Internal Revenue Bulletin 2019-44 (PDF rendition): IRS Revenue Rulings

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

Bulletin No. 2019–44
October 28, 2019
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
ADMINISTRATIVE
Rev. Proc. 2019-41, page 1022.
This procedure publishes the amounts of unused housing
credit carryovers allocated to qualified states under section
42(h)(3)(D) of the Code for calendar year 2019.
EXEMPT ORGANIZATIONS
REG-128246-18, page 1037.
This document contains proposed regulations related to the
Internal Revenue Code (Code), which allows a State (or its
agency or instrumentality) to establish and maintain a tax-ad-
vantaged savings program under which contributions may be
made to an ABLE account for the purpose of paying for the
qualified disability expenses of the designated beneficiary of
the account. The affected Code section was amended by
the Tax Cuts and Jobs Act, signed into law on December 22,
2017. The Tax Cuts and Jobs Act allows certain designated
beneficiaries to contribute a limited amount of compensation
income to their own ABLE accounts.
INCOME TAX
Notice 2019-58, page 1022.
This notice announces that, following the expiration of the
temporary regulations under section 385, taxpayers may
rely on the notice of proposed rulemaking cross-referencing
the temporary regulations.
REG-118784-18, page 1024.
The proposed regulations provide guidance on the tax conse-
quences of the phased elimination of interbank offered rates
(IBORs) that is expected to occur in the United States and
many foreign countries. The proposed regulations generally
provide that modifying a debt instrument, derivative, or other
contract to replace an IBOR-referencing rate (or to revise fall-
back provisions in anticipation of the elimination of an IBOR)
is not treated as a realization event for purposes of section
1001. The proposed regulations also adjust other tax rules,
such as the OID and REMIC rules, to minimize the collateral
consequences of the elimination of IBORs.
Rev. Rul. 2019-24, page 1004.
This Revenue Ruling provides guidance on the tax treatment
of virtual currency hard forks. This Revenue Ruling provides
that a hard fork not followed by an airdrop of units of a new
cryptocurrency does not result in gross income to owners
of the original cryptocurrency. This Revenue Ruling further
provides that a hard fork followed by an airdrop of units of a
new cryptocurrency results in gross income to the recipients
of units of new cryptocurrency from the airdrop.
T.D. 9876, page 1005.
This document contains final regulations concerning how
partnership liabilities are allocated for disguised sale purpos-
es. The regulations replace existing temporary regulations
with final regulations that were in effect prior to the tempo-
rary regulations. These regulations affect partnerships and
their partners.
T.D. 9877, page 1007.
This document contains final regulations addressing when
certain obligations to restore a deficit balance in a partner’s
capital account are disregarded under section 704 of the
Internal Revenue Code (Code), when partnership liabilities
are treated as recourse liabilities under section 752, and
how bottom dollar payment obligations are treated under
section 752. These final regulations provide guidance nec-
essary for a partnership to allocate its liabilities among its
partners. These regulations affect partnerships and their
partners.
Finding Lists begin on page ii.

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.
October 28, 2019 Bulletin No. 2019–44

Part I
26 CFR 1.61-1: Gross income.
(Also §§ 61, 451, 1011.)
Rev. Rul. 2019-24
ISSUES
(1) Does a taxpayer have gross in-
come under § 61 of the Internal Revenue
Code (Code) as a result of a hard fork of
a cryptocurrency the taxpayer owns if the
taxpayer does not receive units of a new
cryptocurrency?
(2) Does a taxpayer have gross income
under § 61 as a result of an airdrop of a
new cryptocurrency following a hard fork
if the taxpayer receives units of new cryp-
tocurrency?
BACKGROUND
Virtual currency is a digital represen-
tation of value that functions as a medi-
um of exchange, a unit of account, and a
store of value other than a representation
of the United States dollar or a foreign
currency. Foreign currency is the coin and
paper money of a country other than the
United States that is designated as legal
tender, circulates, and is customarily used
and accepted as a medium of exchange in
the country of issuance. See 31 C.F.R. §
1010.100(m).
Cryptocurrency is a type of virtual cur-
rency that utilizes cryptography to secure
transactions that are digitally recorded on
a distributed ledger, such as a blockchain.
Units of cryptocurrency are generally re-
ferred to as coins or tokens. Distributed
ledger technology uses independent digi-
tal systems to record, share, and synchro-
nize transactions, the details of which are
recorded in multiple places at the same
time with no central data store or adminis-
tration functionality.
A hard fork is unique to distributed
ledger technology and occurs when a
cryptocurrency on a distributed ledger
undergoes a protocol change resulting in
a permanent diversion from the legacy or
existing distributed ledger. A hard fork
may result in the creation of a new cryp-
tocurrency on a new distributed ledger in
addition to the legacy cryptocurrency on
the legacy distributed ledger. Following
a hard fork, transactions involving the
new cryptocurrency are recorded on the
new distributed ledger and transactions
involving the legacy cryptocurrency con-
tinue to be recorded on the legacy distrib-
uted ledger.
An airdrop is a means of distributing
units of a cryptocurrency to the distrib-
uted ledger addresses of multiple taxpay-
ers. A hard fork followed by an airdrop
results in the distribution of units of the
new cryptocurrency to addresses contain-
ing the legacy cryptocurrency. However,
a hard fork is not always followed by an
airdrop.
Cryptocurrency from an airdrop gen-
erally is received on the date and at the
time it is recorded on the distributed led-
ger. However, a taxpayer may construc-
tively receive cryptocurrency prior to the
airdrop being recorded on the distributed
ledger. A taxpayer does not have receipt
of cryptocurrency when the airdrop is
recorded on the distributed ledger if the
taxpayer is not able to exercise domin-
ion and control over the cryptocurrency.
For example, a taxpayer does not have
dominion and control if the address to
which the cryptocurrency is airdropped
is contained in a wallet managed through
a cryptocurrency exchange and the cryp-
tocurrency exchange does not support the
newly-created cryptocurrency such that
the airdropped cryptocurrency is not im-
mediately credited to the taxpayer’s ac-
count at the cryptocurrency exchange. If
the taxpayer later acquires the ability to
transfer, sell, exchange, or otherwise dis-
pose of the cryptocurrency, the taxpayer
is treated as receiving the cryptocurrency
at that time.
FACTS
Situation 1: A holds 50 units of Crypto
M, a cryptocurrency. On Date 1, the dis-
tributed ledger for Crypto M experiences
a hard fork, resulting in the creation of
Crypto N. Crypto N is not airdropped or
otherwise transferred to an account owned
or controlled by A.
Situation 2: B holds 50 units of Crypto
R, a cryptocurrency. On Date 2, the dis-
tributed ledger for Crypto R experiences
a hard fork, resulting in the creation of
Crypto S. On that date, 25 units of Crypto
S are airdropped to B’s distributed ledger
address and B has the ability to dispose
of Crypto S immediately following the
airdrop. B now holds 50 units of Crypto
R and 25 units of Crypto S. The airdrop
of Crypto S is recorded on the distribut-
ed ledger on Date 2 at Time 1 and, at that
date and time, the fair market value of B’s
25 units of Crypto S is $50. B receives the
Crypto S solely because B owns Crypto
R at the time of the hard fork. After the
airdrop, transactions involving Crypto S
are recorded on the new distributed ledger
and transactions involving Crypto R con-
tinue to be recorded on the legacy distrib-
uted ledger.
LAW AND ANALYSIS
Section 61(a)(3) provides that, except
as otherwise provided by law, gross in-
come means all income from whatever
source derived, including gains from deal-
ings in property. Under § 61, all gains or
undeniable accessions to wealth, clearly
realized, over which a taxpayer has com-
plete dominion, are included in gross in-
come. See Commissioner v. Glenshaw
Glass Co., 348 U.S. 426, 431 (1955). In
general, income is ordinary unless it is
gain from the sale or exchange of a capital
asset or a special rule applies. See, e.g., §§
1222, 1231, 1234A.
Section 1011 of the Code provides that
a taxpayer’s adjusted basis for determining
the gain or loss from the sale or exchange
of property is the cost or other basis deter-
mined under § 1012 of the Code, adjusted
to the extent provided under § 1016 of the
Code. When a taxpayer receives proper-
ty that is not purchased, unless otherwise
provided in the Code, the taxpayer’s basis
in the property received is determined by
reference to the amount included in gross
income, which is the fair market value
of the property when the property is re-
ceived. See generally §§ 61 and 1011; see
also § 1.61-2(d)(2)(i).
Section 451 of the Code provides that
a taxpayer using the cash method of ac-
counting includes an amount in gross in-
October 28, 2019 1004 Bulletin No. 2019–44

come in the taxable year it is actually or
constructively received. See §§ 1.451-1
and 1.451-2. A taxpayer using an accrual
method of accounting generally includes
an amount in gross income no later than
the taxable year in which all the events
have occurred which fix the right to re-
ceive such amount. See § 451.
Situation 1: A did not receive units of
the new cryptocurrency, Crypto N, from
the hard fork; therefore, A does not have
an accession to wealth and does not have
gross income under § 61 as a result of the
hard fork.
Situation 2: B received a new asset,
Crypto S, in the airdrop following the
hard fork; therefore, B has an accession
to wealth and has ordinary income in the
taxable year in which the Crypto S is re-
ceived. See
§§ 61 and 451. B has domin-
ion and control of Crypto S at the time
of the airdrop, when it is recorded on the
distributed ledger, because B immediate-
ly has the ability to dispose of Crypto S.
The amount included in gross income is
$50, the fair market value of B’s 25 units
of Crypto S when the airdrop is record-
ed on the distributed ledger. B’s basis in
Crypto S is $50, the amount of income
recognized. See §§ 61, 1011, and 1.61-
2(d)(2)(i).
HOLDINGS
(1) A taxpayer does not have gross in-
come under § 61 as a result of a hard fork
of a cryptocurrency the taxpayer owns if
the taxpayer does not receive units of a
new cryptocurrency.
(2) A taxpayer has gross income, ordi-
nary in character, under § 61 as a result
of an airdrop of a new cryptocurrency fol-
lowing a hard fork if the taxpayer receives
units of new cryptocurrency.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Suzanne R. Sinno of the Office
of Associate Chief Counsel (Income Tax
& Accounting). For further information
regarding the revenue ruling, contact Ms.
Sinno at (202) 317-4718 (not a toll-free
number).
T.D. 9876
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Removal of Temporary
Regulations on a Partner’s
Share of a Partnership
Liability for Disguised Sale
Purposes
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains fi-
nal regulations concerning how partner-
ship liabilities are allocated for disguised
sale purposes. The regulations replace
existing temporary regulations with final
regulations that were in effect prior to the
temporary regulations. These regulations
affect partnerships and their partners.
DATES: Effective date: These regulations
are effective on November 8, 2019.
Applicability date: For date of applicabili-
ty, see §1.707-9(a)(4).
FOR FURTHER INFORMATION CON-
TACT: Caroline E. Hay at (202) 317-5279
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) under section 707 of the Internal
Revenue Code (Code) regarding allo-
cations of partnership liabilities for dis-
guised sale purposes. Section 707(a)(2)
(B) generally provides that, under regula-
tions prescribed by the Secretary, related
transfers of money or other property to
and by a partnership that, when viewed
together, are more properly characterized
as a sale or exchange of property, will be
treated either as a transaction between the
partnership and one who is not a partner or
between two or more partners acting other
than in their capacity as partners (general-
ly referred to as “disguised sales”).
On April 21, 2017, the President issued
Executive Order 13789 (E.O. 13789),
“Executive Order on Identifying and Re-
ducing Tax Regulatory Burdens” (82 FR
19317, April 26, 2017), which directed
the Secretary to review all significant tax
regulations issued on or after January 1,
2016, and to take concrete action to alle-
viate certain burdens imposed by the reg-
ulations. In response to E.O. 13789, the
Secretary issued an interim report which
identified the final and temporary regula-
tions (T.D. 9788) (707 Temporary Regu-
lations) concerning the allocation of part-
nership liabilities for section 707 purposes
as meeting some of the regulatory burdens
specified in E.O. 13789, and later issued
a second report recommending specific
actions to mitigate the burdens. See No-
tice 2017-38 (2017-30 IRB 147 (July 24,
2017)) and Second Report to the President
on Identifying and Reducing Tax Regula-
tory Burdens (82 FR 48013, October 16,
2017).
Following the issuance of the interim
and second reports, on June 19, 2018, the
Department of the Treasury (Treasury De-
partment) and the IRS published a notice
of proposed rulemaking (REG-131186-
17) in the Federal Register (83 FR 28397)
(2018 Proposed Regulations) proposing to
withdraw the 707 Temporary Regulations.
The 2018 Proposed Regulations also pro-
posed reinstating the regulations under
§1.707-5(a)(2) as in effect prior to the
707 Temporary Regulations and as con-
tained in 26 CFR part 1 revised as of April
1, 2016 (Prior 707 Regulations). Finally,
the 2018 Proposed Regulations withdrew
a notice of proposed rulemaking (REG-
122855-15) that incorporated by cross
reference the 707 Temporary Regulations.
The Treasury Department and the IRS did
not receive any written public comments
in response to the 2018 Proposed Regu-
lations. A scheduled public hearing on the
2018 Proposed Regulations was cancelled
because no one requested to speak.
Therefore, the 2018 Proposed Reg-
ulations proposing to withdraw the 707
Bulletin No. 2019–44 1005 October 28, 2019

October 28, 2019 1006 Bulletin No. 2019–44
Temporary Regulations and reinstate the
Prior 707 Regulations are adopted by this
Treasury decision without change, except
the applicability date has been revised.
To avoid a lapse in rules for allocating
partnership liabilities for disguised sale
purposes, these final regulations apply
to any transaction with respect to which
all transfers occur on or after October 4,
2019, the date that the 707 Temporary
Regulations expire. Preventing a lapse in
rules benefits the Treasury Department,
the IRS, and taxpayers by providing
certainty regarding the applicable rules.
These final regulations continue to pro-
vide that partnerships and their partners
may apply these regulations to any trans-
action with respect to which all transfers
occur on or after January 3, 2017, the
applicability date of the 707 Temporary
Regulations.
Special Analyses
These final regulations are not subject
to review under section 6(b) of Execu-
tive Order 12866 pursuant to the Mem-
orandum of Agreement (April 11, 2018)
between the Treasury Department and
the Office of Management and Budget
regarding review of tax regulations. Be-
cause these final regulations do not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursu-
ant to section 7805(f) of the Code, the
notice of proposed rulemaking preceding
these regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business, and no com-
ments were received.
Ongoing Study of Liability Rule for
Disguised Sales
The 707 Temporary Regulations with-
drawn by this Treasury decision adopted
an approach requiring a partnership to ap-
ply the same percentage used to determine
a partner’s share of excess nonrecourse
liabilities under §1.752-3(a)(3) (with cer-
tain limitations) in determining the part-
ner’s share of all partnership liabilities for
disguised sale purposes. As was noted in
the preamble to the 2018 Proposed Reg-
ulations, some commenters supported
this approach, but also expressed concern
that it was adopted in temporary regula-
tions rather than proposed regulations that
would allow for further comment. The
Treasury Department and the IRS contin-
ue to study the merits of the approach in
the 707 Temporary Regulations and other
approaches, including these final regu-
lations, to determine which results in the
most appropriate treatment of liabilities in
the context of disguised sales.
Drafting Information
The principal author of these regula-
tions is Deane M. Burke, Office of the As-
sociate Chief Counsel (Passthroughs and
Special Industries). However, other per-
sonnel from the Treasury Department and
the IRS 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 * * *
Par. 2. Section 1.707-5 is amended by:
1. Revising paragraph (a)(2).
2. Designating Examples 1 through 13
of paragraph (f) as paragraphs (f)(1)
through (f)(13), respectively.
3. Revising newly designated para-
graphs (f)(2) and (3).
4. Removing the language “Example 5”
in newly designated paragraphs (f)(6)
(i) and (ii) and adding the language
“paragraph (f)(5) of this section (Ex-
ample 5)” in its place.
5. Revising newly designated para-
graphs (f)(7) and (8).
6. Removing the language “Example
10” in newly designated paragraph
(f)(11)(i) and adding the language
“paragraph (f)(10) of this section (Ex-
ample 10)” in its place.
The revisions read as follows:
§1.707-5 Disguised sales of property
to partnership; special rules relating to
liabilities.
(a) * * *
(2) Partner’s share of liability. A part-
ner’s share of any liability of the partner-
ship is determined under the following
rules:
(i) Recourse liability. A partner’s share
of a recourse liability of the partnership
equals the partner’s share of the liabili-
ty under the rules of section 752 and the
regulations in this part under section 752.
A partnership liability is a recourse lia-
bility to the extent that the obligation is
a recourse liability under §1.752-1(a)(1)
or would be treated as a recourse liability
under that section if it were treated as a
partnership liability for purposes of that
section.
(ii) Nonrecourse liability. A partner’s
share of a nonrecourse liability of the
partnership is determined by applying the
same percentage used to determine the
partner’s share of the excess nonrecourse
liability under §1.752-3(a)(3). A partner-
ship liability is a nonrecourse liability of
the partnership to the extent that the ob-
ligation is a nonrecourse liability under
§1.752-1(a)(2) or would be a nonrecourse
liability of the partnership under §1.752-
1(a)(2) if it were treated as a partnership
liability for purposes of that section.
* * * * *
(f) * * *
(2) Example 2. Partnership’s assumption of re-
course liability encumbering transferred property.
(i) C transfers property Y to a partnership. At the
time of its transfer to the partnership, property Y has
a fair market value of $10,000,000 and is subject to
an $8,000,000 liability that C incurred, immediately
before transferring property Y to the partnership, in
order to finance other expenditures. Upon the trans-
fer of property Y to the partnership, the partnership
assumed the liability encumbering that property. The
partnership assumed this liability solely to acquire
property Y. Under section 752 and the regulations
in this part under section 752, immediately after the
partnership’s assumption of the liability encumber-
ing property Y, the liability is a recourse liability
of the partnership and C’s share of that liability is
$7,000,000.
(ii) Under the facts of paragraph (f)(2)(i) of this
section (Example 2), the liability encumbering prop-
erty Y is not a qualified liability. Accordingly, the
partnership’s assumption of the liability results in
a transfer of consideration to C in connection with
C’s transfer of property Y to the partnership in the
amount of $1,000,000 (the excess of the liability
assumed by the partnership ($8,000,000) over C’s

Bulletin No. 2019–44 1007 October 28, 2019
share of the liability immediately after the assump-
tion ($7,000,000)). See paragraphs (a)(1) and (2) of
this section.
(3) Example 3. Subsequent reduction of trans-
ferring partner’s share of liability. (i) The facts are
the same as in paragraph (f)(2) of this section (Ex-
ample 2). In addition, property Y is a fully leased
office building, the rental income from property Y
is sufficient to meet debt service, and the remaining
term of the liability is ten years. It is anticipated
that, three years after the partnership’s assumption
of the liability, C’s share of the liability under sec-
tion 752 will be reduced to zero because of a shift
in the allocation of partnership losses pursuant to
the terms of the partnership agreement. Under the
partnership agreement, this shift in the allocation of
partnership losses is dependent solely on the pas-
sage of time.
(ii) Under paragraph (a)(3) of this section, if the
reduction in C’s share of the liability was anticipat-
ed at the time of C’s transfer, was not subject to the
entrepreneurial risks of partnership operations, and
was part of a plan that has as one of its principal pur-
poses minimizing the extent of sale treatment under
§1.707-3 (that is, a principal purpose of allocating
a large percentage of losses to C in the first three
years when losses were not likely to be realized was
to minimize the extent to which C’s transfer would
be treated as part of a sale), C’s share of the liability
immediately after the assumption is treated as equal
to C’s reduced share.
* * * * *
(7) Example 7. Partnership’s assumptions of lia-
bilities encumbering properties transferred pursuant
to a plan. (i) Pursuant to a plan, G and H transfer
property 1 and property 2, respectively, to an exist-
ing partnership in exchange for interests in the part-
nership. At the time the properties are transferred to
the partnership, property 1 has a fair market value
of $10,000 and an adjusted tax basis of $6,000, and
property 2 has a fair market value of $10,000 and an
adjusted tax basis of $4,000. At the time properties
1 and 2 are transferred to the partnership, a $6,000
nonrecourse liability (liability 1) is secured by prop-
erty 1 and a $7,000 recourse liability of F (liability
2) is secured by property 2. Properties 1 and 2 are
transferred to the partnership, and the partnership
takes subject to liability 1 and assumes liability 2. G
and H incurred liabilities 1 and 2 immediately prior
to transferring properties 1 and 2 to the partnership
and used the proceeds for personal expenditures. The
liabilities are not qualified liabilities. Assume that
G and H are each allocated $2,000 of liability 1 in
accordance with paragraph (a)(2)(ii) of this section
(which determines a partner’s share of a nonrecourse
liability). Assume further that G’s share of liability
2 is $3,500 and H’s share is $0 in accordance with
paragraph (a)(2)(i) of this section (which determines
a partner’s share of a recourse liability).
(ii) G and H transferred properties 1 and 2 to
the partnership pursuant to a plan. Accordingly, the
partnership’s taking subject to liability 1 is treated
as a transfer of only $500 of consideration to G (the
amount by which liability 1 ($6,000) exceeds G’s
share of liabilities 1 and 2 ($5,500)), and the partner-
ship’s assumption of liability 2 is treated as a transfer
of only $5,000 of consideration to H (the amount by
which liability 2 ($7,000) exceeds H’s share of lia-
bilities 1 and 2 ($2,000)). G is treated under the rule
in §1.707-3 as having sold $500 of the fair market
value of property 1 in exchange for the partnership’s
taking subject to liability 1 and H is treated as having
sold $5,000 of the fair market value of property 2 in
exchange for the assumption of liability 2.
(8) Example 8. Partnership’s assumption of lia-
bility pursuant to a plan to avoid sale treatment of
partnership assumption of another liability. (i) The
facts are the same as in paragraph (f)(7) of this sec-
tion (Example 7), except that—
(A) H transferred the proceeds of liability 2 to the
partnership; and
(B) H incurred liability 2 in an attempt to reduce
the extent to which the partnership’s taking subject
to liability 1 would be treated as a transfer of consid-
eration to G (and thereby reduce the portion of G’s
transfer of property 1 to the partnership that would
be treated as part of a sale).
(ii) Because the partnership assumed liability 2
with a principal purpose of reducing the extent to
which the partnership’s taking subject to liability 1
would be treated as a transfer of consideration to G,
liability 2 is ignored in applying paragraph (a)(3) of
this section. Accordingly, the partnership’s taking
subject to liability 1 is treated as a transfer of $4,000
of consideration to G (the amount by which liability
1 ($6,000) exceeds G’s share of liability 1 ($2,000)).
On the other hand, the partnership’s assumption of
liability 2 is not treated as a transfer of any consider-
ation to H because H’s share of that liability equals
$7,000 as a result of H’s transfer of $7,000 in money
to the partnership.
* * * * *
§1.707-5T [Removed]
Par. 3. Section 1.707-5T is removed.
Par. 4. Section 1.707-9 is amended by
revising paragraph (a)(4) and removing
paragraph (a)(5). The revision reads as
follows:
§1.707-9 Effective dates and transitional
rules.
(a) * * *
(4) Applicability date of §1.707-5(a)
(2) and (f)(2), (3), (7), and (8). (i) Section
1.707-5(a)(2) and (f)(2), (3), (7), and (8)
apply to any transaction with respect to
which all transfers occur on or after Oc-
tober 4, 2019. However, a partnership and
its partners may apply §1.707-5(a)(2) and
(f)(2), (3), (7), and (8) to any transaction
with respect to which all transfers occur
on or after January 3, 2017.
(ii) For any transaction with respect to
which any transfers occur before January
3, 2017, §1.707-5(a)(2) and (f), as con-
tained in 26 CFR part 1 revised as of April
1, 2016, apply.
(iii) For any transaction with respect to
which all transfers occur on or after Janu-
ary 3, 2017, and any of such transfers oc-
curs before October 4, 2019, see §1.707-
9T(a)(5) as contained in 26 CFR part 1
revised as of April 1, 2019.
* * * * *
§1.707-9T [Removed]
Par. 5. Section 1.707-9T is removed.
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
Approved: October 1, 2010
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on Oc-
tober 4, 2019, 4:15 p.m., and published in the issue
of the Federal Register for October 9, 2019, 84 F.R.
54027)
T.D. 9877
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Liabilities Recognized
as Recourse Partnership
Liabilities under Section
752
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains fi-
nal regulations addressing when certain
obligations to restore a deficit balance
in a partner’s capital account are disre-
garded under section 704 of the Internal
Revenue Code (Code), when partnership
liabilities are treated as recourse liabilities
under section 752, and how bottom dollar

