Internal Revenue Bulletin 2020-3 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 2020–3
January 13, 2020
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
EMPLOYEE PLANS
REV. RUL. 2020-2, page 298.
This revenue ruling provides tables of covered compensa-
tion under § 401(l)(5)(E) of the Internal Revenue Code and
the Income Tax Regulations thereunder, effective January
1, 2020.
EMPLOYMENT TAX
NOTICE 2020-3, page 330.
The notice provides guidance for the 2020 calendar year
regarding withholding from periodic payments for pensions,
annuities, and certain other deferred income under section
3405(a), including the rules for withholding from periodic
payments under section 3405(a) when no withholding certifi-
cate has been furnished.
INCOME TAX
NOTICE 2020-2, page 327.
This Notice announces that Treasury and the IRS intend
to amend the section 871(m) regulations to delay the
effective/applicability date of certain rules in those final
regulations and extends the phase-in period provided in
Notice 2018-72, 2018-40 I.R.B. 522, for certain provi-
sions of the section 871(m) regulations.
REG-107431-19, page 332.
REG-107431-19 provides proposed amendments to
the regulations under sections 162, 164, and 170 of
the Internal Revenue Code (Code). First, the proposed
amendments update the regulations under section
162 to reflect current law regarding the application of
section 162 to a taxpayer that makes a payment or
transfer to an entity described in section 170(c) for a
business purpose. Second, the proposed amendments
provide safe harbors under section 162 to provide cer-
tainty with respect to the treatment of payments made
by business entities to an entity described in section
170(c). Third, the proposed amendments provide a
safe harbor under section 164 for payments made to
an entity described in section 170(c) by individuals who
itemize deductions and receive or expect to receive a
state or local tax credit in return. Fourth, the proposed
amendments update the regulations under section 170
to reflect past guidance and case law regarding the
application of the quid pro quo principle under section
170 to benefits received or expected to be received by
a donor from a third party.
REG-122180-18, page 342.
Section 162(m) generally limits the otherwise allow-
able deduction for compensation paid with respect to a
covered employee of a publicly held corporation to no
more than $1,000,000 per year. The proposed regula-
tions propose guidance on the application of §162(m),
as amended by section 13601 of Tax Cuts and Jobs
Act (the Act). The Act made significant amendments to
§162(m), and provided a transition rule applicable to
certain outstanding arrangements (commonly referred
to as the grandfather rule). The proposed regulations
propose guidance on the amendments made by the Act
to the definitions of publicly held corporation, covered
employee, and applicable employee remuneration. Ad-
ditionally, the proposed regulations propose guidance
on the operation of the grandfather rule.
Finding Lists begin on page ii.

REV. RUL. 2020-1, page 296.
Federal rates; adjusted federal rates; adjusted feder-
al long-term rate, the long-term exempt rate, and the
blended annual rate. For purposes of sections 382,
1274, 1288, 7872 and other sections of the Code,
tables set forth the rates for January 2020.
T.D. 9887, page 302.
The regulations provide guidance to nonresident alien
individuals and foreign corporations that hold certain
financial products providing for payments that are
contingent upon or determined by reference to U.S.
source dividend payments. The regulations also pro-
vides guidance to withholding agents that are respon-
sible for withholding U.S. tax with respect to a dividend
equivalent, as well as certain other parties to section
871(m) transactions and their agents. Specifically, the
regulations provide guidance regarding (1) the defini-
tion of a broker for purposes of section 871(m), (2)
how to calculate the delta of certain options listed on
a foreign regulated exchange, and (3) who must deter-
mine whether a transaction is a section 871(m) trans-
action when multiple brokers or dealers are involved
in the transaction.
T.D. 9888, page 306.
The final regulations provide guidance in determining
whether a corporation is a predecessor or successor
of a distributing or controlled corporation for purposes
of the exception under section 355(e) to the nonrecog-
nition treatment afforded qualifying distributions. The
final regulations also provide certain limitations on the
recognition of gain in certain cases involving a prede-
cessor of a distributing corporation.

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 of-
ficial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of inter-
nal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rul-
ings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
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,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
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.
January 13, 2020 Bulletin No. 2020–3

Part I
Section 1274.—
Determination of Issue
Price in the Case of Certain
Debt Instruments Issued for
Property
(Also Sections 42, 280G, 382, 467, 468, 482, 483,
642, 1288, 7520, 7872.)
Rev. Rul. 2020-1
This revenue ruling provides various
prescribed rates for federal income tax
purposes for January 2020 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable feder-
al rates (AFR) for the current month for
purposes of section 1274(d) of the Inter-
nal Revenue Code. Table 2 contains the
short-term, mid-term, and long-term ad-
justed applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the ap-
propriate percentages for determining the
low-income housing credit described in
section 42(b)(1) for buildings placed in
service during the current month. Howev-
er, under section 42(b)(2), the applicable
percentage for non-federally subsidized
new buildings placed in service after July
30, 2008, shall not be less than 9%. Ta-
ble 5 contains the federal rate for deter-
mining the present value of an annuity, an
interest for life or for a term of years, or
a remainder or a reversionary interest for
purposes of section 7520. Finally, Table
6 contains the deemed rate of return for
transfers made during calendar year 2020
to pooled income funds described in sec-
tion 642(c)(5) that have been in existence
for less than 3 taxable years immediately
preceding the taxable year in which the
transfer was made.
REV. RUL. 2020-1 TABLE 1
Applicable Federal Rates (AFR) for January 2020
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR 1.60%1.59%1.59%1.58%
110% AFR 1.76%1.75%1.75%1.74%
120% AFR 1.92%1.91%1.91%1.90%
130% AFR 2.08%2.07%2.06%2.06%
Mid-term
AFR1.69%1.68%1.68%1.67%
110% AFR1.86%1.85%1.85%1.84%
120% AFR2.03%2.02%2.01%2.01%
130% AFR2.19%2.18%2.17%2.17%
150% AFR2.54%2.52%2.51%2.51%
175% AFR2.96%2.94%2.93%2.92%
Long-term
AFR2.07%2.06%2.05%2.05%
110% AFR2.28%2.27%2.26%2.26%
120% AFR2.49%2.47%2.46%2.46%
130% AFR2.70%2.68%2.67%2.67%
REV. RUL. 2020-1 TABLE 2
Adjusted AFR for January 2020
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted AFR1.21%1.21%1.21%1.21%
Mid-term adjusted AFR1.28%1.28%1.28%1.28%
Long-term adjusted AFR1.57%1.56%1.56%1.55%
January 13, 2020 296 Bulletin No. 2020–3

REV. RUL. 2020-1 TABLE 3
Rates Under Section 382 for January 2020
Adjusted federal long-term rate for the current month1.57%
Long-term tax-exempt rate for ownership changes during the current month (the highest of
the adjusted federal long-term rates for the current month and the prior two months.)
1.59%
REV. RUL. 2020-1 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for January 2020
Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July
30, 2008, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income housing credit7.43%
Appropriate percentage for the 30% present value low-income housing credit3.18%
REV. RUL. 2020-1 TABLE 5
Rate Under Section 7520 for January 2020
Applicable federal rate for determining the present value of an annuity, an interest for life or
a term of years, or a remainder or reversionary interest
2.0%
REV. RUL. 2020-1 TABLE 6
Deemed Rate for Transfers to New Pooled Income Funds During 2020
Deemed rate of return for transfers during 2020 to pooled income funds that have been in
existence for less than 3 taxable years
2.2%

Section 42.—Low-Income
Housing Credit
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2020. See Rev. Rul. 2020-1, page 296.
Section 280G.—Golden
Parachute Payments
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2020. See Rev. Rul. 2020-1, page 296.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and
Certain Built-In Losses
Following Ownership
Change
The adjusted applicable federal long-term rate
is set forth for the month of January 2020. See
Rev. Rul. 2020-1, page 296.
Section 467.—Certain
Payments for the Use of
Property or Services
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2020. See Rev. Rul. 2020-1, page 296.
Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2020. See Rev. Rul. 2020-1, page 296.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2020. See Rev. Rul. 2020-1, page 296.

Bulletin No. 2020–3 297 January 13, 2020

January 13, 2020 298 Bulletin No. 2020–3
Section 483.—Interest on
Certain Deferred Payments
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2020. See Rev. Rul. 2020-1, page 296.
Section 642.—Special
Rules for Credits and
Deductions
Deemed rate for transfers to new pooled income
funds during 2020 is set forth. See Rev. Rul. 2020–1,
page 296.
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month of
January 2020. See Rev. Rul. 2020-1, page 296.
Section 7520.—Valuation
Tables
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2020. See Rev. Rul. 2020-1, page 296.
Section 7872.—Treatment
of Loans With Below-
Market Interest Rates
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
January 2020. See Rev. Rul. 2020-1, page 296.

26 CFR 1.401(l)-1: Permitted disparity in employ-
er-provided contributions or benefits
Rev. Rul. 2020-2
This revenue ruling provides tables of
covered compensation under § 401(l)(5)
(E) of the Internal Revenue Code and the
Income Tax Regulations thereunder, for
the 2020 plan year.
Section 401(l)(5)(E)(i) defines covered
compensation with respect to an employee
as the average of the contribution and ben-
efit bases in effect under section 230 of the
Social Security Act (the “Act”) for each
year in the 35-year period ending with the
year in which the employee attains social
security retirement age.
Section 401(l)(5)(E)(ii) states that the
determination for any year preceding the
year in which the employee attains social
security retirement age shall be made by
assuming that there is no increase in cov-
ered compensation after the determination
year and before the employee attains so-
cial security retirement age.
Section 1.401(l)-1(c)(34) of the In-
come Tax Regulations defines the taxable
wage base as the contribution and benefit
base under section 230 of the Act.
Section 1.401(l)-1(c)(7)(i) defines cov-
ered compensation for an employee as the
average (without indexing) of the taxable
wage bases in effect for each calendar year
during the 35-year period ending with the
last day of the calendar year in which the
employee attains (or will attain) social se-
curity retirement age. A 35-year period is
used for all individuals regardless of the
year of birth of the individual. In deter-
mining an employee’s covered compensa-
tion for a plan year, the taxable wage base
for all calendar years beginning after the
first day of the plan year is assumed to be
the same as the taxable wage base in ef-
fect as of the beginning of the plan year.
An employee’s covered compensation for
a plan year beginning after the 35-year pe-
riod applicable under § 1.401(l)-1(c)(7)(i)
is the employee’s covered compensation
for a plan year during which the 35-year
period ends. An employee’s covered com-
pensation for a plan year beginning be-
fore the 35-year period applicable under
§ 1.401(l)-1(c)(7)(i) is the taxable wage
base in effect as of the beginning of the
plan year.
Section 1.401(l)-1(c)(7)(ii) provides
that, for purposes of determining the
amount of an employee’s covered com-
pensation under § 1.401(l)-1(c)(7)(i), a
plan may use tables, provided by the Com-
missioner, that are developed by rounding
the actual amounts of covered compensa-
tion for different years of birth.
For purposes of determining covered
compensation for the 2020 year, the tax-
able wage base is $137,700.
The following tables provide covered
compensation for 2020.

Bulletin No. 2020–3 299 January 13, 2020
ATTACHMENT I
2020 COVERED COMPENSATION TABLE
CALENDAR
YEAR OF
BIRTH
CALENDAR YEAR OF
SOCIAL SECURITY
RETIREMENT AGE
2020 COVERED
COMPENSATION
TABLE II
19071972$ 4,488
19081973 4,704
19091974 5,004
19101975 5,316
19111976 5,664
19121977 6,060
19131978 6,480
19141979 7,044
19151980 7,692
19161981 8,460
19171982 9,300
19181983 10,236
19191984 11,232
19201985 12,276
19211986 13,368
19221987 14,520
19231988 15,708
19241989 16,968
19251990 18,312
19261991 19,728
19271992 21,192
19281993 22,716
19291994 24,312
19301995 25,920
19311996 27,576
19321997 29,304
19331998 31,128
19341999 33,060
19352000 35,100
19362001 37,212
19372002 39,444
19382004 43,992
19392005 46,344
19402006 48,816
19412007 51,348
19422008 53,952
19432009 56,628
19442010 59,268
19452011 61,884
19462012 64,560

January 13, 2020 300 Bulletin No. 2020–3
ATTACHMENT I
2020 COVERED COMPENSATION TABLE
CALENDAR
YEAR OF
BIRTH
CALENDAR YEAR OF
SOCIAL SECURITY
RETIREMENT AGE
2020 COVERED
COMPENSATION
TABLE II
19472013 67,308
19482014 69,996
19492015 72,636
19502016 75,180
19512017 77,880
19522018 80,532
19532019 83,244
19542020 86,052
19552022 91,464
19562023 94,116
19572024 96,684
19582025 99,144
19592026 101,556
19602027 103,908
19612028 106,200
19622029 108,396
19632030 110,580
19642031 112,728
19652032 114,792
19662033 116,772
19672034 118,632
19682035 120,384
19692036 122,028
19702037 123,540
19712038 124,980
19722039 126,408
19732040 127,764
19742041 129,012
19752042 130,164
19762043 131,184
19772044 132,060
19782045 132,948
19792046 133,824
19802047 134,616
19812048 135,300
19822049 135,900
19832050 136,440
19842051 136,992
19852052 137,292
19862053 137,556
1987 and Later2054 and Later 137,700

Bulletin No. 2020–3 301 January 13, 2020
ATTACHMENT II
2020 ROUNDED COVERED COMPENSATION TABLE
CALENDAR
YEAR OF
BIRTH
2020 COVERED
COMPENSATION
ROUNDED
1937$ 39,000
1938 – 1939 45,000
1940 48,000
1941 51,000
1942 54,000
1943 57,000
1944 60,000
1945 63,000
1946 – 1947 66,000
1948 69,000
1949 72,000
1950 75,000
1951 78,000
1952 81,000
1953 84,000
1954 87,000
1955 90,000
1956 93,000
1957 96,000
1958 99,000
1959 102,000
1960 – 1961 105,000
1962 108,000
1963 111,000
1964 – 1965 114,000
1966 117,000
1967 – 1968 120,000
1969 – 1970 123,000
1971 – 1972 126,000
1973 – 1975 129,000
1976 – 1978 132,000
1979 – 1982 135,000
1983 and Later 137,700

January 13, 2020 302 Bulletin No. 2020–3
DRAFTING INFORMATION
The principal author of this notice is
Tom Morgan of the Office of the Asso-
ciate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment
Taxes). However, other personnel from
the IRS participated in the development
of this guidance. For further information
regarding this notice, contact Mr. Mor-
gan at 202-317-6700 or Gregory K. Da-
vis at 443-853-5590 (not toll-free num-
bers).
26 CFR 1.871-15: Treatment of dividend equivalents
T.D. 9887
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Dividend Equivalents from
Sources within the United
States
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains
final regulations relating to certain fi-
nancial products providing for payments
that are contingent upon or determined
by reference to U.S. source dividend
payments.
DATES: Effective date: These regulations
are effective on December 17, 2019.
Applicability dates: For dates of applica-
bility, see §1.871-15(r).
FOR FURTHER INFORMATION CON-
TACT: D. Peter Merkel or Karen Wal-
ny at (202) 317-6938 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regula-
tions under §1.871-15 defining the term
broker for purposes of section 871(m) of
the Internal Revenue Code (the Code).
In addition, the final regulations provide
guidance relating to when the delta of an
option that is listed on a foreign regulated
exchange may be calculated based on the
delta of that option at the close of busi-
ness on the business day before the date
of issuance. The final regulations also
provide guidance identifying which party
to a potential section 871(m) transaction
is responsible for determining whether a
transaction is a section 871(m) transac-
tion when multiple brokers or dealers are
involved in the transaction. Finally, this
document withdraws temporary regula-
tions under §1.871-15T regarding these
matters.
I. Background on Section 871(m)
Regulations
On January 23, 2012, the Federal
Register published temporary regulations
(TD 9572) at 77 FR 3108 (2012 tempo-
rary regulations), and a notice of pro-
posed rulemaking by cross-reference to
the temporary regulations and notice of
public hearing at 77 FR 3202 (2012 pro-
posed regulations, and together with the
2012 temporary regulations, 2012 sec-
tion 871(m) regulations) under section
871(m). The 2012 section 871(m) regula-
tions related to dividend equivalents from
sources within the United States paid to
nonresident alien individuals and foreign
corporations. Corrections to the 2012 tem-
porary regulations were published on Feb-
ruary 6, 2012, March 8, 2012, and August
31, 2012, in the Federal Register at 77
FR 5700, 77 FR 13968, and 77 FR 53141,
respectively. The Department of the Trea-
sury (Treasury Department) and the IRS
received written comments on the 2012
proposed regulations, and a public hearing
was held on April 27, 2012.
On December 5, 2013, the Federal
Register published final regulations and
removal of temporary regulations (TD
9648) at 78 FR 73079 (2013 final regu-
lations), which finalized a portion of the
2012 section 871(m) regulations. On the
same date, the Federal Register pub-
lished a withdrawal of notice of proposed
rulemaking, a notice of proposed rulemak-
ing, and a notice of public hearing at 78
FR 73128 (2013 proposed regulations). In
light of comments on the 2012 proposed
regulations, the 2013 proposed regula-
tions described a new approach for deter-
mining whether a payment made pursuant
to a notional principal contract (NPC) or
an equity-linked instrument (ELI) is a
dividend equivalent based on the delta of
the contract. In response to written com-
ments on the 2013 proposed regulations,
the Treasury Department and the IRS re-
leased Notice 2014-14, 2014-13 IRB 881,
on March 24, 2014 (see §601.601(d)(2)(ii)
(b)), stating that the Treasury Department
and the IRS anticipated limiting the appli-
cation of the rules with respect to speci-
fied ELIs described in the 2013 proposed
regulations to ELIs issued on or after 90
days after the date of publication of final
regulations.
On September 18, 2015, the Federal
Register published final regulations and
temporary regulations (TD 9734), at 80
FR 56866, which finalized a portion of the
2013 proposed regulations and introduced
new temporary regulations based on com-
ments received with respect to the 2013
proposed regulations (2015 final regu-
lations and 2015 temporary regulations,
respectively, and together, the 2015 reg-
ulations). On the same date, the Federal
Register published a notice of proposed
rulemaking by cross-reference to tem-
porary regulations and a notice of public
hearing at 80 FR 56415 (2015 proposed
regulations, and together with the 2015
final regulations, 2015 section 871(m)
regulations). A correcting amendment to
the 2015 final regulations and the 2015
proposed regulations was published on
December 7, 2015, in the Federal Reg-
ister at 80 FR 75946 and 80 FR 75956,
respectively.
The Treasury Department and the IRS
received written comments on the 2015
proposed regulations. The public hearing
scheduled for January 15, 2016, was can-
celled because no request to speak was
received.
On July 1, 2016, the Treasury Depart-
ment and the IRS released Notice 2016-42,
2016-29 IRB 67 (QI Notice), containing a
proposed amended qualified intermediary
agreement. The QI Notice included the

Bulletin No. 2020–3 303 January 13, 2020
requirements and obligations applicable
to a QI that acts as a qualified derivatives
dealer (QDD). The Treasury Department
and the IRS received written comments
on Notice 2016-42, which included com-
ments on certain aspects of section 871(m)
and QDDs. On December 30, 2016, the
Treasury Department and the IRS released
Revenue Procedure 2017-15, 2017-3 IRB
437 (2017 QI Agreement), which contains
the final QI withholding agreement and
the requirements and obligations applica-
ble to QDDs.
On December 2, 2016, the Treasury
Department and the IRS released Notice
2016-76, 2016-51 IRB 834, providing
guidance for complying with the final
and temporary regulations under sections
871(m), 1441, 1461, and 1473 in 2017 and
2018 and explaining how the IRS intends
to administer those regulations in 2017
and 2018.
On January 24, 2017, the Federal Reg-
ister published final and temporary regu-
lations (TD 9815) at 82 FR 8144 (2017
final regulations and 2017 temporary reg-
ulations, respectively, and together, the
2017 regulations), which generally ad-
opted the 2015 proposed regulations with
certain changes. The 2017 regulations also
included several technical amendments to
the 2015 final regulations in response to
comments on those regulations. Final-
ly, the 2017 temporary regulations were
based on comments received with respect
to the 2015 proposed regulations. A notice
of proposed rulemaking cross-referenc-
ing the 2017 temporary regulations was
published in the Federal Register on
January 24, 2017 (82 FR 8172), with cor-
recting amendments published in the Fed-
eral Register on October 26, 2017 (82 FR
49508) (together, the 2017 proposed regu-
lations). No public hearing was requested
or held. On August 21, 2017, the Treasury
Department and the IRS published Notice
2017-42, 2017-34 IRB 212, which extend-
ed certain transition relief with respect to
certain portions of the 2017 final regula-
tions.
On February 5, 2018, the Treasury De-
partment and the IRS published Notice
2018-5, 2018-6 IRB 341, which permits
withholding agents to apply the transition
rules for securities loans to which section
871(m) applies from Notice 2010-46,
2010-24 IRB 757, in 2018 and 2019.
On September 20, 2018, the Treasury
Department and the IRS published Notice
2018-72, 2018-40 IRB 522, which fur-
ther extended certain transition relief and
permitted withholding agents to apply the
transition rules from Notice 2010-46 in
2020.
All written comments received in re-
sponse to the 2012 proposed regulations,
2013 proposed regulations, 2015 pro-
posed regulations, and 2017 proposed reg-
ulations are available at www.regulations.
gov or upon request.
This Treasury decision finalizes the
2017 proposed regulations without any
substantive change.
II. Executive Order 13789
Executive Order 13789 (82 FR 19317),
issued on April 21, 2017, instructs the
Secretary of the Treasury (the Secretary)
to review all significant tax regulations
issued on or after January 1, 2016, and
to take concrete action to alleviate the
burdens of regulations that (i) impose an
undue financial burden on U.S. taxpayers;
(ii) add undue complexity to the Federal
tax laws; or (iii) exceed the statutory au-
thority of the IRS. Executive Order 13789
further instructs the Secretary to submit
to the President within 60 days an interim
report that identifies regulations that meet
these criteria. Notice 2017-38, 2017-30
I.R.B. 147, which was published on July
24, 2017, did not include regulations un-
der section 871(m) in a list of eight regula-
tions identified by the Secretary in the in-
terim report as meeting at least one of the
first two criteria specified in E.O. 13789
(no regulations were identified as meeting
the third criterion).
E.O. 13789 further instructs the Sec-
retary to submit to the President by Sep-
tember 18, 2017, a final report that rec-
ommends specific actions to mitigate the
burden imposed by regulations identified
in the interim report. On October 16, 2017,
the Secretary published in the Federal
Register that final report (82 FR 48013),
which indicated, among other things, that
the Treasury Department continues to ana-
lyze all recently issued significant regula-
tions and is considering possible reforms
of several recent regulations not identified
in the earlier report, including the regula-
tions under section 871(m).
Summary of Comments and
Explanation of Provisions
The Treasury Department and the IRS
received one comment regarding the 2017
proposed regulations. After consideration
of the comment, the 2017 proposed reg-
ulations are adopted as final regulations
without any substantive change. In ad-
dition, the regulations under §1.871-15T
are withdrawn. Comments on the section
871(m) regulations that were not specific
to §1.871-15T are beyond the scope of this
rulemaking and are not addressed in this
preamble.
The Treasury Department and the IRS
are continuing to study and consider pos-
sible reforms to the other provisions of
the section 871(m) regulations pursuant
to E.O. 13789 that are not specifically
addressed by this Treasury decision, in-
cluding comments received that relate to
those rules. The Treasury Department and
the IRS will consider these comments in
connection with any future guidance proj-
ects addressing the issues discussed in the
comments.
I. Delta Calculation for Listed Options
Generally, section 1.871-15(g)(2)
provides the delta of a potential section
871(m) transaction is calculated on the
earlier of when the contract is priced and
when the contract is issued. See §1.871-
15(a)(6) (providing that a contract is is-
sued at the inception, original issuance, or
issuance as a result of a deemed exchange
pursuant to section 1001). With respect to
options listed on a regulated exchange,
§1.871-15(g)(4)(i) provided that the delta
for those options is determined based on
the delta of the option at the close of busi-
ness on the business day before the date
of issuance. Section 1.871-15(g)(4)(ii)
(A) defines a regulated exchange as any
exchange defined in §1.871-15(l)(3)(vii).
The 2017 temporary regulations and the
2017 proposed regulations provide that
the term regulated exchange also includes
a foreign exchange that (A) is regulated by
a government agency in the jurisdiction in
which the market is located, (B) maintains
certain requirements designed to protect
investors and to prevent fraud and manip-
ulation, (C) maintains rules to promote ac-
tive trading of listed options, and (D) had

January 13, 2020 304 Bulletin No. 2020–3
trades for which the average trading vol-
ume exceeded $10 billion per day during
the prior calendar year (the “$10 billion
threshold”). See §1.871-15T(g)(4)(ii)
(B). When a foreign securities exchange
has more than one tier or market level on
which listed options may be separately
listed, the 2017 temporary regulations and
the 2017 proposed regulations treat each
tier or market level of the exchange as a
separate exchange. See §1.871-15T(g)(4)
(ii)(B)(4).
A comment expressed concern that the
$10 billion threshold would exclude from
the definition of a regulated exchange
many European exchanges that are treat-
ed as regulated markets by the Europe-
an Securities and Markets Authorities
(“ESMA”) for purposes of the Markets in
Financial Instruments Directive 2004/39/
EC. The comment requested that the fi-
nal regulations eliminate the $10 billion
threshold. Instead, the comment recom-
mended that a foreign regulated exchange
be defined to include an exchange treated
as a regulated market by ESMA or a sim-
ilar national authority and included in the
respective ESMA register or similar na-
tional register (the “ESMA requirement”).
The $10 billion threshold is intended to
ensure that the exchange has a sufficient
level of trading activity so that the pric-
ing cannot be manipulated. The Treasury
Department and the IRS have determined
that the $10 billion threshold continues to
serve this purpose. In addition, the ESMA
requirement requested by the comment ap-
pears duplicative of §1.871-15T(g)(4)(ii)
(B)(1), which requires a foreign securities
exchange to be regulated or supervised by
a governmental authority of the country
in which the market is located, because
the ESMA register is compiled on the ba-
sis of notifications made to ESMA by the
national competent authorities of member
states. Further, a foreign exchange that
does not qualify under §1.871-15T(g)(4)
(ii)(B) can qualify under §1.871-15(g)(4)
(ii)(A) if the option exchange is a quali-
fied board or exchange as determined by
the Secretary pursuant to section 1256(g)
(7)(C) or has a staff no action letter from
the CFTC permitting direct access from
the United States. Therefore, the Treasury
Department and the IRS have determined
that it is not appropriate to remove the
requirement. However, consistent with
the preamble to the 2017 regulations, the
Treasury Department and the IRS have
clarified that the $10 billion threshold is
determined based on the notional amount
of the options, which is the number of
shares referenced by the option multiplied
by the stock price of those shares at the
time of the computation. See §1.871-15(g)
(4)(ii)(B)(1)(iv).
The Treasury Department and the IRS,
however, will continue to study this com-
ment regarding the $10 billion threshold
in connection with future guidance proj-
ects related to E.O. 13789. The Treasury
Department and the IRS request com-
ments regarding whether an alternative
trading threshold for U.S. equity options
would ensure that there is sufficient trad-
ing on the exchange to prevent price ma-
nipulation. For example, instead of estab-
lishing a threshold based on the average
daily trading volume for an exchange as
a whole, an alternative threshold may be
based on only the average daily trading
volume of equity options on the exchange
or only the average daily trading volume
of equity options for a specific stock or
stock index on the exchange. Comments
recommending an alternative threshold
should include information supporting
the suggestion, including information re-
garding the average daily trading volumes
for the exchange with respect to equity
options separated out by exchange (and
stock or stock index, if applicable).
Special Analyses
I. Regulatory Planning and Review –
Economic Analysis
Executive Orders 13563 and 12866
direct agencies to assess costs and ben-
efits of available regulatory alternatives
and, if regulation is necessary, to select
regulatory approaches that maximize net
benefits, including potential economic,
environmental, public health and safety
effects, distributive impacts, and equity.
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, of reducing costs, of harmoniz-
ing rules, and of promoting flexibility.
This regulation is not subject to review
under section 6(b) of Executive Order
12866 pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Department of the Treasury and the Office
of Management and Budget regarding re-
view of tax regulations. Therefore, a reg-
ulatory impact assessment is not required.
II. Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
numbers 1545-0096 and 1545-1597. The
collection of information in these reg-
ulations is in §1.871-15(p). There is no
change to the total annual burden in the
current regulations under §§1.1441-1
through 1.1441-9 as a result of these fi-
nal regulations. Without these final regu-
lations, however, the total annual burden
in the current regulations under §1.1441-1
through 1.1441-9 would increase because
more than one taxpayer could be treated
as a responsible party and be required to
collect information regarding potential
section 871(m) transactions.
The information is required to estab-
lish whether a payment is treated as a U.S.
source dividend for purposes of section
871(m). This information will be used for
audit and examination purposes. The IRS
intends that these information collection
requirements will be satisfied by persons
complying with chapter 3 reporting re-
quirements and the requirements of the
applicable qualified intermediary (QI)
revenue procedure, or alternative certifi-
cation and documentation requirements
set out in these regulations. An agency
may not conduct or sponsor, and a person
is not required to respond to, a collection
of information unless it displays a valid
control number.
The estimates for the number of im-
pacted filers with respect to the collections
of information described in this part II of
the Special Analysis section are based on
the distinct U.S. withholding agents who
filed a form 1042-S reporting income code
34 (substitute payments—dividends) or
income code 40 (Other dividend equiva-
lents under IRS section 871(m) (formerly
871(l)) for calendar year 2017. The esti-
mates for the number of impacted filers
are also based on the number of U.S. with-
holding agents who filed a form 1042 and

Bulletin No. 2020–3 305 January 13, 2020
checked the box in section 3, indicating
that the withholding agent made payments
related to a potential section 871(m) trans-
action, for calendar year 2018. The IRS
estimates the number of affected filers to
be the following:
Tax Forms Impacted
Collection of information
Number of respondents
(estimated)
Number of filings
(estimated)
Forms to which the
information may be
attached
§1.871-15(p)(ii) Transactions with
multiple brokers
150051,000Form 1042, Form 1042-S,
and Form 1042-T
§1.871-15(p)(iii) Responsible party for
transactions traded on an exchange and
cleared by a clearing organization
150051,000Form 1042, Form 1042-S,
and Form 1042-T
§1.871-15(p)(iv) Responsible party for
certain structured notes, warrants, and
convertible instruments
150051,000Form 1042, Form 1042-s,
and Form 1042-T
The IRS does not have a reliable way
of estimating the number of filings that
will not need to be made as a result of
these final regulations.
III. Regulatory Flexibility Act
It is hereby certified that these regula-
tions will not have a significant economic
impact on a substantial number of small en-
tities within the meaning of section 601(6)
of the Regulatory Flexibility Act (5 U.S.C.
chapter 6). This certification is based on the
fact that these regulations primarily will
affect multinational financial institutions,
which tend to be larger businesses, and
foreign persons. Accordingly, a regulatory
flexibility analysis under the Regulatory
Flexibility Act is not required.
Pursuant to section 7805(f), the notice
of proposed rulemaking preceding this
regulation was submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small businesses. No comments
were received.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in any
one year by a state, local, or tribal govern-
ment, in the aggregate, or by the private
sector, of $100 million in 1995 dollars,
updated annually for inflation. In 2019,
that threshold is approximately $154 mil-
lion. This rule does not include any Fed-
eral mandate that may result in expendi-
tures by state, local, or tribal governments,
or by the private sector in excess of that
threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive Order. This final rule does
not have federalism implications and does
not impose substantial direct compliance
costs on state and local governments or
preempt state law within the meaning of
the Executive Order.
Statement of Availability of IRS
Documents
IRS Notices and other guidance cited
in this preamble are published in the In-
ternal Revenue Bulletin and are available
from the Superintendent of Documents,
U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the
IRS website at http://www/irs.gov.
Drafting Information
The principal authors of these final regu-
lations are D. Peter Merkel and Karen Wal-
ny of the Office of Associate Chief Counsel
(International). However, other personnel
from the IRS and the Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amend-
ed as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
§ 1.871-15T [Removed]
Par. 2. Section 1.871-15T is removed.
Par. 3. Section 1.871-15 is amended by:
1. Revising paragraphs (a)(1), (g)(4)(ii)
(B), (p)(1)(ii) through (iv), and (p)(5);
2. Removing the language “(r)(2), (3),
and (4)” from paragraph (r)(1) and adding
“(r)(2) and (3)” in its place; and
3. Removing paragraph (r)(4).
The revisions read as follows:
§1.871-15 Treatment of dividend
equivalents.

January 13, 2020 306 Bulletin No. 2020–3
(a) * * *
(1) Broker. A broker is a broker within
the meaning provided in section 6045(c),
except that the term does not include any
corporation that is a broker solely because
it regularly redeems its own shares.
* * * * *
(g) * * *
(4) * * *
(ii) * * *
(B) Foreign securities exchange—(1)
In general. A foreign securities exchange
that:
(i) Is regulated or supervised by a
governmental authority of the country in
which the market is located;
(ii) Has trading volume, listing, finan-
cial disclosure, surveillance, and other
requirements designed to prevent fraudu-
lent and manipulative acts and practices,
to remove impediments to and perfect the
mechanism of a free and open, fair and
orderly market, and to protect investors,
and the laws of the country in which the
exchange is located and the rules of the
exchange ensure that those requirements
are actually enforced;
(iii) Has rules that effectively promote
active trading of listed options on the ex-
change; and
(iv) Has an average daily trading vol-
ume on the exchange exceeding $10 bil-
lion notional amount during the immedi-
ately preceding calendar year.
(2) Application to an exchange with
more than one tier or market. If an ex-
change in a foreign country has more than
one tier or market level on which listed
options may be separately listed or trad-
ed, each tier or market level is treated as a
separate exchange.
* * * * *
(p) * * *
(1) * * *
(ii) Transactions with multiple brokers.
For a potential section 871(m) transaction
in which both the short party and an agent
or intermediary acting on behalf of the
short party are a broker or dealer, the short
party must determine whether the poten-
tial section 871(m) transaction is a section
871(m) transaction. For a potential section
871(m) transaction in which the short par-
ty is not a broker or dealer and more than
one agent or intermediary acting on behalf
of the short party is a broker or dealer, the
broker or dealer that is a party to the trans-
action and closest to the short party in the
payment chain must determine whether
the potential section 871(m) transaction is
a section 871(m) transaction. For a poten-
tial section 871(m) transaction in which
neither the short party nor any agent or
intermediary acting on behalf of the short
party is a broker or dealer, and the long
party and an agent or intermediary acting
on behalf of the long party are a broker or
dealer, or more than one agent or interme-
diary acting on behalf of the long party is
a broker or dealer, the broker or dealer that
is a party to the transaction and closest to
the long party in the payment chain must
determine whether the potential section
871(m) transaction is a section 871(m)
transaction.
(iii) Responsible party for transactions
traded on an exchange and cleared by a
clearing organization. Except as provided
in paragraph (p)(1)(iv) of this section, for
a potential section 871(m) transaction that
is traded on an exchange and cleared by a
clearing organization, and for which more
than one broker-dealer acts as an agent
or intermediary between the short party
and a foreign payee, the broker or dealer
that has an ongoing customer relation-
ship with the foreign payee with respect
to that transaction (generally the clearing
firm) must determine whether the poten-
tial section 871(m) transaction is a section
871(m) transaction.
(iv) Responsible party for certain
structured notes, warrants, and convert-
ible instruments. When a potential section
871(m) transaction is a structured note,
warrant, convertible stock, or convertible
debt, the issuer is the party responsible for
determining whether a potential section
871(m) transaction is a section 871(m)
transaction.
* * * * *
(5) Example. The following example
illustrates the rules of paragraph (p) of this
section.
(i) Example 1: Responsible party for a transac-
tion with multiple broker-dealers. (A) Facts. CO is a
domestic clearing organization and is not a broker as
defined in paragraph (a)(1) of this section. CO serves
as a central counterparty clearing and settlement ser-
vice provider for derivatives exchanges in the United
States. EB and CB are brokers organized in the United
States and members of CO. FC, a foreign corporation,
instructs EB to execute the purchase of a call option
that is a specified ELI (as described in paragraph (e)
of this section). EB effects the trade for FC on the
exchange and then, as instructed by FC, transfers the
option to CB to be cleared with CO. The exchange
matches FC’s order with an order for a written call op-
tion with the same terms and then sends the matched
trade to CO, which clears the trade. CB and the clear-
ing member representing the person who sold the call
option settle the trade with CO. Upon receiving the
matched trade, the option contracts are novated and
CO becomes the counterparty to CB and the counter-
party to the clearing member representing the person
who sold the call option.
(B) Analysis. Both EB and CB are broker-dealers
acting on behalf of FC for a potential section 871(m)
transaction. Under paragraph (p)(1)(iii) of this sec-
tion, however, only CB is required to make the deter-
minations described in paragraph (p) of this section
because CB has the ongoing customer relationship
with FC with respect to the call option.
(ii) [Reserved]
* * * * *
Sunita Lough
Deputy Commissioner for Services
and Enforcement.
Approved: November 14, 2019
David J. Kautter
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on De-
cember 16, 2019, 8:45 a.m., and published in the is-
sue of the Federal Register for December 17, 2019,
84 F.R. 68790)
26 CFR 1.355-8
T.D. 9888
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Guidance Under Section
355(e) Regarding
Predecessors, Successors,
and Limitation on Gain
Recognition; Guidance
Under Section 355(f)
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.

Bulletin No. 2020–3 307 January 13, 2020
SUMMARY: This document contains fi-
nal regulations that provide guidance re-
garding the distribution by a distributing
corporation of stock or securities of a
controlled corporation without the recog-
nition of income, gain, or loss. In particu-
lar, the final regulations provide guidance
in determining whether a corporation is a
predecessor or successor of a distributing
or controlled corporation for purposes of
the exception under section 355(e) of the
Internal Revenue Code (Code) to the non-
recognition treatment afforded qualifying
distributions. In addition, the final regu-
lations provide certain limitations on the
recognition of gain in certain cases involv-
ing a predecessor of a distributing corpo-
ration. The final regulations also provide
rules regarding the extent to which section
355(f) causes a distributing corporation
(and in certain cases its shareholders) to
recognize income or gain on the distribu-
tion of stock or securities of a controlled
corporation. These regulations affect cor-
porations that distribute the stock or secu-
rities of a controlled corporation and the
shareholders or security holders of those
distributing corporations.
DATES: Effective date: These final reg-
ulations are effective on December 16,
2019.
Applicability dates: For dates of applica-
bility, see § 1.355-8(i).
FOR FURTHER INFORMATION CON-
TACT: W. Reid Thompson, (202) 317-
5024, or Richard K. Passales, (202) 317-
5024 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
I. Corporate Divisions Under Sections
355 and 368(a)(1)(D)
Congress enacted section 355 “to
permit the tax-free division of existing
business arrangements among existing
shareholders.” See S. Rep. No. 105-33,
at 139 (1997) (Senate Report). Under
section 355(a)(1), if certain requirements
are met, a corporation (Distributing) may
distribute stock, or stock and securities,
of a controlled corporation (Controlled)
to Distributing’s shareholders, or to its
shareholders and security holders, with-
out recognition of gain or loss to, or in-
clusion of any amount in income of, the
distributees upon receipt (Distribution).
Section 355(c) generally provides that no
gain or loss is recognized to Distributing
upon a Distribution of qualified property
which is not in pursuance of a plan of re-
organization. Section 355(c)(2)(B) refers
to Controlled stock and Controlled securi-
ties as “qualified property.” If Distributing
distributes property other than qualified
property in a Distribution and the fair
market value of such property exceeds its
adjusted basis, gain is recognized to Dis-
tributing as if the property were sold to
the distributee at its fair market value. See
section 355(c)(2)(A).
Taxpayers also may carry out a Dis-
tribution as part of a “divisive reorga-
nization” under section 368(a)(1)(D). A
divisive reorganization is a transfer by
Distributing of part of its assets to Con-
trolled if, immediately after the transfer,
one or more of the shareholders of Distrib-
uting (including persons who were share-
holders immediately before the transfer)
have control, as defined in section 368(c),
of Controlled, but only if, in pursuance of
the plan, stock or securities of Controlled
are distributed in a Distribution. Section
361(c) generally provides that no gain or
loss is recognized to Distributing upon a
Distribution of qualified property in pur-
suance of a plan of reorganization. Section
361(c)(2)(B) defines “qualified property”
as (i) any stock, right to acquire stock, or
obligation (including a security) of Dis-
tributing, or (ii) any stock, right to acquire
stock, or obligation (including a security)
of Controlled received by Distributing as
part of the divisive reorganization. If Dis-
tributing distributes property other than
qualified property in a Distribution as part
of a divisive reorganization and the fair
market value of such property exceeds its
adjusted basis, gain is recognized to Dis-
tributing as if the property were sold to
the distributee at its fair market value. See
section 361(c)(2)(A).
II. Section 355(e)
Although a Distribution is general-
ly tax-free under sections 355 and 361,
Congress has determined that recognition
of corporate-level gain by Distributing is
appropriate “[i]n cases in which it is in-
tended that new shareholders will acquire
ownership of a business in connection
with a [Distribution],” because the over-
all transaction “more closely resembles a
corporate level disposition of the portion
of the business that is acquired.” Senate
Report at 139-140. Accordingly, the en-
actment of the Taxpayer Relief Act of
1997, Public Law 105-34 (111 Stat. 788
(1997)), added section 355(e) to the Code.
Under section 355(e), stock or securities
of Controlled generally will not be treated
as qualified property for purposes of sec-
tion 355(c)(2) or section 361(c)(2) if the
stock or securities are distributed as part
of a plan or series of related transactions
(Plan) pursuant to which one or more per-
sons acquire directly or indirectly stock
representing a “50-percent or greater in-
terest” in the stock (Planned 50-percent
Acquisition) of Distributing or Controlled.
The term “50-percent or greater interest,”
as defined in section 355(e)(4)(A) by ref-
erence to section 355(d)(4), means stock
possessing at least 50 percent of the total
combined voting power of all classes of
stock entitled to vote or at least 50 percent
of the total value of shares of all classes
of stock. Section 1.355-7(b) provides de-
tailed guidance regarding the meaning and
determination of the existence of a Plan.
Section 355(e)(4)(D) provides that, for
purposes of section 355(e), “any reference
to [Controlled] or [Distributing] shall in-
clude a reference to any predecessor or
successor of such corporation.” However,
Section 355(e) does not define the terms
“predecessor” and “successor.” To pro-
vide definitions for the terms “predeces-
sor” and “successor” for purposes of sec-
tion 355(e), as well as guidance regarding
their application, the Department of the
Treasury (Treasury Department) and the
IRS issued proposed regulations in 2004
(2004 Proposed Regulations) and tem-
porary and proposed regulations in 2016
(2016 Regulations).
III. The 2004 Proposed Regulations and
the 2016 Regulations
The general theory underlying the
2004 Proposed Regulations and the 2016
Regulations was that section 355(e)
should apply if a Distribution is used to

January 13, 2020 308 Bulletin No. 2020–3
combine a tax-free division of the assets
of a corporation other than Distributing
or Controlled (Divided Corporation)
with a Planned 50-percent Acquisition of
the Divided Corporation. The Treasury
Department and the IRS view this type
of transaction as a “synthetic spin-off”
of the assets that are transferred by the
Divided Corporation to Distributing and
then to Controlled. For example, a syn-
thetic spin-off could be achieved through
the following series of transactions oc-
curring pursuant to a Plan (Base Case
Example): (1) A corporation (P) merges
into Distributing in a reorganization de-
scribed in section 368(a)(1)(A), (2) Dis-
tributing contributes some (but not all) of
P’s assets to Controlled in a reorganiza-
tion described in section 368(a)(1)(D),
and (3) Distributing distributes all of the
stock of Controlled in a Distribution.
In the Base Case Example, the Divided
Corporation (that is, P) could have sepa-
rated its assets in its own Distribution. In
that case, the Divided Corporation would
have been a Distributing itself, and section
355(e) clearly would have applied to the
Distribution if it were combined with a
Planned 50-percent Acquisition of the Di-
vided Corporation. However, the Treasury
Department and the IRS observed that if
a Distribution by a Distributing is used as
the vehicle for a synthetic spin-off by the
Divided Corporation, the synthetic spin-
off would not be subject to section 355(e)
unless the Divided Corporation is treated
as a predecessor of Distributing under sec-
tion 355(e)(4)(D) (Predecessor of Distrib-
uting, or POD). Accordingly, the Treasury
Department and the IRS issued the 2004
Proposed Regulations and the 2016 Regu-
lations to treat the Divided Corporation in
the Base Case Example as a POD.
A. 2004 Proposed Regulations
On November 22, 2004, the Treasury
Department and the IRS published in the
Federal Register (69 FR 67873) the 2004
Proposed Regulations (REG-145535-02).
In general, the 2004 Proposed Regula-
tions would have defined a Predecessor of
Distributing as any corporation the assets
of which a Distributing has acquired in a
transaction to which section 381(a) ap-
plies (Section 381 Transaction) and then
divided tax-free through a Distribution.
The 2004 Proposed Regulations referred
to the Section 381 Transaction and the
contribution to Controlled of some (but
not all) of the assets of the POD prior to
the Distribution as a “combining transfer”
and a “separating transfer,” respectively.
The Treasury Department and the IRS
drafted the 2004 proposal primarily to ad-
dress combining and separating transfers
carried out to effect transactions similar to
the Base Case Example (in other words,
synthetic spin-offs effectuated through
Section 381 Transactions).
B. 2016 Regulations
After considering all comments re-
ceived regarding the 2004 Proposed Reg-
ulations, on December 19, 2016, the Trea-
sury Department and the IRS published
temporary regulations (TD 9805) in the
Federal Register (81 FR 91738) (2016
Temporary Regulations), which adopted
the 2004 Proposed Regulations with sig-
nificant modifications. On the same day,
the Treasury Department and the IRS
published in the Federal Register (81 FR
91888) a notice of proposed rulemaking
(REG-140328-15) (2016 Proposed Regu-
lations), which cross-referenced the 2016
Temporary Regulations. A correction to
the 2016 Temporary Regulations was
published in the Federal Register (82 FR
8811) on January 31, 2017. (References to
§ 1.355-8T in this preamble refer to the
text of the 2016 Temporary Regulations as
contained in 26 CFR part 1 revised as of
April 1, 2019.)
Although the 2016 Regulations gener-
ally retained the synthetic spin-off theory
underlying the 2004 Proposed Regula-
tions, the Treasury Department and the
IRS significantly broadened the scope of
the POD definition (but also significantly
narrowed its potential application, as de-
scribed later in this part III.B). Comment-
ers on the 2004 Proposed Regulations
noted that a corporation could have been
a POD only if the corporation transferred
property to Distributing in a Section 381
Transaction (such as the merger in the
Base Case Example) and questioned
whether that approach was under-inclu-
sive. In particular, one commenter ex-
plained that a taxpayer could structure a
series of transactions to achieve many of
the same tax and economic objectives as
the Base Case Example without using a
Section 381 Transaction.
To illustrate that point, the commenter
described the following series of trans-
actions, all of which occur as part of the
same Plan (2016 Preamble Example).
First, Distributing (the common parent of
a consolidated group) acquires all of the
stock of P. P then contributes some (but
not all) of its assets to a wholly owned
subsidiary of Distributing (Internal Dis-
tributing) in a transaction to which section
351 applies. See § 1.1502-34. Thereaf-
ter, Internal Distributing (i) contributes
one of the P assets to Controlled, and (ii)
distributes all of the stock of Controlled
to Distributing in a Distribution. Finally,
Distributing distributes all of the stock of
Controlled in a Distribution.
In response to these comments, the
Treasury Department and the IRS broad-
ened the POD definition in the 2016 Reg-
ulations by removing the requirement of a
Section 381 Transaction from the defini-
tion. Under the 2016 Regulations, no par-
ticular transactional form was required;
rather, the 2016 Regulations focused on
the tax-free division of the POD’s property
(however effected). The Treasury Depart-
ment and the IRS revised the POD defini-
tion in this manner to ensure that section
355(e) would apply to the Base Case Ex-
ample, the 2016 Preamble Example, and
more generally to any synthetic spin-off
that is combined with a Planned 50-per-
cent Acquisition of the Divided Corpo-
ration. Importantly, however, the 2016
Regulations significantly limited POD
treatment to transactions in which all of
the steps involved in the tax-free division
of property of the POD occur as part of a
Plan. See section 355(e)(2)(A)(ii).
Because of these revisions to the 2004
Proposed Regulations, a variety of new
transactional structures resulted in POD
treatment under the 2016 Regulations.
For instance, as illustrated in § 1.355-
8T(h), Example 5 (Example 5), a corpo-
ration was treated as a POD as a result of
the following transactions, each of which
occurs pursuant to the same Plan. First, P
transfers some (but not all) of its assets to
Distributing in exchange for 10 percent
of the stock of Distributing in a transac-
tion to which section 351 applies (leaving
Distributing’s other shareholder, Y, with
90 percent of Distributing’s stock). Dis-

Bulletin No. 2020–3 309 January 13, 2020
tributing then (i) contributes some (but
not all) of the P assets to Controlled in a
reorganization described in section 368(a)
(1)(D), and (ii) distributes all of the stock
of Controlled to P and Y pro rata. Finally,
individual Z acquires 51 percent of the P
stock. Because the assets of P were divid-
ed tax-free as part of a Plan, the 2016 Reg-
ulations treated P as a POD. As described
in part II of the Summary of Comments
and Explanation of Revisions, in response
to comments, the Treasury Department
and the IRS have further limited the scope
of the POD definition in the final regula-
tions to ensure that P will not be treated as
a POD in Example 5.
In expanding the definition of a Prede-
cessor of Distributing, the 2016 Regula-
tions introduced the term “Potential Pre-
decessor.” See § 1.355-8T(b)(2)(ii). Under
the POD definition in the 2016 Regula-
tions, only a Potential Predecessor could be
a POD. See § 1.355-8T(b)(1)(i). Thus, if a
corporation were not a Potential Predeces-
sor, it could not have been a POD under the
2016 Regulations. The 2016 Regulations
defined a Potential Predecessor as any cor-
poration other than Distributing or Con-
trolled. See § 1.355-8T(b)(2)(ii).
Summary of Comments and
Explanation of Revisions
Comments were received regarding
the 2016 Regulations, but no public hear-
ing was requested or held. After consid-
eration of these comments, this Treasury
decision adopts the 2016 Proposed Reg-
ulations with limited modifications, and it
removes the 2016 Temporary Regulations.
In general, the final regulations follow the
approach of the 2016 Regulations while
incorporating certain requested clarifica-
tions and minor revisions.
I. Predecessor of Distributing Definition
The Treasury Department and the IRS
are promulgating the final regulations
with the same goal as the 2004 Proposed
Regulations and the 2016 Regulations: To
ensure that section 355(e) applies prop-
erly to synthetic spin-offs of a Divided
Corporation’s assets. As noted in part II
of the Background, Congress has deter-
mined that corporate-level gain should be
recognized by a Distributing “[i]n cases
in which it is intended that new share-
holders will acquire ownership of a busi-
ness in connection with a [Distribution],”
because the overall transaction “more
closely resembles a corporate level dispo-
sition of the portion of the business that
is acquired.” Senate Report at 139-140.
Consistent with this policy, the final reg-
ulations provide that a corporation cannot
qualify as a POD unless the corporation’s
assets are divided through a Distribution
(that is, unless the corporation is a Divid-
ed Corporation).
The Treasury Department and the IRS
have determined that, by limiting POD
treatment to Divided Corporations, the fi-
nal regulations will further the policy of
section 355(e) while continuing to permit
tax-free divisions of existing business ar-
rangements among existing shareholders.
See Senate Report at 139. In particular,
the Treasury Department and the IRS have
sought to avoid definitions that would
cause section 355(e) to apply to transac-
tions that do not resemble sales. For ex-
ample, starting with the 2004 Proposed
Regulations, the Treasury Department and
the IRS have rejected a POD definition
that would include any corporation that,
without more, transfers assets to a Distrib-
uting in a Section 381 Transaction.
The following example illustrates how
that rejected POD definition would have
run contrary to the policies of section 355
and section 355(e). As part of a Plan, P
merges tax-free into Distributing in a reor-
ganization described in section 368(a)(1)
(A), with the P shareholders receiving 40
percent of the stock of Distributing. Dis-
tributing then distributes all of the stock
of Controlled (which holds none of the P
assets) in a Distribution. If P were treated
as a POD, the Distribution would result in
gain recognition under section 355(e), be-
cause it occurred as part of the same Plan
as an acquisition of a 50-percent or greater
interest in P (that is, a Planned 50-percent
Acquisition). See section 355(e)(3)(B).
However, the Treasury Department and
the IRS have determined that the policy of
section 355(e) does not warrant the recog-
nition of gain in this case, because the as-
sets of P have not been divided and neither
Distributing nor Controlled has undergone
a Planned 50-percent Acquisition. Rather,
the Distribution effected a division of ex-
isting business arrangements among exist-
ing shareholders, and Congress intended
section 355 to afford tax-free treatment to
such a transaction. See Senate Report at
139.
II. Scope of the Potential Predecessor
Definition
Commenters criticized the breadth of
the POD definition in the 2016 Regula-
tions. Although commenters generally
supported the treatment of P as a POD in
the 2016 Preamble Example, commenters
questioned the policy of treating P as a
POD in Example 5. See part III.B of the
Background section (describing the 2016
Preamble Example and Example 5). Af-
ter considering all comments received
on this issue, and as discussed further in
the remainder of this part II, the Treasury
Department and the IRS have determined
that the series of transactions set forth in
Example 5 should not be viewed as a syn-
thetic spin-off, and that P therefore should
not be treated as a POD in Example 5.
A. Example 5 Reduces Neither the Total
Value nor the Total Built-In Gain Inside P
When a corporation distributes an ap-
preciated asset with respect to its stock,
the corporation disposes of the asset for
no consideration, reducing both the total
value and the total built-in gain inside the
corporation. In this regard, the synthetic
spin-off by P in the Base Case Example
resembles an actual Distribution by P of
stock of a controlled corporation holding
the P assets actually held by Controlled.
Both transactions reduce the total value
and built-in gain of P (which, in the Base
Case Example, becomes part of Distribut-
ing) by the value of, and built-in gain in,
the P assets held by Controlled.
By contrast, Example 5 involves a sec-
tion 351 exchange by P, which reduces
neither the total value nor the total built-in
gain inside P. In the section 351 exchange,
P exchanges assets for Distributing stock
of equal value. Under section 358, P’s ba-
sis in this Distributing stock is determined
by reference to P’s basis in the assets ex-
changed therefor, and is then allocated
between P’s Distributing stock and the
Controlled stock P receives in the Distri-
bution. Therefore, upon the conclusion of
Example 5, P holds Distributing stock and

January 13, 2020 310 Bulletin No. 2020–3
Controlled stock with an aggregate value
and built-in gain equal to the aggregate
value of, and built-in gain in, the assets
P transferred to Distributing. Rather than
disposing of an asset for no consideration
(as is the case in an actual distribution of
property with respect to a Distributing’s
stock), P merely has exchanged one asset
for another in Example 5. As a result, the
Treasury Department and the IRS have
determined that the series of transactions
set forth in Example 5 does not resemble
an actual Distribution by P and should not
be viewed as a synthetic spin-off.
B. Ease of Elimination of Built-In Gain in
the 2016 Preamble Example
The key distinction between the 2016
Preamble Example and Example 5 is the
relative ease with which a subsequent
restructuring could be undertaken to
eliminate P’s substituted built-in gain in
the 2016 Preamble Example. The 2016
Preamble Example, like Example 5, in-
volves a section 351 exchange in which
P exchanges assets for Internal Distribut-
ing stock with the same value and built-in
gain. Unlike in Example 5, however, Dis-
tributing in the 2016 Preamble Example
directly and indirectly owns 100 percent
of the stock of both P and Internal Distrib-
uting. As a result, in the 2016 Preamble
Example, Distributing could unilaterally
eliminate the built-in gain preserved in
P’s Internal Distributing stock through an
internal restructuring. The occurrence of
such an internal restructuring would make
the 2016 Preamble Example difficult to
distinguish from the Base Case Example.
By contrast, upon the conclusion of
Example 5, P owns only 10 percent of the
stock of each of Distributing and Con-
trolled, whereas corporation Y owns 90
percent. Although it may be theoretically
possible for P to eliminate its built-in gain
in this stock through certain transactions
involving Distributing and Controlled, P
lacks any meaningful control over either
corporation. In addition, the Treasury De-
partment and the IRS note that such built-
in gain elimination transactions generally
would carry significant non-tax conse-
quences. Therefore, it would be unrea-
sonable to assume that such transactions
would occur and that P’s built-in gain
in the Distributing and Controlled stock
would be eliminated after the Distribution.
One commenter asserted that there is
little opportunity for P to engage in a sub-
sequent restructuring to eliminate its built-
in gain in Distributing or Controlled stock
in a case like Example 5 or the 2016 Pre-
amble Example unless P is a member of
Distributing’s affiliated group (as defined
in section 1504 without regard to section
1504(b)) (Expanded Affiliated Group).
The Treasury Department and the IRS
agree with this comment.
Based on the foregoing, the final regu-
lations define the term Potential Predeces-
sor as any corporation other than Distrib-
uting or Controlled, but only if either (i)
as part of a Plan, the corporation transfers
property to a Potential Predecessor, Dis-
tributing, or a member of the same Ex-
panded Affiliated Group as Distributing in
a Section 381 Transaction (as in the Base
Case Example), or (ii) immediately after
completion of the Plan, the corporation is
a member of the same Expanded Affiliat-
ed Group as Distributing (as in the 2016
Preamble Example). Accordingly, under
the final regulations, P in Example 5 is not
a Potential Predecessor (and thus cannot
be a POD).
III. Pre-Distribution and Post-
Distribution Requirements
A. Overview
Under the 2016 Regulations, a Poten-
tial Predecessor qualified as a POD only
if two pre-Distribution requirements and
one post-Distribution requirement were
satisfied. The Treasury Department and
the IRS intended that these requirements,
taken together, (i) composed a technical
description of a synthetic spin-off, and (ii)
limited POD treatment to Potential Pre-
decessors the assets of which are divided
tax-free through a Distribution by Distrib-
uting. The following discussion summa-
rizes these requirements.
1. First Pre-Distribution Requirement:
Relevant Property
To satisfy the first pre-Distribution re-
quirement, any Controlled stock distribut-
ed in the Distribution must have been (i)
Relevant Property, the gain on which was
not recognized in full as part of a Plan, or
(ii) acquired by Distributing for Relevant
Property, the gain on which was not recog-
nized in full as part of a Plan, and that was
held by Controlled immediately before the
Distribution (Relevant Property Require-
ment). The term “Relevant Property” gen-
erally referred to any property held by the
Potential Predecessor at any point during
the Plan Period (that is, the period that
ends immediately after the Distribution
and begins on the earliest date on which
any part of the Plan is agreed to or under-
stood, arranged, or substantially negotiat-
ed). See § 1.355-8T(b)(2)(iv).
2. Second Pre-Distribution Requirement:
Controlled Stock Reflects Basis of
Separated Property
To satisfy the second pre-Distribu-
tion requirement, any Controlled stock
distributed in the Distribution must have
reflected the basis of any Separated Prop-
erty (Reflection of Basis Requirement). In
general, the 2016 Regulations defined the
term “Separated Property” as any Rele-
vant Property relied on to satisfy the Rel-
evant Property Requirement. See § 1.355-
8T(b)(2)(vii). The 2016 Regulations did
not define the phrase reflect the basis.
3. Post-Distribution Requirement:
Division of Relevant Property
To satisfy the post-Distribution re-
quirement, immediately following the
Distribution, ownership of Relevant Prop-
erty must have been divided between
Controlled, on the one hand, and Distrib-
uting or the Potential Predecessor, on the
other hand (Division of Relevant Property
Requirement).
B. Relevant Property Requirement:
Fluctuations in Value
One commenter requested clarification
of the Relevant Property Requirement’s
application to a case in which (i) gain on
Relevant Property is fully recognized at
some point during the Plan Period, but
(ii) the Relevant Property subsequently
appreciates so that built-in gain exists at
the time of the Distribution. The Treasury
Department and the IRS did not intend
for fluctuations in value to affect the de-

Bulletin No. 2020–3 311 January 13, 2020
termination of POD status under the 2016
Regulations. Consequently, the final reg-
ulations replace the requirement that gain
on Relevant Property not be recognized in
full “as part of a Plan” with the require-
ment that gain (if any) on Relevant Prop-
erty not be recognized in full “at any point
during the Plan Period.”
C. Reflection of Basis Requirement
The Treasury Department and the IRS
have received numerous comments re-
questing clarification of the Reflection of
Basis Requirement’s scope and purpose.
These comments arose from the failure of
the 2016 Regulations to define the phrase
reflect the basis.
To highlight the potential overbreadth
of this undefined phrase, one commenter
questioned whether P could qualify as a
POD solely through a basis adjustment
under § 1.1502-32. In the commenter’s
example, P and unrelated Distributing
(which is the common parent of a con-
solidated group) form corporation X in a
section 351 exchange in which P contrib-
utes Asset 1 and Distributing contributes
other assets in exchange for X stock, with
Distributing receiving at least 80 percent
of X’s stock by vote and value. Thereaf-
ter, Distributing contributes its X stock
to Controlled in exchange for Controlled
stock. Then, because of items relating to
Asset 1, Distributing’s basis in its Con-
trolled stock is adjusted under § 1.1502-
32. Finally, Distributing distributes all
of the stock of Controlled. Based on this
illustrative example, the commenter ex-
pressed concern that the § 1.1502-32 ba-
sis adjustment could cause Distributing’s
Controlled stock to reflect the basis of
Asset 1, and the commenter asserted that
treating P as a POD in this case would be
inappropriate.
The Treasury Department and the IRS
did not intend the Reflection of Basis Re-
quirement in the 2016 Regulations to be
satisfied solely by a basis adjustment un-
der § 1.1502-32. The Reflection of Basis
Requirement served two related purpos-
es. First, the Treasury Department and
the IRS intended the Reflection of Basis
Requirement to ensure a connection be-
tween the gain in the POD’s property
held by Controlled and the gain that Dis-
tributing must recognize under section
355(e). Second, the Treasury Department
and the IRS intended this requirement
to avoid improper duplication of gain if
Controlled stock is distributed in multiple
Distributions as part of the same Plan. See
§ 1.355-8T(h), Example 7 (concluding
with respect to consecutive Distributions
that, although P is a POD with respect to
the first Distribution, P is not a POD with
respect to the second Distribution because
the C stock distributed in the second Dis-
tribution did not reflect the basis of any
Separated Property).
The Treasury Department and the IRS
have addressed these concerns in the final
regulations by clearly articulating the Re-
flection of Basis Requirement. The final
regulations clarify that the Reflection of
Basis Requirement is satisfied only if any
Controlled stock that satisfies the Relevant
Property Requirement had a basis prior to
the Distribution that was determined, in
whole or in part, by reference to the basis
of Separated Property. The final regula-
tions make the same clarification to the two
other provisions that, under the 2016 Reg-
ulations, referred to a reflection of basis:
§ 1.355-8T(b)(2)(vi)(B)(2) (regarding the
treatment of Controlled stock as a Substi-
tute Asset); and § 1.355-8T(b)(2)(x) (pro-
viding a deemed exchange rule for purpos-
es of the Relevant Property Requirement,
the Reflection of Basis Requirement, and
the Substitute Asset definition).
In addition, the final regulations clarify
that the Reflection of Basis Requirement
is satisfied only if, during the Plan Period
prior to the Distribution, any Controlled
stock that satisfies the Relevant Property
Requirement (and the first prong of the
Reflection of Basis Requirement) was nei-
ther distributed in a section 355(e) distri-
bution nor transferred in a transaction in
which the gain (if any) on that Controlled
stock was recognized in full. This clari-
fication ensures that the final regulations
cannot be interpreted in a manner that
would give rise to improper duplication
of gain, a policy objective of the Treasury
Department and the IRS in issuing the
2016 Regulations.
D. Treatment of Property Acquired Not
Pursuant to a Plan
One commenter requested that the
Treasury Department and the IRS clar-
ify that property acquired by a Potential
Predecessor during the Plan Period would
not be treated as Relevant Property if not
acquired pursuant to a Plan. In particular,
the commenter presented an example in
which a Potential Predecessor becomes
a member of Distributing’s consolidated
group pursuant to a Plan. Prior to a Distri-
bution, the Potential Predecessor acquires
from other members of Distributing’s con-
solidated group property that had not been
transferred directly or indirectly to Dis-
tributing pursuant to the Plan. The com-
menter requested clarification that this
property is not Relevant Property.
The commenter’s specific concern was
already addressed by an exception to the
Relevant Property definition in the 2016
Regulations (see § 1.355-8T(b)(2)(iv)(B)),
and the final regulations retain this excep-
tion. This exception provides that property
held directly or indirectly by Distributing
is Relevant Property of a Potential Prede-
cessor only to the extent that the property
(1) was transferred directly or indirectly to
Distributing during the Plan Period, and (2)
was Relevant Property of the Potential Pre-
decessor before the direct or indirect trans-
fers. This exception exempts the property in
the commenter’s example from treatment
as Relevant Property because the property
was not transferred directly or indirectly to
Distributing during the Plan Period.
In addition, the final regulations include
a Plan limitation in the Division of Rele-
vant Property Requirement. Thus, the Di-
vision of Relevant Property Requirement
will be satisfied only if ownership of a
Potential Predecessor’s Relevant Property
has been divided as part of a Plan. Both
the preamble to the 2016 Regulations and
the text of § 1.355-8T(a)(3) (summarizing
the POD definition) described the Division
of Relevant Property Requirement in the
2016 Regulations as including a Plan lim-
itation, and the Treasury Department and
the IRS had intended for § 1.355-8T(b)(1)
(iii) (the Division of Relevant Property Re-
quirement) to include this limitation. The
Treasury Department and the IRS intend
that the Plan limitation in the Division of
Relevant Property Requirement will ensure
more generally that Relevant Property ac-
quired by a Potential Predecessor during
the Plan Period, but not pursuant to a Plan,
will not result in an inappropriate applica-
tion of section 355(e).

