Internal Revenue Bulletin 2020-46 (PDF rendition): IRS Revenue Procedures

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Bulletin No. 2020–46
November 9, 2020
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, EXTATE TAX,
EXCUSE TAX, GIFT TAX, INCOME TAX
Rev. Proc. 2020-45, page 1016.
This procedure provides the 2021 cost-of-living adjustments
for certain items due to inflation as required by various provi-
sions of the Code and Service guidance.
EMPLOYEE PLANS
Notice 2020-79, page 1014.
Section 415 of the Internal Revenue Code (the Code) pro-
vides for dollar limitations on benefits and contributions un-
der qualified retirement plans. Section 415(d) requires that
the Secretary of the Treasury annually adjust these limits for
cost of living increases. Other limitations applicable to de-
ferred compensation plans are also affected by these adjust-
ments under § 415. Under § 415(d), the adjustments are to
be made under adjustment procedures similar to those used
to adjust benefit amounts under § 215(i)(2)(A) of the Social
Security Act.
INCOME TAX
T.D. 9914, page 1000.
This document contains final regulations providing guidance
on the definition of an eligible terminated S corporation and
rules relating to distributions of money by such a corporation
after the post-termination transition period. This document
also amends current regulations to extend the treatment of
distributions of money during the post-termination transition
period to all shareholders of the corporation and clarifies the
allocation of current earnings and profits to distributions of
money and other property. The final regulations affect C cor-
porations that were formerly S corporations and the share-
holders of such corporations.
Finding Lists begin on page ii.

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Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing of-
ficial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, 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 sub-
stantive 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 inter-
nal management are not published; however, statements of
internal 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 rul-
ings to taxpayers or technical advice to Service field offices,
identifying 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
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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,
Legislation 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
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by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
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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.
November 9, 2020 Bulletin No. 2020–46

Part I
Section 1371 —
Coordination with
subchapter C
26 CFR §§1.316-2, amended; 1.481-5 added;
1.481-6, revised 1.1362-2(a)(2)(iii) added; 1.1371-
1, added; 1.1371-2(d), added; 1.1377-2(b), revised;
1.1377-3 revised
T.D. 9914
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Eligible Terminated S
Corporations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulation.
SUMMARY: This document contains fi-
nal regulations providing guidance on the
definition of an eligible terminated S cor-
poration and rules relating to distributions
of money by such a corporation after the
post-termination transition period. This
document also amends current regulations
to extend the treatment of distributions of
money during the post-termination transi-
tion period to all shareholders of the cor-
poration and clarifies the allocation of cur-
rent earnings and profits to distributions of
money and other property. The final regu-
lations affect C corporations that were for-
merly S corporations and the shareholders
of such corporations.
DATES: Effective Date: These regula-
tions are effective October 20, 2020.
Applicability Dates: For dates of appli-
cability, see §§ 1.481-6(b), 1.1371-1(e),
1.1371-2(d), and 1.1377-3(c).
FOR FURTHER INFORMATION
CONTACT: Concerning §§ 1.481-5,
1.481-6, 1.1362-2(a)(2)(iii), 1.1377-2,
and 1.1377-3, Margaret Burow or Mi-
chael Gould at (202) 317-5279; concern-
ing §§1.1371-1 and 1.1371-2, Aglaia
Ovtchinnikova at (202) 317- 6975 or Mar-
garet Burow or Michael Gould at (202)
317-5279; concerning § 1.316-2, Aglaia
Ovtchinnikova at (202) 317-6975.
SUPPLEMENTARY INFORMATION:
Background
In the case of an S corporation, as de-
fined in section 1361(a)(1) of the Internal
Revenue Code (Code), having accumu-
lated earnings and profits (as described in
section 316(a)(1) of the Code (AE&P))
that makes a distribution of property to
which section 301 would otherwise apply,
section 1368(c)(1) of the Code generally
treats the amount of the distribution not
in excess of the S corporation’s accu-
mulated adjustments account (as defined
in § 1.1368-2(a)(1) (AAA)) or the recip-
ient shareholder’s adjusted basis in such
S corporation’s stock as excluded from
the shareholder’s gross income. Section
1368(c)(2) provides that the remaining
portion of the distribution is treated as a
dividend (as defined in section 316(a)) to
the extent of the S corporation’s AE&P.
Finally, section 1368(c)(3) provides that
any amount of the distribution in excess
of the S corporation’s AAA and AE&P
is applied against the shareholder’s re-
maining adjusted basis in the stock, with
any amount exceeding that adjusted basis
treated as gain from the sale or exchange
of property.
Generally, a distribution by a C cor-
poration to its shareholders with respect
to their stock ownership is treated as a
taxable dividend to the extent of the cor-
poration’s earnings and profits. See sec-
tions 301(c) and 316(a). However, fol-
lowing the termination of a corporation’s
S election made under section 1362 of
the Code (S election), section 1371(e) of
the Code allows shareholders of the re-
sulting C corporation to benefit from the
corporation’s former status as an S cor-
poration with respect to distributions of
money during the corporation’s post-ter-
mination transition period (PTTP),
which is generally the one-year period
after the corporation terminates its S
election. Specifically, during the PTTP,
a distribution of money by the C corpo-
ration is characterized as a distribution
from the corporation’s AAA. The receipt
of such a distribution is tax-free to the
extent of the recipient shareholder’s
basis in its stock and the corporation’s
AAA balance. If the distribution exceeds
the recipient shareholder’s basis in its
stock, but not the corporation’s AAA,
then the distribution is tax-free to the ex-
tent of the recipient shareholder’s basis,
with the remainder treated as gain from
the sale of property. If the distribution
exceeds the corporation’s AAA, then the
excess is taxed as a dividend from cur-
rent earnings and profits (as described
in section 316(a)(2) (CE&P)) or any
AE&P from the corporation’s previous
existence as a corporation taxed under
subchapter C. Without section 1371(e),
shareholders of the former S corporation
would be precluded from receiving dis-
tributions allocable to AAA.
Section 13543(a) and (b) of Public Law
115-97, 131 Stat. 2054, 2155 (2017), com-
monly referred to as the Tax Cuts and Jobs
Act (TJCA), amended the Code by adding
new sections 481(d) and 1371(f), effective
as of December 22, 2017, the date of en-
actment of the TCJA.
Section 481(d)(1) of the Code permits
a corporation that qualifies as an eligi-
ble terminated S corporation (ETSC) to
take into account any 481 adjustments
(as defined in part II.C of the Summary
of Comments and Explanation of Revi-
sions) which are attributable to the revo-
cation of an S election over the section
481(d) inclusion period, which is the
six-taxable-year-period beginning with
the year of change (as defined in part II.C
of the Summary of Comments and Ex-
planation of Revisions). Section 481(d)
(2) defines an ETSC as a C corporation
meeting the following three require-
ments: (i) the corporation was an S cor-
poration on December 21, 2017; (ii) the
S corporation revoked its election under
section 1362(a) to be an S corporation
(that is, the S election) during the two-
year period beginning on December 22,
November 9, 2020 1000 Bulletin No. 2020–46

2017 (revocation requirement); and (iii)
the owners of the stock of the corpora-
tion, determined on the date the corpora-
tion made a revocation of its S election,
are the same owners (and own identical
proportions of the corporation’s stock) as
on December 22, 2017 (shareholder iden-
tity requirement).
Section 1371(f) extends the period
during which shareholders of an ETSC
can benefit from its AAA generated
during the corporation’s former status as
an S corporation (ETSC period) by pro-
viding that, in the case of distributions of
money following the PTTP, (i) the dis-
tributing ETSC’s AAA is allocated to a
distribution of money to which section
301 would otherwise apply (qualified
distribution), and (ii) the qualified distri-
bution is chargeable to AE&P in the same
ratio as the amount of such AAA bears
to the amount of such AE&P. In enact-
ing section 1371(f), Congress determined
that “it is important to provide rules to
ease the transition from S corporation to
C corporation for the affected taxpayers”
because, based on the TCJA’s revisions
to the Code, “taxpayers that previously
elected to be taxed as S corporations may
prefer instead to be taxed as C corpora-
tions.” H. Rept. 115-409, 115th Cong.,
1st Sess., at 245 (Nov. 14, 2017) (House
Report).
On November 7, 2019, the Depart-
ment of the Treasury (Treasury Depart-
ment) and the IRS published a notice of
proposed rulemaking (REG-131071-18)
in the Federal Register (84 FR 60011)
containing proposed regulations under
section 1371 and proposed amendments to
the Income Tax Regulations (26 CFR part
1) under sections 481 and 1377 (proposed
regulations). The Treasury Department
and the IRS received 16 written or elec-
tronic comments responding to the pro-
posed regulations. All comments received
on the proposed regulations are available
at http://www.regulations.gov or upon
request. As no request for a public hear-
ing was received, no hearing was held.
After full consideration of the comments
received, this Treasury decision adopts
generally the proposed regulations with
certain modifications in response to the
comments received, as described in the
Summary of Comments and Explanation
of Revisions.
Summary of Comments and
Explanation of Revisions
I. Overview
The final regulations retain the ap-
proach and structure of the proposed
regulations, with certain revisions. This
Summary of Comments and Explanation
of Revisions discusses those revisions, as
well as the comments received in response
to the proposed regulations.
II. Comments on Qualification as an
Eligible Terminated S Corporation
A. Significance of date of revocation of S
election
To qualify as an ETSC under section
481(d)(2), a corporation must satisfy the
revocation requirement by making a revo-
cation of its S election during the two-year
period beginning on December 22, 2017
(two-year period). See section 481(d)
(2)(A)(ii) (setting forth the revocation
requirement); proposed § 1.481-5(b)(2)
(same). In addition, the shareholder iden-
tity requirement must be satisfied by the
same shareholders owning identical pro-
portions of the corporation’s stock on two
dates: December 22, 2017, and the date on
which the corporation made a revocation
of its S election. See section 481(d)(2)
(B) (setting forth the shareholder identity
requirement); proposed § 1.481-5(b)(3)
(same). But see proposed § 1.481-5(c)(1)
(identifying five categories of share trans-
fers that do not result in a change in share-
holder ownership for purposes of section
481(d)(2)(B)). Consequently, the date on
which a corporation makes a revocation
of its S election is critical for determining
ETSC qualification.
A corporation can allow the effective
date of its S election revocation to occur
automatically by operation of section
1362(d)(1)(C), or it can specify an effec-
tive date under section 1362(d)(1)(D). For
example, a revocation made before the
16th day of the third month of an S cor-
poration’s taxable year generally is effec-
tive retroactively on the first day of that
taxable year. See section 1362(d)(1)(C)(i);
§ 1.1362-2(a)(2)(i). In contrast, a revoca-
tion made after the 15th day of the third
month of a corporation’s taxable year
generally is effective prospectively on
the first day of the corporation’s follow-
ing taxable year. See section 1362(d)(1)
(C)(ii); § 1.1362-2(a)(2)(i). Alternatively,
the corporation may specify an immediate
or prospective effective date for a revo-
cation by expressing a date (in terms of
a stated day, month, and year) that occurs
on or after the date on which the revoca-
tion is made. See section 1362(d)(1)(D);
§ 1.1362-2(a)(2)(ii).
1. Retroactive Effective Date of the
Revocation Determines ETSC Status
One commenter suggested that the final
regulations revise proposed § 1.481-5(b)
(2) to confirm that, in the case of a revo-
cation with a retroactive effective date
pursuant to section 1362(d)(1)(C)(i), the
revocation may be treated as occurring
on the retroactive effective date for pur-
poses of ETSC qualification. Based on the
stated congressional goal of facilitating
the transition from S corporation status to
C corporation status, the commenter con-
tended that taxpayers reasonably could
have interpreted the statute to indicate that
compliance with the shareholder identity
requirement would be tested on the ret-
roactive revocation’s effective date. In
support of this contention, the commenter
correctly noted that, in the absence of such
an interpretation, a corporation would not
satisfy the shareholder identity require-
ment for qualifying as an ETSC in pro-
posed § 1.481-5(b)(2) and (3) if the corpo-
ration (i) had the same shareholders (and
in identical proportions) on both Decem-
ber 22, 2017, and the retroactive effective
date of the revocation, but (ii) experienced
a change in shareholder ownership during
the period between the retroactive effec-
tive date of the revocation and the date on
which the revocation was made.
The Treasury Department and the IRS
agree with the commenter’s interpreta-
tion. Proposed § 1.481-5(b)(2) and (3)
directly address revocations with pro-
spective effective dates, which can be
specified with significant flexibility in
the revocation. A retroactive effective
date for a revocation results solely by
operation of section 1362(d)(1)(C)(i) and
§ 1.1362-2(a)(2)(i) and, in such instance,
is always effective on the first day of the
corporation’s taxable year. To confirm
Bulletin No. 2020–46 1001 November 9, 2020

November 9, 2020 1002 Bulletin No. 2020–46
the commenter’s interpretation, § 1.481-
5(c)(2) of the final regulations provides
that, solely with regard to revocations
with retroactive effective dates, a revoca-
tion may be treated as having been made
on the effective date of such revocation.
Accordingly, for purposes of § 1.481-5(b)
(2) and (3), a corporation may test com-
pliance with the revocation requirement
and the shareholder identity requirement
on either the date the revocation was
made or, in the case of a revocation with
a retroactive effective date, the date the
revocation was effective.
2. Application of Section 7503 to a
Revocation of an S Election
As discussed in part II.A of this Sum-
mary of Comments and Explanation of
Revisions, the revocation requirement
of section 481(d)(2)(A)(ii) requires that
a corporation must make a revocation
during the two-year period to qualify as an
ETSC. Section 7503 provides that, “when
the last day prescribed under authority
of the internal revenue laws for perform-
ing any act falls on Saturday, Sunday, or
a legal holiday, the performance of such
act shall be considered timely if it is per-
formed on the next succeeding day which
is not a Saturday, Sunday, or a legal holi-
day.” Because a revocation is an act made
under authority of the internal revenue
laws (that is, section 1362 of the Code),
section 7503 applies for purposes of deter-
mining whether the revocation was made
within the required two-year period. As a
result of the application of section 7503
in conjunction with section 1362 and
§ 1.1362-2(a)(2), December 23, 2019 (a
Monday), is the last day of the two-year
period. Therefore, a revocation made on
that date would be treated as made within
the two-year period. Without the applica-
tion of section 7503, December 21, 2019
(a Saturday), would have been the last day
of the two-year period.
To avoid any doubt, these final regu-
lations clarify the text of § 1.1362-2(a)
(2) to provide explicitly that section 7503
applies where the last day prescribed for
making a revocation occurs on a Satur-
day, Sunday, or legal holiday. Therefore,
a revocation made on December 23, 2019,
will be treated as made during the two-
year period.
B. Applicability of PTTP and ETSC
period to S corporations with no AE&P
Following the termination of an S elec-
tion, section 1371(e) permits shareholders
of the resulting C corporation to benefit
from the corporation’s former status as an
S corporation with respect to distributions
of money during the corporation’s PTTP,
which generally is the one-year period af-
ter the corporation terminates its S elec-
tion. Specifically, during the PTTP, a dis-
tribution of money by the C corporation
is characterized as a distribution from the
corporation’s AAA. The receipt of such a
distribution is tax-free to the extent of the
recipient shareholder’s basis in the stock
with respect to which the shareholder
received the distribution, and is taxed as
gain from the sale of property to the extent
the distribution exceeds the shareholder’s
basis in that stock. See section 1371(e)
(1). If the corporation exhausts its AAA
during the PTTP, subsequent distributions
are subject to treatment under section 301.
A commenter requested confirmation
that the rules regarding distributions made
during the PTTP, including section 1371(e)
and § 1.1377-2, apply if the corporation
did not have AE&P at the time that it ter-
minated its S election. Section 1371(e)(1)
provides special treatment to distributions
made by a corporation during the PTTP
if such distributions (i) consist of mon-
ey and (ii) are made with respect to the
corporation’s stock. Those two conditions
would be satisfied regardless of whether
the distributing corporation had AE&P.
Therefore, the Treasury Department and
the IRS agree with the commenter’s inter-
pretation of section 1371(e) and § 1.1377-
2, but have determined that no clarifying
revisions to the regulations are necessary
in this regard.
The commenter also requested confir-
mation that the rules regarding distribu-
tions made during the ETSC period would
apply if the distributing corporation did
not have AE&P as of the effective date
of the revocation. Example 1 of proposed
§ 1.1371-1(d) illustrates that, if an ETSC
has no AE&P as of the beginning of the
day on which the revocation is effective,
its historical AE&P is zero. Pursuant to
proposed § 1.1371-1(a)(2)(ix) and (x),
such a corporation would enter its ETSC
period with a AAA ratio of 1 and an AE&P
ratio of zero. Therefore, each qualified
distribution would be characterized as a
distribution of AAA. Based on the guid-
ance provided in Example 1, as well as the
definition of the “AAA ratio” set forth in
proposed § 1.1371-1(a)(ii), the Treasury
Department and the IRS have determined
that no clarifying revisions to the regula-
tions are necessary in this regard.
C. Application of section 481(d) to
qualified subchapter S subsidiaries
If an S corporation wholly owns the
stock of a domestic C corporation that is
not an ineligible corporation described
in section 1361(b)(2), the S corporation
may elect under section 1361(b)(3)(B)
(ii) and § 1.1361-3 to treat the C corpora-
tion as a qualified subchapter S subsidi-
ary (QSub) such that (i) the QSub will no
longer be treated as a separate corporation
and (ii) all of the QSub’s assets, liabili-
ties, and items of income, deduction, and
credit will be treated as assets, liabilities,
and such items (as the case may be) of the
S corporation parent. If the requirements
of section 1361(b)(3)(B) cease to be sat-
isfied with respect to a QSub, including
by reason of the revocation of the parent’s
S election, section 1361(b)(3)(C)(i) and
§ 1.1361-5(b)(1)(i) provide that the corpo-
ration’s QSub election is terminated such
that the QSub is treated, for purposes of
the Code, as (i) a newly formed C corpo-
ration subsidiary separate from the parent
and (ii) acquiring all of its assets (and as-
suming all of its liabilities) from the par-
ent through an exchange to which section
351 of the Code applies (deemed section
351 exchange).
If the taxable income of any taxpayer,
including a corporation, for the current
year (year of change) is computed under
a method of accounting that is different
from the method of accounting used by
the taxpayer in the preceding year (ac-
counting method change), section 481
requires that the taxpayer must take into
account those adjustments that are deter-
mined to be necessary solely by reason of
the accounting method change to prevent
items of income or expense from being
duplicated or omitted (481 adjustments).
Section 481(a). The 481 adjustments are
generally taken into account in comput-
ing the taxpayer’s taxable income in the

