Td 9943

5496

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

Internal Revenue Service

§ 1.1256(e)–2, Pamela Lew, (202) 317–
7053 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:

26 CFR Part 1

Background

DEPARTMENT OF THE TREASURY

[TD 9943]
RIN 1545–BP73

Additional Guidance Regarding
Limitation on Deduction for Business
Interest Expense
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

This document contains final
regulations that provide additional
guidance regarding the limitation on the
deduction for business interest expense
under section 163(j) of the Internal
Revenue Code (Code) to reflect
amendments made by the Tax Cuts and
Jobs Act and the Coronavirus Aid,
Relief, and Economic Security Act.
Specifically, the regulations address the
application of the limitation in contexts
involving passthrough entities,
regulated investment companies (RICs),
and controlled foreign corporations. The
regulations also provide guidance
regarding the definitions of real
property development, real property
redevelopment, and syndicate. The
regulations affect taxpayers that have
business interest expense, particularly
passthrough entities, their partners and
shareholders, as well as foreign
corporations and their United States
shareholders. The regulations also affect
RICs that have business interest income,
RIC shareholders that have business
interest expense, and corporations that
are members of a consolidated group.
DATES:
Effective date: The regulations are
effective on January 13, 2021.
Applicability dates: For dates of
applicability, see §§ 1.163–15(b),
1.163(j)–1(c)(4), 1.163(j)–2(k), 1.163(j)–6,
1.163(j)–7(m), 1.163(j)–10(f), 1.469–
11(a)(1) and (4), and 1.1256(e)–2(d).
FOR FURTHER INFORMATION CONTACT:
Concerning § 1.163–15, or 1.163(j)–
2(d)(3), Nathaniel Kupferman, (202)
317–4855, or James Williford, (202)
317–3225; concerning § 1.163(j)–
1(b)(1)(iv), § 1.163(j)–2(b)(3)(iii) or (iv)
or § 1.163(j)–10, John B. Lovelace, (202)
317–5357; concerning § 1.163(j)–1(b)(22)
or (b)(35), Steven Harrison, (202) 317–
6842, or Michael Chin, (202) 317–6842;
concerning § 1.163(j)–6, § 1.469–4 or
§ 1.469–9, Vishal Amin, Brian Choi, or
Jacob Moore, (202) 317–5279;
concerning § 1.163(j)–7, Azeka J.
Abramoff, (202) 317–3800, or Raphael J.
Cohen, (202) 317–6938; concerning

khammond on DSKJM1Z7X2PROD with RULES4

SUMMARY:

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

I. Statutory Background
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) under sections 163 (in particular,
section 163(j)), 469, and 1256(e) of the
Code. Section 163(j) was amended by
Public Law 115–97, 131 Stat. 2054
(December 22, 2017), commonly
referred to as the Tax Cuts and Jobs Act
(TCJA), and the Coronavirus Aid, Relief,
and Economic Security Act, Public Law
116–136, 134 Stat. 281 (March 27, 2020)
(CARES Act). Section 13301(a) of the
TCJA amended section 163(j) by
removing prior section 163(j)(1) through
(9) and adding section 163(j)(1) through
(10). The provisions of section 163(j) as
amended by section 13301 of the TCJA
are effective for taxable years beginning
after December 31, 2017. The CARES
Act further amended section 163(j) by
redesignating section 163(j)(10), as
amended by the TCJA, as new section
163(j)(11), and adding a new section
163(j)(10) providing special rules for
applying section 163(j) to taxable years
beginning in 2019 or 2020.
Section 163(j) generally limits the
amount of business interest expense
(BIE) that can be deducted in the current
taxable year (sometimes referred to in
this preamble as the current year).
Under section 163(j)(1), the amount
allowed as a deduction for BIE is
limited to the sum of (1) the taxpayer’s
business interest income (BII) for the
taxable year; (2) 30 percent of the
taxpayer’s adjusted taxable income
(ATI) for the taxable year (30 percent
ATI limitation); and (3) the taxpayer’s
floor plan financing interest expense for
the taxable year (in sum, the section
163(j) limitation). As further described
later in this Background section, section
163(j)(10), as amended by the CARES
Act, provides special rules relating to
the 30 percent ATI limitation for taxable
years beginning in 2019 or 2020. Under
section 163(j)(2), the amount of any BIE
that is not allowed as a deduction in a
taxable year due to the section 163(j)
limitation is treated as business interest
paid in the succeeding taxable year.
The section 163(j) limitation applies
to all taxpayers, except for certain small
businesses that meet the gross receipts
test in section 448(c) of the Code and
certain trades or businesses listed in
section 163(j)(7) (excepted trades or
businesses). More specifically, section
163(j)(3) provides that the section 163(j)
limitation does not apply to any
taxpayer that meets the gross receipts

PO 00000

Frm 00002

Fmt 4701

Sfmt 4700

test under section 448(c), other than a
tax shelter prohibited from using the
cash receipts and disbursements method
of accounting under section 448(a)(3).
Under section 163(j)(7), the excepted
trades or businesses are the trade or
business of providing services as an
employee, electing real property
businesses, electing farming businesses,
and certain regulated utility businesses.
Section 163(j)(4) provides special
rules for applying section 163(j) in the
case of passthrough entities. Section
163(j)(4)(A) requires that the section
163(j) limitation be applied at the
partnership level, and that a partner’s
ATI be increased by the partner’s share
of excess taxable income, as defined in
section 163(j)(4)(C), but not by the
partner’s distributive share of income,
gain, deduction, or loss. Section
163(j)(4)(B) provides that the amount of
partnership BIE exceeding the section
163(j)(1) limitation is carried forward at
the partner level as excess business
interest expense (EBIE). Section
163(j)(4)(B)(ii) provides that EBIE
allocated to a partner and carried
forward is available to be deducted in a
subsequent year only to the extent that
the partnership allocates excess taxable
income to the partner. As further
described later in this Background
section, section 163(j)(10), as amended
by the CARES Act, provides a special
rule for EBIE allocated to a partner in a
taxable year beginning in 2019. Section
163(j)(4)(B)(iii) provides rules for the
adjusted basis in a partnership of a
partner that is allocated EBIE. Section
163(j)(4)(D) provides that rules similar
to the rules of section 163(j)(4)(A) and
(C) apply to S corporations and S
corporation shareholders.
Section 163(j)(5) and (6) define
‘‘business interest’’ and ‘‘business
interest income,’’ respectively, for
purposes of section 163(j). Generally,
these terms include interest expense
and interest includible in gross income
that is properly allocable to a trade or
business (as defined in section 163(j)(7))
and do not include investment income
or investment expense within the
meaning of section 163(d). The
legislative history states that ‘‘a
corporation has neither investment
interest nor investment income within
the meaning of section 163(d). Thus,
interest income and interest expense of
a corporation is properly allocable to a
trade or business, unless such trade or
business is otherwise explicitly
excluded from the application of the
provision.’’ H. Rept. 115–466, at 386, fn.
688 (2017).
Section 163(j)(8) defines ATI as the
taxable income of the taxpayer (1)
computed without regard to items not

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
properly allocable to a trade or business;
BIE and BII; net operating loss (NOL)
deductions; deductions for qualified
business income under section 199A;
and deductions for depreciation,
amortization, and depletion with
respect to taxable years beginning before
January 1, 2022, and (2) computed with
such other adjustments as provided by
the Secretary of the Treasury or his
delegate (Secretary).
As noted previously, section 163(j)(1)
includes floor plan financing interest in
computing the amount of deductible
business interest. Section 163(j)(9)
defines ‘‘floor plan financing interest’’
and ‘‘floor plan financing
indebtedness.’’ These provisions allow
taxpayers incurring interest expense for
the purpose of securing an inventory of
motor vehicles held for sale or lease to
deduct the full expense without regard
to the section 163(j) limitation.
Under section 163(j)(10)(A)(i), the
amount of BIE that is deductible under
section 163(j)(1) for taxable years
beginning in 2019 or 2020 is computed
using 50 percent, rather than 30 percent,
of the taxpayer’s ATI for the taxable year
(50 percent ATI limitation). A taxpayer
may elect not to apply the 50 percent
ATI limitation to any taxable year
beginning in 2019 or 2020, and instead
apply the 30 percent ATI limitation.
This election must be made separately
for each taxable year. Once the taxpayer
makes the election, the election may not
be revoked without the consent of the
Secretary. See section 163(j)(10)(A)(iii).
Sections 163(j)(10)(A)(ii)(I) and
163(j)(10)(A)(iii) provide that, in the
case of a partnership, the 50 percent ATI
limitation does not apply to
partnerships for taxable years beginning
in 2019, and the election to not apply
the 50 percent ATI limitation may be
made only for taxable years beginning in
2020, and may be made only by the
partnership. Under section
163(j)(10)(A)(ii)(II), however, a partner
treats 50 percent of its allocable share of
a partnership’s EBIE for 2019 as BIE in
the partner’s first taxable year beginning
in 2020 that is not subject to the section
163(j) limitation (50 percent EBIE rule).
The remaining 50 percent of the
partner’s allocable share of the
partnership’s EBIE remains subject to
the section 163(j) limitation applicable
to EBIE carried forward at the partner
level. A partner may elect out of the 50
percent EBIE rule.
Section 163(j)(10)(B)(i) allows a
taxpayer to elect to substitute its ATI for
the last taxable year beginning in 2019
(2019 ATI) for the taxpayer’s ATI for a
taxable year beginning in 2020 (2020
ATI) in determining the taxpayer’s

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

section 163(j) limitation for the taxable
year beginning in 2020.
Section 163(j)(11) provides crossreferences to provisions requiring that
electing farming businesses and electing
real property businesses excepted from
the section 163(j) limitation use the
alternative depreciation system (ADS),
rather than the general depreciation
system, for certain types of property.
The required use of ADS results in the
inability of these electing trades or
businesses to use the additional firstyear depreciation deduction under
section 168(k) for those types of
property.
II. Published Guidance
On April 16, 2018, the Department of
the Treasury (Treasury Department) and
the IRS published Notice 2018–28,
2018–16 I.R.B. 492, which described
regulations intended to be issued under
section 163(j). On December 28, 2018,
the Treasury Department and the IRS (1)
published proposed regulations under
section 163(j), as amended by the TCJA,
in a notice of proposed rulemaking
(REG–106089–18) (2018 Proposed
Regulations) in the Federal Register (83
FR 67490), and (2) withdrew the notice
of proposed rulemaking (1991–2 C.B.
1040) published in the Federal Register
on June 18, 1991 (56 FR 27907 as
corrected by 56 FR 40285 (August 14,
1991)) to implement rules under section
163(j) before its amendment by the
TCJA. On September 14, 2020, the
Treasury Department and the IRS
published final regulations under
section 163(j) and other sections in the
Federal Register (85 FR 56686) (T.D.
9905) to finalize most sections of the
2018 Proposed Regulations.
Concurrently with the publication of
T.D. 9905, the Treasury Department and
the IRS published additional proposed
regulations under section 163(j) in a
notice of proposed rulemaking (REG–
107911–18) in the Federal Register (85
FR 56846) (2020 Proposed Regulations)
to provide additional guidance
regarding the section 163(j) limitation in
response to certain comments received
in response to the 2018 Proposed
Regulations and to reflect the
amendments made by the CARES Act.
The 2020 Proposed Regulations
provided proposed rules: For allocating
interest expense associated with debt
proceeds of a partnership or S
corporation to supplement the rules in
§ 1.163–8T regarding the allocation of
interest expense for purposes of section
163(d) and (h) and section 469
(proposed §§ 1.163–14 and 1.163–15);
amending the definition of ATI and
permitting certain RICs to pay section
163(j) interest dividends (proposed

PO 00000

Frm 00003

Fmt 4701

Sfmt 4700

5497

§ 1.163(j)–1); amending the rules for
applying section 163(j)(4) to
partnerships and S corporations
(proposed § 1.163(j)–6); re-proposing the
proposed rules for applying the section
163(j) limitation to foreign corporations
and United States shareholders
(proposed § 1.163(j)–7) and to foreign
persons with effectively connected
income (proposed § 1.163(j)–8);
amending the definition of real property
trade or business (proposed § 1.469–9);
amending the rules for determining tax
shelter status and providing guidance
on the election to use 2019 ATI to
determine 2020 section 163(j) limitation
(proposed §§ 1.163(j)–2 and 1.1256(e)–
2); and amending the corporate lookthrough rules as applicable to tiered
structures (proposed § 1.163(j)–10).
All written comments received in
response to the 2020 Proposed
Regulations are available at
www.regulations.gov or upon request.
After consideration of the comments
received, this Treasury decision adopts
most of the 2020 Proposed Regulations
as revised in response to the comments,
which are described in the Summary of
Comments and Explanation of Revisions
section. The Treasury Department and
the IRS plan to finalize other portions of
the 2020 Proposed Regulations
separately, to allow additional time to
consider the comments received.
On April 27, 2020, the Treasury
Department and the IRS published
Revenue Procedure 2020–22, 2020–18
I.R.B. 745, to provide the time and
manner of making a late election, or
withdrawing an election, under section
163(j)(7)(B) to be an electing real
property trade or business or under
section 163(j)(7)(C) to be an electing
farming business for taxable years
beginning in 2018, 2019, or 2020.
Revenue Procedure 2020–22 also
provides the time and manner of making
or revoking elections provided by the
CARES Act under section 163(j)(10) for
taxable years beginning in 2019 or 2020.
These elections are: (1) To not apply the
50 percent ATI limitation under section
163(j)(10)(A)(iii); (2) to use the
taxpayer’s 2019 ATI to calculate the
taxpayer’s section 163(j) limitation for
any taxable year beginning in 2020
under section 163(j)(10)(B); and (3) for
a partner to elect out of the 50 percent
EBIE rule under section
163(j)(10)(A)(ii)(II).
Summary of Comments and
Explanation of Revisions
I. Overview
The Treasury Department and the IRS
received approximately 20 written
comments in response to the 2020

E:\FR\FM\19JAR4.SGM

19JAR4

5498

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

Proposed Regulations. Most of the
comments addressing the 2020
Proposed Regulations are summarized
in this Summary of Comments and
Explanation of Revisions section.
However, comments merely
summarizing or interpreting the 2020
Proposed Regulations generally are not
discussed in this preamble.
Additionally, comments outside the
scope of this rulemaking are generally
not addressed in this Summary of
Comments and Explanation of Revisions
section.
The Treasury Department and the IRS
continue to study comments on certain
issues related to section 163(j),
including issues that are beyond the
scope of the final regulations, and may
discuss those comments if future
guidance on those issues is published.
The final regulations retain the same
basic structure as the 2020 Proposed
Regulations, with the revisions
described in this Summary of
Comments and Explanation of Revisions
section.

through (E) and the alternative
computations for those negative
adjustments in proposed § 1.163(j)–
1(b)(1)(iv)(B) and (E). Part III.A.1.b of
this Summary of Comments and
Explanation of Revisions section
provides an overview of the special
rules in § 1.163(j)–1(b)(1)(iv)(A), (C), and
(D) for the application of § 1.163(j)–
1(b)(1)(ii)(C) through (E). Part III.A.2 of
this Summary of Comments and
Explanation of Revisions section
summarizes the comments received on
§ 1.163(j)–1(b)(1)(ii)(C) through (E) and
the alternative computations in
proposed § 1.163(j)–1(b)(1)(iv)(B) and
(E). Part III.A.3 of this Summary of
Comments and Explanation of Revisions
section summarizes the comments
received on the special rules in
§ 1.163(j)–1(b)(1)(iv)(A), (C), and (D).
In response to comments received, the
final regulations provide a number of
clarifications to the ATI computation
and provide new examples
demonstrating their application.

II. Notice 89–35 and Comments on and
Changes to Proposed § 1.163–15: Debt
Proceeds Distributed From Any
Taxpayer Account or From Cash

a. Section 1.163(j)–1(b)(1)(ii)(C) Through
(E) and Proposed § 1.163(j)–
1(b)(1)(iv)(B) and (E)

Section 1.163–15 of the 2020
Proposed Regulations supplemented the
rules in § 1.163–8T, temporary
regulations issued prior to TCJA,
regarding debt proceeds distributed
from any taxpayer account or from cash
proceeds. Consistent with section VI of
Notice 89–35, 1989–1 C.B. 675,
proposed § 1.163–15 provided that
taxpayers may treat any expenditure
made from an account of the taxpayer,
or from cash, within 30 days before or
after debt proceeds are deposited in any
account of the taxpayer, or received in
cash, as made from such proceeds.
Section 1.163–14 of the 2020 Proposed
Regulations related to sections I–V of
Notice 89–35. The Treasury Department
and the IRS received no comments with
respect to proposed § 1.163–15.
Accordingly, the final regulations adopt
this section unchanged. Additional
consideration is being given to § 1.163–
14, which is not being finalized in these
final regulations; thus Notice 89–35
remains in effect.

khammond on DSKJM1Z7X2PROD with RULES4

III. Comments on and Changes to
§ 1.163–1: Definitions
A. Adjustments to Tentative Taxable
Income
Part III.A.1.a of this Summary of
Comments and Explanation of Revisions
section provides an overview of the
negative adjustments to tentative taxable
income in § 1.163(j)–1(b)(1)(ii)(C)

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

1. Overview

Section 1.163(j)–1(b)(43) provides that
tentative taxable income is the amount
to which adjustments are made in
computing ATI. Section 1.163(j)–
1(b)(1)(i) provides for certain additions
to tentative taxable income in
computing ATI. For example, § 1.163(j)–
1(b)(1)(i)(D) provides that, subject to the
rule in § 1.163(j)–1(b)(1)(iii), any
depreciation under section 167, section
168, or former section 168 for taxable
years beginning before January 1, 2022,
is added back to tentative taxable
income to compute ATI. Section
1.163(j)–1(b)(1)(i)(E) and (F) provide
similar rules for amortization and
depletion, respectively.
Section 1.163(j)–1(b)(1)(ii) provides
for certain subtractions from (or
negative adjustments to) tentative
taxable income in computing ATI. For
example, § 1.163(j)–1(b)(1)(ii)(C)
provides that, if property is sold or
otherwise disposed of, the greater of the
allowed or allowable depreciation,
amortization, or depletion of the
property for the taxpayer (or, if the
taxpayer is a member of a consolidated
group, the consolidated group) for
taxable years beginning after December
31, 2017, and before January 1, 2022
(such years, the EBITDA period), with
respect to such property is subtracted
from tentative taxable income. Section
1.163(j)–1(b)(1)(ii)(D) provides that,
with respect to the sale or other
disposition of stock of a member of a

PO 00000

Frm 00004

Fmt 4701

Sfmt 4700

consolidated group by another member,
the investment adjustments under
§ 1.1502–32 with respect to such stock
that are attributable to deductions
described in § 1.163(j)–1(b)(1)(ii)(C) are
subtracted from tentative taxable
income. Section 1.163(j)–1(b)(1)(ii)(E)
provides that, with respect to the sale or
other disposition of an interest in a
partnership, the taxpayer’s distributive
share of deductions described in
§ 1.163(j)–1(b)(1)(ii)(C) with respect to
property held by the partnership at the
time of such sale or other disposition is
subtracted from tentative taxable
income to the extent such deductions
were allowable under section 704(d).
See the preamble to T.D. 9905 for a
discussion of the rationale for these
adjustments.
The preamble to T.D. 9905 noted that,
in the 2018 Proposed Regulations,
§ 1.163(j)–1(b)(1)(ii)(C) incorporated a
‘‘lesser of’’ standard. In other words, the
lesser of (i) the amount of gain on the
sale or other disposition of property, or
(ii) the amount of depreciation
deductions with respect to such
property for the EBITDA period, was
required to be subtracted from tentative
taxable income to determine ATI. As
explained in the preamble to T.D. 9905,
commenters raised several questions
and concerns regarding this ‘‘lesser of’’
standard. T.D. 9905 removed the ‘‘lesser
of’’ approach due in part to concerns
that this approach would be more
difficult to administer than the
approach reflected in T.D. 9905.
However, the Treasury Department
and the IRS recognize that, in certain
cases, the ‘‘lesser of’’ approach might
not create administrative difficulties for
taxpayers. Thus, the 2020 Proposed
Regulations permitted taxpayers to
choose whether to compute the amount
of their adjustment upon the disposition
of property, member stock, or
partnership interests using a ‘‘lesser of’’
standard. See proposed § 1.163(j)–
1(b)(1)(iv)(B) and (E). The Treasury
Department and the IRS requested
comments on the ‘‘lesser of’’ approach,
including how such an approach should
apply to dispositions of member stock
and partnership interests. The
comments received on the ‘‘lesser of’’
approach are summarized in part III.A.2
of this Summary of Comments and
Explanation of Revisions section.
b. Section 1.163(j)–1(b)(1)(iv)(A)
Through (D)
Section 1.163(j)–1(b)(1)(iv) provides
special rules for the application of
§ 1.163(j)–1(b)(1)(ii)(C) through (E).
Section 1.163(b)(1)(iv)(A)(1) provides
that, for purposes of § 1.163(j)–
1(b)(1)(ii)(C) through (E), the term ‘‘sale

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
or other disposition’’ does not include a
transfer of an asset to an acquiring
corporation in a transaction to which
section 381(a) of the Code applies,
except as otherwise provided in
§ 1.163(j)–1(b)(1)(iv)(A). Section
1.163(j)–1(b)(1)(iv)(A)(2) provides that,
for purposes of § 1.163(j)–1(b)(1)(ii)(C)
and (D), the term ‘‘sale or other
disposition’’ excludes all intercompany
transactions, within the meaning of
§ 1.1502–13(b)(1)(i). This provision
reflects the general treatment of a
consolidated group as a single entity for
purposes of section 163(j). Section
1.163(j)–1(b)(1)(iv)(A)(3) provides that,
notwithstanding any other rule in
§ 1.163(j)–1(b)(1)(iv)(A) (including the
rule regarding section 381(a)
transactions), any transaction in which
a member leaves a consolidated group is
treated as a ‘‘sale or other disposition’’
for purposes of § 1.163(j)–1(b)(1)(ii)(C)
and (D), unless the transaction is an
acquisition described in § 1.1502–
13(j)(5)(i)(A).
Section 1.163(j)–1(b)(1)(iv)(B)
provides that, for purposes of § 1.163(j)–
1(b)(1)(ii)(C) through (E), the amount of
a consolidated group’s adjustment
under § 1.163(j)–1(b)(1)(ii)(C) is
computed by reference to the
depreciation, amortization, or depletion
deductions of the group. The 2020
Proposed Regulations added § 1.163(j)–
1(b)(1)(iv)(B)(2) to clarify the
computation under proposed § 1.163(j)–
1(b)(iv)(E)(1) for consolidated groups.
Section 1.163(j)–1(b)(1)(iv)(C)
provides successor asset rules for
certain intercompany transactions. More
specifically, if deductions described in
§ 1.163(j)–1(b)(1)(ii)(C) are allowed or
allowable to a consolidated group
member (S), the depreciable property or
S’s stock is transferred to another
member (S1), and the transferor’s basis
in the S1 stock received in the
intercompany transaction is determined,
in whole or in part, by reference to its
basis in the transferred property or S
stock, then the S1 stock is treated as a
successor asset for purposes of the
negative adjustments to tentative taxable
income upon the disposition of member
stock.
Section 1.163(j)–1(b)(1)(iv)(D)
contains anti-duplication rules. For
example, § 1.163(j)–1(b)(1)(iv)(D)(2)
provides that depreciation,
amortization, or depletion deductions
allowed or allowable for a corporation
for a consolidated return year of a group
are disregarded in applying § 1.163(j)–
1(b)(1)(iv)(D) to a separate return year of
that corporation. Section 1.163(j)–
1(b)(1)(iv)(D)(2) also provides an
example in which S deconsolidates
from a consolidated group (Group 1)

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

(thereby triggering an adjustment under
§§ 1.163(j)–1(b)(1)(ii)(D) and 1.163(j)–
1(b)(1)(iv)(A)(3)) and then sells the
depreciable property. The example
states that no further adjustment is
required under § 1.163(j)–1(b)(1)(ii)(C)
upon the asset disposition with regard
to the amounts included in Group 1.
2. Comments on § 1.163(j)–1(b)(1)(ii)(C)
through (E) and Proposed § 1.163(j)–
1(b)(1)(iv)(B) and (E)
a. Adoption of a ‘‘Lesser of’’ Standard
Several commenters contended that
the final regulations should continue to
allow taxpayers to choose whether to
compute the amount of their adjustment
upon the disposition of property,
member stock, or partnership interests
using a ‘‘lesser of’’ standard, as in
proposed § 1.163(j)–1(b)(1)(iv)(B) and
(E). Commenters asserted that such an
approach would ameliorate the adverse
impact of the subtractions from tentative
taxable income in § 1.163(j)–
1(b)(1)(ii)(C) through (E). One
commenter further asserted that a
‘‘lesser of’’ option is preferable to the
approach in T.D. 9905 because the latter
could create an incentive for taxpayers
to retain assets solely because the
adverse tax consequences of disposing
of the assets outweigh the cost of
keeping the assets.
The Treasury Department and the IRS
agree with these comments, and the
final regulations retain a ‘‘lesser of’’
option for purposes of the negative
adjustments to tentative taxable income
in § 1.163(j)–1(b)(1)(ii)(C) through (E).
The final regulations also update the
special rules in § 1.163(j)–1(b)(1)(iv)(A),
(C), and (D) to add cross–references to
the ‘‘lesser of’’ computations in
§ 1.163(j)–1(b)(1)(iv)(B) and (E).
b. Modification of the ‘‘Lesser of’’
Standard
Several commenters also
recommended modifications to the
‘‘lesser of’’ rules in proposed § 1.163(j)–
1(b)(1)(iv)(B) and (E). For example, one
commenter stated that the proposed
‘‘lesser of’’ approach is likely to be less
accurate for dispositions of member
stock or partnership interests than for
asset dispositions because the gain
prong of the ‘‘lesser of’’ computation in
either case is based on the gain in the
member stock or partnership interests,
respectively, rather than on the gain that
would be recognized on the sale of the
underlying assets.
The Treasury Department and the IRS
received recommendations regarding
several alternative approaches. Under
one alternative, the negative adjustment
under the gain prong of the ‘‘lesser of’’

PO 00000

Frm 00005

Fmt 4701

Sfmt 4700

5499

computation for dispositions of member
stock or partnership interests would
equal the amount of the negative
adjustment if the assets of the subsidiary
or partnership were sold. However, the
commenter acknowledged that this
‘‘deemed asset sale’’ approach could
create unnecessary administrative
difficulties and lead to valuation
disputes by requiring asset valuations
upon dispositions of member stock or
partnership interests.
Among other alternative approaches,
a commenter recommended that the
gain prong of the ‘‘lesser of’’
computation for dispositions of member
stock should be based on the excess of
tax depreciation over economic
depreciation with respect to the
underlying assets. The commenter based
this approach on the theory that only
stock gain that reflects non-economic
depreciation should give rise to a
negative basis adjustment. The
commenter who recommended this
approach suggested several different
computational methods for this
alternative approach, but acknowledged
that this approach likely would not be
appropriate for certain types of assets
(for example, real estate or purchased
goodwill) because metrics that might be
used under this approach, such as
earnings and profits basis or book value,
would not be a good proxy for fair
market value for such assets. Another
commenter recommended revising the
proposed ‘‘lesser of’’ computation for
dispositions of partnership interests
such that certain negative adjustments
would be made at the partnership level
and others would be made at the partner
level.
After considering these comments, the
Treasury Department and the IRS have
determined that the proposed ‘‘lesser
of’’ computations strike a proper
balance between accuracy and
administrability. In particular, as one
commenter noted, there would be
unnecessary administrative complexity
under the first suggested alternative
approach. This complexity includes the
need for separate asset valuations that
would be costly and may be subject to
dispute, resulting in additional
controversy between taxpayers and the
IRS. The second proposed approach
would require an accurate
determination of economic
depreciation. However, as the
commenter acknowledged, there is no
single, simple method for accurately
determining economic depreciation.
Additionally, with regard to economic
depreciation, different types of assets
depreciate at different rates, and some
assets, such as land or certain
improvements to land, may not

E:\FR\FM\19JAR4.SGM

19JAR4

5500

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

khammond on DSKJM1Z7X2PROD with RULES4

depreciate at all. As a result, basing the
gain prong of the ‘‘lesser of’’
computation on non-economic
depreciation would create less certainty,
and would not clearly be a more
accurate approach, than the proposed
‘‘lesser of’’ standard. Requiring certain
adjustments at the partner level and
other adjustments at the partnership
level also would add further complexity
to the ‘‘lesser of’’ computations.
Thus, the final regulations adopt the
approach in proposed § 1.163(j)–
1(b)(1)(iv)(B) and (E). However, the
Treasury Department and the IRS
acknowledge that gain on upper-tier
member stock generally becomes further
removed from asset gain at each
additional tier within a consolidated
group. Therefore, for purposes of the
‘‘lesser of’’ computation in § 1.163(j)–
1(b)(1)(iv)(E)(2), the final regulations
provide that the only stock gain that is
relevant is the gain that is deemed
recognized on the stock of the member
holding the item of property (or the
stock of a successor).
The Treasury Department and the IRS
appreciate the comments received on
the proposed ‘‘lesser of’’ rules and will
continue to consider these comments for
purposes of potential future guidance.
c. Limitation of Negative Adjustments to
Tax Benefit From Adding Back
Depreciation, Amortization, and
Depletion Deductions to Tentative
Taxable Income
The additions to tentative taxable
income for depreciation, amortization,
and depletion deductions during the
EBITDA period (see § 1.163(j)–
1(b)(1)(i)(D) through (F), respectively)
do not necessarily increase a taxpayer’s
ability to deduct BIE. For example, the
taxpayer’s section 163(j) limitation
already may be sufficiently high to
permit a deduction of all of the
taxpayer’s BIE even without such
additions to tentative taxable income.
Commenters have stated that, in such
a situation, the adjustments in
§ 1.163(j)–1(b)(1)(ii)(C) through (E) and
proposed § 1.163(j)–1(b)(1)(iv)(B) and
(E) could inappropriately decrease the
amount of the taxpayer’s BIE deduction
in the year the property, member stock,
or partnership interest is sold because
the taxpayer derived no benefit from the
adjustment under § 1.163(j)–1(b)(1)(i)(D)
through (F) in a prior taxable year. The
commenters asserted that this
detrimental outcome is inconsistent
with both congressional intent and the
statement in the preamble to T.D. 9905
that § 1.163(j)–1(b)(1)(ii)(C) through (E)
and proposed § 1.163(j)–1(b)(1)(iv)(B)
and (E) are intended to ensure that the
positive adjustment to tentative taxable

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

income for depreciation deductions
results in a timing benefit. See part
II.A.5 of the Summary of Comments and
Explanation of Revisions in the
preamble to T.D. 9905. Moreover, if a
taxpayer that did not benefit from a
positive adjustment under § 1.163(j)–
1(b)(1)(i)(D) through (F) were required to
reduce its tentative taxable income in
the year of disposition, the negative
adjustment could put the taxpayer in a
worse position than if the depreciation,
amortization, or depletion deductions
were not added back to tentative taxable
income in the first place. The
commenters thus recommended
providing that a negative adjustment
under § 1.163(j)–1(b)(1)(ii)(C) through
(E) and proposed § 1.163(j)–
1(b)(1)(iv)(B) and (E) is required only to
the extent the prior-year addback under
§ 1.163(j)–1(b)(1)(i)(D) through (F)
resulted in an increase in deductible
BIE.
The Treasury Department and the IRS
agree with this recommendation. Thus,
the final regulations provide that a
negative adjustment to tentative taxable
income under § 1.163(j)–1(b)(1)(ii)(C)
through (E) or § 1.163(j)–1(b)(1)(iv)(B) or
(E) is reduced to the extent the taxpayer
establishes that the additions to
tentative taxable income under
§ 1.163(j)–1(b)(1)(i)(D) through (F) in a
prior taxable year did not result in an
increase in the amount allowed as a
deduction for BIE for such year. The
final regulations also provide examples
illustrating the application of this rule.
d. Capitalized Depreciation
T.D. 9905 provides that, for the
additions to tentative taxable income in
§ 1.163(j)–1(b)(1)(i), amounts of
depreciation, amortization, or depletion
that are capitalized under section 263A
of the Code (collectively, capitalized
depreciation) during the taxable year are
deemed to be included in the
computation of the taxpayer’s tentative
taxable income for such year, regardless
of when the capitalized amount is
recovered. See § 1.163(j)–1(b)(1)(iii).
Thus, a taxpayer makes a positive
adjustment to tentative taxable income
under § 1.163(j)–1(b)(1)(i)(D) through (F)
when the taxpayer capitalizes the
depreciation, amortization, or depletion,
rather than later when the capitalized
amount is recovered (for example,
through cost of goods sold).
Commenters requested clarification
regarding the application of §§ 1.163(j)–
1(b)(1)(ii)(C) through (E) and 1.163(j)–
1(b)(1)(iv) to capitalized depreciation.
For example, commenters asked
whether the adjustments in § 1.163(j)–
1(b)(1)(ii)(C) and proposed § 1.163(j)–
1(b)(iv)(B) and (E) occur upon the

PO 00000

Frm 00006

Fmt 4701

Sfmt 4700

disposition of the depreciated property
or upon the disposition of the property
into which the depreciation was
capitalized. A commenter asked the
same question regarding the application
of the successor asset rules in § 1.163(j)–
1(b)(1)(iv)(C). A commenter also
requested clarification as to how the
negative adjustments in § 1.163(j)–
1(b)(1)(ii)(D) and proposed § 1.163(j)–
1(b)(1)(iv)(E)(2) apply to capitalized
depreciation because there are no basis
adjustments under § 1.1502–32 when
depreciation is capitalized.
The Treasury Department and the IRS
have determined that a negative
adjustment under § 1.163(j)–
1(b)(1)(ii)(C) or proposed § 1.163(j)–
1(b)(1)(iv)(B) or (E) would be required
upon the sale or other disposition of
property with respect to which
depreciation, amortization, or depletion
was allowed or allowable during the
EBITDA period, because it is the
allowed or allowable depreciation,
amortization, or depletion of that
property that is added back to tentative
taxable income. The final regulations
have been modified accordingly. For the
same reason, the final regulations also
clarify that the successor asset rules in
§ 1.163(j)–1(b)(1)(iv)(C) would apply if
such property subsequently were
transferred to another member (S1) in an
intercompany transaction in which the
transferor receives S1 stock. The
Treasury Department and the IRS are
continuing to consider how the negative
adjustments in § 1.163(j)–1(b)(1)(ii)(D)
and proposed § 1.163(j)–1(b)(1)(iv)(E)(2)
apply to capitalized depreciation.
A commenter also expressed concern
that, if a taxpayer does not elect to apply
T.D. 9905 retroactively, then capitalized
depreciation arising in taxable years
beginning before November 13, 2020,
would not be added back to tentative
taxable income, but negative
adjustments under § 1.163(j)–
1(b)(1)(ii)(C) through (E) still would be
required for any ‘‘allowable’’
depreciation, including capitalized
depreciation, if the relevant property,
member stock, or partnership interest
were disposed of in a year to which T.D.
9905 applies. The commenter thus
recommended that negative adjustments
under § 1.163(j)–1(b)(1)(ii)(C) through
(E) and proposed § 1.163(j)–
1(b)(1)(iv)(B) and (E) not apply to
capitalized depreciation amounts that
were incurred in a taxable year that
began before November 13, 2020, unless
the taxpayer included a positive
adjustment reflecting such amounts in
calculating its tentative taxable income.
As discussed in part III.A.2.c of this
Summary of Comments and Explanation
of Revisions section, the final

