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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.

INCOME TAX

REG–134016–15, page 205.Proposed regulations under section 355 of the Internal Reve-nue Code would clarify the application of the device prohibitionand the active business requirement of section 355. The pro-posed regulations would affect corporations that distribute thestock of controlled corporations, their shareholders, and theirsecurity holders.

Rev. Rul. 2016–18, page 194.Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes ofsections 382, 642, 1274, 1288, 7872, and other sections ofthe Code, tables set forth the rates for August 2016.

EMPLOYEE PLANS

Notice 2016–46, page 202.This notice sets forth updates on the corporate bond monthlyyield curve, the corresponding spot segment rates for July2016 used under § 417(e)(3)(D), the 24-month average seg-ment rates applicable for May 2016, and the 30-year Treasuryrates. These rates reflect the application of § 430(h)(2)(C)(iv),which was added by the Moving Ahead for Progress in the 21stCentury Act, Public Law 112–141 (MAP-21) and amended bysection 2003 of the Highway and Transportation Funding Act of2014 (HATFA).

ADMINISTRATIVE

Announcement 2016–25, page 205.This Announcement informs area residents affected by theSouthern California Gas Company’s natural gas leak at Aliso

Canyon that the IRS will not assert that amounts paid either onbehalf of or to the residents pursuant to the relocation plan areincludible in gross income.

T.D. 9778, page 196.Final regulations under section 7602 that clarify that personswith whom the IRS contracts for services described in section6103(n) may be included as persons to receive summonedrecords and, in the presence and under the guidance of an IRSemployee, participate fully in the interview of a summonedwitness.

Finding Lists begin on page ii.

Bulletin No. 2016–31August 1, 2016

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.

August 1, 2016 Bulletin No. 2016–31

Actions Relating toDecisions of the Tax Court

It is the policy of the Internal RevenueService to announce at an early datewhether it will follow the holdings in cer-tain cases. An Action on Decision is thedocument making such an announcement.An Action on Decision will be issued atthe discretion of the Service only on un-appealed issues decided adverse to thegovernment. Generally, an Action on De-cision is issued where its guidance wouldbe helpful to Service personnel workingwith the same or similar issues. Unlike aTreasury Regulation or a Revenue Ruling,an Action on Decision is not an affirma-tive statement of Service position. It is notintended to serve as public guidance andmay not be cited as precedent. Actions onDecisions shall be relied upon within theService only as conclusions applying thelaw to the facts in the particular case at thetime the Action on Decision was issued.Caution should be exercised in extendingthe recommendation of the Action on De-

cision to similar cases where the facts aredifferent. Moreover, the recommendationin the Action on Decision may be super-seded by new legislation, regulations, rul-ings, cases, or Actions on Decisions. Priorto 1991, the Service published acquies-cence or nonacquiescence only in certainregular Tax Court opinions. The Servicehas expanded its acquiescence program toinclude other civil tax cases where guid-ance is determined to be helpful. Accord-ingly, the Service now may acquiesce ornonacquiesce in the holdings of memoran-dum Tax Court opinions, as well as thoseof the United States District Courts,Claims Court, and Circuit Courts of Ap-peal. Regardless of the court deciding thecase, the recommendation of any Actionon Decision will be published in the In-ternal Revenue Bulletin. The recommen-dation in every Action on Decision will besummarized as acquiescence, acquies-cence in result only, or nonacquiescence.Both “acquiescence” and “acquiescencein result only” mean that the Service ac-cepts the holding of the court in a case andthat the Service will follow it in disposing

of cases with the same controlling facts.However, “acquiescence” indicates nei-ther approval nor disapproval of the rea-sons assigned by the court for its conclu-sions; whereas, “acquiescence in resultonly” indicates disagreement or concernwith some or all of those reasons. “Non-acquiescence” signifies that, although nofurther review was sought, the Servicedoes not agree with the holding of thecourt and, generally, will not follow thedecision in disposing of cases involvingother taxpayers. In reference to an opinionof a circuit court of appeals, a “nonacqui-escence” indicates that the Service willnot follow the holding on a nationwidebasis. However, the Service will recog-nize the precedential impact of the opin-ion on cases arising within the venue ofthe deciding circuit.

The Commissioner DOES ACQUIESCEin the following decision:

Voss v. Commissioner2

796 F.3d 1051 (9th Cir. 2015), rev’gSophy v. Commissioner, 138 T.C. 204(2012).

2Acquiescence relating to the holding that the section 163(h)(3) limitations apply on a per taxpayer basis, allowing each taxpayer to deduct interest on mortgage indebtedness of up to $1.1million.

Bulletin No. 2016–31 August 1, 2016193

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 1274—Determination of IssuePrice in the Case ofCertain Debt InstrumentsIssued for Property(Also Sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Rev. Rul. 2016–18

This revenue ruling provides variousprescribed rates for federal income tax

purposes for August 2016 (the currentmonth). Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current month forpurposes of section 1274(d) of the InternalRevenue Code. Table 2 contains the short-term, mid-term, and long-term adjustedapplicable federal rates (adjusted AFR)for the current month for purposes of sec-tion 1288(b). Table 3 sets forth the ad-justed federal long-term rate and the long-term tax-exempt rate described in section382(f). Table 4 contains the appropriate

percentages for determining the low-income housing credit described in sec-tion 42(b)(1) for buildings placed in ser-vice during the current month. However,under section 42(b)(2), the applicable per-centage for non-federally subsidized newbuildings placed in service after July 30,2008, shall not be less than 9%. Finally,Table 5 contains the federal rate for de-termining the present value of an annuity,an interest for life or for a term of years, ora remainder or a reversionary interest forpurposes of section 7520.

REV. RUL. 2016–18 TABLE 1Applicable Federal Rates (AFR) for August 2016

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR .56% .56% .56% .56%

110% AFR .62% .62% .62% .62%

120% AFR .67% .67% .67% .67%

130% AFR .73% .73% .73% .73%

Mid-term

AFR 1.18% 1.18% 1.18% 1.18%

110% AFR 1.30% 1.30% 1.30% 1.30%

120% AFR 1.43% 1.42% 1.42% 1.42%

130% AFR 1.54% 1.53% 1.53% 1.53%

150% AFR 1.78% 1.77% 1.77% 1.76%

175% AFR 2.08% 2.07% 2.06% 2.06%

Long-term

AFR 1.90% 1.89% 1.89% 1.88%

110% AFR 2.09% 2.08% 2.07% 2.07%

120% AFR 2.28% 2.27% 2.26% 2.26%

130% AFR 2.48% 2.46% 2.45% 2.45%

REV. RUL. 2016–18 TABLE 2Adjusted AFR for August 2016

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

adjusted AFR .56% .56% .56% .56%

Mid-term

adjusted AFR 1.03% 1.03% 1.03% 1.03%

Long-term

adjusted AFR 1.82% 1.81% 1.81% 1.80%


REV. RUL. 2016–18 TABLE 3Rates Under Section 382 for August 2016

Adjusted federal long-term rate for the current month 1.82%

Long-term tax-exempt rate for ownership changes during the current month (the highest of theadjusted federal long-term rates for the current month and the prior two months.)

2.15%

REV. RUL. 2016–18 TABLE 4Appropriate Percentages Under Section 42(b)(1) for August 2016

Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service afterJuly 30, 2008, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit 7.35%

Appropriate percentage for the 30% present value low-income housing credit 3.15%

REV. RUL. 2016–18 TABLE 5Rate Under Section 7520 for August 2016

Applicable federal rate for determining the present value of an annuity, an interest for life or aterm of years, or a remainder or reversionary interest

1.4%

Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof August 2016. See Rev. Rul. 2016-18, page 194.

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-termrates are set forth for the month of August 2016. SeeRev. Rul. 2016-18, page 194.

Section 382.—Limitationon Net Operating LossCarryforwards and CertainBuilt-In Losses FollowingOwnership Change

The adjusted applicable federal long-term rate isset forth for the month of August 2016. See Rev.Rul. 2016-18, page 194.

Section 412.—MinimumFunding Standards


Section 467.—CertainPayments for the Use ofProperty or Services


Section 468.—SpecialRules for Mining and SolidWaste Reclamation andClosing Costs


Section 482.—Allocation ofIncome and DeductionsAmong Taxpayers


Section 483.—Interest onCertain Deferred Payments


Section 642.—SpecialRules for Credits andDeductions


Section 807.—Rules forCertain Reserves


Section 846.—DiscountedUnpaid Losses Defined


Section 1288.—Treatmentof Original Issue Discounton Tax-Exempt Obligations



Section 7520.—ValuationTables


Section 7872.—Treatmentof Loans With Below-Market Interest Rates


26 CFR 301.7602–1 is amended to add new para-graph (b)(3) pertaining to summons interviews

T.D. 9778DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 301

Participation of a PersonDescribed in Section 6103(n)in a Summons InterviewUnder Section 7602(a)(2) ofthe Internal Revenue Code

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains finalregulations modifying regulations undersection 7602(a) of the Internal RevenueCode relating to administrative summonses.Specifically, these final regulations clarifythat persons with whom the IRS or the Of-fice of Chief Counsel (Chief Counsel) con-tracts for services described in section6103(n) and its implementing regulationsmay be included as persons designated toreceive summoned books, papers, records,or other data and, in the presence and underthe guidance of an IRS officer or employee,participate fully in the interview of a witnesssummoned by the IRS to provide testimonyunder oath. These regulations may affecttaxpayers, a taxpayer’s officers or employ-ees, and any third party who is served witha summons, as well as any other personentitled to notice of a summons.

DATES: Effective Date: These regula-tions are effective on July 14, 2016.

Applicability Date: For date of appli-cability, see § 301.7602–1(d).

FOR FURTHER INFORMATIONCONTACT: William V. Spatz at (202)317-5461 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

These final regulations amend Proce-dure and Administration Regulations (26CFR part 301) under section 7602 of theInternal Revenue Code. These final regu-lations clarify that persons described insection 6103(n) and Treas. Reg.§ 301.6103(n)–1(a) with whom the IRS orChief Counsel contracts for services –such as outside economists, engineers,consultants, or attorneys – may receivebooks, papers, records, or other data sum-moned by the IRS and, in the presence andunder the guidance of an IRS officer oremployee, participate fully in the inter-view of a person who the IRS has sum-moned as a witness to provide testimonyunder oath. On June 18, 2014, temporaryregulations (TD 9669) regarding partici-pation in a summons interview of a persondescribed in section 6103(n) were pub-lished in the Federal Register (79 FR34625). A notice of proposed rulemaking(REG–121542–14) cross-referencing thetemporary regulations was published inthe Federal Register (79 FR 34668) thesame day.

No public hearing was requested orheld. The Internal Revenue Service re-ceived two comments to the proposed reg-ulations. One comment recommends thatthe regulations be revised to remove theprovision permitting a contractor to ques-tion a witness under oath or to ask awitness’s representative to clarify an ob-jection or assertion of privilege. The othercomment recommends that the proposedand temporary regulations be withdrawn.After consideration of both comments, thesole amendment to the proposed regula-tions is to replace the word “examine”with “review” in the phrase describingwhat contractors may do with books, pa-pers, records, or other data received by theIRS under a summons. This revision clar-ifies that the regulations do not permitcontractors to direct examinations (that is,

audits) of a taxpayer’s return. Accord-ingly, the proposed regulations are ad-opted as amended by this Treasury deci-sion, and the corresponding temporaryregulations are removed.

Explanation and Summary ofComments

l. Potential for IRS Loss of Control OverInterview

One comment raises concerns abouthow the regulations would operate inpractice. This comment states that turningthe questioning of a witness over to athird-party contractor may cause the IRSofficer or employee in charge of the inter-view to lose control of the interview. Thecomment further states that having multi-ple persons “on the record” – an IRSofficer or employee, a contractor, a wit-ness, and a representative of the witness –may lead to a cluttered, incomprehensibletranscript of the interview. To addressthese concerns, the comment suggests thatinstead of having the contractor questionthe witness directly, the IRS officer oremployee should announce to the courtreporter that he or she needs a moment toconfer with the contractor, and after con-sultation ask to go back on the record toresume questioning.

These concerns are unfounded. Whenthe IRS hires a contractor to assist the IRSin reviewing books and records, analyzingdata, or receiving sworn testimony from asummoned witness, the IRS determineswhat information will be requested via asummons and who the summons will re-quest to testify. An IRS officer or em-ployee is present during the interview andremains in charge of the interview. A con-tractor asking questions does not presentany additional difficulties for the IRS of-ficer or employee in retaining control ofthat interview. Rather, the IRS officer oremployee in charge of the interview maybe in a better position to maintain controlof the overall interview if someone else isasking the questions. The IRS officer oremployee always has the ability to ask thecourt reporter to go off the record to con-fer with the contractor, if necessary.

Further, since 2002, § 301.7602–1(b)(1) has provided that a summonedwitness may be required to appear before“one or more” IRS officers or employees


to give testimony, including Chief Coun-sel attorneys. During this time, the IRSexperience with multiple persons askingquestions of summoned persons has notresulted in cluttered interview transcriptsas compared to those transcripts in whichonly one person from the IRS asks a wit-ness questions. Instead, the IRS has gen-erally found that allowing multiple IRSpersons to question a summoned witnessresults in more thorough and completecoverage of the appropriate interview top-ics. This is particularly true when a personasking questions for the IRS has thechance to focus questions on particularsubject areas with which the questioner ismost familiar. Furthermore, the IRS hasfound that significant value is also addedwhen multiple persons have the opportu-nity to ask questions to address gaps inprior questioning or clarify answers by awitness.

Accordingly, for the reasons discussedabove, the proposed regulations have notbeen amended as suggested by this com-ment.

2. Statutory Authority for an OutsideContractor to Question a SummonedWitness

Both comments state section 7602 doesnot authorize a contractor to question awitness during an IRS summons inter-view. Specifically, the comments statethat the regulations improperly delegate tothe contractor the Secretary’s authorityunder section 7602(a)(3) to take testimonyunder oath. According to one of the com-ments, because section 7701(a)(11)(B) de-fines the term “Secretary” to include adelegate, and section 7701(a)(12)(A) de-fines a “delegate” of the Secretary, in part,as a duly authorized “officer, employee oragency of the Treasury Department,” theregulations improperly attempt to treat a“third party agent” (a contractor undersection 6103(n)) as an “agency of theTreasury Department.” The other com-ment adds that this type of treatment of acontractor would be unprecedented undervarious IRS Delegation Orders and Inter-nal Revenue Manual provisions and that astatutory authorization is required for“such delegation.” Both comments statethat section 6306, regarding the IRS’s useof private collection agencies to perform

certain tax collection functions, was anexample of such authorization by statute.

Further, both comments questionwhether under the regulations inherentlygovernmental functions will continue tobe performed by IRS officers or employ-ees, and state that reference to this in thepreamble to the temporary regulationswas included to allay potential concernsabout improper delegation. The commentalso asserts that taking testimony by ask-ing questions, reviewing books or papers,and analyzing other data, as allowed bythe regulations, is inherently governmen-tal. In support of this, the comment statesthat when contractors ask questions thattaxpayers are compelled to answer underoath, the contractor is deciding what in-formation must be produced by the tax-payer. The comment asserts that it is clearthat questioning a witness under oath andwith compulsion, or directing counsel fora witness to clarify an objection or asser-tion of privilege, in an extra-judicial gov-ernmental investigation such as an IRSaudit is inherently governmental. Thiscomment states that the fact that a con-tractor’s participation in a summons inter-view will only be done in the presence andunder the guidance of an IRS officer oremployee suggests that participation in asummons interview is inherently govern-mental.

These comments state further that thereference to § 301.7602–2(c)(1)(i)(B) and(c)(1)(ii) Example 2 in the preamble to thetemporary regulations means that the reg-ulations are delegating authority undersection 7602(a) to the contractor.

The IRS has broad information gather-ing authority under section 7602(a). SeeUnited States v. Arthur Young & Co., 465U.S. 805, 816 (1984). Section 7602(a)provides that, for the purpose of ascertain-ing the correctness of any return, makinga return where none has been made, ordetermining the liability of any person forany internal revenue tax, the Secretary(and the IRS as the Secretary’s delegate)is authorized to examine books and re-cords, issue summonses seeking docu-ments and testimony, and take testimonyfrom witnesses under oath. When a con-tractor assists the IRS in gathering factsby reviewing books and records or askingquestions of a witness during a summonsinterview, the contractor is merely assist-

ing in carrying out the powers granted tothe Secretary. Nothing in section 7602(a)prohibits participation by a contractor in asummons interview, nor does it prescribeprocedures that the IRS must follow dur-ing the summons interview.

Moreover, nothing in these regulationsdelegates authority under section 7602(a).The IRS’s authority to engage contractorsto assist with fact gathering has alwaysexisted under section 7602, and the com-ments acknowledge this authority. For in-stance, the comment addressing the im-pact of multiple questioners on the clarityof the transcribed record of the summonsinterview suggests as an alternative thatthe contractor provide the IRS with thequestions to ask. Given that the commen-tators acknowledge that the IRS is autho-rized to have a contractor communicatethe question off the record to the IRS, itseems implausible that having the con-tractor actually ask the question on therecord, in the presence of and under thesupervision of the IRS, is substantivelydifferent.

