Internal Revenue Bulletin 2019-2 (PDF rendition): IRS Revenue Procedures

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

# INTERNAL REVENUE BULLETIN

Bulletin No. 2019-02
January 7, 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.

## ADMINISTRATIVE

NOTICE 2019-05, page 283.

On September 12, 2018, the Department of Health and Human
Services issued guidance to allow all hardship exemptions
available under 45 CFR 155.605(d)(1) to be claimed by a
qualifying individual (or the taxpayer who may claim a qualifying
individual as a dependent) on a Federal income tax return for
the 2018 tax year without obtaining a hardship exemption
certification from the Health Insurance Marketplace. Notice
2019-5 modifies the current list of hardship exemptions that
may be claimed on a Federal income tax return without obtain-
ing a hardship exemption certification to include the September
12, 2018 HHS guidance. Specifically, for the 2018 tax year,
Notice 2019-5 expands the exemptions set forth in Notice
2014-76 and Notice 2017-14 to include all hardship exemp-
tions available under 45 CFR 155.605(d)(1).

### Rev. Proc. 2019-09, page 292.

This revenue procedure updates Rev. Proc. 2018-11, and
updates the annual adequate disclosure revenue procedure. It
identifies circumstances under which the disclosure on a tax
return with respect to an item or position is adequate for the
purposes of the accuracy penalty of section 6662 and return
preparer penalty under 6694.

## EXCISE TAX

### NOTICE 2019-04, page 282.

Notice 2019-04 extends the dyed fuel relief initially provided
in section 3.02 of Notice 2017-30, 2017-21 I.R.B. 1248,
then extended through December 31, 2018, by section 3 of
Notice 2018-39, 2018-20 I.R.B. 582. A claimant may submit
a refund claim for the § 4081(a)(1) tax imposed on undyed
diesel fuel and kerosene for fuel that is (1) removed from a
Milwaukee or Madison terminal; (2) entered into a Green Bay

terminal within 24 hours; and (3) subsequently dyed and re-
moved from that Green Bay terminal. The relief provided in this
notice takes effect beginning January 1, 2019, and ending
December 31, 2019.

## INCOME TAX

### NOTICE 2019-01, page 275.

This notice announces that the Treasury Department and the
IRS intend to issue regulations addressing certain issues aris-
ing from the enactment of the Tax Cuts and Jobs Act, Pub. L.
115-97 (2017) (the "Act"), on December 22, 2017, with re-
spect to foreign corporations with previously taxed earnings
and profits ("PTEP"). The notice describes regulations that the
Treasury Department intend to issue including (i) rules relating
to the maintenance of PTEP in annual accounts and within
certain groups; (ii) rules relating to the ordering of PTEP upon
distribution and reclassification; and (iii) rules relating to the
adjustment required when an income inclusion exceeds the
earnings and profits of a foreign corporation. It is anticipated
that the regulations announced in the notice will apply to
taxable years of U.S. shareholders ending after the date of
release of the notice and to taxable years of foreign corpora-
tions ending with or within such taxable years.

### NOTICE 2019-02, page 281.

This notice provides the optional 2019 standard mileage rates
for taxpayers to use in computing the deductible costs of
operating an automobile for business, charitable, medical, or
moving expense purposes. This notice also provides the
amount taxpayers must use in calculating reductions to basis
for depreciation taken under the business standard mileage
rate, and the maximum standard automobile cost that may be
used in computing the allowance under a fixed and variable rate
(FAVR) plan.

Finding Lists begin on page ii.

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NOTICE 2019-05, page 283.

On September 12, 2018, the Department of Health and Human
Services issued guidance to allow all hardship exemptions
available under 45 CFR 155.605(d)(1) to be claimed by a
qualifying individual (or the taxpayer who may claim a qualifying
individual as a dependent) on a Federal income tax return for
the 2018 tax year without obtaining a hardship exemption
certification from the Health Insurance Marketplace. Notice
2019-5 modifies the current list of hardship exemptions that
may be claimed on a Federal income tax return without obtain-
ing a hardship exemption certification to include the September
12, 2018 HHS guidance. Specifically, for the 2018 tax year,
Notice 2019-5 expands the exemptions set forth in Notice
2014-76 and Notice 2017-14 to include all hardship exemp-
tions available under 45 CFR 155.605(d)(1).

### REG-104259-18, page 300.

This document contains proposed regulations that provide
guidance regarding an additional tax on certain corporations
with substantial gross receipts (taking into account the gross
receipts of certain related entities) that make certain payments
to foreign persons that are related to the corporations, as well
as additional reporting requirements.

### Rev. Proc. 2019-06, page 284.

The revenue procedure sets forth the unpaid loss discount
factors for the 2018 accident year for purposes of section 846
of the Internal Revenue Code. The revenue procedure also
prescribes the salvage discount factors for the 2018 accident
year, which must be used to compute discounted estimated
salvage recoverable under section 832 of the Internal Revenue
Code.

### Rev. Proc. 2019-09, page 292.

This revenue procedure updates Rev. Proc. 2018-11, and
updates the annual adequate disclosure revenue procedure. It
identifies circumstances under which the disclosure on a tax
return with respect to an item or position is adequate for the
purposes of the accuracy penalty of section 6662 and return
preparer penalty under 6694.

### Rev. Proc. 2019-10, page 296.

This revenue procedure modifies Rev. Proc. 2018-31 to pro-
vide procedures for an insurance company to obtain automatic
consent of the Commissioner to change its method of account-
ing to comply with section 807(f), as amended by section
13513 of the TCJA. This revenue procedure also modifies Rev.
Rul. 94-74 and Rev. Rul. 2002-6.

### REV. RUL. 2019-03, page 272.

Federal rates; adjusted federal rates; adjusted federal long-
term rate, the long-term exempt rate, and the blended annual
rate. For purposes of sections 382, 642, 1274, 1288, 7872
and other sections of the Code, tables set forth the rates for
January 2019.

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## The IRS Mission

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

## Introduction

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

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

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

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

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

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

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

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

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

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

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

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

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

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

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

Section 1274 .- Determination of Issue Price in the
Case of Certain Debt Instruments Issued for Property
(Also Sections 42, 280G, 382, 467, 468, 482, 483, 642,
1288, 7520, 7872.)

## Rev. Rul. 2019-03

This revenue ruling provides various
prescribed rates for federal income tax
purposes for January 2019 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month for
purposes of section 1274(d) of the Internal

Revenue Code. Table 2 contains the short-
term, mid-term, and long-term adjusted
applicable federal rates (adjusted AFR)
for the current month for purposes of sec-
tion 1288(b). Table 3 sets forth the ad-
justed federal long-term rate and the long-
term tax-exempt rate described in section
382(f). Table 4 contains the appropriate
percentages for determining the low-
income housing credit described in sec-
tion 42(b)(1) for buildings placed in ser-
vice during the current month. However,
under section 42(b)(2), the applicable per-
centage for non-federally subsidized new

buildings placed in service after July 30,
2008, shall not be less than 9%. Table 5
contains the federal rate for determining
the present value of an annuity, an interest
for life or for a term of years, or a remain-
der or a reversionary interest for purposes
of section 7520. Finally, Table 6 contains
the deemed rate of return for transfers
made during calendar year 2019 to pooled
income funds described in section
642(c)(5) that have been in existence for
less than 3 taxable years immediately pre-
ceding the taxable year in which the trans-
fer was made.

REV. RUL. 2019-03 TABLE 1 Applicable Federal Rates (AFR) for January 2019 Period for Compounding Annual Semiannual Quarterly Monthly Short-term

AFR

2.72%

2.70%

2.69%

2.68%

110% AFR

2.99%

2.97%

2.96%

2.95%

120% AFR

3.27%

3.24%

3.23%

3.22%

130% AFR

3.54%

3.51%

3.49%

3.48%

Mid-term

AFR

2.89%

2.87%

2.86%

2.85%

110% AFR

3.18%

3.16%

3.15%

3.14%

120% AFR

3.47%

3.44%

3.43%

3.42%

130% AFR

3.76%

3.73%

3.71%

3.70%

150% AFR

4.36%

4.31%

4.29%

4.27%

175% AFR

5.08%

5.02%

4.99%

4.97%

AFR

Long-term

3.15%

3.13%

3.12%

3.11%

110% AFR

3.47%

3.44%

3.43%

3.42%

120% AFR

3.80%

3.76%

3.74%

3.73%

130% AFR

4.11%

4.07%

4.05%

4.04%

REV. RUL. 2019-03 TABLE 2 Adjusted AFR for January 2019 Period for Compounding

Annual

Semiannual

Quarterly

Monthly

Short-term adjusted AFR

2.06%

2.05%

2.04%

2.04%

Mid-term adjusted AFR

2.19%

2.18%

2.17%

2.17%

Long-term adjusted AFR

2.39%

2.38%

2.37%

2.37%

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# REV. RUL. 2019-03 TABLE 3 Rates Under Section 382 for January 2019

Adjusted federal long-term rate for the current month
2.39%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)

2.51%

# REV. RUL. 2019-03 TABLE 4 Appropriate Percentages Under Section 42(b)(1) for January 2019

Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new
buildings placed in service after July 30, 2008, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit
7.70%

Appropriate percentage for the 30% present value low-income housing credit

3.30%

# REV. RUL. 2019-03 TABLE 5

Rate Under Section 7520 for January 2019

Applicable federal rate for determining the present value of an annuity, an interest for life or a term
of years, or a remainder or reversionary interest

3.4%

# REV. RUL. 2019-03 TABLE 6

Deemed Rate for Transfers to New Pooled Income Funds During 2019

Deemed rate of return for transfers during 2019 to pooled income funds that have been in existence for
less than 3 taxable years

2.2%

## Section 42 .- Low-Income Housing Credit

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of January
2019. See Rev. Rul. 2019-03, page 272.

## Section 280G .- Golden Parachute Payments

The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2019. See Rev. Rul. 2019-03, page 272.

# Section 382 .- Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term
rate is set forth for the month of January 2019.
See Rev. Rul. 2019-03, page 272.

## Section 467 .- Certain Payments for the Use of Property or Services

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of January
2019. See Rev. Rul. 2019-03, page 272.

# Section 483 .- Interest on Certain Deferred Payments

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of January
2019. See Rev. Rul. 2019-03, page 272.

## Section 468 .- Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of January
2019. See Rev. Rul. 2019-03, page 272.

## Section 482 .- Allocation of Income and Deductions Among Taxpayers

The applicable federal short-term, mid-
term, and long-term rates are set forth for
the month of January 2019. See Rev. Rul.
2019-03, page 272.

## Section 642 .- Special Rules for Credits and Deductions

Deemed rate for transfers to new pooled income
funds during 2019 is set forth. See Rev. Rul. 2019-
03, page 272.

## Section 1288 .- Treatment of Original Issue Discount on Tax-Exempt Obligations

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2019. See Rev. Rul. 2019-03, page 272.

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## Section 7520 .- Valuation Tables

The applicable federal short-term, mid-
term, and long-term rates are set forth for
the month of January 2019. See Rev. Rul.
2019-03, page 272.

## Section 7872 .- Treatment of Loans With Below- Market Interest Rates

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of January
2019. See Rev. Rul. 2019-03, page 272.

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# Part III. Administrative, Procedural, and Miscellaneous

## Previously Taxed Earnings and Profits Accounts Notice 2019-01

### SECTION 1. OVERVIEW

This notice announces that the Depart-
ment of the Treasury ("Treasury Depart-
ment") and the Internal Revenue Service
("IRS") intend to issue regulations ad-
dressing certain issues arising from the
enactment of the Tax Cuts and Jobs Act,
Pub. L. 115-97 (2017) (the "Act"), on
December 22, 2017, with respect to for-
eign corporations with previously taxed
earnings and profits ("PTEP"). Section 2
of this notice provides background on sec-
tion 959 of the Internal Revenue Code
("Code") and other relevant Code provi-
sions. Section 3 of this notice describes pro-
posed regulations that the Treasury Depart-
ment and the IRS intend to issue concerning
PTEP arising under provisions of the Act
(the "forthcoming regulations"). Section 4
of this notice describes the proposed appli-
cability date of the forthcoming regulations.
Section 5 of this notice requests comments
and provides contact information; as ex-
plained in that section, the Treasury Depart-
ment and the IRS intend to address addi-
tional PTEP issues in separate guidance.

### SECTION 2. BACKGROUND

The term PTEP refers to earnings and
profits ("E&P") of a foreign corporation
attributable to amounts which are, or have
been, included in the gross income of a
United States shareholder (as defined un-
der section 951(b)) ("U.S. shareholder")
under section 951(a) or under section
1248(a). See sections 959(a) and (e). Un-
der section 959(a)(1), distributions of
PTEP are excluded from the U.S. share-
holder's gross income, or the gross in-
come of any other U.S. person who ac-
quires the U.S. shareholder's interest (or a
portion thereof) in the foreign corporation
(such U.S. person, a “successor in inter-
est"). Section 959(a)(2) further excludes
PTEP from a U.S. shareholder's gross in-
come if such E&P would be included in
the gross income of the U.S. shareholder
or successor in interest under section
951(a)(1)(B) as an amount determined un-

der section 956. Distributions of PTEP to
a U.S. shareholder or successor in interest
generally are not treated as dividends ex-
cept that such distributions immediately
reduce the E&P of the foreign corpora-
tion. Section 959(d).

Section 959(c) ensures that distribu-
tions from a foreign corporation are first
attributable to PTEP described in section
959(c)(1) ("section 959(c)(1) PTEP") and
then to PTEP described in section
959(c)(2) ("section 959(c)(2) PTEP"), and
finally to non-previously taxed E&P
("section 959(c)(3) E&P"). In addition,
section 959(f) ensures that, in determining
the amount of any inclusion under sec-
tions 951(a)(1)(B) and 956 with respect to
a foreign corporation, PTEP attributable
to section 951(a)(1)(A) inclusions remain-
ing after any distributions during the year
are taken into account before non-
previously taxed E&P described in section
959(c)(3).

On August 29, 2006, a notice of pro-
posed rulemaking (REG-121509-00)
was published in the Federal Register (71
FR 51155) relating to the exclusion from
gross income of PTEP and associated ba-
sis adjustments, corrections to which were
published in the Federal Register on De-
cember 8, 2006 (71 FR 71116) (together,
the "2006 proposed regulations"). The
2006 proposed regulations were intended
to address some of the complexities and
open issues regarding the application of
sections 959 and 961 that are not specifi-
cally addressed in the current final regu-
lations, which were originally published
in 1965 and were amended in 1974, 1978,
and 1983. See TD 6795 (1965-1 C.B.
287); TD 7334 (1975-1 C.B. 246); TD
7545 (1978-1 C.B. 245); TD 7893
(1983-1 C.B. 132). The 2006 proposed
regulations have not been finalized. The
Treasury Department and the IRS intend
to withdraw the 2006 proposed regula-
tions and to issue new proposed regula-
tions under sections 959 and 961.

Under proposed § 1.959-3(b), share-
holders must account for PTEP with respect
to their stock in a foreign corporation, and
foreign corporations must account for the
aggregate amount of PTEP of all sharehold-
ers, as well as section 959(c)(3) E&P. Be-
fore the Act, annual accounts generally were

maintained for each separate category of
income described in section 904(d)(1) and
segregated between section 959(c)(1) PTEP
and section 959(c)(2) PTEP. See Notice 88-
71, 1988-2 C.B. 374. Section 959(c)(1)
PTEP consisted of E&P previously included
in gross income under sections 951(a)(1)(B)
and (C), and section 959(c)(2) PTEP con-
sisted of E&P previously included in gross
income under section 951(a)(1)(A) or
amounts included in gross income as a div-
idend under section 1248. See § 1.959-
3(b)(1) and (2); see also proposed § 1.959-
3(e)(2). Section 959(c)(1) PTEP also
included E&P that had been originally clas-
sified as section 959(c)(2) PTEP and was
reclassified as section 959(c)(1) PTEP be-
cause it reduced the amount of an income
inclusion under section 951(a)(1)(B) or sec-
tion 951(a)(1)(C) (before its repeal) pursu-
ant to section 959(a)(2) or section 959(a)(3)
(before its repeal). See § 1.959-3(b).

Under the provisions of the Act, the
portion of a U.S. shareholder's global in-
tangible low-taxed income ("GILTI'') in-
cluded in gross income under section
951A(a) that is allocated to a controlled
foreign corporation (as defined in section
957) ("CFC") under section 951A(f)(2) and
proposed § 1.951A-6(b)(2) is treated as an
amount included in the gross income of a
U.S. shareholder under section 951(a)(1)(A)
for purposes of section 959. Section
951A(f)(1). Likewise, amounts determined
under section 965(a), as amended by the
Act, with respect to certain foreign corpora-
tions are treated as increases to subpart F
income, and a U.S. shareholder with respect
to such a foreign corporation generally in-
cludes in gross income under section
951(a)(1)(A) its pro rata share of such
amounts, subject to reduction under section
965(b) for certain deficits attributable to
stock in another foreign corporation owned
by the U.S. shareholder. Amounts of a U.S.
shareholder's inclusions under section
965(a) that are reduced by deficits attribut-
able to stock of another foreign corporation
under section 965(b) are treated as amounts
included in the shareholder's gross income
under section 951(a) for purposes of section
959. Section 965(b)(4)(A). Additionally,
section 245A(e)(2) treats certain hybrid div-
idends received by a CFC as subpart F in-
come for purposes of section 951(a)(1)(A).

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Finally, section 964(e)(4) treats a certain
portion of gain on the disposition of CFC
stock as subpart F income of the selling
CFC for purposes of section 951(a)(1)(A).
Accordingly, after the Act, section 959(c)(2)
PTEP may arise from income inclusions
under section 951(a)(1)(A) (including by
reason of section 245A(e)(2), 951A(f)(1),
959(e), 964(e)(4), or 965(a)) or by reason of
the application of section 965(b)(4)(A).

Section 965 and proposed regulations
under that section provide special foreign
tax credit and deduction rules, and pro-
posed regulations under section 986 pro-
vide special foreign currency gain or
loss rules, for distributions of PTEP at-
tributable to income inclusions arising
from the application of section 965(a)
and PTEP attributable to the application of
section 965(b)(4)(A) (collectively, “section
965 PTEP"). See proposed §§ 1.965-5 and
1.986(c) -1. Section 245A(e)(3) applies the
disallowance of foreign tax credits in sec-
tion 245A(d) with respect to any amount
included in the income of a U.S. shareholder
pursuant to section 245A(e)(2).

In addition, proposed regulations under
section 960 establish, for purposes of de-
termining the amount of foreign income
taxes deemed paid, a system of accounting
for PTEP in annual accounts for each sep-
arate category of income as defined in
proposed § 1.904-5(a)(4)(v) ("section
904 category") and further segregate each
annual account among ten PTEP groups.
Proposed § 1.960-3(c). The groups cor-
respond to various types of income inclu-
sions under section 951(a) (including
amounts treated as giving rise to an in-
come inclusion under section 951(a) for
purposes of section 959) and PTEP reclas-
sifications that can arise after the Act.

Finally, certain provisions of the Act
provide for a deduction with respect to
certain amounts that are included in the
income of a domestic corporation and
treated as section 951(a)(1)(A) inclusions
for purposes of section 959. Sections
245A and 1248(j) generally allow a de-
duction with respect to gain on the sale of
stock of a foreign corporation treated as a
dividend under section 1248. In the case
of gain treated as a dividend under section
964(e)(1) upon the sale or exchange by a
CFC of stock of a lower tier foreign cor-
poration and included in the CFC's sub-
part F income under section 964(e)(4),

section 964(e)(4) generally allows a de-
duction under section 245A with respect
to a domestic corporation's pro rata share
of the subpart F income that it includes in
gross income as a dividend pursuant to
section 964(e)(4).

## SECTION 3. REGULATIONS TO BE ISSUED ADDRESSING PREVIOUSLY TAXED EARNINGS AND PROFITS

### .01 Annual Accounts and Groups of Previously Taxed Earnings and Profits

The Act created the need to account for
new groups of PTEP because section
959(c)(2) PTEP may arise by reason of in-
come inclusions under section 951(a)(1)(A),
245A(e)(2), 951A(f)(1), 959(e), 964(e)(4),
or 965(a) or by reason of the application of
section 965(b)(4)(A), and those different
groups of PTEP may be subject to dif-
ferent rules under sections 960, 965(g),
245A(e)(3), and 986(c). Additionally,
because section 959(c)(2) PTEP may be
reclassified as section 959(c)(1) PTEP
as a result of sections 956 and 959(a)(2),
similar groups for section 959(c)(1)
PTEP must be maintained in order to
properly apply sections 960, 965(g),
245A(e)(3), and 986(c) when earnings
are reclassified. Groups of section
959(c)(1) PTEP must also be maintained
with respect to inclusions under section
951(a)(1)(B) and section 951(a)(1)(C)
(before its repeal) (in such cases, not by
reason of the application of section
959(a)(2) or section 959(a)(3) (before
its repeal)).

The Treasury Department and the IRS
expect that the forthcoming regulations
will provide that an annual account (each
an "annual PTEP account") must be main-
tained and each annual PTEP account
must be segregated into the 16 groups
described below in each section 904 cat-
egory (individually, a "PTEP group" and
collectively, "PTEP groups"). For rules
regarding the year and section 904 cate-
gory to which an account corresponds, see
proposed § 1.960-3(c)(1). These 16
groups include the ten groups identified in
proposed § 1.960-3(c)(2), which is dis-
cussed in section 2 of this notice, and six
additional groups.

1\. E&P described in section 959(c)(1)
(A) that were initially described in

section 959(c)(2) by reason of section
965(a) ("reclassified section 965(a)
PTEP");

2\. E&P described in section 959(c)(1)(A)
that were initially described in sec-
tion 959(c)(2) by reason of section
965(b)(4)(A) ("reclassified section
965(b) PTEP");

3\. E&P described in section 959(c)(1)
(A) by reason of section 951(a)
(1)(B) and not by reason of section
959(a)(2) ("section 951(a)(1)(B)
PTEP");

4\. E&P described in section 959(c)(1)
(A) that were initially described in
section 959(c)(2) by reason of section
951A(f)(2) ("reclassified section
951A PTEP");

5\. E&P described in section 959(c)(1)
(A) that were initially described in
section 959(c)(2) by reason of section
245A(e)(2) ("reclassified section
245A(e)(2) PTEP");

6\. E&P described in section 959(c)(1)
(A) that were initially described in
section 959(c)(2) by reason of section
959(e) ("reclassified section 959(e)
PTEP");

7\. E&P described in section 959(c)(1)
(A) that were initially described in sec-
tion 959(c)(2) by reason of section
964(e)(4) (“reclassified section
964(e)(4) PTEP");

8\. E&P described in section 959(c)(1)
(A) that were initially described in
section 959(c)(2) by reason of section
951(a)(1)(A) (other than E&P that
were initially described in (10)
through (15) of this list) ("reclassified
section 951(a)(1)(A) PTEP");

9\. E&P described in section 959(c)(1)
(B), including by reason of section
959(a)(3) (before its repeal) ("section
956A PTEP");

10\. E&P described in section 959(c)(2)
by reason of section 965(a) ("sec-
tion 965(a) PTEP");

11\. E&P described in section 959(c)(2)
by reason of section 965(b)(4)(A)
("section 965(b) PTEP");

12\. E&P described in section 959(c)(2)
by reason of section 951A(f)(2)
("section 951A PTEP");

13\. E&P described in section 959(c)(2)
by reason of section 245A(e)(2)
("section 245A(e)(2) PTEP");

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14\. E&P described in section 959(c)(2)
by reason of section 959(e) ("sec-
tion 959(e) PTEP");

15\. E&P described in section 959(c)(2)
by reason of section 964(e)(4)
("section 964(e) PTEP"); and

16\. E&P described in section 959(c)(2)
by reason of section 951(a)(1)(A)
not otherwise described in (10)
through (15) of this list ("section
951(a)(1)(A) PTEP").

Accordingly, after the Act, section
959(c)(1) PTEP will be comprised of
PTEP groups described in (1) through (9)
of the preceding paragraph, and section
959(c)(2) PTEP will be comprised of
PTEP groups described in (10) through
(16) of the preceding paragraph. The
forthcoming regulations will provide that
once PTEP is assigned to a PTEP group
within an annual PTEP account for the
year of the income inclusion under section
951(a)(1) (including by reason of section
245A(e)(2), 951A(f)(1), 959(e), 964(e)
(4), or 965(a)) or the year of application of
section 965(b)(4)(A), the PTEP will be
maintained in an annual PTEP account
with a year that corresponds to the year of
the account from which the PTEP origi-
nated if PTEP is distributed or reclassified
in a subsequent taxable year. See also
proposed §§ 1.960-3(c)(3) and 1.960-
3(c)(4) (providing similar rules for pur-
poses of determining the amount of for-
eign income taxes deemed paid under
section 960(b)).

As discussed in section 2 of this notice,
proposed § 1.960-3(c) provides that, for
purposes of determining the amount of
foreign income taxes deemed paid under
section 960(b), with respect to a CFC, a
separate annual PTEP account is main-
tained in each relevant section 904 cate-
gory and the PTEP in each such account is
assigned to one or more of the PTEP
groups. However, the Treasury Depart-
ment and the IRS recognize that for pur-
poses of applying the ordering rules de-
scribed in section 3.02 of this notice, it
may be necessary to aggregate amounts
across section 904 categories. The Trea-
sury Department and the IRS expect that
the forthcoming regulations will provide
that, to the extent a CFC has E&P in a
PTEP group that is in more than one sec-
tion 904 category, any distribution out of
that PTEP group is made pro rata out of

the earnings and profits in each section
904 category. Additionally, the rules in
proposed §§ 1.960-1 and 1.960-3 ad-
dressing the types of PTEP groups and
their treatment for purposes of applying
section 960(b) will be coordinated, as ap-
propriate, with the forthcoming regula-
tions when finalized.

It is expected that forthcoming regula-
tions will provide that dollar basis must be
tracked for each annual PTEP account,
and, to the extent provided in the forth-
coming regulations, separately for each
PTEP group within an annual account.
The forthcoming regulations will confirm
that distributions from any PTEP group
reduce the shareholder's stock basis under
section 961(b)(1) without regard to how
that basis was originally created, includ-
ing if the basis was created under section
961(a) due to an inclusion unrelated to the
PTEP group being distributed.

It is expected that the forthcoming reg-
ulations will provide transition rules for
annual PTEP accounts maintained before
the applicability date of the regulations.
Annual PTEP accounts established for
taxable years before the applicability date
of the forthcoming regulations will only
need to be segregated between the section
951(a)(1)(B) PTEP group, the section
956A PTEP group, and the section
951(a)(1)(A) PTEP group, except for the
taxable year to which section 965 applies.
For the taxable year to which section 965
applies, annual PTEP accounts must also
be segregated between the reclassified
section 965(a) PTEP group, the reclassi-
fied section 965(b) PTEP group, the sec-
tion 965(a) PTEP group, and the section
965(b) PTEP group (the "section 965
PTEP groups"). A shareholder that has
maintained a multi-year pool instead of
annual PTEP accounts for its section
951(a)(1)(B) PTEP, section 956A PTEP,
or its section 951(a)(1)(A) PTEP will be
permitted to treat the respective pool as a
PTEP group in a single annual PTEP ac-
count with an average dollar basis, and
that annual PTEP account will be consid-
ered the annual PTEP account for the last
taxable year ending before the applicabil-
ity date of the proposed regulations. Ad-
ditionally, a shareholder that has main-
tained aggregate dollar basis pools to
reflect the dollar basis of its total section
959(c)(1) PTEP or its total section

959(c)(2) PTEP (or both) for taxable years
before the applicability date of the regu-
lations will be permitted to assign an av-
erage dollar basis to the PTEP in each
annual account (other than the section 965
PTEP groups), if it maintained annual ac-
counts for section 959(c)(1) PTEP and
section 959(c)(2) PTEP.

The forthcoming regulations described
herein are intended to allow for the most
flexibility in applying the limitations on
the creditability of certain foreign income
taxes, and the rules under section 986(c)
regarding the recognition of foreign cur-
rency gain or loss, to the different types of
PTEP. Implementing all of the operative
provisions relating to PTEP following the
Act with complete precision requires
maintaining PTEP in 16 PTEP groups
across the section 904 categories in annual
accounts. The Treasury Department and
the IRS recognize the complexity and
both the administrative and compliance
challenges associated with maintaining
such a large number of PTEP groups and
are weighing those considerations against
the need for precision in applying the re-
lated foreign tax credit and foreign cur-
rency rules. Some of the proposed PTEP
groups, such as reclassified 245A(e)
PTEP, reclassified section 959(e) PTEP,
reclassified section 964(e)(4) PTEP, sec-
tion 956A PTEP, section 245A(e) PTEP,
section 959(e) PTEP, and section
964(e)(4) PTEP are unlikely to arise on a
routine basis. Additionally, because of the
one-time nature of section 965, once all of
the PTEP in the section 965 PTEP groups
are distributed, those groups will be com-
pletely eliminated. See section 3.02 of this
notice. Furthermore, the Treasury Depart-
ment and the IRS are considering ways to
simplify the rules associated with PTEP
by consolidating PTEP groups or group-
ing accounts into multi-year accounts, or
by other methods, and request comments
in this regard.

### .02 Ordering of Earnings and Profits upon Distribution and Reclassification

Section 959(c) provides that, for pur-
poses of sections 959(a) and (b), section
316(a)(2) (relating to E&P of the taxable
year) ("current E&P") and then section
316(a)(1) (relating to E&P accumulated
after February 28, 1913) ("accumulated
E&P") apply first to section 959(c)(1)

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PTEP, then to section 959(c)(2) PTEP,
and finally to section 959(c)(3) E&P. The
reference to section 316 in section 959
indicates that a distribution of PTEP is
dependent upon the existence of E&P oth-
erwise sufficient to support a dividend un-
der section 316. The forthcoming regula-
tions will clarify that a distribution will be
a distribution of PTEP only to the extent it
would have otherwise been a dividend
under section 316. For example, if a for-
eign corporation has no current E&P or
accumulated E&P at the end of a taxable
year, a distribution from the corporation to
a shareholder during the taxable year will
be a return of basis or treated as gain from
the sale or exchange of property under
section 301(c)(2) or (3), respectively, re-
gardless of whether the shareholder has
one or more annual PTEP accounts with
respect to its stock in the foreign corpora-
tion.

Under section 316, distributions are
considered first as distributions from cur-
rent E&P, to the extent thereof, and then
as distributions from the most recently
accumulated E&P, to the extent thereof.
As noted above, PTEP will be maintained
in annual PTEP accounts. To facilitate the
rule in section 959(c), which incorporates
the ordering rule of section 316, the forth-
coming regulations will require a "last in,
first out" approach to the sourcing of dis-
tributions from annual PTEP accounts,
subject to the special priority rule for
PTEP arising by reason of the application
of section 965, as discussed in the follow-
ing paragraph. Thus, in general, section
959(c)(1) PTEP in the most recent annual
PTEP account will be distributed first
(with an exception for section 965 PTEP),
followed by the next most recent annual
PTEP account, and so on, after which the
same approach will apply to section
959(c)(2) PTEP. Within each annual
PTEP account, the PTEP attributable to
each group of PTEP earned in that year
will be distributed in the order prescribed
in the following paragraphs in this section
3.02.

The forthcoming regulations will pro-
vide, under the grants of regulatory author-
ity in sections 965(o) and 7805(a), that
PTEP attributable to income inclusions un-
der section 965(a) or by reason of section
965(b)(4)(A) receive priority when deter-
mining the group of PTEP from which a

distribution is made. This priority will be
integrated into the general ordering rule of
section 959(c) that sources PTEP first from
section 959(c)(1) PTEP and then from sec-
tion 959(c)(2) PTEP. Thus, starting with
section 959(c)(1) PTEP, under the forth-
coming regulations, as an exception to the
last-in, first-out approach, distributions will
be sourced first from the reclassified section
965(a) PTEP and then from the reclassified
section 965(b) PTEP. Once those PTEP
groups are exhausted, under the last-in, first-
out approach, distributions will be sourced
pro rata from the remaining section
959(c)(1) PTEP groups in each annual
PTEP account, starting from the most recent
annual account.

Once the PTEP groups relating to sec-
tion 959(c)(1) PTEP are exhausted, distri-
butions will be sourced from section
959(c)(2) PTEP. As described in the pre-
ceding paragraph, the forthcoming regula-
tions will provide that, as an exception to
the last-in, first-out approach, distribu-
tions will be sourced first from section
965(a) PTEP and then section 965(b)
PTEP. Once those two PTEP groups are
exhausted, under the last-in, first-out ap-
proach, distributions will be sourced pro
rata from the remaining section 959(c)(2)
PTEP groups in each annual PTEP ac-
count, starting from the most recent an-
nual PTEP account. Finally, once all the
PTEP groups have been exhausted, the
remaining amount of any distributions
will be sourced from section 959(c)(3)
E&P, to the extent thereof.

The forthcoming regulations will also
provide that reclassifications of PTEP pur-
suant to the application of section
959(a)(2) will be sourced first from sec-
tion 965(a) PTEP, then section 965(b)
PTEP, and then, under a last-in, first-out
approach, pro rata from the remaining sec-
tion 959(c)(2) PTEP groups in each an-
nual PTEP account, starting from the most
recent annual PTEP account.

These ordering rules are expected to
simplify PTEP recordkeeping in the future
because, once a foreign corporation dis-
tributes all of its section 965 PTEP, the
foreign corporation and its U.S. share-
holder(s) will have reduced the number of
PTEP groups that need to be tracked. Ab-
sent the ordering rules described in the
preceding paragraphs of this section 3.02,
the last in, first out approach to PTEP

distributions would trap annual PTEP ac-
counts with section 965 PTEP behind sub-
sequent annual PTEP accounts, requiring
the section 965 PTEP to be tracked indef-
initely. The ordering rules to be provided
in forthcoming regulations are illustrated
by an example in section 3.04 of this
notice.

.03 Adjustments Due to an Income
Inclusion in Excess of Current Earnings
and Profits

A U.S. shareholder's income inclusion
under section 951A is not subject to a
limitation based on the E&P of its CFCs
for the taxable year. Consequently, in a
year in which the portion of a U.S. share-
holder's GILTI inclusion amount allo-
cated to a CFC under section 951A(f)(2)
and proposed § 1.951A-6(b)(2) exceeds
the CFC's current E&P, the PTEP result-
ing by reason of section 951A(f)(1) and
proposed § 1.951A-6(b)(1) will exceed
the CFC's current E&P and, in some
cases, may exceed the CFC's accumulated
E&P as well. Similarly, an income inclu-
sion under section 951(a)(1)(A) by reason
of section 965 is not subject to an E&P
limitation. Further, while an inclusion un-
der section 951(a)(1)(A) (other than by
reason of section 965) with respect to a
CFC is generally subject to an E&P lim-
itation under section 952(c)(1)(A), a U.S.
shareholder's inclusion under section
951(a)(1)(A) with respect to the CFC can
exceed its E&P if such CFC has a tested
loss. See section 951A(c)(2)(B)(ii) and
proposed § 1.951A-6(d) (increasing a
CFC's E&P by the amount of a tested loss
solely for purposes of applying the E&P
limitation of section 952(c)(1)(A)).

As noted in section 3.02 of this notice,
the aggregate of the amounts of section
959(c)(1) PTEP, section 959(c)(2) PTEP,
and section 959(c)(3) E&P of a foreign
corporation must equal the amount of
E&P of the foreign corporation. The forth-
coming regulations under section 959 will
provide that current E&P are first classi-
fied as section 959(c)(3) E&P and then
section 959(c)(3) E&P are reclassified as
section 959(c)(1) PTEP or section
959(c)(2) PTEP, as appropriate, in full,
which may have the effect of creating or
increasing a deficit in section 959(c)(3)
E&P. For example, in a case in which the
portion of a U.S. shareholder's GILTI in-

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clusion amount allocated to a CFC under
section 951A(f)(2) and proposed § 1.951A-
6(b)(2) exceeds the current E&P of the
CFC, section 959(c)(3) E&P will first be
increased by the CFC's current E&P and
then decreased by the entire amount of the
portion of the GILTI inclusion amount allo-
cated to the CFC , possibly below zero, and
section 959(c)(2) PTEP will be increased by
the same amount. For a similar rule in the
case in which a U.S. shareholder's inclusion
under section 951(a) by reason of section
965(a) exceeds E&P, see proposed § 1.965-
2(d)(1).

Finally, in a case where a foreign cor-
poration has a current-year deficit in E&P,
that deficit will solely reduce the foreign
corporation's section 959(c)(3) E&P with-
out affecting the amount of its section
959(c)(1) PTEP or section 959(c)(2)
PTEP.

### .04 Examples

The rules described in sections 3.02
and 3.03 of this notice are illustrated in the
following examples:

Example 1-(i) Facts. USP, a domestic corpora-
tion, wholly owns FC, a foreign corporation that has

the U.S. dollar as its functional currency. Both USP
and FC use the calendar year as their taxable year.
Before 2018, the PTEP of FC was maintained in
annual accounts. As of December 31, 2018, FC's
$300x of E&P (before taking into account distribu-
tions made or inclusions under section 951(a)(1)(B)
in 2018) applicable to USP's interest in FC are
classified under section 3.01 of this notice as fol-
lows:

Year

Section 959(c)(1)

Section 959(c)(2)

Section 959(c)(3)

Reclassified Section 965(a) PTEP

Reclassified Section 965(b) PTEP

Section 951(a)(1)(B) PTEP

Section 965(a) PTEP

Section 965(b) PTEP

Section 951A PTEP

Section 951(a)(1)(A) PTEP

2018

50x

30x

20x

2017

100x

50x

2016

25x

25x

In 2018, FC has an amount described in section
956(a) ("section 956(a) amount") of $125x, without
considering the application of section 959(a)(2). In
2019, FC earns $25x of current E&P, and the amount
of USP's income inclusion under section 951A(a)
that is allocated to FC under section 951A(f)(2) and
proposed § 1.951A-6(b)(2) is $20x. FC also makes
a distribution of $195x in 2019. In 2020, FC earns no
current E&P, but FC makes a distribution of $60x.
For all years, the PTEP of FC in each PTEP group is
described in a single section 904 category, and all
section 959(c)(3) E&P of FC are described in a
single section 904 category.

(ii) Analysis-(A) 2018. As of December 31,
2018, before considering FC's section 956(a)
amount, FC has total section 959(c)(2) PTEP of
$255x. Under section 959(a)(2) and (f)(1), because
FC's section 959(c)(2) PTEP exceeds its section
956(a) amount, USP does not include any amount in
income under section 951(a)(1)(B). However, un-
der section 959(c)(1)(A), $125x of FC's section
959(c)(2) PTEP must be reclassified as section
959(c)(1) PTEP. Under the rules described in sec-
tion 3.02 of this notice, the reclassification is
sourced first from section 965(a) PTEP and then
from section 965(b) PTEP. Under the rules in

section 3.01 of this notice, the reclassified PTEP
remains in the 2017 annual PTEP account. Thus,
in FC's 2017 annual PTEP account, FC's reclas-
sified section 965(a) PTEP is increased by $100x
and its section 965(a) PTEP is decreased by
$100x. Additionally, FC's reclassified section
965(b) PTEP is increased by $25x and its section
965(b) PTEP is decreased by $25x. Accordingly,
as of December 31, 2018, FC's E&P applicable to
USP's interest in FC are classified under section
3.01 of this notice as follows:

Year

Section 959(c)(1)

Section 959(c)(2)

Section 959(c)(3)

Reclassified Section 965(a) PTEP

Reclassified Section 965(b) PTEP

Section 951(a)(1)(B) PTEP

Section 965(a) PTEP

Section 965(b) PTEP

Section 951A PTEP

Section 951(a)(1)(A) PTEP

2018

50x

30x

20x

2017

100x

25x

25x

2016

25x

25x

(B) 2019-(1) Current year adjustments. During
2019, FC earns $25x of current E&P, and the amount
of USP's income inclusion under section 951A(a)
that is allocated to FC under section 951A(f)(2) and
proposed § 1.951A-6(b)(2) is $20x. Thus, before
taking into account USP's income inclusions with

respect to FC and any distributions by FC, FC's
section 959(c)(3) E&P is initially increased by $25x.
As a result of USP's income inclusion under section
951A, FC's section 951A PTEP increases by $20x
and FC's section 959(c)(3) E&P is decreased by
$20x. Accordingly, as of December 31, 2019, FC's

E&P (before taking into account distributions made
in 2019) applicable to USP's interest in FC are
classified under section 3.01 of this notice as fol-
lows:

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Year

Reclassified Section 965(a) PTEP

Section 959(c)(1)

Section 959(c)(2)

Section 959(c)(3)

Reclassified Section 965(b) PTEP

Section 951(a)(1)(B) PTEP

Section 965(a) PTEP

Section 965(b) PTEP

Section 951A PTEP

Section 951(a)(1)(A) PTEP

2019

20x

25x

2018

50x

30x

2017

100x

25x

25x

2016

25x

25x

(2) Distribution. FC's distribution of $195x is
from PTEP because the entire distribution would be
a dividend under section 316(a) without regard to
section 959 (that is, for purposes of section 316, at
the end of 2019, FC has $325x of E&P (without
regard to the distribution), $25x of which is current
E&P). Under section 959(c), the distribution is first
treated as attributable to section 959(c)(1) PTEP.

(i) Section 959(c)(1) PTEP. Under the rules de-
scribed in section 3.02 of this notice, the distribution
is first sourced from reclassified section 965(a) PTEP
and then from reclassified section 965(b) PTEP, and
then pro rata from the remaining PTEP groups that
contain section 959(c)(1) PTEP under a last-in, first-

out ("LIFO") approach. Thus, in FC's 2017 annual
PTEP account, FC's reclassified section 965(a)
PTEP is decreased by $100x and its reclassified
section 965(b) PTEP is decreased by $25x. In FC's
2016 annual PTEP account, FC's section
951(a)(1)(B) PTEP is reduced by $25x. Thus, of the
distribution of $195x, $150x is treated as attributable
to section 959(c)(1) PTEP ($100x + $25x + $25x).

(ii) Section 959(c)(2) PTEP. After the section
959(c)(1) PTEP is exhausted, the remaining portion
of the distribution ($45x) is treated as attributable to
section 959(c)(2) PTEP, to the extent thereof. Under
the rules described in section 3.02 of this notice,
distributions are first sourced from section 965(a)

PTEP and then from section 965(b) PTEP, and then
pro rata from the remaining PTEP groups that con-
tain section 959(c)(2) PTEP under a LIFO approach.
Thus, in FC's 2017 annual PTEP account, FC's
section 965(b) PTEP is decreased by $25x. In FC's
2019 annual PTEP account, FC's section 951A
PTEP is decreased by $20x. Because the entire dis-
tribution has been accounted for, the remaining
PTEP groups that contain section 959(c)(2) PTEP
and FC's section 959(c)(3) E&P are not affected.
Accordingly, as of December 31, 2019, FC's E&P
applicable to USP's interest in FC are classified
under section 3.01 of this notice as follows:

Year

Reclassified Section 965(a) PTEP

Section 959(c)(1)

Section 959(c)(2)

Section 951(a)(1)(A) PTEP

Section 959(c)(3)

Reclassified

Section 951(a)(1)(B) PTEP

Section 965(a) PTEP

Section 965(b) PTEP

Section 951A PTEP

Section 965(b) PTEP

2019

25x

2018

50x

30x

2017

2016

25x

Total

105x

25x

(C) 2020. FC's distribution of $60x is from
PTEP because the entire distribution would be a
dividend under section 316(a) without regard to sec-
tion 959 (that is, for purposes of section 316, at the
end of 2020, FC has $130x of E&P (without regard
to the distribution), all which is accumulated E&P).
Under section 959(c), the distribution is first treated
as attributable to section 959(c)(1) PTEP; however,

FC has no section 959(c)(1) PTEP. Additionally, FC
has no section 965(a) PTEP or section 965(b) PTEP.
Under the rules described in section 3.02 of this
notice, the distribution is sourced pro rata from the
remaining PTEP groups that contain section
959(c)(2) PTEP under a LIFO approach. Thus, in
FC's 2018 annual PTEP account, FC's section 951A
PTEP is decreased by $37.5x ($60x x $50x/$80x)

and its section 951(a)(1)(A) PTEP is decreased by
$22.5x ($60x x $30x/$80x). Because the entire dis-
tribution has been accounted for, the remaining
PTEP groups that contain section 959(c)(2) PTEP
and FC's section 959(c)(3) E&P are not affected.
Accordingly, as of December 31, 2020, FC's E&P
applicable to USP's interest in FC are classified
under section 3.01 of this notice as follows:

Year

Section 959(c)(1)

Section 959(c)(2)

Section 959(c)(3)

Reclassified Section 965(a) PTEP

Reclassified Section 965(b) PTEP

Section 951(a)(1)(B) PTEP

Section 965(a) PTEP

Section 965(b) PTEP

Section 951A PTEP

Section 951(a)(1)(A) PTEP

2019

25x

2018

12.5x

7.5x

2017

2016

25x

Example 2. (i) Facts. USP, a domestic corpora-
tion, wholly owns FC, a foreign corporation that has
the U.S. dollar as its functional currency. Both USP

and FC use the calendar year as their taxable year. At
the beginning of Year 1, FC has accumulated E&P of
$50x, all of which is section 959(c)(3) E&P. In Year

1, FC has $25x of current E&P and FC makes no
distributions. Furthermore, in Year 1, USP's income
inclusion under section 951A(a) that is allocated to

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FC under section 951A(f)(2) and proposed
§ 1.951A-6(b)(2) is $100x.

(ii) Analysis. Before taking into account USP's
income inclusions with respect to FC in Year 1,
FC's current E&P for Year 1 increase FC's section
959(c)(3) E&P by $25x to $75x ($50x + $25x).
The $100x of USP's income inclusion under sec-
tion 951A(a) allocated to FC results in an increase
of $100x to FC's section 951A PTEP (resulting in
a balance of $100x) and a reduction of $100x to
FC's section 959(c)(3) E&P resulting in a deficit
of $25x ($75x - $100x). The sum of the amounts
of FC's section 959(c)(1) PTEP ($0x), section
959(c)(2) PTEP ($100x), and section 959(c)(3)
E&P (deficit of $25x) equals the amount of FC's
E&P ($75x).

## SECTION 4. APPLICABILITY DATE

It is expected that the forthcoming reg-
ulations will apply to taxable years of
United States shareholders (and successors
in interest) ending after December 14, 2018,
and to taxable years of foreign corporations
ending with or within such taxable years of
United States shareholders. See section
7805(b)(1)(C). Before the issuance of the
forthcoming regulations, a shareholder may
rely on the rules described in section 3 of
this notice if the shareholder and each per-
son related to the shareholder under section
267(b) or 707(b) (each such person, a "re-
lated shareholder") apply the rules consis-
tently with respect to PTEP of all foreign
corporations in which the shareholder or
related shareholder, as the case may be,
owns stock for all taxable years beginning
with the shareholder's or the related share-
holder's taxable year that includes the tax-
able year end of any such foreign corpora-
tion to which section 965 applies.

## SECTION 5. REQUEST FOR COMMENTS AND CONTACT INFORMATION

The Treasury Department and the
IRS request comments on the rules de-
scribed in this notice, including poten-
tial simplification of the rules described
in section 3.02 of this notice through the
establishment of multi-year PTEP ac-
counts. The Treasury Department and
the IRS also request comments concern-
ing the following topics:

1\. The extent to which basis created
under section 961(c) should be
treated as basis for purposes of deter-
mining tested income in applying
section 951A;

2\. The extent to which gain or loss,
including foreign currency gain or
loss, should be recognized by rea-
son of distributions of PTEP. Addi-
tionally, the Treasury Department
and the IRS request comments re-
garding a potential election pursu-
ant to which the shareholder would
agree to establish and maintain a
multi-year section 951A PTEP
group and not apply section
250(a)(2) to the extent such provi-
sion would otherwise be relevant in
calculating its foreign currency gain
or loss on a distribution of section
951A PTEP;

3\. The application of sections 959 and
961 to domestic and foreign partner-
ships; and

4\. Other guidance that should be issued
under sections 959 and 961, includ-
ing comments on the 2006 proposed
regulations and the extent to which
guidance in the 2006 proposed regu-
lations should be incorporated into
new proposed regulations.

Comments should be submitted by Feb-
ruary 12, 2019. Comments may be submit-
ted electronically via the Federal eRulemak-
ing Portal at www.regulations.gov (type
IRS-2018-0041 in the search field on the
regulations. gov homepage to find this notice
and submit comments). Written comments
may be submitted to the Office of Associate
Chief Counsel (International), Attention:
Melinda E. Harvey, Internal Revenue Ser-
vice, IR-4579, 1111 Constitution Avenue,
NW, Washington, DC 20224.

Comments will be available for public
inspection and copying.

The principal author of this notice is
Melinda E. Harvey of the Office of Asso-
ciate Chief Counsel (International). For
further information regarding this notice,
contact Ms. Harvey at (202) 317-6934
(not a toll-free number).

## 2019 Standard Mileage Rates

Notice 2019-02

### SECTION 1. PURPOSE

This notice provides the optional 2019
standard mileage rates for taxpayers to use
in computing the deductible costs of op-

erating an automobile for business, chari-
table, medical, or moving expense pur-
poses. This notice also provides the
amount taxpayers must use in calculating
reductions to basis for depreciation taken
under the business standard mileage rate,
and the maximum standard automobile
cost that may be used in computing the
allowance under a fixed and variable rate
(FAVR) plan.

### SECTION 2. BACKGROUND

Rev. Proc. 2010-51, 2010-51 I.R.B.
883, provides rules for computing the de-
ductible costs of operating an automobile
for business, charitable, medical, or mov-
ing expense purposes, and for substantiat-
ing, under § 274(d) of the Internal Reve-
nue Code and § 1.274-5 of the Income
Tax Regulations, the amount of ordinary
and necessary business expenses of local
transportation or travel away from home.
Taxpayers using the standard mileage
rates must comply with Rev. Proc. 2010-
51. However, a taxpayer is not required to
use the substantiation methods described
in Rev. Proc. 2010-51, but instead may
substantiate using actual allowable ex-
pense amounts if the taxpayer maintains
adequate records or other sufficient evi-
dence.

