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

T.D. 9637, page 427These final regulations remove any reference to, or requirementof reliance on, credit ratings in regulations under the InternalRevenue Code and provide substitute standards of credit-worthiness where appropriate, pursuant to the Dodd-Frank Act.

REG–124148–05, page 444Research expenditures under Section 174. Theses proposedregulations provide guidance on the treatment of amounts paidor incurred in connection with the development of tangibleproperty, including pilot models. Comments requested by De-cember 5, 2013. A public hearing is scheduled for January 8,2014.

REG–161948–05, page 449These proposed regulations apply when a corporation that issubject to U.S. income tax acquires loss property tax-free froma liquidating subsidiary, from shareholders or others in a cap-ital contribution, or from another corporation or person in areorganization, and the loss in the acquired property accruedoutside the U.S. tax system. The proposed regulations provideguidance for preventing the importation of loss in such casesby requiring the bases of the assets received to be equal tovalue.

Notice 2013–60, page 431Clarification of Notice 2013–29. Notice 2013–29 provided twomethods to determine when construction has begun on aqualified energy facility. This notice clarifies Notice 2013–29regarding (i) the determination of whether a taxpayer satisfieseither of those methods with respect to a facility, (ii) theapplicability of the “master contract” provision in that notice,and (iii) the effect of a transfer of a facility after constructionhas begun.

Notice 2013–63, page 436In order to provide emergency housing relief needed as a resultof the devastation caused by severe storms, flooding, land-slides, and mudslides in Colorado, this notice temporarily sus-pends certain requirements under § 142(d) for qualified resi-dential rental projects financed with exempt facility bondsissued by state and local governments under § 142. To thatend, this Notice suspends the income requirements during atemporary housing period that ends September 30, 2014, forunits of a Project within which units are occupied by displacedindividuals. It also provides certain modifications to the begin-ning and ending dates of the qualified project period for aProject occupied by displaced individuals, provides that dis-placed persons are not to be considered transient, and pro-vides 60 days for correcting non-compliant Projects at the endof the temporary housing period.

Notice 2013–64, page 438The Internal Revenue Service is suspending certain require-ments under § 42 of the Code for low-income housing creditprojects to provide emergency housing relief needed as aresult of the devastation caused by recent weather-relateddisasters in the State of Colorado.

(Continued on the next page)

Finding Lists begin on page ii.Index for July through October begins on page iv.

Bulletin No. 2013–44October 28, 2013

EXEMPT ORGANIZATIONS

Announcement 2013–42, page 464The IRS has revoked its determination that the following orga-nizations qualify as organizations described in sections501(c)(3) and 170(c)(2) of the Code: American College ofForensic Examiners International, Inc. of Springfield, MO., B &L Grace Foundation of Fresno, CA., Big Apple Day School ofBrooklyn, NY., BuildClean of Houston, TX., Foster Care Net-work, Inc. of Goodyear, AZ., Generational Arts Limited of NewYork, NY., Help End Hunger Now Foundation of Troy, MI., IDAFoundation for Autism and Alzheimer’s Research and Solution,Inc. of Homestead, FL., J. D. Davis Community Service, Inc., ofInglewood, CA., Joy Center, Inc. of Stuart, FL., Lifeskills 411 ofRichmond, CA., The Music Box Lurrine Burgess of Los Angeles,CA., and One World Hunger of Union Center, CA.

EMPLOYMENT TAX

Notice 2013–61, page 432This notice provides guidance for employers and employees tomake claims for refund or adjustments of overpayments ofFederal Insurance Contributions Act (FICA) taxes and Federalincome tax withholding resulting from the Supreme Court de-cision in United States v. Windsor, 570 U.S. ___ , 133 S.Ct.2675 (2013) decision and Revenue Ruling 2013–17, 2013–38I.R.B. 201.

EXCISE TAX

T.D. 9637, page 427These final regulations remove any reference to, or require-ment of reliance on, credit ratings in regulations under theInternal Revenue Code and provide substitute standards ofcredit-worthiness where appropriate, pursuant to the Dodd-Frank Act.

ADMINISTRATIVE

Notice 2013–65, page 440Optional special per diem rates. This notice provides the2013–2014 special per diem rates for taxpayers to use insubstantiating the amount of ordinary and necessary businessexpenses incurred while traveling away from home. The noticeincludes (1) the special transportation industry rate, (2) the ratefor the incidental expenses only deduction, and (3) the ratesand list of high-cost localities for the high-low substantiationmethod.

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.

October 28, 2013 2013–44 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 150.—Definitionsand Special Rules

T.D. 9637DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Parts 1 and 48

Modification of TreasuryRegulations Pursuant toSection 939A of the Dodd-Frank Wall Street Reform andConsumer Protection Act

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains fi-nal regulations that remove any referenceto, or requirement of reliance on, “creditratings” in regulations under the InternalRevenue Code (Code) and provides sub-stitute standards of credit-worthinesswhere appropriate. This action is requiredby the Dodd-Frank Wall Street Reformand Consumer Protection Act. These reg-ulations affect persons subject to variousprovisions of the Code.

DATES: Effective Date: These regula-tions are effective on September 6, 2013.

Applicability Dates: For dates of appli-cability, see §§1.150–1(a)(4), 1.171–1 (f),1.197–2(b)(7), 1.249–1(f)(3), 1.475(a)–4(d)(4), 1.860G–2(g)(3), 1.1001–3(d), (e),and (g), and 48.4101–1(l)(5).

FOR FURTHER INFORMATIONCONTACT: Arturo Estrada, (202) 622-3900 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Section 939A(a) of the Dodd-FrankWall Street Reform and Consumer Protec-tion Act, Public Law 111–203 (124 Stat.1376 (2010)) (the “Dodd-Frank Act”), re-quires each Federal agency to review its

regulations that require the use of an as-sessment of credit-worthiness of a secu-rity or money market instrument, and toreview any references or requirements inits regulations regarding credit ratings.Section 939A(b) directs each agency tomodify any regulation identified in thereview required under section 939A(a) byremoving any reference to, or requirementof reliance on, credit ratings and substitut-ing a standard of credit-worthiness thatthe agency deems appropriate. Numerousprovisions under the Internal RevenueCode (Code) are affected.

These regulations amend the IncomeTax Regulations (26 CFR part 1) undersections 150, 171, 197, 249, 475, 860G,and 1001 of the Code (the existing regu-lations). These sections were added to theCode during different years to serve dif-ferent purposes. These regulations alsoamend the Manufacturers and RetailersExcise Tax Regulations (26 CFR part 48)under section 4101, which provides regis-tration requirements related to Federalfuel taxes.

On July 6, 2011, temporary regulations(TD 9533) under sections 150, 171, 197,249, 475, 860G, and 1001 of the Codewere published in the Federal Register(76 FR 39278) that modify or eliminatethe reference to credit ratings in the rele-vant regulations. Additional temporaryregulations (26 CFR part 48) under sec-tion 4101 were published as part of TD9533. A notice of proposed rulemaking(REG–118809–11) cross-referencing thetemporary regulations was published inthe Federal Register the same day (76 FR39341). No written comments respondingto the notice of proposed rulemaking werereceived. No public hearing was requestedor held. The regulations are adopted asproposed without substantive changes.

Explanation of Provisions

These regulations remove references to“credit ratings” and “credit agencies” orfunctionally similar terms in the existingregulations. Some changes involve simpleword deletions or substitutions. Others re-flect the revision of one or more sentencesto remove the credit rating references.

Where appropriate, substitute standards ofcredit-worthiness replace the prior refer-ences to credit ratings, credit agencies, orfunctionally similar terms. Language revi-sions serve solely to remove the refer-ences prohibited by section 939A of theDodd-Frank Act and no additionalchanges to the existing regulations are in-tended.

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. It also has beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions. Because the regulations do not im-pose a collection of information on smallentities, the Regulatory Flexibility Act (5U.S.C. chapter 6) does not apply. Pursuantto section 7805(f) of the Code, these reg-ulations have been submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business. No commentswere received.

Drafting Information

These regulations were drafted by per-sonnel in the Office of Associate ChiefCounsel (Financial Institutions and Prod-ucts), the Office of Associate Chief Coun-sel (Income Tax and Accounting), the Of-fice of the Associate Chief Counsel(International) and the Office of the Asso-ciate Chief Counsel (Passthroughs andSpecial Industries). However, other per-sonnel from the IRS and the TreasuryDepartment participated in the develop-ment of the regulations.

*****

Adoption of Amendments to theRegulations

Accordingly, 26 CFR parts 1 and 48are amended as follows:

2013–44 I.R.B. October 28, 2013427

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 1.150–1 is amended as

follows:1. Paragraph heading (a)(2) is revised.2. Paragraph (a)(4) is revised.3. In paragraph (b), the definition of

Issuance costs is revised.The revisions read as follows:

§1.150–1 Definitions.

(a) * * *(2) Effective/applicability date * * ** * * * *(4) Additional exception to the general

applicability date. Section 1.150–1(b), Is-suance costs, applies on and after July 6,2011.

(b) * * *Issuance costs means costs to the ex-

tent incurred in connection with, and al-locable to, the issuance of an issue withinthe meaning of section 147(g). For exam-ple, issuance costs include the followingcosts but only to the extent incurred inconnection with, and allocable to, the bor-rowing: underwriters’ spread; counselfees; financial advisory fees; fees paid toan organization to evaluate the creditquality of an issue; trustee fees; payingagent fees; bond registrar, certification,and authentication fees; accounting fees;printing costs for bonds and offering doc-uments; public approval process costs; en-gineering and feasibility study costs; guar-antee fees, other than for qualifiedguarantees (as defined in §1.148–4(f));and similar costs.

* * * * *

§1.150–1T [Removed]

Par. 3. Section 1.150–1T is removed.Par. 4. Section 1.171–1(f) Example 2 is

revised to read as follows:

§1.171–1 Bond premium.

* * * * *(f) * * *Example 2. Convertible bond—(i) Facts. On Jan-

uary 1, A purchases for $1,100 B corporation’s bondmaturing in three years from the purchase date, witha stated principal amount of $1,000, payable at ma-turity. The bond provides for unconditional pay-

ments of interest of $30 on January 1 and July 1 ofeach year. In addition, the bond is convertible into 15shares of B corporation stock at the option of theholder. On the purchase date, B corporation’s non-convertible, publicly-traded, three-year debt of com-parable credit quality trades at a price that reflects ayield of 6.75 percent, compounded semiannually.

(ii) Determination of basis. A’s basis for deter-mining loss on the sale or exchange of the bond is$1,100. As of the purchase date, discounting theremaining payments on the bond at the yield atwhich B’s similar nonconvertible bonds trade (6.75percent, compounded semiannually) results in apresent value of $980. Thus, the value of the con-version option is $120. Under paragraph(e)(1)(iii)(A) of this section, A’s basis is $980($1,100–$120) for purposes of this section and§§1.171–2 through 1.171–5. The sum of all amountspayable on the bond other than qualified stated in-terest is $1,000. Because A’s basis (as determinedunder paragraph (e)(1)(iii)(A) of this section) doesnot exceed $1,000, A does not acquire the bond at apremium.

(iii) Applicability date. Notwithstand-ing §1.171–5(a)(1), this Example 2 ap-plies to bonds acquired on or after July 6,2011.

§1.171–1T [Removed]

Par. 5. Section 1.171–1T is removed.Par. 6. Section 1.197–2 is amended by

revising paragraph (b)(7) to read as fol-lows:

§1.197–2 Amortization of goodwill andcertain other intangibles.

* * * * *(b) * * *(7) Supplier-based intangibles—(i) In

general. Section 197 intangibles includeany supplier-based intangible. A supplier-based intangible is the value resultingfrom the future acquisition, pursuant tocontractual or other relationships withsuppliers in the ordinary course of busi-ness, of goods or services that will be soldor used by the taxpayer. Thus, the amountpaid or incurred for supplier-based intan-gibles includes, for example, any portionof the purchase price of an acquired tradeor business attributable to the existence ofa favorable relationship with persons pro-viding distribution services (such as fa-vorable shelf or display space at a retailoutlet), or the existence of favorable sup-ply contracts. The amount paid or incurredfor supplier-based intangibles does not in-clude any amount required to be paid forthe goods or services themselves pursuantto the terms of the agreement or other

relationship. In addition, see the excep-tions in paragraph 2(c) of this section,including the exception in paragraph2(c)(6) of this section for certain rights toreceive tangible property or services fromanother person.

(ii) Applicability date. This section ap-plies to supplier-based intangibles ac-quired after July 6, 2011.

* * * * *

§1.197–2T [Removed]

Par. 7. Section 1.197–2T is removed.Par. 8. Section 1.249–1 is amended by

revising paragraphs (e)(2)(ii) and (f)(3) toread as follows:

§1.249–1 Limitation on deduction ofbond premium on repurchase.

* * * * *(e) * * *(2) * * *(ii) In determining the amount under

paragraph (e)(2)(i) of this section, appro-priate consideration shall be given to allfactors affecting the selling price or yieldsof comparable nonconvertible obligations.Such factors include general changes inprevailing yields of comparable obliga-tions between the dates the convertibleobligation was issued and repurchasedand the amount (if any) by which theselling price of the nonconvertible obliga-tion was affected by reason of any changein the issuing corporation’s credit qualityor the credit quality of the obligation dur-ing such period (determined on the basisof widely published financial informationor on the basis of other relevant facts andcircumstances which reflect the relativecredit quality of the corporation or thecomparable obligation).

* * * * *(f) * * *(3) Portion of repurchase premium at-

tributable to cost of borrowing. Paragraph(e)(2)(ii) of this section applies to anyrepurchase of a convertible obligation oc-curring on or after July 6, 2011.

* * * * *

§1.249–1T [Removed]

Par. 9. Section 1.249–1T is removed.Par. 10. Section 1.475(a)–4 is amended

by revising paragraph (d)(4) Example 1,

October 28, 2013 2013–44 I.R.B.428

Example 2, and Example 3 to read asfollows:

§1.475(a)–4 Valuation safe harbor.

* * * * *(d) * * *(4) * * *Example 1. (i) X, a calendar year taxpayer, is a

dealer in securities within the meaning of section475(c)(1). X generally maintains a balanced portfo-lio of interest rate swaps and other interest ratederivatives, capturing bid-ask spreads and keepingits market exposure within desired limits (using, ifnecessary, additional derivatives for this purpose). Xuses a mark-to-market method on a statement that itis required to file with the United States Securitiesand Exchange Commission and that satisfies para-graph (d)(2) of this section with respect to both thecontracts with customers and the additional deriva-tives. When determining the amount of any gain orloss realized on a sale, exchange, or termination of aposition, X makes a proper adjustment for amountstaken into account respecting payments or receipts.X and all of its counterparties on the derivatives havethe same general credit quality as each other.

(ii) Under X’s valuation method, as of each val-uation date, X determines a mid-market probabilitydistribution of future cash flows under the deriva-tives and computes the present values of these cashflows. In computing these present values, X uses anindustry standard yield curve that is appropriate forobligations by persons with this same general creditquality. In addition, based on information that in-cludes its own knowledge about the counterparties,X adjusts some of these present values either upwardor downward to reflect X’s reasonable judgmentabout the extent to which the true credit status ofeach counterparty’s obligation, taking credit en-hancements into account, differs from the generalcredit quality used in the yield curve to present valuethe derivatives.

(iii) X’s methodology does not violate the re-quirement in paragraph (d)(3)(iii) of this section thatthe same cost or risk not be taken into account,directly or indirectly, more than once.

(iv) Applicability date. This Example 1 applies tovaluations of securities on or after July 6, 2011.

Example 2. (i) The facts are the same as inExample 1, except that X uses a better credit qualityin determining the yield curve to discount the pay-ments to be received under the derivatives. Based oninformation that includes its own knowledge aboutthe counterparties, X adjusts these present values toreflect X’s reasonable judgment about the extent towhich the true credit status of each counterparty’sobligation, taking credit enhancements into account,differs from this better credit quality obligation.

(ii) X’s methodology does not violate the re-quirement in paragraph (d)(3)(iii) of this section thatthe same cost or risk not be taken into account,directly or indirectly, more than once.

(iii) Applicability date. This Example 2 applies tovaluations of securities on or after July 6, 2011.

Example 3. (i) The facts are the same as inExample 1, except that, after computing present val-ues using the discount rates that are appropriate for

obligors with the same general credit quality, andbased on information that includes X’s own knowl-edge about the counterparties, X adjusts some ofthese present values either upward or downward toreflect X’s reasonable judgment about the extent towhich the true credit status of each counterparty’sobligation, taking credit enhancements into account,differs from a better credit quality.

(ii) X’s methodology violates the requirement inparagraph (d)(3)(iii) of this section that the same costor risk not be taken into account, directly or indi-rectly, more than once. By using the same generalcredit quality discount rate, X’s method takes intoaccount the difference between risk-free obligationsand obligations with that lower credit quality. Byadjusting values for the difference between a highercredit quality and that lower credit quality, X takesinto account risks that it had already accounted forthrough the discount rates that it used. The sameresult would occur if X judged some of its counter-parties’ obligations to be of a higher credit qualitybut X failed to adjust the values of those obligationsto reflect the difference between a higher credit qual-ity and the lower credit quality.

(iii) Applicability date. This Example 3 applies tovaluations of securities on or after July 6, 2011.

* * * * *

§1.475(a)–4T [Removed]

Par. 11. Section 1.475(a)–4T is re-moved.

Par. 12. Section 1.860G–2 is amendedby revising paragraphs (g)(3)(ii)(B),(g)(3)(ii)(C) and (g)(3)(ii)(D) to read asfollows:

§1.860G–2 Other rules.

* * * * *(g) * * *(3) * * *(ii) * * *(B) Presumption that a reserve is rea-

sonably required. The amount of a reservefund is presumed to be reasonable (and anexcessive reserve is presumed to havebeen promptly and appropriately reduced)if it does not exceed the amount requiredby a third party insurer or guarantor, whodoes not own directly or indirectly (withinthe meaning of section 267(c)) an interestin the REMIC (as defined in §1.860D–1(b)(1)), as a condition of providing creditenhancement.

(C) Presumption may be rebutted. Thepresumption in paragraph (g)(3)(ii)(B) ofthis section may be rebutted if theamounts required by the third party in-surer are not commercially reasonableconsidering the factors described in para-graph (g)(3)(ii)(A) of this section.

(D) Applicability date. Paragraphs(g)(3)(ii)(B) and (g)(3)(ii)(C) of this sec-tion apply on and after July 6, 2011.

* * * * *

§1.860G–2T [Removed]

Par. 13. Section 1.860G–2T is re-moved.

Par. 14. Section 1.1001–3 is amendedas follows:

1. Paragraph (d) Example 9 is revised.2. Paragraph (e)(4)(iv)(B) is revised.3. Paragraph (e)(5)(ii)(B)(2) is revised.4. Paragraph (g) Examples 1, 5 and 8

are revised.The revisions read as follows:

§1.1001–3 Modifications of debtinstruments.

* * * * *(d) * * *Example 9. Holder’s option to increase interest

rate. (i) A corporation issues an 8-year note to a bankin exchange for cash. Under the terms of the note,the bank has the option to increase the rate of interestby a specified amount if certain covenants in the noteare breached. The bank’s right to increase the inter-est rate is a unilateral option as described in para-graph (c)(3) of this section.

(ii) A covenant in the note is breached. The bankexercises its option to increase the rate of interest.The increase in the rate of interest occurs by opera-tion of the terms of the note and does not result in adeferral or a reduction in the scheduled payments orany other alteration described in paragraph (c)(2) ofthis section. Thus, the change in interest rate is not amodification.

(iii) Applicability date. This Example 9 applies tomodifications occurring on or after July 6, 2011.

* * * * *(e) * * *(4) * * *(iv) * * *(B) Nonrecourse debt instruments (1)

A modification that releases, substitutes,adds or otherwise alters a substantialamount of the collateral for, a guaranteeon, or other form of credit enhancementfor a nonrecourse debt instrument is asignificant modification. A substitution ofcollateral is not a significant modification,however, if the collateral is fungible orotherwise of a type where the particularunits pledged are unimportant (for exam-ple, government securities or financial in-struments of a particular type and creditquality). In addition, the substitution of asimilar commercially available credit en-hancement contract is not a significant

2013–44 I.R.B. October 28, 2013429

modification, and an improvement to theproperty securing a nonrecourse debt in-strument does not result in a significantmodification.

(2) Applicability date. Paragraph (e)(4)(iv)(B)(1) of this section applies to modifi-cations occurring on or after July 6, 2011.

* * * * *(5) * * *(ii) * * *(B) * * *(2) Original collateral (i) A modification

that changes a recourse debt instrument to anonrecourse debt instrument is not a signif-icant modification if the instrument contin-ues to be secured only by the original col-lateral and the modification does not resultin a change in payment expectations. Forthis purpose, if the original collateral is fun-gible or otherwise of a type where the par-ticular units pledged are unimportant (forexample, government securities or financialinstruments of a particular type and creditquality), replacement of some or all units ofthe original collateral with other units of thesame or similar type and aggregate value isnot considered a change in the original col-lateral.

(ii) Applicability date. Paragraph(e)(5)(ii)(B)(2)(i) of this section applies tomodifications occurring on or after July 6,2011.

* * * * *(g) * * *Example 1. Modification of call right. (i) Under

the terms of a 30-year, fixed-rate bond, the issuer cancall the bond for 102 percent of par at the end of tenyears or for 101 percent of par at the end of 20 years.At the end of the eighth year, the holder of the bondpays the issuer to waive the issuer’s right to call thebond at the end of the tenth year. On the date of themodification, the issuer’s credit quality is approxi-mately the same as when the bond was issued, butmarket rates of interest have declined from that date.

(ii) The holder’s payment to the issuer changesthe yield on the bond. Whether the change in yield isa significant modification depends on whether theyield on the modified bond varies from the yield onthe original bond by more than the change in yield asdescribed in paragraph (e)(2)(ii) of this section.

(iii) If the change in yield is not a significant mod-ification, the elimination of the issuer’s call right mustalso be tested for significance. Because the specificrules of paragraphs (e)(2) through (e)(6) of this sectiondo not address this modification, the significance of themodification must be determined under the general ruleof paragraph (e)(1) of this section.

(iv) Applicability date. This Example 1 applies tomodifications occurring on or after July 6, 2011.

* * * * *Example 5. Assumption of mortgage with in-

crease in interest rate. (i) A recourse debt instrument

with a 9 percent annual yield is secured by an officebuilding. Under the terms of the instrument, a pur-chaser of the building may assume the debt and besubstituted for the original obligor if the purchaser isequally or more creditworthy than the original obli-gor and if the interest rate on the instrument isincreased by one-half percent (50 basis points). Thebuilding is sold, the purchaser assumes the debt, andthe interest rate increases by 50 basis points.

(ii) If the purchaser’s acquisition of the buildingdoes not satisfy the requirements of paragraph(e)(4)(i)(B) or paragraph (e)(4)(i)(C) of this section,the substitution of the purchaser as the obligor is asignificant modification under paragraph (e)(4)(i)(A)of this section.

(iii) If the purchaser acquires substantially all ofthe assets of the original obligor, the assumption ofthe debt instrument will not result in a significantmodification if there is not a change in paymentexpectations and the assumption does not result in asignificant alteration.

(iv) The change in the interest rate, if testedunder the rules of paragraph (e)(2) of this section,would result in a significant modification. Thechange in interest rate that results from the transac-tion is a significant alteration. Thus, the transactiondoes not meet the requirements of paragraph(e)(4)(i)(C) of this section and is a significant mod-ification under paragraph (e)(4)(i)(A) of this section.

(v) Applicability date. This Example 5 applies tomodifications occurring on or after July 6, 2011.

* * * * *Example 8. Substitution of credit enhancement

contract. (i) Under the terms of a recourse debtinstrument, the issuer’s obligations are secured by aletter of credit from a specified bank. The debt in-strument does not contain any provision allowing asubstitution of a letter of credit from a different bank.The specified bank, however, encounters financialdifficulty. The issuer and holder agree that the issuerwill substitute a letter of credit from another bank.

(ii) Under paragraph (e)(4)(iv)(A) of this section,the substitution of a different credit enhancement con-tract is not a significant modification of a recourse debtinstrument unless the substitution results in a change inpayment expectations. While the substitution of a newletter of credit by a different bank does not itself resultin a change in payment expectations, such a substitu-tion may result in a change in payment expectationsunder certain circumstances (for example, if the obli-gor’s capacity to meet payment obligations is depen-dent on the letter of credit and the substitution substan-tially enhances that capacity from primarily speculativeto adequate).

(iii) Applicability date. This Example 8 applies tomodifications occurring on or after July 6, 2011.

* * * * *

§1.1001–3T [Removed]

Par. 15. Section 1.1001–3T is removed.

PART 48—MANUFACTURERS ANDRETAILERS EXCISE TAXES

Par. 16. The authority citation for part48 continues to read in part as follows:

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

Par. 17. Section 48.4101–1 is amendedas follows:

1. Paragraph (f)(4)(ii)(B) is revised.2. Paragraph (l)(5) is revised.The revisions read as follows:

§48.4101–1 Taxable fuel; registration.

* * * * *(f) * * *(4) * * *(ii) * * *(B) Basis for determination. The deter-

mination under §48.4101–1(f)(4)(ii) mustbe based on all information relevant to theapplicant’s financial status.

* * * * *(l) * * *(5) Applicability date. Paragraph (f)(4)(ii)

(B) of this section applies on and after July6, 2011.

§48.4101–1T [Removed]

Par. 18. Section 48.4101–1T is re-moved.

Beth Tucker,Deputy Commissioner for

Operations Support.

Approved August 14, 2013.

Mark J. Mazur,Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on September 5,2013, 8:45 a.m., and published in the issue of the FederalRegister for September 6, 2013, 78 F.R. 54758)

Section 6402.—Authorityto Make Credits or Refunds

Special administrative procedures formaking adjustments or claiming refundsof overpayments of FICA taxes and in-come tax withholding resulting fromUnited States v. Windsor and Rev. Rul.2013–17, are set forth in Notice 2013–61.See page 432.

October 28, 2013 2013–44 I.R.B.430

Part III. Administrative, Procedural, and MiscellaneousClarification of Notice2013–29

Notice 2013–60

SECTION 1. PURPOSE

The American Taxpayer Relief Act of2012, Pub. L. No. 112–240, 126 Stat.2313 (ATRA), modified the definition of aqualified facility under section 45(d) ofthe Internal Revenue Code by replacingthe placed in service requirement with abegin construction requirement. A tax-payer will be eligible to receive the re-newable electricity production tax credit(PTC) under section 45, or the energyinvestment tax credit (ITC) under section48 in lieu of the PTC, with respect to afacility if construction of such facility be-gins before January 1, 2014. Notice 2013–29, 2013–20 I.R.B. 1085, provides twomethods to determine when constructionhas begun on such a facility. This noticeclarifies Notice 2013–29 regarding (i) thedetermination of whether a taxpayer sat-isfies either of those methods with respectto a facility, (ii) the applicability of the“master contract” provision in that notice,and (iii) the effect of a transfer of a facilityafter construction has begun.

SECTION 2. BACKGROUND

Notice 2013–29 provides two methodsthat a taxpayer may use to establish thatconstruction of a qualified facility has be-gun. A taxpayer may establish the begin-ning of construction by starting physicalwork of a significant nature as describedin section 4 of the notice (Physical WorkTest). Alternatively, a taxpayer may es-tablish the beginning of construction bymeeting the safe harbor provided in sec-tion 5 of the notice (Safe Harbor). Thesemethods require that a taxpayer make con-tinuous progress towards completion onceconstruction has begun (as set forth insections 4.06 (Continuous ConstructionTest) and 5.02 (Continuous Efforts Test)of Notice 2013–29, respectively). Notice2013–29 provides that a taxpayer may en-ter into a master contract for purposes ofthe Physical Work Test in section 4.03(2).Notice 2013–29 does not address the ef-

fect of a transfer of a facility after con-struction has begun.

The Treasury Department and the Inter-nal Revenue Service have received a signif-icant number of questions regarding the ap-plication of the Continuous Constructionand Continuous Efforts Tests in Notice2013–29, the applicability of the mastercontract provision for purposes of the SafeHarbor, and the effect that a transfer of afacility after construction has begun willhave on its ability to qualify for the PTC orITC. In response to these questions, thisnotice provides a method that will allowtaxpayers to be deemed to satisfy both theContinuous Construction and ContinuousEfforts Tests. In addition, this notice pro-vides that the master contract provision inNotice 2013–29 also applies for purposes ofthe Safe Harbor, and that the transfer of afacility after construction has begun will notprevent a facility from qualifying for thePTC or ITC.

SECTION 3. CONTINUOUSCONSTRUCTION/CONTINUOUSEFFORTS TESTS

.01 In general. Section 4.01 of Notice2013–29, setting forth the Physical WorkTest, provides:

The Internal Revenue Service willclosely scrutinize, and may determinethat construction has not begun on a fa-cility before January 1, 2014, if a tax-payer does not maintain a continuousprogram of construction as determinedunder section 4.06.

Section 4.06(1) provides that whether a tax-payer maintains a continuous program ofconstruction will be determined by the rel-evant facts and circumstances. Section4.06(2) provides that certain disruptions inthe taxpayer’s construction of a facility thatare beyond the taxpayer’s control will not beconsidered to indicate that a taxpayer hasfailed to maintain a continuous program ofconstruction, and sets forth a non-exclusivelist of examples of such disruptions.

Section 5.01 of Notice 2013–29, set-ting forth the Safe Harbor, provides:

Construction of a facility will be consid-ered as having begun before January 1,2014, if (1) a taxpayer pays or incurs(within the meaning of Treas. Reg. §1.461–1(a)(1) and (2)) five percent or

more of the total cost of the facility,except as provided in section 5.01(2),before January 1, 2014, and (2) thereaf-ter, the taxpayer maintains continuousefforts to advance towards completion ofthe facility (as determined under section5.02).The exception in section 5.01(2) deals

with costs incurred by a person other thanthe taxpayer under a binding written con-tract with the taxpayer. Section 5.02(1) pro-vides that whether a taxpayer maintains con-tinuous efforts to advance towardscompletion of the facility will be determinedby the relevant facts and circumstances.Section 5.02(2) provides that certain disrup-tions in the taxpayer’s continuous efforts toadvance towards completion of the facilitythat are beyond the taxpayer’s control willnot be considered as indicating that a tax-payer has failed to maintain continuous ef-forts to advance towards completion of thefacility, and sets forth a non-exclusive list ofexamples of such disruptions.