Section 6306, dealing with qualifiedtax collection contracts, does not supportthe contention in the comments that con-gressional action is required to engage acontractor to perform services for the IRS.Long before section 6306 was added tothe Code in 2004, the IRS collection func-tion had contracted with private persons(for example, locksmiths, tow truck driv-ers, storage facilities, property appraisersand auctioneers) for tax administrationpurposes to facilitate IRS seizures ofproperty by levy and IRS sales of suchproperty, pursuant to the statutory powersconferred on the Secretary by sections6301, 6331, and 6335. In fiscal years 1996and 1997, without making any modifica-tions to the Code, Congress earmarked $13million for the IRS to test the use of privatedebt collection companies. In 2004, ratherthan say it was authorizing the IRS to enterinto collection agreements with outside con-tractors to assist the IRS in collecting taxdebts, Congress instead said in section6306(a) that “[n]othing in any provision oflaw shall be construed to prevent the Secre-tary from entering into a qualified tax col-lection contract.” Therefore, section 6306was a congressional clarification of theIRS’s existing authority to engage outsidecontractors to assist with collection. Accord-


ingly, contrary to the comments’ assertions,no explicit congressional authorization wasneeded to permit the IRS to hire outsidecontractors to assist in the collection oftaxes, a role outside contractors had beenplaying for years prior to enactment of sec-tion 6306. As a result, enactment of section6306 does not support the contention in thecomments that having a contractor ask ques-tions during a summons interview is incon-sistent with authority under section 7602.

The comments are also incorrect thatthe regulations include an improper dele-gation to perform certain examinationfunctions. One comment assumes that therole of questioner must be accompaniedby the power to compel the witness toanswer under oath. That is not accurate.While the contractor will ask questionsduring a summons interview, an IRS offi-cer or employee will determine whetherthe questions must be answered by pursu-ing judicial enforcement. Only if an IRSofficer or employee pursues the matter byseeking judicial enforcement can a wit-ness be compelled to answer the questionasked by the contractor. Similarly, a con-tractor can ask counsel for a witness toclarify an objection or assertion of privi-lege, but only an IRS officer or employeecan pursue resolution of the claim of priv-ilege by seeking judicial enforcement.Accordingly, the comment incorrectlyequates the act of compelling a witness toanswer a question asked with the mere actof asking the question. Further, the Fed-eral Activities Inventory Reform Act of1998, Public Law 105–270 (31 U.S.C.501 Note (FAIR Act)), defines “inherentlygovernmental function” as “a functionthat is so intimately related to the publicinterest as to require performance by Fed-eral Government employees.” FAIR Actsection 5(2)(A). Inherently governmentalfunctions include activities that require“the exercise of discretion in applyingFederal Government authority,” including“the interpretation and execution of thelaws of the United States so as . . . to bindthe United States to take or not to takesome action.” Id. at section 5(2)(B)(i).However, Congress further specified inFAIR Act section 5(2)(C)(i) that an inher-ently governmental function does not nor-mally include “gathering information foror providing advice, opinions, recommen-

dations, or ideas to Federal Governmentofficials.”

In 2009, Congress further directed theOffice of Management and Budget(OMB) to refine the definition of “inher-ently governmental function” applicableto all agencies and provide guidance toimprove internal agency management offunctions that are inherently governmen-tal. Public Law. 110–417, section 321.Toward these ends, and after notice andcomment, OMB’s Office of Federal Pro-curement Policy (OFPP) issued its PolicyLetter 11–01 on September 12, 2011. 76FR 56227. The Policy Letter clarified the“discretion” that a contractor may appro-priately exercise as the circumstances“where the contractor does not have theauthority to decide on the overall courseof action, but is tasked to develop optionsor implement a course of action, and theagency official has the ability to overridethe contractor’s action.” Id., at section5–1(a)(1)(ii)(B), 76 FR at 56237. The Pol-icy Letter further explains that “contrac-tors routinely, and properly, exercise dis-cretion in performing functions for theFederal Government when, providing ad-vice, opinions, or recommended actions,emphasizing certain conclusions, and . . .deciding what techniques and proceduresto employ, whether and whom to consult,[and] what research alternatives to exploregiven the scope of the contract.” Id., 76FR at 56237–38. The Policy Letter recog-nizes that in addition to functions that areinherently governmental, there are alsomany functions closely associated withinherently governmental functions. ThePolicy Letter cautions that when a contrac-tor function is closely associated with aninherently governmental one, the agencyshould “limit or guide the contractor’s exer-cise of discretion,” by “establishing in ad-vance a process for subjecting the contrac-tor’s discretionary decisions and conduct tomeaningful oversight and, whenever neces-sary, final approval by an agency official.”Id., at section 5–2(a)(4)(ii) and Appendix C,section(1)(ii), 76 FR at 56238–39 and56241–42.

Accordingly, the preamble to the tem-porary regulations described the inher-ently governmental functions associatedwith section 7602(a) as including the ul-timate decisions to issue a summons,whom to summon, what information must

be produced or who will be required toprovide testimony, as well as issuing thesummons. The final decision to issue anIRS summons may “bind the UnitedStates to take or not take some action,”within the meaning of the FAIR Act sec-tion 5(2)(B)(i). For example, serving anIRS summons pursuant to sections7609(f) and (g) requires prior court ap-proval, and IRS summonses issued for anexamination purpose to third parties gen-erally expose the United States to a courtaction the taxpayer may commence toquash a summons under section7609(b)(2) or obligate the IRS to pay cer-tain search and reproduction costs in-curred by the summoned witness undersection 7610. The final decision to includeor not include certain document or testi-mony requests in an IRS summons alsolimits going forward what information ordocuments the IRS may ask a court torequire a witness to produce in any futuresummons enforcement proceeding regard-ing that summons. The final decision toseek judicial enforcement of an IRS sum-mons pursuant to sections 7402(b) and7604 is also an inherently governmentalfunction. These inherently governmentalactions associated with issuing or seekingto enforce an IRS summons will continueto be performed by IRS officers and em-ployees under these regulations.

As discussed above, pursuant to theseregulations, contractors may assist IRS of-ficers and employees when the IRS hassummoned a witness, by receiving andreviewing books, papers, records, or otherdata produced in compliance with a sum-mons and, in the presence and under theguidance of an IRS officer or employee,ask questions in the interview of the sum-moned witness. The contractor’s assis-tance to the IRS officer or employee pre-siding over a summons interview isclosely associated with the inherentlygovernmental summons functions per-formed by an IRS employee, within themeaning of OFPP Policy Letter 11–01,without crossing the line into the perfor-mance of inherently governmental func-tions. A contractor participating fully in asummons interview will not, for example,be permitted to bind or otherwise disad-vantage the IRS by making any unauthor-ized, premature statements that the sum-moned party has produced all of the


summoned information or has fully an-swered all of the questions asked by theIRS in the interview. Similarly, the con-tractor has no authority to commit the IRSto pursue judicial enforcement of a sum-mons for any documents or answers toquestions that a witness failed to provide.

The contractor’s “discretion” in pursu-ing any potentially relevant line of ques-tioning in a summons interview is permis-sible under Policy Letter 11–01 standardsbecause the contractor will not have theauthority to decide on the overall courseof action adopted by the IRS with respectto the summons interview. The IRS officeror employee presiding over IRS receipt ofdocuments and evidence from the sum-moned witness will also be present for anyquestioning pursued by the contractor andwill have the ability to override the con-tractor’s actions, if necessary and appro-priate. Rather than proving that a contrac-tor would be performing an inherentlygovernmental function under these regu-lations, the additional safeguards the com-ment points to – that a contractor’s partic-ipation in a summons interview will onlybe done in the presence and under theguidance of an IRS officer or employee –show the IRS heeded the instructions ofPolicy Letter 11–01 to establish a processfor subjecting the contractor’s discretion-ary decisions and conduct under these reg-ulations to meaningful IRS oversight.

The comments incorrectly interpretthe purpose of the reference in the pre-amble of the temporary regulations to§ 301.7602–2(c)(1)(i)(B) and (c)(1)(ii)Example 2. The purpose of referencingthat regulation, which implements theprovisions of section 7602(c) (requiringnotice of third party contacts) in the caseof a section 6103(n) contractor, was in-stead intended to highlight the fact thatthe IRS had been allowing contractors,under the guidance of an IRS officer oremployee, to hold discussions and askquestions of witnesses for many yearsand that the proposed regulations werein the nature of a clarification. The pur-pose was not to demonstrate that the IRSis delegating authority to contractors asthe comments incorrectly state.

Therefore, for the reasons above, Trea-sury and the IRS disagree with the com-ments’ assertion that the regulations im-properly delegate authority under section

7602. The statute permits section 6103(n)contractors to receive books, papers, re-cords, or other data summoned by the IRSand, in the presence and under the guid-ance of an IRS officer or employee, par-ticipate fully in the interview of a personwho the IRS has summoned as a witnessto provide testimony under oath.

3. Confidential Taxpayer InformationProvided to a Contractor

One of the comments suggests that theproposed regulations raise issues relatingto confidentiality of taxpayer information.First, the comment states that the regula-tions place confidential taxpayer informa-tion unnecessarily at risk of unauthorizeddisclosure under section 6103. Accordingto the comment, this is because placingtaxpayer information in the hands of out-side contractors under section 6103(n) in-creases the risk of misuse and unlawfuldisclosure because outside contractors arenot subject to the same rules of conduct asIRS employees and may have loyalties toother clients besides the IRS and the pub-lic fisc.

Next, the comment questions whetherthe disclosure of confidential informationto outside counsel is permitted under sec-tion 6103(n). The comment explains thatin 1990 the phrase “other services” wasadded to section 6103(n) to cover outsideexperts, in part, because these experts areobjective and the IRS is not. The commentcontinues that outside counsel, as an ad-vocate, is not objective and, therefore, isnot covered by the phrase “other services”in section 6103(n).

Finally, the comment states that theIRS has failed to demonstrate that govern-ment employees cannot effectively andmore appropriately perform the functioncontemplated by the temporary regula-tions.

These comments do not address theclarification made by the proposed andtemporary regulations (that is, that section6103(n) contractors may be present atsummons interviews, ask questions at asummons interview, and review sum-moned books, papers, records, or otherdata). Further, the comments do not ex-plain why the proposed regulations placeconfidential taxpayer information at riskof unauthorized disclosure at all. Rather,

these comments address disclosure to ex-perts under section 6103(n), which is notthe subject of these regulations. There-fore, the comments do not address issuesunder the regulations.

Regardless of the relevance of the com-ments to these regulations, the IRS takesprotection of the confidentiality of tax-payer information seriously and will notdisclose taxpayer information unless au-thorized under the law. “Return informa-tion” and “taxpayer return information”are in general broadly defined in sections6103(b)(2) and (b)(3), as including infor-mation concerning a taxpayer’s identity,the nature, source or amount of his in-come, payments, receipts, deductions, ex-emptions, credits, assets, liabilities, networth, tax liabilities, tax withheld, owed,or paid, whether the taxpayer is being orwill be examined or investigated, to theextent such information is filed with orfurnished to the IRS by or on behalf of thetaxpayer to whom such information re-lates.

Section 6103(n) authorizes the IRS todisclose confidential taxpayer informationto persons who provide services to theIRS, including outside experts. The legis-lative history of section 6103(n) indicatesthat Congress added the words “other ser-vices” in 1990 to ensure that persons whoprovide services to the IRS, such as expertwitnesses, and to whom the IRS disclosesreturns and return information pursuant tosection 6103, would clearly be subject tothe same confidentiality standards andpenalties for unauthorized disclosure asare IRS employees.

In sections 7431, 7213, and 7213A,Congress created parallel civil and crimi-nal deterrents for outside contractors (tothose applicable to IRS employees) topunish any misuse of taxpayer return in-formation through unlawful inspection orunlawful disclosure of such information.Specifically, section 7431(a)(2) authorizestaxpayers to file the same type of civilaction for damages against an IRS con-tractor for knowingly, or by reason ofnegligence, making any unauthorized in-spection or unauthorized disclosure oftaxpayer return information, as may befiled against the United States for thesame type of conduct committed by anyofficer or employee of the United States.Similarly, in sections 7213(a)(1) and


7213A(a)(1)(B) (by references to personsdescribed in section 6103(n)), Congressmade it a crime punishable by up to fiveyears or up to one year of imprisonment,plus a fine, for an IRS contractor to will-fully make an unauthorized disclosure oran unauthorized inspection of taxpayer re-turn information, respectively. If an IRSofficer or employee is convicted under sec-tions 7213 or 7213A, such person will alsobe dismissed or discharged from Federalemployment. Before any conviction, if theIRS determines that a contractor has vio-lated its taxpayer return information disclo-sure obligations under its contract, the IRSmay also suspend or terminate the contract,pursuant to § 301.6103(n)–1(e)(4)(iii).Moreover, § 301.6103(n)–1(e)(4) providesfurther safeguards against unlawful disclo-sures or inspections of taxpayer return infor-mation by contractors.

Finally, it is unclear what connectionthe comment is making between protect-ing confidentiality of taxpayer informa-tion and objectivity of the section 6103(n)contractor. First, there is no obligationunder section 6103(n) or the regulationsthereunder for a contractor under section6103(n) to be objective. Second, whethera contractor is objective has no relation towhether the contractor has an obligationto protect confidential taxpayer informa-tion from disclosure or the contractor’sability to do so.

For these reasons, the Treasury and theIRS disagree that the regulations placeconfidential taxpayer information unnec-essarily at risk of unauthorized disclosure.

4. Potential Litigation Costs to Enforcethe Regulation

One comment states that including aprovision to allow an IRS contractor in asummons interview to question a witnessunder oath in the final regulations wouldresult in time-consuming and costly liti-gation for the IRS, taxpayers, third partywitnesses, and the courts, and that thesecosts would outweigh the potential bene-fits to the IRS from a contractor directlyquestioning a summoned witness underoath. The comment does not indicate howit came to this conclusion, nor does itprovide any support for its concern.

The IRS makes the decision of whetherto issue a summons or to pursue summons

enforcement actions on a case-by-case ba-sis, analyzing each situation in the light ofits particular facts and weighing the de-sired information against the tax liabilityinvolved, the time and expense of obtain-ing the records, and the adverse effect onvoluntary compliance by others if the en-forcement actions are not successful. Acontractor’s participation in a summonsinterview does not factor into the IRS’sdecision to request the Department of Jus-tice to institute enforcement action or leadthe taxpayer ultimately to file a deficiencyaction in the United States Tax Court or arefund claim in a United States DistrictCourt or the Court of Federal Claims. Asa practical matter, the IRS will likely hirecontractors to assist in the factual devel-opment of an examination only in signif-icant cases. These are cases in which liti-gation over summons enforcement isalready likely to occur if the IRS exami-nation team faces resistance from taxpay-ers to providing requested information.Accordingly, there should not be consid-erably more litigation as a result of thesefinal regulations. Moreover, when there issummons enforcement litigation, it will bebecause the IRS has determined that suchlitigation is in the best interest of tax ad-ministration.

5. Procedural Concerns with theIssuance of the Temporary Regulations

One of the comments states that thetemporary regulations were not issued inaccordance with the Administrative Pro-cedure Act (APA). The temporary regula-tions were promulgated in full compliancewith the APA. In addition, this documentfinalizes proposed regulations containedin a notice of proposed rulemaking thatcross-referenced the temporary regula-tions. The proposed regulations were alsopromulgated in full compliance with theAPA. Because these final regulationsadopt the proposed regulations, it is notnecessary to address concerns regardingprocedural issues relating to promulgationof the temporary regulations.

Special Analyses

It has been determined that this Trea-sury Decision is not a significant regula-tory action as defined in Executive Order12866, as supplemented by Executive Or-

der 13563. Therefore, a regulatory assess-ment is not required. The IRS has deter-mined that sections 553(b) and (d) of theAdministrative Procedure Act (5 U.S.C.chapter 5) do not apply to these regula-tions and because the regulations do notimpose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the InternalRevenue Code, the notice of proposedrulemaking preceding these regulationswas submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comments on its impact onsmall business, and no comments werereceived.

Drafting Information

The principal author of these final reg-ulations is William V. Spatz of the Officeof Associate Chief Counsel (Procedureand Administration). However, other per-sonnel from the Treasury Department andthe IRS participated in their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 301 isamended 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 * * *

§ 301.7602–1T [Removed]

Par. 2. Section 301.7602–1T is re-moved.

Par. 3. Section 301.7602–1 is amendedby adding paragraph (b)(3) and revisingparagraph (d) to read as follows:

§ 301.7602–1 Examination of books andwitnesses.

* * * * *(b)(3) Participation of a person de-

scribed in section 6103(n). For purposesof this paragraph (b), a person autho-rized to receive returns or return infor-mation under section 6103(n) and


§ 301.6103(n)–1(a) of the regulationsmay receive and review books, papers,records, or other data produced in com-pliance with a summons and, in the pres-ence and under the guidance of an IRSofficer or employee, participate fully inthe interview of a witness summoned bythe IRS to provide testimony under oath.Fully participating in an interview in-cludes, but is not limited to, receipt,review, and use of summoned books,papers, records, or other data; beingpresent during summons interviews;questioning the person providing testi-mony under oath; and asking a sum-moned person’s representative to clarifyan objection or assertion of privilege.

* * * * *

(d) Applicability date. This section isapplicable after September 3, 1982, ex-cept for paragraphs (b)(1) and (2) of thissection which are applicable on and af-ter April 1, 2005 and paragraph (b)(3) ofthis section which applies to summonsinterviews conducted on or after July14, 2016. For rules under paragraphs(b)(1) and (2) that are applicable to sum-monses issued on or after September 10,2002 or under paragraph (b)(3) that areapplicable to summons interviews con-ducted on or after June 18, 2014, see 26CFR 301.7602–1T (revised as of April1, 2016).

John Dalrymple,Deputy Commissioner for

Services and Enforcement.Approved: May 27, 2016.

Mark J. Mazur,Assistant Secretary of

the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on July 12, 2016,4:15 p.m., and published in the issue of the Federal Registerfor July 14, 2016, 81 F.R. 45409)


Part III. Administrative, Procedural, and MiscellaneousUpdate for WeightedAverage Interest Rates,Yield Curves, and SegmentRatesNotice 2016–46

This notice provides guidance on thecorporate bond monthly yield curve, thecorresponding spot segment rates used un-der § 417(e)(3), and the 24-month averagesegment rates under § 430(h)(2) of theInternal Revenue Code. In addition, thisnotice provides guidance as to the interestrate on 30-year Treasury securities under§ 417(e)(3)(A)(ii)(II) as in effect for planyears beginning before 2008 and the 30-year Treasury weighted average rate un-der § 431(c)(6)(E)(ii)(I).