An independent contractor conducts an
annual study for the Internal Revenue Ser-
vice of the fixed and variable costs of
operating an automobile to determine the
standard mileage rates for business, med-
ical, and moving use reflected in this no-
tice. The standard mileage rate for chari-
table use is set by § 170(i).

#### SECTION 3. STANDARD MILEAGE RATES

The standard mileage rate for transpor-
tation or travel expenses is 58 cents per
mile for all miles of business use (busi-
ness standard mileage rate). See section 4
of Rev. Proc. 2010-51. However, § 11045
of the Tax Cuts and Jobs Act, Public Law
115-97, 131. Stat. 2054 (December 22,
2017) (the "Act") suspends all miscella-
neous itemized deductions that are sub-
ject to the two-percent of adjusted gross
income floor under § 67, including un-
reimbursed employee travel expenses,
for taxable years beginning after De-
cember 31, 2017, and before January 1,

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2026\. Thus, the business standard mile-
age rate provided in this notice cannot
be used to claim an itemized deduction
for unreimbursed employee travel ex-
penses during the suspension. Notwith-
standing the foregoing suspension of
miscellaneous itemized deductions, de-
ductions for expenses that are deduct-
ible in determining adjusted gross in-
come are not suspended. For example,
members of a reserve component of the
Armed Forces of the United States
(Armed Forces), state or local govern-
ment officials paid on a fee basis, and
certain performing artists are entitled to
deduct unreimbursed employee travel
expenses as an adjustment to total in-
come on line 24 of Schedule 1 of Form
1040 (2018), not as an itemized deduc-
tion on Schedule A of Form 1040
(2018), and therefore may continue to
use the business standard mileage rate.

The standard mileage rate is 14 cents
per mile for use of an automobile in ren-
dering gratuitous services to a charitable
organization under § 170. See section 5 of
Rev. Proc. 2010-51.

The standard mileage rate is 20 cents
per mile for use of an automobile: (1)
for medical care described in § 213; or
(2) as part of a move for which the
expenses are deductible under § 217(g).
See section 5 of Rev. Proc. 2010-51.
Section 11049 of the Act suspends the
deduction for moving expenses for tax-
able years beginning after December 31,
2017, and before January 1, 2026. How-
ever, the suspension does not apply to
members of the Armed Forces on active
duty who move pursuant to a military
order and incident to a permanent
change of station to whom § 217(g)
applies. Thus, except for taxpayers to
whom § 217(g) applies, the standard
mileage rate provided in this notice is
not applicable for the use of an automo-
bile as part of a move occurring during
the suspension.

### SECTION 4. BASIS REDUCTION AMOUNT

For automobiles a taxpayer uses for
business purposes, the portion of the
business standard mileage rate treated as
depreciation is 24 cents per mile for
2015, 24 cents per mile for 2016, 25
cents per mile for 2017, 25 cents per

mile for 2018, and 26 cents per mile for
2019. See section 4.04 of Rev. Proc.
2010-51.

## SECTION 5. MAXIMUM STANDARD AUTOMOBILE COST

For purposes of computing the allow-
ance under a FAVR plan, the standard
automobile cost may not exceed $50,400
for automobiles (including trucks and
vans). See section 6.02(6) of Rev. Proc.
2010-51.

## SECTION 6. EFFECTIVE DATE

This notice is effective for: (1) de-
ductible transportation expenses paid or
incurred on or after January 1, 2019; and
(2) mileage allowances or reimburse-
ments paid to a charitable volunteer or a
member of the Armed Forces to whom
§ 217(g) applies (a) on or after January
1, 2019, and (b) for transportation ex-
penses the charitable volunteer or such
member of the Armed Forces pays or
incurs on or after January 1, 2019.

## SECTION 7. EFFECT ON OTHER DOCUMENTS

Notice 2018-03, as modified by No-
tice 2018-42, is superseded.

## DRAFTING INFORMATION

The principal author of this notice is
Anna Gleysteen of the Office of Associate
Chief Counsel (Income Tax and Account-
ing). For further information on this notice
contact Ms. Gleysteen at (202) 317-7007
(not a toll-free number).

Additional Extension of
Temporary Relief for Fuel
Removals Destined for
Nontaxable Use Due to
West Shore Pipeline
Shutdown

## Notice 2019-04

### SECTION 1. PURPOSE

This notice provides an additional ex-
tension of the temporary dyed fuel relief
initially provided in section 3.02 of Notice
2017-30, 2017-21, I.R.B. 1248, then ex-
tended through December 31, 2018, by

section 3 of Notice 2018-39, 2018-20,
I.R.B. 582. This additional relief will be
available beginning on January 1, 2019,
and ending on December 31, 2019. A
claimant may submit a refund claim for
the Internal Revenue Code § 4081(a)(1)
tax imposed on undyed diesel fuel and
kerosene for fuel that is (1) removed from
a Milwaukee or Madison terminal; (2) en-
tered into a Green Bay terminal within 24
hours of removal from the Milwaukee or
Madison terminal; and (3) subsequently
dyed and removed from that Green Bay
terminal.

# SECTION 2. BACKGROUND

Section 3.02 of Notice 2017-30 pro-
vided a temporary refund mechanism for
the § 4081(a)(1) tax imposed upon re-
moval of undyed diesel fuel and kerosene
from a Milwaukee terminal when such
fuel was subsequently transported to, then
removed from a Green Bay terminal as
dyed fuel destined for a nontaxable use.
This relief was available for the period
beginning on October 31, 2017, and end-
ing on May 3, 2018. Section 3 of Notice
2018-39, extends this relief for the period
beginning on May 4, 2018, and ending on
December 31, 2018. Additionally, Notice
2018-39 expands the relief to include re-
fund claims for fuel that is taxed on re-
moval from a Madison terminal, trans-
ported to a Green Bay terminal, and then
removed from that Green Bay terminal as
dyed fuel.

Notice 2017-59, 2017-45 I.R.B. 484,
provides guidance on how persons eligi-
ble for relief under section 3.02 of Notice
2017-30 may submit claims for refund.
Sections 3.02, 3.03, and 3.04 of Notice
2017-59 describe the conditions and pro-
cedures required to make such claims. No-
tice 2017-59 also requires claimants to
follow those conditions and procedures to
make a claim during the first extension
period.

# SECTION 3. EXTENSION OF TEMPORARY DYED FUEL RELIEF

For the period beginning on January 1,
2019, and ending on December 31, 2019,
if any person (that is, the position holder)
that removes diesel fuel or kerosene that
satisfies the requirements of § 4082 from a
Green Bay terminal establishes to the sat-

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isfaction of the Secretary that a prior tax
was paid with respect to the removal of
such fuel from a Milwaukee or Madison
terminal, then an amount equal to the prior
tax paid shall be allowed as a refund
(without interest) to the position holder in
the same manner as if it were an overpay-
ment of tax imposed by § 4081.

The relief described in this section is
not available with respect to any transac-
tion for which one or more conditions set
forth in section 3.02 of Notice 2017-59
are not satisfied or for any refund claim
that fails to comply with the procedures
set forth in sections 3.03 and 3.04 of No-
tice 2017-59. For purposes of this notice,
any reference in Notice 2017-59 to re-
movals from a Milwaukee terminal shall
be read to also include removals from a
Madison terminal.

## SECTION 4. EFFECTIVE DATE

The temporary dyed fuel relief de-
scribed in section 3 of this notice applies
to removals of dyed diesel fuel and kero-
sene from Green Bay terminals on or after
January 1, 2019, and on or before Decem-
ber 31, 2019.

## SECTION 5. DRAFTING INFORMATION

The principal author of this notice is
Jacob W. Peeples of the Office of the
Associate Chief Counsel (Passthroughs &
Special Industries). For further informa-
tion regarding this notice contact Mr.
Peeples at (202) 317-6855 (not a toll-free
number).

Individual Shared
Responsibility Payment
Hardship Exemptions that
May Be Claimed on a
Federal Income Tax Return
Without Obtaining a
Hardship Exemption
Certification from the
Marketplace for the 2018
Tax Year

Notice 2019-05
PURPOSE

This notice supplements Notice 2014-
76, 2014-50 I.R.B. 946, as supplemented
by Notice 2017-14, 2017-6 I.R.B. 783,
by identifying additional hardship exemp-
tions from the individual shared responsi-
bility payment under § 5000A of the In-
ternal Revenue Code (Code) that a
taxpayer may claim on a Federal income
tax return for the 2018 tax year without
obtaining a hardship exemption certifica-
tion from the Health Insurance Market-
place (Marketplace).

## BACKGROUND

For each month beginning after De-
cember 31, 2013, § 5000A of the Code
requires taxpayers to have minimum es-
sential coverage for themselves and any
nonexempt family member whom the tax-
payer may claim as a dependent, to qual-
ify for an exemption, or to include an
individual shared responsibility payment
with their Federal income tax return. Sec-
tion 11081 of the Tax Cuts and Jobs Act,
Pub. L. No. 115-97, 131 Stat. 2054, 2082,
amended § 5000A(c) to reduce the
amount of the individual shared responsi-
bility payment to zero for taxable years
beginning after December 31, 2018.

Section 5000A(e)(5) of the Code and
§ 1.5000A-3(h) of the Income Tax Reg-
ulations provide that, in general, an indi-
vidual is exempt from the requirement to
have minimum essential coverage for a

month if he or she has in effect a hardship
exemption certification issued by the Mar-
ketplace certifying that the individual has
suffered a hardship (as that term is defined
in 45 CFR 155.605(d)) affecting the indi-
vidual's capability to obtain minimum es-
sential coverage in that month. Section
1.5000A-3(h)(3) provides that a taxpayer
may claim a hardship exemption for the
taxpayer and any dependent of the tax-
payer on a Federal income tax return with-
out obtaining a hardship exemption certi-
fication from the Marketplace if (i) the
taxpayer or his or her dependent is eligible
for a hardship exemption described in
guidance released by the Department of
Health and Human Services (HHS) and
(ii) the exemption is allowed to be
claimed on the taxpayer's Federal income
tax return without obtaining a hardship
exemption certification from the Market-
place pursuant to guidance published by
the Treasury Department and the Internal
Revenue Service.

Notice 2014-76 provides a list of hard-
ship exemptions that may be claimed on a
Federal income tax return without obtain-
ing a hardship exemption certification. See
also 45 CFR 155.605(e) (providing a par-
tial list of hardship exemptions that may
be claimed on a tax return without obtain-
ing an exemption certification). Notice
2017-14 supplements that list by provid-
ing an additional hardship exemption that
may be claimed on a Federal income tax
return for the 2016 tax year without ob-
taining a hardship exemption certifica-
tion.1

## GUIDANCE

To provide additional flexibility for the
2018 tax year, HHS announced in guid-
ance released on September 12, 2018, that
all hardship exemptions available under
45 CFR 155.605(d)(1) may be claimed by
a qualifying individual (or the taxpayer
who may claim a qualifying individual as
a dependent) on a Federal income tax re-
turn for the 2018 tax year without obtain-
ing a hardship exemption certification
from the Marketplace.2 Under 45 CFR
155.605(d)(1), a person is eligible for a

1See also HHS Centers for Medicare & Medicaid Services, Guidance on Health Coverage Tax Credit Hardship Exemption (Aug. 12, 2016) (available at \\*HYPERLINK "https://
www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/Final-Guidance-for-5000A-HCTC.pdf"https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/
Final-Guidance-for-5000A-HCTC.pdf).

2See HHS Centers for Medicare & Medicaid Services, Guidance on Claiming a Hardship Exemption through the Internal Revenue Service (IRS) (Sept. 12, 2018) (available at \\*HYPERLINK

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hardship exemption for at least the month
before, the month(s) during, and the
month after the specific event or circum-
stance that creates the hardship, if the
Marketplace determines that:

(i) He or she experienced financial or
domestic circumstances, including an un-
expected natural or human-caused event,
such that he or she had a significant, un-
expected increase in essential expenses
that prevented him or her from obtaining
coverage under a qualified health plan;

(ii) The expense of purchasing a qual-
ified health plan would have caused him
or her to experience serious deprivation of
food, shelter, clothing, or other necessi-
ties; or

(iii) He or she has experienced other
circumstances that prevented him or her
from obtaining coverage under a qualified
health plan.

The option to claim an exemption on a
Federal income tax return for the 2018 tax
year applies in addition to the existing
procedures for applying for hardship ex-
emptions using the Marketplace exemp-
tion determination process.

## EFFECT ON OTHER DOCUMENTS

Notice 2014-76, 2014-50 I.R.B. 946,
as supplemented by Notice 2017-14,
2017-6 I.R.B. 783, is supplemented.

## EFFECTIVE DATE

This notice applies to taxable years be-
ginning after December 31, 2017 and be-
fore January 1, 2019.

## DRAFTING INFORMATION

The principal author of this notice is
Lisa Mojiri-Azad of the Office of Associ-
ate Chief Counsel (Income Tax & Ac-
counting). For further information regard-
ing this notice contact Ms. Mojiri-Azad
(202) 317-4649 (not a toll-free number).

26 CFR 601.201: Rulings and determination letters.
(Also: Part I, Sections 832, 846; 1.832-4, 1.846-1.)

Rev. Proc. 2019-06

# SECTION 1. PURPOSE

This revenue procedure prescribes un-
paid loss discount factors for the 2018
accident year for use in computing dis-
counted unpaid losses under § 846 of the
Internal Revenue Code. The unpaid loss
discount factors also serve as salvage dis-
count factors for the 2018 accident year
for use in computing discounted estimated
salvage recoverable under § 832. The dis-
count factors prescribed herein were de-
termined under § 846, as amended by
section 13523 of the Tax Cuts and Jobs
Act, Pub. L. No. 115-97 (December 22,
2017) ("TCJA"), and proposed regula-
tions under § 846 (REG-103163-18) pub-
lished in the Federal Register (83 FR
55646) on November 7, 2018 (the “pro-
posed regulations"). If necessary after the
proposed regulations are published as fi-
nal regulations, the Department of the
Treasury (the "Treasury Department")
and Internal Revenue Service ("IRS") in-
tend to publish for each property and ca-
sualty line of business revised unpaid loss
discount factors for the 2018 accident year
for use in taxable years ending on or after
the date the final regulations are pub-
lished.

# SECTION 2. BACKGROUND

## .01 Modification of Discounting Rules

(1) Section 13523 of the TCJA
amended § 846 for taxable years begin-
ning after December 31, 2017. Section
13523(a) and (b) of the TCJA amended
the definition of annual rate under
§ 846(c) and the computational rules for
loss payment patterns under § 846(d), re-
spectively. Section 13523(c) of the TCJA
repealed the election that was previously
set forth in § 846(e) to use the taxpayer's
own historical loss payment pattern in-
stead of the pattern published by the Sec-
retary.

(2) Section 13523(e) of the TCJA pro-
vides the transitional rule for the applica-
tion of the amendments in the first taxable
year beginning after December 31, 2017,
and for subsequent taxable years (the
"TCJA transition rule"). Specifically, sec-

tion 13523(e) provides that, for the first
taxable year beginning after December 31,
2017, the unpaid losses and expenses un-
paid (as defined in § 832(b)(5) and (6)) at
the end of the preceding taxable year,
and the unpaid losses (as defined in
§§ 805(a)(1) and 807(c)(2)) at the end of
the preceding taxable year, are determined
as if the amendments made by section
13523 of the TCJA had applied to the
unpaid losses and expenses unpaid in
the preceding taxable year and by using
the interest rate and loss payment patterns
applicable to accident years ending with
calendar year 2018. The resulting adjust-
ment (the "TCJA adjustment"), if any, is
included in the taxpayer's gross income
ratably over an eight year period (the
"TCJA period of adjustment," which is
the first taxable year beginning after De-
cember 31, 2017, and the seven succeed-
ing taxable years). Section 13523(e) also
provides that, for subsequent taxable
years, the amendments made by section
13523 are applied with respect to unpaid
losses and expenses unpaid for accident
years ending with or before calendar year
2018 by using the interest rate and loss
payment patterns applicable to accident
years ending with calendar year 2018.
Loss payment patterns for the 2017 deter-
mination year were previously prescribed
in Rev. Proc. 2018-13, 2018-7 I.R.B.
356. In Rev. Proc. 2018-13, the Treasury
Department and IRS also announced the
intention to publish revised loss payment
patterns for the 2017 determination year
in accordance with the TCJA transition
rule.

## .02 Proposed Regulations

(1) Section 1.846-1(c) of the proposed
regulations provides that the annual rate
for any calendar year is the average of
the monthly spot interest rates on corpo-
rate bonds with times to maturity of not
more than seventeen and one-half years
based on a yield curve that reflects the av-
erage, for the most recent 60-month period
ending before the beginning of the calendar
year, of monthly yields on corporate bonds
described in § 430(h)(2)(D)(i).

(2) Section 1.846-1(d)(1) of the pro-
posed regulations provides that, in gen-

"https://www.cms.gov/CCHIO/Resources/Regulations-and-Guidance/Downloads/Authority-to-Grant-HS-Exemptions-2018-Final-91218.pdf"https://www.cms.gov/CCIIO/Resources/
Regulations-and-Guidance/Downloads/Authority-to-Grant-HS-Exemptions-2018-Final-91218.pdf).

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eral, the loss payment pattern determined
by the Secretary for each line of business
is determined by reference to the histori-
cal loss payment pattern applicable to
such line of business determined in accor-
dance with the method of determination
set forth in § 846(d)(2) and the computa-
tional rules prescribed in § 846(d)(3) on
the basis of data from annual statements
described in § 846(d)(2)(A) and (B).
However, under § 1.846-1(d)(2) of the
proposed regulations, the Secretary may
adjust the loss payment pattern for any
line of business using a methodology de-
scribed by the Secretary in other pub-
lished guidance if necessary to avoid neg-
ative payment amounts and otherwise
produce a stable pattern of positive dis-
count factors less than one.

## .03 Discount Factors for Accident Year 2018 and Prior Accident Years

(1) The discount factors prescribed in
this revenue procedure are determined by
using the applicable interest rate for acci-
dent year 2018 under § 846(c) and the
proposed regulations and revised loss pay-
ment patterns determined by the Secretary
for the 2017 determination year under
§ 846(d) and the proposed regulations.

(2) Pursuant to § 846(c) and the pro-
posed regulations, the Secretary has deter-
mined that the annual rate for the 2018
calendar year is 3.12 percent, com-
pounded semiannually. This annual rate is
the average of the monthly spot rates on
corporate bonds with times to maturity of
not more than seventeen and one-half
years based on a yield curve that reflects
the average of monthly yields on corpo-
rate bonds described in § 430(h)(2)(D)(i)
for the period from January 2013 through
December 2017 (that is, the most recent
60-month period ending before the begin-
ning of the 2018 calendar year).1

(3) Pursuant to § 846(d) and the pro-
posed regulations, the Secretary has deter-
mined a revised loss payment pattern for
each property and casualty line of busi-
ness for the 2017 determination year for
use with respect to unpaid losses incurred
in accident year 2018 and prior accident
years. The revised loss payment patterns
for the 2017 determination year are based,

initially, on the aggregate loss payment
information reported on the 2015 annual
statements of property and casualty insur-
ance companies and compiled by A.M.
Best and Co. The lines of business for the
2017 determination year are the same as
the lines of business for the 2012 deter-
mination year. See Rev. Proc. 2012-44,
2012-49 I.R.B. 645. Losses are reported
on the annual statement net of losses on
reinsurance ceded, but include losses on
assumed proportional reinsurance. Losses
with respect to assumed non-proportional
reinsurance are reported in three separate
lines of business (for property, liability,
and financial reinsurance). The loss data
include defense, cost containment, adjust-
ing, and other loss expenses, but are not
reduced for salvage and subrogation re-
ceipts.

(4) Pursuant to § 1.846-1(d)(2) of the
proposed regulations, the Secretary may
adjust the loss payment pattern for any
line of business using a methodology de-
scribed by the Secretary in other pub-
lished guidance if necessary to avoid neg-
ative payment amounts and otherwise
produce a stable pattern of positive dis-
count factors less than one. For the 2017
determination year, only one line of busi-
ness requires adjustments under the pro-
posed regulations. That line of business is
Products Liability - Claims Made. The
initial payment pattern results in negative
payment amounts for the fifth, seventh,
and ninth years after the accident year.
Therefore, the payment amounts for
the fourth through the ninth year after the
accident year are adjusted following the
steps listed in the preamble to the pro-
posed regulations. See 83 FR 55646.

# SECTION 3. SCOPE

This revenue procedure applies to any
taxpayer that is required to discount un-
paid losses under § 846 for a line of busi-
ness using the discount factors published
by the Secretary, and also applies to any
taxpayer that is required to discount esti-
mated salvage recoverable under § 832.
This revenue procedure applies to taxable
years beginning after December 31, 2017.

# SECTION 4. TABLES OF DISCOUNT FACTORS

.01 The tables in this section 4 present
separately for each line of business the
unpaid loss discount factors under § 846
for use in the first taxable year beginning
after December 31, 2017, and for use in
calculating the TCJA adjustment. All of
the discount factors presented in these ta-
bles are determined by using the applica-
ble interest rate for 2018 under § 846(c)
and the proposed regulations, which is
3.12 percent, compounded semiannually,
and the revised payment patterns for the
2017 determination year determined by
the Secretary under § 846(d) and the pro-
posed regulations. All of the discount fac-
tors presented in these tables are deter-
mined by assuming all loss payments
occur in the middle of the calendar year.

.02 Tables 1 and 2 present separately
for each line of business the unpaid loss
discount factors under § 846 for use in the
first taxable year beginning after Decem-
ber 31, 2017. Any taxpayer using discount
factors prescribed in Tables 1 and 2 to
compute discounted unpaid losses under
§ 846 for its first taxable year beginning
after December 31, 2017, must use the
discount factors prescribed in Tables 1
and 2 with respect to all of its property
and casualty lines of business and, consis-
tent with the TCJA transition rule, must
use the discount factors prescribed in Ta-
bles 1 and 2 for all accident years ending
with or before calendar year 2018. The
taxpayer also must use the discount fac-
tors prescribed in Tables 1 and 2 as the
salvage discount factors for the 2018 ac-
cident year and all prior accident years for
purposes of determining estimated sal-
vage recoverable under § 832 with respect
to all of its property and casualty lines of
business for its first taxable year begin-
ning after December 31, 2017.

.03 Consistent with the TCJA transi-
tion rule, any taxpayer using the discount
factors prescribed in Tables 1 and 2 for its
first taxable year beginning after Decem-
ber 31, 2017, must, for that taxable year,
use the discount factors prescribed in Ta-
bles 3 and 4 for purposes of determining
the unpaid losses and expenses unpaid (as
defined in § 832(b)(5) and (6)) at the end

1The published yield curve spot rates can be found at https://home.treasury.gov/data/treasury-coupon-issues-and-corporate-bond-yield-curve/corporate-bond-yield-curve.

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of the preceding taxable year, and the
unpaid losses (as defined in §§ 805(a)(1)
and 807(c)(2)) at the end of the preceding
taxable year. The taxpayer also must, for
its first taxable year beginning after De-
cember 31, 2017, use the unpaid loss dis-
count factors prescribed in Tables 3 and 4
to determine the amount of the TCJA ad-

justment to be taken into account in that
taxable year and, unless revised discount
factors have been published, the amount
of the TCJA adjustment to be taken into
account in subsequent taxable years.

.04 Section V of Notice 88-100,
1988-2 C.B. 439, sets forth a composite
method for computing discounted unpaid

losses for accident years that are not sep-
arately reported on the annual statement.
Tables 1 through 4 separately provide dis-
count factors for taxpayers who have
elected to use the composite method of
Notice 88-100. See Rev. Proc. 2002-74,
2002-2 C.B. 980.

Table 1 (part A) Factors for Discounting Unpaid Losses Under Section 846 (percent) For the First Taxable Year Beginning After December 31, 2017, in

Accident Year

Short-Tail Lines of Business Financial Auto Physical Fidelity/ Guaranty/ Mortgage Damage Surety Guaranty International Other*

2018

98.2924

95.7528

95.5027

96.0825

96.9295

2017

96.9631

96.9631

96.9631

96.9631

96.9631

Years before 2017

98.4640

98.4640

98.4640

98.4640

98.4640

\* For Accident and Health lines of business (other than disability income or credit disability insurance), the dis-
count factor for taxable year 2018 is 98.4640 percent.

Table 1 (part B) Factors for Discounting Unpaid Losses Under Section 846 (percent) For the First Taxable Year Beginning After December 31, 2017, in Short-Tail Lines of Business

Accident Year

Reinsurance - Nonproportional Assumed Financial Lines

Reinsurance - Nonproportional Assumed Liability

Reinsurance - Nonproportional Assumed Property

Special Property (Fire, Allied Lines, Inland Marine, Earthquake, Burglary &amp; Theft)

Warranty

Short-Tail Composite

2018

95.3460

94.5342

96.0638

97.3657

98.0866

96.8171

2017

96.9631

96.9631

96.9631

96.9631

96.9631

96.9631

Years before 2017

98.4640

98.4640

98.4640

98.4640

98.4640

98.4640

Table 2 (part A) Factors for Discounting Unpaid Losses Under Section 846 (percent) For the First Taxable Year Beginning After December 31, 2017, in Long-Tail Lines of Business

Accident Year

Commercial Auto/Truck Liability/Medical

Medical Professional Liability - Claims-Made

Medical Professional Liability Occurrence

Multiple Other Liability Peril Lines Claims-Made

Other Liability - Occurrence

2018

93.7136

91.1847

86.1703

95.0382 90.3833

88.7841

2017

94.4581

92.2226

88.3371

93.3147 91.2289

89.6647

2016

95.0089

92.4524

89.9455

93.6251 91.7605

90.2415

2015

95.0495

92.7481

91.3552

92.8232 91.8038

90.4153

2014

94.9245

92.8961

92.3529

90.9251 91.6496

90.1639

2013

94.7625

92.9180

93.1329

91.1314 92.1818

90.2353

2012

95.0535

93.9081

93.9891

90.8234 92.6788

90.2570

2011

94.6859

94.8439

94.7064

90.5036 93.4801

91.5250

2010

96.1971

95.7805

95.8926

93.1447

94.6287

92.1970

2009

98.2598

97.6158

97.6580

94.5519

96.4911

94.1762

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Table 2 (part A) Factors for Discounting Unpaid Losses Under Section 846 (percent) For the First Taxable Year Beginning After December 31, 2017, in Long-Tail Lines of Business

Accident Year

Commercial Auto/Truck Liability/Medical

Medical Professional Liability - Claims-Made

Medical Professional Liability - Occurrence

Multiple Peril Lines

Other Liability - Claims-Made

Other Liability - Occurrence

Taxpayer Not Using the Composite Method

2008

98.4640

98.4640

98.4640

95.9642

97.8837

95.6063

2007

98.4640

98.4640

98.4640

97.3555

98.4640

97.0517

Years

98.4640

98.4640

98.4640

98.4640

98.4640

98.4640

before 2007

Taxpayer Using the Composite Method

Years

98.4640

98.4640

98.4640

96.7357

97.9777

96.5363

before

2009 Table 2 (part B) Factors for Discounting Unpaid Losses Under Section 846 (percent) For the First Taxable Year Beginning After December 31, 2017, in Long-Tail Lines of Business

Accident Year

Private Passenger Auto Liability/Medical

Products Liability - Claims-Made

Products Liability - Occurrence

Workers' Compensation

Long-Tail Composite

2018

95.4241

85.1518

87.1543

87.4184

92.3564

2017

95.0203

85.6347

88.5453

85.8424

91.2748

2016

94.9784

87.5083

89.3276

84.6991

90.9788

2015

94.5984

82.9398

90.7045

83.1346

89.7633

2014

93.9009

84.2812

89.3185

82.5478

88.1393

2013

93.9524

85.6749

89.3669

81.9913

88.0168

2012

94.2025

87.1293

90.3357

82.3684

87.9945

2011

94.7658

88.4262

91.3398

83.2518

88.5587

2010

95.3902

89.7489

91.7494

83.8871

89.8408

2009

97.5924

91.0980

94.0873

85.8606

91.6956

Taxpayer Not Using the Composite Method

2008

98.4640

92.4736

95.5247

87.1320

93.0752

2007

98.4640

93.8753

96.9877

88.4289

94.4760

2006

98.4640

95.3017

98.4640

89.7517

95.8902

2005

98.4640

96.7473

98.4640

91.1009

97.2894

2004

98.4640

98.1839

98.4640

92.4766

98.4640

2003

98.4640

98.4640

98.4640

93.8785

98.4640

2002

98.4640

98.4640

98.4640

95.3051

98.4640

2001

98.4640

98.4640

98.4640

96.7511

98.4640

2000

98.4640

98.4640

98.4640

98.1886

98.4640

Years before 2000

98.4640

98.4640

98.4640

98.4640

98.4640

Taxpayer Using the Composite Method

Years before 2009

98.4640

94.4219

96.4942

90.7644

94.8105

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Table 3 (part A) Factors for Discounting Unpaid Losses Under Section 846 (percent) For the Taxable Year Preceding the First Taxable Year Beginning After December 31, 2017, in Short-Tail Lines of Business

Accident Year

Auto Physical Damage

Fidelity/Surety

Financial Guaranty/Mortgage Guaranty

International

Other*

2017

98.2924

95.7528

95.5027

96.0825

96.9295

2016

96.9631

96.9631

96.9631

96.9631

96.9631

Years before 2016

98.4640

98.4640

98.4640

98.4640

98.4640

\* For Accident and Health lines of business (other than disability income or credit disability insurance), the dis-
count factor for taxable year 2017 is 98.4640 percent.

Table 3 (part B) Factors for Discounting Unpaid Losses Under Section 846 (percent) For the Taxable Year Preceding the First Taxable Year Beginning After December 31, 2017, in Short-Tail Lines of

Accident Year

Business

Reinsurance - Nonproportional Assumed Financial Lines

Reinsurance - Nonproportional Assumed Liability

Reinsurance - Nonproportional Assumed Property

Special Property (Fire, Allied Lines, Inland Marine, Earthquake, Burglary &amp; Theft)

Warranty

Short-Tail Composite

2017

95.3460

94.5342

96.0638

97.3657

98.0866

96.8171

2016

96.9631

96.9631

96.9631

96.9631

96.9631

96.9631

Years before 2016

98.4640

98.4640

98.4640

98.4640

98.4640

98.4640

Table 4 (part A) Factors for Discounting Unpaid Losses Under Section 846 (percent)

Accident Year For the Taxable

Commercial Auto/Truck Liability/Medical Year Preceding the

Medical Professional Liability - Claims- Made First Taxable

Year Beginning Business

After December 31, 2017, in Multiple Other Liability - Peril Lines Claims-Made

Long-Tail Lines of Other Liability - Occurrence

Medical Professional Liability - Occurrence

2017

93.7136

91.1847

86.1703

95.0382

90.3833

88.7841

2016

94.4581

92.2226

88.3371

93.3147

91.2289

89.6647

2015

95.0089

92.4524

89.9455

93.6251

91.7605

90.2415

2014

95.0495

92.7481

91.3552

92.8232

91.8038

90.4153

2013

94.9245

92.8961

92.3529

90.9251

91.6496

90.1639

2012

94.7625

92.9180

93.1329

91.1314

92.1818

90.2353

2011

95.0535

93.9081

93.9891

90.8234

92.6788

90.2570

2010

94.6859

94.8439

94.7064

90.5036

93.4801

91.5250

2009

96.1971

95.7805

95.8926

93.1447

94.6287

92.1970

2008

98.2598

97.6158

97.6580

94.5519

96.4911

94.1762

Taxpayer Not Using the Composite Method

2007

98.4640

98.4640

98.4640

95.9642

97.8837

95.6063

2006

98.4640

98.4640

98.4640

97.3555

98.4640

97.0517

Years before 2006

98.4640

98.4640

98.4640

98.4640

98.4640

98.4640

Taxpayer Using the Composite Method

Years before 2008

98.4640

98.4640

98.4640

96.7357 97.9777

96.5363

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Table 4 (part B) Factors for Discounting Unpaid Losses Under Section 846 (percent) For the Taxable Year Preceding the First Taxable Year Beginning After December 31, 2017, in Long-Tail Lines of

Accident Year

Private Passenger Auto Liability/Medical

Business Products Liability - Claims- Made

Products Liability - Occurrence

Workers' Compensation

Long-Tail Composite

2017

95.4241

85.1518

87.1543

87.4184

92.3564

2016

95.0203

85.6347

88.5453

85.8424

91.2748

2015

94.9784

87.5083

89.3276

84.6991

90.9788

2014

94.5984

82.9398

90.7045

83.1346

89.7633

2013

93.9009

84.2812

89.3185

82.5478

88.1393

2012

93.9524

85.6749

89.3669

81.9913

88.0168

2011

94.2025

87.1293

90.3357

82.3684

87.9945

2010

94.7658

88.4262

91.3398

83.2518

88.5587

2009

95.3902

89.7489

91.7494

83.8871

89.8408

2008

97.5924

91.0980

94.0873

85.8606

91.6956

Taxpayer Not Using the Composite Method

2007

98.4640

92.4736

95.5247

87.1320

93.0752

2006

98.4640

93.8753

96.9877

88.4289

94.4760

2005

98.4640

95.3017

98.4640

89.7517

95.8902

2004

98.4640

96.7473

98.4640

91.1009

97.2894

2003

98.4640

98.1839

98.4640

92.4766

98.4640

2002

98.4640

98.4640

98.4640

93.8785

98.4640

2001

98.4640

98.4640

98.4640

95.3051

98.4640

2000

98.4640

98.4640

98.4640

96.7511

98.4640

1999

98.4640

98.4640

98.4640

98.1886

98.4640

Years before 1999

98.4640

98.4640

98.4640

98.4640

98.4640

Taxpayer Using the Composite Method

Years before 2008

98.4640

94.4219

96.4942

90.7644

94.8105

# SECTION 5. APPLICATION OF DIS- COUNT FACTORS IN SUBSEQUENT YEARS

Unless revised discount factors have
been published, any taxpayer using dis-
count factors prescribed herein to com-
pute discounted unpaid losses under § 846

in the first taxable year beginning after
December 31, 2017, must use the discount
factors prescribed in Tables 5 and 6 in
subsequent taxable years for purposes of
determining the unpaid losses and ex-
penses unpaid (as defined in § 832(b)(5)
and (6)) attributable to accident year

2018, the unpaid losses (as defined in
§§ 805(a)(1) and 807(c)(2)) attributable
to accident year 2018, and salvage re-
coverable attributable to accident year
2018.

Table 5 (part A) Factors for Discounting Unpaid Losses Under Section 846 (percent)

Taxable Year Beginning in For Losses

Incurred in Accident Auto Physical Damage

Year 2018 in Fidelity/Surety

Short-Tail Lines of Financial Guaranty/ Mortgage Guaranty

Business International

Other*

2018

98.2924

95.7528

95.5027

96.0825

96.9295

2019

96.9631

96.9631

96.9631

96.9631

96.9631

Taxpayer Not Using Composite Method

Years after 2019

98.4640

98.4640

98.4640

98.4640

98.4640

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Table 5 (part A) Factors for Discounting Unpaid Losses Under Section 846 (percent)

For Losses Incurred in Accident Year 2018 in Short-Tail Lines of Business

Taxable Year Beginning in

Auto Physical Damage

Fidelity/Surety

Financial Guaranty/ Mortgage Guaranty

International

Other*

Composite Discount Factors

2020

98.4640

98.4640

98.4640

98.4640

98.4640

Years after 2020

Use composite discount factors published for the relevant accident year .**

\* For Accident and Health lines of business (other than disability income or credit disability insurance), the dis-
count factor for taxable year 2018 is 98.4640 percent. For later years, the discount factor for losses incurred in
2018 is the discount factor published for Accident and Health lines of business for losses incurred in the accident
year coinciding with the taxable year.

** The relevant accident year is the accident year that is two years prior to the specified taxable year.

Table 5 (part B) Factors for Discounting Unpaid Losses Under Section 846 (percent)

For Losses Incurred in Accident Year 2018 in Short-Tail Lines of Business

Taxable Year Beginning in

Reinsurance - Nonproportional Assumed Financial Lines

Reinsurance - Nonproportional

Reinsurance - Nonproportional Assumed Property

Special Property (Fire, Allied Lines, Inland Marine, Earthquake, Burglary &amp; Theft)

Warranty

Short-Tail Composite

Assumed Liability

2018

95.3460

94.5342

96.0638

97.3657

98.0866

96.8171

2019

96.9631

96.9631

96.9631

96.9631

96.9631

96.9631

Taxpayer Not Using Composite Method

Years after 2019

98.4640

98.4640

98.4640

98.4640

98.4640

98.4640

Composite Discount Factors

2020

98.4640

98.4640

98.4640

98.4640

98.4640

98.4640

Years after 2020 Use composite discount factors published for the relevant accident year .**

** The relevant accident year is the accident year that is two years prior to the specified taxable year.

Table 6 (part A) Factors for Discounting Unpaid Losses Under Section 846 (percent) For Losses Incurred in Accident Year 2018 in Long-Tail Lines of Business

Taxable Year Beginning in

Commercial Auto/Truck Liability/Medical

Medical Professional Liability - Claims- Made

Medical Professional Liability - Occurrence

Multiple Peril Lines

Other Liability - Claims- Made

Other Liability - Occurrence

2018

93.7136

91.1847

86.1703

95.0382

90.3833

88.7841

2019

94.4581

92.2226

88.3371

93.3147

91.2289

89.6647

2020

95.0089

92.4524

89.9455

93.6251

91.7605

90.2415

2021

95.0495

92.7481

91.3552

92.8232

91.8038

90.4153

2022

94.9245

92.8961

92.3529

90.9251

91.6496

90.1639

2023

94.7625

92.9180

93.1329

91.1314

92.1818

90.2353

2024

95.0535

93.9081

93.9891

90.8234

92.6788

90.2570

2025

94.6859

94.8439

94.7064

90.5036

93.4801

91.5250

2026

96.1971

95.7805

95.8926

93.1447

94.6287

92.1970

2027

98.2598

97.6158

97.6580

94.5519

96.4911

94.1762

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Table 6 (part A) Factors for Discounting Unpaid Losses Under Section 846 (percent) For Losses Incurred in Accident Year 2018 in Long-Tail Lines of Business

Taxable Year Beginning in

Commercial Auto/Truck Liability/Medical

Medical Professional Liability - Claims- Made

Medical Professional Liability - Occurrence

Multiple Peril Lines

Other Liability - Claims- Made

Other Liability - Occurrence

Taxpayer Not Using Composite Method

2028

98.4640

98.4640

98.4640

95.9642

97.8837

95.6063

2029

98.4640

98.4640

98.4640

97.3555

98.4640

97.0517

Years after 2029

98.4640

98.4640

98.4640

98.4640

98.4640

98.4640

Composite Discount Factors

2028

98.4640

98.4640

98.4640

96.7357

97.9777

96.5363

Years after 2028
Use composite discount factors published for the relevant accident year .*

*The relevant accident year is the accident year that is ten years prior to the specified taxable year.

Table 6 (part B) Factors for Discounting Unpaid Losses Under Section 846 (percent) For Losses Incurred in Accident Year 2018 in Long-Tail Lines of Business

Taxable Year Beginning in

Private Passenger Auto Liability/Medical

Products Liability - Claims-Made

Products Liability - Occurrence

Workers' Compensation

Long-Tail Composite

2018

95.4241

85.1518

87.1543

87.4184

92.3564

2019

95.0203

85.6347

88.5453

85.8424

91.2748

2020

94.9784

87.5083

89.3276

84.6991

90.9788

2021

94.5984

82.9398

90.7045

83.1346

89.7633

2022

93.9009

84.2812

89.3185

82.5478

88.1393

2023

93.9524

85.6749

89.3669

81.9913

88.0168

2024

94.2025

87.1293

90.3357

82.3684

87.9945

2025

94.7658

88.4262

91.3398

83.2518

88.5587

2026

95.3902

89.7489

91.7494

83.8871

89.8408

2027

97.5924

91.0980

94.0873

85.8606

91.6956

Taxpayer Not Using Composite Method

2028

98.4640

92.4736

95.5247

87.1320

93.0752

2029

98.4640

93.8753

96.9877

88.4289

94.4760

2030

98.4640

95.3017

98.4640

89.7517

95.8902

2031

98.4640

96.7473

98.4640

91.1009

97.2894

2032

98.4640

98.1839

98.4640

92.4766

98.4640

2033

98.4640

98.4640

98.4640

93.8785

98.4640

2034

98.4640

98.4640

98.4640

95.3051

98.4640

2035

98.4640

98.4640

98.4640

96.7511

98.4640

2036

98.4640

98.4640

98.4640

98.1886

98.4640

Years after 2036

98.4640

98.4640

98.4640

98.4640

98.4640

Composite Discount Factors

2028

98.4640

94.4219

96.4942

90.7644

94.8105

Years after 2028 Use composite discount factors published for the relevant accident year .*

*The relevant accident year is the accident year that is ten years prior to the specified taxable year.

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## SECTION 6. REVISED DISCOUNT FACTORS

.01 If revised unpaid loss discount fac-
tors for the 2018 accident year are pub-
lished after final regulations are published
in the Federal Register, the Treasury De-
partment and IRS propose to issue guid-
ance providing that taxpayers must use,
for taxable years ending on or after the
date the final regulations are published,
the revised discount factors for purposes
of determining, for all accident years end-
ing with or before calendar year 2018, the
unpaid losses and expenses unpaid (as de-
fined in § 832(b)(5) and (6)) and the un-
paid losses (as defined in §§ 805(a)(1) and
807(c)(2)).

.02 The Treasury Department and IRS
propose that such guidance would instruct
any taxpayer that used the discount factors
prescribed in this revenue procedure in a
taxable year beginning after December 31,
2017, and that does not amend the return
filed for such taxable year to use the re-
vised discount factors, to take into account
the difference between the amount of the
TCJA adjustment determined using the
unpaid loss discount factors prescribed in
this revenue procedure and the amount
of the TCJA adjustment determined using
the revised unpaid loss discount factors.
The difference would be taken into ac-
count ratably over the taxable years re-
maining in the TCJA period of adjust-
ment, beginning with the first taxable year
in which the taxpayer uses the revised
discount factors.

.03 Such guidance would also instruct
any taxpayer that used the discount factors
prescribed in this revenue procedure in a
taxable year beginning after December 31,
2017, and that does not amend the return
filed for such taxable year to use the revised
discount factors, to compute, with respect to
the last taxable year in which the discount
factors prescribed in this revenue procedure
were used, the adjustment to the amount of
the discounted unpaid losses under § 846 at
the end of that taxable year and the amount
of discounted estimated salvage recoverable
under § 832 at the end of that taxable year
due to computing those amounts using the
revised discount factors rather than the dis-
count factors prescribed in this revenue pro-
cedure. The adjustment would be computed
as follows: (1) from discounted unpaid

losses computed using the discount factors
prescribed in this revenue procedure sub-
tract discounted unpaid losses computed us-
ing the revised discount factors, and (2) to
the result so obtained, add estimated salvage
computed using the revised discount factors
and subtract estimated salvage computed
using the discount factors prescribed in this
revenue procedure. A positive adjustment
would be taken into account as an addition
to gross income, and a negative adjustment
would be taken into account as a reduction
to gross income. The adjustment would be
taken into account either (1) in the first
taxable year in which the taxpayer uses the
revised discount factors, or (2) ratably over
the taxable years remaining in the TCJA
period of adjustment, beginning with the
first taxable year in which the taxpayer uses
the revised discount factors. For the first
taxable year in which a taxpayer uses the
revised discount factors, the taxpayer would
determine each of the following as if the
revised discount factors had applied in the
preceding taxable year: (1) the unpaid losses
and expenses unpaid (as defined in
§ 832(b)(5) and (6)) at the end of the pre-
ceding taxable year, (2) the unpaid losses (as
defined in §§ 805(a)(1) and 807(c)(2)) at the
end of the preceding taxable year, and (3)
the estimated salvage recoverable under
§ 832 at the end of the preceding taxable
year.

## SECTION 7. REQUEST FOR COMMENTS

The Treasury Department and IRS re-
quest comments on the proposed guidance
described in section 6 of this revenue pro-
cedure. Comments should be submitted in
writing on or before February 6, 2019, and
should contain a reference to this Rev.
Proc. 2019-06. All comments will be
available for public inspection and copy-
ing. Comments may be submitted in one
of three ways:

(1) By mail to Internal Revenue Service,
CC:PA:LPD:PR (Rev. Proc. 2019-
06), Room 5203, P.O. Box 7604,
Ben Franklin Station, Washington,
DC 20044.

(2) Electronically to Notice.Comments@
irscounsel.treas.gov. Please include
"Rev. Proc. 2019-06" in both the body
of the comment and on the subject line
of any electronic communications. Al-
ternatively, taxpayers may submit

comments electronically via the
Federal eRulemaking Portal at
www.regulations.gov (type IRS-
2018-0043 in the search field on
the regulations.gov homepage to
find this notice and submit com-
ments).

(3) By hand-delivery Monday through
Friday between the hours of 8 a.m.
and 4 p.m. to CC:PA:LPD:PR (Rev.
Proc. 2019-06), Courier's Desk, In-
ternal Revenue Service, 1111 Con-
stitution Ave., NW, Washington,
DC 20224.

# SECTION 8. DRAFTING INFORMATION

The principal author of this revenue
procedure is Kathryn M. Sneade of the
Office of Associate Chief Counsel (Finan-
cial Institutions & Products). For further
information regarding this revenue proce-
dure contact Ms. Sneade at (202) 317-
6995 (not a toll free number).

## Section 846 .- Discounted Unpaid Losses Defined.

26 C.F.R. 1.846 -1: Application of dis-
count factors. Applicable unpaid loss dis-
count factors for the 2018 accident year
for purposes of section 846. See Rev.
Proc. 2019 -06, page 284.

## Section 832 .- Insurance company taxable income.

26 C.F.R. 1.832 -4: Gross income.
Applicable salvage discount factors for
the 2018 accident year, which must be
used to compute discounted estimated sal-
vage recoverable under section 832. See
Rev. Proc. 2019 -06, page 284.

26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of
correct tax liability.

(Also: Part 1, §§ 6662, 6694, 1.6662-4, 1.6694-2)

# Rev. Proc. 2019-09

## SECTION 1. PURPOSE

This revenue procedure updates Rev.
Proc. 2018-11, 2018-5 I.R.B. 335, and
identifies circumstances under which the
disclosure on a taxpayer's income tax re-

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turn with respect to an item or position is
adequate for the purpose of reducing the
understatement of income tax under sec-
tion 6662(d) of the Internal Revenue Code
(relating to the substantial understatement
aspect of the accuracy-related penalty),
and for the purpose of avoiding the tax
return preparer penalty under section
6694(a) (relating to understatements due
to unreasonable positions) with respect to
income tax returns. This revenue proce-
dure does not apply with respect to any
other penalty provisions (including but
not limited to the disregard provisions of
the section 6662(b)(1) accuracy-related
penalty, the section 6662(b)(6) accuracy-
related penalty and the section 6662(i)
increased accuracy-related penalty in the
case of nondisclosed noneconomic sub-
stance transactions, and the section
6662(j) increased accuracy-related pen-
alty in the case of undisclosed foreign
financial asset understatements). If this
revenue procedure does not include an
item, disclosure is adequate with respect
to that item only if made on a properly
completed Form 8275 or 8275-R, as ap-
propriate, attached to the return for the
year or to a qualified amended return. See
Treas. Reg. § 1.6664-2(c) for information
about qualified amended returns.

This revenue procedure applies to any
income tax return filed on 2018 tax forms
for a taxable year beginning in 2018, and
to any income tax return filed in 2019 on
2018 tax forms for short taxable years
beginning in 2019.

## SECTION 2. CHANGES FROM REV. PROC. 2018-11

Editorial changes have been made
throughout this revenue procedure. In ad-
dition, minor changes have been made in
order to update the taxable years and tax
forms to which this revenue procedure
applies. No additional substantive
changes have been made.

## SECTION 3. BACKGROUND

.01 If section 6662 applies to any por-
tion of an underpayment of tax required to
be shown on a return, an amount equal to
20 percent of the portion of the underpay-
ment is added to the tax. The penalty rate
increases to 40 percent in the case of gross
valuation misstatements under section

6662(h), nondisclosed noneconomic sub-
stance transactions under section 6662(i),
or undisclosed foreign financial asset un-
derstatements under section 6662(j). Sec-
tion 6662(b)(2) applies to the portion of
an underpayment of tax that is attributable
to a substantial understatement of income
tax.

.02 There is a substantial understate-
ment of income tax if the amount of the
understatement exceeds the greater of (i)
10 percent of the amount of tax required
to be shown on the return for the taxable
year or (ii) $5,000. Section 6662(d)(1).
Section 6662(d)(1)(B) provides a special
rule for corporations. A corporation (other
than an S corporation or a personal hold-
ing company) has a substantial understate-
ment of income tax if the amount of the
understatement exceeds the lesser of (i) 10
percent of the tax required to be shown on
the return for a taxable year (or, if greater,
$10,000) or (ii) $10,000,000. An under-
statement is the excess of the amount of
tax required to be shown on the return for
the taxable year over the amount of the tax
that is shown on the return reduced by any
rebate. Section 6662(d)(2).

.03 In the case of an item not attribut-
able to a tax shelter, if the taxpayer has a
reasonable basis for the tax treatment of
the item, the amount of the understate-
ment is reduced by the portion of the
understatement attributable to the item
with respect to which the relevant facts
affecting the item's tax treatment are ad-
equately disclosed in the return or in a
statement attached to the return. Section
6662(d)(2)(B)(ii).

.04 Section 6694(a) imposes a penalty
on a tax return preparer who prepares a
return or claim for refund reflecting an
understatement of liability due to an "un-
reasonable position" if the tax return pre-
parer knew (or reasonably should have
known) of the position. A position (other
than a position with respect to a tax shelter
or a reportable transaction to which sec-
tion 6662A applies) is generally treated as
unreasonable unless (i) there is or was
substantial authority for the position, or
(ii) the position was properly disclosed in
accordance with section 6662(d)(2)(B)
(ii)(I) and had a reasonable basis. If the
position is with respect to a tax shelter (as
defined in section 6662(d)(2)(C)(ii)) or a
reportable transaction to which section

6662A applies, the position is treated as
unreasonable unless it is reasonable to be-
lieve that the position would more likely
than not be sustained on the merits. See
Notice 2009-5, 2009-3 I.R.B. 309, for
interim penalty compliance rules for tax
shelter transactions.