.02 Deemed satisfaction of ContinuousConstruction/Continuous Efforts Tests. Ifa facility is placed in service before Jan-uary 1, 2016, the facility will be consid-ered to satisfy the Continuous Construc-tion Test (for purposes of satisfying thePhysical Work Test) or the ContinuousEfforts Test (for purposes of satisfying theSafe Harbor). If a facility is not placed inservice before January 1, 2016, whetherthe facility satisfies the Continuous Con-struction or Continuous Efforts Tests willbe determined by the relevant facts andcircumstances, as described in section4.06 and section 5.02 in Notice 2013–29.

SECTION 4. MASTER CONTRACT

.01 In general. Section 4.03(2) of No-tice 2013–29, setting forth the PhysicalWork Test, provides:

If a taxpayer enters into a binding writtencontract for a specific number of compo-nents to be manufactured, constructed, orproduced for the taxpayer by anotherperson under a binding written contract(a “master contract”), and then through anew binding written contract (a “projectcontract”) the taxpayer assigns its rightsto certain components to an affiliatedspecial purpose vehicle that will own the

2013–44 I.R.B. October 28, 2013431

facility for which such property is to beused, work performed with respect to themaster contract may be taken into ac-count in determining when physicalwork of a significant nature begins withrespect to the facility..02 Master contract for Safe Harbor. The

master contract provision, as described insection 4.03(2) of Notice 2013–29 under thePhysical Work Test, also applies for pur-poses of the Safe Harbor.

SECTION 5. TRANSFER OF AFACILITY

.01 In general. Notice 2013–29 did notaddress the effect of a transfer of a facilityafter construction has begun. Section45(d)(1), as amended by ATRA, provides:

In the case of a facility using wind toproduce electricity, the term ‘qualifiedfacility’ means any facility owned by thetaxpayer which is originally placed inservice after December 31, 1993, and theconstruction of which begins before Jan-uary 1, 2014.The statutory language requires only

that construction of a facility begin beforeJanuary 1, 2014. It does not require theconstruction to be begun by the taxpayerclaiming the credit. If a qualified facilitysatisfies either the Physical Work Test orthe Safe Harbor, a taxpayer that owns thefacility during the 10-year period begin-ning on the date the facility was originallyplaced in service may claim the PTC withrespect to that facility even if the taxpayerdid not own the facility at the time con-struction began. Alternatively, a taxpayerthat owns the facility on the date it isoriginally placed in service may elect toclaim the ITC in lieu of the PTC withrespect to that facility even if the taxpayerdid not own the facility at the time con-struction began. Any ITC claimed on afacility will be limited to the taxpayer’sbasis in qualified property (as defined insection 48(a)(5)(D)).

.02 Example. In August 2013, Devel-oper acquires a parcel of land on which itintends to build and operate a wind farm(Facility). Developer contributes the landto its wholly-owned limited liability com-pany (LLC), which is disregarded as anentity separate from its owner for federaltax purposes, to hold and develop Facility.In November 2013, Developer incurs 5percent of the cost of Facility and there-

after maintains continuous efforts to ad-vance towards the completion of Facility.In April 2014, to finance the developmentof the project, Developer sells 95 percentof the interests in LLC to a group ofinvestors (Investors) who are not relatedto Developer, and Developer does notcontribute sales proceeds to LLC. UnderRev. Rul. 99–5, 1999–1 C.B. 434, Devel-oper is treated as selling 95 percent ofeach of the assets of LLC to Investors, andimmediately thereafter Developer and In-vestors are treated as contributing theirrespective 5 percent and 95 percent inter-ests in those assets to LLC, which is nowa partnership and the owner of Facility forfederal tax purposes. In October 2015,LLC places Facility in service. BecauseFacility satisfies the Safe Harbor and as-suming Facility is otherwise a qualifiedfacility under section 45(d), LLC is eligi-ble to claim the PTC with respect to elec-tricity generated by Facility and sold to anunrelated party. Alternatively, LLC mayelect to claim the ITC in lieu of the PTC.

SECTION 6. EFFECT ON OTHERDOCUMENTS

Notice 2013–29 is clarified.

SECTION 7. DRAFTINGINFORMATION

The principal author of this notice isBrian J. Americus of the Office of AssociateChief Counsel (Passthroughs & Special In-dustries). For further information regardingthis notice, contact Brian J. Americus on(202) 622-3110 (not a toll-free call).

Application of WindsorDecision and RevenueRuling 2013–17 toEmployment Taxes andSpecial AdministrativeProcedures for Employersto Make Adjustments orClaims for Refund or Credit

Notice 2013–61

PURPOSE

This notice provides guidance for em-ployers and employees to make claims for

refund or adjustments (referred to in thisnotice as corrections) of overpayments ofFederal Insurance Contributions Act(FICA) taxes and Federal income taxwithholding (employment taxes) with re-spect to certain benefits provided to same-sex spouses and remuneration paid tosame-sex spouses resulting from theUnited States Supreme Court decision inUnited States v. Windsor, 570 U.S. ___,133 S.Ct. 2675 (2013) and the holdings ofRev. Rul. 2013–17, 2013–38 I.R.B. 201.

To reduce filing and reporting burdensassociated with the optional retroactive ap-plication of the holdings of Rev. Rul. 2013–17, the Internal Revenue Service (IRS) isproviding special administrative proceduresfor employers to correct overpayments ofemployment taxes for 2013 and prior yearswith respect to certain same-sex spouse ben-efits and certain remuneration paid to same-sex spouses, including overpayments thatresult from a taxpayer’s retroactive applica-tion of the holdings of Rev. Rul. 2013–17.With respect to these overpayments for2013, this notice provides two alternativespecial administrative procedures. Underthe first alternative, employers may use thefourth quarter 2013 Form 941, Employer’sQUARTERLY Federal Tax Return, to cor-rect these overpayments of employmenttaxes for the first three quarters of 2013.Under the second alternative, employersmay file one Form 941–X, Adjusted Em-ployer’s QUARTERLY Federal Tax Returnor Claim for Refund, for the fourth quarterof 2013 to correct these overpayments ofFICA taxes for all quarters of 2013.

With respect to these overpayments ofFICA taxes for years before 2013, em-ployers can make a claim or adjustmentfor all four calendar quarters of a calendaryear on one Form 941–X filed for thefourth quarter of such year if the period oflimitations on refunds under section 6511of the Internal Revenue Code (Code) hasnot expired and, in the case of adjust-ments, the period of limitations will notexpire within 90 days of filing the ad-justed return. Under normal procedures,employers are required to file a Form941–X for each calendar quarter for whicha refund claim or adjustment is made.

The special administrative proceduresprovided in this notice are optional. Em-ployers that prefer to use the regular pro-cedures for correcting employment tax

October 28, 2013 2013–44 I.R.B.432

overpayments related to same-sex spousebenefits and remuneration paid to same-sex spouses, instead of the special admin-istrative procedures, may do so.

BACKGROUND

Effect of Windsor and Revenue Ruling2013–17

A number of income tax and employ-ment tax provisions provide for exclu-sions from gross income and wages, re-spectively, for certain benefits provided tothe spouse of an employee. In addition,services performed by an individual in theemploy of the individual’s spouse that arenot in the course of the employer’s tradeor business or that are domestic servicesin the employer’s private home are ex-cepted from FICA tax under section3121(b)(3)(B).1 Until the recent decisionof the Supreme Court in Windsor, the IRSinterpreted section 3 of the Defense ofMarriage Act (DOMA) as prohibiting itfrom recognizing same-sex marriages forpurposes of these provisions. Section 3 ofDOMA provided that:

In determining the meaning of any Actof Congress, or of any ruling, regula-tion or interpretation of the various ad-ministrative bureaus and agencies ofthe United States, the word ‘marriage’means only a legal union between oneman and one woman as husband andwife, and the word ‘spouse’ refers onlyto a person of the opposite sex who isa husband or a wife.

1 U.S.C. § 7.As a result, employers withheld and

paid employment taxes with respect tocertain benefits provided to the same-sexspouse of an employee because the mar-riage was not recognized for purposes ofthe Code, and the benefits were not treatedas excludable from gross income or wagesfor Federal income or employment taxpurposes, respectively. Employers mayalso have withheld and paid employmenttaxes on amounts paid for services per-formed by an individual in the employ ofthe individual’s same-sex spouse without

applying the employment tax exceptionsfor certain remuneration paid to spouses.

In Windsor, the Court held that section3 of DOMA is unconstitutional because itviolates the principles of equal protection,and on August 29, 2013, the IRS an-nounced the publication of Rev. Rul.2013–17, which held:

1. for Federal tax purposes, the terms“spouse,” “husband and wife,” “husband,”and “wife” include an individual marriedto a person of the same sex if the individ-uals are lawfully married under state law,and the term “marriage” includes such amarriage between individuals of the samesex;

2. for Federal tax purposes, the IRSadopts a general rule recognizing a mar-riage of same-sex individuals that wasvalidly entered into in a state whose lawsauthorize the marriage of two individualsof the same sex even if the married coupleis domiciled in a state that does not rec-ognize the validity of same-sex marriages;and

3. for Federal tax purposes, the terms“spouse,” “husband and wife,” “husband,”and “wife” do not include individuals(whether of the opposite sex or the samesex) who have entered into a registereddomestic partnership, civil union, or othersimilar formal relationship recognized un-der state law that is not denominated as amarriage under the laws of that state, andthe term “marriage” does not include suchformal relationships.

Rev. Rul. 2013–17 provides that itsholdings will be applied prospectively asof September 16, 2013, which is the dateof publication of the ruling in the InternalRevenue Bulletin. Except as otherwiseprovided in Rev. Rul. 2013–17, taxpayersalso may rely on Rev. Rul. 2013–17 forthe purpose of filing original returns,amended returns, adjusted returns, orclaims for credit or refund for any over-payment of tax resulting from these hold-ings, provided the applicable limitationsperiod for filing such claim under section6511 has not expired. Rev. Rul. 2013–17also provides that if an affected taxpayerfiles an original return, amended return,

adjusted return, or claim for credit or re-fund in reliance on Rev. Rul. 2013–17, allitems required to be reported on the returnor claim that are affected by the maritalstatus of the taxpayer must be adjusted tobe consistent with the marital status re-ported on the return or claim.

Rev. Rul. 2013–17 also provides thattaxpayers may rely (subject to the condi-tions in the preceding paragraph regardingthe applicable limitations period and con-sistency within the return or claim) onRev. Rul. 2013–17 retroactively with re-spect to any employee benefit plan or ar-rangement or any benefit provided there-under only for purposes of filing originalreturns, amended returns, adjusted returns,or claims for credit or refund of an over-payment of tax concerning employmenttax and income tax with respect toemployer-provided health coverage bene-fits or fringe benefits that were providedby the employer and are excludable fromincome under sections 106, 117(d), 119,129, or 132 based on an individual’s mar-ital status. For purposes of the precedingsentence, if an employee made a pre-taxsalary-reduction election for health cover-age under a section 125 cafeteria plansponsored by an employer and alsoelected to provide health coverage for asame-sex spouse on an after-tax basis un-der a group health plan sponsored by thatemployer, an affected taxpayer may treatthe amounts that were paid by the em-ployee for the coverage of the same-sexspouse on an after-tax basis as pre-taxsalary reduction amounts.

Employers may also rely (subject tothe previously noted conditions regardingthe applicable limitations period and theconsistency requirement) on the holdingsin Rev. Rul. 2013–17 for purposes of rec-ognizing same-sex spouses as spouses inapplying exceptions from the definition of“employment” for employment tax pur-poses.

1The Railroad Retirement Tax Act (RRTA) and the Federal Unemployment Tax Act (FUTA) also provide exceptions that can apply for same-sex spouse benefits and remuneration paidto same-sex spouses. RRTA taxes are generally paid on Form CT–1, Employer’s Annual Railroad Retirement Tax Act Return, and FUTA taxes are paid on Form 940, Employer’s AnnualFederal Unemployment (FUTA) Tax Return, which are both annual returns. No special administrative procedures are needed to correct overpayments of taxes on same-sex spouse benefitsand remuneration paid to same-sex spouses reported on those returns. However, some RRTA taxes are paid on Form CT–2, Employee Representative’s Quarterly Railroad Tax Return, whichis a quarterly return, and the special administrative procedures in this notice can be used with respect to overpayments of RRTA tax on same-sex spouse benefits reported on Form CT–2.

2013–44 I.R.B. October 28, 2013433

General Procedures for Corrections ofOverpayments of Employment Taxes

Generally, corrections of overpay-ments of FICA tax are made after an errorhas been ascertained using the adjustmentprocess under section 6413 or using therefund claim process under section 6402.An error is ascertained when the employerhas sufficient knowledge of the error to beable to correct it.

Under section 31.6413(a)–1(a) andsection 31.6413(a)–2(b) of the Employ-ment Tax Regulations, before making anadjustment of an overpayment of FICAtax with respect to an employee, an em-ployer generally must repay or reimbursethe employee in the amount of the over-collection prior to the expiration of theperiod of limitations on credit or refund,and, for FICA tax overcollected in a prioryear, must also secure the employee’swritten statement confirming that the em-ployee has not made any previous claims(or the claims were rejected) and will notmake any future claims for refund orcredit of the amount of the overcollectedFICA tax. An employer repays the em-ployee by direct payment to the employee;an employer reimburses an employee byapplying the amount of the overcollectionagainst the employee FICA tax which at-taches to wages paid by the employer tothe employee. Section 31.6413(a)–2(c)(2)provides that employers cannot adjustoverpayments of withheld income tax af-ter the end of the calendar year, except inthe case of administrative errors. (An ad-ministrative error occurs if the amount theemployer entered on Form 941 is not theamount the employer actually withheld.)Section 31.6413(a)–2(d)(2) provides thatno adjustment in respect of an overpay-ment may be made if the overpaymentrelates to a return period for which theperiod of limitations on credit or refund ofsuch overpayment will expire within 90days of filing the adjusted return.

Section 31.6402(a)–2 provides rulesunder which a refund claim for an over-payment of FICA tax may be made. Pur-suant to § 31.6402(a)–2(a), no refund orcredit for FICA employer tax will be al-lowed unless the employer has first repaidor reimbursed its employee for the em-ployee FICA tax or has secured the em-ployee’s consent to the allowance of the

claim for refund and includes a claim forthe refund of such employee tax. How-ever, this requirement does not apply tothe extent that the employee FICA taxeswere not withheld from the employee or,after the employer makes reasonable ef-forts to repay or reimburse the employeeor secure the employee’s consent, the em-ployer cannot locate the employee or theemployee will not provide consent. Undersection 6414 and § 31.6414–1, no refundto the employer is allowed for the over-payment of withheld income tax whichthe employer deducted or withheld froman employee.

To make employment tax correctionsfor overpayments (that is, to make adjust-ments or to claim refunds), an employeruses the “X” form that corresponds to thereturn being corrected. Thus, an employercorrects overreported taxes on a previ-ously filed Form 941 by filing Form941–X. Generally, a separate X form mustbe filed for each taxable period.

In determining whether there has beenan overpayment of employment taxes andthe amount of any refund, credit, or ad-justment, employers are required to takeinto account the applicable wage base un-der the social security tax portion of theFICA tax, and the tax rates in effect forthe particular year.

Section 31.6051–1(c) requires an em-ployer adjusting a return filed for a prioryear, or claiming a refund or credit ofFICA taxes for a prior year, to file FormsW-2c, Corrected Wage and Tax State-ment, for such year. Section 31.6051–1(c)provides that the employer must fileForms W-2c correcting Forms W-2, Wageand Tax Statement, if an amount of em-ployee social security or Medicare taxshown on the Form W-2 is incorrect and isadjusted or refunded; the amount of socialsecurity wages or Medicare wages shownon the Form W-2 is incorrect; the amountshown in Box 1, Wages, tips, other com-pensation, is incorrect; or the amount ofincome tax actually withheld from the em-ployee is incorrectly reported in Box 2,Federal income tax withheld.

SPECIAL ADMINISTRATIVEPROCEDURES FOR EMPLOYMENTTAX ADJUSTMENTS AND CLAIMSFOR REFUND

To reduce administrative burden, thisnotice provides special administrativeprocedures for adjustments and claims forrefunds or credits for overpayments ofemployment taxes attributable to same-sex spouse benefits, including overpay-ments that result from a taxpayer’s retro-active application of the holdings in Rev.Rul. 2013–17. For purposes of this notice,“same-sex spouse benefits” refers to thebenefits specified in Rev. Rul. 2013–17for which amended income tax returnsand adjusted employment tax returns orclaims for refund or credit may be filed.These benefits are same-sex spouseemployer-provided health coverage andfringe benefits that were provided by anemployer to a same-sex spouse and areexcludable from income under section106, 117(d), 119, 129, or 132 based on anindividual’s marital status. For purposesof the preceding sentence, if an employeemade a pre-tax salary-reduction electionfor health coverage under a section 125cafeteria plan sponsored by an employerand also elected to provide health cover-age for a same-sex spouse on an after-taxbasis under a group health plan sponsoredby that employer, an affected taxpayermay treat the amounts that were paid bythe employee for the coverage of thesame-sex spouse on an after-tax basis aspre-tax salary reductions amounts. Thus,for purposes of this notice, employmenttaxes paid on after-tax amounts that wereused to purchase health coverage for anemployee’s same-sex spouse under thecircumstances described in the precedingsentence are treated as overpayments ofemployment taxes.

In addition, for purposes of this notice,“same-sex spouse benefits” includes remu-neration for services that is excepted fromthe definition of employment for FICA pur-poses under the holdings in Rev. Rul.2013–17 because the services are within theexception of section 3121(b)(3)(B).

Employment Tax Returns for ThirdQuarter 2013 (July, August, September)

If an employer withholds employmenttaxes with respect to same-sex spouse ben-

October 28, 2013 2013–44 I.R.B.434

efits paid to or on behalf of an employee inthe third quarter of 2013, ascertains theamount withheld on such benefits, and re-pays or reimburses the employee for theamount of such taxes before filing the thirdquarter 2013 Form 941, the employer willnot report the wages and withholding on thethird quarter 2013 Form 941. If the em-ployer does not repay or reimburse the em-ployee for the amount of the overcollectionbefore filing the third quarter 2013 Form941, the employer must report the amount ofthe overcollection on that return and can useone of the special administrative proceduresfor 2013 described below to make an adjust-ment or claim a refund for the overpayment.

Special Administrative Procedures forAdjustments for 2013 on Fourth Quarter2013 Form 941 or Fourth Quarter 2013Form 941-X

The IRS is providing two alternativespecial administrative procedures for em-ployers that treated the value of same-sexspouse benefits as wages on Forms 941for the first three quarters of 2013 and thatseek to correct overpayments of employ-ment taxes attributable to the benefits.2

(1) Under the first alternative, an em-ployer must repay or reimburse its em-ployees for the amount of the overcol-lected FICA tax and the overcollectedincome tax withholding with respect tothe same-sex spouse benefits for the firstthree quarters of 2013 on or before De-cember 31, 2013. After repaying or reim-bursing the employees, the employer, inreporting amounts on its fourth quarter2013 Form 941, may reduce the fourthquarter wages, tips, and other compensa-tion reported on line 2, taxable social se-curity wages reported on line 5a (subjectto the wage base limitation discussed be-low), and taxable Medicare wages and tipsreported on line 5c, by the amount of thesame-sex spouse benefits treated as wagesfor the first three quarters of 2013. Also,the income tax withheld from wages, tips,and other compensation reported on line 3of Form 941 should be reduced by theamount of income tax withholding withrespect to the same-sex spouse benefits

that has been repaid or reimbursed to theemployees by the end of the calendar year.In addition, if the value of any same-sexspouse benefits were included in taxablewages subject to Additional Medicare Taxwithholding on line 5d, the amount oftaxable wages subject to Additional Medi-care Tax withholding on the fourth quarter2013 Form 941 should be reduced. Bytaking advantage of this special adminis-trative procedure, the employer will nothave to file separate Forms 941-X to cor-rect each of the first three quarters of2013.

Under this special administrative proce-dure, the employer may only correct theemployer share of FICA tax that corre-sponds to the employee share of FICA taxthat has been repaid or reimbursed to theemployees on or before December 31, 2013.

For the repayment or reimbursement ofoverwithheld social security tax and the cor-responding reduction for taxable social se-curity wages reported on Form 941, line 5a,the employer must take into account thatadjustments of social security tax are limitedto the tax paid on that portion of the value ofthe same-sex spouse benefits that, whenadded to other social security wages and tipsfor the year, does not exceed the socialsecurity wage base for 2013 ($113,700).Accordingly, if for a particular employeethe value of same-sex spouse benefits wasincluded in social security wages and, afterthe exclusion of the value of the same-sexspouse benefits from wages for 2013, theremaining social security wages of the em-ployee are equal to or greater than $113,700,then no refund, credit, or adjustment of so-cial security tax can be made for 2013 forthat employee.

To ensure that use of this special ad-ministrative procedure for the 2013 fourthquarter Form 941 does not result in amismatch between total taxes reported online 10 (total taxes after adjustments) andtotal liability for the quarter reported online 16 for a monthly schedule depositoror on Schedule B (Form 941) for a semi-weekly schedule depositor, the employershould use the following procedures.

If the employer repays or reimburses theemployee share of FICA taxes or income

tax withholding to employees before thefourth quarter (i.e., before October 1, 2013),the repayment or reimbursement and thecorresponding reduction of the employerportion of FICA tax should be reflected byreductions in the amount reported by amonthly schedule depositor on line 16 (Taxliability: Month 1 (October)) or by a semi-weekly schedule depositor on Schedule B(Form 941), Day 1 (October 1) of the Taxliability for Month 1. Negative numbersmust not be entered on Line 16 or ScheduleB (Form 941). If the amount of the adjust-ment for repayments and reimbursementsexceeds the liability of the quarter reportedfor Month 1 or Day 1, the employer shouldapply the amount of the remaining adjust-ment to reduce liabilities in calendar orderuntil the amount of the remaining adjust-ment is completely used. For example, if theemployer’s tax liability for October on line16 would be negative (due to the adjustmentfor repayments and reimbursements madebefore or during the fourth quarter), the em-ployer should not enter a negative amountfor the month. Instead, the employer shouldenter zero for October and subtract the neg-ative amount from the tax liability for No-vember.

If the employer repays or reimbursesthe employee share of FICA taxes or in-come tax withholding to employees dur-ing the fourth quarter (i.e., after Septem-ber 30, 2013 and on or before December31, 2013), the repayment or reimburse-ment and the corresponding reduction ofthe employer portion of FICA tax shouldbe reflected by reductions in the amountreported on line 16 of the fourth quarterForm 941 or Schedule B (Form 941) onthe date of the repayment or reimburse-ment or on the next date after the date ofthe repayment or reimbursement such thatit will not reduce any amount on line 16 orSchedule B (Form 941) below zero.

(2) Under the second alternative, anemployer that does not repay or reimburseemployees for the amount of withheldFICA and income taxes with respect tosame-sex spouse benefits provided in2013 on or before December 31, 2013,and thus, files the 2013 fourth quarterForm 941 without making the adjustment,

2The same procedures are available to filers of Form 941-SS, Employer’s QUARTERLY Federal Tax Return (American Samoa, Guam, the Commonwealth of Northern Mariana Islands,and the U.S. Virgin Islands), Form 941-PR, Planilla para la Declaración Federal TRIMESTRAL del Patrono, and Form CT-2, Employee Representative’s Quarterly Railroad Tax Return(different lines are applicable on Form CT-2). The special procedures are not needed for filers of Form CT-1, Employer’s Annual Railroad Retirement Tax Return, and Form 940, Employer’sAnnual Federal Unemployment (FUTA) Tax Return, which are annual returns.

2013–44 I.R.B. October 28, 2013435

may correct overpayments of FICA taxeswith respect to same-sex spouse benefitspaid in 2013 using Form 941-X. Underthis option, an employer may file oneForm 941-X for the fourth quarter of 2013to make adjustments or claim refunds orcredits of overpayments of FICA taxeswith respect to same-sex spouse benefitspaid in all quarters of 2013, provided theemployer has satisfied the usual require-ments for filing Form 941-X, includingrepaying or reimbursing the overcollectedemployee FICA tax to employees (or, forrefund claims, securing consents from em-ployees), and obtaining the required writ-ten statements from employees. The em-ployer should write “WINDSOR” in dark,bold letters across the top margin of page1 of Form 941-X. Only corrections madeunder this special administrative proce-dure may be shown on this Form 941-X.

An employer may not make an adjust-ment for an overpayment of income taxwithholding for a prior calendar year unlessthe overpayment is attributable to an admin-istrative error. An employer may not claim arefund or credit for an overpayment of in-come tax withholding if the tax was de-ducted and withheld from the employee.Accordingly, this second special administra-tive procedure for 2013 cannot be used withregard to income tax withheld from employ-ees with respect to same-sex spouse benefitsin 2013 because an employer can use thisForm 941-X procedure only if the employerdid not repay or reimburse employees forthe amount of withheld taxes with respect tosame-sex spouse benefits provided in 2013on or before December 31, 2013. In suchcase, employees will receive credit for theincome tax withheld for purposes of deter-mining any entitlement to a refund of in-come tax paid with respect to same-sexspouse benefits provided in 2013 when theyfile Form 1040, U.S. Individual Income TaxReturn.

Special Administrative Procedure forAdjustments or Claims for Refund forYears Before 2013

The IRS is also providing a specialadministrative procedure for employers tomake adjustments or claims for refund orcredit of overpayments of FICA taxespaid with respect to same-sex spouse ben-efits for any year before 2013 for whichthe applicable period of limitations on

credit or refund has not expired. Underthis procedure, the employer must takeinto account the applicable social securitywage base in determining the overpay-ment of FICA taxes for the prior yearbeing corrected. Under this procedure, theemployer may file one Form 941-X for thefourth quarter of the prior year. Thisfourth quarter Form 941-X would includethe adjustments or refunds for all overpay-ments of employment taxes with respectto same-sex spouse benefits provided dur-ing such prior year, including overpay-ments reflected in the Forms 941 for thefirst three quarters of the year. The em-ployer should write “WINDSOR” in dark,bold letters across the top margin of page1 of Form 941-X. Only corrections madeunder this special administrative proce-dure may be shown on this Form 941-X.

Although the employer may file for allfour quarters of a prior year on the fourthquarter Form 941-X, this special adminis-trative procedure is subject to the usualrequirements that apply in the case of cor-rections of overpayments for prior years,including the filing of Forms W-2c, repay-ing or reimbursing employees for theoverwithheld taxes, and obtaining the re-quired written statements (and consents ifapplicable) from employees.

An employer may not make an adjust-ment for an overpayment of income taxwithholding for a prior calendar year un-less the overpayment is attributable to anadministrative error. An employer maynot claim a refund or credit for an over-payment of income tax withholding if thetax was deducted and withheld from theemployee. Accordingly, this special ad-ministrative procedure for prior years can-not be used with regard to income taxwithheld from employees with respect tosame-sex spouse benefits in prior years.Employees may receive refunds of in-come tax paid with respect to same-sexspouse benefits in prior years by filingForm 1040X, Amended U.S. IndividualIncome Tax Return. As indicated above,an employer filing a claim for refund orcredit or making adjustments for prioryears must file Forms W-2c for the prioryears. Forms W-2c will assist employeesin claiming a refund of income tax.

DRAFTING INFORMATION

The principal author of this notice isAlfred G. Kelley of the Office of DivisionCounsel/Associate Chief Counsel (TaxExempt & Government Entities). For fur-ther information regarding this notice,contact Mr. Kelley at (202) 622-6040 (nota toll-free call).

Temporary Shelter forIndividuals Displaced bySevere Storms, Flooding,Landslides, and Mudslidesin Colorado

Notice 2013–63

The Internal Revenue Service is suspend-ing certain requirements under § 142(d) ofthe Internal Revenue Code for qualifiedresidential rental projects financed withexempt facility bonds under § 142 to pro-vide emergency housing relief needed as aresult of the devastation caused by recentweather-related disasters in the State ofColorado (the Disaster). The Disaster in-cludes severe storms, flooding, landslides,and mudslides and is more fully describedin the Federal Emergency ManagementAgency’s (FEMA) Notice of a Major Di-saster Declaration for the State of Colo-rado (Internal Agency Docket No. FEMA-4145-DR) and all amendments thereto.

This Notice provides relief for all quali-fied residential rental projects describedherein. For those projects that are also low-income housing tax credit (LIHTC) proj-ects, this Notice should be read with Notice2013–64, I.R.B. 2013–44 (October 28,2013), which suspends certain low-incomeand non-transient requirements under § 42to allow low-income housing credit projectsto provide emergency housing needed be-cause of the Disaster.

BACKGROUND

On September 14, 2013, the Presidentissued a major disaster declaration for theState of Colorado because of the devastationcaused by the Disaster. The President issuedthe declaration under the Robert T. StaffordDisaster Relief and Emergency AssistanceAct, 42 U.S.C. 5121 et seq. Subsequently,FEMA designated some jurisdictions in

October 28, 2013 2013–44 I.R.B.436

Colorado as eligible for Individual Assis-tance (as FEMA uses that term). Because ofthe widespread damage to housing causedby the Disaster, the Service has determinedthat issuers may approve the use of qualifiedresidential rental projects described in§ 142(d) to temporarily house displaced in-dividuals, as defined below, regardless oftheir income, in accordance with this No-tice. The Service has determined that theprojects to which this approval may begiven can be located in any State, regardlessof whether a major disaster declaration withIndividual Assistance has been issued forthat State.

Consistent with Notice 2013–64, theterm “displaced individual” means, forpurposes of this Notice, an individual whoresided in a jurisdiction designated forIndividual Assistance and who has beendisplaced because his or her residence wasdestroyed or damaged as a result of thedevastation caused by the Disaster.

SECTION 1. SUSPENSION OFINCOME LIMITATIONS

The Service has determined that it isappropriate to temporarily suspend certainincome limitation requirements under§ 142(d) that apply to qualified residentialrental projects financed with tax-exemptbonds issued by a qualified issuer under§ 103 (Issuer). The suspension, described inSection 3 below, is available to both quali-fied residential rental projects under§ 142(d) that are not subject to any LIHTC-related requirements (Bond Projects) and toqualified residential rental projects under§ 142(d) that are also subject to LIHTC-related requirements (Bond/LIHTC Proj-ects). For purposes of this Notice, the term“Project” refers to either a Bond Project or aBond/LIHTC Project.

