admnistrative exempt organizations income … · regarding the disposition of a partnership...

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

ADMNISTRATIVE

Notice 2018–29, page 495.This notice announces that the Treasury Department and theIRS intend to issue regulations under new section 1446(f)regarding the disposition of a partnership interest that is notpublicly traded. This notice also provides interim guidance thattaxpayers may rely on pending the issuance of regulations.

Notice 2018–31, page 501.This notice impacts U.S. multinational enterprise groups thatare required to file a Form 8975 and Schedule A (Form 8975)(Country-by-Country Report) (i.e., those that have more than$850M in revenue in the prior reporting period) and that havemore than 50 percent of their revenues attributable to con-tracts with the Department of Defense or other U.S. govern-mental intelligence or security agencies. Such specified na-tional security contractors may file their Country-by-CountryReport in the modified manner described in the notice.

REG–132434–17, page 503.These proposed regulations will narrow the scope of the cur-rent summons interview regulations by excluding certain non-government attorneys from receiving summoned books, pa-pers, records, or other data, or from participating in theinterview of a witness summoned by the IRS to provide testi-mony under oath. An attorney who is not an officer or employeeof the United States may not be hired by the IRS to performthese activities unless the attorney is hired by the IRS as aspecialist in foreign, state, or local law, including tax law, or innon-tax substantive law that is relevant to an issue in theexamination, such as patent law, property law, or environmen-tal law, or is hired for knowledge, skills, or abilities other thanproviding legal services as an attorney.

EXEMPT ORGANIZATIONS

Announcement 2018–07, page 503.Revocation of IRC 501(c)(3) Organizations for failure to meetthe code section requirements. Contributions made to theorganizations by individual donors are no longer deductibleunder IRC 170(b)(1)(A).

INCOME TAX

Notice 2018–26, page 480.This notice provides additional guidance regarding the imple-mentation of section 965 of the Internal Revenue Code asamended by “An Act to provide for reconciliation pursuant totitles II and V of the concurrent resolution on the budget forfiscal year 2018”, P.L. 115–97, which was enacted on Decem-ber 22, 2017.

Notice 2018–28, page 492.This notice announces that the Department of the Treasury andthe Internal Revenue Service (IRS) intend to issue proposedregulations providing guidance to assist taxpayers in comply-ing with section 163(j) of the Internal Revenue Code (Code), asamended on December 22, 2017, by “An Act to provide forreconciliation pursuant to titles II and V of the concurrentresolution on the budget for fiscal year 2018,” P.L. 115–97(the Act). This notice further describes certain of the rules thatthose proposed regulations will include to provide taxpayerswith interim guidance as more comprehensive guidance isdeveloped. The rules described in this notice apply only forpurposes of determining the limitation on deductions for inter-est expense under section 163(j), as amended by the Act.

Notice 2018–29, page 495.This notice announces that the Treasury Department and theIRS intend to issue regulations under new section 1446(f)

Finding Lists begin on page ii.

Bulletin No. 2018–16April 16, 2018

regarding the disposition of a partnership interest that is notpublicly traded. This notice also provides interim guidance thattaxpayers may rely on pending the issuance of regulations.

Rev. Rul. 2018–10, page 477.Fringe benefits aircraft valuation formula. For purposes ofsection 1.61–21(g) of the Income Tax Regulations, relating tothe rule for valuing non-commercial flights on employer-provided aircraft, the Standard Industry Fare Level (SIFL) cents-per-mile rates and terminal charge in effect for the first half of2018 are set forth.

T.D. 9832, page 477.These final regulations provide rules addressing the allocationof the credit for increasing research activities to corporationsand trades or businesses under common control. These finalregulations also contain rules relating to the allocation of therailroad track maintenance credit and the election for a re-duced research credit.

Special Announcement

Notice 2018–29, page 495.This notice announces that the Treasury Department and theIRS intend to issue regulations under new section 1446(f)regarding the disposition of a partnership interest that is notpublicly traded. This notice also provides interim guidance thattaxpayers may rely on pending the issuance of regulations.

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly.

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

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

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, 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 unlessthe 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 ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A, TaxConventions and Other Related Items, and Subpart B, Legisla-tion and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Sec-retary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished 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.

April 16, 2018 Bulletin No. 2018–16

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 61.—Gross IncomeDefined26 CFR 1.61–21: Taxation of fringe benefits.

Rev. Rul. 2018–10

For purposes of the taxation of fringebenefits under section 61 of the InternalRevenue Code, section 1.61–21(g) of the

Income Tax Regulations provides a rulefor valuing noncommercial flights onemployer-provided aircraft. Section 1.61–21(g)(5) provides an aircraft valuationformula to determine the value of suchflights. The value of a flight is determinedunder the base aircraft valuation formula(also known as the Standard Industry FareLevel formula or SIFL) by multiplying theSIFL cents-per-mile rates applicable for the

period during which the flight was taken bythe appropriate aircraft multiple provided insection 1.61–21(g)(7) and then adding theapplicable terminal charge. The SIFL cents-per-mile rates in the formula and the termi-nal charge are calculated by the Departmentof Transportation and are reviewed semi-annually.

The following chart sets forth the ter-minal charge and SIFL mileage rates:

Period During Which theFlight Is Taken Terminal Charge SIFL Mileage Rates

1/1/18 - 6/30/18 $41.71 Up to 500 miles � $.2282 per mile

501–1500 miles � $.1740 per mile

Over 1500 miles � $.1673 per mile

DRAFTING INFORMATION

The principal author of this revenueruling is Kathleen Edmondson of the Of-fice of Associate Chief Counsel (Tax Ex-empt/Government Entities). For furtherinformation regarding this revenue ruling,contact Ms. Edmondson at (202) 317-6798 (not a toll-free number).

T.D. 9832

DEPARTMENT OF THETREASURY

Internal Revenue Service

26 CFR Part 1

Allocation of ControlledGroup Research Credit

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains fi-nal regulations relating to the allocationof the credit for increasing research ac-tivities (research credit) to corporationsand trades or businesses under commoncontrol (controlled groups). This docu-ment also contains final regulations re-lating to the allocation of the railroad

track maintenance credit and the elec-tion for a reduced research credit.

DATES: Effective date: These regulationsare effective on April 2, 2018.Applicability date: For dates of applicabil-ity, see §§ 1.41–6(j), 1.45G–1(g), and1.280C–4(c).

FOR FURTHER INFORMATION CON-TACT: James Holmes, at (202) 317-4137;(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document amends 26 CFR part 1to provide rules relating to sections 41,45G, and 280C of the Internal RevenueCode (Code). On April 3, 2015, the De-partment of the Treasury (Treasury De-partment) and the IRS published final andtemporary regulations (TD 9717) (tempo-rary regulations) in the Federal Register(80 FR 18096) and a notice of proposedrulemaking by cross-reference to the tem-porary regulations (REG–133489–13) inthe Federal Register (80 FR 18171) (pro-posed regulations). On April 27, 2015, theTreasury Department and the IRS pub-lished corrections to TD 9717 in the Fed-eral Register (80 FR 23237 and 80 FR23238). The temporary regulations expireon April 2, 2018.

The preamble to the temporary regula-tions fully describes the updates to the

regulations under sections 41, 45G, and280C. See 80 FR 18097, April 3, 2015.The temporary regulations updated thesection 41 rules in a manner that is con-sistent with the amendments made tosection 41(f)(1)(A)(ii) and section 41(f)(1)(B)(ii) contained in Section 301(c) ofthe American Taxpayer Relief Act of2012, Public Law 112–240, H.R. 8(ATRA). The temporary regulations alsoupdated the regulations under § 1.45G–1(f) and an example under § 1.280C–4(b)(2) because they are based on therules of section 41(f) in effect before theATRA amendments.

One written comment responding to theproposed regulations was received. No re-quests for a public hearing were made andno public hearing was held. After consider-ation of the comment, the proposed regula-tions are adopted without change by thisTreasury decision.

Summary of Comment andExplanation of Provisions

No comments were received related tothe proposed regulations under section 41or section 280C. One commenter re-quested the regulations under § 1.45G–1(f)(8) be amended to explicitly providethat qualified railroad track maintenanceexpenditures (QRTMEs) associated with atrack assignment reside with the assignee(and not with the track owner) when therehas been an intra-group track assignment.

Bulletin No. 2018–16 April 16, 2018477

Revising those rules is beyond the scopeof these regulations. Therefore, the Trea-sury Department and IRS decline to adoptthe comment.

Effect on Other Documents

The temporary regulations are obsoletefor taxable years beginning on or afterApril 2, 2018.

Special Analyses

Certain IRS regulations, includingthese, are exempt from the requirementsof Executive Order 12866, as supple-mented and reaffirmed by Executive Or-der 13563. Therefore, a regulatory im-pact assessment is not required. Becausethe final regulations do not impose acollection of information on small enti-ties, the Regulatory Flexibility Act (5U.S.C. chapter 6) does not apply. Pur-suant to section 7805(f) of the Code, thenotice of proposed rulemaking that pre-ceded the final regulations was submit-ted to the Chief Counsel for Advocacyof the Small Business Administrationfor comment on their impact on smallbusiness. No comments were receivedon the proposed regulations.

These final regulations provide neces-sary guidance for corporations that file aconsolidated return regarding the alloca-tion of the group credit to members ofcertain controlled groups of corporationsand trades or businesses under commoncontrol. It is necessary to provide thisadministrative relief for these controlledgroups as of April 2, 2018, the expirationdate of the temporary regulations, to re-move impediments to claiming the re-search and railroad track maintenancecredits and making the election for a re-duced research credit. Accordingly, goodcause is found for dispensing with a de-layed effective date pursuant to 5 U.S.C.553(d).

Drafting Information

The principal author of these regula-tions is James Holmes, Office of the As-sociate Chief Counsel (Passthroughs andSpecial Industries). However, other per-sonnel from the Treasury Department andthe IRS participated in their development.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR part 1 isamended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by revising the sectionalauthority entries for §§ 1.41–6 and1.280C–4 and adding a sectional author-ity for § 1.45G–1 in numerical order toread in part as follows:

Authority: 26 U.S.C. 7805 * * ** * * * *

Section 1.41–6 also issued under 26U.S.C. 41(f)(1) and 1502.* * * * *

Section 1.45G–1 also issued under 26U.S.C. 45G(e)(2).* * * * *

Section 1.280C–4 also issued under 26U.S.C. 280C(c)(4)* * * * *

Par. 2. Section 1.41–6 is amended byrevising paragraphs (c), (d)(1) and (3), (e),and (j)(4) and (5) to read as follows:

§ 1.41–6 Aggregation of expenditures.

* * * * *(c) Allocation of the group credit. The

group credit is allocated to each memberof the controlled group on a proportionatebasis to its share of the aggregate of thequalified research expenses, basic re-search payments, and amounts paid or in-curred to energy research consortiumstaken into account for the taxable year bysuch controlled group for purposes of thecredit. For purposes of paragraphs (c), (d),and (e) of this section, qualified researchexpenses, basic research payments, andamounts paid or incurred to energy re-search consortiums are collectively re-ferred to as QREs.

(d) Special rules for consolidatedgroups—(1) In general. For purposes ofapplying paragraph (c) of this section,members of a consolidated group who aremembers of a controlled group are treatedas a single member of the controlledgroup.* * * * *

(3) Special rule for allocation of groupcredit among consolidated group mem-bers. The portion of the group credit thatis allocated to a consolidated group is

allocated to each member of the consoli-dated group on a proportionate basis to itsshare of the aggregate of the QREs takeninto account for the taxable year by suchconsolidated group for purposes of thecredit.

(e) Examples. The following examplesillustrate the provisions of paragraphs (c)and (d) of this section.

Example 1. Controlled group. A, B, and C are acontrolled group. A had $100x, B $300x, and C$500x of qualified research expenses for the year,totaling $900x for the group. A, in the course of itstrade or business, also made a payment of $100x toan energy research consortium for energy research.The group’s QREs total 1000x and the group calcu-lated its total research credit to be $60x for the year.Based on each member’s proportionate share of thecontrolled group’s aggregate QREs, A is allocated$12x, B $18x, and C $30x of the credit.

Example 2. Consolidated group is a member ofcontrolled group. The controlled group’s membersare D, E, F, G, and H. F, G, and H file a consolidatedreturn and are treated as a single member (FGH) ofthe controlled group. D had $240x, E $360x, andFGH $600x of qualified research expenses for theyear ($1,200x aggregate). The group calculated itsresearch credit to be $100x for the year. Based on theproportion of each member’s share of QREs to thecontrolled group’s aggregate QREs for the taxableyear D is allocated $20x, E $30x, and FGH $50x ofthe credit. The $50x of credit allocated to FGH isthen allocated to the consolidated group membersbased on the proportion of each consolidatedgroup member’s share of QREs to the consoli-dated group’s aggregate QREs. F had $120x, G$240x, and H $240x of QREs for the year. There-fore, F is allocated $10x, G is allocated $20x, andH is allocated $20x.

* * * * *(j) * * *(4) Taxable years beginning after De-

cember 31, 2011. Paragraphs (c), (d)(1)and (3), (e), and (j)(4) and (5) of thissection apply to taxable years beginningon or after April 2, 2018. For taxableyears ending before April 2, 2018, see§ 1.41–6T as contained in 26 CFR part 1,as revised April 1, 2017.

(5) Taxable years beginning beforeJanuary 1, 2012. See § 1.41–6 as con-tained in 26 CFR part 1, revised April 1,2014.

§ 1.41–6T [Removed]

Par. 3. Section 1.41–6T is removed.Par. 4. Section 1.45G–1 is amended by

revising paragraphs (f)(4) and (5) and(g)(4) and (5) to read as follows:


§ 1.45G–1 Railroad track maintenancecredit.

* * * * *(f) * * *(4) Allocation of the group credit. The

group credit is allocated to each memberof the controlled group on a proportionatebasis to its share of the aggregate of theQRTMEs taken into account for the tax-able year by such controlled group forpurposes of the credit.

(5) Special rules for consolidatedgroups—(i) In general. For purposes ofapplying paragraph (f)(4) of this section,members of a consolidated group who aremembers of a controlled group are treatedas a single member of the controlledgroup.

(ii) Special rule for allocation of groupcredit among consolidated group mem-bers. The portion of the group credit thatis allocated to a consolidated group isallocated to each member of the consoli-dated group on a proportionate basis to itsshare of the aggregate of the QRTMEstaken into account for the taxable year bysuch consolidated group for purposes ofthe credit.* * * * *

(g) * * *(4) Taxable years beginning after De-

cember 31, 2011. Paragraphs (f)(4) and(5) and (g)(4) and (5) of this section applyto taxable years beginning on or afterApril 2, 2018. For taxable years endingbefore April 2, 2018, see § 1.45G–1T as

contained in 26 CFR part 1, as revisedApril 1, 2017.

(5) Taxable years beginning beforeJanuary 1, 2012. See § 1.45–1 as con-tained in 26 CFR part 1, revised April 1,2014.

§ 1.45G–1T [Removed]

Par. 5. Section 1.45G–1T is removed.Par. 6. Section 1.280C–4 is amended

by revising paragraphs (b)(2) and (c)(2)and (3) to read as follows:

§ 1.280C–4 Credit for increasingresearch activities.

* * * * *(b) * * *(2) Example. The following example illustrates

an application of paragraph (b) of this section: A, B,and C, all of which are calendar year taxpayers, aremembers of a controlled group of corporations(within the meaning of section 41(f)(5)). A, B, and Ceach attach a statement to the 2012 Form 6765,“Credit for Increasing Research Activities,” showingA and C were the only members of the controlledgroup to have qualified research expenses when cal-culating the group credit. A and C report their allo-cated portions of the group credit on the 2012 Form6765 and B reports no research credit on Form 6765.Pursuant to paragraph (a) of this section, A and B,but not C, each make an election for the reducedcredit under section 280C(c)(3)(B) on the 2012 Form6765. In December 2013, B determines it had qual-ified research expenses in 2012 resulting in an in-creased group credit. On an amended 2012 Form6765, A, B, and C each report their allocated por-tions of the group credit. B reports its credit as aregular credit under section 41(a) and reduces the

credit under section 280C(c)(3)(B). C may not re-duce its credit under section 280C(c)(3)(B) becauseC did not make an election for the reduced creditwith its original return.

(c) * * *(2) Taxable years beginning after De-

cember 31, 2011. Paragraphs (b)(2) and(c)(2) and (3) of this section apply totaxable years beginning on or after April2, 2018. For taxable years ending beforeApril 2, 2018, see § 1.280C–4T as con-tained in 26 CFR part 1, as revised April1, 2017.

(3) For taxable years ending beforeJanuary 1, 2012. See § 1.280C–4 as con-tained in 26 CFR part 1, revised April 1,2014.

§ 1.280C–4T [Removed]

Par. 7. Section 1.280C–4T is removed.

Kirsten Wielobob,Deputy Commissioner for Services and

Enforcement.Approved: March 7, 2018.

David J. Kautter,Assistant Secretary of the Treasury (Tax

Policy).

(Filed by the Office of the Federal Register on March 27,2018, 8:45 a.m., and published in the issue of the FederalRegister for March 28, 2018, 83 F.R. 13183)


Part III. Administrative, Procedural, and MiscellaneousAdditional Guidance UnderSection 965; GuidanceUnder Sections 62, 962,and 6081 in ConnectionWith Section 965; andPenalty Relief UnderSections 6654 and 6655 inConnection with Section965 and Repeal of Section958(b)(4)

Notice 2018–26

SECTION 1. OVERVIEW

This notice announces that the Depart-ment of the Treasury (“Treasury Depart-ment”) and the Internal Revenue Service(“IRS”) intend to issue regulations in con-nection with section 965 of the InternalRevenue Code (“Code”) as amended by“An Act to provide for reconciliation pur-suant to titles II and V of the concurrentresolution on the budget for fiscal year2018,” P.L. 115–97 (the “Act”), whichwas enacted on December 22, 2017. Forprior guidance issued under section 965,see Notice 2018–07, 2018–4 I.R.B. 317;Notice 2018–13, 2018–6 I.R.B. 341; andRev. Proc. 2018–17, 2018–9 I.R.B. 384.In addition, this notice announces relieffrom estimated tax penalties in connectionwith the amendment of section 965 andthe repeal of section 958(b)(4) by the Act.

Section 2 of this notice provides back-ground on section 965 and other relevantprovisions of the Code. Section 3 of thisnotice describes regulations that the Trea-sury Department and the IRS intend toissue in connection with section 965 andannounces the IRS’s intent to modify cer-tain form instructions as a result of section965. Section 4 of this notice describes amodification that the Treasury Depart-ment and the IRS intend to make withrespect to regulations under section 965that were described in section 3.04(a) ofNotice 2018–13. Section 5 of this noticeprovides guidance under section 962 inconnection with section 965. Section 6 ofthis notice provides guidance concerningthe application of the estimated tax rulesin sections 6654 and 6655 and a waiver

from the penalty imposed under those sec-tions with respect to estimated taxes inconnection with section 965 and the re-peal of section 958(b)(4). Section 7 of thisnotice describes the effective dates of theregulations and other guidance describedin this notice, as well as a clarification tothe effective date provided in section 6 ofNotice 2018–13 for the rule described insection 5.01 of Notice 2018–13. Section 8of this notice requests comments and pro-vides contact information.

SECTION 2. BACKGROUND

.01 Treatment of Accumulated Post-1986Deferred Foreign Income as Subpart FIncome

Section 965(a) provides that for the lasttaxable year of a deferred foreign incomecorporation (“DFIC”) that begins beforeJanuary 1, 2018 (such year of the DFIC,the “inclusion year”), the subpart F in-come of the corporation (as otherwise de-termined for such taxable year under sec-tion 952) shall be increased by the greaterof (1) the accumulated post-1986 deferredforeign income of such corporation deter-mined as of November 2, 2017, or (2) theaccumulated post-1986 deferred foreignincome of such corporation determined asof December 31, 2017 (each such date, a“measurement date,” and the greater ofthe accumulated post-1986 deferred for-eign income of the corporation as of themeasurement dates, the “section 965(a)earnings amount”). The section 965(a)earnings amount is not subject to the rulesor limitations in section 952 and is notlimited by the accumulated earnings andprofits of the DFIC as of the close of theinclusion year.

