would need
to capture both changes made by the 2018
Act and those that arise out of discretion-
ary authority exercised in the proposed
regulations. The Treasury Department and
the IRS request comments on all aspects
of information collection burdens related
to the proposed regulations, including es-
timates for how much time it would take
to comply with the paperwork burdens de-
scribed above for each relevant form and
ways for the IRS to minimize the paper-
work burden. Proposed revisions to these
forms that reflect the information collec-
tions contained in these proposed regu-
lations will be made available for public
comment at https://apps.irs.gov/app/pick-
list/list/draftTaxForms.htm and will not be
finalized until after these forms have been
approved by OMB under the PRA.
FormType of Filer
OMB
Number(s)
Status
Form 1099-
PAT R
[Business (Legacy
Model)]
1545-0118
Existing collection of information approved by OIRA on 6/3/2016. Public
comments will be sought on a revised collection of information that will
be submitted for OIRA review before 6/30/2019.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201602-1545-024
Form 1065,
Schedule K-1
Business (NEW
Model)
1545-0123
Published in the Federal Register on 10/11/18. Public Comment period
closed on 12/10/18. Approved by OIRA on 12/21/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-re-
quest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd
III. Regulatory Flexibility Act
As described in more detail in this
section, pursuant to the Regulatory Flex-
ibility Act (RFA), 5 U.S.C. chapter 6, the
Treasury Department and the IRS hereby
certify that these proposed regulations
will not have a significant economic im-
pact on a substantial number of small enti-
ties. Notwithstanding this certification, the
Treasury Department and the IRS invite
comments on any impact this rule would
have on small entities.
A. Proposed §1.199A-7(c)(3) and (d)(3)
Although proposed §1.199A-7(c)
(3) and (d)(3) will have an impact on a
substantial number of small entities, the
economic impact will not be significant.
The IRS creates the Business Master File
which contains data from Form 1120-C,
U.S. Income Tax Return for Cooperative
Associations. According to the Business
Master File data, in 2017, the IRS received
approximately 9,000 Forms 1120-C from
Cooperatives. Under the North American
Industry Classification System (NAICS),
a Cooperative is considered a small entity
if it has less than $750,000 in annual gross
receipts. Approximately 4,050 (45 per-
cent) of the 9,000 filers of Forms 1120-C
reported annual gross receipts of less than
$750,000. Therefore, a substantial num-
ber of small entities are affected by the
requirements in proposed §1.199A-7(c)
(3) and (d)(3).
Proposed §1.199A-7 provides rules
similar to those provided in §1.199A-6.
In §1.199A-6, relevant passthrough enti-
ties (RPEs) are not permitted to take the
section 199A deduction but are required
to determine and report the information
necessary for their direct and indirect
owners to determine their individual sec-
tion 199A(a) deductions. Section 1.199A-
6 requires RPEs to determine and report
on or attach to the RPEs’ Schedule K-1s to
the Form 1065 for each trade or business
in which the RPE was directly engaged
four items: (1) The amount of QBI, (2)
W-2 wages, (3) UBIA of qualified proper-
ty, and (4) SSTBs.
Although Cooperatives are not RPEs,
Cooperatives make distributions to pa-
trons that such patrons are permitted to
include in calculating their individual
section 199A(a) deductions. Proposed
§1.199A-7(c) and (d) require the Cooper-
atives to determine and report to their pa-
trons whether the distributions for which
the Cooperatives take deductions under
section 1382(b) and/or (c)(2), as applica-
ble, constitute qualified items of income,
gain, deduction, and loss and whether they
are from an SSTB in which the Coopera-
tive was directly engaged.
In TD 9847 the Treasury Department
and the IRS determined that the reporting

July 29, 2019 556 Bulletin No. 2019–31
burden in §1.199A-6 was estimated at 30
minutes to 20 hours, depending on indi-
vidual circumstances, with an estimated
average of 2.5 hours for all affected en-
tities, regardless of size. The burden on
entities with business receipts below $10
million was expected to be at the low-
er end of the range (30 minutes to 2.5
hours). The estimated compliance burden
for passthrough entities that issue Sched-
ules K-1 is $53 per hour. This estimate
was derived from the Business Taxpayer
Burden model developed by the IRS’s
Office of Research, Applied Analytics,
and Statistics (RAAS), which relates time
and out-of-pocket costs of business tax
preparation, derived from survey data, to
assets and receipts of affected taxpayers
along with other relevant variables. See
Tax Compliance Burden (John Guyton et
al., July 2018) at https://www.irs.gov/pub/
irs-soi/d13315.pdf. Thus, the annual ag-
gregate burden on businesses with gross
receipts below $10 million was estimat-
ed to be between $19.50 and $132.50 per
business. The Treasury Department and
the IRS determined in TD 9847 that the
requirements in §1.199A-6 imposed no
significant economic impact on affected
entities.
The reporting requirements under pro-
posed §1.199A-7(c)(3) and (d)(3) require
Specified Cooperatives to report only two
of the four pieces of information RPEs
are required to report under proposed
§1.199A-6: the amount of qualified items
of income, gain, deduction, and loss and
whether the distributions are from an
SSTB in which the Cooperative was di-
rectly engaged.
The burden imposed by proposed
§1.199A-7(c)(3) and (d)(3) only occurs
when a Cooperative has net income that
it may distribute to its patrons such that
the income will qualify for the income
tax deductions under section 1382(b)
and/or (c), as applicable. With respect
to this net income, Cooperatives already
know the source of their income and de-
ductions without which information they
would not be able to determine the cor-
rect distributions to their patrons and to
claim the income tax deduction for these
distributions under section 1382(b) and/
or (c)(2), as applicable. Finally, assum-
ing that the approximately 4,050 filers of
Forms 1120-C that reported annual gross
receipts of less than $750,000 in 2017
and that each business incurred half of
the higher figure of $132.50 ($66.25) de-
termined for the §1.199A-6 regulations
to satisfy the reporting requirements un-
der proposed §1.199A-7(c)(3) and (d)
(3), the annual burden imposed by the
reporting requirements would not exceed
$66.25 per business. Accordingly, the
Treasury Department and the IRS con-
clude that the requirements in proposed
§1.199A-7(c)(3) and (d)(3) will not im-
pose a significant economic impact on
small entities.
B. Proposed §§1.199A-7(h)(3) and
1.199A-8(h)(3)
Although proposed §§1.199A-7(h)(3)
and 1.199A-8(h)(3) will have an impact
on a substantial number of small entities,
this economic impact will not be signifi-
cant. As previously noted, in 2017, ap-
proximately 45 percent of Cooperatives
reported on Forms 1120-C gross receipts
of less than $750,000. Therefore, a sub-
stantial number of small entities are af-
fected by proposed §§1.199A-7(h)(3) and
1.199A-8(h)(3).
Proposed §§1.199A-7(h)(3) and
1.199A-8(h)(3) requires Cooperatives to
notify patrons if, pursuant to the transi-
tion rule in section 101 of the 2018 Act,
the patron is barred from using certain
qualified payments from a Cooperative
to claim a section 199A(a) deduction in
a taxable year because these qualified
payments are attributable to QPAI with
respect to which a deduction is allow-
able to the Cooperative under former
section 199 in a taxable year beginning
before January 1, 2018. The Coopera-
tive knows which patrons are impacted
since, in order to claim its deduction un-
der former section 199, the Cooperative
must identify which qualified payments
to use. The Treasury Department and
the IRS estimate that the annual burden
imposed by the requirement in proposed
§§1.199A-7(h)(3) and 1.199A-8(h)
(3) will be far less than the $66.25 per
business estimated for the requirements
in proposed §§1.199A-7(c)(3) and
1.199A-8(c)(3) discussed above, since
the Cooperatives know which patrons are
impacted and the reporting is limited to
informing these patrons that they cannot
use such qualified payments to calculate
their section 199A(a) deduction.
In addition, absent notice from the Co-
operatives, patrons would have no way
of determining whether they were barred
from claiming the section 199A(a) deduc-
tion using such qualified payments. Fi-
nally, Cooperatives are not able to claim
a deduction under former section 199 for
taxable years beginning after Decem-
ber 31, 2017. Therefore, the reporting
required by proposed §§1.199A-7(h)(3)
and 1.199A-8(h)(3) will be for a short
duration and have a limited impact on
Cooperatives. Accordingly, for all these
reasons, the requirements in proposed
§§1.199A-7(h)(3) and 1.199A-8(h)(3)
will not impose a significant economic
impact on small entities.
C. Proposed §§1.199A-7(f)(3) and
1.199A-8(d)(3)
Sections 1.199A-7(f)(3) and 1.199A-
8(d)(3) will not have a significant eco-
nomic impact on a substantial number
of small entities. This claim is based on
the fact that this rulemaking will impact
a population of Specified Cooperatives,
only a small percentage of which are con-
sidered small entities. According to the
Business Master File filing data from the
transcribed fields from the Forms 1120-
C for 2017, of the approximately 9,000
Forms 1120-C filed by Cooperatives, ap-
proximately 2,000 filers identified their
Cooperatives as involving agriculture or
horticulture using the NAICS. As noted
previously, a Cooperative is considered
small if it reports less than $750,000 in
annual gross receipts. Of the 2,000 filers
of Forms 1120-C identifying as Specified
Cooperatives, only 175 filers (less than
1 percent) reported annual gross receipts
of less than $750,000. Accordingly, pro-
posed §§1.199A-7(f)(3) and 1.199A-8(d)
(3) will not impose a significant economic
impact on a substantial number of small
entities.
D. Proposed §1.199A-8(f)
Although proposed §1.199A-8(f) will
have an impact on a substantial number
of small entities, this impact will not be
economically significant. According to the
Business Master File filing data from the

Bulletin No. 2019–31 557 July 29, 2019
transcribed fields from the Forms 1065
for 2017, the IRS estimates that there
were 3,954,000 partnerships reporting
their partners’ share of partnership items
on Schedules K-1 (Form 1065). The IRS
also identified approximately 407 differ-
ent partnerships that issued a Schedule
K-1 to 680 different Cooperatives in 2017.
The IRS does not have information as to
whether the 680 Cooperatives all qualified
as Specified Cooperatives.
Of the 407 different partnerships, the
IRS determined that 344 of the partner-
ships conducted activities in 2017 that
would have required the partnerships to
file under proposed §1.199A-8(f). The
IRS does not have sufficient data to de-
termine the type of business activities
of the remaining 63 partnerships. To be
as comprehensive and transparent as
possible in analyzing the potential im-
pact of the proposed regulations, it is
assumed that all 63 of these partnerships
would be required to file under proposed
§1.199A-8(f) and would be considered
small entities.
Of the 344 partnerships identified as
having both issued a Schedule K-1 to a
Cooperative and conducting eligible ac-
tivities in 2017, the IRS determined that
158 of these partnerships conducted activ-
ities for which the Small Business Admin-
istration (SBA) uses the number of em-
ployees to determine if an entity is a small
entity using the NAICS. The IRS deter-
mined that 153 of these 158 partnerships
would be small entities, while five would
not be small entities based on the reported
number of Forms W-2 filed in connection
with the Forms 1065 the partnerships filed
in 2017.
The SBA uses income to determine if
an entity is a small entity for the report-
ed business activities of the remaining
186 partnerships using the NAICS. Based
upon the reported income for 2017, 140
of the remaining 186 partnerships are
small entities, while 46 partnerships are
not small entities. Therefore, a substantial
number of small entities are affected by
requirements in proposed §1.199A-8(f).
The economic impact of proposed
§1.199A-8(f), however, will not be
significant because the information re-
quired to be reported is gross receipts
and related deductions. This information
is readily available to each partnership
and already known for the purpose of
determining tax obligations. Because
the information required to be reported
is already available and familiar to each
partnership, the reporting required by
proposed §1.199A-8(f) will not impose
a significant economic impact on small
entities.
Accordingly, the Treasury Department
and the IRS hereby certify that the pro-
posed regulations will not have a signif-
icant economic impact on a substantial
number of small entities. We invite public
comments with respect to this conclusion.
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.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) requires
that agencies assess anticipated costs and
benefits and take certain other actions be-
fore issuing a final rule that includes any
Federal mandate that may result in expen-
ditures in any one year by a state, local, or
tribal government, in the aggregate, or by
the private sector, of $100 million in 1995
dollars, updated annually for inflation.
In 2018, that threshold is approximately
$150 million. This rule does not include
any Federal mandate that may result in ex-
penditures by state, local, or tribal govern-
ments, or by the private sector in excess of
that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (titled Federal-
ism) prohibits an agency from publishing
any rule that has federalism implications
if the rule either imposes substantial, di-
rect compliance costs on state and local
governments, and is not required by stat-
ute, or preempts state law, unless the agen-
cy meets the consultation and funding re-
quirements of section 6 of the Executive
Order. This proposed rule does not have
federalism implications, and does not im-
pose substantial direct compliance costs
on state and local governments or preempt
state law, within the meaning of the Exec-
utive Order.
Comments and Requests for a Public
Hearing
The Treasury Department and the IRS
request comments on all aspects of the
proposed rules. Before these proposed
regulations are adopted as final regula-
tions, consideration will be given to any
written or electronic comments that are
submitted timely to the IRS. All com-
ments will be available for public inspec-
tion and copying. A public hearing may
be scheduled if requested in writing by
any person who timely submits written
comments. If a public hearing is sched-
uled, notice of the date, time, and place
for the hearing will be published in the
Federal Register.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, Notices and other guidance cit-
ed in this document are published in the
Internal Revenue Bulletin and are avail-
able from the Superintendent of Doc-
uments, U.S. Government Publishing
Office, Washington, DC 20402, or by
visiting the IRS website at http://www.
irs.gov.
Drafting Information
The principal author of these proposed
regulations is Theresa Melchiorre, Office
of Associate Chief Counsel (Passthroughs
and Special Industries). Other personnel
from the Treasury Department and the
IRS participated in their development.
* * * * *
Withdrawal of Notice of Proposed
Rulemaking
Accordingly, under the authority of
26 U.S.C. 7805, the notice of proposed
rulemaking (REG-136459-09) published
in the Federal Register (80 FR 51978) on
August 27, 2015, is withdrawn.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 is pro-
posed to be amended as follows:

July 29, 2019 558 Bulletin No. 2019–31
PART 1 – INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by:
1. Removing the entries for §§ 1.199-0
through 1.199-9, and
2. Adding entries in numerical order to
read in part as follows:
Authority: 26 U.S.C. 7805
* * * * *
Section 1.199A-7 also issued under 26
U.S.C. 199A(f)(4) and (g)(6).
Section 1.199A-8 also issued under 26
U.S.C. 199A(g)(6).
Section 1.199A-9 also issued under 26
U.S.C. 199A(g)(6).
Section 1.199A-10 also issued under
26 U.S.C. 199A(g)(6).
Section 1.199A-11 also issued under
26 U.S.C. 199A(g)(6).
Section 1.199A-12 also issued under
26 U.S.C. 199A(g)(6).
* * * * *
§§1.199-0 through 1.199-9 [Re-
moved]
Par. 2. Sections 1.199-0 through 1.199-
9 are removed.
Par. 3. Sections 1.199A-7 through
1.199A-12 are added to read as follows:
Sec.
* * * * *
1.199A-7 Section 199A(a) Rules for
Cooperatives and their Patrons.
1.199A-8 Deduction for income attrib-
utable to domestic production activities of
specified agricultural or horticultural co-
operatives.
1.199A-9 Domestic production gross
receipts.
1.199A-10 Allocation of costs of goods
sold (COGS) and other deductions to do-
mestic production gross receipts (DPGR),
and other rules.
1.199A-11 Wage limitation for the sec-
tion 199A(g) deduction.
1.199A-12 Expanded affiliated groups.
* * * * *
§1.199A-7 Section 199A(a) Rules for
Cooperatives and their Patrons.
(a) Overview—(1) In general. This
section provides guidance and special
rules on the application of the rules of
§§1.199A-1 through 1.199A-6 regarding
the deduction for qualified business in-
come (QBI) under section 199A(a) (sec-
tion 199A(a) deduction) of the Internal
Revenue Code (Code) by patrons (pa-
trons) of cooperatives to which Part I of
subchapter T of chapter 1 of subtitle A of
the Code applies (Cooperatives). Unless
otherwise provided in this section, all of
the rules in §§1.199A-1 through 1.199A-6
relating to calculating the section 199A(a)
deduction apply to patrons and Cooper-
atives. Paragraph (b) of this section pro-
vides special rules for patrons relating to
trades or businesses. Paragraph (c) of this
section provides special rules for patrons
and Cooperatives relating to the definition
of QBI. Paragraph (d) of this section pro-
vides special rules for patrons and Coop-
eratives relating to specified service trades
or businesses (SSTBs). Paragraph (e) of
this section provides special rules for pa-
trons relating to the statutory limitations
based on W-2 wages and unadjusted ba-
sis immediately after acquisition (UBIA)
of qualified property. Paragraph (f) of
this section provides special rules for
specified agricultural or horticultural co-
operatives (Specified Cooperatives) and
paragraph (g) of this section provides
examples for Specified Cooperatives and
their patrons. Paragraph (h) of this section
sets forth the applicability date of this sec-
tion and a special transition rule relating to
Specified Cooperatives and their patrons.
(2) At patron level. The section 199A(a)
deduction is applied at the patron level,
and patrons who are individuals (as de-
fined in §1.199A-1(a)(2)) may take the
section 199A(a) deduction.
(3) Definitions. For purposes of section
199A and §1.199A-7, the following defi-
nitions apply—
(i) Individual is defined in §1.199A-1(a)
(2).
(ii) Patron is defined in §1.1388-1(e).
(iii) Patronage and nonpatronage is
defined in §1.1388-1(f).
(iv) Relevant Passthrough Entity (RPE)
is defined in §1.199A-1(a)(9).
(v) Qualified payment is defined in
§1.199A-8(d)(2)(ii).
(vi) Specified Cooperative is defined in
§1.199A-8(a)(2) and is a subset of Coop-
eratives defined in §1.199A-7(a)(1).
(b) Trade or business. A patron (wheth-
er the patron is an RPE or an individu-
al) must determine whether it has one or
more trades or businesses that it directly
conducts as defined in §1.199A-1(b)(14).
To the extent a patron operating a trade
or business has income directly from
that business, the patron must follow the
rules of §§1.199A-1 through 1.199A-6
to calculate the section 199A deduction.
Patronage dividends or similar payments
are considered to be generated from the
trade or business the Cooperative con-
ducts on behalf of or with the patron, and
are tested by the Cooperative at its trade
or business level. A patron that receives
patronage dividends or similar payments,
as described in paragraph (c)(1) of this
section, from a Cooperative must follow
the rules of paragraphs (c) through (e) of
this section to calculate the section 199A
deduction.
(c) Qualified Business Income—(1)
In general. QBI means the net amount of
qualified items of income, gain, deduc-
tion, and loss with respect to any trade or
business as determined under the rules of
§1.199A-3(b). A qualified item of income
includes distributions for which the Coop-
erative is allowed a deduction under sec-
tion 1382(b) and (c)(2) (including patron-
age dividends or similar payments, such as
money, property, qualified written notices
of allocations, and qualified per-unit retain
certificates, as well as money or property
paid in redemption of a nonqualified writ-
ten notice of allocation (collectively pa-
tronage dividends or similar payments)),
provided such distribution is otherwise a
qualified item of income, gain, deduction,
or loss. See special rule in paragraph (d)
(3) of this section relating to SSTBs that
may affect QBI.
(2) QBI determinations made by pa-
tron. A patron must determine QBI for
each trade or business it directly conducts.
In situations where the patron receives
distributions described in paragraph (c)
(1) of this section, the Cooperative must
determine whether those distributions in-
clude qualified items of income, gain, de-
duction, and loss. These distributions may
be included in the QBI of the patron’s
trade or business:
(i) To the extent that those payments
are related to the patron’s trade or busi-
ness;
(ii) Are qualified items of income, gain,
deduction, and loss at the Cooperative’s
trade or business level;
(iii) Are not income from an SSTB at
the Cooperative’s trade or business level
(except as permitted by the threshold rules
(see §1.199A-5(a)(2)); and

