Internal Revenue Bulletin 2020-52 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 2020–52
December 21, 2020
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
ADMINISTRATIVE
REV. RUL. 2020-28, page 1669.
Interest rates: underpayments and overpayments. The
rates for interest determined under Section 6621 of the
code for the calendar quarter beginning January 1, 2021,
will be 3 percent for overpayments (2 percent in the case
of a corporation), 3 percent for underpayments, and 5
percent for large corporate underpayments. The rate of
interest paid on the portion of a corporate overpayment
exceeding $10,000 will be 0.5 percent.
T.D. 9912, page 1688.
These final regulations under sections 36B and 6011 of
the Internal Revenue Code (Code) clarify that the reduction
of the personal exemption deduction to zero for taxable
years beginning after December 31, 2017, and before
January 1, 2026, does not affect an individual taxpayer’s
ability to claim the premium tax credit. These final regula-
tions affect individuals who claim the premium tax credit.
EXEMPT ORGANIZATIONS
T.D. 9933, page 1692.
Certain organizations that are generally exempt from federal
income taxes are taxed on income from business activities
that are not related to their exempt purpose. The calculation
of the tax on the unrelated business income depends upon
whether the tax-exempt organization has more than one un-
related trade or business. The final regulations provide guid-
ance on how these tax-exempt organizations determine if
they have more than one unrelated trade or business, and, if
so, how to calculate the amount of taxable income they have
from the unrelated business activities. The final regulations
also clarify that these regulations, as well as others on this
topic, apply to individual retirement accounts.
INCOME TAX
T.D. 9934, page 1729.
This document contains final regulations that coordinate the
extraordinary disposition rules issued under Treasury regula-
tion section 1.245A-5(c) and (d) and the disqualified basis rule
issued under Treasury regulation section 1.951A-2(c)(5). This
document also contains reporting rules under section 6038 to
facilitate administration of these rules.
T.D. 9935, page 1746.
These final regulations amend the current like-kind exchange
regulations to add a definition of real property to implement
statutory changes limiting section 1031 treatment to like-kind
exchanges of real property. The final regulations also provide
a rule addressing a taxpayer’s receipt of personal property
that is incidental to real property the taxpayer receives in an
otherwise qualifying like-kind exchange of real property.
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.
December 21, 2020 Bulletin No. 2020–52

Part I
Section 6621.—
Determination of Rate of
Interest
26 CFR 301.6621-1: Interest rate.
Rev. Rul. 2020-28
Section 6621 of the Internal Revenue
Code establishes the interest rates on over-
payments and underpayments of tax. Under
section 6621(a)(1), the overpayment rate is
the sum of the federal short-term rate plus
3 percentage points (2 percentage points in
the case of a corporation), except the rate
for the portion of a corporate overpayment
of tax exceeding $10,000 for a taxable peri-
od is the sum of the federal short-term rate
plus 0.5 of a percentage point. Under sec-
tion 6621(a)(2), the underpayment rate is
the sum of the federal short-term rate plus
3 percentage points.
Section 6621(c) provides that for pur-
poses of interest payable under section
6601 on any large corporate underpay-
ment, the underpayment rate under section
6621(a)(2) is determined by substituting
“5 percentage points” for “3 percentage
points.” See section 6621(c) and section
301.6621-3 of the Regulations on Proce-
dure and Administration for the definition
of a large corporate underpayment and
for the rules for determining the appli-
cable date. Section 6621(c) and section
301.6621-3 are generally effective for pe-
riods after December 31, 1990.
Section 6621(b)(1) provides that the
Secretary will determine the federal short-
term rate for the first month in each calen-
dar quarter. Section 6621(b)(2)(A) provides
that the federal short-term rate determined
under section 6621(b)(1) for any month
applies during the first calendar quarter be-
ginning after that month. Section 6621(b)
(3) provides that the federal short-term rate
for any month is the federal short-term rate
determined during that month by the Sec-
retary in accordance with section 1274(d),
rounded to the nearest full percent (or, if a
multiple of 1/2 of 1 percent, the rate is in-
creased to the next highest full percent).
Notice 88-59, 1988-1 C.B. 546, an-
nounced that in determining the quarterly
interest rates to be used for overpayments
and underpayments of tax under section
6621, the Internal Revenue Service will
use the federal short-term rate based on
daily compounding because that rate is
most consistent with section 6621 which,
pursuant to section 6622, is subject to dai-
ly compounding.
The federal short-term rate determined
in accordance with section 1274(d) during
October 2020 is the rate published in Rev-
enue Ruling 2020-22, 2020-45 IRB 963, to
take effect beginning November 1, 2020.
The federal short-term rate, rounded to the
nearest full percent, based on daily com-
pounding determined during the month of
October 2020 is 0 percent. Accordingly,
an overpayment rate of 3 percent (2 per-
cent in the case of a corporation) and an
underpayment rate of 3 percent are estab-
lished for the calendar quarter beginning
January 1, 2021. The overpayment rate for
the portion of a corporate overpayment ex-
ceeding $10,000 for the calendar quarter
beginning January 1, 2021 is 0.5 percent.
The underpayment rate for large corporate
underpayments for the calendar quarter
beginning January 1, 2021, is 5 percent.
These rates apply to amounts bearing in-
terest during that calendar quarter.
Sections 6654(a)(1) and 6655(a)(1)
provide that the underpayment rate estab-
lished under section 6621 applies in deter-
mining the addition to tax under sections
6654 and 6655 for failure to pay estimated
tax for any taxable year. Thus, the 3 per-
cent rate also applies to estimated tax un-
derpayments for the first calendar quarter
beginning January 1, 2021. Pursuant to
section 6621(b)(2)(B), in determining the
addition to tax under section 6654 for any
taxable year for an individual, the feder-
al short-term rate that applies during the
third month following the taxable year
also applies during the first 15 days of the
fourth month following the taxable year.
In addition, pursuant to section 6603(d)
(4), the rate of interest on section 6603
deposits is 0 percent for the first calendar
quarter in 2021.
Interest factors for daily compound in-
terest for annual rates of 0.5 percent are
published in Appendix A of this Revenue
Ruling. Interest factors for daily com-
pound interest for annual rates of 2 per-
cent, 3 percent and 5 percent are published
in Tables 9, 11, and 15 of Rev. Proc. 95-
17, 1995-1 C.B. 563, 565, and 569.
Annual interest rates to be compound-
ed daily pursuant to section 6622 that ap-
ply for prior periods are set forth in the
tables accompanying this revenue ruling.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Casey R. Conrad of the Office of
the Associate Chief Counsel (Procedure
and Administration). For further informa-
tion regarding this revenue ruling, contact
Mr. Conrad at (202) 317-6844 (not a toll-
free number).
Bulletin No. 2020–52 1669 December 21, 2020

December 21, 2020 1670 Bulletin No. 2020–52
APPENDIX A
365 Day Year
0.5% Compound Rate 184 Days
DaysFactorDaysFactorDaysFactor
10.000013699630.0008633801250.001713784
20.000027397640.0008770911260.001727506
30.000041096650.0008908011270.001741228
40.000054796660.0009045121280.001754951
50.000068495670.0009182231290.001768673
60.000082195680.0009319341300.001782396
70.000095894690.0009456461310.001796119
80.000109594700.0009593571320.001809843
90.000123294710.0009730691330.001823566
100.000136995720.0009867811340.001837290
110.000150695730.0010004931350.001851013
120.000164396740.0010142061360.001864737
130.000178097750.0010279181370.001878462
140.000191798760.0010416311380.001892186
150.000205499770.0010553441390.001905910
160.000219201780.0010690571400.001919635
170.000232902790.0010827701410.001933360
180.000246604800.0010964841420.001947085
190.000260306810.0011101971430.001960811
200.000274008820.0011239111440.001974536
210.000287711830.0011376251450.001988262
220.000301413840.0011513391460.002001988
230.000315116850.0011650541470.002015714
240.000328819860.0011787681480.002029440
250.000342522870.0011924831490.002043166
260.000356225880.0012061981500.002056893
270.000369929890.0012199131510.002070620
280.000383633900.0012336291520.002084347
290.000397336910.0012473441530.002098074
300.000411041920.0012610601540.002111801
310.000424745930.0012747761550.002125529
320.000438449940.0012884921560.002139257
330.000452154950.0013022081570.002152985
340.000465859960.0013159251580.002166713
350.000479564970.0013296411590.002180441
360.000493269980.0013433581600.002194169
370.000506974990.0013570751610.002207898
380.0005206801000.0013707921620.002221627
390.0005343861010.0013845101630.002235356
400.0005480921020.0013982271640.002249085
410.0005617981030.0014119451650.002262815

Bulletin No. 2020–52 1671 December 21, 2020
420.0005755041040.0014256631660.002276544
430.0005892111050.0014393811670.002290274
440.0006029171060.0014531001680.002304004
450.0006166241070.0014668181690.002317734
460.0006303311080.0014805371700.002331465
470.0006440391090.0014942561710.002345195
480.0006577461100.0015079751720.002358926
490.0006714541110.0015216941730.002372657
500.0006851611120.0015354141740.002386388
510.0006988691130.0015491331750.002400120
520.0007125781140.0015628531760.002413851
530.0007262861150.0015765731770.002427583
540.0007399951160.0015902931780.002441315
550.0007537031170.0016040141790.002455047
560.0007674121180.0016177341800.002468779
570.0007811211190.0016314551810.002482511
580.0007948311200.0016451761820.002496244
590.0008085401210.0016588971830.002509977
600.0008222501220.0016726191840.002523710
610.0008359601230.001686340
620.0008496701240.001700062

December 21, 2020 1672 Bulletin No. 2020–52
366 Day Year
0.5% Compound Rate 184 Days
DaysFactorDaysFactorDaysFactor
10.000013661630.0008610201250.001709097
20.000027323640.0008746931260.001722782
30.000040984650.0008883661270.001736467
40.000054646660.0009020401280.001750152
50.000068308670.0009157131290.001763837
60.000081970680.0009293871300.001777522
70.000095632690.0009430611310.001791208
80.000109295700.0009567351320.001804893
90.000122958710.0009704091330.001818579
100.000136620720.0009840841340.001832265
110.000150283730.0009977581350.001845951
120.000163947740.0010114331360.001859638
130.000177610750.0010251081370.001873324
140.000191274760.0010387831380.001887011
150.000204938770.0010524591390.001900698
160.000218602780.0010661341400.001914385
170.000232266790.0010798101410.001928073
180.000245930800.0010934861420.001941760
190.000259595810.0011071621430.001955448
200.000273260820.0011208391440.001969136
210.000286924830.0011345151450.001982824
220.000300590840.0011481921460.001996512
230.000314255850.0011618691470.002010201
240.000327920860.0011755461480.002023889
250.000341586870.0011892231490.002037578
260.000355252880.0012029001500.002051267
270.000368918890.0012165781510.002064957
280.000382584900.0012302561520.002078646
290.000396251910.0012439341530.002092336
300.000409917920.0012576121540.002106025
310.000423584930.0012712911550.002119715
320.000437251940.0012849691560.002133405
330.000450918950.0012986481570.002147096
340.000464586960.0013123271580.002160786
350.000478253970.0013260061590.002174477
360.000491921980.0013396851600.002188168
370.000505589990.0013533651610.002201859
380.0005192571000.0013670441620.002215550
390.0005329251010.0013807241630.002229242
400.0005465941020.0013944041640.002242933
410.0005602621030.0014080851650.002256625
420.0005739311040.0014217651660.002270317

Bulletin No. 2020–52 1673 December 21, 2020
430.0005876001050.0014354461670.002284010
440.0006012691060.0014491271680.002297702
450.0006149391070.0014628081690.002311395
460.0006286081080.0014764891700.002325087
470.0006422781090.0014901701710.002338780
480.0006559481100.0015038521720.002352473
490.0006696181110.0015175331730.002366167
500.0006832891120.0015312151740.002379860
510.0006969591130.0015448971750.002393554
520.0007106301140.0015585801760.002407248
530.0007243011150.0015722621770.002420942
540.0007379721160.0015859451780.002434636
550.0007516431170.0015996281790.002448331
560.0007653151180.0016133111800.002462025
570.0007789861190.0016269941810.002475720
580.0007926581200.0016406781820.002489415
590.0008063301210.0016543611830.002503110
600.0008200031220.0016680451840.002516806
610.0008336751230.001681729
620.0008473481240.001695413

December 21, 2020 1674 Bulletin No. 2020–52
TABLE OF INTEREST RATES
PERIODS BEFORE JUL. 1, 1975 - PERIODS ENDING DEC. 31, 1986
OVERPAYMENTS AND UNDERPAYMENTS
PERIODRATEIn 1995-1 C.B.
DAILY RATE TABLE
Before Jul. 1, 19756%Table 2,pg. 557
Jul.1,1975–Jan.31,19769%Table4,pg.559
Feb.1,1976–Jan.31,19787%Table3,pg.558
Feb.1,1978–Jan.31,19806%Table2,pg.557
Feb.1,1980–Jan.31,198212%Table5,pg.560
Feb.1,1982–Dec.31,198220%Table6,pg.560
Jan.1,1983–Jun.30,198316%Table37,pg.591
Jul.1,1983–Dec.31,198311%Table27,pg.581
Jan.1,1984–Jun.30,198411%Table75,pg.629
Jul.1,1984–Dec.31,198411%Table75,pg.629
Jan.1,1985–Jun.30,198513%Table31,pg.585
Jul.1,1985–Dec.31,198511%Table27,pg.581
Jan.1,1986–Jun.30,198610%Table25,pg.579
Jul.1,1986–Dec.31,19869%Table23,pg.577
TABLE OF INTEREST RATES
FROM JAN. 1, 1987 - Dec. 31, 1998
OVERPAYMENTSUNDERPAYMENTS
1995-1 C.B.1995-1 C.B. RATE
RATETABLEPGRATETABLEPG
Jan.1,1987–Mar.31,19878%215759%23577
Apr.1,1987–Jun.30,19878%215759%23577
Jul.1,1987–Sep.30,19878%215759%23577
Oct.1,1987–Dec.31,19879%2357710%25579
Jan.1,1988–Mar.31,198810%7362711%75629
Apr.1,1988–Jun.30,19889%7162510%73627
Jul.1,1988–Sep.30,19889%7162510%73627
Oct.1,1988–Dec.31,198810%7362711%75629
Jan.1,1989–Mar.31,198910%2557911%27581
Apr.1,1989–Jun.30,198911%2758112%29583
Jul.1,1989–Sep.30,198911%2758112%29583
Oct.1,1989–Dec.31,198910%2557911%27581
Jan.1,1990–Mar.31,199010%2557911%27581
Apr.1,1990–Jun.30,199010%2557911%27581
Jul.1,1990–Sep.30,199010%2557911%27581
Oct.1,1990–Dec.31,199010%2557911%27581
Jan.1,1991–Mar.31,199110%2557911%27581
Apr.1,1991–Jun.30,19919%2357710%25579

Bulletin No. 2020–52 1675 December 21, 2020
Jul.1,1991–Sep.30,19919%2357710%25579
Oct.1,1991–Dec.31,19919%2357710%25579
Jan.1,1992–Mar.31,19928%696239%71625
Apr.1,1992–Jun.30,19927%676218%69623
Jul.1,1992–Sep.30,19927%676218%69623
Oct.1,1992–Dec.31,19926%656197%67621
Jan.1,1993–Mar.31,19936%175717%19573
Apr.1,1993–Jun.30,19936%175717%19573
Jul.1,1993–Sep.30,19936%175717%19573
Oct.1,1993–Dec.31,19936%175717%19573
Jan.1,1994–Mar.31,19946%175717%19573
Apr.1,1994–Jun.30,19946%175717%19573
Jul.1,1994–Sep.30,19947%195738%21575
Oct.1,1994–Dec.31,19948%215759%23577
Jan.1,1995–Mar.31,19958%215759%23577
Apr.1,1995–Jun.30,19959%2357710%25579
Jul.1,1995–Sep.30,19958%215759%23577
Oct.1,1995–Dec.31,19958%215759%23577
Jan.1,1996–Mar.31,19968%696239%71625
Apr.1,1996–Jun.30,19967%676218%69623
Jul.1,1996–Sep.30,19968%696239%71625
Oct.1,1996–Dec.31,19968%696239%71625
Jan.1,1997–Mar.31,19978%215759%23577
Apr.1,1997–Jun.30,19978%215759%23577
Jul.1,1997–Sep.30,19978%215759%23577
Oct.1,1997–Dec.31,19978%215759%23577
Jan.1,1998–Mar.31,19988%215759%23577
Apr.1,1998–Jun.30,19987%195738%21575
Jul.1,1998–Sep.30,19987%195738%21575
Oct.1,1998–Dec.31,19987%195738%21575

December 21, 2020 1676 Bulletin No. 2020–52
TABLE OF INTEREST RATES
FROM JANUARY 1, 1999 - PRESENT
NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS
1995-1 C.B.
RATETABLEPAGE
Jan.1,1999–Mar.31,19997%19573
Apr.1,1999–Jun.30,19998%21575
Jul.1,1999–Sep.30,19998%21575
Oct.1,1999–Dec.31,19998%21575
Jan.1,2000–Mar.31,20008%69623
Apr.1,2000–Jun.30,20009%71625
Jul.1,2000–Sep.30,20009%71625
Oct.1,2000–Dec.31,20009%71625
Jan.1,2001–Mar.31,20019%23577
Apr.1,2001–Jun.30,20018%21575
Jul.1,2001–Sep.30,20017%19573
Oct.1,2001–Dec.31,20017%19573
Jan.1,2002–Mar.31,20026%17571
Apr.1,2002–Jun.30,20026%17571
Jul.1,2002–Sep.30,20026%17571
Oct.1,2002–Dec.31,20026%17571
Jan.1,2003–Mar.31,20035%15569
Apr.1,2003–Jun.30,20035%15569
Jul.1,2003–Sep.30,20035%15569
Oct.1,2003–Dec.31,20034%13567
Jan.1,2004–Mar.31,20044%61615
Apr.1,2004–Jun.30,20045%63617
Jul.1,2004–Sep.30,20044%61615
Oct.1,2004–Dec.31,20045%63617
Jan.1,2005–Mar.31,20055%15569
Apr.1,2005–Jun.30,20056%17571
Jul.1,2005–Sep.30,20056%17571
Oct.1,2005–Dec.31,20057%19573
Jan.1,2006–Mar.31,20067%19573
Apr.1,2006–Jun.30,20067%19573
Jul.1,2006–Sep.30,20068%21575
Oct.1,2006–Dec.31,20068%21575
Jan.1,2007–Mar.31,20078%21575
Apr.1,2007–Jun.30,20078%21575
Jul.1,2007–Sep.30,20078%21575
Oct.1,2007–Dec.31,20078%21575
Jan.1,2008–Mar.31,20087%67621
Apr.1,2008–Jun.30,20086%65619
Jul.1,2008–Sep.30,20085%63617
Oct.1,2008–Dec.31,20086%65619

Bulletin No. 2020–52 1677 December 21, 2020
Jan.1,2009–Mar.31,20095%15569
Apr.1,2009–Jun.30,20094%13567
Jul.1,2009–Sep.30,20094%13567
Oct.1,2009–Dec.31,20094%13567
Jan.1,2010–Mar.31,20104%13567
Apr.1,2010–Jun.30,20104%13567
Jul.1,2010–Sep.30,20104%13567
Oct.1,2010–Dec.31,20104%13567
Jan.1,2011–Mar.31,20113%11565
Apr.1,2011–Jun.30,20114%13567
Jul.1,2011–Sep.30,20114%13567
Oct.1,2011–Dec.31,20113%11565
Jan.1,2012–Mar.31,20123%59613
Apr.1,2012–Jun.30,20123%59613
Jul.1,2012–Sep.30,20123%59613
Oct.1,2012–Dec.31,20123%59613
Jan.1,2013–Mar.31,20133%11565
Apr.1,2013–Jun.30,20133%11565
Jul.1,2013–Sep.30,20133%11565
Oct.1,2013–Dec.31,20133%11565
Jan.1,2014–Mar.31,20143%11565
Apr.1,2014–Jun.30,20143%11565
Jul.1,2014–Sep.30,20143%11565
Oct.1,2014–Dec.31,20143%11565
Jan.1,2015–Mar.31,20153%11565
Apr.1,2015–Jun.30,20153%11565
Jul.1,2015–Sep.30,20153%11565
Oct.1.2015–Dec.31,20153%11565
Jan.1,2016–Mar.31,20163%59613
Apr.1,2016–Jun.30,20164%61615
Jul.1,2016–Sep.30,20164%61615
Oct.1,2016–Dec.31,20164%61615
Jan.1,2017–Mar.31,20174%13567
Apr.1,2017–Jun.30,20174%13567
Jul.1,2017–Sep.30,20174%13567
Oct.1,2017–Dec.31,20174%13567
Jan.1,2018–Mar.31,20184%13567
Apr.1,2018–Jun.30,20185%15569
Jul.1,2018–Sep.30,20185%15569
Oct.1,2018–Dec.31,20185%15569
Jan.1,2019–Mar.31,20196%17571
Apr.1,2019–Jun.30,20196%17571
Jul.1,2019–Sep.30,20195%15569
Oct.1,2019–Dec. 31,20195%15569

December 21, 2020 1678 Bulletin No. 2020–52
Jan.1,2020–Mar.31, 20205%63617
Apr.1,2020–Jun.30,20205%63617
Jul.1,2020–Sep.30,20203%59613
Oct.1,2020–Dec. 31,20203%59613
Jan.1,2021–Mar. 31,20213%11565

Bulletin No. 2020–52 1679 December 21, 2020
TABLE OF INTEREST RATES
FROM JANUARY 1, 1999 - PRESENT
CORPORATE OVERPAYMENTS AND UNDERPAYMENTS
OVERPAYMENTSUNDERPAYMENTS
1995-1 C.B.1995-1 C.B.
RATETABLEPGRATETABLEPG
Jan.1,1999–Mar.31,19996%175717%19573
Apr.1,1999–Jun.30,19997%195738%21575
Jul.1,1999–Sep.30,19997%195738%21575
Oct.1,1999–Dec.31,19997%195738%21575
Jan.1,2000–Mar.31,20007%676218%69623
Apr.1,2000–Jun.30,20008%696239%71625
Jul.1,2000–Sep.30,20008%696239%71625
Oct.1,2000–Dec.31,20008%696239%71625
Jan.1,2001–Mar.31,20018%215759%23577
Apr.1,2001–Jun.30,20017%195738%21575
Jul.1,2001–Sep.30,20016%175717%19573
Oct.1,2001–Dec.31,20016%175717%19573
Jan.1,2002–Mar.31,20025%155696%17571
Apr.1,2002–Jun.30,20025%155696%17571
Jul.1,2002–Sep.30,20025%155696%17571
Oct.1,2002–Dec.31,20025%155696%17571
Jan.1,2003–Mar.31,20034%135675%15569
Apr.1,2003–Jun.30,20034%135675%15569
Jul.1,2003–Sep.30,20034%135675%15569
Oct.1,2003–Dec.31,20033%115654%13567
Jan.1,2004–Mar.31,20043%596134%61615
Apr.1,2004–Jun.30,20044%616155%63617
Jul.1,2004–Sep.30,20043%596134%61615
Oct.1,2004–Dec.31,20044%616155%63617
Jan.1,2005–Mar.31,20054%135675%15569
Apr.1,2005–Jun.30,20055%155696%17571
Jul.1,2005–Sep.30,20055%155696%17571
Oct.1,2005–Dec.31,20056%175717%19573
Jan.1,2006–Mar.31,20066%175717%19573
Apr.1,2006–Jun.30,20066%175717%19573
Jul.1,2006–Sep.30,20067%195738%21575
Oct.1,2006–Dec.31,20067%195738%21575
Jan.1,2007–Mar.31,20077%195738%21575
Apr.1,2007–Jun.30,20077%195738%21575
Jul.1,2007–Sep.30,20077%195738%21575
Oct.1,2007–Dec.31,20077%195738%21575
Jan.1,2008–Mar.31,20086%656197%67621
Apr.1,2008–Jun.30,20085%636176%65619
Jul.1,2008–Sep.30,20084%616155%63617
Oct.1,2008–Dec.31,20085%636176%65619

December 21, 2020 1680 Bulletin No. 2020–52
Jan.1,2009–Mar.31,20094%135675%15569
Apr.1,2009–Jun.30,20093%115654%13567
Jul.1,2009–Sep.30,20093%115654%13567
Oct.1,2009–Dec.31,20093%115654%13567
Jan.1,2010–Mar.31,20103%115654%13567
Apr.1,2010–Jun.30,20103%115654%13567
Jul.1,2010–Sep.30,20103%115654%13567
Oct.1,2010–Dec.31,20103%115654%13567
Jan.1,2011–Mar.31,20112%95633%11565
Apr.1,2011–Jun.30,20113%115654%13567
Jul.1,2011–Sep.30,20113%115654%13567
Oct.1,2011–Dec.31,20112%95633%11565
Jan.1,2012–Mar.31,20122%576113%59613
Apr.1,2012–Jun.30,20122%576113%59613
Jul.1,2012–Sep.30,20122%576113%59613
Oct.1,2012–Dec.31,20122%576113%59613
Jan.1,2013–Mar.31,20132%95633%11565
Apr.1,2013–Jun.30,20132%95633%11565
Jul.1,2013–Sep.30,20132%95633%11565
Oct.1,2013–Dec.31,20132%95633%11565
Jan.1,2014–Mar.31,20142%95633%11565
Apr.1,2014–Jun.30,20142%95633%11565
Jul.1,2014–Sep.30,20142%95633%11565
Oct.1,2014–Dec.31,20142%95633%11565
Jan.1,2015–Mar.31,20152%95633%11565
Apr.1,2015–Jun.30,20152%95633%11565
Jul.1,z2015–Sep.30,20152%95633%11565
Oct.1,2015–Dec.31,20152%95633%11565
Jan.1,2016–Mar.31,20162%576113%59613
Apr.1,2016–Jun.30,20163%596134%61615
Jul.1,2016–Sep.30,20163%596134%61615
Oct.1,2016–Dec.31,20163%596134%61615
Jan.1,2017–Mar.31,20173%115654%13567
Apr.1,2017–Jun.30,20173%115654%13567
Jul.1,2017–Sep.30,20173%115654%13567
Oct.1,2017–Dec.31,,20173%115654%13567
Jan.1,2018–Mar.31,20183%115654%13567
Apr.1,2018–Jun.30,20184%135675%15569
Jul.1,2018–Sep.30,20184%135675%15569
Oct.1,2018–Dec.31,20184%135675%15569
Jan.1,2019–Mar.31,20195%155696%17571
Apr.1,2019–Jun.30,20195%155696%17571
Jul.1,2019–Sep.30,20194%135675%15569
Oct.1,2019–Dec.31,20194%135675%15569
Jan.1,2020–Mar. 31,20204%616155%63617

Bulletin No. 2020–52 1681 December 21, 2020
Apr.1,2020–Jun.30,20204%616155%63617
Jul.1,2020–Sep.30,20202%576113%59613
Oct.1,2020–Dec.31,20202%576113%59613
Jan.1,2021–Mar.31,20212% 95633%11565

December 21, 2020 1682 Bulletin No. 2020–52
TABLE OF INTEREST RATES
FOR LARGE CORPORATE UNDERPAYMENTS
FROM JANUARY 1, 1991 - PRESENT
1995-1 C.B.
RATETABLEPG
Jan.1,1991–Mar.31,199113%31585
Apr.1,1991–Jun.30,199112%29583
Jul.1,1991–Sep.30,199112%29583
Oct.1,1991–Dec.31,199112%29583
Jan.1,1992–Mar.31,199211%75629
Apr.1,1992–Jun.30,199210%73627
Jul.1,1992–Sep.30,199210%73627
Oct.1,1992–Dec.31,19929%71625
Jan.1,1993–Mar.31,19939%23577
Apr.1,1993–Jun.30,19939%23577
Jul.1,1993–Sep.30,19939%23577
Oct.1,1993–Dec.31,19939%23577
Jan.1,1994–Mar.31,19949%23577
Apr.1,1994–Jun.30,19949%23577
Jul.1,1994–Sep.30,199410%25579
Oct.1,1994–Dec.31,199411%27581
Jan.1,1995–Mar.31,199511%27581
Apr.1,1995–Jun.30,199512%29583
Jul.1,1995–Sep.30,199511%27581
Oct.1,1995–Dec.31,199511%27581
Jan.1,1996–Mar.31,199611%75629
Apr.1,1996–Jun.30,199610%73627
Jul.1,1996–Sep.30,199611%75629
Oct.1,1996–Dec.31,199611%75629
Jan.1,1997–Mar.31,199711%27581
Apr.1,1997–Jun.30,199711%27581
Jul.1,1997–Sep.30,199711%27581
Oct.1,1997–Dec.31,199711%27581
Jan.1,1998–Mar.31,199811%27581
Apr.1,1998–Jun.30,199810%25579
Jul.1,1998–Sep.30,199810%25579
Oct.1,1998–Dec.31,199810%25579
Jan.1,1999–Mar.31,19999%23577
Apr.1,1999–Jun.30,199910%25579
Jul.1,1999–Sep.30,199910%25579
Oct.1,1999–Dec.31,199910%25579
Jan.1,2000–Mar.31,200010%73627
Apr.1,2000–Jun.30,200011%75629
Jul.1,2000–Sep.30,200011%75629
Oct.1,2000–Dec.31,200011%75629
Jan.1,2001–Mar.31,200111%27581

Bulletin No. 2020–52 1683 December 21, 2020
Apr.1,2001–Jun.30,200110%25579
Jul.1,2001–Sep.30,20019%23577
Oct.1,2001–Dec.31,20019%23577
Jan.1,2002–Mar.31,20028%21575
Apr.1,2002–Jun.30,20028%21575
Jul.1,2002–Sep.30,20028%21575
Oct.1,2002–Dec.31,20028%21575
Jan.1,2003–Mar.31,20037%19573
Apr.1,2003–Jun.30,20037%19573
Jul.1,2003–Sep.30,20037%19573
Oct.1,2003–Dec.31,20036%17571
Jan.1,2004–Mar.31,20046%65619
Apr.1,2004–Jun.30,20047%67621
Jul.1,2004–Sep.30,20046%65619
Oct.1,2004–Dec.31,20047%67621
Jan.1,2005–Mar.31,20057%19573
Apr.1,2005–Jun.30,20058%21575
Jul.1,2005–Sep.30,20058%21575
Oct.1,2005–Dec.31,20059%23577
Jan.1,2006–Mar.31,20069%23577
Apr.1,2006–Jun.30,20069%23577
Jul.1,2006–Sep.30,200610%25579
Oct.1,2006–Dec.31,200610%25579
Jan.1,2007–Mar.31,200710%25579
Apr.1,2007–Jun.30,200710%25579
Jul.1,2007–Sep.30,200710%25579
Oct.1,2007–Dec.31,200710%25579
Jan.1,2008–Mar.31,20089%71625
Apr.1,2008–Jun.30,20088%69623
Jul.1,2008–Sep.30,20087%67621
Oct.1,2008–Dec.31,20088%69623
Jan.1,2009–Mar.31,20097%19573
Apr.1,2009–Jun.30,20096%17571
Jul.1,2009–Sep.30,20096%17571
Oct.1,2009–Dec.31,20096%17571
Jan.1,2010–Mar.31,20106%17571
Apr.1,2010–Jun.30,20106%17571
Jul.1,2010–Sep.30,20106%17571
Oct.1,2010–Dec.31,20106%17571
Jan.1,2011–Mar.31,20115%15569
Apr.1,2011–Jun.30,20116%17571
Jul.1,2011–Sep.30,20116%17571
Oct.1,2011–Dec.31,20115%15569
Jan.1,2012–Mar.31,20125%63617
Apr.1,2012–Jun.30,20125%63617

December 21, 2020 1684 Bulletin No. 2020–52
Jul.1,2012–Sep.30,20125%63617
Oct.1,2012–Dec.31,20125%63617
Jan.1,2013–Mar.31,20135%15569
Apr.1,2013–Jun.30,20135%15569
Jul.1,2013–Sep.30,20135%15569
Oct.1,2013–Dec.31,20135%15569
Jan.1,2014–Mar.31,20145%15569
Apr.1,2014–Jun.30,20145%15569
Jul.1,2014–Sep.30,20145%15569
Oct.1,2014–Dec.31,20145%15569
Jan.1,2015–Mar.31,20155%15569
Apr.1,2015–Jun.30,20155%15569
Jul.1,2015–Sep.30,20155%15569
Oct.1,2015–Dec.31,20155%15569
Jan.1,2016–Mar.31,20165%63617
Apr.1,2016–Jun.30,20166%65619
Jul.1,2016–Sep.30,20166%65619
Oct.1,2016–Dec.31,20166%65619
Jan.1,2017–Mar.31,20176%17571
Apr.1,2017–Jun.30,20176%17571
Jul.1,2017–Sep.30,20176%17571
Oct.1,2017–Dec.31,20176%17571
Jan.1,2018–Mar.31,20186%17571
Apr.1,2018–Jun.30,20187%19573
Jul.1,2018–Sep.30,20187%19573
Oct.1,2018–Dec.31,20187%19573
Jan.1,2019–Mar.31,20198%21575
Apr.1,2019–Jun.30,20198%21575
Jul.1,2019–Sep.30,20197%19573
Oct.1,2019–Dec.31,20197%19573
Jan.1,2020–Mar.31,20207%67621
Apr.1,2020–Jun. 30,20207%67621
Jul.1,2020–Sep.30,20205%63617
Oct.1,2020–Dec.31,20205%63617
Jan.1,2021–Mar.31,20215%15569

Bulletin No. 2020–52 1685 December 21, 2020
TABLE OF INTEREST RATES FOR CORPORATE
OVERPAYMENTS EXCEEDING $10,000
FROM JANUARY 1, 1995 – PRESENT
1995-1 C.B.
RATETABLEPG
Jan.1,1995–Mar.31,19956.5%18572
Apr.1,1995–Jun.30,19957.5%20574
Jul.1,1995–Sep.30,19956.5%18572
Oct.1,1995–Dec.31,19956.5%18572
Jan.1,1996–Mar.31,19966.5%66620
Apr.1,1996–Jun.30,19965.5%64618
Jul.1,1996–Sep.30,19966.5%66620
Oct.1,1996–Dec.31,19966.5%66620
Jan.1,1997–Mar.31,19976.5%18572
Apr.1,1997–Jun.30,19976.5%18572
Jul.1,1997–Sep.30,19976.5%18572
Oct.1,1997–Dec.31,19976.5%18572
Jan.1,1998–Mar.31,19986.5%18572
Apr.1,1998–Jun.30,19985.5%16570
Jul.1.1998–Sep.30,19985.5%16570
Oct.1,1998–Dec.31,19985.5%16570
Jan.1,1999–Mar.31,19994.5%14568
Apr.1,1999–Jun.30,19995.5%16570
Jul.1,1999–Sep.30,19995.5%16570
Oct.1,1999–Dec.31,19995.5%16570
Jan.1,2000–Mar.31,20005.5%64618
Apr.1,2000–Jun.30,20006.5%66620
Jul.1,2000–Sep.30,20006.5%66620
Oct.1,2000–Dec.31,20006.5%66620
Jan.1,2001–Mar.31,20016.5%18572
Apr.1,2001–Jun.30,20015.5%16570
Jul.1,2001–Sep.30,20014.5%14568
Oct.1,2001–Dec.31,20014.5%14568
Jan.1,2002–Mar.31,20023.5%12566
Apr.1,2002–Jun.30,20023.5%12566
Jul.1,2002–Sep.30,20023.5%12566
Oct.1,2002–Dec.31,20023.5%12566
Jan.1,2003–Mar.31,20032.5%10564
Apr.1,2003–Jun.30,20032.5%10564
Jul.1,2003–Sep.30,20032.5%10564
Oct.1,2003–Dec.31,20031.5%8562
Jan.1,2004–Mar.31,20041.5%56610
Apr.1,2004–Jun.30,20042.5%58612

December 21, 2020 1686 Bulletin No. 2020–52
Jul.1,2004–Sep.30,20041.5%56610
Oct.1,2004–Dec.31,20042.5%58612
Jan.1,2005–Mar.31,20052.5%10564
Apr.1,2005–Jun.30,20053.5%12566
Jul.1,2005–Sep.30,20053.5%12566
Oct.1,2005–Dec.31,20054.5%14568
Jan.1,2006–Mar.31,20064.5%14568
Apr.1,2006–Jun.30,20064.5%14568
Jul.1,2006–Sep.30,20065.5%16570
Oct.1,2006–Dec.31,20065.5%16570
Jan.1,2007–Mar.31,20075.5%16570
Apr.1,2007–Jun.30,20075.5%16570
Jul.1,2007–Sep.30,20075.5%16570
Oct.1,2007–Dec.31,20075.5%16570
Jan.1,2008–Mar.31,20084.5%62616
Apr.1,2008–Jun.30,20083.5%60614
Jul.1,2008–Sep.30,20082.5%58612
Oct.1,2008–Dec.31,20083.5%60614
Jan.1,2009–Mar.31,20092.5%10564
Apr.1,2009–Jun.30,20091.5%8562
Jul.1,2009–Sep.30,20091.5%8562
Oct.1,2009–Dec.31,20091.5%8562
Jan.1,2010–Mar.31,20101.5%8562
Apr.1,2010–Jun.30,20101.5%8562
Jul.1,2010–Sep.30,20101.5%8562
Oct.1,2010–Dec.31,20101.5%8562
Jan.1,2011–Mar.31,20110.5%*
Apr.1,2011–Jun.30,20111.5%8562
Jul.1,2011–Sep.30,20111.5%8562
Oct.1,2011–Dec.31,20110.5%*
Jan.1,2012–Mar.31,20120.5%*
Apr.1,2012–Jun.30,20120.5%*
Jul.1,2012–Sep.30,20120.5%*
Oct.1,2012–Dec.31,20120.5%*
Jan.1,2013–Mar.31,20130.5%*
Apr.1,2013–Jun.30,20130.5%*
Jul.1,2013–Sep.30,20130.5%*
Oct.1,2013–Dec.31,20130.5%*
Jan.1,2014–Mar.31,20140.5%*
Apr.1,2014–Jun.30,20140.5%*
Jul.1,2014–Sep.30,20140.5%*
Oct.1,2014–Dec.31,20140.5%*

Bulletin No. 2020–52 1687 December 21, 2020
Jan.1,2015–Mar.31,20150.5%*
Apr.1,2015–Jun.30,20150.5%*
Jul.1,2015–Sep.30,20150.5%*
Oct.1,2015–Dec.31,20150.5%*
Jan.1,2016–Mar.31,20160.5%*
Apr.1,2016–Jun.30,20161.5%56610
Jul.1,2016–Sep.30,20161.5%56610
Oct.1,2016–Dec.31,20161.5%56610
Jan.1,2017–Mar.31,20171.5%8562
Apr.1,2017–Jun.30,20171.5%8562
Jul.1,2017–Sep.30,20171.5%8562
Oct.1,2017–Dec.31,20171.5%8562
Jan.1,2018–Mar.31,20181.5%8562
Apr.1,2018–Jun.30,20182.5%10564
Jul.1,2018–Sep.30,20182.5%10564
Oct.1,2018–Dec.31,20182.5%10564
Jan.1,2019–Mar.31,20193.5%12566
Apr.1,2019–Jun.30,20193.5%12566
Jul.1,2019–Sep.30,20192.5%10564
Oct.1,2019–Dec. 31,20192.5%10564
Jan.1,2020–Mar.31,20202.5%58612
Apr.1,2020–Jun.30,20202.5%58612
Jul.1,2020–Sep.30,20200.5%*
Oct.1,2020–Dec.31, 20200.5%*
Jan.1,2021–Mar. 31,20210.5%*
* The asterisk reflects the interest factors for daily compound interest for annual rates of 0.5 percent published in Appendix A of
this Revenue Ruling.

December 21, 2020 1688 Bulletin No. 2020–52
26 CFR 1.36B
T.D. 9912
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Guidance Clarifying
Premium Tax Credit
Unaffected by Suspension
of Personal Exemption
Deduction
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document includes fi-
nal regulations under sections 36B and
6011 of the Internal Revenue Code (Code)
that clarify that the reduction of the per-
sonal exemption deduction to zero for tax-
able years beginning after December 31,
2017, and before January 1, 2026, does
not affect an individual taxpayer’s abili-
ty to claim the premium tax credit. These
final regulations affect individuals who
claim the premium tax credit.
DATES: Effective date: These final regu-
lations are effective on December 1, 2020.
Applicability date: These final regula-
tions apply to taxable years ending on or
after December 31, 2020.
FOR FURTHER INFORMATION
CONTACT: Suzanne R. Sinno at (202)
317-4718 or Lisa Mojiri-Azad at (202)
317-4649 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
I. Overview
This document contains final amend-
ments to the Income Tax Regulations (26
CFR part 1) under sections 36B and 6011
of the Code.
Section 151 of the Code generally al-
lows a taxpayer to claim a personal ex-
emption deduction, based on the exemp-
tion amount defined in section 151(d),
for the taxpayer, the taxpayer’s spouse,
and any dependents, as defined in sec-
tion 152 of the Code. On December 22,
2017, section 151(d)(5) was added to the
Code by section 11041 of Public Law
115-97, 131 Stat. 2054, 2082, commonly
referred to as the Tax Cuts and Jobs Act
(TCJA). Section 151(d)(5)(A) provides
that, for taxable years beginning after
December 31, 2017, and before January
1, 2026, “[t]he term ‘exemption amount’
means zero.” However, section 151(d)
(5)(B) provides that the reduction of the
exemption amount to zero is not taken
into account in determining whether a
deduction under section 151 is allowed
or allowable to a taxpayer, or whether a
taxpayer is entitled to a deduction under
section 151, for purposes of any other
provision of the Code. The conference
report to the TCJA states that this pro-
vision clarifies that the reduction of the
personal exemption to zero “should not
alter the operation of those provisions
of the Code which refer to a taxpayer
allowed a deduction . . . under section
151.” See H.R. Rep. No. 115-466 at 203
n.16 (Conf. Rep.) (2017).
Beginning in 2014, under the Patient
Protection and Affordable Care Act, Pub-
lic Law 111-148 (124 Stat. 119 (2010)),
and the Health Care and Education Rec-
onciliation Act of 2010, Public Law 111-
152 (124 Stat. 1029 (2010)) (collectively,
PPACA), eligible individuals who pur-
chase coverage under a qualified health
plan through a Health Insurance Exchange
(Exchange) established under section
1311 of the PPACA may claim a premium
tax credit under section 36B of the Code.
Several rules relating to the premium tax
credit apply based on whether a taxpayer
properly claims or claimed a personal ex-
emption deduction under section 151 for
the taxpayer, the taxpayer’s spouse, and
any dependents. These rules affect eligi-
bility for the premium tax credit, compu-
tation of the premium tax credit, reconcil-
iation of advance credit payments with the
premium tax credit a taxpayer is allowed
for the taxable year, and income tax return
filing requirements related to the premium
tax credit.
II. Eligibility for, and Computation of, the
Premium Tax Credit
To be eligible for the premium tax
credit, an individual must be an applicable
taxpayer. Under section 36B(c)(1), an ap-
plicable taxpayer generally is a taxpayer
whose household income for the taxable
year is at least 100 percent but not more
than 400 percent of the Federal poverty
line for the taxpayer’s family size for the
taxable year. A taxpayer’s family size is
equal to the number of individuals in the
taxpayer’s family. Section 1.36B-1(d) of
the Income Tax Regulations provides the
rules for determining the individuals in
a taxpayer’s family. Section 1.36B-1(d),
as currently in effect, provides that a tax-
payer’s family means the individuals for
whom a taxpayer properly claims a de-
duction for a personal exemption under
section 151 for the taxable year, and fur-
ther provides that family size means the
number of individuals in the family. Addi-
tionally, §1.36B-2(b)(3) provides that an
individual is not an applicable taxpayer if
another taxpayer may claim a deduction
under section 151 for the individual for
a taxable year beginning in the calendar
year in which the individual’s taxable year
begins.
Section 36B(c)(2) provides that the
premium tax credit generally is not al-
lowed for a month with respect to an in-
dividual if for that month the individual is
eligible for minimum essential coverage
other than coverage in the individual mar-
ket. However, under a special eligibility
rule in §1.36B-2(c)(4)(i), an individual
who may enroll in minimum essential
coverage because of a relationship to an-
other person eligible for the coverage but
for whom the other eligible person does
not claim a personal exemption deduction
under section 151 is treated as eligible for
minimum essential coverage under such
coverage only for months that the related
individual is enrolled in the coverage.
Under section 36B(a), a taxpayer’s pre-
mium tax credit is equal to the premium
assistance credit amount for the taxable
year. Section 36B(b)(1) and §1.36B-3(d)
generally provide that the premium assis-
tance credit amount is the sum of the pre-

Bulletin No. 2020–52 1689 December 21, 2020
mium assistance amounts for all coverage
months in the taxable year for individu-
als in the taxpayer’s family, as defined in
§1.36B-1(d).
III. Reconciliation of Advance Credit
Payments with the Premium Tax Credit
Under section 1412 of the PPACA,
advance payments of the premium tax
credit (advance credit payments) may be
paid directly to issuers of qualified health
plans on behalf of eligible individuals.
The amount of advance credit payments
made on behalf of a taxpayer in a taxable
year is determined by a number of factors,
including projections of the taxpayer’s
household income and family size for the
taxable year. Under §1.36B-4, a taxpayer
generally must reconcile all advance cred-
it payments for coverage of any member
of the taxpayer’s family with the amount
of the premium tax credit allowed under
section 36B.
Section 1.36B-4(a)(1)(ii) provides al-
location rules to reconcile advance cred-
it payments when a taxpayer’s family
members are enrolled with one or more
individuals who are not members of the
taxpayer’s family. If a taxpayer enrolls an
individual and another taxpayer claims a
personal exemption deduction for the in-
dividual, the allocation rules in §1.36B(a)
(1)(ii)(B) apply for purposes of computing
each taxpayer’s premium tax credit and
reconciling any advance credit payments.
If advance credit payments are made for
coverage of an individual for whom no
taxpayer claims a personal exemption de-
duction, §1.36B-4(a)(1)(ii)(C) provides
that the taxpayer who attested to the Ex-
change to the intention to claim a personal
exemption deduction for the individual as
part of the advance credit payment eligi-
bility determination for coverage of the
individual must reconcile the advance
credit payments.
IV. Income Tax Return Filing
Requirements Related to the Premium Tax
Credit
Section 6011 provides the general
rules for filing a return. Section 1.6011-
8 requires a taxpayer who receives the
benefit of advance credit payments in a
taxable year to file an income tax return
for that taxable year to reconcile advance
credit payments with the taxpayer’s pre-
mium tax credit. The regulation further
provides that if advance credit payments
are made for coverage of an individual
for whom no taxpayer claims a personal
exemption deduction, the taxpayer who
attested to the Exchange to the intention
to claim a personal exemption deduction
for the individual as part of the advance
credit payment eligibility determination
for coverage of the individual must file a
tax return and reconcile the advance cred-
it payments. Taxpayers who are required
to reconcile advance credit payments or
who claim the premium tax credit must
complete Form 8962, Premium Tax Cred-
it (PTC), and file it with their income tax
return.
V. Notice 2018-84
On November 5, 2018, the Depart-
ment of the Treasury (Treasury Depart-
ment) and the IRS issued Notice 2018-
84, 2018-45 I.R.B. 768, which provided
interim guidance clarifying that the re-
duction of the personal exemption deduc-
tion to zero under section 151(d)(5) does
not affect the ability of individual tax-
payers to claim the premium tax credit.
Specifically, the notice provides that (1)
a taxpayer is considered to have claimed
a personal exemption deduction for him-
self or herself for a taxable year if the
taxpayer files an income tax return for the
year and does not qualify as a dependent
of another taxpayer under section 152 for
the year; and (2) a taxpayer is considered
to have claimed a personal exemption
deduction for an individual other than
the taxpayer if the taxpayer is allowed
a personal exemption deduction for the
individual, taking into account section
151(d)(5)(B), and lists the individual’s
name and taxpayer identification number
(TIN) on the Form 1040, U.S. Individu-
al Income Tax Return, or Form 1040NR,
U.S. Nonresident Alien Income Tax Re-
turn, the taxpayer files for the year. The
notice states that until further guidance is
issued, the interim guidance described in
the notice applies. The notice also states
that the Treasury Department and the
IRS intend to amend the regulations un-
der sections 36B and 6011 to clarify the
application of section 151(d)(5).
VI. Proposed Regulations
On May 27, 2020, the Treasury De-
partment and the IRS published a notice
of proposed rulemaking (REG-124810-
19) in the Federal Register (85 FR
31710) under section 36B. The notice of
proposed rulemaking announced that the
regulations currently in effect would be
amended to reflect the guidance in No-
tice 2018-84. Specifically, §1.36B-1(d),
as proposed, would define the term fam-
ily to mean the taxpayer, including both
spouses in the case of a joint return, ex-
cept for individuals who qualify as a de-
pendent of another taxpayer under section
152, and any other individual for whom
the taxpayer is allowed a personal exemp-
tion deduction and whom the taxpayer
properly reports on the taxpayer’s income
tax return for the taxable year. Consistent
with Notice 2018-84, the proposed regu-
lations would provide that an individual is
reported on the taxpayer’s income tax re-
turn if the individual’s name and taxpayer
identification number (TIN) are listed on
the taxpayer’s Form 1040 series return.
To conform to §1.36-1(d) as proposed,
§§1.36B-2, 1.36B-4, and 1.6011-8 would
be amended. These amendments as pro-
posed would apply for taxable years end-
ing after the date of publication of the final
regulations in the Federal Register.
VII. Final Regulations
No comments responsive to the subject
of the notice of proposed rulemaking were
received. There were no requests for a pub-
lic hearing on the proposed regulations, so
no public hearing was held. Accordingly,
the Treasury Department and the IRS are
finalizing the proposed regulations with
no changes. The final regulations are ap-
plicable for taxable years ending on or
after December 31, 2020. However, tax-
payers may apply the final regulations for
taxable years to which section 151(d)(5)
applies ending before December 31, 2020.
See section 7805(b)(7).
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-

December 21, 2020 1690 Bulletin No. 2020–52
tween the Treasury Department and the
Office of Management and Budget regard-
ing review of tax regulations.
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby certi-
fied that this final rule will not have a sig-
nificant economic impact on a substantial
number of small entities. This certification
is based on the fact that the final regula-
tions affect individual taxpayers, not en-
tities. Accordingly, the Secretary certifies
that the rule will not have a significant
economic impact on a substantial number
of small entities.
Pursuant to section 7805(f), these final
regulations have been submitted to the
Chief Counsel for the Office of Advocacy
of the Small Business Administration for
comment on their impact on small busi-
ness (85 FR 31710). No comments on
the notice were received from the Chief
Counsel for the Office of Advocacy of the
Small Business Administration.
Unfunded Mandates Reform Act
Section 202 of the Unfunded Man-
dates Reform Act of 1995 (UMRA) re-
quires that agencies assess anticipated
costs and benefits and take certain oth-
er actions before issuing a final rule that
includes any Federal mandate that may
result in expenditures in any one year
by a state, local, or tribal government,
in the aggregate, or by the private sec-
tor, of $100 million (updated annually
for inflation). This rule does not include
any Federal mandate that may result in
expenditures by state, local, or tribal gov-
ernments, or by the private sector in ex-
cess of that threshold.
Executive Order 13132: Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive Order. This final rule does
not have federalism implications and does
not impose substantial direct compliance
costs on state and local governments or
preempt state law within the meaning of
the Executive Order.
Statement of Availability of IRS
Documents
The regulations, notices and other guid-
ance cited in this preamble are generally
published in the Internal Revenue Bulletin
and are available from the Superintendent
of Documents, U.S. Government Publish-
ing Office, Washington, DC 20402, or by
visiting the IRS website at www.irs.gov.
Drafting Information
The principal author of these final reg-
ulations is Suzanne R. Sinno of the Office
of Associate Chief Counsel (Income Tax
and Accounting). Other personnel from the
Treasury Department and the IRS partici-
pated in the development of the regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amend-
ed as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805* * *
Par. 2. Section 1.36B-0 is amended by:
1. Revising the entries for §1.36B-1(d)
and (o).
2. Revising the entries for §1.36B-2(c)
(4)(i) and (e).
3. Revising the entries for §1.36B-4(a)
(1)(ii)(B) and (C).
4. Revising the entry for §1.36B-4(c).
The revisions read as follows:
§1.36B-1 Premium tax credit definitions.
* * * * *
(d) Family and family size.
(1) In general.
(2) Special rule for tax years to which
section 151(d)(5) applies.
* * * * *
(o) Applicability dates.
§1.36B-2 Eligibility for premium tax
credit.
* * * * *
(c) * * *
(4) * * *
(i) Related individual.
* * * * *
(e) Applicability dates.
§1.36B-4 Reconciling the premium tax
credit with advance credit payments.
* * * * *
(a) * * *
(1) * * *
(ii) * * *
(B) Individuals enrolled by a taxpayer
and claimed by another taxpayer.
(C) Responsibility for advance credit
payments for an individual not reported
on any taxpayer’s return.
* * * * *
(c) Applicability dates.
* * * * *
Par. 3. Section 1.36B-1 is amended by
1. Redesignating paragraph (d) as para-
graph (d)(1).
2. Adding new paragraph (d) and new
heading.
3. Revising the paragraph heading to
newly designated paragraph (d)(1).
4. Adding paragraph (d)(2).
5. Revising paragraph (o).
The additions and revisions read as fol-
lows:
§1.36B-1 Premium tax credit definitions.
* * * * *
(d) Family and family size—(1) In gen-
eral.* * *
(2) Special rule for tax years to which
section 151(d)(5) applies. For taxable
years to which section 151(d)(5) applies,
a taxpayer’s family means the taxpayer,
including both spouses in the case of a
joint return, except for individuals who
qualify as a dependent of another taxpay-
er under section 152, and any other indi-
vidual for whom the taxpayer is allowed a
personal exemption deduction and whom
the taxpayer properly reports on the tax-
payer’s income tax return for the taxable
year. For purposes of this paragraph (d)

Bulletin No. 2020–52 1691 December 21, 2020
(2), an individual is reported on the tax-
payer’s income tax return if the individ-
ual’s name and taxpayer identification
number (TIN) are listed on the taxpayer’s
Form 1040 series return. See §601.602 of
this chapter.
* * * * *
(o) Applicability dates. (1) Except for
paragraphs (d)(2), (l), and (m) of this sec-
tion, this section applies to taxable years
ending after December 31, 2013.
(2) Paragraph (d)(2) of this section ap-
plies to taxable years ending on or after
December 31, 2020.
(3) Paragraphs (l) and (m) of this sec-
tion apply to taxable years beginning af-
ter December 31, 2018. Paragraphs (l)
and (m) of §1.36B-1 as contained in 26
CFR part 1 edition revised as of April 1,
2016, apply to taxable years ending after
December 31, 2013, and beginning before
January 1, 2019.
Par. 4. Section 1.36B-2 is amended by:
1. Revising paragraph (c)(4)(i).
2. Revising the heading for paragraph
(e).
3. Adding paragraph (e)(4).
The revisions and addition read as fol-
lows:
§1.36B-2 Eligibility for premium tax
credit.
* * * * *
(c) * * *
(4) Special eligibility rules—(i) Related
individual. An individual who may enroll
in minimum essential coverage because of
a relationship to another person eligible
for the coverage, but is not included in the
family, as defined in §1.36B-1(d), of the
other eligible person, is treated as eligible
for such minimum essential coverage only
for months that the related individual is
enrolled in the coverage.
* * * * *
(e) Applicability dates. * * *
(4) Paragraph (c)(4)(i) of this section
applies to taxable years ending on or after
December 31, 2020.
Par. 5. Section 1.36B-4 is amended by:
1. The heading of paragraph (a)(1)(ii)
(B) is revised.
2. Adding a sentence to the end of
paragraph (a)(1)(ii)(B)(1).
3. Revising paragraphs (a)(1)(ii)(B)(2)
and (a)(1)(ii)(C).
4. Revising the paragraph heading to
paragraph (c) and adding a sentence at the
end.
The additions and revisions read as fol-
lows:
§1.36B-4 Reconciling the premium tax
credit with advance credit payments.
(a) * * *
(1) * * *
(ii) * * *
(B) Individuals enrolled by a taxpayer
and claimed by another taxpayer—(1) In
general. * * * For taxable years to which
section 151(d)(5) applies, the claiming
taxpayer is the taxpayer who properly in-
cludes the shifting enrollee in his or her
family for the taxable year.
(2) Allocation percentage. The enroll-
ing taxpayer and claiming taxpayer may
agree on any allocation percentage be-
tween zero and one hundred percent. If the
enrolling taxpayer and claiming taxpayer
do not agree on an allocation percentage,
the percentage is equal to the number of
shifting enrollees properly included in the
enrolling taxpayer’s family divided by
the number of individuals enrolled by the
enrolling taxpayer in the same qualified
health plan as the shifting enrollee.
* * * * *
(C) Responsibility for advance credit
payments for an individual not reported
on any taxpayer’s return. If advance cred-
it payments are made for coverage of an
individual who is not included in any tax-
payer’s family, as defined in §1.36B-1(d),
the taxpayer who attested to the Exchange
to the intention to include such individual
in the taxpayer’s family as part of the ad-
vance credit payment eligibility determi-
nation for coverage of the individual must
reconcile the advance credit payments.
* * * * *
(c) Applicability dates.* * * The last
sentence of paragraph (a)(1)(ii)(B)(1),
paragraph (a)(1)(ii)(B)(2), and paragraph
(a)(1)(ii)(C) of this section apply to tax-
able years ending on or after December
31, 2020.
Par. 6. Section 1.6011-8 is amended by
revising paragraphs (a) and (b) as follows:
§1.6011-8 Requirement of income tax
return for taxpayers who claim the
premium tax credit under section 36B.
(a) Requirement of return. Except as
otherwise provided in this paragraph (a),
a taxpayer who receives the benefit of ad-
vance payments of the premium tax credit
(advance credit payments) under section
36B must file an income tax return for that
taxable year on or before the due date for
the return (including extensions of time
for filing) and reconcile the advance cred-
it payments. However, if advance credit
payments are made for coverage of an
individual who is not included in any tax-
payer’s family, as defined in §1.36B-1(d),
the taxpayer who attested to the Exchange
to the intention to include such individual
in the taxpayer’s family as part of the ad-
vance credit payment eligibility determi-
nation for coverage of the individual must
file a tax return and reconcile the advance
credit payments.
(b) Applicability dates—(1) In general.
Except as provided in paragraph (b)(2) of
this section, paragraph (a) of this section
applies for taxable years ending on or after
December 31, 2020.
(2) Prior periods. Paragraph (a) of this
section as contained in 26 CFR part 1 edi-
tion revised as of April 1, 2016, applies to
taxable years ending after December 31,
2013, and beginning before January 1,
2017. Paragraph (a) of this section as con-
tained in 26 CFR part 1 edition revised as
of April 1, 2020, applies to taxable years
beginning after December 31, 2016, and
ending before December 31, 2020.
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
Approved: September 4, 2020.
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on
November 27, 2020, 11:15 a.m., and published in the
issue of the Federal Register for December 01, 2020,
85 F.R. 76976)

December 21, 2020 1692 Bulletin No. 2020–52
26 CFR 1.512(a)-6: Special rule for organizations
with more than one unrelated trade or business
T.D. 9933
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Unrelated Business
Taxable Income Separately
Computed for Each Trade
or Business
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final rule.
SUMMARY: This document contains
final regulations that provide guidance
on how an exempt organization subject
to the unrelated business income tax de-
termines if it has more than one unrelat-
ed trade or business, and, if so, how the
exempt organization calculates unrelated
business taxable income. The final reg-
ulations also clarify that the definition
of “unrelated trade or business” applies
to individual retirement accounts. Addi-
tionally, the final regulations provide that
inclusions of “subpart F income” and
“global intangible low-taxed income”
are treated in the same manner as divi-
dends for purposes of determining unre-
lated business taxable income. The final
regulations affect exempt organizations
that are subject to the unrelated business
income tax.
DATES: Effective date: The final regula-
tions are effective on December 2, 2020.
Applicability date: For dates of applica-
bility, see §§1.170A-9(k)(3), 1.509(a)-
3(o), 1.512(a)-1(h), 1.512(a)-6(i),
1.512(b)-1(a)(3), 1.512(b)-1(g)(5), and
1.513-1(h).
FOR FURTHER INFORMATION CON-
TACT: Jonathan A. Carter at (202) 317-
5800 or Stephanie N. Robbins at (202)
317-4086 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document amends the Income
Tax Regulations (26 CFR Part 1) by add-
ing final regulations under section 512(a)
(6) of the Internal Revenue Code (Code).
Section 512(a)(6) was added to the Code
by section 13702 of Public Law 115-97,
131 Stat. 2054 (2017), commonly referred
to as the Tax Cuts and Jobs Act (TCJA).
Section 512(a)(6) requires an exempt or-
ganization subject to the unrelated busi-
ness income tax under section 511 (UBIT)
that has more than one unrelated trade or
business, to calculate unrelated business
taxable income (UBTI), separately with
respect to each such trade or business in-
cluding for purposes of determining any
net operating loss (NOL) deduction.
In August 2018, the Department of the
Treasury (Treasury Department) and the
IRS released Notice 2018-67 (2018-36
IRB 409 (Sept. 4, 2018)), which discussed
and solicited comments regarding various
issues arising under section 512(a)(6) and
set forth interim guidance and transition
rules relating to that section. The Treasury
Department and the IRS received 24 com-
ments in response to Notice 2018-67.
On April 24, 2020, the Treasury De-
partment and the IRS published a notice
of proposed rulemaking (REG-106864-
18) in the Federal Register (85 FR
23172) that proposed regulations to pro-
vide guidance regarding how an exempt
organization subject to UBIT (hereinafter
referred to as an exempt organization) de-
termines if it has more than one unrelated
trade or business, and, if so, how the ex-
empt organization calculates UBTI under
section 512(a)(6) (proposed regulations).
No public hearing was requested or held.
The Treasury Department and the IRS
received 17 comments in response to the
proposed regulations.
The proposed regulations reserved two
issues for additional consideration. The
first issue relates to the allocation of ex-
penses, depreciation, and similar items
shared between an exempt activity and
an unrelated trade or business or between
more than one unrelated trade or business.
The second issue relates to changes made
to the section 172 NOL deduction by the
Coronavirus Aid, Relief, and Economic
Security Act, Public Law 116-136, 134
Stat. 281 (2020) (CARES Act). The Trea-
sury Department and the IRS anticipate
publishing a separate notice of proposed
rulemaking that will address these issues.
After consideration of the comments
received, the proposed regulations are ad-
opted as modified by this Treasury Deci-
sion. The major areas of comment and the
revisions to the proposed regulations are
discussed in the following Summary of
Comments and Explanation of Revisions.
The comments are available for public in-
spection at www.regulations.gov or on re-
quest. Other minor, non-substantive modi-
fications made to the proposed regulations
and adopted in these final regulations are
not discussed in the Summary of Com-
ments and Explanation of Revisions.
Summary of Comments and
Explanation of Revisions
These final regulations provide guid-
ance on how an exempt organization de-
termines if it has more than one unrelated
trade or business, and, if so, how the ex-
empt organization calculates UBTI under
section 512(a)(6). The final regulations
also clarify that the definition of “unrelat-
ed trade or business” in section 513(b) ap-
plies to individual retirement accounts and
that inclusions of subpart F income and
global intangible low-taxed income are
treated in the same manner as dividends
for purposes of section 512.
1. Separate Unrelated Trade or Business
Consistent with section 512(a)(6) and
the proposed regulations, the final regu-
lations provide that an exempt organiza-
tion with more than one unrelated trade or
business must compute UBTI separately
with respect to each unrelated trade or
business, without regard to the specific
deduction in section 512(b)(12), including
for purposes of determining any NOL de-
duction.
a. NAICS 2-Digit Codes Retained
The proposed regulations general-
ly provided that an exempt organization
must identify each of its separate unre-
lated trades or businesses using the first
two digits of the North American Industry

Bulletin No. 2020–52 1693 December 21, 2020
Classification System code (NAICS 2-dig-
it code) that most accurately describes the
unrelated trade or business. Most com-
menters agreed with the proposed regu-
lations’ adoption of NAICS 2-digit codes
over NAICS 6-digit codes, which Notice
2018-67, for purposes of interim guidance,
provided was a reasonable way to identify
separate trades or businesses. One com-
menter discussed how the use of NAICS
2-digit codes balances the legislative in-
tent of not allowing the losses from one
unrelated trade or business to offset the
income from another unrelated trade or
business with the need for an adminis-
trable and efficient method of identifying
separate unrelated trades or businesses.
Other commenters agreed that NAICS
2-digit codes offer the most administrable
and least burdensome method of identify-
ing separate unrelated trades or businesses
for both exempt organizations and the IRS.
One commenter disagreed with the
use of NAICS 2-digit codes to identify
separate unrelated trades or businesses.
This commenter noted that, in passing the
TCJA, Congress intended to limit exempt
organizations’ use of tax benefits that are
unrelated to their tax-exempt purpose or
purposes, and the commenter asserted
that the proposed regulations reversed this
congressional intent by identifying sepa-
rate unrelated trades or businesses using
the twenty broad categories provided by
NAICS 2-digit codes. This commenter
recommended instead that the rules re-
lating to the qualified business deduction
under section 199A for identifying a sep-
arate trade or business should be used for
purposes of section 512(a)(6). The regu-
lations under section 199A provide that
the term “trade or business” has the same
meaning as in section 162. The comment-
er contended that enough case law exists
with respect to section 162 to define “trade
or business” and that the section 199A
regulations have provided practitioners
with enough experience to identify a trade
or business using this definition.
The final regulations do not adopt the
approach taken by the section 199A reg-
ulations as a method of identifying sep-
arate unrelated trades or businesses for
purposes of section 512(a)(6) because,
although sections 199A and 512(a)(6)
were both enacted as part of the TCJA,
they serve different purposes. Section
199A, in part, provides individuals, es-
tates, and certain trusts a deduction of up
to 20 percent of business income from
certain domestic trades or business-
es. Such taxpayers might be engaged
in one or more trades or businesses for
which they may be entitled to the sec-
tion 199A deduction. For purposes of
computing the section 199A deduction,
taxpayers are required to determine the
specific lines between trades or busi-
ness to ensure that only qualified items
of income and expense traced to each
qualified trade or business are used to
compute the deduction and that the W-2
wage and unadjusted basis immediately
after acquisition (UBIA) limitations are
properly applied. Therefore, the section
199A regulations look to section 162
to determine how these lines should be
drawn. By contrast, section 512 looks to
section 162 to determine whether a trade
or business exists but employs a simpli-
fied regime to identify separate unrelated
trades or businesses under section 512(a)
(6) for exempt organizations because
they are not primarily engaged in section
162 for-profit trades or businesses. The
regime also applies for a more limited
purpose, that is preventing exempt orga-
nizations from using losses of one unre-
lated trade or business to offset the gains
of any other unrelated trade or business,
and uniformly to all of an exempt orga-
nization’s separate unrelated trades or
businesses. The Treasury Department
and IRS believe that using NAICS 2-dig-
it codes in this context provides an ob-
jective means to identify separate trades
or businesses consistent with Congress’s
intent without imposing an undue burden
on exempt organizations. Accordingly,
the final regulations under section 512(a)
(6) do not adopt this comment.
b. No Additional Methods of Identifying
Separate Unrelated Trades or Businesses
One commenter recommended that
NAICS 2-digit codes be used as a safe-har-
bor and that a facts and circumstances
test be applied as the primary method of
identifying separate unrelated trades or
businesses. This commenter asserted that
a facts and circumstances test would be
more consistent with other parts of the
Code (including the regulations under
section 199A) and would provide a more
flexible framework for variations in ac-
tivities across exempt organizations. This
commenter proposed considering multiple
factors for identifying separate trades or
businesses that would include the interde-
pendence of the activities, the geographic
location of the activities, and the relation-
ship the exempt organization has with the
operation of the activity. The commenter
opined that a facts and circumstances test
would help alleviate any inequity caused
by section 512(a)(6).
As explained both in Notice 2018-67
and the preamble to the proposed regu-
lations, Congress did not provide any ex-
plicit criteria for determining whether an
exempt organization has “more than one
unrelated trade or business” or for identi-
fying “separate” unrelated trades or busi-
nesses for purposes of calculating UBTI
in accordance with section 512(a)(6). The
Joint Committee on Taxation (JCT) noted
that “it is intended that the Secretary is-
sue guidance concerning when an activi-
ty will be treated as a separate unrelated
trade or business for purposes of [section
512(a)(6)].” Staff of the Joint Commit-
tee on Taxation, General Explanation of
Pub. L. 115-97 (December 2018), at 293
(General Explanation). Notice 2018-67
stated that the Treasury Department and
the IRS would like to set forth a more ad-
ministrable method than a facts and cir-
cumstances test for identifying separate
unrelated trades or businesses. Nonethe-
less, the Treasury Department and the IRS
considered a facts and circumstances test
as a method of identifying separate unre-
lated trades or businesses in response to
comments received following the enact-
ment of section 512(a)(6) and again in
response to Notice 2018-67. The factors
suggested by commenters, and previously
considered, generally were derived from
other Code provisions, such as sections
132, 162, 183, 414, and 469. However,
these Code provisions primarily consider
whether an activity is a trade or business
and not whether one trade or business is
“separate” from another. Accordingly, the
Treasury Department and the IRS con-
tinue to consider these Code provisions,
alone or in conjunction with each other, as
unhelpful models for identifying separate
trades or businesses for purposes of sec-
tion 512(a)(6).