E:\FR\FM\19JAR4.SGM

19JAR4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
regulations adopt the recommendation
that a negative adjustment to tentative
taxable income under § 1.163(j)–
1(b)(1)(ii)(C) through (E) and proposed
§ 1.163(j)–1(b)(1)(iv)(B) and (E) be
reduced to the extent the taxpayer
establishes that the additions to
tentative taxable income under
§ 1.163(j)–1(b)(1)(i)(D) through (F) in a
prior taxable year resulted in no
increase in deductible BIE in that year.
If a taxpayer does not elect to apply T.D.
9905 retroactively, the taxpayer will
have no additions to tentative taxable
income under § 1.163(j)–1(b)(1)(i)(D)
through (F) in a prior taxable year (and,
thus, no increase in deductible BIE in
that year) with respect to capitalized
depreciation. Because the final
regulations already address the
commenter’s concern, the Treasury
Department and the IRS have not
incorporated the commenter’s specific
recommendation.

khammond on DSKJM1Z7X2PROD with RULES4

e. Dispositions by Consolidated Groups
The final regulations also revise
§§ 1.163(j)–1(b)(1)(iv)(A)(2), 1.163(j)–
1(b)(1)(iv)(B)(2), and 1.163(j)–
1(b)(1)(iv)(E) to clarify that the amount
of gain taken into account by a
consolidated group upon a ‘‘sale or
other disposition’’ includes the net gain
the group would take into account,
including as a result of intercompany
transactions. One commenter contended
that this clarification is needed to
ensure that the amount of gain taken
into account by a consolidated group for
purposes of the negative adjustments in
proposed §§ 1.163(j)–1(b)(1)(iv)(B)(2)
and 1.163(j)–1(b)(1)(iv)(E) is the same
regardless of whether the property,
member stock, or partnership interest is
sold in an intercompany transaction
before leaving the group (that is, to
achieve single-entity treatment of the
group). For example, assume that S
would recognize $100 of gain upon the
sale of property to a nonmember.
However, rather than sell the property
directly to a nonmember, S first might
sell the property to member B and
recognize $60 of gain, and B then could
sell the property to the nonmember and
recognize an additional $40 of gain. In
either case, the group would recognize
a net gain of $100 in relation to the
property, and that same $100 should be
relevant in determining the amount of
any negative adjustment to ATI.
3. Comments on § 1.163(j)–
1(b)(1)(iv)(A), (C), and (D)
a. Section 1.163(j)–1(b)(1)(iv)(A)
Commenters questioned why, under
the rules for deconsolidating
transactions in § 1.163(j)–

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

1(b)(1)(iv)(A)(3), the exception to ‘‘sale
or other disposition’’ treatment is
limited to whole-group acquisitions
described in § 1.1502–13(j)(5)(i)(A) and
does not also include whole-group
acquisitions that take the form of reverse
acquisitions, as described in § 1.1502–
13(j)(5)(i)(B). The Treasury Department
and the IRS did not intend this
exception to exclude transactions
described in § 1.1502–13(j)(5)(i)(B), and
the final regulations revise § 1.163(j)–
1(b)(1)(iv)(A)(3) to correct this
typographical error.
The Treasury Department and the IRS
received another comment regarding the
exceptions to ‘‘sale or other disposition’’
treatment for whole-group acquisitions
in § 1.163(j)–1(b)(1)(iv)(A)(3) and for
section 381 transactions in § 1.163(j)–
1(b)(1)(iv)(A)(1) (see the summary in
part III.A.1.b of this Summary of
Comments and Explanation of Revisions
section). The commenter noted that the
tax law generally treats the successor in
a section 381 transaction (and the
acquiring group in a whole-group
acquisition) as stepping into the shoes
of the acquired entity (or group).
However, the commenter also noted that
§ 1.163(j)–1(b)(1)(iv)(A) does not
expressly provide that the acquiring
entity (or group) steps into the shoes of
the acquired entity (or group) for
purposes of the negative adjustments in
§§ 1.163(j)–1(b)(1)(ii)(C) through (E) and
1.163(j)–1(b)(1)(iv)(B) and (E). The
commenter recommended clarifying this
point.
The Treasury Department and the IRS
agree with the commenter. Thus, the
final regulations clarify this point by
expressly stating that the acquiring
corporation in a section 381 transaction
and the surviving group in a transaction
described in § 1.1502–13(j)(5)(i) is
treated as a successor to the distributor
or transferor corporation or the
terminating group, respectively, for
purposes of §§ 1.163(j)–1(b)(1)(ii)(C)
through (E) and 1.163(j)–1(b)(1)(iv)(B)
and (E) of this section.
A commenter also noted that the
‘‘lesser of’’ computation for dispositions
of member stock in proposed § 1.163(j)–
1(b)(1)(iv)(E)(2) could be misconstrued
as overriding the rules for negative
adjustments to a group’s tentative
taxable income in the case of
deconsolidating transactions subject to
§ 1.163(j)–1(b)(1)(iv)(A)(3). Under this
erroneous interpretation, if a sale or
other disposition resulted in a
deconsolidation, the ‘‘lesser of’’
computation would apply solely with
respect to the member stock that was
sold, even though the deconsolidation
rules in § 1.163(j)–1(b)(1)(iv)(A)(3)
would treat the transaction as a

PO 00000

Frm 00007

Fmt 4701

Sfmt 4700

5501

disposition of all of the departing
member’s stock. Thus, the ‘‘lesser of’’
computation would not reflect the full
amount of gain recognized upon the
complete disposition of the departing
member’s stock.
The Treasury Department and the IRS
did not intend the ‘‘lesser of’’ rule in
proposed § 1.163(j)–1(b)(1)(iv)(E)(2) to
override the rules for deconsolidating
transactions. The regulations under
section 163(j) generally treat a
consolidated group as a single entity;
thus, the rules for deconsolidations in
§ 1.163(j)–1(b)(1)(iv)(A)(3) treat the date
of a member’s deconsolidation as the
appropriate time to make adjustments to
tentative taxable income with regard to
all of that member’s stock. Thus, the
final regulations clarify § 1.163(j)–
1(b)(1)(iv)(A)(3) to provide that any
transaction in which a member leaves a
consolidated group is treated as a
taxable disposition of all stock of the
departing member held by any member
of the consolidated group for purposes
of § 1.163(j)–1(b)(1)(ii)(C) and (D) and
§ 1.163(j)–1(b)(1)(iv)(B), (E)(1), and
(E)(2), unless the transaction is
described in § 1.1502–13(j)(5)(i).
A commenter also suggested that
nonrecognition transactions in which a
member leaves a consolidated group
should not be treated as a ‘‘sale or other
disposition’’ for purposes of the
negative adjustments in § 1.163(j)–
1(b)(1)(ii)(C) and (D) and proposed
§ 1.163(j)–1(b)(1)(iv)(B) and (E). The
final regulations do not accept this
comment because, under the single–
entity theory of consolidated groups in
the section 163(j) regulations, such
negative adjustments should be made
when a member deconsolidates,
regardless of the form of the
deconsolidation transaction, other than
in a whole-group acquisition described
in § 1.1502–13(j)(5)(i). In other words,
because the section 163(j) regulations
generally treat a consolidated group as
a unified taxpayer, any adjustments to
ATI related to property should occur
when the item of property leaves the
group. This result should be consistent
whether the property is disposed of
directly by a group member or whether
the property leaves the group upon the
deconsolidation of a member.
The Treasury Department and the IRS
also received a comment that the gain
prong of the proposed ‘‘lesser of’’
computation could yield unintended
results for certain nonrecognition
transactions. Under T.D. 9905,
dispositions are treated as ‘‘sales or
other dispositions’’ for purposes of the
negative adjustments under § 1.163(j)–
1(b)(1)(ii)(C) through (E) unless an
express exception applies. As

E:\FR\FM\19JAR4.SGM

19JAR4

5502

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

previously discussed in this part
III.A.3.a of this Summary of Comments
and Explanation of Revisions section,
T.D. 9905 provides exceptions for
section 381 transactions and wholegroup acquisitions. However, T.D. 9905
does not provide an exception to ‘‘sale
or other disposition’’ treatment for other
nonrecognition transactions, such as
transactions to which section 351 or
section 721 applies.
The commenter noted that the ‘‘lesser
of’’ computations in proposed
§ 1.163(j)–1(b)(1)(iv)(B) and (E) could be
construed to suggest that a taxpayer
would have no negative adjustment
under these provisions if the taxpayer
transferred an asset in a transaction to
which section 351 or section 721
applies. The Treasury Department and
the IRS did not intend the proposed
‘‘lesser of’’ computations to create
additional exceptions to ‘‘sale or other
disposition’’ treatment for purposes of
the negative adjustments required under
§ 1.163(j)–1(b)(1)(ii)(C) through (E).
Thus, the final regulations clarify that
the disposition of property, member
stock, or partnership interests in a
transaction other than a deconsolidation
(the treatment of which is addressed in
§ 1.163(j)–1(b)(1)(iv)(A)(3)) that is a
nonrecognition transaction other than a
section 381 transaction is treated as a
taxable disposition for purposes of the
gain prong of the ‘‘lesser of’’
computation.

khammond on DSKJM1Z7X2PROD with RULES4

b. Section 1.163(j)–1(b)(1)(iv)(C)
As noted in part III.A.1.b of this
Summary of Comments and Explanation
of Revisions section, the successor asset
rules in § 1.163(j)–1(b)(1)(iv)(C) apply to
certain intercompany transactions. For
example, assume that S (a member of
the P group) acquires a depreciable asset
and fully depreciates the asset under
section 168(k). P then contributes its S
stock to S1 (another member of the P
group) in exchange for S1 stock in a
transaction to which section 351
applies. In this case, the S1 stock is a
successor asset to the S stock. Moreover,
if P sells its S1 stock to a third party in
a transaction that causes both S1 and S
to deconsolidate, the transaction is
treated as a taxable disposition of both
the S1 stock and the S stock for
purposes of §§ 1.163(j)–1(b)(1)(ii)(C) and
(D) and 1.163(j)–1(b)(1)(iv)(B) and (E).
See § 1.163(j)–1(b)(1)(iv)(A)(3). In that
case, both the actual sale of the S1 stock
and the disposition of the S stock on its
deconsolidation pursuant to § 1.163(j)–
1(b)(1)(iv)(A)(3) could produce negative
adjustments to ATI. Application of the
anti-duplication rule in § 1.163(j)–
1(b)(1)(iv)(D) effectively would mean

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

that the total subtraction from ATI
would equal the greater of the two stock
gains (if any).
One commenter agreed with this
reading of the regulations but suggested
that an example would be helpful to
clarify the interaction of these multiple
rules. The Treasury Department and the
IRS agree with this suggestion, and the
final regulations include an example
illustrating the operation of these rules.
c. Section 1.163(j)–1(b)(1)(iv)(D)
Commenters have stated that the antiduplication rule in § 1.163(j)–
1(b)(1)(iv)(D)(2) is unclear, does not
properly support the example in that
paragraph, and does not take into
account the exception to the
deconsolidation rule in § 1.163(j)–
1(b)(1)(iv)(A)(3). For example, a
commenter stated that it is unclear
whether the operative rule, which does
not reference § 1.163(j)–1(b)(1)(ii)(C),
actually supports the conclusion in the
example, which references § 1.163(j)–
1(b)(1)(ii)(C). Another commenter
requested clarification that the antiduplication rule in § 1.163(j)–
1(b)(1)(iv)(D)(2) does not apply to a
whole-group acquisition, which is not
treated as a ‘‘sale or other disposition’’
for purposes of § 1.163(j)–1(b)(1)(ii)(C)
through (E). See § 1.163(j)–
1(b)(1)(iv)(A)(3).
The Treasury Department and the IRS
agree with these comments and have
revised § 1.163(j)–1(b)(1)(iv)(D)(2) to
clarify the application of this provision.
The Treasury Department and the IRS
also have clarified the application of
§ 1.163(j)–1(b)(1)(iv)(D)(1), including by
clarifying that the paragraph contains
two separate rules, rather than one rule
and one example.
A commenter also requested examples
illustrating the application of the antiduplication rule in § 1.163(j)–
1(b)(1)(iv)(D) when the taxpayer’s
negative adjustment under the ‘‘lesser
of’’ computation is based on gain
recognized rather than on depreciation
deductions taken during the EBITDA
period. The final regulations add an
example to § 1.163(j)–1(b)(1)(viii) to
illustrate the application of this rule.
B. Dividends From Regulated
Investment Company (RIC) Shares
If a RIC has certain items of income
or gain, part 1 of subchapter M and
other Code provisions provide rules
under which a RIC may pay dividends
that a shareholder in the RIC may treat
in the same manner (or a similar
manner) as the shareholder would treat
the underlying item of income or gain
if the shareholder realized it directly.

PO 00000

Frm 00008

Fmt 4701

Sfmt 4700

Like the preamble to the 2020 Proposed
Regulations, this preamble refers to this
treatment as ‘‘conduit treatment.’’ The
2020 Proposed Regulations provide
rules under which a RIC that earns BII
may pay section 163(j) interest
dividends. The total amount of a RIC’s
section 163(j) interest dividends for a
taxable year is limited to the excess of
the RIC’s BII for the taxable year over
the sum of the RIC’s BIE for the taxable
year and the RIC’s other deductions for
the taxable year that are properly
allocable to the RIC’s BII. The 2020
Proposed Regulations provide that a RIC
shareholder that receives a section
163(j) interest dividend may treat the
dividend as interest income for
purposes of section 163(j), subject to
holding period requirements and other
limitations. The Treasury Department
and the IRS received one comment
requesting that the proposed rules
providing this treatment be finalized.
These final regulations adopt those
proposed rules.
A few commenters requested that
conduit treatment be extended to funds
other than RICs, such as foreign
regulated investment funds and foreign
money market funds, so that investors
in those funds may treat earnings from
those funds as interest income to the
extent the earnings can be traced to
interest income of the funds. These final
regulations do not adopt these
recommendations. The Treasury
Department and the IRS received similar
recommendations in response to the
2018 Proposed Regulations, and they
were not adopted in T.D. 9905. As
explained in the preamble to T.D. 9905,
there are significant differences between
the rules governing income inclusions
in respect of passive foreign investment
companies (PFICs), such as foreign
money market funds, and RICs. These
significant differences would require a
different mechanical approach if
conduit treatment were extended to
PFICs and present additional policy
considerations. The Treasury
Department and the IRS continue to
study this comment and these issues.
Another commenter requested that
conduit treatment be extended to allow
shareholders in real estate investment
trusts (REITs) to treat REIT dividends as
interest income, to the extent that the
income earned by the REIT is interest
income. The Treasury Department and
the IRS continue to consider this
comment.

E:\FR\FM\19JAR4.SGM

19JAR4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
IV. Comments on and Changes to
Proposed § 1.163(j)–6: Application of
the Business Interest Expense
Deduction Limitations to Partnerships
and Subchapter S Corporations

khammond on DSKJM1Z7X2PROD with RULES4

A. Overview
Section 1.163(j)–6 provides rules for
applying section 163(j) to partnerships,
S corporations and their owners. As
described in this part IV of the
Summary of Explanation of Revisions
section, the Treasury Department and
the IRS continue to study aspects of
proposed § 1.163(j)–6. Accordingly, the
final regulations reserve on §§ 1.163(j)–
6(e)(6) (partnership deductions
capitalized by a partner), (h)(4) (partner
basis adjustments upon liquidating
distributions), (h)(5) (partnership basis
adjustments upon partner dispositions),
(j) (tiered partnerships), and (l)(4)(iv) (S
corporation deductions capitalized by
an S corporation shareholder). These
paragraphs of the 2020 Proposed
Regulations are retained in proposed
form and may be relied on to the extent
provided in the Applicability Dates
section of this preamble.
B. Trading Partnerships
The 2020 Proposed Regulations
addressed the application of section
163(j) to partnerships engaged in a trade
or business activity of trading personal
property (including marketable
securities) for the account of owners of
interests in the activity, as described in
§ 1.469–1T(e)(6) (trading partnership).
Specifically, the 2020 Proposed
Regulations included a rule requiring a
partnership engaged in a trading activity
(i.e., trade or business activities
described in section 163(d)(5)(A)(ii) and
illustrated in Revenue Ruling 2008–12,
2008–1 C.B. 520 (March 10, 2008)) to
bifurcate its interest expense from the
trading activity between partners that
are passive investors (taxpayers that do
not materially participate in the activity
within the meaning of section 469) in
the trading activity and all other
partners, and subject only the portion of
the interest expense that is allocable to
the non-passive investors to limitation
under section 163(j) at the partnership
level. The portion of interest expense
from the trading activity allocable to
passive investors is subject to limitation
under section 163(d) at the partner
level, as provided in section
163(d)(5)(A)(ii). Accordingly, proposed
§ 1.163(j)–1(c)(1) and (2) include rules
applicable to trading partnerships that
modify the definitions of BII and BIE to
effectuate this bifurcation.
In addition, proposed § 1.163(j)–
6(d)(4) requires that a trading
partnership bifurcate all of its other

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

items of income, gain, loss and
deduction from its trading activity
between partners that are passive
investors and all other partners. The
portion of the partnership’s other items
of income, gain, loss or deduction from
its trading activity properly allocable to
the passive investors in the partnership
will not be taken into account at the
partnership level as items from a trade
or business for purposes of applying
section 163(j) at the partnership level.
Instead, all such partnership items
properly allocable to passive investors
will be treated as items from an
investment activity of the partnership,
for purposes of sections 163(j) and
163(d).
As stated in the preamble to 2020
Proposed Regulations, this approach, in
order to be effective, presumes that a
trading partnership generally will
possess knowledge regarding whether
its individual partners are passive
investors in its trading activity. Because
no rules currently exist requiring a
partner to inform the partnership
whether the partner has grouped
activities of the trading partnership with
other activities of the partner outside of
the partnership, the 2020 Proposed
Regulations include a revision to the
section 469 activity grouping rules to
provide that any activity described in
section 163(d)(5)(A)(ii) may not be
grouped with any other activity of the
partner, including any other activity
described in section 163(d)(5)(A)(ii).
In response to the decision to
bifurcate interest expenses from a
trading activity, one commenter stated
that the bifurcation approach was
inconsistent with section 163(j)(5).
According to the comment, the statute
does not support the partnership having
BIE for some partners and investment
interest expense for others. Rather, once
a partnership determines that it is
investment interest expense that same
interest expense cannot also be BIE of
the partnership. The commenter read
section 163(j) to mean that if a
partnership is engaged in a trade or
business that is not a passive activity
and with respect to which certain
owners do not materially participate,
then the interest expense allocable to
the partnership’s trade or business is
investment interest and section 163(j)
does not apply to any of the interest
expense.
Alternatively, the commenter
recommended that, to the extent the
Treasury Department and the IRS
determine that materially participating
partners should be subject to limitation
under either section 163(d) or section
163(j), a rule similar to that for corporate
partners should be adopted. Under such

PO 00000

Frm 00009

Fmt 4701

Sfmt 4700

5503

a rule, a trading partnership would treat
all of its interest expense as investment
interest expense at the partnership level
with respect to all of its partners, and
the interest expense allocable to a nonpassive investor would be
recharacterized as BIE by such nonpassive investor. This approach,
according to the commenter, would
achieve a similar result as the proposed
bifurcation approach while eliminating
the administrative complexities
associated with a partnership having to
determine whether each of its partners
is materially participating.
As stated in the preamble to the 2020
Proposed Regulations, the Treasury
Department and the IRS considered
treating all interest expense of a trading
partnership as investment interest
expense but concluded that it was
inconsistent with the intent of section
163(j) to limit BIE of a partnership. The
commenter’s alternative approach also
is inconsistent with the statute because
it ignores the fact that the trading
partnership is engaged in trade or
business and, therefore, any BIE should
be subject to section 163(j). Such an
approach would further diverge from
the application of section 163(j),
particularly with respect to business
interest carryforwards. Partnership BIE
that is limited under section 163(j)(4) is
carried forward by the partner as EBIE
and is not treated as paid or accrued in
succeeding taxable years until the
partner receives ETI from the same
partnership. Under the commenter’s
approach, the partner, if subject to
section 163(j), would treat the interest
expense as paid or accrued in the
succeeding tax year under section
163(j)(2) without requiring an allocation
of ETI or excess BII (EBII) from the
partnership. The bifurcation approach
in the 2020 Proposed Regulations, and
in these final regulations, preserves the
partnership-level application of section
163(j) for those partners who are nonpassive investors in the trade or
business of the partnership as well as
the carryover rules applicable at the
partner-level.
Another commenter suggested an
alternative under which section 163(j)
would be applied at the partnership
level and any EBIE would be allocated
to the partners. Any direct or indirect
partner that is a non-passive investor in
the partnership’s trading activity would
continue to apply the rules of section
163(j) to the EBIE received from the
partnership. For partners who did not
materially participate in the
partnership’s trading activity, any
allocated EBIE from the partnership
would be fully deductible subject to any
partner-level section 163(d) limitation.

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

5504

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

Under this approach, any EBIE received
by a passive investor would be treated
as paid or accrued in the current year
and not subject to the carryover rules
under section 163(j)(4)(B). The Treasury
Department and the IRS do not adopt
this comment as the approach is
inconsistent with the statutory language
and intent of section 163(j)(5) because
the second sentence of section 163(j)(5)
specifically states that BIE shall not
include investment interest expense.
Several commenters opposed the
revision of the grouping rule under
section 469 to prohibit the grouping of
trading activities. Proposed § 1.469–
4(d)(6) provides that a trading activity
described in section 163(d)(5)(A)(ii) may
not be grouped with any other activity
of the taxpayer, including another
trading activity. One commenter
observed that such a rule would
discourage trading funds from using
multiple partnerships because it may
result in partners never being able to
demonstrate material participation in
the trading activity under the 500 hour
test or any other material participation
test (i.e., § 1.469–5T(a)) for any one
partnership, even though the partner
would materially participate in a
properly grouped activity. Another
acknowledged the administrative
burden associated with partnerships
evaluating the activities of their passive
partners but highlighted that
partnerships were already required to
collect details about partner’s tax status
in similar situations. A third suggested
that the grouping rule could be modified
to permit a partner to group activities
provided the partner provides sufficient
information to the partnership to enable
it to identify the taxpayer as a materially
participating partner.
The Treasury Department and the IRS
do not adopt these recommendations
because the rules under section 469
adequately address these concerns.
Activity under section 469 is broadly
defined to be a trade or business under
section 162 and the rules further
provide for grouping by a partnership or
S corporation. As addressed previously,
for the bifurcation method to be
effective, modification of the section
469 grouping rules is necessary to avoid
potential abuse and to allow the trading
partnership to presume that an
individual partner is a passive investor
in the trading activity based solely on
the partnership’s understanding as to
the lack of work performed in the
trading activity. Additionally, if
grouping were allowed, then passive
partners could group their other trade or
business activities, in which they
materially participate, with their trading
activity in order to become a material

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

participant as to the trading activity,
thus, avoiding the section 163(d) limit at
the partner level. The final regulations
clarify that this grouping rule applies
only to individuals, estates, trusts,
closely held C corporations, and
personal service corporations that may
directly or indirectly own interests in
trading activities described in § 1.469–
1T(e)(6) and subject to section
163(d)(5)(ii).
One commenter observed that the
proposed regulations do not discuss a
tiered partnership structure with respect
to the material participation rules. The
Treasury Department and the IRS
determined that such a rule is not
needed. The bifurcation approach in
proposed § 1.163(j)–1(c)(1) and (2)
applies where interest income or
expense is allocable to one or more
partners that do not materially
participate (within the meaning of
section 469), as described in section
163(d)(5)(A)(ii). Thus, in a tiered
structure where interest is not allocable
to one or more partners that do not
materially participate, the rules in
§ 1.163(j)–6(c)(1) and (2) do not apply
and the interest expense is subject to the
rules under section 163(j)(4).
The same commenter recommended
the final regulations provide that if a
partner that has EBIE ceases to
materially participate in a later taxable
year, the EBIE would be allowed in a
later year subject to any section 163(d)
limitation; and conversely, if a passive
investor partner has a section 163(d)
investment carryover and then
materially participates in a later taxable
year, the 163(d) carryover would be
allowed subject to any partner-level
section 163(j) limitation. In light of
concerns with partners shifting between
participating and not participating in
the trading activity in order to
unsuspend EBIE, the Treasury
Department and the IRS determined that
such a rule is not warranted.
One commenter requested transition
relief for trading partnerships that may
have relied on the statement contained
in the preamble to the 2018 Proposed
Regulations that the BIE of the
partnership allocable to trading activity
will be subject to section 163(j) at the
entity level, even if the interest expense
is later subject to limitation under
section 163(d) at the individual partner
level. Partnerships that relied on the
2018 Proposed Regulations may have
allocated EBIE to partners who do not
materially participate in the trading
activity of the partnership. Under the
final regulations, partnerships carrying
on trading activities do not allocate ETI
or EBII from trading activities to their
partners who do not materially

PO 00000

Frm 00010

Fmt 4701

Sfmt 4700

participate in those activities. Rather,
any interest expense and all other items
from such activities allocable to these
partners will be treated as items derived
from an investment activity of the
partnership. As a result, passive
investors that were previously allocated
EBIE from the trading partnership
generally will not be allocated any ETI
or EBII from that partnership in future
years against which they can offset the
EBIE.
The Treasury Department and the IRS
agree that relief should be accorded to
partners of trading partnerships that do
not materially participate in the trading
activity and that relied on the statement
in the preamble to the 2018 Proposed
Regulations. Accordingly, a transition
rule is provided in the final regulations
to permit passive investors in a
partnership engaged in a trading activity
to deduct EBIE allocated to them from
the partnership in any taxable year
ending prior to the effective date of the
final regulations without regard to the
amount of ETI or EBII that may be
allocated by the partnership to the
partner in the first taxable year ending
on or after the effective date of these
final regulations.
For purposes of this transition rule,
any EBIE that is no longer subject to
disallowance under section 163(j) solely
as a result of this transition rule will not
be subject to limitation or disallowance
under section 163(d). In such case, the
partnership treated the interest expense
as business interest expense for
purposes of calculating its limitation
under section 163(j). The treatment of
interest expense by the partnership as
BIE in prior years is not affected by this
transition rule. Accordingly, the rule in
section 163(j)(5) that interest expense
cannot be treated as both BIE and
investment interest expense would still
apply, and the BIE of the partnership
cannot be treated as investment interest
expense of the partner in future years.
The commenter also observed that a
corporate partner is never subject to
section 163(d) regardless of material
participation and requested clarification
whether section 163(j) applies to a
trading partnership’s corporate partner
at the partner or partnership level. The
Treasury Department and the IRS have
determined that the regulations as
proposed adequately addressed this
situation. Generally, a corporate partner
is not a passive investor subject to
section 163(d)(5)(A)(ii); therefore, the
rules under proposed § 1.163(j)–6(c)
would not apply.
In the 2020 Proposed Regulations, the
Treasury Department and the IRS
requested comments regarding whether
similar rules should be adopted with

E:\FR\FM\19JAR4.SGM

19JAR4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

khammond on DSKJM1Z7X2PROD with RULES4

respect to S corporations that also may
be involved in trading activities, and
whether such rules would be
compatible with subchapter S. One
commenter recommended that the final
regulations provide that an S
corporation engaged in a trading activity
be required to bifurcate its interest
expense between shareholders who
materially participate in the trading
activity and shareholders who do not
materially participate and apply section
163(j) to the former and section 163(d)
to the latter at the S corporation level.
The Treasury Department and the IRS
appreciate this recommendation but, as
acknowledged by the commenter, the
implementation of such a rule would
require different allocations of S
corporation income and other items
among shareholders of the S
corporation. Unlike partnerships, S
corporations must allocate items pro
rata to the shareholders, in accordance
with their respective percentages of
stock ownership in the corporation. See
generally section 1377(a)(1). Therefore,
with regard to S corporations, the
Treasury Department and the IRS have
determined that (i) section 163(d)
should continue to be applied at the
shareholder level, and (ii) as provided
by section 163(j)(4)(A) and (D), section
163(j) should continue to be applied at
the S corporation level. Consequently,
the final regulations do not incorporate
the commenter’s recommendation.
C. Treatment of Business Interest
Income and Business Interest Expense
With Respect to Lending Transactions
Between a Partnership and a Partner
(Self-Charged Lending Transactions)
The 2020 Proposed Regulations
provide that, in the case of a selfcharged lending transaction between a
lending partner and a borrowing
partnership in which the lending
partner owns a direct interest, any BIE
of the borrowing partnership
attributable to a self-charged lending
transaction is BIE of the borrowing
partnership for purposes of proposed
§ 1.163(j)–6(n). However, to the extent
the lending partner receives interest
income attributable to the self-charged
lending transaction and also is allocated
EBIE from the borrowing partnership in
the same taxable year, the lending
partner may treat such interest income
as an allocation of EBII from the
borrowing partnership in that taxable
year, but only to the extent of the
lending partner’s allocation of EBIE
from the borrowing partnership in the
same taxable year. To prevent the
potential double counting of BII, the
lending partner includes interest
income re-characterized as EBII only

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

once when calculating the lending
partner’s own section 163(j) limitation.
In cases where the lending partner is not
a C corporation, to the extent that any
interest income exceeds the lending
partner’s allocation of EBIE from the
borrowing partnership for the taxable
year, and such interest income
otherwise would be properly treated as
investment income of the lending
partner for purposes of section 163(d)
for that year, such excess amount of
interest income will continue to be
treated as investment income of the
lending partner for that year for
purposes of section 163(d).
One commenter generally supported
the approach for self-charged lending
transactions provided in the 2020
Proposed Regulations and expected that
many taxpayers may benefit from this
rule. However, the commenter noted
that the rule applies only to self-charged
lending transactions where the lending
partners directly own interests in the
borrowing partnerships and stated that
this rule is too narrow. The commenter
recommended that the rule be
broadened to include loans to a
partnership by other members in the
same consolidated group as a corporate
partner. In addition, the commenter
recommended that the rule for selfcharged lending transactions should be
expanded to include lending partners in
upper-tier partnerships who make loans
to lower-tier partnerships. The
commenter stated that in both cases, the
interest expense would ultimately flow
up to the same taxpayer that recognizes
the interest income.
The Treasury Department and the IRS
have determined that the rule for selfcharged lending transactions should be
adopted in the final regulations without
change. With respect to the
recommendation that the self-charged
lending rule should apply to indirect
lenders in tiered-partnership situations,
the Treasury Department and the IRS
concluded that adopting a rule to allow
interest income of a partner in an uppertier partnership that lent money to a
lower-tier partnership to offset EBIE that
may be suspended in a lower-tier
partnership would add undue
complexity to these rules, and such
rules would likely become more
difficult to administer, particularly with
respect to large and complex multitiered entity structures. With respect to
the recommendation to extend the rule
to apply to corporate partners where the
lender is a member of the same
consolidated group of corporations, the
Treasury Department and the IRS
continue to consider whether this
would be appropriate for inclusion in
future guidance. The Treasury

PO 00000

Frm 00011

Fmt 4701

Sfmt 4700

5505

Department and the IRS are also
considering additional guidance that
would limit the application of the selfcharged interest rule to a lender that is
subject to tax under section 511, due to
the special rules that apply to the
calculation of unrelated business
taxable income under section 512. See
§ 1.512(a)–6.
The Treasury Department and the IRS
solicited comments in the 2020
Proposed Regulations regarding whether
the rule for self-charged lending
transactions between partnerships and
lending partners (or a similar rule)
should apply to, lending transactions
between S corporations and lending
shareholders. No comments were
received in response to this solicitation.
The pro rata allocation requirements
applicable to S corporations make
adopting rules similar to those provided
for partnership self-charged lending
transactions difficult to apply and could
potentially impact the eligibility
requirements under subchapter S.
Accordingly, the final regulations do not
provide such a rule.
D. CARES Act Partnership Rules
The 2020 Proposed Regulations
provide special rules for partners and
partnerships for taxable years beginning
in 2019 or 2020 under section 163(j)(10)
as enacted by the CARES Act. Proposed
§ 1.163(j)–6(g)(4) provides that 50
percent of any EBIE allocated to a
partner for any taxable year beginning in
2019 is treated as BIE paid or accrued
by the partner in the partner’s first
taxable year beginning in 2020 (referred
to in the 2020 Proposed Regulations as
§ 1.163(j)–6(g)(4) business interest
expense). The amount that is treated as
BIE paid or accrued by the partner in
the partner’s 2020 taxable year is not
subject to a section 163(j) limitation at
the partner level. The 2020 Proposed
Regulations further provide that if a
partner disposes of its interest in the
partnership in the partnership’s 2019 or
2020 taxable year, the amount treated as
BIE paid or accrued by the partner
under proposed § 1.163(j)–6(g)(4) is
deductible by the partner and thus does
not result in a basis increase under
§ 1.163(j)–6(h)(3). The 2020 Proposed
Regulations state that a taxpayer may
elect to not have § 1.163(j)–6(g)(4) apply,
and provide two examples illustrating
these rules in §§ 1.163(j)–6(o)(35) and
(o)(36). The Treasury Department and
the IRS specifically requested comments
on these proposed rules and on whether
further guidance was necessary.
One commenter agreed with the
approach taken in the 2020 Proposed
Regulations, but requested that the final
regulations clarify that an election out of

