irb 2015-21 (rev. may 26, 2015)may 26, 2015 bulletin no. 2015–21 part i. rulings and decisions...

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

INCOME TAX

REG–102656–15, page 1005.Proposed regulations under section 446 of the Code providethat, subject to certain exceptions (including the full marginexception), a notional principal contract with a nonperiodicpayment must be treated as two separate transactions con-sisting of one or more loans and an on-market, level paymentswap. The proposed regulations also provide an exceptionunder section 956 of the Code from the definition of UnitedStates property for certain obligations of United States per-sons arising from upfront payments made with respect tonotional principal contracts that qualify for the full marginexception under section 446. These regulations also withdrawthe notice of proposed rulemaking (REG–107548–11; RIN1545–BK10) published in the Federal Register on May 11,2012 (77 FR 27669).

REG–107595–11, page 986.This document contains proposed regulations that provideguidance regarding the application of the modified carryoverbasis rules of section 1022 of the Internal Revenue Code.Specifically, the proposed regulations will modify provisionsof the Treasury Regulations involving basis rules by includinga reference to section 1022 where appropriate. The regu-lations will affect property transferred from certain dece-dents who died in 2010. The regulations reflect changes tothe law made by the Economic Growth and Tax ReliefReconciliation Act of 2001 and the Tax Relief, Unemploy-ment Insurance Reauthorization, and Job Creation Act of2010.

REG–132634–14, page 997.This document contains proposed regulations under section7704(d)(1)(E) of the Internal Revenue Code relating to qualify-ing income from exploration, development, mining or produc-tion, processing, refining, transportation, and marketing of

minerals or natural resources. The proposed regulations affectpublicly traded partnerships and their partners.

Rev. Rul. 2015–9, page 972.This ruling holds that the transaction described is properlytreated for federal income tax purposes as a transfer of stockin an exchange governed by § 351 of the Internal RevenueCode (Code) followed by reorganizations under § 368(a)(1)(D)of the Code. Rev. Rul. 78–130, 1978–1 C.B. 114 is revoked.

Rev. Rul. 2015–10, page 973.This ruling holds that the transaction described is properlytreated for federal income tax purposes as two transfers ofstock in exchanges governed by § 351 of the Internal RevenueCode (Code) followed by a reorganization under § 368(a)(1)(D)of the Code.

Rev. Rul. 2015–11, page 975.The revenue ruling holds that the cost of unrecoverable pre-cious metals used in various manufacturing processes aredepreciable under §§ 167 and 168 of the Internal RevenueCode. The costs of any recoverable precious metals are notdepreciable.

T.D. 9719, page 977.Final, temporary and proposed regulations under section 446of the Code provide that, subject to certain exceptions (includ-ing the full margin exception), a notional principal contract witha nonperiodic payment must be treated as two separate trans-actions consisting of one or more loans and an on-market, levelpayment swap. These regulations also provide an exceptionunder section 956 of the Code from the definition of UnitedStates property for certain obligations of United States per-sons arising from upfront payments made with respect tonotional principal contracts that qualify for the full marginexception under section 446.

(Continued on the next page)

Finding Lists begin on page ii.

Bulletin No. 2015–21May 26, 2015

EMPLOYEE PLANS

REG–107595–11, page 986.This document contains proposed regulations that provideguidance regarding the application of the modified carryoverbasis rules of section 1022 of the Internal Revenue Code.Specifically, the proposed regulations will modify provisions ofthe Treasury Regulations involving basis rules by including areference to section 1022 where appropriate. The regulationswill affect property transferred from certain decedents whodied in 2010. The regulations reflect changes to the law madeby the Economic Growth and Tax Relief Reconciliation Act of2001 and the Tax Relief, Unemployment Insurance Reauthori-zation, and Job Creation Act of 2010.

ESTATE TAX


GIFT TAX


ADMINISTRATIVE

Notice 2015–38, page 984.This Notice updates the list of designated private deliveryservice (�designated PDSs�) set forth in Notice 2004–83,2004–2 C.B. 1030, for purposes of the timely mailing treatedas timely filing/paying rule of section 7502 of the InternalRevenue Code, providing rules for determining the postmarkdate for these services, and provides a new address for sub-mitting documents to the Internal Revenue Service (�IRS�) withrespect to an application for designation as a designated PDS.

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.

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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.

May 26, 2015 Bulletin No. 2015–21

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 368.—DefinitionsRelating to CorporateReorganizations

26 CFR 1.368–2: Definition of terms.(Also §§ 351, 7805; 1.351–1, 301.7805–1.)

Rev. Rul. 2015–9

ISSUE

Is a transaction in which (1) a domesticcorporation transfers all of the stock of itsforeign operating subsidiary to its foreignholding company subsidiary in exchangefor additional stock, (2) the foreign oper-ating subsidiary and three foreign subsid-iaries of the foreign holding companytransfer substantially all of their assets to anewly-formed foreign subsidiary of theforeign holding company in exchange forstock of the new subsidiary, and (3) thesubsidiaries that transfer their assets areliquidated, properly treated for federal in-come tax purposes as a transfer of theforeign operating subsidiary’s stock in anexchange governed by § 351 of the Inter-nal Revenue Code (Code) followed byreorganizations under § 368(a)(1)(D) ofthe Code?

FACTS

P, a domestic corporation, owns all ofthe stock of S–1 and S–2, both of whichare incorporated in foreign country R. S–1is an operating company. S–2 is a holdingcompany that owns all of the stock of X,Y, and Z, which are operating companiesincorporated in foreign country R.

All of the operating companies incountry R are to be combined into a newsubsidiary of S–2 to be formed in coun-try R in accordance with the followingplan:

(a) S–2 will organize N corporation, inforeign country R, solely for the pur-pose of participating in the proposedtransaction.

(b) P will then transfer all of the stockof S–1 to S–2 in exchange for ad-ditional shares of voting commonstock of S–2 (P’s transfer).

(c) Immediately after P’s transfer, X,Y, and Z, as well as S–1, will trans-fer substantially all of their assets(subject to liabilities) to N, in ex-change for additional shares ofcommon stock of N (X, Y, and Z’stransfers and S–1’s transfer).

(d) X, Y, Z, and S–1 will liquidate anddistribute all of their N stock toS–2 (X, Y, and Z’s liquidationsand S–1’s liquidation).

Following the transaction, N will continueto conduct the businesses formerly con-ducted by S–1, X, Y, and Z.

To avoid recognizing gain under§ 367(a)(1) and § 1.367(a)–3(a) on thetransfer of the S–1 stock to S–2, P willproperly enter into a gain recognition agree-ment pursuant to § 1.367(a)–8 with respectto that transfer and will satisfy the applica-ble exceptions to triggering events resultingfrom the other exchanges that occur in thetransaction. P will also take into account theapplication of § 1.367(b)–4, which may re-quire shareholders that exchange stock of aforeign corporation in certain nonrecogni-tion exchanges (including §§ 351 and 354)to include in income as a deemed dividendthe § 1248 amount attributable to the ex-changed stock.

LAW

Section 351(a) provides that no gain orloss will be recognized if property istransferred to a corporation by one ormore persons solely in exchange for stockin such corporation and immediately afterthe exchange such person or persons arein control (as defined in § 368(c)) of thecorporation.

Section 368(c) defines “control” tomean the ownership of stock possessing atleast 80 percent of the total combinedvoting power of all classes of stock enti-tled to vote and at least 80 percent of thetotal number of shares of all other classesof stock of the corporation.

Section 368(a)(1)(D) provides that theterm “reorganization” includes a transferby a corporation of all or a part of itsassets to another corporation if immedi-ately after the transfer the transferor, orone or more of its shareholders (including

persons who were shareholders immedi-ately before the transfer), or any combi-nation thereof, is in control of the corpo-ration to which the assets are transferred;but only if, in pursuance of the plan, stockor securities of the corporation to whichthe assets are transferred are distributed ina transaction which qualifies under § 354,355, or 356.

Section 354(a) provides, in general,that no gain or loss will be recognized ifstock or securities in a corporation a partyto a reorganization are, in pursuance of theplan of reorganization, exchanged solelyfor stock or securities in such corporationor in another corporation a party to thereorganization.

Section 368(b)(2) provides that “aparty to a reorganization” includes bothcorporations, in the case of a reorganiza-tion resulting from the acquisition by onecorporation of stock or property of theother.

Section 354(b)(1) provides, in general,that § 354(a) will not apply to an ex-change in pursuance of a plan of reorga-nization under § 368(a)(1)(D) unless (A)the corporation to which the assets aretransferred acquires substantially all of theassets of the transferor of such assets; and(B) the stock, securities, and other prop-erties received by such transferor, as wellas the other properties of such transferor,are distributed in pursuance of the plan ofreorganization.

Section 368(a)(2)(H) provides thatfor purposes of determining whether anondivisive transaction qualifies under§ 368(a)(1)(D), the term “control” has themeaning given such term by § 304(c).

Section 304(c)(1) provides that “con-trol” means the ownership of stock pos-sessing at least 50 percent of the totalcombined voting power of all classes ofstock entitled to vote, or at least 50 per-cent of the total value of shares of allclasses of stock. If a person (or persons) isin control (within the meaning of the pre-ceding sentence) of a corporation, whichin turn owns at least 50 percent of the totalcombined voting power of all stock enti-tled to vote of another corporation orowns at least 50 percent of the total value

May 26, 2015 Bulletin No. 2015–21972

of the shares of all classes of stock ofanother corporation, then such person (orpersons) will be treated as in control ofsuch other corporation.

ANALYSIS

A transfer of property may be re-spected as a § 351 exchange even if it isfollowed by subsequent transfers of theproperty as part of a prearranged, inte-grated plan. See Rev. Rul. 77–449,1977–2 C.B. 110, amplified by Rev. Rul.83–34, 1983–1 C.B. 79, and Rev. Rul.83–156, 1983–2 C.B. 66; see also Rev.Rul. 2003–51, 2003–1 C.B. 938. How-ever, a transfer of property in an exchangeotherwise described in § 351 will notqualify as a § 351 exchange if, for exam-ple, a different treatment is warranted toreflect the substance of the transaction as awhole. See Rev. Rul. 54–96, 1954–1 C.B.111; Rev. Rul. 70–140, 1970–1 C.B. 73;see also Rev. Rul. 2015–10, page 973, thisBulletin (holding that the transfer by acorporation to its wholly-owned subsid-iary of all of the interests in an entityclassified as a corporation for federal in-come tax purposes, followed by the enti-ty’s planned election to be disregarded asseparate from its owner for federal incometax purposes, is more properly character-ized as a § 368(a)(1)(D) reorganizationthan as a § 351 transfer followed by a§ 332 liquidation).

Under the facts of this revenue ruling,P’s transfer satisfies the formal require-ments of § 351, including the requirementthat P control S–2 within the meaning of§ 368(c) immediately after the exchange.Moreover, even though P’s transfer andS–1’s transfer and liquidation are steps ina prearranged, integrated plan that has asits objective the consolidation of S–1 andthe other operating companies in N, ananalysis of the transaction as a whole doesnot dictate that P’s transfer be treatedother than in accordance with its form inorder to reflect the substance of the trans-action. Accordingly, P’s transfer is re-spected as a § 351 exchange, and no gainor loss is recognized by P on the transferof all of the stock of S–1 to S–2.

S–1’s transfer followed by S–1’s liq-uidation is a reorganization under§ 368(a)(1)(D). X, Y, and Z’s transfersfollowed by X, Y, and Z’s liquidations arealso reorganizations under § 368(a)(1)(D).

HOLDING

A transaction in which (1) a domesticcorporation transfers all of the stock of itsforeign operating subsidiary to its foreignholding company subsidiary in exchangefor additional stock, (2) the foreign oper-ating subsidiary and three foreign subsid-iaries of the foreign holding companytransfer substantially all of their assets to anewly-formed foreign subsidiary of theforeign holding company in exchange forstock of the new subsidiary, and (3) thesubsidiaries that transfer their assets areliquidated, is properly treated for federalincome tax purposes as a transfer of theforeign operating subsidiary’s stock in anexchange governed by § 351 followed byreorganizations under § 368(a)(1)(D).

EFFECT ON OTHER REVENUERULING

Rev. Rul. 78 –130, 1978 –1 C.B. 114is revoked.

PROSPECTIVE APPLICATION

Under the authority of § 7805(b)(8),the Internal Revenue Service will not ap-ply this revenue ruling to challenge a po-sition taken by a taxpayer that reasonablyrelied on the conclusions in Rev. Rul.78–130 prior to May 5, 2015 with respectto a transaction that occurs on or beforesuch date, or a transaction that is effectedpursuant to a written agreement (subjectto customary conditions) that is bindingon May 5, 2015 and at all times thereafteruntil the date the transaction is completed,provided that none of the purported ac-quiring corporation, issuing corporation,and transferor corporation (and each oftheir shareholders) treated the transactioninconsistently for federal income tax pur-poses. See § 601.601(d)(2)(v)(c) of theStatement of Procedural Rules.

DRAFTING INFORMATION

The principal author of this revenueruling is Stephanie D. Floyd of the Of-fice of Associate Chief Counsel (Corpo-rate). For further information regardingthis revenue ruling, contact StephanieD. Floyd at (202) 317-6848 (not a toll-free number).

Section 368.—DefinitionsRelating to CorporateReorganizations

26 CFR 1.368–2: Definition of terms.(Also §§ 351; 1.351–1, 301.7701–3.)

Rev. Rul. 2015–10

ISSUE

Is a transaction in which (1) a parentcorporation transfers all of the interestsin its limited liability company that istaxable as a corporation to its subsidiary(first subsidiary) in exchange for addi-tional stock, (2) the first subsidiarytransfers all of the interests in the limitedliability company to its subsidiary (secondsubsidiary) in exchange for additional stock,(3) the second subsidiary transfers all of theinterests in the limited liability company toits subsidiary (third subsidiary) in exchangefor additional stock, and (4) the limited lia-bility company elects to be disregarded asan entity separate from its owner for federalincome tax purposes effective after it isowned by the third subsidiary, properlytreated for federal income tax purposes astwo transfers of stock in exchanges gov-erned by § 351 of the Internal RevenueCode (Code) followed by a reorganizationunder § 368(a)(1)(D) of the Code?

FACTS

P, a domestic corporation, owns all ofthe interests in LLC, a domestic limitedliability company that elected pursuantto § 301.7701–3(c) of the Procedure andAdministration Regulations to be an as-sociation taxable as a corporation forfederal income tax purposes effective onits date of formation. P also owns all ofthe stock of S1. S1 owns all of the stockof S2, which owns all of the stock ofS3. S3 owns all of the stock of S4. S1,S2, and S3 are each holding companiesthat are domestic corporations. For validbusiness purposes, and as part of aplan:

(a) P will transfer all of the interests inLLC to S1 in exchange for addi-tional shares of voting commonstock of S1 (P’s transfer).

(b) S1 will transfer all of the interestsin LLC to S2 in exchange for ad-

Bulletin No. 2015–21 May 26, 2015973

ditional shares of voting commonstock of S2 (S1’s transfer).

(c) S2 will transfer all of the interestsin LLC to S3 in exchange for addi-tional shares of voting commonstock of S3 (S2’s transfer).

(d) LLC will elect pursuant to§ 301.7701–3(c) to be disregardedas an entity separate from itsowner for federal income tax pur-poses, effective no sooner than oneday after S2’s transfer (LLC’s elec-tion).

Following the transaction, S3 will, throughLLC, continue to conduct the business con-ducted by LLC prior to the transaction.

LAW

Section 351(a) provides that no gain orloss will be recognized if property istransferred to a corporation by one ormore persons solely in exchange for stockin such corporation and immediately afterthe exchange such person or persons arein control (as defined in § 368(c)) of thecorporation.

Section 368(c) defines “control” tomean the ownership of stock possessing atleast 80 percent of the total combinedvoting power of all classes of stock enti-tled to vote and at least 80 percent of thetotal number of shares of all other classesof stock of the corporation.

Section 301.7701–3(a) provides that abusiness entity that is not classified as acorporation under § 301.7701–2(b)(1),(3), (4), (5), (6), (7), or (8) (eligible entity)can elect its classification for federal in-come tax purposes. An eligible entity withat least two members can elect pursuant to§ 301.7701–3(c) to be classified as eitheran association (and thus a corporation un-der § 301.7701–2(b)(2)) or a partnership,and an eligible entity with a single ownercan elect to be classified as an associationor to be disregarded as an entity separatefrom its owner.

Section 301.7701–3(g)(1)(iii) providesthat if an eligible entity classified as anassociation elects pursuant to § 301.7701–3(c) to be disregarded as an entity separatefrom its owner, the following is deemed tooccur: the association distributes all of itsassets and liabilities to its single owner inliquidation of the association.

Section 301.7701–3(g)(2)(i) providesthat the tax treatment of a change in the

classification of an entity for federal in-come tax purposes by an election pursuantto § 301.7701–3(c) is determined under allrelevant provisions of the Internal RevenueCode and general principles of tax law, in-cluding the step transaction doctrine.

Section 368(a)(1)(D) provides that theterm “reorganization” includes a transferby a corporation of all or a part of itsassets to another corporation if immedi-ately after the transfer the transferor, orone or more of its shareholders (includingpersons who were shareholders immedi-ately before the transfer), or any combi-nation thereof, is in control of the corpo-ration to which the assets are transferred;but only if, in pursuance of the plan, stockor securities of the corporation to whichthe assets are transferred are distributed ina transaction which qualifies under § 354,355, or 356.

Section 354(a) provides, in general,that no gain or loss will be recognized ifstock or securities in a corporation a partyto a reorganization are, in pursuance of theplan of reorganization, exchanged solelyfor stock or securities in such corporationor in another corporation a party to thereorganization.

Section 368(b)(2) provides that “aparty to a reorganization” includes both cor-porations, in the case of a reorganizationresulting from the acquisition by one corpo-ration of stock or property of the other.

Section 354(b)(1) provides, in general,that § 354(a) will not apply to an ex-change in pursuance of a plan of reorga-nization under § 368(a)(1)(D) unless (A)the corporation to which the assets aretransferred acquires substantially all of theassets of the transferor of such assets; and(B) the stock, securities, and other prop-erties received by such transferor, as wellas the other properties of such transferor,are distributed in pursuance of the plan ofreorganization.

Section 368(a)(2)(H) provides that forpurposes of determining whether a nondi-visive transaction qualifies under§ 368(a)(1)(D), the term “control” has themeaning given such term by § 304(c).

Section 304(c)(1) provides that “con-trol” means the ownership of stock pos-sessing at least 50 percent of the totalcombined voting power of all classes ofstock entitled to vote, or at least 50 per-cent of the total value of shares of all

classes of stock. If a person (or persons) isin control (within the meaning of the pre-ceding sentence) of a corporation, whichin turn owns at least 50 percent of the totalcombined voting power of all stock enti-tled to vote of another corporation orowns at least 50 percent of the total valueof the shares of all classes of stock ofanother corporation, then such person (orpersons) will be treated as in control ofsuch other corporation.

Section 304(c)(3) provides, in part, that§ 318(a) relating to constructive owner-ship of stock will apply for purposes ofdetermining control under § 304 and thatparagraph (2)(C) of § 318(a) will be ap-plied by substituting “5 percent” for “50percent.”

As modified by § 304(c)(3),§ 318(a)(2)(C) provides that if 5 percentor more in value of the stock in a corpo-ration is owned, directly or indirectly, byor for any person, such person will beconsidered as owning the stock owned,directly or indirectly, by or for such cor-poration, in that proportion which thevalue of the stock such person so ownsbears to the value of all the stock in suchcorporation.

In Rev. Rul. 67–274, 1967–2 C.B. 141,pursuant to a plan of reorganization, cor-poration Y acquired all of the stock ofcorporation X in exchange for votingstock of Y. Thereafter, X completely liq-uidated into Y. The ruling concludes thatthe two steps will not constitute a reorga-nization under § 368(a)(1)(B) followed bya liquidation under § 332, but instead willbe considered a single acquisition of X’sassets in a reorganization under§ 368(a)(1)(C).

ANALYSIS

A transfer of property may be re-spected as a § 351 exchange even if it isfollowed by subsequent transfers of theproperty as part of a prearranged, inte-grated plan. See Rev. Rul. 77–449,1977–2 C.B. 110, amplified by Rev. Rul.83–34, 1983–1 C.B. 79, and Rev. Rul.83–156, 1983–2 C.B. 66; see also Rev.Rul. 2003–51, 2003–1 C.B. 938. How-ever, a transfer of property in an exchangeotherwise described in § 351 will notqualify as a § 351 exchange if, for exam-ple, a different treatment is warranted toreflect the substance of the transaction as a

May 26, 2015 Bulletin No. 2015–21974

whole. See Rev. Rul. 54–96, 1954–1 C.B.111; Rev. Rul. 70–140, 1970–1 C.B. 73.

Under the facts of this revenue ruling,even though P’s transfer is part of a seriesof transactions undertaken as part of aprearranged, integrated plan involvingsuccessive transfers of the LLC interests,P’s transfer satisfies the formal require-ments of § 351, including the requirementthat P control S1 within the meaning of§ 368(c) immediately after the exchange,and an analysis of the transaction as awhole does not dictate that P’s transfer betreated other than in accordance with itsform in order to reflect the substance ofthe transaction. Accordingly, P’s transferis respected as a § 351 exchange, and nogain or loss is recognized by P. Similarly,§ 351 applies to S1’s transfer, and no gainor loss is recognized by S1.

With regard to S2’s transfer and LLC’selection, if an acquiring corporation ac-quires all of the stock of a target corporationin an exchange otherwise qualifying as a§ 351 exchange, and as part of a prear-ranged, integrated plan, the target corpora-tion thereafter transfers its assets to the ac-quiring corporation in liquidation, thetransaction is more properly characterizedas a reorganization under § 368(a)(1)(D), tothe extent it so qualifies. See Rev. Rul. 67–274; see also Rev. Rul. 2004 – 83,2004 –2 C.B. 157. Accordingly, underthe circumstances described above, S2’stransfer and LLC’s election are moreproperly characterized as a reorganiza-tion under § 368(a)(1)(D) than as a§ 351 exchange followed by a § 332liquidation.

HOLDING

A transaction in which (1) a parent cor-poration transfers all of the interests in itslimited liability company that is taxable as acorporation to the first subsidiary in ex-change for additional stock, (2) the first sub-sidiary transfers all of the interests in thelimited liability company to the second sub-sidiary in exchange for additional stock, (3)the second subsidiary transfers all of theinterests in the limited liability company tothe third subsidiary in exchange for addi-tional stock, and (4) the limited liabilitycompany elects to be disregarded as an en-tity separate from its owner for federal in-come tax purposes effective after it is ownedby the third subsidiary, is properly treated

for federal income tax purposes as twotransfers of stock in exchanges governed by§ 351 followed by a reorganization under§ 368(a)(1)(D).


The principal author of this revenueruling is Stephanie D. Floyd of the Officeof Associate Chief Counsel (Corporate).For further information regarding this rev-enue ruling, contact Stephanie D. Floyd at(202) 317-6848 (not a toll-free number).

Section 167.—Depreciation26 CFR 1.167(a)–2: Tangible property.(Also § 168; 1.168(a)–1)

Rev. Rul. 2015–11ISSUE

Is the capitalized cost of unrecoverableprecious metal that is used in variousmanufacturing processes depreciable un-der §§ 167 and 168 of the Internal Reve-nue Code?