SECTION 2. GENERALREQUIREMENTS

.01 Issuer Approval for Relief. If an Is-suer that issued exempt facility bonds for aProject desires to allow the use of the Proj-ect to temporarily house displaced individ-uals, the Issuer must approve that use andmust determine an appropriate period for thetemporary housing, not to extend beyondSeptember 30, 2014 (Temporary HousingPeriod). If a Bond/LIHTC Project subject toboth Notice 2013–64 and this Notice re-

ceives approval, for purposes of § 42, for atemporary housing period and for the sus-pension of income limitations from a Statehousing agency (as contemplated in SectionIV(2) of Notice 2013–64) and that agency isnot the Issuer, then the income limitationsunder § 142(d) for that Bond/LIHTC Projectare suspended only if the project also re-ceives the Issuer’s consent for a suspension.An Issuer that chooses to provide that con-sent must adopt for purposes of § 142(d) thesame temporary housing period that theagency adopted for purposes of § 42.

.02 Protection of Tenants. Existing ten-ants in a Project whose income is at orbelow an applicable income limitation un-der § 142(d) cannot be evicted or havetheir tenancy terminated as a result ofefforts to provide temporary housing fordisplaced individuals.

.03 Certification and RecordkeepingRequirements. The Project operator mustcomply with the certification and record-keeping requirements in Section 4 of thisNotice. For certification and recordkeep-ing requirements under § 42, see Notice2013–64.

.04 Rent Restrictions. To the extentsuch rent restrictions are applicable, rentsfor the low-income units that house dis-placed individuals must not exceed thelesser of–

(1) the maximum gross rent for thatunit under § 142(d)(4)(B); or

(2) the maximum gross rent for thatunit under § 42(g)(2).

.05 Project Must Meet All RemainingRequirements. Except as expressly pro-vided in this Notice, a Project continues tobe subject to all other rules and require-ments of § 142(d) and § 103.

SECTION 3. RELIEF FROM SECTION142 REQUIREMENTS

.01 Qualified Project Period. Only a unitin a Project occupied by a non-displacedindividual counts for purposes of determin-ing the beginning of the qualified projectperiod under § 142(d)(2)(A). Thus, onlynon-displaced individuals are counted fordetermining the 1st day on which 10 percentof the residential units in a Project are oc-cupied under § 142(d)(2)(A). However, oc-cupancy of a unit by any tenant (whether adisplaced individual or a non-displaced in-dividual) in a Project counts for purposes ofdetermining the end of the qualified project

period under § 142(d)(2)(A)(i). If occu-pancy by a displaced individual in a Projectcauses any termination of assistance withrespect to the Project under section 8 of theUnited States Housing Act of 1937, thenthat termination is disregarded for determin-ing when the qualified project period endsunder § 142(d)(2)(A)(iii).

.02 Satisfaction of the Non-TransientUse Requirement. The occupancy of a unitin a Project by a displaced individual duringthe Temporary Housing Period is treated assatisfying the non-transient use requirementapplicable to qualified residential rentalprojects described in § 142(d). See § 1.103–8(b)(4); see also Notice 2013–64 for sus-pension of the non-transient use requirementunder § 42(i)(3)(B)(i).

.03 Income Qualification of Units inBond Projects during Temporary HousingPeriod. A unit in a Bond Project occupiedby a displaced individual during the Tem-porary Housing Period retains the incomestatus it had immediately before that oc-cupancy, regardless of whether the unitwas a market-rate unit, a unit occupied bya tenant who met an applicable incomelimit, a designated low-income unit, or anever previously occupied unit. See Rev.Proc. 2004–39, 2004–2 C.B. 49 (treatingnever previously occupied units as un-available). This means, for example, thatif a unit in a Bond Project had been des-ignated as a low-income unit or rented toan individual whose income was at orbelow an applicable income limit or was amarket-rate unit or an unavailable unit,then the unit remains as such while occu-pied by a displaced individual during theTemporary Housing Period regardless ofthe occupancy by, or income of, the dis-placed individual. Thus, the fact that aunit becomes occupied by a displaced in-dividual does not affect compliance withthe 20–50 test or 40–60 test of§ 142(d)(1)(A) and (B) (or the 25–60 testunder the special rule in § 142(d)(6)).

Under § 142(d)(3)(B), if the income ofa low-income resident of a Project risesabove a specified percentage of the appli-cable income limit, then, for that resi-dent’s income to continue to be treated asnot exceeding the applicable income limit,the next residential unit meeting certaincriteria to become available in the sameProject must be occupied by a new resi-dent whose income does not exceed the

2013–44 I.R.B. October 28, 2013437

applicable income limit (the next avail-able unit rule). For purposes of determin-ing compliance with the next availableunit rule, an operator of a Bond Projectmay disregard the new occupancy of unitsduring the Temporary Housing Period bydisplaced individuals, and apply the rulesolely based on new occupancy by per-sons who are not displaced individuals.The operator may, however, take into ac-count a displaced individual’s occupancyfor purposes of § 142(d)(3)(B) if the op-erator obtains sufficient evidence that thedisplaced individual’s income does notexceed the applicable income limit.

.04 Income Qualifications of Units inBond/LIHTC Projects During the Tempo-rary Housing Period. The income statusof a unit and the income qualification ofthe occupant of a unit for purposes of§ 142(d) in a Bond/LIHTC Project occu-pied by a displaced individual during theTemporary Housing Period shall betreated the same as they are for purposesof § 42 under Notice 2013–64. For pur-poses of determining compliance with thenext available unit rule, an operator of aBond/LIHTC Project may disregard thenew occupancy of units during the Tem-porary Housing Period by displaced indi-viduals, and apply the rule solely based onnew occupancy by persons who are notdisplaced individuals. The operator may,however, take into account a displacedindividual’s occupancy for purposes of§ 142(d)(3)(B) if the operator obtains suf-ficient evidence that the displaced individ-ual’s income does not exceed the applica-ble income limit.

.05 Income Qualifications when Tem-porary Housing Period Ends. After theend of the Temporary Housing Period, thestatus as a displaced individual of an oc-cupant remaining in a unit in a Project willbe disregarded and the status of the unitoccupied by such individual and the in-come of such individual will be re-evaluated as though the formerly dis-placed individual commenced occupancyof the unit on the day immediately follow-ing the end of the Temporary HousingPeriod. Thus, if the displaced individualremains in the unit, the unit will be treatedas occupied for all purposes of § 142(d)and the income of the displaced individualwill be used for determining compliancewith the requirements of § 142(d). If non-

compliance relates to continued occu-pancy of the unit after the TemporaryHousing Period by an occupant who was adisplaced individual during the Tempo-rary Housing Period, a 60-day period isallowed for correction.

SECTION 4. CERTIFICATIONS ANDRECORDKEEPING

In addition to any information and cer-tifications required by § 142(d)(7), Projectoperators must maintain and certify cer-tain information concerning each dis-placed individual temporarily housed inthe Project. The records must contain thefollowing information: the name of thedisplaced individual, the address of thedamaged residence of the displaced indi-vidual, the displaced individual’s socialsecurity number, and a statement signedunder penalties of perjury by the displacedindividual that, because of damage to theindividual’s residence in a jurisdictiondesignated for Individual Assistance byFEMA as a result of the devastationcaused by the Disaster, the individual re-quires temporary housing. In addition, theProject operator must keep accurate re-cords of the Issuer’s approval of the Proj-ect’s use for displaced individuals and theapproved Temporary Housing Period andthe dates during which displaced individ-uals occupied units in the Project.

The recordkeeping described underthis paragraph must be included as part ofthe books and records of the Project op-erator and also must be maintained in amanner that is consistent with any com-pliance monitoring process imposed by§ 142(d).

SECTION 5. EFFECTIVE DATE

This Notice is effective September 14,2013.

SECTION 6. PAPERWORKREDUCTION ACT

The collection of information con-tained in this Notice has been reviewedand approved by the Office of Manage-ment and Budget in accordance with thePaperwork Reduction Act (44 U.S.C.3507) under control number 1545–2244.

A Federal agency may not conduct orsponsor, and a person is not required torespond to, a collection of information

unless the collection of information dis-plays a valid OMB control number.

The collection of information in thisNotice is in the section entitled “Section4: CERTIFICATIONS AND RECORD-KEEPING.” This information is requiredto enable the Service to verify whetherindividuals are displaced as a result of thedevastation caused by the Disaster andthus warrant temporary housing in vacantunits in certain Projects. The collection ofinformation is required to obtain a benefit.The likely respondents are individuals andbusinesses.

The estimated total annual recordkeep-ing burden is 250 hours.

The estimated annual burden per record-keeper is approximately 30 minutes. Theestimated number of recordkeepers is 500.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial to the administration of the internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by § 6103.

SECTION 7. DRAFTINGINFORMATION

The principal authors of this notice areTimothy L. Jones and Spence Hanemannof the Office of Associate Chief Counsel(Financial Institutions & Products). Forfurther information regarding this notice,contact Mr. Hanemann at (202) 622-3980(not a toll-free call).

Low-Income Housing CreditDisaster Relief for SevereStorms, Flooding,Landslides, and Mudslidesin Colorado

Notice 2013–64

The Internal Revenue Service is sus-pending certain requirements under § 42of the Internal Revenue Code for low-income housing credit projects to provideemergency housing relief needed as a re-sult of the devastation caused by recentweather-related disasters in the State ofColorado (the Disaster). The Disaster in-cludes severe storms, flooding, landslides,and mudslides and is more fully described

October 28, 2013 2013–44 I.R.B.438

in the Federal Emergency ManagementAgency’s (FEMA) Notice of a Major Di-saster Declaration for the State of Colo-rado (Internal Agency Docket No. FEMA-4145-DR) and all amendments thereto.This relief is being granted pursuant to theService’s authority under § 42(n) and§ 1.42–13(a) of the Income Tax Regula-tions. This Notice should be read in con-junction with Notice 2013–63, I.R.B.2013–44 (October 28, 2013), which sus-pends certain requirements under § 142(d)for qualified residential rental projects fi-nanced with exempt facility bonds under§ 142 to provide emergency housing reliefas a result of the Disaster.

BACKGROUND

On September 14, 2013, the Presidentissued a major disaster declaration for theState of Colorado because of the devasta-tion caused by the Disaster. The Presidentissued the declaration under the Robert T.Stafford Disaster Relief and EmergencyAssistance Act, 42 U.S.C. 5121 et seq.Subsequently, FEMA designated some ju-risdictions in Colorado for Individual As-sistance. Because of the damage to hous-ing caused by the Disaster, the Service hasdetermined that State housing agencies(Agencies) may provide approval to proj-ect owners in their respective States toprovide temporary emergency housing fordisplaced individuals in accordance withthis Notice. For purposes of this Notice,the term “displaced individual” means anindividual who resided in a jurisdictiondesignated for Individual Assistance andwho has been displaced because his or herresidence was destroyed or damaged as aresult of the Disaster. The Service has alsodetermined that the projects to which thisapproval may be given may be located inany State, regardless of whether a majordisaster declaration with Individual Assis-tance has been issued for that State.

I. SUSPENSION OF INCOMELIMITATIONS

The Service has determined that it isappropriate to temporarily suspend certainincome limitation requirements under§ 42 for certain qualified low-incomehousing projects. The suspension will ap-ply to low-income housing projects whichare approved by the Agency with jurisdic-

tion over the project (the applicableAgency) and in which vacant units arerented to displaced individuals. The appli-cable Agency will determine the appropri-ate period of temporary housing for eachproject, not to extend beyond September30, 2014 (temporary housing period).

II. STATUS OF UNITS

A. Units in the first year of the creditperiod

A displaced individual temporarily oc-cupying a unit during the first year of thecredit period under § 42(f)(1) will bedeemed a qualified low-income tenant forpurposes of determining the project’squalified basis under § 42(c)(1), and formeeting the project’s 20–50 test or 40–60test as elected by the project owner under§ 42(g)(1). After the end of the temporaryhousing period established by the applica-ble Agency, a displaced individual will nolonger be deemed a qualified low-incometenant.

B. Vacant units after the first year ofthe credit period

During the temporary housing period es-tablished by the applicable Agency, the sta-tus of a vacant unit (that is, market-rate orlow-income for purposes of § 42 or neverpreviously occupied) after the first year ofthe credit period that becomes temporarilyoccupied by a displaced individual remainsthe same as the unit’s status before the dis-placed individual moves in. Displaced indi-viduals temporarily occupying vacant unitswill not be treated as low-income tenantsunder § 42(i)(3)(A)(ii). However, even if ithouses a displaced individual, a low-incomeor market rate unit that was vacant beforethe effective date of this Notice will con-tinue to be treated as a vacant low-income ormarket rate unit. Similarly, a unit that wasnever previously occupied before the effec-tive date of this Notice will continue to betreated as a unit that has never been previ-ously occupied even if it houses a displacedindividual. Thus, the fact that a vacant unitbecomes occupied by a displaced individualwill not affect the building’s applicable frac-tion under § 42(c)(1)(B) for purposes ofdetermining the building’s qualified basis,nor will it affect the 20–50 test or 40–60test of § 42(g)(1). If the income of occupantsin low-income units exceeds 140 percent ofthe applicable income limitation, the tempo-rary occupancy of a unit by a displaced

individual will not cause application of theavailable unit rule under § 42(g)(2)(D)(ii).In addition, the project owner is not requiredduring the temporary housing period tomake attempts to rent to low-income indi-viduals the low-income units that house dis-placed individuals.

III. SUSPENSION OF NON-TRANSIENT REQUIREMENTS

The non-transient use requirement of§ 42(i)(3)(B)(i) shall not apply to any unitproviding temporary housing to a dis-placed individual during the temporaryhousing period determined by the applica-ble Agency.

IV. OTHER REQUIREMENTS

All other rules and requirements of § 42will continue to apply during the temporaryhousing period established by the applicableAgency. After the end of the temporaryhousing period, the applicable income lim-itations contained in § 42(g)(1), the avail-able unit rule under § 42(g)(2)(D)(ii), thenontransient requirement of § 42(i)(3)(B)(i),and the requirement to make reasonable at-tempts to rent vacant units to low-incomeindividuals shall resume. If a project owneroffers to rent a unit to a displaced individualafter the end of the temporary housing pe-riod, the displaced individual must be certi-fied under the requirements of § 42(i)(3)(A)(ii)and § 1.42–5(b) and (c) to be a qualifiedlow-income tenant. To qualify for the reliefin this Notice, the project owner must addi-tionally meet all of the following require-ments:

(1) Major Disaster AreaIn the case of an individual displaced

by the Disaster, the displaced individualmust have resided in a jurisdiction desig-nated for Individual Assistance by FEMAas a result of the devastation caused by theDisaster.

(2) Agency ApprovalThe project owner must obtain ap-

proval from the applicable Agency for therelief described in this Notice. The appli-cable Agency will determine the appropri-ate period of temporary housing for eachproject, not to extend beyond September30, 2014.

(3) Certifications and RecordkeepingTo comply with the requirements of

§ 1.42–5, project owners are required to

2013–44 I.R.B. October 28, 2013439

maintain and certify certain informationconcerning each displaced individual tem-porarily housed in the project, specificallythe following: name, address of damagedresidence, social security number, and astatement signed under penalties of per-jury by the displaced individual that, be-cause of damage to the individual’s resi-dence in a jurisdiction designated forIndividual Assistance by FEMA as a re-sult of the Disaster, the individual requirestemporary housing. The owner must no-tify the applicable Agency that vacantunits are available for rent to displacedindividuals.

The owner must also certify the datethe displaced individual began temporaryoccupancy and the date the project willdiscontinue providing temporary housingas established by the applicable Agency.The certifications and recordkeeping fordisplaced individuals must be maintainedas part of the annual compliance monitor-ing process with the Agency.

(4) Rent RestrictionsRents for the low-income units that

house displaced individuals must not ex-ceed the existing rent-restricted rates forthe low-income units established under§ 42(g)(2).

(5) Protection of Existing TenantsExisting tenants in occupied low-

income units cannot be evicted or havetheir tenancy terminated as a result ofefforts to provide temporary housing fordisplaced individuals.

EFFECTIVE DATE

This Notice is effective September 14,2013.

PAPERWORK REDUCTION ACT

The collection of information con-tained in this Notice has been reviewedand approved by the Office of Manage-ment and Budget in accordance with thePaperwork Reduction Act (44 U.S.C.3507) under control number 1545–2244.

A Federal agency may not conduct orsponsor, and a person is not required torespond to, a collection of informationunless the collection of information dis-plays a valid OMB control number.

The collection of information in thisNotice is in the section titled “OTHERREQUIREMENTS” under “(3) Certifica-

tions and Recordkeeping.” This informa-tion is required to enable the Service toverify whether individuals are displacedas a result of the Disaster and thus warranttemporary housing in vacant low-incomehousing units. The collection of informa-tion is required to obtain a benefit. Thelikely respondents are individuals andbusinesses.

The estimated total annual recordkeep-ing burden is 300 hours.

The estimated annual burden per record-keeper is approximately 15 minutes. Theestimated number of recordkeepers is 1200.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial to the administration of the internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by § 6103.

DRAFTING INFORMATION

The principal author of this Notice isDavid Selig of the Office of AssociateChief Counsel (Passthroughs & SpecialIndustries). For further information re-garding this Notice, contact Mr. Selig at(202) 622-3040 (not a toll-free call).

2013–2014 Special PerDiem RatesNotice 2013–65

SECTION 1. PURPOSE

This annual notice provides the 2013–2014 special per diem rates for taxpayersto use in substantiating the amount of or-dinary and necessary business expensesincurred while traveling away from home,specifically (1) the special transportationindustry meal and incidental expenses(M&IE) rates, (2) the rate for the inciden-tal expenses only deduction, and (3) therates and list of high-cost localities forpurposes of the high-low substantiationmethod.

SECTION 2. BACKGROUND

Rev. Proc. 2011–47, 2011–42 I.R.B.520, provides rules for using a per diem rateto substantiate, under § 274(d) of the Inter-nal Revenue Code and § 1.274–5 of theIncome Tax Regulations, the amount of or-

dinary and necessary business expensespaid or incurred while traveling away fromhome. Taxpayers using the rates and list ofhigh-cost localities provided in this noticemust comply with Rev. Proc. 2011–47. No-tice 2012–63, 2012–42 I.R.B. 496, providesthe rates and list of high-cost localities forthe period October 1, 2012, to September30, 2013.

Section 3.02(3) of Rev. Proc. 2011-47provides that the term “incidental expenses”has the same meaning as in the FederalTravel Regulations, 41 C.F.R. 300–3.1, andthat future changes to the definition of inci-dental expenses in the Federal Travel Reg-ulations would be announced in the annualper diem notice. On October 22, 2012, theGeneral Services Administration publishedfinal regulations revising the definition ofincidental expenses under the FederalTravel Regulations to include only fees andtips given to porters, baggage carriers, hotelstaff, and staff on ships. Transportation be-tween places of lodging or business andplaces where meals are taken, and the mail-ing cost of filing travel vouchers and payingemployer-sponsored charge card billings,are no longer included in incidental ex-penses. Accordingly, taxpayers using perdiem rates may separately deduct or be re-imbursed for transportation and mailing ex-penses.

SECTION 3. SPECIAL M&IE RATESFOR TRANSPORTATION INDUSTRY

The special M&IE rates for taxpayersin the transportation industry are $59 forany locality of travel in the continentalUnited States (CONUS) and $65 for anylocality of travel outside the continentalUnited States (OCONUS). See section4.04 of Rev. Proc. 2011–47.

SECTION 4. RATE FOR INCIDENTALEXPENSES ONLY DEDUCTION

The rate for any CONUS or OCONUSlocality of travel for the incidental ex-penses only deduction is $5 per day. Seesection 4.05 of Rev. Proc. 2011–47.

SECTION 5. HIGH-LOWSUBSTANTIATION METHOD

1. Annual high-low rates. For pur-poses of the high-low substantiationmethod, the per diem rates in lieu of therates described in Notice 2012– 63 (the

October 28, 2013 2013–44 I.R.B.440

per diem substantiation method) are$251 for travel to any high-cost localityand $170 for travel to any other localitywithin CONUS. The amount of the $251high rate and $170 low rate that istreated as paid for meals for purposes of§ 274(n) is $65 for travel to any high-cost locality and $52 for travel to any

other locality within CONUS. See sec-tion 5.02 of Rev. Proc. 2011– 47. Theper diem rates in lieu of the rates de-scribed in Notice 2012– 63 (the mealand incidental expenses only substanti-ation method) are $65 for travel to anyhigh-cost locality and $52 for travel toany other locality within CONUS.

2. High-cost localities. The followinglocalities have a federal per diem rate of$210 or more, and are high-cost localitiesfor all of the calendar year or the portionof the calendar year specified in parenthe-ses under the key city name.

Key city County or other defined location

ArizonaSedona

(March 1–April 30)City limits of Sedona

CaliforniaMonterey

(July 1–August 31)Monterey

Napa(October 1–November 30 and April 1–September 30)

Napa

San Diego San DiegoSan Francisco San FranciscoSanta Barbara Santa BarbaraSanta Cruz

(June 1–August 31)Santa Cruz

Santa Monica City limits of Santa MonicaYosemite National Park

(June 1–August 31)Mariposa

ColoradoAspen

(December 1–March 31 and June 1–August 31)Pitkin

Denver/Aurora Denver, Adams, Arapahoe, and JeffersonSteamboat Springs

(December 1–March 31)Routt

Telluride(December 1–March 31 and June 1–September 30)

San Miguel

Vail(December 1–August 31)

Eagle

District of ColumbiaWashington D.C. (also the cities of Alexandria, Falls Church, and Fairfax, and the counties of Arlington and Fairfax, inVirginia; and the counties of Montgomery and Prince George’s in Maryland) (See also Maryland and Virginia)

FloridaBoca Raton/Delray Beach/Jupiter

(January 1–April 30)Palm Beach/Hendry

Fort Lauderdale(January 1–May 31)

Broward

Fort Walton Beach/De Funiak Springs(June 1–July 31)

Okaloosa and Walton

Key West MonroeMiami

(January 1–March 31)Miami-Dade

Naples(January 1–April 30)

Collier

IllinoisChicago

(October 1–November 30 and March 1–September 30)Cook and Lake

LouisianaNew Orleans

(October 1–June 30)Orleans, St. Bernard, Jefferson and Plaquemine Parishes

2013–44 I.R.B. October 28, 2013441

Key city County or other defined locationMaine

Bar Harbor(July 1–August 31)

Hancock

MarylandBaltimore City

(October 1–November 30 and March 1–September 30)Baltimore City

Cambridge/St. Michaels(June 1–August 31)

Dorchester and Talbot

Ocean City(June 1–August 31)

Worcester

Washington, DC Metro Area Montgomery and Prince George’sMassachusetts

Boston/Cambridge Suffolk, City of CambridgeFalmouth

(July 1–August 31)City limits of Falmouth

Martha’s Vineyard(July 1–August 31)

Dukes

Nantucket(June 1–September 30)

Nantucket

New HampshireConway

(July 1–August 31)Carroll

New YorkFloral Park/Garden City/Great Neck NassauGlens Falls

(July 1–August 31)Warren

Lake Placid(July 1–August 31)

Essex

Manhattan (includes the boroughs of Manhattan,Brooklyn, the Bronx, Queens and Staten Island)

Bronx, Kings, New York, Queens, Richmond

Saratoga Springs/Schenectady(July 1–August 31)

Saratoga and Schenectady

Tarrytown/White Plains/New Rochelle WestchesterNorth Carolina

Kill Devil(June 1–August 31)

Dare

PennsylvaniaPhiladelphia Philadelphia

Rhode IslandJamestown/Middletown/Newport

(October 1–October 31 and May 1–September 30)Newport

South CarolinaCharleston

(March 1–May 31)Charleston, Berkeley and Dorchester

TexasMidland Midland

UtahPark City

(December 1–March 31)Summit

VirginiaWashington, DC Metro Area Cities of Alexandria, Fairfax, and Falls Church; counties of

Arlington and FairfaxVirginia Beach

(June 1–August 31)City of Virginia Beach

WashingtonSeattle King

WyomingJackson/Pinedale

(July 1–August 31)Teton and Sublette

October 28, 2013 2013–44 I.R.B.442

3. Changes in high-cost localities. Thelist of high-cost localities in this noticediffers from the list of high-cost localitiesin section 5 of Notice 2012–63.

a. The following localities have beenadded to the list of high-cost localities:Santa Cruz, California; Boca Raton/Del-ray Beach/Jupiter, Florida; Charleston,South Carolina; and Midland, Texas.

b. The following localities havechanged the portion of the year in whichthey are high-cost localities: Monterey,California; Telluride, Colorado; Miami,Florida; Chicago, Illinois; and Park City,Utah.

c. No localities have been removedfrom the list of high-cost localities.

SECTION 6. EFFECTIVE DATE

This notice is effective for per diemallowances for lodging, meal and inciden-tal expenses, or for meal and incidentalexpenses only, that are paid to any em-ployee on or after October 1, 2013, fortravel away from home on or after Octo-ber 1, 2013. For purposes of computingthe amount allowable as a deduction fortravel away from home, this notice is ef-fective for meal and incidental expensesor for incidental expenses only paid orincurred on or after October 1, 2013. See

sections 4.06 and 5.04 of Rev. Proc.2011–47 for transition rules for the last 3months of calendar year 2013.

SECTION 7. EFFECT ON OTHERDOCUMENTS

Notice 2012–63 is superseded.

DRAFTING INFORMATION

The principal author of this notice isNeville R. Jiang of the Office of AssociateChief Counsel (Income Tax & Account-ing). For further information regardingthis notice contact Mr. Jiang at (202) 622-4970, or if after November 15, 2013, at(202) 317-7007.

2013–44 I.R.B. October 28, 2013443

Part IV. Items of General InterestNotice of ProposedRulemaking and Notice ofPublic Hearing

Research Expenditures

REG–124148–05

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemak-ing and notice of public hearing.

SUMMARY: This document proposesregulations to amend the definition of re-search and experimental expenditures un-der section 174 of the Internal RevenueCode (Code). In particular, these proposedregulations provide guidance on the treat-ment of amounts paid or incurred in con-nection with the development of tangibleproperty, including pilot models. The reg-ulations will affect taxpayers engaged inresearch activities. This document alsoprovides notice of a public hearing onthese proposed regulations.

DATES: Written or electronic commentsmust be received by December 5, 2013.Requests to speak and outlines of topics tobe discussed at the public hearing sched-uled for January 8, 2014, at 10 a.m., mustbe received by December 5, 2013.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–124148–05), room5203, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand-delivered Monday through Friday betweenthe hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–124148–05), Courier’sDesk, Internal Revenue Service, 1111 Con-stitution Avenue, N.W., Washington, DC,or sent electronically, via the Federal eRule-making Portal at www.regulations.gov (in-dicate IRS and REG–124148–05). Thepublic hearing will be held in the IRS Au-ditorium, Internal Revenue Building, 1111Constitution Avenue, NW., Washington,DC.

FOR FURTHER INFORMATIONCONTACT: Concerning these proposedregulations, David McDonnell, (202) 622-

3040; concerning submissions of com-ments, the hearing, and/or to be placed onthe building access list to attend the hear-ing, Oluwafunmilayo (Funmi) Taylor,(202) 622-7180 (not toll-free numbers).

SUPPLEMENTARYINFORMATION:

Background and Overview ofProvisions

Section 174—Background

Section 174 was enacted as a part ofthe Internal Revenue Code of 1954 toeliminate uncertainty in the tax account-ing treatment of research and experimen-tal expenditures and to encourage taxpay-ers to carry on research andexperimentation. See H.R. Rep. No.1337,83d Cong., 2d Sess. 28 (1954); S. Rep.No. 1622, 83d Cong., 2d Sess. 33 (1954).Before the enactment of section 174,courts consistently held that the law re-quired capitalization of product researchand development costs, including produc-tion costs of tangible property used in theresearch process. Under prior law, expen-ditures related to a taxpayer’s researchand experimentation generally were capi-talized and held in suspense until the tax-payer could determine (1) whether or notthe research had failed; and (2) if theresearch was successful, whether or notthe research resulted in property that had auseful life determinable with reasonableaccuracy. Research and experimental ex-penditures resulting in property with auseful life determinable with reasonableaccuracy were amortized over the usefullife of the property or, if intangible, mayhave been allocated to tangible assets. Forexample, if a design developed throughresearch and experimentation (“appropri-ate design”) was used to produce a tangi-ble asset that was used in the taxpayer’strade or business or if the appropriate de-sign was used to produce inventory orother property held for sale to customers,then the research costs were recovered byan adjustment to basis at the time thetangible property was used, sold, placed inservice, or otherwise disposed of by thetaxpayer. Where, however, projects werenot abandoned and a useful life could notbe definitely determined, taxpayers had no

means of amortizing research expendi-tures. See H.R. Rep. No.1337, 83d Cong.,2d Sess. 28 (1954); S. Rep. No. 1622, 83dCong., 2d Sess. 33 (1954). Congress ad-dressed this issue by enacting section 174,which allows taxpayers to either currentlydeduct research or experimental expendi-tures as they are paid or incurred or treatthem as deferred expenses amortizableover a period not less than 60 months. Seesections 174(a) and (b). Section 174 doesnot define the phrase “research or experi-mental expenditures.”

In 1957, the IRS published T.D. 6255(the 1957 Regulations) and adopted§1.174–2(a)(1), which defines the phrase“research or experimental expenditures”as expenditures “which represent researchand development costs in the experimen-tal or laboratory sense.” In 1994, the IRSpublished T.D. 8562, which adoptedamendments to § 1.174–2(a)(1). Theamendments clarified the 1957 Regula-tions by providing that the determinationof whether costs qualify as research orexperimental expenditures under section174 depends upon whether the costs areincident to activities intended to discoverinformation that would eliminate uncer-tainty concerning the development or im-provement of a product. Applying thisgeneral rule, costs relating to the produc-tion of a product after the uncertainty re-lating to the development or improvementof the product is eliminated do not qualifyunder section 174.

Section 174(c)—Depreciable Property

Since its enactment in 1954, section174(c) has provided, in relevant part, thatsection 174 shall not apply to any expen-diture for the acquisition or improvementof land, or for the acquisition or improve-ment of property to be used in connectionwith the research or experimentation andof a character that is subject to the allow-ance under section 167, relating to depre-ciation, or section 611, relating to deple-tion, except that allowances undersections 167 and 611 will be considered asexpenditures.

Consistent with the statute, the 1957Regulations provided that expendituresfor the acquisition or improvement of

October 28, 2013 2013–44 I.R.B.444

property that is subject to an allowance fordepreciation or depletion were not deduct-ible under section 174 in the year of theacquisition or improvement. Section1.174–2(b)(1). However, in accordancewith section 174(c), the 1957 Regulationstreated depreciation deductions as section174 expenditures to the extent that theproperty to which the allowances relatedwas used in connection with research andexperimentation. Section 1.174–2(b)(1).