January 13, 2020 312 Bulletin No. 2020–3
E. Stock of Distributing as Relevant
Property
One commenter questioned whether a
reference in § 1.355-8T(b)(2)(v) (limiting
the circumstances under which Distribut-
ing stock is treated as Relevant Proper-
ty) to § 1.355-8T(b)(1)(ii) (the Relevant
Property Requirement and the Reflection
of Basis Requirement) was intended to
refer instead to § 1.355-8T(b)(1)(iii) (the
Division of Relevant Property Require-
ment). The Treasury Department and the
IRS intended for § 1.355-8T(b)(2)(v) to
reference the Division of Relevant Prop-
erty Requirement and have incorporated
this revision into the final regulations.
IV. Implicit Permission
Although § 1.355-7 generally governs
the determination of whether a Distribu-
tion and an acquisition of a 50-percent or
greater interest in a POD have occurred
as part of the same Plan, the 2016 Regu-
lations contained special rules in this re-
gard. See § 1.355-8T(a)(4)(ii). In general,
references to Distributing in § 1.355-7 in-
cluded references to a POD. However, any
agreement, understanding, arrangement,
or substantial negotiations regarding the
acquisition of the stock of a POD were
analyzed under § 1.355-7 with respect to
the actions of officers or directors of Dis-
tributing or Controlled, controlling share-
holders of Distributing or Controlled, or
a person acting with permission of one
of those persons. For that purpose, refer-
ences in § 1.355-7 to Distributing did not
include references to a POD. Therefore,
the actions of officers, directors, or con-
trolling shareholders of a POD, or of a
person acting with the implicit or explicit
permission of one of those persons, would
not have been considered for this purpose
unless those persons otherwise would
have been treated as acting on behalf of
Distributing or Controlled under § 1.355-
7. The final regulations retain these rules.
One commenter expressed concern
regarding the potential scope of the “im-
plicit permission” concept in § 1.355-7
given that the 2016 Regulations contem-
plated that actions on behalf of a Potential
Predecessor may be taken into account
if such actions were carried out with the
implicit permission of Distributing. The
Treasury Department and the IRS have
not addressed this comment in the final
regulations because the implicit permis-
sion concept is a component of § 1.355-7
and therefore is beyond the scope of this
Treasury decision.
V. Successors
Under section 355(e)(4)(D), any refer-
ence to Controlled or Distributing includes
a reference to any successor of such cor-
poration (Successor). Like the 2004 Pro-
posed Regulations, the 2016 Regulations
limited the definition of the term Succes-
sor to a corporation to which Distributing
or Controlled (as the case may be) trans-
fers property in a Section 381 Transaction
after the Distribution. A partnership can-
not receive assets in a Section 381 Trans-
action. Accordingly, a partnership could
not have been a Successor under either the
2004 Proposed Regulations or the 2016
Regulations. As noted later in this part V,
the final regulations retain this approach.
The 2004 Proposed Regulations and
the 2016 Regulations also contained a
deemed acquisition rule (see § 1.355-
8T(d)(2)). Under this rule, after a Section
381 Transaction, an acquisition of stock of
the acquiring corporation is treated also as
an acquisition of the stock of the distrib-
utor or transferor corporation in the Sec-
tion 381 Transaction. Thus, if the assets
of Distributing or any POD are acquired
by another corporation in a Section 381
Transaction, then any subsequent acquisi-
tion of the stock of the acquiring corpora-
tion is treated also as an acquisition of the
stock of Distributing or the POD, as the
case may be.
As a result of these rules, a corpora-
tion’s status as a Successor of Distribut-
ing or Controlled matters only insofar as
an acquisition of its stock is treated as an
acquisition of the stock of Distributing or
Controlled, respectively, which could re-
sult in a Planned 50-percent Acquisition
of Distributing or Controlled. Therefore,
the only significance of a Planned 50-per-
cent Acquisition of a Successor is its treat-
ment as a deemed Planned 50-percent
Acquisition of Distributing or Controlled
(as the case may be). Accordingly, if any
of the stock of Distributing or Controlled
has been acquired in, or prior to, a Section
381 Transaction, the application of sec-
tion 355(e) will turn on whether a Planned
50-percent Acquisition of Distributing
or Controlled has occurred, taking into
account acquisitions of the stock of Dis-
tributing or Controlled in, and prior to, the
Section 381 Transaction, as well as any
acquisitions of the stock of the Successor
following the Section 381 Transaction.
Commenters supported this approach,
and the Treasury Department and the IRS
have retained it in the final regulations.
Thus, under the final regulations, a Suc-
cessor of Distributing or of Controlled
must be a corporation to which Distribut-
ing or Controlled, respectively, transfers
property in a Section 381 Transaction after
the Distribution. A partnership cannot be
a Successor of Distributing or Controlled
under the final regulations for purposes of
section 355(e). Certain references in the
2016 Regulations to a Planned 50-percent
Acquisition of a Successor have been re-
fined to clarify the significance of Succes-
sor status.
VI. Gain Limitation Rules
Taken together, sections 355(e),
355(c), and 361(c) generally require Dis-
tributing to recognize any gain in Con-
trolled stock and securities distributed
in a Distribution that is part of the same
Plan as a Planned 50-percent Acquisition
of a POD, Distributing, or Controlled (the
amount of such gain, Statutory Recogni-
tion Amount). However, the 2016 Regu-
lations contained special rules that limit-
ed the amount of gain that section 355(e)
causes Distributing to recognize in certain
cases involving a POD. In cases involv-
ing a Planned 50-percent Acquisition of a
POD, § 1.355-8T(e)(2) (POD Gain Lim-
itation Rule) generally limited the amount
of gain Distributing was required to rec-
ognize to any built-in gain in the POD’s
Separated Property (generally, POD assets
held by Controlled). Similarly, in cases in-
volving a Planned 50-percent Acquisition
of Distributing as the result of a transfer
by a POD to Distributing in a Section 381
Transaction, § 1.355-8T(e)(3) (Distribut-
ing Gain Limitation Rule) generally re-
duced the amount of gain Distributing was
required to recognize by the built-in gain
in the POD’s Separated Property. In addi-
tion, in cases involving multiple Planned
50-percent Acquisitions, § 1.355-8T(e)

Bulletin No. 2020–3 313 January 13, 2020
(1) generally provided that the total gain
limitation applicable under § 1.355-8T(e)
is determined by adding the Statutory
Recognition Amount (subject to the POD
Gain Limitation Rule and the Distribut-
ing Gain Limitation Rule) with respect to
each Planned 50-percent Acquisition. Fi-
nally, § 1.355-8T(e)(4) provided that the
amount required to be recognized by Dis-
tributing under section 355(e) with regard
to a single Distribution will not exceed the
Statutory Recognition Amount.
Commenters questioned why the 2016
Regulations limited the Distributing Gain
Limitation Rule to Section 381 Transac-
tions, and recommended expanding the
Distributing Gain Limitation Rule so that
it applies to any Planned 50-Percent Ac-
quisition of Distributing. In particular, one
commenter asserted that the form of the
transaction in which a Planned 50-percent
Acquisition of Distributing occurs should
not be relevant to the application of the
gain limitation rules.
As discussed in the preamble to the
2016 Regulations, the Treasury Depart-
ment and the IRS intended the Distribut-
ing Gain Limitation Rule to minimize the
Federal income tax impact of direction-
ality between economically equivalent
Section 381 Transactions. In other words,
the Distributing Gain Limitation Rule was
intended to ensure that the amount of gain
required to be recognized under section
355(e) would be the same regardless of
whether the smaller or the larger corpo-
ration in a Section 381 Transaction acts
as the acquiring corporation. The Distrib-
uting Gain Limitation Rule was limited
to Section 381 Transactions in the 2016
Regulations because the direction of other
types of transactions (such as section 351
exchanges) generally cannot be reversed
without changing the substance of the
transaction, and thus generally do not im-
plicate the policy of directional neutrality.
However, upon further study, the Treasury
Department and the IRS have determined
that the policy underlying the Distributing
Gain Limitation Rule should not be limit-
ed to directional neutrality.
The POD definition is based on the the-
ory that a Distribution that effects a tax-
free division of the assets of a corporation
other than Distributing (a POD) may be
viewed as two separate Distributions: one
by the POD (of a Controlled holding the
Separated Property) (POD Distribution),
and one by Distributing (of a Controlled
holding all of the property held by Con-
trolled in the actual Distribution other
than the Separated Property) (Non-POD
Distribution). Section 355(e) requires gain
recognition when new shareholders ac-
quire ownership of a business in connec-
tion with a spin-off. Thus, when a Planned
50-percent Acquisition of a POD occurs
in connection with a POD Distribution,
the final regulations require gain recog-
nition under section 355(e). However,
unless there is also a Planned 50-percent
Acquisition of Distributing, the Non-POD
Distribution represents a division of exist-
ing business arrangements among existing
shareholders, to which Congress intended
to afford tax-free treatment. See Senate
Report at 139-140. Accordingly, the POD
Gain Limitation Rule limits the amount of
gain required to be recognized to the built-
in gain on the Separated Property.
The same policy goals justify the ex-
pansion of the Distributing Gain Limita-
tion Rule so that it applies to any Planned
50-percent Acquisition of Distributing—
however and by whomever effected. If a
Distribution involves a POD and occurs in
connection with a Planned 50-percent Ac-
quisition of Distributing (but no Planned
50-percent Acquisition of the POD or
Controlled), then the POD Distribution
should not be subject to gain recognition
because it represents a division of exist-
ing business arrangements among existing
shareholders.
Accordingly, the Distributing Gain
Limitation Rule in the final regulations
applies if there is a Planned 50-percent
Acquisition of Distributing. However,
consistent with the policy underlying the
Distributing Gain Limitation Rule, a Dis-
tribution will benefit from the Distributing
Gain Limitation Rule only if a POD ex-
ists and does not also undergo a Planned
50-percent Acquisition. If no POD exists,
then the limitation under the Distributing
Gain Limitation Rule will equal the Stat-
utory Recognition Amount, because there
is no Separated Property. If a POD exists
but also undergoes a Planned 50-percent
Acquisition, then Distributing must rec-
ognize the Statutory Recognition Amount
with respect to the Planned 50-percent Ac-
quisition of the POD (subject to the POD
Gain Limitation Rule) and the Planned
50-percent Acquisition of Distributing
(subject to the Distributing Gain Limita-
tion Rule). See § 1.355-8(e)(1)(ii) of the fi-
nal regulations (Multiple Planned 50-per-
cent Acquisitions). Similarly, if there are
Planned 50-percent Acquisitions of both
Distributing and Controlled, Distributing
must recognize the Statutory Recogni-
tion Amount with respect to the Planned
50-percent Acquisition of Controlled
(which is not eligible for limitation under
any gain limitation rule) and the Planned
50-percent Acquisition of Distributing
(subject to the Distributing Gain Limita-
tion Rule). Although the multiple Planned
50-percent Acquisition rule just described
may deny any benefit under the gain lim-
itation rules, in no event will the final reg-
ulations require Distributing to recognize
an amount that exceeds the Statutory Rec-
ognition Amount with regard to a single
Distribution. See § 1.355-8(e)(4) of the
final regulations (gain recognition limited
to Statutory Recognition Amount).
The Treasury Department and the IRS
have clarified the gain limitation rules in
the final regulations to make them easier
to understand and apply. The Treasury
Department and the IRS also have refined
the calculation of the gain limitation un-
der the Distributing Gain Limitation Rule
to account for the possibility of more than
one POD with respect to a single Distribu-
tion. In addition, to clarify that both built-
in gain and built-in loss assets are taken
into account in computing any applicable
gain limitation, the Treasury Department
and the IRS have refined the description
of gain in the Relevant Property Require-
ment by adding the parenthetical phrase
“(if any),” and have added a similar clar-
ification to the Separated Property defini-
tion.
VII. Relevant Equity
The 2016 Temporary Regulations
used the defined term “Relevant Stock”
(stock that is Relevant Property) in con-
nection with the defined terms “Separat-
ed Property” and “Underlying Property”
(property directly or indirectly held by a
corporation that is the issuer of Relevant
Stock). See § 1.355-8T(b)(2)(iv), (vii),
and (viii). These terms were used to en-
sure that gain would not be duplicated in
determining the applicable gain limitation

January 13, 2020 314 Bulletin No. 2020–3
amount (if any) if the Relevant Property
held by Controlled included stock in a
corporation. The potential for duplication
existed because the gain limitation is cal-
culated based on the built-in gain in Rele-
vant Property held by Controlled, and the
definition of “Relevant Property” included
assets held directly or indirectly (and thus
included both stock of a corporation and
any assets held by the corporation).
The Treasury Department and the IRS
have determined that a similar risk of du-
plicated gain exists when Relevant Prop-
erty includes an interest in a partnership.
Accordingly, the final regulations replace
the term “Relevant Stock” with the term
“Relevant Equity,” which means Relevant
Property that is an equity interest in a cor-
poration or a partnership. This clarifica-
tion relates only to the determination of
the limitation on gain under § 1.355-8(e)
of the final regulations (if any).
VIII. Section 336(e)
The 2016 Regulations prohibited a sec-
tion 336(e) election if the amount of gain
required to be recognized by Distributing
with respect to the Distribution was less
than the Statutory Recognition Amount
due to the POD Gain Limitation Rule or
the Distributing Gain Limitation Rule.
This prohibition applied even if Distribut-
ing chose to recognize the Statutory Rec-
ognition Amount under § 1.355-8T(e)(4).
One commenter criticized this prohibition
as “inequitable as a policy matter and un-
necessary as an administrative one.”
Although the final regulations retain this
prohibition, the Treasury Department and
the IRS continue to study and request com-
ments on the following issues: (1) Whether
permitting a section 336(e) election in this
context would be consistent with the policy
of section 336(e), (2) whether permitting a
section 336(e) election in this context could
give rise to inappropriate planning oppor-
tunities, (3) whether permitting a section
336(e) election in this context only if the
Separated Property accounts for a certain
minimum percentage of Controlled’s value
or built-in gain would be appropriate, and
(4) whether limiting the deemed asset dis-
position that results from a section 336(e)
election in this context to a deemed dispo-
sition of the Separated Property would be
appropriate.
IX. Stock Deemed Acquired in a Section
381 Transaction
Section 355(e)(3)(B) provides a spe-
cial rule for certain asset acquisitions. For
purposes of section 355(e), if the assets of
Distributing or Controlled are acquired by
a successor corporation in a transaction
described in section 368(a)(1)(A), (C), or
(D), or in any other transaction specified in
regulations, the shareholders (immediate-
ly before the acquisition) of the successor
corporation are treated as acquiring stock
in Distributing or Controlled, respective-
ly, except as otherwise provided in regu-
lations. Similarly, the 2016 Regulations
provided that any Section 381 Transaction
is treated as an acquisition of stock in the
distributor or transferor corporation by
shareholders of the acquiring corporation.
A commenter pointed out a mathematical
error in the textual example that followed
this rule (in § 1.355-8T(d)(1)). The final
regulations correct this error and make
minor clarifications to improve the read-
ability of the operative rule.
X. No Step Transaction Implications
From Examples
One commenter suggested that the
Treasury Department and the IRS clarify
that no inference should be drawn from
the examples in § 1.355-8T(h) as to the in-
tended application of the step transaction
doctrine and other general Federal income
tax principles. The Treasury Department
and the IRS did not intend for any such
inference to be drawn, and have added a
specific disclaimer to this effect in the fi-
nal regulations.
XI. Transition Rule
The 2016 Regulations generally ap-
plied to Distributions occurring after Jan-
uary 18, 2017. However, under a transi-
tion rule, the 2016 Regulations generally
did not apply to a Distribution that was
(A) made pursuant to a binding agreement
in effect on or before December 16, 2016
and at all times thereafter; (B) described
in a ruling request submitted to the IRS on
or before December 16, 2016; or (C) de-
scribed on or before December 16, 2016
in a public announcement or in a filing
with the Securities and Exchange Com-
mission. For the transition rule to apply,
the agreement, ruling request, public an-
nouncement, or filing described in the pre-
ceding sentence had to describe all steps
relevant to the determination of POD sta-
tus. See § 1.355-8T(i)(2)(ii).
One commenter criticized the “all rele-
vant steps” rule in § 1.355-8T(i)(2)(ii) as
“extremely narrow” and inappropriate for
immediately effective regulations. This
commenter contended that it is “unlikely
that all such transactions would be de-
scribed . . . until very late in the long and
expensive process of a corporate separa-
tion, if at all.”
The Treasury Department and the IRS
note that the 2016 Regulations were not
immediately applicable; they were pub-
lished on December 19, 2016, but they
generally applied only to Distributions that
occurred after January 18, 2017. More-
over, the final regulations do not contain
a transition rule, so the commenter’s con-
cern is relevant only to transactions that
were the subject of an agreement, ruling
request, public announcement, or public
filing that occurred in 2016 (or before).
Finally, despite the commenter’s general
concern, the Treasury Department and the
IRS are unaware of any transactions that
failed to qualify for the transition rule due
to the “all relevant steps” rule in § 1.355-
8T(i)(2)(ii). Accordingly, the Treasury
Department and the IRS have determined
that it is not necessary to reconsider the
transition rule in the 2016 Regulations as
part of this Treasury decision.
XII. Additional Clarifications
Commenters noted generally that cer-
tain aspects of the 2016 Regulations were
complicated and difficult to understand.
The Treasury Department and the IRS
have refined and clarified certain aspects
of the 2016 Regulations in the final regu-
lations to make the rules easier to follow
and understand. For instance, certain para-
graphs in the 2016 Regulations that were
long and contained multiple distinct rules
have been subdivided in the final regula-
tions. In addition, defined terms have been
added for certain rules (such as the Rele-
vant Property Requirement, the Reflection
of Basis Requirement, and the Division of
Relevant Property Requirement). These
defined terms are intended to allow the

Bulletin No. 2020–3 315 January 13, 2020
reader to more intuitively grasp the mean-
ing of the numerous provisions cross-ref-
erenced in the final regulations.
Section 1.355-8T(c)(1) defined the
term “Predecessor of Controlled” and
provided certain rules relating to Prede-
cessors of Controlled. One of these rules
provided that, for purposes of § 1.355-
8T(c)(1), a reference to Controlled in-
cluded a reference to a Predecessor of
Controlled. However, another provision
in the 2016 Regulations (§ 1.355-8T(a)(4)
(i)) provided more generally that, except
as otherwise provided, any reference to
Controlled included, as the context may
have required, a reference to any Prede-
cessor of Controlled. Accordingly, the rule
in § 1.355-8T(c)(1) was unnecessary, and
the Treasury Department and the IRS have
omitted it in the final regulations.
XIII. Examples
The Treasury Department and the IRS
have modified three of the examples con-
tained in the 2016 Regulations (Examples
5, 7, and 8), and omitted one example
(Example 6), for the reasons described in
this part XIII. All of the retained examples
have been updated to reflect modifications
in the final regulations. For instance, the
POD analyses in Examples 3 and 4 elimi-
nate the statement that Controlled stock is
Separated Property, because that fact is no
longer relevant under the revised Reflec-
tion of Basis Requirement. In some of the
examples, the analysis has been clarified
to make it easier to follow and understand.
The facts of Example 5 of the 2016
Regulations have been retained, but
the consequences of the example have
changed due to the modification the Trea-
sury Department and the IRS have made
to the Potential Predecessor definition. As
a result of this modification, P in Example
5 is no longer a Potential Predecessor (and
thus is not a POD for that reason).
Example 6 of the 2016 Regulations has
been omitted. This example illustrated a
variation on Example 5 that used a for-
ward triangular merger instead of a sec-
tion 351 exchange. However, due to the
modification to the Potential Predecessor
definition, P in Example 6 is no longer a
Potential Predecessor (and thus is not a
POD for that reason), which eliminates
the utility of this example.
Example 7 of the 2016 Regulations has
been incorporated into new Example 6 in
the final regulations, which is based on the
2016 Preamble Example.
Example 8 of the 2016 Regulations has
been retained as Example 7 in the final
regulations, but has been modified so that
P1 and P2 are Potential Predecessors un-
der the final regulations. In particular, the
section 351 exchange between P2 and D
has been replaced by a Section 381 Trans-
action in which P2 merges into D.
Applicability Date
Section 7805(b)(1)(A) and (B) of the
Code generally provide that no tempo-
rary, proposed, or final regulation relating
to the internal revenue laws may apply to
any taxable period ending before the ear-
liest of (A) the date on which such regu-
lation is filed with the Federal Register,
or (B) in the case of a final regulation, the
date on which a proposed or temporary
regulation to which the final regulation
relates was filed with the Federal Regis-
ter. In addition, section 7805(e) provides
that any temporary regulation shall also be
issued as a proposed regulation, and that
such temporary regulation shall expire
within 3 years after the date of issuance of
the temporary regulation.
The final regulations, the substance of
which is generally the same as that of the
2016 Regulations, apply to Distributions
that occur after December 15, 2019, the
day before the expiration date of the 2016
Temporary Regulations.
Special Analyses
This regulation is not subject to review
under section 6(b) of Executive Order
12866 pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Department of the Treasury and the Office
of Management and Budget regarding re-
view of tax regulations.
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby cer-
tified that these final regulations will not
have a significant economic impact on a
substantial number of small entities. This
certification is based on the fact that these
regulations would primarily affect large
corporations with a substantial number of
shareholders, as well as corporations that
are members of large corporate groups.
Additionally, the Treasury Department
and the IRS have determined that no addi-
tional burden will be associated with these
final regulations. Therefore, a regulatory
flexibility analysis is not required.
Pursuant to section 7805(f) of the In-
ternal Revenue Code, the 2016 Proposed
Regulations were submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small businesses, and no com-
ments were received.
Drafting Information
The principal author of these regula-
tions is W. Reid Thompson of the Office
of Associate Chief Counsel (Corporate).
However, other personnel from the Trea-
sury Department and the IRS participated
in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amend-
ed as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entry
for § 1.355-8T and adding an entry in nu-
merical order for § 1.355-8 to read in part
as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.355-8 also issued under 26
U.S.C. 336(e), 355(e)(3)(B), 355(e)(5),
and 355(f).
* * * * *
Par. 2. Section 1.355-0 is amended by
revising the introductory text, removing
the entries for § 1.355-8T, and adding the
entries for § 1.355-8 to read as follows:
§ 1.355-0 Outline of sections.
In order to facilitate the use of
§§ 1.355-1 through 1.355-8, this section
lists the major paragraphs in those sec-
tions as follows:
* * * * *

January 13, 2020 316 Bulletin No. 2020–3
§ 1.355-8 Definition of predecessor
and successor and limitations on gain rec-
ognition under section 355(e) and section
355(f).
(a) In general.
(1) Scope.
(2) Overview.
(i) Purposes and conceptual overview.
(ii) References to and definitions of
terms used in this section.
(iii) Special rules and examples.
(3) Purposes of section; Predecessor of
Distributing overview.
(i) Purposes.
(ii) Predecessor of Distributing over-
view.
(A) Relevant Property transferred to
Controlled.
(B) Relevant Property includes Con-
trolled Stock.
(4) References.
(i) References to Distributing or Con-
trolled.
(ii) References to Plan or Distribution.
(iii) Plan Period.
(5) List of definitions.
(b) Predecessor of Distributing.
(1) Definition.
(i) In general.
(ii) Pre-Distribution requirements.
(A) Relevant Property requirement.
(B) Reflection of basis requirement.
(iii) Post-Distribution requirement.
(2) Additional definitions and rules re-
lated to paragraph (b)(1) of this section.
(i) References to Distributing and Con-
trolled.
(ii) Potential Predecessor.
(A) Potential Predecessor definition.
(B) Expanded Affiliated Group defini-
tion.
(iii) Successors of Potential Predeces-
sors.
(iv) Relevant Property; Relevant Equi-
ty.
(A) In general.
(B) Property held by Distributing.
(C) F reorganizations.
(v) Stock of Distributing as Relevant
Property.
(A) In general.
(B) Certain reorganizations.
(vi) Substitute Asset.
(A) In general.
(B) Controlled stock received by Dis-
tributing.
(1) In general.
(2) Exception.
(C) Treatment as Relevant Property.
(vii) Separated Property.
(viii) Underlying Property.
(ix) Multiple Predecessors of Distrib-
uting.
(x) Deemed exchanges.
(c) Additional definitions.
(1) Predecessor of Controlled.
(2) Successors.
(i) In general.
(ii) Determination of Successor status.
(3) Section 381 Transaction.
(d) Special acquisition rules.
(1) Deemed acquisitions of stock in
Section 381 Transactions.
(i) Rule.
(ii) Example.
(2) Deemed acquisitions of stock after
Section 381 Transactions.
(3) Separate counting for Distributing
and each Predecessor of Distributing.
(e) Special rules for limiting gain rec-
ognition.
(1) Overview.
(i) Gain limitation.
(ii) Multiple Planned 50-percent Ac-
quisitions.
(iii) Statutory Recognition Amount
limit; Section 336(e).
(2) Planned 50-percent Acquisition of a
Predecessor of Distributing.
(i) In general.
(ii) Operating rules.
(A) Separated Property other than Con-
trolled stock.
(B) Controlled stock that is Separated
Property.
(C) Anti-duplication rule.
(3) Planned 50-percent Acquisition of
Distributing.
(4) Gain recognition limited to Statuto-
ry Recognition Amount.
(5) Section 336(e) election.
(f) Predecessor or Successor as a mem-
ber of the affiliated group.
(g) Inapplicability of section 355(f) to
certain intra-group Distributions.
(1) In general.
(2) Alternative application of section
355(f).
(h) Examples.
(i) Applicability date.
§ 1.355-8T [Removed]
Par. 3. Section 1.355-8T is removed.
Par. 4. Section 1.355-8 is added to read
as follows:
§ 1.355-8 Definition of predecessor
and successor and limitations on gain rec-
ognition under section 355(e) and section
355(f).
(a) In general—(1) Scope. For purpos-
es of section 355(e), this section provides
rules under section 355(e)(4)(D) to deter-
mine whether a corporation is treated as a
predecessor or successor of a distributing
corporation (Distributing) or a controlled
corporation (Controlled) with respect to
a distribution by Distributing of stock (or
stock and securities) of Controlled that
qualifies under section 355(a) (or so much
of section 356 as relates to section 355)
(Distribution). This section also provides
rules limiting the amount of Distributing’s
gain recognized under section 355(e) on
a Distribution if section 355(e) applies to
an acquisition by one or more persons, as
part of a Plan, of stock that in the aggre-
gate represents a 50-percent or greater in-
terest (Planned 50-percent Acquisition) of
a Predecessor of Distributing, or a Planned
50-percent Acquisition of Distributing. In
addition, this section provides rules re-
garding the application of section 336(e)
to a Distribution to which this section ap-
plies. This section also provides rules re-
garding the application of section 355(f)
to a Distribution in certain cases.
(2) Overview—(i) Purposes and con-
ceptual overview. Paragraph (a)(3) of this
section summarizes the two principal pur-
poses of this section and sets forth a brief
conceptual overview of the scenarios in
which a corporation may be a Predecessor
of Distributing.
(ii) References to and definitions of
terms used in this section. Paragraph (a)
(4) of this section provides rules regarding
references to the terms Distributing, Con-
trolled, Distribution, Plan, and Plan Peri-
od for purposes of section 355(e), § 1.355-
7, and this section. Paragraph (a)(5) of this
section lists the terms used in this section
and indicates where each term is defined.
Paragraph (b) of this section defines the
term Predecessor of Distributing and sev-
eral related terms. Paragraph (c) of this
section defines the terms Predecessor of
Controlled, Successor (of Distributing or
Controlled), and Section 381 Transaction.
(iii) Special rules and examples. Para-
graph (d) of this section provides guid-
ance with regard to acquisitions and
deemed acquisitions of stock if there is a

Bulletin No. 2020–3 317 January 13, 2020
Predecessor of Distributing or a Succes-
sor of either Distributing or Controlled.
Paragraph (e) of this section provides two
rules that may limit the amount of Dis-
tributing’s gain on a Distribution if there
is a Predecessor of Distributing, as well
as an overall gain limitation. Paragraph
(e) of this section also provides guidance
with respect to the application of section
336(e). Regardless of whether there is a
Predecessor of Distributing, Predeces-
sor of Controlled, or Successor of either
Distributing or Controlled, paragraph (f)
of this section provides a special rule re-
lating to section 355(e)(2)(C), which pro-
vides that section 355(e) does not apply to
certain transactions within an Expanded
Affiliated Group. Paragraph (g) of this
section provides rules coordinating the ap-
plication of section 355(f) with the rules
of this section. Paragraph (h) of this sec-
tion contains examples that illustrate the
rules of this section.
(3) Purposes of section; Predecessor of
Distributing overview—(i) Purposes. The
rules in this section have two principal
purposes. The first is to ensure that section
355(e) applies to a Distribution if, as part
of a Plan, some of the assets of a Prede-
cessor of Distributing are transferred di-
rectly or indirectly to Controlled without
full recognition of gain, and the Distribu-
tion accomplishes a division of the assets
of the Predecessor of Distributing. The
second is to ensure that section 355(e) ap-
plies when there is a Planned 50-percent
Acquisition of a Successor of Distributing
or Successor of Controlled. The rules of
this section must be interpreted and ap-
plied in a manner that is consistent with
and reasonably carries out the purposes of
this section.
(ii) Predecessor of Distributing over-
view. The term Predecessor of Distrib-
uting is defined in paragraph (b) of this
section. Only a Potential Predecessor
can be a Predecessor of Distributing. See
paragraph (b)(1)(i) of this section. A Po-
tential Predecessor can be a Predecessor
of Distributing only if, as part of a Plan,
the Distribution accomplishes a division
of the assets of the Potential Predecessor.
See paragraph (b)(1)(iii) of this section.
Accordingly, in the absence of that Plan,
a Predecessor of Distributing cannot exist
for purposes of section 355(e). The de-
tailed rules set forth in paragraph (b) of
this section provide that a Potential Pre-
decessor the assets of which are divided
as part of a Plan may be a Predecessor of
Distributing in either of the following two
scenarios:
(A) Relevant Property transferred to
Controlled. As part of the Plan, one or
more of the Potential Predecessor’s assets
were transferred to Controlled in one or
more tax-deferred transactions prior to the
Distribution.
(B) Relevant Property includes Con-
trolled Stock. The Potential Predecessor’s
assets included Controlled stock that, as
part of the Plan, was transferred to Dis-
tributing in one or more tax-deferred
transactions prior to the Distribution.
(4) References—(i) References to
Distributing or Controlled. For purpos-
es of section 355(e), except as otherwise
provided in this section, any reference to
Distributing or Controlled includes, as the
context may require, a reference to any
Predecessor of Distributing or any Prede-
cessor of Controlled, respectively, or any
Successor of Distributing or Controlled,
respectively. However, except as other-
wise provided in this section, a reference
to a Predecessor of Distributing or to a
Successor of Distributing does not include
a reference to Distributing, and a refer-
ence to a Predecessor of Controlled or to a
Successor of Controlled does not include
a reference to Controlled.
(ii) References to Plan or Distribution.
Except as otherwise provided in this sec-
tion, references to a Plan in this section
are references to a plan within the mean-
ing of § 1.355-7. References to a distri-
bution in § 1.355-7 include a reference to
a Distribution and other related pre-Dis-
tribution transactions that together effect
a division of the assets of a Predecessor
of Distributing. In determining whether
a Distribution and a Planned 50-percent
Acquisition of a Predecessor of Distrib-
uting, Distributing (including any Suc-
cessor thereof), or Controlled (including
any Successor thereof) are part of a Plan,
the rules of § 1.355-7 apply. In applying
those rules, references to Distributing or
Controlled in § 1.355-7 generally include
references to any Predecessor of Distrib-
uting and any Successor of Distributing,
or any Successor of Controlled, as appro-
priate. However, with regard to any pos-
sible Planned 50-percent Acquisition of
a Predecessor of Distributing, any agree-
ment, understanding, arrangement, or
substantial negotiations with regard to the
acquisition of the stock of the Predecessor
of Distributing is analyzed under § 1.355-
7 with regard to the actions of officers or
directors of Distributing or Controlled,
controlling shareholders (as defined in
§ 1.355-7(h)(3)) of Distributing or Con-
trolled, or a person acting with permission
of one of those parties. For purposes of the
preceding sentence, references in § 1.355-
7 to Distributing do not include references
to a Predecessor of Distributing. There-
fore, the actions of officers, directors, or
controlling shareholders of a Predecessor
of Distributing, or of a person acting with
the implicit or explicit permission of one
of those parties, are not considered unless
those parties otherwise would be treat-
ed as acting on behalf of Distributing or
Controlled under § 1.355-7 (for example,
if a Predecessor of Distributing is a con-
trolling shareholder of Distributing).
(iii) Plan Period. For purposes of this
section, the term Plan Period means the
period that ends immediately after the
Distribution and begins on the earliest date
on which any pre-Distribution step that is
part of the Plan is agreed to or understood,
arranged, or substantially negotiated by
one or more officers or directors acting
on behalf of Distributing or Controlled,
by controlling shareholders of Distribut-
ing or Controlled, or by another person or
persons with the implicit or explicit per-
mission of one or more of such officers,
directors, or controlling shareholders. For
purposes of the preceding sentence, refer-
ences to Distributing and Controlled do
not include references to any Predeces-
sor of Distributing, Predecessor of Con-
trolled, or Successor of Distributing or
Controlled.
(5) List of definitions. This section uses
the following terms, which are defined
where indicated—
(i) Acquiring Owner. Paragraph (d)(1)
(i) of this section.
(ii) Controlled. Paragraph (a)(1) of this
section.
(iii) Distributing. Paragraph (a)(1) of
this section.
(iv) Distributing Gain Limitation Rule.
Paragraph (e)(1)(ii) of this section.
(v) Distribution. Paragraph (a)(1) of
this section.

January 13, 2020 318 Bulletin No. 2020–3
(vi) Division of Relevant Property Re-
quirement. Paragraph (b)(1)(iii) of this
section.
(vii) Expanded Affiliated Group. Para-
graph (b)(2)(ii)(B) of this section.
(viii) Hypothetical Controlled. Para-
graph (e)(2)(i) of this section.
(ix) Hypothetical D/355(e) Reorgani-
zation. Paragraph (e)(2)(i) of this section.
(x) Plan. Paragraph (a)(4)(ii) of this
section.
(xi) Plan Period. Paragraph (a)(4)(iii)
of this section.
(xii) Planned 50-percent Acquisition.
Paragraph (a)(1) of this section.
(xiii) POD Gain Limitation Rule. Para-
graph (e)(1)(ii) of this section.
(xiv) Potential Predecessor. Paragraph
(b)(2)(ii)(A) of this section.
(xv) Predecessor of Controlled. Para-
graph (c)(1) of this section.
(xvi) Predecessor of Distributing.
Paragraph (b)(1) of this section.
(xvii) Reflection of Basis Requirement.
Paragraph (b)(1)(ii)(B) of this section.
(xviii) Relevant Equity. Paragraph (b)
(2)(iv)(A) of this section.
(xix) Relevant Property. Paragraph (b)
(2)(iv)(A) of this section.
(xx) Relevant Property Requirement.
Paragraph (b)(1)(ii)(A) of this section.
(xxi) Section 381 Transaction. Para-
graph (c)(3) of this section.
(xxii) Separated Property. Paragraph
(b)(2)(vii) of this section.
(xxiii) Statutory Recognition Amount.
Paragraph (e)(1)(i) of this section.
(xxiv) Substitute Asset. Paragraph (b)
(2)(vi)(A) of this section.
(xxv) Successor. Paragraph (c)(2)(i) of
this section.
(xxvi) Successor Transaction. Para-
graph (c)(2)(i) of this section.
(xxvii) Underlying Property. Para-
graph (b)(2)(viii) of this section.
(b) Predecessor of Distributing—(1)
Definition—(i) In general. For purposes of
section 355(e), a Potential Predecessor is a
predecessor of Distributing (Predecessor of
Distributing) if, taking into account the spe-
cial rules of paragraph (b)(2) of this section—
(A) Both pre-Distribution requirements
of paragraph (b)(1)(ii) of this section are
satisfied; and
(B) The post-Distribution requirement
of paragraph (b)(1)(iii) of this section is
satisfied.
(ii) Pre-Distribution requirements—
(A) Relevant Property requirement. The
requirement set forth in this paragraph
(b)(1)(ii)(A) (Relevant Property Require-
ment) is satisfied if, before the Distribu-
tion, and as part of a Plan, either—
(1) Any Controlled stock distributed in
the Distribution was directly or indirectly
acquired (or deemed acquired under the
rules set forth in paragraph (b)(2)(x) of
this section) by Distributing in exchange
for any direct or indirect interest in Rele-
vant Property—
(i) That is held directly or indirectly by
Controlled immediately before the Distri-
bution; and
(ii) The gain on which (if any) was not
recognized in full at any point during the
Plan Period; or
(2) Any Controlled stock that is distrib-
uted in the Distribution is Relevant Prop-
erty of the Potential Predecessor.
(B) Reflection of basis requirement.
The requirement set forth in this para-
graph (b)(1)(ii)(B) (Reflection of Basis
Requirement) is satisfied if any Controlled
stock that satisfies the Relevant Property
Requirement—
(1) Either—
(i) Had a basis prior to the Distribution
that was determined in whole or in part
by reference to the basis of any Separated
Property; or
(ii) Is Relevant Property of the Poten-
tial Predecessor; and
(2) During the Plan Period prior to the
Distribution, was neither distributed in a
distribution to which section 355(e) ap-
plied nor transferred in a transaction in
which the gain (if any) on that Controlled
stock was recognized in full.
(iii) Post-Distribution requirement.
The requirement set forth in this para-
graph (b)(1)(iii) (Division of Relevant
Property Requirement) is satisfied if, im-
mediately after the Distribution, and as
part of a Plan, direct or indirect owner-
ship of the Potential Predecessor’s Rele-
vant Property has been divided between
Controlled on the one hand, and Distrib-
uting or the Potential Predecessor (or a
successor to the Potential Predecessor)
on the other hand. For purposes of this
paragraph (b)(1)(iii), if Controlled stock
that is distributed in the Distribution is
Relevant Property of a Potential Prede-
cessor, then Controlled is deemed to have
received Relevant Property of the Poten-
tial Predecessor.
(2) Additional definitions and rules
related to paragraph (b)(1) of this sec-
tion—(i) References to Distributing and
Controlled. For purposes of the Relevant
Property Requirement, the Reflection of
Basis Requirement, and the Division of
Relevant Property Requirement, referenc-
es to Distributing and Controlled do not
include references to any Predecessor of
Distributing, Predecessor of Controlled,
or Successor of Distributing or Controlled.
(ii) Potential Predecessor—(A) Poten-
tial Predecessor definition. The term Po-
tential Predecessor means a corporation,
other than Distributing or Controlled, if—
(1) As part of a Plan, the corporation
transfers property to a Potential Predeces-
sor, Distributing, or a member of the same
Expanded Affiliated Group as Distribut-
ing in a Section 381 Transaction; or
(2) Immediately after completion of
the Plan, the corporation is a member of
the same Expanded Affiliated Group as
Distributing.
(B) Expanded Affiliated Group defini-
tion. The term Expanded Affiliated Group
means an affiliated group (as defined in
section 1504 without regard to section
1504(b)).
(iii) Successors of Potential Prede-
cessors. For purposes of the Division of
Relevant Property Requirement, if a Po-
tential Predecessor transfers property in a
Section 381 Transaction to a corporation
(other than Distributing or Controlled)
during the Plan Period, the corporation is
a successor to the Potential Predecessor.
(iv) Relevant Property; Relevant Equi-
ty—(A) In general. Except as otherwise
provided in this paragraph (b)(2)(iv) or
in paragraph (b)(2)(v) of this section, the
term Relevant Property means any proper-
ty that was held, directly or indirectly, by
the Potential Predecessor during the Plan
Period. The term Relevant Equity means
Relevant Property that is an equity interest
in a corporation or a partnership.
(B) Property held by Distributing. Ex-
cept as provided in paragraph (b)(2)(iv)
(C) of this section, property held directly
or indirectly by Distributing (including
Controlled stock) is Relevant Property of
a Potential Predecessor only to the extent
that the property was transferred directly
or indirectly to Distributing during the

Bulletin No. 2020–3 319 January 13, 2020
Plan Period, and it was Relevant Property
of the Potential Predecessor before the di-
rect or indirect transfer(s). For example, if
during the Plan Period a subsidiary corpo-
ration of a Potential Predecessor merges
into Controlled in a reorganization under
section 368(a)(1)(A) and (2)(D), and, as a
result, the Potential Predecessor directly
or indirectly owns Distributing stock re-
ceived in the merger, the subsidiary’s as-
sets held by Controlled are Relevant Prop-
erty of that Potential Predecessor.
(C) F reorganizations. For purposes of
paragraph (b)(2)(iv)(B) of this section, the
transferor and transferee in any reorgani-
zation described in section 368(a)(1)(F)
(F reorganization) are treated as a single
corporation. Therefore, for example, Rel-
evant Property acquired during the Plan
Period by a corporation that is a transferor
(as to a later F reorganization) is treated as
having been acquired directly (and from
the same source) by the transferee (as
to the later F reorganization) during the
Plan Period. In addition, any transfer (or
deemed transfer) of assets to Distributing
in an F reorganization will not cause the
transferred assets to be treated as Relevant
Property.
(v) Stock of Distributing as Relevant
Property—(A) In general. For purposes
of the Division of Relevant Property Re-
quirement, except as provided in para-
graph (b)(2)(v)(B) of this section, stock of
Distributing is not Relevant Property (and
thus is not Relevant Equity) to the extent
that the Potential Predecessor becomes, as
part of a Plan, the direct or indirect owner
of that stock as the result of the transfer to
Distributing of direct or indirect interests
in the Potential Predecessor’s Relevant
Property. For example, stock of Distrib-
uting is not Relevant Property if it is ac-
quired by a Potential Predecessor as part
of a Plan in an exchange to which section
351(a) applies.
(B) Certain reorganizations. For pur-
poses of the Division of Relevant Property
Requirement, stock of Distributing is Rel-
evant Property (and thus Relevant Equity)
to the extent that the Potential Predecessor
becomes, as part of the Plan, the direct or
indirect owner of that stock as the result of
a transaction described in section 368(a)
(1)(E).
(vi) Substitute Asset—(A) In general.
Subject to paragraph (b)(2)(vi)(B) of this
section, the term Substitute Asset means
any property that is held directly or in-
directly by Distributing during the Plan
Period and was received, during the Plan
Period, in exchange for Relevant Property
that was acquired directly or indirectly by
Distributing if all gain on the transferred
Relevant Property is not recognized on the
exchange. For example, property received
by Controlled in exchange for Relevant
Property in a transaction qualifying un-
der section 1031 is a Substitute Asset. In
addition, stock received by Distributing
in a distribution qualifying under section
305(a) or section 355(a) on Relevant Eq-
uity is a Substitute Asset.
(B) Controlled stock received by Dis-
tributing—(1) In general. Except as pro-
vided in paragraph (b)(2)(vi)(B)(2) of this
section, stock of Controlled received in
exchange for a direct or indirect transfer
of Relevant Property by Distributing is
not a Substitute Asset.
(2) Exception. If the basis in Controlled
stock received or deemed received in an
exchange described in paragraph (b)(2)
(vi)(B)(1) of this section is determined in
whole or in part by reference to the ba-
sis of Relevant Equity the issuer of which
ceases to exist for Federal income tax
purposes under the Plan, that Controlled
stock constitutes a Substitute Asset. See
paragraph (b)(2)(x) of this section.
(C) Treatment as Relevant Property.
For purposes of this section, a Substitute
Asset is treated as Relevant Property with
the same ownership and transfer history as
the Relevant Property for which (or with
respect to which) it was received.
(vii) Separated Property. The term Sep-
arated Property means each item of Rele-
vant Property that is described in the Rel-
evant Property Requirement (regardless of
whether the fair market value of the Rele-
vant Property exceeds its adjusted basis).
However, if Relevant Equity is Separated
Property, Underlying Property associated
with that Relevant Equity is not treated as
Separated Property. In addition, if Distrib-
uting directly or indirectly acquires Rele-
vant Equity in a transaction in which gain
is recognized in full, Underlying Property
associated with that Relevant Equity is not
treated as Separated Property.
(viii) Underlying Property. The term
Underlying Property means property di-
rectly or indirectly held by a corporation
or partnership any equity interest in which
is Relevant Equity.
(ix) Multiple Predecessors of Distrib-
uting. If there are multiple Potential Pre-
decessors that satisfy the pre-Distribution
requirements and post-Distribution re-
quirement of paragraph (b)(1) of this sec-
tion, each of those Potential Predecessors
is a Predecessor of Distributing. For ex-
ample, a Potential Predecessor that trans-
fers property to a Predecessor of Distrib-
uting without full recognition of gain (and
that otherwise meets the requirements of
paragraph (b)(1) of this section) is also a
Predecessor of Distributing if the applica-
ble transfer occurred as part of a Plan that
existed at the time of such transfer.
(x) Deemed exchanges. For purposes
of paragraph (b)(1)(ii) of this section (re-
garding the Relevant Property Require-
ment and the Reflection of Basis Require-
ment) and paragraph (b)(2)(vi) of this
section (regarding Substitute Assets), Dis-
tributing is treated as acquiring Controlled
stock in exchange for a direct or indirect
interest in Relevant Property if the basis of
Distributing in that Controlled stock, im-
mediately after a transfer of the Relevant
Property, is determined in whole or in part
by reference to the basis of that Relevant
Property immediately before the transfer.
For example, if a corporation transfers
Relevant Property to Controlled in ex-
change for Distributing stock in a trans-
action that qualifies as a reorganization
under section 368(a)(1)(C), then, for pur-
poses of paragraphs (b)(1)(ii) and (b)(2)
(vi) of this section, Distributing is treated
as acquiring Controlled stock in exchange
for a direct or indirect interest in Relevant
Property. See § 1.358-6(c)(1).
(c) Additional definitions—(1) Prede-
cessor of Controlled. Solely for purposes
of applying paragraph (f) of this section, a
corporation is a predecessor of Controlled
(Predecessor of Controlled) if, before the
Distribution, it transfers property to Con-
trolled in a Section 381 Transaction as
part of a Plan. Other than for the purpose
described in the preceding sentence, no
corporation can be a Predecessor of Con-
trolled. If multiple corporations satisfy
the requirements of this paragraph (c)(1),
each of those corporations is a Predecessor
of Controlled. For example, a corporation
that transfers property to a Predecessor of
Controlled in a Section 381 Transaction

January 13, 2020 320 Bulletin No. 2020–3
is also a Predecessor of Controlled if the
Section 381 Transaction occurred as part
of a Plan that existed at the time of such
transaction.
(2) Successors—(i) In general. For pur-
poses of section 355(e), a successor (Suc-
cessor) of Distributing or of Controlled
is a corporation to which Distributing or
Controlled, respectively, transfers proper-
ty in a Section 381 Transaction after the
Distribution (Successor Transaction).
(ii) Determination of Successor status.
More than one corporation may be a Suc-
cessor of Distributing or Controlled. For
example, if Distributing transfers proper-
ty to another corporation (X) in a Section
381 Transaction, and X transfers property
to another corporation (Y) in a Section
381 Transaction, then each of X and Y is
a Successor of Distributing. In this case,
the determination of whether Y is a Suc-
cessor of Distributing is made after the
determination of whether X is a Successor
of Distributing.
(3) Section 381 Transaction. The term
Section 381 Transaction means a transac-
tion to which section 381 applies.
(d) Special acquisition rules—(1)
Deemed acquisitions of stock in Section
381 Transactions—(i) Rule. This para-
graph (d)(1)(i) applies to each shareholder
of the acquiring corporation immediately
before a Section 381 Transaction (Ac-
quiring Owner). Each Acquiring Owner
is treated for purposes of this section as
acquiring, in the Section 381 Transaction,
stock representing an interest in the dis-
tributor or transferor corporation, to the
extent that the Acquiring Owner’s interest
in the acquiring corporation immediately
after the Section 381 Transaction exceeds
the Acquiring Owner’s direct or indirect
interest in the distributor or transferor cor-
poration immediately before the Section
381 Transaction.
(ii) Example. The example set forth
in this paragraph (d)(1)(ii) illustrates the
application of the deemed acquisition rule
in paragraph (d)(1)(i) of this section. As-
sume that A held all of the stock of Dis-
tributing, Distributing held a 25-percent
interest in a Predecessor of Distributing,
and A held no direct interest, or other indi-
rect interest, in the Predecessor of Distrib-
uting immediately before a Section 381
Transaction in which the Predecessor of
Distributing transfers its assets to Distrib-
uting. In the Section 381 Transaction, the
Predecessor of Distributing’s sharehold-
ers (other than Distributing) collectively
receive a 10-percent interest in Distribut-
ing (reducing A’s interest in Distributing
to 90 percent). Under paragraph (d)(1)(i)
of this section, A is treated as acquiring in
the Section 381 Transaction stock repre-
senting a 65-percent interest in the Pre-
decessor of Distributing. This is because
A’s 90-percent interest in Distributing (the
acquiring corporation in the Section 381
Transaction) immediately after the Sec-
tion 381 Transaction exceeds A’s 25-per-
cent interest (held indirectly through
Distributing) in the Predecessor of Dis-
tributing (the transferor corporation in
the Section 381 Transaction) immediately
before the Section 381 Transaction by 65
percent. Similarly, each Acquiring Owner
of a Successor of Distributing is treated as
acquiring, in the Successor Transaction,
stock of Distributing, to the extent that the
Acquiring Owner’s interest in the Succes-
sor of Distributing immediately after the
Successor Transaction exceeds the Ac-
quiring Owner’s direct or indirect interest
in Distributing immediately before the
Successor Transaction.
(2) Deemed acquisitions of stock after
Section 381 Transactions. For purposes of
this section, after a Section 381 Transac-
tion (including a Successor Transaction),
an acquisition of stock of an acquiring
corporation (including a deemed stock ac-
quisition under paragraph (d)(1)(i) of this
section) is treated also as an acquisition of
an interest in the stock of the distributor
or transferor corporation. For example,
an acquisition of the stock of Distributing
that occurs after a Section 381 Transaction
is treated not only as an acquisition of the
stock of Distributing, but also as an acqui-
sition of the stock of any Predecessor of
Distributing whose assets were acquired
by Distributing in the prior Section 381
Transaction. Similarly, an acquisition of
the stock of a Successor of Distributing
that occurs after the Successor Transac-
tion is treated not only as an acquisition of
the stock of the Successor of Distributing,
but also as an acquisition of the stock of
Distributing.
(3) Separate counting for Distribut-
ing and each Predecessor of Distribut-
ing. The measurement of whether one
or more persons have acquired stock of
any specific corporation in a Planned
50-percent Acquisition is made separate-
ly from the measurement of any poten-
tial Planned 50-percent Acquisition of
any other corporation. Therefore, there
may be a Planned 50-percent Acquisition
of a Predecessor of Distributing even if
there is no Planned 50-percent Acquisi-
tion of Distributing. Similarly, there may
be a Planned 50-percent Acquisition of
Distributing even if there is no Planned
50-percent Acquisition of a Predecessor
of Distributing.
(e) Special rules for limiting gain rec-
ognition—(1) Overview—(i) Gain lim-
itation. This paragraph (e) provides rules
that limit the amount of gain that must be
recognized by Distributing by reason of
section 355(e) to an amount that is less
than the amount that Distributing other-
wise would be required to recognize un-
der section 355(c)(2) or section 361(c)(2)
(Statutory Recognition Amount) in certain
cases involving one or more Predecessors
of Distributing.
(ii) Multiple Planned 50-percent Ac-
quisitions. If there are Planned 50-percent
Acquisitions of multiple corporations (for
example, two Predecessors of Distribut-
ing), Distributing must recognize the Stat-
utory Recognition Amount with respect to
each such corporation, subject to the lim-
itations in paragraph (e)(2) of this section
relating to a Planned 50-percent Acquisi-
tion of a Predecessor of Distributing (POD
Gain Limitation Rule) and paragraph (e)
(3) of this section relating to a Planned
50-percent Acquisition of Distributing
(Distributing Gain Limitation Rule), if
applicable. The POD Gain Limitation
Rule and the Distributing Gain Limitation
Rule are applied separately to the Planned
50-percent Acquisition of each such cor-
poration to determine the amount of gain
required to be recognized.
(iii) Statutory Recognition Amount
limit; Section 336(e). Paragraph (e)(4) of
this section sets forth an overall gain lim-
itation based on the Statutory Recognition
Amount. Paragraph (e)(5) of this section
clarifies the availability of an election un-
der section 336(e) with regard to certain
Distributions.
(2) Planned 50-percent Acquisition
of a Predecessor of Distributing—(i) In
general. If there is a Planned 50-percent
Acquisition of a Predecessor of Distrib-

Bulletin No. 2020–3 321 January 13, 2020
uting, the amount of gain recognized by
Distributing by reason of section 355(e)
as a result of the Planned 50-percent Ac-
quisition is limited to the amount of gain,
if any, that Distributing would have rec-
ognized if, immediately before the Dis-
tribution, Distributing had engaged in the
following transaction: Distributing trans-
ferred all Separated Property received
from the Predecessor of Distributing to a
newly formed corporation (Hypothetical
Controlled) in exchange solely for stock
of Hypothetical Controlled in a reorga-
nization under section 368(a)(1)(D) and
then distributed the stock of Hypothetical
Controlled to the shareholders of Distrib-
uting in a transaction to which section
355(e) applied (Hypothetical D/355(e)
Reorganization). The computation in this
paragraph (e)(2)(i) is applied regardless of
whether Distributing actually directly held
the Separated Property.
(ii) Operating rules. For purposes of
applying paragraph (e)(2)(i) of this sec-
tion, the following rules apply:
(A) Separated Property other than
Controlled stock. Each of the basis and
the fair market value of Separated Proper-
ty other than stock of Controlled treated as
transferred by Distributing to a Hypothet-
ical Controlled in a Hypothetical D/355(e)
Reorganization equals the basis and the
fair market value, respectively, of such
property in the hands of Controlled imme-
diately before the Distribution.
(B) Controlled stock that is Separated
Property. Each of the basis and the fair
market value of the stock of Controlled
that is Separated Property treated as trans-
ferred by Distributing to a Hypothetical
Controlled in a Hypothetical D/355(e) Re-
organization equals the basis and the fair
market value, respectively, of such stock
in the hands of Distributing immediately
before the Distribution.
(C) Anti-duplication rule. A Predeces-
sor of Distributing’s Separated Property is
taken into account for purposes of apply-
ing this paragraph (e)(2) only to the extent
such property was not taken into account
by Distributing in a Hypothetical D/355(e)
Reorganization with respect to another
Predecessor of Distributing. Further, ap-
propriate adjustments must be made to
prevent other duplicative inclusions of
section 355(e) gain under this paragraph
(e) reflecting the same economic gain.
(3) Planned 50-percent Acquisition of
Distributing. This paragraph (e)(3) ap-
plies if there is a Planned 50-percent Ac-
quisition of Distributing. In that case, the
amount of gain recognized by Distributing
by reason of section 355(e) as a result of
the Planned 50-percent Acquisition is lim-
ited to the excess, if any, of the Statutory
Recognition Amount over the amount of
gain, if any, that Distributing would have
been required to recognize under para-
graphs (e)(1)(ii) and (e)(2) of this section
if there had been a Planned 50-percent
Acquisition of every Predecessor of Dis-
tributing, but not of Distributing or Con-
trolled. For purposes of this paragraph (e)
(3), references to Distributing are not ref-
erences to a Predecessor of Distributing.
(4) Gain recognition limited to Stat-
utory Recognition Amount. The sum of
the amounts required to be recognized by
Distributing under section 355(e) (taking
into account the POD Gain Limitation
Rule and the Distributing Gain Limitation
Rule) with regard to a single Distribution
cannot exceed the Statutory Recognition
Amount. In addition, Distributing may
choose not to apply the POD Gain Lim-
itation Rule or the Distributing Gain Lim-
itation Rule to a Distribution, and instead
may recognize the Statutory Recognition
Amount. Distributing indicates its choice
to apply the preceding sentence by report-
ing the Statutory Recognition Amount on
its original or amended Federal income
tax return for the year of the Distribution.
(5) Section 336(e) election. Distribut-
ing is not eligible to make a section 336(e)
election (as defined in § 1.336-1(b)(11))
with respect to a Distribution to which
this section applies unless Distributing
would, absent the making of a section
336(e) election, recognize the Statutory
Recognition Amount with respect to the
Distribution (taking into account the POD
Gain Limitation Rule and the Distributing
Gain Limitation Rule) without regard to
the final two sentences of paragraph (e)
(4) of this section. See §§ 1.336-1 through
1.336-5 for additional requirements with
regard to a section 336(e) election.
(f) Predecessor or Successor as a mem-
ber of the affiliated group. For purposes
of section 355(e)(2)(C), if a corporation
transfers its assets to a member of the
same Expanded Affiliated Group in a Sec-
tion 381 Transaction, the transferor will be
treated as continuing in existence within
the same Expanded Affiliated Group.
(g) Inapplicability of section 355(f) to
certain intra-group Distributions—(1)
In general. Section 355(f) does not ap-
ply to a Distribution if there is a Planned
50-percent Acquisition of a Predecessor
of Distributing (but not of Distributing,
Controlled, or their Successors), except
as provided in paragraph (g)(2) of this
section. Therefore, except as provided in
paragraph (g)(2) of this section, section
355 (or so much of section 356 as relates
to section 355) and the regulations under
sections 355 and 356, including the POD
Gain Limitation Rule, apply, without re-
gard to section 355(f), to a Distribution
within an affiliated group (as defined in
section 1504(a)) if the Distribution and
the Planned 50-percent Acquisition of the
Predecessor of Distributing are part of a
Plan. For purposes of this paragraph (g)
(1), references to a Distribution (and Dis-
tributing and Controlled) include refer-
ences to a distribution (and Distributing
and Controlled) to which section 355
would apply but for the application of sec-
tion 355(f).
(2) Alternative application of section
355(f). Distributing may choose not to ap-
ply paragraph (g)(1) of this section to each
Distribution (that occurs under a Plan) to
which section 355(f) would otherwise ap-
ply absent paragraph (g)(1) of this section.
Instead, Distributing may apply section
355(f) to all such Distributions according
to its terms, but only if all members of the
same Expanded Affiliated Group report
consistently the Federal income tax conse-
quences of the Distributions that are part
of the Plan (determined without regard to
section 355(f)). In such a case, neither the
POD Gain Limitation Rule nor the Dis-
tributing Gain Limitation Rule is available
with regard to any applicable Distribution.
Distributing indicates its choice to apply
section 355(f) consistently to all applica-
ble Distributions by reporting the Federal
income tax consequences of each Distri-
bution in accordance with section 355(f)
on its Federal income tax return for the
year of the Distribution.
(h) Examples. The following exam-
ples illustrate the principles of this sec-
tion. Unless the facts indicate otherwise,
assume throughout these examples that:
Distributing (D) owns all the stock of