FACTS

Situation 1. A is a contract jeweler whofabricates jewelry to customers’ specifica-tions using gold supplied by the customers.A does not maintain an inventory of gold orcompleted jewelry, but to assist customers Afabricates and maintains gold sample jew-elry showing currently available styles. A’ssamples are not held for sale. Every 3 yearsA melts down the sample jewelry, recover-ing 100 percent of the gold content of thejewelry. For A’s purposes, the recoveredgold is indistinguishable from gold that hasnot previously been used in sample jewelryand A reuses it in fabricating new samplejewelry. A capitalizes the cost of the goldinto the basis of its sample jewelry.

Situation 2. B is a petroleum refiner. Aspart of its refining process, B uses a catalystcalled prills, fabricated from platinum andother chemicals. Based upon engineeringstudies performed by B, B determines thatapproximately 10 percent of the platinuminitially utilized to fabricate prills is lostover the course of the platinum’s reasonablyexpected useful life in the refining process.The remaining 90 percent of the platinum isrecoverable and becomes available to B for

other uses. B capitalizes the cost of the plat-inum.

Situation 3. C manufactures flat glassusing the float manufacturing process.This process involves the use of moltentin, which provides the ideal surface tomanufacture high-quality, flat glass.During the manufacturing process, thetin declines in purity and volume due tochemical reactions and vaporization.Additional tin is added as needed tomaintain the level required for the pro-duction of the glass. After approxi-mately 7 years, all of the original tin islost due to chemical reactions and va-porization. C capitalizes the cost of theinitial tin installed in the tin bath.

LAW

Section 167(a) provides as a deprecia-tion deduction a reasonable allowance forthe exhaustion and wear and tear (includ-ing a reasonable allowance for obsoles-cence) of property used in a taxpayer’strade or business.

Section 1.167(a)–1(a) of the IncomeTax Regulations provides that the depre-ciation allowance is that amount thatshould be set aside for the taxable year inaccordance with a reasonably consistentplan (not necessarily at a uniform rate), sothat the aggregate of the amounts setaside, plus the salvage value, will, at theend of the estimated useful life of thedepreciable property, equal the cost orother basis of the property.

Section 1.167(a)–1(b) provides that forthe purpose of § 167, the estimated usefullife of an asset is not necessarily the usefullife inherent in the asset but is the periodover which the asset may reasonably beexpected to be useful to the taxpayer in itstrade or business or in the production ofhis income. This period is determined byreference to the taxpayer’s experiencewith similar property taking into accountpresent conditions and probable future de-velopments.

Section 1.167(a)–2 provides that thedepreciation allowance in the case of tan-gible property applies only to that part ofthe property which is subject to wear andtear, to decay or decline from naturalcauses, to exhaustion, and to obsoles-cence.

Section 1.168(a)–1(a) provides that§ 168 determines the depreciation allow-

Bulletin No. 2015–21 May 26, 2015975

ance for tangible property that is of acharacter subject to the allowance fordepreciation provided in § 167(a) andthat is placed in service generally afterDecember 31, 1986. See § 1.168(a)–1(b). Accordingly, tangible property towhich § 1.168(a)–1(a) applies is prop-erty that is of a character subject to theallowance for depreciation provided in§ 167(a) if the taxpayer shows that theproperty is subject to exhaustion, wearand tear, or obsolescence, and that theproperty has a determinable estimateduseful life.

ANALYSIS

An asset is depreciable for federal in-come tax purposes to the extent that thetaxpayer can show that the asset is sub-ject to exhaustion, wear and tear, orobsolescence, and that the asset has adeterminable estimated useful life. SeeO’Shaughnessy v. Commissioner, 332F.3d 1125 (8th Cir. 2003), aff’g in part,rev’g in part, 2002–1 U.S.T.C. ¶ 50,235,89 A.F.T.R. 2d 658 (D. Minn. 2001) (al-lowing depreciation for tin that declinedin volume and purity as a result of glassmanufacturing process); Arkla, Inc. v.United States, 765 F.2d 487 (5th Cir.1985), cert. denied, 475 U.S. 1064(1986) (allowing investment credit anddepreciation for unrecoverable cushiongas but not for recoverable cushion gas);Rev. Rul. 97–54, 1997–2 C.B. 23(adopting the reasoning of Arkla, su-pra). In O’Shaughnessy, the Eighth Cir-cuit allowed the taxpayer to depreciatethe initial installation of molten tin used inthe float manufacturing process of flatglass. The Eighth Circuit concluded thatwhether an asset is depreciable for federalincome tax purposes depends on the tax-payer’s showing that the asset is subject toexhaustion and wear and tear. The EighthCircuit reasoned that the tin’s decline involume and purity as a result of its use inthe glass manufacturing process consti-tuted “exhaustion, wear and tear” withinthe meaning of § 167, and therefore, thetaxpayer appropriately depreciated the tinunder § 168. In reaching its decision, thecourt concluded that Rev. Rul. 75–491,1975–2 C.B. 19 (holding that the initialinstallation of molten tin used in the floatmanufacturing process of flat glass is notdepreciable), was no longer persuasive in-

sofar as the ruling predated a substantialrestructuring of the depreciation rulesupon which its holding was based.

O’Shaughnessy, Arkla, Inc., and Rev.Rul. 97–54 require a fact-specific analysisof the extent to which precious metalsused in various manufacturing processesare subject to exhaustion, wear and tear,or obsolescence (in other words, the ex-tent to which precious metals are recover-able or unrecoverable) for determiningwhether such precious metals are depre-ciable under §§ 167 and 168. Accord-ingly, determining whether and the extentto which an asset is depreciable is basedon an examination of the specific factsrelating to the asset’s use in a taxpayer’strade or business and whether the assethas a determinable estimated useful life.This analysis departs from the analysispreviously used in Rev. Rul. 90–65,1990–2 C.B. 41, as corrected by An-nouncement 91–15, 1991–5 I.R.B. 49, andRev. Rul. 75–491.

Rev. Rul. 90–65 and Rev. Rul. 75–491distinguished the treatment of a preciousmetal that remains available to theowner but is consumed in productionfrom a material such as “line pack gas”or “cushion gas,” which is lost for anyother potential use upon its initial instal-lation into a facility (with the facilityitself being a depreciable asset). Rev.Rul. 75– 491 held that the initial instal-lation of molten tin used in the floatmanufacturing process of flat glass isnot depreciable property. The ruling rec-ognized that, although a portion of theinitial tin is consumed in the manufac-turing operation, the remaining portionis undiminished in value and once re-stored to its original level (by addingadditional quantities during the year) isproperty that is “essentially the samethat existed at the beginning of theyear.” Accordingly, the ruling con-cluded that the initial installation ofmolten tin was not depreciable and thatthe cost of tin consumed during the yearin the production of the glass was de-ductible under section 162, subject tobeing included in inventory as a produc-tion cost.

Rev. Rul. 90–65 amplified the holdingof Rev. Ruling 75–491 by clarifying thatthe principles of Rev. Rul. 75–491 applynot only when a recoverable element is

used in its natural state, but also when aneconomically recoverable precious metalis fabricated into items of property used inthe taxpayer’s trade or business. Specifi-cally, Rev. Rul. 90–65 held that if aneconomically recoverable precious metalis fabricated into items of property used inthe taxpayer’s trade or business and thecost of that metal is more than half thecost of the property, the cost of the metalis nondepreciable and is accounted forseparately from the item into which it isfabricated.

The analyses in Rev. Rul. 75–491 andRev. Rul. 90–65 are inconsistent withArkla, Inc. and Rev. Rul. 97–54, whichrequire an analysis of the specific factssurrounding an asset’s use in a taxpayer’strade or business when determiningwhether and the extent to which an asset isdepreciable. In addition, Rev. Rul. 75–491 and Rev. Rul. 90–65 have been sup-planted by more recent authorities such asO’Shaughnessy. Accordingly, this reve-nue ruling adopts the factual analysisapproach as applied by those later au-thorities. Further, because the factualanalysis approach permits depreciationof initial installations of certain preciousmetals, it is no longer relevant whetherthe cost of those initial installations ismore than half the cost of the overallfabricated property.

In Situation 1, the gold used to manu-facture sample jewelry can be recoveredand reused by A in A’s trade or business ina manner that is indistinguishable fromother gold that has never been fabricated,used, and recovered. The utility of thegold does not diminish as a result of itshaving previously been fabricated intosample jewelry. Accordingly, the gold isnot subject to exhaustion, wear and tear,or obsolescence and as a result, is notdepreciable.

In Situation 2, approximately 10 per-cent of the platinum is lost over the courseof its expected useful life and is not re-coverable for reuse. Accordingly, approx-imately 10 percent of the platinum willundergo exhaustion, wear and tear, or ob-solescence over a determinable useful life.To the extent that the platinum will be lostand is not recoverable for reuse (i.e., ap-proximately 10 percent of the total amount),B may depreciate the capitalized cost ofsuch platinum under §§ 167 and 168. To the

May 26, 2015 Bulletin No. 2015–21976

extent that any of the platinum is recover-able for reuse (i.e., approximately 90 per-cent of the total amount), B may not depre-ciate the capitalized cost of such platinum.

In Situation 3, all of the original tinused in the glass manufacturing process islost due to chemical reactions and evapo-ration after about 7 years. Thus, all of theoriginal tin will undergo exhaustion, wearand tear, or obsolescence over a determin-able useful life. Therefore, C may depre-ciate the capitalized cost of all the entireoriginal tin under §§ 167 and 168.

HOLDING

The capitalized cost of unrecoverableprecious metals that are used in variousmanufacturing processes is depreciableunder §§ 167 and 168 of the Code. Thecapitalized cost of any recoverable pre-cious metal is not depreciable under§§ 167 and 168.

APPLICATION

Any change in a taxpayer’s treatmentof the cost of precious metals to conformwith this revenue ruling is a change inmethod of accounting that must be madein accordance with §§ 446 and 481, theregulations thereunder, and the applicableadministrative procedures. See section6.01 of Rev. Proc. 2015–14, 2015–5I.R.B. 450 (or successor guidance). Theamount of the § 481(a) adjustment mustaccount for the proper amount of the de-preciation allowable that is required to becapitalized under any provision of theCode (for example, § 263A) as of thebeginning of the year of change.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 75–491 is revoked.Rev. Rul. 90–65 is revoked.


The principal author of this revenueruling is Douglas H. Kim of the Office ofAssociate Chief Counsel (Income Tax andAccounting). For further information re-garding this revenue ruling, contact Mr.Kim at (202) 317-7005 (not a toll-freenumber).

26 CFR 1.446–3T: Notional Principal Contracts;Swaps with Nonperiodic Payments.

26 CFR 1.956–2T: Definition of United States prop-erty (temporary).

TD 9719

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Notional Principal Contracts;Swaps with NonperiodicPayments

AGENCY: Internal Revenue Service (IRS),Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains fi-nal and temporary regulations amendingthe treatment of nonperiodic paymentsmade or received pursuant to certain no-tional principal contracts. These regula-tions provide that, subject to certain ex-ceptions, a notional principal contractwith a nonperiodic payment, regardless ofwhether it is significant, must be treated astwo separate transactions consisting ofone or more loans and an on-market, levelpayment swap. This document also con-tains temporary regulations regarding anexception from the definition of UnitedStates property. These regulations affectparties making and receiving paymentsunder notional principal contracts, includ-ing United States shareholders of con-trolled foreign corporations and tax-exempt organizations. The text of thetemporary regulations also serves as thetext of the proposed regulations set forthin the notice of proposed rulemaking(REG–102656–15) on this subject in theProposed Rules section in this issue of theFederal Register.

DATES: Effective Date. These regula-tions are effective on May 8, 2015.

Applicability Date. For the dates ofapplicability, see §§ 1.446 –3T(j)(2) and1.956 –2T(f).

FOR FURTHER INFORMATIONCONTACT: Regarding the regulationsunder section 446, Alexa T. Dubert orAnna H. Kim at (202) 317-6895; regard-ing the regulations under section 956,Kristine A. Crabtree at (202) 317-6934(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

I. Embedded Loan Rule

On October 14, 1993, the Treasury De-partment and the IRS published final reg-ulations (TD 8491) under section 446(b)of the Internal Revenue Code (Code) inthe Federal Register (58 FR 53125) re-lating to the timing of income, deduction,gain, or loss with respect to payments,including nonperiodic payments, made orreceived pursuant to a notional principalcontract (NPC) (the 1993 Regulations).See § 1.446 –3. Under the 1993 Regula-tions, when an NPC includes a “signif-icant” nonperiodic payment, the con-tract is generally treated as two separatetransactions consisting of an on-market,level payment swap and a loan (the em-bedded loan rule). The loan must beaccounted for by the parties to the con-tract separately from the swap. Thetime-value component associated withthe loan is recognized as interest for allpurposes of the Code.

A nonperiodic payment commonlyarises when a party to an NPC makesbelow-market periodic payments or re-ceives above-market periodic paymentsunder the terms of the contract. A partymaking below-market periodic paymentsor receiving above-market periodic pay-ments would also typically be required tomake an upfront payment to the counter-party to compensate for the off-marketcoupon payments specified in the contract.For example, if A and B enter into anoff-market interest rate swap the terms ofwhich require A to make periodic below-market, fixed rate payments to B in ex-change for A receiving periodic on-market, floating-rate payments from B,then A typically will compensate B forreceiving the below-market fixed rate pay-ments by making an upfront payment atthe outset of the interest rate swap so thatthe present value of the fixed rate leg ofthe swap will equal the present value ofthe floating rate leg of the swap.

Bulletin No. 2015–21 May 26, 2015977

II. Nonperiodic (Upfront) PaymentsArising from the Standardization ofContract Terms

The Dodd-Frank Wall Street Reformand Consumer Protection Act of 2010,Public Law No. 111–203, 124 Stat. 1376,Title VII (the Dodd-Frank Act), amongother things: (1) provides for the registra-tion and comprehensive regulation ofswap dealers and major swap participants;(2) imposes clearing and trade executionrequirements on many standardized swapcontracts; (3) creates rigorous recordkeep-ing and real-time reporting regimes; and(4) enhances rulemaking and enforcementauthority of various federal regulatorswith respect to entities and intermediarieswithin their jurisdiction. As part of imple-menting the Dodd-Frank Act, the Com-modity Futures Trading Commission(CFTC) has mandated that certain swapcontracts (cleared contracts), includingswaps that are NPCs under § 1.446–3, becleared through U.S.-registered deriva-tives clearing organizations. The Securi-ties and Exchange Commission (SEC) hasnot yet mandated clearing of any security-based swaps through clearing agencies(which, together with derivatives clearingorganizations, are referred to herein asU.S.-registered clearinghouses).

To facilitate clearing and exchangetrading, cleared contracts generally havestandardized terms, which often give riseto upfront payments. For example, a Mar-ket Agreed Coupon interest rate swap(MAC) has standardized terms, includinga standardized coupon rate (or fixed rate).Because the fixed rate is set in advance, itis unlikely that the fixed rate will equal themarket rate on the start date of the MAC.Consequently, except for the rare instancewhen the market rate for a particularMAC equals the fixed rate, a MAC with astandardized coupon rate will be off-market and will require an upfront pay-ment to equalize the present value of thepayment obligations under the contract.

Certain over-the-counter markets inswap contracts not subject to clearing with

U.S.-registered clearinghouses (unclearedcontracts) also have voluntarily begun toadopt terms similar to the MAC, includingpre-defined, market-agreed start and enddates, payment dates, and fixed couponsto achieve greater standardization of con-tract terms. Similar to cleared contracts,these uncleared contracts are resulting inan increasing number of upfront pay-ments.

III. Margin Requirements

As part of establishing a risk-management framework, the SEC, CFTC,and certain other federal regulators (col-lectively, the Regulators) are required bythe Dodd-Frank Act to propose and adoptcollateral requirements for cleared con-tracts and certain uncleared contracts.These requirements are typically referredto as “margin” requirements in the contextof contracts between entities that are reg-ulated by the Regulators (regulated enti-ties) and, in these temporary regulations,the term “margin” is used in the context ofcleared and uncleared contracts betweenregulated entities and the term “collateral”is used in the context of uncleared con-tracts between unregulated entities.

A. Margin requirements on clearedcontracts

U.S.-registered clearinghouses managecredit risk (the risk of counterparty de-fault) in part by requiring that each partyto a cleared contract provide various typesof margin in an amount that fully collat-eralizes the credit risk on the contract.Because credit risk starts at the inceptionof the contract and continues throughoutthe term of the contract, the requirementto exchange margin sufficient to fully col-lateralize credit risk begins when the par-ties enter into the contract. To ensure thatcredit risk on the contract is fully collat-eralized, the contract is marked to marketon a daily basis (beginning on the day thecontract is entered into) and margin is

exchanged by the parties based on themark-to-market value.

For example, if A and B enter into acleared off-market interest rate swap con-tract the terms of which require A to makeperiodic below-market, fixed rate pay-ments to B in exchange for A receivingperiodic on-market, floating-rate pay-ments from B, then A will make an up-front payment to the clearinghouse (to bepassed on to B) so that the present valueof the fixed rate leg of the swap will equalthe present value of the floating rate leg ofthe swap. A has credit risk with respect tothat payment because, if the clearinghouse(or A’s clearing member) were to default,A may not receive the full benefit of re-ceiving on-market, floating rate paymentsin exchange for making below-marketfixed rate payments for the term of thecontract. When the U.S.-registered clear-inghouse makes the upfront payment to B,the U.S.-registered clearinghouse simi-larly has credit risk with respect to B (orB’s clearing member). To eliminate thecredit risk to A and B, the parties arerequired to post margin. More specifi-cally, B (the ultimate recipient of the up-front payment) is required to make a pay-ment of initial variation margin to theU.S.-registered clearinghouse, generallyno later than the end of the business dayon which the upfront payment is made, inan amount that is equal (or substantiallyequal) to the amount of the upfront pay-ment.1 After receiving B’s initial variationmargin payment, the U.S.-registeredclearinghouse will pay the same amountto A.2 Consequently, A is fully collateral-ized on the exposure on the swap contractat the end of the day the upfront paymentis made.

In addition to initial variation margin,U.S.-registered clearinghouses managecredit risk by requiring that each party toa cleared contract provide daily variationmargin. Daily variation margin is a cashpayment made on a daily or intra-day ba-sis between the counterparties to a con-tract to protect against the risk of counter-

1The total amount of initial variation margin posted by B may not equal the amount of A’s upfront payment due to either: (1) the netting of B’s notional exposure to A, or to the U.S.-registeredclearinghouse, as a result of other transactions; or (2) changes in the value of the contract between the time the contract is entered into and the time when the required margin is paid, requiringdaily variation margin to be added to or subtracted from B’s initial variation margin payment, as the case may be. However, on a transaction-by-transaction basis, the payment of initialvariation margin by B should equal (or closely approximate) A’s upfront payment when any daily variation margin is treated as separate from the initial variation margin posted on thatday.

2In each case, unless A and B are clearing members of the U.S.-registered clearinghouse, the payment is made to or through each party’s clearing member (that is, a futures commissionmerchant, broker, or dealer who is a member of the clearinghouse), which may be an affiliate of that party.

May 26, 2015 Bulletin No. 2015–21978

party default. The rules of U.S.-registeredclearinghouses generally require that dailyvariation margin be paid in an amountequal to the change in the fair marketvalue of the contract (the mark-to-marketvalue). Thus, A and B will continue tomark to market the cleared contract andexchange daily variation margin based onthose values on a daily basis for the entireterm of the contract.

B. Margin requirements on unclearedcontracts between regulated entities andthe exchange of collateral on unclearedcontracts between unregulated entities

The margin requirements proposed bythe Regulators for uncleared contracts areexpected to appropriately address thecredit risk posed by a counterparty that isa regulated entity and the risks associatedwith an uncleared contract and are ex-pected to be as stringent as those requiredfor cleared contracts.3 In addition, unreg-ulated entities that enter into unclearedcontracts may exchange collateral suffi-cient to fully collateralize the mark-to-market exposure on the contract on a dailybasis for the entire term of the contract(beginning on the day the contract is en-tered into).

IV. Other Recent Guidance andComments Regarding the EmbeddedLoan Rule as Applied to UpfrontPayments on Cleared and UnclearedContracts

The Dodd-Frank Act has led to signif-icant changes in market practices forcleared and uncleared contracts, includingthe increased volume of cleared and un-cleared contracts with upfront payments.Under the 1993 Regulations, the parties toan NPC with an upfront payment are re-quired to determine whether the upfrontpayment is a significant nonperiodic pay-ment. If the payment is significant, theembedded loan rule will apply. In addi-tion, under the 1993 Regulations, for pur-poses of section 956 (regarding UnitedStates property), the Commissioner maytreat any nonperiodic payment, whether ornot significant, as one or more loans.

On May 11, 2012, the Treasury De-partment and the IRS published temporaryregulations under section 956 (TD 9589)in the Federal Register (77 FR 27612).On the same date, a notice of proposedrulemaking (REG–107548–11) by cross-reference to the temporary regulationswas published in the Federal Register(77 FR 27669). These regulations ex-cepted from the definition of United Statesproperty under section 956 certain obliga-tions arising from upfront payments oncleared contracts with respect to whichfull initial variation margin is posted (theSection 956 Regulations). In response tothe request for comments and, more gen-erally, because of the growing number ofupfront payments on cleared and un-cleared contracts, the Treasury Depart-ment and the IRS have received severalcomment letters noting the potentiallyburdensome tax consequences associatedwith treating an upfront payment as one ormore loans. For example, the 1993 Regu-lations do not define what constitutes a“significant” nonperiodic payment. In-stead, examples in the 1993 Regulationsillustrate contracts with and without sig-nificant nonperiodic payments and explainhow to determine significance by compar-ing the nonperiodic payment to the pres-ent value of the total amount of paymentsdue under the contract. Commenters havenoted that the lack of a definition in theembedded loan rule for when such a pay-ment is significant creates uncertainty andthat taxpayers have developed differentways to determine “significance” for thispurpose.

In addition, commenters have arguedthat receiving an upfront payment andposting cash margin back to the payor ofthe upfront payment lacks the most impor-tant attribute of indebtedness because therecipient lacks discretion as to the pay-ment’s use. Commenters also have raisedconcerns of increased compliance burdensarising from withholding and informationreporting resulting from the increasingnumber of upfront payments treated asloans. Commenters specifically cite thedifficulty of satisfying information report-ing on upfront payments arising fromcleared contracts because a U.S–regis-

tered clearinghouse is interposed betweenthe first party and second party once acontract is submitted and accepted forclearing.

Commenters also have raised concernsthat receipt by a tax-exempt organizationof an upfront payment arising from enter-ing into a standardized cleared or un-cleared contract (the loan separated fromthe on-market swap under the embeddedloan rule) may cause income earned onthe tax-exempt organization’s deploymentof the upfront payment to constitute unre-lated business taxable income under thedebt-financed property rules of section514. Finally, commenters have requestedthat the exception in the Section 956 Reg-ulations be extended to uncleared con-tracts with upfront payments with respectto which full initial variation margin isposted.

Explanation of Provisions

The text of these temporary regulationsalso serves as the text of the proposedregulations set forth in the notice of pro-posed rulemaking on this subject in theProposed Rules section of this issue of theFederal Register. The temporary regula-tions under section 446 simplify the em-bedded loan rule and provide two excep-tions to that rule. The temporaryregulations under section 956 provide anexception to the definition of UnitedStates property with respect to certain no-tional principal contracts subject to mar-gin or collateral requirements as de-scribed in the temporary regulationsunder section 446.