Bulletin No. 2019–31 559 July 29, 2019
(iv) Provided the patron receives cer-
tain information from the Cooperative
about these payments as provided in para-
graphs (c)(3) and (d)(3) of this section.
(3) Qualified items of income, gain,
deduction, and loss determinations made
and reported by Cooperatives. In the case
of a Cooperative that makes distributions
described in paragraph (c)(1) of this sec-
tion to a patron, the Cooperative must de-
termine the amount of qualified items of
income, gain, deduction, and loss in those
distributions. Pursuant to this paragraph
(c)(3), the Cooperative must report the
amounts of qualified items with respect to
any non-SSTB of the Cooperative in the
distributions made to the patron on an at-
tachment to or on the Form 1099-PATR,
Taxable Distributions Received From
Cooperatives (Form 1099-PATR), (or any
successor form) issued by the Cooperative
to the patron, unless otherwise provid-
ed by the instructions to the Form. If the
Cooperative does not report on or before
the due date of the Form 1099-PATR the
amount of such qualified items of income,
gain, deduction, and loss in the distribu-
tions to the patron, the amount of distribu-
tions from the Cooperative that may be in-
cluded in the patron’s QBI is presumed to
be zero. See special rule in paragraph (d)
(3) of this section relating to reporting of
qualified items of income, gain, deduc-
tion, and loss with respect to SSTBs of the
Cooperative.
(d) Specified Service Trades or Busi-
nesses—(1) In general. This section pro-
vides guidance on the determination of
SSTBs. Unless otherwise provided in this
section, all of the rules in §1.199A-5 re-
lating to SSTBs apply to patrons of Co-
operatives.
(2) SSTB determinations made by pa-
tron. A patron (whether an RPE or an in-
dividual) must determine whether each
trade or business it directly conducts is an
SSTB.
(3) SSTB determinations made and
reported by Cooperatives. In the case of
a Cooperative that makes distributions
described in paragraph (c)(1) of this sec-
tion to a patron, the Cooperative must
determine whether the distributions from
the Cooperative include items of income,
gain, deduction, and loss from an SSTB di-
rectly conducted by the Cooperative, and
whether such items are qualified items of
income, gain, deduction, and loss with re-
spect to such SSTB. The Cooperative must
report to the patron the amount of income,
gain, deduction, and loss in the distribu-
tions that is a qualified item of income,
gain, deduction, and loss with respect to
such SSTB. The Cooperative must report
the amount on an attachment to or on the
Form 1099-PATR (or any successor form)
issued by the Cooperative to the patron,
unless otherwise provided by the instruc-
tions to the Form. If the Cooperative does
not report the amount on or before the due
date of the Form 1099-PATR, then only
the amount that a Cooperative reports as
qualified items of income, gain, deduc-
tion, and loss under §1.199A-7(c)(3) may
be included in the patron’s QBI, and the
remaining amount of distributions from
the Cooperative that may be included in
the patron’s QBI is presumed to be zero.
(e) W-2 wages and unadjusted basis
immediately after acquisition of qualified
property—(1) In general. This section
provides guidance on calculating a trade
or business’s W-2 wages and the UBIA of
qualified property properly allocable to
QBI.
(2) Determinations made by patron.
The determination of W-2 wages and
UBIA of qualified property must be made
for each trade or business by the patron
(whether an RPE or individual) that di-
rectly conducts the trade or business be-
fore applying the aggregation rules of
§1.199A-4. Unlike RPEs, Cooperatives
do not allocate their W-2 wages and UBIA
of qualified property to patrons.
(f) Special rules for patrons of Speci-
fied Cooperatives—(1) Section 199A(b)
(7) reduction. A patron of a Specified
Cooperative that receives a qualified pay-
ment must reduce its section 199A(a) de-
duction as provided in §1.199A-1(e)(7).
This reduction applies whether the Speci-
fied Cooperative passes through all, some,
or none of the Specified Cooperative’s
section 199A(g) deduction to the patron in
that taxable year. The proposed rules relat-
ing to the section 199A(g) deduction can
be found in §§1.199A-8 through 1.199A-
12.
(2) Deduction Calculation—(i) Allo-
cation method. If in any taxable year, a
patron receives both qualified payments
and income that is not a qualified pay-
ment in a trade or business, the patron
must allocate those items and related
deductions using a reasonable method
based on all the facts and circumstanc-
es. Different reasonable methods may
be used for different items and related
deductions of income, gain, deduction,
and loss. The chosen reasonable meth-
od for each item must be consistently
applied from one taxable year of the pa-
tron to another, and must clearly reflect
the income and expenses of each trade
or business. The overall combination of
methods must also be reasonable based
on all the facts and circumstances. The
books and records maintained for a trade
or business must be consistent with any
allocations under this paragraph (f)(2)(i).
(ii) Safe harbor. A patron with taxable
income under the threshold amount set
forth in section 199A(e)(2) is eligible to
use the safe harbor set forth in this para-
graph (f)(2)(ii) instead of the allocation
method set forth in paragraph (f)(2)(i) of
this section for any taxable year in which
the patron receives qualified payments
and income from other than qualified
payments in its trade or business. Under
the safe harbor the patron may apportion
its deductions and W-2 wages ratably be-
tween income from qualified payments
and income from other than qualified
payments for purposes of calculating the
reduction in paragraph (f)(1) of this sec-
tion. Accordingly, the amount of deduc-
tions apportioned to determine QBI allo-
cable to qualified payments is equal to the
proportion of the total deductions that the
amount of qualified payments bears to to-
tal gross receipts used to determine QBI.
The same proportion applies to determine
the amount of W-2 wages allocable to the
portion of the trade or business that re-
ceived qualified payments.
(3) Qualified payments notice require-
ment. A Specified Cooperative must re-
port the amount of the qualified payments
made to the eligible taxpayer, as defined in
section 199A(g)(2)(D), on an attachment
to or on the Form 1099-PATR (or any suc-
cessor form) issued by the Cooperative to
the patron, unless otherwise provided by
the instructions to the Form.
(g) Examples. The following examples
illustrate the provisions of paragraph (f)
of this section. For purposes of these ex-
amples, assume that the Specified Coop-
erative has satisfied the applicable written

July 29, 2019 560 Bulletin No. 2019–31
notice requirements in paragraphs (c)(3),
(d)(3) and (f)(3) of this section.
(1) Example 1. Patron of Specified Cooperative
with W-2 wages. (i) P, a grain farmer and patron of
nonexempt Specified Cooperative (C), delivered to
C during 2018 2% of all grain marketed through C
during such year. During 2019, P receives $20,000
in patronage dividends and $1,000 of allocated sec-
tion 199A(g) deduction from C related to the grain
delivered to C during 2018.
(ii) P has taxable income of $75,000 for 2019
(determined without regard to section 199A) and has
a filing status of married filing jointly. P’s QBI relat-
ed to its grain trade or business for 2019 is $50,000,
which consists of gross receipts of $150,000 from
sales to an independent grain elevator, per-unit retain
allocations received from C during 2019 of $80,000,
patronage dividends received from C during 2019
related to C’s 2018 net earnings of $20,000, and
expenses of $200,000 (including $50,000 of W-2
wages).
(iii) The portion of QBI from P’s grain trade
or business related to qualified payments received
from C during 2019 is $10,000, which consists of
per-unit retain allocations received from C during
2019 of $80,000, patronage dividends received from
C during 2019 related to C’s 2018 net earnings of
$20,000, and properly allocable expenses of $90,000
(including $25,000 of W-2 wages).
(iv) P’s deductible amount related to the grain
trade or business is 20% of QBI ($10,000) reduced
by the lesser of 9% of QBI related to qualified pay-
ments received from C ($900) or 50% of W-2 wag-
es related to qualified payments received from C
($12,500), or $9,100. As P does not have any other
trades or businesses, the combined QBI amount is
also $9,100.
(v) P’s deduction under section 199A for 2019
is $10,100, which consists of the combined QBI
amount of $9,100, plus P’s deduction passed through
from C of $1,000.
(2) Example 2. Patron of Specified Cooperative
without W-2 wages. (i) C and P have the same facts
for 2018 and 2019 as Example 1, except that P has
expenses of $200,000 that include zero W-2 wages
during 2019.
(ii) P’s deductible amount related to the grain
trade or business is 20% of QBI ($10,000) reduced
by the lesser of 9% of QBI related to qualified pay-
ments received from C ($900) or 50% of W-2 wages
related to qualified payments received from C ($0),
or $10,000.
(iii) P’s deduction under section 199A for 2019
is $11,000, which consists of the combined QBI
amount of $10,000, plus P’s deduction passed
through from C of $1,000.
(3) Example 3. Patron of Specified Cooperative
– Qualified Payments do not equal QBI and no sec-
tion 199A(g) passthrough. (i) P, a grain farmer and
a patron of a nonexempt Specified Cooperative (C),
during 2019, receives $60,000 in patronage divi-
dends, $100,000 in per-unit retain allocations, and
$0 of allocated section 199A(g) deduction from C
related to the grain delivered to C. C notifies P that
only $150,000 of the patronage dividends and per-
unit retain allocations are qualified payments be-
cause $10,000 of the payments are not attributable
to C’s qualified production activities income (QPAI).
(ii) P has taxable income of $90,000 (determined
without regard to section 199A) and has a filing sta-
tus of married filing jointly. P’s QBI related to its
grain trade or business is $45,000, which consists of
gross receipts of $95,000 from sales to an indepen-
dent grain elevator, plus $160,000 from C (all pay-
ments from C qualify as qualified items of income,
gain, deduction, and loss), less expenses of $210,000
(including $30,000 of W-2 wages).
(iii) The portion of QBI from P’s grain trade
or business related to qualified payments received
from C is $25,000, which consists of the qualified
payments received from C of $150,000, less the
properly allocable expenses of $125,000 (including
$18,000 of W-2 wages), which were determined us-
ing a reasonable method under paragraph (f)(2)(ii)
of this section.
(iv) P’s patron reduction is $2,250, which is the
lesser of 9% of QBI related to qualified payments
received from C, $2,250 (9% x $25,000), or 50% of
W-2 wages related to qualified payments received
from C, $9,000 (50% x $18,000). As P does not
have any other trades or businesses, the combined
QBI amount is $6,750 (20% of P’s total QBI, $9,000
(20% x $45,000), reduced by the patron reduction
of $2,250).
(v) P’s deduction under section 199A is $6,750,
which consists of the combined QBI amount of
$6,750.
(4) Example 4. Patron of Specified Cooperative
– Reasonable Method under paragraph (f)(2)(ii) of
this section. P is a grain farmer that has $45,000 of
QBI related to P’s grain trade or business in 2019.
P’s QBI consists of $105,000 of sales to an indepen-
dent grain elevator, $100,000 of per-unit retain allo-
cations, and $50,000 of patronage dividends from a
nonexempt Specified Cooperative (C), for which C
reports $150,000 of qualified payments to P as re-
quired by paragraph (f)(3) of this section. P’s grain
trade or business has $210,000 of expenses (includ-
ing $30,000 of W-2 wages). P delivered 65x bushels
of grain to C and sold 35x bushels of comparable
grain to the independent grain elevator. To allocate
the expenses between qualified payments ($150,000)
and other income ($105,000), P compares the bush-
els of grain delivered to C (65x) to the total bushels
of grain delivered to C and sold to the independent
grain elevator (100x). P determines $136,500 (65%
x $210,000) of expenses (including $19,500 of W-2
wages) are properly allocable to the qualified pay-
ments. The portion of QBI from P’s grain trade or
business related to qualified payments received from
C is $13,500, which consists of qualified payments
of $150,000 less the properly allocable expenses of
$136,500 (including $19,500 of W-2 wages). P’s
method of allocating expenses is a reasonable meth-
od under paragraph (f)(2)(ii) of this section.
(5) Example 5. Patron of Specified Cooperative
using safe harbor to allocate. (i) P is a grain farmer
with taxable income of $100,000 for 2019 (deter-
mined without regard to section 199A) and has a
filing status of married filing jointly. P’s QBI related
to P’s grain trade or business for 2019 is $50,000,
which consists of gross receipts of $180,000 from
sales to an independent grain elevator, per-unit retain
allocations received from a Specified Cooperative
(C) during 2019 of $15,000, patronage dividends
received from C during 2019 related to C’s 2018
net earnings of $5,000, and expenses of $150,000
(including $50,000 of W-2 wages). C also passed
through $1,800 of the section 199A(g) deduction to
P, which related to the grain delivered by P to the
Specified Cooperative during 2018. P uses the safe
harbor in paragraph (f)(2)(iii) of this section to deter-
mine the expenses (including W-2 wages) allocable
to the qualified payments.
(ii) Using the safe harbor to allocate P’s $150,000
of expenses, P allocates $15,000 of the expenses to
the qualified payments ($150,000 of expenses mul-
tiplied by the ratio (0.10) of qualified payments
($20,000) to total gross receipts ($200,000)). Using
the same ratio, P also determines there are $5,000 of
W-2 wages allocable ($50,000 multiplied by 0.10) to
the qualified payments.
(iii) The portion of QBI from P’s grain trade or
business related to qualified payments received from
C during 2019 is $5,000, which consists of per-unit
retain allocations received from C during 2019 of
$15,000, patronage dividends of $5,000, and prop-
erly allocable expenses of $15,000 (including $5,000
of W-2 wages).
(iv) P’s QBI related to the grain trade or business
is 20% of QBI ($10,000) reduced by the lesser of 9%
of QBI related to qualified payments received from
C ($450) or 50% of W-2 wages related to qualified
payments received from C ($2,500), or $9,550. As
P does not have any other trades or businesses, the
combined QBI amount is also $9,550.
(v) P’s deduction under section 199A for 2019
is $11,350, which consists of the combined QBI
amount of $9,550, plus P’s deduction passed through
from C of $1,800.
(h) Effective/applicability date—(1)
General rule. Except as provided in para-
graph (h)(2) of this section, the provisions
of this section apply to taxable years end-
ing after the date the Treasury decision
adopting these regulations as final regula-
tions is published in the Federal Register.
Taxpayers, however, may rely on these
regulations until that date, but only if the
taxpayers apply the rules in their entirety
and in a consistent manner.
(2) Transition rule for qualified pay-
ments of patrons of Cooperatives. No de-
ductions under section 199A are allowed to
patrons for any qualified payments that are
attributable to QPAI with respect to which
a deduction is allowable to the Specified
Cooperative under section 199 as in effect
on and before December 31, 2017, for a
taxable year of the Specified Cooperative
beginning before January 1, 2018.
(3) Notice from the Cooperative. If a
patron of a Cooperative cannot claim a de-
duction under section 199A for any qual-
ified payments described in the transition
rule set forth in paragraph (h)(2) of this
section, the Cooperative must report this
information on an attachment to or on the
Form 1099-PATR (or any successor form)

Bulletin No. 2019–31 561 July 29, 2019
issued by the Cooperative to the patron,
unless otherwise provided by the instruc-
tions to the Form.
§1.199A-8 Deduction for income at-
tributable to domestic production ac-
tivities of specified agricultural or hor-
ticultural cooperatives.
(a) Overview—(1) In general. This
section provides rules relating to the de-
duction for income attributable to do-
mestic production activities of a specified
agricultural or horticultural cooperative
(Specified Cooperative). This paragraph
(a) provides an overview and definitions
of certain terms. Paragraph (b) of this sec-
tion provides rules explaining the steps
a nonexempt Specified Cooperative per-
forms to calculate its section 199A(g)
deduction and includes definitions of rel-
evant terms. Paragraph (c) of this section
provides rules explaining the steps an ex-
empt Specified Cooperative performs to
calculate its section 199A(g) deduction.
Paragraph (d) of this section provides
rules for Specified Cooperatives passing
through the section 199A(g) deduction to
patrons. Paragraph (e) of this section pro-
vides examples that illustrate the provi-
sions of paragraphs (b), (c), and (d) of this
section. Paragraph (f) of this section pro-
vides guidance for Specified Cooperatives
that are partners in a partnership. Para-
graph (g) of this section provides guid-
ance on the recapture of a claimed sec-
tion 199A(g) deduction. Paragraph (h) of
this section provides effective dates. For
additional rules addressing an expanded
affiliated group (EAG) see §1.199A-12.
The principles of this section apply to the
EAG rules in §1.199A-12.
(2) Specified Cooperative—(i) In gen-
eral. Specified Cooperative means a coop-
erative to which Part I of subchapter T of
chapter 1 of subtitle A of the Internal Rev-
enue Code (Code) applies and which—
(A) Manufactures, produces, grows, or
extracts (MPGE) in whole or significant
part within the United States any agricul-
tural or horticultural product, or
(B) Is engaged in the marketing of agri-
cultural or horticultural products that have
been MPGE in whole or significant part
within the United States by the patrons of
the cooperative.
(ii) Additional rules. See §1.199A-9
for rules to determine if a Specified Coop-
erative has MPGE an agricultural or hor-
ticultural product in whole or significant
part within the United States.
(iii) Types of Specified Cooperatives. A
Specified Cooperative that is qualified as
a farmer’s cooperative organization under
section 521 is an exempt Specified Coop-
erative, while a Specified Cooperative not
so qualified is a nonexempt Specified Co-
operative.
(3) Patron is defined in §1.1388-1(e).
(4) Agricultural or horticultural prod-
ucts are agricultural, horticultural, viticul-
tural, and dairy products, livestock and the
products thereof, the products of poultry
and bee raising, the edible products of
forestry, and any and all products raised
or produced on farms and processed or
manufactured products thereof within the
meaning of the Cooperative Marketing
Act of 1926, 44 Stat. 802 (1926). Agricul-
tural or horticultural products also include
aquatic products that are farmed whether
by an exempt or a nonexempt Specified
Cooperative. In addition, agricultural or
horticultural products include fertilizer,
diesel fuel, and other supplies used in ag-
ricultural or horticultural production that
are MPGE by a Specified Cooperative.
Agricultural or horticultural products,
however, do not include intangible proper-
ty (other than as provided in the exception
in §1.199A-9(b)(2)); for example, an agri-
cultural or horticultural product includes
a seed that is grown, but does not include
the intangible property right to reproduce a
seed for sale. This exclusion of intangible
property does not apply to intangible char-
acteristics of any particular agricultural or
horticultural product. For example, gross
receipts from the sale of different variet-
ies of oranges would all qualify as DPGR
from the disposition of agricultural or
horticultural products (assuming all other
requirements of section 199A(g) are met).
However, gross receipts from the license
of the right to produce and sell a certain
variety of an orange would be considered
separate from the orange and not from an
agricultural or horticultural product.
(b) Steps for a nonexempt Specified Co-
operative in calculating deduction—(1) In
general. Except as provided in paragraph
(c)(3) of this section, this paragraph (b)
applies only to nonexempt Specified Co-
operatives.
(2) Step 1 - Gross receipts and related
deductions—(i) Identify. To determine the
section 199A(g) deduction, a Specified
Cooperative first identifies its patronage
and nonpatronage gross receipts and relat-
ed cost of goods sold (COGS), deductible
expenses, W-2 wages, etc. (deductions)
and allocates them between patronage
and nonpatronage. A single definition for
the term patronage and nonpatronage is
found in §1.1388-1(f).
(ii) Applicable gross receipts and
deductions. For all purposes of the sec-
tion 199A(g) deduction, a Specified Co-
operative can use only patronage gross
receipts and related deductions to calcu-
late qualified production activities income
(QPAI) as defined in paragraph (b)(4)(ii)
of this section, oil-related QPAI as defined
in paragraph (b)(7)(ii) of this section, or
the W-2 wage limitation in paragraph (b)
(5)(ii)(B) of this section. A Specified Co-
operative cannot use its nonpatronage
gross receipts and related deductions to
calculate its section 199A(g) deduction.
(iii) Gross receipts are the Specified
Cooperative’s receipts for the taxable
year that are recognized under the Speci-
fied Cooperative’s methods of accounting
used for Federal income tax purposes for
the taxable year. See §1.199A-12 if the
gross receipts are recognized in an inter-
company transaction within the meaning
of §1.1502-13. Gross receipts include to-
tal sales (net of returns and allowances)
and all amounts received for services. In
addition, gross receipts include any in-
come from investments and from inciden-
tal or outside sources. For example, gross
receipts include interest (except interest
under section 103 but including original
issue discount), dividends, rents, royal-
ties, and annuities, regardless of whether
the amounts are derived in the ordinary
course of the Specified Cooperative’s
trade or business. Gross receipts are not
reduced by COGS or by the cost of prop-
erty sold if such property is described in
section 1221(a)(1), (2), (3), (4), or (5).
Finally, gross receipts do not include
amounts received by the Specified Coop-
erative with respect to sales tax or other
similar state or local taxes if, under the ap-
plicable state or local law, the tax is legal-
ly imposed on the purchaser of the good
or service and the Specified Cooperative
merely collects and remits the tax to the
taxing authority. If, in contrast, the tax is
imposed on the Specified Cooperative un-