January 13, 2020 322 Bulletin No. 2020–3
Controlled (C), and none of the shares of
C held by D has a built-in loss; D dis-
tributes the stock of C in a Distribution
to which section 355(d) does not apply;
X, Y, and Z are individuals; each of D,
D1, C, P, P1, P2, and R is a corporation
having one class of stock outstanding,
and none is a member of a consolidated
group; and each transaction that is part of
a Plan defined in this section is respected
as a separate transaction under general
Federal income tax principles. No infer-
ence should be drawn from any example
concerning whether any requirements of
section 355 are satisfied other than those
of section 355(e) or whether any general
Federal income tax principles (including
the step transaction doctrine) are impli-
cated by the example:
(1) Example 1: Predecessor of D and Planned
50-Percent Acquisition of P—(i) Facts. X owns
100% of the stock of P, which holds multiple assets.
Y owns 100% of the stock of D. The following steps
occur as part of a Plan: P merges into D in a reorgani-
zation under section 368(a)(1)(A). Immediately after
the merger, X and Y own 10% and 90%, respectively,
of the stock of D. D then contributes to C one of the
assets (Asset 1) acquired from P in the merger. At the
time of the contribution, Asset 1 has a basis of $40x
and a fair market value of $110x. In exchange for As-
set 1, D receives additional C stock and $10x. D dis-
tributes the stock of C (but not the cash) to X and Y,
pro rata. The contribution and Distribution constitute
a reorganization under section 368(a)(1)(D), and D
recognizes $10x of gain under section 361(b) on the
contribution. Immediately before the Distribution,
taking into account the $10x of gain recognized by
D on the contribution, Asset 1 has an adjusted basis
of $50x under section 362(b) and a fair market value
of $110x, and the stock of C held by D has a basis of
$100x and a fair market value of $200x.
(ii) Analysis—(A) P is a Predecessor of D. Un-
der paragraph (b)(1) of this section, P is a Predeces-
sor of D. First, P is a Potential Predecessor because,
as part of a Plan, P transferred property to D in a Sec-
tion 381 Transaction. See paragraph (b)(2)(ii)(A)(1)
of this section. Second, both of the pre-Distribution
requirements and the post-Distribution requirement
are satisfied. The Relevant Property Requirement is
satisfied because, immediately before the Distribu-
tion and as part of a Plan, C holds P Relevant Prop-
erty (Asset 1) the gain on which was not recognized
in full at any point during the Plan Period, and some
of the C stock distributed in the Distribution was ac-
quired by D in exchange for Asset 1. See paragraph
(b)(1)(ii)(A)(1) of this section. The Reflection of Ba-
sis Requirement is satisfied because that C stock had
a basis prior to the Distribution that was determined
in whole or in part by reference to the basis of Sepa-
rated Property (Asset 1), and was neither distributed
in a distribution to which section 355(e) applied nor
transferred in a transaction in which the gain on that
C stock was recognized in full during the Plan Peri-
od prior to the Distribution. See paragraph (b)(1)(ii)
(B) of this section. The Division of Relevant Prop-
erty Requirement is satisfied because immediately
after the Distribution, D continues to hold Relevant
Property of P, and therefore, as part of a Plan, P’s
Relevant Property has been divided between C and
D. See paragraph (b)(1)(iii) of this section.
(B) Planned 50-percent Acquisition of P. Under
paragraph (d)(1)(i) of this section, Y is treated as ac-
quiring stock representing 90% of the voting power
and value of P as a result of the merger of P into
D. Accordingly, there has been a Planned 50-percent
Acquisition of P.
(C) Gain limited. Without regard to the limita-
tions in paragraph (e) of this section, D would be
required to recognize $100x of gain ($200x of ag-
gregate fair market value minus $100x of aggregate
basis of the C stock held by D), the Statutory Recog-
nition Amount described in section 361(c)(2). How-
ever, under the POD Gain Limitation Rule, D’s gain
recognized by reason of the Planned 50-percent Ac-
quisition of P will not exceed $60x, an amount equal
to the amount of gain D would have recognized had
D transferred Asset 1 (Separated Property) to a new-
ly formed corporation (C1) solely for C1 stock and
distributed the C1 stock to D’s shareholders in a Hy-
pothetical D/355(e) Reorganization. See paragraph
(e)(2)(i) of this section. For purposes of the compu-
tation in this paragraph (h)(1)(ii)(C), the basis and
fair market value of Asset 1 equal the basis and fair
market value of Asset 1 in the hands of C immedi-
ately before the Distribution. See paragraph (e)(2)(ii)
(A) of this section. Under section 361(c)(2), D would
recognize $60x of gain, an amount equal to the gain
in the hypothetical C1 stock (excess of the $110x fair
market value over the $50x basis). Therefore, D rec-
ognizes $60x of gain (in addition to the $10x of gain
recognized under section 361(b)).
(iii) Plan not in existence at time of acquisition
of Potential Predecessor’s property. The facts are
the same as in paragraph (h)(1)(i) of this section
(Example 1) except that the merger of P into D oc-
curred before the existence of a Plan. Even though
D transferred P property (Asset 1) to C, Asset 1 was
not Relevant Property of P because P did not hold
Asset 1 during the Plan Period. See paragraphs (b)(2)
(iv) and (a)(4)(iii) of this section. Because Asset 1 is
not Relevant Property, D did not receive C stock dis-
tributed in the Distribution in exchange for Relevant
Property when it contributed Asset 1 to C, none of
the distributed C stock had a basis prior to the Distri-
bution that was determined in whole or in part by ref-
erence to the basis of Separated Property, and C did
not hold Relevant Property immediately before the
Distribution. Further, Relevant Property of P has not
been divided. Therefore, P is not a Predecessor of D.
(2) Example 2: Planned 50-percent Acquisition
of D, but not Predecessor of D—(i) Facts. X owns
100% of the stock of P, which holds multiple assets.
Y owns 100% of the stock of D. The following steps
occur as part of a Plan: P merges into D in a reorgani-
zation under section 368(a)(1)(A). Immediately after
the merger, X and Y own 90% and 10%, respectively,
of the stock of D. D then contributes to C one of the
assets (Asset 1) acquired from P in the merger. In
exchange for Asset 1, D receives additional C stock.
D distributes the stock of C to X and Y, pro rata. The
contribution and Distribution constitute a reorgani-
zation under section 368(a)(1)(D). Immediately be-
fore the Distribution, Asset 1 has a basis of $50x and
a fair market value of $110x, and the stock of C held
by D has a basis of $120x and a fair market value
of $200x.
(ii) Analysis—(A) P is a Predecessor of D. Un-
der paragraph (b)(1) of this section, P is a Predeces-
sor of D. First, P is a Potential Predecessor because,
as part of a Plan, P transferred property to D in a
Section 381 Transaction. See paragraph (b)(2)(ii)
(A)(1) of this section. Second, both of the pre-Dis-
tribution requirements and the post-Distribution
requirement are satisfied. The Relevant Property
Requirement is satisfied because, immediately be-
fore the Distribution and as part of a Plan, C holds
P Relevant Property (Asset 1) the gain on which
was not recognized in full at any point during the
Plan Period, and some of the C stock distributed
in the Distribution was acquired by D in exchange
for Asset 1. See paragraph (b)(1)(ii)(A)(1) of this
section. The Reflection of Basis Requirement is
satisfied because that C stock had a basis prior to
the Distribution that was determined in whole or in
part by reference to the basis of Separated Property
(Asset 1), and was neither distributed in a distribu-
tion to which section 355(e) applied nor transferred
in a transaction in which the gain on that C stock
was recognized in full during the Plan Period prior
to the Distribution. See paragraph (b)(1)(ii)(B) of
this section. The Division of Relevant Property Re-
quirement is satisfied because immediately after the
Distribution, D continues to hold Relevant Property
of P, and therefore, as part of a Plan, P’s Relevant
Property has been divided between C and D. See
paragraph (b)(1)(iii) of this section.
(B) Planned 50-percent Acquisition of D. Under
paragraph (d)(1)(i) of this section, Y is treated as ac-
quiring stock representing 10% of the voting power
and value of P as a result of the merger of P into
D. The 10% acquisition of P stock does not cause
section 355(e) gain recognition or cause application
of the POD Gain Limitation Rule because there has
not been a Planned 50-percent Acquisition of P. X
acquires 90% of the voting power and value of D as
a result of the merger of P into D. Accordingly, there
has been a Planned 50-percent Acquisition of D. This
Planned 50-percent Acquisition implicates section
355(e) and results in gain recognition, subject to the
rules of paragraph (e) of this section.
(C) Gain limited. Without regard to the limita-
tions in paragraph (e) of this section, D would be re-
quired to recognize $80x of gain ($200x of fair mar-
ket value minus $120x of basis of the C stock held
by D), the Statutory Recognition Amount described
in section 361(c)(2). However, under the Distribut-
ing Gain Limitation Rule, D’s gain recognized by
reason of the Planned 50-percent Acquisition of D
will not exceed $20x, the excess of the Statutory
Recognition Amount ($80x) over the amount of gain
that D would have been required to recognize un-
der the POD Gain Limitation Rule if there had been
a Planned 50-percent Acquisition of P but not D or
C ($60x). See paragraph (e)(3) of this section. The
hypothetical gain limitation under the POD Gain
Limitation Rule equals the amount D would have
recognized had it transferred Asset 1 (Separated
Property) to a newly formed corporation (C1) solely
for stock and distributed the C1 stock in a Hypothet-
ical D/355(e) Reorganization. See paragraph (e)(2)
(i) of this section. Under section 361(c)(2), D would

Bulletin No. 2020–3 323 January 13, 2020
recognize $60x of gain, an amount equal to the gain
in the hypothetical C1 stock (excess of the $110x fair
market value over the $50x basis). Therefore, D rec-
ognizes $20x of gain ($80x - $60x).
(3) Example 3: Predecessor of D owns C stock—
(i) Facts. X owns 100% of the stock of P, which
holds multiple assets, including Asset 2. Y owns
100% of the stock of D. P owns 35% of the stock of
C (Block 1), and D owns the remaining 65% of the
C stock (Block 2). The following steps occur as part
of a Plan: P merges into D in a reorganization under
section 368(a)(1)(A), and D immediately thereafter
distributes all of the C stock to X and Y pro rata.
Immediately after the merger, X and Y own 10% and
90%, respectively, of the D stock, and, prior to the
Distribution, D owns Block 1 with a basis of $30x
and a fair market value of $35x, and Block 2 with
a basis of $10x and a fair market value of $65x. D
continues to hold Asset 2.
(ii) Analysis—(A) P is a Predecessor of D. Un-
der paragraph (b)(1) of this section, P is a Predeces-
sor of D. First, P is a Potential Predecessor because,
as part of a Plan, P transferred property to D in a Sec-
tion 381 Transaction. See paragraph (b)(2)(ii)(A)(1)
of this section. Second, both of the pre-Distribution
requirements and the post-Distribution requirement
are satisfied. The Relevant Property Requirement is
satisfied because some of the C stock distributed in
the Distribution (Block 1) was Relevant Property of
P. See paragraph (b)(1)(ii)(A)(2) of this section. The
Reflection of Basis Requirement is satisfied because
Block 1 of the C stock is Relevant Property of P, and
was neither distributed in a distribution to which sec-
tion 355(e) applied nor transferred in a transaction
in which the gain on that C stock was recognized in
full during the Plan Period prior to the Distribution.
See paragraph (b)(1)(ii)(B) of this section. The Di-
vision of Relevant Property Requirement is satisfied
because some of the C stock distributed in the Distri-
bution was Relevant Property of P, and therefore C is
deemed to have received Relevant Property of P, and
D continues to hold Relevant Property of P immedi-
ately after the Distribution. See paragraph (b)(1)(iii)
of this section. Therefore, as part of a Plan, P’s Rel-
evant Property has been divided between C and D.
(B) Planned 50-percent Acquisition of P. Under
paragraph (d)(1)(i) of this section, Y is treated as ac-
quiring stock representing 90% of the voting power
and value of P as a result of the merger of P into
D. Accordingly, there has been a Planned 50-percent
Acquisition of P.
(C) Gain limited. Without regard to the limita-
tions in paragraph (e) of this section, D would be
required to recognize $60x of gain ($100x of fair
market value minus $40x of basis of the C stock held
by D), the Statutory Recognition Amount under sec-
tion 355(c)(2). However, under the POD Gain Lim-
itation Rule, D’s gain recognized by reason of the
Planned 50-percent Acquisition of P will not exceed
$5x, an amount equal to the amount D would have
recognized had it transferred Block 1 of the C stock
(Separated Property) to a newly formed corporation
(C1) solely for stock and distributed the C1 stock to
D shareholders in a Hypothetical D/355(e) Reorga-
nization. See paragraph (e)(2)(i) of this section. Be-
cause Relevant Equity (Block 1 of the C stock) is
Separated Property, Underlying Property associated
with that Relevant Equity is not treated as Separated
Property. See paragraph (b)(2)(vii) of this section.
For purposes of the computation in this paragraph
(h)(3)(ii)(C), the basis and fair market value of the
Block 1 C stock equal its basis and fair market val-
ue in the hands of D immediately before the Distri-
bution. See paragraph (e)(2)(ii)(A) of this section.
Under section 361(c)(2), D would recognize $5x of
gain, an amount equal to the gain in the hypotheti-
cal C1 stock ($35x fair market value - $30x basis).
Therefore, D recognizes $5x of gain.
(4) Example 4: C stock as Substitute Asset—(i)
Facts. X owns 100% of the stock of P, which owns
multiple assets, including 100% of the stock of R and
Asset 2. Y owns 100% of the stock of D. The follow-
ing steps occur as part of a Plan: P merges into D
in a reorganization under section 368(a)(1)(A) (P-D
reorganization). Immediately after the merger, X and
Y own 10% and 90%, respectively, of the stock of D.
D then causes R to transfer all of its assets to C and
liquidate in a reorganization under section 368(a)
(1) (R-C reorganization). At the time of the P-D re-
organization, the R stock has a basis of $40x and a
fair market value of $110x. D distributes the stock of
C to X and Y, pro rata. D continues to directly hold
Asset 2. Immediately before the Distribution, the C
stock held by D that was deemed received in the R-C
reorganization (Block 1) has a basis of $40x and a
fair market value of $110x, and all of the stock of
C held by D has a basis of $100x and a fair market
value of $200x.
(ii) Analysis—(A) P is a Predecessor of D.
Under paragraph (b)(1) of this section, P is a Pre-
decessor of D. First, P is a Potential Predecessor
because, as part of a Plan, P transferred property to
D in a Section 381 Transaction. See paragraph (b)
(2)(ii)(A)(1) of this section. Second, both pre-Dis-
tribution requirements and the post-Distribution
requirement are satisfied. The Relevant Property
Requirement is satisfied because, for the following
two reasons, some of the C stock distributed in the
Distribution (Block 1) was Relevant Property of
P. D is treated as acquiring Block 1 of the C stock
in exchange for a direct or indirect interest in R
stock (that is, Relevant Property) in the R-C reor-
ganization because the basis of D in that C stock
immediately after a transfer of the R stock (in the
liquidation of R) is determined in whole or in part
by reference to the basis of the R stock immediately
before the transfer. See paragraph (b)(2)(x) of this
section. Further, because the basis in Block 1 of the
C stock is determined in whole or in part by refer-
ence to the basis of Relevant Equity (the R stock)
the issuer of which ceases to exist for Federal in-
come tax purposes under the Plan, Block 1 of the C
stock is a Substitute Asset, and is therefore treated
as Relevant Property with the same ownership and
transfer history as the R stock. See paragraph (b)
(2)(vi)(B)(2) of this section. The Reflection of Ba-
sis Requirement is satisfied because Block 1 of the
C stock is Relevant Property of P, and was neither
distributed in a distribution to which section 355(e)
applied nor transferred in a transaction in which the
gain on that C stock was recognized in full during
the Plan Period prior to the Distribution. See para-
graph (b)(1)(ii)(B) of this section. The Division of
Relevant Property Requirement is satisfied because
some of the C stock distributed in the Distribu-
tion was Relevant Property of P, and therefore C
is deemed to have received Relevant Property of P,
and immediately after the Distribution, D continues
to hold Asset 2, which is Relevant Property of P.
See paragraph (b)(1)(iii) of this section. Therefore,
as part of a Plan, P’s Relevant Property has been
divided between C and D.
(B) Planned 50-percent Acquisition of P. Under
paragraph (d)(1)(i) of this section, Y is treated as ac-
quiring stock representing 90% of the voting power
and value of P as a result of the P-D reorganization.
Accordingly, there has been a Planned 50-percent
Acquisition of P.
(C) Gain limited. Without regard to the limita-
tions in paragraph (e) of this section, D would be
required to recognize $100x of gain ($200x of fair
market value minus $100x of basis of all C stock
held by D), the Statutory Recognition Amount de-
scribed in section 355(c)(2). However, under the
POD Gain Limitation Rule, D’s gain recognized by
reason of the Planned 50-percent Acquisition of P
will not exceed $70x, an amount equal to the amount
D would have recognized had it transferred Block
1 of the C stock (Separated Property) to a newly
formed corporation (C1) solely for stock and distrib-
uted the C1 stock to D shareholders in a Hypothetical
D/355(e) Reorganization. See paragraph (e)(2)(i) of
this section. Because Relevant Equity (Block 1 of the
C stock) is Separated Property, Underlying Property
associated with that Relevant Equity is not treated as
Separated Property. See paragraph (b)(2)(vii) of this
section. Under section 361(c)(2), D would recognize
$70x of gain, an amount equal to the gain in the hy-
pothetical C1 stock (excess of the $110x fair market
value over the $40x basis). Therefore, D recognizes
$70x of gain.
(5) Example 5: Section 351 transaction—(i)
Facts. X owns 100% of the stock of P, which holds
multiple assets, including Asset 1, Asset 2, and As-
set 3. Y owns 100% of the stock of D. The follow-
ing steps occur as part of a Plan: P transfers Asset 1
and Asset 2 to D and Y transfers property to D in an
exchange qualifying under section 351. Immediate-
ly after the exchange, P and Y own 10% and 90%,
respectively, of the stock of D. D then contributes
Asset 1 to C in exchange for additional C stock. D
distributes all of the stock of C to P and Y, pro rata. D
continues to directly hold Asset 2, and P continues to
directly hold Asset 3. The contribution and Distribu-
tion constitute a reorganization under section 368(a)
(1)(D). Immediately before the Distribution, Asset 1
has a basis of $40x and a fair market value of $110x,
and the stock of C held by D has a basis of $100x and
a fair market value of $200x. Following the Distri-
bution, and as part of the same Plan, Z acquires 51%
of the P stock.
(ii) Analysis—P is not a Predecessor of D. Under
paragraph (b)(1) of this section, P is not a Predeces-
sor of D. P is not a Potential Predecessor because P
did not transfer property to a Potential Predecessor,
D, or a member of the same Expanded Affiliated
Group as D in a Section 381 Transaction and P is not
a member of the same Expanded Affiliated Group
as D immediately after completion of the Plan. See
paragraph (b)(2)(ii) of this section. Thus, P cannot be
a Predecessor of D. See paragraph (b)(1)(i) of this
section.
(6) Example 6: Section 351 transaction after an
acquisition of P—(i) Facts. X owns 100% of the

January 13, 2020 324 Bulletin No. 2020–3
stock of P, which holds multiple assets, including
Asset 1 and Asset 2. Y owns 100% of the stock of D,
D owns 100% of the stock of D1, and D1 owns 100%
of the stock of C. D files a consolidated return for the
affiliated group of which it is the common parent.
The following steps occur as part of a Plan: D ac-
quires 100% of the stock of P from X. P transfers As-
set 1 and Asset 2 to D1 for D1 stock in an exchange
qualifying under section 351. See § 1.1502-34. D1
contributes Asset 1 to C in exchange for additional
C stock. D1 distributes all of the stock of C to D in
exchange for D1 stock (First Distribution). D then
distributes all of the stock of C to Y (Second Distri-
bution). D1 continues to directly hold Asset 2. Im-
mediately before the First Distribution, Asset 1 has
a basis of $10x and a fair market value of $60x, and
the stock of C held by D1 has a basis of $100x and a
fair market value of $200x.
(ii) Analysis—(A) P is a Predecessor of D1. Un-
der paragraph (b)(1) of this section, P is a Predeces-
sor of D1. First, P is a Potential Predecessor of D1
because P is a member of the same Expanded Affil-
iated Group as D1 immediately after completion of
the Plan. See paragraph (b)(2)(ii)(A)(2) of this sec-
tion. The Relevant Property Requirement is satisfied
because, immediately before the First Distribution
and as part of a Plan, C holds P Relevant Property
(Asset 1) the gain on which was not recognized in
full at any point during the Plan Period, and some of
the C stock distributed in the First Distribution was
acquired by D1 in exchange for Asset 1. See para-
graph (b)(1)(ii)(A)(1) of this section. The Reflection
of Basis Requirement is satisfied because that C
stock had a basis prior to the First Distribution that
was determined in whole or in part by reference to
the basis of Separated Property (Asset 1), and was
neither distributed in a distribution to which sec-
tion 355(e) applied nor transferred in a transaction
in which the gain on that C stock was recognized in
full prior to the First Distribution. See paragraph (b)
(1)(ii)(B) of this section. The Division of Relevant
Property Requirement is satisfied because immedi-
ately after the First Distribution, each of C, on the
one hand, and P or D1, on the other hand, continues
to hold Relevant Property of P, and therefore, as part
of a Plan, P’s Relevant Property has been divided
between C and D1. See paragraph (b)(1)(iii) of this
section.
(B) Planned 50-percent Acquisition of P. D has
acquired stock representing 100% of the voting
power and value of P. Accordingly, there has been a
Planned 50-percent Acquisition of P.
(C) Gain on First Distribution. Because there is
a Planned 50-percent Acquisition of a Predecessor
of Distributing (but not of Distributing, Controlled,
or their Successors), section 355(f) will not apply
to the First Distribution unless D and D1 choose to
have section 355(f) apply. See paragraph (g) of this
section. As a result, section 355, including the POD
Gain Limitation Rule, will apply to the First Distri-
bution. Under the POD Gain Limitation Rule, D1’s
gain recognized by reason of the Planned 50-percent
Acquisition of P will not exceed $50x, an amount
equal to the amount D1 would have recognized had
it transferred Asset 1 (Separated Property) to a newly
formed corporation (C1) solely for stock and distrib-
uted the C1 stock to D1 shareholders in a Hypotheti-
cal D/355(e) Reorganization. See paragraph (e)(2)(i)
of this section. Under section 361(c)(2), D1 would
recognize $50x of gain, an amount equal to the gain
in the hypothetical C1 stock (excess of the $60x fair
market value over the $10x basis). Therefore, D1
recognizes $50x of gain. Under paragraph (g)(2)
of this section, however, D and D1 may choose to
apply section 355(f) to the First Distribution as an
exception to the general application of paragraph (g)
(1) of this section. By application of section 355(f),
section 355 (including the POD Gain Limitation
Rule) would not apply to the First Distribution.
Therefore, D1 would be required to recognize $100x
of gain (excess of the $200x fair market value over
the $100x basis of C stock held by D1) under section
311(b), and D would be treated under section 302(d)
as receiving a distribution of $200x to which section
301 applies.
(D) P is not a Predecessor of D. Under paragraph
(b)(1) of this section, P is not a Predecessor of D.
First, P is a Potential Predecessor of D because P is
a member of the same Expanded Affiliated Group
as D immediately after completion of the Plan. See
paragraph (b)(2)(ii)(A)(2) of this section. However,
although the Relevant Property Requirement is satis-
fied, the Reflection of Basis Requirement is not satis-
fied. The Relevant Property Requirement is satisfied
because, immediately before the Second Distribution
and as part of a Plan, C holds P Relevant Property
(Asset 1) the gain on which was not recognized in
full at any point during the Plan Period, and some
of the C stock distributed in the Second Distribution
was indirectly acquired by D in exchange for Asset
1. See paragraph (b)(1)(ii)(A)(1) of this section.
However, regardless of whether D and D1 choose
under paragraph (g)(2) of this section to have section
355(f) apply to the First Distribution, the Reflection
of Basis Requirement cannot be satisfied. If section
355(f) applies to the First Distribution, then all of the
C stock will have been transferred in a transaction
in which the gain on the C stock was recognized in
full during the Plan Period prior to the Second Dis-
tribution. If section 355(f) does not apply to the First
Distribution, then all of the C stock will have been
transferred in a distribution to which section 355(e)
applied during the Plan Period prior to the Second
Distribution. Because not all of the pre-Distribution
and post-Distribution requirements are satisfied, P
cannot be a Predecessor of D.
(7) Example 7: Sequential Predecessors—(i)
Facts. X owns 100% of P1, which holds multiple
assets, including Asset 1 and Asset 2. Y owns 100%
of P2, which holds Asset 3, and Z owns 100% of
D. The following steps occur as part of a Plan: P1
merges into P2 in a reorganization under 368(a)(1)
(A) (P1-P2 reorganization). Immediately after the
merger, X and Y own 10% and 90%, respectively, of
the stock of P2. P2 then merges into D in a reorga-
nization under 368(a)(1)(A) (P2-D reorganization).
Immediately after the merger, X, Y, and Z own 1%,
9%, and 90%, respectively, of the stock of D. D then
contributes Asset 1 to C in exchange for additional C
stock, and retains Asset 2 and Asset 3. D distributes
all of the stock of C to X, Y, and Z, pro rata. Imme-
diately before the Distribution, Asset 1 has a basis of
$40x and a fair market value of $100x, and the stock
of C held by D has a basis of $100x and a fair market
value of $200x.
(ii) Analysis—(A) P2 is a Predecessor of D. Un-
der paragraph (b)(1) of this section, P2 is a Predeces-
sor of D. First, P2 is a Potential Predecessor because,
as part of a Plan, P2 transferred property to D in a
Section 381 Transaction. See paragraph (b)(2)(ii)(A)
(1) of this section. Second, both pre-Distribution re-
quirements and the post-Distribution requirement are
satisfied. The Relevant Property Requirement is sat-
isfied because, immediately before the Distribution
and as part of a Plan, C holds P2 Relevant Property
(Asset 1) the gain on which was not recognized in
full at any point during the Plan Period, and some
of the C stock distributed in the Distribution was ac-
quired by D in exchange for Asset 1. See paragraph
(b)(1)(ii)(A)(1) of this section. The Reflection of Ba-
sis Requirement is satisfied because that C stock had
a basis prior to the Distribution that was determined
in whole or in part by reference to the basis of Sepa-
rated Property (Asset 1), and was neither distributed
in a distribution to which section 355(e) applied nor
transferred in a transaction in which the gain on that
C stock was recognized in full during the Plan Period
prior to the Distribution. See paragraph (b)(1)(ii)(B)
of this section. The Division of Relevant Property
Requirement is satisfied because immediately after
the Distribution, D continues to hold P2 Relevant
Property (Asset 2 and Asset 3), and therefore, as part
of a Plan, P2’s Relevant Property has been divided
between C and D. See paragraph (b)(1)(iii) of this
section.
(B) P1 is a Predecessor of D. Under paragraph
(b)(1) of this section, P1 is a Predecessor of D. First,
P1 is a Potential Predecessor because, as part of a
Plan, P1 transferred property to a Potential Predeces-
sor (P2) in a Section 381 Transaction. See paragraph
(b)(2)(ii)(A)(1) of this section. Second, both pre-Dis-
tribution requirements and the post-Distribution re-
quirement are satisfied. The Relevant Property Re-
quirement is satisfied because, immediately before
the Distribution and as part of a Plan, C holds P1
Relevant Property (Asset 1) the gain on which was
not recognized in full at any point during the Plan Pe-
riod, and some of the C stock distributed in the Dis-
tribution was acquired by D in exchange for Asset 1.
See paragraph (b)(1)(ii)(A)(1) of this section. The
Reflection of Basis Requirement is satisfied because
that C stock had a basis prior to the Distribution that
was determined in whole or in part by reference to
the basis of Separated Property (Asset 1), and was
neither distributed in a distribution to which sec-
tion 355(e) applied nor transferred in a transaction
in which the gain on that C stock was recognized in
full during the Plan Period prior to the Distribution.
See paragraph (b)(1)(ii)(B) of this section. The Di-
vision of Relevant Property Requirement is satisfied
because immediately after the Distribution, D con-
tinues to hold Relevant Property of P1 (Asset 2), and
therefore, as part of a Plan, P1’s Relevant Property
has been divided between C and D. See paragraph
(b)(1)(iii) of this section.
(C) Planned 50-percent Acquisitions of P1 and
P2. Under paragraph (d)(1)(i) of this section, Y is
treated as acquiring stock representing 90% of the
voting power and value of P1 as a result of the P1-
P2 merger. In addition, under paragraph (d)(1)(i) of
this section, Z is treated as acquiring stock represent-
ing 90% of the voting power and value of P2 in the

Bulletin No. 2020–3 325 January 13, 2020
P2-D merger. Accordingly, there have been Planned
50-percent Acquisitions of P1 and P2.
(D) Gain limited. Without regard to the lim-
itations in paragraph (e) of this section, D would
be required to recognize $100x of gain ($200x of
aggregate fair market value minus $100x of aggre-
gate basis of the C stock held by D), the Statutory
Recognition Amount described in section 361(c)
(2), because there have been Planned 50-percent
Acquisitions of P1 and P2, both Predecessors of D.
However, under paragraph (e) of this section, D’s
gain recognized by reason of the Planned 50-per-
cent Acquisitions of P1 and P2 will not exceed
$60x, an amount equal to the amount D would have
recognized had it transferred Asset 1 (Separated
Property) to a newly formed corporation (C1) sole-
ly for stock and distributed the C1 stock to D share-
holders in a Hypothetical D/355(e) Reorganization.
Under section 361(c)(2), D would recognize $60x,
an amount equal to the gain in the hypothetical C1
stock (excess of the $100x fair market value over
the $40x basis). Paragraph (e)(1)(ii) of this section
provides that if there are Planned 50-percent Ac-
quisitions of multiple corporations, Distributing
must recognize the Statutory Recognition Amount
with respect to each such corporation, subject to
the POD Gain Limitation Rule and the Distributing
Gain Limitation Rule, if applicable. In this case,
the POD Gain Limitation Rule limits the amount
of gain required to be recognized by D with respect
to each of the Planned 50-percent Acquisitions of
P1 and P2 to $60x. See paragraph (e)(2)(i) of this
section. Ordinarily, each $60x limitation would be
added together, and the total gain limitation pro-
vided by paragraph (e) of this section would be
$120x. However, the anti-duplication rule set forth
in paragraph (e)(2)(ii)(C) of this section provides
that, for purposes of applying the POD Gain Lim-
itation Rule, a Predecessor of Distributing’s Sep-
arated Property is taken into account only to the
extent such property was not taken into account
with respect to another Predecessor of Distributing.
Thus, Asset 1 may not be taken into account more
than once in determining the total gain limitation.
Therefore, D recognizes $60x of gain.
(8) Example 8: Multiple Predecessors of D—(i)
Facts. X owns 100% of the stock of P1, which holds
multiple assets, including Asset 1 and Asset 3. Y
owns 100% of the stock of P2, which holds multiple
assets, including Asset 2 and Asset 4. Z owns 100%
of the stock of D. The following steps occur as part
of a Plan: Each of P1 and P2 merges into D in a reor-
ganization under section 368(a)(1)(A). Immediately
after the mergers, each of X and Y owns 10%, and Z
owns 80%, of the stock of D. D then contributes to
C Asset 1 (acquired from P1), and Asset 2 (acquired
from P2). In exchange for Asset 1 and Asset 2, D
receives additional C stock. D distributes the stock of
C to X, Y, and Z, pro rata. D’s contribution of Asset 1
and Asset 2 and the Distribution constitute a reor-
ganization under section 368(a)(1)(D). D continues
to hold Asset 3 and Asset 4. Immediately before the
Distribution, Asset 1 has a basis of $50x and a fair
market value of $110x, Asset 2 has a basis of $70x
and a fair market value of $90x, and the stock of C
held by D has a basis of $130x and a fair market
value of $220x.
(ii) Analysis—(A) P1 and P2 are Predecessors of
D. Under paragraph (b)(1) of this section, each of P1
and P2 is a Predecessor of D. First, each of P1 and
P2 is a Potential Predecessor because, as part of a
Plan, each of P1 and P2 transferred property to D in
a Section 381 Transaction. See paragraph (b)(2)(ii)
(A)(1) of this section. Second, both pre-Distribution
requirements and the post-Distribution requirement
are satisfied. The Relevant Property Requirement is
satisfied because, immediately before the Distribu-
tion and as part of a Plan, C holds P1 Relevant Prop-
erty (Asset 1) and P2 Relevant Property (Asset 2),
the gain on each of which was not recognized in full
at any point during the Plan Period, and some of the
C stock distributed in the Distribution was acquired
by D in exchange for each of Asset 1 and Asset 2.
See paragraph (b)(1)(ii)(A)(1) of this section. The
Reflection of Basis Requirement is satisfied because
that C stock had a basis prior to the distribution that
was determined in whole or in part by reference to
the basis of Separated Property (Asset 1 and Asset
2, respectively), and was neither distributed in a dis-
tribution to which section 355(e) applied nor trans-
ferred in a transaction in which the gain on that C
stock was recognized in full during the Plan Period
prior to the Distribution. See paragraph (b)(1)(ii)(B)
of this section. The Division of Relevant Property
Requirement is satisfied because immediately after
the Distribution, D continues to hold Relevant Prop-
erty of P1 and P2, and therefore, as part of a Plan,
each of P1’s and P2’s Relevant Property has been
divided between C and D. See paragraph (b)(1)(iii)
of this section.
(B) Planned 50-percent Acquisitions of P1 and
P2. Under paragraph (d)(1)(i) of this section, Z is
treated as acquiring stock representing 80% of the
voting power and value of each of P1 and P2 as a re-
sult of the mergers of P1 and P2 into D. Accordingly,
there have been Planned 50-percent Acquisitions of
P1 and P2.
(C) Gain limited. Without regard to the limita-
tions in paragraph (e) of this section, D would be
required to recognize $90x of gain ($220x of fair
market value minus $130x of basis of the C stock
held by D), the Statutory Recognition Amount un-
der section 361(c)(2). However, under the POD
Gain Limitation Rule, D’s gain recognized by
reason of the Planned 50-percent Acquisition of
P1 will not exceed $60x ($110x fair market value
minus $50x basis), an amount equal to the amount
D would have recognized had it transferred Asset 1
(Separated Property) to a newly formed corporation
(C1) solely for stock and distributed the C1 stock
to D shareholders in a Hypothetical D/355(e) Reor-
ganization. See paragraph (e)(2)(i) of this section.
In addition, under the POD Gain Limitation Rule,
D’s gain recognized by reason of the deemed ac-
quisition of P2 stock will not exceed $20x ($90x
fair market value minus $70x basis), an amount
equal to the amount D would have recognized had it
transferred Asset 2 (Separated Property) to a second
newly formed corporation (C2) solely for stock and
distributed the C2 stock to D shareholders in a Hy-
pothetical D/355(e) Reorganization. See paragraph
(e)(2)(i) of this section. Therefore, D recognizes
$80x of gain ($60x + $20x). See paragraph (e)(1)
(ii) of this section.
(9) Example 9: Successor of C—(i) Facts. X
owns 100% of the stock of each of D and R. The
following steps occur as part of a Plan: D distrib-
utes all of its C stock to X. Immediately before the
Distribution, D’s C stock has a basis of $10x and a
fair market value of $30x. C then merges into R in a
reorganization under section 368(a)(1)(D). Immedi-
ately after the merger, X owns all of the R stock. As
part of the same Plan, Z acquires 51% of the stock
of R from X.
(ii) Analysis—(A) R is a Successor of C. Under
paragraph (c)(2)(i) of this section, R is a Successor of
C because, after the Distribution, C transfers proper-
ty to R in a Section 381 Transaction.
(B) Planned 50-percent Acquisition of C. Under
paragraph (d)(2) of this section, Z’s acquisition of
stock of R is treated as an acquisition of stock of C.
Therefore, Z is treated as acquiring 51% of the stock
of C. Accordingly, there has been a Planned 50-per-
cent Acquisition of C.
(C) Gain not limited. Section 355(e) applies to
the Distribution because there has been a Planned
50-percent Acquisition of C. Neither the POD Gain
Limitation Rule nor the Distributing Gain Limita-
tion Rule applies because there has been no Planned
50-percent Acquisition of a Predecessor of D, and
no Planned 50-percent Acquisition of D. Therefore,
D recognizes $20x of gain ($30x fair market value
minus $10x basis of the C stock held by D) under
section 355(c)(2).
(10) Example 10: Multiple Successors—(i)
Facts. X owns 100% of the stock of both D and R. Y
owns 100% of the stock of S. The following steps oc-
cur as part of a Plan: D distributes all of the C stock
to X. Immediately after the Distribution, D merges
into R in a reorganization under section 368(a)(1)(A)
(D-R merger). Following the D-R merger, R merg-
es into S in a reorganization under section 368(a)(1)
(A) (R-S merger). Immediately after the R-S merger,
X and Y own 10% and 90%, respectively, of the S
stock. Immediately before the Distribution, D’s C
stock has a basis of $10x and a fair market value of
$30x.
(ii) Analysis—(A) R and S are Successors of
D. Under paragraph (c)(2)(i) of this section, R is a
Successor of D because, after the Distribution, D
transfers property to R in a Section 381 Transaction.
Under paragraph (c)(2)(ii) of this section, S is also a
Successor of D because R (a Successor of D) trans-
fers property to S in a Section 381 Transaction.
(B) Planned 50-percent Acquisition of D. Un-
der paragraph (d)(1)(i) of this section, there is no
deemed acquisition of D stock as a result of the D-R
merger because X wholly owns the stock of D before
the merger and wholly owns the stock of R after the
merger. Under paragraph (d)(1)(i) of this section, Y
is treated as acquiring stock representing 90% of the
voting power and value of R (a Successor of D) as a
result of the R-S merger. Under paragraph (d)(2) of
this section, an acquisition of R stock is also treated
as an acquisition of D stock. Accordingly, there has
been a Planned 50-percent Acquisition of D.
(C) Gain not limited. Section 355(e) applies to
the Distribution because there has been a Planned
50-percent Acquisition of D. The POD Gain Lim-
itation Rule does not apply because there has been
no Planned 50-percent Acquisition of a Predecessor
of D. The Distributing Gain Limitation Rule applies

January 13, 2020 326 Bulletin No. 2020–3
because there has been a Planned 50-percent Ac-
quisition of D. However, the gain limitation under
the Distributing Gain Limitation Rule equals the
Statutory Recognition Amount, because there is no
Predecessor of D (and thus no Separated Property).
Therefore, D recognizes $20x of gain ($30x fair mar-
ket value minus $10x basis of the C stock held by D)
under section 355(c)(2).
(i) Applicability date. This section ap-
plies to Distributions occurring after De-
cember 15, 2019. For Distributions occur-
ring on or before December 15, 2019, see
§ 1.355-8T as contained in 26 CFR part 1
revised as of April 1, 2019.
Douglas W. O’Donnell
Acting Deputy Commissioner for Ser-
vices and Enforcement.
Approved: December 9, 2019.
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on De-
cember 16, 2019, 4:15 p.m., and published in the is-
sue of the Federal Register for December 18, 2019,
84 F.R. 69308)

Bulletin No. 2020–3 327 January 13, 2020
Part III
Extension of the Phase-in
Period for the Enforcement
and Administration of
Section 871(m)
Notice 2020-2
I. PURPOSE
This Notice provides taxpayers with
additional guidance for complying with
the final and temporary regulations under
sections 871(m), 1441, 1461, and 1473
of the Internal Revenue Code (the Code)
(collectively referred to as the section
871(m) regulations) in 2021,
1
2022, and
2023. Specifically, this Notice extends the
transition relief provided in Notice 2018-
72, 2018-40 I.R.B. 522, for two years, as
described in more detail below. The De-
partment of the Treasury (Treasury De-
partment) and the Internal Revenue Ser-
vice (IRS) intend to amend the section
871(m) regulations to delay the effective/
applicability date of certain rules in those
final regulations.
The anti-abuse rule provided in §1.871-
15(o) will continue to apply during the
phase-in years described in this Notice.
As a result, a transaction that would not
otherwise be treated as a section 871(m)
transaction (including as a result of this
Notice) may be a section 871(m) transac-
tion under §1.871-15(o).
2
II. BACKGROUND
On June 14, 2010, the Treasury De-
partment and the IRS published Notice
2010-46, which addresses potential over-
withholding in the context of securities
lending and sale repurchase agreements.
Notice 2010-46 provides a two-part solu-
tion to the problem of overwithholding on
a chain of dividends and dividend equiva-
lents. First, it provides an exception from
withholding for payments to a qualified se-
curities lender (QSL). Second, it provides
a proposed framework to credit forward
prior withholding on a chain of substitute
dividends paid pursuant to a chain of se-
curities loans or stock repurchase agree-
ments. The QSL regime requires a person
that agrees to act as a QSL to comply with
certain withholding and documentation
requirements. The Treasury Department
and the IRS permitted withholding agents
to rely on transition rules described in No-
tice 2010-46, Part III, until guidance was
developed that would include documenta-
tion and substantiation of withholding.
On September 18, 2015, the Federal
Register published final regulations and
temporary regulations (TD 9734, 80 FR
56866), which finalized a portion of a
2013 notice of proposed rulemaking (78
FR 73128), and introduced new temporary
regulations based on comments received
with respect to that notice of proposed
rulemaking (80 FR 56415) (2015 final
regulations and 2015 temporary regula-
tions, respectively). The Treasury Depart-
ment and the IRS stated in the preamble
that the final qualified derivatives dealer
(“QDD”) regulations would supplant the
proposed regulatory framework described
in Notice 2010-46. 80 FR at 56878.
On July 18, 2016, the Treasury Depart-
ment and the IRS published Notice 2016-
42, 2016-29 I.R.B. 67, which contained
the proposed qualified intermediary agree-
ment (QI Agreement) that included provi-
sions relating to the QDD regime and re-
iterated the intent to replace the proposed
regulatory framework described in Notice
2010-46 with the QDD regime.
On December 19, 2016, the Treasury
Department and the IRS published Notice
2016-76, which provided for the phased-
in application of certain provisions of the
section 871(m) regulations to allow for
the orderly implementation of those final
regulations and announced that taxpayers
may continue to rely on Notice 2010-46
until January 1, 2018.
On January 17, 2017, the Treasury De-
partment and the IRS published Revenue
Procedure 2017-15, 2017-3 I.R.B. 437,
which sets forth the final QI Agreement
(2017 QI Agreement), including the re-
quirements and obligations applicable to
QDDs, and provided that taxpayers may
continue to rely on Notice 2010-46 during
2017.
On January 24, 2017, the Feder-
al Register published final regulations
and temporary regulations (TD 9815, 82
FR 8144) (the 2017 regulations), which
finalized the 2015 notice of proposed
rulemaking (80 FR 56415) that was issued
in conjunction with the 2015 temporary
regulations. The effective/applicability
dates in the 2017 regulations reflect the
phased-in application described in Notice
2016-76. See Treas. Reg. §1.871-15(r)
(3). Also, consistent with Notice 2016-
76 and other announcements, the “Effect
on Other Documents” section of the pre-
amble to the 2017 regulations obsoleted
Notice 2010-46 as of January 1, 2018. In
response to a comment requesting that the
QSL regime remain, the preamble to the
2017 regulations noted that “[w]hile the
Treasury Department and the IRS under-
stand that the QSL regime was administra-
tively more convenient for taxpayers than
the QI regime, it created administrability
problems, particularly with respect to ver-
ification, for the IRS. That regime is being
replaced by incorporating the QDD rules
into the existing QI framework, including
the specific rules for pooled reporting on
Form 1042-S, and the QI requirements for
compliance review and certification.” 82
FR at 8153.
On August 21, 2017, the Treasury De-
partment and the IRS published Notice
2017-42, 2017-34 I.R.B. 212, which ex-
tended certain transition relief.
On February 5, 2018, the Treasury De-
partment and the IRS published Notice
2018-5, 2018-6 I.R.B. 341, which permits
withholding agents to apply the transition
rules from Notice 2010-46 in 2018 and
2019.
On October 1, 2018, the Treasury De-
partment and the IRS published Notice
2018-72, which further extended certain
transition relief and permitted withholding
agents to apply the transition rules from
Notice 2010-46 in 2020.
1
Unless otherwise provided, all references to years refer to calendar years.
2
The terms used in this Notice have the meanings provided in the section 871(m) regulations.

January 13, 2020 328 Bulletin No. 2020–3
Consistent with Executive Order 13777
(82 FR 12285), the Treasury Department
and the IRS continue to evaluate the sec-
tion 871(m) regulations and consider possi-
ble agency actions that may reduce unnec-
essary burdens imposed by the regulations.
The Treasury Department and the IRS will
take into account comments already re-
ceived, and welcome any additional com-
ments regarding the issues that new burden
reduction guidance may address as well as
the tax policy considerations, legal authori-
ty for, and the IRS administrative feasibili-
ty of any suggested approaches to be taken
in the burden reduction guidance. Pending
consideration of the section 871(m) regula-
tions pursuant to Executive Order 13777,
this Notice extends the phase-in period de-
scribed in Notice 2018-72 through 2022.
See sections III through VI of this Notice
for more details. Treasury Department and
the IRS intend to provide sufficient time for
taxpayers and withholding agents to imple-
ment any changes to the section 871(m)
regulations adopted in response to Execu-
tive Order 13777.
III. EXTENSION OF THE PHASE-IN
YEAR FOR DELTA-ONE AND NON-
DELTA-ONE TRANSACTIONS
This section describes the extension
to the phased-in application of the sec-
tion 871(m) regulations to delta-one and
non-delta-one transactions. This Notice
does not apply to any transaction that is
a section 871(m) transaction pursuant to
§1.871-15(d)(1) (providing that before
January 1, 2017, a notional principal con-
tract (NPC) is a specified NPC if certain
factors are present).
The Treasury Department and the IRS
have determined that it is appropriate for
taxpayers and withholding agents to delay
certain provisions in the section 871(m)
regulations for non-delta-one transactions,
including transactions that are combined
transactions under §1.871-15(n). There-
fore, the Treasury Department and the IRS
intend to revise the effective/applicability
date for §1.871-15(d)(2) and (e) to pro-
vide that these rules will not apply to any
payment made with respect to any non-
delta-one transaction issued before Janu-
ary 1, 2023. As noted in Part I of this No-
tice, the anti-abuse rule continues to apply
to the phased-in application of the section
871(m) regulations, including for the pur-
pose of determining whether a transaction
is a delta-one transaction.
Notice 2016-76 provides that the IRS
will take into account the extent to which
the taxpayer or withholding agent made a
good faith effort to comply with the section
871(m) regulations with respect to del-
ta-one transactions in 2017 and non-delta-
one transactions in 2018 when it enforces
the section 871(m) regulations. As a result
of extensions in Notice 2017-42 and No-
tice 2018-72, the good faith effort standard
applies to (1) any delta-one transaction in
2017 through 2020, and (2) any non-del-
ta-one transaction that is a section 871(m)
transaction pursuant to §1.871-15(d)(2) or
(e) in 2021. This Notice further extends the
periods during which the enforcement stan-
dards provided by Notice 2018-72 will ap-
ply. Consistent with this extension, the IRS
will take into account the extent to which
the taxpayer or withholding agent made a
good faith effort to comply with the section
871(m) regulations in enforcing the section
871(m) regulations for (1) any delta-one
transaction in 2017 through 2022, and (2)
any non-delta-one transaction that is a sec-
tion 871(m) transaction pursuant to §1.871-
15(d)(2) or (e) in 2023.
Similarly, for purposes of the IRS’s en-
forcement and administration of the QDD
rules in the section 871(m) regulations
and the relevant provisions of the 2017 QI
Agreement, this Notice extends through
2022 the period during which the IRS will
take into account the extent to which the
QDD made a good faith effort to comply
with the section 871(m) regulations and the
relevant provisions of the 2017 QI Agree-
ment. In addition, the IRS is considering
revising the 2017 QI Agreement to provide
that a QDD will be considered to satisfy the
obligations that apply specifically to a QDD
under that agreement for 2017 through
2022 provided that the QDD makes a good
faith effort to comply with the relevant pro-
visions of the 2017 QI Agreement.
IV. EXTENSION OF THE
SIMPLIFIED STANDARD FOR
DETERMINING WHETHER
TRANSACTIONS ARE COMBINED
TRANSACTIONS
Notice 2016-76 provided a simplified
standard for withholding agents to deter-
mine whether transactions entered into
in 2017 are combined transactions. Spe-
cifically, a withholding agent is required
to combine transactions entered into in
2017 for purposes of determining wheth-
er the transactions are section 871(m)
transactions only when the transactions
are over-the-counter transactions that are
priced, marketed, or sold in connection
with each other. Withholding agents are
not required to combine any transactions
that are listed securities entered into in
2017.
Notice 2017-42 and Notice 2018-72
extended the period during which this
simplified standard for combined trans-
actions applies to include 2018 through
2020. This Notice further extends the
period during which this simplified
standard for combined transactions ap-
plies to include 2021 and 2022. Trans-
actions that are entered into in 2017
through 2022 that are combined under
this simplified standard will continue
to be treated as combined transactions
for future years and will not cease to be
combined transactions as a result of ap-
plying §1.871-15(n) or disposing of less
than all of the potential section 871(m)
transactions that are combined under this
rule. Transactions that are entered into
in 2017 through 2022 that are not com-
bined under this simplified standard will
not become combined transactions as a
result of applying §1.871-15(n) to these
transactions in future years, unless a reis-
suance or other event causes the transac-
tions to be retested to determine whether
they are section 871(m) transactions. See
§1.871-15(g)(2) (providing that the delta
of a potential section 871(m) transaction
generally is determined on the earlier of
when the transaction is (1) priced or (2)
issued); see also §1.871-15(a)(6) (defin-
ing the term “issue” to include “an issu-
ance as a result of a deemed exchange
pursuant to section 1001”). This simpli-
fied standard applies only to withholding
agents and does not apply to taxpayers
that are long parties to potential section
871(m) transactions. As noted in Part I
of this Notice, the anti-abuse rule con-
tinues to apply to the phased-in applica-
tion of the section 871(m) regulations,
including for the purpose of determining
whether multiple transactions should be
combined.

Bulletin No. 2020–3 329 January 13, 2020
V. EXTENSION OF PHASE-
IN RELIEF FOR QUALIFIED
DERIVATIVES DEALERS
Section 1.871-15T(q)(1) of the 2015
temporary regulations provided that
when a QDD received a dividend or div-
idend equivalent payment and the QDD
was contractually obligated to make an
offsetting dividend equivalent payment
on the same underlying security in an
amount that was less than the dividend
and dividend equivalent amount re-
ceived, the QDD would be liable for tax
under section 871(a) or section 881 for
the difference. The 2015 final regulations
provided that a withholding agent who
made a payment of a dividend to a qual-
ified intermediary acting as a QDD was
not required to withhold on that payment
if the withholding agent reliably associat-
ed the payment with a valid qualified in-
termediary withholding form containing
a certification described in §1.1441-1(e)
(3)(ii)(E). See §1.1441-1(b)(4)(xxii) of
the 2015 final regulations.
Comments requested that the Treasury
Department and the IRS adopt a different
method of determining a QDD’s tax liabil-
ity. Those comments generally requested
that this method be based on the QDD’s
net delta exposure for each underlying se-
curity. The Treasury Department and the
IRS agreed that the net delta approach was
an administrable and accurate method for
a QDD to determine its residual exposure
to underlying securities, and the 2017 final
regulations adopted the net delta exposure
method.
In adopting the net delta approach,
the Treasury Department and the IRS
were concerned that the exemption from
withholding on dividends paid to a QDD,
when combined with the net delta expo-
sure method, could result in U.S. source
dividends escaping U.S. tax completely
in certain circumstances. Therefore, the
2017 final regulations revised §§1.871-
15(q)(1) and 1.1441-1(b)(4)(xxii) to pro-
vide that a QDD remains liable for tax
under section 881(a)(1) and subject to
withholding under chapters 3 and 4 on
dividends. However, to allow taxpayers
time to implement the net delta approach,
the 2017 QI Agreement and the 2017 final
regulations provided that dividends and
dividend equivalents received by a QDD
in its equity derivatives dealer capacity in
2017 will not be subject to tax under sec-
tion 881(a)(1) or subject to withholding
under chapters 3 and 4.
Notice 2017-42 and Notice 2018-72 an-
nounced that the Treasury Department and
the IRS intend to amend §§1.871-15(q)(1)
and (r)(3), and 1.1441-1(b)(4)(xxii)(C) to
provide that a QDD will not be subject
to tax on dividends and dividend equiv-
alents received in 2017 through 2020 in
its equity derivatives dealer capacity or
withholding on those dividends (including
deemed dividends). This Notice announc-
es that the Treasury Department and the
IRS intend to amend those provisions to
provide that a QDD will not be subject to
tax on dividends and dividend equivalents
received in 2021 and 2022 in its equity
derivatives dealer capacity or withhold-
ing on those dividends (including deemed
dividends) as well.
Section 4.01(1) of Rev. Proc. 2017-15
provides that a QDD will be required to
compute its section 871(m) amount using
the net delta approach beginning in 2018.
Notice 2017-42 and Notice 2018-72 pro-
vided that a QDD would be required to
compute its section 871(m) amount using
the net delta approach beginning in 2021.
This Notice provides that a QDD will be
required to compute its section 871(m)
amount using the net delta approach be-
ginning in 2023.
A QDD will remain liable for tax under
section 881(a)(1) on dividends and divi-
dend equivalents that it receives in any
capacity other than as an equity deriva-
tives dealer, and on any other U.S. source
FDAP payments that it receives (whether
or not in its equity derivatives dealer ca-
pacity). In addition, a QDD is responsible
for withholding on dividend equivalents
it pays to a foreign person on a section
871(m) transaction, whether acting in its
capacity as an equity derivatives dealer or
otherwise.
Finally, section 10.01(C) of the 2017
QI Agreement provides that: “For calen-
dar year 2017, a QDD is not required to
perform a periodic review with respect to
its QDD activities (as otherwise required
by section 10.04 of this Agreement) or
provide the factual information specified
in Appendix I.” Notice 2017-42 and No-
tice 2018-72 provided that a QDD is not
required to perform a periodic review
with respect to its QDD activities for 2017
through 2020. This Notice provides that a
QDD is not required to perform a periodic
review with respect to its QDD activities
for 2021 or 2022. Note that a QDD must
use the same year for the periodic review
of its QI activities and its QDD activities.
A QI that is a QDD must choose 2023 or a
later year within its certification period in
which to perform its periodic review un-
less its applicable certification period ends
in 2022 or an earlier year.
VI. EXTENSION OF TRANSITION
RULES FROM NOTICE 2010-46
Notice 2018-5 and Notice 2018-72
provided that notwithstanding the pre-
amble to the 2017 regulations, withhold-
ing agents may apply the transition rules
described in Notice 2010-46, Part III, for
payments made in 2018, 2019, and 2020.
This Notice provides that withholding
agents may also apply the transition rules
described in Notice 2010-46, Part III, for
payments made in 2021 and 2022.
VII. TAXPAYER RELIANCE
Before the promulgation of the amend-
ments to the section 871(m) regulations
and the 2017 QI Agreement, taxpayers
may rely on the provisions of this Notice
regarding the proposed amendments de-
scribed in sections III and V. Withholding
agents may rely on the simplified standard
for determining whether transactions are
combined transactions as described in sec-
tion IV and may apply the QSL transition
rules described in section VI.
VIII. DRAFTING INFORMATION
The principal authors of this Notice
are Karen Walny and Peter Merkel of the
Office of Associate Chief Counsel (In-
ternational). For further information re-
garding this Notice, contact Karen Walny
or Peter Merkel at (202) 317-6938 (not a
toll-free number).

January 13, 2020 330 Bulletin No. 2020–3
Interim Guidance on
Income Tax Withholding
from Retirement and
Annuity Distributions
Notice 2020-3
I. PURPOSE
This notice provides guidance for the
2020 calendar year regarding withholding
from periodic payments for pensions, an-
nuities, and certain other deferred income
under § 3405(a) of the Internal Revenue
Code (Code), including the rules for with-
holding from periodic payments under
§ 3405(a) when no withholding certificate
has been furnished (default rate of with-
holding). This notice also informs taxpay-
ers that the Department of the Treasury
(Treasury Department) and the Internal
Revenue Service (IRS) are considering
whether the 2020 default rate of withhold-
ing under § 3405(a) will continue to be
appropriate for calendar years after 2020
and request comments related to the po-
tential adoption of a new default rate of
withholding. The deadline for submission
of comments is February 17, 2020.
II. BACKGROUND
Section 3405 generally requires the
payor of certain payments for pensions,
annuities, and certain other deferred in-
come to withhold amounts from the pay-
ments unless an individual has elected not
to have withholding apply.
1
An individ-
ual’s withholding election under § 3405
(or election not to have withholding ap-
ply, if available) generally is made using
Form W-4P, Withholding Certificate for
Pension or Annuity Payments.
Section 3405(a) generally requires the
payor of periodic payments from pen-
sions, annuities, or certain other deferred
income to withhold from those payments
as if the payments were wages paid by an
employer to an employee, unless an indi-
vidual has elected not to have withholding
apply. Section 3402 requires an employer
to deduct and withhold income tax from
employees’ wages under methods and
procedures prescribed by the Secretary.
An employee who receives wages subject
to withholding under § 3402 is required
to furnish a withholding allowance certif-
icate to his or her employer. See § 3402(f)
(2), (5); Treas. Reg. § 31.3402(f)(5)-1.
Prior to the 2020 calendar year, infor-
mation requested on Form W-4P regard-
ing withholding from periodic payments
generally paralleled the information re-
quested on Form W-4 for withholding
from wages.
2
The Form W-4 for the 2020
calendar year (which has been renamed
the Form W-4, Employee’s Withholding
Certificate) has been redesigned to in-
crease transparency and accuracy of the
withholding system. Beginning in calen-
dar year 2020, employers are required to
use the redesigned form for all new em-
ployees and employees hired prior to 2020
who wish to adjust their withholding. As a
result, information requested on the 2020
Form W-4 no longer parallels informa-
tion requested on Form W-4P for with-
holding from periodic payments. Among
other changes, the redesigned Form W-4
requests the employee’s filing status,
rather than marital status, and no longer
requests the number of withholding allow-
ances the employee is claiming. The 2020
Form W-4 also includes a new method by
which an employee may request withhold-
ing using higher withholding rate tables.
Importantly, the Treasury Department and
the IRS have designed the withholding ta-
bles and computational procedures in the
2020 Publication 15-T, Federal Income
Tax Withholding Methods, to work with
both a 2019 or earlier Form W-4 and the
redesigned 2020 Form W-4. Therefore,
for purposes of withholding from periodic
payments under § 3405(a), the IRS plans
to provide in the 2020 Publication 15-A,
Employer’s Supplemental Tax Guide, that
the 2020 Form W-4P will work with cer-
tain withholding tables and computational
procedures in the 2020 Publication 15-T
that are applicable to a 2019 or earlier
Form W-4.
Section 3405(a)(4) was amended by
section 11041(c)(2)(G) of the Tax Cuts
and Jobs Act, Pub. L. 115-97 (TCJA) to
provide that the withholding rate for pe-
riodic payments when no withholding
certificate has been furnished “shall be
determined under rules prescribed by the
Secretary.” Under the law in effect before
2018, § 3405(a)(4) provided that, in the
case of a payee entitled to periodic pay-
ments with respect to which a withhold-
ing certificate had not been furnished, the
amount to be withheld from each such
payment “shall be determined by treating
the payee as a married individual claiming
3 withholding exemptions.” Temporary
Treasury Regulations issued under § 3405
(as in effect before 2018) continue to pro-
vide that, if no withholding certificate has
been furnished with respect to periodic
payments under § 3405(a), then the payor
must base withholding on the rates for a
married person claiming three withhold-
ing allowances. See Temp. Treas. Reg.
§ 35.3405-1T, Q&As A-10, B-3, B-4.
Following enactment of TCJA, the
Treasury Department and the IRS issued
guidance to address changes made by
TCJA to withholding rules under §§ 3401,
3402, and 3405. See Notice 2018-14,
2018-7 I.R.B. 353, and Notice 2018-92,
2018-51 I.R.B. 1038. With respect to
§ 3405(a), section V of Notice 2018-14
provided that, for 2018, the default rate of
withholding would parallel the rules for
prior years and would be based on treating
the payee as a married individual claiming
three withholding allowances. Similarly,
section 10 of Notice 2018-92 provided
that, for 2019, the default rate of with-
holding under § 3405(a)(4) would paral-
lel the rules for prior years, and would be
based on treating the payee as a married
individual claiming three withholding al-
lowances.
III. 2020 FORM W-4P AND
RELATED TABLES AND
COMPUTATIONAL PROCEDURES
FOR WITHHOLDING UNDER
SECTION 3405(a)
The information requested on the 2020
Form W-4P for periodic payments (other
than the no-withholding election on Line
1
The election not to have withholding apply generally is unavailable with respect to eligible rollover distributions under § 3405(c) and certain payments to be made outside of the United
States or its possessions under § 3405(e)(13).
2
The no-withholding election that is generally available for periodic payments under § 3405(a) is not available for wages; therefore, the no-withholding election on Line 1 of the 2019
Form W-4P does not parallel the conditions to claim exemption from wage withholding on the 2019 Form W-4.

Bulletin No. 2020–3 331 January 13, 2020
1) generally will continue to parallel the
information requested on Form W-4 prior
to 2020. Payees of periodic payments may
use either the worksheets to Form W-4P
or the Tax Withholding Estimator (www.
irs.gov/W4App) to assist in determining
their entries on the 2020 Form W-4P. As
explained in Section II of this notice, cer-
tain withholding tables and computational
procedures in the 2020 Publication 15-T
that are applicable to a 2019 or earlier
Form W-4 will also work with the 2020
Form W-4P.
IV. RULES FOR 2020 FOR
WITHHOLDING FROM PERIODIC
PAYMENTS UNDER SECTION
3405(a) WHEN NO WITHHOLDING
CERTIFICATE HAS BEEN
FURNISHED
For the 2020 calendar year, the rules
for withholding from periodic payments
under § 3405(a) when no withholding cer-
tificate has been furnished will continue to
parallel the rules for prior years. Therefore,
for 2020, the default rate of withholding
from periodic payments under § 3405(a)
will be based on treating the payee as a
married individual claiming three with-
holding allowances and applying that sta-
tus to the applicable withholding tables
and related computational procedures in
the 2020 Publication 15-T. The IRS plans
to provide in the 2020 Publication 15-A
that this default rate of withholding will
work with certain withholding tables and
computational procedures in the 2020
Publication 15-T that are applicable to a
2019 or earlier Form W-4.
V. WITHHOLDING UNDER
SECTION 3405(a) FOR YEARS
AFTER 2020
The Treasury Department and the IRS
will provide the rules and procedures that
apply for calendar years after 2020 for
withholding from periodic payments un-
der § 3405(a) in applicable forms, instruc-
tions, publications, and other guidance. In
addition, the Treasury Department and the
IRS are considering whether the default
rate of withholding from periodic pay-
ments under § 3405(a) described in sec-
tion IV of this notice will continue to be
appropriate for calendar years after 2020.
VI. REQUEST FOR COMMENTS
The Treasury Department and the IRS
invite comments on whether the adoption
of a new default rate of withholding from
periodic payments under § 3405(a) that
would apply prospectively (that is, would
only apply to periodic payments that be-
gin after the effective date of the new de-
fault withholding rate) would present any
administrative challenges.
Comments should be submitted in writ-
ing on or before February 17, 2020. Com-
ments should include a reference to No-
tice 2020-3. Comments may be submitted
electronically via the Federal eRulemak-
ing Portal at www.regulations.gov (type
IRS-2019-0051 in the search field on the
regulations.gov homepage to find this no-
tice and submit comments). Alternatively,
comments may be mailed to: CC:PA:LP-
D:PR (Notice 2020-3), Room 5203, Inter-
nal Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044.
All comments will be available for public
inspection and copying in their entirety.
VII. PAPERWORK REDUCTION
ACT
Any collection of information associ-
ated with this notice has been submitted
to the Office of Management and Budget
for review under OMB control number
1545-0074 in accordance with the Paper-
work Reduction Act of 1995 (44 U.S.C.
3507(d)). In general, the collection of in-
formation is required under § 3405(a). An
agency may not conduct or sponsor and a
person is not required to respond to a col-
lection of information unless it displays a
valid OMB control number.
VIII. DRAFTING INFORMATION
The principal author of this notice
is Kara M. Soderstrom of the Office of
the Associate Chief Counsel (Employ-
ee Benefits, Exempt Organizations, and
Employment Taxes). However, other
personnel from the Treasury Department
and the IRS participated in the develop-
ment of this guidance. For further infor-
mation regarding this notice, contact Ms.
Soderstrom at 202-317-6799 (not a toll-
free number).