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

5506

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

the 50 percent EBIE rule is made by a
partner with respect to each partnership
in which the partner holds an interest.
The commenter stated that partners may
have different reasons to elect out of the
50 percent EBIE rule and that by
allowing partners to make the election
out with respect to each partnership,
partners will have greater flexibility in
managing their tax consequences.
The Treasury Department and the IRS
agree with this comment. Thus, the final
regulations clarify that partners may
elect out of the 50 percent EBIE rule on
a partnership by partnership basis.
Another commenter requested
confirmation with respect to an aspect
of the example in § 1.163(j)–6(o)(36). In
the example, the partner is allocated
EBIE in 2018 and 2019 and sells its
partnership interest in 2019. The
commenter requested confirmation that
the partner would not deduct 50 percent
of the EBIE since the sale of the
partnership interest occurred in 2019,
resulting in a gain/loss recognition
event during the 2019 taxable year, and
there would be no basis in the
partnership for the partner to deduct 50
percent of the 2019 EBIE.
The Treasury Department and the IRS
believe that the example, as drafted in
the proposed regulations, represents a
correct interpretation of the regulations
and are therefore finalizing the example
without change. However, these final
regulations clarify that § 1.163(j)–6(g)(4)
business interest expense can be
deducted by the disposing partner
except to the extent that the business
interest expense is negative section
163(j) expense as defined in § 1.163(j)–
6(h)(1) immediately before the
disposition. Under the example in
§ 1.163(j)–6(o)(36), the partner treats 50
percent of 2019 EBIE ($10 x 50%) as
§ 1.163(j)–6(g)(4) business interest
expense. Section 1.163(j)–6(g)(4)
provides that if a partner disposes of a
partnership interest in the partnership’s
2019 or 2020 taxable year, the partner
can deduct the § 1.163(j)–6(g)(4)
business interest expense and there is
no basis increase under § 1.163(j)–
6(h)(3) for this amount. Thus, unless the
partner elects out of the 50 percent EBIE
rule, the partner would have a $25 loss
(instead of a $30 loss) from the sale of
its partnership interest in 2019 and $5
of deductible BIE that is not subject to
a section 163(j) limitation at the partner
level.
The Treasury Department and the IRS
received one comment on proposed
§ 1.163(j)–6(d)(5). This commenter
stated that the proposed regulations
disregard the ‘‘11–step approach’’ in
§ 1.163(j)–6(f)(2), and instead point to
different mechanics of a tiered

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

partnership allocation rule under
proposed § 1.163(j)–6(j)(9). The
commenter recommended additional
guidance and examples on the
application of the proposed regulations
to non-tiered partnerships and
partnerships that historically allocate all
items pro rata.
In light of this comment, and in light
of the fact that the tiered partnership
rules in the proposed regulations are not
being finalized at this time, the Treasury
Department and the IRS believe that a
simpler method for a partnership to take
into account 2019 ATI in 2020 is
warranted. Therefore, these final
regulations prescribe a simplified
method that applies when a partnership
uses its 2019 section 704 income, gain,
loss, and deduction amounts in
determining its 2020 allocable ATI and
include an illustrative example.
V. Comments on and Changes to
Proposed § 1.163(j)–7: Application of
the Section 163(j) Limitation to Foreign
Corporations and United States
Shareholders
A. Overview
Section 1.163(j)–7 provides rules for
applying section 163(j) to relevant
foreign corporations and their United
States shareholders (U.S. shareholders).
As described in this part V of the
Summary of Comments and Explanation
of Revisions section, the Treasury
Department and the IRS continue to
study aspects of proposed § 1.163(j)–7.
Accordingly, the final regulations
reserve on § 1.163(j)–7(c)(2)(iii) (treating
a CFC group as single C corporation for
purposes of allocations to an excepted
trade or business) and (iv) (treating a
CFC group as single taxpayer for
purposes of treating amounts as
interest), (f)(2) (ordering rule when a
CFC group member has ECI), and (j)
(computation of ATI of certain United
States shareholders of applicable CFCs),
and related definitions in § 1.163(j)–
7(k). These paragraphs of the 2020
Proposed Regulations are retained in
proposed form and may be relied on to
the extent provided in the Applicability
Dates section.
B. Negative Adjusted Taxable Income of
CFC Group Members
Proposed § 1.163(j)–7(c) provided
rules for applying section 163(j) to CFC
group members. Proposed § 1.163(j)–
7(c)(2)(i) provided that a single section
163(j) limitation is computed for a
specified period of a CFC group based
on the sum of the current–year business
interest expense, disallowed BIE
carryforwards, BII, floor plan financing
interest expense, and ATI of each CFC

PO 00000

Frm 00012

Fmt 4701

Sfmt 4700

group member. For this purpose, the
ATI and other items of a CFC group
member were generally computed on a
separate–entity basis. Proposed
§ 1.163(j)–7(c)(2)(i).
Under the general rule of § 1.163(j)–
1(b)(1)(vii), ATI of a taxpayer cannot be
less than zero (no-negative ATI rule).
Two comments were received regarding
the application of the no-negative ATI
rule with respect to CFC groups and
CFC group members. One of the
comments stated that it is unclear how
the rule applies to CFC group members.
Both comments asserted that the nonegative ATI rule should apply with
respect to the CFC group, rather than
each separate CFC group member. As a
result, the ATI of a CFC group would
generally be reduced by the negative
ATI of CFC group members, if any. One
comment noted that consolidated
groups have a single ATI amount, which
takes into account losses of consolidated
group members. Another comment
noted that, if negative ATI of CFC group
members is not taken into account, CFC
group members could be required to
deduct BIE in a taxable year in which
the sum of the CFC group members’
tested losses exceed the sum of their
tested income; the comment questioned
whether this result is appropriate,
noting that it would often be more
beneficial to carry forward the
disallowed BIE to the subsequent
taxable year in light of the fact that
tested losses cannot be carried forward
to subsequent taxable years.
The Treasury Department and the IRS
agree that the ATI of CFC group
members should take into account
amounts less than zero for purposes of
determining the ATI of a CFC group.
Accordingly, the final regulations
provide that the no-negative ATI rule
applies with respect to the ATI of a CFC
group, rather than a CFC group member.
C. Transactions Between CFC Group
Members
In general, intragroup transactions are
taken into account for purposes of
computing a CFC group’s section 163(j)
limitation. However, proposed
§ 1.163(j)–7(c)(2)(ii) provided an antiabuse rule that disregarded an
intragroup transaction between CFC
group members if a principal purpose of
entering into the transaction was to
affect the CFC group’s or a CFC group
member’s section 163(j) limitation by
increasing or decreasing the CFC group
or a CFC group member’s ATI. Some
comments requested a broader rule that
would permit taxpayers to elect
annually to disregard BII and BIE
between CFC group members for
purposes of applying section 163(j). The

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
comments asserted that this election
would reduce the compliance burden on
taxpayers.
The final regulations do not provide
an election to disregard intragroup BII
and BIE. The effect of the requested
election would be to allow a deduction
for all intragroup BIE and to cause the
section 163(j) limitation applicable to
other BIE (that is, BIE with respect to
debt that is not between members of a
CFC group) to be determined without
regard to intragroup BII. Although the
requested election would not affect the
total amount of deductible BIE within
the CFC group, it would change the
location of the deduction within the
CFC group (that is, the CFC group
member for which a deduction is
allowed). Moving a BIE deduction from
one CFC group member to another may
have significant Federal income tax
consequences. For example, the location
of a CFC group’s interest deduction can
affect the amount of a CFC group
member’s subpart F income and tested
income (or tested loss) and, therefore,
the amount of a U.S. shareholder’s
income inclusion under section 951(a)
or 951A(a), respectively. Thus, the
requested election could be used to
inappropriately manipulate the impact
of BIE deductions within a CFC group.
However, the final regulations expand
the anti-abuse rule so that it may apply
not only to certain intragroup
transactions that affect ATI but also to
intragroup transactions entered into
with a principal purpose of affecting a
CFC group or a CFC group member’s
section 163(j) limitation by increasing
the CFC group or a CFC group member’s
BII. This rule is intended to prevent
taxpayers from artificially increasing the
total amount of BII and BIE within a
CFC group for a specified period in
order to shift disallowed BIE from one
CFC group member to another or change
the timing of deductions of BIE. For
example, a payment of BIE by a payor
CFC group member to a payee CFC
group member will generally result in
an equal increase in the CFC group’s
section 163(j) limitation (and therefore
the amount of deductible BIE) as a result
of the increase in the CFC group’s BII.
However, the increase in the CFC
group’s section 163(j) limitation is not
necessarily allocated to the payor.
Instead, under the ordering rules of
§ 1.163(j)–7(c)(3), the additional section
163(j) limitation would be allocated first
to the payee to the extent it has BIE, and
then may be allocated to other CFC
group members. This type of transaction
would be subject to the anti-abuse rule
if it was entered into with a principal
purpose of increasing the amount of BIE

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

deductible by other CFC group
members.
D. High-Tax Exceptions
1. Application of Section 163(j) to
Controlled Foreign Corporations With
High-Taxed Income
One comment suggested that the
Treasury Department and the IRS
consider a special rule for the
application of section 163(j) to CFC
group members that are subject to the
subpart F high-tax exception under
§ 1.954–1(d) or the GILTI high-tax
exclusion under § 1.951A–2(c)(7)
(together, high-tax exceptions). For
example, the comment suggested a
multi-step approach under which
section 163(j) would first be applied to
CFC group members on a separate-entity
basis for the purpose of applying the
high-tax exceptions, and then ATI and
BIE of CFC group members subject to
the high-tax exceptions could be
excluded in computing the CFC group’s
section 163(j) limitation.
The Treasury Department and the IRS
have determined that applying section
163(j) first to each CFC group member
on a separate-entity basis, then applying
the high-tax exceptions, and then
reapplying section 163(j) to a CFC group
by excluding income eligible for the
high-tax exceptions, would significantly
increase the administrative and
compliance burdens of section 163(j)
and therefore reduce the benefits of
making a CFC group election.
Furthermore, such an approach would
be inconsistent with the general concept
and purpose of a consolidated approach
to the CFC group election; for example,
it would increase the relevance of the
location of intragroup debt and ATI
within a CFC group and could
inappropriately enhance the effective
foreign tax rate of such income.
Accordingly, the final regulations do not
adopt this recommendation.
2. Disallowed Business Interest Expense
Carryforwards and the High-Tax
Exceptions
Section 163(j) and the section 163(j)
regulations generally apply to determine
the deductibility of BIE of a relevant
foreign corporation (which includes an
applicable CFC) in the same manner as
those provisions apply to determine the
deductibility of BIE of a domestic C
corporation. Section 1.163(j)–7(b). One
comment requested that the Treasury
Department and the IRS confirm that a
CFC to which the high-tax exceptions
apply can still have a disallowed BIE
carryforward.
The high-tax exception does not
modify the rules for determining the

PO 00000

Frm 00013

Fmt 4701

Sfmt 4700

5507

section 163(j) limitation or the amount
of an applicable CFC’s disallowed BIE
carryforward. See part V.D.1 of this
Summary of Comments and Explanation
of Revisions section. Accordingly, an
applicable CFC may have disallowed
BIE carryforwards if the applicable CFC
is subject to a high-tax exception in the
taxable year(s) in which the disallowed
BIE carryforwards arose.
E. Allocation of CFC Group Items to an
Excepted Trade or Business
Proposed § 1.163(j)–7(c)(2)(iii)
provided that, for purposes of allocating
items to an excepted trade or business
under § 1.163(j)–10, all CFC group
members are treated as a single C
corporation. Similarly, proposed
§ 1.163(j)–7(c)(2)(iv) provided that, for
purposes of determining whether
certain amounts are treated as interest
within the meaning of § 1.163(j)–
1(b)(22), all CFC group members are
treated as a single taxpayer. Several
comments addressed the method of
allocating items of a CFC group member
to an excepted trade or business under
§ 1.163(j)–10. The Treasury Department
and the IRS continue to study the
proper method for allocating CFC group
members’ items to an excepted trade or
business and when it is appropriate to
treat a CFC group as a single entity. The
Treasury Department and the IRS may
address these issues in future guidance
and will consider the comments at that
time. Accordingly, the final regulations
reserve on § 1.163(j)–7(c)(2)(iii) and (iv).
F. Limitation on Pre-Group Disallowed
Business Interest Expense Carryforwards
1. Pre-Group Disallowed Business
Interest Expense Carryforwards
Attributable to Specified Group
Members
The 2020 Proposed Regulations
provided special rules relating to
disallowed BIE carryforwards of a CFC
group member that arose in a taxable
year before it joined the CFC group (pregroup disallowed BIE carryforwards).
Under proposed § 1.163(j)–
7(c)(3)(iv)(A)(1), a CFC group member
cannot deduct pre-group disallowed BIE
carryforwards in excess of the
cumulative section 163(j) pre-group
carryforward limitation. This limitation
is determined in a manner similar to the
limitation on the use of carryovers of a
member of a consolidated group arising
in a separate return limitation year
(SRLY). See § 1.1502–21(c).
One comment requested that the
limitation on pre-group disallowed BIE
carryforwards be removed, because it
increases the compliance burden on
taxpayers and any potential for loss

E:\FR\FM\19JAR4.SGM

19JAR4

5508

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

khammond on DSKJM1Z7X2PROD with RULES4

trafficking could adequately be
addressed by an anti-abuse rule.
Alternatively, if this request is not
adopted, the comment requested that
the limitation on pre-group disallowed
BIE carryforwards not apply to
disallowed BIE carryforwards that arose
in a taxable year in which a CFC group
election was available but prior to the
first taxable year for which the CFC
group election was in effect. The
comment asserted that applying the
limitation to such carryforwards is
inappropriate because there is no loss
trafficking concern unless a CFC is
acquired from outside the group.
The Treasury Department and the IRS
have determined that it would be
inappropriate for the limitation on
deduction of pre-group disallowed BIE
carryforwards to be replaced with an
anti-abuse rule focused on loss
trafficking. Loss trafficking concerns
may arise anytime the ATI or BII of one
CFC group member is used to allow a
deduction for BIE of another CFC group
member attributable to a taxable year
before the other CFC group member
joined the CFC group. As a result, the
final regulations retain the limitation on
the deduction of pre-group disallowed
BIE carryforwards.
2. Application of Section 382 to CFCs
Joining or Leaving a CFC Group
As a general matter, the SRLY
limitations described in §§ 1.1502–21(c)
and 1.163(j)–5(d) do not apply to a
member of a consolidated group if their
application would result in an overlap
with the application of section 382
(SRLY overlap rule). See §§ 1.1502–
21(g)(1) and 1.163(j)–5(f). One comment
requested clarification as to whether
section 382 applies to a CFC that does
not have ECI. The comment generally
supported the limitation on pre-group
disallowed BIE carryforwards but
suggested that, if section 382 applies to
CFCs, a rule similar to the SRLY overlap
rule should be adopted to prevent the
limitation on pre-group disallowed BIE
carryforwards from applying to a CFC
group member if its application would
result in an overlap with the application
of section 382.
Section 382, by its terms, applies to
the disallowed BIE carryforwards of
foreign corporations regardless of
whether they have ECI. However, the
Treasury Department and the IRS
continue to study certain aspects of the
application of sections 163(j) and 382 to
foreign corporations, including the
possible application of a SRLY overlap
rule to applicable CFCs joining or
leaving a CFC group, as well as the
computation of any relevant section
382(a) limitation. The Treasury

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

Department and the IRS may address
these issues in future guidance and will
consider the comments at that time.
G. Specified Groups and Specified
Group Members
1. The 80-Percent Ownership Threshold
Proposed § 1.163(j)–7(d) provided
rules for determining a specified group
and specified group members. A
specified group includes one or more
chains of applicable CFCs connected
through stock ownership with a
specified group parent, but only if the
specified group parent owns stock
meeting the requirements of section
1504(a)(2)(B) (which requires 80 percent
ownership by value) in at least one
applicable CFC, and stock meeting the
requirements of section 1504(a)(2)(B) in
each of the applicable CFCs (except the
specified group parent) is owned by one
or more of the other applicable CFCs or
the specified group parent. Indirect
ownership through a partnership or
through a foreign estate or trust is taken
into account for this purpose.
Some comments requested that the
ownership threshold for applying this
rule be reduced to 50 percent, or ‘‘more
than 50 percent,’’ in order to make the
rule consistent with the ownership rules
in sections 957 and 954(d)(3). The
comments asserted that a lower
threshold would reduce the compliance
burden of applying section 163(j) to
CFCs on a separate-entity basis, would
allow joint ventures to be included in
the CFC group, and could prevent
taxpayers from manipulating their
ownership interests in order to break
affiliation and exclude entities from the
CFC group. One comment noted that
local regulatory restrictions may prevent
a U.S. shareholder from owning 80
percent of the stock in a CFC.
Another comment requested that the
ownership threshold be reduced to 50
percent with respect to a CFC that has
only one U.S. shareholder. The
comment asserted that, if a CFC has
only one U.S. shareholder, there is no
concern of potentially inconsistent
treatment by different shareholders and
there would be no need for additional
procedural requirements (for example, a
requirement to provide notice to other
shareholders). Alternatively, the
comment suggested that a specified
group parent that is a qualified U.S.
person be permitted to elect to treat a
CFC as a CFC group member if it meets
the 50 percent (but not the 80 percent)
ownership threshold, even if the
specified group parent is not the sole
U.S. shareholder.
The Treasury Department and the IRS
have determined that it would be

PO 00000

Frm 00014

Fmt 4701

Sfmt 4700

inappropriate to reduce the specified
group ownership threshold below 80
percent. The application of section
163(j) to a CFC group is modeled on the
rules for applying section 163(j) to a
U.S. consolidated group under
§ 1.163(j)–5. Accordingly, the definition
of a specified group is generally
consistent with the definition of an
affiliated group under section 1504. In
certain respects, the rules of § 1.163(j)–
7(c) have the effect of treating a CFC
group as a single entity for purposes of
section 163(j). Such treatment is not
appropriate for CFCs that do not share
at least 80 percent common ownership,
that is, CFCs that are not highly related.
Moreover, because one CFC group
member’s ATI and BII can be used by
other CFC group members to deduct
BIE, reducing the specified ownership
threshold would increase the potential
for one CFC group member to
disproportionately benefit, or suffer a
detriment, from the attributes of another
CFC group member even though those
CFCs are not highly related.
As an alternative, one comment
requested that a U.S. shareholder be
permitted to take into account its pro
rata share of CFC attributes in
computing the CFC group section 163(j)
limitation without regard to the
percentage of the U.S. shareholder’s
ownership interest. This approach is not
adopted in the final regulations because
it would require different U.S.
shareholders to calculate the section
163(j) limitation differently and
separately track disallowed BIE
carryforwards with respect to the same
CFC.
2. Clarifications to Rules for
Determining a Specified Group and
Specified Group Members
The final regulations make several
clarifying changes to the rules for
determining a specified group and
specified group members. First, the
definition of specified group in
§ 1.163(j)–7(d)(2)(i) is modified to clarify
that a specified group may exist when
a qualified U.S. person directly owns all
of its applicable CFCs rather than
owning one or more chains of
applicable CFCs.
Second, the definition of specified
group member in § 1.163(j)–7(d)(3) is
modified to clarify that there must be at
least two applicable CFCs in a specified
group in order for any applicable CFC
to be a specified group member and for
a CFC group election to be available.
Finally, the rule in § 1.163(j)–
7(d)(2)(vii) (concerning when a
specified group ceases to exist) is
modified to clarify that references to the
common parent in § 1.1502–75(d)(1),

E:\FR\FM\19JAR4.SGM

19JAR4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
(d)(2)(i) through (d)(2)(ii), and (d)(3)(i)
through (d)(3)(iv) are treated as
references to the specified group parent.
This is the case even if the specified
group parent is a qualified U.S. person
and therefore not included in the
specified group.

khammond on DSKJM1Z7X2PROD with RULES4

H. CFC Group Election
1. Timing and Revocation of the CFC
Group Election
Proposed § 1.163(j)–7(e) provided
rules and procedures for treating
specified group members as CFC group
members and for determining a CFC
group. Proposed § 1.163(j)–7(e)(5)
provided rules for making and revoking
a CFC group election. Under the 2020
Proposed Regulations, a CFC group
election could not be revoked with
respect to any specified period of the
specified group that begins during the
60-month period following the last day
of the first specified period for which
the election was made. Similarly, once
revoked, a CFC group election could not
be made again with respect to any
specified period of the specified group
that begins during the 60-month period
following the last day of the first
specified period for which the election
was revoked. The preamble to the
proposed regulations requested
comments as to whether a specified
group that does not make a CFC group
election when it first comes into
existence (or for the first specified
period following 60 days after the date
of publication of the Treasury decision
adopting the 2020 Proposed Regulations
as final in the Federal Register) should
be precluded from making the CFC
group election for the following 60month period.
Some comments requested that
taxpayers be permitted to make or
revoke the CFC group election on an
annual basis, due to the difficulty of
predicting the effect of the election five
years in advance (including the
potential for changes in fact or law that
could interact adversely with the CFC
group election). The comments noted
that, although the election is favorable
in most cases, it could have unfavorable
consequences in some circumstances.
Some comments recommended
against imposing a 60-month waiting
period on specified groups for which a
CFC group election is not made for the
first specified period in which a
specified group exists (or the specified
period beginning 60 days after the
regulations are finalized), because
taxpayers may lack the resources or
information to determine whether to
make the election for the first taxable
year in which it is available.

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

Furthermore, some comments asked for
clarification concerning when the 60month period begins if a CFC group
election is made or revoked with respect
to a prior specified period. Finally, one
comment recommended that the
Treasury Department and the IRS
consider providing an exception to the
60-month rule that would allow a CFC
group election to be revoked when there
is a ‘‘change in control.’’ The comment
did not suggest a definition of change in
control.
The Treasury Department and the IRS
have determined that taxpayers should
not be permitted to revoke the CFC
group election for a specified period
beginning within 60 months after the
specified period for which it is made or
to make the CFC group election for a
specified period beginning within 60
months after the specified period for
which it is revoked. The CFC group
rules are based in part on the
consolidated return rules, which do not
allow affiliated groups that have elected
to file a consolidated return to
discontinue the filing of a consolidated
return without the consent of the
Commissioner (which generally requires
a showing of good cause). See § 1.1502–
75(c). In addition, if a corporation
ceases to be a member of a consolidated
group, that corporation generally is not
permitted to rejoin the consolidated
group before the 61st month beginning
after its first taxable year in which it
ceased to be a member of the group.
Section 1504(a)(3)(A).
Moreover, an annual election would
enable taxpayers to use section 163(j) to
inappropriately control the timing of
BIE deductions. In general, the CFC
group election is intended, in large part,
to reduce taxpayer burden, including
compliance costs and costs that might
otherwise be incurred to restructure the
location of debt within a CFC group
solely for purposes of section 163(j), and
to permit allocation of a CFC group’s
section 163(j) limitation to CFC group
members with BIE. The CFC group
election is not intended to allow
taxpayers to select the most favorable
result in every taxable year.
The Treasury Department and the IRS
agree that it is not necessary to impose
the 60-month waiting period on
specified groups that have neither made
nor revoked a CFC group election.
Accordingly, the final regulations do not
impose a 60-month waiting period on a
specified group for which a CFC group
election is not made for the first
specified period in which a specified
group exists (or the specified period
beginning 60 days after the regulations
are finalized). The final regulations
provide, consistent with the 2020

PO 00000

Frm 00015

Fmt 4701

Sfmt 4700

5509

Proposed Regulations, that the 60month period begins after the last day
of the specified period for which the
election was made or revoked. See
§ 1.163(j)–7(e)(5). Therefore, if an
election is made or revoked with respect
to a specified period, the 60-month
period begins to run on the day after the
end of that specified period. Finally, the
Treasury Department and the IRS
continue to study whether an exemption
to the 60-month rule for revoking a CFC
group election is appropriate when the
ownership of the CFC group changes but
the specified group continues and,
therefore, the CFC group would also
otherwise continue absent an
exemption.
2. Disclosure Required for Taxable Years
in Which a CFC Group Election is in
Effect
Under the 2020 Proposed Regulations,
a designated U.S. person makes a CFC
group election by attaching a statement
to its relevant Federal income tax or
information return. Proposed § 1.163(j)–
7(e)(5)(iv). However, the 2020 Proposed
Regulations did not require a statement
to be filed for taxable years following
the taxable year for which an election is
made. In order to facilitate ongoing
disclosure of the computation of the
CFC group 163(j) limitation in
subsequent taxable years, the final
regulations provide that (in accordance
with publications, forms, instructions,
or other guidance) each designated U.S.
person must attach a statement to its
relevant Federal income tax or
information return for each of its taxable
years that includes the last day of a
specified period of a specified group for
which a CFC group election is in effect.
See § 1.163(j)–7(e)(6). The CFC group
election remains in effect even if the
required statement is not filed.
I. CFC Group Members With Effectively
Connected Income
Proposed § 1.163(j)–7(f) provided that
if a CFC group member has income that
is effectively connected with the
conduct of a U.S. trade or business
(ECI), then ECI items and related
attributes of the CFC group member are
not included in the calculation of the
section 163(j) limitation of the CFC
group or in the allocation of the
limitation among CFC group members,
but are treated as items of a separate
CFC (ECI deemed corporation) that is
not treated as a CFC group member. A
comment requested clarification
concerning the proper method for
allocating assets between the CFC group
member and the ECI deemed
corporation, which is relevant to the

E:\FR\FM\19JAR4.SGM

19JAR4

5510

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

allocation of BII and BIE to an excepted
trade or business under § 1.163(j)–10.
As discussed in part VI of this
Summary of Comments and Explanation
of Revisions section, the Treasury
Department and the IRS continue to
study the application of section 163(j) to
foreign corporations with ECI. The
Treasury Department and the IRS may
address these issues in future guidance
and will consider the comment at that
time. Before the issuance of such
guidance, taxpayers should use a
reasonable method for allocating assets
between the CFC group member and the
ECI deemed corporation. The method
must be consistently applied to all CFC
group members and each specified
period of the CFC group after the first
specified period in which it is applied.
In addition, because the Treasury
Department and the IRS continue to
study the application of section 163(j) to
foreign corporations with ECI, the final
regulations reserve on § 1.163(j)–7(f)(2)
(ordering rule with § 1.163(j)–8 when a
CFC group member has ECI).

khammond on DSKJM1Z7X2PROD with RULES4

J. ATI Computation of an Applicable
CFC
1. Foreign Income Taxes
The 2020 Proposed Regulations
provided that, for purposes of
computing the ATI of a relevant foreign
corporation for a taxable year, tentative
taxable income takes into account a
deduction for foreign income taxes.
Proposed § 1.163(j)–7(g)(3). The
preamble to the 2020 Proposed
Regulations requested comments on
whether, and the extent to which, the
ATI of a relevant foreign corporation
should be determined without regard to
a deduction for foreign income taxes.
Some comments asserted that all foreign
income taxes, or foreign income taxes
imposed by the country in which a CFC
is organized or a tax resident, should
not be taken into account as a deduction
for purposes of computing a CFC’s ATI.
The comments asserted that not taking
into account a deduction for such
foreign income taxes would provide
parity between CFCs and domestic
corporations, which do not deduct
Federal income taxes (but may deduct
state and foreign taxes) in determining
their ATI.
Other comments noted that, if a
domestic corporation elects to claim a
foreign tax credit, the deduction for
foreign income taxes is disallowed
under section 275(a)(4) and is not taken
into account in determining the
domestic corporation’s ATI. Therefore,
disregarding a CFC’s deduction for
foreign income taxes would conform the
ATI of a CFC with that of a domestic

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

corporation doing business through a
foreign branch that elects to credit
foreign income taxes. Another comment
asserted that foreign income taxes
should not be deducted to the extent a
CFC’s U.S. shareholders elect to credit
foreign income taxes. Finally, several
comments suggested that the proposed
rule penalizes CFCs operating in hightax jurisdictions.
The Treasury Department and the IRS
agree that it is appropriate to determine
the ATI of a relevant foreign corporation
without regard to a deduction for
foreign income taxes that are eligible to
be claimed as a foreign tax credit.
Accordingly, the final regulations
provide that no deduction for foreign
income taxes (within the meaning of
§ 1.960–1(b)) is taken into account for
purposes of determining the ATI of a
relevant foreign corporation. Thus,
regardless of whether an election is
made to claim a credit for these foreign
income taxes, the foreign income taxes
do not reduce ATI.
2. Anti-Abuse Rule
Proposed § 1.163(j)–7(g)(4) provided
that, if certain conditions are met, when
one specified group member or
applicable partnership (specified
borrower) pays interest to another
specified group member or applicable
partnership (specified lender), and the
payment is BIE to the specified
borrower and income to the specified
lender, then the ATI of the specified
borrower is increased by the amount
necessary for the BIE of the specified
borrower not to be limited under section
163(j). A partnership is an applicable
partnership if at least 80 percent of the
interests in capital or profits is owned,
in the aggregate, directly or indirectly
through one or more other partnerships,
by specified group members of the same
specified group.
The final regulations provide that, for
purposes of determining whether a
partnership is an applicable
partnership, a partner’s interests in the
profits and capital of the partnership are
determined in accordance with the rules
and principles of § 1.706–1(b)(4)(ii)
through (iii).
K. Safe Harbor
Proposed § 1.163(j)–7(h) provided a
safe-harbor election for stand-alone
applicable CFCs and CFC groups. If the
safe-harbor election is in effect for a
taxable year of a stand-alone applicable
CFC or specified taxable year of a CFC
group member, no portion of the BIE of
the stand-alone applicable CFC or of
each CFC group member, as applicable,
is disallowed under section 163(j). The
safe-harbor election is intended to

PO 00000

Frm 00016

Fmt 4701

Sfmt 4700

reduce the compliance burden with
respect to applicable CFCs that would
not have disallowed BIE if they applied
section 163(j) by allowing taxpayers in
general to use subpart F income and
GILTI items in lieu of ATI. In general,
the safe-harbor election measures
whether BIE is less than or equal to the
sum of 30 percent of the applicable
CFC’s subpart F income and GILTI (not
to exceed the applicable CFC’s taxable
income), taking into account only
amounts attributable to a non-excepted
trade or business.
The preamble to the 2020 Proposed
Regulations requested comments on
appropriate modifications, if any, to the
safe-harbor election that would further
the goal of reducing the compliance
burden on stand-alone applicable CFCs
and CFC groups that would not have
disallowed BIE if they applied the
section 163(j) limitation. In this regard,
comments requested that the safe harbor
be expanded to cover applicable CFCs
and CFC groups that have BII that is
greater than or equal to BIE. The
comments noted that an application of
section 163(j) would not disallow any
BIE of an applicable CFC or CFC group
that has net BII.
The Treasury Department and the IRS
agree that it is appropriate for the safeharbor to be expanded as requested
because an application of section 163(j)
in this case would not disallow any BIE.
Accordingly, the final regulations
provide that a safe-harbor election may
be made with respect to a stand-alone
applicable CFC or CFC group if its BIE
does not exceed either (i) its BII, or (ii)
30 percent of the lesser of its eligible
amount (in general, the sum of the
applicable CFC’s subpart F income and
GILTI, taking into account only items
properly allocable to a non-excepted
trade or business) or its qualified
tentative taxable income (that is, the
applicable CFC’s tentative taxable
income determined by taking into
account only items properly allocable to
a non-excepted trade or business). Thus,
under the final regulations, if either a
stand-alone applicable CFC or a CFC
group has BII that is greater than or
equal to its BIE, it is not necessary to
determine its qualified tentative taxable
income or eligible amount in order to
make the safe-harbor election. However,
consistent with the 2020 Proposed
Regulations, the election may not be
made for a CFC group that has pre-group
disallowed BIE carryforwards.
In addition, consistent with the
changes described in part V.B of the
Summary of Comments and Explanation
of Revisions section (providing that
negative ATI of a CFC group member is
taken into account for purposes of

E:\FR\FM\19JAR4.SGM

19JAR4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
computing the CFC group’s section
163(j) limitation), the determination of
the eligible amount of a stand–alone
applicable CFC or a CFC group has been
modified to account for tested losses, if
any, of an applicable CFC. See
§ 1.163(j)–7(h)(3). Rather than providing
a formula for calculating each
component of the eligible amount, the
final regulations rely on existing rules
under sections 951, 951A, 245A (to the
extent provided in section 964(e)(4)),
and 250 to determine the taxable
income a domestic corporation would
have had if it wholly owned the stand–
alone applicable CFC or CFC group
members and had no other assets or
income. See § 1.163(j)–7(h)(3).

khammond on DSKJM1Z7X2PROD with RULES4

L. Increase in Adjusted Taxable Income
of United States Shareholders
Proposed § 1.163(j)–7(j) provided
rules that increase a U.S. shareholder’s
ATI by a portion of its specified deemed
inclusions (as defined in § 1.163(j)–
1(b)(1)(ii)(G)). Several comments were
received on these rules. The Treasury
Department and the IRS continue to
study the method for determining the
portion of the specified deemed
inclusions of a U.S. shareholder that
should increase its ATI. The Treasury
Department and the IRS may address
this issue in future guidance and will
consider the comments at that time.
Accordingly, the final regulations
reserve on § 1.163(j)–7(j).
VI. Comments on and Changes to
Proposed § 1.163(j)–8: Application of
the Business Interest Deduction
Limitation to Foreign Persons With
Effectively Connected Income
Proposed § 1.163(j)–8 provides rules
for applying section 163(j) to a
nonresident alien individual or foreign
corporation with ECI. The Treasury
Department and the IRS continue to
study methods of determining the
amount of deductible BIE and
disallowed business interest expense
carryforwards that are allocable to ECI,
such as the ATI ratio defined in
proposed § 1.163(j)–8(c)(1)(ii) and the
interaction of proposed § 1.163(j)–8 with
the tiered partnership rules in proposed
§ 1.163(j)–6(j). The Treasury Department
and the IRS anticipate addressing these
issues in future guidance and will
consider the comments at that time.
Accordingly, the final regulations
continue to reserve on § 1.163(j)–8.
VII. Comments on and Changes to
Proposed § 1.469–9: Definition of Real
Property Trade or Business
Section 469(c)(7)(C) defines real
property trade or business by reference
to eleven types of trades or businesses

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

that are not defined in the statute. The
2020 Proposed Regulations, in response
to questions about the application of
section 469(c)(7)(C) to timberlands,
provided definitions for two terms—real
property development and real property
redevelopment—to further clarify what
constitutes a real property trade or
business.
One commenter questioned why the
preamble to the 2020 Proposed
Regulations references the definition of
‘‘farming’’ in section 464(e), when the
term ‘‘farming business’’ in section
163(j)(7)(C) is defined by reference to
section 263A(e)(4) rather than to section
464(e). The commenter further noted
that a section 263A(e)(4) ‘‘farming
business’’ excludes not only timber but
also any evergreen tree which is more
than 6 years old at the time severed
from the roots. The commenter posited
that there is no reason why such trees
should be treated differently from
timber for section 163(j) purposes.
The Treasury Department and the IRS
have concluded that no change is
required to the definition of real
property trade or business and that the
definitions of ‘‘real property
development’’ and ‘‘real property
redevelopment’’ in proposed § 1.469–
9(b)(2)(ii)(C) and (D) should be adopted
in the final regulations without change.
However, it should be noted that
§ 1.469–9(b)(2)(i)(B) references section
464(e) to exclude farming activities from
the definition of real property trade or
business for purposes of section
469(c)(7)(C). In promulgating § 1.469–
9(b)(2)(i)(B), the Treasury Department
and the IRS determined that the term
‘‘farming’’ as provided in section 464(e)
is the most appropriate definition for
purposes of section 469(c)(7). Section
464(e) generally excludes the cultivation
and harvesting of trees (except those
bearing fruit or nuts) from the definition
of ‘‘farming.’’ Accordingly, the Treasury
Department and the IRS note that the
term ‘‘timberland’’ as used in § 1.469–
9(b)(2)(ii)(C) and (D) includes evergreen
trees (including those described in
section 263A(e)(4)). Therefore, to the
extent the evergreen trees may be
located on parcels of land covered by
forest, the Treasury Department and the
IRS have concluded that the business
activities of cultivating and harvesting
such evergreen trees may be properly
considered as a component of a ‘‘real
property development’’ or ‘‘real
property redevelopment’’ trade or
business under the final regulations,
and no additional clarification is needed
in this regard. To the extent that any
business activities of cultivating or
harvesting evergreen trees do not
explicitly fall within these two