December 21, 2020 1694 Bulletin No. 2020–52
It continues to be the case that adop-
tion of a facts and circumstances test, as
the only identification method or in addi-
tion to a safe harbor using NAICS 2-digit
codes, would increase the administrative
burden on exempt organizations in com-
plying with section 512(a)(6) because a
fact-intensive analysis would be required
with respect to each unrelated trade or
business. Additionally, adoption of a
facts and circumstances test would offer
exempt organizations less certainty and
likely result in inconsistency among ex-
empt organizations conducting more than
one unrelated trade or business because
of differing approaches exempt organiza-
tions would take in applying such a test.
Also, a facts and circumstances test would
increase the administrative burden on the
IRS, which, upon examination, must per-
form the same fact-intensive analysis with
respect to each of the unrelated trades or
businesses identified by the exempt orga-
nization for purposes of calculating UBTI.
Accordingly, the final regulations do not
adopt a facts and circumstances test in
addition to or in place of NAICS 2-digit
codes as a method of identifying separate
unrelated trades or businesses for purpos-
es of section 512(a)(6).
c. Identifying the Appropriate NAICS
2-Digit Code
The proposed regulations provided that
an exempt organization’s separate unre-
lated trades or businesses are determined
based on the applicable NAICS 2-digit
code. Before an exempt organization can
identify its “separate” unrelated trades or
businesses, it must first determine wheth-
er it regularly carries on unrelated trades
or businesses within the meaning of sec-
tions 511 through 514. Section 1.513-1(a)
clarifies that, unless one of the specific
exceptions of section 512 or 513 applies,
gross income of an exempt organization
is includible in the computation of UBTI
if: (1) it is income from a trade or busi-
ness; (2) such trade or business is regu-
larly carried on by the organization; and
(3) the conduct of such trade or business
is not substantially related (other than
through the production of funds) to the
organization’s performance of its exempt
functions. Accordingly, the final regula-
tions provide that an exempt organization
determines whether it carries on unrelated
trades or businesses by applying sections
511 through 514. Under the final regula-
tions, the exempt organization then iden-
tifies its separate unrelated trades or busi-
nesses for purposes of section 512(a)(6)
using the methods described in the final
regulations. With respect to most unrelat-
ed trade or business activities, an exempt
organization determines whether those
activities are separate unrelated trades or
businesses for purposes of section 512(a)
(6) based on the most accurate NAICS
2-digit codes describing the activities.
Several commenters requested addi-
tional guidance regarding how to choose
the “most accurate” NAICS 2-digit code.
These commenters suggested that strict
adherence to NAICS 2-digit codes can
result in unrelated trade or business activ-
ities that the exempt organization consid-
ers to be one unrelated trade or business
being separated into two or more unrelat-
ed trades or businesses. Other comment-
ers requested that aggregation of NAICS
2-digit codes be allowed in certain cir-
cumstances. The commenters provided
examples of unrelated trade or business
activities that they considered to be one
unrelated trade or business but that may
be identified as more than one unrelat-
ed trade or business when using NAICS
2-digit codes.
For example, one commenter stated that
an organization operating a gift shop that
sells clothing, electronics, and books in a
bricks-and-mortar store and online would
report those activities under two different
NAICS 2-digit codes – one for the sale of
clothing and electronics (44) and one for
books and online sales (45). Another ex-
ample provided by a commenter is a mu-
seum that provides catering services, valet
parking, and personal property rentals as
part of a package for special events, such
as weddings, held on its premises. The
commenter noted that the museum may be
required to identify these activities using
three different NAICS 2-digit codes – one
for catering (72), one for parking (81), and
one for rentals (53). The commenter posit-
ed that the museum should be able to treat
this activity as one trade or business based
on a reasonable and common sense under-
standing of the service provided (hosting
an event), rather than the various compo-
nents of the provided services.
The Treasury Department and the IRS
note that NAICS 2-digit codes aggregate
trade or business activities into only 20
separate trades or businesses, compared to
the more than 1,000 trades or businesses
identified at the NAICS 6-digit code lev-
el. Like the proposed regulations, the final
regulations provide that a separate unre-
lated trade or business is identified by the
NAICS 2-digit code that most accurately
describes the exempt organization’s trade
or business activity. In addition, the final
regulations add that this determination is
based on the more specific NAICS code,
such as at the 6-digit level, that describes
the activity that it conducts. The final reg-
ulations also state that the descriptions in
the current NAICS manual (available at
www.census.gov) of trades or businesses
using more than two digits of the NAICS
codes are relevant in this determination.
In response to commenter examples, the
final regulations incorporate a rule used
in NAICS for identifying certain indus-
tries
1
and provide that, in the case of the
sale of goods, both online and in stores,
the separate unrelated trade or business is
identified by the goods sold in stores if the
same goods generally are sold both online
and in stores.
With respect to the museum example,
the Treasury Department and the IRS note
that income from activities that is appro-
priately characterized as income from
rentals is generally exempt from UBTI
under section 512(b)(3). The analysis of
whether an activity produces rental in-
come depends, in part, on whether other
services are provided by the exempt orga-
nization in connection with the possible
rental activity (such as providing space
for a wedding). To the extent other ser-
vices are provided, income from the use
of space may cease to be rent from real
property and instead take on the character
of the services provided. See §1.512(b)-
1(c)(5). Exempt organizations already
need to do this analysis of the facts and
1
The NAICS code for “Electronic Shopping and Mail-Order Houses” provides that “Store retailing or a combination of store retailing and nonstore retailing in the same establishment—are
classified in Sector 44-45, Retail Trade, based on the classification of the store portion of the activity.”

Bulletin No. 2020–52 1695 December 21, 2020
circumstances to determine their UBTI.
Similarly, whether services provided in
connection with hosting an event should
be aggregated or not depends on the facts
and circumstances, including the language
of the contract or contracts, the services
provided, who is providing the services,
etc. It is possible that the activities could
be separate trades or businesses based on
the fragmentation rule contained in sec-
tion 513(c) and §1.513-1(b) (“[a]ctivities
of producing or distributing goods or per-
forming services from which a particular
amount of gross income is derived do not
lose identity as trade or business merely
because they are carried on within a larger
aggregate of similar activities or within a
larger complex of other endeavors which
may, or may not, be related to the exempt
purposes of the organization”).
Because NAICS at the 2-digit code lev-
el aggregates all trade or business activi-
ties into only 20 separate trades or busi-
nesses, many trade or business activities
that could be considered separate trades or
businesses, such as the provision of food or
lodging, are already aggregated into broad
categories (NAICS code 72 includes both
lodging and food services) and therefore
treated as one trade or business under the
final regulations. Accordingly, if an ex-
empt organization determines that, based
on the facts and circumstances, its trade or
business activities must be separated into
two or more unrelated trades or businesses
under NAICS 2-digit codes, the Treasury
Department and the IRS view that result
as appropriate to achieve the balance of
tax administrability and carrying out the
purposes of section 512(a)(6). Thus, under
the final regulations, if trade or business
activities would be best described by dif-
ferent NAICS 2-digit codes, those activ-
ities should be identified using different
NAICS 2-digit codes and treated as sepa-
rate unrelated trades or businesses.
In addition, consistent with the pro-
posed regulations, the final regulations
continue to provide that the NAICS
2-digit code must identify the separate
unrelated trade or business in which the
exempt organization engages (directly
or indirectly). The NAICS 2-digit code
cannot describe activities the conduct of
which are substantially related to the ex-
ercise or performance by such organiza-
tion of its charitable, educational, or other
purpose or function constituting the basis
for its exemption under section 501 (or,
in the case of an organization described
in section 511(a)(2)(B), to the exercise or
performance of any purpose or function
described in section 501(c)(3)). For ex-
ample, a college or university described in
section 501(c)(3) or 511(a)(2)(B) cannot
use the NAICS 2-digit code for educa-
tional services to identify all of its sepa-
rate unrelated trades or businesses, and a
qualified retirement plan described in sec-
tion 401(a) cannot use the NAICS 2-digit
code for finance and insurance to identify
all of its unrelated trades or businesses.
Also consistent with the proposed reg-
ulations, the final regulations continue to
provide that an organization will report
each NAICS 2-digit code only once. The
Treasury Department and the IRS note
that this rule permits exempt organiza-
tions to aggregate trade or business activi-
ties that may occur in different geographic
locations. The final regulations include
the same example as provided by the pro-
posed regulations — the pharmacies op-
erated in different geographic locations
that are one unrelated trade or business for
purposes of section 512(a)(6) because the
pharmacy trade or business is identified
using one NAICS 2-digit code.
d. Changing NAICS 2-Digit Codes
The proposed regulations generally
provided that, once an organization has
identified a separate unrelated trade or
business using a particular NAICS 2-digit
code, the organization cannot change the
NAICS 2-digit code describing that sepa-
rate unrelated trade or business unless two
requirements are met. First, the exempt
organization must show that the NAICS
2-digit code chosen was due to an unin-
tentional error. Second, the exempt orga-
nization must show that another NAICS
2-digit code more accurately describes the
unrelated trade or business. The preamble
to the proposed regulations stated that the
instructions to the Form 990-T, “Exempt
Organization Business Income Tax Re-
turn,” would be updated to describe how
an exempt organization notifies the IRS of
a change in a NAICS 2-digit code due to
an unintentional error.
At least one commenter requested
clarification regarding what is meant by
“unintentional error.” Commenters also
suggested that the final regulations should
include additional circumstances in which
exempt organizations can change the
NAICS 2-digit code describing a sepa-
rate unrelated trade or business. Several
commenters explained that the nature of
a separate unrelated trade or business may
change or evolve to the extent that the un-
related trade or business would be more
accurately reported under a different NA-
ICS 2-digit code. One commenter likened
this shift in trade or business activities
to the commencement of a new unrelat-
ed trade or business. Accordingly, these
commenters recommended that an exempt
organization be permitted to change the
NAICS 2-digit code identifying a separate
unrelated trade or business if a change in
the unrelated business activity results in it
being better described by a different NA-
ICS 2-digit code. Finally, one commenter
requested that a code change be permitted
if the exempt organization’s tax preparer
reasonably believes that an unrelated trade
or business activity is more accurately de-
scribed by a different NAICS 2-digit code.
Several commenters also requested
clarification of the process for reporting
an erroneous code. One commenter rec-
ommended that the instructions to the
Form 990-T clarify that an exempt orga-
nization should provide such notification
to the IRS on the Form 990-T — includ-
ing an explanation of the change and any
necessary supporting information — and
that such change would be effective on
the first day of the taxable year beginning
after the taxable year for which the Form
990-T providing such notification is filed.
This commenter also questioned whether
reconciliation was required for the prior
taxable year or years in which the erro-
neous code was used and, if so, how an
adjustment resulting from such reconcilia-
tion would be applied.
In response to these comments, the fi-
nal regulations remove the restriction on
changing NAICS 2-digit codes. Instead,
the final regulations require an exempt or-
ganization that changes the identification
of a separate unrelated trade or business
to report the change in the taxable year of
the change in accordance with forms and
instructions. See section 6012(a)(2) and
§1.6012-2(e). The final regulations clarify
that a change in identification of a sepa-

December 21, 2020 1696 Bulletin No. 2020–52
rate unrelated trade or business includes
the changed identification of the separate
unrelated trade or business with respect
to a partnership interest that was incor-
rectly designated as a qualifying partner-
ship interest (discussed in part 2.b of this
Summary of Comments and Explanation
of Revisions). To report the change in
identification, the final regulations require
an organization to provide certain infor-
mation with respect to each separate un-
related trade or business the identification
of which changes: the identification of the
separate unrelated trade or business in the
previous taxable year, the identification of
the separate unrelated trade or business in
the current taxable year, and the reason for
the change. The Treasury Department and
the IRS anticipate that the instructions to
the Form 990-T will be revised for taxable
years for which the final regulations are
effective to provide instructions regarding
where and how changes in identification
are reported. The effect on NOLs caused
by changes of the identification of sep-
arate unrelated trades or businesses are
discussed in part 6.d of this Summary of
Comments and Explanation of Revisions.
e. Transition from NAICS 6-Digit Codes
to NAICS 2-Digit Codes
The preamble to the proposed regu-
lations provided that, for taxable years
beginning before the date the proposed
regulations are published in the Federal
Register as final regulations, an exempt
organization may rely on a reasonable,
good-faith interpretation of sections 511
through 514, considering all the facts and
circumstances, when identifying separate
unrelated trades or businesses for purpos-
es of section 512(a)(6). The preamble to
the proposed regulations provided that
an exempt organization could rely on the
proposed regulations in their entirety or,
alternatively, the methods of aggregating
or identifying separate trades or business-
es provided in Notice 2018-67, which
provided that a reasonable, good-faith in-
terpretation included using NAICS 6-digit
codes.
One commenter recommended that the
final regulations confirm that an exempt
organization that reported separate unre-
lated trades or businesses using NAICS
6-digit codes in taxable years beginning
prior to the exempt organization’s first
taxable year for which the final regula-
tions are effective can reclassify their ac-
tivities using NAICS 2-digit codes with-
out having to report an unintentional error.
As discussed in the Applicability Dates
section of this preamble, these final regu-
lations are applicable to taxable years be-
ginning on or after December 2, 2020. Al-
though an exempt organization may have
used NAICS 6-digit codes to identify its
separate unrelated trades or businesses in
taxable years beginning before this date,
the transition from NAICS 6-digit codes
to NAICS 2-digit codes does not require
the reporting of a code change because
the exempt organization will be using the
same NAICS code to identify its sepa-
rate unrelated trades or businesses – just
with fewer digits. The move from NAICS
6-digit codes to NAICS 2-digit codes may
result in the combination of NOLs if an
exempt organization has trade or business
activities that would be separate unrelat-
ed trades or businesses if identified using
NAICS 6-digit codes but would be one
unrelated trade or business if identified
using NAICS 2-digit codes. An exempt
organization may choose, but is not re-
quired, to amend Forms 990-T filed prior
to December 2, 2020 to report separate
unrelated trades or businesses using NA-
ICS 2-digit codes.
f. No De Minimis Exception Provided
The preamble to the proposed regula-
tions discussed one comment with respect
to Notice 2018-67 that suggested the Trea-
sury Department and the IRS adopt a de
minimis exception for exempt organiza-
tions reporting less than $100,000 of gross
UBTI. The preamble to the proposed reg-
ulations explained that the Treasury De-
partment and the IRS declined to adopt the
comment because section 512(a)(6) does
not provide discretionary authority for the
Treasury Department and the IRS to es-
tablish a de minimis exception. Further,
the preamble to the proposed regulations
explained that, even at a lower threshold,
a de minimis test would be contrary to the
stated congressional intent of not permit-
ting exempt organizations to use losses
from one unrelated trade or business to
offset the gains from another unrelated
trade or business.
One commenter on the proposed reg-
ulations nonetheless recommended the
adoption of a de minimis exception. This
commenter proposed that an exempt or-
ganization with less than $10,000 of total
gross revenues from all unrelated trade or
business activities be permitted to treat all
its unrelated trades or businesses as one
trade or business for purposes of section
512(a)(6). For exempt organizations with
more than $10,000 of total gross revenues
from all unrelated trade or business ac-
tivities, the commenter suggested aggre-
gation of all separate unrelated trades or
businesses with less than $1,000 of total
gross revenues. The commenter reasoned
that exempt organizations with less than
$10,000 of total gross revenues from un-
related trade or business activities likely
lack the resources necessary to comply
with section 512(a)(6).
The commenter attempted to refute the
argument that the Treasury Department
and the IRS lack the authority to promul-
gate a de minimis exception by noting
that the Treasury Department and the IRS
already exercised discretion by permit-
ting exempt organizations to treat their
activities in the nature of investments as
a separate unrelated trade or business for
purposes of section 512(a)(6). The com-
menter cites the JCT General Explanation
as confirmation that the Treasury Depart-
ment and the IRS are authorized to per-
mit the aggregation of separate unrelated
trades or businesses.
Permitting the aggregation of certain
investment activities is an administrative
rule premised on the difficulty an exempt
organization partner may experience in
certain situations in obtaining the infor-
mation needed to determine whether the
trades or businesses conducted by the
partnership are separate unrelated trades
or businesses with respect to the exempt
organization partner (see part 2 of this
Summary of Comments and Explanation
of Revisions for a more in depth discus-
sion). By contrast, permitting the aggre-
gation of “de minimis” separate unrelat-
ed trades or businesses is contrary to the
congressional intent of not permitting
exempt organizations to offset the losses
from one unrelated trade or business with
the gains from another, without regard to
the amount of the gross receipts in either
trade or business. Finally, the concept of a

Bulletin No. 2020–52 1697 December 21, 2020
de minimis amount of UBTI is incompat-
ible with the fragmentation rule in section
513(c); §1.513-1(b). That is, the fragmen-
tation rule requires the identification of
unrelated trade or business activities no
matter the size.
To the extent that smaller exempt orga-
nizations may have difficulty complying
with section 512(a)(6), the Treasury De-
partment and the IRS expect that adoption
of NAICS 2-digit codes, as opposed to
NAICS 6-digit codes, may relieve much
of this burden because smaller exempt
organizations are unlikely to have numer-
ous unrelated trades or businesses under
these final regulations. Furthermore, un-
der §1.6012-2(e), an exempt organization
is required to file Form 990-T only “if it
has gross income, included in computing
[UBTI] for such taxable year, of $1,000
or more.” This filing threshold, which ap-
plies regardless of the number of separate
unrelated trades or businesses conducted
by the exempt organization, serves as a
de minimis rule for small exempt orga-
nizations. Accordingly, the Treasury De-
partment and the IRS do not adopt this
comment in the final regulations for these
reasons as well as the reasons cited in the
preamble to the proposed regulations.
g. Allocation of Directly Connected
Deductions
i. In General
Section 512(a)(1) permits an exempt
organization with an unrelated trade or
business to take the deductions allowed
under chapter 1 of the Code (chapter 1)
that are directly connected with the carry-
ing on of such unrelated trade or business.
Section 512(a)(3) similarly permits a so-
cial club described in section 501(c)(7), a
voluntary employees’ beneficiary associa-
tion (VEBA) described in section 501(c)
(9), or a supplemental unemployment
benefits trust (SUB) described in section
501(c)(17) to take the deductions allowed
under chapter 1 that are directly connected
with the production of gross income (ex-
cluding exempt function income). To the
extent that an exempt organization may
have items of deduction that are shared be-
tween an exempt activity and an unrelated
trade or business, §1.512(a)-1(c) provides
special rules for allocating such expenses.
For example, if facilities are used both to
carry on exempt activities and to conduct
unrelated trade or business activities, then
expenses, depreciation, and similar items
attributable to such facilities must be al-
located between the two uses on a reason-
able basis (reasonable basis standard).
The preamble to the proposed regula-
tions noted that an exempt organization
with more than one unrelated trade or
business must not only allocate shared ex-
penses among exempt and taxable activi-
ties as described in §1.512(a)-1(c) but also
among separate unrelated trades or busi-
nesses. Accordingly, the proposed regula-
tions incorporated the existing allocation
standard in §1.512(a)-1(c) for purposes
of section 512(a)(6). No comments were
received regarding this approach. Accord-
ingly, the final regulations continue to
provide that an exempt organization with
more than one unrelated trade or business
must allocate deductions between sepa-
rate unrelated trades or businesses using
the reasonable basis standard described in
§1.512(a)-1(c).
ii. The Unadjusted Gross-to-Gross
Method Unreasonable in Certain
Circumstances
The preamble to the proposed regula-
tions did, however, describe the concerns
of the Treasury Department and the IRS re-
garding the administrability of the reason-
able basis standard. The preamble to the
proposed regulations announced that the
Treasury Department and the IRS would
continue to consider whether the reason-
able basis standard should be retained and
announced the intention to publish a sepa-
rate notice of proposed rulemaking. As an
initial matter, however, the proposed reg-
ulations stated that allocation of expenses,
depreciation, and similar items using an
unadjusted gross-to-gross method is not
reasonable. In general, a gross-to-gross
method of allocation uses a ratio of gross
income from an unrelated trade or busi-
ness activity over the total gross income
from both unrelated and related activities
generating the same indirect expenditures.
The percentage resulting from this ratio
is used to determine the percentage of the
shared costs attributable to the unrelated
trade or business activity (or activities).
If a price difference exists between the
provision of a good or service to different
populations and no adjustment is made,
the gross-to-gross ratio may be described
as “unadjusted.”
Several commenters asserted that the
unadjusted gross-to-gross method should
not be considered unreasonable. Of these
commenters, two stated that the gross-to-
gross method can be reasonable if there is
no price difference for goods or services
provided in related and unrelated activ-
ities or if adjustments are made for any
price differences. One commenter further
argued that no allocation method should
be per se unreasonable because what is
unreasonable with respect to one set of
facts and circumstances may be reason-
able with respect to another.
In response to these commenters’ rec-
ommendations, the final regulations clar-
ify that allocation of expenses, deprecia-
tion, and similar items is not reasonable if
the cost of providing a good or service in
a related and an unrelated activity is sub-
stantially the same, but the price charged
for that good or service in the unrelated
activity is greater than the price charged
in the related activity and no adjustment is
made to equalize the price difference for
purposes of allocating expenses, depreci-
ation, and similar items based on revenue
between related and unrelated activities.
For example, if a social club described in
section 501(c)(7) charges nonmembers a
higher price than it charges members for
the same good or service, but does not
adjust the price of the good or service
provided to members for purposes of allo-
cating expenses, depreciation, and similar
items attributable to the provision of that
good or service, the allocation method is
not reasonable.
The Action on Decision (AOD) relat-
ing to Rensselaer Polytechnic Institute v.
Commissioner stated that the IRS would
not litigate the reasonableness of an allo-
cation method “until the allocation rules
of [§1.512(a)-1(c)] are amended.” 732
F.2d 1058 (2d Cir. 1984), aff ’g 79 T.C.
967 (1982); AOD 1987-014 (Jun. 18,
1987). The final regulations amend the
rules of §1.512(a)-1(c) and, as discussed
in the Applicability Dates section of this
preamble, are effective for taxable years
beginning on or after December 2, 2020.
Accordingly, the IRS rescinds the AOD to
the limited extent of any allocation meth-

December 21, 2020 1698 Bulletin No. 2020–52
od that fails to equalize price differences
between related activities and unrelated
trade or business activities for such tax-
able years. The IRS will continue to re-
frain from litigating the reasonableness
of other allocation methods pending the
publication of further guidance, which the
Treasury Department and the IRS contin-
ue to consider and expect to publish in a
separate notice of proposed rulemaking.
2. Activities in the Nature of Investments
The proposed regulations treat an ex-
empt organization’s activities in the nature
of an investment (investment activities) as
a separate trade or business for purposes of
section 512(a)(6). Several commenters re-
peated the suggestion previously made in
response to Notice 2018-67 that the Trea-
sury Department and the IRS should not
treat an exempt organization’s investment
activities as an unrelated trade or business,
and therefore the income and losses from
these activities should not be considered
for purposes of applying section 512(a)(6).
The preamble to the proposed regulations
explained that the Treasury Department
and the IRS concluded that the structure
and purposes of sections 511 through 514
indicate that an exempt organization’s in-
vestment activities are an unrelated trade
or business for purposes of section 512(a)
(6), although certain income from such
investment activities (investment income)
is excluded from the calculation of UBTI
under modifications in section 512(b). The
Treasury Department and the IRS also
noted that the language of section 512(a)
(6)(B) states an organization’s total UBTI
is the sum of the UBTI computed for each
separate unrelated trade or business under
section 512(a)(6)(A). To conclude that
investment income is not included in the
separately computed UBTI under section
512(a)(6)(A) would be to remove such
income entirely from UBTI under section
512(a)(6)(B), even when no modification
in section 512(b) applies to the income.
Nothing in the legislative history or the
statute suggests that Congress intended to
amend the items of income that are tax-
able under section 511. Accordingly, the
final regulations continue to treat an ex-
empt organization’s investment activities
that are subject to UBIT as a separate un-
related trade or business for purposes of
section 512(a)(6).
a. Exclusive List of Investment Activities
The proposed regulations provided an
exclusive list of an exempt organization’s
investment activities that may be treated
as a separate unrelated trade or business
for purposes of section 512(a)(6). Under
the proposed regulations, for most exempt
organizations, such investment activities
are limited to: (i) qualifying partnership
interests (see part 2.b of this Summary of
Comments and Explanation of Revisions);
(ii) qualifying S corporation interests (see
part 3.a of this Summary of Comments
and Explanation of Revisions); and (iii)
debt-financed properties (see part 2.d of
this Summary of Comments and Explana-
tion of Revisions).
2
Although commenters
recommended modifications to the rules
regarding the individual items included
in this list, no commenters objected to the
treatment of these items as investment ac-
tivities. Accordingly, the final regulations
adopt the list of investment activities pro-
vided in the proposed regulations without
change.
Nonetheless, some commenters recom-
mended that this exclusive list be expand-
ed to include specified payments from
controlled entities that are included in
UBTI under section 512(b)(13) (discussed
in part 2.a.i of this Summary of Comments
and Explanation of Revisions) and certain
amounts from controlled foreign corpo-
rations that are included in UBTI under
section 512(b)(17) (discussed in part 2.a.ii
of this Summary of Comments and Expla-
nation of Revisions).
i. Specified Payments from Controlled
Entities
Section 512(b)(13)(A) requires an ex-
empt organization, referred to as a “con-
trolling organization,” that receives or
accrues (directly or indirectly) a specified
payment from another entity which it con-
trols, referred to as a “controlled entity,”
to include such payment as an item of
gross income derived from an unrelated
trade or business to the extent such pay-
ment reduces the net unrelated income of
the controlled entity (or increases any net
unrelated loss of the controlled entity).
See also §1.512(b)-1(l)(1). Section 512(b)
(13)(C) defines the term “specified pay-
ment” as any interest, annuity, royalty,
or rent. Accordingly, section 512(b)(13)
treats certain amounts that would ordi-
narily be excluded from the calculation of
UBTI under section 512(b)(1), (2), and (3)
as income derived from an unrelated trade
or business.
The proposed regulations provided
that, if an exempt organization controls
another entity (within the meaning of
section 512(b)(13)(D)), the specified pay-
ments from that controlled entity will be
treated as gross income from a separate
unrelated trade or business for purposes
of section 512(a)(6). If a controlling or-
ganization receives specified payments
from two different controlled entities, the
proposed regulations treated the payments
from each controlled entity as separate un-
related trades or businesses.
Two commenters recommended that
income included in UBTI under section
512(b)(13) should be part of the invest-
ment activities trade or business under
section 512(a)(6). These commenters
noted that different fact patterns can pro-
duce different tax results because of the
interaction between section 512(b)(13)
and the debt-financed property rules of
section 514. For example, one commenter
provided a series of examples in which a
wholly owned taxable subsidiary rented
space from its exempt organization parent
in a debt-financed property owned by the
parent.
Section 1.514(b)-1(b)(2)(ii) of the
current regulations states that section
514 does not apply to amounts specifi-
cally taxable under other provisions of
the Code, such as rents and interest from
controlled organizations includible pursu-
ant to section 512(b)(13). Thus, if a con-
trolling organization leases debt-financed
property to a controlled organization, the
amount of rents includible in the con-
trolling organization’s UBTI shall first
be determined under section 512(b)(13),
2
Special rules discussed in part 4 of this Summary of Comments and Explanation of Revisions apply to social clubs described in section 501(c)(7).

Bulletin No. 2020–52 1699 December 21, 2020
and only the portion of such rents not tak-
en into account by operation of section
512(b)(13) are taken into account by op-
eration of section 514. See §1.512(b)-1(l)
(5)(ii). Because the regulations provide a
clear ordering rule that sets section 512(b)
(13) income apart from the rules of section
514, section 512(b)(13) taxable income
can never be debt-financed investment in-
come.
The Treasury Department and the IRS
considered in the preamble to the proposed
regulations whether specified payments
should be included with an exempt orga-
nization’s investment activities and con-
cluded that this treatment would be incon-
sistent with the purpose of section 512(b)
(13)(A), which is to prevent a controlled
entity from gaining a competitive advan-
tage (in contravention of the purposes of
section 512) through making deductible
payments to a controlling organization that
is exempt from tax. See S. Rep. No. 91-
552, at 73 (1969) (explaining that certain
“rental” arrangements between exempt or-
ganizations and taxable subsidiaries “[en-
able] the taxable [subsidiary] to escape
nearly all of its income taxes”). Consistent
with this purpose, section 512(b)(13)(A)
treats specified payments as income from
an unrelated trade or business only “to
the extent such payment reduces the net
unrelated income of the controlled entity
(or increases any net unrelated loss of the
controlled entity).” Additionally, the re-
quired degree of control of the controlling
organization over the controlled entity in-
dicates that the controlled entities are not a
part of the controlling organization’s oth-
erwise appropriately characterized invest-
ment activities.
Alternatively, if specified payments
are not included with an exempt organi-
zation’s investment activities, these com-
menters requested that specified payments
from any source be treated as one unrelat-
ed trade or business for purposes of sec-
tion 512(a)(6). The commenters asserted
that the aggregation of specified payments
would reduce the incentive to restructure
financial transactions to obtain more fa-
vorable tax results. One commenter set
out an example in which the UBTI from
the separate unrelated trades or businesses
for specified payments received from two
controlled entities of an exempt organi-
zation differed under section 512(b)(13)
depending on whether the exempt orga-
nization owned both subsidiaries directly
or one subsidiary directly and the other
subsidiary indirectly through the first sub-
sidiary. The commenter asserted that ag-
gregating the UBTI from all the controlled
entities would create the same tax result
for all exempt organizations with these
facts regardless of the structure of the sub-
sidiaries and the rental payments.
The Treasury Department and the IRS
continue to view specified payments as
not appropriately characterized as part
of an exempt organization’s investment
activities. Furthermore, because sec-
tion 512(b)(13) views specified payments
as stemming from the trade or business
activity of the controlled entity rather
than from its investment activities, the
Treasury Department and the IRS decline
to adopt the suggestion that all specified
payments be treated as one unrelated
trade or business for purposes of section
512(a)(6). Rather, because section 512(b)
(13)(A) provides that specified payments
from a controlled entity are income de-
rived from an unrelated trade or business,
the final regulations adopt the proposed
regulations regarding specified payments
without modification.
ii. Certain Amounts from Controlled
Foreign Corporations
Section 512(b)(17) requires any
amount included in gross income under
section 951(a)(1)(A) to be included as
an item of gross income derived from an
unrelated trade or business to the extent
the amount so included is attributable
to insurance income (as defined in sec-
tion 953) which, if derived directly by the
exempt organization, would be treated as
gross income from an unrelated trade or
business. Section 953(a)(1) defines “in-
surance income” as any income that (A)
is attributable to the issuing (or reinsur-
ing) of an insurance or annuity contract,
and (B) would (subject to certain modifi-
cations not relevant here) be taxed under
subchapter L of chapter 1 if such income
were the income of a domestic insurance
company. Thus, section 512(b)(17) “ap-
plies a look-through rule in characterizing
certain subpart F insurance income for un-
related business income tax purposes.” H.
R. Rep. No. 104-586 (1996), at 137.
The proposed regulations treated the
provision of insurance by all controlled
foreign corporations (CFCs) as one trade
or business, regardless of whether such
insurance income is received from more
than one CFC, which is consistent with
how NAICS would categorize the provi-
sion of insurance (52 – Finance and Insur-
ance). However, the proposed regulations
did not permit the aggregation of an ex-
empt organization’s insurance income in-
cluded in UBTI under section 512(b)(17)
with any insubstantial commercial-type
insurance activities conducted directly
by the exempt organization because the
CFC, not the exempt organization, is en-
gaged in the activity giving rise to the in-
surance income included in UBTI under
section 512(b)(17). The insurance activi-
ty described in section 512(b)(17) is not
attributed to the exempt organization and
thus is distinguishable from any commer-
cial-type insurance activity engaged in di-
rectly by the exempt organization.
One commenter recommended that
amounts included in income under sec-
tion 512(b)(17) should be part of an ex-
empt organization’s investment activities.
This commenter questioned the statement
in the preamble to the proposed regula-
tion that “the required degree of control
of the exempt organization over the con-
trolled foreign corporation indicates that
the exempt organization’s interest in a
controlled foreign corporation is proba-
bly not part of the exempt organization’s
otherwise appropriately characterized
investment activities.” The commenter
explained that, with respect to insurance
income specifically, the required own-
ership by United States shareholders for
CFC status is reduced to 25 percent from
the usual 50 percent. The commenter as-
serted that an exempt organization share-
holder therefore could hold less than a 10
percent interest in a CFC that as a whole is
owned by United States shareholders. The
commenter stated that the low percent-
age of ownership necessary to have such
amounts included in UBTI should war-
rant inclusion with an exempt organiza-
tion’s investment activities, based on the
similarity to the ownership percentages
for qualifying partnership interest status
discussed in part 2.b of this Summary of
Comments and Explanation of Revisions.
However, another commenter recom-

December 21, 2020 1700 Bulletin No. 2020–52
mended retention of the rules in the pro-
posed regulations for amounts included in
income under section 512(b)(17).
As explained in the preamble to the
proposed regulations, the reasons for not
treating amounts included in income un-
der section 512(b)(17) as an exempt or-
ganization’s investment activities extend
beyond the amount of control the exempt
organization may have over the CFC. In
particular, that preamble explained that
insurance income included in UBTI under
section 512(b)(17) should not be treated
as gross income from an exempt orga-
nization’s investment activities because
the provision of insurance generally is an
unrelated trade or business. See section
501(m) (providing that, in the case of an
exempt organization described in sec-
tion 501(c)(3) or (4) that does not provide
commercial-type insurance as a substan-
tial part of its activities, the activity of
providing commercial-type insurance is
treated as an unrelated trade or business
(as defined in section 513)). Further, the
percentage interest prongs of the qualify-
ing partnership interest rules, discussed in
parts 2.b.iii and 2.b.iv.A of this Summary
of Comments and Explanation of Revi-
sions, serve as a proxy for an exempt or-
ganization’s ability to obtain the informa-
tion necessary to identify the underlying
trade or business of the partnership. For
amounts included in income under section
512(b)(17), the underlying trade or busi-
ness is known because the only amounts
included are from the insurance activity
of the CFC. Thus, the same treatment of
income under section 512(b)(17) is not
needed for administrative convenience.
Accordingly, the final regulations
adopt without change the proposed regu-
lations regarding the treatment of amounts
included in UBTI under section 512(b)
(17) for purposes of section 512(a)(6).
b. Qualifying Partnership Interests
In general, for exempt organizations,
the activities of a partnership are consid-
ered the activities of the exempt organiza-
tion partners.
3
Specifically, section 512(c)
states that if a trade or business regularly
carried on by a partnership of which an
exempt organization is a member is an
unrelated trade or business with respect to
such organization, such organization shall
include its share of the gross income of
the partnership in UBTI. However, com-
menters on both Notice 2018-67 and the
proposed regulations explained the diffi-
culty of obtaining information regarding
the trade or business activities of lower-ti-
er partnerships. Therefore, as a matter of
administrative convenience for both the
exempt organization and the IRS, the pro-
posed regulations permitted, but did not
require, an exempt organization to aggre-
gate its UBTI from an interest in a partner-
ship with more than one unrelated trade or
business (including unrelated trades or
businesses conducted by lower-tier part-
nerships) if it met certain requirements
(qualifying partnership interest, or QPI).
Additionally, the proposed regulations
permitted the aggregation of any QPI with
all other QPIs, resulting in the treatment
of the aggregate group of QPIs (along
with associated debt-financed income un-
der section 514 and qualifying S corpora-
tion interests, both discussed in parts 2.d
and 3.a, respectively, of this Summary of
Comments and Explanation of Revisions)
as a single “investment activities” trade or
business for purposes of section 512(a)(6)
(A).
The proposed regulations identified a
partnership interest as a QPI if it met the
requirements of either the de minimis test
(discussed in part 2.b.iii of this Summa-
ry of Comments and Explanation of Re-
visions) or the control test (discussed in
part 2.b.iv of this Summary of Comments
and Explanation of Revisions). A few
commenters recommended alternative or
additional tests to identify a QPI. Three
commenters suggested that the generally
accepted accounting principles (GAAP)
codified by the Financial Accounting
Standards Board (FASB) should replace
the de minimis and the control tests to
identify partnership interests as QPIs.
These commenters recommended that any
interest that is reported as “fair value” un-
der these standards should be considered
a QPI and included as part of the exempt
organization’s investment activities. Two
other commenters recommended that a
partnership that uses an investment man-
ager should be a QPI. For this purpose,
one of these commenters recommended
defining an investment manager as some-
one who is either (i) included in a listing
of investment managers with the Securi-
ties and Exchange Commission (SEC), (ii)
in the business of providing investment
advice for compensation and manages at
least $150 million in client assets, or (iii)
has filed a Form D notice with the SEC
with respect to the partnership at issue in-
dicating that interests in such partnership
are offered under an exemption from SEC
registration requirements. Finally, one
commenter provided a general list of facts
and circumstances that should be consid-
ered when determining whether a partner-
ship interest is a QPI, such as whether the
exempt organization is a limited partner,
whether the exempt organization has the
right to be involved in the day-to-day
management or operations of the partner-
ship, and whether the exempt organization
formed the partnership.
As noted in Notice 2018-67, the pur-
pose of permitting the aggregation of
QPIs is to reduce the administrative bur-
den of obtaining information from the
partnership regarding the trade or business
activities of the partnership in which the
exempt organization holds a modest inter-
est, and particularly of lower-tier partner-
ships under such partnership. As stated in
the preamble to the proposed regulations,
the percentage interest level for QPIs was
intended as a proxy to identify partnership
interests in which the exempt organization
does not significantly participate. 85 FR at
23180. Taking into account the comments
received, the Treasury Department and the
IRS have determined that, for purposes of
section 512(a)(6), if the percentage inter-
est level indicates that an exempt organi-
zation does not significantly participate in
a partnership, the exempt organization is
not likely to be able to easily obtain the
information required to identify the trades
or businesses conducted, directly or indi-
rectly, by the partnership that are unrelat-
ed trades or businesses with respect to the
exempt organization partner.
The recommendations of the comment-
ers regarding alternate or additional meth-
3
See sections 512(c), 513(a); §1.513-1(d)(1) and (2); Plumstead Theatre Society, Inc. v. Commissioner, 74 T.C. 1324 (1980); 675 F.2d 244 (9
th
Cir. 1995); Service Bolt & Nut Co. Profit Sharing
Trust v. Commissioner, 724 F.2d 519 (6th Cir.1983), affg, 78 T.C. 812 (1982); Rev. Rul. 98-15, 1998-1 C.B. 718.

Bulletin No. 2020–52 1701 December 21, 2020
ods to determine whether a partnership
interest is a QPI do not provide adminis-
trable methods for proximately measuring
an exempt organization’s ability to obtain
information about the partnership’s trades
or businesses. Under GAAP, an exempt
organization accounts for a partnership
interest using “fair value” if it does not
control a partnership or have “significant
influence” in the partnership or if it holds
an interest the value of which is “readi-
ly determinable.” FASB, 2020, ASC par.
958-810-15-4. As discussed in more de-
tail in part 2.b.iv.B of this Summary of
Comments and Explanation of Revisions,
determining “significant influence” under
GAAP is substantially similar to deter-
mining significant participation under the
participation test. By FASB’s own admis-
sion, however, determining significant in-
fluence is not always clear. FASB, 2020,
ASC par. 323-10-15-7. Further, whether
a partnership interest has a readily deter-
minable value does not indicate whether
an exempt organization has access to the
information needed to identify trades or
businesses conducted by the partnership
that are unrelated trades or businesses with
respect to the exempt organization partner.
The de minimis and control tests provide a
substantially similar standard to that found
in GAAP that is more objective and that
does not include additional factors outside
the scope of the QPI test. Additionally, un-
like the adoption of NAICS 2-digit codes,
adopting GAAP would mean using a set
of rules that are maintained and amended
frequently by a non-governmental third
party. Furthermore, GAAP does not al-
ways align with tax standards.
Similarly, the presence of an invest-
ment manager does not indicate whether
an exempt organization can obtain in-
formation to identify separate unrelated
trades or businesses conducted by a part-
nership. In addition, the requirements for
being an investment manager, as outlined
by the commenter, require reliance on an
SEC system that is designed for purposes
that do not align with the those of the QPI
tests. As a result, the investment manager
test does not satisfy the purpose of the QPI
tests and the Treasury Department and the
IRS do not adopt this suggestion. Finally,
the facts and circumstances test suggested
by commenters relies on factors that do not
tend to relate to the exempt organization’s
ability to obtain the information from the
partnership needed to identify separate
unrelated trades or businesses and there-
fore do not advance the administrative
convenience purpose of the QPI test. Ac-
cordingly, the Treasury Department and
the IRS do not adopt these suggestions as
a reliable method for identifying QPIs.
Other commenters suggested the in-
clusion of all limited partnerships or lim-
ited liability companies (LLCs) in which
the exempt organization is not a general
partner or managing member (regardless
of the exempt organization’s percent-
age interest or other participation in the
partnership) as QPIs. As discussed in the
preamble to the proposed regulations, the
Treasury Department and the IRS decline
to adopt this standard because of the varia-
tion in state law for determining non-man-
aging member equivalent interests and
the administrative burden that reliance on
state law places on the IRS.
Accordingly, the Treasury Department
and the IRS do not adopt the recommend-
ed alternative or additional methods for
identifying a QPI.
i. Designation of a QPI
The proposed regulations provided that,
once an organization designates a partner-
ship interest as a QPI (in accordance with
forms and instructions), it cannot thereaf-
ter identify the trades or businesses con-
ducted by the partnership that are unrelat-
ed trades or businesses with respect to the
exempt organization using NAICS 2-digit
codes unless and until the partnership in-
terest is no longer a QPI. For example, if
an exempt organization has a partnership
interest that is a QPI and the exempt orga-
nization designates that partnership inter-
est as a QPI on its Form 990-T, the exempt
organization cannot, in the next taxable
year, identify the trades or businesses of
the partnership that are unrelated trades
or businesses with respect to the exempt
organization using NAICS 2-digit codes.
However, if, in a future taxable year, the
exempt organization’s partnership interest
is no longer a QPI, then the exempt orga-
nization would be required to identify the
trades or businesses of the partnership that
are unrelated trades or businesses with
respect to the exempt organization using
NAICS 2-digit codes. No comments were
received regarding this provision. Accord-
ingly, the final regulations adopt the pro-
posed regulations regarding the designa-
tion of QPIs without change.
ii. General Partner Prohibition
The proposed regulations clarified that
any partnership in which an exempt orga-
nization is a general partner is not a QPI,
regardless of the exempt organization’s
percentage interest. One commenter noted
that, while related parties are considered
for determination of the percentage inter-
est prong of the control test, these same
related parties are not considered when
determining the general partner status of
the exempt organization under the de mi-
nimis test or for determining control under
the second prong of the control test. Thus,
a related entity may be a general partner
in or may control the partnership in which
an exempt organization has an interest and
such control by the related party would
not affect the outcome under the proposed
regulations.
The Treasury Department and the IRS
agree with the commenter that the deter-
mination of whether an exempt organi-
zation is a general partner should include
related organizations. Thus, the final reg-
ulations clarify that, if an organization the
interest of which must be taken into ac-
count when determining the exempt orga-
nization’s percentage interest for purposes
of the first prong of the control test is a
general partner in a partnership in which
an exempt organization holds an interest,
then such interest is not a QPI.
One commenter recommended that the
per se prohibition against general partner
status for a partnership interest to be a QPI
should be extended to status as a manag-
ing member of a limited liability company
(LLC). The Treasury Department and the
IRS agree that the term “partnership” in-
cludes all entities, including LLCs, treated
as partnerships for Federal tax purposes.
Accordingly, an interest in an LLC treated
as a partnership for Federal tax purposes
can be a QPI. However, the rule in the
proposed regulations precluding a gener-
al partner interest from being a QPI was
intended to apply only to interests held
by partners classified as general partners
under applicable state law. The Treasury
Department and the IRS do not believe it

December 21, 2020 1702 Bulletin No. 2020–52
is appropriate to expand the per se prohi-
bition to persons classified as managing
members under applicable state law with-
out the opportunity for further notice and
comment, although managing members
are unlikely to satisfy the participation
test due to their significant participation
in the LLC. Accordingly, the final regula-
tions adopt the proposed regulation with
the clarification that general partner status
is determined under applicable state law.
iii. De Minimis Test
The proposed regulations provided that
a partnership interest is a QPI that meets
the requirements of the de minimis test if
the exempt organization holds directly or
indirectly no more than 2 percent of the
profits interest and no more than 2 percent
of the capital interest.
One commenter recommended remov-
ing the de minimis test. The Treasury De-
partment and the IRS have concluded that
the de minimis test reduces administrative
burden by establishing a clear limit below
which no other factors need to be consid-
ered for inclusion of such interest as a part
of an exempt organization’s investment
activities. Therefore, the Treasury Depart-
ment and the IRS retain the de minimis
test in the final regulations.
One commenter recommended that the
percentage interest threshold of the de mi-
nimis test should be increased to 5 percent
consistent with other sections of the Code
and regulations. The commenter notes
that, not only have other parts of the Code
determined that 5 percent is sufficiently
de minimis, but also that increasing the
amount from 2 percent to 5 percent would
reduce administrative burden by potential-
ly increasing the number of partnership
interests that would meet the requirements
of the de minimis test.
The Treasury Department and the IRS
do not adopt this commenter’s suggestion
for the following reasons. For purposes of
administrative convenience, the de mini-
mis test allows certain partnership invest-
ments to be treated as an investment activ-
ity and aggregated with other investment
activities. Otherwise, as previously dis-
cussed in this section of the preamble, sec-
tion 512(c) mandates that any partnership
interest, even a de minimis interest, must
be analyzed to determine whether it is an
unrelated trade or business with respect to
the exempt organization partner and, by
extension, how many unrelated trades or
businesses for purposes of section 512(a)
(6). Accordingly, any exception made in
the interest of the administrative conve-
nience of taxpayers must be narrowly tai-
lored to achieving that purpose.
Furthermore, under the control test,
partnership interests that exceed 2 per-
cent are QPIs if those interests meet the
requirements of the control test (now re-
named the participation test, as discussed
in part 2.b.iv of this Summary of Com-
ments and Explanation of Revisions).
Many exempt organizations with partner-
ship interests between 2 percent and 5 per-
cent should be able to determine, without
much additional burden, that they do not
significantly participate in the partnership
and thus the partnership interest is a QPI;
thus, not much additional convenience
would be gained for exempt organizations
by increasing the de minimis percentage
amount from 2 percent to 5 percent. On
the other hand, increasing the percentage
under which an exempt organization does
not have to demonstrate a lack of signif-
icant participation to be able to treat the
partnership interest as a QPI would extend
the administrative convenience exception
to identifying the separate unrelated trades
or businesses of the partnership (in accord
with section 513(c)) farther than neces-
sary and undermine the statutory require-
ment of section 512(a)(6). Therefore, the
final regulations follow the proposed reg-
ulations and provide that a partnership in-
terest is a QPI that meets the requirements
of the de minimis test if the exempt orga-
nization holds, directly or indirectly, no
more than 2 percent of the profits interest
and no more than 2 percent of the capital
interest. Additionally, the final regulations
clarify that the exempt organization must
meet the percentage interest requirement
of the de minimis rule during the exempt
organization’s taxable year with which or
in which the partnership’s taxable year
ends.
iv. Control Test Renamed the
“Participation Test”
The proposed regulations provided that
a partnership interest is a QPI that meets
the requirements of the control test if the
exempt organization (i) directly holds no
more than 20 percent of the capital inter-
est; and (ii) does not have control over the
partnership. As previously discussed in
this section, the QPI tests focus on deter-
mining whether an exempt organization
significantly participates in a partnership,
thereby indicating an ability to obtain the
information needed from the partnership
to determine whether a trade or business
conducted by the partnership is an unre-
lated trade or business with respect to the
exempt organization partner. To better re-
flect this intent, the control test has been
renamed in these final regulations as the
“participation test.” Accordingly, the fi-
nal regulations modify the participation
test so that a partnership interest is a QPI
that meets the requirements of the partic-
ipation test if the exempt organization (i)
directly holds no more than 20 percent of
the capital interest; and (ii) does not sig-
nificantly participate in the partnership.
A. Percentage Interest
Numerous commenters made recom-
mendations regarding the first prong of the
control test, most of which recommended
increasing the percentage threshold to 50
percent to conform with the definition of
control in section 512(b)(13). These com-
menters noted that the 50 percent thresh-
old for capital interest is more in line with
other definitions of control found in the
Code. Other commenters suggested that
the percentage interest requirement be
eliminated entirely because an exempt
organization may control a partnership re-
gardless of its percentage interest.
The final regulations retain the 20 per-
cent threshold used in the proposed reg-
ulations. As explained in the preamble to
the proposed regulations, the percentage
interest prong of the control test was in-
tended to identify partnership interests in
which the exempt organization does not
have the ability to significantly participate
in any partnership trade or business and
therefore may be considered an investment
activity for purposes of section 512(a)(6).
Although an exempt organization may not
significantly participate in a partnership in
which it has more than a 20 percent inter-
est, the Treasury Department and the IRS
note that, as an exempt organization’s per-
centage interest in a partnership increas-

Bulletin No. 2020–52 1703 December 21, 2020
es, so too does the exempt organization’s
ability to obtain the information necessary
to identify the trades or businesses con-
ducted by the partnership that are separate
unrelated trades or businesses with respect
to the exempt organization partner. Thus,
the Treasury Department and the IRS have
determined that, for purposes of this as-
pect of the administrative exception for
investment activities, a 20 percent capital
interest is a threshold below which the ex-
empt organization may not be able to ob-
tain the needed information if it does not
otherwise significantly participate.
The preamble to the proposed regula-
tions noted that the 20 percent threshold is
consistent with the administrative excep-
tion found in the regulations under section
731 for certain investment activities. See
section 731(c)(3)(C)(i) & §1.731-2(e).
Some commenters noted that this was not
a relevant standard because section 731(c)
(3)(C)(i) does not define control. Section
731 defines investment partnerships, in
part, as any partnership that has never
been engaged in a trade or business.
The regulations under section 731(c)
(3)(C)(i) identify situations in which the
trade or business activities of a lower tier
partnership should not be attributed to
an upper tier partnership for purposes of
determining whether the upper tier part-
nership is engaged in a trade or business.
Similarly, the QPI rules in the proposed
regulations seek to determine when the
trade or business of a partnership should
not be attributed to the exempt organi-
zation such that the partnership may be
counted as part of an investment activity
rather than as the participation in any un-
derlying trade or business. Thus, the pur-
pose of the regulations under section 731
and the QPI rules in the proposed regula-
tions is similar.
The 20 percent capital interest thresh-
old is further supported by the GAAP
standard for “significant influence” that
some commenters recommended as an
alternative to the de minimis and partici-
pation tests (see parts 2.b.iii and 2.b.iv of
this Summary of Comments and Explana-
tion of Revisions). Due to the difficulty
of the significant influence determination,
GAAP provides that holding 20 percent
voting stock in an investee is presumed,
without more, to constitute a significant
influence. FASB, 2020, ASC par. 323-10-
15-8. The 20 percent voting stock standard
in GAAP was written for determining
whether the investor has “significant influ-
ence” in a corporation. FASB, 2020, ASC
par. 323-10-15-5. For tax purposes, it is
common in the Code, when applying cor-
porate standards to partnerships, to substi-
tute “capital interest” for “voting stock.”
See e.g. sections 4943(c)(3), 6166(b), &
6038(e)(3). Thus, the 20 percent capital
interest threshold in the proposed regu-
lations is consistent with FASB’s deter-
minations of the percentage interest that
represents “significant influence,” which
is similar to the significant participation
standard found in these regulations.
Accordingly, the final regulations retain
the 20 percent capital interest threshold
provided by the proposed regulations but
clarify that the exempt organization must
meet the percentage interest requirement
for the exempt organization’s taxable year
with which or in which the partnership’s
taxable year ends.
No comments were received regarding
how an exempt organization determines
its percentage interest in a partnership.
Therefore, consistent with the proposed
regulations and for purposes of both the
de minimis test and the participation test,
the final regulations continue to provide
that an exempt organization determines its
percentage interest by taking the average
of the exempt organization’s percentage
interest at the beginning and the end of
the partnership’s taxable year, or, in the
case of a partnership interest held for less
than a year, the percentage interest held
at the beginning and end of the period of
ownership within the partnership’s tax-
able year. However, the final regulations
clarify that, for purposes of the de mini-
mis test, an exempt organization’s profits
interest in a partnership is determined in
the same manner as its distributive share
of partnership taxable income (see sec-
tion 704(b) relating to the determination
of the distributive share by the income or
loss ratio, and §§1.704-1 through 1.704-
4). For purposes of both the de minimis
test and the participation test the final reg-
ulations provide that, in the absence of a
provision in the partnership agreement, an
exempt organization’s capital interest in a
partnership is determined on the basis of
its interest in the assets of the partnership
which would be distributable to such or-
ganization upon its withdrawal from the
partnership, or upon liquidation of the
partnership, whichever is the greater.
4
B. Definition of “Significant
Participation”
Under the proposed regulations, a part-
nership interest met the requirements of
the control test if the exempt organization
holds no more than a 20 percent of the cap-
ital interest and does not control the part-
nership. The proposed regulations provid-
ed that all the facts and circumstances are
relevant for determining whether an ex-
empt organization controls a partnership.
The proposed regulations clarified that the
partnership agreement is among the facts
and circumstances that may be considered
when determining control. The proposed
regulations also listed four specific cir-
cumstances that evidence control. Two of
the circumstances focused on the exempt
organization’s ability to perform certain
actions on its own. Specifically, the pro-
posed regulations provided that an exempt
organization controls a partnership if the
exempt organization, by itself, may re-
quire the partnership to perform, or may
prevent the partnership from performing,
any act that significantly affects the opera-
tions of the partnership or has the power to
appoint or remove any of the partnership’s
officers or employees or a majority of di-
rectors. The remaining two circumstanc-
es focused on whether any of the exempt
organization’s officers, directors, trustees,
or employees have rights to participate in
the management of the partnership at any
time or to conduct the partnership’s busi-
ness at any time.
In essence, the proposed regulations
provided a two-part test for determining
control: (1) a general facts and circum-
stances test based on the well-defined
concept in the Code of “control,” and
(2) factors evidencing “per se” control.
As discussed in the introduction to part
4
These clarifying rules for determining an exempt organization’s partnership interest are consistent with longstanding rules in §53.4943-3(c)(2) for purposes of a private foundation’s deter-
mination of whether it has excess business holdings.