The 1957 Regulations further providedthat expenditures could qualify as re-search or experimental expenditures evenif those expenditures resulted, as an endproduct of the research and experimenta-tion, in depreciable property to be used inthe taxpayer’s trade or business. Section1.174–2(b)(4). However, the 1957 Regu-lations attempted to make clear that costsresulting in depreciable property werenonetheless required to meet the generalrequirement for section 174 treatment,namely, that amounts so expended mustbe for research and experimentation(within the meaning of §1.174–2(a)(1) ofthe 1957 Regulations).

To that end, the 1957 Regulations pro-vided, in relevant part, that amounts ex-pended for research or experimentation donot include the costs of the componentmaterials of depreciable property, thecosts of labor or other elements involvedin its construction and installation, orcosts attributable to the acquisition or im-provement of the property. Section1.174–2(b)(4). The 1957 Regulations pro-vide an example where a taxpayer under-takes to develop a new machine for use inthe taxpayer’s business. The taxpayer ex-pends $30,000 on the project of which$10,000 represents the actual costs of ma-terial, labor, etc., to construct the machine,and $20,000 represents research costs thatare not attributable to the machine itself.The example concludes that under section174(a) the taxpayer would be permitted todeduct the $20,000 as expenses notchargeable to capital account, but the$10,000 must be charged to the asset ac-count (the machine). Section 1.174–2(b)(4). This preamble refers to the rulesin §1.174–2(b)(1) and §1.174–2(b)(4) asthe “Depreciable Property Rule.” The De-preciable Property Rule has remained un-changed from the rule’s adoption in the1957 Regulations.

Explanation of Provisions andSummary of Provisions

This document contains proposedamendments to 26 CFR part 1 under sec-tion 174. First, these proposed regulationsprovide that if expenditures qualify as re-search or experimental expenditures, it isirrelevant whether a resulting product isultimately sold or used in the taxpayer’strade or business. Second, these proposedregulations provide that the DepreciableProperty Rule contained in §1.174–2(b)(4) is an application of the generaldefinition of research and experimentalexpenditures contained in §1.174–2(a)(1)to depreciable property. Third, these pro-posed regulations define the term “pilotmodel.” Fourth, these proposed regula-tions clarify the general rule that the costsof producing a product after uncertaintyconcerning the development or improve-ment of a product is eliminated are noteligible expenses under section 174 be-cause these costs are not for research orexperimentation. Finally, these proposedregulations provide a “shrinking-back”provision, similar to the rule provided forin §1.41–4(b)(2), to address situations inwhich the requirements of §1.174–2(a)(1)are met with respect to only a componentpart of a larger product and are not metwith respect to the overall product itself.

In general

Questions have been raised concerningwhether the sale of a product resultingfrom otherwise qualifying research or ex-perimental expenditures subsequently dis-qualifies those expenditures from section174 treatment. Specifically, it has beenargued that section 174(c) precludes sec-tion 174 treatment in the case of a subse-quent sale of a resulting product to a cus-tomer, because the sale gives rise todepreciable property in the hands of thecustomer. See T.G. Missouri Company v.Commissioner, 133 T.C. 278 (2009) (re-jecting the Commissioner’s argument thatresearch or experimental expenditureswere disqualified under section 174 be-cause the product resulting from researchwas sold to customers and was subject todepreciation in the customers’ hands).

The IRS and the Treasury Departmentbelieve that an interpretation of the De-preciable Property Rule that creates an

override to section 174 eligibility upon theoccurrence of a subsequent event (such asa sale of a resulting product or its use inthe taxpayer’s trade or business) does notfurther the Congressional purpose of re-solving accounting uncertainties and en-couraging business investment in researchbecause taxpayers may not be able toknow whether an expenditure was section174 eligible at the time the expense is paidor incurred.

Instead, the IRS and the Treasury De-partment believe that the DepreciableProperty Rule accomplishes two things.First, to the extent that land or depreciableproperty is used in connection with re-search or experimentation, the rule limitsthe amount that a taxpayer can treat as aneligible section 174 expense to depletionor depreciation deductions. Second, theDepreciable Property Rule in §1.174–2(b)(4) reiterates that the only expendi-tures related to the production of depre-ciable property that are deductible section174 expenditures are amounts expendedfor research or experimentation. Thus, forexample, where a $30,000 total cost ex-pended on a machine includes $20,000 ofresearch-related labor and materials and,after all uncertainties related to the ma-chine are resolved, $10,000 ofconstruction-related labor and materials,the $10,000 of construction-related laborand materials is not a section 174 expen-diture because that cost was not a researchor experimental cost within the meaningof §1.174–2(a).

Consistent with this interpretation, theIRS and the Treasury Department proposethe following revisions to the current reg-ulations and provide additional examplesto further administration of the statute.

First, to counter an interpretation thatsection 174 eligibility can be reversed bya subsequent event, the proposed regula-tions provide that the ultimate success,failure, sale, or other use of the research orproperty resulting from research or exper-imentation is not relevant to a determina-tion of eligibility under section 174.

Second, the proposed regulationsamend §1.174–2(b)(4) to provide that theDepreciable Property Rule is an applica-tion of the general definition of researchor experimental expenditures provided forin §1.174–2(a)(1) and should not be ap-

2013–44 I.R.B. October 28, 2013445

plied to exclude otherwise eligible expen-ditures.

Third, the proposed regulations definethe term “pilot model” as any representa-tion or model of a product that is producedto evaluate and resolve uncertainty con-cerning the product during the develop-ment or improvement of the product. Theterm includes a fully-functional represen-tation or model of the product or a com-ponent of a product (to the extent the“shrinking-back” provision, described inthis preamble, applies).

Fourth, the proposed regulations clar-ify the general rule that the costs of pro-ducing a product after uncertainty con-cerning the development or improvementof a product is eliminated are not eligibleunder section 174 because these costs arenot for research or experimentation.

Finally, the proposed regulations pro-vide a “shrinking-back” provision, similarto the rule provided in §1.41–4(b)(2), toaddress situations in which the require-ments of §1.174–2(a)(1) are met with re-spect to only a component part of a largerproduct and are not met with respect to theoverall product itself.

The proposed regulations provide newexamples applying the foregoing provi-sions.

Shrinking-back rule

As with business components undersection 41, research or experimental ex-penditures may relate only to one or morecomponents of a larger product. Taxpay-ers may refine the design of the product,or even redesign components of the prod-uct, after production of the product hasbegun, particularly in the case of a largetangible asset made up of numerous indi-vidual components. In these situations, al-though a basic design specification of theproduct may be established, amounts paidto eliminate uncertainty regarding the ap-propriate design of certain components ofthe product continue to qualify under sec-tion 174. For example, the design of anautomobile may be certain except for theappropriateness of design of its brakingsystem. The IRS and the Treasury Depart-ment believe that it is inappropriate todeny section 174 eligibility with respect tothe development and design of the brakingsystem simply because there is not uncer-tainty with respect to the automobile’s

general design. Accordingly, these pro-posed regulations provide a shrinking-back rule to ensure that section 174 eligi-bility is preserved in these instances. TheIRS and the Treasury Department intendfor this rule to be applied and adminis-tered in a manner that is consistent withthe principles underlying the shrinking-back rule in §1.41–4(b)(2). Thus, for ex-ample, the shrinking-back rule appliesonly if the requirements of section 174 arenot met with respect to an overall product(as defined in §1.174–2(a)(1)), and theshrinking-back rule is not itself applied toexclude research or experimental expen-ditures from section 174 eligibility.

Recordkeeping for section 174

The IRS and the Treasury Departmentnote that the rules generally applicableunder section 6001 provide sufficient de-tail about required documentary substan-tiation for purposes of section 174. Sec-tion 1.6001–1(a) requires the keeping ofrecords sufficient to establish the amountof deductions. The IRS may deny a de-duction for failure to provide sufficientrecords substantiating the claimed deduc-tion.

Proposed effective date

These regulations are proposed to ap-ply to any taxable year ending on or afterthe date of publication of a Treasury de-cision adopting these rules as final regu-lations in the Federal Register. Notwith-standing the prospective effective date,the IRS will not challenge return positionsconsistent with these proposed regula-tions. Therefore, taxpayers may rely onthese proposed regulations until the datethat the final regulations are published inthe Federal Register.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866, as supplemented byExecutive Order 13563. Therefore, a reg-ulatory assessment is not required. It hasalso been determined that section 553(b)of the Administrative Procedure Act (5U.S.C. chapter 5) does not apply to theseregulations, and because the regulationsdo not impose a collection of information

on small entities, the Regulatory Flexibil-ity Act (5 U.S.C. chapter 6) does not ap-ply. Pursuant to section 7805(f) of theCode, this notice of proposed rulemakinghas been submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written (a signedoriginal and eight (8) copies) or electroniccomments that are submitted timely to theIRS. The Treasury Department and theIRS request comments on all aspects ofthe proposed rules. All comments will beavailable for public inspection and copy-ing.

A public hearing has been scheduledfor January 8, 2014, beginning at 10 a.m.in the IRS Auditorium, Internal RevenueBuilding, 1111 Constitution Avenue,N.W., Washington, DC. Due to buildingsecurity procedures, visitors must enter atthe Constitution Avenue entrance. In ad-dition, all visitors must present photoidentification to enter the building. Be-cause of access restrictions, visitors willnot be admitted beyond the immediateentrance area more than 30 minutes beforethe hearing starts. For information abouthaving your name placed on the buildingaccess list to attend the hearing, see the“FOR FURTHER INFORMATIONCONTACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written or electronic comments byDecember 5, 2013 and submit an outlineof the topics to be discussed and the timeto be devoted to each topic (signed origi-nal and eight (8) copies) by December 5,2013. A period of 10 minutes will beallotted to each person for making com-ments. An agenda showing the schedulingof the speakers will be prepared after thedeadline for receiving outlines has passed.Copies of the agenda will be available freeof charge at the hearing.

Drafting Information

The principal author of these proposedregulations is David McDonnell of the

October 28, 2013 2013–44 I.R.B.446

Office of Associate Chief Counsel (Pass-throughs and Special Industries). How-ever, other personnel from the TreasuryDepartment and the IRS participated intheir development.

* * * * *

Proposed Amendments to theRegulations

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

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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.174–2 is amended as

follows:1. Amending paragraph (a)(1) by add-

ing a heading and adding two sentences atthe end.

2. Redesignating paragraph (a)(2) asparagraph (a)(3) and adding a heading tonewly designated paragraph (a)(3).

3. Adding paragraph (a)(2).4. Removing paragraph (a)(7).5. Redesignating paragraphs (a)(8) and

(a)(9) as paragraphs (a)(10) and (a)(11),respectively, and adding headings tonewly designated paragraphs (a)(10) and(a)(11).

6. Redesignating paragraphs (a)(3)through (a)(6) as paragraphs (a)(6)through (a)(9), respectively, and addingheadings to newly designated paragraphs(a)(6) through (a)(9).

7. Adding paragraphs (a)(4) and (a)(5).8. Amending newly designated para-

graph (a)(7) by removing the language“(a)(3)(i)” and adding “(a)(6)(i)” in itsplace.

9. Amending newly designated para-graph (a)(9) by removing the language“(a)(6)” and adding “(a)(9)” in its place.

10. Amending newly designated para-graph (a)(11) by removing the language“subparagraph (2) of this paragraph” andadding “this paragraph (a)” in its place.

11. Amending Example 2 in newlydesignated paragraph (a)(11) by removingthe language “X” and adding “S” in itsplace everywhere “X” appears and by re-moving the language “Y” and adding “T”in its place everywhere “Y” appears.

12. Amending newly designated para-graph (a)(11) by adding Example 3through Example 9.

13. Adding headings to paragraphs(b)(1) through (b)(3).

14. Revising paragraph (b)(4).15. Adding paragraph (b)(5).16. Adding paragraph (d).The revisions and additions read as fol-

lows:

§1.174–2 Definition of research andexperimental expenditures.

(a) In general. (1) Research or exper-imental expenditures defined. * * * Theultimate success, failure, sale, or use ofthe product is not relevant to a determina-tion of eligibility under section 174. Costsmay be eligible under section 174 if paidor incurred after production begins butbefore uncertainty concerning the devel-opment or improvement of the product iseliminated.

(2) Production costs. Except as pro-vided in paragraph (a)(5) of this section(shrinking-back rule), costs paid or in-curred in the production of a product afterthe elimination of uncertainty concerningthe development or improvement of theproduct are not eligible under section 174.

(3) Product defined. * * *(4) Pilot model defined. For purposes

of this section, the term pilot model meansany representation or model of a productthat is produced to evaluate and resolveuncertainty concerning the product duringthe development or improvement of theproduct. The term includes a fully-functional representation or model of theproduct or, to the extent paragraph (a)(5)of this section applies, a component of theproduct.

(5) Shrinking-back rule. If the require-ments of paragraph (a)(1) of this sectionare not met at the level of a product (asdefined in paragraph (a)(3) of this sec-tion), then whether expenditures representresearch and development costs is deter-mined at the level of the component orsubcomponent of the product. The pres-ence of uncertainty concerning the devel-opment or improvement of certain com-ponents of a product does not necessarilyindicate the presence of uncertainty con-cerning the development or improvementof other components of the product or theproduct as a whole. The rule in this para-graph (a)(5) is not itself applied as a rea-son to exclude research or experimentalexpenditures from section 174 eligibility.The rule in this paragraph (a)(5) is to beapplied and administered in a manner that

is consistent with the principles underly-ing the shrinking-back rule in §1.41–4(b)(2).

(6) Research or experimental expendi-tures—exclusions. * * *

(7) Quality control testing. * * *(8) Expenditures for literary, histori-

cal, or similar research—cross reference.* * *

(9) Research or experimental expendi-tures limited to reasonable amounts. * * *

(10) Amounts paid to others for re-search or experimentation. * * *

(11) Examples. * * *Example 3. U is engaged in the manufacture and

sale of custom machines. U contracts to design andproduce a machine to meet a customer’s specifica-tions. Because U has never designed a machine withthese specifications, U is uncertain regarding theappropriate design of the machine, and particularlywhether features desired by the customer can bedesigned and integrated into a functional machine. Uincurs a total of $31,000 on the project. Of the$31,000, U incurs $10,000 of costs on materials andlabor to produce a model that is used to evaluate andresolve the uncertainty concerning the appropriatedesign. U also incurs $1,000 of costs using the modelto test whether certain features can be integrated intothe design of the machine. This $11,000 of costsrepresents research and development costs in theexperimental or laboratory sense. After uncertaintyis eliminated, U incurs $20,000 to produce the ma-chine for sale to the customer based on the appro-priate design. The model produced and used to eval-uate and resolve uncertainty is a pilot model withinthe meaning of paragraph (a)(4) of this section.Therefore, the $10,000 incurred to produce themodel and the $1,000 incurred on design testingactivities qualifies as research or experimental ex-penditures under section 174. However, section 174does not apply to the $20,000 that U incurred toproduce the machine for sale to the customer basedon the appropriate design. See paragraph (a)(2) ofthis section (relating to production costs).

Example 4. Assume the same facts as Example 3,except that during a quality control test of the ma-chine, a component of the machine fails to functiondue to the component’s inappropriate design. U in-curs an additional $8,000 (including design retest-ing) to reconfigure the component’s design. The$8,000 of costs represents research and developmentcosts in the experimental or laboratory sense. Afterthe elimination of uncertainty regarding the appro-priate design of the component, U incurs an addi-tional $2,000 on its production. The reconfiguredcomponent produced and used to evaluate and re-solve uncertainty with respect to the component is apilot model within the meaning of paragraph (a)(4)of this section. Therefore, in addition to the $11,000of research and experimental expenditures previ-ously incurred, the $8,000 incurred on design activ-ities to establish the appropriate design of the com-ponent qualifies as research or experimentalexpenditures under section 174. However, section174 does not apply to the additional $2,000 that Uincurred for the production after the elimination of

2013–44 I.R.B. October 28, 2013447

uncertainty of the re-designed component based onthe appropriate design or to the $20,000 previouslyincurred to produce the machine. See paragraph(a)(2) of this section (relating to production costs).

Example 5. V is a manufacturer that designs anew product. V incurs $5,000 to produce severalmodels of the product that are to be used in testingthe appropriate design before the product is mass-produced for sale. The $5,000 of costs representsresearch and development costs in the experimentalor laboratory sense. Multiple models are necessary totest the design in a variety of different environments(exposure to extreme heat, exposure to extreme cold,submersion, and vibration). Upon completion of sev-eral years of testing, V enters into a contract to sellone of the models to a customer, and uses anothermodel in its trade or business. The remaining modelswere rendered inoperable as a result of the testingprocess. Because V produced the models to resolveuncertainty regarding the appropriate design of theproduct, the models are pilot models under para-graph (a)(4) of this section. Therefore, the $5,000that V incurred in producing the models qualifies asresearch or experimental expenditures under section174. See also paragraph (a)(1) of this section (ulti-mate use is not relevant).

Example 6. W wants to improve a machine foruse in its trade or business and incurs $20,000 todevelop a new component for the machine. The$20,000 is incurred for engineering labor and mate-rials to produce a model of the new component thatis used to eliminate uncertainty regarding the devel-opment of the new component for the machine. The$20,000 of costs represents research and experimen-tal costs in the experimental or laboratory sense.After W completes its research and experimentationon the new component, W incurs $10,000 for mate-rials and labor to produce the component and incor-porate it into the machine. The model produced andused to evaluate and resolve uncertainty with respectto the new component is a pilot model within themeaning of paragraph (a)(4) of this section. There-fore, the $20,000 incurred to produce the model andeliminate uncertainty regarding the development ofthe new component qualifies as research or experi-mental expenditures under section 174. However,section 174 does not apply to the $10,000 of pro-duction costs of the component because those costswere not incurred for research or experimentation.See paragraph (a)(2) of this section (relating to pro-duction costs).

Example 7. X is a manufacturer of aircraft. X isresearching and developing a new, experimental air-craft that can take off and land vertically. To evalu-ate and resolve uncertainty during the developmentor improvement of the product and test the appro-priate design of the experimental aircraft, X pro-duces a working aircraft at a cost of $5,000,000. The$5,000,000 of costs represents research and devel-opment costs in the experimental or laboratory sense.In a later year, X sells the aircraft. Because X pro-duced the aircraft to resolve uncertainty regardingthe appropriate design of the product during thedevelopment of the experimental aircraft, the aircraftis a pilot model under paragraph (a)(4) of this sec-tion. Therefore, the $5,000,000 of costs that X in-curred in producing the aircraft qualifies as researchor experimental expenditures under section 174. Fur-

ther, it would not matter if X sold the pilot model orincorporated it in its own business as a demonstra-tion model. See paragraph (a)(1) of this section (ul-timate use is not relevant).

Example 8. Y is a manufacturer of aircraft en-gines. Y is researching and developing a new type ofcompressor blade, a component of an aircraft engine,to improve its existing aircraft engine design’s per-formance. To test the appropriate design of the newcompressor blade and evaluate the impact of fatigueon the design, Y produces and installs the compres-sor blade on an aircraft engine produced by Y. Thecosts of producing and installing the compressorblade component that Y incurred represent researchand development costs in the experimental or labo-ratory sense. Because Y produced the compressorblade component to resolve uncertainty regardingthe appropriate design of the component, the com-ponent is a pilot model under paragraph (a)(4) of thissection. Therefore, the costs that Y incurred to pro-duce and install the component qualify as research orexperimental expenditures under section 174. Seeparagraph (a)(5) of this section (shrinking-backrule). However, section 174 does not apply to Y’scosts of producing the aircraft engine on which thecomponent was installed. See paragraph (a)(2) ofthis section (relating to production costs).

Example 9. Z is a wine producer. Z is researchingand developing a new wine production process thatinvolves the use of a different method of crushingthe wine grapes. In order to test the effectiveness ofthe new method of crushing wine grapes, Z incurs$2,000 in labor and materials to conduct the test onthis part of the new manufacturing process. The$2,000 of costs represents research and developmentcosts in the experimental or laboratory sense. There-fore, the $2,000 incurred qualifies as research orexperimental expenditures under section 174 be-cause it is a cost incident to the development orimprovement of a component of a process.

(b) * * * (1) Land and other property.* * *

(2) Expenditure resulting in deprecia-ble property. * * *

(3) Amounts paid to others for re-search or experimentation resulting in de-preciable property. * * *

(4) Deductions limited to amounts ex-pended for research or experimentation.The deductions referred to in paragraphs(b)(2) and (3) of this section for expendi-tures in connection with the acquisition orproduction of depreciable property to beused in the taxpayer’s trade or businessare limited to amounts expended for re-search or experimentation within themeaning of section 174 and paragraph (a)of this section.

(5) Examples. The application of para-graph (b) of this section may be illustratedby the following examples:

Example 1. X is a tool manufacturer. X hasdeveloped a new tool design, and orders a specially-built machine from Y to produce X’s new tool. The

machine is built upon X’s order and at X’s risk, andY does not provide a guarantee of economic utility.There is uncertainty regarding the appropriate designof the machine. Under X’s contract with Y, X pays$15,000 for Y’s engineering and design labor,$5,000 for materials and supplies used to develop theappropriate design of the machine, and $10,000 forY’s machine production materials and labor. The$15,000 of engineering and design labor costs andthe $5,000 of materials and supplies costs representresearch and development costs in the experimentalor laboratory sense. Therefore, the $15,000 X pays Yfor Y’s engineering and design labor and the $5,000for materials and supplies used to develop the ap-propriate design of the machine are for research orexperimentation under section 174. However, sec-tion 174 does not apply to the $10,000 of productioncosts of the machine because those costs were notincurred for research or experimentation. See para-graph (a)(2) of this section (relating to productioncosts) and paragraph (b)(4) of this section (limitingdeduction to amounts expended for research or ex-perimentation).

Example 2. Z is an aircraft manufacturer. Z in-curs $5,000,000 to construct a new test bed that willbe used in the development and improvement of Z’saircraft. No portion of Z’s $5,000,000 of costs toconstruct the new test bed represent research anddevelopment costs in the experimental or laboratorysense to develop or improve the test bed. Because noportion of the costs to construct the new test bedwere incurred for research or experimentation, the$5,000,000 will be considered an amount paid orincurred in the production of depreciable property tobe used in the taxpayer’s trade or business that arenot allowable under section 174. However, the al-lowances for depreciation of the test bed are consid-ered research and experimental expenditures of otherproducts, for purposes of section 174, to the extentthe test bed is used in connection with research orexperimentation of other products. See paragraph(b)(1) of this section (depreciation allowances maybe considered research or experimental expendi-tures).

Example 3. Assume the same facts as Example 2,except that $50,000 of the costs of the test bed relatesto costs to resolve uncertainties regarding the newtest bed design. The $50,000 of costs representsresearch and development costs in the experimentalor laboratory sense. Because $50,000 of Z’s costs toconstruct the new test bed was incurred for researchand experimentation, the costs qualify as research orexperimental expenditures under section 174. Para-graph (b)(2) of this section applies to $50,000 of Z’scosts for the test bed because they are expendituresfor research or experimentation that result in depre-ciable property to be used in the taxpayer’s trade orbusiness. Z’s remaining $4,950,000 of costs is notallowable under section 174 because these costswere not incurred for research or experimentation.

* * * * *(d) Effective date. These amendments

to paragraphs (a) and (b) of this sectionapply to taxable years ending on or afterthe date the final regulations are publishedin the Federal Register. Notwithstandingthe prospective effective date, the IRS will

October 28, 2013 2013–44 I.R.B.448

not challenge return positions consistentwith these proposed regulations. There-fore, taxpayers may rely on these pro-posed regulations until the date that thefinal regulations are published in the Fed-eral Register.

Beth Tucker,Deputy Commissioner for

Operations Support.

(Filed by the Office of the Federal Register on September 5,2013, 8:45 a.m., and published in the issue of the FederalRegister for September 6, 2013, 78 F.R. 54796)

Notice of ProposedRulemaking

Limitations on the Importationof Net Built-In Losses

REG–161948–05

AGENCY: Internal Revenue Service (IRS),Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document containsproposed regulations under sections334(b)(1)(B) and 362(e)(1) of the InternalRevenue Code of 1986 (Code). The pro-posed regulations apply to certain nonrec-ognition transfers of loss property to cor-porations that are subject to Federalincome tax. The proposed regulations af-fect the corporations receiving the lossproperty. This document also invites com-ments from the public regarding theseproposed regulations.

DATES: Written or electronic commentsand a request for a public hearing must bereceived by December 9, 2013.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG 161948–05), Room5203, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand-delivered Monday through Friday betweenthe hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–161948–05), Courier’sDesk, Internal Revenue Service, 1111 Con-stitution Avenue, NW, Washington, DC, orsent electronically, via the Federal eRule-making Portal at www.regulations.gov(IRSREG–161948–05).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, John P. Stemwedel (202)622-7550 or Theresa A. Abell (202) 622-7000, and, concerning submissions ofcomments and requests for a public hear-ing, Oluwafunmilayo (Funmi) Taylor at(202) 622-7180 (not toll free numbers).

SUPPLEMENTARYINFORMATION:

Paperwork Reduction Act

The collection of information con-tained in this notice of proposed rulemak-ing revises a collection of information ap-proved by the Office of Management andBudget in accordance with the PaperworkReduction Act of 1995 (44 U.S.C.3507(d)) under control number 1545-2019. Comments on the revised collectionof information should be sent to the Officeof Management and Budget, Attn: DeskOfficer for the Department of the Trea-sury, Office of Information and Regula-tory Affairs, Washington, D.C. 20503,with copies to the Internal Revenue Ser-vice, Attn: IRS Reports Clearance Officer,SE:W:CAR:MP:T:T:SP, Washington,D.C. 20224. Comments on the collectionof information should be received by Oc-tober 15, 2013. Comments are specificallyrequested concerning:

Whether the proposed revised collec-tion of information is necessary for theproper performance of the functions of theInternal Revenue Service, includingwhether the information will have practi-cal utility;

The accuracy of the estimated burdenassociated with the proposed collection ofinformation;

How the quality, utility and clarity ofthe information to be collected may beenhanced;

How the burden of complying with theproposed collection of information maybe minimized, including through the ap-plication of automated collection tech-niques or other forms of information tech-nology; and

Estimates of capital or start-up costs andcosts of operation, maintenance, and pur-chase of service to provide information.

The revised collection of informationin these proposed regulations is in§§1.332–6, 1.351–3, and 1.368–3. By re-

quiring that taxpayers separately reportthe fair market value and basis of property(including stock) described in section362(e)(1)(B) and in 362(e)(2)(A) that istransferred in a tax-free transaction, thisrevised collection of information aids inidentifying transactions within the scopeof sections 334(b)(1)(B), 362(e)(1), and362(e)(2) and thereby facilitates the IRS’verification that taxpayers are complyingwith sections 334(b)(1)(B), 362(e)(1), and362(e)(2). The respondents will be corpo-rations and their shareholders.

Revised estimated total annual report-ing burden: 375,000 hours.

Revised estimated average annual bur-den hours per respondent: 1.25 hours.

Estimated number of respondents:225,000 (of the originally estimated350,000; original 0.75 hour estimate un-changed for the remaining 125,000 re-spondents).

Estimated frequency of responses:once.

An agency may not conduct or spon-sor, and a person is not required to re-spond to, a collection of information un-less the collection of information displaysa valid control number.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by section 6103.

Background

Sections 334(b)(1)(B) and 362(e)(1)(the anti-loss importation provisions)were enacted in the American Jobs Cre-ation Act of 2004 (Public Law 108–357,188 Stat. 1418 (2004)) to prevent erosionof the corporate tax base through the im-portation of loss in nonrecognition trans-fers. This notice of proposed rulemakingproposes regulations under both of theseanti-loss importation provisions.

Explanation of provisions

1. The Anti-loss Importation Provisions:Sections 334(b)(1)(B) and 362(e)(1)

Section 334(b)(1)(B) applies to corpo-rate acquisitions of loss property in liqui-dations described in section 332 (com-

2013–44 I.R.B. October 28, 2013449

plete liquidation of subsidiary). Section362(e)(1) applies to corporate acquisitionsof loss property in transactions describedin section 362(a) (transactions to whichsection 351 applies and acquisitions ofproperty as paid-in surplus or contribu-tions to capital, each a section 362(a)transaction) and in transactions describedin section 362(b) (reorganizations). Theapplication and effect of the anti-loss im-portation provisions are materially identi-cal, and so the proposed regulations usethe same nomenclature and operatingrules for both anti-loss importation provi-sions.

The anti-loss importation provisionsapply when a corporation acquires prop-erty that is described in section362(e)(1)(B) in a transaction described insection 332, 362(a), or 362(b), and, underthe generally applicable basis rules (otherthan the anti-loss duplication rule in sec-tion 362(e)(2)), the acquiring corporation(Acquiring) would take the property withan aggregate basis in excess of “value”(generally equal to fair market value un-der the proposed regulations; see para-graph 1.b.ii. of this preamble). When ananti-loss importation rule applies, Acquir-ing’s basis in each such property is equalto the property’s value. To the extent Ac-quiring receives property in the transac-tion that is not subject to the anti-lossimportation rules, Acquiring’s basis in theproperty is determined under generallyapplicable basis rules, including section362(e)(2).

Property is described in section362(e)(1)(B) (designated “importationproperty” in the proposed regulations) iftwo conditions are satisfied. First, anygain or loss recognized on a disposition ofthe property would not be subject to Fed-eral income tax in the hands of the trans-feror immediately before the transfer. Sec-tion 362(e)(1)(B)(i). Second, any gain orloss recognized on a disposition of theproperty would be subject to Federal in-come tax in the hands of the transfereeimmediately after the transfer. Section362(e)(1)(B)(ii).

Since the enactment of the anti-lossimportation provisions, a number of ques-tions have arisen concerning their appli-cation. The principal concern has been thedetermination of whether property is im-portation property, but various other ques-

tions (discussed subsequently in this pre-amble) have also been raised regardingthe application of the anti-loss importationprovisions and their interaction with otherrules of law. To address these issues, theproposed regulations provide a frameworkfor identifying importation property anddetermining whether the transfer of theproperty is a transaction subject to theanti-loss importation provisions (desig-nated a “loss importation transaction” un-der the proposed regulations).

a. Importation property

The proposed regulations use a hypo-thetical sale analysis to identify importa-tion property. Under this approach, theactual tax treatment of any gain or lossthat would be recognized on a sale of theproperty, first by the transferor immedi-ately before and then by Acquiring imme-diately after the transfer, determineswhether an individual property is impor-tation property. If any gain or loss thatwould be recognized on a hypotheticalsale of the property by the transferor im-mediately before the transfer would not besubject to Federal income tax in the handsof the transferor, the first condition forclassification as importation property issatisfied. If any gain or loss that would berecognized on a hypothetical sale of theproperty by Acquiring immediately afterthe transfer would be subject to Federalincome tax in the hands of Acquiring, thesecond condition for classification as im-portation property is satisfied. Property isimportation property only if both condi-tions are satisfied.