Bulletin No. 2020–46 1003 November 9, 2020
year of change. However, section 481(c)
permits a taxpayer, in such manner and
subject to such conditions prescribed in
regulations by the Secretary of the Trea-
sury or his delegate (Secretary), to take
481 adjustments into account in com-
puting taxable income for the taxable
year or years permitted under such reg-
ulations. As noted earlier, section 481(d)
(1) permits an ETSC to take into account
any 481 adjustments that are attributable
to the revocation of an S election over a
six-taxable year period beginning with
the year of change (that is, the section
481(d) inclusion period).
Commenters have correctly observed
that section 481(a) and (d) do not apply
to an ETSC’s newly formed C corporation
subsidiary (ETSC corporate subsidiary)
that operated as a QSub prior to the re-
vocation of its parent’s S election. Upon
such a revocation, the ETSC corporate
subsidiary is treated as acquiring all of its
assets and assuming all of its liabilities
from the ETSC in a deemed section 351
exchange. See section 1361(b)(3)(C)(i);
§ 1.1361-5(b)(1)(i). A corporation formed
for a business purpose is a taxpayer sepa-
rate from its shareholder(s). See generally
Moline Properties v. Commissioner, 319
U.S. 436 (1943). As a result of the ETSC
corporate subsidiary’s status as a new
C corporation with no prior taxable year
(rather than, for example, as a successor
under section 381(a) of the Code), com-
menters have noted that the ETSC corpo-
rate subsidiary lacks any historical meth-
od of accounting from which to change.
Compare § 1.446-1(e)(1) (providing that
a taxpayer filing its first return may adopt
any permissible method of accounting in
computing taxable income for the taxable
year covered by such return) with section
381(c)(4) (providing that, in general, a
successor corporation must use the meth-
od of accounting used by the predecessor
corporation as of the date of the section
381(a) transaction).
Notwithstanding those observations
of the law, commenters have requested
that the final regulations extend the sec-
tion 481(d) inclusion period to an accru-
al method ETSC corporate subsidiary
that operated as a cash method QSub
of a cash method S corporation prior to
the revocation of the parent’s S election.
These commenters highlighted that, in
the deemed section 351 exchange re-
quired by section 1361(b)(3)(C)(i) and
§ 1.1361-5(b)(1)(i) that results from the
revocation of the parent’s S election,
the accounts receivable of a former cash
method QSub would be deemed trans-
ferred to the accrual method ETSC cor-
porate subsidiary with a zero basis. See
generally Raich v. Commissioner, 46 T.C.
604 (1966) (holding that trade accounts
receivable of a cash method transferor
received by an accrual basis transferee in
a section 351 exchange had a zero basis).
Therefore, the ETSC corporate subsidi-
ary would recognize income as it collects
amounts on the transferred receivables.
In the case where the ETSC corporate
subsidiary collects the entire amount of
the transferred receivables during its first
taxable year, commenters contended that
the ETSC corporate subsidiary’s inability
to include the amount received over the
six-year section 481(d) inclusion period
would inappropriately disadvantage the
former QSub as compared to its former S
corporation parent.
The Treasury Department and the IRS
understand the commenters’ concerns re-
garding the statutorily limited application
of section 481(d) and observe that the
commenters’ request is not unique to the
application of section 481(d), but rather
addresses the longstanding treatment of
former S corporations and QSubs under
section 481 with regard to a deemed sec-
tion 351 exchange. Throughout the nearly
25-year period since the 1996 enactment
of the QSub provisions under section
1361, section 481(a)(2) and any inclusion
period for a 481 adjustment have not ap-
plied with respect to former QSubs. See
section 1308 of the Small Business Job
Protection Act of 1996, Public Law 104-
188, 110 Stat. 1755, 1782-3 (August 20,
1996). See also Rev. Proc. 97-27, 1997-
1 C.B. 680, section 5.02(3)(a) (providing
a four-year amortization period solely to
taxpayers that have a 481 adjustment);
Rev. Proc. 2015-13, 2015-5 I.R.B. 419,
section 7.03(1) (same). After considering
the commenters’ analysis and the explic-
it reference in section 481(d) to section
481(a)(2), the Treasury Department and
the IRS have determined that section
481(d) does not apply to ETSC corpo-
rate subsidiaries, but rather maintains the
longstanding application of section 481(a)
solely to taxpayers that make an account-
ing method change. Accordingly, there is
no authority under section 481(d) to ex-
tend the section 481(d) inclusion period to
ETSC corporate subsidiaries.
Commenters also contended that the
Treasury Department and the IRS could
override the limited scope of section
481(d) through special QSub regulations
issued under the authority provided by
section 481(c), which, in the case of a
taxpayer making an accounting method
change, authorizes regulations permitting
a taxpayer to take any 481 adjustment into
account in computing taxable income for
the taxable year or years permitted under
such regulations. For example, comment-
ers suggested that the final regulations
permit an accrual method ETSC corpo-
rate subsidiary to elect to treat the assets
received (and liabilities assumed) by the
ETSC corporate subsidiary in the deemed
section 351 exchange as though the sub-
sidiary had owned such assets (and had
such liabilities) in a prior taxable year,
thereby creating an accounting method
change upon the revocation. However, this
approach contradicts the explicit text of
section 1362(b)(3)(C)(i), which provides
that, “[f]or purposes of this title” (that is,
for purposes of all of the provisions of
the Code), an ETSC corporate subsidiary
“shall be treated as a new corporation.”
In the alternative, commenters sug-
gested that the final regulations could
permit taxpayers to treat the assets re-
ceived (and liabilities assumed) by an
ETSC corporate subsidiary as though still
owned by the former S corporation on the
date on which the former S corporation
becomes an ETSC. Under this approach,
the ETSC’s 481 adjustment would be
computed as if the ETSC owned such
assets and was subject to such liabilities.
For support, these commenters high-
lighted anti-abuse regulations issued un-
der section 263A of the Code (UNICAP
anti-abuse regulations) that utilized this
alternative approach. See § 1.263A-7(c)
(4)(ii) (providing an anti-abuse rule re-
garding the use of section 351 exchanges
to avoid application of section 263A).
However, the UNICAP anti-abuse reg-
ulations were issued under the authori-
ty of section 263A(h)(1) rather than the
authority granted the Secretary under
section 481(c). See 52 FR 10052, 10059

November 9, 2020 1004 Bulletin No. 2020–46
(March 30, 1987). Section 263A(h)(1)
requires the Secretary to “prescribe rules
to carry out the purpose of section 263A,
including regulations to prevent the use
of related parties, pass-thru entities, or
intermediaries to avoid the application of
this section.” Section 263A(j)(1).
The Treasury Department and the IRS
have considered the commenters’ suggest-
ed approaches for extending the section
481(d) inclusion period to ETSC corpo-
rate subsidiaries but have determined that
section 481(c) would not support either
approach. Section 481(c) and § 1.481-
1(c)(2) provide the general rule that the
481 adjustment is taken into account in
computing taxable income in the year of
change, unless the Commissioner pre-
scribes a different taxable year or years to
take the 481 adjustment into account under
§§ 1.446-1(e)(3) and 1.481-4. Any regula-
tions issued under section 481(c) can ap-
ply only “[i]n the case of any change de-
scribed in [section 481](a)” with regard to
“adjustments required by [section 481](a)
(2).” As acknowledged by the comment-
ers, section 481(a) does not apply to an
ETSC corporate subsidiary because such
entity is newly formed and therefore could
not have had a prior accounting method to
potentially change.
Based on the foregoing, the final regu-
lations do not adopt either of the comment-
ers’ alternative suggestions or provide any
inclusion period for ETSC corporate sub-
sidiaries under section 481. The Treasury
Department and the IRS, however, note
that TCJA amendments to section 448(c)
of the Code have significantly expanded
the applicability of the cash method to
C corporations, including ETSC corpo-
rate subsidiaries. As amended by section
13102(a) of the TCJA (131 Stat. 2054,
2102-3), section 448(c) provides that a
C corporation may use the cash meth-
od if the corporation has average annual
gross receipts not exceeding $25 million
(adjusted for inflation) for its three prior
taxable years. Prior to the TCJA, the gross
receipts threshold under section 448(c)
was $5 million. As a result, fewer ETSC
corporate subsidiaries will be required to
adopt the accrual method as their permis-
sible method of accounting for their first
tax return than if the section 448(c) gross
receipts threshold had not been increased
from $5 million to $25 million.
III. Comments Regarding the Post-
Termination Transition Period
The last sentence of § 1.1377-2(b), as
in effect prior to the effective date of these
final regulations (no-newcomer rule),
limited the special treatment provided
under section 1371(e)(1) (with respect to
distributions of money during a corpora-
tion’s PTTP) solely to those shareholders
who were shareholders of the corporation
at the time that it terminated or revoked
its S election (collectively, legacy share-
holders). Because the rules pertaining to
the PTTP and to the ETSC period serve a
similar objective of easing the transition
from S corporation to C corporation sta-
tus, the Treasury Department and the IRS
determined that the rules regarding new-
comers (that is, non-legacy shareholders)
should be consistent. See preamble to
the proposed regulations, Explanation of
Provisions, part IV. Therefore, based on
the rationale for rejecting a no-newcomer
rule with respect to the ETSC period, as
set forth in part II.A of the Explanation
of Provisions of the preamble to the pro-
posed regulations, the Treasury Depart-
ment and the IRS determined that such
a rule should also not apply with respect
to the PTTP and proposed the removal of
the no-newcomer rule in § 1.1377-2(b).
See id.
A. Reliance on the § 1.1377-2(b) no-
newcomer rule
One commenter expressed concern
that elimination of the no-newcomer rule
in § 1.1377-2(b) could alter bargained-for
economic results if a legacy shareholder
had transferred less than all of its shares
prior to November 7, 2019 (that is, the
publication date of the proposed regula-
tions) or after that date but pursuant to a
binding agreement entered into before
that date. In particular, the commenter
contended that legacy shareholders who
transferred less than all of their shares
would have expected that only legacy
shareholders could receive distributions of
AAA during the PTTP, and perhaps even
during the ETSC period. According to the
commenter, this expectation would have
reduced the bargained-for price for the
transferred shares to reflect the tax benefit
of the future tax-free distributions.
The commenter provided an example
in which a sole shareholder of an ETSC
sold 40 percent of its stock to a third-par-
ty. The sale price was set prior to Novem-
ber 7, 2019, and the parties assumed that
the no-newcomer rule would limit distri-
butions of AAA to the legacy shareholder
during the PTTP, and that a similar rule
would apply during the ETSC period.
Under the proposed elimination of the
no-newcomer rule in § 1.1377-2(b), how-
ever, the newcomer, and not the legacy
shareholder, would be eligible to receive
40 percent of any AAA distributed during
the PTTP or ETSC period. The com-
menter observed that the newcomer’s
accession to a 40 percent interest in the
corporation’s AAA during the PTTP and
ETSC period amounts to a transfer of a
tax benefit from the legacy shareholder to
the newcomer for no consideration, con-
trary to the parties’ expectations. There-
fore, the commenter recommended that
the final regulations include an additional
transition rule. Under this rule, if shares
of a former S corporation were trans-
ferred to a newcomer pursuant to a bind-
ing agreement entered into before the
applicability date of the final regulations,
then, except upon unanimous agreement
of current shareholders of a corporation
that are legacy shareholders, the no-new-
comer rule would apply during the PTTP,
and a similar rule would apply during the
ETSC period.
The Treasury Department and the IRS
understand the concern underlying the
commenter’s recommendation. Howev-
er, the Treasury Department and the IRS
intended the applicability date provisions
in the proposed regulations, and as ad-
opted in these final regulations, to afford
corporations transition flexibility in ap-
plying § 1.1377-2(b) with regard to the
PTTP. Section 1.1377-2(b), as revised
by the final regulations to eliminate the
no-newcomer rule for special treatment
under section 1371(e)(1) of distributions
of money by a corporation with respect to
its stock during the post-termination tran-
sition period applies to a corporation’s
taxable years beginning after the date of
publication of the final regulations. In
the case of a corporation using the cal-
endar year as its annual accounting peri-
od, newcomers are not entitled to receive
distributions of AAA before January 1,

Bulletin No. 2020–46 1005 November 9, 2020
2021, unless the corporation chooses to
apply § 1.1377-2(b) before January 1,
2021. Corporations to which the com-
menter’s transition rule would have ap-
plied generally will thus have completed
their PTTPs prior to the applicability
of § 1.1377-2(b). Distributions of AAA
during those PTTPs would have been
limited to legacy shareholders. Addition-
ally, the commenter’s proposed transition
rule would add complexity in administer-
ing these rules. Accordingly, the Treasury
Department and the IRS have determined
that the applicability date provisions, as
set forth in the proposed regulations and
adopted in these final regulations, bal-
ance appropriately the protection of leg-
acy taxpayers’ expectations with the goal
of the Treasury Department and the IRS
to minimize complexity and administra-
tive difficulties for S corporations, their
shareholders, and the IRS.
With regard to the ETSC period, as
discussed in part II.A of the Explanation
of Provisions of the preamble to the pro-
posed regulations, section 1371(f) does
not contain a no-newcomer rule similar
to § 1.1377-2(b), and the Treasury Depart-
ment and the IRS have concluded that it
is inappropriate to adopt one. Corpora-
tions may have applied a similar analysis
of section 1371(f) and made distributions
of AAA to newcomers during their re-
spective ETSC periods. Providing an al-
ternate rule in these final regulations for
the ETSC period could unexpectedly alter
taxpayers’ bargained-for economic re-
sults. Therefore, the Treasury Department
and the IRS have determined that the best
way to address this situation is to allow
but not require corporations to apply the
final regulations addressing distributions
made during the ETSC period to taxable
years beginning on or before the date that
these final regulations are published in the
Federal Register.
B. Consideration of request for an
additional 120-day PTTP
A commenter recommended that the
final regulations provide a new 120-day
PTTP that would begin on the applica-
bility date of the final regulations. The
commenter noted that this new PTTP
would create an opportunity for any C
corporation with undistributed AAA that
expired at the end of its PTTP to restore
and distribute such AAA pursuant to sec-
tion 1371(e)(1) and § 1.1377-2. The com-
menter contended that the elimination of
the no-newcomer rule only for termina-
tions that occur after the issuance of the
proposed regulations disadvantages cor-
porations that terminated their S election
more than one year prior to issuance of the
proposed regulations, as compared to cor-
porations that terminated their S election
after the issuance of the proposed regula-
tions.
The Code sets forth a statutory defi-
nition of the PTTP that includes detailed
limits on its duration. Specifically, sec-
tion 1377(b)(1)(A), (B), and (C) provide
three separate durations for the PTTP, the
respective applicability of which depends
upon particular events. While the Treasury
Department and the IRS acknowledge the
concerns raised by the commenter, the fi-
nal regulations do not adopt the comment-
er’s recommendation because (i) section
1377(b) provides specific, detailed, and
unambiguous guidance on the duration of
a PTTP, and (ii) the recommended revi-
sion to § 1.1377-2 exceeds the scope of the
authority granted to prescribe regulations
under sections 1371 or 1377.
IV. Consideration of Comment Regarding
Treatment of ETSC Status and AAA as
Section 381 Items
In the case of certain asset acquisitions,
section 381(a) generally requires the ac-
quiring corporation to succeed to and take
into account the tax items described in
section 381(c) of the distributor or trans-
feror corporation. See section 381(a) (de-
scribing distributions to which section 332
of the Code applies and transfers to which
section 361 of the Code applies that are
carried out in connection with certain re-
organizations described in section 368(a)
(1) of the Code); section 381(c) (enumer-
ating tax items of the distributor or trans-
feror corporation that the acquiring corpo-
ration succeeds to and takes into account
under section 381(a)).
A commenter requested that the final
regulations confirm that ETSC status and
AAA constitute tax items that an acquir-
ing corporation would succeed to or take
into account under section 381(a). The
Treasury Department and the IRS have
considered the issue raised by the com-
menter but have determined that further
study would be required to promulgate the
appropriate rule. In addition, the Treasury
Department and the IRS have concluded
that this issue exceeds the scope of the
final regulations because whether AAA
constitutes a tax item to which a successor
may succeed under section 381 is not lim-
ited to the ETSC context. Therefore, the
final regulations do not address the com-
menter’s request.
Applicability Dates
These regulations generally apply to
taxable years beginning after October
20, 2020. See §§ 1.481-6(b), 1.1371-1(e),
1.1371-2(d), and 1.1377-3(c). However,
a corporation may choose to apply the
rules set forth in §§ 1.481-5, 1.1371-1,
and 1.1371-2 in their entirety to taxable
years beginning on or before October 20,
2020. If a corporation makes the choice
described in the previous sentence, all
shareholders of the corporation must re-
port consistently, and the corporation must
continue to apply the rules in §§ 1.481-5,
1.1371-1, and 1.1371-2 in their entirety
for the corporation’s subsequent taxable
years.
In addition, a corporation generally
may choose to not apply the no-newcom-
er rule in § 1.1377-2(b) to taxable years
beginning on or before October 20, 2020
and with respect to which the period de-
scribed in section 6501(a) as applied to
that corporation has not expired. If a cor-
poration makes the choice described in
the previous sentence, all shareholders of
the corporation must report consistently,
and the corporation must adopt §§ 1.481-
5, 1.1371-1, 1.1371-2 (if an ETSC), and
§ 1.1377-2(b) in their entirety and contin-
ue to apply those rules in their entirety
for the corporation’s subsequent taxable
years.
Special Analyses
These final regulations are not subject
to review under section 6(b) of Executive
Order 12866 pursuant to the Memoran-
dum of Agreement (April 11, 2018) be-
tween the Treasury Department and the
Office of Management and Budget regard-
ing review of tax regulations.