.05 In general, this revenue procedure
provides guidance for determining when
disclosure by return is adequate for pur-
poses of section 6662(d)(2)(B)(ii) and
section 6694(a)(2)(B). For purposes of
this revenue procedure, the taxpayer must
furnish all required information in accor-
dance with the applicable forms and in-
structions, and the money amounts en-
tered on these forms must be verifiable.

.06 This revenue procedure may apply
to a return for a fiscal tax year that begins
in 2018 and ends in 2019. This revenue
procedure may also apply to a short year
return for a period beginning in 2019 if
the return is to be filed before the 2019
forms are available. (Note that individuals
are generally not put in this position. The
most frequent situation in which a short
year arises is when filing a decedent's
final return for a fractional part of a year.
In that situation, the 2019 form will be
available because the final return is due
the fifteenth day of the fourth month fol-
lowing the close of the 12-month period
that began with the first day of such frac-
tional part of the year (meaning the due
date is not accelerated). See Treas. Reg.
§ 1.6072-1(b).) In the case of fiscal year
and short year returns, the taxpayer must
take into account any tax law changes that
are effective for tax years beginning after
December 31, 2018, even though these
changes are not reflected on the form or
instructions.

.07 This document does not take into
account the effect of tax law changes ef-
fective for tax years beginning after De-
cember 31, 2018. If a line referenced in
this revenue procedure is affected by such
a change and requires additional report-
ing, a taxpayer may have to file Form
8275, Disclosure Statement, or Form
8275-R, Regulation Disclosure State-
ment, until the Service prescribes criteria
for complying with the requirement.

.08 A complete and accurate disclosure
of a tax position on the appropriate year's
Schedule UTP, Uncertain Tax Position
Statement, will be treated as if the corpo-

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ration filed a Form 8275 or Form 8275-R
regarding the tax position. The filing of a
Form 8275 or Form 8275-R, however,
will not be treated as if the corporation
filed a Schedule UTP.

## SECTION 4. PROCEDURE

### .01 General

(1) Additional disclosure of facts rele-
vant to, or positions taken with respect to,
issues involving any of the items set forth
below is unnecessary for purposes of re-
ducing any understatement of income tax
under section 6662(d) (except as other-
wise provided in section 4.02(3) concern-
ing Schedules M-1 and M-3), provided
that the forms and attachments are com-
pleted in a clear manner and in accordance
with their instructions.

(2) The money amounts entered on the
forms must be verifiable, and the informa-
tion on the return must be disclosed in the
manner described below. For purposes of
this revenue procedure, a number is veri-
fiable if, on audit, the taxpayer can prove
the origin of the amount (even if that
number is not ultimately accepted by the
Internal Revenue Service) and the tax-
payer can show good faith in entering that
number on the applicable form.

(3) The disclosure of an amount as
provided in section 4.02 below is not ad-
equate when the understatement arises
from a transaction between parties who
are related within the meaning of section
267(b). If an entry may present a legal
issue or controversy because of a related-
party transaction, then that transaction and
the relationship must be disclosed on a
Form 8275 or Form 8275-R.

(4) When the amount of an item is
shown on a line that does not have a
preprinted description identifying that
item (such as on an unnamed line under an
"Other Expense" category), the taxpayer
must clearly identify the item by including
the description on that line. For example,
to disclose a bad debt for a sole propri-
etorship, the words "bad debt" must be
written or typed on the line of Schedule C
that shows the amount of the bad debt.
Also, for Schedule M-3 (Form 1120), Part
II, line 25, Other income (loss) items with
differences, or Part III, line 37, Other ex-
pense/deduction items with differences,
the entry must provide descriptive lan-

guage; for example, "Cost of non-compete
agreement deductible not capitalizable,"
and the description must be provided on
an attachment. Similarly, for other forms,
if space limitations on a form do not allow
for an adequate description, the descrip-
tion must be continued on an attachment.

(5) Although a taxpayer may literally
meet the disclosure requirements of this
revenue procedure, the disclosure will
have no effect for purposes of the section
6662 accuracy-related penalty if the item
or position on the return: (1) does not have
a reasonable basis as defined in Treas.
Reg. § 1.6662-3(b)(3); (2) is attributable
to a tax shelter item as defined in section
6662(d)(2)(C)(ii); or (3) is not properly
substantiated or the taxpayer failed to
keep adequate books and records with re-
spect to the item or position.

(6) Disclosure also will have no effect
for purposes of the section 6694(a) pen-
alty as applicable to tax return preparers if
the position is with respect to a tax shelter
(as defined in section 6662(d)(2)(C)(ii)) or
a reportable transaction to which section
6662A applies.

### .02 Items

(1) Form 1040, Schedule A, Itemized
Deductions:

(a) Medical and Dental Expenses:
Complete lines 1 through 4, supplying all
required information.

(b) Taxes: Complete lines 5 through 7,
supplying all required information. Line 6
must list each type of tax and the amount
paid.

(c) Interest Expenses: Complete lines 8
through 10, supplying all required infor-
mation. This section 4.02(1)(c) does not
apply to (i) amounts disallowed under sec-
tion 163(d) unless Form 4952, Investment
Interest Expense Deduction, is completed,
or (ii) amounts disallowed under section
265.

(d) Charitable Contributions: Complete
lines 11 through 14, supplying all required
information and attaching all related
forms required pursuant to statute or reg-
ulation.

(e) Casualty and Theft Losses: Com-
plete Form 4684, Casualties and Thefts,
and attach to the return. Each item or
article for which a casualty or theft loss is
claimed must be listed on Form 4684.

(2) Certain Trade or Business Ex-
penses (including, for purposes of this
section, the following six expenses as they
relate to the rental of property):

(a) Casualty and Theft Losses: The
procedure outlined in section 4.02(1)(e)
must be followed.

(b) Legal Expenses: The amount
claimed must be stated. This section does
not apply, however, to amounts properly
characterized as capital expenditures, per-
sonal expenses, or non-deductible lobby-
ing or political expenditures, including
amounts that are required to be (or that
are) amortized over a period of years.

(c) Specific Bad Debt Charge-off: The
amount written off must be stated.

(d) Officers' Compensation: Complete
Form 1125-E, Compensation of Officers,
when its instructions require. You must
express the "percent of time devoted to
business" as a numerical percentage,
rather than as a non-numerical description
such as "part" or "as needed." This section
does not apply to "excess parachute pay-
ments," as defined in section 280G. This
section does not apply to the extent that
remuneration paid or incurred exceeds an
applicable employee-remuneration deduc-
tion limitation under section 162(m).

(e) Repair Expenses: The amount
claimed must be stated. This section does
not apply, however, to any amount prop-
erly characterized as capital expenditures
or personal expenses.

(f) Taxes (other than foreign taxes):
The amount claimed must be stated.

(3) Differences in book and income tax
reporting:

For Schedule M-1 and all Schedules
M-3, including those listed in (a)-(f) be-
low, the information provided must rea-
sonably apprise the Service of the poten-
tial controversy concerning the tax
treatment of the item. If the information
provided does not so apprise the Service,
a Form 8275 or Form 8275-R must be
used to adequately disclose the item (see
Part II of the instructions for those forms).

Note: An item reported on a line with a
pre-printed description, shown on an
attached schedule or "itemized" on
Schedule M-1, may represent the ag-
gregate amount of several transactions
producing that item (i.e., a group of
similar items, such as amounts paid or
incurred for supplies by a taxpayer en-

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gaged in business). In some instances,
a potentially controversial item may
involve a portion of the aggregate
amount disclosed on the schedule. The
Service will not be reasonably apprised
of a potential controversy by the aggre-
gate amount disclosed. In these in-
stances, the taxpayer must use Form
8275 or Form 8275-R regarding that
portion of the item.

Combining unlike items, whether on
Schedule M-1 or Schedule M-3 (or on an
attachment when directed by the instruc-
tions), will not constitute an adequate dis-
closure.

Additionally, taxpayers that file the
Schedule M-3 (Form 1120), Net Income
(Loss) Reconciliation for Corporations
With Total Assets of $10 Million or More,
may be required to complete Schedule B
(Form 1120), Additional Information for
Schedule M-3 Filers. For further informa-
tion, see Who Must File in the General
Instructions for Schedule B (Form 1120).
Taxpayers that file the Schedule M-3
(Form 1065), Net Income (Loss) Recon-
ciliation for Certain Partnerships, may be
required to complete Schedule C (Form
1065), Additional Information for Sched-
ule M-3 Filers. For further information,
see Who Must File in the General Instruc-
tions for Schedule C (Form 1065). When
required, these schedules are necessary to
constitute adequate disclosure:

(a) Form 1065. Schedule M-3 (Form
1065), Net Income (Loss) Reconciliation
for Certain Partnerships: Column (a), In-
come (Loss) per Income Statement, of Part
II (reconciliation of income (loss) items)
and Column (a), Expense per Income
Statement, of Part III (reconciliation of
expense/deduction items); Column (b),
Temporary Difference, and Column (c),
Permanent Difference, of Part II (recon-
ciliation of income (loss) items) and Part
III (reconciliation of expense/deduction
items); and Column (d), Income (Loss)
per Tax Return, of Part II (reconciliation
of income (loss) items) and Column (d),
Deduction per Tax Return, of Part III (rec-
onciliation of expense/deduction items).

(b) Form 1120. (i) Schedule M-1, Rec-
onciliation of Income (Loss) per Books
With Income per Return.

(ii) Schedule M-3 (Form 1120), Net
Income (Loss) Reconciliation for Corpo-
rations With Total Assets of $10 Million

or More: Column (a), Income (Loss) per
Income Statement, of Part II (reconcilia-
tion of income (loss) items) and Column
(a), Expense per Income Statement, of
Part III (reconciliation of expense/deduc-
tion items); Column (b), Temporary Dif-
ference, and Column (c), Permanent Dif-
ference, of Part II (reconciliation of
income (loss) items) and Part III (recon-
ciliation of expense/deduction items); and
Column (d), Income (Loss) per Tax Re-
turn, of Part II (reconciliation of income
(loss) items) and Column (d), Deduction
per Tax Return, of Part III (reconciliation
of expense/deduction items).

(c) Form 1120-L. Schedule M-3
(Form 1120-L), Net Income (Loss) Rec-
onciliation for U.S. Life Insurance Com-
panies With Total Assets of $10 Million or
More: Column (a), Income (Loss) per In-
come Statement, of Part II (reconciliation
of income (loss) items) and Column (a),
Expense per Income Statement, of Part III
(reconciliation of expense/deduction
items); Column (b), Temporary Differ-
ence, and Column (c), Permanent Differ-
ence, of Part II (reconciliation of income
(loss) items) and Part III (reconciliation of
expense/deduction items); and Column
(d), Income (Loss) per Tax Return, of Part
II (reconciliation of income (loss) items)
and Column (d), Deduction per Tax Re-
turn, of Part III (reconciliation of expense/
deduction items).

(d) Form 1120-PC. Schedule M-3
(Form 1120-PC), Net Income (Loss) Rec-
onciliation for U.S. Property and Casu-
alty Insurance Companies With Total As-
sets of $10 Million or More: Column (a),
Income (Loss) per Income Statement, of
Part II (reconciliation of income (loss)
items) and Column (a), Expense per In-
come Statement, of Part III (reconciliation
of expense/deduction items); Column (b),
Temporary Difference, and Column (c),
Permanent Difference, of Part II (recon-
ciliation of income (loss) items) and Part
III (reconciliation of expense/deduction
items); and Column (d), Income (Loss)
per Tax Return, of Part II (reconciliation
of income (loss) items) and Column (d),
Deduction per Tax Return, of Part III (rec-
onciliation of expense/deduction items).

(e) Form 1120-S. Schedule M-3
(Form 1120-S), Net Income (Loss) Rec-
onciliation for S Corporations With Total
Assets of $10 Million or More: Column

(a), Income (Loss) per Income Statement,
of Part II (reconciliation of income (loss)
items) and Column (a), Expense per In-
come Statement, of Part III (reconciliation
of expense/deduction items); Column (b),
Temporary Difference, and Column (c),
Permanent Difference, of Part II (recon-
ciliation of income (loss) items) and Part
III (reconciliation of expense/deduction
items); and Column (d), Income (Loss)
per Tax Return, of Part II (reconciliation
of income (loss) items) and Column (d),
Deduction per Tax Return, of Part III (rec-
onciliation of expense/deduction items).

(f) Form 1120-F. Schedule M-3
(Form 1120-F), Net Income (Loss) Rec-
onciliation for Foreign Corporations With
Reportable Assets of $10 Million or More:
Column (b), Temporary Differences, Col-
umn (c), Permanent Differences, and Col-
umn (d), Other Permanent Differences for
Allocations to Non-ECI and ECI, of Part
II (reconciliation of income (loss) items)
and Part III (reconciliation of expense/
deduction items).

(4) Foreign Tax Items:

(a) International Boycott Transactions:
Transactions disclosed on Form 5713, In-
ternational Boycott Report; Schedule A,
International Boycott Factor (Section
999(c)(1)); Schedule B, Specifically At-
tributable Taxes and Income (Section
999(c)(2)); and Schedule C, Tax Effect of
the International Boycott Provisions,
must be completed when required by their
instructions.

(b) Treaty-Based Return Position: Trans-
actions and amounts under section 6114 or
section 7701(b) as disclosed on Form 8833,
Treaty-Based Return Position Disclosure
Under Section 6114 or 7701(b), must be
completed when required by its instructions.

(5) Other:

(a) Moving Expenses: Complete Form
3903, Moving Expenses, and attach to the
return.

(b) Employee Business Expenses:
Complete Form 2106, Employee Business
Expenses, or Form 2106-EZ, Unreim-
bursed Employee Business Expenses, and
attach to the return. This section does not
apply to club dues or to travel expenses
for any non-employee accompanying the
taxpayer on the trip.

(c) Fuels Credit: Complete Form 4136,
Credit for Federal Tax Paid on Fuels, and
attach to the return.

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(d) Investment Credit: Complete Form
3468, Investment Credit, and attach to the
return.

## SECTION 5. EFFECTIVE DATE

This revenue procedure applies to any
income tax return filed on a 2018 tax form
for a taxable year beginning in 2018 and
to any income tax return filed on a 2018
tax form in 2019 for a short taxable year
beginning in 2019.

## SECTION 6. DRAFTING INFORMATION

The principal author of this revenue
procedure is Casey R. Conrad of the Of-
fice of the Associate Chief Counsel (Pro-
cedure & Administration). For further
information regarding this revenue proce-
dure, contact Branch 2 of Procedure and
Administration at (202) 317-6844 (not a
toll-free number).

26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also: Part I, §§ 446, 481, 807.)

## Rev. Proc. 2019-10 SECTION 1. PURPOSE

This revenue procedure provides pro-
cedures for an insurance company chang-
ing its basis of computing reserves pursu-
ant to § 807(f) of the Internal Revenue
Code (Code), as amended by section
13513 of the Tax Cuts and Jobs Act, Pub.
L. No. 115-97 (December 22, 2017)
(TCJA). This revenue procedure modifies
Rev. Proc. 2018-31, 2018-22 I.R.B. 637,
to provide procedures under § 446 and
§ 1.446-1(e) of the Income Tax Regula-
tions for an insurance company to obtain
automatic consent of the Commissioner of
Internal Revenue (Commissioner) to
change its method of accounting to com-
ply with § 807(f). This revenue procedure
also modifies Rev. Rul. 94-74, 1994-2
C.B. 157, and Rev. Rul. 2002-6, 2002-1
C.B. 460, to the extent the holdings are
inconsistent with the general rules for
changing a method of accounting under
§ 446(e) and § 1.446-1(e).

In addition, this revenue procedure
provides guidance on (i) accounting for an
adjustment that arose under § 807(f) prior
to its amendment by the TCJA and (ii)

how a change in basis of computing life
insurance reserves must be taken into ac-
count for purposes of computing amounts
under the transition relief rule of section
13517 of the TCJA.

## SECTION 2. BACKGROUND

.01 Section 801(a) imposes a tax on the
life insurance company taxable income of
a life insurance company. For purposes of
computing life insurance company taxable
income, §§ 803(a)(2) and 807(a) include in
gross income a decrease over the taxable
year in reserves described in § 807(c). Sec-
tions 805(a)(2) and 807(b) permit a deduc-
tion for an increase over the taxable year in
such reserves.

.02 Section 831(a) imposes a tax on the
taxable income of a nonlife insurance
company. For purposes of computing tax-
able income of a nonlife insurance com-
pany, § 832(b)(4) provides that a decrease
in unearned premiums over the taxable year
increases premiums earned for that year and
an increase in unearned premiums over the
taxable year reduces premiums earned for
that year. The flush language of § 832(b)(4)
includes life insurance reserves, as deter-
mined under § 807, in unearned premiums
for this purpose.

.03 Section 807(c) enumerates items
that a life insurance company must ac-
count for on a reserve basis and take into
account under § 807(a) and (b).

.04 Section 807(c)(1) includes life in-
surance reserves as an item that is taken
into account under § 807(a) and (b). Un-
der § 807(d), the amount of the life insur-
ance reserves for any contract is generally
determined based on the tax reserve
method applicable to the contract, which
is the Commissioners' Reserve Valuation
Method (CRVM), Commissioners' Annu-
ity Reserve Valuation Method (CARVM),
or other method prescribed by the Na-
tional Association of Insurance Commis-
sioners (NAIC) that covers the contract as
of the date the reserve is determined.

.05 Section 807(f) provides rules for
life insurance companies to implement a
change in the basis of computing items
referred to in § 807(c). Rev. Rul. 65-240,
1965-2 C.B. 236, concludes that because
a nonlife insurance company includes life
insurance reserves in unearned premiums
under § 832(b)(4), a nonlife insurance
company likewise should account for a

change in basis of computing such re-
serves under § 810(d)(1) of the Code as it
existed then, which was similar to
§ 807(f)(1) of the Code prior to its amend-
ment by the TCJA.

.06 Prior to amendment by the TCJA,
§ 807(f)(1) provided that if the amount of
a § 807(c) reserve at the close of a taxable
year was determined on a basis that dif-
fered from the basis for such determina-
tion at the close of the preceding taxable
year, then 1/10th of the difference between
the amount determined at the close of the
taxable year under the old basis and the
amount determined at the close of the tax-
able year under the new basis, to the extent
attributable to contracts issued before the
taxable year, was taken into account for
each of the succeeding ten taxable years as a
deduction under § 805(a)(2) or as gross in-
come under § 803(a)(2), as appropriate.

.07 Section 13513 of the TCJA
amended § 807(f)(1) to treat the adjust-
ments required under § 807(f) as adjust-
ments under § 481 attributable to a change
in method of accounting initiated by the
taxpayer and made with the consent of
the Secretary of the Treasury (Secretary).
The § 481 adjustment takes into account
only amounts attributable to contracts is-
sued before the taxable year of change.
The amendments made by section 13513
are effective for taxable years beginning
after December 31, 2017.

.08 To avoid duplication or omission of
amounts related to changes that arose un-
der § 807(f) in a year beginning prior to
January 1, 2018, a taxpayer must continue
the ten-year spread under prior law by
taking such amounts into account as de-
scribed in § 807(f)(1) before its amend-
ment by the TCJA. See § 807(d)(1)(D);
§ 13513(b) of the TCJA.

.09 Section 13517 of the TCJA, among
other things, amends § 807(d) to provide a
new method for computing the amount of
life insurance reserves, effective for tax-
able years beginning after December 31,
2017. Section 13517(c)(3) of the TCJA
provides a transition relief rule that gen-
erally requires the difference between (1)
the amount of life insurance reserves with
respect to any contract as of the close of
the taxable year preceding the first taxable
year beginning after December 31, 2017,
computed using the method prescribed by
the TCJA (the post-TCJA closing bal-

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ance) and (2) the amount of such reserves
computed using the method prior to the
amendments by the TCJA (the pre-TCJA
closing balance), to be taken into account
over the eight succeeding taxable years.
To avoid duplication or omission of in-
come, the computation of the pre-TCJA
closing balance must take into account
any change in basis that is taken into
account as required by § 807(f).

.10 A change in basis of computing
reserves is a type of change in method of
accounting. See Am. Gen. Life & Accident
Ins. Co. v. United States, 90-1 USTC
(CCH) [ 50,010 (M.D. Tenn. 1989). After
the amendment of § 807(f) by section
13513 of the TCJA, an insurance com-
pany must follow the administrative pro-
cedures for a change in method of ac-
counting to change its basis of computing
reserves. See H.R. Rep. No. 115-466, at
467 (2017) (Conf. Rep.). Section 13513 of
the TCJA, however, does not set forth the
administrative procedures for an insur-
ance company to change the basis of com-
puting reserves to comply with § 807(f)
and does not specify whether an insurance
company is entitled to audit protection or
ruling protection.

.11 In general, § 446(e) requires a tax-
payer to secure the consent of the Secretary
before changing a method of accounting
for federal income tax purposes. Section
1.446-1(e)(3)(ii) provides that the Commis-
sioner may prescribe administrative proce-
dures under which a taxpayer will be per-
mitted to change a method of accounting.
Except as otherwise provided in § 1.446-
1(e)(3)(ii), a taxpayer must file a Form
3115, "Application for Change in Account-
ing Method," in order to secure the Com-
missioner's consent to change a method of
accounting. Rev. Proc. 2015-13, 2015-5
I.R.B. 419, as clarified and modified by Rev.
Proc. 2015-33, 2015-24 I.R.B. 1067, and as
modified by Rev. Proc. 2016-1, 2016-1
I.R.B. 1, and Rev. Proc. 2017-59, 2017-48
I.R.B. 543, provides the general procedures
by which a taxpayer may obtain automatic
consent of the Commissioner to change a
method of accounting described in the List
of Automatic Changes. Rev. Proc. 2018-31
contains the current List of Automatic
Changes.

.12 Section 481(a) provides that in
computing the taxpayer's taxable income
for any taxable year (referred to as the

year of the change), if such computation is
under a method of accounting different
from the method under which the taxpay-
er's taxable income for the preceding tax-
able year was computed, then there shall
be taken into account those adjustments
that are determined to be necessary solely
by reason of the change in order to pre-
vent amounts from being duplicated or
omitted.

.13 Section 481(c) provides that in the
case of any change described in § 481(a),
the taxpayer may, in such manner and
subject to such conditions as the Secretary
may by regulations prescribe, take the ad-
justments required by § 481(a) into ac-
count in computing the tax imposed by
Chapter 1 for the taxable year or years
permitted under such regulations.

.14 Section 1.481-1(c)(2) provides that
if a change in method of accounting is
voluntary (that is, initiated by the tax-
payer), then the entire amount of the ad-
justments required by § 481(a) is gener-
ally taken into account in computing
taxable income in the taxable year of the
change, regardless of whether the adjust-
ments increase or decrease taxable in-
come. Section 1.481-1(c)(2) references
§§ 1.446-1(e)(3) and 1.481-4, however,
which provide that the Commissioner may
prescribe the taxable year or years in
which the adjustments are taken into ac-
count. Under section 7.03(1) of Rev. Proc.
2015-13, the § 481(a) adjustment period
generally is one taxable year (year of
change) for a negative § 481(a) adjust-
ment and four taxable years (year of
change and next three taxable years) for a
positive § 481(a) adjustment.

.15 Under § 1.481-1(c)(1), the refer-
ence to "adjustments" as used in § 481
means the net amount of the adjustments
required by § 481(a) with regard to a
change.

.16 Rev. Rul. 94-74 applies § 807(f)
(as it existed then) to several factual situ-
ations. Among the holdings of Rev. Rul.
94-74 are (1) there is no requirement un-
der § 446(e) to obtain the Commissioner's
consent to change the basis of computing
life insurance reserves, (2) the adjustment
rule of § 807(f) applies if the recomputa-
tion is initiated by the Service, and (3) if a
change in basis of computing life insur-
ance reserves is required to correct for an
erroneous application of the computation

rules of § 807(d)(2) (as it existed then),
either the taxpayer or the Service may
make the change retroactively by amend-
ing (or adjusting) the taxpayer's return
(not otherwise barred by the statute of
limitations) for periods for which there
was an erroneous application of the pre-
scribed rules. Similarly, Rev. Rul. 2002-6
permits a taxpayer to file an amended re-
turn for past taxable years to recalculate
its life insurance reserves for such years to
take into account omitted factors. These
holdings of Rev. Rul. 94-74 and Rev.
Rul. 2002-6 are inconsistent with the
general rules for changing a method of
accounting under § 446(e) and § 1.446-
1(e). Rev. Rul. 94-74 and Rev. Rul.
2002-6 are modified to the extent they are
inconsistent with the general rules for
changing a method of accounting under
§ 446(e) and § 1.446-1(e).

.17 This revenue procedure modifies
Rev. Proc. 2018-31 to provide procedures
for an insurance company to obtain auto-
matic consent of the Commissioner to
change its basis of computing reserves
pursuant to § 807(f).

## SECTION 3. AUTOMATIC METHOD CHANGE

Rev. Proc. 2018-31 is modified to add
new section 26.04 to the List of Automatic
Changes to read as follows:

.04 Changes in basis of computing re-
serves under § 807(f).

(1) Description of change and applica-
bility. This automatic change applies to a
change in basis of computing reserves, as
described in § 807(f), by a life insurance
company or by an insurance company that
is not a life insurance company.

(2) Manner of making change.

(a)(i) In general. If the basis of com-
puting any reserves referenced in § 807(c)
is changed during a taxable year (year of
change), then for purposes of applying
§ 807(a) and (b) with respect to contracts
issued before the year of change, the
amount of reserves at the close of the year
of change attributable to those contracts is
determined on the old basis and the
amount of reserves at the opening of the
succeeding taxable year attributable to
those contracts is determined on the new
basis. Reserves attributable to contracts
issued during the year of change and

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thereafter must be computed on the new
basis.

(ii) Requirement to file Form 3115. A
taxpayer that changes its basis of comput-
ing reserves is subject to the procedures
that apply to obtain the automatic consent
of the Commissioner to change a method
of accounting. Under these procedures,
(A) the taxpayer must file Form 3115 as
provided in this section 26.04, (B) the
taxpayer may receive audit protection for
taxable years prior to the year of change
as provided in section 8.01 of Rev. Proc.

2015-13 in connection with the change,
and (C) the § 481(a) adjustment period
generally will be one taxable year (year of
change) for a negative § 481(a) adjust-
ment, and four taxable years (year of
change and next three taxable years) for a
positive § 481(a) adjustment in accor-
dance with section 7.03(1) of Rev. Proc.
2015-13.

(iii) Example. The following example
illustrates the rules of sections 26.04(2)
(a)(i) and (ii) of this revenue procedure in
two situations: (A) the change in basis in

computing reserves for contracts issued
prior to the year of change results in an
increase in the reserves at the end of the
year of change (negative § 481(a) adjust-
ment) and (B) the change in basis in com-
puting reserves for contracts issued prior
to the year of change results in a decrease
in the reserves at the end of the year of
change (positive § 481(a) adjustment).
The following table summarizes the re-
serve amounts for contracts issued before
the year of change.

Old Basis

New Basis (Negative § 481(a) Adjustment)

New Basis (Positive § 481(a) Adjustment)

End of Year Prior to Year of Change

100

End of Year of Change

105

109

101

End of Year Following Year of Change

112

104

Section 481(a) Adjustment

105-109=(4)

105-101=4

Under section 26.04(2)(a)(i) of this
revenue procedure, reserves for contracts
issued before the year of change are re-
ported under the old basis at the close of
the year of change and under the new
basis at the beginning of the year follow-
ing the year of change; reserves for con-
tracts issued during the year of change and
thereafter are computed under the new
basis. The remainder of this example de-
scribes only the deductions and income
inclusions relating to reserves for con-
tracts issued before the year of change.

Deduction for a net increase in re-
serves for the year of change. In both the
negative and positive § 481(a) adjustment
situations, the company must take $105 of
reserves into account (on the old basis) at
the end of the year of change, resulting in
a $5 increase in reserves ($105 - $100)
and a corresponding deduction for a net
increase in reserves for the year of change.

Negative § 481 adjustment situation.
As described in section 26.04(2)(a)(ii) of
this revenue procedure, the negative
§ 481(a) adjustment of $4 ($109-$105) is
taken into account in the year of change,
such that the company would recognize a
deduction for an increase in reserves un-
der § 807(f) of $4 in the year of change.
This results in total deductions in the year
of change of $9 ($5 + $4).

At the beginning of the following year,
the company must take $109 of reserves

into account (new basis) and the deduc-
tion for the net increase in reserves for
that year is $3 ($112 - $109).

Positive § 481 adjustment situation. As
described in section 26.04(2)(a)(ii) of this
revenue procedure, the positive § 481(a)
adjustment of $4 ($101-$105) is taken
into account over four years, such that the
company recognizes additional income
from a decrease in reserves under § 807(f)
of $1 (1/4th of the § 481(a) adjustment) in
the year of change. This results in a net
reduction in taxable income in the year of
change of $4 ($5 - $1).

At the beginning of the following year,
the company takes $101 of reserves into
account (new basis), and the deduction for
the net increase in reserves for that year is
$3 ($104 - $101). The company also
would recognize another 1/4th of the
§ 481(a) adjustment, resulting in a $1 in-
crease in income due to a decrease in
reserves under § 807(f), and a net reduc-
tion in taxable income of $2 ($3 - $1) in
that year. The remaining $2 of the § 481
adjustment is recognized as increases in
income due to a decrease in reserves un-
der § 807(f) in each of the two remaining
years of the § 481 adjustment period.

(b) Section 481(a) adjustment.

(i) Computation of § 481(a) adjustment
at end of year. In general, a change in basis
of computing reserves under § 807(f) re-
quires an adjustment under § 481(a). The

§ 481(a) adjustment is computed as of the
end of the year of change and is only with
respect to contracts issued before the year of
change.

(ii) Eligibility for additional change
within five taxable years. The eligibility
rule in section 5.01(1)(f) of Rev. Proc.
2015-13 does not apply to a change under
this section 26.04.

(iii) Number of § 481(a) adjustments.
Multiple changes during the same taxable
year in methods, assumptions, or factors,
each of which alone would constitute a
change in basis of computing reserves un-
der § 807(f) for the same type of contract
(life insurance, annuity, etc.), are consid-
ered a single change in basis, and the
effects of such multiple changes are netted
and treated as a single net negative
§ 481(a) adjustment or net positive
§ 481(a) adjustment.

A change in basis of computing the
reserve for each type of contract (life in-
surance, annuity, etc.) is considered a sep-
arate change in basis. A separate § 481(a)
adjustment must be determined for each
type of contract, and each such § 481(a)
adjustment must be taken into account
separately.

(c) No ruling protection for year of
change or subsequent years. The consent
granted under section 9 of Rev. Proc.
2015-13 for a change under this section
26.04 is not a determination by the Com-

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missioner that the new basis of computing
reserves is a permissible basis of comput-
ing reserves and does not create any pre-
sumption that the new basis is a permis-
sible basis of computing reserves. The
Director may ascertain whether the new
method of accounting is a permissible
method of accounting. Thus, a taxpayer
that changes its basis of computing re-
serves under this section 26.04 may be
required to change or modify that basis of
computing reserves for the year of change
or any subsequent year if it is determined
by the Commissioner that the basis to
which the taxpayer changed does not meet
the requirements of federal income tax
law.

(d) Information required to be fur-
nished.

(i) In view of the amendment of
§ 807(f) by section 13513 of the Tax Cuts
and Jobs Act, Pub. L. No. 115-97 (De-
cember 22, 2017) and the information re-
quired in section 26.04(2)(d)(ii) of this
revenue procedure, the information re-
quired under § 1.801-5(c) is not required
to be furnished with the taxpayer's return
or on Form 3115.

(ii) A taxpayer that files a Form 3115
under this section 26.04 is required to
complete or provide only the following
information on Form 3115:

· The identification section of page 1
(above Part I);

· The signature section at the bottom of
page 1;

· Part I;

· Part II, lines 4, 5, 6a-d, 7a-b, 8a-d, 9,
11a-c, 12, 17, and 18;

· The following information, in lieu of
completing Part II, line 14:

· The item in § 807(c) to which the
change in basis relates,

· The type of contract (e.g., life insur-
ance, annuity) to which the change
relates,

· If a life insurance reserve, a descrip-
tion of the applicable tax reserve
method (e.g., Commissioners' Re-
serve Valuation Method or Com-
missioners' Annuity Reserve Valu-
ation Method),

· A description of the change in basis,

. A description of the reason for the
change in basis, including (i)
whether the change results from a
change in the method prescribed by
the National Association of Insur-
ance Commissioners or from an-
other change (such as a change in
assumption for mortality, morbidity,
or interest rate), regardless of
whether the change is reflected on
an annual statement and (ii) whether
the change results from a prior in-
correct application of federal in-
come tax law and the nature of such
incorrect application.

· Part IV. (The taxpayer may indicate
that the § 481(a) adjustment is an
estimate or is to be determined.)

(e) Concurrent automatic changes. A
taxpayer that makes multiple changes in
basis under this section 26.04 may file a
single Form 3115 that includes all the
changes in basis for the year of change.
Likewise, a single Form 3115 may be filed
for all changes in basis for members of a

group filing a consolidated return. The
information required by section 26.04(2)
(d)(ii) of this revenue procedure is re-
quired for each separate change for each
member of the group.

(3) Designated automatic accounting
method change number. The designated
automatic accounting method change
number for a change under this section
26.04 is "240."

(4) Contact information. For further in-
formation regarding a change under this
section, contact Dan Phillips at (202) 317-
6995 (not a toll-free call).

## SECTION 4. EFFECTIVE DATE

This revenue procedure is effective for
taxable years beginning after December
31, 2017.

## SECTION 5. EFFECT ON OTHER DOCUMENTS

This revenue procedure modifies Rev.
Proc. 2018-31. This revenue procedure
also modifies Rev. Rul. 94-74 and Rev.
Rul. 2002-6.

## SECTION 6. DRAFTING INFORMATION

The principal author of this revenue
procedure is Dan Phillips of the Office of
the Associate Chief Counsel (Financial
Institutions and Products). For further in-
formation regarding this revenue proce-
dure, contact Mr. Phillips at (202) 317-
6995 (not a toll-free number).

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## Part IV. Items of General Interest

### Notice of Proposed Rulemaking Base Erosion and Anti-Abuse Tax

REG-104259-18

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains
proposed regulations that provide guid-
ance regarding the tax on base erosion
payments of taxpayers with substantial
gross receipts and reporting requirements
thereunder. The proposed regulations
would affect corporations with substantial
gross receipts that make payments to for-
eign related parties. The proposed regula-
tions under section 6038A would affect
any reporting corporations within the
meaning of section 6038A or 6038C.

DATES: Written or electronic comments
and requests for a public hearing must be
received by February 19, 2019.

ADDRESSES: Send submissions to CC:
PA:LPD:PR (REG-104259-18), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to CC:PA:
LPD:PR (REG-104259-18), Courier's
desk, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington,
DC 20224, or sent electronically, via the
Federal eRulemaking Portal at www.regu-
lations.gov (IRS REG-104259-18).

FOR FURTHER INFORMATION

CONTACT: Concerning §§ 1.59A-1
through 1.59A-10 of the proposed regu-
lations, Sheila Ramaswamy or Karen
Walny at (202) 317-6938; concerning the
services cost method exception, L. Ul-
ysses Chatman at (202) 317-6939; con-
cerning §§ 1.383-1, 1.1502-2, 1.1502-4,
1.1502-43, 1.1502-47, 1.1502-59A,
1.1502-100, and 1.6655-5 of the pro-
posed regulations, Julie Wang at (202)
317-6975 or John P. Stemwedel at (202)
317-5024; concerning §§ 1.6038A-1,

1.6038A-2, and 1.6038A-4 of the pro-
posed regulations, Brad McCormack or
Anand Desai at (202) 317-6939; concern-
ing submissions of comments and re-
quests for a public hearing, Regina John-
son at (202) 317-6901 (not toll-free
numbers).

SUPPLEMENTARY INFORMATION:

#### Background

This document contains proposed
amendments to 26 CFR part 1 under sec-
tions 59A, 383, 1502, 6038A, 6038C, and
6655 of the Internal Revenue Code (the
"Code"). The Tax Cuts and Jobs Act, Pub.
L. 115-97 (2017) (the "Act"), which was
enacted on December 22, 2017, added
section 59A to the Code. Section 59A
imposes on each applicable taxpayer a tax
equal to the base erosion minimum tax
amount for the taxable year (the "base
erosion and anti-abuse tax" or "BEAT").

The Act also added reporting obliga-
tions regarding this tax for 25-percent
foreign-owned corporations subject to
section 6038A and foreign corporations
subject to section 6038C and addressed
other issues for which information report-
ing under those sections is important to
tax administration.

#### Explanation of Provisions

##### I. Overview

These proposed regulations provide
guidance under section 59A regarding the
determination of the tax on base erosion
payments for certain taxpayers with sub-
stantial gross receipts. In general, the
proposed regulations provide rules for
determining whether a taxpayer is an
applicable taxpayer on which the BEAT
may be imposed and rules for computing
the taxpayer's BEAT liability.

Part II of this Explanation of Provi-
sions section describes the rules in pro-
posed § 1.59A-2 for determining whether
a taxpayer is an applicable taxpayer on
which the BEAT may be imposed. Part III
of this Explanation of Provisions section
describes the rules in proposed § 1.59A-
3(b) for determining the amount of base
erosion payments. Part IV of this Expla-

nation of Provisions section describes the
rules in proposed § 1.59A-3(c) for deter-
mining base erosion tax benefits arising
from base erosion payments. Part V of this
Explanation of Provisions section de-
scribes the rules in proposed § 1.59A-4
for determining the amount of modified
taxable income, which is computed in part
by reference to a taxpayer's base erosion
tax benefits and base erosion percentage
of any net operating loss deduction. Part
VI of this Explanation of Provisions sec-
tion describes the rules in proposed
§ 1.59A-5 for computing the base erosion
minimum tax amount, which is computed
by reference to modified taxable income.
Part VII of this Explanation of Provisions
section describes general rules in pro-
posed § 1.59A-7 for applying the pro-
posed regulations to partnerships. Part
VIII of this Explanation of Provisions sec-
tion describes certain rules in the pro-
posed regulations that are specific to
banks and registered securities dealers.
Part IX of this Explanation of Provisions
section describes certain rules in the pro-
posed regulations that are specific to in-
surance companies. Part X of this Expla-
nation of Provisions section describes the
anti-abuse rules in proposed § 1.59A-9.

Parts XI-XIII of this Explanation of
Provisions section address rules in pro-
posed § 1.1502-59A regarding the general
application of the BEAT to consolidated
groups. Part XIV of this Explanation of
Provisions section addresses proposed
amendments to § 1.383-1 to address lim-
itations on a loss corporation's items un-
der section 382 and 383 in the context of
the BEAT. Part XV of this Explanation of
Provisions section describes reporting and
record keeping requirements.

##### II. Applicable Taxpayer

The BEAT applies only to a taxpayer
that is an applicable taxpayer. Proposed
§ 1.59A-2 provides rules for determining
if a taxpayer is an applicable taxpayer.

Generally, an applicable taxpayer is a
corporation (other than (1) a regulated in-
vestment company ("RIC"), (2) a real es-
tate investment trust ("REIT"), or (3) an S
corporation) that satisfies the gross re-
ceipts test and the base erosion percentage

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test. Section 59A and the proposed regu-
lations provide that the taxpayer and cer-
tain other corporations that are related to
the taxpayer are treated as one person for
purposes of determining whether a tax-
payer satisfies these tests.

Part II.A of this Explanation of Provi-
sions section describes the proposed rules
for determining the aggregate group for
applying the gross receipts test and the
base erosion percentage test. Part II.B of
this Explanation of Provisions section de-
scribes the proposed rules for applying the
gross receipts test. Part II.C of this Expla-
nation of Provisions section describes the
proposed rules for applying the base ero-
sion percentage test. Part II.D of this Ex-
planation of Provisions section describes
the proposed rules for applying these tests
on an aggregate group basis when mem-
bers of the aggregate group have different
taxable years. Part II.E of this Explanation
of Provisions section describes proposed
rules for computing the base erosion per-
centage for a taxpayer with deductions
taken into account under a mark-to-
market method of accounting.

A. Determining the Aggregate Group for
Purposes of Applying the Gross Receipts
Test and the Base Erosion Percentage
Test

Section 59A(e)(3) aggregates corpora-
tions ("aggregate group") on the basis of
persons treated as a single employer under
section 52(a), which treats members of the
"same controlled group of corporations"
(as defined in section 1563(a) with certain
modifications) as one person. Although a
section 1563(a) controlled group can in-
clude both foreign and domestic corpora-
tions, the proposed regulations treat
foreign corporations as outside of the con-
trolled group for purposes of applying the
aggregation rules, except to the extent that
the foreign corporation has effectively
connected income. This limitation on the
extent to which foreign corporations are
included in the aggregate group ensures
that payments made by a domestic corpo-
ration, or a foreign corporation with re-
spect to its effectively connected income,
to a foreign related corporation are not
inappropriately excluded from the base
erosion percentage test. Accordingly, the
proposed regulations provide that a tax-

payer must apply the gross receipts test
and the base erosion percentage test using
the aggregate group consisting of mem-
bers of the same controlled group of cor-
porations for purposes of section 52(a)
that are (i) domestic corporations and (ii)
foreign corporations, but only with regard
to gross receipts taken into account in
determining income which is effectively
connected with the conduct of a trade or
business in the United States and subject
to tax under section 882(a). The proposed
regulations limit the aggregate group to
corporations that benefit from deductions,
and accordingly may have base erosion
tax benefits, while excluding foreign cor-
porations that are not subject to U.S. in-
come tax (except on a gross basis under
section 881, with respect to income that is
not effectively connected with a trade or
business in the United States) and do not
benefit from deductions. In the case of a
foreign corporation that determines its net
taxable income under an applicable in-
come tax treaty of the United States, the
foreign corporation is a member of the
aggregate group with regard to gross re-
ceipts taken into account in determining
its net taxable income.

The proposed regulations generally
provide that payments between members
of the aggregate group are not included in
the gross receipts of the aggregate group,
consistent with the single entity concept in
section 59A(e)(3). Similarly, the proposed
regulations generally provide that pay-
ments between members of the aggregate
group are also not taken into account for
purposes of the numerator or the denom-
inator in the base erosion percentage cal-
culation.

Payments between the aggregate group
and any foreign corporation that is not
within the aggregate group with respect to
the payment are taken into account in ap-
plying both the gross receipts test and the
base erosion percentage test. However,
because a foreign corporation is consid-
ered within the aggregate group to the
extent it is subject to net income tax in the
United States, payments to a foreign cor-
poration from within the aggregate group
that are subject to net income tax in the
United States are eliminated and not taken
into account in applying the gross receipts
test and the base erosion percentage test.
Thus, it may be the case that a payment by

a domestic corporation to a foreign corpo-
ration is not taken into account in deter-
mining applicable taxpayer status because
the payee is subject to net income tax in
the United States on that payment, while
another payment by the same domestic
corporation to the same foreign corpora-
tion is taken into account in determining
applicable taxpayer status because the
payee is not subject to net income tax in
the United States on that payment. The
Treasury Department and the IRS wel-
come comments on the proposed regula-
tions addressing the aggregate group for
purposes of the gross receipts test and the
base erosion percentage test.

##### B. Gross Receipts Test

A taxpayer satisfies the gross receipts
test if the taxpayer, or the aggregate group
of which the taxpayer is a member, has
$500 million or more of average annual
gross receipts during the three prior tax-
able years. In the case of a foreign corpo-
ration, the gross receipts test only takes
into account gross receipts that are taken
into account in determining income that is
subject to net income tax as income effec-
tively connected with the conduct of a
trade or business within the United States,
or taken into account in determining net
taxable income under an applicable U.S.
income tax treaty.

In the case of an aggregate group, the
proposed regulations measure gross re-
ceipts of a taxpayer by reference to the
taxpayer's aggregate group determined as
of the end of the taxpayer's taxable year
for which BEAT liability is being com-
puted, and takes into account gross re-
ceipts of those aggregate group members
during the three-year period preceding
that taxable year.

The proposed regulations further clar-
ify how a taxpayer computes gross re-
ceipts, including providing rules for cor-
porations that have been in existence for
fewer than three years or have short years.
These proposed rules are generally con-
sistent with rules set forth in section
448(c). See section 59A(e)(2)(B) (provid-
ing that rules similar to the rules of section
448(c)(3)(B) through (D) apply in deter-
mining gross receipts for purposes of sec-
tion 59A). The proposed regulations also
clarify how gross receipts are determined

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if members of the aggregate group have
different taxable years, as discussed in
Part II.D of this Explanation of Provisions
section.

In addition, the proposed regulations
clarify how gross receipts are determined
for corporations subject to tax under sub-
chapter L (including a foreign corporation
subject to tax under section 842(a)).

If a member of an aggregate group
owns an interest in a partnership, the pro-
posed regulations provide that the group
includes its share of the gross receipts of
the partnership in its gross receipts com-
putation. The aggregate group's share of
the gross receipts of the partnership is
proportionate to its distributive share of
items of gross income from the partner-
ship. See Part VII of this Explanation of
Provisions section for a more detailed de-
scription of the application of section 59A
to partnerships.

##### C. Base Erosion Percentage Test

The base erosion percentage test is sat-
isfied with respect to a taxpayer if the
taxpayer (or if the taxpayer is a member of
an aggregate group, the aggregate group
of which the taxpayer is a member) has a
base erosion percentage of three percent
or more. Generally, a lower threshold of
two percent applies if the taxpayer, or a
member of the taxpayer's aggregate
group, is a member of an affiliated group
(as defined in section 1504(a)(1)) that in-
cludes a domestic bank or registered se-
curities dealer. The proposed regulations
provide that the lower two percent thresh-
old does not apply, however, in the case of
an aggregate group or consolidated group
that has de minimis bank or registered
securities dealer activities. See Part VIII
of this Explanation of Provisions section
for a more detailed description of these
rules.

The proposed regulations provide that
the base erosion percentage for a taxable
year is computed by dividing (1) the ag-
gregate amount of base erosion tax bene-
fits (the "numerator") by (2) the sum of
the aggregate amount of deductions plus
certain other base erosion tax benefits (the
"denominator"). As described in Part II.A
of this Explanation of Provisions section,
in the case of a taxpayer that is a member
of an aggregate group, the base erosion

percentage is measured by reference to the
deductions or certain reductions in gross
income of the taxpayer and members of
the taxpayer's aggregate group as of the
end of the taxpayer's taxable year. Base
erosion tax benefits are generally the de-
ductions or reductions in gross income
that result from base erosion payments.
Part III of this Explanation of Provisions
section describes the proposed rules for
determining the amount of base erosion
payments, and Part IV of this Explanation
of Provisions section describes the pro-
posed rules for determining the base ero-
sion payments that give rise to base ero-
sion tax benefits.

The numerator of the base erosion per-
centage excludes deductions for (i)
amounts paid or accrued to foreign related
parties for services qualifying for the ex-
ception in proposed § 1.59A-3(b)(3)(i)
(the "services cost method ("SCM") excep-
tion"), (ii) payments covered by the quali-
fied derivatives payments ("QDP") excep-
tion in proposed § 1.59A-3(b)(3)(ii), and
(iii) amounts excluded pursuant to the total
loss-absorbing capacity ("TLAC") excep-
tion in proposed § 1.59A-3(b)(3)(v). See
Parts III.B.1, III.B.2, and III.B.5 of this Ex-
planation of Provisions section, for discus-
sions of the SCM exception, QDP excep-
tion, and TLAC exception, respectively.
Generally, these deductions are also ex-
cluded from the denominator of the base
erosion percentage.

An applicable taxpayer may make a
payment to a foreign related party that is
not a member of the aggregate group, if,
for example, the recipient of the payment
is a 25-percent owner as described in pro-
posed § 1.59A-1(b)(17) who does not
own more than 50 percent of the applica-
ble taxpayer, and that payment may qual-
ify for the ECI exception described in
proposed § 1.59A-3(b)(3)(iii). If so, and if
that payment also qualifies for either the
SCM exception described in proposed
§ 1.59A-3(b)(3)(i), the QDP exception de-
scribed in proposed § 1.59A-3(b)(3)(ii), or
the TLAC exception described in proposed
§ 1.59A-3(b)(3)(v), the payment will be
included in the denominator for purposes of
the base erosion percentage. For example, if
an applicable taxpayer makes a deductible
payment to a foreign related person who is a
25-percent owner and that payment is both a
QDP and subject to federal income taxation

as income that is, or is treated as, effectively
connected with the conduct of a trade or
business in the United States under an ap-
plicable provision of the Internal Revenue
Code or regulations, that deductible pay-
ment is included in the denominator of the
base erosion percentage. However, if the
applicable taxpayer makes a deductible pay-
ment to a foreign related person and that
payment is a QDP, but not otherwise subject
to federal income taxation, that deductible
payment is excluded from the denominator
of the base erosion percentage.

The proposed regulations also exclude
any section 988 losses from the numerator
and the denominator in determining the
base erosion percentage. See Part III.B.4
of this Explanation of Provisions section,
describing the exception for section 988
losses from the definition of base erosion
payments.

The numerator of the base erosion per-
centage only takes into account base ero-
sion tax benefits, which generally are base
erosion payments for which a deduction is
allowed under the Code for a taxable year.
See Part IV of this Explanation of Provi-
sions section. Similarly, the proposed reg-
ulations ensure that the denominator of
the base erosion percentage only takes
into account deductions allowed under the
Code by providing that the denominator
of the base erosion percentage does not
include deductions that are not allowed in
determining taxable income for the tax-
able year.

Finally, because a deduction allowed
under section 965(c) to a United States
shareholder of a deferred foreign income
corporation is not one of the categories of
deductions specifically excluded from the
denominator under section 59A(c)(4)(B),
that deduction is included in the denomi-
nator.

