Internal Revenue Bulletin 2014-47 (PDF rendition): IRS Notices

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# Internal Revenue bulletin

## HIGHLIGHTS OF THIS ISSUE

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

## INCOME TAX

### REG-151416-06, page 870.

This notice of proposed rulemaking (NPRM) provides rules that
prescribe how a partner should measure its interest in a part-
nership's unrealized receivables and inventory items, and that
provide guidance regarding the tax consequences of a distri-
bution that causes a reduction in that interest, thus requiring
the recognition of ordinary income. The NPRM takes into ac-
count statutory changes that have occurred subsequent to the
issuance of the existing regulations. The NPRM affects part-
ners in partnerships that own unrealized receivables and inven-
tory items and that make a distribution to one or more part-
ners.

### Rev. Rul. 2014-27, page 832.

The "base period T-bill rate" for the period ending September
30, 2014, is published, as required by section 995(f) of the
Internal Revenue Code.

### Rev. Proc. 2014-59, page 843.

The loss payment patterns and discount factors are set forth
for the 2014 accident year. These factors will be used for
computing discounted unpaid losses under § 846 of the Code.

### Rev. Proc. 2014-60, page 854.

The salvage discount factors are set forth for the 2014 acci-
dent year. These factors will be used for computing discounted
estimated salvage recoverable under § 832 of the Code.

### Rev. Proc. 2014-61, page 860.

This procedure sets forth the 2015 cost-of-living adjustments
to certain items due to inflation as required under various
provisions of the Code and Service guidance.

Finding Lists begin on page ii.

Department of the Treasury
Internal Revenue Service

### Notice 2014-65, page 842.

This notice designates the Ebola virus outbreak in the West
African countries of Guinea, Liberia, and Sierra Leone as a
qualified disaster for purposes of section 139 of the Code.

### Notice 2014-68, page 842.

This notice provides guidance on the treatment of leave-based
donation programs to aid victims of the Ebola virus outbreak in
the West African countries of Guinea, Liberia, and Sierra Leone
for income and employment tax purposes.

## ESTATE TAX

### Rev. Proc. 2014-61, page 860.

This procedure sets forth the 2015 cost-of-living adjustments
to certain items due to inflation as required under various
provisions of the Code and Service guidance.

## GIFT TAX

Rev. Proc. 2014-61, page 860.

This procedure sets forth the 2015 cost-of-living adjustments
to certain items due to inflation as required under various
provisions of the Code and Service guidance.

(Continued on the next page)

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## EXCISE TAX

### Rev. Proc. 2014-61, page 860.

This procedure sets forth the 2015 cost-of-living adjustments
to certain items due to inflation as required under various
provisions of the Code and Service guidance.

### T.D. 9698, page 836.

The final regulations provide guidance on the mandatory filing
of Form 2290, "Heavy Highway Vehicle Use Tax Return," for 25
or more vehicles; credits or refunds of the highway use tax for
sold, destroyed, or stolen vehicles; and the tax liability and
computation of tax on the use of certain second-hand vehicles.
The regulations affect owners and operators of highway motor
vehicles with a taxable gross weight of 55,000 pounds or
more. These regulations also remove the temporary regula-
tions that provide guidance on the filing of Form 2290 and
payment of the associated highway use tax for the taxable
period beginning July 1, 2011.

## ADMINISTRATIVE

Rev. Proc. 2014-61, page 860.

This procedure sets forth the 2015 cost-of-living adjustments
to certain items due to inflation as required under various
provisions of the Code and Service guidance.

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## The IRS Mission

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

## Introduction

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

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

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

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

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

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

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

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

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

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

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

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

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

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

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

### Section 1 .- Tax Imposed

The Service provides inflation adjustments to the
tax rate tables for individuals, trusts, and estates for
taxable years beginning in 2015. The Service also
provides an inflation adjustment to the amount used
to reduce the net unearned income of a minor child
subject to the "kiddie tax" for taxable years begin-
ning in 2015. See Rev. Proc. 2014-61, page 860.

### Section 23 .- Adoption Credit

The Service provides inflation adjustments to the
adoption credit allowed for the adoption of a child
for taxable years beginning in 2015. The Service also
provides inflation adjustments to the value used in
calculating the modified adjusted gross income lim-
itations used to determine the amount of adoption
credit that is allowed in taxable years beginning in
2015. See Rev. Proc. 2014-61, page 860.

#### Section 24 .- Child Tax Credit

The Service provides an inflation adjustment for
the value used in determining the amount of the
credit that may be refundable for taxable years be-
ginning in 2015. See Rev. Proc. 2014-61, page 860.

### Section 25A .- Hope and Lifetime Learning Credits

The Service provides an inflation adjustment for
the amount of qualified tuition and related expenses
that are taken into account in determining the
amount of the Hope Scholarship Credit for taxable
years beginning in 2015. Also for taxable years
beginning in 2015, the Service provides an inflation
adjustment for the amount of a taxpayer's modified
adjusted gross income that is taken into account in
determining the reduction in the amount of the Hope
Scholarship and Lifetime Learning Credits otherwise
available. See Rev. Proc. 2014-61, page 860.

## Section 32 .- Earned Income Credit

The Service provides inflation adjustments to the
limitations on the earned income credit for taxable
years beginning in 2015. See Rev. Proc. 2014-61,
page 860.

## Section 36B .- Refundable Credit for Coverage Under a Qualified Health Plan

The Service provides an inflation adjustment for
calendar year 2015 to the limitation on additional tax
owed when advance credit payments exceed the pre-
mium tax credit allowed. See Rev. Proc. 2014-61,
page 860.

## Section 42 .- Low-Income Housing Credit

The Service provides inflation adjustments to the
amounts used to calculate the State housing credit
ceiling used in determining the low-income housing
credit, and the per low-income unit qualified basis
amount, for calendar year 2015. See Rev. Proc.
2014-61, page 860.

## Section 45R .- Employee Health Insurance Expense of Small Employers

The Service provides the dollar amount used to
calculate average annual wages for determining who
is eligible for the small employer health insurance
credit for calendar year 2015. See Rev. Proc. 2014-
61, page 860.

## Section 55 .- Exemption Amounts for Alternative Minimum Tax

The Service provides an inflation adjustment for
the exemption amounts for the alternative minimum tax
for taxable years beginning in 2015. Also for taxable
years beginning in 2015, the Service provides an infla-
tion adjustment for the amounts used to determine the
phaseout of the exemption amounts for the alternative
minimum tax. See Rev. Proc. 2014-61, page 860.

## Section 59 .- Alternative Minimum Tax Exemption for a Child Subject to the "Kiddie Tax"

The Service provides an inflation adjustment to
the exemption amount used in computing the alter-
native minimum tax for a minor child subject to the
"kiddie tax" for taxable years beginning in 2015. See
Rev. Proc. 2014-61, page 860.

## Section 62 .- Adjusted Gross Income Defined

The Service provides inflation adjustments to the
amounts an eligible employer may pay in calendar
year 2015 to certain welders and heavy equipment
mechanics for rig-related expenses that are deemed
substantiated under an accountable plan if paid in
accordance with Rev. Proc. 2002-41, 2002-1 C.B.
1098. See Rev. Proc. 2014-61, page 860.

## Section 63 .- Taxable Income Defined

The Service provides inflation adjustments to the
standard deduction amounts (including the limitation in
the case of certain dependents, and the additional stan-
dard deduction for the aged or blind) for taxable years
beginning in 2015. See Rev. Proc. 2014-61, page 860.

## Section 68 .- Overall Limitation on Itemized Deductions

The Service provides overall limitations on item-
ized deductions for individuals for taxable years
beginning in 2015. See Rev. Proc. 2014-61, page
860.

## Section 125 .- Cafeteria Plans

The Service provides an inflation adjustment for
voluntary employee salary reductions for contribu-
tions to health flexible spending arrangements for
taxable years beginning in 2015. See Rev. Proc.
2014-61, page 860.

## Section 132 .- Certain Fringe Benefits

The Service provides inflation adjustments to the
limitations on the exclusion of income for a qualified
transportation fringe benefit for taxable years begin-
ning in 2015. See Rev. Proc. 2014-61, page 860.

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## Section 135 .- Income from United States Savings Bonds Used to Pay Higher Education Tuition and Fees

The Service provides inflation adjustments to the
limitation on the exclusion of income from United
States savings bonds for taxpayers who pay qualified
higher education expenses for taxable years begin-
ning in 2015. See Rev. Proc. 2014-61, page 860.

### Section 137 .- Adoption Assistance Programs

The Service provides an inflation adjustment to
the maximum amount that can be excluded from an
employee's gross income in connection with a qual-
ified adoption assistance program for taxable years
beginning in 2015. The Service also provides infla-
tion adjustments to the amounts used to calculate the
modified adjusted gross income limitations used to
determine the amount that can be excluded from an
employee's gross income for taxable years begin-
ning in 2015. See Rev. Proc. 2014-61, page 860.

## Section 146 .- Private Activity Bonds Volume Cap

The Service provides inflation adjustments to the
amounts used to determine the State ceiling for the
volume cap of private activity bonds for calendar
year 2015. See Rev. Proc. 2014-61, page 860.

## Section 147 .- Loan Limits on Agricultural Bonds

The Service provides an inflation adjustment to
the loan limit amount on agricultural bonds for first-
time farmers for calendar year 2015. See Rev. Proc.
2014-61, page 860.

## Section 148 .- Arbitrage

The Service provides inflation adjustments for de-
termining in the calendar year 2015 whether a broker's
commission or similar fee with respect to the acquisi-
tion of a guaranteed investment contract or investments
purchased for a yield restricted defeasance escrow is
reasonable. The Service provides an inflation adjust-
ment to the computation credit determined under per-
mission to rely on § 1.148-3(d)(4) of the proposed
Income Tax Regulations for bond years ending in
2015. See Rev. Proc. 2014-61, page 860.

## Section 151 .- Personal Exemptions

The Service provides an inflation adjustment to the
personal exemption amount for taxable years beginning
in 2015. See Rev. Proc. 2014-61, page 860.

## Section 213 .- Medical, Dental, etc., Expenses

The Service provides inflation adjustments to the
limitations on the amount of eligible long-term care
premiums includible in the term "medical care" for
taxable years beginning in 2015. See Rev. Proc.
2014-61, page 860.

## Section 220 .- Medical Savings Accounts

The Service provides inflation adjustments to the
amounts used to determine whether a health plan is
a "high deductible health plan" for purposes of de-
termining whether an individual is eligible for a
deduction for cash paid to a medical savings account
for taxable years beginning in 2015. See Rev. Proc.
2014-61, page 860.

## Section 221 .- Interest on Education Loans

The Service provides inflation adjustments to the
income limitations used to determine the allowable
deduction for interest on education loans for taxable
years beginning in 2015. See Rev. Proc. 2014-61,
page 860.

## Section 512 .- Unrelated Business Taxable Income

The Service provides an inflation adjustment to the
maximum amount of annual dues that can be paid to
certain agricultural or horticultural organizations with-
out any portion being treated as unrelated trade or
business income by reason of any benefits or privileges
available to members for taxable years beginning in
2015. See Rev. Proc. 2014-61, page 860.

## Section 513 .- Unrelated Trade or Business

The Service provides an inflation adjustment to
the maximum cost of a "low cost article" for taxable
years beginning in 2015. Funds raised through a
charity's distribution of low cost articles will not be
treated as unrelated business income to the charity.
See Rev. Proc. 2014-61, page 860.

## Section 832 .- Insurance Company Taxable Income

The salvage discount factors and payment patterns
are set forth for 2014. These factors must be used to
compute discounted estimated salvage recoverable for
purposes of section 832 of the code. See Rev. Proc.
2014-60, page 854.

## Section 846 .- Discounted Unpaid Losses Defined

The salvage discount factors and payment patterns
are set forth for 2014. These factors must be used to
compute discounted estimated salvage recoverable for
purposes of section 832 of the code. See Rev. Proc.
2014-60, page 854.

## Section 846 .- Discounted unpaid Losses Defined

The composite loss discount factors for Reinsur-
ance (Nonproportional Assumed Property) published
in Rev. Proc. 2014-59, page 843.

## Section 877 .- Expatriation to Avoid Tax

The Service provides an inflation adjustment to
the amount used for calendar year 2015 to determine
whether an individual's loss of United States citizen-
ship had the avoidance of United States tax as one of
its principal purposes. See Rev. Proc. 2014-61, page
860.

## Section 877A .- Tax Responsibilities of Expatriation

The Service provides an inflation adjustment to
the amount that reduces the amount that would be
includible in the gross income of a covered expatri-
ate for taxable years beginning in 2015. See Rev.
Proc. 2014-61, page 860.

## Section 911 .- Citizens or Residents of the United States Living Abroad

The Service provides an inflation adjustment to
the amount of foreign earned income that may be
excluded from gross income for taxable years begin-
ning in 2015. See Rev. Proc. 2014-61, page 860.

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## Section 995 .- Taxation of DISC Income to Shareholders

2014 Base Period T-Bill Rate. The "base period
T-bill rate" for the period ending September 30,
2014, is published as required by section 995(f) of
the Code.

## Rev. Rul. 2014-27

Section 995(f)(1) of the Internal Reve-
nue Code provides that a shareholder of a
DISC shall pay interest each taxable year
in an amount equal to the product of the
shareholder's DISC-related deferred tax
liability for the year and the "base period
T-bill rate." Under section 995(f)(4), the
base period T-bill rate is the annual rate of
interest determined by the Secretary to be
equivalent to the average of the 1-year
constant maturity Treasury yields, as pub-
lished by the Board of Governors of the
Federal Reserve System, for the 1-year
period ending on September 30 of the
calendar year ending with (or of the most
recent calendar year ending before) the
close of the taxable year of the share-
holder. The base period T-bill rate for the
period ending September 30, 2014, is 0.11
percent.

Pursuant to section 6222 of the Code,
interest must be compounded daily. The
table below provides factors for com-
pounding the base period T-bill rate daily
for any number of days in the sharehold-
er's taxable year (including a 52-53 week
accounting period) for the 2014 base pe-
riod T-bill rate. To compute the amount of
the interest charge for the shareholder's
taxable year, multiply the amount of the
shareholder's DISC-related deferred tax
liability (as defined in section 995(f)(2))
for that year by the base period T-bill rate
factor corresponding to the number of
days in the shareholder's taxable year for
which the interest charge is being com-
puted. Generally, one would use the factor
for 365 days. One would use a different
factor only if the shareholder's taxable
year for which the interest charge being
determined is a short taxable year, if the
shareholder uses the 52-53 week taxable
year, or if the shareholder's taxable year is
a leap year.

For the base period T-bill rates for the
periods ending in prior years, see Rev.
Rul. 2013-24, 2013-49 IRB 534; Rev.

Rul. 2012-22, 2012-48 IRB 565; Rev.
Rul. 2011-30, 2011-49 IRB 826; Rev.
Rul. 2010-28, 2010-49 IRB 804; and
Rev. Rul. 2009-36, 2009-47 IRB 650.

## DRAFTING INFORMATION

The principal author of this revenue
ruling is Anand Desai of the Office of
Associate Chief Counsel (International).
For further information regarding the rev-
enue ruling, contact Mr. Desai at (202)
317-6939 (not a toll-free number).

ANNUAL RATE, COMPOUNDED DAILY 0.11 PERCENT

DAYS

FACTOR

1

.000003836

2

.000007671

3

.000011507

4

.000015343

5

.000019178

6

.000023014

7

.000026850

8

.000030685

9

.000034521

10

.000038357

11

.000042193

12

.000046028

13

.000049864

14

.000053700

15

.000057536

16

.000061372

17

.000065207

18

.000069043

19

.000072879

20

.000076715

21

.000080551

22

.000084387

23

.000088223

24

.000092059

25

.000095895

26

.000099731

27

.000103567

28

.000107403

ANNUAL RATE,
COMPOUNDED DAILY
0.11 PERCENT

DAYS

FACTOR

29

.000111239

30

.000115075

31

.000118911

32

.000122747

33

.000126583

34

.000130419

35

.000134255

36

.000138091

37

.000141928

38

.000145764

39

.000149600

40

.000153436

41

.000157272

42

.000161109

43

.000164945

44

.000168781

45

.000172617

46

.000176454

47

.000180290

48

.000184126

49

.000187963

50

.000191799

51

.000195635

52

.000199472

53

.000203308

54

.000207144

55

.000210981

56

.000214817

57

.000218654

58

.000222490

59

.000226327

60

.000230163

61

.000234000

62

.000237836

63

.000241673

64

.000245509

65

.000249346

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ANNUAL RATE,
COMPOUNDED DAILY

ANNUAL RATE,
COMPOUNDED DAILY

ANNUAL RATE,
COMPOUNDED DAILY

0.11 PERCENT

0.11 PERCENT

0.11 PERCENT

DAYS

FACTOR

DAYS

FACTOR

DAYS

FACTOR

102

.000391309

139

.000533292

66

.000253182

103

.000395146

140

.000537129

67

.000257019

104

.000398983

68

.000260855

105

.000402820

141

.000540967

69

.000264692

142

.000544805

70

.000268529

106

.000406657

143

.000548643

107

.000410494

144

.000552480

71

.000272365

108

.000414332

145

.000556318

72

.000276202

109

.000418169

73

.000280039

110

.000422006

146

.000560156

74

.000283875

147

.000563994

75

.000287712

111

.000425843

148

.000567831

112

.000429681

149

.000571669

76

.000291549

113

.000433518

150

.000575507

77

.000295386

114

.000437355

78

.000299222

115

.000441192

151

.000579345

79

.000303059

152

.000583183

80

.000306896

116

.000445030

153

.000587020

117

.000448867

154

.000590858

81

.000310733

118

.000452704

155

.000594696

82

.000314569

119

.000456542

83

.000318406

120

.000460379

156

.000598534

84

.000322243

157

.000602372

85

.000326080

121

.000464216

158

.000606210

122

.000468054

159

.000610048

86

.000329917

123

.000471891

160

.000613886

87

.000333754

124

.000475729

88

.000337591

125

.000479566

161

.000617724

89

.000341427

162

.000621562

90

.000345264

126

.000483404

163

.000625400

127

.000487241

164

.000629238

91

.000349101

128

.000491079

165

.000633076

92

.000352938

129

.000494916

93

.000356775

130

.000498754

166

.000636914

94

.000360612

167

.000640752

95

.000364449

131

.000502591

168

.000644590

132

.000506429

169

.000648428

96

.000368286

133

.000510266

170

.000652266

97

.000372123

134

.000514104

98

.000375960

135

.000517941

171

.000656104

99

.000379797

172

.000659942

100

.000383634

136

.000521779

173

.000663781

137

.000525617

174

.000667619

101

.000387472

138

.000529454

175

.000671457

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ANNUAL RATE,
COMPOUNDED DAILY

ANNUAL RATE,
COMPOUNDED DAILY

ANNUAL RATE,
COMPOUNDED DAILY

0.11 PERCENT 0.11 PERCENT 0.11 PERCENT

DAYS

FACTOR

DAYS

FACTOR

DAYS

FACTOR

212

.000813480

249

.000955523

176

.000675295

213

.000817319

250

.000959362

177

.000679133

214

.000821157

178

.000682972

215

.000824996

251

.000963201

179

.000686810

252

.000967041

180

.000690648

216

.000828835

253

.000970880

217

.000832674

254

.000974719

181

.000694486

218

.000836512

255

.000978559

182

.000698325

219

.000840351

183

.000702163

220

.000844190

256

.000982398

184

.000706001

257

.000986238

185

.000709839

221

.000848029

258

.000990077

222

.000851868

259

.000993916

186

.000713678

223

.000855707

260

.000997756

187

.000717516

224

.000859546

188

.000721355

225

.000863385

261

.001001595

189

.000725193

262

.001005435

190

.000729031

226

.000867223

263

.001009274

227

.000871062

264

.001013114

191

.000732870

228

.000874901

265

.001016953

192

.000736708

229

.000878740

193

.000740547

230

.000882579

266

.001020793

194

.000744385

267

.001024632

195

.000748224

231

.000886418

268

.001028472

232

.000890257

269

.001032311

196

.000752062

233

.000894096

270

.001036151

197

.000755901

234

.000897935

198

.000759739

235

.000901774

271

.001039990

199

.000763578

272

.001043830

200

.000767416

236

.000905614

273

.001047670

237

.000909453

274

.001051509

201

.000771255

238

.000913292

275

.001055349

202

.000775093

239

.000917131

203

.000778932

240

.000920970

276

.001059189

204

.000782770

277

.001063028

205

.000786609

241

.000924809

278

.001066868

242

.000928648

279

.001070708

206

.000790448

243

.000932488

280

.001074547

207

.000794286

244

.000936327

208

.000798125

245

.000940166

281

.001078387

209

.000801964

282

.001082227

210

.000805802

246

.000944005

283

.001086067

247

.000947844

284

.001089906

211

.000809641

248

.000951684

285

.001093746

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ANNUAL RATE,
COMPOUNDED DAILY

ANNUAL RATE,
COMPOUNDED DAILY

ANNUAL RATE,
COMPOUNDED DAILY

0.11 PERCENT

0.11 PERCENT

0.11 PERCENT

DAYS

FACTOR

DAYS

FACTOR

DAYS

FACTOR

322

.001235829

359

.001377932

286

.001097586

323

.001239669

360

.001381773

287

.001101426

324

.001243510

288

.001105266

325

.001247350

361

.001385614

289

.001109106

362

.001389455

290

.001112945

326

.001251191

363

.001393296

327

.001255031

364

.001397137

291

.001116785

328

.001258871

365

.001400978

292

.001120625

329

.001262712

293

.001124465

330

.001266552

366

.001404819

294

.001128305

367

.001408660

295

.001132145

331

.001270393

368

.001412501

332

.001274233

369

.001416342

296

.001135985

333

.001278074

370

.001420183

297

.001139825

334

.001281914

298

.001143665

335

.001285755

371

.001424024

299

.001147505

300

.001151345

336

.001289595

337

.001293436

301

.001155185

338

.001297277

Section 2010 .- Unified

302

.001159025

339

.001301117

Credit Against Estate Tax

303

.001162865

340

.001304958

The Service provides an inflation adjustment to

304

.001166705

the amount of the unified credit against estate tax for

305

.001170545

341

.001308798

the estate of a decedent dying in calendar year 2015. 2014-61,

342

.001312639

See Rev. Proc.

page 860.

306

.001174385

343

.001316480

307

.001178226

344

.001320320

308

.001182066

345

.001324161

Section 2032A .- Valuation

309

.001185906

of Certain Farm, etc., Real

310

.001189746

346

.001328002

Property

347

.001331842

311

.001193586

348

.001335683

The Service provides an inflation adjustment to the

312

.001197426

349

.001339524

maximum amount by and other qualified real

which the value of certain farm property included in a dece-

313

.001201267

350

.001343365

dent's gross estate may be decreased for purposes of

314

.001205107

valuing the estate of a 2015. See Rev. Proc.

decedent dying in calendar year 2014-61, page 860.

315

.001208947

351

.001347205

352

.001351046

316

.001212787

353

.001354887

317

.001216628

354

.001358728

Section 2503

.- Taxable

318

.001220468

355

.001362569

Gifts

319

.001224308

320

.001228148

356

.001366410

The Service provides an inflation adjustment to the amount of gifts that may be made to a person in

357

.001370250

a calendar year without including the amount in

321

.001231989

358

.001374091

taxable gifts for calendar year 2015. See Rev. Proc. 2014-61, page 860.

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## Section 2523 .- Gift to Spouse

The Service provides an inflation adjustment to
the amount of gifts that may be made in a calendar
year to a spouse who is not a citizen of the United
States without including the amount in taxable gifts
for calendar year 2015. See Rev. Proc. 2014-61,
page 860.

## Section 4161 .- Imposition of Tax

The Service provides an inflation adjustment to
the amount of excise tax imposed for calendar year
2015 on the first sale by a manufacturer, producer, or
importer of any shaft of a type used in the manufac-
ture of certain arrows. See Rev. Proc. 2014-61, page
860.

## Section 4261 .- Passenger Air Transportation Excise Tax

The Service provides inflation adjustments for
excise taxes on domestic and international passenger
air transportation for calendar year 2015. See Rev.
Proc. 2014-61, page 860.

26 CFR Part 41: Highway Use Tax Regulations."
The regulations in this part relate to the tax on the
use of certain highway vehicles imposed by section
4481 and to certain associated administrative pro-
visions.

## T.D. 9698

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 41

Highway Use Tax; Sold
Vehicles and Electronic
Filing; Taxable Period
Beginning July 1, 2011

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations and removal
of temporary regulations.

SUMMARY: This document contains fi-
nal regulations that provide guidance on
the mandatory electronic filing of Form
2290, "Heavy Highway Vehicle Use Tax

Return," for 25 or more vehicles; credits
or refunds for sold, destroyed, or stolen
vehicles; and the tax liability and compu-
tation of tax on the use of certain second-
hand vehicles. The regulations affect own-
ers and operators of highway motor
vehicles with a taxable gross weight of
55,000 pounds or more. These final regu-
lations also remove the temporary regula-
tions that provide guidance on the filing of
Form 2290 and payment of the associated
highway use tax for the taxable period
beginning July 1, 2011.

DATES: Effective Date: These regula-
tions are effective on July 1, 2015.

Applicability Date: For dates of appli-
cability, see §§ 41.4481-1(e), 41.4481-
2(c), 41.6001-2(e), 41.6011(a)-1(d),
41.6071(a)-1(d), and 41.6151(a)-1(b).

FOR FURTHER INFORMATION
CONTACT: Natalie Payne, (202) 317-
5262 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

### Background and Explanation of Provisions

This document amends the Highway
Use Tax Regulations (26 CFR Part 41)
under sections 4481, 4483, 6001, 6071,
and 6151 of the Internal Revenue Code
(Code).

Section 4481(a) of the Code imposes
an annual tax on the use of highway ve-
hicles with a taxable gross weight of
55,000 pounds or more. Under paragraphs
(c)(2) and (c)(4) of section 4482, the tax-
able period generally runs from July 1
through the following June 30.

Section 867 of the American Jobs Cre-
ation Act of 2004, Public Law 108-357
(118 Stat. 1418 (2004)), (1) added new
section 4481(e), which requires electronic
filing of a return reporting tax on the use
of 25 or more highway motor vehicles, (2)
modified section 4481(c)(2) to allow a
proration of the tax for vehicles that are
sold, and (3) repealed section 6156, elim-
inating the ability to pay the tax in install-
ments.

On January 16, 2009, the IRS and the
Treasury Department published a notice
of proposed rulemaking (REG-116699-
07, 74 FR 2910) (NPRM 1) in the Federal
Register. The NPRM 1 provides proposed
guidance on mandatory electronic filing of

Form 2290, "Heavy Highway Vehicle
Use Tax Return," for 25 or more vehicles.
Specifically, NPRM 1 provides that sub-
mitting a Form 2290 on paper for 25 or
more vehicles constitutes a failure to file
for purposes of the penalty under section
6651. In addition, NPRM 1 provides that
if a taxpayer is required to file Form 2290
electronically and fails to do so, the IRS
will not return to the taxpayer a receipted
Schedule 1 (Form 2290), which is neces-
sary to register the vehicle with a State.

The NPRM 1 also revises existing reg-
ulations to administer the credits and re-
funds resulting from a statutory overpay-
ment of tax upon the sale of a vehicle, and
it clarifies that the triggering event for
overpayments is the sale, destruction, or
theft of a vehicle. In addition, NPRM 1
clarifies the tax liability and computation
of tax upon the first taxable use of a
second-hand vehicle for which there was a
prior taxable use during the tax period.

The IRS and the Treasury Department
received one written comment in response
to NPRM 1. No public hearing was re-
quested or held.

On July 20, 2011, the IRS and the
Treasury Department published final and
temporary regulations (TD 9537, 76 FR
43121) (the Temporary Regulations) in
the Federal Register. The same day, the
IRS and the Treasury Department pub-
lished a notice of proposed rulemaking
(REG-122813-11, 76 FR 43225) (NPRM
2) by cross-reference to the Temporary
Regulations in the Federal Register. At
the time the IRS and the Treasury Depart-
ment published NPRM 2, the highway use
tax was scheduled to expire at the close of
September 30, 2011, which would have
resulted in a short taxable period for the
taxable period beginning on July 1, 2011
(the effective date of the tax has since
been statutorily extended through Septem-
ber 30, 2017). The Temporary Regula-
tions provide guidance on the filing of
Form 2290 and the payment of the asso-
ciated highway use tax for the taxable
period beginning July 1, 2011. Specifi-
cally, the Temporary Regulations post-
poned the deadline by which a taxpayer
must file a Form 2290 return for taxable
uses during the taxable period beginning
July 1, 2011, to November 30, 2011. Fur-
ther, the Temporary Regulations discour-
aged the filing of a Form 2290, or sub-

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mission of associated payment, before
November 1, 2011, for taxable uses dur-
ing the taxable period beginning July 1,
2011. No comments were received in re-
sponse to NPRM 2, and no public hearing
was requested or held.

These final regulations adopt NPRM 1
with two substantive changes (described
in the next paragraph). In addition, the
IRS and the Treasury Department have
made certain nonsubstantive changes to
the regulatory text, including minor word-
ing changes, to improve the clarity and
readability of the final regulations.

To reduce the burden on small busi-
ness, the final regulations remove the pro-
posals in NPRM 1 related to the effect of
a failure to file a Form 2290 electronically
for 25 or more vehicles. Thus, under the
final regulations, the filing of a Form 2290
on paper for 25 or more vehicles does not
constitute a failure to file for purposes of
the penalty under section 6651, and the
IRS will not withhold from the taxpayer a
receipted Schedule 1 (Form 2290). The
IRS and the Treasury Department con-
tinue to consider ways to ensure compli-
ance with the electronic filing requirement
in section 4481(e). Accordingly, the IRS
and the Treasury Department request
comments on how to enforce the elec-
tronic filing requirement in a manner that
does not unduly burden taxpayers. Com-
ments on this issue should be submitted in
writing and can be mailed to the Office of
Associate Chief Counsel (Passthroughs
and Special Industries), Re: REG-
116699-07, CC:PSI:B7, Room 5314,
1111 Constitution Avenue NW., Wash-
ington, DC 20224. All comments received
will be available for public inspection at
http://www.regulations.gov (IRS REG-
116699-07).

These final regulations do not adopt
NPRM 2 because the period to which
NPRM 2 applies has ended. In addition,
these final regulations remove the Tempo-
rary Regulations.

## Summary of Comment

The comment received in response to
NPRM 1 suggested that the IRS modify
its rule under § 41.6001-2(b)(2)(ii) relat-
ing to the registration of highway motor
vehicles. Under § 41.6001-2(b)(2)(ii), a
State that registers vehicles other than on
the basis of gross weight must require

proof of payment in order to register a
highway motor vehicle, unless the State
receives a written statement providing that
during the taxable period that includes the
date on which the State receives the ap-
plication for registration, the vehicle had a
taxable gross weight of less than 55,000
pounds. The commenter noted that many
highway motor vehicles in the gross
weight range of 8,000 to 54,999 pounds
are used in the same manner each year and
never reach a gross weight of 55,000
pounds. The commenter suggested that
owners of vehicles in the 8,000 to 54,999
pound range be allowed to declare at the
initial vehicle registration that the gross
weight of the highway motor vehicle is
not expected to ever reach 55,000 pounds,
provided the owner also certifies that if
the gross weight of the vehicle ever
reaches a gross weight of 55,000 pounds
or more the owner will make timely pay-
ments of any highway vehicle use tax due.

The final regulations do not adopt the
change proposed by the commenter. The
IRS and the Treasury Department have
determined that the written statement re-
quired by § 41.6001-2(b)(2)(ii) provides
information that is essential to the effec-
tive and efficient administration of the tax
under section 4481 without unduly bur-
dening taxpayers.

## Special Analyses

It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13563. Therefore, a regulatory assess-
ment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. Pursuant to the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6), it is hereby
certified that this regulation will not have
a significant economic impact on a sub-
stantial number of small entities. The reg-
ulations affect owners and operators of
highway motor vehicles with a taxable
gross weight of 55,000 pounds or more,
some of which may be small entities. Al-
though a substantial number of small en-
tities may be subject to the requirements
of this rule, any economic impact is min-
imal. The regulations provide guidance
for claiming a refund or credit when a

vehicle is sold during the tax year. Spe-
cifically, the regulations provide that the
claim must be made on Form 2290 or
Form 8849, "Claim for Refund of Excise
Taxes." The information to complete
these forms is readily available to the tax-
payer and the forms take little time to
complete. Without the claim information,
the IRS could not determine taxpayer el-
igibility or determine the accuracy of the
claim. Accordingly, these regulations do
not impose a collection of information on
small entities within the meaning of the
Regulatory Flexibility Act and a regula-
tory flexibility analysis is not required.

Pursuant to section 7805(f) of the
Code, NPRM 1 and NPRM 2 were sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on their impact on small entities.
No comments were received.

## Drafting Information

The principal author of these regula-
tions is Natalie Payne, Office of the As-
sociate Chief Counsel (Passthroughs and
Special Industries). However, other per-
sonnel from the IRS and the Treasury
Department participated in their develop-
ment.

## Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 41 is
amended as follows:

PART 41-EXCISE TAX ON USE OF
CERTAIN HIGHWAY MOTOR
VEHICLES

Paragraph 1. The authority citation for
part 41 is revised to read as follows:

Authority: 26 U.S.C. 7805.

Section 41.4482(b)-1 also issued under
26 U.S.C. 4482(b).

Section 41.4483-1 also issued under
26 U.S.C. 4483(a).

Section 41.4483-2 also issued under
26 U.S.C. 4483(c).

Section 41.4483-3 also issued under
26 U.S.C. 4483(d).

Section 41.6001-1 also issued under
26 U.S.C. 6001.

Section 41.6001-2 also issued under
26 U.S.C. 6001.

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Section 41.6001-3 also issued under
sec. 507, Public Law 100-17 (101 Stat.
260).

Section 41.6011(a)-1 also issued under
26 U.S.C. 6011(a).

Section 41.6060-1 also issued under
26 U.S.C. 6060(a).

Section 41.6071(a)-1 also issued under
26 U.S.C. 6071(a).

Section 41.6091-1 also issued under
26 U.S.C. 6091(a).

Section 41.6101-1 also issued under
26 U.S.C. 6101.

Section 41.6109-1 also issued under
26 U.S.C. 6109(a).