YIELD CURVE AND SEGMENTRATES

Generally, except for certain plans un-der sections 104 and 105 of the PensionProtection Act of 2006 and CSEC plansunder § 414(y), § 430 of the Code speci-fies the minimum funding requirements

that apply to single-employer plans pursu-ant to § 412. Section 430(h)(2) specifies theinterest rates that must be used to determinea plan’s target normal cost and funding tar-get. Under this provision, present value isgenerally determined using three 24-monthaverage interest rates (“segment rates”),each of which applies to cash flows duringspecified periods. To the extent providedunder § 430(h)(2)(C)(iv), these segmentrates are adjusted by the applicable percent-age of the 25-year average segment rates forthe period ending September 30 of the yearpreceding the calendar year in which theplan year begins.1 However, an electionmay be made under § 430(h)(2)(D)(ii) touse the monthly yield curve in place of thesegment rates.

Notice 2007–81, 2007–44 I.R.B. 899,provides guidelines for determining themonthly corporate bond yield curve, andthe 24-month average corporate bond seg-ment rates used to compute the target nor-mal cost and the funding target. Consis-tent with the methodology specified inNotice 2007–81, the monthly corporatebond yield curve derived from June 2016data is in Table I at the end of this notice.

The spot first, second, and third segmentrates for the month of June 2016 are,respectively, 1.44, 3.46, and 4.48.

The 24-month average segment ratesdetermined under § 430(h)(2)(C)(i)through (iii) must be adjusted pursuantto § 430(h)(2)(C)(iv) to be within theapplicable minimum and maximum per-centages of the corresponding 25-yearaverage segment rates. For plan yearsbeginning before 2018, the applicableminimum percentage is 90% and theapplicable maximum percentage is110%. The 25-year average segmentrates for plan years beginning in 2014,2015, and 2016 were published in No-tice 2013–58, 2013– 40 I.R.B. 294, No-tice 2014 –50, 2014 – 40 I.R.B. 590, andNotice 2015– 61, 2015–39 I.R.B. 408,respectively.

24-MONTH AVERAGE CORPORATEBOND SEGMENT RATES

The three 24-month average corporatebond segment rates applicable for July2016 without adjustment for the 25-yearaverage segment rate limits are as follows:

ApplicableMonth

FirstSegment

SecondSegment

ThirdSegment

July 2016 1.51 3.86 4.86

Based on § 430(h)(2)(C)(iv), the 24-month averages applicable for July 2016 adjusted to be within the applicable minimum andmaximum percentages of the corresponding 25-year average segment rates, are as follows:

For PlanYears

BeginningIn

Adjusted 24-Month AverageSegment Rates

ApplicableMonth

FirstSegment

SecondSegment

ThirdSegment

2015 July 2016 4.72 6.11 6.81

2016 July 2016 4.43 5.91 6.65

1Pursuant to § 433(h)(3)(A), the 3rd segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amountof the full funding limitation under § 433(c)(7)(C)).


30-YEAR TREASURY SECURITIESINTEREST RATES

Generally for plan years beginning af-ter 2007, § 431 specifies the minimumfunding requirements that apply to mul-tiemployer plans pursuant to § 412. Sec-tion 431(c)(6)(B) specifies a minimumamount for the full-funding limitationdescribed in § 431(c)(6)(A), based onthe plan’s current liability. Section

431(c)(6)(E)(ii)(I) provides that the inter-est rate used to calculate current liabilityfor this purpose must be no more than 5percent above and no more than 10 per-cent below the weighted average of therates of interest on 30-year Treasury se-curities during the four-year period endingon the last day before the beginning of theplan year. Notice 88–73, 1988–2 C.B.383, provides guidelines for determiningthe weighted average interest rate. The

rate of interest on 30-year Treasury secu-rities for June 2016 is 2.45 percent. TheService determined this rate as the aver-age of the daily determinations of yield onthe 30-year Treasury bond maturing inMay 2046. For plan years beginning in themonth shown below, the weighted aver-age of the rates of interest on 30-yearTreasury securities and the permissiblerange of rate used to calculate currentliability are as follows:

For Plan YearsBeginning in

30-YearTreasuryWeightedAverage

Permissible Range

Month Year 90% to 105%

July 2016 3.03 2.72 3.18

MINIMUM PRESENT VALUESEGMENT RATES

In general, the applicable interest ratesunder § 417(e)(3)(D) are segment rates

computed without regard to a 24-monthaverage. Notice 2007–81 provides guide-lines for determining the minimum pres-ent value segment rates. Pursuant to thatnotice, the minimum present value seg-

ment rates determined for June 2016 areas follows:

FirstSegment

SecondSegment

ThirdSegment

1.44 3.46 4.48

DRAFTING INFORMATION

The principal author of this notice isTom Morgan of the Office of the Associ-

ate Chief Counsel (Tax Exempt and Gov-ernment Entities). However, other person-nel from the IRS participated in thedevelopment of this guidance. For further

information regarding this notice, contactMr. Morgan at 202-317-6700 or TonyMontanaro at 202-317-8698 (not toll-freenumbers).


Table IMonthly Yield Curve for June 2016

Derived from June 2016 Data

Maturity Yield Maturity Yield Maturity Yield Maturity Yield Maturity Yield

0.5 0.76 20.5 4.19 40.5 4.51 60.5 4.63 80.5 4.68

1.0 0.98 21.0 4.20 41.0 4.51 61.0 4.63 81.0 4.69

1.5 1.18 21.5 4.22 41.5 4.52 61.5 4.63 81.5 4.69

2.0 1.34 22.0 4.23 42.0 4.52 62.0 4.63 82.0 4.69

2.5 1.46 22.5 4.24 42.5 4.53 62.5 4.63 82.5 4.69

3.0 1.56 23.0 4.25 43.0 4.53 63.0 4.64 83.0 4.69

3.5 1.64 23.5 4.27 43.5 4.53 63.5 4.64 83.5 4.69

4.0 1.73 24.0 4.28 44.0 4.54 64.0 4.64 84.0 4.69

4.5 1.83 24.5 4.29 44.5 4.54 64.5 4.64 84.5 4.69

5.0 1.93 25.0 4.30 45.0 4.55 65.0 4.64 85.0 4.69

5.5 2.05 25.5 4.31 45.5 4.55 65.5 4.64 85.5 4.69

6.0 2.18 26.0 4.32 46.0 4.55 66.0 4.65 86.0 4.70

6.5 2.31 26.5 4.33 46.5 4.56 66.5 4.65 86.5 4.70

7.0 2.45 27.0 4.34 47.0 4.56 67.0 4.65 87.0 4.70

7.5 2.59 27.5 4.35 47.5 4.56 67.5 4.65 87.5 4.70

8.0 2.73 28.0 4.35 48.0 4.56 68.0 4.65 88.0 4.70

8.5 2.86 28.5 4.36 48.5 4.57 68.5 4.65 88.5 4.70

9.0 2.98 29.0 4.37 49.0 4.57 69.0 4.65 89.0 4.70

9.5 3.10 29.5 4.38 49.5 4.57 69.5 4.66 89.5 4.70

10.0 3.21 30.0 4.39 50.0 4.58 70.0 4.66 90.0 4.70

10.5 3.31 30.5 4.40 50.5 4.58 70.5 4.66 90.5 4.70

11.0 3.41 31.0 4.40 51.0 4.58 71.0 4.66 91.0 4.70

11.5 3.50 31.5 4.41 51.5 4.58 71.5 4.66 91.5 4.71

12.0 3.58 32.0 4.42 52.0 4.59 72.0 4.66 92.0 4.71

12.5 3.65 32.5 4.42 52.5 4.59 72.5 4.66 92.5 4.71

13.0 3.71 33.0 4.43 53.0 4.59 73.0 4.67 93.0 4.71

13.5 3.77 33.5 4.44 53.5 4.60 73.5 4.67 93.5 4.71

14.0 3.83 34.0 4.44 54.0 4.60 74.0 4.67 94.0 4.71

14.5 3.87 34.5 4.45 54.5 4.60 74.5 4.67 94.5 4.71

15.0 3.92 35.0 4.46 55.0 4.60 75.0 4.67 95.0 4.71

15.5 3.95 35.5 4.46 55.5 4.60 75.5 4.67 95.5 4.71

16.0 3.99 36.0 4.47 56.0 4.61 76.0 4.67 96.0 4.71

16.5 4.02 36.5 4.47 56.5 4.61 76.5 4.67 96.5 4.71

17.0 4.05 37.0 4.48 57.0 4.61 77.0 4.68 97.0 4.71

17.5 4.07 37.5 4.48 57.5 4.61 77.5 4.68 97.5 4.71

18.0 4.10 38.0 4.49 58.0 4.62 78.0 4.68 98.0 4.72

18.5 4.12 38.5 4.49 58.5 4.62 78.5 4.68 98.5 4.72

19.0 4.14 39.0 4.50 59.0 4.62 79.0 4.68 99.0 4.72

19.5 4.15 39.5 4.50 59.5 4.62 79.5 4.68 99.5 4.72

20.0 4.17 40.0 4.51 60.0 4.62 80.0 4.68 100.0 4.72


Part IV. Items of General InterestTax Treatment of PaymentsMade on Behalf of orReimbursements Receivedby Residents Affected bythe Southern California GasCompany Natural Gas LeakAnnouncement 2016–25

On October 23, 2015, Southern Califor-nia Gas Company (SoCal Gas) discovered anatural gas leak at the Aliso Canyon storagefield, which was sealed on February 18,2016. Residents of nearby areas complainedof numerous adverse health effects as a re-sult of the gas leak, including nausea, dizzi-ness, vomiting, shortness of breath, andheadaches. Because the gas leak caused sig-nificant symptoms for area residents, theLos Angeles County Department of PublicHealth directed SoCal Gas to offer free,temporary relocation to affected residents.Pursuant to the directive and subsequentcourt orders, SoCal Gas is required to eitherpay on behalf of or reimburse affected res-idents for certain relocation and cleaningexpenses incurred generally for the periodbeginning November 19, 2015 through May31, 2016. These expenses include:

• Hotel expenses, including meal reim-bursement ($45 per day for an individ-ual age 18 and older; $35 per day or$25 per day for a child based on age),mileage reimbursement, parking ex-penses, pet boarding fees, internetfees, electric vehicle charging fees,and laundry fees;

• Expenses of staying with friends orfamily at the rate of $150 per day, andmileage reimbursement;

• Expenses of renting another home fora lease term (including a lease termextending beyond May 31, 2016) asapproved by SoCal Gas, including ex-penses of housewares, appliances, petfees, furniture rental, utility fees, andmoving expenses;

• Mileage allowances or alternativetransportation for a resident whosechild or children attended the relocatedarea schools until the date the residentexited the relocation program. If, how-ever, a resident enrolled a child in a

school outside of the affected area, So-Cal Gas must pay the mileage allow-ance until the child no longer attendsthe reenrolled school or the schoolyear ends, whichever occurs first;

• Expenses of cleaning the interior of anaffected individual’s home prior to re-turning home according to protocolsestablished by the Los AngelesCounty Department of Public Health;

• Air filtration and purification expenses;• Expenses of cleaning residue from the

exterior of an affected individual’shome, outdoor fixtures, and exteriorfurniture and appliances;

• Expenses of a vehicle detailing treat-ment; and

• Other expenses not specifically de-scribed in the relocation plan based onSoCal Gas’s evaluation of the expenses.

Questions have been raised concerningthe taxability of these expenses paid onbehalf of or as reimbursements to affectedarea residents. Existing guidance does notspecifically address these questions.

The IRS will not assert that an affectedarea resident must include these paymentsor reimbursements in gross income. How-ever, family and friends who receivedpayments under the relocation plan forhousing affected area residents must in-clude these payments in gross income un-der § 61 of the Internal Revenue Code,unless these amounts are properly exclud-able from gross income under § 280A(relating to the exclusion for rental in-come from a taxpayer’s residence for lessthan 15 days during the taxable year).

For further information regarding thisannouncement, contact Sheldon Iskow ofthe Office of Associate Chief Counsel (In-come Tax & Accounting) at (202) 317-4718 (not a toll-free number).

Notice of ProposedRulemakingGuidance Under Section 355Concerning Device andActive Trade or Business

REG–134016–15

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposedrulemaking.

SUMMARY: This document containsproposed regulations under section 355 ofthe Internal Revenue Code (Code). Theproposed regulations would clarify the ap-plication of the device prohibition and theactive business requirement of section355. The proposed regulations would af-fect corporations that distribute the stockof controlled corporations, their share-holders, and their security holders.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by October 13, 2016.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–134016–15), Room5203, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washington,DC 20224. Submissions may be hand-delivered Monday through Friday betweenthe hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–134016–15), Courier’sDesk, Internal Revenue Service, 1111 Con-stitution Avenue, NW. Washington, DC20224. Submissions may also be sent elec-tronically via the Federal eRulemaking Por-tal at http://www.regulations.gov (IRSREG–134016–15).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Stephanie D. Floyd or RussellP. Subin at (202) 317–6848; concerningsubmissions of comments and/or requestsfor a public hearing, Regina Johnson at(202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

A. Introduction

This document contains proposed reg-ulations that would amend 26 CFR part 1under section 355 of the Code. The pro-posed regulations would provide addi-tional guidance regarding the device pro-hibition of section 355(a)(1)(B) andprovide a minimum threshold for the as-sets of one or more active trades or busi-nesses, within the meaning of section355(a)(1)(C) and (b), of the distributing


corporation and each controlled corpora-tion (in each case, within the meaning ofsection 355(a)(1)(A)).

This Background section of the pream-ble (1) summarizes the requirements ofsection 355, (2) discusses the develop-ment of current law and IRS practice un-der section 355 and the regulations there-under, and (3) explains the reasons for theproposed regulations.

B. Section 355 Requirements

Generally, if a corporation distributesproperty with respect to its stock to ashareholder, section 301(b) provides thatthe amount of the distribution is equal tothe amount of money and the fair marketvalue of other property received. Undersection 301(c), this amount is treated as(1) the receipt by the shareholder of adividend to the extent of the corporation’searnings and profits, (2) the recovery ofthe shareholder’s basis in the stock, and/or(3) gain from the sale or exchange ofproperty. The corporation recognizes gainunder section 311(b) to the extent the fairmarket value of the property distributedexceeds the corporation’s adjusted basisin the property. However, section 355 pro-vides that, under certain circumstances, acorporation (Distributing) may distributestock and securities in a corporation itcontrols within the meaning of section368(c) (Controlled) to its shareholders andsecurity holders without causing eitherDistributing or its shareholders or securityholders to recognize income, gain, or losson the distribution.

Section 355 has numerous require-ments for a distribution to be tax-free toDistributing and its shareholders. Some ofthese requirements are intended to preventa distribution from being used inappropri-ately to avoid shareholder-level tax ondividend income. As examples, section355(a)(1)(B) provides that the transactionmust not be used principally as a devicefor the distribution of the earnings andprofits of Distributing or Controlled orboth (a device), and section 355(a)(1)(C)and (b) require Distributing and Con-trolled each to be engaged, immediatelyafter the distribution, in the active conductof a trade or business (an active business).To qualify for this purpose, an active busi-ness must have been actively conducted

throughout the five-year period ending onthe date of the distribution and must nothave been acquired, directly or indirectly,within this period in a transaction inwhich gain or loss was recognized. Sec-tion 355(b)(2)(B), (C), and (D).

Distributions of the stock of Controlledgenerally take three different forms: (1) Apro rata distribution to Distributing’sshareholders of the stock of Controlled (aspin-off), (2) a distribution of the stock ofControlled in redemption of Distributingstock (a split-off), or (3) a liquidating dis-tribution in which Distributing distributesthe stock of more than one Controlled,either pro rata or non-pro rata (in eithercase, a split-up).

C. Development of Current Law and IRSPractice

1. Early Legislation

The earliest predecessor of section 355was section 202(b) of the Revenue Act of1918, ch. 18 (40 Stat. 1057, 1060), whichpermitted a tax-free exchange by a share-holder of stock in a corporation for stockin another corporation in connection witha reorganization. This section did not al-low tax-free spin-offs. In section 203(c) ofthe Revenue Act of 1924, ch. 234 (43 Stat.253, 256), Congress amended this provi-sion to allow tax-free spin-offs pursuant toplans of reorganization.

Taxpayers tried to use this provision toavoid the dividend provisions of the Codeby having Distributing contribute surpluscash or liquid assets to a newly formedControlled and distribute the Controlledstock to its shareholders. See, e.g., Greg-ory v. Helvering, 293 U.S. 465 (1935).Congress reacted to this abuse by elimi-nating the spin-off provision in the Reve-nue Act of 1934, ch. 277 (48 Stat. 680).The legislative history states that the pro-vision had provided a method for corpo-rations “to pay what would otherwise betaxable dividends, without any taxes upontheir shareholders” and that “this means ofavoidance should be ended.” H.R. Rep.No. 73–704, at 14 (1934).

In section 317(a) of the Revenue Act of1951, ch. 521 (65 Stat. 452, 493), Con-gress re-authorized spin-offs pursuant toplans of reorganization:

. . . unless it appears that (A) anycorporation which is a party to suchreorganization was not intended tocontinue the active conduct of atrade or business after such reorga-nization, or (B) the corporationwhose stock is distributed was usedprincipally as a device for the dis-tribution of earnings and profits tothe shareholders of any corporationa party to the reorganization.