October 28, 2019 1008 Bulletin No. 2019–44
payment obligations are treated under sec-
tion 752. These final regulations provide
guidance necessary for a partnership to
allocate its liabilities among its partners.
These regulations affect partnerships and
their partners.
DATES: Effective date: These regulations
are effective on October 9, 2019.
Applicability dates: For dates of applica-
bility, see §§1.704-1(b)(1)(ii)(a), 1.752-
1(d)(2), and 1.752-2(l).
FOR FURTHER INFORMATION CON-
TACT: Caroline E. Hay at (202) 317-5279
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
1. Overview
This Treasury decision contains amend-
ments to the Income Tax Regulations (26
CFR part 1) under sections 704 and 752
of the Code. On January 30, 2014, the
Department of the Treasury (Treasury De-
partment) and the IRS published a notice
of proposed rulemaking in the Federal
Register (REG-119305-11, 79 FR 4826)
to amend the then existing regulations un-
der section 707 relating to disguised sales
of property to or by a partnership and un-
der section 752 concerning the treatment
of partnership liabilities (2014 Proposed
Regulations). The 2014 Proposed Reg-
ulations provided certain technical rules
intended to clarify the application of the
disguised sale rules under section 707 and
also contained rules regarding the sharing
of partnership recourse and nonrecourse
liabilities under section 752.
A public hearing on the 2014 Proposed
Regulations was not requested or held,
but the Treasury Department and the IRS
received written comments. On October
5, 2016, after consideration of, and in re-
sponse to, the comments on the 2014 Pro-
posed Regulations, the Treasury Depart-
ment and the IRS published in the Federal
Register (81 FR 69291) final regulations
under section 707 concerning disguised
sales and under section 752 regarding the
allocation of excess nonrecourse liabilities
of a partnership to a partner for disguised
sale purposes (T.D. 9787). Also on Octo-
ber 5, 2016, the Treasury Department and
the IRS published in the Federal Register
(81 FR 69282) final and temporary regu-
lations under sections 707 and 752 (T.D.
9788) implementing a new rule concern-
ing the allocation of liabilities for section
707 purposes (707 Temporary Regula-
tions) and rules concerning the treatment
of “bottom dollar payment obligations”
(752 Temporary Regulations). Finally, in
the Federal Register (81 FR 69301) on
October 5, 2016, the Treasury Department
and the IRS withdrew the 2014 Proposed
Regulations under §1.752-2 and published
new proposed regulations (REG-122855-
15) cross-referencing the 707 Temporary
Regulations (707 Proposed Regulations)
and the 752 Temporary Regulations and
addressing (1) when certain obligations to
restore a deficit balance in a partner’s cap-
ital account are disregarded under section
704, and (2) when partnership liabilities
are treated as recourse liabilities under
section 752 (752 Proposed Regulations).
On November 17, 2016, the Treasury
Department and the IRS published in the
Federal Register (81 FR 80993 and 81
FR 80994) two correcting amendments to
T.D. 9788 (the temporary regulations as so
corrected, 707 Temporary Regulations).
In the Federal Register (83 FR 28397)
on June 19, 2018, the Treasury Depart-
ment and the IRS subsequently with-
drew the 707 Proposed Regulations, and
published proposed regulations (REG-
131186-17) proposing to reinstate the
regulations under section 707 concerning
how partnership liabilities are allocated
for disguised sale purposes that were in
effect prior to the 707 Temporary Regula-
tions. In addition to these final regulations
under sections 704 and 752, the Treasury
Department and the IRS are publishing in
this issue of the Federal Register final
regulations under section 707 (T.D. 9876)
that are the same as the regulations that
were in effect prior to the 707 Temporary
Regulations.
A public hearing on the 752 Proposed
Regulations was not requested or held,
but the Treasury Department and the IRS
received written comments. After consid-
eration of the comments, this Treasury
decision adopts the rules in the 752 Tem-
porary Regulations and the 752 Proposed
Regulations with some changes. These
changes, and comments received on the
752 Temporary Regulations and the 752
Proposed Regulations, are discussed in
the Summary of Comments and Explana-
tions of Revisions section of the preamble
that follows.
2. Summary of Applicable Law
Section 752 separates partnership lia-
bilities into two categories: recourse lia-
bilities and nonrecourse liabilities. Section
1.752-1(a)(1) provides that a partnership
liability is a recourse liability to the extent
that any partner or related person bears the
economic risk of loss (EROL) for that li-
ability under §1.752-2. Section 1.752-1(a)
(2) provides that a partnership liability is a
nonrecourse liability to the extent that no
partner or related person bears the EROL
for that liability under §1.752-2.
A partner generally bears the EROL
for a partnership liability if the partner
or related person has an obligation to
make a payment to any person within the
meaning of §1.752-2(b). For purposes of
determining the extent to which a part-
ner or related person has an obligation to
make a payment, an obligation to restore
a deficit capital account upon liquidation
of the partnership under the section 704(b)
regulations is taken into account (deficit
restoration obligation). Further, for this
purpose, §1.752-2(b)(6) of the existing
regulations presumes that partners and
related persons who have payment obliga-
tions actually perform those obligations,
irrespective of their net worth, unless the
facts and circumstances indicate a plan to
circumvent or avoid the obligation (the
satisfaction presumption). However, the
satisfaction presumption is subject to an
anti-abuse rule in §1.752-2(j) pursuant to
which a payment obligation of a partner
or related person may be disregarded or
treated as an obligation of another person
if facts and circumstances indicate that a
principal purpose of the arrangement is
to eliminate the partner’s EROL with re-
spect to that obligation or create the ap-
pearance of the partner or related person
bearing the EROL when the substance is
otherwise. Under the existing rules, the
satisfaction presumption is also subject to
a disregarded entity net value requirement
under §1.752-2(k) pursuant to which, for
purposes of determining the extent to

Bulletin No. 2019–44 1009 October 28, 2019
which a partner bears the EROL for a part-
nership liability, a payment obligation of
a disregarded entity is taken into account
only to the extent of the net value of the
disregarded entity as of the allocation date
that is allocated to the partnership liability.
Summary of Comments and
Explanations of Revisions
1. Bottom Dollar Payment Obligations
A. Obligations treated as bottom dollar
payment obligations
The 752 Temporary Regulations pro-
vide that a bottom dollar payment ob-
ligation is not recognized as a payment
obligation for purposes of §1.752-2. The
752 Temporary Regulations provide that
a bottom dollar payment obligation is the
same as or similar to one of the follow-
ing three types of payment obligations
or arrangements: (1) with respect to a
guarantee or similar arrangement, any
payment obligation other than one in
which the partner or related person is or
would be liable up to the full amount of
such partner’s or related person’s pay-
ment obligation if, and to the extent that,
any amount of the partnership liability is
not otherwise satisfied; (2) with respect
to an indemnity or similar arrangement,
any payment obligation other than one
in which the partner or related person is
or would be liable up to the full amount
of such partner’s or related person’s pay-
ment obligation, if, and to the extent
that, any amount of the indemnitee’s or
benefited party’s payment obligation is
recognized; and (3) an arrangement with
respect to a partnership liability that uses
tiered partnerships, intermediaries, se-
nior and subordinate liabilities, or similar
arrangements to convert what would oth-
erwise be a single liability into multiple
liabilities if, based on the facts and cir-
cumstances, the liabilities were incurred
pursuant to a common plan, as part of a
single transaction or arrangement, or as
part of a series of related transactions or
arrangements, and with a principal pur-
pose of avoiding having at least one of
such liabilities or payment obligations
with respect to such liabilities being
treated as a bottom dollar payment ob-
ligation. A payment obligation is not a
bottom dollar payment obligation mere-
ly because a maximum amount is placed
on the partner’s or related person’s pay-
ment obligation, a partner’s or related
person’s payment obligation is stated as
a fixed percentage of every dollar of the
partnership liability, or there is a right of
proportionate contribution running be-
tween partners or related persons who
are co-obligors with respect to a pay-
ment obligation for which each of them
is jointly and severally liable. The 752
Temporary Regulations also provide an
exception to the non-recognition rule of
bottom dollar payment obligations. That
is, a bottom dollar payment obligation
is recognized when a partner or related
person is liable for at least 90 percent of
the partner’s or related person’s initial
payment obligation despite an indemnity,
a reimbursement agreement, or a similar
arrangement.
One commenter stated that the 752
Temporary Regulations are conceptual-
ly flawed, result in inconsistent answers,
and are directly contrary to Congressional
intent. That commenter explained that the
prior regulations appropriately followed
Congress’s mandate that debt is allocated
by a partnership to the partners who bear
the EROL with respect to the debt. See
Section 79 of the Deficit Reduction Act of
1984 (Pub. L. No. 98-369) overruling the
decision in Raphan v. United States, 3 Cl.
Ct. 457 (1983) (holding that a guarantee
on a partnership liability by a general part-
ner did not require that partner to be treat-
ed as personally liable for that liability and
did not preclude the other partners who
did not guarantee the loan from sharing
in the step up in basis on account of the
debt). The commenter argued that the 752
Temporary Regulations instead treat all
guarantees as bottom dollar payment obli-
gations which do not create EROL unless
the partner is liable for the full amount of
that partner’s or related person’s payment
obligation if, and to the extent that, any
amount of the partnership liability is not
otherwise satisfied. The commenter as-
serted that, under the 752 Temporary Reg-
ulations, all guarantees below 90 percent
of a payment obligation are ignored, even
if the partnership and the partners believe
that the guaranteeing partner bears the
EROL with respect to the payment obli-
gation.
As an example of these concerns, the
commenter pointed to the different results
in Examples 10 and 11 in §1.752-2T(f).
In Examples 10 and 11, A, B, and C are
equal members of a partnership, ABC.
ABC borrows $1,000 from Bank. In Ex-
ample 10, A guarantees up to $300 of the
liability if any amount of the $1,000 li-
ability is not recovered by Bank, while
B guarantees payment of up to $200,
but only if Bank otherwise recovers less
than $200. In Example 11, C additional-
ly agrees to indemnify A for up to $100
that A pays with respect to A’s guarantee.
The comment explained that, in Example
10, $300 of the liability is recognized and
allocated (to A), but in Example 11, only
$100 is recognized and allocated (in the
amount indemnified by C). The full $300
payment obligation would have been
recognized and allocated if made by one
partner, but splitting it across two part-
ners caused $200 of the collective pay-
ment obligation to be ignored. This result
is notwithstanding that $300 of the same
first-dollars of the $1,000 partnership li-
ability in the example was guaranteed by
the partners.
Although recommending revocation of
the 752 Temporary Regulations, this com-
menter recognized that prior regulations
under section 752 allow partners that have
no practical economic risk to be allocated
debt. As a compromise, this commenter
proposed that if the Treasury Department
and the IRS are concerned with bottom
dollar payment obligations that lack eco-
nomic reality, the temporary regulations
should be replaced with a rule that does
not recognize obligations below a certain
threshold. The commenter recommended,
as an example, that obligations limited to
the bottom one-third of a debt obligation
not be recognized, but once the obligation
is above that threshold, the entire obliga-
tion is recognized. The commenter argued
that such a rule would provide greater
certainty than the 752 Temporary Regula-
tions and recognize that the guarantor has
risk.
The 752 Temporary Regulations and
these final regulations implement Con-
gressional intent. Bottom dollar pay-
ment obligations do not represent real
EROL because those payment obliga-
tions are structured to insulate the obli-
gor from having to pay their obligations.

October 28, 2019 1010 Bulletin No. 2019–44
Moreover, bottom dollar guarantees are
not relevant to loan risk underwriting
generally. These obligations generally
lack a significant non-tax commercial
business purpose. Therefore, bottom
dollar payment obligations should not
be recognized as payment obligations.
Despite the commenter’s assertion that
there could be some risk to partners with
bottom dollar payment obligations, the
Treasury Department and the IRS re-
ceived no comments (including from
this commenter) on the 752 Temporary
Regulations or the 752 Proposed Regu-
lations demonstrating that bottom dollar
payment obligations have a significant
non-tax commercial business purpose.
Nor did any commenter propose an alter-
native that resolves the concerns raised in
the preamble to the 752 Temporary Reg-
ulations that, under the prior section 752
regulations, partners and related persons
entered into payment obligations that
were not commercial solely to achieve
an allocation of a partnership liability.
The compromise proposal offered by this
commenter would significantly lower
the threshold for the amount required to
be economically at risk from 90 percent
of a partner’s or related person’s initial
payment obligation to 33 percent with-
out explaining why the lower threshold
is more appropriate. Indeed, the compro-
mise could still allow a partner with no
practical economic risk to be allocated
debt. These final regulations comport
with Congress’ directive in response to
Raphan. Moreover, Examples 10 and 11
in §1.752-2(f) are not inconsistent with
one another, but show how an otherwise
recognized payment obligation can be-
come a bottom dollar payment obligation
when the initial payment obligor no lon-
ger bears the real EROL as a result of a
subsequent indemnity. For these reasons,
the Treasury Department and the IRS do
not adopt the commenter’s suggestions.
The 752 Temporary Regulations fur-
ther require taxpayers to disclose bottom
dollar payment obligations by filing Form
8275, Disclosure Statement, or any suc-
cessor form, with the return of the partner-
ship for the taxable year in which a bottom
dollar payment obligation is undertaken or
modified. These final regulations clarify
that identifying the payment obligation
with respect to which disclosure is made
includes stating whether the obligation is
a guarantee, a reimbursement, an indemni-
ty, or deficit restoration obligation.
B. Capital contribution and deficit
restoration obligations
Generally, the regulations under sec-
tion 752 provide a description of obliga-
tions recognized as payment obligations
under §1.752-2(b)(1). The 752 Temporary
Regulations further provide that all statu-
tory and contractual obligations relating
to the partnership liability are taken into
account for purposes of applying §1.752-
2, including obligations to the partner-
ship that are imposed by the partnership
agreement, such as the obligation to make
a capital contribution and a deficit resto-
ration obligation. See §1.752-2T(b)(3).
A commenter expressed concerns that,
although it is clear that a capital contri-
bution obligation and a deficit restoration
obligation are types of payment obliga-
tions to which §1.752-2 applies, the defi-
nition of a bottom dollar payment obli-
gation provides no guidance as to how to
determine whether a capital contribution
obligation or a deficit restoration obliga-
tion is a bottom dollar payment obliga-
tion. For example, a deficit restoration
obligation does not relate to a particular
partnership liability and the proceeds of
the deficit restoration obligation may be
paid to creditors of the partnership or
distributed to other partners. See §1.704-
1(b)(2)(ii)(b)(3). These final regulations
thus revise the definition of a bottom
dollar payment obligation to specifically
address capital contribution obligations
and deficit restoration obligations. Sec-
tion 1.752-2(b)(3)(ii)(C)(1)(iii) in these
final regulations provides that a bottom
dollar payment obligation includes, with
respect to a capital contribution obliga-
tion and a deficit restoration obligation,
any payment obligation other than one in
which the partner is or would be required
to make the full amount of the partner’s
capital contribution or to restore the full
amount of the partner’s deficit capital ac-
count.
C. Anti-abuse rule in §1.752-2(j)(2)
The 752 Temporary Regulations pro-
vide that irrespective of the form of the
contractual obligation, the Commissioner
may treat a partner as bearing the EROL
with respect to a partnership liability, or
portion thereof, to the extent that: (1) the
partner or related person undertakes one
or more contractual obligations so that the
partnership may obtain or retain a loan; (2)
the contractual obligations of the partner
or related person significantly reduce the
risk to the lender that the partnership will
not satisfy its obligations under the loan,
or portion thereof; and (3) with respect to
the contractual obligations described in
(1) or (2), (i) one of the principal purposes
of using the contractual obligation is to at-
tempt to permit partners (other than those
who are directly or indirectly liable for the
obligation) to include a portion of the loan
in the basis of their partnership interests,
or (ii) another partner, or person related
to another partner, enters into a payment
obligation and a principal purpose of the
arrangement is to cause the payment obli-
gation to be disregarded. See §1.752-2T(j)
(2).
A commenter argued that because this
anti-abuse rule is at the Commissioner’s
discretion, taxpayers are uncertain how
to treat certain liabilities that would oth-
erwise be bottom dollar payment obli-
gations. One of the purposes of the 752
Temporary Regulations is to ensure that
only genuine commercial payment obli-
gations, including guarantees and indem-
nities, affect the allocation of partnership
liabilities. Indeed, commenters to the
2014 Proposed Regulations noted that
partners can manipulate contractual ar-
rangements to achieve a federal income
tax result that is not consistent with the
economics of an arrangement. This is
true both of a payment obligation that
does not represent a real EROL as well
as an agreement that purposefully cre-
ates the appearance of a bottom dollar
payment obligation even if that taxpay-
er (or a person related to that taxpayer)
bears the EROL. The anti-abuse rule,
therefore, is appropriate. However, in re-
sponse to comments regarding uncertain-
ty caused because the anti-abuse rule in
the 752 Temporary Regulations applied
at the Commissioner’s discretion, the fi-
nal regulations remove the discretionary
language consistent with the rule in the
regulations under section 752 prior to the
752 Temporary Regulations.

Bulletin No. 2019–44 1011 October 28, 2019
D. Applicability date and transitional
rule
The 752 Temporary Regulations for
bottom dollar payment obligations gener-
ally apply to liabilities incurred or assumed
by a partnership and payment obligations
imposed or undertaken with respect to a
partnership liability on or after October 5,
2016, other than liabilities incurred or as-
sumed by a partnership and payment obli-
gations imposed or undertaken pursuant to
a written binding contract in effect prior to
that date. Under the 752 Temporary Reg-
ulations, a transitional rule applies to any
partner whose allocable share of partner-
ship liabilities under §1.752-2 exceeded
its adjusted basis in its partnership interest
as determined under §1.705-1 on October
5, 2016 (Grandfathered Amount). To the
extent of that excess, those partners may
continue to apply the prior regulations
under §1.752-2 with respect to a partner-
ship liability for a seven-year period. The
amount of partnership liabilities subject to
transition relief decreases for certain re-
ductions in the amount of liabilities allo-
cated to that partner under the transitional
rule and, upon the sale of any partnership
property, for any tax gain (including sec-
tion 704(c) gain) allocated to the partner
less that partner’s share of amount real-
ized.
A commenter explained that the rule in
§1.704-2(g)(3) regarding conversions of
recourse or partner nonrecourse liabilities
into nonrecourse liabilities may overlap
and potentially conflict with the transi-
tional rule. This commenter noted that the
transitional rule may be unnecessary, but,
regardless, believes that the transitional
rule should be coordinated with §1.704-
2(g)(3).
Section 1.704-2(g)(3) provides that a
partner’s share of partnership minimum
gain is increased to the extent provided
in §1.704-2(g)(3) if a recourse or partner
nonrecourse liability becomes partially or
wholly nonrecourse. If a recourse liability
becomes a nonrecourse liability, a partner
has a share of the partnership’s minimum
gain that results from the conversion equal
to the partner’s deficit capital account (de-
termined under §1.704-1(b)(2)(iv)) to the
extent the partner no longer bears the eco-
nomic burden for the entire deficit capi-
tal account as a result of the conversion.
The determination of the extent to which
a partner bears the economic burden for a
deficit capital account is made by deter-
mining the consequences to the partner in
the case of a complete liquidation of the
partnership immediately after the con-
version applying the rules described in
§1.704-1(b)(2)(iii)(c) that deem the value
of partnership property to equal its basis,
taking into account section 7701(g) in the
case of property that secures nonrecourse
indebtedness. If a partner nonrecourse
debt becomes a nonrecourse liability, the
partner’s share of partnership minimum
gain is increased to the extent the partner
is not subject to the minimum gain charge-
back requirement under §1.704-2(i)(4).
The commenter asserts that §1.704-2(g)
(3) increases a partner’s share of mini-
mum gain which increases the partner’s
capital account to reflect the same result as
if nonrecourse deductions had been taken
all along. The gain, if it would have been
triggered as a result of a partner’s negative
section 704(b) account with no deficit re-
duction obligation, is deferred because un-
der §1.704-2(g)(3), the partner’s share of
minimum gain increases. The commenter
argues that §1.752-3(a)(1) or (2) would
apply to allocate the nonrecourse liability
to the partner and, therefore, the partner
would still be allocated a share of the part-
nership liability eliminating the need for
the transitional rule.
Notwithstanding the rule in §1.704-2(g)
(3), the transitional rule is necessary to ad-
dress certain situations when §1.704-2(g)
(3) would not apply because, for example,
before these regulations were finalized, a
bottom dollar deficit restoration obligation
is regarded for section 704 purposes, but
is disregarded for section 752 purposes. In
that case, a partner could recognize gain
under section 731 without the transitional
rule. Additionally, because §1.752-3(a)(1)
and (2) do not apply in determining a part-
ner’s share of a partnership nonrecourse
liability for disguised sale purposes, a dis-
guised sale could occur if a partner’s share
of liabilities under §1.752-3(a)(3) does
not cover the Grandfathered Amount.
To the extent that the transitional rule
applies to a partner’s share of a recourse
partnership liability as a result of the part-
ner bearing the EROL under §1.752-2(b),
the partner’s share of the liability can con-
tinue to be determined under §1.752-2 and
is not converted into a nonrecourse liability
under §1.752-3. In this situation, because
a recourse or partner nonrecourse liability
does not become partially or wholly non-
recourse as a result of the transitional rule,
the rule in §1.704-2(g)(3) would not apply
until the expiration of the seven-year peri-
od. If a partner does not want to apply the
transitional rule in determining its share of
a partnership liability because it believes
that the rule in §1.704-2(g)(3) effectively
defers any negative tax consequences that
could occur when a recourse or partner
nonrecourse liability becomes partially or
wholly nonrecourse, the partner must then
apply the rules under §1.752-2, as amend-
ed after October 5, 2016, in determining
its share of a partnership liability.
This commenter also noted that the
transitional rule should clarify wheth-
er it applies to refinanced liabilities. The
bottom dollar payment obligation rules
do not apply to liabilities incurred or as-
sumed by a partnership and payment ob-
ligations imposed or undertaken pursu-
ant to a written binding contract in effect
before October 5, 2016. The preamble to
the 752 Temporary Regulations explains
that commenters on the 2014 Proposed
Regulations had recommended that part-
nership liabilities or payment obligations
that are modified or refinanced contin-
ue to be subject to the provisions of the
previous regulations to the extent of the
amount and duration of the pre-modifica-
tion (or refinancing) liability or payment
obligation. The preamble explains that the
752 Temporary Regulations do not adopt
this recommendation as the terms of the
partnership liabilities and payment obli-
gations could be changed, which would
affect the determination of whether or not
an obligation is a bottom dollar payment
obligation, but instead provided transition
relief. Under the transitional rule, if a debt
entered into before October 5, 2016, is not
refinanced, these final regulations do not
apply. If the debt is refinanced, then these
regulations apply, but the partner could
instead choose to apply the transitional
rule to the extent of the Grandfathered
Amount. Although the transitional rule in
the 752 Temporary Regulations applies to
modified or refinanced obligations, these
final regulations further clarify that the
transitional rule applies to modified and
refinanced liabilities.

October 28, 2019 1012 Bulletin No. 2019–44
2. Additional Guidance on Disregarding
Purported Payment Obligations
A. Deficit restoration obligation factors
The 752 Proposed Regulations add a
list of factors to §1.704-1(b)(2)(ii)(c) that
are similar to the factors in the proposed
anti-abuse rule under §1.752-2(j) (dis-
cussed in Section 2.B. of the Summary of
Comments and Explanations of Revisions
in this preamble), but specific to deficit
restoration obligations, to indicate when a
plan to circumvent or avoid an obligation
exists. If a plan to circumvent or avoid an
obligation exists, the obligation is disre-
garded for purposes of sections 704 and
752. Under proposed §1.704-1(b)(2)(ii)
(c), the following factors indicate a plan
to circumvent or avoid an obligation: (1)
the partner is not subject to commercial-
ly reasonable provisions for enforcement
and collection of the obligation; (2) the
partner is not required to provide (either at
the time the obligation is made or periodi-
cally) commercially reasonable documen-
tation regarding the partner’s financial
condition to the partnership; (3) the obli-
gation ends or could, by its terms, be ter-
minated before the liquidation of the part-
ner’s interest in the partnership or when
the partner’s capital account as provided
in §1.704-1(b)(2)(iv) is negative; and (4)
the terms of the obligation are not provid-
ed to all the partners in the partnership in
a timely manner.
The Treasury Department and the IRS
are aware that a partner’s transfer of its
deficit restoration obligation to a trans-
feree who agrees to the same deficit res-
toration obligation could run afoul of the
third factor and cause the partner’s deficit
restoration obligation to be disregarded.
However, under these final regulations,
the weight to be given to any particular
factor depends on the particular facts and
the presence or absence of any particular
factor is not, in itself, necessarily indic-
ative of whether or not the obligation is
respected. The fact that a transferee agrees
to the same deficit restoration obligation
should be taken into account when de-
termining whether a plan to circumvent
or avoid an obligation exists. In addition,
these final regulations add an exception to
this factor when a transferee partner as-
sumes the obligation.
B. Anti-abuse factors under §1.752-2(j)
(3)
The 2014 Proposed Regulations in-
cluded a list of factors to determine
whether a partner’s or related person’s ob-
ligation to make a payment with respect
to a partnership liability (excluding those
imposed by state law) would be recog-
nized for purposes of section 752. In re-
sponse to comments, the 752 Proposed
Regulations moved the list of factors to
an anti-abuse rule in §1.752-2(j)(3), oth-
er than the recognition factors concerning
bottom dollar guarantees and indemnities,
which are addressed in the 752 Temporary
Regulations. Under the anti-abuse rule in
the 752 Proposed Regulations, the follow-
ing non-exclusive factors are weighed to
determine whether a payment obligation
should be respected: (1) the partner or re-
lated person is not subject to commercial-
ly reasonable contractual restrictions that
protect the likelihood of payment, (2) the
partner or related person is not required
to provide commercially reasonable doc-
umentation regarding the partner’s or re-
lated person’s financial condition to the
benefited party, (3) the term of the pay-
ment obligation ends prior to the term
of the partnership liability, or the partner
or related person has a right to terminate
its payment obligation, (4) there exists a
plan or arrangement in which the primary
obligor or any other obligor with respect
to the partnership liability directly or indi-
rectly holds money or other liquid assets
in an amount that exceeds the reasonable
foreseeable needs of such obligor, (5)
the payment obligation does not permit
the creditor to promptly pursue payment
following a payment default on the part-
nership liability, or other arrangements
with respect to the partnership liability
or payment obligation otherwise indicate
a plan to delay collection, (6) in the case
of a guarantee or similar arrangement, the
terms of the partnership liability would be
substantially the same had the partner or
related person not agreed to provide the
guarantee, and (7) the creditor or other
party benefiting from the obligation did
not receive executed documentation with
respect to the payment obligation from the
partner or related person before, or within
a commercially reasonable period of time
after, the creation of the obligation. The
weight to be given to any particular fac-
tor depends on the particular case and the
presence or absence of any particular fac-
tor, in itself, is not necessarily indicative
of whether or not a payment obligation is
recognized under §1.752-2(b).
A commenter expressed concerns with
the listed factors asserting that they are
drafted to make an obligation fail (that
the debt will be nonrecourse) because an
obligation is unlikely to satisfy all seven
factors. The commenter also argued that
the factors are subject to manipulation by
taxpayers who desire nonrecourse debt
treatment. Finally, the commenter was
concerned with the subjective and specu-
lative inquiry regarding the fourth and
sixth factors.
The seven factors are appropriate
considerations in determining whether a
plan to circumvent or avoid an obligation
exists. The 2014 Proposed Regulations
provided that a payment obligation with
respect to a partnership liability was not
recognized under §1.752-2(b)(3) unless
all of the factors were met. At comment-
ers’ requests and due to concerns that the
rule was too strict, the 752 Proposed Reg-
ulations moved the list of factors from the
operative rule to the anti-abuse rule where
they are now just factors to examine in
determining whether a plan to circumvent
or avoid an obligation exists. In response
to the comment on the 752 Proposed Reg-
ulations, however, these final regulations
add clarification to the fourth factor that
amounts are not held in excess of the rea-
sonably foreseeable needs of an obligor if
the partnership purchases standard com-
mercial insurance, such as casualty insur-
ance. Additionally, these final regulations
list certain types of commercially reason-
able documentation (balance sheets and
financial statements) as examples of doc-
uments a lender would typically require.
A commenter also requested that the
final regulations clarify how the assump-
tion rule in §1.752-1(d) relates to the
factors in §1.752-2(j). Under §1.752-
1(b), any increase in a partner’s share of
partnership liabilities, or any increase in
a partner’s individual liabilities by rea-
son of the partner’s assumption of part-
nership liabilities, is treated as a contri-
bution of money by that partner to the
partnership. Conversely, §1.752-1(c)
provides that any decrease in a partner’s