Section 41.6109-2 also issued under
26 U.S.C. 6109(a).

Section 41.6151(a)-1 also issued under
26 U.S.C. 6151(a).

Section 41.6695-1 also issued under
26 U.S.C. 6695(b).

Par. 2. Section 41.4481-1 is amended
by:

1\. Revising the section heading.

2\. Removing the third sentence from
paragraph (b).

3\. Adding headings to paragraphs
(c)(1), (c)(2), and (c)(3).

4\. In the introductory text of paragraph
(c)(1), removing the language "Except as
provided in paragraph (c)(2) of this sec-
tion" and adding in its place "Except as
otherwise provided in this paragraph (c)".

5\. Revising paragraphs (c)(4) and
(c)(5).

6\. Removing paragraphs (c)(6) and (d).

7\. Redesignating paragraph (e) as para-
graph (d) and revising the introductory
text in newly-redesignated paragraph (d).

8\. In newly-redesignated paragraph
(d), revising Example (3) and adding Ex-
ample (4).

9\. Adding new paragraph (e).

The revisions and additions read as fol-
lows:

§ 41.4481-1 Imposition and computation
of tax.

* * * * *

(c) * * *

(1) In general. * * *

* * * * *

(2) Certain prorated taxable periods. *

\* \*

(3) Increase in taxable gross weight
during the taxable period. * * *

(4) Prorated taxable period for sold,
destroyed, or stolen vehicles-(i) In gen-
eral. The tax on a taxpayer's use of a
highway vehicle for a taxable period is
determined under paragraph (c)(4)(ii) of
this section if-

(A) The vehicle is destroyed or stolen
before the first day of the last month in the
taxable period and is not later used by the
taxpayer during the period; or

(B) The taxpayer sells the vehicle be-
fore the first day of the last month in the
taxable period and does not later use the
vehicle during the period.

(ii) Computation of tax. If the tax on a
taxpayer's use of a highway vehicle for a
taxable period is determined under this
paragraph (c)(4)(ii), the tax is computed
by multiplying the amount of tax that
would be due for a full taxable period, as
computed under paragraph (c)(1) of this
section, by a fraction. The fraction has as
its numerator the number of months in the
period from the first day of the month in
the period in which the first taxable use of
the highway motor vehicle occurs to and
including the last day of the month in
which the highway motor vehicle was
sold, destroyed, or stolen, and as its de-
nominator the number of months in the
entire taxable period. (See paragraph (d)
Example (3)(i) of this section.)

(iii) Overpayment. If a taxpayer's lia-
bility for the tax on the use of a highway
vehicle for a taxable period is determined
under paragraph (c)(4)(ii) of this section,
any tax the taxpayer paid under section
4481(a) on the use of the vehicle for such
period in excess of the tax calculated un-
der paragraph (c)(4)(ii) of this section is
an overpayment of tax.

(iv) Definition of destroyed vehicle. For
purposes of this paragraph (c)(4), a high-
way motor vehicle is destroyed if the ve-
hicle is damaged due to an accident or
other casualty to such an extent that it is
not economical to rebuild.

(v) Form and content of claim. A claim
for refund of an overpayment described in
paragraph (c)(4)(iii) of this section must
be made on Form 8849, "Claim for Re-
fund of Excise Taxes" (or such other form
as the Commissioner may designate) in
accordance with the instructions for that
form. A claim for a credit must be made
on Form 2290, "Heavy Highway Vehicle
Use Tax Return" (or such other form as

the Commissioner may designate) in ac-
cordance with the instructions for that
form. A claim for refund or credit for any
vehicle must include-

(A) The vehicle identification number
and taxable gross weight of the vehicle;

(B) The date of the sale, destruction, or
theft of the vehicle; and

(C) If the vehicle was sold, the name
and address of the purchaser of the vehi-
cle.

(vi) Tax on buyer's use of second-hand
vehicles. If a vehicle is sold during the
taxable period and a credit or refund of the
tax imposed by section 4481 is allowable
upon the sale under paragraph (c)(4)(iii)
of this section, tax is imposed on the use
of the vehicle after the sale and before the
end of the taxable period. (See paragraph
(c)(4)(vii) of this section for the rules re-
garding the computation of tax after the
sale and before the end of the taxable
period.)

(vii) Computation of tax on second-
hand vehicles. The tax under paragraph
(c)(4)(vi) of this section on the use of a
vehicle after a sale upon which a credit or
refund is allowable is computed by mul-
tiplying the amount of tax that would be
due for a full taxable period as computed
under paragraph (c)(1) of this section by a
fraction. The fraction has as its numerator
the number of months in the period from
the first day of the month in which the first
taxable use of the vehicle after the sale
occurs (the first day of the month after
such month if the first taxable use after the
sale occurs in the month of the sale)
through the end of the taxable period, and
as its denominator the number of months
in the entire taxable period. (See para-
graph (d) Example (3)(ii) of this section.)

(5) Decrease in taxable gross weight,
discontinued use, or converted use. The
computation of the tax is not affected, and
no right to a credit or refund of any tax
paid under section 4481 arises, if in any
taxable period-

(i) The taxable gross weight of a high-
way motor vehicle is decreased;

(ii) The use of a highway motor vehicle
is discontinued (for reasons other than
sale, destruction, or theft as described in
paragraph (c)(4) of this section); or

(iii) The highway motor vehicle is con-
verted to a use that is exempt from the tax
imposed by section 4481(a).

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(d) Examples. The application of

§§ 41
§ 41.4481-1, 41.4481-2, and
41.4482(c)-1(c) may be illustrated by the
following examples:

* * * * *

Example (3). (i) In July, X uses a vehicle that is
registered in X's name and has a taxable gross
weight of 70,000 pounds. The vehicle is not a log-
ging vehicle. X pays the $430 of tax imposed by
section 4481 for the taxable period. On September 2
of the same calendar year, X sells the vehicle to Y.
X's tax is calculated under paragraph (c)(4)(ii) by
multiplying the amount of tax that would be due for
a full taxable period by a fraction that has as its
numerator the number of months in the period from
the first day of the month in which X's first taxable
use of the highway motor vehicle occurs to and
including the last day of the month in which the
vehicle was sold, and as its denominator the number
of months in the entire taxable period. Thus, X's tax
for the period is $107.50 (3/12 of $430), and X may
claim a credit or refund of $322.50 ($430.00 -
$107.50) in accordance with § 41.4481-1(c)(4)(v)
after X sells the vehicle.

(ii) On September 23, Y uses the vehicle. Y is
liable for tax on the use of the vehicle during the
taxable period ending June 30 of the following cal-
endar year. Y's tax is calculated under paragraph
(c)(4)(vii) by multiplying the amount of tax that
would be due for a full taxable period by a fraction
that has as its numerator the number of months in the
period from the first day of the month in which Y's
first taxable use of the vehicle after the sale occurs
(the first day of the month after such month if the
first taxable use after the sale occurs in the month of
the sale) through the end of the taxable period, and as
its denominator the number of months in the entire
taxable period. Y's first use of the vehicle occurs in
the month of the sale. Accordingly, Y's tax is based
on the number of months in the period from the first
day of October (the month following the month of
the first taxable use) through the end of June, and Y
owes a section 4481 tax of $322.50 (9/12 of $430)
for the taxable period.

Example (4). Assume the same facts as in Exam-
ple (3)(i), except that on September 2, X sells the
vehicle to Dealer, a dealer in highway motor vehi-
cles. X may claim a credit or refund of $322.50.
Dealer operates the vehicle exclusively for the pur-
pose of demonstration, which is not a "use" of the
vehicle under § 41.4482(c)-1(c). On May 2 of the
following calendar year, Dealer sells the vehicle to
Y. Dealer does not owe a section 4481 tax and may
not claim a refund. Y's first taxable use of the
vehicle occurs on May 3. Y's first taxable use of the
vehicle does not occur in the month of a sale upon
which a credit or refund is allowable. Accordingly,
Y's tax is calculated under paragraph (c)(2) by mul-
tiplying the amount of tax that would be due for a
full taxable period by a fraction which has as its
numerator the number of months in the taxable pe-
riod beginning with the month of first taxable use
and as its denominator the number of months in the
entire taxable period. The numerator is the number
of months in the period from the first day of May
(the month of Y's first taxable use after the sale)

through the end of June, and Y owes a section 4481
tax of $71.67 (2/12 of $430) for the taxable period.

(e) Effective/applicability date. This
section applies on and after July 1, 2015.
For rules applicable before that date, see
26 CFR 41.4481-1 (revised as of April 1,
2014).

Par. 3. Section 41.4481-2 is amended
by:

1\. Removing the language "or any in-
stallment payment of the tax" in para-
graph (a)(1)(i)(D).

2\. Revising paragraph (a)(2) and add-
ing paragraph (a)(3).

3\. Adding a sentence at the end of
paragraph (b).

4\. Revising paragraph (c).

The revisions and additions read as fol-
lows:

§ 41.4481-2 Persons liable for tax.

(a) * * *

(2) If a vehicle is sold during the tax-
able period and a credit or refund is al-
lowable upon the sale under § 41.4481-
1(c)(4)(iii), paragraph (a)(1) of this
section is applied with the following mod-
ifications:

(i) For purposes of determining the
person liable for the tax determined under
§ 41.4481-1(c)(4)(ii), each reference to a
taxable period in paragraph (a)(1) of this
section is treated as a reference to the
period that begins on the first day of the
taxable period in which the vehicle is sold
and ends on the date of sale.

(ii) For purposes of determining the
person liable for the tax determined under
§ 41.4481-1(c)(4)(vi), each reference to a
taxable period in paragraph (a)(1) of this
section is treated as a reference to the
period that begins on the date of the sale
and ends on the last day of the taxable
period in which the vehicle is sold.

(3) The application of paragraph (a) of
this section may be illustrated by Exam-
ples (3) and (4) in § 41.4481-1(d).

(b) * * * For provisions relating to
penalties for aiding and abetting an under-
statement of tax liability, see section 6701
of the Internal Revenue Code.

(c) Effective/applicability date. This
section applies on and after July 1, 2015.
For rules applicable before that date, see
26 CFR 41.4481-2 (revised as of April 1,
2014).

Par. 4. Section 41.4483-3 is amended
as follows:

1\. In the fourth sentence of paragraph
(f), removing the language "to the extent
that the tax or an installment payment
of the tax has" and adding "(determined in
the case of a transfer described in
§ 41.4481-1(c)(4)(i) under § 41.4481-
1(c)(4)(ii)) to the extent that the tax has"
in its place.

2\. Adding paragraph (i).

The addition reads as follows:

§ 41.4483-3 Exemption for trucks used
for 5,000 or fewer miles and
agricultural vehicles used for 7,500 or
fewer miles on public highways.

* * * * *

(i) Effective/applicability date. This sec-
tion applies on and after July 1, 2015. For
rules applicable before that date, see 26 CFR
41.4483-3 (revised as of April 1, 2014).

## § 41.4483-7 [Removed]

Par. 5. Section 41.4483-7 is removed.

## § 41.6001-1 [Amended]

Par. 6. Section 41.6001-1 is amended
as follows:

1\. In the first sentence of paragraph (a),
the language "district director" is removed
and "Commissioner" is added in its place.

2\. In paragraph (a)(3), the language "In
the case of any such vehicle acquired after
June 30, 1956, the date" is removed and
"The date" is added in its place.

Par. 7. Section 41.6001-2 is amended
by:

1\. Removing the third sentence of para-
graph (a).

2\. In the last sentence of paragraph (a),
removing the language "an application for
registration which is mailed will be con-
sidered to be received by a State on the
date on which it was postmarked" and
adding in its place "the rules of section
7502 and § 301.7502-1 of this chapter
(relating to timely mailing treated as
timely filing) determine when an applica-
tion for registration is considered to be
received by a State".

3\. Redesignating paragraph (b)(1)(i) as
paragraph (b)(1) and revising newly-
redesignated paragraph (b)(1) heading.

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4\. Removing and reserving paragraph
(b)(1)(ii).

5\. Redesignating paragraph (b)(4)(i) as
paragraph (b)(4) and revising newly-
redesignated paragraph (b)(4) heading.

6\. Removing and reserving paragraph
(b)(4)(ii).

7\. Revising paragraph (c).

8\. Adding paragraph (e).

The revisions and addition read as fol-
lows:

§ 41.6001-2 Proof of payment for State
registration purposes.

* * * * *

(b) Proof of payment required-(1) In
general. * * *

* * * * *

(4) Registration during certain months
* * *
* * * * *

(c) Proof of payment-(1) In general.
The proof of payment required in para-
graph (b) of this section consists of a
receipted Schedule 1 (Form 2290 “Heavy
Highway Vehicle Use Tax Return") that is
returned by the Internal Revenue Service,
by mail or electronically, to a taxpayer
that files a return of tax under section
4481(a), meets the requirements of
§ 41.6011(a)-1, and pays the amount of
tax due with such return. A photocopy of
such receipted Schedule 1 also serves as
proof of payment. Such Schedule 1 serves
as proof of suspension of such tax under
§ 41.4483-3 for the number of vehicles
entered in that part of the Schedule 1
designated for vehicles for which tax has
been suspended. The vehicle identification
number of the vehicle being registered must
appear on the Schedule 1 (or an attached
page) in order for the Schedule 1 to be a
valid proof of payment for such vehicle.

(2) Acceptable substitute for receipted
Schedule 1. For purposes of this section, a
State must accept as proof of payment a
photocopy of the Form 2290 (with the
Schedule 1 attached) that was filed with
the Internal Revenue Service for the vehi-
cle being registered with sufficient docu-
mentation of payment of tax due at the
time the Form 2290 was filed (such as a
photocopy of both sides of a cancelled
check). This substitute proof of payment
may be used to register a vehicle when,
for example, the receipted Schedule 1 has

been lost, or when at the time required for
registration of a vehicle, a receipted
Schedule 1 has not been received by a
taxpayer who has filed a Form 2290 with
respect to such vehicle.

* * * * *

(e) Effective/applicability date. Para-
graph (c) of this section applies to regis-
trations of highway motor vehicles pursu-
ant to applications that are received by a
State on or after July 1, 2015. The rules of
section 7502 and § 301.7502-1 of this
chapter (relating to timely mailing treated
as timely filing) determine when an appli-
cation for registration is considered to be
received by a State. For rules applicable to
applications before that date, see 26 CFR
41.6001-2 (revised as of April 1, 2014).

§ 41.6001-2T [Removed]

Par. 8. Section 41.6001-2T is re-
moved.

Par. 9. Section 41.6011(a)-1 is
amended by adding paragraphs (a)(4), (c)
and (d) to read as follows:

§ 41.6011(a)-1 Returns.

(a) * * *

(4) A person that is liable for tax under
§ 41.4481-2(a)(1)(i)(A), (B), (C), or (D),
after taking into account the modification
required under § 41.4481-2(a)(2), is
treated as liable for tax by the same pro-
vision of § 41.4481-2(a)(1)(i) for pur-
poses of this section and must file a return.
* * * * *

(c) Required use of electronic filing-
(1) In general. A person that files any
return reporting 25 or more vehicles must
file the return electronically, as prescribed
by the Commissioner. For this purpose,
the number of vehicles reported on a re-
turn is the total number of vehicles for
which tax is reported and does not include
vehicles for which a suspension of tax is
claimed.

(2) Examples. The application of this
paragraph (c) may be illustrated by the
following examples:

Example 1. A has 100 vehicles registered in its
name, all of which have a taxable gross weight in
excess of 55,000 pounds. Seventy-five of the vehicles
are in use on July 1. Twenty-five are in dead storage as
described in § 41.4482(c)-1(c). The vehicles in dead
storage are not in use and they are not listed on the
Schedule 1. A files Form 2290 electronically for the 75
vehicles in use on July 1 and receives a receipted

Schedule 1. On August 23 of the same calendar year, A
uses the remaining 25 vehicles. A does not file Form
2290 electronically but uses a paper Form 2290. A has
failed to meet the requirements of section 4481(e) for
the remaining 25 vehicles.

Example 2. Assume the same facts as in Example 1
except that on August 23, A uses 15 of the vehicles that
were not used in July. The remaining 10 vehicles are
not used in August. A does not file Form 2290 elec-
tronically but uses a paper Form 2290. A has correctly
filed a return as required by section 4481(e).

(d) Effective/applicability date. Para-
graphs (a)(4) and (c) of this section apply
to returns filed on and after July 1, 2015.
For rules applicable before that date, see
26 CFR 41.6011(a)-1 (revised as of April
1, 2014).

Par. 10. Section 41.6071(a)-1 is
amended as follows:

1\. In paragraph (a) introductory text,
the language "paragraph (b) or paragraph
(c)" is removed and "paragraph (b)" is
added in its place.

2\. Revising paragraph (c).

3\. Adding paragraph (d).

The additions and revision read as fol-
lows:

§ 41.6071(a)-1 Time for filing returns.

* * * * *

(c) Effect of sale during taxable period.
A person that is liable for tax under
§ 41.4481-2(a)(1)(i)(A), (B), (C), or (D)
after taking into account the modification
required under § 41.4481-2(a)(2) is
treated as liable for tax under the same
provision of § 41.4481-2(a)(1)(i) for pur-
poses of this section.

(d) Effective/applicability date. Para-
graph (c) of this section applies on and
after July 1, 2015. For rules applicable
before that date, see 26 CFR 41.6071(a)-1
(revised as of April 1, 2014).

## § 41.6071(a)-1T [Removed]

Par. 11. Section 41.6071(a)-1T is re-
moved.

## § 41.6151(a)-1 [Revised]

Par. 12. Section 41.6151(a)-1 is re-
vised to read as follows:

§ 41.6151(a)-1 Time and place for
paying tax.

(a) In general. The tax must be paid at
the time prescribed in § 41.6071(a)-1 for

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filing the return and at the place prescribed
in § 41.6091-1 for filing the return.

(b) Effective/applicability date. This
section applies on and after July 1, 2015.
For rules applicable before that date, see
26 CFR 41.6151(a)-1 and 41.6151(a)-1T
(revised as of April 1, 2014).

## § 41.6151(a)-1T [Removed]

Par. 13. Section 41.6151(a)-1T is re-
moved.

## § 41.6156-1 [Removed]

Par. 14. Section 41.6156-1 is re-
moved.

John Dalrymple
Deputy Commissioner for
Services and Enforcement.
Approved: September 9, 2014

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

(Filed by the Office of the Federal Register on October 28,
2014, 8:45 a.m., and published in the issue of the Federal
Register for October 29, 2014, 79 F.R. 64313)

## Section 6033 .- Returns by Exempt Organizations

The Service provides an inflation adjustment to
the amount of dues certain exempt organizations
with nondeductible lobbying expenditures can

charge and still be excepted from reporting require-
ments for taxable years beginning in 2015. See Rev.
Proc. 2014-61, page.

## Section 6039F .- Notice of Large Gifts Received From Foreign Persons

The Service provides an inflation adjustment to
the amount of gifts received in a taxable year from
foreign persons that triggers a reporting requirement
for a United States person for taxable years begin-
ning in 2015. See Rev. Proc. 2014-61, page.

## Section 6323 .- Validity and Priority against Certain Persons

The Service provides inflation adjustments for
calendar year 2015 to (1) the maximum amount of a
casual sale of personal property below which a fed-
eral tax lien will not be valid against a purchaser of
the property, and (2) the maximum amount of a
contract for the repair or improvement of certain
residential property at or below which a federal tax
lien will not be valid against a mechanic's lienor. See
Rev. Proc. 2014-61, page.

## Section 6334 .- Property Exempt From Levy

The Service provides inflation adjustments to the
value of certain property exempt from levy (fuel,
provisions, furniture, household personal effects,
arms for personal use, livestock, poultry, and books
and tools of a trade, business, or profession) for
calendar year 2015. See Rev. Proc. 2014-61, page.

## Section 6601 .- Interest on Underpayment, Nonpayment or Extension of Time for Payment, of Tax

The Service provides an inflation adjustment to
the amount used to determine the amount of interest
charged on a certain portion of the estate tax payable
in installments for the estate of a decedent dying in
calendar year 2015. See Rev. Proc. 2014-61, page.

## Section 7430 .- Awarding of Costs and Certain Fees

The Service provides an inflation adjustment to
the hourly limit on attorney fees incurred in calendar
year 2015 that may be awarded in a judgment or
settlement of an administrative or judicial proceed-
ing concerning the determination, collection, or re-
fund of tax, interest, or penalty. See Rev. Proc.
2014-61, page.

## Section 7702B .- Treatment of Qualified Long-Term Care Insurance

The Service provides an inflation adjustment to
the stated dollar amount for calendar year 2015 of
the per diem limitation regarding periodic payments
received under a qualified 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. See Rev.
Proc. 2014-61, page.

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## Part III. Administrative, Procedural, and Miscellaneous

Ebola Virus Disease
Outbreak Occurring in
Guinea, Liberia, and Sierra
Leone Designated as a
Qualified Disaster under
§ 139 of the Internal
Revenue Code

### Notice 2014-65

This notice designates the Ebola Virus
Disease (EVD) outbreak occurring in the
West African countries of Guinea, Libe-
ria, and Sierra Leone as a qualified disas-
ter for purposes of § 139 of the Internal
Revenue Code. As a result of the desig-
nation of the EVD outbreak as a qualified
disaster for purposes of § 139, payments
of qualified disaster relief to assist victims
affected by the EVD outbreak in the three
countries (Guinea, Liberia, and Sierra Le-
one) are excludable from the recipients'
gross income.

### EVD OUTBREAK

As of October 22, 2014, more than
4,800 EVD-related deaths and more than
9,900 suspected and confirmed cases of
EVD have been reported by Guinea, Li-
beria, and Sierra Leone. See www.usaid.
gov/ebola. In addition, the reported num-
ber of cases of EVD continues to increase
rapidly in those countries. USAID West
Africa - Ebola Outbreak - Fact Sheet No.
4 (FY15) (October 22, 2014). President
Obama has stated that the EVD outbreak
in West Africa is a public health emer-
gency, a humanitarian crisis, and a na-
tional security priority, and has directed
U.S. agencies and departments (including
the Departments of State, Defense, and
Health and Human Services, the Centers
for Disease Control and Prevention, and
the U.S. Agency for International
Development) to assist West African gov-
ernments in their responses. See
www.whitehouse.gov/ebola-response. The
President has also called on other nations
regarding the need for more robust com-
mitments and rapid delivery of assistance
by the international community.

### QUALIFIED DISASTER RELIEF PAYMENTS EXCLUDED FROM RECIPIENTS' GROSS INCOME

Section 139(a) provides that gross in-
come shall not include any amount re-
ceived by an individual as a qualified di-
saster relief payment.

Section 139(b) provides that a qualified
disaster relief payment includes any
amount paid to or for the benefit of an
individual-

(1) to reimburse or pay reasonable and
necessary personal, family, living, or fu-
neral expenses (not otherwise compen-
sated for by insurance or otherwise) in-
curred as a result of a qualified disaster, or

(2) to reimburse or pay reasonable and
necessary expenses (not otherwise com-
pensated for by insurance or otherwise)
incurred for the repair or rehabilitation of
a personal residence or repair or replace-
ment of its contents to the extent that the
need for such repair, rehabilitation, or re-
placement is attributable to a qualified di-
saster.

Under § 139(c)(3) the term "qualified
disaster" includes a disaster resulting from
an event that is determined by the Secre-
tary to be of a catastrophic nature.

## DESIGNATION AS QUALIFIED DISASTER

The Commissioner of Internal Reve-
nue, pursuant to a general delegation by
the Secretary, has determined that the
EVD outbreak occurring in the West Af-
rican countries of Guinea, Liberia, and
Sierra Leone is an event of a catastrophic
nature under § 139(c)(3). Therefore, the
EVD outbreak occurring in those coun-
tries is designated as a qualified disaster
under § 139.

## SECTION 501(c)(3) ORGANIZATIONS

Employer-sponsored private founda-
tions may choose to provide disaster relief
to employee victims of the EVD outbreak
in Guinea, Liberia, and Sierra Leone. Like
all organizations described in § 501(c)(3),
private foundations should exercise due
diligence when providing disaster relief as
set forth in Publication 3833, Disaster Re-

lief: Providing Assistance Through Char-
itable Organizations.

## DRAFTING INFORMATION

The principal author of this notice is
Sheldon Iskow of the Office of Associate
Chief Counsel (Income Tax & Account-
ing). For further information regarding
this notice contact Mr. Iskow at (202)
317-4718 (not a toll-free number).

Treatment of Certain
Amounts Paid to Section

170(c) Organizations under
Certain Employer Leave-
Based Donation Programs
to Aid Victims of the Ebola
Virus Disease (EVD)
Outbreak in Guinea,
Liberia, and Sierra Leone
Notice 2014-68

This notice provides guidance on the
treatment of leave-based donation pro-
grams to aid victims of the Ebola Virus
Disease (EVD) outbreak in the West Af-
rican countries of Guinea, Liberia, and
Sierra Leone for income and employment
tax purposes.

## EVD OUTBREAK

As of October 22, 2014, more than
4,800 EVD-related deaths and more than
9,900 suspected and confirmed cases of
EVD have been reported by Guinea, Li-
beria, and Sierra Leone. See www.usaid-
.gov/ebola. In addition, the reported num-
ber of cases of EVD continues to increase
rapidly in those countries. USAID West
Africa - Ebola Outbreak - Fact Sheet No.
4 (FY15) (October 22, 2014). President
Obama has stated that the EVD outbreak
in West Africa is a public health emer-
gency, a humanitarian crisis, and a na-
tional security priority, and has directed
U.S. agencies and departments (includ-
ing the Departments of State, Defense,
and Health and Human Services, the
Centers for Disease Control and Preven-
tion, and the U.S. Agency for Interna-

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tional Development) to assist West Af-
rican governments in their responses.
See www.whitehouse.gov/ebola-response.
The President has also called on other
nations regarding the need for more robust
commitments and rapid delivery of assis-
tance by the international community.

## TREATMENT OF LEAVE-BASED DONATION PAYMENTS

In view of the extreme need for chari-
table relief due to the EVD outbreak in
Guinea, Liberia, and Sierra Leone, em-
ployers may have adopted or may be con-
sidering adopting leave-based donation
programs to aid victims of the EVD out-
break in Guinea, Liberia, and Sierra Le-
one. Under these programs employees
elect to forgo vacation, sick, or personal
leave in exchange for cash payments an
employer makes to organizations de-
scribed in § 170(c) of the Internal Reve-
nue Code (§ 170(c) organizations) for the
relief of victims of the EVD outbreak in
Guinea, Liberia, and Sierra Leone. This
notice provides guidance on the treatment
of these payments for income and em-
ployment tax purposes.

Notice 2012-69, 2012-51 I.R.B. 712,
and Notice 2005-68, 2005-2 C.B. 622,
provided similar guidance in view of the
extreme need for charitable relief follow-
ing Hurricane Sandy and Hurricane
Katrina, respectively. See also Notice
2001-69, 2001-2 C.B. 491, as modified
and superseded by Notice 2003-1, 2003-1
C.B. 257, regarding charitable relief fol-
lowing the September 11, 2001, terrorist
attacks.

The Service will not assert that cash
payments an employer makes to § 170(c)
organizations in exchange for vacation,
sick, or personal leave that its employees
elect to forgo constitute gross income or
wages of the employees if the payments
are: (1) made to the § 170(c) organizations
for the relief of victims of the EVD out-
break in Guinea, Liberia, and Sierra Le-
one; and (2) paid to the § 170(c) organi-
zations before January 1, 2016.

Similarly, the Service will not assert
that the opportunity to make such an elec-
tion results in constructive receipt of gross
income or wages for employees. Electing
employees may not claim a charitable
contribution deduction under § 170 with
respect to the value of forgone leave ex-
cluded from compensation and wages.

The Service will not assert that an em-
ployer will be only permitted to deduct
these cash payments under the rules of
§ 170 rather than the rules of § 162. Cash
payments to which this guidance applies
need not be included in Box 1, 3 (if ap-
plicable), or 5 of an employee's Form
W-2, Wage and Tax Statement.

## DRAFTING INFORMATION

For further information, please contact
Sheldon Iskow of the Office of Associate
Chief Counsel (Income Tax and Account-
ing) at (202) 317-4718 (not a toll-free
number).

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

## Rev. Proc. 2014-59

### SECTION 1. PURPOSE

This revenue procedure prescribes the
loss payment patterns and discount factors
for the 2014 accident year. These factors
will be used to compute discounted un-
paid losses under § 846 of the Internal
Revenue Code. See Rev. Proc. 2012-44,
2012-49 I.R.B. 645, for background con-
cerning the loss payment patterns and ap-
plication of the discount factors.

### SECTION 2. SCOPE

This revenue procedure applies to any
taxpayer that is required to discount un-
paid losses under § 846 for a line of busi-
ness using the discount factors published
by the Secretary.

## SECTION 3. TABLES OF DISCOUNT FACTORS

.01 The following tables present sepa-
rately for each line of business the dis-
count factors under § 846 for accident
year 2014. All the discount factors pre-
sented in this section were determined us-
ing the applicable interest rate under
§ 846(c) for 2014, which is 1.79 percent,
and by assuming all loss payments occur
in the middle of the calendar year.

.02 If the groupings of individual lines
of business on the annual statement
change, taxpayers must discount unpaid
losses on the resulting line of business in
accordance with the discounting patterns
that would have applied to those unpaid
losses based on their classification on the
2010 annual statement. See Rev. Proc.
2012-44, 2012-49 I.R.B. 645, section 2,
for additional background on discounting
under § 846 and the use of the Secretary's
tables.

.03 Section V of Notice 88-100,
1988-2 C.B. 439, sets forth a composite
method for computing discounted unpaid
losses for accident years that are not sep-
arately reported on the annual statement.
The tables separately provide discount
factors for taxpayers who elect to use the
composite method of section V of Notice
88-100. See Rev. Proc. 2002-74, 2002-2
C.B. 980.

.04 Tables.

### Accident and Health (Other Than Disability Income or Credit Disability Insurance)

Taxpayers that do not use the compos-
ite method of Notice 88-100 should use
99.1168 percent to discount unpaid losses
incurred in this line of business in the
2014 accident year and that are outstand-
ing at the end of the 2014 and later taxable
years.

Taxpayers that use the composite
method of Notice 88-100 should use
99.1168 percent to discount all unpaid
losses in this line of business that are
outstanding at the end of the 2014 taxable
year.

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### Auto Physical Damage

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors

2014

90.2657

90.2657

9.7343

9.6418

99.0495

2015

99.7478

9.4822

0.2522

0.2478

98.2453

Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2016 and later years

0.1261

0.1261

0.1250

98.1168

Taxpayers that use the composite method of Notice 88-100 should use 99.1168 percent to discount unpaid losses incurred
in this line of business in 2013 and prior years and that are outstanding at the end of the 2016 taxable year.

### Commercial Auto/Truck Liability/Medical

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors

2014

25.7034

25.7034

74.2966

71.4890

96.2212

2015

48.2664

22.5629

51.7336

50.0047

96.6580

2016

67.8834

19.6171

32.1166

31.1079

96.8595

2017

82.0630

14.1795

17.9370

17.3589

96.7769

2018

90.4161

8.3532

9.5839

9.2420

96.4332

2019

94.6293

4.2132

5.3707

5.1568

96.0164

2020

97.0203

2.3910

2.9797

2.8368

95.2026

2021

98.2283

1.2081

1.7717

1.6687

94.1900

2022

98.6653

0.4370

1.3347

1.2578

94.2342

2023

98.8635

0.1982

1.1365

1.0803

95.0540

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2024

0.1982

0.9382

0.8996

95.8817

2025

0.1982

0.7400

0.7157

96.7157

2026

0.1982

0.5417

0.5285

97.5525

2027

0.1982

0.3435

0.3379

98.3798

2028 and later years

0.1982

0.1453

0.1440

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 95.9970 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2024 taxable year.

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### Composite

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

39.5281

39.5281

60.4719

57.4533

95.0081

2015

62.0267

22.4986

37.9733

35.7826

94.2309

2016

73.7017

11.6750

26.2983

24.6441

93.7097

2017

80.0846

6.3830

19.9154

18.6454

93.6230

2018

85.7818

5.6971

14.2182

13.2312

93.0581

2019

90.2809

4.4992

9.7191

8.9288

91.8690

2020

91.9588

1.6778

8.0412

7.3959

91.9740

2021

92.9722

1.0134

7.0278

6.5058

92.5719

2022

94.0835

1.1113

5.9165

5.5010

92.9776

2023

94.7469

0.6634

5.2531

4.9302

93.8528

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2024

0.6634

4.5898

4.3492

94.7583

2025

0.6634

3.9264

3.7578

95.7050

2026

0.6634

3.2631

3.1558

96.7121

2027

0.6634

2.5997

2.5430

97.8186

2028 and later years

0.6634

1.9364

1.9193

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 94.8470 percent to discount unpaid losses incurred
in this line of business in 2013 and prior years and that are outstanding at the end of the 2024 taxable year.

### Fidelity/Surety

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

22.8449

22.8449

77.1551

75.3264

97.6298

2015

55.8585

33.0137

44.1415

43.3670

98.2453

Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2016 and later years

22.0707

22.0707

21.8758

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 99.1168 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2016 taxable year.

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### Financial Guaranty/Mortgage Guaranty

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

6.2515

6.2515

93.7485

91.4394

97.5370

2015

43.0154

36.7639

56.9846

55.9847

98.2453

Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2016 and later years

28.4923

28.4923

28.2407

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 98.1168 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2016 taxable year.

### International (Composite)

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

39.5281

39.5281

60.4719

57.4533

95.0081

2015

62.0267

22.4986

37.9733

35.7826

94.2309

2016

73.7017

11.6750

26.2983

24.6441

93.7097

2017

80.0846

6.3830

19.9154

18.6454

93.6230

2018

85.7818

5.6971

14.2182

13.2312

93.0581

2019

90.2809

4.4992

9.7191

8.9288

91.8690

2020

91.9588

1.6778

8.0412

7.3959

91.9740

2021

92.9722

1.0134

7.0278

6.5058

91.5719

2022

94.0835

1.1113

5.9165

5.5010

92.9776

2023

94.7469

0.6634

5.2531

4.9302

93.8528

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2024

0.6634

4.5898

4.3492

94.7583

2025

0.6634

3.9264

3.7578

95.7050

2026

0.6634

3.2631

3.1558

96.7121

2027

0.6634

2.5997

2.5430

97.8186

2028 and later years

0.6634

1.9364

1.9193

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 94.8470 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2024 taxable year.