During debate on this legislation, Sen-ator Hubert Humphrey expressed con-cerns about spin-offs and argued thatthese restrictions were necessary. See,e.g., 97 Cong. Rec. 11812 (1951) (“Unlessstrictly safeguarded, [a spin-off provision]can result in a loophole that will enable acorporation to distribute earnings andprofits to stockholders without payment ofthe usual income taxes.”); Id. (“Clauses(A) and (B) of section 317 provide veryimportant safeguards against the taxavoidance which would be possible if sec-tion 317 were adopted without clauses (A)and (B).”). See also 96 Cong. Rec. 13686(1950) (“It was the viewpoint of the com-mittee that [a spin-off] must be strictly abona fide transaction, not colorable, notfor the purpose of evading the tax.”).

Until 1954, a spin-off, split-off, orsplit-up was eligible for tax-free treatmentonly if Distributing transferred property toControlled as part of a reorganization. In1954, Congress adopted section 355 aspart of the 1954 Code. As a significantinnovation, section 355 allowed spin-offs,split-offs, and split-ups to be tax-freewithout a reorganization, and this innova-tion remains in effect.

2. Case Law

Courts applying section 355 (or a pre-decessor provision) have generally placedgreater emphasis on the substance of thetransaction than on compliance with thetechnical requirements of the statute.Thus, some courts have determined that atransaction does not qualify under section355 (or a predecessor provision), notwith-standing strict statutory compliance, onthe basis that the substance of the trans-action was inconsistent with congressio-nal intent. For example, in Gregory, theSupreme Court held that compliance withthe letter of the spin-off statute was insuf-ficient if the transaction was otherwise


indistinguishable from a dividend. TheSupreme Court observed that the transac-tion in Gregory was “an operation havingno business or corporate purpose–a meredevice which put on the form of a corpo-rate reorganization as a disguise for con-cealing its real character.” Gregory, 293U.S. at 469.

Other courts have found that a transac-tion does qualify under section 355 de-spite its failure to comply with all of thestatutory requirements. For example, inCommissioner v. Gordon, 382 F.2d 499(2d Cir.1967), rev’d on other grounds,391 U.S. 83 (1968), the court addressedsection 355(b)(2)(C). Pursuant to that sec-tion, a corporation is treated as engaged inthe active conduct of a trade or businessonly if the trade or business was not ac-quired in a transaction in which gain orloss was recognized in whole or in partwithin the five-year period ending on thedate of the distribution. The court con-cluded that, despite the fact that gain wasrecognized when Distributing transferreda trade or business to Controlled, section355(b)(2)(C) was not violated becausenew assets were not brought within thecombined corporate shells of Distributingand Controlled. The court stated:

We think that the draftsmen ofSection 355 intended these subsec-tions to apply only to the bringing ofnew assets within the combined cor-porate shells of the distributing andthe controlled corporations. There-fore, it is irrelevant in this casewhether gain was recognized on theintercorporate transfer.

Id. at 507.

3. Device Regulations

a. 1955 Regulations

Regulations under section 355 of the1954 Code were issued in 1955 (the 1955regulations). TD 6152 (20 FR 8875).These regulations included § 1.355–2(b)(3), which provided the following:

In determining whether a transac-tion was used principally as a devicefor the distribution of the earningsand profits of the distributing corpo-ration or of the controlled corpora-tion or both, consideration will begiven to all of the facts and circum-stances of the transaction. In partic-

ular, consideration will be given tothe nature, kind and amount of theassets of both corporations (and cor-porations controlled by them) im-mediately after the transaction. Thefact that at the time of the transac-tion substantially all of the assets ofeach of the corporations involvedare and have been used in the activeconduct of trades or businesseswhich meet the requirements of sec-tion 355(b) will be considered evi-dence that the transaction was notused principally as such a device.

b. 1989 Regulations

Additional regulations under section355 were issued in 1989 (the 1989 regu-lations). TD 8238 (54 FR 283). Theseregulations provide substantially moreguidance than the 1955 regulations to de-termine whether a distribution was a de-vice. Section 1.355–2(d)(1) provides that“a tax-free distribution of the stock of acontrolled corporation presents a potentialfor tax avoidance by facilitating the avoid-ance of the dividend provisions of theCode through the subsequent sale or ex-change of stock of one corporation and theretention of the stock of another corpora-tion. A device can include a transactionthat effects a recovery of basis.”

This provision clarifies that, although thedevice prohibition primarily targets the con-version of dividend income to capital gain, adevice can still exist if there would be arecovery of stock basis in lieu of receipt ofdividend income and even if the sharehold-er’s federal income tax rates on dividendincome and capital gain are the same.

The 1989 regulations also expand onthe statement in the 1955 regulations thatthe device analysis takes into account allof the facts and circumstances by specify-ing three factors that are evidence of de-vice and three factors that are evidence ofnondevice. One of the device factors, de-scribed in § 1.355–2(d)(2)(iv)(B), ex-pands the statement in the 1955 regula-tions that consideration will be given tothe nature, kind, and amount of the assetsof Distributing and Controlled immedi-ately after the transaction (the nature anduse of assets device factor). First, thisprovision provides that “[t]he existence ofassets that are not used in a trade or busi-ness that satisfies the requirements of sec-

tion 355(b) is evidence of device. For thispurpose, assets that are not used in a tradeor business that satisfies the requirementsof section 355(b) include, but are not lim-ited to, cash and other liquid assets thatare not related to the reasonable needs ofa business satisfying such section.” Thisprovision continues to provide that “[t]hestrength of the evidence of device dependson all the facts and circumstances, includ-ing, but not limited to, the ratio for eachcorporation of the value of assets not usedin a trade or business that satisfies therequirements of section 355(b) to thevalue of its business that satisfies suchrequirements.” Finally, the provision pro-vides that “[a] difference in the ratio de-scribed in the preceding sentence for thedistributing and controlled corporation isordinarily not evidence of device if thedistribution is not pro rata among theshareholders of the distributing corpora-tion and such difference is attributable to aneed to equalize the value of the stockdistributed and the value of the stock orsecurities exchanged by the distributees.”

Although this provision describes thefactor, it provides little guidance relatingto the quality or quantity of the relevantassets and no guidance on how the factorrelates to other device factors or nonde-vice factors.

The nondevice factors in § 1.355–2(d)(3)are the presence of a corporate businesspurpose, the fact that the stock of Distribut-ing is publicly traded and widely held, andthe fact that the distribution is made to cer-tain domestic corporate shareholders.

Section 1.355–2(d)(5) specifies certaindistributions that ordinarily are not con-sidered a device, notwithstanding thepresence of device factors, because theyordinarily do not present the potential forfederal income tax avoidance in convert-ing dividend income to capital gain orusing stock basis to reduce shareholder-level tax. These transactions include a dis-tribution that, in the absence of section355, with respect to each distributee,would be a redemption to which sale-or-exchange treatment applies.

4. Active Business RequirementRegulations

Section 1.355–3 provides rules for de-termining whether Distributing and Con-


trolled satisfy the active business require-ment. Proposed regulations issued in2007 would amend § 1.355–3. REG–123365–03 (72 FR 26012). The TreasuryDepartment and the IRS continue to studythe active business requirement issuesconsidered in those proposed regulations.

5. Administration of the Active BusinessRequirement

The fact that Distributing’s or Con-trolled’s qualifying active business issmall in relation to all the assets of Dis-tributing or Controlled is generally recog-nized as a device factor. A separate issueis whether a relatively small active busi-ness satisfies the active business require-ment. In Rev. Rul. 73–44 (1973–1 CB182), Controlled’s active business repre-sented a “substantial portion” but less thanhalf of the value of its total assets. Therevenue ruling states:

There is no requirement in section355(b) that a specific percentage ofthe corporation’s assets be devotedto the active conduct of a trade orbusiness. In the instant case, there-fore, it is not controlling for pur-poses of the active business require-ment that the active business assetsof the controlled corporation, Y,represent less than half of the valueof the controlled corporation imme-diately after the distribution.

The IRS has taken the position, in letterrulings and internal memoranda, that anactive business can satisfy the active busi-ness requirement regardless of its absoluteor relative size. However, no publishedguidance issued by the Treasury Depart-ment or the IRS takes this position.

In 1996, the Treasury Department andthe IRS issued Rev. Proc. 96–43 (1996–2CB 330), which provided that (1) the IRSordinarily would not issue a letter rulingor determination letter on whether a dis-tribution was described in section355(a)(1) if the gross assets of the activebusiness would have a fair market valuethat was less than five percent of the totalfair market value of the gross assets of thecorporation directly conducting the activebusiness, but (2) a ruling might be issued“if it can be established that, based uponall relevant facts and circumstances, thetrades or businesses are not de minimiscompared with the other assets or activi-

ties of the corporation and its subsidiar-ies.” This no-rule provision was elimi-nated in Rev. Proc. 2003–48 (2003–2 CB86). Since that time, until the publicationof Rev. Proc. 2015–43 (2015–40 IRB467) and Notice 2015–59 (2015–40 IRB459), discussed in Part D.1 of this Back-ground section of the preamble, the IRSmaintained its position that the relativesize of an active business is a device fac-tor rather than a section 355(b) require-ment. The IRS issued numerous letter rul-ings on section 355 distributionsinvolving active businesses that were deminimis in value compared to the otherassets of Distributing or Controlled.

The IRS interpreted section 355(b) inthis manner in part as a result of the me-chanical difficulties of satisfying the ac-tive business requirement. These mechan-ical difficulties are discussed further inPart D.3.c of this Background section ofthe preamble.

As an example, until section 355(b)was amended by section 202 of the TaxIncrease Prevention and ReconciliationAct of 2005, Public Law 109–222 (120Stat. 345, 348); Division A, section 410 ofthe Tax Relief and Health Care Act of2006, Public Law 109–432 (120 Stat.2922, 2963); and section 4(b) of the TaxTechnical Corrections Act of 2007, PublicLaw 110–172 (121 Stat. 2473, 2476) (theSeparate Affiliated Group, or SAG,Amendments), if, immediately after thedistribution, a corporation did not directlyengage in an active business, it could sat-isfy the active business requirement onlyif substantially all of its assets consisted ofstock and securities of corporations it con-trolled that were engaged in an activebusiness (the holding company rule). Seesection 355(b) prior to the SAG Amend-ments. Because of the limited applicationof the holding company rule, corporationsoften had to undergo burdensome restruc-turings prior to section 355 distributionsmerely to satisfy the active business re-quirement. See, e.g., H.R. Rep. No. 109–304, at 54 (2005).

As another example, until 1992, noguidance provided that Distributing orControlled could rely on activities con-ducted by a partnership to satisfy the ac-tive business requirement, even if Distrib-uting or Controlled held a substantialinterest in the partnership and participated

in its management. This situation changedafter the Treasury Department and the IRSpublished revenue rulings permitting thisreliance. See Rev. Rul. 92–17 (1992–1 CB142) amplified by Rev. Rul. 2002–49(2002–2 CB 288) and modified by Rev.Rul. 2007–42 (2007–2 CB 44).

6. Administration of the DeviceProhibition

The device prohibition continues to beimportant even though the federal incometax rates for dividend income and capitalgain may be identical for many taxpayers.In Rev. Proc. 2003–48, the Treasury De-partment and the IRS announced that theIRS would no longer rule on whether atransaction is a device or has a businesspurpose. As a result, since the publicationof Rev. Proc. 2003–48, the IRS has madeonly limited inquiries as to device andbusiness purpose issues raised in requestsfor private letter rulings under section355.

D. Reasons for Proposed Regulations

1. Rev. Proc. 2015–43 and Notice2015–59

As explained in Part C of this Back-ground section of the preamble, section355 and its predecessors have had a longand contentious history. Despite the safe-guards in the Code and regulations, andthe courts’ interpretations in accordancewith congressionally-articulated statutorypurposes, taxpayers have attempted to usesection 355 distributions in ways that theTreasury Department and the IRS havedetermined to be inconsistent with thepurpose of section 355.

On September 14, 2015, the TreasuryDepartment and the IRS issued Rev. Proc.2015–43 and Notice 2015–59 in responseto concerns relating to distributions in-volving relatively small active businesses,substantial amounts of investment assets,and regulated investment companies(RICs) or real estate investment trusts(REITs). The notice states that the Trea-sury Department and the IRS are studyingissues under sections 337(d) and 355 re-lating to these transactions and that thesetransactions may present evidence of de-vice, lack an adequate business purpose ora qualifying active business, or circum-


vent the purposes of Code provisions in-tended to implement repeal of the GeneralUtilities doctrine, a doctrine under whicha corporation generally could distributeappreciated property to its shareholderswithout recognizing gain (General Utili-ties repeal). The notice invited commentswith respect to these issues and one com-menter (the commenter) submitted a com-ment letter.

The proposed regulations in this noticeof proposed rulemaking would address thedevice prohibition (including the businesspurpose requirement as it pertains to de-vice) and the active business requirement.Congress has addressed certain other is-sues discussed in Notice 2015–59. Seesection 311 of the Protecting Americansfrom Tax Hikes Act of 2015, Public Law114–113 (129 Stat. 3040, 3090), in whichCongress added section 355(h), whichgenerally denies section 355 treatment ifeither Distributing or Controlled is a REITunless both are REITs immediately afterthe distribution, and section 856(c)(8),which generally provides that Distributingor Controlled will not be eligible to makea REIT election within the ten-year periodafter a section 355 distribution. Separatetemporary and proposed regulations ad-dress transactions that avoid the applica-tion of sections 355(h) and 856(c)(8). SeeREG–126452–15 (Certain Transfers ofProperty to RICs and REITs) (81 FR36816), cross-referencing TD 9770 (81FR 36793). The Treasury Department andthe IRS continue to study issues relatingto General Utilities repeal presented byother transactions involving the separationof nonbusiness assets from business as-sets, and are considering issuing guidanceunder section 337(d) to address these is-sues. See Part D.4 of this Backgroundsection of the preamble.

2. Comments Regarding Device

The commenter believes that new rulesare not needed for transactions that raisethe purely shareholder-level concerns thatare the subject of the device prohibition.According to the commenter, those trans-actions likely do not qualify under section355 under current law and are infrequent.Although largely agreeing with this state-ment, the Treasury Department and theIRS have determined that certain clarify-

ing changes should be made to the devicerules. As discussed in Part C.3.b of thisBackground section of the preamble, thecurrent regulations relating to device arenot specific as to the quality or quantity ofassets relevant in the nature and use ofassets device factor or the appropriateweighing of the device and nondevice fac-tors. The Treasury Department and theIRS have determined that, in some situa-tions, insufficient weight has been givento the nature and use of assets devicefactor and that device factors have notbeen balanced correctly against nondevicefactors.

For example, if, after a distribution,Distributing or Controlled holds mostlyliquid nonbusiness assets, the sharehold-ers of that corporation can sell their stockat a price that reflects the value of thenonbusiness assets, and such a sale is ec-onomically similar to a distribution of theliquid nonbusiness assets to the sharehold-ers that would have been treated as adividend to the extent of earnings andprofits of the corporation. See, e.g., Greg-ory. If Distributing’s ratio of nonbusinessassets to total assets differs substantiallyfrom Controlled’s ratio, the distributioncould facilitate a separation of the non-business assets from the business assetsby means of the sale of the stock in thecorporation with a large percentage ofnonbusiness assets. No corporate-levelgain, and possibly little or no shareholder-level gain, would be recognized.

Taxpayers have taken the position thatnondevice factors in the regulations canoutweigh the substantial evidence of de-vice presented in such distributions. Forexample, certain taxpayers have viewedeven a weak business purpose, combinedwith the fact that the stock of Distributingis publicly traded, as offsetting evidenceof device presented by distributions ef-fecting a separation of nonbusiness assetsfrom business assets, even if pressurefrom public shareholders was a significantmotivation for the distribution. The Trea-sury Department and the IRS do not agreethat these types of nondevice factorsshould outweigh the substantial evidenceof device presented by a distribution thatseparates nonbusiness assets from busi-ness assets.

Accordingly, the Treasury Departmentand the IRS have determined that the reg-

ulations should provide clearer, more ob-jective guidance regarding the nature anduse of assets device factor and the appro-priate weighing of device factors and non-device factors. The Treasury Departmentand the IRS also have determined that if ahigh enough proportion of assets of Dis-tributing or Controlled consists of non-business assets, and if the assets of theother corporation include a much lowerproportion of nonbusiness assets, the evi-dence of device is so strong that nonde-vice factors generally should not be al-lowed to overcome the evidence ofdevice.

The commenter also noted that the im-portance of device, traditionally under-stood as reflecting shareholder-level poli-cies, has diminished in the context of aunified rate regime for long-term capitalgains and qualified dividend income forsome taxpayers. However, because ofcontinuing differences in the federal in-come tax treatment of capital gains anddividends, including the potential for ba-sis recovery (see § 1.355–2(d)(1)) and theavailability of capital gains to absorb cap-ital losses, the device prohibition contin-ues to be important.

3. Comments Regarding Active Business

a. Section 355(b) Requires MinimumSize Active Business

The commenter stated that section 355is meant to apply to genuine separationsof businesses, and that section 355(b)should not function as a formality. Nev-ertheless, the commenter does not believethat the active business requirement needsto be strengthened through the adoption ofa requirement of a minimum amount ofactive business assets.