November 9, 2020 1006 Bulletin No. 2020–46
I. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibili-
ty Act (5 U.S.C. chapter 6), it is hereby
certified that these final regulations will
not have a significant economic impact
on a substantial number of small entities
within the meaning of section 601(6) of
the Regulatory Flexibility Act. Notwith-
standing this certification, the Treasury
Department and the IRS provided such
an analysis in the notice of proposed
rulemaking preceding these final regu-
lations (see 84 FR 60011) and received
no comments on the impact that the pro-
posed regulations would have on small
entities. This certification is based on the
fact that the amount of time necessary to
report the required information will be
minimal in that it requires ETSCs to pro-
vide information already required to be
collected by previously existing statutory
and regulatory requirements. According-
ly, the Secretary certifies that these reg-
ulations will not have a significant eco-
nomic impact on a substantial number of
small entities.
Pursuant to section 7805(f), the no-
tice of proposed rulemaking preceding
this regulation was submitted to the
Chief Counsel for the Office of Advo-
cacy of the Small Business Administra-
tion for comment on its impact on small
businesses. No comments were received
from the Chief Counsel for the Office of
Advocacy of the Small Business Admin-
istration.
II. Paperwork Reduction Act
These final regulations do not require
collection of any new or additional infor-
mation pursuant to the Paperwork Reduc-
tion Act (44 U.S.C. 3501 et seq.). Nev-
ertheless, the Treasury Department and
the IRS provided such an analysis in the
notice of proposed rulemaking preceding
these final regulations. See 84 FR 60011.
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in any
one year by a state, local, or tribal govern-
ment, in the aggregate, or by the private
sector, of $100 million in 1995 dollars,
updated annually for inflation. In 2020,
that threshold is approximately $156 mil-
lion. This final rule does not include any
mandate that may result in expenditures
by state, local, or tribal governments,
or by the private sector in excess of that
threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive Order. This final rule does
not have federalism implications and does
not impose substantial, direct compliance
costs on state and local governments or
preempt state law within the meaning of
the Executive Order.
Drafting Information
The principal authors of these final reg-
ulations are Margaret Burow and Michael
Gould of the Office of Associate Chief
Counsel (Passthroughs and Special In-
dustries) and Aglaia Ovtchinnikova of the
Office of Associate Chief Counsel (Cor-
porate). However, other personnel from
the Treasury Department and the IRS par-
ticipated in the development of the final
regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amend-
ed as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order for § 1.481-6 to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.481-6 is also issued under 26
U.S.C. 481.
* * * * *
§ 1.316-2 [Amended]
Par. 2. Section 1.316-2 is amended by
removing “consist only of money and”
from the second sentence of paragraph (b).
§ 1.481-5 [Redesignated as § 1.481-6]
Par. 3. Section 1.481-5 is redesignated
as § 1.481-6.
Par. 4. New § 1.481-5 is added to read
as follows:
§ 1.481-5 Eligible terminated S
corporation.
(a) Scope. Section 481(d)(2) of the
Internal Revenue Code (Code) and this
section provide rules relating to the quali-
fication of a corporation as an eligible ter-
minated S corporation (ETSC). Paragraph
(b) of this section sets forth the require-
ments a corporation must meet to qualify
as an ETSC. Paragraph (c) of this sec-
tion describes certain transfers and other
events that are disregarded for purposes of
determining whether a corporation quali-
fies as an ETSC, as well as the treatment
of revocations for which the effective date
is the first day of the taxable year during
which the revocation is made. Paragraph
(d) of this section contains examples illus-
trating the rules of this section.
(b) ETSC qualification. For a C corpo-
ration to qualify as an ETSC, it must satis-
fy the following requirements:
(1) The corporation must have been an
S corporation on December 21, 2017;
(2) During the 2-year period beginning
on December 22, 2017, the corporation
must have made a valid revocation of its
S election under section 1362(d)(1) and
the regulatory provisions in this part un-
der section 1362 of the Code (revocation);
and
(3) Except as provided in paragraph (c)
of this section, the owners of the shares of
stock of the corporation must be the same
(and in identical proportions) on both:

Bulletin No. 2020–46 1007 November 9, 2020
(i) December 22, 2017; and
(ii) The day on which the revocation is
made.
(c) Special rules—(1) Certain disre-
garded events. The following events are
disregarded for purposes of determining
whether the requirement in paragraph (b)
(3) of this section is satisfied:
(i) Transfers of stock between a share-
holder and that shareholder’s trust treated
as wholly owned by that shareholder un-
der subpart E of subchapter J of chapter 1
of the Code;
(ii) Transfers of stock between a share-
holder and an entity owned by that share-
holder that is disregarded as separate from
its owner under § 301.7701-2(c)(2)(i) of
the Procedure and Administration Regu-
lations;
(iii) An election by a shareholder trust
to be treated as part of a decedent’s estate
under section 645 of the Code or the ter-
mination of an election under that section;
(iv) A change in the status of a share-
holder trust from one type of eligible S
corporation shareholder trust described
in section 1361(c)(2)(A) of the Code
to another type of eligible S corpora-
tion shareholder trust; for example, a
trust to which the shares of stock were
transferred pursuant to the terms of a
will (testamentary trust) described in
section 1361(c)(2)(A)(iii) that elects to
become an electing small business trust
described in section 1361(c)(2)(A)(v)
and (e); and
(v) A transaction that includes more
than one of the events described in this
paragraph (c)(1).
(2) Certain revocations. For purposes
of paragraphs (b)(2) and (b)(3)(ii) of this
section, a revocation with an effective
date that is the first day of the taxable year
during which the revocation is made pur-
suant to section 1362(d)(1)(C)(i) may be
treated as having been made on the day
the revocation was made or on the effec-
tive date of the revocation.
(d) Examples. Paragraphs (d)(1)
through (3) of this section (Examples 1
through 3) illustrate the rules of this sec-
tion. For purposes of paragraphs (d)(1)
through (3) of this section (Examples 1
through 3), as of December 1, 2017, X
is a calendar year S corporation with 100
shares of stock outstanding that is owned
equally by unrelated individuals A and
B. Pursuant to section 1362(d)(1) and
§§ 1.1362-2 and 1.1362-6, X made a val-
id revocation of its S election on March
15, 2019, effective on January 1, 2019.
X treats the revocation as having been
made on March 15, 2019, for purposes
of paragraphs (b)(2) and (b)(3)(ii). At all
times, X has a single class of stock out-
standing. Paragraphs (d)(1) through (3) of
this section (Examples 1 through 3) de-
scribe all relevant transactions involving
the X stock from December 1, 2017, until
March 15, 2019.
(1) Example 1—(i) Facts. On June 5, 2018, A
contributed 20 of its shares of X stock to Y, a wholly
owned limited liability company that is disregarded
as an entity separate from A pursuant to § 301.7701-
2(c)(2)(i). On June 14, 2018, A contributed all of its
interest in Y to Trust, which was a revocable trust
treated as a wholly owned grantor trust of A pursuant
to sections 671 and 676 of the Code. On December
27, 2018, B sold 10 shares of its X stock to C, an
unrelated person.
(ii) Analysis. X is an ETSC if it satisfies the re-
quirements of paragraph (b) of this section.
(A) S corporation. X was an S corporation on
December 21, 2017. Therefore, X satisfies the re-
quirement of paragraph (b)(1) of this section.
(B) Date of revocation. X made a valid revoca-
tion of its S election pursuant to section 1362(d)(1)
on March 15, 2019, which is during the two-year
period specified in paragraph (b)(2) of this section.
Therefore, X satisfies the requirement of paragraph
(b)(2) of this section.
(C) Ownership. For purposes of the requirement
in paragraph (b)(3) of this section, the relevant dates
are: December 22, 2017, and March 15, 2019 (the
date X made a revocation of its S corporation status).
(1) A’s ownership interest. As of December 22,
2017, A owned 50 shares of the outstanding shares
of X stock. On June 5, 2018, A contributed 20 of its
shares of X stock to Y (Transfer). On June 14, 2018,
A contributed all of its interest in Y to Trust (Contri-
bution). Both the Transfer and the Contribution are
disregarded for purposes of determining whether the
requirement of paragraph (b)(3) of this section is sat-
isfied. See paragraphs (c)(2) and (1) of this section,
respectively. Therefore, A owns 50 shares of the out-
standing stock of X on March 15, 2019.
(2) B’s ownership interest. As of December 22,
2017, B owned 50 shares of the outstanding shares
of X stock. On December 27, 2018, B sold 10 shares
to C. Therefore, B owns 40 shares of the outstanding
stock of X on March 15, 2019.
(3) C’s ownership interest. As of December 22,
2017, C owned no shares of X stock. On December
27, 2018, C purchased 10 shares from B. Therefore,
C owns 10 shares of the outstanding stock of X on
March 15, 2019.
(4) Failure to satisfy the requirement in para-
graph (b)(3) of this section. As described in para-
graphs (d)(1)(ii)(C)(2) and (3) of this section, B’s and
C’s interest in X were not in the same proportions on
December 22, 2017, and March 15, 2019. Therefore,
X does not satisfy the requirement of paragraph (b)
(3) of this section and does not qualify as an ETSC.
(iii) Restoration of interests prior to end of PTTP.
If C transferred its shares of X stock back to B on
February 1, 2019, then on December 22, 2017, and
March 15, 2019, A and B will have owned 50 shares
of the outstanding stock of X. Under these facts, X
satisfies the requirement of paragraph (b)(3) of this
section and qualifies as an ETSC.
(2) Example 2—(i) Facts. The facts are the same
as in paragraph (d)(1)(i) of this section, except that
B sold 10 shares of its X stock to C on December 18,
2017, in addition to the sale of 10 shares of X stock
on December 27, 2018.
(ii) Analysis. The analysis in paragraph (d)(1)
(ii)(A) and (B) of this section remains the same re-
garding the requirements of paragraph (b)(1) and
(2) of this section. With respect to the requirement
of paragraph (b)(3) of this section, on December 22,
2017, A owned 50%, B owned 40%, and C owned
10% of the outstanding stock of X. As in paragraph
(d)(1)(ii)(C)(1) of this section, the Transfer and the
Contribution are disregarded for purposes of deter-
mining whether the requirement of paragraph (b)
(3) of this section is satisfied. Therefore, on March
15, 2019, A owned 50% (50 shares), B owned 30%
(30 shares), and C owned 20% (20 shares) of the
outstanding shares of X. Even though A, B, and C
owned shares of X on December 22, 2017, B’s and
C’s proportionate ownership interest of X stock was
not the same on December 22, 2017, and March 15,
2019. Therefore, X does not satisfy the requirement
of paragraph (b)(3) of this section and does not
qualify as an ETSC.
(3) Example 3—(i) Facts. The facts are the same
as in paragraph (d)(1)(i) of this section, except that X
made a valid revocation of its S election on Novem-
ber 1, 2019, effective on January 1, 2020.
(ii) Analysis. The analysis in paragraph (d)(1)(ii)
(A) through (C) of this section remains the same re-
garding the requirements of paragraph (b)(1) through
(3) of this section, except that the relevant dates are:
December 22, 2017, and November 1, 2019 (the date
X made a revocation of its S corporation status). Al-
though the effective date of X’s revocation of its S
election (January 1, 2020) occurs after the conclu-
sion of the two-year period specified in paragraph
(b)(2) of this section, it is irrelevant for purposes of
determining whether the requirements of paragraph
(b)(2) and (3) of this section are satisfied.
Par. 5. Newly redesignated § 1.481-6 is
revised to read as follows:
§ 1.481-6 Effective dates; applicability
dates.
(a) Sections 1.481-1, 1.481-2, 1.481-
3, and 1.481-4 are effective for Consent
Agreements signed on or after December
27, 1994. For Consent Agreements signed
before December 27, 1994, see §§ 1.481-
1, 1.481-2, 1.481-3, 1.481-4, and 1.481-5
as contained in 26 CFR part 1, revised as
of April 1, 1995.
(b) Section 1.481-5 applies to taxable
years beginning after October 20, 2020.
However, a corporation may choose to ap-

November 9, 2020 1008 Bulletin No. 2020–46
ply the rules in §§ 1.481-5, 1.1371-1, and
1.1371-2 in their entirety to taxable years
beginning on or before October 20, 2020.
If a corporation makes the choice de-
scribed in the previous sentence, the cor-
poration must continue to apply the rules
in §§ 1.481-5, 1.1371-1, and 1.1371-2 in
their entirety for the corporation’s subse-
quent taxable years.
Par. 6. Section 1.1362-2 is amended
by adding paragraph (a)(2)(iii) to read as
follows:
§ 1.1362-2 Termination of election.
(a) * * *
(2) * * *
(iii) Applicability of section 7503. With
respect to a revocation made under para-
graph (a)(2) of this section, see section
7503 (addressing time for performance
of acts where the last day occurs on a
Saturday, Sunday, or legal holiday). This
paragraph (a)(2)(iii) applies to revocations
made under paragraph (a)(2) of this sec-
tion effective after October 20, 2020. A
corporation may apply this paragraph (a)
(2)(iii) retroactively to a revocation made
by the corporation under paragraph (a)(2)
of this section effective on or before Oc-
tober 20, 2020.
* * * * *
Par. 6. Sections 1.1371-1 and 1.1371-2
are added to read as follows:
§ 1.1371-1 Distributions of money by
an eligible terminated S corporation.
(a) Scope and definitions—(1) Scope.
This section provides rules relating to
qualified distributions and distributions to
which section 301 of the Internal Revenue
Code (Code) applies during each taxable
year of the ETSC period, including the tax-
able year in which the ETSC period ends.
If an ETSC does not make any qualified
distributions during a taxable year, then no
distribution by the ETSC is governed by
section 1371(f) of the Code or this section.
Paragraph (a)(2) of this section contains
definitions that apply for purposes of this
section. Paragraph (b) of this section con-
tains rules regarding the characterization
of a qualified distribution. Paragraph (c)
of this section contains rules regarding the
characterization of any excess qualified
distribution and non-qualified distribution
during each taxable year of the ETSC pe-
riod, including the taxable year in which
the ETSC period ends. Paragraph (d) of
this section contains examples illustrating
the rules of this section. Paragraph (e) of
this section contains the applicability date
of this section.
(2) Definitions. The following defini-
tions apply for purposes of this section—
(i) AAA. The term AAA means the ac-
cumulated adjustments account, within
the meaning of section 1368(e)(1)(A) of
the Code and § 1.1368-2(a)(1).
(ii) AAA ratio. Except as provided in
this paragraph or paragraph (b)(3)(iv) of
this section, the term AAA ratio means the
fraction of which the numerator is histor-
ical AAA and the denominator is the sum
of historical AAA and historical AE&P.
Notwithstanding the preceding sentence,
if the AE&P of the ETSC is less than or
equal to zero as of the beginning of a tax-
able year, then the AAA ratio is one for
such year and for all subsequent taxable
years of the ETSC period.
(iii) AE&P. The term AE&P means
earnings and profits described in section
316(a)(1) of the Code.
(iv) AE&P ratio. Except as provided in
this paragraph or paragraph (b)(3)(iv) of
this section, the term AE&P ratio means
the fraction of which the numerator is
historical AE&P, and the denominator is
the sum of historical AAA and historical
AE&P. Notwithstanding the preceding
sentence, if the AE&P of the ETSC is less
than or equal to zero as of the beginning of
a taxable year, then the AE&P ratio is zero
for such year and all subsequent taxable
years of the ETSC period.
(v) CE&P. The term CE&P means
earnings and profits that are described in
section 316(a)(2).
(vi) ETSC. The term ETSC means an
eligible terminated S corporation, within
the meaning of section 481(d) of the Code
and § 1.481-5.
(vii) ETSC period. In general, the term
ETSC period means any taxable year, or
portion thereof, of an ETSC beginning
on the first day after the post-termina-
tion period within the meaning of section
1377(b)(1)(A) of the Code and ending on
the date on which the ETSC’s AAA bal-
ance is zero. Additionally, an ETSC does
not have an ETSC period if the ETSC’s
AAA balance is not greater than zero at
the end of its post-termination transition
period. See § 1.1371-2 for rules governing
the impact of a post-termination period,
within the meaning of section 1377(b)(1)
(B), on the ETSC period.
(viii) Excess qualified distribution. The
term excess qualified distribution means
the portion of a qualified distribution that
is not characterized pursuant to paragraph
(b)(2) or (3) of this section.
(ix) Historical AAA. The term histori-
cal AAA means the AAA of the ETSC as
of the beginning of the day on which the
revocation of an election under section
1362(a) of the Code is effective pursuant
to section 1362(d)(1).
(x) Historical AE&P. The term histor-
ical AE&P means the AE&P of the ETSC
as of the beginning of the day on which
the revocation of an election under section
1362(a) is effective pursuant to section
1362(d)(1). For purposes of the preceding
sentence, if the ETSC’s historical AE&P
is less than zero, then the historical AE&P
is treated as zero.
(xi) Non-qualified distribution. The
term non-qualified distribution means a
distribution that is not a qualified distribu-
tion and to which section 301 applies.
(xii) Qualified distribution. The term
qualified distribution means a distribution
of money by an ETSC during the ETSC
period to which, absent the application
of section 1371(f) and this section, sec-
tion 301 would apply. However, if para-
graph (d)(2)(i) of this section applies to
the ETSC, then a qualified distribution to
a non-legacy shareholder is treated as a
non-qualified distribution.
(b) Characterization of qualified distri-
bution—(1) In general. Paragraph (b)(2)
of this section provides rules regarding the
determination of the amount of a qualified
distribution that is sourced from AAA and
the corollary effects of such a character-
ization. Paragraph (b)(3) of this section
provides rules regarding the determination
of the amount of a qualified distribution
that is sourced from AE&P and the cor-
ollary effects of such a characterization.
Paragraph (b)(4) of this section provides
rules regarding the characterization of an
excess qualified distribution as a separate
qualified distribution. The rules in para-
graphs (b)(2) through (4) of this section
are applied before the application of para-
graph (c) of this section.

Bulletin No. 2020–46 1009 November 9, 2020
(2) Distribution of AAA—(i) Amount.
The portion of a qualified distribution that
is sourced from an ETSC’s AAA is equal
to the lesser of:
(A) The product of the qualified distri-
bution and the AAA ratio; and
(B) The ETSC’s AAA immediately be-
fore the qualified distribution.
(ii) Reduction or elimination of ETSC’s
AAA. The ETSC’s AAA is reduced by
the amount of the distribution described
in paragraph (b)(2)(i) of this section. If,
with respect to a qualified distribution, the
amount described in paragraph (b)(2)(i)
(A) of this section equals or exceeds the
amount described in paragraph (b)(2)(i)
(B) of this section, then the rules in this
paragraph (b) do not apply to any subse-
quent distributions by the ETSC. Instead,
the subsequent distributions are treated in
the manner provided in paragraph (c) of
this section.
(iii) Effect on the shareholder. The
amount described in paragraph (b)(2)(i) of
this section is applied against and reduc-
es the shareholder’s adjusted basis of the
shares of stock with respect to which the
distribution is made under the principles
of section 301(c)(2). If the application of
the amount described in paragraph (b)(2)
(i) of this section would result in a reduc-
tion of basis that exceeds the shareholder’s
adjusted basis of any share of stock with
respect to which the distribution is made,
such excess is treated as gain from the sale
or exchange of property. The reduction of
the shareholder’s basis described in this
paragraph with respect to a qualified dis-
tribution occurs prior to the application of
paragraph (c) of this section to the excess
qualified distribution, if any, with respect
to such qualified distribution.
(3) Distribution of AE&P—(i) Amount.
This paragraph (b)(3) applies if an ET-
SC’s AE&P ratio is greater than zero. If
this paragraph (b)(3) applies, the portion
of a qualified distribution that is sourced
from the ETSC’s AE&P is equal to the
lesser of:
(A) The product of the qualified distri-
bution and the AE&P ratio; and
(B) The ETSC’s AE&P immediately
before the qualified distribution. For pur-
poses of the preceding sentence, if the ET-
SC’s AE&P immediately before the quali-
fied distribution is less than zero, then the
ETSC’s AE&P is treated as zero.
(ii) Effect on ETSC’s AE&P. The ET-
SC’s AE&P is reduced, as described in
section 312(a)(1), by the amount of the
distribution described in paragraph (b)(3)
(i) of this section. The AE&P reduction
described in this paragraph occurs prior
to the application of paragraph (c) of this
section, even if a distribution to which
paragraph (c) of this section applies (re-
garding excess qualified distributions and
non-qualified distributions) occurs earlier
in time than the qualified distribution to
which this paragraph applies.
(iii) Effect on the shareholder. The
amount of the qualified distribution that
is sourced from the ETSC’s AE&P de-
scribed in paragraph (b)(3)(i) of this sec-
tion is included in the gross income of the
shareholder as a dividend under section
301(c)(1).
(iv) Adjustment to the AAA ratio and
the AE&P ratio. After the application of
paragraph (b)(3)(ii) of this section, if the
ETSC’s AE&P is zero and the ETSC’s
AAA is greater than zero, then the ETSC’s
AAA ratio is one and the ETSC’s AE&P
ratio is zero for all subsequent qualified
distributions during:
(A) That taxable year; and
(B) All subsequent taxable years of the
ETSC period.
(4) Excess qualified distribution treat-
ed as a separate qualified distribution—
(i) In general. After the application of
paragraph (b)(2)(ii) of this section with
respect to a qualified distribution, if the
ETSC has any remaining AAA, then any
amount of excess qualified distribution,
with respect to such qualified distribution,
is treated as a separate qualified distribu-
tion and is analyzed pursuant to paragraph
(b) of this section.
(ii) No change in characterization of
previously characterized portion of qual-
ified distribution. Paragraph (b)(4)(i) will
not change the characterization of any
portion of a qualified distribution that was
previously characterized pursuant to para-
graphs (b)(2) and (3) of this section and
will reflect the application of paragraphs
(b)(2) and (3) of this section to the portion
of the qualified distribution previously
characterized.
(c) Characterization of excess quali-
fied distribution and non-qualified distri-
butions. After the application of paragraph
(b), the excess qualified distributions, if
any, and non-qualified distributions, if
any, are treated in the manner provided in
sections 301(c) and 316.
(d) Examples. Paragraphs (d)(1)
through (5) of this section (Examples 1
through 5) illustrate the rules of this sec-
tion. For purposes of paragraphs (d)(1)
through (5) of this section (Examples 1
through 5), X is a calendar year S corpora-
tion with a single share of stock outstand-
ing. A, an individual, purchased its share
of X stock prior to December 22, 2017,
and, except as otherwise indicated, never
contributed any amounts to X’s capital. A
remained the sole shareholder of X when
X made a valid revocation on March 15,
2018, pursuant to section 1362(d)(1) and
§§ 1.1362-2 and 1.1362-6, of its S election
and when that revocation became effec-
tive on January 1, 2018. X qualified as
an ETSC pursuant to § 1.481-5(b) and its
ETSC period began on January 1, 2019.
Additionally, X did not make any distri-
butions during its post-termination transi-
tion period, within the meaning of section
1377(b)(1)(A). Furthermore, A remains
the sole shareholder of X at the time of the
distribution(s) described.
(1) Example 1: Historical AE&P is zero—(i)
Facts. At the beginning of January 1, 2018, X had
AAA of $100 and AE&P of $0. During 2018, X had
$300 of CE&P and made no distributions. At the be-
ginning of January 1, 2019, X has AAA of $100 and
AE&P of $300, and A’s adjusted basis in its share of
X stock is $460. During 2019, the only distribution
that X makes is a $60 distribution of money to A on
December 27. X’s CE&P during 2019 is $150, with-
out diminution by reason of any distributions made
during the taxable year.
(ii) Analysis—(A) Calculation of AAA ratio and
AE&P ratio. Pursuant to paragraphs (a)(2)(ix) and
(x) of this section, respectively, X’s historical AAA
and X’s historical AE&P are determined as of the be-
ginning of January 1, 2018, the beginning of the day
on which the revocation of X’s election under sec-
tion 1362(a) is effective pursuant to section 1362(d)
(1). Accordingly, X’s historical AAA is $100 and X’s
historical AE&P is $0. Therefore, X’s AAA ratio is 1
($100/($100 + $0)), and X’s AE&P ratio is zero ($0/
($100 + $0)).
(B) Characterization of distribution. Pursuant to
paragraph (a)(2)(xii) of this section, the $60 distribu-
tion on December 27, 2019, is a qualified distribu-
tion because it is a distribution of money by an ETSC
during the ETSC period to which section 301 would
apply absent the application of section 1371(f) and
this section.
(C) Analysis of qualified distribution—(1) Dis-
tribution of AAA. Pursuant to paragraph (b)(2)(i) of
this section, the portion of the qualified distribution
that is sourced from AAA is equal to the lesser of:
the product of the qualified distribution and the AAA
ratio ($60 x 1, or $60), and X’s AAA immediately