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### Medical Professional Liability - Claims-Made

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

6.3462

6.3462

93.6538

88.5243

94.5230

2015

23.0958

16.7496

76.9042

73.2101

95.1965

2016

41.6827

18.5868

58.3173

55.7681

95.6287

2017

56.5267

14.8440

43.4733

41.7901

96.1281

2018

71.2882

14.7615

28.7118

27.6451

96.2847

2019

82.3023

11.0141

17.6977

17.0277

96.2140

2020

86.5143

4.2120

13.4857

13.0830

97.0134

2021

91.1422

4.6279

8.8578

8.6480

97.6313

2022

94.8664

3.7242

5.1336

5.0454

98.2819

2023

97.5408

2.6745

2.4592

2.4375

99.1168

Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2024 and later years
2.4592

–
–

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 99.1168 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2024 taxable year.

### Medical Professional Liability - Occurrence

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

1.2044

1.2044

98.7956

90.6806

91.7861

2015

4.3376

3.1332

95.6624

89.1427

93.1846

2016

11.8161

7.4785

88.1839

83.1932

94.3405

2017

24.7088

12.8928

75.2912

71.6747

95.1967

2018

42.3863

17.6774

57.6137

55.1228

95.6764

2019

57.1600

14.7738

42.8400

41.2040

96.1813

2020

68.9797

11.8196

31.0203

30.0167

96.7644

2021

82.4247

13.4450

17.5753

16.9891

96.6647

2022

86.7084

4.2837

13.2916

12.9714

97.5906

2023

91.6701

4.9617

8.3299

8.1977

98.4120

Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2024 and later years

4.9617

3.3683

3.3385

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 97.0243 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2024 taxable year.

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### Miscellaneous Casualty

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

69.0731

69.0731

30.9269

30.2773

97.8996

2015

85.5169

16.4438

14.4831

14.2290

98.2453

Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2016 and later years

7.2415

7.2415

7.1776

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 99.1168 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2016 taxable year.

#### Multiple Peril Lines (Homeowners/Farmowners, Commercial Multiple Peril, and Special Liability (Ocean Marine, Aircraft (All Perils), Boiler and Machinery))

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End

Discount Factors %)

(%)

2014

60.9719

60.9719

39.0281

37.7427

96.7063

2015

82.9059

21.9341

17.0941

16.2888

95.2890

2016

89.2783

6.3724

10.7217

10.1511

94.6789

2017

91.5605

2.2822

8.4395

8.0303

95.1520

2018

94.4255

2.8649

5.5745

5.2836

94.7811

2019

96.5899

2.1644

3.4101

3.1945

93.6765

2020

97.6023

1.0124

2.3977

2.2302

93.0150

2021

98.0034

0.4011

1.9966

1.8655

93.4323

2022

98.3410

0.3376

1.6590

1.5583

93.9272

2023

98.5727

0.2317

1.4273

1.3524

94.7512

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid

losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2024

0.2317

1.1957

1.1429

95.5863

2025

0.2317

0.9640

0.9297

96.4337

2026

0.2317

0.7324

0.7126

97.2960

2027

0.2317

0.5007

0.4916

98.1802

2028 and later

years

0.2317

0.2691

0.2667

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 95.6622 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2024 taxable year.

### Other (Including Credit)

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

54.6589

54.6589

45.3411

44.5308

98.2129

2015

84.2314

29.5725

15.7686

15.4919

98.2453

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Estimated Cumulative Losses Paid

Estimated Losses Paid Each Year

Unpaid Losses at Year End

Discounted Unpaid Losses at Year End

Discount Factors

Tax Year

(%)

(%)

(%)

(%)

%)

Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.
2016 and later years
7.8843
7.8843
7.8146
99.1168

Taxpayers that use the composite method of Notice 88-100 should use 99.1168 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2016 taxable year.

### Other Liability - Claims-Made

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year

Unpaid Losses at Year End

Discounted Unpaid Losses at Year End

Discount Factors %)

(%)

(%)

(%)

2014

7.4270

7.4270

92.5730

87.1655

94.1587

2015

25.2808

17.8538

74.7192

70.7129

94.6382

2016

44.2108

18.9301

55.7892

52.8800

94.7853

2017

56.4956

12.2848

43.5044

41.4323

95.2370

2018

69.2838

12.7883

30.7162

29.2717

95.2975

2019

77.6662

8.3823

22.3338

21.3387

95.5442

2020

83.1572

5.4910

16.8428

16.1807

96.0688

2021

88.1777

5.0205

11.8223

11.4051

96.4709

2022

93.1315

4.9539

6.8685

6.6113

96.2552

2023

92.9490

-0.1826

7.0510

6.9138

98.0536

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2024

3.2639

3.7871

3.7446

98.8760

2025 and later years

3.2639

0.5232

0.5186

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 98.8835 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2024 taxable year.

#### Other Liability - Occurrence

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

10.0721

10.0721

89.9279

83.2624

92.5879

2015

24.3995

14.3274

75.6005

70.2978

92.9858

2016

37.3366

12.9372

62.6634

58.5036

93.3618

2017

52.4142

15.0776

47.5858

44.3389

93.1768

2018

64.3437

11.9295

35.6563

33.0968

92.8218

2019

73.7950

9.4512

26.2050

24.1538

92.1723

2020

79.7756

5.9807

20.2244

18.5522

91.7317

2021

84.0963

4.3206

15.9037

14.5251

91.3315

2022

85.6878

1.5915

14.3122

13.1794

92.0851

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Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2023

86.9224

1.2346

13.0776

12.1698

93.0577

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2024

1.2346

11.8431

11.1420

94.0805

2025

1.2346

10.6085

10.0959

95.1680

2026

1.2346

9.3740

9.0311

96.3421

2027

1.2346

8.1394

7.9472

97.6382

2028 and later years

1.2346

6.9048

6.8439

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 94.1596 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2024 taxable year.

#### Private Passenger Auto Liability/Medical

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

42.9881

42.9881

57.0119

55.4898

97.3301

2015

71.9931

29.0051

28.0069

27.2195

97.1887

2016

84.8250

12.8318

15.1750

14.7605

97.2687

2017

92.3500

7.5251

7.6500

7.4327

97.1594

2018

96.2665

3.9165

3.7335

3.6143

96.8084

2019

97.9880

1.7214

2.0120

1.9422

96.5308

2020

98.7958

0.8078

1.2042

1.1620

96.4928

2021

99.2445

0.4487

0.7555

0.7300

96.6335

2022

99.4543

0.2097

0.5457

0.5315

97.3919

2023

99.6370

0.1827

0.3630

0.3567

98.2513

Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.
2024 and later years
0.1827
0.1803
0.1787
99.1168

Taxpayers that use the composite method of Notice 88-100 should use 99.1168 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2024 taxable year.

### Products Liability - Claims-Made

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

4.5270

4.5270

95.4730

87.9108

92.0792

2015

16.0134

11.4865

83.9866

77.8956

92.7476

2016

45.1313

29.1179

54.8687

49.9126

90.9673

2017

39.2459

-5.8854

60.7541

56.7438

93.3992

2018

44.8357

5.5898

55.1643

52.1199

94.4813

2019

72.1615

27.3258

27.8385

25.4836

91.5409

2020

80.4448

8.2834

19.5552

17.5826

89.9130

2021

73.2957

-7.1491

26.7043

25.1102

94.0305

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Estimated Cumulative Losses Paid

Estimated Losses Paid Each Year

Unpaid Losses at Year End

Discounted Unpaid Losses at Year End

Discount Factors

Tax Year

(%)

(%)

(%)

(%)

%)

2022

87.4824

14.1866

12.5176

11.2466

89.8460

2023

87.7500

0.2677

12.2500

11.1779

91.2480

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid

losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2024

0.2677

11.9823

11.1079

92.7025

2025

0.2677

11.7147

11.0367

94.2127

2026

0.2677

11.4470

10.9642

95.7823

2027

0.2677

11.1793

10.8904

97.4156

2028 and later years

0.2677

10.9117

10.8153

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 94.4051 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2024 taxable year.

#### Products Liability - Occurrence

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

7.1936

7.1936

92.8064

85.1351

91.7341

2015

16.9555

9.7619

83.0445

76.8101

92.4927

2016

28.3624

11.4069

71.6376

66.6765

93.0747

2017

39.7945

11.4321

60.2055

56.3360

93.5729

2018

54.3906

14.5961

45.6094

42.6183

93.4419

2019

60.9060

6.5154

39.0940

36.8077

94.1518

2020

67.7760

6.8700

32.2240

30.5353

94.7596

2021

75.7119

7.9359

24.2881

23.0753

95.0067

2022

79.5966

3.8847

20.4034

19.5690

95.9107

2023

83.9430

4.3464

16.0570

15.5342

96.7441

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2024

4.3464

11.7107

11.4272

97.5795

2025

4.3464

7.3643

7.2467

98.4026

2026 and later years

4.3464

3.0179

2.9913

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 97.9028 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2024 taxable year.

#### Reinsurance - Nonproportional Assumed Property

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

20.1003

20.1003

79.8997

77.0575

96.4428

2015

59.2833

39.1830

40.7167

38.9047

95.5497

2016

73.0867

13.8034

26.9133

25.6747

95.3978

2017

80.3675

7.2808

19.6325

18.7886

95.7015

2018

87.7278

7.3603

12.2722

11.6990

95.3295

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Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year

Unpaid Losses at Year End

Discounted Unpaid Losses at Year End

Discount Factors

(%)

(%)

(%)

%)

2019

94.4454

6.7175

5.5546

5.1310

92.3737

2020

96.5143

2.0689

3.4857

3.1355

89.9532

2021

97.9468

1.4326

2.0532

1.7463

85.0551

2022

97.4560

-0.4909

2.5440

2.2728

89.3394

2023

97.0652

-0.3908

2.9348

2.7078

92.2638

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid

losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2024

0.1836

2.7512

2.5710

93.4497

2025

0.1836

2.5675

2.4317

94.7098

2026

0.1836

2.3839

2.2900

96.0596

2027

0.1836

2.2003

2.1457

97.5193

2028 and later years

0.1836

2.0166

1.9988

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 93.6157 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2024 taxable year.

### Reinsurance - Nonproportional Assumed Liability

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year

Unpaid Losses at Year End

Discounted Unpaid Losses at Year End

Discount Factors

(%)

(%)

(%)

%)

2014

3.4987

3.4987

96.5013

88.6033

91.8156

2015

23.2170

19.7183

76.7830

70.2953

91.5505

2016

43.7483

20.5313

56.2517

50.8393

90.3782

2017

38.9131

-4.8352

61.0869

56.6276

92.7001

2018

47.9298

9.0167

52.0702

48.5442

93.2284

2019

80.0315

32.1017

19.9685

17.0254

85.2613

2020

76.5053

-3.5292

23.4947

20.8878

88.9042

2021

78.1701

1.6649

21.8299

19.5820

89.7028

2022

80.0717

1.9015

19.9283

18.0141

90.3941

2023

79.8791

-0.1926

20.1209

18.5308

92.0972

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid

losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2024

1.1246

18.9963

17.7279

93.3227

2025

1.1246

17.8717

16.9106

94.6220

2026

1.1246

16.7471

16.0787

96.0085

2027

1.1246

15.6225

15.2318

97.4993

2028 and later years

1.1246

14.4979

14.3699

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 93.5114 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2024 taxable year.

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### Reinsurance - Nonproportional Assumed Financial Lines

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

1.5423

1.5423

98.4577

92.2737

93.7191

2015

20.9273

19.3850

79.0727

74.3677

94.0497

2016

30.4705

9.5433

69.5295

66.0705

95.0253

2017

46.3043

15.8337

53.6957

51.2784

95.4981

2018

51.8464

5.5421

48.1536

46.6047

96.7836

2019

72.7869

20.9405

27.2131

26.3119

96.6884

2020

82.0967

9.3097

17.9033

17.3902

97.1337

2021

89.2630

7.1664

10.7370

10.4712

97.5250

2022

95.3692

6.1062

4.6308

4.4981

97.1342

2023

96.7995

1.4303

3.2005

3.1355

97.9710

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.
2024
1.4303
98.7822

1.7702

1.7486

2025 and later years

1.4303

0.3399

0.3369

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 98.8072 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2024 taxable year.

### Special Property (Fire, Allied Lines, Inland Marine, Earthquake, Burglary and Theft)

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors %)

2014

55.6145

55.6145

44.3855

43.7162

98.4922

2015

89.3328

33.7182

10.6672

10.4801

98.2453

Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2016 and later years

5.3336

5.3336

5.2865

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 99.1168 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2016 taxable year.

#### Warranty

Tax Year

Estimated Cumulative Losses Paid

Estimated Losses Paid Each Year

Unpaid Losses at Year End

Discounted Unpaid Losses at Year End

Discount Factors

(%)

(%)

(%)

(%)

%)

2014

85.4101

85.4101

14.5899

14.4490

99.0347

2015

99.5388

14.1287

0.4612

0.4531

98.2453

Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid
losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.
2016 and later years
0.2306
0.2306
0.2286
99.1168

Taxpayers that use the composite method of Notice 88-100 should use 99.1168 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2016 taxable year.

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### Workers' Compensation

Tax Year

Estimated Cumulative Losses Paid

Estimated Losses Paid Each Year

Unpaid Losses at Year End

Discounted Unpaid Losses at Year End

Discount Factors

(%)

(%)

(%)

(%)

%)

2014

21.8973

21.8973

78.1027

71.7286

91.8388

2015

43.4962

21.5989

56.5038

51.2212

90.6509

2016

56.0061

12.5099

43.9939

39.5167

89.8231

2017

63.5544

7.5482

36.4456

32.6085

89.4717

2018

68.9880

5.4337

31.0120

27.7101

89.3530

2019

73.9567

4.9687

26.0433

23.1932

89.0563

2020

76.0580

2.1013

23.9420

21.4883

89.7517

2021

77.6365

1.5785

22.3635

20.2804

90.6854

2022

80.1194

2.4828

19.8806

18.1385

91.2368

2023

81.3456

1.2262

18.6544

17.2260

92.3427

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid

losses incurred in this line of business in the 2014 accident year and that are outstanding at the end of the tax year shown.

2024

1.2262

17.4281

16.2971

93.5104

2025

1.2262

16.2019

15.3517

94.7524

2026

1.2262

14.9757

14.3893

96.0846

2027

1.2262

13.7494

13.4097

97.5293

2028 and later years

1.2262

12.5232

12.4126

99.1168

Taxpayers that use the composite method of Notice 88-100 should use 94.5527 percent to discount unpaid losses incurred
in this line of business in 2014 and prior years and that are outstanding at the end of the 2024 taxable year.

## SECTION 4. DRAFTING INFORMATION

The principal author of this revenue
procedure is David Remus of the Office of
Associate Chief Counsel (Financial Insti-
tutions & Products). For further informa-
tion regarding this revenue procedure con-
tact Mr. Remus on (202) 317-6995 (not a
toll-free call).

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

## Rev. Proc. 2014-60

### SECTION 1. PURPOSE

This revenue procedure prescribes the
salvage discount factors for the 2014 ac-
cident year. These factors must be used to
compute discounted estimated salvage re-
coverable under § 832 of the Internal Rev-
enue Code.

## SECTION 2. BACKGROUND

Section 832(b)(5)(A) requires that all
estimated salvage recoverable (including
that which cannot be treated as an asset
for state accounting purposes) be taken
into account in computing the deduction
for losses incurred. Under § 832(b)(5)(A),
paid losses are reduced by salvage and
reinsurance recovered during the taxable
year. This amount is adjusted to reflect
changes in discounted unpaid losses on
nonlife insurance contracts and in unpaid
losses on life insurance contracts. An adjust-
ment is then made to reflect any changes in
discounted estimated salvage recoverable
and in reinsurance recoverable.

Pursuant to § 832(b), the amount of
estimated salvage is determined on a dis-
counted basis in accordance with proce-
dures established by the Secretary.

## SECTION 3. SCOPE

This revenue procedure applies to any
taxpayer that is required to discount esti-
mated salvage recoverable under § 832.

## SECTION 4. TABLES OF DISCOUNT FACTORS

.01 The following tables present sepa-
rately for each line of business the dis-
count factors under § 832 for the 2014
accident year. All the discount factors pre-
sented in this section were determined us-
ing the applicable interest rate under
§ 846(c) for 2014, which is 1.79 percent,
and by assuming all estimated salvage is
recovered in the middle of the calendar year.

.02 These tables must be used by tax-
payers irrespective of whether they
elected to discount unpaid losses using
their own experience under § 846(e).

.03 Section V of Notice 88-100,
1988-2 C.B. 439, provides a composite
discount factor to be used in determining
the discounted unpaid losses for accident
years that are not separately reported on
the annual statement approved by the Na-
tional Association of Insurance Commis-
sioners. The tables separately provide dis-
count factors for taxpayers who elect to
use the composite method. Rev. Proc.
2002-74, 2002-2 C.B. 980, clarifies that

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for certain insurance companies subject to
tax under § 831 the composite method for
discounting unpaid losses set forth in Notice
88-100, section V, is permitted but not re-
quired. Rev. Proc. 2002-74 further provides
alternative methods for computing dis-
counted unpaid losses that are permitted for
insurance companies not using the compos-
ite method, and sets forth a procedure for
insurance companies to obtain automatic
consent of the Commissioner to change to
one of the methods described therein.

.04 Tables.

### Accident and Health (Other Than Disability Income or Credit Disability Insurance)

Taxpayers that do not use the composite
method of Notice 88-100 should use
99.1168 percent to discount salvage recov-
erable with respect to losses incurred in this
line of business in the 2014 accident year as
of the end of the 2014 and later taxable years.

Taxpayers that use the composite
method of Notice 88-100 should use
99.1168 percent to discount all salvage
recoverable in this line of business as of
the end of the 2014 taxable year.

### Auto Physical Damage

Tax Year

Discount Factors (%)

2014

98.7423

2015

98.2453

Taxpayers that do not use the com-
posite method of Notice 88-100
should use the following factor to
discount salvage recoverable as of
the end of the tax year shown with
respect to losses incurred in this line
of business in the 2014 accident year.
2016 and later years 99.1168
Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount sal-
vage recoverable as of the end of
the 2016 taxable year with respect
to losses incurred in this line of
business in 2014 and prior years.

### Commercial Auto/Truck Liability/Medical

2014

96.7325

2015

96.3843

2016

96.6665

2017

96.2440

2018

96.5723

2019

96.3659

2020

93.6195

2021

92.4758

2022

94.2956

2023

95.1153

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tors to discount salvage recover-
able as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2024

95.9425

2025

96.7754

2026

97.6093

2027

98.4282

2028 and later years

99.1168

Taxpayers that use the composite
method of Notice 88-100 should
use 96.0678 percent to discount
salvage recoverable as of the end
of the 2024 taxable year with re-
spect to losses incurred in this line
of business in 2014 and prior
years.

### Composite

Tax Year

Discount Factors (%)

2014

96.5134

2015

96.3694

2016

96.5122

2017

95.5187

2018

95.8346

2019

95.5449

2020

95.4539

2021

95.8855

2022

95.9009

2023

96.7345

### Composite

Discount
Factors
(%)

Tax Year

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tors to discount salvage recover-
able as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2024

97.5703

2025

98.3948

2026 and

99.1168

later

years

Taxpayers that use the composite
method of Notice 88-100 should
use 97.8773 percent to discount
salvage recoverable as of the end
of the 2024 taxable year with re-
spect to losses incurred in this line
of business in 2014 and prior
years.

### Fidelity/Surety

Tax Year

Discount Factors (%)

2014

97.1917

2015

98.2453

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tor to discount salvage recoverable
as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2016 and later years 99.1168
Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount sal-
vage recoverable as of the end of
the 2016 taxable year with respect
to losses incurred in this line of
business in 2014 and prior years.

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### Financial Guaranty/Mortgage Guaranty

Tax Year

Discount Factors (%)

2014

96.8703

2015

98.2453

Taxpayers that do not use the com-
posite method of Notice 88-100
should use the following factor to
discount salvage recoverable as of
the end of the tax year shown with
respect to losses incurred in this line
of business in the 2014 accident year.
2016 and later years
99.1168

Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount sal-
vage recoverable as of the end of
the 2016 taxable year with respect
to losses incurred in this line of
business in 2014 and prior years.

### International (Composite)

2014

96.5134

2015

96.3694

2016

96.5122

2017

95.5187

2018

95.8346

2019

95.5449

2020

95.4539

2021

95.8855

2022

95.9009

2023

96.7345

Taxpayers that do not use the com-
posite method of Notice 88-100
should use the following factors to
discount salvage recoverable as of
the end of the tax year shown with
respect to losses incurred in this line
of business in the 2014 accident year.

2024

97.5703

2025

98.3948

2026 and later years
99.1168

Taxpayers that use the composite
method of Notice 88-100 should
use 97.8773 percent to discount
salvage recoverable as of the end
of the 2024 taxable year with re-
spect to losses incurred in this line
of business in 2014 and prior
years.

#### Medical Professional Liability - Claims-Made

Tax Year

Discount Factors (%)

2014

96.0526

2015

96.6202

2016

95.0588

2017

96.8818

2018

97.0316

2019

97.3423

2020

97.9353

2021

98.3367

2022

98.3235

2023

99.1168

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tor to discount salvage recoverable
as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2024 and later years
99.1168

Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount
salvage recoverable as of the end
of the 2024 taxable year with re-
spect to losses incurred in this line
of business in 2014 and prior
years.

### Medical Professional Liability - Occurrence

Tax Year

Discount Factors (%)

2014

96.4719

2015

97.8218

2016

97.4678

2017

98.2840

2018

97.6293

2019

98.5357

2020

98.1177

2021

98.1691

2022

96.9838

2023

97.8150

### Medical Professional Liability - Occurrence

Discount
Factors
(%)

Tax Year

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tors to discount salvage recover-
able as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2024
98.6191
2025 and later
99.1168

years

Taxpayers that use the composite
method of Notice 88-100 should
use 98.6898 percent to discount
salvage recoverable as of the end
of the 2024 taxable year with re-
spect to losses incurred in this line
of business in 2014 and prior
years.

### Miscellaneous Casualty

Tax Year

Discount Factors (%)

2014

97.6023

2015

98.2453

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tor to discount salvage recoverable
as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2016 and later years 99.1168

Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount
salvage recoverable as of the end
of the 2016 taxable year with re-
spect to losses incurred in this line
of business in 2014 and prior
years.

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Multiple Peril Lines (Homeown-
ers/Farmowners, Commercial
Multiple Peril, and Special Liabil-
ity (Ocean Marine, Aircraft (All
Perils), Boiler and Machinery))

Tax Year

Discount Factors (%)

2014

96.9791

2015

96.9479

2016

97.2874

2017

96.0346

2018

97.0669

2019

97.3816

2020

97.4797

2021

97.4149

2022

97.1966

2023

99.1168

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tor to discount salvage recoverable
as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2024 and later years 99.1168
Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount
salvage recoverable as of the end
of the 2024 taxable year with re-
spect to losses incurred in this line
of business in 2014 and prior
years.

### Other (Including Credit)

Tax Year

Discount Factors (%)

2014

98.0762

2015

98.2453

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tor to discount salvage recoverable
as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.
2016 and later years
99.1168

### Other (Including Credit)

Tax Year

Discount
Factors
(%)

Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount
salvage recoverable as of the end
of the 2016 taxable year with re-
spect to losses incurred in this line
of business in 2014 and prior
years.

### Other Liability - Claims-Made

Tax Year

Discount Factors (%)

2014

95.9092

2015

96.1565

2016

96.1868

2017

96.9451

2018

96.9744

2019

97.0833

2020

97.8158

2021

97.7968

2022

97.9792

2023

98.7913

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tor to discount salvage recoverable
as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.
2024 and later years 99.1168
Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount
salvage recoverable as of the end
of the 2024 taxable year with re-
spect to losses incurred in this line
of business in 2014 and prior
years.

### Other Liability - Occurrence

Tax Year

Discount Factors (%)

2014

93.8186

2015

94.5698

### Other Liability - Occurrence

Tax Year

Discount Factors (%)

2016

95.3574

2017

95.7908

2018

96.3014

2019

97.0076

2020

97.1268

2021

97.0645

2022

98.2897

2023

99.1168

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tor to discount salvage recoverable
as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2024 and
later years

99.1168

Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount
salvage recoverable as of the end
of the 2024 taxable year with re-
spect to losses incurred in this line
of business in 2014 and prior
years.

### Private Passenger Auto Liability/ Medical

Tax Year

Discount Factors (%)

2014

97.5561

2015

97.4705

2016

97.4544

2017

97.0578

2018

97.0480

2019

97.1429

2020

96.9880

2021

97.1983

2022

98.0209

2023

98.8382

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### Private Passenger Auto Liability/ Medical

Discount
Factors
(%)

Tax Year

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tor to discount salvage recoverable
as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2024 and later years 99.1168
Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount
salvage recoverable as of the end
of the 2024 taxable year with re-
spect to losses incurred in this line
of business in 2014 and prior
years.

### Products Liability - Claims- Made

Tax Year

Discount Factors (%)

2014

93.4898

2015

94.5254

2016

93.3374

2017

96.8473

2018

95.5103

2019

98.8605

2020

97.7007

2021

90.7891

2022

98.9061

2023

99.1168

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tor to discount salvage recoverable
as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.
2024 and later years 99.1168

### Products Liability - Claims- Made

Discount
Factors
(%)

Tax Year

Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount
salvage recoverable as of the end
of the 2024 taxable year with re-
spect to losses incurred in this line
of business in 2014 and prior
years.

### Products Liability - Occurrence

Tax Year

Discount Factors (%)

2014

94.0709

2015

94.1348

2016

94.6993

2017

95.5583

2018

95.9410

2019

96.5187

2020

96.4711

2021

97.9185

2022

97.5355

2023

98.3655

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tor to discount salvage recoverable
as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2024 and later years 99.1168
Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount
salvage recoverable as of the end
of the 2024 taxable year with re-
spect to losses incurred in this line
of business in 2014 and prior
years.

Reinsurance - Nonproportional
Assumed Property

Tax Year

Discount Factors (%)

2014

95.4619

### Reinsurance - Nonproportional Assumed Property

Tax Year

Discount Factors (%)

2015

96.9712

2016

95.5913

2017

94.7682

2018

96.2298

2019

95.5500

2020

98.0696

2021

93.7236

2022

97.4473

2023

98.2942

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tor to discount salvage recoverable
as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2024 and later
99.1168

years

Taxpayers that use the composite
method of Notice 88-100 should
use 97.7839 percent to discount
salvage recoverable as of the end
of the 2024 taxable year with re-
spect to losses incurred in this line
of business in 2014 and prior
years.

### Reinsurance - Nonproportional Assumed Liability

Tax Year

Discount Factors (%)

2014

91.8961

2015

93.4287

2016

89.8887

2017

90.7734

2018

94.6399

2019

96.6265

2020

96.0780

2021

96.4434

2022

95.3130

2023

97.8830

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### Reinsurance - Nonproportional Assumed Liability

Discount
Factors
(%)

Tax Year

Taxpayers that do not use the com-
posite method of Notice 88-100
should use the following factors to
discount salvage recoverable as of the
end of the tax year shown with re-
spect to losses incurred in this line of
business in the 2014 accident year.

2024
98.6881
2025 and later
99.1168

years

Taxpayers that use the composite
method of Notice 88-100 should
use 98.7373 percent to discount sal-
vage recoverable as of the end of
the 2024 taxable year with respect
to losses incurred in this line of
business in 2014 and prior years.

### Reinsurance - Nonproportional Assumed Financial Lines

Tax Year

Discount Factors (%)

2014

92.4687

2015

93.5870

2016

95.9473

2017

96.0353

2018

96.9299

2019

95.6978

2020

96.9455

2021

96.9062

2022

98.9756

2023

99.1168

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tor to discount salvage recoverable
as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2024 and later years 99.1168
Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount sal-
vage recoverable as of the end of
the 2024 taxable year with respect
to losses incurred in this line of
business in 2014 and prior years.

### Special Property (Fire, Allied Lines, Inland Marine, Earth- quake, Burglary and Theft)

Tax Year

Discount Factors (%)

2014

97.7085

2015

98.2453

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tor to discount salvage recoverable
as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2016 and later years 99.1168
Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount sal-
vage recoverable as of the end of
the 2016 taxable year with respect
to losses incurred in this line of
business in 2014 and prior years.

### Warranty

Tax Year

Discount Factors (%)

2014

97.4036

2015

98.2453

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tor to discount salvage recoverable
as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2016 and later years 99.1168
Taxpayers that use the composite
method of Notice 88-100 should
use 99.1168 percent to discount sal-
vage recoverable as of the end of
the 2016 taxable year with respect
to losses incurred in this line of
business in 2014 and prior years.

### Workers' Compensation

Tax Year

Discount Factors (%)

2014

94.5251

### Workers' Compensation

Tax Year

Discount Factors (%)

2015

95.5384

2016

96.0785

2017

95.1114

2018

94.7198

2019

94.2792

2020

94.6788

2021

95.6107

2022

95.7908

2023

96.6277

Taxpayers that do not use the
composite method of Notice 88-
100 should use the following fac-
tors to discount salvage recover-
able as of the end of the tax year
shown with respect to losses in-
curred in this line of business in
the 2014 accident year.

2024

97.4704

2025

98.3125

2026 and

99.1168

later

years

Taxpayers that use the composite
method of Notice 88-100 should
use 97.8091 percent to discount sal-
vage recoverable as of the end of
the 2024 taxable year with respect
to losses incurred in this line of
business in 2014 and prior years.

## SECTION 5. DRAFTING INFORMATION

The principal author of this revenue
procedure is David Remus of the Office of
Associate Chief Counsel (Financial Insti-
tutions & Products). For further informa-
tion regarding this revenue procedure con-
tact Mr. Remus on (202) 317-6995 (not a
toll free number).

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26 CFR 601.602: Tax forms and instructions.

(Also Part I, §§ 1, 23, 24, 254, 32, 36B, 42, 45R, 55, 59, 62, 63, 68, 125, 132(f), 135, 137, 146, 147, 148, 151, 213, 220, 221, 512, 513, 877, 8774, 911, 2010, 2032A,
2503, 2523, 4161, 4261, 6033, 6039F, 6323, 6334, 6601, 7430, 7702B; 1.148-5.)

## Rev. Proc. 2014-61

TABLE OF CONTENTS

### SECTION 1. PURPOSE

#### SECTION 2. CHANGES

#### SECTION 3. 2015 ADJUSTED ITEMS

Code Section

.01 Tax Rate Tables

1(a)-(e)

.02 Unearned Income of Minor Children Taxed as if Parent's Income ("Kiddie Tax").

1(g)

.03 Adoption Credit

23

.04 Child Tax Credit

24

.05 Hope Scholarship and Lifetime Learning Credits

25A

.06 Earned Income Credit

32

.07 Refundable Credit for Covertage Under a Qualified Health Plan

36B(f)(2)(B)

.08 Rehabilitation Expenditures Treated as Separate New Building

42(e)

.09 Low-Income Housing Credit.

42(h)

.10 Employee Health Insurance Expense of Small Employers

45R

.11 Exemption Amounts for Alternative Minimum Tax

55

.12 Alternative Minimum Tax Exemption for a Child Subject to the "Kiddie Tax"

59(j)

.13 Transportation Mainline Pipeline Construction Industry Optional Expense

62(c)

Substantiation Rules for Payments to Employees under Accountable Plans

.14 Standard Deduction

63

.15 Overall Limitation on Itemized Deductions.

68

.16 Cafeteria Plans

125

.17 Qualified Transportation Fringe Benefit

132(f)

.18 Income from United States Savings Bonds for Taxpayers Who Pay Qualified Higher Education Expenses

135

.19 Adoption Assistance Programs

137

.20 Private Activity Bonds Volume Cap

146(d)

.21 Loan Limits on Agricultural Bonds.

147(c)(2)

.22 General Arbitrage Rebate Rules

148(f)

.23 Safe Harbor Rules for Broker Commissions on Guaranteed Investment Contracts or Investments Purchased for a Yield Restricted Defeasance Escrow

148

.24 Personal Exemption

151

.25 Eligible Long-Term Care Premiums

213(d)(10)

.26 Medical Savings Accounts

220

.27 Interest on Education Loans

221

.28 Treatment of Dues Paid to Agricultural or Horticultural Organizations

512(d)

.29 Insubstantial Benefit Limitations for Contributions Associated With Charitable Fund-Raising Campaigns

513(h)

.30 Expatriation to Avoid Tax.

877

.31 Tax Responsibilities of Expatriation

877A

.32 Foreign Earned Income Exclusion

911

.33 Unified Credit Against Estate Tax

2010

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.34 Valuation of Qualified Real Property in Decedent's Gross Estate

2032A

.35 Annual Exclusion for Gifts.

2503; 2523

.36 Tax on Arrow Shafts.

4161

.37 Passenger Air Transportation Excise Tax

4261

.38 Reporting Exception for Certain Exempt Organizations with Nondeductible Lobbying Expenditures

6033(e)(3)

.39 Notice of Large Gifts Received from Foreign Persons

6039F

.40 Persons Against Whom a Federal Tax Lien Is Not Valid

6323

.41 Property Exempt from Levy

6334

.42 Interest on a Certain Portion of the Estate Tax Payable in Installments

6601(j)

.43 Attorney Fee Awards

7430

.44 Periodic Payments Received under Qualified Long-Term Care Insurance Contracts or under Certain Life Insurance Contracts

7702B(d)

# SECTION 4. EFFECTIVE DATE SECTION 5. DRAFTING INFORMATION

## SECTION 1. PURPOSE

This revenue procedure sets forth inflation-adjusted items for 2015.