After studying this issue, the TreasuryDepartment and the IRS have determinedthat Distributing or Controlled should notsatisfy the active business requirement byholding a relatively de minimis activebusiness. As described in the remainder ofthis Part D.3, the Treasury Departmentand the IRS have determined that inter-preting section 355(b) as having meaningand substance and therefore requiring anactive business that is economically sig-nificant is consistent with congressionalintent, case law, and the reorganization


provisions. In addition, given the develop-ments in the tax law described in PartD.3.c of this Background section of thepreamble, the Treasury Department andthe IRS have determined that allowing ade minimis active business to satisfy theactive business requirement is not neces-sary to reduce the burden of compliancewith the active business requirement. Fur-thermore, requiring a minimum relativesize for an active business is not inconsis-tent with the facts of Rev. Rul. 73–44 orwith its conclusion. See Part D.3.d of thisBackground section of the preamble.

b. Consistent with Congressional Intent,Case Law, and the ReorganizationProvisions

Allowing section 355(b) to be satisfiedwith an active business that is economi-cally insignificant in relation to other as-sets of Distributing or Controlled is notconsistent with the congressional purposefor adopting the active business require-ment. It is generally understood that Con-gress intended section 355 to be used toseparate businesses, not to separate inac-tive assets from a business. See S. Rep.No. 83–1622, at 50–51 (section 355 “con-templates that a tax-free separation shallinvolve only the separation of assets at-tributable to the carrying on of an activebusiness” and does not permit “the taxfree separation of an existing corporationinto active and inactive entities”); see alsoCoady v. Commissioner, 33 T.C. 771, 777(1960), aff’d, 289 F.2d 490 (6th Cir. 1961)(stating that a function of section 355(b) is“to prevent the tax-free separation of ac-tive and inactive assets into active andinactive corporate entities”) (emphasis inoriginal); § 1.355–1(b) (“[s]ection 355provides for the separation . . . of one ormore existing businesses”). Additionally,when the active business of Distributingor Controlled is economically insignifi-cant in relation to its other assets, it isunlikely that any non-federal tax purposefor separating that business from otherbusinesses is a significant purpose for thedistribution. See § 1.355–2(b)(1) (“Sec-tion 355 applies to a transaction only if itis carried out for one or more corporatebusiness purposes. . . . The potential forthe avoidance of Federal taxes by the dis-tributing or controlled corporations . . . is

relevant in determining the extent towhich an existing corporate business pur-pose motivated the distribution.”).

Further, as the Supreme Court held inGregory, transactions are to be taxed inaccordance with their substance. The re-organization regulations adopt the sameprinciple. For example, § 1.368–1(b) pro-vides that “[b]oth the terms of the speci-fications [of the reorganization provi-sions] and their underlying assumptionsand purposes must be satisfied in order toentitle the taxpayer to the benefit of theexception from the general rule.” Addi-tionally, § 1.368–1(c) provides that “[a]scheme, which involves an abrupt depar-ture from normal reorganization proce-dure in connection with a transaction onwhich the imposition of tax is imminent,such as a mere device that puts on theform of a corporate reorganization as adisguise for concealing its real character,and the object and accomplishment ofwhich is the consummation of a precon-ceived plan having no business or corpo-rate purpose, is not a plan of reorganiza-tion.”

Accordingly, when a corporation thatowns only nonbusiness assets and a rela-tively de minimis active business is sepa-rated from a corporation with another ac-tive business, the substance of thetransaction is not a separation of busi-nesses as contemplated by section 355.

c. Developments in the Tax Law Reducethe Burden of Complying With Section355

In the past, the active business require-ment was more difficult to satisfy than it istoday, in part because of the limited ap-plication of the holding company rule,discussed in Part C.5 of this Backgroundsection of the preamble. However, severaldevelopments in the tax law have oc-curred that make the active business re-quirement easier to satisfy and negate thehistorical need to reduce the administra-tive burden of complying with section355(b).

In the SAG Amendments, Congressamended section 355(b) to adopt the sep-arate affiliated group rules of section355(b)(3). Section 355(b)(3)(A) providesthat, for purposes of determining whethera corporation meets the requirements of

section 355(b)(2)(A), all members of thecorporation’s separate affiliated group(SAG) are treated as one corporation. Sec-tion 355(b)(3)(B) provides that a corpora-tion’s SAG is the affiliated group whichwould be determined under section1504(a) if the corporation were the com-mon parent and section 1504(b) did notapply.

Additionally, as discussed in Part C.5of this Background section of the pream-ble, section 355(b) now can be satisfiedthrough the ownership of certain interestsin a partnership that is engaged in anactive business. See Rev. Rul. 2007–42and Rev. Rul. 92–17. Similarly,§ 301.7701–3 now allows an eligible en-tity to elect to be disregarded as an entityseparate from its owner and permits acorporation to satisfy the active businessrequirement through a tax-free acquisitionwithout having to assume liabilities relat-ing to an active business. Finally, the ex-pansion rules of § 1.355–3(b)(3)(ii) havebeen developed so that it is easier to ac-quire the assets of an active business in ataxable transaction while complying withsection 355(b). See, e.g., Rev. Rul.2003–18 (2003–1 CB 467) and Rev. Rul.2003–38 (2003–1 CB 811) (both describ-ing facts and circumstances to be consid-ered in determining whether one trade orbusiness is in the same line of business asanother).

d. Rev. Rul. 73–44

Rev. Rul. 73–44 is sometimes cited insupport of the proposition that a de mini-mis active business satisfies the section355(b) requirement. However, Rev. Rul.73–44 states only that there is no require-ment in section 355(b) that a specific per-centage of a corporation’s assets be de-voted to the active conduct of a trade orbusiness, not that any size active businesscan satisfy section 355(b). In fact, the sizeof the active business in that ruling repre-sented a substantial portion of Con-trolled’s assets, although less than half ofControlled’s value. Accordingly, Rev.Rul. 73–44 does not validate a section355 distribution involving a de minimisactive business, and the proposed regula-tions in this notice of proposed rulemak-ing addressing the minimum relative sizeof active businesses would not change the


conclusion set forth in that revenue ruling.Nevertheless, the Treasury Departmentand the IRS intend to modify Rev. Rul.73–44 with regard to the statement in therevenue ruling that there is no requirementthat a specific percentage of a corpora-tion’s assets be devoted to the active con-duct of a trade or business.

4. General Utilities Repeal

The Treasury Department and the IRShave observed, as noted in Notice 2015–59, that taxpayers may attempt to use sec-tion 355 distributions in ways that areinconsistent with the purpose of GeneralUtilities repeal. Specifically, the TreasuryDepartment and the IRS are concernedthat certain taxpayers may be interpretingthe current regulations under sections337(d) and 355 in a manner allowing tax-free distributions motivated in whole orsubstantial part by a purpose of avoidingcorporate-level taxation of built-in gain ininvestment or nonbusiness assets. See§ 1.355–1(b) (“Section 355 provides forthe separation . . . of one or more existingbusinesses formerly operated, directly orindirectly, by a single corporation . . . .”).The Treasury Department and the IRScontinue to study whether permitting tax-free separations of large amounts of non-business assets from business assets, es-pecially when the gain in the nonbusinessassets is expected to be eliminated, is con-sistent with General Utilities repeal in allcircumstances. Comments are welcomeon potential additional guidance undersection 337(d) addressing such transac-tions.

Explanation of Provisions

A. Modification of Device Regulations

The proposed regulations would mod-ify § 1.355–2(d), which addresses trans-actions that are or are not a device. Theproposed regulations would modify thenature and use of assets device factor in§ 1.355–2(d)(2)(iv), modify the corporatebusiness purpose nondevice factor in§ 1.355–2(d)(3)(ii), and add a per se de-vice test.

1. Nature and Use of Assets

The Treasury Department and the IRShave determined that device potential gen-erally exists either if Distributing or Con-trolled owns a large percentage of assetsnot used in business operations comparedto total assets or if Distributing’s and Con-trolled’s percentages of these assets dif-fers substantially. A proposed change tothe nature and use of assets device factorin § 1.355–2(d)(2)(iv) would focus on as-sets used in a Business (Business Assets)(each as defined in proposed § 1.355–2(d)(2)(iv)(B)) rather than assets used inan active business meeting the require-ments of section 355(b) (a Five-Year-Active Business, as defined in proposed§ 1.355–9(a)(2)). In general, Businesswould have the same meaning as a Five-Year-Active Business, but without regardto whether the business has been operatedor owned for at least five years prior to thedate of the distribution or whether thecollection of income requirement in§ 1.355–3(b)(2)(ii) is satisfied. BusinessAssets would be gross assets used in aBusiness, including reasonable amountsof cash and cash equivalents held forworking capital and assets required to beheld to provide for exigencies related to aBusiness or for regulatory purposes withrespect to a Business. The Treasury De-partment and the IRS have determinedthat the presence of Business Assets gen-erally does not raise any more device con-cerns than the presence of assets used in aFive-Year-Active Business (Five-Year-Active-Business Assets). Thus, the pro-posed regulations would modify § 1.355–2(d)(2)(iv)(B) to take into accountBusiness Assets, not just Five-Year-Active-Business Assets.

Rev. Proc. 2015–43 (now incorporatedinto Rev. Proc. 2016–3 (2016–1 IRB126)) and Notice 2015–59 focus on in-vestment assets (using a modified section355(g) definition) of a corporation as as-sets that may raise device concerns. How-ever, after further study, the Treasury De-partment and the IRS have determinedthat investment assets as defined thereinmay include certain assets that do notraise device concerns, such as cash neededby a corporation for working capital, andmay not include other assets that do raisedevice concerns, such as real estate not

related to the taxpayer’s Business. TheTreasury Department and the IRS havedetermined that focusing on NonbusinessAssets, as defined in the proposed regula-tions, is a better method of evaluatingdevice or nondevice as compared to usinginvestment assets as described in Rev.Proc. 2016–3 and Notice 2015–59. Thus,the proposed regulations would focus onNonbusiness Assets rather than invest-ment assets.

The proposed regulations would pro-vide thresholds for determining whetherthe ownership of Nonbusiness Assets(gross assets that are not Business Assets)and/or differences in the Nonbusiness As-set Percentages (the percentage of a cor-poration’s Total Assets (its Business As-sets and Nonbusiness Assets) that areNonbusiness Assets) for Distributing andControlled are evidence of device. If nei-ther Distributing nor Controlled has Non-business Assets that comprise 20 percentor more of its Total Assets, the ownershipof Nonbusiness Assets ordinarily wouldnot be evidence of device. Additionally, adifference in the Nonbusiness Asset Per-centages for Distributing and Controlledordinarily would not be evidence of de-vice if such difference is less than 10percentage points or, in the case of a non-pro rata distribution, if the difference isattributable to a need to equalize the valueof the Controlled stock and securities dis-tributed and the consideration exchangedtherefor by the distributees. Accordingly,the Treasury Department and the IRS pro-pose to treat such circumstances as ordi-narily not constituting evidence of device.

2. Corporate Business Purpose

The Treasury Department and the IRSalso propose to revise the nondevice fac-tor in § 1.355–2(d)(3)(ii), which relates tocorporate business purpose for a transac-tion as evidence of nondevice. Under theproposed revision, a corporate businesspurpose that relates to a separation ofNonbusiness Assets from one or moreBusinesses or from Business Assetswould not be evidence of nondevice, un-less the business purpose involves an ex-igency that requires an investment orother use of the Nonbusiness Assets in aBusiness. The Treasury Department andthe IRS have determined that, absent such


an exigency, such separations are not con-sistent with the intent of Congress to pre-vent section 355 from applying to a dis-tribution that is used principally as adevice.

3. Per se Device Test

The Treasury Department and the IRSalso propose to add a per se device test tothe device determination in proposed§ 1.355–2(d)(5). Under proposed § 1.355–2(d)(5), if designated percentages of Dis-tributing’s and/or Controlled’s Total As-sets are Nonbusiness Assets, thetransaction would be considered a device,notwithstanding the presence of any othernondevice factors, for example, a corpo-rate business purpose or stock being pub-licly traded and widely held. By their na-ture, these transactions present such clearevidence of device that the Treasury De-partment and the IRS have determinedthat the nondevice factors can never over-come the device potential. The only ex-ceptions to this per se device rule wouldapply if the distribution is also describedin § 1.355–2(d)(3)(iv) (distributions inwhich the corporate distributee would beentitled to a dividends received deductionunder section 243(a) or 245(b)) or in re-designated § 1.355–2(d)(6) (§ 1.355–2(d)(5) of the current regulations, relatingto transactions ordinarily not consideredas a device).

The per se device test would have twoprongs, both of which must be met for thedistribution to be treated as a per se de-vice.

The first prong would be if Distributingor Controlled has a Nonbusiness AssetPercentage of 662⁄3 percent or more. If 662⁄3 percent or more of the Total Assets ofeither corporation consist of NonbusinessAssets, a strong device potential exists.

The second prong of the test wouldcompare the Nonbusiness Asset Per-centage of Distributing with that ofControlled. The comparison would besimilar to the comparison, in § 1.355–2(d)(2)(iv)(B) of the current regulations,between Distributing’s ratio of assetsnot used in a Five-Year-Active Businessto assets used in a Five-Year-Active Busi-ness and Controlled’s ratio of such assets.However, the Treasury Department andthe IRS recognize that valuation of assets

may be difficult and that determiningwhether certain assets are Business Assetsalso may be difficult. Accordingly, ratherthan requiring Distributing and Controlledto make exact determinations of theirNonbusiness Asset Percentages, whichwould then be compared to the other cor-poration’s Nonbusiness Asset Percentage,the second prong of the per se device testwould provide for three bands in makingthis comparison. These bands generallywould provide for the comparison of theNonbusiness Asset Percentages of Dis-tributing and Controlled but require lessprecision in asset valuation.

In the first band, if one corporation’sNonbusiness Asset Percentage is 662⁄3percent or more, but less than 80 percent,the distribution would fall within the bandif the other corporation’s Nonbusiness As-set Percentage is less than 30 percent. Inthe second band, if one corporation’sNonbusiness Asset Percentage is 80 per-cent or more, but less than 90 percent, thedistribution would fall within the band ifthe other corporation’s Nonbusiness AssetPercentage is less than 40 percent. In thethird band, if one corporation’s Nonbusi-ness Asset Percentage is 90 percent ormore, the distribution would fall withinthe band if the other corporation’s Non-business Asset Percentage is less than 50percent. All of these bands represent casesin which the Nonbusiness Asset Percent-ages of Distributing and Controlled aresignificantly different.

If both prongs of the per se device testare met, that is, if the Nonbusiness AssetPercentage for either Distributing or Con-trolled is 662⁄3 percent or more and theNonbusiness Asset Percentages of Dis-tributing and Controlled fall within one ofthe three bands, the distribution would bea per se device. Otherwise, the generalfacts-and-circumstances test of § 1.355–2(d), as modified by these proposed regu-lations, would apply to determine if thetransaction was a device.

4. Certain Operating Rules

In making the determination of whichassets of a corporation are Business As-sets and which are Nonbusiness Assets, ifDistributing or Controlled owns a partner-ship interest or stock in another corpora-

tion, the proposed regulations would pro-vide four operating rules.

First, all members of a SAG with re-spect to which Controlled is the commonparent (CSAG) and all members of a SAGwith respect to which Distributing is thecommon parent excluding Controlled andits SAG (DSAG) would be treated as asingle corporation. Thus, any stock ownedby one member of a SAG in another mem-ber of the same SAG and any intercom-pany obligations between the same SAGmembers would be disregarded.

Second, a partnership interest wouldgenerally be considered a NonbusinessAsset. However, if, by reason of a corpo-ration’s ownership interest or its owner-ship interest and participation in manage-ment of the partnership, the corporation isconsidered to be engaged in the Businessconducted by such partnership (based onthe criteria that would be used to deter-mine whether such corporation is consid-ered to be engaged in the Five-Year-Active Business of such partnership underRev. Ruls. 92–17, 2002–49, and 2007–42), the fair market value of the partner-ship interest would be allocated betweenBusiness Assets and Nonbusiness Assetsin the same proportion as the proportionof the fair market values of the BusinessAssets and the Nonbusiness Assets of thepartnership.

Third, a rule similar to the partnershipinterest rule would apply for corporatestock owned by Distributing or Con-trolled. That is, stock in a corporation,other than a member of the DSAG or theCSAG, would generally be a NonbusinessAsset. However, there would be an excep-tion for stock in a Member of a 50-Percent-Owned Group. For this purpose, a50-Percent-Owned Group would have thesame meaning as SAG, except substitut-ing “50-percent” for “80-percent,” and aMember of a 50-Percent-Owned Groupwould be a corporation that would be amember of a DSAG or CSAG, with suchsubstitution. If a Member of a 50-Percent-Owned Group with respect to Distributingor Controlled owns stock in another Mem-ber of such 50-Percent-Owned Group(other than a member of the DSAG or theCSAG, respectively), the fair marketvalue of such stock would be allocatedbetween Business Assets and Nonbusi-ness Assets in the same proportion as the


proportion of the fair market values of theBusiness Assets and the Nonbusiness As-sets of the issuing corporation.

Fourth, the proposed regulations wouldprovide for adjustments to prevent distor-tion if Distributing or Controlled owesmoney to or is owed money by a partner-ship or Member of a 50-Percent-OwnedGroup.

The partnership rules and the 50-Percent-Owned Group rules are designedto recognize that ownership of a partner-ship interest or stock in a Member of a50-Percent-Owned Group may reflect aninvestment in Business Assets, Nonbusi-ness Assets, or both, while minimizing thesignificance of changes in the form ofownership of Business Assets and Non-business Assets.

5. Multiple Controlleds

If a transaction involves distributionsby Distributing of the stock of more thanone Controlled, proposed §§ 1.355–2(d)(2)(iv) and 1.355–2(d)(5) would ap-ply to all such Controlleds. To the extentany rule would require a comparison be-tween characteristics of Distributing andControlled, there would have to be a com-parison between Distributing and eachControlled and between each Controlledand each other Controlled. If any compar-ison under proposed § 1.355–2(d)(2)(iv)or § 1.355–2(d)(5) would result in a de-termination that a distribution is a device,then all distributions involved in the trans-action would be considered a device.

B. Minimum Size for Active Business

Section 355(b) does not literally pro-vide a minimum absolute or relative sizerequirement for an active business to qual-ify under section 355(b). Nevertheless, asdiscussed in Part D.3 of the Backgroundsection of the preamble, the Treasury De-partment and the IRS have determinedthat Congress intended that section 355(b)would require that distributions have sub-stance and that a distribution involvingonly a relatively de minimis active busi-ness should not qualify under section 355because such a distribution is not a sepa-ration of businesses as contemplated bysection 355.