In general, as discussed in more detail
in Part IV.A of this Explanation of Provi-
sions section, if tax is imposed by section
871 or 881 and that tax has been deducted
and withheld under section 1441 or 1442
on a base erosion payment, the base ero-
sion payment is not treated as a base ero-
sion tax benefit for purposes of calculating
a taxpayer's modified taxable income. If
an income tax treaty reduces the amount
of withholding imposed on the base ero-
sion payment, the base erosion payment is
treated as a base erosion tax benefit to the

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extent of the reduction in withholding un-
der rules similar to those in section
163(j)(5)(B) as in effect before the Act.

The proposed regulations apply the
same rule concerning withholding taxes
for purposes of the base erosion percent-
age computation. Accordingly, a base ero-
sion tax benefit is not included in the
numerator when the payment was subject
to tax under section 871 or 881 and that
tax has been deducted and withheld under
section 1441 or 1442. In addition, the pro-
posed regulations provide that for any
base erosion payment subject to a reduced
rate of withholding tax under an income
tax treaty, the associated amount of base
erosion tax benefits eliminated from the
numerator of the base erosion percentage
calculation is determined using rules sim-
ilar to those in section 163(j)(5)(B) as in
effect before the Act.

The base erosion percentage also takes
into account the two categories of base
erosion tax benefits that result from reduc-
tions in gross income rather than deduc-
tions allowed under the Code (that is, (1)
certain premium or other consideration
paid to a foreign related party for reinsur-
ance, and (2) amounts paid or accrued by
the taxpayer to certain surrogate foreign
corporations that result in a reduction in
gross receipts to the taxpayer). Section
59A(c)(4)(A)(ii)(II) provides that those
base erosion tax benefits that result from
reductions in gross income are included in
the both the numerator and the denomina-
tor in the same amount. Other payments
that reduce gross income but that are not
base erosion payments are not included in
the denominator of the base erosion per-
centage.

##### D. Taxpayers in an Aggregate Group with Different Taxable Years

Section 59A determines the status of a
corporation as an applicable taxpayer on
the basis of the aggregate group rules by
taking into account the gross receipts and
base erosion payments of each member of
the aggregate group. However, each mem-
ber must compute the aggregate group
amount of gross receipts and base erosion
payments based on its own taxable year
and based on those corporations that are
members of the aggregate group at the end
of such taxable year. Therefore, members

with different taxable years may have dif-
ferent base erosion percentages.

However, each corporation that is an
applicable taxpayer computes its modified
taxable income and base erosion mini-
mum tax amount on a separate taxpayer
basis. In the case of a group of affiliated
corporations filing a consolidated tax re-
turn, the consolidated group is treated as a
single taxpayer for purposes of section
59A, and its modified taxable income and
base erosion minimum tax amount are de-
termined on a consolidated group basis.

The proposed regulations provide rules
for determining whether the gross receipts
test and base erosion percentage test are
satisfied with respect to a specific tax-
payer when other members of its aggre-
gate group have different taxable years.
See proposed § 1.59A-2(e)(3)(vii). In
general, the proposed regulations provide
that each taxpayer determines its gross
receipts and base erosion percentage by
reference to its own taxable year, taking
into account the results of other members
of its aggregate group during that taxable
year. In other words, for purposes of de-
termining the gross receipts, base erosion
tax benefits, and deductions of the aggre-
gate group, the taxpayer must include
those amounts that occur during the
course of the taxpayer's own taxable year,
not another member of the aggregate
group's taxable year, if different. The pro-
posed regulations adopt this approach to
provide certainty for taxpayers and avoid
the complexity of a rule that identifies a
single taxable year for an aggregate group
for purposes of section 59A that may dif-
fer from a particular member of the ag-
gregate group's taxable year. As a result
of this rule, two related taxpayers with
different taxable years will compute their
applicable gross receipts and base erosion
percentage by reference to different peri-
ods, even though in each case the calcu-
lations are done on an aggregate group
basis that takes into account other mem-
bers of the controlled group. Taxpayers
may use a reasonable method to determine
the gross receipts and base erosion per-
centage information for the time period of
the member of the aggregate group with a
different taxable year. For an illustration
of this rule, see proposed § 1.59A-2(f)(2)
(Example 2).

The proposed regulations also provide
that when determining the base erosion
percentage for a taxpayer that is a member
of an aggregate group with other members
that have a different taxable year, the ef-
fective date in section 14401(e) of the Act,
as it applies to the taxpayer making the
return, controls whether that taxpayer
takes into account transactions of other
members of its aggregate group. (Section
14401(e) of the Act provides that section
59A applies only to base erosion pay-
ments paid or accrued in taxable years
beginning after December 31, 2017.)

Thus, if one corporation (US1) that has
a calendar year is a member of an aggre-
gate group with another corporation
(US2) that has a taxable year ending No-
vember 30, when US1 computes its base
erosion percentage for its calendar year
ending December 31, 2018, the base ero-
sion payments made by US2 during the
period from January 1, 2018, through De-
cember 31, 2018, are taken into account
with respect to US1 for its computations
even though US2's base erosion payments
in its taxable year ending November 30,
2018, are not base erosion payments with
respect to US2 because of section
14401(e) of the Act. Correspondingly,
US2's taxable year beginning December
1, 2017, and ending November 30, 2018,
is not subject to section 59A because
US2's base erosion payments occur in a
year beginning before January 1, 2018,
and base erosion payments made by US1
during the period from December 1, 2017
through November 30, 2018, do not
change that result. For a general discus-
sion of the Act's effective date for section
59A, see Part III.C of this Explanation of
Provisions section.

##### E. Mark-to-Market Deductions

As discussed in Part II.C of this Expla-
nation of Provisions section, the taxpayer
(or in the case of a taxpayer that is a
member of an aggregate group, the aggre-
gate group) must determine the amount of
base erosion tax benefits in the numerator
and the total amount of certain deductions,
including base erosion tax benefits, in the
denominator to determine the base erosion
percentage for the year. The proposed reg-
ulations provide rules for determining the
amount of base erosion tax benefits in the

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case of transactions that are marked to
market. These proposed rules also apply
for determining the total amount of the
deductions that are included in the denom-
inator of the base erosion percentage com-
putation.

Specifically, to ensure that only a sin-
gle deduction is claimed with respect to
each transaction, the proposed regulations
combine all income, deduction, gain, or
loss on each transaction for the year to
determine the amount of the deduction
that is used for purposes of the base ero-
sion percentage test. This rule does not
modify the net amount allowed as a de-
duction pursuant to the Code and regula-
tions. This rule is intended to prevent dis-
tortions in deductions from being included
in the denominator of the base erosion
percentage, including as a result of the use
of an accounting method that values a
position more frequently than annually.

##### III. Base Erosion Payments

The proposed regulations define a base
erosion payment as a payment or accrual
by the taxpayer to a foreign related party
(as defined in § 1.59A-1(b)(12)) that is
described in one of four categories: (1) a
payment with respect to which a deduc-
tion is allowable; (2) a payment made in
connection with the acquisition of depre-
ciable or amortizable property; (3) premi-
ums or other consideration paid or ac-
crued for reinsurance that is taken into
account under section 803(a)(1)(B) or
832(b)(4)(A); or (4) a payment resulting
in a reduction of the gross receipts of the
taxpayer that is with respect to certain
surrogate foreign corporations or related
foreign persons.

A payment or accrual that is not within
one of the categories may be a base ero-
sion payment described in one of the other
categories. For example, a deductible pay-
ment related to reinsurance that does not
meet the requirements for the third cate-
gory of base erosion payments may still
be a base erosion payment under the first
category because the payment is deduct-
ible. Nonetheless, to the extent all or a
portion of a payment or accrual is de-
scribed in more than one of these catego-
ries, the amount is only taken into account
once as a base erosion payment.

Except as otherwise provided in the
proposed regulations, the determination of
whether a payment or accrual by the tax-
payer to a foreign related party is de-
scribed in one of these four categories is
made under general U.S. federal income
tax law. For example, the proposed regu-
lations do not explicitly address whether a
royalty payment is classified as deductible
under section 162 or as a cost includible in
inventory under sections 471 and 263A
resulting in a reduction in gross income
under section 61.

In general, the treatment of a payment
as deductible, or as other than deductible,
such as an amount that reduces gross in-
come or is excluded from gross income
because it is beneficially owned by an-
other person, generally will have federal
income tax consequences that will affect
the application of section 59A and will
also have consequences for other provi-
sions of the Code. In light of existing tax
law dealing with identifying who is the
beneficial owner of income, who owns an
asset, and the related tax consequences
(including under principal-agent princi-
ples, reimbursement doctrine, case law
conduit principles, assignment of income
or other principles of generally applicable
tax law), the proposed regulations do not
establish any specific rules for purposes of
section 59A for determining whether a
payment is treated as a deductible pay-
ment or, when viewed as part of a series of
transactions, should be characterized in a
different manner.

Part III.A of this Explanation of Provi-
sions section discusses the operating rules
for certain specific types of base erosion
payments and Part III.B of this Explana-
tion of Provisions section describes cer-
tain exceptions to the definition of base
erosion payments.

##### A. Certain Specific Types of Base Erosion Payments

This Part III.A of this Explanation of
Provisions describes proposed operating
rules for determining whether there is a
payment or accrual that can give rise to a
base erosion payment. This part also dis-
cusses proposed rules coordinating the
definition of base erosion payment with
rules that allocate deductions for purposes

of determining a foreign corporation's ef-
fectively connected income.

1\. Payments or Accruals That Consist of
Non-Cash Consideration

The proposed regulations clarify that a
payment or accrual by a taxpayer to a
foreign related party may be a base ero-
sion payment regardless of whether the
payment is in cash or in any form of
non-cash consideration. See proposed
§ 1.59A-3(b)(2)(i). There may be situa-
tions where a taxpayer incurs a non-cash
payment or accrual to a foreign related
party in a transaction that meets one of the
definitions of a base erosion payment, and
that transaction may also qualify under
certain nonrecognition provisions of the
Code. Examples of these transactions in-
clude a domestic corporation's acquisition
of depreciable assets from a foreign re-
lated party in an exchange described in
section 351, a liquidation described in sec-
tion 332, and a reorganization described in
section 368.

The proposed regulations do not in-
clude any specific exceptions for these
types of transactions even though (a)
the transferor of the assets acquired by the
domestic corporation may not recognize
gain or loss, (b) the acquiring domestic
corporation may take a carryover basis in
the depreciable or amortizable assets, and
(c) the importation of depreciable or am-
ortizable assets into the United States in
these transactions may increase the regu-
lar income tax base as compared to the
non-importation of those assets. The Trea-
sury Department and the IRS have deter-
mined that neither the nonrecognition of
gain or loss to the transferor nor the ab-
sence of a step-up in basis to the trans-
feree establishes a basis to create a sepa-
rate exclusion from the definition of a
base erosion payment. The statutory defi-
nition of this type of base erosion payment
that results from the acquisition of depre-
ciable or amortizable assets in exchange
for a payment or accrual to a foreign re-
lated party is based on the amount of
imported basis in the asset. That amount
of basis is imported regardless of whether
the transaction is a recognition transaction
or a transaction subject to rules in sub-
chapter C or elsewhere in the Code.

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In contrast, for transactions in which a
taxpayer that owns stock in a foreign re-
lated party receives depreciable property
from the foreign related party as an in-
kind distribution subject to section 301,
there is no base erosion payment because
there is no consideration provided by the
taxpayer to the foreign related party in
exchange for the property. Thus, there is
no payment or accrual.

In addition, because section 59A(d)(1)
defines the first category of base erosion
payment as "any amount paid or accrued
by the taxpayer to a foreign person which
is a related party of the taxpayer and with
respect to which a deduction is allowable
under this chapter," a base erosion pay-
ment also includes a payment to a foreign
related party resulting in a recognized
loss; for example, a loss recognized on the
transfer of property to a foreign related
party. The Treasury Department and the
IRS welcome comments about the treat-
ment of payments or accruals that consist
of non-cash consideration. See Part III.B.4
of this Explanation of Provisions section
for a specific exception from the base ero-
sion payment definition for exchange loss
from a section 988 transaction.

##### 2. Interest Expense Allocable to a Foreign Corporation's Effectively Connected Income

Section 59A applies to foreign corpo-
rations that have income that is subject to
net income taxation as effectively con-
nected with the conduct of a trade or busi-
ness in the United States, taking into ac-
count any applicable income tax treaty of
the United States. These proposed regula-
tions generally provide that a foreign cor-
poration that has interest expense alloca-
ble under section 882(c) to income that is
effectively connected with the conduct of
a trade or business within the United
States will have a base erosion payment to
the extent the interest expense results
from a payment or accrual to a foreign
related party. The amount of interest that
will be treated as a base erosion payment
depends on the method used under
§ 1.882-5.

If a foreign corporation uses the
method described in § 1.882-5(b) through
(d), interest on direct allocations and on
U.S .- booked liabilities that is paid or ac-

crued to a foreign related party will be a
base erosion payment. If U.S .- booked li-
abilities exceed U.S .- connected liabilities,
a foreign corporation computing its inter-
est expense under this method must apply
the scaling ratio to all of its interest ex-
pense on a pro-rata basis to determine the
amount that is a base erosion payment.
Interest on excess U.S .- connected liabili-
ties also may be a base erosion payment if
the foreign corporation has liabilities with
a foreign related party.

If a foreign corporation determines its
interest expense under the separate cur-
rency pools method described in § 1.882-
5(e), the amount of interest expense that is
a base erosion payment is equal to the sum
of (1) the interest expense on direct allo-
cations paid or accrued to a foreign related
party and (2) the interest expense in each
currency pool multiplied by the ratio of
average foreign related party liabilities
over average total liabilities for that pool.
The base erosion payment exceptions dis-
cussed in Part III.B of this Explanation of
Provisions section may apply and may
lower the amount of interest expense that
is a base erosion payment.

The Treasury Department and the IRS
recognize that § 1.882-5 provides certain
simplifying elections for determining the
interest deduction of a foreign corpora-
tion. In particular, § 1.882-5(c) generally
provides that the amount of U.S .-
connected liabilities equals the total value
of U.S. assets multiplied by the taxpayer's
worldwide leverage ratio. However,
§ 1.882-5(c)(4) allows a taxpayer to elect
to use a fixed ratio instead of its actual
worldwide leverage ratio. Similarly,
§ 1.882-5(d)(5)(ii)(A) provides a general
rule that the deduction for interest on ex-
cess U.S .- connected liabilities is deter-
mined by reference to the average rate of
interest on U.S .- dollar liabilities that are
not U.S .- booked liabilities. However,
§ 1.882-5(d)(5)(ii)(B) allows certain tax-
payers to elect to determine the deduction
by reference to the 30-day London Inter-
bank Offering Rate. The Treasury Depart-
ment and the IRS request comments about
similar simplifying elections for determin-
ing the portion of U.S .- connected liabili-
ties that are paid to a foreign related party.

##### 3. Other Deductions Allowed with Respect to Effectively Connected Income

Like excess interest expense, the pro-
posed regulations provide that the amount
of a foreign corporation's other deduc-
tions properly allocated and apportioned
to effectively connected gross income un-
der § 1.882-4 are base erosion payments
to the extent that those deductions are paid
or accrued to a foreign related party. Sec-
tion 1.882-4(a)(1) generally provides that
a foreign corporation engaged in a trade or
business within the United States is al-
lowed the deductions which are properly
allocated and apportioned to the foreign
corporation's gross income which is ef-
fectively connected its conduct of a trade
or business within the United States. The
proposed regulations follow the approach
under § 1.882-4. Accordingly, the regu-
lations identify base erosion payments by
tracing each item of deduction, and deter-
mining whether the deduction arises from
a payment to a foreign related party.

If a foreign corporation engaged in a
trade or business within the United States
acquires property of a character subject to
the allowance for depreciation (or amorti-
zation in lieu of depreciation) from a for-
eign related party, the amount paid or
accrued by the taxpayer to the foreign
related party is a base erosion payment to
the extent the property is used, or held for
use, in the conduct of a trade or business
within the United States.

##### 4. Income Tax Treaties

Certain U.S. income tax treaties pro-
vide alternative approaches for the alloca-
tion or attribution of business profits of an
enterprise of one contracting state to its
permanent establishment in the other con-
tracting state on the basis of assets used,
risks assumed, and functions performed
by the permanent establishment. The use
of a treaty-based expense allocation or
attribution method does not, in and of
itself, create legal obligations between the
U.S. permanent establishment and the rest
of the enterprise. These proposed regula-
tions recognize that as a result of a treaty-
based expense allocation or attribution
method, amounts equivalent to deductible
payments may be allowed in computing

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the business profits of an enterprise with
respect to transactions between the perma-
nent establishment and the home office or
other branches of the foreign corporation
("internal dealings"). The deductions
from internal dealings would not be al-
lowed under the Code and regulations,
which generally allow deductions only for
allocable and apportioned costs incurred
by the enterprise as a whole. The proposed
regulations require that these deductions
from internal dealings allowed in comput-
ing the business profits of the permanent
establishment be treated in a manner con-
sistent with their treatment under the
treaty-based position and be included as
base erosion payments.

The proposed regulations include rules
to recognize the distinction between the
allocations of expenses that are addressed
in Parts III.A.2 and 3 of this Explanation
of Provisions section, and internal deal-
ings. In the first instance, the allocation
and apportionment of expenses of the
enterprise to the branch or permanent
establishment is not itself a base erosion
payment because the allocation repre-
sents a division of the expenses of the
enterprise, rather than a payment be-
tween the branch or permanent estab-
lishment and the rest of the enterprise.
In the second instance, internal dealings
are not mere divisions of enterprise ex-
penses, but rather are priced on the basis
of assets used, risks assumed, and func-
tions performed by the permanent estab-
lishment in a manner consistent with the
arm's length principle. The approach in
the proposed regulations creates parity
between deductions for actual regarded
payments between two separate corpo-
rations (which are subject to section
482), and internal dealings (which are
generally priced in a manner consistent
with the applicable treaty and, if appli-
cable, the OECD Transfer Pricing
Guidelines). The rules in the proposed
regulations applicable to foreign corpo-
rations using this approach apply only to
deductions attributable to internal deal-
ings, and not to payments to entities
outside of the enterprise, which are sub-
ject to the general base erosion payment
rules as provided in proposed § 1.59A-
3(b)(4)(v)(A).

##### 5. Certain Payments to Domestic Passthrough Entities with Foreign Owners or to Another Aggregate Group Member

The proposed regulations also provide
rules for certain payments to a domestic
trust, REIT or RIC, and for certain pay-
ments to a related domestic corporation
that is not part of a consolidated group.
Proposed § 1.59A-3(b)(2)(v) provides a
rule that applies when a domestic trust,
REIT or RIC receives a payment that oth-
erwise would be a base erosion payment.
Proposed § 1.59A-3(b)(2)(vi) applies
when a taxpayer transfers certain property
to a member of an aggregate group that
includes the taxpayer, to ensure that any
deduction for depreciation (or amortiza-
tion in lieu of deprecation) by the trans-
feree taxpayer remains a base erosion tax
benefit to the same extent as the amount
that would have been a base erosion tax
benefit in the hands of the transferor.

##### B. Exceptions from the Base Erosion Payment Definition

1\. Exception for Certain Amounts with
Respect to Services

The SCM exception described in sec-
tion 59A(d)(5) provides that section
59A(d)(1) (which sets forth the general
definition of a base erosion payment) does
not apply to any amount paid or accrued
by a taxpayer for services if (A) the ser-
vices are eligible for the services cost
method under section 482 (determined
without regard to the requirement that the
services not contribute significantly to
fundamental risks of business success or
failure) and (B) the amount constitutes the
total services cost with no markup com-
ponent. The Treasury Department and the
IRS interpret "services cost method" to
refer to the services cost method described
in § 1.482-9(b), interpret the requirement
regarding "fundamental risks of business
success or failure" to refer to the test in
§ 1.482-9(b)(5) commonly called the
business judgment rule, and interpret "to-
tal services cost" to refer to the definition
of "total services costs" in § 1.482-9(j).

Section 59A(d)(5) is ambiguous as to
whether the SCM exception applies when
an amount paid or accrued for services
exceeds the total services cost, but the

payment otherwise meets the other re-
quirements for the SCM exception set
forth in section 59A(d)(5). Under one in-
terpretation of section 59A(d)(5), the
SCM exception does not apply to any
portion of a payment that includes any
mark-up component. Under another inter-
pretation of section 59A(d)(5), the SCM
exception is available if there is a markup,
but only to the extent of the total services
costs. Under the former interpretation, any
amount of markup would disqualify a
payment, in some cases resulting in dra-
matically different tax effects based on a
small difference in charged costs. In ad-
dition, if any markup were required, for
example because of a foreign tax law or
non-tax reason, a payment would not
qualify for the SCM exception. Under the
latter approach, the services cost would
continue to qualify for the SCM exception
provided the other requirements of the
SCM exception are met. The latter ap-
proach to the SCM exception is more ex-
pansive because it does not limit qualifi-
cation to payments made exactly at cost.

The proposed regulations provide that
the SCM exception is available if there is
a markup (and if other requirements are
satisfied), but that the portion of any pay-
ment that exceeds the total cost of services
is not eligible for the SCM exception and
is a base erosion payment. The Treasury
Department and the IRS have determined
that this interpretation is more consistent
with the text of section 59A(d)(5). Rather
than require an all-or-nothing approach to
service payments, section 59A(d)(5) pro-
vides an exception for "any amount" that
meets the specified test. This language
suggests that a service payment may
be disaggregated into its component
amounts, just as the general definition of
base erosion payment applies to the de-
ductible amount of a foreign related party
payment even if the entire payment is not
deductible. See section 59A(d)(1). The
most logical interpretation is that a pay-
ment for a service that satisfies subpara-
graph (A) is excepted up to the qualifying
amount under subparagraph (B), but
amounts that do not qualify (i.e., the
markup component) are not excepted.
This interpretation is reinforced by the
fact that section 59A(d)(5)(A) makes the
SCM exception available to taxpayers that
cannot apply the services cost method de-

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scribed in § 1.482-9(b) (which permits
pricing a services transaction at cost for
section 482 purposes) because the tax-
payer cannot satisfy the business judg-
ment rule in § 1.482-9(b)(5). Because a
taxpayer in that situation cannot ordinarily
charge cost, without a mark-up, for trans-
fer pricing purposes, failing to adopt this
approach would render the parenthetical
reference in section 59A(d)(5)(A) a nul-
lity. The interpretation the proposed reg-
ulations adopt gives effect to the reference
to the business judgment rule in section
59A(d)(5). The Treasury Department and
the IRS welcome comments on whether the
regulations should instead adopt the inter-
pretation of section 59A(d)(5) whereby the
SCM exception is unavailable to a payment
that includes any mark-up component.

To be eligible for the SCM exception,
the proposed regulations require that all of
the requirements of § 1.482-9(b) must be
satisfied, except as modified by the pro-
posed regulations. Therefore, a taxpayer's
determination that a service qualifies for
the SCM exception is subject to review
under the requirements of § 1.482-9(b)(3)
and (b)(4), and its determination of the
amount of total services cost and alloca-
tion and apportionment of costs to a par-
ticular service is subject to review under
the rules of § 1.482-9(j) and § 1.482-9(k),
respectively.

Although the proposed regulations do
not require a taxpayer to maintain separate
accounts to bifurcate the cost and markup
components of its services charges to
qualify for the SCM exception, the pro-
posed regulations do require that taxpay-
ers maintain books and records adequate
to permit verification of, among other
things, the amount paid for services, the
total services cost incurred by the ren-
derer, and the allocation and apportion-
ment of costs to services in accordance
with § 1.482-9(k). Because payments for
certain services that are not eligible for the
SCM due to the business judgment rule or
for which taxpayers select another transfer
pricing method may still be eligible for
the SCM exception to the extent of total
services cost, the record-keeping require-
ments in the proposed regulations differ
from the requirements in § 1.482-
9(b)(6). See § 1.59A-3(b)(3)(i)(B)(2).
Unlike § 1.482-9(b)(6), the proposed
regulations do not require that taxpayers

"include a statement evidencing [their]
intention to apply the services cost
method to evaluate the arm's length
charge for such services," but the pro-
posed regulations do require that tax-
payers include a calculation of the
amount of profit mark-up (if any) paid
for the services. For purposes of quali-
fying for the SCM exception under sec-
tion 59A(d)(5), taxpayers are required to
comply with the books and records re-
quirements under these proposed regu-
lations but not § 1.482-9(b)(6).

The proposed regulations also clarify
that the parenthetical reference in section
59A(d)(5) to the business judgment rule
prerequisite for applicability of the ser-
vices cost method - "(determined with-
out regard to the requirement that the ser-
vices not contribute significantly to
fundamental risks of business success or
failure)" - disregards the entire require-
ment set forth in § 1.482-9(b)(5) solely
for purposes of section 59A(d)(5).

##### 2. Qualified Derivative Payments

Section 59A(h) provides that a qualified
derivative payment (QDP) is not a base ero-
sion payment. Proposed § 1.59A-6 defines
a QDP as any payment made by a taxpayer
to a foreign related party pursuant to a de-
rivative for which the taxpayer recognizes
gain or loss on the derivative on a mark-to-
market basis (treats the derivative as sold on
the last business day of the taxable year), the
gain or loss is ordinary, and any gain, loss,
income or deduction on a payment made
pursuant to the derivative is also treated as
ordinary.

The QDP exception applies only if the
taxpayer satisfies reporting requirements
in proposed § 1.6038A-2(b)(7)(ix). If a
taxpayer satisfies the reporting require-
ments for some QDPs, but not all, then
only the payments for which the taxpayer
fails to satisfy the reporting requirements
will be ineligible for the QDP exception.
Section 1.6038A-2(b)(7)(ix) will first ap-
ply to taxable years beginning after final
regulations are published, which provides
taxpayers additional time to meet those
reporting requirements. The proposed reg-
ulations provide that before final regula-
tions are published, taxpayers satisfy the
reporting requirements for QDPs by re-
porting the aggregate amount of QDPs for

the taxable year on Form 8991, Tax on
Base Erosion Payments of Taxpayers
With Substantial Gross Receipts.

Section 59A(h)(3) provides two excep-
tions to the QDP exception. Specifically,
the QDP exception does not apply (1) to a
payment that would be treated as a base
erosion payment if it were not made pur-
suant to a derivative or (2) with respect to
a contract that has derivative and non-
derivative components, to a payment that
is properly allocable to the nonderivative
component. The proposed regulations do
not specifically address or modify these
statutory provisions. For the avoidance of
doubt, the Treasury Department and the
IRS observe that these rules in section
59A(h)(3) are self-executing; thus, taxpay-
ers must apply these two rules to determine
whether any of their payments pursuant to
derivatives fail to qualify for the QDP ex-
ception. The Treasury Department and the
IRS request comments on whether regula-
tions should further clarify the statutory pro-
visions in section 59A(h)(3).

Proposed § 1.59A-6(d) defines a de-
rivative as any contract, the value of
which, or any payment with respect to
which, is determined by reference to any
stock, evidence of indebtedness, actively
traded commodity, currency, or any rate,
price, amount, index, formula or algo-
rithm. However, direct ownership of any
of these items is not ownership of a de-
rivative. The proposed regulations clarify
that for purposes of section 59A(h)(4), a
derivative does not include an insurance
contract, a securities lending transaction, a
sale-repurchase transaction, or any sub-
stantially similar transaction.

For federal tax purposes, a sale-
repurchase transaction satisfying certain
conditions is treated as a secured loan.
Sections 59A(h)(3) and 59A(h)(4) explic-
itly exclude from qualified derivatives
payment status any payment that would be
treated as a base erosion payment if it
were not made pursuant to a derivative,
such as a payment of interest on a debt
instrument. Accordingly, for purposes of
section 59A(h), the proposed regulations
provide that sale-repurchase transactions
are not treated as derivatives. Because
sale-repurchase transactions and securities
lending transactions are economically
similar to each other, the Treasury Depart-
ment and the IRS have determined that

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these transactions should be treated simi-
larly for purposes of section 59A(h)(4),
and therefore payments on those transac-
tions are not treated as QDPs. The Trea-
sury Department and the IRS request
comments on whether securities lending
transactions and sale-repurchase transac-
tions have been properly excluded from
the definition of a derivative, including
whether certain transactions lack a signif-
icant financing component such that those
transactions should be treated as deriva-
tives for purposes of section 59A(h). The
Treasury Department and the IRS also
request comments regarding whether any
additional transactions or financial instru-
ments should be explicitly excluded from
the definition of a derivative.

##### 3. Exception to Base Erosion Payment Status for Payments the Recipient of which is Subject to U.S. Tax

In general, for a payment or accrual to
be treated as a base erosion payment, the
recipient must be a foreign person (within
the meaning of section 6038A(c)(3)) that
is a related party with respect to the tax-
payer, and a deduction must be allowable
with respect to the payment or accrual.
See section 59A(f). Section 6038A(c)(3)
defines "foreign person" as any person
that is not a United States person within
the meaning of section 7701(a)(30), but
for this purpose the term "United States
person" does not include any individual
who is a citizen of any U.S. territory (but
not otherwise a citizen of the United
States) and who is not a resident of the
United States. See proposed § 1.59A-
1(b)(10). The Treasury Department and
the IRS have determined that it is appro-
priate in defining a base erosion payment
to consider the U.S. tax treatment of the
foreign recipient. In particular, the Trea-
sury Department and the IRS have deter-
mined that a payment to a foreign person
should not be taxed as a base erosion
payment to the extent that payments to the
foreign related party are effectively con-
nected income. Those amounts are subject
to tax under sections 871(b) and 882(a) on
a net basis in substantially the same man-
ner as amounts paid to a United States
citizen or resident or a domestic corpora-
tion. Accordingly, the proposed regula-
tions include an exception from the defi-

nition of base erosion payment for
amounts that are subject to tax as income
effectively connected with the conduct of
a U.S. trade or business. In the case of a
foreign recipient that determines its net
taxable income under an applicable in-
come tax treaty, the exception from the
definition of base erosion payment applies
to payments taken into account in deter-
mining net taxable income under the
treaty.

##### 4. Exchange Loss from a Section 988 Transaction

Proposed § 1.59A-3(b)(3)(iv) provides
that exchange losses from section 988
transactions described in § 1.988-1(a)(1)
are not base erosion payments. The Trea-
sury Department and the IRS have deter-
mined that these losses do not present the
same base erosion concerns as other types
of losses that arise in connection with
payments to a foreign related party. Ac-
cordingly, under these proposed regula-
tions, section 988 losses are excluded
from the numerator.

The proposed regulations also provide
that section 988 losses are excluded from
the denominator of the base erosion per-
centage. Specifically, proposed § 1.59A-
2(e)(3)(ii)(D) provides that an exchange
loss from a section 988 transaction (in-
cluding with respect to persons other than
foreign related parties) is not included in
the denominator when calculating the
base erosion percentage. Exchange gain
from a section 988 transaction, however,
is included as a gross receipt for purposes
of the gross receipts test under proposed
§ 1.59A-2(d).

The Treasury Department and the IRS
request comments on the treatment of sec-
tion 988 losses in the context of section
59A, including whether the rule relating to
section 988 losses in the denominator of
the base erosion percentage calculation
should be limited to transactions with a
foreign related party.

##### 5. Exception for Interest on Certain Instruments Issued by Globally Systemically Important Banking Organizations.

The Federal Reserve requires that cer-
tain global systemically important bank-
ing organizations (GSIBs) issue TLAC se-

curities as part of a global framework for
bank capital that has sought to minimize
the risk of insolvency. In particular, the
Board of Governors of the Federal Re-
serve (the Board) has issued regulations
that prescribe the amount and form of
external TLAC securities that domestic
GSIBs must issue and internal TLAC se-
curities that certain foreign GSIBs must
issue. In the case of internal TLAC secu-
rities, the Board regulations require the
domestic intermediate holding company
of a foreign GSIB to issue a specified
minimum amount of TLAC to its foreign
parent. Section 59A(i) provides that the
Secretary shall prescribe such regulations
or other guidance as may be necessary or
appropriate to carry out the provisions of
section 59A, including regulations ad-
dressing specifically enumerated situa-
tions. The Treasury Department and the
IRS have determined that because of the
special status of TLAC as part of a global
system to address bank solvency and the
precise limits that Board regulations place
on the terms of TLAC securities and
structure of intragroup TLAC funding, it
is necessary and appropriate to include an
exception to base erosion payment status
for interest paid or accrued on TLAC se-
curities required by the Federal Reserve.

Specifically, the proposed regulations
include a TLAC exception that applies
only to the extent of the amount of TLAC
securities required by the Federal Reserve
under subpart P of 12 CFR part 252. As a
result, the exception is scaled back if the
adjusted issue price of the average amount
of TLAC securities issued and outstand-
ing exceeds the average amount of TLAC
long-term debt required by the Federal
Reserve for the taxable year. The TLAC
exception applies only to securities re-
quired by the Federal Reserve, and as a
result generally does not apply to securi-
ties issued by a foreign corporation en-
gaged in a U.S. trade or business because
the applicable Federal Reserve require-
ment applies only to domestic institutions.
However, the Treasury Department and
the IRS acknowledge that foreign regula-
tors may impose similar requirements on
the financial institutions they regulate.
The Treasury Department and the IRS re-
quest comments regarding a similar ex-
ception for foreign corporations that are
required by law to issue a similar type of

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loss-absorbing instrument, including the
appropriate scope of an exception that
would provide parity between the treat-
ment of domestic corporations and foreign
corporations engaged in a U.S. trade or
business.

##### C. Base Erosion Payments Occurring Before the Effective Date and Pre-2018 Disallowed Business Interest

Section 14401(e) of the Act provides
that section 59A applies only to base ero-
sion payments paid or accrued in taxable
years beginning after December 31, 2017.
The statutory definition of a base erosion
tax benefit is based upon the definition of
a base erosion payment. Accordingly, the
proposed regulations confirm the exclu-
sion of a deduction described in section
59A(c)(2)(A)(i) (deduction allowed under
Chapter 1 for the taxable year with respect
to any base erosion payment) or section
59A(c)(2)(A)(ii) (deduction allowed un-
der Chapter 1 for the taxable year for
depreciation or amortization with respect
to any property acquired with such pay-
ment) that is allowed in a taxable year
beginning after December 31, 2017, if it
relates to a base erosion payment that oc-
curred in a taxable year beginning before
January 1, 2018.

For example, if in 2015, a calendar
year taxpayer makes a payment or accrual
to a foreign related party to acquire depre-
ciable property, the 2015 payment is ex-
cluded from the definition of a base ero-
sion payment because of section 14401(e)
of the Act. As a result, the taxpayer's
depreciation deduction allowed in 2018
with respect to this property is not a base
erosion tax benefit.

Similarly, if in 2016, a taxpayer with a
calendar year had paid or accrued interest
on an obligation to a foreign related party,
but the interest was not deductible in 2016
due to the application of section 267(a),
the 2016 accrual of the interest amount is
excluded from the definition of a base
erosion payment because of section
14401(e) of the Act. As a result, if the
interest amount becomes deductible in
2018, the taxpayer's deduction allowed in
2018 with respect to this item is not a base
erosion tax benefit.

In the case of business interest expense
that is not allowed as a deduction under

section 163(j)(1), the proposed regula-
tions provide a rule that clarifies that the
effective date rules apply in a similar
manner as with other base erosion pay-
ments that initially arose before the effec-
tive date in section 14401(e) of the Act.
Section 163(j), as modified by the Act,
provides that the deduction for business
interest expense is limited to the sum of
business interest income, 30 percent of
adjusted taxable income ("ATI"), and the
amount of any floor plan financing inter-
est. Section 163(j)(2) further provides that
any disallowed business interest is carried
forward to the succeeding year, and that
the carryforward amount is treated as
"paid or accrued" in the succeeding tax-
able year.

In Notice 2018-28, 2018-16 I.R.B.
492, Section 3, the Treasury Department
and the IRS stated that business interest
carried forward from a taxable year begin-
ning before January 1, 2018, will be
treated in the same manner as interest paid
or accrued in a taxable year beginning
after December 31, 2017, for purposes of
section 59A. Under this approach, busi-
ness interest expense that was initially
paid or accrued in a taxable year begin-
ning before January 1, 2018, could none-
theless be a base erosion payment in a
taxable year beginning after December 31,
2017, because section 163(j)(2) deems a
recurring "payment or accrual" for such
item in each carryforward year. Com-
ments requested that the Treasury Depart-
ment and the IRS reconsider the position
taken in Notice 2018-28, on the basis that
the determination of whether a payment is
a base erosion payment should be made as
of the date of the actual payment of inter-
est rather than the date that a deduction is
allowed under section 163(j).

The Treasury Department and the IRS
agree and have determined that the ap-
proach described in Notice 2018-28 is not
consistent with the general effective date
provision in Section 14401(e) of the Act
because the language in section 163(j)(2)
deeming a recurring "payment or accrual"
is primarily to implement the carryfor-
ward mechanism in section 163(j), rather
than to treat interest that is carried forward
to a subsequent taxable year as paid or
accrued for all tax purposes in that subse-
quent taxable year. Accordingly, the pro-
posed regulations do not follow the ap-

proach described in Notice 2018-28.
Instead, the proposed regulations provide
that any disallowed disqualified interest
under section 163(j) that resulted from a
payment or accrual to a foreign related
party and that is carried forward from a
taxable year beginning before January 1,
2018, is not a base erosion payment. The
proposed regulations also clarify that any
disallowed business interest carryforward
under section 163(j) that resulted from a
payment or accrual to a foreign related
party is treated as a base erosion payment
in the year that the interest was paid or
accrued even though the interest may be
deemed to be paid or accrued again in the
year in which it is actually deducted. The
rule in the proposed regulations generally
is consistent with excluding interest paid
or accrued before January 1, 2018 (gener-
ally under financing arranged prior to the
Act) from treatment as a base erosion pay-
ment. The Treasury Department and the
IRS welcome comments with respect to
the treatment of disallowed disqualified
interest under section 163(j) from a tax-
able year beginning before January 1,
2018. See Part IV.B of this Explanation of
Provisions section for proposed rules de-
termining the amount of business interest
expense for which a deduction is allowed
when section 163(j) applies to limit inter-
est deductions.

##### IV. Base Erosion Tax Benefits

The amount of base erosion tax bene-
fits is an input in (i) the computation of the
base erosion percentage test (discussed in
Part II.C of this Explanation of Provisions
section) and (ii) the determination of mod-
ified taxable income (discussed in Part V
of this Explanation of Provisions section).
Generally, a base erosion tax benefit is the
amount of any deduction relating to a base
erosion payment that is allowed under the
Code for the taxable year. Base erosion
tax benefits are defined in proposed
§ 1.59A-3(c).

##### A. Withholding Tax on Payments

As discussed in Part II.C of this Expla-
nation of Provisions section, if tax is im-
posed by section 871 or 881 and the tax is
deducted and withheld under section 1441
or 1442 without reduction by an applica-

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ble income tax treaty on a base erosion
payment, the base erosion payment is
treated as having a base erosion tax ben-
efit of zero for purposes of calculating a
taxpayer's modified taxable income. If an
income tax treaty reduces the amount of
withholding imposed on the base erosion
payment, the base erosion payment is
treated as a base erosion tax benefit to the
extent of the reduction in withholding un-
der rules similar to those in section
163(j)(5)(B) as in effect before the Act.

##### B. Rules for Classifying Interest for which a Deduction is Allowed when Section 163(j) Limits Deductions

Section 59A(c)(3) provides a stacking
rule in cases in which section 163(j) ap-
plies to a taxpayer, under which the re-
duction in the amount of deductible inter-
est is treated as allocable first to interest
paid or accrued to persons who are not
related parties with respect to the taxpayer
and then to related parties. The statute
does not provide a rule for determining
which portion of the interest treated as
paid to related parties (and thus poten-
tially treated as a base erosion payment) is
treated as paid to a foreign related person
as opposed to a domestic related person.
Proposed § 1.59A-3(c)(4) provides rules
coordinating section 163(j) with the deter-
mination of the amount of base erosion
tax benefits. This rule provides, consistent
with section 59A(c)(3), that where section
163(j) applies to limit the amount of a
taxpayer's business interest expense that
is deductible in the taxable year, a tax-
payer is required to treat all disallowed
business interest first as interest paid or
accrued to persons who are not related
parties, and then as interest paid or ac-
crued to related parties for purposes of
section 59A. More specifically, the pro-
posed regulations provide that when a cor-
poration has business interest expense
paid or accrued to both unrelated parties
and related parties, the amount of allowed
business interest expense is treated first as
the business interest expense paid to re-
lated parties, proportionately between for-
eign and domestic related parties, and then
as business interest expense paid to unre-
lated parties. Conversely, the amount of a
disallowed business interest expense car-
ryforward is treated first as business inter-

est expense paid to unrelated parties, and
then as business interest expense paid to
related parties, proportionately between
foreign and domestic related party busi-
ness interest expense.

Because section 163(j) and the pro-
posed regulations thereunder provide an
ordering rule that allocates business inter-
est expense deductions first to business
interest expense incurred in the current
year and then to business interest expense
carryforwards from prior years (starting
with the earliest year) in order to sepa-
rately track the attributes on a year-by-
year layered approach for subchapter C
purposes, these proposed regulations fol-
low that convention. Accordingly, the
proposed regulations also follow a year-
by-year convention in the allocation of
business interest expense and carryovers
among the related and unrelated party
classifications. See also the discussion of
singular tax attributes in Part V.A of this
Explanation of Provisions section. The
proposed regulations adopt a similar ap-
proach for business interest expense and
excess business interest of a partnership
that is allocated to a corporate partner by
separately tracking and ordering items al-
located from a partnership.

##### V. Modified Taxable Income

For any taxable year, section 59A im-
poses a tax on each applicable taxpayer
equal to the base erosion minimum tax
amount for that year. Section 59A(b)(1)
provides that the base erosion minimum
tax amount is determined based on an
applicable taxpayer's modified taxable in-
come for the taxable year. Part V.A of this
Explanation of Provisions section dis-
cusses how an applicable taxpayer com-
putes its modified taxable income. Part
V.B of this Explanation of Provisions sec-
tion describes how modified taxable in-
come is calculated if an applicable tax-
payer has an overall taxable loss for a
taxable year. Finally, Part V.C of this Ex-
planation of Provisions section describes
the base erosion percentage that is used
when the base erosion percentage of a net
operating loss deduction ("NOL deduc-
tion") is added back to taxable income for
purposes of the modified taxable income
calculation.

##### A. Method of Computation

Section 59A(c)(1) provides that the
term modified taxable income means the
taxable income of the taxpayer computed
under Chapter 1 for the taxable year, de-
termined without regard to base erosion
tax benefits and the base erosion percent-
age of any NOL deduction under section
172 for the taxable year. The proposed
regulations clarify that the computation of
modified taxable income and the compu-
tation of the base erosion minimum tax
amount (which is discussed in Part VI of
this Explanation of Provisions section) are
made on a taxpayer-by-taxpayer basis.
That is, under the proposed regulations,
the aggregate group concept is used solely
for determining whether a taxpayer is an
applicable taxpayer and the base erosion
percentage of any NOL deduction. This
approach is consistent with section
59A(a)'s imposition of a tax equal to the
base erosion minimum tax amount, which
is in addition to the regular tax liability of
a taxpayer.

The proposed regulations also provide
that the computation of modified taxable
income is done on an add-back basis.
The computation starts with taxable in-
come (or taxable loss) of the taxpayer as
computed for regular tax purposes, and
adds to that amount (a) the gross amount
of base erosion tax benefits for the taxable
year and (b) the base erosion percentage
of any NOL deduction under section 172
for the taxable year.

The proposed regulations do not pro-
vide for the recomputation of income un-
der an approach similar to the alternative
minimum tax, which the Act repealed for
corporations. See section 12001(a) of the
Act. Under a recomputation approach, at-
tributes that are limited based on taxable
income would be subject to different an-
nual limitations, and those attributes
would have to be re-computed for pur-
poses of section 59A. Applying this ap-
proach in a manner that reflects the results
of the BEAT-basis recomputation to sub-
sequent years would lead to parallel attri-
butes that are maintained separately in a
manner similar to the pre-Act corporate
alternative minimum tax. For example,
the amount of the net operating loss used
to reduce modified taxable income would
differ from the amount used in computing

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regular tax liability, and the carryforward
of unused net operating loss that is used to
compute regular tax liability would not
reflect the net operating loss amount used
to reduce modified taxable income (absent
a separate BEAT-basis carryover). The
annual limitation under section 163(j)(1),
which generally limits a corporation's an-
nual deduction for business interest ex-
pense, would present similar issues under a
recomputation approach. Consequently, the
add-back approach also provides simplifica-
tion relative to the recomputation approach
because the add-back approach eliminates
the need to engage in the more complex
tracking of separate attributes on a BEAT
basis in a manner similar to the repealed
corporate AMT. The Treasury Department
and the IRS welcome comments on the add-
back approach provided in the proposed
regulations, and the practical effects of an
alternative recomputation-based approach.

###### B. Conventions for Computing Modified Taxable Income - Current Year Losses and Excess Net Operating Loss Carryovers

If a taxpayer has an excess of deduc-
tions allowed by Chapter 1 over gross
income, computed without regard to the
NOL deduction, the taxpayer has negative
taxable income for the taxable year. Gen-
erally, the proposed regulations provide
that a negative amount is the starting point
for computing modified taxable income
when there is no NOL deduction from net
operating loss carryovers and carrybacks.

The proposed regulations further pro-
vide a rule applicable to situations in
which there is a NOL deduction from a
net operating loss carryover or carryback
to the taxable year and that NOL deduc-
tion exceeds the amount of positive tax-
able income before that deduction (be-
cause, for example, the loss arose in a year
beginning before January 1, 2018). The
proposed regulations provide that the ex-
cess amount of NOL deduction does not
reduce taxable income below zero for de-
termining the starting point for computing
modified taxable income. The Treasury
Department and the IRS have determined
that this rule is necessary because section
172(a) could be read to provide that, for
example, if a taxpayer has a net operating
loss of $100x that arose in a taxable year

beginning before January 1, 2018, that is
carried forward, and in a subsequent year
the taxpayer has taxable income of $5x
before taking into account the $100x net
operating loss carryover deduction, the
taxpayer may nonetheless have a $100x
NOL deduction in that year or a $95x
taxable loss (even though $95x of the net
operating loss would remain as a carryfor-
ward to future years, as well). Because the
proposed regulations recognize the notion
of a taxable loss when deductions other
than the NOL deduction exceed gross in-
come (as discussed earlier in this Part V),
this rule clarifies that the taxpayer's start-
ing point for computing modified taxable
income in this situation is zero, rather than
negative $95x.

The proposed regulations further clar-
ify that the NOL deduction taken into
account for purposes of adding the base
erosion percentage of the NOL deduction
to taxable income under section 59A(c)
(1)(B) is determined in the same manner.
Accordingly, in the example above, the
base erosion percentage of the NOL de-
duction added to taxable income is com-
puted based on the $5x NOL deduction
that reduces regular taxable income to
zero, rather than the entire $100x of net
operating loss carryforward, $95x of
which is not absorbed in the current tax-
able year.

Finally, the proposed regulations pro-
vide that an applicable taxpayer's taxable
income is determined according to section
63(a) without regard to the rule in section
860E(a)(1). That rule generally provides
that a holder of a residual interest in a real
estate mortgage investment conduit (“RE-
MIC") may not have taxable income less
than its excess inclusion amount. As a
result of section 860E(a)(1), a holder of a
REMIC residual interest may have taxable
income for purposes of computing its reg-
ular tax liability even though it has a cur-
rent year loss. The proposed regulations
provide that the limitation in section
860E(a)(1) is disregarded for purposes of
calculating modified taxable income un-
der section 59A. The rule described in this
paragraph is relevant, for example, in sit-
uations when the taxpayer would have
negative taxable income attributable to a
current year loss, as described in this
Part V.B, or no taxable income as a
result of a net operating loss. Because

section 860E(a)(1) ensures that the ex-
cess inclusion is subject to tax under
section 11, the Treasury Department and
the IRS have determined that it is not
appropriate to apply the rule in section
860E(a)(1) for the purpose of calculat-
ing modified taxable income under sec-
tion 59A.

C. Conventions for Computing Modified
Taxable Income - Determining the Base
Erosion Percentage of NOL Deductions

Section 59A(c)(1)(B) provides that
modified taxable income includes the base
erosion percentage of any NOL deduction
allowed under section 172 for the taxable
year. In this context, the relevant base
erosion percentage could be either the
base erosion percentage in the year that
the net operating loss arose, or alterna-
tively, the base erosion percentage in the
year in which the taxpayer takes the NOL
deduction. Proposed § 1.59A-4(b)(2)(ii)
applies the base erosion percentage of the
year in which the loss arose, or vintage
year, because the base erosion percentage
of the vintage year reflects the portion of
base eroding payments that are reflected
in the net operating loss carryover. In ad-
dition, because the vintage-year base ero-
sion percentage is a fixed percentage, tax-
payers will have greater certainty as to the
amount of the future add-back to modified
taxable income (as compared to using the
utilization-year base erosion percentage).

Based on this approach, the proposed
regulations also provide that in the case of
net operating losses that arose in taxable
years beginning before January 1, 2018,
and that are deducted as carryovers in
taxable years beginning after December
31, 2017, the base erosion percentage is
zero because section 59A applies only to
base erosion payments that are paid or
accrued in taxable years beginning after
December 31, 2017. See section 14401(e)
of the Act. As a result, there is no add-
back to modified taxable income for the
use of those net operating loss carryovers.
The Treasury Department and the IRS
welcome comments on the vintage-year
approach as well as the alternative
utilization-year approach.

The proposed regulations also clarify
that in computing the add-back for NOL
deductions for purposes of the modified

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taxable income calculation, the relevant
base erosion percentage is the base ero-
sion percentage for the aggregate group
that is used to determine whether the tax-
payer is an applicable taxpayer, rather
than a separate computation of base ero-
sion percentage computed solely by refer-
ence to the single taxpayer.