November 9, 2020 1010 Bulletin No. 2020–46
before the qualified distribution ($100). Therefore,
$60 is sourced from AAA. Pursuant to paragraph (b)
(2)(ii) of this section, after the distribution, X’s AAA
is reduced by $60 to $40. Pursuant to paragraph (b)
(2)(iii) of this section, A’s basis in its X stock is re-
duced by $60 to $400.
(2) Distribution of AE&P. Pursuant to paragraph
(b)(3)(i) of this section, the portion of the distribu-
tion that is sourced from AE&P is equal to the lesser
of: the product of the qualified distribution and the
AE&P ratio ($60 x 0, or $0), and X’s AE&P immedi-
ately before the qualified distribution ($300). There-
fore, $0 is sourced from AE&P.
(2) Example 2: Qualified distributions with both
historical AAA and historical AE&P—(i) Facts. At
the beginning of January 1, 2018, X had AAA of
$200 and AE&P of $100. During 2018, X had $0 of
CE&P and made no distributions. At the beginning
of January 1, 2019, X has AAA of $200 and AE&P
of $100, and A’s adjusted basis in its share of X stock
is $500. During 2019, X makes a $90 distribution
of money on February 9 and a $150 distribution of
money on June 5. X’s CE&P during 2019 is $500,
without diminution by reason of any distributions
made during the taxable year.
(ii) Analysis—(A) Calculation of AAA ratio and
AE&P ratio. Pursuant to paragraphs (a)(2)(ix) and
(x) of this section, respectively, X’s historical AAA
and X’s historical AE&P are determined as of the be-
ginning of January 1, 2018, the beginning of the day
on which the revocation of X’s election under sec-
tion 1362(a) is effective pursuant to section 1362(d)
(1). Accordingly, X’s historical AAA is $200 and X’s
historical AE&P is $100. Therefore, X’s AAA ratio
is 0.67 ($200/($200 + $100)), and X’s AE&P ratio is
0.33 ($100/($200 + $100)).
(B) Characterization of distributions. Pursuant
to paragraph (a)(2)(xii) of this section, the $90 dis-
tribution on February 9, 2019, and the $150 distribu-
tion on June 5, 2019, are both qualified distributions
because they are distributions of money by an ETSC
during the ETSC period to which section 301 would
apply absent the application of section 1371(f) and
this section.
(C) Analysis of qualified distributions—(1) Feb-
ruary 9, 2019 distribution—(i) Distribution of AAA.
Pursuant to paragraph (b)(2)(i) of this section, the
portion of the qualified distribution that is sourced
from AAA is equal to the lesser of: the product of the
qualified distribution and the AAA ratio ($90 x 0.67,
or $60), and X’s AAA immediately before the qual-
ified distribution ($200). Therefore, $60 is sourced
from AAA. Pursuant to paragraph (b)(2)(ii) of this
section, after the distribution, X’s AAA is reduced
by $60 to $140. Pursuant to paragraph (b)(2)(iii) of
this section, A’s basis in its X stock is reduced by
$60 to $440.
(ii) Distribution of AE&P. Pursuant to paragraph
(b)(3)(i) of this section, the portion of the distribu-
tion that is sourced from AE&P is equal to the lesser
of: the product of the qualified distribution and the
AE&P ratio ($90 x 0.33, or $30), and X’s AE&P im-
mediately before the qualified distribution ($100).
Therefore, $30 is sourced from AE&P. Pursuant to
paragraph (b)(3)(ii) of this section, after the distribu-
tion, X’s AE&P is reduced by $30 to $70. Pursuant
to paragraph (b)(3)(iii) of this section, the $30 distri-
bution is characterized as a dividend.
(2) June 5, 2019 distribution—(i) Distribution
of AAA. Pursuant to paragraph (b)(2)(i) of this sec-
tion, the portion of the qualified distribution that is
sourced from AAA is equal to the lesser of: the prod-
uct of the qualified distribution and the AAA ratio
($150 x 0.67, or $100), and X’s AAA immediately
before the qualified distribution ($140). Therefore,
$100 is sourced from AAA. Pursuant to paragraph
(b)(2)(ii) of this section, after the distribution, X’s
AAA is reduced by $100 to $40. Pursuant to para-
graph (b)(2)(iii) of this section, A’s basis in its X
stock is reduced by $100 to $340.
(ii) Distribution of AE&P. Pursuant to paragraph
(b)(3)(i) of this section, the portion of the distribu-
tion that is sourced from AE&P is equal to the lesser
of: the product of the qualified distribution and the
AE&P ratio ($150 x 0.33, or $50), and X’s AE&P
immediately before the qualified distribution ($70).
Therefore, $50 is sourced from AE&P. Pursuant to
paragraph (b)(3)(ii) of this section, after the distribu-
tion, X’s AE&P is reduced by $50 to $20. Pursuant
to paragraph (b)(3)(iii) of this section, the $50 distri-
bution is characterized as a dividend.
(3) Example 3: Limitation on amount char-
acterized as AAA—(i) Facts. At the beginning of
January 1, 2018, X had AAA of $100 and AE&P of
$300. During 2018, X had $280 of CE&P and made
no distributions. At the beginning of January 1,
2019, X has AAA of $100 and AE&P of $580, and
A’s adjusted basis in its share of X stock is $450.
During 2019, the only distribution that X makes is
a $500 distribution of money to A on October 5.
X’s CE&P during 2019 is $150, without diminu-
tion by reason of any distributions made during the
taxable year.
(ii) Analysis—(A) Calculation of AAA ratio and
AE&P ratio. Pursuant to paragraphs (a)(2)(ix) and
(x) of this section, respectively, X’s historical AAA
and X’s historical AE&P are determined as of the be-
ginning of January 1, 2018, the beginning of the day
on which the revocation of X’s election under sec-
tion 1362(a) is effective pursuant to section 1362(d)
(1). Accordingly, X’s historical AAA is $100 and X’s
historical AE&P is $300. Therefore, X’s AAA ratio
is 0.25 ($100/($100 + $300)), and X’s AE&P ratio is
0.75 ($300/($100 + $300)).
(B) Characterization of distribution. Pursuant to
paragraph (a)(2)(xii) of this section, the $500 distri-
bution on October 5, 2019, is a qualified distribution
because it is a distribution of money by an ETSC
during the ETSC period to which section 301 would
apply absent the application of section 1371(f) and
this section.
(C) Analysis of qualified distribution—(1) Dis-
tribution of AAA. Pursuant to paragraph (b)(2)(i) of
this section, the portion of the qualified distribution
that is sourced from AAA is equal to the lesser of:
the product of the qualified distribution and the
AAA ratio ($500 x 0.25, or $125), and X’s AAA
immediately before the qualified distribution ($100).
Therefore, $100 is sourced from AAA. Pursuant to
paragraph (b)(2)(ii) of this section, after the distribu-
tion, X’s AAA is reduced by $100 to $0. Pursuant to
paragraph (b)(2)(iii) of this section, A’s basis in its X
stock is reduced by $100 to $350.
(2) Distribution of AE&P. Pursuant to paragraph
(b)(3)(i) of this section, the portion of the distribu-
tion that is sourced from AE&P is equal to the lesser
of: the product of the qualified distribution and the
AE&P ratio ($500 x 0.75, or $375), and X’s AE&P
immediately before the qualified distribution ($580).
Therefore, $375 is sourced from AE&P. Pursuant to
paragraph (b)(3)(ii) of this section, after the distribu-
tion, X’s AE&P is reduced by $375 to $205. Pursuant
to paragraph (b)(3)(iii) of this section, the $375 dis-
tribution is characterized as a dividend.
(D) Effect of qualified distribution on ETSC peri-
od. Pursuant to paragraph (a)(2)(vii) of this section,
X’s ETSC period ends because X’s AAA balance is
zero following the October 5, 2019 distribution.
(E) Analysis of excess qualified distribution—(1)
Amount of excess qualified distribution. Pursuant to
paragraph (a)(2)(viii) of this section, the amount of
the excess qualified distribution is $25, the portion
of the qualified distribution ($500) not characterized
pursuant to paragraph (b)(2) or (3) of this section
($100 AAA distribution + $375 AE&P distribution).
(2) Characterization of excess qualified distribu-
tion. Paragraph (b)(4) of this section does not apply
to the excess qualified distribution because X’s AAA
balance is zero after the application of paragraph (b)
(2)(ii) of this section (see paragraph (d)(3)(ii)(C)
(1) of this section). Pursuant to paragraph (c) of this
section, section 301(c) applies to the excess qualified
distribution. Pursuant to sections 301(c)(1) and 316,
the $25 excess qualified distribution is sourced from
CE&P.
(iii) Subsequent contribution. The facts are the
same as paragraph (d)(3)(i) of this section, except
that at the time of the October 5, 2019 distribution,
A’s adjusted basis in its X stock is $90. Further, on
December 27, 2019, A contributes $100 to X in a
transaction described in section 351(a). The analy-
sis in paragraph (d)(3)(ii) of this section remains the
same, except that, unlike the second to last sentence
of paragraph (d)(3)(ii)(C)(1) of this section, A’s basis
in its X stock is reduced by $90 to $0 and pursuant
to paragraph (b)(2)(iii) of this section, $10 is treated
as gain from the sale or exchange of property. Addi-
tionally, as a result of the December 27, 2019 contri-
bution of $100, A’s basis in its X stock is increased
by $100, so that at the end of 2019, A’s basis in its X
stock is $100.
(4) Example 4: Limitation on the amount char-
acterized as AE&P—(i) Facts. At the beginning of
January 1, 2018, X had AAA of $100 and AE&P of
$100. During 2018, X had CE&P of $(75) and made
no distributions. At the beginning of January 1, 2019,
X has AAA of $100 and AE&P of $25, and A’s ad-
justed basis in its share of X stock is $500. During
2019, the only distributions that X makes are a $100
distribution of money to A on July 9 and a $40 dis-
tribution of money to A on September 27. X’s CE&P
during 2019 is $20, without diminution by reason of
any distributions made during the taxable year.
(ii) Analysis—(A) Calculation of AAA ratio and
AE&P ratio. Pursuant to paragraphs (a)(2)(ix) and
(x) of this section, respectively, X’s historical AAA
and X’s historical AE&P are determined as of the be-
ginning of January 1, 2018, the beginning of the day
on which the revocation of X’s election under sec-
tion 1362(a) is effective pursuant to section 1362(d)
(1). Accordingly, X’s historical AAA is $100 and X’s
historical AE&P is $100. Therefore, X’s AAA ratio is
0.5 ($100/($100 + $100)), and X’s AE&P ratio is 0.5
($100/($100 + $100)).

Bulletin No. 2020–46 1011 November 9, 2020
(B) Analysis of July 9, 2019 distribution—(1)
Characterization of distribution. Pursuant to para-
graph (a)(2)(xii) of this section, the $100 distribution
on July 9, 2019, is a qualified distribution because
it is a distribution of money by an ETSC during the
ETSC period to which section 301 would apply ab-
sent the application of section 1371(f) and this sec-
tion.
(2) Analysis of qualified distribution—(i) Distri-
bution of AAA. Pursuant to paragraph (b)(2)(i) of this
section, the portion of the distribution that is sourced
from AAA is equal to the lesser of: the product of the
qualified distribution and the AAA ratio ($100 x 0.5,
or $50), and X’s AAA immediately before the qual-
ified distribution ($100). Therefore, $50 is sourced
from AAA. Pursuant to paragraph (b)(2)(ii) of this
section, after the distribution, X’s AAA is reduced
by $50 to $50. Pursuant to paragraph (b)(2)(iii) of
this section, A’s basis in its X stock is reduced by
$50 to $450.
(ii) Distribution of AE&P. Pursuant to paragraph
(b)(3)(i) of this section, the portion of the distribu-
tion that is sourced from AE&P is equal to the lesser
of: the product of the qualified distribution and the
AE&P ratio ($100 x 0.5, or $50), and X’s AE&P
immediately before the qualified distribution ($25).
Therefore, $25 is sourced from AE&P. Pursuant to
paragraph (b)(3)(ii) of this section, after the distribu-
tion, X’s AE&P is reduced by $25 to $0. Pursuant to
paragraph (b)(3)(iii) of this section, $25 of the distri-
bution is characterized as a dividend.
(3) Recalculation of AAA and AE&P ratios. Pur-
suant to paragraph (b)(3)(iv) of this section, because
the July 9, 2019 distribution caused X’s AE&P to be
reduced to zero, the AAA ratio is one and the AE&P
ratio is zero for all subsequent qualified distributions
during the 2019 taxable year and subsequent taxable
years of the ETSC period.
(4) Excess qualified distribution—(i) Amount of
excess qualified distribution. Pursuant to paragraph
(a)(2)(viii) of this section, the amount of the excess
qualified distribution is $25, the amount of the qual-
ified distribution ($100) not characterized pursuant
to paragraph (b)(2) or (3) of this section ($50 AAA
distribution + $25 AE&P distribution).
(ii) Characterization of excess qualified distribu-
tion as a separate qualified distribution. Pursuant to
paragraph (b)(4) of this section, because X has AAA
remaining after characterizing the qualified distri-
bution (see paragraph (d)(4)(ii)(B)(2)(i) of this sec-
tion), the $25 excess qualified distribution is treated
as a separate qualified distribution and is analyzed
pursuant to paragraph (b) of this section.
(iii) Analysis of excess qualified distribution that
is treated as a separate qualified distribution. Pursu-
ant to paragraph (b)(2)(i) of this section, the portion
of the distribution that is sourced from AAA is equal
to the lesser of: the product of the excess qualified
distribution and the AAA ratio ($25 x 1, or $25), and
X’s AAA immediately before the excess qualified
distribution ($50). Therefore, $25 is sourced from
AAA. Pursuant to paragraph (b)(2)(ii) of this sec-
tion, after the distribution, X’s AAA is reduced by
$25 to $25. Pursuant to paragraph (b)(2)(iii) of this
section, A’s basis in its X stock is reduced by $25 to
$425. Pursuant to paragraph (b)(3)(i) of this section,
because X’s AE&P ratio is zero, paragraph (b)(3) of
this section does not apply.
(C) Analysis of September 27, 2019 distribu-
tion—(1) Characterization of the distribution. Pur-
suant to paragraph (a)(2)(xii) of this section, the $40
distribution on September 27, 2019, is a qualified
distribution because it is a distribution of money by
an ETSC during the ETSC period to which section
301 would apply absent the application of section
1371(f) and this section.
(2) Analysis of qualified distribution—(i) Distri-
bution of AAA. Pursuant to paragraph (b)(2)(i) of this
section, the portion of the distribution that is sourced
from AAA is equal to the lesser of: the product of
the qualified distribution and the AAA ratio ($40
x 1, or $40), and X’s AAA immediately before the
qualified distribution ($25) (see paragraph (d)(4)(ii)
(B)(4)(iii) of this section). Therefore, $25 is sourced
from AAA. Pursuant to paragraph (b)(2)(ii) of this
section, after the distribution, X’s AAA is reduced
by $25 to $0. Pursuant to paragraph (b)(2)(iii) of this
section, A’s basis in its X stock is reduced by $25
to $400.
(ii) Distribution of AE&P. Pursuant to paragraph
(b)(3)(i) of this section, because X’s AE&P ratio is
zero, paragraph (b)(3) of this section does not apply.
(3) Excess qualified distribution—(i) Amount of
excess qualified distribution. Pursuant to paragraph
(a)(2)(viii) of this section, the amount of the excess
qualified distribution is $15, the portion of the qual-
ified distribution ($40) not characterized pursuant to
paragraph (b)(2) or (3) of this section ($25 AAA dis-
tribution + $0 AE&P distribution).
(ii) Excess qualified distribution not character-
ized as a separate qualified distribution. Pursuant to
paragraph (b)(4) of this section, because X has AAA
of $0 after characterizing the qualified distribution
(see paragraph (d)(4)(ii)(C)(2)(i) of this section), the
$15 excess qualified distribution is not treated as a
separate qualified distribution.
(iii) Analysis of excess qualified distribution that
is not treated as a separate qualified distribution.
Pursuant to paragraph (c) of this section, section
301(c) applies to the excess qualified distribution.
Pursuant to sections 301(c)(1) and 316, the $15 ex-
cess qualified distribution is sourced from CE&P.
(5) Example 5: Distributions include non-qual-
ified distributions—(i) Facts. At the beginning of
January 1, 2018, X had AAA of $100 and AE&P of
$100. During 2018, X had $0 of CE&P and made no
distributions. At the beginning of January 1, 2019,
X has AAA of $100 and AE&P of $100, and A’s ad-
justed basis in its X stock is $200. During 2019, X
makes a $100 distribution of money on June 14; a
$300 distribution of property on November 9; and
a $200 distribution of money on December 18. X’s
CE&P during 2019 is $160, without diminution by
reason of any distributions made during the taxable
year.
(ii) Analysis—(A) Calculation of AAA ratio and
AE&P ratio. Pursuant to paragraphs (a)(2)(ix) and
(x) of this section, respectively, X’s historical AAA
is $100 and X’s historical AE&P is $100. Therefore,
X’s AAA ratio is 0.5 ($100/($100 + $100)), and X’s
AE&P ratio is 0.5 ($100/($100 + $100)).
(B) Characterization of distributions. Pursuant to
paragraph (a)(2)(xii) of this section, the $100 distri-
bution on June 14, 2019, and the $200 distribution on
December 18, 2019, are both qualified distributions
because they are distributions of money by an ETSC
during the ETSC period to which section 301 would
apply absent the application of section 1371(f) and
this section. Pursuant to paragraph (a)(2)(xi) of this
section, the $300 distribution of property on Novem-
ber 9, 2019, is a non-qualified distribution. Pursuant
to paragraph (b)(1) of this section, the rules of para-
graph (b)(2) through (b)(4) of this section apply to
the qualified distributions before the rules of para-
graph (c) of this section apply to the non-qualified
distribution and any excess qualified distributions.
(C) Analysis of qualified distributions—(1) June
14, 2019 distribution—(i) Distribution of AAA. Pur-
suant to paragraph (b)(2)(i) of this section, the por-
tion of the distribution that is sourced from AAA is
equal to the lesser of: the product of the qualified
distribution and the AAA ratio ($100 x 0.5, or $50),
and X’s AAA immediately before the qualified distri-
bution ($100). Therefore, $50 is sourced from AAA.
Pursuant to paragraph (b)(2)(ii) of this section, after
the distribution, X’s AAA is reduced by $50 to $50.
Pursuant to paragraph (b)(2)(iii) of this section, on
June 14, 2019, A’s basis in its X stock is reduced by
$50 to $150.
(ii) Distribution of AE&P. Pursuant to paragraph
(b)(3)(i) of this section, the portion of the distribu-
tion that is sourced from AE&P is equal to the lesser
of: the product of the qualified distribution and the
AE&P ratio ($100 x 0.5, or $50), and X’s AE&P im-
mediately before the qualified distribution ($100).
Therefore, $50 is sourced from AE&P. Pursuant to
paragraph (b)(3)(ii) of this section, after the distribu-
tion, X’s AE&P is reduced by $50 to $50. Pursuant
to paragraph (b)(3)(iii) of this section, the $50 distri-
bution is characterized as a dividend.
(iii) Amount of excess qualified distribution. The
amount of the excess qualified distribution is $0, the
amount of the qualified distribution ($100) not char-
acterized pursuant to paragraph (b)(2) or (3) of this
section ($50 AAA distribution + $50 AE&P distri-
bution).
(2) December 18, 2019 distribution—(i) Distri-
bution of AAA. Pursuant to paragraph (b)(2)(i) of this
section, the portion of the distribution that is sourced
from AAA is equal to the lesser of: the product of the
qualified distribution and the AAA ratio ($200 x 0.5,
or $100), and X’s AAA immediately before the qual-
ified distribution ($50). Therefore, $50 is sourced
from AAA. Pursuant to paragraph (b)(2)(ii) of this
section, after the distribution, X’s AAA is reduced
by $50 to $0. Pursuant to paragraph (b)(2)(iii) of this
section, A must determine its basis as of December
18, 2019, in order to determine the consequences
of receiving the $50 AAA distribution. Because the
non-qualified distribution on November 9, 2019,
which precedes the December 18, 2019 qualified
distribution, could have the effect of reducing A’s
basis, any effect on A’s basis from that non-qualified
distribution must be analyzed prior to determining
the effect of the December 18, 2019 distribution of
AAA on A’s basis. See paragraphs (d)(5)(ii)(D)(3)
and (4) of this section. Pursuant to paragraph (a)(2)
(vii) of this section, X’s ETSC period ends because
X’s AAA balance is zero following the December 18,
2019 distribution.
(ii) Distribution of AE&P. Pursuant to paragraph
(b)(3)(i) of this section, the portion of the distribu-
tion that is sourced from AE&P is equal to the lesser
of: the product of the qualified distribution and the