Bulletin No. 2019–44 1013 October 28, 2019
share of partnership liabilities, or any de-
crease in a partner’s individual liabilities
by reason of the partnership’s assumption
of the individual liabilities of the partner,
is treated as a distribution of money by
the partnership to that partner. The as-
sumption rule in §1.752-1(d) applies to
determine whether a partner has assumed
a partnership liability (treated as a con-
tribution under section 752(a)), or the
partnership has assumed a partner liabili-
ty (treated as a distribution under section
752(b)). Generally under §1.752-1(d), a
person is considered to assume a liability
only to the extent that (1) the assuming
person is personally obligated to pay the
liability; and (2) if a partner or related
person assumes a partnership liability,
the person to whom the liability is owed
knows of the assumption and can directly
enforce the partner’s or related person’s
obligation for the liability, and no other
partner or person that is a related person
to another partner would bear the EROL
for the liability immediately after the as-
sumption. Sections 1.752-2 and 1.752-3
provide the rules for determining a part-
ner’s share of partnership recourse and
nonrecourse liabilities.
The analysis for determining whether a
partner or person that is a related person
to a partner bears the EROL for a liabil-
ity for purposes of the assumption rule in
§1.752-1(d) should be the same analysis
for determining whether a partner or relat-
ed person bears the EROL under §1.752-
2, including the factors in §1.752-2(j) for
payment obligations. Therefore, these
final regulations add a cross reference in
§1.752-1(d) to clarify that an assumption
will be treated as giving rise to a payment
obligation only to the extent no other part-
ner or a person related to another partner
bears the EROL for the liability as deter-
mined under §1.752-2.
C. Reasonable expectation of ability to
satisfy obligation
The satisfaction presumption in
§1.752-2(b)(6) of the existing regulations
is subject to a disregarded entity net value
requirement under existing §1.752-2(k).
The 2014 Proposed Regulations expanded
the scope of the net value requirement and
provided that, in determining the extent
to which a partner or related person other
than an individual or a decedent’s estate
bears the EROL for a partnership liabili-
ty other than a trade payable, a payment
obligation is recognized only to the extent
of the net value of the partner or related
person that, as of the allocation date, is al-
located to the liability, as determined un-
der §1.752-2(k). The 2014 Proposed Reg-
ulations also required a partner to provide
a statement concerning the net value of a
person with a payment obligation (a pay-
ment obligor) to the partnership. The pre-
amble to the 2014 Proposed Regulations
requested comments concerning whether
the net value rule should also apply to
individuals and estates and whether the
regulations should consolidate these rules
under §1.752-2(k).
Comments on the 2014 Proposed Reg-
ulations suggested that if the net value rule
is retained, §1.752-2(k) should be extend-
ed to all partners and related persons other
than individuals. A commenter expressed
concerns that a partner who may be treat-
ed as bearing the EROL with respect to a
partnership liability would have to pro-
vide information regarding the net value
of a payment obligor, which is unneces-
sarily intrusive. Another commenter be-
lieved that if the rules requiring net value
were extended to all partners in partner-
ships, the attempt to achieve more realis-
tic substance would be accompanied by a
corresponding increase in the potential for
manipulation.
The preamble to the 752 Proposed Reg-
ulations explains that the Treasury Depart-
ment and the IRS remain concerned with
ensuring that a partner or related person be
presumed to satisfy its payment obligation
only to the extent that such partner or re-
lated person would be able to pay the ob-
ligation. After consideration of the com-
ments to the 2014 Proposed Regulations,
however, the Treasury Department and the
IRS agreed that expanding the application
of the net value rules under §1.752-2(k)
may lead to more litigation and may undu-
ly burden taxpayers. Furthermore, net val-
ue as provided in §1.752-2(k) may not ac-
curately take into account future earnings
of a business entity, which normally factor
into lending decisions. Therefore, the 752
Proposed Regulations proposed to remove
§1.752-2(k) of the existing regulations
and instead create a new presumption un-
der the anti-abuse rule in §1.752-2(j).
Under the presumption in the 752 Pro-
posed Regulations, evidence of a plan to cir-
cumvent or avoid an obligation is deemed
to exist if the facts and circumstances indi-
cate that there is not a reasonable expecta-
tion that the payment obligor will have the
ability to make the required payments if the
payment obligation becomes due and pay-
able (Presumed Anti-abuse Rule). A pay-
ment obligor includes disregarded entities
(including grantor trusts). If evidence of a
plan to circumvent or avoid the obligation
exists or is deemed to exist, the obligation
is not recognized under §1.752-2(b) and
therefore the partnership liability is treated
as a nonrecourse liability under §1.752-
1(a)(2).
Commenters argued that §1.752-2(k)
should be retained, however, because it
provides clarity and certainty to taxpay-
ers. One commenter suggested that if the
government believes that the Presumed
Anti-abuse Rule is necessary, §1.752-
2(k) should still be retained, or, alterna-
tively, expanded to all partners and relat-
ed persons other than individuals. This
commenter noted that the Presumed An-
ti-abuse Rule creates uncertainty as it is
not clear that taxpayers may proactively
assert the Presumed Anti-abuse Rule. The
commenter suggested that the final regu-
lations clarify that motive and intent are
irrelevant in determining whether the Pre-
sumed Anti-abuse Rule applies and that
no actual plan to circumvent or avoid an
obligation needs to exist.
Expanding the application of §1.752-
2(k) in the existing regulations would
unduly burden taxpayers and would not
accurately reflect economics. A more ac-
curate reflection of economics is to de-
termine whether a debtor will have the
ability to make payments when due, not
necessarily to whether the debtor has
sufficient assets to satisfy an obligation
currently. The Treasury Department and
the IRS agree with the commenter, how-
ever, that the Presumed Anti-abuse Rule
could create confusion and uncertainty.
These final regulations, therefore, amend
§1.752-2(k) and clarify how the satisfac-
tion presumption in §1.752-2(b)(6) relates
to §1.752-2(k) in these final regulations.
Amended §1.752-2(k) applies to all part-
ners of a partnership, including partners
that are disregarded entities or grantor
trusts.

October 28, 2019 1014 Bulletin No. 2019–44
Under these final regulations, it is as-
sumed that all payment obligors actually
perform those obligations, irrespective of
their actual net worth, unless the facts and
circumstances indicate that at the time the
partnership determines a partner’s share of
partnership liabilities under §§1.705-1(a)
and 1.752-4(d) there is not a commercially
reasonable expectation that the payment
obligor will have the ability to make the
required payments under the terms of the
obligation if the obligation becomes due
and payable. A partner or related person’s
ability to pay may be based on documents
such as, but not limited to, balance sheets,
income statements, cash flow statements,
credit reports, and projected future finan-
cial results.
D. General applicability date
Except as provided in Section 1.D. of
the Summary of Comments and Explana-
tions of Revisions in this preamble relat-
ing to bottom dollar payments obligations,
these final regulations apply to liabilities
incurred or assumed by a partnership and
to payment obligations imposed or under-
taken with respect to a partnership liability
on or after October 9, 2019, other than li-
abilities incurred or assumed by a partner-
ship and payment obligations imposed or
undertaken pursuant to a written binding
contract in effect prior to that date.
3. Additional Issues Concerning
Partnership Liabilities That Are Outside
the Scope of These Regulations
A commenter recommended guidance
in determining a partner’s amount at risk
under section 465 for deficit restoration
obligations. This commenter noted that
under Hubert Enterprises, Inc. v. Com-
missioner, T.C. Memo. 2008-46, a deficit
restoration obligation was not treated as
giving a partner at risk basis because the
obligation was contingent (because it was
dependent upon the partner liquidating his
interest) and the amount was uncertain
(the deficit restoration obligation covered
only the deficit in the partner’s capital ac-
count at the time of liquidation and did not
cover the entire debt obligation at issue).
The commenter also recommended pro-
viding guidance under section 465 similar
to that provided in these final regulations
regarding when guarantees will be rec-
ognized. Providing guidance concerning
section 465 is beyond the scope of these
regulations. The Treasury Department
and the IRS request comments, however,
concerning whether guidance is needed to
address issues under section 465.
The commenter recommended that
these regulations incorporate standards
to determine when a debt is recourse to
a partnership under section 1001. The
commenter questioned whether that test
under section 1001 is performed at the
partnership or partner level. These final
regulations provide guidance as to how li-
abilities are allocated to partners in a part-
nership and do not concern how liabilities
are characterized to the partnership under
section 1001. This comment is thus out-
side the scope of these regulations.
This commenter also suggested that the
Treasury Department and the IRS consider
whether the rules in section 357(d) should
have been adopted for partnerships since
section 357(d)(3) states that the Secretary
may also prescribe regulations which pro-
vide that the manner in which a liability
is treated as assumed under section 357(d)
is applied, where appropriate, elsewhere
in Title 26. Section 357(d)(1)(A) pro-
vides that a recourse liability (or portion
thereof) shall be treated as having been
assumed if, as determined on the basis of
all facts and circumstances, the transferee
has agreed to, and is expected to, satisfy
such liability (or portion), whether or not
the transferor has been relieved of such
liability. Section 357(d)(1)(B) provides
that except as provided in section 357(d)
(2), a nonrecourse liability shall be treated
as having been assumed by the transferee
of any asset subject to such liability. This
recommended change is beyond the scope
of these regulations, which are concerned
with whether a partnership debt is re-
course or non-recourse to a partner in the
partnership.
The 752 Proposed Regulations request-
ed comments concerning exculpatory lia-
bilities in response to comments received
on the 2014 Proposed Regulations request-
ing guidance with respect to such liabili-
ties. An exculpatory liability is a liability
that is recourse to an entity under state law
and section 1001, but no partner bears the
EROL within the meaning of section 752.
Thus, the liability is treated as nonrecourse
for section 752 purposes. The Treasury De-
partment and the IRS, after acknowledging
that exculpatory liabilities are beyond the
scope of the 752 Proposed Regulations,
sought additional comments regarding the
proper treatment of an exculpatory liability
under regulations under section 704(b) and
the effect of such a liability’s classification
under section 1001. Further, the Treasury
Department and the IRS requested addi-
tional comments addressing the allocation
of an exculpatory liability among multiple
assets and possible methods for calculating
minimum gain with respect to such liabili-
ty, such as the so-called “floating lien” ap-
proach (whereby all the assets in the entity,
including cash, are considered to be subject
to the exculpatory liability) or a specific
allocation approach. The Treasury Depart-
ment and the IRS continue to consider the
comments received concerning exculpato-
ry liabilities under sections 704 and 752.
Special Analyses
These final regulations are not subject
to review under section 6(b) of Executive
Order 12866 pursuant to the Memoran-
dum of Agreement (April 11, 2018) be-
tween the Treasury Department and the
Office of Management and Budget regard-
ing review of tax regulations. It is hereby
certified that the collection of information
in these regulations will not have a sig-
nificant economic impact on a substantial
number of small entities. This certification
is based on the fact that the amount of time
necessary to report the required informa-
tion will be minimal in that it requires
partnerships (including partnerships that
may be small entities) to provide infor-
mation they already maintain or can eas-
ily obtain to the IRS. Moreover, it should
take a partnership no more than 2 hours
to satisfy the information requirement in
these regulations. Accordingly, this rule
will not have a significant economic im-
pact on a substantial number of small en-
tities pursuant to the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6). Pursuant to
section 7805(f) of the Code, the notice of
proposed rulemaking that preceded these
final regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business, and no com-
ments were received.

Bulletin No. 2019–44 1015 October 28, 2019
Paperwork Reduction Act
The collection of information con-
tained in these final regulations under sec-
tion 752 is reported on Form 8275, Dis-
closure Statement, and has been reviewed
in accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) and approved
by the Office of Management and Budget
under control number 1545-0889.
The collection of information in these
final regulations under section 752 is in
§1.752-2(b)(3)(ii)(D). This information is
required by the IRS to ensure that section
752 of the Code and applicable regula-
tions are properly applied for allocations
of partnership liabilities. The respondents
will be partners and partnerships.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and tax
return information are confidential, as re-
quired by section 6103.
Drafting Information
The principal author of these regula-
tions is Caroline E. Hay, Office of the As-
sociate Chief Counsel (Passthroughs and
Special Industries). However, other per-
sonnel from the Treasury Department and
the IRS 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 * * *
Par. 2. Section 1.704-1 is amended by:
1. Adding two sentences to the end of
paragraph (b)(1)(ii)(a).
2. Adding a sentence to the end of para-
graph (b)(2)(ii)(b)(3) introductory
text.
3. Removing the undesignated para-
graph following paragraph (b)(2)(ii)
(b)(3).
4. Adding paragraphs (b)(2)(ii)(b)(4)
through (7).
5. Revising paragraph (b)(2)(ii)(c).
The additions and revisions read as fol-
lows:
§1.704-1 Partner’s distributive share.
* * * * *
(b) * * *
(1) * * *
(ii) * * *
(a) * * * Furthermore, the last sentence
of paragraph (b)(2)(ii)(b)(3) of this section
and paragraphs (b)(2)(ii)(b)(4) through
(7) and (b)(2)(ii)(c) of this section apply
to partnership taxable years ending on or
after October 9, 2019. However, taxpayers
may apply the last sentence of paragraph
(b)(2)(ii)(b)(3) of this section and para-
graphs (b)(2)(ii)(b)(4) through (7) and (b)
(2)(ii)(c) of this section for partnership
taxable years ending on or after October 5,
2016. For partnership taxable years end-
ing before October 9, 2019, see §1.704-1
as contained in 26 CFR part 1 revised as
of April 1, 2019.
* * * * *
(2) * * *
(ii) * * *
(b) * * *
(3) * * * Notwithstanding the partner-
ship agreement, an obligation to restore a
deficit balance in a partner’s capital ac-
count, including an obligation described
in paragraph (b)(2)(ii)(c)(1) of this sec-
tion, will not be respected for purposes of
this section to the extent the obligation is
disregarded under paragraph (b)(2)(ii)(c)
(4) of this section.
(4) For purposes of paragraphs (b)(2)
(ii)(b)(1) through (3) of this section, a
partnership taxable year shall be deter-
mined without regard to section 706(c)(2)
(A).
(5) The requirements in paragraphs (b)
(2)(ii)(b)(2) and (3) of this section are not
violated if all or part of the partnership in-
terest of one or more partners is purchased
(other than in connection with the liqui-
dation of the partnership) by the partner-
ship or by one or more partners (or one or
more persons related, within the meaning
of section 267(b) (without modification by
section 267(e)(1)) or section 707(b)(1), to
a partner) pursuant to an agreement nego-
tiated at arm’s length by persons who at
the time such agreement is entered into
have materially adverse interests and if
a principal purpose of such purchase and
sale is not to avoid the principles of the
second sentence of paragraph (b)(2)(ii)(a)
of this section.
(6) The requirement in paragraph (b)
(2)(ii)(b)(2) of this section is not violated
if, upon the liquidation of the partnership,
the capital accounts of the partners are in-
creased or decreased pursuant to paragraph
(b)(2)(iv)(f) of this section as of the date of
such liquidation and the partnership makes
liquidating distributions within the time set
out in the requirement in paragraph (b)(2)
(ii)(b)(2) of this section in the ratios of the
partners’ positive capital accounts, except
that it does not distribute reserves reason-
ably required to provide for liabilities (con-
tingent or otherwise) of the partnership and
installment obligations owed to the part-
nership, so long as such withheld amounts
are distributed as soon as practicable and
in the ratios of the partners’ positive capital
account balances.
(7) See Examples 1.(i) and (ii), 4.(i),
8.(i), and 16.(i) of paragraph (b)(5) of this
section for issues concerning paragraph
(b)(2)(ii)(b) of this section.
(c) Obligation to restore deficit—(1)
Other arrangements treated as obliga-
tions to restore deficits. If a partner is not
expressly obligated to restore the deficit
balance in such partner’s capital account,
such partner nevertheless will be treated
as obligated to restore the deficit balance
in his capital account (in accordance with
the requirement in paragraph (b)(2)(ii)(b)
(3) of this section and subject to paragraph
(b)(2)(ii)(c)(2) of this section) to the ex-
tent of—
(A) The outstanding principal balance
of any promissory note (of which such
partner is the maker) contributed to the
partnership by such partner (other than a
promissory note that is readily tradable on
an established securities market), and
(B) The amount of any unconditional
obligation of such partner (whether im-

October 28, 2019 1016 Bulletin No. 2019–44
posed by the partnership agreement or
by state or local law) to make subsequent
contributions to the partnership (oth-
er than pursuant to a promissory note of
which such partner is the maker).
(2) Satisfaction requirement. For pur-
poses of paragraph (b)(2)(ii)(c)(1) of this
section, a promissory note or uncondition-
al obligation is taken into account only if
it is required to be satisfied at a time no
later than the end of the partnership tax-
able year in which such partner’s interest
is liquidated (or, if later, within 90 days
after the date of such liquidation). If a
promissory note referred to in paragraph
(b)(2)(ii)(c)(1) of this section is negotia-
ble, a partner will be considered required
to satisfy such note within the time period
specified in this paragraph (b)(2)(ii)(c)(2)
if the partnership agreement provides that,
in lieu of actual satisfaction, the partner-
ship will retain such note and such partner
will contribute to the partnership the ex-
cess, if any, of the outstanding principal
balance of such note over its fair market
value at the time of liquidation. See para-
graph (b)(2)(iv)(d)(2) of this section. See
Examples 1.(ix) and (x) of paragraph (b)
(5) of this section.
(3) Related party notes. For purposes of
paragraph (b)(2) of this section, if a part-
ner contributes a promissory note to the
partnership during a partnership taxable
year beginning after December 29, 1988,
and the maker of such note is a person re-
lated to such partner (within the meaning
of §1.752-4(b)(1)), then such promissory
note shall be treated as a promissory note
of which such partner is the maker.
(4) Obligations disregarded—(A) Gen-
eral rule. A partner in no event will be
considered obligated to restore the defi-
cit balance in his capital account to the
partnership (in accordance with the re-
quirement in paragraph (b)(2)(ii)(b)(3) of
this section) to the extent such partner’s
obligation is a bottom dollar payment
obligation that is not recognized under
§1.752-2(b)(3) or is not legally enforce-
able, or the facts and circumstances oth-
erwise indicate a plan to circumvent or
avoid such obligation. See paragraphs (b)
(2)(ii)(f), (b)(2)(ii)(h), and (b)(4)(vi) of
this section for other rules regarding such
obligation. To the extent a partner is not
considered obligated to restore the deficit
balance in the partner’s capital account to
the partnership (in accordance with the re-
quirement in paragraph (b)(2)(ii)(b)(3) of
this section), the obligation is disregarded
and paragraph (b)(2) of this section and
§1.752-2 are applied as if the obligation
did not exist.
(B) Factors indicating plan to circum-
vent or avoid obligation. In the case of
an obligation to restore a deficit balance
in a partner’s capital account upon liqui-
dation of a partnership, paragraphs (b)(2)
(ii)(c)(4)(B)(i) through (iv) of this section
provide a non-exclusive list of factors that
may indicate a plan to circumvent or avoid
the obligation. For purposes of making
determinations under this paragraph (b)
(2)(ii)(c)(4), the weight to be given to any
particular factor depends on the particular
case and the presence or absence of any
particular factor is not, in itself, necessar-
ily indicative of whether or not the obli-
gation is respected. The following factors
are taken into consideration for purposes
of this paragraph (b)(2):
(i) The partner is not subject to com-
mercially reasonable provisions for en-
forcement and collection of the obligation.
(ii) The partner is not required to pro-
vide (either at the time the obligation
is made or periodically) commercially
reasonable documentation regarding the
partner’s financial condition to the part-
nership.
(iii) The obligation ends or could, by its
terms, be terminated before the liquidation
of the partner’s interest in the partnership
or when the partner’s capital account as
provided in §1.704-1(b)(2)(iv) is negative
other than when a transferee partner as-
sumes the obligation.
(iv) The terms of the obligation are not
provided to all the partners in the partner-
ship in a timely manner.
* * * * *
Par. 3. Section 1.752-0 is amended by:
1. Adding entries for §1.752-1(d)(1) and
(2).
2. Adding entries for §1.752-2(b)(3)(i)
and (ii), (b)(3)(ii)(A) through (C), (b)
(3)(ii)(C)(1) through (3), (b)(3)(ii)
(D), and (b)(3)(iii).
3. Adding entries for §1.752-2(j)(2)(i)
and (ii).
4. Adding entries for §1.752-2(j)(3)(i)
through (ii).
5. Revising the entries for §1.752-2(j)
(3) and (4).
6. Adding entries for §1.752-2(k) and
(k)(1) and (2).
7. Adding an entry for §1.752-2(l).
The additions and revisions read as fol-
lows:
§1.752-0 Table of contents.
* * * * *
§1.752-1 Treatment of partnership lia-
bilities.
* * * * *
(d) * * *
(1) In general.
(2) Applicability date.
* * * * *
§1.752-2 Partner’s share of recourse
liabilities.
* * * * *
(b) * * *
(3) * * *
(i) In general.
(ii) Special rules for bottom dollar pay-
ment obligations.
(A) In general.
(B) Exception.
(C) Definition of bottom dollar pay-
ment obligation.
(1) In general.
(2) Exceptions.
(3) Benefited party defined.
(D) Disclosure of bottom dollar pay-
ment obligations.
(iii) Special rule for indemnities and
reimbursement agreements.
* * * * *
(j) * * *
(2) * * *
(i) In general.
(ii) Economic risk of loss.
(3) Plan to circumvent or avoid an ob-
ligation.
(i) General rule.
(ii) Factors indicating plan to circum-
vent or avoid an obligation.
(4) Example.
(k) No reasonable expectation of pay-
ment.
(1) In general.
(2) Examples.
(l) Applicability dates.
* * * * *
Par. 4. Section 1.752-1 is amended by:
1. Redesignating paragraphs (d)(1) and
(2) as paragraphs (d)(1)(i) and (ii), re-
spectively, and revising newly redes-
ignated paragraph (d)(1)(ii).