I. Simplification of the Embedded LoanRule

Because excepting non-significantnonperiodic payments from the embeddedloan rule is not functioning as a rule ofadministrative convenience as intended,these temporary regulations eliminate thatexception. Instead, other than contractsfor which there is an explicit exception,the temporary regulations treat all no-tional principal contracts that have nonpe-riodic payments as including one or moreloans. The Treasury Department and the

3See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 79 FR 59898 (October 3, 2014); Basel Committee on Banking Supervision (BCBS) andthe Board of the International Organization of Securities Commissions (IOSCO), Margin Requirements for Non-centrally Cleared Derivatives (September 2013).

Bulletin No. 2015–21 May 26, 2015979

IRS have determined that, unless an ex-ception applies, the economic loan that isinherent in a nonperiodic payment shouldbe taxed as one or more loans, and that itis reasonable to require taxpayers to sep-arate the loan or loans from an NPC in thecase of any nonperiodic payment, regard-less of the relative size of such payment.Taxpayers may implement this changeupon publication in the Federal Register,but for those taxpayers that need addi-tional time, the temporary regulations de-lay the applicability date of this rule untilNovember 4, 2015.

II. Exceptions to the Embedded LoanRule

The temporary regulations provide twoindependent exceptions from the embed-ded loan rule. First, except for purposes ofsections 514 and 956, the temporary reg-ulations provide an exception for a non-periodic payment made under an NPCwith a term of one year or less (short-termexception).

Second, the temporary regulations pro-vide an exception for certain NPCs withnonperiodic payments that are subject toprescribed margin or collateral require-ments. The embedded loan rule is in-tended to address situations when oneparty to a contract provides cash to thecounterparty and is compensated for thatcash with a direct or indirect interest pay-ment. The Treasury Department and theIRS have concluded, however, that thesame concerns do not exist when a partypays or receives an upfront payment andmust immediately collect or post anequivalent amount of cash margin or col-lateral. Accordingly, in those circum-stances, the Treasury Department and theIRS have determined that the embeddedloan rule should not apply to the upfrontpayment.

In order to qualify for the exception,the regulations require both that the mar-gin or collateral posted and collected bepaid in cash and that the parties to thecontract be required to post and collectmargin or collateral in an amount thatfully collateralizes the mark-to-market ex-posure on the contract (including the ex-posure on the nonperiodic payment) on adaily basis for the entire term of the con-tract. The mark-to-market exposure on a

cleared contract will be fully collateral-ized only if the contract is subject to bothinitial variation margin in an amountequal to the nonperiodic payment (exceptfor variances permitted by intraday pricechanges) and daily variation margin in anamount equal to the daily change in thefair market value of the contract, and onan uncleared contract if it is subject toequivalent margin or collateral require-ments (full margin exception). A taxpayermay use the full margin exception withoutregard to whether the contract qualifies forthe short-term exception.

The Treasury Department and the IRSrequest comments on whether there areother circumstances in which the embed-ded loan rule should not apply. For exam-ple, there may be circumstances in whichtime value is appropriately accounted forunder the contract because applying theembedded loan rule would not alter thetax consequences of the contract. In par-ticular, the Treasury Department and theIRS request comments on whether it isnecessary to require taxpayers to apply theembedded loan rule to NPCs with nonpe-riodic payments that are subject to mark-to-market accounting.

Finally, the Treasury Department andthe IRS request comments on all otheraspects of the temporary and proposedrules, including but not limited to anyanticipated effects on market participants’behavior, the applicability of the full mar-gin exception only in cases in which cashmargin is posted, or possible effects on thegoal of the Dodd-Frank Act to encouragecentralized clearing of swaps.

III. Exception to the Definition of UnitedStates Property

The temporary regulations under sec-tion 956 provide an exception to the def-inition of United States property for cer-tain obligations of United States personsarising from upfront payments made withrespect to notional principal contracts thatqualify for the full margin exception to theembedded loan rule in the temporary reg-ulations under section 446. To qualify forthe United States property exception, theupfront payment must be made by a con-trolled foreign corporation (as defined insection 957(a)) that is either a dealer in

securities under section 475(c)(1) or adealer in commodities.

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 13653. 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, and because these regulations do notimpose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the InternalRevenue Code, these regulations havebeen submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comment on their impact onsmall entities.

Drafting Information

The principal authors of these regula-tions are Alexa T. Dubert and Anna H.Kim of the Office of Associate ChiefCounsel (Financial Institutions and Prod-ucts). However, other personnel from theTreasury Department and the IRS partic-ipated in their development.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1 — INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.446–3 is amended by:1. Revising paragraph (g)(4).2. Revising paragraph (g)(6), Examples

2, 3 and 4.3. Redesignating paragraph (j) as (j)(1)

and revising the paragraph heading ofparagraph (j)(1).

4. Adding paragraph (j)(2).The revisions and addition to read as

follows:

May 26, 2015 Bulletin No. 2015–21980

§ 1.446–3 Notional principal contracts.

* * * * *(g) * * *(4) [Reserved]. For further guidance,

see § 1.446–3T(g)(4).* * * * *(6) * * *Example 2. [Reserved]. For further guidance, see

§ 1.446–3T(g)(6), Example 2.Example 3. [Reserved]. For further guidance, see

§ 1.446–3T(g)(6), Example 3.Example 4. [Reserved]. For further guidance, see

§ 1.446–3T(g)(6), Example 4.

* * * * *(j) Effective/applicability date—(1) * * *(2) [Reserved]. For further guidance,

see § 1.446–3T(j)(2).Par. 3. Section 1.446–3T is added to

read as follows:

§ 1.446–3T Notional principal contracts(temporary).

(a) through (g)(3) [Reserved]. For fur-ther guidance, see § 1.446–3(a) through(g)(3).

(4) Notional principal contracts withnonperiodic payments—(i) Generalrule. Except as provided in paragraph(g)(4)(ii) of this section, a notional prin-cipal contract with one or more nonpe-riodic payments is treated as two sepa-rate transactions consisting of an on-market, level payment swap and one ormore loans. The loan(s) must be ac-counted for by the parties to the contractindependently of the swap. The timevalue component associated with theloan(s) is not included in the net incomeor net deduction from the swap under§ 1.446 –3(d), but it is recognized asinterest for all purposes of the InternalRevenue Code. See paragraph (g)(6) Ex-ample 2 of this section.

(ii) Exceptions—(A) Notional princi-pal contract with a term of one year orless—(1) General rule. Except for pur-poses of sections 514 and 956, paragraph(g)(4)(i) of this section does not apply to anotional principal contract if the term ofthe contract is one year or less. For pur-poses of this paragraph (g)(4)(ii)(A), theterm of a notional principal contract is thestated term of the contract, inclusive ofany extensions (optional or otherwise)provided for in the terms of the contract,without regard to whether any extension is

unilateral, is subject to approval by one orboth parties to the contract, or is based onthe occurrence or non-occurrence of aspecified event.

(2) Anti-abuse rule. For purposes ofdetermining the term of a contract underparagraph (g)(4)(ii)(A)(1) of this section,the Commissioner may treat two or morecontracts as a single contract if a principalpurpose of entering into separate contractsis to qualify for the exception set forth inparagraph (g)(4)(ii)(A)(1) of this section.A purpose may be a principal purposeeven though it is outweighed by otherpurposes (taken together or separately).

(B) Notional principal contract subjectto margin or collateral requirements.Subject to the requirements in paragraph(g)(4)(ii)(C) of this section, paragraph(g)(4)(i) of this section does not apply to anotional principal contract if the contractis described in paragraph (g)(4)(ii)(B)(1)or (2) of this section. See § 1.956–2T(b)(1)(xi) for a related exception undersection 956.

(1) The contract is cleared by a deriv-atives clearing organization (as such termis defined in section 1a of the CommodityExchange Act (7 U.S.C. 1a)) or by a clear-ing agency (as such term in defined insection 3 of the Securities Exchange Actof 1934 (15 U.S.C. 78c)) that is registeredas a derivatives clearing organization un-der the Commodity Exchange Act or as aclearing agency under the Securities Ex-change Act of 1934, respectively, and thederivatives clearing organization orclearing agency requires the parties tothe contract to post and collect marginor collateral to fully collateralize themark-to-market exposure on the con-tract (including the exposure on the non-periodic payment) on a daily basis for theentire term of the contract. The mark-to-market exposure on a contract will befully collateralized only if the contract issubject to both initial variation margin inan amount equal to the nonperiodic pay-ment (except for variances permitted byintraday price changes) and daily varia-tion margin in an amount equal to thedaily change in the fair market value ofthe contract. See paragraph (g)(6) Exam-ple 3 of this section.

(2) The parties to the contract are re-quired, pursuant to the terms of the con-tract or the requirements of a federal reg-

ulator, to post and collect margin orcollateral to fully collateralize the mark-to-market exposure on the contract (in-cluding the exposure on the nonperiodicpayment) on a daily basis for the entireterm of the contract. The mark-to-marketexposure on a contract will be fully col-lateralized only if the contract is subject toboth initial variation margin or collateralin an amount equal to the nonperiodicpayment (except for variances permittedby intraday price changes) and daily vari-ation margin or collateral in an amountequal to the daily change in the fair mar-ket value of the contract. For purposes ofthis paragraph (g)(4)(ii)(B)(2), the term“federal regulator” means the Securitiesand Exchange Commission (SEC), Com-modity Futures Trading Commission(CFTC), or a prudential regulator, as de-fined in section 1a(39) of the CommodityExchange Act (7 U.S.C. 1a), as amendedby section 721 of the Dodd-Frank Act.See paragraph (g)(6) Example 4 of thissection.

(C) Limitations and special rules—(1)Cash requirement. A notional principalcontract is described in paragraph(g)(4)(ii)(B) of this section only to theextent the parties post and collect marginor collateral to fully collateralize themark-to-market exposure on the contract(including the exposure on the nonperi-odic payment) by paying and receivingthe required margin or collateral in cash.The term “cash” includes U.S. dollars orcash in any currency in which paymentobligations under the notional principalcontract are denominated.

(2) Excess margin or collateral. Forpurposes of paragraph (g)(4)(ii)(B)(2) ofthis section, if the amount of cash marginor collateral posted and collected is inexcess of the amount necessary to fullycollateralize the mark-to-market exposureon the contract (including the exposure onthe nonperiodic payment) on a daily basisfor the entire term of the contract, anyexcess is subject to the rule in paragraph(g)(4)(i) of this section.

(3) Margin or collateral paid and re-ceived in cash and other property. If theparties to the contract post and collectboth cash and other property to satisfymargin or collateral requirements to col-lateralize the mark-to-market exposure onthe contract (including the exposure on

Bulletin No. 2015–21 May 26, 2015981

the nonperiodic payment), any excess ofthe nonperiodic payment over the cashmargin or collateral posted and collectedis subject to the rule in paragraph (g)(4)(i)of this section.

(5) [Reserved]. For further guidance,see § 1.446–3(g)(5).

(6) Examples through Example 1. [Re-served]. For further guidance, see § 1.446–3(g)(6), Examples through Example 1.

Example 2. Nonperiodic payment. (i) On January1, 2016, unrelated parties M and N enter into an interestrate swap contract. Under the terms of the contract, N

agrees to make five annual payments to M equal toLIBOR times a notional principal amount of $100million. In return, M agrees to pay N 6% of $100million annually, plus an upfront payment of$15,163,147 on January 1, 2016. At the time M and Nenter into the contract, the rate for similar on-marketswaps is LIBOR to 10%, and N provides M withinformation that the amount of the upfront paymentwas determined as the present value, at 10% com-pounded annually, of five annual payments from M toN of $4,000,000 (4% of $100,000,000). The contractdoes not require the parties to post and collect marginor collateral to collateralize the mark-to-market expo-sure on the contract on a daily basis for the entire termof the contract.

(ii) The exceptions in paragraphs (g)(4)(ii)(A) and(B) of this section do not apply. Under paragraph(g)(4)(i) of this section, the transaction is recharacter-ized as consisting of both a $15,163,147 loan from Mto N that N repays in installments over the term of thecontract and an interest rate swap between M and N inwhich M immediately pays the installment paymentson the loan back to N as part of its fixed payments onthe swap in exchange for the LIBOR payments by N.

(iii) The upfront payment is recognized over thelife of the contract by treating the $15,163,147 as aloan that will be repaid with level payments over fiveyears. Assuming a constant yield to maturity andannual compounding at 10%, M and N account forthe principal and interest on the loan as follows:

Level Payment Interest Component Principal Component

2016 $ 4,000,000 $1,516,315 $ 2,483,685

2017 4,000,000 1,267,946 2,732,054

2018 4,000,000 994,741 3,005,259

2019 4,000,000 694,215 3,305,785

2020 4,000,000 363,636 3,636,364

$20,000,000 $4,836,853 $15,163,147

(iv) M recognizes interest income, and N claimsan interest deduction, each taxable year equal to theinterest component of the deemed installment pay-ments on the loan. These interest amounts are notincluded in the parties’ net income or net deductionfrom the swap contract under § 1.446–3(d). The prin-cipal components are needed only to compute the in-terest component of the level payment for the followingperiod and do not otherwise affect the parties’ netincome or net deduction from this contract.

(v) N also makes swap payments to M based onLIBOR and receives swap payments from M at afixed rate that is equal to the sum of the stated fixedrate and the rate calculated by dividing the deemedlevel annual payments on the loan by the notionalprincipal amount. Thus, the fixed rate on this swap is10%, which is the sum of the stated rate of 6% andthe rate calculated by dividing the annual loan pay-ment of $4,000,000 by the notional principal amountof $100,000,000, or 4%. Using the methods providedin § 1.446–3(e)(2), the fixed swap payments from Mto N of $10,000,000 (10% of $100,000,000) and theLIBOR swap payments from N to M are included inthe parties’ net income or net deduction from thecontract for each taxable year.

Example 3. Full margin – cleared contract. (i) A,a domestic corporation enters into an interest rateswap contract with unrelated counterparty B. Thecontract is required to be cleared and is acceptedfor clearing by a U.S.-registered derivatives clear-ing organization (DCO). The standardized termsof the contract provide that A, for a term of Xyears, will pay B a fixed coupon of 1% per yearand receive a floating coupon on a notional prin-cipal amount of $Y. When A and B enter into theinterest rate swap, the market coupon for similarinterest rate swaps is 2% per year. The DCOrequires A to make an upfront payment to com-pensate B for the below-market annual couponpayments that B will receive, and A makes the

upfront payment in cash. The DCO also requires Bto post initial variation margin in an amount equalto the upfront payment and requires each party topost and collect daily variation margin in anamount equal to the change in the fair marketvalue of the contract on a daily basis for the entireterm of the contract. B posts the initial variationmargin in U.S. dollars, and the parties post andcollect daily variation margin in U.S. dollars.

(ii) Because the contract is subject to initial vari-ation margin in an amount equal to the upfront paymentand daily variation margin in an amount equal to thechange in the fair market value of the contract on adaily basis for the entire term of the contract, thecontract is described in paragraph (g)(4)(ii)(B)(1) ofthis section and paragraph (g)(4)(i) of this section doesnot apply to the contract.

Example 4. Full margin – uncleared contract. (i)On June 1, 2016, P, a domestic corporation, entersinto an interest rate swap contract with an unrelateddomestic counterparty, CP. Under the terms of thecontract, CP agrees to make five annual payments toP equal to a specified contract rate of 3% times thenotional amount of $10,000,000 plus an upfront pay-ment of $1,878,030. In exchange, P agrees to make fiveannual payments to CP equal to the same notionalamount times LIBOR. At the time the parties enter intothe contract, the fixed rate for an on-market swap is7.52%. The contract is not required to be cleared and isnot accepted for clearing by a U.S.-registered deriva-tives clearing organization. However, pursuant to theterms of the contract, P is obligated to post $1,878,030as collateral with CP, and P and CP are obligated topost and collect collateral each business day in anamount equal to the daily change in the fair marketvalue of the contract for the entire term of the contract.All collateral on the contract is required to be in U.S.dollars.

(ii) Because the contract is required to be collat-eralized in an amount equal to the upfront payment

and changes in the fair market value of the contracton a daily basis for the entire term of the contract, thecontract is described in paragraph (g)(4)(ii)(B)(2) ofthis section and paragraph (g)(4)(i) of this sectiondoes not apply to the contract.

(h) through (j)(1) [Reserved]. For fur-ther guidance, see § 1.446–3(h) through(j)(1).

(2) Application of § 1.446–3T(g)(4).The rules provided in paragraph (g)(4)(i)of this section apply to notional principalcontracts entered into on or after Novem-ber 4, 2015. Taxpayers may apply therules provided in paragraph (g)(4)(i) ofthis section to notional principal contractsentered into before November 4, 2015.The rules provided in paragraph (g)(4)(ii)of this section apply to notional princi-pal contracts entered into on or afterMay 8, 2015. Taxpayers may apply therules provided in paragraph (g)(4)(ii) ofthis section to notional principal con-tracts entered into before May 8, 2015.For the rules that apply to notional prin-cipal contracts with nonperiodic pay-ments entered into before the dates setforth in this paragraph (j)(2), see§ 1.446 –3(g)(4) as contained in 26 CFRpart 1, revised April 1, 2015.

(k) Expiration date. The applicabilityof paragraph (g)(4) of this section andparagraph (g)(6) Examples 2, 3 and 4 ofthis section expires on May 7, 2018.

May 26, 2015 Bulletin No. 2015–21982

Par. 4. Section 1.956–2T is amendedby revising paragraphs (b)(1)(xi), (f) and(g) to read as follows:

§ 1.956–2T Definition of United Statesproperty (temporary).

* * * * *(b) * * *(1) * * *(xi) An obligation of a United States

person arising from a nonperiodic paymentby a controlled foreign corporation (withinthe meaning of section 957(a)) with respectto a notional principal contract described in§ 1.446–3T(g)(4)(ii)(B)(1) or (2) if the fol-lowing conditions are satisfied—

(A) The controlled foreign corporationthat makes the nonperiodic payment iseither a dealer in securities (within themeaning of section 475(c)(1)) or a dealerin commodities; and

(B) The conditions set forth in§ 1.446–3T(g)(4)(ii)(C)(1) (relating tofull margin or collateral in cash) are sat-isfied.

(C) Examples. The following examplesillustrate the application of this paragraph(b)(1)(xi):

Example 1. Full margin – cleared contract. (i) Adomestic corporation (USC) wholly owns a con-trolled foreign corporation (CFC) that is a dealer insecurities under section 475(c)(1). CFC enters intoan interest rate swap contract with unrelated coun-terparty B. The contract is required to be cleared andis accepted for clearing by a U.S.-registered deriva-tives clearing organization (DCO). CFC is not amember of the DCO. CFC uses a U.S. affiliate (CM),which is a member of the DCO, as its clearingmember to submit the contract to be cleared. CM isa domestic corporation that is wholly owned byUSC. The standardized terms of the contract provide

that, for a term of X years, CFC will pay B a fixedcoupon of 1% per year and receive a floating couponon a notional principal amount of $Y. When CFCand B enter into the contract, the market coupon forsimilar interest rate swaps is 2% per year. The DCOrequires CFC to make an upfront payment to com-pensate B for the below-market annual coupon pay-ments that B will receive, and CFC makes the up-front payment in cash. CFC makes the upfrontpayment through CM to the DCO, which then makesthe payment to B. The DCO also requires B to postinitial variation margin in an amount equal to theupfront payment and requires each party to post andcollect daily variation margin in an amount equal tothe change in the fair market value of the contract ona daily basis for the entire term of the contract. Bposts the initial variation margin in U.S. dollars,which is received by CFC (through DCO and CM),and the parties post and collect daily variation mar-gin in U.S. dollars.

(ii) Because the contract is subject to initial vari-ation margin in an amount equal to the upfrontpayment and daily variation margin in an amountequal to the change in the fair market value of thecontract on a daily basis for the entire term of thecontract, the contract is described in § 1.446–3T(g)(4)(ii)(B)(1). Furthermore, because the addi-tional conditions set forth in this paragraph (b)(1)(xi)are satisfied, the obligation of CM arising from theupfront payment by CFC does not constitute UnitedStates property for purposes of section 956.

Example 2. Full margin – uncleared contract. (i)Assume the same facts as in Example 1, except forthe following. CFC’s counterparty to the contract isUSC, CM is not involved, and the contract is notrequired to be cleared and is not accepted for clear-ing by a U.S.-registered derivatives clearing organi-zation. The contract requires CFC to make an up-front payment to compensate USC for the below-market annual coupon payments that USC willreceive, and CFC makes the upfront payment in U.S.dollars. Pursuant to the requirements of a federalregulator, USC is obligated to post initial variationmargin with CFC in an amount equal to CFC’supfront payment, and USC and CFC are obligated topost and collect daily variation margin in an amountequal to the change in the fair market value of thecontract on a daily basis for the entire term of the

contract. USC posts the initial variation margin inU.S. dollars, which is received by CFC, and theparties post and collect daily variation margin inU.S. dollars.

(ii) Because the contract is subject to initial vari-ation margin in an amount equal to the upfrontpayment and daily variation margin in an amountequal to the change in the fair market value of thecontract on a daily basis for the entire term of thecontract, the contract is described in § 1.446–3T(g)(4)(ii)(B)(2). Furthermore, because the addi-tional conditions set forth in this paragraph (b)(1)(xi)are satisfied, the obligation of USC arising from theupfront payment by CFC does not constitute UnitedStates property for purposes of section 956.

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

graph (b)(1)(xi) of this section applies topayments described in § 1.956–2T(b)(1)(xi) made on or after May 8,2015. Taxpayers may apply the rules ofparagraph (b)(1)(xi) to payments madebefore May 8, 2015.

(g) Expiration date. The applicabilityof paragraph (b)(1)(xi) of this section ex-pires on May 7, 2018.

John M. DalrympleDeputy Commissioner for

Services and Enforcement.

Approved: April 29, 2015

Mark J. MazurAssistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 7, 2015,8:45 a.m., and published in the issue of the Federal Registerfor May 8, 2015, 80 F.R. 26437)

Bulletin No. 2015–21 May 26, 2015983

Part III. Administrative, Procedural, and MiscellaneousDesignation of PrivateDelivery Services

Notice 2015–38

This notice updates the list of desig-nated private delivery services (“desig-nated PDSs”) set forth in Notice 2004–83, 2004–2 C.B. 1030, for purposes of thetimely mailing treated as timely filing/paying rule of section 7502 of the InternalRevenue Code, provides rules for deter-mining the postmark date for these ser-vices, and provides a new address for sub-mitting documents to the InternalRevenue Service (“IRS”) with respect toan application for designation as a desig-nated PDS. These changes are effectiveMay 6, 2015.

BACKGROUND

Section 7502(f) authorizes the Secre-tary to designate certain private deliveryservices (“PDSs”) for the timely mailingtreated as timely filing/paying rule of sec-tion 7502. Revenue Procedure 97–19,1997–1 C.B. 644, provided rules to applyto be a designated PDS, as well as settingforth the criteria for eligibility for desig-nation as a PDS. Originally, under Rev.Proc. 97–19, there was a semi-annual ap-plication period for designation as a PDSwith set dates for announcing the list ofdesignated PDSs to the public. The cur-rent rules provide that there is one annualapplication period to apply for designa-tion, ending on June 30th, and the list ofdesignated PDSs is updated as PDSs areadded or removed from the list. See No-tice 97–50, 1997–2 C.B. 305, and Notice99–41, 1999–2 C.B. 325. In addition, theaddress for submitting applications listedin Rev. Proc. 97–19 was updated in No-tice 2001–62, 2001–2 C.B. 307.