November 9, 2020 1012 Bulletin No. 2020–46
AE&P ratio ($200 x 0.5, or $100), and X’s AE&P
immediately before the qualified distribution ($50).
Therefore, $50 is sourced from AE&P. Pursuant to
paragraph (b)(3)(ii) of this section, after the distribu-
tion, X’s AE&P is reduced by $50 to $0. Pursuant to
paragraph (b)(3)(iii) of this section, the $50 distribu-
tion is characterized as a dividend.
(iii) Amount of excess qualified distribution. The
amount of the excess qualified distribution is $100,
the amount of the qualified distribution ($200) not
characterized pursuant to paragraph (b)(2) or (3) of
this section ($50 AAA distribution + $50 AE&P dis-
tribution).
(D) Analysis of non-qualified and excess qualified
distributions—(1) In general. The $300 non-quali-
fied distribution on November 9, 2019, and the $100
excess qualified distribution on December 18, 2019,
are treated in the manner provided in section 301(c).
(2) Allocation of CE&P. Pursuant to section 316
and § 1.316-2, X’s CE&P is allocated proportionate-
ly among the excess qualified and the non-qualified
distributions. Therefore, the portion of X’s CE&P
that is allocated to the November 9, 2019 distribu-
tion and the December 18, 2019 distribution is $120
($160 CE&P x ($300 distribution / $400 total ex-
cess qualified and non-qualified distributions during
2019) and $40 ($160 CE&P x ($100 distribution /
$400 total excess qualified and non-qualified distri-
butions during 2019), respectively.
(3) November 9, 2019 distribution. Pursuant to
paragraph (d)(5)(ii)(D)(2) of this section, $120 of
the $300 distribution is characterized as a distribu-
tion of CE&P. Pursuant to paragraph (d)(5)(ii)(C)(2)
(ii) of this section, the amount of X’s AE&P avail-
able to allocate the November 9, 2019 distribution
is $0. Therefore, the remaining $180 is characterized
pursuant to section 301(c)(2) and (3). Pursuant to
paragraph (d)(5)(ii)(C)(1)(i) of this section, A’s basis
in its X stock prior to the November 9, 2019 distribu-
tion is $150. Therefore, $150 is applied against basis
pursuant to section 301(c)(2) (reducing A’s basis to
$0) and $30 is treated as gain from the sale or ex-
change of property pursuant to section 301(c)(3).
(4) December 18, 2019 distribution—(i) Con-
sequences of AAA distribution. As of December 18,
2019, A’s basis in its X stock is $0. See paragraph
(d)(5)(ii)(D)(3) of this section. Pursuant to paragraph
(d)(5)(ii)(C)(2)(i) of this section, $50 of the distribu-
tion is characterized as a distribution of AAA. Be-
cause the amount of the distribution of AAA ($50)
exceeds A’s basis in its X stock ($0), pursuant to
paragraph (b)(2)(iii) of this section, on December
18, 2019, $50 is treated as gain from the sale or ex-
change of property.
(ii) Characterization of excess qualified distri-
bution. Pursuant to paragraph (d)(5)(ii)(C)(2)(iii) of
this section, $100 of the December 18, 2019 distribu-
tion is an excess qualified distribution. Paragraph (b)
(4) of this section does not apply to the excess qual-
ified distribution because X’s AAA balance is zero
after the application of paragraph (b)(2)(ii) of this
section (see paragraph (d)(5)(ii)(C)(2)(i) of this sec-
tion. Pursuant to paragraph (c) of this section, section
301(c) applies to the excess qualified distribution.
Pursuant to paragraph (d)(5)(ii)(D)(2) of this sec-
tion, $40 of the $100 excess qualified distribution is
characterized as a distribution of CE&P. Pursuant to
paragraph (d)(5)(ii)(D)(3) of this section, X’s AE&P
as the time of the December 18, 2019 distribution
is $0. Therefore, the remaining $60 is characterized
pursuant to section 301(c)(2) and (3). Pursuant to
paragraph (d)(5)(ii)(D)(4)(i) of this section, A’s basis
in its X stock prior to characterization of the excess
qualified distribution is $0. Therefore, $60 is treated
as gain from the sale or exchange of property pursu-
ant to section 301(c)(3).
(e) Applicability date. This section ap-
plies to taxable years beginning after Oc-
tober 20, 2020. However, a corporation
may choose to apply the rules in §§ 1.481-
5, 1.1371-1, and 1.1371-2 in their entirety
to taxable years beginning on or before
October 20, 2020. If a corporation makes
the choice described in the previous sen-
tence, all shareholders of the corporation
must report consistently, and the corpo-
ration must continue to apply the rules
in §§ 1.481-5, 1.1371-1, and 1.1371-2 in
their entirety for the corporation’s subse-
quent taxable years.
§ 1.1371-2 Impact of Audit PTTP on
ETSC Period.
(a) Definitions. For purposes of this sec-
tion, the definitions used in § 1.1371-1(a)
(2) are applicable. Additionally, the fol-
lowing definitions apply for purposes of
this section—
(1) Audit PTTP. The term audit PTTP
means a post-termination transition period
described in section 1377(b)(1)(B) of the
Internal Revenue Code (Code).
(2) Initial PTTP. The term initial PTTP
means a post-termination transition period
described in section 1377(b)(1)(A).
(3) Intervening audit PTTP. The term
intervening audit PTTP means an audit
PTTP arising during the ETSC period.
(b) In general. If an intervening audit
PTTP arises, the ETSC period immediate-
ly stops. Immediately following the end
of the intervening audit PTTP, the ETSC
period resumes if the ETSC’s AAA bal-
ance is greater than zero. Otherwise, any
subsequent distributions by the ETSC are
treated in the manner provided in section
301(c) of the Code.
(c) Examples. Paragraphs (c)(1) and (2)
of this section (Examples 1 and 2) illus-
trate the rules of this section. For purposes
of paragraphs (c)(1) and (2) of this section
(Examples 1 and 2), X is a calendar year
S corporation. A, an individual, purchased
all of the outstanding shares of X in a sin-
gle transaction at the same price per share
prior to December 22, 2017, and was the
sole shareholder of X at all times. Pursu-
ant to section 1362(d)(1) of the Code and
§§ 1.1362-2 and 1.1362-6, X made a valid
revocation of its S election on March 15,
2019, that became effective on January 1,
2019. No amount distributed by X is an
extraordinary dividend within the mean-
ing of section 1059.
(1) Example 1: No ETSC period following ini-
tial PTTP—(i) Facts. At the beginning of January 1,
2019, X had AAA of $49,000 and AE&P of $2,000,
and A’s adjusted basis in its shares of X stock was
$50,000. During 2019, the only distribution that X
made was a $49,000 distribution of money to A on
March 13, 2019. X’s CE&P during 2019 was $0,
without regard to any diminution by reason of any
distributions made during the taxable year.
(ii) Analysis—(A) Distribution during initial
PTTP. Pursuant to sections 1371(e) and 1377(b)(1)
(A), the $49,000 distribution of money on March 13,
2019, is characterized as a distribution of AAA be-
cause it was made during the initial PTTP.
(B) Effect on corporation. Pursuant to § 1.1368-
2(a)(3)(iii), X’s AAA is reduced by $49,000 to $0.
Following the initial PTTP, even if X satisfies the
requirements of section 481(d)(2) of the Code and
§ 1.481-5(b) to be an ETSC, X does not have an
ETSC period because its AAA balance is zero at the
end of its initial PTTP. Therefore, section 1371(f) of
the Code and § 1.1371-1 will not apply to any subse-
quent distributions by X.
(C) Effect on shareholder. Pursuant to section
1371(e)(1), A reduces its basis in its X stock by
$49,000 to $1,000.
(2) Example 2: Intervening audit PTTP—(i)
Facts. The facts are the same as the facts in para-
graph (c)(1) of this section. On May 20, 2020, which
is after X’s initial PTTP, the IRS begins an audit of
X’s 2018 return. During the audit it is agreed that
X overstated its advertising expense deduction by
$10,000. On July 6, 2020, A signs a closing agree-
ment whereby X’s overstatement results in an addi-
tional tax on A’s 2018 individual return. As a result,
at the beginning of January 1, 2019, X had AAA of
$59,000 ($49,000 + $10,000) and AE&P of $2,000.
Additionally, at the beginning of January 1, 2019, A’s
adjusted basis in its shares of X stock was $60,000
($50,000 + $10,000). During 2020, the only distribu-
tion X makes is a $6,000 distribution of money to A
on September 1, 2020. X’s CE&P during 2020 was
$0, without regard to any diminution by reason of
any distributions made during the taxable year.
(ii) Analysis—(A) Analysis of March 13, 2019
distribution. The treatment of the March 13, 2019,
distribution is the same as described in paragraph (c)
(1)(ii)(A) of this section, because the amount of the
distribution ($49,000) does not exceed X’s AAA bal-
ance at the beginning of January 1, 2019 ($59,000),
and so the entirety of the $49,000 distribution is
properly characterized as a distribution of AAA.
(1) Effect on corporation. As described in para-
graph (c)(1)(ii)(B) of this section, X’s AAA ($59,000
at the beginning of January 1, 2019) is reduced by
$49,000 to $10,000. At the conclusion of X’s initial
PTTP (ending on December 31, 2019), X’s AAA bal-
ance is $10,000. Pursuant to § 1.1371-1(a)(2)(vii), X

Bulletin No. 2020–46 1013 November 9, 2020
has an ETSC period. Therefore, section 1371(f) and
§ 1.1371-1 will apply to any subsequent qualified
distributions by X.
(2) Effect on shareholder. As described in para-
graph (c)(1)(ii)(C) of this section, A reduces its basis
in its X stock ($60,000 at the beginning of January 1,
2019) by $49,000 to $11,000.
(B) Intervening audit PTTP. Pursuant to sec-
tion 1377(b)(1)(B), X enters an intervening audit
PTTP that begins on July 6, 2020, and ends on No-
vember 2, 2020. The application of section 1371(f)
and § 1.1371-1 to distributions during the inter-
vening audit PTTP is stopped. Instead, sections
1371(e) and 1377(b)(1)(B) and §§ 1.1371-2 and
1.1377-2 apply for the duration of the intervening
audit PTTP. During the intervening audit PTTP, the
only distribution X made is a $6,000 distribution
of money to A on September 1, 2020. Pursuant to
sections 1371(e) and 1377(b)(1)(B), the $6,000
distribution is characterized as a distribution of
AAA because it was made during the intervening
audit PTTP.
(1) Effect on corporation. Pursuant to § 1.1368-
2(a)(3)(iii), X’s AAA is reduced by $6,000 to
$4,000. Beginning on November 3, 2020, pursuant
to § 1.1371-1(a)(2)(vii), X’s ETSC period resumes
(after the intervening audit PTTP’s conclusion) be-
cause its AAA balance is greater than zero.
(2) Effect on shareholder. Pursuant to section
1371(e)(1), A reduces its basis in its X stock by
$6,000 to $5,000.
(C) ETSC period. Beginning on No-
vember 3, 2020, X’s ETSC period re-
sumes, and distributions of money are sub-
ject to section 1371(f) and § 1.1371-1 until
X’s AAA balance is zero. For purposes of
calculating each of X’s AAA and AE&P
ratios, X’s historical AAA is $59,000 (at
the beginning of January 1, 2019, which
includes the $10,000 increase as a result
of the July 6, 2020, closing agreement).
(d) Applicability date. This section ap-
plies to taxable years beginning after Oc-
tober 20, 2020. However, a corporation
may choose to apply the rules in §§ 1.481-
5, 1.1371-1, and 1.1371-2 in their entirety
to taxable years that began on or before
October 20, 2020. If a corporation makes
the choice described in the previous sen-
tence, all shareholders of the corporation
must report consistently, and the corpo-
ration must continue to apply the rules
in §§ 1.481-5, 1.1371-1, and 1.1371-2 in
their entirety for the corporation’s subse-
quent taxable years.
§ 1.1377-2 [Amended]
Par. 7. Section 1.1377-2 is amended by
removing the last sentence of paragraph
(b).
Par. 8. Section 1.1377-3 is revised to
read as follows:
§ 1.1377-3 Applicability dates.
(a) In general. Except as otherwise
provided in this section, §§ 1.1377-1 and
1.1377-2 apply to taxable years of an S
corporation beginning after December 31,
1996.
(b) Certain conversions. Section
1.1377-1(a)(2)(iii) and (c)(3) (Example 3)
are applicable for taxable years beginning
on and after May 14, 2002.
(c) Special treatment of distributions of
money during post-termination transition
period—(1) In general. Except as pro-
vided in paragraph (c)(2) of this section,
§ 1.1377-2(b) applies to taxable years be-
ginning after October 20, 2020. For tax-
able years beginning on or before October
20, 2020, see § 1.1377-2(b) as contained
in 26 CFR part 1, revised April 1, 2020.
(2) Taxable years beginning on or be-
fore October 20, 2020. A corporation may
choose to apply § 1.1377-2(b) to taxable
years beginning on or before October 20,
2020 and with respect to which the period
described in section 6501(a) has not ex-
pired. If a corporation makes the choice
described in the previous sentence, all
shareholders of the corporation must re-
port consistently, and the corporation must
adopt §§ 1.481-5, 1.1371-1, 1.1371-2, if
an ETSC, and 1.1377-2(b) in their entity
and continue to apply those rules in their
entirety for the corporation’s subsequent
taxable years.
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
Approved: September 9, 2020.
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on Oc-
tober 19, 2020, 8:45 a.m., and published in the issue
of the Federal Register for October 20, 2020, 85 FR
66471)