In general, the determination is madeby reference to the tax treatment of thehypothetical seller of the transferred oracquired property, that is, whether the hy-pothetical seller would take the gain orloss into account in determining its Fed-eral income tax liability. This determina-tion must take into account all relevantfacts and circumstances. The proposedregulations include a number of examplesillustrating this approach. Thus, in oneexample, a tax-exempt entity transfersproperty to a taxable domestic corpora-tion, and the determination takes into ac-count whether the transferor, though gen-erally tax-exempt, would nevertheless berequired to include the amount of the gain

or loss in unrelated business taxable in-come under sections 511 through 514 ofthe Code. In other examples, a foreigncorporation transfers property to a taxabledomestic corporation and the determina-tion takes into account whether the for-eign corporation would be required to in-clude the amount of gain or loss undersection 864 or 897 as income effectivelyconnected with, or treated as effectivelyconnected with, the conduct of a U.S.trade or business. Although the examplesassume there is no applicable income taxtreaty, in the case of an applicable incometax treaty, the determination of whetherproperty is importation property wouldtake into account whether the transferorwould be taxable under the business prof-its article or gains article of the income taxtreaty.

i. Partnerships, S corporations, grantortrusts as hypothetical seller

Although the general rule in the pro-posed regulations looks solely to the taxtreatment of the hypothetical seller, amodified rule applies if a hypotheticalseller is a partnership, a small businesscorporation that has elected under section1362(a) to be an S corporation, or agrantor trust. In these cases, the determi-nation is made by reference to the taxtreatment of the gain or loss as taken intoaccount by the partners, shareholders, orowners of the entities. The modified rulerecognizes that, in these cases, the Codeprovides that the gain or loss on the hy-pothetical sale would be included by thepartner, shareholder, or owner, and wouldnot be taxable to the hypothetical seller,irrespective of whether any amount is ac-tually distributed to such other person. Seesection 701 (partnership not subject totax), flush language in section362(e)(1)(B) (partners treated as owningpartnership property); sections 1363 and1366 (S corporation’s income generallytaxable to shareholders, not S corpora-tion); section 671 (grantor or other persontreated as owning trust property).

If an organizing instrument assignsgain and loss to partners or beneficiariesin different amounts, including by reasonof a special allocation under a partnershipagreement, the proposed regulations makeclear that the hypothetical sale model

October 28, 2013 2013–44 I.R.B.450

makes the determination of whether gainor loss is subject to Federal income tax byreference to the person to whom, underthe terms of the instrument, the hypothet-ical gain or loss would actually be allo-cated, taking into account the entity’s netgain or loss actually recognized in the taxperiod in which the transaction occurs.

ii. Other pass-through entities: anti-avoidance rule

In certain circumstances, the Code per-mits distributions to effect a similar shift-ing of tax consequences. For example,under sections 651 and 652, and sections661 and 662, distributions made by a trustare deducted from the trust’s income andincluded in the beneficiary’s (or beneficia-ries’) income. Certain domestic corpora-tions are also able to shift tax conse-quences by distributing income or gainfrom a property sale. These corporationsinclude regulated investment companies(RICs, as defined in section 851(a)), realestate investment trusts (REITs, as definedin section 856(a)), and domestic corpora-tions taxable as cooperatives (see section1381).

The IRS and the Treasury Departmentare concerned that disregarding the effectsof this shifting of tax liability would incertain circumstances undermine the anti-importation provisions. However, the IRSand the Treasury Department are also con-cerned that applying a look-through rulein all such cases would present a signifi-cant administrative burden.

Accordingly, the proposed regulationscontain an anti-avoidance rule that appliesto domestic trusts, estates, RICs, REITs,and cooperatives that directly or indirectlytransfer property (including through othersuch entities) in a section 362 transaction,if the property had been directly or indi-rectly transferred to or acquired by theentity as part of a plan to avoid the appli-cation of the anti-importation provisions.For purposes of this rule, it is immaterialwho had the plan to avoid the anti-importation provisions. When the anti-avoidance rule applies, the domestic en-tity, which, absent application of the anti-avoidance rule, would be treated underthese regulations as subject to Federal in-come tax, is treated as subject to a look-through rule. Under the look-through rule,

the entity is presumed to distribute theproceeds of the hypothetical sale (which,for this purpose, are presumed to be anamount greater than zero), and, to the full-est extent permitted by the terms of itsorganizing instrument, it is presumed tomake the distributions to persons thatwould not take distributions from the en-tity into account in determining a Federalincome tax liability. If an interest in suchan entity is held indirectly through one ormore other such entities, the principles ofthis rule apply to look to the ultimateowners of the interest. The determinationof whether the property is importationproperty is then made by reference to thedeemed distributees or, in the case oftiered entities, to the ultimate deemed dis-tributees.

To illustrate, assume 90 percent of aREIT’s shares are owned by persons thatwould not take into account any gain orloss in determining a Federal income taxliability and that each share has an equalright to any distribution by the REIT. TheREIT holds property that was transferredto the REIT as part of a plan to avoid theapplication of the anti-importation rule toa section 362 transaction. At a time whenthe acquired property has a built-in loss,the REIT transfers the property to a do-mestic corporation in a section 362 trans-action. In this case, the anti-avoidancerule would apply. Thus, the REIT is pre-sumed to distribute all the proceeds of thehypothetical sale of the property trans-ferred in the section 362 transaction, andthe determination of whether any gain orloss on that hypothetical sale would betaken into account in determining a Fed-eral income tax liability is made by refer-ence to the distributee REIT shareholders.Thus, 90 percent of the property trans-ferred in the section 362 transactionwould be importation property. Alterna-tively, assume that the property was orig-inally acquired (as part of a plan to avoidthe application of the anti-importation ruleto a section 362 transaction) by a trustwhose trustee has discretion to distributeall or a portion of the trust’s gain or loss toa person that would not take any amountof such distribution into account in deter-mining a Federal income tax liability and,when the property has a built-in loss, thetrust transfers the property to a domesticcorporation in a section 362 transaction.

In this case, all of the property transferredin the section 362 transaction would beimportation property because the trusteecould distribute all of the proceeds fromthe hypothetical sale to a person thatwould not take the distribution into ac-count in determining a Federal income taxliability.

The IRS and the Treasury Departmentcontinue to study whether a look-throughapproach should be generally applied totrusts and request comments on the needfor, and potential scope of, such a rule.

iii. Gain or loss affecting certain incomeinclusions

Practitioners have raised numerousquestions regarding the treatment of prop-erty held by or transferred to controlledforeign corporations (CFC), as defined insection 957 (taking into account section953(c)). Because the general rule looks tothe tax treatment of the hypotheticalseller, and no exception applies for CFCs,the general operation of the proposed reg-ulations would not treat such amounts assubject to Federal income tax. Neverthe-less, because the characterization of gainor loss that would be taken into account indetermining a potential income inclusionunder section 951(a) has generated someconcern among practitioners, the pro-posed regulations include an express pro-vision stating that gain or loss recognizedby a CFC is not considered subject toFederal income tax solely by reason of anincome inclusion under section 951(a).The proposed regulations include a simi-lar provision to clarify that gain or lossrecognized by a passive foreign invest-ment company, as defined in section1297(a), is also considered not subject toFederal income tax notwithstanding that itcould affect an inclusion under section1293(a). Comments are specifically re-quested on this approach.

iv. Gain or loss taxed to more than oneperson

If any gain or loss realized on a hypo-thetical sale would be includible in in-come by more than one person, the pro-posed regulations treat such property astentatively divided into separate portionsin proportion to the allocation of gain or

2013–44 I.R.B. October 28, 2013451

loss to each person. Tentatively dividedportions are treated and analyzed in thesame manner as any other property forpurposes of applying the anti-importationprovisions. (See paragraph c. of this pre-amble for an illustration of the applicationof this rule.) Thus, the generally applica-ble rules determine whether a portion oftentatively divided property is importationproperty, and, if the tentatively dividedportion is importation property, it is takeninto account (as described subsequently inthis preamble) with all other importationproperty to determine whether the trans-action is a loss importation transaction.

b. Loss importation transaction

Once the importation property hasbeen identified, Acquiring determines theaggregate basis that it would have in allimportation property acquired in the trans-action (including the tentatively dividedportions of transferred property), withoutregard to the anti-loss importation provi-sions or section 362(e)(2). If the aggregatebasis of the importation property exceedssuch property’s aggregate value, the trans-action is a loss importation transactionand subject to the anti-loss importationprovisions. If the aggregate basis of im-portation property does not exceed suchproperty’s value, the anti-loss importationprovisions have no further application.

i. Aggregate, not transferor-by-transferor, approach

Under section 362(e)(1) and the pro-posed regulations, the determination ofwhether a section 362 transaction is a lossimportation transaction is made by refer-ence to the net amount of built-in gain andbuilt-in loss in all importation propertyacquired from all transferors in the trans-action. This approach differs from thetransferor-by-transferor approach of sec-tion 362(e)(2), which expressly focusseson the net built-in loss transferred by aparticular transferor in a section 362(a)transaction.

ii. Valuing partnership interests

In general, the anti-loss importationrules do not take liabilities into account indetermining the value of transferred prop-

erty and, thus, whether the transfer of suchproperty is a transfer of loss property.

However, in both informal inquiriesand written comments, practitioners haveraised concerns about the effect of thisrule when the property transferred is aninterest in a partnership with liabilities. Inparticular, practitioners are concerned thatthe inclusion of a partner’s share of part-nership liabilities in outside basis maycreate the appearance of a built-in lossbecause partnership liabilities do not cor-respondingly increase the value of the in-terest. The amount of cash at which thepartnership interest would change handsbetween a willing buyer and willing seller,neither being under any compulsion tobuy or sell and both having reasonableknowledge of relevant facts, should reflectthe appropriate measure of fair marketvalue. When a partnership interest is sold,the amount realized may include a shareof partnership liabilities from which thetransferor is discharged, which is gener-ally equal to the amount of liabilities in-cluded in the transferor’s outside basis. Assuch, the sale of a partnership interestproperly accounts for the transferee part-ner’s share of partnership liabilities andtherefore, reflects the value of that part-nership interest.

To address this issue, the proposed reg-ulations generally adopt the approach pro-posed by commentators and modify thedefinition of “value” (generally, fair mar-ket value) to take liabilities into accountwhen determining whether a partnershipinterest is a loss asset. However, becausethere can be differences between Trans-feror’s share of partnership liabilities andAcquiring’s share of partnership liabili-ties, the proposed regulations provide thatthe value of a partnership interest is thesum of cash that Acquiring would receivefor such interest, increased by any§1.752–1 liabilities (as defined in §1.752–1(a)(4)) of the partnership that are allo-cated to Acquiring with regard to suchtransferred interest under section 752. Theproposed regulations include an examplethat illustrates the application and effectof this rule. The proposed regulations alsoclarify that any section 743(b) adjustmentto be made as a result of the transaction ismade after any section 362(e) basis ad-justment.

c. Acquiring’s basis in acquiredproperty

If a transaction is a loss importationtransaction, Acquiring’s basis in each im-portation property received (including thetentatively divided portions of propertydetermined to be importation property) isan amount equal to value, notwithstandingthe general rules in sections 334(b)(1)(B),362(a), and 362(b). This rule applies to allimportation property, regardless ofwhether the property’s value is greater orless than its basis prior to the loss impor-tation transaction.

Immediately following the applicationof the anti-loss importation provisions(and prior to any application of section362(e)(2)), any property that was treatedas tentatively divided for purposes of ap-plying these provisions ceases to betreated as divided and is treated as oneundivided property (re-constituted prop-erty) with a basis equal to the sum of thebases of the portions determined under theanti-importation provision and the basesof all other portions determined undergenerally applicable provisions (otherthan section 362(e)(2)). For example, as-sume that property is transferred in a sec-tion 362(a) transaction and the property istreated as tentatively divided for purposesof applying section 362(e)(1) (see para-graph a.iv. of this preamble). Further as-sume that one tentatively divided portion(basis $125, value $100) is determined tobe importation property and the other (ba-sis $125, value $100) is not. Finally, as-sume that, the aggregate basis of all im-portation property transferred in thetransaction (including the $125 basis ofthe tentatively divided portion) is $900and the aggregate value of all importationproperty (including the $100 value of thetentatively divided portion) is only $800.Thus, the importation property has a netloss, the transaction is a loss importationtransaction, and the basis of each impor-tation property is equal to its value. Ac-cordingly, immediately after the applica-tion of section 362(e)(1), the tentativelydivided property is treated as one singleproperty with a basis of $225 ($100 basisin the importation portion plus $125 basisin the non-importation portion).

If the transaction is described in sec-tion 362(a), the transferred property (in-

October 28, 2013 2013–44 I.R.B.452

cluding the re-constituted property thatwas tentatively divided for purposes ofapplying section 362(e)(1)) is then aggre-gated on a transferor-by-transferor basisto determine whether further adjustmentwill be required to the bases of loss prop-erty under section 362(e)(2). Therefore inthe example in the preceding paragraph,after the application of section 362(e)(1),the provisions of section 362(e)(2) mayapply to adjust the basis of the propertyfurther because the transfer is a section362(a) transaction. The proposed regula-tions include a cross-reference to section362(e)(2) as well as examples illustratingthe application of both sections 362(e)(1)and section 362(e)(2) to situations involv-ing multiple transferors and multipleproperties that are not all importationproperties. Because section 362(e)(2) onlyapplies to transactions described in sec-tion 362(a), section 362(e)(2) has no ap-plication to liquidations or to reorganiza-tions that do not include a transactiondescribed in section 362(a). The proposedregulations include examples illustratingthe interaction of these provisions.

2. Filing Requirements

To facilitate the administration of boththe anti-loss importation provisions andthe anti-duplication provisions in section362(e)(2), the proposed regulations mod-ify the reporting requirements applicablein all affected transactions (section 332liquidations and transactions described insection 362(a) or section 362(b)) to re-quire taxpayers to identify the basis andvalue of property subject to those sections.

3. Modifications to LiquidationRegulations

The proposed regulations also includeseveral modifications to the regulationsapplicable to corporate liquidations.These modifications are not changes tocurrent substantive law; they are intendedsolely to update the regulations to reflectcertain statutory changes. The statutorychanges reflected in these modificationsinclude the repeal of the General Utilitiesdoctrine (reflected in the modification ofsections 334(a) and 337(a), and the repealof sections 333 and 334(c)), the removalof former section 334(b)(2) (replaced by

section 338), and the relocation of formersection 332(c) (subsidiary indebtedness)to current section 337(b). In response tocertain regulatory changes, the proposedregulations also add several cross-references to regulations under section367 and 897 to highlight the treatment ofcertain transfers between foreign corpora-tions.

The proposed regulations do not ad-dress the regulations under section 346and no inference should be drawn fromthe omission of a proposal under that sec-tion.

Effective/applicability date

These regulations are generally pro-posed to apply to transactions occurringon or after the date the regulations arepublished as final regulations in the Fed-eral Register, unless completed pursuantto a binding agreement that was in effectimmediately before the date such finalregulations are published and all timesafterwards. It is also proposed that taxpay-ers would be permitted to apply the finalregulations (when published) to transac-tions occurring after October 22, 2004.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866, as supplemented byExecutive Order 13563. Therefore, a reg-ulatory assessment is not required. It hasalso been determined that section 553(b)of the Administrative Procedure Act (5U.S.C. chapter 5) does not apply to theseregulations. Further, it is hereby certifiedthat these proposed regulations will nothave a significant economic impact on asubstantial number of small entities. Thiscertification is based on the fact that thecollection of information requirement inthese regulations modifies an existing col-lection of information by requiring thatcertain information be reported separatelyinstead of in the aggregate. Although theremay be an increase in reporting burden,the increased burden is expected to beminimal because taxpayers should haveready access to the requested informationas the proposed regulations would not re-quire taxpayers to report or maintain re-cords on information that is not, in the

aggregate, already required to be reportedand maintained under the current regula-tions. Accordingly, a Regulatory Flexibil-ity Analysis under the Regulatory Flexi-bility Act (5 U.S.C. chapter 6) is notrequired. Pursuant to section 7805(f) ofthe Code, this notice of proposed rulemak-ing has been submitted to the Chief Coun-sel for Advocacy of the Small BusinessAdministration for comment on its impacton small business.

Comments and Requests for PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments (asigned original and eight (8) copies) orelectronic comments that are timely sub-mitted to the IRS. Alternatively, taxpayersmay submit comments electronically viathe Federal e-Rulemaking Portal at www.regulations.gov (IRS REG–161948–05).The IRS and the Treasury Department re-quest comments on all aspects of the pro-posed regulations. Comments are specifi-cally requested on the appropriatetreatment of transactions subject to bothsection 367(b) and either section334(b)(1)(B) or 362(e)(1). Comments arealso specifically requested on what effecta basis reduction required under section334(b)(1)(B) or section 362(e)(1) mayhave on earnings and profits and any in-clusion required under §1.367(b)–3. Allcomments that are submitted by the publicwill be available for public inspection andcopying at www.regulations.gov or uponrequest. A public hearing may be sched-uled if requested in writing by any personwho timely submits comments. If a publichearing is scheduled, notice of the date,time, and place of the hearing will bepublished in the Federal Register.

Drafting Information

The principal author of these regula-tions is John P. Stemwedel of the Office ofAssociate Chief Counsel (Corporate),IRS. However, other personnel from theIRS and the Treasury Department partic-ipated in their development.

*****

2013–44 I.R.B. October 28, 2013453

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 is amended by adding entries toread in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.332–6 is amended by

revising paragraph (a)(3) and adding anew sentence at the end of paragraph (e)to read as follows:

§1.332–6 Records to be kept andinformation to be filed with return.

(a) * * *(3) The fair market value and basis of

assets of the liquidating corporation thathave been or will be transferred to anyrecipient corporation, aggregated as fol-lows:

(i) Importation property distributed in aloss importation transaction, as defined in§1.362–3(c)(2) and (c)(3) (except that“section 332 liquidation” is substituted for“section 362 transaction”), respectively;

(ii) Property with respect to which gainor loss was recognized on the distribution;

(iii) Property not described in para-graph (a)(3)(i) or paragraph (a)(3)(ii) ofthis section;

* * * * *(e) Effective/applicability date. * * *

Paragraph (a)(3) of this section applies toany taxable year beginning on or afterthese regulations are published as finalregulations in the Federal Register, un-less effected pursuant to a binding agree-ment that was in effect prior to that dateand at all times thereafter.

Par. 3. Section 1.332–7 is amended byadding a new sentence after the first sen-tence of the paragraph to read as follows:

§1.332–7 Indebtedness of subsidiary toparent.

* * * See section 337(b)(1) (for anytaxable year beginning on or after theseregulations are published as final regula-tions in the Federal Register). * * *

Par. 4. Section 1.334–1 is revised toread as follows:

§1.334–1 Basis of property received inliquidations.

(a) In general. Section 334 sets forthrules for determining a distributee’s basisin property received in a distribution incomplete liquidation of a corporation. Thegeneral rule is set forth in section 334(a)and provides that, if property is receivedin a distribution in complete liquidation ofa corporation and if gain or loss is recog-nized on the receipt of the property, thenthe distributee’s basis in the property isthe fair market value of the property at thetime of the distribution. However, if prop-erty is received in a complete liquidationto which section 332 applies, includingproperty received in satisfaction of an in-debtedness described in section 337(b)(1),see section 334(b)(1) and paragraph (b) ofthis section.

(b) Liquidations under section 332—(1) General rule. Except as otherwise pro-vided in paragraph (b)(2) or (b)(3) of thissection, if a corporation (P) meeting theownership requirements of section332(b)(1) receives property from a subsid-iary (S) in a complete liquidation to whichsection 332 applies (section 332 liquida-tion), including property received in atransfer in satisfaction of indebtednessthat satisfies the requirements of section337(b)(1), P’s basis in the property re-ceived is the same as S’s basis in theproperty immediately before the propertywas distributed. However, see §1.460–4(k)(3)(iv)(B)(2) for rules relating to ad-justments to the basis of certain contractsaccounted for using a long-term contractmethod of accounting that are acquired ina section 332 liquidation.

(2) Basis in property with respect towhich gain or loss was recognized. Exceptas otherwise provided in the Internal Rev-enue Code and regulations, if S recognizesgain or loss on the distribution of propertyto P in a section 332 liquidation, P’s basisin that property is the fair market value ofthe property at the time of the distribution.Section 334(b)(1)(A) (certain tax-exemptdistributions under section 337(b)(2)); seealso, for example, §1.367(e)–2(b)(3)(i).

(3) Basis in importation property re-ceived in loss importation transaction—(i) Purpose. The purpose of section334(b)(1)(B) and this paragraph (b)(3) isto prevent P from importing a net built-in

loss in a transaction described in section332. See paragraph (b)(3)(iii)(A) of thissection for definitions of terms used in thisparagraph (b)(3).

(ii) Determination of basis. Notwith-standing paragraph (b)(1) of this section,if a section 332 liquidation is a loss im-portation transaction, P’s basis in eachimportation property received from S inthe liquidation is an amount that is equalto the value of the property. The basis ofproperty received in a section 332 liqui-dation that is not importation property re-ceived in a loss importation transaction isdetermined under generally applicable ba-sis rules without regard to whether theliquidation also involves the receipt ofimportation property in a loss importationtransaction.

(iii) Operating rules—(A) In general.For purposes of section 334(b)(1)(B) andthis paragraph (b)(3), the provisions of§1.362–3 (basis of importation propertyreceived in a loss importation transaction)apply, adjusted as appropriate to apply tosection 332 liquidations. Thus, when usedin this paragraph (b)(3), the terms “impor-tation property,” “loss importation trans-action,” and “value” have the same mean-ing as in §1.362–3(c)(2), (c)(3) and (c)(4),respectively, except that “section 332 liq-uidation” is substituted for “section 362transaction.” Similarly, when gain or losson property would be owned or treated asowned by multiple persons, the provisionsof §1.362–3(d)(2) apply to tentatively di-vide the property in applying this section,substituting “section 332 liquidation” for“section 362 transaction” and makingsuch other adjustments as necessary.

(B) Time for making determinations.For purposes of section 334(b)(1)(B) andthis paragraph (b)(3)—

(1) P’s basis in distributed property.P’s basis in each property S distributes toP in the section 332 liquidation is deter-mined immediately after S distributeseach such property;

(2) Value of distributed property. Thevalue of each property S distributes to P inthe section 332 liquidation is determinedimmediately after S distributes the prop-erty;

(3) Importation property. The determi-nation of whether each property distrib-uted by S is importation property is made

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as of the time S distributes each suchproperty;

(4) Loss importation transaction. Thedetermination of whether a section 332liquidation is a loss importation transac-tion is made immediately after S makesthe final liquidating distribution to P.

(iv) Examples. The examples in thisparagraph (b)(3)(iv) illustrate the applica-tion of section 334(b)(1)(B) and the pro-visions of this paragraph (b)(3). Unlessthe facts indicate otherwise, the examplesuse the following nomenclature and as-sumptions: USP is a domestic corporationthat has not elected to be an S corporationwithin the meaning of section 1361(a)(1);FC, CFC1, and CFC2 are controlled for-eign corporations within the meaning ofsection 957(a), which are not engaged in aU.S. trade or business, have no U.S. realproperty interests, and have no other rela-tionships, activities, or interests thatwould cause their property to be subject toFederal income taxation; there is no ap-plicable income tax treaty; and all personsand transactions are unrelated. All otherrelevant facts are set forth in the exam-ples:

Example 1. Basic application of this paragraph(b)(3). (i) Distribution of importation property in aloss importation transaction. (A) Facts. USP ownsthe sole outstanding share of FC stock. FC ownsthree assets, A1 (basis $40, value $50), A2 (basis$120, value $30), and A3 (basis $140, value $20).On Date 1, FC distributes A1, A2, and A3 to USP ina complete liquidation that qualifies under section332.

(B) Importation property. Under §1.362–3(d)(2),the fact that any gain or loss recognized by a CFCmay affect an income inclusion under section 951(a)does not alone cause gain or loss recognized by theCFC to be treated as taken into account in determin-ing a Federal income tax liability for purposes of thissection. Thus, if FC had sold either A1, A2, or A3immediately before the transaction, no gain or lossrecognized on the sale would have been taken intoaccount in determining a Federal income tax liabil-ity. Further, if USP had sold A1, A2, or A3 imme-diately after the transaction, USP would take intoaccount any gain or loss recognized on the sale indetermining its Federal income tax liability. There-fore, A1, A2, and A3 are all importation properties.See paragraph (b)(3)(iii)(A) of this section and§1.362–3(c)(2).

(C) Loss importation transaction. Immediatelyafter the distribution, USP’s aggregate basis in theimportation properties, A1, A2, and A3, would, butfor section 334(b)(1)(B) and this section, be $300($40 � $120 � $140) and the properties’ aggregatevalue would be $100 ($50 � $30 � $20). Therefore,the importation properties’ aggregate basis wouldexceed their aggregate value and the distribution is a

loss importation transaction. See paragraph(b)(3)(iii)(A) of this section and §1.362–3(c)(3).

(D) Basis of importation property distributed inloss importation transaction. Because the importa-tion properties, A1, A2, and A3, were transferred ina loss importation transaction, the basis in each ofthe importation properties received is equal to itsvalue immediately after FC distributes the property.Accordingly, USP’s basis in A1 is $50; USP’s basisin A2 is $30; and USP’s basis in A3 is $20.

(ii) Distribution of both importation and non-importation property in a loss importation transac-tion. (A) Facts. The facts are the same as in para-graph (i)(A) of this Example 1 except that FC isengaged in a U.S. trade or business and A3 is used inthat U.S. trade or business.

(B) Importation property. A1 and A2 are impor-tation properties for the reasons set forth in para-graph (i)(B) of this Example 1. However, if FC hadsold A3 immediately before the transaction, FCwould take into account any gain or loss recognizedon the sale in determining its Federal income taxliability. Therefore, A3 is not importation property.See paragraph (b)(3)(iii)(A) of this section and§1.362–3(c)(2).

(C) Loss importation transaction. Immediatelyafter the distribution, USP’s aggregate basis in theimportation properties, A1 and A2, would, but forsection 334(b)(1)(B) and this section, be $160 ($40� $120). Further, the properties’ aggregate valuewould be $80 ($50 � $30). Therefore, the importa-tion properties’ aggregate basis would exceed theiraggregate value and the distribution is a loss impor-tation transaction. See paragraph (b)(3)(iii)(A) ofthis section and §1.362–3(c)(3).

(D) Basis of importation property distributed inloss importation transaction. Because the importa-tion properties, A1 and A2, were transferred in a lossimportation transaction, the basis in each of theimportation properties received is equal to its valueimmediately after FC distributes the property. Ac-cordingly, USP’s basis in A1 is $50 and USP’s basisin A2 is $30.

(E) Basis of other property. Because A3 is notimportation property distributed in a loss importationtransaction, USP’s basis in A3 is determined undergenerally applicable basis rules. Accordingly, USP’sbasis in A3 is $140, the adjusted basis that FC had inthe property immediately before the distribution. Seesection 334(b)(1).

(iii) FC not wholly owned. The facts are the sameas in paragraph (i)(A) of this Example 1 except thatUSP owns only 80% of the sole outstanding class ofFC stock and the remaining 20% is owned by indi-vidual X. Further, on Date 1 and pursuant to the planof liquidation, FC distributes A1 and A2 to USP andA3 to X. A1 and A2 are importation properties, thedistribution to USP is a loss importation transaction,and USP’s bases in A1 and A2 are equal to theirvalue ($50 and $30, respectively) for the reasons setforth in paragraphs (ii)(C) and (ii)(D) of this Exam-ple 1. Under section 334(a), X’s basis in A3 is $20.

(iv) Importation property, no net built in loss.(A) Facts. The facts are the same as in paragraph(i)(A) of this Example 1 except that the value of A2is $230.

(B) Importation property. A1, A2, and A3, areimportation properties for the reasons set forth in(i)(B) of this Example 1.

(C) Loss importation transaction. Immediatelyafter the distribution, USP’s aggregate basis in theimportation properties, A1, A2, and A3, would, butfor section 334(b)(1)(B) and this section, be $300($40 � $120 � $140). However, the properties’aggregate value would also be $300 ($50 � $230 �$20). Therefore, the importation properties’ aggre-gate basis would not exceed their aggregate valueand the distribution is not a loss importation trans-action. See paragraph (b)(3)(iii)(A) of this sectionand §1.362–3(c)(3).

(D) Basis of importation property not distributedin loss importation transaction. Because the impor-tation properties, A1, A2, and A3, were not distrib-uted in a loss importation transaction, the basis ofeach of the importation properties is determined un-der the generally applicable basis rules. Accordingly,immediately after the distribution, USP’s basis in A1is $40, USP’s basis in A2 is $120, and USP’s basisin A3 is $140, the adjusted bases that FC had in theproperties immediately before the distribution. Seesection 334(b)(1).

(v) CFC stock as importation property distrib-uted in loss importation transaction. (A) Facts. USPowns the sole outstanding share of FC stock. FCowns the sole outstanding share of CFC1 stock (ba-sis $80, value $100) and the sole outstanding shareof CFC2 stock (basis $100, value $5). On Date 1, FCdistributes its shares of CFC1 and CFC2 stock toUSP in a complete liquidation that qualifies undersection 332.

(B) Importation property. No special rule appliesto the treatment of property that is the stock of aCFC. Thus, if FC had sold either the CFC1 share orthe CFC2 share immediately before the transaction,no gain or loss recognized on the sale would havebeen taken into account in determining a Federalincome tax liability. Further, if USP had sold eitherthe CFC1 share or the CFC2 share immediately afterthe transaction, USP would take into account anygain or loss recognized on the sale in determining itsFederal income tax liability. Thus, the CFC1 shareand the CFC2 share are importation property. Seeparagraph (b)(3)(iii)(A) of this section and §1.362–3(c)(2).

(C) Loss importation transaction. Immediatelyafter the distribution, USP’s aggregate basis in im-portation property (the CFC1 share and the CFC2share) would, but for section 334(b)(1)(B) and thissection, be $180 ($80 � $100) and the shares’ ag-gregate value is $105 ($100 � $5). Therefore, theimportation property’s aggregate basis would exceedtheir aggregate value and the distribution is a lossimportation transaction. See paragraph (b)(3)(iii)(A)of this section and §1.362–3(c)(3).

(D) Basis of importation property distributed inloss importation transaction. Because the importa-tion property (the CFC1 share and the CFC2 share)was transferred in a loss importation transaction,USP’s basis in each of the shares received is equal toits value immediately after FC distributes the shares.Accordingly, USP’s basis in the CFC1 share is $100and USP’s basis in the CFC2 share is $5.