.02 Determination of United StatesShareholder’s Section 951(a)(1)Inclusion by Reason of Section 965

Section 965(b)(1) provides that, if ataxpayer is a United States shareholderwith respect to at least one DFIC and atleast one E&P deficit foreign corporation,then the portion of the section 965(a)earnings amount which would otherwisebe taken into account under section 951(a)(1) by a United States shareholder withrespect to each DFIC is reduced by the

amount of such United States sharehold-er’s aggregate foreign E&P deficit that isallocated to such DFIC. The portion of thesection 965(a) earnings amount that istaken into account under section 951(a)(1)by a United States shareholder, taking intoaccount the reduction described in the pre-ceding sentence, is referred to in this no-tice as the “section 965(a) inclusionamount.”

.03 Allocation of Aggregate ForeignE&P Deficit and Definition of E&PDeficit Foreign Corporation

The aggregate foreign E&P deficit ofany United States shareholder is allocatedto each DFIC of the United States share-holder in an amount that bears the sameproportion to such aggregate as (A) suchUnited States shareholder’s pro rata shareof the section 965(a) earnings amount ofeach such DFIC bears to (B) the aggregateof such United States shareholder’s prorata shares of the section 965(a) earningsamounts of all DFICs of such UnitedStates shareholder. Section 965(b)(2). Theterm “aggregate foreign E&P deficit”means, with respect to any United Statesshareholder, the lesser of (I) the aggregateof such shareholder’s pro rata shares ofthe specified E&P deficits of the E&Pdeficit foreign corporations of such share-holder or (II) the aggregate of such share-holder’s pro rata shares of the section965(a) earnings amounts of all DFICs ofsuch shareholder. Section 965(b)(3)(A)(i).

The term “E&P deficit foreign corpo-ration” means, with respect to any tax-payer, any specified foreign corporationwith respect to which such taxpayer is aUnited States shareholder, if, as of No-vember 2, 2017, (i) such specified foreigncorporation has a deficit in post-1986earnings and profits, (ii) such corporationwas a specified foreign corporation, and(iii) such taxpayer was a United Statesshareholder of such corporation. Section965(b)(3)(B). The term “specified E&Pdeficit” means, with respect to an E&Pdeficit foreign corporation, the amount ofsuch corporation’s deficit in post-1986earnings and profits as of November 2,2017. See section 965(b)(3)(C).


.04 Application of the ParticipationExemption

Section 965(c)(1) provides that thereshall be allowed as a deduction for thetaxable year of a United States share-holder in which a section 965(a) inclu-sion amount is included in the grossincome of such United States share-holder an amount equal to the sum of(A) the United States shareholder’s 8percent rate equivalent percentage (asdefined in section 965(c)(2)(A)) of theexcess (if any) of (i) the section 965(a)inclusion amount, over (ii) the amountof such United States shareholder’s ag-gregate foreign cash position, plus (B)the United States shareholder’s 15.5percent rate equivalent percentage (asdefined in section 965(c)(2)(B)) of somuch of such United States sharehold-er’s aggregate foreign cash position asdoes not exceed the section 965(a) in-clusion amount. The deduction allowedto a United States shareholder undersection 965(c) with respect to a section965(a) inclusion amount of the UnitedStates shareholder is referred to in thisnotice as a “section 965(c) deduction.”

Section 965(c)(3)(A) provides that theterm “aggregate foreign cash position”means, with respect to any United Statesshareholder, the greater of (i) the aggre-gate of such United States shareholder’spro rata share of the cash position ofeach specified foreign corporation ofsuch United States shareholder deter-mined as of the close of the last taxableyear of such specified foreign corpora-tion that begins before January 1, 2018(“final cash measurement date”),1 or (ii)one half of the sum of (I) the aggregatedescribed in clause (i) determined as ofthe close of the last taxable year of eachsuch specified foreign corporation thatends before November 2, 2017 (the“second cash measurement date”), plus(II) the aggregate described in clause (i)determined as of the close of the taxableyear of each such specified foreign cor-poration that precedes the taxable yearreferred to in subclause (I) (“first cash

measurement date”). Each date referredto in the preceding sentence is referredto in this notice as a “cash measurementdate.”

The cash position of any specified for-eign corporation is the sum of (i) cashheld by such corporation, (ii) the net ac-counts receivable of such corporation, and(iii) the fair market value of the followingassets held by such corporation (each as-set, a “cash equivalent asset”): (I) personalproperty which is of a type that is activelytraded and for which there is an estab-lished financial market; (II) commercialpaper, certificates of deposit, the securitiesof the Federal government and of anyState or foreign government; (III) any for-eign currency; (IV) any obligation with aterm of less than one year (“short-termobligation”); and (V) any asset which theSecretary identifies as being economicallyequivalent to any asset described in sec-tion 965(c)(3)(B). Section 965(c)(3)(B).For purposes of determining the aggregateforeign cash position of a United Statesshareholder, the term “net accounts re-ceivable” means, with respect to anyspecified foreign corporation, the excess(if any) of (i) such corporation’s ac-counts receivable, over (ii) such corpo-ration’s accounts payable (determinedconsistent with the rules of section 461).Section 965(c)(3)(C).

Section 965(c)(3)(D) provides that netaccounts receivable, actively traded prop-erty, and short-term obligations shall notbe taken into account by a United Statesshareholder in determining its aggregateforeign cash position to the extent thatsuch United States shareholder demon-strates to the satisfaction of the Secretarythat such amount is so taken into accountby such United States shareholder withrespect to another specified foreign corpo-ration.

Section 965(c)(3)(F) provides that ifthe Secretary determines that a principalpurpose of any transaction was to reducethe aggregate foreign cash position takeninto account under section 965(c), suchtransaction shall be disregarded for pur-poses of section 965(c).

.05 Definition of DFIC and AccumulatedPost-1986 Deferred Foreign Income

For purposes of section 965, a DFIC is,with respect to any United States share-holder, any specified foreign corporationof such United States shareholder that hasaccumulated post-1986 deferred foreignincome (as of a measurement date) greaterthan zero. Section 965(d)(1). The term“accumulated post-1986 deferred foreignincome” means the post-1986 earningsand profits of the specified foreign corpo-ration except to the extent such earningsand profits (A) are attributable to incomeof the specified foreign corporation that iseffectively connected with the conduct ofa trade or business within the UnitedStates and subject to tax under chapter 1(“effectively connected income”), or (B)in the case of a controlled foreign corpo-ration (“CFC”), if distributed, would beexcluded from the gross income of aUnited States shareholder under section959 (“previously taxed income”). Section965(d)(2).

Section 965(d)(3) provides that theterm “post-1986 earnings and profits”means the earnings and profits of the for-eign corporation (computed in accordancewith sections 964(a) and 986, and by tak-ing into account only periods when theforeign corporation was a specified for-eign corporation) accumulated in taxableyears beginning after December 31, 1986,and determined (A) as of the measurementdate that is applicable with respect to suchforeign corporation, and (B) without dim-inution by reason of dividends distributedduring the inclusion year other than divi-dends distributed to another specified for-eign corporation.

.06 Specified Foreign Corporation

Section 965(e)(1) provides that the term“specified foreign corporation” means (A)any CFC and (B) any foreign corporationwith respect to which one or more domesticcorporations is a United States shareholder.For purposes of sections 951 and 961, aspecified foreign corporation described insection 965(e)(1)(B) is treated as a CFC

1Notice 2018-07 and Notice 2018-13 referred to the year that includes the final cash measurement date as the “inclusion year” of such specified foreign corporation. However, only a DFICcan have an inclusion year, and therefore the final cash measurement date of a specified foreign corporation, which can be a DFIC, an E&P deficit foreign corporation, or neither, will notnecessarily be the close of an inclusion year. The regulations described in Notice 2018-07 and Notice 2018-13 will describe the final cash measurement date consistently with section965(c)(3)(A) and this notice. Any reference to an “inclusion year” for a specified foreign corporation that is not a DFIC will describe the last year of the specified foreign corporation thatbegins before January 1, 2018.


solely for purposes of taking into accountthe subpart F income of such corporationunder section 965(a) (and for purposes ofdetermining a United States shareholder’spro rata share of any amount with respect toa specified foreign corporation under section965(f)). Section 965(e)(2). However, if apassive foreign investment company (as de-fined in section 1297) with respect to theshareholder is not a CFC, then such corpo-ration is not a specified foreign corporation.Section 965(e)(3).

.07 Determination of Pro Rata Share

Section 965(f)(1) provides that the de-termination of any United States share-holder’s pro rata share of any amount withrespect to any specified foreign corpora-tion shall be determined under rules sim-ilar to the rules of section 951(a)(2) bytreating such amount in the same manneras subpart F income (and by treating suchspecified foreign corporation as a CFC).

.08 Election Under Section 965(h)Concerning Payment of Net TaxLiability Under Section 965

Section 965(h)(1) provides that in thecase of a United States shareholder of aDFIC, such United States shareholdermay elect to pay the net tax liability undersection 965 in eight installments. Section965(h)(5) provides that any election undersection 965(h)(1) must be made not laterthan the due date for the return of tax forthe year of the United States shareholderin which or with which the inclusion yearof the DFIC ends and must be made insuch manner as the Secretary provides.

If an election is made under section965(h)(1), the first installment must bepaid on the due date (determined withoutregard to any extension of time for filingthe return) for the return of tax for the yearof the United States shareholder in whichor with which the inclusion year of theDFIC ends, and each succeeding install-ment must be paid on the due date (deter-mined without regard to any extension oftime for filing the return) for the return oftax for the taxable year following the tax-able year with respect to which the pre-ceding installment was made. Section965(h)(2).

Section 965(h)(6) defines the net taxliability under section 965 with respect to

any United States shareholder as the ex-cess (if any) of (i) such taxpayer’s netincome tax for the taxable year in whichan amount is included in the gross incomeof such United States shareholder undersection 951(a)(1) by reason of section965, over (ii) such taxpayer’s net incometax for such taxable year determined (I)without regard to section 965, and (II)without regard to any income or deductionproperly attributable to a dividend re-ceived by such United States shareholderfrom any DFIC. For this purpose, the term“net income tax” means the regular taxliability reduced by the credits allowedunder subparts A, B, and D of part IV ofsubchapter A.

.09 Election Under Section 965(i)Concerning Payment of Net TaxLiability Under Section 965 by SCorporation Shareholder and RelatedReporting Requirements

Section 965(i)(1) provides that in thecase of any S corporation that is a UnitedStates shareholder of a DFIC, each share-holder of such S corporation may elect todefer payment of such shareholder’s nettax liability under section 965 with respectto such S corporation until the sharehold-er’s taxable year which includes the trig-gering event with respect to such liability.

Under section 965(i)(1), any net taxliability, payment of which is deferredunder section 965(i)(1), will be assessedon the return of tax as an addition to taxin the shareholder’s taxable year whichincludes the triggering event with re-spect to such liability. As defined insection 965(i)(2), in the case of anyshareholder’s net tax liability under sec-tion 965 with respect to any S corpora-tion, the triggering event with respect tosuch liability is whichever of the follow-ing occurs first: (i) such corporationceases to be an S corporation (deter-mined as of the first day of the firsttaxable year that such corporation is notan S corporation); (ii) a liquidation orsale of substantially all the assets ofsuch S corporation (including in a title11 or similar case), a cessation of busi-ness by such S corporation, such S cor-poration ceases to exist, or any similarcircumstance; or (iii) a transfer of anyshare of stock in such S corporation bythe taxpayer (including by reason of

death, or otherwise). In the case of atransfer of less than all of the taxpayer’sshares of stock in the S corporation,such transfer shall only be a triggeringevent with respect to so much of thetaxpayer’s net tax liability under section965 with respect to such S corporationas is properly allocable to such stock.Section 965(i)(2)(B).

Section 965(i)(3) defines a sharehold-er’s net tax liability under section 965with respect to any S corporation as thenet tax liability under section 965 whichwould be determined under section965(h)(6) if the only amounts taken intoaccount under section 951(a)(1) by rea-son of section 965 by such shareholderwere allocations from such S corpora-tion.

.10 Election Under Section 965(m)Concerning Inclusions of AmountsUnder Section 965

Under section 965(m)(1)(B), a real es-tate investment trust (REIT) may elect, inlieu of including any amount requiredto be taken into account under section951(a)(1) by reason of section 965 in thetaxable year in which it would otherwisebe included in gross income (for purposesof the computation of REIT taxable in-come under section 857(b)), to includesuch amount in gross income in eight in-stallments.

.11 Election Under Section 965(n) Notto Apply Net Operating Loss Deduction

Under section 965(n)(1), a UnitedStates shareholder of a DFIC may makean election pursuant to which the amountdescribed in section 965(n)(2) shall not betaken into account (A) in determining theamount of the net operating loss deductionunder section 172 of such shareholder forsuch taxable year, or (B) in determiningthe amount of taxable income for suchtaxable year which may be reduced by netoperating loss carryovers or carrybacks tosuch taxable year under section 172. Theamount described in section 965(n)(2) isthe sum of (A) the amount required to betaken into account under section 951(a)(1)by reason of section 965 (determined afterthe application of section 965(c)), plus (B)in the case of a domestic corporationwhich chooses to have the benefits of sub-


part A of part III of subchapter N for thetaxable year, the taxes deemed to be paidby such corporation under subsections (a)and (b) of section 960 for such taxableyear with respect to the amount describedin section 965(n)(2)(A) which are treatedas a dividends under section 78.

.12 Regulations or Other GuidanceUnder Section 965

Section 965(o) provides that the Sec-retary shall prescribe such regulations orother guidance as may be necessary orappropriate to carry out the provisionsof section 965, including regulations orother guidance to provide appropriatebasis adjustments, and regulations orother guidance to prevent the avoidanceof the purposes of section 965, includingthrough a reduction in earnings andprofits, through changes in entity classi-fication or accounting methods, or oth-erwise.

.13 Definition of United StatesShareholder

For taxable years of foreign corpora-tions beginning before January 1, 2018,under section 951(b), a United Statesshareholder is a United States person(within the meaning of section 957(c))that owns within the meaning of section958(a), or is considered as owning byapplying the rules of ownership of sec-tion 958(b), 10 percent or more of thetotal combined voting power of allclasses of stock entitled to vote of thestock of a foreign corporation. Undersection 957(c), a United States persongenerally has the meaning assigned to itby section 7701(a)(30), which includesa domestic partnership or domestic trust.But see Notice 2010 – 41, 2010 –22I.R.B. 715 (announcing that the Trea-sury Department and the IRS intendto issue regulations treating certain do-mestic partnerships as foreign partner-ships for purposes of identifying whichUnited States shareholders are requiredto include amounts in gross income un-der section 951(a)). Moreover, an S cor-poration is treated as a partnership forpurposes of sections 951 through 965.See section 1373(a).

.14 Attribution Rules in Section 958(b)and Section 318(a)

Section 958 provides rules for deter-mining direct, indirect, and constructivestock ownership. Under section 958(a)(1),stock is considered owned by a person if itis owned directly or is owned indirectlythrough certain foreign entities undersection 958(a)(2). Under section 958(b),section 318 applies, with certain modifi-cations, to the extent that the effect is totreat any United States person as a UnitedStates shareholder within the meaning ofsection 951(b), to treat a person as a re-lated person within the meaning of section954(d)(3), to treat the stock of a domesticcorporation as owned by a United Statesshareholder of a CFC for purposes of sec-tion 956(c)(2), or to treat a foreign corpo-ration as a CFC under section 957.

Section 318 provides rules that attributethe ownership of stock to certain familymembers, between certain entities and theirowners, and to holders of options to acquirestock. Section 318(a)(1) provides rules at-tributing stock ownership among membersof a family. Section 318(a)(2) provides rulesattributing stock ownership “upward” frompartnerships, estates, trusts, and corpora-tions to partners, beneficiaries, owners, andshareholders. In addition, section 318(a)(3)provides specific rules that attribute theownership of stock “downward” from part-ners, beneficiaries, owners, and sharehold-ers to partnerships, estates, trusts, andcorporations. In particular, section 318(a)(3)(A) provides that stock owned, directlyor indirectly, by or for a partner in a part-nership or a beneficiary of an estate is con-sidered as owned by the partnership or es-tate. This provision applies to all partnersand beneficiaries without regard to the sizeof their interest in the partnership or estate.Section 318(a)(3)(B) similarly provides,subject to certain exceptions, that stockowned, directly or indirectly, by or for abeneficiary of a trust (or a person who isconsidered an owner of a trust) is consideredowned by the trust. In comparison, section318(a)(3)(C) provides that stock owned, di-rectly or indirectly, by or for a shareholderin a corporation is considered owned by thecorporation only if 50 percent or more invalue of the stock in the corporation isowned, directly or indirectly, by such per-son.

Effective for the last taxable year offoreign corporations beginning beforeJanuary 1, 2018, and each subsequent yearof such foreign corporations, and for thetaxable years of United States sharehold-ers in which or with which such taxableyears of foreign corporations end, the Actrepeals section 958(b)(4). As in effectprior to repeal, section 958(b)(4) providedthat subparagraphs (A), (B), and (C) ofsection 318(a)(3) (providing for “down-ward” attribution) were not to be appliedso as to consider a United States person asowning stock that is owned by a personwho is not a United States person.

.15 Estimated Taxes Under Sections6654 and 6655

Taxpayers who fail to make sufficientand timely payments of estimated taxesare liable for additions to tax under sec-tions 6654(a), for individuals, and6655(a), for corporations. Generally, theaddition to tax is calculated by applyingthe underpayment interest rate under sec-tion 6621 to the unpaid portion of anyrequired installment for the period thatportion goes unpaid.

.16 Miscellaneous Itemized Deductions

Under section 67(a), miscellaneousitemized deductions are allowed only tothe extent that the aggregate of such de-ductions exceeds 2 percent of adjustedgross income (the “2-percent floor”). Asamended by the Act, section 67(g) pro-vides that for taxable years beginning af-ter December 31, 2017, and before Janu-ary 1, 2026, no miscellaneous itemizeddeductions are allowable under section67(a). In addition, under section 56(b)(1)(A)(i), an individual subject to the alter-native minimum tax (“AMT”) in 2017 isnot allowed a deduction for any miscella-neous itemized deduction. Under section63(d), itemized deductions generallymean all allowable deductions except forthe deductions allowable in arriving atadjusted gross income pursuant to section62(a), the deduction provided by section151, and the deduction provided in section199A (added by the Act). Miscellaneousitemized deductions include all itemizeddeductions other than those listed in sec-tion 67(b), which does not reference thededuction under section 965(c).


.17 Election Under Section 962 forIndividual to be Subject to Tax atCorporate Rates

As amended by the Act, section 962provides that an individual who is aUnited States shareholder may elect tohave the tax imposed under chapter 1 onamounts that are included in the individ-ual’s gross income under section 951(a)be an amount equal to the tax that wouldbe imposed under section 11 if theamounts were received by a domestic cor-poration. In addition, if such election ismade, the amounts included in the indi-vidual’s gross income under section951(a) are treated as if they were receivedby a domestic corporation for purposes ofapplying section 960 (relating to foreigntax credits). See § 1.962–1(a). However,the taxable income determined for pur-poses of applying section 11 is not re-duced by any deduction of the UnitedStates shareholder. See § 1.962–1(b)(1)(i).An election under section 962 does notaffect tax imposed under other chapters,including under chapter 2A.