November 9, 2020 1014 Bulletin No. 2020–46
Part III
2021 Limitations Adjusted
as Provided in Section
415(d), etc.
Notice 2020-79
Section 415 of the Internal Revenue
Code (the Code) provides for dollar lim-
itations on benefits and contributions un-
der qualified retirement plans. Section
415(d) requires that the Secretary of the
Treasury annually adjust these limits for
cost-of-living increases. Other limitations
applicable to deferred compensation plans
are also affected by these adjustments
under § 415. Under § 415(d), the adjust-
ments are to be made under adjustment
procedures similar to those used to adjust
benefit amounts under § 215(i)(2)(A) of
the Social Security Act.
Cost-of-Living Adjusted Limits for
2021
Effective January 1, 2021, the limita-
tion on the annual benefit under a defined
benefit plan under § 415(b)(1)(A) remains
unchanged at $230,000.
For a participant who separated from
service before January 1, 2021, the partic-
ipant’s limitation under a defined benefit
plan under § 415(b)(1)(B) is computed by
multiplying the participant’s compensa-
tion limitation, as adjusted through 2020,
by 1.0122.
The limitation for defined contribution
plans under § 415(c)(1)(A) is increased
for 2021 from $57,000 to $58,000.
The Code provides that various other
dollar amounts are to be adjusted at the
same time and in the same manner as the
dollar limitation of § 415(b)(1)(A). After
taking into account the applicable round-
ing rules, the amounts for 2021 are as fol-
lows:
The limitation under § 402(g)(1) on
the exclusion for elective deferrals
described in § 402(g)(3) remains un-
changed at $19,500.
The annual compensation limit under
§§ 401(a)(17), 404(l), 408(k)(3)(C),
and 408(k)(6)(D)(ii) is increased from
$285,000 to $290,000.
The dollar limitation under § 416(i)(1)
(A)(i) concerning the definition of “key
employee” in a top-heavy plan remains
unchanged at $185,000.
The dollar amount under § 409(o)(1)
(C)(ii) for determining the maximum
account balance in an employee stock
ownership plan subject to a 5-year
distribution period is increased from
$1,150,000 to $1,165,000, while the
dollar amount used to determine the
lengthening of the 5-year distribution
period remains unchanged at $230,000.
The limitation used in the definition of
“highly compensated employee” under
§ 414(q)(1)(B) remains unchanged at
$130,000.
The dollar limitation under § 414(v)
(2)(B)(i) for catch-up contributions to
an applicable employer plan other than
a plan described in § 401(k)(11) or
§ 408(p) for individuals aged 50 or over
remains unchanged at $6,500. The dol-
lar limitation under § 414(v)(2)(B)(ii)
for catch-up contributions to an applica-
ble employer plan described in § 401(k)
(11) or § 408(p) for individuals aged 50
or over remains unchanged at $3,000.
The annual compensation limitation
under § 401(a)(17) for eligible partic-
ipants in certain governmental plans
that, under the plan as in effect on July
1, 1993, allowed cost-of-living adjust-
ments to the compensation limitation
under the plan under § 401(a)(17) to be
taken into account, is increased from
$425,000 to $430,000.
The compensation amount under
§ 408(k)(2)(C) regarding simplified
employee pensions (SEPs) is increased
from $600 to $650.
The limitation under § 408(p)(2)(E) re-
garding SIMPLE retirement accounts
remains unchanged at $13,500.
The limitation on the aggregate amount
of length of service awards accruing
with respect to any year of service for
any bona fide volunteer under § 457(e)
(11)(B)(ii) concerning deferred com-
pensation plans of state and local gov-
ernments and tax-exempt organizations
remains unchanged at $6,000.
The limitation on deferrals under
§ 457(e)(15) concerning deferred com-
pensation plans of state and local gov-
ernments and tax-exempt organizations
remains unchanged at $19,500.
The limitation under § 664(g)(7) con-
cerning the qualified gratuitous trans-
fer of qualified employer securities to
an employee stock ownership plan re-
mains unchanged at $50,000.
The compensation amount under
§ 1.61-21(f)(5)(i) of the Income Tax
Regulations concerning the definition
of “control employee” for fringe benefit
valuation purposes remains unchanged
at $115,000. The compensation amount
under § 1.61-21(f)(5)(iii) is increased
from $230,000 to $235,000.
The dollar limitation on premiums paid
with respect to a qualifying longevity
annuity contract under § 1.401(a)(9)-6,
A-17(b)(2)(i) of the Income Tax Regu-
lations remains unchanged at $135,000.
The Code provides that the
$1,000,000,000 threshold used to de-
termine whether a multiemployer plan
is a systemically important plan under
§ 432(e)(9)(H)(v)(III)(aa) is adjusted us-
ing the cost-of-living adjustment provid-
ed under § 432(e)(9)(H)(v)(III)(bb). After
taking the applicable rounding rule into
account, the threshold used to determine
whether a multiemployer plan is a sys-
temically important plan under § 432(e)
(9)(H)(v)(III)(aa) is increased from
$1,135,000,000 to $1,176,000,000.
The Code also provides that several
retirement-related amounts are to be ad-
justed using the cost-of-living adjustment
under § 1(f)(3). After taking the applicable
rounding rules into account, the amounts
for 2021 are as follows:
The adjusted gross income limitation
under § 25B(b)(1)(A) for determin-
ing the retirement savings contribu-
tions credit for married taxpayers
filing a joint return is increased from
$39,000 to $39,500; the limitation un-
der § 25B(b)(1)(B) is increased from
$42,500 to $43,000; and the limitation
under §§ 25B(b)(1)(C) and 25B(b)
(1)(D) is increased from $65,000 to
$66,000.
The adjusted gross income limitation
under § 25B(b)(1)(A) for determining
the retirement savings contributions

Bulletin No. 2020–46 1015 November 9, 2020
credit for taxpayers filing as head of
household is increased from $29,250 to
$29,625; the limitation under § 25B(b)
(1)(B) is increased from $31,875 to
$32,250; and the limitation under
§§ 25B(b)(1)(C) and 25B(b)(1)(D) is
increased from $48,750 to $49,500.
The adjusted gross income limitation
under § 25B(b)(1)(A) for determining
the retirement savings contributions
credit for all other taxpayers is in-
creased from $19,500 to $19,750; the
limitation under § 25B(b)(1)(B) is in-
creased from $21,250 to $21,500; and
the limitation under §§ 25B(b)(1)(C)
and 25B(b)(1)(D) is increased from
$32,500 to $33,000.
The deductible amount under § 219(b)
(5)(A) for an individual making qual-
ified retirement contributions remains
unchanged at $6,000.
The applicable dollar amount under
§ 219(g)(3)(B)(i) for determining the
deductible amount of an IRA contri-
bution for taxpayers who are active
participants filing a joint return or as
a qualifying widow(er) is increased
from $104,000 to $105,000. The appli-
cable dollar amount under § 219(g)(3)
(B)(ii) for all other taxpayers who are
active participants (other than married
taxpayers filing separate returns) is in-
creased from $65,000 to $66,000. If an
individual or the individual’s spouse
is an active participant, the applicable
dollar amount under § 219(g)(3)(B)(iii)
for a married individual filing a sepa-
rate return is not subject to an annual
cost-of-living adjustment and remains
$0. The applicable dollar amount un-
der § 219(g)(7)(A) for a taxpayer who
is not an active participant but whose
spouse is an active participant is in-
creased from $196,000 to $198,000.
Accordingly, under § 219(g)(2)(A), the
deduction for taxpayers making contri-
butions to a traditional IRA is phased
out for single individuals and heads
of household who are active partici-
pants in a qualified plan (or another
retirement plan specified in § 219(g)
(5)) and have adjusted gross incomes
(as defined in § 219(g)(3)(A)) between
$66,000 and $76,000, increased from
between $65,000 and $75,000. For
married couples filing jointly, if the
spouse who makes the IRA contribu-
tion is an active participant, the income
phase-out range is between $105,000
and $125,000, increased from between
$104,000 and $124,000. For an IRA
contributor who is not an active partic-
ipant and is married to someone who
is an active participant, the deduction
is phased out if the couple’s income is
between $198,000 and $208,000, in-
creased from between $196,000 and
$206,000. For a married individual fil-
ing a separate return who is an active
participant, the phase-out range is not
subject to an annual cost-of-living ad-
justment and remains $0 to $10,000.
The adjusted gross income limitation un-
der § 408A(c)(3)(B)(ii)(I) for determin-
ing the maximum Roth IRA contribution
for married taxpayers filing a joint return
or for taxpayers filing as a qualifying
widow(er) is increased from $196,000
to $198,000. The adjusted gross income
limitation under § 408A(c)(3)(B)(ii)(II)
for all other taxpayers (other than mar-
ried taxpayers filing separate returns) is
increased from $124,000 to $125,000.
The applicable dollar amount under
§ 408A(c)(3)(B)(ii)(III) for a married
individual filing a separate return is not
subject to an annual cost-of-living ad-
justment and remains $0.
Accordingly, under § 408A(c)(3)(A),
the adjusted gross income phase-out
range for taxpayers making contri-
butions to a Roth IRA is $198,000 to
$208,000 for married couples filing
jointly, increased from $196,000 to
$206,000. For single individuals and
heads of household, the income phase-
out range is $125,000 to $140,000,
increased from $124,000 to $139,000.
For a married individual filing a sepa-
rate return, the phase-out range is not
subject to an annual cost-of-living ad-
justment and remains $0 to $10,000.
Drafting Information
The principal author of this notice is
Tom Morgan of the Office of the Asso-
ciate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment
Taxes). However, other personnel from
the IRS participated in the development
of this guidance. For further information
regarding this notice, contact Mr. Morgan
at 202-317-6700 or John Heil at 443-853-
5519 (not toll-free numbers).

November 9, 2020 1016 Bulletin No. 2020–46
26 CFR 601.602: Tax forms and instructions.
(Also Part I, §§ 1, 23, 24, 25A, 32, 36B, 42, 45R, 55, 59, 62, 63, 125, 132(f),135, 137, 146, 147, 148, 152, 179, 199A, 213, 220, 221, 448, 461, 512, 513, 642, 831,
877, 877A, 911, 1274A, 2010, 2032A, 2503, 2523, 4161, 4261, 6033, 6039F, 6323, 6334, 6601, 6651, 6652, 6695, 6698, 6699, 6721, 6722, 7345, 7430, 7702B,
9831; 1.148-5.)
Rev. Proc. 2020-45
Table of Contents
SECTION 1. PURPOSE
SECTION 2. CHANGES
SECTION 3. 2021 ADJUSTED ITEMS
Code Section
.01 Tax Rate Tables 1(j)(2) (A)-(D)
.02 Unearned Income of Minor Children 1(g)
(“Kiddie Tax”)
.03 Maximum Capital Gains Rate 1(h)
.04 Adoption Credit 23
.05 Child Tax Credit 24
.06 Lifetime Learning Credit 25A
.07 Earned Income Credit 32
.08 Refundable Credit for Coverage Under a Qualified Health Plan 36B(f)(2)(B)
.09 Rehabilitation Expenditures Treated as Separate New Building 42(e)
.10 Low-Income Housing Credit 42(h)
.11 Employee Health Insurance Expense of Small Employers 45R
.12 Exemption Amounts for Alternative Minimum Tax 55
.13 Alternative Minimum Tax Exemption for a Child Subject to the 59(j)
“Kiddie Tax”
.14 Certain Expenses of Elementary and Secondary 62(a)(2)(D)
School Teachers
.15 Transportation Mainline Pipeline Construction Industry Optional 62(c)
Expense Substantiation Rules for Payments to Employees Under
Accountable Plans
.16 Standard Deduction 63
.17 Cafeteria Plans 125
.18 Qualified Transportation Fringe Benefit 132(f)
.19 Income from United States Savings Bonds for Taxpayers Who 135
Pay Qualified Higher Education Expenses
.20 Adoption Assistance Programs 137
.21 Private Activity Bonds Volume Cap 146(d)
.22 Loan Limits on Agricultural Bonds 147(c)(2)
.23 General Arbitrage Rebate Rules 148(f)
.24 Safe Harbor Rules for Broker Commissions on Guaranteed 148
Investment Contracts or Investments Purchased for a Yield
Restricted Defeasance Escrow
.25 Gross Income Limitation for a Qualifying Relative 152(d)(1)(B)
.26 Election to Expense Certain Depreciable Assets 179
.27 Qualified Business Income 199A
.28 Eligible Long-Term Care Premiums 213(d)(10)
.29 Medical Savings Accounts 220
.30 Interest on Education Loans 221
.31 Limitation on Use of Cash Method of Accounting 448
.32 Threshold for Excess Business Loss 461(l)

Bulletin No. 2020–46 1017 November 9, 2020
.33 Treatment of Dues Paid to Agricultural or Horticultural 512(d)
Organizations
.34 Insubstantial Benefit Limitations for Contributions Associated 513(h)
With Charitable Fund-Raising Campaigns
.35 Special Rules for Credits and Deductions 642
.36 Tax on Insurance Companies Other than Life 831
Insurance Companies
.37 Expatriation to Avoid Tax 877
.38 Tax Responsibilities of Expatriation 877A
.39 Foreign Earned Income Exclusion 911
.40 Debt Instruments Arising Out of Sales or Exchanges 1274A
.41 Unified Credit Against Estate Tax 2010
.42 Valuation of Qualified Real Property in Decedent’s Gross Estate 2032A
.43 Annual Exclusion for Gifts 2503; 2523
.44 Tax on Arrow Shafts 4161
.45 Passenger Air Transportation Excise Tax 4261
.46 Reporting Exception for Certain Exempt Organizations with 6033(e)(3)
Nondeductible Lobbying Expenditures
.47 Notice of Large Gifts Received from Foreign Persons 6039F
.48 Persons Against Whom a Federal Tax Lien Is Not Valid 6323
.49 Property Exempt from Levy 6334(a)
.50 Exempt Amount of Wages, Salary, or Other Income 6334(d)
.51 Interest on a Certain Portion of the Estate Tax Payable in 6601(j)
Installments
.52 Failure to File Tax Return 6651
.53 Failure to File Certain Information Returns, Registration 6652
Statements, etc.
.54 Other Assessable Penalties With Respect to the 6695
Preparation of Tax Returns for Other Persons
.55 Failure to File Partnership Return 6698
.56 Failure to File S Corporation Return 6699
.57 Failure to File Correct Information Returns 6721
.58 Failure to Furnish Correct Payee Statements 6722
.59 Revocation or Denial of Passport in Case of Certain 7345
Tax Delinquencies
.60 Attorney Fee Awards 7430
.61 Periodic Payments Received Under Qualified Long-Term Care 7702B(d)
Insurance Contracts or Under Certain Life Insurance Contracts
.62 Qualified Small Employer Health Reimbursement 9831
Arrangement
SECTION 4. EFFECTIVE DATE
SECTION 5. DRAFTING INFORMATION
SECTION 1. PURPOSE
This revenue procedure sets forth in-
flation-adjusted items for 2021 for various
provisions of the Internal Revenue Code
of 1986 (Code), as amended as of Octo-
ber 26, 2020. To the extent amendments
to the Code are enacted for 2021 after Oc-
tober 26, 2020, taxpayers should consult
additional guidance to determine whether
these adjustments remain applicable for
2021.
SECTION 2. CHANGES
Section 402(b) of Div. O of the Further
Consolidated Appropriation Act, 2020,
Pub. L. 116-94, 133 Stat. 2534 (Dec. 22,
2019), increased the amount of the min-
imum addition to tax under § 6651(a) for
failure to file a tax return within 60 days of
the due date of such return (determined with
regard to any extensions of time for filing).
For returns the due date for which (includ-
ing extensions) is after December 31, 2019,
the amount of the addition to tax shall not
be less than the lesser of $435 (increased
from $330) or 100 percent of the amount
required to be shown as tax on such returns.
Additionally, the $435 amount is adjusted
for inflation in accordance with § 6651(j).
SECTION 3. 2021 ADJUSTED ITEMS
.01 Tax Rate Tables. For taxable years
beginning in 2021, the tax rate tables un-
der § 1 are as follows:

November 9, 2020 1018 Bulletin No. 2020–46
TABLE 1 - Section 1(j)(2)(A) - Married Individuals Filing Joint Returns and Surviving Spouses
If Taxable Income Is: The Tax Is:
Not over $19,900 10% of the taxable income
Over $19,900 but $1,990 plus 12% of
not over $81,050 the excess over $19,900
Over $81,050 but $9,328 plus 22% of
not over $172,750 the excess over $81,050
Over $172,750 but $29,502 plus 24% of
not over $329,850 the excess over $172,750
Over $329,850 but $67,206 plus 32% of
not over $418,850 the excess over $329,850
Over $418,850 but $95,686 plus 35% of
not over $628,300 the excess over $418,850
Over $628,300 $168,993.50 plus 37% of
the excess over $628,300
TABLE 2 - Section 1(j)(2)(B) – Heads of Households
If Taxable Income Is: The Tax Is:
Not over $14,200 10% of the taxable income
Over $14,200 but $1,420 plus 12% of
not over $54,200 the excess over $14,200
Over $54,200 but $6,220 plus 22% of
not over $86,350 the excess over $54,200
Over $86,350 but $13,293 plus 24% of
not over $164,900 the excess over $86,350
Over $164,900 but $32,145 plus 32% of
not over $209,400 the excess over $164,900
Over $209,400 but $46,385 plus 35% of
not over $523,600 the excess over $209,400
Over $523,600 $156,355 plus 37% of
the excess over $523,600

Bulletin No. 2020–46 1019 November 9, 2020
TABLE 3 - Section 1(j)(2)(C) – Unmarried Individuals (other than Surviving Spouses and Heads of Households)
If Taxable Income Is: The Tax Is:
Not over $9,950 10% of the taxable income
Over $9,950 but $995 plus 12% of
not over $40,525 the excess over $9,950
Over $40,525 but $4,664 plus 22% of
not over $86,375 the excess over $40,525
Over $86,375 but $14,751 plus 24% of
not over $164,925 the excess over $86,375
Over $164,925 but $33,603 plus 32% of
not over $209,425 the excess over $164,925
Over $209,425 but $47,843 plus 35% of
not over $523,600 the excess over $209,425
Over $523,600 $157,804.25 plus 37% of
the excess over $523,600
TABLE 4 - Section 1(j)(2)(D) – Married Individuals Filing Separate Returns
If Taxable Income Is: The Tax Is:
Not over $9,950 10% of the taxable income
Over $9,950 but $995 plus 12% of
not over $40,525 the excess over $9,950
Over $40,525 but $4,664 plus 22% of
not over $86,375 the excess over $40,525
Over $86,375 but $14,751 plus 24% of
not over $164,925 the excess over $86,375
Over $164,925 but $33,603 plus 32% of
not over $209,425 the excess over $164,925
Over $209,425 but $47,843 plus 35% of
not over $314,150 the excess over $209,425
Over $314,150 $84,496.75 plus 37% of
the excess over $314,150
TABLE 5 - Section 1(j)(2)(E) – Estates and Trusts
If Taxable Income Is: The Tax Is:
Not over $2,650 10% of the taxable income
Over $2,650 but $265 plus 24% of
not over $9,550 the excess over $2,650
Over $9,550 but $1,921 plus 35% of
not over $13,050 the excess over $9,550
Over $13,050 $3,146 plus 37% of
the excess over $13,050