## SECTION 2. CHANGES

Section 1401 of the Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148, 124
Stat. 119 (PPACA), added § 36B to the Internal Revenue Code. Section 36B creates a refundable tax
credit ("the premium tax credit") for eligible individuals and families who purchase health insurance
through a Health Insurance Marketplace. Taxpayers who meet certain criteria may have some or all
of their estimated premium tax credit paid in advance directly to the insurance company to assist with
the cost of monthly premiums. These amounts are called advance credit payments. The amount of a
taxpayer's premium tax credit allowed for a taxable year is reduced by the amount of the advance
credit payments made for the taxpayer during the year. If a taxpayer's advance credit payments for a
taxable year exceed the premium tax credit allowed for the year, the taxpayer owes the excess as an
additional tax, subject to a limitation in § 36B(f)(2)(B). The limitation amounts on the increase of tax
for excess advance credit payments under § 36B(f)(2)(B) are adjusted for inflation for taxable years
beginning after December 31, 2014. The U.S. Department of the Treasury and the IRS will issue future
guidance as necessary to provide the applicable inflation adjusted items under section 36B(b)(3)(A)(ii)
that are used to determine (1) a taxpayer's premium assistance amount under section 36B(b)(2), and
(2) the required contribution percentage under section 36B(c)(2)(C)(i)(II) for determining the employ-
er-sponsored minimum essential coverage.

## SECTION 3. 2015 ADJUSTED ITEMS

.01 Tax Rate Tables. For taxable years beginning in 2015, the tax rate tables under § 1 are as follows:

TABLE 1 - Section 1(a) - Married Individuals Filing Joint Returns and Surviving Spouses

If Taxable Income Is:

The Tax Is:

Not over $18,450

10% of the taxable income

Over $18,450 but not over $74,900

$1,845 plus 15% of the excess over $18,450

Over $74,900 but not over $151,200

$10,312.50 plus 25% of the excess over $74,900

Over $151,200 but not over $230,450

$29,387.50 plus 28% of the excess over $151,200

Over $230,450 but not over $411,500

$51,577.50 plus 33% of the excess over $230,450

Over $411,500 but not over $464,850

$111,324 plus 35% of the excess over $411,500

Over $464,850

$129,996.50 plus 39.6% of the excess over $464,850

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TABLE 3 - Section 1(c) - Unmarried Individuals (other than Surviving Spouses and Heads of Households)

TABLE 2 - Section 1(b) - Heads of Households

If Taxable Income Is:

The Tax Is:

Not over $13,150

10% of the taxable income

Over $13,150 but not over $50,200

$1,315 plus 15% of the excess over $13,150

Over $50,200 but not over $129,600

$6,872.50 plus 25% of the excess over $50,200

Over $129,600 but not over $209,850

$26,722.50 plus 28% of the excess over $129,600

Over $209,850 but not over $411,500

$49,192.50 plus 33% of the excess over $209,850

Over $411,500 not over $439,000

$115,737 plus 35% of the excess over $411,500

Over $439,000

$125,362 plus 39.6% of the excess over $439,000

If Taxable Income Is:

The Tax Is:

Not over $9,225

10% of the taxable income

Over $9,225 but not over $37,450

$922.50 plus 15% of the excess over $9,225

Over $37,450 but not over $90,750

$5,156.25 plus 25% of the excess over $37,450

Over $90,750 but not over $189,300

$18,481.25 plus 28% of the excess over $90,750

Over $189,300 but not over $411,500
Over $411,500 not over $413,200

$46,075.25 plus 33% of the excess over $189,300

$119,401.25 plus 35% of the excess over $411,500

Over $413,200

$119,996.25 plus 39.6% of the excess over $413,200

TABLE 4 - Section 1(d) - Married Individuals Filing Separate Returns
If Taxable Income Is:
The Tax Is:

Not over $9,225

10% of the taxable income

Over $9,225 but not over $37,450

$922.50 plus 15% of the excess over $9,225

Over $37,450 but not over $75,600

Over $75,600 but not over $115,225

$5,156.25 plus 25% of the excess over $37,450
$14,693.75 plus 28% of the excess over $75,600

Over $115,225 but not over $205,750
Over $205,750 not over $232,425
Over $232,425

$25,788.75 plus 33% of the excess over $115,225
$55,662 plus 35% of the excess over $205,750

$64,998.25 plus 39.6% of the excess over $232,425

TABLE 5 - Section 1(e) - Estates and Trusts

If Taxable Income Is:

The Tax Is:

Not over $2,500

15% of the taxable income

Over $2,500 but not over $5,900

$375 plus 25% of the excess over $2,500

Over $5,900 but not over $9,050

$1,225 plus 28% of the excess over $5,900

Over $9,050 but not over $12,300

$2,107 plus 33% of the excess over $9,050

Over $12,300

$3,179.50 plus 39.6% of the excess over $12,300

.02 Unearned Income of Minor Children Taxed as if Parent's Income (the "Kiddie Tax").
For taxable years beginning in 2015, 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 $1,050. This $1,050 amount is the same as the amount provided in § 63(c)(5)(A),
as adjusted for inflation. The same $1,050 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 2015
must be more than $1,050 but less than $10,500.

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.03 Adoption Credit. For taxable years beginning in 2015, under § 23(a)(3) the credit allowed for an
adoption of a child with special needs is $13,400. For taxable years beginning in 2015, under
§ 23(b)(1) the maximum credit allowed for other adoptions is the amount of qualified adoption
expenses up to $13,400. The available adoption credit begins to phase out under § 23(b)(2)(A) for
taxpayers with modified adjusted gross income in excess of $201,010 and is completely phased out for
taxpayers with modified adjusted gross income of $241,010 or more. (See section 3.19 of this revenue
procedure for the adjusted items relating to adoption assistance programs.)

.04 Child Tax Credit. For taxable years beginning in 2015, the value used in § 24(d)(1)(B)(i) to
determine the amount of credit under § 24 that may be refundable is $3,000.

.05 Hope Scholarship, American Opportunity, and Lifetime Learning Credits.

(1) For taxable years beginning in 2015, the Hope Scholarship Credit under § 25A(b)(1), as increased
under § 25A(i) (the American Opportunity Tax Credit), is an amount equal to 100 percent of qualified
tuition and related expenses not in excess of $2,000 plus 25 percent of those expenses in excess of
$2,000, but not in excess of $4,000. Accordingly, the maximum Hope Scholarship Credit allowable
under § 25A(b)(1) for taxable years beginning in 2015 is $2,500.

(2) For taxable years beginning in 2015, a taxpayer's modified adjusted gross income in excess of
$80,000 ($160,000 for a joint return) is used to determine the reduction under § 25A(d)(2) in the
amount of the Hope Scholarship Credit otherwise allowable under § 25A(a)(1). For taxable years
beginning in 2015, a taxpayer's modified adjusted gross income in excess of $55,000 ($110,000 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).

.06 Earned Income Credit.

(1) In general. For taxable years beginning in 2015, 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 completed phaseout amounts shown in the table below for married
taxpayers filing a joint return include the increase provided in § 32(b)(3)(B)(i), as adjusted for inflation
for taxable years beginning in 2015.

Number of Qualifying Children

Item

One

Two

Three or More

None

Earned Income Amount

$9,880

$13,870

$13,870 $6,580

Maximum Amount of Credit

$3,359

$5,548

$6,242 $503

Threshold Phaseout Amount (Single, Surviving

$18,110

$18,110

$18,110 $8,240

Spouse, or Head of Household)

Completed Phaseout Amount (Single, Surviving

$39,131

$44,454

$47,747 $14,820

Spouse, or Head of Household)

Threshold Phaseout Amount (Married Filing Jointly)

$23,630

$23,630

$23,630 $13,750

Completed Phaseout Amount (Married Filing Jointly)

$44,651

$49,974

$53,267 $20,330

The instructions for the Form 1040 series provide tables showing the amount of the earned
income credit for each type of taxpayer.

(2) Excessive Investment Income. For taxable years beginning in 2015, the earned income tax credit is
not allowed under § 32(i) if the aggregate amount of certain investment income exceeds $3,400.

.07 Refundable Credit for Coverage Under a Qualified Health Plan. For taxable years beginning in 2015,
the limitation on tax imposed under § 36B(f)(2)(B) for excess advance credit payments is determined using
the following table:

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If the household income (expressed as a percent of poverty line) is:

The limitation amount for unmarried individuals (other than surviving spouses and heads of household) is:

The limitation amount for all other taxpayers is:

Less than 200%

$300

$600

At least 200% but less than 300%

$750

$1,500

At least 300% but less than 400%

$1,250

$2,500

.08 Rehabilitation Expenditures Treated as Separate New Building. For calendar year 2015,
the per low-income unit qualified basis amount under § 42(e)(3)(A)(ii)(II) is $6,600.

.09 Low-Income Housing Credit. For calendar year 2015, the amount used under
§ 42(h)(3)(C)(ii) to calculate the State housing credit ceiling for the low-income housing
credit is the greater of (1) $2.30 multiplied by the State population, or (2) $2,680,000.

.10 Employee Health Insurance Expense of Small Employers. For taxable years beginning
in 2015, the dollar amount in effect under § 45R(d)(3)(B) is $25,800. This amount is used
under § 45R(c) for limiting the small employer health insurance credit and under
§ 45R(d)(1)(B) for determining who is an eligible small employer for purposes of the credit.

.11 Exemption Amounts for Alternative Minimum Tax. For taxable years beginning in 2015,
the exemption amounts under § 55(d)(1) are:

Joint Returns or

$83,400

Surviving Spouses

Unmarried Individuals (other than

$53,600

Surviving Spouses)

Married Individuals Filing Separate

$41,700

Returns

Estates and Trusts

$23,800

For taxable years beginning in 2015, under § 55(b)(1), the excess taxable income above
which the 28 percent tax rate applies is:

Married Individuals Filing Separate Returns

$92,700

Joint Returns, Unmarried Individuals (other than surviving spouses), and Estates and Trusts

$185,400

For taxable years beginning in 2015, the amounts used under § 55(d)(3) to determine the
phaseout of the exemption amounts are:

Joint Returns or Surviving

Spouses

$158,900

Unmarried Individuals (other

$119,200

than Surviving Spouses)

Married Individuals Filing Sepa-

$79,450

rate Returns and Estates and

Trusts

.12 Alternative Minimum Tax Exemption for a Child Subject to the "Kiddie Tax." For
taxable years beginning in 2015, for a child to whom the § 1(g) "kiddie tax" applies, the
exemption amount under §§ 55 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)
$7,400.

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.13 Transportation Mainline Pipeline Construction Industry Optional Expense Substantiation Rules
for Payments to Employees under Accountable Plans. For calendar year 2015, an eligible employer
may pay certain welders and heavy equipment mechanics an amount of up to $17 per hour for
rig-related expenses that are deemed substantiated under an accountable plan if paid in accordance
with Rev. Proc. 2002-41, 2002-1 C.B. 1098. If the employer provides fuel or otherwise reimburses
fuel expenses, up to $11 per hour is deemed substantiated if paid under Rev. Proc. 2002-41.

### .14 Standard Deduction.

(1) In general. For taxable years beginning in 2015, the standard deduction amounts under § 63(c)(2) are
as follows:

Filing Status

Standard Deduction

Married Individuals Filing Joint Returns and Surviving Spouses (§ 1(a))

$12,600

Heads of Households (§ 1(b))

$9,250

Unmarried Individuals (other than Surviving Spouses and Heads of Households) (§ 1(c))

$6,300

Married Individuals Filing Separate Returns (§ 1(d))

$6,300

(2) Dependent. For taxable years beginning in 2015, the standard deduction amount under
§ 63(c)(5) for an individual who may be claimed as a dependent by another taxpayer cannot
exceed the greater of (1) $1,050, or (2) the sum of $350 and the individual's earned income.

(3) Aged or blind. For taxable years beginning in 2015, the additional standard deduction amount
under § 63(f) for the aged or the blind is $1,250. The additional standard deduction amount is
increased to $1,550 if the individual is also unmarried and not a surviving spouse.

15 Overall Limitation on Itemized Deductions. For taxable years beginning in 2015, the appli-
cable amounts under § 68(b) are $309,900 in the case of a joint return or a surviving spouse,
$284,050 in the case of a head of household, $258,250 in the case of an individual who is not
married and who is not a surviving spouse or head of household, $154,950 in the case of a married
individual filing a separate return.

.16 Cafeteria Plans. For the taxable years beginning in 2015, the dollar limitation under § 125(i)
on voluntary employee salary reductions for contributions to health flexible spending arrange-
ments is $2,550.

.17 Qualified Transportation Fringe Benefit. For taxable years beginning in 2015, the monthly
limitation under § 132(f)(2)(A) regarding the aggregate fringe benefit exclusion amount for transpor-
tation in a commuter highway vehicle and any transit pass is $130. The monthly limitation under
§ 132(f)(2)(B) regarding the fringe benefit exclusion amount for qualified parking is $250.

.18 Income from United States Savings Bonds for Taxpayers Who Pay Qualified Higher Education
Expenses. For taxable years beginning in 2015, the exclusion under § 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 $115,750 for joint returns and $77,200 for all
other returns. The exclusion is completely phased out for modified adjusted gross income of $145,750
or more for joint returns and $92,200 or more for all other returns.

.19 Adoption Assistance Programs. For taxable years beginning in 2015, 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 $13,400. For taxable years beginning in 2015, under § 137(b)(1) the maximum amount that
can be excluded from an employee's gross income 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 $13,400. The amount excludable from an employee's gross income
begins to phase out under § 137(b)(2)(A) for taxpayers with modified adjusted gross income in excess
of $201,010 and is completely phased out for taxpayers with modified adjusted gross income of
$241,010 or more. (See section 3.03 of this revenue procedure for the adjusted items relating to the
adoption credit.)

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.20 Private Activity Bonds Volume Cap. For calendar year 2015, the amounts used under
§ 146(d)(1) to calculate the State ceiling for the volume cap for private activity bonds is the
greater of (1) $100 multiplied by the State population, or (2) $301,515,000.

.21 Loan Limits on Agricultural Bonds. For calendar year 2015, the loan limit amount on
agricultural bonds under § 147(c)(2)(A) for first-time farmers is $517,700.

.22 General Arbitrage Rebate Rules. For bond years ending in 2015, the amount of the
computation credit determined under the permission to rely on § 1.148-3(d)(4) of the proposed
Income Tax Regulations is $1,650.

.23 Safe Harbor Rules for Broker Commissions on Guaranteed Investment Contracts or
Investments Purchased for a Yield Restricted Defeasance Escrow. For calendar year 2015,
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 investments purchased for a yield restricted defeasance
escrow is reasonable if (1) the amount of the fee that the issuer treats as a qualified adminis-
trative cost does not exceed the lesser of (A) $39,000, 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) the issuer does not
treat more than $110,000 in brokers' commissions or similar fees as qualified administrative
costs for all guaranteed investment contracts and investments for yield restricted defeasance
escrows purchased with gross proceeds of the issue.

.24 Personal Exemption.

(1) For taxable years beginning in 2015, the personal exemption amount under § 151(d) is
$4,000.

(2) Phaseout. For taxable years beginning in 2015, the personal exemption phases out for
taxpayers with the following adjusted gross income amounts:

Filing Status

AGI - Beginning of Phaseout

AGI - Completed Phaseout

Married Individuals Filing Joint Returns and

$309,900

$432,400

Surviving Spouses (§ 1(a))

Heads of Households (§ 1(b))

$284,050

$406,550

Unmarried Individuals (other

$258,250

$380,750

than Surviving

Spouses and Heads of Households) (§ 1(c))

Married Individuals Filing Separate Returns (§ 1(d))

$154,950

$216,200

.25 Eligible Long-Term Care Premiums. For taxable years beginning in 2015, the limita-
tions under § 213(d)(10), regarding eligible long-term care premiums includible in the term
"medical care," are as follows:

Attained Age Before the Close of the Taxable

Year

Limitation on Premiums

40 or less

$380

More than 40 but not more than 50

$710

More than 50 but not more than 60

$1,430

More than 60 but not more than 70

$3,800

More than 70

$4,750

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.26 Medical Savings Accounts.

(1) Self-only coverage. For taxable years beginning in 2015, the term "high deductible health
plan" as defined in § 220(c)(2)(A) means, for self-only coverage, a health plan that has an annual
deductible that is not less than $2,200 and not more than $3,300, and under which the annual
out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not
exceed $4,450.

(2) Family coverage. For taxable years beginning in 2015, the term "high deductible health plan"
means, for family coverage, a health plan that has an annual deductible that is not less than $4,450
and not more than $6,650, and under which the annual out-of-pocket expenses required to be paid
(other than for premiums) for covered benefits do not exceed $8,150.

.27 Interest on Education Loans. For taxable years beginning in 2015, 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 adjusted gross income in excess of $65,000 ($130,000
for joint returns), and is completely phased out for taxpayers with modified adjusted gross income
of $80,000 or more ($160,000 or more for joint returns).

.28 Treatment of Dues Paid to Agricultural or Horticultural Organizations. For taxable years
beginning in 2015, 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 $160.

.29 Insubstantial Benefit Limitations for Contributions Associated with Charitable Fund-Raising
Campaigns.

(1) Low cost article. For taxable years beginning in 2015, for purposes of defining the term
"unrelated trade or business" for certain exempt organizations under § 513(h)(2), "low cost
articles" are articles costing $10.50 or less.

(2) Other insubstantial benefits. For taxable years beginning in 2015, 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 contribution, without causing
the contribution to fail to be fully deductible, are $10.50, $52.50, and $105, respectively.

.30 Expatriation to Avoid Tax. For calendar year 2015, under § 877A(g)(1)(A), unless an
exception under § 877A(g)(1)(B) applies, an individual is a covered expatriate 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 $160,000.

.31 Tax Responsibilities of Expatriation. For taxable years beginning in 2015, 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 $690,000.

.32 Foreign Earned Income Exclusion. For taxable years beginning in 2015, the foreign earned
income exclusion amount under § 911(b)(2)(D)(i) is $100,800.

.33 Unified Credit Against Estate Tax. For an estate of any decedent dying during calendar year
2015, the basic exclusion amount is $5,430,000 for determining the amount of the unified credit
against estate tax under § 2010.

.34 Valuation of Qualified Real Property in Decedent's Gross Estate. For an estate of a decedent
dying in calendar year 2015, if the executor elects to use the special use valuation method under
§ 2032A for qualified real property, the aggregate decrease in the value of qualified real property
resulting from electing to use § 2032A for purposes of the estate tax cannot exceed $1,100,000.

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.35 Annual Exclusion for Gifts.

(1) For calendar year 2015, the first $14,000 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 2015, the first $147,000 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.

.36 Tax on Arrow Shafts. For calendar year 2015, 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 manufacture of certain arrows is $0.49 per shaft.

.37 Passenger Air Transportation Excise Tax. For calendar year 2015, the tax under
§ 4261(b)(1) on the amount paid for each domestic segment of taxable air transportation is
$4. For calendar year 2015, 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 $17.70. Under § 4261(c)(3), however, a
lower amount 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 2015, the rate
is $8.90.

.38 Reporting Exception for Certain Exempt Organizations with Nondeductible Lobbying
Expenditures. For taxable years beginning in 2015, the annual per person, family, or entity
dues limitation to qualify for the reporting exception under § 6033(e)(3) (and section 5.05
of Rev. Proc. 98-19, 1998-1 C.B. 547), regarding certain exempt organizations with
nondeductible lobbying expenditures, is $111 or less.

.39 Notice of Large Gifts Received from Foreign Persons. For taxable years beginning in
2015, § 6039F authorizes the Treasury 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 $15,601.

.40 Persons Against Whom a Federal Tax Lien Is Not Valid. For calendar year 2015, 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 $1,520, or (2) a mechanic's lienor under
§ 6323(b)(7) who repaired or improved certain residential property if the contract price with
the owner is not more than $7,590.

.41 Property Exempt from Levy. For calendar year 2015, the value of property exempt from
levy under § 6334(a)(2) (fuel, provisions, furniture, and other household personal effects,
as well as arms for personal use, livestock, and poultry) cannot exceed $9,080. The value
of property exempt from levy under § 6334(a)(3) (books and tools necessary for the trade,
business, or profession of the taxpayer) cannot exceed $4,540.

.42 Interest on a Certain Portion of the Estate Tax Payable in Installments. For an estate
of a decedent dying in calendar year 2015, 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 $1,470,000.

.43 Attorney Fee Awards. For fees incurred in calendar year 2015, the attorney fee award
limitation under § 7430(c)(1)(B)(iii) is $200 per hour.

.44 Periodic Payments Received under Qualified Long-Term Care Insurance Contracts or
under Certain Life Insurance Contracts. For calendar year 2015, the stated dollar amount
of the per diem limitation under § 7702B(d)(4), regarding periodic payments received under
a qualified 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 $330.

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SECTION 4. EFFECTIVE DATE

.01 General Rule. Except as provided in section 4.02, this revenue procedure applies to taxable years beginning in 2015. .02 Calendar Year Rule. This revenue procedure applies to transactions or events occurring in calendar year 2015 for purposes of sections 3.08 (rehabilitation expenditures treated as separate new building), 3.09 (low-income housing credit), 3.13 (transportation mainline pipeline construction industry op- tional expense substantiation rules for payments to employees under accountable plans), 3.20 (private activity bonds volume cap), 3.21 (loan limits on agricultural bonds), 3.22 (general arbitrage rebate rules), 3.23 (safe harbor rules for broker commissions on guaranteed investment contracts or invest- ments purchased for a yield restricted defeasance escrow), 3.30 (expatriation to avoid tax), 3.34 (valuation of qualified real property in decedent's gross estate), 3.35 (annual exclusion for gifts), 3.36 (tax on arrow shafts), 3.37 (passenger air transportation excise tax), 3.40 (persons against whom a federal tax lien is not valid), 3.41 (property exempt from levy), 3.42 (interest on a certain portion of the estate tax payable in installments), 3.43 (attorney fee awards), and 3.44 (periodic payments received under qualified long-term care insurance contracts or under certain life insurance contracts).

SECTION 5. DRAFTING INFORMATION

The principal author of this revenue procedure is William Ruane of the Office of Associate Chief Counsel (Income Tax &amp; Accounting). For further information regarding this revenue procedure, contact Mr. Ruane at (202) 317-4718 (not a toll-free number).

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# Part IV. Items of General Interest

Notice of Proposed
Rulemaking
Certain Distributions
Treated as Sales or
Exchanges

## REG-151416-06

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains
proposed regulations that prescribe how a
partner should measure its interest in a
partnership's unrealized receivables and
inventory items, and that provide guid-
ance regarding the tax consequences of a
distribution that causes a reduction in that
interest. The proposed regulations take
into account statutory changes that have
occurred subsequent to the issuance of the
existing regulations. The proposed regula-
tions affect partners in partnerships that
own unrealized receivables and inventory
items and that make a distribution to one
or more partners.

DATES: Comments and requests for a
public hearing must be received by Feb-
ruary 2, 2015.

ADDRESSES: Send submissions to CC:
PA:LPD:PR (REG-151416-06), room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
D.C., 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to
CC:PA:LPD:PR (REG-151416-06),
Courier's Desk, Internal Revenue Service,
1111 Constitution Avenue, N.W., Wash-
ington, D.C., 20224, or via the Federal
eRulemaking Portal at www.regulations.
gov ( IRS REG-151416-06).

FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations, Allison R. Carmody at (202)
317-5279 or Frank J. Fisher at (202) 317-
6850; concerning submissions of com-
ments and requests for hearing, Oluwa-
funmilayo Taylor at (202) 317-6901 (not
toll-free numbers).

SUPPLEMENTARY INFORMATION:

## Paperwork Reduction Act

The collection of information con-
tained in this notice of proposed rulemak-
ing has been submitted to the Office of
Management and Budget for review in
accordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507(d)). Com-
ments on the collection of information
should be sent to the Office of Manage-
ment and Budget, Attn: Desk Officer for
the Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Re-
ports Clearance Officer, SE -: CAR:MP:T:
T:SP, Washington, DC 20224. Comments
on the collection of information should be
received by January 2, 2015.

Comments are specifically requested
concerning:

Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the Internal Revenue Service,
including whether the information will
have practical utility;

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

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

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

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

The collection of information required
by this proposed regulation is in § 1.751-
1(b)(3) and (b)(6), and in § 1.755-
1(c)(2)(vi). This information is required
for a partnership and certain partners to
report the information to the IRS neces-
sary to ensure that the partners of the
partnership properly report in accordance
with the rules of the proposed regulations
the correct amount of ordinary income
and/or capital gain upon a distribution of

property from the partnership to its part-
ners. The collection of information is nec-
essary to ensure tax compliance.

The likely respondents are business or
other for-profit institutions.

Estimated total annual reporting bur-
den: 22,500 hours.

Estimated average annual burden hours
per respondent vary from 30 minutes to 2
hours, depending on individual circum-
stances, with an estimated average of 1
hour.

Estimated number of respondents:
22,500.

Estimated annual frequency of re-
sponses: annually.

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

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

### Background

This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) under section 751(b)
of the Internal Revenue Code (the Code).
In 1954, Congress enacted section 751 to
prevent the use of a partnership to convert
potential ordinary income into capital
gain. See H.R. Rep. No. 1337 at 70
(1954), reprinted in 1954 U.S.C.C.A.N.
4017, 4097. To that end, section 751(a)
provides that the amount of any money, or
the fair market value of any property, re-
ceived by a transferor partner in exchange
for all or part of that partner's interest in
the partnership's unrealized receivables
and inventory items is considered as an
amount realized from the sale or exchange
of property other than a capital asset. Fur-
ther, section 751(b) overrides the nonrec-
ognition provisions of section 731 to the
extent a partner receives a distribution
from the partnership that causes a shift
between the partner's interest in the part-

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nership's unrealized receivables or sub-
stantially appreciated inventory items
(collectively, the partnership's “section
751 property") and the partner's interest
in the partnership's other property.

Whether section 751(b) applies de-
pends on the partner's interest in the part-
nership's section 751 property before and
after a distribution. The statute does not
define a partner's interest in a partner-
ship's section 751 property, but the legis-
lative history indicates that Congress be-
lieved a partner's interest in a
partnership's section 751 property equals
the partner's rights to income from the
partnership's section 751 property:

The provisions relating to unreal-
ized receivables and appreciated in-
ventory items are necessary to pre-
vent the use of the partnership as a
device for obtaining capital-gain
treatment on fees or other rights to
income and on appreciated inven-
tory. Amounts attributable to such
rights would be treated as ordinary
income if realized in normal course
by the partnership. The sale of a
partnership interest or distributions
to partners should not be permitted
to change the character of this in-
come. The statutory treatment pro-
posed, in general, regards the in-
come rights as severable from the
partnership interest and as subject
to the same tax consequences which
would be accorded an individual
entrepreneur.

S. Rep. No. 1622 at 99 (1954), re-
printed in 1954 U.S.C.C.A.N. 4621, 4732.
(Emphasis added.)

In 1984, Congress amended section
704(c), making mandatory its application
to property contributed to a partnership.
While Congress did not specifically ad-
dress the overlap of section 704(c) and
section 751, the Conference Report indi-
cates that the 1984 Congress understood
that the section 704(c) amendment would
impact other provisions in subchapter K
and provides regulatory authority to the
Secretary of the Treasury to address those
repercussions. See H.R. Conf. Rep. No.
861, 98th Cong., 2d Sess., June 23, 1984,
reprinted in 1984 U.S.C.C.A.N. 1445,
1545.

The IRS and the Treasury Department
first issued regulations implementing sec-
tion 751 in 1956. Following the changes

to section 704(c) making its application
mandatory, the IRS and the Treasury De-
partment amended the regulations under
section 751(a) to provide generally that a
partner's interest in section 751 property
is the amount of income or loss from
section 751 property that would be allo-
cated to the partner if the partnership had
sold all of its property in a fully taxable
transaction for cash in an amount equal to
the fair market value of such property.
(See TD 8847, 64 FR 69903, Dec. 15,
1999.) However, the 1956 regulations
with respect to section 751(b) remained
unchanged.

The examples in the current regula-
tions under section 751(b) determine a
partner's interest in section 751 property
by reference to the partner's share of the
gross value of the partnership's assets (the
"gross value" approach), not by reference
to the partner's share of the unrealized
gain or loss in the property. See, for ex-
ample, § 1.751-1(g), Example 2. Because
the gross value approach focuses on a
partner's share of the asset's value rather
than the partner's share of the unrealized
gain, the examples in the current regula-
tions may be too narrow in some respects,
and too broad in others, to carry out the
intended purpose of section 751(b). That
is, the gross value approach may allow a
distribution that reduces a partner's share
of the unrealized gain in the partnership's
section 751 property without triggering
section 751(b), and, conversely, may trig-
ger section 751(b) even if the partner's
share of the unrealized gain in the part-
nership's section 751 property is not re-
duced. For example, Rev. Rul. 84-102
(84-102 CB 119) provides that deemed
distributions under section 752 resulting
from shifting allocations of indebtedness
may result in the partners' shares of asset
gross value changing, even though the
partners' shares of unrealized gain associ-
ated with section 751 property would not
necessarily have changed.

If the distribution results in a shift be-
tween the partner's interest in the partner-
ship's section 751 property and the part-
nership's other property, the current
regulations require a deemed asset ex-
change of both section 751 property and
other property between the partner and the
partnership to determine the tax conse-
quences of the distribution (the “asset ex-

change" approach). See, for example,
§ 1.751-1(g), Example 6, of the current
regulations. The asset exchange approach
is complex, requiring the partnership and
partner to determine the tax consequences
of both a deemed distribution of relin-
quished property and a deemed taxable
exchange of that property back to the part-
nership. The asset exchange approach also
often accelerates capital gain unnecessar-
ily by requiring certain partners to recog-
nize capital gain even when their shares of
partnership capital gain have not been re-
duced.

In 2006, the IRS and the Treasury De-
partment published Notice 2006-14
(2006-1 CB 498), which suggested, and
requested comments on, alternative ap-
proaches to section 751(b) that were in-
tended to better achieve the purpose of the
statute while providing greater simplicity.
See § 601.601(d)(2)(ii)(b). Specifically,
Notice 2006-14 asked for comments on:
(1) replacing the gross value approach
with a "hypothetical sale" approach for
purposes of determining a partner's inter-
est in the partnership's section 751 prop-
erty, and (2) replacing the asset exchange
approach with a "hot asset sale" approach
to determine the tax consequences when
section 751(b) applies. The hypothetical
sale approach and the hot asset sale ap-
proach are described in Parts 1.A and 3,
respectively, of the Summary of Com-
ments and Explanation of Provisions sec-
tion of this preamble. Notice 2006-14
also requested comments on other possi-
ble approaches to simplifying compliance
with section 751(b).

As described in Notice 2006-14, the
hypothetical sale approach for section
751(b) is similar to the approach taken in
the 1999 regulations issued under section
751(a), shifting the focus to tax gain and
away from gross value. Under the hypo-
thetical sale approach, a partner's interest
in section 751 property is determined by
reference to the amount of ordinary in-
come that would be allocated to the part-
ner if the partnership disposed of all of its
property for fair market value immedi-
ately before the distribution. More specif-
ically, the hypothetical sale approach ap-
plies section 704(c) principles in
comparing: (1) the amount of ordinary
income that each partner would recognize
if the partnership sold all of its property

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for fair market value immediately before
the distribution, with (2) the amount of
ordinary income each partner would rec-
ognize if the partnership sold all of its
property (and the distributee partners sold
the distributed assets) for fair market
value immediately after the distribution. If
the distribution reduces the amount of or-
dinary income (or increases the amount of
ordinary loss) from section 751 property
that would be allocated to, or recognized
by, a partner (thus reducing that partner's
interest in the partnership's section 751
property), the distribution triggers section
751(b).

Notice 2006-14 indicated that changes
to the framework of subchapter K since
the promulgation of the existing regula-
tions would work in tandem with the hy-
pothetical sale approach to achieve the
statute's objective of ensuring that a part-
ner recognizes its proper share of the part-
nership's income from section 751 prop-
erty without unnecessarily accelerating
the recognition of that income. For exam-
ple, regulations under section 704(b) al-
low a partnership to revalue its assets
upon a distribution in consideration of a
partnership interest. Any revaluation gain
or loss is subject to the rules of section
704(c), which generally preserve each
partner's share of the unrealized gain and
loss in the partnership's assets.

Notice 2006-14 also requested com-
ments on using the hot asset sale ap-
proach, rather than the asset exchange ap-
proach, to determine the tax consequences
of the distribution that is subject to section
751(b). The hot asset sale approach deems
the partnership to distribute the relin-
quished section 751 property to the part-
ner whose interest in the partnership's
section 751 property is reduced, and then
deems the partner to sell the relinquished
section 751 property back to the partner-
ship immediately before the actual distri-
bution.

## Summary of Comments and Explanation of Provisions

The IRS and the Treasury Department
received both formal and informal re-
sponses to Notice 2006-14. In addition, a
number of commentators published arti-
cles analyzing the proposals outlined in
Notice 2006-14. Commentators' re-

sponses to Notice 2006-14 were predom-
inantly favorable.

These proposed regulations adopt
many of the principles described in Notice
2006-14. Part 1 of this section describes
the rules included in the proposed regula-
tions for determining partners' interests in
section 751 property. Part 2 of this section
sets forth the proposed regulations' test to
determine whether section 751(b) applies
to a partnership distribution, including
anti-abuse principles that may apply in
certain situations in which the test would
not otherwise be satisfied. Part 3 of this
section explains the tax consequences of a
section 751(b) distribution under the pro-
posed regulations. Finally, Part 4 of this
section describes certain ancillary issues
relating to the proposed regulations, in-
cluding a clarification to the scope of
§ 1.751-1(a).

### 1. Determination of a Partner's Interest in Section 751 Property

Section 751(b) applies to a partnership
distribution to the extent the distribution
reduces a partner's interest in section 751
property. As discussed further in this Part
1, the proposed regulations establish an
approach for measuring partners' interests
in section 751 property, provide new rules
under section 704(c) to help partnerships
compute partner gain in section 751 prop-
erty more precisely, and describe how ba-
sis adjustments under sections 734(b) and
743(b) affect the computation of partners'
interests in section 751 property.

### A. Adoption of Hypothetical Sale Approach

The first step in computing the effect of
section 751(b) is to measure the partners'
interests in section 751 property. Com-
mentators generally agreed that the hypo-
thetical sale approach is a substantial im-
provement over the gross value approach
in the existing regulations. As described in
this preamble, the hypothetical sale ap-
proach requires a partnership to compare:
(1) the amount of ordinary income (or
ordinary loss) that each partner would rec-
ognize if the partnership sold its property
for fair market value immediately before
the distribution with (2) the amount of
ordinary income (or ordinary loss) each
partner would recognize if the partnership

sold its property, and the distributee part-
ner sold the distributed assets, for fair
market value immediately after the distri-
bution. The commentators agreed that,
when compared against the gross value
approach, the hypothetical sale approach
is more consistent with Congress's intent
in enacting section 751(b), is easier to
apply, and reduces the likelihood that sec-
tion 751(b) would unnecessarily acceler-
ate ordinary income. Accordingly, these
proposed regulations adopt the hypotheti-
cal sale approach as the method by which
the partners must measure their respective
interests in section 751 property for the
purpose of determining whether a distri-
bution reduces a partner's interest in the
partnership's section 751 property. (A dis-
tribution that reduces a partner's interest
in the partnership's section 751 property
is referred to as a "section 751(b) distri-
bution.")