.18 Extensions of Time for FilingIncome Tax Returns and Paying Tax forCertain Citizens and Residents Abroad

In relevant part, regulations under sec-tion 6081 provide an extension of time tothe fifteenth day of the sixth month fol-lowing the close of the taxable year forfiling returns of income and for payingany tax shown on the return in the case ofUnited States citizens or residents whosetax homes and abodes, in a real and sub-stantial sense, are outside the UnitedStates and Puerto Rico, and United Statescitizens and residents in military or navalservice on duty, including non-permanentor short term duty, outside the UnitedStates and Puerto Rico (“specified indi-viduals”). See § 1.6081–5(a)(5) and (6).

SECTION 3. REGULATIONS TO BEISSUED ADDRESSING THEAPPLICATION OF SECTION 965

.01 Application of Section 318(a)(3)(A)to Treat a Foreign Corporation as aSpecified Foreign Corporation

As a result of the application of theconstructive ownership rule in section318(a)(3)(A) (providing for downward at-

tribution of stock from a partner to a part-nership), it may be difficult to determine ifa foreign corporation is a specified foreigncorporation under certain circumstances.Assume, for example, that a person, A,owns 100 percent of the stock of a domes-tic corporation, DC, and 1 percent of theinterests in a partnership, PS. Assume fur-ther that a United States citizen, USI,owns 10 percent of the interests in PS and10 percent by vote and value of the stockof a foreign corporation, FC. The remain-ing 90 percent by vote and value of thestock of FC is owned by non-U.S. personsthat are unrelated to A, USI, DC, and PS.Absent the application of sections 958(b),318(a)(3)(A), and 318(a)(3)(C), FC wouldnot be a specified foreign corporation, be-cause FC is not a CFC and there would beno domestic corporation that is a UnitedStates shareholder of FC.

Under sections 958(b) and 318(a)(3)(A), PS would be treated as owning100 percent of the stock of DC and 10percent of the stock of FC. As a result,under sections 958(b), 318(a)(5)(A), and318(a)(3)(C), DC would be treated asowning the stock of FC treated as ownedby PS, and thus DC would be a UnitedStates shareholder with respect to FC,causing FC to be a specified foreign cor-poration within the meaning of section965(e)(1)(B). USI is a United Statesshareholder with respect to FC and thus,absent an exception, would be required toinclude amounts in gross income undersection 951(a)(1) by reason of section 965with respect to FC. The results are thesame whether A or PS or both are domes-tic or foreign persons.

The Treasury Department and the IRShave determined that it would pose com-pliance difficulties for taxpayers and ad-ministrative difficulties for the IRS to re-quire a United States person to determinewhether a foreign corporation with respectto which it is a United States shareholderis a specified foreign corporation if suchforeign corporation may be a specified for-eign corporation solely by reason of down-ward attribution under section 318(a)(3)(A)of stock from a partner to a partnershipwhen such partner has only a de minimisinterest in such partnership. Accordingly,the Treasury Department and the IRS intendto issue regulations, pursuant to the grant ofauthority under section 965(o), providing

that, solely for purposes of determiningwhether a foreign corporation is a specifiedforeign corporation within the meaning ofsection 965(e)(1)(B), stock owned, directlyor indirectly, by or for a partner (testedpartner) will not be considered as beingowned by a partnership under sections958(b) and 318(a)(3)(A) if such partnerowns less than five percent of the interests inthe partnership’s capital and profits. For pur-poses of the preceding sentence, an interestin the partnership owned by another partnerwill be considered as being owned by thetested partner under the principles of sec-tions 958(b) and 318, as modified by thisnotice, as if the interest in the partnershipwere stock.

Thus, for example, assume the samefacts as in the example above, except thatA is a corporation wholly owned by B,and B directly owns 4 percent of the in-terests in PS. For purposes of the rule inthis section 3.01, applying the principlesof sections 958(b) and 318, as modified bythis notice, as if the interest in PS werestock, A is treated as owning the interestsin PS owned by B (in addition to the 1percent interest in PS that A owns directly),and thus A is not treated as owning less thanfive percent of the interests in PS’s capitaland profits. Accordingly, the rule in thissection 3.01 does not apply, and PS istreated as owning A’s stock in DC for pur-poses of determining whether FC is a spec-ified foreign corporation within the meaningof section 965(e)(1)(B).

.02 Determination of Cash MeasurementDates of a Specified ForeignCorporation with Respect to a UnitedStates Shareholder

In certain cases, a specified foreigncorporation may not be owned by a par-ticular United States shareholder on all ofthe cash measurement dates, whether be-cause the specified foreign corporationgoes out of existence before the final cashmeasurement date or because its stock isacquired or disposed of between cashmeasurement dates. The Treasury Depart-ment and the IRS understand that section965(c)(3)(A)(i) could be interpreted totreat the close of the final taxable year ofa specified foreign corporation that ceasedto exist before November 2, 2017, as thefinal cash measurement date of such spec-ified foreign corporation. Additionally, if


a United States shareholder acquires ordisposes of stock of a specified foreigncorporation between cash measurementdates of the specified foreign corporation,questions have been raised as to whetherthe United States shareholder’s pro ratashare of the cash position of such speci-fied foreign corporation as of an earlier orsubsequent cash measurement date shouldbe taken into account for purposes of de-termining the United States shareholder’saggregate foreign cash position.

The Treasury Department and the IRSintend to issue regulations providing that(i) the final cash measurement date of aspecified foreign corporation is the closeof the last taxable year of the specifiedforeign corporation that begins beforeJanuary 1, 2018, and ends on or afterNovember 2, 2017, if any; (ii) the secondcash measurement date of a specified for-eign corporation is the close of the lasttaxable year of the specified foreign cor-poration that ends after November 1,

2016, and before November 2, 2017, ifany; (iii) the first cash measurement dateof a specified foreign corporation is theclose of the last taxable year of the spec-ified foreign corporation that ends afterNovember 1, 2015, and before November2, 2016, if any; and (iv) a United Statesshareholder takes into account its pro ratashare of the cash position of a specifiedforeign corporation as of any cash mea-surement date of the specified foreign cor-poration on which such United Statesshareholder is a United States shareholderof such specified foreign corporation, re-gardless of whether such United Statesshareholder is a United States shareholderof such specified foreign corporation as ofany other cash measurement date, includ-ing the final cash measurement date ofsuch specified foreign corporation. Forpurposes of applying this paragraph, a 52-53-week taxable year is deemed to beginon the first day of the calendar monthnearest to the first day of the 52-53-week

taxable year, and is deemed to end orclose on the last day of the calendar monthnearest to the last day of the 52-53-weektaxable year, as the case may be. See§ 1.441–2(c).

Example. (i) Facts. Except as otherwise pro-vided, for all relevant periods, USP, a domesticcorporation, has owned directly at least 10 percent ofthe stock of CFC1, CFC2, CFC3, and CFC4, each aforeign corporation. CFC1 and CFC2 have calendaryear U.S. taxable years. CFC3 and CFC4 have U.S.taxable years that end on November 30. No entityhas a short taxable year, except as a result of thetransactions described below.

(a) USP transferred all of its stock of CFC2 to anunrelated person on June 30, 2016, at which pointUSP ceased to be a United States shareholder withrespect to CFC2.

(b) CFC4 dissolved on December 30, 2010, and,as a result, its final taxable year ended on December30, 2010.

(ii) Analysis. Each of CFC1, CFC2, CFC3, andCFC4 is a specified foreign corporation. Taking intoaccount the regulations described in this section3.02, the cash measurement dates of the specifiedforeign corporations to be taken into account by USPin determining its aggregate foreign cash position aresummarized in the following table:

Cash Measurement Dates

Final Second First

CFC1 December 31, 2017 December 31, 2016 December 31, 2015

CFC2 N/A N/A December 31, 2015

CFC3 November 30, 2018 November 30, 2016 November 30, 2015

CFC4 N/A N/A N/A

.03 Treatment of Certain AccruedForeign Income Taxes for Purposes ofDetermining Post-1986 Earnings andProfits

Post-1986 earnings and profits are de-fined, in relevant part, as the earnings andprofits of a specified foreign corporationdetermined as of each of the two measure-ment dates described in section 965(a) and“computed in accordance with sections964(a) and 986.” Section 965(d)(3). Ingeneral, section 964(a) provides that, un-der regulations prescribed by the Secre-tary, the earnings and profits of any for-eign corporation, and the deficit inearnings and profits of any foreign cor-poration, for any taxable year shall bedetermined according to rules substan-tially similar to those applicable to do-mestic corporations. As described insection 3.02 of Notice 2018 –13, for pur-poses of measuring the post-1986 earn-ings and profits of a specified foreign

corporation as of a measurement date,the extent to which an item of income,deduction, gain, or loss is taken intoaccount as of such measurement datemust be determined under principlesgenerally applicable to the calculationof the earnings and profits of a domesticcorporation. Section 3.02(a) of Notice2018 –13 provided a limited exceptionto this general rule in order to reducetaxpayer compliance burdens. Section3.02(a) of Notice 2018 – 07 also an-nounced the intention to issue regula-tions that may provide exceptions to thisgeneral rule in limited cases that arecontemplated by section 965 or the leg-islative history to the Act, such as toaddress double counting or double non-counting.

The Treasury Department and the IRShave determined that an additional limitedexception to the general rule is appropri-ate for certain foreign income taxes that

accrue between measurement dates. Ac-cordingly, the Treasury Department andthe IRS intend to issue regulations provid-ing that, for purposes of determining aspecified foreign corporation’s post-1986earnings and profits as of the measure-ment date on November 2, 2017, any for-eign income tax (as defined in section901(m)(5)) that accrues (i) within thespecified foreign corporation’s U.S. tax-able year that includes November 2, 2017,and (ii) after November 2, 2017, but on orbefore December 31, 2017, will be allo-cated between the respective portions ofthe foreign tax base on which the accruedforeign taxes are determined that are at-tributable to the part of the U.S. taxableyear ending on November 2, 2017, and thepart of the U.S. taxable year beginningafter November 2, 2017.

The Treasury Department and the IRShave determined that it is appropriate tolimit the scope of the regulations to for-


eign income taxes that accrue on or beforeDecember 31, 2017, in order to allow forthe section 965(a) earnings amounts ofeach specified foreign corporation to bedetermined as of the final measurementdate, December 31, 2017.

The regulations announced in this sec-tion 3.03 are relevant solely for purposesof determining a specified foreign corpo-ration’s post-1986 earnings and profits(including a deficit) within the meaning ofsection 965(d)(3). Therefore, the regula-tions to be issued will not affect, for ex-ample, the computation of credits fortaxes deemed paid under sections 902 and960.

.04 Prevention of the Reduction of theSection 965 Tax Liability of a UnitedStates Shareholder

(a) Anti-Avoidance Rule

(i) Transactions Undertaken with aPrincipal Purpose of Reducing Section965 Tax Liability

The Treasury Department and the IRSintend to issue regulations under sections965(c)(3)(F) and 965(o) providing that atransaction will be disregarded for pur-poses of determining a United Statesshareholder’s section 965 tax liability ifeach of the following conditions is satis-fied: (i) such transaction occurs, in wholeor in part, on or after November 2, 2017(the “specified date”); (ii) such transactionis undertaken with a principal purpose ofreducing the section 965 tax liability ofsuch United States shareholder; and (iii)such transaction would, without regard tothis sentence, reduce the section 965 taxliability of such United States shareholder(the “anti-avoidance rule”).

For purposes of this section 3.04(a) andsection 3.04(b) of this notice, a transaction(or change in method of accounting orelection described in section 3.04(b) ofthis notice) reduces the section 965 taxliability of a United States shareholder ifsuch transaction (i) reduces a section965(a) inclusion amount of such UnitedStates shareholder with respect to anyspecified foreign corporation, (ii) reducesthe aggregate foreign cash position ofsuch United States shareholder, or (iii)increases the amount of foreign incometaxes of any specified foreign corporation

deemed paid by such United States share-holder under section 960 as a result of aninclusion under section 951(a) by reasonof section 965. Also for purposes of thissection 3.04(a) and section 3.04(b) of thisnotice, in the case of a United Statesshareholder that is a domestic pass-through entity, a domestic pass-throughowner of such domestic pass-through en-tity is also treated as a United Statesshareholder. For the definition of domesticpass-through entity and domestic pass-through owner, see section 3.05(b) of thisnotice.

Under section 3.04(a)(ii) through (iv)of this notice, certain transactions are pre-sumed to be undertaken with a principalpurpose of reducing the section 965 taxliability of a United States shareholder forpurposes of the anti-avoidance rule. Thepresumption described in the precedingsentence may be rebutted only if facts andcircumstances clearly establish that thetransaction was not undertaken with aprincipal purpose of reducing the section965 tax liability of a United States share-holder. The regulations will provide that ataxpayer that takes the position that thepresumption is rebutted must attach astatement to its income tax return for itstaxable year in which or with which therelevant taxable year of the relevant spec-ified foreign corporation ends disclosingthat it has rebutted the presumption. In thecase of a transaction described in section3.04(a)(ii) and (iii), if the presumptiondoes not apply because such transactionoccurs in the ordinary course of business,whether such transaction was undertakenwith a principal purpose of reducing thesection 965 tax liability of a United Statesshareholder must be determined under allthe facts and circumstances. Under section3.04(a)(ii) through (iv) of this notice, cer-tain transactions are also treated per se asbeing undertaken with a principal purposeof reducing the section 965 tax liability ofa United States shareholder. Further, un-der section 3.04(a)(ii), certain distribu-tions are treated per se as not being un-dertaken with a principal purpose ofreducing the section 965 tax liability ofsuch United States shareholder and there-fore are not subject to the anti-avoidancerule.

For purposes of the rules described insection 3.04(a)(ii) through (iv) of this no-

tice, a person is treated as related to aUnited States shareholder if (i) the personbears a relationship to the United Statesshareholder described in section 267(b) orsection 707(b) and (ii) the relationshipdescribed in clause (i) of this sentence issatisfied either immediately before or im-mediately after the transaction. Further-more, for purposes of the rules described insection 3.04(a)(ii) and (iv) of this notice, theterm “transfer” includes any disposition, ex-change, contribution, distribution, issuance,redemption, recapitalization, or loan, and in-cludes an indirect transfer (for example, atransfer of an interest in a partnership is atransfer of the assets of such partnership).

No inference is intended as to the treat-ment, under general tax law, of transac-tions that occurred before the specifieddate. The IRS may, where appropriate,challenge such transactions under theCode, regulations, or judicial doctrinessuch as the step transaction doctrine or theeconomic substance doctrine.

(ii) Application of the Anti-AvoidanceRule to Cash Reduction Transactions

For purposes of applying the anti-avoidance rule, a cash reduction transac-tion is presumed to be undertaken with aprincipal purpose of reducing the section965 tax liability of a United States share-holder. For this purpose, the term “cashreduction transaction” means (i) a transferof cash, accounts receivable, or cashequivalent assets by a specified foreigncorporation to a United States shareholderof such specified foreign corporation or aperson related to a United States share-holder of such specified foreign corpora-tion, or (ii) an assumption by a specifiedforeign corporation of an accounts pay-able of a United States shareholder ofsuch specified foreign corporation or aperson related to a United States share-holder of such specified foreign corpora-tion, if such transfer or assumption would,without regard to the anti-avoidance rule,reduce the aggregate foreign cash positionof such United States shareholder. Thepresumption described in this paragraphdoes not apply to a cash reduction trans-action that occurs in the ordinary courseof business.

Notwithstanding the presumption de-scribed in the preceding paragraph, except


in the case of a specified distribution, acash reduction transaction that is a distri-bution by a specified foreign corporationto a United States shareholder of suchspecified foreign corporation will betreated per se as not being undertakenwith a principal purpose of reducing thesection 965 tax liability of such UnitedStates shareholder for purposes of theanti-avoidance rule. A specified distribu-tion will be treated per se as being under-taken with a principal purpose of reducingthe section 965 tax liability of a UnitedStates shareholder for purposes of theanti-avoidance rule. For purposes of thissection 3.04(a)(ii), the term “specified dis-tribution” means a cash reduction transac-tion that is a distribution by a specifiedforeign corporation of a United Statesshareholder if (i) at the time of the distri-bution, there was a plan or intention forthe distributee to transfer, directly or in-directly, cash, accounts receivable, or cashequivalent assets to any specified foreigncorporation of such United States share-holder, or (ii) the distribution is a non prorata distribution to a foreign person that isrelated to such United States shareholder.For purpose of clause (i) of the precedingsentence, an indirect transfer includes, forexample, a transfer of cash to a partner-ship if a specified foreign corporation ofsuch United States shareholder is a part-ner.

(iii) Application of the Anti-AvoidanceRule to E&P Reduction Transactions

For purposes of applying the anti-avoidance rule, an E&P reduction trans-action is presumed to be undertaken witha principal purpose of reducing the section965 tax liability of a United States share-holder. For this purpose, the term “E&Preduction transaction” means a transactionbetween a specified foreign corporationand any of (i) a United States shareholderof such specified foreign corporation, (ii)another specified foreign corporation of aUnited States shareholder of such speci-fied foreign corporation, or (iii) any per-son related to a United States shareholderof such specified foreign corporation, ifsuch transaction would, without regard tothe anti-avoidance rule, reduce the accu-mulated post-1986 deferred foreign in-come or the post-1986 undistributed earn-

ings (as defined in section 902(c)(1) as ineffect before the date of the enactment ofthe Act) of such specified foreign corpo-ration or another specified foreign corpo-ration of any United States shareholder ofsuch specified foreign corporation. Thepresumption described in this paragraphdoes not apply to an E&P reduction trans-action that occurs in the ordinary courseof business.

Notwithstanding the presumption de-scribed in the preceding paragraph, aspecified transaction will be treated per seas being undertaken with a principal pur-pose of reducing the section 965 tax lia-bility of a United States shareholder forpurposes of the anti-avoidance rule. Forpurposes of the preceding sentence, theterm “specified transaction” means anE&P reduction transaction that involvesone or more of the following: (i) a com-plete liquidation of a specified foreigncorporation to which section 331 applies;(ii) a sale or other disposition of stock bya specified foreign corporation, or (iii) adistribution by a specified foreign corpo-ration that reduces the earnings and profitsof such specified foreign corporation pur-suant to section 312(a)(3).

(iv) Application of the Anti-AvoidanceRule to Pro Rata Share Transactions

For purposes of applying the anti-avoidance rule, a pro rata share transac-tion is presumed to be undertaken with aprincipal purpose of reducing the section965 tax liability of a United States share-holder. For this purpose, the term “prorata share transaction” means a transfer ofthe stock of a specified foreign corpora-tion to a United States shareholder of thespecified foreign corporation or a personrelated to a United States shareholder ofsuch specified foreign corporation if suchtransfer would, without regard to the anti-avoidance rule, (i) reduce such UnitedStates shareholder’s pro rata share of thesection 965(a) earnings amount of suchspecified foreign corporation if it is aDFIC; (ii) increase such United Statesshareholder’s pro rata share of the speci-fied E&P deficit of such specified foreigncorporation if it is an E&P deficit foreigncorporation; or (iii) reduce such UnitedStates shareholder’s pro rata share of the

cash position of such specified foreigncorporation.

Notwithstanding the presumption de-scribed in the preceding paragraph, an in-ternal group transaction will be treated perse as being undertaken with a principalpurpose of reducing the section 965 taxliability of a United States shareholder forpurposes of the anti-avoidance rule. Forpurposes of the preceding sentence, theterm “internal group transaction” means apro rata share transaction if, immediatelybefore or after the transfer, the transferorof the stock of the specified foreign cor-poration and the transferee of such stockare members of an affiliated group inwhich the United States shareholder is amember. For this purpose, the term “affil-iated group” has the meaning set forth insection 1504(a), determined without re-gard to paragraphs (1) through (8) of sec-tion 1504(b), and the term “members of anaffiliated group” means entities includedin the same affiliated group. For purposesof identifying an affiliated group and themembers of such group, (i) each partner ina partnership, as determined without re-gard to clause (ii) of this sentence, istreated as holding its proportionate shareof the stock held by the partnership, asdetermined under the rules and principlesof sections 701 through 777, and (ii) ifone or more members of an affiliatedgroup own, in the aggregate, at least 80percent of the interests in a partnership’scapital or profits, the partnership will betreated as a corporation that is a memberof the affiliated group.