December 21, 2020 1704 Bulletin No. 2020–52
2.b.iv of this Summary of Comments and
Explanation of Revisions, the Treasury
Department and the IRS have renamed
the “control test” the “participation test”
to better capture the purpose of the test,
which is to identify partnerships in which
exempt organization partners significant-
ly participate. However, unlike “control,”
“significant participation” generally is not
a defined term in the Code. A test consid-
ering all the facts and circumstances to
determine whether an exempt organiza-
tion partner significantly participates in a
partnership could have a broader applica-
tion than intended. Furthermore, a general
facts and circumstances standard for a test
that is not well-defined increases uncer-
tainty and, as a result, the administrative
burden on exempt organizations and the
IRS. Therefore, the final regulations do not
include a general facts and circumstances
test as part of the significant participation
prong of the participation test, but instead
retain only the four factors, which, in the
final regulations, evidence significant par-
ticipation rather than control.
Some commenters stated that the list of
factors indicating control was too broad.
One commenter contended that the factors
focusing on whether an officer, director, or
employee of an exempt organization has
rights to manage the partnership or con-
duct the business of the partnership should
be removed entirely as the presence of
these factors does not indicate control by
the exempt organization. While the fac-
tors identified by this commenter and the
factors other commenters characterized as
too broad may not always represent con-
trol, these factors do indicate when an ex-
empt organization participates in the part-
nership to an extent that would allow the
exempt organization to obtain sufficient
information to identify the underlying
separate trades or businesses.
Another commenter suggested that the
factors listed as indicating control may not
always result in control, and thus, the fac-
tors listed should create a rebuttable pre-
sumption of control rather than being “per
se” indicators of control. The Treasury
Department and the IRS retain the factors
listed in the proposed regulations as “per
se” indicators of significant participation
because the QPI rules, including the par-
ticipation test, are designed to provide ad-
ministrative convenience for both the IRS
and exempt organizations. In this way,
firm standards that indicate significant par-
ticipation allow both the IRS and exempt
organizations to have more certainty in the
decision whether to include such interests
with an exempt organization’s investment
activities. A rebuttable presumption would
introduce more uncertainly, rely more on
facts and circumstances, and be more dif-
ficult for both the IRS and exempt organi-
zations to administer.
The Treasury Department and the IRS
note that the factors provided in the regu-
lations are similar to the factors indicat-
ing “control” and “significant influence”
under FASB’s codification of GAAP,
which several commenters proposed as
an alternative test. For partnership inter-
ests, GAAP determines that enough con-
trol exists to require the consolidation
of partnership interests with the investor
if the investor has substantive kick-out
or participating rights. A kick-out right
is the ability of limited partners to dis-
solve (liquidate) the limited partnership
or otherwise remove the general partners
without cause. FASB, 2020, ASC section
958-810-20. These rights are included, in
the proposed regulations, in an exempt
organization’s ability to require, by itself,
the partnership to perform, or prevent the
partnership from performing, any act that
significantly affects the operations of the
partnership.
Further, under GAAP, certain partic-
ipating rights are considered per se sub-
stantive rights and overcome the presump-
tion of control by a general partner. These
include:
• Selecting, terminating, and setting
the compensation of management
responsible for implementing the
limited partnership policies and pro-
cedures; and
• Establishing operating and capital
decisions of the limited partnership,
including budgets, in the ordinary
course of business. ASC paragraph
958-810-25-22.
These substantive participating rights
are similar to an exempt organization’s
ability to appoint or remove, by itself, any
of the partnership’s officers or employees
or a majority of directors; or its officers,
directors, trustees, or employees’ rights to
conduct the partnership’s business at any
time, respectively. As such, these substan-
tive participating rights found in GAAP
are covered by the four factors listed in the
proposed regulations as indicating control
(here renamed significant participation).
Additionally, some of the factors rele-
vant to “significant influence” included in
GAAP are representation on the board, the
ability to participate in the policy-making
process, and the interchange of manageri-
al personnel. FASB, 2020, ASC par. 323-
10-15-6. These factors are also similar to
the factors in the proposed regulations,
which focus on whether an exempt or-
ganization’s officers, directors, trustees,
or employees have rights to participate
on the partnership’s board or participate
in management of the business. More-
over, the ability to participate in the pol-
icy-making process could stem from the
investor’s ability to require the partner-
ship to perform, or prevent the partnership
from performing, any act that significantly
affects the operations of the partnership.
Consequently, the factors for determining
“significant influence” under GAAP are
also covered by the factors listed in the
proposed regulations.
Accordingly, the Treasury Department
and the IRS have concluded that the list of
factors indicating significant participation
(renamed from “control” as used in the
proposed regulations) is consistent with
other standards recommended by com-
menters for making similar determina-
tions. Therefore, the Treasury Department
and the IRS continue to believe that, for
purposes of the administrative exception
for investment activities, the factors listed
in the proposed regulations appropriately
identify partnerships in which the exempt
organization significantly participates
such that it can obtain the information
needed to identify the trades or businesses
conducted by the partnership that are sep-
arate unrelated trades or businesses with
respect to the exempt organization.
Commenters pointed out that the exer-
cise of certain rights common to all part-
ners in a partnership may be construed to
come within the ambit of the list of factors
indicating significant participation. Spe-
cifically, these commenters explained that
an exempt organization with voting rights
equal to those of a large number of other
limited partners might be considered to be
able to prevent the actions of a partnership
if the vote requires a unanimous vote. The

Bulletin No. 2020–52 1705 December 21, 2020
Treasury Department and the IRS agree
with these commenters that the ability to
prevent an action of the partnership due to
a unanimous vote requirement or through
minority consent rights was not intended
to be covered by the proposed regulations.
Accordingly, the final regulations modi-
fy the proposed regulations’ treatment of
the ability of an exempt organization, by
itself, to prevent a partnership from per-
forming an act as a factor that indicates
significant participation. As modified, the
final regulations provide that an exempt
organization significantly participates in a
partnership if—
• The exempt organization, by itself,
may require the partnership to per-
form, or prevent the partnership
from performing (other than through
a unanimous voting requirement or
through minority consent rights), any
act that significantly affects the oper-
ations of the partnership;
• Any of the exempt organization’s of-
ficers, directors, trustees, or employ-
ees have rights to participate in the
management of the partnership at any
time;
• Any of the organization’s officers, di-
rectors, trustees, or employees have
rights to conduct the partnership’s
business at any time; or
• The organization, by itself, has the
power to appoint or remove any of
the partnership’s officers or employ-
ees or a majority of directors.
Some commenters recommended that
instead of, or in addition to, a list of fac-
tors that indicate significant participation,
the regulations should provide a list of
powers that do not indicate significant
participation, such as the ability to remove
or replace a fund manager who manages
partnership investments, to approve the
selection or removal of a general partner,
to appoint a member of an advisory board
of the partnership, to withdraw from a
partnership, or to dissolve or terminate the
partnership.
The Treasury Department and the IRS
expect that, because the participation test
no longer includes a general facts and cir-
cumstances test, the need to define actions
that do not evidence significant participa-
tion is significantly reduced or eliminated.
An exempt organization need not consider
rights or powers other than the four specif-
ically listed in the participation test when
determining whether a partnership interest
is a QPI. Accordingly, the Treasury De-
partment and the IRS decline to adopt the
suggestion to include a list of powers that
do not indicate significant participation.
C. Combining Related Interests
The proposed regulations provided a
rule to address situations in which an ex-
empt organization may control a partner-
ship through the aggregation of interests
(aggregation rule). The aggregation rule
in the proposed regulations applied only
for purposes of the control test and not for
purposes of the de minimis test. The ag-
gregation rule in the proposed regulations
required an exempt organization to con-
sider the interests of supporting organiza-
tions (as defined in section 509(a)(3)) and
controlled entities (as defined in section
512(b)(13)) in the same partnership. The
preamble to the proposed regulations stat-
ed that the Treasury Department and the
IRS would continue to consider whether
the aggregation of the interests of sup-
porting organizations is appropriate in the
circumstance in which the exempt orga-
nization is a supported organization that
has little to no control over its supporting
organizations.
A supporting organization is charac-
terized as a Type I, Type II, or Type III
supporting organization depending on its
relationship with its supported organiza-
tion. The supporting organization may be
(i) operated, supervised, or controlled by
(Type I), (ii) supervised or controlled in
connection with (Type II), or (iii) operated
in connection with (Type III), its support-
ed organization.
For a Type I relationship to exist, a
supported organization must have a sub-
stantial degree of direction over the pol-
icies, programs, and activities of its sup-
porting organization. The relationship of
the supported organization to the Type I
supporting organization is comparable to
that of a parent and subsidiary, where the
subsidiary is under the direction of, and
accountable or responsible to, the parent
organization.
For a Type II relationship to exist, there
must be common supervision or control
by the persons supervising or controlling
both the supporting organization and the
publicly supported organizations to ensure
that the supporting organization will be re-
sponsive to the needs and requirements of
the publicly supported organizations. The
relationship of the supported organization
to the Type II supporting organization is
comparable to that of a brother and sister,
where the supporting organization and
the supported organization are subject to
common control. Polm Family Founda-
tion, Inc. v. United States, 655 F. Supp. 2d
125, 128 (D.C. Cir. 2009) (quoting Cock-
erline Memorial Fund v. Commissioner,
86 T.C. 53, 59 (1986)).
For a Type III relationship to exist, a
supporting organization must, among oth-
er things, maintain significant involvement
in the operations of a supported organiza-
tion or provide support on which the sup-
ported organization is dependent. A Type
III supporting organization can either be
functionally integrated or non-function-
ally integrated. A functionally integrated
Type III supporting organization can sup-
port its supported organization through
engaging in activities substantially all of
which directly further the exempt purpos-
es of the supported organization, being the
parent of the supported organization, or by
supporting certain types of governmental
supported organizations. A functionally
integrated Type III supporting organiza-
tion is a parent of the supported organi-
zation if the supporting organization exer-
cises a substantial degree of direction over
the policies, programs, and activities of
the supported organization and a majori-
ty of the officers, directors, or trustees of
the supported organization is appointed or
elected, directly or indirectly, by the gov-
erning body, members of the governing
body, or officers (acting in their official
capacity) of the supporting organization.
A non-functionally integrated Type III
supporting organization provides financial
support to the supported organization that
meets the distribution requirements found
in §1.509(a)-4(i)(5)(ii).
Two commenters addressed whether
partnership interests of related support-
ing organizations should be considered
in determining the supported organiza-
tion’s percentage interest for purposes of
determining whether the supported orga-
nization meets the control test. One com-
menter recommended that none of the
partnership interests of a supporting orga-

December 21, 2020 1706 Bulletin No. 2020–52
nization should be considered when deter-
mining the supported organization’s per-
centage interest. Another made the same
recommendation but only with respect to
Type III supporting organizations.
An exempt organization with more
than one unrelated trade or business may
be a supporting organization or a sup-
ported organization. If the exempt orga-
nization is a supported organization, the
exempt organization, or individuals that
control the exempt organization, may
control the investment activities (includ-
ing any partnership interests) of its Type
I or Type II supporting organizations due
to the parent/subsidiary relationship re-
quired for a Type I relationship to exist
or the brother/sister relationship required
for a Type II relationship to exist. In any
event, these close relationships increase
the likelihood that the exempt organi-
zation can obtain the information about
its Type I or Type II supporting organi-
zation’s partnership investments and that
the exempt organization significantly
participates in the partnership, even if
indirectly. Accordingly, the final regula-
tions continue to require an exempt orga-
nization that is a supported organization
to include the partnership interests of
its Type I or II supporting organizations
when determining whether its partner-
ship interests meet the percentage inter-
est threshold of the participation test.
On the other hand, in the case of a Type
III supporting organization, the exempt or-
ganization that is a supported organization
is required to have a “significant voice”
in the investment policies of its Type III
supporting organization; nevertheless, de-
pending on the basis for this Type III re-
lationship, this relationship may not per-
mit the supported organization to obtain
detailed information regarding its Type
III supporting organization’s partnership
interests or to significantly participate in
the partnership. In the case of a Type III
supporting organization that is the parent
of its supported organizations, the rela-
tionship between the supported and sup-
porting organizations is similar to that of
a Type I supporting organization, except
the supporting organization controls the
supported organizations instead of the op-
posite. Due to this close relationship, the
final regulations continue to require the
aggregation of partnership interests held
by a Type III supporting organization that
is the parent of its supported organizations
for the purposes of determining whether
the supported organization’s partnership
interest meets the percentage interest
threshold of the participation test. How-
ever, the interests held by nonparent Type
III supporting organizations are not so ag-
gregated.
One commenter recommended adding
additional interests to the list of related
interests that must be considered when
determining percentage interest for pur-
poses of the control test. This commenter
recommended including related persons
within the definition of section 267(b)
(9) and “controlled taxpayers” within the
principles of section 482 to the list of orga-
nizations with which partnership interests
must be aggregated. The same commenter
also recommended adding indirect inter-
ests owned by an exempt organization for
the purposes of determining the organiza-
tion’s percentage interest.
As mentioned previously, the QPI rules
were created to reduce the administrative
burden of obtaining the information need-
ed to determine whether trades or busi-
nesses conducted – directly or indirectly
– by the partnership are separate unrelated
trades or businesses with respect to the ex-
empt organization partner. The addition of
the interests recommended to be included
by this commenter would significantly
increase the administrative burden of the
rule but would not necessarily capture in-
terests that demonstrate an increased abil-
ity for the exempt organization to obtain
the information needed to identify sepa-
rate underlying trades or businesses. Ac-
cordingly, the Treasury Department and
the IRS do not adopt these recommended
additions to the aggregation rule. The final
regulations provide that, when determin-
ing an organization’s percentage interest
for purposes of the participation test (for-
merly the control test), the interests of a
supporting organization (other than a Type
III supporting organization that is not a
parent of its supported organizations) or a
controlled entity in the same partnership
are taken into account.
v. Look-Through Rule
The proposed regulations provided
that, if an exempt organization does not
control a partnership in which the exempt
organization holds a direct interest (direct-
ly-held partnership interest) but the direct-
ly-held partnership interest is not a QPI
because the exempt organization holds
more than 20 percent of the capital inter-
est, any partnership in which the exempt
organization holds an indirect interest
through the directly-held partnership in-
terest (indirectly-held partnership interest)
may be a QPI if the indirectly-held part-
nership interest meets the requirements of
the de minimis test (look-through rule).
Accordingly, the proposed regulations
permitted (but did not require) an exempt
organization to aggregate the UBTI from
de minimis indirectly-held QPIs with its
directly-held QPIs. However, the pro-
posed look-through rule did not apply to
indirectly-held QPIs that do not meet the
requirements of the de minimis test but
might meet the requirements of the con-
trol test (now renamed participation test).
Several commenters recommended ex-
panding the look-through rule to permit
use of the control test for indirectly-held
partnership interests and to permit use of
the look-through rule even if the exempt
organization controls the directly-held
partnership. These commenters stated that,
even if an exempt organization controls a
directly-held partnership, if the lower-tier
partnerships meet the de minimis test or
the control test, an exempt organization
would be prevented from controlling the
lower-tier partnerships. Further, the com-
menters noted that, preventing the use of
such look-through rules would treat or-
ganizations holding the same level and
type of partnership interests differently
depending on whether they owned them
directly or indirectly. Another comment-
er, however, stated that the look-through
rule is unhelpful and that it is extremely
difficult, if not impossible, to determine
ownership percentages in lower-tier part-
nerships, especially multiple tiers down.
Based on these comments, the final reg-
ulations do not prevent application of the
look-through rule if the exempt organiza-
tion significantly participates in the direct-
ly-held partnership. The final regulations
otherwise retain the look-through rule for
indirectly-held partnership interests that
meet the requirements of the de minimis
test with regard to the exempt organiza-
tion. Additionally, the final regulations ex-

Bulletin No. 2020–52 1707 December 21, 2020
pand application of the look-through rule
to indirectly-held partnership interests that
meet the requirements of the participation
test with regards to the immediately high-
er-tier partnership that owns the interest
in that partnership. Thus, for purposes of
the look-through rule, the participation
test will apply tier-by-tier to the exempt
organization’s indirectly-held partnership
interests. The regulations explain how the
second prong of the participation test —
the significant participation prong — ap-
plies within this context and provides an
example of the application of this test.
vi. Grace Period
The preamble to the proposed regula-
tions stated that the Treasury Department
and the IRS recognize that an exempt or-
ganization may not be aware of changes
in its partnership interest until it receives a
Schedule K-1 (Form 1065) from the part-
nership at the end of the partnership’s tax-
able year. In such a circumstance, it may
be appropriate to permit a higher percent-
age interest in taxable years in which the
increase in an exempt organization’s per-
centage interest during a taxable year is the
result of the actions of other partners. The
Treasury Department and the IRS request-
ed comments regarding whether a higher
percentage interest should be permitted in
taxable years in which the increase occurs
as the result of the actions of other partners.
One commenter stated that private in-
vestment funds often admit limited part-
ners in waves (“closings”) over the course
of several months at the beginning of the
fund’s term. Therefore, the comment-
er recommended a phase-in period that
would provide that the percentage inter-
est in a newly formed partnership not be
considered for purposes of the control
test until the end of the partnership’s ini-
tial closing period (as long as that period
is no later than 18 months following the
exempt organization becoming a part-
ner). The final regulations do not adopt
an initial phase-in period because the
aggregation of an exempt organization’s
investment activities, including QPIs, is a
rule of administrative convenience and a
phase-in rule would increase the complex-
ity of the rule. Additionally, as discussed
in part 2.b.iv.A of this Summary of Com-
ments and Explanation of Revisions, the
final regulations adopt, without change,
the rule that an exempt organization’s per-
centage partnership interest is determined
by averaging the exempt organization’s
percentage partnership interest at the be-
ginning of the partnership’s taxable year
with its partnership percentage interest at
the end of that same taxable year. Thus, an
exempt organization’s percentage interest
may vary during a period but still meet the
requirements of the participation test.
The commenter also recommended
that an exempt organization be granted 90
days to reduce its interest in a partnership
to the appropriate amount should its inter-
est exceed that amount at the end of the
year through the actions of other partners.
Two other commenters recommended that
an exempt organization should be permit-
ted to count a partnership interest that ex-
ceeds the percentage interest threshold of
the participation test due to the actions of
other partners as a QPI for a period of time
following that change in interest amount.
One of the commenters recommended
that such interests should be permitted to
be QPIs through the end of the tax year in
which it learns that the percentage inter-
est exceeds the permitted threshold. The
other commenter recommended that such
interest should continue to be QPI through
the later of (1) the end of the tax year im-
mediately following the year an increase
occurs through no fault of the exempt or-
ganization; or (2) 120 days after the date
on which the” between “organization” and
“partnership” so that the list reads “the lat-
er of (1) the end of the tax year immediate-
ly following the year an increase occurs
through no fault of the exempt organi-
zation; or (2) 120 days after the date on
which the partnership issues the Schedule
K-1. partnership issues the Schedule K-1.
The Treasury Department and the IRS
agree that a change in an exempt organi-
zation’s percentage interest in a partnership
that is due entirely to the actions of other
partners may present significant difficul-
ties for the exempt organization. Further,
requiring such an interest to be removed
from the exempt organization’s investment
activities in one year but potentially includ-
ed as a QPI in the next would create further
administrative difficulty. Accordingly, the
final regulations adopt a grace period that
permits a partnership interest to be treated
as meeting the requirements of the de mini-
mis test or the participation test, respective-
ly, in the exempt organization’s prior tax-
able year if certain requirements are met.
The final regulations provide that a
partnership interest that fails to meet the
requirements of either the de minimis test
or the participation test because of an in-
crease in percentage interest in the organi-
zation’s current taxable year may be treat-
ed as meeting the requirements of the test
it met in the prior taxable year for the tax-
able year of the change if: (1) the partner-
ship interest met the requirements of the
de minimis test or participation test, re-
spectively, in the organization’s prior tax-
able year without application of the grace
period; (2) the increase in percentage in-
terest is due to the actions of one or more
partners other than the exempt organiza-
tion; and (3) in the case of a partnership
interest that met the requirements of the
participation test in the prior taxable year,
the interest of the partner or partners that
caused the increase in percentage interest
described in (2) was not combined for the
prior taxable year and is not combined for
the taxable year of the change with the
exempt organization’s partnership interest
under the rules discussed in part 2.b.iv.C
of this Summary of Comments and Ex-
planation of Revisions. An exempt orga-
nization can treat such interest as a QPI in
the taxable year that such change occurs,
but the exempt organization would need to
reduce its percentage interest prior to the
end of the following taxable year to meet
the requirements of either the de minimis
test or the participation test in that suc-
ceeding taxable year for the partnership
interest to remain a QPI.
vii. Reliance on Schedule K-1 (Form
1065)
The proposed regulations provided
that, when determining an exempt orga-
nization’s percentage interest for purpos-
es of the de minimis test or the control
test (now renamed the participation test),
the exempt organization may rely on the
Schedule K-1 (Form 1065) it receives
from the partnership if the form lists the
exempt organization’s percentage profits
interest or its percentage capital interest,
or both, at the beginning and end of the
year. However, the proposed regulations
clarified that the organization may not rely

December 21, 2020 1708 Bulletin No. 2020–52
on the form to the extent that any infor-
mation about the organization’s percent-
age interest is not specifically provided.
For example, if the Schedule K-1 (Form
1065) an exempt organization receives
from a partnership lists the organization’s
profits interest as “variable” but lists its
percentage capital interest at the begin-
ning and end of the year, the organization
may rely on the form only with respect to
its percentage capital interest. Generally,
this information can be found in Part II,
line J (partner’s share of profit, loss, and
capital), of Schedule K-1 (Form 1065).
No comments were received with respect
to reliance on the Schedule K-1 (Form
1065). Accordingly, the final regulations
adopt these proposed regulations without
change, other than minor edits for clarity.
Nonetheless, commenters made rec-
ommendations with respect to other as-
pects of the Schedule K-1 (Form 1065)
and other partnership or S corporation
forms. A few commenters recommended
that updates be made to the regulations
under section 6031 or on the forms and in-
structions of the Form 1065, “U.S. Return
of Partnership Income,” or Form 1120-S,
“U.S. Income Tax Return for an S Corpo-
ration,” including the respective Schedules
K-1 provided to partners or S corporation
shareholders. These commenters request-
ed updates that would require partnerships
to provide information to exempt organi-
zation partners (1) on the NAICS 2-digit
codes of the underlying activity, (2) sep-
arately reporting debt-financed income,
and (3) requiring a specific capital inter-
est amount rather than stating “various.”
Alternatively, another commenter specif-
ically recommended that partnerships not
be required to provide the NAICS 2-digit
code of the underlying activity.
Section 6031(d) provides that partner-
ships must provide exempt organization
partners with such information as is nec-
essary to enable each partner to compute
its distributive share of partnership in-
come or loss from such trade or business
in accordance with section 512(a)(1). Fol-
lowing the passage of section 512(a)(6),
exempt organization partners will need
additional information to compute their
UBTI from partnerships under section
512(a)(1). The Treasury Department and
the IRS have concluded that the require-
ment found in section 6031(d) is sufficient
for requiring partnerships to provide this
information. Accordingly, the Treasury
Department and the IRS do not adopt any
regulatory changes under section 6031 at
this time. The IRS may amend the forms
and instructions in the future, however.
viii. Additional Recommended Changes
A. Capital Account Threshold
One commenter recommended that a
capital accounts threshold be added to the
control test. The commenter recommended
that the threshold be based on the average
capital account amount throughout the
year and that the threshold be $500,000. A
capital account threshold does not further
the purposes of the QPI tests. A capital ac-
counts threshold added to the control test
provided by the proposed regulations (now
renamed the participation test) is not an ef-
fective proxy for an exempt organization’s
ability to obtain information from a partner-
ship because the size of a capital account
has no correlation to a partner’s ability to
participate in a partnership. Further, capital
accounts can be calculated under various
standards, which would result in an incon-
sistent application of such a rule. Addition-
ally, if the commenter’s level of $500,000
capital accounts were accepted, IRS data
for the 2018 taxable year indicates that it
would encompass over 75 percent of all
partnerships held by exempt organizations.
Such a threshold therefore likely would
not serve as an additional limitation on the
ability to use the participation test. Accord-
ingly, the Treasury Department and the IRS
do not adopt a capital accounts threshold as
part of the participation test.
B. ERISA-Covered Trusts
One commenter recommended that QPI
treatment be extended to all partnership in-
terests held by trusts that are subject to the
Employee Retirement Income Security Act
of 1974, Public Law 93-406, 88 Stat. 829
(1974) (ERISA). The commenter stated
that because the fiduciary duty and prohib-
ited transaction rules under ERISA would
make it difficult to operate a trade or busi-
ness through the trust itself, or through an
entity that is treated under ERISA as hold-
ing “plan assets” subject to ERISA, the
primary source of UBTI for these plans is
investment vehicles that are taxed as part-
nerships. In addition, the fiduciary and pro-
hibited transaction rules (and related penal-
ties) create an incentive for the investment
vehicles to limit the participation of ERISA
plans. If 25 percent or more of the value
of any class of equity interests in a private
investment fund is held by benefit plan
investors, the plan assets of a benefit plan
investor will generally include not only the
plan’s investment, but also an undivided
interest in each of the underlying assets of
the investment fund. Anyone who exercis-
es authority or control with respect to the
disposition of plan assets or who provides
investment advice with respect to those
assets will be a fiduciary of the investing
plan. See 29 CFR 2510.3-101. Many in-
vestment funds seek to avoid this status by
limiting ERISA plan investment or quali-
fying for an exemption. The commenter
posited that under the proposed regula-
tions, significant administration would be
required to separate investments between
QPIs and other partnerships that may be
subject to the look-through rule or NAICS
codes, and in which the ultimate, bottom-ti-
er investments are almost certainly under
the 2 percent ownership threshold for the
de minimis test.
To the extent that ERISA-covered
trusts’ interests in partnerships meet ei-
ther the de minimis or the participation
tests, then those interests will be treated
as investment activities. To the extent that
the partnership interests of ERISA-cov-
ered trusts do not meet the de minimis or
the participation test, nothing about ER-
ISA-covered trusts suggests that they are
in greater need of the administrative con-
venience provided by such tests. Conse-
quently, the Treasury Department and the
IRS do not adopt this recommendation.
C. Anti-abuse Rule
One commenter noted that an exempt
organization with a directly-held partner-
ship interest in a partnership that is not a
QPI (non-QPI partnership) could also have
one or more indirectly-held partnership
interests in that same partnership through
interests that are QPIs (QPI partnerships),
which would effectively permit the exempt
organization to significantly participate in
a partnership but structure its partnership
interest such that most of the distributable

Bulletin No. 2020–52 1709 December 21, 2020
share of the partnership’s income, losses,
etc. would be aggregated with its other in-
vestment activities. The commenter recom-
mended requiring an exempt organization
receiving income through a QPI partnership
that derives income from a non-QPI inter-
est in the same partnership to segregate that
income from the “investment activities”
trade or business and report it separately for
each underlying trade or business.
Under the situation described by the
commenter, an exempt organization’s in-
directly-held partnership interest (through
a QPI partnership) in the non-QPI partner-
ship would necessarily be limited by the
fact that the exempt organization may own
no more than 20 percent of the QPI part-
nership and the exempt organization can-
not control the QPI partnership; therefore
it would be difficult, and perhaps unlikely,
for an exempt organization to actively ar-
range such a scenario for the purposes of
avoiding the application of section 512(a)
(6). Further, the application of such rule
would reduce the administrative conve-
nience that these rules seek to achieve. Ac-
cordingly, the Treasury Department and the
IRS do not adopt the recommendation.
The same commenter, noting that such
a rule would reduce the administrative
burden of the QPI rules, recommended the
creation of an anti-abuse rule in the alter-
native. The Treasury Department and the
IRS recognize that some situations, sim-
ilar to the situation posited by the com-
menter or otherwise, may exist whereby
an exempt organization may arrange part-
nership structures to avoid application of
section 512(a)(6). It is always the case
that, upon examination, the IRS may de-
termine whether partnership interests are
QPIs under the application of the law to
the facts and characterize such interests
accordingly. Therefore, the Treasury De-
partment and the IRS do not consider a
specific anti-abuse rule necessary for pur-
poses of the QPI rules and the final regu-
lations do not incorporate this comment.
c. Transition Rule
Both Notice 2018-67 and the proposed
regulations permitted an exempt organiza-
tion to treat each partnership interest ac-
quired prior to August 21, 2018, that met
the requirements of neither the de minimis
test nor the control test, as one trade or
business for purposes of section 512(a)(6),
regardless of whether there was more than
one trade or business directly or indirectly
conducted by the partnership or lower-tier
partnerships (transition rule). This transi-
tion rule was proposed to apply until the
first day of the organization’s first taxable
year beginning after the date the proposed
regulations are published as final regula-
tions (transition period). The proposed
regulations clarified that a partnership in-
terest acquired prior to August 21, 2018,
will continue to meet the requirement of
the transition rule even if the exempt orga-
nization’s percentage interest changes on
or after August 21, 2018. Further, the pro-
posed regulations provided that an exempt
organization may apply either the transi-
tion rule or the look-through rule, but not
both, to a partnership interest that meets
the requirements for both rules.
Three commenters recommended that
the transition rule become a grandfather
rule such that any partnership interest
meeting the requirements of the transi-
tion rule would be a single unrelated trade
or business in perpetuity for purposes of
section 512(a)(6). One commenter stated
that the rationale for the transition rule
outlined in Notice 2018-67 that “[a] previ-
ously acquired partnership interest may be
difficult to modify to the de minimis test
or control test and the exempt organiza-
tion may have to incur significant trans-
action costs to do so” will continue to be
an accurate reflection of the difficulty of
transitioning such previously owned part-
nership interests even after the final regu-
lations are published.
Changing the transition rule to a grand-
father rule is contrary to the congressional
intent of section 512(a)(6) to prevent loss-
es of one unrelated trade or business from
offsetting gains of another unrelated trade
or business. Exempt organizations have
been on notice since the announcement of
the transition rule in Notice 2018-67 that
the transition rule would sunset after pub-
lication of final regulations and have had
over two years since the release of Notice
2018-67 to anticipate the requirement to
account for the income from such part-
nership interests differently. The Treasury
Department and the IRS disagree that the
rationale for the transition rule justifies
perpetually excluding previously held
partnership interests from the application
of section 512(a)(6) to the unrelated trade
or business activities of the partnership.
Accordingly, the Treasury Department
and the IRS do not adopt the transition
rule as a grandfather rule.
d. Unrelated Debt-Financed Income
The proposed regulations included un-
related debt-financed property or proper-
ties described in sections 512(b)(4) and
514 in the list of “investment activities”
treated as a separate unrelated trade or
business for purposes of section 512(a)
(6). One commenter recommended that
the reference to the definition of debt-fi-
nanced property “within the meaning of
section 514” exclude section 514(b)(1)(B)
because that paragraph removes from the
definition of debt-financed property any
property that is used in the production of
income from an unrelated trade or busi-
ness and proposed §1.512(a)-6(c)(1)(iii)
includes income from debt-financed prop-
erty in the “investment activities trade or
business.” The commenter further recom-
mended that “debt-financed property” ex-
clude debt-financed property used in the
production of income from an unrelated
trade or business that is reported under a
NAICS two-digit code by the exempt or-
ganization. Two other commenters recom-
mended allowing exempt organizations
to opt out of inclusion of debt-financed
property as part of an exempt organiza-
tion’s investment activities and to instead
include that income as part of a separate
unrelated trade or business identified by
the relevant NAICS 2-digit code.
Section 512(b)(4) includes as UBTI
any unrelated debt-financed income as
defined in section 514. As part of the defi-
nition of debt-financed property, section
514(b)(1)(B) provides that “any property
[is not debt-financed property] to the ex-
tent that the income from such property is
taken into account in computing the gross
income of any unrelated trade or business”
without application of section 512(b)(4).
For example, if an exempt organization
runs a hotel, but it has taken out a loan to
acquire the hotel, then the income from
the hotel is UBTI regardless of section
512(b)(4) and the hotel is not “debt-fi-
nanced property.” Sections 1.512(b)-1(c)
(5) and 1.514(b)-1(b)(2)(ii). Thus, the in-
come from the hotel is not “debt-financed

December 21, 2020 1710 Bulletin No. 2020–52
income.” As a result, any income included
in UBTI as “debt-financed income” nec-
essarily derives from an activity that has
otherwise been excluded from the defi-
nition of UBTI in section 512(a)(1), for
reasons other than the exempt nature of
the activity. Section 514 taxes otherwise
nontaxable income, derived from lever-
aged income-producing assets, that are
not related to an organization’s exempt
purposes. Debt-financed income is, there-
fore, of a different nature than income that
is otherwise described in section 512(a)
(1) and is more appropriately classified
as investment rather than being tied to an
underlying trade or business or NAICS
2-digit code.
Furthermore, allowing an exempt orga-
nization to elect to treat the debt-financed
income as part of a NAICS 2-digit code,
instead of including such income as part
of an organization’s investment activi-
ties, would not reduce the burden on the
exempt organization or the burden on the
IRS. Such income would still need to be
identified as debt-financed income and an
additional determination of the underly-
ing activity would also need to be made
to determine a NAICS 2-digit code. Fur-
thermore, the inconsistent treatment of
debt-financed income by different exempt
organizations would increase the adminis-
trative burden for the IRS.
Accordingly, the Treasury Department
and the IRS adopt the proposed regulation
regarding the treatment of debt-financed
income without change.
3. S Corporation Interest Treated as
an Interest in an Unrelated Trade or
Business
For purposes of the unrelated business
income tax, section 512(e) provides spe-
cial rules applicable to S corporations.
Section 512(e)(1)(A) provides that if an
exempt organization permitted to be an
S corporation shareholder (as described
in section 1361(c)(2)(A)(vi) or (6)) holds
stock in an S corporation, such interest
will be treated as an interest in an unrelat-
ed trade or business. Thus, notwithstand-
ing any other provision in sections 511
through 514, section 512(e)(1)(B) requires
an exempt organization permitted to hold
S corporation stock to take the following
amounts into account in computing the
UBTI of such exempt organization: (i) all
items of income, loss, or deduction taken
into account under section 1366(a) (re-
garding the determination of an S corpo-
ration shareholder’s tax liability); and (ii)
any gain or loss on the disposition of the
stock in the S corporation.
a. Qualifying S Corporation Interests
As discussed in part 2.a.i of this Sum-
mary of Comments and Explanation of
Revisions, the proposed and final regula-
tions include qualifying S corporation in-
terests (QSIs) in an exempt organization’s
investment activities. The proposed reg-
ulations explained that an S corporation
interest is a QSI if the exempt organiza-
tion’s ownership interest (by percentage
of stock ownership) in the S corporation
meets the requirements for a QPI – that is,
the requirements of either the de minimis
test or the control test (now renamed the
participation test).
The final regulations provide greater
clarity regarding how the QPI rules ap-
ply to S corporation interests. First, the
final regulations provide a number of term
substitutions. Specifically, the final reg-
ulations provide that, when applying the
QPI rules to an S corporation interest, “S
corporation” is substituted for “partner-
ship” and “shareholder” or “shareholders”
is substituted for “partner” or “partners.”
When applying the de minimis test, “no
more than 2 percent of stock ownership”
is substituted for “no more than 2 percent
of the profits interest and no more than 2
percent of the capital interest” and, when
applying the participation test, “no more
than 20 percent of stock ownership” is
substituted for “no more than 20 percent
of the capital interest.” When applying
the reliance rule, “Schedule K-1 (Form
1120-S)” is substituted for “Schedule K-1
(Form 1065).”
Second, the final regulations clarify
that the rules regarding the determination
of an exempt organization’s capital in-
terest and profits interest in a partnership
do not apply for purposes of determining
whether an S corporation interest is a QSI.
Rather, the average percentage stock own-
ership is determinative.
Third, because of differences in the
Schedule K-1 (Form 1065) and the Sched-
ule K-1 (Form 1120-S), the final regu-
lations clarify that an exempt organiza-
tion can rely on the Schedule K-1 (Form
1120-S) received from the S corporation
if the form lists information sufficient to
determine the exempt organization’s per-
centage of stock ownership for the year.
A Schedule K-1 (Form 1120-S) that re-
ports “zero” as the organization’s number
of shares of stock in either the beginning
or end of the S corporation’s taxable year
does not list information sufficient to de-
termine the organization’s percentage of
stock ownership for the year. The Trea-
sury Department and the IRS are consid-
ering whether revision of Schedule K-1
(Form 1120-S) is necessary to provide the
information needed to determine whether
an S corporation interest is a QSI.
Finally, the final regulations also clarify
that a grace period may apply for changes
in an exempt organization’s percentage of
stock ownership in an S corporation.
b. Nonqualifying S Corporation Interests
With the exception of QSIs, the pro-
posed regulations applied the language of
section 512(e)(1)(A) to provide that if an
exempt organization owns stock in an S
corporation, such S corporation interest
will be treated as an interest in a separate
unrelated trade or business for purposes
of the proposed regulations. Similarly, the
proposed regulations clarified that if an
exempt organization owns two S corpora-
tion interests, neither of which is a QSI,
the exempt organization will report two
separate unrelated trades or businesses,
one for each S corporation interest. The
proposed regulations also provided that
the UBTI from an S corporation interest
is the amount described in section 512(e)
(1)(B), which includes both the items of
income, loss, or deduction taken into ac-
count under section 1366(a) and the gain
or loss on the disposition of S corporation
stock.
Two commenters recommended that
an exempt organization with an S corpo-
ration interest should be permitted to look
through that S corporation to the under-
lying trades or businesses and to classi-
fy those S corporation trades or business
using NAICS 2-digit codes. One of these
commenters suggested that this should be
the general rule for all non-qualifying S
corporation interests. The other comment-

Bulletin No. 2020–52 1711 December 21, 2020
er provided that such a rule should be an
alternative to the rule requiring each S cor-
poration interest to be treated as an interest
in a separate unrelated trade or business.
One of these commenters further recom-
mended that income that would ordinarily
be excluded under section 512(b)(1), (2),
(3) or (5), but that is taxable because it is
earned through an S corporation, should
be included as part of the exempt organi-
zation’s investment activities.
The final regulations adopt the pro-
posed regulations regarding non-qual-
ifying S corporation interests without
change. As discussed in the preamble to
the proposed regulations, this treatment
is consistent with the language of section
512(e)(1)(A), which treats an interest in
an S corporation as an unrelated trade or
business. Although the Treasury Depart-
ment and the IRS considered whether
to permit exempt organizations to look
through the S-corporation and identify
the separate unrelated trades or businesses
conducted by the S-corporation using NA-
ICS 2-digit codes as a matter of adminis-
trative convenience, the commenters to
Notice 2018-67 noted that obtaining that
information from the S corporation would
be difficult. Accordingly, the Treasury De-
partment and the IRS decline to adopt a
rule that modifies the straightforward ap-
plication of the language of section 512(e)
(1)(A) and is not otherwise justified as a
matter of administrative convenience to
taxpayers or the IRS.
4. Social Clubs, Voluntary Employees’
Beneficiary Associations, and
Supplemental Unemployment Benefits
Trusts
As discussed in the preamble to the
proposed regulations, section 512(a)(3)
provides a special definition of UBTI for
social clubs, VEBAs, and SUBs.
5
Unlike
an exempt organization subject to sec-
tion 512(a)(1) which is taxed only on in-
come derived from an unrelated trade or
business, a social club, VEBA, or SUB
is taxed on “gross income (excluding ex-
empt function income),” which includes
amounts excluded from the calculation
of UBTI under section 512(a)(1), such as
interest, annuities, dividends, royalties,
rents, and capital gains. The preamble to
the proposed regulations provided that,
despite the differences between section
512(a)(1) and (3), a social club, VEBA,
or SUB would determine whether it has
more than one unrelated trade or business
in the same manner as an exempt organi-
zation subject to section 512(a)(1). The
final regulations adopt the same approach,
as discussed in parts 4.a and b of this Sum-
mary of Comments and Explanation of
Revisions.
a. Investment Activities
As discussed in part 2 of this Summa-
ry of Comments and Explanation of Re-
visions, the proposed regulations treated
certain investment activities (that is, QPIs,
QSIs, and debt-financed property or prop-
erties) as a separate unrelated trade or
business for purposes of section 512(a)
(6). Thus, because a social club, VEBA, or
SUB determines whether it has more than
one unrelated trade or business in the same
manner as an exempt organization subject
to section 512(a)(1), such an exempt orga-
nization would include the investment ac-
tivities specifically listed in the proposed
regulations as a separate unrelated trade
or business for purposes of section 512(a)
(6). However, because UBTI is defined
differently for social clubs, VEBAs, and
SUBs, the proposed regulations clarified
that, in addition to other investment activ-
ities treated as a separate unrelated trade
or business for purposes of section 512(a)
(6), gross income from the investment ac-
tivities of a social club, VEBA, or SUB
also includes any amount that (i) would be
excluded from the calculation of UBTI un-
der section 512(b)(1), (2), (3), or (5) (that
is, interest, annuities, dividends, royalties,
rents, and capital gains) if the organization
were subject to section 512(a)(1); (ii) is at-
tributable to income set aside (and not in
excess of the set aside limit described in
section 512(a)(3)(E)), but not used, for a
purpose described in section 512(a)(3)(B)
(i) or (ii); or (iii) is in excess of the set
aside limit described in section 512(a)(3)
(E). The final regulations adopt the pro-
posed investment activity rules specific to
social clubs, VEBAs, and SUBs, without
change as discussed in part 4.a.i and ii of
this Summary of Comments and Explana-
tion of Revisions.
In the preamble to the proposed regu-
lations, the Treasury Department and the
IRS requested comments on any unin-
tended consequences, in areas other than
UBIT, resulting from the treatment of in-
vestment activity of VEBAs and SUBs as
an unrelated trade or business for purpos-
es of section 512(a)(6). One commenter
expressed a concern that these proposed
rules could encourage VEBAs and SUBs
to create more complicated investment
structures (for example, increased use of
blocker corporations) or that these rules
could encourage VEBAs and SUBs to
consider more conservative investment
strategies than otherwise merited based on
their asset values.
The commenter did not include any fur-
ther elaboration on these general nontax
concerns regarding the investment behav-
ior of VEBAs and SUBs. Furthermore, the
commenter did not offer a specific recom-
mendation to address these general con-
cerns other than its overall recommenda-
tion to not treat investment activities as an
unrelated trade or business for purposes of
section 512(a)(6). As discussed earlier in
part 2 of this Summary of Comments and
Explanation of Revisions, the Treasury
Department and the IRS have concluded
that the structure and purposes of sections
511 through 514 treat an exempt organi-
zation’s investment activities as unrelated
trade or business activities for purposes of
section 512(a)(6). Accordingly, the final
regulations adopt these provisions of the
proposed regulations without change.
i. Amounts Described in Section 512(b)
(1), (2), (3), and (5)
Social clubs, VEBAs, and SUBs gen-
erally must include interest, dividends,
royalties, rents, and capital gains in UBTI
under section 512(a)(3)(A) because the
modifications in section 512(b)(1), (2),
(3), and (5) are not available under sec-
tion 512(a)(3). Nonetheless, such amounts
may be excluded from UBTI if set aside
(and not in excess of the set aside limit
5
See §1.512(a)-5, 84 FR 67370 (Dec. 10, 2019), for a discussion of the UBTI rules as they specifically apply to VEBAs and SUBs.

December 21, 2020 1712 Bulletin No. 2020–52
described in section 512(a)(3)(E)) for a
purpose described in section 512(a)(3)(B)
(i) or (ii).
6
Interest, dividends, royalties,
rents, and capital gains generally are con-
sidered income from investment activities
and, as stated in part 4 of this Summary of
Comments and Explanation of Revisions,
treated as one unrelated trade or business
for purposes of section 512(a)(6). Accord-
ingly, the proposed regulations provided
that, for purposes of section 512(a)(6),
UBTI from the investment activities of a
social club, VEBA, or SUB includes any
amount that would be excluded from the
calculation of UBTI under section 512(b)
(1), (2), (3), or (5) if the social club,
VEBA, or SUB were subject to section
512(a)(1).
Commenters generally were in favor of
this approach. Accordingly, the final regu-
lations adopt this portion of the proposed
regulations without change.
ii. Amounts Set Aside but Used for
Another Purpose and Amounts in Excess
of Account Limits
Section 512(a)(3)(B) provides that,
if an amount which is attributable to in-
come set aside for a purpose described in
section 512(a)(3)(B)(i) or (ii) is used for
a purpose other than one described there-
in, then such amount shall be included in
UBTI under section 512(a)(3)(A). Fur-
thermore, with respect to a VEBA or SUB,
the amount set aside may not exceed the
set aside limit under section 512(a)(3)(E)
and any amount that exceeds this limit is
UBTI under section 512(a)(3)(A).
As discussed in part 4.a.i of this Sum-
mary of Comments and Explanation of
Revisions, the amounts that may be set
aside under section 512(a)(3)(B)(i) or (ii)
are income from the social club, VEBA,
or SUB’s investment activities. Therefore,
the proposed regulations also provided
that UBTI from the investment activities
of a social club, VEBA, or SUB includes
any amount that is attributable to income
set aside (and not in excess of the set aside
limit described in section 512(a)(3)(E)),
but not used, for a purpose described in
section 512(a)(3)(B)(i) or (ii) and also
includes any amount in excess of the set
aside limit described in section 512(a)(3)
(E).
No comments were received on this
section of the proposed regulations and it
is therefore adopted as final.
b. Social Club Activities
i. Limitation on Investment Activities
Section 501(c)(7) requires that “sub-
stantially all of the activities” of an orga-
nization described therein be “for plea-
sure, recreation, and other nonprofitable
purposes.” Accordingly, a social club has
specific limits on the amount of nonex-
empt function income that may be earned
without endangering its tax-exempt status.
While the Code does not provide more de-
tail, intended limits are described in leg-
islative history. See S. Rep. No. 94-1318
(1976), at 4-5. Additionally, Congress did
not intend social clubs to receive, with-
in these limits, non-traditional unrelated
business income. Id. at 4 (“It is not in-
tended that these organizations should be
permitted to receive...income from the
active conduct of businesses not tradition-
ally carried on by these organizations.”).
Accordingly, consistent with Notice 2018-
67, the proposed regulations provided that
the QPI rule and the transition rule do not
apply to social clubs because social clubs
should not be invested in partnerships that
would generally be conducting non-tradi-
tional, unrelated trades or businesses that
generate more than a de minimis amount
of UBTI. In this regard, a partnership in-
terest meeting the requirements of the de
minimis rule in these proposed regulations
is not the same as a partnership interest
generating only de minimis amounts of
UBTI from non-traditional, unrelated
trades or businesses.
One commenter recommended that
social clubs should have access to the de
minimis test for investments in partner-
ships. The commenter states that partner-
ship holdings may include exclusively
items that are described in section 512(b)
(1), (2), (3), and (5) and that social clubs
would have equal difficulty determining
the underlying trade or business as other
exempt organization investors.
The Treasury Department and the IRS
do not adopt the commenter’s recommen-
dation for the following reasons. To the
extent that a social club is invested in a
partnership all of the holdings of which
would be excluded under section 512(b)
(1), (2), (3), and (5) if the social club were
subject to section 512(a)(1), then all such
income is part of the social club’s invest-
ment activities trade or business without
application of the de minimis test. To the
extent that a social club holds, directly or
indirectly, an interest in a partnership that
is performing a non-traditional, unrelat-
ed trade or business, then under section
512(c) the social club itself is engaged in
a non-traditional, unrelated trade or busi-
ness. Because a social club’s nontradi-
tional activities could jeopardize a social
club’s exemption, it is incumbent upon the
social club to know the type and amount
of such activities without regard to section
512(a)(6). Thus, the Treasury Department
and the IRS do not consider the adminis-
trative convenience rationale supporting
the QPI rule as relevant for social clubs
and do not adopt the commenter’s recom-
mendation.
ii. Nonmember Activities
Under the proposed regulations, a
social club with nonmember income is
subject to the same rules for identifying
its unrelated trades or businesses as an
organization subject to the rules of sec-
tion 512(a)(1). Further, as discussed in the
preamble to the proposed regulations, a
social club cannot use the NAICS 2-dig-
it code generally describing golf courses
and country clubs (71) to describe all its
nonmember income because the NAICS
code used must describe its separate unre-
lated trade or business and not the purpose
for which it is exempt. While this code
may describe some of a social club’s non-
member income, such as greens fees, oth-
er NAICS codes may be more appropri-
ate to describe other nonmember income,
such as merchandise sales (45) and food
and beverage services (72). Accordingly,
6
As explained in the introduction to part 4 of this Summary of Comments and Explanation of Revisions, treating the investment activities of a social club, VEBA, or SUB as an unrelated
trade or business for purposes of section 512(a)(6) does not affect the amounts that may be set aside under section 512(a)(3)(B)(i) or (ii).

Bulletin No. 2020–52 1713 December 21, 2020
a social club must identify its separate un-
related trades or businesses in accordance
with the rule described in part 1 of this
Summary of Comments and Explanation
of Revisions, like an exempt organization
subject to section 512(a)(1). See part 1.c
of this Summary of Comments and Ex-
planation of Revisions for a discussion of
how to identify the appropriate NAICS
2-digit code.
Commenters again requested that a
social club be permitted to treat all non-
member activities as one unrelated trade
or business for purposes of section 512(a)
(6). The commenters stated that separat-
ing a social club’s nonmember activities
into more than one unrelated trade or
business would result in substantial ad-
ministrative burden. The commenters de-
scribed the variety of activities in which
social clubs engage, including food and
beverage sales in club dining facilities
and on club grounds (such as at pools or
on golf courses and tennis courts); retail
sales; greens fees; and space rental fees,
whether or not they include substantial
services. One commenter also stated that,
because the treatment of UBTI for social
clubs under section 512(a)(3) is different
from that of other exempt organizations’
treatment of UBTI under section 512(a)
(1), using different rules to identify the
separate unrelated trades or businesses
for social clubs was reasonable. Finally, a
commenter provided that, because social
clubs are already capped at 15 percent of
their revenue from nonmember activi-
ties, aggregating all nonmember income
under that cap has a de minimis effect on
taxable income while greatly decreasing
the administrative burden of such orga-
nizations.
Section 512(a)(3) taxes all income, oth-
er than exempt function income, of the ex-
empt organizations subject to that section,
while section 512(a)(1) taxes only the
income from the unrelated trades or busi-
nesses of all other exempt organizations.
As a result, section 512(a)(3) captures a
broader group of sources of income than
under section 512(a)(1). Further, Con-
gress has previously expressed a desire to
limit the nonmember income of a social
club to 15 percent of all income and to
constrain further the non-traditional trades
or businesses of a social club. See S. Rep.
No. 94-1318, at 4. Social clubs would be
in a more favorable tax position if social
clubs were permitted to aggregate in-
come that organizations subject to section
512(a)(1) would not be able to aggregate
if they performed the same activities. The
Treasury Department and the IRS are not
persuaded that social clubs should have
a more favorable position under section
512(a)(6) than other exempt organiza-
tions. Additionally, section 512(a)(6) does
not specifically except social clubs, nor
does it except a social club’s nonmember
income. Accordingly, the Treasury De-
partment and the IRS do not adopt the rec-
ommendation to treat all of a social club’s
nonmember income as a single unrelated
trade or business.
One commenter recommended that so-
cial clubs be permitted to use the Uniform
System of Financial Reporting for Clubs
that is produced jointly by the Hospitality
Financial and Technology Professionals
and the Club Managers Association of
America. This commenter stated that this
system would better represent separate
unrelated trades or businesses historically
identified by social clubs.
The accounting system recommended
by the commenter is a proprietary system
that is not available for public use. Adopt-
ing this system as the required method of
identifying a separate unrelated trade or
business for social clubs would require
all such clubs to purchase the materials
of a third-party provider. Accordingly, the
Treasury Department and the IRS do not
adopt the Uniform System of Financial
Reporting for Clubs as a method of iden-
tifying a separate unrelated trade or busi-
ness for social clubs.
The final regulations adopt the pro-
posed regulations’ treatment of a social
club’s nonmember activities without
change.
iii. Nonrecurring Events
The Treasury Department and the IRS
recognize that UBTI within the meaning
of section 512(a)(3) includes gross in-
come without regard to a specific determi-
nation regarding the associated activities’
qualification as an unrelated trade or busi-
ness (within the meaning of section 513)
because UBTI under section 512(a)(3)
includes “all gross income (excluding ex-
empt function income).”
These final regulations generally re-
quire an exempt organization to identify
its separate unrelated trades or businesses
using the NAICS 2-digit code that most
accurately describes each trade or busi-
ness. Whether an infrequent or possibly
nonrecurring event constitutes a separate
unrelated trade or business or wheth-
er such event is part of another trade or
business (including, in some cases, part
of the social club’s investment activities)
depends on the facts and circumstances
of each social club and the event at is-
sue, including the scope of activities as
part of the event. While such determina-
tion is not necessary for including such
income in UBTI under section 512(a)
(3), identification of separate unrelated
trades or businesses is necessary for ap-
plying section 512(a)(6). In the preamble
to the proposed regulations, the Treasury
Department and the IRS requested com-
ments regarding the particular facts and
circumstances that should be considered
by a social club when determining wheth-
er a non-recurring event should be treated
as a separate unrelated trade or business,
part of a larger trade or business, or as part
of a social club’s investment activities for
purposes of section 512(a)(6).
Multiple commenters provided several
facts and circumstances that might assist a
social club in identifying the separate un-
related trade or business associated with
the non-recurring activity. However, the
Treasury Department and the IRS have
determined that, due to the limited nature
of these activities and the great variety of
such circumstances, the inclusion of such
a list of factors within the final regulations
is not warranted at this time. Accordingly,
the Treasury Department and the IRS do
not adopt any additional factors for social
clubs to consider when identifying the
separate trade or business of the non-re-
curring activity. Social clubs can rely on
the general rules in the final regulations
for identifying a separate trade or business
to identify the separate trade or business
associated with non-recurring events.
iv. Activities Without a Profit Motive
As discussed in part 1 of this Summa-
ry of Comments and Explanation of Re-
visions, §1.513-1(b) provides that “for
purposes of section 513 the term trade

December 21, 2020 1714 Bulletin No. 2020–52
or business has the same meaning it has
in section 162, and generally includes
any activity carried on for the production
of income.” The requirement for a trade
or business to have an intent to profit is
further supported by case law. See, e.g.,
Commissioner v. Groetzinger, 480 U.S.
23, 35 (1987) (stating that, “to be engaged
in a trade or business, ... the taxpayer’s
primary purpose for engaging in the ac-
tivity must be for income or profit”). This
profit motive requirement was applied to
the unrelated trades or businesses of a so-
cial club in Portland Golf Club v. Com-
missioner, 497 U.S. 154 (1990) (finding
that, under section 512(a)(3) prior to the
enactment of section 512(a)(6), the golf
club could use nonmember sales losses
for food and drink to offset investment
income only if the sales were motivated
by an intent to profit, and in demonstrating
the requisite profit motive, the golf club
had to employ the same method of allocat-
ing fixed expenses as it used in calculating
its actual loss).
One commenter on the proposed reg-
ulations requested that the Treasury De-
partment and the IRS clarify that non-
member activities conducted without
intent to profit are not unrelated trades
or businesses. In the preamble to the
proposed regulations, the Treasury De-
partment and the IRS declined to address
this comment because it is adequately ad-
dressed by existing precedent and cited
to Portland Golf.
In response to the preamble of the pro-
posed regulations, one commenter stated
that a specific trade or business activity
must be identified prior to determining
whether it creates losses on a consistent
basis. Given that the trade or business
activity must first be identified, and that
the proposed regulations prescribed the
use of NAICS 2-digit codes for identify-
ing a separate unrelated trade or business,
the commenter noted that a social club
must first identify the appropriate NAICS
2-digit code for a trade or business activity
and determine whether the trade or busi-
ness activity represented by that NAICS
2-digit code generates losses on a consis-
tent basis (and thus may lack the requisite
profit motive to be a trade or business at
all for UBIT purposes). Under this analy-
sis, the commenter recommended allow-
ing exempt organizations to include, or
exclude, certain activities from a trade or
business based on the social club’s inter-
nal determination that the activity lacks a
profit motive.
The Treasury Department and the IRS
agree that profit motive is relevant to de-
termining whether an activity is a trade or
business and that an exempt organization
has a separate unrelated trade or business
for purposes of section 512(a)(6) only if
the activity being analyzed as separate
is a trade or business. The Treasury De-
partment and the IRS also agree that, for
UBIT purposes, the appropriate level for
determining whether a profit motive ex-
ists (based on the generation of consis-
tent losses) with regard to an activity as
a trade or business is the NAICS 2-digit
level since the Treasury Department and
the IRS have determined that the NAICS
2-digit codes appropriately identify sepa-
rate unrelated trades or businesses.
However, the Treasury Department
and the IRS do not adopt the commenter’s
recommendation to allow exempt organi-
zations to exclude certain activities from
the UBTI calculation based on the orga-
nization’s assertion of a lack of intention
to make a profit. In determining the lack
of a profit motive, greater weight is giv-
en to objective facts than to a taxpayer’s
intent. See, e.g., §1.183-2(a). Thus, an ex-
empt organization would need to demon-
strate a factual lack of profit motive rather
than claiming a lack of intent without any
demonstrated losses. Furthermore, in light
of the purpose and effect of section 512(a)
(6) to not permit losses from one trade or
business to offset income from another
trade or business, the commenter’s rec-
ommendation would only benefit exempt
organizations if the exempt organization
could exclude income from a trade or
business activity (first separated on the ba-
sis of the NAICS 2-digit code levels) from
UBTI on an assertion that the exempt or-
ganization has no profit motive with re-
gard to such activity notwithstanding the
income from that activity. The Treasury
Department and the IRS do not see any
basis for providing such a rule.
5. Total UBTI and the Charitable
Contribution Deduction
Consistent with section 512(a)(6), the
proposed regulations provided that the to-
tal UBTI of an exempt organization with
more than one unrelated trade or business
is the sum of the UBTI with respect to
each separate unrelated trade or business,
less the specific deduction under section
512(b)(12), and that the UBTI with re-
spect to any separate unrelated trade or
business cannot be less than zero.
Section 512(b)(10) and (11) permit
exempt organizations to take a charita-
ble contribution deduction. The amount
of this deduction, in the case of section
512(b)(10), which applies to most exempt
organizations, is limited to 10 percent of
UBTI computed without application of
the charitable contribution deduction and,
in the case of section 512(b)(11), which
applies to certain trusts, is limited to the
amounts described in section 170(b)(1)
(A) and (B) determined with reference to
UBTI, again, computed without applica-
tion of the charitable contribution deduc-
tion. The proposed regulations clarified
that the term “unrelated business taxable
income” as used in section 512(b)(10) and
(11) refers to UBTI after application of
section 512(a)(6). As a result, the limita-
tions on the charitable contribution deduc-
tion would be computed using total UBTI
under section 512(a)(6)(B).
Although the proposed regulations
clarified how to calculate the limitation
on the charitable contribution deduction
(that is, using total UBTI), the proposed
regulations did not explicitly state, other
than in the preamble, that the charitable
contribution deduction was to be taken
against total UBTI. Accordingly, the final
regulations have been revised to clarify
that the total UBTI of an exempt organi-
zation with more than one unrelated trade
or business is the sum of the UBTI with
respect to each separate unrelated trade
or business, less a charitable contribution
deduction, an NOL deduction for losses
arising in taxable years beginning before
January 1, 2018 (discussed in part 6 of
this Summary of Comments and Expla-
nation of Revisions), and a specific de-
duction under section 512(b)(12), as ap-
plicable.
One commenter asserted that certain
expenses, such as tax return preparation
fees and state taxes, are difficult to allo-
cate between two or more unrelated trades
or businesses and recommended that ex-
empt organizations be permitted to deduct