###### VI. Base Erosion Minimum Tax Amount

An applicable taxpayer computes its
base erosion minimum tax amount (“BE-
MTA") for the taxable year to determine
its liability under section 59A(a). Pro-
posed § 1.59A-5 describes the calculation
of the BEMTA. Generally, the taxpayer's
BEMTA equals the excess of (1) the ap-
plicable tax rate for the taxable year
("BEAT rate") multiplied by the taxpay-
er's modified taxable income for the tax-
able year over (2) the taxpayer's adjusted
regular tax liability for that year. See Part
VIII of this Explanation of Provisions sec-
tion for a discussion of the higher BEAT
rate for certain banks and registered secu-
rities dealers.

In determining the taxpayer's adjusted
regular tax liability for the taxable year,
credits (including the foreign tax credit)
are generally subtracted from the regular
tax liability amount. To prevent an inap-
propriate understatement of a taxpayer's
adjusted regular tax liability, the proposed
regulations provide that credits for over-
payment of taxes and for taxes withheld at
source are not subtracted from the taxpay-
er's regular tax liability because these
credits relate to federal income tax paid
for the current or previous year.

For taxable years beginning before
January 1, 2026, under section 59A(b)
(1)(B), the credits allowed against regular
tax liability (which reduce the amount of
regular tax liability for purposes of calcu-
lating BEMTA) are not reduced by the
research credit determined under section
41(a) or by a portion of applicable section
38 credits. For taxable years beginning
after December 31, 2025, this special
treatment of the research credit and appli-
cable section 38 credits no longer applies.
As a result, an applicable taxpayer may
have a greater BEMTA than would be the
case in taxable years beginning before
January 1, 2026. In general, foreign tax
credits are taken into account in comput-

ing a taxpayer's regular tax liability be-
fore other credits. See section 26(a). As a
result, a taxpayer with foreign tax credits
that reduce its regular tax liability to, or
close to, zero may not use its section 41(a)
credits or its applicable section 38 credits
in computing its regular tax liability. In
these situations, those credits will not be
taken into account in computing the tax-
payer's BEMTA even in a pre-2026 year.
Instead, those credits will reduce (or, put
differently, will prevent an increase in) the
BEMTA in the year when those credits
are used for regular tax purposes (pro-
vided that the taxable year begins before
January 1, 2026).

###### VII. Application of Section 59A to Partnerships

A partnership is not an "applicable tax-
payer" as defined in Section 59A; only
corporations can be applicable taxpayers.
In general, however, a partnership also is
not subject to the income tax imposed by
Chapter 1 of Subtitle A of the Code. In-
stead, partners are liable for income tax
only in their separate capacities. Each tax-
payer that is a partner in a partnership
takes into account separately the partner's
distributive share of the partner's income
or loss in determining its taxable income.
Accordingly, an item of income is subject
to federal income taxation based on the
status of the partners, and not the partner-
ship as an entity. Similarly, a partnership
does not itself benefit from a deduction.
Instead, the tax benefit from a deduction is
taken by the taxpayer that is allocated the
deduction under section 704. Section
702(b) provides that the character of any
item be taken into account as if such item
were realized directly from the source
from which realized by the partnership, or
incurred in the same manner as incurred
by the partnership. Section 702(b) ac-
knowledges that differences in partner tax
characteristics (for example, whether the
partner is a corporation or an individual,
or domestic or foreign) may result in dif-
ferences in the tax consequences of items
the partnership allocates to its partners.

The proposed regulations generally ap-
ply an aggregate approach in conjunction
with the gross receipts test for evaluating
whether a corporation is an applicable tax-
payer and in addressing the treatment of

payments made by a partnership or re-
ceived by a partnership for purposes of
section 59A. The proposed regulations
generally provide that partnerships are
treated as an aggregate of the partners in
determining whether payments to or pay-
ments from a partnership are base erosion
payments consistent with the approach de-
scribed in subchapter K as well as the
authority provided in section 59A(i)(1) to
prescribe such regulations that are neces-
sary or appropriate to carry out the provi-
sions of section 59A, including through
the use of intermediaries or by character-
izing payments otherwise subject to sec-
tion 59A as payments not subject to 59A.
Thus, when determining whether a corpo-
rate partner that is an applicable taxpayer
has made a base erosion payment,
amounts paid or accrued by a partnership
are treated as paid by each partner to the
extent an item of expense is allocated to
the partner under section 704. Similarly,
any amounts received by or accrued to a
partnership are treated as received by each
partner to the extent the item of income or
gain is allocated to each partner under
section 704. The rules and exceptions for
base erosion payments and base erosion
tax benefits then apply accordingly on an
aggregate basis.

The Treasury Department and the IRS
have determined that a rule that applies
the aggregate principle consistently is
necessary to align the treatment of eco-
nomically similar transactions. The pro-
posed rule prevents an applicable taxpayer
from (a) paying a domestic partnership
that is owned by foreign related parties,
rather than paying those foreign partners
directly, to circumvent the BEAT and (b)
causing a partnership in which an appli-
cable taxpayer is a partner to make a pay-
ment to a foreign related party, rather than
paying that foreign related party directly.
The rule applies consistently when a pay-
ment is to a foreign partnership that is
owned, for example, by domestic corpo-
rations. This rule also addresses situations
in which a partnership with an applicable
taxpayer partner makes a payment to a
foreign related party. Partners with certain
small ownership interests are excluded
from this aggregate approach for purposes
of determining base erosion tax benefits
from the partnership. This small owner-
ship interests exclusion generally applies

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to partnership interests that represent less
than ten percent of the capital and profits
of the partnership and less than ten per-
cent of each item of income, gain, loss,
deduction, and credit; and that have a fair
market value of less than $25 million. See
proposed § 1.59A-7(b)(4). The Treasury
Department and the IRS determined that a
threshold of ten percent appropriately bal-
anced the administrative burdens of deter-
mining whether deductions allocated to a
partner with a small ownership interest in
a partnership are base erosion payments
with the Treasury Department and IRS's
interest in maintaining a consistent aggre-
gate approach to partnerships in applying
to the BEAT. In determining the appro-
priate threshold for a small ownership in-
terest, the Treasury Department and the
IRS considered the treatment of small
ownership interests in partnerships in
analogous situations in other Treasury
regulations. The Treasury Department and
the IRS welcome comments on the aggre-
gate approach to partnerships as well as
the exception for small ownership inter-
ests, including the specific thresholds for
the exception.

The proposed regulations do not pro-
vide for special treatment of base erosion
tax benefits attributable to a partnership or
to partnership nonrecognition transac-
tions. Instead, the aggregate principle gen-
erally applies to these situations. For ex-
ample, if a partnership acquires property
from a foreign related party of a taxpayer
that is a partner in the partnership, deduc-
tions for depreciation of the property al-
located to the taxpayer generally are base
erosion tax benefits. Similarly, if a foreign
related party and a taxpayer form a part-

nership, and the foreign related party con-
tributes depreciable property, deductions
for depreciation of the property generally
are base erosion tax benefits, in part, be-
cause the partnership is treated as acquir-
ing the property in exchange for an inter-
est in the partnership under section 721.
This approach is consistent with the ap-
proach taken with respect to subchapter C
transactions, as described in Part III.A.1
of this Explanation of Provisions section.

The proposed regulations provide that
with respect to any person that owns an
interest in a partnership, the related party
determination under section 59A(g) ap-
plies at the partner level.

VIII. Rules Relating to Banks and
Dealers for Purposes of Computing the
Base Erosion Percentage and
Determining the BEAT Rate for
Computing BEMTA

Section 59A modifies two general rules
in the case of certain banks or registered
securities dealers. First, section 59A(e)
(1)(C) lowers the base erosion percentage
threshold for certain banks and registered
securities dealers from three percent or more
to two percent or more. See Part II.C of this
Explanation of Provisions section for addi-
tional discussion of this rule. Second, sec-
tion 59A(b)(3) provides that the BEAT rate
is one percentage point higher for those
banks or registered securities dealers.

The proposed regulations do not mod-
ify the statutory definition of the term
"bank" for these purposes from its refer-
ence to section 581, which defines a bank
by reference to a bank or trust company
incorporated and doing business under the
laws of United States (including laws re-
lated to the District of Columbia) or of
any state. Thus, a foreign corporation li-
censed to conduct a banking business in
the United States and subject to taxation
with respect to income that is, or is treated
as, effectively connected with the conduct
of a trade or business in the United States
is not included in this definition.

The proposed regulations clarify that
the term "registered securities dealer" is
limited to a dealer as defined in section
3(a)(5) of the Securities Exchange Act of
1934 that is registered, or required to be
registered, under section 15 of the Secu-
rities Exchange Act of 1934.

The proposed regulations also confirm
that the operative rules that lower the base
erosion percentage threshold and that in-
crease the BEAT rate apply only to a
taxpayer that is a member of an affiliated
group as defined in section 1504(a)(1),
and thus do not apply, for example, if the
taxpayer is not affiliated with another in-
cludible corporation (within the meaning
of section 1504(b)(1)), or if the taxpayer is
not itself an includible corporation (for
example, a foreign corporation that is an
applicable taxpayer).

For purposes of applying the lower
base erosion percentage threshold to
banks and registered securities dealers, the
proposed regulations clarify that because

the base erosion percentage is determined
on an aggregate group basis, the lower
threshold applies if any member of the
aggregate group is a member of an affili-
ated group that includes a bank or regis-
tered securities dealer. The proposed reg-
ulations provide a limited exception for
members of an affiliated group that in-
cludes a bank or registered securities
dealer where the bank or registered secu-
rities dealer activities are de minimis. This
de minimis rule provides that a consoli-
dated group, or a member of the aggregate
group of which the taxpayer is a member,
is not subject to the lower base erosion
percentage threshold if its gross receipts
attributable to the bank or the registered
securities dealer are less than two percent
of the aggregate group's total gross reve-
nue. This de minimis rule uses the same
threshold measurement for exclusion from
the special rule for banks and registered
securities dealers (two percent) that is
used as the base erosion percentage
threshold for banks or registered securities
dealers to determine whether such taxpay-
ers are applicable taxpayers that are sub-
ject to the BEAT, with the latter test func-
tioning in a manner similar to a de
minimis threshold for the application of
the BEAT. See Part II.C of this Explana-
tion of Provisions section. The Treasury
Department and the IRS welcome com-
ments on the scope of the de minimis rule
for banks and registered securities dealers.
See also Part III.B.5 of this Explanation of
Provisions section for a discussion of an
exception to base erosion payment status
for interest on TLAC securities.

###### IX. Rules Relating to Insurance Companies

The definition of a base erosion pay-
ment in section 59A(d) includes any pre-
miums or other consideration paid or ac-
crued by a taxpayer to a foreign related
party for any reinsurance payments taken
into account under section 803(a)(1)(B) or
832(b)(4)(A). Generally, section 803(a)
(1) defines gross income for a life insur-
ance company to include the gross amount
of premiums and other consideration on
insurance and annuity contracts less return
premiums and premiums and other con-
sideration arising out of indemnity rein-
surance. For an insurance company other

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than a life insurance company, under sec-
tion 832(b), gross income generally in-
cludes underwriting income, which is
comprised of premiums earned during the
taxable year less losses incurred and ex-
penses incurred. Section 832(b)(4)(A)
provides that the amount of premiums
earned on insurance contracts is the
amount of gross premiums written on in-
surance contracts during the taxable year
less return premiums and premiums paid
for reinsurance.

The Treasury Department and the IRS
are aware that certain reinsurance agree-
ments provide that amounts paid to and
from a reinsurer are settled on a net basis
or netted under the terms of the agree-
ment. The Treasury Department and the
IRS are also aware that other commercial
agreements with reciprocal payments may
be settled on a net basis or netted under
the terms of those agreements. The pro-
posed regulations do not provide a rule
permitting netting in any of these circum-
stances because the BEAT statutory
framework is based on including the gross
amount of deductible and certain other
payments (base erosion payments) in the
BEAT's expanded modified taxable in-
come base without regard to reciprocal
obligations or payments that are taken into
account in the regular income tax base,
but not the BEAT's modified taxable in-
come base. Generally, the amounts of in-
come and deduction are determined on a
gross basis under the Code; however, as
discussed in Part III of this Explanation of
Provisions section, if there are situations
where an application of otherwise gener-
ally applicable tax law would provide that
a deduction is computed on a net basis
(because an item received reduces the
item of deduction rather than increasing
gross income), the proposed regulations
do not change that result. The Treasury
Department and the IRS request com-
ments addressing whether a distinction
should be made between reinsurance con-
tracts entered into by an applicable tax-
payer and a foreign related party that pro-
vide for settlement of amounts owed on a
net basis and other commercial contracts
entered into by an applicable taxpayer and
a foreign related party that provide for
netting of items payable by one party
against items payable by the other party in

determining that net amount to be paid
between the parties.

The proposed regulations also do not
provide any specific rules for payments by
a domestic reinsurance company to a for-
eign related insurance company. In the
case of a domestic reinsurance company,
claims payments for losses incurred and
other payments are deductible and are
thus potentially within the scope of sec-
tion 59A(d)(1). See sections 803(c) and
832(c). In the case of an insurance com-
pany other than a life insurance company
(non-life insurance company) that rein-
sures foreign risk, certain of these pay-
ments may also be treated as reductions in
gross income under section 832(b)(3),
which are not deductions and also not the
type of reductions in gross income de-
scribed in sections 59A(d)(3). The Trea-
sury Department and the IRS request
comments on the appropriate treatment of
these items under subchapter L. The Trea-
sury Department and the IRS also recog-
nize that to the extent that the items are
not treated as deductions for non-life in-
surance companies this may lead to asym-
metric treatment for life insurance compa-
nies that reinsure foreign risk because part
I of subchapter L (the rules for life insur-
ance companies) refers to these costs only
as deductions (that is, does not also refer
to the costs as reductions in gross income
in a manner similar to section 832(b)(3)).
The Treasury Department and the IRS re-
quest comments on whether the regula-
tions should provide that a life insurance
company that reinsures foreign risk is
treated in the same manner as a non-life
insurance company that reinsures foreign
risk.

The proposed regulations do not ad-
dress a foreign insurance company that
has in effect an election to be treated as a
domestic corporation for purposes of the
Code. Amounts paid or accrued to such a
company are not base erosion payments
because the corporation is treated as a
domestic corporation for purposes of the
Code.

##### X. Anti-Abuse and Recharacterization Rules

Proposed § 1.59A-9(b) provides that
certain transactions that have a principal
purpose of avoiding section 59A will be

disregarded or deemed to result in a base
erosion payment. This proposed anti-
abuse rule addresses the following types
of transactions: (a) transactions involving
intermediaries acting as a conduit to avoid
a base erosion payment; (b) transactions
entered into to increase the deductions
taken into account in the denominator of
the base erosion percentage; and (c) trans-
actions among related parties entered into
to avoid the application of rules applicable
to banks and registered securities dealers
(for example, causing a bank or registered
securities dealer to disaffiliate from an
affiliated group so as to avoid the require-
ment that it be a member of such a group).

##### XI. Consolidated Groups as Taxpayers

Affiliated groups of domestic corpora-
tions that elect to file a consolidated in-
come tax return generally compute their
income tax liability on a "single-entity"
basis. Because the regular tax liability is
computed on a single entity basis, the
additional tax imposed by section 59A
must also be imposed on the same basis
(because it is an addition to that regular
tax liability). Accordingly, the proposed
regulations provide that for affiliated cor-
porations electing to file a consolidated
income tax return, the tax under section
59A is determined at the consolidated
group level, rather than determined sepa-
rately for each member of the group. The
BEAT is an addition to the regular corpo-
rate income tax under section 11, and the
regular corporate income tax is applied to
a consolidated group on a consolidated
basis. Further, application of the BEAT on
a group level eliminates the differences in
the aggregate amount of taxation to a con-
solidated group that would otherwise oc-
cur, based on the location of deductions,
including, for example, the location of
related party interest payments within the
group. Accordingly, the BEAT is also ap-
plied on a consolidated basis. This single
taxpayer treatment for members of a con-
solidated group applies separately from
the aggregate group concept in proposed
§ 1.59A-2(c), which also treats all mem-
bers of the aggregate group as a single
entity, but in that case, only for purposes
of applying the gross receipts test and
base erosion percentage test for determin-
ing whether a particular taxpayer is an

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applicable taxpayer. See generally, Part II
of this Explanation of Provisions section.

To properly reflect the taxable income
of the group, consolidated return regula-
tions generally determine the tax treat-
ment of items resulting from intercom-
pany transactions (as defined in § 1.1502-
13(b)(1)(i)) by treating members of the
consolidated group as divisions of a single
corporation (single entity treatment). In
general, the existence of an intercompany
transaction should not change the consol-
idated taxable income or consolidated tax
liability of a consolidated group. Consis-
tent with single entity treatment, items
from intercompany transactions are not
taken into account for purposes of making
the computations under section 59A. For
example, any increase in depreciation de-
ductions resulting from intercompany
sales of property are disregarded for pur-
poses of determining the taxpayer's base
erosion percentage. Similarly, interest
payments on intercompany obligations (as
defined in § 1.1502-13(g)(2)(ii)) are not
taken into account in making the compu-
tations under section 59A.

###### XII. Coordinating Consolidated Group Rules for Sections 59A(c)(3) and 163(j)

Section 59A(c)(3) and proposed
§ 1.59A-3(c)(4) coordinate the applica-
tion of section 163(j) with the determina-
tion of the amount of base erosion tax
benefits when a taxpayer has business in-
terest expense paid to both unrelated par-
ties and related parties. Those rules pro-
vide that, where section 163(j) applies to
limit the amount of a taxpayer's business
interest that is deductible in a taxable year,
the taxpayer is required to treat all disal-
lowed business interest as allocable first to
interest paid or accrued to persons who
are not related parties, and then to related
parties. See Part IV.B of this Explanation
of Provisions section.

Proposed § 1.1502-59A provides rules
regarding application of section 59A(c)(3)
to consolidated groups. These rules are
required for the allocation of the BEMTA
among members of the group under sec-
tion 1552. In addition, apportionment of
the domestic related party status and for-
eign related party status (defined later in
this Part XII) of section 163(j) carryfor-
wards among members of the group is

necessary when a member deconsolidates
from the group.

The proposed regulations implement
the classification approach of proposed
§ 1.59A-3(c)(4) on a consolidated basis
(the "classification rule"), to identify
which interest deductions are allocable to
domestic related party payments, foreign
related party payments, and unrelated
party payments. Slightly different rules
apply to the deduction of current year
business interest expense than to the de-
duction of section 163(j) carryforwards. A
consolidated group applies these rules to
the amount of business interest expense
(either from current year business interest
expense or from carryforward amounts)
that is actually deducted pursuant to sec-
tion 163(j) and proposed §§ 1.163(j)
-4(d) and 1.163(j) -5(b)(3). If the group
deducts business interest expense paid or
accrued in different taxable years (for ex-
ample, both current year business interest
expense and section 163(j) carryfor-
wards), the classification rule applies sep-
arately to business interest expense in-
curred in each taxable year. For purposes
of the proposed regulations, a member's
current year business interest expense is
the member's business interest expense
that would be deductible in the current
taxable year without regard to section
163(j) and that is not a disallowed busi-
ness interest expense carryforward from a
prior taxable year.

The classification rule applies on a
single-entity basis to deductions of current
year business interest expense. The con-
solidated group classifies its aggregate
business interest deduction from current
year business interest expense based on
the aggregate current year business inter-
est expense of all types (related or unre-
lated) paid by members of the group to
nonmembers. Business interest deduc-
tions are treated as from payments or ac-
cruals to related parties first, and then
from payments or accruals to unrelated
parties. If there are payments to both for-
eign related parties and domestic related
parties, the deductions are classified as to
the related parties on a pro-rata basis.

Recognizing the flexibility of related-
party financing, these proposed regula-
tions provide that, if the group has ag-
gregate business interest deductions
classified as payments or accruals to a

domestic related party (domestic related
party status) or foreign related party
(foreign related party status), the status
of such payments or accruals is spread
among members of the group (the allo-
cation rule). Specifically, the domestic
related party status and foreign related
party status of the deduction is allocated
among members of the group in propor-
tion to the amount of each member's
deduction of its current year business
interest expense. Similarly, if any part
of a section 163(j) carryforward is from
a payment or accrual to a domestic re-
lated party or a foreign related party, the
related party status of the section 163(j)
carryforwards for the year will be allo-
cated among members of the group. The
allocation is in proportion to the relative
amount of each member's section 163(j)
carryforward from that year. Members'
additional section 163(j) carryforward
amounts are treated as payments or ac-
cruals to unrelated parties. The alloca-
tion rule applies separately to each car-
ryforward year.

With regard to the deduction of any
member's section 163(j) carryforward, the
classification rule applies on an entity-by-
entity basis. As discussed, before a mem-
ber's section 163(j) carryforward moves
forward into subsequent years, it is allo-
cated a domestic related party status, for-
eign related party status, or unrelated
party status. This allocation ensures that
business interest deductions drawn from
any carryforward originating in the same
consolidated return year bear the same
ratio of domestic related, foreign related,
and unrelated statuses. When a member
deducts any portion of its section 163(j)
carryforward, the member applies section
59A(c)(3) and proposed § 1.59A-3(c)(4)
to determine the status of the deducted
carryforward, based on the status previ-
ously allocated to the member's section
163(j) carryforward for the relevant tax
year. The tax liability imposed under sec-
tion 59A on the consolidated group is
allocated among the members of the con-
solidated group pursuant to the consoli-
dated group's tax allocation method, tak-
ing into account these allocations. See
section 1552.

If a member that is allocated a foreign
related party status or domestic related
party status to its section 163(j) carryfor-

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ward deconsolidates from the group, the
departing member's carryforward retains
the allocated status. The departing mem-
ber (and not the original consolidated
group) takes into account the status of that
carryforward for purposes of computing
the BEAT in future years.

##### XIII. Consolidated Tax Liability

In § 1.1502-2, a reference is added to
the base erosion anti-abuse tax as a tax
included in the computation of consoli-
dated tax liability. Additionally, the pro-
posed regulations make the following
changes: (1) remove paragraph (j) of this
regulation section because section 1333,
relating to war loss recoveries, was re-
pealed by section 1901(a)(145)(A) of the
Tax Reform Act of 1976, Pub. L. 94-455,
(2) remove paragraph (h) of this regula-
tion section because section 1201, relating
to the alternative tax for corporations, was
repealed by section 13001(b)(2)(A) of the
Act, and (3) update the cross reference to
life insurance taxable income to section
801, following the revision of subchapter
L of chapter 1 of the code in section 211
of the Deficit Reduction Act of 1984, Pub.
L. 98-369.

In addition, the proposed regulations also
make nonsubstantive changes to reorganize
the structure of current § 1.1502-2. Specif-
ically, the proposed regulations reorganize
the current § 1.1502-2 to properly designate
the unnumbered paragraphs. The proposed
regulations also update other regulation sec-
tions that reference § 1.1502-2.

Finally, the proposed regulations cor-
rect an error in § 1.6655-5(e) Example 10.
The proposed regulations replace the ref-
erence to "§ 1.1502-2(h)" with a refer-
ence to "1.1502-1(h)" because the context
of Example 10 demonstrates that the in-
tended reference was to the definition of a
consolidated group.

##### XIV. Sections 382 and 383

Section 1.383-1 provides that only oth-
erwise currently allowable pre-change
losses and pre-change credits will result in
the absorption of the section 382 limita-
tion and the section 383 credit limitation.
The limitations under sections 382 and
383 are applied after the application of all
other limitations contained in subtitle A of

the Code. If the pre-change losses or pre-
change credits cannot be deducted or oth-
erwise used, they are carried forward to
the next taxable year. The BEAT is not a
modification to the normal computation of
income tax under Subtitle A of the Code
but an addition to that income tax. There-
fore, these proposed regulations clarify
that additions to tax under section 59A do
not affect whether a loss, deduction, or
credit is absorbed under section 382 or
section 383.

##### XV. Reporting and Recordkeeping Requirements Pursuant to Section 6038A

Section 6038A imposes reporting and
recordkeeping requirements on domestic
corporations that are 25-percent foreign-
owned. Section 6038C imposes the same
reporting and recordkeeping requirements
on certain foreign corporations engaged in
a U.S. trade or business. These corpora-
tions are collectively known as "reporting
corporations."

Reporting corporations are required to
file an annual return on Form 5472, Infor-
mation Return of a 25% Foreign-Owned
U.S. Corporation or a Foreign Corpora-
tion Engaged in a U.S. Trade or Business
(Under Sections 6038A and 6038C of the
Internal Revenue Code), with respect to
each related party with which the report-
ing corporation has had any "reportable
transactions." See § 1.6038A-2. Report-
ing corporations are also subject to spe-
cific requirements under sections 6038A
and 6038C to maintain and make avail-
able the permanent books of account or
records as required by section 6001 that
are sufficient to establish the accuracy of
the federal income tax return of the cor-
poration, including information, docu-
ments, or records to the extent they may
be relevant to determine the correct U.S.
tax treatment of transactions with related
parties. See § 1.6038A-3.

The Act amended section 6038A by
adding paragraph (b)(2), which autho-
rizes regulations requiring information
from a reporting corporation that is also
a section 59A "applicable taxpayer" for
purposes of administering section 59A.
Section 6038A(b)(2) applies to taxable
years beginning after December 31,
2017. These proposed regulations iden-
tify certain types of information that

will be required to be reported on Form
5472 and Form 8991, Tax on Base Ero-
sion Payments of Taxpayers With Sub-
stantial Gross Receipts, and also pro-
vide the time and manner for reporting.
While an applicable taxpayer that is not
a reporting corporation would not be
subject to monetary penalties and collat-
eral provisions specific to sections
6038A and 6038C, the taxpayer remains
subject to BEAT-related reporting obli-
gations, including Form 8991, and ap-
plicable consequences for noncompli-
ance.

Under section 59A(d)(4), the status of
a foreign shareholder as a surrogate for-
eign corporation as defined in section
7874(a)(2)(B) or as a member of the same
expanded affiliated group, as defined in
section 7874(c)(1), as the surrogate for-
eign corporation can affect the treatment
of payments from a taxpayer to that cor-
poration under section 59A(d). If the re-
porting corporation is an expatriated en-
tity as defined in section 7874(a)(2), the
taxation of certain transactions between it
and its foreign related persons as defined
in section 7874(d)(3) may be affected.
Consequently, the proposed regulations
require all reporting corporations to state
whether a foreign shareholder required to
be listed on Form 5472 is a surrogate
foreign corporation. The form may pro-
vide for reporting of whether the share-
holder is a member of an expanded affil-
iated group including the surrogate
foreign corporation.

In addition, to facilitate screening for
important tax compliance concerns under
section 59A as well as other provisions at
the return filing stage, these proposed reg-
ulations clarify that the IRS may require
by form or by form instructions the fol-
lowing information: (1) reporting of par-
ticular details of the reporting corpora-
tion's relationships with related parties in
regard to which it is required to file a
Form 5472, (2) reporting of transactions

within certain categories on a more de-
tailed basis, (3) reporting of the manner
(such as type of transfer pricing method
used) in which the reporting corporation
determined the amount of particular re-
portable transactions and items, and (4)
summarization of a reporting corpora-
tion's reportable transactions and items

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with all foreign related parties on a sched-
ule to its annual Form 5472 filing.

XVI. Partial withdrawal of proposed
regulations

The proposed regulations also withdraw,
in part, a notice of proposed rulemaking.
Because of statutory changes in section
12001 of the Act, the proposed regulations
would not incorporate the substance of
§ 1.1502-2, relating to the computation of a
consolidated group's alternative minimum
tax, of the notice of proposed rulemaking
(IA-57-89) published in the Federal Reg-
ister on December 30, 1992 (57 FR 62251).
Accordingly, the Partial Withdrawal of Pro-
posed Regulations section in this document
withdraws that section of the notice of pro-
posed rulemaking.

#### Proposed Applicability Date

Under section 7805(b)(2), and consis-
tent with the applicability date of section
59A, these regulations (other than the pro-
posed reporting requirements for QDPs in
proposed § 1.6038A-2(b)(7)) are pro-
posed to apply to taxable years beginning
after December 31, 2017. Until finaliza-
tion, a taxpayer may rely on these pro-
posed regulations for taxable years begin-
ning after December 31, 2017, provided
the taxpayer and all related parties of the
taxpayer (as defined in proposed § 1.59A-
1(b)(17)) consistently apply the proposed
regulations for all those taxable years that
end before the finalization date.

With respect to the reporting require-
ments for QDPs, proposed § 1.6038A-
2(b)(7)(ix) applies to taxable years begin-
ning one year after final regulations are
published in the Federal Register, al-
though simplified QDP reporting require-
ments provided in § 1.6038A-2(g) are
also proposed to apply to taxable years
beginning after December 31, 2017.

If any provision is finalized after June
22, 2019, the Treasury Department and
the IRS generally expect that such provi-
sion will apply only to taxable years end-
ing on or after December 17, 2018. See
section 7805(b)(1)(B).

#### Special Analyses

Regulatory Planning and Review -
Economic Analysis

Executive Orders 13563 and 12866 di-
rect agencies to assess costs and benefits
of available regulatory alternatives and, if
regulation is necessary, to select regula-
tory approaches that maximize net bene-
fits (including potential economic, envi-
ronmental, 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.
The preliminary Executive Order 13771
designation for this proposed rule is reg-
ulatory.

The proposed regulations have been
designated by the Office of Management
and Budget's ("OMB") Office of Informa-
tion and Regulatory Affairs ("OIRA") as
subject to review under Executive Order
12866 pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Treasury Department and OMB regarding
review of tax regulations. OIRA has de-
termined that the proposed rulemaking is
economically significant under section
1(c) of the Memorandum of Agreement
and thereby subject to review. Accord-
ingly, the proposed regulations have been
reviewed by OMB.

##### A. Overview

The proposed regulations provide
guidance under section 59A regarding the
determination of the tax on base erosion
payments for certain taxpayers with sub-
stantial gross receipts. They provide guid-
ance for applicable taxpayers to determine
the amount of BEAT liability and how to
compute the components of the tax calcu-
lation. Among other benefits, this clarity
helps ensure that all taxpayers apply sec-
tion 59A in a similar manner, which pro-
motes efficiency and equity with respect
to the provisions of the overall Code.

The proposed regulations under sec-
tions 59A (proposed §§ 1.59A-1 through
1.59A-10) provide details for taxpayers
regarding whether a taxpayer is an appli-
cable taxpayer and the computation of
certain components of the base erosion

minimum tax, including the amount of
base erosion payments, the amount of
base erosion tax benefits arising from base
erosion payments, and modified taxable
income. The proposed regulations also
provide guidance for banks, registered se-
curities dealers, and insurance companies
and provide guidance attributing partner-
ship income and deductions involving
partnerships to the owners of the partner-
ships (amounts paid by and to partner-
ships). These proposed regulations also
establish anti-abuse rules to prevent tax-
payers from taking measures to inappro-
priately avoid section 59A.

The proposed regulations under sec-
tions 383, 1502 and 6038A (proposed
§§ 1.383-1, 1.502-2, 1.502-59A,
1.6038A-1, 1.6038A-2, and 1.6038-4)
provide rules for the application of sec-
tion 59A with respect to limitations on
certain capital losses and excess credits,
consolidated groups and their members,
and reporting requirements, which in-
clude submitting, in certain cases, new
Form 8991, Tax on Base Erosion Pay-
ments of Taxpayers With Substantial
Gross Receipts. This economic analysis
describes the economic benefits and
costs of the proposed regulations. The
Treasury Department and the IRS antic-
ipate that any final rule will contain the
analysis prescribed by the Memorandum
of Agreement (April 11, 2018) between
the Treasury Department and OMB.

##### B. Economic Analysis of the Proposed Regulations

###### 1. Background

Congress was concerned, in part, that
foreign-owned U.S. subsidiaries are able
to reduce their U.S. tax liability by mak-
ing deductible payments to a foreign par-
ent or foreign affiliates, eroding the U.S
tax base if the payments are subject to
little or no U.S. withholding tax. This
result may favor foreign-headquartered
companies over U.S. headquartered com-
panies, creating a tax-driven incentive for
foreign takeovers of U.S. firms and en-
hancing the pressure for U.S headquar-
tered companies to re-domicile abroad
and shift income to low-tax jurisdictions.
Senate Committee on Finance, Explana-
tion of the Bill, S. Rpt. 115-20, at 391.

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Section 59A was introduced, in part, as a
minimum tax to prevent excessive reduc-
tion in corporate tax liability using de-
ductible and certain other payments to for-
eign related parties.

The Treasury Department views sec-
tion 59A as largely self-executing, which
means that it is binding on taxpayers and
the IRS without any regulatory action.
The Treasury Department and the IRS
recognize, however, that section 59A,
while self-executing, provides interpretive
latitude for taxpayers and the IRS that
could, without further implementation
guidance, prompt a variety of responses.
Consequently, many of the details behind
the relevant terms and necessary calcula-
tions required for the computation of an
applicable taxpayer's BEAT liability
would benefit from greater specificity. As
is expected after the passage of major tax
reform legislation, the proposed regula-
tions answer unresolved questions and
provide detail and specificity for the def-
initions and concepts described in section
59A, so that taxpayers can readily and
accurately determine if they are applicable
taxpayers and, if so, compute their BE-
MTA. For example, the proposed regula-
tions define the scope of crucial terms
such as applicable taxpayer, base erosion
payments, base erosion tax benefits, de
minimis exemptions, and modified tax-
able income. Specific examples of where
these proposed regulations provide clari-
fication of the statute are discussed in this
Part B of the Special Analyses section.

As explained in Part VI of the Expla-
nation of Provisions section, an applicable
taxpayer computes its BEMTA for the
taxable year to determine its liability un-
der section 59A(a). In general, the taxpay-
er's BEMTA is equal to the excess of (1)
the applicable tax rate for the year at issue
multiplied by the taxpayer's modified tax-
able income over (2) the taxpayer's ad-
justed regular tax liability for that year.
Modified taxable income is a taxpayer's
taxable income for the year calculated
without regard to any base erosion tax
benefit or the base erosion percentage of
any allowable net operating loss deduc-
tions.

In general, the proposed regulations in-
terpret the statute by answering two im-
portant questions: (1) to which taxpayers

does the BEAT apply, and (2) how do the
rules apply to those taxpayers?

##### a. Applicable Taxpayer

In order for the BEAT to apply, a tax-
payer must be an applicable taxpayer, as
described in Part II of the Explanation of
Provisions section. In general, an applica-
ble taxpayer is a corporation, other than a
RIC, REIT, or an S corporation, that sat-
isfies the gross receipts test and the base
erosion percentage test. For purposes of
these tests, members of a group of corpo-
rations related by stock ownership are ag-
gregated. Section 59A(e)(3) refers to ag-
gregation on the basis of persons treated
as a single taxpayer under section 52(a)
(controlled group of corporations), which
includes both domestic and foreign per-
sons. As discussed in Part II.A of the
Explanation of Provisions section, the
Treasury Department and the IRS deter-
mined that to implement the provisions of
section 59A, it was necessary to treat for-
eign corporations as outside of the con-
trolled group for purposes of applying the
aggregation rules, except to the extent that
the foreign corporation is subject to net
income tax under section 882(a) (tax on
income of foreign corporations connected
with U.S. business). Upon aggregation of
domestic and foreign controlled groups of
corporations, intra-aggregate group trans-
actions are eliminated. If aggregation
were defined to include both domestic and
all foreign persons (i.e., a "single em-
ployer" under section 52(a)), this elimina-
tion would include most base erosion pay-
ments, which are defined by section
59A(d)(1) as "any amount paid or accrued
by the taxpayer to a foreign person which
is a related party of the taxpayer and with
respect to which a deduction is allowed
under this chapter." Without these base
erosion payments, virtually no taxpayer or
aggregated group would satisfy the base
erosion percentage test; thus substantially
all taxpayers (or the aggregate group of
which the taxpayer was a member) would
be excluded from the requirement to pay a
tax equal to the BEMTA.

A taxpayer, or the aggregate group of
which the taxpayer is a member, satisfies
the gross receipts test if it has average
annual gross receipts of at least $500 mil-

lion for the three taxable years ending
with the preceding taxable year.

The base erosion percentage test is sat-
isfied if the taxpayer (or aggregated
group) has a base erosion percentage of
three percent or more. A lower two per-
cent base erosion percentage applies for
banks and registered securities dealers. As
explained in proposed § 1.52A-2(e), the
base erosion percentage is computed by
dividing (1) the aggregate amount of base
erosion tax benefits by (2) the sum of the
aggregate amount of deductions plus cer-
tain other base erosion tax benefits.

The statute is ambiguous or silent on
certain details for determining whether a
taxpayer is an applicable taxpayer, includ-
ing the aggregation rule described in Part
II.A. of the Explanation of Provisions sec-
tion. Absent these proposed regulations,
there would be uncertainty among taxpay-
ers as to whether the tax equal to the
BEMTA would apply to them. Without
guidance, different taxpayers would likely
take different positions regarding the de-
termination of their status as an applicable
taxpayer, which would result in inefficient
decision-making and inconsistent applica-
tion of the statute as taxpayers engage in
corporate restructurings, or adjust invest-
ment and spending policies based on tax
planning strategies to manage BEAT lia-
bility (as discussed in this Part B.2.b. of
the Special Analyses section). The pro-
posed regulations provide clarity by (1)
defining the aggregate group to which the
gross receipts and base erosion percentage
tests apply, and (2) providing guidance on
the definitions and computations neces-
sary to apply those tests.

#### b. BEAT Calculation

Part III of the Explanation of Provi-
sions section discusses the rules regarding
the types of payments that are base ero-
sion payments (as defined in proposed
§ 1.52A-3(b)). Section 59A(d)(5) pro-
vides an exception from the definition of a
base erosion payment for an amount paid
or accrued by a taxpayer for services if the
services are eligible for the services cost
method under section 482 (without regard
to certain requirements under the section
482 regulations) and the amount consti-
tutes the total services cost with no
markup component. The statute is ambig-

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uous as to whether the SCM exception (1)
does not apply to a payment or accrual
that includes a markup component, or (2)
does apply to such a payment or accrual
that includes a markup component, but
only to the extent of the total services
costs. The proposed regulations follow the
latter approach as discussed in Part B.2.b.
of this Special Analyses section.

As discussed in Part III.B.3 of the
Explanation of Provisions section, the
proposed regulations provide an excep-
tion from the definition of base erosion
payment for payments to the U.S.
branch of a foreign person to the extent
that payments to the foreign related
party are treated as effectively con-
nected income. In general, whether a
payment is a base erosion payment is
determined based on whether the recip-
ient is a foreign person (as defined in
section 6038A(c)(3)) and a related
party, and whether the payment is de-
ductible to the payor. See section
59A(f). A foreign person means any per-
son who is not a United States person.
However, as discussed in Part III.B.3. of
the Explanation of Provisions section,
the Treasury Department and the IRS
determined that establishing whether a
payment is a base erosion payment
based solely on the status of the recipi-
ent as a foreign person is inconsistent
with the statute's intent of eliminating
base erosion. Deductible payments to a
foreign person that are treated as effec-
tively connected income are subject to
tax under section 871(b) and 882(a) in
substantially the same manner as pay-
ments to a U.S. citizen or resident, or a
domestic corporation, and, thus, such
payments do not result in base erosion.
Proposed § 1.52A-3(b)(3)(iii) adopts an
exception for such amounts.

As described in this Part B.1. of the
Special Analyses section, modified tax-
able income is a taxpayer's taxable in-
come for the year calculated without re-
gard to any base erosion tax benefit or the
base erosion percentage of any allowable
net operating loss deductions under sec-
tion 172 (net operating loss deduction). As
discussed in Part V.A. of the Explanation
of Provisions section, modified taxable in-
come is not calculated by recomputing the
tax base without base erosion tax benefits
under an approach similar to the alterna-

tive minimum tax, which the Act repealed
for corporations. To do so would require
taxpayers to maintain records for separate
carryforward balances for attributes, such
as net operating loss deductions and busi-
ness interest expense carryovers. These
items are limited based on taxable income,
so under the recomputation or alternative
minimum tax-approach, there would most
likely be different annual limitations and
other computational differences for regu-
lar tax purposes and section 59A pur-
poses.

As discussed in Part VII of the Expla-
nation of Provisions section, the proposed
regulations apply the aggregate approach
to base erosion payments involving part-
nerships because partnerships are pass-
through entities that are not themselves
subject to U.S. income tax, but rather the
income of the partnership is taxed to the
partners in the partnership. Accordingly,
the proposed regulations provide that pay-
ments by a corporation to a partnership,
and payments by a partnership to a corpo-
ration, are treated in the first instance as
payments to the partners in the partnership
and in second instance as payments by the
partners in the partnership. For example,
in the absence of this aggregate approach
rule, a payment by an applicable taxpayer
(corporation) to a related foreign partner-
ship could be a base erosion payment even
if all of the partners in the partnership are
domestic persons. Under this rule, which
applies an aggregate approach to partner-
ships, the payment by the applicable tax-
payer (corporation) to a related foreign
partnership is only treated as a base ero-
sion payment to the extent that the part-
ners in the foreign partnership are them-
selves foreign related parties. Conversely,
also in the absence of this aggregate ap-
proach rule, a payment by an applicable
taxpayer (corporation) to a related domes-
tic partnership could not be a base erosion
payment even if some or all of the part-
ners in the partnership are foreign related
parties. Under the aggregate approach, the
payment by an applicable taxpayer (cor-
poration) to a related domestic partnership
is treated as a base erosion payment to the
extent that the partners in the domestic
partnership are foreign related parties.
This approach is thus neutral in both pre-
venting potential abuse and preventing
potential over breadth. The regulations

thus eliminate a distortion that would oth-
erwise be present if the status of base
erosion payments is made by reference to
the partnership, rather than by reference to
the partners. For example, in the absence
of the proposed regulations, taxpayers
might be incentivized to route payments
through a domestic partnership that is
formed by foreign persons as an interme-
diary to avoid the BEAT. Conversely, in
the absence of the proposed regulations,
taxpayers would be incentivized to re-
structure to avoid making any payments to
a foreign partnership that has partners that
are solely domestic because such payment
could be inappropriately classified as a
base erosion payment. The Treasury De-
partment requests comments on the ap-
proach to partnerships in the proposed
regulations.

#### c. Anti-abuse and Reporting Requirements

Section 59A(i) provides the Secretary
authority to issue regulations and other
guidance to prevent the avoidance of the
purposes of section 59A. As such, pro-
posed § 1.59A-9 provides rules recharac-
terizing certain specified transactions as
necessary to prevent the avoidance of sec-
tion 59A, and provides examples.

The proposed regulations also provide
reporting requirements necessary to prop-
erly administer and enforce section 59A.
In particular, the Treasury Department
and the IRS have identified certain types
of information from taxpayers who are
applicable taxpayers for purposes of sec-
tion 59A that will be required to be re-
ported on Form 5472, Information Return
of a 25% Foreign-Owned U.S. Corpora-
tion or a Foreign Corporation Engaged in
a U.S. Trade or Business (Under Sections
6038A and 6038C of the Internal Revenue
Code), and a new Form 8991, Tax on
Base Erosion Payments of Taxpayers
With Substantial Gross Receipts. Further
detail regarding anticipated paperwork
burdens can be found in Part C (Paper-
work Reduction Act) of this Special Anal-
yses section, which includes a link to draft
forms and guidance for providing com-
ment on the proposed forms.

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##### 2. Anticipated Benefits and Costs of the Proposed Regulations

###### a. Baseline

The Treasury Department and the IRS
have assessed the impacts, benefits, and
costs of the proposed regulations against a
"no action" baseline that reflects projected
tax-related and other behavior in the ab-
sence of the proposed regulations.

The Treasury Department projects that
the proposed regulations will have a non-
revenue effect on the economy of at least
$100 million per year ($2018) measured
against this baseline. The Treasury De-
partment requests comments on this con-
clusion.

#### b. Anticipated Benefits

The Treasury Department and IRS ex-
pect that the certainty and clarity provided
by these proposed regulations, relative to
the baseline, will enhance U.S. economic
performance under the statute. Because a
tax has not previously been imposed on
base-eroding payments in this manner and
the statute is silent on certain aspects of
definitions and calculations, taxpayers can
particularly benefit from enhanced speci-
ficity regarding the relevant terms and
necessary calculations they are required to
apply under the statute. In the absence of
this enhanced specificity, similarly situ-
ated taxpayers might interpret the statu-
tory rules of section 59A differently. For
example, different taxpayers might pursue
intercompany investment and payment
policies based on different assumptions
about whether such investments and pay-
ments are base eroding payments subject
to section 59A, and some taxpayers may
forego specific investments and payments
that other taxpayers deem worthwhile
based on different interpretations of the
tax consequences alone. The guidance
provided in these proposed regulations
helps to ensure that taxpayers face more
uniform incentives when making eco-
nomic decisions, a tenet of economic ef-
ficiency. Consistent reporting across tax-
payers also increases the IRS's ability to
consistently enforce the tax rules, thus
increasing equity and decreasing opportu-
nities for tax evasion.

For example, as described in Part
III.B.3 of the Explanation of Provisions
section, the proposed regulations exclude
from base erosion payments those pay-
ments made to a foreign related party that
are treated as effectively connected in-
come of the foreign payee. Such payments
are treated as income to the recipient and
subject to U.S. tax, substantially similar to
any payment between related U.S. corpo-
rations. The payments are not base erod-
ing because their receipt is taxable by the
United States. Further, treatment of effec-
tively connected income payments to a
foreign related party would produce dif-
ferent tax results for two similarly situated
U.S. taxpayers. That is, if the taxpayer
were to make a payment to a related U.S.
corporation, the payment generally would
not be subject to the BEAT, but if a tax-
payer were to make a payment to a foreign
person with respect to its effectively con-
nected income, it would give rise to
BEAT liability, despite the fact that in
both cases the recipients include the pay-
ment in U.S. taxable income.

The Treasury Department and the IRS
also considered the benefits and costs of
providing the specific proposed terms, cal-
culations, and other details regarding the
BEAT. In developing these proposed reg-
ulations, the Treasury Department and the
IRS have generally aimed to apply the
principle that an economically efficient
tax system would treat income derived
from similar economic decisions simi-
larly, to the extent consistent with the
statute and considerations of administra-
bility of the tax system. For example, as
noted in Part B.1.b. of this Special Anal-
yses section, section 59A(d)(5) provides
an exception to the definition of a base
erosion payment for certain payments
made to foreign related parties for ser-
vices that meet the eligibility require-
ments for use of the SCM (under section
482). The proposed regulations adopt an
approach that allows an SCM exception
for the total cost of services even if there
is a profit markup so long as a transaction
meets certain other requirements for using
the SCM (under section 482). The pro-
posed regulations provide that the portion
of any payment that exceeds the total cost
of services is not eligible for the SCM
exception and is a base eroding payment.

Alternatives would have been to disal-
low the SCM exception for the entire
amount of any payment that includes a
markup component, or to not provide any
guidance at all regarding the SCM excep-
tion. The Treasury Department and the
IRS rejected the former approach. The
section 482 regulations mandate inter-
company pricing under an "arm's length
standard." Under specific circumstances,
the section 482 regulations provide that
intercompany payments for services can
be set by a taxpayer at the cost of provid-
ing the service with no profit markup.
However, the section 482 regulations pro-
hibit use of this cost-only SCM approach
for services "that contribute significantly
to fundamental risks of business success
or failure" (the "business judgment rule").
See § 1.482-9(b)(5). At arm's length,
such services would generally be priced to
include a profit element to satisfy the mar-
ket's demand for, and supply of, services
among recipients and providers. Section
59A(d)(5)(A) explicitly allows an excep-
tion from the BEAT for services that
would be eligible for the SCM, "deter-
mined without regard to [the business
judgment rule]." By allowing an excep-
tion from the BEAT for intercompany ser-
vice payments that do not include a profit
markup (i.e., under the SCM transfer pric-
ing method), but also for intercompany
service payments that must apply a differ-
ent transfer pricing method, and therefore
generally would include a profit markup at
arm's length (i.e., those subject to the
business judgment rule), the statute cre-
ates ambiguity about the SCM exception's
application with respect to the portion of
intercompany prices paid for services re-
flecting the cost of providing the services
when there is also a mark-up component.

To promote the consistent application
by taxpayers of a SCM exception to the
BEAT, and to provide greater clarity,
the proposed regulations provide that the
SCM exception is available if there is a
profit markup (provided that other re-
quirements are satisfied), but the portion
of any payment exceeding cost is not eli-
gible for the SCM exception. The Trea-
sury Department and the IRS also rejected
the option of not providing any guidance
at all regarding the SCM exception be-
cause if taxpayers relied on statutory lan-
guage alone, taxpayers would adopt dif-

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ferent approaches due to ambiguity in the
statute, leaving it open to differing statu-
tory interpretations and an inconsistent
application of the statute. The Treasury
Department and IRS expect that approxi-
mately one-half of taxpayers filing Form
8991 would avail themselves of the SCM
exception. The Treasury Department and
the IRS request comments about applica-
tion of the SCM exception.

As discussed in Part V.A of the Expla-
nation of Provisions section, the Treasury
Department and the IRS also considered
alternatives regarding the method by
which modified taxable income could be
calculated for purposes of the BEAT. The
proposed regulations could have followed
an add-back approach or an approach
more similar to that used for the alterna-
tive minimum tax. As noted in Part B.1.b.
of this Special Analyses section, the pro-
posed regulations adopt the former ap-
proach, which is expected to be less costly
for taxpayers to apply since taxpayers will
not have to recompute their entire tax re-
turn on a different basis, or maintain sep-
arate sets of records to track annual limi-
tations on attributes such as net operating
loss carryforwards or business interest ex-
pense carryforwards.

In addition, the proposed regulations
clarify that the computations of modified
taxable income and BEMTA are done on
a taxpayer-by-taxpayer basis. That is, the
aggregate group concept is used solely for
determining whether a taxpayer is an ap-
plicable taxpayer, and does not apply to
the computations of modified taxable in-
come and the BEMTA. In the absence of
these clarifying definitions, taxpayers
could calculate the BEMTA differently
depending on their differing views of the
base on which the BEAT should be cal-
culated (i.e., aggregated group, consoli-
dated group, individual company), leading
to inequitable results across otherwise
similar taxpayers. Under the proposed
regulations' approach for the calculation
of modified taxable income and BEMTA,
it is also expected to be less costly for
taxpayers to calculate BEMTA since the
statutory framework of section 59A ap-
plies in addition to the regular tax liability
of a taxpayer. Calculation of BEAT liabil-
ity at an aggregate level, for example,
would require taxpayers to first aggregate
regular taxable liabilities of the different

taxpayers, calculate the BEMTA on an
aggregated basis, and then reallocate any
BEAT liability among the separate tax-
payers. The approach of the proposed reg-
ulations, which clarify that the tax should
be calculated on a separate taxpayer basis,
simplifies these calculations.