Example. (i) Facts. FP, a foreign corporation,owns all of the stock of USP, a domestic corporation.USP owns all of the stock of FS, a foreign corpora-tion. USP has held the stock of FS for more than oneyear. USP has a calendar year taxable year; FS’staxable year ends November 30. On January 2, 2018,USP transfers all of the stock of FS to FP in ex-change for cash. On January 3, 2018, FS makes adistribution with respect to the stock transferred toFP. USP treats the transaction as a taxable sale of theFS stock and claims a dividends received deductionunder section 245A with respect to its deemed div-idend under section 1248(j) as a result of the sale. FShas post-1986 earnings and profits as of December31, 2017, and no previously taxed income or effec-tively connected income for any previous taxableyear.

(ii) Analysis. The transfer of the stock of FS is apro rata share transaction because such transfer is toa person related to USP, and the transfer would,without regard to the anti-avoidance rule, reduceUSP’s pro rata share of FS’s section 965(a) earningsamount. Because USP and FP are also members of


an affiliated group within the meaning of this section3.04(a)(iv), the transfer of the stock of FS is also aninternal group transaction and is treated per se asbeing undertaken with a principal purpose of reduc-ing the section 965 tax liability of USP. Accordingly,the transfer will be disregarded for purposes of de-termining USP’s section 965 tax liability with theresult that, among other things, USP’s pro rata shareof FS’s section 965(a) earnings amount is deter-mined as if USP owned (within the meaning ofsection 958(a)) 100 percent of the stock of FS on thelast day of FS’s inclusion year and no other personreceived a distribution with respect to such stockduring such year. See section 951(a)(2)(A) and (B).

(b) Disregard of Certain Changes inMethod of Accounting and EntityClassification Elections

The Treasury Department and the IRSalso intend to issue regulations, pursuantto the grant of authority under section965(o), providing that any change inmethod of accounting made for a taxableyear of a specified foreign corporation thatends in 2017 or 2018 will be disregardedfor purposes of determining the section965 tax liability of a United States share-holder if such change in method of ac-counting would otherwise reduce the sec-tion 965 tax liability of such United Statesshareholder. The rule described in thissection 3.04(b) will apply whether or notsuch change in method of accounting wasmade in accordance with the proceduresdescribed in Rev. Proc. 2015–13, 2015–5I.R.B. 419 (or successor), and whether ornot such change in method of accountingwas properly made. These regulations willnot apply to a change in method of ac-counting for which the original and/or du-plicate copy of any Form 3115, Applica-tion for Change in Accounting Method,requesting the change was filed before thespecified date, November 2, 2017.

The regulations will also provide thatany entity classification election under§ 301.7701–3 that is filed on or after thespecified date will be disregarded for pur-poses of determining the section 965 taxliability of such United States shareholderif such entity classification election wouldotherwise reduce the section 965 tax lia-bility of any United States shareholder.An entity classification election filed on orafter the specified date will be subject tothese regulations even if such entity clas-sification election was effective on a datebefore the specified date.

The regulations described in this sec-tion 3.04(b) will apply regardless ofwhether such change in method of ac-counting or change of entity classificationelection is made with a principal purposeof reducing the section 965 tax liability ofa United States shareholder.

.05 Rules Related to Elections,Reporting, and Payment

(a) Documentation of Cash Position

Section 965(c)(3)(D) provides that netaccounts receivable, actively traded prop-erty, and short-term obligations shall notbe taken into account by a United Statesshareholder in determining its aggregateforeign cash position to the extent thatsuch United States shareholder demon-strates to the satisfaction of the Secretarythat such amount is so taken into accountby such United States shareholder withrespect to another specified foreign corpo-ration. The IRS intends to issue forms,publications, regulations, or other guid-ance that will specify the documentationthat a United States shareholder mustmaintain or provide, and the time andmanner for providing any such documen-tation, in order to make the required dem-onstration to the Secretary.

(b) United States Persons Eligible toMake Elections Under Section 965 inthe Case of a United States Shareholderthat is a Domestic Pass-Through Entity

Section 965 increases the amount in-cluded in the gross income of a UnitedStates shareholder under section 951(a)(1)only if such United States shareholder owns(within the meaning of section 958(a)) stockin one or more specified foreign corpora-tions. See section 951(a)(2)(A). For pur-poses of this notice, the term “section 958(a)stock” means, with respect to a UnitedStates shareholder of a DFIC, the stock ofthe DFIC owned by the United States share-holder within the meaning of section 958(a).

The Treasury Department and IRShave determined that if a domestic pass-through entity is a United States share-holder of a DFIC and owns section 958(a)stock in such DFIC, the section 965(a)inclusion amount with respect to such sec-tion 958(a) stock and the section 965(c)deduction with respect to such amount

should be determined at the level of thedomestic pass-through entity. However,the domestic pass-through owners of thedomestic pass-through entity are subjectto federal income tax on their share of thesection 965(a) inclusion amount with re-spect to the section 958(a) stock of thedomestic pass-through entity. Accord-ingly, in the case of a domestic pass-through entity that is a United Statesshareholder, the regulations will providethat each domestic pass-through ownertakes into account its share of the section965(a) inclusion amount with respect tosection 958(a) stock of a DFIC of thedomestic pass-through entity and the sec-tion 965(c) deduction with respect to suchamount, regardless of whether such do-mestic pass-through owner is also aUnited States shareholder with respect tosuch DFIC. In this case, the section 965(a)inclusion amount and the related section965(c) deduction must be allocated in thesame proportion. For example, if a domes-tic pass-through owner is allocated 50percent of the section 965(a) inclusionamount with respect to section 958(a)stock of a domestic pass-through entity,such domestic pass-through owner mustbe allocated 50 percent of the related sec-tion 965(c) deduction. If the domesticpass-through owner is also a United Statesshareholder with respect to such DFICthat owns section 958(a) stock of suchDFIC, regulations will provide that thesection 965(a) inclusion amount with re-spect to such section 958(a) stock of suchdomestic pass-through owner and the sec-tion 965(c) deduction with respect to suchamount are determined separately from itsshare of the section 965(a) inclusionamount and section 965(c) deduction ofthe domestic pass-through entity.

For purposes of this notice, the term“domestic pass-through entity” means apass-through entity that is a United Statesperson (as defined in section 7701(a)(30)).Also for purposes of this notice, a “pass-through entity” means a partnership, Scorporation, or any other person to theextent that the income or deductions ofsuch person are included in the income ofone or more direct or indirect owners orbeneficiaries of the person. Accordingly,if, for example, a domestic trust is subjectto federal income tax on a portion of itssection 965(a) inclusion amount and its


domestic pass-through owners are subjectto tax on the remaining portion, the do-mestic trust is treated as a domestic pass-through entity with respect to such re-maining portion. Also for purposes of thisnotice, the term “domestic pass-throughowner” means a United States personthat is a partner, shareholder, beneficiary,grantor, or owner, as the case may be, in adomestic pass-through entity, except that,in the case of tiered pass-through entities,the term does not include a partner, share-holder, beneficiary, or owner that is itselfa domestic pass-through entity. In the caseof tiered pass-through entities, a referencein this notice to a domestic pass-throughowner includes a United States person thatis an indirect partner, shareholder, benefi-ciary, or owner through one or more otherpass-through entities, and a reference to adomestic pass-through owner’s share ofthe section 965(a) inclusion amount andsection 965(c) deduction of a domesticpass-through entity includes such domes-tic pass-through owner’s share of the sec-tion 965(a) inclusion amount and section965(c) deduction of a domestic pass-through entity owned indirectly by suchdomestic pass-through owner through oneor more other pass-through entities.

The elections under section 965(h),(m), and (n) (“specified elections”) aredescribed in section 965 as available toa United States shareholder of a DFIC.However, because a domestic pass-through owner includes in income ashare of the section 965(a) inclusionamount with respect to section 958(a)stock of a DFIC of a domestic pass-through entity, the Treasury Departmentand the IRS intend to issue regulations,pursuant to the grant of regulatory au-thority under section 965(o), allowingsuch domestic pass-through owner tomake a specified election that applies toits share of the section 965(a) inclusionamount with respect to section 958(a)stock of a DFIC of the domestic pass-through entity. Such a domestic pass-through owner will be permitted tomake a specified election regardless ofwhether the domestic pass-throughowner is itself a United States share-holder of the DFIC. If a domestic pass-through owner makes a specified elec-tion for its taxable year, such electionwill be applicable to all section 965(a)

inclusion amounts included in the grossincome of such domestic pass-throughowner for such taxable year (other thanamounts with respect to which electionsunder section 965(i) are effective),whether included directly by reason ofowning section 958(a) stock in a DFICor indirectly by reason of being a do-mestic pass-through owner.

If an S corporation is, directly or indi-rectly, a partner, beneficiary, or owner ofa domestic pass-through entity and takesinto account a share of the section 965(a)inclusion amount of a domestic pass-through entity with respect to a DFIC, andthe S corporation is a United States share-holder of the DFIC, the regulations willprovide that shareholders of the S corpo-ration will be permitted to make an elec-tion under section 965(i) to defer theshareholder’s net tax liability under sec-tion 965 with respect to the S corporation.However, in such a case, if the S corpo-ration is not itself a United States share-holder of a DFIC, the net tax liabilityunder section 965 of a shareholder withrespect to the S corporation for purposesof the election under section 965(i) willnot include the shareholder’s share of thedomestic pass-through entity’s section965(a) inclusion amount with respect tothe DFIC or section 965(c) deduction withrespect to such amount.

(c) Determination of Amount of Net TaxLiability Under Section 965 forPurposes of Section 965(h)

As discussed in section 3.05(b) of thisnotice, if a domestic pass-through entity isa United States shareholder that has a sec-tion 965(a) inclusion amount with respectto section 958(a) stock in a DFIC, aUnited States person that is a domesticpass-through owner, directly or indirectly,in such domestic pass-through entity issubject to net income tax on its share ofthe section 965(a) inclusion amount. Ac-cordingly, the Treasury Department andthe IRS intend to issue regulations provid-ing that for purposes of determining thenet tax liability under section 965 of adomestic pass-through owner, the domes-tic pass-through owner will be treated as aUnited States shareholder. See, however,section 5 of this notice, which providesthat a domestic pass-through owner that is

not itself a United States shareholder isnot permitted to make an election undersection 962.

Furthermore, the regulations will pro-vide that, in the case of a taxpayer that hasmade one or more elections under section965(i) for a taxable year, the taxpayer’snet tax liability under section 965 for pur-poses of section 965(h) is the taxpayer’snet tax liability under section 965 as de-termined under section 965(h)(6) (takinginto account the rules in this section3.05(c)) reduced by the aggregate amountof the taxpayer’s net tax liabilities undersection 965 as determined under section965(i)(3) (taking into account the rule pro-vided in section 3.05(b) of this notice)with respect to which elections under sec-tion 965(i) are effective.

(d) Application of Section 965(n) toLosses Arising in the Year in Which theInclusion Year of a DFIC Ends

A United States shareholder of a DFICmay elect the application of section965(n) for the taxable year of the UnitedStates shareholder in which, or withwhich, the inclusion year of the DFICends. If such an election is made, theUnited States shareholder does not takeinto account the amount described in sec-tion 965(n)(2) in determining the amountof the net operating loss deduction undersection 172 of such shareholder for suchtaxable year or in determining the amountof taxable income for such taxable yearwhich may be reduced by net operatingloss carryovers or carrybacks to such tax-able year under section 172.

Questions have arisen regarding thescope of the election under section 965(n)due to the use of the term “deduction” insection 965(n)(1)(A). A net operating loss“deduction” for a taxable year generally re-fers to the amount of a net operating losscarried to such taxable year from a prior orsubsequent year rather than the net operat-ing loss arising from such year. Comparesection 172(a) and (c). However, interpret-ing “deduction” in section 965(n)(1)(A) torefer to carryovers or carrybacks (and not tothe net operating loss for the taxable year)would cause that paragraph to be duplicativeof section 965(n)(1)(B), which already pro-vides that amounts described in section965(n)(2) are disregarded for purposes of


applying net operating loss carryovers orcarrybacks to such taxable year undersection 172. The Treasury Department andthe IRS have determined that section965(n)(1)(A) was intended to apply to adifferent set of losses than those to whichsection 965(n)(1)(B) applies. Therefore, theTreasury Department and the IRS intend toissue regulations providing that, if an elec-tion under section 965(n) is made with re-spect to a taxable year in which or withwhich the inclusion year of a DFIC ends, theamount of a net operating loss for suchtaxable year will be determined without tak-ing into account as gross income the amountdescribed in section 965(n)(2). The regula-tions will also clarify that an election madeunder section 965(n) will be treated as madewith respect to both the amount of a netoperating loss for such taxable year and thenet operating loss carryovers or carrybacksfor such taxable year.

(e) Filing and Payment Due Date forSpecified Individuals

A specified individual (as defined insection 2.18 of this notice) who does notmake the election under section 965(h)(1)or (i)(1) is considered to have timely filedsuch person’s return and paid the net taxliability under section 965 if the filing andpayment are made on or before the fif-teenth day of the sixth month followingthe close of the taxable year, and the spec-ified individual attaches a statement to thereturn showing that the person for whomthe return is made is a person described in§ 1.6081–5(a). See § 1.6081–5(a)(5)–(6),and (b). For a specified individual who makesthe election under section 965(h)(1), section965(h)(2) provides that the installments mustbe paid on the due dates for the relevant re-turns (determined without regard to any exten-sion of time for filing the return).

The question has arisen whether thedisregarding of extensions of time tofile in section 965(h)(2) applies to negatethe extension of time to pay that is other-wise available under § 1.6081–5 for aspecified individual that does not makethe election under section 965(h)(1). TheTreasury Department and the IRS intendto issue regulations providing that, if aspecified individual receives an extensionof time to file and pay under § 1.6081–5(a)(5) or (6), then the individual’s due

date for an installment payment under sec-tion 965(h) is also the fifteenth day of thesixth month following the close of a tax-able year.

.06 Treatment of Section 965(c) De-duction for Purposes of Sections 62(a)and 63(d)

Questions have arisen as to whether thesection 965(c) deduction is a miscella-neous itemized deduction as defined insection 67(b). The Treasury Departmentand the IRS have determined that an indi-vidual’s section 965(c) deduction was notintended to be subject to the 2-percentfloor under section 67 or the deductiondisallowance under the AMT, or, in thecase of a taxable year beginning after De-cember 31, 2017, the deduction disallow-ance under section 67 as modified by theAct. Therefore, the Treasury Departmentand the IRS intend to issue regulations,pursuant to the grant of authority undersection 965(o), providing that a section965(c) deduction will not be treated as anitemized deduction, including for pur-poses of sections 56 and 67.

SECTION 4. MODIFICATION OFRULE DESCRIBED IN SECTION3.04(a) OF NOTICE 2018–13

Section 3.04(a) of Notice 2018–13 an-nounced that the Treasury Departmentand the IRS intend to issue regulationsproviding that, for purposes of calculat-ing the net accounts receivable of aspecified foreign corporation, the term“accounts receivable” means receiv-ables described in section 1221(a)(4),and the term “accounts payable” meanspayables arising from the purchase ofproperty described in section 1221(a)(1)or 1221(a)(8) or the receipt of servicesfrom vendors or suppliers. The TreasuryDepartment and the IRS have deter-mined that it is appropriate to excludeany receivable or payable with an initialterm of one year or more for purposes ofcalculating a specified foreign corpora-tion’s net accounts receivable. Cf.section 965(c)(3)(B)(iii)(IV) (short-termobligations). Accordingly, the TreasuryDepartment and the IRS intend to issue reg-ulations providing that the terms “accountsreceivable” and “accounts payable” will in-clude only receivables or payables with aterm of less than one year.

SECTION 5. REGULATIONS TO BEISSUED ADDRESSING ELECTIONSUNDER SECTION 962

As discussed in section 3.05(b) of thisnotice, if a domestic pass-through entity isa United States shareholder that has a sec-tion 965(a) inclusion amount with respectto section 958(a) stock in a DFIC, a do-mestic pass-through owner of such entityis subject to net income tax on its share ofthe section 965(a) inclusion amount. TheTreasury Department and the IRS intend toissue regulations clarifying that a domesticpass-through owner who is an individual(including, as provided in § 1.962–2(a), atrust or estate) and a United States share-holder with respect to a DFIC may make anelection under section 962 with respect tothe individual’s share of the section 965(a)inclusion amount of a domestic pass-through entity with respect to such DFIC.However, an individual who is not a UnitedStates shareholder of a DFIC is not permit-ted to make an election under section 962with respect to the individual’s share of asection 965(a) inclusion amount of a domes-tic pass-through entity with respect to suchDFIC notwithstanding the rules in section3.05(b) and (c) of this notice. See section962(b). The regulations will clarify that thesame principles apply to inclusions undersection 951(a) other than by reason of sec-tion 965.

If an individual elects to have the provi-sions of section 962 apply for a taxable year,the tax imposed on amounts included in theindividual’s gross income under section951(a) (directly by reason of owning section958(a) stock or indirectly by reason of beinga domestic pass-through owner), includingby reason of section 965, is an amount equalto the tax that would be imposed undersection 11 if the amounts were receivedby a domestic corporation. In addition,§ 1.962–1(b)(1)(i) provides that a deductionof a United States shareholder does not re-duce the amount included in gross incomeunder section 951(a) for purposes of com-puting the amount of tax that would beimposed under section 11.

The Treasury Department and the IRShave determined that in the case of a tax-payer making an election under section962, Congress intended for the section965(c) deduction (which is generallyavailable to United States shareholders of


DFICs, including individuals) to be al-lowed with respect to the tax imposedunder section 11 rather than under section1. See H.R. Rep. No. 115–466, at 620(2017) (Conf. Rep.). Pursuant to the grantof authority under section 965(o), theTreasury Department and the IRS intendto modify § 1.962–1(b)(1)(i) to providethat, in computing the amount of tax dueas a result of a section 962 election, thesection 965(c) deduction may be takeninto account. Specifically, the regulationswill provide that “taxable income” as usedin section 11 shall be reduced by the sec-tion 965(c) deduction. These regulationswill not apply to any other deductions, andtherefore existing § 1.962–1(b)(1)(i) willcontinue to provide that “taxable income”as used in section 11 shall not be reducedby any other deductions. Any section965(c) deduction allowed in determining“taxable income” as used in section 11 forpurposes of computing the tax due as aresult of a section 962 election will notalso be allowed for purposes of determin-ing an individual’s actual taxable income.

Example. (i) Facts. USI, a United States citizen,owns 10% of the capital and profits of USPRS, adomestic partnership that has a calendar year taxableyear, the remainder of which is owned by foreignpersons unrelated to USI or USPRS. USPRS ownsall of the stock of FS, a foreign corporation that is aCFC with a calendar year U.S. taxable year. USPRShas a section 965(a) inclusion amount with respect toFS of $1,000 and is allowed a section 965(c) deduc-tion of $700. FS has no post-1986 foreign incometaxes (as defined in section 902(c)(1) as in effectbefore the date of the enactment of the Act). USImakes a valid election under section 962 for 2017.

(ii) Analysis. USI’s “taxable income” describedin § 1.962–1(b)(1)(i) equals $100 (USI’s distributiveshare of USPRS’s section 965(a) inclusion amount)minus $70 (USI’s distributive share of USPRS’sallowable section 965(c) deduction), or $30. Noother deductions are allowed in determining thisamount. USI’s tax on such amount will be equal tothe tax imposed under section 11 as if $30 werereceived by a domestic corporation. USI cannot de-duct $70 for purposes of determining USI’s taxableincome that is subject to tax under section 1.