To ensure that congressional intent issatisfied and to reduce uncertainty, theTreasury Department and the IRS proposeto add new § 1.355–9. This section wouldprovide that, for the requirements of sec-tion 355(a)(1)(C) and (b) to be satisfiedwith respect to a distribution, the Five-Year-Active-Business Asset Percentage(the percentage determined by dividingthe fair market value of a corporation’sFive-Year-Active-Business Assets by thefair market value of its Total Assets) ofeach of Controlled (or the CSAG) andDistributing (or the DSAG excludingControlled and other CSAG members)must be at least five percent. Similar to theproposed definition of Business Assets,Five-Year-Active-Business Assets wouldinclude reasonable amounts of cash andcash equivalents held for working capitaland assets required to be held to providefor exigencies related to a Five-Year-Active Business or for regulatory pur-poses with respect to a Five-Year-ActiveBusiness.

In making the determination of the per-centage of a corporation’s assets that areFive-Year-Active-Business Assets, if acorporation is considered to be engaged ina Five-Year-Active Business of a partner-ship, the fair market value of the partner-ship interest would be allocated betweenFive-Year-Active-Business Assets andNon-Five-Year-Active-Business Assets(assets other than Five-Year-Active-Business Assets) in the same proportionas the proportion of the fair market valuesof Five-Year-Active-Business Assets andNon-Five-Year-Active-Business Assets ofthe partnership.

Except in the case of a member of itsSAG, neither Distributing nor Controlledwould be considered to be engaged in theFive-Year-Active Business of a corpora-tion in which it owns stock. Accordingly,such stock in a corporation would be con-sidered a Non-Five-Year-Active-BusinessAsset. Although the proposed regulationsrelating to the device prohibition wouldprovide an allocation rule for assets heldby a Member of a 50-Percent-OwnedGroup, discussed in Part A.4 of this Ex-planation of Provisions section of the pre-amble, the Treasury Department and theIRS believe the SAG Amendments, dis-cussed in Parts C.5 and D.3.c of the Back-ground section of the preamble, limit the

ability to take into account assets held bysubsidiaries for purposes of the activebusiness requirement. Accordingly, pro-posed § 1.355–9 would not provide a sim-ilar allocation rule for stock owned byDistributing or Controlled.

The commenter stated that the regula-tions should not provide a minimum sizerequirement for an active business in anydistribution and that such a requirementcould be especially problematic in intra-group distributions in preparation for adistribution outside of a group. Internaldistributions often are necessary to alignthe proper assets within Distributing andControlled prior to a distribution of thestock of Controlled outside the group. If aminimum size requirement is imposed oneach of these internal distributions, tax-payers may have to undertake movementsof active businesses within groups to meetthe minimum size requirement for eachinternal distribution.

In enacting the SAG Amendments,Congress did not provide an exception tothe requirements of section 355(b) for in-ternal distributions that are preparatory toexternal distributions, although Congresspermitted Distributing and Controlled torely on active businesses held by membersof their respective SAGs, even if suchassets were distributed or sold within theSAG in a taxable transaction. Under thecommenter’s rationale, the regulationsshould not only permit an internal distri-bution with a de minimis active business,but could also permit tax-free treatmentfor taxable distributions or sales of assetswithin the SAG if such assets need to bemoved in preparation of the external dis-tribution. The Treasury Department andthe IRS have determined that each distri-bution must meet all the requirements ofsection 355, including the requirementthat Distributing and each Controlled con-duct an active business immediately afterthe distribution. Accordingly, the pro-posed regulations would provide a five-percent minimum Five-Year-Active-Business Asset Percentage requirementfor all distributions.

C. Timing of Asset Identification,Characterization, and Valuation

For purposes of determining whether atransaction would be considered a device


and whether one or more Five-Year-Active Businesses would meet the five-percent minimum Five-Year-Active-Business Asset Percentage requirement ofproposed § 1.355–9, the assets held byDistributing and by Controlled must beidentified, and their character and fairmarket value must be determined. Theassets under consideration would be theassets held by Distributing and by Con-trolled immediately after the distribution.Thus, for example, the stock of Controlledthat is distributed would not be an asset ofDistributing for this purpose. The charac-ter of the assets held by Distributing andby Controlled, as Business Assets or Non-business Assets or as Five-Year-Active-Business Assets or Non-Five-Year-Active-Business Assets, also would be thecharacter as determined immediately afterthe distribution.

The proposed regulations would pro-vide, however, that the fair market valueof assets would be determined, at the elec-tion of the parties on a consistent basis,either (a) immediately before the distribu-tion, (b) on any date within the 60-dayperiod before the distribution, (c) on thedate of an agreement with respect to thedistribution that was binding on Distribut-ing on such date and at all times thereaf-ter, or (d) on the date of a public an-nouncement or filing with the Securitiesand Exchange Commission with respectto the distribution. The parties would berequired to make consistent determina-tions between themselves, and use thesame date, for purposes of applying thedevice rules of proposed § 1.355–2(d) andthe five-percent minimum Five-Year-Active-Business Asset Percentage re-quirement of proposed § 1.355–9. If theparties do not meet these consistencyrequirements, the valuation would bedetermined as of immediately before thedistribution unless the Commissionerdetermines that the use of such date isinconsistent with the purposes of section355 and the regulations thereunder.

D. Anti-Abuse Rules

The proposed regulations would alsoprovide anti-abuse rules. Under the anti-abuse rules, a transaction or series oftransactions (such as a change in the formof ownership of an asset; an issuance,

assumption or repayment of indebtedness;or an issuance or redemption of stock)would not be given effect if undertakenwith a principal purpose of affecting theNonbusiness Asset Percentage of any cor-poration in order to avoid a determinationthat a distribution was a device or affect-ing the Five-Year-Active-Business AssetPercentage of any corporation in order toavoid a determination that a distributiondoes not meet the requirements of§ 1.355–9. The transactions covered bythe anti-abuse rules generally would notinclude an acquisition or disposition ofassets, other than an acquisition fromor disposition to a person the ownership ofwhose stock would, under section 318(a)(other than paragraph (4) thereof), be at-tributed to Distributing or Controlled, or atransfer of assets between Distributingand Controlled. However, such transac-tions would not be given effect if they aretransitory, for example, if Distributingcontributes cash to Controlled and retainssome of the stock of Controlled or Con-trolled debt instruments, and there is aplan or intention for Controlled to returnthe cash to Distributing in redemption ofthe stock or repayment of the debt.

Statement of Availability of IRSDocuments

IRS revenue procedures, revenue rul-ings, notices, and other guidance cited inthis document are published in the Inter-nal Revenue Bulletin (or Cumulative Bul-letin) and are available from the Superin-tendent of Documents, U.S. GovernmentPrinting Office, Washington, D.C. 20402,or by visiting the IRS Web site, http://www.irs.gov.

Effect on Other Documents

Section 3 of Notice 2015–59 is obso-lete as of July 15, 2016. The IRS willmodify Rev. Rul. 73–44, as of the date theTreasury decision adopting these regula-tions as final regulations is published inthe Federal Register, as necessary to con-form to § 1.355–9 of these proposed reg-ulations. The IRS solicits comments as towhether other publications should bemodified, clarified, or obsoleted.

Special Analyses

Certain IRS regulations, including thisone, are exempt from the requirements ofExecutive Order 12866, as supplementedand reaffirmed by Executive Order 13563.Therefore, a regulatory impact assessmentis not required. It has also been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these proposed regu-lations. Pursuant to the Regulatory Flexi-bility Act (5 U.S.C. chapter 6), it is herebycertified that this regulation will not havea significant economic impact on a sub-stantial number of small entities. This cer-tification is based on the fact that theseregulations primarily affect larger corpo-rations operating more than one businessand with a substantial number of share-holders. Thus, these regulations are notexpected to affect a substantial number ofsmall entities. Accordingly, a regulatoryflexibility analysis is not required. Pursu-ant to section 7805(f) of the Code, theseregulations will be submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on theirimpact on small business.

Comments and Requests for PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written or electroniccomments that are submitted timely to theIRS as prescribed in this preamble underthe ADDRESSES heading. The TreasuryDepartment and the IRS request com-ments on all aspects of the proposed reg-ulations, including—

1. Whether there should be any excep-tions to the application of proposed§ 1.355–9.

2. Whether additional exceptionsshould be incorporated into the per sedevice rule in proposed § 1.355–2(d)(5).

3. The scope of the safe harbors relat-ing to presence of Nonbusiness Assets asevidence of device under proposed§ 1.355–2(d)(2)(iv)(C)(1) and (2) andwhether additional safe harbors should beadded to proposed § 1.355–2(d).

4. Whether the definition of BusinessAssets in proposed § 1.355–2(d)(2)(iv)(B)(2) should be revised, forexample, to include additional categories


of assets or to include cash or cash equiv-alents expected to be used for other cate-gories of expenditures.

5. Whether the operating rules applica-ble to proposed § 1.355–2(d)(2)(iv)(D)(6)through (8) concerning the allocation ofthe value of a partnership interest betweenBusiness Assets and Nonbusiness Assetsto its partners, the allocation of the valueof the stock of a Member of a 50-Percent-Owned Group between Business Assetsand Nonbusiness Assets to its sharehold-ers, and certain borrowings should bemodified, including whether the partner-ship rule should allocate an allocableshare of the partnership’s gross assets toits partners, whether different allocationrules should be used for partnership inter-ests with different characteristics(for ex-ample, limited liability vs. non-limited li-ability), and whether the rules relating toborrowing between a partnership and apartner or between a Member of a 50-Percent-Owned Group and a shareholdershould be made more specific.

6. Whether the anti-abuse rules in theproposed regulations pertaining to deviceand the five-percent minimum Five-Year-Active-Business Assets require-ment should be revised, for example, toinclude or exclude additional transactionsor to include a reference to acquisitions ofassets by Distributing or Controlled onbehalf of shareholders.

7. Whether the absence of any devicefactor, for example, a small difference inNonbusiness Asset Percentages for Dis-tributing and Controlled, should be con-sidered a nondevice factor.

All comments will be available atwww.regulations.gov or upon request.

A public hearing will be scheduled ifrequested in writing by any person thattimely submits written or electronic com-ments. If a public hearing is scheduled,notice of the date, time, and place for thepublic hearing will be published in theFederal Register.

Drafting Information

The principal authors of these proposedregulations are Stephanie D. Floyd and Rus-sell P. Subin of the Office of AssociateChief Counsel (Corporate). Other personnelfrom the Treasury Department and the IRSparticipated in their development.

* * * * *

Proposed Amendments to theRegulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.355–0 is amended by:

1. Removing from the introductory text“1.355–7” and adding “1.355–9” in itsplace.

2. Revising the entry for § 1.355–2(d)(2)(iv)(B).

3. Adding entries for § 1.355–2(d)(2)(iv)(B)(1), (2), (3), (4), (5), (6), and(7).

4. Redesignating the entry for § 1.355–2(d)(2)(iv)(C) as the entry for § 1.355–2(d)(2)(iv)(F).

5. Adding a new entry for § 1.355–2(d)(2)(iv)(C).

6. Adding entries for § 1.355–2(d)(2)(iv)(C)(1), (2), and (3).

7. Adding an entry for § 1.355–2(d)(2)(iv)(D).

8. Adding entries for § 1.355–2(d)(2)(iv)(D)(1), (2), (3), and (4).

9. Adding entries for § 1.355–2(d)(2)(iv)(D)(4)(i) and (ii).

10. Adding entries for § 1.355–2(d)(2)(iv)(D)(5) and (6).


12. Adding an entry for § 1.355–2(d)(2)(iv)(D)(7).


14. Adding an entry for § 1.355–2(d)(2)(iv)(D)(8).

15. Adding an entry for § 1.355–2(d)(2)(iv)(E).

16. Redesignating the entry for§ 1.355–2(d)(5) as the entry for § 1.355–2(d)(6).

17. Adding a new entry for § 1.355–2(d)(5).

18. Adding entries for § 1.355–2(d)(5)(i), (ii), (iii), and (iv).

19. Adding entries for § 1.355–2(i)(1),(i)(1)(i) and (ii), and (i)(2).

20. Adding an entry for § 1.355–8.21. Adding entries for § 1.355–9.

The revisions and additions read as fol-lows:

§ 1.355–0 Outline of sections.

* * * * *

§ 1.355–2 Limitations.

* * * * *(d) * * *(2) * * *(iv) * * *(B) Definitions.(1) Business.(2) Business Assets.(3) Nonbusiness Assets.(4) Total Assets.(5) Nonbusiness Asset Percentage.(6) Separate Affiliated Group, SAG,

CSAG, and DSAG.(7) 50-Percent-Owned Group, Member

of a 50-Percent-Owned Group.(C) Presence of Nonbusiness Assets as

evidence of device.(1) Ownership of Nonbusiness Assets.(2) Difference between Nonbusiness

Asset Percentages.(3) Cross-reference.(D) Operating rules.(1) Multiple controlled corporations.(2) Treatment of SAG as a single cor-

poration.(3) Time to identify assets and deter-

mine character of assets.(4) Time to determine fair market

value of assets.(i) In general.(ii) Consistency.(5) Fair market value.(6) Interest in partnership.(i) In general.(ii) Exception for certain interests in

partnerships.(7) Stock in corporation.(i) In general.(ii) Exception for stock in Member of a

50-Percent-Owned Group.(8) Obligation between distributing

corporation or controlled corporation andcertain partnerships or Members of 50-Percent-Owned Groups.

(E) Anti-abuse rule.* * * * *(5) Distributions involving separation

of Business Assets from Nonbusiness As-sets.

(i) In general.


(ii) Definitions and operating rules.(iii) Certain distributions involving

separation of Nonbusiness Assets fromBusiness Assets.

(iv) Anti-abuse rule.* * * * *(i) * * *(1) Paragraph (d) of this section.(i) In general.(ii) Transition rule.(2) Paragraph (g) of this section.* * * * *

§ 1.355–8 Reserved.

§ 1.355–9 Minimum percentage of Five-Year-Active-Business Assets.

(a) Definitions.(1) Distributing, Controlled.(2) Five-Year-Active Business.(3) Five-Year-Active-Business Assets.(4) Non-Five-Year-Active-Business

Assets.(5) Total Assets.(6) Five-Year-Active-Business Asset

Percentage.(7) Separate Affiliated Group, CSAG,

and DSAG.(b) Five percent minimum Five-Year-

Active-Business Asset Percentage.(c) Operating rules.(1) Treatment of SAG and fair market

value.(2) Time to identify assets, determine

character of assets, and determine fairmarket value of assets.

(3) Interest in partnership.(i) In general.(ii) Exception for certain interests in

partnerships.(d) Anti-abuse rule.(e) Effective/applicability date.(1) In general.(2) Transition rule.Par. 3. Section 1.355–2 is amended by:

1. Adding the language “federal” beforethe language “tax avoidance” in thesecond sentence of paragraph (d)(1).

2. Removing the last sentence of para-graph (d)(1) and adding two sentencesat the end of the paragraph.

3. Revising paragraphs (d)(2)(iv)(A) and(B).

4. Redesignating paragraph (d)(2)(iv)(C) as(d)(2)(iv)(F).

5. Adding new paragraphs (d)(2)(iv)(C),(D), and (E).

6. Revising paragraph (d)(3)(ii).7. Removing from paragraph (d)(3)(ii)(A)

the language “the business” and add-ing the language “one or more Busi-nesses (as defined in paragraph(d)(2)(iv)(B)(1) of this section) of thedistributing corporation, the controlledcorporation, or both” in its place.

8. Revising paragraph (d)(4).9. Redesignating paragraph (d)(5) as

(d)(6).10. Adding a new paragraph (d)(5).11. Revising newly designated paragraph

(d)(6)(i).12. Removing from newly designated

paragraph (d)(6)(v) the language“subparagraph (5)” and adding thelanguage “paragraph (d)(6)” in itsplace.

13. Removing from the last sentence ofnewly designated paragraph (d)(6)(v)Example 1 the language “(d)(5)(i)”and adding the language “(d)(6)(i)” inits place.

14. Removing from the sixth sentence ofnewly designated paragraph (d)(6)(v)Example 2 the language “(d)(5)(i)”and adding the language “(d)(6)(i)” inits place.

15. Removing from the last sentence ofnewly designated paragraph (d)(6)(v)Example 2 the language “made from allthe facts” and adding the language“made from either the presence of aseparation of Business Assets fromNonbusiness Assets as described inparagraph (d)(5) of this section or fromall the facts” in its place.

16. Adding to paragraph (h) the language“and § 1.355–9 (relating to MinimumPercentage of Five-Year-Active-Business Assets)” immediately beforethe language “are satisfied”.

17. Revising paragraph (i).The revisions and additions read as fol-

lows:

§ 1.355–2 Limitations.

* * * * *(d) * * *(1) * * * However, if a transaction is

specified in paragraph (d)(5)(iii) of thissection, then it is considered to have beenused principally as a device unless it isalso specified in paragraph (d)(3)(iv) ofthis section or paragraph (d)(6) of this

section. If a transaction is specified inparagraph (d)(6) of this section, then it isordinarily considered not to have beenused principally as a device.

(2) * * *(iv) * * * (A) In general. The determi-

nation of whether a transaction was usedprincipally as a device will take into ac-count the nature, kind, amount, and use ofthe assets of the distributing corporationand the controlled corporation.