Notice 97–26, 1997–1 C.B. 413, pro-vided the first list of designated PDSs aswell as special rules to determine the datethat will be treated as the postmark datefor purposes of section 7502, includingcertain presumption rules and rules forovercoming the presumption. The list ofdesignated PDS services was updated byNotice 97–50, Notice 99–41, Notice

2001–62, Notice 2002–62, 2002–2 C.B.574, and Notice 2004–83.

NATURE OF CHANGES

The IRS is adding four new deliveryservices to the list of designated deliveryservices. Federal Express Corporation(“FedEx”): FedEx First Overnight, FedExInternational First Next Flight Out, andFedEx International Economy; and UnitedParcel Service (“UPS”): UPS Next DayAir Early AM are added to the list pub-lished in Notice 2004–83.

In addition, the IRS is removing fivedelivery services previously designatedthat are no longer provided. Notice2004–83 contained five services providedby DHL Express (DHL Same Day Ser-vice; DHL Next Day 10:30 am; DHLNext Day 12:00 pm; DHL Next Day 3:00pm; and DHL 2nd Day Service) that hadbeen designated for purposes of section7502. Since the publication of Notice2004–83, DHL Express substantially al-tered or discontinued its delivery serviceswithin the domestic United States, and theDHL Express services listed in Notice2004–83 are no longer provided. Accord-ingly, the DHL Express services listed inNotice 2004–83 are no longer designated.

This notice also updates, and consoli-dates in one place, the rules for determin-ing the postmark date for documents de-livered by a designated delivery service.

Finally, this notice modifies Rev. Proc.97–19, as modified by Notice 2001–62, toprovide a new address to submit an appli-cation for PDS designation. This new ad-dress may also be used to request admin-istrative review of a letter of denial ofdesignation, appeal a letter confirming thedenial of designation, provide written no-tification of any change in application in-formation, and appeal a proposed revoca-tion letter.

LIST OF DESIGNATED PDSs

Effective May 6, 2015, the list of des-ignated PDSs is as follows:

FedEx:1. FedEx First Overnight2. FedEx Priority Overnight3. FedEx Standard Overnight4. FedEx 2 Day

5. FedEx International Next Flight Out6. FedEx International Priority7. FedEx International First8. FedEx International Economy

UPS:1. UPS Next Day Air Early AM2. UPS Next Day Air3. UPS Next Day Air Saver4. UPS 2nd Day Air5. UPS 2nd Day Air A.M.6. UPS Worldwide Express Plus7. UPS Worldwide Express.

Only the specific delivery services enu-merated in this list are designated deliveryservices for purposes of section 7502(f).FedEx and UPS are not designated withrespect to any type of delivery service notenumerated in this list. Taxpayers are cau-tioned that merely because a delivery ser-vice is provided by FedEx or UPS, it doesnot mean that the service is designated forpurposes of the timely mailing treated astimely filing/paying rule of section 7502.

This list of designated PDSs and des-ignated services will remain in effect untilfurther notice. The IRS will publish a sub-sequent notice setting forth a new list onlyif a designated PDS (or service) is addedto, or removed from, the current list, or ifthere is a change to the application and/orappeal procedures. Delivery services re-questing to be designated in time for anupcoming filing season must submit ap-plications by June 30th of the year pre-ceding that filing season, as required byRev. Proc. 97–19, as modified by Notice97–50.

SPECIAL RULES FORDETERMINING POSTMARK DATEIN THE CASE OF A PDS

Section 7502(f)(2)(C) requires a PDSto either (1) record electronically to itsdata base (kept in the regular course of itsbusiness) the date on which an item wasgiven to the PDS for delivery or (2) markon the cover of the item the date on whichan item was given to the PDS for delivery.Under section 7502(f)(1), the date recordedor the date marked by the PDS under section7502(f)(2)(C) is treated as the postmark datefor purposes of section 7502.

For each PDS designated in this notice,the delivery service records electronically

May 26, 2015 Bulletin No. 2015–21984

the date on which an item was given to itfor delivery, which is treated as the post-mark date for purposes of section 7502.Under this notice, the postmark date for anitem delivered after the due date is pre-sumed to be the day that precedes thedelivery date by an amount of time thatequals the amount of time it would nor-mally take for an item to be deliveredunder the terms of the specific type ofdelivery service used (e.g., two days be-fore the actual delivery date for a two-daydelivery service). Taxpayers who wish toovercome this presumption must provideinformation that shows that the date re-corded in the delivery service’s electronicdata base is on or before the due date, suchas a written confirmation produced andissued by the delivery service. Each deliv-ery service stores the date recorded in itsdatabase only for a finite period, but for noless than six months. Senders or recipientsusing a designated delivery service canobtain information concerning the date re-corded by contacting the designated deliv-ery service. Contact information for each

delivery service is available on the com-pany’s website.

NEW ADDRESS FOR SUBMITTINGAPPLICATIONS

The application address first providedin Rev. Proc. 97–19 and modified by No-tice 2001–62 is no longer correct. Effec-tive May 6, 2015, applications must besubmitted to:

Internal Revenue ServicePostal and Transport Policy Section,PDSMC 7015 NDAL4050 Alpha RoadDallas, TX 75244

The above address is also where a PDSmay write to: (1) obtain administrativereview of a letter of denial of designa-tion under section 9.03 of Rev. Proc.97–19; (2) appeal a letter confirming thedenial of designation under section 9.06of Rev. Proc. 97–19; (3) provide promptwritten notification to the IRS of anychange in application information under

section 10.01 of Rev. Proc. 97–19; and(4) appeal the issuance of a proposedrevocation letter under section 12.03 ofRev. Proc. 97–19.

EFFECT ON OTHER DOCUMENTS

Revenue Procedure 97–19 is modified.Notice 97–26, Notice 2001–62, Notice2002–62 and Notice 2004–83 are super-seded.

EFFECTIVE DATE

This notice is effective on May 6,2015.

FOR FURTHER INFORMATION

The principal author of this notice isSteven L. Karon of the Office of AssociateChief Counsel (Procedure & Administra-tion). For further information regardingthis notice contact Steven L. Karon at(202) 317-6834 (not a toll-free number).

Bulletin No. 2015–21 May 26, 2015985

Part IV. Items of General InterestNotice of ProposedRulemaking

Application of ModifiedCarryover Basis to GeneralBasis Rules

REG–107595–11


ACTION: Notice of proposed rulemaking.

SUMMARY: This document containsproposed regulations that provide guid-ance regarding the application of the mod-ified carryover basis rules of section 1022of the Internal Revenue Code (Code).Specifically, the proposed regulations willmodify provisions of the Treasury Regu-lations involving basis rules by includinga reference to section 1022 where appro-priate. The regulations will affect propertytransferred from certain decedents whodied in 2010. The regulations reflectchanges to the law made by the EconomicGrowth and Tax Relief Reconciliation Actof 2001 and the Tax Relief, Unemploy-ment Insurance Reauthorization, and JobCreation Act of 2010.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by August 10, 2015.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG–107595–11), room5205, Internal Revenue Service, PO Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand-delivered Monday through Friday be-tween the hours of 8 a.m. and 4 p.m. to:CC:PA:LPD:PR (REG–107595–11), Cou-rier’s Desk, Internal Revenue Service, 1111Constitution Avenue, NW, Washington,DC, or sent electronically via the FederaleRulemaking Portal at www.regulations.gov(REG–107595–11).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Mayer R. Samuels, (202)317-6859; concerning submissions ofcomments or a request for a public hear-

ing, Oluwafunmilayo Taylor, (202) 317-6901 (not toll-free numbers).


Background

Subtitle A of title V of the EconomicGrowth and Tax Relief Reconciliation Actof 2001, Public Law 107–16 (EGTRRA)enacted section 2210 of the Code, whichmade chapter 11 (the estate tax) inappli-cable to the estate of any decedent whodied in 2010. Subtitle E of title V ofEGTRRA enacted section 1022 regardinga modified carryover basis system appli-cable during 2010. On December 17,2010, the Tax Relief, Unemployment In-surance Reauthorization, and Job CreationAct of 2010, Public Law 111–312 (TRU-IRJCA) became law, and section 301(a) ofTRUIRJCA retroactively reinstated theestate and generation-skipping transfertaxes. However, section 301(c) of TRU-IRJCA allows the executor of the estate ofa decedent who died in 2010 to elect toapply the Code as though section 301(a)of TRUIRJCA did not apply with respectto chapter 11 and with respect to propertyacquired or passing from the decedent(within the meaning of section 1014(b) ofthe Code). Thus, section 301(c) of TRU-IRJCA allows the executor of the estate ofa decedent who died in 2010 to elect notto have the provisions of chapter 11 applyto the decedent’s estate, but rather to havethe provisions of section 1022 apply (Sec-tion 1022 Election).

Generally, under section 1014(a), thebasis of property in the hands of a personacquiring the property from a decedent orto whom the property passed from a de-cedent is the fair market value of the prop-erty at the date of the decedent’s death.However, if the decedent died in 2010 andthe decedent’s executor, as defined in sec-tion 2203, makes the Section 1022 Elec-tion, then the basis of property in thehands of a person acquiring the propertyfrom that decedent is governed by section1022 and not by section 1014.

Section 1022(a)(1) generally providesthat property acquired from a decedent(within the meaning of section 1022(e)) istreated as having been transferred by gift.If the decedent’s adjusted basis is less

than or equal to the property’s fair marketvalue (FMV) determined as of the dece-dent’s date of death, the recipient’s basisis the adjusted basis of the decedent. If thedecedent’s adjusted basis is greater thanthat FMV, the recipient’s basis is limitedto that FMV. See section 1022(a)(2).

If the decedent’s adjusted basis in theproperty is less than the property’s FMVon the decedent’s date of death, sections1022(b) and 1022(c) allow the executor ofa decedent’s estate to allocate additionalbasis (Basis Increase) to certain assets thatboth are owned by the decedent (withinthe meaning of section 1022(d)) at deathand are acquired from the decedent(within the meaning of section 1022(e)).However, the property’s total basis maynot exceed the property’s FMV on thedate of death.

Although section 1022 was applicableonly to decedents dying in calendar year2010, basis determined pursuant to thatsection will continue to be relevant untilall of the property whose basis is deter-mined under that section has been sold orotherwise disposed of. Accordingly, theexisting regulations need to be updated toincorporate appropriate references to basisdetermined under section 1022.


These proposed regulations incorpo-rate into the existing regulations, as ap-propriate, references to section 1022 toensure that references to basis also includebasis as determined under that section.Some changes involve simply insertingthe words “or section 1022”, “and 1022”,or similar references. Others (such as§ 1.742–1) require the insertion of a newsentence or an example to expressly ad-dress the applicability of section 1022. Afew changes (such as proposed§ 1.684–3) require the inclusion of a newsection to provide a detailed explanationof the application of section 1022 in theparticular context of the existing regula-tion. The proposed regulations also pro-vide cross references for section 1022when appropriate and make other minor,non-substantive changes. Language revi-sions serve solely to conform the existingregulations to the provisions of section

May 26, 2015 Bulletin No. 2015–21986

1022 and no additional changes are in-tended. The more significant changes arebriefly described below.

Section 1.48–12(b)(2)(vii)(B) of theproposed regulations provides that, if atransferee’s basis is determined under sec-tion 1022, any qualified rehabilitation ex-penditures incurred by the decedent undersection 48 within the measuring periodthat are treated as having been incurred bythe transferee decrease the transferee’s ba-sis for purposes of the substantial rehabil-itation test.

Section 1.83–4(b)(1) of the proposedregulations provides that, if property towhich section 83 applies is acquired byany person while such property is substan-tially nonvested, such person’s basis in theproperty reflects any adjustments to basisprovided under section 1022, as well asunder sections 1015 and 1016.

Sections 1.179–4(c)(1)(iv), 1.267(d)–1(a)(3), 1.336–1(b)(5)(i)(A) and 1.355–6(d)(1)(i)(A)(2) of the proposed regula-tions provide that property acquired froma decedent in a transaction in which therecipient’s basis is determined under sec-tion 1022 is not acquired by purchase orexchange for purposes of sections 179,267, 336, and 355(d).

Section 1.197–2(h)(5)(i) of the pro-posed regulations provides that the anti-churning rules of § 1.197–2(h) do notapply to the acquisition of a section197(f)(9) intangible if the acquiring tax-payer’s basis in the intangible is deter-mined under section 1022.

Section 1.306–3(e) of the proposedregulations provides that section 306stock continues to be classified as section306 stock if the basis of such stock isdetermined by reference to the decedent-stockholder’s basis under section 1022. Inaddition, the revision of the last sentenceof the existing regulation clarifies the ref-erence to “the optional valuation date un-der section 1014” by changing the lan-guage to refer expressly to the election touse the alternate valuation date under sec-tion 2032.

Section 1.382–9 of the proposed regu-lations provides that for purposes of§ 1.382–9(d)(5)(i), the definition of qual-ified transfer is expanded to include situ-ations where the transferee’s basis in theindebtedness is determined under section1022.

Section 1.421–2(c)(4) of the proposedregulations provides that an optiongranted under an employee stock purchaseplan acquires a basis, determined undersection 1014 (or section 1022, if applica-ble), only if the transfer of the share pur-suant to the exercise of such option qual-ifies for the special tax treatment providedby section 421(a).

Section 1.423–2(k)(2) of the proposedregulations provides that if the specialrules provided under § 1.423–2(k) are ap-plicable to a share of stock upon the deathof an employee, then the basis of the sharein the hands of the estate or the personreceiving the stock by bequest or inheri-tance shall be determined under section1014 (or section 1022, if applicable).

Section 1.467–7(c)(2) of the proposedregulations provides that section 467 re-capture does not apply to a disposition ondeath of the transferor if the basis of theproperty in the hands of the transferee isdetermined under section 1022. However,section 467 recapture does apply to prop-erty that constitutes a right to receive anitem of income in respect of a decedent.Section 1.467–7(c)(4) of the proposedregulations provides that, if the transfereesubsequently disposes of the property in atransaction to which § 1.467–7(a) applies,the prior understated inclusion is com-puted by taking into account the amountsattributable to the period of the transfer-or’s ownership of the property prior to thefirst disposition.

Section 1.617–3(d)(5)(ii)(b) of the pro-posed regulations provides that theamount of the adjusted exploration expen-ditures for mining property in the hands ofthe transferee immediately after a dispo-sition of property that is subject to section1022 is equal to the amount of the ad-justed exploration expenditures for min-ing property in the hands of the transferorimmediately before the disposition, minusthe amount of any gain taken into accountunder section 617(d). In addition, under§ 1.617–4(c)(1)(i), no gain is recognizedon the gift of mining property. For pur-poses of determining gain from the dispo-sition of certain mining property, the term“gift” is expanded to include dispositionof property with a basis that is determinedunder section 1022.

Section 684 generally requires gain tobe recognized on any transfer of appreci-

ated property by a U.S. person to a foreignnon-grantor trust or foreign estate. Fordecedents dying in 2010, section 684 alsoapplies to certain transfers of property byreason of death to nonresident aliens. Gainis determined by reference to the fair mar-ket value of the property over the adjustedbasis of such property in the hands of thetransferor. Section 1.684–3(c) currentlyprovides that, in the case of a transfer ofproperty by reason of death of a U.S.transferor to a foreign non-grantor trust,no gain recognition is required if the basisof the property in the hands of the trust isdetermined under section 1014(a).

Section 1.684–3(c) of the proposedregulations provides that this rule is mod-ified to clarify the application of section684 to transfers of property by reason ofdeath of U.S. transferor decedents dyingin 2010. If the executor of a U.S. decedentdoes not make a Section 1022 Election,the proposed regulations confirm that thegeneral exception to gain recognition willapply. If the executor of a U.S. decedentdoes make a Section 1022 Election, theproposed regulations provide, consistentwith Rev. Proc. 2011–41 (2011–35 IRB188 (August 29, 2011)) (see§ 601.601(d)(2)(ii)(b) of this chapter) andNotice 2011–66 (2011–35 IRB 184 (Au-gust 29, 2011)) (see § 601.601(d)(2)(ii)(b)of this chapter), that there is gain recog-nition. Any basis increase that the execu-tor allocates under section 1022 will re-duce the amount of gain in that propertyfor purposes of section 684.

Section 1.742–1(a) of the proposedregulations provides that the basis of apartnership interest acquired from a dece-dent who died in 2010, and whose exec-utor made a Section 1022 Election, is thelower of the adjusted basis of the decedentor fair market value of the interest at thedate of decedent’s death. The basis ofproperty acquired from a decedent may befurther increased under section 1022(b)and/or 1022(c), but not above the fair mar-ket value of the interest on the date of thedecedent’s death.

Section 1.995–4(d)(2) of the proposedregulations provides that the period duringwhich a shareholder of stock in a DISChas held stock includes the period he isconsidered to have held it by reason of theapplication of section 1223 and, if hisbasis is determined in whole or in part

Bulletin No. 2015–21 May 26, 2015987

under the provisions of section 1022, theholding period of the decedent.

Section 1.1014–4(a) of the proposedregulations provides that the basis ofproperty acquired from a decedent, in-cluding basis determined under section1022, is uniform in the hands of everyperson having possession or enjoyment ofthe property at any time, whether obtainedunder the will or other instrument or underthe laws of descent and distribution.

Section 1.1014–5(b) of the proposedregulations provides that, in determininggain or loss from the sale or other dispo-sition of a term interest in property theadjusted basis of which is determined pur-suant to section 1022, that part of theadjusted uniform basis assignable underthe rules of § 1.1014–5(a) to the interestsold or otherwise disposed of is disre-garded to the extent and in the mannerprovided by section 1001(e).

Section 1.1223–1(b) of the proposedregulations provides that the holding pe-riod under section 1223 of the recipient ofproperty acquired from a decedent whodied in 2010, and whose executor made aSection 1022 Election, includes the periodthat the property was held by the dece-dent.

Sections 1.1245–2(c)(2)(ii)(d) and1.1245–3(a)(3) of the proposed regula-tions provide that, if section 1245 propertyis acquired from a decedent who died in2010 and whose executor made a Section1022 Election, the amount of the adjust-ments reflected in the adjusted basis of theproperty in the hands of the transfereeimmediately after the transfer is equal tothe amount of the adjustments reflected inthe adjusted basis of the property in thehands of the transferor immediately be-fore the transfer, minus the amount of anygain taken into account under section1245(a)(1) by the transferor upon thetransfer. Further, even though property isnot of a character subject to the allowancefor depreciation in the hands of the tax-payer, the property is section 1245 prop-erty if the taxpayer’s basis in the propertyis determined under section 1022 and theproperty was of a character subject to theallowance for depreciation in the hands ofthe decedent.

Section 1.1245–4(a)(1) of the pro-posed regulations provides that no gain isrecognized under section 1245(a)(1) upon

a transfer of section 1245 property from adecedent whose executor made the Sec-tion 1022 Election.

Section 1.1250–4(c)(5) of the pro-posed regulations provides that the hold-ing period under section 1250(e) for therecipient of property acquired from a de-cedent who died in 2010, and whose ex-ecutor made a Section 1022 Election, in-cludes the period that the property washeld by the decedent.

Section 1.1254–2(a)(1) of the pro-posed regulations provides that no gain isrecognized under section 1254(a)(1) upona transfer of natural resource recaptureproperty from a decedent who died in2010 and whose executor made a Section1022 Election.

Sections 1.1254–3(b), 1.1254–4(e)(4),and 1.1254–5(c)(2)(iv) of the proposedregulations provide that, for purposes ofdetermining the amount of section 1254costs from the disposition of natural re-source recapture property, the term “gift”is expanded to include the transfer ofproperty with a basis that is determinedunder section 1022.

Section 1.1296–1(d)(4) of the pro-posed regulations provides that the basisof stock of a passive foreign investmentcompany for which a section 1296 elec-tion was in effect as of the date of thedecedent’s death that is acquired from adecedent is the lower of the adjusted basisof the stock in the hands of the decedentimmediately before his death or the basisthat would have been determined undersection 1014 or section 1022, as applica-ble, without regard to this paragraph.

Section 1.1312–7(b) of the proposedregulations provides that the taxpayerwith respect to whom the erroneous treat-ment occurred must be a taxpayer whohad title to the property at the time of theerroneously treated transaction and fromwhom, mediately or immediately, the tax-payer with respect to whom the determi-nation is made derived title, if the basis ofthe property in the hands of the taxpayerwith respect to whom the determination ismade is determined under section 1022.

Proposed Effective/Applicability Date

These regulations are proposed to ap-ply on and after the date the regulationsare published as final regulations in theFederal 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 alsohas been determined that section 553(b) ofthe Administrative Procedure Act (5U.S.C. chapter 5) does not apply to theseregulations, and, because these regula-tions do not impose a collection of infor-mation requirement on small entities, theRegulatory Flexibility Act (5 U.S.C.chapter 6) does not apply. Pursuant tosection 7805(f) of the Code, this notice ofproposed rulemaking has been submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Comments and Requests for a PublicHearing

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. All comments will be available atwww.regulations.gov or upon request forpublic inspection and copying. A publichearing will be scheduled if requested inwriting by any person that timely submitscomments. If a public hearing is sched-uled, notice of the date, time, and place forthe public hearing will be published in theFederal Register.


The principal author of these regula-tions is Mayer R. Samuels, Office of theAssociate Chief Counsel (Passthroughsand Special Industries). However, otherpersonnel from the IRS and the TreasuryDepartment participated in their develop-ment.

* * * * *

Proposed Amendments to theRegulations

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

May 26, 2015 Bulletin No. 2015–21988

PART 1—INCOME TAXES


Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.48–12 is amended by

revising the last sentence of paragraph(b)(2)(vii)(B) and adding paragraph (g) toread as follows:

§ 1.48–12 Qualified rehabilitatedbuilding; expenditures incurred afterDecember 31, 1981.

* * * * *(b) * * *(2) * * *(vii) * * *(B) * * * If a transferee’s basis is

determined under section 1014 or section1022, any expenditures incurred by thedecedent within the measuring period thatare treated as having been incurred by thetransferee under paragraph (c)(3)(ii) ofthis section shall decrease the transferee’sbasis for purposes of the substantial reha-bilitation test.

* * * * *(g) Effective/applicability date. This

section applies on and after the date theseregulations are published as final regula-tions in the Federal Register. For rulesbefore the date these regulations are pub-lished as final regulations in the FederalRegister, see § 1.48–12 as contained in26 CFR (revised as of the April 1 preced-ing the date these regulations are pub-lished as final regulations in the FederalRegister).

Par. 3. Section 1.83–4 is amended byrevising the last sentence of paragraph(b)(1) and adding paragraph (d) to read asfollows:

§ 1.83–4 Special rules.

* * * * *(b) * * *(1) * * * Such basis shall also reflect

any adjustments to basis provided undersections 1015, 1016, and 1022.

* * * * *(d) Effective/applicability date. The

provisions in this section are applicablefor taxable years beginning on or afterJuly 21, 1978. The provisions of para-graph (b)(1) of this section relating to

section 1022 are effective on and after thedate these regulations are published asfinal regulations in the Federal Register.

Par. 4. Section 1.179–4 is amended byrevising the first sentence of paragraph(c)(1)(iv) to read as follows:

§ 1.179–4 Definitions.