SECTION 6. PENALTY RELIEFUNDER SECTIONS 6654 AND 6655 INCONNECTION WITH THEAMENDMENT OF SECTION 965 ANDTHE REPEAL OF SECTION 958(b)(4)

.01 Penalty Waiver with Respect toSection 965

A United States shareholder that has anet tax liability under section 965 gener-

ally includes the amount of the net taxliability on its return for the year in whichor with which the inclusion year of theDFIC ends.

Section 965(h)(1) provides that aUnited States shareholder of a DFIC mayelect to pay the net tax liability undersection 965 in eight annual installments,the first of which is due on the due date(without regard to any extension of timeto file) of the return for the shareholder’staxable year in which or with which theinclusion year of the DFIC ends. Eachsuccessive installment is due on the duedate (without regard to any extension oftime to file) of the return for the taxableyear following the taxable year the priorinstallment was made. Section 965(h)(2).The timely payment of an installmentdoes not incur underpayment interest. SeeH.R. Rep. No. 115–466, at 611 (2017)(Conf. Rep.). Section 965(h), therefore,demonstrates Congress’s intent to permita taxpayer to pay its net tax liability undersection 965 without incurring additionalliability, including additions to tax. Con-sistent with this intent, and in the interestof sound tax administration, the IRS willwaive underpayment penalties under sec-tions 6654 and 6655 with respect to ataxpayer’s net tax liability under section965 for those taxpayers that make an elec-tion under section 965(h). In addition, theIRS will waive underpayment penaltiesunder sections 6654 and 6655 with respectto a taxpayer’s net tax liability under sec-tion 965 for those taxpayers who do notelect to pay their net tax liability undersection 965 in installments. Accordingly,a taxpayer’s required installments of esti-mated tax need not include amounts at-tributable to its net tax liability under sec-tion 965 to prevent the imposition ofpenalties under sections 6654(a) and6655(a). If a taxpayer fails to timely payits net tax liability under section 965 whendue, other sections of the Code may apply;for example, additions to tax could resultunder section 6651, and installment pay-ments could be accelerated under section965(h)(3).

The instructions to estimated tax formswill be modified, as necessary, to clarifythat no underpayment penalty will be im-posed under section 6654 or section 6655with respect to a taxpayer’s net tax liabil-ity under section 965 and that the taxpayer

may exclude such amounts when calculat-ing the amount of its required installment.

.02 Penalty Waiver for 2017 withRespect to Amendments to Sections 965and 958(b) by the Act

In addition, because the amendment tosection 965 and the repeal of section958(b)(4) could also affect tax liability(other than by way of the imposition ofthe net tax liability under section 965) forperiods that end before or shortly after theenactment of the Act, the IRS has deter-mined that additional penalty relief is ap-propriate. Therefore, the IRS has deter-mined that if the amendment to section965 or the amendment to section 958(b)by the Act causes an underpayment re-lated to a required installment of esti-mated tax due on or before January 15,2018, the estimated tax penalty under sec-tion 6654 or section 6655 will not apply tothat underpayment.

SECTION 7. EFFECTIVE DATES

Section 965 is effective for the lasttaxable years of foreign corporations thatbegin before January 1, 2018, and withrespect to United States shareholders, forthe taxable years in which or with whichsuch taxable years of the foreign corpora-tions end. The Treasury Department andthe IRS intend to provide that the regu-lations and instructions described in sec-tions 3, 4, 5, and 6 of this notice areeffective beginning for the first taxableyear of a foreign corporation (and withrespect to United States shareholders,the taxable years in which or with whichsuch taxable years of the foreign corpo-rations end) to which section 965 ap-plies. Before the issuance of the regula-tions and instructions described in thisnotice, taxpayers may rely on the rulesdescribed in sections 3, 4, 5, and 6 ofthis notice.

This notice also clarifies one of theeffective dates described in section 6 ofNotice 2018–13, which provided that tax-payers could rely on the rules described insection 5.01 of Notice 2018–13 with re-spect to the last taxable year of foreigncorporations beginning before January 1,2018, and for the taxable years of UnitedStates shareholders in which or withwhich such taxable years of foreign cor-


porations end, pending the issuance offurther guidance. Taxpayers may rely onsection 5.01 of Notice 2018–13 with re-spect to the last taxable year of foreigncorporations beginning before January 1,2018, and each subsequent year of suchforeign corporations, and for the taxableyears of United States shareholders inwhich or with which such taxable years offoreign corporations end, pending the is-suance of further guidance (the applica-tion of which will be prospective).

SECTION 8. REQUEST FORCOMMENTS AND CONTACTINFORMATION

The Treasury Department and the IRSrequest comments on the rules describedin this notice. The Treasury Departmentand the IRS expect to issue additionalguidance under section 965, and the Trea-sury Department and the IRS requestcomments on what additional guidanceshould be issued to assist taxpayers inapplying section 965.

Written comments may be submitted tothe Office of Associate Chief Counsel (In-ternational), Attention: Leni C. Perkins,Internal Revenue Service, IR–4579, 1111Constitution Avenue, NW, Washington,DC 20224. Alternatively, taxpayersmay submit comments electronically [email protected] will be available for publicinspection and copying.

The principal author of this notice isMs. Perkins of the Office of AssociateChief Counsel (International). For furtherinformation regarding this notice, contactMs. Perkins at (202) 317-6934 (not a toll-free number).

Initial Guidance UnderSection 163(j) asApplicable to TaxableYears Beginning AfterDecember 31, 2017

Notice 2018–28

SECTION 1. PURPOSE

This notice announces that the Depart-ment of the Treasury (Treasury Depart-ment) and the Internal Revenue Service

(IRS) intend to issue proposed regulationsproviding guidance to assist taxpayers incomplying with section 163(j) of the In-ternal Revenue Code (Code), as amendedon December 22, 2017, by “An Act toprovide for reconciliation pursuant to ti-tles II and V of the concurrent resolutionon the budget for fiscal year 2018,” P.L.115–97 (the Act). This notice further de-scribes certain of the rules that those pro-posed regulations will include to providetaxpayers with interim guidance as morecomprehensive guidance is developed.The rules described in this notice applyonly for purposes of determining the lim-itation on deductions for interest expenseunder section 163(j), as amended by theAct. Before the issuance of the regulationsdescribed in this notice, taxpayers mayrely on the rules described in sections 3through 7 of this notice.


Prior to the Act, section 163(j) disal-lowed a deduction for disqualified interestpaid or accrued by a corporation in ataxable year if two threshold tests weresatisfied. The first threshold test was sat-isfied if the payor’s debt-to-equity ratioexceeded 1.5 to 1.0 (safe harbor ratio).The second threshold test was satisfied ifthe payor’s net interest expense exceeded50 percent of its adjusted taxable income(generally, taxable income computedwithout regard to deductions for net inter-est expense, net operating losses, domes-tic production activities under section 199,depreciation, amortization, and deple-tion). Disqualified interest for this purposeincluded interest paid or accrued to: (1)related parties when no Federal incometax was imposed with respect to such inter-est; (2) unrelated parties in certain instancesin which a related party guaranteed thedebt; or (3) a real estate investment trust(REIT) by a taxable REIT subsidiary ofthat REIT. Interest amounts disallowedfor any taxable year under section 163(j)prior to the Act were treated as interestpaid or accrued in the succeeding tax-able year and could be carried forwardindefinitely. In addition, any excess lim-itation (i.e., the excess, if any, of 50percent of the adjusted taxable incomeof the payor over the payor’s net interestexpense) could be carried forward threeyears.

Prior to the Act, section 163(j)(6)(C)provided that “[a]ll members of the sameaffiliated group (within the meaning ofsection 1504(a)) shall be treated as 1 tax-payer.” In addition, section 163(j)(9)(B)provided the Secretary with the authorityto issue regulations providing for adjust-ments in the case of corporations that aremembers of an affiliated group as may beappropriate for carrying out the purposesof section 163(j). The Report of the Com-mittee on the Budget, House of Represen-tatives, House Report 101–247 at 1248(Sept. 20, 1989) noted that “[i]n caseswhere a group of commonly controlledU.S. corporations would constitute an af-filiated group but for the inclusion withinthe group of one or more entities otherthan includible corporations (as defined insection 1504(b)), the committee intendsfor the regulations to treat all U.S. corpo-rations that are members of such a groupas a single taxpayer where such treatmentis appropriate in order to carry out thepurposes of the bill or to prevent avoid-ance of the purposes of the bill.”

Proposed regulations under section163(j) were issued on June 18, 1991 (Pro-posed Regulations). 56 FR 27907 (June18, 1991). The Proposed Regulations con-tained affiliation rules for section 163(j)purposes (the super-affiliation rules). Inparticular, proposed § 1.163(j)–5(a)(2)contained a rule that would treat all mem-bers of an affiliated group (as defined insection 1504(a)) as one taxpayer for pur-poses of section 163(j), without regard towhether such affiliated group files a con-solidated return pursuant to section 1501.The Proposed Regulations also containedrules in proposed § 1.163(j)–5(a)(3) underwhich, for purposes of section 163(j), if atleast 80 percent of the total voting powerand total value of the stock of an includ-ible corporation (as defined in section1504(b)) is owned, directly or indirectly,by another includible corporation, the firstcorporation would be treated as a memberof an affiliated group that includes theother corporation and its affiliates.

Section 163(j) was amended by the Actto provide new rules limiting the deduc-tion of business interest expense for tax-able years beginning after December 31,2017. See Section 13301(a) of the Act.For any taxpayer to which section 163(j)applies, section 163(j)(1) now limits the


taxpayer’s annual deduction for businessinterest expense to the sum of: (1) thetaxpayer’s business interest income (asdefined in section 163(j)(6)) for the tax-able year; (2) 30 percent of the taxpayer’sadjusted taxable income (as defined insection 163(j)(8)) for the taxable year; and(3) the taxpayer’s floor plan financing in-terest (as defined in section 163(j)(9)) forthe taxable year. The limitation in section163(j) applies to all taxpayers, except forcertain taxpayers that meet the gross re-ceipts test in section 448(c), and to alltrades or businesses, except certain tradesor businesses listed in section 163(j)(7).Section 163(j)(2), as amended by the Act,provides that the amount of any businessinterest not allowed as a deduction for anytaxable year as a result of the limitation insection 163(j)(1) is treated as business in-terest paid or accrued in the next taxableyear and may be carried forward. Section163(j), as amended by the Act, does notprovide for the carryforward of any excesslimitation. Section 163(j)(6)(C), whichtreated an affiliated group as one taxpayer,and section 163(j)(9)(B), which autho-rized the super-affiliation rules, were re-moved by the Act and no equivalent pro-visions are included in section 163(j), asamended by the Act.

The Conference Report to AccompanyH.R. 1, Report 115–466 (Dec. 15, 2017)(the Conference Report) states in a foot-note describing the House Bill that “. . . acorporation has neither investment inter-est nor investment income within themeaning of section 163(d). Thus, interestincome and interest expense of a corpora-tion is properly allocable to a trade orbusiness, unless such trade or business isotherwise explicitly excluded from the ap-plication of the provision.” See Confer-ence Report footnote 688, at 386. Nothingin the Conference Report’s descriptionof the Senate Amendment or the Con-ference Agreement is inconsistent withthis approach. The Conference Reportalso notes, in the description of theHouse Bill, that “[i]n the case of a groupof affiliated corporations that file a con-solidated return, the limitation applies atthe consolidated tax return filing level.”See Conference Report at 386. Nothingin the Conference Report’s description ofthe Senate Amendment or the ConferenceAgreement is inconsistent with this ap-

proach. However, there is no mention in theConference Report of applying section163(j) to affiliated groups (within the mean-ing of section 1504(a)) that do not file aconsolidated return.

SECTION 3. TREATMENT OFDISALLOWED DISQUALIFIEDINTEREST FROM LAST TAXABLEYEAR BEGINNING BEFOREJANUARY 1, 2018

Prior to the Act, C corporation taxpay-ers that could not deduct all of their inter-est expense under section 163(j)(1)(A)could carry their disallowed disqualifiedinterest forward to the succeeding taxableyear under section 163(j)(1)(B). Such in-terest was treated as paid or accrued in thesucceeding taxable year. Similarly, undersection 163(j)(2), as amended by the Act,taxpayers that cannot deduct all of theirbusiness interest because of the limitationin section 163(j)(1) may carry their disal-lowed business interest forward to thesucceeding taxable year, and such interestis treated as business interest paid or ac-crued in the succeeding taxable year.

Consistent with the approach of section163(j)(1)(B) prior to the Act and section163(j)(2), as amended by the Act, theTreasury Department and the IRS intendto issue regulations clarifying that taxpay-ers with disqualified interest disallowedunder prior section 163(j)(1)(A) for thelast taxable year beginning before January1, 2018, may carry such interest forwardas business interest to the taxpayer’s firsttaxable year beginning after December 31,2017. The regulations will also clarify thatbusiness interest carried forward will besubject to potential disallowance under sec-tion 163(j), as amended by the Act, in thesame manner as any other business interestotherwise paid or accrued in a taxable yearbeginning after December 31, 2017.

The regulations will also address theinteraction of section 163(j) with section59A, relating to the tax on base erosionpayments of taxpayers with substantialgross receipts, which was added by sec-tion 14401 of the Act. The regulations willprovide that business interest carried for-ward from a taxable year beginning beforeJanuary 1, 2018, will be subject to section59A in the same manner as interest paid oraccrued in a taxable year beginning afterDecember 31, 2017, and will clarify how

section 59A applies to that interest. Thus,for example, if interest paid or accrued bya taxpayer to a foreign person that is arelated party as defined in section 59A(g)is carried forward to a taxable year begin-ning after December 31, 2017, and a de-duction is otherwise allowable underChapter 1 of the Code for such interest,then the interest is treated as a baseerosion payment described in section59A(d)(1) and is subject to the rules undersection 59A(c)(3).

In addition, the regulations will pro-vide rules for the allocation of businessinterest from a group treated as affiliatedunder the super-affiliation rules applicableto section 163(j) prior to the Act to tax-payers under section 163(j), as amended.

Prior to the Act, section 163(j)(2)(B)(ii) also allowed a corporation thatwas subject to the limitation in section163(j)(1) to add to its annual limitationany “excess limitation carryforward”from the prior year, as defined in section163(j)(2)(B)(ii). Section 163(j), as amendedby the Act, does not have a provision thatwould allow an excess limitation carryfor-ward. Thus, the Treasury Department and theIRS intend to issue regulations clarifying thatno amount previously treated as an excesslimitation carryforward may be carried to tax-able years beginning after December 31, 2017.

For further information regarding car-ryforwards generally, contact ZacharyKing or Charles Gorham at (202) 317-7003 (not a toll-free number). For furtherinformation regarding the interaction ofsections 59A and 163(j), contact SheilaRamaswamy or Steve Jensen at (202)317-6938 (not a toll-free number).

SECTION 4. C CORPORATIONBUSINESS INTEREST EXPENSEAND INCOME

Consistent with congressional intent asreflected in the Conference Report, theTreasury Department and the IRS intendto issue regulations clarifying that, solelyfor purposes of section 163(j), as amendedby the Act, in the case of a taxpayer that isa C corporation, all interest paid or ac-crued by the C corporation on indebted-ness of such C corporation will be busi-ness interest within the meaning of section163(j)(5), and all interest on indebtednessheld by the C corporation that is includ-ible in gross income of such C corporation


will be business interest income within themeaning of section 163(j)(6). The regula-tions described in the foregoing sen-tence will not apply to a corporation thatis an S corporation as defined in section1361(a)(1). Regulations also will ad-dress whether and to what extent interestpaid, accrued, or includible in gross in-come by a non-corporate entity such as apartnership in which a C corporationholds an interest is properly character-ized, to such C corporation, as businessinterest within the meaning of section163(j)(5) or business interest incomewithin the meaning of section 163(j)(6).

For further information regarding thisissue, contact John B. Lovelace at (202)317-4723 (not a toll-free number).

SECTION 5. APPLICATION OFSECTION 163(j) TOCONSOLIDATED GROUPS

Consistent with congressional intent asreflected in the Conference Report, theTreasury Department and the IRS intendto issue regulations clarifying that the lim-itation in section 163(j)(1) on the amountallowed as a deduction for business inter-est applies at the level of the consolidatedgroup (as defined in § 1.1502–1(h)). Thus,for example, a consolidated group’s tax-able income for purposes of calculatingadjusted taxable income (as defined insection 163(j)(8)) will be its consolidatedtaxable income (as determined under§ 1.1502–11), and intercompany obliga-tions (as defined in § 1.1502–13(g)(2)(ii))will be disregarded for purposes of deter-mining the limitation in section 163(j)(1).

Regulations also will address other is-sues concerning the application of section163(j) to consolidated groups, including:the allocation of the section 163(j)(1) lim-itation among group members; the treat-ment of disallowed interest deduction car-ryforwards when a member leaves thegroup; the treatment of disallowed interestdeduction carryforwards of a member thatjoins the group, including whether such car-ryforwards are subject to a separate returnlimitation year (SRLY) limitation (see§§ 1.1502–15, 1.1502–21(c), and 1.1502–22(c)); the application of § 1.1502–32 (pro-viding rules for adjusting the basis of thestock of a subsidiary owned by anothermember) to disallowed interest deductions;and the application of section 163(j) to a

consolidated group with one or more mem-bers that conduct a trade or business de-scribed in section 163(j)(7)(A)(ii), (iii), or(iv), as amended by the Act, or whose mem-bers hold an interest in a non-corporate en-tity such as a partnership that conducts sucha trade or business. The Treasury Depart-ment and the IRS anticipate that such regu-lations will not include a general rule treat-ing an affiliated group that does not file aconsolidated return as a single taxpayer forpurposes of section 163(j), as amended bythe Act.


SECTION 6. IMPACT OF SECTION163(j) ON EARNINGS ANDPROFITS

The Treasury Department and the IRSintend to issue regulations clarifying thatthe disallowance and carryforward of adeduction for a C corporation’s businessinterest expense under section 163(j), asamended by the Act, will not affectwhether or when such business interestexpense reduces earnings and profits ofthe payor C corporation.


SECTION 7. BUSINESS INTERESTINCOME AND FLOOR PLANFINANCING OF PARTNERSHIPS,PARTNERS, S CORPORATIONS,AND S CORPORATIONSHAREHOLDERS

Section 163(j)(4) requires that the an-nual limitation on the deduction for busi-ness interest expense be applied at thepartnership level and that any deductionfor business interest be taken into accountin determining the non-separately statedtaxable income or loss of the partnership.Although section 163(j)(4) is applied atthe partnership level with respect to thepartnership’s indebtedness, section 163(j)may also be applied at the partner level incertain circumstances. The Treasury Depart-ment and the IRS intend to issue regulationsproviding that, for purposes of calculating apartner’s annual deduction for business in-terest under section 163(j)(1), a partner can-not include the partner’s share of the part-nership’s business interest income for the

taxable year except to the extent of the part-ner’s share of the excess of (i) the partner-ship’s business interest income over (ii) thepartnership’s business interest expense (notincluding floor plan financing). Addition-ally, the Treasury Department and the IRSintend to issue regulations providing that apartner cannot include such partner’s shareof the partnership’s floor plan financing in-terest in determining the partner’s annualbusiness interest expense deduction limita-tion under section 163(j). Such regulationsare intended to prevent the double countingof business interest income and floor planfinancing interest for purposes of the deduc-tion afforded by section 163(j) and are con-sistent with general principles of Chapter 1of the Code. Similar rules will apply to anyS corporation and its shareholders.

For further information regarding thisissue, contact Meghan Howard at (202)317-5279, Adrienne Mikolashek at (202)317-6850, or Anthony McQuillen at (202)317-6850 (not a toll-free number).