### B. Revaluations

Because the hypothetical sale approach
relies on the principles of section 704(c)
to preserve a partner's share of the unre-
alized gain and loss in the partnership's
section 751 property, these proposed reg-
ulations make several changes to the reg-
ulations relating to section 704(c). Specif-
ically, the proposed regulations revise
§ 1.704-1(b)(2)(iv)(f), regarding revalua-
tions of partnership property, to make its
provisions mandatory if a partnership dis-
tributes money or other property to a part-
ner as consideration for an interest in the
partnership, and the partnership owns sec-
tion 751 property immediately after the
distribution. (A partnership that does not
own section 751 property immediately af-
ter the distribution may still revalue its
property under the existing regulation, but
is not required to do so under these pro-
posed regulations.) If a partnership does
not maintain capital accounts in accor-
dance with § 1.704-1(b)(2)(iv), the part-
nership must comply with this require-
ment by computing each partner's share
of gain or loss in each partnership asset
prior to a distribution, and making future
allocations of partnership items in a man-
ner that takes these amounts into account
(making subsequent adjustments for cost
recovery and other events that affect the
property basis of each such asset).

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In addition, the proposed regulations
contain a special revaluation rule for dis-
tributing partnerships that own an interest
in a lower-tier partnership. Because a part-
nership's section 751 property includes,
under section 751(f), the partnership's
proportionate share of section 751 prop-
erty owned by any other partnership in
which the distributing partnership is a
partner, these proposed regulations also
require a partnership in which the distrib-
uting partnership owns a controlling inter-
est (which is defined as a greater than 50
percent interest) to revalue its property if
the lower-tier partnership owns section
751 property immediately after the distri-
bution. If the distributing partnership
owns a non-controlling (that is, less than
or equal to 50 percent) interest in a lower-
tier partnership, these proposed regula-
tions require the distributing partnership
to allocate its distributive share of the
lower-tier partnership's items among its
partners in a manner that reflects the allo-
cations that would have been made had
the lower-tier partnership revalued its
partnership property. The IRS and the
Treasury Department are aware that in
some instances a distributing partnership
may be unable to obtain sufficient infor-
mation to comply with this requirement
from a lower-tier partnership in which the
distributing partnership holds a non-
controlling interest. We request comments
on reasonable approaches to address this
issue.

Upon the revaluation of partnership
property in connection with a partnership
distribution, the regulations under section
704(c) permit a partnership to choose any
reasonable method to account for the
built-in gain or built-in loss that is consis-
tent with the purpose of section 704(c). If
property with built-in gain decreases in
value (or property with built-in loss in-
creases in value), then the partnership may
be unable to allocate tax losses (or gains)
to a non-contributing partner in an amount
equal to the partner's economic loss (or
gain). If the property with built-in gain (or
loss) is section 751 property, then the in-
ability to allocate those tax losses (or
gains) may cause ordinary income to shift
among the partners. The regulations under
section 704(c) provide two reasonable
methods for a partnership to allocate items
to cure or remediate that shift. However,

the regulations under section 704(c) also
provide a third reasonable method, the
traditional method, under which the shift
of ordinary income is not cured. The IRS
and the Treasury Department are aware
that distortions created under the section
704(c) traditional method may cause ordi-
nary income to shift among partners.
However, the regulations under section
704(c) contain an anti-abuse rule that pro-
vides that a method is not reasonable if,
for example, the event that results in a
reverse section 704(c) allocation and the
corresponding allocation of tax items with
respect to the property are made with a
view to shifting the tax consequences of
built-in gain or built-in loss among the
partners in a manner that substantially re-
duces the present value of the partners'
aggregate tax liability. The IRS and the
Treasury Department believe that this
anti-abuse provision under section 704(c)
properly addresses the possibility that tax-
payers would use the traditional method to
shift ordinary income.

Some commentators suggested chang-
ing the regulations under section 704(c) to
minimize the situations in which section
751(b) applies. Generally, when a partner-
ship revalues its assets, the partnership
allocates a reverse section 704(c) amount
with respect to each partnership asset, as
opposed to an aggregate section 704(c)
amount with respect to all assets (subject
to certain exceptions). As a result, any
distribution of appreciated section 751
property in which another partner has a
share of income would trigger section
751(b) under the hypothetical sale ap-
proach. The commentators recommended
that the IRS and the Treasury Department
narrow the application of section 751(b)
by allowing partners (subject to the sub-
stantiality requirements of § 1.704-
1(b)(2)(iii)) to "exchange" reverse section
704(c) amounts resulting from a section
751 distribution. These proposed regula-
tions do not adopt this comment because it
is beyond the scope of these regulations
and would impact other provisions of sub-
chapter K. However, the IRS and the
Treasury Department believe that the is-
sue merits further study and request com-
ments on how such permissible exchanges
of reverse section 704(c) amounts might
be addressed in future regulations.

C. Effect of Basis Adjustments on
Section 751(b) Computations

While section 704(c) revaluations gen-
erally preserve partners' interests in sec-
tion 751 property upon a partnership dis-
tribution, certain basis adjustments under
sections 732(c) or 734(b) may alter part-
ners' interests in section 751 property fol-
lowing the distribution. Accordingly,
these proposed regulations provide rules
on the effect of these basis adjustments on
the computation of partners' interests in
section 751 property.

If a distribution of capital gain property
results in a basis adjustment under section
734(b), that basis adjustment is allocated
to capital gain property of the partnership
under § 1.755-1(c)(1). However, some
property that is characterized as capital
gain property for purposes of section 755
can also result in ordinary income when
sold. For example, section 1231 property
is characterized as a capital asset for pur-
poses of section 755, but selling the prop-
erty can also result in ordinary income
from recapture under section 1245(a)(1).
The regulations under section 755 do not
differentiate between the capital gain as-
pect of the property and the ordinary in-
come aspect of the property for this pur-
pose. Accordingly, allocating a section
734(b) positive basis adjustment to such
property as capital gain property may re-
duce the amount of ordinary income that
would result on a sale of the property.
Under these proposed regulations, that re-
duction in ordinary income would consti-
tute a reduction in the partners' shares of
unrealized gain in the partnership's sec-
tion 751 property, which could trigger
section 751(b) in situations in which
751(b) would not have otherwise applied.
A similar reduction in section 751 prop-
erty could occur if the basis of the distrib-
uted property increases under section 732.

One commentator recommended al-
lowing partnerships to avoid this result by
eliminating a positive section 734(b) ad-
justment to the extent the section 734(b)
adjustment would reduce the partnership's
ordinary income. Another commentator
recommended allocating the section
734(b) adjustment to other partnership
capital gain property. The same commen-
tator alternatively recommended treating a
positive section 734(b) adjustment that re-

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duced the partnership's ordinary income
as a separate asset.

Although these proposed regulations
do not treat the section 734(b) adjustment
as a separate asset, the proposed regula-
tions reach a similar result to this last
recommendation. They provide that a ba-
sis adjustment under section 732(c) or
section 734(b) (as adjusted for recovery of
the basis adjustment) that is allocated to
capital gain property and that reduces the
ordinary income (attributable, for exam-
ple, to recapture under section 1245(a)(1))
that the partner or partnership would rec-
ognize on a taxable disposition of the
property is not taken into account in de-
termining (1) the partnership's basis for
purposes of sections 617(d)(1),
1245(a)(1), 1250(a)(1), 1252(a)(1), and
1254(a)(1), and (2) the partner or partner-
ship's respective gain or loss for purposes
of sections 995(c), 1231(a), and 1248(a).
The IRS and the Treasury Department in-
tend for these amendments to apply for
purposes of other provisions that cross-
reference those sections (for example, the
reference in § 1.367(b)-2(c) to section
1248). The IRS and the Treasury Depart-
ment are aware that these rules may result
in additional administrative burden and,
therefore, permit a partnership and its
partners to elect to recognize ordinary in-
come currently under section 751(b) in
lieu of applying these rules.

In addition, one commentator raised
questions about the application of section
751(b) upon the distribution to a partner
of section 751 property for which another
partner has a basis adjustment under sec-
tion 743(b) (the transferee partner). The
commentator questioned whether the dis-
tributee partner's share of section 751
property could be increased inappropri-
ately if the special basis adjustment is not
taken into account in determining the dis-
tributee's basis in the section 751 property
under section 732. The IRS and the Trea-
sury Department believe that although the
distributee partner does not take the sec-
tion 743(b) basis adjustment into account
in determining its basis in the distributed
property, the reallocation of the section
743(b) basis adjustment pursuant to
§ 1.743-1(g)(2)(ii) should generally re-
duce the transferee partner's share of sec-
tion 751 property, triggering an income
inclusion to that partner under section

751(b) which is offset by the basis adjust-
ment. The IRS and the Treasury Depart-
ment acknowledge that, in situations in
which the partnership holds no other sec-
tion 751 property (and the section 743(b)
basis adjustment is temporarily suspended
under §§ 1.743-1(g)(2)(ii) and 1.755-
1(c)(4) until the partnership acquires ad-
ditional ordinary income property), the
application of section 751(b) may be un-
clear. Accordingly, the proposed regula-
tions require that partners include the ef-
fect of carryover basis adjustments when
determining their shares of section 751
property, as though those basis adjust-
ments were immediately allocable to or-
dinary income property. See Example 4 in
§ 1.751-1(g) of the proposed regulations.

2\. Distributions to which Section 751(b)
Applies

#### A. General Principle

The purpose of section 751 is to pre-
vent a partner from converting its share of
potential ordinary income into capital
gain. A distribution of partnership prop-
erty (including money) is a section 751(b)
distribution if the distribution reduces any
partner's share of net section 751 unreal-
ized gain or increases any partner's share
of net section 751 unrealized loss (as de-
termined under the hypothetical sale ap-
proach described in Part 1.A of the Sum-
mary of Comments and Explanation of
Provisions section of this preamble). For
this purpose, a partner's net section 751
unrealized gain or loss immediately be-
fore a distribution equals the amount of
net gain or loss, as the case may be, from
section 751 property that would be allo-
cated to the partner if the partnership dis-
posed of all of the partnership's assets for
cash in an amount equal to the fair market
value of such property (taking into ac-
count section 7701(g)). A partner's net
section 751 unrealized gain or loss in-
cludes any remedial allocations under
§ 1.704-3(d).

A partner's net section 751 unrealized
gain or loss also takes into account any
section 743 basis adjustment pursuant to
§ 1.743-1(j)(3), including any carryover
basis adjustment that results under any of
§ 1.743-1(g)(2)(ii), § 1.755-
1(b)(5)(iii)(D), or § 1.755-1(c)(4) when
the partnership must adjust the basis of a

specific class of assets, but that adjustment
is suspended because the partnership does
not own assets in that class. The regula-
tions take such suspended basis adjust-
ments into account as though the basis
adjustment is applied to the basis of no-
tional partnership section 751 property
with a fair market value of zero. For ex-
ample, if A and B are partners in the AB
partnership, which owns capital assets and
a single ordinary income asset that is the
subject of a section 743(b) adjustment
with respect to B, and that asset is distrib-
uted to partner A, B's basis adjustment is
suspended because the partnership lacks
other ordinary income property. However,
the basis adjustment will eventually ben-
efit B when the partnership acquires new
ordinary income property. For this reason,
the proposed regulations require B to take
the suspended adjustment into account
when determining whether section 751(b)
applies to B with respect to the distribu-
tion.

A partner's share of net section 751
unrealized gain or loss from section 751
property immediately following a distri-
bution is computed using the same for-
mula. However, the distributee partner
also includes in its post-distribution
amount its share of net income or loss
from a hypothetical sale of the distributed
section 751 property.

If section 751(b) applies to a distribu-
tion, each partner must generally recog-
nize or take into account currently ordi-
nary income equal to its "section 751(b)
amount." If a partner has net section 751
unrealized gain both before and after the
distribution, then the partner's section
751(b) amount equals the partner's net
section 751 unrealized gain immediately
before the distribution less the partner's
net section 751 unrealized gain immedi-
ately after the distribution. If a partner has
net section 751 unrealized loss both be-
fore and after the distribution, then the
partner's section 751(b) amount equals
the partner's net section 751 unrealized
loss immediately after the distribution less
the partner's net section 751 unrealized
loss immediately before the distribution.
If a partner has net section 751 unrealized
gain before the distribution and net sec-
tion 751 unrealized loss after the distribu-
tion, then the partner's section 751(b)
amount equals the sum of the partner's net

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section 751 unrealized gain immediately
before the distribution and the partner's
net section 751 unrealized loss immedi-
ately after the distribution.

Commentators requested a de minimis
exception to section 751(b). The IRS and
the Treasury Department continue to
study the issue and request comments de-
scribing the parameters of a de minimis
rule that would be helpful.

#### B. Section 751 Anti-Abuse Rule

The IRS and the Treasury Department
believe that, despite the general principle
that section 751(b) should apply only at
the time that a partner's share of net sec-
tion 751 unrealized gain is reduced (or net
section 751 loss is increased), the deferral
of ordinary income upon the receipt of a
distribution is inappropriate in certain cir-
cumstances. Specifically, deferral is inap-
propriate if a partner engages in a trans-
action that relies on the rules of section
704(c) to defer or eliminate ordinary in-
come while monetizing most of the value
of the partnership interest. Accordingly,
these proposed regulations provide an
anti-abuse rule that requires taxpayers to
apply the rules set forth in the proposed
regulations in a manner consistent with
the purpose of section 751, and that allows
the Commissioner to recast transactions
for federal tax purposes as appropriate to
achieve tax results that are consistent with
the purpose of section 751.

The proposed regulations provide a list
of situations that are presumed inconsis-
tent with the purpose of section 751. Un-
der this list, a distribution is presumed
inconsistent with the purpose of section
751 if section 751(b) would apply but for
the application of section 704(c) princi-
ples, and one or more of the following
conditions exists: (1) a partner's interest
in net section 751 unrealized gain is at
least four times greater than the partner's
capital account immediately after the dis-
tribution, (2) a distribution reduces a part-
ner's interest to such an extent that the
partner has little or no exposure to part-
nership losses and does not meaningfully
participate in partnership profits aside
from a preferred return for the use of
capital, (3) the net value of the partner (or
its successor) becomes less than its poten-
tial tax liability from section 751 property

as a result of a transaction, (4) a partner
transfers a portion of its partnership inter-
est within five years after the distribution
to a tax-indifferent party in a manner that
would not trigger ordinary income recog-
nition in the absence of this anti-abuse
rule, or (5) a partnership transfers to a
corporation in a nonrecognition transac-
tion section 751 property other than pur-
suant to a transfer of all property used in a
trade or business (excluding assets that are
not material to a continuation of the trade
or business). In addition, the proposed
regulations provide that an amendment to
the partnership agreement that results in a
reduction in a partner's interest in section
751 property is also presumed inconsis-
tent with the purpose of section 751. A
partnership or a partner taking a position
on its return that section 751 does not
apply to a transaction that meets one or
more of these situations must disclose its
position on Form 8275, Disclosure State-
ment.

##### 3. Tax Consequences of a Section 751(b) Distribution

If section 751(b) applies to a distribu-
tion under the principles set forth in Part 2
of the Summary of Comments and Expla-
nation of Provisions section of this pream-
ble, then the partners must determine the
consequences of its application to the
partnership and its partners. As described
in the Background section of this pream-
ble, Notice 2006-14 discussed replacing
the asset exchange approach with a hot
asset sale approach to determine these
consequences. While most commentators
agreed that the hot asset sale approach is
an improvement over the existing regula-
tions' asset exchange approach, commen-
tators were able to identify situations in
which the hot asset sale approach fails to
achieve the correct result or causes unde-
sirable results under other Code provi-
sions. Two commentators advocated
adopting, in lieu of the hot asset sale ap-
proach, an approach similar to that taken
in section 704(c)(1)(B) (referred to in this
preamble as a "deemed gain" approach),
in which a section 751(b) distribution re-
sults in: (1) the partnership recognizing
ordinary income in the aggregate amount
of each partner's reduction in the partner's
interest in section 751 property, (2) the
partnership allocating ordinary income to

the partner or partners whose interest in
section 751(b) property was reduced by
the distribution, and (3) the partnership
making appropriate basis adjustments to
its assets to reflect its ordinary income
recognition. One variation of the deemed
gain approach would require capital gain
recognition in certain cases.

The IRS and the Treasury Department
determined that a deemed gain approach
produces an appropriate outcome in the
greatest number of circumstances out of
the approaches under consideration, and
that the hot asset sale approach also pro-
duced an appropriate outcome in most cir-
cumstances. However, no one approach
produced an appropriate outcome in all
circumstances. Therefore, these proposed
regulations withdraw the asset exchange
approach of the current regulations, but do
not require the use of a particular ap-
proach for determining the tax conse-
quences of a section 751(b) distribution.
Instead, these proposed regulations pro-
vide that if, under the hypothetical sale
approach, a distribution reduces a part-
ner's interest in the partnership's section
751 property, giving rise to a section
751(b) amount, then the partnership must
use a reasonable approach that is consis-
tent with the purpose of section 751(b) to
determine the tax consequences of the re-
duction. Except in limited situations, a
partnership must continue to use the same
approach, once chosen, including after a
termination of the partnership under sec-
tion 708(b)(1)(B). These proposed regula-
tions include examples in which the ap-
proach adopted is generally reasonable
based on the facts of the examples, and
one example in which it is determined that
the adopted approach is not reasonable
based on the facts of the example.

Finally, some commentators recom-
mended allowing taxpayers to elect to rec-
ognize capital gain in certain situations
(for example, in the situation described in
Example 2 in Notice 2006-14 involving
distributions of section 751(b) property to
a partner that has insufficient basis in its
partnership interest to absorb fully the
partnership's basis in the distributed prop-
erty). Recognition of gain may be appro-
priate where failing to recognize gain
would cause an adjustment to the basis of
distributed property (under section 732) or
to the basis of partnership property (under

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section 734(b)) if those basis adjustments
would change the partners' shares of or-
dinary income already determined under
the principles described in Part 1 of the
Summary of Comments and Explanation
of Provisions section of this preamble.
Such changes in ordinary income amounts
could (in the case of certain adjustments
under section 734(b)) decrease partners'
shares of partnership ordinary income, re-
quiring the recognition of additional in-
come under section 751(b), or could (in
the case of certain adjustments under sec-
tion 732) convert a distributee partner's
share of capital gain into ordinary income.
Thus, these proposed regulations require
that distributee partners recognize capital
gain in certain situations, and permit dis-
tributee partners to elect to recognize cap-
ital gain in certain other situations.

The proposed regulations require a dis-
tributee partner to recognize capital gain
to the extent necessary to prevent the dis-
tribution from triggering a basis adjust-
ment under section 734(b) that would re-
duce other partners' shares of net
unrealized section 751 gain or loss. Cap-
ital gain recognition is necessary in this
situation because the section 734(b) basis
adjustment was not taken into account in
determining the partners' net section 751
unrealized gain or loss immediately after
the section 751 distribution, and the IRS
and the Treasury Department believe that
an approach under which a partnership
redetermines a partner's net section 751
unrealized gain or loss to account for sec-
tion 734(b) basis adjustments would be
both administratively burdensome and
would accelerate ordinary income unnec-
essarily. See Examples 5 and 6 in § 1.751-
1(g) of the proposed regulations. Gain rec-
ognized in this event is generally capital;
however, if the partnership makes an elec-
tion under § 1.755-1(c)(2)(vi), then the
partner must characterize all or a portion
of the gain recognized under this rule as
ordinary income or a dividend, as appro-
priate, to preserve the character of the gain
in the adjusted asset. See Example 9 in
§ 1.751-1(g) of the proposed regulations.

These proposed regulations also allow
distributee partners to elect to recognize
capital gain in certain circumstances to
avoid decreases to the basis of distributed
section 751 property. Elective capital gain
recognition is appropriate to eliminate a

negative section 732(a)(2) or (b) basis ad-
justment to the asset or assets received in
distribution if, and to the extent that, the
distributee partner's net section 751 unre-
alized gain would otherwise be greater
immediately after the distribution than it
was immediately before the distribution
(or would cause the distributee partner's
net section 751 unrealized loss to be less
immediately after the distribution than it
was immediately before the distribution).
For example, elective capital gain recog-
nition is appropriate if a partner with zero
basis in its partnership interest receives a
distribution of partnership section 751
property with basis in the hands of the
partnership equal to its value, and the dis-
tribution otherwise increases the distribu-
tee partner's net section 751 unrealized
gain.

### 4. Miscellaneous

#### A. Section 751(a)

As described in Parts 2.A and 2.B of
this preamble, these proposed regulations
generally defer the recognition of ordinary
income upon a distribution when the part-
ner's unrealized gain and loss in the part-
nership's section 751 property is pre-
served through the application of the
principles of section 704(c). This ap-
proach is consistent with the 1984 amend-
ment to section 704(c). By mandating the
application of section 704(c) principles,
that amendment partially severed the re-
lationship that had generally existed be-
tween a partner's distributive share (that
is, the right to share in the economic gain
or loss) associated with a partnership item
and the partner's share of tax gain or loss
from the sale of that item. The IRS and the
Treasury Department believe that, by
mandating the application of section
704(c) principles in 1984, Congress in-
tended that impacted provisions be inter-
preted consistent with this new emphasis
on tax gain or loss. Congress provided a
broad delegation of authority to the Trea-
sury Department to address these reper-
cussions of amending section 704(c) on
other provisions in subchapter K.

Some commentators interpret section
751(a) as limiting the amount of ordinary
income that a transferor partner may rec-
ognize upon a transfer of a partnership
interest to the amount of any money or

property received by the transferor part-
ner, without taking into account the total
amount of ordinary income attributable to
the partnership interest transferred that re-
lates to section 751 property. However,
interpreting section 751(a) as limiting or-
dinary income in this way would contra-
vene Congress's intent to tax partners on
their shares of partnership ordinary in-
come as determined by applying section
704(c) principles. The IRS and the Trea-
sury Department believe that section
751(a) should be interpreted in a manner
that accounts for the impact of section
704(c). Thus, these proposed regulations
provide that the amount of money or the
fair market value of property received for
purposes of section 751(a) takes into ac-
count the transferor partner's share of in-
come or gain from section 751 property.

The IRS and the Treasury Department
alternatively considered addressing this
issue by deeming a partner that sells or
exchanges its partnership interest to re-
ceive a distribution of the partner's share
of the section 751 property, followed by a
sale of the property back to the partner-
ship for its fair market value, recognizing
the deferred ordinary income inherent in
the section 751 property. The partner
would then be deemed to contribute the
cash proceeds to the partnership thereby
increasing the partner's basis in the part-
ner's partnership interest. Finally, upon
the sale or exchange of the partnership
interest, the partner would recognize the
appropriate amount of capital loss. This
potential multi-step deemed approach
would result in additional complexity and
would reach the same result that the cur-
rent regulations under § 1.751-1(a) reach
as clarified by these proposed regulations.
Therefore, the IRS and the Treasury De-
partment are not proposing this alternative
approach.

#### B. Previously Contributed Property Exception

Section 751(b)(2)(A) provides that sec-
tion 751(b) does not apply to a distribu-
tion of property that the distributee con-
tributed to the partnership ("previously
contributed property exception"). Unlike
other provisions in subchapter K that in-
clude similar previously contributed prop-
erty exceptions, the current regulations

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under section 751(b) do not contain suc-
cessor rules for purposes of applying the
section 751(b) previously contributed
property exception. These proposed regu-
lations add successor rules to section
751(b) similar to the successor rules con-
tained in other previously contributed
property exceptions within subchapter K.

### C. Mergers and Divisions

A commentator requested guidance
confirming how the rules of section
751(b) apply in the case of an incorpora-
tion, merger, or division of a partnership.
The proposed regulations do not adopt
this comment because the IRS and the
Treasury Department believe such guid-
ance is beyond the scope of these pro-
posed regulations.

#### D. Substantial Appreciation Test

These proposed regulations also make
a number of technical corrections to ac-
count for changes in the law since the
issuance of existing regulations under sec-
tion 751. For example, these proposed
regulations remove the language "sub-
stantially appreciated" from the first sen-
tence of § 1.751-1(a)(1), which applies
with respect to sales or exchanges of an
interest in a partnership. In addition to
conforming the language of the regula-
tions to that of the Code, this change is
intended to clarify that, upon a sale or
exchange of a partnership interest, unreal-
ized receivables and inventory items are
treated in the same manner. Thus, a trans-
feror partner may recognize an ordinary
loss with respect to inventory items pur-
suant to section 751(a) to the extent the
transferor would be allocated a net ordi-
nary loss pursuant to § 1.751-1(a)(2).
These proposed regulations also update
the definition of "inventory items which
have appreciated substantially in value"
with respect to section 751(b) to reflect
the 1993 amendment to the statute that
eliminated the 10-percent test from the
definition of "substantial appreciation."
See Public Law 103-66, Sec.
13206(e)(1). These proposed regulations
also clarify that unrealized receivables are
not included in the term "inventory items
which have appreciated substantially in
value."

#### E. Other Changes Relating to Revaluations

Finally, these proposed regulations ad-
dress some of the comments received in
response to Notice 2009-70 (2009-2 CB
255), in which the IRS and the Treasury
Department requested comments on,
among other things, whether additional
events should be added to the list of
events permitting a revaluation of partner-
ship property pursuant to § 1.704-
1(b)(2)(iv)(f) and whether, in a tiered part-
nership structure, a revaluation at one
partnership in the tier should permit an-
other partnership in the tier to revalue that
partnership's property. Commentators
recommended that partnership recapital-
izations (changes to the way partners
agree to share partnership profits and
losses) be added as a permissible revalu-
ation event. The IRS and the Treasury
Department agree that partnership recapi-
talizations should be added as a permissi-
ble event because, absent providing for a
special allocation of any unrealized gain
or loss in partnership assets that arose
prior to the recapitalization, a revaluation
is necessary to preserve each partner's
share of such unrealized amounts. In ad-
dition, commentators recommended that a
partnership in a tiered partnership struc-
ture be able to revalue its partnership
property if another partnership in the
tiered structure was permitted to revalue
its partnership property. The IRS and the
Treasury Department agree and believe
that permitting successive revaluations in
a tiered partnership structure is necessary
to properly allocate items with respect to a
reverse section 704(c) allocation to the
appropriate partner.

## Availability of IRS Documents

IRS notices cited in this preamble are
made available by the Superintendent of
Documents, U.S. Government Printing
Office, Washington, DC 20402.

## Effect on Other Documents

The following publication will be ob-
solete as of the date of publication of a
Treasury decision adopting these rules as
final regulations in the Federal Register:
Rev. Rul. 84-102 (1984-2 CB 119).

## Proposed Effective/Applicability Date

The regulations, as proposed, apply to
distributions occurring in any taxable pe-
riod ending on or after the date of publi-
cation of a Treasury decision adopting
these rules as final regulations in the Fed-
eral Register. The rules contained in
§ 1.751-1(a)(2) would apply to transfers
of partnership interests that occur on or
after November 3, 2014. However, the
rules contained in § 1.751-1(a)(2) are a
clarification of existing rules, and no in-
ference is intended from the change to
§ 1.751-1(a)(2) with respect to sales or
exchanges of partnership interests prior to
the effective date for § 1.751-1(a)(2). The
rules contained in § 1.751-1(a)(3) con-
tinue to apply to transfers of partnership
interests that occur on or after December
15, 1999. A partnership and its partners
would be able to rely on § 1.751-1(b)(2)
of these proposed regulations for purposes
of determining a partner's interest in the
partnership's section 751 property on or
after November 3, 2014, provided the
partnership and its partners apply each of
§ 1.751-1(a)(2), § 1.751-1(b)(2), and
§ 1.751-1(b)(4) of these proposed regula-
tions consistently for all partnership dis-
tributions and sales or exchanges, includ-
ing for any distributions and sales or
exchanges the partnership makes after a
termination of the partnership under sec-
tion 708(b)(1)(B).

## Special Analyses

It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866, as supplemented by
Executive Order 13653. Therefore, a reg-
ulatory assessment is not required. It has
also been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations. It is hereby certified that the
collection of information in these regula-
tions will not have a significant economic
impact on a substantial number of small
entities. This certification is based on the
fact that the amount of time necessary to
prepare the required disclosure is not
lengthy and few small businesses are
likely to be partners or partnerships re-
quired to make the disclosures required by
the rule. Accordingly, a Regulatory Flex-

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ibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Code, this notice of proposed rulemak-
ing has been submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on its impact
on small business.

## Comments and Requests for Public Hearing

The IRS and the Treasury Department
request comments on all aspects of the
proposed rules. In particular, the IRS and
the Treasury Department request com-
ments, in addition to those previously re-
quested in this preamble, on: (1) whether
and how carryover adjustments to ordi-
nary income property under sections
734(b) and 743(b) should be taken into
account under the hypothetical sale ap-
proach, (2) whether the final regulations
should exclude certain types of transac-
tions from the previously contributed
property successor rules provided in these
proposed regulations, (3) whether the reg-
ulations should specifically describe ap-
proaches as generally reasonable ap-
proaches for determining the tax
consequences of a section 751(b) distribu-
tion, and which approaches should be
specified as generally reasonable, (4)
whether the final regulations should pro-
vide rules similar to those proposed in
new § 1.755-1(c)(2)(iii) through (vi) in
§ 1.755-1(b)(5) with respect to section
743(b) adjustments in substituted basis
transactions, and (5) what disclosures the
IRS and the Treasury Department should
require from partners and partnerships
that either recognize gain under section
751(a) or (b), or rely on reverse section
704(c) allocations to defer the gain recog-
nition required by section 751(a) or (b).

The IRS and the Treasury Department
also request comments on a topic that,
although not specific to section 751, may
impact the rules under section 751. The
IRS and the Treasury Department are
aware that the regulations under § 1.1245-
1(e)(3) (concerning the interaction of sec-
tion 1245 and section 743), and § 1.1250-
1(f), by reference to § 1.1245-1(e)(3), are
out of date. The intent of the regulations
under § 1.1245-1(e)(3) is, in part, to en-
sure that a transferee partner does not rec-
ognize ordinary income with respect to

section 1245 property to the extent a sec-
tion 743 adjustment has displaced that or-
dinary income. For example, if a partner
sells in a fully taxable exchange its inter-
est in a partnership that has elected under
section 754, and the selling partner recog-
nizes ordinary income under section
751(a) with respect to partnership section
1245 property, then the rules under sec-
tions 1245 and 743 are intended to ensure
that the transferee partner recognizes no
ordinary income on an immediately sub-
sequent disposition of the section 1245
property in a fully taxable transaction.
However, the regulations under § 1.1245-
1(e)(3) have not been amended to take
into account changes to subchapter K, in-
cluding the regulations under section 751,
resulting in issues and uncertainties. The
IRS and the Treasury Department are
studying these issues and request com-
ments in this area.

Finally, the IRS and the Treasury De-
partment request comments as to how sec-
tion 751(b) should interact with rules for
withholding and reporting with respect to
nonresident aliens and foreign corpora-
tions. For example, the IRS and the Trea-
sury Department are considering whether
regulations should provide that for pur-
poses of withholding under chapter 3 of
Subtitle A (for example, under section
1446), income recognized as a result of a
section 751(b) distribution is treated as
recognized by the partnership regardless
of the approach chosen to determine the
U.S. tax consequences of the section
751(b) distribution. The IRS and the Trea-
sury Department are also considering
whether additional guidance with respect
to tax or information returns (for example,
pursuant to section 6031(b) or section
6050K) is necessary for gain recognized
on section 751(b) distributions affecting
these taxpayers.

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the "Addresses"
heading. All comments will be available
at www.regulations.gov or upon request.
A public hearing will be scheduled if re-
quested in writing by any person who
submits timely written or electronic com-
ments. If a public hearing is scheduled,
notice of the date, time, and place for the

public hearing will be published in the
Federal Register.

## Drafting Information

The principal authors of these regula-
tions are Allison R. Carmody and Frank J.
Fisher, Office of the Associate Chief
Counsel (Passthroughs and Special Indus-
tries). However, other personnel from the
IRS and the Treasury Department partic-
ipated in their development.

*****

## Proposed Amendments to the Regulations

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

PART 1-INCOME TAXES

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

Par. 2. Section 1.617-4 is amended by
adding a new sentence at the end of para-
graph (c)(3)(ii)(g) to read as follows:

### § 1.617-4 Treatment of gain from disposition of certain mining property.

* * * * *

(c) * * *

(3) * * *

(ii) * * *

(g) * * * See also §§ 1.732-1(c)(2)(iii)
and 1.755-1(c)(2)(iii) for rules governing
the application of section 617 to partner-
ship property in certain situations.

* * * * *

Par. 3. Section 1.704-1 is amended by:

a. Revising paragraph (b)(2)(iv)(f) in-
troductory text.

b. Redesignating paragraph
(b)(2)(iv)(f)(5)(v)
as
paragraph

(b)(2)(iv)(f)(5)(vi).

c. Adding new paragraph
(b)(2)(iv)(f)(5)(v).

d. Designating the undesignated text
after paragraph (b)(2)(iv)(f)(5)(vi) as para-
graph (b)(2)(iv)(f)(5)(vii).

The revisions and additions read as fol-
lows:

§ 1.704-1 Partner's distributive share.

* * * * *

(b) * * *

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(2) * * *

(iv) * * *

(f) Revaluations of property. A partner-
ship agreement may, upon the occurrence
of certain events, and must in the circum-
stances described in § 1.751-1(b)(2)(iv),
increase or decrease the capital accounts
of the partners to reflect a revaluation of
partnership property (including intangible
assets such as goodwill) on the partner-
ship's books. If a partnership that revalues
its property pursuant to this paragraph
owns an interest in another partnership,
that partnership in which it owns an inter-
est may also revalue its property in accor-
dance with this section. Similarly, if an
interest in a partnership that revalues its
property pursuant to this paragraph is
owned by another partnership, the partner-
ship owning that interest may also revalue
its property in accordance with this sec-
tion. Capital accounts so adjusted will not
be considered to be determined and main-
tained in accordance with the rules of this
paragraph (b)(2)(iv) unless-

* * * * *

(5) * * *

(v) In connection with an agreement to
change (other than a de minimis change)
the manner in which the partners share
any item or class of items of income, gain,
loss, deduction or credit of the partnership
under the partnership agreement, or

* * * * *

Par. 4. Section 1.704-3 is amended in
paragraph (a)(9) by adding a sentence im-
mediately following the first sentence to
read as follows:

§ 1.704-3 Contributed property.