Bulletin No. 2019–44 1017 October 28, 2019
2. Redesignating the text of paragraph
(d) introductory text following its
subject heading as paragraph (d)(1),
revising the heading for paragraph
(d), and adding a heading to newly
redesignated paragraph (d)(1).
3. Adding paragraph (d)(2).
The revisions and additions read as fol-
lows:
§1.752-1 Treatment of partnership
liabilities.
* * * * *
(d) * * *
(1) In general. * * *
(ii) If a partner or related person as-
sumes a partnership liability, the person to
whom the liability is owed knows of the
assumption and can directly enforce the
partner’s or related person’s obligation for
the liability, and no other partner or person
that is a related person to another partner
would bear the economic risk of loss for
the liability under §1.752-2 immediately
after the assumption.
(2) Applicability date. Paragraph (d)(1)
(ii) of this section applies to liabilities in-
curred or assumed by a partnership on or
after October 9, 2019. The rules applicable
to liabilities incurred or assumed prior to
October 9, 2019, are contained in §1.752-
1 in effect prior to October 9, 2019, (see
26 CFR part 1 revised as of April 1, 2019).
* * * * *
Par. 5. Section 1.752-2 is amended by:
1. Revising paragraphs (b)(3) and (6).
2. Adding a sentence to the end of para-
graph (f) introductory text.
3. Designating Example 1 through 11
of paragraph (f) as paragraph (f)(1)
through (f)(11), respectively.
4. Removing and reserving newly re-
designated paragraph (f)(9).
5. Revising newly redesignated para-
graphs (f)(10) and (11).
6. Revising paragraphs (j)(2) and (3).
7. Adding paragraph (j)(4).
8. Revising paragraphs (k) and (l).
The revisions and additions read as fol-
lows:
§1.752-2 Partner’s share of recourse
liabilities.
* * * * *
(b) * * *
(3) Obligations recognized—(i) In
general. The determination of the extent
to which a partner or related person has
an obligation to make a payment under
§1.752-2(b)(1) is based on the facts and
circumstances at the time of the determi-
nation. To the extent that the obligation
of a partner or related person to make a
payment with respect to a partnership li-
ability is not recognized under this para-
graph (b)(3), §1.752-2(b) is applied as if
the obligation did not exist. All statutory
and contractual obligations relating to the
partnership liability are taken into account
for purposes of applying this section, in-
cluding—
(A) Contractual obligations outside the
partnership agreement such as guarantees,
indemnifications, reimbursement agree-
ments, and other obligations running di-
rectly to creditors, to other partners, or to
the partnership;
(B) Obligations to the partnership that
are imposed by the partnership agreement,
including the obligation to make a capital
contribution and to restore a deficit capital
account upon liquidation of the partner-
ship as described in §1.704-1(b)(2)(ii)(b)
(3) (taking into account §1.704-1(b)(2)(ii)
(c)); and
(C) Payment obligations (whether in
the form of direct remittances to another
partner or a contribution to the partner-
ship) imposed by state or local law, in-
cluding the governing state or local law
partnership statute.
(ii) Special rules for bottom dollar
payment obligations—(A) In general.
For purposes of §1.752-2, a bottom dollar
payment obligation (as defined in para-
graph (b)(3)(ii)(C) of this section) is not
recognized under this paragraph (b)(3).
(B) Exception. If a partner or relat-
ed person has a payment obligation that
would be recognized under this paragraph
(b)(3) (initial payment obligation) but for
the effect of an indemnity, a reimburse-
ment agreement, or a similar arrangement,
such bottom dollar payment obligation
is recognized under this paragraph (b)
(3) if, taking into account the indemnity,
reimbursement agreement, or similar ar-
rangement, the partner or related person is
liable for at least 90 percent of the part-
ner’s or related person’s initial payment
obligation.
(C) Definition of bottom dollar pay-
ment obligation—(1) In general. Except
as provided in paragraph (b)(3)(ii)(C)(2)
of this section, a bottom dollar payment
obligation is a payment obligation that is
the same as or similar to a payment ob-
ligation or arrangement described in this
paragraph (b)(3)(ii)(C)(1).
(i) With respect to a guarantee or sim-
ilar arrangement, any payment obligation
other than one in which the partner or re-
lated person is or would be liable up to the
full amount of such partner’s or related
person’s payment obligation if, and to the
extent that, any amount of the partnership
liability is not otherwise satisfied.
(ii) With respect to an indemnity or
similar arrangement, any payment obliga-
tion other than one in which the partner
or related person is or would be liable up
to the full amount of such partner’s or re-
lated person’s payment obligation, if, and
to the extent that, any amount of the in-
demnitee’s or benefited party’s payment
obligation that is recognized under this
paragraph (b)(3) is satisfied.
(iii) With respect to an obligation to
make a capital contribution or to restore
a deficit capital account upon liquidation
of the partnership as described in §1.704-
1(b)(2)(ii)(b)(3) (taking into account
§1.704-1(b)(2)(ii)(c)), any payment obli-
gation other than one in which the partner
is or would be required to make the full
amount of the partner’s capital contribu-
tion or to restore the full amount of the
partner’s deficit capital account.
(iv) An arrangement with respect to
a partnership liability that uses tiered
partnerships, intermediaries, senior and
subordinate liabilities, or similar arrange-
ments to convert what would otherwise be
a single liability into multiple liabilities
if, based on the facts and circumstances,
the liabilities were incurred pursuant to a
common plan, as part of a single transac-
tion or arrangement, or as part of a series
of related transactions or arrangements,
and with a principal purpose of avoiding
having at least one of such liabilities or
payment obligations with respect to such
liabilities being treated as a bottom dollar
payment obligation as described in para-
graph (b)(3)(ii)(C)(1)(i), (ii), or (iii) of
this section.
(2) Exceptions. A payment obligation
is not a bottom dollar payment obliga-
tion merely because a maximum amount
is placed on the partner’s or related per-
son’s payment obligation, a partner’s or

October 28, 2019 1018 Bulletin No. 2019–44
related person’s payment obligation is
stated as a fixed percentage of every dol-
lar of the partnership liability to which
such obligation relates, or there is a right
of proportionate contribution running be-
tween partners or related persons who are
co-obligors with respect to a payment ob-
ligation for which each of them is jointly
and severally liable.
(3) Benefited party defined. For purpos-
es of §1.752-2, a benefited party is the per-
son to whom a partner or related person
has the payment obligation.
(D) Disclosure of bottom dollar pay-
ment obligations. A partnership must
disclose to the Internal Revenue Service
a bottom dollar payment obligation (in-
cluding a bottom dollar payment obliga-
tion that is recognized under paragraph
(b)(3)(ii)(B) of this section) with respect
to a partnership liability on a complet-
ed Form 8275, Disclosure Statement, or
successor form, attached to the return
of the partnership for the taxable year
in which the bottom dollar payment ob-
ligation is undertaken or modified, that
includes all of the following informa-
tion:
(1) A caption identifying the statement
as a disclosure of a bottom dollar payment
obligation under section 752.
(2) An identification of the payment
obligation with respect to which disclo-
sure is made (including whether the ob-
ligation is a guarantee, a reimbursement,
an indemnity, or an obligation to restore
a deficit balance in a partner’s capital ac-
count).
(3) The amount of the payment obliga-
tion.
(4) The parties to the payment obliga-
tion.
(5) A statement of whether the payment
obligation is treated as recognized for pur-
poses of this paragraph (b)(3).
(6) If the payment obligation is recog-
nized under paragraph (b)(3)(ii)(B) of this
section, the facts and circumstances that
clearly establish that a partner or related
person is liable for up to 90 percent of the
partner’s or related person’s initial pay-
ment obligation and, but for an indemnity,
a reimbursement agreement, or a similar
arrangement, the partner’s or related per-
son’s initial payment obligation would
have been recognized under this para-
graph (b)(3).
(iii) Special rule for indemnities and
reimbursement agreements. An indemni-
ty, a reimbursement agreement, or a sim-
ilar arrangement will be recognized un-
der this paragraph (b)(3) only if, before
taking into account the indemnity, reim-
bursement agreement, or similar arrange-
ment, the indemnitee’s or other benefited
party’s payment obligation is recognized
under this paragraph (b)(3), or would be
recognized under this paragraph (b)(3)
if such person were a partner or related
person.
* * *
(6) Deemed satisfaction of obligation.
For purposes of determining the extent
to which a partner or related person has
a payment obligation and the economic
risk of loss, it is assumed that all partners
and related persons who have obligations
to make payments (a payment obligor) ac-
tually perform those obligations, irrespec-
tive of their actual net worth, unless the
facts and circumstances indicate—
(i) A plan to circumvent or avoid the
obligation under paragraph (j) of this sec-
tion, or
(ii) That there is not a commercially
reasonable expectation that the payment
obligor will have the ability to make the
required payments under the terms of the
obligation if the obligation becomes due
and payable as described in paragraph (k)
of this section.
* * * * *
(f) Examples. * * * Unless otherwise
provided, for purposes of paragraph (f)(1)
through (9) of this section (Examples 1
through 9), assume that any obligation of
a partner or related person to make a pay-
ment is recognized under paragraph (b)(3)
of this section.
* * * * *
(9) [Reserved].
(10) Example 10. Guarantee of first and last
dollars. (i) A, B, and C are equal members of a
limited liability company, ABC, that is treated as
a partnership for federal tax purposes. ABC bor-
rows $1,000 from Bank. A guarantees payment of
up to $300 of the ABC liability if any amount of
the full $1,000 liability is not recovered by Bank.
B guarantees payment of up to $200, but only if
the Bank otherwise recovers less than $200. Both
A and B waive their rights of contribution against
each other.
(ii) Because A is obligated to pay up to $300
if, and to the extent that, any amount of the $1,000
partnership liability is not recovered by Bank, A’s
guarantee is not a bottom dollar payment obligation
under paragraph (b)(3)(ii)(C) of this section. There-
fore, A’s payment obligation is recognized under
paragraph (b)(3) of this section. The amount of A’s
economic risk of loss under §1.752-2(b)(1) is $300.
(iii) Because B is obligated to pay up to $200 only
if and to the extent that the Bank otherwise recovers
less than $200 of the $1,000 partnership liability, B’s
guarantee is a bottom dollar payment obligation un-
der paragraph (b)(3)(ii)(C) of this section and, there-
fore, is not recognized under paragraph (b)(3)(ii)(A)
of this section. Accordingly, B bears no economic
risk of loss under §1.752-2(b)(1) for ABC’s liability.
(iv) In sum, $300 of ABC’s liability is allocat-
ed to A under §1.752-2(a), and the remaining $700
liability is allocated to A, B, and C under §1.752-3.
(11) Example 11. Indemnification of guarantees.
(i) The facts are the same as in paragraph (f)(10) of
this section (Example 10), except that, in addition, C
agrees to indemnify A up to $100 that A pays with
respect to its guarantee and agrees to indemnify B
fully with respect to its guarantee.
(ii) The determination of whether C’s indemnity
is recognized under paragraph (b)(3) of this section
is made without regard to whether C’s indemnity it-
self causes A’s guarantee not to be recognized. Be-
cause A’s obligation would be recognized but for the
effect of C’s indemnity and C is obligated to pay A
up to the full amount of C’s indemnity if A pays any
amount on its guarantee of ABC’s liability, C’s in-
demnity of A’s guarantee is not a bottom dollar pay-
ment obligation under paragraph (b)(3)(ii)(C) of this
section and, therefore, is recognized under paragraph
(b)(3) of this section. The amount of C’s economic
risk of loss under §1.752-2(b)(1) for its indemnity of
A’s guarantee is $100.
(iii) Because C’s indemnity is recognized under
paragraph (b)(3) of this section, A is treated as liable
for $200 only to the extent any amount beyond $100
of the partnership liability is not satisfied. Thus, A
is not liable if, and to the extent, any amount of the
partnership liability is not otherwise satisfied, and
the exception in paragraph (b)(3)(ii)(B) of this sec-
tion does not apply. As a result, A’s guarantee is a
bottom dollar payment obligation under paragraph
(b)(3)(ii)(C) of this section and is not recognized un-
der paragraph (b)(3)(ii)(A) of this section. Therefore,
A bears no economic risk of loss under §1.752-2(b)
(1) for ABC’s liability.
(iv) Because B’s obligation is not recognized un-
der paragraph (b)(3)(ii) of this section independent
of C’s indemnity of B’s guarantee, C’s indemnity
is not recognized under paragraph (b)(3)(iii) of this
section. Therefore, C bears no economic risk of loss
under §1.752-2(b)(1) for its indemnity of B’s guar-
antee.
(v) In sum, $100 of ABC’s liability is allocated to
C under §1.752-2(a) and the remaining $900 liability
is allocated to A, B, and C under §1.752-3.
* * * * *
(j) * * *
(2) Arrangements tantamount to a
guarantee—(i) In general. Irrespective
of the form of a contractual obligation, a
partner is considered to bear the economic
risk of loss with respect to a partnership
liability, or a portion thereof, to the extent
that—

Bulletin No. 2019–44 1019 October 28, 2019
(A) The partner or related person un-
dertakes one or more contractual obliga-
tions so that the partnership may obtain or
retain a loan;
(B) The contractual obligations of the
partner or related person significantly re-
duce the risk to the lender that the partner-
ship will not satisfy its obligations under
the loan, or a portion thereof; and
(C) With respect to the contractual ob-
ligations described in paragraphs (j)(2)(i)
(A) and (B) of this section—
(1) One of the principal purposes of
using the contractual obligations is to at-
tempt to permit partners (other than those
who are directly or indirectly liable for the
obligation) to include a portion of the loan
in the basis of their partnership interests;
or
(2) Another partner, or a person related
to another partner, enters into a payment
obligation and a principal purpose of the
arrangement is to cause the payment obli-
gation described in paragraphs (j)(2)(i)(A)
and (B) of this section to be disregarded
under paragraph (b)(3) of this section.
(ii) Economic risk of loss. For purposes
of this paragraph (j)(2), partners are con-
sidered to bear the economic risk of loss
for a liability in accordance with their
relative economic burdens for the liabili-
ty pursuant to the contractual obligations.
For example, a lease between a partner and
a partnership that is not on commercially
reasonable terms may be tantamount to a
guarantee by the partner of the partnership
liability.
(3) Plan to circumvent or avoid an ob-
ligation—(i) General rule. An obligation
of a partner or related person to make a
payment is not recognized under para-
graph (b) of this section if the facts and
circumstances evidence a plan to circum-
vent or avoid the obligation.
(ii) Factors indicating plan to circum-
vent or avoid an obligation. In the case of
a payment obligation, other than an obli-
gation to restore a deficit capital account
upon liquidation of a partnership, para-
graphs (j)(3)(ii)(A) through (G) of this
section provide a non-exclusive list of fac-
tors that may indicate a plan to circumvent
or avoid the payment obligation. The pres-
ence or absence of a factor is based on all
of the facts and circumstances at the time
the partner or related person makes the
payment obligation or if the obligation is
modified, at the time of the modification.
For purposes of making determinations
under this paragraph (j)(3), the weight to
be given to any particular factor depends
on the particular case and the presence or
absence of a factor is not necessarily in-
dicative of whether a payment obligation
is or is not recognized under paragraph (b)
of this section.
(A) The partner or related person is not
subject to commercially reasonable con-
tractual restrictions that protect the likeli-
hood of payment, including, for example,
restrictions on transfers for inadequate
consideration or distributions by the part-
ner or related person to equity owners in
the partner or related person.
(B) The partner or related person is not
required to provide (either at the time the
payment obligation is made or periodical-
ly) commercially reasonable documen-
tation regarding the partner’s or related
person’s financial condition to the benefit-
ed party, including, for example, balance
sheets and financial statements.
(C) The term of the payment obligation
ends prior to the term of the partnership
liability, or the partner or related person
has a right to terminate its payment obli-
gation, if the purpose of limiting the du-
ration of the payment obligation is to ter-
minate such payment obligation prior to
the occurrence of an event or events that
increase the risk of economic loss to the
guarantor or benefited party (for example,
termination prior to the due date of a bal-
loon payment or a right to terminate that
can be exercised because the value of loan
collateral decreases). This factor typically
will not be present if the termination of the
obligation occurs by reason of an event or
events that decrease the risk of econom-
ic loss to the guarantor or benefited party
(for example, the payment obligation ter-
minates upon the completion of a building
construction project, upon the leasing of a
building, or when certain income and as-
set coverage ratios are satisfied for a spec-
ified number of quarters).
(D) There exists a plan or arrangement
in which the primary obligor or any other
obligor (or a person related to the obligor)
with respect to the partnership liability di-
rectly or indirectly holds money or other
liquid assets in an amount that exceeds the
reasonably foreseeable needs of such obli-
gor (but not taking into account standard
commercial insurance, for example, casu-
alty insurance).
(E) The payment obligation does not
permit the creditor to promptly pursue
payment following a payment default on
the partnership liability, or other arrange-
ments with respect to the partnership li-
ability or payment obligation otherwise
indicate a plan to delay collection.
(F) In the case of a guarantee or simi-
lar arrangement, the terms of the partner-
ship liability would be substantially the
same had the partner or related person not
agreed to provide the guarantee.
(G) The creditor or other party bene-
fiting from the obligation did not receive
executed documents with respect to the
payment obligation from the partner or re-
lated person before, or within a commer-
cially reasonable period of time after, the
creation of the obligation.
(4) Example. The following example
illustrates the principles of paragraph (j)
of this section.
(i) In 2020, A, B, and C form a domes-
tic limited liability company (LLC) that
is classified as a partnership for federal
tax purposes. Also in 2020, LLC receives
a loan from a bank. A, B, and C do not
bear the economic risk of loss with re-
spect to that partnership liability, and, as
a result, the liability is treated as nonre-
course under §1.752-1(a)(2) in 2020. In
2022, A guarantees the entire amount of
the liability. The bank did not request the
guarantee and the terms of the loan did not
change as a result of the guarantee. A did
not provide any executed documents with
respect to A’s guarantee to the bank. The
bank also did not require any restrictions
on asset transfers by A and no such restric-
tions exist.
(ii) Under paragraph (j)(3) of this sec-
tion, A’s 2022 guarantee (payment obliga-
tion) is not recognized under paragraph (b)
(3) of this section if the facts and circum-
stances evidence a plan to circumvent or
avoid the payment obligation. In this case,
the following factors indicate a plan to cir-
cumvent or avoid A’s payment obligation:
the partner is not subject to commercial-
ly reasonable contractual restrictions that
protect the likelihood of payment, such
as restrictions on transfers for inadequate
consideration or equity distributions; the
partner is not required to provide (either
at the time the payment obligation is made

October 28, 2019 1020 Bulletin No. 2019–44
or periodically) commercially reasonable
documentation regarding the partner’s or
related person’s financial condition to the
benefited party; in the case of a guaran-
tee or similar arrangement, the terms of
the liability are the same as they would
have been without the guarantee; and the
creditor did not receive executed docu-
ments with respect to the payment obli-
gation from the partner or related person
at the time the obligation was created.
Absent the existence of other facts or cir-
cumstances that would weigh in favor of
respecting A’s guarantee, evidence of a
plan to circumvent or avoid the obligation
exists and, pursuant to paragraph (j)(3)(i)
of this section, A’s guarantee is not recog-
nized under paragraph (b) of this section.
As a result, LLC’s liability continues to be
treated as nonrecourse.
(k) No reasonable expectation of pay-
ment—(1) In general. An obligation of
any partner or related person to make a
payment is not recognized under para-
graph (b) of this section if the facts and
circumstances indicate that at the time
the partnership must determine a part-
ner’s share of partnership liabilities under
§§1.705-1(a) and 1.752-4(d) there is not a
commercially reasonable expectation that
the payment obligor will have the ability
to make the required payments under the
terms of the obligation if the obligation
becomes due and payable. Facts and cir-
cumstances to consider in determining
a commercially reasonable expectation
of payment include factors a third party
creditor would take into account when
determining whether to grant a loan.
For purposes of this section, a payment
obligor includes an entity disregarded
as an entity separate from its owner un-
der section 856(i), section 1361(b)(3), or
§§301.7701-1 through 301.7701-3 of this
chapter (a disregarded entity), and a trust
to which subpart E of part I of subchapter
J of chapter 1 of the Code applies
(2) Examples. The following examples
illustrate the principles of paragraph (k) of
this section.
(i) Example 1. Undercapitalization. (A) In 2020,
A forms a wholly owned domestic limited liability
company, LLC, with a contribution of $100,000. A
has no liability for LLC’s debts, and LLC has no
enforceable right to a contribution from A. Under
§301.7701-3(b)(1)(ii) of this chapter, LLC is treated
for federal tax purposes as a disregarded entity. Also
in 2020, LLC contributes $100,000 to LP, a limited
partnership with a calendar year taxable year, in ex-
change for a general partnership interest in LP, and B
and C each contributes $100,000 to LP in exchange
for a limited partnership interest in LP. The partner-
ship agreement provides that only LLC is required
to restore any deficit in its capital account. On Janu-
ary 1, 2021, LP borrows $300,000 from a bank and
uses $600,000 to purchase nondepreciable property.
The $300,000 is secured by the property and is also a
general obligation of LP. LP makes payments of only
interest on its $300,000 debt during 2021. LP has a
net taxable loss in 2021, and, under §§1.705-1(a) and
1.752-4(d), LP determines its partners’ shares of the
$300,000 debt at the end of its taxable year, Decem-
ber 31, 2021. As of that date, LLC holds no assets
other than its interest in LP.
(B) Because LLC is a disregarded entity, A is
treated as the partner in LP for federal income tax
purposes. Only LLC has an obligation to make a pay-
ment on account of the $300,000 debt if LP were to
constructively liquidate as described in paragraph (b)
(1) of this section. Therefore, paragraph (k) of this
section is applied to the LLC and not to A. LLC has
no assets with which to pay if the payment obliga-
tion becomes due and payable. Because there is no
commercially reasonable expectation that LLC will
be able to satisfy its payment obligation, LLC’s ob-
ligation to restore its deficit capital account is not
recognized under paragraph (b) of this section. As a
result, LP’s $300,000 debt is characterized as nonre-
course under §1.752-1(a)(2) and is allocated among
A, B, and C under §1.752-3.
(ii) Example 2. Disregarded entity with ability
to pay. (A) The facts are the same as in paragraph
(k)(2)(i) of this section (Example 1), except LLC
also holds real property worth $475,000 subject to
a $200,000 liability. Additionally, LLC reasonably
projects to earn $20,000 of net rental income per year
from such real property.
(B) Because LLC is a disregarded entity, A is
treated as the partner in LP for federal income tax
purposes. Only LLC has an obligation to make a pay-
ment on account of the $300,000 debt if LP were to
constructively liquidate as described in paragraph (b)
(1) of this section. Therefore, paragraph (k) of this
section is applied to the LLC and not to A. Because
there is a commercially reasonable expectation that
LLC will be able to satisfy its payment obligation,
LLC’s obligation to restore its deficit capital account
is recognized under paragraph (b) of this section.
As a result, LP’s $300,000 debt is characterized as
recourse under §1.752-1(a)(1) and is allocated to A
under §1.752-2.
(l) Applicability dates. (1) Paragraphs
(a) and (h)(3) of this section apply to lia-
bilities incurred or assumed by a partner-
ship on or after October 11, 2006, other
than liabilities incurred or assumed by a
partnership pursuant to a written binding
contract in effect prior to that date. The
rules applicable to liabilities incurred or
assumed (or pursuant to a written bind-
ing contract in effect) prior to October
11, 2006, are contained in §1.752-2 in
effect prior to October 11, 2006, (see 26
CFR part 1 revised as of April 1, 2006).
Paragraphs (b)(6), (j)(3) and (4), and (k)
of this section apply to liabilities incurred
or assumed by a partnership and to pay-
ment obligations imposed or undertaken
with respect to a partnership liability on
or after October 9, 2019, other than lia-
bilities incurred or assumed by a partner-
ship and payment obligations imposed or
undertaken pursuant to a written binding
contract in effect prior to that date. How-
ever, taxpayers may apply paragraphs (b)
(6), (j)(3) and (4), and (k) of this section
to all of their liabilities as of the beginning
of the first taxable year of the partnership
ending on or after October 5, 2016. The
rules applicable to liabilities incurred or
assumed (or pursuant to a written bind-
ing contract in effect) prior to October 9,
2019, are contained in §1.752-2 in effect
prior to October 9, 2019, (see 26 CFR part
1 revised as of April 1, 2019).
(2) Paragraphs (b)(3), (f)(10) and (11),
and (j)(2) of this section apply to liabili-
ties incurred or assumed by a partnership
and payment obligations imposed or un-
dertaken with respect to a partnership li-
ability on or after October 5, 2016, other
than liabilities incurred or assumed by a
partnership and payment obligations im-
posed or undertaken pursuant to a writ-
ten binding contract in effect prior to that
date. Partnerships may apply paragraphs
(b)(3), (f)(10) and (11), and (j)(2) of this
section to all of their liabilities as of the
beginning of the first taxable year of the
partnership ending on or after October
5, 2016. The rules applicable to liabil-
ities incurred or assumed (or subject to
a written binding contract in effect) pri-
or to October 5, 2016, are contained in
§1.752-2 in effect prior to October 5,
2016, (see 26 CFR part 1 revised as of
April 1, 2016).
(3) If a partner has a share of a re-
course partnership liability under §1.752-
2(a) as a result of bearing the economic
risk of loss under §1.752-2(b) immedi-
ately prior to October 5, 2016 (Transition
Partner), and such liability is modified or
refinanced, the partnership (Transition
Partnership) may choose not to apply
paragraphs (b)(3), (f)(10) and (11), and
(j)(2)(i)(C)(2) of this section to the extent
the amount of the Transition Partner’s
share of liabilities under §1.752-2(a) as
a result of bearing the economic risk of
loss under §1.752-2(b) immediately prior

Bulletin No. 2019–44 1021 October 28, 2019
to October 5, 2016, exceeds the amount
of the Transition Partner’s adjusted basis
in its partnership interest as determined
under §1.705-1 at such time (Grandfa-
thered Amount). See also §1.704-2(g)
(3). A liability is modified or refinanced
for purposes of this paragraph (l) to the
extent that the proceeds of a partnership
liability (the refinancing debt) are al-
locable under the rules of §1.163-8T to
payments discharging all or part of any
other liability (pre-modification liability)
of that partnership or there is a significant
modification of that liability as provided
under §1.1001-3. A Transition Partner
that is a partnership, S corporation, or a
business entity disregarded as an entity
separate from its owner under section
856(i) or 1361(b)(3) or §§301.7701-1
through 301.7701-3 of this chapter ceas-
es to qualify as a Transition Partner if
the direct or indirect ownership of that
Transition Partner changes by 50 percent
or more. The Transition Partnership may
continue to apply the rules under §1.752-
2 in effect prior to October 5, 2016, with
respect to a Transition Partner for pay-
ment obligations described in §1.752-
2(b) to the extent of the Transition Part-
ner’s adjusted Grandfathered Amount for
the seven-year period beginning October
5, 2016. The termination of a Transi-
tion Partnership under section 708(b)
(1)(B) and applicable regulations prior
to January 1, 2018, does not affect the
Grandfathered Amount of a Transition
Partner that remains a partner in the new
partnership (as described in §1.708-1(b)
(4)), and the new partnership is treated as
a continuation of the Transition Partner-
ship for purposes of this paragraph (l)(3).
However, a Transition Partner’s Grand-
fathered Amount is reduced (not below
zero), but never increased by—
(i) Upon the sale of any property by the
Transition Partnership, an amount equal to
the excess of any gain allocated for feder-
al income tax purposes to the Transition
Partner by the Transition Partnership (in-
cluding amounts allocated under section
704(c) and applicable regulations) over
the product of the total amount realized
by the Transition Partnership from the
property sale multiplied by the Transition
Partner’s percentage interest in the part-
nership; and
(ii) An amount equal to any decrease in
the Transition Partner’s share of liabilities
to which the rules of this paragraph (l)(3)
apply, other than by operation of para-
graph (l)(3)(i) of this section.
§1.752-2T [Amended]
Par. 6. In §1.752-2T, paragraphs (a)
and (b), (c)(1) and (2), (d) through (k), (l)
(1) through (3), and (m)(1) are removed
and reserved.
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
Approved: October 1, 2019.
David J. Kautter
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on Oc-
tober 4, 2019, 4:15 p.m., and published in the issue
of the Federal Register for October 9, 2019, 84 F.R.
54014)