July 29, 2019 562 Bulletin No. 2019–31
der the applicable law, then gross receipts
include the amounts received that are allo-
cable to the payment of such tax.
(3) Step 2 – Determine gross receipts
that are DPGR—(i) In general. A Spec-
ified Cooperative examines its patronage
gross receipts to determine which of these
are DPGR. A Specified Cooperative does
not use nonpatronage gross receipts to de-
termine DPGR.
(ii) DPGR are the gross receipts of the
Specified Cooperative that are derived
from any lease, rental, license, sale, ex-
change, or other disposition of an agri-
cultural or horticultural product that is
MPGE by the Specified Cooperative or
its patrons in whole or significant part
within the United States. DPGR does not
include gross receipts derived from ser-
vices or the lease, rental, license, sale,
exchange, or other disposition of land
unless a de minimis or other exception
applies. See §1.199A-9 for additional
rules on determining if gross receipts are
DPGR.
(4) Step 3 – Determine QPAI—(i) In
general. A Specified Cooperative de-
termines QPAI from patronage DPGR
and patronage deductions identified in
paragraphs (b)(3)(ii) and (b)(2)(i) of this
section, respectively. A Specified Coop-
erative does not use nonpatronage gross
receipts or deductions to determine QPAI.
(ii) QPAI for the taxable year means an
amount equal to the excess (if any) of—
(A) DPGR for the taxable year, over
(B) The sum of—
(1) COGS that are allocable to DPGR,
and
(2) Other expenses, losses, or deduc-
tions (other than the section 199A(g)
deduction) that are properly allocable to
DPGR.
(C) QPAI computational rules. QPAI is
computed without taking into account the
section 199A(g) deduction or any deduc-
tion allowed under section 1382(b). See
§1.199A-10 for additional rules on calcu-
lating QPAI.
(5) Step 4 – Calculate deduction—(i)
In general. From QPAI and taxable in-
come, a Specified Cooperative calculates
its section 199A(g) deduction as provided
in paragraph (b)(5)(ii) of this section.
(ii) Deduction—(A) In general. A
Specified Cooperative is allowed a deduc-
tion equal to 9 percent of the lesser of—
(1) QPAI of the Specified Cooperative
for the taxable year, or
(2) Taxable income of the Specified
Cooperative for the taxable year.
(B) W-2 wage limitation. The deduc-
tion allowed under paragraph (b)(5)(ii)(A)
of this section for any taxable year cannot
exceed 50 percent of the patronage W-2
wages attributable to DPGR for the tax-
able year. See §1.199A-11 for additional
rules on calculating the patronage W-2
wage limitation.
(C) Taxable income. Taxable income is
defined in section 1382 and §1.1382-1 and
§1.1382-2. For purposes of determining
the amount of the deduction allowed under
paragraph (b)(5)(ii) of this section, taxable
income is limited to taxable income and
related deductions from patronage sourc-
es. Patronage net operating losses (NOLs)
reduce taxable income. Taxable income is
computed without taking into account the
section 199A(g) deduction or any deduc-
tion allowable under section 1382(b). Tax-
able income is determined using the same
method of accounting used to determine
distributions under section 1382(b) and
qualified payments to eligible taxpayers.
(6) Use of patronage section 199A(g)
deduction. Except as provided in
§1.199A-12(c)(2) related to the rules for
EAGs, the patronage section 199A(g) de-
duction cannot create or increase a patron-
age or nonpatronage NOL or the amount
of a patronage or nonpatronage NOL car-
ryover or carryback, if applicable, in ac-
cordance with section 172. A patronage
section 199A(g) deduction can be applied
only against patronage income and deduc-
tions. A patronage section 199A(g) de-
duction that is not used in the appropriate
taxable year is lost.
(7) Special rules for nonexempt Spec-
ified Cooperatives that have oil-related
QPAI—(i) Reduction of section 199A(g)
deduction. If a Specified Cooperative has
oil-related QPAI for any taxable year,
the amount otherwise allowable as a de-
duction under paragraph (b)(5)(ii) of this
section must be reduced by 3 percent of
the least of—
(A) Oil-related QPAI of the Specified
Cooperative for the taxable year,
(B) QPAI of the Specified Cooperative
for the taxable year, or
(C) Taxable income of the Specified
Cooperative for the taxable year.
(ii) Oil-related QPAI means, for any
taxable year, the patronage QPAI that is
attributable to the production, refining,
processing, transportation, or distribution
of oil, gas, or any primary product thereof
(within the meaning of section 927(a)(2)
(C), as in effect before its repeal) during
such taxable year. Oil-related QPAI for
any taxable year is an amount equal to the
excess (if any) of patronage DPGR de-
rived from the production, refining or pro-
cessing of oil, gas, or any primary product
thereof (oil-related DPGR) over the sum
of—
(A) COGS of the Specified Coopera-
tive that is allocable to such receipts; and
(B) Other expenses, losses, or deduc-
tions (other than the section 199A(g)
deduction) that are properly allocable to
such receipts.
(iii) Special rule for patronage oil-re-
lated DPGR. Oil-related DPGR does not
include gross receipts derived from the
transportation or distribution of oil, gas,
or any primary product thereof. However,
to the extent that the nonexempt Specified
Cooperative treats gross receipts derived
from transportation or distribution of oil,
gas, or any primary product thereof as part
of DPGR under §1.199A-9(j)(3)(i), or un-
der §1.199A-9(j)(3)(i)(B), then the Speci-
fied Cooperative must treat those patron-
age gross receipts as oil-related DGPR.
(iv) Oil includes oil recovered from
both conventional and non-conventional
recovery methods, including crude oil,
shale oil, and oil recovered from tar/oil
sands. The primary product from oil in-
cludes all products derived from the de-
structive distillation of oil, including vola-
tile products, light oils such as motor fuel
and kerosene, distillates such as naphtha,
lubricating oils, greases and waxes, and
residues such as fuel oil. The primary
product from gas means all gas and asso-
ciated hydrocarbon components from gas
wells or oil wells, whether recovered at
the lease or upon further processing, in-
cluding natural gas, condensates, liquefied
petroleum gases such as ethane, propane,
and butane, and liquid products such as
natural gasoline. The primary products
from oil and gas provided in this paragraph
(b)(7)(iv) are not intended to represent ei-
ther the only primary products from oil or
gas, or the only processes from which pri-
mary products may be derived under ex-

Bulletin No. 2019–31 563 July 29, 2019
isting and future technologies. Examples
of non-primary products include, but are
not limited to, petrochemicals, medicinal
products, insecticides, and alcohols.
(c) Exempt Specified Cooperatives—
(1) In general. This paragraph (c) applies
only to exempt Specified Cooperatives.
(2) Two section 199A(g) deductions.
The Specified Cooperative must calculate
two separate section 199A(g) deductions,
one patronage sourced and the other non-
patronage sourced. Patronage and non-
patronage gross receipts, related COGS
that are allocable to DPGR, and other ex-
penses, losses, or deductions (other than
the section 199A(g) deduction) that are
properly allocable to DPGR (deductions),
DPGR, QPAI, NOLs, W-2 wages, etc. are
not netted to calculate these two separate
section 199A(g) deductions.
(3) Exempt Specified Cooperative pa-
tronage section 199A(g) deduction. The
Specified Cooperative calculates its pa-
tronage section 199A(g) deduction fol-
lowing steps 1 through 4 in paragraphs (b)
(2) through (5) of this section as if it were
a nonexempt Specified Cooperative.
(4) Exempt Specified Cooperative
nonpatronage section 199A(g) deduc-
tion—(i) In general. The Specified Co-
operative calculates its nonpatronage sec-
tion 199A(g) deduction following steps 2
through 4 in paragraphs (b)(2) through (5)
of this section using only nonpatronage
gross receipts and related nonpatronage
deductions. For purposes of determin-
ing the amount of the nonpatronage sec-
tion 199A(g) deduction allowed under
paragraph (b)(5)(ii) of this section, tax-
able income is limited to taxable income
and related deductions from nonpatron-
age sources. Nonpatronage NOLs reduce
taxable income. Taxable income is com-
puted without taking into account the sec-
tion 199A(g) deduction or any deduction
allowable under section 1382(c). Taxable
income is determined using the same
method of accounting used to determine
distributions under section 1382(c)(2).
(ii) Use of nonpatronage sec-
tion 199A(g) deduction. Except as pro-
vided in §1.199A-12(c)(2) related to the
rules for EAGs, the nonpatronage sec-
tion 199A(g) deduction cannot create
or increase a nonpatronage NOL or the
amount of nonpatronage NOL carryover
or carryback, if applicable, in accordance
with section 172. A Specified Cooper-
ative cannot allocate its nonpatronage
section 199A(g) deduction under para-
graph (d) of this section and can apply the
nonpatronage section 199A(g) deduction
only against its nonpatronage income and
deductions. As is the case for the patron-
age section 199A(g) deduction, the non-
patronage section 199A(g) deduction that
a Specified Cooperative does not use in
the appropriate taxable year is lost.
(d) Discretion to pass through de-
duction—(1) In general. A Specified
Cooperative may, at its discretion, pass
through all, some, or none of its patron-
age section 199A(g) deduction to an el-
igible taxpayer. An eligible taxpayer is
a patron other than a C corporation or a
Specified Cooperative. A Specified Co-
operative member of a federated cooper-
ative may pass through the patronage sec-
tion 199A(g) deduction it receives from
the federated cooperative to its member
patrons that are eligible taxpayers.
(2) Amount of deduction being passed
through—(i) In general. A Specified Co-
operative is permitted to pass through to
an eligible taxpayer an amount equal to
the portion of the Specified Cooperative’s
section 199A(g) deduction that is allowed
with respect to the portion of the coop-
erative’s QPAI that is attributable to the
qualified payments the Specified Cooper-
ative distributed to the eligible taxpayer
during the taxable year and identified on
the notice required in §1.199A-7(f)(3) on
an attachment to or on the Form 1099-
PATR, Taxable Distributions Received
From Cooperatives (Form 1099-PATR),
(or any successor form) issued by the
Specified Cooperative to the eligible
taxpayer, unless otherwise provided by
the instructions to the Form. The notice
requirement to pass through the section
199A(g) deduction is in paragraph (d)(3)
of this section.
(ii) Qualified payment means any
amount of a patronage dividend or per-
unit retain allocation, as described in sec-
tion 1385(a)(1) or (3) received by a patron
from a Specified Cooperative that is at-
tributable to the portion of the Specified
Cooperative’s QPAI, for which the coop-
erative is allowed a section 199A(g) de-
duction. For this purpose, patronage divi-
dends include any advances on patronage
and per-unit retain allocations include per-
unit retains paid in money during the tax-
able year. A Specified Cooperative calcu-
lates its qualified payment using the same
method of accounting it uses to calculate
its taxable income.
(3) Notice requirement to pass through
deduction. A Specified Cooperative must
identify in a written notice the amount
of the section 199A(g) deduction being
passed through to the eligible taxpayer.
This written notice must be mailed by
the Specified Cooperative to the eligible
taxpayer no later than the 15th day of
the ninth month following the close of
the taxable year of the Specified Coop-
erative. The Specified Cooperative may
use the same written notice, if any, that
it uses to notify the eligible taxpayer of
the eligible taxpayer’s respective alloca-
tions of patronage distributions, or may
use a separate timely written notice(s) to
comply with this section. The Specified
Cooperative must report the amount of
section 199A(g) deduction passed through
to the eligible taxpayer on an attachment
to or on the Form 1099-PATR (or any suc-
cessor form) issued by the Specified Co-
operative to the eligible taxpayer, unless
otherwise provided by the instructions to
the Form.
(4) Section 199A(g) deduction allo-
cated to eligible taxpayer. An eligible
taxpayer may deduct the lesser of the sec-
tion 199A(g) deduction identified on the
notice described in paragraph (d)(3) of
this section or the eligible taxpayer’s tax-
able income in the taxable year in which
the eligible taxpayer receives the timely
written notice described in paragraph (d)
(3) of this section. For this purpose, the
eligible taxpayer’s taxable income is de-
termined without taking into account the
section 199A(g) deduction being passed
through to the eligible taxpayer and after
taking into account any section 199A(a)
deduction allowed to the eligible taxpay-
er. Any section 199A(g) deduction the
eligible taxpayer does not use in the tax-
able year in which the eligible taxpayer
receives the notice (received on or before
the due date of the Form 1099-PATR)
is lost and cannot be carried forward or
back to other taxable years. The taxable
income limitation for the section 199A(a)
deduction set forth in section 199A(b)
(3) and §1.199A-1(a) and (b) does not
apply to limit the deductibility of the sec-

July 29, 2019 564 Bulletin No. 2019–31
tion 199A(g) deduction passed through to
the eligible taxpayer.
(5) Special rules for eligible taxpay-
ers that are Specified Cooperatives. A
Specified Cooperative that receives a sec-
tion 199A(g) deduction as an eligible tax-
payer can take the deduction only against
patronage gross income and related de-
ductions.
(6) W-2 wage limitation. The W-2 wage
limitation described in paragraph (b)(5)
(ii)(B) of this section is applied at the co-
operative level whether or not the Speci-
fied Cooperative chooses to pass through
some or all of the section 199A(g) deduc-
tion. Any section 199A(g) deduction that
has been passed through by a Specified
Cooperative to an eligible taxpayer is not
subject to the W-2 wage limitation a sec-
ond time at the eligible taxpayer’s level.
(7) Specified Cooperative denied sec-
tion 1382 deduction for portion of qual-
ified payments. A Specified Cooperative
must reduce its section 1382 deduction
under section 1382(b) and/or (c), as appli-
cable) by an amount equal to the portion
of any qualified payment that is attribut-
able to the Specified Cooperative’s sec-
tion 199A(g) deduction passed through
to the eligible taxpayer. This means the
Specified Cooperative must reduce its sec-
tion 1382 deduction in an amount equal
to the section 199A(g) deduction passed
through to its eligible taxpayers.
(8) No double counting. A qualified
payment received by a Specified Cooper-
ative that is a patron of a Specified Co-
operative is not taken into account by the
patron for purposes of section 199A(g).
(e) Examples. The following examples
illustrate the application of paragraphs (b),
(c), and (d) of this section. Assume for
each example that the Specified Coopera-
tive sent all required notices to patrons on
or before the due date of the Form 1099-
PATR.
(1) Example 1. Nonexempt Specified Coopera-
tive calculating section 199A(g) deduction. (i) C is
a grain marketing nonexempt Specified Coopera-
tive, with $5,250,000 in gross receipts during 2018
from the sale of grain grown by its patrons. C paid
$4,000,000 to its patrons at the time the grain was
delivered in the form of per-unit retain allocations
pursuant to an agreement and another $1,000,000 in
patronage dividends after the close of the 2018 tax-
able year. C has other expenses of $250,000 during
2018, including $100,000 of W-2 wages.
(ii) C has DPGR of $5,250,000 and QPAI as
defined in §1.199A-8(b)(4)(ii) of $5,000,000 for
2018. C’s section 199A(g) deduction is equal to the
least of 9% of QPAI ($450,000), 9% of taxable in-
come ($450,000), or 50% of W-2 wages ($50,000).
C passes through the entire section 199A(g) de-
duction to its patrons. Accordingly, C reduces
its $5,000,000 deduction allowable under sec-
tion 1382(b) (relating to the $1,000,000 patronage
dividends and $4,000,000 per-unit retain alloca-
tions) by $50,000.
(2) Example 2. Nonexempt Specified Cooper-
ative calculating section 199A(g) deduction with
purchases. Same facts as Example 1, except C pur-
chased grain from its patrons for $4,000,000 and
these purchases are not per-unit retain allocations
described in section 1388(f). C allocated and report-
ed the $1,000,000 patronage dividends to its patrons
and provided notification (in accordance with the
requirements of §1.199A-7(f)(3)) that only the pa-
tronage dividends are treated as qualified payments
for purposes of its section 199A(g) deduction. C has
QPAI and taxable income of $1,000,000 ($5,250,000
– $4,000,000 – $250,000). C’s section 199A(g) de-
duction is the lesser of 9% of QPAI ($90,000), 9%
of taxable income without taking into account any
deduction under section 1382(b) ($90,000), or 50%
of W-2 wages ($50,000). C passes through the entire
section 199A(g) deduction to its patrons. Accord-
ingly, C reduces its $1,000,000 deduction allowable
under section 1382(b) by $50,000. Patrons do not in-
clude any of the $4,000,000 of payments when deter-
mining the reduction amount under section 199A(b)
(7).
(3) Example 3. Nonexempt Specified Cooperative
determines amounts included in QPAI and taxable
income. (i) C, a nonexempt Specified Cooperative,
offers harvesting services and markets the grain of
patrons and nonpatrons. C had gross receipts from
harvesting services and grain sales, and expenses
related to both. All of C’s harvesting services were
performed for their patrons, and 75% of the grain
sales were for patrons.
(ii) C identifies 75% of the gross receipts and
related expenses from grain sales and 100% of the
gross receipts and related expenses from the harvest-
ing services as patronage sourced. C identifies 25%
of the gross receipts and related expenses from grain
sales as nonpatronage sourced.
(iii) C does not include any nonpatronage gross
receipts or related expenses from grain sales in ei-
ther QPAI or taxable income when calculating the
section 199A(g) deduction. C’s QPAI includes the
patronage DPGR, less related expenses (allocable
COGS, wages and other expenses). C’s taxable in-
come includes the patronage gross receipts, whether
such gross receipts are DPGR or non-DPGR.
(iv) C allocates and reports patronage dividends
to its harvesting patrons and grain marketing pa-
trons. C also notifies its grain marketing patrons (in
accordance with the requirements of §1.199A-7(f)
(3)) that their patronage dividends are qualified
payments used in C’s section 199A(g) computation.
The patrons must use this information for purposes
of computing their section 199A(b)(7) reduction to
their section 199A(a) deduction (see §1.199A-7(f)).
(4) Example 4. Nonexempt Specified Coopera-
tive with patronage and nonpatronage gross receipts
and related deductions. (i) C, a nonexempt Specified
Cooperative, markets corn grown by its patrons in
the United States. For the calendar year ending De-
cember 31, 2020, C derives gross receipts from the
marketing activity of $1,800. Such gross receipts
qualify as DPGR. Assume C has $800 of expenses
(including COGS, other expenses, and $400 of W-2
wages) properly allocable to DPGR, and a $1,000
deduction allowed under section 1382(b). C also de-
rives gross receipts from nonpatronage sources in the
amount of $500, and has nonpatronage deductions in
the amount of $400 (including COGS, other expens-
es, and $100 of W-2 wages).
(ii) C does not include any gross receipts or de-
ductions from nonpatronage sources when calculat-
ing the deduction under paragraph (b)(5)(ii) of this
section. C’s QPAI and taxable income both equal
$1,000 ($1,800 – 800). C’s deduction under para-
graph (b)(5)(ii) of this section for the taxable year is
equal to $90 (9% of $1,000), which does not exceed
$200 (50% of C’s W-2 wages properly allocable to
DPGR). C passes through $90 of the deduction to
patrons and C reduces its section 1382(b) deduction
by $90.
(5) Example 5. Exempt Specified Cooperative
with patronage and nonpatronage income and de-
ductions. (i) C, an exempt Specified Cooperative,
markets corn MPGE by its patrons in the United
States. For the calendar year ending December 31,
2020, C derives gross receipts from the marketing
activity of $1,800. For this activity assume C has
$800 of expenses (including COGS, other expenses,
and $400 of W-2 wages) properly allocable to DPGR,
and a $1,000 deduction under section 1382(b). C also
derives gross receipts from nonpatronage sources in
the amount of $500. Assume the gross receipts qual-
ify as DPGR. For this activity assume C has $400 of
expenses (including COGS, other expenses, and $20
of W-2 wages) properly allocable to DPGR and no
deduction under section 1382(c).
(ii) C calculates two separate section 199A(g)
deduction amounts. C’s section 199A(g) deduction
attributable to patronage sources is the same as the
deduction calculated by the nonexempt Specified
Cooperative in Example 1 in paragraph (e)(1) of this
section.
(iii) C’s nonpatronage QPAI and taxable income
is equal to $100 ($500 – $400). C’s deduction un-
der paragraph (c)(3) of this section that directs C to
use paragraph (b)(5)(ii) of this section attributable to
nonpatronage sources is equal to $9 (9% of $100),
which does not exceed $10 (50% of C’s W-2 wages
properly allocable to DPGR). C cannot pass through
any of the nonpatronage section 199A(g) deduction
amount to its patrons.
(6) Example 6. NOL. C, a nonexempt Specified
Cooperative, MPGE agricultural or horticultur-
al products. C is not part of an EAG as defined in
§1.199A-12. In 2018, C generates QPAI and taxable
income is $600, without taking into account any of
its deductions under section 1382(b), the deduction
under section 199A(g), or an NOL deduction. During
2018, C incurs W-2 wages as defined in §1.199A-11
of $300. C has an NOL carryover to 2018 of $500.
C’s deduction under this section for 2018 is $9 (9%
× (lesser of QPAI of $600 and taxable income of
$100 ($600 taxable income – $500 NOL)). Under
these facts the wage limitation does not act to limit
the deduction because the wage limitation is $150
(50% × $300).