PO 00000

Frm 00017

Fmt 4701

Sfmt 4700

5511

definitions, then such business
activities may otherwise qualify under
one or more of the other terms provided
in section 469(c)(7)(C). Providing a
definition for any of the remaining
undefined terms in section 469(c)(7)(C)
is beyond the scope of the final
regulations.
VIII. Comments on and Changes to
Proposed § 1.163(j)–10
A. Proposed Limitation on Corporate
Look-Through Rules
For purposes of determining the
extent to which a shareholder’s basis in
the stock of a domestic nonconsolidated C corporation or CFC is
allocable to an excepted or nonexcepted trade or business under
§ 1.163(j)–10, § 1.163(j)–10(c)(5)(ii)(B)
provides several look-through rules
whereby the shareholder ‘‘looks
through’’ to the corporation’s basis in its
assets.
The application of these look-through
rules may produce distortive results in
certain situations. For example, assume
Corporation X’s basis in its assets is
split equally between X’s excepted and
non-excepted trades or businesses, and
that (as a result) X has a 50 percent
exempt percentage applied to its interest
expense. However, rather than operate
its excepted trade or business directly,
X operates its excepted trade or business
through a wholly owned, nonconsolidated subsidiary (Corporation Y),
and each of X and Y borrows funds from
external lenders. Assuming for purposes
of this example that neither the antiavoidance rule in § 1.163(j)–2(h) nor the
anti-abuse rule in § 1.163(j)–10(c)(8)
applies, Y’s interest expense would not
be subject to the section 163(j)
limitation because Y is engaged solely
in an excepted trade or business.
Moreover, a portion of X’s interest
expense also would be allocable to an
excepted trade or business by virtue of
the application of the look-through rule
in § 1.163(j)–10(c)(5)(ii)(B)(2) to X’s
basis in Y’s stock.
The anti-avoidance rule in § 1.163(j)–
2(h) and the anti-abuse rule in
§ 1.163(j)–10(c)(8) would preclude the
foregoing result in certain
circumstances. However, proposed
§ 1.163(j)–10(c)(5)(ii)(D)(2) would
modify the look-through rule for
domestic non-consolidated C
corporations and CFCs to limit the
potentially distortive effect of this lookthrough rule on tiered structures in
situations to which the anti-avoidance
and anti-abuse rules do not apply. More
specifically, proposed § 1.163(j)–
10(c)(5)(ii)(D)(2) would modify the lookthrough rule for non-consolidated C

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

5512

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

corporations to provide that, for
purposes of determining a taxpayer’s
basis in its assets used in excepted and
non-excepted trades or businesses, any
such corporation whose stock is being
looked through may not itself apply the
look-through rule (Limited LookThrough Rule).
For example, P wholly and directly
owns S1, which wholly and directly
owns S2. Each of these entities is a nonconsolidated C corporation to which the
small business exemption does not
apply. In determining the extent to
which its interest expense is subject to
the section 163(j) limitation, S1 may
look through the stock of S2 for
purposes of allocating S1’s basis in its
S2 stock between excepted and nonexcepted trades or businesses. However,
in determining the extent to which P’s
interest expense is subject to the section
163(j) limitation, S1 may not look
through the stock of S2 for purposes of
allocating P’s basis in its S1 stock
between excepted and non-excepted
trades or businesses.
Several commenters objected to the
Limited Look-Through Rule. One
commenter stated that the Limited
Look-Through Rule should not be
finalized because it would penalize
taxpayers that incur debt at the holding
company level but hold excepted trade
or business assets through tiers of nonconsolidated subsidiaries (such as CFCs)
for non-tax reasons. The commenter
contended that this result is especially
distortive in regulated industries, such
as utilities, in which debt financing at
the operating-entity level may be
limited or prohibited by regulators.
Another commenter noted that the
Limited Look-Through Rule potentially
conflicts with the single C corporation
approach for CFCs under proposed
§ 1.163(j)–7(c)(2)(iii).
The Treasury Department and the IRS
remain concerned that application of
the look-through rules in § 1.163(j)–10
to non-consolidated C corporations may
produce distortive results in certain
situations. However, as stated in the
preamble to the 2020 Proposed
Regulations, the Treasury Department
and the IRS are aware that taxpayers are
organized into multi-tiered structures
for legitimate, non-tax reasons and that
it may be commercially difficult or
impossible for taxpayers to limit or
reduce the number of tiers in many
cases. The Treasury Department and the
IRS have therefore determined that such
multi-tiered structures should be able to
apply the look through rules in
§ 1.163(j)–10. However, the Treasury
Department and the IRS have also
determined that the application of the
look through rules in § 1.163(j)–10 is

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

inappropriate in cases where a principal
purpose of a multi-tiered structure is to
benefit from distortion under those
rules.
Thus, the final regulations replace the
Limited Look-Through Rule with an
anti-abuse rule providing that, for
purposes of applying the look-through
rules in § 1.163(j)–10(c)(5)(ii)(B) and (C)
to a non-consolidated C corporation
(upper-tier entity), that upper-tier entity
may not apply those look-through rules
to a lower-tier non-consolidated C
corporation if a principal purpose for
borrowing funds at the upper-tier entity
level or adding an upper-tier or lowertier entity to the ownership structure is
increasing the amount of the taxpayer’s
basis allocable to excepted trades or
businesses.
For example, P wholly and directly
owns S1 (the upper-tier entity), which
wholly and directly owns S2. Each of S1
and S2 is a non-consolidated C
corporation to which the small business
exemption does not apply, and S2 is
engaged in an excepted trade or
business. With a principal purpose of
increasing the amount of its basis
allocable to excepted trades or
businesses, P has S1 (rather than S2)
borrow funds from a third party. S1 may
not look through the stock of S2 (and
may not apply the asset basis lookthrough rule described in § 1.163(j)–
10(c)(5)(ii)(B)(2)(iv)) for purposes of P’s
allocation of its basis in its S1 stock
between excepted and non-excepted
trades or businesses; instead, S1 must
treat its stock in S2 as an asset used in
a non-excepted trade or business for that
purpose. However, S1 may look through
the stock of S2 for purposes of S1’s
allocation of its basis in its S2 stock
between excepted and non-excepted
trades or businesses.
B. 80-Percent Ownership Threshold in
§ 1.163(j)–10(c)(7)(i)
A commenter recommended
eliminating the 80-percent ownership
threshold in § 1.163(j)–10(c)(7)(i) for
applying the look-through rules in
§ 1.163(j)–10(c)(5)(ii) to nonconsolidated C corporations. More
specifically, the commenter
recommended providing that interest
expense allocable to an equity interest
in an entity engaged in an electing real
property trade or business (RPTOB) be
treated as allocated to an electing
RPTOB to the extent the assets of that
entity are attributable to an electing
RPTOB, regardless of the level of the
equity interest. The commenter stated
that, because a less-than-80-percent
interest in a subsidiary corporation is
treated as allocable to a ‘‘trade or
business’’ for purposes of the section

PO 00000

Frm 00018

Fmt 4701

Sfmt 4700

163(j) limitation, it is appropriate to
treat the stock of that corporation as
allocable to an electing RPTOB if the
subsidiary corporation is an electing
RPTOB, without regard to an ownership
threshold.
As stated in the preamble to the 2018
Proposed Regulations, the Treasury
Department and the IRS have
determined that non-consolidated
entities generally should not be
aggregated for purposes of applying the
section 163(j) limitation. Moreover, as
stated in the preamble to T.D. 9905, the
Treasury Department and the IRS have
determined that an 80-percent
ownership threshold is appropriate for
domestic non-consolidated C
corporations because, unlike a
partnership, a corporation generally is
respected as an entity separate from its
owner(s) for tax purposes and, unlike a
partnership or an S corporation, a C
corporation is not taxed as a flowthrough entity. Thus, the final
regulations do not accept the
commenter’s recommendation.
C. Application of Look-Through Rules to
Small Businesses
Section 1.163(j)–10(c)(5)(ii)(D)
provides that a taxpayer may not apply
the look-through rules in § 1.163(j)–
10(c)(5)(ii) to a partnership, S
corporation, or non-consolidated C
corporation that is eligible for the small
business exemption under section
163(j)(3) and § 1.163(j)–2(d)(1), unless
that entity elects under § 1.163(j)–9 for
a trade or business to be an electing
RPTOB or an electing farming business.
Under § 1.163(j)–9(b)(2)(i), an exempt
small business entity that conducts a
RPTOB may make a ‘‘protective
election’’ for its RPTOB to be an
excepted trade or business.
A commenter noted that, if a taxpayer
indirectly holds an interest in an
electing RPTOB through an exempt
upper-tier partnership that does not
conduct an excepted trade or business,
the taxpayer would be ineligible to
allocate the taxpayer’s interest expense
to the electing RPTOB under T.D. 9905.
To ensure that the owners of an exempt
small business entity are treated
consistently regardless of the entity’s
overall capital structure, the commenter
recommended either (i) allowing the
owners of an exempt small business
entity to apply the look-through rules
without the need for a ‘‘protective
election’’ to be an excepted trade or
business, or (ii) allowing the small
business entity to elect to opt into the
look-through rules.
The Treasury Department and the IRS
appreciate the comments received on
the application of the look-through rules

E:\FR\FM\19JAR4.SGM

19JAR4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
to small businesses. These comments
concern provisions in T.D. 9905 that
were not revised in the 2020 Proposed
Regulations, and the Treasury
Department and the IRS have
determined that addressing these
comments would exceed the scope of
the final regulations. However, the
Treasury Department and the IRS will
continue to consider these comments for
purposes of potential future guidance.

khammond on DSKJM1Z7X2PROD with RULES4

D. Alternative to Asset Basis Allocation
A commenter recommended
amending § 1.163(j)–10 to permit
taxpayers to use a fair market value
allocation method when determining
allocations of BIE for purposes of
section 163(j). To discourage taxpayers
from shifting allocation methods, the
commenter recommended that a fair
market value allocation election be
irrevocable absent consent from the IRS.
As explained in the preamble to T.D.
9905, disputes between taxpayers and
the IRS over the fair market value of an
asset are a common and costly
occurrence. Moreover, in the TCJA,
Congress repealed the use of fair market
value in the apportionment of interest
expense under section 864 of the Code
(see section 14502(a) of the TCJA). As
noted in the preamble to T.D. 9905,
Congress stated that the ability to elect
to allocate interest expense under
section 864 on the basis of fair market
value of assets has led to inappropriate
results and needless complexity. For
these and other reasons, the Treasury
Department and the IRS continue to
believe that allocating interest expense
based on relative amounts of asset basis
is more appropriate than a regime based
on the relative fair market value of
assets. Thus, the final regulations do not
accept this comment.
Applicability Dates
These final regulations apply to
taxable years beginning on or after
March 22, 2021. See additional
discussion in part VI of the Special
Analyses addressing the Congressional
Review Act.
Some provisions regarding the choice
to apply the final regulations to taxable
years beginning before the applicability
date have changed from the 2020
Proposed Regulations. Commenters
noted that these provisions in the 2020
Proposed Regulations were complicated.
More specifically, in the 2020 Proposed
Regulations, retroactive application of
certain provisions requires application
of all of the section 163(j) regulations
contained in T.D. 9905, some or all of
the provisions in these final regulations,
and other specified provisions.
Additionally, most provisions had to be

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

applied to subsequent taxable years
once applied for a taxable year
(subsequent year application). As
provided in this section, to simplify the
applicability date provisions and
provide certainty to taxpayers, these
final regulations, except as otherwise
described later in this Applicability
Dates section, require taxpayers
choosing to apply the final regulations
to a taxable year beginning before the
applicability date to apply the section
163(j) regulations contained in T.D.
9905 as modified by these final
regulations, along with other specified
provisions, and require subsequent year
application.
Except for §§ 1.163–15 and 1.1256(e)–
2, pursuant to section 7805(b)(7),
taxpayers and their related parties,
within the meaning of sections 267(b)
(determined without regard to section
267(c)(3)) and 707(b)(1), may choose to
apply the rules of these final regulations
to a taxable year beginning after
December 31, 2017,1 and before March
22, 2021, provided that they
consistently apply the section 163(j)
regulations contained in T.D. 9905 as
modified by these final regulations and,
if applicable, §§ 1.263A–9, 1.263A–15,
1.381(c)(20)–1, 1.382–1, 1.382–2, 1.382–
5, 1.382–6, 1.382–7, 1.383–0, 1.383–
1,1.469–9, 1,469–11, 1.704–1, 1.882–5,
1.1362–3, 1.1368–1, 1.1377–1, 1.1502–
13, 1.1502–21, 1.1502–36, 1.1502–79,
1.1502–90, 1.1502–91 through 1.1502–
99 (to the extent they effectuate the
rules of §§ 1.382–2, 1.382–5, 1.382–6,
and 1.383–1), and 1.1504–4 contained
in T.D. 9905 as modified by these final
regulations to that taxable year and each
subsequent taxable year.
Pursuant to section 7805(b)(7),
taxpayers and their related parties,
within the meaning of sections 267(b)
(determined without regard to section
267(c)(3)) and 707(b)(1), may apply the
provisions of § 1.163–15 or 1.1256(e)–2
of the final regulations for a taxable year
beginning after December 31, 2017, and
before March 22, 2021, provided that
they consistently apply the rules in
§ 1.163–15 or 1.1256(e)–2, as applicable,
1 Under the 2020 Proposed Regulations, for
purposes of determining applicability dates, the
term ‘‘related party’’ has the meaning provided in
sections 267(b) and 707(b)(1). Section 267(c)(3)
broadens the scope of related parties under section
267(b) by potentially treating individual partners in
a partnership as related to a corporation owned by
the partnership, even if the individual partners own
only a small interest in the partnership. The
Treasury Department and the IRS have determined
that this broad scope is unnecessary in this context
and may impede the ability of certain taxpayers to
choose to apply the regulations to pre-applicability
taxable years. Accordingly, under these final
regulations, for purposes of determining
applicability dates, the term ‘‘related party’’ is
determined without regard to section 267(c)(3).

PO 00000

Frm 00019

Fmt 4701

Sfmt 4700

5513

to that taxable year and each subsequent
taxable year.
Alternatively, taxpayers and their
related parties, within the meaning of
sections 267(b) (determined without
regard to section 267(c)(3)) and
707(b)(1), may rely on the rules in the
2020 Proposed Regulations to the extent
provided in the 2020 Proposed
Regulations.
To the extent that a rule in the 2020
Proposed Regulations is not finalized in
these final regulations, taxpayers and
their related parties, within the meaning
of sections 267(b) (determined without
regard to section 267(c)(3)) and
707(b)(1), may rely on that rule for a
taxable year beginning on or after March
22, 2021, provided that they
consistently follow all of the rules in the
2020 Proposed Regulations that are not
being finalized to that taxable year and
each subsequent taxable year beginning
on or before the date the Treasury
decision adopting that rule as final is
applicable or other guidance regarding
continued reliance is issued.
Statement of Availability of IRS
Documents
The IRS Notices, Revenue Rulings,
and Revenue Procedures cited in this
document are published in the Internal
Revenue Bulletin (or Cumulative
Bulletin) and are available from the
Superintendent of Documents, U.S.
Government Publishing Office,
Washington, DC 20402, or by visiting
the IRS website at http://www.irs.gov.
Special Analyses
I. Regulatory Planning and Review—
Economic Analysis
Executive Orders 13771, 13563, and
12866 direct agencies to assess costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits,
including potential economic,
environmental, public health and safety
effects, distributive impacts, and equity.
Executive Order 13563 emphasizes the
importance of quantifying both costs
and benefits, reducing costs,
harmonizing rules, and promoting
flexibility. For purposes of E.O. 13771
this rule is regulatory.
These final regulations have been
designated by the Office of Information
and Regulatory Affairs (OIRA) as subject
to review under Executive Order 12866
pursuant to the Memorandum of
Agreement (MOA, April 11, 2018)
between the Treasury Department and
the Office of Management and Budget
(OMB) regarding review of tax
regulations. OIRA has designated these

E:\FR\FM\19JAR4.SGM

19JAR4

5514

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

regulations as economically significant
under section 1(c) of the MOA.
Accordingly, the OMB has reviewed
these regulations.
A. Need for the Final Regulations
The Tax Cuts and Jobs Act (TCJA)
substantially modified the statutory
rules of section 163(j) to limit the
amount of net business interest expense
that can be deducted in the current
taxable year. Because this limitation on
deduction for business interest expense
is relatively new, taxpayers would
benefit from regulations that explain key
terms and calculations. The Treasury
Department and the IRS published
proposed regulations in December 2018
(2018 Proposed Regulations) and
published final regulations in
September 2020 (T.D. 9905) to finalize
most sections of the 2018 Proposed
Regulations. Concurrently with the
publication of T.D. 9905, the Treasury
Department and the IRS published
proposed regulations (2020 Proposed
Regulations) to provide additional
section 163(j) limitation guidance to
T.D. 9905 in response to certain
comments to the 2018 Proposed
Regulations. The final regulations are
needed to bring clarity to instances
where the meaning of the statute was
unclear and to respond to comments
received on the 2020 Proposed
Regulations.
B. Background and Overview

khammond on DSKJM1Z7X2PROD with RULES4

Section 163(j), substantially revised
by the TCJA, provides a set of statutory
rules that impose a limitation on the
amount of business interest expense that
a taxpayer may deduct for Federal tax
purposes. This limitation does not apply
to businesses with gross receipts of $25
million or less (inflation adjusted). This
provision has the general effect of
putting debt-financed investment by
businesses on a more equal footing with
equity-financed investment, a treatment
that Congress believed would lead to a
more efficient capital structure for firms.
See Senate Budget Explanation of the
Bill as Passed by SFC (2017–11–20) at
pp. 163–4. Subsequently, the
Coronavirus Aid, Relief, and Economic
Security Act (CARES Act) amended
section 163(j) to provide special rules
relating to the ATI limitation for taxable
years beginning in 2019 or 2020.
C. Economic Analysis
1. Baseline
In this analysis, the Treasury
Department and the IRS assess the
economic effects of the final regulations
relative to a no-action baseline reflecting
anticipated Federal income tax-related

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

behavior in the absence of the final
regulations.
2. Summary of Economic Effects
The final regulations provide
certainty and clarity to taxpayers
regarding terms and calculations that
are contained in section 163(j), which
was substantially modified by TCJA. In
the absence of this clarity, the
likelihood that different taxpayers
would interpret the rules regarding the
deductibility of business interest
expense (BIE) differently would be
exacerbated. In general, overall
economic performance is enhanced
when businesses face more uniform
signals about tax treatment. Certainty
and clarity over tax treatment also
reduce compliance costs for taxpayers.
For those situations where taxpayers
would generally adopt similar
interpretations of the statute even in the
absence of guidance, the final
regulations provide value by helping to
ensure that those interpretations are
consistent with the purpose of the
statute. For example, the final
regulations may specify a tax treatment
that few or no taxpayers would adopt in
the absence of specific guidance.
The Treasury Department and the IRS
project that the final regulations will
have an annual economic effect greater
than $100 million ($2020) relative to the
no-action baseline. This determination
is based on the substantial volume of
business interest payments in the
economy 2 and the general
responsiveness of business investment
to effective tax rates,3 one component of
which is the deductibility of interest
expense. Based on these two factors,
even modest changes in the
deductibility of interest payments (and
in the certainty of that deductibility)
provided by the final regulations,
relative to the no-action baseline, can be
expected to have annual effects greater
than $100 million. This claim is
particularly likely to hold for the first
set of general section 163(j) guidance
that is promulgated following major
legislation, such as TCJA, and for other
major guidance, which the Treasury
Department and the IRS have
determined includes the final
regulations.
Regarding the nature of the economic
effects, the Treasury Department and the
IRS project that the final regulations
will increase investment in the United
2 Interest deductions in tax year 2013 for
corporations, partnerships, and sole proprietorships
were approximately $800 billion.
3 See E. Zwick and J. Mahon, ‘‘Tax Policy and
Heterogeneous Investment Behavior,’’ at American
Economic Review 2017, 107(1): 217–48 and articles
cited therein.

PO 00000

Frm 00020

Fmt 4701

Sfmt 4700

States and increase the proportion that
is debt-financed, relative to the noaction baseline. They have further
determined that these effects are
consistent with the intent and purpose
of the statute. Because the final
regulations are projected to lead to a
decrease in Federal tax revenue relative
to the no-action baseline, there may be
an increase in the Federal deficit
relative to the no-action baseline. This
may lead to a decrease in investment by
taxpayers not directly affected by these
final regulations, relative to the noaction baseline. This effect should be
weighed against the enhanced efficiency
arising from the clarity and enhanced
consistency with the intent and purpose
of the statute provided by these
regulations. The Treasury Department
and the IRS have determined that the
final regulations provide a net benefit to
the U.S. economy relative to the noaction baseline.
The Treasury Department and the IRS
have not undertaken more precise
quantitative estimates of these effects
because many of the definitions and
calculations under section 163(j) are
new and many of the economic
decisions that are implicated by these
final regulations involve highly specific
taxpayer circumstances. The Treasury
Department and the IRS do not have
readily available data or models to
estimate with reasonable precision the
types and volume of different financing
arrangements that taxpayers might
undertake under the final regulations
versus the no-action baseline.
In the absence of such quantitative
estimates, the Treasury Department and
the IRS have undertaken a qualitative
analysis of the economic effects of the
final regulations relative to the noaction baseline and relative to
alternative regulatory approaches. This
analysis is presented in Part I.C.3 of this
Special Analyses.
No comments on the economic
analysis of the 2020 Proposed
Regulations were received.
3. Economic Effects of Specific
Provisions
a. Definition of Interest
T.D. 9905 set forth several categories
of amounts and transactions that
generate interest for purposes of section
163(j). The final regulations provide
further guidance on the definition of
interest relevant to the calculation of
interest expense and interest income. In
particular, the final regulations provide
rules under which the dividends paid
by a regulated investment company
(RIC) that earns net business interest
income (BII) (referred to as section

E:\FR\FM\19JAR4.SGM

19JAR4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
163(j) interest dividends) are to be
treated as interest income by the RIC’s
shareholders. That is, under the final
regulations, certain interest income
earned by the RIC and paid to a
shareholder as a dividend is treated as
if the shareholder earned the interest
income directly for purposes of section
163(j).
These final regulations clarify that
reported dividends paid by RICs can
include designations of BII for the
purposes of the section 163(j) limitation.
This clarification makes clear that
investment through RICs is treated, for
purposes of the section 163(j) limitation,
similarly to investment through other
possible debt instruments. To the extent
that taxpayers believed, in the absence
of the final regulations, that dividends
paid by RICs are not treated as BII for
the purposes of the section 163(j)
limitation, then taxpayers may respond
to the final regulations by increasing
investment in RICs. The Treasury
Department and the IRS have
determined that this treatment is
consistent with the intent and purpose
of the statute.
Affected Taxpayers. The Treasury
Department and the IRS have
determined that the rules regarding
section 163(j) interest dividends will
potentially affect approximately 10,000
RICs. The Treasury Department and the
IRS do not have readily available data
on the number of RIC shareholders that
would receive section 163(j) interest
dividends that the shareholder could
treat as BII for purposes of the
shareholder’s section 163(j) limitation.
They further do not have data on the
volume of dividends that would be
eligible for this treatment.
b. Provisions Related to Partnerships

khammond on DSKJM1Z7X2PROD with RULES4

i. Trading Partnerships
Section 163(j) limits the deductibility
of interest expense at the partnership
level. The final regulations address
commenter concerns about the
interaction between this section 163(j)
limitation and the section 163(d) partner
level limitation on interest expense that
existed prior to TJCA. Under logic
described in the preamble to the 2018
Proposed Regulations, section 163(j)
limitations would apply at the
partnership level while section 163(d)
limitations would apply at the partner
level and these tests would be applied
independently. Commenters suggested
and the Treasury Department and the
IRS have agreed that the correct
interpretation of the statute is to exempt
interest expense that is limited at the
partner level by section 163(d) from the
partnership-level section 163(j)

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

limitation in accordance with the
language of section 163(j)(5).
The final regulations provide that
interest expense at the partnership level
that is allocated to non-materially
participating partners subject to section
163(d) is not included in the section
163(j) limitation calculation of the
partnership. Generally, the section
163(d) limitation is more generous than
the section 163(j) limitation. Relative to
the 2018 Proposed Regulations, this
change may encourage these partners to
incur additional interest expense
because they will be less likely to be
limited in their ability to use it to offset
other income. Commenters argued that
exempting from section 163(j) any
interest expense allocated to nonmaterially participating partners subject
to section 163(d) will treat this interest
expense in the same way as the interest
expense generated through separately
managed accounts, which are not
subject to section 163(j) limitations.
The Treasury Department and the IRS
project that the final regulations will
result in additional investment in
trading partnerships and generally
higher levels of debt in any given
trading partnership relative to the 2018
Proposed Regulations. Because
investments in trading partnerships may
be viewed as economically similar to
investments in separately managed
accounts arrangements, they further
project that the final regulations, by
making the tax treatments of these two
arrangements generally similar, will
improve U.S. economic performance
relative to the no-action baseline.
Number of Affected Taxpayers. The
Treasury Department and the IRS have
determined that the rules regarding
trading partnerships will potentially
affect approximately 275,000
partnerships, not including their
partners. This number was reached by
determining, using data for the 2017
taxable year, the number of Form 1065
and Form 1065–B filers that (1)
completed Schedule B to Form 1065
and marked box b, c, or d in question
1 to denote limited partnership, limited
liability company, or limited liability
partnership status; and (2) have a North
American Industry Classification
System (NAICS) code starting with 5231
(securities and commodity contracts
intermediation and brokerage), 5232
(securities and commodity exchanges),
5239 (other financial investment
activities), or 5259 (other investment
pools and funds). Additionally, the
Treasury Department and the IRS have
determined that the rules regarding
publicly traded partnerships will
potentially affect approximately 80
partnerships, not including their

PO 00000

Frm 00021

Fmt 4701

Sfmt 4700

5515

partners. This number was reached by
determining, using data for the 2017
taxable year, the number of Form 1065
and 1065–B filers with gross receipts
exceeding $25 million that answered
‘‘yes’’ to question 5 on Schedule B to
Form 1065 denoting that the entity is a
publicly traded partnership. The
Treasury Department and the IRS do not
have readily available data on the
number of filers that are tax shelters that
are potentially affected by these
provisions.
ii. Self-Charged Lending
The 2018 Proposed Regulations
requested comments on the treatment of
lending transactions between a
partnership and a partner (self-charged
lending transactions). Suppose that a
partnership receives a loan from a
partner and allocates the resulting
interest expense to that partner. Prior to
TCJA, the interest income and interest
expense from this loan would net
precisely to zero on the lending
partner’s tax return. Under section
163(j) as revised by TCJA, however, the
partnership’s interest expense
deduction may now be limited.
Therefore, in absence of specific
regulatory guidance, the lending partner
may receive interest income from the
partnership accompanied by less-thanfully-offsetting interest expense. Instead,
the lending partner would receive
excess business interest expense (EBIE),
which would not be available to offset
his personal interest income. This
outcome has the effect of increasing the
cost of lending transactions between
partners and their partnerships relative
to otherwise similar financing
arrangements.
To avoid this outcome, the final
regulations treat the lending partner’s
interest income from the loan as excess
business interest income (EBII) from the
partnership, but only to the extent of the
partner’s share of any EBIE from the
partnership for the taxable year. This
allows the interest income from the loan
to be offset by the EBIE. The business
interest expense (that is, BIE) of the
partnership attributable to the lending
transaction will thus be treated as BIE
of the partnership for purposes of
applying section 163(j) to the
partnership.
The Treasury Department and the IRS
expect that the final regulations will
lead a higher proportion of self-charged
lending transactions in partnership
financing, relative to the no-action
baseline. In a self-charged lending
transaction, the lending partner is on
both sides of the transaction. It is the
lender and, through the partnership, the
borrower. Because of this, debt from

E:\FR\FM\19JAR4.SGM

19JAR4

5516

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

self-charged lending transactions is
generally viewed as less risky than
traditional debt, as both the lender and
the borrower are incentivized to repay
the loan without default. Therefore, the
Treasury Department and the IRS
believe that the better policy choice is
to not subject self-charged lending
transactions to section 163(j). The
Treasury Department and the IRS
further project that the final regulations
will increase the proportion of
partnership financing that is debtfinanced relative to the no-action
baseline. The Treasury Department and
the IRS have determined that these
effects are consistent with the intent and
purpose of the statute.
Number of Affected Taxpayers. The
Treasury Department and the IRS do not
have readily available data to determine
the number of taxpayers affected by
rules regarding self-charged interest
because no reporting modules currently
connect these payments by and from
partnerships.
c. Provisions Related to Controlled
Foreign Corporations (CFCs)

khammond on DSKJM1Z7X2PROD with RULES4

i. How To Apply Section 163(j) When
CFCs Have Shared Ownership
T.D. 9905 clarified that section 163(j)
and the section 163(j) regulations
generally apply to determine the
deductibility of a CFC’s BIE for tax
purposes in the same manner as these
provisions apply to a domestic
corporation. The final regulations
provide additional rules and guidance
as to how section 163(j) applies to CFCs,
including when CFCs have shared
ownership and are eligible to be
members of CFC groups.
The Treasury Department and the IRS
considered three options with respect to
the application of section 163(j) to CFC
groups. The first option was to apply the
163(j) limitation to CFCs on a standalone basis, regardless of whether CFCs
have shared ownership. However, if
section 163(j) were applied on a standalone basis, business interest deductions
of individual CFCs might be limited by
section 163(j) even when, if calculated
on a group basis, business interest
deductions would not be limited.
Taxpayers could restructure or ‘‘selfhelp’’ to mitigate the effects of the
section 163(j) limitation. Such an option
would lead to restructuring costs for the
taxpayer (relative to the third option,
described later) with no corresponding
economically productive activity.
The second option, which was
proposed in the 2018 Proposed
Regulations, was to allow an election to
treat related CFCs in a similar manner
as partnerships with respect to their

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

U.S. shareholders. Under this option,
while the section 163(j) rules would still
be computed at the individual CFC
level, the business interest expense of
each CFC group member that was
subject to section 163(j) was limited to
its share of the net business interest
expense of the CFC group, and the
‘‘excess taxable income’’ of a CFC could
be passed up from lower-tier CFCs to
upper-tier CFCs and U.S. shareholders
in the same group. Excess taxable
income is the amount of income by
which a CFC’s ATI exceeds the
threshold amount of ATI below which
there would be disallowed BIE.
Comments to the 2018 Proposed
Regulations suggested that computing a
section 163(j) limitation for each CFC
and rolling up CFC excess taxable
income would be burdensome for
taxpayers, especially since some
multinational organizations have
hundreds of CFCs. In addition,
comments noted that the ability to pass
up excess taxable income would
encourage multinational organizations
to restructure such that CFCs with low
interest payments and high ATI are
lower down the ownership chain and
CFCs with high interest payments and
low ATI are higher up in the chain of
ownership. Similar to the first option,
this restructuring would impose costs
on taxpayers without any corresponding
productive economic activity.
The third option, which is adopted by
the Treasury Department and the IRS in
the final regulations, was to allow
taxpayers to elect to apply the section
163(j) rules to CFC groups on an
aggregate basis, similar to the rules
applicable to U.S. consolidated groups.
This option was suggested by many
comments and is the approach taken in
the final regulations. Under this option,
a single section 163(j) limitation is
computed for a CFC group by summing
the items necessary for this computation
(for example, current-year BIE and ATI)
across all CFC group members. The CFC
group’s limitation is then allocated to
each CFC member using allocation rules
similar to those that apply to U.S.
consolidated groups.
The choice to use the consolidated
approach versus the stand-alone entity
approach may affect the amount of
interest that can be deducted. The
amount of interest that can be deducted
may affect the amount of subpart F
income and tested income for purposes
of determining the amount of inclusions
under sections 951 and 951A. However,
the consolidated approach applies only
for purposes of computing the section
163(j) limitation and not for purposes of
applying any other Code provision, such
as section 951 or 951A.