Example 2. Multiple step liquidation. (i) Facts.USP owns the sole outstanding share of FC stock.

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On January 1 of year 1, FC adopts a plan of liqui-dation. FC makes the following distributions to USPin a transaction that qualifies as a complete liquida-tion under section 332. In year 1, FC distributes A1and, immediately before the distribution, FC’s basisin A1 is $100 and A1’s value is $120. In Year 2, FCdistributes A2, and, immediately before the distribu-tion, FC’s basis in A2 is $100 and A2’s value is$120. In year 3, in its final liquidating distribution,FC distributes A3 and, immediately before the dis-tribution, FC’s basis in A3 is $100 and A3’s value is$120. As of the time of the final distribution, USPhad depreciated the bases of A1 and A2 to $90 and$95, respectively; the value of A1 had appreciated to$160; and, the value of A2 has declined to $0.

(ii) Importation property. If FC had sold eitherA1, A2, or A3 immediately before it was distributed,no gain or loss recognized on the sale would havebeen taken into account in determining a Federalincome tax liability. Further, if USP had sold eitherA1, A2, or A3 immediately after it was distributed,USP would take into account any gain or loss rec-ognized on the sale in determining its Federal in-come tax liability. Therefore, A1, A2, and A3 are allimportation properties. See paragraph (b)(3)(iii)(A)of this section and §1.362–3(c)(2).

(iii) Loss importation transaction. Immediatelyafter it was distributed, USP’s basis in each of theimportation properties, A1, A2, and A3, would, butfor section 334(b)(1)(B) and this section, have been$100. Further, immediately after each such propertywas distributed, its value was $120. Thus, the prop-erties’ aggregate basis, $300, would not have ex-ceeded the properties’ aggregate value, $360. Ac-cordingly, the distribution is not a loss importationtransaction irrespective of the fact that, when theliquidation was completed, the properties’ aggregatebasis was $285 and the properties’ aggregate valuewas $280. See paragraph (b)(3)(iii)(B) of this sectionand §1.362–3(c)(3).

(iv) Basis of importation property not distributedin loss importation transaction. Because the impor-tation properties, A1, A2, and A3, were not distrib-uted in a loss importation transaction, the basis ofeach of the importation properties is determined un-der the generally applicable basis rules. Accordingly,USP takes each of the properties with a basis of $100and, immediately after the final distribution, has anadjusted basis of $90 in A1 (USP’s $100 basis lessthe $10 depreciation), $95 in A2 (USP’s $100 basisless the $5 depreciation), and $100 in A3. See sec-tion 334(b).

(c) Effective/applicability date. Thissection applies to any taxable year begin-ning on or after these regulations are pub-lished as final regulations in the FederalRegister, unless effected pursuant to abinding agreement that was in effect priorto that date and at all times thereafter.However, taxpayers may apply this sec-tion to transactions occurring after Octo-ber 22, 2004.

Par. 5. Section 1.337–1 is added to readas follows:

§1.337–1 Nonrecognition for propertydistributed to parent in completeliquidation of subsidiary.

(a) General rule. If section 332(a) isapplicable to the receipt of a subsidiary‘sproperty in complete liquidation, no gainor loss is recognized to the liquidatingsubsidiary with respect to such property(including property distributed with re-spect to indebtedness, see section337(b)(1) and §1.332–7), except as pro-vided in section 337(b)(2) (distributions tocertain tax-exempt distributees), section367(e)(2) (distributions to foreign corpo-rations), and section 897(d) (distributionsof U.S. real property interests by foreigncorporations).

(b) Effective/applicability date. Thissection applies to any taxable year begin-ning on or after these regulations are pub-lished as final regulations in the FederalRegister.

Par. 6. Section 1.351–3 is amended byrevising paragraphs (a)(3) and (b)(3), andadding a sentence at the end of paragraph(f) to read as follows:

§1.351–3 Records to be kept andinformation to be filed.

(a) * * *(3) The fair market value and basis of

the property transferred by such transferorin the exchange, determined immediatelybefore the transfer and aggregated as fol-lows:

(i) Importation property transferred ina loss importation transaction, as definedin §1.362–3(c)(2) and §1.362–3(c)(3), re-spectively;

(ii) Loss duplication property as de-fined in §1.362–4(c)(1);

(iii) Property with respect to which anygain or loss was recognized on the transfer(without regard to whether such propertyis also identified in paragraph (a)(3)(i) or(ii) of this section); and

(iv) Property not described in para-graphs (a)(3)(i), (a)(3)(ii), or (a)(3)(iii) ofthis section.

* * * * *(b) * * *(3) The fair market value and basis of

property received in the exchange, deter-mined immediately before the transfer andaggregated as follows:

(i) Importation property transferred ina loss importation transaction, as definedin §1.362–3(c)(2) and §1.362–3(c)(3), re-spectively;

(ii) Loss duplication property as de-fined in §1.362–4(c)(1);

(iii) Property with respect to which anygain or loss was recognized on the transfer(without regard to whether such propertyis also identified in paragraph (b)(3)(ii) ofthis section);

(iv) Property not described in para-graphs (b)(3)(i), (b)(3)(ii), or (b)(3)(iii) ofthis section; and

* * * * *(f) Effective/applicability date. * * *

Paragraphs (a)(3) and (b)(3) of this sec-tion apply to any taxable year beginningon or after these regulations are publishedas final regulations in the Federal Regis-ter, unless effected pursuant to a bindingagreement that was in effect prior to thatdate and at all times thereafter.

Par. 7. Section 1.358–6 is amended byrevising paragraphs (c)(1)(i)(A),(c)(2)(ii)(B), (c)(3)(i), (c)(3)(ii), (c)(4),(e), (f)(1), and the first sentence of para-graph (f)(3), and adding new paragraph(f)(4) to read as follows:

§1.358–6 Stock basis in certaintriangular reorganizations.

* * * * *(c) * * *(1) * * *(i) * * *(A) P acquired the T assets acquired by

S in the reorganization (and P assumedany liabilities which S assumed or towhich the T assets acquired by S weresubject) directly from T in a transaction inwhich P’s basis in the T assets was deter-mined under section 362(b) (taking intoaccount the provisions of section362(e)(1)); and

* * * * *(2) * * *(ii) * * *(B) Determine the basis in the T stock

acquired as if P acquired such stock fromthe former T shareholders in a transactionin which P’s basis in the T stock wasdetermined under section 362(b) (takinginto account the provisions of section362(e)(1) and, to the extent the transfer is

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a transaction described in section 362(a),the provisions of section 362(e)(2)).

(3) * * *(i) P acquired the T stock acquired by S

in the reorganization directly from the Tshareholders in a transaction in which P’sbasis in the T stock was determined undersection 362(b) (taking into account theprovisions of section 362(e)(1)); and

(ii) P transferred the T stock to S in atransaction in which P’s basis in its Sstock was determined under section 358(taking into account the provisions of sec-tion 362(e)(2) to the extent the transfer isa transaction described in section 362(a)).

(4) Examples. The rules of this para-graph (c) are illustrated by the followingexamples. For purposes of these exam-ples, P, S, and T are domestic corpora-tions, the property transferred is not im-portation property within the meaning of§1.362–3(c)(2) or loss duplication prop-erty within the meaning of §1.362–4(c)(2), P and S do not file consolidatedreturns, P owns all of the shares of theonly class of S stock, the P stock ex-changed in the transaction satisfies therequirements of the applicable triangularreorganization provisions, and the factsset forth the only corporate activity.

* * * * *(e) Cross-references—(1) Triangular

reorganizations involving members of aconsolidated group. For rules relating tostock basis adjustments made as a resultof a triangular reorganization in which Pand S, or P and T, as applicable, are, orbecome, members of a consolidatedgroup, see §1.1502–30. However, if atransaction is a group structure change,stock basis adjustments are determinedunder §1.1502–31 and not under §1.1502–30, even if the transaction also qualifies asa reorganization otherwise subject to§1.1502–30.

(2) Transfers of importation propertyin loss importation transaction and trans-fers of loss duplication property. For rulesrelating to stock basis adjustments madeas a result of a triangular reorganization inwhich the property treated as acquired byP would be importation property receivedin a loss importation transaction, see§1.362–3. For rules relating to adjust-ments made as a result of a triangularreorganization that also qualifies undersection 362(a), see §1.362–4.

(3) Triangular reorganizations involv-ing certain foreign corporations. For rulesrelating to stock basis adjustments madeas a result of triangular reorganizationsinvolving certain foreign corporations, see§§1.367(b)–4(b), 1.367(b)–10, and1.367(b)–13.

(f) * * * (1) General rule. In general,this section applies to triangular reorgani-zations occurring on or after December23, 1994. However, paragraphs(c)(1)(i)(A), (c)(2)(ii)(B), (c)(3)(i), and(c)(3)(ii) of this section apply to triangularreorganizations occurring on or after thedate these regulations are published asfinal regulations in the Federal Register.

* * * * *(3) * * * Paragraphs (b)(2)(v) and

(e)(1) of this section shall apply to trian-gular reorganizations occurring on or afterSeptember 17, 2008. * * *

(4) Triangular reorganizations involv-ing importation property acquired in lossimportation transaction or loss duplica-tion transaction; triangular reorganiza-tions involving certain foreign corpora-tions. Paragraphs (e)(2) and (e)(3) of thissection shall apply to triangular reorgani-zations occurring on or after the date theseregulations are published as final regula-tions in the Federal Register.

Par. 8. Section 1.362–3 is added to readas follows:

§1.362–3 Basis of importation propertyacquired in loss importation transaction.

(a) Purpose. The purpose of section362(e)(1) and this section is to prevent acorporation (Acquiring) from importing anet built-in loss in a transaction describedin either section 362(a) (section 351 trans-fers, contributions to capital, or paid-insurplus) or section 362(b) (reorganiza-tions). See paragraph (c) of this section fordefinitions of terms used in this section.

(b) Basis determinations under thissection—(1) Basis of importation prop-erty received in loss importation transac-tion. Notwithstanding any other provisionof law, Acquiring’s basis in importationproperty (as defined in paragraph (c)(2) ofthis section) acquired in a loss importationtransaction (as defined in paragraph (c)(3)of this section) is equal to the value of theproperty immediately after the transac-tion.

(2) Adjustment to basis of subsidiarystock in triangular reorganizations. If acorporation (P) computes its basis in stockof a subsidiary (whether S or T) under§1.358–6 (stock basis in certain triangu-lar reorganizations), P’s basis in propertytreated as acquired by P in §1.358–6(c) isdetermined under section 362(e)(1) andthis section to the extent such property, ifactually acquired by P, would be impor-tation property acquired in a loss impor-tation transaction. See §1.358–6(c)(1)(i)(A), paragraphs (c)(2)(ii)(B),and (c)(3)(i). The subsidiary’s basis in theproperty actually acquired in the transac-tion is determined under applicable law(including this section), without regard tothe amount of any adjustment to P’s basisin the subsidiary’s stock. Thus, the basisof the property in S’s or T’s hands maydiffer from the amount of the adjustmentto P’s basis in its stock of S or T.

(3) Acquiring’s basis in other propertytransferred. In general, Acquiring’s basisin property received in a section 362transaction (as defined in paragraph (c)(1)of this section) that is not determined un-der section 362(e)(1) and this section isdetermined under section 362(a) or sec-tion 362(b). However, if the transaction isdescribed in section 362(a) (without re-gard to whether it is also described in anyother section), further adjustment may berequired under section 362(e)(2). See§1.362–4.

(c) Definitions. For purposes of thissection, the following definitions apply:

(1) Section 362 transaction. The termsection 362 transaction means any trans-action described in section 362(a) or insection 362(b).

(2) Importation property.—(i) Generalrule. The term importation propertymeans any property (including separateportions of property tentatively dividedunder paragraph (e)(2) of this section)with respect to which—

(A) Any gain or loss that would berecognized on its sale by the transferorimmediately before the transaction (thetransferor’s hypothetical sale) would notbe subject to tax imposed under any pro-vision of subtitle A of the Internal Reve-nue Code (Federal income tax) (takinginto account the provisions of paragraph(d) of this section); and

2013–44 I.R.B. October 28, 2013457

(B) Any gain or loss that would berecognized on its sale by Acquiring im-mediately after the transaction (Acquir-ing’s hypothetical sale) would be subjectto Federal income tax (taking into accountthe provisions of paragraph (d) of thissection)

(ii) Special rules for applying thisparagraph (c)(2). See paragraph (d) ofthis section for rules for determiningwhether gain or loss on a hypothetical salewould be taken into account in determin-ing a Federal income tax liability andparagraph (e) of this section for rules ap-plicable when more than one personwould take such gain or loss into account.

(3) Loss importation transaction. Theterm loss importation transaction meansany section 362 transaction in which Ac-quiring’s aggregate basis in all importa-tion property received from all transferorsin the transaction would exceed the aggre-gate value of such property immediatelyafter the transaction. For this purpose, Ac-quiring’s basis in property received is de-termined without regard to this section orsection 362(e)(2).

(4) Value—(i) General rule. The termvalue means fair market value.

(ii) Special rule for transfers of part-nership interests. Notwithstanding thegeneral rule in paragraph (c)(4)(i) of thissection, when referring to a partnershipinterest, for purposes of this section, theterm value means the sum of the cash thatAcquiring would receive for the interest,assuming an exchange between a willingbuyer and a willing seller (neither beingunder any compulsion to buy or sell andboth having reasonable knowledge of rel-evant facts), increased by any §1.752–1liabilities (as defined in §1.752–1(a)(4)) ofthe partnership allocated to Acquiringwith regard to such transferred interestunder section 752 immediately after thetransfer to Acquiring. See §1.743–1 re-garding the application of section 743(b)following a section 362(e) basis reduction.

(d) Rules for determining whether gainor loss would be taken into account indetermining a Federal income tax liabili-ty—(1) General rule. In general, any gainor loss that would be recognized on ahypothetical sale described in either para-graph (c)(2)(i) or paragraph (c)(2)(ii) ofthis section is considered to be subject toFederal income tax if, taking into account

all relevant facts and circumstances, suchgain or loss would affect or be taken intoaccount in determining the Federal in-come tax liability of the transferor or Ac-quiring, respectively. This determinationis made without regard to whether suchperson has or would have any actual Fed-eral income tax liability for the taxableyear of the transaction.

(2) Look-through rule in the case ofcertain pass-through entities. Notwith-standing the general rule in paragraph(d)(1) of this section, the determination ofwhether any gain or loss on a hypotheticalsale would be treated as subject to Federalincome tax is made by reference to theperson that would be required to includesuch gain or loss in its taxable income ifthe hypothetical seller is—

(i) A trust treated as owned by itsgrantors or others (see section 671);

(ii) A partnership (see section 701); or(iii) An S corporation (see sections

1363 and 1366).(3) Controlled foreign corporations

(CFC), passive foreign investment compa-nies (PFIC). For purposes of this section,gain or loss that would be recognized by aCFC (as defined in section 957(a)) or aPFIC (as defined in section 1297(a)) is notdeemed taken into account in determininga Federal income tax liability solely be-cause it could affect an inclusion undersection 951(a) or section 1293(a).

(4) Look-through treatment in the caseof certain avoidance transactions. (i) Ap-plication of section. This paragraph (d)(4)applies if—

(A) The transferor is a domestic entitythat is a trust, estate, regulated investmentcompany (RIC) (as defined in section851(a)), a real estate investment trust(REIT) (as defined in section 856(a)), or acooperative (see section 1381); and

(B) The transferor transfers, directly orindirectly, property that was transferred toor acquired by it as part of a plan (whetherof transferor, Acquiring, or any other per-son) to avoid the application of section362(e)(1) and this section to a section 362transaction.

(ii) Effect of application of section.Notwithstanding paragraph (d)(1) of thissection, if a transferor is described in bothparagraphs (d)(4)(ii)(A) and (d)(4)(ii)(B)of this section—

(A) The transferor is treated as thoughit distributes the proceeds of the hypothet-ical sale (which, for this purpose, are pre-sumed to be an amount greater than zero);

(B) To the fullest extent possible underthe transferor’s organizing instrument,taking into account the beneficiaries orowners of interests (as applicable) in thetransferor, the deemed distribution istreated as made to a distributee or dis-tributees that would not take distributionsfrom the transferor into account in deter-mining a Federal income tax liability; and

(C) The determination of whether thegain or loss on the hypothetical sale istreated as subject to Federal income tax ismade by reference to the deemed distrib-utee or distributees.

(iii) Tiered entities. If a deemed distrib-utee is an entity described in paragraph(d)(4)(i)(A) of this section, the determina-tion of whether gain or loss on the hypo-thetical sale is taken into account in de-termining a Federal income tax liability ismade by treating the deemed distributee,and any successive such deemed distribu-tees, as a transferor and applying the rulesin paragraphs (d)(4)(i) and (d)(4)(ii) ofthis section to its deemed distribution (andto all successive deemed distributions),until no deemed distributee or successivedeemed distributee is an entity describedin paragraph (d)(4)(i)(A) of this section.

(e) Special rules for gain or loss thatwould be taken into account by multiplepersons—(1) In general. If gain or lossfrom a disposition of property would beincludible in income by more than oneperson, the property is treated as tenta-tively divided into separate portions inproportion to the amount of gain or lossrecognized with respect to the propertythat would be allocated to each such per-son. If an entity’s organizing instrumentspecially allocates gain and loss, the ten-tative division of property under this para-graph (e) must reflect the manner in whichgain or loss on the disposition of suchproperty would be allocated under theterms of the organizing instrument, takinginto account the net gain or loss actuallyrecognized by the entity in that tax year.

(2) Application of section. The rules ofthis section apply independently to eachtentatively divided portion to determine ifthe portion is importation property. Eachtentatively divided portion that is deter-

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mined to be importation property is in-cluded with all other importation propertyin the determination of whether the trans-action is a loss importation transaction.

(3) Acquiring’s basis in property ten-tatively divided into separate portions.Immediately after the application of sec-tion 362(e)(1) and this section and beforethe application of section 362(e)(2), eachproperty treated as tentatively divided intoseparate portions for purposes of applyingsection 362(e)(1) and this section ceasesto be treated as tentatively divided andAcquiring has a single, undivided basis insuch property that is equal to the sum of—

(i) The value of each tentatively di-vided portion that is importation property,if the transaction is a loss importationtransaction; and

(ii) Acquiring’s basis in each tenta-tively divided portion that is not importa-tion property received in a loss importa-tion transaction, as determined undersection 362(a) or section 362(b), as appli-cable, and without regard to any potentialapplication of section 362(e)(2).

(f) Examples. The examples in thisparagraph (f) illustrate the application ofsection 362(e)(1) and the provisions ofthis section. Unless otherwise indicated,the examples use the following nomencla-ture and assumptions: A and B are U.S.citizens. DC, DC1, and P are domesticcorporations that have not elected to be Scorporations within the meaning of sec-tion 1361(a)(1) and that are not membersof a consolidated group. F is a foreignindividual. FP is a foreign partnership.FC, FC1, and FC2 are foreign corpora-tions. Unless the facts indicate otherwise,the foreign individuals, corporations, andpartnerships are not engaged in a U.S.trade or business, have no U.S. real prop-erty interests, and have no other relation-ships, activities, or interests that wouldcause them, their shareholders, their part-ners, or their property to be subject toFederal income taxation. There is no ap-plicable income tax treaty, and all personsand transactions are unrelated unless thefacts indicate otherwise.

Example 1. Basic application of section. (i) Sec-tion 351 transfer of importation property in a lossimportation transaction. (A) Facts. FC owns threeassets, A1 (basis $40, value $150), A2 (basis $120,value $30), and A3 (basis $140, value $20). On Date1, FC transfers A1, A2, and A3 to DC in a transac-tion to which section 351 applies.

(B) Importation property. If FC had sold A1, A2,or A3 immediately before the transaction, no gain orloss recognized on the sale would have been takeninto account in determining a Federal income taxliability. Further, if DC had sold A1, A2, or A3immediately after the transaction, DC would takeinto account any gain or loss recognized on the salein determining its Federal income tax liability.Therefore, A1, A2, and A3 are all importation prop-erties. See paragraph (c)(2) of this section.

(C) Loss importation transaction. FC’s transferof A1, A2, and A3 is a section 362 transaction.Furthermore, but for section 362(e)(1) and this sec-tion and section 362(e)(2), DC’s aggregate basis inthe importation properties, A1, A2, and A3, wouldbe $300 ($40 � $120 � $140) under section 362(a)and the properties’ aggregate value would be $200($150 � $30 � $20). Therefore, the importationproperties’ aggregate basis would exceed their ag-gregate value and the transaction is a loss importa-tion transaction. See paragraph (c)(3) of this section.

(D) Application of section 362(e)(1) and thissection to importation property received in loss im-portation transaction. Because the importation prop-erties, A1, A2, and A3, were transferred in a lossimportation transaction, paragraph (b)(1) of this sec-tion applies and DC’s basis in A1, A2, and A3 willeach be equal to the property’s value ($150, $30, and$20, respectively) immediately after the transfer.

(E) Basis of property received in transaction.Following the application of section 362(e)(1) andthis section, the provisions of section 362(e)(2) mustbe taken into account because the transfer is a sec-tion 362(a) transaction. Taking into account the ap-plication of section 362(e)(1) and this section, DC’saggregate basis in the transferred properties wouldnot exceed their aggregate value immediately afterthe transfer. Therefore, FC does not have a netbuilt-in loss, FC’s transfer is not a loss duplicationtransaction, and section 362(e)(2) does not apply tothis transaction. DC’s bases in A1, A2, and A3, asdetermined under paragraph (i)(D) of this Example1, are $150, $30, and $20, respectively. Under sec-tion 358(a), FC receives the DC stock with a basis of$300 (the sum of FC’s bases in A1, A2, and A3immediately before the exchange).

(ii) Reorganization. The facts are the same as inparagraph (i)(A) of this Example 1 except that, in-stead of transferring property to DC in a section 351exchange, FC merges with and into DC in a trans-action described in section 368(a)(1)(A). The analy-sis and results are the same as set forth in paragraphs(i)(B), (i)(C), (i)(D), and (i)(E) of this Example 1,except that, under section 358(a), FC’s shareholderswill take the DC stock with a basis determined byreference to their FC stock basis.

(iii) FC’s property used in U.S. trade or busi-ness. (A) Facts. The facts are the same as in para-graph (i)(A) of this Example 1, except that FC isengaged in a U.S. trade or business and uses all theproperties in that U.S. trade or business. In this case,none of the properties would be importation propertybecause FC would take any gain or loss on thedisposition of the properties into account in deter-mining its Federal income tax liability. Accordingly,this section does not apply to the transaction.

(B) Basis of property received in transaction.Following the application of section 362(e)(1) and

this section, the provisions of section 362(e)(2) mustbe taken into account because the transfer is a sec-tion 362(a) transaction. Taking into account the ap-plication of section 362(e)(1) and this section butwithout taking into account the provisions of section362(e)(2), DC’s aggregate basis in the transferredproperties would be $300 ($40 � $120 � $140)under section 362(a) and the properties’ aggregatevalue immediately after the transfer would be $200($150 � $30 � $20). Therefore, FC has a netbuilt-in loss and FC’s transfer of A1, A2, and A3 isa loss duplication transaction. Accordingly, underthe general rule of section 362(e)(2), FC’s $100 netbuilt-in loss ($300 aggregate basis over $200 aggre-gate value) would be allocated proportionately (bythe amount of built-in loss in each property) toreduce DC’s basis in the loss properties, A2 and A3.See §1.362–4. As a result, DC’s basis in A2 wouldbe $77.14 ($120 basis under section 362(a) reducedby $42.86, A2’s proportionate share of FC’s netbuilt-in loss, computed as $90/$210 x $100) andDC’s basis in A3 would be $82.86 ($140 basis undersection 362(a) reduced by $57.14, A3’s proportion-ate share of FC’s net built-in loss, computed as$120/$210 x $100). However, if FC and DC were toelect under section 362(e)(2)(C) to apply the $100basis reduction to FC’s basis in the DC stock re-ceived in the transaction, DC’s bases in A2 and A3would remain their section 362(a) bases of $120 and$140, respectively. Under section 362(a), DC’s basisin A1 is $40 (irrespective of whether the section362(e)(2)(C) election is made). If FC and DC do notmake a section 362(e)(2)(C) election, FC’s basis inthe DC stock received in the exchange will be $300;if FC and DC do make the election, FC’s basis in theDC stock will be $200 ($300–$100 net built-in loss).See §1.362–4(b).

Example 2. Multiple transferors. (i) Facts. Thefacts are the same as in paragraph (i)(A) of Example1, except that FC only owns A1 (basis $40, value$150) and A2 (basis $120, value $30) and F owns A3(basis $140, value $20). On Date 1, FC transfers A1and A2, and F transfers A3, to DC in a singletransaction described in section 351.

(ii) Importation property. A1 and A2 are impor-tation properties for the reasons set forth in para-graph (i)(B) of Example 1. A3 is also an importationproperty because, if F had sold A3 immediatelybefore the transaction, no gain or loss recognized onthe sale would have been taken into account indetermining a Federal income tax liability, and, fur-ther, if DC had sold A3 immediately after the trans-action, DC would take into account any gain or lossrecognized on the sale in determining its Federalincome tax liability.

(iii) Loss importation transaction. The transfersby FC and F are a section 362 transaction. Thetransaction is a loss importation transaction for thereasons set forth in paragraph (i)(C) of Example 1(notwithstanding that one of the transferors, FC, didnot transfer a net built-in loss). See paragraph (c)(3)of this section.

(iv) Application of section 362(e)(1) and thissection to importation property received in loss im-portation transaction. Because the importation prop-erties, A1, A2, and A3, were transferred in a lossimportation transaction, paragraph (b)(1) of this sec-tion applies and DC’s basis in A1, A2, and A3 will

2013–44 I.R.B. October 28, 2013459

each be equal to the property’s value ($150, $30, and$20, respectively) immediately after the transfer.

(v) Basis of property received in transaction.Following the application of section 362(e)(1) andthis section, the provisions of section 362(e)(2) mustbe taken into account because the transfer is a sec-tion 362(a) transaction. The application of section362(e)(2) is determined separately for each trans-feror. See §1.362–4(b). Taking into account the ap-plication of section 362(e)(1) and this section, nei-ther DC’s aggregate basis in FC’s properties norDC’s basis in F’s property would exceed the prop-erties’ respective values immediately after the trans-action. Therefore neither FC nor F has a net built-inloss, neither transfer is a loss duplication transaction,and section 362(e)(2) does not apply to either trans-fer. DC’s bases in A1, A2, and A3, as determinedunder paragraph (iv) of this Example 2, are $150,$30, and $20, respectively. Under section 358(a),FC’s basis in the DC stock received is $160 ($40 �$120) and F’s basis in the DC stock received in theexchange is $140.

Example 3. Transfer of importation and non-importation property. (i) Facts. As in paragraph (i)of Example 2, FC owns A1 (basis $40, value $150)and A2 (basis $120, value $30), and F owns A3(basis $140, value $20). In addition, A2 is a U.S. realproperty interest as defined in section 897(c)(1). OnDate 1, FC transfers A1 and A2, and F transfers A3,to DC in a single transaction described in section351.

(ii) Importation property. A1 and A3 are impor-tation properties for the reasons set forth in para-graph (i)(B) of Example 1 and paragraph (i) of Ex-ample 2, respectively. However, A2 is notimportation property because, if FC had sold A2immediately before the transaction, FC would takeinto account any gain or loss recognized on the salein determining its Federal income tax liability.

(iii) Loss importation transaction. FC’s transferis a section 362 transaction. Furthermore, but forsection 362(e)(1) and this section and section362(e)(2), DC’s aggregate basis in the importationproperties, A1 and A3, would be $180 ($40 � $140)and the properties’ aggregate value would be $170($150 � $20) immediately after the transaction.Therefore, the importation properties’ aggregate ba-sis would exceed their aggregate value immediatelyafter the transaction, and the transfer is a loss im-portation transaction.

(iv) Application of section 362(e)(1) and thissection to importation property received in loss im-portation transaction. Because the importation prop-erties, A1 and A3, were transferred in a loss impor-tation transaction, paragraph (b)(1) of this sectionapplies and DC’s basis in A1 and in A3 will each beequal to the property’s value ($150 and $20, respec-tively) immediately after the transfer.

(v) Basis of property received in transaction.Following the application of section 362(e)(1) andthis section, the provisions of section 362(e)(2) mustbe taken into account because the transfer is a sec-tion 362(a) transaction. The application of section362(e)(2) is determined separately for each trans-feror. See §1.362–4(b).

(A) FC’s transfer. Taking into account the ap-plication of section 362(e)(1) and this section butwithout taking into account the provisions of section

362(e)(2), DC would have an aggregate basis of$270 in the transferred properties ($150 in A1, asdetermined under paragraph (iv) of this Example 3,plus $120 in A2, determined under section 362(a)),and the properties would have an aggregate value of$180 ($150 � $30) immediately after the transfer.Therefore, FC has a net built-in loss and FC’s trans-fer of A1 and A2 is a loss duplication transaction.Accordingly, under the general rule of section362(e)(2), FC’s $90 net built-in loss ($270 aggregatebasis to DC over $180 aggregate value) would beallocated proportionately to reduce DC’s basis in theloss property transferred by FC. As a result, FC’sentire net built-in loss would be allocated to A2, theonly loss property transferred by FC, and DC’s basisin A2 would be $30 ($120 basis under section 362(a)reduced by $90 net built-in loss). However, if FCand DC were to elect under section 362(e)(2)(C) toapply the $90 basis reduction to FC’s basis in the DCstock received in the transaction, DC’s basis in A2would remain its section 362(a) basis of $120. DC’sbasis in A1 is $150 as determined under paragraph(iv) of this Example 3 (irrespective of whether thesection 362(e)(2)(C) election is made). If FC and DCdo not make a section 362(e)(2)(C) election, FC’sbasis in the DC stock received in the exchange willbe $270; if FC and DC do make the election, FC’sbasis in the DC stock will be $180 ($270–$90 netbuilt-in loss). See §1.362–4.

(B) F’s transfer of A3. Taking into account theapplication of section 362(e)(1) and this section,DC’s basis in A3, the property transferred by F,would not exceed its value immediately after thetransfer. Therefore, F does not have a built-in loss,F’s transfer is not a loss duplication transaction, andsection 362(e)(2) does not apply to F’s transfer.DC’s basis in A3, as determined under paragraph(iv) of this Example 3, is $20. Under section 358(a),F receives the DC stock with a basis of $140.