November 9, 2020 1020 Bulletin No. 2020–46
.02 Unearned Income of Minor Chil-
dren (the “Kiddie Tax”). For taxable years
beginning in 2021, the amount in § 1(g)(4)
(A)(ii)(I), which is used to reduce the net
unearned income reported on the child’s
return that is subject to the “kiddie tax,”
is $1,100. This $1,100 amount is the same
as the amount provided in § 63(c)(5)(A),
as adjusted for inflation. The same $1,100
amount is used for purposes of § 1(g)(7)
(that is, to determine whether a parent may
elect to include a child’s gross income in
the parent’s gross income and to calculate
the “kiddie tax”). For example, one of the
requirements for the parental election is
that a child’s gross income is more than
the amount referenced in § 1(g)(4)(A)(ii)
(I) but less than 10 times that amount; thus,
a child’s gross income for 2021 must be
more than $1,100 but less than $11,000.
.03 Maximum Capital Gains Rate. For
taxable years beginning in 2021, the Maxi-
mum Zero Rate Amount under § 1(h)(1)(B)
(i) is $80,800 in the case of a joint return or
surviving spouse ($40,400 in the case of a
married individual filing a separate return),
$54,100 in the case of an individual who
is a head of household (§ 2(b)), $40,400 in
the case of any other individual (other than
an estate or trust), and $2,700 in the case
of an estate or trust. The Maximum 15-per-
cent Rate Amount under § 1(h)(1)(C)(ii)(l)
is $501,600 in the case of a joint return or
surviving spouse ($250,800 in the case of a
married individual filing a separate return),
$473,750 in the case of an individual who is
the head of a household (§ 2(b)), $445,850
in the case of any other individual (other
than an estate or trust), and $13,250 in the
case of an estate or trust.
.04 Adoption Credit. For taxable years
beginning in 2021, under § 23(a)(3) the
credit allowed for an adoption of a child
with special needs is $14,440. For taxable
years beginning in 2021, under § 23(b)
(1) the maximum credit allowed for oth-
er adoptions is the amount of qualified
adoption expenses up to $14,440. The
available adoption credit begins to phase
out under § 23(b)(2)(A) for taxpayers with
modified adjusted gross income in excess
of $216,660 and is completely phased
out for taxpayers with modified adjusted
gross income of $256,660 or more. (See
section 3.20 for the adjusted items relating
to adoption assistance programs.)
.05 Child Tax Credit. For taxable years
beginning in 2021, the value used in § 24(d)
(1)(A) to determine the amount of credit un-
der § 24 that may be refundable is $1,400.
.06 Lifetime Learning Credit. For tax-
able years beginning in 2021, a taxpayer’s
modified adjusted gross income in excess
of $59,000 ($119,000 for a joint return)
is used to determine the reduction under
§ 25A(d)(2) in the amount of the Lifetime
Learning Credit otherwise allowable under
§ 25A(a)(2). The Lifetime Learning Credit
is completely phased out for taxpayers with
modified adjusted gross income in excess
of $69,000 ($139,000 for a joint return).
.07 Earned Income Credit.
(1) In general. For taxable years be-
ginning in 2021, the following amounts
are used to determine the earned income
credit under § 32(b). The “earned income
amount” is the amount of earned income
at or above which the maximum amount
of the earned income credit is allowed.
The “threshold phaseout amount” is the
amount of adjusted gross income (or, if
greater, earned income) above which the
maximum amount of the credit begins
to phase out. The “completed phaseout
amount” is the amount of adjusted gross
income (or, if greater, earned income) at
or above which no credit is allowed. The
threshold phaseout amounts and the com-
pleted phaseout amounts shown in the
table below for married taxpayers filing a
joint return include the increase provided
in § 32(b)(2)(B), as adjusted for inflation
for taxable years beginning in 2021.
Number of Qualifying Children
ItemOneTwo Three or
More
None
Earned Income Amount$10,640$14,950$14,950$7,100
Maximum Amount of Credit$3,618$5,980$6,728$543
Threshold Phaseout Amount (Single, Surviving Spouse, or Head of
Household)
$19,520$19,520$19,520$8,880
Completed Phaseout Amount (Single, Surviving Spouse, or Head of
Household)
$42,158$47,915$51,464$15,980
Threshold Phaseout Amount (Married Filing Jointly)$25,470$25,470$25,470$14,820
Completed Phaseout Amount (Married Filing Jointly)$48,108$53,865$57,414$21,920
The instructions for the Form 1040 se-
ries provide tables showing the amount of
the earned income credit for each type of
taxpayer.
(2) Excessive Investment Income.
For taxable years beginning in 2021, the
earned income tax credit is not allowed
under § 32(i) if the aggregate amount
of certain investment income exceeds
$3,650.
.08 Refundable Credit for Coverage
Under a Qualified Health Plan. For tax-
able years beginning in 2021, the limita-
tion on tax imposed under § 36B(f)(2)(B)
for excess advance credit payments is de-
termined using the following table:

Bulletin No. 2020–46 1021 November 9, 2020
If the household income The limitation amount for The limitation amount for
(expressed as a percent unmarried individuals all other taxpayers is:
of poverty line) is: (other than surviving
spouses and heads of
household) is:
Less than 200% $325 $650
At least 200% but less
than 300% $800 $1,600
At least 300% but less
than 400% $1,350 $2,700
.09 Rehabilitation Expenditures Treat-
ed as Separate New Building. For calen-
dar year 2021, the per low-income unit
qualified basis amount under § 42(e)(3)
(A)(ii)(II) is $7,100.
.10 Low-Income Housing Credit. For
calendar year 2021, the amount used un-
der § 42(h)(3)(C)(ii) to calculate the State
housing credit ceiling for the low-income
housing credit is the greater of (1) $2.8125
multiplied by the State population, or (2)
$3,245,625.
.11 Employee Health Insurance Ex-
pense of Small Employers. For taxable
years beginning in 2021, the dollar amount
in effect under § 45R(d)(3)(B) is $27,800.
This amount is used under § 45R(c) for
limiting the small employer health insur-
ance credit and under § 45R(d)(1)(B) for
determining who is an eligible small em-
ployer for purposes of the credit.
.12 Exemption Amounts for Alterna-
tive Minimum Tax. For taxable years be-
ginning in 2021, the exemption amounts
under § 55(d)(1) are:
Joint Returns or Surviving Spouses $114,600
Unmarried Individuals (other than Surviving Spouses) $73,600
Married Individuals Filing Separate Returns $57,300
Estates and Trusts $25,700
For taxable years beginning in 2021,
under § 55(b)(1), the excess taxable in-
come above which the 28 percent tax rate
applies is:
Married Individuals Filing Separate Returns $99,950
Joint Returns, Unmarried Individuals (other
than surviving spouses), and Estates and Trusts $199,900
For taxable years beginning in 2021,
the amounts used under § 55(d)(2) to de-
termine the phaseout of the exemption
amounts are:
Threshold Complete
Phaseout amount Phaseout amount
Joint Returns or Surviving Spouses $1,047,200 $1,505,600
Unmarried Individuals (other than $523,600 $818,000
Surviving Spouses)
Married Individuals Filing Separate $523,600 $752,800
Returns
Estates and Trusts $85,650 $188,450
.13 Alternative Minimum Tax Exemp-
tion for a Child Subject to the “Kiddie
Ta x.” For taxable years beginning in 2021,
for a child to whom the § 1(g) “kiddie
tax” applies, the exemption amount un-
der §§ 55(d) and 59(j) for purposes of
the alternative minimum tax under § 55
may not exceed the sum of (1) the child’s
earned income for the taxable year, plus
(2) $7,950.
.14 Certain Expenses of Elementa-
ry and Secondary School Teachers. For
taxable years beginning in 2021, under
§ 62(a)(2)(D) the amount of the deduction
allowed under § 162 that consists of ex-

November 9, 2020 1022 Bulletin No. 2020–46
penses paid or incurred by an eligible ed-
ucator in connection with books, supplies
(other than nonathletic supplies for cours-
es of instruction in health or physical ed-
ucation), computer equipment (including
related software and services) and other
equipment, and supplementary materials
used by the eligible educator in the class-
room is $250.
.15 Transportation Mainline Pipeline
Construction Industry Optional Expense
Substantiation Rules for Payments to Em-
ployees Under Accountable Plans. For
calendar year 2021, an eligible employer
may pay certain welders and heavy equip-
ment mechanics an amount up to $18
per hour for rig-related expenses that are
deemed substantiated under an account-
able plan if paid in accordance with Rev.
Proc. 2002-41, 2002-1 C.B. 1098. If the
employer provides fuel or otherwise reim-
burses fuel expenses, an amount up to $11
per hour is deemed substantiated if paid
under Rev. Proc. 2002-41.
.16 Standard Deduction.
(1) In general. For taxable years be-
ginning in 2021, the standard deduction
amounts under § 63(c)(2) are as follows:
Filing Status Standard Deduction
Married Individuals Filing Joint Returns $25,100
and Surviving Spouses (§ 1(j)(2)(A))
Heads of Households (§ 1(j)(2)(B)) $18,800
Unmarried Individuals (other than Surviving Spouses $12,550
and Heads of Households) (§ 1(j)(2)(C))
Married Individuals Filing Separate $12,550
Returns (§ 1(j)(2)(D))
(2) Dependent. For taxable years be-
ginning in 2021, the standard deduction
amount under § 63(c)(5) for an individual
who may be claimed as a dependent by
another taxpayer cannot exceed the great-
er of (1) $1,100, or (2) the sum of $350
and the individual’s earned income.
(3) Aged or blind. For taxable years
beginning in 2021, the additional standard
deduction amount under § 63(f) for the
aged or the blind is $1,350. The additional
standard deduction amount is increased to
$1,700 if the individual is also unmarried
and not a surviving spouse.
.17 Cafeteria Plans. For taxable years
beginning in 2021, the dollar limitation
under § 125(i) on voluntary employee sal-
ary reductions for contributions to health
flexible spending arrangements is $2,750.
If the cafeteria plan permits the carryover
of unused amounts, the maximum carry-
over amount is $550.
.18 Qualified Transportation Fringe
Benefit. For taxable years beginning
in 2021, the monthly limitation under
§ 132(f)(2)(A) regarding the aggregate
fringe benefit exclusion amount for trans-
portation in a commuter highway vehicle
and any transit pass is $270. The monthly
limitation under § 132(f)(2)(B) regarding
the fringe benefit exclusion amount for
qualified parking is $270.
.19 Income from United States Savings
Bonds for Taxpayers Who Pay Qualified
Higher Education Expenses. For taxable
years beginning in 2021, the exclusion un-
der § 135, regarding income from United
States savings bonds for taxpayers who
pay qualified higher education expenses,
begins to phase out for modified adjusted
gross income above $124,800 for joint
returns and $83,200 for all other returns.
The exclusion is completely phased out
for modified adjusted gross income of
$154,800 or more for joint returns and
$98,200 or more for all other returns.
.20 Adoption Assistance Programs.
For taxable years beginning in 2021,
under § 137(a)(2), the amount that can
be excluded from an employee’s gross
income for the adoption of a child with
special needs is $14,440. For taxable
years beginning in 2021, under § 137(b)
(1) the maximum amount that can be
excluded from an employee’s gross in-
come for the amounts paid or expenses
incurred by an employer for qualified
adoption expenses furnished pursuant to
an adoption assistance program for other
adoptions by the employee is $14,440.
The amount excludable from an employ-
ee’s gross income begins to phase out
under § 137(b)(2)(A) for taxpayers with
modified adjusted gross income in excess
of $216,660 and is completely phased
out for taxpayers with modified adjusted
gross income of $256,660 or more. (See
section 3.04 of this revenue procedure for
the adjusted items relating to the adop-
tion credit.)
.21 Private Activity Bonds Volume
Cap. For calendar year 2021, the amounts
used under § 146(d) to calculate the State
ceiling for the volume cap for private
activity bonds is the greater of (1) $110
multiplied by the State population, or (2)
$324,995,000.
.22 Loan Limits on Agricultural Bonds.
For calendar year 2021, the loan lim-
it amount on agricultural bonds under
§ 147(c)(2)(A) for first-time farmers is
$558,000.
.23 General Arbitrage Rebate Rules.
For bond years ending in 2021, the amount
of the computation credit determined un-
der § 1.148-3(d)(4) of the Income Tax
Regulations is $1,780.
.24 Safe Harbor Rules for Broker
Commissions on Guaranteed Investment
Contracts or Investments Purchased for
a Yield Restricted Defeasance Escrow.
For calendar year 2021, under § 1.148-
5(e)(2)(iii)(B)(1), a broker’s commission
or similar fee for the acquisition of a
guaranteed investment contract or invest-
ments purchased for a yield restricted de-
feasance escrow is reasonable if (1) the
amount of the fee that the issuer treats as
a qualified administrative cost does not
exceed the lesser of (A) $42,000, and (B)
0.2 percent of the computational base (as
defined in § 1.148-5(e)(2)(iii)(B)(2)) or,
if more, $4,000; and (2) for any issue, the
issuer does not treat more than $118,000
in brokers’ commissions or similar fees

Bulletin No. 2020–46 1023 November 9, 2020
as qualified administrative costs for all
guaranteed investment contracts and in-
vestments for yield restricted defeasance
escrows purchased with gross proceeds
of the issue.
.25 Gross Income Limitation for a
Qualifying Relative. For taxable years be-
ginning in 2021, the exemption amount
referenced in § 152(d)(1)(B) is $4,300.
.26 Election to Expense Certain De-
preciable Assets. For taxable years be-
ginning in 2021, under § 179(b)(1), the
aggregate cost of any § 179 property that
a taxpayer elects to treat as an expense
cannot exceed $1,050,000 and under
§ 179(b)(5)(A), the cost of any sport util-
ity vehicle that may be taken into account
under § 179 cannot exceed $26,200. Un-
der § 179(b)(2), the $1,050,000 limita-
tion under section 179(b)(1) is reduced
(but not below zero) by the amount by
which the cost of § 179 property placed
in service during the 2021 taxable year
exceeds $2,620,000.
.27 Qualified Business Income. For
taxable years beginning in 2021, the
threshold amount under § 199A(e)(2) is
$329,800 for married filing joint returns,
$164,925 for married filing separate re-
turns, and $164,900 for all other returns.
.28 Eligible Long-Term Care Premi-
ums. For taxable years beginning in 2021,
the limitations under § 213(d)(10), regard-
ing eligible long-term care premiums in-
cludible in the term “medical care,” are as
follows:
Attained Age Before the Close of the Taxable Year Limitation on Premiums
40 or less $450
More than 40 but not more than 50 $850
More than 50 but not more than 60 $1,690
More than 60 but not more than 70 $4,520
More than 70 $5,640
.29 Medical Savings Accounts.
(1) Self-only coverage. For taxable
years beginning in 2021, the term “high
deductible health plan” as defined in
§ 220(c)(2)(A) means, for self-only cov-
erage, a health plan that has an annual de-
ductible that is not less than $2,400 and
not more than $3,600, and under which the
annual out-of-pocket expenses required to
be paid (other than for premiums) for cov-
ered benefits do not exceed $4,800.
(2) Family coverage. For taxable years
beginning in 2021, the term “high deduct-
ible health plan” means, for family cover-
age, a health plan that has an annual de-
ductible that is not less than $4,800 and
not more than $7,150, and under which the
annual out-of-pocket expenses required to
be paid (other than for premiums) for cov-
ered benefits do not exceed $8,750.
.30 Interest on Education Loans. For
taxable years beginning in 2021, the
$2,500 maximum deduction for interest
paid on qualified education loans under
§ 221 begins to phase out under § 221(b)
(2)(B) for taxpayers with modified ad-
justed gross income in excess of $70,000
($140,000 for joint returns), and is com-
pletely phased out for taxpayers with mod-
ified adjusted gross income of $85,000 or
more ($170,000 or more for joint returns).
.31 Limitation on Use of Cash Method
of Accounting. For taxable years begin-
ning in 2021, a corporation or partnership
meets the gross receipts test of § 448(c)
for any taxable year if the average annual
gross receipts of such entity for the 3-tax-
able-year period ending with the taxable
year which precedes such taxable year
does not exceed $26,000,000.
.32 Threshold for Excess Business
Loss. For taxable years beginning in 2021,
in determining a taxpayer’s excess busi-
ness loss, the amount under § 461(l)(3)
(A)(ii)(II) is $262,000 ($524,000 for joint
returns).
.33 Treatment of Dues Paid to Agri-
cultural or Horticultural Organizations.
For taxable years beginning in 2021, the
limitation under § 512(d)(1), regarding
the exemption of annual dues required to
be paid by a member to an agricultural or
horticultural organization, is $173.
.34 Insubstantial Benefit Limitations
for Contributions Associated with Chari-
table Fund-Raising Campaigns.
(1) Low cost article. For taxable years
beginning in 2021, for purposes of defin-
ing the term “unrelated trade or business”
for certain exempt organizations under
§ 513(h)(2), “low cost articles” are articles
costing $11.30 or less.
(2) Other insubstantial benefits. For
taxable years beginning in 2021, under
§ 170, the $5, $25, and $50 guidelines in
section 3 of Rev. Proc. 90-12, 1990-1 C.B.
471 (as amplified by Rev. Proc. 92-49,
1992-1 C.B. 987, and modified by Rev.
Proc. 92-102, 1992-2 C.B. 579), for the
value of insubstantial benefits that may be
received by a donor in return for a con-
tribution, without causing the contribution
to fail to be fully deductible, are $11.30,
$56.50 and $113, respectively.
.35 Special Rules for Credits and De-
ductions. For taxable years beginning in
2021, the amount of the deduction under
§ 642(b)(2)(C)(i) is $4,300.
.36 Tax on Insurance Companies Oth-
er than Life Insurance Companies. For
taxable years beginning in 2021, under
§ 831(b)(2)(A)(i) the amount of the limit
on net written premiums or direct writ-
ten premiums (whichever is greater) is
$2,400,000 to elect the alternative tax for
certain small companies under § 831(b)
(1) to be taxed only on taxable investment
income.
.37 Expatriation to Avoid Tax. For cal-
endar year 2021, under § 877A(g)(1)(A),
unless an exception under § 877A(g)(1)
(B) applies, an individual is a covered ex-
patriate if the individual’s “average annual
net income tax” under § 877(a)(2)(A) for
the five taxable years ending before the
expatriation date is more than $172,000.
.38 Tax Responsibilities of Expatria-
tion. For taxable years beginning in 2021,
the amount that would be includible in
the gross income of a covered expatriate
by reason of § 877A(a)(1) is reduced (but
not below zero) by $744,000 pursuant to
§ 877A(a)(3).
.39 Foreign Earned Income Exclusion.
For taxable years beginning in 2021, the