* * * * *(c) * * *(1) * * *(iv) The property is not acquired by

purchase if the basis of the property in thehands of the person acquiring it is deter-mined in whole or in part by reference to theadjusted basis of such property in the handsof the person from whom acquired, is deter-mined under section 1014(a), relating toproperty acquired from a decedent, or isdetermined under section 1022, relating tothe basis of property acquired from certaindecedents who died in 2010. * * *

* * * * *Par. 5. Section 1.179–6 is amended by:a. Revising the section heading and the

first sentence of paragraph (a).b. Adding paragraph (d).The revision and addition read as fol-

lows:

§ 1.179–6 Effective/applicability dates.

(a) * * * Except as provided in para-graphs (b), (c), and (d) of this section, theprovisions of §§ 1.179–1 through1.179–5 apply for property placed in ser-vice by the taxpayer in taxable years end-ing after January 25, 1993. * * *

* * * * *(d) Application of § 1.179–4(c)(1)(iv).

The provisions of § 1.179–4(c)(1)(iv) re-lating to section 1022 are effective on andafter the date these regulations are pub-lished as final regulations in the FederalRegister.

Par. 6. Section 1.197–2 is amended byrevising paragraphs (h)(5)(i) and (h)(12)(viii)and adding paragraph (l)(5) to read as follows:

§ 1.197–2 Amortization of goodwill andcertain other intangibles.

* * * * *(h) * * *(5) * * *

(i) The acquisition of a section197(f)(9) intangible if the acquiring tax-payer’s basis in the intangible is deter-mined under section 1014(a) or 1022; or

* * * * *(12) * * *(viii) Operating rule for transfers upon

death. For purposes of this paragraph(h)(12), if the basis of a partner’s interestin a partnership is determined under sec-tion 1014(a) or 1022, such partner istreated as acquiring such interest from aperson who is not related to such partner,and such interest is treated as having pre-viously been held by a person who is notrelated to such partner.

* * * * *(l) * * *(5) Application of section 1022. The

provisions of § 1.197–2 relating to section1022 are effective on and after the datethese regulations are published as finalregulations in the Federal Register.

Par. 7. Section 1.267(d)–1 is amendedby revising paragraph (a)(3) to read asfollows:

§ 1.267(d)–1 Amount of gain where losspreviously disallowed.

(a) * * *(3) The benefit of the general rule is

available only to the original transfereebut does not apply to any original trans-feree (for example, a donee or a personacquiring property from a decedent wherethe basis of property is determined undersection 1014 or 1022) who acquired theproperty in any manner other than by pur-chase or exchange.

* * * * *Par. 8. Section 1.267(d)–2 is amended

by revising the section heading and add-ing a sentence to the end of the paragraphto read as follows:

§ 1.267(d)–2 Effective/applicabilitydates.

* * * The provisions of § 1.267(d)–1(a)(3) relating to section 1022 are effec-tive on and after the date these regulationsare published as final regulations in theFederal Register.

Par. 9. Section 1.273–1 is revised toread as follows:

Bulletin No. 2015–21 May 26, 2015989

§ 1.273–1 Life or terminable interests.

(a) In general. Amounts paid as in-come to the holder of a life or a terminableinterest acquired by gift, bequest, or in-heritance shall not be subject to any de-duction for shrinkage (whether called bydepreciation or any other name) in thevalue of such interest due to the lapse oftime. In other words, the holder of such aninterest so acquired may not set up thevalue of the expected future payments ascorpus or principal and claim deductionfor shrinkage or exhaustion thereof due tothe passage of time. For the treatmentgenerally of distributions to beneficiariesof an estate or trust, see Subparts A, B, C,and D (section 641 and following), Sub-chapter J, Chapter 1 of the Code, andcorresponding regulations. For basis ofproperty acquired from a decedent and bygifts and transfers in trust, see sections1014, 1015, and 1022, and correspondingregulations.

(b) Effective/applicability date. Theprovisions in this section are applicablefor taxable years beginning on or afterSeptember 16, 1958. The provisions ofthis section relating to section 1022 areeffective on and after the date these reg-ulations are published as final regulationsin the Federal Register.

Par. 10. Section 1.306–3 is amendedby removing the last sentence of para-graph (e) and adding two sentences in itsplace to read as follows:

§ 1.306–3 Section 306 stock defined.

* * * * *(e) * * * Section 306 stock ceases to be

so classified if the basis of such stock isdetermined by reference to its fair marketvalue on the date of the decedent-stockholder’s death under section 1014 orthe optional valuation date under section2032. Section 306 stock continues to be soclassified if the basis of such stock isdetermined under section 1022.

* * * * *Par. 11. Section 1.306–4 is added to

read as follows:

§ 1.306–4 Effective/applicability date.

The provisions of §§ 1.306–1 through1.306–3 are applicable on or after June

22, 1954. The provisions of § 1.306–3relating to section 1022 are effective onand after the date these regulations arepublished as final regulations in the Fed-eral Register.

Par. 12. Section 1.336–1 is amendedby revising paragraph (b)(5)(i)(A) to readas follows:

§ 1.336–1 General principles,nomenclature, and definitions for asection 336(e) election.

* * * * *(b) * * *(5) * * *(i) * * *(A) The basis of the stock in the hands

of the purchaser is not determined inwhole or in part by reference to the ad-justed basis of such stock in the hands ofthe person from whom the stock is ac-quired, is not determined under section1014(a) (relating to property acquiredfrom a decedent), or is not determinedunder section 1022 (relating to the basis ofproperty acquired from certain decedentswho died in 2010);

* * * * *Par. 13. Section 1.336–5 is amended

by revising the section heading and add-ing a sentence to the end of the paragraphto read as follows:


* * * The provisions of § 1.336–1(b)(5)(i)(A) relating to section 1022 areeffective on and after the date these reg-ulations are published as final regulationsin the Federal Register.

Par. 14. Section 1.355–6 is amendedby revising paragraphs (d)(1)(i)(A)(2) and(g) to read as follows:

§ 1.355–6 Recognition of gain oncertain distributions of stock orsecurities in controlled corporation.

* * * * *(d) * * *(1) * * *(i) * * *(A) * * *(2) Under section 1014(a) or 1022; and* * * * *(g) Effective/applicability dates. This

section applies to distributions occurring

after December 20, 2000, except that theydo not apply to any distributions occur-ring pursuant to a written agreement thatis (subject to customary conditions)binding on December 20, 2000, and atall later times. The provisions of para-graph (d)(1)(i)(A)(2) of this section re-lating to section 1022 are effective onand after the date these regulations arepublished as final regulations in theFederal Register.

Par. 15. Section 1.382–9 is amended byrevising paragraphs (d)(5)(ii)(D) and(d)(6)(i) to read as follows:

§ 1.382–9 Special rules under section382 for corporations under thejurisdiction of a court in a title 11 orsimilar case.

* * * * *(d) * * *(5) * * *(ii) * * *(D) The transferee’s basis in the in-

debtedness is determined under section1014, 1015, or 1022 or with reference tothe transferor’s basis in the indebtedness;

* * * * *(6) Effective/applicability date—(i) In

general. This paragraph (d) applies toownership changes occurring on or afterMarch 17, 1994. The provisions of para-graph (d)(5)(ii)(D) of this section relat-ing to section 1022 are effective on andafter the date these regulations are pub-lished as final regulations in the FederalRegister.


by:a. Revising paragraphs (c)(4)(i)(a) and

(c)(4)(ii).b. Revising paragraph (f) heading and

adding paragraph (f)(3).The revisions and addition read as fol-

lows:

§ 1.421–2 General rules.

* * * * *(c) * * *(4)(i)(a) In the case of the death of an

optionee, the basis of any share of stockacquired by the exercise of an option un-der this paragraph (c), determined undersection 1011, shall be increased by an

May 26, 2015 Bulletin No. 2015–21990

amount equal to the portion of the basis ofthe option attributable to such share. Forexample, if a statutory option to acquire10 shares of stock has a basis of $100, thebasis of one share acquired by a partialexercise of the option, determined undersection 1011, would be increased by1/10th of $100, or $10. The option ac-quires a basis, determined under section1014(a) or under section 1022, if applica-ble, only if the transfer of the share pur-suant to the exercise of such option qual-ifies for the special tax treatment providedby section 421(a). To the extent the optionis so exercised, in whole or in part, it willacquire a basis equal to its fair marketvalue (or the basis as determined undersection 1022, if applicable) at the date ofthe employee’s death or, if an election ismade under section 2032, its value at itsapplicable valuation date. In certain cases,the basis of the share is subject to theadjustments provided by paragraphs(c)(4)(i)(b) and (c) of this section, butsuch adjustments are only applicable inthe case of an option that is subject tosection 423(c).

* * * * *(ii) If a statutory option is not exercised

by the estate of the individual to whom theoption was granted, or by the person whoacquired such option by bequest or inher-itance or by reason of the death of suchindividual, the option shall be consideredto be property that constitutes a right toreceive an item of income in respect of adecedent to which the rules of sections691 and 1014(c) (or section 1022(f), ifapplicable) apply.

* * * * *(f) Effective/applicability date. * * ** * * * *(3) Application of section 1022. The

provisions of § 1.421–2(c) relating to sec-tion 1022 are effective on and after thedate these regulations are published asfinal regulations in the Federal Register.

Par. 17. Section 1.423–2 is amendedby:

a. Revising the third sentence of para-graph (k)(2).

b. Adding a sentence to the end ofparagraph (l).

The revision and addition read as fol-lows:

§ 1.423–2 Employee stock purchase plandefined.

* * * * *(k) * * *(2) * * * If the special rules provided in

this paragraph (k) are applicable to a shareof stock upon the death of an employee,then the basis of the share in the hands ofthe estate or the person receiving the stockby bequest or inheritance shall be deter-mined under section 1014 or under section1022, if applicable, and shall not be in-creased by reason of the inclusion uponthe decedent’s death of any amount in thedecedent’s gross income under this para-graph (k). * * *

* * * * *(l) * * * The provisions of § 1.423–2

relating to section 1022 are effective onand after the date these regulations arepublished as final regulations in the Fed-eral Register.

Par. 18. Section 1.424–1 is amendedby revising the last sentence of paragraph(c)(2) and adding paragraph (g)(3) to readas follows:

§ 1.424–1 Definitions and special rulesapplicable to statutory options.

* * * * *(c) * * *(2) * * * For determination of basis in

the hands of the survivor where joint own-ership is terminated by the death of one ofthe owners, see section 1014 or section1022, if applicable.

* * * * *(g) * * *(3) Application of section 1022. The

provisions of § 1.424–1(c)(2) relating tosection 1022 are effective on and after thedate these regulations are published asfinal regulations in the Federal Register.

Par. 19. Section 1.467–7 is amended byrevising paragraph (c)(2) and revising thefirst sentence of paragraph (c)(4) to readas follows:

§ 1.467–7 Section 467 recapture andother rules relating to dispositions andmodifications.

* * * * *(c) * * *(2) Dispositions at death. Paragraph (a)

of this section does not apply to a dispo-

sition if the basis of the property in thehands of the transferee is determined un-der section 1014(a) or section 1022. How-ever, see paragraph (c)(4) of this sectionfor dispositions of property subject to sec-tion 1022 by transferees. This paragraph(c)(2) does not apply to property that con-stitutes a right to receive an item of in-come in respect of a decedent. See sec-tions 691, 1014(c), and 1022(f).

* * * * *(4) * * * If the recapture amount with

respect to a disposition of property (thefirst disposition) is limited under para-graph (c)(1), (c)(2) (if the basis of theproperty in the hands of the transferee isdetermined under section 1022), or (c)(3)of this section and the transferee subse-quently disposes of the property in a trans-action to which paragraph (a) of this sec-tion applies, the prior understatedinclusion determined under paragraph(b)(2) of this section is computed by tak-ing into account the amounts attributableto the period of the transferor’s ownershipof the property prior to the first disposi-tion. * * *

* * * * *Par. 20. Section 1.467–9 is amended by

revising the section heading and addingparagraph (f) to read as follows:

§ 1.467–9 Effective/applicability datesand automatic method changes forcertain agreements.

* * * * *(f) Application of section 1022. The

provisions of § 1.467–7(c) relating to sec-tion 1022 are effective on and after thedate these regulations are published asfinal regulations in the Federal Register.

Par. 21. Section 1.617–3 is amended byrevising paragraph (d)(5)(ii)(b) to read asfollows:

§ 1.617–3 Recapture of explorationexpenditures.

* * * * *(d) * * *(5) * * *(ii) * * *(b) The transactions referred to in para-

graph (d)(5)(ii)(a) of this section are:(1) A disposition that is in part a sale or

exchange and in part a gift;

Bulletin No. 2015–21 May 26, 2015991

(2) A disposition that is described insection 617(d) through the incorporationby reference of the provisions of section1245(b)(3) (relating to certain tax freetransactions); or

(3) A transfer at death where basis ofproperty in the hands of the transferee isdetermined under section 1022.


by revising the second sentence of para-graph (c)(1)(i) to read as follows:

§ 1.617–4 Treatment of gain fromdisposition of certain mining property.

* * * * *(c) * * *(1)(i) * * * For purposes of this para-

graph (c), the term “gift” means, except tothe extent that paragraph (c)(1)(ii) of thissection applies, a transfer of mining prop-erty that, in the hands of the transferee,has a basis determined under the provi-sions of section 1015(a) or 1015(d) (relat-ing to basis of property acquired by gift)or section 1022 (relating to the basis ofproperty acquired from certain decedentswho died in 2010). * * *

* * * * *Par. 23. Section 1.617–5 is added to

read as follows:


Sections 1.617–3 and 1.617–4 applyon and after the date these regulations arepublished as final regulations in the Fed-eral Register. For rules before the datethese regulations are published as finalregulations in the Federal Register, see§§ 1.617–3 and 1.617–4 as contained in26 CFR (revised as of the April 1 preced-ing the date these regulations are pub-lished as final regulations in the FederalRegister).

Par. 24. Section 1.684–3 is amendedby revising paragraph (c) to read as fol-lows:

§ 1.684–3 Exceptions to general rule ofgain recognition.

* * * * *(c) Certain transfers at death—(1) Sec-

tion 1014 basis. The general rule of gainrecognition under § 1.684–1 shall not ap-ply to any transfer of property to a foreign

trust or foreign estate or, in the case of atransfer of property by a U.S. transferordecedent dying in 2010, to a foreign trust,foreign estate, or a nonresident alien, byreason of death of the U.S. transferor, ifthe basis of the property in the hands ofthe transferee is determined under section1014(a).

(2) Section 1022 basis election. ForU.S. transferor decedents dying in 2010,the general rule of gain recognition under§ 1.684–1 shall apply to any transfer ofproperty by reason of death of the U.S.transferor if the basis of the property inthe hands of the foreign trust, foreign es-tate, or the nonresident alien individual isdetermined under section 1022. The gainon the transfer shall be calculated as setout under § 1.684–1(a), except that ad-justed basis will reflect any increases al-located to such property under section1022.

* * * * *Par. 25. Section 1.684–5 is revised to

read as follows:


(a) Sections 1.684–1 through 1.684–4apply to transfers of property to foreigntrusts and foreign estates after August 7,2000, except as provided in paragraph (b)of this section.

(b) In the case a U.S. transferor dece-dent dying in 2010, § 1.684–3(c) appliesto transfers of property to foreign trusts,foreign estates, and nonresident aliens af-ter December 31, 2009, and before Janu-ary 1, 2011.

Par. 26. Section 1.691(a)–3 is amendedby revising the last two sentences of para-graph (a) and adding paragraph (c) to readas follows:

§ 1.691(a)–3 Character of gross income.

(a) * * * The provisions of section1014(a), relating to the basis of propertyacquired from a decedent, and section1022, relating to the basis of propertyacquired from certain decedents who diedin 2010, do not apply to these amounts inthe hands of the estate and such persons.See sections 1014(c) and 1022(f).

* * * * *(c) Effective/applicability dates. The

last two sentences of paragraph (a) of this

section apply on and after the date theseregulations are published as final regula-tions in the Federal Register. For rulesbefore the date these regulations are pub-lished as final regulations in the FederalRegister, see § 1.691(a)–3 as contained in26 CFR (revised as of the April 1 preced-ing the date these regulations are pub-lished as final regulations in the FederalRegister).

Par. 27. Section 1.742–1 is revised toread as follows:

§ 1.742–1 Basis of transferee partner’sinterest.

(a) In general. The basis to a transfereepartner of an interest in a partnership shallbe determined under the general basisrules for property provided by part II (sec-tion 1011 and following), Subchapter O,Chapter 1 of the Internal Revenue Code.Thus, the basis of a purchased interest willbe its cost. Generally, the basis of a part-nership interest acquired from a decedentis the fair market value of the interest atthe date of his death or at the alternatevaluation date, increased by his estate’s orother successor’s share of partnership lia-bilities, if any, on that date, and reduced tothe extent that such value is attributable toitems constituting income in respect of adecedent (see section 753 and §§ 1.706–1(c)(3)(v) and 1.753–1(b)) under section691. See section 1014(c). However, thebasis of a partnership interest acquiredfrom a decedent is determined under sec-tion 1022 if the decedent died in 2010 andthe decedent’s executor elected to havesection 1022 apply to the decedent’s es-tate. For basis of contributing partner’sinterest, see section 722. The basis so de-termined is then subject to the adjustmentsprovided in section 705.

(b) Effective/applicability date. Thissection applies on and after the date theseregulations are published as final regula-tions in the Federal Register. For rulesbefore the date these regulations are pub-lished as final regulations in the FederalRegister, see § 1.742–1 as contained in 26CFR (revised as of the April 1 precedingthe date these regulations are published asfinal regulations in the Federal Register).

Par. 28. Section 1.743–1 is amended byrevising paragraphs (k)(2)(ii) and (l) toread as follows:

May 26, 2015 Bulletin No. 2015–21992

§ 1.743–1 Optional adjustment to basisof partnership property.

* * * * *(k) * * *(2) * * *(ii) Special rule. A transferee that ac-

quires, on the death of a partner, an inter-est in a partnership with an election undersection 754 in effect for the taxable yearof the transfer, must notify the partner-ship, in writing, within one year of thedeath of the deceased partner. The writtennotice to the partnership must be signedunder penalties of perjury and must in-clude the names and addresses of the de-ceased partner and the transferee, the tax-payer identification numbers of thedeceased partner and the transferee, therelationship (if any) between the trans-feree and the transferor, the deceased part-ner’s date of death, the date on which thetransferee became the owner of the part-nership interest, the fair market value ofthe partnership interest on the applicabledate of valuation set forth in section 1014or section 1022, the manner in which thefair market value of the partnership inter-est was determined, and the carryover ba-sis as adjusted under section 1022 (if ap-plicable).

* * * * *(l) Effective/applicability date. The

provisions in this section apply to trans-fers of partnership interests that occur onor after December 15, 1999. The provi-sions of this section relating to section1022 are effective on and after the datethese regulations are published as finalregulations in the Federal Register.

Par. 29. Section 1.755–1 is amendedby:

a. Revising paragraphs (a)(4)(i)(C) andthe first sentence of (b)(4)(i).

b. Revising the heading of paragraph(e) and paragraph (e)(2).

The revisions read as follows:

§ 1.755–1 Rules for allocation of basis.

(a) * * *(4) * * *(i) * * *(C) Income in respect of a decedent.

Solely for the purpose of determiningpartnership gross value under this para-graph (a)(4)(i), where a partnership inter-

est is transferred as a result of the death ofa partner, the transferee’s basis in its part-nership interest is determined without re-gard to section 1014(c) or section 1022(f),and is deemed to be adjusted for thatportion of the interest, if any, that is at-tributable to items representing income inrespect of a decedent under section 691.

* * * * *(b) * * *(4) * * *(i) * * * Where a partnership interest is

transferred as a result of the death of apartner, under section 1014(c) or section1022(f), the transferee’s basis in its part-nership interest is not adjusted for thatportion of the interest, if any, that is at-tributable to items representing income inrespect of a decedent under section 691. ** *

* * * * *(e) Effective/applicability dates. * * *(2) Special rules. Paragraphs (a) and

(b)(3)(iii) of this section apply to transfersof partnership interests and distributionsof property from a partnership that occuron or after June 9, 2003. The provisions ofparagraphs (a)(4)(i)(C) and (b)(4)(i) ofthis section relating to section 1022 areeffective on and after the date these reg-ulations are published as final regulationsin the Federal Register.

Par. 30. Section 1.995–4 is amendedby revising the first sentence of paragraph(d)(2) and adding paragraph (f) to read asfollows:

§ 1.995–4 Gain on disposition of stockin a DISC.

* * * * *(d) * * *(2) * * * For purposes of this section,

the period during which a shareholder hasheld stock includes the period he is con-sidered to have held it by reason of theapplication of section 1223 and, if hisbasis is determined in whole or in partunder the provisions of section 1014(d)(relating to special rule for DISC stockacquired from decedent) or section 1022(relating to property acquired from certaindecedents who died in 2010), the holdingperiod of the decedent. * * *

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

section applies on and after the date these

regulations are published as final regula-tions in the Federal Register. For rulesbefore the date these regulations are pub-lished as final regulations in the FederalRegister, see § 1.995–4 as contained in26 CFR (revised as of the April 1 preced-ing the date these regulations are pub-lished as final regulations in the FederalRegister).

Par. 31. Section 1.1001–1 is amendedby revising the last sentence of paragraph(a), revising paragraph (f)(1), and addingparagraph (f)(5) to read as follows:

§ 1.1001–1 Computation of gain or loss.

(a) * * * Section 1001(e) and paragraph(f) of this section prescribe the method ofcomputing gain or loss upon the sale orother disposition of a term interest inproperty the adjusted basis (or a portion)of which is determined pursuant, or byreference, to section 1014 (relating to thebasis of property acquired from a dece-dent), section 1015 (relating to the basis ofproperty acquired by gift or by a transferin trust), or section 1022 (relating to thebasis of property acquired from certaindecedents who died in 2010).

* * * * *(f) * * *(1) General rule. Except as otherwise

provided in paragraph (f)(3) of this sec-tion, for purposes of determining gain orloss from the sale or other dispositionafter October 9, 1969, of a term interest inproperty (as defined in paragraph (f)(2) ofthis section), a taxpayer shall not take intoaccount that portion of the adjusted basisof such interest that is determined pursu-ant, or by reference, to section 1014 (re-lating to the basis of property acquiredfrom a decedent), section 1015 (relating tothe basis of property acquired by gift or bya transfer in trust), or section 1022 (relat-ing to the basis of property acquired fromcertain decedents who died in 2010) to theextent that such adjusted basis is a portionof the adjusted uniform basis of the entireproperty (as defined in § 1.1014–5).Where a term interest in property is trans-ferred to a corporation in connection witha transaction to which section 351 appliesand the adjusted basis of the term interest:

(i) Is determined pursuant to sections1014, 1015, or 1022; and

Bulletin No. 2015–21 May 26, 2015993

(ii) Is also a portion of the adjusteduniform basis of the entire property, a sub-sequent sale or other disposition of suchterm interest by the corporation will be sub-ject to the provisions of section 1001(e) andthis paragraph (f) to the extent that the basisof the term interest so sold or otherwisedisposed of is determined by reference to itsbasis in the hands of the transferor as pro-vided by section 362(a). See paragraph(f)(2) of this section for rules relating to thecharacterization of stock received by thetransferor of a term interest in property inconnection with a transaction to which sec-tion 351 applies. That portion of the ad-justed uniform basis of the entire propertythat is assignable to such interest at the timeof its sale or other disposition shall be de-termined under the rules provided in§ 1.1014–5. Thus, gain or loss realized froma sale or other disposition of a term interestin property shall be determined by compar-ing the amount of the proceeds of such salewith that part of the adjusted basis of suchinterest that is not a portion of the adjusteduniform basis of the entire property.