PO 00000

Frm 00022

Fmt 4701

Sfmt 4700

This option reduces the compliance
burden on taxpayers in comparison to
applying the section 163(j) rules on an
individual CFC basis and calculating the
excess taxable income to be passed up
from lower-tier CFCs to higher-tier
CFCs. In comparison to the first and
second options, this option also
removes the incentive for taxpayers to
undertake costly restructuring, since the
location of interest payments and ATI
among CFC group members will not
affect the interest disallowance for the
group. The Treasury Department and
the IRS have not estimated this
difference in compliance costs because
they do not have readily available data
or models to do so.
The final regulations also set out a
number of rules to govern membership
in a CFC group. These rules specify
which CFCs can be members of the
same CFC group, how CFCs with U.S.
effectively connected income (ECI)
should be treated, and the timing for
making or revoking a CFC group
election. These rules provide clarity and
certainty to taxpayers regarding the CFC
group election for section 163(j). In the
absence of these regulations, taxpayers
may make financing decisions or
undertake restructuring based on
differential interpretations of the
appropriate tax treatment, an outcome
that is generally inefficient relative to
decisions based on the more uniform
interpretation provided by the final
regulations.
Number of Affected Taxpayers. The
set of taxpayers affected by this rule
includes any taxpayer with ownership
in a CFC that is a member of a CFC
group that has average gross receipts
over a three-year period in excess of $25
million. The Treasury Department and
the IRS estimate that there are
approximately 7,500 taxpayers with two
or more CFCs based on counts of e-filed
tax returns for tax years 2015–2017.
This estimate includes C corporations, S
corporations, partnerships, and
individuals with CFC ownership.
ii. Foreign Income Taxes and ATI of a
CFC
The 2020 Proposed Regulations
provided that the ATI of a CFC is
determined by taking into account a
deduction for foreign income taxes. The
preamble to the 2020 Proposed
Regulations requested comments on
whether, and the extent to which, the
ATI of a CFC should be determined
without regard to a deduction for
foreign income taxes. The final
regulations provide that the ATI of a
CFC is determined without regard to a
deduction for foreign income taxes that
are eligible to be claimed as a foreign tax

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
credit. Thus, regardless of whether an
election is made to claim a credit for
these foreign income taxes, the foreign
income taxes do not reduce ATI.
The Treasury Department and the IRS
considered three options, based on
comments received, in determining the
extent to which foreign income taxes
paid by a CFC should be taken into
account in determining its ATI. The first
option would not take into account a
deduction for foreign income taxes
imposed by the national government of
the country in which a CFC is organized
or a tax resident, but would take into
account a deduction for taxes imposed
by sub-national levels of government.
This would result in treating a CFC in
an analogous manner to a domestic
corporation, which does not deduct
Federal income taxes (but may deduct
state and foreign taxes) in determining
its ATI. However, this option would
result in the ATI of a CFC being
determined in a different manner than
the ATI of a domestic corporation doing
business through a foreign branch that
elects to credit foreign income taxes (as
discussed in the next option).
Furthermore, this option would increase
(relative to the next option) the
administrative and compliance burdens
of taxpayers required to determine
which foreign income taxes paid by a
CFC are imposed by a national
government and which are imposed by
sub-national levels of government.
The second option considered would
not take into account foreign income
taxes for which an election is made to
claim a foreign tax credit. This option
would conform the ATI of a CFC with
that of a domestic corporation doing
business through a foreign branch. If a
domestic corporation doing business
through a foreign branch elects to claim
a foreign tax credit, the deduction for
foreign income taxes is disallowed
under section 275(a)(4) and is not taken
into account in determining the
domestic corporation’s ATI. However,
unlike a foreign branch that has a single
owner, a CFC may have multiple
shareholders. Because the election to
credit foreign income taxes is made at
the shareholder-level, this option would
require a CFC to determine which of its
shareholders elects to credit foreign
income taxes, thereby increasing the
administrative and compliance burdens.
Furthermore, some shareholders of a
CFC may elect to credit foreign income
taxes, while other shareholders of the
CFC may not elect or may not be eligible
to elect a credit (for example, because
the shareholder is a foreign
corporation). Since the section 163(j)
limitation is determined at the CFClevel, rather than on a shareholder-by-

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

shareholder basis, this option could
result in one shareholder being affected
by the election of an unrelated
shareholder of the same CFC, an
outcome that would generally lead to
economically inefficient decisionmaking.
The third option, which is adopted by
the Treasury Department and the IRS in
the final regulations, does not take into
account a deduction for foreign income
taxes that are eligible to be claimed as
a foreign tax credit for purposes of
calculating a CFC’s ATI, regardless of
whether the CFC’s U.S. shareholders
have made an election to claim a foreign
tax credit. Relative to the first and
second options, this option minimizes
the administrative and compliance
burden of determining ATI of a CFC,
and also results in the greatest amount
of ATI and section 163(j) limitation. In
addition, this option does not treat CFCs
located in high-tax countries differently
than CFCs located in low-tax countries.
Otherwise similar CFCs will have
similar ATIs regardless of their foreign
income taxes. In this way, the rule does
not penalize U.S. shareholders of CFCs
with high foreign taxes.
Number of Affected Taxpayers. The
population of affected taxpayers
includes any taxpayer that is a U.S.
shareholder of a CFC. The Treasury
Department and the IRS estimate that
there are approximately 10,000 to
11,000 affected taxpayers based on a
count of e-filed tax returns for tax years
2015–2017. These counts include C
corporations, S corporations,
partnerships, and individuals with CFC
ownership that meet a $25 million
three-year average gross receipts
threshold. The Treasury Department
and the IRS do not have readily
available data on the number of filers
that are tax shelters that are potentially
affected by these provisions.
d. Election To Use 2019 ATI To
Determine 2020 Section 163(j)
Limitation for Consolidated Groups
The final regulations provide that if a
taxpayer filing as a consolidated group
elects to substitute its 2019 ATI for its
2020 ATI, that group can use the
consolidated group ATI for the 2019
taxable year, even if membership of the
consolidated group changed in the 2020
taxable year. For example, suppose
consolidated group C has three members
in the 2019 taxable year, P, the common
parent of the consolidated group, and S1
and S2, which are both wholly owned
by P. In the 2019 taxable year, each
member of consolidated group C had
$100 of ATI on a stand-alone basis, and
that consolidated group C had $300 of
ATI. In the 2020 taxable year,

PO 00000

Frm 00023

Fmt 4701

Sfmt 4700

5517

consolidated group C sells all of the
stock of S2 and acquires all of the stock
of a new member, S3. In the 2019
taxable year, S3 had $50 in ATI on a
stand-alone basis. Under the final
regulations, consolidated group C may
elect to use $300 in ATI from 2019 as
a substitute for its ATI in the 2020
taxable year.
The Treasury Department and the IRS
considered as an alternative basing the
2019 ATI on the membership of the
consolidated group in the 2020 taxable
year. In the example in the previous
paragraph, this approach would subtract
out the $100 in ATI from S2 and add the
$50 in ATI from S3, for a total of $250
in 2019 ATI that could potentially be
substituted for 2020 ATI for
consolidated group C. This approach
would add burden to taxpayers relative
to the final regulations by requiring
additional calculations and tracking of
ATI on a member-by-member basis to
determine the amount of 2019 ATI that
can be used in the 2020 taxable year
without providing any general economic
benefit.
In addition, the 2019 tax year will
have closed for most taxpayers by the
time the final regulations will be
published. This implies that a final rule
based on the consolidated group
composition in the 2019 taxable year to
calculate the amount of 2019 ATI that
can be used in the 2020 taxable year
will, relative to the alternative approach
of using the composition in the 2020
taxable year, reduce the incentive for
taxpayers to engage in costly mergers,
acquisitions, or divestures to achieve a
favorable tax result for those taxpayers
for whom the 2020 taxable year has not
closed by the time the final regulations
are published.
Number of Affected Taxpayers. The
Treasury Department and the IRS
estimate that approximately 34,000
corporate taxpayers filed a consolidated
group tax return for tax year 2017. This
represents an upper-bound of the
number of taxpayers affected by the
final rule as not all consolidated groups
would need to calculate the amount of
section 163(j) interest limitation in tax
years 2019 and 2020.
II. Paperwork Reduction Act
The collection of information in the
final regulations has been submitted to
the OMB for review in accordance with
the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)) (PRA). An agency
may not conduct or sponsor, and a
person is not required to respond to, a
collection of information unless it
displays a valid OMB control number.
Books or records relating to a
collection of information must be

E:\FR\FM\19JAR4.SGM

19JAR4

5518

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and return information are
confidential, as required by section 6103
of the Code.
iv. Collections of Information
The collections of information subject
to the PRA in the final regulations are
in §§ 1.163(j)–6(d)(5), 1.163(j)–6(g)(4),
1.163(j)–7(e)(5)(iv), 1.163(j)–7(e)(6), and
1.163(j)–7(h)(5).
The collections of information in
§§ 1.163(j)–6(d)(5) and 1.163(j)–6(g)(4)
are required to make two elections
relating to changes made to section
163(j) by the CARES Act. The election
under § 1.163(j)–6(d)(5) is for a
passthrough taxpayer to use the
taxpayer’s ATI for the last taxable year
beginning in 2019 as its ATI for any
taxable year beginning in 2020, in
accordance with section 163(j)(10)(B).
The election under § 1.163(j)–6(g)(4)
relates to EBIE of a partnership for any
taxable year beginning in 2019 that is
allocated to a partner. Section
163(j)(10)(A)(ii)(II) provides that, unless
the partner elects out, in 2020, the
partner treats 50 percent of the EBIE as
not subject to the section 163(j)
limitation. If the partner elects out, the
partner treats all EBIE as subject to the
same limitations as other EBIE allocated
to the partner.
Revenue Procedure 2020–22 describes
the time and manner for making these
elections. For both elections, taxpayers
make the election by timely filing a
Federal income tax return or Form 1065,
including extensions, an amended
Federal income tax return, amended
Form 1065, or administrative
adjustment request, as applicable. More

specifically, taxpayers complete the
Form 8990, ‘‘Limitation on Business
Interest Expense under Section 163(j),’’
using the taxpayer’s 2019 ATI and/or
not applying the rule in section
163(j)(10)(ii)(II), as applicable. No
formal statements are required to make
these elections. Accordingly, the
reporting burden associated with the
collections of information in §§ 1.163(j)–
6(d)(5) and 1.163(j)–6(g)(4) will be
reflected in the IRS Form 8990 PRA
Submissions (OMB control number
1545–0123).
The collections of information in
§ 1.163(j)–7 are required for taxpayers
(1) to make or revoke an election under
§ 1.163(j)–7(e)(5)(iv) to apply section
163(j) to a CFC group (CFC group
election) and to file an annual
information statement to demonstrate
how the CFC group calculated its
section 163(j) limitation under
§ 1.163(j)–7(e)(6) (annual information
statement), or (2) to make an annual
election to exempt a CFC or CFC group
from the section 163(j) limitation under
§ 1.163(j)–7(h)(5) (safe-harbor election).
The CFC group election or revocation of
the CFC group election are made by
attaching a statement to the US
shareholder’s annual return. Similarly,
the annual information statement must
be attached to the US shareholder’s
annual return. The CFC group election
remains in place until revoked and may
not be revoked for any period beginning
before 60 months following the period
for which it is initially made. The safeharbor election is made on an annual
basis.
Under § 1.964–1(c)(3)(i), to make an
election on behalf of a foreign
corporation, the controlling domestic

Form

OMB No.

Form 1040 .......

1545–0074 ..............................

shareholder provides a statement with
its return and notice of the election to
the minority shareholders under
§ 1.964–1(c)(3)(ii) and (iii). See also
§ 1.952–2(b)–(c). These collections are
necessary to ensure that the election is
properly effectuated, and that taxpayers
properly report the amount of interest
that is potentially subject to the
limitation.
B. Future Modifications to Forms To
Collect Information
At this time, the Treasury Department
and the IRS are considering
modifications to the Form 8990,
‘‘Limitation on Business Interest
Expense IRC 163(j),’’ with regard to the
elections under section 163(j)(10)
regarding the election under §§ 1.163(j)–
6(d)(5) and 1.163(j)–6(g)(4), the CFC
group election, annual information
statement, and safe-harbor election. Any
modifications to Form 8990 would not
be effective until the form cycle for the
2021 taxable year. For the PRA, the
reporting burden of Form 8990 is
associated with OMB control number
1545–0123. In the 2018 Proposed
Regulations, Form 8990 was estimated
to be required by fewer than 92,500
taxpayers.
If an additional information collection
requirement is imposed through these
regulations in the future, for purposes of
the PRA, any reporting burden
associated with these regulations will be
reflected in the aggregated burden
estimates and the OMB control numbers
for general income tax forms or the
Form 8990, ‘‘Limitation on Business
Interest Expense Under Section 163(j)’’.
The forms are available on the IRS
website at:

IRS website link

Status

https://www.irs.gov/pub/irs-pdf/f1040.pdf (Instructions: https://www.irs.gov/pub/irs-pdf/
i1040gi.pdf).

Published in the Federal Register on 10/30/
2020. Public comment period ends 12/29/
2020.

khammond on DSKJM1Z7X2PROD with RULES4

Link: https://www.federalregister.gov/documents/2020/10/30/2020-24139/proposed-extension-of-information-collection-requestsubmitted-for-public-comment-comment-request.
Form 1120 .......

1545–0123 ..............................

Form 1120S .....

.................................................

Form 1065 .......

.................................................

Form 1120–
REIT.

.................................................

Form 8990 .......

.................................................

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

https://www.irs.gov/pub/irs-pdf/f1120.pdf (Instructions: https://www.irs.gov/pub/irs-pdf/
i1120.pdf.).
https://www.irs.gov/pub/irs-pdf/f1120s.pdf (Instructions: https://www.irs.gov/pub/irs-pdf/
i1120s.pdf.).
https://www.irs.gov/pub/irs-pdf/f1065.pdf (Instructions: https://www.irs.gov/pub/irs-pdf/
i1065.pdf.).
https://www.irs.gov/pub/irs-pdf/f1120rei—
2018.pdf (Instructions: https://www.irs.gov/
pub/irs-pdf/i1120rei.pdf.).
https://www.irs.gov/pub/irs-pdf/f8990_accessible.pdf (Instructions: https://www.irs.gov/
pub/irs-pdf/i8990.pdf.).

PO 00000

Frm 00024

Fmt 4701

Sfmt 4700

Published in the Federal Register on 11/3/
2020. Public comment period ends January
4, 2021.

E:\FR\FM\19JAR4.SGM

19JAR4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
Form

OMB No.

IRS website link

5519

Status

Link: https://www.federalregister.org/documents/2020/11/03/2020-24251/proposed-collection-comment-request-for-forms-10651066-1120-1120-c-1120-f-1120-h-1120-nd-1120-s.

khammond on DSKJM1Z7X2PROD with RULES4

In addition, when available, drafts of
IRS forms are posted for comment at
https://apps.irs.gov/app/picklist/list/
draftTaxForms.htm. IRS forms are
available at https://www.irs.gov/formsinstructions. Forms will not be finalized
until after they have been approved by
OMB under the PRA.
C. Burden Estimates
The following estimates for the
collections of information in the final
regulations are based on the most
recently available Statistics of Income
(SOI) tax data.
For the collection of income in
§ 1.163(j)–6(d)(5), where a passthrough
taxpayer elects to use the taxpayer’s ATI
for the last taxable beginning in 2019 as
the taxpayer’s ATI for any taxable year
beginning in 2020, the most recently
available 2017 SOI tax data indicates
that, on the high end, the estimated
number of respondents is 49,202. This
number was determined by examining,
for the 2017 tax year, Form 1065 and
Form 1120–S filers with greater than
$26 million in gross receipts that have
reported interest expense, and do not
have an NAICS code that is associated
with a trade or business that normally
would be excepted from the section
163(j) limitation.
For the collection of information
under § 1.163(j)–6(g)(4), in which a
partner elects out of treating 50 percent
of any EBIE allocated to the partner in
2019 as not subject to a limitation in
2020, the Treasury Department and the
IRS estimate that only taxpayers that
actively want to reduce their deductions
will make this election. The application
of the base erosion minimum tax under
section 59A depends, in part, on the
amount of a taxpayer’s deductions.
Accordingly, the Treasury Department
and the IRS estimate that taxpayers that
are subject to both the base erosion
minimum tax under section 59A and
section 163(j) are the potential filers of
this election. Using the 2017 SOI tax
data, the Treasury Department estimates
that 1,182 firms will make the election.
This estimate was determined by
examining three criteria: First, the
number of taxpayers subject to section
59A, namely, C corporations with at
least $500,000,000 in gross receipts,
second, the portion of those taxpayers
that do not have an NAICS code
associated with a trade or business that
is generally not subject to the section
163(j) limitation (2211 (electric power

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

generation, transmission and
distribution), 2212 (natural gas
distribution), 2213 (water, sewage and
other systems), 111 or 112 (farming),
531 (real property)), and, third, the
portion of taxpayers satisfying the first
two criteria that received a Form K–1,
‘‘Partner’s Share of Income, Deductions,
Credits, etc.’’
The reporting burdens associated with
the information collections in
§§ 1.163(j)–6(d)(5) and 1.163(j)–6(g)(4)
are included in the aggregated burden
estimates for OMB control numbers
1545–0074 in the case of individual
filers and 1545–0123 in the case of
business filers. The overall burden
estimates associated with those OMB
control numbers are aggregate amounts
that relate to the entire package of forms
associated with the applicable OMB
control number and will in the future
include, but not isolate, the estimated
burden of the tax forms that will be
created or revised as a result of the
information collections in these
regulations. No burden estimates
specific to §§ 1.163(j)–6(d)(5) and
1.163(j)–6(g)(4) of the final regulations
are currently available.
The Treasury Department and the IRS
request comments on all aspects of the
forms that reflect the information
collection burdens related to the final
regulations, including estimates for how
much time it would take to comply with
the paperwork burdens related to the
forms described and ways for the IRS to
minimize the paperwork burden.
For the collections of information in
§ 1.163(j)–7, namely the CFC group
election and annual statement, and the
safe-harbor election, and the
corresponding notice under § 1.964–
1(c)(3)(iii), the most recently available
2017 SOI tax data indicates that, on the
high end, the estimated number of
respondents is 4,980 firms. This number
was determined by examining, for the
2017 tax year, Form 1040, Form 1120,
Form 1120–S, and Form 1065 filers with
greater than $26 million in gross
receipts that filed a Form 5471,
Information Return of U.S. Persons With
Respect to Certain Foreign Corporations,
where an interest expense amount was
reported on Schedule C of the Form
5471.
The estimated number of respondents
that could be subject to the collection of
information for the CFC group or safeharbor election is 4,980. The estimated

PO 00000

Frm 00025

Fmt 4701

Sfmt 4700

annual burden per respondent/
recordkeeper varies from 0 to 30
minutes, depending on individual
circumstances, with an estimated
average of 15 minutes. The estimated
total annual reporting and/or
recordkeeping burden is 1,245 hours
(4,980 respondents * 15 minutes). The
estimated annual cost burden to
respondents is $95 per hour.
Accordingly, we expect the total annual
cost burden for the CFC group election
and safe-harbor election statements to
be $118,275 (4,980 * .25 * $95).
III. Regulatory Flexibility Act
It is hereby certified that the final
regulations will not have a significant
economic impact on a substantial
number of small entities.
This certification can be made
because the Treasury Department and
the IRS have determined that the
number of small entities that are
affected as a result of the regulations is
not significant. These rules do not
disincentivize taxpayers from their
operations, and any burden imposed is
not significant because the cost of
implementing the rules, if any, is low.
As discussed in the 2018 Proposed
Regulations, section 163(j) provides
exceptions for which many small
entities will qualify. First, under section
163(j)(3), the limitation does not apply
to any taxpayer, other than a tax shelter
under section 448(a)(3), which meets
the gross receipts test under section
448(c) for any taxable year. A taxpayer
meets the gross receipts test under
section 448(c) if the taxpayer has
average annual gross receipts for the 3taxable year period ending with the
taxable year that precedes the current
taxable year that do not exceed
$26,000,000. The gross receipts
threshold is indexed annually for
inflation. Because of this threshold, the
Treasury Department and the IRS
project that entities with 3-year average
gross receipts below $26 million will
not be affected by these regulations
except in rare cases.
Section 163(j) provides that certain
trades or businesses are not subject to
the limitation, including the trade or
business of performing services as an
employee, electing real property trades
or businesses, electing farming
businesses, and certain utilities as
defined in section 163(j)(7)(A)(iv).
Under the 2018 Proposed Regulations,
taxpayers that otherwise qualified as

E:\FR\FM\19JAR4.SGM

19JAR4

5520

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

real property trades or businesses or
farming businesses that satisfied the
small business exemption in section
448(c) were not eligible to make an
election to be an electing real property
trade or business or electing farming
business. Under T.D. 9905, however,
those taxpayers are eligible to make an
election to be an electing real property
trade or business or electing farming
business. Additionally, T.D. 9905
provides that certain utilities not
otherwise excepted from the limitation
can elect for a portion of their nonexcepted utility trade or business to be
excepted from the limitation. Any
economic impact on any small entities
as a result of the requirements in the
final regulations, not just the
requirements that impose a PRA burden,
is not expected to be significant because
the cost of implementing the rules, if
any, is low.
The Treasury Department and the IRS
do not have readily available data on the
number of filers that are tax shelters, as
defined in section 448(a)(3), that are
potentially affected by these provisions.
As described in more detail earlier in
this preamble, the final regulations

cover several topics, including, but not
limited to, self-charged interest, the
treatment of section 163(j) in relation to
trader funds, the impact of section 163(j)
on publicly traded partnerships, and the
application of section 163(j) to United
States shareholders of controlled foreign
corporations.
The Treasury Department and the IRS
do not have readily available data to
determine the number of taxpayers
affected by rules regarding self-charged
interest because no reporting modules
currently connect these payments by
and from partnerships. Additionally, the
Treasury Department and the IRS do not
have readily available data to determine
the number of taxpayers affected by
rules regarding debt proceeds
distributed from a taxpayer account or
from cash. However, the rules do not
impose a significant paperwork or
implementation cost burden on
taxpayers. Under Notice 89–35,
taxpayers have been required to
maintain books and records to properly
report the tax treatment of interest. The
rules in § 1.163–15 are a finalization of
the rules in section VI of Notice 89–35,
which extends the period in § 1.163–

8T(c)(4)(iii)(B) from 15 to 30 days to
determine whether debt proceeds have
been distributed from a particular
account.
As shown in the following table, the
Treasury Department and the IRS
estimate that approximately 276 trading
partnerships will be affected by these
rules. The table was calculated using
data for the 2018 taxable year, the
number of Form 1065 and Form 1065–
B filers, with more than $26 million in
gross receipts but less than the amount
considered to be a small entity for
purposes of this Regulatory Flexibility
Act analysis, that (1) completed
Schedule B to Form 1065 and marked
box b, c, or d in question 1 to denote
limited partnership, limited liability
company or limited liability partnership
status; and (2) have a North American
Industry Classification System (NAICS)
code starting with 5231 (securities and
commodity contracts intermediation
and brokerage), 5232 (securities and
commodity exchanges), 5239 (other
financial investment activities) or 5259
(other investment pools and funds).

FORM 1065 AND 1065–B FILERS + NAICS CODES + GROSS RECEIPTS RANGE + SCHEDULE B, QUESTION 1 BOX b, c,
OR d MARKED
NAICS code
(description)
5231
5232
6239
5259

Gross receipts range

(securities and commodity contracts intermediation and brokerage) .................
(securities and commodity exchanges) ..............................................................
(other financial investment activities) ..................................................................
(other investment pools and funds) ....................................................................

khammond on DSKJM1Z7X2PROD with RULES4

Total ......................................................................................................................

Additionally, the Treasury
Department and the IRS have
determined that the rules regarding
publicly traded partnerships might
affect approximately 71 taxpayers. This
number was reached by determining,
using data for the 2018 taxable year, the
number of Form 1065 and 1065–B filers
with gross receipts exceeding $25
million that answered ‘‘yes’’ to question
5 on Schedule B to Form 1065 denoting
that the entity is a publicly traded
partnership.
As noted earlier, the final regulations
do not impose any new collection of
information on these entities. These
final regulations actually assist small
entities in meeting their filing
obligations by providing definitive
advice on which they can rely.
For the section 163(j)(10) elections for
passthrough taxpayers under final
§§ 1.163(j)–6(d)(5) and 1.163(j)–6(g)(4),
most small taxpayers do not need to

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

>$26M
>$26M
>$26M
>$26M

but
but
but
but

$41.5M ............
$41.5M ............
$41.5M ............
$35M ...............

22
0
242
12

...................................................................

276

make the elections because, as
discussed above, they are not subject to
the section 163(j) limitation. For small
taxpayers that are subject to the
limitation, the cost to implement the
election is low. Pursuant to Revenue
Procedure 2020–22, these passthrough
taxpayers simply complete the Form
8990 as if the election has been made.
Accordingly, the burden of complying
with the elections, if needed, is no
different than for taxpayers who do not
make the elections.
The persons potentially subject to
final § 1.163(j)–7 are U.S. shareholders
of one or more CFCs for which BIE is
reported, and that (1) have average
annual gross receipts for the 3-taxable
year period ending with the taxable year
that precedes the current taxable year
exceeding $26,000,000, and (2) want to
make the CFC group election or safeharbor election. Section 1.163(j)–7 of the

PO 00000

Frm 00026

Fmt 4701

Sfmt 4700

not
not
not
not

more
more
more
more

than
than
than
than

Schedule B,
question 1 box
b, c or d

final regulations requires such taxpayers
to attach a statement to their return
providing basic information regarding
the CFC group or standalone CFC.
As discussed in the PRA section of
this preamble, the reporting burden for
both statements is estimated at 0 to 30
minutes, depending on individual
circumstances, with an estimated
average of 15 minutes for all affected
entities, regardless of size. The
estimated monetized burden for
compliance is $95 per hour.
Accordingly, the Secretary certifies
that the rule will not have a significant
economic impact on a substantial
number of small entities.
Pursuant to section 7805(f), the notice
of proposed rulemaking preceding this
final rule was submitted to the Chief
Counsel for the Office of Advocacy of
the Small Business Administration for
comment on its impact on small
business. No comments on the notice

E:\FR\FM\19JAR4.SGM

19JAR4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
were received from the Chief Counsel
for the Office of Advocacy of the Small
Business Administration.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded
Mandates Reform Act of 1995 requires
that agencies assess anticipated costs
and benefits and take certain other
actions before issuing a final rule that
includes any Federal mandate that may
result in expenditures in any one year
by a state, local, or tribal government, in
the aggregate, or by the private sector, of
$100 million in 1995 dollars, updated
annually for inflation. These final
regulations do not include any Federal
mandate that may result in expenditures
by state, local, or tribal governments, or
by the private sector in excess of that
threshold.

khammond on DSKJM1Z7X2PROD with RULES4

V. Executive Order 13132: Federalism
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state
law, unless the agency meets the
consultation and funding requirements
of section 6 of the Executive Order.
These final regulations do not have
federalism implications and do not
impose substantial direct compliance
costs on state and local governments or
preempt state law within the meaning of
the Executive Order.
VI. Congressional Review Act
The Administrator of OIRA has
determined that this is a major rule for
purposes of the Congressional Review
Act (5 U.S.C. 801 et seq.) (CRA). Under
section 801(3) of the CRA, a major rule
takes effect 60 days after the rule is
published in the Federal Register.
Notwithstanding this requirement,
section 808(2) of the CRA allows
agencies to dispense with the
requirements of section 801 when the
agency for good cause finds that such
procedure would be impracticable,
unnecessary, or contrary to the public
interest and the rule shall take effect at
such time as the agency promulgating
the rule determines. Pursuant to section
808(2) of the CRA, the Treasury
Department and the IRS find, for good
cause, that a 60-day delay in the
effective date is unnecessary and
contrary to the public interest.
These final regulations resolve
ambiguity with respect to the statute
and certain aspects of the 2020
Proposed Regulations, prevent abuse
through the application of several antiabuse rules, and grant taxpayer relief

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

that would not be available based solely
on the statute. Following the
amendments to section 163(j) by the
TCJA, the Treasury Department and the
IRS published the proposed regulations
to provide certainty to taxpayers. In
particular, as demonstrated by the wide
variety of public comments in response
to the proposed regulations received
after the publication of the final
regulations, taxpayers continue to
express uncertainty regarding the proper
application of the statutory rules and
the final regulations under section
163(j). This uncertainty extends to the
application of a number of important
temporary provisions in section 163(j)
enacted as part of the CARES Act that
were intended to provide relief for
taxpayers impacted by COVID–19. The
final regulations provide rules that are
relevant to the application of these
taxpayer-favorable provisions. Certainty
with respect to these temporary
provisions is essential so that taxpayers
can accurately model the impact of
these provisions on their liquidity in
order to make timely informed business
decisions during the limited periods in
which these provisions are in place.
Furthermore, in order to make informed
business decisions, taxpayers will need
to consider the potentially complex
interaction of these temporary
provisions, and section 163(j) more
generally, with other Code provisions
(for example, sections 59A, 172, and
250), which further heightens the need
for prompt guidance. Consistent with
Executive Order 13924 (May 19, 2020),
the Treasury Department and the IRS
have therefore determined that an
expedited effective date of the final
regulations would ‘‘give businesses . . .
the confidence they need to re-open by
providing guidance on what the law
requires.’’ 85 FR 31353–4. Accordingly,
the Treasury Department and the IRS
have determined that the rules in this
Treasury decision will take effect on the
date it is filed with the Office of the
Federal Register for public inspection.
Drafting Information
The principal authors of these
regulations are Susie Bird, Charlie
Gorham, Nathaniel Kupferman, Jaime
Park, Sophia Wang, and James Williford
(Income Tax & Accounting), Vishal
Amin, Brian Choi, Jacob Moore,
Adrienne M. Mikolashek, and William
Kostak (Passthroughs and Special
Industries), Azeka J. Abramoff and
Raphael J. Cohen (International), Russell
G. Jones and John B. Lovelace
(Corporate), and William Blanchard,
Michael Chin, Steven Harrison, and
Pamela Lew (Financial Institutions &
Products). Other personnel from the

PO 00000

Frm 00027

Fmt 4701

Sfmt 4700

5521

Treasury Department and the IRS
participated in their development.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings notices, and other guidance
cited in this document are published in
the Internal Revenue Bulletin (or
Cumulative Bulletin) and are available
from the Superintendent of Documents,
U.S. Government Publishing Office,
Washington, DC 20402, or by visiting
the IRS website at https://www.irs.gov.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:

■

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

Par. 2. Section 1.163–15 is added to
read as follows:

■

§ 1.163 –15 Debt Proceeds Distributed
from Any Taxpayer Account or from Cash.

(a) In general. Regardless of
paragraphs (c)(4) and (5) of § 1.163–8T,
in the case of debt proceeds deposited
in an account, a taxpayer that is
applying § 1.163–8T or § 1.163–14 may
treat any expenditure made from any
account of the taxpayer, or from cash,
within 30 days before or 30 days after
debt proceeds are deposited in any
account of the taxpayer as made from
such proceeds to the extent thereof.
Similarly, in the case of debt proceeds
received in cash, a taxpayer that is
applying § 1.163–8T or § 1.163–14 may
treat any expenditure made from any
account of the taxpayer, or from cash,
within 30 days before or 30 days after
debt proceeds are received in cash as
made from such proceeds to the extent
thereof. For purposes of this section,
terms used have the same meaning as in
§ 1.163–8T(c)(4) and (5).
(b) Applicability date. This section
applies to taxable years beginning on or
after March 22, 2021. However,
taxpayers and their related parties,
within the meaning of sections 267(b)
(determined without regard to section
267(c)(3)) and 707(b)(1), may choose to
apply the rules in this section to a
taxable year beginning after December
31, 2017, and before March 22, 2021,
provided that those taxpayers and their
related parties consistently apply all of

E:\FR\FM\19JAR4.SGM

19JAR4

5522

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

the rules in this section to that taxable
year and each subsequent taxable year.
■ Par. 3. Section 1.163(j)–0 is amended
by:
■ 1. Adding entries for §§ 1.163(j)–
1(b)(1)(iv)(A)(4) and 1.163(j)–
1(b)(1)(iv)(B)(1) and (2).
■ 2. Revising the entry for § 1.163(j)–
1(b)(1)(iv)(C).
■ 3. Adding entries for § 1.163(j)–
1(b)(1)(iv)(E) through (G).
■ 4. Revising the entries for § 1.163(j)–
1(b)(22)(iii)(F) and (b)(35).
■ 5. Adding entries for §§ 1.163(j)–
1(c)(4), 1.163(j)–2(b)(3)(i) through (iv),
and 1.163(j)–2(d)(3).
■ 6. Revising the entries for §§ 1.163(j)–
2(k) and 1.163(j)–6(c)(1) through (3).
■ 7. Adding entries for §§ 1.163(j)–
6(c)(4), 1.163(j)–6(d)(3) through (5),
1.163(j)–6(e)(5) and (6), 1.163(j)–
6(f)(1)(iii), 1.163(j)–6(g)(4), and 1.163(j)–
6(l)(4)(iv).
■ 8. Revising the entries for §§ 1.163(j)–
6(n) and (p), 1.163(j)–7(c) through (f)
and (h) through (m).
■ 9. Adding entries for § 1.163(j)–7(g)(3)
and (4).
■ 10. Revising the entries for
§§ 1.163(j)–10(c)(5)(ii)(D) and 1.163(j)–
10(f).
The revisions and additions read as
follows:

(3) Conduit amounts.
(4) Holding period.
(5) Exception to holding period
requirement for money market funds and
certain regularly declared dividends.

§ 1.163 (j)–0

*

*

*

Table of Contents.

*

§ 1.163(j)–1

*

*

*

khammond on DSKJM1Z7X2PROD with RULES4

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

(4) Paragraphs (b)(1)(iv)(A)(2) through (4),
(B) through (G), (b)(22)(iii)(F), and (b)(35).
§ 1.163(j)–2 Deduction for business interest
expense limited.

*

*

*

*

*

(b) * * *
(3) * * *
(i) In general.
(ii) Short taxable years.
(iii) Transactions to which section 381
applies.
(iv) Consolidated groups.

*

*

*

*

*

*

*

*

*

*

*

*

§ 1.163(j)–6 Application of the business
interest deduction limitation to
partnerships and subchapter S
Corporations.

*

*

Jkt 253001

*

*

*

*

*

(c) * * *
(1) Modification of business interest
income for partnerships.
(2) Modification of business interest
expense for partnerships.
(3) Transition rule.
(4) Character of business interest expense.
(d) * * *
(3) Section 743(b) adjustments and
publicly traded partnerships.
(4) Modification of adjusted taxable income
for partnerships.
(5) Election to use 2019 adjusted taxable
income for taxable years beginning in 2020.
(e) * * *
(5) Partner basis items, remedial items, and
publicly traded partnerships.
(6) [Reserved].
(f) * * *
(1) * * *
(iii) Exception applicable to publicly
traded partnerships.

*

PO 00000

*

*

Frm 00028

*

Fmt 4701

*

*

Sfmt 4700

*

*

*

*

*

*

(l) * * *
(4) * * *
(iv) [Reserved].

*

(k) Applicability dates.
(1) In general.
(2) Paragraphs (b)(3)(iii), (b)(3)(iv), and
(d)(3).

*

19:59 Jan 17, 2021

*

(c) * * *

*

*

(22) * * *
(iii) * * *
(F) Section 163(j) interest dividends.
(1) In general.
(2) Limitation on amount treated as interest
income.

VerDate Sep<11>2014

*

(d) * * *
(3) Determining a syndicate’s loss amount.

(E) Alternative computation method.
(1) Alternative computation method for
property dispositions.
(2) Alternative computation method for
dispositions of member stock.
(3) Alternative computation method for
dispositions of partnership interests.
(F) Cap on negative adjustments.
(1) In general.
(2) Example.
(G) Treatment of depreciation,
amortization, or depletion capitalized under
section 263A.

*

*

Definitions.

*

*

(35) Section 163(j) interest dividend.
(i) In general.
(ii) Reduction in the case of excess
reported amounts.
(iii) Allocation of excess reported amount.
(A) In general.
(B) Special rule for noncalendar year RICs.
(iv) Definitions.
(A) Reported section 163(j) interest
dividend amount.
(B) Excess reported amount.
(C) Aggregate reported amount.
(D) Post-December reported amount.
(E) Excess section 163(j) interest income.
(v) Example.