SECTION 8. WITHDRAWAL OFPROPOSED REGULATIONS

The Treasury Department and the IRSintend to withdraw the Proposed Regula-tions in connection with the issuance ofproposed regulations under section 163(j),as amended by the Act.

SECTION 9. REQUEST FORCOMMENTS

The Treasury Department and the IRSrequest comments on the rules describedin this notice. In addition, the TreasuryDepartment and the IRS expect to issueregulations under section 163(j) providingguidance with respect to issues not de-scribed in this notice and request commentson what additional issues should be ad-dressed by those regulations to assist tax-payers in applying section 163(j). Com-ments must be submitted by May 31, 2018.All comments received will be available forpublic inspection and copying.

Written comments responding to thisnotice should be mailed to:

Internal Revenue ServiceCC:PA:LPD:PR (Notice 2018–28)Room 5203P.O. Box 7604Ben Franklin StationWashington, DC 20044


Please include “Notice 2018–28” on thecover page.

Submissions may be hand deliveredMonday through Friday between thehours of 8 a.m. and 4 p.m. to:

Internal Revenue ServiceCourier’s Desk1111 Constitution Ave., N.W.Washington, DC 20224Attn: CC:PA:LPD:PR(Notice 2018–28)Submissions may also be sent electron-

ically to the following e-mail address:[email protected] include “Notice 2018 –28” in thesubject line.

SECTION 10. DRAFTING ANDGENERAL CONTACTINFORMATION

The principal authors of this notice areZachary King and Charles Gorham of theOffice of the Associate Chief Counsel (In-come Tax and Accounting). Other person-nel from the Treasury Department and theIRS participated in its development. Forfurther information regarding this notice,contact Mr. King or Mr. Gorham at (202)317-7003 (not a toll-free number).

Guidance Regarding theImplementation of NewSection 1446(f) forPartnership Interests ThatAre Not Publicly Traded

Notice 2018–29

SECTION 1. OVERVIEW

This notice announces that the Depart-ment of the Treasury (“Treasury Depart-ment”) and the Internal Revenue Service(“IRS”) intend to issue regulations undernew section 1446(f) of the Internal Reve-nue Code (“Code”) regarding the disposi-tion of a partnership interest that is notpublicly traded. This notice also providesinterim guidance that taxpayers may relyon pending the issuance of regulations.New section 1446(f) was added by section13501 of “An Act to provide for reconcil-iation pursuant to titles II and V of theconcurrent resolution on the budget forfiscal year 2018,” P.L. 115–97 (the

“Act”), which was enacted on December22, 2017. Section 13501 of the Act alsoadded new section 864(c)(8).

SECTION 2. BACKGROUND ANDSUMMARY OF COMMENTS

In general, section 864(c)(8) providesthat gain or loss from the sale, exchange,or other disposition of a partnership inter-est by a nonresident alien or foreign cor-poration is effectively connected with theconduct of a trade or business in theUnited States to the extent that the personwould have had effectively connectedgain or loss had the partnership sold all ofits assets at fair market value. Section864(c)(8) applies to sales, exchanges, orother dispositions occurring on or afterNovember 27, 2017. See Rev. Rul. 91–32,1991–1 C.B. 107, for the IRS’s positionwith respect to sales, exchanges, or otherdispositions of an interest in a partnershipby a nonresident alien individual or for-eign corporation occurring before Novem-ber 27, 2017.

In general, section 1446(f)(1) providesthat if any portion of the gain on anydisposition of an interest in a partnershipwould be treated under section 864(c)(8)as effectively connected with the conductof a trade or business within the UnitedStates, then the transferee must deduct andwithhold a tax equal to 10 percent of theamount realized on the disposition. Underan exception in section 1446(f)(2), how-ever, withholding is generally not requiredif the transferor furnishes an affidavit tothe transferee stating, among other things,that the transferor is not a foreign person.

Section 1446(f)(4) provides that if atransferee fails to withhold any amountrequired to be withheld under section1446(f)(1), the partnership shall be re-quired to deduct and withhold from distri-butions to the transferee a tax in anamount equal to the amount the transfereefailed to withhold (plus interest under theCode on such amount).

Section 1446(f)(6) authorizes the Sec-retary to prescribe such regulations orother guidance as may be necessary tocarry out the purposes of section 1446(f),including regulations providing for excep-tions from the provisions of section1446(f). Furthermore, section 1446(g) au-thorizes the Secretary to prescribe suchregulations as may be necessary to carry

out the purposes of section 1446 gener-ally. Section 1446(f) applies to sales, ex-changes, or other dispositions occurringafter December 31, 2017.

On December 29, 2017, the TreasuryDepartment and IRS advance releasedNotice 2018–08, 2018–7 I.R.B. 352(“PTP Notice”). The PTP Notice sus-pended the requirement to withhold ondispositions of certain interests in publiclytraded partnerships (“PTPs”) in responseto stakeholder concerns that applying sec-tion 1446(f) to PTPs without guidancepresented significant practical problems.The PTP Notice also requested commentson the implementation of section 1446(f),including whether a temporary suspensionof section 1446(f) for partnership intereststhat are not publicly traded (“non-PTPinterests”) was needed. Several commentswere received.

Comments in response to the PTP No-tice requested guidance minimizing theapplication of section 1446(f) until furtherguidance was issued, including suspen-sion of section 1446(f) for non-PTP inter-ests. This notice does not suspend theapplication of section 1446(f) for non-PTP interests in all cases, but does includeguidance under section 1446(f) designed toallow for an effective and orderly imple-mentation, including minimizing occasionsof overwithholding. The rules in this notice(including section 6) that modify or suspendwithholding under section 1446(f) do notaffect the transferor’s tax liability under sec-tion 864(c)(8). See section 4.06 of this no-tice.

Comments stated that applying section1446(f) to dispositions of non-PTP inter-ests presents significant practical prob-lems. Comments stated that a transferee isobligated to withhold with respect to dis-positions occurring after December 31,2017, but without forms, instructions orother guidance, it is unclear when or howto deposit the withheld amounts. To ad-dress this concern, section 5 of this noticeprovides interim guidance on reportingand paying over the amount required to bewithheld under section 1446(f)(1). Thisguidance generally adopts the forms andprocedures relating to withholding on dis-positions of U.S. real property interestsunder section 1445 and the regulationsthereunder.


Comments requested guidance on theprocedures for the transferor to furnish anaffidavit of non-foreign status to the trans-feree as described in section 1446(f)(2) tobe relieved from withholding. Section6.01 of this notice provides this guidanceby generally adopting the rules in the sec-tion 1445 regulations for similar situa-tions.

Section 1446(f) applies only whenthere is gain on a disposition of an interestin a partnership. To prevent withholdingwhen no gain occurs on a disposition,section 6.02 of this notice provides that ifa transferee receives a certification from atransferor that the disposition will not re-sult in gain, then the transferee generallyis not required to withhold under section1446(f).

Comments requested relief from with-holding obligations when the amount ofeffectively connected gain under section864(c)(8) is zero or a small amount. Onecomment recommended a rule providingrelief based on the value of the assetsproducing effectively connected in-come, modeled on § 1.1445–11T. Sec-tion 1.1445–11T provides an exceptionfrom the requirement that a transfereewithhold on the transfer of an interest ina partnership that holds U.S. real prop-erty interests. The transferee is relievedfrom withholding under this exception ifthe partnership provides the transferee astatement certifying that fifty percent ormore of the value of the gross assetsdoes not consist of U.S. real propertyinterests, or that ninety percent or moreof the value of the gross assets of thepartnership does not consist of U.S. realproperty interests plus cash or cashequivalents. Instead of adopting a rulebased on the test in § 1.1445–11T, sec-tions 6.03 and 6.04 of this notice pro-vide two rules that relieve the transfereefrom withholding in circumstances sim-ilar to those described by the comments.

Section 6.03 of this notice providesgenerally that, if a transferor certifies to atransferee that for each of the past threeyears the transferor’s effectively con-nected taxable income from the partner-ship was less than 25 percent of the trans-feror’s total income from the partnership,the transferee is not required to withhold.This rule is designed to provide a simpleapproach, obviating the need for the part-

nership to make the computation requiredby section 864(c)(8) or to otherwise pro-vide information to the transferor or trans-feree at the time of the transaction. How-ever, in certain cases transferees may notbe able to obtain this certification, so sec-tion 6.04 of this notice provides a separaterule relieving a transferee of its withhold-ing obligation under section 1446(f)(1)when the transferee receives a certifica-tion from the partnership that the partner-ship’s effectively connected gain undersection 864(c)(8) would be less than 25percent of the total gain on the deemedsale of all its assets. The Treasury Depart-ment and the IRS intend to provide futureguidance that will reduce the threshold forwithholding below 25 percent for both ofthese rules. Other limitations are also un-der consideration. The Treasury Depart-ment and the IRS expect that any suchreduction in the threshold for withholdingwould be effective at the same time asguidance providing for withholding certif-icates or otherwise providing for with-holding determined by reference to gainrecognized under section 1446(f)(3).

A comment recommended guidance pro-viding that no gain or loss be recognizedunder section 864(c)(8) in certain disposi-tions that would otherwise be considerednonrecognition transactions, providedthat gain or loss is preserved. Specifi-cally, the comment suggested alterna-tive rules, one considering whether thegain or loss is preserved in the U.S. taxbase, and the other considering whetherthe gain or loss is preserved in the handsof the transferee. The Treasury Depart-ment and the IRS are studying the ap-propriate treatment of nonrecognitiontransactions under section 864(c)(8),and comments are requested on this is-sue, including the relationship betweennonrecognition transactions under sec-tions 864(c)(8) and 897. See § 1.897–6T. Until this guidance is provided, sec-tion 6.05 of this notice provides that nowithholding is required under section1446(f) in a transaction in which no gainis recognized.

Section 1446(f)(1) applies to theamount realized on the disposition of apartnership interest. The amount realizedincludes a reduction in the transferor’s shareof partnership liabilities and other liabilitiesto which the partnership interest is subject.

See §§ 1.752–1(h) and 1.1001–2. Section 7of this notice provides two rules for deter-mining the amount of partnership liabilitiesthat are included in the amount realized.Section 7.02 of this notice provides that atransferee may generally rely on a transfer-or’s most recently issued Schedule K-1(Form 1065), Partner’s Share of Income,Deductions, Credits, etc., for purposes ofdetermining the transferor’s share of part-nership liabilities included in the amountrealized for purposes of section 1446(f). Al-ternatively, section 7.03 provides that atransferee may generally rely on a certifica-tion from the partnership providing theamount of the transferor’s share of partner-ship liabilities.

Comments stated that when the amountrealized includes a reduction in liabilities,the amount the transferee may be requiredto withhold could exceed the cash or otherproperty the transferee pays to the trans-feror. Further, in some situations, a trans-feror may not provide any information tothe transferee about its share of partner-ship liabilities, making a determination ofthe total amount realized difficult. To ad-dress these issues, section 8 of this noticeprovides that in certain cases, the totalamount of withholding is generally lim-ited to the total amount of cash and prop-erty to be transferred. The Treasury De-partment and the IRS expect that theexception in section 8 will not apply afterguidance is issued providing for withhold-ing certificates or otherwise providing forwithholding determined by reference togain recognized under section 1446(f)(3).

The comments also raised an issue re-lating to the determination of a transfer-or’s basis in its partnership interest. Sec-tion 731(a) provides that in the case of adistribution by a partnership to a partner,gain shall not be recognized to such part-ner, except to the extent that any moneydistributed exceeds the adjusted basis ofsuch partner’s interest in the partnershipimmediately before the distribution. Anygain recognized under section 731(a) isconsidered gain from the sale or exchangeof the partnership interest of the distribu-tee partner. Thus, section 1446(f) appliesin certain cases when a distribution ofmoney (including marketable securities)results in gain under section 731. Accord-ing to a comment, when a partnershipdistributes money, it may not know the


distributee partner’s basis in its interestand, thus, may not know whether the dis-tribution will cause the distributee partnerto recognize gain. In response to this com-ment, section 9 of this notice provides thatthe partnership may generally rely on itsbooks and records, or on a certificationreceived from the distributee partner, todetermine whether the distribution ex-ceeds the partner’s basis.

Section 10 of this notice responds torequests for guidance on the interaction ofsection 1445 with section 1446(f).

The Treasury Department and the IRSare considering rules that would relieve apartnership of its obligation under section1446(f)(4) if it provides the informationrequired by a transferor and transferee tocomply with the requirements under sec-tions 864(c)(8) and 1446(f), including thecertification described in section 6.04 ofthis notice, information on the calculationof the tax liability under section 864(c)(8)to the transferor, and information neces-sary to calculate the amount realized (in-cluding calculations relating to section 752)by the transferor. Section 11 of this noticeprovides that the withholding requirementsdescribed in section 1446(f)(4) will not ap-ply until regulations or other guidance havebeen issued under that section.

SECTION 3. DEFINITIONS

.01 Effectively connected gain. The term“effectively connected gain” means theamount of net gain (if any) that wouldhave been effectively connected with theconduct of a trade or business within theUnited States if the partnership had soldall of its assets at their fair market value asof the date of the transfer described insection 864(c)(8)(A)..02 Transfer. The term “transfer” meansany sale, exchange or other disposition..03 Transferor. The term “transferor”means any person that transfers a partner-ship interest, and includes a person thatreceives a distribution from a partnership..04 Transferee. The term “transferee”means any person that acquires a partner-ship interest by transfer, and includes apartnership that makes a distribution..05 Related person. The term “related per-son” is a person that is related within themeaning of section 267(b) or section707(b)(1).

SECTION 4. RULES OF GENERALAPPLICABILITY

.01 U.S. taxpayer identification numbers(“U.S. TINs”). A certificate described insections 6.02, 6.03, and 7.02 of this noticemust include the transferor’s U.S. TIN tothe extent that the transferor is required tohave, or does have, a U.S. TIN. A trans-feree may rely on an otherwise valid cer-tificate that does not include a U.S. TINfor the transferor unless the transfereeknows that the transferor is required tohave a U.S. TIN or that the transferor doesin fact have a U.S. TIN. An affidavit ofnon-foreign status or Form W–9, Requestfor Taxpayer Identification Number andCertification, provided for purposes ofsection 6.01 of this notice must include aU.S. TIN in all cases..02 Penalties of perjury. For purposes ofthis notice, a certification signed under“penalties of perjury” must provide thefollowing: “Under penalties of perjury Ideclare that I have examined the informa-tion on this document, and to the best ofmy knowledge and belief, it is true, cor-rect, and complete.” Such a certificationby an entity must further provide the fol-lowing: “I further declare that I have au-thority to sign this document on behalf of[name of entity].”.03 Authority to sign certifications. Forpurposes of this notice, a certification de-scribed in section 6, 7, or 9 of this noticefrom an entity must be signed by an indi-vidual who is an officer, director, generalpartner, or managing member of the en-tity, or, if the general partner or managingmember of the entity is itself an entity, anindividual who is an officer, director, gen-eral partner, or managing member of theentity that is the general partner or man-aging member..04 Retention period. A transferee thatobtains and relies upon an affidavit orcertification provided for in this noticemust retain that document with its booksand records for a period of five calendaryears following the close of the last cal-endar year in which the entity relied uponthe certification or as long as it may berelevant to the determination of the trans-feree’s withholding obligation under sec-tion 1446(f), whichever period is longer..05 Publicly traded partnerships. Therules in this notice do not apply to the

transfer of a publicly traded interest in apublicly traded partnership (within themeaning of section 7704(b))..06 Applicability of Section 864(c)(8). Therules in this notice that modify or suspendwithholding under section 1446(f) do notaffect the transferor’s tax liability under sec-tion 864(c)(8).

SECTION 5. USE OF SECTION 1445PRINCIPLES FOR REPORTINGAND PAYING OVER SECTION1446(f) WITHHOLDING FORDISPOSITIONS OF NON-PUBLICLYTRADED PARTNERSHIPINTERESTS

The Treasury Department and the IRShave determined that, until regulations,other guidance, or forms and instructionshave been issued under section 1446(f),transferees required to withhold undersection 1446(f)(1) must use the rules insection 1445 and the regulations thereun-der for purposes of reporting and payingover the tax, except as otherwise providedin this notice. See, e.g., § 1.1445–1(c).The forms specified in those rules includeForm 8288, U.S. Withholding Tax Returnfor Dispositions by Foreign Persons ofU.S. Real Property Interests, and Form8288–A, Statement of Withholding onDispositions by Foreign Persons of U.S.Real Property Interests. The transfereemust include the statement “Section1446(f)(1) withholding” at the top of boththe relevant Form 8288 and the relevantForm 8288–A. Except as provided in sec-tion 8 of this notice, the transferee mustalso enter the amount subject to withhold-ing under section 1446(f)(1) on line 5b ofPart I of the Form 8288 and on line 3 ofForm 8288–A and enter the amount with-held on line 6 of Part I of Form 8288 andon line 2 of Form 8288–A. At this time,the IRS will not issue withholding certif-icates under section 1446(f)(3), such asthose provided on Form 8288–B, Appli-cation for Withholding Certificate for Dis-positions by Foreign Persons of U.S. RealProperty Interests.

The rules for reporting and paying overamounts withheld and the rules regardingthe contents of Form 8288 and Form8288–A contained in § 1.1445–1(c) and(d) (such as the requirement to report andpay over withholding within 20 days of atransfer) apply to the submission of sec-


tion 1446(f)(1) withholding. A transfereethat is required to pay over a withholdingtax under section 1446(f) is made liablefor that tax under section 1461 (includingany applicable penalties and interest). Aperson that is required, but fails, to payover the withholding tax required by sec-tion 1446(f) may also be subject to civiland criminal penalties. Officers or otherresponsible persons of either an entity thatis required to pay over the withholding taxor any other withholding agent may besubject to a civil penalty under section6672. The Treasury Department and theIRS intend to issue regulations providingthat with respect to any forms that wererequired to be filed, or amounts that weredue, under section 1446(f) on or beforeMay 31, 2018, no penalties or interest willbe asserted if these forms are filed with,and such amounts are paid over to, theIRS on or before May 31, 2018.

SECTION 6. EXCEPTIONS TOSECTION 1446(f) WITHHOLDINGON DISPOSITIONS OF NON-PUBLICLY TRADEDPARTNERSHIP INTERESTS

.01 Certifying Non-Foreign Status

Section 1446(f)(2) provides that noperson shall be required to deduct andwithhold any amount under section1446(f)(1) with respect to any disposi-tion of an interest in a partnership if thetransferor furnishes to the transferee anaffidavit by the transferor stating, underpenalty of perjury, the transferor’s U.S. TINand that the transferor is not a foreign per-son. Thus, unless the transferee receives therequired affidavit, it must presume that thetransferor is foreign for purposes of with-holding under section 1446(f)(1).

The Treasury Department and the IRSintend to issue regulations applying rulessubstantially similar to § 1.1445–2(b), ex-cept § 1.1445–2(b)(2)(ii), for making acertification of non-foreign status for pur-poses of applying section 1446(f)(2). Sec-tion 1.1445–2(b) provides rules pursuantto which a transferor of a U.S. real prop-erty interest can provide a certification ofnon-foreign status to inform the transfereethat withholding is not required. Until reg-ulations on certifications of non-foreignstatus under section 1446(f) are issued, atransferor may furnish the certification de-

scribed in § 1.1445–2(b), as modified totake into account section 1446(f) to satisfythe requirements of section 1446(f)(2).Further, a transferor may submit a FormW–9 for this purpose if: (i) it includes thename and U.S. TIN of the transferor; (ii) itis signed and dated by the transferor; and(iii) the jurat has not been deleted. Atransferee may generally rely on a FormW–9 that it has previously received fromthe transferor if it meets these require-ments. Until further notice, the certifica-tion of non-foreign status or Form W–9the transferor provides to the transfereeshould not be furnished to the IRS. Seesection 1446(f)(2)(B)(ii). If the transfereehas actual knowledge that the certificationor Form W–9 is false, or the transferee re-ceives a notice (as described in section1445(d)) from a transferor’s agent or trans-feree’s agent that it is false, it may not berelied upon. See section 1446(f)(2)(B)(i).