Bulletin No. 2020–52 1715 December 21, 2020
such expenses against total UBTI. Simi-
larly, this commenter recommended that
investment management fees be deduct-
ed against total investment related UBTI
(instead of total UBTI). In support of this
suggestion, this commenter noted that the
proposed regulations permitted the char-
itable contribution deduction in section
512(b)(10) and (11) to be taken against
total UBTI.
The final regulations do not adopt this
commenter’s recommendations. First, the
charitable contribution deduction in sec-
tion 512(b)(10) and (11) is distinguish-
able from other deductions under section
512(a)(1) or (3) or section 512(b) because
the Code specifically provides that this
deduction is permitted “whether or not di-
rectly connected with the carrying on of an
unrelated trade or business.” Accordingly,
the Treasury Department and the IRS de-
termined that the charitable contribution
deduction could be taken against total
UBTI calculated under section 512(a)(6)
(B).
Second, the structure of section 512(a)
(6) itself confirms that Congress did not
intend for any deductions to be taken
against total UBTI calculated under sec-
tion 512(a)(6)(B) other than the ones spe-
cifically permitted. Section 512(a)(6)(A)
provides that, when calculating the UBTI
of a separate unrelated trade or business,
such calculation is made “without re-
gard to” the specific deduction in section
512(b)(12). Section 512(a)(6)(B) clari-
fies that total UBTI is the sum of UBTI
computed with respect to each separate
unrelated trade or business “less a specif-
ic deduction under [section] 512(b)(12).”
Thus, the only deductions permitted
against total UBTI are a charitable con-
tribution deduction under section 512(b)
(10) and (11), an NOL deduction for
losses arising in taxable years beginning
before January 1, 2018 (permitted by sec-
tion 13702(b)(2) of the TCJA), and a spe-
cific deduction under section 512(b)(12).
All other deductions are taken against the
UBTI of each separate unrelated trade
or business, provided that each such de-
duction meets the requirements of sec-
tion 512(a)(1) or (3), as applicable. Any
deduction attributable to more than one
unrelated trade or business must be allo-
cated in accordance with §1.512(a)-1(c)
of the current regulations.
6. NOLs and UBTI
a. NOL Deduction Calculated Separately
with Respect to Each Trade or Business
Consistent with the statute and the pro-
posed regulations, the final regulations
provide that, for taxable years beginning
after December 31, 2017, an exempt or-
ganization with more than one unrelated
trade or business determines the NOL
deduction allowed by sections 172(a)
and 512(b)(6) separately with respect to
each of its unrelated trades or businesses.
Also consistent with the proposed regu-
lations, the final regulations provide that
§1.512(b)-1(e), which addresses the ap-
plication of section 172 in the context of
UBIT, applies separately with respect to
each such unrelated trade or business.
b. Coordination of NOLs
The proposed regulations provided that
an exempt organization with losses arising
in a taxable year beginning before January
1, 2018 (pre-2018 NOLs), and losses aris-
ing in a taxable year beginning after De-
cember 31, 2017 (post-2017 NOLs), de-
ducts its pre-2018 NOLs from total UBTI
before deducting any post-2017 NOLs
with regard to a separate unrelated trade
or business against the UBTI from such
trade or business. One commenter recom-
mended that an exempt organization be
permitted to choose the order in which it
uses pre-2018 and post-2017 NOLs based
on its own facts and circumstances.
The Treasury Department and the IRS
do not accept this recommendation. Sec-
tion 1.172-4(a)(3) of the current regula-
tions provides that the amount which is
carried back or carried over to any taxable
year is an NOL “to the extent it was not
absorbed in the computation of the taxable
(or net) income for other taxable years, pre-
ceding such taxable year, to which it may
be carried back or carried over.” This sec-
tion further provides that, for the purpose
of determining the taxable (or net) income
for any such preceding taxable year, the
various NOL carryovers and carrybacks
to such taxable year are considered to be
applied in reduction of the taxable (or net)
income in the order of the taxable years
from which such losses are carried over or
carried back, beginning with the loss for
the earliest taxable year. Furthermore, in
Notice 2018-67, the Treasury Department
and the IRS noted that section 512(a)(6)
may have changed the order in which
NOLs are taken and requested comments
regarding how the NOL deduction should
be taken under section 512(a)(6) by ex-
empt organizations with more than one
unrelated trade or business and, in partic-
ular, by such organizations with both pre-
2018 and post-2017 NOLs. Comments
received in response to Notice 2018-67
noted that section 512(a)(6) does not alter
the ordering rules under section 172 and
that pre-2018 NOLs should be allowed
prior to post-2017 NOLs, especially be-
cause pre-2018 NOLs remain subject to
a carry-forward limitation. The comment-
er on the proposed regulations provided
no new information that would support
changing the NOL ordering rule for pur-
poses of section 512(a)(6). Accordingly,
the final regulations adopt the proposed
regulations without change.
The proposed regulations further
provided that pre-2018 NOLs are taken
against total UBTI in the manner that
results in maximum utilization of the
pre-2018 NOLs in a taxable year. One
commenter requested that the final reg-
ulations clarify the methodology or prin-
ciple that should be used to allocate pre-
2018 NOLs among separate unrelated
trades or businesses. The methods sug-
gested by this commenter would result
in the pro-rata distribution of pre-2018
NOLs based on various factors, such as
the ratio of UBTI of a separate unrelated
trade or business to total UBTI. In the al-
ternative, two commenters proposed that
an exempt organization be permitted to
use any reasonable method to allocate its
pre-2018 NOLs.
Although pre-2018 NOLs are taken
against total UBTI, pre-2018 NOLs must
be allocated in some manner between sep-
arate unrelated trades or businesses to de-
termine the amount of pre-2018 NOLs ac-
tually taken in a taxable year because the
UBTI with respect to each separate unre-
lated trade or business is calculated before
total UBTI and post-2017 NOLs are taken
against the UBTI of the separate unrelated
trade or business in which they arose. Pre-
2018 NOLs could be allocated any num-
ber of ways, including ratably between
separate unrelated trades or businesses

December 21, 2020 1716 Bulletin No. 2020–52
or only to those separate unrelated trades
or businesses with no post-2017 NOLs.
In permitting the “maximum utilization
of the pre-2018 NOLs in a taxable year”
in the proposed regulations, the Treasury
Department and the IRS intended to pro-
vide exempt organizations with the flexi-
bility to choose how to allocate pre-2018
NOLs among separate unrelated trades or
businesses. However, the actual effect of
this rule is to permit an exempt organiza-
tion to maximize post-2017 NOLs taken
against the UBTI from the separate unre-
lated trades or businesses after taking the
pre-2018 NOLs. Accordingly, the final
regulations clarify that pre-2018 NOLs
are taken against the total UBTI in a man-
ner that allows for maximum utilization
of post-2017 NOLs, rather than pre-2018
NOLs, in a taxable year. For example, the
final regulations further clarify that an
exempt organization may allocate all of
its pre-2018 NOLs to one of its separate
unrelated trades or businesses or it may
allocate its pre-2018 NOLs ratably among
its separate unrelated trades or businesses,
whichever results in the greater utilization
of the post-2017 NOLs in that taxable
year.
Additionally, several commenters re-
quested guidance regarding how changes
made to section 172 by the Coronavirus
Aid, Relief, and Economic Security Act,
Public Law 116-136, 134 Stat. 281 (2020)
(CARES Act) would affect section 512(a)
(6). The Treasury Department and the IRS
are considering how these changes affect
the calculation of UBTI under section
512(a)(6) and expect to publish additional
guidance on the issue. It is anticipated that
this additional guidance will include ex-
amples that illustrate both how the chang-
es to the CARES Act affect the calcula-
tion of UBTI as well as how an exempt
organization calculates UBTI when it has
pre-2018 NOLs, either with or without
post-2017 NOLs.
c. Treatment of NOLs upon Sale, Transfer,
Termination, or Other Disposition of a
Separate Unrelated Trade or Business
Several commenters requested guid-
ance on the treatment of accumulated
NOLs upon the sale, transfer, termination,
or other disposition of a separate unrelated
trade or business. At least one commenter
recommended that, in such an event, the
use of all such prior losses be applied first
to any gain realized on the disposition of
the trade or business and that any remain-
ing losses be permitted to offset UBTI
from other, separate unrelated trades or
businesses. Another commenter recom-
mended that any accumulated NOLs be
suspended and taken if the exempt organi-
zation later resumes the separate unrelated
trade or business.
Section 512(a)(6) permits only pre-
2018 NOLs to be taken against total UBTI.
Consistent with the legislative intent of
section 512(a)(6), losses attributable to a
separate unrelated trade or business may
be taken only against income from that
separate unrelated trade or business. How-
ever, the Treasury Department and the IRS
recognize that an exempt organization lat-
er may recommence that separate unrelat-
ed trade or business or acquire a separate
unrelated trade or business identified in
the same manner. Accordingly, the final
regulations provide that, after offsetting
any gain from the termination, sale, ex-
change, or other disposition of a separate
unrelated trade or business, any NOL re-
maining is suspended. However, the sus-
pended NOLs may be used if that previous
separate unrelated trade or business is lat-
er resumed or if a new unrelated trade or
business that is accurately identified using
the same NAICS 2-digit code as the pre-
vious separate unrelated trade or business
is commenced or acquired in a future tax-
able year.
d. Treatment of NOLs Upon Changing
Identification of a Separate Unrelated
Trade or Business
Six commenters requested that the final
regulations clarify what happens to NOLs
when a partnership interest moves in and
out of QPI status. The Treasury Depart-
ment and the IRS expect that the grace
period described in part 2.b.vi of this
Summary of Comments and Explanation
of Revisions will reduce the incidence of
partnership interests moving in and out of
QPI status. Nonetheless, instances will ex-
ist where a partnership interest that was a
QPI becomes a non-QPI. Additionally, as
discussed in part 1.d of this Summary of
Comments and Explanation of Revisions,
an exempt organization may change the
NAICS 2-digit code identifying a sepa-
rate unrelated trade or business. Thus, the
same question exists regarding what hap-
pens to NOLs when the NAICS 2-digit
code identifying a separate unrelated trade
or business changes.
In response to the commenters, the fi-
nal regulations generally provide that, for
purposes of section 512(a)(6), a separate
unrelated trade or business that changes
identification is treated as if the original-
ly identified separate unrelated trade or
business is terminated and a new separate
unrelated trade or business is commenced.
As a result, none of the NOLs from the
previously identified separate unrelated
trade or business will be carried over to the
newly identified separate unrelated trade
or business. For example, if the nature
of a separate unrelated trade or business
changes such that it is more accurately
described by another NAICS 2-digit code,
the separate unrelated trade or business is
treated as a new separate unrelated trade
or business with no NOLs.
The final regulations further clarify
that the change in identification may ap-
ply to all or a part of the originally iden-
tified separate unrelated trade or business.
If the change in identification applies to
the originally identified separate trade
or business in its entirety, any NOLs at-
tributable to that separate unrelated trade
or business are suspended. If the change
in identification applies to the originally
identified separate unrelated trade or busi-
ness in part, to aid in tax administration
and to avoid a need for allocation of NOLs
within an originally identified separate
trade or business, the originally identified
separate unrelated trade or business that
is not changing retains the full NOLs at-
tributable to it, including the portion for
which the identification is changing. Ad-
ditionally, the final regulations provide
that this general rule also applies to the
separate unrelated trades or businesses
that are identified when a QPI becomes a
non-QPI. In this case, any NOLs attribut-
able to the QPI that became a non-QPI are
retained with the organization’s invest-
ment activities.
Under the final regulations, a change in
identification is effective as of the first day
of the taxable year in which the change is
made. Accordingly, the final regulations
treat the newly identified separate unre-

Bulletin No. 2020–52 1717 December 21, 2020
lated trade or business as commencing on
this date.
Nonetheless, the final regulations pro-
vide an exception for when an organiza-
tion has determined that an unrelated trade
or business is more accurately identified
by another NAICS 2-digit code, provided
that there has been no material change in
the unrelated trade or business. In these
cases, the final regulations provide that
the NOLs attributable to the previous-
ly identified separate unrelated trade or
business are NOLs of the newly identified
separate unrelated trade or business. This
approach is consistent with the legislative
intent that losses from one unrelated trade
or business not be used to offset the gains
from another unrelated trade or business
but recognizes that mistakes may be made
and that NOLs should not be suspended
(as discussed in part 6.c of this Summary
of Comments and Explanation of Revi-
sions) in such a case. The final regulations
provide examples illustrating the applica-
tion of these rules regarding NOLs.
e. Coordination of NOL and Excess
Charitable Contribution Carryovers
The proposed regulations requested
comments on the coordination of NOL
and excess contribution carryovers. The
proposed regulations noted that an order-
ing rule may be necessary. Although a few
comments were received, these final regu-
lations do not address this issue. The Trea-
sury Department and the IRS continue to
consider this issue and will issue addition-
al guidance, if needed.
7. Form 990-T
At least one commenter requested
clarification regarding the reporting of
separate unrelated trades or businesses
that do not have corresponding NAICS
codes, such as investment activities, in-
come from certain controlled entities, and
non-qualifying S corporation interests.
The IRS is in the process of revising the
2020 Form 990-T and related instructions.
It is anticipated that separate unrelated
trades or businesses that are not identified
using NAICS 2-digit codes – that is, sep-
arate unrelated trades or businesses iden-
tified under §1.512(a)-6(c) (investment
activities), (d)(1) (specified payments
from controlled entities), (d)(2) (certain
amounts derived from controlled foreign
corporations), and (e) (non-qualifying S
corporation interests) - will be identified
using numeric codes distinguishable from
NAICS codes. The instructions to the
Form 990-T will explain how an exempt
organization determines the appropriate
code to use, as well as how to report code
changes.
8. Waiver of Penalties Not Provided
One commenter requested that the
Treasury Department and the IRS waive
any penalties arising from the underpay-
ment of tax for tax years prior to the ap-
plicability date of the final regulations.
As discussed in the Applicability Dates
section of this preamble, an exempt orga-
nization may rely on a reasonable, good-
faith interpretation of section 512(a)(6)
prior to the applicability date of the final
regulations. Accordingly, the Treasury
Department and the IRS decline to waive
any underpayment penalties with respect
to the calculation of UBTI under section
512(a)(6).
9. Individual Retirement Accounts
The proposed regulations added a new
paragraph to §1.513-1 clarifying that the
section 513(b) definition of “unrelated
trade or business” applies to individual
retirement accounts (IRAs) described in
section 408. No comments were received
with respect to this provision. According-
ly, the final regulations adopt these pro-
posed regulations without change.
10. Inclusions of Subpart F Income and
Global Intangible Low-Taxed Income
The proposed regulations revised
§1.512(b)-1(a) to clarify that an inclusion
of subpart F income under section 951(a)
(1)(A) is treated in the same manner as a
dividend for purposes of section 512(b)(1)
and that an inclusion of global intangible
low-taxed income (GILTI) under section
951A(a) is treated in the same manner as
an inclusion of subpart F income under
section 951(a)(1)(A) for purposes of sec-
tion 512(b)(1). At least one commenter ex-
plicitly supported this treatment of an in-
clusion of subpart F income or GILTI and
no other comments were received. There-
fore, the final regulations adopt these pro-
posed regulations without change.
11. Public Support
The preamble to the proposed regula-
tions confirmed that section 512(a)(6) po-
tentially impacted the calculation of pub-
lic support under sections 509(a)(1) and
170(b)(1)(A)(vi) and under section 509(a)
(2) (the public support tests) because of the
inability of an exempt organization with
more than one unrelated trade or business
to use losses from one unrelated trade or
business to offset gains from another un-
related trade or business. Furthermore, the
preamble to the proposed regulations not-
ed that the Treasury Department and the
IRS were not aware of any congressional
intent to change the public support tests
in enacting section 512(a)(6). Accord-
ingly, the proposed regulations revised
§§1.170A-9(f) and 1.509(a)-3 to permit
an organization with more than one un-
related trade or business to aggregate its
net income and net losses from all of its
unrelated business activities, including
unrelated trades or businesses within the
meaning of section 512, for purposes of
determining whether an organization is
publicly supported.
Commenters agreed that Congress
likely did not intend to change the public
support tests when enacting section 512(a)
(6) and generally supported the proposed
clarifications to the public support test.
However, two commenters noted that an
exempt organization that satisfies the pub-
lic support tests using its UBTI calculated
for purposes of section 512(a)(6) also will
satisfy the public support tests if it cal-
culates its UBTI in the aggregate. These
commenters therefore recommended that
an exempt organization be permitted to
use either its UBTI calculated under sec-
tion 512(a)(6) or its UBTI calculated in
the aggregate to determine public sup-
port. These commenters noted that this
approach would reduce the administrative
burden on exempt organizations because
organizations that satisfy the requirements
of the public support test using their UBTI
calculated under section 512(a)(6) would
not be required to recalculate UBTI in
the aggregate. At the same time, this ap-
proach would also address any unintended

December 21, 2020 1718 Bulletin No. 2020–52
consequence of the enactment of section
512(a)(6) for exempt organizations that
have historically satisfied the require-
ments of the public support test but would
no longer because of the effect of section
512(a)(6). The final regulations adopt
these commenters’ suggestions and permit
an exempt organization with more than
one unrelated trade or business to deter-
mine public support using either its UBTI
calculated under section 512(a)(6) or its
UBTI calculated in the aggregate.
12. Technical Correction of Inadvertently
Omitted Regulatory Language
The proposed regulations made a tech-
nical correction to §1.512(a)-1(b) by in-
cluding language that was omitted from
the Federal Register when the final reg-
ulation was published in 1975. No com-
ments were received with respect to this
technical correction. Accordingly, the fi-
nal regulations adopt the technical correc-
tion in the proposed regulations without
change.
Applicability Dates
The proposed regulations were pro-
posed to apply to taxable years beginning
on or after the date the regulations were
published in the Federal Register as fi-
nal regulations. Two commenters rec-
ommended that the applicability date of
the final regulations be delayed. Another
commenter suggested that the applicabil-
ity date be extended such that all exempt
organizations be provided with at least
one year before the final regulations are
applicable. This commenter explained that
time will be required to implement the fi-
nal regulations, including making changes
to accounting systems. Accordingly, this
commenter proposed that the applicability
date of the final regulations be extended to
the first day of the second taxable year be-
ginning after the date the final regulations
are published in the Federal Register.
The Treasury Department and the IRS
recognize that implementation of the re-
quirements of section 512(a)(6) by some
exempt organizations requires changes to
the way these organizations track income
and expenses. However, the Treasury De-
partment and the IRS have provided guid-
ance regarding how exempt organizations
would be expected to comply with section
512(a)(6) starting with Notice 2018-67 in
September of 2018 and continuing with
the proposed regulations in April of 2020.
The final regulations adopt the proposed
regulations with minor changes requested
by commenters. Accordingly, consistent
with the proposed regulations, the final
regulations are applicable to taxable years
beginning on or after December 2, 2020.
In addition, an exempt organization may
choose to apply the final regulations un-
der section 512(a)(6), as well as the final
regulations relating to the calculation of
public support, to taxable years beginning
on or after January 1, 2018, and before
December 2, 2020. Alternatively, an ex-
empt organization may rely on a reason-
able, good-faith interpretation of section
512(a)(6) for such taxable years. For this
purpose, a reasonable good faith interpre-
tation includes the methods of aggregating
or identifying separate trades or business-
es provided in Notice 2018-67 or the pro-
posed regulation.
With respect to the inclusions of sub-
part F income or GILTI discussed in part
10 of the Summary of Comments and Ex-
planation of Revisions, a taxpayer may
choose to apply the final regulations under
§1.512(b)-1(a) to taxable years beginning
before December 2, 2020 consistent with
the longstanding position of the Treasury
Department and the IRS on the inclusion
of subpart F income under section 951(a)
(1)(A).
Statement of Availability of IRS
Documents
For copies of recently issued Revenue
Procedures, Revenue Rulings, Notices,
and other guidance published in the In-
ternal Revenue Bulletin, please visit the
IRS Web site at http://www.irs.gov or the
Superintendent of Documents, U.S. Gov-
ernment Printing Office, Washington, DC
20402.
Special Analyses
I. Regulatory Planning and Review –
Economic Analysis
Executive Orders 12866, 13563, and
13771 direct agencies to assess costs and
benefits of available regulatory alterna-
tives and, if regulation is necessary, to se-
lect regulatory approaches that maximize
net benefits (including potential econom-
ic, environmental, public health, and safe-
ty effects; distributive impacts; and equi-
ty). Executive Order 13563 emphasizes
the importance of quantifying both costs
and benefits, of reducing costs, of harmo-
nizing rules, and of promoting flexibility.
These final regulations have been
designated as significant and subject to
review under Executive Order 12866
and section 1(b) of the Memorandum of
Agreement (April 11, 2018) between the
Treasury Department and the Office of
Management and Budget regarding re-
view of tax regulations. For purposes of
Executive Order 13771, the final regula-
tions are regulatory. The Administrator of
the Office of Information and Regulatory
Affairs (OIRA), Office of Management
and Budget, has waived review of this rule
in accordance with section 6(a)(3)(A) of
Executive Order 12866.
1. Background
Certain corporations, trusts, and other
entities are exempt from Federal income
taxation because of the specific functions
they perform (exempt organizations). Ex-
amples include religious and charitable
organizations. However, exempt organi-
zations that engage in business activities
that are not substantially related to their
exempt purposes may have taxable in-
come under section 511(a)(1) of the Inter-
nal Revenue Code (Code). For example,
the income that a tax-exempt organization
generates from the sale of advertising in
its quarterly magazine is unrelated busi-
ness taxable income (UBTI).
Prior to the Tax Cuts and Jobs Act
(TCJA), UBTI was calculated by aggre-
gating the net incomes from all the unre-
lated business activities conducted by an
exempt organization. As a result, losses
from one unrelated trade or business ac-
tivity could be used to offset profits from
another unrelated trade or business activ-
ity. New section 512(a)(6), enacted in the
TCJA, provides that organizations with
more than one unrelated trade or busi-
ness calculate the taxable amounts sep-
arately for each trade or business so that
losses only offset income from the same
unrelated trade or business. The statuto-

Bulletin No. 2020–52 1719 December 21, 2020
ry language, however, does not specify
standards for determining what activities
would be considered the same or a differ-
ent trade or business.
On April 21, 2020, the Department of
the Treasury (Treasury Department) and
the IRS published a notice of proposed
rulemaking (REG-106864-18) in the Fed-
eral Register (85 FR 23172) containing
proposed regulations under section 512
(proposed regulations). The final reg-
ulations retain the basic approach and
structure of the proposed regulations with
certain minor modifications. As part of
these modifications, the final regulations
modify the participation test (called the
“control test” in the proposed regulations)
to permit indirectly held partnerships in-
terests to be eligible for inclusion in an
exempt organization’s single “investment
activities” trade or business. The final reg-
ulations address the need for guidance by
providing rules for determining when an
exempt organization has more than one
unrelated trade or business and how such
an exempt organization computes UBTI
under new section 512(a)(6). Specifically
discussed below, the final regulations es-
tablish guidelines for (1) identifying sep-
arate unrelated trades or businesses; and
(2) in certain cases, permitting an exempt
organization to treat investment activities
as one unrelated trade or business for pur-
poses of computing UBTI.
2. Baseline
In this analysis, the Treasury Depart-
ment and the IRS assess the benefits and
costs of these proposed regulations rel-
ative to a no-action baseline reflecting
anticipated Federal income tax-related
behavior in the absence of these proposed
regulations.
3. Affected Entities
Prior tax law did not require tax-ex-
empt organizations to report unrelated
business income by separate activity, so it
is not possible to obtain accurate counts
of the number of exempt organizations po-
tentially affected by the final regulations.
However, the IRS estimates that less than
2 percent of exempt organizations would
be affected, as calculated below.
Approximately 1.4 million exempt or-
ganizations filed some type of information
or tax return with the IRS for fiscal year
2018.
7
Only 188,000 exempt organiza-
tions filed Form 990-T, which is used to
report UBTI. While not all Form 990-T
filers also file an information return with
the IRS, as an upper bound estimate, 14
percent of exempt organizations could
be affected by the regulations. Within
Form 990-T filers, only a smaller sub-
set, primarily the largest organizations in
certain categories, are expected to have
more than one unrelated trade or business.
Among the types of organizations expect-
ed to have more than one unrelated trade
or business are colleges and universities,
certain cultural organizations such as mu-
seums, and some tax-exempt hospitals.
Additional information on organiza-
tions that may be affected is provided by
a 2018 Center on Nonprofits and Philan-
thropy (CNP) survey of 723 primarily
large exempt organizations.
8
Three-hun-
dred and thirty of these organizations re-
ported that they had filed a Form 990-T.
Of these, 70 percent had revenues over
$10 million and most were educational
or arts and cultural organizations. Only
46 organizations (14 percent of the sur-
veyed organizations filing Form 990-T)
reported having more than one source of
UBTI and almost half of these had only
two sources. Thus, the Treasury Depart-
ment and the IRS project that if the CNP
survey results applied to the population of
Form 990-T filers, then less than 2 percent
of exempt organizations or approximately
4,000 filers would be affected by the final
regulations and that these would tend to
be large educational or arts and cultural
organizations.
4. Economic Analysis of Final
Regulations
The final regulations provide great-
er certainty to exempt organizations re-
garding how to compute UBTI and tax in
response to the changes made by TCJA.
They also improve economic efficiency
by helping to ensure that similar exempt
organizations are taxed similarly. In the
absence of this guidance taxpayers might
make different assumptions regarding
how to calculate UBTI and tax.
This section describes the two major
provisions of the final rule and provides a
qualitative economic analysis of each one.
a. Identifying Separate Trades or
Businesses
Section 512(a)(6) requires exempt or-
ganizations with more than one unrelated
trade or business to calculate UBTI sep-
arately for each trade or business so that
losses are used to offset only income from
the same unrelated trade or business. The
final regulations generally require the use
of NAICS codes to identify separate un-
related trades or businesses. NAICS is an
industry classification system for purpos-
es of collecting, analyzing, and publishing
statistical data related to the United States
business economy. Each digit of the NA-
ICS 6-digit codes describes an industry
with increasing specificity. The final reg-
ulations allow the use of NAICS 2-digit
codes, which encompass broader catego-
ries of trades or businesses than NAICS
6-digit codes, to reduce the compliance
burdens for exempt organizations with
multiple similar types of business activity.
For example, different types of food ser-
vices would be included in the same NA-
ICS 2-digit code as opposed to separate
NAICS 6-digit codes. Similarly, different
types of recreational activities, such as fit-
ness centers and golf courses, would be in
the same NAICS 2-digit code as opposed
to separate NAICS 6-digit codes. A single
facility might have elements fitting sever-
al of these categories, which could change
over time when NAICS codes are revised.
The use of NAICS 6-digit codes could po-
tentially require an exempt organization
to split what has traditionally been consid-
ered one unrelated trade or business into
multiple unrelated trades or businesses.
7
See Internal Revenue Service Research, Applied Analytics, and Statistics, Statistics of Income Division Fiscal Year Return Projections for the United States Publication 6292 (Rev. 9-2019),
Projected Returns 2019-2026. Exempt organizations generally must file an annual information return with IRS. See generally section 6033. However, churches and small organizations are
exempt from this filing requirement. See section 6033(a)(3). Organizations that have more than $1,000 in gross UBTI must also file Form 990-T to calculate their UBTI and tax. See section
512(b)(12) (providing a $1,000 specific deduction).
8
See Elizabeth Boris and Joseph Cordes, “How the TCJA’s New UBIT Provisions Will Affect Nonprofits,” Urban Institute Research Report, January 2019.

December 21, 2020 1720 Bulletin No. 2020–52
In addition, exempt organizations may
need to incur the costs of changing their
accounting systems so as to collect the
information needed for separate NAICS
6-digit codes.
Some commenters to the proposed
regulations advocated using the NAICS
2-digit codes as a safe-harbor when iden-
tifying separate unrelated trades or busi-
nesses and that a facts and circumstances
test be applied as the primary method of
identifying separate unrelated business-
es. Adoption of a facts and circumstanc-
es test would increase the administrative
burden of tax-exempt organizations in
complying with section 512(a)(6) be-
cause fact-intensive analysis would be
required to determine each unrelated
trade or business. Additionally, adoption
of a facts and circumstances test would
offer exempt organizations less certainty
and increase the IRS administrative bur-
den.
The guidance provided in the final reg-
ulations ensures that the tax liability is cal-
culated similarly across taxpayers, avoid-
ing situations where one taxpayer receives
differential treatment compared to another
taxpayer for fundamentally similar eco-
nomic activity based on their differing
reasonable, good-faith interpretations of
the statute. In the absence of these final
regulations, an exempt organization might
be uncertain about whether an activity is
one or more than one trade or business. As
a result, in the absence of the final regula-
tions, similar institutions might take dif-
ferent positions and pay different amounts
of tax, introducing economic inefficiency
and inequity. These regulations provide
greater certainty and flexibility such that
compliance costs may be slightly low-
er for affected organizations relative to a
no-action baseline.
b. Aggregation of Investment Activities
The final regulation’s treatment of
investment activities will also provide
clarity and reduce burdens for exempt
organizations. By providing explic-
it rules for the treatment of investment
activities, the final regulations reduce
the uncertainty about what would be ac-
ceptable under a reasonable, good-faith
interpretation. Although investment in-
come, such as interest and dividend in-
come, is not generally statutorily taxed
as UBTI, exempt organizations may en-
gage in certain activities that the organi-
zation considers “investments” but that
generate UBTI, such as debt-financed
investments or investments through part-
nerships. The final regulations allow cer-
tain of this investment income to be ag-
gregated and treated as a single trade or
business. The final regulations provide
rules for the treatment of partnership in-
come and explicitly list the other types of
UBTI that can be aggregated as “invest-
ment” income in response to comments
requesting additional clarification. The
allowance of this type of aggregation is
responsive to situations where exempt
organizations are invested in partner-
ships in which they do not significantly
participate. The allowance of aggrega-
tion in the final regulations recognizes
that in these situations the exempt orga-
nizations are unlikely to be able to access
information from such partnerships for
purposes of separating the partnerships’
investments according to NAICS codes.
As a result, the final regulations reduce
the compliance burdens of exempt orga-
nizations of obtaining information from
partnerships and simplify the calculation
of UBTI when the income is generated
from “investment” activities relative to
the no-action baseline.
c. Summary
The final regulations provide rules for
determining when an exempt organization
has more than one unrelated trade or busi-
ness and how such an exempt organization
computes UBTI. In addition, the final reg-
ulations provide guidelines for when an
exempt organization treats its investment
activities as one unrelated trade or busi-
ness for purposes of computing UBTI.
In the absence of guidance, affected tax-
payers may face more uncertainty when
calculating their tax liability, a situation
generally that could lead to greater con-
flicts with tax administrators. The Trea-
sury Department and the IRS project that
the final regulations will reduce taxpayer
compliance burden relative to the no-ac-
tion baseline. In addition, the Treasury
Department and the IRS project that these
regulations will affect a small number of
exempt organizations. Based on this anal-
ysis, the Treasury Department and the IRS
anticipate any economic effects of the fi-
nal regulations will be modest relative to
the no-action baseline.
II. Paperwork Reduction Act
The collections of information con-
tained in the final regulations will be sub-
mitted to the Office of Management and
Budget for review in accordance with
the Paperwork Reduction Act of (1995)
(44 U.S.C. 3507(d)). An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of in-
formation unless it displays a valid control
number assigned by the Office of Man-
agement 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
return information are confidential, as re-
quired by 26 U.S.C. 6103.
1. Collections of Information Imposed by
the Regulations
The collection of information in these
final regulations is in §1.512(b)-6(a).
This information is required to determine
whether an exempt organization has more
than one unrelated trade or business and
therefore must report those unrelated
trades or businesses on Form 990-T and
related schedules. In 2018, the IRS re-
leased and invited comments on drafts of
an earlier version of the Form 990-T and
related schedules to give members of the
public opportunity to comment on chang-
es made to the Form 990-T, and the addi-
tion of a new schedule to report additional
unrelated trades or businesses, as required
by the enactment of section 512(a)(6). The
IRS received no comments on the Form
990-T and related schedules during that
comment period. Consequently, the IRS
made Form 990-T available on January 8,
2019, and the new schedule for reporting
additional unrelated trades or businesses
available on January 25, 2019, for use by
the public. The IRS intends that the bur-
den of collections of information will be
reflected in the burden associated with
the Form 990 series under OMB approval
number 1545-0047.

Bulletin No. 2020–52 1721 December 21, 2020
2. Burden Estimates
The burden associated with Form
990-T is included in the aggregated bur-
den estimates for OMB control number
1545-0047. The burden estimates in 1545-
0047 relate to all filers associated with the
Forms 990, and will in the future include,
but not isolate, the estimated burden of the
information collections associated with
these final regulations.
No burden estimates specific to the
final regulations are currently available.
The Treasury Department has not esti-
mated the burden, including that of any
new information collections, related to
the requirements under the final regula-
tions. Those estimates would capture both
changes made by the Act and those that
arise out of discretionary authority exer-
cised in the final regulations. The current
status of the Paperwork Reduction Act
submissions related to these final regula-
tions is provided in the following table.
Form
OMB Control
Number
Status
990 and related
forms
1545-0047
Sixty-day notice published on 9/24/2019. Thirty-day notice published on 12/31/2019.
Approved by OIRA on 2/12/2020.
Link: https://www.irs.gov/forms-pubs/about-form-990
In the proposed regulations, the Trea-
sury Department and the IRS requested
comments on all aspects of information
collection burdens related to the regula-
tions, including estimates for how much
time it would take to comply with the pa-
perwork burdens described above for each
relevant form and ways for the IRS to min-
imize the paperwork burden. The Treasury
Department and the IRS did not receive
any comments on these issues. Proposed
revisions (if any) to the forms that reflect
the information collections contained in
these final regulations will be made avail-
able for public comment at https://apps.
irs.gov/app/picklist/list/draftTaxForms.
html and will not be finalized until after
these forms have been approved by OMB
under the PRA. Comments on these forms
can be submitted at https://www.irs.gov/
forms-pubs/comment-on-tax-forms-and-
publications.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby cer-
tified that these final regulations will not
have a significant economic impact on a
substantial number of small entities. In the
proposed regulations, the Treasury De-
partment and the IRS invited comments
on the impact this rule may have on small
entities. The Treasury Department and
the IRS did not receive any comments on
this issue. As discussed elsewhere in this
section, these final regulations apply to
all exempt organizations with UBTI, but
only to the extent required to determine
if an exempt organization has more than
one unrelated trade or business. If an ex-
empt organization only has one unrelated
trade or business, these regulations do
not apply and the exempt organization
determines UBTI under section 512(a)
(1) or section 512(a)(3), as appropriate.
If an exempt organization has more than
one unrelated trade or business, these pro-
posed regulations provide instructions for
computing UBTI separately with respect
to each such unrelated trade or business.
These final regulations are not likely
to affect a substantial number of small
entities. According to the IRS Data Book,
1,835,534 exempt organizations existed
in 2018. Internal revenue ServIce, Pub-
lIcatIon 55b, Internal revenue ServIce
Data book 2018, 57 (May 2019). How-
ever, only 188,334 Form 990-Ts were
filed in 2018. Internal revenue ServIce,
PublIcatIon 6292, FIScal Year return
ProjectS For the unIteD StateS: 2019-
2026, Fall 2019 4 (September 2019). Ac-
cordingly, approximately 10 percent of the
exempt organization population file Form
990-T. This population includes large hos-
pital systems and universities not included
in the SBA definition of “small entities.”
Therefore, these final regulations are not
likely to affect a substantial number of
small entities.
Even if the regulations affected a sub-
stantial number of small entities, the eco-
nomic impact of these final rules is not
likely to be significant. An organization
affected by this rule, with more than one
unrelated trade or business, completes
Part I and Part II on page 1 of Form 990-
T and completes and attaches a separate
schedule for each additional unrelated
trade or business. Affected taxpayers
have been reporting UBTI on form 990-
T for separate unrelated trades or busi-
nesses for the previous two tax years.
As discussed elsewhere in this section,
these regulations provide certainty and
guidance for these organizations. In the
absence of this guidance, affected tax-
payers may face more uncertainty when
calculating their tax liability, a situation
generally that could lead to greater con-
flicts with tax administrators. Although
affected taxpayers will have to spend
time reading these final regulations, the
Treasury Department and the IRS project
that the final regulations provide certain-
ty and guidance that will reduce taxpayer
compliance burden for large and small
entity taxpayers. Accordingly, the Sec-
retary of the Treasury’s delegate certifies
that these regulations will not have a sig-
nificant economic impact on a substantial
number of small entities.
Pursuant to section 7805(f), the notice
of proposed rulemaking was submitted to
the Chief Counsel for the Office of Advo-
cacy of the Small Business Administra-
tion for comment on its impact on small
business (84 FR 31795). No comments on
the notice were received from the Chief
Counsel for the Office of Advocacy of the
Small Business Administration.
IV. Congressional Review Act
The Office of Management and Budget
has determined that the final rule is not a
“major rule” within the meaning of the
Congressional Review Act (5 U.S.C. 801,
et seq.).

December 21, 2020 1722 Bulletin No. 2020–52
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in any
one year by a state, local, or tribal govern-
ment, in the aggregate, or by the private
sector, of $100 million in 1995 dollars,
updated annually for inflation. The final
regulations do not include any Federal
mandate that may result in expenditures
by state, local, or tribal governments,
or by the private sector in excess of that
threshold.
VII. Executive Order 13132: Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive order. The final regulations
do not have federalism implications and
do not impose substantial direct compli-
ance costs on state and local governments
or preempt state law within the meaning
of the Executive order.
Drafting Information
The principal authors of these reg-
ulations are Stephanie N. Robbins and
Jonathan A. Carter, Office of the Chief
Counsel (Employee Benefits, Exempt
Organizations, and Employment Taxes).
However, other personnel from the Trea-
sury Department and the IRS participated
in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 are 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 1.170A-9 is amended
by:
1. Adding paragraph (f)(7)(v).
2. Adding paragraph (k)(3).
The additions read as follows:
§1.170A-9 Definition of section 170(b)
(1)(A) organization.
* * * * *
(f) * * *
(7) * * *
(v) Unrelated business activities. The
term net income from unrelated business
activities in section 509(d)(3) includes (but
is not limited to) an organization’s unrelat-
ed business taxable income (UBTI) with-
in the meaning of section 512. However,
when calculating UBTI for purposes of
determining support (within the meaning
of this paragraph (f)(7)), section 512(a)(6)
does not apply. Accordingly, in the case of
an organization that derives gross income
from the regular conduct of two or more
unrelated business activities, support in-
cludes the aggregate of gross income from
all such unrelated business activities less
the aggregate of the deductions allowed
with respect to all such unrelated business
activities. Nonetheless, when determining
support, such organization can use either
its UBTI calculated under section 512(a)
(6) or its UBTI calculated in the aggregate.
* * * * *
(k) * * *
(3) Applicability date. Paragraph (f)(7)
(v) of this section applies to taxable years
beginning on or after December 2, 2020.
Taxpayers may choose to apply this sec-
tion to taxable years beginning on or after
January 1, 2018, and before December 2,
2020.
Par. 3. Section 1.509(a)-3 is amended
by:
1. Revising the first sentence of para-
graph (a)(3)(i).
2. Redesignating paragraph (a)(4) as
paragraph (a)(5).
3. Adding new paragraph (a)(4).
4. Revising paragraph (o).
The revisions and additions read as fol-
lows:
§1.509(a)-3 Broadly, publicly supported
organizations.
(a) * * *
(3) * * *
(i) * * * An organization will meet
the not-more-than-one-third support test
under section 509(a)(2)(B) if it normally
(within the meaning of paragraph (c) or
(d) of this section) receives not more than
one-third of its support in each taxable
year from the sum of its gross investment
income (as defined in section 509(e)) and
the excess (if any) of the amount of its
unrelated business taxable income (as de-
fined in section 512, without regard to sec-
tion 512(a)(6), or with regard to section
512(a)(6), if the organization so chooses)
derived from trades or businesses that
were acquired by the organization after
June 30, 1975, over the amount of tax im-
posed on such income by section 511.
* * * * *
(4) Unrelated business activities. The
denominator of the one-third support
fraction and the denominator of the not-
more-than-one-third support fraction both
include net income from unrelated busi-
ness activities, whether or not such activ-
ities are carried on regularly as a trade or
business. The term net income from unre-
lated business activities includes (but is
not limited to) an organization’s unrelat-
ed business taxable income (UBTI) with-
in the meaning of section 512. However,
when calculating UBTI for purposes of
determining the denominator of both sup-
port fractions, section 512(a)(6) does not
apply. Accordingly, in the case of an or-
ganization that derives gross income from
the regular conduct of two or more unre-
lated business activities, support includes
the aggregate of gross income from all
such unrelated business activities less the
aggregate of the deductions allowed with
respect to all such unrelated business ac-
tivities. Nonetheless, when determining
support, such organization can use either
its UBTI calculated under section 512(a)
(6) or its UBTI calculated in the aggregate.
* * * * *
(o) Applicability date. This section
generally applies to taxable years begin-
ning after December 31, 1969, except
paragraphs (a)(3)(i) and (a)(4) of this
section apply to taxable years beginning
on or after December 2, 2020. Taxpayers

Bulletin No. 2020–52 1723 December 21, 2020
may choose to apply this section to tax-
able years beginning on or after January 1,
2018, and before December 2, 2020. Oth-
erwise, for taxable years beginning before
December 2, 2020, see these paragraphs
as in effect and contained in 26 CFR part
1 revised as of April 1, 2020.
Par. 4. Section 1.512(a)-1 is amended
by:
1. Revising the first and fourth sen-
tence of paragraph (a).
2. Revising the first and second sen-
tence of paragraph (b).
3. Adding two sentences to the end of
paragraph (c).
4. Revising paragraph (h).
The revisions and additions read as fol-
lows:
§1.512(a)-1 Definition.
(a) * * * Except as otherwise provid-
ed in §1.512(a)-3, §1.512(a)-4, or para-
graph (f) of this section, section 512(a)
(1) defines unrelated business taxable
income as the gross income derived from
any unrelated trade or business regularly
carried on, less those deductions allowed
by chapter 1 of the Internal Revenue Code
(Code) which are directly connected with
the carrying on of such trade or business,
subject to certain modifications referred
to in §1.512(b)-1. * * * In the case of an
organization with more than one unrelated
trade or business, unrelated business tax-
able income is calculated separately with
respect to each such trade or business. See
§1.512(a)-6. * * *
(b) * * * Expenses, depreciation, and
similar items attributable solely to the
conduct of unrelated business activities
are proximately and primarily related to
that business activity, and therefore qual-
ify for deduction to the extent that they
meet the requirements of section 162, sec-
tion 167, or other relevant provisions of
the Code. Thus, for example, salaries of
personnel employed full-time in carrying
on unrelated business activities are di-
rectly connected with the conduct of that
activity and are deductible in computing
unrelated business taxable income if they
otherwise qualify for deduction under the
requirements of section 162. * * *
(c) * * * However, allocation of ex-
penses, depreciation, and similar items is
not reasonable if the cost of providing a
good or service in a related and an unre-
lated activity is substantially the same, but
the price charged for that good or service
in the unrelated activity is greater than
the price charged in the related activity
and no adjustment is made to equalize
the price difference for purposes of allo-
cating expenses, depreciation, and similar
items based on revenue between related
and unrelated activities. For example, if a
social club described in section 501(c)(7)
charges nonmembers a higher price than
it charges members for the same good or
service but does not adjust the price of the
good or service provided to members for
purposes of allocating expenses, depreci-
ation, and similar items attributable to the
provision of that good or service, the allo-
cation method is not reasonable.
* * * * *
(h) Applicability date. This sec-
tion generally applies to taxable years be-
ginning after December 12, 1967, except
as provided in paragraph (g)(2) of this
section, and except that paragraphs (a)
through (c) of this section apply to taxable
years beginning on or after December 2,
2020. For taxable years beginning before
December 2, 2020, see these paragraphs
as in effect and contained in 26 CFR part
1 revised as of April 1, 2020.
Par. 5. Section 1.512(a)-6 is added to
read as follows:
§1.512(a)-6 Special rule for
organizations with more than one
unrelated trade or business.
(a) More than one unrelated trade or
business—(1) In general. An organiza-
tion with more than one unrelated trade or
business must compute unrelated business
taxable income (UBTI) separately with
respect to each such trade or business,
without regard to the specific deduction in
section 512(b)(12), including for purpos-
es of determining any net operating loss
(NOL) deduction. An organization with
more than one unrelated trade or business
computes its total UBTI under paragraph
(g) of this section.
(2) Separate trades or businesses. An
organization determines whether it regu-
larly carries on unrelated trades or busi-
nesses by applying sections 511 through
514. For purposes of section 512(a)(6)(A)
and paragraph (a)(1) of this section, an or-
ganization identifies its separate unrelated
trades or businesses using the methods
described in paragraphs (b) through (e) of
this section.
(3) Reporting changes in identification.
An organization that changes the identi-
fication of a separate unrelated trade or
business under paragraph (a)(2) of this
section must report the change in the tax-
able year of that change in accordance
with forms and instructions. For this pur-
pose, a change in identification of a sep-
arate unrelated trade or business includes
the changed identification of the separate
unrelated trade or business with respect to
a partnership interest that was incorrect-
ly designated as a qualifying partnership
interest (QPI). In the case of an incorrect
designation of a QPI, paragraph (c)(2)(iii)
of this section (regarding designation of
qualifying partnership interests) does not
apply. In all cases, to report the change
in identification, an organization must
provide the following information with
respect to each separate change in identi-
fication—
(i) The identification of the separate
unrelated trade or business in the previous
taxable year;
(ii) The identification of the separate
unrelated trade or business in the current
taxable year; and
(iii) The reason for the change.
(b) North American Industry Classi-
fication System—(1) In general. Except
as provided in paragraphs (c) through (e)
of this section, an organization identifies
each of its separate unrelated trades or
businesses using the first two digits of the
North American Industry Classification
System code (NAICS 2-digit code) that
most accurately describes the unrelated
trade or business based on the more spe-
cific NAICS code, such as at the 6-digit
level, that describes the activity it con-
ducts and subject to the requirements of
paragraph (b)(2) and (3) of this section.
The descriptions in the current NAICS
manual (available at www.census.gov) of
trades or businesses using more than two
digits of the NAICS codes are relevant
in this determination. In the case of the
sale of goods, both online and in stores,
the separate unrelated trade or business is
identified by the goods sold in stores if the
same goods generally are sold both online
and in stores.

December 21, 2020 1724 Bulletin No. 2020–52
(2) Codes must identify the unrelat-
ed trade or business. The NAICS 2-digit
code must identify the unrelated trade or
business in which the organization engag-
es (directly or indirectly) and not activi-
ties the conduct of which are substantially
related to the exercise or performance by
such organization of its charitable, ed-
ucational, or other purpose or function
constituting the basis for its exemption
under section 501 (or, in the case of an
organization described in section 511(a)
(2)(B), to the exercise or performance of
any purpose or function described in sec-
tion 501(c)(3)). For example, a college or
university described in section 501(c)(3)
cannot use the NAICS 2-digit code for ed-
ucational services to identify all its sepa-
rate unrelated trades or businesses, and a
qualified retirement plan described in sec-
tion 401(a) cannot use the NAICS 2-digit
code for finance and insurance to identify
all of its unrelated trades or businesses.
(3) Codes only reported once. An or-
ganization will report each NAICS 2-digit
code only once. For example, a hospital
organization that operates several hospital
facilities in a geographic area (or multiple
geographic areas), all of which include
pharmacies that sell goods to the general
public, would include all the pharmacies
under the NAICS 2-digit code for retail
trade, regardless of whether the hospital
organization keeps separate books and re-
cords for each pharmacy.
(c) Activities in the nature of invest-
ments—(1) In general. An organization’s
activities in the nature of investments
(investment activities) are treated collec-
tively as a separate unrelated trade or busi-
ness for purposes of section 512(a)(6) and
paragraph (a) of this section. Except as
provided in paragraphs (c)(7) and (c)(8) of
this section, an organization’s investment
activities are limited to its—
(i) Qualifying partnership interests (de-
scribed in paragraph (c)(2) of this section);
(ii) Qualifying S corporation interests
(described in paragraph (e)(2)(i) of this
section); and
(iii) Debt-financed property or proper-
ties (within the meaning of section 514).
(2) Qualifying partnership interests—
(i) Directly-held partnership interests. An
interest in a partnership is a qualifying
partnership interest (QPI) if the exempt
organization holds a direct interest in
the partnership (directly-held partnership
interest) that meets the requirements of
either the de minimis test (described in
paragraph (c)(3) of this section) or the
participation test (described in paragraph
(c)(4) of this section).
(ii) Indirectly-held partnership inter-
ests—(A) Look through rule. If an orga-
nization holds a direct interest in a part-
nership but that directly-held partnership
interest is not a QPI because it does not
meet the requirements of the de minimis
test (described in paragraph (c)(3) of this
section) or the participation test (described
in paragraph (c)(4) of this section), any
partnership in which the organization
holds an indirect interest through the di-
rectly-held partnership interest (indirect-
ly-held partnership interest) may be a QPI
if the indirectly-held partnership interest
meets the requirements of paragraph (c)
(2)(ii)(B) or (c)(2)(ii)(C) of this section.
(B) Indirectly-held partnership in-
terests that meet the requirements of the
de minimis test. An indirectly-held part-
nership interest meets the requirements
of this paragraph (c)(2)(ii)(B) if the in-
directly-held partnership interest meets
the requirements of the de minimis test
described in paragraph (c)(3) of this sec-
tion with regard to the organization. For
example, if an organization directly holds
50 percent of the capital interests of a part-
nership and the directly-held partnership
holds 4 percent of the capital and profits
interest of lower-tier partnership A, the
organization may aggregate its interest
in lower-tier partnership A with its other
QPIs because the organization indirectly
holds 2 percent of the capital and profits
interests of lower-tier partnership A (4
percent x 50 percent).
(C) Indirectly-held partnership in-
terests that meet the requirements of the
participation test. An indirectly-held part-
nership interest meets the requirements
of this paragraph (c)(2)(ii)(C) if the indi-
rectly-held partnership interest meets the
requirements of the participation test (de-
scribed in paragraph (c)(4) of this section)
with respect to the partnership that direct-
ly owns the interest in the indirectly-held
partnership. For purposes of applying
the participation test to a partnership, the
term organization in paragraph (c)(4) of
this section refers to the partnership that
directly holds the indirectly-held partner-
ship interest being tested for QPI status.
Additionally, the list of officers, directors,
trustees, or employees of an organization
found in paragraphs (c)(4)(iii)(B) and (C)
includes a general partner that directly
owns an interest in the lower-tier partner-
ship.
(D) Example—(1) Organization D is
described in section 501(c) and is exempt
from Federal income tax under section
501(a). Organization D owns 50 percent
of the capital interest in Partnership A.
Partnership A owns 30 percent of the cap-
ital interest in Partnership B, but Partner-
ship A does not significantly participate
in Partnership B within the meaning of
paragraph (c)(4)(iii) of this section. Fur-
ther, Partnership B owns 15 percent of the
capital interest in Partnership C, in which
Partnership B does not significantly par-
ticipate within the meaning of paragraph
(c)(4)(iii) of this section. No other orga-
nizations related (within the meaning of
paragraph (c)(4)(ii) of this section) to ei-
ther Organization D or the partnerships
owns an interest in any of the lower-tier
partnerships.
(2) Neither the interest in Partnership
A nor B is a QPI. Organization D’s in-
terest in Partnership A does not meet the
requirements of either the de minimis test
or the participation test because it owns
50 percent of the interest in the partner-
ship. Organization D’s indirect interest in
Partnership B (50 percent of 30 percent,
or 15 percent) does not meet the de mini-
mis test. Additionally, because Partnership
A owns greater than 20 percent interest in
Partnership B, Partnership A’s interest in
Partnership B does not meet the partic-
ipation test. However, Organization D’s
interest in Partnership C is a QPI because
Partnership C meets the participation test.
That is, Partnership B holds a 15 percent
interest in Partnership C and does not sig-
nificantly participate in Partnership C.
(iii) Designation. An organization that
has a partnership interest meeting the re-
quirements of paragraph (c)(2)(i) or (ii) of
this section in a taxable year may desig-
nate that partnership interest as a QPI by
including its share of partnership gross
income (and directly connected deduc-
tions) with the gross income (and directly
connected deductions) from its other in-
vestment activities (see paragraph (c)(1)
of this section) in accordance with forms

Bulletin No. 2020–52 1725 December 21, 2020
and instructions. Any partnership interest
that is designated as a QPI remains a QPI
unless and until it no longer meets the re-
quirements of paragraph (c)(2)(i) or (ii) of
this section. For example, if an organiza-
tion designates a directly-held partnership
interest that meets the requirements of the
de minimis rule as a QPI in one taxable
year, the organization cannot, in the next
taxable year, use NAICS 2-digit codes to
describe the partnership trades or busi-
nesses that are unrelated trades or busi-
nesses with respect to the organization un-
less the directly-held partnership interest
fails to meet the requirements of both the
de minimis test and the participation test
(after application of the grace period de-
scribed in paragraph (c)(6) of this section,
if appropriate).
(3) De minimis test. A partnership in-
terest is a QPI that meets the requirements
of the de minimis test if the organization
holds directly (within the meaning of para-
graph (c)(2)(i) of this section) or indirect-
ly (within the meaning of paragraph (c)(2)
(ii) of this section) no more than 2 percent
of the profits interest and no more than 2
percent of the capital interest during the
organization’s taxable year with which
or in which the partnership’s taxable year
ends.
(4) Participation test—(i) In general.
A partnership interest is a QPI that meets
the requirements of the participation test
if the organization holds directly (within
the meaning of paragraph (c)(2)(i) of this
section) or indirectly (within the meaning
of paragraph (c)(2)(ii) of this section) no
more than 20 percent of the capital inter-
est during the organization’s taxable year
with which or in which the partnership’s
taxable year ends and the organization
does not significantly participate in the
partnership within the meaning of para-
graph (c)(4)(iii) of this section.
(ii) Combining related interests. When
determining an organization’s percentage
interest in a partnership for purposes of
paragraph (c)(4)(i) of this section, the in-
terests of a supporting organization (as de-
fined in section 509(a)(3) and §1.509(a)-
4), other than a Type III supporting
organization (as defined in §1.509(a)-4(i))
that is not a parent of its supported organi-
zation, or of a controlled entity (as defined
in section 512(b)(13)(D) and §1.512(b)-
1(l)) in the same partnership will be tak-
en into account. For example, if an orga-
nization owns 10 percent of the capital
interests in a partnership, and its Type I
supporting organization owns an addition-
al 15 percent capital interest in that part-
nership, the organization would not meet
the requirements of the participation test
because its aggregate percentage interest
exceeds 20 percent (10 percent + 15 per-
cent = 25 percent).
(iii) Significant Participation. An or-
ganization significantly participates in a
partnership if—
(A) The organization, by itself, may re-
quire the partnership to perform, or may
prevent the partnership from performing
(other than through a unanimous voting
requirement or through minority consent
rights), any act that significantly affects
the operations of the partnership;
(B) Any of the organization’s officers,
directors, trustees, or employees have
rights to participate in the management of
the partnership at any time;
(C) Any of the organization’s officers,
directors, trustees, or employees have
rights to conduct the partnership’s busi-
ness at any time; or
(D) The organization, by itself, has the
power to appoint or remove any of the
partnership’s officers or employees or a
majority of directors.
(5) Determining percentage interest—
(i) Profits interest. For purposes of the de
minimis test described in paragraph (c)(3)
of this section, an organization’s profits
interest in a partnership is determined in
the same manner as its distributive share
of partnership taxable income. See sec-
tion 704(b) (relating to the determination
of the distributive share by the income or
loss ratio) and §§1.704-1 through 1.704-4.
(ii) Capital interest. For purposes of the
de minimis test (described in paragraph
(c)(3) of this section) and the participation
test (described in paragraph (c)(4)(i) of
this section), in the absence of a provision
in the partnership agreement, an organiza-
tion’s capital interest in a partnership is de-
termined on the basis of its interest in the
assets of the partnership which would be
distributable to such organization upon its
withdrawal from the partnership, or upon
liquidation of the partnership, whichever
is the greater.
(iii) Average percentage interest. For
purposes of the de minimis test (described
in paragraph (c)(3) of this section) and the
participation test (described in paragraph
(c)(4)(i) of this section), an organization
determines its percentage interest by tak-
ing the average of the organization’s per-
centage interest at the beginning and the
end of the partnership’s taxable year, or,
in the case of a partnership interest held
for less than a year, the percentage interest
held at the beginning and end of the peri-
od of ownership within the partnership’s
taxable year. For example, if an organiza-
tion acquires an interest in a partnership
that files on a calendar year basis in May
and the partnership reports on Schedule
K-1 (Form 1065) that the partner held a
3 percent profits interest at the date of ac-
quisition but held a 1 percent profits in-
terest at the end of the calendar year, the
organization will be considered to have
held 2 percent of the profits interest in that
partnership for that year ((3 percent + 1
percent)/2).
(iv) Reliance on Schedule K-1 (Form
1065). When determining the organiza-
tion’s average percentage interest (de-
scribed in paragraph (c)(5)(iii) of this sec-
tion) in a partnership for purposes of the
de minimis test (described in paragraph
(c)(3) of this section) and the participation
test (described in paragraph (c)(4) of this
section), an organization may rely on the
Schedule K-1 (Form 1065) (or its succes-
sor) it receives from the partnership if the
form lists the organization’s percentage
profits interest or its percentage capital
interest, or both, at the beginning and end
of the year. However, the organization
may not rely on the form to the extent that
any information about the organization’s
percentage interest is not specifically pro-
vided. For example, if the Schedule K-1
(Form 1065) an organization receives
from a partnership lists the organization’s
profits interest as “variable” but lists its
percentage capital interest at the begin-
ning and end of the year, the organization
may rely on the form only with respect to
its percentage capital interest.
(6) Changes in percentage interest. A
partnership interest that fails to meet the
requirements of the de minimis test (de-
scribed in paragraph (c)(3) of this section)
or the participation test (described in para-
graph (c)(4) of this section) because of an
increase in percentage interest in the or-
ganization’s current taxable year may be

December 21, 2020 1726 Bulletin No. 2020–52
treated for the taxable year of the change
as meeting the requirements of the test it
met in the prior taxable year if—
(i) The partnership interest met the
requirements of the de minimis test or
participation test, respectively, in the or-
ganization’s prior taxable year without ap-
plication of this paragraph (c)(6);
(ii) The increase in percentage interest
is solely due to the actions of one or more
partners other than the organization; and
(iii) In the case of a partnership interest
that met the requirements of the participa-
tion test in the prior taxable year, the inter-
est of the partner or partners that caused
the increase in paragraph (c)(6)(ii) of this
section was not combined for the prior
taxable year and is not combined for the
taxable year of the change with the organi-
zation’s partnership interest for purposes
of paragraph (c)(4)(ii) of this section.
(7) UBTI from the investment activities
of organizations subject to section 512(a)
(3). For purposes of paragraph (c)(1) of
this section, UBTI from the investment
activities of an organization subject to sec-
tion 512(a)(3) includes any amount that—
(i) Would be excluded from the calcu-
lation of UBTI under section 512(b)(1),
(2), (3), or (5) if the organization were
subject to section 512(a)(1);
(ii) Is attributable to income set aside
(and not in excess of the set aside lim-
it described in section 512(a)(3)(E)), but
not used, for a purpose described in sec-
tion 512(a)(3)(B)(i) or (ii); or
(iii) Is in excess of the set aside limit
described in section 512(a)(3)(E).
(8) Limitations—(i) Social clubs. Para-
graphs (c)(2) (regarding QPIs) and (c)(9)
(transition rule for certain partnership in-
terests) of this section do not apply to so-
cial clubs described in section 501(c)(7).
(ii) General partnership interests. Any
partnership in which an organization, or an
organization whose interest is combined
with that organization’s interest for pur-
poses of paragraph (c)(4)(ii) of this section,
is a general partner under applicable state
law is not a QPI within the meaning of
paragraph (c)(2) of this section, regardless
of the organization’s percentage interest.
Such partnership interest cannot be a QPI
for any organization or for any of the orga-
nizations whose interest is combined with
that organization’s interest for purposes of
paragraph (c)(4)(ii) of this section.
(iii) Application of other sections. This
paragraph (c) does not otherwise impact
application of section 512(c) and the frag-
mentation rule under section 513(c).
(9) Transition rule for certain part-
nership interests—(i) In general. If a di-
rectly-held partnership interest acquired
prior to August 21, 2018, is not a QPI, an
organization may treat such partnership
interest as a separate unrelated trade or
business for purposes of section 512(a)
(6) regardless of the number of unrelated
trades or businesses directly or indirectly
conducted by the partnership. For exam-
ple, if an organization has a 35 percent
capital interest in a partnership acquired
prior to August 21, 2018, it can treat the
partnership as a single trade or business
even if the partnership’s investments gen-
erated UBTI from lower-tier partnerships
that were engaged in multiple trades or
businesses. A partnership interest acquired
prior to August 21, 2018, will continue to
meet the requirement of this rule even if
the organization’s percentage interest in
such partnership changes before the end
of the transition period (see paragraph (c)
(9)(iii) of this section).
(ii) Exclusivity. An organization may
apply either the transition rule in para-
graph (c)(9)(i) of this section or the look-
through rule in paragraph (c)(2)(ii) of this
section, but not both, to a partnership in-
terest described in paragraph (c)(9)(i) of
this section that also qualifies for applica-
tion of the look-through rule described in
paragraph (c)(2)(ii).
(iii) Transition period. An organization
may rely on this transition rule until the
first day of the organization’s first taxable
year beginning after December 2, 2020.
(d) Income from certain controlled
entities—(1) Specified payments from
controlled entities. If an organization
(controlling organization) controls an-
other entity (within the meaning of sec-
tion 512(b)(13)(D)) (controlled entity),
all specified payments (as defined in sec-
tion 512(b)(13)(C)) received by a con-
trolling organization from that controlled
entity are treated as gross income from a
separate unrelated trade or business for
purposes of paragraph (a) of this section.
If a controlling organization receives spec-
ified payments from two different con-
trolled entities, the payments from each
controlled entity are treated as a separate
unrelated trade or business. For example,
a controlling organization that receives
rental payments from two controlled en-
tities has two separate unrelated trades or
businesses, one for each controlled entity.
The specified payments from a controlled
entity are treated as gross income from one
trade or business regardless of whether the
controlled entity engages in more than one
unrelated trade or business or whether the
controlling organization receives more
than one type of specified payment from
that controlled entity.
(2) Certain amounts derived from con-
trolled foreign corporations. All amounts
included in UBTI under section 512(b)
(17) are treated as income derived from
a separate unrelated trade or business for
purposes of paragraph (a) of this section.
(e) S corporation interests—(1) In gen-
eral. Except as provided in paragraph (e)
(2) of this section, if an organization owns
stock in an S corporation (S corporation
interest), such S corporation interest is
treated as an interest in a separate unrelat-
ed trade or business for purposes of para-
graph (a) of this section. Thus, if an orga-
nization owns two S corporation interests,
neither of which is described in paragraph
(e)(2) of this section, the exempt organiza-
tion reports two separate unrelated trades
or businesses, one for each S corporation
interest. The UBTI from an S corporation
interest is the amount described in sec-
tion 512(e)(1)(B).
(2) Exception for a qualifying S corpo-
ration interest. Notwithstanding paragraph
(e)(1) of this section, an organization may
aggregate its UBTI from an S corporation
interest with its UBTI from other invest-
ment activities (described in paragraph (c)
(1) of this section) if the organization’s
ownership interest in the S corporation
meets the criteria for a QPI as described
in paragraph (c)(2)(i) of this section (sub-
stituting “S corporation” for “partnership”
and “shareholder” or “shareholders” for
“partner” or “partners,” as applicable,
throughout paragraphs (c)(2)(i), (c)(3), (c)
(4), (c)(5)(iii), (c)(5)(iv), and (c)(6) of this
section; “no more than 2 percent of stock
ownership” for “no more than 2 percent
of the profits interest and no more than
2 percent of the capital interest” in para-
graph (c)(3) of this section; “no more than
20 percent of stock ownership” in place
of “no more than 20 percent of the capi-

Bulletin No. 2020–52 1727 December 21, 2020
tal interest” in paragraph (c)(4)(i) of this
section; and “Schedule K-1 (Form 1120-
S)” for “Schedule K-1 (Form 1065)” for
purposes of paragraph (c)(5)(iv) of this
section). Paragraphs (c)(5)(i) and (c)(5)
(ii) do not apply for purposes of determin-
ing an organization’s ownership interest
in an S corporation; rather, the average
percentage stock ownership determined
under paragraph (c)(5)(iii) of this section
applies for purposes of this paragraph (e)
(2). For purposes of paragraph (c)(5)(iv)
of this section, an organization can rely
on the Schedule K-1 (Form 1120-S) (or
its successor) it receives from the S cor-
poration only if the form lists information
sufficient to determine the organization’s
percentage of stock ownership for the
year. A Schedule K-1 (Form 1120-S) that
reports “zero” as the organization’s num-
ber of shares of stock in either the begin-
ning or end of the S corporation’s taxable
year does not list information sufficient
to determine the organization’s percent-
age of stock ownership for the year. The
grace period described in paragraph (c)
(6) of this section applies to changes in an
exempt organization’s percentage of stock
ownership in an S corporation.
(f) Allocation of deductions. An orga-
nization must allocate deductions between
separate unrelated trades or businesses
using the method described in §1.512(a)-
1(c).
(g) Total UBTI—(1) In general. The
total UBTI of an organization with more
than one unrelated trade or business is the
sum of the UBTI computed with respect
to each separate unrelated trade or busi-
ness (as identified under paragraph (a)(2)
of this section and subject to the limitation
described in paragraph (g)(2) of this sec-
tion), less a charitable contribution deduc-
tion, an NOL deduction for losses arising
in taxable years beginning before January
1, 2018 (pre-2018 NOLs), and a specific
deduction under section 512(b)(12), as
applicable.
(2) UBTI not less than zero. For pur-
poses of paragraph (g)(1) of this section,
the UBTI with respect to any separate un-
related trade or business identified under
paragraph (a)(2) of this section cannot be
less than zero.
(h) Net operating losses—(1) In gen-
eral. For taxable years beginning after
December 31, 2017, an exempt organiza-
tion with more than one unrelated trade or
business determines the NOL deduction
allowed by sections 172(a) and 512(b)(6)
separately with respect to each of its unre-
lated trades or businesses. Accordingly, if
an exempt organization has more than one
unrelated trade or business, §1.512(b)-
1(e) applies separately with respect to
each such unrelated trade or business.
(2) Coordination of pre-2018 and post-
2017 NOLs. An organization with pre-2018
NOLs, and with losses arising in a taxable
year beginning after December 31, 2017
(post-2017 NOLs), deducts its pre-2018
NOLs from total UBTI before deducting
any post-2017 NOLs with regard to a sep-
arate unrelated trade or business against
the UBTI from such trade or business.
Pre-2018 NOLs are taken against the total
UBTI as determined under paragraph (g)
of this section in a manner that allows for
maximum utilization of post-2017 NOLs in
a taxable year. For example, an organiza-
tion could choose to allocate all of its pre-
2018 NOLs to one of its separate unrelated
trades or businesses or it could allocate its
pre-2018 NOLs ratably among its separate
unrelated trades or businesses, whichever
results in the greatest utilization of the post-
2017 NOLs in that taxable year.
(3) Treatment of NOLs upon the termi-
nation, sale, exchange, or other disposi-
tion of a separate unrelated trade or busi-
ness. After offsetting any gain resulting
from the termination, sale, exchange, or
disposition of a separate unrelated trade or
business, any NOL remaining is suspend-
ed. However, the suspended NOLs may
be used if that previous separate unrelated
trade or business is later resumed or if a
new unrelated trade or business that is ac-
curately identified using the same NAICS
2-digit code as the previous separate un-
related trade or business is commenced or
acquired in a future taxable year.
(4) Treatment of NOLs when the iden-
tification of a separate unrelated trade
or business changes—(i) In general. For
purposes of section 512(a)(6) and this sec-
tion, a separate unrelated trade or business
for which the appropriate identification
(within the meaning of paragraph (a) of
this section) changes is treated as if the
originally identified separate unrelated
trade or business is terminated and a new
separate unrelated trade or business is
commenced. None of the NOLs from the
previously identified separate unrelated
trade or business will be carried over to the
newly identified separate unrelated trade
or business. For example, if the nature
of a separate unrelated trade or business
changes such that it is more accurately
described by another NAICS 2-digit code,
the separate unrelated trade or business is
treated as a new separate unrelated trade
or business with no NOLs. The change in
identification may apply to all or a part of
the originally identified separate unrelated
trade or business. If the change in identi-
fication applies to the originally identified
separate trade or business in its entirety,
any NOLs attributable to that separate un-
related trade or business are suspended in
accordance with paragraph (h)(3) of this
section. If the change in identification
applies to the originally identified sep-
arate unrelated trade or business in part,
the originally identified separate unrelat-
ed trade or business that is not changing
retains the full NOLs attributable to the
originally identified separate unrelated
trade or business, without allocation to
the portion that became a newly identified
separate unrelated trade or business. This
paragraph (h)(4) also applies to each QPI
that becomes a non-QPI. In this case, any
NOLs attributable to the QPI that became
a non-QPI are retained with the organiza-
tion’s investment activities described in
paragraph (c) of this section.
(ii) Exception for non-material chang-
es. In the case of a separate unrelated trade
or business that is accidentally identified
using the wrong NAICS 2-digit code or if
an organization has determined that a sep-
arate unrelated trade or business that has
not materially changed is more accurately
identified by another NAICS 2-digit code,
any NOL attributable to the originally
identified separate unrelated trade or busi-
ness becomes an NOL of the newly iden-
tified separate unrelated trade or business.
(iii) Effective date of change in iden-
tification. A change in identification de-
scribed in this paragraph (h)(4) is effec-
tive on the first day of the taxable year in
which the change in identification is made.
Accordingly, the newly identified separate
unrelated trade or business is treated as
commencing on this date.
(iv) Examples—(A) In general. The
following examples illustrate the rules de-
scribed in this paragraph (h)(4).