*

(b) * * *
(1) * * *
(iv) * * *
(A) * * *
(4) Nonrecognition transactions.
(B) * * *
(1) In general.
(2) Application of the alternative
computation method.
(C) Successor rules.
(1) Successor assets.
(2) Successor entities.

*

*

(g) * * *
(4) Special rule for taxable years beginning
in 2019 and 2020.

*

*

*

(n) Treatment of self-charged lending
transactions between partnerships and
partners.
(o) * * *
(p) Applicability dates.
(1) In general.
(2) Paragraphs (c)(1) and (2), (d)(3) through
(5), (e)(5), (f)(1)(iii), (g)(4), (n), and (o)(24)
through (29), and (34) through (36).
§ 1.163(j)–7 Application of the section
163(j) limitation to foreign corporations
and United States shareholders.

*

*

*

*

*

(c) Application of section 163(j) to CFC
group members of a CFC group.
(1) Scope.
(2) Calculation of section 163(j) limitation
for a CFC group for a specified period.
(i) In general.
(ii) Certain transactions between CFC
group members disregarded.
(iii) [Reserved]
(iv) [Reserved]
(3) Deduction of business interest expense.
(i) CFC group business interest expense.
(A) In general.
(B) Modifications to relevant terms.
(ii) Carryforwards treated as attributable to
the same taxable year.
(iii) Multiple specified taxable years of a
CFC group member with respect to a
specified period.
(iv) Limitation on pre-group disallowed
business interest expense carryforward.
(A) General rule.
(1) CFC group member pre-group
disallowed business interest expense
carryforward.
(2) Subgrouping.
(3) Transition rule.
(B) Deduction of pre-group disallowed
business interest expense carryforwards.
(4) Currency translation.
(5) Special rule for specified periods
beginning in 2019 or 2020.
(i) 50 percent ATI limitation applies to a
specified period of a CFC group.
(ii) Election to use 2019 ATI applies to a
specified period of a CFC group.
(A) In general.
(B) Specified taxable years that do not
begin in 2020.
(d) Determination of a specified group and
specified group members.
(1) Scope.
(2) Rules for determining a specified group.
(i) Definition of a specified group.
(ii) Indirect ownership.
(iii) Specified group parent.
(iv) Qualified U.S. person.
(v) Stock.
(vi) Options treated as exercised.
(vii) When a specified group ceases to
exist.
(3) Rules for determining a specified group
member.
(e) Rules and procedures for treating a
specified group as a CFC group.

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
(1) Scope.
(2) CFC group and CFC group member.
(i) CFC group.
(ii) CFC group member.
(3) Duration of a CFC group.
(4) Joining or leaving a CFC group.
(5) Manner of making or revoking a CFC
group election.
(i) In general.
(ii) Revocation by election.
(iii) Timing.
(iv) Election statement.
(v) Effect of prior CFC group election.
(6) Annual information reporting.
(f) Treatment of a CFC group member that
has ECI.
(1) In general.
(2) [Reserved]
(g) * * *
(3) Treatment of certain foreign income
taxes.
(4) Anti-abuse rule.
(i) In general.
(ii) ATI adjustment amount.
(A) In general.
(B) Special rule for taxable years or
specified periods beginning in 2019 or 2020.
(iii) Applicable partnership.
(h) Election to apply safe-harbor.
(1) In general.
(2) Eligibility for safe-harbor election.
(i) Stand-alone applicable CFC.
(ii) CFC group.
(iii) Currency translation.
(3) Eligible amount.
(i) Stand-alone applicable CFC.
(ii) CFC group.
(iii) Additional rules for determining an
eligible amount.
(4) Qualified tentative taxable income.
(5) Manner of making a safe-harbor
election.
(i) In general.
(ii) Election statement.
(6) Special rule for taxable years or
specified periods beginning in 2019 or 2020.
(i)–(j) [Reserved]
(k) Definitions.
(1) Applicable partnership.
(2) Applicable specified taxable year.
(3) ATI adjustment amount.
(4) [Reserved]
(5) [Reserved]
(6) CFC group.
(7) CFC group election.
(8) CFC group member.
(9) [Reserved]
(10) Cumulative section 163(j) pre-group
carryforward limitation.
(11) Current group.
(12) Designated U.S. person.
(13) ECI deemed corporation.
(14) Effectively connected income.
(15) Eligible amount.
(16) Former group.
(17) Loss member.
(18) Payment amount.
(19) Pre-group disallowed business interest
expense carryforward.
(20) Qualified tentative taxable income.
(21) Qualified U.S. person.
(22) Relevant period.
(23) Safe-harbor election.
(24) Specified borrower.
(25) Specified group.
(26) Specified group member.

VerDate Sep<11>2014

22:05 Jan 17, 2021

Jkt 253001

(27) Specified group parent.
(28) Specified lender.
(29) Specified period.
(i) In general.
(ii) Short specified period.
(30) Specified taxable year.
(31) Stand-alone applicable CFC.
(32) Stock.
(l) Examples.
(m) Applicability dates.
(1) General applicability date.
(2) Exception.
(3) Early application.
(i) Rules for paragraphs (b) and (g)(1) and
(2) of this section.
(ii) Rules for certain other paragraphs in
this section.
(4) Additional rules that must be applied
consistently.
(5) Election for prior taxable years.

*

*

*

*

*

§ 1.163(j)–10 Allocation of interest expense,
interest income, and other items of
expense and gross income to an
excepted trade or business.

*

*

*

*

*

(c) * * *
(5) * * *
(ii) * * *
(D) Limitations on application of lookthrough rules.
(1) Inapplicability of look-through rule to
partnerships or non-consolidated C
corporations to which the small business
exemption applies.
(2) Limitation on application of lookthrough rule to C corporations.

*

*

*

*

*

(f) Applicability dates.
(1) In general.
(2) Paragraph (c)(5)(ii)(D)(2).

*

*
*
*
*
Par. 4. Section 1.163(j)–1 is amended
by:
■ 1. In paragraph (b)(1)(iv)(A)(1), adding
the text ‘‘and paragraphs (b)(1)(iv)(B)
and (E)’’ after the text ‘‘paragraphs
(b)(1)(ii)(C), (D), and (E)’’.
■ 2. Revising paragraphs (b)(1)(iv)(A)(2)
and (3).
■ 3. Adding paragraph (b)(1)(iv)(A)(4).
■ 4. Revising paragraphs (b)(1)(iv)(B),
(C), and (D).
■ 5. Adding paragraphs (b)(1)(iv)(E), (F),
and (G).
■ 6. Revising paragraphs (b)(1)(viii)(A)
through (D).
■ 7. Adding paragraph (b)(1)(viii)(E).
■ 8. Adding paragraphs (b)(22)(iii)(F)
and (b)(35).
■ 9. In paragraph (c)(1), removing
‘‘paragraphs (c)(2) and (3)’’ from the first
sentence and adding ‘‘paragraphs (c)(2),
(3), and (4)’’ in its place.
■ 10. Adding paragraph (c)(4).
The revisions and additions read as
follows:
■

§ 1.163(j)–1

*

Definitions.

*
*
(b) * * *
(1) * * *

PO 00000

Frm 00029

*

Fmt 4701

*

Sfmt 4700

5523

(iv) * * *
(A) * * *
(2) Intercompany transactions. For
purposes of paragraphs (b)(1)(ii)(C) and
(D) and paragraphs (b)(1)(iv)(B) and
(b)(1)(iv)(E)(1) and (2) of this section,
the term sale or other disposition
excludes all intercompany transactions,
within the meaning of § 1.1502–
13(b)(1)(i), to the extent necessary to
achieve single-entity taxation of the
consolidated group.
(3) Deconsolidations.
Notwithstanding any other rule in this
paragraph (b)(1)(iv)(A), any transaction
in which a member (S) leaves a
consolidated group (selling group),
including a section 381(a) transaction
described in paragraph (b)(1)(iv)(A)(1) of
this section, is treated as a taxable
disposition of all S stock held by any
member of the selling group for
purposes of paragraphs (b)(1)(ii)(C) and
(D) and paragraphs (b)(1)(iv)(B) and
(b)(1)(iv)(E)(1) and (2) of this section,
unless the transaction is described in
§ 1.1502–13(j)(5)(i). Following S’s
deconsolidation, any subsequent sales
or dispositions of S stock by the selling
group do not trigger further adjustments
under paragraphs (b)(1)(ii)(C) and (D)
and paragraphs (b)(1)(iv)(B) and
(b)(1)(iv)(E)(1) and (2) of this section. If
a transaction is described in § 1.1502–
13(j)(5)(i), the transaction is not treated
as a sale or other disposition for
purposes of paragraphs (b)(1)(ii)(C) and
(D) and paragraphs (b)(1)(iv)(B) and
(b)(1)(iv)(E)(1) and (2) of this section.
See also the successor rules in
paragraph (b)(1)(iv)(C) of this section.
(4) Nonrecognition transactions. The
disposition of property, member stock
(other than in a deconsolidation
described in paragraph (b)(1)(iv)(A)(3) of
this section), or partnership interests in
a nonrecognition transaction, other than
a section 381(a) transaction described in
paragraph (b)(1)(iv)(A)(1) of this section,
is treated as a taxable disposition of the
property, member stock, or partnership
interest disposed of for purposes of
paragraph (b)(1)(iv)(E)(1)(i),
(b)(1)(iv)(E)(2)(i), and (b)(1)(iv)(E)(3)(i) of
this section, respectively. For example,
if a taxpayer transfers property to a
wholly owned, non-consolidated
subsidiary, the transfer of the property
is treated as a taxable disposition for
purposes of paragraph (b)(1)(iv)(E)(1)(i)
of this section notwithstanding the
application of section 351.
(B) Deductions by members of a
consolidated group—(1) In general. If
paragraph (b)(1)(ii)(C), (D), or (E) of this
section applies to adjust the tentative
taxable income of a consolidated group,
and if the consolidated group does not
use the alternative computation method

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

5524

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

in paragraph (b)(1)(iv)(E) of this section,
the amount of the adjustment under
paragraph (b)(1)(ii)(C) of this section
equals the greater of the allowed or
allowable depreciation, amortization, or
depletion of the property, as provided
under section 1016(a)(2), for the
consolidated group for the taxable years
beginning after December 31, 2017, and
before January 1, 2022, with respect to
such property.
(2) Application of the alternative
computation method. If paragraph
(b)(1)(ii)(C), paragraph (b)(1)(ii)(D), or
paragraph (b)(1)(ii)(E) of this section
applies to adjust the tentative taxable
income of a consolidated group, and if
the consolidated group uses the
alternative computation method in
paragraph (b)(1)(iv)(E) of this section,
the amount of the adjustment computed
under paragraph (b)(1)(iv)(E)(1)(i),
paragraph (b)(1)(iv)(E)(2)(i), or
paragraph (b)(1)(iv)(E)(3)(i) of this
section must take into account the net
gain that would be taken into account
by the consolidated group, including
from intercompany transactions,
determined by treating the sale or other
disposition as a taxable transaction (see
paragraphs (b)(1)(iv)(A)(3) and (4) of this
section regarding deconsolidations and
certain nonrecognition transactions,
respectively).
(C) Successor rules—(1) Successor
assets. This paragraph (b)(1)(iv)(C)(1)
applies if deductions described in
paragraph (b)(1)(ii)(C) of this section are
allowed or allowable to a consolidated
group member (S) and either the
depreciable property or S’s stock is
subsequently transferred to another
member (S1) in an intercompany
transaction in which the transferor
receives S1 stock. If this paragraph
(b)(1)(iv)(C)(1) applies, and if the
transferor’s basis in the S1 stock
received in the intercompany
transaction is determined, in whole or
in part, by reference to its basis in the
depreciable property or the S stock, the
S1 stock received in the intercompany
transaction is treated as a successor
asset for purposes of paragraph
(b)(1)(ii)(D) and (b)(1)(iv)(E)(2) of this
section. Thus, except as otherwise
provided in paragraph (b)(1)(iv)(D) of
this section, the subsequent disposition
of either the S1 stock or the S stock (or
both) may require the application of the
adjustment rules of paragraph
(b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2)
of this section.
(2) Successor entities. The acquiring
corporation in a section 381(a)
transaction to which the exception in
paragraph (b)(1)(iv)(A)(1) of this section
applies is treated as a successor to the
distributor or transferor corporation for

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

purposes of paragraphs (b)(1)(ii)(C)
through (E) and (b)(1)(iv)(B) and (E) of
this section. Therefore, for example, in
applying paragraphs (b)(1)(ii)(C) through
(E) and (b)(1)(iv)(B) and (E) of this
section, the acquiring corporation is
treated as succeeding to the allowed or
allowable items of the distributor or
transferor corporation. Similarly, the
surviving group in a transaction
described in § 1.1502–13(j)(5)(i) to
which the exception in paragraph
(b)(1)(iv)(A)(3) of this section applies is
treated as a successor to the terminating
group for purposes of paragraphs
(b)(1)(ii)(C) through (E) and (b)(1)(iv)(B)
and (E) of this section.
(D) Anti-duplication rule—(1) In
general. The aggregate of the
subtractions from tentative taxable
income of a consolidated group under
paragraphs (b)(1)(ii)(C) through (E) or
paragraphs (b)(1)(iv)(E)(1) through (3) of
this section with respect to an item of
property (including with regard to
dispositions of successor assets
described in paragraph (b)(1)(iv)(C)(1) of
this section) cannot exceed the aggregate
amount of the consolidated group
members’ deductions described in
paragraph (b)(1)(ii)(C) of this section
with respect to such item of property. In
addition, once an item of property is no
longer held by any member of a
consolidated group (whether or not an
adjustment to the tentative taxable
income of the group is made under
paragraph (b)(1)(ii)(C) of this section
with respect to the direct or indirect
disposition of that property), no further
adjustment to the group’s tentative
taxable income is made under paragraph
(b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2)
of this section in relation to the same
property with respect to any subsequent
stock disposition.
(2) Adjustments following
deconsolidation. If a corporation (S)
leaves a consolidated group (Group 1) in
a transaction that requires an
adjustment under paragraph (b)(1)(ii)(D)
or paragraph (b)(1)(iv)(E)(2) of this
section, no further adjustment is
required under paragraph (b)(1)(ii)(C) or
(E) or paragraph (b)(1)(iv)(E) of this
section in a separate return year (as
defined in § 1.1502–1(e)) of S with
respect to depreciation, amortization, or
depletion deductions allowed or
allowable to Group 1. See paragraph
(b)(1)(iv)(A) of this section for special
rules regarding the meaning of the term
‘‘sale or other disposition’’ for purposes
of the adjustments required under
paragraphs (b)(1)(ii)(C) through (E) and
paragraphs (b)(1)(iv)(B) and (E) of this
section. For example, assume that S
deconsolidates from Group 1 in a
transaction not described in § 1.1502–

PO 00000

Frm 00030

Fmt 4701

Sfmt 4700

13(j)(5)(i) after holding property for
which depreciation, amortization, or
depletion deductions were allowed or
allowable in Group 1. On the
deconsolidation, S and Group 1 would
adjust tentative taxable income with
regard to that property. See paragraphs
(b)(1)(iv)(A)(3), (b)(1)(ii)(D), and
(b)(1)(iv)(E)(2) of this section. If,
following the deconsolidation, S sells
the property referred to in the previous
sentence, no subtraction from tentative
taxable income is made under paragraph
(b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1)
of this section during S’s separate return
year with regard to the amounts
included in Group 1. See paragraphs
(b)(1)(iv)(A)(3), (b)(1)(ii)(D), and
(b)(1)(iv)(E)(2) of this section.
(E) Alternative computation method.
If paragraph (b)(1)(ii)(C), (D), or (E) of
this section applies to adjust the
tentative taxable income of a taxpayer,
the taxpayer may compute the amount
of the adjustments required by such
paragraph using the formulas in
paragraph (b)(1)(iv)(E)(1), (2), and (3) of
this section, respectively, provided that
the taxpayer applies such formulas to all
dispositions for which an adjustment is
required under paragraph (b)(1)(ii)(C),
(D), or (E) of this section. For special
rules regarding the treatment of
deconsolidating transactions and
nonrecognition transactions, see
paragraph (b)(1)(iv)(A)(3) and (4) of this
section, respectively. For special rules
regarding the application of the
formulas in paragraph (b)(1)(iv)(E)(1),
(2), and (3) of this section by
consolidated groups, see paragraph
(b)(1)(iv)(B)(2) of this section.
(1) Alternative computation method
for property dispositions. With respect
to the sale or other disposition of
property, the lesser of:
(i) Any gain recognized on the sale or
other disposition of such property by
the taxpayer (or, if the taxpayer is a
member of a consolidated group, the
consolidated group); and
(ii) The greater of the allowed or
allowable depreciation, amortization, or
depletion of the property, as provided
under section 1016(a)(2), for the
taxpayer (or, if the taxpayer is a member
of a consolidated group, the
consolidated group) for the taxable years
beginning after December 31, 2017, and
before January 1, 2022, with respect to
such property.
(2) Alternative computation method
for dispositions of member stock. With
respect to the sale or other disposition
by a member of a consolidated group of
stock of another member for whom
depreciation, amortization, or depletion
was allowed or allowable with regard to

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
an item of property (or stock of any
successor to that member), the lesser of:
(i) Any gain recognized on the sale or
other disposition of such stock; and
(ii) The investment adjustments under
§ 1.1502–32 with respect to such stock
that are attributable to deductions
described in paragraph (b)(1)(ii)(C) of
this section. The investment
adjustments referred to in this
paragraph (b)(1)(iv)(E)(2)(ii) include
investment adjustments replicated in
stock of members that are successor
entities.
(3) Alternative computation method
for dispositions of partnership interests.
With respect to the sale or other
disposition of an interest in a
partnership, the lesser of:
(i) Any gain recognized on the sale or
other disposition of such interest; and
(ii) The taxpayer’s (or, if the taxpayer
is a consolidated group, the
consolidated group’s) distributive share
of deductions described in paragraph
(b)(1)(ii)(C) of this section with respect
to property held by the partnership at
the time of such sale or other
disposition to the extent such
deductions were allowable under
section 704(d).
(F) Cap on negative adjustments—(1)
In general. A subtraction from (or
negative adjustment to) tentative taxable
income that is required under paragraph
(b)(1)(ii)(C), (D), or (E) or paragraph
(b)(1)(iv)(B) or (E) of this section is
reduced to the extent the taxpayer
establishes that the positive adjustments
to tentative taxable income under
paragraphs (b)(1)(i)(D) through (F) of
this section in a prior taxable year did
not result in an increase in the amount
allowed as a deduction for business
interest expense for such year. The
extent to which the positive adjustments
under paragraphs (b)(1)(i)(D) through (F)
of this section resulted in an increase in
the amount allowed as a deduction for
business interest expense in a prior
taxable year (such amount of positive
adjustments, the negative adjustment
cap) is determined after taking into
account all other adjustments to
tentative taxable income under
paragraph (b)(1)(i) and (ii) of this section
for that year, as established through
books and records. The amount of the
negative adjustment cap for a prior
taxable year is reduced in future taxable
years to the extent of negative
adjustments under paragraphs
(b)(1)(ii)(C) through (E) and paragraphs
(b)(1)(iv)(B) and (E) of this section with
respect to the prior taxable year.
(2) Example. A is a calendar-year
individual taxpayer engaged in a trade
or business that is neither an excepted
trade or business nor eligible for the

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

small business exemption. A has no
disallowed business interest expense
carryforwards. In 2021, A has $100x of
business interest expense, no business
interest income or floor plan financing
interest expense, and $400x of tentative
taxable income. After taking into
account the adjustments to tentative
taxable income under paragraph (b)(1)(i)
and (ii) of this section other than
positive adjustments under paragraphs
(b)(1)(i)(D) through (F) of this section, A
has tentative taxable income of $450x. A
increases its tentative taxable income by
$30x (from $450x to $480x) under
paragraph (b)(1)(i)(D) of this section to
reflect $30x of depreciation deductions
with respect to Asset Y in 2021. Thus,
for 2021, A would have a section 163(j)
limitation of $135x ($450x × 30 percent)
without regard to adjustments under
paragraphs (b)(1)(i)(D) through (F) of
this section. After the application of
paragraph (b)(1)(i)(D) of this section, A
has a section 163(j) limitation of $144x
($480x × 30 percent). In 2022, A sells
Asset Y at a gain of $50x. Under
paragraph (b)(1)(iv)(F)(1) of this section,
A is not required to reduce its tentative
taxable income in 2022 under paragraph
(b)(1)(ii)(C) through (E) or paragraph
(b)(1)(iv)(E) of this section. As
established by A, the $30x addition to
tentative taxable income under
paragraph (b)(1)(i)(D) of this section
resulted in no increase in the amount
allowed as a deduction for business
interest expense in 2021.
(G) Treatment of depreciation,
amortization, or depletion capitalized
under section 263A. Paragraphs
(b)(1)(ii)(C) through (E) of this section
and this paragraph (b)(1)(iv) apply with
respect to the sale or other disposition
of property to which paragraph
(b)(1)(iii) of this section applies. For
example, if a taxpayer with depreciable
machinery capitalizes the depreciation
into inventory under section 263A,
paragraph (b)(1)(ii)(C) or paragraph
(b)(1)(iv)(E) of this section (and, if the
taxpayer is a consolidated group,
paragraph (b)(1)(iv)(B) of this section)
applies upon the disposition of the
machinery, subject to the cap in
paragraph (b)(1)(iv)(F) of this section.
Similarly, the successor asset rules in
paragraph (b)(1)(iv)(C)(1) of this section
would apply if the depreciable
machinery subsequently were
transferred to another member (S1) in an
intercompany transaction in which the
transferor received S1 stock.
*
*
*
*
*
(viii) * * *
(A) Example 1—(1) Facts. In 2021, A
purchases a depreciable asset (Asset X)
for $30x and fully depreciates Asset X

PO 00000

Frm 00031

Fmt 4701

Sfmt 4700

5525

under section 168(k). For the 2021
taxable year, A establishes that its ATI
before adding back depreciation
deductions with respect to Asset X
under paragraph (b)(1)(i)(D) of this
section is $130x, and that its ATI after
adding back depreciation deductions
with respect to Asset X under paragraph
(b)(1)(i)(D) of this section is $160x. A
incurs $45x of business interest expense
in 2021. In 2024, A sells Asset X to an
unrelated third party for $25x.
(2) Analysis. A’s section 163(j)
limitation for 2021 is $48x ($160x × 30
percent). Thus, all $45x of A’s business
interest expense incurred in 2021 is
deductible in that year. Under
paragraph (b)(1)(ii)(C) of this section, A
must subtract $30x from its tentative
taxable income in computing its ATI for
its 2024 taxable year. Alternatively,
under paragraph (b)(1)(iv)(E)(1) of this
section, A must subtract $25x (the lesser
of $30x or $25x ($25x¥$0x)) from its
tentative taxable income in computing
its ATI for its 2024 taxable year.
However, the negative adjustments
under paragraphs (b)(1)(ii)(C) and
(b)(1)(iv)(E)(1) of this section are both
subject to the negative adjustment cap
in paragraph (b)(1)(iv)(F) of this section.
Under that paragraph, A’s negative
adjustment under either paragraph
(b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1)
of this section is capped at $20x, or
$150x (the amount of ATI that A needed
in order to deduct all $45x of business
interest expense in 2021) minus $130x
(the amount of A’s tentative taxable
income in 2021 before adding back any
amounts under paragraph (b)(1)(i)(D)
through (F) of this section). As
established by A, the additional $10x
($30x¥$20x) of depreciation
deductions that were added back to
tentative taxable income in 2021 under
paragraph (b)(1)(i)(D) of this section did
not increase A’s business interest
expense deduction for that year.
(3) Transfer of assets in a
nonrecognition transaction to which
section 381 applies. The facts are the
same as in paragraph (b)(1)(viii)(A)(1) of
this section, except that, rather than sell
Asset X to an unrelated third party in
2024, A merges with and into an
unrelated third party in 2024 in a
transaction described in section
368(a)(1)(A) in which no gain is
recognized. As provided in paragraph
(b)(1)(iv)(A)(1) of this section, the
merger transaction is not treated as a
‘‘sale or other disposition’’ for purposes
of paragraph (b)(1)(ii)(C) or paragraph
(b)(1)(iv)(E)(1) of this section. Thus, no
adjustment to tentative taxable income
is required in 2024 under paragraph
(b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1)
of this section.

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

5526

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

(4) Transfer of assets in a
nonrecognition transaction to which
section 351 applies. The facts are the
same as in paragraph (b)(1)(viii)(A)(1) of
this section, except that, rather than sell
Asset X to an unrelated third party in
2024, A transfers Asset X to B (A’s
wholly owned subsidiary) in 2024 in a
transaction to which section 351
applies. The section 351 transaction is
treated as a ‘‘sale or other disposition’’
for purposes of paragraphs (b)(1)(ii)(C)
and (b)(1)(iv)(E)(1) of this section, and it
is treated as a taxable disposition for
purposes of paragraph (b)(1)(iv)(E)(1) of
this section. See paragraph
(b)(1)(iv)(A)(1) and (4) of this section.
However, the negative adjustments
under paragraphs (b)(1)(ii)(C) and
(b)(1)(iv)(E)(1) of this section are both
subject to the negative adjustment cap
in paragraph (b)(1)(iv)(F) of this section.
Thus, A must subtract $20x from its
tentative taxable income in computing
its ATI for its 2024 taxable year.
(B) Example 2—(1) Facts. In 2021, S
purchases a depreciable asset (Asset Y)
for $30x and fully depreciates Asset Y
under section 168(k). P reduces its basis
in its S stock by $30x under § 1.1502–
32 to reflect S’s depreciation deductions
with respect to Asset Y. For the 2021
taxable year, the P group establishes that
its ATI before adding back S’s
depreciation deductions with respect to
Asset Y under paragraph (b)(1)(i)(D) of
this section is $130x, and that its ATI
after adding back S’s depreciation
deductions with respect to Asset Y
under paragraph (b)(1)(i)(D) of this
section is $160x. The P group incurs
$45x of business interest expense in
2021. In 2024, P sells all of its S stock
to an unrelated third party at a gain of
$25x.
(2) Analysis. The P group’s section
163(j) limitation for 2021 is $48x ($160x
× 30 percent). Thus, all $45x of the P
group’s business interest expense
incurred in 2021 is deductible in that
year. Under paragraph (b)(1)(ii)(D) of
this section, the P group must subtract
$30x from its tentative taxable income
in computing its ATI for its 2024 taxable
year. Alternatively, under paragraph
(b)(1)(iv)(E)(2) of this section, the P
group must subtract $25x (the lesser of
$30x or $25x) from its tentative taxable
income in computing its ATI for its
2024 taxable year. However, the
negative adjustments under paragraphs
(b)(1)(ii)(D) and (b)(1)(iv)(E)(2) of this
section are both subject to the negative
adjustment cap in paragraph (b)(1)(iv)(F)
of this section. Under that paragraph,
the P group’s negative adjustment under
either paragraph (b)(1)(ii)(D) or
paragraph (b)(1)(iv)(E)(2) of this section
is capped at $20x, or $150x (the amount

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

of ATI the P group needed in order to
deduct all $45x of business interest
expense in 2021) minus $130x (the
amount of the P group’s tentative
taxable income in 2021 before adding
back any amounts under paragraph
(b)(1)(i)(D) through (F) of this section).
As established by the P group, the
additional $10x ($30x¥$20x) of
depreciation deductions that were
added back to tentative taxable income
in 2021 under paragraph (b)(1)(i)(D) of
this section did not increase the P
group’s business interest expense
deduction for that year.
(3) Disposition of less than all
member stock. The facts are the same as
in paragraph (b)(1)(viii)(B)(1) of this
section, except that, in 2024, P sells half
of its S stock to an unrelated third party.
The results are the same as in paragraph
(b)(1)(viii)(B)(2) of this section. See
paragraph (b)(1)(iv)(A)(3) of this section.
Thus, the P group must subtract $20x
from its tentative taxable income in
computing its ATI for its 2024 taxable
year. No further adjustment under
paragraphs (b)(1)(ii)(C) and (D) or
paragraphs (b)(1)(iv)(E)(1) and (2) of this
section is required if P subsequently
sells its remaining S stock or if S
subsequently disposes of Asset Y. See
paragraphs (b)(1)(iv)(A)(3) and
(b)(1)(iv)(D) of this section.
(4) Intercompany transfer; disposition
of successor assets—(i) Adjustments in
2024. The facts are the same as in
paragraph (b)(1)(viii)(B)(1) of this
section, except that, rather than sell all
of its S stock to an unrelated third party
in 2024, P transfers all of its S stock to
T in 2024 in a transaction to which
section 351 applies and, in 2025, P sells
all of its T stock to an unrelated third
party at a gain of $40x. As provided in
paragraph (b)(1)(iv)(A)(2) of this section,
P’s intercompany transfer of its S stock
to T is not a ‘‘sale or other disposition’’
for purposes of paragraph (b)(1)(ii)(D) or
paragraph (b)(1)(iv)(E)(2) of this section.
Thus, no adjustment to tentative taxable
income is required in 2024 under
paragraph (b)(1)(ii)(D) or paragraph
(b)(1)(iv)(E)(2) of this section.
(ii) Adjustments in 2025. Pursuant to
paragraph (b)(1)(iv)(C)(1) of this section,
P’s stock in T is treated as a successor
asset for purposes of paragraph
(b)(1)(ii)(D) and (b)(1)(iv)(E)(2) of this
section. Moreover, P’s sale of its T stock
causes both T and S to deconsolidate.
Thus, under paragraph (b)(1)(iv)(A)(3) of
this section, the transaction is treated as
a taxable disposition of all of the T stock
and all of the S stock held by all
members of the P group. Under the antiduplication rule in paragraph
(b)(1)(iv)(D) of this section, the total
amount of gain recognized for purposes

PO 00000

Frm 00032

Fmt 4701

Sfmt 4700

of paragraph (b)(1)(iv)(E)(2)(i) of this
section is $40x, the greater of the gain
on the disposition of the T stock ($40x)
or on the disposition of the S stock
($25x). However, the negative
adjustments under paragraph
(b)(1)(iv)(E)(2) of this section are subject
to the negative adjustment cap in
paragraph (b)(1)(iv)(F) of this section.
Thus, the P group must subtract $20x
from its tentative taxable income in
computing its ATI for its 2025 taxable
year.
(5) Alternative computation and nondeconsolidating disposition of member
stock. The facts are the same as in
paragraph (b)(1)(viii)(B)(1) of this
section, except that, in 2024, P sells just
ten percent of its S stock to an unrelated
third party at a gain of $2.5x. Under
paragraph (b)(1)(iv)(E)(2) of this section,
the lesser of P’s gain recognized on the
sale of the S stock ($2.5x) and the
investment adjustments under § 1.1502–
32 with respect to the S stock P sold
($3x) is $2.5x, an amount less than the
$20x limitation under paragraph
(b)(1)(iv)(F) of this section. Thus, the P
group must subtract $2.5x from its
tentative taxable income in computing
its ATI for its 2024 taxable year.
(6) Non-deconsolidating disposition of
member stock followed by asset
disposition. The facts are the same as in
paragraph (b)(1)(viii)(B)(5) of this
section, except that, in 2025, S sells
Asset Y to an unrelated third party for
a gain of $20x. Under paragraph
(b)(1)(iv)(E)(1) of this section, the
amount of the adjustment in 2025 is the
lesser of two amounts. The first amount
is the amount of S’s gain recognized on
the sale of Asset Y ($20x). See paragraph
(b)(1)(iv)(E)(1)(i) of this section. The
second amount is the amount of
depreciation with respect to Asset Y
(see paragraph (b)(1)(iv)(E)(1)(ii) of this
section), reduced by the amount of
depreciation previously taken into
account in the computation under
paragraph (b)(1)(iv)(E)(2)(ii) of this
section ($30x¥$3x, or $27x). See
paragraph (b)(1)(iv)(D)(1) of this section.
Thus, the amount of the adjustment
under paragraphs (b)(1)(iv)(D) and
(b)(1)(iv)(E)(1) of this section is $20x. In
turn, this amount is subject to the
negative adjustment cap under
paragraph (b)(1)(iv)(F), which, after
accounting for the negative adjustment
on the earlier sale of S stock in 2024, is
$17.5x ($20x¥$2.5x). Accordingly, the
P group must subtract $17.5x from its
tentative taxable income in computing
its ATI for its 2025 taxable year.
(C) Example 3—(1) Facts. The facts
are the same as in paragraph
(b)(1)(viii)(B)(1) of this section, except
that, in 2024, S sells Asset Y to an

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
unrelated third party for $25x and, in
2025, P sells all of its S stock to an
unrelated third party at a gain of $25x.
(2) Analysis. The results are the same
as in paragraph (b)(1)(viii)(B)(2) of this
section. Thus, the P group must subtract
$20x from its tentative taxable income
in computing its ATI for its 2024 taxable
year. P’s sale of all of its S stock in 2025
is a ‘‘sale or other disposition’’ for
purposes of paragraph (b)(1)(ii)(D) and
(b)(1)(iv)(E)(2) of this section. However,
pursuant to paragraph (b)(1)(iv)(D)(1) of
this section, no further adjustment to
the P group’s tentative taxable income is
required in 2025 under paragraph
(b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2)
of this section.
(3) Disposition of S stock prior to S’s
asset disposition. The facts are the same
as in paragraph (b)(1)(viii)(C)(1) of this
section, except that, in 2024, P sells all
of its S stock to an unrelated third party
at a gain of $25x and, in 2025, S sells
Asset Y to an unrelated third party for
$25x. The results are the same as in
paragraph (b)(1)(viii)(B)(2) of this
section. Thus, the P group must subtract
$20x from its tentative taxable income
in computing its ATI for its 2024 taxable
year. Pursuant to paragraph
(b)(1)(iv)(D)(2) of this section, no
adjustment to the acquiring group’s
tentative taxable income is required in
2025 under paragraph (b)(1)(ii)(C) or
paragraph (b)(1)(iv)(E)(1) of this section.
(4) Deconsolidation of S in
nonrecognition transaction. The facts
are the same as in paragraph
(b)(1)(viii)(C)(3) of this section, except
that, rather than sell all of its S stock to
an unrelated third party, P causes S to
merge with and into an unrelated third
party in a transaction described in
section 368(a)(1)(A). As provided in
paragraph (b)(1)(iv)(A)(3) of this section,
the merger transaction is treated as a
taxable disposition of all of P’s stock in
S for purposes of paragraphs (b)(1)(ii)(D)
and (b)(1)(iv)(E)(2) of this section
because S leaves the P group. Thus, the
results are the same as in paragraph
(b)(1)(viii)(C)(3) of this section.
(D) Example 4—(1) Facts. P wholly
owns T, which wholly owns S. In 2021,
S purchases a depreciable asset (Asset
Z) for $30x and fully depreciates Asset
Z under section 168(k). T reduces its
basis in its S stock, and P reduces its
basis in its T stock, by $30x under
§ 1.1502–32 to reflect S’s depreciation
deductions with respect to Asset Z. For
the 2021 taxable year, the P group
establishes that its ATI before adding
back S’s depreciation deductions with
respect to Asset Z under paragraph
(b)(1)(i)(D) of this section is $130x, and
that its ATI after adding back S’s
depreciation deductions with respect to

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

Asset Z under paragraph (b)(1)(i)(D) of
this section is $160x. The P group
incurs $45x of business interest expense
in 2021. In 2024, T sells all of its S stock
to an unrelated third party at a gain of
$25x. In 2025, P sells all of its T stock
to an unrelated third party at a gain of
$40x.
(2) Analysis. The results are the same
as in paragraph (b)(1)(viii)(B)(2) of this
section. Thus, the P group must subtract
$20x from its tentative taxable income
in computing its ATI for its 2024 taxable
year. Pursuant to paragraph
(b)(1)(iv)(D)(1) of this section, no
negative adjustment to the P group’s
tentative taxable income is required in
2025 under paragraph (b)(1)(ii)(D) or
paragraph (b)(1)(iv)(E)(2) of this section.
(3) Disposition of T stock in 2024. The
facts are the same as in paragraph
(b)(1)(viii)(D)(1) of this section, except
that, in 2024, P sells all of its T stock
to another consolidated group at a gain
of $40x and, in 2025, T sells all of its
S stock to an unrelated party at a gain
of $25x. Whereas the transaction
described in paragraph (b)(1)(viii)(B)(4)
of this section is treated as a taxable
disposition of both the T stock and the
S stock, only the actual disposition of
the T stock in the transaction described
in this paragraph (b)(1)(viii)(D)(3) is
treated as a taxable disposition for
purposes of paragraphs (b)(1)(ii)(D) and
(b)(1)(iv)(E)(2) of this section. See
paragraph (b)(1)(iv)(A)(3) of this section.
However, the results are the same as in
paragraph (b)(1)(viii)(B)(2) and
(b)(1)(viii)(B)(4) of this section because
of the negative adjustment cap in
paragraph (b)(1)(iv)(F) of this section.
Thus, the P group must subtract $20x
from its tentative taxable income in
computing its ATI for its 2024 taxable
year. Pursuant to paragraph (b)(1)(iv)(D)
of this section, no negative adjustment
to the acquiring group’s tentative
taxable income is required in 2025
under paragraph (b)(1)(ii)(D) or
paragraph (b)(1)(iv)(E)(2) of this section.
(E) Example 5—(1) Facts. In 2021, A
purchases Assets X and Y for $30x and
$80x, respectively, and fully depreciates
each asset under section 168(k). For the
2021 taxable year, A establishes that its
ATI before adding back depreciation
deductions with respect to Assets X and
Y under paragraph (b)(1)(i)(D) of this
section is $150x, and that its ATI after
adding back depreciation deductions
with respect to Assets X and Y under
paragraph (b)(1)(i)(D) of this section is
$260x. A incurs $75x of business
interest expense in 2021. In 2024, A
sells Assets X and Y to an unrelated
third party for $40x and $90x,
respectively.