The proposed regulations also include
de minimis thresholds for partnerships
and for registered securities dealers. In
general, such thresholds reduce compli-
ance costs for the large number of small
taxpayers that would fall below such
threshold without substantially affecting
the BEAT base. For the de minimis ex-
ception for banks and registered securities
dealers, in the absence of an exception,
affiliated groups that are not principally
engaged in banking or securities dealing
would be incentivized to alter their busi-
ness structure to eliminate minimal banks
or registered securities dealers from their
aggregate groups. These changes would
give rise to tax-motivated, inefficient re-
structuring costs. A de minimis threshold
reduces this potential inefficiency again
without substantially affecting the BEAT
base. In both cases, the thresholds were
chosen to balance these competing con-
cerns and to adhere to generally similar
standards elsewhere in the Code. The
Treasury Department and IRS request
comment on the impact of this approach.

##### 3. Anticipated impacts on administrative and compliance costs

Because the statute requires payment
of tax regardless of the issuance of regu-
lations or instructions, the new forms, re-
visions to existing forms, and other pro-
posed regulations can lower the burden on
taxpayers of determining their tax liabil-
ity. The Treasury Department and the IRS
expect that the proposed regulations will
reduce the costs for taxpayers to comply
with the Act, on balance, relative to the
baseline of no promulgated regulations.

Certain record-keeping requirements
added by the proposed regulations derive
directly from statutory changes that re-
quire information from a reporting corpo-
ration that is also a section 59A applicable
taxpayer. Proposed § 1.6038A-2 in-
creases record-keeping requirements for
taxpayers because additional information

is to be reported on Form 5472 and Form
8991.

Proposed § 1.59A-3(b)(3) also in-
creases record-keeping requirements for
taxpayers because additional information
is required for taxpayers to satisfy a reg-
ulatory requirement of the SCM excep-
tion. The requirement added by these pro-
posed regulations is consistent with the
requirements for eligibility for the ser-
vices cost method under section 482, in-
cluding the existing requirements of
§ 1.482-9(b).

#### C. Paperwork Reduction Act

##### 1. Collections of Information - Forms 8991, 5471, 5472, and 8858

The collections of information in these
proposed regulations with respect to sec-
tion 59A are in proposed §§ 1.59-3(b)(3)
and 1.6038A-2. The information collec-
tion requirements pursuant to proposed
§ 1.59A-3(b)(3)(i)(C) are discussed fur-
ther below. The IRS intends that the col-
lections of information pursuant to section
59A, except with respect to information
collected under proposed § 1.59A-
3(b)(3), will be conducted by way of the
following:

Form 8991, Tax on Base Erosion
Payments of Taxpayers With Sub-
stantial Gross Receipts;

Schedule G to the Form 5471, Infor-
mation Return of U.S. Persons With
Respect to Certain Foreign Corpora-
tions;

Part VIII of the updated Form 5472,
Information Return of a 25% For-
eign-Owned U.S. Corporation or a
Foreign Corporation Engaged in a
U.S. Trade or Business;

Revised Form 8858, Information Re-
turn of U.S. Persons With Respect to
Foreign Disregarded Entities.

For purposes of the Paperwork Reduc-
tion Act, the reporting burden associated
with the collections of information with
respect to section 59A, other than with
respect to proposed § 1.59A-3(b)(3), will
be reflected in the IRS Forms 14029 Pa-
perwork Reduction Act Submission, asso-
ciated with Forms 5471 (OMB control
numbers 1545-0123, and 1545-0074),
5472 (OMB control number 1545-0123),
8858 (OMB control numbers 1545-0123,

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1545-0074, and 1545-1910), and 8991
(OMB control number 1545-0123).

The current status of the Paperwork
Reduction Act submissions related to
BEAT is provided in the following table.
The BEAT provisions are included in ag-
gregated burden estimates for the OMB
control numbers listed below which, in the
case of 1545-0123, represents a total esti-
mated burden time, including all other
related forms and schedules for corpora-
tions, of 3.157 billion hours and total es-
timated monetized costs of $58.148 bil-
lion ($2017) and, in the case of 1545-
0074, a total estimated burden time,
including all other related forms and
schedules for individuals, of 1.784 billion

hours and total estimated monetized costs
of $31.764 billion ($2017). The burden
estimates provided in the OMB control
numbers below are aggregate amounts
that relate to the entire package of forms
associated with the OMB control number,
and will in the future include but not iso-
late the estimated burden of only the
BEAT requirements. These numbers are
therefore unrelated to the future calcula-
tions needed to assess the burden imposed
by the proposed regulations. The Treasury
Department and IRS urge readers to rec-
ognize that these numbers are duplicates
and to guard against overcounting the bur-
den that international tax provisions im-
posed prior to TCJA. No burden estimates

specific to the proposed regulations are
currently available. The Treasury Depart-
ment has not estimated the burden, includ-
ing that of any new information collec-
tions, related to the requirements under
the proposed regulations. Those estimates
would capture both changes made by the
Act and those that arise out of discretion-
ary authority exercised in the proposed
regulations. The Treasury Department and
the IRS request comment on all aspects of
information collection burdens related to
the proposed regulations. In addition,
when available, drafts of IRS forms are
posted for comment at https://apps.irs.
gov/app/picklist/list/draftTaxForms.htm.

Form

Type of Filer

OMB Number(s)

Status

Form 5471 (including Schedule G)

Business (NEW Model)

1545-0123

Published in the FRN on 10/8/18. Public Comment period closes on 12/10/18.

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment- request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd

Individual (NEW Model)

1545-0074

Limited Scope submission (1040 only) on 10/11/18 at OIRA for review. Full ICR submission for all forms in 3/2019. 60 Day FRN not published yet for full collection.

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031

Form 5472 (including Part VIII)

Business (NEW Model)

1545-0123

Published in the FRN on 10/11/18. Public Comment period closes on 12/10/18.

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment- request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd

Form 8858

All other Filers (mainly trusts and estates)

(Legacy system) 1545-1910

Published in the FRN on 10/30/18. Public Comment period closes on11/30/18. ICR in process by the Treasury Department as of 9/6/18.

Link: https://www.federalregister.gov/documents/2018/10/30/2018-23644/agency-information-collection- activities-submission-for-omb-review-comment-request-multiple-irs

Business (NEW Model)

1545-0123

Published in the FRN on 10/8/18. Public Comment period closes on 12/10/18.

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment- request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd

Individual (NEW Model)

1545-0074

Limited Scope submission (1040 only) on 10/11/18 at OIRA for review. Full ICR submission for all forms in 3-2019. 60 Day FRN not published yet for full collection.

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Form

Type of Filer

OMB Number(s)

Status

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031

Form 8991

Business (NEW Model)

1545-0123 Published in the FRN on 10/11/18. Public Comment period closes on 12/10/18.

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment- request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd

###### Related New or Revised Tax Forms

New

Revision of existing form

Number of respondents (2018, estimated)

Form 8991

Y

3,500 - 4,500

Form 5471, Schedule G

Y

15,000 - 25,000

Form 5472, Part VIII

Y

80,000 - 100,000

Form 8858

Y

15,000 - 25,000

The numbers of respondents in the Re-
lated New or Revised Tax Forms table
were estimated by Treasury's Office of
Tax Analysis based on data from IRS
Compliance Planning and Analytics using
tax return data for tax years 2015 and
2016. Data for Form 8991 represent pre-
liminary estimates of the total number of
taxpayers which may be required to file
the new Form 8991. Only certain large
corporate taxpayers with gross receipts of
at least $500 million are expected to file
this form. Data for each of the Forms
5471, 5472, and 8858 represent prelimi-
nary estimates of the total number of tax-
payers that are expected to file these in-
formation returns regardless of whether
that taxpayer must also file Form 8991.

##### 2. Collection of Information - Proposed § 1.59A-3(b)(3)

In contrast to the collections of infor-
mation pursuant to other provisions of
section 59A (as discussed above), the IRS
intends that the information collection re-
quirements pursuant to proposed § 1.59A-
3(b)(3)(i)(C) will be satisfied by the tax-
payer maintaining permanent books and
records that are adequate to verify the
amount charged for the services and the
total services costs incurred by the ren-
derer, including a description of the ser-
vices in question, identification of the ren-
derer and the recipient of the services,
calculation of the amount of profit
mark-up (if any) paid for the services, and
sufficient documentation to allow verifi-

cation of the methods used to allocate and
apportion the costs to the services.

The collection of information con-
tained in proposed § 1.59A-3(b)(3) has
been submitted to the Office of Manage-
ment and Budget for review in accordance
with the Paperwork Reduction Act of
1994 (44 U.S.C. 3507(d)). Comments on
the collection of information should be
sent to the Office of Management and
Budget, Attn: Desk Officer for the Depart-
ment of the Treasury, Office of Informa-
tion and Regulatory Affairs, Washington,
DC 20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer, SE:W:CAR:MP:T:T:
SP, Washington, DC 20224. Comments
on the collection of information should be
received by February 19, 2019.

Comments are specifically requested
concerning:

Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the duties of the IRS, includ-
ing whether the information will have
practical utility;

The accuracy of the estimated burden
associated with the proposed collection of
information (including underlying as-
sumptions and methodology);

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

How the burden of complying with the
proposed collection of information may
be minimized, including through the ap-
plication of automated collection tech-

niques or other forms of information tech-
nology; and

Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchases of services to provide informa-
tion.

The collection of information in pro-
posed § 1.59A-3(b)(3) is mandatory for
taxpayers seeking to exclude certain
amounts paid or accrued to a foreign re-
lated party for services from treatment as
base erosion payments for purposes of
section 59A (the "SCM exception to the
BEAT", as discussed this Part B.2.b. of
the Special Analyses section). Taxpayers
seeking to rely on the SCM exception to
the BEAT are aggregate groups of corpo-
rations with average annual gross receipts
of at least $500 million and that make
payments to foreign related parties. The
information required to be maintained will
be used by the IRS for tax compliance
purposes.

Estimated total annual reporting bur-
den: 5,000 hours.

Estimated average annual burden
hours per respondent: 2.5 hours.

Estimated average cost per respondent
($2017): $238.00.

Estimated number of respondents:
2,000. This estimate is based on the as-
sumption that only a portion of taxpayers
will qualify for the SCM exception, mul-
tiplied by the number of respondents
shown above.

Estimated annual frequency of re-
sponses: Once.

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Based on these estimates, the annual
three-year reporting burden for those
electing the SCM exemption is $0.16
mn/yr ($2017) ($238 x 2000/3, converted
to millions).

An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less it displays 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
required by 26 U.S.C. 6103.

#### D. Regulatory Flexibility Act

It is hereby certified that these regula-
tions will not have a significant economic
impact on a substantial number of small
entities within the meaning of section
601(6) of the Regulatory Flexibility Act
(5 U.S.C. chapter 6). Accordingly, a reg-
ulatory flexibility analysis is not required.
This certification is based on the fact that
these regulations will primarily affect ag-
gregate groups of corporations with aver-
age annual gross receipts of at least $500
million and that make payments to foreign
related parties. Generally only large busi-
nesses both have substantial gross receipts
and make payments to foreign related par-
ties.

Notwithstanding this certification, the
Treasury Department and the IRS invite
comments from the public about the im-
pact of this proposed rule on small enti-
ties.

Pursuant to section 7805(f), these reg-
ulations will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.

##### E. 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
expenditures by state, local, or tribal gov-
ernments, or by the private sector in ex-
cess of that threshold.

#### F. Executive Order 13132: Federalism

Executive Order 13132 (entitled “Fed-
eralism") prohibits an agency from pub-
lishing any rule that has federalism impli-
cations 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 Request for Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the "Addresses"
heading. The Treasury Department and
the IRS request comments on all aspects
of the proposed rules.

All comments will be available at
www.regulations.gov or upon request. A
public hearing will be scheduled if re-
quested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hear-
ing will be published in the Federal Reg-
ister.

### Statement of Availability of IRS Documents

IRS revenue procedures, revenue rul-
ings, notices, and other guidance cited in
this preamble are published in the Internal
Revenue Bulletin and are available from
the Superintendent of Documents, U.S.
Government Publishing Office, Washing-

ton, DC 20402, or by visiting the IRS
website at http://www.irs.gov.

### Drafting Information

The principal authors of the proposed
regulations are Sheila Ramaswamy and
Karen Walny of the Office of Associate
Chief Counsel (International) and Julie
Wang and John P. Stemwedel of the Of-
fice of Associate Chief Counsel (Corpo-
rate). However, other personnel from the
Treasury Department and the IRS partic-
ipated in their development.

### Partial Withdrawal of Proposed Regulations

Accordingly, under the authority of 26
U.S.C. 7805 and 26 U.S.C. 1502,
§ 1.1502-2 of the notice of proposed rule-
making (IA-57-89) published in the Fed-
eral Register on December 30, 1992 (57
FR 62251) is withdrawn.

* * * * *

### 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 revising the entry
for § 1.6038A-2 and adding entries for
§§ 1.59A-1, 1.59A-2, 1.59A-3, 1.59A-4,
1.59A-5, 1.59A-6, 1.59A-7, 1.59A-8,
1.59A-9, 1.59A-10, 1.1502-59A, 1.1502-
100, 1.6038A-2, and 1.6038A-2(a)(3) and
(b)(7) to read in part as follows:

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

§ 1.59A-1 also issued under 26 U.S.C.
59A(i).

§ 1.59A-2 also issued under 26 U.S.C.
59A(i).

§ 1.59A-3 also issued under 26 U.S.C.
59A(i).

§ 1.59A-4 also issued under 26 U.S.C.
59A(i).

§ 1.59A-5 also issued under 26 U.S.C.
59A(i).

§ 1.59A-6 also issued under 26 U.S.C.
59A(i).

§ 1.59A-7 also issued under 26 U.S.C.
59A(i).

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§ 1.59A-8 also issued under 26 U.S.C.
59A(i).

§ 1.59A-9 also issued under 26 U.S.C.
59A(i).

§ 1.59A-10 also issued under 26
U.S.C. 59A(i).

§ 1.1502-59A also issued under 26
U.S.C. 1502.

§ 1.1502-100 also issued under 26
U.S.C. 1502.

§ 1.6038A-2 also issued under 26
U.S.C. 6001, 6038A, and 6038C.

§§ 1.6038A-2(a)(3) and (b)(7) also is-
sued under 26 U.S.C. 6038A(b)(2).

Par. 2. Sections 1.59A-1 through
1.59A-10 are added to read as follows:

§ 1.59A-1 Base erosion and anti-abuse
tax.

(a) Purpose. This section and
§§ 1.59A-2 through 1.59A-10 (collec-
tively, the "section 59A regulations") pro-
vide rules under section 59A to determine
the amount of the base erosion and anti-
abuse tax. Paragraph (b) of this section
provides definitions applicable to the sec-
tion 59A regulations. Section 1.59A-2
provides rules regarding how to determine
whether a taxpayer is an applicable tax-
payer. Section 1.59A-3 provides rules re-
garding base erosion payments and base
erosion tax benefits. Section 1.59A-4 pro-
vides rules for calculating modified tax-
able income. Section 1.59A-5 provides
rules for calculating the base erosion min-
imum tax amount. Section 1.59A-6 pro-
vides rules relating to qualified derivative
payments. Section 1.59A-7 provides rules
regarding application of section 59A to
partnerships. Section 1.59A-8 is reserved
for rules regarding the application of sec-
tion 59A to certain expatriated entities.
Section 1.59A-9 provides an anti-abuse
rule to prevent avoidance of section 59A.
Finally, § 1.59A-10 provides the applica-
bility date for the section 59A regulations.

(b) Definitions. For purposes of this
section and §§ 1.59A-2 through 1.59A-
10, the following terms have the meanings
described in this paragraph (b).

(1) Aggregate group. The term aggre-
gate group means the group of corpora-
tions determined by-

(i) Identifying a controlled group of
corporations as defined in section 1563(a),
except that the phrase "more than 50 per-
cent" is substituted for "at least 80 per-
cent" each place it appears in section
1563(a)(1) and the determination is made
without regard to sections 1563(a)(4) and
(e)(3)(C), and

(ii) Once the controlled group of cor-
porations is determined, excluding foreign
corporations except with regard to income
that is, or is treated as, effectively con-
nected with the conduct of a trade or busi-
ness in the United States under an appli-
cable provision of the Internal Revenue
Code or regulations published under 26
CFR chapter I. Notwithstanding the fore-
going, if a foreign corporation determines
its net taxable income under an applicable
income tax treaty of the United States, it is
excluded from the controlled group of
corporations except with regard to income
taken into account in determining its net
taxable income.

(2) Applicable section 38 credits. The
term applicable section 38 credits means
the credits allowed under section 38 for
the taxable year that are properly allocable
to-

(i) The low-income housing credit de-
termined under section 42(a),

(ii) The renewable electricity produc-
tion credit determined under section 45(a),
and

(iii) The investment credit determined
under section 46, but only to the extent
properly allocable to the energy credit de-
termined under section 48.

(3) Applicable taxpayer. The term ap-
plicable taxpayer means a taxpayer that
meets the requirements set forth in
§ 1.59A-2(b).

(4) Bank. The term bank means an en-
tity defined in section 581.

(5) Base erosion and anti-abuse tax
rate. The term base erosion and anti-
abuse tax rate means the percentage that
the taxpayer applies to its modified tax-
able income for the taxable year to calcu-
late its base erosion minimum tax amount.
See § 1.59A-5(c) for the base erosion and
anti-abuse tax rate applicable to the rele-
vant taxable year.

(6) Business interest expense. The term
business interest expense, with respect to
a taxpayer and a taxable year, has the
meaning provided in § 1.163(j) -1(b)(2).

(7) Deduction. The term deduction
means any deduction allowable under
chapter 1 of subtitle A of the Internal
Revenue Code.

(8) Disallowed business interest ex-
pense carryforward. The term disallowed
business interest expense carryforward
has the meaning provided in § 1.163(j)
-1(b)(9).

(9) Domestic related business interest
expense. The term domestic related busi-
ness interest expense for any taxable year
is the taxpayer's business interest expense
paid or accrued to a related party that is
not a foreign related party.

(10) Foreign person. The term foreign
person means any person who is not a
United States person. For purposes of the
preceding sentence, a United States per-
son has the meaning provided in section
7701(a)(30), except that any individual
who is a citizen of any possession of the
United States (but not otherwise a citizen
of the United States) and who is not a
resident of the United States is not a
United States person. See § 1.59A-7(b)
for rules applicable to partnerships.

(11) Foreign related business interest
expense. The term foreign related busi-
ness interest expense for any taxable year
is the taxpayer's business interest expense
paid or accrued to a foreign related party.

(12) Foreign related party. The term
foreign related party means a foreign per-
son, as defined in paragraph (b)(10) of this
section, that is a related party, as defined
in paragraph (b)(17) of this section, with
respect to the taxpayer. In addition, for
purposes of § 1.59A-3(b)(4)(v)(B), a for-
eign related party also includes the foreign
corporation's home office or a foreign
branch of the foreign corporation. See
§ 1.59A-7(c) for rules applicable to part-
nerships.

(13) Gross receipts. The term gross
receipts has the meaning provided in
§ 1.448-1T(f)(2)(iv).

(14) Member of an aggregate group.
The term member of an aggregate group
means a corporation that is included in an
aggregate group, as defined in paragraph
(b)(1) of this section.

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(15) Registered securities dealer. The
term registered securities dealer means
any dealer as defined in section 3(a)(5) of
the Securities Exchange Act of 1934 that
is registered, or required to be registered,
under section 15 of the Securities Ex-
change Act of 1934.

(16) Regular tax liability. The term
regular tax liability has the meaning pro-
vided in section 26(b).

(17) Related party-(i) In general. A
related party, with respect to an applica-
ble taxpayer, is-

(A) Any 25-percent owner of the tax-
payer;

(B) Any person who is related (within
the meaning of section 267(b) or
707(b)(1)) to the taxpayer or any 25-
percent owner of the taxpayer; or

(C) A controlled taxpayer within the
meaning of § 1.482-1(i)(5) together with,
or with respect to, the taxpayer.

(ii) 25-percent owner. With respect to
any corporation, a 25-percent owner
means any person who owns at least 25
percent of-

(A) The total voting power of all
classes of stock of the corporation entitled
to vote; or

(B) The total value of all classes of
stock of the corporation.

(iii) Application of section 318. Section
318 applies for purposes of paragraphs
(b)(17)(i) and (ii) of this section, except
that-

(A) "10 percent" is substituted for "50
percent" in section 318(a)(2)(C); and

(B) Section 318(a)(3)(A) through (C)
are not applied so as to consider a United
States person as owning stock that is
owned by a person who is not a United
States person.

(18) TLAC long-term debt required
amount. The term TLAC long-term debt
required amount means the specified min-
imum amount of debt that is required pur-
suant to 12 CFR 252.162(a).

(19) TLAC securities amount. The term
TLAC securities amount is the sum of the
adjusted issue prices (as determined for
purposes of § 1.1275-1(b)) of all TLAC
securities issued and outstanding by the
taxpayer.

(20) TLAC security. The term TLAC
security means an eligible internal debt
security, as defined in 12 CFR 252.161.

(21) Unrelated business interest ex-
pense. The term unrelated business inter-
est expense for any taxable year is the
taxpayer's business interest expense paid
or accrued to a party that is not a related
party.

§ 1.59A-2 Applicable taxpayer.

(a) Scope. This section provides rules
for determining whether a taxpayer is an
applicable taxpayer. Paragraph (b) of this
section defines an applicable taxpayer.
Paragraph (c) of this section provides
rules for determining whether a taxpayer
is an applicable taxpayer by reference to
the aggregate group of which the taxpayer
is a member. Paragraph (d) of this section
provides rules regarding the gross receipts
test. Paragraph (e) of this section provides
rules regarding the base erosion percent-
age calculation. Paragraph (f) of this sec-
tion provides examples illustrating the
rules of this section.

(b) Applicable taxpayer. For purposes
of section 59A, a taxpayer is an applicable
taxpayer with respect to any taxable year
if the taxpayer-

(1) Is a corporation, but not a regulated
investment company, a real estate invest-
ment trust, or an S corporation;

(2) Satisfies the gross receipts test of
paragraph (d) of this section; and

(3) Satisfies the base erosion percent-
age test of paragraph (e) of this section.

(c) Aggregation rules. A taxpayer that
is a member of an aggregate group deter-
mines its gross receipts and its base ero-
sion percentage on the basis of the aggre-
gate group as of the end of the taxpayer's
taxable year. For these purposes, transac-
tions that occur between members of the
taxpayer's aggregate group that were
members of the aggregate group as of the
time of the transaction are not taken into
account. In the case of a foreign corpora-
tion that is a member of an aggregate
group, only transactions that relate to in-
come effectively connected with, or
treated as effectively connected with, the
conduct of a trade or business in the
United States are disregarded for this pur-
pose. In the case of a foreign corporation
that is a member of an aggregate group
and that determines its net taxable income
under an applicable income tax treaty of
the United States, only transactions that

are taken into account in determining its
net taxable income are disregarded for this
purpose.

(d) Gross receipts test-(1) Amount of
gross receipts. A taxpayer, or the aggre-
gate group of which the taxpayer is a
member, satisfies the gross receipts test if
it has average annual gross receipts of at
least $500,000,000 for the three-taxable-
year period ending with the preceding tax-
able year.

(2) Period for measuring gross re-
ceipts for an aggregate group-(i) Calen-
dar year taxpayers that are members of an
aggregate group. In the case of a corpo-
ration that has a calendar year and that is
a member of an aggregate group, the cor-
poration applies the gross receipts test in
paragraph (d)(1) of this section on the
basis of the gross receipts of the aggregate
group for the three-calendar-year period
ending with the preceding calendar year,
without regard to the taxable year of any
other member of the aggregate group.

(ii) Fiscal year taxpayers that are
members of an aggregate group. In the
case of a corporation that has a fiscal year
and that is a member of an aggregate
group, the corporation applies the gross
receipts test in paragraph (d)(1) of this
section on the basis of the gross receipts
of the aggregate group for the three-fiscal-
year period ending with the preceding fis-
cal year of the corporation, without regard
to the taxable year of any other member of
the aggregate group.

(3) Gross receipts of foreign corpora-
tions. With respect to any foreign corpo-
ration, only gross receipts that are taken
into account in determining income that is
effectively connected with the conduct of
a trade or business within the United
States are taken into account for purposes
of paragraph (d)(1) of this section. In the
case of a foreign corporation that is a
member of an aggregate group and that
determines its net taxable income under
an applicable income tax treaty of the
United States, the foreign corporation in-
cludes only gross receipts that are attrib-
utable to transactions taken into account
in determining its net taxable income.

(4) Gross receipts of an insurance
company. For any corporation that is sub-
ject to tax under subchapter L or any
corporation that would be subject to tax
under subchapter L if that corporation

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were a domestic corporation, gross re-
ceipts are reduced by return premiums,
but are not reduced by any reinsurance
premiums paid or accrued.

(5) Gross receipts from partnerships.
See § 1.59A-7(b)(5)(ii).

(6) Taxpayer not in existence for entire
three-year period. If a taxpayer was not in
existence for the entire three-year period
referred to in paragraph (d)(1) of this sec-
tion, the taxpayer determines a gross re-
ceipts average for the period that it was in
existence, taking into account paragraph
(d)(7) of this section.

(7) Treatment of short taxable year. If
a taxpayer has a taxable year of fewer than
12 months (a short period), gross receipts
are annualized by multiplying the gross
receipts for the short period by 365 and
dividing the result by the number of days
in the short period.

(8) Treatment of predecessors. For pur-
poses of determining gross receipts under
this paragraph (d), any reference to a tax-
payer includes a reference to any prede-
cessor of the taxpayer. For this purpose, a
predecessor includes the distributor or
transferor corporation in a transaction de-
scribed in section 381(a) in which the
taxpayer is the acquiring corporation.

(9) Reductions in gross receipts. Gross
receipts for any taxable year are reduced
by returns and allowances made during
that taxable year.

(10) Gross receipts of consolidated
groups. For purposes of section 59A, the
gross receipts of a consolidated group are
determined by aggregating the gross re-
ceipts of all of the members of the con-
solidated group. See § 1.1502-59A(b).

(e) Base erosion percentage test-(1) In
general. A taxpayer, or the aggregate
group of which the taxpayer is a member,
satisfies the base erosion percentage test if
its base erosion percentage is three per-
cent or higher.

(2) Base erosion percentage test for
banks and registered securities dealers-
(i) In general. A taxpayer that is a member
of an affiliated group (as defined in sec-
tion 1504(a)(1)) that includes a bank (as
defined in § 1.59A-1(b)(4)) or a registered
securities dealer (as defined in section
§ 1.59A-1(b)(15)) satisfies the base ero-
sion percentage test if its base erosion
percentage is two percent or higher.

(ii) Aggregate groups. An aggregate
group of which a taxpayer is a member
and that includes a bank or a registered
securities dealer that is a member of an
affiliated group (as defined in section
1504(a)(1)) will be subject to the base
erosion percentage threshold described in
paragraph (e)(2)(i) of this section.

(iii) De minimis exception for banking
and registered securities dealer activities.
An aggregate group that includes a bank
or a registered securities dealer that is a
member of an affiliated group (as defined
in section 1504(a)(1)) is not treated as
including a bank or registered securities
dealer for purposes of paragraph (e)(2)(i)
of this section for a taxable year, if, in that
taxable year, the total gross receipts of the
aggregate group attributable to the bank or
the registered securities dealer represent
less than two percent of the total gross
receipts of the aggregate group, as deter-
mined under paragraph (d) of this section.
When there is no aggregate group, a con-
solidated group that includes a bank or a
registered securities dealer is not treated
as including a bank or registered securities
dealer for purposes of paragraph (e)(2)(i)
of this section for a taxable year, if, in that
taxable year, the total gross receipts of the
consolidated group attributable to the
bank or the registered securities dealer
represent less than two percent of the total
gross receipts of the consolidated group,
as determined under paragraph (d) of this
section.

(3) Computation of base erosion per-
centage-(i) In general. The taxpayer's
base erosion percentage for any taxable
year is determined by dividing-

(A) The aggregate amount of the tax-
payer's (or in the case of a taxpayer that is
a member of an aggregate group, the ag-
gregate group's) base erosion tax benefits
(as defined in § 1.59A-3(c)(1)) for the
taxable year, by

(B) The sum of-

(1) The aggregate amount of the de-
ductions (including deductions for base
erosion tax benefits described in § 1.59A-
3(c)(1)(i) and base erosion tax benefits
described in § 1.59A-3(c)(1)(ii)) allow-
able to the taxpayer (or in the case of a
taxpayer that is a member of an aggregate
group, any member of the aggregate
group) under chapter 1 of Subtitle A for
the taxable year;

(2) The base erosion tax benefits de-
scribed in § 1.59A-3(c)(1)(iii) with re-
spect to any premiums or other consider-
ation paid or accrued by the taxpayer (or
in the case of a taxpayer that is a member
of an aggregate group, any member of the
aggregate group) to a foreign related party
for any reinsurance payment taken into
account under sections 803(a)(1)(B) or
832(b)(4)(A) for the taxable year; and

(3) Any amount paid or accrued by the
taxpayer (or in the case of a taxpayer that
is a member of an aggregate group, any
member of the aggregate group) resulting
in a reduction of gross receipts described
in § 1.59A-3(c)(1)(iv) for the taxable
year.

(ii) Certain items not taken into ac-
count in denominator. Except as provided
in paragraph (e)(3)(viii) of this section,
the amount under paragraph (e)(3)(i)(B)
of this section is determined by not taking
into account-

(A) Any deduction allowed under sec-
tion 172, 245A, or 250 for the taxable
year;

(B) Any deduction for amounts paid or
accrued for services to which the excep-
tion described in § 1.59A-3(b)(3)(i) ap-
plies;

(C) Any deduction for qualified deriv-
ative payments that are not treated as base
erosion payments by reason of § 1.59A-
3(b)(3)(ii);

(D) Any exchange loss within the
meaning of § 1.988-2 from a section 988
transaction as described in § 1.988-
1(a)(1);

(E) Any deduction for amounts paid or
accrued to foreign related parties with re-
spect to TLAC securities that are not
treated as base erosion payments by rea-
son of § 1.59A-3(b)(3)(v); and

(F) Any deduction not allowed in de-
termining taxable income from the taxable
year.

(iii) Effect of treaties on base erosion
percentage determination. In computing
the base erosion percentage, the amount of
the base erosion tax benefit with respect to
a base erosion payment on which tax is
imposed by section 871 or 881 and with
respect to which tax has been deducted
and withheld under section 1441 or 1442
is equal to the gross amount of the base
erosion tax benefit before the application

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of the applicable treaty multiplied by a
fraction equal to-

(A) The rate of tax imposed without
regard to the treaty, reduced by the rate of
tax imposed under the treaty; over

(B) The rate of tax imposed without
regard to the treaty.

(iv) Amounts paid or accrued between
members of a consolidated group. See
§ 1.1502-59A(b).

(v) Deductions and base erosion tax
benefits from partnerships. See § 1.59A-
7(b).

(vi) Mark-to-market positions. For any
position with respect to which the tax-
payer (or in the case of a taxpayer that is
a member of an aggregate group, a mem-
ber of the aggregate group) applies a
mark-to-market method of accounting for
federal income tax purposes, the taxpayer
must determine its gain or loss with re-
spect to that position for any taxable year
by combining all items of income, gain,
loss, or deduction arising with respect to
the position during the taxable year, re-
gardless of how each item arises (includ-
ing from a payment, accrual, or mark) for
purposes of paragraph (e)(3) of this sec-
tion. See paragraph (f)(1) of this section
(Example 1) for an illustration of this rule.
For purposes of section 59A, a taxpayer
computes its losses resulting from posi-
tions subject to a mark-to-market regime
under the Internal Revenue Code based on
a single mark for the taxable year on the
earlier of the last business day of the tax-
payer's taxable year and the disposition
(whether by sale, offset, exercise, termi-
nation, expiration, maturity, or other
means) of the position, regardless of how
frequently a taxpayer marks to market for
other purposes. See § 1.59A-3(b)(2)(iii)
for the application of this rule for pur-
poses of determining the amount of base
erosion payments.

(vii) Computing the base erosion per-
centage when members of an aggregate
group have different taxable years-(A)
Calendar year taxpayers that are mem-
bers of an aggregate group. In the case of
a taxpayer that has a calendar year and
that is a member of an aggregate group,
the taxpayer applies the base erosion per-
centage in paragraph (e)(1) or (2) of this
section (and determines the base erosion
percentage used in § 1.59A-4(b)(2)(ii))
on the basis of the base erosion percentage

for the calendar year in the manner set
forth in paragraph (e)(3) of this section,
without regard to the taxable year of any
other member of the aggregate group. See
paragraph (f)(2) of this section (Example
2) for an illustration of this rule. For pur-
poses of applying paragraph (e)(3)(vi) of
this section, all members of the aggregate
group are treated as having a calendar
year.

(B) Fiscal year taxpayers that are
members of an aggregate group. In the
case of a taxpayer that has a fiscal year
and that is a member of an aggregate
group, the taxpayer applies the base ero-
sion percentage test in paragraph (e)(1) or
(2) of this section (and determines the
base erosion percentage used in § 1.59A-
4(b)(2)(ii)) on the basis of the base ero-
sion percentage for its fiscal year in the
manner set forth in paragraph (e)(3) of
this section, without regard to the taxable
year of any other member of the aggregate
group. See paragraph (f)(2) of this section
(Example 2) for an illustration of this rule.
For purposes of applying paragraph
(e)(3)(vi) of this section, all members of
the aggregate group are treated as having
the taxpayer's fiscal year.

(C) Transition rule for aggregate
group members with different taxable
years. For purposes of this paragraph
(e)(3)(vii), if the taxpayer has a different
taxable year than another member of the
taxpayer's aggregate group, each taxpayer
that is a member of the aggregate group
determines the availability of the excep-
tion in § 1.59A-3(b)(3)(vi) (amounts paid
or accrued in taxable years beginning be-
fore January 1, 2018) by using the taxpay-
er's taxable year for all members of the
taxpayer's aggregate group.

(viii) Certain payments that qualify for
the effectively connected income excep-
tion and another base erosion payment
exception. Subject to paragraph (c) of this
section (transactions that occur between
members of the taxpayer's aggregate
group), a payment that qualifies for the
effectively connected income exception
described in § 1.59A-3(b)(3)(iii) and ei-
ther the service cost method exception
described in § 1.59A-3(b)(3)(i), the qual-
ified derivative payment exception de-
scribed in § 1.59A-3(b)(3)(ii), or the
TLAC exception described in § 1.59A-
3(b)(3)(v) is not subject to paragraph

(e)(3)(ii)(B), (C), or (E) of this section and
those amounts are included in the denom-
inator of the base erosion percentage if the
foreign related party who received the
payment is not a member of the aggregate
group.

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

(1) Example 1: Mark-to-market. (i) Facts. (A)
Foreign Parent (FP) is a foreign corporation that
owns all of the stock of domestic corporation (DC)
and foreign corporation (FC). FP and FC are foreign
related parties of DC under § 1.59A-1(b)(12) but not
members of the aggregate group. DC is a registered
securities dealer that does not hold any securities for
investment. On January 1 of year 1, DC enters into
two interest rate swaps for a term of two years, one
with unrelated Customer A as the counterparty (po-
sition A) and one with unrelated Customer B as the
counterparty (position B). Each of the swaps pro-
vides for semiannual periodic payments to be made
or received on June 30 and December 31. No party
makes any payment to any other party upon initia-
tion of either of the swaps (that is, they are entered
into at-the-money). DC is required to mark-to-
market positions A and B for federal income tax
purposes. DC is a calendar year taxpayer.

(B) For position A in year 1, DC makes a pay-
ment of $150 on June 30, and receives a payment of
$50 on December 31. There are no other payments in
year 1. On December 31, position A has a value to
DC of $110 (that is, position A is in-the- money by
$110).

(C) For position B in year 1, DC receives a
payment of $120 on June 30, and makes a payment
of $30 on December 31. There are no other payments
in year 1. On December 31, position B has a value to
DC of ($130) (that is, position B is out-of-the-money
by $130).

(ii) Analysis. (A) With respect to position A,
based on the total amount of payments made and
received in year 1, DC has a net deduction of $100.
In addition, DC has a mark-to-market gain of $110.
As described in paragraph (e)(3)(vi) of this section,
the mark-to-market gain of $110 is combined with
the net deduction of $100 resulting from the pay-
ments. Therefore, with respect to position A, DC has
a gain of $10, and thus has no deduction in year 1 for
purposes of section 59A.

(B) With respect to position B, based on the total
amount of payments made and received in year 1,
DC has net income of $90. In addition, DC has a
mark-to-market loss of $130. As described in para-
graph (e)(3)(vi) of this section, the mark-to-market
loss of $130 is combined with the net income of $90
resulting from the payments. Therefore, with respect
to position B, DC has a loss of $40, and thus has a
$40 deduction in year 1 for purposes of section 59A.

(2) Example 2: Determining gross receipts test
and base erosion percentage when aggregate group
members have different taxable years. (i) Facts. For-
eign Parent (FP) is a foreign corporation that owns
all of the stock of a domestic corporation that uses a
calendar year (DC1) and a domestic corporation that
uses a fiscal year ending on January 31 (DC2). FP
does not have income effectively connected with the
conduct of a trade or business within the United

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States. DC2 is a member of DC1's aggregate group,
and DC1 is a member of DC2's aggregate group.

(ii) Analysis. (A) For DC1's tax return filed for
the calendar year ending December 31, 2026, DC1
determines its gross receipts based on gross receipts
of DC1 and DC2 for the calendar years ending
December 31, 2023, December 31, 2024, and De-
cember 31, 2025. Further, DC1 determines its base
erosion percentage for the calendar year ending De-
cember 31, 2026, on the basis of transactions of DC1
and DC2 for the calendar year ending December 31,
2026.

(B) For DC2's tax return filed for the fiscal year
ending January 31, 2027, DC2 determines its gross
receipts based on gross receipts of DC2 and DC1 for
the fiscal years ending January 31, 2024, January 31,
2025, and January 31, 2026. Further, DC2 deter-
mines its base erosion percentage for the fiscal year
ending January 31, 2027, on the basis of transactions
of DC2 and DC1 for the fiscal year ending January
31, 2027.

§ 1.59A-3 Base erosion payments and
base erosion tax benefits.

(a) Scope. This section provides defi-
nitions and related rules regarding base
erosion payments and base erosion tax
benefits. Paragraph (b) of this section pro-
vides definitions and rules regarding base
erosion payments. Paragraph (c) of this
section provides rules for determining the
amount of base erosion tax benefits. Para-
graph (d) of this section provides exam-
ples illustrating the rules described in this
section.

(b) Base erosion payments-(1) In
general. Except as provided in paragraph
(b)(3) of this section, a base erosion pay-
ment means-

(i) Any amount paid or accrued by the
taxpayer to a foreign related party of the
taxpayer and with respect to which a de-
duction is allowable under chapter 1 of
subtitle A of the Internal Revenue Code;

(ii) Any amount paid or accrued by the
taxpayer to a foreign related party of the
taxpayer in connection with the acquisi-
tion of property by the taxpayer from the
foreign related party if the character of the
property is subject to the allowance for
depreciation (or amortization in lieu of
depreciation);

(iii) Any premium or other consider-
ation paid or accrued by the taxpayer to a
foreign related party of the taxpayer for
any reinsurance payments that are taken
into account under section 803(a)(1)(B) or
832(b)(4)(A); or

(iv) Any amount paid or accrued by the
taxpayer that results in a reduction of the

gross receipts of the taxpayer if the
amount paid or accrued is with respect
to-

(A) A surrogate foreign corporation, as
defined in section 59A(d)(4)(C)(i), that is
a related party of the taxpayer (but only if
the corporation first became a surrogate
foreign corporation after November 9,
2017); or

(B) A foreign person that is a member
of the same expanded affiliated group, as
defined in section 59A(d)(4)(C)(ii), as the
surrogate foreign corporation.

(2) Operating rules-(i) Amounts paid
or accrued in cash and other consider-
ation. For purposes of paragraph (b)(1) of
this section, an amount paid or accrued
includes an amount paid or accrued using
any form of consideration, including cash,
property, stock, or the assumption of a
liability.

(ii) Transactions providing for net pay-
ments. Except as otherwise provided in
paragraph (b)(2)(iii) of this section or as
permitted by the Internal Revenue Code
or the regulations, the amount of any base
erosion payment is determined on a gross
basis, regardless of any contractual or le-
gal right to make or receive payments on
a net basis. For this purpose, a right to
make or receive payments on a net basis
permits the parties to a transaction or se-
ries of transactions to settle obligations by
offsetting any amounts to be paid by one
party against amounts owed by that party
to the other party. For example, any pre-
mium or other consideration paid or ac-
crued by a taxpayer to a foreign related
party for any reinsurance payments is not
reduced by or netted against other
amounts owed to the taxpayer from the
foreign related party or by reserve adjust-
ments or other returns.

(iii) Amounts paid or accrued with re-
spect to mark-to-market position. For any
transaction with respect to which the tax-
payer applies the mark-to-market method
of accounting for federal income tax pur-
poses, the rules set forth in § 1.59A-
2(e)(3)(vi) apply to determine the amount
of base erosion payment.

(iv) Coordination among categories of
base erosion payments. A payment that
does not satisfy the criteria of one cate-
gory of base erosion payment may be a
base erosion payment described in one of
the other categories.

(v) Certain domestic passthrough enti-
ties-(A) In general. If an applicable tax-
payer pays or accrues an amount that
would be a base erosion payment except
for the fact that the payment is made to a
specified domestic passthrough, then the
applicable taxpayer will be treated as
making a base erosion payment to each
specified foreign related party for pur-
poses of section 59A and §§ 1.59A-2
through 1.59A-10. This rule has no effect
on the taxation of the specified domestic
passthrough under subchapter J or sub-
chapter M of the Code (as applicable).

(B) Amount of base erosion payment.
The amount of the base erosion payment
is equal to the lesser of the amount paid or
accrued by the applicable taxpayer to or
for the benefit of the specified domestic
passthrough and the amount of the deduc-
tion allowed under section 561, 651 or
661 to the specified domestic passthrough
with respect to amounts paid, credited,
distributed, deemed distributed or re-
quired to be distributed to a specified for-
eign related party.

(C) Specified domestic passthrough.
For purposes of this paragraph (b)(2)(v),
specified domestic passthrough means:

(1) A domestic trust that is not a
grantor trust under subpart E of subchap-
ter J of Chapter 1 of the Code ("domestic
trust") and which domestic trust is al-
lowed a deduction under section 651 or
section 661 with respect to amounts paid,
credited, or required to be distributed to a
specified foreign related party;

(2) A real estate investment trust (as
defined in § 1.856-1(a)) that pays, or is
deemed to pay, a dividend to a specified
foreign related party for which a deduc-
tion is allowed under section 561; or

(3) A regulated investment company
(as defined in § 1.851-1(a)) that pays, or
is deemed to pay, a dividend to a specified
foreign related party for which a deduc-
tion is allowed under section 561.

(D) Specified foreign related party. For
purposes of this paragraph (b)(2)(v), spec-
ified foreign related party means, with re-
spect to a specified domestic passthrough,
any foreign related party of an applicable
taxpayer that is a direct or indirect bene-
ficiary or shareholder of the specified do-
mestic passthrough.

(vi) Transfers of property to related
taxpayers. If a taxpayer owns property of

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a character subject to the allowance for
depreciation (or amortization in lieu of
depreciation) with respect to which para-
graph (c)(1)(ii) of this section applies, and
the taxpayer sells, exchanges, or other-
wise transfers the property to another tax-
payer that is a member of an aggregate
group that includes the taxpayer, any de-
duction for depreciation (or amortization
in lieu of deprecation) by the transferee
taxpayer remains subject to paragraph
(c)(1)(ii) of this section to the same extent
the amounts would have been so subject
in the hands of the transferor. See para-
graph (d)(7) of this section (Example 7)
for an illustration of this rule.

(3) Exceptions to base erosion pay-
ment. Paragraph (b)(1) of this section does
not apply to the types of payments or
accruals described in paragraphs (b)(3)(i)
through (vii) of this section.

(i) Certain services cost method
amounts-(A) In general. Amounts paid or
accrued by a taxpayer to a foreign related
party for services that meet the require-
ments in paragraph (b)(3)(i)(B) of this
section, but only to the extent of the total
services cost of those services. Thus, any
amount paid or accrued to a foreign re-
lated party in excess of the total services
cost of services eligible for the services
cost method exception (the mark-up com-
ponent) remains a base erosion payment.
For this purpose, services are an activity
as defined in § 1.482-9(1)(2) performed by
a foreign related party (the renderer) that
provides a benefit as defined in § 1.482-
9(l)(3) to the taxpayer (the recipient).

(B) Eligibility for the services cost
method exception. To be eligible for the
services cost method exception, all of the
requirements of § 1.482-9(b) must be sat-
isfied, except that:

(1) The requirements of § 1.482-
9(b)(5) do not apply for purposes of de-
termining eligibility for the service cost
method exception in this section; and

(2) Adequate books and records must
be maintained as described in paragraph
(b)(3)(i)(C) of this section, instead of as
described in § 1.482-9(b)(6).

(C) Adequate books and records. Per-
manent books of account and records
must be maintained for as long as the
costs with respect to the services are in-
curred by the renderer. The books and
records must be adequate to permit veri-

fication by the Commissioner of the
amount charged for the services and the
total services costs incurred by the ren-
derer, including a description of the ser-
vices in question, identification of the ren-
derer and the recipient of the services,
calculation of the amount of profit
mark-up (if any) paid for the services, and
sufficient documentation to allow verifi-
cation of the methods used to allocate and
apportion the costs to the services in ques-
tion in accordance with § 1.482-9(k).

(D) Total services cost. For purposes of
this section, total services cost has the
same meaning as total services costs in
§ 1.482-9(j).

(ii) Qualified derivative payments. Any
qualified derivative payment as described
in § 1.59A-6.

(iii) Effectively connected income-
(A) In general. Amounts paid or accrued
to a foreign related party that are subject
to federal income taxation as income that
is, or is treated as, effectively connected
with the conduct of a trade or business in
the United States under an applicable pro-
vision of the Internal Revenue Code or
regulations. This paragraph (b)(3)(iii) ap-
plies only if the taxpayer receives a with-
holding certificate on which the foreign
related party claims an exemption from
withholding under section 1441 or 1442
because the amounts are effectively con-
nected income.

(B) Application to certain treaty resi-
dents. Notwithstanding paragraph (b)(3)
(iii)(A) of this section, if a foreign related
party determines its net taxable income
under an applicable income tax treaty,
amounts paid or accrued to the foreign
related party taken into account in deter-
mining its net taxable income.

(iv) Exchange loss on a section 988
transaction. Any exchange loss within the
meaning of § 1.988-2 from a section 988
transaction described in § 1.988-1(a)(1)
that is an allowable deduction and that
results from a payment or accrual by the
taxpayer to a foreign related party of the
taxpayer.

(v) Amounts paid or accrued with re-
spect to TLAC securities-(A) In general.
Except as provided in paragraph (b)(3)
(v)(B) of this section, amounts paid or
accrued to foreign related parties with re-
spect to TLAC securities.

(B) Limitation on exclusion for TLAC
securities. The amount excluded under
paragraph (b)(3)(v)(A) of this section is
no greater than the product of the scaling
ratio and amounts paid or accrued to for-
eign related parties with respect to TLAC
securities for which a deduction is al-
lowed.

(C) Scaling ratio. For purposes of this
paragraph (b)(3)(v), the scaling ratio for a
taxable year of a taxpayer is a fraction the
numerator of which is the average TLAC
long-term debt required amount and the
denominator of which is the average
TLAC securities amount. The scaling ra-
tio may in no event be greater than one.

(D) Average TLAC securities amount.
The average TLAC securities amount for
a taxable year is the average of the TLAC
securities amounts for the year, computed
at regular time intervals in accordance
with this paragraph. The TLAC securities
amounts used in calculating the average
TLAC securities amount is computed on a
monthly basis.

(E) Average TLAC long-term debt re-
quired amount. The average TLAC long-
term debt required amount for a taxable
year is the average of the TLAC long-term
debt required amounts, computed on a
monthly basis.

(vi) Amounts paid or accrued in tax-
able years beginning before January 1,
2018. Any amount paid or accrued in tax-
able years beginning before January 1,
2018.

(vii) Business interest carried forward
from taxable years beginning before Jan-
uary 1, 2018. Any disallowed business
interest described in section 163(j)(2) that
is carried forward from a taxable year
beginning before January 1, 2018.

(4) Rules for determining the amount
of certain base erosion payments. The fol-
lowing rules apply in determining the de-
ductible amount that is a base erosion
payment.

(i) Interest expense allocable to a for-
eign corporation's effectively connected
income-(A) Method described in
§ 1.882-5(b) through (d). A foreign cor-
poration that has interest expense allo-
cable under section 882(c) to income
that is, or is treated as, effectively con-
nected with the conduct of a trade or
business within the United States apply-
ing the method described in § 1.882-

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5(b) through (d) has base erosion pay-
ments under paragraph (b)(1)(i) of this
section for the taxable year equal to the
sum of-

(1) The interest expense on a liability
described in § 1.882-5(a)(1)(ii)(A) or (B)
(direct allocations) or interest expense on
U.S .- booked liabilities, as described in
§ 1.882-5(d)(2), that is paid or accrued by
the foreign corporation to a foreign related
party; and

(2) The interest expense on U.S .-
connected liabilities in excess of U.S .-
booked liabilities (hereafter, excess
U.S .- connected liabilities), as described in
§ 1.882-5(d)(5), multiplied by a fraction,
the numerator of which is the foreign cor-
poration's average worldwide liabilities
due to a foreign related party, and the
denominator of which is the foreign cor-
poration's average total worldwide liabil-
ities. For purposes of this fraction, any
liability that is a U.S .- booked liability or
is subject to a direct allocation is excluded
from both the numerator and the denom-
inator of the fraction.