October 28, 2019 1022 Bulletin No. 2019–44
Part III
Temporary Regulations
under Section 385 on
the Treatment of Certain
Interests in Corporations as
Stock or Indebtedness
Notice 2019-58
On October 21, 2016, the Treasury De-
partment and the IRS published T.D. 9790
in the Federal Register (81 FR 72858),
which included final and temporary regu-
lations under section 385 addressing doc-
umentation in §1.385-2 and certain debt
that is issued to a controlling shareholder
in a distribution or in another related-party
transaction in §1.385-3. On the same date,
the Treasury Department and the IRS also
published a notice of proposed rulemak-
ing (REG-130314-16) in the Federal Reg-
ister (81 FR 72751) (the 2016 Proposed
Regulations) by cross-reference to the
temporary regulations under section 385,
which include §§1.385-3T and 1.385-4T
(the Temporary Regulations).
The Temporary Regulations expire on
October 13, 2019. See section 7805(e);
§1.385-3T(l); §1.385-4T(h). The 2016
Proposed Regulations are proposed to
apply to taxable years ending on or after
January 19, 2017; in contrast to the Tem-
porary Regulations, the 2016 Proposed
Regulations do not expire. A taxpayer
may rely on the 2016 Proposed Regula-
tions for periods following the expira-
tion of the Temporary Regulations until
further notice is given, provided that the
taxpayer consistently applies the rules in
the 2016 Proposed Regulations in their
entirety.
The principal author of this notice is
Azeka J. Abramoff of the Office of Asso-
ciate Chief Counsel (International). For
further information regarding this notice,
contact Ms. Abramoff at (202) 317-6938
(not a toll free number).
Rev. Proc. 2019-41
SECTION 1. PURPOSE
This revenue procedure publishes the
amounts of unused housing credit carry-
overs allocated to qualified states under §
42(h)(3)(D) of the Internal Revenue Code
for calendar year 2019.
SECTION 2. BACKGROUND
Rev. Proc. 92-31, 1992-1 C.B. 775,
provides guidance to state housing credit
agencies of qualified states on the proce-
dure for requesting an allocation of un-
used housing credit carryovers under §
42(h)(3)(D). Section 4.06 of Rev. Proc.
92-31 provides that the Internal Reve-
nue Service will publish in the Internal
Revenue Bulletin the amount of unused
housing credit carryovers allocated to
qualified states for a calendar year from
a national pool of unused credit authority
(the National Pool). This revenue proce-
dure publishes these amounts for calen-
dar year 2019.
SECTION 3. PROCEDURE
The unused housing credit carryover
amount allocated from the National Pool
by the Secretary to each qualified state for
calendar year 2019 is as follows:
Qualified State Amount Allocated
Alabama50,449
Arizona74,020
California408,277
Connecticut36,874
Delaware9,982
Florida219,835
Georgia108,574
Idaho18,106
Illinois131,504
Indiana69,068
Maryland62,368
Massachusetts71,239
Michigan103,170
Montana10,964
Nebraska19,912
New Jersey91,947
New Mexico21,627
New York201,700

Bulletin No. 2019–44 1023 October 28, 2019
Qualified State Amount Allocated
North Carolina107,172
Ohio120,649
Oklahoma40,697
Pennsylvania132,185
Rhode Island10,913
South Dakota9,106
Texas296,238
Utah32,627
Vermont6,464
Virginia87,913
Washington77,777
West Virginia18,638
Wisconsin60,003
EFFECTIVE DATE
This revenue procedure is effective
for allocations of housing credit dollar
amounts attributable to the National Pool
component of a qualified state’s housing
credit ceiling for calendar year 2019.
DRAFTING INFORMATION
The principal author of this revenue
procedure is YoungNa Lee of the Office
of Associate Chief Counsel (Passthroughs
and Special Industries). For further infor-
mation regarding this revenue procedure,
contact Ms. Lee at (202) 317-4137 (not a
toll-free number).
Section 42.—Low-Income
Housing Credit
26 CFR 1.42-14. Allocation rules for post-1989
housing credit ceiling amounts.
Guidance is provided to state housing credit
agencies of qualified states that request an allocation
of unused housing credit carryover under section
42(h)(3)(D) of the Internal Revenue Code. See Rev.
Proc. 2019-41.

October 28, 2019 1024 Bulletin No. 2019–44
Part IV
Guidance on the Transition
From Interbank Offered
Rates to Other Reference
Rates
REG-118784-18
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations that provide guid-
ance on the tax consequences of the tran-
sition to the use of reference rates other
than interbank offered rates (IBORs) in
debt instruments and non-debt contracts.
The proposed regulations are necessary to
address the possibility that an alteration of
the terms of a debt instrument or a mod-
ification of the terms of other types of
contracts to replace an IBOR to which the
terms of the debt instrument or other con-
tract refers with a new reference rate could
result in the realization of income, deduc-
tion, gain, or loss for Federal income tax
purposes or could result in other tax con-
sequences. The proposed regulations will
affect parties to debt instruments and other
contracts that reference an IBOR.
DATES: Written or electronic comments
and requests for a public hearing must be
received by November 25, 2019.
ADDRESSES: Submit electronic submis-
sions via the Federal eRulemaking Portal
at https://www.regulations.gov (indicate
IRS and REG-118784-18) by following
the online instructions for submitting
comments. Once submitted to the Federal
eRulemaking Portal, comments cannot be
edited or withdrawn. The Department of
the Treasury (Treasury Department) and
the IRS will publish for public availability
any comment received to its public dock-
et, whether submitted electronically or in
hard copy. Send hard copy submissions
to: CC:PA:LPD:PR (REG-118784-18),
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-118784-
18), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW,
Washington, DC 20224.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Caitlin Holzem at (202) 317-4391;
concerning submissions of comments and
requesting a hearing, Regina L. Johnson
at (202) 317-6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regu-
lations (26 CFR part 1) under sections
860G, 882, 1001, and 1275 of the Internal
Revenue Code (Code).
1. Elimination of IBORs
On July 27, 2017, the U.K. Financial
Conduct Authority, the U.K. regulator
tasked with overseeing the London inter-
bank offered rate (LIBOR), announced
that all currency and term variants of
LIBOR, including U.S.-dollar LIBOR
(USD LIBOR), may be phased out after
the end of 2021. The Financial Stability
Board (FSB) and the Financial Stability
Oversight Council (FSOC) have publicly
acknowledged that in light of the preva-
lence of USD LIBOR as the reference rate
in a broad range of financial instruments,
the probable elimination of USD LIBOR
has created risks that pose a potential
threat to the safety and soundness of not
only individual financial institutions, but
also to financial stability generally. In its
2014 report “Reforming Major Interest
Rate Benchmarks,” the FSB discussed
the problems associated with key IBORs
and made recommendations to address
these problems, including the develop-
ment and adoption of nearly risk-free ref-
erence rates to replace IBORs. The FSB
and FSOC have recognized that a sudden
cessation of a widely used reference rate
could cause considerable disruptions in
the marketplace and might adversely af-
fect the normal functioning of a variety
of markets in the United States, including
business and consumer lending and the
derivatives markets.
The Alternative Reference Rates Com-
mittee (ARRC), whose ex-officio mem-
bers include the Board of Governors of the
Federal Reserve System, the Treasury De-
partment, the Commodity Futures Trading
Commission, and the Office of Financial
Research, was convened by the Board of
Governors of the Federal Reserve Sys-
tem and the Federal Reserve Bank of
New York to identify alternative refer-
ence rates that would be both more robust
than USD LIBOR and that would comply
with standards such as the International
Organization of Securities Commissions’
“Principles for Financial Benchmarks.”
The ARRC was also responsible for de-
veloping a plan to facilitate the voluntary
acceptance of the alternative reference
rate or rates that were chosen. On March
5, 2018, the ARRC published a report that
summarizes the work done earlier to se-
lect the Secured Overnight Financing Rate
(SOFR) as the replacement for USD LI-
BOR. The Federal Reserve Bank of New
York began publishing SOFR daily as of
April 3, 2018, in cooperation with the Of-
fice of Financial Research. In addition, the
Chicago Mercantile Exchange and other
entities have launched trading in SOFR
futures and have begun clearing for over-
the-counter SOFR swaps. Although SOFR
is calculated from overnight transactions,
it is possible that one or more term rates
based on SOFR derivatives may be added
in the future.
Other jurisdictions have also been
working toward replacing the LIBOR as-
sociated with their respective currencies.
The Working Group on Sterling Risk-Free
Reference Rates in the United Kingdom
chose the Sterling Overnight Index Av-
erage (SONIA) to replace British pound
sterling LIBOR; the Study Group on Risk-
Free Reference Rates in Japan chose the
Tokyo Overnight Average Rate (TONAR)
to replace yen LIBOR and to serve as an
alternative to the Tokyo Interbank Offered
Rate (TIBOR); and the National Working

Bulletin No. 2019–44 1025 October 28, 2019
Group in Switzerland selected the Swiss
Average Rate Overnight (SARON) to re-
place Swiss franc LIBOR. Alternatives for
the relevant IBOR rate have also been se-
lected for Australia, Canada, Hong Kong,
and the Eurozone. Other countries are at
various stages of selecting a reference
rate to replace their respective versions of
IBOR.
2. Letters on the Tax Implications of
the Elimination of IBORs on Debt
Instruments and Non-Debt Contracts
On April 8, 2019, and June 5, 2019, the
ARRC submitted to the Treasury Depart-
ment and the IRS documents that identi-
fy various potential tax issues associated
with the elimination of IBORs and request
tax guidance to address those issues and to
facilitate an orderly transition (ARRC let-
ters). The ARRC stated that existing debt
instruments and derivatives providing for
IBOR-based payments must be amend-
ed to address the coming elimination of
IBORs. The ARRC indicated that these
amendments will likely take one of two
forms. First, the parties may alter the in-
struments to replace the IBOR-referencing
rate with another rate, such as one based
on SOFR. Second, the parties may alter
the instruments to replace an IBOR-refer-
encing fallback rate with another fallback
rate upon the discontinuance of the IBOR
or at some other appropriate time. The
ARRC describes fallback provisions as
the provisions specifying what is to occur
if an IBOR is permanently discontinued
or is judged to have deteriorated to an ex-
tent that its relevance as a reliable bench-
mark has been significantly impaired. The
ARRC notes that, regardless of which of
these two forms the amendment takes, the
rate that replaces the IBOR-referencing
rate may include “(i) appropriate adjust-
ments to the spread above the base refer-
ence rate in order to account for the ex-
pected differences between the two base
reference rates (generally representing
term premium and credit risk) and/or (ii)
a one time, lump-sum payment in lieu of a
spread adjustment.” The ARRC also stat-
ed that newer debt instruments and deriv-
atives may already include fallback pro-
visions that anticipate the elimination of
an IBOR and provide a methodology for
changing the rate when the relevant IBOR
becomes unreliable or ceases to exist.
The ARRC letters urged broad and
flexible tax guidance in this area. The
ARRC letters requested guidance on spe-
cific tax issues that arise as a result of
these efforts to transition from IBORs to
alternative rates. The ARRC first asked
that a debt instrument, derivative, or other
contract not be treated as exchanged un-
der section 1001 when the terms of the in-
strument are amended either to replace an
IBOR-referencing rate or to include a fall-
back rate in anticipation of the elimination
of the relevant IBOR. The ARRC noted
that these same amendments could cause a
taxpayer with a synthetic debt instrument
under §1.1275-6 to be treated as legging
out of the integrated transaction, and it
also sought clarification on the source and
character of a one-time payment in lieu
of a spread adjustment on a derivative.
The ARRC recommended treating SOFR,
similar replacement rates for IBOR-refer-
encing rates in other currencies, and po-
tentially any qualified floating rate under
§1.1275-5 as permitted alternative refer-
ence rates to IBOR-referencing rates. The
ARRC further requested that alteration of
a regular interest in a real estate mortgage
investment conduit (REMIC) to replace
an IBOR-referencing rate or to change
fallback provisions not prevent the regu-
lar interest from having fixed terms on the
startup day, and that the existence and ex-
ercise of a fallback provision not prevent
a variable interest rate on a regular interest
in a REMIC from being a permitted vari-
able rate under §1.860G-1. Additionally,
the ARRC suggested that, for the purpose
of determining the amount and timing of
original issue discount (OID) on a debt
instrument, an IBOR-referencing quali-
fied floating rate and the fallback rate that
replaces the IBOR-referencing rate should
be treated as a single qualified floating
rate. Finally, the ARRC requested that the
reference to 30-day LIBOR in §1.882-5(d)
(5)(ii)(B) be amended so that taxpayers
may continue to use the simplified meth-
od of computing excess interest permitted
under that section. The Treasury Depart-
ment and the IRS received letters from the
Structured Finance Industry Group and
the Real Estate Roundtable articulating
concerns similar to those set forth in the
ARRC letters. The comment letters also
raised certain issues that are beyond the
scope of this regulation.
3. Tax Implications of the Elimination of
IBORs on Debt Instruments and Non-
Debt Contracts
The following subsections discuss the
primary tax issues raised by changes to the
terms of debt instruments and non-debt
contracts in anticipation of the elimination
of IBORs.
A. Section 1001
Section 1001 provides rules for deter-
mining the amount and recognition of gain
or loss from the sale or other disposition
of property. The regulations under section
1001 generally provide that gain or loss is
realized upon the exchange of property for
other property differing materially either
in kind or in extent. See §1.1001-1(a). In
the case of a debt instrument, §1.1001-
3(b) provides that a significant modifica-
tion of the debt instrument results in an
exchange of the original debt instrument
for a modified debt instrument that differs
materially either in kind or in extent for
purposes of §1.1001-1(a). Under §1.1001-
3(c), a modification is generally any alter-
ation, including any deletion or addition,
in whole or in part, of a legal right or ob-
ligation of the issuer or a holder of a debt
instrument. However, a modification gen-
erally does not include an alteration of a
legal right or obligation that occurs by op-
eration of the terms of a debt instrument.
Section 1.1001-3(a)(1) provides that the
rules of §1.1001-3 apply to any modifi-
cation of a debt instrument, regardless of
whether the modification takes the form of
an amendment to the terms of the debt in-
strument or an exchange of a new debt in-
strument for an existing debt instrument.
An alteration of a legal right or obligation
that is treated as a modification must be
tested for significance under §1.1001-3(e).
Consequently, changing the interest rate
index referenced in a U.S. dollar-denom-
inated debt instrument from USD LIBOR
to SOFR if no provision has been made in
the terms of the debt instrument for such a
change is an alteration of the terms of the
debt instrument that could be treated as a

October 28, 2019 1026 Bulletin No. 2019–44
significant modification and result in a tax
realization event, even when USD LIBOR
no longer exists.
Other than §1.1001-4, which general-
ly prescribes the tax consequences to the
nonassigning counterparty when there is a
transfer or assignment of a derivative con-
tract by a dealer or a clearinghouse, and
§1.1001-5, which addresses the conver-
sion of legacy currencies to the euro, there
are no regulations that specifically address
when a modification of a derivative or oth-
er non-debt contract creates a realization
event. This absence of regulations has led
to concern that modifying a non-debt con-
tract to reflect the elimination of an IBOR,
such as changing the floating rate index
referenced in an interest rate swap con-
tract from USD LIBOR to SOFR, could
cause a deemed termination of the non-
debt contract for tax purposes.
Moreover, a modification of the fall-
back provisions of a debt instrument or
non-debt contract to address the possibili-
ty of an IBOR being eliminated might re-
quire the parties to recognize income, de-
duction, gain, or loss. For example, if the
terms of a derivative provide for payments
at an IBOR-referencing rate but contain no
fallback provision, a modification to the
terms of the derivative to add a fallback
to the IBOR-referencing rate could cause
a deemed termination of the derivative.
Likewise, if the terms of a debt instrument
provide for an IBOR-referencing fallback
rate, an alteration of the terms of the debt
instrument to replace the IBOR-referenc-
ing fallback rate with another fallback rate
could cause a deemed exchange of the
debt instrument.
B. Integrated Transactions and Hedges
A debt instrument and one or more
hedges may be treated in certain circum-
stances as a single, integrated instrument
for certain specified purposes. For exam-
ple, §1.1275-6 describes the circumstanc-
es under which a debt instrument may be
integrated with a hedge for the purpose of
determining the amount and timing of the
taxpayer’s income, deduction, gain, or loss.
Sections 1.988-5(a) (regarding foreign cur-
rency transactions) and 1.148-4(h) (regard-
ing arbitrage investment restrictions on
tax-exempt bonds issued by State and local
governments) similarly provide rules by
which a debt instrument may be integrated
with a hedge for a specific purpose. In each
of these cases, amending an IBOR-refer-
encing debt instrument or hedge to address
the elimination of the IBOR may cause a
deemed termination or legging out of the
integrated hedge that in effect dissolves
the integrated instrument into its compo-
nent parts, which may yield undesirable tax
consequences or recognition events for the
parties to those instruments.
Similarly, §1.446-4 provides rules by
which taxpayers determine the timing of
income, deduction, gain, or loss attribut-
able to a hedging transaction. These rules
generally state that the method of account-
ing used by a taxpayer for a hedging trans-
action must reasonably match the timing
of income, deduction, gain, or loss from
the hedging transaction with the timing of
the income, deduction, gain, or loss from
the item or items being hedged. If a tax-
payer hedges an item and later terminates
the item but keeps the hedge, the taxpayer
must match the built-in gain or loss on the
hedge to the gain or loss on the terminated
item. Accordingly, amending the terms of
a debt instrument or hedge to address the
elimination of an IBOR could affect the
timing of gain or loss under §1.446-4 if
the amendment results in an exchange un-
der section 1001.
C. Source and Character of a One-Time
Payment
The ARRC letters pointed out that,
when parties alter the terms of a debt in-
strument or modify the terms of a non-
debt contract to replace a rate referencing
an IBOR, the alteration or modification
may consist not only of the replacement
of the IBOR with a new reference rate
such as SOFR but also of an adjustment to
the existing spread to account for the dif-
ferences between the IBOR and the new
reference rate. Alternatively, in lieu of (or
in addition to) an adjustment to the spread,
the parties may agree to a one-time pay-
ment as compensation for any reduction
in payments attributable to the differences
between the IBOR and the new reference
rate. In the latter case, questions arise
about the source and character of this one-
time payment for various purposes of the
Internal Revenue Code, such as the with-
holding rules in sections 1441 and 1442.
D. Grandfathered Debt Instruments and
Non-Debt Contracts
The requirements of certain statutes
and regulations do not apply to debt in-
struments and non-debt contracts issued
before a specific date. For example, an
obligation issued on or before March 18,
2012, is not a registration-required ob-
ligation under section 163(f) if the obli-
gation was issued under certain arrange-
ments reasonably designed to ensure that
the obligation was sold only to non-U.S.
persons. If such an obligation is modi-
fied after March 18, 2012, in a manner
that results in an exchange for purposes
of §1.1001-1(a), the modified obligation
is treated as reissued and will be a regis-
tration-required obligation unless other-
wise excepted under section 163(f)(2)(A).
Likewise, payments made on certain debt
instruments and non-debt contracts out-
standing on July 1, 2014, (grandfathered
obligations) are exempt from withholding
requirements that may otherwise apply
under chapter 4 of the Code, subject to
any material modification of a grandfa-
thered obligation that results in the obli-
gation not being treated as outstanding on
July 1, 2014. Accordingly, if a debt instru-
ment is altered or a non-debt contract is
modified to replace an IBOR-referencing
rate in anticipation of the elimination of
the IBOR, the debt instrument or non-debt
contract may be treated as reissued as a
consequence of the alteration or modifica-
tion and therefore subject to the statute or
regulation from which it was previously
exempt.
E. OID and Qualified Floating Rate
Section 1.1275-5 defines a variable
rate debt instrument (VRDI) and provides
rules for determining the amount and ac-
crual of qualified stated interest and OID
on a VRDI. Under §1.1275-5(b), a VRDI
may provide for stated interest at one
or more qualified floating rates. A vari-
able rate is generally a qualified floating
rate if variations in the value of the rate
can reasonably be expected to measure
contemporaneous variations in the cost
of newly borrowed funds. The rate may
measure contemporaneous variations in
borrowing costs for the issuer of the debt
instrument or for issuers in general. How-

Bulletin No. 2019–44 1027 October 28, 2019
ever, a multiple of a qualified floating rate
is not a qualified floating rate, except as
permitted within limited parameters. If a
debt instrument provides for two or more
qualified floating rates that can reason-
ably be expected to have approximate-
ly the same values throughout the term
of the instrument, the qualified floating
rates together constitute a single qualified
floating rate. Under §1.1275-5(e)(2), if a
VRDI provides for stated interest at a sin-
gle qualified floating rate and certain other
requirements are satisfied, the amount of
any OID that accrues during an accrual
period is determined under the rules ap-
plicable to fixed rate debt instruments by
assuming that the qualified floating rate is
a fixed rate equal to the value, as of the
issue date, of the qualified floating rate.
Section 1.1275-2(h) describes the treat-
ment under sections 1271 through 1275
and the regulations under those sections
of a debt instrument with respect to which
one or more payments are subject to a re-
mote contingency. Section 1.1275-2(h)
(2) provides that a contingency is remote
if there is a remote likelihood that the
contingency will occur and that, in such
a case, it is assumed that the contingency
will not occur. In the event that a remote
contingency actually occurs, §1.1275-2(h)
(6) generally provides that the debt instru-
ment, including a VRDI, that undergoes
this “change in circumstances” is treated
as retired and then reissued for purposes
of sections 1272 and 1273.
In general, if a debt instrument pro-
vides for a floating rate of interest and
the debt instrument does not qualify as a
VRDI, the debt instrument is a contingent
payment debt instrument (CPDI) that is
subject to more complex and less favor-
able rules under §1.1275-4. For example,
under §1.1275-4, all of the stated interest
is OID and the holder and issuer recognize
interest income or deductions at times oth-
er than when cash payments are made. In
addition, if a debt instrument that provides
for a floating rate of interest is subject to
a contingency that is not a remote con-
tingency, the instrument may be a CPDI.
Even if the contingency is remote, if the
contingency occurs, the debt instrument is
treated as retired and reissued for purposes
of the OID rules. In both cases, the treat-
ment of the contingency affects whether
the debt instrument has OID and, if so, the
amount of the OID and the accruals of the
OID over the term of the debt instrument.
The transition to alternative rates, such
as SOFR, in connection with the phase-
out of IBORs has raised questions under
the OID rules. For example, it is not clear
whether certain debt instruments that ref-
erence IBOR qualify as VRDIs or whether
they are subject to non-remote contingen-
cies that must be taken into account.
F. REMICs
Section 860G(a)(1) provides in part
that a regular interest in a REMIC must
be issued on the startup day with fixed
terms. Section 1.860G-1(a)(4) clarifies
that a regular interest has fixed terms on
the startup day if, on the startup day, the
REMIC’s organizational documents irre-
vocably specify, among other things, the
interest rate or rates used to compute any
interest payments on the regular interest.
Accordingly, an alteration of the terms of
the regular interest to change the rate or
fallback provisions in anticipation of the
cessation of an IBOR could preclude the
interest from being a regular interest.
Section 860G(a)(1) also provides in
part that interest payments on a regular
interest in a REMIC may be payable at a
variable rate only to the extent provided
in regulations and that a regular interest
must unconditionally entitle the holder
to receive a specified principal amount.
Section 1.860G-1(a)(3) describes the vari-
able rates permitted for this purpose, and
§1.860G-1(a)(5) confirms that the princi-
pal amount of a regular interest generally
may not be contingent. Notwithstanding
these limitations on the payment of prin-
cipal and interest on a regular interest in
a REMIC, §1.860G-1(b)(3) lists certain
contingencies affecting the payment of
principal and interest that do not prevent
an interest in a REMIC from being a reg-
ular interest. The list of excepted con-
tingencies does not, however, include a
fallback rate that is triggered by an event,
such as the elimination of IBOR, that is
likely to occur. Nor does the list expressly
include the contingent reduction of prin-
cipal or interest payments to offset costs
incurred by amending a regular interest
to replace a rate that refers to an IBOR or
by adding a fallback rate in anticipation of
the elimination of the relevant IBOR.
Subject to certain exceptions, section
860G(d) imposes a tax equal to 100 per-
cent of amounts contributed to a REMIC
after the startup day. If a party other than
the REMIC pays costs incurred by the
REMIC after the startup day, that payment
could be treated as a contribution to the
REMIC subject to the tax under section
860G(d).
G. Interest Expense of a Foreign
Corporation
A foreign corporation applies §1.882-5
to determine its interest expense allocable
under section 882(c) to income that is ef-
fectively connected with the conduct of a
trade or business within the United States.
If a foreign corporation uses the method
described in §1.882-5(b) through (d), that
foreign corporation could have U.S.-con-
nected liabilities that exceed U.S.-booked
liabilities (excess U.S.-connected liabil-
ities). When a foreign corporation has
excess U.S.-connected liabilities, §1.882-
5(d)(5)(ii)(A) generally provides that the
interest rate that applies to the excess
U.S.-connected liabilities is the foreign
corporation’s average U.S.-dollar bor-
rowing cost on all U.S.-dollar liabilities
other than its U.S.-booked liabilities. Al-
ternatively, §1.882-5(d)(5)(ii)(B) provides
that a foreign corporation that is a bank,
may elect to use a published average 30-
day LIBOR for the year instead of deter-
mining its average U.S.-dollar borrowing
cost. Because the election provided in
§1.882-5(d)(5)(ii)(B) only permits a for-
eign corporation that is a bank to elect a
rate that references 30-day LIBOR, the
current election will not be available when
LIBOR is phased out.
Explanation of Provisions
1. Proposed Substantive Amendments to
the Regulations
The Treasury Department and the IRS
have determined that it is appropriate to
provide guidance on the tax issues dis-
cussed earlier in this preamble in order
to minimize potential market disruption
and to facilitate an orderly transition in
connection with the phase-out of IBORs
and the attendant need for changes in debt
instruments and other non-debt contracts