December 21, 2020 1728 Bulletin No. 2020–52
(B) Example 1. Erroneous code—(1)
Organization G is described in section
501(c) and is exempt from Federal income
tax under section 501(a). In addition to its
investment activities, Organization G has
two separate unrelated trades or business-
es – Q and R – that are identified with dif-
ferent NAICS 2-digit codes. Both Q and R
have NOLs carried over from post-2017
taxable years.
(2) In Year 2 (a post-2017 taxable year),
Organization G realizes that it accidental-
ly used the wrong NAICS 2-digit code to
identify R. The NOLs attributable to R
under the old NAICS 2-digit code become
the NOLs of R under the new NAICS
2-digit code as of the first day of Year 2.
(C) Example 2. Material change—(1)
Same facts as Example 1, except assume
that, in addition to its investment activi-
ties, Organization G has three separate un-
related trades or businesses – Q, R, and S
– that are identified with different NAICS
2-digit codes. Q, R, and S all have NOLs
carried over from post-2017 taxable years.
(2) Organization G changes the NA-
ICS 2-digit code identifying R to the same
NAICS 2-digit code identifying S because
the nature of the unrelated trade or busi-
ness materially changed. Any post-2017
NOLs attributable to R are suspended (see
paragraph (h)(4)(i) of this section). Orga-
nization G now has two separate unrelated
trades or businesses – Q and S – as of the
first day of Year 2.
(D) Example 3. Partial material
change. Same facts as Example 1, except
assume that Organization G determines
that a part of R has materially changed
such that R should be identified as two
separate unrelated trades or businesses –
R1 and R2. R1 retains the NAICS 2-digit
code originally identifying R, and R2 is
identified with a new NAICS 2-digit code
that is not the same NAICS 2-digit code
identifying Q. R2 is treated as a new sep-
arate unrelated trade or business with no
NOLs as of the first day of Year 2. Any
post-2017 NOLs attributable to R remain
with R1.
(E) Example 4. QPI to non-QPI—(1)
Same facts as Example 1, but assume that
Organization G has a partnership interest
in T that was, for prior taxable years, a
QPI included with Organization G’s in-
vestment activities. In Year 3 (a post-2017
taxable year), Organization G acquires
more than 20 percent of the capital inter-
ests in T. The grace period described in
paragraph (c)(6) of this section does not
apply because the increase in percentage
interest was not due to the actions of other
partners.
(2) T conducts two trade or business
activities that are unrelated trade or busi-
ness activities with respect to Organi-
zation G – T1 and T2. Both T1 and T2
will be treated as new separate unrelat-
ed trades or business as of the first day
of Year 2. Organization G identifies T1
with the same NAICS 2-digit code used
to identify Q and T2 with a NAICS 2-dig-
it code that is different than the NAICS
2-digit codes used to identify Q and R.
In addition to its investment activities,
Organization G has three separate unre-
lated trades or businesses – Q, R, and T2.
Any post-2017 NOLs attributable to the
QPI remain with Organization G’s other
investment activities separate unrelated
trade or business.
(i) Applicability dates. This section is
applicable to taxable years beginning on
or after December 2, 2020. Taxpayers
may choose to apply this section to tax-
able years beginning on or after January 1,
2018, and before December 2, 2020.
Par. 6. Section 1.512(b)-1 is amended
by:
1. Revising paragraph (a)(1).
2. Adding a sentence to the end of para-
graph (a)(3).
3. Adding paragraph (e)(5).
4. Adding paragraphs (g)(4) and (5).
The revisions and additions read as fol-
lows:
§1.512(b)-1 Modifications.
(a) * * *
(1) * * * Dividends (including an in-
clusion of subpart F income under sec-
tion 951(a)(1)(A) or an inclusion of glob-
al intangible low-taxed income (GILTI)
under section 951A(a), both of which are
treated in the same manner as a dividend
for purposes of section 512(b)(1)), inter-
est, payments with respect to securities
loans (as defined in section 512(a)(5)),
annuities, income from notional principal
contracts (as defined in §1.837-7 or reg-
ulations issued under section 446), other
substantially similar income from ordi-
nary and routine investments to the extent
determined by the Commissioner, and all
deductions directly connected with any
of the foregoing items of income must be
excluded in computing unrelated business
taxable income.
* * * * *
(3) * * * The exclusion under para-
graph (a)(1) of this section of an inclusion
of subpart F income under section 951(a)
(1)(A) or an inclusion of GILTI under
section 951A(a) from income (both inclu-
sions being treated in the same manner as
dividends) is applicable to taxable years
beginning on or after December 2, 2020.
However, an organization may choose to
apply this exclusion to taxable years be-
ginning before December 2, 2020.
* * * * *
(e) * * *
(5) See §1.512(a)-6(h) regarding the
computation of the net operating loss de-
duction when an organization has more
than one unrelated trade or business.
* * * * *
(g) * * *
(4) The term unrelated business tax-
able income
as used in section 512(b)
(10) and (11) refers to unrelated business
taxable income after application of sec-
tion 512(a)(6).
(5) Paragraph (g)(4) of this section is
applicable to taxable years beginning on
or after December 2, 2020. Taxpayers
may choose to apply this section to tax-
able years beginning on or after January 1,
2018, and before December 2, 2020.
* * * * *
Par. 7. Section 1.513-1 is amended by:
1. Revising the third and fourth sen-
tence in paragraph (a).
2. Redesignating paragraphs (f) and (g)
as paragraphs (g) and (h).
3. Adding new paragraph (f).
4. Adding a sentence to the end of new-
ly redesignated paragraph (h).
The revisions and additions read as fol-
lows:
§1.513-1 Definition of unrelated trade or
business.
(a) * * * For certain exceptions from this
definition, see paragraph (e) of this section.
For a special definition of unrelated trade
or business applicable to certain trusts, see
paragraph (f) of this section. * * *
* * * * *

Bulletin No. 2020–52 1729 December 21, 2020
(f) Special definition of “unrelated trade
or business” for trusts. In the case of a trust
computing its unrelated business taxable
income under section 512 for purposes of
section 681, or a trust described in sec-
tion 401(a) or section 501(c)(17), which
is exempt from tax under section 501(a),
section 513(b) provides that the term unre-
lated trade or business means any trade or
business regularly carried on by such trust
or by a partnership of which it is a member.
This definition also applies to an individual
retirement account described in section 408
that, under section 408(e), is subject to the
tax imposed by section 511.
* * * * *
(h) * * * Paragraph (f) of this sec-
tion applies to taxable years beginning on
or after December 2, 2020.
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
Approved: November 13, 2020.
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on
November 30, 2020, 4:14 p.m., and published in the
issue of the Federal Register for December 02, 2020,
85 FR 77952)
26 CFR 1.245A-6 through 26 CFR 1.245A-11; 26
CFR 1.951A-2; 26 CFR 1.6038-2
T.D. 9934
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Coordination of
Extraordinary Disposition
and Disqualified Basis
Rules
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations under sections 245A and
951A of the Internal Revenue Code (the
“Code”) that coordinate the extraordinary
disposition rule under section 245A of
the Code with the disqualified basis and
disqualified payment rules under section
951A of the Code. This document also
contains final regulations under section
6038 of the Code regarding information
reporting to facilitate administration of
the final regulations. The final regulations
affect corporations that are subject to the
extraordinary disposition rule and the
disqualified basis rule or the disqualified
payment rule. This document finalizes
proposed regulations published on August
27, 2020.
DATES: Effective date: These regulations
are effective on January 12, 2021.
Applicability dates: For dates of applica-
bility, see §§ 1.245A-11 and 1.6038-2(m)
(5).
FOR FURTHER INFORMATION CON-
TACT: Logan M. Kincheloe, (202) 317-
6937 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On August 27, 2020, the Department
of the Treasury (‘‘Treasury Department’’)
and the IRS published proposed regula-
tions (REG-124737-19) under sections
245A, 951A, and 6038 in the Federal
Register (85 FR 53098) (the ‘‘proposed
regulations’’).
The Treasury Department and the IRS
received one written comment with re-
spect to the proposed regulations; howev-
er, the comment was not substantively re-
lated to, and did not suggest any revisions
to, the proposed regulations. Therefore,
this preamble does not address the com-
ment. The written comment is available
at www.regulations.gov or upon request.
A public hearing on the proposed regula-
tions was not held because there were no
requests to speak.
This document contains amendments
to 26 CFR part 1 under sections 245A,
951A, and 6038 (the “final regulations”).
Any term used but not defined in this pre-
amble has the meaning given to it in the
final regulations or the preamble to the
proposed regulations.
The effective date of these regula-
tions is delayed until January 12, 2021,
to provide for the orderly amendment of
§1.951A-2 by TD 9922, 85 FR 71998,
published on November 12, 2020, and
with a delayed effective date of January
11, 2021. The changes to §1.951A-2 made
in these regulations are to the regulation
text as amended by TD 9922.
Explanation of Revisions
I. Overview
The extraordinary disposition rule
and the disqualified basis rule generally
address certain transactions, involving
related controlled foreign corporations
(“CFCs”) of a section 245A sharehold-
er, that were not subject to current U.S.
tax solely by reason of having occurred
during the disqualified period. In gener-
al, as to the section 245A shareholder, the
extraordinary disposition rule ensures that
earnings and profits generated by such a
transaction are subject to U.S. tax when
distributed as a dividend, and the disqual-
ified basis rule ensures that basis gener-
ated by the transaction does not offset or
reduce income that would otherwise be
subject to U.S. tax at the section 245A
shareholder-level under section 951(a)(1)
(A) or 951A(a), or at the CFC-level un-
der section 882(a) (that is, as income ef-
fectively connected with the conduct of a
trade or business in the United States). See
§§1.245A-5 and 1.951A-2(c)(5).
Absent a coordination mechanism, the
extraordinary disposition rule and the dis-
qualified basis rule could give rise to ex-
cess taxation as to a section 245A share-
holder, because the earnings and profits to
which the extraordinary disposition rule
applies (“extraordinary disposition E&P”),
and the basis to which the disqualified ba-
sis rule applies (“disqualified basis”), are
generally a function of a single amount of
gain. The proposed regulations coordinate
the extraordinary disposition rule and the
disqualified basis rule through two opera-
tive rules: the DQB reduction rule, which
reduces disqualified basis in certain cases,
and the EDA reduction rule, which reduc-
es an extraordinary disposition account in

December 21, 2020 1730 Bulletin No. 2020–52
certain cases. See proposed §§1.245A-7
and 1.245A-8. These operative rules also
apply to coordinate the extraordinary dis-
position rule and the disqualified payment
rule, which addresses transactions similar
to those to which the disqualified basis
rule applies.
This rulemaking finalizes the pro-
posed regulations, with one revision, as
discussed in part II of this Explanation of
Revisions.
II. The DQB Reduction Rule – Treatment
of Prior Extraordinary Disposition
Amounts
Under the proposed regulations, the
DQB reduction rule generally applies
when, as to a section 245A shareholder,
extraordinary disposition E&P become
subject to U.S. tax by reason of the appli-
cation of the extraordinary disposition rule
to a distribution of the extraordinary dispo-
sition E&P. See proposed §§1.245A-7(b)
and 1.245A-8(b). In general, the DQB
reduction rule provides that basis attrib-
utable to gain to which the extraordinary
disposition E&P are also attributable is no
longer disqualified basis. Id.
The preamble to the proposed regula-
tions noted that the Treasury Department
and the IRS were studying whether the
DQB reduction rule should also apply
by reason of a prior extraordinary dispo-
sition amount described in §1.245A-5(c)
(3)(i)(D)(1)(i) through (iv). The pream-
ble requested comments on this matter,
but none were received. Such a prior ex-
traordinary disposition amount generally
represents extraordinary disposition E&P
that have become subject to U.S. tax as to
a section 245A shareholder other than by
direct application of the extraordinary dis-
position rule – for example, extraordinary
disposition E&P that give rise to an in-
come inclusion to the section 245A share-
holder by reason of sections 951(a)(1)(B)
and 956(a). Under the extraordinary dis-
position rule, the application of the other
provision to the extraordinary disposition
E&P results in a reduction to the applica-
tion of the extraordinary disposition rule,
because otherwise the earnings and profits
(or an amount of other earnings and prof-
its) could be taxed as to the section 245A
shareholder both by reason of the other
provision and the extraordinary disposi-
tion rule. See §1.245A-5(c)(3)(i)(D). This
reduction to the application of the extraor-
dinary disposition rule will generally re-
sult in an extraordinary disposition being
subject to a single level of U.S. tax.
The Treasury Department and the IRS
have determined that the DQB reduc-
tion rule should also apply by reason of
a prior extraordinary disposition amount
described in §1.245A-5(c)(3)(i)(D)(1)(i)
through (iv), and therefore the final reg-
ulations provide a rule to this effect. See
§§1.245A-7(b)(3) and 1.245A-8(b)(6).
Absent such an approach, gain to which
extraordinary disposition E&P and dis-
qualified basis are attributable could in
effect be taxed both by reason of the dis-
qualified basis rule and a provision other
than the extraordinary disposition rule.
Applicability Dates
The final regulations apply to taxable
years of foreign corporations beginning
on or after December 1, 2020, and to
taxable years of section 245A sharehold-
ers in which or with which such taxable
years of foreign corporations end. See
§1.245A-11(a). In addition, taxpayers
may choose to apply the final regulations
to taxable years beginning before Decem-
ber 1, 2020, subject to certain limitations.
See
§1.245A-11(b).
Special Analyses
These regulations are not subject to re-
view under section 6(b) of Executive Or-
der 12866 pursuant to the Memorandum
of Agreement (April 11, 2018) between
the Treasury Department and the Office
of Management and Budget regarding re-
view of tax regulations.
I. Paperwork Reduction Act (“PRA”)
The collections of information in the
final regulations are in §1.6038-2(f)(17)
and (18). Under the PRA (44 U.S.C. 3501
et seq.), an agency may not conduct or
sponsor and a person is not required to re-
spond to a collection of information unless
it displays a valid OMB control number.
The collection of information in
§1.6038-2(f)(17) is mandatory for every
U.S. shareholder of a CFC that holds an
item of property that has disqualified ba-
sis within the meaning of §1.951A-3(h)
(2) during an annual accounting period
and files Form 5471 for that period (OMB
control number 1545-0123). The collec-
tion of information in §1.6038-2(f)(17) is
satisfied by providing information about
the items of property with disqualified
basis held by the CFC during the CFC’s
accounting period as Form 5471 and its
instructions may prescribe. For purposes
of the PRA, the reporting burden associat-
ed with §1.6038-2(f)(17) will be reflected
in the applicable PRA submission asso-
ciated with Form 5471. As provided be-
low, the estimated number of respondents
for the reporting burden associated with
§1.6038-2(f)(17) is 7,500-8,500, based on
estimates provided by the Research, Ap-
plied Analytics and Statistics Division of
the IRS.
The related new or revised tax form is
as follows:
NewRevision of existing formNumber of respondents (estimate)
Schedule to Form 5471

7,500-8,500
The collection of information in §1.6038-
2(f)(18) is mandatory for every U.S. share-
holder of a CFC that applies the rules of
§§1.245A-6 through 1.245A-11 during an
annual accounting period and files Form
5471 for that period (OMB control number
1545-0123). The collection of information
in §1.6038-2(f)(18) is satisfied by provid-
ing information about the reduction to an
extraordinary disposition account made pur-
suant to §1.245A-7(b) or §1.245A-8(b) and
reductions to an item of specified property’s
disqualified basis pursuant to §1.245A-7(c)
or §1.245A-8(c) during the corporation’s
accounting period as Form 5471 and its in-
structions may prescribe. For purposes of
the PRA, the reporting burden associated
with §1.6038-2(f)(18) will be reflected in
the applicable PRA submission associated
with Form 5471. As provided below, the
estimated number of respondents for the re-

Bulletin No. 2020–52 1731 December 21, 2020
porting burden associated with §1.6038-2(f)
(18) is 7,500-8,500, based on estimates pro-
vided by the Research, Applied Analytics
and Statistics Division of the IRS.
The related new or revised tax form is
as follows:
NewRevision of existing formNumber of respondents (estimate)
Schedule to Form 5471

7,500-8,500
The current status of the PRA submis-
sions related to the new revised Form 5471
as a result of the information collections in
the final regulations is provided in the ac-
companying table. The reporting burdens
associated with the information collec-
tions in § 1.6038-2(f)(17) and (18) are in-
cluded in the aggregated burden estimates
for OMB control number 1545-0123,
which represents a total estimated burden
time for all forms and schedules for cor-
porations of 3.157 billion hours and total
estimated monetized costs of $58.148 bil-
lion ($2017). The overall burden estimates
provided in 1545-0123 are aggregate
amounts that relate to the entire package
of forms associated with the OMB con-
trol number and will in the future include
but not isolate the estimated burden of the
tax forms that will be revised as a result
of the information collections in the final
regulations. These numbers are therefore
unrelated to the future calculations needed
to assess the burden imposed by the final
regulations. The Treasury Department
and the IRS urge readers to recognize that
these numbers are duplicates of estimates
provided for informational purposes in
other proposed and final regulatory ac-
tions and to guard against over-counting
the burden that international tax provi-
sions imposed before the Act.
No burden estimates specific to the
final regulations are currently available.
The Treasury Department and the IRS
have not identified any burden estimates,
including those for new information col-
lections, related to the requirements under
the final regulations. Proposed revisions
to these forms that reflect the information
collections contained in these final regu-
lations will be made available for public
comment at www.irs.gov/draftforms and
will not be finalized until after approved
by OMB under the PRA.
Information
Collection
Type of
Filer
OMB
Number(s)
Status
Form 5471
Business
(NEW
Model)
1545-0123
Published in the Federal Register on 9/30/19. Public Comment period
closed on 11/29/19. Approved by OMB through 1/31/2021.
https://www.federalregister.gov/documents/2019/09/30/2019-21068/proposed-collection-comment-
request-for-forms-1065-1066-1120-1120-c-1120-f-1120-h-1120-nd-1120-s
II. Regulatory Flexibility Act
It is hereby certified that this rulemak-
ing will not have a significant economic
impact on a substantial number of small
entities within the meaning of section
601(6) of the Regulatory Flexibility Act (5
U.S.C. chapter 6). The small entities that
are subject to §1.245A–5 are small enti-
ties that are U.S. shareholders of certain
foreign corporations that are otherwise
eligible for the section 245A deduction
on distributions from the foreign corpo-
ration. The small entities that are subject
to §1.951A-2(c)(5) are U.S. shareholders
of certain foreign corporations that are
subject to tax under section 951 with re-
spect to subpart F income of those foreign
corporations or section 951A with respect
to tested income of those foreign corpo-
rations.
The taxpayers potentially affected by
these final regulations are U.S. sharehold-
ers of at least two related foreign corpora-
tions, one that has an extraordinary dispo-
sition account and the other that has assets
with disqualified basis corresponding to
the extraordinary disposition account.
This means that the foreign corporation
with the extraordinary disposition account
has or had a fiscal year and engaged in a
disposition of property (i) during the peri-
od between January 1, 2018, and the end
of the transferor foreign corporation’s last
taxable year beginning before 2018; (ii)
outside the ordinary course of the foreign
corporation’s activities; and (iii) general-
ly, while the corporation was a CFC.
The Treasury Department and the IRS
have not estimated how many taxpayers
are likely to be affected by these regu-
lations because data on the taxpayers
that may have engaged in these particu-
lar transactions are not readily available.
Based on tabulations of the 2014 Statis-
tics of Income Study file the Treasury
Department and the IRS estimate that
there are approximately 5,000 domes-
tic corporations with at least one fiscal
year CFC. Previous estimates suggest
that approximately half of domestic cor-
porations with CFCs have less than $25
million in gross receipts. However, the
number of potentially affected taxpayers
is smaller than the number of domestic
corporations with at least one fiscal year
CFC because a domestic corporation will
not be affected unless its fiscal year CFC
engages in a non-routine sale with a re-
lated party that creates an extraordinary
disposition account and disqualified ba-
sis, and the domestic corporation must
then incur the type of cost (limitation of
the section 245A deduction or allocation
of deductions or losses to residual CFC
gross income and reduction in untaxed
earnings) that causes these final regula-
tions to apply. There are several indus-
tries that may be identified as small even

December 21, 2020 1732 Bulletin No. 2020–52
through their annual receipts are above
$25 million or because they have fewer
employees than the SBA Size Standard
for that industry. The Treasury Depart-
ment and the IRS do not have more pre-
cise data indicating the number of small
entities that will be potentially affected
by the regulations. The rule may affect
a substantial number of small entities,
but data are not readily available to as-
sess how many entities will be affected.
Nevertheless, for the reasons described
below, the Treasury Department and the
IRS have determined that the regulations
will not have a significant economic im-
pact on small entities.
The Treasury Department and the IRS
have concluded that there is no signifi-
cant economic impact on such entities as
a result of the final regulations. To make
this determination, the Treasury Depart-
ment and the IRS calculated the ratio of
estimated global intangible lowed-taxed
income (‘‘GILTI’’) and subpart F in-
come tax attributable to these businesses
to aggregate total sales data. Bureau of
Economic Analysis data on the activities
of multinational enterprises report to-
tal sales of all foreign affiliates of U.S.
parents of $7,183 billion in 2017 (ac-
cessed at this web address in December,
2018: https://apps.bea.gov/iTable/iTable.
cfm?ReqID=2&step=1). Projections for
GILTI and Subpart F tax revenues aver-
age $20 billion per year over the ten-year
budget window (see Joint Committee on
Taxation, Estimated Budget Effects of
the Conference Agreement for H.R. 1,
The “Tax Cuts and Jobs Act, JCX-67-17,
December 18, 2017), resulting in a less
than 1 percent share of GILTI and Sub-
part F tax in total sales of U.S.-parent-
ed affiliates. Compliance costs for these
regulations will be a small fraction of the
revenue amounts. Thus, any tax regula-
tion that affects the proceeds from GILTI
and subpart F income would have an eco-
nomic impact of less than 3 to 5 percent
of “receipts” (as that term is defined in 13
CFR 121.104, the provision for calculat-
ing small business receipts, to mean sales
and any other measure of gross income),
an economic impact that the Treasury De-
partment and IRS regard as the threshold
for significant under the Regulatory Flex-
ibility Act. This calculated percentage is
furthermore an upper bound on the true
expected effect of the final regulations
because not all the GILTI and subpart
F income estimated to be attributable to
small entities will be affected by the final
regulations. For example, GILTI and sub-
part F income that is not attributable to a
CFC that holds property with disqualified
basis (or property that would otherwise
have disqualified basis in the absence of
these regulations) is not affected by these
final regulations. Consequently, the Trea-
sury Department and the IRS have deter-
mined that these final regulations will not
have a significant economic impact on a
substantial number of small entities.
Pursuant to section 7805(f) of the Code,
the proposed regulations (REG-124737-
19) preceding these final regulations were
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on the impact on small busi-
nesses, and no comments were received.
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in any
one year by a state, local, or tribal govern-
ment, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, up-
dated annually for inflation. These regula-
tions do not include any Federal mandate
that may result in expenditures by state,
local, or tribal governments, or by the pri-
vate sector in excess of that threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive Order. These regulations do
not have federalism implications and do
not impose substantial direct compliance
costs on state and local governments or
preempt state law within the meaning of
the Executive Order.
Drafting Information
The principal author of the final regu-
lations is Logan M. Kincheloe, Office of
Associate Chief Counsel (International).
However, other personnel from the Trea-
sury Department and the IRS participated
in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amend-
ed as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order for §§ 1.245A-6 through
1.245A-11 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sections 1.245A-6 through 1.245A-
11 also issued under 26 U.S.C. 245A(g),
882(c)(1)(A), 951A, 954(b)(5), 954(c)(6),
and 965(o).
* * * * *
Par. 2. Section 1.245A-5 is amended
by:
1. In the first sentence of paragraph (c)
(3)(i)(A), adding immediately after the
language “by the prior extraordinary dis-
position amount” the language “and as
provided in §1.245A-7 or §1.245A-8”.
2. Revising paragraph (j)(8)(ii).
The revision reads as follows:
§1.245A-5 Limitation of section 245A
deduction and section 954(c)(6)
exception.
* * * * *
(j) * * *
(8) * * *
(ii) Analysis. Because the royalty pre-
payment was carried out with a principal
purpose of avoiding the purposes of this
section, appropriate adjustments are re-
quired to be made under the anti-abuse
rule in paragraph (h) of this section. CFC1
is a CFC that has a November 30 taxable
year, so under paragraph (c)(3)(iii) of this
section, CFC1 has a disqualified period

Bulletin No. 2020–52 1733 December 21, 2020
beginning on January 1, 2018, and ending
on November 30, 2018. In addition, even
though the intangible property licensed
by CFC1 to CFC2 is specified property,
CFC2’s prepayment of the royalty would
not be treated as a disposition of the spec-
ified property by CFC1 and, therefore,
would not constitute an extraordinary dis-
position (and thus would not give rise to
extraordinary disposition E&P), absent
the application of the anti-abuse rule of
paragraph (h) of this section. Pursuant to
paragraph (h) of this section, the earnings
and profits of CFC1 generated as a result
of the $100x of prepaid royalty are treat-
ed as extraordinary disposition E&P for
purposes of this section and, therefore,
US1 has an extraordinary disposition ac-
count with respect to CFC1 of $100x. In
addition, the prepaid royalty gives rise
to a disqualified payment (as defined in
§1.951A-2(c)(6)(ii)(A)) of $100x. As a
result, §1.245A-7(b) or §1.245A-8(b), as
applicable, applies to reduce the disquali-
fied payment in the same manner as if the
disqualified payment were disqualified
basis, and §1.245A-7(c) or §1.245A-8(c),
as applicable, applies to reduce the ex-
traordinary disposition account in the
same manner as if the deductions direct-
ly or indirectly related to the disqualified
payment were deductions attributable to
disqualified basis of an item of specified
property that corresponds to the extraordi-
nary disposition account.
* * * * *
Par. 3. Sections 1.245A-6 through
1.245A-11 are added to read as follows:
Sec.
* * * * *
1.245A-6 Coordination of extraordinary
disposition and disqualified basis rules.
1.245A-7 Coordination rules for simple
cases.
1.245A-8 Coordination rules for complex
cases.
1.245A-9 Other rules and definitions.
1.245A-10 Examples.
1.245A-11 Applicability dates.
* * * * *
(a) Scope. This section and §§1.245A-
7 through 1.245A-11 coordinate the ap-
plication of the extraordinary disposition
rules of §1.245A-5(c) and (d) and the dis-
qualified basis rule of §1.951A-2(c)(5).
Section 1.245A-7 provides coordination
rules for simple cases, and §1.245A-8
provides coordination rules for complex
cases. Section 1.245A-9 provides defini-
tions and other rules, including rules of
general applicability for purposes of this
section and §§1.245A-7 through 1.245A-
11. Section 1.245A-10 provides exam-
ples illustrating the application of this
section and §§1.245A-7 through 1.245A-
9. Section 1.245A-11 provides applica-
bility dates.
(b) Conditions to apply coordination
rules for simple cases. For a taxable year
of a section 245A shareholder for which
the conditions described in paragraphs (b)
(1) and (2) of this section are satisfied, the
section 245A shareholder may apply the
coordination rules of §1.245A-7 (rules
for simple cases) to an extraordinary
disposition account of the section 245A
shareholder with respect to an SFC and
disqualified basis of an item of specified
property that corresponds to the extraor-
dinary disposition account (as determined
pursuant to §1.245A-9(b)(1)). If the
conditions are not satisfied, then the co-
ordination rules of §1.245A-8 (rules for
complex cases) apply beginning with the
first day of the first taxable year of the
section 245A shareholder for which the
conditions are not satisfied and all tax-
able years thereafter. If the conditions are
satisfied for a taxable year of the section
245A shareholder but the section 245A
shareholder chooses not to apply the co-
ordination rules of §1.245A-7 for that
taxable year, then the coordination rules
of §1.245A-8 apply to that taxable year
(though, for a subsequent taxable year,
the section 245A shareholder may ap-
ply the coordination rules of §1.245A-7,
provided that the conditions described in
paragraphs (b)(1) and (2) of this section
are satisfied for such subsequent taxable
year and have been satisfied for all earlier
taxable years). For purposes of applying
paragraphs (b)(1) and (2) of this section,
a reference to a section 245A shareholder,
an SFC, or a CFC does not include a suc-
cessor of the section 245A shareholder,
the SFC, or the CFC, respectively.
(1) Requirements related to the SFC.
The condition of this paragraph (b)(1) is
satisfied for a taxable year of the section
245A shareholder if the following require-
ments are satisfied:
(i) On January 1, 2018, the section
245A shareholder owns (within the mean-
ing of section 958(a)) all of the stock (by
vote and value) of the SFC.
(ii) On each day of the taxable year of
the section 245A shareholder, the section
245A shareholder owns (within the mean-
ing of section 958(a)) all of the stock (by
vote and value) of the SFC.
(iii) On no day during the taxable year
of the section 245A shareholder was the
SFC a distributing or controlled corpora-
tion in a transaction described in a section
355, or did the SFC acquire the assets of
a corporation as to which there is an ex-
traordinary disposition account pursuant
to a transaction described in section 381
(that is, taking into account the require-
ments of this paragraph (b)(1) and para-
graph (b)(2) of this section, the section
245A shareholder’s extraordinary disposi-
tion account with respect to the SFC has
not been not been adjusted pursuant to the
rules of §1.245A-5(c)(4)).
(2) Requirements related to an item of
specified property that corresponds to an
extraordinary disposition account and a
CFC holding the item. The condition of
this paragraph (b)(2) is satisfied for a tax-
able year of a section 245A shareholder if
the following requirements are satisfied:
(i) For each item of specified property
with disqualified basis that corresponds
to the extraordinary disposition account,
the item of specified property is held by a
CFC immediately after the extraordinary
disposition of the item of specified prop-
erty.
(ii) For each CFC described in para-
graph (b)(2)(i) of this section—
(A) All of the stock (by vote and value)
of the CFC is owned (within the meaning
of section 958(a)) by the section 245A
shareholder and any domestic affiliates
of the section 245A shareholder immedi-
ately after the extraordinary disposition
described in paragraph (b)(2)(i) of this
section;
(B) For each taxable year of the CFC
that ends with or within the taxable year
of the section 245A shareholder, there is
no extraordinary disposition account with
respect to the CFC, and the sum of the bal-
ance of the hybrid deduction accounts (as
described in §1.245A(e)-1(d)(1)) with re-
spect to shares of stock of the CFC is zero
(determined as of the end of the taxable

December 21, 2020 1734 Bulletin No. 2020–52
year of the CFC and taking into account
any adjustments to the accounts for the
taxable year); and
(C) On each day of each taxable year of
the CFC that ends with or within the tax-
able year of the section 245A shareholder,
and on each day of each taxable year of the
CFC that begins with or within the taxable
year of the section 245A shareholder—
(1) The CFC holds the item of specified
property described in paragraph (b)(1)(i)
of this section;
(2) The section 245A shareholder and
any domestic affiliates own (within the
meaning of section 958(a)) all of the stock
(by vote and value) of the CFC;
(3) The CFC does not hold any item of
specified property with disqualified basis
other than an item of specified property
that corresponds to the extraordinary dis-
position account;
(4) The CFC does not own an interest
in a partnership, trust, or estate (directly
or indirectly through one or more other
partnerships, trusts, or estates) that holds
an item of specified property with disqual-
ified basis; and
(5) The CFC is not engaged in the con-
duct of a trade or business in the United
States and therefore does not have ECTI,
and the CFC does not have any deficit in
earnings and profits subject to §1.381(c)
(2)-1(a)(5).
§1.245A-7 Coordination rules for simple
cases.
(a) Scope. This section applies for a
taxable year of a section 245A shareholder
for which the conditions of §1.245A-6(b)
(1) and (2) are satisfied and for which the
section 245A shareholder chooses to ap-
ply this section (in lieu of §1.245A-8).
(b) Reduction of disqualified basis by
reason of an extraordinary disposition
amount or tiered extraordinary disposi-
tion amount—(1) In general. If, for a tax-
able year of a section 245A shareholder,
an extraordinary disposition account of
the section 245A shareholder gives rise
to one or more extraordinary disposition
amounts or tiered extraordinary disposi-
tion amounts, then, with respect to an item
of specified property that corresponds to
the extraordinary disposition account,
the disqualified basis of the item of spec-
ified property is, solely for purposes of
§1.951A-2(c)(5), reduced (but not below
zero) by an amount (determined in the
functional currency in which the extraor-
dinary disposition account is maintained)
equal to the product of—
(i) The sum of the extraordinary dis-
position amounts and the tiered extraordi-
nary disposition amounts; and
(ii) A fraction, the numerator of which
is the disqualified basis of the item of
specified property, and the denominator of
which is the sum of the disqualified basis
of each item of specified property that cor-
responds to the extraordinary disposition
account.
(2) Timing rules regarding disquali-
fied basis. See §1.245A-9(b)(2) for timing
rules regarding the determination of, and
reduction to, disqualified basis of an item
of specified property.
(3) Special rule regarding prior ex-
traordinary disposition amounts. For pur-
poses of paragraph (b)(1) of this section,
to the extent that an extraordinary disposi-
tion account of a section 245A sharehold-
er is reduced under §1.245A-5(c)(3)(i)(A)
by reason of a prior extraordinary dispo-
sition amount described in §1.245A-5(c)
(3)(i)(D)(1)(i) through (iv), the extraordi-
nary disposition account is considered to
give rise to an extraordinary disposition
amount or tiered extraordinary disposition
amount (and the amount by which the ac-
count is reduced is treated as an extraordi-
nary disposition amount or tiered extraor-
dinary disposition amount).
(c) Reduction of extraordinary dispo-
sition account by reason of the alloca-
tion and apportionment of deductions or
losses attributable to disqualified basis—
(1) In general. If, for a taxable year of a
CFC, the CFC holds one or more items
of specified property that correspond to
an extraordinary disposition account of a
section 245A shareholder with respect to
an SFC, then the extraordinary disposition
account is reduced (but not below zero)
by the lesser of the amounts described in
paragraphs (c)(1)(i) and (ii) of this section
(each determined in the functional curren-
cy of the CFC).
(i) The excess (if any) of the adjusted
earnings of the CFC for the taxable year
of the CFC, over the sum of the previously
taxed earnings and profits accounts with
respect to the CFC for purposes of section
959 (determined as of the end of the tax-
able year of the CFC and taking into ac-
count any adjustments to the accounts for
the taxable year).
(ii) The balance of the section 245A
shareholder’s RGI account with respect
to the CFC (determined as of the end of
the taxable year of the CFC, but without
regard to the application of paragraph (c)
(4)(ii) of this section for the taxable year).
(2) Timing of reduction to extraordinary
disposition account. See §1.245A-9(b)(3)
for timing rules regarding the reduction to
an extraordinary disposition account.
(3) Adjusted earnings. The term ad-
justed earnings means, with respect to a
CFC and a taxable year of the CFC, the
earnings and profits of the CFC, deter-
mined as of the end of the CFC’s taxable
year (taking into account all distributions
during the taxable year), and with the ad-
justments described in paragraphs (c)(3)
(i) through (iii) of this section.
(i) The earnings and profits are in-
creased by the amount of any deduction
or loss that is or was allocated and appor-
tioned to residual CFC gross income of
the CFC solely by reason of §1.951A-2(c)
(5)(i).
(ii) The earnings and profits are de-
creased by the amount by which an RGI
account with respect to the CFC has been
decreased pursuant to paragraph (c)(4)(ii)
of this section for a prior taxable year of
the CFC.
(iii) The earnings and profits are deter-
mined without regard to income described
in section 245(a)(5)(A) or dividends de-
scribed in section 245(a)(5)(B) (deter-
mined without regard to section 245(a)
(12)).
(4) RGI account. For a taxable year of
a CFC, the following rules apply to deter-
mine the balance of a section 245A share-
holder’s RGI account with respect to the
CFC:
(i) The balance of the RGI account is
increased by the sum of the amounts of
deductions and losses of the CFC that,
but for §1.951A-2(c)(5)(i), would have
decreased one or more categories of the
CFC’s positive subpart F income or the
CFC’s tested income, or increased or giv-
en rise to a tested loss or one or more qual-
ified deficits of the CFC.
(ii) The balance of the RGI account is
decreased to the extent that, by reason of
the application of paragraph (c)(1) of this

Bulletin No. 2020–52 1735 December 21, 2020
section with respect to the taxable year of
the CFC, there is a reduction to the ex-
traordinary disposition account of the sec-
tion 245A shareholder.
§1.245A-8 Coordination rules for
complex cases.
(a) Scope. This section applies begin-
ning with the first day of the first taxable
year of a section 245A shareholder for
which §1.245A-7 does not apply and for
all taxable years thereafter, or for a tax-
able year of a section 245A shareholder
for which the section 245A shareholder
chooses not to apply §1.245A-7.
(b) Reduction of disqualified basis by
reason of an extraordinary disposition
amount or tiered extraordinary disposi-
tion amount—(1) In general. If, for a tax-
able year of a section 245A shareholder,
an extraordinary disposition account of
the section 245A shareholder gives rise
to one or more extraordinary disposition
amounts or tiered extraordinary disposi-
tion amounts, then, with respect to an item
of specified property that corresponds to
the extraordinary disposition account and
for which the ownership requirement of
paragraph (b)(3)(i) of this section is sat-
isfied for the taxable year of the section
245A shareholder, solely for purposes of
§1.951A-2(c)(5), the disqualified basis of
the item of specified property is reduced
(but not below zero) by an amount (deter-
mined in the functional currency in which
the extraordinary disposition account is
maintained) equal to the product of—
(i) The excess (if any) of—
(A) The sum of the extraordinary dis-
position amounts and the tiered extraordi-
nary disposition amounts; over
(B) The basis benefit account with re-
spect to the extraordinary disposition ac-
count (determined as of the end of the tax-
able year of the section 245A shareholder,
and without regard to the application of
paragraph (b)(4)(i)(B) of this section for
the taxable year); and
(ii) A fraction, the numerator of which
is the disqualified basis of the item of
specified property, and the denominator
of which is the sum of the disqualified ba-
sis of each item of specified property that
corresponds to the extraordinary disposi-
tion account and for which the ownership
requirement of paragraph (b)(3)(i) of this
section is satisfied for the taxable year of
the section 245A shareholder.
(2) Timing rules regarding disquali-
fied basis. See §1.245A-9(b)(2) for timing
rules regarding the determination of, and
reduction to, disqualified basis of an item
of specified property.
(3) Ownership requirement with re-
spect to an item of specified property—(i)
In general. For a taxable year of a section
245A shareholder, the ownership require-
ment of this paragraph (b)(3)(i) is satisfied
with respect to an item of specified prop-
erty if, on at least one day that falls with-
in the taxable year, the item of specified
property is held by—
(A) The section 245A shareholder;
(B) A person (other than the section
245A shareholder) that, on at least one day
that falls within the section 245A share-
holder’s taxable year, is a related party
with respect to the section 245A share-
holder (such a person, a qualified related
party with respect to the section 245A
shareholder for the taxable year of the sec-
tion 245A shareholder); or
(C) A specified entity at least 10 percent
of the interests of which are, on at least
one day that falls within the section 245A
shareholder’s taxable year, owned direct-
ly or indirectly through one or more oth-
er specified entities by the section 245A
shareholder or a qualified related party.
(ii) Rules for determining an inter-
est in a specified entity. For purposes of
paragraph (b)(3)(i)(C) of this section, the
phrase at least 10 percent of the interests
means—
(A) If the specified entity is a foreign
corporation, at least 10 percent of the
stock (by vote or value) of the foreign cor-
poration;
(B) If the specified entity is a partner-
ship, at least 10 percent of the interests in
the capital or profits of the partnership; or
(C) If the specified entity is not a for-
eign corporation or a partnership, at least
10 percent of the value of the interests in
the specified entity.
(4) Basis benefit account—(i) Gener-
al rules. The term basis benefit account
means, with respect to an extraordinary
disposition account of a section 245A
shareholder, an account of the section
245A shareholder (the initial balance of
which is zero), adjusted pursuant to the
rules of paragraphs (b)(4)(i)(A) and (B) of
this section on the last day of each taxable
year of the section 245A shareholder. The
basis benefit account must be maintained
in the same functional currency as the ex-
traordinary disposition account.
(A) The balance of the basis benefit ac-
count is increased to the extent that a basis
benefit amount with respect to an item of
specified property that corresponds to the
section 245A shareholder’s extraordinary
disposition account is assigned to the tax-
able year of the section 245A shareholder.
However, if the extraordinary disposition
ownership percentage applicable to the
section 245A shareholder’s extraordinary
disposition account is less than 100 per-
cent, then, the basis benefit account is
instead increased by the amount equal to
the basis benefit amount multiplied by the
extraordinary disposition ownership per-
centage.
(B) The balance of the basis benefit
account is decreased to the extent that,
for a taxable year that includes the date
on which the section 245A shareholder’s
taxable year ends, disqualified basis of
an item of specified property would have
been reduced pursuant to paragraph (b)(1)
of this section but for an amount in the ba-
sis benefit account.
(ii) Rules for determining a basis ben-
efit amount—(A) In general. The term
basis benefit amount means, with respect
to an item of specified property that has
disqualified basis, the portion of disqual-
ified basis that, for a taxable year, is di-
rectly (or indirectly through one or more
specified entities that are not corporations)
taken into account for U.S. tax purposes
by a U.S. tax resident, a CFC described in
§1.267A-5(a)(17), or a specified foreign
person and—
(1) Reduces the amount of the U.S. tax
resident’s taxable income, one or more
categories of the CFC’s positive subpart F
income, the CFC’s tested income, or the
specified foreign person’s ECTI, as appli-
cable; or
(2) Prevents a decrease or offset of the
amount of the CFC’s tested loss or quali-
fied deficits.
(B) Rules for determining whether dis-
qualified basis of an item of specified prop-
erty is taken into account. For purposes
of paragraph (b)(4)(ii)(A) of this section,
disqualified basis of an item of specified
property is taken into account for U.S. tax

December 21, 2020 1736 Bulletin No. 2020–52
purposes without regard to whether the
disqualified basis is reduced or eliminated
under §1.951A-3(h)(2)(ii)(B)(1).
(C) Timing rules when disqualified ba-
sis gives rise to a deferred or disallowed
loss. To the extent disqualified basis of an
item of specified property gives rise to a
deduction or loss during a taxable year
that is deferred, then the determination of
whether the item of deduction or loss gives
rise to a basis benefit amount under para-
graph (b)(4)(ii)(A) of this section is made
when the item of deduction or loss is no
longer deferred. In addition, to the extent
disqualified basis of an item of specified
property gives rise to a deduction or loss
during a taxable year that is disallowed
under section 267(a)(1), then a basis ben-
efit amount is treated as occurring in the
taxable year when and to the extent that
gain is reduced pursuant to section 267(d),
and provided that the gain is described in
paragraph (b)(4)(ii)(A) of this section.
(iii) Rules for assigning a basis benefit
amount to a taxable year of a section 245A
shareholder—(A) In general. For purpos-
es of applying paragraph (b)(4)(i)(A) of
this section with respect to a section 245A
shareholder, a basis benefit amount with
respect to an item of specified property is
assigned to a taxable year of the section
245A shareholder if—
(1) With respect to the item of specified
property, the ownership requirement of
paragraph (b)(3)(i) of this section is sat-
isfied for the taxable year of the section
245A shareholder; and
(2) The basis benefit amount occurs
during the taxable year of the section
245A shareholder, or a taxable year of a
U.S. tax resident (other than the section
245A shareholder), a CFC described in
§1.267A-5(a)(17), or a specified foreign
person, as applicable, that—
(i) Ends with or within the taxable year
of the section 245A shareholder; or
(ii) Begins with or within the taxable
year of the section 245A shareholder, but
only in a case in which but for this para-
graph (b)(4)(iii)(A)(2)(ii) the basis benefit
amount would not be assigned to a taxable
year of the section 245A shareholder.
(B) Anti-duplication rule. For purposes
of paragraph (b)(4)(i)(A) of this section,
to the extent that disqualified basis of an
item of specified property gives rise to a
basis benefit amount that is assigned to a
taxable year of a section 245A sharehold-
er under paragraph (b)(4)(iii)(A) of this
section, and thereafter such disqualified
basis gives rise to an additional basis ben-
efit amount, the additional basis benefit
amount cannot be assigned to another tax-
able year of any section 245A shareholder.
Thus, for example, if the entire amount
of disqualified basis of an item of speci-
fied property gives rise to a basis benefit
amount for a particular taxable year of a
CFC and is assigned to a taxable year of a
section 245A shareholder but, pursuant to
§1.951A-3(h)(2)(ii)(B)(1)(ii), the disqual-
ified basis is not reduced or eliminated in
such taxable year of the CFC (because, for
example, the buyer is a CFC that is a relat-
ed party) and, as a result, the disqualified
basis thereafter gives rise to an addition-
al basis benefit amount, then no portion
of the additional basis benefit amount is
assigned to a taxable year of any section
245A shareholder.
(iv) Successor rules for basis benefit
accounts. To the extent that an extraor-
dinary disposition account of a section
245A shareholder is adjusted pursuant to
§1.245A-5(c)(4), a basis benefit account
with respect to the extraordinary disposi-
tion account is adjusted in a similar man-
ner.
(5) Special rules regarding duplicate
DQB of an item of exchanged basis prop-
erty—(i) Adjustments to certain rules in
applying paragraph (b)(1) of this sec-
tion. For purposes of paragraph (b)(1) of
this section for a taxable year of a section
245A shareholder, the following rules ap-
ply with respect to duplicate DQB of an
item of exchanged basis property:
(A) Duplicate DQB of the item of ex-
changed basis property with respect to an
item of specified property to which the
item of exchanged property relates is not
taken into account for purposes of para-
graph (b)(1) of this section if the disqual-
ified basis of the item of specified prop-
erty is taken into account for purposes of
paragraph (b)(1) of this section. Thus, for
example, if for a taxable year of a section
245A shareholder the ownership require-
ment of paragraph (b)(3) of this section is
satisfied with respect to an item of spec-
ified property and an item of exchanged
basis property that relates to the item of
specified property, all of the disqualified
basis of which is duplicate DQB with
respect to the item of specified property,
then only the disqualified basis of the item
of specified property is taken into account
for purposes of, and is subject to reduction
under, paragraph (b)(1) of this section.
(B) If, pursuant to paragraph (b)(5)(i)
(A) of this section, duplicate DQB of an
item of exchanged basis property with
respect to an item of specified proper-
ty is not taken into account for purposes
of paragraph (b)(1) of this section, then,
solely for purposes of §1.951A-2(c)(5),
the duplicate DQB of the item of ex-
changed basis property is reduced (in the
same manner as it would be if the disqual-
ified basis were taken into account for pur-
poses of paragraph (b)(1) of this section)
by the product of the amounts described in
paragraphs (b)(5)(i)(B)(1) and (2) of this
section.
(1) The reduction, under paragraph (b)
(1) of this section for the taxable year of
the section 245A shareholder, to the dis-
qualified basis of the item of specified
property to which the item of exchanged
basis property relates.
(2) A fraction, the numerator of which
is the duplicate DQB of the item of ex-
changed basis property with respect to
the item of specified property, and the
denominator of which is the sum of the
amounts of duplicate DQB with respect to
the item of specified property of each item
of exchanged basis property that relates
to the item of specified property and for
which the ownership requirement of para-
graph (b)(3)(i) of this section is satisfied
for the taxable year of the section 245A
shareholder. For purposes of determining
this fraction, duplicate DQB of an item of
exchanged basis property is determined
pursuant to the rules of paragraph (b)(2)
(i) of this section (by replacing the term
“paragraph (b)(1)” in that paragraph with
the term “paragraph (b)(5)(i)(B)”). In ad-
dition, duplicate DQB of an item of ex-
changed basis property is excluded from
the denominator of the fraction to the
extent the duplicate DQB is attributable
to duplicate DQB of another item of ex-
changed basis property that is included in
the denominator of the fraction.
(ii) Adjustments to certain rules in ap-
plying paragraph (b)(4) of this section.
For purposes of paragraph (b)(4)(i)(A) of
this section, to the extent that disqualified
basis of an item of specified property gives

Bulletin No. 2020–52 1737 December 21, 2020
rise to a basis benefit amount that is as-
signed to a taxable year of a section 245A
shareholder under paragraph (b)(4)(iii)(A)
of this section, and thereafter duplicate
DQB attributable to such disqualified ba-
sis of the item of specified property gives
rise to an additional basis benefit amount,
the additional basis benefit amount cannot
be assigned to another taxable year of any
section 245A shareholder. Similarly, for
purposes of paragraph (b)(4)(i)(A) of this
section, to the extent that duplicate DQB
attributable to disqualified basis of an item
of specified property gives rise to a basis
benefit amount that is assigned to a taxable
year of a section 245A shareholder under
paragraph (b)(4)(iii)(A) of this section,
and thereafter such disqualified basis of
the item of specified property (or duplicate
DQB attributable to such disqualified ba-
sis of the item of specified property) gives
rise to an additional basis benefit amount,
the additional basis benefit amount cannot
be assigned to another taxable year of any
section 245A shareholder.
(6) Special rule regarding prior ex-
traordinary disposition amounts. For pur-
poses of paragraph (b)(1) of this section,
to the extent that an extraordinary disposi-
tion account of a section 245A sharehold-
er is reduced under §1.245A-5(c)(3)(i)(A)
by reason of a prior extraordinary dispo-
sition amount described in §1.245A-5(c)
(3)(i)(D)(1)(i) through (iv), the extraordi-
nary disposition account is considered to
give rise to an extraordinary disposition
amount or tiered extraordinary disposition
amount (and the amount by which the ac-
count is reduced is treated as an extraordi-
nary disposition amount or tiered extraor-
dinary disposition amount).
(c) Reduction of extraordinary disposi-
tion account by reason of the allocation
and apportionment of deductions or loss-
es attributable to disqualified basis—(1)
In general. For a taxable year of a CFC,
if there is an RGI account with respect to
the CFC that relates to an extraordinary
disposition account of a section 245A
shareholder with respect to an SFC, and
the section 245A shareholder satisfies the
ownership requirement of paragraph (c)
(5) of this section for the taxable year of
the CFC, then, subject to the limitations in
paragraphs (c)(6) and (7) of this section,
the extraordinary disposition account is
reduced (but not below zero) by the less-
er of the following amounts (each deter-
mined in the functional currency of the
CFC)—
(i) The excess (if any) of—
(A) The product of—
(1) The adjusted earnings of the CFC
for the taxable year of the CFC; and
(2) The percentage of stock of the CFC
(by value) that, in aggregate, is owned di-
rectly or indirectly through one or more
specified entities by the section 245A
shareholder and any domestic affiliates
on the last day of the taxable year of the
CFC; over
(B) The sum of—
(1) The sum of the balance of the sec-
tion 245A shareholder’s and any domestic
affiliates’ previously taxed earnings and
profits accounts with respect to the CFC
for purposes of section 959 (determined as
of the end of the taxable year of the CFC
and taking into account any adjustments
to the accounts for the taxable year);
(2) The sum of the balance of the hy-
brid deduction accounts (as described
in §1.245A(e)-1(d)(1)) with respect to
shares of stock of the CFC that the sec-
tion 245A shareholder and any domestic
affiliates own (within the meaning of sec-
tion 958(a), and determined by treating a
domestic partnership as foreign) as of the
end of the taxable year of the CFC and
taking into account any adjustments to the
accounts for the taxable year; and
(3) The sum of the balance of the sec-
tion 245A shareholder’s and any domes-
tic affiliates’ extraordinary disposition
accounts with respect to the CFC (deter-
mined as of the end of the taxable year
of the CFC and taking into account any
adjustments to the accounts for the tax-
able year). However, if the section 245A
shareholder or a domestic affiliate has an
RGI account with respect to the CFC that
relates to an extraordinary disposition ac-
count with respect to the CFC, then only
the excess, if any, of the balance of the
extraordinary disposition account over the
balance of the RGI account that relates to
the extraordinary disposition account (de-
termined as of the end of the taxable year
of the CFC, but without regard to the ap-
plication of paragraph (c)(4)(i)(B) of this
section for the taxable year) is taken into
account for purposes of this paragraph
(c)(1)(i)(B)(
3). In addition, for purposes
of this paragraph (c)(1)(i)(B)(3), an ex-
traordinary disposition account that but
for paragraph (e)(1) of this section would
be with respect to the CFC for purposes
of this section is treated as an extraordi-
nary disposition account with respect to
the CFC and thus is taken into account for
purposes of this paragraph (c)(1)(i)(B)(3).
(ii) The balance of the RGI account
with respect to the CFC that relates to the
section 245A shareholder’s extraordinary
disposition account with respect to the
SFC (determined as of the end of the tax-
able year of the CFC, but without regard
to the application of paragraph (c)(4)(i)
(B) of this section for the taxable year).
(2) Timing of reduction to extraordinary
disposition account. See §1.245A-9(b)(3)
for timing rules regarding the reduction to
an extraordinary disposition account.
(3) Adjusted earnings. The term adjust-
ed earnings means, with respect to a CFC
and a taxable year of the CFC, the earn-
ings and profits of the CFC, determined as
of the end of the CFC’s taxable year (tak-
ing into account all distributions during
the taxable year, and not taking into ac-
count any deficit in earnings and profits
subject to §1.381(c)(2)-1(a)(5)) and with
the adjustments described in paragraphs
(c)(3)(i) through (iv) of this section.
(i) The earnings and profits are in-
creased by the amount of any deduction
or loss that—
(A) Is or was attributable to disquali-
fied basis of an item of specified property,
but only to the extent that gain recognized
on the extraordinary disposition of the
item of specified property was included
in the initial balance of an extraordinary
disposition account;
(B) Is or was allocated and apportioned
to residual CFC gross income of the CFC
(or a predecessor) solely by reason of
§1.951A-2(c)(5)(i); and
(C) Does not or has not given rise to
or increased a deficit in earnings and prof-
its subject to §1.381(c)(2)-1(a)(5), deter-
mined as of the end of the taxable year of
the CFC.
(ii) The earnings and profits are de-
creased by the amount by which any RGI
account with respect to the CFC has been
decreased pursuant to paragraph (c)(4)(i)
(B) of this section for a prior taxable year
of the CFC.
(iii) The earnings and profits are deter-
mined without regard to earnings attribut-