(a) * * *

(9) * * * If a partnership (the upper-tier
partnership) owns an interest in another
partnership (the lower-tier partnership),
and both the upper-tier partnership and the
lower-tier partnership simultaneously re-
value partnership property pursuant to
§ 1.704-1(b)(2)(iv)(f), the principles of
this paragraph (a)(9) shall apply to any
reverse section 704(c) allocations created
upon the revaluation. * * *
* * * * *

Par. 5. Section 1.732-1 is amended by
adding paragraphs (c)(2)(iii), (iv), (v),
(vi), and (vii), and revising paragraph
(c)(5) to read as follows:

§ 1.732-1 Basis of distributed property
other than money.

* * * * *

(c) * * *

(2) * * *

(iii) Property subject to section 1245.
Any increase in basis allocated to capital
gain property pursuant to the second sen-
tence in paragraph (c)(2)(ii) of this section
is not taken into account in determining
the recomputed or adjusted basis in the
property for purposes of section
1245(a)(1). Notwithstanding the prior
sentence, any depreciation or amortization
of the increase in basis that is allowed or
allowable is taken into account in comput-
ing the property's recomputed basis. In
the case of property that is subject to
section 617(d)(1), section 1250(a)(1), sec-
tion 1252(a)(1), or section 1254(a)(1),
rules similar to the rule in this paragraph
(c)(2)(iii) shall apply. See Examples 2 and
3 in § 1.755-1(c)(6).

(iv) Section 1231 property. Any in-
crease in basis allocated to capital gain
property pursuant to the second sentence
in paragraph (c)(2)(ii) of this section is not
taken into account in determining section
1231 gain and loss, as defined in section
1231(a)(3). See Examples 2 and 3 in
§ 1.755-1(c)(6).

(v) Property subject to section 1248.
Any increase in basis allocated to stock in
a foreign corporation pursuant to the sec-
ond sentence in paragraph (c)(2)(ii) of this
section or any decrease in basis allocated
to stock in a foreign corporation pursuant
to the second sentence in paragraph
(c)(2)(i) of this section is not taken into
account in determining the amount of gain
recognized on the sale or exchange of
such stock for purposes of section
1248(a). In the case of property that is
subject to section 995(c), rules similar to
the rule set forth in this paragraph
(c)(2)(v) shall apply. See Examples 8 and
9 in § 1.751-1(g).

(vi) Special rule. Any basis adjustment
to an asset that is not taken into account
under paragraph (c)(2)(iii), (iv), or (v) of
this section shall, upon a taxable disposi-
tion, be treated as gain or loss, as the case
may be, from the sale or exchange of a
capital asset with the same holding period
as the underlying asset. See Examples 2
and 3 in § 1.755-1(c)(6).

(vii) Election not to apply the provi-
sions of paragraphs (c)(2)(iii), (iv), and
(v). See § 1.755-1(c)(2)(vi) for rules re-
garding an election to have the provisions
of paragraphs (c)(2)(iii), (iv), and (v) of
this section, and § 1.755-1(c)(2)(iii), (iv),
and (v) not apply. See Examples 2 and 3 in
§ 1.755-1(c)(6).

* * * * *

(5) Effective/applicability date. This
paragraph (c) applies to distributions of
property from a partnership that occur on
or after December 15, 1999, except that
paragraphs (c)(2)(iii), (iv), (v), (vi), and
(vii) of this section apply to distributions
of property from a partnership that occur
on or after the date of publication of a
Treasury decision adopting these rules as
final regulations in the Federal Register.
* * * * *

§ 1.736-1 [Amended]

Par. 6. Section 1.736-1 is amended in
paragraph (b)(4) by removing the lan-
guage "paragraph (b)(3)(iii)" from the last
sentence and adding the language "para-
graph (b)(3)" in its place.

Par. 7. Section 1.751-1 is amended by:

a. Revising paragraphs (a)(1) and (2).

b. Revising the first sentence of para-
graph (b)(1)(i) and adding a new sentence
at the end of paragraph (b)(1)(i).

c. Removing the last four sentences of
paragraph (b)(1)(ii).

d. Revising paragraphs (b)(1)(iii) and
(b)(2) and (3).

e. Redesignating paragraphs (b)(4) and
(5) as paragraphs (b)(5) and (6).

f. Adding a new paragraph (b)(4).

g. Revising the paragraph heading of
newly designated paragraph (b)(5).

h. Further redesignating newly redesig-
nated paragraph (b)(5)(ii) as paragraph
(b)(5)(vi) and adding paragraphs (b)(5)(ii),
(iii), (iv), and (v).

i. Revising newly designated paragraph
(b)(6).

j. Revising paragraph (c)(4)(vi).

k. Adding paragraph (c)(4)(x).

l. Removing paragraphs (c)(5) and (6).

m. Revising the first and second sen-
tences of paragraph (d)(1).

n. Revising paragraphs (e), (f), and (g).
The additions and revisions read as fol-
lows:

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§ 1.751-1 Unrealized receivables and
inventory items.

(a) * * * (1) Character of amount re-
alized. To the extent that money or prop-
erty received by a partner in exchange for
all or part of his partnership interest is
attributable to his share of the value of
partnership unrealized receivables or in-
ventory items, the money or fair market
value of the property received shall be
considered as an amount realized from the
sale or exchange of property other than a
capital asset. The remainder of the total
amount realized on the sale or exchange
of the partnership interest is realized from
the sale or exchange of a capital asset
under section 741. For definition of "un-
realized receivables" and "inventory
items," see section 751(c) and (d). See
paragraph (e) of this section for the defi-
nition of section 751 property.

(2) Determination of gain or loss. The
income or loss realized by a partner upon
the sale or exchange of its interest in sec-
tion 751 property is the amount of income
or loss from section 751 property (taking
into account allocations of tax items ap-
plying the principles of section 704(c),
including any remedial allocations under
§ 1.704-3(d), and any section 743 basis
adjustment pursuant to § 1.743-1(j)(3))
that would have been allocated to the part-
ner (to the extent attributable to the part-
nership interest sold or exchanged) if the
partnership had sold all of its property in a
fully taxable transaction for cash in an
amount equal to the fair market value of
such property (taking into account section
7701(g)) immediately prior to the part-
ner's transfer of the interest in the part-
nership. Any gain or loss recognized that
is attributable to section 751 property will
be ordinary gain or loss. The difference
between the amount of capital gain or loss
that the partner would realize in the ab-
sence of section 751 and the amount of
ordinary income or loss determined under
this paragraph (a)(2) is the transferor's
capital gain or loss on the sale of its part-
nership interest. For purposes of section
751(a) and paragraph (a) of this section,
the amount of money or the fair market
value of property received by the partner
in exchange for all or part of his partner-
ship interest must take into account the
partner's share of income or gain from

section 751 property. See Example 1 in
paragraph (g) of this section. See § 1.460-
4(k)(2)(iv)(E) for rules relating to the
amount of ordinary income or loss attrib-
utable to a contract accounted for under a
long-term contract method of accounting.
* * * * *

(b) Certain distributions treated as
sales or exchanges-(1) In general. (i)
Certain distributions to which section
751(b) applies are treated in whole or in
part as sales or exchanges of property, and
not as distributions to which sections 731
through 736 apply. * * * For purposes of
section 751 and this section, a partner's
interest in the partnership's section 751
property includes allocations of tax items
applying the principles of section 704(c).
* * * * *

(iii) If a distribution is a section 751(b)
distribution, as described in paragraph
(b)(2)(i) of this section, the tax conse-
quences of the section 751(b) distribution,
as determined under paragraph (b)(3) of this
section, shall first apply, and then the rules
of sections 731 through 736 shall apply. See
paragraph (b)(5)(vi) of this section for treat-
ment of payments under section 736(a).

(2) Distributions to which section
751(b) applies-(i) Section 751(b)
amount. A distribution is a section 751(b)
distribution if it gives rise to a "section
751(b) amount" for any partner. A part-
ner's section 751(b) amount (if any) asso-
ciated with a distribution of partnership
property (including money) equals the
greatest of-

(A) The amount by which the partner's
net section 751 unrealized gain immedi-
ately before the distribution exceeds the
partner's net section 751 unrealized gain
immediately after the distribution;

(B) The amount by which the partner's
net section 751 unrealized loss immedi-
ately after the distribution exceeds the
partner's net section 751 unrealized loss
immediately before the distribution; and

(C) The amount of the partner's net
section 751 unrealized gain immediately
before the distribution, increased by the
total amount of the partner's net section
751 unrealized loss immediately after the
distribution (where neither of those num-
bers equals zero).

(ii) Net section 751 unrealized gain or
loss before a distribution. A partner's net
section 751 unrealized gain or loss immedi-

ately before a distribution equals the amount
of net income or loss, as the case may be,
from section 751 property that would be
allocated to the partner if the partnership
disposed of all of the partnership's assets for
cash in an amount equal to the fair market
value of such property (taking into account
section 7701(g)). For this purpose, a part-
ner's net section 751 unrealized gain or loss
includes any remedial allocations under
§ 1.704-3(d), and takes into account any
section 743 basis adjustment pursuant to
§ 1.743-1(j)(3) and any carryover basis ad-
justment described in §§ 1.743-1(g)(2)(ii),
1.755-1(b)(5)(iii)(D), or 1.755-1(c)(4) as
though the carryover basis adjustment was ap-
plied to the basis of new partnership section
751 property with fair market value of zero.

(iii) Net section 751 unrealized gain or
loss after a distribution. A partner's net
section 751 unrealized gain or loss imme-
diately after a distribution equals the sum
of (to the extent applicable)-

(A) With respect to a partner remaining
in the partnership immediately after the dis-
tribution (including a distributee partner re-
maining in the partnership), the amount of
net income or loss, as the case may be
(including any remedial allocations under
§ 1.704-3(d) and taking into account any
section 743 basis adjustment pursuant to
§ 1.743-1(j)(3) and any carryover basis ad-
justment described in §§ 1.743-1(g)(2)(ii),
1.755-1(b)(5)(iii)(D), or 1.755-1(c)(4) as
though the carryover basis adjustment was
applied to the basis of new partnership
section 751 property with fair market
value of zero), from section 751 property
that would be allocated to the partner if
the partnership disposed of all of the part-
nership's assets for cash in an amount
equal to the fair market value of such
property (taking into account section
7701(g)); and

(B) With respect to a partner receiving
a distribution, the amount of net income or
loss, as the case may be, from section 751
property that would be recognized by the
distributee if, immediately after the distri-
bution, the distributee disposed of the dis-
tributed assets for cash in an amount equal
to the fair market value of such property
(taking into account section 7701(g)).

(iv) Revaluation of assets. For a part-
nership that distributes money or property
(other than a de minimis amount) to a
partner as consideration for an interest in

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the partnership, and that owns section 751
property immediately after the distribu-
tion, if the partnership maintains capital
accounts in accordance with § 1.704-
1(b)(2)(iv), the partnership must revalue
its assets immediately prior to the distri-
bution in accordance with § 1.704-
1(b)(2)(iv)(f). If a partnership does not
maintain capital accounts in accordance
with § 1.704-1(b)(2)(iv), the partnership
must comply with this section by comput-
ing its partners' shares of partnership gain
or loss immediately before the distribution
as if the partnership assets were sold for
cash in a fully taxable transaction (taking
into account section 7701(g)), and by tak-
ing those computed shares of gain or loss
into account under the principles of sec-
tion 704(c) (making subsequent adjust-
ments for cost recovery and other events
that affect the basis of the property). In
addition, if the partnership (upper-tier
partnership) owns another partnership di-
rectly or indirectly through one or more
partnerships (lower-tier partnership), and
the same persons own, directly or indi-
rectly (through one or more entities), more
than 50 percent of the capital and profits
interests in both the upper-tier partnership
and the lower-tier partnership, the lower-
tier partnership must also revalue its as-
sets immediately prior to the distribution
in accordance with § 1.704-1(b)(2)(iv)(f)
if the lower-tier partnership owns section
751 property. If the same persons do not
own, directly or indirectly, more than 50
percent of the capital and profits interests
in both the upper-tier partnership and the
lower-tier partnership, the upper-tier part-
nership must allocate its distributive share
of the lower-tier partnership's items
among its partners in a manner that re-
flects the allocations that would have been
made had the lower-tier partnership reval-
ued its property.

(3) Tax consequences of a section
751(b) distribution-(i) Reasonable ap-
proach. In the case of a section 751(b)
distribution described in paragraph (b)(2)
of this section, the partnership must
choose a reasonable approach that is con-
sistent with the purpose of section 751(b)
under which each partner with a section
751(b) amount recognizes ordinary in-
come (or takes it into account by elimi-
nating a basis adjustment) equal to that
section 751(b) amount immediately prior

to the section 751(b) distribution. In cer-
tain circumstances described in paragraph
(b)(3)(ii) of this section, a distributee part-
ner may also be permitted or required to
recognize capital gain. To be reasonable,
an approach must conform to the general
principles and anti-abuse rules described
in paragraph (b)(4) of this section. An
approach is not necessarily unreasonable
merely because another approach would
result in a higher aggregate tax liability.
Once the partnership has adopted a rea-
sonable approach, it must apply that ap-
proach consistently for all section 751(b)
distributions, including for any distribu-
tions the partnership makes after a termi-
nation of the partnership under section
708(b)(1)(B). If the application of the ad-
opted approach to a later section 751(b)
distribution produces results inconsistent
with the purpose of section 751, the part-
nership must adopt another reasonable ap-
proach that achieves the purposes of sec-
tion 751 for that distribution only. See
Example 3 through Example 8 in para-
graph (g) of this section.

(ii) Gain Recognition-(A) Mandatory
recognition. A partner's net section 751
unrealized gain or net section 751 unreal-
ized loss for purposes of paragraph
(b)(3)(i) of this section is determined be-
fore taking into account any basis adjust-
ments required by paragraph (b)(3)(iii) of
this section. In certain instances, the ap-
plication of paragraph (b)(3)(iii) of this
section may cause a partner to receive
distributed property with a basis that dif-
fers from the basis of the property in the
hands of the distributing partnership. If an
adjustment to the basis of the distributed
section 751 property results in a section
734(b) basis adjustment, and that basis
adjustment would have altered the amount
of net section 751 unrealized gain or loss
computed under paragraph (b)(2) of this
section if the section 734(b) adjustment
had been included immediately prior to
the distribution, then the distributee part-
ner must recognize capital gain immedi-
ately prior to the distribution in an amount
sufficient to eliminate that section 734(b)
basis adjustment. See Examples 5 and 6 in
paragraph (g) of this section. If, however,
the partnership makes an election under
§ 1.755-1(c)(2)(vi), then the partner must
characterize all or a portion of the gain
recognized under this paragraph as ordi-

nary income or a dividend, as appropriate,
to preserve the character of the gain in the
adjusted asset. See Example 9 in para-
graph (g) of this section.

(B) Elective recognition. A distributee
partner may elect to recognize capital gain
(in addition to amounts required to be
recognized under this section) to eliminate
section 732(a)(2) or (b) basis adjustments
to the asset or assets received in distribu-
tion if, and to the extent that, the basis
adjustments required by paragraph
(b)(3)(iii) of this section would otherwise
cause the distributee partner's net section
751 unrealized gain to be greater immedi-
ately after the distribution than it was im-
mediately before the distribution or would
cause the distributee partner's net section
751 unrealized loss to be less immediately
after the distribution than it was immedi-
ately before the distribution. A distributee
partner elects under this paragraph
(b)(3)(ii)(B) by providing the partnership
with written notification of its intent to
make the election and reporting the capital
gain on its return. An extension of time to
make an election under this paragraph
(b)(3)(ii)(B) will not be granted under
§ 301.9100-3 of this chapter. The require-
ment in paragraph (b)(1)(i) of this section
that a partnership apply a chosen reason-
able method consistently across all part-
nership distributions does not apply for
purposes of this paragraph. See Example 7
in paragraph (g) of this section.

(iii) Adjustments to Basis. The partner-
ship and its partners must make appropriate
adjustments to the adjusted basis of the part-
ners' interests in the partnership, and of sec-
tion 751 property and other property held by
the partnership or partners, in a manner con-
sistent with the adopted approach to reflect
any ordinary income or capital gain recog-
nized upon application of paragraph (b)(3)
of this section, and section 704(c) amounts
must be adjusted accordingly.

(4) General principles and anti-abuse
rules. (i) The purpose of section 751 is to
prevent a partner from converting its
rights to ordinary income into capital gain,
including by relying on the rules of sec-
tion 704(c) to defer ordinary income while
monetizing most of the value of the part-
nership interest. The partnership and all
partners of the partnership must apply the
rules of section 751 and § 1.751-1 in a
manner consistent with the purpose of

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section 751. Accordingly, if a principal
purpose of a transaction is to achieve a tax
result that is inconsistent with the purpose
of section 751, the Commissioner may
recast the transaction for federal tax pur-
poses as appropriate to achieve tax results
that are consistent with the purpose of
section 751. The Commissioner will de-
termine whether a tax result is inconsis-
tent with the purpose of section 751 based
on all the facts and circumstances. The
existence of one or more of the situations
set forth below is presumed to establish
that a transaction is inconsistent with the
purpose of section 751 and disclosure to
the Internal Revenue Service in accor-
dance with § 1.751-1(b)(4)(ii) is required.

(A) Circumstances in which a partner
received a distribution that would other-
wise be subject to section 751(b), but for
the application of the principles of section
704(c), and one or more of the following
conditions exist (whether at the time of
the distribution or, in the case of para-
graph (b)(4)(i)(A)(2), (3), (4), or (5) of
this section, a later date):

(1) The partner's interest in net section
751 unrealized gain is at least four times
greater than the partner's capital account
immediately after the distribution, pursuant
to § 1.704-1(b)(2)(iv) (or comparable
amount for partnerships not maintaining
capital accounts under § 1.704-1(b)(2)(iv);

(2) The partner is substantially protected
from losses from the partnership's activities
and has little or no participation in the prof-
its from the partnership's activities other
than a preferred return that is in the nature of
a payment for the use of capital;

(3) The partner engages in a transac-
tion that, at the time of the transaction,
causes the net value of the partner (or its
successor) to be less than the tax liability
that the partner (or its successor) would
incur with respect to its interest in the
partnership's section 751 property upon a
sale of its partnership interest for its fair
market value at the time of the transaction.
For this purpose, the net value of the part-
ner (or its successor) equals-

(i) The fair market value of all assets
owned by the partner (or its successor)
that may be subject to creditor's claims
under local law (including the partner's
enforceable right to contributions from its
owner or owners), less

(ii) All obligations of the partner (or its
successor) other than the partner's obliga-
tion with respect to the tax liability for
which the net value is being determined;

(4) The partner transfers a portion of its
partnership interest within five years after
the distribution in a manner that does not
trigger ordinary income recognition, and or-
dinary income or gain with respect to the
partnership interest is subject to Federal in-
come tax in the hands of the transferor part-
ner immediately before the transfer, but any
ordinary income or gain with respect to the
partnership interest is exempt from, or oth-
erwise not subject to, Federal income tax in
the hands of the transferee partner immedi-
ately after the transfer;

(5) The partnership transfers to a cor-
poration in a nonrecognition transaction
section 751 property other than pursuant
to a transfer of all property used in a trade
or business (excluding assets that are not
material to a continuation of the trade or
business); or

(B) The partners agree to change (other
than a de minimis change) the manner in
which the partners share any item or class
of items of income, gain, loss, deduction
or credit of the partnership under the part-
nership agreement and that change re-
duces the partner's net section 751 unre-
alized gain.

(ii) If a partner participates in a transac-
tion described in paragraph (b)(4)(i)(A) or
(B) of this section and does not recognize
and report its share of ordinary income from
section 751 property on its tax return for the
taxable year of the transaction, the partner
must file Form 8275-R, Regulation Disclo-
sure Statement, or any appropriate successor
form, disclosing its participation in the
transaction for the taxable year in which the
transaction occurred.

(5) Special rules. * * *

* * * * *

(ii) The transferee in a nonrecognition
transaction of all or a portion of the part-
nership interest of a contributing partner is
treated as the contributing partner for pur-
poses of section 751(b)(2) in an amount
attributable to the interest transferred.

(iii) For purposes of section 751(b)(2), if
a partnership disposes of contributed section
751 property in a nonrecognition transac-
tion, the substituted basis property (within
the meaning of section 7701(a)(42)) re-
ceived in exchange for such substituted ba-

sis property is treated as the contributed
section 751 property with regard to the con-
tributing partner. If a partnership transfers
contributed section 751 property together
with other property in a nonrecognition
transaction, the substituted basis property
(within the meaning of section 7701(a)(42))
is treated as the contributed section 751
property with regard to the contributing
partner in the same proportion as the fair
market value of the contributed section 751
property, at the time of the transfer, bears to
the fair market value of the other property
transferred at the time of the transfer. If a
transfer described in this paragraph
(b)(5)(iii) was in exchange for an interest in
an entity, the interest in the entity will not be
treated as the contributed section 751 prop-
erty with regard to the contributing partner
to the extent the value of the interest is
attributable to other property the partnership
contributed to the entity.

(iv) For purposes of section 751(b)(2),
an interest in an entity previously contrib-
uted to the partnership is not treated as
previously contributed property to the ex-
tent the value of the interest is attributable
to property the partnership contributed to
the entity after the interest was contrib-
uted to the partnership. The preceding
sentence does not apply to the extent that
the property contributed to the entity was
contributed to the partnership by the part-
ner that also contributed the interest in the
entity to the partnership.

(v) For purposes of section 751(b)(2),
the distribution of an undivided interest in
property is treated as the distribution of
previously contributed property to the ex-
tent that the undivided interest does not
exceed the undivided interest, if any, con-
tributed by the distributee partner in the
same property.

* * * * *

(6) Statements required- (i) Partner-
ship. A partnership that makes a section
751(b) distribution must submit with its
return for the year of the distribution a
statement for each section 751(b) distribu-
tion made during the year that includes the
following:

(A) A caption identifying the statement
as the disclosure of a section 751(b) distri-
bution and the date of the distribution; and

(B) A brief description of the reason-
able approach adopted by the partnership
pursuant to paragraph (b)(3)(i) of this sec-

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tion for recognizing the ordinary income;
if applicable, the capital gain required to
be recognized; and if relevant, whether the
approach varies from an approach previ-
ously adopted within any of the three tax
years preceding the current tax year.

(ii) Partner. A partnership that makes a
section 751(b) distribution during the part-
nership's tax year must submit with its re-
turn for the year of the distribution a state-
ment for each partner that has a section
751(b) amount greater than $0 in connection
with that distribution. The statement must
be attached to the statement for that partner
required by section 6031(b) and § 1.6031(b)-
1T(a), and must include the following:

(A) The date of the section 751(b) dis-
tribution;

(B) The amount of ordinary income the
partner recognized pursuant to paragraph
(b)(3)(i) of this section; and

(C) The amount of capital gain the part-
ner recognized, if any, pursuant to para-
graph (b)(3)(ii)(A) or (B) of this section.

(c) * * *

(4) * * *

(vi) With respect to any taxable year of
a partnership beginning after July 18,
1984, amounts treated as ordinary income
under section 467 are treated as ordinary
income under this section in the same
manner as amounts treated as ordinary
income under section 1245 (see paragraph
(c)(4)(iii) of this section) or section 1250
(see paragraph (c)(4)(v) of this section).
* * * * *

(x) With respect to any taxable year of
a partnership beginning after July 18,
1984, the term unrealized receivables, for
purposes of this section and sections 731,
732, and 741 (but not for purposes of
section 736), includes any market dis-

count bond (as defined in section 1278)
and any short-term obligation (as defined
in section 1283) but only to the extent of
the amount that would be treated as ordi-
nary income if (at the time of the transac-
tion described in this section or section
731, 732, or 741, as the case may be) such
property had been sold by the partnership.

* * * * *

(d) Inventory items which have sub-
stantially appreciated in value- (1) Sub-
stantial appreciation. Partnership inven-
tory items shall be considered to have
appreciated substantially in value if, at the
time of the distribution, the total fair mar-
ket value of all the inventory items of the
partnership exceeds 120 percent of the
aggregate adjusted basis for such property
in the hands of the partnership (without
regard to any special basis adjustment to
the partner). The terms "inventory items
which have appreciated substantially in
value" or "substantially appreciated in-
ventory items" refer to the aggregate of all
partnership inventory items but do not in-
clude any unrealized receivables. * * *

* * * * *

(e) Section 751 property and other
property. For purposes of paragraph (a) of
this section, section 751 property means
unrealized receivables or inventory items.
For purposes of paragraph (b) of this sec-
tion, section 751 property means unreal-
ized receivables or substantially appreci-
ated inventory items. For purposes of all
paragraphs of this section, other property
means all property (including money) that
is not section 751 property.

(f) Applicability date. The rules con-
tained in paragraph (a)(2) of this section
apply to transfers of partnership interests
that occur on or after November 3, 2014.

The rules contained in paragraph (a)(3) of
this section apply to transfers of partner-
ship interests that occur on or after De-
cember 15, 1999. The rules contained in
paragraphs (b)(2) and (3) of this section
apply to distributions of partnership prop-
erty that occur on or after the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the
Federal Register. However, a partnership
and its partners may apply the rules con-
tained in paragraph (b)(2) of this section
for purposes of determining a partner's
interest in the partnership's section 751
property on or after November 3, 2014,
provided the partnership and its partners
apply paragraphs (a)(2), (b)(2), and (b)(4)
of this section consistently for all partner-
ship sales, exchanges, and distributions,
including for any distributions the partner-
ship makes after a termination of the part-
nership under section 708(b)(1)(B).

(g) Examples. Application of the provi-
sions of section 751 may be illustrated by
the following examples. In each of Exam-
ples 2 through 9 of this paragraph (g), none
of the section 751 property qualifies as prop-
erty that the distributee previously contrib-
uted as described in section 751(b)(2)(A),
and no distribution to a retiring partner is a
payment described in section 736(a):

Example 1. (i)(A) A and B are equal partners in
personal service partnership PRS. A contributed non-
depreciable capital assets (the "Capital Assets") to PRS
with a basis and fair market value of $14,000. B con-
tributed unrealized receivables described in paragraph
(c) of this section (the "Unrealized Receivables") to
PRS with a basis of zero and fair market value of
$14,000. Later, when the fair market value of the Cap-
ital Assets had declined to $2,000, B transferred its
interest in PRS to T for $9,000 when PRS's balance
sheet (reflecting a cash receipts and disbursements
method of accounting) was as follows:

Assets

Adjusted Basis

Fair Market Value

Cash

$ 4,000

$ 4,000

Capital Assets

14,000

2,000

Unrealized Receivables

0

14,000

Total

18,000

20,000

Liabilities and Capital

Adjusted Basis

Fair Market Value

Liabilities

$2,000

$2,000

Capital:

A

15,000

9,000

B

1,000

9,000

Total

18,000

20,000

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(B) The total amount realized by B is $10,000,
consisting of the cash received, $9,000, plus $1,000,
B's share of the partnership liabilities assumed by T.
See section 752. B's interest in the partnership property
includes an interest in the partnership's Unrealized
Receivables. B's basis in its partnership interest is
$2,000 ($1,000, plus $1,000, B's share of partnership
liabilities). If section 751(a) did not apply to the sale, B
would recognize $8,000 of capital gain from the sale of
the interest in PRS. However, section 751(a) does ap-
ply to the sale.

(ii) For purposes of section 751(a), the amount of
money or the fair market value of property received
by the partner in exchange for all or part of his
partnership interest must take into account the part-
ner's share of income or gain from section 751
property. If PRS sold all of its section 751 property

in a fully taxable transaction immediately prior to the
transfer of B's partnership interest to T, B would have
been allocated $14,000 of ordinary income from the
sale of PRS's Unrealized Receivables under section
704(c). Therefore, B will recognize $14,000 of ordi-
nary income with respect to the Unrealized Receiv-
ables. The difference between the amount of capital
gain or loss that the partner would realize in the ab-
sence of section 751 ($8,000) and the amount of ordi-
nary income or loss determined under paragraph (a)(2)
of this section ($14,000) is the transferor's capital gain
or loss on the sale of its partnership interest. In this
case, B will recognize a $6,000 capital loss.

Example 2. (i) A, B, and C each contribute $120
to partnership ABC in exchange for a 1/3 interest. A,
B, and C each share in the profits and losses of ABC
in accordance with their 1/3 interest. ABC purchases

land for $100 in Year 1. At the end of Year 3, when
ABC holds $260 in cash and land with a value of $100
and has generated $90 in zero-basis unrealized receiv-
ables, ABC distributes $50 cash to C in a current
distribution, reducing C's interest in ABC from 1/3 to
1/4. ABC has a section 754 election in effect. To
determine if the distribution is a distribution to which
section 751(b) applies, ABC must apply the test set
forth in paragraph (b)(2) of this section.

(ii)(A) Pursuant to paragraph (b)(2)(iv) of this
section, ABC revalues its assets and its partners'
capital accounts are increased under § 1.704-
1(b)(2)(iv)(f) to reflect each partner's share of the
unrealized gain in the partnership's assets. Before
the distribution, ABC's balance sheet is as follows:

Tax

Book

Capital

Tax

Book

Cash

$260

$260

A

$120

$150

Unrealized Receivable

0

90

B

120

150

Real Property

100

100

C

120

150

Totals

360

450

360

450

(B) If ABC disposed of all of its assets for cash
in an amount equal to the fair market value of such
property immediately before the distribution, A, B,
and C would each be allocated $30 of net income

from ABC's section 751 property. Accordingly, A,
B, and C's net section 751 unrealized gain immedi-
ately before the distribution is $30 each under para-
graph (b)(2)(ii) of this section.

(iii)(A) After the distribution (but before taking
into account any consequences under this section),
ABC's balance sheet would be as follows:

Tax

Book

Capital

Tax

Book

Cash

$210

$210

A

$120

$150

Unrealized Receivable

0

90

B

120

150

Real Property

100

100

C

70

100

Totals

310

400

310

400

(B) If ABC disposed of all of its assets in ex-
change for cash in amounts equal to the fair market
values of those assets immediately after the distribu-
tion, A, B, and C would each still be allocated $30 of
net income from ABC's section 751 property pursu-
ant to § 1.704-3(a)(6). C did not receive any section
751 property in the distribution. Accordingly, A, B,
and C's net section 751 unrealized gain immediately
after the distribution is $30 each under paragraph
(b)(2)(iii) of this section.

(iv) Because no partner's net section 751 unre-
alized gain is greater immediately before the distri-
bution than immediately after the distribution, and
because no partner's net section 751 unrealized loss is
greater immediately after the distribution than immedi-
ately before the distribution, the distribution is not a sec-
tion 751(b) distribution under paragraph (b)(2)(i) of this
section. Accordingly, section 751(b) does not apply to the
distribution.

Example 3. (i) Assume the same facts as in
Example 2 of this paragraph (g), but assume ABC

distributes $150 cash to C in complete liquidation of
C's interest. To determine if the distribution is a distribu-
tion to which section 751(b) applies, ABC must apply the
test set forth in paragraph (b)(2) of this section.

(ii)(A) Pursuant to paragraph (b)(2)(iv) of this
section, ABC revalues its assets and its partners'
capital accounts are increased under § 1.704-
1(b)(2)(iv)(f) to reflect each partner's share of the
unrealized gain in the partnership's assets. Before
the distribution, ABC's balance sheet is as follows:

Tax

Book

Capital

Tax

Book

Cash

$260

$260

A

$120

$150

Unrealized Receivable

0

90

B

120

150

Real Property

100

100

C

120

150

Totals

360

450

360

450

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(B) If ABC disposed of all of its assets in ex-
change for cash in amounts equal to the fair market
values of these assets immediately before the distri-
bution, A, B, and C would each be allocated $30 of
net income from ABC's section 751 property. Ac-
cordingly, A, B, and C's net section 751 unrealized

gain immediately before the distribution is $30 each
under paragraph (b)(2)(ii) of this section.

(iii)(A) Because ABC has elected under section
754, and because A recognizes $30 gain on the
distribution of cash, the basis of the real property is
increased to $130 under section 734(b). After the

distribution (but before taking into account any con-
sequences under this section), ABC's balance sheet
would be as follows:

Tax

Book

Capital

Tax

Book

Cash

$110

$110

A

$120

$150

Unrealized Receivable

0

90

B

120

150

Real Property

130

100

C

0

0

Totals

240

300

240

300

(B) Because C is no longer a partner in ABC, C
would not be allocated any net income from ABC's
section 751 property immediately after the distribu-
tion. Also, C did not receive any section 751 prop-
erty in the distribution. Accordingly, C's net section
751 unrealized gain immediately after the distribu-
tion is $0 under paragraph (b)(2)(iii) of this section.

(iv) Because C's net section 751 unrealized gain is
greater immediately before the distribution than imme-
diately after the distribution, section 751(b) applies to
the distribution. Under paragraph (b)(2)(i) of this sec-
tion, C has a section 751(b) amount equal to $30, the
amount by which C's share of pre-distribution net

section 751 unrealized gain ($30) exceeds C's share of
post-distribution net section 751 unrealized gain ($0).
Accordingly, paragraph (b)(3)(i) of this section requires
C to recognize $30 of ordinary income using a reason-
able approach consistent with the purpose of this sec-
tion. ABC considers two approaches, the first of which
is described in paragraphs (v) and (vi) of this example,
and the second of which is described in paragraphs (vii)
and (viii) of this example.