Bulletin No. 2019–31 565 July 29, 2019
(7) Example 7. NOL. (i) C, a nonexempt Speci-
fied Cooperative, MPGE agricultural or horticultural
products. C is not part of an EAG. In 2018, C gen-
erates QPAI and taxable income of $100, without
taking into account any of its deductions under sec-
tion 1382(b), the deduction under section 199A(g),
or an NOL deduction. C has an NOL carryover to
2018 of $500 that reduces its taxable income for
2018 to $0. C’s section 199A(g) deduction for 2018
is $0 (9% × (lesser of QPAI of $100 and taxable in-
come of $0)).
(ii) Carryover to 2019. C’s taxable income for
purposes of determining its NOL carryover to 2019 is
$100. Accordingly, for purposes of section 199A(g),
C’s NOL carryover to 2019 is $400 ($500 NOL car-
ryover to 2018 – $100 NOL used in 2018).
(f) Special rule for Specified Cooper-
ative partners. In the case described in
section 199A(g)(5)(B), where a Specified
Cooperative is a partner in a partnership,
the partnership must separately identi-
fy and report on the Schedule K-1 of the
Form 1065, U.S. Return of Partnership
Income (or any successor form) issued
to the Specified Cooperative the cooper-
ative’s share of gross receipts and related
deductions, unless otherwise provided by
the instructions to the Form. The Specified
Cooperative determines what gross re-
ceipts reported by the partnership qualify
as DPGR and includes these gross receipts
and related deductions to calculate one
section 199A(g) deduction (in the case of
a nonexempt Specified Cooperative) or
two section 199A(g) deductions (in the
case of an exempt Specified Cooperative)
using the steps set forth in paragraphs (b)
and (c) of this section.
(g) Recapture of section 199A(g)
deduction. If the amount of the sec-
tion 199A(g) deduction that was passed
through to eligible taxpayers exceeds the
amount allowable as a section 199A(g)
deduction as determined on examination
or reported on an amended return, then
recapture of the excess will occur at the
Specified Cooperative level in the taxable
year the Specified Cooperative took the
excess section 199A(g) deduction.
(h) Applicability date. Except as pro-
vided in paragraph (h)(2) of §1.199A-7,
the provisions of this section apply to
taxable years ending after the date the
Treasury decision adopting these regula-
tions as final regulations is published in
the Federal Register. Taxpayers, howev-
er, may rely on these regulations until that
date, but only if the taxpayers apply the
rules in their entirety and in a consistent
manner.
§1.199A-9 Domestic production gross
receipts.
(a) Domestic production gross re-
ceipts—(1) In general. The provisions of
this section apply solely for purposes of
section 199A(g) of the Internal Revenue
Code (Code). The provisions of this sec-
tion provide guidance to determine what
gross receipts (defined in §1.199A-8(b)
(2)(iii)) are domestic production gross re-
ceipts (DPGR) (defined in §1.199A-8(b)
(3)(ii)). DPGR does not include gross re-
ceipts derived from services or the lease,
rental, license, sale, exchange, or other
disposition of land unless a de minimis or
other exception applies. Partners, includ-
ing partners in an EAG partnership de-
scribed in §1.199A-12(i)(1), may not treat
guaranteed payments under section 707(c)
as DPGR.
(2) Application to marketing coopera-
tives. For purposes of determining DPGR,
a Specified Cooperative (defined in
§1.199A-8(a)(2)) will be treated as having
manufactured, produced, grown, or ex-
tracted (MPGE) (defined in paragraph (f)
of this section) in whole or significant part
(defined in paragraph (h) of this section)
any agricultural or horticultural product
(defined in §1.199A-8(a)(4)) within the
United States (defined in paragraph (i) of
this section) marketed by the Specified
Cooperative which its patrons (defined in
§1.1388-1(e)) have so MPGE.
(b) Related persons—(1) In general.
Pursuant to 199A(g)(3)(D)(ii), DPGR
does not include any gross receipts derived
from agricultural or horticultural products
leased, licensed, or rented by the Specified
Cooperative for use by any related person.
A person is treated as related to another
person if both persons are treated as a sin-
gle employer under either section 52(a) or
(b) (without regard to section 1563(b)), or
section 414(m) or (o). Any other person
is an unrelated person for purposes of the
section 199A(g) deduction.
(2) Exceptions. Notwithstanding para-
graph (b)(1) of this section, gross receipts
derived from any agricultural or horti-
cultural product leased or rented by the
Specified Cooperative to a related person
may qualify as DPGR if the agricultural or
horticultural product is held for sublease
or rent, or is subleased or rented, by the
related person to an unrelated person for
the ultimate use of the unrelated person.
Similarly, notwithstanding paragraph (b)
(1) of this section, gross receipts derived
from a license of the right to reproduce an
agricultural or horticultural product to a
related person for reproduction and sale,
exchange, lease, or rental to an unrelated
person for the ultimate use of the unrelated
person are treated as gross receipts from a
disposition of an agricultural or horticul-
tural product and may qualify as DPGR.
(c) Allocating gross receipts—(1) In
general. A Specified Cooperative must de-
termine the portion of its gross receipts for
the taxable year that is DPGR and the por-
tion of its gross receipts that is non-DP-
GR using a reasonable method based on
all the facts and circumstances. Applica-
ble Federal income tax principles apply
to determine whether a transaction is, in
substance, a lease, rental, license, sale,
exchange, or other disposition the gross
receipts of which may constitute DPGR,
whether it is a service the gross receipts of
which may constitute non-DPGR, or some
combination thereof. For example, if a
Specified Cooperative sells an agricultural
or horticultural product and, in connection
with that sale, also provides services, the
Specified Cooperative must allocate its
gross receipts from the transaction us-
ing a reasonable method based on all the
facts and circumstances that accurately
identifies the gross receipts that constitute
DPGR and non-DPGR in accordance with
the requirements of §§1.199A-8(b) and/or
(c). The chosen reasonable method must
be consistently applied from one taxable
year to another and must clearly reflect the
portion of gross receipts for the taxable
year that is DPGR and the portion of gross
receipts that is non-DPGR. The books and
records maintained for gross receipts must
be consistent with any allocations under
this paragraph (c)(1).
(2) Reasonable method of alloca-
tion. If a Specified Cooperative has the
information readily available and can,
without undue burden or expense, specif-
ically identify whether the gross receipts
are derived from an item (and thus, are
DPGR), then the Specified Cooperative
must use that specific identification to
determine DPGR. If the Specified Co-
operative does not have information
readily available to specifically identify
whether gross receipts are derived from

July 29, 2019 566 Bulletin No. 2019–31
an item or cannot, without undue burden
or expense, specifically identify whether
gross receipts are derived from an item,
then the Specified Cooperative is not re-
quired to use a method that specifically
identifies whether the gross receipts are
derived from an item but can use a rea-
sonable allocation method. Factors taken
into consideration in determining wheth-
er the Specified Cooperative’s method of
allocating gross receipts between DPGR
and non-DPGR is reasonable include
whether the Specified Cooperative uses
the most accurate information avail-
able; the relationship between the gross
receipts and the method used; the accu-
racy of the method chosen as compared
with other possible methods; whether the
method is used by the Specified Cooper-
ative for internal management or other
business purposes; whether the method
is used for other Federal or state income
tax purposes; the time, burden, and cost
of using alternative methods; and wheth-
er the Specified Cooperative applies the
method consistently from year to year.
(3) De minimis rules—(i) DPGR. A
Specified Cooperative’s applicable gross
receipts as provided in §§1.199A-8(b)
and/or (c) may be treated as DPGR if less
than 5 percent of the Specified Coopera-
tive’s total gross receipts are non-DPGR
(after application of the exceptions pro-
vided in §1.199A-9(j)(3)). If the amount
of the Specified Cooperative’s gross
receipts that are non-DPGR equals or
exceeds 5 percent of the Specified Co-
operative’s total gross receipts, then,
except as provided in paragraph (c)(3)
(ii) of this section, the Specified Cooper-
ative is required to allocate all gross re-
ceipts between DPGR and non-DPGR in
accordance with paragraph (c)(1) of this
section. If a Specified Cooperative is a
member of an expanded affiliated group
(EAG) (defined in §1.199A-12), but is
not a member of a consolidated group,
then the determination of whether less
than 5 percent of the Specified Coopera-
tive’s total gross receipts are non-DPGR
is made at the Specified Cooperative level.
If a Specified Cooperative is a member of
a consolidated group, then the determi-
nation of whether less than 5 percent of
the Specified Cooperative’s total gross re-
ceipts are non-DPGR is made at the con-
solidated group level. See §1.199A-12(d).
(ii) Non-DPGR. A Specified Coopera-
tive’s applicable gross receipts as provid-
ed in §§1.199A-8(b) and/or (c) may be
treated as non-DPGR if less than 5 percent
of the Specified Cooperative’s total gross
receipts are DPGR. If a Specified Cooper-
ative is a member of an EAG, but is not a
member of a consolidated group, then the
determination of whether less than 5 per-
cent of the Specified Cooperative’s total
gross receipts are DPGR is made at the
Specified Cooperative level. If a Specified
Cooperative is a member of a consolidated
group, then the determination of whether
less than 5 percent of the Specified Coop-
erative’s total gross receipts are DPGR is
made at the consolidated group level.
(d) Use of historical data for multi-
ple-year transactions. If a Specified Co-
operative recognizes and reports gross
receipts from upfront payments or other
similar payments on a Federal income tax
return for a taxable year, then the Spec-
ified Cooperative’s use of historical data
in making an allocation of gross receipts
from the transaction between DPGR and
non-DPGR may constitute a reasonable
method. If a Specified Cooperative makes
allocations using historical data, and sub-
sequently updates the data, then the Speci-
fied Cooperative must use the more recent
or updated data, starting in the taxable
year in which the update is made.
(e) Determining DPGR item-by-item—
(1) In general. For purposes of the sec-
tion 199A(g) deduction, a Specified Co-
operative determines, using a reasonable
method based on all the facts and circum-
stances, whether gross receipts qualify as
DPGR on an item-by-item basis (and not,
for example, on a division-by-division,
product line-by-product line, or transac-
tion-by-transaction basis). The chosen
reasonable method must be consistently
applied from one taxable year to anoth-
er and must clearly reflect the portion of
gross receipts that is DPGR. The books
and records maintained for gross receipts
must be consistent with any allocations
under this paragraph (e)(1).
(i) The term item means the agricul-
tural or horticultural product offered by
the Specified Cooperative in the normal
course of its trade or business for lease,
rental, license, sale, exchange, or other
disposition (for purposes of this para-
graph (e), collectively referred to as dispo-
sition) to customers, if the gross receipts
from the disposition of such product qual-
ify as DPGR; or
(ii) If paragraph (e)(1)(i) of this sec-
tion does not apply to the product, then
any component of the product described
in paragraph (e)(1)(i) of this section is
treated as the item, provided that the gross
receipts from the disposition of the prod-
uct described in paragraph (e)(1)(i) of this
section that are attributable to such com-
ponent qualify as DPGR. Each component
that meets the requirements under this
paragraph (e)(1)(ii) must be treated as a
separate item and a component that meets
the requirements under this paragraph (e)
(1)(ii) may not be combined with a com-
ponent that does not meet these require-
ments.
(2) Special rules. (i) For purposes of
paragraph (e)(1)(i) of this section, in no
event may a single item consist of two
or more products unless those products
are offered for disposition, in the normal
course of the Specified Cooperative’s
trade or business, as a single item (regard-
less of how the products are packaged).
(ii) In the case of agricultural or hor-
ticultural products customarily sold by
weight or by volume, the item is deter-
mined using the most common custom of
the industry (for example, barrels of oil).
(3) Exception. If the Specified Cooper-
ative MPGE agricultural or horticultural
products within the United States that it
disposes of, and the Specified Cooperative
leases, rents, licenses, purchases, or oth-
erwise acquires property that contains or
may contain the agricultural or horticul-
tural products (or a portion thereof), and
the Specified Cooperative cannot reason-
ably determine, without undue burden and
expense, whether the acquired property
contains any of the original agricultural
or horticultural products MPGE by the
Specified Cooperative, then the Specified
Cooperative is not required to determine
whether any portion of the acquired prop-
erty qualifies as an item for purposes of
paragraph (e)(1) of this section. There-
fore, the gross receipts derived from the
disposition of the acquired property may
be treated as non-DPGR. Similarly, the
preceding sentences apply if the Speci-
fied Cooperative can reasonably deter-
mine that the acquired property contains
agricultural or horticultural products (or a

Bulletin No. 2019–31 567 July 29, 2019
portion thereof) MPGE by the Specified
Cooperative, but cannot reasonably deter-
mine, without undue burden or expense,
how much, or what type, grade, etc., of the
agricultural or horticultural MPGE by the
Specified Cooperative the acquired prop-
erty contains.
(f) Definition of manufactured, pro-
duced, grown, or extracted (MPGE)—(1)
In general. Except as provided in para-
graphs (f)(2) and (3) of this section, the
term MPGE includes manufacturing, pro-
ducing, growing, extracting, installing,
developing, improving, and creating ag-
ricultural or horticultural products; mak-
ing agricultural or horticultural products
out of material by processing, manipulat-
ing, refining, or changing the form of an
article, or by combining or assembling
two or more articles; cultivating soil,
raising livestock, and farming aquatic
products. The term MPGE also includes
storage, handling, or other processing ac-
tivities (other than transportation activi-
ties) within the United States related to
the sale, exchange, or other disposition
of agricultural or horticultural products
only if the products are consumed in
connection with or incorporated into the
MPGE of agricultural or horticultural
products, whether or not by the Specified
Cooperative. The Specified Cooperative
(or the patron if section 1.199A-9(a)(2)
applies) must have the benefits and bur-
dens of ownership of the agricultural
or horticultural products under Federal
income tax principles during the period
the MPGE activity occurs in order for the
gross receipts derived from the MPGE of
the agricultural or horticultural products
to qualify as DPGR.
(2) Packaging, repackaging, or label-
ing. If the Specified Cooperative packag-
es, repackages, or labels agricultural or
horticultural products and engages in no
other MPGE activity with respect to those
agricultural or horticultural products, the
packaging, repackaging, or labeling does
not qualify as MPGE with respect to those
agricultural or horticultural products.
(3) Installing. If a Specified Coopera-
tive installs agricultural or horticultural
products and engages in no other MPGE
activity with respect to the agricultural
or horticultural products, the Specified
Cooperative’s installing activity does not
qualify as an MPGE activity. Notwith-
standing paragraph (j)(3)(i)(A) of this
section, if the Specified Cooperative in-
stalls agricultural or horticultural products
MPGE by the Specified Cooperative and
the Specified Cooperative has the bene-
fits and burdens of ownership of the ag-
ricultural or horticultural products under
Federal income tax principles during the
period the installing activity occurs, then
the portion of the installing activity that
relates to the agricultural or horticultural
products is an MPGE activity.
(4) Consistency with section 263A. A
Specified Cooperative that has MPGE ag-
ricultural or horticultural products for the
taxable year must treat itself as a producer
under section 263A with respect to the ag-
ricultural or horticultural products unless
the Specified Cooperative is not subject
to section 263A. A Specified Cooperative
that currently is not properly accounting
for its production activities under sec-
tion 263A, and wishes to change its meth-
od of accounting to comply with the pro-
ducer requirements of section 263A, must
follow the applicable administrative pro-
cedures issued under §1.446-1(e)(3)(ii)
for obtaining the Commissioner’s consent
to a change in accounting method (for fur-
ther guidance, for example, see Rev. Proc.
2015-13, 2015-5 IRB 419, or any applica-
ble subsequent guidance (see §601.601(d)
(2) of this chapter)).
(g) By the taxpayer. With respect to
the exception of the rules applicable to
an EAG and EAG partnerships under
§1.199A-12, only one Specified Coop-
erative may claim the section 199A(g)
deduction with respect to any qualifying
activity under paragraph (f) of this section
performed in connection with the same
agricultural or horticultural product. If an
unrelated party performs a qualifying ac-
tivity under paragraph (f) of this section
pursuant to a contract with a Specified Co-
operative (or its patron as relevant under
paragraph (a)(2) of this section), then only
if the Specified Cooperative (or its patron)
has the benefits and burdens of ownership
of the agricultural or horticultural prod-
uct under Federal income tax principles
during the period in which the qualifying
activity occurs is the Specified Coopera-
tive (or its patron) treated as engaging in
the qualifying activity.
(h) In whole or significant part de-
fined—(1) In general. Agricultural or
horticultural products must be MPGE in
whole or significant part by the Specified
Cooperative (or its patrons in the case de-
scribed in paragraph (a)(2) of this section)
and in whole or significant part within
the United States to qualify under sec-
tion 199A(g)(3)(D)(i). If a Specified Co-
operative enters into a contract with an un-
related person for the unrelated person to
MPGE agricultural or horticultural prod-
ucts for the Specified Cooperative and the
Specified Cooperative has the benefits and
burdens of ownership of the agricultural
or horticultural products under applicable
Federal income tax principles during the
period the MPGE activity occurs, then,
pursuant to paragraph (g) of this section,
the Specified Cooperative is considered
to MPGE the agricultural or horticultural
products under this section. The unrelated
person must perform the MPGE activity
on behalf of the Specified Cooperative in
whole or significant part within the United
States in order for the Specified Cooper-
ative to satisfy the requirements of this
paragraph (h)(1).
(2) Substantial in nature. Agricultural
or horticultural products will be treated as
MPGE in whole or in significant part by
the Specified Cooperative (or its patrons
in the case described in paragraph (a)(2)
of this section) within the United States
for purposes of paragraph (h)(1) of this
section if the MPGE of the agricultural or
horticultural products by the Specified Co-
operative within the United States is sub-
stantial in nature taking into account all
the facts and circumstances, including the
relative value added by, and relative cost
of, the Specified Cooperative’s MPGE
within the United States, the nature of
the agricultural or horticultural products,
and the nature of the MPGE activity that
the Specified Cooperative performs with-
in the United States. The MPGE of a key
component of an agricultural or horticul-
tural product does not, in itself, meet the
substantial-in-nature requirement with
respect to an agricultural or horticultural
product under this paragraph (h)(2). In
the case of an agricultural or horticultural
product, research and experimental activ-
ities under section 174 and the creation
of intangible assets are not taken into ac-
count in determining whether the MPGE
of the agricultural or horticultural product
is substantial in nature.

July 29, 2019 568 Bulletin No. 2019–31
(3) Safe harbor—(i) In general. A
Specified Cooperative (or its patrons in
the case described in paragraph (a)(2)
of this section) will be treated as having
MPGE an agricultural or horticultural
product in whole or in significant part
within the United States for purposes of
paragraph (h)(1) of this section if the di-
rect labor and overhead of such Specified
Cooperative to MPGE the agricultural or
horticultural product within the United
States account for 20 percent or more of
the Specified Cooperative’s COGS of the
agricultural or horticultural product, or in
a transaction without COGS (for exam-
ple, a lease, rental, or license), account
for 20 percent or more of the Specified
Cooperative’s unadjusted depreciable ba-
sis (as defined in paragraph (h)(3)(ii) of
this section) in property included in the
definition of agricultural or horticultur-
al products. For Specified Cooperatives
subject to section 263A, overhead is all
costs required to be capitalized under sec-
tion 263A except direct materials and di-
rect labor. For Specified Cooperatives not
subject to section 263A, overhead may
be computed using a reasonable method
based on all the facts and circumstances,
but may not include any cost, or amount
of any cost, that would not be required to
be capitalized under section 263A if the
Specified Cooperative were subject to sec-
tion 263A. Research and experimental ex-
penditures under section 174 and the costs
of creating intangible assets are not taken
into account in determining direct labor or
overhead for any agricultural or horticul-
tural product. In the case of agricultural or
horticultural products, research and exper-
imental expenditures under section 174
and any other costs incurred in the cre-
ation of intangible assets may be exclud-
ed from COGS or unadjusted depreciable
basis for purposes of determining whether
the Specified Cooperative meets the safe
harbor under this paragraph (h)(3). For
Specified Cooperatives not subject to sec-
tion 263A, the chosen reasonable method
to compute overhead must be consistently
applied from one taxable year to another
and must clearly reflect the Specified Co-
operative’s portion of overhead not sub-
ject to section 263A. The method must
also be reasonable based on all the facts
and circumstances. The books and records
maintained for overhead must be consis-
tent with any allocations under this para-
graph (h)(3)(i).
(ii) Unadjusted depreciable basis. The
term unadjusted depreciable basis means
the basis of property for purposes of sec-
tion 1011 without regard to any adjust-
ments described in section 1016(a)(2) and
(3). This basis does not reflect the reduc-
tion in basis for—
(A) Any portion of the basis the Speci-
fied Cooperative properly elects to treat as
an expense under sections 179 or 179C; or
(B) Any adjustments to basis provided
by other provisions of the Code and the
regulations under the Code (for example,
a reduction in basis by the amount of the
disabled access credit pursuant to sec-
tion 44(d)(7)).
(4) Special rules—(i) Contract with
an unrelated person. If a Specified Co-
operative enters into a contract with an
unrelated person for the unrelated person
to MPGE an agricultural or horticultural
product within the United States for the
Specified Cooperative, and the Specified
Cooperative is considered to MPGE the
agricultural or horticultural product pur-
suant to paragraph (f)(1) of this section,
then, for purposes of the substantial-in-na-
ture requirement under paragraph (h)(2)
of this section and the safe harbor under
paragraph (h)(3)(i) of this section, the
Specified Cooperative’s MPGE activities
or direct labor and overhead must include
both the Specified Cooperative’s MPGE
activities or direct labor and overhead to
MPGE the agricultural or horticultural
product within the United States as well
as the MPGE activities or direct labor
and overhead of the unrelated person to
MPGE the agricultural or horticultural
product within the United States under the
contract.
(ii) Aggregation. In determining
whether the substantial-in-nature require-
ment under paragraph (h)(2) of this sec-
tion or the safe harbor under paragraph (h)
(3)(i) of this section is met at the time the
Specified Cooperative disposes of an agri-
cultural or horticultural product—
(A) An EAG member must take into
account all of the previous MPGE activ-
ities or direct labor and overhead of the
other members of the EAG;
(B) An EAG partnership as defined in
§1.199A-12(i)(1) must take into account
all of the previous MPGE activities or
direct labor and overhead of all members
of the EAG in which the partners of the
EAG partnership are members (as well as
the previous MPGE activities of any other
EAG partnerships owned by members of
the same EAG); and
(C) A member of an EAG in which the
partners of an EAG partnership are mem-
bers must take into account all of the pre-
vious MPGE activities or direct labor and
overhead of the EAG partnership (as well
as those of any other members of the EAG
and any previous MPGE activities of any
other EAG partnerships owned by mem-
bers of the same EAG).
(i) United States defined. For purposes
of section 199A(g), the term United States
includes the 50 states, the District of Co-
lumbia, the territorial waters of the Unit-
ed States, and the seabed and subsoil of
those submarine areas that are adjacent to
the territorial waters of the United States
and over which the United States has ex-
clusive rights, in accordance with inter-
national law, with respect to the explora-
tion and exploitation of natural resources.
Consistent with its definition in section
7701(a)(9), the term United States does
not include possessions and territories of
the United States or the airspace or space
over the United States and these areas.
(j) Derived from the lease, rental, li-
cense, sale, exchange, or other dispo-
sition—(1) In general—(i) Definition.
The term derived from the lease, rental,
license, sale, exchange, or other disposi-
tion is defined as, and limited to, the gross
receipts directly derived from the lease,
rental, license, sale, exchange, or other
disposition of agricultural or horticultural
products even if the Specified Coopera-
tive has already recognized receipts from
a previous lease, rental, license, sale, ex-
change, or other disposition of the same
agricultural or horticultural products. Ap-
plicable Federal income tax principles ap-
ply to determine whether a transaction is,
in substance, a lease, rental, license, sale,
exchange, or other disposition, whether it
is a service, or whether it is some combi-
nation thereof.
(ii) Lease income. The financing and
interest components of a lease of agricul-
tural or horticultural products are consid-
ered to be derived from the lease of such
agricultural or horticultural products.
However, any portion of the lease income