December 21, 2020 1738 Bulletin No. 2020–52
able to income described in section 245(a)
(5)(A) or dividends described in section
245(a)(5)(B) (determined without regard
to section 245(a)(12)).
(iv) The earnings and profits are de-
creased by the amount of any deduction or
loss that, but for paragraph (c)(3)(i)(C) of
this section, would be described in para-
graph (c)(3)(i) of this section.
(4) RGI account—(i) In general. For a
taxable year of a CFC, the following rules
apply to determine the balance of a sec-
tion 245A shareholder’s RGI account that
is with respect to the CFC and that relates
to an extraordinary disposition account of
the section 245A shareholder with respect
to an SFC:
(A) The balance of the RGI account is
increased by the product of the amounts
described in paragraphs (c)(4)(i)(A)(1)
and (2) of this section for a taxable year
of the CFC.
(1) The sum of the amounts of deduc-
tions and losses of the CFC that—
(i) Are attributable to disqualified basis
of one or more items of specified property
that correspond to the extraordinary dis-
position account; and
(ii) But for §1.951A-2(c)(5)(i), would
have decreased one or more categories of
the CFC’s positive subpart F income, the
CFC’s tested income, or the CFC’s ECTI,
or increased or given rise to a tested loss
or one or more qualified deficits of the
CFC.
(2) The lesser of—
(i) A fraction (expressed as a percent-
age), the numerator of which is the sum
of the portions of the CFC’s subpart F
income and tested income or tested loss
(expressed as a positive number) taken
into account under sections 951(a)(1)
(A) and 951A(a) (as determined under
the rules of §§1.951-1(b) and (e) and
1.951A-1(d)) by the section 245A share-
holder and any domestic affiliates of the
section 245A shareholder and the section
245A shareholder’s and any domestic
affiliates’ pro rata shares of the CFC’s
qualified deficits (expressed as a positive
number), and the denominator of which
is the sum of the CFC’s subpart F income,
tested income or tested loss (expressed as
a positive number), and qualified deficits
(expressed as a positive number), but
for purposes of this paragraph (c)(4)(i)
(A)(2)(i) treating ECTI (expressed as a
positive number) as if it were subpart F
income; and
(ii) The extraordinary disposition own-
ership percentage applicable as to the
section 245A shareholder’s extraordinary
disposition account.
(B) The balance of the RGI account is
decreased to the extent that, by reason of
the application of paragraph (c)(1) of this
section with respect to the taxable year of
the CFC, there is a reduction to the ex-
traordinary disposition account of the sec-
tion 245A shareholder.
(ii) Successor rules for RGI accounts.
To the extent that an extraordinary disposi-
tion account of a section 245A sharehold-
er is adjusted pursuant to §1.245A-5(c)
(4), an RGI account of a CFC with respect
to the extraordinary disposition account is
adjusted in a similar manner.
(5) Ownership requirement with re-
spect to a CFC. For a taxable year of a
CFC, a section 245A shareholder satisfies
the ownership requirement of this para-
graph (c)(5) if, on the last day of the CFC’s
taxable year, the section 245A shareholder
or a domestic affiliate is a United States
shareholder with respect to the CFC.
(6) Allocation of reductions among
multiple extraordinary disposition ac-
counts. This paragraph (c)(6) applies if,
by reason of the application of paragraph
(c)(1) of this section with respect to a tax-
able year of a CFC (and but for the appli-
cation of this paragraph (c)(6) and para-
graph (c)(7) of this section), the sum of
the reductions under paragraph (c)(1) of
this section to two or more extraordinary
disposition accounts of a section 245A
shareholder or a domestic affiliate of the
section 245A shareholder would exceed
the amount described in paragraph (c)(1)
(i)(A) of this section (the amount of such
excess, the excess amount). When this
paragraph (c)(6) applies, the reduction to
each extraordinary disposition account de-
scribed in the previous sentence is equal to
the reduction that would occur but for this
paragraph (c)(6) and paragraph (c)(7) of
this section, less the product of the excess
amount and a fraction, the numerator of
which is the balance of the extraordinary
disposition account, and the denominator
of which is the sum of the balances of all
of the extraordinary dispositions accounts
described in the previous sentence. For
purposes of determining this fraction,
the balance of an extraordinary disposi-
tion account is determined as of the end
of the taxable year of the section 245A
shareholder or the domestic affiliate, as
applicable, that includes the date on which
the CFC’s taxable year ends (and after the
determination of any extraordinary dis-
position amounts or tiered extraordinary
disposition amounts for the taxable year
of the section 245A shareholder or the
domestic affiliate, as applicable, and ad-
justments to the extraordinary disposition
account for prior extraordinary disposition
amounts).
(7) Extraordinary disposition account
not reduced below balance of basis ben-
efit account. An extraordinary disposition
account of a section 245A shareholder
cannot be reduced pursuant to paragraph
(c)(1) of this section below the balance of
the basis benefit account with respect to
the extraordinary disposition account (de-
termined when a reduction to the extraor-
dinary disposition account would occur
under paragraph (c)(1) of this section).
(d) Special rules for determining when
specified property corresponds to an ex-
traordinary disposition account—(1)
Substituted property—(i) Treatment as
specified property that corresponds to an
extraordinary disposition account. For
purposes of this section, an item of sub-
stituted property is treated as an item of
specified property that corresponds to an
extraordinary disposition account to which
the related item of specified property (that
is, the item of specified property to which
the item of substituted property relates, as
described in paragraph (d)(1)(ii) of this
section) corresponds. In addition, in a case
in which an item of substituted property
relates to an item of specified property
that corresponds to a particular extraor-
dinary disposition account and an item
of specified property that corresponds to
another extraordinary disposition account
(such that, pursuant to this paragraph (d)
(1)(i), the item of substituted property is
treated as corresponding to multiple ex-
traordinary disposition accounts), only the
disqualified basis of the item of substitut-
ed property attributable to the first item of
specified property is taken into account
for purposes of applying this section as
to the first extraordinary disposition ac-
count, and, similarly, only the disqualified
basis of the item of substituted property

Bulletin No. 2020–52 1739 December 21, 2020
attributable to the second item of specified
property is taken into account for purpos-
es of applying this section as to the second
extraordinary disposition account.
(ii) Definition of substituted property.
The term substituted property means an
item of property the disqualified basis of
which is, pursuant to §1.951A-3(h)(2)(ii)
(B)(2)(i) or (iii), increased by reason of a
reduction under §1.951A-3(h)(2)(ii)(B)(1)
in disqualified basis of an item of specified
property. An item of substituted property
relates to an item of specified property if
the disqualified basis of the item of sub-
stituted property was increased by reason
of a reduction in disqualified basis of the
item of specified property.
(2) Exchanged basis property—(i)
Treatment as specified property that corre-
sponds to an extraordinary disposition ac-
count for certain purposes. For purposes
of this section, an item of exchanged basis
property is treated as an item of specified
property that corresponds to an extraor-
dinary disposition account to which the
related item of specified property (that is,
the item of specified property to which the
item of exchanged basis property relates)
corresponds.
(ii) Definition of exchanged basis prop-
erty. The term exchanged basis property
means an item of property the disqualified
basis of which, pursuant to §1.951A-3(h)
(2)(ii)(B)(2)(ii), includes disqualified ba-
sis of an item of specified property. An
item of exchanged basis property relates
to an item of specified property if the dis-
qualified basis of the item of exchanged
basis property includes disqualified basis
of the item of specified property.
(iii) Definition of duplicate DQB—
(A) In general. The term duplicate DQB
means, with respect to an item of ex-
changed basis property and the item of
specified property to which the exchanged
basis property relates, the disqualified ba-
sis of the item of exchanged basis property
that includes or is attributable to disquali-
fied basis of the item of specified property.
(B) Certain nonrecognition transfers
involving stock or a partnership interest.
To the extent that an item of exchanged
basis property that is stock or an interest
in a partnership (lower-tier item) includes
disqualified basis of an item of specified
property to which the lower-tier item re-
lates (contributed item), and another item
of exchanged basis property that is stock
or a partnership interest (upper-tier item)
includes disqualified basis of the lower-ti-
er item that is attributable to disqualified
basis of the contributed item, the disquali-
fied basis of the upper-tier item is attribut-
able to disqualified basis of the contribut-
ed item and the upper-tier item is an item
of exchanged basis property that relates
to the contributed item. The principles of
the preceding sentence apply each time
disqualified basis of an item of exchanged
basis property that is stock or an interest
in a partnership is included in disqualified
basis of another item of exchanged basis
property that is stock or an interest in a
partnership.
(C) Multiple nonrecognition transfers
of an item of specified property. To the
extent that multiple items of exchanged
basis property that are stock or interests
in a partnership include disqualified ba-
sis of the same item of specified property
(contributed item) to which the items of
exchanged basis property relate, and the
issuer of one of the items of exchanged
basis property (upper-tier successor item)
receives the other item of exchanged ba-
sis property (lower-tier successor item) in
exchange for the contributed property, the
disqualified basis of the upper-tier succes-
sor item is attributable to disqualified ba-
sis of the lower-tier successor item and the
upper-tier successor item is an item of ex-
changed basis property that relates to the
lower-tier successor item. The principles
of the preceding sentence apply each time
disqualified basis of an item of specified
property to which an item of exchanged
basis property that is stock or an interest in
partnership relates is included in disqual-
ified basis of another item of exchanged
basis property that is stock or an interest
in a partnership.
(e) Special rules when extraordinary
disposition accounts are adjusted pur-
suant to §1.245A-5(c)(4)—(1) Extraor-
dinary disposition account with respect
to multiple SFCs. This paragraph (e)(1)
applies if, pursuant to §1.245A-5(c)(4)
(ii) or (iii) (the transaction or transactions
by reason of which §1.245A-5(c)(4)(ii) or
(iii) applies, the adjustment transaction),
an extraordinary disposition account of a
section 245A shareholder with respect to
an SFC (such extraordinary disposition
account, the transferor ED account; and
such SFC, the transferor SFC) gives rise
to an increase in the balance of an extraor-
dinary disposition account with respect to
another SFC (such extraordinary disposi-
tion account, the transferee ED account;
such SFC, the transferee SFC; and such
increase, the adjustment amount). When
this paragraph (e)(1) applies, the follow-
ing rules apply for purposes of this sec-
tion:
(i) A ratable portion of the transfer-
ee ED account is treated as retaining its
status as an extraordinary disposition ac-
count with respect to the transferor SFC
and is not treated as an extraordinary dis-
position account with respect to the trans-
feree SFC (the transferee ED account to
such extent, the deemed transferor ED
account), based on the adjustment amount
relative to the balance of the transferee ED
account (without regard to this paragraph
(e)(1)) immediately after the adjustment
transaction. Thus, for example, whether or
not the transferor SFC is in existence im-
mediately after the transaction, the items
of specified property that correspond to
the deemed transferor ED account are the
same as the items of specified property that
correspond to the transferor ED account.
As an additional example, whether or not
the transferor SFC is in existence imme-
diately after the transaction the extraor-
dinary disposition ownership percentage
with respect to the deemed transferor ED
account is the same as the extraordinary
disposition ownership percentage with re-
spect to the transferor ED account (except
to the extent the extraordinary disposition
ownership percentage is adjusted pursuant
to the rules of paragraph (e)(2) of this sec-
tion).
(ii) In the case of an amount (such as an
extraordinary disposition amount or tiered
extraordinary disposition amount) deter-
mined by reference to the transferee ED
account (without regard to this paragraph
(e)(1)), the portion of the amount that is
considered attributable to the deemed
transferor ED account (and not the trans-
feree ED account) is equal to the product
of such amount and a fraction, the numer
-
ator of which is the balance of the deemed
transferor ED account, and the denomina-
tor of which is the balance of the trans-
feree ED account (determined without
regard to this paragraph (e)(1)). Thus, for
example, if after an adjustment transaction

December 21, 2020 1740 Bulletin No. 2020–52
the transferee ED account (without regard
to this paragraph (e)(1)) gives rise to an
extraordinary disposition amount, and if
the fraction (expressed as a percentage)
is 40, then, for purposes of this section,
40 percent of the extraordinary disposi-
tion amount is treated as attributable to
the deemed transferor ED account and the
remaining 60 percent of the extraordinary
disposition amount is attributable to the
transferee ED account, and the balance of
each of the deemed transferor ED account
and the transferee ED account is corre-
spondingly reduced.
(2) Extraordinary disposition accounts
with respect to a single SFC. If an ex-
traordinary disposition account of a sec-
tion 245A shareholder with respect to an
SFC is reduced by reason of §1.245A-5(c)
(4), then, except as provided in paragraph
(e)(1) of this section, for purposes of this
section, the extraordinary disposition
ownership percentage as to the extraor-
dinary disposition account (as well as the
extraordinary disposition ownership per-
centage as to any extraordinary disposi-
tion account with respect to the SFC that
is increased by reason of the reduction) is
adjusted in a similar manner.
§1.245A-9 Other rules and definitions.
(a) In general. This section provides
rules of general applicability for purposes
of §§1.245A-6 through 1.245A-10, a tran-
sition rule to revoke an election to elimi-
nate disqualified basis, and definitions.
(b) Rules of general applicability—
(1) Correspondence. An item of specified
property corresponds to a section 245A
shareholder’s extraordinary disposition
account if gain was recognized on the
extraordinary disposition of the item and
the gain was taken into account in deter-
mining the initial balance of the account.
See §1.245A-8(d) for additional rules re-
garding when an item of property is treat-
ed as corresponding to an extraordinary
disposition account in certain complex
cases.
(2) Timing rules related to disqual-
ified basis for purposes of applying
§§1.245A-7(b) and 1.245A-8(b)—(i)
Determination of disqualified basis.
For purposes of determining the frac-
tion described in §1.245A-7(b)(1)(ii)
or §1.245A-8(b)(1)(ii) when applying
§1.245A-7(b)(1) or §1.245A-8(b)(1)
(ii), respectively, for a taxable year of a
section 245A shareholder, disqualified
basis of an item of specified property is
determined as of the beginning of the
taxable year of the CFC that holds the
item of specified property (in a case in
which §1.245A-7(b) applies) or the spec-
ified property owner (in a case in which
§1.245A-8(b) applies), in either case, that
includes the date on which the section
245A shareholder’s taxable year ends
(and without regard to any reductions to
the disqualified basis of the item of spec-
ified property pursuant to §1.245A-7(b)
(1) or §1.245A-8(b)(1) for such taxable
year of the CFC or the specified prop-
erty owner, as applicable). However, if
disqualified basis of the item of specified
property arose as a result of an extraor-
dinary disposition that occurred after the
beginning of the taxable year of the CFC
or the specified property owner described
in the preceding sentence, then the dis-
qualified basis of the item of specified
property is determined as of the date
on which the extraordinary disposition
occurred (and without regard to any re-
ductions to the disqualified basis of the
item of specified property pursuant to
paragraph (b)(1) of this section for such
taxable year of the CFC or the specified
property owner).
(ii) Reduction to disqualified basis of an
item of specified property. The reduction
to disqualified basis of an item of speci-
fied property pursuant to §1.245A-7(b)
(1) or §1.245A-8(b)(1) occurs on the date
described in paragraph (b)(2)(i) of this
section.
(iii) Definition of specified prop-
erty owner
. For purposes of applying
§1.245A-8(b)(1) and paragraphs (b)(2)(i)
and (ii) of this section for a taxable year of
a section 245A shareholder, the term spec-
ified property owner means, with respect
to an item of specified property, the per-
son that, on at least one day of the taxable
year of the person that includes the date
on which the section 245A shareholder’s
taxable year ends, held the item of spec-
ified property. However, if, but for this
sentence, there would be more than one
specified property owner with respect to
the item of specified property, then the
specified property owner is the person that
held the item of specified property on the
earliest date that falls within the section
245A shareholder’s taxable year.
(3) Timing rules for reducing an ex-
traordinary disposition account under
§§1.245A-7(c) and 1.245A-8(c). For pur-
poses of §1.245A-7(c)(1) or §1.245A-8(c)
(1), as applicable, with respect to a taxable
year of a CFC, the reduction to an extraor-
dinary disposition account pursuant to
§1.245A-7(c)(1) or §1.245A-8(c)(1) oc-
curs as of the end of the taxable year of the
section 245A shareholder that includes the
date on which the CFC’s taxable year ends
(and after the determination of any ex-
traordinary disposition amounts or tiered
extraordinary amounts, adjustments to
the extraordinary disposition account for
prior extraordinary disposition amounts,
and the application of §1.245A-7(b) or
§1.245A-8(b), as applicable, each for the
taxable year of the section 245A share-
holder).
(4) Currency translation. For pur-
poses of applying §§1.245A-7(b) and
1.245A-8(b), the disqualified basis of (and,
if applicable, a basis benefit amount with
respect to) an item of specified property
that corresponds to an extraordinary dis-
position account are translated (if neces-
sary) into the functional currency in which
the extraordinary disposition account is
maintained, using the spot rate on the date
the extraordinary disposition occurred. A
reduction in disqualified basis of an item
of specified property determined under
§1.245A-7(b)(1) or §1.245A-8(b)(1) is
translated (if necessary) into the func-
tional currency in which the disqualified
basis of the item of specified property is
maintained, and a reduction in an extraor-
dinary disposition account determined un-
der §1.245A-7(c) or §1.245A-8(c) section
is translated (if necessary) into the func-
tional currency in which the extraordinary
disposition account is maintained, in each
case using the spot rate described in the
preceding sentence.
(5) Anti-avoidance rule. Appropriate
adjustments are made pursuant to this
paragraph (b)(5), including adjustments
that would disregard a transaction or ar-
rangement in whole or in part, to any
amounts determined under (or subject to
application of) this section if a transaction
or arrangement is engaged in with a prin-
cipal purpose of avoiding the purposes of
§§1.245A-6 through 1.245A-10.

Bulletin No. 2020–52 1741 December 21, 2020
(c) Transition rule to revoke election
to eliminate disqualified basis—(1) In
general. This paragraph (c)(1) applies
to an election that is filed, pursuant to
§1.951A-3(h)(2)(ii)(B)(3), to eliminate
the disqualified basis of an item of spec-
ified property. An election to which this
paragraph (c)(1) applies may be revoked
if, on or before March 1, 2021—
(i) All controlling domestic sharehold-
ers (as defined in §1.964-1(c)(5)) of the
CFC (or, in the case of an election made
by a partnership, the partnership) each at-
tach a revocation statement (in the man-
ner described in paragraph (c)(2) of this
section) to an amended return, for the
taxable year to which the election applies,
that revokes the election (or, in the case
of a partnership subject to subchapter C of
chapter 63 of the Internal Revenue Code,
requests administrative adjustment under
section 6227); and
(ii) The controlling domestic share-
holders (or the partnership) each file an
amended tax return, for any other taxable
years reflecting the election to eliminate
the disqualified basis, that reflects the
election having been revoked (or, in the
case of a partnership subject to subchapter
C of chapter 63, requests administrative
adjustment under section 6227).
(2) Revocation statement. Except as
otherwise provided in publications, forms,
instructions, or other guidance, a revoca-
tion statement attached by a person to an
amended tax return must include the per-
son’s name, taxpayer identification num-
ber, and a statement that the revocation
statement is filed pursuant to paragraph
(c)(1) of this section to revoke an elec-
tion pursuant to §1.951A-3(h)(2)(ii)(B)
(3). In addition, the revocation statement
must be filed in the manner prescribed in
publications, forms, instructions, or other
guidance.
(d) Definitions. In addition to the defi-
nitions in §1.245A-5, the following defi-
nitions apply for purposes of §§1.245A-6
through 1.245A-11.
(1) The term adjusted earnings has the
meaning provided in §1.245A-7(c)(3) or
§1.245A-8(c)(3), as applicable.
(2) The term basis benefit account has the
meaning provided in §1.245A-8(b)(4)(i).
(3) The term basis benefit amount has
the meaning provided in §1.245A-8(b)(4)
(ii).
(4) The term disqualified basis has the
meaning provided in §1.951A-3(h)(2)(ii).
(5) The term domestic affiliate means,
with respect to a section 245A sharehold-
er, a domestic corporation that is a relat-
ed party with respect to the section 245A
shareholder. See also §1.245A-5(i)(19)
(defining related party).
(6) The term duplicate DQB has the
meaning provided in §1.245A-8(d)(2)(iii).
(7) The term ECTI means, with respect
to a taxable year of a specified foreign
person, the taxable income (or loss) of the
specified foreign person determined by tak-
ing into account only items of income and
gain that are, or are treated as, effectively
connected with the conduct of a trade or
business in the United States (as described
in §1.882-4(a)(1)) and are not exempt from
U.S. tax pursuant to a treaty obligation of
the United States, and items of deduction
and loss that are allocated and apportioned
to such items of income and gain.
(8) The term exchanged basis property
has the meaning provided in §1.245A-8(d)
(2)(ii).
(9) The term qualified deficit has the
meaning provided in section 952(c)(1)(B)
(ii).
(10) The term qualified related party
has the meaning provided in §1.245A-8(b)
(3)(ii).
(11) The term RGI account means, with
respect to a CFC and an extraordinary dis-
position account of a section 245A share-
holder with respect to an SFC, an account
of the section 245A shareholder with
respect to an SFC (the initial balance of
which is zero), adjusted at the end of each
taxable year of the CFC pursuant to the
rules of §1.245A-7(c)(4) or §1.245A-8(c)
(4), as applicable. The RGI account must
be maintained in the functional currency
of the CFC.
(12) The term specified foreign person
means a nonresident alien individual (as
defined in section 7701(b) and the regu-
lations under section 7701(b)) or a for-
eign corporation (including a CFC) that
conducts, or is treated as conducting, a
trade or business in the United States (as
described in §1.882-4(a)(1)).
(13) The term specified property owner
has the meaning provided in §1.245A-8(b)
(2)(iii).
(14) The term subpart F income has the
meaning provided in section 952(a).
(15) The term substituted property has
the meaning provided in §1.245A-8(d)(1)
(ii).
(16) The term tested income has the
meaning provided in section 951A(c)(2)
(A).
(17) The term tested loss has the mean-
ing provided in section 951A(c)(2)(B).
§1.245A-10 Examples.
(a) Scope. This section provides ex-
amples illustrating the application of
§§1.245A-6 through 1.245A-9.
(b) Presumed facts. For purposes of the
examples in the section, except as other-
wise stated, the following facts are pre-
sumed:
(1) US1 and US2 are both domestic
corporations that have calendar taxable
years.
(2) CFC1, CFC2, CFC3, and CFC4 are
all SFCs and CFCs that have taxable years
ending November 30.
(3) Each entity uses the U.S. dollar as
its functional currency.
(4) There are no items of deduction or
loss attributable to an item of specified
property.
(5) Absent the application of §1.245A-
5, any dividends received by US1 from
CFC1 would meet the requirements to
qualify for the section 245A deduction.
(6) All dispositions of items of speci-
fied property by an SFC during a disqual-
ified period of the SFC to a related party
give rise to an extraordinary disposition.
(7) None of the CFCs have a deficit
subject to §1.381(c)(2)-1(a)(5), and none
of the CFCs are engaged in the conduct
of a trade or business in the United States
(and therefore none of the CFCs have
ECTI).
(8) There is no previously taxed earn-
ings and profits account with respect to
any CFC for purposes of section 959. In
addition, each hybrid deduction account
with respect to a share of stock of a CFC
has a zero balance at all times. Further,
there is no extraordinary disposition ac-
count with respect to any CFC.
(9) Under §1.245A-11(b), taxpay-
ers choose to apply §§1.245A-6 through
1.245A-11 to the relevant taxable years.
(c) Examples—(1) Example 1. Reduction of dis-
qualified basis under rule for simple cases by reason
of dividend paid out of extraordinary disposition ac-
count—(i) Facts. US1 owns 100% of the single class

December 21, 2020 1742 Bulletin No. 2020–52
of stock of CFC1 and CFC2. On November 30, 2018,
in a transaction that is an extraordinary disposition,
CFC1 sells two items of specified property, Item 1
and Item 2, to CFC2 in exchange for $150x of cash
(the “Disqualified Transfer”). Item 1 is sold for $90x
and Item 2 is sold for $60x. Item 1 and Item 2 each
has a basis of $0 in the hands of CFC1 immediately
before the Disqualified Transfer, and therefore CFC1
recognizes $150x of gain as a result of the Disqual-
ified Transfer ($150x - $0). After the Disqualified
Transfer, CFC2’s only assets are Item 1 and Item
2. On November 30, 2018, and thus during US1’s
taxable year ending December 31, 2018, CFC1 dis-
tributes $150x of cash to US1, and all of the distri-
bution is characterized as a dividend under section
301(c)(1) and treated as a distribution out of earn-
ings and profits described in section 959(c)(3). For
CFC1’s taxable year ending on November 30, 2018,
CFC1 has $160x of earnings and profits described
in section 959(c)(3), without regard to any distribu-
tions during the taxable year. CFC2 continues to hold
Item 1 and Item 2. Lastly, because the conditions of
§1.245A-6(b)(1) and (2) are satisfied for US1’s 2018
taxable year, US1 chooses to apply §1.245A-7 (rules
for simple cases) in lieu of §1.245A-8 (rules for com-
plex cases) for that taxable year.
(ii) Analysis—(A) Application of §§1.245A-5
and 1.951A-2 as a result of the Disqualified Trans-
fer. As a result of the Disqualified Transfer, under
§1.951A-2(c)(5), Item 1 has disqualified basis of
$90x, and Item 2 has disqualified basis of $60x. In
addition, as a result of the Disqualified Transfer,
under §1.245A-5(c)(3)(i)(A), US1 has an extraordi-
nary disposition account with respect to CFC1 with
an initial balance of $150x. Under §1.245A-5(c)(2)
(i), $10x of the dividend is considered paid out of
non-extraordinary disposition E&P of CFC1 with re-
spect to US1, and $140x of the dividend is considered
paid out of US1’s extraordinary disposition account
with respect to CFC1 to the extent of the balance of
the extraordinary disposition account ($150x). Thus,
the dividend of $150x is an extraordinary disposition
amount, within the meaning of §1.245A-5(c)(1), to
the extent of $140x. As a result, the balance of the
extraordinary disposition account is reduced to $10x
($150x - $140x).
(B) Correspondence requirement. Under
§1.245A-9(b)(1), each of Item 1 and Item 2 corre-
sponds to US1’s extraordinary disposition account
with respect to CFC1, because as a result of the
Disqualified Transfer CFC1 recognized gain with
respect to Item 1 and Item 2, and the gain was tak-
en into account in determining the initial balance of
US1’s extraordinary disposition account with respect
to CFC1.
(C) Reduction of disqualified basis of Item 1.
Because Item 1 corresponds to US1’s extraordinary
disposition account, the disqualified basis of Item 1
is reduced pursuant to §1.245A-7(b)(1) by reason of
US1’s $140x extraordinary disposition amount for
US1’s 2018 taxable year. Paragraphs (c)(2)(ii)(C)(1)
through (3) of this section describe the determina-
tions pursuant to §1.245A-7(b)(1).
(1) To determine the reduction to the disqualified
basis of Item 1, the disqualified basis of Item 1, as
well as the disqualified basis of Item 2, must be de-
termined as of the date described in §1.245A-9(b)(2)
(i) (and before the application of §1.245A-7(b)(1)).
See §1.245A-7(b)(1)(ii). For each of Item 1 and Item
2, that date is December 1, 2018. December 1, 2018,
is the first day of the taxable year of CFC2 (the CFC
that holds Item 1 and Item 2) beginning on December
1, 2018, which is the taxable year of CFC2 that in-
cludes December 31, 2018, the date on which US1’s
2018 taxable year ends. See §1.245A-9(b)(2)(i).
(2) Pursuant to §1.245A-7(b)(1), the disqualified
basis of Item 1 is reduced by $84x, computed as the
product of—
(i) $140x, the extraordinary disposition amount;
and
(ii) A fraction, the numerator of which is $90x
(the disqualified basis of Item 1 on December 1,
2018, and before the application of §1.245A-7(b)
(1)), and the denominator of which is $150x (the
disqualified basis of Item 1, $90x, plus the disqual-
ified basis of Item 2, $60x, in each case determined
on December 1, 2018, and before the application of
§1.245A-7(b)(1)). See §1.245A-7(b)(1).
(3) The $84x reduction to the disqualified basis
of Item 1 occurs on December 1, 2018, the date on
which the disqualified basis of Item 1 is determined
for purposes of determining the reduction pursuant
to §1.245A-7(b)(1). See §1.245A-9(b)(2)(ii).
(D) Reduction of disqualified basis of Item 2. For
reasons similar to those described in paragraph (c)
(2)(ii)(C) of this section, on December 1, 2018, the
disqualified basis of Item 2 is reduced by $56x, the
amount equal to the product of $140x, the extraordi-
nary disposition amount, and a fraction, the numer-
ator of which is $60x (the disqualified basis of Item
2 on December 1, 2018, and before the application
of §1.245A-7(b)(1)), and the denominator of which
is $150x (the disqualified basis of Item 1, $90x, plus
the disqualified basis of Item 2, $60x, in each case
determined on December 1, 2018, and before the ap-
plication of §1.245A-7(b)(1)).
(2) Example 2. Basis benefit amount and impact
on reduction to disqualified basis under rule for
complex cases—(i) Facts. The facts are the same
as in paragraph (c)(1)(i) of this section (Example
1) (and the results are the same as in paragraph (c)
(1)(ii)(A) of this section), except that, on December
1, 2018, CFC2 sells Item 1 for $90x of cash to an
individual that is not a related party with respect
to US1 or CFC2 (such transaction, the “Sale,” and
such individual, “Individual A”). At the time of the
Sale, CFC2’s basis in Item 1 is $90x (all of which
is disqualified basis, as described in §1.951A-3(h)(2)
(ii)(A)). CFC2 takes into the account the disquali-
fied basis of Item 1 for purposes of determining the
amount of gain recognized on the Sale, which is $0
($90x - $90x); but for the disqualified basis, CFC2
would have had $90x of gain that would have been
taken into account in computing its tested income. As
a result of the Sale, the condition of §1.245A-6(b)(2)
is not satisfied, because on at least one day of CFC2’s
taxable year beginning on December 1, 2018 (which
begins within US1’s 2018 taxable year) CFC2 does
not hold Item 1. See §1.245A-6(b)(2)(ii)(C)(1). US1
therefore applies §1.245A-8 (rules for complex cas-
es) for its 2018 taxable year. See §1.245A-6(b).
(ii) Analysis—(A) Ownership requirement. With
respect to each of Item 1 and Item 2, the ownership
requirement of §1.245A-8(b)(3)(i) is satisfied for
US1’s 2018 taxable year. This is because on at least
one day that falls within US1’s 2018 taxable year,
each of Item 1 and Item 2 is held by CFC2, and US1
directly owns all of the stock of CFC2 throughout
such taxable year (and thus, for purposes of applying
§1.245A-8(b)(3)(i), US1 owns at least 10% of the in-
terests of CFC2 on at least one day that falls within
such taxable year). See §1.245A-8(b)(3).
(B) Basis benefit amount with respect to Item 1 as
a result of the Sale. Under §1.245A-8(b)(4)(i), US1
has a basis benefit account with respect to its extraor-
dinary disposition account with respect to CFC1. As
described in paragraphs (c)(2)(ii)(B)(1) through (3) of
this section, the balance of the basis benefit account
(which is initially zero) is, on December 31, 2018, in-
creased by $90x, the basis benefit amount with respect
to Item 1 and assigned to US1’s 2018 taxable year.
(1) By reason of the Sale, for CFC2’s taxable year
beginning December 1, 2018, and ending November
30, 2019, the entire $90x of disqualified basis of Item
1 is taken into account for U.S. tax purposes by CFC2
and, as a result, reduces CFC2’s tested income or
increases CFC2’s tested loss. Accordingly, for such
taxable year, there is a $90x basis benefit amount
with respect to Item 1. See §1.245A-8(b)(4)(ii)(A).
The result would be the same if the Sale were to a
related person and thus, pursuant to §1.951A-3(h)(2)
(ii)(B)(1)(ii), no portion of the $90x of disqualified
basis were eliminated or reduced by reason of the
Sale. See §1.245A-8(b)(4)(ii)(B).
(2) The $90x basis benefit amount with respect to
Item 1 is assigned to US1’s 2018 taxable year. This is
because the ownership requirement of §1.245A-8(b)
(3)(i) is satisfied with respect to Item 1 for US1’s
2018 taxable year, and the basis benefit amount oc-
curs in CFC2’s taxable year beginning December
1, 2018, a taxable year of CFC2 that begins within
US1’s 2018 taxable year (and, but for §1.245A-8(b)
(4)(iii)(A)(2)(ii), the basis benefit amount would
not be assigned to a taxable year of US1, such as
the taxable year of US1 beginning January 1, 2019,
given that, as result of the Sale, the ownership re-
quirement of §1.245A-8(b)(3)(i) would not be satis-
fied with respect to Item 1 for such taxable year). See
§1.245A-8(b)(4)(iii)(A).
(3) On December 31, 2018 (the last day of US1’s
2018 taxable year), US1’s basis benefit account with
respect to its extraordinary disposition account with
respect to CFC1 is increased by $90x, the $90x basis
benefit amount with respect to Item 1 and assigned
to US1’s 2018 taxable year. The basis benefit ac-
count is increased by such amount because Item 1
corresponds to US1’s extraordinary disposition ac-
count with respect to CFC1, and the extraordinary
disposition ownership percentage applicable to
such extraordinary disposition account is 100. See
§1.245A-8(b)(4)(i)(A).
(C) Basis benefit amount limitation on reduc-
tion to disqualified basis. By reason of US1’s $140x
extraordinary disposition amount for US1’s 2018
taxable year, the disqualified basis of Item 1 is re-
duced by $30x, and the disqualified basis of Item 2 is
reduced by $20x, pursuant to §1.245A-8(b)(1). See
§1.245A-8(b). Paragraphs (c)(2)(ii)(C)(1) through
(4) of this section describe the determinations pursu-
ant to §1.245A-8(b)(1).
(1) For purposes of determining the reduction
to the disqualified bases of Item 1 and Item 2, the
disqualified bases of the Items are determined on
December 1, 2018 (and before the application of

Bulletin No. 2020–52 1743 December 21, 2020
§1.245A-8(b)(1)). See §1.245A-8(b)(1)(ii). The dis-
qualified bases of the Items are determined on De-
cember 1, 2018, because that date is the first day of
the taxable year of CFC2 beginning on December 1,
2018, which is the taxable year of CFC2 (the spec-
ified property owner of each of Item 1 and Item 2)
that includes December 31, 2018, the date on which
US1’s 2018 taxable year ends. See §1.245A-8(b)(2)
(i). For purposes of applying §§1.245A-8(b)(1) and
§1.245A-9(b)(2) for US1’s 2018 taxable year, CFC2
is the specified property owner of each of Item 1
and Item 2 because, on at least one day of CFC2’s
taxable year that includes the date on which US1’s
2018 taxable year ends (that is, on at least one day of
CFC2’s taxable year beginning December 1, 2018),
CFC2 held the Item. See §1.245A-9(b)(2)(iii). CFC2
is the specified property owner of Item 1 even though
Individual A also held Item 1 during Individual A’s
taxable year that includes the date on which US1’s
2018 taxable year ends because CFC2 held Item 1 on
an earlier date than Individual A. See §1.245A-9(b)
(2)(iii).
(2) Pursuant to §1.245A-8(b)(1), the disqualified
basis of Item 1 is reduced by $30x, computed as the
product of—
(i) $50x, the excess of the extraordinary dispo-
sition amount ($140x) over the balance of the basis
benefit account with respect to US1’s extraordinary
disposition with respect to CFC1 ($90x); and
(ii) A fraction, the numerator of which is $90x
(the disqualified basis of Item 1 on December 1,
2018, and before the application of §1.245A-8(b)
(1)), and the denominator of which is $150x (the
disqualified basis of Item 1, $90x, plus the disqual-
ified basis of Item 2, $60x, in each case determined
on December 1, 2018, and before the application of
§1.245A-8(b)(1)). See paragraph §1.245A-8(b)(1).
(3) Pursuant to §1.245A-8(b)(1), the disqualified
basis of Item 2 is reduced by $20x, computed as the
product of—
(i) $50x, the excess of the extraordinary dispo-
sition amount ($140x) over the balance of the basis
benefit account with respect to US1’s extraordinary
disposition with respect to CFC1 ($90x); and
(ii) A fraction, the numerator of which is $60x
(the disqualified basis of Item 2 on December 1,
2018, and before the application of paragraph (b)
(1) of this section), and the denominator of which
is $150x (the disqualified basis of Item 1, $90x, plus
the disqualified basis of Item 2, $60x, in each case
determined on December 1, 2018, and before the ap-
plication of §1.245A-8(b)(1)). See §1.245A-8(b)(1).
(4) The $30x and $20x reductions to the dis-
qualified bases of Item 1 and Item 2, respectively,
occur on December 1, 2018, the date on which the
disqualified bases of the Items are determined for
purposes of determining the reductions pursuant to
§1.245A-8(b)(1). See §1.245A-9(b)(2)(ii).
(D) Reduction of basis benefit account. The
balance of the basis benefit account with respect to
US1’s extraordinary disposition account with re-
spect to CFC1 is decreased by $90x, the amount by
which, for CFC2’s taxable year beginning December
1, 2018, the disqualified bases of Item 1 and Item 2
would have been reduced pursuant to §1.245A-8(b)
(1) but for the $90x balance of the basis benefit ac-
count. See §1.245A-8(b)(4)(i)(B). The reduction to
the balance of the basis benefit account occurs on
December 31, 2018, and after the completion of all
other computations pursuant to §1.245A-8(b). See
§1.245A-8(b)(4)(i)(B).
(3) Example 3. Reduction in balance of extraor-
dinary disposition account under rules for simple
cases by reason of allocation and apportionment of
deductions to residual CFC gross income—(i) Facts.
The facts are the same as in paragraph (c)(1)(i) of
this section (Example 1) (and the results are the same
as in paragraph (c)(1)(ii)(A) of this section), except
that CFC1 does not make a distribution to US1. In
addition, during CFC2’s taxable year beginning De-
cember 1, 2018, and ending November 30, 2019, the
disqualified basis of Item 1 gives rise to a $6x amor
-
tization deduction, and the disqualified basis of Item
2 gives rise to a $4x amortization deduction, and
each of the amortization deductions is allocated and
apportioned to residual CFC gross income of CFC2
solely by reason of §1.951A-2(c)(5) (though, but for
§1.951A-2(c)(5), would have been allocated and ap-
portioned to gross tested income of CFC2). Further,
as of the end of CFC2’s taxable year ending Novem-
ber 30, 2019, CFC2 has $15x of earnings and prof-
its. Lastly, because the conditions of §1.245A-6(b)
(1) and (2) are satisfied for US1’s 2018 taxable year,
US1 chooses to apply §1.245A-7 (rules for simple
cases) in lieu of §1.245A-8 (rules for complex cases)
for that taxable year.
(ii) Analysis. Pursuant to §1.245A-7(c)(1), US1’s
extraordinary disposition account with respect to
CFC1 is reduced by the lesser of the amount de-
scribed in §1.245A-7(c)(1)(i) with respect to US1,
and the RGI account of US1 with respect to CFC2
that relates to its extraordinary disposition account
with respect to CFC1. See §1.245A-7(c)(1). Para-
graphs (c)(3)(ii)(A) through (D) of this section de-
scribe the determinations pursuant to §1.245A-8(c)
(1).
(A) Computation of adjusted earnings of CFC2,
and amount described in §1.245A-7(c)(1)(i) with
respect to US1. To determine the amount described
in §1.245A-7(c)(1)(i) with respect to US1, the ad-
justed earnings of CFC2 must be computed for
CFC2’s taxable year ending November 30, 2019. See
§1.245A-7(c)(1)(i). Paragraphs (c)(3)(ii)(A)(1) and
(2) of this section describe these determinations.
(1) The adjusted earnings of CFC2 for its taxable
year ending November 30, 2019, is $25x, computed
as $15x (CFC2’s earnings and profits as of Novem-
ber 30, 2019, the last day of that taxable year), plus
$10x (the sum of the $6x and $4x amortization de-
ductions of CFC2 for that taxable year, which is the
amount of all deductions or losses of CFC2 that is
or was attributable to disqualified basis of items of
specified property and allocated and apportioned to
residual CFC gross income of CFC2 solely by reason
of §1.951A-2(c)(5)(i)). See §1.245A-7(c)(3).
(2) For CFC2’s taxable year ending November
30, 2019, the amount described in §1.245A-7(c)(1)
(i) with respect to US1 is $25x, computed as the ex-
cess of $25x (the adjusted earnings) over $0 (the sum
of the balance of the previously taxed earnings and
profits accounts with respect to CFC2).
(B) Increase to balance of RGI account. Under
§1.245A-9(d)(11), US1 has an RGI account with re-
spect to CFC2 that relates to its extraordinary dispo-
sition account with respect to CFC1. On November
30, 2019 (the last day of CFC2’s taxable year), the
balance of the RGI account (which is initially zero)
is increased by $10x, the sum of the $6x and $4x
amortization deductions of CFC2 for its taxable year
ending November 30, 2019. See §1.245A-7(c)(4)(i).
Each of the amortization deductions is taken into ac-
count for this purpose because, but for §1.951A-2(c)
(5)(i), the deduction would have decreased CFC2’s
tested income or increased or given rise to a tested
loss of CFC2. See §1.245A-7(c)(4)(i).
(C) Reduction in balance of extraordinary dispo-
sition account. Pursuant to §1.245A-7(c)(1), US1’s
extraordinary disposition account with respect to
CFC1 is reduced by $10x, the lesser of the amount
described in §1.245A-7(c)(1)(i) with respect to US1
for CFC2’s taxable year ending November 30, 2019
($25x), and the balance of US1’s RGI account with
respect to CFC2 that relates to its extraordinary
disposition account with respect to CFC1 ($10x,
determined as of November 30, 2019, but without
regard to the application of §1.245A-7(c)(4)(ii) for
the taxable year of CFC2 ending on that date). See
§1.245A-7(c)(1). The $10x reduction in the balance
of US1’s extraordinary disposition account occurs on
December 31, 2019, the last day of US1’s taxable
year that includes November 30, 2019 (the last day
of CFC2’s taxable year). See §1.245A-9(c)(3).
(D) Reduction in balance of RGI account. On
November 30, 2019 (the last day of CFC2’s tax-
able year), the balance of US1’s RGI account with
respect to CFC2 that relates to its extraordinary dis-
position account with respect to CFC1 is decreased
by $10x, the amount of the reduction, pursuant to
§1.245A-7(c)(1) section and by reason of the RGI
account, to US1’s extraordinary disposition account
with respect to CFC1. See §1.245A-7(c)(4)(ii).
Therefore, following that reduction, the balance of
the RGI account is zero ($10x - $10x).
(iii) Alternative facts in which the reduction is
limited by earnings and profits. The facts are the
same as in paragraph (c)(3)(i) of this section (Ex-
ample 3), except that CFC2 has a $5x deficit in its
earnings and profits as of the end of its taxable year
ending November 30, 2019. In this case—
(A) The adjusted earnings of CFC2 for its taxable
year ending November 30, 2019, is $5x, computed
as -$5x (CFC2’s deficit in earnings and profits as
of November 30, 2019) plus $10x (the sum of the
$6x and $4x amortization deductions of CFC2), see
§1.245A-7(c)(3);
(B) The amount described in §1.245A-7(c)(1)(i)
with respect to US1 for CFC’s taxable year ending
November 30, 2019, is $5x, computed as the excess
of $5x (the adjusted earnings) over $0 (the sum of the
balance of the previously taxed earnings and profits
accounts with respect to CFC2), see §1.245A-7(c)
(1)(i);
(C) On December 31, 2019, US1’s extraordi-
nary disposition account with respect to CFC1 is re-
duced by $5x, the lesser of the amount described in
§1.245A-7(c)(1)(i) with respect to US1 for CFC2’s
taxable year ending November 30, 2019 ($5x), and
the balance of US1’s RGI account with respect to
CFC2 that relates to its extraordinary disposition ac-
count with respect to CFC1 ($10x, determined as of
November 30, 2019, but without regard to the appli-
cation of §1.245A-8(c)(4)(i)(B) for the taxable year
of CFC2 ending on that date), see §§1.245A-7(c)(1)
and 1.245A-9(c)(3); and

December 21, 2020 1744 Bulletin No. 2020–52
(D) On November 30, 2019 (the last day of
CFC2’s taxable year), the balance of US1’s RGI ac-
count with respect to CFC2 is decreased by $5x (the
amount of the reduction, pursuant to §1.245A-7(c)
(1) and by reason of the RGI account, to US1’s
extraordinary disposition account with respect to
CFC1) and, therefore, following such reduction, the
balance of the RGI account is $5x ($10x - $5x), see
§1.245A-7(c)(4)(ii).
(4) Example 4. Reduction to extraordinary dis-
position accounts limited by §1.245A-8(c)(6)—(i)
Facts. The facts are the same as in paragraph (c)(3)
(iii) of this section (Example 3, alternative facts in
which the reduction is limited by earnings and prof-
its) (and the results are the same as in paragraph (c)
(1)(ii)(A) of this section), except that US1 also owns
100% of the stock of US2, which owns 100% of
the stock of CFC3, and on November 30, 2018, in
a transaction that was an extraordinary disposition,
CFC3 sold an item of specified property (“Item 3”)
to CFC2 in exchange for $200x of cash. Item 3 had
a basis of $0 in the hands of CFC3 immediately be-
fore the sale and, therefore, CFC3 recognized $200x
of gain as a result of the sale ($200x - $0), Item 3
has $200x of disqualified basis under §1.951A-2(c)
(5), and US2 has an extraordinary disposition ac-
count with respect to CFC3 with an initial balance
of $200x under §1.245A-5(c)(3)(i)(A). Moreover,
during CFC2’s taxable year beginning December 1,
2018, and ending November 30, 2019, the disquali-
fied basis of Item 3 gives rise to a $20x amortization
deduction, which is allocated and apportioned to re-
sidual CFC gross income of CFC2 solely by reason
of §1.951A-2(c)(5) (though, but for §1.951A-2(c)(5),
would have been allocated and apportioned to gross
tested income of CFC2). Further, as of the end of
US1’s 2018 taxable year, the balance of US1’s basis
benefit account with respect to its extraordinary dis-
position account with respect to CFC1 is $0; similar-
ly, as of the end of US2’s 2018 taxable year, the bal-
ance of US2’s basis benefit account with respect to
its extraordinary disposition account with respect to
CFC2 is $0. Because CFC2 holds items of specified
property that correspond to more than one extraor-
dinary disposition account (that is, Item 1 and Item
2 correspond to US1’s extraordinary disposition ac-
count with respect to CFC2, and Item 3 corresponds
to US2’s extraordinary disposition account with re-
spect to CFC2), the condition of §1.245A-6(b)(2)
is not satisfied. See §1.245A-6(b)(2)(ii)(C)(3). US1
and US2 therefore apply §1.245A-8 (rules for com-
plex cases) for their 2018 taxable years.
(ii) Analysis. Pursuant to §1.245A-8(c)(1), US1’s
extraordinary disposition account with respect to
CFC1 is, subject to the limitation in §1.245A-8(c)
(6), reduced by the lesser of the amount described
in §1.245A-8(c)(1)(i) with respect to US1, and the
RGI account of US1 with respect to CFC2 that re-
lates to its extraordinary disposition account with
respect to CFC1. See §1.245A-8(c)(1). Similarly,
US2’s extraordinary disposition account with respect
to CFC3 is, subject to the limitation in §1.245A-8(c)
(6), reduced by the lesser of the amount described in
§1.245A-8(c)(1)(i) with respect to US2, and the RGI
account of US2 with respect to CFC2 that relates to
its extraordinary disposition account with respect to
CFC3. See §1.245A-8(c)(1). Paragraphs (c)(4)(ii)(A)
through (F) of this section describe the determina-
tions pursuant to §1.245A-8(c)(1).
(A) Ownership requirement. Each of US1
and US2 satisfy the ownership requirement of
§1.245A-8(c)(5) for CFC2’s taxable year ending
November 30, 2019, because on the last day of that
taxable year each is a United States shareholder with
respect to CFC2. See §1.245A-8(c)(5).
(B) Computation of adjusted earnings of CFC2,
and amount described in §1.245A-8(c)(1)(i) with
respect to US1 and US2. The adjusted earnings of
CFC2 for its taxable year ending November 30,
2019, is $25x, computed as -$5x (CFC2’s deficit in
earnings and profits as of November 30, 2019), plus
$30x (the sum of the $6x, $4x, and $20x amortiza-
tion deductions of CFC2). See §1.245A-8(c)(3). For
CFC2’s taxable year ending November 30, 2019, the
amount described in §1.245A-8(c)(1)(i) with respect
to US1 is $25x, computed as the excess of the prod-
uct of $25x (the adjusted earnings) and 100% (the
percentage of the stock of CFC2 that US1 and its
domestic affiliate, US2, own), over $0 (the sum of
the balance of certain previously taxed earnings and
profits accounts and hybrid deduction accounts).
See
§1.245A-8(c)(1)(i). Similarly, for CFC2’s taxable
year ending November 30, 2019, the amount de-
scribed in §1.245A-8(c)(1)(i) with respect to US2 is
$25x, computed as the excess of the product of $25x
(the adjusted earnings) and 100% (the percentage of
the stock of CFC2 that US2 and its domestic affiliate,
US1, own), over $0 (the sum of the balance of certain
previously taxed earnings and profits accounts and
hybrid deduction accounts). See §1.245A-8(c)(1)(i).
(C) Increase to balance of RGI account. As de-
scribed in paragraph (c)(3)(ii)(B) of this section,
US1 has an RGI account with respect to CFC2 that
relates to its extraordinary disposition account with
respect to CFC1, and the balance of the RGI ac-
count is $10x on November 30, 2019 (the last day of
CFC2’s taxable year). Similarly, US2 has an RGI ac-
count with respect to CFC2 that relates to its extraor-
dinary disposition account with respect to CFC3, and
the balance of the RGI account is $20x on November
30, 2019 (reflecting a $20x increase to the balance
of the account for the $20x amortization deduction
of CFC2 for its taxable year ending November 30,
2019). See §1.245A-8(c)(4)(i).
(D) Reduction in balance of extraordinary dispo-
sition accounts but for §1.245A-8(c)(6). But for the
application of §1.245A-8(c)(6), US1’s extraordinary
disposition account with respect to CFC2 would be
reduced by $10x, which is the lesser of $25x, the
amount described in §1.245A-8(c)(1)(i) with respect
to US1 for CFC2’s taxable year ending November
30, 2019, and $10x, the balance of the RGI account
of US1 with respect to CFC2 that relates to its ex-
traordinary disposition account with respect to CFC1
(determined as of November 30, 2019, but without
regard to the application of §1.245A-8(c)(4)(i)(B)
for the taxable year of CFC2 ending on that date).
See §1.245A-8(c)(1)(i) and (ii). Similarly, but for the
application of §1.245A-8(c)(6), US2’s extraordinary
disposition account with respect to CFC3 would be
reduced by $20x, which is the lesser of $25x, the
amount described in §1.245A-8(c)(1)(i) with respect
to US2 for CFC2’s taxable year ending November
30, 2019, and $20x, the balance of the RGI account
of US2 with respect to CFC2 that relates to its ex-
traordinary disposition account with respect to CFC3
(determined as of November 30, 2019, but without
regard to the application of §1.245A-8(c)(4)(i)(B)
for the taxable year of CFC2 ending on that date).
See §1.245A-8(c)(1)(i) and (ii).
(E) Application of limitation of §1.245A-8(c)
(6). As described in paragraph (c)(4)(ii)(D) of this
section, but for the application of §1.245A-8(c)(6),
there would be a total of $30x of reductions to US1’s
extraordinary disposition account with respect to
CFC1, and US2’s extraordinary disposition account
with respect to CFC3, by reason of the application
of §1.245A-8(c)(1) with respect to CFC2’s taxable
year ending November 30, 2019. Because that $30x
exceeds the amount described in §1.245A-8(c)(1)(i)
with respect to US1 and US2 ($25x)—
(1) US1’s extraordinary disposition account
with respect to CFC1 is reduced by $7.86x, comput-
ed as $10x (the reduction that would occur but for
§1.245A-8(c)(6)) less the product of $5x (the excess
amount, computed as $30x, the total reductions that
would occur but for the application of §1.245A-8(c)
(6), less $25x, the amount described in §1.245A-8(c)
(1)(i)) and a fraction, the numerator of which is
$150x (the balance of US1’s extraordinary disposi-
tion account with respect to CFC1) and the denomi-
nator of which is $350x ($150x, the balance of US1’s
extraordinary disposition account with respect to
CFC1, plus $200x, the balance of US2’s extraordi-
nary disposition account with respect to CFC3), see
§1.245A-8(c)(6); and
(2) US2’s extraordinary disposition account with
respect to CFC3 is reduced by $17.14x, comput-
ed as $20x (the reduction that would occur but for
§1.245A-8(c)(6)) less the product of $5x (the excess
amount, computed as $30x, the total reductions that
would occur but for the application of §1.245A-8(c)
(6), less $25x, the amount described in §1.245A-8(c)
(1)(i)) and a fraction, the numerator of which is
$200x (the balance of US2’s extraordinary disposi-
tion account with respect to CFC3) and the denomi-
nator of which is $350x ($150x, the balance of US1’s
extraordinary disposition account with respect to
CFC1, plus $200x, the balance of US2’s extraordi-
nary disposition account with respect to CFC3), see
§1.245A-8(c)(6) of this section.
(F) Reduction in balance of RGI accounts. On
November 30, 2019 (the last day of CFC2’s taxable
year)—
(
1) The balance of US1’s RGI account with re-
spect to CFC2 that relates to its extraordinary dis-
position account with respect to CFC1 is decreased
by $7.86x (the amount of the reduction, pursuant to
§1.245A-8(c)(1) and by reason of the RGI account,
to US1’s extraordinary disposition account with re-
spect to CFC1) and, thus, following that reduction,
the balance of the RGI account is $2.14x ($10x -
$7.86x), see §1.245A-8(c)(4)(i)(B); and
(2) The balance of US2’s RGI account with re-
spect to CFC2 that relates to its extraordinary dis-
position account with respect to CFC3 is decreased
by $17.14x (the amount of the reduction, pursuant to
§1.245A-8(c)(1) and by reason of the RGI account,
to US2’s extraordinary disposition account with re-
spect to CFC3) and, thus, following that reduction,
the balance of the RGI account is $2.86x ($20x -
$17.14x), see §1.245A-8(c)(4)(i)(B).
(5) Example 5. Computation of duplicate DQB—
(i) Facts. The facts are the same as in paragraph (c)
(1)(i) of this section (Example 1) (and the results are
the same as in paragraph (c)(1)(ii)(A) of this sec-
tion), except that CFC1 does not make any distribu-

Bulletin No. 2020–52 1745 December 21, 2020
tion to US1, and on November 30, 2018, immedi-
ately after the Disqualified Transfer, CFC2 transfers
Item 1 to newly-formed CFC3 solely in exchange for
the sole share of stock of CFC3 (the contribution,
“Contribution 1,” and the share of stock of CFC3,
the “CFC3 Share”) and, immediately after Contri-
bution 1, CFC3 transfers Item 1 to newly-formed
CFC4 solely in exchange for the sole share of stock
of CFC4 (the contribution, “Contribution 2,” and the
share of stock of CFC4, the “CFC4 Share”). Pursu-
ant to section 358(a)(1), CFC2’s basis in its share
of stock of CFC3 is $90x, and CFC3’s basis in its
share of stock of CFC4 is $90x basis. As a result of
Contribution 1, the condition of §1.245A-6(b)(2) is
not satisfied, because on at least one day of CFC2’s
taxable year ending on November 30, 2018 (which
ends within US1’s 2018 taxable year), CFC2 does
not hold Item 1. See §1.245A-6(b)(2)(ii)(C)(1). US1
therefore applies §1.245A-8 (rules for complex cas-
es) for its 2018 taxable year. See §1.245A-6(b).
(ii) Analysis—(A) Application of exchanged ba-
sis rule under section 951A to Contribution 1 and
Contribution 2. As a result of Contribution 1, pur-
suant to §1.951A-3(h)(2)(ii)(B)(2)(ii), the disquali-
fied basis of CFC3 Share includes the disqualified
basis of Item 1 ($90x), and therefore the disqualified
basis of CFC3 Share is $90x. Similarly, as a result
of Contribution 2, pursuant to §1.951A-3(h)(2)(ii)
(B)(2)(ii), the disqualified basis of CFC4 Share also
includes the disqualified basis of Item 1 ($90x), and
therefore the disqualified basis of CFC4 Share is
$90x.
(B) Determination of duplicate DQB of CFC3
Share as a result of Contribution 1. Because the
disqualified basis of CFC3 Share includes the dis-
qualified basis of Item 1, CFC3 Share is an item
of exchanged basis property that relates to Item 1.
See §1.245A-8(d)(2)(ii). In addition, because CFC3
Share is an item of exchanged basis property that re-
lates to Item 1 (which corresponds to US1’s extraor-
dinary disposition account with respect to CFC1),
CFC3 Share is, for purposes of §1.245A-8, treated
as an item of specified property that corresponds
to US1’s extraordinary disposition account with re-
spect to CFC1. See §1.245A-8(d)(2)(i). Further, the
duplicate DQB of CFC3 Share as to Item 1 is $90x,
the portion of the disqualified basis of CFC3 Share
that includes Item 1’s disqualified basis of $90x. See
§1.245A-8(d)(2)(iii)(A).
(C) Determination of duplicate DQB of CFC4
Share as a result of Contribution 2. For reasons sim-
ilar to those described in paragraph (c)(5)(ii)(B) of
this section, CFC4 Share is an item of exchanged
basis property that relates to Item 1, CFC4 is treated
for purposes of §1.245A-8 as an item of specified
property that corresponds to US1’s extraordinary
disposition account with respect to CFC1, and the
duplicate DQB of CFC4 Share as to Item 1 is $90x.
(D) Determination of duplicate DQB of CFC3
Share as a result of Contribution 2. Because the
disqualified basis of CFC3 Share and the disquali-
fied basis of CFC4 Share each includes $90x of the
disqualified basis of Item 1 and CFC3 receives the
CFC4 Share in Contribution 2, the $90x of disqual-
ified basis of CFC3 Share is attributable to the $90x
of disqualified basis of CFC4 Share, and CFC3 Share
is an item of exchanged basis property that relates to
CFC4 Share. See §1.245A-8(d)(2)(i) and (d)(2)(iii)
(C). In addition, the duplicate DQB of CFC3 Share as
to CFC4 Share is $90x. See §1.245A-8(d)(2)(iii)(A).
(E) Application of duplicate basis rules in
§1.245A-8(b)(5). For purposes of computing the
fraction described in §1.245A-8(b)(1)(ii), if US1’s
extraordinary disposition account with respect to
CFC1 were to give rise to an extraordinary disposition
amount or a tiered extraordinary disposition amount
during US1’s 2018 taxable year, then the duplicate
DQB of CFC3 Share and the duplicate DQB of CFC4
Share would not be taken into account, because the
disqualified basis of Item 1 (an item of specified prop-
erty that corresponds to US1’s extraordinary disposi-
tion account and as to which each of CFC3 Share and
CFC4 share relates) would be taken into account. See
§1.245A-8(b)(1)(ii) and (b)(5)(i)(A). Accordingly, in
such a case, for US1’s 2018 taxable year, the numer-
ator of the fraction described in §1.245A-8(b)(1)(ii)
would reflect only the disqualified basis of Item 1 or
Item 2, as applicable, and the denominator would re-
flect only the sum of the disqualified basis of each of
Item 1 and Item 2. See §1.245A-8(b)(1)(ii) and (b)(5)
(i)(A). Furthermore, to the extent there were to be a re-
duction under §1.245A-8(b)(1) to the disqualified ba-
sis of Item 1, then the duplicate DQB of CFC4 Share
would be reduced (but not below zero) by the product
of the reduction to the disqualified basis of Item 1 and
a fraction, the numerator of which would be $90x (the
duplicate DQB of CFC4 Share), and the denominator
of which would also be $90x (the duplicate DQB of
CFC4 Share). See §1.245A-8(b)(5)(i)(B). The $90x
of duplicate DQB of CFC3 Share would be excluded
from the denominator of the fraction described in the
previous sentence because it is attributable to the $90x
of duplicate DQB of CFC4 Share. See §1.245A-8(b)
(5)(i)(B)(2) (last sentence). For reasons similar to
those described in this paragraph (c)(4)(ii)(E) with
respect to the application of §1.245A-8(b)(5)(i)(B)
to CFC4 Share, the duplicate DQB of CFC3 Share
would be reduced (but not below zero) by the product
of the reduction to the disqualified basis of Item 1 and
a fraction, the numerator of which would be $90x, and
the denominator of which would also be $90x.
§1.245A-11 Applicability dates.
(a) In general. Sections 1.245A-6
through 1.245A-11 apply to taxable years
of a foreign corporation beginning on or
after December 1, 2020 and to taxable
years of section 245A shareholders in
which or with which such taxable years
end.
(b) Exception. Notwithstanding para-
graph (a) of this section, a taxpayer may
choose to apply §§1.245A-6 through
1.245A-11 for a taxable year of a foreign
corporation beginning before December
1, 2020 and to a taxable year of a section
245A shareholder in which or with which
such taxable year ends, provided that the
taxpayer and all persons bearing a rela-
tionship to the taxpayer described in sec-
tion 267(b) or 707(b) apply §§1.245A-6
through 1.245A-11, in their entirety, and
§1.6038-2(f)(18) for all such taxable years
and any subsequent taxable years begin-
ning before December 1, 2020.
Par. 4. Section 1.951A-2 is amended
by:
1. Redesignating paragraph (c)(5)(iv)
as paragraph (c)(5)(v).
2. Adding new paragraph (c)(5)(iv).
3. In newly redesignated paragraph (c)
(5)(v)(B)(1), removing the language “(c)
(5)(iv)(A)(1)” and adding the language
“(c)(5)(v)(A)(1)” in its place.
4. In newly redesignated paragraph (c)
(5)(v)(C)(1), removing the language “(c)
(5)(iv)(B)(1)” and adding the language
“(c)(5)(v)(B)(1)” in its place.
5. Redesignating paragraph (c)(6)(iv)
as paragraph (c)(6)(v).
6. Adding new paragraph (c)(6)(iv).
7. In newly redesignated paragraph (c)
(6)(v)(B)(1), removing the language “(c)
(6)(iv)(A)(1) and adding the language “(c)
(6)(v)(A)(1)” in its place.
The additions read as follows:
§1.951A-2 Tested income and tested loss.
* * * * *
(c) * * *
(5) * * *
(iv) Reductions to disqualified ba-
sis pursuant to coordination rules. See
§1.245A-7(b) or §1.245A-8(b), as appli-
cable, for reductions to disqualified basis
resulting from the application of §1.245A-
5.
* * * * *
(6) * * *
(iv) Reductions to disqualified pay-
ments pursuant to coordination rules.
See §1.245A-5(j)(8) and §1.245A-7(b) or
§1.245A-8(b), as applicable, for reduc-
tions to disqualified payments resulting
from the application of §1.245A-5.
* * * * *
Par. 5. Section 1.6038-2 is amended
by adding paragraphs (f)(17) and (18) and
(m)(5) to read as follows:
§1.6038-2 Information returns required
of United States persons with respect to
annual accounting periods of certain
foreign corporations.
* * * * *
(f) * * *