January 13, 2020 332 Bulletin No. 2020–3
Part IV
Notice of Proposed
Rulemaking and
Notification of Public
Hearing
Treatment of Payments
to Charitable Entities in
Return for Consideration
REG-107431-19
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notification of public hearing.
SUMMARY: This document provides
proposed amendments to the regulations
under sections 162, 164, and 170 of the
Internal Revenue Code (Code). First, the
proposed amendments update the regula-
tions under section 162 to reflect current
law regarding the application of section
162 to a taxpayer that makes a payment or
transfer to an entity described in section
170(c) for a business purpose. Second,
the proposed amendments provide safe
harbors under section 162 to provide cer-
tainty with respect to the treatment of pay-
ments made by business entities to an en-
tity described in section 170(c). Third, the
proposed amendments provide a safe har-
bor under section 164 for payments made
to an entity described in section 170(c) by
individuals who itemize deductions and
receive or expect to receive a state or local
tax credit in return. Fourth, the proposed
amendments update the regulations under
section 170 to reflect past guidance and
case law regarding the application of the
quid pro quo principle under section 170
to benefits received or expected to be re-
ceived by a donor from a third party.
DATES: Written or electronic comments
must be received by January 31, 2020. Re-
quests to speak and outlines of topics to be
discussed at the public hearing scheduled
for February 20, 2020, must be received
by January 31, 2020.
ADDRESSES: Submit electronic submis-
sions via the Federal eRulemaking Portal
at http://www.regulations.gov (indicate
IRS and REG–107431–19) by follow-
ing the online instructions for submitting
comments. Once submitted to the Federal
eRulemaking Portal, comments cannot be
edited or withdrawn. The Department of
the Treasury (Treasury Department) and
the IRS will publish for public availability
any comment received to its public dock-
et, whether submitted electronically or in
hard copy. Send hard copy submissions
to: CC:PA:LPD:PR (REG–107431–19),
Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may
be hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–107431–19),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue NW, Washing-
ton, DC 20224.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Mon L. Lam and Merrill D. Feldstein
at (202) 317-4059; concerning submission
of comments and requests to speak at the
public hearing, Regina Johnson at (202)
317-6901 (not toll-free numbers) or fdms.
database@irscounsel.treas.gov.
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
I. Contributions in Exchange for State
and Local Tax Credits
Section 170(a)(1) generally allows
an itemized deduction for any “charita-
ble contribution” paid within the taxable
year. Section 170(c) defines “charitable
contribution” as a “contribution or gift
to or for the use of” an entity described
in that section. Under section 170(c)(1),
such entities include a State, a possession
of the United States, or any political sub-
division of the foregoing, or the District
of Columbia. Section 170(c)(2) includes
certain corporations, trusts, or community
chests, funds, or foundations, organized
and operated exclusively for religious,
charitable, scientific, literary, or educa-
tional purposes, or to foster national or
international amateur sports competition,
or for the prevention of cruelty to children
or animals. Section 1.170A-1(c)(5) of the
Income Tax Regulations provides that
transfers of property to an organization
described in section 170(c) that bear a di-
rect relationship to the taxpayer’s trade or
business and that are made with a reason-
able expectation of financial return com-
mensurate with the amount of the transfer
may constitute allowable deductions as
trade or business expenses rather than as
charitable contributions. Section 162(a)
allows a deduction for all the ordinary
and necessary expenses paid or incurred
during the taxable year in carrying on any
trade or business. Section 162(b) provides
that no deduction shall be allowed under
subsection (a) for any contribution or gift
that would be allowable as a deduction un-
der section 170 were it not for the percent-
age limitations, the dollar limitations, or
the requirements as to the time of payment
set forth in that section.
Section 1.162-15(a) applies to con-
tributions to entities described in section
170(c). Section 1.162-15(a)(1) currently
provides that no deduction is allowable
under section 162(a) for a contribution or
gift by an individual or a corporation if
any part thereof is deductible under sec-
tion 170. For example, if a taxpayer makes
a contribution of $5,000 and only $4,000
of this amount is deductible under section
170(a) (whether because of the percentage
limitation under either section 170(b)(1)
or (2), the requirement as to time of pay-
ment, or both), no deduction is allowable
under section 162(a) for the remaining
$1,000. However, §1.162-15(a)(2) clari-
fies that the limitations provided in section
162(b) and §1.162-15(a)(1) apply only to
payments that are in fact contributions or
gifts to organizations described in section
170. For example, payments by a transit
company to a local hospital (which is a
charitable organization within the mean-
ing of section 170) in consideration of a
binding obligation on the part of the hos-
pital to provide hospital services and facil-
ities for the company’s employees are not

Bulletin No. 2020–3 333 January 13, 2020
contributions or gifts within the meaning
of section 170 and may be deductible un-
der section 162(a) if the requirements of
section 162(a) are otherwise satisfied.
Section 164(a) allows a deduction for
the payment of certain taxes, including:
(1) state and local, and foreign, real prop-
erty taxes; (2) state and local personal
property taxes; and (3) state and local, and
foreign, income, war profits, and excess
profits taxes. In addition, section 164 al-
lows a deduction for taxes not described
in the preceding sentence that are paid or
accrued within the taxable year in carry-
ing on a trade or business or an activity
described in section 212. Moreover, under
section 164(b)(5), taxpayers may elect to
deduct state and local general sales taxes
in lieu of state and local income taxes.
Section 164(b)(6), as added by section
11042(a) of the Tax Cuts and Jobs Act
Pub. L. 115-97, (the “TCJA”) provides
that in the case of an individual, deduc-
tions for foreign real property taxes are not
allowable under section 164(a)(1), and the
deduction for the aggregate amount of the
following state and local taxes paid during
the calendar year is limited to $10,000
($5,000 in the case of a married individual
filing a separate return): (1) real property
taxes; (2) personal property taxes; (3) in-
come, war profits, and excess profits taxes;
and (4) general sales taxes. This limitation
applies to taxable years beginning after
December 31, 2017, and before January 1,
2026, and does not apply to foreign taxes
described in section 164(a)(3) or to any
taxes described in section 164(a)(1) and
(2) that are paid or accrued in carrying on
a trade or business or an activity described
in section 212.
In response to the limitation in section
164(b)(6), some taxpayers have consid-
ered tax planning strategies to avoid or
mitigate its effects. Some of these strat-
egies rely on state and local tax cred-
it programs under which states provide
tax credits in return for contributions by
taxpayers to entities described in section
170(c), and some state and local govern-
ments have created new programs intend-
ed to facilitate use of these strategies.
On June 11, 2018, the Treasury De-
partment and the IRS announced their in-
tention to propose regulations addressing
the proper application of sections 164 and
170 to taxpayers who make contributions
under state and local tax credit programs
to entities described in section 170(c). See
Notice 2018-54, 2018-24 I.R.B. 750. On
August 27, 2018, proposed regulations
(REG-112176-18) under sections 170
and 642(c) were published in the Federal
Register (83 FR 43563) (“2018 proposed
regulations”). The 2018 proposed regula-
tions proposed amending §1.170A-1(h)(3)
to provide, in general, that if a taxpayer
makes a payment or transfers property to
or for the use of an entity described in sec-
tion 170(c), and the taxpayer receives or
expects to receive a state or local tax cred-
it in return for such payment or transfer,
the tax credit constitutes a return benefit
to the taxpayer and reduces the taxpayer’s
charitable contribution deduction. The
2018 proposed regulations were premised,
in part, on the quid pro quo principle ar-
ticulated by the Supreme Court in United
States v. American Bar Endowment, 477
U.S. 105, 116 (1986), and its progeny that
“a payment of money generally cannot
constitute a charitable deduction if the
contributor expects a substantial benefit
in return.” The 2018 proposed regulations
also proposed amending regulations under
section 642(c), to provide a similar rule
for payments made by a trust or dece-
dent’s estate.
The Treasury Department and the IRS
received over 7,700 comments responding
to the 2018 proposed regulations and 25
requests to speak at the public hearing,
which was held on November 5, 2018.
After taking into account the comments
received and the concerns expressed at the
public hearing, the Treasury Department
and the IRS published final regulations
in the Federal Register on June 13, 2019
(T.D. 9864, 84 FR 27513) (“the final reg-
ulations”). The final regulations retained
the rules set out in the 2018 proposed reg-
ulations, with certain clarifying and tech-
nical changes. Most significantly, the final
regulations retained the general rule that,
if a taxpayer makes a payment or transfers
property to or for the use of an entity de-
scribed in section 170(c), and the taxpayer
receives or expects to receive a state or
local tax credit in return for such transfer,
the tax credit constitutes a return benefit
to the taxpayer, or quid pro quo, reducing
the taxpayer’s charitable contribution de-
duction. See §1.170A-1(h)(3) of the final
regulations.
In response to Notice 2018-54 and the
2018 proposed regulations, commenters
raised several ancillary issues. These is-
sues involved: (1) treatment of business
entity payments to entities described in
section 170(c); (2) treatment of payments
by individuals with total state and local
tax liabilities that were less than or equal
to the section 164(b)(6) limitations; and
(3) application of the quid pro quo princi-
ple under section 170 to benefits received
or expected to be received by the donor
from a party other than the donee.
Although the Treasury Department and
the IRS have provided sub-regulatory safe
harbors related to the first two issues (in
Rev. Proc. 2019-12, 2019-04 I.R.B. 401,
and Notice 2019-12, 2019-27 I.R.B. 57),
the Treasury Department and the IRS be-
lieve that it is appropriate to include these
safe harbors in proposed regulations and
to request comments. Further, in the pre-
amble to the final regulations, the Trea-
sury Department and the IRS extensively
addressed the third issue — whether a
benefit received or expected to be re-
ceived from a party other than the donee
may constitute a quid pro quo that reduces
the taxpayer’s charitable contribution de-
duction under section 170. The preamble
to the final regulations stated that the Trea-
sury Department and the IRS would pro-
pose additional regulations setting forth a
general rule for benefits received or ex-
pected to be received from third parties.
Accordingly, the proposed regulations,
provided herein, would amend the regu-
lations under sections 162, 164, and 170
to provide guidance on these three issues.
II. Payments by Business Entities
in Exchange for State or Local Tax
Credits
After the issuance of Notice 2018-54,
and continuing after the publication of the
2018 proposed regulations, the Treasury
Department and the IRS received inquiries
from taxpayers regarding the application
of the proposed regulations to businesses
that make payments to entities described in
section 170(c) pursuant to state and local
tax credit programs. The taxpayers sought
guidance as to whether a business entity
may deduct these payments under section
162 as ordinary and necessary business
expenses incurred in carrying on a trade

January 13, 2020 334 Bulletin No. 2020–3
or business. In response, on September 5,
2018, the IRS released a frequently asked
question (“FAQ”) stating that a business
taxpayer making a payment to an entity
described in section 170(c) is generally
permitted to deduct such payment as an
ordinary and necessary business expense
under section 162 if the payment is made
with a business purpose. However, after
the release of the FAQ, taxpayers con-
tinued to express concern about whether
the business purpose requirement is met
for contributions that result in a tax cred-
it. Specifically, taxpayers asked whether
payments by business entities in exchange
for state and local tax credits would bear
a direct relationship to the taxpayer’s
trade or business such that these payments
would qualify as ordinary and necessary
business expenses of carrying on a trade
or business under section 162(a).
On December 28, 2018, the IRS issued
Rev. Proc. 2019-12, providing a safe har-
bor under section 162 for payments made
by a business entity that is a C corpora-
tion or specified passthrough entity to or
for the use of an organization described
in section 170(c) if the C corporation or
specified passthrough entity receives or
expects to receive state or local tax cred-
its in return. The revenue procedure states
that, to the extent that a C corporation re-
ceives or expects to receive a state or lo-
cal tax credit in return for a payment to an
organization described in section 170(c),
it is reasonable to conclude that there is
a direct benefit and a reasonable expecta-
tion of commensurate financial return to
the C corporation’s business in the form
of a reduction in the state or local taxes
the C corporation would otherwise be re-
quired to pay. Thus, the revenue procedure
provides a safe harbor that allows a C cor-
poration engaged in a trade or business
to treat the portion of the payment that is
equal to the amount of the credit received
or expected to be received as meeting the
requirements of an ordinary and necessary
business expense under section 162.
The IRS determined that a similar anal-
ysis is appropriate in the case of a business
entity other than a C corporation if (1) the
business entity is regarded as separate
from its owner for all Federal tax purposes
under §301.7701-3 of the Procedure and
Administration Regulations (“passthrough
entity”); (2) the passthrough entity oper-
ates a trade or business within the mean-
ing of section 162; (3) the passthrough
entity is subject to a state or local tax in-
curred in carrying on its trade or business
that is imposed directly on the entity; and
(4) in return for a payment to an entity de-
scribed in section 170(c), the passthrough
entity receives or expects to receive a state
or local tax credit that the entity applies
or expects to apply to offset a state or lo-
cal tax other than a state or local income
tax. Thus, to the extent that a specified
passthrough entity makes a payment to an
entity described in section 170(c) and re-
ceives or expects to receive a state or local
tax credit, Rev. Proc. 2019-12 permits the
passthrough entity to treat the payment as
meeting the requirements of an ordinary
and necessary business expense under
section 162. The safe harbors for C corpo-
rations and specified passthrough entities
apply only to payments of cash and cash
equivalents.
In the interest of providing certainty
for taxpayers, the Treasury Department
and the IRS believe that it is appropriate
to propose regulations to incorporate the
safe harbors set out in Rev. Proc. 2019-
12 and to request comments on these safe
harbors. Thus, these proposed regula-
tions propose amending §1.162-15(a) to
incorporate the Rev. Proc. 2019-12 safe
harbors. These proposed regulations also
propose amending §1.170A-1(c)(5) and
(h)(3)(viii) to provide cross references to
§1.162-15(a). The Treasury Department
and the IRS specifically request comments
on whether the safe harbors should be ex-
panded to apply to an individual who is
carrying on a trade or business or an activ-
ity described in section 212.
The proposed regulations propose ad-
ditional revisions to §1.162-15(a) to more
clearly reflect the current state of the law
regarding a taxpayer’s payment or transfer
to an entity described in section 170(c). If
the taxpayer’s payment or transfer bears a
direct relationship to its trade or business,
and the payment is made with a reason-
able expectation of commensurate finan-
cial return, the payment or transfer to the
section 170(c) entity may constitute an
allowable deduction as a trade or business
expense under section 162, rather than a
charitable contribution under section 170.
See §1.170A-1(c)(5); Marquis v. Commis-
sioner, 49 T.C. 695 (1968). A proposed
example illustrates that this rule applies
regardless of whether the taxpayer expects
to receive a state or local tax credit in re-
turn.
The proposed revisions are also con-
sistent with the decision in American Bar
Endowment, which states that a payment
to an entity described in section 170(c)
may have a dual character—part chari-
table contribution and part business ex-
pense. 477 U.S. at 117. Under American
Bar Endowment and §1.170A-1(h), if a
taxpayer makes a payment to an entity de-
scribed under section 170(c) in an amount
that exceeds the fair market value of the
benefit that the taxpayer receives or ex-
pects to receive in return, and this excess
amount is paid with charitable intent, the
taxpayer is allowed a charitable contribu-
tion deduction under section 170 for this
excess amount.
In addition, the proposed regula-
tions propose to add a cross-reference to
§1.170A-1(h) (payments to section 170(c)
entities in exchange for consideration),
which provides more detailed rules for de-
termining whether a payment, or a portion
of a payment, to an entity described in sec-
tion 170(c) may be deducted under section
162(a) or section 170.
III. Payments by Individuals in
Exchange for State and Local Tax
Credits
After publication of the 2018 proposed
regulations, commenters expressed con-
cerns that the proposed regulations would
create unfair consequences for certain in-
dividuals who receive state or local tax
credits in return for their payments. Spe-
cifically, commenters noted that individ-
uals who itemize deductions for Federal
income tax purposes and have total state
and local tax liabilities for the taxable year
of $10,000 or less ($5,000 or less in the
case of a married individual filing a sepa-
rate return) would be precluded from tak-
ing charitable contribution deductions to
the extent that they receive state or local
tax credits even though the individuals
would have been able to deduct equivalent
payments of state and local taxes. Thus, if
these individuals chose to make a payment
to a section 170(c) entity through a state or
local tax credit program instead of paying
tax to the state or local government, they

Bulletin No. 2020–3 335 January 13, 2020
would lose the deduction to which they
would otherwise have been entitled under
section 164 even after the application of
the section 164(b)(6) limitation.
These state and local tax credit pro-
grams effectively offer taxpayers a choice
of paying taxes to the state or local gov-
ernment or making a payment to a section
170(c) entity and receiving a tax cred-
it that offsets a tax liability the taxpayer
would otherwise owe to the state or local
government. This situation can be anal-
ogized to situations in which an individ-
ual entitled to receive a payment from a
second party directs or permits the second
party to satisfy its payment obligation by
making a payment to a third party. In such
situations, the payment may be treated,
for Federal income tax purposes, as a pay-
ment by the payor to the individual enti-
tled to receive payment. Cf. Rev. Rul. 86-
14, 1986-1 C.B. 304, modifying Rev. Rul.
74-75, 1974-1 C.B. 19 (payment made by
an employer to a third party to discharge
an obligation of an employee treated for
Federal income tax purposes as made by
the employer to the employee).
For these reasons, on June 11, 2019, the
IRS released Notice 2019-12, announcing
that the Treasury Department and the IRS
intend to publish proposed regulations
with a safe harbor under section 164 for
individuals who make payments to section
170(c) entities in return for state or local
tax credits. Under this safe harbor, an indi-
vidual who itemizes deductions and who
makes a payment to an entity described in
section 170(c) in exchange for a state or
local tax credit may treat as a payment of
state or local tax for purposes of section
164 the portion of such payment for which
a charitable contribution deduction is or
will be disallowed under §1.170A-1(h)
(3). This treatment is allowed in the tax-
able year in which the payment is made,
but only to the extent that the individual
applies the resulting credit pursuant to
applicable state or local law to offset the
individual’s state or local tax liability for
such taxable year or the preceding taxable
year. Notice 2019-12 requested comments
for purposes of incorporating the safe har-
bor in proposed regulations.
The Treasury Department and the IRS
received several comments in response to
Notice 2019-12. Generally, commenters
responded favorably to the safe harbor in
the notice, finding that its rationale was
sound and that the rule would effective-
ly eliminate concerns that the final regu-
lations under §1.170A-1(h)(3) unfairly
burden individuals who itemize deduc-
tions and have state and local tax liabil-
ities that are less than the section 164(b)
(6) limitation. One commenter noted that
Executive Order 12866, which directs the
agency issuing a regulation to identify the
problem it intends to address and design
the regulation in the most cost-effective
manner to achieve that objective with the
least amount of burden on society, further
supports the safe harbor. See Executive
Order 12866, section 1(b). This comment-
er also suggested that the IRS should track
the effects of the safe harbor by requiring
taxpayers to disclose state tax and local
tax credits on their Form 1040, Schedule
A. Alternatively, the commenter suggest-
ed that the IRS obtain this information di-
rectly from the states. Another commenter
generally supported the safe harbor, but
suggested that the Treasury Department
and the IRS should avoid creating more
safe harbor exceptions to §1.170A-1(h)(3)
of the final regulations. This commenter
also expressed concerns about the applica-
tion of the safe harbor when the state and
local tax limitation under section 164(b)
(6) expires or is modified.
Other commenters were concerned that
Notice 2019-12 did not fully address the
tax consequences to taxpayers who re-
ceived or expected to receive state or local
tax credits. Specifically, these commenters
asked that the Treasury Department and
the IRS provide guidance to address the
treatment of state or local tax credits for
Federal income tax purposes upon their
sale or expiration. As noted in the pre-
amble to the final regulations, the Trea-
sury Department and the IRS recognize
the significance and complexity of these
questions. The Treasury Department and
the IRS continue to study these issues and
invite additional comment to inform po-
tential future guidance on these issues.
The Treasury Department and the
IRS continue to believe that the notice
provides a fair, reasonable, and legally
sound basis for the safe harbor for indi-
vidual taxpayers, and that the safe harbor
should be added to the regulations under
section 164. Accordingly, these proposed
regulations propose adding §1.164-3(j)
to provide a safe harbor for individuals
who make a payment to or for the use of
an entity described in section 170(c) in re-
turn for a state or local tax credit. These
proposed regulations also propose adding
§1.170A-1(h)(3)(ix) to provide a cross
reference to the safe harbor proposed un-
der §1.164-3(j) and to request comments.
Under these proposed regulations, an
individual who itemizes deductions and
who makes a payment to a section 170(c)
entity in exchange for a state or local tax
credit may treat as a payment of state
or local tax for purposes of section 164
the portion of such payment for which a
charitable contribution deduction under
section 170 is or will be disallowed un-
der §1.170A-1(h)(3). This treatment is
allowed in the taxable year in which the
payment is made, but only to the extent
that the resulting credit is applied pursu-
ant to applicable state or local law to offset
the individual’s state or local tax liabili-
ty for such taxable year or the preceding
taxable year. Any unused credit permit-
ted to be carried forward may be treated
as a payment of state or local tax under
section 164 in the taxable year or years
for which the carryover credit is applied
in accordance with state or local law. The
safe harbor for individuals applies only to
payments of cash and cash equivalents.
The proposed regulations are not in-
tended to permit a taxpayer to avoid the
limitations of section 164(b)(6). There-
fore, the proposed regulations provide
that any payment treated as a state or local
tax under section 164, pursuant to the safe
harbor provided in §1.164-3(j) of the pro-
posed regulations, is subject to the limita-
tions on deductions in section 164(b)(6).
Furthermore, the proposed regulations
are not intended to permit deductions of
the same payments under more than one
provision. Thus, the proposed regulations
provide that an individual who relies on
the safe harbor in §1.164-3(j) to deduct
qualifying payments under section 164
may not also deduct the same payments
under any other section of the Code.
IV. Consideration Provided by Party
Other Than the Donee
Section 1.170A-1(h)(1) provides
that no part of a payment that a taxpay-
er makes to or for the use of an organi-

January 13, 2020 336 Bulletin No. 2020–3
zation described in section 170(c) that
is in consideration for (as defined in
§1.170A-13(f)(6)) goods or services (as
defined in §1.170A-13(f)(5)) is a contri-
bution or gift within the meaning of sec-
tion 170(c) unless the taxpayer (i) intends
to make a payment in an amount that ex-
ceeds the fair market value of the goods or
services; and (ii) makes a payment in an
amount that exceeds the fair market value
of the goods or services.
Section 1.170A-1(h)(2) states that the
charitable contribution deduction under
section 170(a) may not exceed the amount
of cash paid and the fair market value of
property transferred to an organization
described in section 170(c) over the fair
market value of goods or services the
organization provides in return. Section
1.170A-13(f)(5) defines goods or ser-
vices as cash, property, services, benefits,
and privileges. Section 1.170A-13(f)(6)
provides that a donee provides goods or
services in consideration for a taxpayer’s
payment if, at the time the taxpayer makes
a payment to the donee, the taxpayer re-
ceives or expects to receive goods or ser-
vices in exchange for that payment.
Section 1.170A-1(h)(3)(iii) defines
“in consideration for” for purposes of
determining whether a state or local tax
credit should reduce a charitable contri-
bution under section 170. This section
provides that the term “in consideration
for” shall have the meaning set forth in
§1.170A-13(f)(6), except that the state or
local tax credit need not be provided by
the donee organization.
Some commenters on the 2018 pro-
posed regulations interpreted the defi-
nition of “in consideration for” under
§1.170A-13(f)(6) to suggest that consid-
eration provided by a third party is disre-
garded in calculating the charitable contri-
bution deduction, and that §1.170A-1(h)
(3)(iii) of the proposed regulations provid-
ed an exception from this rule solely for
state or local tax credits provided by third
parties. Other commenters disagreed with
this interpretation and suggested that the
final regulations should set forth a general
rule clarifying that consideration includes
all benefits that a taxpayer receives or
expects to receive, regardless of whether
they are provided by the donee.
In the preamble to the final regulations,
the Treasury Department and the IRS
acknowledged that the final regulations
did not address all situations in which a
taxpayer makes a payment or transfers
property and receives or expect to receive
benefits from a party that is not the donee.
Accordingly, the preamble to the final reg-
ulations indicated that the Treasury De-
partment and the IRS intended to propose
amendments to the regulations under sec-
tion 170 to make clear that the quid pro
quo principle applies regardless of wheth-
er the party providing the quid pro quo is
the donee.
As noted in the preamble to the final
regulations, in American Bar Endow-
ment, 477 U.S. at 116-17, and Hernandez
v. Commissioner, 490 U.S. 680, 691-92
(1989), the Supreme Court made clear
that a payment is not a charitable contri-
bution if the donor expects to receive a
substantial benefit in return. American
Bar Endowment and Hernandez did not
directly address the question of benefits
provided by third parties; the return ben-
efits at issue in those cases were provided
by the donees. However, the Court de-
rived the quid pro quo principle in those
cases from a lower court decision and a
revenue ruling that directly addressed the
question. See American Bar Endowment,
477 U.S. at 117 (citing Singer v. United
States, 449 F.2d 413 (Ct. Cl. 1971), and
Rev. Rul. 67-246, 1967-2 C.B. 104); Her-
nandez, 490 U.S. at 691 (citing Singer). In
Singer, the appellate division of the Court
of Claims (the predecessor to the Court of
Appeals for the Federal Circuit) held that
a sewing machine company was not eligi-
ble for a charitable contribution deduction
for selling sewing machines to schools at a
discount because the company “expected
a return in the nature of future increased
sales” to students. Singer, 449 F.2d at
423–24. In so holding, the court express-
ly rejected the company’s argument that
this expected benefit should be ignored
because it would come from the students
rather than from the schools. Id. at 422-23.
The court stated, “Obviously, we cannot
agree with plaintiff’s distinction.” Id.
In Rev. Rul. 67-246, Example 11, a
local store agreed to award a transistor
radio, worth $15, to each person who con-
tributed $50 or more to a specific charity.
The ruling concluded that if a taxpayer
received a $15 radio as a result of a $100
payment to the charity, only $85 qualified
as a charitable contribution deduction.
It did not matter that the donor received
the $15 radio from the store, a third party,
rather than from the charity. This conclu-
sion is reflected in the IRS’s audit practic-
es. See IRS Conservation Easement Audit
Techniques Guide (Rev. Jan. 24, 2018, p.
16) (stating that a “quid pro quo contribu-
tion is a transfer of money or property . .
. partly in exchange for goods or services
in return from the charity or a third par-
ty,” and “a quid pro quo may also be in
the form of an indirect benefit from a third
party”).
Moreover, courts have ruled that a tax-
payer’s expectation of significant financial
returns demonstrates a lack of charitable
intent. For example, in Ottawa Silica Co.
v. United States, 699 F.2d 1124 (Fed. Cir.
1983), the Federal Circuit denied a tax-
payer’s charitable contribution deduction
for the value of land the taxpayer donated
for construction of a school. The court’s
analysis focused on the taxpayer’s expec-
tation of benefits, and not on the source
of such benefits. The court found that the
taxpayer had reason to believe that con-
struction of a school would result in the
construction of new roads that would in
turn increase the value of the taxpayer’s
retained land. The court recognized that
although the taxpayer did not receive an
agreement from any party that the roads
would be built, the expectation of this
benefit was a sufficient reason to deny
the charitable contribution deduction.
More recently, in Wendell Falls Develop-
ment, LLC v. Commissioner, T.C. Memo.
2018-45, a taxpayer contributed a conser-
vation easement that essentially restrict-
ed land for use as a park. The taxpayer
expected this restriction to increase the
value of the taxpayer’s adjacent property.
The Tax Court disallowed the taxpayer’s
claimed charitable contribution deduc-
tion for the easement, finding that the
taxpayer contributed the easement with
the expectation of receiving a substan-
tial benefit (increased value of taxpayer’s
adjacent property) from the contribution,
even though the expected benefit would
not come from the donee. In accordance
with these authorities, the source of the
return benefit is immaterial in determin-
ing whether the donee at the time of the
contribution expects to receive substan-
tial benefits in return.

Bulletin No. 2020–3 337 January 13, 2020
The quid pro quo principle is thus
equally applicable regardless of whether
the donor expects to receive the benefit
from the donee or from a third party. In
either case, the donor’s payment is not a
charitable contribution or gift to the extent
that the donor expects a substantial ben-
efit in return. Accordingly, the Treasury
Department and the IRS propose amend-
ments to §1.170A-1(h) that address a do-
nor’s payments in exchange for consider-
ation in order for the regulation to reflect
existing law. Specifically, these proposed
amendments revise paragraph (h)(4) to
provide definitions of “in consideration
for” and “goods and services” for purpos-
es of applying the rules in §1.170A-1(h).
Under the proposed regulations, a taxpay-
er will be treated as receiving goods and
services in consideration for a taxpayer’s
payment or transfer to an entity described
in section 170(c) if, at the time the taxpay-
er makes the payment or transfer, the tax-
payer receives or expects to receive goods
or services in return.
The proposed regulations do not amend
the language of §1.170A-13(f)(6) which
discusses “in consideration for” for pur-
poses of determining whether the taxpayer
provides proper substantiation of its char-
itable contribution. Section 1.170A-13(f)
details the requirements of a contempora-
neous written acknowledgment, including
a statement of whether the donee organi-
zation provides any goods or services in
consideration for any cash or other prop-
erty transferred to the donee organization
and a description and a good faith estimate
of the value of those goods or services. See
§1.170A-13(f)(2)(ii) and (iii). These sub-
stantiation provisions refer only to written
acknowledgments from donee organiza-
tions and do not address the application
of quid pro quo principles to benefits re-
ceived from parties other than donees. The
Treasury Department and the IRS request
comments on whether guidance concern-
ing substantiation and reporting of quid
pro quo benefits provided or expected to
be provided by third parties, including
state governments, would be beneficial to
taxpayers in demonstrating that they have
given more than they received or expected
to receive and to the IRS in administering
the proposed regulation. In addition, the
Treasury Department and the IRS request
comments regarding the manner by which
donors, donees, or third parties may report
or provide substantiation for the value or
type of consideration received or expected
to be received from third parties.
For additional clarity, the proposed
regulation amends the language in
§1.170A-1(h)(2)(i)(B) to clarify that the
fair market value of goods and services
includes the value of goods and services
provided by parties other than the donee.
Also, the proposed regulation adds a defi-
nition of “goods and services” that is the
same as the definition in §1.170A-13(f)
(5). Finally, the proposed regulation revis-
es the cross-references defining “in con-
sideration for” and “goods and services”
in paragraphs (h)(1) and (h)(3)(iii) to be
consistent with the proposed definitions
provided in paragraph (h)(4).
Proposed Applicability Dates
The proposed amendments contained in
§§1.162-15(a)(1) and (2) and 1.170A-1(c)
(5), regarding the application of section
162 to taxpayers that make payments or
transfers to entities described in section
170(c), are proposed to apply to payments
or transfers on or after December 17,
2019. However, a taxpayer may rely on
these proposed regulations for payments
and transfers made on or after January 1,
2018 and before the date regulations final-
izing these proposed regulations are pub-
lished in the Federal Register.
The proposed amendment contained
in §1.162-15(a)(3), regarding safe har-
bors for C corporations and specified
passthrough entities making payments to
or for the use of section 170(c) entities in
exchange for state or local tax credits, is
proposed to apply to payments on or af-
ter December 17, 2019. However, prior
to this date, a taxpayer may continue to
apply Rev. Proc. 2019-12, which applies
to payments made on or after January 1,
2018.
The proposed amendments contained
in §§1.164-3(j) and 1.170A-1(h)(3)(ix),
regarding the safe harbor for payments
by certain individuals to or for the use of
section 170(c) entities, are proposed to
apply to payments made on or after June
11, 2019, the date that the IRS issued No-
tice 2019-12, announcing it intended to
publish proposed regulations with a safe
harbor under section 164 for individuals
who make payments to section 170(c) en-
tities in return for state or local tax credits.
However, individuals may rely on these
proposed regulations for payments made
after August 27, 2018, the applicability
date of the final regulations, and before
the date regulations finalizing these pro-
posed regulations are published in the
Federal Register.
Finally, the proposed amendments con-
tained in §§1.170A-1(h)(1), (h)(2)(i)(B),
(h)(3)(iii), and (h)(4)(i), and 1.170A-13(f)
(7) clarifying “in consideration for” for
purposes of applying §1.170A-1(h) are
proposed to apply to payments or transfers
on or after December 17, 2019.
Special Analyses
Regulatory Planning and Review –
Economic Analysis
Executive Orders 13563 and 12866 di-
rect agencies to assess costs and benefits
of available regulatory alternatives and, if
regulation is necessary, to select regulato-
ry approaches that maximize net benefits
(including potential economic, environ-
mental, public health and safety effects,
distributive impacts, and equity). Execu-
tive Order 13563 emphasizes the impor-
tance of quantifying both costs and ben-
efits, of reducing costs, of harmonizing
rules, and of promoting flexibility. This
proposed rule is expected to be an EO
13771 regulatory action. Details on the
estimated costs of this proposed rule can
be found in the rule’s economic analysis.
These proposed regulations have been
designated as subject to review under
Executive Order 12866 pursuant to the
Memorandum of Agreement (April 11,
2018) between the Treasury Department
and the Office of Management and Bud-
get (OMB) regarding review of tax reg-
ulations. The Office of Information and
Regulatory Affairs has designated these
regulations as significant under section
1(b) of the MOA. Accordingly, the OMB
has reviewed these regulations.
A. Background
Section 164 of the Code allows a deduc-
tion for certain state and local taxes paid,
including state or local income and prop-
erty taxes. Section 164(b)(6), added by the

January 13, 2020 338 Bulletin No. 2020–3
TCJA, generally limits an individual’s de-
duction of these taxes to $10,000 ($5,000 in
the case of a married individual filing a sep-
arate return). The limitation does not apply
to foreign income taxes or to property taxes
that are paid or incurred in carrying on a
trade or business or an activity described in
section 212. Section 162 allows a deduc-
tion for ordinary and necessary expenses
paid or incurred in carrying on a trade or
business. Section 170 allows a deduction
for charitable contributions, specifically for
payments or transfers to an entity described
in section 170(c); however, the deduction
must be reduced by any quid pro quo ben-
efit that the taxpayer receives or expects to
receive in return.
After the enactment of the TCJA,
questions arose regarding the interaction
of these deductions. To clarify the appli-
cation of these provisions, the Treasury
Department and the IRS issued guidance
including: 1) Final regulations (T.D. 9864,
84 FR 27513) providing that a tax credit
received or expected to be received in re-
turn for a payment or transfer to an entity
described in section 170(c) (hereafter re-
ferred to as a charitable entity) is a return
benefit to the taxpayer, resulting in the
reduction of the charitable contribution
deduction; 2) Notice 2019-12 announcing
the intent to issue proposed regulations
providing a safe harbor for individuals un-
der which a charitable contribution that is
disallowed because of a return benefit of a
state or local tax credit may be treated as a
payment of state or local tax; and 3) Rev.
Proc. 2019-12 providing a safe harbor al-
lowing as a deductible business expense
certain payments by businesses to charita-
ble organizations.
B. Need for the proposed regulations
The Treasury Department and the IRS
believe that it is appropriate to propose
as regulations and seek additional public
comment on the safe harbors provided in
Notice 2019-12 and Rev. Proc. 2019-12.
In addition, comments received in re-
sponse to Notice 2018-54 and the 2018
proposed regulations (guidance preceding
the final regulations T.D. 9864) indicate
that taxpayers will benefit from addition-
al guidance regarding contributions to a
charitable entity resulting in a return ben-
efit from a third party.
C. Overview of the proposed regulations
First, these proposed regulations reflect
the guidance in Notice 2019-12. Under
the safe harbor an individual who itemizes
deductions and who makes a payment to
a charitable entity in exchange for a state
or local tax credit may be able to claim a
state and local tax deduction for the por-
tion of the payment for which a charitable
contribution deduction is or will be disal-
lowed as a return benefit. The safe harbor
for individuals applies only to payments
of cash and cash equivalents. In addition,
these payments are subject to the overall
limitation on state and local deductions
added by the TCJA. Further, any payment
may be deducted under only one pro-
vision of the Code. Thus, an individual
who has total state and local tax liability
of $10,000 or less, and who makes a pay-
ment to a charitable entity and receives a
state tax credit in return resulting in the
disallowance of a charitable contribution
deduction, may claim an itemized deduc-
tion for the disallowed amount, subject to
other requirements of the Code.
Second, the proposed regulations in-
corporate into the regulations under sec-
tion 162 longstanding principles from case
law and existing section 170 regulations
regarding a taxpayer’s payment or trans-
fer to a charitable entity. Specifically, the
proposed regulations confirm that, when
a taxpayer’s transfer or payment bears a
direct relationship to its trade or business,
and that transfer or payment is made with
a reasonable expectation of commensurate
financial return, the transfer or payment
to the charitable entity may constitute an
allowable deduction under section 162,
rather than under section 170. In addition,
the proposed regulations incorporate the
safe harbors provided by Rev. Proc. 2019-
12 for certain payments by C corporations
and specified passthrough entities, for
cases in which the financial return is a tax
credit. Thus, under the proposed regula-
tions, a C corporation may treat the portion
of the payment to a charitable entity that is
equal to the amount of tax credit received
or expected to be received in return as a
deductible business expense under section
162. Consistent with Rev. Proc. 2019-12,
the proposed regulations also provide that
a specified passthrough entity may treat a
payment resulting in a tax credit as a busi-
ness expense if the business is regarded
as separate from its owner for Federal tax
purposes, if it operates a trade or business
within the meaning of section 162, if it
is subject to state or local tax incurred in
carrying on its trade or business that is im-
posed directly on the passthrough entity,
and if it receives or expects to receive a
state or local tax credit in return for the
payment.
Third, the proposed regulations clarify
that a payment to a charitable entity that
results in a return benefit is a quid pro quo
for purposes of section 170, regardless of
whether the donor expects to receive the
benefit from the donee or from a third
party. As a result, the contribution is re-
duced by the amount of the return benefit
for purposes of determining the amount
allowable as a charitable contribution de-
duction.
D. Economic Analysis
1. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of
these proposed regulations compared to a
no-action baseline that reflects anticipated
Federal income tax-related behavior in the
absence of these proposed regulations.
2. Summary of Economic Effects
The proposed regulations reflect exist-
ing, published, Treasury Department and
IRS policies. As a result, they provide
some additional clarity to taxpayers by
clearly articulating these existing policies
as regulations. The Treasury Department
does not expect any noticeable change in
taxpayer behavior resulting from these
regulations, but requests comments on
their potential economic effects. The in-
creased clarity, in particular the provision
of safe harbors, is expected to reduce
compliance burdens.
As described in the Special Analyses
for the final regulations (T.D. 9864), al-
lowing a payment that is disallowed as a
charitable contribution deduction because
of the receipt or expected receipt of a tax
credit to be deducted as a payment of state
or local tax means that payments by tax-
payers with state and local tax liabilities
of $10,000 or less are subject to the same

Bulletin No. 2020–3 339 January 13, 2020
tax treatment under these proposed regu-
lations as under the TCJA (in absence of
any guidance) and as under the law pri-
or to the TCJA. (See Example 2, Table 1,
T.D. 9864.) It also means that such tax-
payers are not treated less favorably than
taxpayers with state and local tax liabili-
ties in excess of $10,000 or taxpayers sub-
ject to the Alternative Minimum Tax. (See
Examples 1 and 3 of Table 1, T.D. 9864.)
The Treasury Department and the IRS
request comments on the economic effects
of the proposed regulations.
Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby certi-
fied that this proposed rule will not have a
significant economic impact on a substan-
tial number of small entities. Although
data are not readily available for the IRS
and the Treasury Department to assess the
number of small entities that are likely to
be directly affected by the regulations, the
economic impact is unlikely to be signif-
icant.
As discussed elsewhere in this pre-
amble, the proposed rule largely updates
the regulations to reflect existing law and
policy. The proposed amendments would
update the section 162 and section 170
regulations to reflect current law. In ad-
dition, the proposed amendments add
to the regulations safe harbors under
section 162 and section 164, regarding
deductions when payments are made to
entities described in section 170(c) and
the donor receives or expects to receive
a state or local tax credit in return; these
safe harbors were provided previously
in Internal Revenue Bulletin guidance.
These regulations are expected to pro-
vide some additional certainty to taxpay-
ers but are not expected to result in any
noticeable change in taxpayer behavior.
The increased certainty, and in particular
the provision of safe harbors, is expected
to reduce compliance burdens. Accord-
ingly, the Treasury Department and the
IRS certify that the proposed rule will not
have a significant economic impact on a
substantial number of small entities.
Notwithstanding this certification, the
Treasury Department and the IRS invite
comments about the potential impact of
this proposed rule on small entities.
Pursuant to section 7805(f), the pro-
posed regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small businesses.
Comments and Requests and Public
Hearing
Before the regulations proposed herein
are adopted as final regulations, consider-
ation will be given to any electronic and
written comments that are submitted time-
ly to the IRS as prescribed in this pream-
ble under the ADDRESSES heading. All
comments submitted will be made avail-
able at http://www.regulations.gov or upon
request. A public hearing has been sched-
uled for February, 20, 2020, beginning at
10 a.m. in the Auditorium of the Internal
Revenue Building, 1111 Constitution Ave-
nue, N.W., Washington, DC 20224. Due to
building security procedures, visitors must
enter at the Constitution Avenue entrance.
In addition, all visitors must present photo
identification to enter the building. Because
of access restrictions, visitors will not be
admitted beyond the immediate entrance
area more than 30 minutes before the hear-
ing starts. For information about having
your name placed on the building access
list to attend the hearing, see the “FOR
FURTHER INFORMATION CONTACT”
section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish
to present oral comments at the hearing
must submit an outline of the topics to
be discussed and the time to be devoted
to each topic by January 31, 2020. Sub-
mit a signed paper or electronic copy of
the outline as prescribed in this preamble
under the “Addresses” heading. An agen-
da showing the scheduling of the speakers
will be prepared after the deadline for re-
ceiving outlines has passed. Copies of the
agenda will be available free of charge at
the hearing.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, Notices, and other guidance cit-
ed in this document are published in the
Internal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Su-
perintendent of Documents, U.S. Govern-
ment Publishing Office, Washington, DC
20402, or by visiting the IRS website at
http://www.irs.gov.
Drafting Information
The principal author of these proposed
regulations is the Office of the Associate
Chief Counsel (Income Tax and Account-
ing). However, other personnel from the
IRS and the Treasury Department partici-
pated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
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 1.162-15 is amended by
revising paragraph (a) to read as follows:
§1.162-15 Contributions, dues, etc.
(a) Payments and transfers to entities de-
scribed in section 170(c)—(1) In general. A
payment or transfer to or for the use of an
entity described in section 170(c) that bears
a direct relationship to the taxpayer’s trade
or business and that is made with a reason-
able expectation of financial return com-
mensurate with the amount of the payment
or transfer may constitute an allowable de-
duction as a trade or business expense rath-
er than a charitable contribution deduction
under section 170. For payments or trans-
fers in excess of the amount deductible un-
der section 162(a), see §1.170A-1(h).
(2) Examples. The following examples
illustrate the rules of paragraph (a)(1) of
this section:
(i) Example 1. A, an individual, is a sole propri-
etor who manufactures musical instruments and sells
them through a website. A makes a $1,000 payment
to a local church (which is a charitable organization
described in section 170(c)) for a half-page adver-
tisement in the church’s program for a concert. In
the program, the church thanks its concert sponsors,
including A. A’s advertisement includes the URL for
the website through which A sells its instruments. A

January 13, 2020 340 Bulletin No. 2020–3
reasonably expects that the advertisement will attract
new customers to A’s website and will help A to sell
more musical instruments. A may treat the $1,000
payment as an expense of carrying on a trade or busi-
ness under section 162.
(ii) Example 2. P, a partnership, operates a chain
of supermarkets, some of which are located in State
N. P operates a promotional program in which it sets
aside the proceeds from one percent of its sales each
year, which it pays to one or more charities described
in section 170(c). The funds are earmarked for use in
projects that improve conditions in State N. P makes
the final determination on which charities receive
payments. P advertises the program. P reasonably
believes the program will generate a significant de-
gree of name recognition and goodwill in the com-
munities where it operates and thereby increase its
revenue. As part of the program, P makes a $1,000
payment to a charity described in section 170(c). P
may treat the $1,000 payment as an expense of car-
rying on a trade or business under section 162. This
result is unchanged if, under State N’s tax credit
program, P expects to receive a $1,000 income tax
credit on account of P’s payment, and under State N
law, the credit can be passed through to P’s partners.
(3) Safe harbors for C corporations
and specified passthrough entities making
payments in exchange for state or local tax
credits—(i) Safe harbor for C corpora-
tions. If a C corporation makes a payment
to or for the use of an entity described in
section 170(c) and receives or expects to
receive in return a state or local tax credit
that reduces a state or local tax imposed
on the C corporation, the C corporation
may treat such payment as meeting the re-
quirements of an ordinary and necessary
business expense for purposes of section
162(a) to the extent of the amount of the
credit received or expected to be received.
(ii) Safe harbor for specified
passthrough entities—(A) Definition of
specified passthrough entity. For purposes
of this paragraph (a)(3)(ii), an entity is a
specified passthrough entity if each of the
following requirements is satisfied—
(1) The entity is a business entity other
than a C corporation and is regarded for
all Federal income tax purposes as sepa-
rate from its owners under §301.7701-3 of
this chapter;
(2) The entity operates a trade or busi-
ness within the meaning of section 162;
(3) The entity is subject to a state or
local tax incurred in carrying on its trade
or business that is imposed directly on the
entity; and
(4) In return for a payment to an enti-
ty described in section 170(c), the entity
described in paragraph (a)(3)(ii)(A)(1) of
this section receives or expects to receive
a state or local tax credit that this entity
applies or expects to apply to offset a state
or local tax described in paragraph (a)(3)
(ii)(A)(3) of this section.
(B) Safe harbor. Except as provided
in paragraph (a)(3)(ii)(C) of this section,
if a specified passthrough entity makes
a payment to or for the use of an entity
described in section 170(c), and receives
or expects to receive in return a state or
local tax credit that reduces a state or
local tax described in paragraph (a)(3)
(ii)(A)(3) of this section, the specified
passthrough entity may treat such pay-
ment as meeting the requirements of an
ordinary and necessary business expense
for purposes of section 162(a) to the ex-
tent of the amount of credit received or
expected to be received.
(C) Exception. The safe harbor de-
scribed in this paragraph (a)(3)(ii) does
not apply if the credit received or expect-
ed to be received reduces a state or local
income tax.
(iii) Definition of payment. For pur-
poses of this paragraph (a)(3), payment
is defined as a payment of cash or cash
equivalent.
(iv) Examples. The following examples
illustrate the rules of paragraph (a)(3) of
this section.
(A) Example 1: C corporation that receives or
expects to receive dollar-for-dollar state or local
tax credit. A, a C corporation engaged in a trade or
business, makes a payment of $1,000 to an entity
described in section 170(c). In return for the pay-
ment, A expects to receive a dollar-for-dollar state
tax credit to be applied to A’s state corporate income
tax liability. Under paragraph (a)(3)(i) of this section,
A may treat the $1,000 payment as an expense of car-
rying on a trade or business under section 162.
(B) Example 2: C corporation that receives or
expects to receive percentage-based state or local
tax credit. B, a C corporation engaged in a trade or
business, makes a payment of $1,000 to an entity de-
scribed in section 170(c). In return for the payment,
B expects to receive a local tax credit equal to 80
percent of the amount of this payment ($800) to be
applied to B’s local real property tax liability. Under
paragraph (a)(3)(i) of this section, B may treat $800
as an expense of carrying on a trade or business un-
der section 162. The treatment of the remaining $200
will depend upon the facts and circumstances and is
not affected by paragraph (a)(3)(i) of this section.
(C) Example 3: Partnership that receives or ex-
pects to receive dollar-for-dollar state or local tax
credit. P is a limited liability company classified as
a partnership for Federal income tax purposes under
§301.7701-3 of this chapter. P is engaged in a trade
or business and makes a payment of $1,000 to an en-
tity described in section 170(c). In return for the pay-
ment, P expects to receive a dollar-for-dollar state
tax credit to be applied to P’s state excise tax liability
incurred by P in carrying on its trade or business.
Under applicable state law, the state’s excise tax is
imposed at the entity level (not the owner level). Un-
der paragraph (a)(3)(ii) of this section, P may treat
the $1,000 as an expense of carrying on a trade or
business under section 162.
(D) Example 4: S corporation that receives or
expects to receive percentage-based state or local tax
credit. S is an S corporation engaged in a trade or busi-
ness and is owned by individuals C and D. S makes a
payment of $1,000 to an entity described in section
170(c). In return for the payment, S expects to receive
a local tax credit equal to 80 percent of the amount
of this payment ($800) to be applied to S’s local real
property tax liability incurred by S in carrying on its
trade or business. Under applicable state and local law,
the real property tax is imposed at the entity level (not
the owner level). Under paragraph (a)(3)(ii) of this
section, S may treat $800 of the payment as an ex-
pense of carrying on a trade or business under section
162. The treatment of the remaining $200 will depend
upon the facts and circumstances and is not affected
by paragraph (a)(3)(ii) of this section.
(v) Applicability of section 170 to pay-
ments in exchange for state or local tax
benefits. For rules regarding the availabil-
ity of a charitable contribution deduction
under section 170 where a taxpayer makes
a payment or transfers property to or for
the use of an entity described in section
170(c) and receives or expects to receive a
state or local tax benefit in return for such
payment, see §1.170A-1(h)(3).
(4) Applicability dates. Paragraphs (a)
(1) and (2) of this section, regarding the
application of section 162 to taxpayers
making payments or transfers to entities
described in section 170(c), apply to pay-
ments or transfers on or after December
17, 2019. However, taxpayers may choose
to apply paragraphs (a)(1) and (2) to pay-
ments and transfers on or after January 1,
2018. Paragraph (a)(3) of this section, re-
garding the safe harbors for C corporations
and specified passthrough entities making
payments to section 170(c) entities in ex-
change for state or local tax credits applies
to payments made by these entities on or
after December 17, 2019. However, tax-
payers may choose to apply the safe har-
bors of paragraph (a)(3) to payments on or
after January 1, 2018.
* * * * *
Par. 3. Section 1.164-3 is amended by
adding paragraph (j) to read as follows:
§1.164-3 Definitions and special rules.
* * * * *
(j) Safe harbor for payments by indi-
viduals in exchange for state or local tax
credits—(1) In general. An individual

Bulletin No. 2020–3 341 January 13, 2020
who itemizes deductions and who makes
a payment to or for the use of an entity de-
scribed in section 170(c) in consideration
for a state or local tax credit may treat as
a payment of state or local tax for purpos-
es of section 164 the portion of such pay-
ment for which a charitable contribution
deduction under section 170 is disallowed
under §1.170A-1(h)(3). This treatment as
payment of state or local tax under section
164(a) is allowed in the taxable year in
which the payment is made to the extent
that the resulting credit is applied, con-
sistent with applicable state or local law,
to offset the individual’s state or local tax
liability for such taxable year or the pre-
ceding taxable year.
(2) Credits carried forward. To the ex-
tent that a state or local tax credit described
in paragraph (j)(1) of this section is not
applied to offset the individual’s applica-
ble state or local tax liability for the tax-
able year of the payment or the preceding
taxable year, any excess state or local tax
credit permitted to be carried forward may
be treated as a payment of state or local tax
under section 164(a) in the taxable year or
years for which the carryover credit is ap-
plied in accordance with state or local law.
(3) Limitation on individual deduc-
tions. Nothing in this paragraph (j) may
be construed as permitting a taxpayer who
applies this safe harbor to avoid the limita-
tions of section 164(b)(6) for any amount
paid as a tax or treated under this para-
graph (j) as a payment of tax.
(4) No safe harbor for transfers of
property. The safe harbor provided in this
paragraph (j) applies only to a payment of
cash or cash equivalent.
(5) Coordination with other deduc-
tions. An individual who deducts a pay-
ment under section 164 may not also de-
duct the same payment under any other
Code section.
(6) Examples. In the following exam-
ples, assume that the taxpayer is an indi-
vidual who itemizes deductions for Feder-
al income tax purposes.
(i) Example 1. In year 1, Taxpayer A makes a pay-
ment of $500 to an entity described in section 170(c).
In return for the payment, A receives a dollar-for-dol-
lar state income tax credit. Prior to application of the
credit, A’s state income tax liability for year 1 was
more than $500. A applies the $500 credit to A’s year
1 state income tax liability. Under paragraph (j)(1)
of this section, A treats the $500 payment as a pay-
ment of state income tax in year 1. To determine A’s
deduction amount, A must apply the provisions of
section 164 applicable to payments of state and local
taxes, including the limitation in section 164(b)(6).
See paragraph (j)(3) of this section.
(ii) Example 2. In year 1, Taxpayer B makes a pay-
ment of $7,000 to an entity described in section 170(c).
In return for the payment, B receives a dollar-for-dol-
lar state income tax credit, which under state law may
be carried forward for three taxable years. Prior to
application of the credit, B’s state income tax liability
for year 1 was $5,000; B applies $5,000 of the $7,000
credit to B’s year 1 state income tax liability. Under
paragraph (j)(1) of this section, B treats $5,000 of the
$7,000 payment as a payment of state income tax in
year 1. Prior to application of the remaining credit, B’s
state income tax liability for year 2 exceeds $2,000. B
applies the excess credit of $2,000 to B’s year 2 state
income tax liability. For year 2, under paragraph (j)
(2) of this section, B treats the $2,000 as a payment
of state income tax under section 164. To determine
B’s deduction amounts in years 1 and 2, B must apply
the provisions of section 164 applicable to payments
of state and local taxes, including the limitation under
section 164(b)(6). See paragraph (j)(3) of this section.
(iii) Example 3. In year 1, Taxpayer C makes a
payment of $7,000 to an entity described in section
170(c). In return for the payment, C receives a lo-
cal real property tax credit equal to 25 percent of the
amount of this payment ($1,750). Prior to applica-
tion of the credit, C’s local real property tax liabil-
ity in year 1 was more than $1,750. C applies the
$1,750 credit to C’s year 1 local real property tax
liability. Under paragraph (j)(1) of this section, for
year 1, C treats $1,750 of her $7,000 payment as a
payment of local real property tax for purposes of
section 164. To determine C’s deduction amount, C
must apply the provisions of section 164 applicable
to payments of state and local taxes, including the
limitation under section 164(b)(6). See paragraph (j)
(3) of this section.
(7) Applicability date. This paragraph
(j) applies to payments made to section
170(c) entities on or after June 11, 2019.
However, a taxpayer may choose to ap-
ply this paragraph (j) to payments made
to section 170(c) entities after August 27,
2018.
Par. 4. Section 1.170A-1 is amended as
follows:
1. Paragraph (c)(5) is revised.
2. In paragraph (h)(1), remove the
cross-references to Ҥ1.170A-13(f)
(6)” and “§1.170A-13(f)(5)” and add
in their places “paragraph (h)(4)(i) of
this section” and “paragraph (h)(4)(ii)
of this section”, respectively.
3. Paragraphs (h)(2)(i)(B) and (h)(3)(iii)
are revised.
4. Paragraph (h)(3)(viii) is redesignated
as paragraph (h)(3)(x).
5. New paragraph (h)(3)(viii) and para-
graph (h)(3)(ix) are added.
6. Paragraphs (h)(4) through (6) are
redesignated as paragraphs (h)(5)
through (7).
7. New paragraph (h)(4) is added.
The revisions and additions read as fol-
lows:
§1.170A-1 Charitable, etc., contribu-
tions and gifts; allowance of deduction.
* * * * *
(c) * * *
(5) For payments or transfers to an en-
tity described in section 170(c) by a tax-
payer carrying on a trade or business, see
§1.162-15(a).
* * * * *
(h) * * *
(2) * * *
(i) * * *
(B) The fair market value of the goods
or services received or expected to be re-
ceived in return.
* * * * *
(3) * * *
(iii) In consideration for. For purposes
of paragraph (h) of this section, the term
in consideration for has the meaning set
forth in paragraph (h)(4)(i) of this section.
* * * * *
(viii) Safe harbor for payments by C
corporations and specified passthrough
entities. For payments by a C corporation
or by a specified passthrough entity to an
entity described in section 170(c), where
the C corporation or specified passthrough
entity receives or expects to receive a state
or local tax credit that reduces the charita-
ble contribution deduction for such pay-
ments under paragraph (h)(3) of this sec-
tion, see §1.162-15(a)(3) (providing safe
harbors under section 162(a) to the extent
of that reduction).
(ix) Safe harbor for individuals. Under
certain circumstances, an individual who
itemizes deductions and makes a payment
to an entity described in section 170(c) in
consideration for a state or local tax credit
may treat the portion of such payment for
which a charitable contribution deduction
is disallowed under paragraph (h)(3) of
this section as a payment of state or local
taxes under section 164. See §1.164-3(j),
providing a safe harbor for certain pay-
ments by individuals in exchange for state
or local tax.
* * * * *
(4) Definitions. For purposes of this
paragraph (h), the following definitions
apply:
(i) In consideration for. A taxpayer re-
ceives goods or services in consideration

January 13, 2020 342 Bulletin No. 2020–3
for a taxpayer’s payment or transfer to an
entity described in section 170(c) if, at the
time the taxpayer makes the payment to
such entity, the taxpayer receives or ex-
pects to receive goods or services from
that entity or any other party in return.
(ii) Goods or services. Goods or ser-
vices means cash, property, services, ben-
efits, and privileges.
(iii) Applicability date. The definitions
provided in this paragraph (h)(4) are ap-
plicable for amounts paid or property
transferred on or after December 17, 2019.
* * * * *
§1.170A-13 [Amended]
Par. 5. Section 1.170A-13(f)(7) is
amended by removing the cross-reference
to “§1.170A-1(h)(5)” and adding in its
place “§1.170A-1(h)(6).”
Sunita Lough
Deputy Commissioner for Services
and Enforcement.
(Filed by the Office of the Federal Register on De-
cember 13, 2019, 4:15 p.m., and published in the is-
sue of the Federal Register for December 17, 2019,
84 F.R. 68833)
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Certain Employee
Remuneration in Excess of
$1,000,000 under Internal
Revenue Code Section
162(m)
REG-122180-18
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document sets forth
proposed regulations under section
162(m) of the Internal Revenue Code
(Code), which limits the deduction for
certain employee remuneration in ex-
cess of $1,000,000 for federal income
tax purposes. These proposed regula-
tions implement the amendments made
to section 162(m) by the Tax Cuts and
Jobs Act. These proposed regulations
would affect publicly held corporations.
This document also provides a notice of
a public hearing on these proposed reg-
ulations.
DATES: Written or electronic comments
must be received by February 18, 2020.
Outlines of topics to be discussed at the
public hearing scheduled for March 9,
2020, at 10 a.m. must be received by Feb-
ruary 18, 2020.
ADDRESSES: Submit electronic sub-
missions via the Federal eRulemaking
Portal at www.regulations.gov (indicate
IRS and REG–122180–18) by follow-
ing the online instructions for submitting
comments. Once submitted to the Federal
eRulemaking Portal, comments cannot be
edited or withdrawn. The Department of
the Treasury (Treasury Department) and
the IRS will publish for public availability
any comment received to its public dock-
et, whether submitted electronically or in
hard copy. Send hard copy submissions
to: CC:PA:LPD:PR (REG–122180–18),
Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may
be hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–122180–18),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue NW, Washing-
ton, DC 20224.
FOR FURTHER INFORMATION
CONTACT: Concerning these proposed
regulations, Ilya Enkishev at (202) 317-
5600; concerning submissions of com-
ments, the hearing, and/or being placed
on the building access list to attend the
hearing, Regina Johnson at (202) 317-
6901 (not toll-free numbers) or fdms.da-
tabase@irscounsel.treas.gov.
SUPPLEMENTARY INFORMATION:
Background
This document sets forth proposed
amendments to the Income Tax Reg-
ulations (26 CFR part 1) under sec-
tion 162(m). Section 162(m)(1) disallows
the deduction by any publicly held corpo-
ration for applicable employee remunera-
tion paid with respect to any covered em-
ployee to the extent that such remuneration
for the taxable year exceeds $1,000,000.
Section 162(m) was added to the Code by
section 3211(a) of the Omnibus Budget
Reconciliation Act of 1993, Public Law
103-66. Proposed regulations under sec-
tion 162(m) were published in the Federal
Register on December 20, 1993 (58 FR
66310) (1993 proposed regulations). On
December 2, 1994, the Treasury Depart-
ment and the IRS issued amendments to
the proposed regulations (59 FR 61884)
(1994 proposed regulations). On Decem-
ber 20, 1995, the Treasury Department
and the IRS issued final regulations under
section 162(m) (TD 8650) (60 FR 65534)
(final regulations).
Section 162(m) was amended by sec-
tion 13601 of the Tax Cuts and Jobs Act
(TCJA) (Pub. L. 115-97, 131 Stat. 2054,
2155 (2017)). Section 13601 of TCJA
amended the definitions of covered em-
ployee, publicly held corporation, and
applicable employee remuneration in sec-
tion 162(m). Section 13601 also provid-
ed a transition rule applicable to certain
outstanding compensatory arrangements
(commonly referred to as the grandfather
rule).
On August 21, 2018, the Treasury
Department and the IRS released No-
tice 2018-68 (2018-36 I.R.B. 418), which
provides guidance on certain issues under
section 162(m). Specifically, the notice
provides guidance on the amended rules
for identifying covered employees. Fur-
thermore, the notice provides guidance on
the operation of the grandfather rule, in-
cluding when a contract will be considered
materially modified so that it is no longer
grandfathered. Notice 2018-68 requested
comments on the following issues:
• the application of the definition of
publicly held corporation to foreign
private issuers, including the refer-
ence to issuers that are required to file
reports under section 15(d) of the Se-
curities Exchange Act of 1934,
• the application of the definition of
covered employee to an employee
who was a covered employee of a
predecessor of the publicly held cor-
poration,

Bulletin No. 2020–3 343 January 13, 2020
• the application of section 162(m) to
corporations immediately after they
become publicly held either, through
an initial public offering or a similar
business transaction, and
• the application of the Securities and
Exchange Commission (SEC) exec-
utive compensation disclosure rules
for determining the three most highly
compensated executive officers for a
taxable year that does not end on the
same date as the last completed fiscal
year.
In drafting these proposed regulations,
the Treasury Department and the IRS have
considered all comments received on the
notice. See §601.601(d)(2)(ii)(b). Com-
menters noted that the many examples in
Notice 2018-68 were helpful in illustrat-
ing the guidance in the notice. In light of
these comments, the Treasury Department
and the IRS have included numerous ex-
amples in these proposed regulations to
illustrate the proposed rules.
Explanation of Provisions
I. Overview
Section 13601 of TCJA significant-
ly amended section 162(m). This doc-
ument adds a section to the Income Tax
Regulations (26 CFR part 1) to reflect
these amendments. The amended section
162(m) applies to taxable years beginning
after December 31, 2017, except to the ex-
tent the grandfather rule applies. Because
the final regulations continue to apply to
deductions related to amounts of remu-
neration that are grandfathered, the final
regulations are retained as a separate sec-
tion in the Income Tax Regulations under
section 162(m).
II. Publicly Held Corporation
A. In General
Section 162(m)(2) defines the term
“publicly held corporation.” Before the
amendments made by section 13601(c) of
TCJA, section 162(m)(2) defined publicly
held corporation as any corporation issu-
ing any class of common equity securities
required to be registered under section 12
of the Securities Exchange Act of 1934
(Exchange Act). In defining a publicly
held corporation, §1.162-27(c)(1) adds
that whether a corporation is publicly held
is determined based solely on whether, as
of the last day of its taxable year, the cor-
poration is subject to the reporting obliga-
tions of section 12 of the Exchange Act.
Section 13601(c) of TCJA amended the
definition of publicly held corporation in
section 162(m)(2) to provide that the term
means any corporation which is an issuer
(as defined in section 3 of the Exchange
Act) the securities of which are required
to be registered under section 12 of the
Exchange Act, or that is required to file re-
ports under section 15(d) of the Exchange
Act. Thus, section 13601(c) of TCJA ex-
panded the definition of publicly held
corporation in two ways to include: (1)
A corporation with any class of securities
(rather than only a class of common equity
securities) that is required to be registered
under section 12 of the Exchange Act, and
(2) a corporation that is required to file re-
ports under section 15(d) of the Exchange
Act.
The proposed regulations similarly
define a publicly held corporation as any
corporation that issues securities required
to be registered under section 12 of the
Exchange Act or that is required to file re-
ports under section 15(d) of the Exchange
Act. Unlike the final regulations, the pro-
posed regulations do not focus on whether
the corporation is subject to the reporting
obligations of section 12 of the Exchange
Act. Rather, tracking the statutory text as
amended, the proposed regulations focus
on whether a corporation’s securities are
required to be registered under section 12,
or whether a corporation is required to file
reports under section 15(d).
Consistent with the statutory expansion
of section 162(m), Congress provided in
the legislative history to TCJA that the
definition of a publicly held corporation
“may include certain additional corpora-
tions that are not publicly traded, such as
large private C or S corporations.” H. Rep.
115-466, at 490 (2017) (Conf. Rep.). See
also Staff of the Joint Committee on Tax-
ation, General Explanation of Public Law
115-97 (Blue Book), at 261 (December
20, 2018). As a result, these proposed reg-
ulations make clear that an S corporation
(as defined in section 1361(a)(1)) would
qualify as a publicly held corporation if it
(1) issues securities required to be regis-
tered under section 12(b) of the Exchange
Act, or (2) is required to file reports un-
der section 15(d) of the Exchange Act
(for example, because the S corporation
has issued publicly traded debt). See Pro-
posed §1.162-33(c)(1)(i). Accordingly,
the proposed regulations also provide that
an S corporation parent of a qualified sub-
chapter S subsidiary (as defined in section
1361(b)(3)(B)) (QSub) that issues securi-
ties required to be so registered, or is re-
quired to file such reports, likewise would
qualify as a publicly held corporation. See
part II.G of this Explanation of Provisions
section. See also Proposed §1.162-33(c)
(1)(iv).
For ease of administration, the pro-
posed regulations follow the approach in
the final regulations and use the last day of
a corporation’s taxable year to determine
whether it is publicly held. Accordingly,
the proposed regulations provide that a
corporation is publicly held if, as of the
last day of its taxable year, its securities
are required to be registered under section
12 of the Exchange Act or it is required
to file reports under section 15(d) of the
Exchange Act.
A corporation is required to register
its securities under section 12 of the Ex-
change Act in two circumstances. First,
section 12(b) of the Exchange Act requires
a corporation to register its securities in
order to list them for trading on a nation-
al securities exchange (15 U.S.C. 78l(b)).
Second, section 12(g) of the Exchange Act
requires an issuer with total assets exceed-
ing $10 million to register a class of equity
securities that is held of record by either
2,000 or more persons, or 500 or more
persons who are not accredited investors
(as that term is defined by the SEC) (15
U.S.C. 78l(g)).
1
A corporation is required to file re-
ports under section 15(d) of the Exchange
1
In the case of an issuer that is a bank, savings and loan holding company, or bank holding company, section 12(g) of the Exchange Act requires registration if the issuer has assets exceeding
$10 million and a class of equity securities held of record by 2,000 or more persons. See Exchange Act Rule 12g-1 (17 CFR 240.12g-1) regarding the requirements of section 12(g) generally,
and Exchange Act Rule 12g5-1 (17 CFR 240.12g5-1) for determining record ownership of securities for purposes of Exchange Act sections 12(g) and 15(d).