* * * * *(5) Effective/applicability date. This


* * * * *Par.32. Section 1.1014–1 is amended

by revising paragraph (a) and adding para-graph (d) to read as follows:

§ 1.1014–1 Basis of property acquiredfrom a decedent.

(a) General rule. The purpose of sec-tion 1014 is, in general, to provide a basisfor property acquired from a decedent thatis equal to the value placed upon suchproperty for purposes of the Federal estatetax. Accordingly, the general rule is thatthe basis of property acquired from a de-cedent is the fair market value of suchproperty at the date of the decedent’sdeath, or, if the decedent’s executor soelects, at the alternate valuation date pre-

scribed in section 2032, or in section811(j) of the Internal Revenue Code(Code) of 1939. However, the basis of prop-erty acquired from certain decedents whodied in 2010 is determined under section1022, if the decedent’s executor made anelection under section 301(c) of the TaxRelief, Unemployment Insurance Reautho-rization, and Job Creation Act of 2010, Pub-lic Law 111–312 (124 Stat. 3296, 3300(2010)). See section 1022. Property ac-quired from a decedent includes, princi-pally, property acquired by bequest, devise,or inheritance, and, in the case of decedentsdying after December 31, 1953, propertyrequired to be included in determining thevalue of the decedent’s gross estate underany provision of the Code of 1954 or theCode of 1939. The general rule governingbasis of property acquired from a decedent,as well as other rules prescribed elsewherein this section, shall have no application ifthe property is sold, exchanged, or other-wise disposed of before the decedent’s deathby the person who acquired the propertyfrom the decedent. For general rules on theapplicable valuation date where the executorof a decedent’s estate elects under section2032, or under section 811(j) of the Code of1939, to value the decedent’s gross estate atthe alternate valuation date prescribed insuch sections, see § 1.1014–3(e).

* * * * *(d) Effective/applicability date. This


Par. 33. Section 1.1014–4 is amendedby revising the first sentence of paragraph(a)(1), revising the second sentence ofparagraph (a)(2), and adding paragraph(d) to read as follows:

§ 1.1014–4 Uniformity of basis;adjustment to basis.

(a) * * *(1) The basis of property acquired from

a decedent, as determined under section1014(a) or section 1022, is uniform in the

hands of every person having possessionor enjoyment of the property at any timeunder the will or other instrument or underthe laws of descent and distribution. * * *

(2) * * * Accordingly, there is a com-mon acquisition date for all titles to prop-erty acquired from a decedent within themeaning of section 1014 or section 1022,and, for this reason, a common or uniformbasis for all such interests. * * *



Par. 34. Section 1.1014–5 is amendedby revising paragraph (b), adding and re-serving paragraph (d), and adding para-graph (e) to read as follows:

§ 1.1014–5 Gain or loss.

* * * * *(b) Sale or other disposition of certain

term interests. In determining gain or lossfrom the sale or other disposition afterOctober 9, 1969, of a term interest inproperty (as defined in § 1.1001–1(f)(2))the adjusted basis of which is determinedpursuant, or by reference, to section 1014(relating to the basis of property acquiredfrom a decedent), section 1015 (relating tothe basis of property acquired by gift or bya transfer in trust), or section 1022 (relat-ing to the basis of property acquired fromcertain decedents who died in 2010), thatpart of the adjusted uniform basis assign-able under the rules of paragraph (a) ofthis section to the interest sold or other-wise disposed of shall be disregarded tothe extent and in the manner provided bysection 1001(e) and § 1.1001–1(f).

* * * * *(d) [Reserved](e) Effective/applicability date. This

section applies on and after the date theseregulations are published as final regula-tions in the Federal Register. For rulesbefore the date these regulations are pub-lished as final regulations in the Federal

May 26, 2015 Bulletin No. 2015–21994

Register, see § 1.1014–5 as contained in26 CFR (revised as of the April 1 preced-ing the date these regulations are pub-lished as final regulations in the FederalRegister).

Par. 35. Section 1.1223–1 is amendedby adding a sentence to the end of para-graph (b) and adding paragraph (l) to readas follows:

§ 1.1223–1 Determination of period forwhich capital assets are held.

* * * * *(b) * * * Similarly, the period for

which property acquired from a decedentwho died in 2010 was held by the dece-dent must be included in determining theperiod during which the property was heldby the recipient, if the recipient’s basis inthe property is determined under section1022.

* * * * *(l) Effective/applicability date. This


Par. 36. Section 1.1245–2 is amendedby revising paragraph (c)(2)(ii) and add-ing paragraph (d) to read as follows:

§ 1.1245–2 Definition of recomputedbasis.

* * * * *(c) * * *(2) * * *(ii) The transactions referred to in para-

graph (c)(2)(i) of this section are:(a) A disposition that is in part a sale or

exchange and in part a gift (see § 1.1245–4(a)(3));

(b) A disposition (other than a disposi-tion to which section 1245(b)(6)(A) ap-plies) that is described in section1245(b)(3) (relating to certain tax-freetransactions);

(c) An exchange described in§ 1.1245–4(e)(2) (relating to transfers de-scribed in section 1081(d)(1)(A)); or

(d) A transfer at death where the basisof property in the hands of the transfereeis determined under section 1022.



Par. 37. Section 1.1245–3 is amendedby revising paragraph (a)(3) and addingparagraph (d) to read as follows:

§ 1.1245–3 Definition of section 1245property.

(a) * * *(3) Even though property may not be

of a character subject to the allowance fordepreciation in the hands of the taxpayer,such property may nevertheless be section1245 property if the taxpayer’s basis forthe property is determined by reference toits basis in the hands of a prior owner ofthe property and such property was of acharacter subject to the allowance for de-preciation in the hands of such priorowner, or if the taxpayer’s basis for theproperty is determined by reference to thebasis of other property that in the hands ofthe taxpayer was property of a charactersubject to the allowance for depreciation,or if the taxpayer’s basis for the propertyis determined under section 1022 and suchproperty was of a character subject to theallowance for depreciation in the hands ofthe decedent. Thus, for example, if a fa-ther uses an automobile in his trade orbusiness during a period after December31, 1961, and then gives the automobile tohis son as a gift for the son’s personal use,the automobile is section 1245 property inthe hands of the son.


section applies on and after the date theseregulations are published as final regula-tions in the Federal Register. For rulesbefore the date these regulations are pub-lished as final regulations in the FederalRegister, see § 1.1245–3 as contained in

26 CFR (revised as of the April 1 preced-ing the date these regulations are pub-lished as final regulations in the FederalRegister).

Par. 38. Section 1.1245–4 is amendedby revising the second sentence of para-graph (a)(1) and adding paragraph (i) toread as follows:

§ 1.1245–4 Exceptions and Limitations.

(a) * * *(1) * * * For purposes of this paragraph

(a), the term “gift” means, except to theextent that paragraph (a)(3) of this sectionapplies, a transfer of property that, in thehands of the transferee, has a basis deter-mined under the provisions of section1015(a) or 1015(d) (relating to basis ofproperty acquired by gifts) or section1022 (relating to basis of property ac-quired from certain decedents who died in2010). * * *

* * * * *(i) Effective/applicability date. This


Par. 39. Section 1.1250–4 is amendedby adding paragraphs (c)(5) and (h) toread as follows:

§ 1.1250–4 Holding period.

* * * * *(c) * * *(5) A transfer at death where the basis

of the property in the hands of the trans-feree is determined under section 1022.

* * * * *(h) Effective/applicability date. This

section applies on and after the date theseregulations are published as final regula-tions in the Federal Register. For rulesbefore the date these regulations are pub-lished as final regulations in the FederalRegister, see § 1.1250–4 as contained in26 CFR (revised as of the April 1 preced-ing the date these regulations are pub-

Bulletin No. 2015–21 May 26, 2015995

lished as final regulations in the FederalRegister).

Par. 40. Section 1.1254–2 is amendedby revising the second sentence of para-graph (a)(1) to read as follows:

§ 1.1254–2 Exceptions and limitations.

(a) * * *(1) * * * For purposes of this paragraph

(a), the term “gift” means, except to theextent that paragraph (a)(2) of this sectionapplies, a transfer of natural resource re-capture property that, in the hands of thetransferee, has a basis determined underthe provisions of section 1015(a) or1015(d) (relating to basis of property ac-quired by gift) or section 1022 (relating tothe basis of property acquired from certaindecedents who died in 2010). * * *


by revising paragraphs (b)(2)(ii) and (iii)and adding paragraph (b)(2)(iv) to read asfollows:

§ 1.1254–3 Section 1254 costsimmediately after certain acquisitions.

* * * * *(b) * * *(2) * * *(ii) A transaction described in section

1041(a);(iii) A disposition described in

§ 1.1254–2(c)(3) (relating to certain tax–free transactions); or

(iv) A transfer at death where basis ofproperty in the hands of the transferee isdetermined under section 1022.


by revising paragraph (e)(4) introductorytext to read as follows:

§ 1.1254–4 Special rules for Scorporations and their shareholders.

* * * * *(e) * * *(4) * * * If stock is acquired in a

transfer that is a gift, in a transfer that is apart sale or exchange and part gift, in atransfer that is described in section1041(a), or in a transfer at death where thebasis of property in the hands of the trans-feree is determined under section 1022,the amount of section 1254 costs with

respect to the property held by the corpo-ration in the acquiring shareholder’shands immediately after the transfer is anamount equal to—


by revising paragraph (c)(2)(iv) introduc-tory text to read as follows:

§ 1.1254–5 Special rules forpartnerships and their partners.

* * * * *(c) * * *(2) * * *(iv) * * * If an interest in a partnership

is transferred in a transfer that is a gift, ina transfer that is a part sale or exchangeand part gift, in a transfer that is describedin section 1041(a), or in a transfer at deathwhere the basis of property in the handsof the transferee is determined undersection 1022, the amount of the trans-feree partner’s section 1254 costs withrespect to property held by the partner-ship immediately after the transfer is anamount equal to—

* * * * *Par. 44. Section 1.1254–6 is revised to

read as follows:


(a) Sections 1.1254–1 through1.1254–3 and 1.1254–5 are effective withrespect to any disposition of natural re-source recapture property occurring afterMarch 13, 1995. The rule in § 1.1254–1(b)(2)(iv)(A)(2), relating to a nonoperat-ing mineral interest carved out of anoperating mineral interest with respectto which an expenditure has been de-ducted, is effective with respect to anydisposition occurring after March 13,1995, of property (within the meaningof section 614) that is placed in serviceby the taxpayer after December 31,1986. Section 1.1254 – 4 applies to dis-positions of natural resource recaptureproperty by an S corporation (and a cor-poration that was formerly an S corpo-ration) and dispositions of S corporationstock occurring on or after October 10,1996. Sections 1.1254 –2(d)(1)(ii),1.1254 –3(b)(1)(i), (b)(1)(ii), (d)(1)(i),and (d)(1)(ii) are effective for dispositions

of property occurring on or after October10, 1996.

(b) The provisions of §§ 1.1254–2(a)(1), 1.1254–3(b)(2), 1.1254–4(e)(4),and 1.1254 –5(c)(2)(iv) that relate tosection 1022 are effective on and afterthe date these regulations are publishedas final regulations in the Federal Reg-ister.

Par. 45. Section 1.1296–1 is amendedby revising paragraphs (d)(4) and (j) toread as follows:

§ 1.1296–1 Mark to market election formarketable stock.

* * * * *(d) * * *(4) Stock acquired from a decedent. In

the case of stock of a PFIC that is ac-quired by bequest, devise, or inheritance(or by the decedent’s estate) and withrespect to which a section 1296 electionwas in effect as of the date of the dece-dent’s death, notwithstanding section1014 or section 1022, the basis of suchstock in the hands of the person so ac-quiring it shall be the adjusted basis ofsuch stock in the hands of the decedentimmediately before his death (or, iflesser, the basis that would have beendetermined under section 1014 or sec-tion 1022 without regard to this para-graph (d)).

* * * * *(j) Effective/applicability date. The

provisions in this section are applicablefor taxable years beginning on or afterMay 3, 2004. The provisions of paragraph(d)(4) of this section relating to section1022 are effective on and after the datethese regulations are published as finalregulations in the Federal Register.

Par. 46. Section 1.1312–7 is amendedby revising paragraph (b) and addingparagraph (d) to read as follows:

§ 1.1312–7 Basis of property aftererroneous treatment of a priortransaction.

* * * * *(b)(1) For this section to apply, the

taxpayer with respect to whom the erro-neous treatment occurred must be:

(i) The taxpayer with respect to whomthe determination is made; or

May 26, 2015 Bulletin No. 2015–21996

(ii) A taxpayer who acquired title tothe property in the erroneously treatedtransaction and from whom, mediatelyor immediately, the taxpayer with re-spect to whom the determination ismade derived title in such a manner thathe will have a basis ascertained by ref-erence to the basis in the hands of thetaxpayer who acquired title to the prop-erty in the erroneously treated transac-tion; or

(iii) A taxpayer who had title to theproperty at the time of the erroneouslytreated transaction and from whom, me-diately or immediately, the taxpayerwith respect to whom the determinationis made derived title, if the basis of theproperty in the hands of the taxpayerwith respect to whom the determinationis made is determined under section1015(a) (relating to the basis of propertyacquired by gift) or section 1022 (relat-ing to the basis of property acquiredfrom certain decedents who died in2010).

(2) No adjustment is authorized withrespect to the transferor of the property ina transaction upon which the basis of theproperty depends, when the determinationis with respect to the original transferee ora subsequent transferee of the originaltransferee.



John Dalrymple,Deputy Commissioner for



Notice of ProposedRulemaking

Qualifying Income fromActivities of PubliclyTraded Partnerships WithRespect to Minerals orNatural Resources

REG–132634–14


ACTION: Notice of proposed rulemaking.

SUMMARY: This document containsproposed regulations under section7704(d)(1)(E) of the Internal RevenueCode (Code) relating to qualifying incomefrom exploration, development, mining orproduction, processing, refining, transpor-tation, and marketing of minerals or nat-ural resources. The proposed regulationsaffect publicly traded partnerships andtheir partners.

DATES: Comments and requests for apublic hearing must be received by Au-gust 4, 2015.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–132634–14), room5203, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand-delivered Monday through Friday be-tween the hours of 8 a.m. and 4 p.m. toCC:PA:LPD:PR (REG–132634–14), Cou-rier’s Desk, Internal Revenue Service, 1111Constitution Avenue, NW, Washington,DC, or sent electronically, via the FederaleRulemaking Portal at www.regulations.gov(IRS REG–132634–14).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Caroline E. Hay at (202) 317-5279; concerning the submissions of com-ments and requests for a public hearing,Regina Johnson at (202) 317-6901 (nottoll-free numbers).


Background

This document contains proposedamendments to the Income Tax Regula-

tions (26 CFR part 1) under section7704(d)(1)(E) regarding qualifying in-come from certain activities with respectto minerals or natural resources.

Congress enacted section 7704 in theOmnibus Budget Reconciliation Act of1987, Public Law 100–203 (101 Stat.1330 (1987)), due to concerns that therapid growth of certain publicly tradedpartnerships was eroding the corporate taxbase. See H.R. Rep. No. 100–391, at 1065(1987). Section 7704(a) provides that, as ageneral rule, publicly traded partnershipswill be treated as corporations. In section7704(c), Congress provided an exceptionfrom this rule if 90 percent or more of thepartnership’s gross income is “qualifyingincome.” Qualifying income is generallypassive-type income, such as interest, div-idends, and rent. Section 7704(d)(1)(E)provides, however, that qualifying incomealso includes income and gains derivedfrom the exploration, development, min-ing or production, processing, refining,transportation, or marketing of minerals ornatural resources. Section 7704(d)(1) de-fines the term “mineral or natural re-source” as any product for which a deduc-tion for depletion is allowed under section611, except soil, sod, dirt, turf, water,mosses, or minerals from sea water, theair, or other similar inexhaustible sources.

Regulations have been published pro-viding guidance on (1) when a partnershipis publicly traded (§ 1.7704–1), (2) tran-sition rules for partnerships in existenceprior to the effective date of section 7704(§ 1.7704–2), and (3) qualifying incomefrom certain financial products (§ 1.7704–3). No regulations have been issued undersection 7704(d)(1)(E). Instead, questionsabout the specific application of section7704(d)(1)(E) generally have been re-solved by private letter ruling. However,the number of private letter ruling re-quests received has increased steadilyfrom five or fewer requests per year formost years before 2008 to more than 30requests received in 2013. Many of theserequests seek rulings that income fromsupport services provided to businessesengaged in the section 7704(d)(1)(E) ac-tivities is qualifying income for purposesof section 7704. The Treasury Departmentand the IRS are issuing these proposedregulations in response to this increased

Bulletin No. 2015–21 May 26, 2015997

interest in the application of section7704(d)(1)(E).

These proposed regulations provideguidance on whether income from activi-ties with respect to minerals or naturalresources as defined in section 7704(d)(1)is qualifying income. These regulations donot address the transportation or storageof any fuel described in section 6426(b),(c), (d) or (e), or activities with respect toindustrial source carbon dioxide, any alco-hol fuel defined in section 6426(b)(4)(A), orany biodiesel fuel as defined in section40A(d)(1). The Treasury Department andthe IRS request comments concerningwhether guidance is also needed with re-spect to those activities and, if so, the spe-cific issues such guidance should address.


These proposed regulations use theterm “qualifying activities” to describe ac-tivities relating to minerals or natural re-sources that generate qualifying income.Qualifying activities include: (1) the ex-ploration, development, mining or pro-duction, processing, refining, transporta-tion, or marketing of minerals or naturalresources (section 7704(d)(1)(E) activities),and (2) certain limited support activities thatare intrinsic to section 7704(d)(1)(E) activ-ities (an “intrinsic activity”). These pro-posed regulations set forth the require-ments under which an activity is aqualifying activity.

1. Section 7704(d)(1)(E) activities

Section 7704(d)(1)(E) activities repre-sent different stages in the extraction ofminerals or natural resources and theeventual offering of products for sale.These stages include exploration, devel-opment, mining or production, process-ing, refining, transportation (includingpipelines transporting gas, oil, or productsthereof), and marketing of any mineral ornatural resource (including fertilizer, geo-thermal energy, and timber). Each of thesestages involves various types of opera-tions. Based in part on discussions withIRS engineers specializing in the variousoil and natural resource fields, the pro-posed regulations provide an exclusive listof operations that comprise the section7704(d)(1)(E) activities for purposes ofsection 7704. This list may be expanded

by published guidance. The Treasury De-partment and the IRS intend that this listrepresents only those activities that wouldbe undertaken by an exploration and devel-opment company, a mining or productioncompany, a refiner or processor, or a trans-porter or marketer of a mineral or naturalresource. Services provided to those busi-nesses are not section 7704(d)(1)(E) activi-ties, although they may qualify as intrinsicactivities. The Treasury Department and theIRS request comments concerning whetheradditional activities should be included inthe list of section 7704(d)(1)(E) activities.

A. Exploration

These proposed regulations define ex-ploration as an activity performed to as-certain the existence, location, extent, orquality of any deposit of mineral or natu-ral resource before the beginning of thedevelopment stage of the natural deposit.A partnership is engaged in exploration ifthe partnership: (i) drills an exploratory orstratigraphic type test well; (ii) conductsdrill stem and production flow tests toverify commerciality of the deposit; (iii)conducts geological or geophysical sur-veys; or (iv) interprets data obtained fromgeological or geophysical surveys. Forminerals, exploration also includes testpit-ting, trenching, drilling, driving of explo-ration tunnels and adits, and similar typesof activities described in Rev. Rul. 70–287 (1970–1 CB 146) if conducted priorto development activities with respect tothe minerals.

B. Development

These proposed regulations define de-velopment as an activity performed tomake minerals or natural resources acces-sible. A partnership is engaged in devel-opment if the partnership: (i) drills wellsto access deposits of mineral or naturalresources; (ii) constructs and installs dril-ling, production, or dual purpose plat-forms in marine locations (or constructsand installs any similar supporting struc-tures necessary for extraordinary non-marine terrain such as swamps or tundra);(iii) completes wells including by install-ing lease and well equipment (such aspumps, flow lines, separators, and storagetanks) so that wells are capable of produc-

ing oil and gas, and the production can beremoved from the premises; (iv) performsa development technique (for example,fracturing for oil and natural gas, or, withrespect to minerals, stripping, benchingand terracing, dredging by dragline,stoping, and caving or room-and-pillarexcavation); or (v) constructs and in-stalls gathering systems and custodytransfer stations.

C. Mining or production

These proposed regulations definemining or production as an activity per-formed to extract minerals or other naturalresources from the ground. A partnershipis engaged in mining or production if thepartnership: (i) operates equipment to ex-tract natural resources from mines orwells, or (ii) operates equipment to con-vert raw mined products or raw well ef-fluent to substances that can be readilytransported or stored (including by pass-ing crude oil through mechanical separa-tors to remove gas, placing crude oil insettling tanks to recover basic sedimentand water, dehydrating crude oil, and op-erating heater-treaters that separate rawoil well effluent into crude oil, natural gas,and salt water).

D. Processing or refining

Because processing and refining activ-ities vary with respect to different miner-als or natural resources, these proposedregulations provide industry-specific rules(described herein) for when an activityqualifies as processing or refining. In gen-eral, however, these proposed regulationsprovide that an activity is processing orrefining if it is done to purify, separate, oreliminate impurities. These proposed reg-ulations further require that, for an activityto be treated as processing or refining, thepartnership’s position that an activity isprocessing or refining for purposes of sec-tion 7704 must be consistent with the part-nership’s designation of an appropriateModified Accelerated Cost Recovery Sys-tem (MACRS) class life for assets used inthe activity in accordance with Rev. Proc.87–56 (1987–2 CB 674) (for example,MACRS asset class 13.3 for petroleumrefining facilities). In addition, except asspecifically provided otherwise, process-

May 26, 2015 Bulletin No. 2015–21998

ing or refining does not include activitiesthat cause a substantial physical or chem-ical change in a mineral or natural re-source, or that transform the extractedmineral or natural resource into new ordifferent mineral products, includingmanufactured products. The Treasury De-partment and the IRS believe that this ruleis consistent with definitions found else-where in the Code and regulations. See,for example, § 1.613–4(g)(5).

With respect to natural gas, an activityis processing or refining only if the activ-ity purifies natural gas, including by re-moval of oil or condensate, water, andnon-hydrocarbon gases (including carbondioxide, hydrogen sulfide, nitrogen, andhelium), or separates natural gas into itsconstituents which are normally recoveredin a gaseous phase (for example, methaneand ethane) and those which are normallyrecovered in a liquid phase (for example,propane and butane, pentane and gas con-densate). It is generally anticipated thatactivities that create the products listed inthe 2012 version (the most recent versionas of the date of publication of these pro-posed regulations) of North American In-dustry Classification System (NAICS)code 211112 concerning natural gas liquidextraction will be qualifying activities.Processing will also include convertingmethane in one integrated conversion intoliquid fuels that are otherwise producedfrom the processing of crude oil, as de-scribed in the following paragraph.