(B) Separate currency pools method. A
foreign corporation that has interest ex-
pense allocable under section 882(c) to
income that is, or is treated as, effectively
connected with the conduct of a trade or
business within the United States applying
the separate currency pools method de-
scribed in § 1.882-5(e) has a base erosion
payment under paragraph (b)(1)(i) of this
section for the taxable year equal to the
sum of-

(1) The interest expense on a liability
described in § 1.882-5(a)(1)(ii)(A) or (B)
(direct allocations) that is paid or accrued
by the foreign corporation to a foreign
related party; and

(2) The interest expense attributable to
each currency pool, as described in
§ 1.882-5(e)(1)(iii), multiplied by a frac-
tion equal to the foreign corporation's av-
erage worldwide liabilities denominated
in that currency and that is due to a for-
eign related party over the foreign corpo-
ration's average total worldwide liabilities
denominated in that currency. For pur-
poses of this fraction, any liability that has
a direct allocation is excluded from both
the numerator and the denominator.

(C) U.S .- booked liabilities in excess of
U.S .- connected liabilities. A foreign cor-
poration that is computing its interest ex-

pense under the method described in
§ 1.882-5(b) through (d) and that has
U.S .- booked liabilities in excess of U.S .-
connected liabilities must apply the scal-
ing ratio pro-rata to all interest expense
consistent with § 1.882-5(d)(4) for pur-
poses of determining the amount of allo-
cable interest expense that is a base ero-
sion payment.

(D) Liability reduction election. A for-
eign corporation that elects to reduce its
liabilities under § 1.884-1(e)(3) must re-
duce its liabilities on a pro-rata basis, con-
sistent with the requirements under
§ 1.884-1(e)(3)(iii), for purposes of de-
termining the amount of allocable interest
expense that is a base erosion payment.

(ii) Other deductions allowed with re-
spect to effectively connected income. A
deduction allowed under § 1.882-4 for an
amount paid or accrued by the foreign
corporation to a foreign related party (in-
cluding a deduction for an amount appor-
tioned in part to effectively connected in-
come and in part to income that is not
effectively connected income) is treated
as a base erosion payment under para-
graph (b)(1) of this section.

(iii) Depreciable property. Any
amount paid or accrued by the foreign
corporation to a foreign related party of
the taxpayer in connection with the acqui-
sition of property by the foreign corpora-
tion from the foreign related party if the
character of the property is subject to the
allowance for depreciation (or amortiza-
tion in lieu of depreciation) is a base ero-
sion payment to the extent the property so
acquired is used, or held for use, in the
conduct of a trade or business within the
United States.

(iv) Coordination with ECI exception.
For purposes of this paragraph (b)(4),
amounts paid or accrued to a foreign re-
lated party treated as effectively con-
nected income (or, in the case of foreign
related party that determines net taxable
income under an applicable income tax
treaty, such amounts that are taken into
account in determining net taxable in-
come) are not treated as paid to a foreign
related party. Additionally, for purposes
of paragraph (b)(4)(i)(A)(2) or (b)(4)
(i)(B)(2) of this section, a liability with
interest paid or accrued to a foreign re-
lated party that is treated as effectively
connected income (or, in the case of for-

eign related party that determines net tax-
able income under an applicable income
tax treaty, interest taken into account in
determining net taxable income) is treated
as a liability not due to a foreign related
party.

(v) Coordination with certain tax trea-
ties-(A) Allocable expenses. If a foreign
corporation elects to determine its taxable
income pursuant to business profits provi-
sions of an income tax treaty rather than
provisions of the Internal Revenue Code,
or the regulations published under 26 CFR
chapter I, for determining effectively con-
nected income, and the foreign corpora-
tion does not apply §§ 1.882-5 and
1.861-8 to allocate interest and other de-
ductions, then in applying paragraphs
(b)(4)(i) and (ii) of this section, the for-
eign corporation must determine whether
each allowable deduction attributed to the
permanent establishment in its determina-
tion of business profits is a base erosion
payment under paragraph (b)(1) of this
section.

(B) Internal dealings under certain in-
come tax treaties. If, pursuant to the terms
of an applicable income tax treaty, a for-
eign corporation determines the profits at-
tributable to a permanent establishment
based on the assets used, risks assumed,
and functions performed by the permanent
establishment, then any deduction attrib-
utable to any amount paid or accrued (or
treated as paid or accrued) by the perma-
nent establishment to the foreign corpora-
tion's home office or to another branch of
the foreign corporation (an "internal deal-
ing") is a base erosion payment to the
extent such payment or accrual is de-
scribed under paragraph (b)(1) of this sec-
tion.

(vi) Business interest expense arising
in taxable years beginning after Decem-
ber 31, 2017. Any disallowed business
interest expense described in section
163(j)(2) that resulted from a payment or
accrual to a foreign related party that first
arose in a taxable year beginning after
December 31, 2017, is treated as a base
erosion payment under paragraph (b)(1)(i)
of this section in the year that the business
interest expense initially arose. See para-
graph (c)(4) of this section for rules that
apply when business interest expense is
limited under section 163(j)(1) in order to
determine whether the disallowed busi-

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ness interest is attributed to business in-
terest expense paid to a person that is not
a related party, a foreign related party, or
a domestic related party.

(c) Base erosion tax benefit-(1) In
general. Except as provided in paragraph
(c)(2) of this section, a base erosion tax
benefit means:

(i) In the case of a base erosion pay-
ment described in paragraph (b)(1)(i) of
this section, any deduction that is allowed
under chapter 1 of subtitle A of the Inter-
nal Revenue Code for the taxable year
with respect to that base erosion payment;

(ii) In the case of a base erosion pay-
ment described in paragraph (b)(1)(ii) of
this section, any deduction allowed under
chapter 1 of subtitle A of the Internal
Revenue Code for the taxable year for
depreciation (or amortization in lieu of
depreciation) with respect to the property
acquired with that payment;

(iii) In the case of a base erosion pay-
ment described in paragraph (b)(1)(iii) of
this section, any reduction under section
803(a)(1)(B) in the gross amount of pre-
miums and other consideration on insur-
ance and annuity contracts for premiums
and other consideration arising out of in-
demnity insurance, or any deduction un-
der section 832(b)(4)(A) from the amount
of gross premiums written on insurance
contracts during the taxable year for pre-
miums paid for reinsurance; or

(iv) In the case of a base erosion pay-
ment described in paragraph (b)(1)(iv) of
this section, any reduction in gross re-
ceipts with respect to the payment in com-
puting gross income of the taxpayer for
the taxable year for purposes of chapter 1
of subtitle A of the Internal Revenue
Code.

(2) Withholding tax exception to base
erosion tax benefit. Except as provided in
paragraph (c)(3) of this section, any base
erosion tax benefit attributable to any base
erosion payment is not taken into account
as a base erosion tax benefit if tax is
imposed on that payment under section
871 or 881, and the tax has been deducted
and withheld under section 1441 or 1442.

(3) Effect of treaty on base erosion tax
benefit. If any treaty between the United
States and any foreign country reduces the
rate of tax imposed by section 871 or 881,
the amount of base erosion tax benefit that
is not taken into account under paragraph

(c)(2) of this section is equal to the
amount of the base erosion tax benefit
before the application of paragraph (c)(2)
of this section multiplied by a fraction
of-

(i) The rate of tax imposed without
regard to the treaty, reduced by the rate of
tax imposed under the treaty; over

(ii) The rate of tax imposed without
regard to the treaty.

(4) Application of section 163(j) to
base erosion payments-(i) Classification
of payments or accruals of business inter-
est expense based on the payee. The fol-
lowing rules apply for corporations and
partnerships: -

(A) Classification of payments or ac-
cruals of business interest expense of a
corporation. For purposes of this section,
in the year that business interest expense
of a corporation is paid or accrued the
business interest expense is classified as
foreign related business interest expense,
domestic related business interest ex-
pense, or unrelated business interest ex-
pense.

(B) Classification of payments or ac-
cruals of business interest expense by a
partnership. For purposes of this section,
in the year that business interest expense
of a partnership is paid or accrued, the
business interest expense that is allocated
to a partner is classified separately with
respect to each partner in the partnership
as foreign related business interest ex-
pense, domestic related business interest
expense, or unrelated business interest ex-
pense.

(C) Classification of payments or ac-
cruals of business interest expense that is
subject to the exception for effectively
connected income. For purposes of para-
graph (c)(4)(i)(A) and (B) of this section,
business interest expense paid or accrued
to a foreign related party to which the
exception in paragraph (b)(3)(iii) of this
section (effectively connected income)
applies is classified as domestic related
business interest expense.

(ii) Ordering rules for business interest
expense that is limited under section
163(j)(1) to determine which classifica-
tions of business interest expense are de-
ducted and which classifications of busi-
ness interest expense are carried
forward-(A) In general. Section 163(j)
and the regulations published under 26

CFR chapter I provide a limitation on the
amount of business interest expense al-
lowed as a deduction in a taxable year by
a corporation or a partner in a partnership.
In the case of a corporation with a disal-
lowed business interest expense carryfor-
ward, the regulations under section 163(j)
determine the ordering of the business in-
terest expense deduction that is allowed
on a year-by-year basis by reference first
to business interest expense incurred in
the current taxable year and then to disal-
lowed business interest expense carryfor-
wards from prior years. To determine the
amount of base erosion tax benefit under
paragraph (c)(1) of this section, this para-
graph (c)(4)(ii) sets forth ordering rules
that determine the amount of the deduc-
tion of business interest expense allowed
under section 163(j) that is classified as
paid or accrued to a foreign related party
for purposes of paragraph (c)(1)(i) of this
section. This paragraph (c)(4)(ii) also sets
forth similar ordering rules that apply to
disallowed business interest expense car-
ryforwards for which a deduction is per-
mitted under section 163(j) in a later year.

(B) Ordering rules for treating busi-
ness interest expense deduction and disal-
lowed business interest expense carryfor-
wards as foreign related business interest
expense, domestic related business inter-
est expense, and unrelated business inter-
est expense-(1) General ordering rule
for allocating business interest expense
deduction between classifications. For
purposes of paragraph (c)(1) of this sec-
tion, if a deduction for business interest
expense is not subject to the limitation
under section 163(j)(1) in a taxable year,
the deduction is treated first as foreign
related business interest expense and do-
mestic related business interest expense
(on a pro-rata basis), and second as unre-
lated business interest expense. The same
principle applies to business interest ex-
pense of a partnership that is deductible at
the partner level under § 1.163(j) -6(f).

(2) Ordering of business interest ex-
pense incurred by a corporation. If a cor-
poration's business interest expense de-
duction allowed for any taxable year is
attributable to business interest expense
paid or accrued in that taxable year and to
disallowed business interest expense car-
ryforwards from prior taxable years, the
ordering of business interest expense de-

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duction provided in paragraph (c)(4)
(ii)(B)(1) of this section among the clas-
sifications described therein applies sepa-
rately for the carryforward amount from
each taxable year, following the ordering
set forth in § 1.163(j) -5(b)(2). Corre-
sponding adjustments to the classification
of disallowed business interest expense
carryforwards are made consistent with
this year-by-year approach. For purposes
of section 59A and this section, an acquir-
ing corporation in a transaction described
in section 381(a) will succeed to and take
into account the classification of any dis-
allowed business interest expense carry-
forward. See § 1.381(c)(20) -1.

(3) Ordering of business interest ex-
pense incurred by a partnership and allo-
cated to a corporate partner. For a cor-
porate partner in a partnership that is
allocated a business interest expense de-
duction under § 1.163(j) -6(f), the order-
ing rule provided in paragraph (c)(4)
(ii)(B)(1) of this section applies separately
to the corporate partner's allocated busi-
ness interest expense deduction from the
partnership; that deduction is not com-
ingled with the business interest expense
deduction addressed in paragraph (c)(4)
(ii)(B)(1) or (2) of this section or the cor-
porate partner's items from any other part-
nership. Similarly, when a corporate part-
ner in a partnership is allocated excess
business interest expense from a partner-
ship under the rules set forth in § 1.163(j)
-6(f) and the excess interest expense be-
comes deductible to the corporate partner,
that partner applies the ordering rule pro-
vided in paragraph (c)(4)(ii)(B)(1) of this
section separately to that excess interest
expense on a year-by-year basis. Corre-
sponding adjustments to the classification
of disallowed business interest expense
carryforwards are made consistent with
this year-by-year and partnership-by-
partnership approach.

(d) Examples. The following examples
illustrate the application of this section.
For purposes of all the examples, assume
that the taxpayer is an applicable taxpayer
and all payments apply to a taxable year
beginning after December 31, 2017.

(1) Example 1: Determining a base erosion pay-
ment. (i) Facts. FP is a foreign corporation that owns
all of the stock of FC, a foreign corporation, and DC,
a domestic corporation. FP has a trade or business in
the United States with effectively connected income
(USTB). DC owns FDE, a foreign disregarded en-

tity. DC pays interest to FDE and FC. FDE pays
interest to USTB. All interest paid by DC to FC and
by FDE to USTB is deductible by DC in the current
year for regular income tax purposes. FDE also
acquires depreciable property from FP during the
taxable year. FP's income from the sale of the de-
preciable property is not effectively connected with
the conduct of FP's trade or business in the United
States. DC and FP (based only on the activities of
USTB) are applicable taxpayers under § 1.59A-2(b).

(ii) Analysis. The payment of interest by DC to
FC is a base erosion payment under paragraph
(b)(1)(i) of this section because the payment is made
to a foreign related party and the interest payment is
deductible. The payment of interest by DC to FDE
is not a base erosion payment because the transaction
is not a payment to a foreign person and the trans-
action is not a deductible payment. With respect to
the payment of interest by FDE to USTB, if FP's
USTB treats the payment of interest by FDE to
USTB as income that is effectively connected with
the conduct of a trade or business in the United
States pursuant to section 864 or as profits attribut-
able to a U.S. permanent establishment of a tax
treaty resident, and if DC receives a withholding
certificate from FP with respect to the payment, then
the exception in paragraph (b)(3)(iii) of this section
applies. Accordingly, the payment from DC, through
FDE, to USTB is not a base erosion payment even
though the payment is to the USTB of FP, a foreign
related party. The acquisition of depreciable property
by DC, through FDE, is a base erosion payment
under paragraph (b)(1)(ii) of this section because
there is a payment to a foreign related party in
connection with the acquisition by the taxpayer of
property of a character subject to the allowance for
depreciation and the exception in paragraph
(b)(3)(iii) of this section does not apply because FP's
income from the sale of the depreciable property is
not effectively connected with the conduct of FP's
trade or business in the United States. See § 1.59A-2
for the application of the aggregation rule with re-
spect to DC and FP's USTB.

(2) Example 2: Interest allocable under
§ 1.882-5. (i) Facts. FC, a foreign corporation, has
income that is effectively connected with the con-
duct of a trade or business within the United States.
FC determines its interest expense under the three-
step process described in §§ 1.882-5(b) through (d)
with a total interest expense of $125x. The total
interest expense is comprised of interest expense of
$100x on U.S .- booked liabilities ($60x paid to a
foreign related party and $40x paid to unrelated
persons) and $25x of interest on excess U.S .-
connected liabilities. FC has average total liabilities
(that are not U.S .- booked liabilities) of $10,000x and
of that number $2000x are liabilities held by a for-
eign related party. FC is an applicable taxpayer with
respect to its effectively connected income. Assume
all of the interest expense is deductible in the current
taxable year and that none of the interest is subject to
the effectively connected income exception in para-
graph (b)(3)(iii) of this section.

(ii) Analysis. Under paragraph (b)(4)(i) of this
section, the total amount of interest expense deter-
mined under § 1.882-5 that is a base erosion pay-
ment is $65x ($60x + 5x). FC has $60x of interest
on U.S .- booked liabilities that is paid to a foreign

related party and that is treated as a base erosion
payment under paragraph (b)(4)(i)(A)(1) of this sec-
tion. Additionally, $5x of the $25x of interest on
excess U.S .- connected liabilities is treated as a base
erosion payment under paragraph (b)(4)(i)(A)(2) of
this section ($25x * ($2000x / $10,000x)).

(3) Example 3: Interaction with section 163(j).
(i) Facts. Foreign Parent (FP) is a foreign corpora-
tion that owns all of the stock of DC, a domestic
corporation that is an applicable taxpayer. In Year 1,
DC has adjusted taxable income, as defined in sec-
tion 163(j)(8), of $1000x and pays the following
amounts of business interest expense: $420x that is
paid to unrelated Bank, and $360x that is paid to FP.
DC does not earn any business interest income or
incur any floor plan financing interest expense in
Year 1. None of the exceptions in paragraph (b)(3) of
this section apply, and the interest is not subject to
withholding.

(ii) Analysis-(A) Classification of business in-
terest. In Year 1, DC is only permitted to deduct
$300x of business interest expense under section
163(j)(1) ($1000x x 30%). Paragraph (c)(4)(ii)(B) of
this section provides that for purposes of paragraph
(c)(1) of this section the deduction is treated first as
foreign related business interest expense and domes-
tic related business interest expense (here, only FP);
and second as unrelated business interest expense
(Bank). As a result, the $300x of business interest
expense that is permitted under section 163(j)(1) is
treated entirely as the business interest paid to the
related foreign party, FP. All of DC's $300x deduct-
ible interest is treated as an add-back to modified
taxable income in the Year 1 taxable year for pur-
poses of § 1.59A-4(b)(2)(i).

(B) Ordering rules for business interest expense
carryforward. Under section 163(j)(2), the $480x of
disallowed business interest ($420x + $360x - $300x)
is carried forward to the subsequent year. Under para-
graph (c)(4)(ii)(B)(1) and (2) of this section, the interest
carryforward is correspondingly treated first as unre-
lated business interest expense, and second pro-rata as
foreign related business interest expense and domestic
related business interest expense. As a result, $420x of
the $480x business interest expense carryforward is
treated first as business interest expense paid to Bank
and the remaining $60x of the $480x business interest
expense carryforward is treated as interest paid to FP
and as an add-back to modified taxable income.

(4) Example 4: Interaction with section 163(j);
carryforward. (i) Facts. The facts are the same as in
paragraph (d)(3) of this section (the facts in Example
3), except that in addition, in Year 2, DC has ad-
justed taxable income of $250x, and pays the fol-
lowing amounts of business interest expense: $50x
that is paid to unrelated Bank, and $45x that is paid
to FP. DC does not earn any business interest income
or incur any floor plan financing interest expense in
Year 2. None of the exceptions in paragraph (b)(3) of
this section apply.

(ii) Analysis-(A) Classification of business in-
terest. In Year 2, for purposes of section 163(j)(1),
DC is treated as having paid or accrued total busi-
ness interest of $575x, consisting of $95x business
interest expense actually paid in Year 2 and $480x of
business interest expense that is carried forward
from Year 1. DC is permitted to deduct $75x of
business interest expense in Year 2 under the limi-

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tation in section 163(j)(1) ($250x x 30%). Section
1.163(j)-5(b)(2) provides that, for purposes of sec-
tion 163(j), the allowable business interest expense is
first attributed to amounts paid or accrued in the
current year, and then attributed to amounts carried
over from earlier years on a first-in-first-out basis
from the earliest year. Accordingly, the $75x of
deductible business interest expense is deducted en-
tirely from the $95x business interest expense in-
curred in Year 2 for section 163(j) purposes. Because
DC's business interest expense deduction is limited
under section 163(j)(1) and because DC's total busi-
ness interest expense is attributable to more than one
taxable year, paragraph (c)(4)(ii)(B)(2) of this sec-
tion provides that the ordering rule in paragraph
(c)(4)(ii)(B)(1) of this section is applied separately to
each annual amount of section 163(j) disallowed
business interest expense carryforward. With respect
to the Year 2 layer, which is deducted first, para-
graph (c)(4)(ii)(B) of this section provides that, for
purposes of paragraph (c)(1) of this section, the Year
2 $75x deduction is treated first as foreign related
business interest expense and domestic related busi-
ness interest expense (here, only FP, $45x); and
second as unrelated business interest expense (Bank,
$30x). Consequentially, all of the $45x deduction of
business interest expense that was paid to FP in Year
2 is treated as a base erosion tax benefit and an
add-back to modified taxable income for the Year 2
taxable year for purposes of § 1.59A-4(b)(2)(i).

(B) Ordering rules for business interest expense
carryforward. The disallowed business interest ex-
pense carryforward of $20x from Year 2 is corre-
spondingly treated first as interest paid to Bank un-
der paragraph (c)(4)(i) of this section. The
disallowed business interest expense carryforward of
$480x from the Year 1 layer that is also not allowed
as a deduction in Year 2 remains treated as $420x
paid to Bank and $60 paid to FP.

(5) Example 5: Interaction with section 163(j);
carryforward. (i) Facts. The facts are the same as in
paragraph (d)(4) of this section (the facts in Example
4), except that in addition, in Year 3, DC has ad-
justed taxable income of $4000x and pays no busi-
ness interest expense. DC does not earn any business
interest income or incur any floor plan financing
interest expense in Year 3.

(ii) Analysis. In Year 3, DC is treated as having
paid or accrued total business interest expense of
$500x, consisting of $480x of business interest ex-
pense that is carried forward from Year 1 and $20x
of business interest expense that is carried forward
from Year 2 for purposes of section 163(j)(1). DC is
permitted to deduct $1200x of business interest ex-
pense in Year 3 under the limitation in section
163(j)(1) ($4000x x 30%). For purposes of section
163(j), DC is treated as first deducting the business
interest expense from Year 1 then the business in-
terest expense from Year 2. See § 1.163(j)-5(b)(2).
Because none of DC's $500x business interest ex-
pense is limited under section 163(j), the stacking
rule in paragraph (c)(4)(ii) of this section for al-
lowed and disallowed business interest expense
does not apply. For purposes of § 1.59A-
4(b)(2)(i), DC's add-back to modified taxable in-
come is $60x determined by the classifications in
paragraph (c)(4)(i)(A) of this section ($60x treated
as paid to FP from Year 1).

(6) Example 6: Interaction with section 163(j);
partnership. (i) Facts. The facts are the same as in
paragraph (d)(4) of this section (the facts in Example
4), except that in addition, in Year 2, DC forms a
domestic partnership (PRS) with Y, a domestic cor-
poration that is not related to DC within the meaning
of § 1.59A-1(b)(17). DC and Y are equal partners in
partnership PRS. In Year 2, PRS has ATI of $100x
and $48x of business interest expense. $12x of
PRS's business interest expense is paid to Bank, and
$36x of PRS's business interest expense is paid to
FP. PRS allocates the items comprising its $100x of
ATI $50x to DC and $50x to Y. PRS allocates its
$48x of business interest expense $24x to DC and
$24x to Y. DC classifies its $24x of business interest
expense as $6x unrelated business interest expense
(Bank) and $18x as foreign related business interest
expense (FP) under paragraph (c)(4)(i)(B) of this
section. Y classifies its $24x of business interest
expense as entirely unrelated business interest ex-
pense of Y (Bank and FP) under paragraph
(c)(4)(i)(B) of this section. None of the exceptions in
paragraph (b)(3) of this section apply.

(ii) Partnership level analysis. In Year 2, PRS's
section 163(j) limit is 30 percent of its ATI, or $30x
($100x x 30 percent). Thus, PRS has $30x of de-
ductible business interest expense and $18x of ex-
cess business interest expense ($48x - $30x). The
$30x of deductible business interest expense is in-
cludible in PRS's non-separately stated income or
loss, and is not subject to further limitation under
section 163(j) at the partners' level.

(iii) Partner level allocations analysis. Pursuant
to § 1.163(j) -6(f)(2), DC and Y are each allocated
$15x of deductible business interest expense and $9x
of excess business interest expense. At the end of
Year 2, DC and Y each have $9x of excess business
interest expense from PRS, which under § 1.163(j)
-6 is not treated as paid or accrued by the partner
until such partner is allocated excess taxable income
or excess business interest income from PRS in a
succeeding year. Pursuant to § 1.163(j) -6(e), DC
and Y, in computing their limit under section 163(j),
do not increase any of their section 163(j) items by
any of PRS's section 163(j) items.

(iv) Partner level allocations for determining
base erosion tax benefits. The $15x of deductible
business interest expense allocated to DC is treated
first as foreign related business interest expense (FP)
under paragraph (c)(4)(ii)(B) of this section. DC's
excess business interest expense from PRS of $9x is
classified first as the unrelated business interest ex-
pense with respect to Bank ($6x) and then as the
remaining portion of the business interest expense
paid to FP ($3x, or $18x - $15x). Under paragraph
(c)(4)(ii)(B)(3) of this section, these classifications
of the PRS items apply irrespective of the classifi-
cations of DC's own interest expense as set forth in
paragraph (d)(4) of this section (Example 4).

(v) Computation of modified taxable income. For
Year 2, DC is treated as having incurred base erosion
tax benefits of $60x, consisting of the $15x base
erosion tax benefit with respect to its interest in PRS
that is computed in paragraph (d)(6)(iii) of this sec-
tion (Example 6) and $45x that is computed in para-
graph (d)(4) of this section (Example 4).

(7) Example 7: Transfers of property to related
taxpayers. (i) Facts. FP is a foreign corporation that

owns all of the stock of DC1 and DC2, both domes-
tic corporations. DC1 and DC2 are both members of
the same aggregate group but are not members of the
same consolidated tax group under section 1502. In
Year 1, FP sells depreciable property to DC1. On the
first day of the Year 2 tax year, DC1 sells the
depreciable property to DC2.

(ii) Analysis-(A) Year 1. The acquisition of
depreciable property by DC1 from FP is a base
erosion payment under paragraph (b)(1)(ii) of this
section because there is a payment to a foreign
related party in connection with the acquisition by
the taxpayer of property of a character subject to the
allowance for depreciation.

(B) Year 2. The acquisition of the depreciable
property in Year 2 by DC2 is not itself a base erosion
payment because DC2 did not acquire the property
from a foreign related party. However, under para-
graph (b)(2)(vi) of this section any depreciation ex-
pense taken by DC2 on the property acquired from
DC1 is a base erosion payment and a base erosion
tax benefit under paragraph (c)(1)(ii) of this section
because the acquisition of the depreciable property
was a base erosion payment by DC1 and the property
was sold to a member of the aggregate group; there-
fore, the depreciation expense continues as a base
erosion tax benefit to DC2 as it would have been to
DC1 if it continued to own the property.

§ 1.59A-4 Modified taxable income.

(a) Scope. Paragraph (b)(1) of this sec-
tion provides rules for computing modi-
fied taxable income. Paragraph (b)(2) of
this section provides rules addressing how
base erosion tax benefits and net operating
losses affect modified taxable income.
Paragraph (b)(3) of this section provides a
rule for a holder of a residual interest in a
REMIC. Paragraph (c) of this section pro-
vides examples illustrating the rules de-
scribed in this section.

(b) Computation of modified taxable
income-(1) In general. The term modified
taxable income means a taxpayer's tax-
able income, as defined in section 63(a),
determined with the additions described in
paragraph (b)(2) of this section. Notwith-
standing the foregoing, the taxpayer's tax-
able income may not be reduced to an
amount less than zero as a result of a net
operating loss deduction allowed under
section 172. See paragraphs (c)(1) and (2)
of this section (Examples 1 and 2).

(2) Modifications to taxable income.
The amounts described in this paragraph
(b)(2) are added back to a taxpayer's tax-
able income to determine its modified tax-
able income.

(i) Base erosion tax benefits. The
amount of any base erosion tax benefit as
defined in § 1.59A-3(c)(1).

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(ii) Certain net operating loss deduc-
tions. The base erosion percentage, as de-
scribed in § 1.59A-2(e)(3), of any net
operating loss deduction allowed to the
taxpayer under section 172 for the taxable
year. For purposes of determining modi-
fied taxable income, the net operating loss
deduction allowed does not exceed tax-
able income before taking into account the
net operating loss deduction. See para-
graph (c)(1) and (2) of this section (Ex-
amples 1 and 2). The base erosion per-
centage for the taxable year that the net
operating loss arose is used to determine
the addition under this paragraph
(b)(2)(ii). For a net operating loss that
arose in a taxable year beginning before
January 1, 2018, the base erosion percent-
age for the taxable year is zero.

(3) Rule for holders of a residual in-
terest in a REMIC. For purposes of para-
graph (b)(1) of this section, the limitation
in section 860E(a)(1) is not taken into
account for determining the taxable in-
come amount that is used to compute
modified taxable income for the taxable
year.

(c) Examples. The following examples
illustrate the rules of paragraph (b) of this
section.

(1) Example 1: Current year loss. (i) Facts. A
domestic corporation (DC) is an applicable taxpayer
that has a calendar taxable year. In 2020, DC has
gross income of $100x, a deduction of $80x that is
not a base erosion tax benefit, and a deduction of
$70x that is a base erosion tax benefit. In addition,
DC has a net operating loss carryforward to 2020 of
$400x that arose in 2016.

(ii) Analysis. DC's starting point for computing
modified taxable income is $(50x), computed as
gross income of $100x, less a deduction of $80x
(non-base erosion tax benefit) and a deduction of
$70x (base erosion tax benefit). Under paragraph
(b)(2)(ii) of this section, DC's starting point for
computing modified taxable income does not take
into account the $400x net operating loss carryfor-
ward because the allowable deductions for 2020, not
counting the NOL deduction, exceed the gross in-
come for 2020. DC's modified taxable income for
2020 is $20x, computed as $(50x) + $70x base
erosion tax benefit.

(2) Example 2: Net operating loss deduction. (i)
Facts. The facts are the same as in paragraph
(c)(1)(i) of this section (the facts in Example 1),
except that DC's gross income in 2020 is $500x.

(ii) Analysis. DC's starting point for computing
modified taxable income is $0x, computed as gross
income of $500x, less: a deduction of $80x (non-
base erosion tax benefit), a deduction of $70x (base
erosion tax benefit), and a net operating loss deduc-
tion of $350x (which is the amount of taxable in-
come before taking into account the net operating

loss deduction, as provided in paragraph (b)(2)(ii) of
this section ($500x - $150x)). DC's modified taxable
income for 2020 is $70x, computed as $0x + $70x
base erosion tax benefit. DC's modified taxable in-
come is not increased as a result of the $350x net
operating loss deduction in 2020 because the base
erosion percentage of the net operating loss that
arose in 2016 is zero under paragraph (b)(2)(ii) of
this section.

## § 1.59A-5 Base erosion minimum tax amount.

(a) Scope. Paragraph (b) of this section
provides rules regarding the calculation of
the base erosion minimum tax amount.
Paragraph (c) of this section describes the
base erosion and anti-abuse tax rate appli-
cable to the taxable year.

(b) In general. With respect to any
applicable taxpayer, the base erosion min-
imum tax amount for any taxable year is,
the excess (if any) of-

(1) An amount equal to the base ero-
sion and anti-abuse tax rate multiplied by
the modified taxable income of the tax-
payer for the taxable year, over

(2) An amount equal to the regular tax
liability as defined in § 1.59A-1(b)(16) of
the taxpayer for the taxable year, reduced
(but not below zero) by the excess (if any)
of-

(i) The credits allowed under chapter 1
of subtitle A of the Code against regular
tax liability over

(ii) The sum of the credits described in
paragraph (b)(3) of this section.

(3) Credits that do not reduce regular
tax liability. The sum of the following
credits are used in paragraph (b)(2)(ii) of
this section to limit the amount by which
the credits allowed under chapter 1 of
subtitle A of the Internal Revenue Code
reduce regular tax liability-

(i) Taxable years beginning on or be-
fore December 31, 2025. For any taxable
year beginning on or before December 31,
2025-

(A) The credit allowed under section
38 for the taxable year that is properly
allocable to the research credit determined
under section 41(a);

(B) The portion of the applicable sec-
tion 38 credits not in excess of 80 percent
of the lesser of the amount of those appli-
cable section 38 credits or the base ero-
sion minimum tax amount (determined
without regard to this paragraph (b)(3)
(i)(B)); and

(C) Any credits allowed under sections
33 and 37.

(ii) Taxable years beginning after De-
cember 31, 2025. For any taxable year
beginning after December 31, 2025, any
credits allowed under sections 33 and 37.

(c) Base erosion and anti-abuse tax
rate-1) In general. For purposes of calcu-
lating the base erosion minimum tax
amount, the base erosion and anti-abuse
tax rate is-

(i) Calendar year 2018. For taxable
years beginning in calendar year 2018,
five percent.

(ii) Calendar years 2019 through 2025.
For taxable years beginning after Decem-
ber 31, 2018, through taxable years begin-
ning before January 1, 2026, 10 percent.

(iii) Calendar years after 2025. For
taxable years beginning after December
31, 2025, 12.5 percent.

(2) Increased rate for banks and reg-
istered securities dealers. In the case of a
taxpayer that is a member of an affiliated
group (as defined in section 1504(a)(1))
that includes a bank or a registered secu-
rities dealer, the percentage otherwise in
effect under paragraph (c)(1) of this sec-
tion is increased by one percentage point.

(3) Application of section 15. Section
15 does not apply to any taxable year that
includes January 1, 2018. See § 1.15-1(d).
For a taxpayer using a taxable year other
than the calendar year, section 15 applies
to any taxable year beginning after Janu-
ary 1, 2018.

§ 1.59A-6 Qualified derivative payment.

(a) Scope. This section provides addi-
tional guidance regarding qualified deriv-
ative payments. Paragraph (b) of this sec-
tion defines the term qualified derivative
payment. Paragraph (c) of this section
provides guidance on certain payments
that are not treated as qualified derivative
payments. Paragraph (d) defines the term
derivative for purposes of section 59A.
Paragraph (e) of this section provides an
example illustrating the rules of this sec-
tion.

(b) Qualified derivative payment-1) In
general. A qualified derivative payment
means any payment made by a taxpayer to
a foreign related party pursuant to a de-
rivative with respect to which the taxpay-
er-

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(i) Recognizes gain or loss as if the
derivative were sold for its fair market
value on the last business day of the tax-
able year (and any additional times as
required by the Internal Revenue Code or
the taxpayer's method of accounting);

(ii) Treats any gain or loss so recog-
nized as ordinary; and

(iii) Treats the character of all items of
income, deduction, gain, or loss with re-
spect to a payment pursuant to the deriv-
ative as ordinary.

(2) Reporting requirements- (i) In gen-
eral. No payment is a qualified derivative
payment under paragraph (b)(1) of this
section for any taxable year unless the
taxpayer reports the information required
in § 1.6038A-2(b)(7)(ix) for the taxable
year.

(ii) Failure to satisfy the reporting re-
quirement. If a taxpayer fails to satisfy the
reporting requirement described in para-
graph (b)(2)(i) of this section with respect
to any payments, those payments will not
be eligible for the qualified derivative
payment exception described in § 1.59A-
3(b)(3)(ii). A taxpayer's failure to report a
payment as a qualified derivative payment
does not impact the eligibility of any other
payment which the taxpayer properly re-
ported under paragraph (b)(2)(i) of this
section from being a qualified derivative
payment.

(3) Amount of any qualified derivative
payment. The amount of any qualified de-
rivative payment excluded from the de-
nominator of the base erosion percentage
as provided in § 1.59A-2(e)(3)(ii)(C) is
determined as provided in § 1.59A-
2(e)(3)(vi).

(c) Exceptions for payments otherwise
treated as base erosion payments. A pay-
ment does not constitute a qualified deriv-
ative payment if-

(1) The payment would be treated as a
base erosion payment if it were not made
pursuant to a derivative, including any
interest, royalty, or service payment; or

(2) In the case of a contract that has
derivative and nonderivative components,
the payment is properly allocable to the
nonderivative component.

(d) Derivative defined-(1) In general.
For purposes of this section, the term de-
rivative means any contract (including
any option, forward contract, futures con-
tract, short position, swap, or similar con-

tract) the value of which, or any payment
or other transfer with respect to which, is
(directly or indirectly) determined by ref-
erence to one or more of the following:

(i) Any share of stock in a corporation;

(ii) Any evidence of indebtedness;

(iii) Any commodity that is actively
traded;

(iv) Any currency; or

(v) Any rate, price, amount, index, for-
mula, or algorithm.

(2) Exceptions. The following con-
tracts are not treated as derivatives for
purposes of section 59A.

(i) Direct interest. A derivative con-
tract does not include a direct interest in
any item described in paragraph (d)(1)(i)
through (v) of this section.

(ii) Insurance contracts. A derivative
contract does not include any insurance,
annuity, or endowment contract issued by
an insurance company to which subchap-
ter L applies (or issued by any foreign
corporation to which the subchapter
would apply if the foreign corporation
were a domestic corporation).

(iii) Securities lending and sale-
repurchase transactions. A derivative
contract does not include any securities
lending transaction, sale-repurchase trans-
action, or substantially similar transaction.
Securities lending transaction and sale-
repurchase transaction have the same
meaning as provided in § 1.861-2(a)(7).

(3) American depository receipts. For
purposes of section 59A, American depos-
itory receipts (or any similar instruments)
with respect to shares of stock in a foreign
corporation are treated as shares of stock
in that foreign corporation.

(e) Example. The following example
illustrates the rules of this section.

(1) Facts. Domestic Corporation (DC) is a dealer
in securities within the meaning of section 475. On
February 1, 2019, DC enters into a contract (Interest
Rate Swap) with Foreign Parent (FP), a foreign
related party, for a term of five years. Under the
Interest Rate Swap, DC is obligated to make a pay-
ment to FP each month, beginning March 1, 2019, in
an amount equal to a variable rate determined by
reference to the prime rate, as determined on the first
business day of the immediately preceding month,
multiplied by a notional principal amount of $50
million. Under the Interest Rate Swap, FP is obli-
gated to make a payment to DC each month, begin-
ning March 1, 2019, in an amount equal to 5%
multiplied by the same notional principal amount.
The Interest Rate Swap satisfies the definition of a
notional principal contract under § 1.446-3(c). DC
recognizes gain or loss on the Interest Rate Swap

pursuant to section 475. DC reports the information
required to be reported for the taxable year under
§ 1.6038A-2(b)(7)(ix).

(2) Analysis. The Interest Rate Swap is a deriv-
ative as described in paragraph (d) of this section
because it is a contract that references the prime rate
and a fixed rate for determining the amount of pay-
ments. The exceptions described in paragraph (c) of
this section do not apply to the Interest Rate Swap.
Because DC recognizes ordinary gain or loss on the
Interest Rate Swap pursuant to section 475(d)(3), it
satisfies the condition in paragraph (b)(1)(ii) of this
section. Because DC satisfies the requirement relat-
ing to the information required to be reported under
paragraph (b)(2) of this section, any payment to FP
with respect to the Interest Rate Swap will be a
qualified derivative payment. Therefore, under
§ 1.59A-3(b)(3)(ii), the payments to FP are not base
erosion payments.

§ 1.59A-7 Application of base erosion
and anti-abuse tax to partnerships.

(a) Scope. This section provides rules
regarding how partnerships and their part-
ners are treated for purposes of section
59A. Paragraph (b) of this section pro-
vides the general application of an aggre-
gate approach to partnerships for purposes
of section 59A, including specific rules
addressing the application of section 59A
to amounts paid or accrued by a partner-
ship to a related party, rules addressing the
application of section 59A to amounts
paid or accrued to a partnership from a
related party, and other operating rules.
Paragraph (c) of this section provides
rules for determining whether a party is a
foreign related party.

(b) Application of section 59A to a
partnership-(1) In general. Except as oth-
erwise provided in this section, section
59A is applied at the partner level in the
manner described in this section. The pro-
visions of section 59A must be interpreted
in a manner consistent with this approach.

(2) Payment made by a partnership.
Except as provided in paragraph (b)(4) of
this section, for purposes of determining
whether a payment or accrual by a part-
nership is a base erosion payment, any
amount paid or accrued by a partnership is
treated as paid or accrued by each partner
based on the partner's distributive share of
items of deduction (or other amounts that
could be base erosion tax benefits) with
respect to that amount (as determined un-
der section 704).

(3) Payment received by a partnership.
For purposes of determining whether a

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payment or accrual to a partnership is a
base erosion payment of the payor, any
amount paid or accrued to a partnership is
treated as paid or accrued to each partner
based on the partner's distributive share of
the income or gain with respect to that
amount (as determined under section
704).

(4) Exception for base erosion tax ben-
efits of certain partners-(i) In general. For
purposes of determining a partner's
amount of base erosion tax benefits, a
partner does not take into account its dis-
tributive share of any partnership amount
of base erosion tax benefits for the taxable
year if -

(A) The partner's interest in the part-
nership represents less than ten percent of
the capital and profits of the partnership at
all times during the taxable year;

(B) The partner is allocated less than
ten percent of each partnership item of
income, gain, loss, deduction, and credit
for the taxable year; and

(C) The partner's interest in the part-
nership has a fair market value of less than
$25 million on the last day of the partner's
taxable year, determined using a reason-
able method.

(ii) Attribution. For purposes of para-
graph (b)(4)(i) of this section, a partner's
interest in a partnership or partnership
item is determined by adding the interests
of the partner and any related party of the
partner (as determined under section
59A), taking into account any interest
owned directly, indirectly, or through con-
structive ownership (applying the section
318 rules as modified by section 59A (ex-
cept section 318(a)(3)(A) through (C) will
also apply so as to consider a United
States person as owning stock that is
owned by a person who is not a United
States person), but excluding any interest
to the extent already taken into account).

(5) Other relevant items-(i) In general.
For purposes of section 59A, subject to
paragraph (b)(4) of this section, each part-
ner is treated as owning its share of the
partnership items determined under sec-
tion 704, including the assets of the part-
nership, using a reasonable method with
respect to the assets. For items that are
allocated to the partners, the partner is
treated as owning its distributive share
(including of deductions and base erosion
tax benefits). For items that are not allo-

cated to the partners, the partner is treated
as owning an interest proportionate with
the partner's distributive share of partner-
ship income.

(ii) Gross receipts-(A) In general. For
purposes of section 59A, each partner in
the partnership includes a share of part-
nership gross receipts in proportion to the
partner's distributive share (as determined
under section 704) of items of gross in-
come that were taken into account by the
partnership under section 703.

(B) Foreign corporation. A foreign
corporation takes into account a share of
gross receipts only with regard to re-
ceipts that produce income that is effec-
tively connected with the conduct of a
trade or business within the United
States. In the case of a foreign corpora-
tion that determines its net taxable in-
come under an applicable income tax
treaty, the foreign corporation takes into
account its share of gross receipts only
with regard to such gross receipts that
are taken into account in determining its
net taxable income.

(iii) Registered securities dealers. If a
partnership, or a branch of the partnership,
is a registered securities dealer, each part-
ner is treated as a registered securities
dealer unless the partner's interest in the
registered securities dealer would satisfy
the criteria for the exception in paragraph
(b)(4) of this section. For purposes of ap-
plying the de minimis exception in
§ 1.59A-2(e)(2)(iii), the partner takes into
account its distributive share of the rele-
vant partnership items.

(iv) Application of sections 163(j) and
59A(c)(3) to partners of partnerships. See
§ 1.59A-3(c)(4).

(6) Tiered partnerships. If the partner
of a partnership is a partnership, then
paragraphs (b) and (c) of this section are
applied again at the level of the partner,
applying this paragraph successively until
the partner is not a partnership. Paragraph
(b)(4) of this section is only applied at the
level where the partner is not itself a part-
nership.

(c) Foreign related party. With respect
to any person that owns an interest in a
partnership, the related party determina-
tion in section 59A(g) applies at the part-
ner level.

§ 1.59A-8 Application of base erosion
and anti-abuse tax to certain expatriated
entities. [Reserved]

## § 1.59A-9 Anti-abuse and recharacterization rules.

(a) Scope. This section provides rules
for recharacterizing certain transactions
according to their substance for purposes
of applying section 59A and the section
59A regulations. Paragraph (b) of this sec-
tion provides specific anti-abuse rules.
Paragraph (c) of this section provides ex-
amples illustrating the rules of paragraph
(b) of this section.

(b) Anti-abuse rules-(1) Transactions
involving unrelated persons, conduits, or
intermediaries. If a taxpayer pays or ac-
crues an amount to one or more interme-
diaries (including an intermediary unre-
lated to the taxpayer) that would have
been a base erosion payment if paid or
accrued to a foreign related party, and one
or more of the intermediaries makes (di-
rectly or indirectly) corresponding pay-
ments to or for the benefit of a foreign
related party as part of a transaction (or
series of transactions), plan or arrange-
ment that has as a principal purpose
avoiding a base erosion payment (or re-
ducing the amount of a base erosion pay-
ment), the role of the intermediary or in-
termediaries is disregarded as a conduit,
or the amount paid or accrued to the in-
termediary is treated as a base erosion
payment, as appropriate.

(2) Transactions to increase the
amount of deductions taken into account
in the denominator of the base erosion
percentage computation. A transaction (or
component of a transaction or series of
transactions), plan or arrangement that has
a principal purpose of increasing the de-
ductions taken into account for purposes
of § 1.59A-2(e)(3)(i)(B) (the denominator
of the base erosion percentage computa-
tion) is disregarded for purposes of
§ 1.59A-2(e)(3).

(3) Transactions to avoid the applica-
tion of rules applicable to banks and reg-
istered securities dealers. A transaction
(or series of transactions), plan or arrange-
ment that occurs among related parties
that has a principal purpose of avoiding
the rules applicable to certain banks and
registered securities dealers in § 1.59A-

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2(e)(2) (base erosion percentage test for
banks and registered securities dealers) or
§ 1.59A-5(c)(2) (increased base erosion
and anti-abuse tax rate for banks and reg-
istered securities dealers) is not taken into
account for purposes of § 1.59A-2(e)(2)
or § 1.59A-5(c)(2).

(c) Examples. The following examples
illustrate the application of paragraph (b)
of this section. For purposes of all of the
examples, assume that FP, a foreign cor-
poration, owns all the stock of DC, a
domestic corporation and an applicable
taxpayer and that none of the foreign cor-
porations are subject to federal income
taxation with respect to income that is, or
is treated as, effectively connected with
the conduct of a trade or business in the
United States under an applicable provi-
sion of the Internal Revenue Code or reg-
ulations thereunder. Also assume that all
payments occur in a taxable year begin-
ning after December 31, 2017.

(1) Example 1: Substitution of payments that are
not base erosion payments for payments that other-
wise would be base erosion payments through a
conduit or intermediary. (i) Facts. FP owns Property
1 with a fair market value of $95x, which FP intends
to transfer to DC. A payment from DC to FP for
Property 1 would be a base erosion payment. Corp A
is a domestic corporation that is not a related party
with respect to DC. As part of a plan with a principal
purpose of avoiding a base erosion payment, FP
enters into an arrangement with Corp A to transfer
Property 1 to Corp A in exchange for $95x. Pursuant
to the same plan, Corp A transfers Property 1 to DC
in exchange for $100x. Property 1 is subject to the
allowance for depreciation (or amortization in lieu of
depreciation) in the hands of DC.

(ii) Analysis. The arrangement between FP, DC,
and Corp A is deemed to result in a $95x base
erosion payment under paragraph (b)(1) of this sec-
tion because DC's payment to Corp A would have
been a base erosion payment if paid to a foreign
related person, and Corp A makes a corresponding
payment to FP as part of the series of transactions
that has as a principal purpose avoiding a base ero-
sion payment.

(2) Example 2: Alternative transaction to base
erosion payment. (i) Facts. The facts are the same as
in paragraph (c)(1)(i) of this section (the facts in
Example 1), except that DC does not purchase Prop-
erty 1 from FP or Corp A. Instead, DC purchases
Property 2 from Corp B, a domestic corporation that
is not a related party with respect to DC and that
originally produced or acquired Property 2 for Corp
B's own account. Property 2 is substantially similar
to Property 1, and DC uses Property 2 in substan-
tially the same manner that DC would have used
Property 1.

(ii) Analysis. Paragraph (b)(1) of this section
does not apply to the transaction between DC and
Corp B because Corp B does not make a correspond-

ing payment to or for the benefit of FP as part of a
transaction, plan or arrangement.

(3) Example 3: Alternative financing source. (i)
Facts. On Date 1, FP loaned $200x to DC in ex-
change for Note A. DC pays or accrues interest
annually on Note A, and the payment or accrual is a
base erosion payment within the meaning of
§ 1.59A-3(b)(1)(i). On Date 2, DC borrows $200x
from Bank, a corporation that is not a related party
with respect to DC, in exchange for Note B. The
terms of Note B are substantially similar to the terms
of Note A. DC uses the proceeds from Note B to
repay Note A.

(ii) Analysis. Paragraph (b)(1) of this section
does not apply to the transaction between DC and
Bank because Bank does not make a corresponding
payment to or for the benefit of FP as part of the
series of transactions.

(4) Example 4: Alternative financing source that
is a conduit. (i) Facts. The facts are the same as in
paragraph (c)(3)(i) of this section (the facts in Ex-
ample 3) except that in addition, with a principal
purpose of avoiding a base erosion payment, and as
part of the same plan or arrangement as the Note B
transaction, FP deposits $250x with Bank. The dif-
ference between the interest rate paid by Bank to FP
on FP's deposit and the interest rate paid by DC to
Bank is less than one percentage point. The interest
rate charged by Bank to DC would have differed
absent the deposit by FP.

(ii) Analysis. The transactions between FP, DC,
and Bank are deemed to result in a base erosion
payment under paragraph (b)(1) of this section be-
cause DC's payment to Bank would have been a
base erosion payment if paid to a foreign related
person, and Bank makes a corresponding payment to
FP as part of the series of transactions that has as a
principal purpose avoiding a base erosion payment.
See Rev. Rul. 87-89, 1987-2 C.B. 195, Situation 3.

(5) Example 5: Transactions to increase the
amount of deductions taken into account in the de-
nominator of the base erosion percentage computa-
tion. (i) Facts. With a principal purpose of increasing
the deductions taken into account by DC for pur-
poses of § 1.59A-2(e)(3)(i)(B), DC enters into a
long position with respect to Asset with Financial
Institution 1 and simultaneously enters into a short
position with respect to Asset with Financial Insti-
tution 2. Financial Institution 1 and Financial Insti-
tution 2 are not related to DC and are not related to
each other.