Bulletin No. 2019–31 569 July 29, 2019
that is attributable to services or non-qual-
ified property as defined in paragraph (j)
(3) of this section is not derived from the
lease of agricultural or horticultural prod-
ucts.
(iii) Income substitutes. The proceeds
from business interruption insurance,
governmental subsidies, and governmen-
tal payments not to produce are treated
as gross receipts derived from the lease,
rental, license, sale, exchange, or other
disposition to the extent they are substi-
tutes for gross receipts that would qualify
as DPGR.
(iv) Exchange of property—(A) Ta x-
able exchanges. The value of property
received by the Specified Cooperative in
a taxable exchange of agricultural or hor-
ticultural products MPGE in whole or in
significant part by the Specified Cooper-
ative within the United States is DPGR
for the Specified Cooperative (assuming
all the other requirements of this section
are met). However, unless the Specified
Cooperative meets all of the requirements
under this section with respect to any ad-
ditional MPGE by the Specified Cooper-
ative of the agricultural or horticultural
products received in the taxable exchange,
any gross receipts derived from the sale by
the Specified Cooperative of the proper-
ty received in the taxable exchange are
non-DPGR, because the Specified Coop-
erative did not MPGE such property, even
if the property was an agricultural or hor-
ticultural product in the hands of the other
party to the transaction.
(B) Safe harbor. For purposes of para-
graph (j)(1)(iv)(A) of this section, the
gross receipts derived by the Specified
Cooperative from the sale of eligible
property (as defined in paragraph (j)(1)
(iv)(C) of this section) received in a tax-
able exchange, net of any adjustments be-
tween the parties involved in the taxable
exchange to account for differences in the
eligible property exchanged (for example,
location differentials and product differ-
entials), may be treated as the value of the
eligible property received by the Specified
Cooperative in the taxable exchange. For
purposes of the preceding sentence, the
taxable exchange is deemed to occur on
the date of the sale of the eligible proper-
ty received in the taxable exchange by the
Specified Cooperative, to the extent the
sale occurs no later than the last day of the
month following the month in which the
exchanged eligible property is received
by the Specified Cooperative. In addition,
if the Specified Cooperative engages in
any further MPGE activity with respect to
the eligible property received in the tax-
able exchange, then, unless the Specified
Cooperative meets the in-whole-or-in-
significant-part requirement under para-
graph (h)(1) of this section with respect
to the property sold, for purposes of this
paragraph (j)(1)(iv)(B), the Specified Co-
operative must also value the property
sold without taking into account the gross
receipts attributable to the further MPGE
activity.
(C) Eligible property. For purposes of
paragraph (j)(1)(iv)(B) of this section, eli-
gible property is—
(1) Oil, natural gas, or petrochemicals,
or products derived from oil, natural gas,
or petrochemicals; or
(2) Any other property or product des-
ignated by publication in the Internal Rev-
enue Bulletin (see § 601.601(d)(2)(ii)(b)
of this chapter).
(3) For this purpose, the term natural
gas includes only natural gas extracted
from a natural deposit and does not in-
clude, for example, methane gas extracted
from a landfill. In the case of natural gas,
production activities include all activities
involved in extracting natural gas from the
ground and processing the gas into pipe-
line quality gas.
(2) Hedging transactions—(i) In gen-
eral. For purposes of this section, if a
transaction is a hedging transaction with-
in the meaning of section 1221(b)(2)(A)
and §1.1221-2(b), is properly identified as
a hedging transaction in accordance with
§1.1221-2(f), and the risk being hedged
relates to property described in sec-
tion 1221(a)(1) that gives rise to DPGR or
to property described in section 1221(a)
(8) that is consumed in an activity that
gives rise to DPGR, then—
(A) In the case of a hedge of purchases
of property described in section 1221(a)
(1), income, deduction, gain, or loss on
the hedging transaction must be taken into
account in determining COGS;
(B) In the case of a hedge of sales of
property described in section 1221(a)(1),
income, deduction, gain, or loss on the
hedging transaction must be taken into ac-
count in determining DPGR; and
(C) In the case of a hedge of purchases
of property described in section 1221(a)
(8), income, deduction, gain, or loss on
the hedging transaction must be taken into
account in determining DPGR.
(ii) Allocation. The income, deduc-
tion, gain and loss from hedging trans-
actions described in paragraph (j)(2) of
this section must be allocated between the
patronage and nonpatronage (defined in
§1.1388-1(f)) sourced income and related
deductions of the Specified Cooperatives
consistent with the cooperative’s method
for determining patronage and nonpatron-
age income and deductions.
(iii) Effect of identification and non-
identification. The principles of §1.1221-
2(g) apply to a Specified Cooperative that
identifies or fails to identify a transaction
as a hedging transaction, except that the
consequence of identifying as a hedging
transaction a transaction that is not in fact
a hedging transaction described in para-
graph (j)(2) of this section, or of failing
to identify a transaction that the Specified
Cooperative has no reasonable grounds
for treating as other than a hedging trans-
action described in paragraph (j)(2) of this
section, is that deduction or loss (but not
income or gain) from the transaction is
taken into account under paragraph (j)(2)
of this section.
(iv) Other rules. See §1.1221-2(e) for
rules applicable to hedging by members
of a consolidated group and §1.446-4 for
rules regarding the timing of income, de-
ductions, gains or losses with respect to
hedging transactions.
(3) Allocation of gross receipts to em-
bedded services and non-qualified proper-
ty—(i) Embedded services and non-qual-
ified property—(A) In general. Except as
otherwise provided in paragraph (j)(3)(i)
(B) of this section, gross receipts derived
from the performance of services do not
qualify as DPGR. In the case of an em-
bedded service, that is, a service the price
of which, in the normal course of the
business, is not separately stated from the
amount charged for the lease, rental, li-
cense, sale, exchange, or other disposition
of agricultural or horticultural products,
DPGR includes only the gross receipts de-
rived from the lease, rental, license, sale,
exchange, or other disposition of agricul-
tural or horticultural products (assuming
all the other requirements of this section

July 29, 2019 570 Bulletin No. 2019–31
are met) and not any receipts attributable
to the embedded service. In addition,
DPGR does not include gross receipts de-
rived from the lease, rental, license, sale,
exchange, or other disposition of property
that does not meet all of the requirements
under this section (non-qualified proper-
ty). The allocation of the gross receipts
attributable to the embedded services or
non-qualified property will be deemed to
be reasonable if the allocation reflects the
fair market value of the embedded ser-
vices or non-qualified property.
(B) Exceptions. There are five excep-
tions to the rules under paragraph (j)(3)
(i)(A) of this section regarding embed-
ded services and non-qualified property.
A Specified Cooperative may include in
DPGR, if all the other requirements of this
section are met with respect to the under-
lying item of agricultural or horticultural
products to which the embedded services
or non-qualified property relate, the gross
receipts derived from—
(1) A qualified warranty, that is, a war-
ranty that is provided in connection with
the lease, rental, license, sale, exchange,
or other disposition of agricultural or hor-
ticultural products if, in the normal course
of the Specified Cooperative’s business—
(i) The price for the warranty is not sep-
arately stated from the amount charged for
the lease, rental, license, sale, exchange,
or other disposition of the agricultural or
horticultural products; and
(ii) The warranty is neither separately
offered by the Specified Cooperative nor
separately bargained for with customers
(that is, a customer cannot purchase the
agricultural or horticultural products with-
out the warranty);
(2) A qualified delivery, that is, a deliv-
ery or distribution service that is provided
in connection with the lease, rental, li-
cense, sale, exchange, or other disposition
of agricultural or horticultural products if,
in the normal course of the Specified Co-
operative’s business—
(i) The price for the delivery or dis-
tribution service is not separately stated
from the amount charged for the lease,
rental, license, sale, exchange, or other
disposition of the agricultural or horticul-
tural products; and
(ii) The delivery or distribution service
is neither separately offered by the Speci-
fied Cooperative nor separately bargained
for with customers (that is, a customer
cannot purchase the agricultural or horti-
cultural products without the delivery or
distribution service).
(3) A qualified operating manual, that
is, a manual of instructions that is provid-
ed in connection with the lease, rental, li-
cense, sale, exchange, or other disposition
of the agricultural or horticultural prod-
ucts if, in the normal course of the Speci-
fied Cooperative’s business—
(i) The price for the manual is not sepa-
rately stated from the amount charged for
the lease, rental, license, sale, exchange,
or other disposition of the agricultural or
horticultural products;
(ii) The manual is neither separately
offered by the Specified Cooperative nor
separately bargained for with customers
(that is, a customer cannot purchase the
agricultural or horticultural products with-
out the manual); and
(iii) The manual is not provided in con-
nection with a training course for custom-
ers.
(4) A qualified installation, that is, an
installation service for agricultural or
horticultural products that is provided in
connection with the lease, rental, license,
sale, exchange, or other disposition of the
agricultural or horticultural products if, in
the normal course of the Specified Coop-
erative’s business—
(i) The price for the installation service
is not separately stated from the amount
charged for the lease, rental, license, sale,
exchange, or other disposition of the agri-
cultural or horticultural products; and
(ii) The installation is neither separate-
ly offered by the Specified Cooperative
nor separately bargained for with custom-
ers (that is, a customer cannot purchase
the agricultural or horticultural products
without the installation service).
(5) A de minimis amount of gross
receipts from embedded services and
non-qualified property for each item of
agricultural or horticultural products may
qualify. For purposes of this exception,
a de minimis amount of gross receipts
from embedded services and non-qual-
ified property is less than 5 percent of
the total gross receipts derived from the
lease, rental, license, sale, exchange, or
other disposition of each item of agri-
cultural or horticultural products. In the
case of gross receipts derived from the
lease, rental, license, sale, exchange, or
other disposition of agricultural or horti-
cultural products that are received over a
period of time (for example, a multi-year
lease or installment sale), this de mini-
mis exception is applied by taking into
account the total gross receipts for the
entire period derived (and to be derived)
from the lease, rental, license, sale, ex-
change, or other disposition of the item
of agricultural or horticultural products.
For purposes of the preceding sentence,
if a Specified Cooperative treats gross
receipts as DPGR under this de minimis
exception, then the Specified Coopera-
tive must treat the gross receipts recog-
nized in each taxable year consistently
as DPGR. The gross receipts that the
Specified Cooperative treats as DPGR
under paragraphs (j)(3)(i)(B)(1) through
(4) of this section are treated as DPGR
for purposes of applying this de minimis
exception. This de minimis exception
does not apply if the price of a service
or non-qualified property is separately
stated by the Specified Cooperative, or
if the service or non-qualified property
is separately offered or separately bar-
gained for with the customer (that is, the
customer can purchase the agricultural or
horticultural products without the service
or non-qualified property).
(ii) Non-DPGR. Applicable gross re-
ceipts as provided in §§1.199A-8(b) and/
or (c) derived from the lease, rental, li-
cense, sale, exchange or other disposition
of an item of agricultural or horticultural
products may be treated as non-DPGR if
less than 5 percent of the Specified Coop-
erative’s total gross receipts derived from
the lease, rental, license, sale, exchange or
other disposition of that item are DPGR
(taking into account embedded services
and non-qualified property included in
such disposition, but not part of the item).
In the case of gross receipts derived from
the lease, rental, license, sale, exchange,
or other disposition of agricultural or hor-
ticultural products that are received over
a period of time (for example, a multi-
year lease or installment sale), this para-
graph (j)(5)(ii) is applied by taking into
account the total gross receipts for the
entire period derived (and to be derived)
from the lease, rental, license, sale, ex-
change, or other disposition of the item of
agricultural or horticultural products. For

Bulletin No. 2019–31 571 July 29, 2019
purposes of the preceding sentence, if the
Specified Cooperative treats gross receipts
as non-DPGR under this de minimis ex-
ception, then the Specified Cooperative
must treat the gross receipts recognized in
each taxable year consistently as non-DP-
GR.
(k) Applicability date. The provisions
of this section apply to taxable years end-
ing after the date the Treasury decision
adopting these regulations as final regula-
tions is published in the Federal Register.
Taxpayers, however, may rely on these
regulations until that date, but only if the
taxpayers apply the rules in their entirety
and in a consistent manner.
§1.199A-10 Allocation of costs of
goods sold (COGS) and other deduc-
tions to domestic production gross re-
ceipts (DPGR), and other rules.
(a) In general. The provisions of this
section apply solely for purposes of sec-
tion 199A(g) of the Internal Revenue
Code (Code). The provisions of this sec-
tion provide additional guidance on de-
termining qualified production activities
income (QPAI) as described and defined
in §1.199A-8(b)(4)(ii).
(b) COGS allocable to DPGR—(1)
In general. When determining its QPAI,
the Specified Cooperative (defined in
§1.199A-8(a)(2)) must subtract from
its DPGR (defined in §1.199A-8(b)(3)
(ii)) the COGS allocable to its DPGR.
The Specified Cooperative determines
its COGS allocable to DPGR in accor-
dance with this paragraph (b)(1) or, if
applicable, paragraph (f) of this section.
In the case of a sale, exchange, or other
disposition of inventory, COGS is equal
to beginning inventory of the Specified
Cooperative plus purchases and produc-
tion costs incurred during the taxable
year and included in inventory costs by
the Specified Cooperative, less ending
inventory of the Specified Cooperative.
In determining its QPAI, the Specified
Cooperative does not include in COGS
any payment made, whether during the
taxable year, or included in beginning
inventory, for which a deduction is al-
lowed under section 1382(b) and/or (c),
as applicable. See §1.199A-8(b)(4)(C).
COGS is determined under the methods
of accounting that the Specified Coop-
erative uses to compute taxable income.
See sections 263A, 471, and 472. If sec-
tion 263A requires the Specified Cooper-
ative to include additional section 263A
costs (as defined in §1.263A-1(d)(3)) in
inventory, additional section 263A costs
must be included in determining COGS.
COGS also includes the Specified Coop-
erative’s inventory valuation adjustments
such as write-downs under the lower of
cost or market method. In the case of a
sale, exchange, or other disposition (in-
cluding, for example, theft, casualty, or
abandonment) by the Specified Cooper-
ative of non-inventory property, COGS
for purposes of this section includes the
adjusted basis of the property.
(2) Allocating COGS—(i) In general.
A Specified Cooperative must use a rea-
sonable method based on all the facts and
circumstances to allocate COGS between
DPGR and non-DPGR. Whether an allo-
cation method is reasonable is based on
all the facts and circumstances, including
whether the Specified Cooperative uses
the most accurate information available;
the relationship between COGS and the
method used; the accuracy of the meth-
od chosen as compared with other possi-
ble methods; whether the method is used
by the Specified Cooperative for internal
management or other business purpos-
es; whether the method is used for other
Federal or state income tax purposes; the
availability of costing information; the
time, burden, and cost of using alterna-
tive methods; and whether the Specified
Cooperative applies the method consis-
tently from year to year. Depending on
the facts and circumstances, reasonable
methods may include methods based on
gross receipts (defined in §1.199A-8(b)
(2)(iii)), number of units sold, number of
units produced, or total production costs.
Ordinarily, if a Specified Cooperative
uses a method to allocate gross receipts
between DPGR and non-DPGR, then
the use of a different method to allocate
COGS that is not demonstrably more ac-
curate than the method used to allocate
gross receipts will not be considered rea-
sonable. However, if a Specified Cooper-
ative has information readily available to
specifically identify COGS allocable to
DPGR and can specifically identify that
amount without undue burden or expense,
COGS allocable to DPGR is that amount
irrespective of whether the Specified Co-
operative uses another allocation method
to allocate gross receipts between DPGR
and non-DPGR. A Specified Cooperative
that does not have information readily
available to specifically identify COGS
allocable to DPGR and that cannot, with-
out undue burden or expense, specifically
identify that amount is not required to use
a method that specifically identifies COGS
allocable to DPGR. The chosen reason-
able method must be consistently applied
from one taxable year to another and must
clearly reflect the portion of COGS be-
tween DPGR and non-DPGR. The method
must also be reasonable based on all the
facts and circumstances. The books and
records maintained for COGS must be
consistent with any allocations under this
paragraph (b)(2).
(ii) Gross receipts recognized in an
earlier taxable year. If the Specified Co-
operative (other than a Specified Coopera-
tive that uses the small business simplified
overall method of paragraph (f) of this
section) recognizes and reports gross re-
ceipts on a Federal income tax return for a
taxable year, and incurs COGS related to
such gross receipts in a subsequent taxable
year, then regardless of whether the gross
receipts ultimately qualify as DPGR, the
Specified Cooperative must allocate the
COGS to—
(A) DPGR if the Specified Coopera-
tive identified the related gross receipts as
DPGR in the prior taxable year; or
(B) Non-DPGR if the Specified Coop-
erative identified the related gross receipts
as non-DPGR in the prior taxable year or
if the Specified Cooperative recognized
under the Specified Cooperative’s meth-
ods of accounting those gross receipts in
a taxable year to which section 199A(g)
does not apply.
(iii) COGS associated with activities
undertaken in an earlier taxable year—
(A) In general. A Specified Cooperative
must allocate its COGS between DPGR
and non-DPGR under the rules provided
in paragraphs (b)(2)(i) and (iii) of this sec-
tion, regardless of whether certain costs
included in its COGS can be associated
with activities undertaken in an earlier
taxable year (including a year prior to
the effective date of section 199A(g)).
A Specified Cooperative may not segre-
gate its COGS into component costs and
allocate those component costs between
DPGR and non-DPGR.

July 29, 2019 572 Bulletin No. 2019–31
(B) Example. The following example
illustrates an application of paragraph (b)
(2)(iii)(A) of this section.
(1) Example. During the 2018 taxable
year, nonexempt Specified Cooperative X
grew and sold Horticultural Product A. All
of the patronage gross receipts from sales
recognized by X in 2018 were from the sale
of Horticultural Product A and qualified as
DPGR. Employee 1 of X was involved in
X’s production process until he retired in
2013. In 2018, X paid $30 directly from its
general assets for Employee 1’s medical
expenses pursuant to an unfunded, self-in-
sured plan for retired X employees. For
purposes of computing X’s 2018 taxable
income, X capitalized those medical costs
to inventory under section 263A. In 2018,
the COGS for a unit of Horticultural Prod-
uct A was $100 (including the applicable
portion of the $30 paid for Employee 1’s
medical costs that was allocated to COGS
under X’s allocation method for addition-
al section 263A costs). X has information
readily available to specifically identify
COGS allocable to DPGR and can iden-
tify that amount without undue burden
and expense because all of X’s gross re-
ceipts from sales in 2018 are attributable
to the sale of Horticultural Product A and
qualify as DPGR. The inventory cost of
each unit of Horticultural Product A sold
in 2018, including the applicable portion
of retiree medical costs, is related to X’s
gross receipts from the sale of Horticultur-
al Product A in 2018. X may not segregate
the 2018 COGS by separately allocating
the retiree medical costs, which are com-
ponents of COGS, to DPGR and non-DP-
GR. Thus, even though the retiree medical
costs can be associated with activities un-
dertaken in prior years, $100 of inventory
cost of each unit of Horticultural Product
A sold in 2018, including the applicable
portion of the retiree medical expense cost
component, is allocable to DPGR in 2018.
(3) Special allocation rules. Sec-
tion 199A(g)(3)(C) provides the following
two special rules—
(i) For purposes of determining the
COGS that are allocable to DPGR, any
item or service brought into the United
States (defined in §1.199A-9(i)) is treat-
ed as acquired by purchase, and its cost
is treated as not less than its value imme-
diately after it entered the United States.
A similar rule applies in determining the
adjusted basis of leased or rented proper-
ty where the lease or rental gives rise to
DPGR.
(ii) In the case of any property de-
scribed in paragraph (b)(3)(i) of this sec-
tion that has been exported by the Speci-
fied Cooperative for further manufacture,
the increase in cost or adjusted basis under
paragraph (b)(3)(i) of this section cannot
exceed the difference between the value of
the property when exported and the value
of the property when brought back into
the United States after the further manu-
facture. For the purposes of this paragraph
(b)(3), the value of property is its customs
value as defined in section 1059A(b)(1).
(4) Rules for inventories valued at
market or bona fide selling prices. If
part of COGS is attributable to the Spec-
ified Cooperative’s inventory valuation
adjustments, then COGS allocable to
DPGR includes inventory adjustments to
agricultural or horticultural products that
are MPGE in whole or significant part
within the United States. Accordingly, a
Specified Cooperative that values its in-
ventory under §1.471-4 (inventories at
cost or market, whichever is lower) or
§1.471-2(c) (subnormal goods at bona
fide selling prices) must allocate a proper
share of such adjustments (for example,
write-downs) to DPGR based on a rea-
sonable method based on all the facts
and circumstances. Factors taken into ac-
count in determining whether the method
is reasonable include whether the Speci-
fied Cooperative uses the most accurate
information available; the relationship
between the adjustment and the allo-
cation base chosen; the accuracy of the
method chosen as compared with other
possible methods; whether the method
is used by the Specified Cooperative for
internal management or other business
purposes; whether the method is used
for other Federal or state income tax pur-
poses; the time, burden, and cost of us-
ing alternative methods; and whether the
Specified Cooperative applies the meth-
od consistently from year to year. If the
Specified Cooperative has information
readily available to specifically identify
the proper amount of inventory valuation
adjustments allocable to DPGR, then the
Specified Cooperative must allocate that
amount to DPGR. The Specified Coop-
erative that does not have information
readily available to specifically identify
the proper amount of its inventory val-
uation adjustments allocable to DPGR
and that cannot, without undue burden or
expense, specifically identify the proper
amount of its inventory valuation adjust-
ments allocable to DPGR, is not required
to use a method that specifically identi-
fies inventory valuation adjustments to
DPGR. The chosen reasonable method
must be consistently applied from one
taxable year to another and must clearly
reflect inventory adjustments. The meth-
od must also be reasonable based on all
the facts and circumstances. The books
and records maintained for inventory
adjustments must be consistent with any
allocations under this paragraph (b)(4).
(5) Rules applicable to inventories
accounted for under the last-in, first-out
inventory method—(i) In general. This
paragraph (b)(5) applies to inventories
accounted for using the specific goods
last-in, first-out (LIFO) method or the dol-
lar-value LIFO method. Whenever a spe-
cific goods grouping or a dollar-value pool
contains agricultural or horticultural prod-
ucts that produce DPGR and goods that
do not, the Specified Cooperative must
allocate COGS attributable to that group-
ing or pool between DPGR and non-DP-
GR using a reasonable method based on
all the facts and circumstances. Whether
a method of allocating COGS between
DPGR and non-DPGR is reasonable must
be determined in accordance with para-
graph (b)(2) of this section. In addition,
this paragraph (b)(5) provides methods
that a Specified Cooperative may use to
allocate COGS for a Specified Coopera-
tive’s inventories accounted for using the
LIFO method. If the Specified Coopera-
tive uses the LIFO/FIFO ratio method
provided in paragraph (b)(5)(ii) of this
section or the change in relative base-year
cost method provided in paragraph (b)
(5)(iii) of this section, then the Specified
Cooperative must use that method for all
of the Specified Cooperative’s inventory
accounted for under the LIFO method.
The chosen reasonable method must be
consistently applied from one taxable year
to another and must clearly reflect the in-
ventory method. The method must also be
reasonable based on all the facts and cir-
cumstances. The books and records main-
tained for the inventory method must be