Example 4. Multiple transferors of non-importation properties. (i) Facts. DC1 owns A1 (ba-sis $40, value $150). In addition, as in Example 3,FC owns A2 (basis $120, value $30), a U.S. realproperty interest as defined in section 897(c)(1), andF owns A3 (basis $140, value $20). On Date 1, DC1transfers A1, FC transfers A2, and F transfers A3, toDC in a single transaction described in section 351.

(ii) Importation property. A2 is not importationproperty and A3 is importation property for the rea-sons set forth in paragraph (ii) of Example 3 andparagraph (i)(B) of Example 1, respectively. A1 isnot importation property because, if DC1 had soldA2 immediately before the transaction, DC1 wouldtake into account any gain or loss recognized on thesale in determining its Federal income tax liability.

(iii) Loss importation transaction. The transfer ofA1, A2, and A3 is a section 362 transaction. Fur-thermore, but for section 362(e)(1) and this sectionand section 362(e)(2), DC’s basis in importationproperty, A3, would be $140 and the value of theproperty would be $20 immediately after the trans-action. Therefore, the importation property’s basiswould exceed value and the transfer is a loss impor-tation transaction.

(iv) Application of section 362(e)(1) and thissection to importation property received in loss im-portation transaction. Because the importation prop-erty, A3, was transferred in a loss importation trans-

action, section 362(e)(1) and paragraph (b)(1) of thissection applies and DC’s basis in A3 will be equal toA3’s $20 value immediately after the transfer.

(v) Basis of property received in transaction.Following the application of section 362(e)(1) andthis section, the provisions of section 362(e)(2) mustbe taken into account because the transfer is a sec-tion 362(a) transaction. The application of section362(e)(2) is determined separately for each trans-feror. See §1.362–4.

(A) DC1’s transfer. Taking into account the ap-plication of section 362(e)(1) and this section, DC’sbasis in A1 ($40 under section 362(a)) would notexceed its value immediately after the transfer.Therefore, DC1 does not have a net built-in loss,DC1’s transfer is not a loss duplication transaction,and section 362(e)(2) does not apply to DC1’s trans-fer. DC’s basis in A1, determined under section362(a), is $40. Under section 358(a), DC1 receivesthe DC stock with a basis of $40.

(B) FC’s transfer. Taking into account the appli-cation of section 362(e)(1) and this section, but with-out taking into account the provisions of section362(e)(2), DC would have a section 362(a) basis of$120 in A2, which would exceed A2’s $30 valueimmediately after the transfer. Therefore, FC has anet built-in loss and FC’s transfer of A2 is a lossduplication transaction. Accordingly, under the gen-eral rule of section 362(e)(2), FC’s $90 net built-inloss (DC’s $120 basis in A2 over A2’s $30 value)would be applied to reduce DC’s basis in A2, theonly loss property transferred by FC. As a result,DC’s basis in A2 would be $30 ($120 basis undersection 362(a), reduced by the $90 net built-in loss).However, if FC and DC were to elect under section362(e)(2)(C) to apply the $90 basis reduction to FC’sbasis in the DC stock received in the transaction,DC’s basis in A2 would be its $120 basis determinedunder section 362(a). If FC and DC do not make asection 362(e)(2)(C) election, FC’s basis in the DCstock received in the exchange will be $120; if FCand DC do make the election, FC’s basis in the DCstock will be $30 ($120–$90). See §1.362–4.

(C) F’s transfer. F’s transfer of A3 is a transac-tion described in section 362(a). However, takinginto account the application of section 362(e)(1) andthis section, DC’s basis in A3 ($20) would not ex-ceed its value immediately after the transfer. There-fore, F does not have a built-in loss, F’s transfer isnot a loss duplication transaction, and section362(e)(2) does not apply to F’s transfer. DC’s basisin A3, as determined under paragraph (iv) of thisExample 4, is $20. Under section 358(a), FC receivesthe DC stock with a basis of $140.

Example 5. Partnership transactions. (i) Trans-fer by foreign partnership, foreign and domesticpartners. (A) Facts. A and F are equal partners inFP. FP owns A1 (basis $100, value $70). Under theterms of the FP partnership agreement, FP’s items ofincome, gain, deduction, and loss are allocatedequally between A and F. FP transfers A1 to DC ina transfer to which section 351 applies. No electionis made under section 362(e)(2)(C).

(B) Importation property. If FP had sold A1immediately before the transaction, any gain or lossrecognized on the sale would be allocated to andincludible by A and F equally under the partnershipagreement. Thus, A1 is treated as tentatively divided

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into two equal portions, one treated as owned by Aand one treated as owned by F. If FP had sold A1immediately before the transaction, any gain or lossrecognized on the portion treated as owned by Awould have been taken into account in determining aFederal income tax liability (A’s); thus A’s tenta-tively divided portion of A1 is not importation prop-erty. However, no gain or loss recognized on thetentatively divided portion treated as owned by Fwould have been taken into account in determining aFederal income tax liability. Further, if DC had soldA1 immediately after the transaction, any gain orloss recognized on the sale would have been takeninto account in determining a Federal income taxliability (DC’s); thus, F’s tentatively divided portionof A1 is importation property.

(C) Loss importation transaction. FP’s transferof A1 is a section 362 transaction. Furthermore, butfor section 362(e)(1) and this section and section362(e)(2), DC’s basis in the importation property,F’s portion of A1, would be $50 under section 362(a)and the property’s value would be $35 immediatelyafter the transaction. Therefore, the importationproperty’s basis would exceed its value and thetransfer is a loss importation transaction.

(D) Application of section 362(e)(1) and thissection to importation property received in loss im-portation transaction. Because the importation prop-erty, F’s tentatively divided portion of A1, was trans-ferred in a loss importation transaction, section362(e)(1) and paragraph (b)(1) of this section appliesand DC’s basis in F’s portion of A1 will be equal toits $35 value.

(E) Basis of property received in transaction.Following the application of section 362(e)(1) andthis section, the provisions of section 362(e)(2) mustbe taken into account because the transfer is a sec-tion 362(a) transaction. Taking into account the ap-plication of section 362(e)(1) and this section butwithout taking into account the provisions of section362(e)(2), DC’s aggregate basis in A1 would be $85(the sum of the $35 basis in F’s tentatively dividedportion of A1, as determined under paragraph (i)(D)of this Example 5, and the $50 basis in A’s tenta-tively divided portion of A1, determined under sec-tion 362(a), see paragraph (d)(2) of this section) andA1’s value immediately after the transfer would be$70. Therefore, FP has a net built-in loss and FP’stransfer of A1 is a loss duplication transaction. Ac-cordingly, under the general rule of section362(e)(2), FP’s $15 net built-in loss ($85 basis over$70 value) would be allocated to reduce DC’s basisin the loss asset, A1, the only loss property trans-ferred by FP. As a result, DC’s basis in A1 would be$70 ($85 basis under section 362(a) and this section,reduced by the $15 net built-in loss). Under section358, FP’s basis in the DC stock received in theexchange will be $100. See §1.362–4.

(ii) Transfer with election to apply section362(e)(2)(C). The facts are the same as in paragraph(i)(A) of this Example 5, except that FP and DC electto apply section 362(e)(2)(C) to reduce FP’s basis inthe DC stock received in the exchange. The analysisand results are the same as in paragraphs (i)(B),(i)(C), (i)(D), and (i)(E) of this Example 5, exceptthat the $15 reduction to DC’s basis in A1 is notmade and, as a result, DC’s basis in A1 remains $85,and FP’s basis in the DC stock received in the

exchange is reduced from $100 to $85. The $15reduction to FP’s basis in DC stock reduces A’sbasis in its FP interest under section 705(a)(2)(B).See §1.362–4(f)(1).

(iii) Transfer by domestic partnership. The factsare the same as in paragraph (i)(A) of this Example5 except that FP is a domestic partnership. Theanalysis and results are the same as in paragraphs(i)(B), (i)(C), (i)(D), and (i)(E) of this Example 5.

(iv) Transfer of interest in partnership with lia-bility. (A) Facts. F and two other individuals areequal partners in FP. F’s basis in its partnershipinterest is $247. F’s share of FP’s §1.752–1 liabili-ties (as defined in §1.752–1(a)(4)) is $150. F trans-fers his partnership interest to DC in a transaction towhich section 351 applies. FP has no section 754election in effect. If DC were to sell the FP interestimmediately after the transfer, DC would receive$100 in cash or other property. In addition, takinginto account the rules under §1.752–4, DC’s share ofFP’s §1.152–1 liabilities (as defined in §1.752–1(a)(4)) is $145 immediately after the transfer.

(B) Importation property. If F had sold his part-nership interest immediately before the transaction,no gain or loss recognized on the sale would havebeen taken into account in determining a Federalincome tax liability. Further, if DC had sold thepartnership interest immediately after the transac-tion, any gain or loss recognized on the sale wouldhave been taken into account in determining a Fed-eral income tax liability. Therefore, F’s partnershipinterest is importation property.

(C) Loss importation transaction. F’s transfer isa section 362 transaction. However, but for section362(e)(1) and this section and section 362(e)(2),DC’s basis in the importation property, the partner-ship interest, determined under section 362(a) andtaking into account the rules under section 752,would be $242 (F’s $247 basis reduced by F’s $150share of FP liabilities and increased by DC’s $145share of FP liabilities) and, under § 1.362–4(c)(12)(ii), the value of the FP interest would be$245 (the sum of $100, the cash DC would receive ifDC immediately sold the partnership interest, and$145, DC’s share of the §1.752–1 liabilities (as de-fined in §1.752–1(a)(4)) under section 752 immedi-ately after the transfer to DC). Therefore, the impor-tation property’s basis ($242) would not exceed itsvalue ($245), and the transfer is not a loss importa-tion transaction.

(D) Basis in property received in transaction.Following the application of section 362(e)(1) andthis section, the provisions of section 362(e)(2) mustbe taken into account because the transfer is a sec-tion 362(a) transaction. As described in paragraph(iv)(C) of this Example 5, taking into account theapplication of section 362(e)(1) and this section,DC’s basis in the partnership interest would notexceed its value. Therefore, under §1.362–4, F doesnot have a net built-in loss, the transfer is not a lossduplication transaction, and section 362(e)(2) doesnot apply to the transfer. DC’s basis in F’s partner-ship interest is $242, determined under sections362(a) and 752. Under section 358, taking into ac-count the rules under section 752, F’s basis in the DCstock received in the exchange is $97 ($247 reducedby F’s $150 share of FP liabilities).

Example 6. Transactions involving tax-exemptentities. (i) Exempt transferor. (A) Facts. InsCo is abenevolent life insurance association of a purelylocal character exempt from Federal income tax un-der section 501(a) because it is described in section501(c)(12). InsCo owns shares of stock of DC1(basis $100, value $70) for investment purposes,which are not debt-financed property (as defined insection 514). On December 31, Year 1, InsCo trans-fers the DC1 stock to DC in a transaction to whichsection 351 applies. No election is made under sec-tion 362(e)(2)(C).

(B) Importation property. If InsCo had sold theDC1 stock immediately before the transaction, anygain or loss realized would be excluded from unre-lated business taxable income (UBTI) under section512(b)(5), and thus no gain or loss recognized on thesale would have been taken into account in deter-mining Federal income tax liability. Further, if DChad sold the DC1 stock immediately after the trans-action, any gain or loss recognized on the sale wouldhave been taken into account in determining Federalincome tax liability. Therefore, the DC1 stock isimportation property.

(C) Loss importation transaction. InsCo’s trans-fer is a section 362 transaction. Furthermore, but forsection 362(e)(1) and this section and section362(e)(2), DC’s basis in importation property, theDC1 stock, would be $100, and the stock’s valuewould be $70 immediately after the transaction.Therefore, the importation property’s basis wouldexceed its value and the transfer is a loss importationtransaction.

(D) Application of section 362(e)(1) and thissection to importation property received in loss im-portation transaction. Because the importation prop-erty, the DC1 stock, was transferred in a loss impor-tation transaction, paragraph (b)(1) of this sectionapplies and DC’s basis in the stock will be equal toits $70 value.

(E) Basis of property received in transaction.Following the application of section 362(e)(1) andthis section, the provisions of section 362(e)(2) mustbe taken into account because the transfer is a sec-tion 362(a) transaction. Taking into account the ap-plication of section 362(e)(1) and this section, DC’sbasis in the DC1 stock would not exceed its valueimmediately after the transaction. Therefore, InsCodoes not have a net built-in loss, InsCo’s transfer isnot a loss duplication transaction, and section362(e)(2) has no application to the transaction. DC’sbasis in the DC1 stock, as determined under para-graph (i)(D) of this Example 6, is $70. Under section358, InsCo’s basis in the DC stock received in theexchange will be $100.

(ii) Transferor loses tax-exempt status. (A) Facts.The facts are the same as in paragraph (i)(A) of thisExample 6 except that InsCo fails to be described insection 501(c)(12) in Year 1.

(B) Importation property. If InsCo had sold theDC1 stock immediately before the transaction, anygain or loss recognized on the sale would have beentaken into account in determining a Federal incometax liability. Therefore, the DC1 stock is not impor-tation property and this section does not apply to thetransaction.

(C) Basis of property received in transaction.Following the application of section 362(e)(1) and

2013–44 I.R.B. October 28, 2013461

this section, the provisions of section 362(e)(2) mustbe taken into account because the transfer is a sec-tion 362(a) transaction. Taking into account the ap-plication of section 362(e)(1) and this section butwithout taking into account the provisions of section362(e)(2), DC would have a section 362(a) basis of$100 in the stock, which would exceed its value of$70 immediately after the transfer. Therefore, InsCohas a net built-in loss and InsCo’s transfer of theDC1 stock is a loss duplication transaction. Accord-ingly, under the general rule of section 362(e)(2),InsCo’s $30 net built-in loss ($100 basis over $70value) would be allocated to reduce DC’s basis in theloss asset, the DC1 stock, the only loss propertytransferred by InsCo. As a result, DC’s basis in theDC1 stock would be $70 ($100 basis under section362(a), reduced by the $30 net built-in loss). Undersection 358, InsCo’s basis in the DC stock receivedin the exchange will be $100.

(iii) Transfer of property that is subject to unre-lated business tax. (A) Facts. The facts are the sameas in paragraph (i)(A) of this Example 6 except that,on December 31, Year 1, instead of the DC1 stock,InsCo transfers A1 (basis $200, value $150) to DC.A1 is an office building that InsCo owned fromJanuary 1 to December 31 of Year 1. During theentirety of this period, A1 constitutes debt-financedproperty (as defined in section 514). Pursuant tosections 512 and 514, InsCo would be required toinclude in UBTI a portion of the gains or losses froma sale of A1 at the end of Year 1. DC does not takethe property subject to the debt.

(B) Importation property. If InsCo had sold A1immediately before the transaction, the gain or lossrecognized on the sale would have been taken intoaccount in determining a Federal income tax liabil-ity, even though at a lesser rate of inclusion. There-fore, A1 is not importation property and this sectiondoes not apply to the transaction.

(C) Basis of property received in transaction.The analysis and results are the same as in paragraph(ii)(C) of this Example 6.

Example 7. Transactions involving CFCs. (i)Transfer by CFC. (A) Facts. FC is a CFC with 100shares of stock outstanding. A owns 60 of the sharesand F owns the remaining 40 shares. FC owns twoassets, A1 (basis $70, value $100), which is used inthe conduct of a U.S. trade or business, and A2 (basis$100, value $75), which is not used in the conduct ofa U.S. trade or business. FC transfers both assets toDC in a transaction to which section 351 applies.

(B) Importation property. If FC had sold A1immediately before the transaction, any gain or lossrecognized on the sale would have been taken intoaccount in determining a Federal income tax liability(FC’s). See section 882(a). Therefore, A1 is notimportation property. If FC had sold A2 immediatelybefore the transaction, FC would not take the gain orloss recognized into account in determining its Fed-eral income tax liability, but the gain or loss could betaken into account in determining a section 951inclusion to FC’s U.S. shareholders. However, underparagraph (d)(3) of this section, gain or loss is notdeemed taken into account in determining a Federalincome tax liability solely because it could affect aninclusion under section 951(a). Further, if DC hadsold A2 immediately after the transaction, any gainor loss recognized on the sale would have been taken

into account in determining a Federal income taxliability. Therefore, A2 is importation property.

(C) Loss importation transaction. FC’s transferis a section 362 transaction. Furthermore, but forsection 362(e)(1) and this section and section362(e)(2), DC’s basis in the importation property,A2, would be $100 and the property’s value wouldbe $75 immediately after the transaction. Therefore,the importation property’s basis would exceed itsvalue and the transfer is a loss importation transac-tion.

(D) Application of section 362(e)(1) and thissection to importation property received in loss im-portation transaction. Because the importation prop-erty, A2, was transferred in a loss importation trans-action, paragraph (b)(1) of this section applies andDC’s basis in A2 will be equal to A2’s $75 valueimmediately after the transfer.

(E) Basis of property received in transaction.Following the application of section 362(e)(1) andthis section, the provisions of section 362(e)(2) mustbe taken into account because the transfer is a sec-tion 362(a) transaction. Taking into account the ap-plication of section 362(e)(1) and this section butwithout taking into account the provisions of section362(e)(2), DC would have an aggregate basis of$145 in the transferred properties ($70 in A1, deter-mined under section 362(a), plus $75 in A2, deter-mined under this section) and the properties wouldhave an aggregate value of $175 ($100 � $75)immediately after the transfer. Therefore, FC doesnot have a net built-in loss, FC’s transfer is not a lossduplication transaction, and section 362(e)(2) doesnot apply to the transaction. DC’s basis in A1 will be$70, determined under section 362(a), and DC’sbasis in A2 will be $75, as determined under para-graph (i)(D) of this Example 7. Under the generalrule in section 358(a), FC receives the DC stock witha basis of $170 ($70 attributable to A1 plus $100attributable to A2).

(ii) Transfer of CFC stock. (A) Facts. The factsare the same as in paragraph (i)(A) of this Example7, except that A transfers its 60 shares of FC stock(basis $80, value $105) and F transfers its 40 sharesof FC stock (basis $100, value $70) to DC in anexchange that qualifies under section 351.

(B) Importation property. If A had sold its FCshares immediately before the transaction, any gainor loss recognized on the sale would have been takeninto account in determining a Federal income taxliability (A’s). Therefore, A’s FC shares are notimportation property. However, if F had sold its FCshares immediately before the transaction, no gain orloss recognized on the sale would have been takeninto account in determining a Federal income taxliability. Further, if DC had sold F’s FC sharesimmediately after the transaction, any gain or lossrecognized on the sale would have been taken intoaccount in determining a Federal income tax liabil-ity. Therefore, F’s FC shares are importation prop-erty.

(C) Loss importation transaction. The transfer ofthe FC shares is a section 362 transaction. Further-more, but for section 362(e)(1) and this section andsection 362(e)(2), DC’s aggregate basis in the im-portation property, F’s shares of FC stock, would be$100 under section 362(a) and the shares’ aggregatevalue would be $70. Therefore, the importation

property’s aggregate basis would exceed its aggre-gate value, and the transfer is a loss importationtransaction.

(D) Application of section 362(e)(1) and thissection to importation property received in loss im-portation transaction. Because the importation prop-erty, F’s shares of FC stock, was transferred in a lossimportation transaction, paragraph (b)(1) of this sec-tion applies and DC’s aggregate basis in the shareswill be equal to their $70 aggregate value immedi-ately after the transfer.

(E) Basis of property received in transaction.Following the application of section 362(e)(1) andthis section, the provisions of section 362(e)(2) mustbe taken into account because the transfer is a sec-tion 362(a) transaction. The application of section362(e)(2) is determined separately for each trans-feror. See §1.362–4(b).

(1) A’s transfer. Taking into account the appli-cation of section 362(e)(1) and this section, DC’saggregate basis in the shares ($80 under section362(a)) would not exceed the shares’ value ($105)immediately after the transaction. Therefore A doesnot have a built-in loss, A’s transfer is not a lossduplication transaction, and section 362(e)(2) doesnot apply to A’s transfer. DC’s aggregate basis inA’s shares, determined under section 362(a), is $80.Under section 358(a), A receives the DC stock witha basis of $80.

(2) F’s transfer. Taking into account the appli-cation of section 362(e)(1) and this section, DC’saggregate basis in the shares would not exceed theirvalue immediately after the transaction. Therefore, Fdoes not have a built-in loss, F’s transfer is not a lossduplication transaction, and section 362(e)(2) doesnot apply to F’s transfer. DC’s aggregate basis in F’sshares, as determined under paragraph (ii)(D) of thisExample 7, is $70. Under section 358(a), F receivesthe DC stock with a basis of $100.

Example 8. Property subject to withholding tax.(i) Facts. FC owns a share of DC1 stock (basis $100,value $70) as an investment. FC receives dividendson the share that are subject to Federal withholdingtax of 30 percent of the amount received undersection 881(a); under section 1442(a), DC1 mustwithhold tax on the dividends paid. FC transfers theDC1 share to DC in a transaction to which section351 applies.

(ii) Importation property. Although any divi-dends received with respect to the DC1 stock weresubject to withholding tax, if FC had sold the shareof stock of DC1, no gain or loss recognized on thesale would have been taken into account in deter-mining a Federal income tax liability. See section865(a)(2). Further, if DC had sold the share of DC1stock immediately after the transaction, any gain orloss recognized on the sale would be taken intoaccount in determining Federal income tax liability.Therefore, the share of DC1 stock is importationproperty.

(iii) Loss importation transaction. FC’s transferis a section 362 transaction. Furthermore, but forsection 362(e)(1) and this section and section362(e)(2), DC’s basis in the importation property,the share of DC1 stock, would be $100 and theshare’s value would be $70 immediately after thetransaction. Therefore, the share’s basis would ex-

October 28, 2013 2013–44 I.R.B.462

ceed its value and the transfer is a loss importationtransaction.

(iv) Application of section 362(e)(1) and thissection to importation property received in loss im-portation transaction. Because the importation prop-erty, the DC1 share, was transferred in a loss impor-tation transaction, paragraph (b)(1) of this sectionapplies and DC’s basis in the share will be equal tothe share’s $70 value.

(v) Basis of property received in transaction.Following the application of section 362(e)(1) andthis section, the provisions of section 362(e)(2) mustbe taken into account because the transfer is a sec-tion 362(a) transaction. Taking into account the ap-plication of section 362(e)(1) and this section, DC’sbasis in the DC1 share would not exceed the share’svalue immediately after the transaction. Therefore,FC does not have a net built-in loss, FC’s transfer isnot a loss duplication transaction, and section362(e)(2) does not apply to the transaction. DC’sbasis in the DC1 share, as determined under para-graph (iv) of this Example 8, is $70. Under section358, FC’s basis in the DC stock received in theexchange will be $100.

Example 9. Property transferred in triangularreorganization. (i) Foreign subsidiary. (A) Facts. Powns the sole outstanding share of stock of FC (basis$1), FC1 owns the sole outstanding share of FC2(basis $100), and FC2 owns one asset, A1 (basis$100, value $20). In a forward triangular mergerdescribed in §1.358–6(b)(2)(i), FC2 merges withand into FC, and FC1 receives shares of P stock inexchange for its FC2 stock. The forward triangularmerger is a transaction described in section368(a)(2)(D) and, therefore, in section 362(b).

(B) Determining P’s basis in its FC share. Pur-suant to §1.358–6, for purposes of determining theadjustment to P’s basis in its FC shares, P is treatedas though it first received A1 in a transaction inwhich its basis in A1 would be determined undersection 362(b) and then it transferred A1 to FC in atransaction in which P’s basis in its FC stock wouldbe determined under section 358.

(1) P’s deemed acquisition and transfer of A1. IfFC2 had sold A1 for its value immediately before thedeemed transaction, no gain or loss recognized onthe sale would have been taken into account indetermining a Federal income tax liability. If P hadsold A1 immediately after the deemed transaction,any gain or loss recognized on the sale would havebeen taken into account in determining a Federalincome tax liability (P’s). Therefore, with respect toP’s deemed acquisition, A1 is importation property.Furthermore, immediately after the deemed transac-tion, P’s basis in A1, but for section 362(e)(1) andthis section and section 362(e)(2), would be $100and A1’s value is $20. Therefore, the importationproperty’s basis would exceed its value and thetransfer is a loss importation transaction. Accord-ingly, P’s deemed basis in A1 will be equal to A1’s$20 value.

(2) P’s FC stock basis. As a result of P’s deemedtransfer of A1 to FC (and applying the principles of§1.367(b)–13), P’s basis in its FC stock is increasedby its $20 deemed basis in A1. Accordingly, follow-ing the transaction, P’s basis in its share of FC stockwill be $21 (the sum of its original $1 basis and the$20 adjustment for the deemed transfer of A1).

(C) FC’s basis in A1. FC’s basis in A1 is deter-mined under the rules of this section without regardto the determination of P’s adjustment to its basis inFC stock. If FC2 had sold A1 for its value immedi-ately before the transaction, no gain or loss recog-nized on the sale would have been taken into accountin determining a Federal income tax liability. How-ever, if FC had sold A1 immediately after the trans-action, no gain or loss recognized on the sale wouldhave been taken into account in determining a Fed-eral income tax liability, so A1 is not importationproperty. Accordingly, this section will not apply tothe transaction. Although there is a net built-in lossin A1, the transaction is not described in section362(a), and so section 362(e)(2) and §1.362–4 willnot apply to the transaction. Thus, under section362(b), FC’s basis in A1 will be $100.

(D) FC1’s basis in P stock. Under section 358,FC1’s basis in the P stock it receives in the exchangewill be $100.

(ii) Property transferred to U.S. subsidiary intriangular reorganization. (A) Facts. The facts arethe same as in paragraph (i)(A) of this Example 9,except that P also owns the sole outstanding share ofDC (basis $1) and, instead of merging into FC, FC2merged into DC.

(B) Determining P’s basis in its DC share. Asdetermined under paragraph (i)(B)(2) of this Exam-ple 9, P’s basis in its DC share is $21, the sum of itsoriginal $1 basis plus the $20 adjustment for thedeemed transfer of A1.

(C) DC’s basis in A1. If FC2 had sold A1 for itsvalue immediately before the transaction, no gain orloss recognized on the sale would have been takeninto account in determining a Federal income taxliability. However, if DC had sold A1 immediatelyafter the transaction, any gain or loss recognized onthe sale would have been taken into account indetermining a Federal income tax liability, so A1 isimportation property with respect to DC. Further-more, immediately after the transaction, DC’s basisin A1, but for section 362(e)(1) and this section andsection 362(e)(2), would be $100 and A1’s value is$20. Therefore, the importation property’s basiswould exceed its value and the transfer is a lossimportation transaction. Accordingly, DC’s basis inA1 will be $20, A1’s value immediately after thetransaction.

(D) FC1’s basis in P stock. Under section 358,FC1’s basis in the P stock it receives in the exchangeis $100.

(g) Effective/applicability date. Thissection applies to any transaction occur-ring on or after the date these regulationsare published as final regulations in theFederal Register, unless effected pursu-ant to a binding agreement that was ineffect prior to that date and at all timesthereafter. However, taxpayers may applythis section to transactions occurring afterOctober 22, 2004.

Par. 9. Section 1.362–4 is amended by:1. Revising the introductory text in

paragraph (h).2. Revising paragraph (h) Example 11.

3. Adding a new sentence to the end ofparagraph (j).

The revisions and addition read as fol-lows:

§1.362–4 Basis of loss duplicationproperty.

* * * * *(h) * * * The examples in this para-

graph (h) illustrate the application of sec-tion 362(e)(2) and the provisions of thissection. Unless the facts otherwise indi-cate, the examples use the following no-menclature and assumptions: X, Y, P, S,S1, and S2 are domestic corporations; Aand B are U.S. individuals; FC1 and FC2are foreign corporations and are not en-gaged in a U.S. trade or business, have noU.S. real property interests, and have noother relationships, activities, or intereststhat would cause them, their shareholders,or their property to be subject to Federalincome taxation; there is no applicableincome tax treaty; PRS is a domestic part-nership; no election is made under section362(e)(2)(C); and the transferred propertyis not importation property (as defined in§1.362–3(c)(2)) and the transfers are notloss importation transactions (as definedin §1.362–3(c)(3)), so that the basis of noproperty is determined under section362(e)(1). All persons and transactions areunrelated unless the facts indicate other-wise, and all other relevant facts are setforth in the examples. See §1.362–3(f) foradditional examples illustrating the appli-cation of section 362(e)(2) and this sec-tion, including to transactions that are sub-ject to section 362(e)(2), and section362(e)(1).

* * * * *Example 11. Transfers of importation property

with non-importation property. (i) Single transferor,loss importation transaction. (A) Facts. FC1 trans-fers Asset 1 (basis $80, value $50) and Asset 2 (basis$120, value $110) to DC in a transaction to whichsection 351 applies. Asset 1 is not importation prop-erty within the meaning of §1.362–3(c)(2). Asset 2 isimportation property within the meaning of §1.362–3(c)(2).

(B) Application of section 362(e)(1). Immedi-ately after the transfer, and without regard to section362(e)(1) or section 362(e)(2) and this section, DC’saggregate basis in importation property (Asset 2)would be $120. The aggregate value of the importa-tion property immediately after the transfer is $110.Accordingly, the transaction is a loss importationtransaction within the meaning of §1.362–3(c)(3)and, under section 362(e)(1), DC’s basis in Asset 2would equal its value, $110.

2013–44 I.R.B. October 28, 2013463

(C) Application of section 362(e)(2) and this sec-tion. (1) Analysis. (i) Loss duplication transaction.FC1’s transfer of Asset 1 and Asset 2 is a transactiondescribed in section 362(a). But for section 362(e)(2)and this section, DC’s aggregate basis in those assetswould be $190 ($80 under section 362(a) � $110under section 362(e)(1)), which would exceed the ag-gregate value of the assets $160 ($50 � $110) imme-diately after the transaction. Accordingly, the transfer isa loss duplication transaction and FC1 has a net built-inloss of $30 ($190–$160).

(ii) Identifying loss duplication property. But forsection 362(e)(2) and this section, DC’s basis in Asset1 would be $80, which would exceed Asset 1’s $50value immediately after the transaction. Accordingly,Asset 1 is loss duplication property. But for section362(e)(2) and this section, DC’s basis in Asset 2 wouldbe $110, which would not exceed Asset 2’s $110 valueimmediately after the transaction. Accordingly, Asset 2is not loss duplication property.

(C) Basis in loss duplication property. DC’s ba-sis in Asset 1 is $50, computed as its $80 basis undersection 362(a) reduced by FC1’s $30 net built-inloss.

(D) Basis in other property. Under section362(e)(1), DC’s basis in Asset 2 is $110. Undersection 358(a), FC1 has an exchanged basis of $200in the DC stock it receives in the transaction.