October 28, 2019 1028 Bulletin No. 2019–44
to implement this transition. The Treasury
Department and the IRS expect that this
guidance will reduce Federal income tax
uncertainties and minimize taxpayer bur-
den associated with this transition.
A. Section 1001
The proposed regulations under
§1.1001-6(a) generally provide that, if the
terms of a debt instrument are altered or
the terms of a non-debt contract, such as
a derivative, are modified to replace, or to
provide a fallback to, an IBOR-referenc-
ing rate and the alteration or modification
does not change the fair market value of
the debt instrument or non-debt contract or
the currency of the reference rate, the al-
teration or modification does not result in
the realization of income, deduction, gain,
or loss for purposes of section 1001. The
Treasury Department and the IRS intend
that the proposed rules in §1.1001-6(a),
as with other regulations under section
1001, apply to both the issuer and holder
of a debt instrument and to each party to
a non-debt contract. The proposed rules
in §1.1001-6(a) also apply regardless of
whether the alteration or modification oc-
curs by an amendment to the terms of the
debt instrument or non-debt contract or by
an exchange of a new debt instrument or
non-debt contract for the existing one.
Section 1.1001-6(a)(1) of the proposed
regulations provides that altering the
terms of a debt instrument to replace a rate
referencing an IBOR with a qualified rate
(qualified rates are discussed in detail later
in this preamble) is not treated as a modi-
fication and therefore does not result in a
deemed exchange of the debt instrument
for purposes of §1.1001-3. This same rule
applies to “associated alterations,” which
are alterations that are both associated
with the replacement of the IBOR-refer-
encing rate and reasonably necessary to
adopt or implement that replacement. One
example of an associated alteration is the
addition of an obligation for one party to
make a one-time payment in connection
with the replacement of the IBOR-refer-
encing rate with a qualified rate to offset
the change in value of the debt instrument
that results from that replacement.
Section 1.1001-6(a)(2) of the proposed
regulations provides that modifying a
non-debt contract to replace a rate refer-
encing an IBOR with a qualified rate is not
treated as a deemed exchange of property
for other property differing materially in
kind or extent for purposes of §1.1001-
1(a). The rule also applies to “associated
modifications,” which differ from associ-
ated alterations only in that they relate to
non-debt contracts. The principal example
of a non-debt contract for purposes of the
proposed regulations is a derivative con-
tract, but the category is also intended to
include any other type of contract (such as
a lease) that may refer to an IBOR and that
is not debt. Thus, for example, if an in-
terest rate swap is modified to change the
floating rate leg of the swap from Over-
night USD LIBOR plus 25 basis points to
an alternative rate referencing SOFR that
meets the requirements for a qualified rate
under the proposed regulations (including
the requirement that the fair market value
of the swap contract after the modifica-
tion is substantially equivalent to the fair
market value of the swap contract before
the modification), that modification would
not be treated as an exchange of proper-
ty for other property differing materially
in kind or extent and would therefore not
be an event that results in the realization
of income, deduction, gain or loss under
§1.1001-1(a).
Section 1.1001-6(a)(3) of the proposed
regulations provides that an alteration
to the terms of a debt instrument to in-
clude a qualified rate as a fallback to an
IBOR-referencing rate and any associated
alteration are not treated as modifications
and therefore do not result in an exchange
of the debt instrument for purposes of
§1.1001-3. In addition, an alteration to the
terms of a debt instrument by which an
IBOR-based fallback rate is replaced with
a different fallback rate that is a qualified
rate and any associated alteration are also
not treated as modifications. Similar rules
provide that these same changes to a non-
debt contract do not result in the exchange
of property for other property differing
materially in kind or extent for purposes
of §1.1001-1(a).
A coordination rule in §1.1001-6(a)
(4) of the proposed regulations makes
clear that any alteration to the terms of a
debt instrument that is not given special
treatment under either §1.1001-6(a)(1)
or (3) is subject to the ordinary operation
of §1.1001-3. The proposed regulations
provide a similar rule for non-debt con-
tracts. These proposed rules contemplate
that when an alteration or modification
not described in §1.1001-6(a)(1), (2), or
(3) occurs at the same time as the alter-
ation or modification described in those
paragraphs, the alteration or modification
described in §1.1001-6(a)(1), (2), or (3) is
treated as part of the existing terms of the
debt instrument or non-debt contract and,
consequently, becomes part of the base-
line against which the alteration or mod-
ification not described in §1.1001-6(a)(1),
(2), or (3) is tested.
Section 1.1001-6(b) of the proposed
regulations sets forth the rules for deter-
mining whether a rate is a qualified rate.
Section 1.1001-6(b)(1) lists the rates that
may be qualified rates for purposes of
§1.1001-6, provided that they satisfy the
requirements set forth in §1.1001-6(b)
(2) and (3). The list of potential qual-
ified rates in §1.1001-6(b)(1) includes
a qualified floating rate as defined in
§1.1275-5(b), except that for this purpose
a multiple of a qualified floating rate is
considered a qualified floating rate. This
list also includes any rate selected, en-
dorsed or recommended by the central
bank, reserve bank, monetary authority
or similar institution (including a com-
mittee or working group thereof) as a
replacement for an IBOR or its local cur-
rency equivalent in that jurisdiction. To
avoid any uncertainty on the question of
whether the rates identified in §1.1001-
6(b)(1)(i) through (viii) may be qualified
rates, those rates are individually enu-
merated even though each is a qualified
floating rate, as defined in §1.1275-5(b),
and each has been selected by a central
bank, reserve bank, monetary authority
or similar institution as a replacement for
an IBOR or its local currency equivalent
in that jurisdiction. The proposed regula-
tions further provide that a rate that is de-
termined by reference to one of the rates
listed in §1.1001-6(b)(1) may also be a
qualified rate. For example, a rate equal
to the compound average of SOFR over
the past 30 days may be a qualified rate
because that rate is determined by refer-
ence to SOFR, which is listed in §1.1001-
6(b)(1). To retain the flexibility to re-
spond to future developments, proposed
§1.1001-6(b)(1)(xii) provides authority
to add a rate to this list by identifying the

Bulletin No. 2019–44 1029 October 28, 2019
new rate in guidance published in the In-
ternal Revenue Bulletin.
A rate described in §1.1001-6(b)(1) of
the proposed regulations is not a qualified
rate if it fails to satisfy the requirement
of §1.1001-6(b)(2)(i). Section 1.1001-
6(b)(2)(i) of the proposed regulations
generally requires that the fair market
value of the debt instrument or non-debt
contract after the relevant alteration or
modification must be substantially equiv-
alent to the fair market value before that
alteration or modification. The purpose
of this requirement is to ensure that the
alterations or modifications described in
§1.1001-6(a)(1) through (3) are generally
no broader than is necessary to replace
the IBOR in the terms of the debt instru-
ment or non-debt contract with a new ref-
erence rate. However, the Treasury De-
partment and the IRS recognize that the
fair market value of a debt instrument or
non-debt contract may be difficult to de-
termine precisely and intend that the pro-
posed regulations broadly facilitate the
transition away from IBORs. According-
ly, the proposed regulations provide that
the fair market value of a debt instrument
or derivative may be determined by any
reasonable valuation method, as long as
that reasonable valuation method is ap-
plied consistently and takes into account
any one-time payment made in lieu of a
spread adjustment.
To further ease compliance with
the value equivalence requirement in
§1.1001-6(b)(2)(i), the proposed regu-
lations provide two safe harbors and re-
serve the authority to provide addition-
al safe harbors in guidance published in
the Internal Revenue Bulletin. Under the
first safe harbor, the value equivalence
requirement is satisfied if at the time of
the alteration the historic average of the
IBOR-referencing rate is within 25 basis
points of the historic average of the rate
that replaces it. The parties may use any
reasonable method to compute an his-
toric average, subject to two limitations.
First, the lookback period from which
the historic data are drawn must begin
no earlier than 10 years before the alter-
ation or modification and end no earlier
than three months before the alteration
or modification. Second, once a lookback
period is established, the historic average
must take into account every instance of
the relevant rate published during that
period. For example, if the lookback pe-
riod is comprised of the calendar years
2016 through 2020 and the relevant rate
is 30-day USD LIBOR, the historic av-
erage of that rate must take into account
each of the 60 published instances of
30-day USD LIBOR over the five-year
lookback period. Alternatively, the par-
ties may compute the historic average
of a rate in accordance with an indus-
try-wide standard, such as a standard for
determining an historic average set forth
by the International Swaps and Deriva-
tives Association or the ARRC for this or
a similar purpose. In any application of
this safe harbor, the parties must use the
same methodology and lookback period
to compute the historic average for each
of the rates to be compared.
Under the second safe harbor, the val-
ue equivalence requirement of §1.1001-
6(b)(2)(i) is satisfied if the parties to the
debt instrument or non-debt contract are
not related and, through bona fide, arm’s
length negotiations over the alteration or
modification, determine that the fair mar-
ket value of the altered debt instrument or
modified non-debt contract is substantial-
ly equivalent to the fair market value of
the debt instrument or non-debt contract
before the alteration or modification. In
determining the fair market value of an
altered debt instrument or modified non-
debt contract, the parties must take into
account the value of any one-time pay-
ment made in lieu of a spread adjustment.
A rate described in §1.1001-6(b)(1)
of the proposed regulations is also not
a qualified rate if it fails to satisfy the
requirement in §1.1001-6(b)(3). This
paragraph generally requires that any in-
terest rate benchmark included in the re-
placement rate and the IBOR referenced
in the replaced rate are based on trans-
actions conducted in the same currency
or are otherwise reasonably expected to
measure contemporaneous variations
in the cost of newly borrowed funds in
the same currency. As is the case with
the value equivalence requirement under
§1.1001-6(b)(2)(i), this requirement is
intended to ensure that the alterations or
modifications described in §1.1001-6(a)
(1) through (3) are no broader than nec-
essary to address the elimination of the
relevant IBOR.
B. Integrated Transactions and Hedges
Section 1.1001-6(c) of the proposed
regulations confirms that a taxpayer is per-
mitted to alter the terms of a debt instru-
ment or modify one or more of the other
components of an integrated or hedged
transaction to replace a rate referencing an
IBOR with a qualified rate without affect-
ing the tax treatment of either the under-
lying transaction or the hedge, provided
that the integrated or hedged transaction
as modified continues to qualify for inte-
gration. For example, a taxpayer that has
issued a floating rate debt instrument that
pays interest at a rate referencing USD
LIBOR and has entered into an interest
rate swap contract that permits that tax-
payer to create a synthetic fixed rate debt
instrument under the integration rules of
§1.1275-6 is not treated as legging out
of the integrated transaction if the terms
of the debt instrument are altered and
the swap is modified to replace the USD
LIBOR-referencing interest rate with a
SOFR-referencing interest rate, provid-
ed that in the transaction as modified the
§1.1275-6 hedge continues to meet the
requirements for a §1.1275-6 hedge. The
proposed regulations provide similar rules
for a foreign currency hedge integrated
with a debt instrument under §1.988-5(a)
and for an interest rate hedge integrated
with an issue of tax-exempt bonds under
§1.148-4(h). The proposed regulations
also provide that, in the case of a trans-
action subject to the hedge accounting
rules under §1.446-4, altering the terms of
a debt instrument or modifying the terms
of a derivative to replace an IBOR-refer-
encing rate with a qualified rate on one or
more legs of the transaction is not a dis-
position or termination of either leg under
§1.446-4(e)(6).
C. Source and Character of a One-Time
Payment
Section 1.1001-6(d) of the proposed
regulations provides that, for all purposes
of the Internal Revenue Code, the source
and character of a one-time payment that
is made by a payor in connection with
an alteration or modification described
in proposed §1.1001-6(a)(1), (2), or (3)
will be the same as the source and char-
acter that would otherwise apply to a pay-

October 28, 2019 1030 Bulletin No. 2019–44
ment made by the payor with respect to
the debt instrument or non-debt contract
that is altered or modified. For example,
a one-time payment made by a counter-
party to an interest rate swap is treated as
a payment with respect to the leg of the
swap on which the counterparty making
the one-time payment is obligated to per-
form. Accordingly, under §1.863-7(b), the
source of that one-time payment would
likely be determined by reference to the
residence of the recipient of the payment.
With respect to a lease of real property, a
one-time payment made by the lessee to
the lessor is treated as a payment of rent
and, under sections 861(a)(4) and 862(a)
(4), the source of that one-time payment
would be the location of the leased real
property.
The Treasury Department and the IRS
expect that parties to debt instruments
and non-debt contracts will generally re-
place the IBOR with an overnight, near-
ly risk-free rate, such as SOFR. Because
of differences in term and credit risk, an
overnight, nearly risk-free rate will gener-
ally be lower than the IBOR it replaces.
Accordingly, the Treasury Department
and the IRS expect that, for example, one-
time payments with respect to a debt in-
strument will generally not be paid by the
lender to the borrower. However, in the
event that it is determined that guidance
in respect of such payments is needed, the
Treasury Department and the IRS request
comments on the source and character of
a one-time payment on a debt instrument
or non-debt contract received by a party
(such as the borrower on a debt instrument
or the lessee on a lease) that does not ordi-
narily receive payments during the term of
the debt instrument or non-debt contract.
D. Grandfathered Debt Instruments and
Non-Debt Contracts
The rules in §1.1001-6(a) of the pro-
posed regulations generally prevent
debt instruments and non-debt contracts
from being treated as reissued follow-
ing a deemed exchange under section
1001. Thus, for example, a debt instru-
ment grandfathered under section 163(f),
871(m), or 1471 or a regulation under one
of those sections would not lose its grand-
fathered status as a result of any alterations
made in connection with the elimination
of an IBOR and described in §1.1001-6(a)
(1) or (3) of the proposed regulations. To
provide certainty in treating a non-debt
contract as a grandfathered obligation
for chapter 4 purposes in the case of the
modification of the contract to replace
an IBOR-referencing rate, §1.1001-6(e)
of the proposed regulations provides that
any modification of a non-debt contract
to which §1.1001-6(a)(2) or (3) applies is
not a material modification for purposes
of §1.1471-2(b)(2)(iv).
E. OID and Qualified Floating Rate
Section 1.1275-2(m) of the proposed
regulations sets forth three special rules
for determining the amount and accrual of
OID in the case of a VRDI that provides
both for interest at an IBOR-referencing
qualified floating rate and for a fallback
rate that is triggered when the IBOR be-
comes unavailable or unreliable. Under
§1.1275-2(m)(2), the IBOR-referencing
qualified floating rate and the fallback
rate are treated as a single qualified float-
ing rate for purposes of §1.1275-5. Under
§1.1275-2(m)(3), the possibility that the
relevant IBOR will become unavailable
or unreliable is treated as a remote con-
tingency for purposes of §1.1275-2(h).
Under §1.1275-2(m)(4), the occurrence
of the event that triggers activation of the
fallback rate is not treated as a change
in circumstances. Thus, for example, the
VRDI is not treated as retired and reissued
under §1.1275-2(h)(6) when the relevant
IBOR becomes unavailable or unreliable
and the rate changes to the fallback rate,
even if the IBOR becoming unavailable
or unreliable was a remote contingency at
the time the VRDI was issued. With the
exception of these three rules in §1.1275-
2(m) of the proposed regulations, the OID
regulations apply to an IBOR-referencing
VRDI as they would to any other debt in-
strument.
F. REMICs
Section 1.860G-1(e) of the proposed
regulations permits an interest in a REMIC
to retain its status as a regular interest de-
spite certain alterations and contingencies.
Specifically, if the parties to a regular in-
terest alter the terms after the startup day
to replace an IBOR-referencing rate with
a qualified rate, to include a qualified rate
as a fallback to an IBOR-referencing rate,
or to make any other alteration described
in §1.1001-6(a)(1) or (3) of the proposed
regulations, §1.860G-1(e)(2) provides
that those alterations are disregarded for
the purpose of determining whether the
regular interest has fixed terms on the
startup day.
Supplementing the list of disregard-
ed contingencies in §1.860G-1(b)(3),
§1.860G-1(e)(3) and (4) of the proposed
regulations describe certain contingencies
affecting the payment of principal and
interest that do not prevent an interest in
a REMIC from being a regular interest.
Under §1.860G-1(e)(3), an interest in a
REMIC does not fail to be a regular in-
terest solely because the terms of the in-
terest permit the rate to change from an
IBOR-referencing rate to a fallback rate in
anticipation of the relevant IBOR becom-
ing unavailable or unreliable. Although
this proposed rule permits taxpayers to
disregard the contingency in determining
whether the rate is a variable rate per-
mitted under §1.860G-1(a)(3), both the
IBOR-referencing rate and the fallback
rate considered individually must be rates
permitted under section 860G. Under
§1.860G-1(e)(4) of the proposed regula-
tions, an interest in a REMIC does not fail
to be a regular interest solely because the
amount of payments of principal or inter-
est may be reduced by reasonable costs of
replacing an IBOR-referencing rate with a
qualified rate, of amending fallback pro-
visions to address the elimination of an
IBOR, or of modifying a non-debt con-
tract that is associated with the interest in
the REMIC, such as a credit enhancement.
Section 1.860G-1(e)(4) further provides
that, if a party other than the REMIC pays
those reasonable costs after the startup
day, that payment is not subject to the tax
imposed under section 860G(d).
G. Interest Expense of a Foreign
Corporation
Because the election provided in
§1.882-5(d)(5)(ii)(B) only permits a for-
eign corporation that is a bank to elect
a rate that references 30-day LIBOR,
the current election will not be available
when LIBOR is phased out. To address
this change in facts, the proposed regu-

Bulletin No. 2019–44 1031 October 28, 2019
lations amend the election in §1.882-5(d)
(5)(ii)(B) to allow a foreign corporation
that is a bank to compute interest expense
attributable to excess U.S.-connected lia-
bilities using a yearly average SOFR. The
Treasury Department and the IRS have
determined that SOFR is an appropriate
rate to use in §1.882-5(d)(5)(ii)(B) to re-
place LIBOR. Since SOFR is an overnight
rate that does not reflect credit risk, the use
of SOFR is likely to result in a lower rate
than the 30-day LIBOR calculation pre-
viously allowed under §1.882-5(d)(5)(ii)
(B). Because of these differences between
SOFR and 30-day LIBOR, the Treasury
Department and the IRS request com-
ments on whether another nearly risk-free
rate might be more appropriate in comput-
ing interest expense on excess U.S.-con-
nected liabilities for purposes of §1.882-
5(d)(5)(ii)(B).
2. Proposed Applicability Dates and
Reliance on the Proposed Regulations
A. Proposed Applicability Dates of the
Final Regulations
This part 2(A) of the Explanation of
Provisions section describes the various
applicability dates proposed to apply
to the final regulations. Under the pro-
posed applicability date in §1.1001-6(g),
§1.1001-6 of the final regulations would
apply to an alteration of the terms of a
debt instrument or a modification to the
terms of a non-debt contract that occurs
on or after the date of publication of a
Treasury decision adopting those rules
as final regulations in the Federal Regis-
ter. However, under proposed §1.1001-
6(g), a taxpayer may choose to apply
§1.1001-6 of the final regulations to
alterations and modifications that occur
before that date, provided that the tax-
payer and its related parties consistently
apply the rules before that date. See sec-
tion 7805(b)(7).
Under the proposed applicability
date in §1.1275-2(m)(5), the OID rules
in §1.1275-2(m) of the final regulations
would apply to debt instruments issued
on or after the date of publication of a
Treasury decision adopting those rules
as final regulations in the Federal Reg-
ister. However, under proposed §1.1275-
2(m)(5), a taxpayer may choose to apply
§1.1275-2(m) of the final regulations to
debt instruments issued before that date.
See section 7805(b)(7).
Under the proposed applicability date
in §1.860G-1(e)(5)(i), the REMIC rules
in §1.860G-1(e)(2) and (4) of the final
regulations would apply with respect to
an alteration or modification that occurs
on or after the date of publication of a
Treasury decision adopting those rules as
final regulations in the Federal Register.
However, a taxpayer may choose to apply
§1.860G-1(e)(2) and (4) of the final reg-
ulations with respect to an alteration or
modification that occurs before that date.
See section 7805(b)(7). Under the pro-
posed applicability date in §1.860G-1(e)
(5)(ii), §1.860G-1(e)(3) of the final reg-
ulations would apply to a regular interest
in a REMIC issued on or after the date of
publication of a Treasury decision adopt-
ing that rule as a final regulation in the
Federal Register. However, a taxpayer
may choose to apply §1.860G-1(e)(3) of
the final regulations to a regular interest
in a REMIC issued before that date. See
section 7805(b)(7).
Under the proposed applicability date
in §1.882-5(f)(3), §1.882-5(d)(5)(ii)(B) of
the final regulations would apply to tax-
able years ending after the date of pub-
lication of a Treasury decision adopting
that rule as a final regulation is published
in the Federal Register.
B. Reliance on the Proposed Regulations
A taxpayer may rely on the proposed
regulations to the extent provided in this
part 2(B) of the Explanation of Provi-
sions section. A taxpayer may rely on
§1.1001-6 of the proposed regulations for
any alteration of the terms of a debt in-
strument or modification of the terms of
a non-debt contract that occurs before the
date of publication of a Treasury decision
adopting those rules as final regulations
in the Federal Register, provided that
the taxpayer and its related parties con-
sistently apply the rules of §1.1001-6 of
the proposed regulations before that date.
A taxpayer may rely on §1.1275-2(m) or
§1.860G-1(e)(3) of the proposed regula-
tions for any debt instrument or regular
interest in a REMIC issued before the
date of publication of a Treasury decision
adopting those rules as final regulations
in the Federal Register. A taxpayer may
rely on §1.860G-1(e)(2) and (4) of the
proposed regulations with respect to any
alteration or modification that occurs be-
fore the date of publication of a Treasury
decision adopting that rule as a final reg-
ulation in the Federal Register. A tax-
payer may rely on §1.882-5(d)(5)(ii)(B)
of the proposed regulations for any tax-
able year ending after October 9, 2019,
but before the date of publication of a
Treasury decision adopting these rules as
final regulations in the Federal Register.
Special Analyses
I. Regulatory Planning and Review –
Economic Analysis
Executive Orders 12866 and 13563 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 (i) potential economic, envi-
ronmental, and public health and safety
effects, (ii) potential distributive impacts,
and (iii) equity). Executive Order 13563
emphasizes the importance of quantifying
both costs and benefits, reducing costs,
harmonizing rules, and promoting flexi-
bility.
These proposed regulations have been
designated as subject to review under
Executive Order 12866 pursuant to the
Memorandum of Agreement (April 11,
2018) (MOA) between the Treasury De-
partment and the Office of Management
and Budget (OMB) regarding review of
tax regulations. The Office of Information
and Regulatory Affairs has designated
these proposed regulations as economi-
cally significant under section 1(c) of the
MOA.
A. Background, Need for the Proposed
Regulations, and Economic Analysis of
Proposed Regulations
A very large volume of U.S. financial
products and contracts include terms or
conditions that reference LIBOR or, more
generally, IBORs. Concern about manip-
ulation and a decline in the volume of the
funding from which the LIBOR is calcu-
lated led to recommendations for the de-
velopment of alternatives to the LIBOR,

October 28, 2019 1032 Bulletin No. 2019–44
ones that would be based on transactions
in a more robust underlying market. In
addition, on July 27, 2017, the U.K. Fi-
nancial Conduct Authority, the U.K. reg-
ulator tasked with overseeing LIBOR,
announced that all currency and term
variants of LIBOR, including USD LI-
BOR, may be phased out after 2021 and
not be published after that timeframe. The
ARRC, a group of stakeholders affected
by the cessation of the publication of USD
LIBOR, was convened to identify an al-
ternative rate and to facilitate its voluntary
adoption. The ARRC recommended the
SOFR as a potential replacement for USD
LIBOR. Essentially all financial prod-
ucts and contracts that currently contain
conditions or legal provisions that rely
on LIBOR and IBORs are expected to
transition to the SOFR or similar alterna-
tives in the next few years. This transition
will involve changes in debt, derivatives,
and other financial contracts to adopt the
SOFR or other alternative reference rates.
The ARRC has estimated that the to-
tal exposure to USD LIBOR was close to
$200 trillion in 2016, of which approxi-
mately 95 percent were in over-the-count-
er derivatives.
1
ARRC further notes that
USD LIBOR is also referenced in several
trillion dollars of corporate loans, float-
ing-rate mortgages, and similar financial
products.
In the absence of further tax guidance,
the vast majority of expected changes in
such contracts could lead to the recogni-
tion of gains (or losses) in these contracts
for U.S. income tax purposes and to corre-
spondingly potentially large tax liabilities
for their holders. To address this issue, the
proposed regulations provide that changes
in debt instruments, derivative contracts,
and other affected contracts to replace ref-
erence rates based on IBORs with quali-
fied rates (as defined in the proposed reg-
ulations) will not result in tax realization
events under section 1001 and relevant
regulations thereunder. The proposed reg-
ulations require that qualified rates be sub-
stantially equivalent in fair market value
to the replaced rates based on any reason-
able, consistently applied method of val-
uation. The proposed regulations further
provide certain safe harbors for this com-
parability standard, based on historic av-
erage rates and bona fide fair market value
negotiations between unrelated parties.
The proposed regulations also provide
corresponding guidance on hedging trans-
actions and derivatives to the effect that
taxpayers may modify the components of
hedged or integrated transactions to re-
place IBORs with qualified rates without
affecting the tax treatment of the hedges
or underlying transactions.
In the absence of these proposed reg-
ulations, parties to contracts affected by
the cessation of the publication of LIBOR
would either suffer tax consequences to
the extent that a change to the contract
results in a tax realization event under
section 1001 or attempt to find alternative
contracts that avoid such a tax realization
event, which may be difficult as a com-
mercial matter. Both such options would
be both costly and highly disruptive to
U.S. financial markets. A large number
of contracts may end up being breached,
leading to bankruptcies or other legal pro-
ceedings. The types of actions that con-
tract holders might take in the absence of
these proposed regulations are difficult
to predict because such an event is out-
side recent experience in U.S. financial
markets. This financial disruption would
be particularly unproductive because the
economic characteristics of the financial
products and contracts under the new rates
would be essentially unchanged. Thus,
there is no underlying economic rationale
for a tax realization event.
The Treasury Department and the IRS
project that these proposed regulations
would avoid this costly and unproductive
disruption. The Treasury Department and
the IRS further project that these proposed
regulations, by implementing the regula-
tory provisions requested by ARRC and
taxpayers, will help facilitate the econ-
omy’s adaptation to the cessation of the
LIBOR in a least-cost manner.
The Treasury Department and the IRS
request comments on these proposed reg-
ulations.
II. Regulatory Planning and Review and
Regulatory Flexibility Act
Under the Regulatory Flexibility Act
(5 U.S.C. chapter 6), it is hereby certi-
fied that these proposed regulations will
not have a significant economic impact
on a substantial number of small entities
that are directly affected by the proposed
regulations. These proposed regulations
provide rules to minimize the economic
impact of the elimination of IBORs on all
taxpayers. Parties to IBOR-referencing fi-
nancial instruments are generally expect-
ed to alter or to modify those instruments
in response to the elimination of the rel-
evant IBOR and, in the absence of rules
such as those proposed, those alterations
and modifications may trigger significant
tax consequences for the parties to those
instruments. In addition, these proposed
regulations do not impose a collection of
information on any taxpayers, including
small entities. Accordingly, this rule will
not have a significant economic impact on
a substantial number of small entities.
Pursuant to section 7805(f) of the
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Adminis-
tration for comment on its impact on small
business.
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) requires
that agencies assess anticipated costs and
benefits and take certain other actions be-
fore issuing a final rule that includes any
Federal mandate that may result in expen-
ditures in any one year by a State, local, or
tribal government, in the aggregate, or by
the private sector, of $100 million in 1995
dollars, updated annually for inflation.
In 2019, that threshold is approximately
$150 million. This rule does not include
any Federal mandate that may result in ex-
penditures by state, local, or tribal govern-
ments, or by the private sector in excess of
that threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (titled “Feder-
alism”) prohibits an agency from publish-
ing any rule that has federalism implica-
tions if the rule either imposes substantial,
direct compliance costs on state and local
governments, and is not required by stat-
1
See Second Report, The Alternative Reference Rates Committee, March 2018, Table 1 and related discussion, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/
files/2018/ARRC-Second-report.