PO 00000

Frm 00033

Fmt 4701

Sfmt 4700

5527

(2) Analysis. A’s section 163(j)
limitation for 2021 is $78x ($260x × 30
percent). Thus, all $75x of A’s business
interest expense incurred in 2021 is
deductible in that year. Under
paragraph (b)(1)(ii)(C) of this section, A
must subtract $110x ($30x + $80x) from
its tentative taxable income in
computing its ATI for its 2024 taxable
year. Alternatively, under paragraph
(b)(1)(iv)(E)(1) of this section, A must
subtract $30x with respect to Asset X
(the lesser of $30x or $40x ($40x¥$0x)),
and $80x with respect to Asset Y (the
lesser of $80x or $90x ($90x¥$0x)),
from its tentative taxable income in
computing its ATI for its 2024 taxable
year. However, the negative adjustments
under paragraphs (b)(1)(ii)(C) and
(b)(1)(iv)(E)(1) of this section are both
subject to the negative adjustment cap
in paragraph (b)(1)(iv)(F) of this section.
Under that paragraph, A’s negative
adjustment in 2024 under either
paragraph (b)(1)(ii)(C) ($110x) or
paragraph (b)(1)(iv)(E)(1) (also $110x) of
this section is limited to $100x. This
amount equals $250x (the amount of
ATI that A needed in order to deduct all
$75x of business interest expense in
2021) minus $150x (the amount of A’s
tentative taxable income in 2021 before
adding back any amounts under
paragraph (b)(1)(i)(D) through (F) of this
section). As established by A, the
additional $10x ($110x¥$100x) of
depreciation deductions that were
added back to tentative taxable income
in 2021 under paragraph (b)(1)(i)(D) of
this section did not increase A’s
business interest expense deduction for
that year.
(3) Sale of assets in different taxable
years. The facts are the same as in
paragraph (b)(1)(viii)(E)(1) of this
section, except that A sells Asset Y to
an unrelated third party for $90x in
2025. Under paragraph (b)(1)(ii)(C) of
this section, A must subtract $30x from
its tentative taxable income in
computing its ATI for its 2024 taxable
year. Alternatively, under paragraph
(b)(1)(iv)(E)(1) of this section, A must
subtract $30x (the lesser of $30x or $40x
($40x¥$0x)) from its tentative taxable
income in computing its ATI for its
2024 taxable year. Because A’s negative
adjustment cap for its 2021 taxable year
is $100x (see paragraph (b)(1)(viii)(E)(2)
of this section), A’s negative adjustment
in 2024 of $30x is not reduced under
paragraph (b)(1)(iv)(F) of this section. In
2025, A must subtract $80x from its
tentative taxable income under
paragraph (b)(1)(ii)(C) of this section in
computing its ATI. Alternatively, under
paragraph (b)(1)(iv)(E)(1) of this section,
A must subtract $80x (the lesser of $80x

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

5528

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

or $90x ($90x¥$0x)) from its tentative
taxable income in computing its ATI for
its 2025 taxable year. However, the
negative adjustments under paragraphs
(b)(1)(ii)(C) and (b)(1)(iv)(E)(1) of this
section are both subject to the negative
adjustment cap in paragraph (b)(1)(iv)(F)
of this section. Moreover, A’s negative
adjustment cap for its 2021 taxable year
is reduced from $100x to $70x to reflect
A’s $30x negative adjustment in 2024.
See paragraph (b)(1)(iv)(F) of this
section. Thus, A’s negative adjustment
for 2025 under either paragraph
(b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1)
of this section is reduced from $80x to
$70x. As established by A, the
additional $10x ($110x¥$100x) of
depreciation deductions that were
added back to tentative taxable income
in 2021 under paragraph (b)(1)(i)(D) of
this section did not increase A’s
business interest expense deduction for
that year.
*
*
*
*
*
(22) * * *
(iii) * * *
(F) Section 163(j) interest dividends—
(1) In general. Except as otherwise
provided in this paragraph
(b)(22)(iii)(F), a section 163(j) interest
dividend is treated as interest income.
(2) Limitation on amount treated as
interest income. A shareholder may not
treat any part of a section 163(j) interest
dividend as interest income to the
extent the amount of the section 163(j)
interest dividend exceeds the excess of
the amount of the entire dividend that
includes the section 163(j) interest
dividend over the sum of the conduit
amounts other than interest-related
dividends under section 871(k)(1)(C)
and section 163(j) interest dividends
that affect the shareholder’s treatment of
that dividend.
(3) Conduit amounts. For purposes of
paragraph (b)(22)(iii)(F)(2) of this
section, the term conduit amounts
means, with respect to any category of
income (including tax-exempt interest)
earned by a RIC for a taxable year, the
amounts identified by the RIC (generally
in a designation or written report) in
connection with dividends of the RIC
for that taxable year that are subject to
a limit determined by reference to that
category of income. For example, a RIC’s
conduit amount with respect to its net
capital gain is the amount of the RIC’s
capital gain dividends under section
852(b)(3)(C).
(4) Holding period. Except as
provided in paragraph (b)(22)(iii)(F)(5)
of this section, no dividend is treated as
interest income under paragraph
(b)(22)(iii)(F)(1) of this section if the
dividend is received with respect to a
share of RIC stock—

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

(i) That is held by the shareholder for
180 days or less (taking into account the
principles of section 246(c)(3) and (4))
during the 361-day period beginning on
the date which is 180 days before the
date on which the share becomes exdividend with respect to such dividend;
or
(ii) To the extent that the shareholder
is under an obligation (whether
pursuant to a short sale or otherwise) to
make related payments with respect to
positions in substantially similar or
related property.
(5) Exception to holding period
requirement for money market funds
and certain regularly declared
dividends. Paragraph (b)(22)(iii)(F)(4)(i)
of this section does not apply to
dividends distributed by any RIC
regulated as a money market fund under
17 CFR 270.2a–7 (Rule 2a–7 under the
1940 Act) or to regular dividends paid
by a RIC that declares section 163(j)
interest dividends on a daily basis in an
amount equal to at least 90 percent of
its excess section 163(j) interest income,
as defined in paragraph (b)(35)(iv)(E) of
this section, and distributes such
dividends on a monthly or more
frequent basis.
*
*
*
*
*
(35) Section 163(j) interest dividend.
The term section 163(j) interest dividend
means a dividend paid by a RIC for a
taxable year for which section 852(b)
applies to the RIC, to the extent
described in paragraph (b)(35)(i) or (ii)
of this section, as applicable.
(i) In general. Except as provided in
paragraph (b)(35)(ii) of this section, a
section 163(j) interest dividend is any
dividend, or part of a dividend, that is
reported by the RIC as a section 163(j)
interest dividend in written statements
furnished to its shareholders.
(ii) Reduction in the case of excess
reported amounts. If the aggregate
reported amount with respect to the RIC
for the taxable year exceeds the excess
section 163(j) interest income of the RIC
for such taxable year, the section 163(j)
interest dividend is—
(A) The reported section 163(j)
interest dividend amount; reduced by
(B) The excess reported amount that
is allocable to that reported section
163(j) interest dividend amount.
(iii) Allocation of excess reported
amount—(A) In general. Except as
provided in paragraph (b)(35)(iii)(B) of
this section, the excess reported
amount, if any, that is allocable to the
reported section 163(j) interest dividend
amount is that portion of the excess
reported amount that bears the same
ratio to the excess reported amount as
the reported section 163(j) interest

PO 00000

Frm 00034

Fmt 4701

Sfmt 4700

dividend amount bears to the aggregate
reported amount.
(B) Special rule for noncalendar year
RICs. In the case of any taxable year that
does not begin and end in the same
calendar year, if the post-December
reported amount equals or exceeds the
excess reported amount for that taxable
year, paragraph (b)(35)(iii)(A) of this
section is applied by substituting ‘‘postDecember reported amount’’ for
‘‘aggregate reported amount,’’ and no
excess reported amount is allocated to
any dividend paid on or before
December 31 of such taxable year.
(iv) Definitions. The following
definitions apply for purposes of this
paragraph (b)(35):
(A) Reported section 163(j) interest
dividend amount. The term reported
section 163(j) interest dividend amount
means the amount of a dividend
distribution reported to the RIC’s
shareholders under paragraph (b)(35)(i)
of this section as a section 163(j) interest
dividend.
(B) Excess reported amount. The term
excess reported amount means the
excess of the aggregate reported amount
over the RIC’s excess section 163(j)
interest income for the taxable year.
(C) Aggregate reported amount. The
term aggregate reported amount means
the aggregate amount of dividends
reported by the RIC under paragraph
(b)(35)(i) of this section as section 163(j)
interest dividends for the taxable year
(including section 163(j) interest
dividends paid after the close of the
taxable year described in section 855).
(D) Post-December reported amount.
The term post-December reported
amount means the aggregate reported
amount determined by taking into
account only dividends paid after
December 31 of the taxable year.
(E) Excess section 163(j) interest
income. The term excess section 163(j)
interest income means, with respect to
a taxable year of a RIC, the excess of the
RIC’s business interest income for the
taxable year over the sum of the RIC’s
business interest expense for the taxable
year and the RIC’s other deductions for
the taxable year that are properly
allocable to the RIC’s business interest
income.
(v) Example—(A) Facts. X is a
domestic C corporation that has elected
to be a RIC. For its taxable year ending
December 31, 2021, X has $100x of
business interest income (all of which is
qualified interest income for purposes of
section 871(k)(1)(E)) and $10x of
dividend income (all of which is
qualified dividend income within the
meaning of section 1(h)(11) and would
be eligible for the dividends received
deduction under section 243,

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
determined as described in section
854(b)(3)). X has $10x of business
interest expense and $20x of other
deductions. X has no other items for the
taxable year. On December 31, 2021, X
pays a dividend of $80x to its
shareholders, and reports, in written
statements to its shareholders, $71.82x
as a section 163(j) interest dividend;
$10x as dividends that may be treated
as qualified dividend income or as
dividends eligible for the dividends
received deduction; and $72.73x as
interest-related dividends under section
871(k)(1)(C). Shareholder A, a domestic
C corporation, meets the holding period
requirements in paragraph
(b)(22)(iii)(F)(4) of this section with
respect to the stock of X, and receives
a dividend of $8x from X on December
31, 2021.
(B) Analysis. X determines that
$18.18x of other deductions are
properly allocable to X’s business
interest income. X’s excess section
163(j) interest income under paragraph
(b)(35)(iv)(E) of this section is $71.82x
($100x business interest income—($10x
business interest expense + $18.18x
other deductions allocated) = $71.82x).
Thus, X may report up to $71.82x of its
dividends paid on December 31, 2021,
as section 163(j) interest dividends to its
shareholders. X may also report up to
$10x of its dividends paid on December
31, 2021, as dividends that may be
treated as qualified dividend income or
as dividends that are eligible for the
dividends received deduction. X
determines that $9.09x of interest
expense and $18.18x of other
deductions are properly allocable to X’s
qualified interest income. Therefore, X
may report up to $72.73x of its
dividends paid on December 31, 2021,
as interest-related dividends under
section 871(k)(1)(C) ($100x qualified
interest income—$27.27x deductions
allocated = $72.73x). A treats $1x of its
$8x dividend as a dividend eligible for
the dividends received deduction and
no part of the dividend as an interestrelated dividend under section
871(k)(1)(C). Therefore, under paragraph
(b)(22)(iii)(F)(2) of this section, A may
treat $7x of the section 163(j) interest
dividend as interest income for
purposes of section 163(j) ($8x
dividend—$1x conduit amount = $7x
limitation).
*
*
*
*
*
(c) * * *
(4) Paragraphs (b)(1)(iv)(A)(2) through
(4), (B) through (G), (b)(22)(iii)(F), and
(b)(35). Paragraphs (b)(1)(iv)(A)(2)
through (4), (b)(1)(iv)(B) through (G),
(b)(22)(iii)(F), and (b)(35) of this section
apply to taxable years beginning on or

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

after March 22, 2021. Taxpayers and
their related parties, within the meaning
of sections 267(b) (determined without
regard to section 267(c)(3)) and
707(b)(1), may choose to apply the rules
in paragraphs (b)(1)(iv)(A)(2) through
(4), (b)(1)(iv) (B) through (G),
(b)(22)(iii)(F), and (b)(35) of this section
to a taxable year beginning after
December 31, 2017, and before March
22, 2021, provided that those taxpayers
and their related parties consistently
apply all of the rules in the section
163(j) regulations contained in T.D.
9905 (§§ 1.163(j)–0 through 1.163(j)–11,
effective November 13, 2020) as
modified by T.D. 9943 (effective January
13, 2021), and, if applicable, §§ 1.263A–
9, 1.263A–15, 1.381(c)(20)–1, 1.382–1,
1.382–2, 1.382–5, 1.382–6, 1.382–7,
1.383–0, 1.383–1, 1.469–9, 1.469–11,
1.704–1, 1.882–5, 1.1362–3, 1.1368–1,
1.1377–1, 1.1502–13, 1.1502–21,
1.1502–36, 1.1502–79, 1.1502–91
through 1.1502–99 (to the extent they
effectuate the rules of §§ 1.382–2, 1.382–
5, 1.382–6, and 1.383–1), and 1.1504–4
contained in T.D. 9905, as modified by
T.D. 9943, to that taxable year and all
subsequent taxable years.
■ Par. 5. Section 1.163(j)–2 is amended
by:
■ 1. Adding paragraphs (b)(3)(iii) and
(iv) and (d)(3).
■ 2. Redesignating paragraph (k) as
paragraph (k)(1).
■ 3. Adding a new subject heading for
paragraph (k).
■ 4. Revising the subject heading of
newly redesignated paragraph (k)(1).
■ 5. Adding paragraph (k)(2).
The revisions and additions read as
follows:
§ 1.163 (j)–2 Deduction for business
interest expense limited.

*

*
*
*
*
(b) * * *
(3) * * *
(iii) Transactions to which section 381
applies. For purposes of the election
described in paragraph (b)(3)(i) of this
section, and subject to the limitation in
paragraph (b)(3)(ii) of this section, the
2019 ATI of the acquiring corporation in
a transaction to which section 381
applies equals the amount of the
acquiring corporation’s ATI for its last
taxable year beginning in 2019.
(iv) Consolidated groups. For
purposes of the election described in
paragraph (b)(3)(i) of this section, and
subject to the limitation in paragraph
(b)(3)(ii) of this section, the 2019 ATI of
a consolidated group equals the amount
of the consolidated group’s ATI for its
last taxable year beginning in 2019.
*
*
*
*
*
(d) * * *

PO 00000

Frm 00035

Fmt 4701

Sfmt 4700

5529

(3) Determining a syndicate’s loss
amount. For purposes of section 163(j),
losses allocated under section
1256(e)(3)(B) and § 1.448–1T(b)(3) are
determined without regard to section
163(j). See also § 1.1256(e)–2(b).
*
*
*
*
*
(k) Applicability dates.
(1) In general.* * *
(2) Paragraphs (b)(3)(iii), (b)(3)(iv),
and (d)(3). Paragraphs (b)(3)(iii) and (iv)
and (d)(3) of this section apply to
taxable years beginning on or after
March 22, 2021. However, taxpayers
and their related parties, within the
meaning of sections 267(b) (determined
without regard to section 267(c)(3)) and
707(b)(1), may choose to apply the rules
in paragraphs (b)(3)(iii), (b)(3)(iv), and
(d)(3) of this section to a taxable year
beginning after December 31, 2017, and
before March 22, 2021, provided that
those taxpayers and their related parties
consistently apply all of the rules in
paragraphs (b)(3)(iii) and (iv) of this
section and the rules in the section
163(j) regulations contained in T.D.
9905 (§§ 1.163(j)–0 through 1.163(j)–11,
effective November 13, 2020) as
modified by T.D. 9943 (effective January
13, 2021), and, if applicable, §§ 1.263A–
9, 1.263A–15, 1.381(c)(20)–1, 1.382–1,
1.382–2, 1.382–5, 1.382–6, 1.382–7,
1.383–0, 1.383–1, 1.469–9, 1.469–11,
1.704–1, 1.882–5, 1.1362–3, 1.1368–1,
1.1377–1, 1.1502–13, 1.1502–21,
1.1502–36, 1.1502–79, 1.1502–91
through 1.1502–99 (to the extent they
effectuate the rules of §§ 1.382–2, 1.382–
5, 1.382–6, and 1.383–1), and 1.1504–4
contained in T.D. 9905 as modified by
T.D. 9943, for that taxable year and for
each subsequent taxable year.
Par. 6. Section 1.163(j)–6 is amended
by:
■ 1. Adding paragraphs (c)(1) and (2).
■ 2. Redesignating paragraph (c)(3) as
paragraph (c)(4).
■ 3. Adding new paragraph (c)(3) and
paragraphs (d)(3) through (5) and (e)(5).
■ 4. Adding paragraphs (f)(1)(iii) and
(g)(4).
■ 5. Adding paragraph (n).
■ 6. Adding paragraphs (o)(24) through
(26), reserved paragraphs (o)(27).
through (33), and paragraphs (o)(34)
through (36).
■ 7. Redesignating paragraph (p) as
paragraph (p)(1), revising the subject
heading of paragraph (p), and adding a
subject heading for newly designated
paragraph (p)(1).
■ 8. Adding paragraph (p)(2).
The revisions and additions read as
follows:
■

E:\FR\FM\19JAR4.SGM

19JAR4

5530

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

§ 1.163 (j)–6 Application of the section
163(j) limitation to partnerships and
subchapter S corporations.

khammond on DSKJM1Z7X2PROD with RULES4

*

*
*
*
*
(c) * * *
(1) Modification of business interest
income for partnerships. The business
interest income of a partnership
generally is determined in accordance
with § 1.163(j)–1(b)(4). However, to the
extent that interest income of a
partnership that is properly allocable to
trades or businesses that are per se nonpassive activities is allocated to partners
that do not materially participate
(within the meaning of section 469), as
described in § 1.469–1T(e)(6) and
subject to section 163(d)(5)(A)(ii), such
interest income shall not be considered
business interest income for purposes of
determining the section 163(j) limitation
of a partnership pursuant to § 1.163(j)–
2(b). A per se non-passive activity is an
activity that is not treated as a passive
activity for purposes of section 469
regardless of whether the owners of the
activity materially participate in the
activity.
(2) Modification of business interest
expense for partnerships. The business
interest expense of a partnership
generally is determined in accordance
with § 1.163(j)–1(b)(3). However, to the
extent that interest expense of a
partnership that is properly allocable to
trades or businesses that are per se nonpassive activities is allocated to partners
that do not materially participate
(within the meaning of section 469), as
described in § 1.469–1T(e)(6) and
subject to section 163(d)(5)(A)(ii), such
interest expense shall not be considered
business interest expense for purposes
of determining the section 163(j)
limitation of a partnership pursuant to
§ 1.163(j)–2(b).
(3) Transition rule. With respect to a
partner in a partnership engaged in a
trade or business described in § 1.469–
1T(e)(6) and subject to section
163(d)(5)(A)(ii), if such partner had been
allocated EBIE from the partnership
with respect to the trade or business
described in § 1.469–1T(e)(6) and
subject to section 163(d)(5)(A)(ii) in any
prior taxable year in which the partner
did not materially participate, such
partner may treat such excess business
interest expense not previously treated
as paid or accrued under § 1.163(j)–
6(g)(2) as paid or accrued by the partner
in the first taxable year ending on or
after the effective date of the final
regulations and not subject to further
limitation under section 163(j) or
163(d).
*
*
*
*
*
(d) * * *

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

(3) Section 743(b) adjustments and
publicly traded partnerships. Solely for
purposes of § 1.163(j)–6, a publicly
traded partnership, as defined in
§ 1.7704–1, shall treat the amount of any
section 743(b) adjustment of a purchaser
of a partnership unit that relates to a
remedial item that the purchaser
inherits from the seller as an offset to
the related section 704(c) remedial item.
For this purpose, § 1.163(j)–6(e)(2)(ii)
applies. See Example 25 in paragraph
(o)(25) of this section.
(4) Modification of adjusted taxable
income for partnerships. The adjusted
taxable income of a partnership
generally is determined in accordance
with § 1.163(j)–1(b)(1). However, to the
extent that the items comprising the
adjusted taxable income of a partnership
that are properly allocable to trades or
businesses that are per se non-passive
activities are allocated to partners that
do not materially participate (within the
meaning of section 469), as described in
section 163(d)(5)(A)(ii), such
partnership items shall not be
considered adjusted taxable income for
purposes of determining the section
163(j) limitation of a partnership
pursuant to § 1.163(j)–2(b).
(5) Election to use 2019 adjusted
taxable income for taxable years
beginning in 2020. In the case of any
taxable year beginning in 2020, a
partnership may elect to apply this
section by substituting its adjusted
taxable income for the last taxable year
beginning in 2019 for the adjusted
taxable income for such taxable year
(post-election ATI or 2019 ATI). See
§ 1.163(j)–2(b)(4) for the time and
manner of making or revoking this
election. An electing partnership
determines each partner’s allocable ATI
(as defined in paragraph (f)(2)(ii) of this
section) by using the partnership’s 2019
section 704 income, gain, loss, and
deduction as though such amounts were
recognized by the partnership in 2020.
See Example 34 in paragraph (o)(34) of
this section.
(e) * * *
(5) Partner basis items, remedial
items, and publicly traded partnerships.
Solely for purposes of § 1.163(j)–6, a
publicly traded partnership, as defined
in § 1.7704–1, shall either allocate gain
that would otherwise be allocated under
section 704(c) based on a partner’s
section 704(b) sharing ratios, or, for
purposes of allocating cost recovery
deductions under section 704(c),
determine a partner’s remedial items, as
defined in § 1.163(j)–6(b)(3), based on
an allocation of the partnership’s asset
basis (inside basis) items among its
partners in proportion to their share of
corresponding section 704(b) items

PO 00000

Frm 00036

Fmt 4701

Sfmt 4700

(rather than applying the traditional
method, described in § 1.704–3(b)). See
Example 24 in paragraph (o)(24) of this
section.
(f) * * *
(1) * * *
(iii) Exception applicable to publicly
traded partnerships. Publicly traded
partnerships, as defined in § 1.7704–1,
do not apply the rules in paragraph
(f)(2) of this section to determine a
partner’s share of section 163(j) excess
items. Rather, publicly traded
partnerships determine a partner’s share
of section 163(j) excess items by
applying the same percentage used to
determine the partner’s share of the
corresponding section 704(b) items that
comprise ATI.
*
*
*
*
*
(g) * * *
(4) Special rule for taxable years
beginning in 2019 and 2020. In the case
of any excess business interest expense
of a partnership for any taxable year
beginning in 2019 that is allocated to a
partner under paragraph (f)(2) of this
section, 50 percent of such excess
business interest expense (§ 1.163(j)–
6(g)(4) business interest expense) is
treated as business interest expense that,
notwithstanding paragraph (g)(2) of this
section, is paid or accrued by the
partner in the partner’s first taxable year
beginning in 2020. Additionally,
§ 1.163(j)–6(g)(4) business interest
expense is not subject to the section
163(j) limitation at the level of the
partner. For purposes of paragraph
(h)(1) of this section, any § 1.163(j)–
6(g)(4) business interest expense is,
similar to deductible business interest
expense, taken into account before any
excess business interest expense. This
paragraph applies after paragraph (n) of
this section. If a partner disposes of a
partnership interest in the partnership’s
2019 or 2020 taxable year, § 1.163(j)–
6(g)(4) business interest expense is
deductible by the partner (except to the
extent that the business interest expense
is negative section 163(j) expense as
defined in § 1.163(j)–6(h)(1)
immediately prior to the disposition)
and thus does not result in a basis
increase under paragraph (h)(3) of this
section. See Example 35 and Example
36 in paragraphs (o)(35) and (o)(36),
respectively, of this section. A partner
may elect to not have this provision
apply with respect to each partnership
interest held by the partner on an
interest by interest basis. The rules and
procedures regarding the time and
manner of making, or revoking, such an
election are provided in Revenue
Procedure 2020–22, 2020–18 I.R.B. 745,
and may be further modified through

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
other guidance (see §§ 601.601(d) and
601.602 of this chapter).
*
*
*
*
*
(n) Treatment of self-charged lending
transactions between partnerships and
partners. In the case of a lending
transaction between a partner (lending
partner) and partnership (borrowing
partnership) in which the lending
partner owns a direct interest (selfcharged lending transaction), any
business interest expense of the
borrowing partnership attributable to
the self-charged lending transaction is
business interest expense of the
borrowing partnership for purposes of
this section. If in a given taxable year
the lending partner is allocated excess
business interest expense from the
borrowing partnership and has interest
income attributable to the self-charged
lending transaction (interest income),
the lending partner is deemed to receive
an allocation of excess business interest
income from the borrowing partnership
in such taxable year. The amount of the
lending partner’s deemed allocation of
excess business interest income is the
lesser of such lending partner’s
allocation of excess business interest
expense from the borrowing partnership
in such taxable year or the interest
income attributable to the self-charged
lending transaction in such taxable year.
To prevent the double counting of
business interest income, the lending
partner includes interest income that
was treated as excess business interest
income pursuant to this paragraph (n)
only once when calculating its own
section 163(j) limitation. To the extent
an amount of interest income received
by a lending partner is attributable to a
self-charged lending transaction, and is
deemed to be an allocation of excess
business interest income from the
borrowing partnership pursuant to this
paragraph (n), such an amount of
interest income will not be treated as
investment income for purposes of
section 163(d). In cases where the
lending partner is not a C corporation,
to the extent that any interest income
exceeds the lending partner’s allocation
of excess business interest expense from
the borrowing partnership for the
taxable year, and such interest income
otherwise would be properly treated as
investment income of the lending
partner for purposes of section 163(d)
for that year, such excess amount of
interest income will continue to be
treated as investment income of the
lending partner for that year for
purposes of section 163(d). See Example
26 in paragraph (o)(26) of this section.
(o) * * *

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

(24) Example 24—(i) Facts. On
January 1, 2020, L and M form LM, a
publicly traded partnership (as defined
in § 1.7704–1), and agree that each will
be allocated a 50 percent share of all LM
items. The partnership agreement
provides that LM will make allocations
under section 704(c) using the remedial
allocation method under § 1.704–3(d). L
contributes depreciable property with
an adjusted tax basis of $4,000 and a fair
market value of $10,000. The property is
depreciated using the straight-line
method with a 10-year recovery period
and has 4 years remaining on its
recovery period. M contributes $10,000
in cash, which LM uses to purchase
land. Except for the depreciation
deductions, LM’s expenses equal its
income in each year of the 10 years
commencing with the year LM is
formed. LM has a valid section 754
election in effect.
(ii) Section 163(j) remedial items and
partner basis items. LM sells the asset
contributed by L in a fully taxable
transaction at a time when the adjusted
basis of the property is $4,000. Under
§ 1.163(j)–6(e)(2)(ii), solely for purposes
of § 1.163(j)–6, the tax gain of $6,000 is
allocated equally between L and M
($3,000 each). To avoid shifting built-in
gain to the non-contributing partner (M)
in a manner consistent with the rule in
section 704(c), a remedial deduction of
$3,000 is allocated to M (leaving M with
no net tax gain), and remedial income
of $3,000 is allocated to L (leaving L
with total tax gain of $6,000).
(25) Example 25—(i) Facts. The facts
are the same as Example 24 in
paragraph (o)(24) of this section except
the property contributed by L had an
adjusted tax basis of zero. For each of
the 10 years following the contribution,
there would be $500 of section 704(c)
remedial income allocated to L and
$500 of remedial deductions allocated
to M with respect to the contributed
asset. A buyer of M’s units would step
into M’s shoes with respect to the $500
of annual remedial deductions. A buyer
of L’s units would step into L’s shoes
with respect to the $500 of annual
remedial income and would have an
annual section 743(b) deduction of
$1,000 (net $500 of deductions).
(ii) Analysis. Pursuant to § 1.163(j)–
6(d)(2)(ii), solely for purposes of
§ 1.163(j)–6, a buyer of L’s units
immediately after formation of LM
would offset its $500 annual section
704(c) remedial income allocation with
$500 of annual section 743(b)
adjustment (leaving the buyer with net
$500 of section 743(b) deduction). As a
result, such buyer would be in the same
position as a buyer of M’s units. Each
buyer would have net deductions of

PO 00000

Frm 00037

Fmt 4701

Sfmt 4700

5531

$500 per year, which would not affect
ATI before 2022.
(26) Example 26—(i) Facts. X and Y
are partners in partnership PRS. In Year
1, PRS had $200 of excess business
interest expense. Pursuant to § 1.163(j)–
6(f)(2), PRS allocated $100 of such
excess business interest expense to each
of its partners. In Year 2, X lends
$10,000 to PRS and receives $1,000 of
interest income for the taxable year
(self-charged lending transaction). X is
not in the trade or business of lending
money. The $1,000 of interest expense
resulting from this loan is allocable to
PRS’s trade or business assets. As a
result, such $1,000 of interest expense is
business interest expense of PRS. X and
Y are each allocated $500 of such
business interest expense as their
distributive share of PRS’s business
interest expense for the taxable year.
Additionally, in Year 2, PRS has $3,000
of ATI. PRS allocates the items
comprising its $3,000 of ATI $0 to X and
$3,000 to Y.
(ii) Partnership-level. In Year 2, PRS’s
section 163(j) limit is 30 percent of its
ATI plus its business interest income, or
$900 ($3,000 × 30 percent). Thus, PRS
has $900 of deductible business interest
expense, $100 of excess business
interest expense, $0 of excess taxable
income, and $0 of excess business
interest income. Pursuant to § 1.163(j)–
6(f)(2), $400 of X’s allocation of business
interest expense is treated as deductible
business interest expense, $100 of X’s
allocation of business interest expense
is treated as excess business interest
expense, and $500 of Y’s allocation of
business interest expense is treated as
deductible business interest expense.
(iii) Lending partner. Pursuant to
§ 1.163(j)–6(n), X treats $100 of its
$1,000 of interest income as excess
business interest income allocated from
PRS in Year 2. Because X is deemed to
have been allocated $100 of excess
business interest income from PRS, and
excess business interest expense from a
partnership is treated as paid or accrued
by a partner to the extent excess
business interest income is allocated
from such partnership to a partner, X
treats its $100 allocation of excess
business interest expense from PRS in
Year 2 as business interest expense paid
or accrued in Year 2. X, in computing
its limit under section 163(j), has $100
of business interest income ($100
deemed allocation of excess business
interest income from PRS in Year 2) and
$100 of business interest expense ($100
allocation of excess business interest
expense treated as paid or accrued in
Year 2). Thus, X’s $100 of business
interest expense is deductible business
interest expense. At the end of Year 2,