.02 Transferee Receives a Certificationof No Realized Gain

The Treasury Department and the IRSintend to issue regulations providing that,if the transferee receives a certification,issued by the transferor (signed underpenalties of perjury and including a U.S.TIN, to the extent required under section4.01 of this notice), stating that the trans-fer of its partnership interest will not re-sult in realized gain, a transferee may gen-erally rely on the certification and berelieved from liability for withholding un-der section 1446(f). The transferee maynot rely on the certification and is notrelieved from withholding if it has knowl-edge that the certification is false underthe principles of § 1.1445–2(b)(4). Pend-ing the issuance of other guidance, thetransferor should not submit to the IRSForm 8288–B for this purpose. If gain isrealized in a transfer but not recognized asa result of a nonrecognition provision, thetransferee cannot apply this section 6.02.In this circumstance, see section 6.05 ofthis notice.

.03 Transferee Receives a Certificationthat Transferor Had Less than 25Percent Effectively Connected TaxableIncome in Three Prior Taxable Years

The Treasury Department and the IRSintend to issue regulations providing that

no withholding is required under section1446(f)(1) upon the transfer of a partner-ship interest if no earlier than 30 daysbefore the transfer the transferee receivesfrom the transferor a certification (signedunder penalties of perjury and including aU.S. TIN, to the extent required undersection 4.01 of this notice) that for thetransferor’s immediately prior taxableyear and the two taxable years that pre-cede it the transferor was a partner in thepartnership for the entirety of each ofthose years, and that the transferor’s allo-cable share of effectively connected tax-able income (ECTI) (as determined under§ 1.1446–2) for each of those taxableyears was less than 25 percent of thetransferor’s total distributive share of in-come for that year. For this purpose, thetransferor’s immediately prior taxableyear is the most recent taxable year of thetransferor that includes the partnershiptaxable year that ends with or within thetransferor’s taxable year and for whichboth a Form 8805, Foreign Partner’s In-formation Statement of Section 1446Withholding Tax, and a Schedule K-1(Form 1065) were due (including exten-sions) or filed (if earlier) by the time of thetransfer. In no event may a transferee relyon a certification provided prior to thetransferor’s receipt of the relevant Forms8805 and Schedules K-1 (Form 1065). Forpurposes of this rule, a transferor that hada distributive share of deductions and ex-penses attributable to the partnership’sU.S. trade or business but no ECTI allo-cated to it in a year must treat its allocableshare of ECTI for that year as zero. Atransferor that did not have a distributiveshare of income in any of its three imme-diately prior taxable years during whichthe partnership had effectively connectedincome cannot provide this certification.A transferee may not rely on the certifi-cation and is not relieved from withhold-ing if it has actual knowledge that thecertification is false. When a partnership isa transferee by reason of making a distri-bution, this section 6.03 does not apply.

.04 Transferee Receives a Certificationfrom Partnership of Less than 25Percent Effectively Connected GainUnder Section 864(c)(8)

The Treasury Department and the IRSintend to issue regulations providing that


no withholding is required under section1446(f)(1) upon the transfer of a partner-ship interest if the transferee is provided acertification, issued by the partnership andsigned under penalties of perjury no ear-lier than 30 days before the transfer, cer-tifying that if the partnership had sold allof its assets at their fair market value, theamount of gain that would have been ef-fectively connected with the conduct of atrade or business within the United Stateswould be less than 25 percent of the totalgain. For purposes of this section 6.04,effectively connected gain includes gaintreated as effectively connected with atrade or business in the United States un-der section 897. Principles similar to therules of § 1.1445–11T(d)(2)(ii) and (iii)apply to certifications furnished pursuantto this section 6.04. When a partnership isa transferee by reason of making a distri-bution, the transferee partnership must re-tain a record of the documentation reliedupon to determine the amount of gain (ifany), and the portion of the gain thatwould have been effectively connectedwith the conduct of a trade or business inthe United States (if any). This documen-tation must be retained for the period de-scribed in section 4.04 of this notice.

.05 Nonrecognition Transactions

The Treasury Department and the IRSintend to issue regulations providing thatno withholding is required under section1446(f)(1) upon the transfer of a partner-ship interest if the transferee receivesfrom the transferor a notice that satisfiesthe requirements of § 1.1445–2(d)(2),treating references to section 1445(a) asreferences to section 1446(f), and refer-ences to “U.S. real property interest” as“partnership interest”, except as providedin this section 6.05. A transferee shouldnot mail a copy of the transferor’s noticeto the IRS as described in § 1.1445–2(d)(2)(i)(B). The Treasury Departmentand the IRS are studying the appropriatetreatment of nonrecognition transactionsunder section 864(c)(8). Until guidanceproviding for the treatment of nonrecogni-tion transactions under section 864(c)(8) isissued, a transfer in which the transferor isnot required to recognize any gain or loss byreason of a nonrecognition provision of theCode (without regard to section 864(c)(8))will be eligible for the exception from with-

holding provided in this section 6.05. Whena partnership is a transferee by reason ofmaking a distribution in which no gain isrecognized, the transferee partnership is notrequired to withhold and the transferor is notrequired to provide a notice to the transfereepartnership.

.06 Rules for Agents

Section 1446(f)(2)(C) provides that therules of section 1445(d) shall apply to atransferor’s agent or transferee’s agentwith respect to any affidavit of nonforeignstatus in the same manner as such rulesapply with respect to the disposition of aUnited States real property interest undersuch section. The Treasury Department andthe IRS intend to issue regulations providingthat the principles of § 1.1445–4 apply foragents to fulfill their responsibilities withrespect to any certification provided for pur-poses of section 1446(f).

SECTION 7. DETERMINING THEAMOUNT OF PARTNERSHIPLIABILITIES INCLUDED INAMOUNT REALIZED

.01 In General

The Treasury Department and the IRSintend to issue regulations providing that atransferee may rely upon a certificationdescribed in section 7.02 or section 7.03of this notice to determine the amount ofliabilities of the partnership that are in-cluded in the amount realized on a transferfor purposes of section 1446(f), unless thetransferee has actual knowledge that thecertification is incorrect or unreliable.

.02 Transferor Certification

A transferor that is not a controllingpartner (as defined below) may provide tothe transferee a certification (signed underpenalties of perjury and including a U.S.TIN, to the extent required under section4.01 of this notice) that provides (i) theamount of the transferor’s share of part-nership liabilities reported on the mostrecently received Schedule K-1 (Form1065) from the partnership, for a partner-ship taxable year that closed no more than10 months before the date of transfer, and(ii) that the transferor does not have actualknowledge of events occurring after theSchedule K-1 (Form 1065) was issued

that would cause the amount of the trans-feror’s share of partnership liabilities atthe time of the transfer to be significantlydifferent than the amount shown on theSchedule K-1 (Form 1065). A differencein the amount of the transferor’s share ofpartnership liabilities of 25 percent or lessis not a significant difference. A transferoris a controlling partner for purposes of thissection 7.02 if the transferor (and relatedpersons) owned a 50 percent or greater in-terest in capital, profits, deductions or lossesin the 12 months before the transfer.

.03 Partnership Certification

The partnership may issue a certifica-tion, signed under penalties of perjury, noearlier than 30 days before the transfer,that provides (i) the amount of the trans-feror’s share of partnership liabilities,which may be the amount reported on themost recently prepared Schedule K-1(Form 1065), and (ii) that the partnershipdoes not have actual knowledge of eventsoccurring after its determination of theamount of the transferor’s share of part-nership liabilities that would cause theamount of the transferor’s share of part-nership liabilities at the time of the trans-fer to be significantly different than theamount shown on the certification pro-vided to the transferee. A difference in theamount of the transferor’s share of part-nership liabilities of 25 percent or less isnot a significant difference.

SECTION 8. WITHHOLDINGLIMITATION IN CERTAIN CASESRELATING TO THETRANFEROR’S SHARE OFPARTNERSHIP LIABILITIES

The Treasury Department and the IRSintend to issue regulations providing thatif the amount otherwise required to bewithheld under section 1446(f) exceedsthe amount realized less the decrease inthe transferor partner’s share of partner-ship liabilities, then the amount of with-holding required by section 1446(f)(1) isthe amount realized less the decrease inthe transferor partner’s share of partner-ship liabilities. In addition, if a transfereeis unable to determine the amount realizedbecause it does not have knowledge of thetransferor partner’s share of partnershipliabilities (and does not receive a certifi-


cation described in section 7.02 or section7.03 of this notice on which it can rely),then the amount of withholding requiredis the entire amount realized, determinedwithout regard to the decrease in the trans-feror partner’s share of partnership liabil-ities. In both cases, the amount of with-holding under section 1446(f) is generallythe amount that the transferor would, butfor the transferee remitting it as withhold-ing under section 1446(f), receive fromthe transferee. A transferee may rely onthis rule only if the transferee (1) is not thepartnership in which the transferor is apartner, and (2) is not a related person tothe transferor. A transferee applying thissection 8 must check the box on line 5c ofPart I of Form 8288 and include theamount withheld in the total reported online 6, Part I of Form 8288 and line 2 ofForm 8288–A.

SECTION 9. DETERMINATION OFAPPLICABILITY OF SECTION1446(f)(1) TO DISTRIBUTIONS BYPARTNERSHIPS

The Treasury Department and the IRSintend to issue regulations providing thatfor purposes of section 1446(f)(1), if apartnership makes a distribution to a part-ner, the partnership may rely on its booksand records, or on a certification receivedfrom the distributee partner, to determinewhether the distribution exceeds the part-ner’s basis in its partnership interest, pro-vided that the partnership does not knowor have reason to know that its books andrecords, or the distributee partner’s certi-fication, is incorrect and the partnershipretains a record of the documentation re-lied upon to establish the partner’s basisfor the period described in section 4.04 ofthis notice.

SECTION 10. COORDINATIONWITH SECTION 1445WITHHOLDING

The Treasury Department and the IRSintend to issue regulations providing that atransferee that is otherwise required towithhold under section 1445(e)(5) or§ 1.1445–11T(d)(1) with respect to theamount realized, as well as under section1446(f)(1), will be subject to the paymentand reporting requirements of section1445 only, and not section 1446(f)(1),

with respect to such amount. However,this rule applies only if the transferor hasnot obtained a withholding certificate thatis provided for in the last sentence of§ 1.1445–11T(d)(1). If the transferor hasobtained such a withholding certificate,the transferee must withhold the greater ofthe amounts required under section1445(e)(5) or section 1446(f)(1). Underthese circumstances, a transferee that hascomplied with the withholding require-ments under either section 1445(e)(5) orsection 1446(f)(1), as applicable, will bedeemed to satisfy the other withholdingrequirement.

SECTION 11. TIMING OF THEWITHHOLDING REQUIREMENTOF SECTION 1446(f)(4)

The Treasury Department and the IRSintend to issue regulations providing thatthe withholding requirements in section1446(f)(4) will not apply until regulationsor other guidance have been issued underthat section.

SECTION 12. TIEREDPARTNERSHIPS

The Treasury Department and the IRSintend to issue regulations clarifying thatif a transferor transfers an interest in apartnership (upper-tier partnership) thatowns an interest (directly or indirectly)in another partnership (lower-tier part-nership), and the lower-tier partnershipwould have effectively connected gainupon the deemed transaction describedin section 864(c)(8)(B)(i)(I) that wouldbe taken into account by the transferorat the time of the transfer of the interestin the upper-tier partnership, a portionof the gain recognized by the transferoris characterized as effectively connectedgain. These regulations will requirelower-tier partnerships to furnish infor-mation to their partners in order for theirindirect partners to be able to complywith sections 864(c)(8) and 1446(f). Seesection 6031(b); § 1.6031(b)–1T.

SECTION 13. REQUEST FORCOMMENTS AND CONTACTINFORMATION

The Treasury Department and the IRSrequest comments on the rules to be is-sued under section 1446(f). In addition to

requests for comments identified in thePTP Notice (which may also be applicableto non-PTP interests) and in section 2 ofthis notice, comments are requested con-cerning the following:

(i) rules for determining the amountrealized, including when the amount ofrequired withholding may exceed the pro-ceeds of a sale of a partnership interest;

(ii) procedures for reducing the amountrequired to be withheld, such as (a) limit-ing the withholding to the tax on the gainrecognized (if determinable) and (b) re-lieving identifiable historically complianttaxpayers from withholding;

(iii) credit and refund forms and pro-cesses, such as (a) forms of standardizeddocumentation that could be used bytransferors when claiming refunds orcredits for the withholding to facilitateIRS’s evaluation of such claims, or (b)providing for an expedited refund proce-dure if a taxpayer can demonstrate sub-stantial overwithholding;

(iv) rules implementing the require-ment for a partnership to withhold undersection 1446(f)(4) on distributions to atransferee that fails to withhold under sec-tion 1446(f)(1);

(v) rules that should apply under sec-tions 864(c)(8), 897, 1445, and 1446(f)when a partner disposes of an interest in apartnership that holds both U.S. real prop-erty interests and other property used inthe conduct of a trade or business in theUnited States; and

(vi) the calculation of the amount ofgain or loss from the sale, exchange, orother disposition of a partnership interestthat is effectively connected with the con-duct of a trade or business in the UnitedStates by operation of section 864(c)(8).

Comments must be submitted by June2, 2018. All comments received will beavailable for public inspection and copy-ing.

Written comments responding to thisnotice should be mailed to:

Internal Revenue ServiceCC:PA:LPD:PR (Notice 2018–29)Room 5203P.O. Box 7604Ben Franklin StationWashington, DC 20044

Please include “Notice 2018–29” on thecover page.


Submissions may be hand deliveredMonday through Friday between thehours of 8 a.m. and 4 p.m. to:

Internal Revenue ServiceCourier’s Desk1111 Constitution Ave., N.W.Washington, DC 20224Attn: CC:PA:LPD:PR(Notice 2018–29)Alternatively, taxpayers may submit

comments electronically to the follow-ing email address: [email protected]. Please include“Notice 2018 –29” in the subject line ofany electronic submission.

The principal authors of this notice areRonald M. Gootzeit of the Office of As-sociate Chief Counsel (International) andKevin I. Babitz of the Office of AssociateChief Counsel (Passthroughs and SpecialIndustries). However, other personnelfrom the Treasury Department and theIRS also participated in its development.For further information regarding this no-tice contact Mr. Gootzeit at 202.317.4953(not a toll-free number).

National SecurityConsiderations withRespect to Country-by-Country Reporting

Notice 2018–31

SECTION 1. OVERVIEW

This notice provides additional guidanceconcerning country-by-country (CbC) re-porting requirements under section 6038and § 1.6038–4. In consideration of thenational security interests of the UnitedStates, this notice addresses modifications tothe reporting requirement under § 1.6038–4with respect to certain U.S. multinationalenterprise (MNE) groups. The Departmentof the Treasury (Treasury Department) andthe Internal Revenue Service (IRS) intend toamend § 1.6038–4 to incorporate the guid-ance described in this notice. Prior to theissuance of these amendments, U.S. MNEgroups may rely on the provisions of section3 of this notice.


On December 23, 2015, a notice ofproposed rulemaking (REG–109822–15)relating to the furnishing of CbC reportsby certain United States persons undersection 6038 was published in the FederalRegister (80 FR 79795). The preambleto the proposed regulations requestedcomments concerning the need for a na-tional security exception to the CbC in-formation reporting requirement. OnJune 30, 2016, the Treasury Departmentand the IRS published final regulations(TD 9773) requiring annual CbC report-ing on Form 8975, Country-by-CountryReport (CbC report), by certain UnitedStates persons that are ultimate parententities of U.S. MNE groups that haveannual revenue for the preceding report-ing period of $850,000,000 or more. Thefinal regulations do not provide a gen-eral exception for information that mayrelate to national security, but the pre-amble to the final regulations stated thatthe Department of Defense would con-tinue to consider the national securityimplications of CbC reports in particularfact patterns. Based on subsequent con-sultations with the Department of De-fense, the Treasury Department and theIRS have determined that national secu-rity interests require modifications to thereporting requirements for U.S. MNEgroups that are specified national secu-rity contractors as defined in section3.01 of this notice and that have a re-porting requirement under § 1.6038 – 4.

SECTION 3. MODIFICATIONS TOCBC REPORTING FOR SPECIFIEDNATIONAL SECURITYCONTRACTORS

.01 Specified National SecurityContractor

For purposes of this notice, a U.S.MNE group is a “specified national secu-rity contractor” if more than 50 percent ofthe U.S. MNE group’s annual revenue, asdetermined in accordance with U.S. gen-erally accepted accounting principles, inthe preceding reporting period is attribut-able to contracts with the Department ofDefense or other U.S. government intelli-gence or security agencies.

.02 Modifications to Manner ofReporting on Form 8975

The Treasury Department and the IRSintend to amend § 1.6038–4 to providethe definition of specified national secu-rity contractor and modifications to themanner of reporting on Form 8975 forsuch U.S. MNE groups. The amended reg-ulations will provide that U.S. MNEgroups that have a Form 8975 filing obli-gation under § 1.6038–4 and are specifiednational security contractors may provideForm 8975 and Schedules A (Form 8975)in the following manner:

• Complete Form 8975 with a statementat the beginning of Part II, AdditionalInformation, that the U.S. MNE groupis a specified national security contrac-tor as defined in this notice;

• Complete one Schedule A (Form8975) for the Tax Jurisdiction of theUnited States with aggregated financialand employee information for the entireU.S. MNE group in Part I, Tax Jurisdic-tion Information, and only the ultimateparent entity’s information in Part II,Constituent Entity Information; and

• Complete one Schedule A (Form8975) for the Tax Jurisdiction “State-less” with zeroes in Part I, Tax Juris-diction Information, and only the ulti-mate parent entity’s information inPart II, Constituent Entity Information.

No other Schedule A (Form 8975) or ad-ditional information is required.

.03 Amended Form 8975 and SchedulesA (Form 8975)

A specified national security contractorthat has already filed Form 8975 andSchedules A (Form 8975) for prior report-ing periods may file an amended Federalincome tax return (following the instruc-tions for filing of amended Federal in-come tax returns) and attach an amendedForm 8975 and Schedules A (Form 8975)in the manner provided in section 3.02with the amended report checkbox onForm 8975 marked. Specified national se-curity contractors that do not electroni-cally file their amended Federal incometax returns should, in addition to filing anamended Federal income tax return withan amended Form 8975 and Schedules A(Form 8975), mail a copy of page 1 of


their amended Form 8975 to Ogden asprovided in the Instructions for Form8975 and Schedule A (Form 8975) underthe heading “Where to File.” In order toensure originally-filed CbC reports are notautomatically exchanged, specified na-tional security contractors that are filingamended Form 8975 and Schedules A(Form 8975) to supersede an already-filedForm 8975 and Schedules A (Form 8975)

should do so by April 20, 2018, if filing anamended Federal income tax return onpaper, or by May 25, 2018, if filing elec-tronically.

SECTION 4. EFFECTIVE DATE

The amendments to the regulations de-scribed in this notice shall apply to CbCreports and amended CbC reports filedafter March 30, 2018.

SECTION 5. DRAFTINGINFORMATION

The principal author of this notice isMelinda E. Harvey of the Office of Asso-ciate Chief Counsel (International). Forfurther information regarding this noticecontact Melinda E. Harvey (202) 317-6934 (not a toll-free number).


Part IV. Items of General InterestDeletions From Cumulative List of Organizations, Contributions to Which areDeductible Under Section 170 of the CodeAnnouncement 2018–07________________________________________________________________________________________Table of Contents

The Internal Revenue Service has revoked its determination that the organizations listed below qualify as organizations describedin sections 501(c)(3) and 170(c)(2) of the Internal Revenue Code of 1986.