January 13, 2020 344 Bulletin No. 2020–3
Act when it offers securities for sale in a
transaction subject to the registration re-
quirements of the Securities Act of 1933
(Securities Act) and its registration state-
ment is declared effective by the SEC. A
corporation’s section 15(d) filing obliga-
tion is automatically suspended when cer-
tain statutory requirements are met, and a
corporation that meets other requirements
established by rule may file a form with
the SEC to suspend its section 15(d) filing
obligation.
2
A commenter suggested that a
corporation should not be considered pub-
licly held if its obligation to file reports
under section 15(d) of the Exchange Act
is suspended. The proposed regulations
adopt this suggestion.
In defining the term publicly held
corporation under pre-amended section
162(m)(2), the final regulations included
examples illustrating whether a corpora-
tion, as of the last day of its taxable year, is
subject to the reporting obligations of the
Exchange Act. Similarly, these proposed
regulations include examples illustrating
when a corporation, as of the last day of its
taxable year, is either required to file re-
ports under section 15(d) of the Exchange
Act or required to register its securities
under section 12 of the Exchange Act.
Even though the examples in these pro-
posed regulations illustrate the application
of the Securities Act and the Exchange
Act and the rules thereunder (17 CFR Part
240) for purposes of section 162(m), the
examples are not intended to provide any
guidance on how an issuer should apply
the requirements of the Securities Act, the
Exchange Act, and the rules thereunder
(17 CFR Part 240). Questions regarding
those requirements should be directed to
the SEC.
B. Subsidiaries That File Reports under
Section 15(d) of the Exchange Act
Pursuant to the definition of publicly
held corporation in the proposed regula-
tions, a corporation is publicly held if, as
of the last day of its taxable year, it is re-
quired to file reports under section 15(d)
of the Exchange Act. A commenter sug-
gested that if a wholly-owned subsidiary
corporation of a publicly held corporation
subject to section 162(m) is required to
file reports under section 15(d) of the Ex-
change Act, then it should not be consid-
ered a publicly held corporation separately
subject to section 162(m) because its par-
ent corporation is already subject to sec-
tion 162(m). According to the commenter,
to consider the subsidiary a publicly held
corporation would result in two sets of
covered employees—one for the parent
corporation and one for the subsidiary cor-
poration. The commenter was concerned
that there would be too many covered em-
ployees for the group of corporations. The
proposed regulations do not adopt this
suggestion because not treating the sub-
sidiary corporation as a separate publicly
held corporation is inconsistent with the
text of amended section 162(m)(2), which
defines a publicly held corporation as a
corporation that is required to file reports
under section 15(d) of the Exchange Act.
This conclusion is consistent with the af-
filiated group rule in the final regulations
(which is retained in these proposed regu-
lations and discussed in section II.E of this
preamble) providing that a publicly held
subsidiary is separately subject to section
162(m) and, therefore, has its own set of
covered employees.
C. Foreign Private Issuers
Foreign issuers
3
may access the U.S.
capital markets to raise capital or estab-
lish a trading presence for their securities.
There are specific rules under the Federal
securities laws that apply if a foreign issuer
meets the regulatory definition of “foreign
private issuer” (FPI). “Foreign private is-
suer” is defined in 21 CFR 240.3b-4(c). A
foreign private issuer is any foreign issuer
other than a foreign government, except
for an issuer that has (1) more than 50%
of its outstanding voting securities held
of record by U.S. residents and (2) any of
the following: (i) a majority of its officers
and directors are citizens or residents of
the United States, (ii) more than 50% of
its assets are located in the United States,
or (iii) its business is principally adminis-
tered in the United States.
A FPI may access the U.S. capital mar-
kets or establish a trading presence in the
U.S. by offering or listing its securities,
often in the form of American Depositary
Receipts (ADRs). An ADR is a negotiable
certificate that evidences ownership of a
specified number (or fraction) of the FPI’s
securities held by a depositary (typically, a
U.S. bank). Depending on the FPI’s level
of participation in the U.S. capital market
or trading presence, the FPI may be re-
quired to register its deposited securities
(underlying the ADRs) under section 12
of the Exchange Act.
Commenters recommended that the
proposed regulations provide that section
162(m) does not apply to FPIs. Before
TCJA, the IRS ruled in several private
letter rulings that section 162(m) does
not apply to FPIs because FPIs are not
required to file a summary compensation
table pursuant to the reporting obligations
under the Exchange Act.
4
The rationale of
the rulings is that section 162(m) does not
apply to FPIs because they do not have
covered employees as a result of not being
required to file a summary compensation
table with the SEC. Commenters suggest-
ed that section 162(m) should continue to
be inapplicable to FPIs because they are
not required to disclose compensation of
their officers on an individual basis under
the Exchange Act, unless that disclosure is
required by their home country. The com-
menters asserted that determining com-
pensation on an individual basis (in order
to determine the three most highly com-
pensated executive officers) would require
the FPIs to expend significant time and
money in adopting the necessary internal
legal and compliance procedures to com-
ply with the Exchange Act requirements
that are otherwise inapplicable to them.
The proposed regulations do not adopt
the recommendation to exclude FPIs from
the application of section 162(m). Pursu-
ant to the definition of publicly held cor-
2
See Exchange Act Section 15(d) (15 U.S.C. 78o(d)), and Exchange Act Rules 15d-6 (17 CFR 240.15d-6) and 12h-3 (17 CFR 240.12h-3).
3
The term “foreign issuer” means any issuer which is a foreign government, a national of any foreign country or a corporation or other organization incorporated or organized under the laws
of any foreign country. 21 CFR 240.3b-4(b).
4
A private letter ruling may be relied upon only by the taxpayer to whom the ruling was issued, and does not constitute generally applicable guidance. See section 11.02 of Revenue Procedure
2019-1, 2019-01 I.R.B. 157.

Bulletin No. 2020–3 345 January 13, 2020
poration in amended section 162(m)(2),
a FPI is a publicly held corporation if it
is required either to register its securities
under section 12 of the Exchange Act or
to file reports under section 15(d) of the
Exchange Act. The legislative history to
TCJA indicates that Congress intended for
section 162(m) to apply to FPIs.
5
Further-
more, the rationale of the private letter rul-
ings, which conclude that section 162(m)
does not apply to FPIs because they are
not required to file a summary compensa-
tion table, is inconsistent with the defini-
tion of covered employee in amended sec-
tion 162(m)(3). As discussed in section III
of this preamble, under the definition of
covered employee as amended by TCJA, a
publicly held corporation has covered em-
ployees regardless of whether it is required
to file a summary compensation table, and
regardless of whether the employees ap-
pear on a summary compensation table
that is filed. Accordingly, the proposed
regulations do not adopt the suggestion
to exclude FPIs from the application of
section 162(m). The proposed regulations
include examples illustrating when a FPI
is a publicly held corporation. Because
the calculation of compensation to deter-
mine the three highest compensated exec-
utive officers for a taxable year is made
in accordance with the SEC executive
compensation disclosure rules under the
Exchange Act, the Treasury Department
and the IRS request comments on whether
a safe harbor for that determination is ap-
propriate for FPIs that are not required to
disclose compensation of their officers on
an individual basis in their home countries
and, if so, how that safe harbor should be
designed.
D. Publicly Traded Partnerships
Partnerships may issue equity interests
that are required to be registered under
section 12 of the Exchange Act because
they are traded on an established securi-
ties market. These partnerships are known
as publicly traded partnerships (PTPs).
Under section 7704(a), a PTP generally is
treated as a corporation for purposes of the
Code, unless its gross income meets the
requirement of section 7704(c)(2). Stake-
holders have asked whether a PTP that is
treated as a corporation under that provi-
sion would be considered a publicly held
corporation. As described in the preamble
to the 1993 proposed regulations, stake-
holders previously raised this issue:
Questions have arisen as to the ap-
plication of section 162(m) to certain
master limited partnerships whose
equity interests are required to be
registered under the Exchange Act
and that, beginning in 1997, may be
treated as corporations for Federal
income tax purposes. Whether these
partnerships would be publicly held
corporations within the meaning of
section 162(m) and, if so, the manner
in which they would satisfy the ex-
ception for performance-based com-
pensation is currently under study and
is not addressed in these proposed
regulations. If necessary, guidance as
to the application of section 162(m)
to these entities will be provided in
the future.
(58 FR 66310, 66311). The Treasury De-
partment and the IRS have concluded
that, for purposes of section 162(m), a
PTP that is treated as a corporation under
section 7704 (or otherwise) is a publicly
held corporation if, as of the last day of its
taxable year, its securities are required to
be registered under section 12 of the Ex-
change Act or it is required to file reports
under section 15(d) of the Exchange Act.
A PTP that is not treated as a corporation
for Federal tax purposes (for example,
because it satisfies the gross income re-
quirement under section 7704(c)(2) and
is not otherwise treated as a corporation
for Federal tax purposes) is not a publicly
held corporation for purposes of section
162(m).
E. Affiliated Groups
In defining the term “publicly held cor-
poration,” §1.162-27(c)(1)(ii) provides
that a publicly held corporation includes
an affiliated group of corporations, as de-
fined in section 1504 (determined without
regard to section 1504(b)). The proposed
regulations retain this rule with a modi-
fication described below. Because an af-
filiated group may include more than one
publicly held corporation, §1.162-27(c)
(1)(ii) provides that an affiliated group of
corporations does not include any subsid-
iary that is itself a publicly held corpo-
ration. In that case, pursuant to the final
regulations, the publicly held subsidiary
and its subsidiaries (if any) are separately
subject to section 162(m). Therefore, the
parent corporation that is a publicly held
corporation and the publicly held subsid-
iary each has its own set of covered em-
ployees. However, the final regulations
do not specifically address the situation
in which a parent corporation is privately
held and the subsidiary is publicly held.
Because the amended definition of public-
ly held corporation includes a corporation
that is required to file reports under sec-
tion 15(d) of the Exchange Act, this type
of affiliated group may be more common
post-TCJA. Accordingly, unlike the final
regulations, which provide that a publicly
held subsidiary is excluded from an affil-
iated group, with the result that a private-
ly held parent is not part of an affiliated
group with its publicly held subsidiary,
these proposed regulations provide that an
affiliated group includes a parent corpora-
tion that is privately held and its subsidi-
ary that is publicly held. Furthermore, be-
cause an affiliated group of corporations
is determined without regard to section
1504(b), an affiliated group may also in-
clude a domestic parent corporation that
is publicly held and its foreign subsidiary
that is not publicly held.
A covered employee of a publicly held
corporation may also perform services for
another member of the affiliated group. In
these situations, §1.162-27(c)(1)(ii) pro-
vides that
[i]f a covered employee is paid com-
pensation in a taxable year by more
than one member of an affiliated
group, compensation paid by each
member of the affiliated group is ag-
gregated with compensation paid to
the covered employee by all other
members of the group. Any amount
disallowed as a deduction by this
5
The legislative history to TCJA provides that the amendment to the definition of publicly held corporation under section 162(m) “extends the applicability of section 162(m) to include ... all
foreign companies publicly traded through ADRs.” House Conf. Rpt. 115-466, 489 (2017). The Blue Book similarly states that “the provision extends the applicability of section 162(m) to
include all foreign companies publicly traded through ADRs.” Blue Book at page 261.

January 13, 2020 346 Bulletin No. 2020–3
section must be prorated among the
payor corporations in proportion to
the amount of compensation paid to
the covered employee by each such
corporation in the taxable year.
The proposed regulations retain this rule
and include additional rules addressing
the proration of the deduction disallow-
ance in situations in which a covered
employee is paid compensation in a tax-
able year by more than one publicly held
corporation in an affiliated group. Under
these rules, the amount disallowed as a
deduction is determined separately with
respect to each publicly held payor corpo-
ration of which the individual is a covered
employee. Accordingly, in determining
the deduction disallowance with respect to
compensation paid to a covered employee
by one publicly held payor corporation of
an affiliated group, compensation paid to
the covered employee by another public-
ly held payor corporation of the affiliated
group (of which the individual is also a
covered employee) is not aggregated for
purposes of the deduction disallowance
proration.
F. Disregarded Entities
Generally under §301.7701-2(c)(2)(i),
a business entity that has a single owner
and is not a corporation under §301.7701-
2(b) is disregarded as an entity separate
from its owner for Federal tax purposes
(disregarded entity). All of the activities of
a disregarded entity are therefore treated
in the same manner as a sole proprietor-
ship or as a branch or division of its owner
under §301.7701-2. Section 301.7701-
2(c)(2)(iv) provides that §301.7701-2(c)
(2)(i) does not apply to taxes imposed
under Subtitle C—Employment Taxes
and Collection of Income Tax (Chapters
21, 22, 23, 23A, 24, and 25 of the Code).
Because section 162(m) is in Subtitle A,
the general rule in §301.7701-2(c)(2)(i)
applies for purposes of section 162(m).
Nonetheless, a disregarded entity that
is owned by a privately held corporation
may be an issuer of securities that are re-
quired to be registered under section 12(b)
of the Exchange Act or may be required to
file reports under section 15(d) of the Ex-
change Act. The Treasury Department and
the IRS have concluded that, for purposes
of section 162(m), a corporation that is the
owner of a disregarded entity is treated as
issuing any securities issued by its disre-
garded entity. Accordingly, if a disregard-
ed entity that is owned by a privately held
corporation is an issuer of securities that
are required to be registered under section
12(b) of the Exchange Act or is required
to file reports under section 15(d) of the
Exchange Act, these proposed regulations
treat the privately held corporation as a
publicly held corporation for purposes of
section 162(m).
The Treasury Department and the IRS
are aware that a corporation could form a
partnership with a minority partner in an
attempt to circumvent the proposed rules
treating a corporation that wholly-owns a
disregarded entity that issues certain se-
curities as a publicly held corporation for
purposes of section 162(m). In these cir-
cumstances, the corporation may be treat-
ed as a publicly held corporation by rea-
son of the application of §1.701-2 or other
federal income tax principles. The Trea-
sury Department and the IRS also note
that, in addition to the above-described
fact pattern involving disregarded entities,
§1.701-2 and other federal income tax
principles may apply to any transaction in
which a corporation forms a partnership
in an attempt to circumvent the proposed
rules.
G. Qualified Subchapter S Subsidiaries
Section 1361(b)(3)(B) defines a QSub
as any domestic corporation that is not an
ineligible corporation (as defined in sec-
tion 1361(b)(2)) if an S corporation owns
100 percent of the stock of such corpora-
tion and the S corporation elects to treat
the corporation as a QSub. Under section
1361(b)(3)(A), unless otherwise provided
by regulations, a QSub is not treated as a
separate corporation, and therefore all of
its assets, liabilities, and items of income,
deduction, and credit are treated as assets,
liabilities, and such items (as the case may
be) of its parent S corporation.
Like a disregarded entity, a QSub may
issue securities required to be registered
under section 12(b) of the Exchange Act,
or be required to file reports under section
15(d) of the Exchange Act. The Treasury
Department and the IRS have concluded
that, for purposes of section 162(m), an S
corporation that is the owner of a QSub
is treated as issuing any securities that
are issued by its QSub. Accordingly, if
a QSub is an issuer of securities that are
required to be registered under section
12(b) of the Exchange Act, or is required
to file reports under section 15(d) of the
Exchange Act, these proposed regulations
treat the QSub’s S corporation parent as
a publicly held corporation for purposes
of section 162(m). See Proposed §1.162-
33(c)(1)(iv).
III. Covered Employee
A. In General
Section 162(m)(3) defines the term
“covered employee.” Before TCJA, sec-
tion 162(m)(3) defined a covered employ-
ee as any employee of the taxpayer if (a)
as of the close of the taxable year, such
employee is the chief executive officer of
the taxpayer or is an individual acting in
such capacity, or (b) the total compensa-
tion of such employee for the taxable year
is required to be reported to shareholders
under the Exchange Act by reason of such
employee being among the four highest
compensated officers for the taxable year
(other than the chief executive officer).
Section 13601(b) of TCJA amended
the definition of covered employee in sec-
tion 162(m)(3) to provide that a covered
employee means any employee of the tax-
payer if (a) the employee is the principal
executive officer (PEO) or principal finan-
cial officer (PFO) of the taxpayer at any
time during the taxable year, or was an in-
dividual acting in such a capacity, (b) the
total compensation of the employee for
the taxable year is required to be reported
to shareholders under the Exchange Act
by reason of such employee being among
the three highest compensated officers for
the taxable year (other than the PEO and
PFO), or (c) the individual was a covered
employee of the taxpayer (or any prede-
cessor) for any preceding taxable year be-
ginning after December 31, 2016. Section
13601(c) of TCJA also added flush lan-
guage to provide that a covered employee
includes any employee whose total com-
pensation for the taxable year places the
individual among the three highest com-
pensated officers for the taxable year (oth-
er than any individual who is the PEO or
PFO of the taxpayer at any time during the

Bulletin No. 2020–3 347 January 13, 2020
taxable year, or was an individual acting in
such a capacity) even if the compensation
of the officer is not required to be reported
to shareholders under the Exchange Act.
The SEC executive compensation
disclosure rules generally require disclo-
sure of compensation of the three most
highly compensated executive officers
if they were employed at the end of the
taxable year and up to two executive of-
ficers whose compensation would have
been disclosed but for the fact that they
were not employed at the end of the tax-
able year. See Item 402 of Regulation
S-K, 17 CFR 229.402(a)(3). After TCJA
amended the definition of covered em-
ployee, stakeholders submitted comments
indicating that they would benefit from
initial guidance on whether amended sec-
tion 162(m)(3)(B) and the flush language
to section 162(m)(3) require an employee
to be employed at the end of the taxable
year to qualify as a covered employee.
Notice 2018-68 provided that a covered
employee for any taxable year means any
employee who is among the three highest
compensated executive officers for the
taxable year, regardless of whether the ex-
ecutive officer is serving at the end of the
publicly held corporation’s taxable year,
and regardless of whether the executive
officer’s compensation is subject to dis-
closure for the last completed fiscal year
under the applicable SEC rules. To reach
this conclusion, consistent with Notice
2018-68, the proposed regulations rely on
the flush language to section 162(m)(3),
the legislative history,
6
and the SEC exec-
utive compensation disclosure rules that
do not necessarily require an executive of-
ficer to be employed at the end of the fiscal
year for his or her compensation to be dis-
closed for the year. Based on these consid-
erations, the proposed regulations adopt
the position set forth in Notice 2018-68.
7
B. Taxable Years Not Ending on Same
Date as Fiscal Years
The SEC executive compensation dis-
closure rules are based on a corporation’s
fiscal year. Usually, a corporation’s fiscal
and taxable years end on the same date;
however, this is not always the case (for
example, due to a short taxable year as a
result of a corporate transaction that does
not result in a short fiscal year). In these
cases, the publicly held corporation will
have three most highly compensated ex-
ecutive officers under section 162(m)(3)
(B) for the short taxable year (instead of
the fiscal year). In Notice 2018-68, the
Treasury Department and IRS requested
comments on the application of the SEC
executive compensation disclosure rules
to determine the three most highly com-
pensated executive officers for a taxable
year that does not end on the same date
as the fiscal year for purposes of section
162(m)(3)(B). The notice provided that
until additional guidance is issued, taxpay-
ers should base their determination of the
three most highly compensated executive
officers for purposes of section 162(m)(3)
(B) upon a reasonable good faith interpre-
tation of the statute.
A commenter suggested that the deter-
mination of the three highest compensated
executive officers should be based on the
total amount of otherwise deductible re-
muneration. The proposed regulations do
not adopt this approach. In defining cov-
ered employee, section 162(m)(3)(B) pro-
vides that the three most highly compen-
sated executive officers are officers whose
compensation is required to be (or would
be required to be) reported to shareholders
under the Exchange Act. Therefore, under
the statutory text, the determination of the
three most highly compensated executive
officers is made pursuant to the rules under
the Exchange Act. Accordingly, the pro-
posed regulations provide that the amount
of compensation used to identify the three
most highly compensated executive offi-
cers is determined pursuant to the execu-
tive compensation disclosure rules under
the Exchange Act using the taxable year
as the fiscal year for purposes of making
the determination. Thus, for example, if a
publicly held corporation uses a calendar
year fiscal year for SEC reporting purpos-
es, but has a taxable year beginning July
1, 2019, and ending June 30, 2020, then
the three most highly compensated execu-
tive officers are determined for the taxable
year ending June 30, 2020, by applying
the executive compensation disclosure
rules under the Exchange Act as if the fis-
cal year ran from July 1, 2019 to June 30,
2020. The same rule applies to short tax-
able years. Assume in the previous exam-
ple that, due to a corporate transaction, the
corporation’s taxable year ran from July 1,
2019, to March 31, 2020. In that situation,
the three most highly compensated ex-
ecutive officers would be determined for
the taxable year ending March 31, 2020
by applying the disclosure rules as if the
fiscal year began July 1, 2019, and ended
March 31, 2020. For a discussion of the
proposed special applicability dates relat-
ed to the determination of the three most
highly compensated executive officers for
a corporation whose fiscal year and tax-
able year do not end on the same date, see
section VIII.B of this preamble.
C. Covered Employees Limited to
Executive Officers
The SEC executive compensation dis-
closure rules require disclosure of com-
pensation for certain executive officers.
The term executive officer is defined in 17
CFR 240.3b-7 as follows:
The term executive officer, when
used with reference to a registrant,
means its president, any vice presi-
dent of the registrant in charge of a
principal business unit, division or
function (such as sales, administra-
tion or finance), any other officer who
performs a policy making function or
any other person who performs sim-
ilar policy making functions for the
registrant. Executive officers of sub-
sidiaries may be deemed executive
officers of the registrant if they per-
form such policy making functions
for the registrant.
Under the amended definition of covered
employee, a PEO and PFO are covered
employees by virtue of having those po-
sitions or acting in those capacities. The
three highest compensated officers (other
than the PEO or PFO) are covered em-
ployees by reason of their compensation.
With respect to the three highest compen-
sated officers for a taxable year, a com-
menter asked whether only an executive
officer (as defined in 17 CFR 240.3b-7)
6
See House Conf. Rpt. 115-466, 489 (2017).
7
Furthermore, in explaining the amended definition of covered employee, the Blue Book concurred with the guidance provided in Notice 2018-68. Blue Book at page 260.

January 13, 2020 348 Bulletin No. 2020–3
may qualify as a covered employee. Be-
cause the SEC executive compensation
disclosure rules that require disclosure of
the three highest compensated executive
officers apply only to executive officers,
only an executive officer may qualify as
a covered employee under section 162(m)
(3)(B).
A publicly held corporation may own
an interest in a partnership as discussed in
section IV.B. of this preamble. Consistent
with the definition of the term executive
officer in 17 CFR 240.3b-7, an officer of
a partnership is deemed to be an executive
officer of a publicly held corporation that
owns an interest in such partnership if the
officer performs a policy making function
for the publicly held corporation. As a
deemed executive officer of the publicly
held corporation, the officer of the part-
nership may be a covered employee under
section 162(m)(3)(B) if the officer is one
of the three highest compensated execu-
tive officers of the publicly held corpora-
tion.
D. Covered Employees after Separation
from Service
Consistent with section 162(m)(3)(C),
as amended by TCJA, Notice 2018-68
provides that a covered employee iden-
tified for taxable years beginning after
December 31, 2016, will continue to be a
covered employee for all subsequent tax-
able years. Accordingly, if an individual is
a covered employee for a taxable year, the
individual remains a covered employee
for all subsequent taxable years, even after
the individual has separated from service.
For example, if a publicly held corpora-
tion makes nonqualified deferred com-
pensation (NQDC) payments to a former
PEO after separation from service, then
the deduction for the payments generally
would be subject to section 162(m). No-
tice 2018-68 based this conclusion on the
statutory text in section 162(m)(3)(C) and
the legislative history, which provides that
if an individual is a covered employ-
ee with respect to a corporation for a
taxable year beginning after Decem-
ber 31, 2016, the individual remains
a covered employee for all future
years. Thus, an individual remains
a covered employee with respect to
compensation otherwise deductible
for subsequent years, including for
years during which the individual is
no longer employed by the corpora-
tion and years after the individual has
died.
(House Conf. Rpt. 115-466, 489 (2017)).
The Blue Book reiterated the legislative
history in explaining the amended defini-
tion of covered employee.
8
One commenter suggested that a cov-
ered employee ceases to be a covered em-
ployee for taxable years following the tax-
able year in which the individual separates
from service because the statutory text
uses the term “employee” instead of “indi-
vidual” in defining covered employee. In
other words, the commenter asserted that
the term “employee” in the statute should
be interpreted as referring to a “current
employee” instead of a “current or former
employee.” The commenter suggested
that because this is the plain reading of the
statute, the legislative history should be
ignored. The proposed regulations do not
adopt this suggestion. The statute gives
no indication that the term “employee” is
limited to a current employee, and a ref-
erence in the Code to an “employee” has
frequently been interpreted in regulations
as a reference to a current or a former em-
ployee.
9
Given the ambiguity in the mean-
ing of “employee” and the legislative
intent in this context to include a former
employee, as evidenced by the legislative
history and the Blue Book explanation of
the term covered employee, the proposed
regulations define employee to include a
former employee.
E. Predecessor Corporation
Section 162(m)(3)(C) provides that
the term “covered employee” means any
employee who was a covered employee
of the taxpayer for any preceding taxable
year beginning after December 31, 2016.
The term “covered employee” also means
any employee who was a covered employ-
ee of any predecessor of the taxpayer for
any preceding taxable year beginning af-
ter December 31, 2016. For clarity, these
proposed regulations use the term “prede-
cessor of a publicly held corporation” in-
stead of “predecessor.” An individual who
is a covered employee for one taxable year
(including a taxable year of a predecessor
of a publicly held corporation) remains a
covered employee for subsequent taxable
years.
In certain circumstances, the term “pre-
decessor of a publicly held corporation”
includes the publicly held corporation it-
self if it was a publicly held corporation
for a prior taxable year. Specifically, the
proposed regulations provide that a pre-
decessor of a publicly held corporation
includes a publicly held corporation that,
after becoming privately held, again be-
comes a publicly held corporation for a
taxable year ending before the 36-month
anniversary of the due date for the corpo-
ration’s U.S. Federal income tax return
(excluding any extensions) for the last
taxable year for which the corporation was
previously publicly held. For a discussion
of the proposed special applicability date
related to the definition of predecessor of
a publicly held corporation as applied to
a privately held corporation that was pre-
viously a publicly held corporation and
again becomes a publicly held corpora-
tion, see section VIII.B of this preamble.
The proposed regulations also provide
that the term “predecessor of a publicly
held corporation” includes a publicly held
corporation that is acquired (target corpo-
ration), or the assets of which are acquired,
by another publicly held corporation (ac-
quiror corporation) in certain transactions.
Accordingly, the covered employees of
the target corporation in those transac-
tions are also covered employees of the
acquiror corporation.
The proposed regulations define the
term “predecessor of a publicly held cor-
poration” by reference to the type of cor-
porate acquisition in which a publicly held
corporation is acquired. The proposed reg-
ulations describe corporate acquisitions in
four categories: (1) Corporate reorgani-
zations, (2) corporate divisions, (3) stock
acquisitions, and (4) asset acquisitions.
8
The Blue Book states that, “[i]n addition, if an individual is a covered employee with respect to a corporation for a taxable year beginning after December 31, 2016, the individual remains
a covered employee for all future years. Thus, an individual remains a covered employee with respect to compensation otherwise deductible for subsequent years, including for years during
which the individual is no longer employed by the corporation and years after the individual has died.” Blue Book at page 260.
9
For example, under §1.105-11(c)(3)(iii), the nondiscrimination rules of section 105(h)(3) apply to former employees even though the Code uses only the term “employees.”

Bulletin No. 2020–3 349 January 13, 2020
Certain transactions may fall within more
than one category, but this redundancy is
intended to provide certainty as to the ap-
plication of these rules if a taxpayer is un-
sure which category covers the acquisition
in question.
With respect to corporate reorganiza-
tions, the proposed regulations provide that
a predecessor of a publicly held corporation
includes a publicly held corporation that is
acquired or that is the transferor corpora-
tion in a corporate reorganization described
in section 368(a)(1). For example, if a pub-
licly held target corporation merges into
a publicly held acquiror corporation, then
any covered employee of the target corpo-
ration would become a covered employee
of the acquiror corporation.
With respect to corporate divisions,
the proposed regulations provide that a
predecessor of a publicly held corpora-
tion includes a publicly held distributing
corporation that distributes or exchang-
es the stock of one or more controlled
corporations in a transaction described
in section 355(a)(1) (a 355(a)(1) trans-
action) if the controlled corporation is
a publicly held corporation. This rule
applies to the distributing corporation
only with respect to covered employees
of the distributing corporation who are
hired by the controlled corporation (or
by a corporation affiliated with the con-
trolled corporation that received stock of
the controlled corporation as a sharehold-
er of the distributing corporation in the
355(a)(1) transaction) within the period
beginning 12 months before and ending
12 months after the distribution. For ex-
ample, if a publicly held distributing cor-
poration exchanges with its shareholders
the stock of a controlled corporation for
stock of the distributing corporation in a
355(a)(1) transaction, and the controlled
corporation is a publicly held corpora-
tion after the exchange, then any covered
employee of the distributing corpora-
tion would become a covered employ-
ee of the controlled corporation if hired
by the controlled corporation within the
period beginning 12 months before and
ending 12 months after the exchange.
Furthermore, a covered employee of the
distributing corporation who becomes a
covered employee of the controlled cor-
poration will remain a covered employ-
ee of the distributing corporation for all
subsequent taxable years because, as dis-
cussed in section III.D of this preamble,
if an individual is a covered employee for
a taxable year, the individual remains a
covered employee for all subsequent tax-
able years.
With respect to stock acquisitions, a
predecessor of a publicly held corpora-
tion includes a publicly held corporation
that becomes a member of an affiliated
group (as defined in proposed §1.162-
33(c)(1)(ii)). For example, if an affiliated
group that is considered a publicly held
corporation pursuant to proposed §1.162-
33(c)(1)(ii) in the proposed regulations
acquires a publicly held target corpora-
tion that becomes a member of the affil-
iated group, then the target corporation
would be considered a predecessor of the
affiliated group. Therefore, any covered
employee of the target corporation would
become a covered employee of the affil-
iated group.
With respect to asset acquisitions, if an
acquiror corporation or one or more mem-
bers of an affiliated group (acquiror group)
acquires at least 80% of the operating as-
sets (determined by fair market value on
the date of acquisition) of a publicly held
target corporation, then the target corpora-
tion is a predecessor of the acquiror corpo-
ration or group. For example, if an acquiror
corporation acquires 80% or more of the
operating assets of a publicly held target
corporation, then any covered employees
of the target corporation that become em-
ployees of the acquiror corporation would
become covered employees of the acquiror
corporation. For acquisitions of assets that
occur over time, the proposed regulations
provide that generally only acquisitions
that occur within a 12-month period are
taken into account to determine whether at
least 80% of the target corporation’s oper-
ating assets were acquired.
Similarly, this asset acquisition rule
provides that the target is a predecessor
of a publicly held corporation only with
respect to a covered employee of the tar-
get corporation who is hired by the ac-
quiror (or a corporation affiliated with the
acquiror) within the period beginning 12
months before and ending 12 months after
the date on which all events necessary for
the acquisition have occurred.
These proposed regulations provide
that the rules for determining predeces-
sors are applied cumulatively, with the
result that a predecessor of a corporation
includes each predecessor of the corpora-
tion and the predecessor or predecessors
of any prior predecessor or predecessors.
Also, in a similar manner to the rule for
a publicly held corporation that becomes
privately held, and subsequently becomes
publicly held, these proposed regulations
provide that a target corporation may be a
predecessor corporation in certain circum-
stances. For example, the proposed regu-
lations provide that if a target corporation
was a publicly held corporation, subse-
quently becomes privately held, is then
acquired by an acquiror that is not a pub-
licly held corporation, and the acquiror
becomes a publicly held corporation for a
taxable year ending before the 36-month
anniversary of the due date for the target
corporation’s U.S. Federal income tax
return (excluding any extensions) for the
last taxable year for which the target cor-
poration was publicly held, then the target
corporation is a predecessor of the public-
ly held corporation. The proposed regula-
tions also provide a similar rule for asset
acquisitions.
These proposed regulations further
clarify that, in the case of an election to
treat as an asset purchase either the sale,
exchange, or distribution of stock pursu-
ant to regulations under section 336(e) or
the purchase of stock pursuant to regula-
tions under section 338, the corporation
is treated as the same corporation before
and after the transaction for which the
election is made. Similar exceptions are
made to the general treatment of an elec-
tion under section 336(e) and section 338
that would treat the post-election corpo-
ration as a new corporation for purposes
of other rules regarding various compen-
sation tax provisions (see §1.338-1(b)
(2)(i)). These exceptions align with the
other predecessor rules in these proposed
regulations by treating a substantial con-
tinuation of the earlier business in the
post-election corporation as continuing
the pre-election corporation, so that the
covered employees continue to be cov-
ered employees.
F. Disregarded Entities
Under section 162(m)(3), only em-
ployees of the taxpayer may be covered

January 13, 2020 350 Bulletin No. 2020–3
employees. When a corporation owns an
entity that is disregarded as an entity sep-
arate from its owner under §301.7701-2(c)
(2)(i), the corporation that is a publicly held
corporation (and not its wholly-owned en-
tity) is the taxpayer for purposes of section
162(m)(3). In that case, the covered em-
ployees of the publicly held corporation are
identified pursuant to the rules discussed
in sections III.A through III.E of this pre-
amble. Accordingly, a PEO, PFO, or exec-
utive officer of a disregarded entity whol-
ly-owned by a corporation is generally not
treated as a PEO, PFO, or executive officer
of the corporate owner (the publicly held
corporation). However, consistent with the
definition of the term executive officer in
17 CFR 240.3b-7 that treats executive of-
ficers of subsidiaries as executive officers
of the registrant if the executive officers
perform policy making functions for the
registrant, an executive officer of a disre-
garded entity is treated as an executive of-
ficer of its corporate owner for the taxable
year if the executive officer performs poli-
cy making functions for the corporate own-
er during the taxable year. These proposed
regulations include examples illustrating
how to determine whether employees of
a disregarded entity are treated as covered
employees of its publicly held corporate
owner for purposes of section 162(m).
The Treasury Department and the IRS
are aware that, in an attempt to circumvent
the proposed rules treating a corporation
that wholly-owns a disregarded entity
that issues certain securities as a publicly
held corporation for purposes of section
162(m), a corporation could form a part-
nership with a minority partner and the
partnership could then employ an individ-
ual who otherwise would have been a cov-
ered employee of the corporation. In these
circumstances, §1.701-2 and other feder-
al income tax principles may apply to a
transaction in which a corporation forms
a partnership in an attempt to circumvent
the proposed rules.
G. Qualified Subchapter S Subsidiaries
Like the case when a corporation owns
a disregarded entity, when an S corpora-
tion that is a publicly held corporation
owns a QSub, the S corporation, and not
its QSub, is the taxpayer for purposes of
section 162(m)(3). Therefore, pursuant
to the rules discussed in sections III.A
through III.E of this preamble, a PEO,
PFO, or executive officer of such QSub
generally is not treated as a PEO, PFO,
or executive officer of the S corporation
owner (that is, the publicly held corpora-
tion). Under these proposed regulations,
an executive officer of a QSub is treated
as an executive officer of its S corporation
owner for the taxable year if the executive
officer performs policy making functions
for the S corporation owner during the
taxable year. See Proposed §1.162-33(c)
(2)(iv). This treatment is consistent with
the definition of the term executive officer
in 17 CFR 240.3b-7, which treats execu-
tive officers of subsidiaries as executive
officers of the registrant if the executive
officers perform policy making functions
for the registrant.
IV. Applicable Employee Remuneration
A. In General
Section 162(m)(4) defines the term
“applicable employee remuneration” with
respect to any covered employee for any
taxable year as the aggregate amount al-
lowable as a deduction for such taxable
year (determined without regard to section
162(m)) for remuneration for services per-
formed by such employee (whether or not
during the taxable year). Before TCJA, ap-
plicable employee remuneration did not in-
clude remuneration payable on a commis-
sion basis (as defined in section 162(m)(4)
(B)) or performance-based compensation
(as defined in section 162(m)(4)(C)). Sec-
tion 13601(a) of TCJA amended the defini-
tion of applicable employee remuneration
to eliminate these exclusions, while section
13601(d) of TCJA added a special rule for
remuneration paid to beneficiaries. This
special rule, set forth in section 162(m)(4)
(F), provides that remuneration shall not
fail to be applicable employee remunera-
tion merely because it is includible in the
income of, or paid to, a person other than
the covered employee, including after the
death of the covered employee.
For simplicity, when incorporating the
amendments TCJA made to the definition
of applicable employee remuneration,
these proposed regulations use the term
“compensation” instead of “applicable
employee remuneration.” Consistent with
the amendments made by TCJA, these
proposed regulations provide that com-
pensation means the aggregate amount
allowable as a deduction under chapter
1 of the Code for the taxable year (deter-
mined without regard to section 162(m))
for remuneration for services performed
by a covered employee, whether or not
the services were performed during the
taxable year. The proposed regulations
also clarify that compensation includes an
amount that is includible in the income of,
or paid to, a person other than the covered
employee, including after the death of the
covered employee.
B. Compensation Paid by a Partnership to
a Covered Employee
These proposed regulations address the
issue of compensation paid by a partner-
ship (as defined for Federal tax purposes)
to a covered employee of a publicly held
corporation; this issue has been subject
to a no-rule position for private letter rul-
ings since 2010. Between 2006 and 2008,
the IRS issued four private letter rulings
addressing specific situations in which a
publicly held corporation was a partner
in a partnership. As part of the analysis,
the private letter rulings stated that if a
publicly held corporation is a partner in
a partnership, then section 162(m) does
not apply to the corporation’s distribu-
tive share of the partnership’s deduction
for compensation paid by the partnership
for services performed for it by a covered
employee of the corporation. Therefore,
the private letter rulings ruled on the facts
presented that section 162(m) did not lim-
it the otherwise deductible compensation
expense of the publicly held corporation
for compensation the partnership paid the
covered employee. Upon further consid-
eration, and recognizing the potential for
abuse, the IRS stopped issuing private let-
ter rulings involving section 162(m) and
partnerships.
10
Stakeholders have asked
10
Initially, the IRS announced the no-rule position in 2010 in section 5.06 of Revenue Procedure 2010-3, 2010-1 I.R.B. 110, which provided that “[w]hether the deduction limit under § 162(m)
applies to compensation attributable to services performed for a related partnership” was an area under study in which rulings or determination letters will not be issued until the IRS resolves
the issue through publication of a revenue ruling, revenue procedure, regulations, or otherwise. Most recently, section 4.01(13) of Revenue Procedure 2019-3, 2019-01 I.R.B. 130, provides
that this issue is an area in which rulings or determination letters will not ordinarily be issued.

Bulletin No. 2020–3 351 January 13, 2020
the Treasury Department and the IRS to
address this issue in these proposed reg-
ulations.
In relevant part, section 162(m)(1) pro-
vides that “[i]n the case of any publicly
held corporation, no deduction shall be
allowed under this chapter for applicable
employee remuneration with respect to
any covered employee.” This language
does not limit the application of section
162(m) to deductions for compensation
paid by the publicly held corporation; it
also covers the deduction for compen-
sation paid to the corporation’s covered
employees by another party to the extent
the corporation is allocated a share of the
otherwise deductible item. For instance, if
a publicly held corporate partner is allo-
cated a distributive share of the partner-
ship’s deduction for compensation paid by
the partnership, the allocated distributive
share of the deduction is subject to sec-
tion 162(m) even though the corporation
did not directly pay the compensation to
the covered employee. Thus, the publicly
held corporation must take into account
its distributive share of the partnership’s
deduction for compensation expense paid
to the publicly held corporation’s covered
employee and aggregate that distributive
share and the corporation’s otherwise al-
lowable deduction for compensation paid
directly to that employee in determining
the amount allowable to the corporation as
a deduction for compensation under sec-
tion 162(m). See §1.702-1(a)(8)(ii) and
(iii).
The Treasury Department and the IRS
are aware that this issue has not been ad-
dressed in generally applicable guidance
and understand taxpayers may have tak-
en positions contrary to those set forth in
these proposed regulations. Accordingly,
the proposed regulations provide transition
relief for current compensation arrange-
ments, but also prohibit the formation or
expansion of these types of structures for
the purpose of avoiding the application
of section 162(m) prior to the issuance
of final regulations. Specifically, in order
to ensure that compensation agreements
are not formed or otherwise structured to
circumvent this rule after publication of
these proposed regulations and prior to
the publication of the final regulations,
the proposed regulations propose that the
rule with respect to compensation paid by
a partnership will apply to any deduction
for compensation that is otherwise allow-
able for a taxable year ending on or after
December 20, 2019 but will not apply to
compensation paid pursuant to a written
binding contract in effect on December
20, 2019 that is not materially modified
after that date. The Treasury Department
and the IRS request comments on whether
similar rules should apply to trusts.
C. Compensation for Services in a
Capacity other than an Executive Officer
A commenter suggested that, if a cov-
ered employee separates from service as
an executive officer and subsequently per-
forms services as a director of the publicly
held corporation, then the compensation
paid to the individual as a director should
not be considered applicable employ-
ee remuneration for purposes of section
162(m)(4). These proposed regulations do
not adopt this suggestion.
Since the enactment of section 162(m)
in 1993, director fees were considered ap-
plicable employee remuneration for pur-
poses of section 162(m)(4). In describing
compensation for which the deduction is
limited by section 162(m), the legislative
history to the enactment of section 162(m)
states:
Unless specifically excluded, the de-
duction limitation applies to all remu-
neration for services, including cash
and the cash value of all remuneration
(including benefits) paid in a medium
other than cash. If an individual is a
covered employee for a taxable year,
the deduction limitation applies to all
compensation not explicitly excluded
from the deduction limitation, regard-
less of whether the compensation is
for services as a covered employee
and regardless of when the compen-
sation was earned.
House Conf. Rpt. 103-213, 585 (1993).
Thus, in enacting section 162(m), Con-
gress did not exclude compensation for
services not performed as a covered em-
ployee from the deduction limitation. As
stated in the preamble to the 1993 pro-
posed regulations, “[t]he deduction limit
of section 162(m) applies to any compen-
sation that could otherwise be deducted
in a taxable year, except for enumerated
types of payments set forth in section
162(m)(4)” (58 FR 66310, 66310). Com-
pensation earned by a covered employee
through a non-employee position, such as
director fees, was never one of the “enu-
merated types of payments set forth in
section 162(m)(4)” and so this compen-
sation does not fall within the exception
and has always been considered applica-
ble employee remuneration for which the
deduction is limited by section 162(m).
11

The amendments to section 162(m)(4)
made by TCJA did not change this aspect
of the definition of applicable employee
remuneration; accordingly, the proposed
regulations do not adopt the commenter’s
suggestion.
Pursuant to the amended definition of
covered employee in section 162(m)(3)
(C), a covered employee includes any
individual who was a covered employee
of the publicly held corporation (or any
predecessor) for any taxable year begin-
ning after December 31, 2016. Therefore,
a covered employee remains a covered
employee after separation from service.
If, after separation from service as an
employee, a covered employee returns to
provide services to the publicly held cor-
poration in any capacity, including as a
common law employee, a director, or an
independent contractor, then any deduc-
tion for compensation paid to the covered
employee is subject to section 162(m).
V. Privately Held Corporations that
Become Publicly Held
Section 162(m) applies to the deduc-
tion for compensation paid to a covered
employee that is otherwise deductible for
a taxable year of a publicly held corpora-
tion. These proposed regulations provide
that, in the case of a corporation that is a
privately held corporation that becomes a
publicly held corporation, section 162(m)
11
Furthermore, as explained in section II.E of this preamble, the final regulations provide that all compensation paid to a covered employee by more than one member of an affiliated group
is aggregated for purposes of prorating the amount disallowed as a deduction by section 162(m). For purposes of aggregating the total compensation paid by the affiliated group, the final
regulations do not exclude compensation paid for services performed by a covered employee in a capacity other than an employee (for example, as an independent contractor).

January 13, 2020 352 Bulletin No. 2020–3
applies to the deduction for any compen-
sation that is otherwise deductible for the
taxable year ending on or after the date
that the corporation becomes a publicly
held corporation. Furthermore, the pro-
posed regulations provide that a corpora-
tion is considered to become publicly held
on the date that its registration statement
becomes effective either under the Securi-
ties Act or the Exchange Act.
Commenters suggested that these pro-
posed regulations retain the transition re-
lief provided in the final regulations for
privately held corporations that become
publicly held. Commenters reasoned that
corporations that become publicly held
corporations need time to adjust compen-
sation arrangements to take into account
section 162(m). The proposed regulations
do not adopt this suggestion.
As background, in enacting section
162(m) in 1993, Congress excepted per-
formance-based compensation from the
definition of applicable employee remu-
neration and, thus, the section 162(m) de-
duction limitation. Before TCJA, section
162(m)(4)(C) defined performance-based
compensation as “any remuneration pay-
able solely on account of the attainment of
one or more performance goals, but only
if—
(i) the performance goals are deter-
mined by a compensation committee
of the board of directors of the tax-
payer which is comprised solely of 2
or more outside directors,
(ii) the material terms under which
the remuneration is to be paid, includ-
ing the performance goals, are dis-
closed to shareholders and approved
by a majority of the vote in a separate
shareholder vote before the payment
of such compensation, and
(iii) before any payment of such re-
muneration, the compensation com-
mittee referred to in clause (i) certi-
fies that the performance goals and
any other material terms were in fact
satisfied.
These requirements are also set forth in
§§1.162-27(e)(2) through (e)(5). In enact-
ing section 162(m), Congress recognized
that privately held corporations may have
difficulty adopting compensation arrange-
ments that satisfy the requirements for
performance-based compensation. Specif-
ically, Congress was concerned about the
shareholder approval requirement. Con-
gress also recognized that, when a cor-
poration becomes a publicly held corpo-
ration in connection with an initial public
offering (IPO), prospective shareholders
who read the corporation’s prospectus are
aware of the compensation arrangements
adopted prior to the IPO. Accordingly,
Congress thought that shareholders who
read the prospectus and purchase the cor-
poration’s shares are, in effect, approving
the corporation’s compensation arrange-
ments. The 1993 legislative history pro-
vides as follows:
[I]n the case of a privately held com-
pany that becomes publicly held,
the prospectus is subject to the rules
similar to those applicable to public-
ly held companies. Thus, if there has
been disclosure that would satisfy the
rules described above, persons who
buy stock in the publicly held com-
pany will be aware of existing com-
pensation arrangements. No further
shareholder approval is required of
compensation arrangements existing
prior to the time the company became
public unless there is a material mod-
ification of such arrangements.
House Conf. Rpt. 103-213, 588 (1993).
Based on the legislative history, the final
regulations provided transition relief for
corporations that become publicly held.
Section 1.162-27(f)(1) provides that in the
case of a corporation that was not a pub-
licly held corporation and then becomes a
publicly held corporation, section 162(m)
“does not apply to any remuneration
paid pursuant to a compensation plan or
agreement that existed during the period
in which the corporation was not publicly
held.” If a corporation becomes publicly
held in connection with an IPO, then the
relief provided in §1.162-27(f)(1) applies
only to the extent that the prospectus ac-
companying the IPO disclosed informa-
tion concerning the existing compensation
plans or agreements and satisfied all appli-
cable securities laws.
Section 13601(a) of TCJA amended
the definition of applicable employee re-
muneration in section 162(m)(4) to elimi-
nate the exception for performance-based
compensation, which among other things,
made shareholder approval of compensa-
tion arrangements irrelevant with respect
to entitlement to the deduction. Accord-
ingly, these proposed regulations do not
retain the transition relief provided in the
final regulations.
For a discussion of rules applicable to
privately held corporations that previously
were publicly held corporations, see sec-
tion III.E. of this preamble.
VI. Grandfather Rules
A. In General
Section 13601(e) of TCJA generally
provides that TCJA amendments to sec-
tion 162(m) apply to taxable years begin-
ning after December 31, 2017. However,
it further provides that those amendments
do not apply to remuneration that is pro-
vided pursuant to a written binding con-
tract that was in effect on November 2,
2017, and that was not modified in any
material respect on or after such date.
As discussed in Notice 2018-68, the
text of section 13601(e) of the TJCA is
almost identical to the text of pre-TCJA
section 162(m)(4)(D), which provided a
grandfather rule in connection with the
enactment of section 162(m) in 1993. Un-
der that grandfather rule, section 162(m)
did not apply to remuneration payable un-
der a written binding contract that was in
effect on February 17, 1993, and that was
not modified thereafter in any material re-
spect before such remuneration was paid.
Section 1.162-27(h) provides guidance on
the definitions of written binding contract
and material modification for purposes
of applying the original grandfather rule,
and Notice 2018-68 adopted those defini-
tions for purposes of the grandfather rule
in connection with section 13601(e) of
TCJA. The proposed regulations likewise
adopt those definitions. Notice 2018-68
also provided examples illustrating the
use of these definitions, and many of those
examples are incorporated in these pro-
posed regulations. However, to increase
clarity, the proposed regulations replace
some examples from Notice 2018-68 with
other examples. This replacement with
new examples does not reflect a substan-
tive change from the definitions of written
binding contract and material modifica-
tion provided in Notice 2018-68.
Notice 2018-68 clarified that remuner-
ation is payable under a written binding
contract that was in effect on November

Bulletin No. 2020–3 353 January 13, 2020
2, 2017, only to the extent that the cor-
poration is obligated under applicable
law (for example, state contract law) to
pay the remuneration under the contract
if the employee performs services or sat-
isfies the applicable vesting conditions.
Accordingly, the TJCA amendments to
section 162(m) apply to any amount of
remuneration that exceeds the amount of
remuneration that applicable law obligates
the corporation to pay under a written
binding contract that was in effect on No-
vember 2, 2017, if the employee performs
services or satisfies the applicable vesting
conditions.
As an alternative to the grandfather
rules in Notice 2018-68, some commenters
suggested that these proposed regulations
adopt a safe harbor regarding the determi-
nation of whether a contract qualifies as a
written binding contract so that compen-
sation paid pursuant to the contract would
be grandfathered. Under the suggested
safe harbor, any arrangement in effect on
or before November 2, 2017, would be
treated as a written binding contract if an
amount related to the compensation pay-
able under the contract was accrued (or
could have been accrued) as a cost under
Generally Accepted Accounting Princi-
ples (GAAP), regardless of whether the
corporation is obligated to pay the remu-
neration under applicable law.
Although the Treasury Department and
the IRS understand that the application
of the written binding contract standard
may be burdensome in certain cases and
welcome the potential for simplification,
the suggested safe harbor raises several
issues. First, as expressed in the com-
ment, the accrual of a cost is often based
on predictions of whether the amount will
be paid, which may not necessarily reflect
whether the amount must be paid in all
cases. This raises issues of whether costs
identified correlate with the statutory stan-
dard of being paid under a legally binding
contract if, in fact, the employer was not
necessarily bound to pay the amounts of
compensation but rather was likely to pay
them. Second, the suggested safe harbor
is an accounting standard based on finan-
cial statements audited by accountants.
This raises issues of tax administration,
including the potential for the IRS to au-
dit for section 162(m) purposes a corpo-
ration’s “audited” financial statements,
and challenges IRS examiners would have
in applying GAAP principles. For these
reasons, the proposed regulations do not
adopt this suggested safe harbor. Howev-
er, the Treasury Department and the IRS
welcome further comments on whether
the suggested safe harbor standard would
be administrable, including how it would
be implemented with respect to differing
positions on corporate tax returns (such
as use of the standard in Notice 2018-68
and these proposed regulations) that have
already been filed.
B. Compensation Subject to Discretion
Under the definition of written binding
contract in Notice 2018-68 and these pro-
posed regulations, applicable law (such as
state contract law) determines the amount
of compensation that a corporation is obli-
gated to pay pursuant to a written binding
contract in effect on November 2, 2017.
Some commenters suggested that nega-
tive discretion be completely disregarded
in determining the amount of compensa-
tion that a corporation is obligated to pay
pursuant to a written binding contract. The
proposed regulations do not adopt this ap-
proach, because it is contrary to the stat-
utory text and the legislative history. See
House Conf. Rpt. 115-466, 490 (2017).
The Treasury Department and the IRS
are aware, however, that compensation
arrangements may purport to provide the
corporation with a wider scope of nega-
tive discretion than applicable law permits
the corporation to exercise. In that case,
the negative discretion is taken into ac-
count only to the extent the corporation
may exercise the negative discretion un-
der applicable law.
One commenter asked whether an
amount of compensation is grandfathered
if it is paid pursuant to a written binding
contract under which the corporation is
obligated to recover an amount of com-
pensation from the employee if a vesting
condition is later determined not to have
been satisfied. For example, a vesting con-
dition may be based on the achievement of
results reported in the financial statements.
In this example, if a corporation pays a bo-
nus based on the financial statements but
the financial statements are subsequently
restated and demonstrate that the vesting
condition was not, in fact, satisfied, then
the corporation is required to recover a
portion of the bonus from the employee.
If, under applicable law, the employee re-
tains the remaining portion of the bonus
then, pursuant to the grandfather rules in
Notice 2018-68 and these proposed regu-
lations, that remaining portion of the bo-
nus is grandfathered compensation that is
not subject to TCJA amendments. Similar-
ly, if the corporation has discretion to re-
cover compensation (in whole or in part),
only the amount of compensation that the
corporation is obligated to pay under ap-
plicable law that is not subject to potential
recovery is grandfathered. The proposed
regulations include examples illustrating
these principles.
Applicable law may provide a corpo-
ration with contingent discretion to re-
cover compensation. This issue was not
addressed in Notice 2018-68. Under these
proposed regulations, a corporation is
not treated as currently having discretion
merely because it will have discretion to
recover an amount if a condition occurs
subsequent to the vesting and payment
of the compensation and the occurrence
of the condition is objectively outside of
the corporation’s control. For example,
pursuant to a written binding contract in
effect on November 2, 2017, a corporation
may be obligated under applicable law to
pay $500,000 of compensation if the em-
ployee satisfies a vesting condition, but
the corporation may be permitted to re-
cover $300,000 from the employee if the
employee is convicted of a felony within
three calendar years from the date of pay-
ment. If the employee is not convicted of
a felony within three calendar years from
the date of payment, then the $500,000 is
grandfathered. If, however, the employee
is convicted of a felony within three years
after the payment of the $500,000, then
the corporation has discretion whether to
recover the $300,000 from the employee.
Accordingly, if the employee is convicted
of a felony within three calendar years af-
ter the payment, $300,000 of the $500,000
is not grandfathered. This is true regard-
less of whether the corporation exercises
its discretion to recover the $300,000.
Because the corporation may not recov-
er $200,000 of the $500,000 payment in
any event, the $200,000 remains grandfa-
thered regardless of whether the employee
is convicted of a felony.

January 13, 2020 354 Bulletin No. 2020–3
C. Account and Nonaccount Balance
Plans
Notice 2018-68 includes examples
illustrating the application of the grand-
father rule to account balance plans, and
those examples are incorporated into
these proposed regulations. Commenters
requested guidance on the application of
the grandfather rule to nonaccount bal-
ance plans, and some of these commenters
suggested that benefits accruing under a
nonaccount balance plan after November
2, 2017, should be automatically grandfa-
thered. The proposed regulations do not
adopt this approach. Consistent with the
text of section 13601(e) of TCJA provid-
ing the grandfather rule, the amount of
compensation that is grandfathered under
a nonaccount balance plan is the amount
that the corporation is obligated to pay un-
der applicable law on November 2, 2017.
The proposed regulations include exam-
ples illustrating these rules.
Commenters also requested guidance
on determining the amount of compensa-
tion that a corporation is obligated to pay
under applicable law with respect to linked
plan arrangements. In these arrangements,
the amount payable to an employee un-
der a NQDC plan is linked to a qualified
employer plan. For example, a typical ar-
rangement may provide that the amount of
NQDC to be paid to an employee is the ac-
count balance (or an accumulated benefit)
in a NQDC plan reduced by the account
balance in a section 401(k) plan. These
proposed regulations include an example
involving this type of arrangement.
D. Earnings on Grandfathered Amounts
in Account and Nonaccount Balance
Plans
Notice 2018-68 includes an example
illustrating the circumstances in which
earnings credited to account balance
plans after November 2, 2017, are grand-
fathered, as well as an example illustrat-
ing that those earnings are not grandfa-
thered when the corporation retains the
right under applicable law to amend the
plan at any time either to stop or to reduce
future credits (including earnings) to the
account balance. Commenters suggested
that earnings credited after November
2, 2017, on grandfathered amounts in
nonaccount balance plans should also
be grandfathered. The proposed regula-
tions do not adopt the commenters’ sug-
gestion. Instead, consistent with TCJA
and the guidance in Notice 2018-68, the
proposed regulations provide that earn-
ings credited after November 2, 2017, on
grandfathered amounts are grandfathered
only if the corporation is obligated to pay
the earnings under applicable law pursu-
ant to a written binding contract in effect
on November 2, 2017.
Stakeholders asked how §1.409A-3(j)
(4)(ix)(C)(3) affects the determination of
whether earnings credited on a grandfa-
thered amount after November 2, 2017,
are grandfathered if the corporation re-
tains the right under applicable law to ter-
minate the plan at any time in compliance
with section 409A. Section 1.409A-3(j)
(4)(ix)(C)(3) provides that, if a service
recipient terminates a NQDC plan, then
the time and form of payments may be ac-
celerated, but payment may not be made
within 12 months of the date of termina-
tion of the plan. The definition of written
binding contract in Notice 2018-68 and
these proposed regulations provides that
earnings credited after November 2, 2017,
on grandfathered amounts are grandfa-
thered only if the corporation is obligated
to pay the earnings under applicable law
pursuant to a written binding contract in
effect on November 2, 2017. Accordingly,
if, under applicable law, the corporation is
obligated to continue to credit earnings for
amounts under the NQDC plan during the
12 months after terminating the plan, then
the earnings would be grandfathered.
12
In
that case, the grandfathered amount would
be the amount that the corporation is ob-
ligated to pay under applicable law as of
November 2, 2017, plus the 12 months of
earnings that the corporation is obligated
to credit under applicable law. Howev-
er, any additional amounts that become
payable under the plan after November
2, 2017, and earnings on those amounts
would not be grandfathered.
Applicable law and the terms of the
plan determine the amount of earnings
that the corporation is obligated to cred-
it for amounts under the plan during the
12 months after plan termination. Thus,
for example, with respect to a nonaccount
balance plan, under applicable law, the
amount of earnings that the corporation
is obligated to credit might be limited to
the difference between the present value
of the benefit under the plan as of Novem-
ber 2, 2017, and any increase in present
value due solely to passage of time (12
months). Furthermore, with respect to a
nonaccount balance plan that provides
for a formula amount (for example, the
amount payable under the plan is based on
the participant’s final salary and years of
service), the amount of earnings that the
corporation is obligated to credit under
applicable law might be limited to a rea-
sonable rate of interest to reflect the time
value of money during the passage of time
(12 months) applied to the benefit under
the plan as of November 2, 2017 (and not
reflecting any additional salary increase
or years of service accumulated after No-
vember 2, 2017).
E. Severance Agreements
Commenters asked about the appli-
cation of the grandfather rule in Notice
2018-68 to compensation payable pur-
suant to a severance agreement that is a
written binding contract and is in effect
on November 2, 2017. Severance payable
under such a contract is grandfathered
only if the amount of severance is based
on compensation elements the employ-
er is obligated to pay under the contract.
For example, if the amount of severance
is based on final base salary, the severance
is grandfathered only if the corporation is
obligated to pay both the base salary and
the severance under applicable law pursu-
ant to a written binding contract in effect
on November 2, 2017. For this purpose, a
corporation may be obligated to pay sev-
erance under a written binding contract as
12
Section 1.409A-3(j)(4)(ix)(C) provides that if a service recipient terminates a NQDC plan (as defined in §1.409A-1(c)) for one participant, then it must terminate the NQDC plan for all par-
ticipants. Given this requirement, a corporation might refrain from terminating a NQDC plan and continue to credit earnings on a grandfathered amount after November 2, 2017. If a corpora-
tion is permitted under applicable law to terminate the NQDC plan, then only the amount it would be obligated to pay under applicable law if it did terminate the NQDC plan is grandfathered.