With respect to crude oil, an activity isprocessing or refining if the activity isperformed to physically separate crude oilinto its component parts, including, butnot limited to, naphtha, gasoline, kero-sene, fuel oil, lubricating base oils, waxes,and similar products. An activity thatchemically converts the physically sepa-rated components is processing or refiningof crude oil only if one or more of theproducts of the conversion are recom-bined with other physically separatedcomponents of crude oil in a manner thatis necessary to the cost-effective produc-tion of gasoline or other fuels (for exam-ple, gas oil converted to naphtha through acracking process that is hydrotreated andcombined into gasoline). It is generallyanticipated that activities within a refinerythat create the products that are listed inthe 2012 version (the most recent version

as of the date of publication of these pro-posed regulations) of NAICS code324110 concerning petroleum refinerieswill be qualifying activities, if those prod-ucts are refinery grade products that areobtained in the steps required to makefuels, lubricating base oils, waxes, andsimilar products. Additionally, physicallyseparating any product that is itself gen-erated by the processing or refining ofcrude oil is a qualifying activity for pur-poses of section 7704(d)(1)(E).

The production of plastics and similarpetroleum derivatives does not give rise toqualifying income derived from process-ing or refining. See H.R. Rep. No. 100–495, at 947 (1987) (Conf. Rep.). The fol-lowing products are also not qualifyingproducts under this standard: (1) heat,steam, or electricity produced by the re-fining processes; (2) products that are ob-tained from third parties or produced on-site for use in the refinery, such ashydrogen, if excess amounts are sold; and(3) any product that results from furtherchemical change of the product producedfrom the separation of the crude oil if it isnot combined with other products sepa-rated from the crude oil (for example,production of petroleum coke from heavy(refinery) residuum qualifies, but any up-grading of petroleum coke (such as toanode-grade coke) does not qualify be-cause it is further chemically changed).

With respect to ores and minerals, anactivity is processing or refining if theactivity is listed in Treas. Reg. § 1.613–4(f)(1)(ii) or (g)(6)(iii). Generally, refin-ing of ores and minerals is any activitythat eliminates impurities or foreign mat-ter from smelted or partially processedmetallic and nonmetallic ores and miner-als, as for example, the refining of blistercopper.

With respect to timber, an activity isprocessing if it merely modifies the phys-ical form of timber. Processing includesthe application of heat or pressure to tim-ber without adding any foreign sub-stances. Processing of timber does not in-clude activities that use chemicals or otherforeign substances to manipulate timber’sphysical or chemical properties, such asusing a digester to produce pulp. Productsthat result from timber processing includewood chips, sawdust, untreated lumber,veneers (unless a foreign substance is

added), wood pellets, wood bark, andrough poles. Products that are not the re-sult of timber processing include pulp,paper, paper products, treated lumber, ori-ented strand board, plywood, and treatedpoles.

These proposed regulations reserve theprovisions relating to fertilizer. The Trea-sury Department and the IRS requestcomments on what activities should beincluded.

E. Transportation

These proposed regulations definetransportation as the movement of miner-als or natural resources and products pro-duced from processing and refining, in-cluding by pipeline, barge, rail, or truck.Transportation also includes terminalling,providing storage services, and operatingcustody transfer stations and gatheringsystems. Transportation includes the con-struction of a pipeline only to the extentthat a pipe is run to connect a client to apreexisting interstate or intrastate lineowned by the publicly traded partnership(interconnect agreement). Transportation(except for pipeline transportation) doesnot include transportation of oil or gas (oroil or gas products) to a place that sells ordispenses to retail customers. See H.R.Rep. No. 100–795, at 401 (1988). Thelegislative history accompanying section7704 clarifies that “a retail customer doesnot include a person who acquires the oilor gas for refining or processing, or par-tially refined or processed productsthereof for further refining or processing,. . . [or a] utility providing power to cus-tomers.” See H.R. Rep. No. 100–1104,vol. 2, at 18 (1988) (Conf. Rep.). By con-trast, “transporting refined petroleumproducts by truck to retail customers is nota qualifying activity.” Id. However, trans-portation includes bulk transportation, solong as the transportation is not to a placethat sells or dispenses oil and gas (or oiland gas products) to retail customers. SeeS. Rep. No. 100–445, at 424 (1988).

F. Marketing

These proposed regulations definemarketing as the activities undertaken tofacilitate sale of minerals or natural re-sources, or products produced from pro-

Bulletin No. 2015–21 May 26, 2015999

cessing and refining. Marketing may alsoinclude some additive blending into fuelsprovided to a customer’s specification.The legislative history of section 7704provides that marketing does not includeactivities and assets involved primarily insales “to end users at the retail level.” S.Rep. No. 100–445, at 424 (1988). There-fore, marketing does not include retailsales (sales made in small quantities di-rectly to end users). For example, gasstation operations are not included inmarketing for purposes of section7704(d)(1)(E). Id. However, marketingincludes bulk and wholesale sales madeto end users. See, for example, H.R.Rep. 100 –1104, at 18 (1988) (Conf.Rep.) (with respect to fertilizer) and in-corporating in footnote 1, 133 Cong.Rec. 37957 (December 22, 1987) (state-ment of Sen. Bentsen with respect topropane).

2. Intrinsic Activities

The Treasury Department and the IRSbelieve that certain limited support activ-ities intrinsic to section 7704(d)(1)(E) ac-tivities also give rise to qualifying incomebecause the income is “derived from” thesection 7704(d)(1)(E) activities. The pro-posed regulations set forth three require-ments for a support activity to be intrinsicto section 7704(d)(1)(E) activities. An ac-tivity will qualify as an intrinsic activityonly if the activity is specialized to sup-port the section 7704(d)(1)(E) activity, isessential to the completion of the section7704(d)(1)(E) activity, and requires theprovision of significant services to supportthe section 7704(d)(1)(E) activity. If eachof these requirements is met, the activityis an intrinsic activity, and any incomereceived from the activity is qualifyingincome. The Treasury Department andIRS intend that intrinsic activities consti-tute active support of section7704(d)(1)(E) activities, and not merelythe supply of goods.

A. Specialized

An activity meets the first requirementof the intrinsic test if both the personnelperforming the activity and any propertyused in the activity or sold to the customerperforming the section 7704(d)(1)(E) ac-

tivity are specialized. Personnel are spe-cialized if they have received trainingunique to the mineral or natural resourceindustries that is of limited utility otherthan to perform or support a section7704(d)(1)(E) activity. An activity cannotbe an intrinsic activity without specializedservice personnel because all intrinsic ac-tivities require the provision of significantservices (as described in part 3.C of theExplanation of Provisions section of thisPreamble). For example, catering ser-vices provided to employees at a drillingsite would not give rise to qualifyingincome because catering services do notrequire skills (or equipment as ex-plained below) limited to supporting asection 7704(d)(1)(E) activity. As such,catering services are not intrinsic activ-ities and any income from those servicesis not qualifying income for purposes ofsection 7704(c).

If an activity also involves the sale,provision, or use of property, then theproperty must qualify as specialized forthe activity to be an intrinsic activity. Theproposed regulations provide two alterna-tive tests under which that property canqualify as specialized. Under the first test,property is specialized if it is used only inconnection with section 7704(d)(1)(E)activities and has limited use outside ofthose activities. That property must alsonot be easily converted to a use otherthan performing or supporting a section7704(d)(1)(E) activity. Whether prop-erty is easily converted is determinedbased on all facts and circumstances, includ-ing the cost to convert the property.

Under the second test, property that canbe used for purposes other than to performor support a section 7704(d)(1)(E) activitywill qualify as specialized to the extentthat the property is used as an injectant toperform a section 7704(d)(1)(E) activity,and, as part of the activity, the partnershipalso collects and cleans, recycles, or oth-erwise disposes of the injectant after usein accordance with federal, state, or localregulations concerning waste productsfrom mining or production activities. In-jectants under this definition include, forexample, water, lubricants, and sand usedin connection with section 7704(d)(1)(E)activities.

B. Essential

An activity meets the second require-ment of the intrinsic test if the activity isessential to a section 7704(d)(1)(E) activ-ity. An activity is essential if it is neces-sary to (a) physically complete the section7704(d)(1)(E) activity (including in a costeffective manner in order to make theactivity economically viable), or (b) com-ply with federal, state or local law regu-lating the section 7704(d)(1)(E) activity.For example, water delivery and disposalservices are essential when provided foruse in fracturing because the water mustbe used to complete the drilling operations(a development activity under section7704(d)(1)(E)) and because the water dis-posal services must be performed to com-ply with federal, state, or local law regu-lating drilling and fracturing. Legal,financial, consulting, accounting, insur-ance, and other similar services are notessential to a section 7704(d)(1)(E) activ-ity because the connection to completionof the section 7704(d)(1)(E) activity is tooattenuated.

C. Significant Services

An activity meets the third requirementof the intrinsic test if the activity includesthe provision of significant services. Apartnership provides significant services ifits personnel have an ongoing or frequentpresence at the site of the section7704(d)(1)(E) activity and the activities ofthose personnel are necessary for the part-nership to provide its services or to sup-port the section 7704(d)(1)(E) activity. Apartnership that provides the same ser-vices to multiple clients may satisfy thistest by performing the activity through arotating presence at multiple sites. For thispurpose, determining whether services areongoing or frequent is determined underall facts and circumstances, including rec-ognized best practices in the relevant in-dustry. The Treasury Department and theIRS request comments on whether andhow this requirement could be set forth asan objective standard.

In addition, the proposed regulationsacknowledge that a qualifying activity inwhich the partnership engages could re-quire extensive offsite services. There-fore, these proposed regulations provide

May 26, 2015 Bulletin No. 2015–211000

that the services may be conducted offsiteif the services are performed on an ongo-ing or frequent basis and offered exclu-sively for those engaged in one or moresection 7704(d)(1)(E) activities. For exam-ple, monitoring services will satisfy the sig-nificant services requirement if the monitor-ing is done on an ongoing or frequent basisonly to support persons engaged in one ormore section 7704(d)(1)(E) activities.

The proposed regulations also identifycertain activities that do not qualify assignificant services because they involvethe manufacture and sale or temporaryprovision of a good. Thus, the design,construction, manufacturing, repair, main-tenance, lease, rent, or temporary provi-sion of assets is not taken into accountwhen determining whether a partnershiphas provided significant services.

Proposed Effective/Applicability Dateand Transition Rules

Except for rules concerning the Tran-sition Period, these regulations are pro-posed to apply to income earned by apartnership in a taxable year beginning onor after the date these regulations are pub-lished as final regulations in the FederalRegister. These regulations also providefor a Transition Period, which ends on thelast day of the partnership’s taxable yearthat includes the date that is ten years afterthe date that these regulations are pub-lished as final regulations in the FederalRegister.

The proposed regulations provide thata partnership may treat income from anactivity as qualifying income during theTransition Period if the partnership re-ceived a private letter ruling from the IRSholding that income from the activity isqualifying income. In addition, a partner-ship may treat income from an activity asqualifying income during the TransitionPeriod if, prior to May 6, 2015, the part-nership was publicly traded, engaged inthe activity, and treated the activity asgiving rise to qualifying income undersection 7704(d)(1)(E), and that incomewas qualifying income under the statute asreasonably interpreted prior to the issu-ance of these proposed regulations. In de-termining whether an interpretation wasreasonable, the legislative history and in-terpretations applied by the IRS prior tothe issuance of these proposed regulations

are taken into account. An interpretationwas not reasonable merely because a part-nership had a reasonable basis for thatposition. With respect to an activity un-dertaken prior to May 6, 2015, no infer-ence is intended that an activity that is notdescribed in these proposed regulations asa qualifying activity did or did not pro-duce qualifying income under the statuteand legislative history.

A partnership that is publicly tradedand engages in an activity after May 6,2015, but before the date these regulationsare published as final regulations in theFederal Register may treat income fromthat activity as qualifying income duringthe Transition Period if the income fromthat activity is qualifying income underthese proposed regulations.

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 alsohas been determined that section 553(b) ofthe Administrative Procedure Act (5U.S.C. chapter 5) does not apply to theseproposed regulations. Because these pro-posed regulations do not impose a collec-tion of information on small entities, theRegulatory Flexibility Act (5 U.S.C.chapter 6) does not apply. Pursuant tosection 7805(f) of the Code, this notice ofproposed rulemaking has been submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any comments that aresubmitted timely to the IRS as prescribedin this preamble under the “Addresses”heading. The IRS and the Treasury De-partment request comments on all aspectsof the proposed rules. All comments willbe available at www.regulations.gov orupon request. A public hearing will bescheduled if requested in writing by anyperson that timely submits written com-ments. If a public hearing is scheduled,

notice of the date, time, and place for thepublic hearing will be published in theFederal Register.


The principal author of these proposedregulations is Caroline E. Hay, Office ofthe Associate Chief Counsel (Pass-throughs and Special Industries). How-ever, other personnel from the IRS andTreasury Department participated in theirdevelopment.

* * * * *





Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.7704–4 is added to

read as follows:

§ 1.7704–4 Qualifying income –mineral and natural resources.

(a) In general. For purposes of section7704(d)(1)(E), qualifying income in-cludes only income and gains from qual-ifying activities with respect to mineralsor natural resources as defined in para-graph (b) of this section. For purposes ofsection 7704(d)(1)(E), qualifying activi-ties include section 7704(d)(1)(E) activi-ties (as described in paragraph (c) of thissection) and intrinsic activities (as de-scribed in paragraph (d) of this section).

(b) Mineral or natural resource. Theterm mineral or natural resource (includ-ing fertilizer, geothermal energy, and tim-ber) means any product of a characterwith respect to which a deduction for de-pletion is allowable under section 611,except that such term does not include anyproduct described in section 613(b)(7)(A)or (B) (soil, sod, dirt, turf, water,mosses, minerals from sea water, the air,or other similar inexhaustible sources).For purposes of this section, the termmineral or natural resource does not in-clude industrial source carbon dioxide,fuels described in section 6426(b)through (e), any alcohol fuel defined in

Bulletin No. 2015–21 May 26, 20151001

section 6426(b)(4)(A), or any biodieselfuel as defined in section 40A(d)(1).

(c) Section 7704(d)(1)(E) activities—(1) Definition. Section 7704(d)(1)(E) ac-tivities include the exploration, develop-ment, mining or production, processing,refining, transportation, or marketing ofany mineral or natural resource as limitedto those activities described in this para-graph (c) or as provided by the Commis-sioner by notice or in other forms of pub-lished guidance. No other activitiesqualify as section 7704(d)(1)(E) activities.

(2) Exploration. An activity constitutesexploration if it is performed to ascertainthe existence, location, extent, or qualityof any deposit of mineral or natural re-source before the beginning of the devel-opment stage of the natural deposit by:

(i) Drilling an exploratory or strati-graphic type test well;

(ii) Conducting drill stem and produc-tion flow tests to verify commerciality ofthe deposit;

(iii) Conducting geological or geo-physical surveys;

(iv) Interpreting data obtained fromgeological or geophysical surveys; or

(v) For minerals, testpitting, trenching,drilling, driving of exploration tunnelsand adits, and similar types of activitiesdescribed in Rev. Rul. 70–287 (1970–1CB 146), (see § 601.601(d)(2)(ii)(b) ofthis chapter) if conducted prior to devel-opment activities with respect to the min-erals.

(3) Development. An activity consti-tutes development if it is performed tomake accessible minerals or natural re-sources by:

(i) Drilling wells to access deposits ofmineral or natural resources;

(ii) Constructing and installing drilling,production, or dual purpose platforms inmarine locations, or any similar support-ing structures necessary for extraordinarynon-marine terrain (such as swamps ortundra);

(iii) Completing wells, including by in-stalling lease and well equipment, such aspumps, flow lines, separators, and storagetanks, so that wells are capable of produc-ing oil and gas, and the production can beremoved from the premises;

(iv) Performing a development tech-nique such as, for minerals, stripping,benching and terracing, dredging by dra-

gline, stoping, and caving or room-and-pillar excavation, and for oil and naturalgas, fracturing; or

(vi) Constructing and installing gather-ing systems and custody transfer stations.

(4) Mining or production. An activityconstitutes mining or production if it isperformed to extract minerals or other nat-ural resources from the ground by:

(i) Operating equipment to extract nat-ural resources from mines and wells; or

(ii) Operating equipment to convertraw mined products or raw well effluent tosubstances that can be readily transportedor stored (for example, passing crude oilthrough mechanical separators to removegas, placing crude oil in settling tanks torecover basic sediment and water, dehy-drating crude oil, and operating heater-treaters that separate raw oil well effluentinto crude oil, natural gas, and salt water).

(5) Processing or refining—(i) In gen-eral. Except as otherwise provided inparagraph (c)(5) of this section, an activityis processing or refining if it is done topurify, separate, or eliminate impurities.For an activity to be treated as processingor refining for purposes of this section, thepartnership’s position that an activity isprocessing or refining for purposes ofthis section must be consistent with thepartnership’s designation of an appro-priate Modified Accelerated Cost Re-covery System (MACRS) class life forassets used in the activity in accordancewith Rev. Proc. 87–56, 1987–2 CB 674(see § 601.601(d)(2)(ii)(b) of this chap-ter). For example, for an activity to beprocessing or refining of crude oil underparagraph (c)(5)(iii) of this section, theassets used in that process must alsohave a MACRS class life of 13.3, Petro-leum Refining. Unless otherwise pro-vided in this paragraph (c)(5), an activ-ity will not qualify as processing orrefining if the activity causes a substan-tial physical or chemical change in amineral or natural resource, or trans-forms the extracted mineral or naturalresource into new or different mineralproducts or into manufactured products.

(ii) Natural Gas. An activity consti-tutes processing of natural gas if it isperformed to:

(A) Purify natural gas, including byremoval of oil or condensate, water, ornon-hydrocarbon gases (including carbon

dioxide, hydrogen sulfide, nitrogen, andhelium);

(B) Separate natural gas into its con-stituents which are normally recovered ina gaseous phase (methane and ethane) andthose which are normally recovered in aliquid phase (propane, butane, pentane,and gas condensate); or

(C) Convert methane in one integratedconversion into liquid fuels that are oth-erwise produced from petroleum.

(iii) Petroleum—(A) Qualifying activ-ities. An activity constitutes processing orrefining of petroleum if the end productsof these processes are not plastics or sim-ilar petroleum derivatives and the activityis performed to:

(1) Physically separate crude oil intoits component parts, including, but notlimited to, naphtha, gasoline, kerosene,fuel oil, lubricating base oils, waxes andsimilar products;

(2) Chemically convert the physicallyseparated components if one or more ofthe products of the conversion are recom-bined with other physically separatedcomponents of crude oil in a manner thatis necessary to the cost effective produc-tion of gasoline or other fuels (for exam-ple, gas oil converted to naphtha through acracking process that is hydrotreated andcombined into gasoline); or

(3) Physically separate products cre-ated through activities described in para-graph (c)(5)(iii)(A)(1) or (2) of this sec-tion.

(B) Non-qualifying activities. For pur-poses of this section, the following prod-ucts are not obtained through processingof petroleum:

(1) Heat, steam, or electricity producedby the refining processes;

(2) Products that are obtained fromthird parties or produced onsite for use inthe refinery, such as hydrogen, if excessamounts are sold; and

(3) Any product that results from fur-ther chemical change of the product pro-duced from the separation of the crude oilif it is not combined with other productsseparated from the crude oil (for example,production of petroleum coke from heavy(refinery) residuum qualifies, but any up-grading of petroleum coke (such as toanode-grade coke) does not qualify be-cause it is further chemically changed).

May 26, 2015 Bulletin No. 2015–211002

(iv) Ores and minerals. An activityconstitutes processing or refining of oresand minerals if it meets the definition ofmining processes under § 1.613–4(f)(1)(ii) or refining under § 1.613–4(g)(6)(iii). Generally, refining of oresand minerals is any activity that elimi-nates impurities or foreign matter fromsmelted or partially processed metallicand nonmetallic ores and minerals, as forexample the refining of blister copper.

(v) Timber. An activity constitutes pro-cessing of timber if it is performed tomodify the physical form of timber, in-cluding by the application of heat or pres-sure to timber, without adding any foreignsubstances. Processing of timber does notinclude activities that add chemicals orother foreign substances to timber to ma-nipulate its physical or chemical proper-ties, such as using a digester to producepulp. Products that result from timber pro-cessing include wood chips, sawdust,rough lumber, kiln-dried lumber, veneers,wood pellets, wood bark, and rough poles.Products that are not the result of timberprocessing include pulp, paper, paperproducts, treated lumber, oriented strandboard/plywood, and treated poles.

(vi) Fertilizer. [Reserved](6) Transportation. Transportation is

the movement of minerals or natural re-sources and products produced underparagraph (c)(4) or (5) of this section,including by pipeline, barge, rail, or truck,except for transportation (not includingpipeline transportation) to a place thatsells or dispenses to retail customers. Re-tail customers do not include a personwho acquires oil or gas for refining orprocessing, or a utility. The following ac-tivities qualify as transportation—

(i) Providing storage services;(ii) Terminalling;(iii) Operating gathering systems and

custody transfer stations;(iv) Operating pipelines, barges, rail, or

trucks; and(v) Construction of a pipeline only to

the extent that a pipe is run to connect aproducer or refiner to a preexisting inter-state or intrastate line owned by the pub-licly traded partnership (interconnectagreements).

(7) Marketing. An activity constitutesmarketing if it is performed to facilitatesale of minerals or natural resources and

products produced under paragraph (c)(4)or (5) of this section, including blendingadditives into fuels. Marketing does notinclude activities and assets involved pri-marily in retail sales (sales made in smallquantities directly to end users), whichincludes, but is not limited to, operation ofgasoline service stations, home heating oildelivery services, and local gas deliveryservices.

(d) Intrinsic activities—(1) General re-quirements. An activity is an intrinsic ac-tivity only if the activity is specialized tosupport a section 7704(d)(1)(E) activity, isessential to the completion of the section7704(d)(1)(E) activity, and requires theprovision of significant services to supportthe section 7704(d)(1)(E) activity. Whetheran activity is an intrinsic activity is deter-mined on an activity-by-activity basis.

(2) Specialization. An activity is a spe-cialized activity if:

(i) The partnership provides personnel toperform or support a section 7704(d)(1)(E)activity and those personnel have receivedtraining unique to the mineral or naturalresource industry that is of limited utilityother than to perform or support a section7704(d)(1)(E) activity; and

(ii) To the extent that the activity in-cludes the sale, provision, or use of prop-erty, either:

(A) The property is primarily tangibleproperty that is dedicated to, and has limitedutility outside of, section 7704(d)(1)(E) ac-tivities and is not easily converted (based onall the facts and circumstances, includingthe cost to convert the property) to anotheruse other than supporting or performing thesection 7704(d)(1)(E) activities; or

(B) The property is used as an injectantto perform a section 7704(d)(1)(E) activ-ity that is also commonly used outside ofsection 7704(d)(1)(E) activities (such aswater, lubricants, and sand) and, as part ofthe activity, the partnership also collectsand cleans, recycles, or otherwise dis-poses of the injectant after use in accor-dance with federal, state, or local regula-tions concerning waste products frommining or production activities.

(3) Essential—(i) An activity is essen-tial to the section 7704(d)(1)(E) activity ifit is required to—

(A) Physically complete a section7704(d)(1)(E) activity (including in a cost

effective manner, such as by making theactivity economically viable), or

(B) Comply with federal, state, or locallaw regulating the section 7704(d)(1)(E)activity.

(ii) Legal, financial, consulting, ac-counting, insurance, and other similar ser-vices do not qualify as essential to a sec-tion 7704(d)(1)(E) activity.