(B) Definitions. The following defini-tions apply for purposes of this paragraph(d)(2)(iv):

(1) Business. Business means the activeconduct of a trade or business, within themeaning of section 355(b) and § 1.355–3,without regard to—

(i) The requirements of section355(b)(2)(B), (C), and (D), and § 1.355–3(b)(3) and (4) (relating to active conductthroughout the five-year period precedinga distribution and acquisitions during suchperiod);

(ii) The collection of income require-ment in § 1.355–3(b)(2)(ii); and

(iii) The requirement of § 1.355–9 (re-lating to Minimum Percentage of Five-Year-Active-Business Assets (as definedin § 1.355–9(a)(3))).

(2) Business Assets. Business Assets ofa corporation means its gross assets usedin one or more Businesses. Such assetsinclude cash and cash equivalents held asa reasonable amount of working capitalfor one or more Businesses. Such assetsalso include assets required (by bindingcommitment or legal requirement) to beheld to provide for exigencies related to aBusiness or for regulatory purposes withrespect to a Business. For this purpose,such assets include assets the holder isrequired (by binding commitment or legalrequirement) to hold to secure or other-wise provide for a financial obligation rea-sonably expected to arise from a Businessand assets held to implement a bindingcommitment to expend funds to expand orimprove a Business.

(3) Nonbusiness Assets. NonbusinessAssets of a corporation means its grossassets other than its Business Assets.

(4) Total Assets. Total Assets of a cor-poration means its Business Assets and itsNonbusiness Assets.

(5) Nonbusiness Asset Percentage. TheNonbusiness Asset Percentage of a corpo-


ration is the percentage determined by di-viding the fair market value of its Non-business Assets by the fair market valueof its Total Assets.

(6) Separate Affiliated Group, SAG,CSAG, and DSAG. Separate AffiliatedGroup (or SAG) means a separate affili-ated group as defined in section355(b)(3)(B), CSAG means a SAG withrespect to which a controlled corporationis the common parent, and DSAG means aSAG with respect to which a distributingcorporation is the common parent, exclud-ing the controlled corporation and anyother members of the CSAG.

(7) 50-Percent-Owned Group, Memberof a 50-Percent-Owned Group. 50-Percent-Owned Group has the samemeaning as SAG, except that “50-percent”is substituted for “80-percent” each placeit appears in section 1504(a)(2), for pur-poses of section 355(b)(3)(B). A Memberof a 50-Percent-Owned Group is a corpo-ration that would be a member of a DSAGor a CSAG, with the substitution providedin this paragraph (d)(2)(iv)(B)(7).

(C) Presence of Nonbusiness Assets asevidence of device—(1) Ownership ofNonbusiness Assets. Ownership of Non-business Assets by the distributing corpo-ration or the controlled corporation is ev-idence of device. The strength of theevidence will be based on all the facts andcircumstances, including the NonbusinessAsset Percentage for each corporation.The larger the Nonbusiness Asset Percent-age of either corporation, the stronger isthe evidence of device. Ownership ofNonbusiness Assets ordinarily is not evi-dence of device if the Nonbusiness AssetPercentage of each of the distributing cor-poration and the controlled corporation isless than 20 percent.

(2) Difference between NonbusinessAsset Percentages. A difference betweenthe Nonbusiness Asset Percentage of thedistributing corporation and the Nonbusi-ness Asset Percentage of the controlledcorporation is evidence of device, and thelarger the difference, the stronger is theevidence of device. Such a difference or-dinarily is not itself evidence of device(but may be considered in determining thepresence or the strength of other devicefactors) if—

(i) The difference is less than 10 per-centage points; or

(ii) The distribution is not pro rataamong the shareholders of the distributingcorporation, and the difference is attribut-able to a need to equalize the value of thecontrolled stock and securities (if any)distributed and the value of the distribut-ing stock and securities (if any) ex-changed therefor by the distributees.

(3) Cross-reference. See paragraph(d)(5) of this section for a rule underwhich a distribution is considered to havebeen used principally as a device when thedistributing corporation or the controlledcorporation has a large Nonbusiness AssetPercentage and there is a large differencebetween Nonbusiness Asset Percentagesof the two corporations.

(D) Operating rules. The following op-erating rules apply for purposes of thisparagraph (d)(2)(iv):

(1) Multiple controlled corporations. Ifa transaction involves distributions by adistributing corporation of the stock ofmore than one controlled corporation, thisparagraph (d)(2)(iv) applies to all suchcontrolled corporations. If any provisionin this paragraph (d)(2)(iv) requires acomparison between characteristics of thedistributing corporation and the controlledcorporation, the provision also requiressuch a comparison between the distribut-ing corporation and each of the controlledcorporations and between each controlledcorporation and each other controlled cor-poration. If any distribution involved inthe transaction is determined to have beenused principally as a device by reason ofthis paragraph (d)(2)(iv), all distributionsinvolved in the transaction are consideredto have been used principally as a device.

(2) Treatment of SAG as a single cor-poration. The members of a DSAG aretreated as a single corporation, the mem-bers of a CSAG are treated as a singlecorporation, references to the distributingcorporation include all members of theDSAG, and references to the controlledcorporation include all members of theCSAG.

(3) Time to identify assets and deter-mine character of assets. The assets of thedistributing corporation and the controlledcorporation that are relevant in connectionwith this paragraph (d)(2)(iv), and thecharacter of these assets as Business As-sets or Nonbusiness Assets, must be de-termined by the distributing corporation

and the controlled corporation immedi-ately after the distribution. Accordingly,for purposes of this paragraph (d)(2)(iv),the assets of the distributing corporationdo not include any asset, including stockof the controlled corporation, that is dis-tributed in the transaction.

(4) Time to determine fair market valueof assets—(i) In general. The distributingcorporation and the controlled corporationeach must determine the fair market valueof its assets at the time of the distributionas of one of the following dates: Immedi-ately before the distribution; on any datewithin the 60-day period before the distri-bution; on the date of an agreement withrespect to the distribution that was bindingon the distributing corporation on suchdate and at all times thereafter; or on thedate of a public announcement or filingwith the Securities and Exchange Com-mission with respect to the distribution.

(ii) Consistency. The distributing cor-poration and the controlled corporationmust make the determinations describedin paragraph (d)(2)(iv)(D)(4)(i) of thissection in a manner consistent with eachother and as of the same date for purposesof this paragraph (d)(2)(iv), paragraph(d)(5) of this section, and § 1.355–9. Ifthese consistency requirements are notmet, the fair market value of assets will bedetermined immediately before the distri-bution for purposes of all such provisions,unless the Commissioner determines thatthe use of such date is inconsistent withthe purposes of section 355 and the regu-lations thereunder.

(5) Fair market value. The fair marketvalue of an asset is determined under gen-eral federal tax principles but reduced (butnot below the adjusted basis of the asset)by the amount of any liability that is de-scribed in section 357(c)(3) (relating toexclusion of certain liabilities, includingliabilities the payment of which wouldgive rise to a deduction, from the amountof liabilities assumed in certain ex-changes) and relates to the asset (or to aBusiness with which the asset is associ-ated). Any other liability is disregardedfor purposes of determining the fair mar-ket value of an asset.

(6) Interest in partnership—(i) In gen-eral. Except as provided in paragraph(d)(2)(iv)(D)(6)(ii) of this section, an in-


terest in a partnership is a NonbusinessAsset.

(ii) Exception for certain interests inpartnerships. A distributing corporationor controlled corporation may be consid-ered to be engaged in one or more Busi-nesses conducted by a partnership. Thisdetermination will be made using thesame criteria that would be used to deter-mine for purposes of section 355(b) and§ 1.355–3 whether the corporation is con-sidered to be engaged in the active con-duct of a trade or business conducted bythe partnership (relating to the corpora-tion’s ownership interest or to its owner-ship interest and participation in manage-ment of the partnership). If a distributingcorporation or controlled corporation isconsidered to be engaged in one or moreBusinesses conducted by a partnership,the fair market value of the corporation’sinterest in the partnership will be allocatedbetween Business Assets and Nonbusi-ness Assets in the same proportion as theproportion of the fair market values of theBusiness Assets and Nonbusiness Assetsof the partnership.

(7) Stock in corporation—(i) In gen-eral. Except as provided in paragraph(d)(2)(iv)(D)(7)(ii) of this section, stock ina corporation other than a member of theDSAG or the CSAG is a NonbusinessAsset.

(ii) Exception for stock in Member of a50-Percent-Owned Group. If a Member ofa 50-Percent-Owned Group with respectto the distributing corporation or the con-trolled corporation owns stock in anotherMember of the 50-Percent-Owned Group(other than a member of the DSAG or theCSAG, respectively), the fair marketvalue of such stock will be allocated be-tween Business Assets and NonbusinessAssets in the same proportion as the pro-portion of the fair market values of theBusiness Assets and Nonbusiness Assetsof the issuing corporation. This computa-tion will be made with respect to lower-tier Members of the 50-Percent-OwnedGroup before the computations with re-spect to higher-tier members.

(8) Obligation between distributingcorporation or controlled corporationand certain partnerships or Members of50-Percent-Owned Groups. If an obliga-tion of the distributing corporation or thecontrolled corporation is held by a part-

nership described in paragraph(d)(2)(iv)(D)(6)(ii) of this section or by aMember of its 50-Percent-Owned Group,or if an obligation of a partnership de-scribed in paragraph (d)(2)(iv)(D)(6)(ii)of this section or of a Member of its50-Percent-Owned Group, with respect tothe distributing corporation or the con-trolled corporation, is held by the distrib-uting corporation or the controlled corpo-ration, proper adjustments will be made toprevent double inclusion of assets or in-appropriate allocation between BusinessAssets and Nonbusiness Assets of the dis-tributing corporation or the controlled cor-poration on account of such obligation.See Examples 6 and 7 of paragraph (d)(4)of this section.

(E) Anti-abuse rule. A transaction orseries of transactions undertaken with aprincipal purpose of affecting the Non-business Asset Percentage of any corpo-ration will not be given effect for purposesof applying this paragraph (d)(2)(iv). Forthis purpose, a transaction or series oftransactions includes a change in the formof ownership of an asset; an issuance,assumption, or repayment of indebtednessor other obligations; or an issuance orredemption of stock. However, this para-graph (d)(2)(iv)(E) generally does not ap-ply to a non-transitory acquisition or dis-position of assets, other than anacquisition from or disposition to a personthe ownership of whose stock would, un-der section 318(a) (other than paragraph(4) thereof), be attributed to the distribut-ing corporation or the controlled corpora-tion, or to a non-transitory transfer of as-sets between the distributing corporationand the controlled corporation.

* * * * *(3) * * *(ii) Corporate business purpose. A cor-

porate business purpose for the transac-tion is evidence of nondevice. The stron-ger the evidence of device (such as thepresence of the device factors specified inparagraph (d)(2) of this section), the stron-ger the corporate business purpose mustbe to prevent the determination that thetransaction is being used principally as adevice. Evidence of device presented byownership of Nonbusiness Assets (as de-fined in paragraph (d)(2)(iv)(B)(3) of thissection) can be outweighed by the exis-tence of a corporate business purpose for

the ownership. Evidence of device pre-sented by a difference between the Non-business Asset Percentages (as defined inparagraph (d)(2)(iv)(B)(5) of this section)of the distributing corporation and thecontrolled corporation can be outweighedby the existence of a corporate businesspurpose for the difference. A corporatebusiness purpose that relates to a separa-tion of Nonbusiness Assets from one ormore Businesses or Business Assets (asdefined in paragraph (d)(2)(iv)(B) of thissection) is not evidence of nondevice un-less the business purpose involves an ex-igency that requires an investment orother use of the Nonbusiness Assets inone or more Businesses of the distributingcorporation, the controlled corporation, orboth. The assessment of the strength of acorporate business purpose will be basedon all of the facts and circumstances, in-cluding, but not limited to, the followingfactors:

* * * * *(4) Examples. The provisions of para-

graphs (d)(1) through (3) of this sectionmay be illustrated by the following exam-ples. For purposes of these examples, Aand B are individuals; P is a partnership;D and C are the distributing corporationand the controlled corporation, respective-ly; D and C each has no assets other thanthose described; there is no other evidenceof device or nondevice other than as de-scribed; D has accumulated earnings andprofits; and D distributes the stock of C ina distribution which, but for the issue ofwhether the transaction has been usedprincipally as a device, satisfies the re-quirements of section 355(a).

Example 1. Sale after distribution (device). Aowns all of the stock of D, which is engaged in thewarehousing business. D owns all of the stock of C,which is engaged in the transportation business. Allof D’s and C’s assets are Business Assets. D em-ploys B, who is extremely knowledgeable of thewarehousing business in general and the operationsof D in particular. B has informed A that he willseriously consider leaving D if he is not given theopportunity to purchase a significant amount of stockof D. Because of his knowledge and experience, theloss of B would seriously damage the business of D.B cannot afford to purchase any significant amountof stock of D as long as D owns C. Accordingly, Ddistributes the stock of C to A and A subsequentlysells a portion of his D stock to B. However, insteadof A selling a portion of the D stock, D could haveissued additional shares to B after the distribution. Inlight of the fact that D could have issued additionalshares to B, the sale of D stock by A is substantial


evidence of device. The transaction is considered tohave been used principally as a device. See para-graph (d)(1), (2)(i), (ii), and (iii)(A), (B), and (D),and (3)(i) and (ii) of this section.

Example 2. Disproportionate division of Non-business Assets (device)—(i) Facts. D owns andoperates a fast food restaurant in State M and ownsall of the stock of C, which owns and operates a fastfood restaurant in State N. The value of the BusinessAssets of D’s and C’s fast food restaurants are $100and $105, respectively. D also has $195 cash whichD holds as a Nonbusiness Asset. D and C operatetheir businesses under franchises granted by compet-ing businesses F and G, respectively. G has recentlychanged its franchise policy and will no longer grantor renew franchises to subsidiaries or other membersof the same affiliated group of corporations operat-ing businesses under franchises granted by its com-petitors. Thus, C will lose its franchise if it remainsa subsidiary of D. The franchise is about to expire.The lease for the State M location will expire in 24months, and D will be forced to relocate at that time.While D has not made any plans, it is weighing itsoption to purchase a building for the relocation. Dcontributes $45 to C, which C will retain, and dis-tributes the stock of C pro rata among D’s share-holders.

(ii) Analysis. After the distribution, D’s Nonbusi-ness Asset Percentage is 60 percent ($150/$250), andC’s Nonbusiness Asset Percentage is 30 percent($45/$150). D’s and C’s ownership of NonbusinessAssets of at least 20 percent of their respective TotalAssets is evidence of device with respect to each.The difference between D’s Nonbusiness Asset Per-centage and C’s Nonbusiness Asset Percentage is 30percentage points, which is also evidence of device.The corporate business purpose for the distributiondoes not relate to a separation of Nonbusiness Assetsfrom one or more Businesses or Business Assets andis evidence of nondevice. However, D has no cor-porate business purpose for the difference of Non-business Asset Percentages. While D is consideringpurchasing a building for use in the State M location,this purchase is not required by any exigency. Thefact that the distribution is pro rata is also evidenceof device. Based on all the facts and circumstances,the transaction is considered to have been used prin-cipally as a device. See paragraph (d)(1), (2)(i), (ii),(iv)(A) and (C), and (3)(i) and (ii)(A), (B), and (C) ofthis section.

Example 3. Proportionate division of Nonbusi-ness Assets (nondevice). The facts are the same as inExample 2, except that D contributes $95 of the cashto C instead of $45. After the distribution, D’s Non-business Asset Percentage is 50 percent ($100/$200)and C’s Nonbusiness Asset Percentage is 47.5 per-cent ($95/$200), each of which is evidence of de-vice. The difference between D’s Nonbusiness AssetPercentage and C’s Nonbusiness Asset Percentage(2.5 percentage points) is less than 10 percentagepoints and thus is not evidence of device. The cor-porate business purpose for the distribution is evi-dence of nondevice. Based on all the facts and cir-cumstances, the transaction is considered not to havebeen used principally as a device. See paragraph(d)(1), (2)(i), (ii), (iv)(A) and (C), and (3)(i) and(ii)(A), (B), and (C) of this section.

Example 4. Disproportionate division of Non-business Assets (nondevice).

The facts are the same as in Example 2, exceptthat the lease for the State M location will expire in6 months instead of 24 months, and D will use $80of the $150 cash it retains to purchase a nearbybuilding for the relocation. After the distribution,D’s Nonbusiness Asset Percentage is 60 percent, andC’s Nonbusiness Asset Percentage is 30 percent. D’sand C’s ownership of Nonbusiness Assets of at least20 percent of their respective Total Assets is evi-dence of device with respect to each. The differencebetween D’s Nonbusiness Asset Percentage and C’sNonbusiness Asset Percentage is 30 percentagepoints, which is also evidence of device. However, Dhas a corporate business purpose for a significantpart of the difference of Nonbusiness Asset Percent-ages because D’s use of $80 is required by businessexigencies. The fact that the distribution is pro rata isalso evidence of device. The corporate business pur-pose for the distribution is evidence of nondevice.Based on all the facts and circumstances, the trans-action is not considered to have been used princi-pally as a device. See paragraph (d)(1), (2)(i), (ii),(iv)(A) and (C), and (3)(i) and (ii)(A), (B), and (C) ofthis section.

Example 5. Nonbusiness Asset Percentage (50-Percent-Owned Group)—(i) Facts. C’s assets con-sist of 50% of the stock of S1 and other assetsconsisting of $10,000 of Business Assets and $5,000of Nonbusiness Assets. S1’s assets consist of 40% ofthe stock of S2, 60% of the stock of S3 and otherassets consisting of $1,000 of Business Assets and$500 of Nonbusiness Assets. S1 has $500 of liabil-ities, owed to unrelated persons. S2’s assets consistof $500 Business Assets and $100 Nonbusiness As-sets. S2 has $200 of liabilities. S3’s assets consist of$3,000 Business Assets and $1,500 Nonbusiness As-sets. S3 has $3,500 of liabilities, owed to unrelatedpersons.