Bulletin No. 2020–3 355 January 13, 2020
of November 2, 2017, even if the employ-
ee remains employed as of November 2,
2017, but only with respect to the amount
the corporation would have been required
to pay if the employee had been terminat-
ed as of November 2, 2017.
Commenters also asked whether all or
a portion of severance is grandfathered
if a portion of the amount is based on a
variable component, such as a discretion-
ary or performance bonus. The examples
in these proposed regulations illustrate
that each component of the severance for-
mula is analyzed separately to determine
the amount of severance that is grandfa-
thered. For example, the amount of sev-
erance may be equal to two times the sum
of: (1) Final base salary and (2) any bonus
paid within 12 months prior to separation
from service. In this example, the amount
of severance is based on two components,
base salary and bonus. Therefore, the en-
tire amount of severance (based on both
components) is grandfathered only if,
under applicable law, the corporation is
obligated to pay both portions, the base
salary and the bonus pursuant to a written
binding contract in effect on November 2,
2017.
F. Material Modification
1. In General
These proposed regulations adopt the
definition of material modification in
Notice 2018-68. Under that definition,
a material modification occurs when
the contract is amended to increase the
amount of compensation payable to the
employee. Furthermore, if a written bind-
ing contract is materially modified, it is
treated as a new contract entered into as
of the date of the material modification.
Accordingly, amounts received by an
employee under the contract before a
material modification are not affected,
but amounts received subsequent to the
material modification are treated as paid
pursuant to a new contract, rather than as
paid pursuant to a written binding con-
tract in effect on November 2, 2017. The
adoption of a supplemental contract or
agreement that provides for increased
compensation, or the payment of addi-
tional compensation, is a material mod-
ification of a written binding contract if
the facts and circumstances demonstrate
that the additional compensation is paid
on the basis of substantially the same ele-
ments or conditions as the compensation
that is otherwise paid pursuant to the writ-
ten binding contract in effect on Novem-
ber 2, 2017. However, a material modifi-
cation of a written binding contract does
not include a supplemental payment that
is equal to or less than a reasonable cost-
of-living increase over the payment made
in the preceding year under that written
binding contract. In that case, only the
deduction for the reasonable cost-of-liv-
ing increase is subject to section 162(m)
as amended by TCJA. In addition, the
failure, in whole or in part, to exercise
negative discretion under a contract does
not result in the material modification of
that contract. Finally, if amounts are paid
to an employee from more than one writ-
ten binding contract (or if a single writ-
ten document consists of several written
binding contracts), then a material mod-
ification of one written binding contract
does not automatically result in a materi-
al modification of the other contracts un-
less the material modification affects the
amounts payable under those contracts.
2. Earnings on Grandfathered Amounts
that are Subsequently Deferred
Notice 2018-68 provides rules for de-
termining whether a material modification
occurs if a written binding contract in ef-
fect on November 2, 2017, is subsequent-
ly modified to defer the payment of com-
pensation. Under those rules, which are
adopted in these proposed regulations, if
the contract is modified to defer the pay-
ment of compensation, any compensation
paid or to be paid that is in excess of the
amount that was originally payable to the
employee under the contract will not be
treated as resulting in a material modifi-
cation if the additional amount is based
on either a reasonable rate of interest or a
predetermined actual investment (whether
or not assets associated with the amount
originally owed are actually invested
therein) such that the amount payable
by the employer at the later date will be
based on the actual rate of return on the
predetermined actual investment (includ-
ing any decrease, as well as any increase,
in the value of the investment). The pro-
posed regulations provide that a prede-
termined actual investment means a pre-
determined actual investment as defined
in §31.3121(v)(2)-1(d)(2)(i)(B), and also
include examples illustrating these rules
relating to the treatment of earnings.
However, even though the payment
of earnings will not result in the contract
being materially modified, this generally
does not mean that the earnings are treated
as grandfathered. For situations in which
an employee defers an amount of grand-
fathered compensation after November 2,
2017, the earnings on the deferred amount
are not grandfathered if, as of November
2, 2017, the corporation was not obligated
under the terms of the contract to provide
the deferral election and to pay the earn-
ings on the deferred amount under appli-
cable law. Pursuant to the definition of
written binding contract in Notice 2018-
68 and these proposed regulations, these
earnings are not grandfathered because, as
of November 2, 2017, the corporation was
not obligated to pay them under applica-
ble law.
3. Material Modification Prior to Payment
of a Grandfathered Amount
Commenters asked whether a grand-
fathered amount of compensation is no
longer considered grandfathered if the
underlying compensation arrangement
is materially modified after Novem-
ber 2, 2017, but before the payment of
the grandfathered amount. Pursuant to
the definition of material modification
in Notice 2018-68 and these proposed
regulations, if the contract is materially
modified after November 2, 2017, but
before the payment of a grandfathered
amount of compensation, then the com-
pensation is treated as paid pursuant to
the new contract and is no longer grand-
fathered. For example, if, under applica-
ble law, a corporation is obligated to pay
$100,000 on December 31, 2020, under
a written binding contract in effect on
November 2, 2017, then the $100,000 is
grandfathered. If, on January 1, 2019, the
contract is materially modified, then the
$100,000 is treated as paid pursuant to a
new contract and is not grandfathered.

January 13, 2020 356 Bulletin No. 2020–3
4. Acceleration of Payment or Vesting
Under the definition of material mod-
ification in Notice 2018-68 and these
proposed regulations, a modification of a
written binding contract that accelerates
the payment of compensation is a material
modification unless the amount of com-
pensation paid is discounted to reasonably
reflect the time value of money. For ex-
ample, if a corporation is obligated under
applicable law to pay compensation on
December 31, 2020, pursuant to a written
binding contract in effect on November 2,
2017, then the compensation is grandfa-
thered. If the corporation pays the entire
amount of compensation on December 31,
2019 without a discount to reasonably re-
flect the time of value of money, then the
entire amount of compensation is treated
as paid pursuant to a new contract and
is no longer grandfathered. Furthermore,
any subsequent payment made pursuant to
the contract is not grandfathered because
the contract itself was materially modified
when the prior payment was accelerated
without a discount to reasonably reflect
the time value of money.
Commenters asked whether accelerat-
ing the payment of compensation attribut-
able to equity-based compensation is con-
sidered a material modification when the
payment is subject to a substantial risk of
forfeiture. For example, an option may be
subject to a substantial risk of forfeiture if,
on the date of grant, the terms of the option
provide that an employee may exercise
the option only after performing services
for three years after the date of grant. In
this example, if the terms of the option are
subsequently modified to require perfor-
mance of services for only two years, then
the modification results in the lapse of a
substantial risk of forfeiture. One might
consider this a material modification be-
cause the employee may exercise the op-
tion and receive compensation attributable
to the exercise earlier than provided in the
terms of the option on the date of grant.
However, commenters suggested that ac-
celerating vesting of equity-based com-
pensation should not be a material modi-
fication because the acceleration does not
provide for an increase in the amount of
compensation received. The commenters
reasoned that the acceleration of vesting
of an equity award for which the amount
of compensation is always variable is un-
like the acceleration of the payment of a
fixed cash award in which the acceleration
may always be considered an increase in
compensation due to the time value of
money. To support their recommendation,
commenters pointed out that, with respect
to incentive stock options, section 424(h)
(3)(C) and §1.424-1(e)(4)(ii) provide that
acceleration of vesting of an incentive
stock option is not a modification.
These proposed regulations adopt the
commenters’ suggestion. Specifically,
these proposed regulations provide that
for compensation received pursuant to the
substantial vesting of restricted property,
or the exercise of a stock option or stock
appreciation right that do not provide for
a deferral of compensation (as defined in
§1.409A-1(b)(5)(i) and (ii)), a modifica-
tion of a written binding contract in effect
on November 2, 2017, that results in a
lapse of the substantial risk of forfeiture
(as defined §1.83-3(c)) is not considered
a material modification. Likewise, with
respect to other compensation arrange-
ments, if an amount of compensation pay-
able under a written binding contract in
effect on November 2, 2017, is subject to
a substantial risk of forfeiture (as defined
in §1.409A-1(d)), then a modification of
the contract that results in a lapse of the
substantial risk of forfeiture is not consid-
ered a material modification. Thus, for all
forms of compensation, a modification to
a written binding contract that accelerates
vesting will not be considered a material
modification.
The Treasury Department and the IRS
considered alternatives to the comment-
ers’ suggestion. For example, the Treasury
Department and the IRS considered an
approach based on the rules under section
280G. Under those rules, an acceleration
of vesting can give rise to an excess para-
chute payment under section 280G even
if the timing of the payment is not accel-
erated. See §1.280G-1, Q&A-24. In other
words, the rules under section 280G are
based on the principle that there is inde-
pendent value attributable to the acceler-
ation of vesting, even if the timing of the
payment is unchanged. Given the limited
scope of the section 162(m) grandfather-
ing rule and its diminishing applicability
over time, the Treasury Department and
the IRS have determined that it is not nec-
essary to apply that principle in this con-
text.
G. Ordering Rule for Payments
Consisting of Grandfathered and Non-
Grandfathered Amounts
Some NQDC arrangements provide
for a series of payments instead of a lump
sum. For a NQDC arrangement that is a
written binding contract entered into prior
to November 2, 2017, only a portion of the
amounts payable under the arrangement
might be grandfathered depending on the
terms of the arrangement and applicable
law. To identify the grandfathered amount
when payment under the arrangement is
made in a series of payments, the pro-
posed regulations provide that the grand-
fathered amount is allocated to the first
otherwise deductible payment paid un-
der the arrangement. If the grandfathered
amount exceeds the payment, then the
excess is allocated to the next otherwise
deductible payment paid under the ar-
rangement. This process is repeated until
the entire grandfathered amount has been
paid. For example, assume that a NQDC
arrangement provides for an annual pay-
ment of $100,000 for three years, and
only $120,000 is grandfathered. Pursu-
ant to the proposed regulations, the entire
$100,000 paid in the first year is grandfa-
thered. In the second year, only $20,000
of the $100,000 payment is grandfathered;
the remaining $80,000 paid in the second
year is not grandfathered. In the third year,
none of the $100,000 payment is grandfa-
thered.
VII. Coordination with Section 409A
Section 409A addresses NQDC ar-
rangements and sets forth certain require-
ments that must be met to avoid current
income inclusion and certain additional
income tax. NQDC arrangements must
designate a time and form of payment,
among other requirements, to comply with
section 409A. Pursuant to §1.409A-2(b)
(7)(i), a payment may be delayed past the
designated payment date to the extent that
the service recipient reasonably antici-
pates that, if the payment were made as
scheduled, the service recipient’s deduc-
tion with respect to such payment would
not be permitted due to the application of

Bulletin No. 2020–3 357 January 13, 2020
section 162(m).
13
Generally, a payment
delayed in accordance with §1.409A-2(b)
(7)(i) must be paid no later than the ser-
vice provider’s first taxable year in which
the deduction of such payment will not
be barred by the application of section
162(m).
If any scheduled payment to a ser-
vice provider in a service recipient’s tax-
able year is delayed in accordance with
§1.409A-2(b)(7)(i), then the delay in pay-
ment is treated as a subsequent deferral
election unless all scheduled payments to
that service provider that could be delayed
in accordance with §1.409A-2(b)(7)(i)
are also delayed.
14
A subsequent deferral
election will violate section 409A if the
election fails to satisfy the requirements of
section 409A(a)(4)(C).
15
A similar rule un-
der §1.409A-1(b)(4)(ii) permits delayed
payments of compensation that otherwise
qualifies as a short-term deferral under
§1.409A-1(b)(4)(i) (commonly referred to
as the short-term deferral exception).
Before TCJA, an individual who was
a covered employee for one taxable year
would not necessarily remain a covered
employee for subsequent taxable years,
and would not be a covered employee
after separation from service. Accord-
ingly, parties to NQDC arrangements
anticipated that in these cases, pursuant
to §§1.409A-1(b)(4)(ii) and 1.409A-2(b)
(7)(i), the corporation would be able to
make the payment when the individu-
al separated from service (if not earlier),
when the individual would no longer be a
covered employee and the deduction for
the payment would no longer be restricted
due to the application of section 162(m).
Because TCJA amendments to the defini-
tion of covered employee fundamentally
alter the premise of §§1.409A-1(b)(4)
(ii) and 1.409A-2(b)(7)(i), commenters
asked whether a service recipient may
delay the scheduled payment of grand-
fathered amounts in accordance with
§§1.409A-1(b)(4)(ii) and 1.409A-2(b)
(7)(i), without delaying the payment of
non-grandfathered amounts, in circum-
stances in which the service recipient has
discretion to delay the payment. Com-
menters stated that the service provider
may not want the non-grandfathered pay-
ments delayed and that the corporation
would be willing to pay those payments
under the original schedule since a delay
in many cases would not result in the cor-
poration being able to deduct the payment.
The Treasury Department and the IRS
have concluded that the rules should be
modified to accommodate this change.
Consequently, in circumstances in which
the service recipient has discretion to delay
the payment, a service recipient may delay
the scheduled payment of grandfathered
amounts in accordance with §§1.409A-1(b)
(4)(ii) and 1.409A-2(b)(7)(i), without de-
laying the payment of non-grandfathered
amounts, and the delay of the grandfathered
amounts will not be treated as a subsequent
deferral election. As discussed in section
VI of this preamble, the amendments made
to section 162(m) by TCJA do not apply to
grandfathered amounts. Therefore, the de-
duction for amounts grandfathered under
the amended section 162(m) is not subject
to section 162(m) when paid to a former
covered employee who separated from ser-
vice. Thus, the payment of these grandfa-
thered amounts may be delayed consistent
with §§1.409A-1(b)(4)(ii) and 1.409A-2(b)
(7)(i). The Treasury Department and the
IRS intend to incorporate these modifi-
cations into the regulations under section
409A, and taxpayers may rely on the guid-
ance in this paragraph of the preamble for
any taxable year beginning after December
31, 2017, until the issuance of proposed
regulations under section 409A incorporat-
ing these modifications and permitting tax-
payers to rely on such proposed regulations
under section 409A.
Even though §§1.409A-1(b)(4)(ii) and
1.409A-2(b)(7)(i) provide that the service
recipient has discretion to delay a payment,
and that the discretion is not required to
be set forth in the written plan, the Trea-
sury Department and the IRS understand
that compensation arrangements in effect
on November 2, 2017, may explicitly re-
quire the service recipient to delay a pay-
ment if the service recipient reasonably
believes the deduction with respect to the
payment will not be permitted under sec-
tion 162(m). Commenters pointed out that
with respect to a service provider who is
a covered employee, non-grandfathered
amounts may require the passage of a sig-
nificant period of time before a payment
of the entire amount would be deductible,
and may possibly never become deduct-
ible if the service provider dies and the
payment (or remaining amount due) is
payable at death. Commenters requested
that relief be provided so that compen-
sation arrangements may be amended to
no longer require the service recipient to
delay a payment that the service recipient
reasonably believes will not be deductible
under section 162(m) without resulting in a
failure to meet the requirements of section
409A. The Treasury Department and the
IRS have determined that this type of relief
is appropriate given the impact of TCJA
amendments on application of the rules in
§§1.409A-1(b)(4)(ii) and 1.409A-2(b)(7)
(i). Accordingly, if a NQDC arrangement
is amended to remove the provision requir-
ing the corporation to delay a payment if
the corporation reasonably anticipates at
the time of the scheduled payment that the
deduction would not be permitted under
section 162(m), then the amendment will
not result in an impermissible acceleration
of payment under §1.409A-3(j), and will
not be considered a material modification
for purposes of the grandfather rule under
the amended section 162(m). The plan
amendment must be made no later than
December 31, 2020. If, pursuant to the
amended plan, the corporation would have
been required to make a payment (or pay-
ments) prior to December 31, 2020, then
the payment (or payments) must be made
no later than December 31, 2020. The
Treasury Department and the IRS intend
13
In general, if a payment is delayed pursuant to §1.409A-2(b)(7)(i), then the payment must be made either during the service provider’s first taxable year in which the service recipient rea-
sonably anticipates, or reasonably should anticipate, that the payment will not fail to be deductible because of section 162(m), if the payment is made during such year or, if later, during the
period beginning on the day the service provider separates from service and ending on the later of the last day of the taxable year of the service recipient in which the separation from service
occurs or the 15
th
day of the third month following the separation from service.
14
See §1.409A-2(b)(7) for additional requirements for the service recipient to delay a payment so that the delay is not treated as a subsequent deferral election, such as treating all payments
to similarly situated service providers on a reasonably consistent basis.
15
Pursuant to section 409A(a)(4)(C), a subsequent deferral election (i) must be made at least 12 months before the prior scheduled payment date, (ii) cannot be effective for at least 12 months
after the date of the subsequent election, and (iii) must delay the payment at least 5 years from the original scheduled payment date.

January 13, 2020 358 Bulletin No. 2020–3
to incorporate these modifications into the
regulations under section 409A, and tax-
payers may rely on the guidance in this
paragraph of the preamble for any taxable
year beginning after December 31, 2017,
until the issuance of proposed regulations
under section 409A incorporating these
modifications and permitting taxpayers to
rely on such proposed regulations under
section 409A.
Amounts payable under NQDC ar-
rangements may consist of both grand-
fathered amounts and non-grandfathered
amounts. With respect to these arrange-
ments, employers may apply the guidance
provided in the previous two paragraphs
of this preamble. Accordingly, the plan
may be amended to remove the provi-
sion requiring the corporation to delay the
payment of non-grandfathered amounts if
it is anticipated that the corporation’s de-
duction with respect to the payments will
not be permitted under section 162(m);
notwithstanding such an amendment, the
corporation may continue to delay pay-
ment of the grandfathered amounts in ac-
cordance with §§1.409A-1(b)(4)(ii) and
1.409A-2(b)(7)(i).
VIII. Proposed Applicability Dates
A. General Applicability Date
Generally, these regulations are pro-
posed to apply to compensation that is
otherwise deductible for taxable years
beginning on or after [DATE OF PUBLI-
CATION OF THE FINAL RULE IN THE
FEDERAL REGISTER]. Taxpayers may
choose to rely on these proposed regu-
lations until the applicability date of the
final regulations, provided that taxpayers
apply these proposed regulations consis-
tently and in their entirety. Because these
proposed regulations do not broaden the
definition of “covered employee” as pro-
vided in Notice 2018-68 and do not re-
strict the application of the definition of
“written binding contract” as provided in
Notice 2018-68, except as provided by the
special applicability dates described in
section VIII.B of this preamble, taxpay-
ers may no longer rely on Notice 2018-68
for taxable years ending on or after De-
cember 20, 2019, but instead may rely on
these proposed regulations for those tax-
able years.
B. Special Applicability Dates
These regulations are proposed to in-
clude special applicability dates covering
certain aspects of the following provisions
of the proposed regulations:
1. Definition of covered employee.
2. Definition of predecessor of a public-
ly held corporation.
3. Definition of compensation.
4. Application of section 162(m) to a
deduction for compensation other-
wise deductible for a taxable year
ending on or after a privately held
corporation becomes a publicly held
corporation.
5. Definitions of written binding con-
tract and material modification.
First, the definition of covered employ-
ee is proposed to apply to taxable years
ending on or after September 10, 2018,
the publication date of Notice 2018-68,
which provided guidance on the definition
of covered employee. Notice 2018-68 also
provided that the Treasury Department
and the IRS anticipate that the guidance
in the notice will be incorporated in future
regulations that, with respect to the issues
addressed in the notice, will apply to any
taxable year ending on or after September
10, 2018. Because these proposed regula-
tions adopt the definition of covered em-
ployee in Notice 2018-68, the guidance
on the definition of covered employee in
these proposed regulations is proposed to
apply to taxable years ending on or after
September 10, 2018. The Treasury De-
partment and the IRS recognize, howev-
er, that the rules related to a corporation
whose fiscal year and taxable year do not
end on the same date were not discussed
in Notice 2018-68. Accordingly, the pro-
posed regulations provide that, for a cor-
poration whose fiscal and taxable years do
not end on the same date, the rule requir-
ing the determination of the three most
highly compensated executive officers to
be made pursuant to the rules under the
Exchange Act applies to taxable years be-
ginning on or after December 20, 2019.
Second, the provisions defining a pre-
decessor corporation of a publicly held
corporation are proposed to apply to corpo-
rate transactions for which all events nec-
essary for the transaction occur on or after
[DATE OF PUBLICATION OF THE FI-
NAL RULE IN THE FEDERAL REGIS-
TER]. With respect to the rules that apply
to corporations that change from publicly
held to privately held status or visa-ver-
sa, the definition of the term predecessor
corporation of a publicly held corporation
applies to a privately held corporation that
again becomes a publicly held corporation
on or after [DATE OF PUBLICATION
OF THE FINAL RULE IN THE FEDER-
AL REGISTER]. Accordingly, depending
on the timing of any earlier transition from
a publicly held corporation to a privately
held corporation, the publicly held corpo-
ration that existed before the issuance of
final regulations may be treated as a pre-
decessor of a privately held corporation
that becomes a publicly held corporation
after the date of issuance of final regula-
tions. Until the applicability date of the fi-
nal regulations, taxpayers may rely on the
definition of predecessor of a publicly held
corporation in these proposed regulations
or a reasonable good faith interpretation
of the term “predecessor.” The Treasury
Department and the IRS have determined,
however, that excluding the following
target corporations from the definition of
the term “predecessor” in the following
situations is not a reasonable good faith
interpretation of the statute: (1) A publicly
held target corporation the stock or assets
of which are acquired by another publicly
held corporation in a transaction to which
section 381(a) applies, and (2) a public-
ly held target corporation, at least 80% of
the total voting power, and at least 80%
of the total value, of the stock of which is
acquired by a publicly held acquiring cor-
poration (including an affiliated group).
No inference is intended regarding wheth-
er the treatment of a target corporation as
other than a “predecessor” in any other
situation is a reasonable good faith inter-
pretation of the statute.
Third, as discussed in section IV.C. of
this preamble, the rule that the definition
of compensation in proposed §1.162-33(c)
(3) includes an amount equal to the pub-
licly held corporation’s distributive share
of a partnership’s deduction for compen-
sation expense attributable to the compen-
sation paid by the partnership is proposed
to apply to any deduction for compensa-
tion that is otherwise allowable for a tax-
able year ending on or after December
20, 2019. The Treasury Department and
the IRS are aware that arrangements cur-

Bulletin No. 2020–3 359 January 13, 2020
rently exist that reflect an understanding
that the allocated deduction would not be
limited by section 162(m). Accordingly,
this aspect of the definition of compen-
sation would not apply to compensation
paid pursuant to a written binding contract
in effect on December 20, 2019 that is not
materially modified after that date.
Fourth, the guidance on the applicabil-
ity of section 162(m)(1) to the deduction
for any compensation otherwise deduct-
ible for a taxable year ending on or after
the date when a corporation becomes a
publicly held corporation is proposed to
apply to corporations that become pub-
licly held after December 20, 2019. A
corporation that was not a publicly held
corporation and then becomes a publicly
held corporation on or before December
20, 2019 may rely on the transition relief
as provided in §1.162-27(f)(1) until the
earliest of the events provided in §1.162-
27(f)(2).
Fifth, the definitions of written bind-
ing contract and material modification are
proposed to apply to taxable years ending
on or after September 10, 2018, the pub-
lication date of Notice 2018-68, which
provided guidance defining these terms.
Notice 2018-68 also provided that the
Treasury Department and IRS anticipat-
ed that the guidance in the notice would
be incorporated in future regulations that,
with respect to the issues addressed in the
notice, would apply to any taxable year
ending on or after September 10, 2018.
Because these proposed regulations adopt
the definitions of the terms “written bind-
ing contract” and “material modification”
that were included in Notice 2018-68, the
guidance on these definitions in these pro-
posed regulations is proposed to apply to
taxable years ending on or after Septem-
ber 10, 2018.
Special Analyses
This regulation is not subject to review
under section 6(b) of Executive Order
12866 pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Department of the Treasury and the Of-
fice of Management and Budget regard-
ing review of tax regulations. Pursuant
to the Regulatory Flexibility Act (RFA)
(5 U.S.C. chapter 6), it is hereby certified
that these proposed regulations would not
have a significant economic impact on a
substantial number of small entities. This
certification is based on the fact that sec-
tion 162(m)(1) applies only to publicly
held corporations (for example, corpo-
rations that list securities on a national
securities exchange and are rarely small
entities) and only impacts those publicly
held corporations that compensate certain
executive officers in excess of $1 million
in a taxable year. Notwithstanding this
certification that the proposed regulations
would not have a significant economic
impact on a substantial number of small
entities, the Treasury Department and the
IRS invite comments on the impacts these
proposed regulations may have on small
entities. Pursuant to section 7805(f) of the
Code, this proposed rule has been submit-
ted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small entities.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the “ADDRESS-
ES” heading. Treasury and the IRS request
comments on all aspects of the proposed
rules. All comments will be available at
www.regulations.gov or upon request.
A public hearing has been scheduled
for March 9, 2020, beginning at 10 a.m.
in the Auditorium of the Internal Revenue
Building, 1111 Constitution Avenue, NW.,
Washington, DC. Due to building security
procedures, visitors must enter at the Con-
stitution Avenue entrance. In addition, all
visitors must present photo identification
to enter the building. Because of access
restrictions, visitors will not be admitted
beyond the immediate entrance area more
than 30 minutes before the hearing starts.
For more information about having your
name placed on the building access list to
attend the hearing, see the “FOR FUR-
THER INFORMATION CONTACT”
section of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit an outline of the topics to be dis-
cussed and the time to be devoted to each
topic by February 18, 2020. Submit a
signed paper or electronic copy of the out-
line as prescribed in this preamble under
the “ADDRESSES” heading. A period of
10 minutes will be allotted to each person
for making comments. An agenda show-
ing the scheduling of the speakers will be
prepared after the deadline for receiving
outlines has passed. Copies of the agen-
da will be available free of charge at the
hearing.
Drafting Information
The principal author of these regula-
tions is Ilya Enkishev, Office of Associ-
ate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment
Taxes). However, other personnel from
the Treasury Department and the IRS par-
ticipated in the development of these reg-
ulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
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 1.162-27 is amended by
revising paragraphs (a) and (j)(1) to read
as follows:
§1.162-27 Certain employee remuner-
ation in excess of $1,000,000 not deduct-
ible for taxable years beginning on or af-
ter January 1, 1994, and for taxable years
beginning prior to January 1, 2018.
(a) Scope. This section provides rules
for the application of the $1 million de-
duction limitation under section 162(m)
(1) for taxable years beginning on or af-
ter January 1, 1994, and beginning prior
to January 1, 2018, and, as provided in
paragraph (j) of this section, for taxable
years beginning after December 31, 2017.
For rules concerning the applicability of
section 162(m)(1) to taxable years be-
ginning after December 31, 2017, see

January 13, 2020 360 Bulletin No. 2020–3
§1.162-33. Paragraph (b) of this section
provides the general rule limiting deduc-
tions under section 162(m)(1). Paragraph
(c) of this section provides definitions of
generally applicable terms. Paragraph (d)
of this section provides an exception from
the deduction limitation for compensation
payable on a commission basis. Paragraph
(e) of this section provides an exception
for qualified performance-based compen-
sation. Paragraphs (f) and (g) of this sec-
tion provide special rules for corporations
that become publicly held corporations
and payments that are subject to section
280G, respectively. Paragraph (h) of this
section provides transition rules, includ-
ing the rules for contracts that are grand-
fathered and not subject to section 162(m)
(1). Paragraph (j) of this section contains
the effective date provisions, which also
specify when these rules apply to the de-
duction for compensation otherwise de-
ductible in a taxable year beginning after
December 31, 2017. For rules concern-
ing the deductibility of compensation for
services that are not covered by section
162(m)(1) and this section, see section
162(a)(1) and §1.162-7. This section is not
determinative as to whether compensation
meets the requirements of section 162(a)
(1). For rules concerning the deduction
limitation under section 162(m)(6) appli-
cable to certain health insurance provid-
ers, see §1.162-31.
*****
(j) Effective date—(1) In general. Sec-
tion 162(m) and this section apply to the
deduction for compensation that is other-
wise deductible by the corporation in tax-
able years beginning on or after January
1, 1994, and beginning prior to January
1, 2018. Section 162(m) and this section
also apply to compensation that is a grand-
fathered amount (as defined in §1.162-
33(g)) at the time it is paid to the covered
employee. For examples of the applica-
tion of the rules of this section to grandfa-
thered amounts paid during taxable years
beginning after December 31, 2017, see
§1.162-33(g).
*****
Par. 3. Section 1.162-33 is added to
read as follows:
§1.162-33 Certain employee remuner-
ation in excess of $1,000,000 not deduct-
ible for taxable years beginning after De-
cember 31, 2017.
(a) Scope. This section provides rules
for the application of the $1 million de-
duction limitation under section 162(m)
(1) for taxable years beginning after De-
cember 31, 2017. For rules concerning the
applicability of section 162(m)(1) to tax-
able years beginning on or after January
1, 1994, and prior to January 1, 2018, see
§1.162-27. Paragraph (b) of this section
provides the general rule limiting deduc-
tions under section 162(m)(1). Paragraph
(c) of this section provides definitions of
generally applicable terms. Paragraph (d)
of this section provides rules for determin-
ing when a corporation becomes a public-
ly held corporation. Paragraph (e) of this
section provides rules for payments that
are subject to section 280G. Paragraph (f)
of this section provides a special rule for
coordination with section 4985. Paragraph
(g) of this section provides transition
rules, including the rules for contracts that
are grandfathered. Paragraph (h) of this
section sets forth the effective date provi-
sions. For rules concerning the deductibil-
ity of compensation for services that are
not covered by section 162(m)(1) and this
section, see section 162(a)(1) and §1.162-
7. This section is not determinative as to
whether compensation meets the require-
ments of section 162(a)(1). For rules con-
cerning the deduction limitation under
section 162(m)(6) applicable to certain
health insurance providers, see §1.162-31.
(b) Limitation on deduction. Section
162(m)(1) precludes a deduction under
chapter 1 of the Internal Revenue Code
by any publicly held corporation for com-
pensation paid to any covered employee
to the extent that the compensation for the
taxable year exceeds $1,000,000.
(c) Definitions—(1) Publicly held cor-
poration—(i) General rule. A publicly
held corporation means any corporation
that issues securities required to be reg-
istered under section 12 of the Exchange
Act or that is required to file reports under
section 15(d) of the Exchange Act. In ad-
dition, a publicly held corporation means
any S corporation (as defined in section
1361(a)(1)) that issues securities that are
required to be registered under section
12(b) of the Exchange Act, or that is re-
quired to file reports under section 15(d)
of the Exchange Act. For purposes of this
section, whether a corporation is publicly
held is determined based solely on wheth-
er, as of the last day of its taxable year,
the securities issued by the corporation are
required to be registered under section 12
of the Exchange Act or the corporation is
required to file reports under section 15(d)
of the Exchange Act. Whether registra-
tion under the Exchange Act is required
by rules other than those of the Exchange
Act is irrelevant to this determination. A
publicly traded partnership that is treated
as a corporation under section 7704 (or
otherwise) is a publicly held corporation
if, as of the last day of its taxable year, its
securities are required to be registered un-
der section 12 of the Exchange Act or it is
required to file reports under section 15(d)
of the Exchange Act.
(ii) Affiliated groups—(A) In gener-
al. A publicly held corporation includes
an affiliated group of corporations, as de-
fined in section 1504 (determined without
regard to section 1504(b)) that includes
one or more publicly held corporations
(as defined in paragraph (c)(1)(i) of this
section). In the case of an affiliated group
that includes two or more publicly held
corporations as defined in paragraph (c)
(1)(i) of this section, each member of the
affiliated group that is a publicly held cor-
poration as defined in paragraph (c)(1)
(i) of this section is separately subject to
this section, and the affiliated group as a
whole is subject to this section. Thus, for
example, assume that a publicly held cor-
poration (as defined in paragraph (c)(1)(i)
of this section) is a wholly-owned subsid-
iary of another publicly held corporation
(as defined in paragraph (c)(1)(i) of this
section), which is a wholly-owned subsid-
iary of a privately held corporation. In this
case, the two subsidiaries are separately
subject to this section, and all three corpo-
rations are members of an affiliated group
that is subject to this section. Furthermore,
each subsidiary has its own set of covered
employees as defined in paragraphs (c)(2)
(i) through (iv) of this section (although it
is possible that the same individual may
be a covered employee of both subsidiar-
ies).
(B) Proration of amount disallowed as
a deduction. If, in a taxable year, a cov-
ered employee (as defined in paragraphs
(c)(2)(i) through (iv) of this section) of
one member of an affiliated group is paid
compensation by more than one mem-
ber of the affiliated group, compensation

Bulletin No. 2020–3 361 January 13, 2020
paid by each member of the affiliated
group is aggregated with compensation
paid to the covered employee by all oth-
er members of the affiliated group (ex-
cluding compensation paid by any other
publicly held corporation in the affiliated
group, as defined in paragraph (c)(1)(i)
of this section, of which the individual
is also a covered employee as defined in
paragraphs (c)(2)(i) through (iv) of this
section). In the event that, in a taxable
year, a covered employee (as defined in
paragraphs (c)(2)(i) through (iv) of this
section) is paid compensation by more
than one publicly held corporation in
an affiliated group and is also a covered
employee of more than one publicly held
payor corporation (as defined in para-
graph (c)(1)(i) of this section) in the af-
filiated group, the amount disallowed as
a deduction is determined separately with
respect to each publicly held corporation
of which the individual is a covered em-
ployee. Any amount disallowed as a de-
duction by this section must be prorated
among the payor corporations (excluding
any other publicly held payor corporation
of which the individual is also a covered
employee) in proportion to the amount
of compensation paid to the covered em-
ployee (as defined in paragraphs (c)(2)
(i) through (iv) of this section) by each
such corporation in the taxable year. This
process is repeated for each publicly held
payor corporation of which the individu-
al is a covered employee.
(iii) Disregarded entities. For purposes
of paragraph (c)(1) of this section, a pub-
licly held corporation includes a corpora-
tion that owns an entity that is disregarded
as an entity separate from its owner within
the meaning of §301.7701-2(c)(2)(i) of
this chapter if the disregarded entity issues
securities required to be registered under
section 12(b) of the Exchange Act, or is
required to file reports under section 15(d)
of the Exchange Act.
(iv) Qualified subchapter S subsidiar-
ies. For purposes of paragraph (c)(1) of
this section, a publicly held corporation
includes an S corporation that owns a
qualified subchapter S subsidiary as de-
fined in section 1361(b)(3)(B) (QSub) if
the QSub issues securities required to be
registered under section 12(b) of the Ex-
change Act, or is required to file reports
under section 15(d) of the Exchange Act.
(v) Examples. The following exam-
ples illustrate the provisions of this para-
graph (c)(1). For each example, assume
that no corporation is a predecessor of
a publicly held corporation within the
meaning of this paragraph (c)(2)(ii). Fur-
thermore, for each example, unless pro-
vided otherwise, a reference to a publicly
held corporation means a publicly held
corporation as defined in paragraph (c)(1)
(i) of this section. Additionally, for each
example, assume that the corporation is
a calendar year taxpayer and has a fiscal
year ending December 31 for reporting
purposes under the Exchange Act. These
examples are not intended to provide
guidance on the legal requirements of the
Securities Act and Exchange Act and the
rules thereunder (17 CFR Part 240).
(A) Example 1 (Corporation required to file re-
ports under section 15(d) of the Exchange Act)—(1)
Facts. Corporation Z plans to issue debt securities in
a public offering registered under the Securities Act.
Corporation Z is not required to file reports under
section 15(d) of the Exchange Act with respect to
any other class of securities and does not have anoth-
er class of securities required to be registered under
section 12 of the Exchange Act. On April 1, 2021, the
Securities Act registration statement for Corporation
Z’s debt securities is declared effective by the SEC.
As a result, Corporation Z is required to file reports
under section 15(d) of the Exchange Act. Accord-
ingly, as of December 31, 2021, the last day of its
taxable year, Corporation Z is required to file reports
under section 15(d) of the Exchange Act.
(2) Conclusion. Corporation Z is a publicly held
corporation for its 2021 taxable year because it is
required to file reports under section 15(d) of the
Exchange Act as of the last day of its taxable year.
(B) Example 2 (Corporation not required to file
reports under section 15(d) of the Exchange Act)—
(1) Facts. The facts are the same as in paragraph (c)
(1)(v)(A) of this section (Example 1), except that, on
January 1, 2022, pursuant to section 15(d) of the Ex-
change Act, Corporation Z’s obligation to file reports
under section 15(d) is automatically suspended for
the fiscal year ending December 31, 2022, because
Corporation Z meets the statutory requirements for
an automatic suspension to file reports under section
15(d). Accordingly, as of December 31, 2022, Cor-
poration Z is not required to file reports under section
15(d) of the Exchange Act.
(2) Conclusion. Corporation Z is not a publicly
held corporation for its 2022 taxable year because
it is not required to file reports under section 15(d)
of the Exchange Act as of as of the last day of its
taxable year.
(C) Example 3 (Corporation not required to file
reports under section 15(d) of the Exchange Act)—
(1) Facts. The facts are the same as in paragraph (c)
(1)(v)(B) of this section (Example 2), except that,
on January 1, 2022, pursuant to section 15(d) of the
Exchange Act, Corporation Z’s obligation to file re-
ports under section 15(d) is not automatically sus-
pended for the fiscal year ending December 31, 2022
because Corporation Z does not meet the statutory
requirements for automatic suspension. Instead, on
May 2, 2022, Corporation Z is eligible to suspend its
section 15(d) reporting obligation under Rule 12h-3
of the Exchange Act (17 CFR 240.12h-3) and files
Form 15, Certification and Notice of Termination of
Registration under Section 12(g) of the Securities
Exchange Act of 1934 or Suspension of Duty to File
Reports under Sections 13 and 15(d) of the Securities
Exchange Act of 1934 (or its successor), to suspend
its section 15(d) reporting obligation for its fiscal
year ending December 31, 2022. Accordingly, as of
December 31, 2022, Corporation Z is not required to
file reports under section 15(d) of the Exchange Act.
(2) Conclusion. Corporation Z is not a publicly
held corporation for its 2022 taxable year because
it is not required to file reports under section 15(d)
of the Exchange Act as of the last day of its taxable
year.
(D) Example 4 (Corporation required to file re-
ports under section 15(d) of the Exchange Act)—(1)
Facts. The facts are the same as in paragraph (c)(1)
(v)(C) of this section (Example 3), except that, Cor-
poration Z does not utilize Rule 12h-3 under the Ex-
change Act (17 CFR 240.12h-3) to file a Form 15,
Certification and Notice of Termination of Registra-
tion under Section 12(g) of the Securities Exchange
Act of 1934 or Suspension of Duty to File Reports
under Sections 13 and 15(d) of the Securities Ex-
change Act of 1934 (or its successor), to suspend its
section 15(d) reporting obligation during its fiscal
year ending December 31, 2022. Accordingly, Cor-
poration Z’s reporting obligation under section 15(d)
of the Exchange Act is not suspended for its fiscal
year ending December 31, 2022.
(2) Conclusion. Corporation Z is a publicly held
corporation for its 2022 taxable year because it is
required to file reports under section 15(d) of the
Exchange Act as of the last day of its taxable year.
(E) Example 5 (Corporation required to file re-
ports under section 15(d) of the Exchange Act)—(1)
Facts. Corporation Y is a wholly-owned subsidiary
of Corporation X, which is required to file reports
under the Exchange Act. Corporation Y issued a
class of debt securities in a public offering registered
under the Securities Act, and therefore is required
to file reports under Exchange Act Section 15(d),
including for its fiscal year ending December 31,
2020. Corporation Y has no other class of securities
registered under the Exchange Act. In its Form 10-
K, Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (or its suc-
cessor), for the 2020 fiscal year, Corporation Y may
omit Item 11 Executive Compensation (required by
Part III of Form 10-K), which requires disclosure of
compensation of certain executive officers because
it is wholly-owned by Corporation X and the other
conditions of General Instruction I to Form 10-K are
satisfied.
(2) Conclusion. Corporation Y is a publicly held
corporation for its 2020 taxable year because it is
required to file reports under section 15(d) of the
Exchange Act as of the last day of its taxable year.
(F) Example 6 (Corporation not required to
file reports under section 15(d) of the Exchange
Act and not required to register securities under
section 12 of the Exchange Act)—(1) Facts. Cor-
poration A has a class of securities registered un-

January 13, 2020 362 Bulletin No. 2020–3
der section 12(g) of the Exchange Act. For its 2020
taxable year, Corporation A is a publicly held cor-
poration. On September 30, 2021, Corporation A is
eligible to terminate the registration of its securities
under section 12(g) of the Exchange Act pursuant
to Rule 12g-4(a)(2) of the Exchange Act (17 CFR
240.12g-4(a)(2)), but does not terminate the regis-
tration of its securities prior to December 31, 2021.
Because Corporation A did not issue securities in a
public offering registered under the Securities Act,
Corporation A is not required to file reports under
section 15(d) of the Exchange Act.
(2) Conclusion. Corporation A is not a publicly
held corporation for its 2021 taxable year because, as
of the last day of its taxable year, the securities issued
by Corporation A are not required to be registered
under section 12 of the Exchange Act and Corpo-
ration A is not required to file reports under section
15(d) of the Exchange Act.
(G) Example 7 (Corporation required to file re-
ports under section 15(d) of the Exchange Act)—(1)
Facts. The facts are the same as in paragraph (c)(1)
(v)(F) of this section (Example 6), except that Cor-
poration A previously issued a class of securities
in a public offering registered under the Securities
Act. Furthermore, on October 1, 2021, Corporation
A terminates the registration of its securities under
section 12(g) of the Exchange Act. Because Corpora-
tion A issued a class of securities in a public offering
registered under the Securities Act and is not eligi-
ble to suspend its reporting obligation under section
15(d) of the Exchange Act, as of December 31, 2021,
Corporation A is required to file reports under sec-
tion 15(d) of the Exchange Act.
(2) Conclusion. Corporation A is a publicly held
corporation for its 2021 taxable year because it is
required to file reports under section 15(d) of the
Exchange Act as of the last day of its taxable year.
(H) Example 8 (Corporation not required to file
reports under section 15(d) of the Exchange Act and
not required to register securities under section 12
of the Exchange Act)—(1) Facts. On November 1,
2021, Corporation B is an issuer with only one class
of equity securities. On November 5, 2021, Corpo-
ration B files a registration statement for its equity
securities under section 12(g) of the Exchange Act.
Corporation B’s filing of its registration statement
is voluntary because the Exchange Act does not re-
quire Corporation B to register its class of securities
under section 12(g) of the Exchange Act based on
the number and composition of its record holders.
On December 1, 2021, the Exchange Act registration
statement for Corporation B’s securities is declared
effective by the SEC. As of December 31, 2021, the
last day of its taxable year, Corporation B continues
to have its class of equity securities registered volun-
tarily under section 12 of the Exchange Act. Further-
more, Corporation B is not required to file reports
under section 15(d) of the Exchange Act because it
did not register any class of securities in a public of-
fering under the Securities Act.
(2) Conclusion. Corporation B is not a publicly
held corporation for its 2021 taxable year because,
as of the last day of that taxable year, the securities
issued by Corporation B are not required to be reg-
istered under section 12 of the Exchange Act and
Corporation B is not required to file reports under
section 15(d) of the Exchange Act.
(I) Example 9 (Corporation not required to file
reports under section 15(d) of the Exchange Act and
not required to register securities under section 12 of
the Exchange Act)—(1) Facts. The facts are the same
as in paragraph (c)(1)(v)(H) of this section (Exam-
ple 8), except that, on December 31, 2022, because
of a change in circumstances, under the Exchange
Act, Corporation B must register its class of equity
securities under section 12(g) of the Exchange Act
within 120 days of December 31, 2022. On Febru-
ary 1, 2023, the Exchange Act registration statement
for Corporation B’s securities is declared effective
by the SEC.
(2) Conclusion. Corporation B is not a publicly
held corporation for its 2022 taxable year because,
as of the last day of that taxable year, Corporation
B is not required to file reports under section 15(d)
of the Exchange Act, and the class of equity securi-
ties issued by Corporation B is not yet required to
be registered under section 12 of the Exchange Act.
Corporation B has 120 days following December 31,
2022, to file a registration statement to register its
class of equity securities under section 12(g) of the
Exchange Act.
(J) Example 10 (Securities of foreign private
issuer in the form of ADRs traded in the over-the-
counter market)—(1) Facts. For its fiscal and taxable
years ending December 31, 2021, Corporation W is
a foreign private issuer. Because Corporation W has
not registered an offer or sale of securities under the
Securities Act, it is not required to file reports under
section 15(d) of the Exchange Act. Corporation W
qualifies for an exemption from registration of its se-
curities under section 12(g) of the Exchange Act pur-
suant to Rule 12g3-2(b) under the Exchange Act (17
CFR 240.12g3-2(b)). Corporation W wishes to have
its securities traded in the U.S. in the over-the-count-
er market in the form of ADRs. Because Corporation
W qualifies for an exemption pursuant to Rule 12g3-
2(b) under the Exchange Act (17 CFR 240.12g3-
2(b)), Corporation W is not required to register its
securities underlying the ADRs under section 12 of
the Exchange Act. However, the depositary bank is
required to register the ADRs under the Securities
Act. Even though the depositary bank is required to
register the ADRs under the Securities Act, such reg-
istration of the ADRs does not create a requirement
for either the depositary bank or Corporation W to
file reports under section 15(d) of the Exchange Act.
On February 3, 2021, the Securities Act registration
statement for the ADRs is declared effective by the
SEC. On February 4, 2021, Corporation W’s ADRs
begin trading in the over-the-counter market. On De-
cember 31, 2021, the securities of Corporation W are
not required to be registered under Section 12 of the
Exchange Act because Corporation W qualifies for
an exemption pursuant to Rule 240.12g3-2(b) of the
Exchange Act. Furthermore, on December 31, 2021,
Corporation W is not required to file reports under
section 15(d) of the Exchange Act.
(2) Conclusion. Corporation W is not a publicly
held corporation for its 2021 taxable year because, as
of the last day of that taxable year, the securities un-
derlying the ADRs are not required to be registered
under section 12 of the Exchange Act and Corpora-
tion W is not required to file reports under section
15(d) of the Exchange Act. The conclusion would be
the same if Corporation W had its securities traded
in the over-the-counter market other than in the form
of ADRs.
(K) Example 11 (Securities of foreign private is-
suer in the form of ADRs quoted on Over the Counter
Bulletin Board)—(1) Facts. The facts are the same
as in paragraph (c)(1)(v)(J) of this section (Exam-
ple 10), except that Corporation W has its securi-
ties quoted on the Over the Counter Bulletin Board
(OTCBB) in the form of ADRs. Because Corpora-
tion W qualifies for an exemption pursuant to Rule
12g3-2(b) of the Exchange Act (17 CFR 240.12g3-
2(b)), Corporation W is not required to register its
securities underlying the ADRs under section 12 of
the Exchange Act. However, the depositary bank is
required to register the ADRs under the Securities
Act. Section 6530(b)(1) of the OTCBB Rules re-
quires that a foreign equity security may be quoted
on the OTCBB only if the security is registered with
the SEC pursuant to section 12 of the Exchange Act
and the issuer of the security is current in its report-
ing obligations. To comply with section 6530(b)(1)
of the OTCBB Rules, on February 5, 2021, Corpo-
ration W files a registration statement for its class of
securities underlying the ADRs under section 12(g)
of the Exchange Act. On February 26, 2021, the Ex-
change Act registration statement for Corporation
W’s securities is declared effective by the SEC. As
of December 31, 2021, Corporation W is subject to
the reporting obligations under the section 12 of the
Exchange Act as a result of section 12 registration.
(2) Conclusion. Corporation W is not a publicly
held corporation for its 2021 taxable year because,
as of the last day of that taxable year, its ADRs and
the securities underlying the ADRs are not required
by the Exchange Act to be registered under section
12, and Corporation W is not required to file reports
under section 15(d) of the Exchange Act. The con-
clusion would be the same if Corporation W had its
securities traded on the OTCBB other than in the
form of ADRs.
(L) Example 12 (Securities of foreign private
issuer in the form of ADRs listed on a national se-
curities exchange without a capital raising trans-
action)—(1) Facts. For its fiscal and taxable years
ending December 31, 2021, Corporation V is a for-
eign private issuer. Corporation V wishes to list its
securities on the New York Stock Exchange (NYSE)
in the form of ADRs without a capital raising trans-
action. Under the Exchange Act, Corporation V is re-
quired to register its securities underlying the ADRs
under section 12(b) of the Exchange Act. Because
the ADRs and the deposited securities are separate
securities, the depositary bank is required to register
the ADRs under the Securities Act. On February 2,
2021, Corporation V’s registration statement under
section 12(b) of the Exchange Act in connection with
the underlying securities, and the depositary bank’s
registration statement under the Securities Act in
connection with the ADRs, are declared effective
by the SEC. On March 1, 2021, Corporation V’s se-
curities begin trading on the NYSE in the form of
ADRs. As of December 31, 2021, Corporation V is
not required to file reports under section 15(d) of the
Exchange Act; however, the securities underlying
the ADRs are required to be registered under section
12(b) of the Exchange Act.
(2) Conclusion. Corporation V is a publicly held
corporation for its 2021 taxable year because, as of

Bulletin No. 2020–3 363 January 13, 2020
the last day of that taxable year, the securities un-
derlying the ADRs are required to be registered un-
der section 12 of the Exchange Act. The conclusion
would be the same if Corporation V had its securities
listed on the NYSE other than in the form of ADRs.
(M) Example 13 (Securities of foreign private
issuer in the form of ADRs listed on a national secu-
rities exchange with a capital raising transaction)—
(1) Facts. The facts are the same as in paragraph (c)
(1)(v)(L) of this section (Example 12), except that
Corporation V wishes to raise capital and have its
securities listed on the NYSE in the form of ADRs.
Corporation V is required to register the offer of se-
curities underlying the ADRs under the Securities
Act and to register the class of those securities under
section 12(b) of the Exchange Act. The depositary
bank is required to register the ADRs under the Se-
curities Act. On February 2, 2021, Corporation V’s
registration statements under the Securities Act and
section 12(b) of the Exchange Act, and the registra-
tion statement for the ADRs under the Securities Act,
are declared effective by the SEC. As of December
31, 2021, Corporation V is not required to file reports
under section 15(d) of the Exchange Act; however,
the securities underlying the ADRs are required to be
registered under section 12(b) of the Exchange Act.
(2) Conclusion. Corporation V is a publicly held
corporation for its 2021 taxable year because, as of
the last day of that taxable year, its securities under-
lying the ADRs are required to be registered under
section 12 of the Exchange Act. The conclusion
would be the same if Corporation V had its securities
listed on the NYSE other than in the form of ADRs.
(N) Example 14 (Foreign private issuer incor-
porates subsidiary in the United States to issue debt
securities and subsequently issues a guarantee)—(1)
Facts. Corporation T is a corporation incorporated
in Country S (which is not the United States). For
its fiscal and taxable years ending December 31,
2021, Corporation T is a foreign private issuer. Cor-
poration T wishes to access the U.S. capital markets.
Corporation T incorporates Corporation U in the
United States to issue debt securities. On January 15,
2021, the SEC declares Corporation U’s Securities
Act registration statement effective. Corporation U
is a wholly-owned subsidiary of Corporation T. To
enhance the credit of Corporation U and the market-
ability of Corporation U’s debt securities, Corpora-
tion T issues a guarantee of Corporation U’s secu-
rities and, as required, registers the guarantee under
the Securities Act on the registration statement that
the SEC declares effective on January 15, 2021. On
December 31, 2021, Corporations T and U are re-
quired to file reports under section 15(d) of the Ex-
change Act.
(2) Conclusion. Corporations T and U are pub-
licly held corporations for their 2021 taxable years
because they are required to file reports under section
15(d) of the Exchange Act as of the last day of their
taxable years.
(O) Example 15 (Affiliated group composed of
two corporations, one of which is a publicly held
corporation)—(1) Facts. Employee D, a covered
employee of Corporation N, performs services and
receives compensation from Corporations N and O,
members of an affiliated group of corporations. Cor-
poration N, the parent corporation, is a publicly held
corporation. Corporation O is a direct subsidiary of
Corporation N and is a privately held corporation.
The total compensation paid to Employee D from all
affiliated group members is $3,000,000 for the tax-
able year, of which Corporation N pays $2,100,000
and Corporation O pays $900,000.
(2) Conclusion. Because the compensation paid
by all affiliated group members is aggregated for
purposes of section 162(m)(1), $2,000,000 of the ag-
gregate compensation paid is nondeductible. Corpo-
rations N and O each are treated as paying a ratable
portion of the nondeductible compensation. Thus,
two thirds of each corporation’s payment will be
nondeductible. Corporation N has a nondeductible
compensation expense of $1,400,000 ($2,100,000
x $2,000,000/$3,000,000). Corporation O has a
nondeductible compensation expense of $600,000
($900,000 x $2,000,000/$3,000,000).
(P) Example 16 (Affiliated group composed of
two corporations, one of which is a publicly held
corporation)—(1) Facts. The facts are the same as
in paragraph (c)(1)(v)(O) of this section (Example
15), except that, Corporation O is a publicly held
corporation and Corporation N is a privately held
corporation, and Employee D is a covered employee
of Corporation O (instead of Corporation N).
(2) Conclusion. The result is the same as in
paragraph (c)(1)(v)(O) of this section (Example 15).
Even though Corporation O is a subsidiary that is a
publicly held corporation, it is still a member of the
affiliated group comprised of Corporations N and O.
Accordingly, $2,000,000 of the aggregate compensa-
tion paid is nondeductible. Thus, Corporations N and
O each are treated as paying a ratable portion of the
nondeductible compensation.
(Q) Example 17 (Affiliated group composed of
two publicly held corporations)—(1) Facts. The
facts are the same as in paragraph (c)(1)(v)(O) of this
section (Example 15), except that Corporation O is
also a publicly held corporation. As in paragraph (c)
(1)(v)(O) of this section (Example 15), Employee D
is not a covered employee of Corporation O.
(2) Conclusion. The result is the same as in
paragraph (c)(1)(v)(O) of this section (Example 15).
Even though Corporation O is a subsidiary that is a
publicly held corporation, it is still a member of the
affiliated group comprised of Corporations N and
O. Corporations N and O are payor corporations
that are members of an affiliated group for purposes
of prorating the amount disallowed as a deduction.
Accordingly, $2,000,000 of the aggregate compen-
sation paid is nondeductible. Thus, Corporations N
and O each are treated as paying a ratable portion of
the nondeductible compensation.
(R) Example 18 (Affiliated group composed of
two publicly held corporations)—(1) Facts. The
facts are the same as in paragraph (c)(1)(v)(Q) of
this section (Example 17), except that Employee D is
also a covered employee of Corporation O.
(2) Conclusion. Even though Corporations N and
O are each publicly held corporations and separately
subject to this section, they are still members of the
affiliated group comprised of Corporations N and O.
Because Employee D is a covered employee of both
Corporations N and O, which are each a separate
publicly held corporation, the determination of the
amount disallowed as a deduction is made separate-
ly for each publicly held corporation. Accordingly,
Corporation N has a nondeductible compensation
expense of $1,100,000 (the excess of $2,100,000
over $1,000,000), and Corporation O has no nonde-
ductible compensation expense because the amount
it paid to Employee D was below $1,000,000.
(S) Example 19 (Affiliated group composed of
three corporations, one of which is a publicly held
corporation)—(1) Facts. Employee C, a covered
employee of Corporation P, performs services for,
and receives compensation from, Corporations P,
Q, and R, members of an affiliated group of corpo-
rations. Corporation P, the parent corporation, is a
publicly held corporation. Corporation Q is a direct
subsidiary of Corporation P, and Corporation R is a
direct subsidiary of Corporation Q. Corporations Q
and R are both privately held corporations. The total
compensation paid to Employee C from all affiliated
group members is $3,000,000 for the taxable year, of
which Corporation P pays $1,500,000, Corporation
Q pays $900,000, and Corporation R pays $600,000.
(2) Conclusion. Because the compensation paid
by all affiliated group members is aggregated for
purposes of section 162(m)(1), $2,000,000 of the
aggregate compensation paid is nondeductible. Cor-
porations P, Q, and R are each treated as paying a
ratable portion of the nondeductible compensation.
Thus, two thirds of each corporation’s payment will
be nondeductible. Corporation P has a nondeductible
compensation expense of $1,000,000 ($1,500,000
x $2,000,000/$3,000,000). Corporation Q has a
nondeductible compensation expense of $600,000
($900,000 x $2,000,000/$3,000,000). Corporation
R has a nondeductible compensation expense of
$400,000 ($600,000 x $2,000,000/$3,000,000).
(T) Example 20 (Affiliated group composed of
three corporations, one of which is a publicly held
corporation)—(1) Facts. The facts are the same as in
paragraph (c)(1)(v)(S) of this section (Example 19),
except that Corporation Q is a publicly held corpo-
ration and Corporation P is a privately held corpo-
ration, and Employee C is a covered employee of
Corporation Q (instead of Corporation P).
(2) Conclusion. The result is the same as in para-
graph (c)(1)(v)(S) of this section (Example 19). Even
though Corporation Q is a subsidiary that is a public-
ly held corporation, it is still a member of the affil-
iated group comprised of Corporations P, Q, and R.
Accordingly, $2,000,000 of the aggregate compensa-
tion paid is nondeductible. Thus, Corporations P, Q,
and R are each treated as paying a ratable portion of
the nondeductible compensation.
(U) Example 21 (Affiliated group composed of
three corporations, two of which are publicly held
corporations)—(1) Facts. The facts are the same
as in paragraph (c)(1)(v)(T) of this section (Exam-
ple 20), except that Corporation R is also a publicly
held corporation. As in paragraph (c)(1)(v)(T) of this
section (Example 20), Corporation Q is a publicly
held corporation, Corporation P is a privately held
corporation, and Employee C is a covered employ-
ee of Corporation Q but not a covered employee of
Corporation R.
(2) Conclusion. The result is the same as in para-
graph (c)(1)(v)(T) of this section (Example 20). Even
though Corporation R is a subsidiary that is a public-
ly held corporation, it is still a member of the affil-
iated group comprised of Corporations P, Q, and R.
Accordingly, $2,000,000 of the aggregate compensa-
tion paid is nondeductible. Thus, Corporations P, Q,

January 13, 2020 364 Bulletin No. 2020–3
and R are each treated as paying a ratable portion of
the nondeductible compensation.
(V) Example 22 (Affiliated group composed of
three publicly held corporations)—(1) Facts. The
facts are the same as in paragraph (c)(1)(v)(S) of this
section (Example 19), except that, Corporations Q
and R are also publicly held corporations, and Em-
ployee C is a covered employee of both Corporations
P and Q, but is not a covered employee of Corpora-
tion R.
(2) Conclusion. Even though Corporations Q and
R are subsidiaries that are publicly held corporations
and separately subject to this section, they are still
members of the affiliated group comprised of Cor-
porations P, Q, and R. Because Employee C is a
covered employee of both Corporations P and Q, the
determination of the amount disallowed as a deduc-
tion is prorated among Corporation P and R, and sep-
arately prorated among Corporations Q and R. With
respect to Corporations P and R, $1,100,000 of the
aggregate compensation is nondeductible (the differ-
ence between the total compensation of $2,100,000
paid by Corporations P and R and the $1,000,000
deduction limitation). Corporations P and R are each
treated as paying a ratable portion of the nondeduct-
ible compensation. Accordingly, Corporation P has
a nondeductible compensation expense of $785,714
($1,500,000 x $1,100,000/$2,100,000), and Corpora-
tion R has a nondeductible compensation expense of
$314,285 ($600,000 x $1,100,000/$2,100,000). With
respect to Corporations Q and R, $500,000 of the
aggregate compensation is nondeductible (the differ-
ence between the total compensation of $1,500,000
paid by Corporations Q and R and the $1,000,000 de-
duction limitation). Accordingly, Corporation Q has
a nondeductible compensation expense of $300,000
($900,000 x $500,000/$1,500,000), and Corpora-
tion R has a nondeductible compensation expense
of $200,000 ($600,000 x $500,000/$1,500,000).
The total amount of nondeductible compensation
expense with respect to Corporation R is $514,285.
(W) Example 23 (Affiliated group composed of
three publicly held corporations)—(1) Facts. The
facts are the same as in paragraph (c)(1)(v)(V) of this
section (Example 22), except that Employee C does
not perform any services for Corporation R and does
not receive any compensation from Corporation R.
(2) Conclusion. Even though Corporations Q
and R are subsidiaries that are publicly held corpo-
rations and separately subject to this section, they
are still members of the affiliated group comprised
of Corporations P, Q, and R. Because Employee C
performs services only for Corporations P and Q and
because Employee C is a covered employee of both
Corporations P and Q, which are each a separate
publicly held corporation, the determination of the
amount disallowed as a deduction is made separate-
ly for each publicly held corporation. Accordingly,
Corporation P has a nondeductible compensation
expense of $500,000 (the excess of $1,500,000 over
$1,000,000), and Corporation Q has no nondeduct-
ible compensation expense because the amount it
paid to Employee C was below $1,000,000.
(X) Example 24 (Affiliated group composed of
three corporations, one of which is a publicly held
corporation—(1) Facts. The facts are the same as in
paragraph (c)(1)(v)(S) of this section (Example 19),
except that Corporation R is a direct subsidiary of
Corporation P instead of being a direct subsidiary of
Corporation Q.
(2) Conclusion. The result is the same as in
paragraph (c)(1)(v)(S) of this section (Example 19).
Corporations P, Q, and R are members of an affiliat-
ed group. Accordingly, $2,000,000 of the aggregate
compensation paid is nondeductible. Thus, Corpora-
tions P, Q, and R are each treated as paying a ratable
portion of the nondeductible compensation.
(Y) Example 25 (Affiliated group composed of
three publicly held corporations)—(1) Facts. The
facts are the same as in paragraph (c)(1)(v)(X) of
this section (Example 24), except that Corporations
Q and R are also publicly held corporations, and Em-
ployee C is a covered employee of both Corporations
P and Q.
(2) Conclusion. The result is the same as in
paragraph (c)(1)(v)(V) of this section (Example 22).
Even though Corporations Q and R are subsidiaries
that are publicly held corporations and separately
subject to this section, they are still members of the
affiliated group comprised of Corporations P, Q, and
R. Because Employee C is a covered employee of
both Corporations P and Q, the determination of the
amount disallowed as a deduction is prorated among
Corporation P and R, and separately among Corpo-
rations Q and R.
(Z) Example 26 (Disregarded entity)—(1) Facts.
Corporation G is a privately held corporation for its
2020 taxable year. Entity H, a limited liability com-
pany, is wholly-owned by Corporation G and is dis-
regarded as an entity separate from its owner under
§301.7701-2(c)(2)(i). As of December 31, 2020, En-
tity H is required to file reports under section 15(d)
of the Exchange Act.
(2) Conclusion. Because Entity H is required to
file reports under section 15(d) of the Exchange Act
and is disregarded as an entity separate from its own-
er Corporation G, Corporation G is a publicly held
corporation under paragraph (c)(1)(iii) of this section
for its 2020 taxable year.
(2) Covered employee—(i) Gener-
al rule. Except as provided in paragraph
(c)(2)(v) of this section, with respect to
a publicly held corporation as defined in
paragraph (c)(1) of this section (without
regard to paragraph (c)(1)(ii) of this sec-
tion), for the publicly held corporation’s
taxable year, a covered employee means
any of the following—
(A) The principal executive officer
(PEO) or principal financial officer (PFO)
of the publicly held corporation serving at
any time during the taxable year, including
individuals acting in either such capacity.
(B) The three highest compensated ex-
ecutive officers of the publicly held cor-
poration for the taxable year (other than
the principal executive officer or principal
financial officer, or an individual acting
in such capacity), regardless of whether
the executive officer is serving at the end
of the publicly held corporation’s taxable
year, and regardless of whether the ex-
ecutive officer’s compensation is subject
to disclosure for the last completed fiscal
year under the executive compensation
disclosure rules under the Exchange Act.
The amount of compensation used to
identify the three most highly compensat-
ed executive officers for the taxable year
is determined pursuant to the executive
compensation disclosure rules under the
Exchange Act (using the taxable year as
the fiscal year for purposes of making the
determination), regardless of whether the
corporation’s fiscal year and taxable year
end on the same date.
(C) Any individual who was a covered
employee of the publicly held corporation
(or any predecessor of a publicly held cor-
poration, as defined in paragraph (c)(2)
(ii) of this section) for any preceding tax-
able year beginning after December 31,
2016. For taxable years beginning prior to
January 1, 2018, covered employees are
identified in accordance with the rules in
§1.162-27(c)(2).
(ii) Predecessor of a publicly held cor-
poration—(A) Publicly held corporations
that become privately held. For purposes
of this paragraph (c)(2)(ii), a predecessor
of a publicly held corporation includes a
publicly held corporation that, after be-
coming a privately held corporation, again
becomes a publicly held corporation for a
taxable year ending before the 36-month
anniversary of the due date for the corpo-
ration’s U.S. Federal income tax return
(disregarding any extensions) for the last
taxable year for which the corporation
was previously publicly held.
(B) Corporate reorganizations. A pre-
decessor of a publicly held corporation
includes a publicly held corporation the
stock or assets of which are acquired in
a corporate reorganization (as defined in
section 368(a)(1)).
(C) Corporate divisions. A predecessor
of a publicly held corporation includes a
publicly held corporation that is a distrib-
uting corporation (within the meaning of
section 355(a)(1)(A)) that distributes the
stock of a controlled corporation (within
the meaning of section 355(a)(1)(A)) to its
shareholders in a distribution or exchange
qualifying under section 355(a)(1) (corpo-
rate division). The rule of this paragraph
(c)(2)(ii)(C) applies only with respect to
covered employees of the distributing cor-
poration who commence the performance