(4) Significant services—(i) An activ-ity requires significant services to supportthe section 7704(d)(1)(E) activity if itmust be conducted on an ongoing or fre-quent basis by the partnership’s personnelat the site or sites of the section7704(d)(1)(E) activities. Alternatively,those services may be conducted offsite ifthe services are performed on an ongoingor frequent basis and are offered exclu-sively to those engaged in one or moresection 7704(d)(1)(E) activities. Whetherservices are conducted on an ongoing orfrequent basis is determined based on allthe facts and circumstances, including rec-ognized best practices in the relevant in-dustry.

(ii) Partnership personnel perform sig-nificant services only if those services arenecessary for the partnership to performan activity that is essential to the section7704(d)(1)(E) activity, or to support thesection 7704(d)(1)(E) activity.

(iii) An activity does not constitute sig-nificant services with respect to a section7704(d)(1)(E) activity if the activity prin-cipally involves the design, construction,manufacturing, repair, maintenance, lease,rent, or temporary provision of property.

(e) Examples. The following examplesillustrate the provisions of this section:

Example 1. Petrochemical products sourcedfrom an oil and gas well. (i) Z, a publicly tradedpartnership, chemically converts a mixture of ethaneand propane (obtained from physical separation ofnatural gas) into ethylene, propylene, and other gasesthrough use of a steam cracker.

(ii) Z’s activities chemically convert physicallyseparated components of natural gas. The chemicalconversion of physically separated components ofnatural gas (ethane and propane) is not an activitythat gives rise to qualifying income under paragraph(c)(5)(ii) of this section. Therefore, the income Zreceives from the sale of ethylene and propylene isnot qualifying income for purposes of section7704(d)(1)(E).

Example 2. Petroleum streams chemically con-verted into refinery grade olefins byproducts. (i) Y, apublicly traded partnership, owns a petroleum refin-ery. Y classifies Y’s assets used in the activity de-scribed in this paragraph under MACRS class 13.3

Bulletin No. 2015–21 May 26, 20151003

(Petroleum Refining). The refinery physically sepa-rates crude oil, obtaining heavy gas oil. The refinerythen uses a catalytic cracking unit to chemicallyconvert the heavy gas oil into a liquid stream suitablefor gasoline blending and a gas stream containingethane, ethylene, and other gases. The refinery alsofurther physically separates the gas steam withoutadditional chemical change, resulting in refinerygrade ethylene. Y sells the ethylene to a third party.

(ii) Y’s activities are performed to physicallyseparate crude oil into its component parts and tochemically convert the separated heavy gas oil into aliquid stream for recombining with other physicallyseparated components of crude oil. Y has classifiedits assets used in that activity under an appropriateMACRS code pursuant to paragraph (c)(5)(i) of thissection. Income Y receives from the liquid stream isqualifying income pursuant to paragraph(c)(5)(iii)(A)(2) of this section. Y’s further physicalseparation of the gas stream produces ethane, ethyl-ene, and other gases. Pursuant to paragraph(c)(5)(iii)(A)(3), income Y receives from the physi-cally separated gases is qualifying income becausethe heavy gas oil was chemically converted as part ofa processing activity pursuant to paragraph(c)(5)(iii)(A)(2) of this section.

Example 3. Processing methane gas into syn-thetic fuels through chemical change. (i) Y, a pub-licly traded partnership, chemically converts meth-ane into methanol and synthesis gas, and furtherchemically converts those products into gasoline anddiesel fuel. Y receives income from sales of gasolineand diesel created during the conversion processes,as well as from sales of methanol.

(ii) With respect to the production of gasoline ordiesel, Y is engaged in the processing of natural gasas provided in paragraph (c)(5)(ii)(C) of this section.The production and sale of methanol, an intermedi-ate product in the conversion process, is not a section7704(d)(1)(E) activity because methanol is not aliquid fuel otherwise produced from the processingof crude oil.

Example 4. Delivery of refined products. (i) X, apublicly traded partnership, sells diesel and lubricat-ing oils to a government entity at wholesale pricesand delivers those goods in bulk.

(ii) X’s sale of refined products to the govern-ment entity is a section 7704(d)(1)(E) activity be-cause it is a bulk transportation and sale as describedin paragraphs (c)(6) and (7) of this section and is nota retail sale.

Example 5. Delivery of water. (i) X, a publiclytraded partnership, owns interstate and intrastate nat-ural gas pipelines. X built a water delivery pipelinealong the existing right of way for its natural gaspipeline to deliver water to A for use in A’s fractur-ing activity. A uses the delivered water in fracturingto develop A’s natural gas reserve in a cost-efficientmanner. X earns income for transporting natural gasin the pipelines and for delivery of water.

(ii) X’s income from transporting natural gas inits interstate and intrastate pipelines is qualifyingincome for purposes of section 7704(c) becausetransportation of natural gas is a section7704(d)(1)(E) activity as provided in paragraph(c)(6) of this section.

(iii) The income X obtains from its water deliv-ery services is not a section 7704(d)(1)(E) activity as

provided in paragraph (c) of this section. However,because X’s water delivery supports A’s develop-ment of natural gas, a section 7704(d)(1)(E) activity,X’s income from water delivery services may bequalifying income for purposes of section 7704(c) ifthe water delivery service is an intrinsic activity asprovided in paragraph (d) of this section. An activityis an intrinsic activity if the activity is specialized tonarrowly support the section 7704(d)(1)(E) activity,is essential to the completion of the section7704(d)(1)(E) activity, and requires the provision ofsignificant services to support the section7704(d)(1)(E) activity. Under paragraph (d)(2)(ii)(B)of this section, the provision of water used in asection 7704(d)(1)(E) activity is specialized to thatactivity only if the partnership also collects andcleans, recycles, or otherwise disposes of the waterafter use in accordance with federal, state, or localregulations concerning waste products from miningor production activities. Because X does not collectand clean, recycle, or otherwise dispose of the de-livered water after use, X’s water delivery activitiesare not specialized to narrowly support the section7704(d)(1)(E) activity. Thus, X’s water delivery isnot an intrinsic activity. Accordingly, X’s incomefrom the delivery of water is not qualifying incomefor purposes of section 7704(c).

Example 6. Delivery of water and recovery andrecycling of flowback. (i) Assume the same facts asin Example 5, except that X also collects and treatsflowback at the drilling site in accordance with stateregulations as part of its water delivery services andtransports the treated flowback away from the site. Inconnection with these services, X provides personnelto perform these services on an ongoing or frequentbasis that is consistent with best industry practices. Xhas provided these personnel with specialized train-ing regarding the recovery and recycling of flowbackproduced during the development of natural gas, andthis training is of limited utility other than to performor support the development of natural gas.

(ii) The income X obtains from its water deliveryservices is not a section 7704(d)(1)(E) activity asprovided in paragraph (d) of this section. However,because X’s water delivery supports A’s develop-ment of natural gas, a section 7704(d)(1)(E) activity,X’s income from water delivery services may bequalifying income for purposes of section 7704(c) ifthe water delivery service is an intrinsic activity asprovided in paragraph (d) of this section.

(iii) An activity is an intrinsic activity if theactivity is specialized to narrowly support the section7704(d)(1)(E) activity, is essential to the completionof the section 7704(d)(1)(E) activity, and requiresthe provision of significant services to support thesection 7704(d)(1)(E) activity. Under paragraph(d)(2)(ii)(B) of this section, the provision of waterused in a section 7704(d)(1)(E) activity is special-ized to that activity only if the partnership alsocollects and cleans, recycles, or otherwise disposesof the water after use in accordance with federal,state, or local regulations concerning waste productsfrom mining or production activities. X’s provisionof personnel is specialized because those personnelreceived training regarding the recovery and recy-cling of flowback produced during the developmentof natural gas, and this training is of limited utilityother than to perform or support the development of

natural gas. The provision of water is also special-ized because water is an injectant used to perform asection 7704(d)(1)(E) activity, and X also collectsand treats flowback in accordance with state regula-tions as part of its water delivery services. Therefore,X meets the specialized requirement. The delivery ofwater is essential to support A’s development activ-ity because the water is needed for use in fracturingto develop A’s natural gas reserve in a cost-efficientmanner. Finally, the water delivery and recovery andrecycling activities require significant services tosupport the development activity because X’s per-sonnel provide services necessary for the partnershipto perform the support activity at the developmentsite on an ongoing or frequent basis that is consistentwith best industry practices. Because X’s delivery ofwater and X’s collection, transport, and treatment offlowback is a specialized activity, is essential to thecompletion of a section 7704(d)(1)(E) activity, andrequires significant services, the delivery of waterand the transport and treatment of flowback is anintrinsic activity. X’s income from the delivery ofwater and the collection, treatment, and transport offlowback is qualifying income for purposes of sec-tion 7704(c).

(f) Proposed Effective/ApplicabilityDate and Transition Rule—(i) Except asprovided in paragraph (f)(ii) of this sec-tion, this section is proposed to apply toincome earned by a partnership in a tax-able year beginning on or after the datethese regulations are published as finalregulations in the Federal Register. Para-graph (f)(ii) of this section applies duringthe Transition Period, which ends on thelast day of the partnership’s taxable yearthat includes the date that is ten years afterthe date that these regulations are pub-lished as final regulations in the FederalRegister.

(ii) A partnership may treat incomefrom an activity as qualifying income dur-ing the Transition Period if:

(A) The partnership received a privateletter ruling from the IRS holding that theincome from that activity is qualifyingincome;

(B) Prior to May 6, 2015, the partner-ship was publicly traded, engaged in theactivity, and treated the activity as givingrise to qualifying income under section7704(d)(1)(E), and that income was qual-ifying income under the statute as reason-ably interpreted prior to the issuance ofthese proposed regulations; or

(C) The partnership is publicly tradedand engages in the activity after May 6,2015 but before the date these regulationsare published as final regulations in theFederal Register, and the income from

May 26, 2015 Bulletin No. 2015–211004

that activity is qualifying income underthese proposed regulations.

John Dalrymple,Deputy Commissioner for Services and

Enforcement.


Notice of ProposedRulemaking

Notional PrincipalContracts; Swaps withNonperiodic Payments

REG–102656–15


ACTION: Withdrawal of notice of pro-posed rulemaking; notice of proposedrulemaking by cross-reference to tempo-rary regulations.

SUMMARY: In the Rules and Regula-tions section of this issue of the FederalRegister, the IRS is issuing final and tem-porary regulations that amend the treat-ment of nonperiodic payments made orreceived pursuant to certain notional prin-cipal contracts. These regulations providethat, subject to certain exceptions, a no-tional principal contract with a nonperi-odic payment, regardless of whether it issignificant, must be treated as two sepa-rate transactions consisting of one or moreloans and an on-market, level paymentswap. The regulations provide an excep-tion from the definition of United Statesproperty. These regulations affect partiesmaking and receiving payments under no-tional principal contracts, includingUnited States shareholders of controlledforeign corporations and tax-exempt orga-nizations. The text of the temporary reg-ulations also serves as the text of theseproposed regulations. This documentwithdraws the notice of proposed rule-making (REG–107548–11; RIN 1545–BK10) published in the Federal Registeron May 11, 2012 (77 FR 27669).

DATES: Comments and requests for apublic hearing must be received by Au-gust 6, 2015.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG–102656–15), room5203, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand-delivered Monday through Friday be-tween the hours of 8 a.m. and 4 p.m. toCC:PA:LPD:PR (REG–102656–15), Cou-rier’s Desk, Internal Revenue Service, 1111Constitution Avenue NW., Washington, DC20224, or sent electronically via the FederaleRulemaking Portal at www.regulations.gov(IRS REG–102656–15).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations under section 446, Alexa T.Dubert or Anna H. Kim at (202) 317-6895; concerning the proposed regula-tions under section 956, Kristine A.Crabtree at (202) 317-6934; concerningsubmissions of comments or to request apublic hearing, Oluwafunmilayo Taylor,(202) 317-6901 (not toll-free numbers).


Background and Explanation ofProvisions

On May 11, 2012, the Treasury De-partment and the IRS published temporaryregulations under section 956 (TD 9589)in the Federal Register (77 FR 27612).On the same date, a notice of proposedrulemaking (REG–107548–11) by cross-reference to the temporary regulationswas published in the Federal Register(77 FR 27669). This document withdrawsthose proposed regulations (REG–107548–11; RIN 1545–BK10) and pro-vides new proposed regulations (REG–102656–15).

Final and temporary regulations in theRules and Regulations section of this is-sue of the Federal Register amend theIncome Tax Regulations (26 CFR Part 1).The final and temporary regulations amendthe regulations under section 446 of the In-ternal Revenue Code (Code) relating to thetreatment of nonperiodic payments made orreceived pursuant to certain notional princi-pal contracts for U.S. federal income taxpurposes. The final and temporary regula-tions also amend the regulations under sec-

tion 956 of the Code regarding an excep-tion from the definition of United Statesproperty. The text of the final and tempo-rary regulations also serves as the text ofthese proposed regulations. The preambleto the final and temporary regulations ex-plains those regulations and these pro-posed regulations.

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 13653. Therefore, a reg-ulatory assessment is not required. It alsohas been determined that section 553(b) ofthe Administrative Procedure Act (5U.S.C. chapter 5) does not apply to theseregulations, and because these regulationsdo not impose a collection of informationon 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 entities.

Comments and Requests for PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any comments that aresubmitted timely to the IRS as prescribedin this preamble under the “Addresses”heading. The Treasury Department andthe IRS request comments on all aspectsof the proposed rules. All comments willbe available at www.regulations.gov orupon request. A public hearing will bescheduled if requested in writing by anyperson that timely submits written com-ments. If a public hearing is scheduled,notice of the date, time, and place for thehearing will be published in the FederalRegister.

Drafting information

The principal authors of these regula-tions are Alexa T. Dubert and Anna H.Kim of the Office of Associate ChiefCounsel (Financial Institutions and Prod-ucts). However, other personnel from the

Bulletin No. 2015–21 May 26, 20151005

Treasury Department and the IRS partic-ipated in their development.

* * * * *

Withdrawal of Notice of ProposedRulemaking

Accordingly, under the authority of 26U.S.C. 7805, the notice of proposed rule-making (REG–107548–11 and RIN1545–BK10) that was published in theFederal Register on May 11, 2012 (77FR 27669) is withdrawn.





Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.446–3 is amended by:1. Revising paragraph (g)(4).2. Revising paragraph (g)(6), Examples

2, 3 and 4.3. Revising paragraph (j)(2).

The revisions read as follows:

§ 1.446–3 Notional principal contracts.

* * * * *(g) * * *(4) [The text of the proposed amend-

ment to § 1.446–3(g)(4) is the same as thetext of § 1.446–3T(g)(4) published else-where in this issue of the Federal Regis-ter].

* * * * *(6) * * *Example 2. [The text of proposed amendment to

§ 1.446–3(g)(6) Example 2 is the same as the text of§ 1.446–3T(g)(6) Example 2 published elsewhere inthis issue of the Federal Register].

Example 3. [The text of proposed amendment to§ 1.446–3(g)(6) Example 3 is the same as the text of§ 1.446–3T(g)(6) Example 3 published elsewhere inthis issue of the Federal Register].

Example 4. [The text of proposed amendment to§ 1.446–3(g)(6) Example 4 is the same as the text of§ 1.446–3T(g)(6) Example 4 published elsewhere inthis issue of the Federal Register].

* * * * *(j) * * *(2) [The text of the proposed amend-

ment to § 1.446–3(j)(2) is the same as thetext of § 1.446–3T(j)(2) published else-

where in this issue of the Federal Regis-ter].

Par. 3. Section 1.956–2 is amended byrevising paragraphs (b)(1)(xi) and (f) toread as follows:

§ 1.956–2 Definition of United Statesproperty.

* * * * *(b)(1)(xi) [The text of this proposed

amendment is the same as the text of§ 1.956–2T(b)(1)(xi) published elsewherein this issue of the Federal Register].

* * * * *(f) [The text of this proposed amend-

ment is the same as the text of § 1.956–2T(f) published elsewhere in this issue ofthe Federal Register].

John M. DalrympleDeputy Commissioner for



May 26, 2015 Bulletin No. 2015–211006

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bulletin No. 2015–21 May 26, 2015i

Numerical Finding List1

Bulletin 2015–1 through 2015–21

Announcements:

2015-1, 2015-11 I.R.B. 7582015-2, 2015-3 I.R.B. 3242015-3, 2015-3 I.R.B. 3282015-4, 2015-5 I.R.B. 5652015-5, 2015-7 I.R.B. 6022015-6, 2015-8 I.R.B. 6852015-7, 2015-13 I.R.B. 8232015-8, 2015-9 I.R.B. 6982015-10, 2015-11 I.R.B. 7582015-11, 2015-15 I.R.B. 8832015-12, 2015-12 I.R.B. 7702015-13, 2015-15 I.R.B. 9082015-14, 2015-20 I.R.B. 971

Proposed Regulations:

REG-109187-11, 2015-2 I.R.B. 277REG-132751-14, 2015-2 I.R.B. 279REG-145878-14, 2015-2 I.R.B. 290REG-153656-3, 2015-5 I.R.B. 566REG-102648-15, 2015-10 I.R.B. 745REG-136018-13, 2015-11 I.R.B. 759REG-143416-14, 2015-11 I.R.B. 757REG-100400-14, 2015-12 I.R.B. 779REG-132253-11, 2015-12 I.R.B. 771REG-143040-11, 2015-13 I.R.B. 827REG-133489-13, 2015-16 I.R.B. 926REG-103281-11, 2015-19 I.R.B. 948REG-107595-11, 2015-21 I.R.B. 986REG-132634-14, 2015-21 I.R.B. 997REG-102656-15, 2015-21 I.R.B. 1005

Notices:

2015-1, 2015-2 I.R.B. 2492015-2, 2015-4 I.R.B. 3342015-3, 2015-6 I.R.B. 5832015-4, 2015-5 I.R.B. 4072015-5, 2015-5 I.R.B. 4082015-6, 2015-5 I.R.B. 4122015-7, 2015-6 I.R.B. 5852015-8, 2015-6 I.R.B. 5892015-9, 2015-6 I.R.B. 5902015-10, 2015-20 I.R.B. 9652015-11, 2015-8 I.R.B. 6182015-15, 2015-9 I.R.B. 6872015-12, 2015-8 I.R.B. 7002015-13, 2015-10 I.R.B. 7222015-14, 2015-10 I.R.B. 7222015-16, 2015-10 I.R.B. 7322015-17, 2015-14 I.R.B. 8452015-19, 2015-9 I.R.B. 6902015-20, 2015-11 I.R.B. 7542015-18, 2015-12 I.R.B. 7652015-21, 2015-12 I.R.B. 765

Notices:—Continued

2015-22, 2015-12 I.R.B. 7682015-23, 2015-12 I.R.B. 7692015-24, 2015-13 I.R.B. 8112015-25, 2015-13 I.R.B. 8142015-26, 2015-13 I.R.B. 8142015-27, 2015-13 I.R.B. 8162015-28, 2015-14 I.R.B. 8482015-29, 2015-15 I.R.B. 8732015-30, 2015-17 I.R.B. 9282015-31, 2015-17 I.R.B. 9292015-32, 2015-20 I.R.B. 9672015-33, 2015-18 I.R.B. 9342015-34, 2015-18 I.R.B. 9422015-35, 2015-18 I.R.B. 9432015-37, 2015-19 I.R.B. 9472015-38, 2015-21 I.R.B. 984

Revenue Procedures:

2015-1, 2015-1 I.R.B. 12015-2, 2015-1 I.R.B. 1052015-3, 2015-1 I.R.B. 1292015-4, 2015-1 I.R.B. 1442015-5, 2015-1 I.R.B. 1862015-6, 2015-1 I.R.B. 1942015-7, 2015-1 I.R.B. 2312015-8, 2015-1 I.R.B. 2352015-9, 2015-2 I.R.B. 2492015-10, 2015-2 I.R.B. 2612015-12, 2015-2 I.R.B. 2652015-13, 2015-5 I.R.B. 4192015-14, 2015-5 I.R.B. 4502015-15, 2015-5 I.R.B. 5642015-16, 2015-7 I.R.B. 5962015-17, 2015-7 I.R.B. 5992015-18, 2015-8 I.R.B. 6422015-19, 2015-8 I.R.B. 6782015-20, 2015-9 I.R.B. 6942015-21, 2015-13 I.R.B. 8172015-22, 2015-11 I.R.B. 7542015-23, 2015-13 I.R.B. 8202015-24, 2015-13 I.R.B. 8222015-25, 2015-14 I.R.B. 8482015-26, 2015-15 I.R.B. 8752015-27, 2015-16 I.R.B. 9142015-28, 2015-16 I.R.B. 9202015-29, 2015-15 I.R.B. 8822015-30, 2015-20 I.R.B. 970

Revenue Rulings:

2015-1, 2015-4 I.R.B. 3312015-2, 2015-3 I.R.B. 3212015-3, 2015-6 I.R.B. 5802015-4, 2015-10 I.R.B. 7432015-5, 2015-13 I.R.B. 7882015-6, 2015-13 I.R.B. 8012015-7, 2015-14 I.R.B. 8492015-8, 2015-18 I.R.B. 945

Revenue Rulings:—Continued

2015-9, 2015-21 I.R.B. 9722015-10, 2015-21 I.R.B. 9732015-11, 2015-21 I.R.B. 975

Treasury Decisions:

9707, 2015-2 I.R.B. 2479708, 2015-5 I.R.B. 3379709, 2015-7 I.R.B. 5939710, 2015-8 I.R.B. 6039711, 2015-11 I.R.B. 7489712, 2015-11 I.R.B. 7509713, 2015-13 I.R.B. 8029714, 2015-14 I.R.B. 8319715, 2015-15 I.R.B. 8519716, 2015-15 I.R.B. 8639717, 2015-16 I.R.B. 9109718, 2015-15 I.R.B. 8669719, 2015-21 I.R.B. 977

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2014–27 through 2014–52 is in Internal Revenue Bulletin2014–52, dated December 28, 2014.

May 26, 2015 Bulletin No. 2015–21ii

Finding List of Current Actions onPreviously Published Items1

Bulletin 2015–1 through 2015–21

Announcements:

2010-3Amplified byAnn. 2015-3, 2015-3 I.R.B. 328

Revenue Procedures:

2014-01Superseded byRev. Proc. 2015-01, 2015-01 I.R.B. 1










2011-14Modified byRev. Proc. 2015-12, 2015-2 I.R.B. 265


Revenue Procedures:—Continued

2011-14Amplified byRev. Proc. 2015-13, 2015-5 I.R.B. 419

2011-14Clarified byRev. Proc. 2015-13, 2015-5 I.R.B. 419

1997-27Clarified byRev. Proc. 2015-13, 2015-5 I.R.B. 419









2002-43Obsoleted byRev. Proc. 2015-26, 2015-15 I.R.B. 875

Revenue Rulings:

92-19Supplemented byRev. Rul. 2015-02, 2015-3 I.R.B. 321

78-130Revoked byRev. Rul. 2015-9, 2015-21 I.R.B. 972

Revenue Rulings:—Continued



Notices:

2013-01Modified byNotice 2015-20, 2015-11 I.R.B. 754

2013-01Superseded byNotice 2015-20, 2015-11 I.R.B. 754

2014-24Obsoleted byNotice 2015-29, 2015-15 I.R.B. 882

1997-19Modified byNotice 2015-38, 2015-21 I.R.B. 984





1A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2014–27 through 2014–52 is in Internal Revenue Bulletin 2014–52, dated December 28,2014.

Bulletin No. 2015–21 May 26, 2015iii

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