(ii) Analysis. Paragraph (b)(2) of this section
applies and the transactions between DC and Finan-
cial Institution 1 and DC and Financial Institution 2.
These transactions are not taken into account for
purposes of § 1.59A-2(e)(3)(i)(B) because the trans-
actions have a principal purpose of increasing the
deductions taken into account for purposes of
§ 1.59A-2(e)(3)(i)(B).

§ 1.59A-10 Applicability date.

Sections 1.59A-1 through 1.59A-9 ap-
ply to taxable years beginning after De-
cember 31, 2017.

Par. 3. Section 1.383-1 is amended by
adding two sentences at the end of para-
graph (d)(3)(i) to read as follows:

§ 1.383-1 Special limitations on certain
capital losses and excess credits.

* * * * *

(d) * * *

(3) * * *

(i) * * * The application of section 59A
is not a limitation contained in subtitle A
for purposes of this paragraph (d)(3)(i).
Therefore, the treatment of pre-change
losses and pre-change credits in the com-
putation of the base erosion minimum tax
amount will not affect whether such losses
or credits result in absorption of the sec-
tion 382 limitation and the section 383
credit limitation.

* * * * *

Par. 4. Section 1.1502-2 is revised to
read as follows:

§ 1.1502-2 Computation of tax liability.

(a) Taxes imposed. The tax liability of
a group for a consolidated return year is
determined by adding together-

(1) The tax imposed by section 11(a) in
the amount described in section 11(b)

on the consolidated taxable income for
the year (reduced by the taxable income of
a member described in paragraphs (a)(5)
through (8) of this section);

(2) The tax imposed by section 541 on
the consolidated undistributed personal
holding company income;

(3) If paragraph (a)(2) of this section
does not apply, the aggregate of the taxes
imposed by section 541 on the separate
undistributed personal holding company
income of the members which are per-
sonal holding companies;

(4) If neither paragraph (a)(2) nor (3)
of this section apply, the tax imposed by
section 531 on the consolidated accumu-
lated taxable income (see § 1.1502-43);

(5) The tax imposed by section 594(a)
in lieu of the taxes imposed by section 11
on the taxable income of a life insurance
department of the common parent of a
group which is a mutual savings bank;

(6) The tax imposed by section 801 on
consolidated life insurance company tax-
able income;

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(7) The tax imposed by section 831(a)
on consolidated insurance company tax-
able income of the members which are
subject to such tax;

(8) Any increase in tax described in
section 1351(d)(1) (relating to recoveries
of foreign expropriation losses); and

(9) The tax imposed by section 59A on
base erosion payments of taxpayers with
substantial gross receipts.

(b) Credits. A group is allowed as a
credit against the taxes described in para-
graph (a) (except for paragraph (a)(9) of
this section) of this section: the general
business credit under section 38 (see
§ 1.1502-3), the foreign tax credit under
section 27 (see § 1.1502-4), and any other
applicable credits provided under the In-
ternal Revenue Code. Any increase in tax
due to the recapture of a tax credit will be
taken into account. See section 59A and
the regulations thereunder for credits al-
lowed against the tax described in para-
graph (a)(9) of this section.

(c) Allocation of dollar amounts. For
purposes of this section, if a member or
members of the consolidated group are
also members of a controlled group that
includes corporations that are not mem-
bers of the consolidated group, any dollar
amount described in any section of the
Internal Revenue Code is apportioned
among all members of the controlled
group in accordance with the provisions
of the applicable section and the regula-
tions thereunder.

(d) Applicability date-(1) Except as
provided in paragraph (d)(2) of this sec-
tion, this section applies to any consoli-
dated return year for which the due date of
the income tax return (without regard to
extensions) is on or after the date of pub-
lication of the Treasury Decision adopting
these rules as final regulations in the Fed-
eral Register.

(2) Paragraph (a)(9) of this section ap-
plies to consolidated return years begin-
ning after December 31, 2017.

Par. 5. Section 1.1502-4 is amended
by revising paragraph (d)(3) to read as
follows:

§ 1.1502-4 Consolidated foreign tax
credit.

* * * * *

(d) * * *

(3) Computation of tax against which
credit is taken. The tax against which the
limiting fraction under section 904(a) is
applied will be the consolidated tax liabil-
ity of the group determined under
§ 1.1502-2, but without regard to para-
graphs (a)(2), (3), (4), (8), and (9) of that
section, and without regard to any credit
against such liability.

* * * * *

Par. 6. Section 1.1502-43 is amended
by revising paragraph (b)(2)(i)(A) to read
as follows:

§ 1.1502-43 Consolidated accumulated
earnings tax.

** * * *

(b) * * *

(2) * * *

(i) * * *

(A) The consolidated liability for tax
determined without § 1.1502-2(a)(2)
through (a)(4), and without the foreign tax
credit provided by section 27, over
* * * * *

Par. 7. Section 1.1502-47 is amended
by revising paragraph (f)(7)(iii) to read as
follows.

§ 1.1502-47 Consolidated returns by
life-nonlife groups.

* * * * *

(f) * * *

(7) * * *

(iii) Any taxes described in § 1.1502-2
(other than by paragraphs (a)(1) and (d)(6)
of that section).

* * * * *

Par. 8. Section 1.1502-59A is added to
read as follows:

§ 1.1502-59A Application of section
59A to consolidated groups.

(a) Scope. This section provides rules
for the application of section 59A and the
regulations thereunder (the section 59A
regulations, see §§ 1.59A-1 through
1.59A-10) to consolidated groups and
their members (as defined in § 1.1502-
1(h) and (b), respectively). Rules in the
section 59A regulations apply to consoli-
dated groups except as modified in this
section. Paragraph (b) of this section pro-
vides rules treating a consolidated group
(rather than each member of the group) as

a single taxpayer, and a single applicable
taxpayer, as relevant, for certain purposes.
Paragraph (c) of this section coordinates
the application of the business interest
stacking rule under § 1.59A-3(c)(4) to
consolidated groups. Paragraph (d) of this
section addresses how the base erosion
minimum tax amount is allocated among
members of the consolidated group. Para-
graph (e) of this section sets forth defini-
tions. Paragraph (f) of this section pro-
vides examples. Paragraph (g) of this
section provides the applicability date and
a transition rule.

(b) Consolidated group as the applica-
ble taxpayer-1) In general. For purposes
of determining whether the consolidated
group is an applicable taxpayer (within
the meaning of § 1.59A-2(b)) and the
amount of tax due pursuant to section
59A(a), all members of a consolidated
group are treated as a single taxpayer.
Thus, for example, members' deductions
are aggregated in making the required
computations under section 59A. In addi-
tion, items resulting from intercompany
transactions (as defined in § 1.1502-
13(b)(1)(i)) are disregarded for purposes
of making the required computations. For
example, additional depreciation deduc-
tions resulting from intercompany asset
sales are not taken into account for pur-
poses of applying the base erosion per-
centage test under § 1.59A-2(e).

(2) Consolidated group as member of
the aggregate group. The consolidated
group is treated as a single member of an
aggregate group for purposes of § 1.59A-
2(c).

(3) Related party determination. For
purposes of section 59A and the section
59A regulations, if a person is a related
party with respect to any member of a
consolidated group, that person is a re-
lated party of the group and of each of its
members.

(c) Coordination of section 59A(c)(3)
and section 163(j) in a consolidated
group-1) Overview. This paragraph (c)
provides rules regarding the application of
§ 1.59A-3(c)(4) to a consolidated group's
section 163(j) interest deduction. The
classification rule in paragraph (c)(3) of
this section addresses how to determine if,
and to what extent, the group's section
163(j) interest deduction is a base erosion
tax benefit. These regulations contain a

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single-entity classification rule with re-
gard to the deduction of the consolidated
group's aggregate current year business
interest expense ("BIE"), but a separate-
entity classification rule for the deduction
of the consolidated group's disallowed
BIE carryforwards. Paragraph (c)(3) of
this section classifies the group's aggre-
gate current year BIE deduction, in con-
formity with § 1.59A-3(c)(4), as consti-
tuting domestic related current year BIE
deduction, foreign related current year
BIE deduction, or unrelated current year
BIE deduction. The allocation rules in
paragraph (c)(4) of this section then allo-
cate to specific members of the group the
domestic related current year BIE deduc-
tion, foreign related current year BIE de-
duction, and unrelated current year BIE
deduction taken in the taxable year. Any
member's current year BIE that is carried
forward to the succeeding taxable year as
a disallowed BIE carryforward is allo-
cated a status as domestic related BIE
carryforward, foreign related BIE carry-
forward, or unrelated BIE carryforward
under paragraph (c)(5) of this section. The
status of any disallowed BIE carryforward
deducted by a member in a later year is
classified on a separate-entity basis by the
deducting member under paragraph (c)(3)
of this section, based on the status allo-
cated to the member's disallowed BIE
carryforward under paragraph (c)(5) of
this section. This paragraph (c) also pro-
vides rules regarding the consequences of
the deconsolidation of a corporation that
has been allocated a domestic related BIE
carryforward status, a foreign related
BIE carryforward status, or an unrelated
BIE carryforward status; and the consoli-
dation of a corporation with a disallowed
BIE carryforward classified as from pay-
ments to a domestic related party, foreign
related party, or unrelated party.

(2) Absorption rule for the group's
business interest expense. To determine
the amount of the group's section 163(j)
interest deduction, and to determine the
year in which the member's business in-
terest expense giving rise to the deduction
was incurred or accrued, see §§ 1.163(j)
-4(d) and 1.163(j)-5(b)(3).

(3) Classification of the group's sec-
tion 163(j) interest deduction-i) In gen-
eral. Consistent with § 1.59A-3(c)(4)(i)
and paragraph (b) of this section, the clas-

sification rule of this paragraph (c)(3) de-
termines whether the consolidated group's
section 163(j) interest deduction is a base
erosion tax benefit. To the extent the con-
solidated group's business interest ex-
pense is permitted as a deduction under
section 163(j)(1) in a taxable year, the
deduction is classified first as from busi-
ness interest expense paid or accrued to a
foreign related party and business interest
expense paid or accrued to a domestic
related party (on a pro-rata basis); any
remaining deduction is treated as from
business interest expense paid or accrued
to an unrelated party.

(ii) Year-by-year application of the
classification rule. If the consolidated
group's section 163(j) interest deduction
in any taxable year is attributable to busi-
ness interest expense paid or accrued in
more than one taxable year (for example,
the group deducts the group's aggregate
current year BIE, the group's disallowed
BIE carryforward from year 1, and the
group's disallowed BIE carryforward
from year 2), the classification rule in
paragraph (c)(3)(i) of this section applies
separately to each of those years, pursuant
to paragraphs (c)(3)(iii) and (iv) of this
section.

(iii) Classification of current year BIE
deductions. Current year BIE deductions
are classified under the section 59A regu-
lations and this paragraph (c) as if the
consolidated group were a single taxpayer
that had paid or accrued the group's ag-
gregate current year BIE to domestic re-
lated parties, foreign related parties, and
unrelated parties. The rules of paragraph
(c)(4) of this section apply for allocating
current year BIE deductions among mem-
bers of the consolidated group. To the
extent the consolidated group's aggregate
current year BIE exceeds its section 163(j)
limitation, the rules of paragraph (c)(5) of
this section apply.

(iv) Classification of deductions of dis-
allowed BIE carryforwards. Each mem-
ber of the group applies the classification
rule in this paragraph (c)(3) to its deduc-
tion of any part of a disallowed BIE car-
ryforward from a year, after the group
applies paragraph (c)(5) of this section to
the consolidated group's disallowed BIE
carryforward from that year. Therefore,
disallowed BIE carryforward that is actu-
ally deducted by a member is classified

based on the status of the components of
that carryforward, assigned pursuant to
paragraph (c)(5) of this section.

(4) Allocation of domestic related cur-
rent year BIE deduction status and for-
eign related current year BIE deduction
status among members of the consolidated
group-(i) In general. This paragraph
(c)(4) applies if the group has domestic
related current year BIE deductions, for-
eign related current year BIE deductions,
or both, as a result of the application of the
classification rule in paragraph (c)(3) of
this section. Under this paragraph (c)(4),
the domestic related current year BIE, for-
eign related current year BIE, or both, that
is treated as deducted in the current year
are deemed to have been incurred pro-rata
by all members that have current year BIE
deduction in that year, regardless of which
member or members actually incurred the
current year BIE to a domestic related
party or a foreign related party.

(ii) Domestic related current year BIE
deduction-(A) Amount of domestic re-
lated current year BIE deduction status
allocable to a member. The amount of
domestic related current year BIE deduc-
tion status that is allocated to a member is
determined by multiplying the group's do-
mestic related current year BIE deduction
(determined pursuant to paragraph (c)(3)
of this section) by the percentage of cur-
rent year BIE deduction allocable to such
member in that year.

(B) Percentage of current year BIE
deduction allocable to a member. The per-
centage of current year BIE deduction al-
locable to a member is equal to the
amount of the member's current year BIE
deduction divided by the amount of the
group's aggregate current year BIE de-
duction.

(iii) Amount of foreign related current
year BIE deduction status allocable to a
member. The amount of foreign related
current year BIE deduction status that is
allocated to a member is determined by
multiplying the group's foreign related
current year BIE deduction (determined
pursuant to paragraph (c)(3) of this sec-
tion) by the percentage of current year
BIE deduction allocable to such member
(defined in paragraph (c)(4)(ii)(B) of this
section).

(iv) Treatment of amounts as having
unrelated current year BIE deduction sta-

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tus. To the extent the amount of a mem-
ber's current year BIE that is absorbed
under paragraph (c)(2) of this section ex-
ceeds the domestic related current year
BIE deduction status and foreign related
current year BIE deduction status allo-
cated to the member under paragraph
(c)(4)(ii) and (iii) of this section, such
excess amount is treated as from pay-
ments or accruals to an unrelated party.

(5) Allocation of domestic related BIE
carryforward status and foreign related
BIE carryforward status to members of
the group-(i) In general. This paragraph
(c)(5) applies in any year the consolidated
group's aggregate current year BIE ex-
ceeds its section 163(j) limitation. After
the application of paragraph (c)(4) of this
section, any remaining domestic related
current year BIE, foreign related current
year BIE, and unrelated current year BIE
is deemed to have been incurred pro-rata
by members of the group pursuant to the
rules in paragraph (c)(5)(ii), (iii), and (iv)
of this section, regardless of which mem-
ber or members actually incurred the busi-
ness interest expense to a domestic related
party, foreign related party, or unrelated
party.

(ii) Domestic related BIE carryfor-
ward-(A) Amount of domestic related
BIE carryforward status allocable to a
member. The amount of domestic related
BIE carryforward status that is allocated
to a member equals the group's domestic
related BIE carryforward from that year
multiplied by the percentage of disal-
lowed BIE carryforward allocable to the
member.

(B) Percentage of disallowed BIE car-
ryforward allocable to a member. The
percentage of disallowed BIE carryfor-
ward allocable to a member for a taxable
year equals the member's disallowed BIE
carryforward from that year divided by
the consolidated group's disallowed BIE
carryforwards from that year.

(iii) Amount of foreign related BIE car-
ryforward status allocable to a member.
The amount of foreign related BIE carry-
forward status that is allocated to a mem-
ber equals the group's foreign related BIE
carryforward from that year multiplied by
the percentage of disallowed BIE carry-
forward allocable to the member (as de-
fined in paragraph (c)(5)(ii)(B) of this sec-
tion).

(iv) Treatment of amounts as having
unrelated BIE carryforward status. If a
member's disallowed BIE carryforward
for a year exceeds the amount of domestic
related BIE carryforward status and for-
eign related BIE carryforward status that
is allocated to the member pursuant to
paragraphs (c)(5)(ii) and (iii) of this sec-
tion, respectively, the excess carryforward
amount is treated as from payments or
accruals to an unrelated party.

(v) Coordination with section 381. If a
disallowed BIE carryforward is allocated
a status as a domestic related BIE carry-
forward, foreign related BIE carryfor-
ward, or unrelated BIE carryforward un-
der the allocation rule of paragraph (c)(5)
of this section, the acquiring corporation
in a transaction described in section
381(a) will succeed to and take into ac-
count the allocated status of the carryfor-
ward for purposes of section 59A. See
§ 1.381(c)(20) -1.

(6) Member deconsolidates from a
consolidated group. When a member de-
consolidates from a group (the original
group), the member's disallowed BIE car-
ryforwards retain their allocated status,
pursuant to paragraph (c)(5) of this sec-
tion, as a domestic related BIE carryfor-
ward, foreign related BIE carryforward, or
unrelated BIE carryforward (as applica-
ble). Following the member's deconsoli-
dation, no other member of the original
group is treated as possessing the domes-
tic related BIE carryforward status, for-
eign related BIE carryforward status, or
unrelated BIE carryforward status that is
carried forward by the departing member.

(7) Corporation joins a consolidated
group. If a corporation joins a consoli-
dated group (the acquiring group), and
that corporation was allocated a domestic
related BIE carryforward status, foreign
related BIE carryforward status, or unre-
lated BIE carryforward status pursuant to
paragraph (c)(5) of this section from an-
other consolidated group (the original
group), or separately has a disallowed BIE
carryforward that is classified as from
payments or accruals to a domestic related
party, foreign related party, or unrelated
party, the status of the carryforward is
taken into account in determining the ac-
quiring group's base erosion tax benefit
when the corporation's disallowed BIE
carryforward is absorbed.

(d) Allocation of the base erosion min-
imum tax amount to members of the con-
solidated group. For rules regarding the
allocation of the base erosion minimum
tax amount, see section 1552. Allocations
under section 1552 take into account the
classification and allocation provisions of
paragraphs (c)(3) through (5) of this sec-
tion.

(e) Definitions. The following defini-
tions apply for purposes of this section -

(1) Aggregate current year BIE. The
consolidated group's aggregate current
year BIE is the aggregate of all members'
current year BIE.

(2) Aggregate current year BIE deduc-
tion. The consolidated group's aggregate
current year BIE deduction is the aggre-
gate of all members' current year BIE
deductions.

(3) Applicable taxpayer. The term ap-
plicable taxpayer has the meaning pro-
vided in § 1.59A-2(b).

(4) Base erosion minimum tax amount.
The consolidated group's base erosion
minimum tax amount is the tax imposed
under section 59A.

(5) Base erosion tax benefit. The term
base erosion tax benefit has the meaning
provided in § 1.59A-3(c)(1).

(6) Business interest expense. The term
business interest expense, with respect to
a member and a taxable year, has the
meaning provided in § 1.163(j) -1(b)(2),
and with respect to a consolidated group
and a taxable year, has the meaning pro-
vided in § 1.163(j) -4(d)(2)(iii).

(7) Consolidated group's disallowed
BIE carryforwards. The term consoli-
dated group's disallowed BIE carryfor-
wards has the meaning provided in
§ 1.163(j)-5(b)(3)(i).

(8) Current year BIE. A member's cur-
rent year BIE is the member's business
interest expense that would be deductible
in the current taxable year without regard
to section 163(j) and that is not a disal-
lowed business interest expense carryfor-
ward from a prior taxable year.

(9) Current year BIE deduction. A
member's current year BIE deduction is
the member's current year BIE that is
permitted as a deduction in the taxable
year.

(10) Domestic related BIE carryfor-
ward. The consolidated group's domestic
related BIE carryforward for any taxable

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year is the excess of the group's domestic
related current year BIE over the group's
domestic related current year BIE deduc-
tion (if any).

(11) Domestic related current year
BIE. The consolidated group's domestic
related current year BIE for any taxable
year is the consolidated group's aggregate
current year BIE paid or accrued to a
domestic related party.

(12) Domestic related current year BIE
deduction. The consolidated group's do-
mestic related current year BIE deduction
for any taxable year is the portion of the
group's aggregate current year BIE de-
duction classified as from interest paid or
accrued to a domestic related party under
paragraph (c)(3) of this section.

(13) Domestic related party. A domes-
tic related party is a related party that is
not a foreign related party and is not a
member of the same consolidated group.

(14) Disallowed BIE carryforward.
The term disallowed BIE carryforward
has the meaning provided in § 1.163(j)
-1(b)(9).

(15) Foreign related BIE carryfor-
ward. The consolidated group's foreign
related BIE carryforward for any taxable
year, is the excess of the group's foreign
related current year BIE over the group's
foreign related current year BIE deduction
(if any).

(16) Foreign related current year BIE.
The consolidated group's foreign related
current year BIE for any taxable year is
the consolidated group's aggregate cur-
rent year BIE paid or accrued to a foreign
related party.

(17) Foreign related current year BIE
deduction. The consolidated group's for-
eign related current year BIE deduction
for any taxable year is the portion of the
consolidated group's aggregate current
year BIE deduction classified as from in-
terest paid or accrued to a foreign related
party under paragraph (c)(3) of this sec-
tion.

(18) Foreign related party. A foreign
related party has the meaning provided in
§ 1.59A-1(b)(12).

(19) Related party. The term related
party has the meaning provided in
§ 1.59A-1(b)(17), but excludes members
of the same consolidated group.

(20) Section 163(j) interest deduction.
The term section 163(j) interest deduction

means, with respect to a taxable year, the
amount of the consolidated group's busi-
ness interest expense permitted as a de-
duction pursuant to § 1.163(j) -5(b)(3) in
the taxable year.

(21) Section 163(j) limitation. The term
section 163(j) limitation has the meaning
provided in § 1.163(j) -1(b)(31).

(22) Unrelated BIE carryforward. The
consolidated group's unrelated BIE car-
ryforward for any taxable year is the ex-
cess of the group's unrelated current year
BIE over the group's unrelated current
year BIE deduction.

(23) Unrelated current year BIE. The
consolidated group's unrelated current
year BIE for any taxable year is the con-
solidated group's aggregate current year
BIE paid or accrued to an unrelated party.

(24) Unrelated current year BIE de-
duction. The consolidated group's unre-
lated current year BIE deduction for any
taxable year is the portion of the group's
aggregate current year BIE deduction
classified as from interest paid or accrued
to an unrelated party under paragraph
(c)(3) of this section.

(25) Unrelated party. An unrelated
party is a party that is not a related party.

(f) Examples. The following examples
illustrate the general application of this
section. For purposes of the examples, a
foreign corporation (FP) wholly owns do-
mestic corporation (P), which in turn
wholly owns S1 and S2. P, S1, and S2 are
members of a consolidated group. The
consolidated group is a calendar year tax-
payer.

(1) Example 1: Computation of the consolidated
group's base erosion minimum tax amount. (i) The
consolidated group is the applicable taxpayer. (A)
Facts. The members have never engaged in inter-
company transactions. For the 2019 taxable year, P,
S1, and S2 were permitted the following amounts of
deductions (within the meaning of section
59A(c)(4)), $2,400x, $1,000x, and $2,600x; those
deductions include base erosion tax benefits of
$180x, $370x, and $230x. The group's consolidated
taxable income for the year is $150x. In addition, the
group satisfies the gross receipts test in § 1.59A-
2(d).

(B) Analysis. Pursuant to paragraph (b) of this
section, the receipts and deductions of P, S1, and S2
are aggregated for purposes of making the compu-
tations under section 59A. The group's base erosion
percentage is 13% (($180x + $370x + $230x)/
($2,400x + $1,000x + $2,600x)). The consolidated
group is an applicable taxpayer under § 1.59A-2(b)
because the group satisfies the gross receipts test and
the group's base erosion percentage (13%) is higher
than 3%. The consolidated group's modified taxable

income is computed by adding back the members'
base erosion tax benefits (and, when the consolidated
group has consolidated net operating loss available
for deduction, the consolidated net operating loss
allowed times base erosion percentage) to the con-
solidated taxable income, $930x ($150x + $180x +
$370x + $230x). The group's base erosion mini-
mum tax amount is then computed as 10 percent of
the modified taxable income less the regular tax
liability, $61.5x ($930x × 10% - $150x × 21%).

(ii) The consolidated group engages in intercom-
pany transactions. (A) Facts. The facts are the same
as in paragraph (f)(1)(i)(A) of this section (the facts
in Example 1(i)), except that S1 sold various inven-
tory items to S2 during 2019. Such items are depre-
ciable in the hands of S2 (but would not have been
depreciable in the hands of S1) and continued to be
owned by S2 during 2019.

(B) Analysis. The result is the same as paragraph
(f)(1)(i)(A) of this section (the facts in Example
1(i)),. Pursuant to paragraph (b)(2) of this section,
items resulting from the intercompany sale (for ex-
ample, gross receipts, depreciation deductions) are
not taken into account in computing the group's
gross receipts under § 1.59A-2(d) and base erosion
percentage under § 1.59A-2(e)(3).

(2) Example 2: Business interest expense subject
to section 163(j) and the group's domestic related
current year BIE and foreign related current year
BIE for the year equals its section 163(j) limitation.
(i) Facts. During the current year (Year 1), P in-
curred $150x of business interest expense to domes-
tic related parties; S1 incurred $150x of business
interest expense to foreign related parties; and S2
incurred $150x of business interest expense to unre-
lated parties. The group's section 163(j) limitation
for the year is $300x. After applying the rules in
§ 1.163(j) -5(b)(3), the group deducts $150x of P's
Year 1 business interest expense, and $75x each of
S1 and S2's Year 1 business interest expense. As-
sume the group is an applicable taxpayer for pur-
poses of section 59A.

(ii) Analysis-(A) Application of the absorption
rule in paragraph (c)(2) of this section. Following
the rules in section 163(j), the group's section 163(j)
interest deduction for Year 1 is $300x, and the entire
amount is from members' Year 1 business interest
expense.

(B) Application of the classification rule in para-
graph (c)(3) of this section. Under paragraph (c)(3)
of this section, the group's aggregate current year
BIE deduction of $300x is first classified as pay-
ments or accruals to related parties (pro-rata among
domestic related parties and foreign related parties),
and second as payments or accruals to unrelated
parties. For Year 1, the group has $150x of domestic
related current year BIE and $150x of foreign related
current year BIE, and the group's aggregate current
year BIE deduction will be classified equally among
the related party expenses. Therefore, $150x of the
group's deduction is classified as domestic related
current year BIE deduction and $150x is classified as
a foreign related current year BIE deduction.

(C) Application of the allocation rule in para-
graph (c)(4) of this section. After the application of
the classification rule in paragraph (c)(3) of this
section, the group has $150x each of domestic re-
lated current year BIE deduction and foreign related

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current year BIE deduction from the group's aggre-
gate current year BIE in Year 1. The domestic re-
lated current year BIE deduction and foreign related
current year BIE deduction will be allocated to P, S1,
and S2 based on each member's deduction of its
Year 1 business interest expense.

(1) Allocations to P. The percentage of current
year BIE deduction attributable to P is 50% (P's
deduction of its Year 1 current year BIE, $150x,
divided by the group's aggregate current year BIE
deduction for Year 1, $300x). Thus, the amount of
domestic related current year BIE deduction status
allocated to P is $75x (the group's domestic related
current year BIE deduction, $150x, multiplied by the
percentage of current year BIE deduction allocable
to P, 50%); and the amount of foreign related current
year BIE deduction status allocated to P is $75x (the
group's foreign related current year BIE deduction,
$150x, multiplied by the percentage of current year
BIE deduction allocable to P, 50%).

(2) Allocations to S1 and S2. The percentage of
current year BIE deduction attributable to S1 is 25%
(S1's deduction of its Year 1 current year BIE, $75x,
divided by the group's aggregate current year BIE
deduction for Year 1, $300x). Thus, the amount of
domestic related current year BIE deduction status
allocated to S1 is $37.5x (the group's domestic re-
lated current year BIE deduction, $150x, multiplied
by the percentage of current year BIE deduction
allocable to S1, 25%); and the amount of foreign
related current year BIE deduction status allocated to
S1 is $37.5x (the group's foreign related current year
BIE deduction, $150x, multiplied by the percentage
of current year BIE deduction allocable to S1, 25%).
Because S2 also deducted $75 of its Year 1 current
year BIE, S2's deductions are allocated the same
pro-rata status as those of S1 under this paragraph
(f)(2)(ii)(C)(2).

(D) Application of the allocation rule in para-
graph (c)(5) of this section. Although the group will
have disallowed BIE carryforwards after Year 1 (the
group's aggregate current year BIE of $450x ($150x
\+ $150x + $150x) exceeds the section 163(j) lim-
itation of $300x), all of the domestic related current
year BIE and foreign related current year BIE in
Year 1 has been taken into account pursuant to the
classification rule in paragraph (c)(3) of this section.
Thus, under paragraph (c)(5)(iv) of this section, each
member's disallowed BIE carryforward is treated as
from payments or accruals to unrelated parties.

(3) Example 3: Business interest expense subject
to section 163(j). (i) The group's domestic related
current year BIE and foreign related current year
BIE for the year exceeds its section 163(j) limitation.
(A) Facts. During the current year (Year 1), P in-
curred $60x of business interest expense to domestic
related parties; S1 incurred $40x of business interest
expense to foreign related parties; and S2 incurred
$80x of business interest expense to unrelated par-
ties. The group's section 163(j) limitation for the
year is $60x. After applying the rules in § 1.163(j)-
5(b)(3), the group deducts $20x each of P, S1, and
S2's current year business interest expense. Assume
the group is an applicable taxpayer for purposes of
section 59A.

(B) Analysis-(1) Application of the absorption
rule in paragraph (c)(2) of this section. Following
the rules in section 163(j), the group's section 163(j)

interest deduction is $60x, and the entire amount is
from members' Year 1 business interest expense.

(2) Application of the classification rule in para-
graph (c)(3) of this section. Under paragraph (c)(3)
of this section, the group's $60x of aggregate current
year BIE deduction is first classified as payments or
accruals to related parties (pro-rata among domestic
related parties and foreign related parties), and sec-
ond as payments or accruals from unrelated parties.
The group's total related party interest expense in
Year 1, $100x (sum of the group's Year 1 domestic
related current year BIE, $60x, and the group's Year
1 foreign related current year BIE, $40x), exceeds
the group's aggregate current year BIE deduction of
$60x. Thus, the group's aggregate current year BIE
deduction will be classified, pro-rata, as from pay-
ments or accruals to domestic related parties and
foreign related parties. Of the group's aggregate
current year BIE deduction in Year 1, $36x is clas-
sified as a domestic related current year BIE deduc-
tion (the group's aggregate current year BIE deduc-
tion, $60x, multiplied by the ratio of domestic
related current year BIE over the group's total Year
1 related party interest expense ($60x /
($60x+$40x))); and $24x of the group's aggregate
current year BIE deduction is classified as a foreign
related current year BIE deduction (the group's sec-
tion 163(j) interest deduction, $60x, multiplied by
the ratio of foreign related current year BIE over the
group's total Year 1 related party interest expense
($40x / ($60x+$40x))).

(3) Application of the allocation rule in para-
graph (c)(4) of this section. After the application of
the classification rule in paragraph (c)(3) of this
section, the group has $36x of domestic related cur-
rent year BIE deduction and $24x of foreign related
current year BIE deduction from the group's aggre-
gate current year BIE in Year 1. The domestic re-
lated current year BIE deduction and foreign related
current year BIE deduction will be allocated to P, S1,
and S2 based on each member's current year BIE
deduction in Year 1.

(i) Allocation of the group's domestic related
current year BIE deduction status. Because each
member is deducting $20x of its Year 1 business
interest expense, all three members have the same
percentage of current year BIE deduction attribut-
able to them. The percentage of current year BIE
deduction attributable to each of P, S1, and S2 is
33.33% (each member's current year BIE deduction
in Year 1, $20x, divided by the group's aggregate
current year BIE deduction for Year 1, $60x). Thus,
the amount of domestic related current year BIE
deduction status allocable to each member is $12x
(the group's domestic related current year BIE de-
duction, $36x, multiplied by the percentage of cur-
rent year BIE deduction allocable to each member,
33.33%).

(ii) Allocations of the group's foreign related
current year BIE deduction status. The amount of
foreign related current year BIE deduction status
allocable to each member is $8x (the group's foreign
related current year BIE deduction, $24x, multiplied
by the percentage of current year BIE deduction allo-
cable to each member, 33.33%, as computed earlier in
paragraph (f)(3) of this section (Example 3).

(4) Application of the allocation rule in para-
graph (c)(5) of this section. In Year 1 the group has

$60x of domestic related current year BIE, of which
$36x is deducted in the year (by operation of the
classification rule). Therefore, the group has $24x of
domestic related BIE carryforward. Similarly, the
group has $40x of foreign related current year BIE in
Year 1, of which $24x is deducted in the year.
Therefore, the group has $16x of foreign related BIE
carryforward. The $24x domestic related BIE carry-
forward status and $16x foreign related BIE carry-
forward status will be allocated to P, S1, and S2 in
proportion to the amount of each member's disal-
lowed BIE carryforward.

(i) Allocation to P. The percentage of disallowed
BIE carryforward allocable to P is 33.33% (P's Year
1 disallowed BIE carryforward, $40x ($60x-$20x),
divided by the group's Year 1 disallowed BIE car-
ryforward, $120x ($60x + $40x + 80x - $60x)).
Thus, the amount of domestic related BIE carryfor-
ward status allocated to P is $8x (the group's do-
mestic related BIE carryforward, $24x, multiplied by
the percentage of disallowed BIE carryforward allo-
cable to P, 33.33%); and the amount of foreign
related BIE carryforward status allocated to P is
$5.33x (the group's foreign related BIE carryfor-
ward, $16x, multiplied by the percentage of disal-
lowed BIE carryforward allocable to P, 33.33%).
Under paragraph (c)(5)(iv) of this section, P's disal-
lowed BIE carryforward that has not been allocated
a status as either a domestic related BIE carryfor-
ward or a foreign related BIE carryforward will be
treated as interest paid or accrued to an unrelated
party. Therefore, $26.67x ($40x P's disallowed BIE
carryforward - $8x domestic related BIE carryfor-
ward status allocated to P - $5.33x foreign related
BIE carryforward status allocated to P) is treated as
interest paid or accrued to an unrelated party.

(ii) Allocation to S1. The percentage of disal-
lowed BIE carryforward allocable to S1 is 16.67%
(S1's Year 1 disallowed BIE carryforward, $20x
($40x - $20x), divided by the group's Year 1 disal-
lowed BIE carryforward, $120x ($60x + $40x +
80x - $60x). Thus, the amount of domestic related
BIE carryforward status allocated to S1 is $4x (the
group's domestic related BIE carryforward, $24x,
multiplied by the percentage of disallowed BIE car-
ryforward allocable to S1, 16.67%); and the amount
of foreign related BIE carryforward status allocated
to S1 is $2.67x (the group's foreign related BIE
carryforward, $16x, multiplied by the percentage of
disallowed BIE carryforward allocable to S1,
16.67%). Under paragraph (c)(5)(iv) of this section,
S1's disallowed BIE that has not been allocated a
status as either a domestic related BIE carryforward
or a foreign related BIE carryforward will be treated
as interest paid or accrued to an unrelated party.
Therefore, $13.33x ($20x S1's disallowed BIE car-
ryforward - $4x domestic related BIE carryforward
status allocated to S1 - $2.67x foreign related BIE
carryforward status allocated to S1) is treated as
interest paid or accrued to an unrelated party.

(iii) Allocation to S2. The percentage of disal-
lowed BIE carryforward allocable to S2 is 50% (S2's
Year 1 disallowed BIE carryforward, $60x ($80x-
$20x), divided by the group's Year 1 disallowed BIE
carryforward, $120x ($60x+$40x+80x-$60x).
Thus, the amount of domestic related BIE carryfor-
ward status allocated to S2 is $12x (the group's
domestic related BIE carryforward, $24x, multiplied

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by the percentage of disallowed BIE carryforward
allocable to S2, 50%); and the amount of foreign
related BIE carryforward status allocated to S2 is
$8x (the group's foreign related BIE carryforward,
$16x, multiplied by the percentage of disallowed
BIE carryforward allocable to S2, 50%). Under para-
graph (c)(5)(iv) of this section, S2's disallowed BIE
that has not been allocated a status as either a do-
mestic related BIE carryforward or a foreign related
BIE carryforward will be treated as interest paid or
accrued to an unrelated party. Therefore, $40x ($60x
S2's disallowed BIE carryforward - $12x domestic
related BIE carryforward status allocated to S2 - $8x
foreign related BIE carryforward status allocated to
S2) is treated as interest paid or accrued to an unre-
lated party.

(ii) The group deducting its disallowed BIE car-
ryforwards. (A) Facts. The facts are the same as in
paragraph (f)(3)(i)(A) of this section (the facts in
Example 3(i)), and in addition, none of the members
incurs any business interest expense in Year 2. The
group's section 163(j) limitation for Year 2 is $30x.

(B) Analysis-(1) Application of the absorption
rule in paragraph (c)(2) of this section. Following
the rules in section 163(j), each member of the group
is deducting $10x of its disallowed BIE carryforward
from Year 1. Therefore, the group's section 163(j)
deduction for Year 2 is $30x.

(2) Application of the classification rule in para-
graph (c)(3) of this section. Under paragraph
(c)(3)(iv) of this section, to the extent members are
deducting their Year 1 disallowed BIE carryforward
in Year 2, the classification rule will apply to the
deduction in Year 2 after the allocation rule in para-
graph (c)(5) of this section has allocated the related
and unrelated party status to the member's disal-
lowed BIE carryforward in Year 1. The allocation
required under paragraph (c)(5) of this section is
described in paragraph (f)(3)(i)(B)(4) of this section.

(i) Use of P's allocated domestic related BIE
carryforward status and foreign related BIE carry-
forward status. P has $40x of Year 1 disallowed BIE
carryforward, and P was allocated $8x of domestic
related BIE carryforward status and $5.33x of for-
eign related BIE carryforward status. In Year 2, P
deducts $10x of its Year 1 disallowed BIE carryfor-
ward. Under the classification rule of paragraph
(c)(3) of this section, P is treated as deducting pro-
rata from its allocated status of domestic related BIE
carryforward and foreign related BIE carryforward.
Therefore, P is treated as deducting $6x of its allo-
cated domestic related BIE carryforward ($10x X
$8x/($8x + $5.33x)), and $4x of its allocated foreign
related BIE carryforward ($10x X $5.33x / $8x +
$5.33x)). After Year 2, P has remaining $30x of
Year 1 disallowed BIE carryforward, of which $2x
has a status of domestic related BIE carryforward,
$1.33x has the status of foreign related BIE carry-
forward, and $26.67x of interest treated as paid or
accrued to unrelated parties.

(ii) Use of SI's allocated domestic related BIE
carryforward status and foreign related BIE carry-
forward status. S1 has $20x of Year 1 disallowed
BIE carryforward, and S1 was allocated $4x of do-
mestic related BIE carryforward status and $2.67x of
foreign related BIE carryforward status. In Year 2,
S2 deducts $10x of its Year 1 disallowed BIE car-
ryforward. Because S2's deduction of its Year 1

disallowed BIE carryforward, $10x, exceeds its al-
located domestic related BIE carryforward status
($4x) and foreign related BIE carryforward status
($2.67x), all of the allocated related party status are
used up. After Year 2, all of S1's Year 1 disallowed
BIE carryforward, $10x, is treated as interest paid or
accrued to an unrelated party.

(iii) Use of S2's allocated domestic related BIE
carryforward status and foreign related BIE carry-
forward status. S2 has $60x of Year 1 disallowed
BIE carryforward, and S2 was allocated $12x of
domestic related BIE carryforward status and $8x of
foreign related BIE carryforward status. In Year 2,
S2 deducts $10x of its Year 1 disallowed BIE car-
ryforward. Under the classification rule of paragraph
(c)(3) of this section, S2 is treated as deducting $6x
of its allocated domestic related BIE carryforward
($10x X $12x / ($12x + $8x)), and $4x of its
allocated foreign related BIE carryforward ($10x X
$8x / $8x + $12x)). After Year 2, P has remaining
$50x of Year 1 disallowed BIE carryforward, of
which $6x has a status of domestic related BIE
carryforward, $4x has the status of foreign related
BIE carryforward, and $40x of interest treated as
paid or accrued to unrelated parties.

(g) Applicability date-(1) In general.
Except as provided in this paragraph (g),
this section applies to taxable years begin-
ning after December 31, 2017.

(2) Application of section 59A if S joins
a consolidated group with a taxable year
beginning before January 1, 2018. If dur-
ing calendar year 2018 a corporation (S)
joins a consolidated group during a con-
solidated return year beginning before
January 1, 2018, then section 59A will not
apply to S's short taxable year that is
included in the group's consolidated re-
turn year, even though S's short taxable
year begins after December 31, 2017.

Par. 9. Section 1.1502-100 is amended
by revising paragraph (b) to read as fol-
lows:

§ 1.1502-100 Corporations exempt
from tax.

* * * * *

(b) The tax liability for a consolidated
return year of an exempt group is the tax
imposed by section 511(a) on the consol-
idated unrelated taxable income for the
year (determined under paragraph (c) of
this section), and by allowing the credits
provided in § 1.1502-2(b).

* * * * *

Par. 10. Section 1.6038A-1 is amended
by adding a sentence to the end of para-
graph (n)(2) and revising the last sentence
of paragraph (n)(3) to read as follows:

§ 1.6038A-1 General requirements and
definitions.

* * * * *

(n) * * *

(2) * * * Section 1.6038A-2(a)(3),
(b)(6), and (b)(7) apply for taxable years
beginning after December 31, 2017.

(3) * * * For taxable years ending on or
before December 31, 2017, see
§ 1.6038A-4 as contained in 26 CFR part
1 revised as of April 1, 2018.

* * * * *

Par. 11. Section 1.6038A-2 is amended
by

1\. Revising the headings for para-
graphs (a) and (a)(1).

2\. Revising paragraph (a)(2).

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

4\. Revising paragraphs (b)(1)(ii),
(b)(2)(iv), and the second sentence of
paragraph (b)(3).

5\. Redesignating paragraphs (b)(6)
through (b)(9) as paragraphs (b)(8)
through (b)(11).

6\. Adding new paragraphs (b)(6) and
(7).

7\. Revising paragraph (c) and the first
sentence of paragraph (d).

8\. Removing the language "Paragraph
(b)(8)" from the second sentence of para-
graph (g) and adding the language "Para-
graph (b)(10)" in its place.

9\. Adding two sentences to the end of
paragraph (g).

The revisions and additions read as fol-
lows:

§ 1.6038A-2 Requirement of return.

(a) Forms required. (1) Form 5472.
* * *

(2) Reportable transaction. A report-
able transaction is any transaction of the
types listed in paragraphs (b)(3) and (4) of
this section, and, in the case of a reporting
corporation that is an applicable taxpayer,
as defined under § 1.59A-2(b), any other
arrangement that, to prevent avoidance of
the purposes of section 59A, is identified
on Form 5472 as a reportable transaction.
However, except as the Secretary may
prescribe otherwise for an applicable tax-
payer, the transaction is not a reportable
transaction if neither party to the transac-
tion is a United States person as defined in
section 7701(a)(30) (which, for purposes

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of section 6038A, includes an entity that
is a reporting corporation as a result of
being treated as a corporation under
§ 301.7701-2(c)(2)(vi) of this chapter)
and the transaction-

(i) Will not generate in any taxable
year gross income from sources within the
United States or income effectively con-
nected, or treated as effectively con-
nected, with the conduct of a trade or
business within the United States, and

(ii) Will not generate in any taxable
year any expense, loss, or other deduction
that is allocable or apportionable to such
income.

(3) Form 8991. Each reporting corpo-
ration that is an applicable taxpayer, as
defined under § 1.59A-2(b), must make
an annual information return on Form
8991. The obligation of an applicable tax-
payer to report on Form 8991 does not
depend on applicability of tax under sec-
tion 59A or obligation to file Form 5472.

(b) * * *

(1) * * *

(ii) The name, address, and U.S. tax-
payer identification number, if applicable,
of all its direct and indirect foreign share-
holders (for an indirect 25-percent foreign
shareholder, explain the attribution of
ownership); whether any 25-percent for-
eign shareholder is a surrogate foreign
corporation under section 7874(a)(2)(B)
or a member of an expanded affiliated
group as defined in section 7874(c)(1);
each country in which each 25-percent
foreign shareholder files an income tax
return as a resident under the tax laws of
that country; the places where each 25-
percent shareholder conducts its business;
and the country or countries of organiza-
tion, citizenship, and incorporation of
each 25-percent foreign shareholder.

* * * * *

(2) * * *

(iv) The relationship of the reporting
corporation to the related party (including,
to the extent the form may prescribe, any
intermediate relationships).

(3) * * * The total amount of such
transactions, as well as the separate
amounts for each type of transaction de-
scribed below, and, to the extent the form
may prescribe, any further description,

categorization, or listing of transactions
within these types, must be reported on
Form 5472, in the manner the form pre-
scribes. * * *
* * * * *

(6) Compilation of reportable transac-
tions across multiple related parties. A
reporting corporation must, to the extent
and in the manner Form 5472 may pre-
scribe, include a schedule tabulating infor-
mation with respect to related parties for
which the reporting corporation is re-
quired to file Forms 5472. The schedule
will not require information (beyond to-
taling) that is not required for the individ-
ual Forms 5472. The schedule may in-
clude the following:

(i) The identity and status of the related
parties;

(ii) The reporting corporation's rela-
tionship to the related parties;

(iii) The reporting corporation's report-
able transactions with the related parties;
and

(iv) Other items required to be reported
on Form 5472.

(7) Information on Form 5472 and
Form 8991 regarding base erosion pay-
ments. If any reporting corporation is an
applicable taxpayer, as defined under
§ 1.59A-2(b), it must report the informa-
tion required by Form 8991 and by any
Form 5472 it is required to file, regarding:

(i) Determination of whether a tax-
payer is an applicable taxpayer;

(ii) Computation of base erosion mini-
mum tax amount, including computation
of regular tax liability as adjusted for pur-
poses of computing base erosion mini-
mum tax amount;

(iii) Computation of modified taxable
income;

(iv) Base erosion tax benefits;

(v) Base erosion percentage calcula-
tion;

(vi) Base erosion payments;

(vii) Amounts with respect to services
as described in § 1.59A-3(b)(3)(i), includ-
ing a breakdown of the amount of the total
services cost and any mark-up compo-
nent;

(viii) Arrangements or transactions de-
scribed in § 1.59A-9;

(ix) Any qualified derivative payment,
including:

(A) The aggregate amount of qualified
derivative payments for the taxable year,
including as determined by type of deriv-
ative contract;

(B) The identity of each counterparty
and the aggregate amount of qualified de-
rivative payments made to that counter-
party; and

(C) A representation that all payments
satisfy the requirements of § 1.59A-
6(b)(2), and

(x) Any other information necessary to
carry out section 59A.

* * * * *

(c) Method of reporting. All statements
required on or with the Form 5472 or
Form 8991 under this section and
§ 1.6038A-5 must be in the English lan-
guage. All amounts required to be re-
ported under paragraph (b) of this section
must be expressed in United States cur-
rency, with a statement of the exchange
rates used, and, to the extent the forms
may require, must indicate the method by
which the amount of a reportable transac-
tion or item was determined.

(d) * * * A Form 5472 and Form 8991
required under this section must be filed
with the reporting corporation's income
tax return for the taxable year by the due
date (including extensions) of that return.
* * *

* * * * *

(g) * * * Paragraph (b)(7)(ix) of this
section applies to taxable years beginning
one year after final regulations are pub-
lished in the Federal Register. Before
these regulations are applicable, a tax-
payer will be treated as satisfying the re-
porting requirement described in § 1.59A-
6(b)(2) only to the extent that it reports the
aggregate amount of qualified derivative
payments on Form 8991.

## § 1.6038A-4 [Amended]

Par. 12. For each paragraph listed in
the table, remove the language in the "Re-
move" column from wherever it appears
and add in its place the language in the
"Add" column as set forth below:

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Section

Remove

Add

Section 1.6038A-4(a)(1)

$10,000

$25,000

Section 1.6038A-4(a)(3)

$10,000

$25,000

Section 1.6038A-4(d)(1)

$10,000

$25,000

Section 1.6038A-4(d)(4)

$10,000

$25,000

Section 1.6038A-4(f)

$10,000

$25,000

Section 1.6038A-4(f)

$30,000

$75,000

Section 1.6038A-4(f)

$90,000

$225,000

# § 1.6655-5 [Amended]

Par. 13. Section 1.6655-5 is amended
by removing the language "§ 1.1502-
2(h)" in paragraph (e) Example 10 and
adding the languageҤ 1.1502-1(h)" in its
place.

Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.

(Filed by the Office of the Federal Register on December 17,
2018, 4:15 p.m., and published in the issue of the Federal
Register for December 21, 2018, 83 F.R. 65965)

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## Definition of Terms

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

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

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

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

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

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

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

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

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

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

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

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

### Abbreviations

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

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

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

GE-Grantee.

GP-General Partner.

GR-Grantor.

COOP-Cooperative.

IC-Insurance Company.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

CY-County.

LE-Lessee.

D-Decedent.

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.

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.

BK-Bank.

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

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

CI-City.

DC-Dummy Corporation.

X-Corporation.

Y-Corporation.

Z-Corporation.

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#### Numerical Finding List1

Bulletin 2019-2

Notices:

2019-01, 2019-02 I.R.B. 275

2019-02, 2019-02 I.R.B. 281

2019-04, 2019-02 I.R.B. 282

2019-05, 2019-02 I.R.B. 283

##### Proposed Regulations:

REG-104259-18, 2019-02 I.R.B. 300

Revenue Procedures:

2019-1, 2019-01 I.R.B. 1

2019-2, 2019-01 I.R.B. 106

2019-3, 2019-01 I.R.B. 130

2019-4, 2019-01 I.R.B. 146

2019-5, 2019-01 I.R.B. 230

2019-6, 2019-02 I.R.B. 284

2019-7, 2019-01 I.R.B. 268

2019-9, 2019-2 I.R.B. 292

2019-10, 2019-2 I.R.B. 296

#### Revenue Rulings:

2019-03, 2019-02 I.R.B. 272

1A 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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# Finding List of Current Actions on Previously Published Items1

Bulletin 2019-2

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# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.

# We Welcome Comments About the Internal Revenue Bulletin

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
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