Bulletin No. 2019–44 1033 October 28, 2019
ute, or preempts state law, unless the agen-
cy meets the consultation and funding re-
quirements of section 6 of the Executive
Order. This proposed rule does not have
federalism implications and does not im-
pose substantial direct compliance costs
on state and local governments or preempt
state law within the meaning of the Exec-
utive Order.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the ADDRESSES
heading. The Treasury Department and
the IRS specifically seek comment on
any complications under any section of
the Code or existing regulations that may
arise from the replacement of an IBOR
with a qualified rate and that are not re-
solved in these proposed regulations. All
comments will be available at http://www.
regulations.gov or upon request. A public
hearing will be scheduled if requested in
writing by any person that timely submits
written comments. If a public hearing is
scheduled, notice of the date, time, and
place for the hearing will be published in
the Federal Register.
Drafting Information
The principal authors of these reg-
ulations are Caitlin Holzem and Spen-
ce Hanemann of the Office of Associate
Chief Counsel (Financial Institutions and
Products). However, other personnel from
the Treasury Department and the IRS par-
ticipated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order for §1.1001-6 to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.1001-6 also issued under 26
U.S.C. 148(i), 26 U.S.C. 988(d), and 26
U.S.C. 1275(d).
* * * * *
Par. 2. Section 1.860A-0 is amended by
adding entries for §1.860G-1(e) to read as
follows:
§1.860A-0 Outline of REMIC
provisions.
* * * * *
§1.860G-1 Definition of regular and
residual interests.
* * * * *
(e) Transition from interbank offered
rates.
(1) In general.
(2) Change in reference rate for a regu-
lar interest after the startup day.
(3) Contingencies of rate on a regular
interest.
(4) Reasonable expenses incurred to al-
ter a regular interest.
(5) Applicability dates.
* * * * *
Par. 3. Section 1.860G-1 is amended by
adding paragraph (e) to read as follows:
§1.860G-1 Definition of regular and
residual interests.
* * * * *
(e) Transition from interbank offered
rates—(1) In general. This paragraph (e)
applies to certain interests in a REMIC
that provide for a rate referencing an in-
terbank offered rate. See §1.1001-6 for
additional rules that may apply to an in-
terest in a REMIC that provides for a rate
referencing an interbank offered rate.
(2) Change in reference rate for a reg-
ular interest after the startup day. An al-
teration to a regular interest in a REMIC
that occurs after the startup day and that is
described in §1.1001-6(a)(1) or (3) is dis-
regarded in determining whether the reg-
ular interest has fixed terms on the startup
day under paragraph (a)(4) of this section.
(3) Contingencies of rate on a regular
interest. An interest in a REMIC does not
fail to qualify as a regular interest sole-
ly because it is subject to a contingency
whereby a rate that references an inter-
bank offered rate and is a variable rate
permitted under paragraph (a)(3) of this
section may change to a fixed rate or a dif-
ferent variable rate permitted under para-
graph (a)(3) of this section in anticipation
of the interbank offered rate becoming un-
available or unreliable.
(4) Reasonable expenses incurred to
alter a regular interest. An interest in a
REMIC does not fail to qualify as a reg-
ular interest solely because it is subject
to a contingency whereby the amount
of payments of principal or interest (or
other similar amounts) with respect to
the interest in the REMIC is reduced
by reasonable costs incurred to effect
an alteration or modification described
in §1.1001-6(a)(1), (2), or (3). In addi-
tion, payment by a party other than the
REMIC of reasonable costs incurred to
effect an alteration or modification de-
scribed in §1.1001-6(a)(1), (2), or (3) is
not a contribution to the REMIC for pur-
poses of section 860G(d).
(5) Applicability dates. (i) Paragraphs
(e)(2) and (4) of this section apply with
respect to an alteration or modification
that occurs on or after the date of pub-
lication of a Treasury decision adopting
these rules as final regulations in the
Federal Register. However, taxpayers
may apply paragraphs (e)(2) and (4) of
this section with respect to an alteration
or a modification that occurs before the
date of publication of a Treasury decision
adopting these rules as final regulations
in the Federal Register. See section
7805(b)(7).
(ii) Paragraph (e)(3) of this section ap-
plies to a regular interest in a REMIC is-
sued on or after the date of publication of
a Treasury decision adopting these rules
as final regulations in the Federal Reg-
ister. However, a taxpayer may apply
paragraph (e)(3) of this section to a regu-
lar interest in a REMIC issued before the
date of publication of a Treasury decision
adopting these rules as final regulations
in the Federal Register. See section
7805(b)(7).
Par. 4. Section 1.882-5 is amended by:
1. Revising the fourth sentence of para-
graph (a)(7)(i).
2. Revising paragraph (d)(5)(ii)(B).
3. Removing the “(1)” from the “(f)(1)”
paragraph designation and adding a
subject heading to paragraph (f)(1).
4. Adding paragraph (f)(3).

October 28, 2019 1034 Bulletin No. 2019–44
The revisions and addition read as fol-
lows:
§1.882-5 Determination of interest
deduction.
(a) * * *
(7) * * *
(i) * * * An elected method (other than
the fair market value method under para-
graph (b)(2)(ii) of this section, or the pub-
lished rate election in paragraph (d)(5)(ii)
of this section) must be used for a mini-
mum period of five years before the tax-
payer may elect a different method. * * *
* * * * *
(d) * * *
(5) * * *
(ii) * * *
(B) Published rate election. For each
taxable year in which a taxpayer is a bank
within the meaning of section 585(a)(2)
(B) (without regard to the second sen-
tence thereof or whether any activities
are effectively connected with a trade or
business within the United States), the
taxpayer may elect to compute the interest
expense attributable to excess U.S.-con-
nected liabilities by using the yearly av-
erage Secured Overnight Financing Rate
(SOFR) published by the Federal Bank of
New York for the taxable year rather than
the interest rate provided in paragraph (d)
(5)(ii)(A) of this section. A taxpayer may
elect to apply the rate provided in para-
graph (d)(5)(ii)(A) of this section or in
this paragraph (d)(5)(ii)(B) on an annual
basis and the taxpayer does not need the
consent of the Commissioner to change
this election in a subsequent taxable year.
If a taxpayer that is eligible to make the
published rate election either does not
file a timely return or files a calculation
with no excess U.S.-connected liabilities
and it is later determined by the Director
of Field Operations that the taxpayer has
excess U.S.-connected liabilities, then the
Director of Field Operations, and not the
taxpayer, may choose whether to apply the
interest rate provided under either para-
graph (d)(5)(ii)(A) or (B) of this section
to the taxpayer’s excess U.S.-connected
liabilities in determining interest expense.
* * * * *
(f) * * *—
(1) General rule. * * *
* * * * *
(3) Applicability date for published
rate election. Paragraph (d)(5)(ii)(B) of
this section applies to taxable years end-
ing after the date of publication of a Trea-
sury decision adopting these rules as final
regulations is published in the Federal
Register.
Par. 5. Section 1.1001-6 is added to
read as follows:
§1.1001-6 Transition from interbank
offered rates.
(a) Treatment under section 1001—
(1) Debt instruments. An alteration of the
terms of a debt instrument to replace a
rate referencing an interbank offered rate
(IBOR) with a qualified rate as defined
in paragraph (b) of this section (qualified
rate) and any associated alteration as de-
fined in paragraph (a)(5) of this section
(associated alteration) are not treated as
modifications and therefore do not result
in an exchange of the debt instrument for
purposes of §1.1001-3. For example, if
the terms of a debt instrument that pays
interest at a rate referencing the U.S.-dol-
lar London Interbank Offered Rate (USD
LIBOR) are altered to provide that the in-
strument pays interest at a qualified rate
referencing the Secured Overnight Fi-
nancing Rate published by the Federal Re-
serve Bank of New York, that alteration of
terms is not treated as a modification and
therefore does not result in an exchange
for purposes of §1.1001-3.
(2) Non-debt contracts. A modifica-
tion of the terms of a contract other than
a debt instrument (a non-debt contract) to
replace a rate referencing an IBOR with
a qualified rate and any associated mod-
ification as defined in paragraph (a)(5) of
this section (associated modification) are
not treated as the exchange of property for
other property differing materially in kind
or extent for purposes of §1.1001-1(a). A
non-debt contract includes but is not lim-
ited to a derivative, stock, an insurance
contract, and a lease agreement.
(3) Fallback rate. An alteration of the
terms of a debt instrument to include a
qualified rate as a fallback to a rate ref-
erencing an IBOR and any associated al-
teration are not treated as modifications
and therefore do not result in an exchange
of the debt instrument for purposes of
§1.1001-3. In addition, an alteration of the
terms of a debt instrument to substitute a
qualified rate in place of a rate referencing
an IBOR as a fallback to another rate and
any associated alteration are not treated as
modifications and therefore do not result
in an exchange of the debt instrument for
purposes of §1.1001-3. A modification of
the terms of a non-debt contract to include
a qualified rate as a fallback to a rate refer-
encing an IBOR and any associated modi-
fication are not treated as the exchange of
property for other property differing ma-
terially in kind or extent for purposes of
§1.1001-1(a). In addition, a modification
of the terms of a non-debt contract to sub-
stitute a qualified rate in place of a rate ref-
erencing an IBOR as a fallback to another
rate and any associated modification are
not treated as the exchange of property for
other property differing materially in kind
or extent for purposes of §1.1001-1(a).
(4) Other contemporaneous alterations
and modifications. Whether an alteration
of the terms of a debt instrument that is
not described in paragraph (a)(1) or (3) of
this section and that is made contempo-
raneously with an alteration described in
paragraph (a)(1) or (3) of this section re-
sults in an exchange of the debt instrument
is determined under §1.1001-3. Similarly,
whether a modification of the terms of a
non-debt contract that is not described in
paragraph (a)(2) or (3) of this section and
that is made contemporaneously with a
modification described in paragraph (a)(2)
or (3) of this section results in an exchange
of property for other property differing
materially in kind or extent is determined
under §1.1001-1(a). In applying §1.1001-
3 or §1.1001-1(a) for this purpose, the
altered or modified terms described in
paragraph (a)(1), (2), or (3) of this section
are treated as part of the terms of the debt
instrument or non-debt contract prior to
any alteration or modification that is not
so described. For example, if the parties
to a debt instrument change the interest
rate from a rate referencing USD LIBOR
to a qualified rate and at the same time in-
crease the interest rate to account for de-
terioration of the issuer’s credit since the
issue date, the qualified rate is treated as
a term of the instrument prior to the al-
teration and only the addition of the risk
premium is analyzed under §1.1001-3.
(5) Associated alteration or modifi-
cation. For purposes of this section, as-

Bulletin No. 2019–44 1035 October 28, 2019
sociated alteration or associated mod-
ification means any alteration of a debt
instrument or modification of a non-debt
contract that is associated with the alter-
ation or modification by which a qualified
rate replaces, or is included as a fallback
to, the IBOR-referencing rate and that is
reasonably necessary to adopt or to im-
plement that replacement or inclusion. An
associated alteration or associated modifi-
cation may be a technical, administrative,
or operational alteration or modification,
such as a change to the definition of inter-
est period or a change to the timing and
frequency of determining rates and mak-
ing payments of interest (for example,
delaying payment dates on a debt instru-
ment by two days to allow sufficient time
to compute and pay interest at a qualified
rate computed in arrears). An associated
alteration or associated modification may
also be the addition of an obligation for
one party to make a one-time payment in
connection with the replacement of the
IBOR-referencing rate with a qualified
rate to offset the change in value of the
debt instrument or non-debt contract that
results from that replacement (a one-time
payment).
(b) Qualified rate—(1) In general. For
purposes of this section, a qualified rate is
any one of the following rates, provided
that the rate satisfies the fair market val-
ue requirement of paragraph (b)(2) of this
section and the currency requirement of
paragraph (b)(3) of this section:
(i) The Secured Overnight Financing
Rate published by the Federal Reserve
Bank of New York (SOFR);
(ii) The Sterling Overnight Index Aver-
age (SONIA);
(iii) The Tokyo Overnight Average
Rate (TONAR or TONA);
(iv) The Swiss Average Rate Overnight
(SARON);
(v) The Canadian Overnight Repo Rate
Average (CORRA);
(vi) The Hong Kong Dollar Overnight
Index (HONIA);
(vii) The interbank overnight cash rate
administered by the Reserve Bank of Aus-
tralia (RBA Cash Rate);
(viii) The euro short-term rate admin-
istered by the European Central Bank
(€STR);
(ix) Any alternative, substitute or suc-
cessor rate selected, endorsed or recom-
mended by the central bank, reserve bank,
monetary authority or similar institution
(including any committee or working
group thereof) as a replacement for an
IBOR or its local currency equivalent in
that jurisdiction;
(x) Any qualified floating rate, as de-
fined in §1.1275-5(b) (but without regard
to the limitations on multiples set forth
in §1.1275-5(b)), that is not described in
paragraphs (b)(1)(i) through (ix) of this
section;
(xi) Any rate that is determined by ref-
erence to a rate described in paragraphs (b)
(1)(i) through (x) of this section, including
a rate determined by adding or subtracting
a specified number of basis points to or
from the rate or by multiplying the rate by
a specified number; or
(xii) Any rate identified as a qualified
rate in guidance published in the Internal
Revenue Bulletin (see §601.601(d)(2)(ii)
(a) of this chapter) for purposes of this
section.
(2) Substantial equivalence of fair mar-
ket value—(i) In general. Notwithstand-
ing paragraph (b)(1) of this section, a rate
is a qualified rate only if the fair market
value of the debt instrument or non-debt
contract after the alteration or modifica-
tion described in paragraph (a)(1), (2), or
(3) of this section is substantially equiv-
alent to the fair market value of the debt
instrument or non-debt contract before the
alteration or modification. In determining
fair market value for this purpose, the par-
ties may use any reasonable, consistently
applied valuation method and must take
into account the value of any one-time
payment that is made in connection with
the alteration or modification. A reason-
able valuation method may (but need not)
be based in whole or in part on past or pro-
jected values of the relevant rate. The re-
quirements of this paragraph (b)(2)(i) are
deemed to be satisfied if the rate meets the
safe harbor set forth in paragraph (b)(2)
(ii)(A) of this section or if the parties sat-
isfy the safe harbor set forth in paragraph
(b)(2)(ii)(B) of this section.
(ii) Safe harbors—(A) Historic average
of rates. Paragraph (b)(2)(i) of this section
is satisfied if, on the date of the alteration
or modification described in paragraph (a)
(1), (2), or (3) of this section, the historic
average of the relevant IBOR-referencing
rate does not differ by more than 25 ba-
sis points from the historic average of the
replacement rate, taking into account any
spread or other adjustment to the rate, and
adjusted to take into account the value of
any one-time payment that is made in con-
nection with the alteration or modification.
For this purpose, an historic average may
be determined by using an industry-wide
standard, such as a method of determin-
ing an historic average recommended by
the International Swaps and Derivatives
Association for the purpose of computing
the spread adjustment on a rate included
as a fallback to an IBOR-referencing rate
on a derivative or a method of determining
an historic average recommended by the
Alternative Reference Rates Committee
(or a comparable non-U.S. organization
or non-U.S. regulator) for the purpose
of computing the spread adjustment for
a rate that replaces an IBOR-referencing
rate on a debt instrument. An historic av-
erage may also be determined by any rea-
sonable method that takes into account ev-
ery instance of the relevant rate published
during a continuous period beginning no
earlier than 10 years before the alteration
or modification and ending no earlier than
three months before the alteration or mod-
ification. For purposes of this safe harbor,
the historic average must be determined
for both rates using the same method and
historical data from the same timeframes
and must be determined in good faith by
the parties with the goal of making the
fair market value of the debt instrument
or non-debt contract after the alteration
or modification substantially equivalent
to the fair market value of the debt instru-
ment or non-debt contract before the alter-
ation or modification.
(B) Arm’s length negotiations. Para-
graph (b)(2)(i) of this section is satisfied
if the parties to the debt instrument or
non-debt contract are not related (with-
in the meaning of section 267(b) or sec-
tion 707(b)(1)) and the parties determine,
based on bona fide, arm’s length negoti-
ations between the parties, that the fair
market value of the debt instrument or
non-debt contract before the alteration or
modification described in paragraph (a)
(1), (2), or (3) of this section is substan-
tially equivalent to the fair market value
after the alteration or modification. For
this purpose, the fair market value of the
debt instrument or non-debt contract after

October 28, 2019 1036 Bulletin No. 2019–44
the alteration or modification must take
into account the value of any one-time
payment that is made in connection with
the alteration or modification.
(C) Published in the Internal Revenue
Bulletin. In guidance published in the In-
ternal Revenue Bulletin, the Commission-
er may set forth additional circumstances
in which a rate is treated as satisfying the
requirement of paragraph (b)(2)(i) of this
section (see §601.601(d)(2)(ii)(a) of this
chapter).
(3) Currency of the interest rate bench-
mark. Notwithstanding paragraph (b)(1)
of this section, a rate is a qualified rate only
if the interest rate benchmark to which the
rate refers after the alteration or modifica-
tion described in paragraph (a)(1), (2), or
(3) of this section and the IBOR to which
the debt instrument or non-debt contract
referred before that alteration or modifi-
cation are based on transactions conduct-
ed in the same currency or are otherwise
reasonably expected to measure contem-
poraneous variations in the cost of newly
borrowed funds in the same currency.
(c) Effect of an alteration of the terms
of a debt instrument or a modification of
the terms of a derivative on integrated
transactions and hedges. An alteration
of the terms of a debt instrument or a
modification of the terms of a derivative
to replace a rate referencing an IBOR
with a qualified rate on one or more legs
of a transaction that is integrated under
§1.988-5 or §1.1275-6 is not treated as
legging-out of the transaction, provided
that the §1.1275-6 hedge (as defined in
§1.1275-6(b)(2)) or the §1.988-5(a) hedge
(as defined in §1.988-5(a)(4)) as modified
continues to meet the requirements for a
§1.1275-6 hedge or §1.988-5(a) hedge,
whichever is applicable. Similarly, an al-
teration of the terms of a debt instrument
or a modification of the terms of a deriva-
tive to replace an interest rate referencing
an IBOR with a qualified rate on one or
more legs of a transaction that is subject
to the hedge accounting rules described in
§1.446-4 will not be treated as a disposi-
tion or termination (within the meaning of
§1.446-4(e)(6)) of either leg of the trans-
action. In addition, a modification to re-
place an interest rate referencing an IBOR
with a qualified rate on a hedging transac-
tion for bonds that is integrated as a quali-
fied hedge under §1.148-4(h) for purposes
of the arbitrage investment restrictions
applicable to State and local tax-exempt
bonds and other tax-advantaged bonds (as
defined in §1.150-1(b)) is not treated as a
termination of that qualified hedge under
§1.148-4(h)(3)(iv)(B), provided that the
hedge as modified continues to meet the
requirements for a qualified hedge under
§1.148-4(h), as determined by applying
the special rules for certain modifications
of qualified hedges under §1.148-4(h)(3)
(iv)(C).
(d) Source and character of a one-time
payment. For all purposes of the Internal
Revenue Code, the source and character
of a one-time payment that is made by a
payor in connection with the alteration or
modification described in paragraph (a)
(1), (2), or (3) of this section is the same
as the source and character that would
otherwise apply to a payment made by
the payor with respect to the debt instru-
ment or non-debt contract that is altered
or modified.
(e) Coordination with provision for
grandfathered obligations under chapter
4. A non-debt contract that is modified
only as described in paragraph (a)(2) or
(3) of this section is not materially mod-
ified for purposes of §1.1471-2(b)(2)(iv).
(f) Coordination with the OID and
REMIC rules. For rules regarding origi-
nal issue discount on certain debt instru-
ments that provide for a rate referencing
an IBOR, see §1.1275-2(m). For rules re-
garding certain interests in a REMIC that
provide for a rate referencing an IBOR,
see §1.860G-1(e).
(g) Applicability date. This section ap-
plies to an alteration of the terms of a debt
instrument or a modification of the terms
of a non-debt contract that occurs on or
after the date of publication of a Treasury
decision adopting these rules as final reg-
ulations in the Federal Register. Taxpay-
ers and their related parties, within the
meaning of sections 267(b) and 707(b)(1),
may apply this section to an alteration of
the terms of a debt instrument or a modifi-
cation of the terms of a non-debt contract
that occurs before the date of publication
of a Treasury decision adopting these
rules as final regulations in the Federal
Register, provided that the taxpayers and
their related parties consistently apply the
rules of this section before that date. See
section 7805(b)(7).
Par. 6. Section 1.1271-0 is amended by
adding a reserved entry for §1.1275-2(l)
and by adding entries for §1.1275-2(m) to
read as follows:
§1.1271-0 Original issue discount;
effective date; table of contents.
* * * * *
§1.1275-2 Special rules relating to
debt instruments.
* * * * *
(l) [Reserved]
(m) Transition from interbank offered
rates.
(1) In general.
(2) Single qualified floating rate.
(3) Remote contingency.
(4) Change in circumstances.
(5) Applicability date.
* * * * *
Par. 7. Section 1.1275-2, as proposed
to be amended at 84 FR 47210, Septem-
ber 9, 2019, is further amended by adding
paragraph (m) to read as follows:
§1.1275-2 Special rules relating to debt
instruments.
* * * * *
(m) Transition from interbank offered
rates—(1) In general. This paragraph (m)
applies to a variable rate debt instrument
(as defined in §1.1275-5(a)) that provides
both for a qualified floating rate that ref-
erences an interbank offered rate (IBOR)
and for a methodology to change the
IBOR-referencing rate to a different rate
in anticipation of the IBOR becoming un-
available or unreliable. See §1.1001-6 for
additional rules that may apply to a debt
instrument that provides for a rate refer-
encing an IBOR.
(2) Single qualified floating rate. If a
debt instrument is described in paragraph
(m)(1) of this section, the IBOR-referenc-
ing rate and the different rate are treated as
a single qualified floating rate for purpos-
es of §1.1275-5.
(3) Remote contingency. If a debt in-
strument is described in paragraph (m)
(1) of this section, the possibility that the
IBOR will become unavailable or unreli-
able is treated as a remote contingency for
purposes of paragraph (h) of this section.
(4) Change in circumstances. If a debt
instrument is described in paragraph (m)