(ii) Determination of S1’s Business Assets andNonbusiness Assets. Because C owns at least 50% ofthe stock of S1, S1 is a member of C’s 50-Percent-Owned Group. See paragraph (d)(2)(iv)(B)(7) of thissection. In determining the amount of C’s BusinessAssets and Nonbusiness Assets, whether S1’s stockin S2 and S3 are Nonbusiness Assets or partiallyNonbusiness Assets and partially Business Assetsmust first be determined. See paragraph(d)(2)(iv)(D)(7)(ii) of this section (computations aremade with respect to lower-tier Members of a 50-Percent-Owned Group before the computations withrespect to higher-tier members). The fair marketvalue of S1’s stock in S2 is $160 (40% of $400($500 � $100 – $200)). Because S1 owns less than50% of the stock of S2, S2 is not a member of C’s50-Percent-Owned Group, and thus the S2 stock is a$160 Nonbusiness Asset in the hands of S1. Seeparagraph (d)(2)(iv)(B)(7) and (D)(7)(i) of this sec-tion. The fair market value of S1’s stock in S3 is$600 (60% of $1,000 ($3,000 � $1,500 – $3,500)).Because C owns at least 50% of the stock of S1 andS1 owns at least 50% of the stock of S3, S3 is amember of C’s 50-Percent-Owned Group. See para-graph (d)(2)(iv)(B)(7) of this section. Thus, the fairmarket value of the S3 stock is allocated betweenBusiness Assets and Nonbusiness Assets in the sameproportion as S3’s proportion of Business Assets and

Nonbusiness Assets. See paragraph (d)(2)(iv)(D)(7)(ii)of this section. Because S3 has Business Assets of$3,000 and Nonbusiness Assets of $1,500, this propor-tion is 662⁄3 % Business Assets ($3,000/$4,500) and331⁄3 % Nonbusiness Assets ($1,500/$4,500). The$600 fair market value of S1’s stock in S3 is allocated$400 to Business Assets ($600 x 662⁄3%) and $200 toNonbusiness Assets ($600 x 331⁄3 %). Thus, S1’s assetsconsist of $1,400 of Business Assets ($1,000 held di-rectly � $400 allocated from S3) and $860 of Non-business Assets ($500 held directly � $160 fair marketvalue of its S2 stock � $200 allocated from S3).

(iii) Determination of C’s Business Assets andNonbusiness Assets. The fair market value of C’sstock in S1 is $880 (50% of $1,760 ($160 � $600 �$1,000 � $500 – $500)). Because C owns at least 50%of the stock of S1, S1 is a member of C’s 50-Percent-Owned Group. See paragraph (d)(2)(iv)(B)(7) of thissection. Thus, the fair market value of the S1 stock isallocated between Business Assets and NonbusinessAssets in the same proportion as the proportion of S1’sBusiness Assets and Nonbusiness Assets. See para-graph (d)(2)(iv)(D)(7)(ii) of this section. Because S1has Business Assets of $1,400 and Nonbusiness Assetsof $860, this proportion is 61.95% Business Assets($1,400/$2,260) and 38.05% Nonbusiness Assets($860/$2,260). The $880 fair market value of C’s S1stock is allocated $545 to Business Assets ($880 x61.95%) and $335 to Nonbusiness Assets ($880 x38.05%). Thus, C’s assets consist of $10,545 of Busi-ness Assets ($10,000 � $545) and $5,335 of Nonbusi-ness Assets ($5,000 � $335), for Total Assets of$15,880. C’s Nonbusiness Asset Percentage is 33.6%($5,335/$15,880).

Example 6. Partnership interest held by Distrib-uting. (i) Facts. D has directly-held Business Assetsof $1,000, directly held Nonbusiness Assets of$2,000, and a 40% partnership interest in P. P has$450 of Business Assets and $1,350 of cash, whichP holds as a Nonbusiness Asset, and owes a liabilityof $800.

(ii) Analysis. Pursuant to paragraph(d)(2)(iv)(D)(6)(ii) of this section, D is allocated$100 of Business Assets from P ($400 (value of D’s40% interest in P) x 25% ($450/$1,800)) and $300 ofNonbusiness Assets from P ($400 (value of D’s 40%interest in P) x 75% ($1,350/$1,800)), which areadded to D’s directly held Business Assets and Non-business Assets, respectively. D’s Nonbusiness As-set Percentage is 67.6% ($2,300 Nonbusiness As-sets/$3,400 Total Assets).

Example 7. Borrowing by Distributing from part-nership. (i) Facts. The facts are the same as inExample 6, except that D borrows $500 from P andinvests the proceeds in a Nonbusiness Asset. P’sdirectly-held Nonbusiness Assets increase by $500.The D obligation is a Nonbusiness Asset in P’shands.

(ii) Analysis. D’s directly-held Nonbusiness As-sets increase by $500, to $2,500. There is no corre-sponding decrease in the amount of Business Assetsor Nonbusiness Assets allocated to D from P, be-cause a Nonbusiness Asset of P ($500 cash) has beenreplaced by another $500 Nonbusiness Asset, theobligation from D. Effectively, because D has a 40%interest in P, D has borrowed $200 (40% of $500)from itself. Accordingly, D’s Nonbusiness Assetsmust be decreased by $200. D’s Business Assets will


continue to be $1,100 ($1,000 directly held plus$100 allocated from P), and D’s Nonbusiness Assetswill be $2,600 ($2,500 directly held, plus $300 al-located from P less the $200 decrease to preventdouble inclusion of the obligation and the obligationproceeds).

* * * * *(5) Distributions involving separation

of Business Assets from Nonbusiness As-sets—(i) In general. A distribution speci-fied in paragraph (d)(5)(iii) of this sectionis considered to have been used princi-pally as a device, notwithstanding thepresence of nondevice factors described inparagraph (d)(3) of this section or otherfacts and circumstances. However, thisparagraph (d)(5)(i) does not apply to adistribution that is described in paragraph(d)(3)(iv) of this section (distributions todomestic corporations entitled to certaindividends received deductions absent ap-plication of section 355(a)) or paragraph(d)(6) of this section (transactions ordinar-ily not considered to be a device).

(ii) Definitions and operating rules.The definitions in paragraph (d)(2)(iv)(B)of this section and the operating rules inparagraph (d)(2)(iv)(D) of this section ap-ply for purposes of this paragraph(d)(5). For purposes of paragraph(d)(2)(iv)(D)(1), (2), and (3), referencesto paragraph (d)(2)(iv) of this sectionare treated as references to this para-graph (d)(5).

(iii) Certain distributions involvingseparation of Nonbusiness Assets fromBusiness Assets. A distribution is specifiedin this paragraph (d)(5)(iii) if both—

(A) The Nonbusiness Asset Percentageof the distributing corporation or the con-trolled corporation is 662⁄3 percent ormore, and

(B) If the Nonbusiness Asset Percent-age of the distributing corporation or thecontrolled corporation is—

(1) 662⁄3 percent or more but less than80 percent, and the Nonbusiness AssetPercentage of the other corporation (thecontrolled corporation or the distributingcorporation, as the case may be) is lessthan 30 percent;

(2) 80 percent or more but less than 90percent, and the Nonbusiness Asset Per-centage of the other corporation (the con-trolled corporation or the distributing cor-poration, as the case may be) is less than40 percent; or

(3) 90 percent or more, and the Non-business Asset Percentage of the othercorporation (the controlled corporation orthe distributing corporation, as the casemay be) is less than 50 percent.

(iv) Anti-abuse rule. The anti-abuserule in paragraph (d)(2)(iv)(E) of this sec-tion applies for purposes of this paragraph(d)(5), with references to paragraph(d)(2)(iv) of this section treated as refer-ences to this paragraph (d)(5) and refer-ences to paragraph (d)(2)(iv)(E) of thissection treated as references to this para-graph (d)(5)(iv).

(6) Transactions ordinarily not consid-ered as a device—(i) In general. Thisparagraph (d)(6) specifies three distribu-tions that ordinarily do not present thepotential for federal tax avoidance de-scribed in paragraph (d)(1) of this section.Accordingly, such distributions are ordi-narily considered not to have been usedprincipally as a device, notwithstandingthe presence of any of the device factorsdescribed in paragraph (d)(2) of this sec-tion or a separation of Business Assetsfrom Nonbusiness Assets as described inparagraph (d)(5) of this section. A trans-action described in paragraph (d)(6)(iii) or(iv) of this section is not protected by thisparagraph (d)(6) from a determination thatit was used principally as a device if itinvolves the distribution of the stock ofmore than one controlled corporation andfacilitates the avoidance of the dividendprovisions of the Code through the subse-quent sale or exchange of stock of onecorporation and the retention of the stockof another corporation.* * *

* * * * *(i) Effective/applicability date—(1)

Paragraph (d) of this section—(i) In gen-eral. Except as provided in paragraph(i)(1)(ii) of this section, paragraph (d) ofthis section applies to transactions occur-ring on or after the date the Treasurydecision adopting these regulations as fi-nal regulations is published in the FederalRegister.

(ii) Transition rule. Paragraph (d) ofthis section does not apply to a distribu-tion that is—

(A) Made pursuant to an agreement,resolution, or other corporate action that isbinding on or before the date the Treasurydecision adopting these regulations as fi-

nal regulations is published in the FederalRegister and at all times thereafter;

(B) Described in a ruling request sub-mitted to the Internal Revenue Service onor before July 15, 2016; or

(C) Described in a public announce-ment or filing with the Securities and Ex-change Commission on or before the datethe Treasury decision adopting these reg-ulations as final regulations is published inthe Federal Register.

(2) Paragraph (g) of this section. Para-graph (g) of this section applies to distri-butions occurring after October 20, 2011.For rules regarding distributions occurringon or before October 20, 2011, see§ 1.355–2T(i), as contained in 26 CFRpart 1, revised as of April 1, 2011.

Par. 5. Reserved § 1.355–8 is added toread as follows:

§ 1.355–8 [Reserved]

Par. 6. Section 1.355–9 is added to readas follows:

§ 1.355–9 Minimum percentage of Five-Year-Active-Business Assets.

(a) Definitions. The following defini-tions apply for purposes of this section:

(1) Distributing, Controlled. Distribut-ing means the distributing corporationwithin the meaning of § 1.355–1(b). Con-trolled means the controlled corporationwithin the meaning of § 1.355–1(b).

(2) Five-Year-Active Business. Five-Year-Active Business means the activeconduct of a trade or business that satisfiesthe requirements and limitations of sec-tion 355(b)(2) and § 1.355–3(b).

(3) Five-Year-Active-Business Assets.Five-Year-Active-Business Assets of acorporation means its gross assets used inone or more Five-Year-Active Businesses.Such assets include cash and cash equiv-alents held as a reasonable amount ofworking capital for one or more Five-Year-Active Businesses. Such assets alsoinclude assets required (by binding com-mitment or legal requirement) to be heldto provide for exigencies related to a Five-Year-Active Business or for regulatorypurposes with respect to a Five-Year-Active Business. For this purpose, suchassets include assets the holder is required(by binding commitment or legal require-ment) to hold to secure or otherwise pro-


vide for a financial obligation reasonablyexpected to arise from a Five-Year-ActiveBusiness and assets held to implement abinding commitment to expend funds toexpand or improve a Five-Year-ActiveBusiness.

(4) Non-Five-Year-Active-Business As-sets. Non-Five-Year-Active-Business As-sets of a corporation means its gross assetsother than its Five-Year-Active-BusinessAssets.

(5) Total Assets. Total Assets of a cor-poration means its Five-Year-Active-Business Assets and its Non-Five-Year-Active-Business Assets.

(6) Five-Year-Active-Business AssetPercentage. The Five-Year-Active-Business Asset Percentage of a corpora-tion is the percentage determined by di-viding the fair market value of its Five-Year-Active-Business Assets by the fairmarket value of its Total Assets.

(7) Separate Affiliated Group, SAG,CSAG, and DSAG. Separate AffiliatedGroup (or SAG), CSAG, and DSAG havethe same meanings as in § 1.355–2(d)(2)(iv)(B)(6).

(b) Five percent minimum Five-Year-Active-Business Asset Percentage. For therequirements of section 355(a)(1)(C) andsection 355(b) to be satisfied with respectto a distribution, the Five-Year-Active-Business Asset Percentage of each of Dis-tributing and Controlled must be at leastfive percent.

(c) Operating rules. The following op-erating rules apply for purposes of thissection:

(1) Treatment of SAG and fair marketvalue. The operating rules in § 1.355–2(d)(2)(iv)(D)(2) (treatment of SAG as asingle corporation) and (5) (fair marketvalue) apply.

(2) Time to identify assets, determinecharacter of assets, and determine fairmarket value of assets. The provisions of§ 1.355–2(d)(2)(iv)(D)(3) (time to iden-tify assets and determine character of as-sets) apply, except that references to para-graph (d)(2)(iv) are treated as referencesto this section and “Business Assets orNonbusiness Assets” is replaced with“Five-Year-Active-Business Assets orNon-Five-Year-Active-Business Assets,”and the provisions of § 1.355–2(d)(2)(iv)(D)(4) (time to determine fairmarket value of assets) apply.

(3) Interest in partnership—(i) In gen-eral. Except as provided in paragraph(c)(3)(ii) of this section, an interest in apartnership is a Non-Five-Year-Active-Business Asset.

(ii) Exception for certain interests inpartnerships. If Distributing or Controlledis considered to be engaged in one ormore Five-Year-Active Businesses con-ducted by a partnership, the fair marketvalue of the corporation’s interest in thepartnership will be allocated betweenFive-Year-Active-Business Assets andNon-Five-Year-Active-Business Assets inthe same proportion as the proportion ofthe fair market values of the Five-Year-Active-Business Assets and Non-Five-Year-Active-Business Assets of the part-nership.

(d) Anti-abuse rule. A transaction orseries of transactions undertaken with aprincipal purpose of affecting the Five-Year-Active-Business Asset Percentageof any corporation will not be given effectfor purposes of applying this § 1.355–9.For this purpose, a transaction or series oftransactions includes a change in the formof ownership of an asset; an issuance,assumption, or repayment of indebtednessor other obligations; or an issuance or

redemption of stock. However, this para-graph (d) generally does not apply to anon-transitory acquisition or dispositionof assets, other than an acquisition from ordisposition to a person the ownership ofwhose stock would, under section 318(a)(other than paragraph (4) thereof), be at-tributed to Distributing or Controlled, orto a non-transitory transfer of assets be-tween Distributing and Controlled.

(e) Effective/applicability date—(1) Ingeneral. Except as provided in paragraph(e)(2) of this section, this section appliesto transactions occurring on or after thedate the Treasury decision adopting theseregulations as final regulations is pub-lished in the Federal Register.

(2) Transition rule—This section doesnot apply to a distribution that is—

(i) Made pursuant to an agreement, res-olution, or other corporate action that isbinding on or before the date the Treasurydecision adopting these regulations as fi-nal regulations is published in the FederalRegister and at all times thereafter;

(ii) Described in a ruling request sub-mitted to the Internal Revenue Service onor before July 15, 2016; or

(iii) Described in a public announce-ment or filing with the Securities and Ex-change Commission on or before the datethe Treasury decision adopting these reg-ulations as final regulations is published inthe Federal Register.

John Dalrymple,Deputy Commissioner for Services and

Enforcement.

(Filed by the Office of the Federal Register on July 14, 2016,8:45 a.m., and published in the issue of the Federal Registerfor July 15, 2016, 81 F.R. 46004)


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. 2016–31 August 1, 2016i

Numerical Finding List1

Bulletins 2016–27 through 2016–31

Action on Decision:

2016-01, 2016-16 I.R.B. 5802016-02, 2016-31 I.R.B. 193

Announcements:

2016-21, 2016-27 I.R.B. 82016-23, 2016-27 I.R.B. 102016-24, 2016-30 I.R.B. 1702016-25, 2016-31 I.R.B. 205

Notices:

2016-40, 2016-27 I.R.B. 42016-41, 2016-27 I.R.B. 52016-42, 2016-29 I.R.B. 672016-43, 2016-29 I.R.B. 1322016-44, 2016-29 I.R.B. 1322016-45, 2016-29 I.R.B. 1352016-46, 2016-31 I.R.B. 202

Proposed Regulations:

REG-109086-15, 2016-30 I.R.B. 171REG-101689-16, 2016-30 I.R.B. 170REG-123854-12, 2016-28 I.R.B. 15REG-147196-07, 2016-29 I.R.B. 32REG-134016-15, 2016-31 I.R.B. 205

Revenue Procedures:

2016-37, 2016-29 I.R.B. 1362016-39, 2016-30 I.R.B. 1642016-40, 2016-30 I.R.B. 165

Revenue Rulings:

2016-17, 2016-27 I.R.B. 12016-18, 2016-31 I.R.B. 194

Treasury Decisions:

9773, 2016-29 I.R.B. 569774, 2016-30 I.R.B. 1519775, 2016-30 I.R.B. 1599778, 2016-31 I.R.B. 196

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2016–01 through 2016–26 is in Internal Revenue Bulletin2016–26, dated June 27, 2016.

August 1, 2016 Bulletin No. 2016–31ii

Finding List of Current Actions onPreviously Published Items1

Bulletins 2016–27 through 2016–31

Notices:

2013-1Modified byNotice 2016-41, 2016-27 I.R.B. 5

2013-1Superseded byNotice 2016-41, 2016-27 I.R.B. 5

Revenue Procedures:

2007-44Clarified byRev. Proc. 2016-37, 2016-29 I.R.B. 136

2007-44Modified byRev. Proc. 2016-37, 2016-29 I.R.B. 136

2007-44Superseded byRev. Proc. 2016-37, 2016-29 I.R.B. 136



1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2016–01 through 2016–26 is in Internal Revenue Bulletin2016–26, dated June 27, 2016.

Bulletin No. 2016–31 August 1, 2016iii

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