Bulletin No. 2020–3 365 January 13, 2020
of services for the controlled corporation
(or for a corporation affiliated with the
controlled corporation that receives stock
of the controlled corporation in the corpo-
rate division) within the period beginning
12 months before and ending 12 months
after the distribution.
(D) Affiliated groups. A predecessor
of a publicly held corporation includes a
publicly held corporation that becomes a
member of an affiliated group (as defined
in paragraph (c)(1)(ii) of this section).
(E) Asset acquisitions. If a publicly
held corporation, including one or more
members of an affiliated group as defined
in paragraph (c)(1)(ii) of this section (ac-
quiror), acquires at least 80% of the op-
erating assets (determined by fair market
value on the date of acquisition) of anoth-
er publicly held corporation (target), then
the target is a predecessor of the acquiror.
For an acquisition of assets that occurs
over time, only assets acquired within a
12-month period are taken into account
to determine whether at least 80% of the
target’s operating assets were acquired.
However, this 12-month period is extend-
ed to include any continuous period that
ends on, or begins on, any day during
which the acquiror has an arrangement to
purchase, directly or indirectly, assets of
the target. Additions to the assets of target
by a shareholder made as part of a plan
or arrangement to avoid the application of
this subsection to acquiror’s purchase of
target’s assets are disregarded in applying
this paragraph. This paragraph (c)(2)(ii)
(E) applies only with respect to covered
employees of the target who commence
the performance of services for the ac-
quiror (or a corporation affiliated with the
acquiror) within the period beginning 12
months before and ending 12 months af-
ter the date of the transaction as defined
in paragraph (c)(2)(ii)(I) of this section
(incorporating any extensions to the
12-month period made pursuant to this
paragraph).
(F) Predecessor of a predecessor. For
purposes of this paragraph (c)(2)(ii), a ref-
erence to a predecessor of a corporation
includes each predecessor of the corpora-
tion and the predecessor or predecessors
of any prior predecessor or predecessors.
(G) Corporations that are not public-
ly held at the time of the transaction and
sequential transactions–(1) Predecessor
corporation is not publicly held at the time
of the transaction. If a corporation that
was previously publicly held (the first cor-
poration) would be a predecessor to an-
other corporation (the second corporation)
under the rules of this paragraph (c)(2)
(ii) but for the fact that it is not a publicly
held corporation at the time of the relevant
transaction (or transactions), the first cor-
poration is a predecessor of a publicly held
corporation if the second corporation is a
publicly held corporation at the time of the
relevant transaction (or transactions) and
the relevant transaction (or transactions)
take place during a taxable year ending
before the 36-month anniversary of the
due date for the first corporation’s U.S.
Federal income tax return (excluding any
extensions) for the last taxable year for
which the first corporation was previously
publicly held.
(2) Second corporation is not public-
ly held at the time of the transaction. If
a corporation that is publicly held (the
first corporation) at the time of the rele-
vant transaction (or transactions) would
be a predecessor to another corporation
(the second corporation) under the rules
of this paragraph (c)(2)(ii) but for the fact
that the second corporation is not a pub-
licly held corporation at the time of the
relevant transaction (or transactions), the
first corporation is a predecessor of a pub-
licly held corporation if the second corpo-
ration becomes a publicly held corpora-
tion for a taxable year ending before the
36-month anniversary of the due date for
the first corporation’s U.S. Federal income
tax return (excluding any extensions) for
the first corporation’s last taxable year
in which the transaction is taken into ac-
count.
(3) Neither corporation is publicly held
at the time of the transaction. If a corpo-
ration that was previously publicly held
(the first corporation) would be a prede-
cessor to another corporation (the second
corporation) under the rules of this para-
graph (c)(2)(ii) but for the fact that neither
it nor the second corporation is a publicly
held corporation at the time of the rele-
vant transaction (or transactions), the first
corporation is a predecessor of a publicly
held corporation if the second corporation
becomes a publicly held corporation for a
taxable year ending before the 36-month
anniversary of the due date for the first
corporation’s U.S. Federal income tax
return (excluding any extensions) for the
last taxable year for which the first corpo-
ration was previously publicly held.
(4) Sequential transactions. If a corpo-
ration that was previously publicly held
(the first corporation) would be a prede-
cessor to another corporation (the second
corporation) under the rules of this para-
graph (c)(2)(ii) but for the fact that the
first corporation is (or its assets are) trans-
ferred to one or more intervening corpora-
tions prior to being transferred to the sec-
ond corporation, and if each intervening
corporation would be a predecessor of a
publicly held corporation with respect to
the second corporation if the intervening
corporation or corporations were publicly
held corporations, then paragraphs (c)(2)
(ii)(G)(1) through (3) of this section also
apply without regard to the intervening
corporations.
(H) Elections under sections 336(e)
and 338. For purposes of this paragraph
(c)(2), when a corporation makes an elec-
tion to treat as an asset purchase either the
sale, exchange, or distribution of stock
pursuant to regulations under section
336(e) or the purchase of stock pursuant
to regulations under section 338, the cor-
poration that issued the stock is treated as
the same corporation both before and after
such transaction.
(I) Date of transaction. For purposes
of this paragraph (c)(2)(ii), the date that
a transaction is treated as having occurred
is the date on which all events necessary
for the transaction to be described in the
relevant provision have occurred.
(J) Publicly traded partnership. For
purposes of applying this paragraph (c)
(2)(ii), a publicly traded partnership is a
predecessor of a publicly held corporation
if under the same facts and circumstances
a corporation substituted for the publicly
traded partnership would be a predeces-
sor of the publicly held corporation, and
at the time of the transaction the publicly
traded partnership is treated as a publicly
held corporation as defined in paragraph
(c)(1)(i) of this section. In making this de-
termination, the rules in paragraphs (c)(2)
(ii)(A) through (I) of this section apply to
publicly traded partnerships by analogy.
(iii) Disregarded entities. If a public-
ly held corporation under paragraph (c)
(1) of this section owns an entity that is

January 13, 2020 366 Bulletin No. 2020–3
disregarded as an entity separate from its
owner under §301.7701-2(c)(2)(i) of this
chapter, then the covered employees of the
publicly held corporation are determined
pursuant to paragraphs (c)(2)(i) and (ii)
of this section. The executive officers of
the entity that is disregarded as an entity
separate from its corporate owner under
§301.7701-2(c)(2)(i) of this chapter are
neither covered employees of the entity
nor of the publicly held corporation un-
less they meet the definition of covered
employee in paragraphs (c)(2)(i) and (ii)
of this section with respect to the publicly
held corporation, in which case they are
covered employees for its taxable year.
(iv) Qualified subchapter S subsidiar-
ies. If a publicly held corporation under
paragraph (c)(1) of this section owns an
entity that is a QSub under section 1361(b)
(3)(B), then the covered employees of the
publicly held corporation are determined
pursuant to paragraphs (c)(2)(i) and (ii)
of this section. The executive officers of
the QSub are neither covered employees
of the QSub nor of the publicly held cor-
poration unless they meet the definition of
covered employee in paragraphs (c)(2)(i)
and (ii) of this section with respect to the
publicly held corporation, in which case
they are covered employees for its taxable
year.
(v) Covered employee of an affiliated
group. A person who is identified as a
covered employee in paragraphs (c)(2)(i)
through (iv) of this section for a publicly
held corporation’s taxable year is also a
covered employee for the taxable year of
a publicly held corporation as defined in
paragraph (c)(1)(ii) of this section.
(vi) Examples. The following examples
illustrate the provisions of this paragraph
(c)(2). For each example, assume that the
corporation has a taxable year that is a
calendar year and has a fiscal year ending
December 31 for reporting purposes un-
der the Exchange Act. Additionally, for
each example, unless explicitly provided,
assume that none of the employees were
covered employees for any taxable year
preceding the first taxable year set forth in
that example (since being a covered em-
ployee for a preceding taxable year would
provide a separate and independent basis
for classifying that employee as a covered
employee for a subsequent taxable year).
(A) Example 1 (Covered employees of members
of an affiliated group)—(1) Facts. Corporations A,
B, and C are direct wholly-owned subsidiaries of
Corporation D. Corporation D is a publicly held
corporation as defined in paragraph (c)(1)(i) of this
section because its class of securities is required to
be registered under section 12 of the Exchange Act
as of December 31, 2020. Corporation A is a publicly
held corporation as defined in paragraph (c)(1)(i) of
this section because it is required to file reports under
section 15(d) of the Exchange Act as of December
31, 2020. Corporations B and C are not publicly held
corporations for their 2020 taxable years. Employee
E served as the PEO of Corporation D from Janu-
ary 1, 2020, to March 31, 2020. Employee F served
as the PEO of Corporation D from April 1, 2020, to
December 31, 2020. Employee G served as the PEO
of Corporation A for its entire 2020 taxable year.
Employee H served as the PEO of Corporation B
for its entire 2020 taxable year. Employee I served
as the PEO of Corporation C for its entire 2020 tax-
able year. From April 1, 2020, through September
30, 2020, Employee E served as an advisor (not as
a PEO) to Employee I and received compensation
from Corporation C for these services. In 2020, all
four corporations paid compensation to their respec-
tive PEOs.
(2) Conclusion (Employees F and E). Because
both Employees E and F served as the PEO during
Corporation D’s 2020 taxable year, both Employees
E and F are covered employees for Corporation D’s
2020 and subsequent taxable years. Corporations D
and C are members of an affiliated group as defined
in paragraph (c)(1)(ii) of this section. Because Em-
ployee E received compensation from Corporations
D and C, the compensation paid by both corporations
is aggregated. Any amount disallowed as a deduction
by this section is prorated between Corporations D
and C in proportion to the amount of compensation
paid to Employee E by each corporation in 2020.
(3) Conclusion (Employee G). Because Employ-
ee G served as a PEO of Corporation A, a publicly
held corporation, Employee G is a covered employee
of Corporation A for its 2020 and subsequent taxable
years.
(4) Conclusion (Employee H). Even though Em-
ployee H served as the PEO of Corporation B, Em-
ployee H is not a covered employee of Corporation
B for its 2020 taxable year, because Corporation B
is considered a publicly held corporation solely by
reason of being a member of an affiliated group as
defined in paragraph (c)(1)(ii) of this section.
(5) Conclusion (Employee I). Even though Em-
ployee I served as the PEO of Corporation C, Em-
ployee I is not a covered employee of Corporation
C for its 2020 taxable year, because Corporation C
is considered a publicly held corporation solely by
reason of being a member of an affiliated group as
defined in paragraph (c)(1)(ii) of this section. The
aggregation of the compensation paid to Employee
E by Corporations D and C (for purposes of deter-
mining the amount of deduction disallowed by this
section) is immaterial to determining whether Em-
ployee I is a covered employee of Corporation C.
(B) Example 2 (Covered employees of a publicly
held corporation)—(1) Facts. Corporation J is a pub-
licly held corporation. Corporation J is not a smaller
reporting company or emerging growth company for
purposes of reporting under the Exchange Act. For
2020, Employee K served as the sole PEO of Cor-
poration J and Employees L and M both served as
the PFO of Corporation J at different times during
the year. Employees N, O, and P were, respectively,
the first, second, and third highest compensated ex-
ecutive officers of Corporation J for 2020 other than
the PEO and PFO, and all three retired before the
end of 2020. Employees Q, R, and S were, respec-
tively, Corporation J’s fourth, fifth, and sixth highest
compensated executive officers other than the PEO
and PFO for 2020, and all three were serving at the
end of 2020. On March 1, 2021, Corporation J filed
its Form 10-K, Annual Report Pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934
with the SEC. With respect to Item 11, Executive
Compensation (as required by Part III of Form 10-K,
or its successor), Corporation J disclosed the com-
pensation of Employee K for serving as the PEO,
Employees L and M for serving as the PFO, and Em-
ployees Q, R, and S pursuant to Item 402 of Regu-
lation S-K, 17 CFR 229.402(a)(3)(iii). Corporation J
also disclosed the compensation of Employees N and
O pursuant to Item 402 of Regulation S-K, 17 CFR
229.402(a)(3)(iv).
(2) Conclusion (PEO). Because Employee K
served as the PEO during 2020, Employee K is a
covered employee for Corporation J’s 2020 taxable
year.
(3) Conclusion (PFO). Because Employees L
and M served as the PFO during 2020, Employees
L and M are covered employees for Corporation J’s
2020 taxable year.
(4) Conclusion (Three Highest Compensated
Executive Officers). Even though the executive com-
pensation disclosure rules under the Exchange Act
require Corporation J to disclose the compensation
of Employees N, O, Q, R, and S for 2020, Corpora-
tion J’s three highest compensated executive officers
who are covered employees for its 2020 taxable year
are Employees N, O, and P, because these are the
three highest compensated executive officers other
than the PEO and PFO for 2020.
(C) Example 3 (Covered employees of a small-
er reporting company)—(1) Facts. The facts are the
same as in paragraph (c)(2)(vi)(B) of this section
(Example 2), except that Corporation J is a smaller
reporting company or emerging growth company for
purposes of reporting under the Exchange Act. Ac-
cordingly, with respect to Item 11, Executive Com-
pensation (as required by Part III of Form 10-K, or
its successor), Corporation J disclosed the compen-
sation of Employee K for serving as the PEO, Em-
ployees Q and R pursuant to Item 402(m) of Regula-
tion S-K, 17 CFR 229.402(m)(2)(ii), and Employees
N and O pursuant to Item 402(m) of Regulation S-K,
17 CFR 229.402(m)(2)(iii).
(2) Conclusion. The result is the same as in para-
graph (c)(2)(vi)(B) of this section (Example 2). For
purposes of identifying a corporation’s covered em-
ployees, it is not relevant whether the reporting obli-
gation under the Exchange Act for smaller reporting
companies and emerging growth companies apply to
the corporation, nor is it relevant whether the specific
executive officers’ compensation must be disclosed
pursuant to the disclosure rules under the Exchange
Act applicable to the corporation.

Bulletin No. 2020–3 367 January 13, 2020
(D) Example 4 (Covered employees of a pub-
licly held corporation that is not required to file a
Form 10-K)—(1) Facts. The facts are the same as in
paragraph (c)(2)(vi)(B) of this section (Example 2),
except that on February 4, 2021, Corporation J files
Form 15, Certification and Notice of Termination of
Registration under Section 12(g) of the Securities
Exchange Act of 1934 or Suspension of Duty to File
Reports under Sections 13 and 15(d) of the Securities
Exchange Act of 1934 (or its successor), to terminate
the registration of its securities. Corporation J’s duty
to file reports under Section 13(a) of the Exchange
Act is suspended upon the filing of the Form 15
and, as a result, Corporation J is not required to file
a Form 10-K and disclose the compensation of its
executive officers for 2020.
(2) Conclusion. The result is the same as in para-
graph (c)(2)(vi)(B) of this section (Example 2). Cov-
ered employees include executive officers of a pub-
licly held corporation even if the corporation is not
required to disclose the compensation of its execu-
tive officers under the Exchange Act. Therefore, Em-
ployees K, L, M, N, O, and P are covered employees
for 2020. The conclusion would be different if Cor-
poration J filed Form 15, Certification and Notice of
Termination of Registration under Section 12(g) of
the Securities Exchange Act of 1934 or Suspension
of Duty to File Reports under Sections 13 and 15(d)
of the Securities Exchange Act of 1934 (or its suc-
cessor), to terminate the registration of its securities
prior to December 31, 2020. In that case, Corpora-
tion J would not be a publicly held corporation for its
2020 taxable year, and, therefore, Employees K, L,
M, N, O, and P would not be covered employees for
Corporation J’s 2020 taxable year.
(E) Example 5 (Covered employees of two pub-
licly held corporations after a corporate trans-
action)—(1) Facts. Corporation T is a domestic
publicly held corporation for its 2019 taxable year.
Corporation U is a domestic privately held corpo-
ration for its 2019 and 2020 taxable years. On July
31, 2020, Corporation U acquires for cash 80% of
the only class of outstanding stock of Corporation
T. The group (comprised of Corporations U and T)
elects to file a consolidated Federal income tax re-
turn. As a result of this election, Corporation T has
a short taxable year ending on July 31, 2020. Cor-
poration T does not change its fiscal year for report-
ing purposes under the Exchange Act to correspond
to the short taxable year. Corporation T remains
a domestic publicly held corporation for its short
taxable year ending on July 31, 2020, and its sub-
sequent taxable year ending on December 31, 2020,
for which it files a consolidated Federal income
tax return with Corporation U. For Corporation
T’s taxable year ending July 31, 2020, Employee
V serves as the only PEO, and Employee W serves
as the only PFO. Employees X, Y, and Z are the
three most highly compensated executive officers
of Corporation T for the taxable year ending July
31, 2020, other than the PEO and PFO. As a result
of the acquisition, effective July 31, 2020, Employ-
ee V ceases to serve as the PEO of Corporation T.
Instead, Employee AA begins serving as the PEO
of Corporation T on August 1, 2020. Employee V
continues to provide services for Corporation T and
never serves as PEO again (or as an individual act-
ing in such capacity). For Corporation T’s taxable
year ending December 31, 2020, Employee AA
serves as the only PEO, and Employee W serves as
the only PFO. Employees X, Y, and Z continue to
serve as executive officers of Corporation T during
the taxable year ending December 31, 2020. Em-
ployees BB, CC, and DD are the three most highly
compensated executive officers of Corporation T,
other than the PEO and PFO, for the taxable year
ending December 31, 2020.
(2) Conclusion (Employee V). Because Employ-
ee V served as the PEO during Corporation T’s short
taxable year ending July 31, 2020, Employee V is a
covered employee for Corporation T’s short taxable
year ending July 31, 2020. Furthermore, Employee
V is a covered employee for Corporation T’s short
taxable year ending July 31, 2020, even though Em-
ployee V’s compensation is required to be disclosed
pursuant to the executive compensation disclosure
rules under the Exchange Act only for the fiscal year
ending December 31, 2020. Because Employee V
was a covered employee for Corporation T’s short
taxable year ending July 31, 2020, Employee V is
also a covered employee for Corporation T’s short
taxable year ending December 31, 2020.
(3) Conclusion (Employee W). Because Employ-
ee W served as the PFO during Corporation T’s short
taxable years ending July 31, 2020, and December
31, 2020, Employee W is a covered employee for
both taxable years. Furthermore, Employee W is a
covered employee for Corporation T’s short taxable
year ending July 31, 2020, even though Employee
W’s compensation is required to be disclosed pur-
suant to the executive compensation disclosure rules
under the Exchange Act only for the fiscal year end-
ing December 31, 2020. Employee W would be a
covered employee for Corporation T’s short taxable
year ending December 31, 2020, even if Employee
W did not serve as the PFO during this taxable year
because Employee W was a covered employee for
Corporation T’s short taxable year ending July 31,
2020.
(4) Conclusion (Employee AA). Because Em-
ployee AA served as the PEO during Corporation
T’s short taxable year ending December 31, 2020,
Employee AA is a covered employee for this taxable
year.
(5) Conclusion (Employees X, Y, and Z). Em-
ployees X, Y, and Z are covered employees for
Corporation T’s short taxable years ending July 31,
2020, and December 31, 2020. Employees X, Y, and
Z are covered employees for Corporation T’s short
taxable year ending July 31, 2020, because these em-
ployees are the three highest compensated executive
officers for this taxable year. Employees X, Y, and Z
are covered employees for Corporation T’s short tax-
able year ending December 31, 2020, because they
were covered employees for Corporation T’s short
taxable year ending July 31, 2020. Accordingly, Em-
ployees X, Y, and Z would be covered employees for
Corporation T’s short taxable years ending July 31,
2020, and December 31, 2020, even if their compen-
sation would not be required to be disclosed pursuant
to the executive compensation disclosure rules under
the Exchange Act.
(6) Conclusion (Employees BB, CC, and DD).
Employees BB, CC, and DD are covered employ-
ees for Corporation T’s short taxable year ending
December 31, 2020 because these employees are the
three highest compensated executive officers for this
taxable year.
(F) Example 6 (Predecessor of a publicly held
corporation)—(1) Facts. Corporation EE is a public-
ly held corporation for its 2021 taxable year. Corpo-
ration EE is a privately held corporation for its 2022
and 2023 taxable years. For its 2024 taxable year,
Corporation EE is a publicly held corporation.
(2) Conclusion. Corporation EE is a predecessor
of a publicly held corporation within the meaning
of paragraph (c)(2)(ii)(A) of this section because
it became a publicly held corporation for a taxable
year ending prior to April 15, 2025. Therefore, for
Corporation EE’s 2024 taxable year, the covered em-
ployees of Corporation EE include the covered em-
ployees of Corporation EE for its 2021 taxable year
and any additional covered employees determined
pursuant to paragraph (c)(2) of this section.
(G) Example 7 (Predecessor of a publicly held
corporation)—(1) Facts. The facts are the same as in
paragraph (c)(2)(vi)(F) of this section (Example 6),
except that Corporation EE remains a privately held
corporation until it becomes a publicly held corpora-
tion for its 2027 taxable year.
(2) Conclusion. Corporation EE is not a predeces-
sor of a publicly held corporation within the meaning
of paragraph (c)(2)(ii)(A) of this section because it
became a publicly held corporation for a taxable year
ending after April 15, 2025. Therefore, any covered
employee of Corporation EE for its 2021 taxable
year is not a covered employee of Corporation EE
for its 2027 taxable year due to that individual’s sta-
tus as a covered employee of Corporation EE for a
preceding taxable year beginning after December 31,
2016 (but may be a covered employee due to status
during the 2027 taxable year).
(H) Example 8 (Predecessor of a publicly held
corporation that is party to a merger)—(1) Facts.
On June 30, 2021, Corporation FF (a publicly held
corporation) merged into Corporation GG (a pub-
licly held corporation) in a transaction that qualifies
as a reorganization under section 368(a)(1)(A), with
Corporation GG as the surviving corporation. As
a result of the merger, Corporation FF has a short
taxable year ending June 30, 2021. Corporation FF
is a publicly held corporation for this short taxable
year. Corporation GG does not have a short taxable
year and is a publicly held corporation for its 2021
taxable year.
(2) Conclusion. Corporation FF is a predecessor
of a publicly held corporation within the meaning
of paragraph (c)(2)(ii)(B) of this section. Therefore,
any covered employee of Corporation FF for its short
taxable year ending June 30, 2021, is a covered em-
ployee of Corporation GG for its 2021 taxable year.
Accordingly, for Corporation GG’s 2021 and subse-
quent taxable years, the covered employees of Cor-
poration GG include the covered employees of Cor-
poration FF (for a preceding taxable year beginning
after December 31, 2016) and any additional covered
employees determined pursuant to paragraph (c)(2)
of this section.
(I) Example 9 (Predecessor of a publicly held
corporation that is party to a merger)—(1) Facts.
The facts are the same as in paragraph (c)(2)(vi)(H)
of this section (Example 8), except that, after the
merger, Corporation GG is a privately held corpora-
tion for its 2021 taxable year.

January 13, 2020 368 Bulletin No. 2020–3
(2) Conclusion. Because Corporation GG is a
privately held corporation for its 2021 taxable year,
it is not subject to section 162(m)(1) for this taxable
year.
(J) Example 10 (Predecessor of a publicly held
corporation that is party to a merger)—(1) Facts.
The facts are the same as in paragraph (c)(2)(vi)(I)
of this section (Example 9), except Corporation GG
becomes a publicly held corporation on June 30,
2023, and is a publicly held corporation for its 2023
taxable year.
(2) Conclusion. Because Corporation GG be-
came a publicly held corporation for a taxable year
ending prior to April 15, 2025, Corporation FF is a
predecessor of a publicly held corporation within the
meaning of paragraph (c)(2)(ii)(G) of this section.
Therefore, any covered employee of Corporation FF
for its short taxable year ending June 30, 2021, is a
covered employee of Corporation GG for its 2023
and subsequent taxable years. Accordingly, for Cor-
poration GG’s 2023 and subsequent taxable years,
the covered employees of Corporation GG include
the covered employees of Corporation FF (for a pre-
ceding taxable year beginning after December 31,
2016) and any additional covered employees deter-
mined pursuant to paragraph (c)(2) of this section.
(K) Example 11 (Predecessor of a publicly held
corporation that is party to a merger)—(1) Facts.
The facts are the same as in paragraph (c)(2)(vi)(J)
of this section (Example 10), except that Corporation
FF is a privately held corporation for its taxable year
ending June 30, 2021, but was a publicly held corpo-
ration for its 2020 taxable year.
(2) Conclusion. Even though Corporation FF
was a privately held corporation when it merged
with Corporation GG on June 30, 2021, Corpo-
ration FF may still be a considered a predecessor
corporation if Corporation GG becomes a public-
ly held corporation within a taxable year ending
prior to April 15, 2024. Because Corporation GG
became a publicly held corporation for a taxable
year ending December 31, 2023, Corporation FF is
a predecessor of a publicly held corporation with-
in the meaning of paragraph (c)(2)(ii)(G) of this
section. Therefore, any covered employee of Cor-
poration FF for its 2020 taxable year is a covered
employee of Corporation GG for its 2024 and sub-
sequent taxable years. Accordingly, for Corporation
GG’s 2023 and subsequent taxable years, the cov-
ered employees of Corporation GG include the cov-
ered employees of Corporation FF (for a preceding
taxable year beginning after December 31, 2016)
and any additional covered employees determined
pursuant to paragraph (c)(2) of this section.
(L) Example 12 (Predecessor of a publicly held
corporation that is party to a merger and subse-
quently becomes member of an affiliated group)—(1)
Facts. The facts are the same as in paragraph (c)(2)
(vi)(I) of this section (Example 9). Additionally, on
June 30, 2022, Corporation GG becomes a member
of an affiliated group (as defined in paragraph (c)(1)
(ii) of this section) that files a consolidated Federal
income tax return. Corporation II is the parent corpo-
ration of the group and is a publicly held corporation.
Employee HH was a covered employee of Corpora-
tion FF for its taxable year ending June 30, 2021. On
July 1, 2022, Employee HH becomes an employee
of Corporation II.
(2) Conclusion. By becoming a member of an
affiliated group (as defined in paragraph (c)(1)(ii)
of this section) on June 30, 2022, Corporation GG
became a publicly held corporation for a taxable
year ending prior to April 15, 2025. Therefore, Cor-
poration FF is a predecessor of a publicly held cor-
poration (Corporation GG) within the meaning of
paragraph (c)(2)(ii)(G) of this section. Furthermore,
Corporation FF is a predecessor of a publicly held
corporation (Corporation II) within the meaning of
paragraph (c)(2)(ii)(G) of this section. Accordingly,
for Corporation II’s 2022 and subsequent taxable
years, Employee HH is a covered employee of Cor-
poration II because Employee HH was a covered em-
ployee of Corporation FF for its taxable year ending
June 30, 2021.
(M) Example 13 (Predecessor of a publicly held
corporation that is party to a merger and subse-
quently becomes member of an affiliated group)—
(1) Facts. The facts are the same as in paragraph (c)
(2)(vi)(L) of this section (Example 12), except that,
Corporation FF was a privately held corporation for
its taxable year ending June 30, 2021, and Employee
HH was a covered employee of Corporation FF for
its taxable year ending December 31, 2020.
(2) Conclusion. Even though Corporation FF
was a privately held corporation when it merged with
Corporation GG on June 30, 2021, Corporation FF
may still be a considered a predecessor corporation
if Corporation GG becomes a publicly held corpora-
tion for a taxable year ending prior to April 15, 2024.
Because Corporation GG became a publicly held
corporation for its 2022 taxable year by becoming
a member of an affiliated group (as defined in para-
graph (c)(1)(ii) of this section), Corporation FF is a
predecessor of a publicly held corporation (Corpora-
tion GG) within the meaning of paragraph (c)(2)(ii)
(G) of this section. Furthermore, Corporation FF is a
predecessor of a publicly held corporation (Corpora-
tion II) within the meaning of paragraph (c)(2)(ii)(G)
of this section. Therefore, any covered employee of
Corporation FF for its 2020 taxable year is a covered
employee of Corporation II for its 2022 and subse-
quent taxable years. Accordingly, for Corporation
II’s 2022 taxable year, Employee HH is a covered
employee of Corporation II because Employee HH
was a covered employee of Corporation FF for its
2020 taxable year.
(N) Example 14 (Predecessor of a publicly held
corporation that is a party to a merger)—(1) Facts.
Corporation JJ is a publicly held corporation for its
2019 taxable year. Corporation JJ is incorporated in
State KK. On June 1, 2019, Corporation JJ formed a
wholly-owned subsidiary, Corporation LL. Corpora-
tion LL is a publicly held corporation incorporated in
State MM. On June 30, 2021, Corporation JJ merged
into Corporation LL under State MM law in a trans-
action that qualifies as a reorganization under section
368(a)(1)(A), with Corporation LL as the surviving
corporation. As a result of the merger, Corporation
JJ has a short taxable year ending June 30, 2021.
Corporation JJ is a publicly held corporation for this
short taxable year.
(2) Conclusion. Corporation JJ is a predecessor
of a publicly held corporation within the meaning
of paragraph (c)(2)(ii)(B) of this section. Therefore,
any covered employee of Corporation JJ for its short
taxable year ending June 30, 2021, is a covered em-
ployee of Corporation LL for its taxable years ending
after June 30, 2021. Accordingly, for taxable years
ending after June 30, 2021, the covered employees
of Corporation LL include the covered employees of
Corporation JJ (for a preceding taxable year begin-
ning after December 31, 2016) and any additional
covered employees determined pursuant to para-
graph (c)(2) of this section.
(O) Example 15 (Predecessor of a publicly
held corporation becomes member of an affiliated
group)—(1) Facts. Corporations NN and OO are
publicly held corporations for their 2021 and 2022
taxable years. On June 30, 2021, Corporation OO ac-
quires for cash 100% of the only class of outstanding
stock of Corporation NN. The group (comprised of
Corporations NN and OO) elects to file a consoli-
dated income tax return. As a result of this election,
Corporation NN has a short taxable year ending on
June 30, 2021. Corporation NN is a publicly held
corporation for its taxable year ending June 30, 2021,
and a privately held corporation for subsequent tax-
able years. On June 30, 2022, Corporation OO com-
pletely liquidates Corporation NN.
(2) Conclusion. After Corporation OO acquired
Corporation NN, Corporations NN and OO com-
prised an affiliated group as defined in paragraph
(c)(1)(ii) of this section. Thus, Corporation NN is
a predecessor of a publicly held corporation within
the meaning of paragraph (c)(2)(ii)(D) of this sec-
tion. Therefore, any covered employee of Corpora-
tion NN for its short taxable year ending June 30,
2021, is a covered employee of Corporation OO for
its taxable years ending after June 30, 2021. Ac-
cordingly, for taxable years ending after June 30,
2021, the covered employees of Corporation OO
include the covered employees of Corporation NN
(for a preceding taxable year beginning after De-
cember 31, 2016) and any additional covered em-
ployees determined pursuant to paragraph (c)(2) of
this section.
(P) Example 16 (Predecessor of a publicly
held corporation becomes member of an affiliat-
ed group)—(1) Facts. The facts are the same as in
paragraph (c)(2)(vi)(O) of this section (Example 15),
except that Corporation OO is a privately held cor-
poration on June 30, 2021, and for its 2021 and 2022
taxable years.
(2) Conclusion. Because Corporation OO is a
privately held corporation for its 2021 and 2022 tax-
able years, it is not subject to section 162(m)(1) for
these taxable years.
(Q) Example 17 (Predecessor of a publicly
held corporation becomes member of an affiliat-
ed group)—(1) Facts. The facts are the same as in
paragraph (c)(2)(vi)(P) of this section (Example 16),
except that on October 1, 2022, Corporation OO’s
Securities Act registration statement in connection
with its initial public offering is declared effective
by the SEC, and Corporation OO is a publicly held
corporation for its 2022 taxable year.
(2) Conclusion (Taxable Year Ending December
31, 2021). Because Corporation OO is a privately
held corporation for its 2021 taxable year, it is not
subject to section 162(m)(1) for this taxable year.
(3) Conclusion (Taxable Year Ending December
31, 2022). For the 2022 taxable year, Corporations
NN and OO comprised an affiliated group as defined
in paragraph (c)(1)(ii) of this section. Corporation

Bulletin No. 2020–3 369 January 13, 2020
NN is a predecessor of a publicly held corporation
within the meaning of paragraph (c)(2)(ii)(D) and
(F) of this section because Corporation OO became
a publicly held corporation for a taxable year end-
ing prior to April 15, 2025. Therefore, any covered
employee of Corporation NN for its short taxable
year ending June 30, 2021, is a covered employee of
Corporation OO for its 2022 and subsequent taxable
years. Accordingly, for Corporation OO’s 2022 and
subsequent taxable years, the covered employees of
Corporation OO include the covered employees of
Corporation NN (for a preceding taxable year begin-
ning after December 31, 2016) and any additional
covered employees determined pursuant to para-
graph (c)(2) of this section.
(R) Example 18 (Predecessor of a publicly held
corporation and asset acquisition)—(1) Facts.
Corporations PP and QQ are publicly held corpora-
tions for their 2020 and 2021 taxable years. On June
30, 2021, Corporation PP acquires for cash 80% of
the operating assets (determined by fair market
value) of Corporation QQ. Employees RR, SS, TT,
and UU were covered employees for Corporation
QQ’s taxable year ending December 31, 2020. On
April 1, 2020, Employee RR becomes an employee
of Corporation PP. On June 30, 2021, Employee SS
becomes an employee of Corporation PP. On Octo-
ber 1, 2021, Employee TT becomes an employee of
Corporation PP. On August 1, 2022, Employee UU
becomes an employee of Corporation PP.
(2) Conclusion. Because Corporation PP ac-
quired 80% of Corporation QQ’s operating assets
(determined by fair market value), Corporation QQ
is a predecessor of a publicly held corporation within
the meaning of paragraph (c)(2)(ii)(E) of this section.
Therefore, any covered employee of Corporation QQ
for its 2020 taxable year (who commenced services
for Corporation PP within the 12 months before or
the 12 months after the acquisition) is a covered
employee of Corporation PP for its 2021 and sub-
sequent taxable years. Accordingly, for Corporation
PP’s 2021 and subsequent taxable years, the covered
employees of Corporation PP include Employees
RR, SS, and TT, and any additional covered employ-
ees determined pursuant to paragraph (c)(2) of this
section. Because Employee UU became an employ-
ee of Corporation PP after June 30, 2022, Employee
UU is not a covered employee of Corporation PP for
its 2022 taxable year, but may be a covered employ-
ee of Corporation PP by application of paragraph (c)
(2) of this section to Employee UU’s employment at
Corporation PP.
(S) Example 19 (Predecessor of a publicly held
corporation and asset acquisition)—(1) Facts. The
facts are the same as in paragraph (c)(2)(vi)(R) of
this section (Example 18), except that Corporation
PP is a privately held corporation on June 30, 2021
and for its 2021 taxable year.
(2) Conclusion. Because Corporation PP is a pri-
vately held corporation for its 2021 taxable year, it is
not subject to section 162(m)(1) for this taxable year.
(T) Example 20 (Predecessor of a publicly held
corporation and asset acquisition)—(1) Facts. The
facts are the same as in paragraph (c)(2)(vi)(S) of
this section (Example 19), except that, on October
1, 2022, Corporation PP’s Securities Act registration
statement in connection with its initial public offer-
ing is declared effective by the SEC, and Corporation
PP is a publicly held corporation for 2022 taxable
year.
(2) Conclusion (2021 taxable year). Because
Corporation PP is a privately held corporation for its
2021 taxable year, it is not subject to section 162(m)
(1) for this taxable year.
(3) Conclusion (2022 taxable year). Corporation
QQ is a predecessor of a publicly held corporation
within the meaning of paragraph (c)(2)(ii)(G) of this
section because Corporation PP became a publicly
held corporation for a taxable year ending prior to
April 15, 2025. Therefore, any covered employee of
Corporation QQ for its 2020 taxable year is a cov-
ered employee of Corporation PP for its 2022 and
subsequent taxable years. Accordingly, for Corpo-
ration PP’s 2022 and subsequent taxable years, the
covered employees of Corporation PP include the
covered employees of Corporation QQ and any ad-
ditional covered employees determined pursuant to
paragraph (c)(2) of this section.
(U) Example 21 (Predecessor of a publicly held
corporation and asset acquisition)—(1) Facts. Cor-
porations VV, WW, and XX are publicly held corpo-
rations for their 2020 and 2021 taxable years. Cor-
porations VV and WW are members of an affiliated
group. Corporation WW is a direct subsidiary of
Corporation VV. On June 30, 2021, Corporation VV
acquires for cash 40% of the operating assets (de-
termined by fair market value) of Corporation XX.
On January 31, 2022, Corporation WW acquires an
additional 40% of the operating assets (determined
by fair market value) of Corporation XX. Employees
YY, ZZ, and AAA are covered employees for Corpo-
ration XX’s 2020 taxable year. Employees BBB and
CCC are covered employees for Corporation XX’s
2021 taxable year. On January 15, 2021, Employee
AAA becomes an employee of Corporation WW. On
July 1, 2021, Employee YY becomes an employee
of Corporation WW. On February 1, 2022, Employ-
ees ZZ and BBB become employees of Corporation
WW. On June 30, 2023, Employee CCC becomes an
employee of Corporation WW.
(2) Conclusion. Because an affiliated group, com-
prised of Corporations VV and WW, acquired 80%
of Corporation XX’s operating assets (determined by
fair market value), Corporation XX is a predecessor
of a publicly held corporation within the meaning of
paragraph (c)(2)(ii)(E) of this section. Therefore, any
covered employee of Corporation XX for its 2020
and 2021 taxable years (who commenced services
for Corporation WW within the period beginning
12 months before and ending 12 months after the
acquisition), is a covered employee of Corpora-
tion WW for its 2021, 2022 and subsequent taxable
years. Accordingly, for Corporation WW’s 2021 and
subsequent taxable years, the covered employees of
Corporation WW include Employees AAA and YY,
and any additional covered employees determined
pursuant to paragraph (c)(2) of this section. For Cor-
poration WW’s 2022 and subsequent taxable years,
the covered employees of Corporation WW include
Employees AAA, YY, ZZ and BBB, and any addi-
tional covered employees determined pursuant to
paragraph (c)(2) of this section. Because Employee
CCC became an employee of Corporation WW after
January 31, 2023, Employee CCC is not a covered
employee of Corporation WW for its 2023 taxable
year, but may be a covered employee of Corpora-
tion WW by application of this paragraph (c)(2) to
Employee CCC’s employment at Corporation WW.
(V) Example 22 (Predecessor of a publicly held
corporation and asset acquisition)—(1) Facts. The
facts are the same as in paragraph (c)(2)(vi)(U) of
this section (Example 21), except that Corporations
VV and WW are not publicly held corporations on
June 30, 2021, and for their 2021 taxable years.
(2) Conclusion. Because Corporations VV and
WW are not publicly held corporations for their 2021
taxable years, they are not subject to section 162(m)
(1) for this taxable year.
(W) Example 23 (Predecessor of a publicly held
corporation and asset acquisition)—(1) Facts. The
facts are the same as in paragraph (c)(2)(vi)(V) of
this section (Example 22), except that, on October 1,
2022, Corporation VV’s Securities Act registration
statement in connection with its initial public offer-
ing is declared effective by the SEC, and Corporation
VV is a publicly held corporation for its 2022 taxable
year.
(2) Conclusion (2021 taxable year). Because
Corporations VV and WW are not publicly held cor-
porations for their 2021 taxable years, they are not
subject to section 162(m)(1) for this taxable year.
(3) Conclusion (2022 taxable year). Corporation
XX is a predecessor of a publicly held corporation
within the meaning of paragraph (c)(2)(ii)(G) of this
section because the affiliated group, comprised of
Corporations VV and WW, became a publicly held
corporation for a taxable year ending prior to April
15, 2024. Therefore, any covered employee of Cor-
poration XX for its 2020 taxable year is a covered
employee of Corporation WW for its 2022 taxable
year. Accordingly, for Corporation WW’s 2022 and
subsequent taxable years, the covered employees of
Corporation WW include the covered employees of
Corporation XX (for a preceding taxable year begin-
ning after December 31, 2016) and any additional
covered employees determined pursuant to this para-
graph (c)(2).
(X) Example 24 (Predecessor of a publicly held
corporation and a division)—(1) Facts. Corporation
DDD is a publicly held corporation for its 2021 and
2022 taxable years. On March 2, 2021, Corpora-
tion DDD forms a wholly-owned subsidiary, Cor-
poration EEE, and transfers assets to it. On April
1, 2022, Corporation DDD distributes all shares of
Corporation EEE to its shareholders in a transaction
described in section 355(a)(1). On April 1, 2022,
Corporation EEE’s Securities Act registration state-
ment in connection with its initial public offering is
declared effective by the SEC. Corporation EEE is a
publicly held corporation for its 2022 taxable year.
Employee FFF serves as the PFO of Corporation
DDD from January 1, 2022, to March 31, 2022. On
April 2, 2022, Employee FFF joins Corporation EEE
to serve as an advisor (as a common law employ-
ee) to the PFO of Corporation EEE. After March 31,
2022, Employee FFF ceases to provide services for
Corporation EEE.
(2) Conclusion. Because the distribution of the
stock of Corporation EEE is a transaction described
under section 355(a)(1), Corporation DDD is a pre-
decessor of Corporation EEE within the meaning of
paragraph (c)(2)(ii)(C) of this section. According-
ly, Corporation DDD is a predecessor of Corpora-
tion EEE within the meaning of paragraph (c)(2)(ii)

January 13, 2020 370 Bulletin No. 2020–3
(A) of this section even if Corporation EEE was a
privately held corporation prior to its 2022 taxable
year. Because Employee FFF was a covered employ-
ee of Corporation DDD for its 2022 taxable year,
Employee FFF is a covered employee of Corpora-
tion EEE for its 2022 taxable year. The result is the
same whether Employee FFF performs services for
Corporation EEE as a common law employee or an
independent contractor.
(Y) Example 25 (Predecessor of a publicly held
corporation and a division)—(1) Facts. The facts are
the same as in paragraph (c)(2)(vi)(X) of this section
(Example 24), except that, Corporation DDD ex-
changes 100% of the shares of Corporation EEE with
Corporation GGG in a transaction described in sec-
tion 355(a)(1) and Corporation EEE does not register
any class of securities with the SEC. Furthermore,
Employee FFF performs services for Corporation
GGG instead of for Corporation EEE. Corporation
GGG is a privately held corporation for its 2022 tax-
able year. On October 1, 2023, Corporation GGG’s
Securities Act registration statement in connection
with its initial public offering is declared effective
by the SEC. Corporation GGG is a publicly held
corporation for its 2023 taxable year. On January 1,
2028, Employee FFF begins serving as a director of
Corporation DDD. Corporation DDD is a publicly
held corporation for its 2028 taxable year.
(2) Conclusion (2022 taxable year). Because
Corporation GGG is a privately held corporation
for its 2022 taxable year, section 162(m)(1) does not
limit the deduction for compensation deductible for
this taxable year.
(3) Conclusion (2023 taxable year). Because the
exchange of the stock of Corporation EEE is a trans-
action described under section 355(a)(1), because
Corporations EEE and GGG are an affiliated group,
and because Corporation GGG became a publicly
held corporation for a taxable year ending prior to
April 15, 2025, Corporation DDD is a predecessor of
Corporation GGG within the meaning of paragraphs
(c)(2)(ii)(D) and (G) of this section. Employee FFF
was a covered employee of Corporation DDD for its
2022 taxable year, and began performing services
for Corporation GGG following April 1, 2021, and
before April 1, 2023. Therefore, Employee FFF is a
covered employee of Corporation GGG for its 2023
taxable year.
(4) Conclusion (2028 taxable year). Because
Employee FFF served as the PFO of Corporation
DDD from January 1, 2022, to March 31, 2022, Em-
ployee FFF was a covered employee of Corporation
DDD for its 2022 taxable year. Because an individ-
ual who is a covered employee for a taxable year re-
mains a covered employee for all subsequent taxable
years (even after the individual has separated from
service), Employee FFF is a covered employee of
Corporation DDD for its 2028 taxable year.
(Z) Example 26 (Predecessor of a publicly held
corporation and a division)—(1) Facts. The facts
are the same as in paragraph (c)(2)(vi)(Y) of this
section (Example 25), except that, Employee FFF
begins performing services for Corporation GGG on
June 30, 2023, instead of on April 2, 2022, and never
performs services for Corporation DDD after June
30, 2023. Furthermore, on June 30, 2023, Employee
HHH, a covered employee of Corporation EEE for
all of its taxable years, begins performing services
for Corporation GGG as an independent contractor
advising its PEO but not serving as a PEO.
(2) Conclusion (2023 taxable year). Because the
exchange of the stock of Corporation EEE is a trans-
action described under section 355(a)(1) and because
Corporation GGG became a publicly held corpora-
tion for a taxable year ending before April 15, 2025,
Corporation DDD is a predecessor of Corporation
GGG within the meaning of paragraphs (c)(2)(ii)(D)
and (G) of this section. Even though Employee FFF
was a covered employee of Corporation DDD for
its 2022 taxable year, because Employee FFF began
performing services for Corporation GGG after April
1, 2023, Employee FFF is not a covered employee
of Corporation GGG for its 2023 taxable year. How-
ever, if Employee FFF is a PEO, PFO, or one of the
three highest compensated executives (other than
the PEO or PFO) of Corporation GGG for its 2023
or subsequent taxable years, then Employee FFF is
a covered employee of Corporation GGG for such
taxable year (and subsequent taxable years). Because
Employee HHH was a covered employee of Corpo-
ration EEE for its 2022 taxable year, Employee is a
covered employee of Corporation GGG for its 2023
taxable year.
(AA) Example 27 (Predecessor of a publicly
held corporation and election under section 338(h)
(10))—(1) Facts. Corporation III is the common par-
ent of a group of corporations filing consolidated re-
turns that includes Corporation JJJ as a member. Cor-
poration III wholly-owns Corporation JJJ, a publicly
held corporation within the meaning of paragraph (c)
(1)(i) of this section. On June 30, 2021, Corporation
LLL purchases Corporation JJJ from Corporation III.
Corporation III and Corporation LLL make a timely
election under section 338(h)(10) with respect to the
purchase of Corporation JJJ stock. For its taxable
year after the purchase ending December 31, 2021,
Corporation JJJ continues to be a publicly held cor-
poration within the meaning of paragraph (c)(1)(i)
of this section.
(2) Conclusion. As provided in paragraph (c)(2)
(ii)(H), Corporation JJJ is treated as the same corpo-
ration for purposes for purposes of paragraph (c)(2).
Accordingly, any covered employee of Corporation
JJJ for its short taxable year ending June 30, 2021, is
a covered employee of Corporation JJJ for its short
taxable year ending on December 31, 2021, and sub-
sequent taxable years.
(BB) Example 28 (Disregarded entity)–(1) Facts.
Corporation MMM is a privately held corporation
for its 2020 taxable year. Entity NNN is a whol-
ly-owned limited liability company and is disregard-
ed as an entity separate from its owner, Corporation
MMM, under §301.7701-2(c)(2)(i) of this chapter.
As of December 31, 2020, Entity NNN is required
to file reports under section 15(d) of the Exchange
Act. For the 2020 taxable year, Employee OOO is
the PEO and Employee PPP is the PFO of Corpo-
ration MMM. Employees QQQ, RRR, and SSS are
the three most highly compensated executive officers
of Corporation MMM (other than Employees OOO
and PPP). Employee TTT is the PFO of Entity NNN
and does not perform any policy making functions
for Corporation MMM. Entity NNN has no other ex-
ecutive officers.
(2) Conclusion. Because Entity NNN is disre-
garded as an entity separate from its owner, Corpo-
ration MMM, and is required to file reports under
section 15(d) of the Exchange Act, Corporation
MMM is a publicly held corporation under para-
graph (c)(1)(iii) of this section for its 2020 taxable
year. Even though Employee TTT is a PFO of En-
tity NNN, Employee TTT is not considered a PFO
of Corporation MMM under paragraph (c)(2)(iii) of
this section. As PEO and PFO, Employees OOO and
PPP are covered employees of Corporation MMM
under paragraph (c)(2)(i) of this section. Addition-
ally, as the three most highly compensated executive
officers of Corporation MMM (other than Employ-
ees OOO and PPP), Employees QQQ, RRR, and SSS
are also covered employees of Corporation MMM
under paragraph (c)(2)(i) of this section for Corpo-
ration MMM’s 2020 taxable year because their com-
pensation would be disclosed if Corporation MMM
were subject to the SEC executive compensation
disclosure rules. The conclusion would be the same
if Entity NNN was not required to file reports under
section 15(d) of the Exchange Act and Corporation
MMM was a publicly held corporation pursuant to
paragraph (c)(1)(i) instead of paragraph (c)(1)(iii) of
this section.
(CC) Example 29 (Disregarded entity)—(1)
Facts. The facts are the same as in paragraph (c)(2)
(vi)(BB) of this section (Example 28), except that
Employee TTT performs a policy making function
for Corporation MMM. If Corporation MMM were
subject to the SEC executive compensation disclo-
sure rules, then Employee TTT would be treated as
an executive officer of Corporation MMM pursuant
to 17 CFR 240.3b-7 for purposes of determining the
three highest compensated executive officers for
Corporation MMM’s 2020 taxable year. Employees
QQQ, RRR and SSS are the three most highly com-
pensated executive officers of Corporation MMM
(other than Employees OOO and PPP). Employee
TTT is compensated more than Employee QQQ, but
less than Employees RRR and SSS.
(2) Conclusion. Because Entity NNN is disre-
garded as an entity separate from its owner, Corpo-
ration MMM, and is required to file reports under
section 15(d) of the Exchange Act, Corporation
MMM is a publicly held corporation under para-
graph (c)(1)(iii) of this section for its 2020 taxable
year. As PEO and PFO, Employees OOO and PPP
are covered employees of Corporation MMM under
paragraph (c)(2)(i) of this section. Employee TTT is
one of the three highest compensated executive offi-
cers for Corporation MMM’s taxable year. Because
Employees TTT, RRR, and SSS are the three most
highly compensated executive officers of Corpora-
tion MMM (other than Employees OOO and PPP),
they are covered employees of Corporation MMM
under paragraph (c)(2)(i) of this section for Corpo-
ration MMM’s 2020 taxable year because their com-
pensation would be disclosed if Corporation MMM
were subject to the SEC executive compensation
disclosure rules. The conclusion would be the same
if Entity NNN was not required to file reports under
section 15(d) of the Exchange Act and Corporation
MMM was a publicly held corporation pursuant to
paragraph (c)(1)(i) instead of paragraph (c)(1)(iii) of
this section.
(DD) Example 30 (Individual as covered employ-
ee of a publicly held corporation that includes the
affiliated group)—(1) Facts. Corporations UUU and

Bulletin No. 2020–3 371 January 13, 2020
VVV are publicly held corporations for their 2020,
2021, and 2022 taxable years. Corporation VVV is
a direct subsidiary of Corporation UUU. Employee
WWW is an employee, but not a covered employee,
of Corporation UUU for its 2020, 2021, and 2022
taxable years. From April 1, 2020, to September 30,
2020, Employee WWW performs services for Cor-
poration VVV. Employee WWW does not perform
any services for Corporation VVV for its 2021 and
2022 taxable years. Employee WWW is a covered
employee of Corporation VVV for its 2020, 2021,
and 2022 taxable years. For the 2020 taxable year,
Employee WWW receives compensation for ser-
vices provided to Corporations UUU and VVV only
from Corporation UUU in the amount of $1,500,000.
Employee WWW receives $2,000,000 from Corpo-
ration UUU for performing services for Corporation
UUU during each of its 2021 and 2022 taxable years.
On June 30, 2022, Corporation VVV pays $500,000
to Employee WWW from a nonqualified deferred
compensation plan that complies with section 409A.
(2) Conclusion (2020 taxable year). Because
Employee WWW is a covered employee of Corpora-
tion VVV and because the affiliated group of corpo-
rations (composed of Corporations UUU and VVV)
is a publicly held corporation, Employee WWW is a
covered employee of the publicly held corporation
that is the affiliated group pursuant to paragraph (c)
(2)(v) of this section. Accordingly, compensation
paid by Corporations UUU and VVV is aggregated
for purposes of section 162(m)(1) and, as a result,
$500,000 of the aggregate compensation paid is
nondeductible. The conclusion would be the same if
Corporation UUU was a privately held corporation
for its 2020 taxable year.
(3) Conclusion (2021 taxable year). Because
Employee WWW is a covered employee of Corpora-
tion VVV pursuant to paragraph (c)(2)(i)(C) of this
section and because the affiliated group of corpora-
tions (composed of Corporations UUU and VVV) is
a publicly held corporation, Employee WWW is a
covered employee of the publicly held corporation
that is the affiliated group pursuant to paragraph (c)
(2)(v) of this section. Accordingly, compensation
paid by Corporations UUU and VVV is aggregated
for purposes of section 162(m)(1) and, as a result,
$1,000,000 of the aggregate compensation paid is
nondeductible. The conclusion would be the same if
Corporation UUU was a privately held corporation
for its 2021 taxable year.
(4) Conclusion (2022 taxable year). Because
Employee WWW is a covered employee of Corpora-
tion VVV pursuant to paragraph (c)(2)(i)(C) of this
section and because the affiliated group of corpora-
tions (composed of Corporations UUU and VVV) is
a publicly held corporation, Employee WWW is a
covered employee of the publicly held corporation
that is the affiliated group pursuant to paragraph (c)
(2)(v) of this section. Accordingly, compensation
paid by Corporations UUU and VVV is aggregated
for purposes of section 162(m)(1) and, as a result,
$1,500,000 of the aggregate compensation paid is
nondeductible. The conclusion would be the same if
Corporation UUU was a privately held corporation
for its 2022 taxable year.
(EE) Example 31 (Individual as covered employ-
ee of a publicly held corporation that includes the
affiliated group)—(1) Facts. Corporation BBBB is a
publicly held corporation for its 2020 through 2022
taxable years. Corporations YYY and ZZZ are direct
subsidiaries of Corporation BBBB and are private-
ly held corporations for their 2020 through 2022
taxable years. Employee AAAA serves as the PFO
of Corporation BBBB from January 1, 2020 to De-
cember 31, 2020, when Employee AAAA separates
from service. On January 1, 2021, Employee AAAA
commences employment with Corporation YYY. In
2021, Employee AAAA receives compensation from
Corporation YYY in excess of $1,000,000. On April
1, 2022, Employee AAAA commences employment
with Corporation ZZZ. On September 30, 2022, Em-
ployee AAAA separates from service from Corpo-
rations YYY and ZZZ. In 2022, Employee AAAA
receives compensation from Corporations YYY
and ZZZ in excess of $1,000,000. For the 2021 and
2022 taxable years, Employee AAA does not serve
as either the PEO or PFO of Corporations YYY and
ZZZ, and is not one of the three highest compensated
executive officers (other than the PEO or PFO) of
Corporations YYY and ZZZ.
(2) Conclusion (2021 taxable year). Employ-
ee AAAA is a covered employee of Corporation
BBBB for the 2020 taxable year and subsequent
taxable years. Because Employee AAAA is a cov-
ered employee of Corporation BBBB and because
the affiliated group of corporations (composed of
Corporations BBBB, YYY, and ZZZ) is a public-
ly held corporation, Employee AAAA is a covered
employee of the publicly held corporation that is the
affiliated group pursuant to paragraph (c)(2)(v) of
this section for the 2020 taxable year and subsequent
taxable years. Therefore, Corporation YYY’s deduc-
tion for compensation paid to Employee AAAA for
the 2021 taxable year is subject to limitation under
section 162(m)(1). The result would be the same if
Corporation YYY was a publicly held corporation as
defined in paragraph (c)(1)(i) of this section.
(3) Conclusion (2022 taxable year). Because
Employee AAAA is a covered employee of Corpo-
ration BBBB and because the affiliated group of cor-
porations (composed of Corporations BBBB, YYY,
and ZZZ) is a publicly held corporation, Employee
AAAA is a covered employee of the publicly held
corporation that is the affiliated group pursuant to
paragraph (c)(2)(v) of this section. Therefore, Cor-
poration YYY’s and ZZZ’s deduction for compen-
sation paid to Employee AAAA for the 2022 taxable
year is subject to limitation under section 162(m)
(1). Because the compensation paid by all affiliated
group members is aggregated for purposes of section
162(m)(1), $1,000,000 of the aggregate compensa-
tion paid is nondeductible. Corporations YYY and
ZZZ each are treated as paying a ratable portion of
the nondeductible compensation. The result would
be the same if either Corporation YYY or ZZZ (or
both) was a publicly held corporation as defined in
paragraph (c)(1)(i).
(3) Compensation—(i) In general.
For purposes of the deduction limitation
described in paragraph (b) of this sec-
tion, compensation means the aggregate
amount allowable as a deduction under
chapter 1 of the Internal Revenue Code
for the taxable year (determined without
regard to section 162(m)(1)) for remuner-
ation for services performed by a covered
employee in any capacity, whether or not
the services were performed during the
taxable year. Compensation includes an
amount that is includible in the income
of, or paid to, a person other than the cov-
ered employee (including a beneficiary
after the death of the covered employee)
for services performed by the covered em-
ployee.
(ii) Compensation paid by a partner-
ship. For purposes of paragraph (c)(3)(i)
of this section, compensation includes an
amount equal to a publicly held corpora-
tion’s distributive share of a partnership’s
deduction for compensation expense at-
tributable to the remuneration paid by
the partnership for services performed by
a covered employee of the publicly held
corporation.
(iii) Exceptions. Compensation does
not include—
(A) Remuneration covered in section
3121(a)(5)(A) through (D) (concerning
remuneration that is not treated as wag-
es for purposes of the Federal Insurance
Contributions Act);
(B) Remuneration consisting of any
benefit provided to or on behalf of an
employee if, at the time the benefit is pro-
vided, it is reasonable to believe that the
employee will be able to exclude it from
gross income; or
(C) Salary reduction contributions de-
scribed in section 3121(v)(1).
(iv) Examples. The following exam-
ples illustrate the provisions of this para-
graph (c)(3). For each example, assume
that the corporation is a calendar year tax-
payer.
(A) Example 1—(1) Facts. Corporation Z is a
publicly held corporation for its 2020 taxable year,
during which Employee A serves as the PEO of
Corporation Z and also serves on the board of di-
rectors of Corporation Z. In 2020, Corporation Z
paid $1,200,000 to Employee A plus an additional
$50,000 fee for serving as chair of the board of direc-
tors of Corporation Z. These amounts are otherwise
deductible for Corporation Z’s 2020 taxable year.
(2) Conclusion. The $1,200,000 paid to Employ-
ee A in 2020 plus the additional $50,000 director’s
fee paid to Employee A in 2020 are compensation
within the meaning of paragraph (c)(3) of this sec-
tion. Therefore, Corporation Z’s $1,250,000 deduc-
tion for the 2020 taxable year is subject to limitation
under section 162(m)(1).
(B) Example 2—(1) Facts. Corporation X is a
publicly held corporation for its 2020 through 2024
taxable years. Employee B serves as the PEO of Cor-
poration X for its 2020 taxable year. In 2020, Corpo-