(ii) Multiple transferors, no importation of loss.(A) Facts. The facts are the same as paragraph (i)(A)of this Example 11, except that, in addition, FC2transfers Asset 3 (basis $100, value $150) to DC aspart of the same transaction. Asset 3 is importationproperty within the meaning of §1.362–3(c)(2).

(B) Application of section 362(e)(1). Immedi-ately after the transfer, and without regard to section362(e)(1) or section 362(e)(2) and this section, DC’saggregate basis in importation property (Asset 2 andAsset 3) would be $220 ($120 � $100). The aggre-gate value of the importation property immediatelyafter the transfer is $260 ($110 � $150). Accord-ingly, the transaction is not a loss importation trans-action within the meaning of §1.362–3(c)(3) andDC’s bases in the importation property is not deter-mined under section 362(e)(1).

(C) Application of section 362(e)(2) and thissection: FC1. Notwithstanding that the transfers byFC1 and FC2 are pursuant to a single plan formingone transaction, section 362(e)(2) and this sectionapply to each transferor separately.

(1) Analysis. (i) Loss duplication transaction.FC1’s transfer of Asset 1 and Asset 2 is a transactiondescribed in section 362(a). But for section 362(e)(2)and this section, DC’s aggregate basis in those assetswould be $200 ($80 � $120), which would exceedthe aggregate value of the assets $160 ($50 � $110)immediately after the transaction. Accordingly, thetransfer is a loss duplication transaction and FC1 hasa net built-in loss of $40 ($200–$160).

(ii) Identifying loss duplication property. But forsection 362(e)(2) and this section, DC’s basis in Asset1 would be $80, which would exceed Asset 1’s $50value immediately after the transaction. Accordingly,Asset 1 is loss duplication property. But for section362(e)(2) and this section, DC’s basis in Asset 2 wouldbe $120, which would exceed Asset 2’s $110 valueimmediately after the transaction. Accordingly, Asset 2is also loss duplication property.

(2) Basis in loss duplication property. DC’s basisin Asset 1 is $50, computed as its $80 basis undersection 362(a) reduced by $30, its allocable portionof FC1’s $40 net built-in loss ($80/$200 x $40).DC’s basis in Asset 2 is $110, computed as its $120basis under section 362(a) reduced by $10, its allo-cable portion of FC1’s $40 net built-in loss ($120/$200 x $40).

(3) Basis in other property. Under section358(a), FC1 has an exchanged basis of $200 in theDC stock it receives in the transaction.

(D) Application of section: FC2. FC2’s transferof Asset 3 is not a loss duplication transaction be-cause Asset 3’s value exceeds its basis immediatelyafter the transaction. Accordingly, under section362(a), DC’s basis in Asset 3 is $100.

* * * * *

(j) * * * The introductory text andExample 11 of paragraph (h) of this sec-tion apply to transactions on or after thedate these regulations are published asfinal regulations in the Federal Registerunless effected pursuant to a bindingagreement that was in effect prior to thatdate and at all times thereafter; however,taxpayers may apply such provisions totransactions occurring after October 22,2004.

Par. 10. Section 1.368–3 is amendedby revising paragraphs (a)(3), (b)(3) andadding a sentence to the end of paragraph(e) to read as follows:

§1.368–3 Records to be kept andinformation to be filed with returns.

(a) * * *(3) The value and basis of the assets,

stock or securities of the target corpora-tion transferred in the transaction, deter-mined immediately before the transfer andaggregated as follows—

(i) Importation property transferred ina loss importation transaction, as definedin §§1.362–3(c)(2) and 1.362–3(c)(3), re-spectively;

(ii) Loss duplication property as de-fined in §1.362–4(c)(1);

(iii) Property with respect to which anygain or loss was recognized on the transfer(without regard to whether such propertyis also identified in paragraph (a)(3)(i) or(a)(3)(ii) of this section);

(iv) Property not described in para-graphs (a)(3)(i), (a)(3)(ii) or (a)(3)(iii) ofthis section; and

* * * * *(b) * * *(3) The value and basis of all the stock

or securities of the target corporation held

by the significant holder that is transferredin the transaction and such holder’s basisin that stock or securities, determined im-mediately before the transfer and aggre-gated as follows—

(i) Stock and securities with respect towhich an election is made under section362(e)(2)(C); and

(ii) Stock and securities not describedin paragraph (b)(3)(i) of this section.

* * * * *(e) Effective/applicability date. * * *

Paragraphs (a)(3) and (b)(3) of this sec-tion apply to any taxable year beginningon or after these regulations are publishedas final regulations in the Federal Regis-ter, unless effected pursuant to a bindingagreement that was in effect prior to thatdate and at all times thereafter.

Beth Tucker,Deputy Commissioner for

Operations Support.

(Filed by the Office of the Federal Register on September 6,2013, 8:45 a.m., and published in the issue of the FederalRegister for September 9, 2013, 78 F.R. 54971)

Deletions from CumulativeList of OrganizationsContributions to Which areDeductible Under Section170 of the Code

Announcement 2013–42

The Internal Revenue Service has re-voked its determination that the organiza-tions listed below qualify as organizationsdescribed in sections 501(c)(3) and170(c)(2) of the Internal Revenue Code of1986.

Generally, the Service will not disal-low deductions for contributions made toa listed organization on or before the dateof announcement in the Internal RevenueBulletin that an organization no longerqualifies. However, the Service is not pre-cluded from disallowing a deduction forany contributions made after an organiza-tion ceases to qualify under section170(c)(2) if the organization has nottimely filed a suit for declaratory judg-ment under section 7428 and if the con-tributor (1) had knowledge of the revoca-tion of the ruling or determination letter,(2) was aware that such revocation was

October 28, 2013 2013–44 I.R.B.464

imminent, or (3) was in part responsiblefor or was aware of the activities or omis-sions of the organization that broughtabout this revocation.

If on the other hand a suit for declara-tory judgment has been timely filed, con-tributions from individuals and organiza-tions described in section 170(c)(2) thatare otherwise allowable will continue tobe deductible. Protection under section7428(c) would begin on October 28, 2013,and would end on the date the court firstdetermines that the organization is not de-scribed in section 170(c)(2) as more par-ticularly set forth in section 7428(c)(1).For individual contributors, the maximumdeduction protected is $1,000, with a hus-band and wife treated as one contributor.

This benefit is not extended to any indi-vidual, in whole or in part, for the acts oromissions of the organization that werethe basis for revocation.

American College of Forensic ExaminersInternational, Inc.Springfield, MO

B & L Grace FoundationFresno, CA

Big Apple Day SchoolBrooklyn, NY

BuildCleanHouston, TX

Foster Care Network, Inc.Goodyear, AZ

Generational Arts LimitedNew York, NY

Help End Hunger Now FoundationTroy, MI

IDA Foundation for Autism andAlzheimer’s Research and Solution, Inc.Homestead, Fl

J. D. Davis Community Service, Inc.Inglewood, CA

Joy Center, Inc.Stuart, FL

Lifeskills 411Richmond, CA

Music Box Lurrine Burgess, TheLos Angeles, CA

One World HungerUnion City, CA

2013–44 I.R.B. October 28, 2013465

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.

2013–44 I.R.B. October 28, 2013i

Numerical Finding List1

Bulletins 2013–27 through 2013–44

Announcements:

2013-35, 2013-27 I.R.B. 462013-36, 2013-33 I.R.B. 1422013-37, 2013-34 I.R.B. 1552013-38, 2013-36 I.R.B. 1852013-39, 2013-35 I.R.B. 1672013-40, 2013-38 I.R.B. 2262013-41, 2013-40 I.R.B. 3222013-42, 2013-44 I.R.B. 464

Notices:

2013-41, 2013-29 I.R.B. 602013-42, 2013-29 I.R.B. 612013-43, 2013-31 I.R.B. 1132013-44, 2013-29 I.R.B. 622013-45, 2013-31 I.R.B. 1162013-46, 2013-31 I.R.B. 1172013-47, 2013-31 I.R.B. 1202013-48, 2013-31 I.R.B. 1202013-49, 2013-32 I.R.B. 1272013-50, 2013-32 I.R.B. 1332013-51, 2013-34 I.R.B. 1532013-52, 2013-35 I.R.B. 1592013-53, 2013-36 I.R.B. 1732013-54, 2013-40 I.R.B. 2872013-55, 2013-38 I.R.B. 2072013-56, 2013-39 I.R.B. 2622013-57, 2013-40 I.R.B. 2932013-58, 2013-40 I.R.B. 2942013-59, 2013-40 I.R.B. 2972013-60, 2013-44 I.R.B. 4312013-61, 2013-44 I.R.B. 4322013-63, 2013-44 I.R.B. 4362013-64, 2013-44 I.R.B. 4382013-65, 2013-44 I.R.B. 440

Proposed Regulations:

REG-124148-05, 2013-44 I.R.B. 444REG-161948-05, 2013-44 I.R.B. 449REG-132251-11, 2013-37 I.R.B. 191REG-111753-12, 2013-40 I.R.B. 302REG-112815-12, 2013-35 I.R.B. 162REG-114122-12, 2013-35 I.R.B. 163REG-136630-12, 2013-40 I.R.B. 303REG-140789-12, 2013-32 I.R.B. 136REG-144990-12, 2013-39 I.R.B. 264REG-110732-13, 2013-43 I.R.B. 405REG-111837-13, 2013-39 I.R.B. 266REG-113792-13, 2013-38 I.R.B. 211REG-115300-13, 2013-37 I.R.B. 197

Revenue Procedures:

2013-28, 2013-27 I.R.B. 282013-29, 2013-33 I.R.B. 1412013-30, 2013-36 I.R.B. 1732013-31, 2013-38 I.R.B. 2082013-32, 2013-28 I.R.B. 552013-33, 2013-38 I.R.B. 2092013-34, 2013-43 I.R.B. 398

Revenue Rulings:

2013-13, 2013-32 I.R.B. 1242013-15, 2013-28 I.R.B. 472013-16, 2013-40 I.R.B. 2752013-17, 2013-38 I.R.B. 2012013-18, 2013-37 I.R.B. 1862013-19, 2013-39 I.R.B. 2402013-20, 2013-40 I.R.B. 2722013-21, 2013-43 I.R.B. 396

Treasury Decisions:

9620, 2013-27 I.R.B. 19621, 2013-28 I.R.B. 499622, 2013-30 I.R.B. 649623, 2013-30 I.R.B. 739624, 2013-31 I.R.B. 869625, 2013-34 I.R.B. 1479626, 2013-34 I.R.B. 1499627, 2013-35 I.R.B. 1569628, 2013-36 I.R.B. 1699629, 2013-37 I.R.B. 1889630, 2013-38 I.R.B. 1999631, 2013-38 I.R.B. 2059632, 2013-39 I.R.B. 2419633, 2013-39 I.R.B. 2279634, 2013-40 I.R.B. 2729635, 2013-40 I.R.B. 2739636, 2013-43 I.R.B. 3319637, 2013-44 I.R.B. 427

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2013-1 through 2013-26 is in Internal Revenue Bulletin2013-26, dated June 24, 2013.

October 28, 2013 2013–44 I.R.B.ii

Finding List of Current Actions onPreviously Published Items1

Bulletins 2013–27 through 2013–44

Notices:

2004-23Clarified byNotice 2013-57, 2013-40 I.R.B. 293

2004-50Clarified byNotice 2013-57, 2013-40 I.R.B. 293

2005-70Obsoleted byT.D. 9633, 2013-39 I.R.B. 227

2012-74Obsoleted byNotice 2013-51, 2013-34 I.R.B. 153

2013-16Superseded byNotice 2013-55, 2013-38 I.R.B. 207

2013-29Clarified byNotice 2013-60, 2013-44 I.R.B. 431

2013-36Appendix updated byNotice 2013-55, 2013-38 I.R.B. 207

Superseded byNotice 2013-55, 2013-38 I.R.B. 207

2013-39Amplified byNotice 2013-47, 2013-31 I.R.B. 120

2013-40Amplified byNotice 2013-47, 2013-31 I.R.B. 120

Revenue Procedures:

81-60Modified byRev. Proc. 2013-32, 2013-28 I.R.B. 55

83-59Modified byRev. Proc. 2013-32, 2013-28 I.R.B. 55

86-42Modified byRev. Proc. 2013-32, 2013-28 I.R.B. 55

90-52Modified byRev. Proc. 2013-32, 2013-28 I.R.B. 55

Revenue Procedures—Continued:

96-30Modified byRev. Proc. 2013-32, 2013-28 I.R.B. 55

97-48Situation 1 superseded, Situation 2 obsoleted byRev. Proc. 2013-30, 2013-36 I.R.B. 173

2003-43Modified and superseded byRev. Proc. 2013-30, 2013-36 I.R.B. 173

2003-48Obsoleted in part and superseded in part byRev. Proc. 2013-32, 2013-28 I.R.B. 55

2004-34Modified and clarified byRev. Proc. 2013-29, 2013-33 I.R.B. 141

2004-48Modified and superseded byRev. Proc. 2013-30, 2013-36 I.R.B. 173

2004-49Sections 4.01 & 4.02 modified and superseded,Section 4.03 obsoleted byRev. Proc. 2013-30, 2013-36 I.R.B. 173

2007-44Modified byAnn. 2013-37, 2013-34 I.R.B. 155

2007-62Modified and superseded byRev. Proc. 2013-30, 2013-36 I.R.B. 173

2009-25Pilot program discontinued byRev. Proc. 2013-32, 2013-28 I.R.B. 55

2011-18Modified and clarified byRev. Proc. 2013-29, 2013-33 I.R.B. 141

2011-49Modified byAnn. 2013-37, 2013-34 I.R.B. 155

2012-25Obsoleted in part byRev. Proc. 2013-28, 2013-27 I.R.B. 28

2013-1Amplified and modified byRev. Proc. 2013-32, 2013-28 I.R.B. 55

2013-3Amplified and modified byRev. Proc. 2013-32, 2013-28 I.R.B. 55

Revenue Procedures—Continued:

2003-61Superseded byRev. Proc. 2013-34, 2013-43 I.R.B. 398

Revenue Rulings:

58-66Amplified and clarified byRev. Rul. 2013-17, 2013-38 I.R.B. 201

2013-17Supplemented byNotice 2013-61, 2013-44 I.R.B. 432

Treasury Decisions:

9610Corrected byAnn. 2013-41, 2013-40 I.R.B. 322

9612Corrected byAnn. 2013-35, 2013-27 I.R.B. 46

9622Corrected byAnn. 2013-39, 2013-35 I.R.B. 167

1A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2013–1 through 2013–26 is in Internal Revenue Bulletin 2013-26, dated June 24, 2013.

2013–44 I.R.B. October 28, 2013iii

INDEXInternal Revenue Bulletins 27 through 44

The abbreviation and number in parenthesis following the indexentry refer to the specific item; numbers in roman and italic typefollowing the parentheses refer to the Internal Revenue Bulletin inwhich the item may be found and the page number on which itappears.

Key to Abbreviations:Ann AnnouncementCD Court DecisionDO Delegation OrderEO Executive OrderPL Public LawPTE Prohibited Transaction ExemptionRP Revenue ProcedureRR Revenue RulingSPR Statement of Procedural RulesTC Tax ConventionTD Treasury DecisionTDO Treasury Department Order

EMPLOYEE PLANSAccommodations for nonprofit organizations with religious ob-

jections to providing contraceptive services (TD 9624) 31, 86Credit for employee health insurance expenses of small employ-

ers (REG–113792–13) 38, 211Employee retirement benefit plan returns required on magnetic

media (REG–111837–13) 39, 266Exemption for religious employers from the requirement to pro-

vide coverage for contraceptive services (TD 9624) 31, 86Proposed Regulations:

26 CFR 1.45R–1 through 1.45R–5 added (tax credit for em-ployee health insurance expenses of small employers)(REG–113792–13) 38, 211

26 CFR 301.6057–3 added; 301.6058–2 added; 301.6059–2added (employee retirement benefit plan returns requiredon magnetic media) (REG–111837–13) 39, 266

Qualified plans, determination letters (Ann 37) 34, 155Qualified plans, mortality tables (Notice 49) 32, 127Regulations:

26 CFR 54.9815–2713 added (certain preventive servicesunder the ACA) (TD 9624) 31, 86

26 CFR 54.9815–2713A added (certain preventive servicesunder the ACA) (TD 9624) 31, 86

26 CFR 301.6103 amended (disclosure of return information)(TD 9628) 36, 169

Update to Revenue Ruling 58–66 (RR 17) 38, 201Weighted average interest rates:

Segment rates for:July 2013 (Notice 46) 31, 117August 2013 (Notice 52) 35, 159September 2013 (Notice 58) 40, 294

Wellness regulations related to rewards, plan design, and alter-natives to avoid prohibited discrimination (TD 9620) 27, 1

EMPLOYMENT TAXDisclosure of return information (TD 9628) 36, 169Disclosure of return information reflected on returns to officers

and employees of the Department of Commerce for certainstatistical purposes and related activities (TD 9631) 38, 205

Regulations:26 CFR part 301 amended; section 301.6103(j)(1) amended;

section 301.6103(j)(1)1–T amended; revising paras.(b)(3)(xxix), (b)(3)(xxx) and (e) (TD 9631) 38, 205

Special administrative procedures for claims for refund andadjustments of overpayments of employment tax with respectto same-sex spouse benefits (Notice 61) 44, 432

Update to Revenue Ruling 58–66 (RR 17) 38, 201

ESTATE TAXDisclosure of return information (TD 9628) 36, 169Update to Revenue Ruling 58–66 (RR 17) 38, 201Valuation of certain farm, etc., real property (RR 19) 39, 240

EXCISE TAXAccommodations for nonprofit organizations with religious ob-

jections to providing contraceptive services (TD 9624) 31, 86Branded prescription drugs (Notice 51) 34, 153Disclosure of return information (TD 9628) 36, 169Disclosure of return information reflected on returns to officers

and employees of the Department of Commerce for certainstatistical purposes and related activities (TD 9631) 38, 205

Exemption for religious employers from the requirement to pro-vide coverage for contraceptive services (TD 9624) 31, 86

Indoor tanning services; excise taxes (TD 9621) 28, 49Information reporting by applicable large employers on health

insurance coverage (REG–136630–12) 40, 303Regulations:

26 CFR 40.0–1 amended; 40.6302(c)–1 amended (indoortanning services) (TD 9621) 28, 49

26 CFR 1.150–1 amended; 1.150–1T removed; 1.171–1 amend-ed; 1.171–1T removed; 1.197–2 amended; 1.197–2T re-moved; 1.249–1 amended; 1.249–1T removed; 1.475(a)–4amended; 1.475(a)–4T removed; 1.860G–2 amended;1.860G–2T removed; 1.1001–3 amended; 1.1001–3T re-moved; 48.4101–1 amended; 48.4101–1T removed (removalof regulatory references to credit ratings pursuant to section939A of the Dodd-Frank Act (TD 9637) 44, 427

26 CFR 54.9815–2713 added (certain preventive servicesunder the ACA) (TD 9624) 31, 86

26 CFR 54.9815–2713A added (certain preventive servicesunder the ACA) (TD 9624) 31, 86

26 CFR 301.6103 amended (disclosure of return information)(TD 9628) 36, 169

Removal of regulatory references to credit ratings pursuant tosection 939A of the Dodd-Frank Act (TD 9637) 44, 427

Transition relief for 2014 under sections 6055, 6056, and 4980H(information reporting and employer shared responsibility pro-visions) (Notice 45) 31, 116

October 28, 2013 2013–44 I.R.B.iv

EXCISE TAX—Cont.Wellness regulations related to rewards, plan design, and alter-

natives to avoid prohibited discrimination (TD 9620) 27, 1

EXEMPT ORGANIZATIONSProposed Regulations:

53 CFR 6011–1 amended; 53.6011–1T added; 53.6071–1amended; 53.6071–1T added (requirement of a section4959 excise tax return and time for filing the return)(REG–115300–13) 37, 197

Requirement of a section 4959 excise tax return and time forfiling the return (REG–115300–13) 37, 197

Requirement of a section 4959 excise tax return and time forfiling the return (TD 9629) 37, 188

Revocations (Ann 42) 44, 464

GIFT TAXDisclosure of return information (TD 9628) 36, 169Update to Revenue Ruling 58–66 (RR 17) 38, 201

INCOME TAXAction on Decision (AOD):

Media Space v. Commissioner 32Wilson v. Commissioner 32

Advance payments, taxable year of inclusion (RP 29) 33, 141Application of market reforms to certain healthcare arrangements

and guidance on EAPs and section 125(f)(3) (Notice 54) 40, 287Application of section 108(i) to partnerships and S corporations

(TD 9623) 30, 73Average area purchase price safe-harbor guidance for 2013 (RP

28) 27, 28Capitalization of amounts paid to acquire, produce, or improve

tangible property (TD 9636) 43, 331Certain transfers of property to Regulated Investment Companies

(RICs) and Real Estate Investment Trusts (REITs) (TD 9626)34, 149

Credit for employee health insurance expenses of small employ-ers (REG–113792–13) 38, 211

Croatian per se entity (Notice 44) 29, 62Debt that is a position in personal property that is part of a

straddle (TD 9635) 40, 273Debt that is a position in personal property that is part of a

straddle (REG–111753–12) 40, 302Deduction for section 179 expense, qualified real property (No-

tice 59) 40, 297Deferred discharge of indebtedness income of corporations (TD

9622) 30, 64Deferred original issue discount deductions (TD 9622) 30, 64Determining the amount of taxes paid for purposes of the foreign

tax credit (TD 9634) 40, 272Disallowance of deductions, exception for reimbursed expenses

(TD 9625) 34, 147Disciplinary actions involving attorneys, certified public accoun-

tants, enrolled agents, and enrolled actuaries (Ann 36) 33, 142Disclosure of return information (TD 9628) 36, 169

INCOME TAX—Cont.Dispositions of property subject to depreciation under section

168 (REG–110732–13) 43, 404Energy investment tax credit (Notice 60) 44, 431Energy production tax credit (Notice 60) 44, 431Gift cards (RP 29) 33, 141Guidance for seeking equitable relief under section 66(c) or

section 6015(f) (RP 34) 43, 397Guidance regarding deferred discharge of indebtedness income

of corporations and deferred original issue discount deduc-tions; correcting TD 9622 (Ann 39) 35, 167

Information reporting by foreign financial institutions and withhold-ing on certain payments to foreign financial institutions and otherforeign entities; correcting TD 9610 (Ann 41) 40, 322

Installment agreements and offer in compromise user fees(REG–144990–12) 39, 264

Insurance, effectively connected income (RP 33) 38, 209Interest:

Investment:Federal short-term, mid-term, and long-term rates for:

July 2013 (RR 15) 28, 47August 2013 (RR 13) 32, 124September 2013 (RR 18) 37, 186October 2013 (RR 21) 43, 394

Letter rulings that address issues presented in transactions describedin sections 332, 351, 355, 368, and 1036 (RP 32) 28, 55

Limitations on duplication of net built-in losses (TD 9633) 39,227

Limitations on importation of net built-in losses (REG–161948–05) 44, 449

Low-income housing tax credit (Notice 47) 31, 120Low-income housing tax credit (RP 31) 38, 208Low-income housing tax credit (Notice 63) 44, 436Low-income housing tax credit (Notice 64) 44, 438Mixed straddles; straddle-by-straddle identification under section

1092(b)(2)(A)(i)(I) (TD 9627) 35, 156Mixed straddles; straddle-by-straddle identification under section

1092(b)(2)(A)(i)(I) (REG–112815–12) 35, 162Noncompensatory partnership options; correcting TD 9612 (Ann

35) 27, 46Per capita payments from proceeds of settlements of Indian tribal

trust cases (Notice 55) 38, 207Premium tax credit (REG–140789–12) 32, 136Premium tax credit, minimum essential coverage (Notice 41) 29,

60Proposed Regulations:

26 CFR 1.36B–0 amended (premium tax credit) (REG–140789–12) 32, 136

26 CFR 1.36B–5 amended (premium tax credit) (REG–140789–12) 32, 136

26 CFR 1.45R–1 through 1.45R–5 added (tax credit for em-ployee health insurance expenses of small employers)(REG–113792–13) 38, 211

26 CFR 1.168(i)–0; 1.168(i)–1, 1.168(i)–7 amended (dispo-sitions of property subject to depreciation under section168) (REG–110732–13) 43, 404

2013–44 I.R.B. October 28, 2013v

INCOME TAX—Cont.26 CFR 1.332–6 amended; 1.332–7 amended; 1.334–1

amended; 1.337–1 added; 1.351–3 amended; 1.358–6amended; 1.362–3 added; 1.362–4 amended; 1.368–3amended (limitations on the importation of net built-inlosses (REG–161948–05) 44, 449

26 CFR 1.851–5 amended (Regulated Investment Companycontrolled group regulation examples) (REG–114122–12)35, 163

26 CFR 1.1092–1 revised (debt that is a position in personalproperty that is part of a straddle) (REG–111753–12) 40,302

26 CFR 1.1092(b)–6 added (mixed straddles; straddle-by-straddle identification under section 1092(b)(2)(A)(i)(I))(REG–112815–12) 35, 162

26 CFR 1.6015–5 amended (relief from joint and severalliability) (REG–132251–11) 37, 191

26 CFR 300.1 amended; 26 CFR 300.2 amended; 26 CFR300.3 amended (installment agreements and offer in com-promise user fees) (REG–144990–12) 39, 264

Qualified exempt facility bonds (Notice 47) 31, 120Qualified exempt facility bonds (Notice 63) 44, 436Qualified residential rental projects (Notice 47) 31, 120Qualified residential rental projects (Notice 63) 44, 436Regulated Investment Company controlled group regulation ex-

amples (REG-114122–12) 35, 163Regulations:

26 CFR 1.108(i)–0, 26 CFR 1.108(i)–1, and 26 CFR1.108(i)–3 added (deferred discharge of indebtedness in-come of corporations and deferred original issue discountdeductions) (TD 9622) 30, 64

26 CFR 1.108(i)–2 added; 1.108(i)–2T removed (applicationof section 108(i) to partnerships and S corporations) (TD9623) 30, 73

26 CFR 1.150–1 amended; 1.150–1T removed; 1.171–1amended; 1.171–1T removed; 1.197–2 amended;1.197–2T removed; 1.249–1 amended; 1.249–1T re-moved; 1.475(a)–4 amended; 1.475(a)–4T removed;1.860G–2 amended; 1.860G–2T removed; 1.1001–3amended; 1.1001–3T removed; 48.4101–1 amended;48.4101–1T removed (removal of regulatory references tocredit ratings pursuant to section 939A of the Dodd-FrankAct (TD 9637) 44, 427

26 CFR 1.168(i)–7, and 1.263(a)–6 added; 1.162–11,1.165–2, 1.167(a)–7, 1.167(a)–8, 1.263(a)–0, 1.263A–0,1.263A–1, 1.1016–3, and 602.101 amended; 1.162–3T,1.162–4T, 1.162–11T, 1.165–2T, 1.167(a)–4T, 1.167(a)–7T, 1.167(a)–8T, 1.168(i)–7T, 1.263(a)–0T, 1.263(a)–1T,1.263(a)–2T, 1.263(a)–3T, 1.263(a)–6T, 1.263A–1T, and1.1016–3 removed; 1.162–3, 1.162–4, 1.167(a)–4,1.263(a)–1, 1.263(a)–2, and 1.263(a)–3 revised (guidanceregarding deduction and capitalization of expenditures re-lated to tangible property) (TD 9636) 43, 331

26 CFR 1.358–2 amended; 1.362–4 amended; 1.705–1amended; 1.1367–1 amended; 602.101 amended (limita-tions on duplication of net built-in losses) (TD 9633) 39,227

INCOME TAX—Cont.26 CFR 1.482–7 amended; 1.482–7T removed (use of differ-

ential income stream as an application of the incomemethod) (TD 9630) 38, 199

26 CFR 1.901–2 amended; 1.901–2T removed (determiningthe amount of taxes paid for purposes of the foreign taxcredit) (TD 9634) 40, 272

26 CFR 1.1092–1 revised (debt that is a position in personalproperty that is part of a straddle) (TD 9635) 40, 273

26 CFR 1.1092(b)–6T added (mixed straddles; straddle-by-straddle identification under section 1092(b)(2)(A)(i)(I))(TD 9627) 35, 156

26 CFR 1.1471–1 (scope of chapter 4 and definitions) (Ann41) 40, 322

26 CFR 1.5000A–0, 1.5000A–1, 1.5000A–2, 1.5000A–3,1.5000A–4 added; 26 CFR 602.101 amended (shared re-sponsibility payment for not maintaining minimum essen-tial coverage) (TD 9632) 39, 241

26 CFR 301.6103 amended (disclosure of return information)(TD 9628) 36, 169

Relief from joint and several liability (REG–132251–11) 37, 191Removal of regulatory references to credit ratings pursuant to

section 939A of the Dodd-Frank Act (TD 9637) 44, 427Research expenditures (REG–124148–05) 44, 444S corporation elections (RP 30) 36, 173Section 5000A transition relief for employees eligible to enroll in

non-calendar year health plans (Notice 42) 29, 61Shared responsibility payment for not maintaining minimum

essential coverage (TD 9632) 39, 241Standard Industry Fare Level (SIFL) (RR 20) 40, 272Timeline for implementation of the requirements under sections

1471–1474, commonly known as FATCA (Notice 43) 31, 113Transitional penalty relief and schedule for notices of incorrect

name/TIN combinations for information returns relating topayment card and third party network transactions (Notice 56)39, 262

2013 marginal production rates (Notice 53) 36, 1732013 section 43 inflation adjustment (Notice 50) 32, 1342013–2014 special per diem rates (Notice 65) 44, 440Underpayments and overpayments, quarter beginning October 1,

2013 (RR 16) 40, 275Update to Revenue Ruling 58–66 (RR 17) 38, 201Use of differential income stream as an application of the income

method and as a consideration in assessing the best method(TD 9630) 38, 199

Wash sales, money market fund shares (Notice 48) 31, 120

SELF-EMPLOYMENT TAXUpdate to Revenue Ruling 58–66 (RR 17) 38, 201

TAX CONVENTIONU.S.-Belgium agreement regarding OECD report on the attribu-

tion of profits to permanent establishments (Ann 38) 36, 185

October 28, 2013 2013–44 I.R.B.vi

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

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

CUMULATIVE BULLETINSThe contents of the weekly Bulletins were consolidated semiannually into permanent, indexed, Cumulative Bulletins through the

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would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page(www.irs.gov) or write to the IRS Bulletin Unit, SE:W:CAR:MP:P:SPA, Washington, DC 20224.

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