Generally, the IRS will not disallow deductions for contributions made to a listed organization on or before the date ofannouncement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the IRS is not precluded fromdisallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c)(2) if the organizationhas not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocationof the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was awareof the activities or omissions of the organization that brought about this revocation.

If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizationsdescribed in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) wouldbegin on April 16, 2018 and would end on the date the court first determines the organization is not described in section 170(c)(2)as more particularly set for in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with ahusband and wife treated as one contributor. This benefit is not extended to any individual, in whole or in part, for the acts oromissions of the organization that were the basis for revocation.

NAME OF ORGANIZATIONEffective Date of

Revocation LOCATION

Louisiana Elite Athletics Academy 3/21/2014 New Iberia, LA

Lifeback Foundation 1/1/2013 Liberty Lake, WA

Federation of Chians Cultural Educational Fund, Inc. 1/1/2012 Astoria, NY

Port Susan Food & Farming Center 1/1/2014 Stanwood, WA

Lon Morris College 8/1/2013 Dallas, TX

Nightingale Adult Day Center 1/1/2014 Houston, TX

Partners in Charity, Inc. 9/2/2011 Crystal Lake, IL

Educate Today, Inc. 12/31/2014 Jacksonville, FL

Provided by Chivon 1/1/2014 New York, NY

Free Truth Enterprises 1/1/2014 Cincinnati, OH

Sichuan Commercial Club of North America 1/1/2015 Monrovia, CA

New Beginnings of Philadelphia Corporation 1/1/2014 Philadelphia, PA

Certain Non-GovernmentAttorneys Not Authorized toParticipate in Examinationsof Books and Witnesses asa Section 6103(n)Contractor

REG–132434–17

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains pro-posed regulations to amend regulations undersection 7602(a) of the Internal Revenue Coderelating to administrative proceedings. Currentregulations permit any person authorized toreceive returns and return information undersection 6103(n) and the regulations thereun-der to receive and review summoned books,papers, and other data, and, in the presenceand under the guidance of an IRS officer oremployee, participate fully in the interviewof a witness in a summons interview. Theseproposed regulations significantly narrowthe scope of the current regulations by ex-

cluding non-government attorneys from re-ceiving summoned books, papers, records,or other data or from participating in theinterview of a witness summoned by theIRS to provide testimony under oath, with alimited exception. These proposed regula-tions affect taxpayers involved in a federal taxexamination and other persons whose booksand records or testimony are sought to beexamined by the IRS under section 7602(a).

DATES: Written or electronic commentsand requests for a public hearing must bereceived by June 26, 2018.


ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–132434–17), room5203, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washington,D.C. 20044. Submissions may be hand-delivered Monday through Friday betweenthe hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–132434–17), Courier’sDesk, Internal Revenue Service, 1111 Con-stitution Avenue, NW, Washington D.C., orsent electronically via the Federal eRule-making Portal at www.regulations.gov(IRS-REG-132434-17).

FOR FURTHER INFORMATION CON-TACT: Concerning submission of com-ments, Regina Johnson, (202) 317-6901;concerning the proposed regulations, Wil-liam V. Spatz at (202) 317-5461 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

These proposed regulations amendProcedure and Administration Regula-tions (26 CFR part 301) under section7602(a) of the Internal Revenue Code re-lating to participation by persons de-scribed in section 6103(n) and Treas. Reg.§ 301.6103(n)–1(a) in receiving and re-viewing summoned books, papers, re-cords, or other data and in interviewing asummoned witness under oath. These pro-posed regulations narrow the scope of thecurrent regulations by providing that cer-tain non-government attorneys hired bythe IRS are not authorized to participate inan examination.

On June 18, 2014, temporary regula-tions (TD 9669) regarding participation ina summons interview of a person de-scribed in section 6103(n) were publishedin the Federal Register (79 FR 34625). Anotice of proposed rulemaking (REG–121542–14) cross-referencing the tempo-rary regulations was published in the Fed-eral Register (79 FR 34668) the sameday. No public hearing was requested orheld. The Internal Revenue Service re-ceived two comments on the proposedregulations. One comment recommendedthat the regulations be revised to removethe provision permitting a contractor toquestion a witness under oath or to ask awitness’s representative to clarify an ob-jection or assertion of privilege. The othercomment recommended that the proposed

and temporary regulations be withdrawn.After consideration of these comments,the proposed regulations were adopted infinal regulations (TD 9778) published inthe Federal Register (81 FR 45409) onJuly 14, 2016 (“Summons Interview Reg-ulations”). The only change from the tem-porary regulations in the final regulationswas to replace the word “examine” with“review” in the phrase describing whatcontractors may do with books, papers,records, or other data received by the IRSunder a summons. The preamble to thefinal regulations explains that this was in-tended to clarify that the regulations donot authorize contractors to direct auditsof a taxpayer’s return. See 81 FR 45410.

Description of Summons InterviewRegulations

The United States tax system reliesupon taxpayers’ self-assessment and re-porting of their tax liability. The expan-sive information-gathering authority thatCongress granted to the IRS under theCode includes the IRS’s broad examina-tion and summons authority, which allowsthe IRS to determine the accuracy of thatself-assessment. See United States v. Ar-thur Young & Co., 65 U.S. 805, 816(1984). Section 7602(a) provides that, forthe purpose of ascertaining the correctnessof any return, making a return where nonehas been made, or determining the liabil-ity of any person for any internal revenuetax, the IRS is authorized to examinebooks and records, issue summonses seek-ing documents and testimony, and taketestimony from witnesses under oath.These provisions have been part of therevenue laws since 1864.

Use of outside specialists is appropri-ate to assist the IRS in determining thecorrectness of the taxpayer’s self-assessedtax liability. The assistance of personsfrom outside the IRS, such as economists,engineers, appraisers, industry specialists,and actuaries, promotes fair and efficientadministration and enforcement of thelaws administered by the IRS by provid-ing specialized knowledge, skills, or abil-ities that the IRS officers or employeesassigned to the examination may not pos-sess. Section 6103(n) and Treas. Reg.§ 301.6103(n)–1(a) authorize the IRS todisclose returns and return information tothese contractors. The regulations under

§ 301.7602–1(b)(3) were issued to clarifythat persons described in section 6103(n)and Treas. Reg. § 301.6103(n)–1(a) mayreceive and review books, papers, records,or other data summoned by the IRS and,in the presence and under the guidance ofan IRS officer or employee, participatefully in the interview of a person who theIRS has summoned as a witness to pro-vide testimony under oath. See 81 FR45410.

Executive Order 13789, Notice 2017–38,and the Reports to the President

Executive Order 13789, issued onApril 21, 2017 (E.O. 13789, 82 FR19317), instructs the Secretary of theTreasury (the Secretary) to review all sig-nificant tax regulations issued on or afterJanuary 1, 2016, and to take appropriateaction to alleviate the burdens of regula-tions that (i) impose an undue financialburden on U.S. taxpayers; (ii) add unduecomplexity to the Federal tax laws; or (iii)exceed the statutory authority of the IRS.

E.O. 13789 further instructs the Secre-tary to submit to the President within 60days a report (First Report) that identifiesregulations that meet these criteria. Notice2017–38 (2017–30 I.R.B. 147 (July 24,2017)) included the Summons InterviewRegulations in a list of eight regulationsidentified by the Secretary in the FirstReport as meeting at least one of the firsttwo criteria specified in E.O. 13789. E.O.13789 further instructs the Secretary tosubmit to the President a second report(Second Report) that recommends specificactions to mitigate the burden imposed byregulations identified in the First Report.

In response to Notice 2017–38, theTreasury Department and the IRS re-ceived seven comments from professionaland business associations addressing theSummons Interview Regulations. All butone of these comments recommended re-moval of the regulations based primarilyon the commentators’ perception that theregulations create longer and less efficientexaminations by improperly delegatingauthority to outside law firms to conductexaminations. The one commenter thatdid not recommend removal of the regu-lations in their entirety requested removalof the provisions permitting a contractorto directly question a witness during asummons interview.


As explained in the preamble to thefinal Summons Interview Regulations, theregulations do not delegate authority toconduct examinations or summons inter-views. Rather, the regulations permit con-tractors authorized under section 6103(n)to review books and records and be pres-ent and ask questions during summonsinterviews, all under the supervision ofIRS officers and employees. See 81 FR45410-45412.

Comments in response to Notice2017–38 also raised concerns that the reg-ulations permit the IRS to hire law firmsto receive and review summoned informa-tion and fully participate in a summonsinterview on behalf of the government.

On October 16, 2017, the Secretarypublished the Second Report in the Fed-eral Register (82 FR 48013) stating thatthe Treasury Department and the IRS areconsidering proposing a prospectively ef-fective amendment to the Summons Inter-view Regulations to narrow their scope toprohibit non-government attorneys fromquestioning witnesses on behalf of theIRS, reviewing summoned records, orplaying a behind-the-scenes role in an ex-amination, such as consulting on IRS legalstrategy, with a limited exception.

The Code provides IRS officers andemployees with significant and broadpowers under its summons authority toquestion witnesses under oath and torequire the production of books and re-cords. The Summons Interview Regula-tions require the IRS to retain authorityover important decisions when section6103(n) contractors question witnesses,but there is a perceived risk that the IRSmay not be able to maintain full controlover the actions of a non-governmentattorney hired by the IRS when such anattorney, with the limited exception de-scribed below, questions witnesses. Theactions of the non-governmental attor-ney while questioning witnesses couldforeclose IRS officials from indepen-dently exercising their judgment. Man-aging an examination or summons inter-view is therefore best exercised solelyby government employees, includinggovernment attorneys, whose only dutyis to serve the public interest. Theseconcerns outweigh the countervailingneed for the IRS to use non-governmentattorneys, except in the limited circum-

stances set forth in proposed paragraph(b)(3)(ii). Treasury and the IRS remainconfident that the core functions ofquestioning witnesses and conductingexaminations are well within the exper-tise and ability of government attorneysand examination agents.

Explanation of Provisions

Proposed § 301.7602–1(b)(3)(i) retainsthe rule from the Summons InterviewRegulations authorizing section 6103(n)contractors to receive and review sum-moned information and fully participate inthe summons interview, including ques-tioning witnesses. However, proposed§ 301.7602–1(b)(3)(ii) is added to pro-hibit contractors who are attorneys, withthe limited exception described below,from participating in the administrativeprocess contemplated by section 7602(a).Under this prohibition, a non-governmentattorney, with the limited exception de-scribed below, may not review summonedbooks, papers, records or other data orquestion summoned witnesses on behalfof the IRS unless the attorney is hired bythe IRS for a permitted purpose.

As a limited exception to that prohibi-tion, proposed § 301.7602–1(b)(3)(ii) per-mits the IRS to hire a non-governmentattorney if the attorney is being hired forspecialized substantive subject matter ex-pertise in an area other than federal taxlaw. Specifically, proposed § 301.7602–1(b)(3)(ii) permits the IRS to hire an at-torney who has specialized knowledge offoreign, state, or local law, including taxlaw, or who is a specialist in non-tax sub-stantive law such as patent law, propertylaw, or environmental law. It would notpermit IRS to hire an attorney for non-substantive specialized knowledge, suchas civil litigation skills. Proposed§ 301.7602–1(b)(3)(ii) also permits theIRS to hire a contractor who may happento be an attorney, but who is hired forknowledge, skills, or abilities other thanproviding legal services as an attorney.Further, proposed § 301.7602–1(b)(3)(ii)permits the IRS to hire an entity that em-ploys or is owned by attorneys so long asthe expertise they are providing is notprohibited by proposed § 301.7602–1(b)(3)(ii).

These changes are proposed to be ef-fective for examinations begun and sum-

monses served by the IRS on or after thedate that these proposed regulations arepublished in the Federal Register.

Special Analyses

Certain IRS regulations, includingthese, are exempt from the requirementsof Executive Order 12866, as supple-mented and affirmed by Executive Order13563. Therefore, a regulatory assess-ment is not required. Because the pro-posed regulations would not impose acollection of information on small enti-ties, the Regulatory Flexibility Act (5U.S.C. chapter 6) does not apply. There-fore, a regulatory flexibility analysis isnot required. Pursuant to section 7805(f)of the Internal Revenue Code, the IRSwill submit the proposed regulations tothe Chief Counsel for Advocacy of theSmall Business Administration for com-ments about the regulations’ impact onsmall businesses.

Comments and Request for a PublicHearing

Before these proposed regulations areadopted as final, the IRS will consider anywritten (signed original and 8 copies) orelectronic comments timely submitted.The IRS requests comments on all aspectsof these proposed regulations. All com-ments will be available for public inspec-tion and copying. The IRS will schedule apublic meeting if one is requested, in writ-ing, by a person who submits written com-ments. If the IRS does schedule a publichearing, the IRS will publish notice of thedate, time, and place for the public hear-ing in the Federal Register.

Drafting Information

The principal author of these regula-tions is William V. Spatz of the Office ofAssociate Chief Counsel (Procedure andAdministration).

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 301 is pro-posed to be amended as follows:


PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 301.7602–1 is amended

by revising paragraphs(b)(3) and (d) toread as follows:

§ 301.7602–1 Examination of books andwitnesses.

* * * * *(b)* * *(3) Participation of a person described

in section 6103(n). (i) In general. Exceptas provided in paragraph (b)(3)(ii) of thissection, for purposes of this paragraph (b),a person authorized to receive returns orreturn information under section 6103(n)and § 301.6103(n)–1(a) of the regulationsmay receive and review books, papers,records, or other data produced in compli-ance with a summons, and, in the presenceand under the guidance of an IRS officer

or employee, participate fully in the inter-view of a witness summoned by the IRSto provide testimony under oath. Fullyparticipating in an interview includes, butis not limited to, receipt, review, and useof summoned books, papers, records, orother data; being present during summonsinterviews; and questioning the personproviding testimony under oath.

(ii) Exception for certain non-govern-mental attorneys. An attorney who is notan officer or employee of the UnitedStates may not be hired by the IRS toperform the activities described in para-graph (b)(3)(i) of this section unless theattorney is hired by the IRS as a specialistin foreign, state, or local law, includingtax law, or in non-tax substantive law thatis relevant to an issue in the examination,such as patent law, property law, or envi-ronmental law, or is hired for knowledge,skills, or abilities other than providing le-gal services as an attorney.* * * * *

(d) Applicability date. This section isapplicable after September 3, 1982, ex-cept for paragraphs (b)(1) and (2) of this

section which are applicable on and afterApril 1, 2005 and paragraph (b)(3) of thissection which applies to examinations be-gun or administrative summonses servedby the IRS on or after March 27, 2018.For rules under paragraphs (b)(1) and (2)of this section that are applicable to sum-monses issued on or after September 10,2002 or under paragraph (b)(3) of thissection that are applicable to summonsinterviews conducted on or after June 18,2014 and before July 14, 2016, see 26CFR 301.7602–1T (revised as of April 1,2016). For rules under paragraph (b)(3) ofthis section that are applicable to admin-istrative summonses served by the IRSbefore March 27, 2018, see 26 CFR301.7602–1 (revised as of April 1, 2017).

Kirsten Wielobob,Deputy Commissioner for Services and

Enforcement.

(Filed by the Office of the Federal Register on March 27,2018, 8:45 a.m., and published in the issue of the FederalRegister for March 28, 2018, 83 F.R. 13206)


Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds thatthe same principle also applies to B, theearlier ruling is amplified. (Compare withmodified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the newruling does more than restate the sub-

stance of a prior ruling, a combination ofterms is used. For example, modified andsuperseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that isself contained. In this case, the previouslypublished ruling is first modified and then,as modified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear in ma-terial published in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.ER—Employer.

ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.PRS—Partnership.

PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

Bulletin No. 2018–16 April 16, 2018i

Numerical Finding List1

Bulletin 2018–1 through 2018–16

Announcements:

2018-01, 2018-9 I.R.B. 3872018-02, 2018-9 I.R.B. 3872018-03, 2018-9 I.R.B. 3872018-04, 2018-10 I.R.B. 4012018-05, 2018-13 I.R.B. 4612018-07, 2018-16 I.R.B. 503

Notices:

2018-01, 2018-3 I.R.B. 2852018-02, 2018-2 I.R.B. 2812018-03, 2018-2 I.R.B. 2852018-05, 2018-6 I.R.B. 3412018-06, 2018-3 I.R.B. 3002018-07, 2018-4 I.R.B. 3172018-08, 2018-7 I.R.B. 3522018-10, 2018-8 I.R.B. 3592018-11, 2018-11 I.R.B. 4252018-12, 2018-12 I.R.B. 4412018-13, 2018-6 I.R.B. 3412018-14, 2018-7 I.R.B. 3532018-15, 2018-9 I.R.B. 3762018-16, 2018-10 I.R.B. 3902018-17, 2018-9 I.R.B. 3762018-18, 2018-12 I.R.B. 4432018-19, 2018-12 I.R.B. 4432018-20, 2018-12 I.R.B. 4442018-21, 2018-15 I.R.B. 4722018-22, 2018-14 I.R.B. 4642018-23, 2018-15 I.R.B. 4742018-25, 2018-15 I.R.B. 4762018-26, 2018-16 I.R.B. 4802018-28, 2018-16 I.R.B. 4922018-29, 2018-16 I.R.B. 4952018-31, 2018-16 I.R.B. 501

Proposed Regulations:

REG-119514-15, 2018-04 I.R.B. 325REG-129260-16, 2018-14 I.R.B. 470REG-118067-17, 2018-08 I.R.B. 360REG-132197-17, 2018-10 I.R.B. 404REG-132197-17, 2018-10 I.R.B. 404REG-132434-17, 2018-16 I.R.B. 503

Revenue Procedures:

2018-1, 2018-1 I.R.B. 12018-2, 2018-1 I.R.B. 1062018-3, 2018-1 I.R.B. 1302018-4, 2018-1 I.R.B. 1462018-5, 2018-1 I.R.B. 2442018-7, 2018-1 I.R.B. 2822018-8, 2018-2 I.R.B. 2862018-9, 2018-2 I.R.B. 290

Revenue Procedures:—Continued

2018-10, 2018-7 I.R.B. 3552018-11, 2018-5 I.R.B. 3342018-12, 2018-6 I.R.B. 3492018-13, 2018-7 I.R.B. 3562018-14, 2018-9 I.R.B. 3782018-15, 2018-9 I.R.B. 3792018-16, 2018-9 I.R.B. 3832018-17, 2018-9 I.R.B. 3842018-18, 2018-10 I.R.B. 3922018-19, 2018-14 I.R.B. 4662018-20, 2018-11 I.R.B. 4272018-21, 2018-14 I.R.B. 467

Revenue Rulings:

2018-01, 2018-2 I.R.B. 2752018-02, 2018-2 I.R.B. 2772018-03, 2018-2 I.R.B. 2782018-04, 2018-4 I.R.B. 3042018-05, 2018-6 I.R.B. 3392018-06, 2018-10 I.R.B. 3882018-07, 2018-13 I.R.B. 4452018-09, 2018-14 I.R.B. 4622018-10, 2018-16 I.R.B. 477

Treasury Decisions:

9829, 2018-04 I.R.B. 3089830, 2018-11 I.R.B. 4239831, 2018-13 I.R.B. 4599832, 2018-16 I.R.B. 477

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2017–27 through 2017–52 is in Internal Revenue Bulletin2017–52, dated December 27, 2017.

April 16, 2018 Bulletin No. 2018–16ii

Finding List of Current Actions onPreviously Published Items1

Bulletin 2018–1 through 2018–16

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2017–27 through 2017–52 is in Internal Revenue Bulletin2017–52, dated December 27, 2017.

Bulletin No. 2018–16 April 16, 2018iii

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

Bulletins are available at www.irs.gov/irb/.

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would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page(www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.NW, IR-6230 Washington, DC 20224.

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