January 13, 2020 372 Bulletin No. 2020–3
ration X established a new nonqualified retirement
plan for its executive officers. The retirement plan
provides for the distribution of benefits over a three-
year period beginning after a participant separates
from service. Employee B separates from service in
2021 and becomes a member of the board of direc-
tors of Corporation X in 2022. In 2022, Employee B
receives a $75,000 fee for services as a director and
$1,500,000 as the first payment under the retirement
plan. Employee B continues to serve on the board of
directors until 2023 when Employee B dies before
receiving the retirement benefit for 2023 and before
becoming entitled to any director’s fees for 2023. In
2023 and 2024, Corporation X pays the $1,500,000
annual retirement benefits to Person C, a beneficiary
of Employee B.
(2) Conclusion (2022 Taxable Year). In 2022,
Corporation X paid Employee B $1,575,000, in-
cluding $1,500,000 under the retirement plan and
$75,000 in director’s fees. The retirement benefit
and the director’s fees are compensation within the
meaning of this paragraph (c)(3). Therefore, Corpo-
ration X’s $1,575,000 deduction for the 2022 taxable
year is subject to limitation under section 162(m)(1).
(3) Conclusion (2023 and 2024 Taxable Years).
In 2023 and 2024, Corporation X made payments to
Person C of $1,500,000 under the retirement plan.
The retirement benefits are compensation within the
meaning of this paragraph (c)(3). Therefore, Cor-
poration X’s deduction for each annual payment of
$1,500,000 for the 2023 and 2024 taxable years is
subject to limitation under section 162(m)(1).
(D) Example 3—(1) Facts. Corporation T is a
publicly held corporation for its 2021 taxable year.
Corporation S is a privately held corporation for its
2021 taxable year. On January 2, 2021, Corporations
S and T form a general partnership. Under the part-
nership agreement, Corporations S and T each have
a 50% share of the partnership’s income, loss, and
deductions. For the taxable year ending December
31, 2021, Employee D, a covered employee of Cor-
poration T, performs services for the partnership,
and the partnership pays $800,000 to Employee D
for these services, $400,000 of which is allocated to
Corporation T.
(2) Conclusion. Because Corporation T’s distrib-
utive share of the partnership’s $400,000 deduction
is attributable to the compensation paid by the part-
nership for services performed by Employee D, a
covered employee of Corporation T, the $400,000 is
compensation within the meaning of this paragraph
(c)(3) and section 162(m)(1) limits Corporation T’s
deduction for this expense for the 2021 taxable year.
Corporation T’s $400,000 share of the partnership’s
deduction is aggregated with Corporation T’s deduc-
tion for compensation paid to Employee D, if any,
in determining the amount allowable as a deduction
to Corporation T for remuneration paid to Employ-
ee D for Corporation T’s 2021 taxable year. See
§1.702-1(a)(8)(iii). The result is the same whether
the covered employee performs services for the part-
nership as a common law employee, an independent
contractor, or a partner, and whether the payment for
services is a payment under section 707(a) or a guar-
anteed payment under section 707(c).
(4) Securities Act. The Securities Act
means the Securities Act of 1933.
(5) Exchange Act. The Exchange Act
means the Securities Exchange Act of
1934.
(6) SEC. The SEC means the United
States Securities and Exchange Commis-
sion.
(7) Foreign Private Issuer. A foreign
private issuer means an issuer as defined
in 17 CFR 240.3b-4(c).
(8) American Depositary Receipt
(ADR). An American Depositary Receipt
means a negotiable certificate that evi-
dences ownership of a specified number
(or fraction) of a foreign private issuer’s
securities held by a depositary (typically,
a U.S. bank).
(9) Privately held corporation. A pri-
vately held corporation is a corporation
that is not a publicly held corporation as
defined in paragraph (c)(1) of this section
(without regard to paragraph (c)(1)(ii) of
this section).
(d) Corporations that become pub-
licly held—(1) In general. In the case of
a corporation that was a privately held
corporation and then becomes a publicly
held corporation, the deduction limitation
of paragraph (b) of this section applies to
any compensation that is otherwise de-
ductible for the taxable year ending on or
after the date that the corporation becomes
a publicly held corporation. A corporation
is considered to become publicly held
on the date that its registration statement
becomes effective either under the Secu-
rities Act or the Exchange Act. The rules
in this section apply to a partnership that
becomes a publicly traded partnership that
is a publicly held corporation within the
meaning of paragraph (c)(1)(i) of this sec-
tion.
(2) Example. The following exam-
ple illustrates the provision of this para-
graph (d).
(i) Facts. In 2021, Corporation E plans to issue
debt securities in a public offering registered under
the Securities Act. Corporation E is not required to
file reports under section 15(d) of the Exchange Act
with respect to any other class of securities and does
not have another class of securities required to be
registered under section 12 of the Exchange Act. On
December 18, 2021, the Securities Act registration
statement for Corporation Z’s debt securities is de-
clared effective by the SEC.
(ii) Conclusion. Corporation E is considered to
become a publicly held corporation on December 18,
2021 because it is now required to file reports under
section 15(d) of the Exchange Act. The deduction
limitation of paragraph (b) of this section applies
to any remuneration that is otherwise deductible for
Corporation E’s taxable year ending on or after De-
cember 18, 2021.
(e) Coordination with disallowed ex-
cess parachute payments under section
280G. The $1,000,000 limitation in para-
graph (b) of this section is reduced (but
not below zero) by the amount (if any)
that would have been included in the com-
pensation of the covered employee for
the taxable year but for being disallowed
by reason of section 280G. For example,
assume that during a taxable year a cor-
poration pays $1,500,000 to a covered
employee. Of the $1,500,000, $600,000 is
an excess parachute payment, as defined
in section 280G(b)(1), and a deduction for
that excess parachute payment is disal-
lowed by reason of section 280G(a). Be-
cause the $1,000,000 limitation in para-
graph (b) of this section is reduced by the
amount of the excess parachute payment,
the corporation may deduct $400,000
($1,000,000 - $600,000), and $500,000 of
the otherwise deductible amount is nonde-
ductible by reason of section 162(m)(1).
Thus $1,100,000 (of the total $1,500,000
payment) is non-deductible, reflecting the
disallowance related to the excess para-
chute payment under section 280G and
the application of section 162(m)(1).
(f) Coordination with excise tax
on specified stock compensation. The
$1,000,000 limitation in paragraph (b)
of this section is reduced (but not below
zero) by the amount (if any) of any pay-
ment (with respect to such employee) of
the tax imposed by section 4985 directly
or indirectly by the expatriated corpora-
tion (as defined in section 4985(e)(2)) or
by any member of the expanded affiliated
group (as defined in section 4985(e)(4))
that includes such corporation.
(g) Transition rules—(1) Amount of
compensation payable under a written
binding contract which was in effect on
November 2, 2017—(i) General rule. This
section does not apply to the deduction
for remuneration payable under a written
binding contract that was in effect on No-
vember 2, 2017, and that is not modified in
any material respect on or after such date
(a grandfathered amount). Instead, section
162(m), as in effect prior to its amendment
by Public Law 115-97, applies to limit the
deduction for such remuneration. Accord-
ingly, because §1.162-27 implemented

Bulletin No. 2020–3 373 January 13, 2020
section 162(m), as in effect prior to its
amendment by Public Law 115-97, the
rules of §1.162-27 determine the appli-
cability of the deduction limitation under
section 162(m) with respect to the pay-
ment of a grandfathered amount. Remu-
neration is a grandfathered amount only to
the extent that as of November 2, 2017,
the corporation was and remains obligated
under applicable law (for example, state
contract law) to pay the remuneration un-
der the contract if the employee performs
services or satisfies the applicable vesting
conditions. Accordingly, this section ap-
plies to the deduction for any amount of
remuneration that exceeds the grandfa-
thered amount if the employee performs
services or satisfies the applicable vesting
conditions. If a grandfathered amount and
non-grandfathered amount are otherwise
deductible for the same taxable year and,
under the rules of §1.162-27, the deduc-
tion of some or all of the grandfathered
amount may be limited (for example, the
grandfathered amount does not satisfy the
requirements of §1.162-27(e)(2) through
(5) as qualified performance-based com-
pensation), then the grandfathered amount
is aggregated with the non-grandfathered
amount to determine the deduction disal-
lowance for the taxable year under section
162(m)(1) (so that the deduction limit
applies to the excess of the aggregated
amount over $1 million). If a portion of
the remuneration payable under a contract
is a grandfathered amount and a portion
is subject to this section and payment
under the contract is made in a series of
payments, the grandfathered amount is al-
located to the first payment of an amount
under the contract that is otherwise deduct-
ible. If the grandfathered amount exceeds
the initial payment, the excess is allocated
to the next payment of an amount under
the contract that is otherwise deductible,
and this process is repeated until the entire
grandfathered amount has been paid.
(ii) Contracts that are terminable or
cancelable. If a written binding contract
is renewed after November 2, 2017, this
section (and not §1.162-27) applies to
any payments made after the renewal. A
written binding contract that is terminable
or cancelable by the corporation without
the employee’s consent after November
2, 2017, is treated as renewed as of the
earliest date that any such termination or
cancellation, if made, would be effective.
Thus, for example, if the terms of a con-
tract provide that it will be automatically
renewed or extended as of a certain date
unless either the corporation or the em-
ployee provides notice of termination of
the contract at least 30 days before that
date, the contract is treated as renewed as
of the date that termination would be ef-
fective if that notice were given. Similarly,
for example, if the terms of a contract pro-
vide that the contract will be terminated or
canceled as of a certain date unless either
the corporation or the employee elects to
renew within 30 days of that date, the con-
tract is treated as renewed by the corpora-
tion as of that date (unless the contract is
renewed before that date, in which case, it
is treated as renewed on that earlier date).
Alternatively, if the corporation will re-
main legally obligated by the terms of a
contract beyond a certain date at the sole
discretion of the employee, the contract
will not be treated as renewed as of that
date if the employee exercises the discre-
tion to keep the corporation bound to the
contract. A contract is not treated as ter-
minable or cancelable if it can be termi-
nated or canceled only by terminating the
employment relationship of the employ-
ee. A contract is not treated as renewed
if upon termination or cancellation of
the contract the employment relationship
continues but would no longer be covered
by the contract. However, if the employ-
ment continues after such termination or
cancellation, payments with respect to
such post-termination or post-cancellation
employment are not made pursuant to the
contract (and, therefore, are not grandfa-
thered amounts).
(iii) Compensation payable under a
plan or arrangement. If a compensation
plan or arrangement is binding, the deduc-
tion for the amount that the corporation
is obligated to pay pursuant to a written
binding contract in effect on November 2,
2017, to an employee pursuant to the plan
or arrangement is not subject to this sec-
tion even if the employee was not eligible
to participate in the plan or arrangement
as of November 2, 2017, if the employee
was employed on November 2, 2017, by
the corporation that maintained the plan
or arrangement, or the employee had the
right to participate in the plan or arrange-
ment under a written binding contract as
of that date.
(iv) Compensation subject to recovery
by corporation. If the corporation is ob-
ligated or has discretion to recover com-
pensation paid in a taxable year only upon
the future occurrence of a condition that
is objectively outside of the corporation’s
control, then the corporation’s right to re-
covery is disregarded for purposes of de-
termining the grandfathered amount for
the taxable year. If the condition occurs,
only the amount the corporation is obli-
gated to pay under applicable law remains
grandfathered taking into account the oc-
currence of the condition. Whether or not
the corporation exercises its discretion to
recover any compensation does not affect
the amount of compensation that the cor-
poration remains obligated to pay under
applicable law.
(2) Material modifications—(i) If a
written binding contract is modified after
November 2, 2017, this section (and not
§1.162-27) applies to any payments made
after the modification. A material modifi-
cation occurs when the contract is amend-
ed to increase the amount of compensa-
tion payable to the employee. If a written
binding contract is materially modified, it
is treated as a new contract entered into
as of the date of the material modification.
Thus, amounts received by an employee
under the contract before a material mod-
ification are not affected, but amounts
received subsequent to the material mod-
ification are treated as paid pursuant to a
new contract, rather than as paid pursuant
to a written binding contract in effect on
November 2, 2017.
(ii) A modification of the contract that
accelerates the payment of compensa-
tion is a material modification unless the
amount of compensation paid is discount-
ed to reasonably reflect the time value
of money. If the contract is modified to
defer the payment of compensation, any
compensation paid or to be paid that is in
excess of the amount that was originally
payable to the employee under the con-
tract will not be treated as resulting in a
material modification if the additional
amount is based on applying to the amount
originally payable either a reasonable rate
of interest or the rate of return on a pre-

January 13, 2020 374 Bulletin No. 2020–3
determined actual investment as defined
in §31.3121(v)(2)-1(d)(2)(i)(B) of this
chapter, (whether or not assets associated
with the amount originally owed are actu-
ally invested therein) such that the amount
payable by the employer at the later date
will be based on the reasonable rate of
interest or the actual rate of return on the
predetermined actual investment (includ-
ing any decrease, as well as any increase,
in the value of the investment).
(iii) The adoption of a supplemental
contract or agreement that provides for
increased compensation, or the payment
of additional compensation, is a material
modification of a written binding contract
if the facts and circumstances demonstrate
that the additional compensation to be
paid is based on substantially the same el-
ements or conditions as the compensation
that is otherwise paid pursuant to the writ-
ten binding contract. However, a material
modification of a written binding contract
does not include a supplemental payment
that is equal to or less than a reasonable
cost-of-living increase over the payment
made in the preceding year under that
written binding contract. In addition, the
failure, in whole or in part, to exercise
negative discretion under a contract does
not result in the material modification of
that contract.
(iv) If a grandfathered amount is sub-
ject to a substantial risk of forfeiture (as
defined in §1.409A-1(d)), then a modifi-
cation of the contract that results in a lapse
of the substantial risk of forfeiture is not
considered a material modification. For
compensation received pursuant to the
substantial vesting of restricted property,
or the exercise of a stock option or stock
appreciation right that do not provide for
a deferral of compensation (as defined in
§1.409A-1(b)(5)(i) and (ii)), a modifica-
tion of a written binding contract in effect
on November 2, 2017, that results in a
lapse of the substantial risk of forfeiture
(as defined §1.83-3(c)) is not considered a
material modification.
(3) Examples. The following exam-
ples illustrate the provisions of this para-
graph (g). For each example, assume for
all relevant years that the corporation is a
publicly held corporation within the mean-
ing of paragraph (c)(1) of this section and
is a calendar year taxpayer. Furthermore,
assume that, for each example, if any ar-
rangement is subject to section 409A, then
the arrangement complies with section
409A, and that no arrangement is subject
to section 457A.
(i) Example 1 (Multi-year agreement for annual
salary)—(A) Facts. On October 2, 2017, Corpora-
tion X executed a 3-year employment agreement
with Employee A for an annual salary of $2,000,000
beginning on January 1, 2018. Employee A serves as
the PFO of Corporation X for the 2017 through 2020
taxable years. The agreement provides for automatic
extensions after the 3-year term for additional 1-year
periods, unless the corporation exercises its option
to terminate the agreement within 30 days before the
end of the 3-year term or, thereafter, within 30 days
before each anniversary date. Termination of the em-
ployment agreement does not require the termination
of Employee A’s employment with Corporation X.
Under applicable law, the agreement for annual sala-
ry constitutes a written binding contract in effect on
November 2, 2017, to pay $2,000,000 of annual sal-
ary to Employee A for three years through December
31, 2020.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee A is a covered employee for Corporation
X’s 2018 through 2020 taxable years. Because the
October 2, 2017, employment agreement is a writ-
ten binding contract to pay Employee A an annual
salary of $2,000,000, this section does not apply (and
§1.162-27 does apply) to the deduction for Employ-
ee A’s annual salary. Pursuant to §1.162-27(c)(2),
Employee A is not a covered employee for Corpo-
ration X’s 2018 through 2020 taxable years. Accord-
ingly, the deduction for Employee A’s annual salary
for the 2018 through 2020 taxable years is not sub-
ject to section 162(m)(1). However, the employment
agreement is treated as renewed on January 1, 2021,
unless it is previously terminated, and the deduction
limit of this section (and not §1.162-27) will apply
to the deduction for any payments made under the
employment agreement on or after that date.
(ii) Example 2 (Agreement for severance based
on annual salary and discretionary bonus)—(A)
Facts. The facts are the same as in paragraph (g)(3)
(i) of this section (Example 1), except that the em-
ployment agreement also requires Corporation X to
pay Employee A severance if Corporation X termi-
nates the employment relationship without cause
within the term of the agreement. The amount of sev-
erance is equal to the sum of two times Employee A’s
annual salary plus two times Employee A’s discre-
tionary bonus (if any) paid within 12 months preced-
ing termination. Under applicable law, the agreement
for severance constitutes a written binding contract
in effect on November 2, 2017, to pay $4,000,000
(two times Employee A’s $2,000,000 annual salary)
if Corporation X terminates Employee A’s employ-
ment without cause within the term of the agreement.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee A is a covered employee for Corporation
X’s 2018 through 2020 taxable years. Because the
October 2, 2017, employment agreement is a writ-
ten binding contract to pay Employee A $4,000,000
if Employee A is terminated without cause prior
to December 31, 2020, this section does not apply
(and §1.162-27 does apply) to the deduction for
$4,000,000 of Employee A’s severance. Pursu-
ant to §1.162-27(c)(2), Employee A is not a cov-
ered employee for Corporation X’s 2018 through
2020 taxable years. Accordingly, the deduction for
$4,000,000 of Employee A’s severance is not sub-
ject to section 162(m)(1). However, the employment
agreement is treated as renewed on January 1, 2021,
unless it is previously terminated, and this section
(and not §1.162-27) will apply to the deduction for
any payments made under the employment agree-
ment, including for severance, on or after that date.
(iii) Example 3 (Agreement for severance based
on annual salary and discretionary bonus)—(A)
Facts. The facts are the same as in paragraph (g)(3)
(ii) of this section (Example 2), except that, on Octo-
ber 31, 2017, Corporation X paid Employee A a dis-
cretionary bonus of $10,000. Under applicable law,
the agreement for severance constitutes a written
binding contract in effect on November 2, 2017, to
pay $4,000,000 (two times Employee A’s $2,000,000
annual salary) if Corporation X terminates Employ-
ee A’s employment without cause prior to December
31, 2020, and $20,000 if Corporation X terminates
Employee A’s employment without cause prior to
October 31, 2018. On June 30, 2018, Corporation X
terminates Employee A without cause and makes a
$4,020,000 severance payment to Employee A.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee A is a covered employee for Corporation
X’s 2018 taxable year. Because the October 2,
2017, agreement is a written binding contract to
pay Employee A $4,000,000 if Employee A is ter-
minated without cause prior to December 31, 2020,
and $20,000 if Corporation X terminates Employee
A’s employment without cause prior to October 31,
2018, this section does not apply (and §1.162-27
does apply) to the deduction for Employee A’s sev-
erance payment of $4,020,000. Pursuant to §1.162-
27(c)(2), Employee A is not a covered employee for
Corporation X’s 2018 taxable year. Accordingly, the
deduction for the entire $4,020,000 of Employee A’s
severance payment is not subject to section 162(m)
(1).
(iv) Example 4 (Effect of discretionary bonus
payment on agreement for severance based on an-
nual salary and discretionary bonus)—(A) Facts.
The facts are the same as in paragraph (g)(3)(ii) of
this section (Example 2), except that, on May 14,
2018, Corporation X paid a $600,000 discretionary
bonus to Employee A and, on April 30, 2019, ter-
minated Employee A’s employment without cause.
Pursuant to the terms of the employment agreement
for severance, on May 1, 2019, Corporation X made
a $5,200,000 severance payment (the sum of two
times the $2,000,000 annual salary and two times the
$600,000 discretionary bonus) to Employee A.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee A is a covered employee for Corporation X’s
2019 taxable year. Because the October 2, 2017,
agreement is a written binding contract to pay Em-
ployee A $4,000,000 if Employee A is terminated
without cause prior to December 31, 2020, this sec-
tion does not apply (and §1.162-27 does apply) to the
deduction for $4,000,000 of Employee A’s severance
payment. Accordingly, the deduction for $4,000,000
of Employee A’s severance payment is not subject
to section 162(m)(1). Because the October 2, 2017,
agreement is not a written binding contract to pay
Employee A a discretionary bonus, the deduction for
$1,200,000 (based on the discretionary bonus) of the

Bulletin No. 2020–3 375 January 13, 2020
$5,200,000 payment is subject to this section (and
not §1.162-27).
(v) Example 5 (Effect of adjustment to annual
salary on severance)—(A) Facts. The facts are the
same as in paragraph (g)(3)(ii) of this section (Ex-
ample 2), except that the employment agreement
provides for discretionary increases in salary and, on
January 1, 2019, Corporation X increased Employee
A’s annual salary from $2,000,000 to $2,050,000, an
increase that was less than a reasonable, cost-of-liv-
ing adjustment.
(B) Conclusion (Annual salary): If this §1.162-
33 applies, Employee A is a covered employee for
Corporation X’s 2018 through 2020 taxable years.
Because the October 2, 2017, agreement is a written
binding contract to pay Employee A an annual sal-
ary of $2,000,000, this section does not apply (and
§1.162-27 does apply) to the deduction for Employ-
ee A’s annual salary unless the change in the salary
is a material modification. Even though the $50,000
increase is paid on the basis of substantially the same
elements or conditions as the salary that is otherwise
paid under the contract, the $50,000 increase does
not constitute a material modification because it
is less than or equal to a reasonable cost-of-living
increase to the $2,000,000 annual salary Corpora-
tion X is required to pay under applicable law as of
November 2, 2017. However, the deduction for the
$50,000 increase is subject to this section (and not
§1.162-27).
(C) Conclusion (Severance payment): Because
the October 2, 2017, agreement is a written binding
contract to pay Employee A severance of $4,000,000,
this section would not apply (and §1.162-27 would
apply) to the deduction for this amount of severance
unless the change in the employment agreement is a
material modification. Even though the $100,000 in-
crease in severance (two times the $50,000 increase
in salary) would be paid on the basis of substantial-
ly the same elements or conditions as the severance
that would otherwise be paid pursuant to the writ-
ten binding contract, the $50,000 increase in salary
on which it is based does not constitute a material
modification of the written binding contract since it
is less than or equal to a reasonable cost-of-living
increase. However, the deduction for the $100,000
increase in severance is subject to this section (and
not §1.162-27).
(vi) Example 6 (Effect of adjustment to annual
salary on severance)—(A) Facts. The facts are the
same as in paragraph (g)(3)(v) of this section (Ex-
ample 5), except that, on January 1, 2019, Corpora-
tion X increased Employee A’s annual salary from
$2,000,000 to $3,000,000, an increase that exceeds a
reasonable, cost-of-living adjustment.
(B) Conclusion (Annual salary): If this §1.162-
33 applies, Employee A is a covered employee for
Corporation X’s 2018 through 2020 taxable years.
Because the October 2, 2017, agreement is a writ-
ten binding contract to pay Employee A an annual
salary of $2,000,000, this section does not apply
(and §1.162-27 does apply) to the deduction for
Employee A’s annual salary unless the change in the
employment agreement is a material modification.
The $1,000,000 increase is a material modification
of the written binding contract because the addition-
al compensation is paid on the basis of substantially
the same elements or conditions as the compensation
that is otherwise paid pursuant to the written binding
contract, and it exceeds a reasonable, annual cost-
of-living increase from the $2,000,000 annual salary
for 2018 that Corporation X is required to pay under
applicable law as of November 2, 2017. Because the
written binding contract is materially modified as of
January 1, 2019, the deduction for all annual salary
paid to Employee A in 2019 and thereafter is subject
to this section (and not §1.162-27).
(C) Conclusion (Severance payment): Because
the October 2, 2017, agreement is a written binding
contract to pay Employee A severance of $4,000,000,
this section would not apply (and §1.162-27 would
apply) to the deduction for this amount of severance
unless the change in the employment agreement is
a material modification. The additional $2,000,000
(two times the $1,000,000 increase in annual sala-
ry) constitutes a material modification of the written
binding contract because the $1,000,000 increase
in salary on which it is based constitutes a material
modification of the written binding contract since it
exceeds a reasonable cost-of-living increase from the
$2,000,000 annual salary for 2018 that Corporation
X is required to pay under applicable law as of No-
vember 2, 2017. Because the agreement is materially
modified as of January 1, 2019, the deduction for any
amount of severance payable to Employee A under
the severance agreement is subject to this section
(and not §1.162-27).
(vii) Example 7 (Elective deferral of an amount
that corporation was obligated to pay under ap-
plicable law)—(A) Facts. The facts are the same
as in paragraph (g)(3)(i) of this section (Example
1), except that, on December 15, 2018, Employee
A makes a deferral election under a NQDC plan to
defer $200,000 of annual salary earned and pay-
able in 2019. Pursuant to the deferred compensation
agreement, the $200,000, including earnings, is to be
paid in a lump sum at Employee A’s separation from
service. The earnings are based on the Standard &
Poor’s 500 Index. Under applicable law, pursuant to
the written binding contract in effect on November
2, 2017, (and absent the deferral agreement) Corpo-
ration X would have been obligated to pay $200,000
to Employee A in 2019, but is not obligated to pay
any earnings on the $200,000 deferred pursuant to
the deferral election Employee A makes on Decem-
ber 15, 2018. Employee A separates from service on
December 15, 2020. On December 15, 2020, Cor-
poration X pays $250,000 (the deferred $200,000 of
salary plus $50,000 in earnings).
(B) Conclusion. If this §1.162-33 applies, Em-
ployee A is a covered employee for Corporation
X’s 2020 taxable year. Employee A’s deferred com-
pensation agreement is not a material modification
of the written binding contract in effect on Novem-
ber 2, 2017, because the earnings to be paid under
the deferred compensation agreement are based on
a predetermined actual investment (as defined in
§31.3121(v)(2)-1(d)(2)(i)(B)). The deduction for
the $50,000 of earnings to be paid that exceed the
amount originally payable to Employee A under the
written binding contract ($200,000 of salary) are
subject to this section (and not §1.162-27). This sec-
tion does not apply (and §1.162-27 does apply) to the
deduction for the $200,000 portion of the $250,000
payment because Corporation X was obligated un-
der applicable law to pay as of November 2, 2017.
Pursuant to §1.162-27(c)(2), Employee A is not a
covered employee for Corporation X’s 2020 taxable
year; thus, the deduction for the $200,000 payment is
not subject to section 162(m)(1).
(viii) Example 8 (Compensation subject to man-
datory recovery by corporation)—(A) Facts. Em-
ployee B serves as the PFO of Corporation Z for
its 2017 through 2019 taxable years. On October 2,
2017, Corporation Z executed a bonus agreement
with Employee B that provides for a performance
bonus of $3,000,000 to be paid on May 1, 2019, if
Corporation Z’s net earnings increase by at least
10% for its 2018 taxable year based on the financial
statements filed with the SEC. The agreement pro-
hibits Corporation Z from reducing the amount of the
bonus for any reason but provides that, if the bonus
is paid and subsequently the financial statements are
restated to show that the net earnings did not increase
by at least 10%, then Corporation Z shall recover the
$3,000,000 from Employee B within six months of
the restatement. Under applicable law, the agree-
ment for the performance bonus constitutes a written
binding contract in effect on November 2, 2017, to
pay $3,000,000 to Employee B if Corporation Z’s
net earnings increase by at least 10% for its 2018
taxable year based on the financial statements filed
with the SEC. On May 1, 2019, Corporation Z pays
$3,000,000 to Employee B because its net earnings
increased by at least 10% of its 2018 taxable year.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee B is a covered employee for Corporation Z’s
2019 taxable year. The terms of the contract provid-
ing for recovery of the $3,000,000 do not preclude
Corporation Z from being contractually obligated
under applicable law to pay $3,000,000 to Employ-
ee B if the net earnings increase by at least 10% for
its 2018 taxable year. Because the October 2, 2017,
agreement is a written binding contract to pay Em-
ployee B $3,000,000 if Corporation Z’s net earnings
increase by at least 10% for its 2018 taxable year
based on the financial statements filed with the SEC,
this section does not apply (and §1.162-27 does ap-
ply) to the deduction for the $3,000,000 payment.
Pursuant to §1.162-27(c)(2), Employee B is not a
covered employee for Corporation Z’s 2019 taxable
year, so the deduction for the $3,000,000 payment is
not subject to section 162(m)(1).
(ix) Example 9 (Compensation subject to dis-
cretionary recovery by corporation)—(A) Facts.
The facts are the same as in paragraph (g)(3)(viii) of
this section (Example 8), except that the agreement
provides that, if the financial statements are restated
to show that the net earnings did not increase by at
least 10%, then Corporation Z may, in its discretion,
recover all or a portion of the $3,000,000 bonus from
Employee B within six months of the restatement.
Under applicable law, the agreement constitutes a
written binding contract in effect on November 2,
2017, to pay $3,000,000 to Employee B if the con-
ditions are met. However, under applicable law, tak-
ing into account the employer’s ability to exercise
discretion and the employer’s past exercise of such
discretion with respect to a recovery in the event of
an earnings restatement, on November 2, 2017, the
bonus plan is a written binding contract only with
respect to $500,000 if Corporation Z’s financial
statements are restated to show that the net earnings
did not increase by at least 10%. On May 1, 2019,
Corporation Z pays $3,000,000 to Employee B. On
July 1, 2019, Corporation Z’s financial statements
are restated to show that its net earnings did not in-

January 13, 2020 376 Bulletin No. 2020–3
crease by at least 10% for its 2018 taxable year. On
July 30, 2019, Corporation Z recovers $1,000,000
from Employee B.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee B is a covered employee for Corporation Z’s
2019 taxable year. Because the October 2, 2107,
agreement is a written binding contract to pay Em-
ployee B $3,000,000 if the applicable conditions are
met, this section does not apply (and §1.162-27 does
apply) to the deduction for the $3,000,000 provided
Corporation Z’s financial statements are not restated
to show that its net earnings did not increase by at
least 10%. However, because Corporation Z’s finan-
cial statements were so restated, then, on November
2, 2017, under applicable law, taking into account
the employer’s ability to exercise discretion and the
employer’s past exercise of such discretion, the bo-
nus plan constitutes a written binding contract to pay
only $500,000. Because Corporation Z recovered
$1,000,000 of the $3,000,000 payment, this section
does not apply (and §1.162-27 does apply) to the
deduction for $500,000 of the $2,000,000 that Cor-
poration Z did not recover. Pursuant to §1.162-27(c)
(2), Employee B is not a covered employee for Cor-
poration Z’s 2019 taxable year, so the deduction for
the $500,000 is not subject to section 162(m)(1). The
deduction for the remaining $1,500,000 is subject to
this section (and not §1.162-27).
(x) Example 10 (Compensation subject to dis-
cretionary recovery by corporation based on a
condition)—(A) Facts. The facts are the same as in
paragraph (g)(3)(viii) of this section (Example 8),
except that the agreement does not include a pro-
vision regarding an earnings restatement. Instead,
the agreement provides that Corporation Z may,
in its discretion, require Employee B to repay the
$3,000,000 bonus if, within three years from the
date of payment, Employee B engages in willful or
reckless behavior that has a material adverse impact
on Corporation Z, or is convicted of, or pleads nolo
contendre or guilty to a felony. Under applicable law,
the agreement constitutes a written binding contract
in effect on November 2, 2017, to pay $3,000,000 to
Employee B if the conditions are met. However, un-
der applicable law, taking into account the employ-
er’s ability to exercise discretion and the employer’s
past exercise of such discretion, if conditions arise
to permit Corporation Z to recover the $3,000,000
bonus from Employee B, then the bonus plan estab-
lished on October 2, 2017, constitutes a written bind-
ing contract to pay only $2,000,000 to Employee B
if Corporation Z’s net earnings increase by at least
10% for its 2018 taxable year based on the financial
statements filed with the SEC. On May 1, 2019, Cor-
poration Z pays $3,000,000 to Employee B. Prior to
May 1, 2022, Employee B does not engage in willful
or reckless behavior that has a material adverse im-
pact on Corporation Z, and is not convicted of, or
plead nolo contendre or guilty to a felony.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee B is a covered employee for Corporation Z’s
2019 taxable year. Because the October 2, 2017,
agreement is a written binding contract under ap-
plicable law to pay Employee B $3,000,000 if the
applicable conditions are met, this section does not
apply (and §1.162-27 does apply) to the deduction
for the $3,000,000. Pursuant to §1.162-27(c)(2),
Employee B is not a covered employee for Corpora-
tion Z’s 2019 taxable year, so the deduction for the
$3,000,000 is not subject to section 162(m)(1).
(xi) Example 11 (Compensation subject to dis-
cretionary recovery by corporation based on a con-
dition)—(A) Facts. The facts are the same as in para-
graph (g)(3)(x) of this section (Example 10), except
that, on April 1, 2021, Employee B pleads guilty to a
felony. Because Employee B pled guilty to a felony
prior to May 1, 2022, Corporation Z has discretion
to recover the $3,000,000 bonus from Employee B.
Corporation Z chooses not to recover any amount of
the $3,000,000 from Employee B.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee B is a covered employee for Corporation Z’s
2019 taxable year. Because Employee B pled guilty
to a felony prior to May 1, 2022, the bonus plan con-
stitutes a written binding contract in effect on No-
vember 2, 2017, to pay only $2,000,000 to Employee
B if the applicable conditions were met. According-
ly, this section does not apply (and §1.162-27 does
apply) to the deduction for the $2,000,000 portion
of the $3,000,000. Pursuant to §1.162-27(c)(2), Em-
ployee B is not a covered employee for Corporation
Z’s 2019 taxable year; thus, the deduction for the
$2,000,000 portion of the $3,000,000 is not subject
to section 162(m)(1). The deduction for the remain-
ing $1,000,000 of the $3,000,000 is subject to this
section (and not §1.162-27).
(xii) Example 12 (Election to defer bonus)—(A)
Facts. On December 31, 2015, Employee C, an em-
ployee of Corporation Y, makes an election under a
NQDC plan to defer the entire amount that would
otherwise be paid to Employee C on December 31,
2016, under Corporation Y’s 2016 annual bonus
plan. Pursuant to the NQDC plan, the earnings on the
deferred amount may be based on either of the fol-
lowing two investment choices (but not the greater of
the two): annual total shareholder return for Corpo-
ration Y or Moody’s Average Corporate Bond Yield.
On a prospective basis, Employee C may change
the investment measure. The deferred amount and
the earnings thereon are to be paid in a lump sum at
Employee C’s separation from service. Employee C
initially elects to have earnings based on annual total
shareholder return for Corporation Y. On December
31, 2018, Employee C elects to have earnings based
on Moody’s Average Corporate Bond Yield. The bo-
nus plan provides that Corporation Y may not reduce
the bonus or any applicable earnings. Employee C
earns a $200,000 bonus for the 2016 taxable year.
Under applicable law, the deferred compensation
agreement constitutes a written binding contract in
effect on November 2, 2017, to pay the $200,000
bonus plus earnings. Specifically, Corporation Y is
obligated to pay earnings on the $200,000 deferred
pursuant to the deferral election Employee C makes
on December 31, 2015. On January 1, 2018, Em-
ployee C is promoted to serve as PEO of Corpora-
tion Y and becomes a covered employee for the first
time. On December 15, 2020, Employee C separates
from service and Corporation Y pays $225,000 (the
deferred $200,000 bonus plus $25,000 in earnings)
to Employee C.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee C is a covered employee for Corporation Y’s
2020 taxable year because Employee C served as the
PEO of Corporation Y during the taxable year. The
December 31, 2015, agreement is a written binding
contract to pay the $200,000 bonus plus earnings.
Furthermore, Employee C’s December 31, 2018,
election to change the earnings measure does not
constitute a material modification. Accordingly, this
section does not apply (and §1.162-27 does apply) to
the deduction for the $225,000 payment from Cor-
poration Y to Employee C. Pursuant to §1.162-27(c)
(2), Employee C is not a covered employee because
Employee C did not serve as the PEO at the close of
the Corporation Y’s taxable year, so the deduction
for the $225,000 payment is not subject to section
162(m)(1).
(xiii) Example 13 (Nonaccount balance plan)—
(A) Facts. On November 2, 2012, Employee D
commences employment with Corporation W as its
PFO. Employee D separates from service as PFO on
January 7, 2020. For each taxable year, Employee
D receives a base salary of $2,000,000. On Janu-
ary 1, 2016, Corporation W and Employee D enter
into a NQDC arrangement that is a nonaccount bal-
ance plan (as defined in §1.409A-1(c)(2)(i)(C). Un-
der the terms of the plan, Corporation W will pay
Employee D a lump sum payment equal to 25% of
Employee D’s base salary in the year of separation
from service multiplied by 1/12 for each month of
service. The plan provides that this payment will be
made six months after separation from service and
that Corporation W may, at any time, amend the plan
to reduce the amount of future benefits; however,
Corporation W may not reduce the benefit accrued
prior to the date of the amendment. Furthermore,
under the terms of the plan and in accordance with
§1.409A-3(j)(4)(ix)(C)(3), if Corporation W termi-
nates the plan, the payments due under the plan may
be accelerated to any date no earlier than 12 months
after the date of termination and no later than 24
months after the date of termination. Under applica-
ble law, if an employer terminates a NQDC plan and
does not make a payment until 12 months after the
date of termination, then, to reflect the time value of
money, the employer is obligated to pay a reasonable
rate of interest (compounded annually) on any ben-
efit accrued under the plan at the date of termination
until the date of payment. Assume for this purpose
that for all applicable periods 3% is a reasonable rate
of interest. As of November 2, 2017, Employee D
has 60 months of service for Corporation W as calcu-
lated under the NQDC plan terms. Under applicable
law, the plan constitutes a written binding contract in
effect on November 2, 2017, to pay $2,575,000. The
$2,575,000 is equal to the amount Corporation W is
obligated to pay if it terminated the plan on Novem-
ber 2, 2017 (25% x $2,000,000 x 1/12 x 60 months
of service ($2,500,000), plus a 3% reasonable rate
of interest that the $2,500,000 earns after plan ter-
mination ($75,000)). On January 7, 2020, when
Employee D separates from service, Corporation D
pays $3,583,333.33 (25% x $2,000,000 x 1/12 x 86
months of service).
(B) Conclusion. If this §1.162-33 applies, Em-
ployee D is a covered employee for Corporation W’s
2020 taxable year. Because, as of November 2, 2017,
the plan is a written binding contract with respect to
$2,575,000, this section does not apply (and §1.162-
27 does apply) to the deduction for the $2,575,000
portion of the $3,583,333.33 payment. Pursuant to
§1.162-27(c)(2), Employee D is not a covered em-
ployee, so the deduction for the $2,575,000 portion

Bulletin No. 2020–3 377 January 13, 2020
of the $3,583,333.33 payment is not subject to sec-
tion 162(m)(1). The deduction for the remaining
$1,008,333.33 portion of the $3,583,333.33 payment
is subject to this section (and not §1.162-27).
(xiv) Example 14 (Nonaccount balance plan
with offset)—(A) Facts. The facts are the same as in
paragraph (g)(3)(xiii) of this section (Example 13),
except that the plan provides that the amount to be
paid to an employee is decreased by the employee’s
account balance in Corporation W’s 401(k) plan on
the date of separation from service. The terms of the
offset comply with section 409A. On November 2,
2017, and July 7, 2020, Employee D’s account bal-
ance in the 401(k) plan is $500,000 and $600,000,
respectively. Under applicable law, the NQDC plan
constitutes a written binding contract in effect on
November 2, 2017, to pay $2,075,000, which is
equal to the amount of remuneration Corporation W
is obligated to pay if it terminated the NQDC plan on
November 2, 2017. The $2,075,000 is the difference
between the $500,000 401(k) plan account balance
on November 2, 2017, and the $2,500,000 accumu-
lated benefit (25% x $2,000,000 x 1/12 x 60 months
of service), plus the 3% interest that the $2,500,000
earns after plan termination ($75,000). On July 7,
2020, under the terms of the NQDC plan, Corpora-
tion D pays $2,983,333.33 (the difference between
the $600,000 401(k) account balance on July 7,
2020, and $3,583,333.33 (25% x $2,000,000 x 1/12
x 86 months of service)).
(B) Conclusion. If this §1.162-33 applies, Em-
ployee D is a covered employee for Corporation
W’s 2020 taxable year. Because, as of November
2, 2017, the plan is a written binding contract with
respect to $2,075,000, this section does not apply
(and §1.162-27 does apply) to the deduction for
$2,075,000 of the $2,983,333.33 payment. Pursuant
to §1.162-27(c)(2), Employee D is not a covered
employee, so the deduction for the $2,075,000 por-
tion of the $2,983,333.33 payment is not subject to
section 162(m)(1). The deduction for the remaining
$908,333.33 portion of the $2,983,333.33 payment
is subject to this section (and not §1.162-27).
(xv) Example 15 (Nonaccount balance plan)—
(A) Facts. The facts are the same as in paragraph (g)
(3)(xiii) of this section (Example 13), except that the
nonaccount balance plan provides that Corporation
W will pay Employee D a lump sum payment of
$5,000,000 on November 7, 2020, if Employee D
provides services from January 1, 2016, through June
30, 2017. Under applicable law, the plan constitutes
a written binding contract in effect on November
2, 2017, to pay $4,712,979.55, which is the sum of
$4,575,708.30 (the amount of remuneration Corpo-
ration W is obligated to pay if it reduced the amount
of future benefits to $0 on November 2, 2017) and the
increase in present value of $137,271.55 (the differ-
ence between $4,575,708.30 and $4,712,979.55 (the
present value of $5,000,000 on November 2, 2018)).
On November 7, 2020, Corporation W makes a lump
sum payment of $5,000,000 to Employee D.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee D is a covered employee for Corporation
W’s 2020 taxable year. Because, as of November
2, 2017, the plan is a written binding contract with
respect to $4,712,979.55, this section does not ap-
ply (and §1.162-27 does apply) to the deduction for
the $4,712,979.55 portion of the $5,000,000 pay-
ment. Pursuant to §1.162-27(c)(2), Employee D is
not a covered employee, so the deduction for the
$4,712,979.55 portion of the $5,000,000 payment is
not subject to section 162(m)(1). The deduction for
the remaining $287,020.45 portion of the $5,000,000
payment is subject to this section (and not §1.162-
27).
(xvi) Example 16 (Performance bonus plan with
negative discretion)—(A) Facts. Employee E serves
as the PEO of Corporation V for the 2017 and 2018
taxable years. On February 1, 2017, Corporation V
establishes a bonus plan, under which Employee E
will receive a cash bonus of $1,500,000 if a speci-
fied performance goal is satisfied. The compensation
committee retains the right, if the performance goal
is met, to reduce the bonus payment to no less than
$400,000 if, in its judgment, other subjective factors
warrant a reduction. On November 2, 2017, under
applicable law which takes into account the employ-
er’s ability to exercise negative discretion, the bonus
plan established on February 1, 2017, constitutes a
written binding contract to pay $400,000. On March
1, 2018, the compensation committee certifies that
the performance goal was satisfied, but exercises
its discretion to reduce the award to $500,000. On
April 1, 2018, Corporation V pays $500,000 to Em-
ployee E. The payment satisfies the requirements
of §1.162-27(e)(2) through (5) as qualified perfor-
mance-based compensation.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee E is a covered employee for Corporation V’s
2018 taxable year. Because the February 1, 2017,
plan is a written binding contract to pay Employee E
$400,000 if the performance goal is satisfied, this sec-
tion does not apply (and §1.162-27 does apply) to the
deduction for the $400,000 portion of the $500,000
payment. Furthermore, the failure of the compensa-
tion committee to exercise its discretion to reduce the
award further to $400,000, instead of $500,000, does
not result in a material modification of the contract.
Pursuant to §1.162-27(e)(1), the deduction for the
$400,000 payment is not subject to section 162(m)
(1) because the payment satisfies the requirements
of §1.162-27(e)(2) through (5) as qualified perfor-
mance-based compensation. The deduction for the
remaining $100,000 of the $500,000 payment is sub-
ject to this section (and not §1.162-27) and therefore
the status as qualified performance-based compensa-
tion is irrelevant to the application of section 162(m)
(1) to this remaining portion.
(xvii) Example 17 (Account balance plan)—(A)
Facts. Employee F serves as the PFO of Corporation
U for the 2016 through 2018 taxable years. On Jan-
uary 4, 2016, Corporation U and Employee F enter
into a NQDC arrangement that is an account balance
plan. Under the terms of the plan, Corporation A
will pay Employee X’s account balance on June 30,
2019, but only if Employee F continues to serve as
the PFO through December 31, 2018. Pursuant to the
terms of the plan, Corporation U credits $100,000 to
Employee F’s account annually on December 31 of
each year for three years beginning on December 31,
2016, and credits earnings and losses on the account
balance daily. The plan also provides that Corpora-
tion U may, in its discretion and at any time, amend
the plan either to stop or to reduce the amount of fu-
ture credits; however, Corporation U may not reduce
Employee F’s account balance credited before the
date of any such amendment. Under the terms of the
plan and in accordance with §1.409A-3(j)(4)(ix)(C)
(3), if Corporation U terminates the plan, the pay-
ment under the plan may be accelerated, but may not
be made within 12 months of the date of termination.
Under the plan terms and applicable law, if Corpora-
tion U terminates the plan, then it is obligated to pay
any earnings that accumulated through the date of
payment. Under applicable law, the plan constitutes
a written binding contract in effect on November 2,
2017, to pay $100,000 of remuneration that Corpora-
tion U credited to the account balance on December
31, 2016, plus any earnings credited on that amount
through November 2, 2018, which is equal to the
amount Corporation U is obligated to pay if it termi-
nates the plan on November 2, 2017 (i.e., after that
date, Corporation U is obligated to credit earnings
but not any further contributions). On November 2,
2017, Employee E’s account balance under the plan
is $110,000. On November 2, 2018, Employee E’s
account balance under the plan would be $115,000
(the $110,000 account balance on November 2,
2017, plus $5,000 earnings on that amount). On June
30, 2019, Corporation U pays Employee F $350,000,
the account balance on June 30, 2019.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee F is a covered employee for Corporation U’s
2019 taxable year because Employee F served as the
PFO of Corporation U during the taxable year. Be-
cause the January 4, 2016, agreement constitutes a
written binding contract to pay $115,000, this sec-
tion does not apply (and §1.162-27 does apply) to the
deduction for the $115,000 portion of the $350,000.
Pursuant to §1.162-27(c)(2), Employee F is not a
covered employee of Corporation U for the 2019
taxable year, so the deduction for the $115,000 por-
tion of the $350,000 is not subject to section 162(m)
(1). The deduction for the remaining $235,000 por-
tion of the payment is subject to this section (and not
§1.162-27).
(xviii) Example 18 (Effect of increasing credits
to an account balance plan)—(A) Facts. The facts
are the same as in paragraph (g)(3)(xvii) of this sec-
tion (Example 17), except that on January 1, 2018,
Corporation U increased the amount it would credit
to Employee F’s account on December 31, 2018 to
$200,000. The amount of the increase exceeds a rea-
sonable, annual cost-of-living increase. On June 30,
2019, Corporation U pays Employee F the account
balance of $455,000 (including earnings).
(B) Conclusion. If this §1.162-33 applies, Em-
ployee F is a covered employee for Corporation U’s
2019 taxable year. The January 1, 2018 increase in
the amount credited to the account balance plan is
a material modification of the plan because the ad-
ditional compensation (the excess of $200,000 over
$100,000) credited under the plan is credited on the
basis of substantially the same elements or condi-
tions as the compensation that would otherwise be
credited pursuant to the plan ($100,000), and it ex-
ceeds a reasonable, annual cost-of-living increase.
Because the plan is materially modified as of Jan-
uary 1, 2018, and all payments under the plan are
made on or after January 1, 2018, the deduction for
all payments under the plan is subject to this section
(and not §1.162-27).
(xix) Example 19 (Equity-based compensation
with underlying grants made prior to November 2,

January 13, 2020 378 Bulletin No. 2020–3
2017)—(A) Facts. On January 2, 2017, Corporation
T executed a 4-year employment agreement with
Employee G to serve as its PEO, and Employee G
serves as the PEO for the four-year term. Pursuant
to the employment agreement, on January 2, 2017,
Corporation T executed a grant agreement and grant-
ed to Employee G nonqualified stock options to pur-
chase 1,000 shares of Corporation T stock, stock ap-
preciation rights (SARs) on 1,000 shares, and 1,000
shares of Corporation T restricted stock. On the date
of grant, the stock options had no readily ascertain-
able fair market value as defined in §1.83-7(b), and
neither the stock options nor the SARs provided for
a deferral of compensation under §§ 1.409A-1(b)
(5)(i)(A) and (B). The stock options, SARs, and
shares of restricted stock are subject to a substantial
risk of forfeiture and all substantially vest on Jan-
uary 2, 2020. Employee G may exercise the stock
options and the SARs at any time from January 2,
2020, through January 2, 2027. On January 2, 2020,
Employee G exercises the stock options and the
SARs, and the 1,000 shares of restricted stock be-
come substantially vested (as defined in §1.83-3(b)).
The grant agreement pursuant to which grants of the
stock options, SARs, and shares of restricted stock
are made constitutes a written binding contract under
applicable law. The compensation attributable to the
stock options and the SARs satisfy the requirements
of §1.162-27(e)(2) through (5) as qualified perfor-
mance-based compensation.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee G is a covered employee for Corporation T’s
2020 taxable year. Because the January 2, 2017, grant
agreement constitutes a written binding contract, this
section does not apply (and §1.162-27 does apply)
to the deduction for compensation received pursuant
to the exercise of the stock options and the SARs,
or the restricted stock becoming substantially vested
(as defined in §1.83-3(b)). Pursuant to §1.162-27(e)
(1), the deduction attributable to the stock options
and the SARs is not subject to section 162(m)(1)
because the compensation satisfies the requirements
of §1.162-27(e)(2) through (5) as qualified perfor-
mance-based compensation. However, the deduction
attributable to the restricted stock is subject to sec-
tion 162(m)(1) because the compensation does not
satisfy the requirements of §1.162-27(e)(2) through
(5) as qualified performance-based compensation.
(xx) Example 20 (Equity-based compensation
with underlying grants made prior to November 2,
2017 for which vesting is accelerated)—(A) Facts.
The facts are the same as in paragraph (g)(3)(xix) of
this section (Example 19), except that, on December
31, 2018, Corporation T modifies the grant agree-
ment pursuant to which grants are made to provide
that the stock options, SARs, and shares of Corpo-
ration T restricted stock are vested as of January 2,
2019. On January 3, 2019, Employee G exercises the
stock options and the SARs.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee G is a covered employee for Corporation T’s
2019 taxable year. The modification of the January 2,
2017, grant agreement is not a material modification.
Because the January 2, 2017, agreement under which
grants were made constitutes a written binding con-
tract, this section does not apply (and §1.162-27 does
apply) to the deduction for compensation received
pursuant to the exercise of the stock options and the
SARs, or the restricted stock becoming vested. Pur-
suant to §1.162-27(e)(2)(iii)(B), the acceleration of
substantial vesting of the stock options and SARs
is not an impermissible increase in compensation to
disqualify the compensation attributable to the stock
options and SARs from satisfying the requirements
of §1.162-27(e)(2) through (5) as qualified perfor-
mance-based compensation, so the deduction attrib-
utable to the stock options and the SARs is not sub-
ject to section 162(m)(1). However, the deduction
attributable to the restricted stock is subject to sec-
tion 162(m)(1) because the compensation does not
satisfy the requirements of §1.162-27(e)(2) through
(5) as qualified performance-based compensation.
(xxi) Example 21 (Plan in which an employee is
not a participant on November 2, 2017)—(A) Facts.
On October 2, 2017, Employee H executes an em-
ployment agreement with Corporation Y to serve as
its PFO, and commences employment with Corpora-
tion Y. The employment agreement, which is a writ-
ten binding contract under applicable law, provides
that if Employee H continues in his position through
April 1, 2018, Employee H will become eligible to
participate in the NQDC plan of Corporation Y and
that Employee H’s benefit accumulated on that date
will be $3,000,000. On April 1, 2021, Employee H
receives a payment of $4,500,000 (the increase from
$3,000,000 to $4,500,000 is not a result of a material
modification as defined in paragraph (g)(2) of this
section), which is the entire benefit accumulated un-
der the plan through the date of payment.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee H is a covered employee for Corporation Y’s
2021 taxable year. Even though Employee H was not
eligible to participate in the NQDC plan on Novem-
ber 2, 2017, Employee H had the right to participate
in the plan under a written binding contract as of that
date. Because the amount required to be paid pursu-
ant to the written binding contract is $3,000,000, this
section does not apply (and §1.162-27 does apply)
to the deduction for the $3,000,000 portion of the
$4,500,000. Pursuant to §1.162-27(c)(2), Employee
H is not a covered employee of Corporation Y for the
2021 taxable year. Accordingly, the deduction for the
$3,000,000 portion of the $4,500,000 is not subject
to section 162(m)(1). The deduction for the remain-
ing $1,500,000 portion of the payment is subject to
this section (and not §1.162-27).
(xxii) Example 22 (Material modification of an-
nual salary)—(A) Facts. On January 2, 2017, Cor-
poration R executed a 5-year employment agreement
with Employee I to serve as Corporation R’s PFO,
providing for an annual salary of $1,800,000. The
agreement constitutes a written binding contract
under applicable law. In 2017 and 2018, Employ-
ee I receives the salary of $1,800,000 per year. In
2019, Corporation R increases Employee I’s salary
by $40,000, which is less than a reasonable cost-
of-living increase from $1,800,000. On January 1,
2020, Corporation R increases Employee I’s sala-
ry to $2,400,000. The $560,000 increase exceeds
a reasonable, annual cost-of-living increase from
$1,840,000.
(B) Conclusion ($1,840,000 Payment in 2019).
If this §1.162-33 applies, Employee I is a covered
employee for Corporation R’s 2018 through 2020
taxable years. Because the January 1, 2017, agree-
ment is a written binding contract to pay Employee I
an annual salary of $1,800,000, this section does not
apply (and §1.162-27 does apply) to the deduction
for Employee I’s annual salary unless the change in
the employment agreement is a material modifica-
tion. Pursuant to §1.162-27(c)(2), Employee I is not
a covered employee of Corporation R for the 2019
taxable year, so the deduction for the $1,800,000 sal-
ary is not subject to section 162(m)(1). Even though
the $40,000 increase is made on the basis of substan-
tially the same elements or conditions as the salary,
the $40,000 increase does not constitute a material
modification of the written binding contract because
the $40,000 is less than or equal to a reasonable cost-
of-living increase applied to the $1,800,000 annual
salary Corporation R owes under the agreement.
However, the deduction for the $40,000 increase is
subject to this section (and not §1.162-27).
(C) Conclusion (Salary increase to $2,400,000 in
2020). The $560,000 increase in salary in 2020 is a
material modification of the written binding contract
because the additional compensation is paid on the
basis of substantially the same elements or condi-
tions as the salary, and it exceeds a reasonable, annu-
al cost-of-living increase from $1,840,000. Because
the written binding contract is materially modified as
of January 1, 2020, the deduction for all salary paid
to Employee I on and after January 1, 2020 is subject
is subject to this section (and not §1.162-27).
(xxiii) Example 23 (Additional payment not
considered a material modification)—(A) Facts.
The facts are the same as in paragraph (g)(3)(xxii)
of this section (Example 22), except that instead of
an increase in salary, in 2020 Employee I receives
a restricted stock grant subject to Employee I’s con-
tinued employment for the balance of the contract.
(B) Conclusion. The restricted stock grant is not
a material modification of the written binding con-
tract because any additional compensation paid to
Employee I under the grant is not paid on the basis
of substantially the same elements and conditions as
Employee I’s salary. However, the deduction attrib-
utable to the restricted stock grant is subject to this
section (and not §1.162-27).
(xxiv) Example 24 (Modification of written bind-
ing contract to provide for accelerated vesting)—(A)
Facts. Employee J serves as the PFO of Corpora-
tion Q for the 2017 through 2020 taxable years. On
July 14, 2017, Corporation Q and Employee J enter
into an agreement providing that Corporation Q will
pay $2,000,000 to Employee J if Employee J contin-
ues to serve as the PFO until the third anniversary
of the agreement (July 14, 2020). The agreement
provides that Corporation Q will make the payment
on the date Employee J meets the service require-
ment. The right to the $2,000,000 payment is sub-
ject to a substantial risk of forfeiture as defined in
§1.409A-1(d). Under applicable law, the plan con-
stitutes a written binding contract in effect on No-
vember 2, 2017, to pay $2,000,000 to Employee J if
Employee J serves as the PFO through July 14, 2020.
On November 29, 2019, Corporation Q modifies the
written binding contract to provide for substantial
vesting of the $2,000,000 on that date and pays the
$2,000,000 to Employee J.
(B) Conclusion. If this §1.162-33 applies, Em-
ployee J is a covered employee for Corporation Q’s
2019 taxable year because Employee J served as
the PFO of Corporation Q during the taxable year.
Because the July 14, 2017, agreement constitutes a
written binding contract to pay $2,000,000, this sec-
tion does not apply (and §1.162-27 does apply) to

Bulletin No. 2020–3 379 January 13, 2020
the deduction for the $2,000,000 unless the contract
is materially modified. Pursuant to §1.162-27(c)(2),
Employee J is not a covered employee of Corpora-
tion Q for the 2019 taxable year. The change in terms
of the contract on November 29, 2019, to accelerate
vesting but to otherwise pay the amounts under the
original terms is not a material modification. Accord-
ingly, the deduction for the $2,000,000 is not subject
to section 162(m)(1).
(h) Effective/Applicability dates—(1)
Effective date. These regulations are ef-
fective on [DATE OF PUBLICATION OF
THE FINAL RULE IN THE FEDERAL
REGISTER].
(2) Applicability dates—(i) General
applicability date. Except as otherwise
provided in paragraph (h)(2)(ii) of this
section, these regulations apply to taxable
years beginning on or after [DATE OF
PUBLICATION OF THE FINAL RULE
IN THE FEDERAL REGISTER].
(ii) Special applicability dates—(A)
Definition of covered employee. The defi-
nition of covered employee in paragraph
(c)(2)(i) of this section applies to taxable
years ending on or after September 10,
2018. However, for a corporation whose
fiscal year and taxable year do not end on
the same date, the rule in paragraph (c)(2)
(i)(B) requiring the determination of the
three most highly compensated executive
officers to be made pursuant to the rules
under the Exchange Act applies to taxable
years ending on or after December 20,
2019.
(B) Definition of predecessor of a pub-
licly held corporation—(1) Publicly held
corporations that become privately held.
The definition of predecessor of a pub-
licly held corporation in paragraph (c)(2)
(ii)(A) of this section applies to any pub-
licly held corporation that becomes a pri-
vately held corporation for a taxable year
beginning after December 31, 2017, and,
subsequently, again becomes a publicly
held corporation on or after [DATE OF
PUBLICATION OF THE FINAL RULE
IN THE FEDERAL REGISTER]. Ac-
cordingly, the definition of predecessor of
a publicly held corporation in paragraph
(c)(2)(ii)(A) of this section does not ap-
ply to any publicly held corporation that
became a privately held corporation for a
taxable year beginning before January 1,
2018, with respect to the earlier period as
a publicly held corporation; or a publicly
held corporation that becomes a privately
held corporation for a taxable year begin-
ning after December 31, 2017, and, sub-
sequently, again becomes a publicly held
corporation before [DATE OF PUBLICA-
TION OF THE FINAL RULE IN THE
FEDERAL REGISTER].
(2) Corporate transactions. The defi-
nition of predecessor of a publicly held
corporation in paragraphs (c)(2)(ii)(B)
through (H) of this section applies to cor-
porate transactions that occur (as provided
in the transaction timing rule of paragraph
(c)(2)(ii)(I) of this section) on or after
[DATE OF PUBLICATION OF THE FI-
NAL RULE IN THE FEDERAL REGIS-
TER].
(C) Definition of compensation. The
definition of compensation provided in
paragraph (c)(3)(ii) of this section (relat-
ing to allocable shares of partnership de-
ductions for compensation paid) applies
to any deduction for compensation that
is otherwise allowable for a taxable year
ending on or after December 20, 2019.
However, this definition of compensation
does not apply to compensation paid pur-
suant to a written binding contract that
is in effect on December 20, 2019 and
that is not materially modified after that
date. For purposes of this paragraph (h)
(3), written binding contract and material
modification have the same meanings as
provided in paragraphs (g)(1) and (g)(2)
of this section.
(D) Corporations that become public-
ly held. The rule in paragraph (d) of this
section (providing that the deduction lim-
itation of paragraph (b) of this section ap-
plies to a deduction for any compensation
that is otherwise deductible for the tax-
able year ending on or after the date that
a privately held corporation becomes a
publicly held corporation) applies to cor-
porations that become publicly held on
or after December 20, 2019. A privately
held corporation that becomes a publicly
held corporation before December 20,
2019 may rely on the transition rules pro-
vided in §1.162-27(f)(1) until the earliest
of the events provided in §1.162-27(f)
(2).
(E) Transition rules. The transition
rules in paragraphs (g)(1) and (2) of this
section (providing that this section does
not apply to remuneration payable under
a written binding contract which was in
effect on November 2, 2017, and which
is not modified in any material respect on
or after such date) apply to taxable years
ending on or after September 10, 2018.
Par. 4. Section 1.338-1 is amended by
revising paragraph (b)(2)(i) to read as fol-
lows:
§ 1.338-1 General principles, status of
old target and new target.
* * * * *
(b) * * *
(2) * * *
(i) The rules applicable to employ-
ee benefit plans (including those plans
described in sections 79, 104, 105, 106,
125, 127, 129, 132, 137, and 220), qual-
ified pension, profit-sharing, stock bonus
and annuity plans (sections 401(a) and
403(a)), simplified employee pensions
(section 408(k)), tax qualified stock op-
tion plans (sections 422 and 423), welfare
benefit funds (sections 419, 419A, 512(a)
(3), and 4976), voluntary employee bene-
fit associations (section 501(c)(9) and the
regulations thereunder (26 CFR 1.501(c)
(9)-1 through 1.501(c)(9)-8)) and certain
excessive employee remuneration (sec-
tion 162(m) and the regulations thereun-
der (26 CFR 1.162-27 and §1.162-31));
* * * * *
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
(Filed by the Office of the Federal Register on De-
cember 16, 2019, 4:15 p.m., and published in the is-
sue of the Federal Register for December 20, 2019,
84 F.R. 70356)

Bulletin No. 2020–3 i January 13, 2020
Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).
Clarified is used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion. It
is not used where a position in a prior rul-
ing is being changed.
Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transactions.
This term is most commonly used in a ruling
that lists previously published rulings that
are obsoleted because of changes in laws or
regulations. A ruling may also be obsoleted
because the substance has been included in
regulations subsequently adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previous-
ly published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cas-
es in litigation, or the outcome of a Ser-
vice study.
Abbreviations
The following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

January 13, 2020 ii Bulletin No. 2020–3
Numerical Finding List
1
Bulletin 2020–3
Notices:
2020-1, 2020-2 I.R.B. 290
2020-2, 2020-3 I.R.B. 327
2020-3, 2020-3 I.R.B. 330
Proposed Regulations:
REG-107431-19, 2020-3 I.R.B. 332
REG-122180-18, 2020-3 I.R.B. 342
Revenue Rulings:
2020-1, 2020-3 I.R.B. 296
2020-2, 2020-3 I.R.B. 298
Treasury Decisions:
9886, 2020-2 I.R.B. 285
9887, 2020-3 I.R.B. 302
9888, 2020-3 I.R.B. 306
Revenue Procedures:
2020-1, 2020-01 I.R.B. 1
2020-2, 2020-01 I.R.B. 107
2020-3, 2020-01 I.R.B. 131
2020-4, 2020-01 I.R.B. 148
2020-5, 2020-01 I.R.B. 241
2020-7, 2020-01 I.R.B. 281
2020-9, 2020-02 I.R.B. 294
2020-10, 2020-02 I.R.B. 295
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018–27 through 2018–52 is in Internal Revenue Bulletin
2018–52, dated December 27, 2018.

Bulletin No. 2020–3 iii January 13, 2020
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2020–3
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018–27 through 2018–52 is in Internal Revenue Bulletin
2018–52, dated December 27, 2018.

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