Bulletin No. 2019–31 573 July 29, 2019
consistent with any allocations under this
paragraph (b)(5).
(ii) LIFO/FIFO ratio method. The
LIFO/FIFO ratio method is applied
with respect to the LIFO inventory on a
grouping-by-grouping or pool-by-pool
basis. Under the LIFO/FIFO ratio meth-
od, a Specified Cooperative computes
the COGS of a grouping or pool alloca-
ble to DPGR by multiplying the COGS
of agricultural or horticultural prod-
ucts (defined in §1.199A-8(a)(4)) in the
grouping or pool that produced DPGR
computed using the FIFO method by
the LIFO/FIFO ratio of the grouping or
pool. The LIFO/FIFO ratio of a group-
ing or pool is equal to the total COGS
of the grouping or pool computed using
the LIFO method over the total COGS of
the grouping or pool computed using the
FIFO method.
(iii) Change in relative base-year cost
method. A Specified Cooperative using
the dollar-value LIFO method may use the
change in relative base-year cost meth-
od. The change in relative base-year cost
method for a Specified Cooperative using
the dollar-value LIFO method is applied
to all LIFO inventory on a pool-by-pool
basis. The change in relative base-year
cost method determines the COGS allo-
cable to DPGR by increasing or decreas-
ing the total production costs (section 471
costs and additional section 263A costs)
of agricultural or horticultural products
that generate DPGR by a portion of any
increment or liquidation of the dollar-val-
ue pool. The portion of an increment or
liquidation allocable to DPGR is deter-
mined by multiplying the LIFO value of
the increment or liquidation (expressed
as a positive number) by the ratio of the
change in total base-year cost (expressed
as a positive number) of agricultural or
horticultural products that will generate
DPGR in ending inventory to the change
in total base-year cost (expressed as a
positive number) of all goods in ending
inventory. The portion of an increment
or liquidation allocable to DPGR may be
zero but cannot exceed the amount of the
increment or liquidation. Thus, a ratio in
excess of 1.0 must be treated as 1.0.
(6) Specified Cooperative using a sim-
plified method for additional section 263A
costs to ending inventory. A Specified Co-
operative that uses a simplified method
specifically described in the section 263A
regulations to allocate additional sec-
tion 263A costs to ending inventory must
follow the rules in paragraph (b)(2) of
this section to determine the amount of
additional section 263A costs allocable to
DPGR. Allocable additional section 263A
costs include additional section 263A
costs included in the Specified Coopera-
tive’s beginning inventory as well as addi-
tional section 263A costs incurred during
the taxable year by the Specified Cooper-
ative. Ordinarily, if the Specified Cooper-
ative uses a simplified method specifically
described in the section 263A regulations
to allocate its additional section 263A
costs to its ending inventory, the addition-
al section 263A costs must be allocated in
the same proportion as section 471 costs
are allocated.
(c) Other deductions properly alloca-
ble to DPGR or gross income attributable
to DPGR—(1) In general. In determining
its QPAI, the Specified Cooperative must
subtract from its DPGR (in addition to
the COGS), the deductions that are prop-
erly allocable and apportioned to DPGR.
A Specified Cooperative generally must
allocate and apportion these deductions
using the rules of the section 861 method
provided in paragraph (d) of this section.
In lieu of the section 861 method, an eligi-
ble Specified Cooperative may apportion
these deductions using the simplified de-
duction method provided in paragraph (e)
of this section. Paragraph (f) of this sec-
tion provides a small business simplified
overall method that may be used by a
qualifying small Specified Cooperative.
A Specified Cooperative using the simpli-
fied deduction method or the small busi-
ness simplified overall method must use
that method for all deductions. A Speci-
fied Cooperative eligible to use the small
business simplified overall method may
choose at any time for any taxable year to
use the small business simplified overall
method or the simplified deduction meth-
od for a taxable year.
(2) Treatment of net operating losses.
A deduction under section 172 for a net
operating loss (NOL) is not allocated or
apportioned to DPGR or gross income at-
tributable to DPGR.
(3) W-2 wages. Although only W-2
wages as described in §1.199A-11 are
taken into account in computing the W-2
wage limitation, all wages paid (or in-
curred in the case of an accrual method
taxpayer) in the taxable year are taken
into account in computing QPAI for that
taxable year.
(d) Section 861 method. Under the
section 861 method, the Specified Co-
operative must allocate and apportion
its deductions using the allocation and
apportionment rules provided under the
section 861 regulations under which sec-
tion 199A(g) is treated as an operative
section described in §1.861-8(f). Accord-
ingly, the Specified Cooperative applies
the rules of the section 861 regulations
to allocate and apportion deductions
(including, if applicable, its distributive
share of deductions from passthrough
entities) to gross income attributable to
DPGR. If the Specified Cooperative ap-
plies the allocation and apportionment
rules of the section 861 regulations for
section 199A(g) and another operative
section, then the Specified Cooperative
must use the same method of allocation
and the same principles of apportionment
for purposes of all operative sections.
Research and experimental expenditures
must be allocated and apportioned in ac-
cordance with §1.861-17 without taking
into account the exclusive apportion-
ment rule of §1.861-17(b). Deductions
for charitable contributions (as allowed
under section 170 and section 873(b)(2)
or 882(c)(1)(B)) must be ratably appor-
tioned between gross income attributable
to DPGR and gross income attributable to
non-DPGR based on the relative amounts
of gross income.
(e) Simplified deduction method—(1)
In general. An eligible Specified Cooper-
ative (defined in paragraph (e)(2) of this
section) may use the simplified deduction
method to apportion business deductions
between DPGR and non-DPGR. The sim-
plified deduction method does not apply
to COGS. Under the simplified deduction
method, the business deductions (except
the NOL deduction) are ratably appor-
tioned between DPGR and non-DPGR
based on relative gross receipts. Accord-
ingly, the amount of deductions for the
current taxable year apportioned to DPGR
is equal to the proportion of the total busi-
ness deductions for the current taxable
year that the amount of DPGR bears to
total gross receipts.

July 29, 2019 574 Bulletin No. 2019–31
(2) Eligible Specified Cooperative. For
purposes of this paragraph (e), an eligible
Specified Cooperative is—
(i) A Specified Cooperative that has
average annual total gross receipts (as de-
fined in paragraph (g) of this section) of
$100,000,000 or less; or
(ii) A Specified Cooperative that has to-
tal assets (as defined in paragraph (e)(3) of
this section) of $10,000,000 or less.
(3) Total assets.—(i) In general. For
purposes of the simplified deduction
method, total assets mean the total assets
the Specified Cooperative has at the end of
the taxable year.
(ii) Members of an expanded affiliated
group. To compute the total assets of an
expanded affiliated group (EAG) at the
end of the taxable year, the total assets at
the end of the taxable year of each member
of the EAG at the end of the taxable year
that ends with or within the taxable year
of the computing member (as described in
§1.199A-12(g)) are aggregated.
(4) Members of an expanded affil-
iated group—(i) In general. Whether
the members of an EAG may use the
simplified deduction method is deter-
mined by reference to all the members
of the EAG. If the average annual gross
receipts of the EAG are less than or
equal to $100,000,000 or the total as-
sets of the EAG are less than or equal
to $10,000,000, then each member of
the EAG may individually determine
whether to use the simplified deduction
method, regardless of the cost allocation
method used by the other members.
(ii) Exception. Notwithstanding para-
graph (e)(4)(i) of this section, all members
of the same consolidated group must use
the same cost allocation method.
(f) Small business simplified overall
method—(1) In general. A qualifying
small Specified Cooperative may use the
small business simplified overall method
to apportion COGS and deductions be-
tween DPGR and non-DPGR. Under the
small business simplified overall meth-
od, a Specified Cooperative’s total costs
for the current taxable year (as defined in
paragraph (f)(3) of this section) are ap-
portioned between DPGR and non-DPGR
based on relative gross receipts. Accord-
ingly, the amount of total costs for the cur-
rent taxable year apportioned to DPGR is
equal to the proportion of total costs for
the current taxable year that the amount of
DPGR bears to total gross receipts.
(2) Qualifying small Specified Cooper-
ative. For purposes of this paragraph (f),
a qualifying small Specified Cooperative
is a Specified Cooperative that has av-
erage annual total gross receipts (as de-
fined in paragraph (g) of this section) of
$25,000,000 or less.
(3) Total costs for the current taxable
year. For purposes of the small business
simplified overall method, total costs for
the current taxable year means the to-
tal COGS and deductions for the current
taxable year. Total costs for the current
taxable year are determined under the
methods of accounting that the Specified
Cooperative uses to compute taxable in-
come.
(4) Members of an expanded affiliat-
ed group—(i) In general. Whether the
members of an EAG may use the small
business simplified overall method is de-
termined by reference to all the members
of the EAG. If the average annual gross
receipts of the EAG are less than or equal
to $25,000,000 then each member of the
EAG may individually determine whether
to use the small business simplified over-
all method, regardless of the cost alloca-
tion method used by the other members.
(ii) Exception. Notwithstanding para-
graph (f)(4)(i) of this section, all members
of the same consolidated group must use
the same cost allocation method.
(g) Average annual gross receipts—(1)
In general. For purposes of the simplified
deduction method and the small business
simplified overall method, average annual
gross receipts means the average annual
gross receipts of the Specified Coopera-
tive for the 3 taxable years (or, if fewer,
the taxable years during which the taxpay-
er was in existence) preceding the current
taxable year, even if one or more of such
taxable years began before the effective
date of section 199A(g). In the case of
any taxable year of less than 12 months
(a short taxable year), the gross receipts of
the Specified Cooperative are annualized
by multiplying the gross receipts for the
short period by 12 and dividing the result
by the number of months in the short pe-
riod.
(2) Members of an expanded affiliated
group—(i) In general. To compute the av-
erage annual gross receipts of an EAG, the
gross receipts for the entire taxable year of
each member that is a member of the EAG
at the end of its taxable year that ends with
or within the taxable year are aggregated.
For purposes of this paragraph (g)(2), a
consolidated group is treated as one mem-
ber of an EAG.
(ii) Exception. Notwithstanding para-
graph (g)(1)(i) of this section, all members
of the same consolidated group must use
the same cost allocation method.
(h) Cost allocation methods for deter-
mining oil-related QPAI—(1) Section 861
method. A Specified Cooperative that
uses the section 861 method to determine
deductions that are allocated and appor-
tioned to gross income attributable to
DPGR must use the section 861 method
to determine deductions that are allocated
and apportioned to gross income attribut-
able to oil-related DPGR.
(2) Simplified deduction method. A
Specified Cooperative that uses the sim-
plified deduction method to apportion de-
ductions between DPGR and non-DPGR
must determine the portion of deductions
allocable to oil-related DPGR by multi-
plying the deductions allocable to DPGR
by the ratio of oil-related DPGR to DPGR
from all activities.
(3) Small business simplified over-
all method. A Specified Cooperative that
uses the small business simplified overall
method to apportion total costs (COGS
and deductions) between DPGR and
non-DPGR must determine the portion of
total costs allocable to oil-related DPGR
by multiplying the total costs allocable to
DPGR by the ratio of oil-related DPGR to
DPGR from all activities.
(i) Applicability date. The provisions
of this section apply to taxable years end-
ing after the date the Treasury decision
adopting these regulations as final regula-
tions is published in the Federal Register.
Taxpayers, however, may rely on these
regulations until that date, but only if the
taxpayers apply the rules in their entirety
and in a consistent manner.
§1.199A-11 Wage limitation for the
section 199A(g) deduction.
(a) Rules of application—(1) In gen-
eral. The provisions of this section apply
solely for purposes of section 199A(g) of
the Internal Revenue Code (Code). The

Bulletin No. 2019–31 575 July 29, 2019
provisions of this section provide guid-
ance on determining the W-2 wage lim-
itation as defined in §1.199A-8(b)(5)(ii)
(B). Except as provided in paragraph (d)
(2) of this section, the Form W-2, Wage
and Tax Statement, or any subsequent
form or document used in determining the
amount of W-2 wages, are those issued
for the calendar year ending during the
taxable year of the Specified Cooperative
(defined in §1.199A-8(a)(2)) for wages
paid to employees (or former employees)
of the Specified Cooperative for employ-
ment by the Specified Cooperative. Em-
ployees are limited to employees defined
in section 3121(d)(1) and (2) (that is, offi-
cers of a corporate taxpayer and employ-
ees of the taxpayer under the common law
rules). See paragraph (a)(5) of this section
for the requirement that W-2 wages must
have been included in a return filed with
the Social Security Administration (SSA)
within 60 days after the due date (includ-
ing extensions) of the return. See also sec-
tion 199A(a)(4)(C).
(2) Wage limitation for section 199A(g)
deduction. The amount of the deduction
allowable under section 199A(g) to the
Specified Cooperative for any taxable
year cannot exceed 50 percent of the W-2
wages (as defined in section 199A(g)(1)
(B)(ii) and paragraph (b) of this section)
for the taxable year that are attributable
to domestic production gross receipts
(DPGR), defined in §1.199A-8(b)(3)(ii),
of agricultural or horticultural products
defined in §1.199A-8(a)(4).
(3) Wages paid by entity other than
common law employer. In determining
W-2 wages, the Specified Cooperative
may take into account any W-2 wages paid
by another entity and reported by the other
entity on Forms W-2 with the other enti-
ty as the employer listed in Box c of the
Forms W-2, provided that the W-2 wages
were paid to common law employees or
officers of the Specified Cooperative for
employment by the Specified Coopera-
tive. In such cases, the entity paying the
W-2 wages and reporting the W-2 wages
on Forms W-2 is precluded from taking
into account such wages for purposes
of determining W-2 wages with respect
to that entity. For purposes of this para-
graph (a)(4), entities that pay and report
W-2 wages on behalf of or with respect
to other taxpayers can include, but are not
limited to, certified professional employer
organizations under section 7705, statu-
tory employers under section 3401(d)(1),
and agents under section 3504.
(4) Requirement that wages must be
reported on return filed with the Social
Security Administration—(i) In gener-
al. Pursuant to section 199A(g)(1)(B)
(ii) and section 199A(b)(4)(C), the term
W-2 wages does not include any amount
that is not properly included in a return
filed with SSA on or before the 60th day
after the due date (including extensions)
for such return. Under §31.6051-2 of this
chapter, each Form W-2 and the transmit-
tal Form W-3, Transmittal of Wage and
Tax Statements, together constitute an
information return to be filed with SSA.
Similarly, each Form W-2c, Corrected
Wage and Tax Statement, and the trans-
mittal Form W-3 or W-3c, Transmittal of
Corrected Wage and Tax Statements, to-
gether constitute an information return to
be filed with SSA. In determining whether
any amount has been properly included in
a return filed with SSA on or before the
60th day after the due date (including ex-
tensions) for such return, each Form W-2
together with its accompanying Form W-3
is considered a separate information re-
turn and each Form W-2c together with its
accompanying Form W-3 or Form W-3c is
considered a separate information return.
Section 6071(c) provides that Forms W-2
and W-3 must be filed on or before Jan-
uary 31 of the year following the calen-
dar year to which such returns relate (but
see the special rule in §31.6071(a)-1T(a)
(3)(1) of this chapter for monthly returns
filed under §31.6011(a)-5(a) of this chap-
ter). Corrected Forms W-2 are required to
be filed with SSA on or before January 31
of the year following the year in which the
correction is made.
(ii) Corrected return filed to correct
a return that was filed within 60 days of
the due date. If a corrected information
return (Return B) is filed with SSA on or
before the 60th day after the due date (in-
cluding extensions) of Return B to correct
an information return (Return A) that was
filed with SSA on or before the 60th day
after the due date (including extensions)
of the information return (Return A) and
paragraph (a)(5)(iii) of this section does
not apply, then the wage information on
Return B must be included in determin-
ing W-2 wages. If a corrected information
return (Return D) is filed with SSA later
than the 60th day after the due date (in-
cluding extensions) of Return D to correct
an information return (Return C) that was
filed with SSA on or before the 60th day
after the due date (including extensions)
of the information return (Return C), then
if Return D reports an increase (or increas-
es) in wages included in determining W-2
wages from the wage amounts reported
on Return C, such increase (or increases)
on Return D is disregarded in determining
W-2 wages (and only the wage amounts
on Return C may be included in determin-
ing W-2 wages). If Return D reports a de-
crease (or decreases) in wages included in
determining W-2 wages from the amounts
reported on Return C, then, in determining
W-2 wages, the wages reported on Return
C must be reduced by the decrease (or de-
creases) reflected on Return D.
(iii) Corrected return filed to correct
a return that was filed later than 60 days
after the due date. If an information return
(Return F) is filed to correct an informa-
tion return (Return E) that was not filed
with SSA on or before the 60th day after
the due date (including extensions) of Re-
turn E, then Return F (and any subsequent
information returns filed with respect to
Return E) will not be considered filed on
or before the 60th day after the due date
(including extensions) of Return F (or the
subsequent corrected information return).
Thus, if a Form W-2c is filed to correct a
Form W-2 that was not filed with SSA on
or before the 60th day after the due date
(including extensions) of the Form W-2
(or to correct a Form W-2c relating to a
Form W-2 that had not been filed with SSA
on or before the 60th day after the due date
(including extensions) of the Form W-2),
then this Form W-2c is not to be consid-
ered to have been filed with SSA on or
before the 60th day after the due date (in-
cluding extensions) for this Form W-2c,
regardless of when the Form W-2c is filed.
(b) Definition of W-2 wages—(1) In
general. Section 199A(g)(1)(B)(ii) pro-
vides that the W-2 wages of the Specified
Cooperative must be determined in the
same manner as under section 199A(b)(4)
(without regard to section 199A(b)(4)(B)
and after application of section 199A(b)
(5)). Section 199A(b)(4)(A) provides
that the term W-2 wages means with re-

July 29, 2019 576 Bulletin No. 2019–31
spect to any person for any taxable year
of such person, the amounts described in
paragraphs (3) and (8) of section 6051(a)
paid by such person with respect to em-
ployment of employees by such person
during the calendar year ending during
such taxable year. Thus, the term W-2
wages includes the total amount of wag-
es as defined in section 3401(a); the total
amount of elective deferrals (within the
meaning of section 402(g)(3)); the com-
pensation deferred under section 457; and
the amount of designated Roth contribu-
tions (as defined in section 402A).
(2) Section 199A(g) deduction. Pursu-
ant to section 199A(g)(3)(A), W-2 wages
do not include any amount which is not
properly allocable to DPGR for purpos-
es of calculating qualified production
activities income (QPAI) as defined in
§1.199A-8(b)(4)(ii). The Specified Co-
operative may determine the amount of
wages that is properly allocable to DPGR
using a reasonable method based on all the
facts and circumstances. The chosen rea-
sonable method must be consistently ap-
plied from one taxable year to another and
must clearly reflect the wages allocable to
DPGR for purposes of QPAI. The books
and records maintained for wages alloca-
ble to DPGR for purposes of QPAI must
be consistent with any allocations under
this paragraph (b)(2).
(c) Methods for calculating W-2 wages.
The Secretary may provide for methods to
be used in calculating W-2 wages, includ-
ing W-2 wages for short taxable years by
publication in the Internal Revenue Bulle-
tin (see §601.601(d)(2)(ii)(b) of this chap-
ter).
(d) Wage limitation — acquisitions,
dispositions, and short taxable years—(1)
In general. For purposes of computing the
deduction under section 199A(g) of the
Specified Cooperative, in the case of an
acquisition or disposition (as defined in
section 199A(b)(5) and paragraph (d)(3)
of this section) that causes more than one
Specified Cooperative to be an employer
of the employees of the acquired or dis-
posed of Specified Cooperative during the
calendar year, the W-2 wages of the Spec-
ified Cooperative for the calendar year of
the acquisition or disposition are allocated
between or among each Specified Coop-
erative based on the period during which
the employees of the acquired or disposed
of Specified Cooperatives were employed
by the Specified Cooperative, regardless
of which permissible method is used for
reporting predecessor and successor wag-
es on Form W-2, Wage and Tax Statement.
(2) Short taxable year that does not
include December 31. If the Specified
Cooperative has a short taxable year that
does not contain a calendar year ending
during such short taxable year, wages
paid to employees for employment by the
Specified Cooperative during the short
taxable year are treated as W-2 wages for
such short taxable year for purposes of
paragraph (a) of this section (if the wages
would otherwise meet the requirements to
be W-2 wages under this section but for
the requirement that a calendar year must
end during the short taxable year).
(3) Acquisition or disposition. For pur-
poses of paragraph (d)(1) and (2) of this
section, the terms acquisition and dispo-
sition include an incorporation, a liqui-
dation, a reorganization, or a purchase or
sale of assets.
(e) Application in the case of a Spec-
ified Cooperative with a short taxable
year. In the case of a Specified Cooper-
ative with a short taxable year, subject to
the rules of paragraph (a) of this section,
the W-2 wages of the Specified Coopera-
tive for the short taxable year can include
only those wages paid during the short
taxable year to employees of the Specified
Cooperative, only those elective deferrals
(within the meaning of section 402(g)(3))
made during the short taxable year by
employees of the Specified Cooperative,
and only compensation actually deferred
under section 457 during the short tax-
able year with respect to employees of the
Specified Cooperative.
(f) Non-duplication rule. Amounts that
are treated as W-2 wages for a taxable
year under any method cannot be treated
as W-2 wages of any other taxable year.
Also, an amount cannot be treated as W-2
wages by more than one taxpayer. Finally,
an amount cannot be treated as W-2 wag-
es by the Specified Cooperative both in
determining patronage and nonpatronage
W-2 wages.
(g) Wage expense safe harbor—(1)
In general. A Specified Cooperative us-
ing either the section 861 method of
cost allocation under §1.199A-10(d) or
the simplified deduction method under
§1.199A-10(e) may determine the amount
of W-2 wages that are properly allocable
to DPGR for a taxable year by multiply-
ing the amount of W-2 wages determined
under paragraph (b)(1) of this section for
the taxable year by the ratio of the Speci-
fied Cooperative’s wage expense included
in calculating QPAI for the taxable year
to the Specified Cooperative’s total wage
expense used in calculating the Speci-
fied Cooperative’s taxable income for the
taxable year, without regard to any wage
expense disallowed by section 465, 469,
704(d), or 1366(d). A Specified Coopera-
tive that uses either the section 861 meth-
od of cost allocation or the simplified de-
duction method to determine QPAI must
use the same expense allocation and ap-
portionment methods that it uses to deter-
mine QPAI to allocate and apportion wage
expense for purposes of this safe harbor.
For purposes of this paragraph (g)(1), the
term wage expense means wages (that is,
compensation paid by the employer in the
active conduct of a trade or business to its
employees) that are properly taken into
account under the Specified Cooperative’s
method of accounting.
(2) Wage expense included in cost of
goods sold. For purposes of paragraph (g)
(1) of this section, a Specified Cooperative
may determine its wage expense included
in cost of goods sold (COGS) using a rea-
sonable method based on all the facts and
circumstances, such as using the amount
of direct labor included in COGS or us-
ing section 263A labor costs (as defined in
§1.263A-1(h)(4)(ii)) included in COGS.
The chosen reasonable method must be
consistently applied from one taxable year
to another and must clearly reflect the por-
tion of wage expense included in COGS.
The method must also be reasonable
based on all the facts and circumstances.
The books and records maintained for
wage expense included in COGS must be
consistent with any allocations under this
paragraph (g)(2).
(3) Small business simplified overall
method safe harbor. The Specified Coop-
erative that uses the small business simpli-
fied overall method under §1.199A-10(f)
may use the small business simplified
overall method safe harbor for determin-
ing the amount of W-2 wages determined
under paragraph (b)(1) of this section that
is properly allocable to DPGR. Under this