(v) Assume ABC adopts an approach under
which, immediately before the section 751(b) distri-
bution, C is deemed to recognize $30 of ordinary
income. To reflect C's recognition of $30 of ordinary

income, C increases its basis in its ABC partnership
interest by $30, and the partnership increases its
basis in the unrealized receivable by the $30 of
income recognized by C, immediately before the
distribution. Provided the partnership applies the ap-
proach consistently for all section 751(b) distribu-
tions, ABC's adopted approach is reasonable. After
taking into account the tax consequences of the sec-
tion 751(b) distribution immediately prior to the cash
distribution, ABC's modified balance sheet is as
follows:

Tax

Book

Capital

Tax

Book

Cash

$260

$260

A

$120

$150

Unrealized Receivable

30

90

B

120

150

Real Property

100

100

C

150

150

Totals

390

450

390

450

(vi) After determining the tax consequences of
the section 751(b) distribution, the rules of sections
731 through 736 apply. Accordingly, C recognizes

no gain or loss under section 731(a) upon the distri-
bution. Because C recognizes no gain on the distri-
bution, the basis of the partnership real property is

not adjusted. After the distribution, ABC's balance
sheet is as follows:

Tax

Book

Capital

Tax

Book

Cash

$110

$110

A

$120

$150

Unrealized Receivable

30

90

B

120

150

Real Property

100

100

C

0

0

Totals

240

300

240

300

(vii) Assume alternatively that ABC adopts an
approach under which, immediately before the sec-
tion 751(b) distribution, C is deemed to-

(A) Receive a distribution of ABC's unrealized
receivables with a fair market value of $30 and a tax
basis of $0;

(B) Sell the unrealized receivable to ABC in
exchange for $30, recognizing $30 of ordinary in-
come; and

(C) Contribute the $30 to ABC. Provided the
partnership applies the approach consistently for all
section 751(b) distributions, ABC's adopted ap-
proach is reasonable. After taking into account the

tax consequences of the section 751(b) distribution
immediately prior to the cash distribution, ABC's
modified balance sheet is the same as the balance
sheet shown in paragraph (v) of this example.

(viii) After determining the tax consequences of
the section 751(b) distribution, the rules of sections
731 through 736 apply. The tax consequences under

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the rules of sections 731 through 736 are the same
tax consequences described in paragraph (vi) of this
example.

Example 4. (i) A and B are equal partners in a
partnership, AB, that owns Unrealized Receivable
with a fair market value of $50 and nondepreciable
real property with a basis of $50 and a fair market
value of $100. A has an adjusted basis in its part-
nership interest of $25, and B has an adjusted basis

in its partnership interest of $50. The partnership has
a section 754 election in effect, and B has a basis
adjustment under section 743(b) of $25 that is allo-
cated to Unrealized Receivable. AB distributes Un-
realized Receivable to A in a current distribution. To
determine if the distribution is a distribution to
which section 751(b) applies, AB must apply the test
set forth in paragraph (b)(2) of this section.

(ii)(A) AB makes a non-mandatory revaluation
of its assets and its partners' capital accounts are
increased under § 1.704-1(b)(2)(iv)(f) to reflect each
partner's share of the unrealized gain in the partner-
ship's assets. Before the distribution, AB's balance
sheet is as follows:

Tax

Basis Adj.

Book

Capital

Tax

Special Basis

Book

Unrealized Receivable

0

25

50

A

25

75

Real Property

50

100

B

25

25

75

Totals

50

25

150

50

25

150

(B) If AB disposed of all of its assets in exchange
for cash in amounts equal to the fair market values of
these assets immediately before the distribution, A
and B would each be allocated $25 of net income
from AB's section 751 property. However, B's net
income from Unrealized Receivable would be offset

by its $25 section 743 adjustment. § 1.743-1(j)(3).
Accordingly, A and B's net section 751 unrealized
gain immediately before the distribution are $25 and
$0, respectively, under paragraph (b)(2)(ii) of this
section.

(iii)(A) After the distribution (but before taking
into account any consequences under this section),
AB's balance sheet would be as follows:

Tax

Basis Adj.

Book

Capital

Tax

Carryover Adjustment

Book

Carryover Adjustment

25

0

A

25

25

Real Property

50

100

B

25

25

75

Totals

50

25

100

50

25

100

(B) If AB disposed of all of its assets in exchange
for cash in amounts equal to the fair market values of
those assets immediately after the distribution, no
partner would be allocated net income or loss from
section 751 property. However, B has a carryover
basis adjustment to ordinary income property of $25
under §§ 1.743-1(g)(2)(ii) and 1.755-1(c)(4), which
B must treat as applied to section 751 property with
fair market value of $0 pursuant to paragraph
(b)(2)(ii) of this section. Accordingly, B's net sec-
tion 751 unrealized loss immediately after the distri-
bution is $25 under paragraph (b)(2)(iii)(A) of this
section. If, immediately after the distribution, A dis-
posed of Unrealized Receivable in exchange for $50
cash, A would recognize $50 of net income from
section 751 property. Accordingly, A's net section
751 unrealized gain immediately after the distribu-

tion is $50 under paragraph (b)(2)(iii)(B) of this
section.

(iv) Because B's net section 751 unrealized loss
immediately after the distribution ($25) exceeds B's
net section 751 unrealized loss immediately before
the distribution ($0), the distribution is a section
751(b) distribution. Under paragraph (b)(2)(i) of this
section, B has a section 751(b) amount equal to $25,
the difference of B's share of pre-distribution net
section 751 unrealized gain ($0) and B's share of
post-distribution net section 751 unrealized loss
($25). Accordingly, paragraph (b)(3)(i) of this sec-
tion requires B to account for $25 of ordinary in-
come using a reasonable approach consistent with
the purpose of this section.

(v) Assume AB adopts an approach under which,
immediately before the section 751(b) distribution, B
is deemed to-

(A) Receive a distribution of Unrealized Receiv-
able with a fair market value of $25 and a tax basis
of $25 (which consists of B's section 743(b) basis
adjustment and is determined solely for purposes of
applying a reasonable method consistent with the
purposes of section 751(b));

(B) Sell Unrealized Receivable to AB in ex-
change for $25, so that B recognizes $0 of ordinary
income, and AB receives Unrealized Receivable
with a basis of $25; and

(C) Contribute the $25 to AB. Provided the part-
nership applies the approach consistently for all sec-
tion 751(b) distributions, AB's adopted approach is
reasonable. After taking into account the tax conse-
quences of the section 751(b) distribution, AB's
modified balance sheet is as follows:

Tax

Book

Capital

Tax

Book

A

0

25

Real Property

50

100

B

50

75

Totals

50

100

50

100

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(vi) After determining the tax consequences of
the section 751(b) distribution, the rules of sections
731 through 736 apply. Accordingly, A recognizes
no gain on the distribution of Unrealized Receivable,
which A takes with a basis of $25.

Example 5. Capital Gain Recognition Required.
(i) A, B, and C are each 1/3 partners in a partnership,
ABC, that holds Unrealized Receivable 1 with a fair
market value of $90, Unrealized Receivable 2 with a

fair market value of $30, and nondepreciable real
property with a fair market value of $180. The part-
nership has a section 754 election in effect. Each of
the partners has an adjusted basis in its partnership
interest of $0 with a fair market value of $100. None
of the partners has a capital loss carryforward. ABC
distributes to A Unrealized Receivable 1 in a current
distribution. To determine if the distribution is a
distribution to which section 751(b) applies, ABC

must apply the test set forth in paragraph (b)(2) of
this section.

(ii)(A) Pursuant to paragraph (b)(2)(iv) of this
section, ABC revalues its assets and its partners'
capital accounts are increased under § 1.704-
1(b)(2)(iv)(f) to reflect each partner's share of the
unrealized gain in the partnership's assets. Before
the distribution, ABC's balance sheet is as follows:

Tax

Book

Capital

Tax

Book

Unrealized Receivable 1

$0

$90

A

$0

$100

Unrealized Receivable 2

0

30

B

0

100

Real Property

0

180

C

0

100

Totals

0

300

0

300

(B) If ABC disposed of all of its assets for cash
in an amount equal to the fair market value of such
property immediately before the distribution, A, B,
and C would each be allocated $40 of net income
from ABC's section 751 property ($30 each from

Unrealized Receivable 1 and $10 each from Unreal-
ized Receivable 2). Accordingly, A, B, and C's net
section 751 unrealized gain immediately before the
distribution is $40 each under paragraph (b)(2)(ii) of
this section.

(iii)(A) After the distribution (but before taking
into account any consequences under this section),
ABC's balance sheet would be as follows:

Tax

Book

Capital

Tax

Book

Unrealized

$0

$30

A

$0

$10

Receivable 2

B

0

100

Real Property

0

180

C

0

100

Totals

0

210

0

210

(B) If ABC disposed of all of its assets in ex-
change for cash in amounts equal to the fair market
values of those assets immediately after the distribu-
tion, A, B, and C would each be allocated $10 of net
income from ABC's section 751 property ($10 each
from Unrealized Receivable 2). If immediately after
the distribution, A disposed of Unrealized Receiv-
able 1 in exchange for $90 cash, A would recognize
$90 of net income from section 751 property. Ac-
cordingly, B and C's net section 751 unrealized gain
immediately after the distribution is $10 each under
paragraph (b)(2)(iii)(A) of this section, and A's is
$100 under paragraphs (b)(2)(iii)(A) and (B) of this
section.

(iv) Because B and C's net section 751 unreal-
ized gain is greater immediately before the distribu-
tion than immediately after the distribution, the dis-
tribution is a section 751(b) distribution. Under
paragraph (b)(2)(i) of this section, each of B and C
has a section 751(b) amount equal to $30, the
amount by which each partner's share of pre-
distribution net section 751 unrealized gain ($40)

exceeds its share of post-distribution net section 751
unrealized gain ($10). Accordingly, paragraph
(b)(3)(i) of this section requires each of B and C to
recognize $30 of ordinary income using a reasonable
approach consistent with the purpose of this section.
ABC considers three approaches, the first of which is
described in paragraphs (v) and (vi) of this example,
the second of which is described in paragraphs (vii)
and (viii) of this example, and the third of which is
described in paragraph (ix) of this example.

(v) Assume ABC adopts an approach under
which, immediately before the section 751(b) distri-
bution, B and C are each deemed to recognize $30 of
ordinary income. To reflect B and C's recognition of
$30 of ordinary income, B and C increase their bases
in their ABC partnership interests by $30 each, and
the partnership increases its basis in Unrealized Re-
ceivable 1 by $60 immediately before the distribu-
tion to A. Following the distribution to A, A's basis
in Unrealized Receivable 1 is $0 under section
732(a)(2). Because ABC has elected under section
754, the distribution of Unrealized Receivable 1 to A

would result in a $60 section 734(b) adjustment to
Unrealized Receivable 2. See § 1.755-1(c)(1). Be-
cause that basis adjustment would have altered the
amount of net section 751 unrealized gain or loss
computed under paragraph (b)(2) of this section, A
must recognize $60 of capital gain prior to the dis-
tribution of Unrealized Receivable 1 pursuant to
paragraph (b)(3)(ii)(A) of this section. This gain
recognition increases A's basis in its ABC partner-
ship interest by $60 immediately before the distribu-
tion to A, eliminating the section 734(b) adjustment.
See section 732(a)(2). In addition, the partnership
increases its basis in Real Property by $60 pursuant
to paragraph (b)(3)(iii) of this section, and treats A's
gain recognized as reducing A's $60 reverse section
704(c) amount in the Real Property. Provided the
partnership applies the approach consistently for all
section 751(b) distributions, ABC's adopted ap-
proach is reasonable. After taking into account the tax
consequences of the deemed gain approach described
in this example, ABC's modified balance sheet imme-
diately prior to the distribution is as follows:

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Tax

Book

Capital

Tax

Book

Unrealized Receivable 1

$60

$90

A

$60

$100

Unrealized Receivable 2

0

30

B

30

100

Real Property

60

180

C

30

100

Totals

120

300

120

300

(vi) After determining the tax consequences of
the section 751(b) distribution, the rules of sections
731 through 736 apply. Thus, Unrealized Receivable

1 would take a $60 basis in A's hands under section
732(a), and no section 734(b) adjustment would be

made to Unrealized Receivable 2. After the distribu-
tion, ABC's balance sheet is as follows:

Tax

Book

Capital

Tax

Book

Unrealized Receivable 2

$0

$30

A B

$0 30

$10 100

Real Property

60

180

C

30

100

Totals

60

210

60

210

(vii) Assume alternatively that ABC adopts an
approach under which, immediately before the sec-
tion 751(b) distribution, B and C are each deemed to:

(A) Receive a distribution of Unrealized Receiv-
able 1 with a fair market value of $30 and tax basis
of $0;

(B) Sell the unrealized receivable to ABC for
$30, recognizing $30 of ordinary income; and

(C) Contribute the $30 to ABC. For the same
reasons stated in paragraph (v) of this example, A
recognizes capital gain of $60. To accomplish this,
A, immediately before the section 751(b) distribu-
tion, is deemed to:

(1) Receive a distribution of Real Property with
a fair market value of $60 and tax basis of $0;

(2) Sell the Real Property to ABC for $60, rec-
ognizing $60 of capital gain; and

(3) Contribute the $60 to ABC.

(viii) The partnership treats the $60 of gain rec-
ognized by A as reducing A's $60 reverse section
704(c) amount in the Real Property. Provided the
partnership applies the approach consistently for all
section 751(b) distributions, ABC's adopted ap-
proach is reasonable. Before taking into account the
tax consequences of the section 751(b) distribution,
ABC's balance sheet is the same as the balance sheet
shown in paragraph (v) of this example. After deter-
mining the tax consequences of the section 751(b)
distribution, the rules of sections 731 through 736
apply. The tax consequences under the rules of sec-

tions 731 through 736 are the same tax consequences
described in paragraph (vi) of this example.

(ix) Assume alternatively that A does not recog-
nize capital gain of $60. As a result, upon the dis-
tribution of Unrealized Receivable 1 to A, ABC
makes a $60 section 734(b) adjustment to Unrealized
Receivable 2. The adopted approach is not reason-
able because it is contrary to paragraph (b)(3)(ii)(A)
of this section.

Example 6. Capital Gain Recognition Required.
(i)(A) Assume the same facts as Example 5 of this
paragraph (g), except that Unrealized Receivable 1
has a $9 tax basis, and each of the partners has an
adjusted basis in its partnership interest of $3. Before
the distribution, ABC's balance sheet is as follows:

Tax

Book

Capital

Tax

Book

Unrealized Receivable 1

$9

$90

A

$3

$100

Unrealized Receivable 2

0

30

B

3

100

Real Property

0

180

C

3

100

Totals

9

300

9

300

(B) If ABC disposed of all of its assets for cash
in an amount equal to the fair market value of such
property immediately before the distribution, A, B,
and C would each be allocated $37 of net income
from ABC's section 751 property ($27 each from

Unrealized Receivable 1 and $10 each from Unreal-
ized Receivable 2). Accordingly, A, B, and C's net
section 751 unrealized gain immediately before the
distribution is $37 each under paragraph (b)(2)(ii) of
this section.

(ii)(A) After the distribution (but before taking
into account any consequences under this section),
ABC's balance sheet would be as follows:

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Tax

Book

Capital

Tax

Book

Unrealized

$6

$30

A

$0

$10

Receivable 2

B

3

100

Real Property

0

180

C

3

100

Totals

6

210

6

210

(B) If ABC disposed of all of its assets for cash
in an amount equal to the fair market value of such
property immediately after the distribution, taking
into account the $6 section 734(b) adjustment allo-
cated to Unrealized Receivable 2, A, B, and C would
each be allocated $8 of net income from ABC's
section 751 property ($8 each from Unrealized Re-
ceivable 2). If, immediately after the distribution, A
disposed of Unrealized Receivable 1 for cash in an
amount equal to its fair market value, A would
recognize $87 of net income from section 751 prop-
erty. Accordingly, B and C's net section 751 unre-
alized gain immediately after the distribution is $8
each under paragraph (b)(2)(iii)(A) of this section,
and A's is $95 under paragraphs (b)(2)(iii)(A) and
(B) of this section.

(iii) Because B and C's net section 751 unreal-
ized gain is greater immediately before the distribu-
tion than immediately after the distribution, the dis-
tribution is a section 751(b) distribution. Under
paragraph (b)(2)(i) of this section, each of B and C
has a section 751(b) amount equal to $29, the
amount by which each partner's share of pre-

distribution net section 751 unrealized gain ($37)
exceeds its share of post-distribution net section 751
unrealized gain ($8). Accordingly, paragraph
(b)(3)(i) of this section requires each of B and C to
recognize $29 of ordinary income using a reasonable
approach consistent with the purpose of this section.
ABC considers two approaches, the first of which is
described in paragraphs (iv) and (v) of this example,
and the second of which is described in paragraphs
(vi) and (vii) of this example.

(iv) Assume ABC adopts an approach under
which, immediately before the section 751(b) distri-
bution, B and C are each deemed to recognize $29 of
ordinary income. To reflect B and C's recognition of
$29 of ordinary income, B and C increase their bases
in their ABC partnership interests by $29 each, and
the partnership increases its basis in Unrealized Re-
ceivable 1 by $58 to $67 immediately before the
distribution to A. Following the distribution to A,
A's basis in Unrealized Receivable 1 is $3 under
section 732(a)(2). Because ABC has elected under
section 754, the distribution of Unrealized Receiv-
able 1 to A would result in a $64 section 734(b)

adjustment to Unrealized Receivable 2 (rather than
the $6 section 734(b) adjustment computed prior to
the application of this section). See § 1.755-1(c)(1).
Because that additional basis adjustment would have
altered the amount of net section 751 unrealized gain
or loss computed under paragraph (b)(2) of this
section, A must recognize $58 of capital gain prior to
the distribution of Unrealized Receivable 1 pursuant
to paragraph (b)(3)(ii)(A) of this section. This gain
recognition increases A's basis in its ABC partner-
ship interest by $58 to $61 immediately before the
distribution to A. In addition, the partnership in-
creases its basis in Real Property by $58 pursuant to
paragraph (b)(3)(iii) of this section, and treats A's
gain recognized as reducing A's $60 reverse section
704(c) amount in the Real Property. Provided the
partnership applies the approach consistently for all
section 751(b) distributions, ABC's adopted ap-
proach is reasonable. After taking into account the
tax consequences of the deemed gain approach de-
scribed in this example, ABC's modified balance
sheet immediately prior to the distribution is as fol-
lows:

Tax

Book

Capital

Tax

Book

Unrealized Receivable 1

$67

$90

A

$61

$100

Unrealized Receivable 2

0

30

B

32

100

Real Property

58

180

C

32

100

Totals

125

300

125

300

(v) After determining the tax consequences of
the section 751(b) distribution, the rules of sections
731 through 736 apply. Thus, A would take a $61 tax

basis in Unrealized Receivable 1 under section
732(a), and a $6 section 734(b) adjustment would be

made to Unrealized Receivable 2. After the distribu-
tion, ABC's balance sheet is as follows:

Tax

Book

Capital

Tax

Book

Unrealized

$6

$30

A

$0

$10

Receivable 2

B

32

100

Real Property

58

180

C

32

100

Totals

64

210

64

210

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(vi) Assume alternatively that ABC adopts an
approach under which, immediately before the sec-
tion 751(b) distribution, B and C are each deemed to:

(A) Receive a distribution of Unrealized Receiv-
able 1 with a fair market value of $29 and tax basis
of $0;

(B) Sell the unrealized receivable to ABC for
$29, recognizing $29 of ordinary income; and

(C) Contribute the $29 to ABC. For the same
reasons stated in paragraph (iv) of this example, A
recognizes capital gain of $58. To accomplish this,
A, immediately before the section 751(b) distribu-
tion, is deemed to:

(1) Receive a distribution of Real Property with
a fair market value of $58 and tax basis of $0;

(2) Sell the Real Property to ABC for $58, rec-
ognizing $58 of capital gain; and

(3) Contribute the $58 to ABC.

(vii) The partnership treats the $58 of gain rec-
ognized by A as reducing A's $60 reverse section
704(c) amount in the Real Property. Provided the
partnership applies the approach consistently for all
section 751(b) distributions, ABC's adopted ap-
proach is reasonable. After taking into account the
tax consequences of the section 751(b) distribution,
ABC's balance sheet is the same as the balance sheet
shown in paragraph (iv) of this example. After de-
termining the tax consequences of the section 751(b)
distribution, the rules of sections 731 through 736
apply. The tax consequences under the rules of sec-

tions 731 through 736 are the same tax consequences
described in paragraph (v) of this example.

Example 7. Capital Gain Recognition Elective.
(i)(A) Assume the same facts as described in Exam-
ple 6 of this paragraph (g), including that ABC
adopts the deemed gain approach described in para-
graph (iv), except that ABC does not have a section
754 election in effect. As in Example 6, each of A, B,
and C has net section 751 unrealized gain of $37
immediately before the distribution. After the distri-
bution (but before taking into account any conse-
quences under this section), ABC's balance sheet
would be as follows:

Tax

Book

Capital

Tax

Book

Unrealized

$0

$30

A

0

10

Receivable 2

B

3

100

Real Property

0

180

C

3

100

Totals

0

210

6

210

(B) If ABC disposed of all of its assets for cash
in an amount equal to the fair market value of such
property immediately after the distribution, because
there is no section 734(b) adjustment allocated to
Unrealized Receivable 2, A, B, and C would each be
allocated $10 of net income from ABC's section 751
property ($10 each from Unrealized Receivable 2).
If, immediately after the distribution, A disposed of
Unrealized Receivable 1 for cash in an amount equal
to its fair market value, A would recognize $87 of
net income from section 751 property. Accordingly,
B and C's net section 751 unrealized gain immedi-
ately after the distribution is $10 each under para-
graph (b)(2)(iii)(A) of this section, and A's is $97
under paragraphs (b)(2)(iii)(A) and (B) of this sec-
tion.

(ii) Because B and C's net section 751 unrealized
gain is greater immediately before the distribution
than immediately after the distribution, the distribu-
tion is a section 751(b) distribution. Under paragraph
(b)(2)(i) of this section B and C each have a section
751(b) amount equal to $27, the amount by which
those partners' shares of pre-distribution net section

751 unrealized gain ($37), exceeds their shares of
post-distribution net section 751 unrealized gain
($10). Accordingly, paragraph (b)(3)(i) of this sec-
tion requires each of B and C to recognize $27 of
ordinary income using a reasonable approach con-
sistent with the purpose of this section.

(iii) Assume ABC adopts an approach under
which, immediately before the section 751(b) distri-
bution, B and C are each deemed to recognize $27 of
ordinary income. To reflect B and C's recognition of
$27 of ordinary income, B and C increase their bases
in their ABC partnership interests by $27, and the
partnership increases its basis in Unrealized Receiv-
able 1 by $54 to $63 immediately before the distri-
bution to A. The distribution to A results in an
adjustment to the basis of the distributed Unrealized
Receivable 1 under section 732(a)(2), reducing the
basis of Unrealized Receivable 1 in the hands of A to
$3. Because ABC has not elected under section 754
and does not have a substantial basis reduction under
section 734(d), this $60 decrease to the basis of
Unrealized Receivable 1 will not affect the basis of
other assets held by ABC. Thus, the distribution does

not alter the amount of net section 751 unrealized
gain or loss computed under paragraph (b)(2) of this
section. Accordingly, A is not obligated under para-
graph (b)(3)(ii)(A) of this section to recognize gain
or income upon the distribution of Unrealized Re-
ceivable 1. However, A may elect to recognize $60
of capital gain under paragraph (b)(3)(ii)(B) of this
section to eliminate the section 732 basis adjustment
to the distributed Unrealized Receivable 1 which
would otherwise cause A's net section 751 unreal-
ized gain to be greater immediately after the distri-
bution than it was immediately before the distribu-
tion. This gain recognition increases A's basis in its
ABC partnership interest by $60 immediately before
the distribution to A. In addition, the partnership
increases its basis in Real Property by $60 pursuant
to paragraph (b)(3)(iii) of this section, and treats A's
gain recognized as reducing A's $60 reverse section
704(c) amount in the Real Property. A receives the
distributed Unrealized Receivable 1 with a basis of
$63, so that the distribution does not increase A's net
section 751 unrealized gain. After the distribution,
ABC's balance sheet is as follows:

Tax

Book

Capital

Tax

Book

Unrealized

$0

$30

A

0

10

Receivable 2

B

30

100

Real Property

60

180

C

30

100

Totals

60

210

60

210

Example 8. (i) A, B, and C, each domestic cor-
porations, are 1/3 partners in a domestic partnership
ABC. ABC purchased 100% of the stock in two
foreign corporations, X and Y. X and Y each have

one share of stock outstanding. ABC has a basis of
$15 in its X share with a fair market value of $150,
and a basis of $3 in its Y share with a fair market
value of $30. The earnings and profits of X that are

attributable to ABC's X stock under section 1248 are
$135; the earnings and profits of Y that are attribut-
able to ABC's Y stock are $27. ABC has a section
754 election in effect. Each of A, B, and C has a

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partnership interest with an adjusted basis of $6 and
a fair market value of $60. On January 1, 2013, ABC
distributes the Y share to A in a current distribution.
To determine if the distribution is a distribution to
which section 751(b) applies, ABC must apply the
test set forth in paragraph (b)(2) of this section.

(ii)(A) Pursuant to paragraph (b)(2)(iv) of this
section, ABC revalues its assets. Its partners' capital
accounts are increased under § 1.704-1(b)(2)(iv)(f)
to reflect each partner's share of the unrealized gain
in the partnership's assets. Before the distribution,
ABC's balance sheet is as follows (with the shares of

X and Y each reflected as having both an unrealized
receivable component and a capital gain compo-
nent):

Tax

Book

Capital

Tax

Book

X stock (total)

$15

$150

A

$6

$60

Unrealized receivable

0

135

B

6

60

Capital gain asset

15

15

C

6

60

Y stock (total)

3

30

Unrealized receivable

0

27

Capital gain asset

3

3

Totals

18

180

18

180

(B) If ABC disposed of all of its assets for cash
in an amount equal to the assets' fair market value
immediately before the distribution, A, B, and C
would each be allocated $54 of net income from
ABC's section 751 property ($45 each from X stock

and $9 each from Y stock). Accordingly, A, B, and
C's net section 751 unrealized gain immediately
before the distribution is $54 each under paragraph
(b)(2)(ii) of this section.

(iii)(A) After the distribution (but before taking
into account any consequences under this section),
ABC's balance sheet is as follows:

Tax

Book

Capital

Tax

Book

X stock (total)

$15

$150

A

$3

$30

Unrealized receivable

0

135

B

6

60

Capital gain asset

15

15

C

6

60

Totals

15

150

15

150

(B) If ABC disposed of its asset for cash in an
amount equal to the fair market value of that asset
immediately after the distribution, A, B, and C
would each be allocated $45 of net income from
ABC's section 751 property pursuant to § 1.704-
3(a)(6). A, however, received Y stock, which con-
tinues to be section 751 property in A's hands under
section 735(a), with a holding period that includes
the partnership's holding period under section
735(b). If A disposed of its Y stock for cash in an
amount equal to its fair market value, A would
recognize $27 of gain under section 751(b) on the Y
stock (a foreign corporation described in section
1248) that is included in A's income under section
1248 as a dividend to the extent of the attributable
earnings. Accordingly, B and C's net section 751
unrealized gain immediately after the distribution is
$45 each under paragraph (b)(2)(iii)(A) of this sec-
tion, and A's is $72 under paragraphs (b)(2)(iii)(A)
and (B) of this section.

(iv) Because B and C's net section 751 unreal-
ized gain is greater immediately before the distribu-
tion than immediately after the distribution, the dis-

tribution is a section 751(b) distribution. Under
paragraph (b)(2)(i) of this section, B and C each have
a section 751(b) amount equal to $9, the amount by
which those partners shares of pre-distribution net
section 751 unrealized gain ($54) exceeds their
shares of post-distribution net section 751 unrealized
gain ($45). Accordingly, paragraph (b)(3)(i) of this
section requires each of B and C to recognize $9 as
a dividend under section 1248 using a reasonable
approach consistent with the purpose of this section.
ABC considers two approaches, the first of which is
described in paragraphs (v) and (vi) of this example,
and the second of which is described in paragraph
(vii) of this example.

(v) Assume ABC adopts an approach under
which, immediately before the section 751(b) distri-
bution, B and C are each deemed to recognize $9 of
gain includible as a dividend with respect to the
distribution of the Y stock, which is treated as a sale
or exchange for purposes of section 1248. To reflect
B and C's recognition of $9 of dividend income, B
and C increase the bases in their ABC partnership
interests by $9 each, and the partnership increases its

basis in the Y share unrealized receivable component
by $18 immediately before the distribution. The por-
tion of the unrealized receivable component of the Y
share that is deemed to be sold or exchanged under
section 1248 has a new holding period beginning on
the day after the section 751(b) distribution ("the
new holding period portion"). The earnings and prof-
its of $18 attributable to the new holding period
portion of the Y share are 2/3 of the total earnings
and profits attributable to the Y share immediately
before the distribution (B and C's $18 aggregate gain
recognized under section 751(b) divided by $27, the
aggregate of all the partners' net section 751 unre-
alized gain immediately before the distribution). The
remaining earnings and profits are allocated to the
remainder of the Y share. Provided the partnership
applies the approach consistently for all section
751(b) distributions, ABC's adopted approach is rea-
sonable. After taking into account the tax conse-
quences of the deemed gain approach described in
this example, ABC's modified balance sheet imme-
diately before the distribution is as follows:

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Tax

Book

Capital

Tax

Book

X stock

$15

$150

A

$6

$60

Unrealized receivable

0

135

B

15

60

Capital gain asset

15

15

C

15

60

Y stock

21

30

New holding period portion

18

18

Unrealized receivable

0

9

Capital gain asset

3

3

Totals

36

180

36

180

(vi) After determining the tax consequences of
the section 751(b) distribution, the rules of sections
731 through 736 apply. Accordingly, the basis of the
distributed Y stock in A's hands is limited under
section 732(a)(2) to A's $6 basis in its partnership
interest. Pursuant to section 732(c)(3)(B), the $15
decrease in basis from $21 to $6 must be allocated to
the distributed components of the Y stock in propor-
tion to their respective adjusted bases. A must allo-

cate the $15 decrease in basis in the Y stock between
the new holding period portion (which has a basis of
$18) and the remainder of the Y share (which has a
basis of $3). Accordingly, A receives the new hold-
ing period portion of the Y share with an adjusted
basis of $5.14 ($6 multiplied by ($18 divided by
$21)), and the remainder of the Y share with an
adjusted basis of $0.86 ($6 multiplied by ($3 divided
by $21)). Because the basis of the distributed Y stock

in A's hands was reduced from $21 (the basis of the
Y stock in the hands of ABC) to $6 (the basis in A's
hands), ABC must increase the basis of its remaining
asset under section 734(b)(1)(B) by $15. ABC must
allocate the $15 under § 1.755-1(c)(1)(i) to the cap-
ital gain portion of the X stock. After the distribu-
tion, ABC's balance sheet is as follows:

Tax

Book

Capital

Tax

Book

X stock

$30

$150

A

$0

$30

Unrealized receivable

0

135

B

15

60

Capital gain asset

30

15

C

15

60

Totals

30

150

30

150

(vii) Assume alternatively that ABC adopts an
approach under which, immediately before the sec-
tion 751(b) distribution, B and C are each deemed to:

(A) Receive a distribution of the portion of the
partnership's Y stock with a fair market value of $9
and a tax basis of $0;

(B) Sell the Y stock back to ABC for $9, recog-
nizing $9 of gain includible as a dividend; and

(C) Contribute the $9 to ABC. ABC will be
deemed to have purchased for $18 a portion of the Y
stock unrealized receivable component, which will
have a new holding period. The deemed sale of Y
stock by B and C to ABC will be treated as a sale or
exchange for purposes of section 1248. Provided that
the partnership applies the approach consistently for
all section 751(b) distributions, Partnership ABC's
adopted approach is reasonable. After taking into
account the tax consequences of the deemed trans-
action, ABC's balance sheet is the same as the bal-
ance sheet shown in paragraph (v) of this example.
After taking into account the tax consequences of the
section 751(b) distribution, ABC's balance sheet is
the same as the balance sheet shown in paragraph
(vi) of this example.

(viii) Assume that in a later unrelated transaction,
A sells its Y stock at a time when its fair market
value, earnings and profits, and adjusted basis have
not changed. The sale of Y stock by A is a sale or
exchange subject to section 1248. Pursuant to

§ 1.732-1(c)(2)(v), in determining the dividend por-
tion of its gain on the Y stock under section 1248, A
does not take into account the $15 decrease in basis
under section 732. Accordingly, upon the sale of the
Y stock, A recognizes $9 of gain, the lesser of $9 ($0
gain on the new holding period portion ($18 fair
market value minus $18 basis) plus $9 gain on the
remainder ($12 fair market value minus $3 basis)) or
$9 (earnings and profits attributable to the remainder
of the Y share) as dividend income under section
1248. A recognizes $15 of capital gain in addition to
the $9 of dividend income ($30 amount realized
minus $15 ($6 aggregate basis in Y share plus $9
section 1248 dividend income)).

(ix) Assume that ABC also sells its X stock in a
later unrelated transaction at a time when its fair
market value has declined to $120 but earnings and
profits have remained the same. ABC has not made
an election under § 1.755-1(c)(2)(vi). In determining
the dividend portion of its gain on the X stock under
section 1248, ABC does not take into account the
$15 increase in basis under section 734(b). Upon the
sale of the stock, ABC recognizes $105, the lesser of
$105 ($120 - $15) or $135 (earnings and profits
attributable to the X stock for the partnership's hold-
ing period) as dividend income. In addition to the
$105 of gain includible as a dividend, ABC recog-
nizes $15 of capital loss ($120 amount realized mi-

nus $135 ($30 aggregate basis in X stock plus $105
section 1248 dividend income)).

Example 9. (i) Assume the same facts as in
Example 8 of this paragraph (g), except assume that
Partnership ABC makes an election under § 1.755-
1(c)(2)(vi). As in Example 8, paragraph (b)(3)(i) of
this section requires each of B and C to recognize $9
as a dividend under section 1248 using a reasonable
approach consistent with the purpose of this section
for the reasons described in paragraphs (ii) through
(iv) of Example 8. Further assume that ABC adopts
the deemed gain approach described in paragraph (v)
of Example 8. As in Example 8, B and C are each
deemed to recognize $9 of dividend income with
respect to the distribution of the Y stock, which is
treated as a sale or exchange for purposes of section
1248. To reflect B and C's recognition of $9 of
dividend income, B and C increase the bases in their
ABC partnership interests by $9 each. The partner-
ship increases its basis in the Y share unrealized
receivable component by $18 immediately before
the distribution. The portion of the unrealized receiv-
able component of the Y share that is deemed to be
sold or exchanged under section 1248 has a new
holding period beginning on the day after the section
751(b) distribution ("the new holding period por-
tion").