December 21, 2020 1746 Bulletin No. 2020–52
(17) Reporting of disqualified basis
and disqualified payments. If for the an-
nual accounting period of a corporation
it holds an item of property having dis-
qualified basis within the meaning of
§1.951A-3(h)(2)(ii) or §1.951A-2(c)(5),
or incurs an item of deduction or loss re-
lated to a disqualified payment (within the
meaning of §1.951A-2(c)(6)(ii)(A)), then
Form 5471 (or successor form) must con-
tain such information about the disquali-
fied basis, or such information relating to
the disqualified payment, in the form and
manner and to the extent prescribed by
the form, instructions to the form, publi-
cation, or other guidance published in the
Internal Revenue Bulletin.
(18) Adjustments to extraordinary
disposition accounts and disqualified ba-
sis. If for the annual accounting period a
section 245A shareholder of the corpo-
ration reduces its extraordinary disposi-
tion account pursuant to §1.245A-7(c) or
§1.245A-8(c), as applicable, or the cor-
poration reduces the disqualified basis
in an item of specified property pursuant
to §1.245A-7(b) or §1.245A-8(b), as ap-
plicable, then Form 5471 (or a succes-
sor form) must contain such information
about the reduction to the extraordinary
disposition account or disqualified basis,
as applicable, in the form and manner
and to the extent prescribed by the form,
instructions to the form, publication, or
other guidance published in the Internal
Revenue Bulletin.
* * * * *
(m) * * *
(5) Special rule for paragraphs (f)(17)
and (18) of this section. Paragraphs (f)(17)
and (18) of this section apply with respect
to information for annual accounting pe-
riods beginning after December 1, 2020.
In addition, as provided in §1.245A-11(b),
paragraph (f)(18) of this section applies
with respect to information for an annual
accounting period that includes a taxable
year for which a taxpayer has chosen to
apply §§1.245A-6 through 1.245A-11
pursuant to §1.245A-11(b).
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
Approved: November 13, 2020
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on
November 25, 2020, 4:45 p.m., and published in the
issue of the Federal Register for December 01, 2020,
85 F.R. 76960)

26 CFR 1.1031(a)-3
T.D. 9935
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Statutory Limitations on
Like-Kind Exchanges
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations providing guidance un-
der section 1031 of the Internal Revenue
Code (Code) to implement recent statuto-
ry changes to that section. More specifi-
cally, the final regulations amend the cur-
rent like-kind exchange regulations to add
a definition of real property to implement
statutory changes limiting section 1031
treatment to like-kind exchanges of real
property. The final regulations also pro-
vide a rule addressing a taxpayer’s receipt
of personal property that is incidental to
real property the taxpayer receives in an
otherwise qualifying like-kind exchange
of real property. The final regulations af-
fect taxpayers that exchange business or
investment property for other business or
investment property, and that must deter-
mine whether the exchanged properties
are real property under section 1031.
DATES: Effective date: These final regu-
lations are effective on December 2, 2020.
Applicability dates: These regulations
generally apply to exchanges beginning
after December 2, 2020. See §§1.1031(a)-
1(e)(2), 1.1031(a)-3(c), and 1.1031(k)-
1(g)(9). However, the regulations in
§§1.168(i)-1(e)(2)(viii)(A) and 1.168(i)-
8(c)(4)(i) apply to taxable years beginning
after December 2, 2020. See §§1.168(i)-
1(m)(5) and 1.168(i)-8(j)(5).
FOR FURTHER INFORMATION CON-
TACT: Edward C. Schwartz at (202) 317-
4740, or Suzanne R. Sinno at (202) 317-
4718 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
I. Overview
This document amends the Income
Tax Regulations (26 CFR Part 1, as re-
vised April 1, 2020) under section 1031
(current regulations). The amendments to
the current regulations (final regulations)
implement statutory amendments to sec-
tion 1031 made by section 13303 of Pub-
lic Law 115-97, 131 Stat. 2054 (2017),
commonly referred to as the Tax Cuts and
Jobs Act (TCJA). Section 13303(c) of the
TCJA amended section 1031 to limit its
application to exchanges of real property
for exchanges completed after December
31, 2017, subject to a transition rule for
certain exchanges in which property had
been transferred before January 1, 2018.
To implement these statutory changes, the
final regulations limit the application of
the like-kind exchange rules under section
1031 to exchanges of real property, add a
definition of real property, and adapt an
existing incidental property exception to
apply to a taxpayer’s receipt of personal
property that is incidental to real property
the taxpayer receives in the exchange.
II. Section 1031 after the TCJA
As amended by the TCJA, section
1031(a) provides that no gain or loss is
recognized on the exchange of real prop-
erty held for productive use in a trade or
business or for investment (relinquished
real property) if the relinquished real
property is exchanged solely for real prop-
erty of a like kind that is to be held either
for productive use in a trade or business
or for investment (replacement real prop-
erty). The legislative history to the TCJA

Bulletin No. 2020–52 1747 December 21, 2020
amendments to section 1031 provides that
Congress “intended that real property eli-
gible for like-kind exchange treatment un-
der present law will continue to be eligible
for like-kind exchange treatment under the
[amended] provision.” H.R. Conf. Rept.
115-466, at 396, fn. 726 (2017) (Confer-
ence Report). However, left unchanged by
the TCJA, section 1031(b) provides that a
taxpayer must recognize gain to the extent
of money and non-like-kind property the
taxpayer receives in an exchange.
III. Current Regulations Regarding “Like
Kind”
The need to determine whether the
relinquished real property and the re-
placement real property are of a like kind
continues to exist after the changes to
section 1031 made by the TCJA. Current
§1.1031(a)-1(b) provides that “like kind”
refers to the nature or character of the real
property and not to its grade or quality.
The fact that any real property involved
is improved or unimproved is not material
in determining whether real property is of
like kind. Under current §1.1031(a)-1(c),
examples of exchanges of real property of
a like kind include an exchange of a lease-
hold interest in a fee with 30 years or more
to run for real estate.
IV. Identification of Exchanged
Properties
Under section 1031(a)(3), unchanged
by the TCJA, real property a taxpayer re-
ceives in an exchange is not of like-kind
to the relinquished property unless, within
45 days after the taxpayer’s transfer of the
relinquished real property, the real proper-
ty is identified as replacement real proper-
ty to be received in the exchange. Current
§1.1031(k)-1(c)(4) provides a limit on the
number of properties, or the fair market
value of the properties, a taxpayer may
identify to meet the requirements of sec-
tion 1031(a)(3). However, under current
§1.1031(k)-1(c)(5), property is disregard-
ed in evaluating the identification rules if
it is incidental to a larger item of property
and therefore, is not treated as property
separate from the larger item. Proper-
ty is incidental to a larger property if, in
standard commercial transactions, the
property is typically transferred with the
larger item of property, and the aggregate
fair market value of all of the incidental
property does not exceed 15 percent of the
aggregate fair market value of the larger
item of property.
V. Recognition of Gain or Loss on Actual
or Constructive Receipt of Non-like-kind
Property
Under current §1.1031(k)-1(f)(1) and
(2), if a taxpayer actually or constructively
receives money or non-like-kind property
for the relinquished property before the
taxpayer receives like-kind replacement
real property, the transaction is a sale or
taxable exchange and not a like-kind ex-
change, even though the taxpayer may
ultimately receive like-kind replacement
real property. Current §1.1031(k)-1(g)
(2) through (5) provides safe harbors, the
use of which results in a taxpayer not be-
ing considered in actual or constructive
receipt of the consideration for the relin-
quished property.
Under current §1.1031(k)-1(g)(4)(i),
in the case of a taxpayer’s transfer of re-
linquished property involving a qualified
intermediary, the determination of wheth-
er the taxpayer is in actual or constructive
receipt of money or non-like-kind proper-
ty is made as if the qualified intermediary
is not the agent of the taxpayer. However,
current §1.1031(k)-1(g)(4)(i) applies only
if the agreement between the taxpayer and
the qualified intermediary expressly limits
the taxpayer’s rights to receive, pledge,
borrow, or otherwise obtain the benefits
of money or non-like-kind property held
by the qualified intermediary. Current
§1.1031(k)-1(g)(7) lists items received in
an exchange that are disregarded in deter-
mining whether a taxpayer’s rights to re-
ceive, pledge, borrow, or otherwise obtain
the benefits of money or non-like-kind
property are expressly limited.
VI. Proposed Regulations
On June 12, 2020, the Department of
the Treasury (Treasury Department) and
the IRS published a notice of proposed
rulemaking (REG-117589-18) in the Fed-
eral Register (85 FR 35835) containing
proposed regulations under section 1031
(proposed regulations). The Treasury De-
partment and the IRS received 21 written
comments in response to the notice of
proposed rulemaking. All comments were
considered and are available at http://
www.regulations.gov or upon request. A
public hearing on the proposed regulations
was neither requested nor held. After full
consideration of the comments received,
this Treasury decision adopts the proposed
regulations with modifications in response
to such comments, as described in the
Summary of Comments and Explanation
of Revisions following this Background.
Summary of Comments and
Explanation of Revisions
I. Overview
The final regulations retain the basic
approach and structure of the proposed
regulations, with certain revisions. In
particular, the final regulations revise the
definition of “real property” in the pro-
posed regulations to provide that property
is classified as real property for section
1031 purposes if, on the date it is trans-
ferred in an exchange, the property is real
property under the law of the State or lo-
cal jurisdiction in which that property is
located. The final regulations also revise
the proposed definition of real property
to eliminate, with regard to both tangible
and intangible properties, any consider-
ation of whether the particular property
contributes to the production of income
unrelated to the use or occupancy of space
(referred to as the “purpose or use test,”
as defined in part II.B.1 of this Summary
of Comments and Explanation of Revi-
sions). Finally, in §1.1031(a)-3(a)(7), the
final regulations retain the language of the
proposed regulations clarifying that the
rules of these final regulations apply only
for purposes of section 1031, and that no
inference is intended with respect to the
classification or characterization of prop-
erty for other purposes of the Code.
II. Definition of Real Property
A. State or local law definitions of real
property
1. Approach of the Proposed Regulations
Section 1031 does not provide a defini-
tion for the term “real property.” As noted

December 21, 2020 1748 Bulletin No. 2020–52
in part II of the Background section, the
Conference Report provides that Congress
intended real property that was eligible for
like-kind exchange treatment prior to the
enactment of the TCJA to continue to be
eligible for like-kind exchange treatment
after its enactment. See Conference Re-
port, at 396, fn. 726. Specifically, with
regard to the applicability of State law
for real property determinations, the Con-
ference Report sets forth the following
example: “a like-kind exchange of real
property includes an exchange of shares
in a mutual ditch, reservoir, or irrigation
company described in section 501(c)(12)
(A) [of the Code] if at the time of the ex-
change such shares have been recognized
by the highest court or statute of the State
in which the company is organized as con-
stituting or representing real property or
an interest in real property” (Conference
Report Example). Id. Accordingly, due to
the absence of a statutory definition for the
term “real property” in section 1031, the
Treasury Department and the IRS based
the proposed definition of real property
upon the Conference Report Example.
Under proposed §1.1031(a)-3(a)(1),
State law controls whether shares in a mu-
tual ditch, reservoir, or irrigation company
are real property for purposes of section
1031. Aside from those enumerated asset
types, the proposed regulations provide
that State or local law definitions were
not controlling for purposes of deter-
mining whether property is real property
for section 1031 purposes. See proposed
§1.1031(a)-3(a)(1). The intent of the Trea-
sury Department and the IRS in propos-
ing a rule that expressly applied State or
local law in this manner was to provide a
definition of real property for purposes of
section 1031 “in a manner consistent with
the scope described by Congress in the
Conference Report.” See the preamble to
the proposed regulations at 85 FR 35836.
2. Consideration of Comments and
Revision of “Real Property” Definition
Commenters generally critiqued the
apparent scope of the application of State
and local law in the proposed regulations
for purposes of defining real property.
These commenters contended that, prior
to enactment of the TCJA, State and local
law classification of a property often was
the determining factor in characterizing
property as real or personal under section
1031. With regard to the Conference Re-
port Example, the commenters asserted
that the reference to “shares in a mutual
ditch, reservoir, or irrigation company”
merely constituted a set of examples that
Congress provided to broadly indicate
that real property eligible for like-kind
treatment under law prior to enactment of
the TCJA will continue to be eligible fol-
lowing the TCJA’s amendment to section
1031. Consequently, the commenters rec-
ommended that the final regulations con-
form to that intent by expanding the rules
to rely significantly, or wholly, on State-
law classifications for all assets, rather
than limiting such reliance to shares in a
mutual ditch, reservoir, or irrigation com-
pany. Additionally, commenters suggested
that the final regulations should include
multiple examples of instances in which
taxpayers may rely on State or local law
for purposes of classifying property as
real or personal.
In light of these comments, the Trea-
sury Department and the IRS have recon-
sidered the degree to which State or local
law determinations of real property should
be controlling for defining real property
for section 1031 purposes. As a result of
that reconsideration, the final regulations
provide generally that property is real
property for purposes of section 1031 if,
on the date it is transferred in an exchange,
that property is classified as real property
under the law of the State or local juris-
diction in which that property is located
(State and local law test). The State and
local law test applies to both tangible and
intangible property classifications.
However, consistent with Congres-
sional intent that “real property eligible
for like-kind exchange treatment” under
the law in effect prior to enactment of
the TCJA will continue to be eligible for
like-kind exchange treatment after enact-
ment of the TCJA, property ineligible for
like-kind exchange treatment prior to en-
actment of the TCJA remains ineligible,
including real property that was excluded
from the application of section 1031. See
Conference Report at 396, fn. 726. Prior to
amendment by the TCJA, former section
1031(a)(2) explicitly excluded certain as-
sets from the application of section 1031.
Accordingly, the final regulations exclude
from the definition of real property the
intangible assets listed in section 1031(a)
(2) prior to its amendment by the TCJA,
regardless of the classification of the prop-
erty under State or local law, because such
property never was “real property eligible
for like-kind exchange treatment” prior to
enactment of the TCJA. Conference Re-
port at 396, fn. 726 (emphasis added).
In summary, under the final regulations,
property is classified as real property for
purposes of section 1031 if the property is
(i) so classified under the State and local
law test, subject to certain exceptions, (ii)
specifically listed as real property in the
final regulations, or (iii) considered real
property based on all the facts and circum-
stances under the various factors provided
in the final regulations. A determination
that property is personal property under
State or local law does not preclude the
conclusion that property is real property
as specifically listed in §1.1031(a)-3(a)
(2)(ii) or (a)(2)(iii)(B) or under the factors
listed in §1.1031(a)-3(a)(2)(ii)(C) or (a)
(2)(iii)(B).
3. Chief Counsel Advice (CCA)
201238027
Multiple commenters who objected to
the scope of State and local law determina-
tions under the proposed regulations also
asserted that the approach in the proposed
regulations replicated the analysis in CCA
201238027 (April 17, 2012), particularly
with regard to one of the fact patterns ad-
dressed therein regarding a steam turbine
(Case 3). In Case 3, the Chief Counsel
Advice disregarded State law that charac-
terized the steam turbine as real property
and held that the steam turbine was not of
like kind to land because it did not have
the same nature or character as land. Com-
menters objected to this conclusion, con-
tending that the State law classification of
the steam turbine as real property should
be respected and, based on that classifica-
tion, the steam turbine and the undevel-
oped land should be considered like-kind
property.
These final regulations do not address
whether exchanged properties are of like
kind to one another. As a consequence of
expressly including the State and local
law test in the final regulations, the final
regulations do not adopt the reasoning of

Bulletin No. 2020–52 1749 December 21, 2020
CCA 201238027 to the extent it suggests
that State or local law is disregarded in de-
termining whether property is real proper-
ty under section 1031.
4. Additional Comments Regarding the
Application of State and Local Law
In connection with the State and local
law test under the final regulations, the
Treasury Department and the IRS have
considered numerous additional com-
ments. For instance, one commenter rec-
ommended that any asset determined to be
essentially the same as an asset classified
as a real property for purposes of section
1031 also should automatically be treated
as real property for purposes of section
1031. For example, if one asset (Property
A) is classified as real property under the
State or local law of State X, an asset lo-
cated in a different jurisdiction (Property
B) that is essentially the same as Property
A also should be classified as real proper-
ty for section 1031 purposes, irrespective
of whether Property B is classified as real
property under (i) the law of the State or
local jurisdiction in which Property B is
located or (ii) the real property definition
and factors under the proposed regula-
tions.
The final regulations do not adopt this
suggestion. First, the Treasury Depart-
ment and the IRS have determined that
the “essentially the same” standard rec-
ommended by the commenter would be
difficult for taxpayers to apply and the IRS
to administer with certainty. In addition,
the analysis advocated by the comment-
er is conceptually similar to the analysis
applied by CCA 201238027, which, based
on several other comments, the Treasury
Department and the IRS have determined
to be inconsistent with the State and local
law test provided in the final regulations.
A commenter also requested that the
final regulations classify as real property
all property that was treated as real prop-
erty for section 1031 purposes at any time
between May 22, 2008, and the effective
date of the TCJA. May 22, 2008, is the
effective date of former section 1031(i),
which treats shares in certain mutual ditch
companies as real property for section
1031 purposes. The commenter reasoned
that, because the treatment of mutual ditch
company shares has been preserved by the
proposed regulations following the enact-
ment of the TCJA, all property classified
as real property as of May 22, 2008, also
should be classified as real property under
the final regulations.
The final regulations do not adopt the
commenter’s suggestion. The Treasury
Department and the IRS have determined
that a rule that fixes property classifi-
cations under State or local laws as of a
date certain would add complexity as the
post-enactment period of the TCJA contin-
ues to lengthen. Given that the final regu-
lations have broadened the applicability of
State and local real property classification
for purposes of section 1031 qualification,
the Treasury Department and the IRS have
determined that the perpetually increasing
complexity of such a rule would signifi-
cantly outweigh any potential benefits of
the commenter’s suggestion.
B. Purpose or use test
1. Approach of the Proposed Regulations
Under proposed §1.1031(a)-3(a)(1),
real property includes land and improve-
ments to land, and improvements to land
include both inherently permanent struc-
tures and the structural components of in-
herently permanent structures. Inherently
permanent structures are buildings or oth-
er structures that are permanently affixed
to real property and that will ordinarily
remain affixed for an indefinite period
of time. See proposed §1.1031(a)-3(a)(2)
(ii)(A). A list of structures that qualify as
buildings or as other inherently perma-
nent structures is provided in proposed
§1.1031(a)-3(a)(2)(ii)(B) and (C). A struc-
tural component is any distinct asset, as
defined in the proposed regulations, that is
a constituent part of, and integrated into,
an inherently permanent structure. See
proposed §1.1031(a)-3(a)(2)(iii)(A). Pro-
posed §1.1031(a)-3(a)(2)(iii)(B) provides
examples of items that are structural com-
ponents under section 1031.
The proposed regulations also consid-
er the function of property in determining
whether the property is real property for
section 1031 purposes (purpose or use
test). In particular, neither tangible prop-
erty, such as machinery or equipment,
nor intangible property, such as licenses
or permits, is classified as real proper-
ty under the proposed regulations if the
property contributes to the production
of income unrelated to the use or occu-
pancy of space, irrespective of any other
factor under the proposed regulations.
See proposed §§1.1031(a)-3(a)(2)(ii)(D)
(regarding machinery and equipment)
and 1.1031(a)-3(a)(5) (regarding intangi-
ble property). For example, a gas line in-
stalled for the sole purpose of providing
fuel to fryers and ovens in a restaurant
is not a constituent part of an inherently
permanent structure and therefore not real
property under the proposed regulations.
See also proposed §1.1031(a)-3(b)(12)
(providing a similar example with regard
to a license to operate a casino business,
which is an intangible property). The pro-
posed regulations requested comments on
whether the purpose or use test is appro-
priate to use as the basis for determining
whether property qualifies as real property
for section 1031 purposes.
2. Summary of Comments Received
Commenters uniformly disagreed with
the purpose or use test and advocated that
it be omitted from the final regulations.
According to these commenters, the pur-
pose or use test improperly narrows the
scope of the definition of real property for
section 1031 purposes and, if adopted in
the final regulations, would treat certain
types of property that have historically
been treated as real property for section
1031 purposes as personal property con-
trary to the directive of Congress in the
Conference Report. See Conference Re-
port, at 396, fn. 726.
In addition, commenters contend that
machinery and equipment should not be
disqualified as an inherently permanent
structure, and thus as real property, mere-
ly because the machinery or equipment is
used in the production of income unrelat-
ed to use or occupancy of space. Instead,
the commenters asserted that if such prop-
erty is inherently permanent, the proper-
ty should be treated as real property for
purposes of section 1031, regardless of
its purpose or use or the type of income
it generates. Therefore, according to the
commenters, permanently affixed items
such as gas lines, cooling units, and piping
should be treated as real property without
regard to whether those items comprise

December 21, 2020 1750 Bulletin No. 2020–52
part of an income-generating structure.
The commenters also recommended that
the final regulations provide revised ex-
amples to reflect the position that the real
property characterization of a particular
asset is based on the degree to which the
item is permanently affixed and not on its
purpose and use.
One commenter also emphasized that
the purpose or use test would prove bur-
densome for small businesses and indi-
vidual taxpayers because that test would
require them to expend resources on cost
segregation studies to determine which
items of machinery and equipment are
personal and which are real property. Ac-
cording to the commenter, such expenses
would be eliminated if real property de-
terminations are based on permanent af-
fixation and not purpose or use. Finally,
the commenter noted that inclusion of the
purpose or use test in the final regulations
would be problematic because neither sec-
tion 1031 nor the regulations under sec-
tion 1031 provide a definition of machin-
ery. However, the term “machinery” is not
necessary if, as this commenter recom-
mended, real property determinations for
an asset are based on the degree to which
the asset is permanently affixed and not its
purpose or use.
3. Elimination of Proposed Purpose or
Use Test
The Treasury Department and the IRS
agree with the commenters and have re-
vised the final regulations to eliminate a
purpose or use test for tangible proper-
ty. Consequently, with regard to tangible
property, if such property is permanently
affixed to real property and will ordinarily
remain affixed for an indefinite period of
time, the property is generally an inherent-
ly permanent structure and thus real prop-
erty for section 1031 purposes, irrespec-
tive of the purpose or use of the property or
whether it contributes to the production of
income. A structural component likewise
is characterized as real property under the
final regulations if it is integrated into an
inherently permanent structure, regard-
less of whether the structural component
contributes to the production of income.
Accordingly, under the final regulations,
items of machinery and equipment are
characterized as real property if they com-
prise an inherently permanent structure, a
structural component, or are real property
under the State or local law test.
The Treasury Department and the IRS
received no comments regarding the ap-
plication of the proposed purpose or use
test to real property classifications of in-
tangible property. However, the Treasury
Department and the IRS have determined
that many of the comments pertaining to
the purpose or use test with regard to tan-
gible property equally apply to classifica-
tions of intangible property. As a result,
under the final regulations, whether in-
tangible property produces or contributes
to the production of income other than
consideration for the use or occupancy
of space is not considered in determining
whether intangible property is real prop-
erty for section 1031 purposes. However,
the purpose of the intangible property re-
mains relevant to the real property deter-
mination.
C. Revisions to the definition of inherently
permanent structure
Proposed §1.1031(a)-3(a)(2)(ii)(A)
defines the term “inherently permanent
structures” to mean “any building or oth-
er structure that is a distinct asset (within
the meaning of [proposed §1.1031(a)-3(a)
(4)]) and is permanently affixed to real
property and that will ordinarily remain
affixed for an indefinite period of time.”
One commenter highlighted that the pro-
posed regulations do not define the phrases
“permanently affixed” or “indefinite peri-
od of time” for purposes of defining “in-
herently permanent structure,” other than
providing that affixation to real property
may be accomplished by weight alone.
See proposed §1.1031(a)-3(a)(2)(ii)(C).
The commenter noted that §1.856-10(d)
(2)(i) provides that, “[i]f the affixation is
reasonably expected to last indefinitely
based on all the facts and circumstances,
the affixation is considered permanent.”
As a result, the commenter recommended
that the final regulations clarify the mean-
ing of these terms, including by adding the
above-quoted language in §1.856-10 to
explain the phrase “permanently affixed.”
The Treasury Department and the IRS
agree with the commenter’s suggestion
to incorporate the language provided in
§1.856-10(d)(2)(i) to provide additional
clarity regarding the meaning of “perma-
nently affixed” and have revised the final
regulations accordingly.
D. Comments regarding offshore
platforms and pipelines, and related
example
Proposed §1.1031(a)-3(a)(2)(ii)(C)
specifically lists offshore drilling plat-
forms and oil and gas pipelines as inher-
ently permanent structures, and therefore
such property is defined as real property.
The proposed regulations also provide an
example addressing a pipeline transmis-
sion system comprised of underground
pipelines, isolation valves and vents, pres-
sure control and relief valves, meters, and
compressors. See proposed §1.1031(a)-
3(b)(10) (Example 10). Example 10 con-
cludes that the meters and compressors
are not real property because (i) they are
not time consuming and expensive to in-
stall and remove from the pipelines, (ii)
they are not designed specifically for the
particular pipelines for which they are a
part, and (iii) their removal does not cause
damage to the asset or the pipelines if re-
moved. Based on the same analysis, Ex-
ample 10 concludes that isolation valves
and vents, and pressure control and relief
valves are real property for section 1031
purposes.
One commenter suggested that the final
regulations should remove the adjective
“drilling” from “offshore drilling plat-
form” as listed as an inherently permanent
structure in proposed §1.1031(a)-3(a)(2)
(ii)(C). For support, the commenter stated
that an offshore platform used for produc-
tion is structurally similar to an offshore
platform used for drilling, and therefore
the term should be appropriately broad-
ened. As so modified, the term “offshore
platform” would cover both offshore drill-
ing platforms and offshore production
platforms.
The commenter also provided addition-
al recommendations regarding assets used
in an oil and gas business. For example,
the commenter suggested that the final
regulations should explicitly provide that
underground and above-ground pipelines
are real property for section 1031 purpos-
es. The commenter recommended that the
final regulations characterize meters and
compressors as real property. In contend-

Bulletin No. 2020–52 1751 December 21, 2020
ing that Example 10 provided an incorrect
conclusion, the commenter explained that
meters and compressors generally require
substantial amounts of time and money
to prepare, construct, and place in service
due to unique circumstances affecting in-
dividual pipelines.
The Treasury Department and the IRS
have clarified the final regulations based
on the commenter’s recommendations.
As an initial matter, the final regulations
delete “drilling” from the term “offshore
drilling platform,” as listed in proposed
§1.1031(a)-3(a)(2)(ii)(C). The Treasury
Department and the IRS agree that an
offshore platform used for production
likewise should be characterized as an in-
herently permanent structure because such
property is structurally similar to an off-
shore platform used for drilling.
In addition, the final regulations contain
a revised version of Example 10, renum-
bered as Example 9, to clarify the analysis
and conclusions in the proposed example.
With regard to an above-ground pipeline,
an oil and gas pipeline is listed property
in proposed §1.1031(a)-3(a)(2)(ii)(C) and
is therefore real property, regardless of
whether above or below ground. Wheth-
er particular meters or compressors are
real property must be determined by their
unique facts and circumstances. If un-
der different circumstances the meters or
compressors described in proposed Exam-
ple 10, now Example 9, required substan-
tial amounts of time and money to pre-
pare, construct, and place in service due to
unique circumstances affecting individual
pipelines, the components would be real
property for section 1031 purposes. Ex-
ample 9 in the final regulations illustrates
these rules.
E. Requests to list additional tangible
assets as real property
1. Installed Appliances
One commenter requested that the final
regulations expressly list as real property
installed appliances (also referred to as
“appliances in place”), including refriger-
ators, stoves, dishwashers, and microwave
ovens. The commenter explained that, in
certain regions of the United States, res-
idential real property generally is sold
with the appliances in place as part of the
sale. The commenter further stated that, in
many like-kind exchanges of one-family
rental properties, sellers (i) consider the
appliances, furniture, and electrical fix-
tures remaining in the property to be part
of the real property transaction, and (ii)
count such items of property towards the
amount of replacement property that must
be acquired to avoid gain recognition un-
der section 1031.
2. Sheds and Carports
One commenter recommended add-
ing sheds and carports to the list of assets
that are expressly included as buildings in
proposed §1.1031(a)-3(a)(2)(ii)(B). The
commenter contended that such structures
generally take the form of buildings and,
therefore, a specific listing as a building
under the final regulations would increase
certainty regarding exchanges involving
such assets.
3. Wi-Fi Systems
Another commenter suggested that
proposed §1.1031(a)-3(a)(2)(iii)(A) be
revised to specifically list as structural
components Wi-Fi systems, distributed
antenna systems, and other integrated sys-
tems that may be installed in buildings to
transmit and receive wireless signals and
cellular service. The commenter asserted
that such integrated systems are installed
in buildings and inherently permanent
structures, and often are as essential to the
use of buildings as heating and electricity.
Additionally, the commenter emphasized
that such integrated systems generally re-
quire that the taxpayer hold a real property
interest in conjunction with its installation
of the system, and therefore should satisfy
the definition of a structural component
under the proposed regulations.
4. Trade Fixtures
One commenter recommended that
“trade fixtures” be expressly listed as
real property under the final regulations.
The commenter noted that such items are
semi-permanently affixed to real property
and perform or support the performance
of functions (including manufacturing,
cooking, and decorative lighting) unrelat-
ed to basic building functions. Addition-
ally, the commenter asserted that trade
fixtures have historically been treated as
real property for State law purposes, ex-
cept in instances in which there is a plan
to remove or relocate them to a different
property.
5. Final Regulations Do Not Specifically
List the Requested Items as Real Property
After consideration of the commenters’
recommendations, the Treasury Depart-
ment and the IRS have determined that
the final regulations should not specifi-
cally list any of these suggested assets as
real property for purposes of section 1031.
The final regulations are intended to pro-
vide tests under which taxpayers can eval-
uate the particular facts and circumstances
of the property in question to determine
with certainty whether particular prop-
erty is characterized as real or personal
property. To limit complexity of the final
regulations, the characterization of the
above-listed items in this part II.E is most
appropriately determined based on the ap-
plication of the State and local law test or
the various factors in the final regulations.
Specifically, with regard to installed
appliances, whether a seller considers an
item transferred with real property to be
part of the real property transaction is not
a relevant factor in determining whether
the item is real property for section 1031
purposes. Movable items, such as furni-
ture, are personal property irrespective
of the terms of the sales contract for the
real property that is the subject of the
sale. Those items, however, may be inci-
dental personal property that, under the
final regulations, is disregarded in deter-
mining whether a taxpayer’s rights to re-
ceive, pledge, borrow, or otherwise obtain
the benefits of money or non-like-kind
property held by a qualified intermedi-
ary are expressly limited as provided in
§1.1031(k)-1(g)(6).
F. Requested clarifications regarding
carpeting and wiring
One commenter requested clarification
regarding whether carpeting in an office
building, or other real property held for
productive use in a trade or business or
for investment, is considered real prop-
erty or personal property under the final

December 21, 2020 1752 Bulletin No. 2020–52
regulations. Another commenter inquired
whether wires installed within the walls
of an office building are real property for
section 1031 purposes if the wires were
installed specifically for computer work-
stations that produce income for the busi-
ness. The commenter acknowledged that
the proposed regulations provide that wir-
ing is a structural component, and there-
fore real property for purposes of section
1031, provided the wiring is a constituent
part of, and integrated into, an inherently
permanent structure.
The Treasury Department and the IRS
appreciate the commenters’ requests for
clarification regarding the qualification of
carpeting and wiring as inherently perma-
nent structures or structural components.
However, such qualification would be de-
pendent upon a facts-and-circumstances
analysis unique to the specific carpeting
or wiring, as well as the classification of
such items under applicable State or local
law. As a result, the final regulations do
not adopt the commenters’ suggestions,
but instruct taxpayers to apply the State
and local law test or the various factors in
the final regulations.
G. Requests to list additional intangible
assets as real property
1. Stock in a Cooperative Housing
Corporation
The proposed regulations provide that
an interest in real property, including fee
ownership, co-ownership, a leasehold, an
option to acquire real property, an ease-
ment, or a similar interest, is real prop-
erty for purposes of section 1031. See
proposed §1.1031(a)-3(a)(1). One com-
menter suggested that this list of items be
revised to include stock held by a person
as a tenant-stockholder in a cooperative
housing corporation. The commenter not-
ed that the term “interests in real property”
for purposes of regulations regarding real
estate investment trusts (REITs) includes
stock held by a person as a tenant-stock-
holder in a cooperative housing corpora-
tion. See §1.856-3(c).
2. Development Rights
One commenter requested that rights
to develop land be expressly listed as real
property in final §1.1031(a)-3(a)(1). For
support, the commenter emphasized that
the IRS has published a private letter rul-
ing that an exchange of a fee interest in
real estate for development rights in real
estate qualified as a like-kind exchange
under section 1031. Accordingly, the com-
menter concluded that development rights
should be specifically listed as real prop-
erty in the final regulations.
3. Final Regulations Expressly List the
Requested Items as Real Property
The Treasury Department and the IRS
agree with the commenters’ recommen-
dations regarding stock in a cooperative
housing corporation and land development
rights. The intangible assets described in
this part II.G have historically been char-
acterized as real property. Accordingly,
the final regulations have been revised to
expressly list those intangible assets.
4. Licenses and Permits
Under the proposed regulations, a li-
cense, permit, or other similar right that
is solely for the use, enjoyment, or occu-
pation of land or an inherently permanent
structure, and that is in the nature of a
leasehold or easement, generally is an in-
terest in real property under section 1031.
See proposed §1.1031(a)-3(a)(5)(ii). One
commenter contended that this language
is too restrictive because it addresses only
leaseholds and easements.
In response to this comment, the final
regulations provide that a license, per-
mit, or other similar right that is solely
for the use, enjoyment, or occupation of
land or an inherently permanent structure
and that is in the nature of a leasehold, an
easement, or a similar right generally is
an interest in real property and thus is real
property under section 1031.
H. Requested clarifications regarding
easements and leaseholds
Proposed §1.1031(a)-3(a)(5)(ii) pro-
vides that a “license, permit, or other
similar right that is solely for the use,
enjoyment, or occupation of land or an
inherently permanent structure and that is
in the nature of a leasehold or easement
generally is an interest in real proper-
ty.” One commenter requested that final
§1.1031(a)-3(a)(5)(ii) add the word “per-
petual” or “permanent” before “ease-
ment” to communicate that an easement
must have a term exceeding 30 years as
of the date of the exchange to be con-
sistent with §1.1031(a)-1(c). Under that
regulation, examples of exchanges of
real property of a like kind include an
exchange of a leasehold interest in a fee
with a term of 30 years or more to run for
real estate.
On this aspect of easements and
leaseholds, however, the comments re-
ceived were not uniform. For example,
another commenter requested that final
§1.1031(a)-3(a)(5)(ii) specify that lease-
holds or easements of any duration are
an interest in real property under sec-
tion 1031. As a conforming revision, the
commenter also recommended that the
final regulations remove the reference
in §1.1031(a)-1(c) to leaseholds with 30
years or more to run to provide parity
among all interests in real property eligi-
ble for like-kind exchanges under section
1031. In addition, a separate commenter
recommended that the final regulations
clarify whether a leasehold interest in real
property must have, as of the date of the
exchange, a remaining term of at least 30
years or more in order to qualify as an in-
terest in real property.
The Treasury Department and the IRS
note, as an initial matter, that the pro-
posed and final regulations address solely
the qualification of an asset as real prop-
erty for section 1031 purposes, and do not
specifically address whether an exchange
is like kind. Duration of an easement or
a leasehold is not relevant in determin-
ing whether the easement or leasehold is
real property under §1.1031(a)-3(a)(5),
and therefore, proposed §1.1031(a)-3(a)
(5)(ii) did not include a reference to du-
ration. The commenters, however, cor-
rectly note that duration may be relevant
under §1.1031(a)-1(c) for purposes of
determining whether an exchange of an
easement or leasehold for real property
would qualify as like kind. Because like-
kind determinations exceed the scope of
the final regulations, the commenters’
suggestions and requests for clarification
regarding like-kind determinations are
not incorporated into these final regula-
tions.

Bulletin No. 2020–52 1753 December 21, 2020
I. Applicability of distinct asset test to
three-property rule in §1.1031(k)-1(c)(4)
(i)(A)
The proposed regulations provide that,
in general, each distinct asset is analyzed
separately from each other distinct asset
in determining whether a distinct asset
is real property for section 1031 purpos-
es. One commenter requested that the
final regulations clarify that this distinct
asset rule does not apply for purposes of
§1.1031(k)-1(c)(4)(i)(A), which generally
limits a taxpayer to the identification of
three replacement properties (three-prop-
erty rule). In response to the comment, the
Treasury Department and the IRS have
added language to the definition of dis-
tinct asset in §1.1031(a)-3(a)(4) to clarify
that the distinct asset rule applies only for
purposes of determining whether property
is real property for section 1031 purposes
and does not affect the application of the
three-property rule.
III. Incidental Property Rule
A. Approach of the proposed regulations
Section 1.1031(k)-1(g)(7)(iii) of the
proposed regulations addresses the receipt
of personal property that is incidental to
the taxpayer’s replacement real property
in an exchange (incidental property rule).
The incidental property rule provides
that, for exchanges involving a qualified
intermediary, personal property that is in-
cidental to replacement real property (in-
cidental personal property) is disregarded
in determining whether a taxpayer’s rights
to receive, pledge, borrow, or otherwise
obtain the benefits of money or non-like-
kind property held by the qualified inter-
mediary are expressly limited as provided
in §1.1031(k)-1(g)(6). However, as per-
sonal property, incidental personal proper-
ty is non-like-kind property that generally
results in gain recognition under section
1031(b) on the exchange.
Personal property is incidental to real
property acquired in an exchange if (i)
in standard commercial transactions, the
personal property is typically transferred
together with the real property, and (ii) the
aggregate fair market value of the inci-
dental personal property transferred with
the real property does not exceed 15 per-
cent of the aggregate fair market value of
the replacement real property (15-percent
limitation).
B. Calculation of 15-percent limitation
The Treasury Department and the IRS
received several comments recommend-
ing a change to the calculation of the
amount of incidental property that a tax-
payer may acquire and still meet the re-
quirements of the incidental property rule.
For example, commenters recommended
that the value of incidental property under
the final regulations be permitted to equal
up to 15 percent of the total fair market
value of the replacement real property, as
well as the incidental property. For sup-
port, these commenters highlighted that
their suggested 15-percent calculation is
consistent with sections 856(d)(1)(C) and
856(c)(9)(A)(ii) of the Code pertaining to
REITs. In addition, a commenter suggest-
ed that final §1.1031(k)-1(g)(7)(iii) should
permit the aggregate fair market value of
the incidental personal property to equal
up to 20 percent of the aggregate fair mar-
ket value of the replacement real property.
The final regulations do not adopt these
comments. As explained in part II of the
Explanation of Provisions section of the
preamble to the proposed regulations,
the proposed incidental property rule is
“based on the existing rule in § 1.1031(k)-
1(c)(5), which provides that certain inci-
dental property is ignored in determining
whether a taxpayer has properly identi-
fied replacement property under section
1031(a)(3)(A) and § 1.1031(k)-1(c).” 85
FR 35839. In addition, the Treasury De-
partment has determined that a limitation
in excess of 15 percent “might induce tax-
payers to bundle more personal property
with their exchanged property,” which
“would lead to increased amounts of per-
sonal property exchanged with real prop-
erty under section 1031 and effectively
unlock a class of personal property that
would no longer be ‘incidental’ to the real
property.” 85 FR 35840. Consequently,
the Treasury Department and the IRS con-
tinue to believe that the proposed 15-per-
cent limitation, and its calculation, are
“responsive to ordinary-course exchanges
that often commingle personal property
and real property as part of the aggregate
exchanged property.” Id.
C. Requests to identify incidental
property rule as a safe harbor
Commenters requested that the inci-
dental property rule be specifically iden-
tified in the final regulations as a safe har-
bor. One commenter expressed concern
that, unless identified as a safe harbor, the
incidental property rule may be interpret-
ed as a bright-line rule under which acqui-
sitions of personal property valued in ex-
cess of 15 percent of the real property will
cause the exchange to fail, and the transfer
of relinquished property to be fully tax-
able. Additionally, a separate commenter
requested that the final regulations clarify
that incidental property may include in-
tangible property such as goodwill.
The final regulations do not adopt the
request that the incidental property rule
be identified as a safe harbor. The items
in current §1.1031(k)-1(g)(1) through (5)
consist of safe harbors that help taxpayers
comply with other rules in §1.1031(k)-
1, and §1.1031(k)-1(g)(7)(i) and (ii) are
items that are disregarded in determining
whether one of the existing safe harbors
ceases to apply. The incidental property
rule adds an additional item to §1.1031(k)-
1(g)(7) that is disregarded in determining
whether one of the existing safe harbors
ceases to apply. Identifying the incidental
property rule as a safe harbor would thus
be confusing because it is an item that is
disregarded in determining if an existing
safe harbor applies. Therefore, the inci-
dental property rule operates as part of
an existing safe harbor. Consequently,
acquisitions of personal property valued
in excess of 15 percent of the replace-
ment real property are not disregarded in
determining if one of the safe harbors in
§1.1031(k)-1(g)(3) through (5) ceases to
apply and whether the taxpayer’s rights
to receive, pledge, borrow, or otherwise
obtain the benefits of money or non-like-
kind property are expressly limited as
provided in §1.1031(k)-1(g)(6), but will
not automatically cause the exchange to
fail section 1031 and the transfer of relin-
quished property to be treated as a sale or
taxable exchange.
Further, the incidental property rule
applies to non-real property, regardless of
whether tangible or intangible. No change
to the regulations is required to accommo-
date this suggestion.

December 21, 2020 1754 Bulletin No. 2020–52
D. Application of section 1031(b) to
receipt of incidental personal property
Several commenters recommended
that the final incidental property rule pro-
vide that a taxpayer’s receipt of personal
property incidental to the real property re-
ceived in a like-kind exchange be treated
as the receipt of real property, and thus not
give rise to recognized gain under section
1031(b). Under section 1031(b), a taxpay-
er must recognize gain on a section 1031
exchange to the extent of money or non-
like-kind property the taxpayer receives in
the exchange. Similarly, one commenter
suggested that, if the final regulations re-
quire recognition of gain on the receipt of
incidental personal property, the final reg-
ulations should not include the incidental
property rule. That commenter contended
that inclusion of the incidental property
rule in the final regulations will result in
some taxpayers misinterpreting the rule
by treating incidental personal property in
the same manner as real property for pur-
poses of the nonrecognition of gain or loss
under section 1031.
The final regulations do not adopt
the commenters’ recommendations. As
amended by the TCJA, section 1031(a)
is limited to exchanges of real property.
However, the TCJA did not amend section
1031(b), which provides that a taxpayer
must recognize gain on an exchange to the
extent of money and non-like-kind prop-
erty received in the exchange. Personal
property received in a like-kind exchange
of real property is non-like-kind property
received in the exchange. Consequently,
under section 1031(b), gain generally must
be recognized to the extent of the personal
property received in the exchange.
The final regulations revise proposed
§1.1031(k)-1(g)(7)(iii)(B) slightly to
improve readability; the revision does
not change the meaning of proposed
§1.1031(k)-1(g)(7)(iii)(B).
The final regulations include the in-
cidental property rule to provide assur-
ance to taxpayers that a qualified inter-
mediary’s use of exchange proceeds to
acquire incidental personal property will
not cause the taxpayer to fail to meet
the requirements of §1.1031(k)-1(g)(6)
(i), and thus the requirements of section
1031. As explained in the preamble to
the proposed regulations, the incidental
property rule was proposed to respond
to concerns that a taxpayer would be
considered to be in constructive receipt
of all of the exchange funds held by the
qualified intermediary if the taxpayer is
able to direct the qualified intermediary
to use those funds to acquire property
that is not of a like kind to the taxpay-
er’s relinquished property. See generally
part II of the Explanation of Provisions
section in the preamble to the proposed
regulations. The incidental property rule
is intended to help taxpayers comply
with the requirements of section 1031,
particularly the prohibition on a taxpay-
er’s ability to actually or constructively
receive the proceeds from the transfer of
relinquished property before receiving
like-kind replacement property.
One commenter recommended that
the final regulations include language
specifically providing that the receipt of
incidental personal property in a section
1031 exchange results in taxable gain to
the taxpayer. The final regulations adopt
this recommendation and add language
in §1.1031(k)-1(g)(7)(iii) to clarify this
point.
E. Request that 15-percent limitation not
be applied on a property-by-property
basis
One commenter recommended that the
final regulations clarify that the 15-percent
limitation for the incidental property rule
is not applied on a property-by-property
basis. For example, assume a taxpayer ac-
quires an office building (Building 1) with
office furniture, and a second office build-
ing (Building 2) with no personal proper-
ty. The commenter requested that the fi-
nal regulations confirm that the taxpayer
does not exceed the 15-percent limitation
if the value of the furniture is 15 percent
or less of the total value of Building 1 and
Building 2, even if the value of the furni-
ture exceeds 15 percent of the value of just
Building 1.
The Treasury Department and the IRS
agree with the commenter’s recommenda-
tion. Accordingly, the final regulations in-
clude language to clarify that the 15-per-
cent limitation is calculated by comparing
the value of all of the incidental properties
to the value of all of the replacement real
properties acquired in the same exchange.
F. Suggested language changes to
incidental property rule
One commenter recommended a se-
ries of language modifications to the in-
cidental property rule in the proposed
§1.1031(k)-1(g)(7)(iii). For example, the
commenter recommended that the rule for
determining whether personal property is
incidental to real property acquired in an
exchange not reference the term “com-
mercial transaction.” For support, the
commenter asserted that the term might
be interpreted to include only contracts in-
volving transfers of non-residential prop-
erty such as commercial real estate and
not residential rental property. In addition,
the commenter suggested that, in the final
regulations, the language “the personal
property is typically transferred together
with the real property” be replaced with
“the personal property is typically listed in
the contract and transferred with the real
property.”
The final regulations do not adopt these
suggested modifications because the Trea-
sury Department and the IRS have deter-
mined that proposed §1.1031(k)-1(g)(7)
(iii) provides clear guidance for determin-
ing whether personal property is incidental
to real property acquired in an exchange.
In particular, the term “commercial trans-
actions” refers to transactions involving
business or investment property rather
than personal-use property. Accordingly,
the term “commercial” describes the type
of transaction, not the type of property.
Therefore, a commercial transaction may
involve either residential or non-residen-
tial property.
The final regulations also do not adopt
the commenter’s recommendation that the
language “the personal property is typically
transferred together with the real property”
be replaced with “the personal property is
typically listed in the contract and trans-
ferred with the real property.” Generally, if
personal property is transferred as part of a
transfer of real property, the personal prop-
erty would be listed in the contract relating
to the transfer. However, if a taxpayer lists
the personal property in a contract separate
from the contract addressing the transfer of
real property, listing the personal property
in a separate contract generally will not
prevent the taxpayer from using the inci-
dental property rule.

Bulletin No. 2020–52 1755 December 21, 2020
G. Request to apply incidental property
rule retroactively
A commenter also requested that, under
the final regulations, the incidental prop-
erty rule apply retroactively to exchang-
es after either (i) the 1984 enactment of
the deferred exchange rules in section
1031(a)(3) or (ii) the 1991 effective date
of the §1.1031(k)-1 deferred exchange fi-
nal regulations. The commenter observed
that the concerns that led to the inclusion
of the incidental property rule in the pro-
posed regulations, which include directing
a qualified intermediary to use exchange
proceeds to acquire non-like-kind proper-
ty, also existed for pre-TCJA exchanges
under section 1031. Thus, the commenter
suggested that the incidental property rule
apply to pre-TCJA exchanges.
Prior to enactment of the TCJA, per-
sonal property was eligible for like-kind
exchange treatment. Therefore, a rule
disregarding the receipt of incidental per-
sonal property in determining whether a
taxpayer was in constructive receipt of
non-like-kind property prior to enactment
of the TCJA would function in a very dif-
ferent way than it does post-TCJA. Ac-
cordingly, these final regulations do not
adopt this suggestion.
H. Requested clarifications regarding
receipt of personal property or escrow
funds
Commenters requested clarification re-
garding the application of the incidental
property rule to cash placed in escrow to
pay transactional and other items in a real
estate transfer. The Treasury Department
and the IRS note that a taxpayer’s receipt
of escrowed funds that the taxpayer placed
in escrow for transactional-type items is
not a receipt of incidental personal prop-
erty. Therefore, the final regulations do
not revise the incidental property rule in
response to the commenters’ request. A
commenter also requested guidance re-
garding situations in which an exchanging
taxpayer acquires a substantial amount of
personal property due to unforeseen cir-
cumstances. The final regulations do not
address this specific situation. The 15-per-
cent limitation is not a bright-line test for
determining whether a transaction fails to
meet the requirements of an exchange un-
der section 1031. All of the facts and cir-
cumstances of the taxpayer’s situation are
considered in determining if the exchange
meets the requirements of section 1031.
IV. Comments That Exceed the Scope of
the Final Regulations
A. Application of section 453 of the Code
to gain on a transfer of personal property
A commenter recommended that the
final regulations provide clarification re-
garding the application of section 453 to
certain like-kind exchanges. Specifically,
the commenter requested guidance about
the timing of gain recognition when (i) real
property is exchanged for both like-kind
real property and non-like-kind personal
property incidental to the real property,
and (ii) the exchange is not completed un-
til the taxable year succeeding the taxable
year of the transfer of the relinquished
property. The commenter requested that
the final regulations address whether the
gain on the receipt of the personal proper-
ty is recognized in the first or the second
taxable year (Tax Year 1 and Tax Year 2,
respectively) if the like-kind exchange
straddles two taxable years.
The commenter also requested guid-
ance regarding a situation involving a
taxpayer who (i) has a bona fide intent
to execute a section 1031 exchange, (ii)
transfers relinquished real property and
incidental personal property in Tax Year
1, and (iii) fails to acquire replacement
property by the 180th day after the trans-
fer of the relinquished property, which is
in Tax Year 2. Specifically, the commenter
recommends that the final regulations ad-
dress whether the gain on the transfer of
the personal property is recognized in Tax
Year 1 or Tax Year 2.
The Treasury Department and the IRS
appreciate the commenter’s questions but
have determined the commenter’s request-
ed guidance exceeds the scope of the final
regulations. The issues raised by the com-
menter relate to the application of current
§1.1031(k)-1(j)(2), which addresses the
application of the installment method of
accounting in section 453 to like-kind ex
-
changes involving the receipt of non-like-
kind property that straddles two taxable
years, or that would have straddled two
taxable years if successfully completed.
The scope of the final regulations is lim-
ited to the definition of real property un-
der section 1031 and to incidental prop-
erty received in a section 1031 exchange.
Accordingly, the final regulations do not
address the issues relating to the timing of
gain recognition raised by the commenter.
B. Application of current §1.1031(j)-1 to
post-TCJA exchanges
Several commenters inquired about
the application of current §1.1031(j)-1 to
exchanges of multiple properties follow-
ing the enactment of the TCJA. Section
1.1031(j)-1 provides an exception to the
general rule that section 1031 requires
a property-by-property comparison for
computing the gain recognized and basis
of property received in a like-kind ex-
change. Section 1.1031(j)-1 applies when
there is more than one exchange group
created, as described in §1.1031(j)-1(b)(2)
(i), or, if there is only one exchange group,
there is more than one property transferred
or received within the exchange group.
Under §1.1031(j)-1, the amount of gain
recognized and the basis of the properties
received by a taxpayer are computed after
separating the properties transferred and
received by the taxpayer in the exchange
into exchange groups, in accordance with
the rules in §1.1031(j)-1(b)(3) and (c), re-
spectively. In addition, under §1.1031(j)-
1(b)(2)(ii), all liabilities assumed by a
taxpayer as part of an exchange to which
§1.1031(j)-1 applies are offset against all
liabilities of which the taxpayer is relieved
as part of the exchange.
One commenter asked whether
§1.1031(j)-1 applies to a post-TCJA ex-
change of real property and personal prop-
erty for other real property and personal
property. Under section 1031 as in effect
before the TCJA amendments, §1.1031(j)-
1 would have applied to this exchange if
the relinquished real property was of a like
kind to the replacement real property, and
the relinquished personal property was
of a like kind to the replacement person-
al property. Other commenters requested
the Treasury Department and the IRS to
conclude that §1.1031(j)-1 will continue
to apply in this situation so that taxpay-
ers will not have to carry out a proper-
ty-by-property comparison for computing
gain on the exchange.