Bulletin No. 2019–31 577 July 29, 2019
safe harbor, the amount of W-2 wages de-
termined under paragraph (b)(1) of this
section that is properly allocable to DPGR
is equal to the same proportion of W-2
wages determined under paragraph (b)(1)
of this section that the amount of DPGR
bears to the Specified Cooperative’s total
gross receipts.
(h) Applicability date. The provisions
of this section apply to taxable years end-
ing after the date the Treasury decision
adopting these regulations as final regula-
tions is published in the Federal Register.
Taxpayers, however, may rely on these
regulations until that date, but only if the
taxpayers apply the rules in their entirety
and in a consistent manner.
§1.199A-12 Expanded affiliated
groups.
(a) In general. The provisions of this
section apply solely for purposes of sec-
tion 199A(g) of the Internal Revenue
Code (Code). Except as otherwise pro-
vided in the Code or regulations issued
under the relevant section of the Code
(for example, sections 199A(g)(3)(D)(ii)
and 267, §1.199A-8(c), paragraph (a)(3)
of this section, and the consolidated re-
turn regulations under section 1502, each
Specified Cooperative whether exempt or
nonexempt (as defined in §1.199A-8(a)
(2)(iii)) that is a member of an expanded
affiliated group (EAG) (defined in para-
graph (a)(1) of this section) computes its
own taxable income or loss, qualified pro-
duction activities income (QPAI) (defined
in §1.199A-8(b)(4)(ii)), and W-2 wages
(defined in §1.199A-11(b)). If a Specified
Cooperative is also a member of a con-
solidated group, see paragraph (d) of this
section.
(1) Definition of an expanded affiliated
group. An EAG is an affiliated group as
defined in section 1504(a), determined by
substituting “more than 50 percent” for “at
least 80 percent” in each place it appears
and without regard to section 1504(b)(2)
and (4).
(2) Identification of members of an ex-
panded affiliated group—(i) In general.
Each Specified Cooperative must deter-
mine if it is a member of an EAG on a
daily basis.
(ii) Becoming or ceasing to be a mem-
ber of an expanded affiliated group. If a
Specified Cooperative becomes or ceas-
es to be a member of an EAG, the Spec-
ified Cooperative is treated as becoming
or ceasing to be a member of the EAG at
the end of the day on which its status as a
member changes.
(3) Attribution of activities—(i) In gen-
eral. Except as provided in paragraph (a)
(3)(iv) of this section, if a Specified Co-
operative that is a member of an EAG
(disposing member) derives gross re-
ceipts (defined in §1.199A-8(b)(2)(iii))
from the lease, rental, license, sale, ex-
change, or other disposition (defined in
§1.199A-9(j)) of agricultural or horticul-
tural products (defined in §1.199A-8(a)
(4)) that were manufactured, produced,
grown or extracted (MPGE) (as defined
in §1.199A-9(f)), in whole or significant
part (as defined in §1.199A-9(h)) in the
United States (as defined in §1.199A-9(i))
by another Specified Cooperative, then
the disposing member is treated as con-
ducting the previous activities conducted
by such other Specified Cooperative with
respect to the agricultural or horticultural
products in determining whether its gross
receipts are domestic production gross re-
ceipts (DPGR) (defined in §1.199A-8(b)
(3)(ii)) if—
(A) Such property was MPGE by such
other Specified Cooperative, and
(B) The disposing member is a member
of the same EAG as such other Specified
Cooperative at the time that the disposing
member disposes of the agricultural or
horticultural products.
(ii) Date of disposition for leases,
rentals, or licenses. Except as provided
in paragraph (a)(3)(iv) of this section,
with respect to a lease, rental, or license,
the disposing member described in para-
graph (a)(3)(i) of this section is treated
as having disposed of the agricultural or
horticultural products on the date or dates
on which it takes into account the gross
receipts derived from the lease, rental, or
license under its methods of accounting.
(iii) Date of disposition for sales, ex-
changes, or other dispositions. Except as
provided in paragraph (a)(3)(iv) of this
section, with respect to a sale, exchange,
or other disposition, the disposing mem-
ber is treated as having disposed of the ag-
ricultural or horticultural products on the
date on which it ceases to own the agricul-
tural or horticultural products for Federal
income tax purposes, even if no gain or
loss is taken into account.
(iv) Exception. Nonexempt Specified
Cooperatives. A nonexempt Specified Co-
operative is not attributed nonpatronage
activities conducted by another Specified
Cooperative. See §1.199A-8(b)(2)(ii).
(4) Marketing Specified Cooperatives.
A Specified Cooperative will be treated as
having MPGE in whole or significant part
any agricultural or horticultural product
within the United States marketed by the
Specified Cooperative which its patrons
have so MPGE. Patrons are defined in
§1.1388-1(e).
(5) Anti-avoidance rule. If a transaction
between members of an EAG is engaged
in or structured with a principal purpose
of qualifying for, or increasing the amount
of, the section 199A(g) deduction of the
EAG or the portion of the section 199A(g)
deduction allocated to one or more mem-
bers of the EAG, the Secretary may make
adjustments to eliminate the effect of the
transaction on the computation of the sec-
tion 199A(g) deduction.
(b) Computation of EAG’s sec-
tion 199A(g) deduction.—(1) In general.
The section 199A(g) deduction for an
EAG is determined by separately com-
puting the section 199A(g) deduction
from the patronage sources of Specified
Cooperatives that are members of the
EAG and the section 199A(g) deduction
from the nonpatronage sources of exempt
Specified Cooperatives that are members
of the EAG. The section 199A(g) deduc-
tion from patronage sources of Specified
Cooperatives is determined by aggregat-
ing the income or loss, QPAI, and W-2
wages, if any, of each patronage source
of a Specified Cooperative that is a mem-
ber of the EAG (whether an exempt or
nonexempt Specified Cooperative). The
section 199A(g) deduction from nonpa-
tronage sources of exempt Specified Co-
operatives is determined by aggregating
the income or loss, QPAI, and W-2 wag-
es, if any, of each nonpatronage source
of exempt Specified Cooperatives that
are members of the EAG. For purposes
of this determination, a member’s QPAI
may be positive or negative. A Specified
Cooperative’s taxable income or loss and
QPAI will be determined by reference to
the Specified Cooperative’s method of
accounting. For purposes of determin-

July 29, 2019 578 Bulletin No. 2019–31
ing the section 199A(g) deduction for an
EAG, taxable income or loss, QPAI, and
W-2 wages of a nonexempt Specified Co-
operative from nonpatronage sources are
considered to be zero. See §1.199A-8(b)
(2)(ii).
(2) Example. The following examples
illustrates the application of paragraph (b)
(1) of this section.
(i) Example. Nonexempt Specified Co-
operatives X, Y, and Z, calendar year tax-
payers, are the only members of an EAG
and are not members of a consolidated
group. X’s patronage source has taxable
income of $50,000, QPAI of $15,000,
and W-2 wages of $0. Y has patronage
source taxable income of ($20,000), QPAI
of ($1,000), and W-2 wages of $750. Z’s
patronage source has taxable income
of $0, QPAI of $0, and W-2 wages of
$3,000. In determining the EAG’s sec-
tion 199A(g) deduction, the EAG aggre-
gates each member’s patronage source’s
taxable income or loss, QPAI, and W-2
wages. Thus, the EAG’s patronage source
has taxable income of $30,000, the sum
of X’s patronage source taxable income
of $50,000, Y’s patronage source taxable
income of ($20,000), and Z’s patronage
source taxable income of $0. The EAG has
QPAI of $14,000, the sum of X’s QPAI of
$15,000, Y’s QPAI of ($1,000), and Z’s
QPAI of $0. The EAG has W-2 wages
of $3,750, the sum of X’s W-2 wages of
$0, Y’s W-2 wages of $750, and Z’s W-2
wages of $3,000. Accordingly, the EAG’s
section 199A(g) deduction equals $1,260,
9% of $14,000, the lesser of the QPAI and
patronage source taxable income, but not
greater than $1,875, 50% of its W-2 wages
of $3,750. This result would be the same
if X had a nonpatronage source income or
loss, because nonpatronage source income
of a nonexempt Specified Cooperative is
not taken into account in determining the
section 199A(g) deduction.
(3) Net operating loss carryovers/
carrybacks. In determining the taxable
income of an EAG, if a Specified Cooper-
ative has a net operating loss (NOL) from
its patronage sources that may be carried
over or carried back, if applicable, (in ac-
cordance with section 172), to the taxable
year, then for purposes of determining the
taxable income of the Specified Coop-
erative, the amount of the NOL used to
offset taxable income cannot exceed the
taxable income of the patronage source of
that Specified Cooperative. Similarly, if a
Specified Cooperative has an NOL from
its nonpatronage sources that may be car-
ried over to the taxable year, then for pur-
poses of determining the taxable income
of the Specified Cooperative, the amount
of the NOL used to offset taxable income
cannot exceed the taxable income of the
nonpatronage sources of that Specified
Cooperative.
(4) Losses used to reduce taxable in-
come of an expanded affiliated group. The
amount of an NOL sustained by a Spec-
ified Cooperative member of an EAG
that is used in the year sustained in de-
termining an EAG’s taxable income lim-
itation under §1.199A-8(b)(5)(ii)(C) (for
nonexempt Specified Cooperatives) or
§1.199A-8(c)(4)(i) (for exempt Specified
Cooperatives), as applicable, is not treat-
ed as an NOL carryover to any taxable
year in determining the taxable income
limitation under §1.199A-8(b)(5)(ii)(C)
or §1.199A-8(c)(4)(i), as applicable. For
purposes of this paragraph (b)(4), an NOL
is considered to be used if it reduces an
EAG’s aggregate taxable income from
patronage source or nonpatronage source,
as the case may be, regardless of whether
the use of the NOL actually reduces the
amount of the section 199A(g) deduction
that the EAG would otherwise derive. An
NOL is not considered to be used to the
extent that it reduces an EAG’s aggregate
taxable income from patronage source or
nonpatronage source, as the case may be,
to an amount less than zero. If more than
one Specified Cooperative has an NOL
used in the same taxable year to reduce
the EAG’s taxable income from patronage
or nonpatronage sources, as the case may
be, the respective NOLs are deemed used
in proportion to the amount of each Spec-
ified Cooperative’s NOL.
(5) Example. The following example
illustrates the application of paragraph (b)
(4) of this section.
(i) Example—(A) Facts. Nonexempt Specified
Cooperatives A and B are the only two members of
an EAG. A and B are both calendar year taxpayers
and they do not join in the filing of a consolidated
Federal income tax return. Neither A nor B had tax-
able income or loss prior to 2018. In 2018, A has
patronage QPAI and taxable income of $1,000 and
B has patronage QPAI of $1,000 and a patronage
NOL of $1,500. A also has nonpatronage income of
$3,000. B has no activities other than from its pa-
tronage activities. In 2019, A has patronage QPAI
of $2,000 and patronage taxable income of $1,000
and B has patronage QPAI of $2,000 and patronage
taxable income prior to the NOL deduction allowed
under section 172 of $2,000. Neither A nor B has
nonpatronage activities in 2019. A’s and B’s patron-
age activities have aggregate W-2 wages in excess
of the section 199A(g)(1)(B) wage limitation in both
2018 and 2019.
(B) Section 199A(g) deduction for 2018. In de-
termining the EAG’s section 199A(g) deduction for
2018, A’s $1,000 of QPAI and B’s $1,000 of QPAI
are aggregated, as are A’s $1,000 of taxable income
from its patronage activities and B’s $1,500 NOL
from its patronage activities. A’s nonpatronage in-
come is not included. Thus, for 2018, the EAG has
patronage QPAI of $2,000 and patronage taxable
income of ($500). The EAG’s section 199A(g) de-
duction for 2018 is 9% of the lesser of its patronage
QPAI or its patronage taxable income. Because the
EAG has a taxable loss from patronage sources in
2018, the EAG’s section 199A(g) deduction is $0.
(C) Section 199A(a) deduction for 2019. In deter-
mining the EAG’s section 199A deduction for 2019,
A’s patronage QPAI of $2,000 and B’s patronage
QPAI of $2,000 are aggregated, resulting in the EAG
having patronage QPAI of $4,000. Also, $1,000 of
B’s patronage NOL from 2018 was used in 2018 to
reduce the EAG’s taxable income from patronage
sources to $0. The remaining $500 of B’s patronage
NOL from 2018 is not considered to have been used
in 2018 because it reduced the EAG’s patronage tax-
able income to less than $0. Accordingly, for purpos-
es of determining the EAG’s taxable income limita-
tion under §1.199A-8(b)(5) in 2019, B is deemed to
have only a $500 NOL carryover from its patronage
sources from 2018 to offset a portion of its 2019 tax-
able income from its patronage sources. Thus, B’s
taxable income from its patronage sources in 2019
is $1,500, which is aggregated with A’s $1,000 of
taxable income from its patronage sources. The
EAG’s taxable income limitation in 2019 is $2,500.
The EAG’s section 199A(g) deduction is 9% of the
lesser of its patronage sourced QPAI of $4,000 and
its taxable income from patronage sources of $2,500.
Thus, the EAG’s section 199A(g) deduction in 2019
is 9% of $2,500, or $225. The results for 2019 would
be the same if neither A nor B had patronage sourced
QPAI in 2018.
(c) Allocation of an expanded affili-
ated group’s section 199A(g) deduction
among members of the expanded affiliat-
ed group—(1) In general. An EAG’s sec-
tion 199A(g) deduction from its patronage
sources, as determined in paragraph (b)
of this section, is allocated among the
Specified Cooperatives that are mem-
bers of the EAG in proportion to each
Specified Cooperative’s patronage QPAI,
regardless of whether the Specified Co-
operative has patronage taxable income
or W-2 wages for the taxable year. An
EAG’s section 199A(g) deduction from
its nonpatronage sources, as determined
in paragraph (b) of this section, is allocat-
ed among the Specified Cooperatives that

Bulletin No. 2019–31 579 July 29, 2019
are members of the EAG in proportion to
each Specified Cooperative’s nonpatron-
age QPAI, regardless of whether the Spec-
ified Cooperative has nonpatronage tax-
able income or W-2 wages for the taxable
year. For these purposes, if a Specified
Cooperative has negative patronage or
nonpatronage QPAI, such QPAI is treated
as zero. Pursuant to §1.199A-8(b)(6), a
patronage section 199A(g) deduction can
be applied only against patronage income
and deductions. Pursuant to §1.199A-8(c)
(ii), a nonpatronage section 199A(g) de-
duction and can be applied only against
nonpatronage income and deductions.
(2) Use of section 199A(g) deduction to
create or increase a net operating loss. If
a Specified Cooperative that is a member
of an EAG has some or all of the EAG’s
section 199A(g) deduction allocated to it
under paragraph (c)(1) of this section and
the amount allocated exceeds patronage or
nonpatronage taxable income, determined
as described in this section and prior to al-
location of the section 199A(g) deduction,
the section 199A(g) deduction will create
an NOL for the patronage source or non-
patronage source. Similarly, if a Specified
Cooperative that is a member of an EAG,
prior to the allocation of some or all of the
EAG’s section 199A(g) deduction to the
member, has a patronage or nonpatronage
NOL for the taxable year, the portion of
the EAG’s section 199A(g) deduction al-
located to the member will increase such
NOL.
(d) Special rules for members of the
same consolidated group—(1) Inter-
company transactions. In the case of an
intercompany transaction between con-
solidated group members S and B (as the
terms intercompany transaction, S and B
are defined in §1.1502-13(b)(1)), S takes
the intercompany transaction into ac-
count in computing the section 199A(g)
deduction at the same time and in the
same proportion as S takes into account
the income, gain, deduction, or loss
from the intercompany transaction under
§1.1502-13.
(2) Application of the simplified deduc-
tion method and the small business sim-
plified overall method. For purposes of
applying the simplified deduction meth-
od under §1.199A-10(e) and the small
business simplified overall method under
§1.199A-10(f), a Specified Cooperative
that is part of a consolidated group deter-
mines its QPAI using its members’ DPGR,
non-DPGR, cost of goods sold (COGS),
and all other deductions, expenses, or
losses (hereinafter deductions), deter-
mined after application of §1.1502-13.
(3) Determining the section 199A(g)
deduction—(i) Expanded affiliated
group consists of consolidated group and
non-consolidated group members. In de-
termining the section 199A(g) deduction,
if an EAG includes Specified Cooperatives
that are members of the same consolidat-
ed group and Specified Cooperatives that
are not members of the same consolidated
group, the consolidated taxable income or
loss, QPAI, and W-2 wages, from patron-
age sources, if any, of the consolidated
group (and not the separate taxable in-
come or loss, QPAI, and W-2 wages from
patronage sources of the members of the
consolidated group), are aggregated with
the taxable income or loss, QPAI, and W-2
wages, from patronage sources, if any, of
the non-consolidated group members. A
similar rule applies with respect to non-
patronage taxable income or loss, QPAI,
and W-2 wages. For example, if A, B, C,
S1, and S2 are Specified Cooperatives that
are members of the same EAG, and A, S1,
and S2 are members of the same consol-
idated group (the A consolidated group),
then the A consolidated group is treated
as one member of the EAG. Accordingly,
the EAG is considered to have three mem-
bers, the A consolidated group, B, and C.
The consolidated taxable income or loss,
QPAI, and W-2 wages from patronage
sources, if any, of the A consolidated group
are aggregated with the taxable income or
loss from patronage sources, QPAI, and
W-2 wages, if any, of B and C in deter-
mining the EAG’s section 199A(g) deduc-
tion from patronage sources. Similarly,
the consolidated taxable income or loss,
QPAI, and W-2 wages from nonpatron-
age sources, if any, of the A consolidated
group are aggregated with the taxable in-
come or loss from nonpatronage sources,
QPAI, and W-2 wages, if any, of B and C
in determining the EAG’s section 199A(g)
deduction from nonpatronage sources.
Pursuant to §1.199A-8(b)(6), a patronage
section 199A(g) deduction can be applied
only against patronage income and deduc-
tions. Pursuant to §1.199A-8(c)(ii), a non-
patronage section 199A(g) deduction and
can be applied only against nonpatronage
income and deductions.
(ii) Expanded affiliated group consists
only of members of a single consolidated
group. If all of the Specified Coopera-
tives that are members of an EAG are also
members of the same consolidated group,
the consolidated group’s section 199A(g)
deduction is determined using the con-
solidated group’s consolidated taxable
income or loss, QPAI, and W-2 wages,
from patronage sources or nonpatronage
sources, as the case may be, rather than
the separate taxable income or loss, QPAI,
and W-2 wages from patronage sources or
nonpatronage sources of its members.
(4) Allocation of the section 199A(g) de-
duction of a consolidated group among its
members. The section 199A(g) deduction
from patronage sources of a consolidated
group (or the section 199A(g) deduction
allocated to a consolidated group that is a
member of an EAG) is allocated among
the patronage sources of Specified Coop-
eratives in proportion to each Specified
Cooperative’s patronage QPAI, regardless
of whether the Specified Cooperative has
patronage separate taxable income or W-2
wages for the taxable year. In allocating
the section 199A(g) deduction of a pa-
tronage source of a Specified Cooperative
that is part of a consolidated group among
patronage sources of other members of
the same group, any redetermination of a
member’s patronage receipts, COGS, or
other deductions from an intercompany
transaction under §1.1502-13(c)(1)(i) or
(c)(4) is not taken into account for purpos-
es of section 199A(g). Also, for purposes
of this allocation, if a patronage source of
a Specified Cooperative that is a mem-
ber of a consolidated group has negative
QPAI, the QPAI of the patronage source is
treated as zero.
(e) Examples. The following examples
illustrate the application of paragraphs (a)
through (d) of this section.
(i) Example 1. Specified Cooperatives X, Y, and
Z are members of the same EAG but are not mem-
bers of a consolidated group. X, Y, and Z each files
Federal income tax returns on a calendar year basis.
None of X, Y, or Z have activities other than from
its patronage sources. Prior to 2018, X had no tax-
able income or loss. In 2018, X has taxable income
of $0, QPAI of $2,000, and W-2 wages of $0, Y has
taxable income of $4,000, QPAI of $3,000, and W-2
wages of $500, and Z has taxable income of $4,000,
QPAI of $5,000, and W-2 wages of $2,500. Accord-
ingly, the EAG’s patronage source taxable income