(ii) Because ABC makes an election under
§ 1.755-1(c)(2)(vi), the distribution of the Y share to

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A results in a $15 section 734(b) adjustment to the
unrealized receivable component of the X share.
Because that basis adjustment would have altered the
amount of net section 751 unrealized gain or loss
computed under paragraph (b)(2) of this section, A
must recognize $15 of gain with respect to the X
share pursuant to paragraph (b)(3)(ii)(A) of this sec-
tion. Also pursuant to paragraph (b)(3)(ii)(A) of this
section, A's recognition of income with respect to

the X stock is a sale or exchange for purposes of
section 1248 and begins a new holding period for
this portion of ABC's X stock, including for pur-
poses of attributing earnings and profits. This income
recognition increases A's basis in its ABC partner-
ship interest by $15 immediately before the distribu-
tion to A. In addition, the partnership increases its
basis in the X share by $15, immediately before the
distribution to A. The partnership treats the $15 of

dividend income recognized by A as reducing A's
$15 reverse section 704(c) amount in the X stock.
Provided the partnership applies the approach con-
sistently for all section 751(b) distributions, ABC's
adopted approach is reasonable. After taking into
account the tax consequences of the deemed gain
approach described above, ABC's balance sheet is as
follows:

Tax

Book

Capital

Tax

Book

X stock

$30

$150

A

$21

$60

Unrealized receivable

0

120

B

15

60

Capital gain asset

30

30

C

15

60

Y stock

21

30

Unrealized receivable

0

9

Capital gain asset

21

21

Totals

51

180

51

180

(iii)(A) After determining the tax consequences
of the section 751(b) distribution, the rules of sec-
tions 731 through 736 apply. Accordingly, the Y

stock would take a $21 basis in A's hands under
section 732(a), and no section 734(b) adjustment

would be made to the X stock. After the distribution,
ABC's balance sheet is as follows:

Tax

Book

Capital

Tax

Book

X stock

$30

$150

A

$0

$30

Unrealized receivable

0

120

B

15

60

Capital gain asset

30

30

C

15

60

Totals

30

150

30

150

(B) If the partnership sells the X stock, the gain
recognized is $120 ($150 - $30), all of which is
recharacterized as a dividend under section 1248.
Because A's recognition of $15 of dividend income
reduced A's reverse section 704(c) amount in the X
stock, this gain is allocated $45 to B, $45 to C, and
$30 to A.

Par. 8. Section 1.755-1 is amended by:

a. Adding paragraphs (c)(2)(iii), (iv),
(v), and (vi).

b. Revising the paragraph heading and
the introductory text of paragraph (c)(6).

c. Removing the paragraph heading
"Example." in paragraph (c)(6) and add-
ing "Example 1." in its place.

d. Adding Examples 2 and 3 to para-
graph (c)(6).

e. Revising paragraph (e)(2).

The additions and revisions read as fol-
lows:

§ 1.755-1 Rules for allocation of basis.

* * * * *

(c) * * *

(2) * * *

(iii) Coordination with section 1245
and similar provisions. Any increase in
basis allocated to capital gain property
pursuant to the second sentence in para-
graph (c)(2)(i) of this section is not taken
into account in determining the recom-
puted or adjusted basis in the property for
purposes of section 1245(a)(1). Notwith-
standing the prior sentence, any deprecia-
tion or amortization of the increase in
basis that is allowed or allowable is taken
into account in computing the property's
recomputed basis. In the case of property
that is subject to section 617(d)(1),
1250(a)(1), 1252(a)(1), or 1254(a)(1),
rules similar to the rule in this paragraph
(c)(2)(iii) shall apply.

(iv) Coordination with section 1231.
Any increase in basis allocated to capital
gain property pursuant to the second sen-
tence in paragraph (c)(2)(i) of this section
is not taken into account in determining
section 1231 gain and loss, as defined in
section 1231(a)(3). Any basis adjustment
to an asset not taken into account pursuant
to this paragraph (c)(2)(iv) shall be treated
as gain from the sale or exchange of a
capital asset with the same holding period
as the underlying asset.

(v) Coordination with sections 1248
and 995. Any increase in basis allocated
to stock in a foreign corporation pursuant
to the second sentence in paragraph
(c)(2)(i) of this section, or any decrease in
basis allocated to stock in a foreign cor-
poration pursuant to the second sentence
in paragraph (c)(2)(ii) of this section, is
not taken into account in determining the
amount of gain recognized on the sale or

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exchange of such stock for purposes of
section 1248(a). In the case of property
that is subject to section 995(c), rules sim-
ilar to the rule set forth in this paragraph
(c)(2)(v) shall apply.

(vi) Election not to apply the provi-
sions of paragraphs (c)(2)(iii), (iv), and
(v). A partnership may elect not to apply
paragraphs (c)(2)(iii), (iv), and (v) of this
section, and § 1.732-1(c)(2)(iii), (iv), and
(v). An election made under this para-
graph (c)(2)(vi) shall apply to all property
distributions taking place in the partner-
ship taxable year for which the election is
made and in all subsequent partnership
taxable years (including after a termina-
tion of the partnership under section
708(b)(1)(B)). An election under this
paragraph (c)(2)(vi) must be made in a
written statement filed with the partner-
ship return for the first taxable year in
which any of paragraph (c)(2)(iii), (iv), or
(v) of this section, or § 1.732-1(c)(2)(iii),
(iv), and (v), would have applied if no
election was made. An election under this
paragraph (c)(2)(vi) is valid only if the
required statement is included with a part-
nership return that is filed not later than
the time prescribed by paragraph (e) of
this section or § 1.6031(a)-1 (including
extensions thereof) for filing the return for
such taxable year. This election is a
method of accounting under section 446,
and once the election is made, it can be
revoked only with the consent of the
Commissioner. The revocation of the
election, or the making of a late election,
under this paragraph (c)(2)(vi) is a change
in method of accounting to which the pro-
visions of section 446(e) and the regula-
tions under section 446(e) apply. See para-
graph (c)(6), Example 3, of this section for
the treatment of a section 734(b) adjust-
ment if an election under this paragraph
(c)(2)(vi) is made, and certain conse-
quences of the election under section
751(b). The statement required by this
paragraph (c)(2)(vi) shall-

(A) Set forth the name and address of
the partnership making the election;

(B) Be signed by any officer, manager,
or member of the partnership who is au-
thorized (under local law or the partner-
ship's organizational documents) to make
the election and who represents to having
such authorization under penalties of per-
jury; and

(C) Contain a declaration that the part-
nership elects not to apply paragraphs
(c)(2)(iii), (iv), and (v) of this section and
§ 1.732-1(c)(2)(iii), (iv), and (v).

* * * * *

(6) Examples. The following examples
illustrate this paragraph (c):
* * * * *

Example 2. (i) A, B, and C are equal partners in
ABC. Each partner has an outside basis in its part-
nership interest of $20. ABC owns depreciable
equipment X with an adjusted basis of $30 and a fair
market value of $150 and depreciable equipment Y
with an adjusted basis of $30 and a fair market value
of $30. ABC has made an election under section 754.

(ii) The depreciable equipment X has $120 of
adjustments reflected in its adjusted basis within the
meaning of § 1.1245-2(a)(2). Accordingly, the entire
$120 of the gain with respect to depreciable equip-
ment X would be treated as gain to which section
1245(a)(1) would apply if the partnership sold the
depreciable equipment X for its fair market value.
ABC, therefore, has a $120 unrealized receivable
within the meaning of § 1.751-1(c)(4)(iii). Assume
ABC makes a current distribution of the depreciable
equipment Y to A. Because A's basis in his partner-
ship interest is only $20, A's basis in the depreciable
equipment Y will be limited to $20 under section
732(a). Under section 734(b), ABC will increase the
basis in its capital gain property by $10 and will not
adjust the basis of ordinary income property. As-
sume ABC has not made an election under § 1.755-
1(c)(2)(vi).

(iii) Allocation between classes. Pursuant to
§ 1.755-1(a)(1), ABC's $120 unrealized receivable
associated with the depreciable equipment X is
treated as a separate asset that is ordinary income
property. Thus, ABC is treated as having two assets
(each actually a component of the single asset,
equipment X) after the distribution, one that is cap-
ital gain property with a basis of $30 and a fair
market value of $30, and one that is ordinary income
property with a basis of $0 and a fair market value of
$120.

(iv) Allocation within class. ABC must allocate
the $10 basis increase entirely to the capital gain
portion of the depreciable equipment X, as it holds
no other capital gain property after it distributes the
depreciable equipment Y to A. Therefore, ABC in-
creases the basis of the capital gain property to $40.

(v) Treatment of section 734(b) adjustment. Pur-
suant to paragraph (c)(2)(iii) of this section, if ABC
sold its depreciable equipment X for $150 immedi-
ately after the distribution to A, ABC would not take
into account the $10 section 734(b) adjustment in
determining ABC's recomputed or adjusted basis in
the depreciable equipment X for purposes of section
1245(a)(1) and, accordingly, would recognize $120
of ordinary income. Also pursuant to paragraph
(c)(2)(iv) of this section, the $10 section 734(b)
adjustment is not taken into account for purposes of
determining section 1231 gain or loss. Thus, pursu-
ant to paragraph (c)(2)(vi) of this section, ABC
would recognize a $10 capital loss.

(vi) Treatment of additional depreciation and
appreciation. (A) Assume, instead, that ABC con-
tinues to own the equipment and takes additional

depreciation deductions of $16 ($15 with respect to
the original remaining $30 basis and $1 with respect
to the additional $10 basis resulting from the section
734(b) adjustment). At a time when the equipment
has appreciated in value to $170, ABC sells the
depreciable equipment X for $170 in a taxable trans-
action. In that same taxable year, ABC does not sell
any other property used in its trade or business.

(B) Pursuant to section 1245(a)(1), ABC must
recognize ordinary income in an amount by which
the lesser of the following two amounts exceeds
ABC's adjusted basis in the depreciable equipment
X-

(1) ABC's recomputed basis in the depreciable
equipment, or

(2) ABC's amount realized;

(C) Pursuant to section 1245(a)(2)(A), ABC's
recomputed basis is an amount equal to the sum of-

(1) ABC's adjusted basis of the property, plus

(2) The amount of adjustments reflected in the
adjusted basis on account of deductions allowed or
allowable.

(D) Pursuant to (c)(2)(iii) of this section, the $9
remaining section 734(b) adjustments is not taken
into account in determining ABC's recomputed or
adjusted basis in the property for purposes of section
1245(a)(1). Thus, ABC's adjusted basis in the prop-
erty is $15 (the remaining original basis). Also pur-
suant to (c)(2)(iii) of this section, however, any de-
preciation, or amortization of the section 734(b)
adjustment that is allowed or allowable is taken into
account in computing the property's recomputed ba-
sis. Thus, ABC's amount of adjustments reflected in
the adjusted basis is $136 (the original $120 adjust-
ment for depreciation deductions plus the additional
$15 adjustment for depreciation deductions plus the
additional $1 adjustment for depreciation deductions
taken with respect to the section 734(b) adjustment).
Accordingly, ABC's recomputed basis is $151 ($15
adjusted basis plus $136 of adjustments), which is
lower than ABC's amount realized of $170. ABC,
therefore, must recognize ordinary income in an
amount by which ABC's recomputed basis of $151
exceeds ABC's adjusted basis in the depreciable
equipment X. Pursuant to (c)(2)(iii) of this section,
the $9 remaining section 734(b) adjustments is not
taken into account in determining the adjusted basis
in the property for purposes of section 1245(a)(1).
Accordingly, ABC must recognize $136 of ordinary
income (the excess of ABC's $151 recomputed basis
in the depreciable equipment X over ABC's $15
adjusted basis in the depreciable equipment X).

(E) Pursuant to paragraph (c)(2)(iv) of this sec-
tion, the section 734(b) adjustment is not taken into
account in determining ABC's section 1231 gain or
loss. Accordingly, pursuant to section 1231(a)(1),
ABC recognizes $19 of capital gain (ABC's $170
amount realized on the disposition of the depreciable
equipment X over ABC's adjusted basis of $15 in
the depreciable equipment X, reduced by the $136 of
ordinary income ABC recognized under section
1245(a)(1)). Pursuant to paragraph (c)(2)(vi) of this
section, ABC also recognizes a capital loss equal to
the remaining $9 section 734(b) adjustment.

Example 3. (i) Assume the same facts as Exam-
ple 2 of this paragraph (c), except ABC has made an
election under paragraph (c)(2)(vi) of this section.

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(ii) Treatment of section 734(b) adjustment. Be-
cause ABC has made an election under paragraph
(c)(2)(vi) of this section, paragraph (c)(2)(iii) of this
section does not apply. Thus, if ABC sold its depre-
ciable equipment X immediately after the distribu-
tion to A, ABC would take into account the $10
section 734(b) adjustment in determining ABC's re-
computed or adjusted basis in the depreciable equip-
ment X for purposes of section 1245(a)(1) and, ac-
cordingly, would recognize $110 of ordinary income
(including for purposes of applying section 751).

* * * * *

(e) * * *

(2) Special rules. Paragraphs (a) and
(b)(3)(iii) of this section apply to transfers
of partnership interests and distributions
of property from a partnership that occur
on or after June 9, 2003, and paragraphs
(c)(2)(iii), (iv), (v), (vi), and (c)(6) of this
section and Examples 2 and 3 of para-
graph (c) of this section apply to distribu-
tions of property from a partnership that
occur on or after the date of publication of
a Treasury decision adopting these rules
as final regulations in the Federal Regis-
ter.

Par. 9. Section 1.995-4 is amended by
revising the section heading and adding a
new sentence at the end of paragraph
(a)(1) to read as follows:

§ 1.995-4 Gain on certain dispositions
of stock in a DISC.

(a) * * * (1) * * * But see §§ 1.732-
1(c)(2)(v) and 1.755-1(c)(2)(v) for rules
governing the application of section
995(c) to partnership property in situa-
tions in which the basis of the property is
increased or decreased under section 732
or 734(b).

* * * * *

Par. 10. Section 1.1231-1 is amended
by adding a new sentence after the third
sentence in the introductory text of para-
graph (d) to read as follows:

§ 1.1231-1 Gains and losses from the
sale or exchange of certain property
used in the trade or business.

* * * * *

(d) * * * See also §§ 1.732-1(c)(2)(iv)
and 1.755-1(c)(2)(iv) for rules governing
the application of section 1231 to partner-
ship property in situations in which the
basis of the property is increased under
section 732 or 734(b). * * *

* * * * *

§ 1.1245-2 [Amended]

Par. 11. Section 1.1245-2 is amended
by removing paragraph (c)(6)(ii) and re-
designating paragraph (c)(6)(iii) as para-
graph (c)(6)(ii).

Par. 12. Section 1.1245-4 is amended
by revising paragraphs (f)(2)(ii) and (f)(3)
and Example 2 to read as follows:

§ 1.1245-4 Exceptions and limitations.

* * * * *

(f) * * *

(2) * * *

(ii) The portion of such potential sec-
tion 1245 income which is recognized as
ordinary income under paragraphs
(b)(3)(i) and (b)(4)(i) of § 1.751-1.

(3) * * *

Example 2. Assume the same facts as in Example
1 of this paragraph (f) except that the machine had
been purchased by the partnership. Assume further
that upon the distribution, $4,000 of gain is recog-
nized as ordinary income under section 751(b). Un-
der section 1245(b)(3), gain to be taken into account
under section 1245(a)(1) by the partnership is lim-
ited to $4,000. Immediately after the distribution, the
amount of adjustments reflected in the adjusted basis
of the property is $2,000 (that is, potential section
1245 income of the partnership, $6,000, minus gain
recognized under section 751(b), $4,000). Thus, if
the adjusted basis of the machine in the hands of C
were $10,000, the recomputed basis of the machine
would be $12,000 ($10,000 plus $2,000).

* * * * *

Par. 13. Section 1.1248-1 is amended
by adding a new sentence at the end of
paragraph (a)(1) to read as follows:

§ 1.1248-1 Treatment of gain from
certain sales or exchanges of stock in
certain foreign corporations.

(a) * * * (1) * * * See also §§ 1.732-
1(c)(2)(v) and 1.755-1(c)(2)(v) for rules
governing the application of section 1248
to partnership property in situations in
which the basis of the property is in-
creased or decreased under section 732 or
734(b).

* * * * *

Par. 14. Section 1.1250-1 is amended
by revising the section heading and add-
ing a new sentence at the end of paragraph
(f) to read as follows:

§ 1.1250-1 Gain from disposition of
certain depreciable property.

(f) * * * See also §§ 1.732-1(c)(2)(iii)
and 1.755-1(c)(2)(iii) for rules governing
the application of section 1250 to partner-
ship property in situations in which the
basis of the property is increased under
section 732 or 734(b).

* * * * *

Par. 15. Section 1.1252-2 is amended
by adding a new sentence at the end of
paragraph (c)(2)(vii) to read as follows:

§ 1.1252-2 Special rules.

* * * * *

(c) * * *

(2) * * *

(vii) * * * See also § 1.732-
1(c)(2)(iii) and 1.755-1(c)(2)(iii) for rules
governing the application of section 1252
to partnership property in situations in
which the basis of the property is in-
creased under section 732 or 734(b).

* * * * *

Par. 16. Section 1.1254-5 is amended
by revising the introductory text of para-
graph (b)(1) to read as follows:

§ 1.1254-5 Special rules for partner-
ships and their partners.

* * * * *

(b) Determination of gain treated as
ordinary income under section 1254 upon
the disposition of natural resource recap-
ture property by a partnership-(1) Gen-
eral rule. Upon a disposition of natural
resource recapture property by a partner-
ship, the amount treated as ordinary in-
come under section 1254 is determined at
the partner level. See also §§ 1.732-
1(c)(2)(iii) and 1.755-1(c)(2)(iii) for rules
governing the application of section 1254
to partnership property in certain situa-
tions. Each partner must recognize as or-
dinary income under section 1254 the
lesser of-

* * * * *

Par. 17. Section 1.6050K-1 is amended
by revising paragraph (a)(4)(ii) and add-
ing a new sentence after the third sentence
of paragraph (c) introductory text to read
as follows:

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§ 1.6050K-1 Returns relating to sales or
exchanges of certain partnership
interests.

(a) * * *

(4) * * *

(ii) Section 751 property. For purposes
of this section, the term "section 751 prop-
erty" means unrealized receivables, as de-

fined in section 751(c) and the regulations,
and inventory items, as defined in section
751(d) and the regulations.
* * * * *

(c) * * * With respect to any statement
required to be furnished to a transferor,
the statement shall, in addition to the other
information required, include the amount
of any gain or loss attributable to section

751 property that is required to be recog-
nized pursuant to paragraph (a)(2) of
§ 1.751-1. * * *
* * * * *

Par. 18. For each section listed in the
table, remove the language in the "Re-
move" column and add in its place the
language in the "Add" column as set forth
below:

Section

Remove

Add

§ 1.704-3, paragraph (a)(6)(ii)

§ 1.743-1(b) or 1.751-1(a)(2)

§ 1.743-1(b), 1.751-1(a)(2), or 1.751-1(b)

§ 1.751-1, paragraph (c)(4)(i) first and last sentences

sections 731, 736, 741, and 751

sections 731, 732, and 741 (but not for purposes of section 736)

§ 1.751-1, paragraph (c)(4)(ii), first and last sentences

sections 731, 736, 741, and 751

sections 731, 732, and 741 (but not for purposes of section 736)

§ 1.751-1, paragraph (c)(4)(iii) first and last sentences

sections 731, 736, 741, and 751

sections 731, 732, and 741 (but not for purposes of section 736)

§ 1.751-1, paragraph (c)(4)(iv) first and last sentences

sections 731, 736, 741, and 751

sections 731, 732, and 741 (but not for purposes of section 736)

§ 1.751-1, paragraph (c)(4)(v) first and last sentences

sections 731, 736, 741, and 751

sections 731, 732, and 741 (but not for purposes of section 736)

§ 1.751-1, paragraph (c)(4)(vii) first and last sentences

sections 731, 736, 741, and 751

sections 731, 732, and 741 (but not for purposes of section 736)

§ 1.751-1, paragraph (c)(4)(viii) First and last sentences

sections 731, 736, 741, and 751

sections 731, 732, and 741 (but not for purposes of section 736)

§ 1.751-1, paragraph (c)(4)(ix) first and last sentences

sections 731, 736, 741, and 751

sections 731, 732, and 741 (but not for purposes of section 736)

§ 1.751-1, paragraph (d)(2)(i) last sentence

section 1221(1)

section 1221(a)(1)

§ 1.751-1, paragraph (d)(2)(ii) second sen- tence

section 1221(4)

section 1221(a)(4)

§ 1.1245-1, paragraph (a) last sentence

see section 1245(b) and § 1.1245-4.

see section 1245(b), and §§ 1.732- 1(c)(2)(iii), 1.755-1(c)(2)(iii), and 1.1245-4.

§ 1.1245-2, paragraph (c)(6)(i)

1245(b)(6)(B)

1245(b)(5)(B)

John Dalrymple,
Deputy Commissioner for Services
and Enforcement.

(Filed by the Office of the Federal Register on October 31, 2014, 8:45 a.m., and published in the issue of the Federal Register for November 3, 2014, 79 F.R. 65151)

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# Definition of Terms

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

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

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

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

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

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

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

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

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

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

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

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

# Abbreviations

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

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

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

GE-Grantee.

GP-General Partner.

GR-Grantor.

COOP-Cooperative.

IC-Insurance Company.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

CY-County.

LE-Lessee.

TT-Trustee.

D Decedent.

LP-Limited Partner.

LR-Lessor.

X-Corporation.

DE-Donee.

M-Minor.

Nonacq .- Nonacquiescence.

O Organization.

P-Parent Corporation.

PHC-Personal Holding Company.

PO Possession of the U.S.

PR-Partner.

PRS Partnership.

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

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S Subsidiary.

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

Stat .- Statutes at Large.

BK-Bank.

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

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

CI-City.

T.I.R .- Technical Information Release.

TP-Taxpayer.
TR-Trust.

U.S.C .- United States Code.

DC-Dummy Corporation.

Del. Order-Delegation Order.

DISC-Domestic International Sales Corporation.

DR-Donor.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

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

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

T-Target Corporation.

T.C .- Tax Court.

T.D .- Treasury Decision.

TFE-Transferee.

TFR-Transferor.

Y-Corporation.

Z-Corporation.

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## Numerical Finding List1

Bulletins 2014-27 through 2014-47

### Announcements:

2014-2, 2014-28 I.R.B. 120
2014-28, 2014-34 I.R.B. 391
2014-29, 2014-35 I.R.B. 452
2014-31, 2014-46 I.R.B. 827

### Notices:

2014-40, 2014-27 I.R.B. 100
2014-41, 2014-27 I.R.B. 97
2014-42, 2014-34 I.R.B. 387
2014-43, 2014-31 I.R.B. 249
2014-44, 2014-32 I.R.B. 270
2014-45, 2014-34 I.R.B. 388
2014-46, 2014-36 I.R.B. 520
2014-47, 2014-36 I.R.B. 522
2014-48, 2014-36 I.R.B. 523
2014-49, 2014-41 I.R.B. 665
2014-50, 2014-40 I.R.B. 590
2014-51, 2014-40 I.R.B. 594
2014-52, 2014-42 I.R.B. 712
2014-53, 2014-43 I.R.B. 739
2014-54, 2014-41 I.R.B. 670
2014-55, 2014-41 I.R.B. 672
2014-56, 2014-41 I.R.B. 674
2014-57, 2014-42 I.R.B. 723
2014-58, 2014-44 I.R.B. 746
2014-59, 2014-44 I.R.B. 747
2014-60, 2014-43 I.R.B. 743
2014-61, 2014-43 I.R.B. 746
2014-62, 2014-44 I.R.B. 749
2014-63, 2014-45 I.R.B. 759
2014-64, 2014-45 I.R.B. 759
2014-65, 2014-47 I.R.B. 842
2014-66, 2014-46 I.R.B. 820
2014-67, 2014-46 I.R.B. 822
2014-68, 2014-47 I.R.B. 842

### Proposed Regulations:

Revenue Procedures:

2014-26, 2014-27 I.R.B. 26
2014-27, 2014-27 I.R.B. 41
2014-29, 2014-28 I.R.B. 105
2014-37, 2014-33 I.R.B. 363

2014-38, 2014-29 I.R.B. 132
2014-39, 2014-29 I.R.B. 151
2014-40, 2014-30 I.R.B. 229
2014-41, 2014-33 I.R.B. 364
2014-42, 2014-29 I.R.B. 193
2014-43, 2014-32 I.R.B. 273
2014-44, 2014-32 I.R.B. 274
2014-45, 2014-34 I.R.B. 388
2014-46, 2014-33 I.R.B. 367
2014-47, 2014-35 I.R.B. 393
2014-48, 2014-36 I.R.B. 527
2014-49, 2014-37 I.R.B. 535
2014-50, 2014-37 I.R.B. 540
2014-51, 2014-37 I.R.B. 543
2014-52, 2014-38 I.R.B. 560
2014-53, 2014-39 I.R.B. 573
2014-54, 2014-41 I.R.B. 675
2014-55, 2014-44 I.R.B. 753
2014-56, 2014-45 I.R.B. 762
2014-57, 2014-45 I.R.B. 777
2014-58, 2014-45 I.R.B. 793
2014-59, 2014-47 I.R.B. 843
2014-60, 2014-47 I.R.B. 854
2014-61, 2014-47 I.R.B. 860

### Revenue Rulings:

2014-14, 2014-27 I.R.B. 12
2014-19, 2014-32 I.R.B. 266
2014-20, 2014-28 I.R.B. 101
2014-21, 2014-34 I.R.B. 381
2014-22, 2014-37 I.R.B. 523
2014-23, 2014-40 I.R.B. 575
2014-24, 2014-37 I.R.B. 529
2014-25, 2014-40 I.R.B. 574
2014-26, 2014-41 I.R.B. 663
2014-26, 2014-41 I.R.B. 663
2014-27, 2014-47 I.R.B. 832
2014-28, 2014-45 I.R.B. 756

Treasury Decisions:

REG-151416-06, 2014-47 I.R.B. 870

9664, 2014-32 I.R.B. 254 9668, 2014-27 I.R.B. 1

REG-104579-13, 2014-33 I.R.B. 370

REG-120756-13, 2014-31 I.R.B. 252

9669, 2014-28 I.R.B. 103

REG-105067-14, 2014-34 I.R.B. 391

9670, 2014-29 I.R.B. 121

REG-110948-14, 2014-30 I.R.B. 239

9671, 2014-29 I.R.B. 124

REG-121542-14, 2014-28 I.R.B. 119

9672, 2014-30 I.R.B. 196

REG-107012-14, 2014-33 I.R.B. 371

9673, 2014-30 I.R.B. 212

REG-123286-14, 2014-33 I.R.B. 377

9674, 2014-30 I.R.B. 225

REG-209459-78, 2014-31 I.R.B. 253

9675, 2014-31 I.R.B. 242

REG-129507-14, 2014-38 I.R.B. 561

9676, 2014-32 I.R.B. 260

REG-129786-14, 2014-38 I.R.B. 562

9677, 2014-31 I.R.B. 241

REG-105739-11, 2014-41 I.R.B. 704

9678, 2014-32 I.R.B. 262

REG-136676-13, 2014-45 I.R.B. 814

9679, 2014-32 I.R.B. 267

Treasury Decisions :- Continued

9680, 2014-32 I.R.B. 254
9681, 2014-33 I.R.B. 340
9682, 2014-33 I.R.B. 342
9683, 2014-33 I.R.B. 330
9684, 2014-33 I.R.B. 345
9685, 2014-34 I.R.B. 379
9686, 2014-34 I.R.B. 382
9687, 2014-36 I.R.B. 486
9688, 2014-36 I.R.B. 482
9689, 2014-36 I.R.B. 456
9690, 2014-38 I.R.B. 548
9691, 2014-38 I.R.B. 547
9692, 2014-40 I.R.B. 574
9693, 2014-41 I.R.B. 596
9694, 2014-41 I.R.B. 626
9695, 2014-42 I.R.B. 707
9696, 2014-43 I.R.B. 727
9697, 2014-43 I.R.B. 729
9698, 2014-47 I.R.B. 836
9699, 2014-46 I.R.B. 818

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2014-01 through 2014-26 is in Internal Revenue Bulletin
2014-26, dated June 30, 2014.

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Finding List of Current Actions on Previously Published Items1

Revenue Procedures-Continued: 2005-77

Revenue Procedures-Continued:

2014-16

Bulletins 2014-27 through 2014-47

Superseded by

Superseded by

Rev. Proc. 2014-47, 2014-35 I.R.B. 393

Rev. Proc. 2014-51, 2014-37 I.R.B. 543

Announcements:

2011-14

2014-16

2012-11

Modified by

Modified by

Supplemented by

Rev. Proc. 2014-48, 2014-36 I.R.B. 527

Rev. Proc. 2014-51, 2014-37 I.R.B. 543

Ann. 2014-2, 2014-28 I.R.B. 120

2011-14

2014-12

2013-11

Modified by

Modified by

Supplemented by

Rev. Proc. 2014-54, 2014-41 I.R.B. 675

Rev. Proc. 2014-54, 2014-41 I.R.B. 675

Ann. 2014-2, 2014-28 I.R.B. 120

2011-16

2014-17

2010-41

Superseded by

Modified by

Obsoleted by

Rev. Proc. 2014-51, 2014-37 I.R.B. 543

Rev. Proc. 2014-54, 2014-41 I.R.B. 675

Rev. Proc. 2014-43, 2014-32 I.R.B. 273

2011-16

Revenue Rulings:

Proposed Regulations:

Modified by

Rev. Proc. 2014-51, 2014-51 I.R.B. 543

2008-40

84-102

Modified by

Obsoleted by

2012-38

Rev. Rul. 2014-24, 2014-37 I.R.B. 529

REG-151416-06 2014-47 I.R.B. 870

Superseded by

Rev. Proc. 2014-27, 2014-27 I.R.B. 26

2011-1

Revenue Procedures:

2012-46

Modified by

Rev. Rul. 2014-24, 2014-37 I.R.B. 529

1981-38

Superseded by

Superseded by

Rev. Proc. 2014-26, 2014-27 I.R.B. 41

2012-6

Rev. Proc. 2014-42, 2014-29 I.R.B. 193

2014-4

Modified by

Rev. Rul. 2014-24, 2014-37 I.R.B. 529

93-37

Amplified by

Modified and Superseded by

Rev. Proc. 2014-40, 2014-30 I.R.B. 229

Notices ::

Rev. Proc. 2014-43, 2014-32 I.R.B. 273

2014-4

2010-62

1981-38

Modified by

Amplified by

Modified by

Rev. Proc. 2014-41, 2014-41 I.R.B. 675

Notice 2014-58, 2014-44 I.R.B. 746

Rev. Proc. 2014-42, 2014-29 I.R.B. 193

2014-5

2013-1

2000-12

Amplified by

Modified by

Superseded by

Rev. Proc. 2014-40, 2014-30 I.R.B. 229

Notice 2014-61, 2014-43 I.R.B. 746

Rev. Proc. 2014-39, 2014-29 I.R.B. 151

2014-8

2013-1

2002-23

Amplified by

Superseded by

Superseded by

Rev. Proc. 2014-40, 2014-30 I.R.B. 229

Notice 2014-61, 2014-43 I.R.B. 746

Rev. Proc. 2014-55, 2014-44 I.R.B. 753

2002-55

2014-9

2013-11

Amplified by

Modified by

Revoked by Rev. Proc. 2014-39, 2014-29 I.R.B. 151

Rev. Proc. 2014-40, 2014-30 I.R.B. 229

Notice 2014-48, 2014-36 I.R.B. 523

2003-64

2014-10

2013-23

Superseded by

Amplified by

Modified by

Rev. Proc. 2014-47, 2014-35 I.R.B. 393

Rev. Proc. 2014-40, 2014-30 I.R.B. 229

Notice 2014-48, 2014-36 I.R.B. 523

2003-75

2014-13

2013-28

Superseded by

Modified by

Modified by

Rev. Proc. 2014-55, 2014-44 I.R.B. 753

Rev. Proc. 2014-38, 2014-29 I.R.B. 132

Notice 2014-48, 2014-36 I.R.B. 523

2004-21

2014-13

2013-29

Superseded by

Superseded by

Modified by

Rev. Proc. 2014-47, 2014-35 I.R.B. 393

Rev. Proc. 2014-38, 2014-29 I.R.B. 132

Notice 2014-46, 2014-36 I.R.B. 520

1A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2014-01 through 2014-26 is in Internal Revenue Bulletin 2014-26, dated June 30, 2014.

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### Revenue Rulings-Continued:

2013-29
Clarified by
Notice 2014-46, 2014-36 I.R.B. 520

2013-32
Modified by
Notice 2014-48, 2014-36 I.R.B. 523

2013-37
Modified by
Notice 2014-48, 2014-36 I.R.B. 523

2013-38
Superseded by
Notice 2014-61, 2014-43 I.R.B. 746

2013-51
Obsoleted by
Notice 2014-42, 2014-34 I.R.B. 387

2013-60
Modified by
Notice 2014-46, 2014-36 I.R.B. 520

2013-60
Clarified by
Notice 2014-46, 2014-36 I.R.B. 520

2013-65
Superseded by
Notice 2014-57, 2014-42 I.R.B. 723

2013-38
Superseded by
Notice 2014-61, 2014-43 I.R.B. 746

2014-44
Supplemented by
Notice 2014-45, 2014-34 I.R.B. 388

Treasury Decisions ::

2005-47
Obsoleted by
T.D. 9668 2014-27 I.R.B. 1

2010-51
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345

2010-71
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345

2011-6
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345

2011-9
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345

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Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.

# CUMULATIVE BULLETINS

The contents of the weekly Bulletins were consolidated semiannually into permanent, indexed, Cumulative Bulletins through the
2008-2 edition.

# INTERNAL REVENUE BULLETINS ON CD-ROM

Internal Revenue Bulletins are available annually as part of Publication 1796 (Tax Products CD-ROM). The CD-ROM can be
purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)
or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.

# We Welcome Comments About the Internal Revenue Bulletin

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
(www.irs.gov) or write to the IRS Bulletin Unit, SE:W:CAR:MP:P:SPA, Washington, DC 20224.