Bulletin No. 2019–44 1037 October 28, 2019
(1) of this section, the fact that the IBOR
has become unavailable or unreliable is
not treated as a change in circumstances
for purposes of paragraph (h)(6) of this
section.
(5) Applicability date. Paragraph (m) of
this section applies to debt instruments is-
sued on or after the date of publication of a
Treasury decision adopting these rules as
final regulations in the Federal Register.
However, a taxpayer may apply paragraph
(m) of this section to debt instruments
issued before the date of publication of a
Treasury decision adopting these rules as
final regulations in the Federal Register.
See section 7805(b)(7).
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
(Filed by the Office of the Federal Register on Oc-
tober 8, 2019, 8:45 a.m., and published in the issue
of the Federal Register for October 9, 2019, 84 F.R.
54068)
Contribution Limits
Applicable to ABLE
Accounts
REG-128246-18
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations related to the Inter-
nal Revenue Code (Code), which allows
a State (or its agency or instrumentality)
to establish and maintain a tax-advantaged
savings program under which contribu-
tions may be made to an ABLE account
for the purpose of paying for the qualified
disability expenses of the designated ben-
eficiary of the account. The affected Code
section was amended by the Tax Cuts and
Jobs Act, signed into law on December 22,
2017. The Tax Cuts and Jobs Act allows
certain designated beneficiaries to con-
tribute a limited amount of compensation
income to their own ABLE accounts.
DATES: Comments must be received by
January 8, 2020.
ADDRESSES: Submit electronic sub-
missions via the Federal eRulemaking
Portal at www.regulations.gov (indicate
IRS and REG-128246-18) by following
the online instructions for submitting
comments. Once submitted to the Fed-
eral eRulemaking Portal at www.regula-
tions.gov comments cannot be edited or
withdrawn. The Department of the Trea-
sury (Treasury Department) and the IRS
will publish for public availability any
comment received to its public docket,
whether submitted electronically or in
hard copy. Send hard copy submissions
to: CC:PA:LPD:PR (REG-128246-18),
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–128246–
18), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW,
Washington, DC 20224.
FOR FURTHER INFORMATION
CONTACT: Concerning these proposed
regulations, Julia Parnell, (202) 317-4086;
concerning submissions of comments
and requests for a public hearing, Regina
Johnson at email address fdms.database@
irscounsel.treas.gov and (202) 317-6901
(not toll-free numbers).
SUPPLEMENTARY INFORMA-
TION: This document contains proposed
regulations related to section 529A of the
Internal Revenue Code (Code), which al-
lows a State (or its agency or instrumen-
tality) to establish and maintain a tax-ad-
vantaged savings program under which
contributions may be made to an ABLE
account for the purpose of paying for the
qualified disability expenses of the desig-
nated beneficiary of the account. Section
529A was amended by the Tax Cuts and
Jobs Act, Public Law 115-97, 131 Stat.
2054, (2017) (2017 Act), signed into law
on December 22, 2017. The 2017 Act
allows certain designated beneficiaries
to contribute a limited amount of com-
pensation income to their own ABLE ac-
counts.
Background
1. The ABLE Act
The Stephen Beck, Jr., Achieving a
Better Life Experience Act of 2014 (the
“ABLE Act”) was enacted on December
19, 2014, as part of the Tax Increase Pre-
vention Act of 2014, Public Law 113-295,
128 Stat. 4010, (2014). The ABLE Act
added section 529A to the Code. Section
529A allows a State (or its agency or in-
strumentality) to establish and maintain
a tax-advantaged savings program under
which contributions may be made to an
ABLE account for the purpose of paying
for the qualified disability expenses of
the designated beneficiary of the account.
Section 529A was amended by the 2017
Act.
Prior to its amendment by the 2017
Act, section 529A(b)(2) stated that a pro-
gram shall not be treated as a qualified
ABLE program unless it provides that
no contribution will be accepted unless
it is in cash, or if the contribution (oth-
er than a rollover contribution described
in section 529A(c)(1)(C)) would result
in aggregate contributions from all con-
tributors in excess of the amount of the
section 2503(b) gift tax exclusion for the
calendar year in which the designated
beneficiary’s taxable year begins. Under
section 529A(b)(2), rules similar to the
rules of section 408(d)(4) apply to permit
the return of excess contributions (with
any attributable net income) on or before
the due date (including extensions) of the
designated beneficiary’s income tax re-
turn. In addition, under section 529A(b)
(6), a qualified ABLE program must pro-
vide adequate safeguards to ensure that
total contributions do not exceed the
State’s limit for aggregate contributions
under its qualified tuition program as
described in section 529(b)(6). A quali-
fied tuition program under section 529 is
a program established by a State (or its
agency or instrumentality) that permits a
person to prepay or contribute to a tax-fa-
vored savings account for a designated
beneficiary’s qualified higher education
expenses (QHEEs) or a program estab-
lished by an eligible educational insti-
tution that permits a person to prepay a
designated beneficiary’s QHEEs.

October 28, 2019 1038 Bulletin No. 2019–44
2. Prior Rulemaking and Statutory
Change
On June 22, 2015, the Treasury De-
partment and the IRS published a Notice
of Proposed Rulemaking (REG-102837-
15) in the Federal Register (80 FR
35602) (the 2015 Proposed Regulations).
More than 200 written comments were
received in response to the 2015 Pro-
posed Regulations and a public hearing
was held on October 14, 2015.
1
In ad-
dition to these comments, several com-
menters asked the Treasury Department
and the IRS to issue interim guidance
to address three particular issues so that
these programs could be established be-
fore the issuance of final regulations. In
order to prevent a delay in the creation
of ABLE programs, the Treasury Depart-
ment and the IRS issued Notice 2015-81,
2015-49 I.R.B. 784 (Dec. 7, 2015), which
describes how the Treasury Department
and the IRS intend to revise three par-
ticular provisions of the proposed regu-
lations under section 529A when those
regulations are finalized.
Since the issuance of the 2015 Pro-
posed Regulations and the Notice, two
statutes have been enacted that amended
one or more provisions of section 529A.
On December 18, 2015, section 303
of the Protecting Americans from Tax
Hikes Act of 2015 (the PATH Act), was
enacted as part of the Consolidated Ap-
propriations Act, Public Law 114-113,
129 Stat. 2242, (2016). The PATH Act
amended section 529A(b)(1), effective
for taxable years beginning after De-
cember 31, 2014, by removing the re-
quirement that a State’s qualified ABLE
program allow the establishment of an
ABLE account only for a designated
beneficiary who is a resident of that State
or of a contracting State. Due to this
amendment, the Treasury Department
and the IRS intend to remove references
to the residency requirement in the pro-
posed regulations under section 529A
when those regulations are finalized. The
other statutory change was made in the
2017 Act as described in these proposed
regulations.
3. The 2017 Act
The 2017 Act amended sec-
tion 529A(b)(2)(B) to allow an employed
designated beneficiary described in new
section 529A(b)(7) to contribute, prior
to January 1, 2026, an additional amount
in excess of the limit in section 529A(b)
(2)(B)(i) (the annual gift tax exclusion
amount in section 2503(b), formerly set
forth in section 529A(b)(2)(B)). This ad-
ditional permissible contribution is sub-
ject to its own limit as described in sec-
tion 529A(b)(2)(B)(ii). Specifically, this
additional contributed amount may not
exceed the lesser of (i) the designated
beneficiary’s compensation as defined by
section 219(f)(1) for the taxable year, or
(ii) an amount equal to the poverty line for
a one-person household for the calendar
year preceding the calendar year in which
the taxable year begins. The 2017 Act also
amended the section 529A(b)(2) flush lan-
guage to require the designated beneficia-
ry, or a person acting on behalf of the des-
ignated beneficiary, to maintain adequate
records to ensure, and to be responsible
for ensuring, that the requirements of sec-
tion 529A(b)(2)(B)(ii) are met.
New section 529A(b)(7)(A) identi-
fies a designated beneficiary eligible to
make this additional contribution as one
who is an employee (including a self-em-
ployed individual) with respect to whom
there has been no contribution made for
the taxable year to: a defined contribution
plan meeting the requirements of sections
401(a) or 403(a); an annuity contract de-
scribed in section 403(b); or an eligible
deferred contribution plan under section
457(b). Section 529A(b)(7)(B) defines the
term “poverty line” as having the meaning
provided in section 673 of the Communi-
ty Services Block Grant Act (42 U.S.C.
9902).
The 2017 Act also amended section
529 to allow, before January 1, 2026, a
limited amount to be rolled over to an
ABLE account from the designated ben-
eficiary’s own section 529 qualified tui-
tion program (QTP) account or from the
QTP account of certain family members.
The 2017 Act added section 529(c)(3)(C)
(i)(III), which provides that a distribution
from a QTP made after December 22,
2017, and before January 1, 2026, is not
subject to income tax if, within 60 days
of the distribution, it is transferred to an
ABLE account of the designated benefi-
ciary or a member of the family of the
designated beneficiary. Under section
529(c)(3)(C)(i), the amount of any roll-
over to an ABLE account is limited to the
amount that, when added to all other con-
tributions made to the ABLE account for
the taxable year, does not exceed the con-
tribution limit for the ABLE account un-
der section 529A(b)(2)(B)(i), that is, the
annual gift tax exclusion amount under
section 2503(b). This limited rollover is
described in more detail in Notice 2018-
58, 2018-33 I.R.B. 305 (Aug. 13, 2018).
4. Notice 2018-62
To address the 2017 Act modifica-
tions to section 529A, the Treasury De-
partment and the IRS published Notice
2018-62, 2018-34 I.R.B. 316 (Aug. 20,
2018), which announces the intent of the
Treasury Department and the IRS to issue
proposed regulations to implement these
changes, and describes the anticipated
rules to implement the statutory changes.
No comments were received in response
to the Notice. These proposed regulations
incorporate, without substantive change,
the anticipated rules described in that No-
tice.
Explanation of Provisions
1. Additional Contributions
The 2017 Act amended section
529A(b)(2)(B) to permit an employed or
self-employed designated beneficiary de-
scribed in section 529A(b)(7) to contrib-
ute to his or her ABLE account the lesser
of the designated beneficiary’s compen-
sation for the taxable year or an amount
equal to the poverty line for a one-person
household for the calendar year preceding
the calendar year in which the designated
beneficiary’s taxable year begins. These
proposed regulations confirm that the em-
1
Comments related to the 2015 Proposed Regulations will be considered prior to finalizing them, which the Treasury Department and the IRS expect to occur in conjunction with the final-
ization of these proposed regulations.

Bulletin No. 2019–44 1039 October 28, 2019
ployed designated beneficiary, or the per-
son acting on his or her behalf, is solely
responsible for ensuring that the require-
ments in section 529A(b)(2)(B)(ii) are
met and for maintaining adequate records
for that purpose. In addition, to minimize
burdens for the designated beneficiary
and the qualified ABLE program, these
proposed regulations provide that ABLE
programs may allow a designated benefi-
ciary or the person acting on his or her be-
half to certify, under penalties of perjury,
that he or she is a designated beneficiary
described in section 529A(b)(7) and that
his or her contributions of compensation
do not exceed the limit set forth in section
529A(b)(2)(B)(ii).
2. Poverty Line
Section 529A(b)(7)(B) provides that
the term poverty line referred to in sec-
tion 529A(b)(2)(B)(ii) has the same
meaning given to that term by section
673 of the Community Services Block
Grant Act (42 U.S.C. 9902). These pro-
posed regulations clarify that the poverty
line in section 529A(b)(7)(B) is to be de-
termined by using the poverty guidelines
updated periodically in the Federal Reg-
ister by the U.S. Department of Health
and Human Services under the authority
of 42 U.S.C. 9902(2). Those guidelines
vary based on locality. Specifically, there
are separate guidelines for (1) the contig-
uous 48 states and the District of Colum-
bia, (2) Alaska, and (3) Hawaii. Because
the Treasury Department and the IRS
have concluded that the poverty guide-
line that most closely reflects the em-
ployed designated beneficiary’s cost of
living is the most relevant for determin-
ing the contribution limit, these proposed
regulations provide that a designated
beneficiary’s contribution limit is to be
determined using the poverty guideline
applicable in the state of the designated
beneficiary’s residence.
3. Return of Excess Contributions
Because section 529A(b)(2) provides
that rules similar to those set forth in sec-
tion 408(d)(4) regarding the return of ex-
cess contributions to an individual retire-
ment account or annuity apply to ABLE
accounts, these proposed regulations pro-
vide that a qualified ABLE program must
return any contributions of the designated
beneficiary’s compensation in excess of
the limit in section 529A(b)(2)(B)(ii) to
the designated beneficiary.
Consistent with section 529A(b)(2),
these proposed regulations provide that it
will be the sole responsibility of the des-
ignated beneficiary (or the person acting
on the designated beneficiary’s behalf)
to identify and request the return of any
excess contribution of such compensation
income. Such returns of excess compen-
sation contributions must be received by
the employed designated beneficiary on or
before the due date (including extensions)
of the designated beneficiary’s income
tax return for the year in which the excess
compensation contributions were made. A
failure to return excess contributions with-
in this time period will result in the impo-
sition on the designated beneficiary of a 6
percent excise tax under section 4973(a)
(6) on the amount of excess compensation
contributions.
Additionally, in order to minimize ad-
ministrative burdens for the designated
beneficiary and the qualified ABLE pro-
gram, for purposes of ensuring that the
limit on contributions made under sec-
tion 529A(b)(2)(B)(ii) is not exceeded,
the qualified ABLE program may rely on
self-certifications, made under penalties
of perjury, of the designated beneficiary or
the person acting on the designated bene-
ficiary’s behalf.
Proposed Effective/Applicability Date
These regulations are proposed to ap-
ply to taxable years beginning after the
date of publication of the Treasury deci-
sion adopting these rules as final regula-
tions in the Federal Register. Until the
issuance of final regulations, taxpayers
and qualified ABLE programs may rely
on these proposed 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.
Regulatory Flexibility Act
Pursuant to the Regulatory Flexibili-
ty Act (5 U.S.C. chapter 6), it is hereby
certified that the collection of information
in these regulations will not have a sig-
nificant economic impact on a substantial
number of small entities. This certification
is based on the fact that these proposed
regulations will not impact a substantial
number of small entities. These regula-
tions primarily affect states and individ-
uals and therefore will not have a signif-
icant economic impact on a substantial
number of small entities. Pursuant to sec-
tion 7805(f) of the Code, these proposed
regulations will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consider-
ation will be given to any comments that
are timely submitted to the IRS as pre-
scribed in this preamble under the ‘‘AD-
DRESSES’’ heading. The Treasury De-
partment and the IRS request comments
on all aspects of these proposed rules.
All comments will be available at www.
regulations.gov or upon request. A public
hearing will be scheduled if requested in
writing by any person that timely sub-
mits written or electronic comments. If a
public hearing is scheduled, notice of the
date, time, and place for the hearing will
be published in the Federal Register.
Statement of Availability of IRS
Documents
Notices 2015-81, 2018-58 and 2018-
62 are published in the Internal Revenue
Bulletin and are available from the Su-
perintendent of Documents, U.S. Govern-
ment Publishing Office, Washington, D.C.
20402, or by visiting the IRS website at
http://www.irs.gov.
Drafting Information
The principal author of these regula-
tions is Julia Parnell, Office of Associate
Chief Counsel (Employee Benefits, Ex-

October 28, 2019 1040 Bulletin No. 2019–44
empt Organizations, and Employment
Taxes). However, other personnel from
the IRS and the Treasury Department par-
ticipated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry for
§1.529A–8 in numerical order to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
*****
Section 1.529A–8 also issued under 26
U.S.C. 529A(g).
*****
Par. 2. Section 1.529A-0, as proposed
to be added at 80 FR 35602, June 22,
2015, is further amended by adding an
entry for §1.529A-8 in numerical order to
read as follows:
§1.529A-0 Table of contents.
* * * * *
§1.529A-8 Additional contributions to
ABLE accounts made by an employed des-
ignated beneficiary.
(a) Additional contributions to ABLE
accounts made by an employed designat-
ed beneficiary.
(1) In general.
(2) Amount of additional contribution.
(b) Additional definitions.
(1) Employed designated beneficiary.
(2) Applicable poverty line.
(3) Excess compensation contribution.
(c) Example.
(d) Responsibility for ensuring contri-
bution limit is met.
(e) Return of excess compensation
contributions.
(f) Applicability date.
Par.3. Section 1.529A-1, as proposed to
be added at 80 FR 35602, June 22, 2015,
is further amended by revising paragraph
(b)(3) to read as follows:
§1.529A-1 Exempt status of qualified
ABLE program and definitions.
* * * * *
(b) * * *
(3) Contribution means any payment
directly allocated to an ABLE account
for the benefit of the designated benefi-
ciary, including amounts transferred from
a qualified tuition program under section
529 after December 22, 2017 and before
January 1, 2026.
* * * * *
Par. 4. Section 1.529A-8 is added to
read as follows:
§1.529A-8 Additional contributions to
ABLE accounts made by an employed
designated beneficiary.
(a) Additional contributions by an em-
ployed designated beneficiary—(1) In
general. An employed designated bene-
ficiary defined in paragraph (b)(1) of this
section may contribute amounts up to the
limit specified in paragraph (a)(2) of this
section in addition to the annual amount
described in section 529A(b)(2)(B)(i).
(2) Amount of additional permissible
contribution. Any additional contribution
made by the designated beneficiary pursu-
ant to this section is limited to the lesser
of—
(i) The designated beneficiary’s com-
pensation as defined by section 219(f)(1)
for the taxable year; or
(ii) An amount equal to the applicable
poverty line, as defined in paragraph (b)
(2) of this section, for a one-person house-
hold for the calendar year preceding the
calendar year in which the designated
beneficiary’s taxable year begins.
(b) Additional definitions. In addition
to the definitions in §1.529A-1(b), the
following definitions also apply for the
purposes of this section—
(1) Employed designated beneficiary
means a designated beneficiary who is an
employee (including an employee within
the meaning of section 401(c)), with re-
spect to whom no contribution is made for
the taxable year to—
(i) A defined contribution plan (within
the meaning of section 414(i)) with re-
spect to which the requirements of sec-
tions 401(a) or 403(a) are met;
(ii) An annuity contract described in
section 403(b); and
(iii) An eligible deferred compensation
plan described in section 457(b).
(2) Applicable poverty line means the
amount provided in the poverty guidelines
updated periodically in the Federal Regis-
ter by the U.S. Department of Health and
Human Services under the authority of 42
U.S.C. 9902(2) for the State of residence
of the employed designated beneficiary. If
the designated beneficiary lives in more
than one state during the taxable year, the
applicable poverty line is the poverty line
for the state in which the designated ben-
eficiary resided longer than in any other
state during that year.
(3) Excess compensation contribution
means the amount by which the amount
contributed during the taxable year of an
employed designated beneficiary to the
designated beneficiary’s ABLE account
exceeds the limit in effect under sec-
tion 529A(b)(2)(B)(ii) and paragraph (a)
(2) of this section for the calendar year in
which that taxable year of the employed
designated beneficiary begins.
(c) Example. The following example
illustrates the principles of paragraphs (a)
(2) and (b)(2) of this section. In 2019, A,
the designated beneficiary of an ABLE ac-
count, lives in Hawaii. A’s compensation,
as defined by section 219(f)(1), for 2019
is $20,000. The poverty line for a one-per-
son household in Hawaii was $13,960 in
2018. Because A’s compensation exceed-
ed the applicable poverty line amount,
A’s additional permissible contribution in
2019 is limited to $13,960, the amount of
the 2018 applicable poverty line.
(d) Responsibility for ensuring contri-
bution limit is met. (1) The employed des-
ignated beneficiary, or the person acting
on his or her behalf, is solely responsible
for ensuring that the requirements in sec-
tion 529A(b)(2)(B)(ii) and paragraph (a)
(2) of this section are met and for main-
taining adequate records for that purpose.
(2) A qualified ABLE program may al-
low a designated beneficiary (or the per-
son acting on his or her behalf) to certi-
fy, under penalties of perjury, and in the

Bulletin No. 2019–44 1041 October 28, 2019
manner specified by the qualified ABLE
program that —
(i) The designated beneficiary is an em-
ployed designated beneficiary; and
(ii) The designated beneficiary’s con-
tributions of compensation are not excess
compensation contributions.
(e) Return of excess compensation con-
tributions. If an excess compensation con-
tribution is deposited into or allocated to
the ABLE account of a designated bene-
ficiary, the qualified ABLE program must
return that excess contribution, including
all net income attributable to the excess
contribution, as determined under the rules
set forth in §1.408-11 (treating references
to an IRA as references to an ABLE ac-
count, and references to returned contribu-
tions under section 408(d)(4) as referenc-
es to excess compensation contributions),
to the employed designated beneficiary.
The employed designated beneficiary, or
the person acting on the employed desig-
nated beneficiary’s behalf, is responsible
for identifying any excess compensation
contribution and for requesting the return
of the excess compensation contribution.
The excess compensation contribution, if
requested, must be received by the em-
ployed designated beneficiary on or before
the due date (including extensions) of the
Federal income tax return of the employed
designated beneficiary for the taxable year
in which the excess compensation contri-
bution is made.
(f) Applicability date. The rules of this
section apply to taxable years beginning
after [DATE OF PUBLICATION OF
FINAL REGULATIONS IN THE FED-
ERAL REGISTER].
Kirsten Wielobob,
Deputy Commissioner for Services
and Enforcement.
(Filed by the Office of the Federal Register on Octo-
ber 9, 2019, 8:45 a.m., and published in the issue of
the Federal Register for October 10, 2019, 84 F.R.
54529)

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).
Clarified is used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion. It
is not used where a position in a prior rul-
ing is being changed.
Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transactions.
This term is most commonly used in a ruling
that lists previously published rulings that
are obsoleted because of changes in laws or
regulations. A ruling may also be obsoleted
because the substance has been included in
regulations subsequently adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previous-
ly published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cas-
es in litigation, or the outcome of a Ser-
vice study.
Abbreviations
The following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI
—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Bulletin No. 2019–44 i October 28, 2019

Numerical Finding List
1
Bulletin 2019–44
AOD:
2019-02, 2019-41 I.R.B. 806
2019-03, 2019-42 I.R.B. 934
Announcements:
2019-07, 2019-27 I.R.B. 62
2019-08, 2019-32 I.R.B. 621
Notices:
2019-12, 2019-27 I.R.B. 57
2019-40, 2019-27 I.R.B. 59
2019-41, 2019-28 I.R.B. 256
2019-42, 2019-29 I.R.B. 352
2019-27, 2019-31 I.R.B. 484
2019-43, 2019-31 I.R.B. 487
2019-24, 2019-31 I.R.B. 489
2019-45, 2019-32 I.R.B. 593
2019-48, 2019-36 I.R.B. 678
2019-46, 2019-37 I.R.B. 695
2019-49, 2019-37 I.R.B. 699
2019-50, 2019-37 I.R.B. 700
2019-47, 2019-39 I.R.B. 731
2019-51, 2019-41 I.R.B. 866
2019-52, 2019-41 I.R.B. 869
2019-54, 2019-42 I.R.B. 935
2019-55, 2019-42 I.R.B. 937
2019-58, 2019-44 I.R.B. 1022
Proposed Regulations:
REG-105476-18, 2019-27 I.R.B. 63
REG-106282-18, 2019-28 I.R.B. 259
REG-101828-19, 2019-29 I.R.B. 412
REG-106877-18, 2019-30 I.R.B. 441
REG-121508-18, 2019-30 I.R.B. 456
REG-105474-18, 2019-31 I.R.B. 493
REG-118425-18, 2019-31 I.R.B. 539
REG-130700-14, 2019-36 I.R.B. 681
REG-101378-19, 2019-37 I.R.B. 702
REG-104554-18, 2019-39 I.R.B. 737
REG-104870-18, 2019-39 I.R.B. 754
REG-102508-16, 2019-40 I.R.B. 777
REG-125710-18, 2019-40 I.R.B. 785
REG-106808-19, 2019-41 I.R.B. 912
REG-136401-18, 2019-42 I.R.B. 960
REG-104223-18, 2019-43 I.R.B. 989
REG-118784-18, 2019-44 I.R.B. 1024
REG-128246-18, 2019-44 I.R.B. 1037
Revenue Rulings:
2019-16, 2019-28 I.R.B. 96
2019-17, 2019-32 I.R.B. 583
Revenue Rulings:—Continued
2019-18, 2019-35 I.R.B. 668
2019-19, 2019-36 I.R.B. 674
2019-20, 2019-36 I.R.B. 675
2019-21, 2019-38 I.R.B. 708
2019-22, 2019-40 I.R.B. 776
2019-23, 2019-41 I.R.B. 807
2019-24, 2019-44 I.R.B. 1004
Revenue Procedures:
2019-24, 2019-29 I.R.B. 353
2019-28, 2019-32 I.R.B. 596
2019-29, 2019-32 I.R.B. 620
2019-30, 2019-33 I.R.B. 638
2019-31, 2019-33 I.R.B. 643
2019-32, 2019-33 I.R.B. 659
2019-33, 2019-34 I.R.B. 662
2019-34, 2019-35 I.R.B. 669
2019-23, 2019-38 I.R.B. 725
2019-36, 2019-38 I.R.B. 729
2019-37, 2019-39 I.R.B. 731
2019-35, 2019-41 I.R.B. 870
2019-38, 2019-42 I.R.B. 942
2019-39, 2019-42 I.R.B. 945
2019-40, 2019-43 I.R.B. 982
2019-41, 2019-44 I.R.B. 1022
Treasury Decisions:
9863, 2019-27 I.R.B. 1
9864, 2019-27 I.R.B. 6
9865, 2019-27 I.R.B. 27
9867, 2019-28 I.R.B. 98
9868, 2019-28 I.R.B.
252
9866, 2019-29 I.R.B. 261
9861, 2019-30 I.R.B. 433
9869, 2019-30 I.R.B. 438
9862, 2019-31 I.R.B. 477
9872, 2019-32 I.R.B. 585
9871, 2019-33 I.R.B. 624
9873, 2019-33 I.R.B. 630
9874, 2019-41 I.R.B. 809
9875, 2019-41 I.R.B. 856
9876, 2019-44 I.R.B. 1005
9877, 2019-44 I.R.B. 1007
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.
October 28, 2019 ii Bulletin No. 2019–44

Bulletin No. 2019–44 iii October 28, 2019
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2019–44
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.

Internal Revenue Service
Washington, DC 20224
Official Business
Penalty for Private Use, $300
INTERNAL REVENUE BULLETIN
The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.
We Welcome Comments About the Internal Revenue Bulletin
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it,
we would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.
NW, IR-6230 Washington, DC 20224.