December 21, 2020 1756 Bulletin No. 2020–52
Another commenter inquired about
the application of §1.1031(j)-1 to ex-
changes of both qualifying real property
and non-qualifying property that involve
indebtedness encumbering both types of
properties. Specifically, the comment-
er asked whether the full amount of the
indebtedness assumed by the taxpayer
would offset the full amount of the indebt-
edness liabilities of which the taxpayer is
relieved as part of the exchange, even if a
portion of that indebtedness relates to the
personal property in the exchange.
The Treasury Department and the IRS
appreciate the issues raised by these com-
menters but note that the application of §
1.1031(j)-1 to transactions to which the
TCJA applies exceeds the scope of the
final regulations. Therefore, the final reg-
ulations do not address these comments.
The Treasury Department and the IRS,
however, continue to consider poten-
tial future guidance on issues relating to
§1.1031(j)-1.
C. Application of Revenue Rulings 2003-
56 and 2004-86
One commenter suggested that Rev.
Rul. 2003-56, 2003-23 I.R.B. 985, likely
needs to be modified to address post-TC-
JA exchanges involving both real and
personal property. The commenter also
questioned whether Rev. Rul. 2004-86,
2004-33 I.R.B. 191, needs to be updated
to address the TCJA changes to section
1031.
Rev. Rul. 2003-56 addresses the con-
sequences under section 752 of the Code
and §1.704-2(d) of a section 1031 like-
kind exchange that straddles two taxable
years and involves relinquished and re-
placement property subject to a liability.
The revenue ruling addresses whether the
liabilities are netted and which taxable
year the net change in a partner’s share of
partnership liability is taken into account.
Rev. Rul. 2004-86 addresses whether
an interest in a Delaware statutory trust
(DST) is treated as an interest in the real
property owned by the DST, and whether
a taxpayer may exchange real property for
an interest in a DST in a transaction that
qualifies for nonrecognition of gain under
section 1031. The revenue ruling exam-
ines the grantor trust rules of sections 671
and 677 of the Code and the entity-classi-
fication rules in section 7701 of the Code
and the section 7701 regulations. Rev. Rul.
2004-86 concludes that, under the facts of
the ruling, including the DST agreement,
the exchange qualifies for nonrecognition
under section 1031.
The Treasury Department and the IRS
appreciate these helpful comments but
have determined that they exceed the
scope of the final regulations. That scope
is limited to the definition of real property
under section 1031 and to incidental prop-
erty received in a section 1031 exchange.
Both Rev. Rul. 2003-56 and Rev. Rul.
2004-86 address other issues related to the
application of section 1031.
With regard to Rev. Rul. 2004-86, noth-
ing in the proposed regulations or the TCJA
is contrary to the view that a transfer of an
interest in a DST, if a grantor trust, is treat-
ed as the transfer of the underlying property
held by the DST. The Treasury Department
and the IRS, however, will continue to re-
view existing guidance concerning section
1031 like-kind exchanges to determine the
effect of the TCJA on that guidance.
D. Computation error in examples
contained in §1.1031(k)-1(d)(2)
A commenter highlighted that ex-
amples in §1.1031(k)-1(d)(2) include a
computation error. For example, the sum
of $187,500 and $87,500 is incorrect-
ly provided as $250,000. Although, the
proposed regulations do not address the
rules in §1.1031(k)-1(d)(2), this Treasury
decision corrects the scrivener’s error
identified by the commenter by replacing
“$87,500” with “$62,500” each place it
appears therein.
E. Interaction of bonus depreciation rules
with section 1031
One commenter discussed the inter-
action between the additional first year
depreciation deduction rules in section
168 of the Code, commonly referred to
as bonus depreciation, and the like-kind
exchange rules in section 1031, as amend-
ed by the TCJA. The commenter pointed
out that there may be an adverse timing
difference between (i) when gain is recog-
nized on the transfer of real property that
includes the transfer of personal property,
and (ii) when a taxpayer is allowed a bonus
depreciation deduction for the acquisition
of replacement real property and person-
al property subject to bonus depreciation.
The commenter also asserted that when
the 100-percent bonus depreciation rules
expire after 2022, the gain associated with
a section 1031 exchange involving real
estate including personal property will be
larger than the gain intended by Congress.
These comments, while helpful, exceed
the scope of the final regulations. Accord-
ingly, the final regulations do not include
the guidance requested by the commenter.
However, the Treasury Department and
the IRS will consider the interaction be-
tween the bonus depreciation rules under
section 168 and the like-kind exchange
rules under section 1031.
V. Correction to Preamble of Proposed
Regulations Regarding Kind or Class of
Property
One commenter noted that the back-
ground section of the preamble to the pro-
posed regulations provides the following:
“Real property of one kind or class may
not, under section 1031, be exchanged for
real property of a different kind or class.”
Proposed regulations, Background, part
III. The commenter correctly pointed
out that this sentence is inaccurate be-
cause distinguishing between properties
of a different class is relevant to personal
property and whether, under section 1031
prior to enactment of the TCJA, personal
properties were of like kind, not whether
the properties were real property. Conse-
quently, this sentence is deleted from part
III of the Background of the preamble to
the final regulations.
Statement of Availability of IRS
Documents
The IRS guidance cited in this pream-
ble is published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and is
available from the Superintendent of Doc-
uments, U.S. Government Publishing Of-
fice, Washington, DC 20402, or by visit-
ing the IRS website at http://www.irs.gov.
Effective/Applicability Date
These final regulations apply to ex-
changes beginning after December 2,

Bulletin No. 2020–52 1757 December 21, 2020
2020. A taxpayer may rely on the pro-
posed regulations (REG-117589-18) pub-
lished in the Federal Register on June 12,
2020 (85 FR 35835), if followed consis-
tently and in their entirety, for exchanges
of real property beginning after December
31, 2017, and before December 2, 2020.
Special Analyses
I. Regulatory Planning and Review –
Economic Analysis
Executive Orders 12866, 13563, and
13771 direct agencies to assess costs and
benefits of available regulatory alterna-
tives and, if regulation is necessary, to se-
lect regulatory approaches that maximize
net benefits (including (i) potential eco-
nomic, environmental, and public health
and safety effects, (ii) potential distribu-
tive impacts, and (iii) equity). Executive
Order 13563 emphasizes the importance
of quantifying both costs and benefits, re-
ducing costs, harmonizing rules, and pro-
moting flexibility.
These regulations have been desig-
nated as subject to review under Execu-
tive Order 12866 pursuant to the Mem-
orandum of Agreement (April 11, 2018)
(MOA) between the Treasury Department
and the Office of Management and Bud-
get (OMB) regarding review of tax reg-
ulations. The Office of Information and
Regulatory Affairs (OIRA) has designated
these final regulations as economically
significant under section 1(c) of the MOA.
Accordingly, the OMB has reviewed these
final regulations.
A. Background
1. Like-Kind Exchange
Prior to the amendment of section 1031
by the TCJA, certain exchanges of person-
al, intangible, or real property held for use
in a trade or business or for investment
qualified for nonrecognition under section
1031. Section 13303 of the TCJA gen-
erally limits the application of like-kind
exchange treatment to exchanges of real
property after December 31, 2017, subject
to a transition rule applicable to exchang-
es not completed by January 1, 2018. Spe-
cifically, section 1031 provides that no
gain or loss is recognized on the exchange
of real property held for productive use in
a trade or business or for investment if the
real property is exchanged solely for real
property of a like kind that is to be held
either for productive use in a trade or busi-
ness or for investment.
2. Final Regulations
The final rules provide a definition of
real property to distinguish it from per-
sonal property, as the TCJA limited the
nonrecognition of gain or loss in the case
of like-kind exchanges to exchanges of
real property. The legislative history to the
TCJA provides that real property eligible
for like-kind exchange treatment prior to
the TCJA should continue to be eligible for
like-kind exchange treatment. Conference
Report, at 396, fn. 726. On June 12, 2020,
the Treasury Department and the IRS pub-
lished a notice of proposed rulemaking
(REG-117589-18) in the Federal Regis-
ter (85 FR 35835) containing proposed
regulations under section 1031 (proposed
regulations). The final regulations retain
the basic approach and structure of the
proposed regulations, with certain revi-
sions. In particular, the final regulations
revise the definition of “real property” in
the proposed regulations to provide that
property is classified as real property for
section 1031 purposes if, on the date it is
transferred in an exchange, the property is
real property under the law of the State or
local jurisdiction in which that property
is located. However, property ineligible
for like-kind exchange treatment before
enactment of the TCJA remains ineligible
for like-kind exchange treatment after the
enactment of the TCJA regardless of its
classification under the laws of the State
or local jurisdiction. The final regulations
also revise the proposed definition of real
property to eliminate, with regard to both
tangible and intangible properties, any
consideration of whether the particular
property contributes to the production of
income unrelated to the use or occupan-
cy of space (referred to as the “purpose or
use test,” as defined in part II.B.1 of this
Summary of Comments and Explanation
of Revisions).
The final regulations retain the rule re-
lating to personal property in an exchange
that is incidental to the real property ex-
change. Under this rule personal property
is incidental to real property acquired in an
exchange if, in standard commercial trans-
actions, the personal property is typically
transferred together with the real property,
and the aggregate fair market value of the
incidental personal property transferred
with the real property does not exceed 15
percent of the aggregate fair market val-
ue of the replacement real property. This
incidental property rule in the proposed
regulations is based on an existing rule in
the regulations under section 1031, which
provides that certain incidental property
is ignored in determining whether a tax-
payer has properly identified replacement
property.
3. No-action Baseline
In this analysis, the Treasury Depart-
ment and the IRS assess the benefits and
costs of these final regulations relative to
a no-action baseline reflecting anticipated
Federal income tax-related behavior in the
absence of these final regulations.
4. Economic Analysis of Final
Regulations
The statutory changes made by the
TCJA to section 1031 limit like-kind ex-
changes to real property. The final regu-
lations provide that property is real prop-
erty for purposes of section 1031 if, on
the date it is transferred in an exchange,
that property is classified as real property
under the law of the State or local juris-
diction in which that property is located.
Consequently, under the final regulations,
property is classified as real property for
purposes of section 1031 if the property
is (i) so classified under the State and lo-
cal law test, (ii) specifically listed as real
property in the final regulations, or (iii)
considered real property based on all the
facts and circumstances under the various
factors provided in the final regulations.
The proposed regulations had extracted
certain portions of the definition of real
property from various existing regulations
with the intention that they are consistent
with the legislative history underlying the
TCJA amendment to section 1031. See, for
example, §§1.263(a)-3(b)(3) and 1.856-
10 (defining the term “real property” to
mean land and improvements to land such
as buildings and other inherently perma-

December 21, 2020 1758 Bulletin No. 2020–52
nent structures, and their structural com-
ponents); §1.263A-8(c) (providing that
real property includes unsevered natural
products of land such as growing crops
and plants, mines, wells, and other natural
deposits); and §1.856-10(c) (providing, in
relevant part, that the term “land” includes
“water and air space superjacent to land”).
The final regulations also eliminate
the purpose or use test for tangible prop-
erty to qualify as real property that was
included in the proposed regulations. If
tangible property is permanently affixed
to real property and will ordinarily remain
affixed for an indefinite period of time,
the property is an inherently permanent
structure and thus real property for section
1031 purposes, irrespective of the purpose
or use of the property or whether it con-
tributes to the production of income.
As emphasized in comments received
by the Treasury Department and the IRS,
the proposed regulations may have caused
certain real property that qualified for like-
kind exchange treatment prior to the en-
actment of the TCJA to no longer qualify.
The final regulations more closely follow
the legislative history to the TCJA amend-
ments to section 1031. See Conference
Report, at 396, fn. 726 (providing that
Congress “intended that real property eli-
gible for like-kind exchange treatment un-
der present law will continue to be eligible
for like-kind exchange treatment under
the [amended] provision”). The Treasury
Department and the IRS have determined
that using the local law test and eliminat-
ing the purpose or use test will reduce
compliance costs relative to the proposed
rules. As a result, taxpayers may rely on
existing State and local law definitions of
real property or may look to the specifi-
cally listed property or the various factors
provided in the final regulations.
The Treasury Department and the IRS
have determined that there is not likely
to be a material difference in the quantity
of tangible property that qualifies as real
property eligible for like-kind exchanges
under the two standards. In making this
determination, the Treasury Department
and the IRS observed that, for an ex-
change to qualify for gain-deferral treat-
ment under section 1031, the subject prop-
erty (that is, the relinquished property) not
only must constitute “real property,” but
also must be “like kind” with regard to the
property exchanged therefore (that is, the
replacement property). Like-kind deter-
minations are made pursuant to Federal,
rather than State or local, tax law. See gen-
erally §1.1031(a)-1(b) through (d). Conse-
quently, State and local law definitions of
real property, on their own, affect only one
prong of the section 1031 qualification for
exchanges of property as a result of these
final regulations. In the future, State and
local governments could modify their tax
laws to include additional assets within
the definition of real property. However,
the Treasury Department and the IRS can-
not determine the extent to which State
and local governments may take such ac-
tions. The Treasury Department and the
IRS note that such actions likely would af-
fect the tax revenue of those jurisdictions.
Moreover, the final regulations provide
that property ineligible for like-kind ex-
change treatment prior to enactment of the
TCJA remains ineligible, including real
property that was excluded from the ap-
plication of section 1031. This approach is
consistent with Congressional intent that
“real property eligible for like-kind ex-
change treatment” under the law in effect
prior to enactment of the TCJA will con-
tinue to be eligible for like-kind exchange
treatment after enactment of the TCJA.
See Conference Report at 396, fn. 726.
Prior to amendment by the TCJA, for-
mer section 1031(a)(2) explicitly exclud-
ed certain assets from the application of
section 1031. Accordingly, the final regu-
lations exclude from the definition of real
property the intangible assets listed in sec-
tion 1031(a)(2) prior to its amendment by
the TCJA, regardless of the classification
of the property under State or local law,
because such property never was “real
property eligible for like-kind exchange
treatment” prior to enactment of the
TCJA. Conference Report at 396, fn. 726.
The final regulations may influence which
intangible assets qualify as real proper-
ty for like-kind exchanges relative to the
definition in the proposed regulations. To
the extent an intangible asset derives its
value from real property or an interest in
real property, it is inseparable from that
real property or interest in real property.
Accordingly, the intangible asset does not
produce or contribute to the production of
income other than consideration for the
use or occupancy of space, and therefore
may be real property or an interest in real
property under State or local law. Under
the proposed regulations, intangible as-
sets, such as mineral extraction rights or
timber cutting rights, that produce in come
other than for the use or occupancy of
space would not be considered real prop-
erty. Under the final regulations, the min-
eral rights and timber cutting rights are
real property if they are considered real
property under State or local law.
The modification of the definition of
real property in the final regulations aligns
the proposed definition to more closely
track the intent of Congress as described
in the Conference Report. The proposed
rules could have had a significant impact
on the amount of intangible property that
previously qualified for like-kind exchang-
es. For example, oil and gas firms account-
ed for approximately $4 billion in deferred
gains in 2012. This figure can be viewed
as an upper limit on the size of the taxable
income that the proposed rule could have
excluded from qualifying for like-kind
exchanges as it includes both developed
fields that would have qualified under the
proposed rule and mineral rights that may
have been excluded. The proposed rule
may have also affected other intangible real
property such as mineral rights not associ-
ated with oil and gas properties or timber
cutting rights, but these are likely small
when compared to the deferred gains in the
oil and gas industry.
Consistent with longstanding regula-
tions under section 1031, in determining
whether a taxpayer has actual or construc-
tive receipt of money or other property
held by a qualified intermediary, the final
regulations disregard certain incidental
personal property. Specifically, the final
regulations disregard incidental personal
property that (1) in standard commercial
transactions is typically transferred to-
gether with the real property, and (2) does
not exceed 15 percent of the aggregate fair
market value of the replacement real prop-
erty. Nonetheless, under section 1031(b),
a taxpayer must recognize gain on the re-
ceipt of the incidental personal property,
which is not like-kind to real property. The
15-percent limitation is responsive to or-
dinary-course exchanges that often com-
mingle personal property and real prop-
erty as part of the aggregate exchanged
property.

Bulletin No. 2020–52 1759 December 21, 2020
With regard to a limitation on the val-
ue of incidental personal property in ex-
cess of 15 percent, the Treasury Depart-
ment and the IRS have determined that
a higher limit might induce taxpayers to
bundle more personal property with their
exchanged property. Such a result would
lead to increased amounts of personal
property exchanged with real property un-
der section 1031 and effectively unlock a
class of personal property that would no
longer be “incidental” to the real property.
With regard to a lower limit, the Treasury
Department and the IRS have determined
that the burden of accurately measuring
the separate costs of comingled personal
and real property would increase.
In addition, the final 15 percent inci-
dental personal property limitation would
reduce the cost of investing in real prop-
erty, when compared to no exchanges for
incidental personal property. Raising this
limit, however, would further increase
the tax incentives for investing in such
property, although most taxpayers will
be indifferent when exchanging inciden-
tal property, plants, and equipment with
a depreciable life of 20 years or less that
is eligible for 100 percent additional first
year depreciation, commonly referred to
as “bonus depreciation.” Under 100 per-
cent bonus depreciation, gains from the
sale of property can be offset by deduc-
tions for investment in other qualifying
property. Qualifying property placed in
service after September 27, 2017, and
before January 1, 2023, qualifies for full
bonus depreciation. The bonus depreci-
ation rate is phased down 20 percent a
year for property placed in service after
this date. In the absence of 100 percent
bonus depreciation, expanding incentives
for like-kind exchanges through a higher
incidental personal property limitation
could also distort investment decisions
within and across industries leading to
over-investment in like-kind properties
relative to consistent treatment across
properties.
As part of the economic analysis of the
proposed regulations, the Treasury De-
partment and the IRS requested comments
and information that would help further
inform the analysis underlying the pro-
posed 15-percent limitation for incidental
personal property. See part I.A.4 of the
Special Analyses of the proposed regula-
tions (85 FR 35840). No comments were
received by the Treasury Department or
the IRS.
The Treasury Department and the IRS
have determined that these final regula-
tions will not have meaningful effects
regarding the section 1031 qualification
of real property exchanges. Finally, these
final regulations do not significantly affect
compliance burdens as the regulations
are substantially similar to existing regu-
lations affecting like-kind exchanges for
real property.
II. Paperwork Reduction Act
The collection of information in these
final regulations is reflected in the col-
lection of information for Form 8824,
Like-Kind Exchanges, which has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507(c)) under control number
1545-0074. The number of respondents
to Form 8824 for tax year 2018 is esti-
mated at 125,000–220,000. The estimat-
ed burden for individual taxpayers filing
this form is approved under OMB control
number 1545-0074 and is included in the
estimates shown in the instructions for
their individual income tax return. The
estimated burden for taxpayers who file
Form 8824, which has not changed as a
result of these final regulations, is shown
below.
Recordkeeping . . . . 10 hr., 16 min.
Learning about
the law or the
form . . . . . . . . . . . . 1 hr., 59 min.
Preparing the
form . . . . . . . . . . . . 2 hr., 14 min.
Form 8824 is used by taxpayers en-
gaging in section 1031 like-kind ex-
changes. Beginning after December 31,
2017, section 1031 like-kind exchange
treatment applies only to exchanges of
real property held for use in a trade or
business or for investment, other than
real property held primarily for sale. Be-
fore the law change, section 1031 also
applied to certain exchanges of personal
or intangible property. These final regula-
tions provide a definition of real property
for purposes of section 1031 and a rule
for the receipt of personal property that is
incidental to real property received in an
exchange and makes conforming chang-
es to the regulations. The law change re-
flected in the final regulations will result
in fewer taxpayers engaging in section
1031 like-kind exchanges. This decrease
in burden will be reflected in the updated
burden estimates for the Form 8824. The
requirement to maintain records to sub-
stantiate information on the Form 8824 is
already contained in the burden associat-
ed with the control number for the form
and remains unchanged. For purposes of
the Paperwork Reduction Act, no burden
estimates specific to the final regulations
are currently available. The Treasury De-
partment has not estimated the burden,
including that of any new information
collections, related to the requirements
under the final regulations. Those esti-
mates would capture both changes made
by the TCJA and those that arise out of
discretionary authority exercised in the
final regulations.
The current status of the Paperwork
Reduction Act submissions related to
section 1031 is provided in the following
table. The section 1031 provisions are
included in aggregated burden estimates
for OMB control number 1545-0074,
which represents a total estimated bur-
den time, including all related forms and
schedules, of 1.784 billion hours and to-
tal estimated monetized costs of $31.764
billion ($2017). The burden estimates
provided in the OMB control numbers
below are aggregate amounts that relate
to the entire package of forms associat-
ed with the OMB control number and
will in the future include but not isolate
the estimated burden of only the section
1031 requirements. These numbers are
therefore unrelated to the future calcu-
lations needed to assess the burden im-
posed by the final regulations. The Trea-
sury Department and IRS urge readers to
recognize that these numbers are dupli-
cates and to guard against over-counting
the burden that tax provisions imposed
prior to the TCJA. The Treasury Depart-
ment and the IRS request comments on
all aspects of information collection bur-
dens related to the final regulations. In
addition, when available, drafts of IRS
forms are posted for comment at www.
irs.gov/draftforms.

December 21, 2020 1760 Bulletin No. 2020–52
Form 8824Individual (NEW Model) Sixty-day notice published in the Federal Register on 10/30/20
1545-0074(85 FR 68956). Public Comment period closes on 12/29/20.
Link: https://www.federalregister.gov/documents/2020/10/30/2020-24139/proposed-extension-of-information-collection-request-
submitted-for-public-comment-comment-request
Form 8824 is also used by members of
the executive branch of the Federal Gov-
ernment and judicial officers of the Feder-
al Government to elect to defer gain under
section 1043 on certain sales of property
due to potential conflicts of interest arising
from their status as government officials.
These final regulations do not address or
affect the deferral of gain on sales under
section 1043.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
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
return information are confidential, as re-
quired by 26 U.S.C. 6103.
III. Regulatory Flexibility Act
It is hereby certified that these final
regulations will not have a significant eco-
nomic impact on a substantial number of
small entities within the meaning of sec-
tion 601(6) of the Regulatory Flexibility
Act (5 U.S.C. chapter 6).
These final regulations update existing
regulations under section 1031 to reflect
statutory changes made to section 1031
by the TCJA. Section 1031 provides that
a taxpayer exchanging investment proper-
ty or property held for productive use in a
trade or business for other investment or
trade or business property recognizes gain
only to the extent of money or non-like-
kind property received in the exchange,
and recognizes no loss on the exchange.
Under the TCJA amendments to section
1031, for years after 2017, section 1031
applies only to exchanges of real proper-
ty and no longer applies to exchanges of
personal property and certain intangible
property. The final regulations provide a
definition of real property to be used in de-
termining whether a taxpayer has met the
requirements of section 1031. In so doing,
the final regulations follow the legislative
history underlying the TCJA amendment
to section 1031 providing that real prop-
erty eligible for like-kind exchange treat-
ment under pre-TCJA law continues to be
eligible for like-kind exchange treatment
in years beginning after 2017.
Consequently, the final regulations use
a State or local law test and certain aspects
from existing regulatory definitions of real
property in a manner consistent with the
legislative history underlying the TCJA
amendment to section 1031 requiring that
the definition of real property remain the
same both before and after enactment of
the TCJA. Taxpayers already are familiar
with these rules, which provide that real
property includes land, improvements to
land, unsevered natural products of land,
and water and air space superjacent to
land. In addition, the final regulations pro-
vide a rule addressing a taxpayer’s receipt
of personal property that is incidental to
the real property the taxpayer receives in
the exchange that is based on an existing
rule in §1.1031(k)-1.
Individuals and business entities that
own investment real property or real prop-
erty held for productive use in a trade or
business may engage in a section 1031
exchange. The provisions of section 1031
apply in the same manner to all taxpayers,
so the effect of the final regulations is the
same for taxpayers that are small entities
and taxpayers that are not small entities.
The small entities potentially impacted by
these regulations are businesses organized
as corporations (including S corporations),
partnerships, and individuals that file a
Form 1040 Schedule C for their respective
trades or businesses or Form 1040 Sched-
ule E for their rental real estate.
The number of small entities poten-
tially affected by these final regulations
is unknown but likely substantial because
like-kind exchanges are entered into by
entities of all sizes. Although a substan-
tial number of small entities is potential-
ly affected by these final regulations, the
Treasury Department and the IRS have
concluded that the final regulations will
not have a significant economic impact on
a substantial number of small entities be-
cause the costs to comply with these final
regulations are not significant. This is be-
cause for taxpayers still able to engage in
section 1031 exchanges, there are no addi-
tional forms they are required to file, and
there is no new recordkeeping required, to
comply with section 1031 as amended by
the TCJA and these final regulations other
than the time to read and understand these
regulations. Thus, taxpayers that engage
in
like-kind exchanges of real property in
2018 and later years will not have any ad-
ditional burden as compared to taxpayers
engaging in like-kind exchanges in years
before 2018. Accordingly, the Secretary
certifies that these final regulations will
not have a significant economic impact on
a substantial number of small entities.
Pursuant to section 7805(f), the notice
of proposed rulemaking preceding this fi-
nal regulation was submitted to the Chief
Counsel for the Office of Advocacy of the
Small Business Administration for com-
ment on its impact on small business (85
FR 35835). No comments on the notice
were received from the Chief Counsel for
the Office of Advocacy of the Small Busi-
ness Administration.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in any
one year by a State, local, or tribal govern-
ment, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, up-
dated annually for inflation. In 2020, that
threshold is approximately $156 million.
This rule does not include any mandate
that may result in expenditures by State,
local, or tribal governments, or by the pri-
vate sector in excess of that threshold.

Bulletin No. 2020–52 1761 December 21, 2020
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
State and local governments, and is not
required by statute, or preempts State law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive Order. This rule does not
have federalism implications and does
not impose substantial, direct compliance
costs on State and local governments or
preempt State law within the meaning of
the Executive Order.
VI. Congressional Review Act
The Administrator of OIRA has deter-
mined that this Treasury decision is a ma-
jor rule for purposes of the Congressional
Review Act (5 U.S.C. 801 et seq.) (CRA).
Under section 801(3) of the CRA, a major
rule takes effect 60 days after the rule is
published in the Federal Register.
Notwithstanding this requirement, sec-
tion 808(2) of the CRA allows agencies to
dispense with the requirements of section
801 when the agency for good cause finds
that such procedure would be impractica-
ble, unnecessary, or contrary to the pub-
lic interest and the rule shall take effect
at such time as the agency promulgating
the rule determines. Pursuant to section
808(2) of the CRA, the Treasury Depart-
ment and the IRS find, for good cause,
that a 60-day delay in the effective date
is unnecessary and contrary to the public
interest.
Following the amendments to section
1031 by the TCJA, the Treasury Depart-
ment and the IRS published the proposed
regulations to provide certainty to tax-
payers. In particular, and as emphasized
by the wide variety of public comments
received in response to the proposed
regulations, taxpayers lacked certainty
regarding the longstanding role of State
and local law in real property determi-
nations for purposes of qualification un-
der section 1031. Consistent with Exec-
utive Order 13924 (May 19, 2020), the
Treasury Department and the IRS have
determined that an expedited effective
date of the final regulations would “give
businesses, especially small businesses,
the confidence they need to re-open by
providing guidance on what the law re-
quires.” 85 FR 31353-4. Accordingly, the
Treasury Department and the IRS have
determined that the rules in this Treasury
decision shall take effect on the date of
publication in the Federal Register.
Drafting Information
The principal authors of these regu-
lations are Edward C. Schwartz and Su-
zanne R. Sinno of the Office of Associate
Chief Counsel (Income Tax and Account-
ing). However, other personnel from the
Treasury Department and the IRS partici-
pated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amend-
ed as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Par. 2. Section 1.168(i)-1 is amended
by:
1. In the last sentence in paragraph (e)
(2)(viii)(A), removing “does not apply.” at
the end of the sentence and adding “and
the distinct asset determination under
§1.1031(a)-3(a)(4) do not apply.” in its
place;
2. In the first sentence in paragraph (m)
(1), removing the word “This” at the be-
ginning of the sentence and adding “Ex-
cept as provided in paragraph (m)(5) of
this section, this” in its place; and
3. Redesignating paragraph (m)(5) as
paragraph (m)(6) and adding new para-
graph (m)(5).
The addition reads as follows:
§1.168(i)-1 General asset accounts.
* * * * *
(m) * * *
(5) Application of paragraph (e)(2)
(viii)(A). The language “and the distinct
asset determination under §1.1031(a)-3(a)
(4) do not apply.” in the last sentence of
paragraph (e)(2)(viii)(A) of this section
applies on or after December 2, 2020.
Paragraph (e)(2)(viii)(A) of this section as
contained in 26 CFR part 1 edition revised
as of April 1, 2020, applies before Decem-
ber 2, 2020.
Par. 3. Section 1.168(i)-8 is amended
by:
1. In the last sentence in paragraph
(c)(4)(i), removing “does not apply” at
the end of the sentence and adding “and
the distinct asset determination under
§1.1031(a)-3(a)(4) do not apply” in its
place;
2. At the beginning of paragraph (j)
(1), removing the word “This” and adding
“Except as provided in paragraph (j)(5) of
this section, this” in its place;
3. Redesignating paragraph (j)(5) as
paragraph (j)(6) and adding new para-
graph (j)(5).
The addition reads as follows:
§1.168(i)-8 Dispositions of MACRS
property.
* * * * *
(j) * * *
(5) Application of paragraph (c)(4)(i).
The language “and the distinct asset deter-
mination under §1.1031(a)-3(a)(4) do not
apply.” in the last sentence of paragraph
(c)(4)(i) of this section applies on or after
December 2, 2020. Paragraph (c)(4)(i) of
this section as contained in 26 CFR part 1
edition revised as of April 1, 2020, applies
before December 2, 2020.
Par. 4. Section 1.1031-0 is amended by
revising the entry for §1.1031(a)-1(e) and
adding entries for §1.1031(a)-3 to read as
follows:
§1.1031-0 Table of contents.
* * * * *
§1.1031(a)-1 Property held for
productive use in a trade or business or
for investment.
* * * * *
(e) Applicability dates.
* * * * *

December 21, 2020 1762 Bulletin No. 2020–52
§1.1031(a)-3 Definition of real property.
(a) Real property.
(b) Examples.
(c) Applicability date.
* * * * *
Par. 5. Section 1.1031(a)-1 is amended
by adding paragraph (a)(3) and revising
paragraph (e) to read as follows:
§1.1031(a)-1 Property held for
productive use in trade or business or for
investment.
(a) * * *
(3) Exchanges after 2017. Pursuant to
section 13303 of Public Law 115-97 (131
Stat. 2054), for exchanges beginning af-
ter December 31, 2017, section 1031 and
§§1.1031(a)-1, 1.1031(b)-2, 1.1031(d)-1T,
1.1031(d)-2, 1.1031(j)-1, 1.1031(k)-1, and
references to section 1031 in §§1.1031(b)-
1, 1.1031(c)-1, and 1.1031(d)-1, apply
only to qualifying exchanges of real prop-
erty (within the meaning of §1.1031(a)-3)
that is held for productive use in a trade or
business, or for investment, and that is not
held primarily for sale.
* * * * *
(e) Applicability dates—(1) Exchanges
of partnership interests. The provisions of
paragraph (a)(1) of this section relating to
exchanges of partnership interests apply
to transfers of property made by taxpayers
on or after April 25, 1991.
(2) Exchanges after 2017. The provi-
sions of paragraph (a)(3) of this section
apply to exchanges beginning after De-
cember 2, 2020.
Par. 6. Section 1.1031(a)-3 is added to
read as follows:
§1.1031(a)-3 Definition of real property.
(a) Real property—(1) In general. The
term real property under section 1031
and §§1.1031(a)-1 through 1.1031(k)-1
means land and improvements to land,
unsevered natural products of land, and
water and air space superjacent to land.
Under paragraph (a)(5) of this section,
an intangible interest in real property of
a type described in this paragraph (a)(1)
is real property for purposes of section
1031 and this section. Property that is
real property under State or local law as
provided in paragraph (a)(6) of this sec-
tion is real property for purposes of sec-
tion 1031 and this section.
(2) Improvements to land—(i) In gen-
eral. The term improvements to land
means inherently permanent structures
and the structural components of inherent-
ly permanent structures.
(ii) Inherently permanent structures—
(A) In general. The term inherently per-
manent structure means any building or
other structure that is a distinct asset with-
in the meaning of paragraph (a)(4) of this
section and is permanently affixed to real
property and that will ordinarily remain
affixed for an indefinite period of time.
Affixation is considered permanent if it
is reasonably expected to last indefinitely
based on all the facts and circumstances.
(B) Building. A building is any struc-
ture or edifice enclosing a space within its
walls, and covered by a roof, the purpose
of which is, for example, to provide shelter
or housing, or to provide working, office,
parking, display, or sales space. Buildings
include the following distinct assets if
permanently affixed: houses, apartments,
hotels, motels, enclosed stadiums and are-
nas, enclosed shopping malls, factories
and office buildings, warehouses, barns,
enclosed garages, enclosed transportation
stations and terminals, and stores.
(C) Other inherently permanent struc-
tures. Inherently permanent structures
under paragraph (a)(2)(ii) of this section
include the following distinct assets, if
permanently affixed: in-ground swim-
ming pools; roads; bridges; tunnels; paved
parking areas, parking facilities, and other
pavements; special foundations; station-
ary wharves and docks; fences; inherently
permanent advertising displays for which
an election under section 1033(g)(3) is
in effect; inherently permanent outdoor
lighting facilities; railroad tracks and sig-
nals; telephone poles; power generation
and transmission facilities; permanently
installed telecommunications cables; mi-
crowave transmission, cell, broadcasting,
and electric transmission towers; oil and
gas pipelines; offshore platforms, der-
ricks, oil and gas storage tanks; and grain
storage bins and silos. Affixation to real
property may be accomplished by weight
alone. If property is not listed as an inher-
ently permanent structure in paragraph (a)
(2)(ii)(B) or (C) of this section, the deter-
mination of whether the property is an in-
herently permanent structure under para-
graph (a)(2)(ii) of this section is based on
the following factors—
(1) The manner in which the distinct
asset is affixed to real property;
(2) Whether the distinct asset is de-
signed to be removed or to remain in
place;
(3) The damage that removal of the dis-
tinct asset would cause to the item itself or
to the real property to which it is affixed;
(4) Any circumstances that suggest the
expected period of affixation is not indef-
inite; and
(5) The time and expense required to
move the distinct asset.
(iii) Structural components—(A) In
general. The term structural compo-
nent means any distinct asset, within
the meaning of paragraph (a)(4) of this
section, that is a constituent part of, and
integrated into, an inherently permanent
structure. If interconnected assets work
together to serve an inherently permanent
structure (for example, systems that pro-
vide a building with electricity, heat, or
water), the assets are analyzed together
as one distinct asset that may be a struc-
tural component. A structural component
may qualify as real property only if the
taxpayer holds its interest in the structural
component together with a real property
interest in the space in the inherently per-
manent structure served by the structural
component. If a distinct asset is custom-
ized, the customization does not affect
whether the distinct asset is a structural
component. Tenant improvements to a
building that are inherently permanent or
otherwise classified as real property with-
in the meaning of this paragraph (a)(2)(iii)
are real property under this section. How-
ever, property produced for sale, such as
bricks, nails, paint, and windowpanes,
that is not real property in the hands of
the producing taxpayer or a related per-
son, as defined in section 1031(f)(3), but
that may be incorporated into real proper-
ty by an unrelated buyer, is not treated as
real property by the producing taxpayer.
(B) Examples of structural compo-
nents. Structural components include the
following items, provided the item is a
constituent part of, and integrated into,
an inherently permanent structure: walls;
partitions; doors; wiring; plumbing sys-
tems; central air conditioning and heating

Bulletin No. 2020–52 1763 December 21, 2020
systems; pipes and ducts; elevators and
escalators; floors; ceilings; permanent
coverings of walls, floors, and ceilings;
insulation; chimneys; fire suppression
systems, including sprinkler systems and
fire alarms; fire escapes; security systems;
humidity control systems; and other sim-
ilar property. If a component of a build-
ing or inherently permanent structure is a
distinct asset and is not listed as a struc-
tural component in this paragraph (a)(2)
(iii)(B), the determination of whether the
component is a structural component un-
der this paragraph (a)(2)(iii) is based on
the following factors—
(1) The manner, time, and expense of
installing and removing the component;
(2) Whether the component is designed
to be moved;
(3) The damage that removal of the
component would cause to the item itself
or to the inherently permanent structure to
which it is affixed; and
(4) Whether the component is installed
during construction of the inherently per-
manent structure.
(3) Unsevered natural products of land.
Unsevered natural products of land, in-
cluding growing crops, plants, and timber;
mines; wells; and other natural deposits,
generally are treated as real property for
purposes of this section. Natural products
and deposits, such as crops, timber, water,
ores, and minerals, cease to be real prop-
erty when they are severed, extracted, or
removed from the land.
(4) Distinct asset—(i) In general. For
this section, a distinct asset is analyzed
separately from any other assets to which
the asset relates to determine if the asset
is real property, whether as land, an inher-
ently permanent structure, or a structural
component of an inherently permanent
structure. Buildings and other inherently
permanent structures are distinct assets.
Assets and systems listed as a structural
component in paragraph (a)(2)(iii)(B) of
this section are treated as distinct assets.
(ii) Facts and circumstances. The de-
termination of whether a particular sep-
arately identifiable item of property is a
distinct asset is based on all the facts and
circumstances. In particular, the following
factors must be taken into account—
(A) Whether the item is customarily
sold or acquired as a single unit rather
than as a component part of a larger asset;
(B) Whether the item can be separated
from a larger asset, and if so, the cost of
separating the item from the larger asset;
(C) Whether the item is commonly
viewed as serving a useful function inde-
pendent of a larger asset of which it is a
part; and
(D) Whether separating the item from a
larger asset of which it is a part impairs the
functionality of the larger asset.
(5) Intangible assets—(i) In general.
Intangible assets that are real property for
purposes of section 1031 and this section
include the following items: fee owner-
ship; co-ownership; a leasehold; an op-
tion to acquire real property; an easement;
stock in a cooperative housing corpora-
tion; shares in a mutual ditch, reservoir,
or irrigation company described in section
501(c)(12)(A) of the Code if, at the time of
the exchange, such shares have been rec-
ognized by the highest court of the State
in which the company was organized, or
by a State statute, as constituting or repre-
senting real property or an interest in real
property; and land development rights.
Similar interests are real property for pur-
poses of section 1031 and this section if
the intangible asset derives its value from
real property or an interest in real property
and is inseparable from that real property
or interest in real property. The following
intangible assets are not real property for
purposes of section 1031 and this section,
regardless of the classification of such
property under State or local law—
(A) Stock not described in paragraph
(a)(5)(i) of this section, bonds, or notes;
(B) Other securities or evidences of in-
debtedness or interest;
(C) Interests in a partnership (other
than an interest in a partnership that has in
effect a valid election under section 761(a)
to be excluded from the application of all
of subchapter K);
(D) Certificates of trust or beneficial
interests; and
(E) Choses in action.
(ii) Licenses and permits. A license,
permit, or other similar right that is solely
for the use, enjoyment, or occupation of
land or an inherently permanent structure
and that is in the nature of a leasehold,
easement, or other similar right, gener-
ally is an interest in real property under
this section. However, a license or permit
to engage in or operate a business on real
property is not real property or an interest
in real property, regardless of its classifi-
cation under State or local law.
(6) State or local law. Except as other-
wise provided in paragraph (a)(5) of this
section, property is real property within
the meaning of paragraph (a)(1) of this
section under State or local law if, on the
date it is transferred in an exchange, the
property is real property under the law of
the State or local jurisdiction in which that
property is located.
(7) No inference outside of section
1031. The rules provided in this section
concerning the definition of real property
apply only for purposes of section 1031.
No inference is intended with respect to
the classification or characterization of
property for other purposes of the Code,
such as depreciation and sections 1245
and 1250. For example, a structure or a
portion of a structure may be section 1245
property for depreciation purposes and for
determining gain under section 1245, not-
withstanding that the structure or the por-
tion of the structure is real property under
this section. Also, a taxpayer transferring
relinquished property that is section 1245
property in a section 1031 exchange is
subject to the gain recognition rules under
section 1245 and the regulations under
section 1245, notwithstanding that the re-
linquished property or replacement prop-
erty is real property under this section.
In addition, the taxpayer must follow the
rules of section 1245 and the regulations
under section 1245, and section 1250 and
the regulations under section 1250, based
on the determination of the relinquished
property and replacement property being,
in whole or in part, section 1245 property
or section 1250 property under those Code
sections and not under this section.
(b) Examples. The following examples
illustrate the provisions of this section. In
each example, unless otherwise provided,
the State or local law of the applicable ju-
risdiction in which the property at issue
is located does not address whether the
property is real property.
(1) Example 1: Natural products of land. A owns
land with perennial fruit-bearing plants that A har-
vests annually. The unsevered plants are natural
products of the land within the meaning of paragraph
(a)(3) of this section and thus are real property for
purposes of section 1031. A annually harvests fruit
from the plants. Upon severance from the land, the
harvested fruit ceases to be part of the land and there-

December 21, 2020 1764 Bulletin No. 2020–52
fore is not real property. Storage of the harvested
fruit upon or within real property does not cause the
harvested fruit to be real property.
(2) Example 2: Water space superjacent to land.
B owns a marina comprised of U-shaped boat slips
and end ties. The U-shaped boat slips are spaces on
the water that are surrounded by a dock on three
sides. The end ties are spaces on the water at the end
of a slip or on a long, straight dock. B rents the boat
slips and end ties to boat owners. The boat slips and
end ties are water space superjacent to land and thus
are real property within the meaning of paragraph (a)
(1) of this section.
(3) Example 3: Indoor sculpture. (i) C owns an
office building and a large sculpture in the atrium of
the building. The sculpture measures 30 feet tall by
18 feet wide and weighs five tons. The building was
specifically designed to support the sculpture, which
is permanently affixed to the building by supports
embedded in the building’s foundation. The sculp-
ture was constructed within the building. Removal
would be costly and time consuming and would de-
stroy the sculpture. The sculpture is reasonably ex-
pected to remain in the building indefinitely.
(ii) The sculpture is not an inherently permanent
structure listed in paragraph (a)(2)(ii)(C) of this sec-
tion, and, therefore, C must use the factors provided
in paragraphs (a)(2)(ii)(C)(1) through (5) of this sec-
tion to determine whether the sculpture is an inher-
ently permanent structure. The sculpture—
(A) Is permanently affixed to the building by
supports embedded in the building’s foundation;
(B) Is not designed to be removed and is de-
signed to remain in place indefinitely;
(C) Would be damaged if removed and would
damage the building to which it is affixed;
(D) Is expected to remain in the building indef-
initely; and
(E) Would require significant time and expense
to move.
(iii) The factors described in paragraphs (a)(2)(ii)
(C)(1) through (5) of this section all support the con-
clusion that the sculpture is an inherently permanent
structure within the meaning of paragraph (a)(2)(ii)
(A) of this section. Therefore, the sculpture is real
property.
(4) Example 4: Bus shelters. (i) D owns 400 bus
shelters, each of which consists of four posts, a roof,
and panels enclosing two or three sides. D enters
into a long-term lease with a local transit authority
for use of the bus shelters. Each bus shelter is pre-
fabricated from steel and is bolted to the sidewalk.
Bus shelters are disassembled and moved when bus
routes change. Moving a bus shelter takes less than a
day and does not significantly damage either the bus
shelter or the real property to which it was affixed.
(ii) The bus shelters are not permanently affixed
enclosed transportation stations or terminals, are not
buildings under paragraph (a)(2)(ii)(B) of this sec-
tion, nor are they listed as types of other inherent-
ly permanent structures in paragraph (a)(2)(ii)(C)
of this section. Therefore, the bus shelters must be
analyzed to determine whether they are inherently
permanent structures using the factors provided in
paragraphs (a)(2)(ii)(C)(1) through (5) of this sec-
tion. The bus shelters—
(A) Are not permanently affixed to the land or an
inherently permanent structure;
(B) Are designed to be removed and not remain
in place indefinitely;
(C) Would not be damaged if removed and would
not damage the sidewalks to which they are affixed;
(D) Will not remain affixed indefinitely; and
(E) Would not require significant time and ex-
pense to move.
(iii) The factors described in paragraphs (a)(2)
(ii)(C)(1) through (5) of this section all support the
conclusion that the bus shelters are not inherently
permanent structures within the meaning of para-
graph (a)(2)(ii) of this section. Thus, the bus shelters
are not inherently permanent structures within the
meaning of paragraph (a)(2)(ii) of this section and,
therefore, are not real property.
(5) Example 5: Industrial 3D printer and gen-
erator. (i) E owns a building that it uses in its trade
or business of manufacturing airplane parts. The
building includes an industrial 3D printer that can
print airplane wings and an electrical generator that
serves the building and the 3D printer in a backup
capacity. The 3D printer weighs 12 tons, is designed
to remain in place indefinitely once installed in the
building, and its removal would be time-consuming
and very costly, and would cause significant damage
to the building. The 3D printer was installed during
the building’s construction. The generator also was
installed during construction and is designed to re-
main in place indefinitely once installed. Although
costly and time-consuming to remove, removal of
the generator will not result in substantial damage to
the generator or the building.
(ii) The 3D printer is not listed as an example
of a structural component under paragraph (a)(2)(iii)
(B) of this section. Therefore, the 3D printer must
be analyzed to determine whether it is a structural
component using the factors provided in paragraphs
(a)(2)(iii)(B)(1) through (4) of this section. The 3D
printer—
(A) Is time-consuming and costly to move;
(B) Is not designed to be moved;
(C) If removed, would cause significant damage
to the building in which it is located; and
(D) Was installed during construction of the
building.
(iii) The factors described in paragraphs (a)(2)
(iii)(B)(1) through (4) of this section support the con-
clusion that the 3D printer is a structural component
of E’s building and real property under this section.
Thus, the 3D printer is real property.
(iv) The electrical generator also is not listed as an
example of a structural component under paragraph
(a)(2)(iii)(B) of this section and must be analyzed to
determine whether it is a structural component using
the factors provided in paragraphs (a)(2)(iii)(B)(1)
through (4) of this section. The generator—
(A) Is time-consuming and costly to move;
(B) Is not designed to be moved;
(C) If removed, would not result in significant
damage to the generator or the building in which it
is located; and
(D) Was installed during construction of the
building.
(v) The factors described in paragraphs (a)(2)(iii)
(B)(1) through (4) of this section, considered in the
aggregate, support the conclusion that the generator
is a structural component of E’s building. Although
the generator’s removal would not result in signifi-
cant damage to the generator or to E’s building, that
factor does not outweigh the factors supporting the
conclusion that it is a structural component. Conse-
quently, the generator is a structural component of
E’s building and real property under this section.
(6) Example 6: Raised flooring for industrial 3D
printer. (i) The facts are the same as in paragraph
(b)(5), Example 5, except that E, when installing its
3D printer, also installed a raised flooring system for
the purpose of facilitating the operation of the 3D
printer. The raised flooring system is not designed or
constructed to remain permanently in place. Rather,
the raised flooring system can be removed, without
any substantial damage to the system itself or to the
building, and then reused. The raised flooring was
installed during the building’s construction.
(ii) Although floors are listed as an example of a
structural component under paragraph (a)(2)(iii)(B)
of this section, the raised flooring system installed
to facilitate the operation of E’s 3D printer is not a
constituent part of, and integrated into, an inherently
permanent structure as required by paragraph (a)(2)
(iii)(A) of this section and, therefore, is not flooring
as listed in paragraph (a)(2)(iii)(B) of this section.
Thus, the raised flooring must be analyzed to de-
termine whether it is a structural component of E’s
building (within the meaning of paragraph (a)(2)(iii)
of this section) using the factors provided in para-
graphs (a)(2)(iii)(B)(1) through (4) of this section.
The raised flooring—
(A) Is installed and removed quickly and with
little expense;
(B) Is designed to be moved and is not designed
specifically for the particular building of which it is
a part;
(C) Is not damaged, and the building is not dam-
aged, upon its removal; and
(D) Was installed during construction of the
building.
(iii) The factors described in paragraphs (a)(2)
(iii)(B)(1) through (4) of this section, considered in
the aggregate, support the conclusion that the raised
flooring is not a structural component of E’s building
within the meaning of paragraph (a)(2)(iii) of this
section. Although the raised flooring was installed
during construction of the building, that factor does
not outweigh the factors supporting the conclusion
that the flooring is not a structural component. There-
fore, the raised flooring is not real property.
(7) Example 7: Steam turbine. (i) F owns a build-
ing with a large steam turbine attached as a fixture to
the building. The steam turbine is a component of a
system used for the commercial production of elec-
tricity for sale to customers in the ordinary course of
F’s business as an electric utility. The steam turbine
also generates electricity for F’s building. The steam
turbine takes up a substantial portion of the building
and is designed to remain in place indefinitely once
installed in F’s building. The steam turbine was in-
stalled during the construction of the building and
its removal would be costly and cause damage to the
building.
(ii) The steam turbine is not listed as an example
of a structural component under paragraph (a)(2)(iii)
(B) of this section and must be analyzed to determine
whether it is a structural component using the factors
provided in paragraphs (a)(2)(iii)(B)(1) through (4)
of this section. The steam turbine—

Bulletin No. 2020–52 1765 December 21, 2020
(A) Is costly to remove from the building in
which it is located;
(B) Is not designed to be moved;
(C) If removed, would cause damage to the
building; and
(D) Was installed during construction of the
building.
(iii) The factors described in paragraphs (a)(2)
(iii)(B)(1) through (4) of this section support the
conclusion that the steam turbine is a structural com-
ponent of F’s building and real property under this
section. Thus, the steam turbine is real property.
(8) Example 8: Partitions. (i) G owns an office
building that it leases to tenants. The building in-
cludes partitions owned by G that are used to delin-
eate space within the building. The office building
has two types of interior, non-load-bearing drywall
partition systems: a conventional drywall partition
system (Conventional Partition System) and a mod-
ular drywall partition system (Modular Partition
System). Neither the Conventional Partition Sys-
tem nor the Modular Partition System was installed
during construction of the office building. Conven-
tional Partition Systems are comprised of fully in-
tegrated gypsum board partitions, studs, joint tape,
and covering joint compound. Modular Partition
Systems are comprised of assembled panels, studs,
tracks, and exposed joints. Both the Conventional
Partition System and the Modular Partition System
reach from the floor to the ceiling. In addition, both
are distinct assets as described in paragraph (a)(4)
of this section.
(ii) Depending on the needs of a new tenant, the
Conventional Partition System may remain in place
when a tenant vacates the premises. The Conven-
tional Partition System is integrated into the office
building and is designed and constructed to remain
in areas not subject to reconfiguration or expansion.
The Conventional Partition System can be removed
only by demolition, and, once removed, neither the
Conventional Partition System nor its components
can be reused. Removal of the Conventional Parti-
tion System causes substantial damage to the Con-
ventional Partition System itself, but does not cause
substantial damage to the building.
(iii) Modular Partition Systems are typically re-
moved when a tenant vacates the premises. Modular
Partition Systems are not designed or constructed to
remain permanently in place. Modular Partition Sys-
tems are designed and constructed to be movable.
Each Modular Partition System can be readily re-
moved, remains in substantially the same condition
as before, and can be reused. Removal of a Modu-
lar Partition System does not cause any substantial
damage to the Modular Partition System itself or to
the building. The Modular Partition System may be
moved to accommodate the reconfigurations of the
interior space within the office building for various
tenants that occupy the building.
(iv) The Conventional Partition System is com-
prised of walls that are integrated into an inherent-
ly permanent structure and are listed as structural
components in paragraph (a)(2)(iii)(B) of this sec-
tion. Thus, the Conventional Partition System is real
property.
(v) The Modular Partition System is not integrat-
ed into the building as required by paragraph (a)(2)
(iii)(A) of this section and, therefore, is not listed
in paragraph (a)(2)(iii)(B) of this section. Thus, the
Modular Partition System must be analyzed to de-
termine whether it is a structural component using
the factors provided in paragraphs (a)(2)(iii)(B)(1)
through (4) of this section. The Modular Partition
System—
(A) Is installed and removed quickly and with
little expense;
(B) Is designed to be moved and is not designed
specifically for the particular building of which it is
a part;
(C) Is not damaged, and the building is not dam-
aged, upon its removal; and
(D) Was not installed during construction of the
building.
(vi) The factors described in paragraphs (a)(2)
(iii)(B)(1) through (4) of this section support the
conclusion that the Modular Partition System is not
a structural component of G’s office building within
the meaning of paragraph (a)(2)(iii) of this section.
Therefore, the Modular Partition System is not real
property.
(9) Example 9: Pipeline transmission system.
(i) H owns a natural gas pipeline transmission sys-
tem that provides a conduit to transport natural gas
from unrelated third-party producers and gathering
facilities to unrelated third-party distributors and end
users. The pipeline transmission system is comprised
of underground pipelines, isolation valves and vents,
pressure control and relief valves, meters, and com-
pressors. Each of these distinct assets was installed
during construction of the pipeline transmission sys-
tem and each was designed to remain permanently
in place.
(ii) The pipelines are permanently affixed and
are listed as other inherently permanent structures
in paragraph (a)(2)(ii)(C) of this section. Thus, the
pipelines are real property.
(iii) Isolation valves and vents are placed at regu-
lar intervals along the pipelines to isolate and evacu-
ate sections of the pipelines in case there is need for a
shut-down or maintenance of the pipelines. Pressure
control and relief valves are installed at regular inter-
vals along the pipelines to provide overpressure pro-
tection. The isolation valves and vents and pressure
control and relief valves are not listed in paragraph
(a)(2)(iii)(B) of this section and, therefore, must be
analyzed to determine whether they are structural
components using the factors provided in paragraphs
(a)(2)(iii)(B)(1) through (4) of this section. The
isolation valves and vents and pressure control and
relief valves—
(A) Are time consuming and expensive to install
and remove from the pipelines;
(B) Are designed specifically for the particular
pipelines for which they are a part;
(C) Will sustain damage and will damage the
pipelines if removed; and
(D) Were installed during construction of the
pipelines.
(iv) The factors in paragraphs (a)(2)(iii)(B)(1)
through (4) of this section support the conclusion
that the isolation valves and vents and pressure con-
trol and relief valves are structural components of
H’s pipelines within the meaning of paragraph (a)(2)
(iii) of this section. Therefore, the isolation valves
and vents and pressure control and relief valves are
real property.
(v) Meters are used to measure the natural gas
passing into or out of the pipeline transmission
system for purposes of determining the end us-
ers’ consumption. Over long distances, pressure
is lost due to friction in the pipeline transmission
system. Compressors are required to add pressure
to transport natural gas through the entirety of the
pipeline transmission system. H installed meters
and compressors during the construction of the
pipelines. However, unlike other types of such me-
ters and compressors, these particular meters and
compressors are not time consuming and expensive
to install and remove from the pipelines; are not
designed specifically for the particular pipelines
for which they are a part; and their removal does
not cause damage to the asset or the pipelines if
removed. Therefore, the meters and compressors
installed by H are not structural components within
the meaning of paragraph (a)(2)(iii) of this section
and, therefore, are not real property.
(10) Example 10: State or local law determina-
tion of property. (i) J owns water pipeline in State X
that it wants to exchange for cell phone towers locat-
ed in State Y. On the date that J transfers the water
pipeline in an exchange for the cell phone towers, the
water pipeline is classified as real property under the
law of State X, the jurisdiction in which the water
pipeline is located.
(ii) The water pipeline is real property under
paragraphs (a)(1) and (a)(6) of this section, regard-
less of whether the water pipeline is listed as an in-
herently permanent structure or a structural compo-
nent of an inherently permanent structure, or is real
property under the factors listed in paragraph (a)(2)
(ii)(C) or (a)(2)(iii)(B) of this section.
(iii) Cell phone towers are listed as an inherently
permanent structure under paragraph (a)(2)(ii)(C) of
this section. Thus, the cell phone towers that J ac-
quires in the exchange for the water pipeline are real
property under this section, regardless of the State
or local characterization of the cell phone towers or
whether the cell phone towers are real property under
the factors in paragraph (a)(2)(ii)(C) or (a)(2)(iii)(B)
of this section.
(11) Example 11: Land use permit. K receives a
special use permit from the government to place a
cell tower on Federal Government land that abuts a
Federal highway. Government regulations provide
that the permit is not a lease of the land, but is a per-
mit to use the land for a cell tower. Under the per-
mit, the government reserves the right to cancel the
permit and compensate K if the site is needed for a
higher public purpose. The permit is in the nature of
a leasehold that allows K to place a cell tower in a
specific location on government land. Therefore, the
permit is an interest in real property under paragraph
(a)(5) of this section.
(12) Example 12: License to operate a business.
L owns a building and receives a license from State
A to operate a casino in the building. The license ap-
plies only to K’s building and cannot be transferred
to another location. L’s building is an inherently
permanent structure under paragraph (a)(2)(ii)(A) of
this section and, therefore, is real property. However,
L’s license to operate a casino is not a right for the
use, enjoyment, or occupation of L’s building, but is
rather a license to engage in or operate the casino
business in the building. Therefore, the casino li-

December 21, 2020 1766 Bulletin No. 2020–52
cense is not real property or an interest in real prop-
erty under paragraph (a)(5)(ii) of this section.
(c) Applicability date. This section
applies to exchanges beginning after De-
cember 2, 2020.
Par. 7. Section 1.1031(k)-1 is amended
by:
1. In paragraph (d)(2), remov-
ing “$87,500” and adding in its place
“$62,500” each place it appears;
2. Removing “, and” at the end of para-
graph (g)(7)(i) and adding a semicolon in
its place;
3. Removing the period at the end of
paragraph (g)(7)(ii) and adding “; and” in
its place;
4. Adding paragraph (g)(7)(iii);
5. In paragraph (g)(8), designating Ex-
amples 1 through 5 as paragraphs (g)(8)(i)
through (v), respectively;
6. In newly designated paragraph (g)
(8)(i):
a. Redesignating paragraph (g)(8)(i)(i)
as paragraph (g)(8)(i)(A);
b. In newly designated paragraph (g)
(8)(i)(A), redesignating paragraphs (g)(8)
(i)(A)(A) and (B) as paragraphs (g)(8)(i)
(A)(1) and (2), respectively;
c. Designating the undesignated para-
graph immediately following newly re-
designated paragraph (g)(8)(i)(A)(2) as
paragraph (g)(8)(i)(A)(3); and
d. In newly designated paragraph (g)
(8)(i) redesignating paragraph (g)(8)(i)(ii)
as paragraph (g)(8)(i)(B);
7. In newly designated paragraph (g)
(8)(ii):
a. Redesignate old paragraph (i) as
paragraph (A);
b. Redesignate old paragraph (A) as
paragraph (1);
c. Redesignate old paragraphs (1) and
(2) as paragraphs (i) and (ii), respectively;
d. Redesignate old paragraphs (B) and
(C) as paragraphs (2) and (3), respective-
ly;
e. Designating the undesignated para-
graph immediately following newly re-
designated paragraph (g)(8)(ii)(A)(3) as
paragraph (g)(8)(ii)(A)(4); and
f. Redesignate old paragraphs (ii) and
(iii) as paragraphs (B) and (C), respectively;
8. In newly designated paragraph (g)
(8)(iii), redesignating old paragraphs (i)
through (v) as paragraphs (A) through (E),
respectively;
9. In newly designated paragraph (g)
(8)(iv), redesignating old paragraphs (i)
through (iii) as paragraphs (A) through
(C), respectively;
10. In newly designated paragraph (g)
(8)(v), redesignating old paragraphs (i)
through (iii) as paragraphs (A) through
(C), respectively;
11. Adding paragraph (g)(8)(vi); and
12. Adding paragraph (g)(9).
The additions read as follows:
§1.1031(k)-1 Treatment of deferred
exchanges.
* * * * *
(g) * * *
(7) * * *
(iii) Personal property generally re-
sulting in gain recognition under section
1031(b) that is incidental to real property
acquired in an exchange. For purposes of
this paragraph (g)(7), personal property is
incidental to real property acquired in an
exchange if—
(A) In standard commercial transac-
tions, the personal property is typically
transferred together with the real proper-
ty; and
(B) The aggregate fair market value of
the property described in paragraph (g)(7)
(iii)(A) of this section transferred with the
real property does not exceed 15 percent
of the aggregate fair market value of the
replacement real property or properties re-
ceived in the exchange.
* * * * *
(8) * * *
(vi) Example 6. (A) In 2020, B transfers to C
real property with a fair market value of $1,100,000
and an adjusted basis of $400,000. B’s replacement
property is an office building and, as a part of the
exchange, B also will acquire certain office furniture
in the building that is not real property, which is in-
dustry practice in a transaction of this type. The fair
market value of the real property B will acquire is
$1,000,000 and the fair market value of the personal
property is $100,000.
(B) In a standard commercial transaction, the
buyer of an office building typically also acquires
some or all of the office furniture in the building.
The fair market value of the personal property B will
acquire does not exceed 15 percent of the fair market
value of the office building B will acquire. Accord-
ingly, under paragraph (g)(7)(iii) of this section, the
personal property is incidental to the real property
in the exchange and is disregarded in determining
whether the taxpayer’s rights to receive, pledge,
borrow or otherwise obtain the benefits of money or
non-like-kind property are expressly limited as pro-
vided in paragraph (g)(6) of this section. Upon the
receipt of the personal property, B recognizes gain
of $100,000 under section 1031(b), the lesser of the
realized gain on the disposition of the relinquished
property, $700,000, and the fair market value of the
non-like-kind property B acquired in the exchange,
$100,000.
(9) Applicability date. Paragraphs (g)
(7)(iii) and (g)(8)(vi) of this section apply
to exchanges beginning after December 2,
2020.
* * * * *
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
Approved: November 18, 2020
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on
November 30, 2020, 4:15 p.m., and published in the
issue of the Federal Register for December 02, 2020,
85 F.R. 77365)

Bulletin No. 2020–52 i December 21, 2020
Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).
Clarified is used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion. It
is not used where a position in a prior rul-
ing is being changed.
Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transactions.
This term is most commonly used in a ruling
that lists previously published rulings that
are obsoleted because of changes in laws or
regulations. A ruling may also be obsoleted
because the substance has been included in
regulations subsequently adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previous-
ly published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cas-
es in litigation, or the outcome of a Ser-
vice study.
Abbreviations
The following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

December 21, 2020 ii Bulletin No. 2020–52
Numerical Finding List
1
Bulletin 2020–52
Announcements:
2020-8, 2020-32 I.R.B. 244
2020-9, 2020-32 I.R.B. 244
2020-10, 2020-33 I.R.B. 385
2020-11, 2020-33 I.R.B. 385
2020-13, 2020-35 I.R.B. 492
2020-14, 2020-36 I.R.B. 549
2020-15, 2020-38 I.R.B. 577
2020-16, 2020-38 I.R.B. 578
2020-17, 2020-40 I.R.B. 794
2020-12, 2020-41 I.R.B. 893
2020-40, 2020-45 I.R.B. 999
2020-47, 2020-19 I.R.B. 1070
Notices:
2020-43, 2020-27 I.R.B. 1
2020-45, 2020-27 I.R.B. 3
2020-46, 2020-27 I.R.B. 7
2020-47, 2020-27 I.R.B. 7
2020-49, 2020-27 I.R.B. 8
2020-50, 2020-28 I.R.B. 35
2020-48, 2020-29 I.R.B. 72
2020-51, 2020-29 I.R.B. 73
2020-52, 2020-29 I.R.B. 79
2020-53, 2020-30 I.R.B. 151
2020-54, 2020-31 I.R.B. 226
2020-56, 2020-32 I.R.B. 239
2020-57, 2020-32 I.R.B. 240
2020-58, 2020-34 I.R.B. 419
2020-55, 2020-35 I.R.B. 467
2020-61, 2020-35 I.R.B. 468
2020-62, 2020-35 I.R.B. 476
2020-63, 2020-35 I.R.B. 491
2020-60, 2020-36 I.R.B. 514
2020-64, 2020-36 I.R.B. 519
2020-65, 2020-38 I.R.B. 567
2020-68, 2020-38 I.R.B. 567
2020-69, 2020-39 I.R.B. 604
2020-59, 2020-40 I.R.B. 782
2020-66, 2020-40 I.R.B. 785
2020-71, 2020-40 I.R.B. 786
2020-72, 2020-40 I.R.B. 789
2020-73, 2020-41 I.R.B. 886
2020-74, 2020-41 I.R.B. 887
2020-70, 2020-43 I.R.B. 913
2020-77, 2020-45 I.R.B. 988
2020-79, 2020-46 I.R.B. 1014
2020-76, 2020-47 I.R.B. 1058
2020-80, 2020-47 I.R.B. 1060
2020-75, 2020-49 I.R.B. 1453
2020-82, 2020-49 I.R.B. 1458
2020-82, 2020-49 I.R.B. 1458
2020-83, 2020-50 I.R.B. 1497
Notices:—Continued
2020-84, 2020-51 I.R.B. 1645
2020-85, 2020-51 I.R.B. 1645
Proposed Regulations:
REG-119307-19, 2020-28 I.R.B. 44
REG-112339-19, 2020-30 I.R.B. 155
REG-117589-18, 2020-30 I.R.B. 184
REG-125716-18, 2020-30 I.R.B. 197
REG-123027-19, 2020-31 I.R.B. 229
REG-130081-19, 2020-32 I.R.B. 246
REG-127732-19, 2020-33 I.R.B. 385
REG-111879-20, 2020-34 I.R.B. 421
REG-112042-19, 2020-34 I.R.B. 422
REG-132766-18, 2020-34 I.R.B. 436
REG-132434-17, 2020-35 I.R.B. 508
REG-116475-19, 2020-37 I.R.B. 553
REG-107911-18, 2020-40 I.R.B. 795
REG-110059-20, 2020-42 I.R.B. 904
REG-119890-18, 2020-47 I.R.B. 1063
REG-122462-20, 2020-48 I.R.B. 1137
REG-101657-20, 2020-49 I.R.B. 1466
REG-123652-18, 2020-51 I.R.B. 1652
Revenue Procedures:
2020-16, 2020-27 I.R.B. 10
2020-31, 2020-27 I.R.B. 12
2020-35, 2020-29 I.R.B. 82
2020-36, 2020-32 I.R.B. 243
2020-37, 2020-33 I.R.B. 381
2020-38, 2020-36 I.R.B. 522
2020-39, 2020-36 I.R.B. 546
2020-40, 2020-38 I.R.B. 575
2020-41, 2020-40 I.R.B. 793
2020-42, 2020-41 I.R.B. 891
2020-43, 2020-45 I.R.B. 991
2020-44, 2020-45 I.R.B. 991
2020-46, 2020-45 I.R.B. 995
2020-45, 2020-46 I.R.B. 1016
2020-47, 2020-48 I.R.B. 1121
2020-49, 2020-48 I.R.B. 1122
2020-50, 2020-48 I.R.B. 1122
2020-48, 2020-49 I.R.B. 1459
2020-51, 2020-50 I.R.B. 1599
Revenue Rulings:
2020-14, 2020-28 I.R.B. 33
2020-15, 2020-32 I.R.B. 233
2020-16, 2020-37 I.R.B. 550
2020-17, 2020-37 I.R.B. 552
2020-18, 2020-39 I.R.B. 584
2020-19, 2020-40 I.R.B. 611
2020-20, 2020-41 I.R.B. 880
2020-21, 2020-41 I.R.B. 882
2020-22, 2020-45 I.R.B. 963
2020-24, 2020-45 I.R.B. 965
Revenue Rulings:—Continued
2020-23, 2020-47 I.R.B. 1028
2020-25, 2020-48 I.R.B. 1109
2020-26, 2020-50 I.R.B. 1550
2020-27, 2020-50 I.R.B. 1552
2020-28, 2020-52 I.R.B. 1669
Treasury Decisions:
9899, 2020-29 I.R.B. 62
9900, 2020-30 I.R.B. 143
9903, 2020-32 I.R.B. 235
9901, 2020-33 I.R.B. 266
9902, 2020-33 I.R.B. 349
9904, 2020-34 I.R.B. 413
9907, 2020-38 I.R.B. 559
9906, 2020-39 I.R.B. 579
9905, 2020-40 I.R.B. 614
9915, 2020-41 I.R.B. 882
9908, 2020-42 I.R.B. 894
9920, 2020-43 I.R.B. 909
9910, 2020-44 I.R.B. 915
9924, 2020-44 I.R.B. 943
9911, 2020-45 I.R.B. 966
9913, 2020-45 I.R.B. 975
9927, 2020-47 I.R.B. 1031
9918, 2020-45 I.R.B. 979
9914, 2020-46 I.R.B. 1000
9919, 2020-48 I.R.B. 1073
9931, 2020-48 I.R.B. 1087
9922, 2020-49 I.R.B. 1139
9929, 2020-49 I.R.B. 1220
9930, 2020-49 I.R.B. 1400
9923, 2020-50 I.R.B. 1554
9926, 2020-51 I.R.B. 1602
9912, 2020-52 I.R.B. 1688
9933, 2020-52 I.R.B. 1692
9934, 2020-52 I.R.B. 1729
9935, 2020-52 I.R.B. 1746
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2019–27 through 2019–52 is in Internal Revenue Bulletin
2019–52, dated December 27, 2019.

Bulletin No. 2020–52 iii December 21, 2020
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2020–52
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2019–27 through 2019–52 is in Internal Revenue Bulletin
2019–52, dated December 27, 2019.

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