November 9, 2020 1024 Bulletin No. 2020–46
foreign earned income exclusion amount
under § 911(b)(2)(D)(i) is $108,700.
.40 Debt Instruments Arising Out of
Sales or Exchanges. For calendar year
2021, a qualified debt instrument under
§ 1274A(b) has stated principal that does
not exceed $6,099,500, and a cash meth-
od debt instrument under § 1274A(c)(2)
has stated principal that does not exceed
$4,356,800.
.41 Unified Credit Against Estate Tax.
For an estate of any decedent dying in
calendar year 2021, the basic exclusion
amount is $11,700,000 for determining
the amount of the unified credit against
estate tax under § 2010.
.42 Valuation of Qualified Real Prop-
erty in Decedent’s Gross Estate. For an
estate of a decedent dying in calendar
year 2021, if the executor elects to use
the special use valuation method under
§ 2032A for qualified real property, the
aggregate decrease in the value of quali-
fied real property resulting from electing
to use § 2032A for purposes of the estate
tax cannot exceed $1,190,000.
.43 Annual Exclusion for Gifts.
(1) For calendar year 2021, the first
$15,000 of gifts to any person (other than
gifts of future interests in property) are
not included in the total amount of taxable
gifts under § 2503 made during that year.
(2) For calendar year 2021, the first
$159,000 of gifts to a spouse who is not
a citizen of the United States (other than
gifts of future interests in property) are
not included in the total amount of taxable
gifts under §§ 2503 and 2523(i)(2) made
during that year.
.44 Tax on Arrow Shafts. For calen-
dar year 2021, the tax imposed under
§ 4161(b)(2)(A) on the first sale by the
manufacturer, producer, or importer of
any shaft of a type used in the manufac-
ture of certain arrows is $0.53 per shaft.
.45 Passenger Air Transportation Ex-
cise Tax. For calendar year 2021, the tax
under § 4261(b)(1) on the amount paid
for each domestic segment of taxable air
transportation is $4.30. For calendar year
2021, the tax under § 4261(c)(1) on any
amount paid (whether within or without
the United States) for any international air
transportation, if the transportation begins
or ends in the United States, generally is
$19.10. Under § 4261(c)(3), however, a
lower rate of tax applies under § 4261(c)
(1) to a domestic segment beginning or
ending in Alaska or Hawaii, and the tax
applies only to departures. For calendar
year 2021, the rate of tax is $9.60.
.46 Reporting Exception for Certain
Exempt Organizations with Nondeduct-
ible Lobbying Expenditures. For taxable
years beginning in 2021, the annual per
person, family, or entity dues limitation
to qualify for the reporting exception un-
der § 6033(e)(3) (and section 5.05 of Rev.
Proc. 98-19, 1998-1 C.B. 547), regarding
certain exempt organizations with nonde-
ductible lobbying expenditures, is $120 or
less.
.47 Notice of Large Gifts Received from
Foreign Persons. For taxable years begin-
ning in 2021, § 6039F authorizes the Trea-
sury Department and the Internal Revenue
Service to require recipients of gifts from
certain foreign persons to report these gifts
if the aggregate value of gifts received in
the taxable year exceeds $16,815.
.48 Persons Against Whom a Federal
Tax Lien Is Not Valid. For calendar year
2021, a federal tax lien is not valid against
(1) certain purchasers under § 6323(b)
(4) who purchased personal property in
a casual sale for less than $1,640, or (2)
a mechanic’s lien or under § 6323(b)(7)
who repaired or improved certain residen-
tial property if the contract price with the
owner is not more than $8,180.
.49 Property Exempt from Levy. For
calendar year 2021, the value of property
exempt from levy under § 6334(a)(2) (fuel,
provisions, furniture, and other household
personal effects, as well as arms for per-
sonal use, livestock, and poultry) cannot
exceed $9,790. The value of property ex-
empt from levy under § 6334(a)(3) (books
and tools necessary for the trade, business,
or profession of the taxpayer) cannot ex-
ceed $4,890.
.50 Exempt Amount of Wages, Salary,
or Other Income. For taxable years be-
ginning in 2021, the dollar amount used
to calculate the amount determined under
§ 6334(d)(4)(B) is $4,300.
.51 Interest on a Certain Portion of the
Estate Tax Payable in Installments. For an
estate of a decedent dying in calendar year
2021, the dollar amount used to determine
the “2-percent portion” (for purposes of
calculating interest under § 6601(j)) of the
estate tax extended as provided in § 6166
is $1,590,000.
.52 Failure to File Tax Return. In the
case of any return required to be filed in
2022, the amount of the addition to tax
under § 6651(a) for failure to file a tax re-
turn within 60 days of the due date of such
return (determined with regard to any ex-
tensions of time for filing) shall not be less
than the lesser of $435 or 100 percent of
the amount required to be shown as tax on
such returns.
.53 Failure to File Certain Information
Returns, Registration Statements, etc. For
returns required to be filed in 2022, the
penalty amounts under § 6652(c) are:
(1) for failure to file a return required
under § 6033(a)(1) (relating to returns
by exempt organization) or § 6012(a)(6)
(relating to returns by political organiza-
tions):
ScenarioDaily
Penalty
Maximum Penalty
Organization (§ 6652(c)(1)(A))$20Lessor of $10,500 or 5% of
gross receipts of the organiza-
tion for the year.
Organization with gross receipts exceeding $1,094,500 (§ 6652(c)(1)(A))$105$54,500
Managers (§ 6652(c)(1)(B))$10$5,000
Public inspection of annual returns and reports (§ 6652(c)(1)(C))$20$10,500
Public inspection of applications for exemption and notice of status (§ 6652(c)(1)(D))$20No Limits

Bulletin No. 2020–46 1025 November 9, 2020
(2) for failure to file a return required
under § 6034 (relating to returns by cer-
tain trust) or § 6043(b) (relating to termi-
nations, etc., of exempt organizations):
ScenarioDaily PenaltyMaximum Penalty
Organization or trust (§ 6652(c)(2)(A))$10$5,000
Managers (§ 6652(c)(2)(B))$10$5,000
Split-Interest Trust (§ 6652(c)(2)(C)(ii))$20$10,500
Any trust with gross income exceeding $273,500 (§ 6652(c)(2)(C)(ii))$105$54,500
(3) for failure to file a disclosure required under § 6033(a)(2):
ScenarioDaily PenaltyMaximum Penalty
Tax–exempt entity (§ 6652(c)(3)(A))$105$54,500
Failure to comply with written demand (§ 6652(c)(3)(B)(ii))$105$10,500
.54 Other Assessable Penalties With
Respect to the Preparation of Tax Returns
for Other Persons. In the case of any fail-
ure relating to a return or claim for refund
filed in 2022, the penalty amounts under
§ 6695 are:
ScenarioPer Return or Claim
for Refund
Maximum
Penalty
Failure to furnish copy to taxpayer (§ 6695(a))$50$27,000
Failure to sign return (§ 6695(b))$50$27,000
Failure to furnish identifying number (§ 6695(c))$50$27,000
Failure to retain copy or list (§ 6695(d))$50$27,000
Failure to file correct information returns (§ 6695(e))$50 per return and
item in return
$27,000
Negotiation of check (§ 6695(f))$545 per checkNo limit
Failure to be diligent in determining eligibility for head of household fil-
ing status, child tax credit, American opportunity tax credit, and earned
income credit (§ 6695(g))
$545 per failureNo limit
.55 Failure to File Partnership Return.
In the case of any return required to be
filed in 2022, the dollar amount used to
determine the amount of the penalty under
§ 6698(b)(1) is $210.
.56 Failure to File S Corporation Re-
turn. In the case of any return required to
be filed in 2022, the dollar amount used to
determine the amount of the penalty under
§ 6699(b)(1) is $210.
.57 Failure to File Correct Information
Returns. In the case of any failure relating
to a return required to be filed in 2022, the
penalty amounts under § 6721 are:
(1) for persons with average annual
gross receipts for the most recent three
taxable years of more than $5,000,000, for
failure to file correct information returns:
ScenarioPenalty Per ReturnCalendar Year Maximum
General Rule (§ 6721(a)(1))$280$3,426,000
Corrected on or before 30 days after required filing date (§ 6721(b)(1))$50$571,000
Corrected after 30
th
day but on or before August 1, 2022 (§ 6721(b)(2))$110$1,713,000

November 9, 2020 1026 Bulletin No. 2020–46
(2) for persons with average annual
gross receipts for the most recent three
taxable years of $5,000,000 or less, for
failure to file correct information returns:
ScenarioPenalty Per ReturnCalendar Year Maximum
General Rule (§ 6721(d)(1)(A))$280$1,142,000
Corrected on or before 30 days after required filing date (§ 6721(d)(1)(B))$50$199,500
Corrected after 30
th
day but on or before August 1, 2022 (§ 6721(d)(1)(C))$110$571,000
(3) for failure to file correct informa-
tion returns due to intentional disregard of
the filing requirement (or the correct in-
formation reporting requirement):
ScenarioPenalty Per ReturnCalendar Year Maximum
Return other than a return required to be filed un-
der §§ 6045(a), 6041A(b), 6050H, 6050I, 6050J,
6050K, or 6050L (§ 6721(e)(2)(A))
Greater of (i) $570, or (ii) 10% of aggregate
amount of items required to be reported correctly
No limit
Return required to be filed under §§ 6045(a),
6050K, or 6050L (§ 6721(e)(2)(B))
Greater of (i) $570, or (ii) 5% of aggregate
amount of items required to be reported correctly
No limit
Return required to be filed under § 6050I(a)
(§ 6721(e)(2)(C))
Greater of (i) $28,550, or (ii) amount of cash re-
ceived up to $114,000
No limit
Return required to be filed under § 6050V
(§ 6721(e)(2)(D))
Greater of (i) $570, or (ii) 10% of the value of the
benefit of any contract with respect to which in-
formation is required to be included on the return
No limit
.58 Failure to Furnish Correct Payee
Statements. In the case of any failure re-
lating to a statement required to be fur-
nished in 2022, the penalty amounts under
§ 6722 are:
(1) for persons with average annual
gross receipts for the most recent three
taxable years of more than $5,000,000, for
failure to file correct information returns:
ScenarioPenalty Per ReturnCalendar Year Maximum
General Rule (§ 6722(a)(1))$280$3,426,000
Corrected on or before 30 days after required filing date (§ 6722(b)(1))$50$571,000
Corrected after 30th day but on or before August 1, 2022 (§ 6722(b)(2))$110$1,713,000
(2) for persons with average annual
gross receipts for the most recent 3 taxable
years of $5,000,000 or less, for failure to
file correct information returns:
ScenarioPenalty Per ReturnCalendar Year Maximum
General Rule (§ 6722(d)(1)(A))$280$1,142,000
Corrected on or before 30 days after required filing date (§ 6722(d)(1)(B))$50$199,500
Corrected after 30
th
day but on or before August 1, 2022 (§ 6722(d)(1)(C))$110$571,000
(3) for failure to file correct payee
statements due to intentional disregard of
the requirement to furnish a payee state-
ment (or the correct information reporting
requirement):

Bulletin No. 2020–46 1027 November 9, 2020
ScenarioPenalty Per ReturnCalendar Year Maximum
Statement other than a statement required under
§§ 6045(b), 6041A(e) (in respect of a return re-
quired under § 6041A(b)), 6050H(d), 6050J(e),
6050K(b), or 6050L(c) (§ 6722(e)(2)(A))
Greater of (i) $570, or (ii) 10% of aggregate
amount of items required to be reported correctly
No limit
Payee statement required under §§ 6045(b),
6050K(b), or 6050L(c) (§ 6722(e)(2)(B))
Greater of (i) $570, or (ii) 5% of aggregate
amount of items required to be reported correctly
No limit
.59 Revocation or Denial of Passport
in Case of Certain Tax Delinquencies. For
calendar year 2021, the amount of a se-
rious delinquent tax debt under § 7345 is
$54,000.
.60 Attorney Fee Awards. For fees in-
curred in calendar year 2021, the attorney
fee award limitation under § 7430(c)(1)
(B)(iii) is $210 per hour.
.61 Periodic Payments Received Un-
der Qualified Long-Term Care Insurance
Contracts or Under Certain Life Insur-
ance Contracts. For calendar year 2021,
the stated dollar amount of the per diem
limitation under § 7702B(d)(4), regarding
periodic payments received under a qual-
ified long-term care insurance contract or
periodic payments received under a life
insurance contract that are treated as paid
by reason of the death of a chronically ill
individual, is $400.
.62 Qualified Small Employer Health
Reimbursement Arrangement. For tax-
able years beginning in 2021, to qualify
as a qualified small employer health reim-
bursement arrangement under § 9831(d),
the arrangement must provide that the
total amount of payments and reimburse-
ments for any year cannot exceed $5,300
($10,700 for family coverage).
SECTION 4. EFFECTIVE DATE
.01 General Rule. Except as provided
in section 4.02 of this revenue procedure,
this revenue procedure applies to taxable
years beginning in 2021.
.02 Calendar Year Rule. This reve-
nue procedure applies to transactions or
events occurring in calendar year 2021
for purposes of sections 3.09 (rehabil-
itation expenditures treated as separate
new building), 3.10 (low-income hous-
ing credit), 3.15 (transportation mainline
pipeline construction industry optional
expense substantiation rules for payments
to employees under accountable plans),
3.21 (private activity bonds volume cap),
3.22 (loan limits on agricultural bonds),
3.23 (general arbitrage rebate rules), 3.24
(safe harbor rules for broker commissions
on guaranteed investment contracts or in-
vestments purchased for a yield restricted
defeasance escrow), 3.37 (expatriation
to avoid taxes), 3.40 (debt instruments
arising out of sales or exchanges), 3.41
(unified credit against estate tax), 3.42
(valuation of qualified real property in
decedent’s gross estate), 3.43 (annual
exclusion for gifts), 3.44 (tax on arrow
shafts), 3.45 (passenger air transportation
excise tax), 3.48 (persons against whom a
federal tax lien is not valid), 3.49 (proper-
ty exempt from levy), 3.51 (interest on a
certain portion of the estate tax payable in
installments), 3.59 (revocation or denial of
passport in case of certain tax delinquen-
cies), 3.60 (attorney fee awards), and 3.61
(periodic payments received under quali-
fied long-term care insurance contracts or
under certain life insurance contracts) of
this revenue procedure.
SECTION 5. DRAFTING
INFORMATION
The principal author of this revenue
procedure is William Ruane of the Office
of Associate Chief Counsel (Income Tax
& Accounting). For further information
regarding this revenue procedure, contact
Mr. Ruane at (202) 317-4718 (not a toll-
free number).

Bulletin No. 2020–46 i November 9, 2020
Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).
Clarified is used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion. It
is not used where a position in a prior rul-
ing is being changed.
Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transactions.
This term is most commonly used in a ruling
that lists previously published rulings that
are obsoleted because of changes in laws or
regulations. A ruling may also be obsoleted
because the substance has been included in
regulations subsequently adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previous-
ly published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cas-
es in litigation, or the outcome of a Ser-
vice study.
Abbreviations
The following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

November 9, 2020 ii Bulletin No. 2020–46
Numerical Finding List
1
Bulletin 2020–46
Announcements:
2020-8, 2020-32 I.R.B. 244
2020-9, 2020-32 I.R.B. 244
2020-10, 2020-33 I.R.B. 385
2020-11, 2020-33 I.R.B. 385
2020-13, 2020-35 I.R.B. 492
2020-14, 2020-36 I.R.B. 549
2020-15, 2020-38 I.R.B. 577
2020-16, 2020-38 I.R.B. 578
2020-17, 2020-40 I.R.B. 794
2020-12, 2020-41 I.R.B. 893
2020-40, 2020-45 I.R.B. 999
Notices:
2020-43, 2020-27 I.R.B. 1
2020-45, 2020-27 I.R.B. 3
2020-46, 2020-27 I.R.B. 7
2020-47, 2020-27 I.R.B. 7
2020-49, 2020-27 I.R.B. 8
2020-50, 2020-28 I.R.B. 35
2020-48, 2020-29 I.R.B. 72
2020-51, 2020-29 I.R.B. 73
2020-52, 2020-29 I.R.B. 79
2020-53, 2020-30 I.R.B. 151
2020-54, 2020-31 I.R.B. 226
2020-56, 2020-32 I.R.B. 239
2020-57, 2020-32 I.R.B. 240
2020-58, 2020-34 I.R.B. 419
2020-55, 2020-35 I.R.B. 467
2020-61, 2020-35 I.R.B. 468
2020-62, 2020-35 I.R.B. 476
2020-63, 2020-35 I.R.B. 491
2020-60, 2020-36 I.R.B. 514
2020-64, 2020-36 I.R.B. 519
2020-65, 2020-38 I.R.B. 567
2020-68, 2020-38 I.R.B. 567
2020-69, 2020-39 I.R.B. 604
2020-59, 2020-40 I.R.B. 782
2020-66, 2020-40 I.R.B. 785
2020-71, 2020-40 I.R.B. 786
2020-72, 2020-40 I.R.B. 789
2020-73, 2020-41 I.R.B. 886
2020-74, 2020-41 I.R.B. 887
2020-70, 2020-43 I.R.B. 913
2020-77, 2020-45 I.R.B. 988
2020-79, 2020-46 I.R.B. 1014
Proposed Regulations:
REG-119307-19, 2020-28 I.R.B. 44
REG-112339-19, 2020-30 I.R.B. 155
REG-117589-18, 2020-30 I.R.B. 184
REG-125716-18, 2020-30 I.R.B. 197
REG-123027-19, 2020-31 I.R.B. 229
Proposed Regulations:—Continued
REG-130081-19, 2020-32 I.R.B. 246
REG-127732-19, 2020-33 I.R.B. 385
REG-111879-20, 2020-34 I.R.B. 421
REG-112042-19, 2020-34 I.R.B. 422
REG-132766-18, 2020-34 I.R.B. 436
REG-132434-17, 2020-35 I.R.B. 508
REG-116475-19, 2020-37 I.R.B. 553
REG-107911-18, 2020-40 I.R.B. 795
REG-110059-20, 2020-42 I.R.B. 904
Revenue Procedures:
2020-16, 2020-27 I.R.B. 10
2020-31, 2020-27 I.R.B. 12
2020-35, 2020-29 I.R.B. 82
2020-36, 2020-32 I.R.B. 243
2020-37, 2020-33 I.R.B. 381
2020-38, 2020-36 I.R.B. 522
2020-39, 2020-36 I.R.B. 546
2020-40, 2020-38 I.R.B. 575
2020-41, 2020-40 I.R.B. 793
2020-42, 2020-41 I.R.B. 891
2020-43, 2020-45 I.R.B. 991
2020-44, 2020-45 I.R.B. 991
2020-46, 2020-45 I.R.B. 995
2020-45, 2020-46 I.R.B. 1016
Revenue Rulings:
2020-14, 2020-28 I.R.B. 33
2020-15, 2020-32 I.R.B. 233
2020-16, 2020-37 I.R.B. 550
2020-17, 2020-37 I.R.B. 552
2020-18, 2020-39 I.R.B. 584
2020-19, 2020-40 I.R.B. 611
2020-20, 2020-41 I.R.B. 880
2020-21, 2020-41 I.R.B. 882
2020-22, 2020-45 I.R.B. 963
2020-24, 2020-45 I.R.B. 965
Treasury Decisions:
9899, 2020-29 I.R.B. 62
9900, 2020-30 I.R.B. 143
9903, 2020-32 I.R.B. 235
9901, 2020-33 I.R.B. 266
9902, 2020-33 I.R.B. 349
9904, 2020-34 I.R.B. 413
9907, 2020-38 I.R.B. 559
9906, 2020-39 I.R.B. 579
9905, 2020-40 I.R.B. 614
9915, 2020-41 I.R.B. 882
9908, 2020-42 I.R.B. 894
9920, 2020-43 I.R.B. 909
9910, 2020-44 I.R.B. 915
9924, 2020-44 I.R.B. 943
9911, 2020-45 I.R.B. 966
9913, 2020-45 I.R.B. 975
Treasury Decisions:—Continued
9918, 2020-45 I.R.B. 979
9914, 2020-46 I.R.B. 1000
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2019–27 through 2019–52 is in Internal Revenue Bulletin
2019–52, dated December 27, 2019.

Bulletin No. 2020–46 iii November 9, 2020
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2020–46
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2019–27 through 2019–52 is in Internal Revenue Bulletin
2019–52, dated December 27, 2019.

Internal Revenue Service
Washington, DC 20224
Official Business
Penalty for Private Use, $300
INTERNAL REVENUE BULLETIN
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