July 29, 2019 580 Bulletin No. 2019–31
is $8,000, the sum of X’s taxable income of $0, Y’s
taxable income of $4,000, and Z’s taxable income
of $4,000. The EAG has QPAI of $10,000, the sum
of X’s QPAI of $2,000, Y’s QPAI of $3,000, and Z’s
QPAI of $5,000. The EAG’s W-2 wages are $3,000,
the sum of X’s W-2 wages of $0, Y’s W-2 wages of
$500, and Z’s W-2 wages of $2,500. Thus, the EAG’s
section 199A(g) deduction for 2018 is $720 (9% of
the lesser of the EAG’s patronage source taxable in-
come of $8,000 and the EAG’s QPAI of $10,000, but
no greater than 50% of its W-2 wages of $3,000, i.e.,
$1,500). Pursuant to paragraph (c)(1) of this section,
the $720 section 199A(g) deduction is allocated to
X, Y, and Z in proportion to their respective amounts
of QPAI, that is $144 to X ($720 × $2,000/$10,000),
$216 to Y ($720 × $3,000/$10,000), and $360 to Z
($720 × $5,000/$10,000). Although X’s patronage
source taxable income for 2018 determined prior to
allocation of a portion of the EAG’s section 199A(g)
deduction to it was $0, pursuant to paragraph (c)(2)
of this section, X will have an NOL from its patron-
age source for 2018 equal to $144, which will be a
carryover to 2019.
(ii) Example 2. (A) Facts. Corporation X is the
common parent of a consolidated group, consisting
of X and Y, which has filed a consolidated Federal
income tax return for many years. Corporation P is
the common parent of a consolidated group, consist-
ing of P and S, which has filed a consolidated Federal
income tax return for many years. The X and P con-
solidated groups each file their consolidated Federal
income tax returns on a calendar year basis. X, Y, P,
and S are each Specified Cooperatives, and none of
X, Y, P, or S has ever had activities other than from
its patronage sources. The X consolidated group and
the P consolidated group are members of the same
EAG in 2019. In 2018, the X consolidated group
incurred a consolidated net operating loss (CNOL)
of $25,000. Neither P nor S (nor the P consolidat-
ed group) has ever incurred an NOL. In 2019, the X
consolidated group has (prior to the deduction under
section 172) taxable income of $8,000 and the P con-
solidated group has taxable income of $20,000. X’s
QPAI is $8,000, Y’s QPAI is ($13,000), P’s QPAI is
$16,000 and S’s QPAI is $4,000. There are sufficient
W-2 wages to exceed the section 199A(g)(1)(B) lim-
itation.
(B) Analysis. The X consolidated group uses
$8,000 of its CNOL from 2018 to offset the X con-
solidated group’s taxable income in 2019. None of
the X consolidated group’s remaining CNOL may
be used to offset taxable income of the P consoli-
dated group under paragraph (b)(3) of this section.
Accordingly, for purposes of determining the EAG’s
section 199A(g) deduction for 2019, the EAG has
taxable income of $20,000 (the X consolidated
group’s taxable income, after the deduction under
section 172, of $0 plus the P consolidated group’s
taxable income of $20,000). The EAG has QPAI
of $15,000 (the X consolidated group’s QPAI of
($5,000) (X’s $8,000 + Y’s ($13,000)), and the P
consolidated group’s QPAI of $20,000 (P’s $16,000
+ S’s $4,000)). The EAG’s section 199A(g) deduc-
tion equals $1,350, 9% of the lesser of its taxable
income of $20,000 and its QPAI of $15,000. The
section 199A(g) deduction is allocated between the
X and P consolidated groups in proportion to their
respective QPAI. Because the X consolidated group
has negative QPAI, all of the section 199A(g) de-
duction of $1,350 is allocated to the P consolidated
group. This $1,350 is allocated between P and S, the
members of the P consolidated group, in proportion
to their QPAI. Accordingly, P is allocated $1,080
($1,350 x ($16,000/$20,000) and S is allocated $270
($1,350 x $4,000/$20,000)).
(f) Allocation of patronage income
and loss by a Specified Cooperative that
is a member of the expanded affiliated
group for only a portion of the year—(1)
In general. A Specified Cooperative that
becomes or ceases to be a member of an
EAG during its taxable year must allocate
its taxable income or loss, QPAI, and W-2
wages between the portion of the taxable
year that the Specified Cooperative is a
member of the EAG and the portion of
the taxable year that the Specified Coop-
erative is not a member of the EAG. This
allocation of items is made by using the
pro rata allocation method described in
this paragraph (f)(1). Under the pro rata
allocation method, an equal portion of
patronage taxable income or loss, QPAI,
and W-2 wages, and nonpatronage taxable
income or loss, QPAI, and W-2 wages for
the taxable year is assigned to each day of
the Specified Cooperative’s taxable year.
Those items assigned to those days that
the Specified Cooperative was a member
of the EAG are then aggregated.
(2) Coordination with rules relating to
the allocation of income under §1.1502-
76(b). If §1.1502-76(b) (relating to items
included in a consolidated return) applies
to a Specified Cooperative that is a mem-
ber of an EAG, then any allocation of
items required under this paragraph (f) is
made only after the allocation of the items
pursuant to §1.1502-76(b).
(g) Total section 199A(g) deduction
for a Specified Cooperative that is a
member of an expanded affiliated group
for some or all of its taxable year—(1)
Member of the same EAG for the entire
taxable year. If a Specified Cooperative is
a member of the same EAG for its entire
taxable year, the Specified Cooperative’s
section 199A(g) deduction for the taxable
year (whether patronage sourced or non-
patronage sourced) is the amount of the
section 199A(g) deduction allocated to it
by the EAG under paragraph (c)(1) of this
section.
(2) Member of the expanded affiliated
group for a portion of the taxable year. If
a Specified Cooperative is a member of an
EAG for only a portion of its taxable year
and is either not a member of any EAG
or is a member of another EAG, or both,
for another portion of the taxable year, the
Specified Cooperative’s section 199A(g)
deduction for the taxable year (whether pa-
tronage sourced or nonpatronage sourced)
is the sum of its section 199A(g) deduc-
tions for each portion of the taxable year.
(3) Example. The following example
illustrates the application of paragraphs (f)
and (g) of this section.
(i) Example—(A) Facts. Specified Cooperatives
X and Y, calendar year taxpayers, are members of the
same EAG for the entire 2018 taxable year. Specified
Cooperative Z, also a calendar year taxpayer, is a
member of the EAG of which X and Y are members
for the first half of 2018 and not a member of any
EAG for the second half of 2018. Assume that X,
Y, and Z each has W-2 wages in excess of the sec-
tion 199A(g)(1)(B) wage limitation for all relevant
periods. In 2018, X’s patronage source has taxable
income of $2,000 and QPAI of $600, Y’s patron-
age source has a taxable loss of $400 and QPAI of
($200), and Z’s patronage source has taxable income
of $1,400 and QPAI of $2,400.
(B) Analysis. Pursuant to the pro rata allocation
method, $700 of Z’s 2018 patronage taxable income
and $1,200 of its 2018 QPAI are allocated to the first
half of the 2018 taxable year (the period in which
Z is a member of the EAG) and $700 of Z’s 2018
patronage taxable income and $1,200 of its 2018
QPAI are allocated to the second half of the 2018
taxable year (the period in which Z is not a mem-
ber of any EAG). Accordingly, in 2018, the EAG
has taxable income from patronage source of $2,300
(X’s $2,000 + Y’s ($400) + Z’s $700) and QPAI of
$1,600 (X’s $600 + Y’s ($200) + Z’s $1,200). The
EAG’s section 199A(g) deduction for 2018 is $144
(9% of the lesser of the EAG’s taxable income from
patronage source of $2,300 or QPAI of $1,600).
Pursuant to §1.199A-14(c)(1), this $144 deduction
is allocated to X’s, Y’s, and Z’s patronage source in
proportion to their respective QPAI. Accordingly,
X’s patronage source is allocated $48 of the EAG’s
section 199A(g) deduction ($144 x ($600/($600 + $0
+ $1,200))), Y’s patronage source is allocated $0 of
the EAG’s section 199A(g) deduction ($144 x ($0
/ ($600 + $0 + $1,200))), and Z’s patronage source
is allocated $96 of the EAG’s section 199A(g) de-
duction ($144 x ($1,200 / ($600 + $0 + $1,200))).
For the second half of 2018, Z’s patronage source
has taxable income of $700 and QPAI of $1,200.
Therefore, for the second half of 2018, Z’s patronage
source has a section 199A(g) deduction of $63 (9%
of the lesser of its taxable income of $700 or its QPAI
of $1,200 for the second half of 2018). Accordingly,
X’s 2018 section 199A(g) deduction is $48 and Y’s
2018 section 199A(g) deduction is $0. Z’s 2018 sec-
tion 199A(g) deduction is $159, the sum of the $96
section 199A(g) deduction of the EAG allocated to Z
for the first half of 2018 and Z’s $63 section 199A(g)
deduction for the second half of 2018.
(h) Computation of section 199A(g) de-
duction for members of an expanded affil-

Bulletin No. 2019–31 581 July 29, 2019
iated group with different taxable years—
(1) In general. If Specified Cooperatives
that are members of an EAG have differ-
ent taxable years, in determining the sec-
tion 199A(g) deduction of a member (the
computing member), the computing mem-
ber is required to take into account the tax-
able income or loss, determined without
regard to the section 199A(g) deduction,
QPAI, and W-2 wages of each other group
member that are both—
(i) Attributable to the period that each
other member of the EAG and the com-
puting member are members of the EAG;
and
(ii) Taken into account in a taxable year
that begins after the effective date of sec-
tion 199A(g) and ends with or within the
taxable year of the computing member
with respect to which the section 199A(g)
deduction is computed.
(2) Example. The following example
illustrates the application of this para-
graph (h).
(i) Example. (A) Specified Cooperatives X, Y, and
Z are members of the same EAG. Neither X, Y, nor
Z is a member of a consolidated group. X and Y are
calendar year taxpayers and Z is a June 30 fiscal year
taxpayer. Z came into existence on July 1, 2017. All
of X, Y’s, and Z’s activities are patronage sourced.
Each Specified Cooperative has taxable income that
exceeds its QPAI and W-2 wages in excess of the
section 199A(g)(1)(B) wage limitation. For the tax-
able year ending December 31, 2018, X’s QPAI is
$8,000 and Y’s QPAI is ($6,000). For its taxable year
ending June 30, 2019, Z’s QPAI is $2,000.
(B) In computing X’s and Y’s respec-
tive section 199A(g) deductions for their
taxable years ending December 31, 2018,
X’s taxable income or loss, QPAI and
W-2 wages and Y’s taxable income or
loss, QPAI, and W-2 wages from their
respective taxable years ending Decem-
ber 31, 2018, are aggregated. The EAG’s
QPAI for this purpose is $2,000 (X’s QPAI
of $8,000 + Y’s QPAI of ($6,000)). The
$180 deduction is allocated to each of X
and Y in proportion to their respective
QPAI as a percentage of the QPAI of each
member of the EAG that was taken into
account in computing the EAG’s sec-
tion 199A(g) deduction. Pursuant to para-
graph (c)(1) of this section, in allocating
the section 199A(g) deduction between X
and Y, because Y’s QPAI is negative, Y’s
QPAI is treated as being $0. Accordingly,
X’s section 199A(g) deduction for its tax-
able year ending December 31, 2018, is
$180 ($180 × $8,000/($8,000 + $0)). Y’s
section 199A(g) deduction for its taxable
year ending December 31, 2018, is $0
($180 × $0/($8,000 + $0)).
(C) In computing Z’s section 199A(g)
deduction for its taxable year ending
June 30, 2019, X’s and Y’s items from
their respective taxable years ending De-
cember 31, 2018, are taken into account.
Therefore, X’s taxable income or loss and
Y’s taxable income or loss, determined
without regard to the section 199A(g) de-
duction, QPAI, and W-2 wages from their
taxable years ending December 31, 2018,
are aggregated with Z’s taxable income
or loss, QPAI, and W-2 wages from its
taxable year ending June 30, 2019. The
EAG’s QPAI is $4,000 (X’s QPAI of
$8,000 + Y’s QPAI of ($6,000) + Z’s QPAI
of $2,000). The EAG’s section 199A(g)
deduction is $360 (9% × $4,000). A por-
tion of the $360 deduction is allocated to
Z in proportion to its QPAI as a percentage
of the QPAI of each member of the EAG
that was taken into account in computing
the EAG’s section 199A(g) deduction.
Pursuant to paragraph (c)(1) of this sec-
tion, in allocating a portion of the $360
deduction to Z, Y’s QPAI is treated as be-
ing $0 because Y’s QPAI is negative. Z’s
section 199A(g) deduction for its taxable
year ending June 30, 2019, is $72 ($360 ×
($2,000/($8,000 + $0 + $2,000))).
(i) Partnership owned by expanded
affiliated group—(1) In general. For pur-
poses of section 199A(g)(3)(D) relating to
DPGR, if all of the interests in the capi-
tal and profits of a partnership are owned
by members of a single EAG at all times
during the taxable year of such partner-
ship (EAG partnership), then the EAG
partnership and all members of that EAG
are treated as a single taxpayer during
such period.
(2) Attribution of activities—(i) In gen-
eral. If a Specified Cooperative which is a
member of an EAG (disposing member)
derives gross receipts from the lease, rent-
al, license, sale, exchange, or other dispo-
sition of property that was MPGE by an
EAG partnership, all the partners of which
are members of the same EAG to which
the disposing member belongs at the time
that the disposing member disposes of
such property, then the disposing member
is treated as conducting the MPGE activ-
ities previously conducted by the EAG
partnership with respect to that property.
The previous sentence applies only for
those taxable years in which the disposing
member is a member of the EAG of which
all the partners of the EAG partnership are
members for the entire taxable year of the
EAG partnership. With respect to a lease,
rental, or license, the disposing member is
treated as having disposed of the proper-
ty on the date or dates on which it takes
into account its gross receipts from the
lease, rental, or license under its method
of accounting. With respect to a sale, ex-
change, or other disposition, the disposing
member is treated as having disposed of
the property on the date it ceases to own
the property for Federal income tax pur-
poses, even if no gain or loss is taken into
account. Likewise, if an EAG partner-
ship derives gross receipts from the lease,
rental, license, sale, exchange, or other
disposition of property that was MPGE
by a member (or members) of the same
EAG (the producing member) to which
all the partners of the EAG partnership
belong at the time that the EAG partner-
ship disposes of such property, then the
EAG partnership is treated as conducting
the MPGE activities previously conducted
by the producing member with respect to
that property. The previous sentence ap-
plies only for those taxable years in which
the producing member is a member of the
EAG of which all the partners of the EAG
partnership are members for the entire
taxable year of the EAG partnership. With
respect to a lease, rental, or license, the
EAG partnership is treated as having dis-
posed of the property on the date or dates
on which it takes into account its gross
receipts derived from the lease, rental, or
license under its method of accounting.
With respect to a sale, exchange, or other
disposition, the EAG partnership is treat-
ed as having disposed of the property on
the date it ceases to own the property for
Federal income tax purposes, even if no
gain or loss is taken into account.
(ii) Attribution between expanded affil-
iated group partnerships. If an EAG part-
nership (disposing partnership) derives
gross receipts from the lease, rental, li-
cense, sale, exchange, or other disposition
of property that was MPGE by another
EAG partnership (producing partnership),
then the disposing partnership is treated as
conducting the MPGE activities previous-
ly conducted by the producing partnership

July 29, 2019 582 Bulletin No. 2019–31
with respect to that property, provided that
each of these partnerships (the producing
partnership and the disposing partnership)
is owned for its entire taxable year in
which the disposing partnership disposes
of such property by members of the same
EAG. With respect to a lease, rental, or li-
cense, the disposing partnership is treated
as having disposed of the property on the
date or dates on which it takes into account
its gross receipts from the lease, rental, or
license under its method of accounting.
With respect to a sale, exchange, or other
disposition, the disposing partnership is
treated as having disposed of the property
on the date it ceases to own the property
for Federal income tax purposes, even if
no gain or loss is taken into account.
(iii) Exception. No member of an EAG
other than an exempt Specified Coopera-
tive is attributed nonpatronage activities
conducted by an EAG partnership. An
EAG partnership is not attributed nonpa-
tronage activities conducted by any mem-
ber of the EAG or by another EAG part-
nership.
(j) Applicability date. The provisions
of this section apply to taxable years end-
ing after the date the Treasury decision
adopting these regulations as final regula-
tions is published in the Federal Register.
Taxpayers, however, may rely on these
regulations until that date, but only if the
taxpayers apply the rules in their entirety
and in a consistent manner.
Par. 3. Section 1.1388-1 is amended by
adding paragraphs (f) and (g).
The additions read as follows:
§1.1388-1 Definitions and special rules.
* * * * *
(f) Patronage and nonpatronage.
Whether an item of income or deduction
is patronage or nonpatronage sourced is
determined by applying the directly re-
lated use test. The directly related use test
provides that if the income or deduction
is produced by a transaction that actual-
ly facilitates the accomplishment of the
cooperative’s marketing, purchasing, or
services activities, the income or deduc-
tion is from patronage sources. However,
if the transaction producing the income or
deduction does not actually facilitate the
accomplishment of these activities but
merely enhances the overall profitability
of the cooperative, being merely inciden-
tal to the association’s cooperative oper-
ation, the income or deduction is from
nonpatronage sources. Patronage and
nonpatronage income or deductions can-
not be netted unless otherwise permitted
by the Internal Revenue Code or regula-
tions issued under the relevant section of
the Internal Revenue Code, or guidance
published in the Internal Revenue Bulletin
(see §601.601(d)(2) of this chapter).
(g) Effective/applicability date. The
provisions of paragraph (f) of this section
apply to taxable years ending after the
date the Treasury decision adopting these
regulations as final regulations is pub-
lished in the Federal Register. However,
taxpayers may rely on the provisions of
paragraph (f) of this section until the date
the Treasury decision adopting these regu-
lations as final regulations is published in
the Federal Register.
Kirsten Wielobob,
Deputy Commissioner for Services
and Enforcement.
(Filed by the Office of the Federal Register on June
18, 2019, 8:45 a.m., and published in the issue of the
Federal Register for June 19, 2019, 84 F.R. 28668)

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 be-
ing made clear because the language has
caused, or may cause, some confusion. It
is not used where a position in a prior rul-
ing 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 transactions.
This term is most commonly used in a ruling
that lists previously published rulings 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
period 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 previous-
ly 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 cas-
es in litigation, or the outcome of a Ser-
vice study.
Abbreviations
The following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI
—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Bulletin No. 2019–31 i July 29, 2019

Numerical Finding List
1
Bulletin 2019–31
Announcements:
2019-07, 2019-27 I.R.B. 62
Notices:
2019-12, 2019-27 I.R.B. 57
2019-40, 2019-27 I.R.B. 59
2019-41, 2019-28 I.R.B. 256
2019-42, 2019-29 I.R.B. 352
2019-27, 2019-31 I.R.B. 484
2019-43, 2019-31 I.R.B. 487
2019-24, 2019-31 I.R.B. 489
Proposed Regulations:
REG-105476-18, 2019-27 I.R.B. 63
REG-106282-18, 2019-28 I.R.B. 259
REG-101828-19, 2019-29 I.R.B. 412
REG-106877-18, 2019-30 I.R.B. 441
REG-121508-18, 2019-30 I.R.B. 456
REG-105474-18, 2019-31 I.R.B. 493
REG-118425-18, 2019-31 I.R.B. 539
Revenue Rulings:
2019-16, 2019-28 I.R.B. 96
Revenue Procedures:
2019-24, 2019-29 I.R.B. 353
Treasury Decisions:
9863, 2019-27 I.R.B. 1
9864, 2019-27 I.R.B. 6
9865, 2019-27 I.R.B. 27
9867, 2019-28 I.R.B. 98
9868, 2019-28 I.R.B. 252
9866, 2019-29 I.R.B. 261
9861, 2019-30 I.R.B. 433
9869, 2019-30 I.R.B. 438
9862, 2019-31 I.R.B. 477
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018–27 through 2018–52 is in Internal Revenue Bulletin
2018–52, dated December 27, 2018.
July 29, 2019 ii Bulletin No. 2019–31

Bulletin No. 2019–31 iii July 29, 2019
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2019–31
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018–27 through 2018–52 is in Internal Revenue Bulletin
2018–52, dated December 27, 2018.

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