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

5532

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

X has $100 of excess business interest
expense from PRS ($100 from Year 1).
X treats $900 of its $1,000 of interest
income as investment income for
purposes of section 163(d).
(27)–(33) [Reserved]
(34) Example 34—(i) Facts. X and Y
are equal partners in partnership PRS.
Further, X and Y share the profits of
PRS equally. In 2019, PRS had ATI of
$100. Additionally, in 2019, PRS had
$100 of section 704(b) income which
was allocated $50 to X and $50 to Y
(PRS did not have any section 704(c)
income in 2019). In 2020, PRS’s only
items of income, gain, loss or deduction
was $1 of trade or business income,
which it allocated to X pursuant to
section 704(c).
(ii) Partnership-level. In 2020, PRS
makes the election described in
§ 1.163(j)–6(d)(5) to use its 2019 ATI in
2020. As a result, PRS has $100 of ATI
in 2020. PRS does not have any business
interest expense. Therefore, PRS has
$100 of excess taxable income in 2020.
(iii) Partner-level allocations. PRS
allocates its $100 of excess taxable
income to X and Y pursuant to
§ 1.163(j)–6(f)(2). To determine each
partner’s share of the $100 of excess
taxable income, PRS must determine
each partner’s allocable ATI (as defined
in § 1.163(j)–6(f)(2)(ii)). Because PRS
made the election described in
§ 1.163(j)–6(d)(5), PRS must determine
the allocable ATI of each of its partners
pursuant to paragraph (d)(5).
Specifically, PRS determines each
partner’s share of allocable ATI based
on PRS’s 2019 section 704 income, gain,
loss, and deduction. PRS had $100 of
section 704(b) income in 2019 which
was allocated $50 to X and $50 to Y.
Therefore, in 2020, X and Y are both
allocated $50 of excess taxable income
(50% × $100).
(35) Example 35—(i) Facts. X, a
partner in partnership PRS, was
allocated $20 of excess business interest
expense from PRS in 2018 and $10 of
excess business interest expense from
PRS in 2019. In 2020, PRS allocated $16
of excess taxable income to X.
(ii) Analysis. X treats 50 percent of its
$10 of excess business interest expense
allocated from PRS in 2019 as
§ 1.163(j)–6(g)(4) business interest
expense. Thus, $5 of § 1.163(j)–6(g)(4)
business interest expense is treated as
paid or accrued by X in 2020 and is not
subject to the section 163(j) limitation at
X’s level. Because X was allocated $16
of excess taxable income from PRS in
2020, X treats $16 of its $25 of excess
business interest expense as business
interest expense paid or accrued
pursuant to § 1.163(j)–6(g)(2). X, in
computing its limit under section 163(j)

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

in 2020, has $16 of ATI (as a result of
its allocation of $16 of excess taxable
income from PRS), $0 of business
interest income, and $16 of business
interest expense ($16 of excess business
interest expense treated as paid or
accrued in 2020). Pursuant to § 1.163(j)–
2(b)(2)(i), X’s section 163(j) limit in 2020
is $8 ($16 × 50 percent). Thus, X has $8
of business interest expense that is
deductible under section 163(j). The $8
of X’s business interest expense not
allowed as a deduction ($16 business
interest expense subject to section
163(j), less $8 section 163(j) limit) is
treated as business interest expense paid
or accrued by X in 2021. At the end of
2020, X has $9 of excess business
interest expense from PRS ($20 from
2018, plus $10 from 2019, less $5
treated as paid or accrued pursuant to
§ 1.163(j)–6(g)(4), less $16 treated as
paid or accrued pursuant to § 1.163(j)–
6(g)(2)).
(36) Example 36—(i) Facts. X is a
partner in partnership PRS. At the
beginning of 2018, X’s outside basis in
PRS was $100. X was allocated $20 of
excess business interest expense from
PRS in 2018 and $10 of excess business
interest expense from PRS in 2019. X
sold its PRS interest in 2019 for $70.
(ii) Analysis. X treats 50 percent of its
$10 of excess business interest expense
allocated from PRS in 2019 as
§ 1.163(j)–6(g)(4) business interest
expense. Thus, $5 of § 1.163(j)–6(g)(4)
business interest expense is treated as
paid or accrued by X in 2020 and is not
subject to the section 163(j) limitation at
X’s level. Pursuant to paragraph (h)(3) of
this section, immediately before the
disposition, X increases the basis of its
PRS interest from $70 to $95 (add back
of $20 of EBIE from 2018 and $5 of
remaining EBIE from 2019). Thus, X has
a $25 section 741 loss recognized on the
sale ($70¥$95).
(p) Applicability dates.
(1) In general.* * *
(2) Paragraphs (c)(1) and (2), (d)(3)
through (5), (e)(5), (f)(1)(iii), (g)(4), (n),
and (o)(24) through (29), and (34)
through (36). Paragraphs (c)(1) and (2),
(d)(3) through (5), (e)(5), (f)(1)(iii), (g)(4),
(n), and (o)(24) through (29), and (34)
through (36) of this section apply to
taxable years beginning on or after
March 22, 2021. However, taxpayers
and their related parties, within the
meaning of sections 267(b) (determined
without regard to section 267(c)(3)) and
707(b)(1), may choose to apply the rules
in paragraphs (c)(1) and (2), (d)(3)
through (5), (e)(5), (f)(1)(iii), (g)(4), (n),
and (o)(24) through (29), and (34)
through (36) to a taxable year beginning
after December 31, 2017, and before
March 22, 2021, provided that those

PO 00000

Frm 00038

Fmt 4701

Sfmt 4700

taxpayers and their related parties
consistently apply all of the rules in
T.D. 9905 (§§ 1.163(j)–0 through
1.163(j)–11, effective November 13,
2020) as modified by T.D. 9943
(effective January 13, 2021), and, if
applicable, §§ 1.263A–9, 1.263A–15,
1.381(c)(20)–1, 1.382–1, 1.382–2, 1.382–
5, 1.382–6, 1.382–7, 1.383–0, 1.383–1,
1.469–9, 1.469–11, 1.704–1, 1.882–5,
1.1362–3, 1.1368–1, 1.1377–1, 1.1502–
13, 1.1502–21, 1.1502–36, 1.1502–79,
1.1502–91 through 1.1502–99 (to the
extent they effectuate the rules of
§§ 1.382–2, 1.382–5, 1.382–6, and
1.383–1), and 1.1504–4 contained in
T.D. 9905 as modified by T.D. 9943, for
that taxable year and for each
subsequent taxable year.
■ Par. 7. Section 1.163(j)–7 is amended
by revising paragraph (a), adding
paragraphs (c) through (f), (g)(3) and (4),
(h), (k), and (l), and revising paragraph
(m) to read as follows:
§ 1.163 (j)–7 Application of the section
163(j) limitation to foreign corporations and
United States shareholders.

(a) Overview. This section provides
rules for the application of section 163(j)
to relevant foreign corporations and
United States shareholders of relevant
foreign corporations. Paragraph (b) of
this section provides the general rule
regarding the application of section
163(j) to a relevant foreign corporation.
Paragraph (c) of this section provides
rules for applying section 163(j) to CFC
group members of a CFC group.
Paragraph (d) of this section provides
rules for determining a specified group
and specified group members.
Paragraph (e) of this section provides
rules and procedures for treating a
specified group member as a CFC group
member and for determining a CFC
group. Paragraph (f) of this section
provides rules regarding the treatment
of a CFC group member that has ECI.
Paragraph (g) of this section provides
rules concerning the computation of
ATI of an applicable CFC. Paragraph (h)
of this section provides a safe harbor
that exempts certain stand-alone
applicable CFCs and CFC groups from
the application of section 163(j) for a
taxable year. Paragraphs (i) and (j) of
this section are reserved. Paragraph (k)
of this section provides definitions that
apply for purposes of this section (see
also § 1.163(j)–1 for additional
definitions). Paragraph (l) of this section
provides examples illustrating the
application of this section.
*
*
*
*
*
(c) Application of section 163(j) to
CFC group members of a CFC group—
(1) Scope. This paragraph (c) provides
rules for applying section 163(j) to a

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
CFC group and a CFC group member.
Paragraph (c)(2) of this section provides
rules for computing a single section
163(j) limitation for a specified period of
a CFC group. Paragraph (c)(3) of this
section provides rules for allocating a
CFC group’s section 163(j) limitation to
CFC group members for specified
taxable years. Paragraph (c)(4) of this
section provides currency translation
rules. Paragraph (c)(5) of this section
provides special rules for specified
periods beginning in 2019 or 2020.
(2) Calculation of section 163(j)
limitation for a CFC group for a
specified period—(i) In general. A single
section 163(j) limitation is computed for
a specified period of a CFC group. For
purposes of applying section 163(j) and
the section 163(j) regulations, the
current-year business interest expense,
disallowed business interest expense
carryforwards, business interest income,
floor plan financing interest expense,
and ATI of a CFC group for a specified
period equal the sums of each CFC
group member’s respective amounts for
its specified taxable year with respect to
the specified period. A CFC group
member’s current-year business interest
expense, business interest income, floor
plan financing interest expense, and
ATI for a specified taxable year are
generally determined on a separatecompany basis. For purposes of
determining the ATI of a CFC group,
§ 1.163(j)–1(b)(1)(vii) (providing that
ATI cannot be less than zero) applies
with respect to the ATI of the CFC group
but not the ATI of any CFC group
member.
(ii) Certain transactions between CFC
group members disregarded. Any
transaction between CFC group
members of a CFC group that is entered
into with a principal purpose of
affecting a CFC group or a CFC group
member’s section 163(j) limitation by
increasing or decreasing a CFC group or
a CFC group member’s ATI or business
interest income for a specified taxable
year is disregarded for purposes of
applying section 163(j) and the section
163(j) regulations.
(3) Deduction of business interest
expense—(i) CFC group business
interest expense—(A) In general. The
extent to which a CFC group member’s
current-year business interest expense
and disallowed business interest
expense carryforwards for a specified
taxable year that ends with or within a
specified period may be deducted under
section 163(j) is determined under the
rules and principles of § 1.163(j)–5(a)(2)
and (b)(3)(ii), subject to the
modifications described in paragraph
(c)(3)(i)(B) of this section.

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

(B) Modifications to relevant terms.
For purposes of paragraph (c)(3)(i)(A) of
this section, the rules and principles of
§ 1.163(j)–5(b)(3)(ii) are applied by—
(1) Replacing ‘‘§ 1.163(j)–4(d)(2)’’ in
§ 1.163(j)–5(a)(2)(ii) with ‘‘§ 1.163(j)–
7(c)(2)(i)’’;
(2) Replacing the term ‘‘allocable
share of the consolidated group’s
remaining section 163(j) limitation’’
with ‘‘allocable share of the CFC group’s
remaining section 163(j) limitation’’;
(3) Replacing the terms ‘‘consolidated
group’’ and ‘‘group’’ with ‘‘CFC group’’;
(4) Replacing the term ‘‘consolidated
group’s remaining section 163(j)
limitation’’ with ‘‘CFC group’s
remaining section 163(j) limitation’’;
(5) Replacing the term ‘‘consolidated
return year’’ with ‘‘specified period’’;
(6) Replacing the term ‘‘current year’’
or ‘‘current-year’’ with ‘‘current
specified period’’ or ‘‘specified taxable
year with respect to the current
specified period,’’ as the context
requires;
(7) Replacing the term ‘‘member’’ with
‘‘CFC group member’’; and
(8) Replacing the term ‘‘taxable year’’
with ‘‘specified taxable year with
respect to a specified period.’’
(ii) Carryforwards treated as
attributable to the same taxable year.
For purposes of applying the principles
of § 1.163(j)–5(b)(3)(ii), as required
under paragraph (c)(3)(i) of this section,
CFC group members’ disallowed
business interest expense carryforwards
that arose in specified taxable years
with respect to the same specified
period are treated as disallowed
business interest expense carryforwards
from taxable years ending on the same
date and are deducted on a pro rata
basis, under the principles of § 1.163(j)–
5(b)(3)(ii)(C)(3), pursuant to paragraph
(c)(3)(i) of this section.
(iii) Multiple specified taxable years
of a CFC group member with respect to
a specified period. If a CFC group
member has more than one specified
taxable year (each year, an applicable
specified taxable year) with respect to a
single specified period of a CFC group,
then all the applicable specified taxable
years are taken into account for
purposes of applying the principles of
§ 1.163(j)–5(b)(3)(ii), as required under
paragraph (c)(3)(i) of this section, with
respect to the specified period. The
portion of the section 163(j) limitation
allocable to disallowed business interest
expense carryforwards of the CFC group
member that arose in taxable years
before the first applicable specified
taxable year is prorated among the
applicable specified taxable years in
proportion to the number of days in
each applicable specified taxable year.

PO 00000

Frm 00039

Fmt 4701

Sfmt 4700

5533

(iv) Limitation on pre-group
disallowed business interest expense
carryforward—(A) General rule—(1)
CFC group member pre-group
disallowed business interest expense
carryforward. This paragraph (c)(3)(iv)
applies to pre-group disallowed
business interest expense carryforwards
of a CFC group member. The amount of
the pre-group disallowed business
interest expense carryforwards
described in the preceding sentence that
may be included in any CFC group
member’s business interest expense
deduction for any specified taxable year
under this paragraph (c)(3) may not
exceed the aggregate section 163(j)
limitation for all specified periods of the
CFC group, determined by reference
only to the CFC group member’s items
of income, gain, deduction, and loss,
and reduced (including below zero) by
the CFC group member’s business
interest expense (including disallowed
business interest expense carryforwards)
taken into account as a deduction by the
CFC group member in all specified
taxable years in which the CFC group
member has continuously been a CFC
group member of the CFC group
(cumulative section 163(j) pre-group
carryforward limitation).
(2) Subgrouping. In the case of a pregroup disallowed business interest
expense carryforward, a pre-group
subgroup is composed of the CFC group
member with the pre-group disallowed
business interest expense carryforward
(the loss member) and each other CFC
group member of the loss member’s CFC
group (the current group) that was a
member of the CFC group in which the
pre-group disallowed business interest
expense carryforward arose and joined
the specified group of the current group
at the same time as the loss member. A
CFC group member that is a member of
a pre-group subgroup remains a member
of the pre-group subgroup until its first
taxable year during which it ceases to be
a member of the same specified group
as the loss member. For purposes of this
paragraph (c), the rules and principles
of § 1.163(j)–5(d)(1)(B) apply to a pregroup subgroup as if the pre-group
subgroup were a SRLY subgroup.
(3) Transition rule. Solely for
purposes of paragraph (c)(3)(iv)(A)(2) of
this section, a CFC group includes a
group of applicable CFCs for which a
CFC group election was made under
guidance under section 163(j) published
on December 28, 2018. Therefore, if the
requirements of paragraph
(c)(3)(iv)(A)(2) of this section are
satisfied, a group of applicable CFCs
described in the preceding sentence
may be treated as a pre-group subgroup.

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

5534

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

(B) Deduction of pre-group disallowed
business interest expense carryforwards.
Notwithstanding paragraph
(c)(3)(iv)(A)(1) of this section, pre-group
disallowed business interest expense
carryforwards are available for
deduction by a CFC group member in its
specified taxable year only to the extent
the CFC group has remaining section
163(j) limitation for the specified period
after the deduction of current-year
business interest expense and
disallowed business interest expense
carryforwards from earlier taxable years
that are permitted to be deducted in
specified taxable years of CFC group
members with respect to the specified
period. See paragraph (c)(3)(i) of this
section and § 1.163(j)–5(b)(3)(ii)(A). Pregroup disallowed business interest
expense carryforwards are deducted on
a pro rata basis (under the principles of
paragraph (c)(3)(i) of this section and
§ 1.163(j)–5(b)(3)(ii)(C)(4)) with other
disallowed business interest expense
carryforwards from taxable years ending
on the same date.
(4) Currency translation. For purposes
of applying this paragraph (c), items of
a CFC group member are translated into
a single currency for the CFC group and
back to the functional currency of the
CFC group member using the average
exchange rate for the CFC group
member’s specified taxable year. The
single currency for the CFC group may
be the U.S. dollar or the functional
currency of a plurality of the CFC group
members.
(5) Special rule for specified periods
beginning in 2019 or 2020—(i) 50
percent ATI limitation applies to a
specified period of a CFC group. In the
case of a CFC group, § 1.163(j)–2(b)(2)
(including the election under § 1.163(j)–
2(b)(2)(ii)) applies to a specified period
of the CFC group beginning in 2019 or
2020, rather than to a specified taxable
year of a CFC group member. An
election under § 1.163(j)–2(b)(2)(ii) for a
specified period of a CFC group is not
effective unless made by each
designated U.S. person. Except as
otherwise provided in this paragraph
(c)(5)(i), the election is made in
accordance with Revenue Procedure
2020–22, 2020–18 I.R.B. 745. For
purposes of applying § 1.964–1(c), the
election is treated as if made for each
CFC group member.
(ii) Election to use 2019 ATI applies
to a specified period of a CFC group—
(A) In general. In the case of a CFC
group, for purposes of applying
paragraph (c)(2) of this section, an
election under § 1.163(j)–2(b)(3)(i) is
made for a specified period of a CFC
group beginning in 2020 and applies to
the specified taxable years of each CFC

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

group member with respect to such
specified period, taking into account the
application of paragraph (c)(5)(ii)(B) of
this section. The election under
§ 1.163(j)–2(b)(3)(i) does not apply to
any specified taxable year of a CFC
group member other than those
described in the preceding sentence. An
election under § 1.163(j)–2(b)(3)(i) for a
specified period of a CFC group is not
effective unless made by each
designated U.S. person. Except as
otherwise provided in this paragraph
(c)(5)(ii)(A), the election is made in
accordance with Revenue Procedure
2020–22, 2020–18 I.R.B. 745. For
purposes of applying § 1.964–1(c), the
election is treated as if made for each
CFC group member.
(B) Specified taxable years that do not
begin in 2020. If a specified taxable year
of a CFC group member with respect to
the specified period described in
paragraph (c)(5)(ii)(A) of this section
begins in 2019, then, for purposes of
applying paragraph (c)(2) of this section,
§ 1.163(j)–2(b)(3) is applied to such
specified taxable year by substituting
‘‘2018’’ for ‘‘2019’’ and ‘‘2019’’ for
‘‘2020.’’ If a specified taxable year of a
CFC group member with respect to the
specified period described in paragraph
(c)(5)(ii)(A) of this section begins in
2021, then, for purposes of applying
paragraph (c)(2) of this section,
§ 1.163(j)–2(b)(3) is applied to such
specified taxable year by substituting
‘‘2020’’ for ‘‘2019’’ and ‘‘2021’’ for
‘‘2020.’’
(d) Determination of a specified group
and specified group members—(1)
Scope. This paragraph (d) provides rules
for determining a specified group and
specified group members. Paragraph
(d)(2) of this section provides rules for
determining a specified group.
Paragraph (d)(3) of this section provides
rules for determining specified group
members.
(2) Rules for determining a specified
group—(i) Definition of a specified
group. Subject to paragraph (d)(2)(ii) of
this section, the term specified group
means one or more applicable CFCs or
chains of applicable CFCs connected
through stock ownership with a
specified group parent (which is
included in the specified group only if
it is an applicable CFC), but only if—
(A) The specified group parent owns
directly or indirectly stock meeting the
requirements of section 1504(a)(2)(B) in
at least one applicable CFC; and
(B) Stock meeting the requirements of
section 1504(a)(2)(B) in each of the
applicable CFCs (except the specified
group parent) is owned directly or
indirectly by one or more of the other

PO 00000

Frm 00040

Fmt 4701

Sfmt 4700

applicable CFCs or the specified group
parent.
(ii) Indirect ownership. For purposes
of applying paragraph (d)(2)(i) of this
section, stock is owned indirectly only
if it is owned under section 318(a)(2)(A)
through a partnership or under section
318(a)(2)(A) or (B) through an estate or
trust not described in section
7701(a)(30).
(iii) Specified group parent. The term
specified group parent means a
qualified U.S. person or an applicable
CFC.
(iv) Qualified U.S. person. The term
qualified U.S. person means a United
States person described in section
7701(a)(30)(A) or (C). For purposes of
this paragraph (d), members of a
consolidated group that file (or that are
required to file) a consolidated U.S.
Federal income tax return are treated as
a single qualified U.S person and
individuals described in section
7701(a)(30)(A) whose filing status is
married filing jointly are treated as a
single qualified U.S. person.
(v) Stock. For purposes of this
paragraph (d)(2), the term stock has the
same meaning as ‘‘stock’’ in section
1504 (without regard to § 1.1504–4,
except as provided in paragraph
(d)(2)(vi) of this section) and all shares
of stock within a single class are
considered to have the same value.
Thus, control premiums and minority
and blockage discounts within a single
class are not taken into account.
(vi) Options treated as exercised. For
purposes of this paragraph (d)(2),
options that are reasonably certain to be
exercised, as determined under
§ 1.1504–4(g), are treated as exercised.
For purposes of this paragraph (d)(2)(vi),
options include call options, warrants,
convertible obligations, put options, and
any other instrument treated as an
option under § 1.1504–4(d), determined
by replacing the term ‘‘a principal
purpose of avoiding the application of
section 1504 and this section’’ with ‘‘a
principal purpose of avoiding the
application of section 163(j).’’
(vii) When a specified group ceases to
exist. The principles of § 1.1502–
75(d)(1), (d)(2)(i) and (ii), and (d)(3)(i)
through (iv) apply for purposes of
determining when a specified group
ceases to exist. Solely for purposes of
applying these principles, references to
the common parent are treated as
references to the specified group parent
and each applicable CFC that is treated
as a specified group member for a
taxable year with respect to a specified
period is treated as affiliated with the
specified group parent from the
beginning to the end of the specified

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
period, without regard to the beginning
or end of its taxable year.
(3) Rules for determining a specified
group member. If two or more
applicable CFCs are included in a
specified group on the last day of a
taxable year of each applicable CFC that
ends with or within a specified period,
then each applicable CFC is a specified
group member with respect to the
specified period for its entire taxable
year ending with or within the specified
period. If only one applicable CFC is
included in a specified group on the last
day of its taxable year that ends with or
within the specified period, it is not a
specified group member. If an
applicable CFC has multiple taxable
years that end with or within a specified
period, this paragraph (d)(3) is applied
separately to each taxable year to
determine if the applicable CFC is a
specified group member for such taxable
year.
(e) Rules and procedures for treating
a specified group as a CFC group—(1)
Scope. This paragraph (e) provides rules
and procedures for treating a specified
group member as a CFC group member
and for determining a CFC group for
purposes of applying section 163(j) and
the section 163(j) regulations.
(2) CFC group and CFC group
member—(i) CFC group. The term CFC
group means, with respect to a specified
period, all CFC group members for their
specified taxable years.
(ii) CFC group member. The term CFC
group member means, with respect to a
specified taxable year and a specified
period, a specified group member of a
specified group for which a CFC group
election is in effect. However,
notwithstanding the prior sentence, a
specified group member is not treated as
a CFC group member for a taxable year
of the specified group member
beginning before January 1, 2018.
(3) Duration of a CFC group. A CFC
group continues until the CFC group
election is revoked, or there is no longer
a specified period with respect to the
specified group. A failure to provide the
information described in paragraph
(e)(6) of this section does not terminate
a CFC group election.
(4) Joining or leaving a CFC group. If
an applicable CFC becomes a specified
group member for a specified taxable
year with respect to a specified period
of a specified group for which a CFC
group election is in effect, the CFC
group election applies to the applicable
CFC and the applicable CFC becomes a
CFC group member. If an applicable
CFC ceases to be a specified group
member for a specified taxable year with
respect to a specified period of a
specified group for which a CFC group

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

election is in effect, the CFC group
election terminates solely with respect
to the applicable CFC.
(5) Manner of making or revoking a
CFC group election—(i) In general. An
election is made or revoked under this
paragraph (e)(5) (CFC group election)
with respect to a specified period of a
specified group. A CFC group election
remains in effect for each specified
period of the specified group until
revoked. A CFC group election that is in
effect with respect to a specified period
of a specified group applies to each
specified group member for its specified
taxable year that ends with or within the
specified period. The making or
revoking of a CFC group election is not
effective unless made or revoked by
each designated U.S. person.
(ii) Revocation by election. A CFC
group election cannot be revoked with
respect to any specified period
beginning before 60 months following
the last day of the specified period for
which the election was made. Once a
CFC group election has been revoked, a
new CFC group election cannot be made
with respect to any specified period
beginning before 60 months following
the last day of the specified period for
which the election was revoked.
(iii) Timing. A CFC group election
must be made or revoked with respect
to a specified period of a specified
group no later than the due date (taking
into account extensions, if any) of the
original Federal income tax return for
the taxable year of each designated U.S.
person in which or with which the
specified period ends.
(iv) Election statement. To make or
revoke a CFC group election for a
specified period of a specified group,
each designated U.S. person must attach
a statement to its relevant Federal
income tax or information return in
accordance with publications, forms,
instructions, or other guidance. The
statement must include the name and
taxpayer identification number of all
designated U.S. persons, a statement
that the CFC group election is being
made or revoked, as applicable, the
specified period for which the CFC
group election is being made or revoked,
and the name of each CFC group
member and its specified taxable year
with respect to the specified period. The
statement must be filed in the manner
prescribed in publications, forms,
instructions, or other guidance.
(v) Effect of prior CFC group election.
A CFC group election is made solely
pursuant to the provisions of this
paragraph (e)(5), without regard to
whether a CFC group election described
in guidance under section 163(j)

PO 00000

Frm 00041

Fmt 4701

Sfmt 4700

5535

published on December 28, 2018, was in
effect.
(6) Annual information reporting.
Each designated U.S. person must attach
a statement to its relevant Federal
income tax or information return for
each taxable year in which a CFC group
election is in effect that contains
information concerning the computation
of the CFC group’s section 163(j)
limitation and the application of
paragraph (c)(3) of this section to the
CFC group in accordance with
publications, forms, instructions, or
other guidance.
(f) Treatment of a CFC group member
that has ECI—(1) In general. If a CFC
group member has ECI in its specified
taxable year, then for purposes of
section 163(j) and the section 163(j)
regulations—
(i) The items, disallowed business
interest expense carryforwards, and
other attributes of the CFC group
member that are ECI are treated as
items, disallowed business interest
expense carryforwards, and attributes of
a separate applicable CFC (such deemed
corporation, an ECI deemed
corporation) that has the same taxable
year and shareholders as the applicable
CFC; and
(ii) The ECI deemed corporation is not
treated as a specified group member for
the specified taxable year.
(2) [Reserved].
(g) * * *
(3) Treatment of certain foreign
income taxes. For purposes of
computing the ATI of a relevant foreign
corporation for a taxable year, no
deduction is taken into account for any
foreign income tax (as defined in
§ 1.960–1(b), but substituting the phrase
‘‘relevant foreign corporation’’ for the
phrase ‘‘controlled foreign
corporation’’).
(4) Anti-abuse rule—(i) In general. If
a specified group member of a specified
group or an applicable partnership
(specified lender) includes an amount
(payment amount) in income and such
amount is attributable to business
interest expense incurred by another
specified group member or an
applicable partnership of the specified
group (specified borrower) during its
taxable year, then the ATI of the
specified borrower for the taxable year
is increased by the ATI adjustment
amount if—
(A) The business interest expense is
incurred with a principal purpose of
reducing the Federal income tax
liability of any United States
shareholder of a specified group
member (including over other taxable
years);

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

5536

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

(B) Absent the application of this
paragraph (g)(4), the effect of the
specified borrower treating all or part of
the payment amount as disallowed
business interest expense would be to
reduce the Federal income tax liability
of any United States shareholder of a
specified group member; and
(C) Either no CFC group election is in
effect with respect to the specified
group or the specified borrower is an
applicable partnership.
(ii) ATI adjustment amount—(A) In
general. For purposes of this paragraph
(g)(4), the term ATI adjustment amount
means, with respect to a specified
borrower and a taxable year, the product
of 31⁄3 and the lesser of the payment
amount or the disallowed business
interest expense, computed without
regard to this paragraph (g)(4).
(B) Special rule for taxable years or
specified periods beginning in 2019 or
2020. For any taxable year of an
applicable CFC or specified taxable year
of a CFC group member with respect to
a specified period for which the section
163(j) limitation is determined based, in
part, on 50 percent of ATI, in
accordance with § 1.163(j)–2(b)(2),
paragraph (g)(4)(ii)(A) of this section is
applied by substituting ‘‘2’’ for ‘‘31⁄3.’’
(iii) Applicable partnership. For
purposes of this paragraph (g)(4), the
term applicable partnership means,
with respect to a specified group, a
partnership in which at least 80 percent
of the interests in profits or capital is
owned, directly or indirectly through
one or more other partnerships, by
specified group members of the
specified group. For purposes of this
paragraph (g)(4)(iii), a partner’s interest
in the profits of a partnership is
determined in accordance with the rules
and principles of § 1.706–1(b)(4)(ii) and
a partner’s interest in the capital of a
partnership is determined in accordance
with the rules and principles of § 1.706–
1(b)(4)(iii).
(h) Election to apply safe-harbor—(1)
In general. If an election to apply this
paragraph (h)(1) (safe-harbor election) is
in effect with respect to a taxable year
of a stand-alone applicable CFC or a
specified taxable year of a CFC group
member, as applicable, then, for such
year, no portion of the applicable CFC’s
business interest expense is disallowed
under the section 163(j) limitation. This
paragraph (h) does not apply to excess
business interest expense, as described
in § 1.163(j)–6(f)(2), until the taxable
year in which it is treated as paid or
accrued by an applicable CFC under
§ 1.163(j)–6(g)(2)(i). Furthermore, excess
business interest expense is not taken
into account for purposes of
determining whether the safe-harbor

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

election is available for a stand-alone
applicable CFC or a CFC group until the
taxable year in which it is treated as
paid or accrued by an applicable CFC
under § 1.163(j)–6(g)(2)(i).
(2) Eligibility for safe-harbor
election—(i) Stand-alone applicable
CFC. The safe-harbor election may be
made for the taxable year of a standalone applicable CFC only if, for the
taxable year, the business interest
expense of the applicable CFC is less
than or equal to either—
(A) The business interest income of
the applicable CFC; or
(B) 30 percent of the lesser of the
eligible amount or the qualified
tentative taxable income of the
applicable CFC.
(ii) CFC group. The safe-harbor
election may be made for the specified
period of a CFC group only if, for the
specified period, no CFC group member
has any pre-group disallowed business
interest expense carryforward and the
business interest expense of the CFC
group for the specified period is less
than or equal to either—
(A) The business interest income of
the CFC group; or
(B) 30 percent of the lesser of the
eligible amount or the qualified
tentative taxable income of the CFC
group.
(iii) Currency translation. For
purposes of applying this paragraph (h),
BII, BIE, and qualified tentative taxable
income of a stand-alone applicable CFC
or a CFC group must be determined
using the U.S. dollar. If BII, BIE, or any
items of income, gain, deduction, or loss
that are taken into account in computing
qualified tentative taxable income are
maintained in a currency other than the
U.S. dollar, then those items must be
translated into the U.S. dollar using the
average exchange rate for the taxable
year or the specified taxable year, as
applicable.
(3) Eligible amount—(i) Stand-alone
applicable CFC. The eligible amount of
a stand-alone applicable CFC for a
taxable year is the sum of the amounts
a domestic corporation would include
in gross income under sections
951(a)(1)(A) and 951A(a), reduced by
any deductions that would be allowed
under section 245A (by reason of
section 964(e)(4)) or section
250(a)(1)(B)(i), determined as if the
domestic corporation has a taxable year
that ends on the last date of the taxable
year of the stand-alone applicable CFC,
it wholly owns the stand-alone
applicable CFC throughout the CFC’s
taxable year, it does not own any assets
other than stock in the stand-alone
applicable CFC, and it has no other

PO 00000

Frm 00042

Fmt 4701

Sfmt 4700

items of income, gain, deduction, or
loss.
(ii) CFC group. The eligible amount of
a CFC group for a specified period is the
sum of the amounts a domestic
corporation would include in gross
income under sections 951(a)(1)(A) and
951A(a), reduced by any deductions that
would be allowed under section 245A
(by reason of section 964(e)(4)) or
section 250(a)(1)(B)(i), determined as if
the domestic corporation has a taxable
year that is the specified period, it
wholly owns each CFC group member
throughout the CFC group member’s
specified taxable year, it does not own
any assets other than stock in the CFC
group members, and it has no other
items of income, gain, deduction, or
loss.
(iii) Additional rules for determining
an eligible amount. For purposes of
paragraphs (h)(3)(i) and (ii) of this
section, the amounts that would be
included in gross income of a United
States shareholder under sections
951(a)(1)(A) and 951A(a), and any
corresponding deductions that would be
allowed under section 245A (by reason
of section 964(e)(4)) or section
250(a)(1)(B)(i), are determined by taking
into account any elections that are made
with respect to the applicable CFC(s),
including under § 1.954–1(d)(5) (relating
to the subpart F high-tax exception) and
§ 1.951A–2(c)(7)(viii) (relating to the
GILTI high-tax exclusion). These
amounts are also determined without
regard to any section 163(j) limitation
on business interest expense and
without regard to any disallowed
business interest expense carryovers. In
addition, those amounts are determined
by only taking in account items of the
applicable CFC(s) that are properly
allocable to a non-excepted trade or
business under § 1.163(j)–10.
(4) Qualified tentative taxable income.
The term qualified tentative taxable
income means, with respect to a taxable
year of a stand-alone applicable CFC,
the applicable CFC’s tentative taxable
income, and with respect to a specified
period of a CFC group, the sum of each
CFC group member’s tentative taxable
income for the specified taxable year;
provided that for purposes of this
paragraph (h)(4), tentative taxable
income is determined by taking into
account only items properly allocable to
a non-excepted trade or business under
§ 1.163(j)–10.
(5) Manner of making a safe-harbor
election—(i) In general. A safe-harbor
election is an annual election made
under this paragraph (h)(5) with respect
to a taxable year of a stand-alone
applicable CFC or with respect to a
specified period of a CFC group. A safe-

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
harbor election that is made with
respect to a specified period of a CFC
group is effective with respect to each
CFC group member for its specified
taxable year. A safe-harbor election is
only effective if made by each
designated U.S. person with respect to
a stand-alone applicable CFC or a CFC
group. A safe-harbor election is made
with respect to a taxable year of a standalone applicable CFC, or a specified
period of a CFC group, no later than the
due date (taking into account
extensions, if any) of the original
Federal income tax return for the
taxable year of each designated U.S.
person, respectively, in which or with
which the taxable year of the standalone applicable CFC ends or the
specified period of the CFC group ends.
(ii) Election statement. To make a
safe-harbor election, each designated
U.S. person must attach to its relevant
Federal income tax return or
information return a statement that
includes the name and taxpayer
identification number of all designated
U.S. persons, a statement that a safeharbor election is being made pursuant
to § 1.163(j)–7(h) and a calculation that
substantiates that the requirements for
making the election are satisfied, and
the taxable year of the stand-alone
applicable CFC or the specified period
of the CFC group, as applicable, for
which the safe-harbor election is being
made in accordance with publications,
forms, instructions, or other guidance.
In the case of a CFC group, the
statement must also include the name of
each CFC group member and its
specified taxable year that ends with or
within the specified period for which
the safe-harbor election is being made.
The statement must be filed in the
manner prescribed in publications,
forms, instructions, or other guidance.
(6) Special rule for taxable years or
specified periods beginning in 2019 or
2020. In the case of a stand-alone
applicable CFC, for any taxable year
beginning in 2019 or 2020, paragraph
(h)(2)(i) of this section is applied by
substituting ‘‘50 percent’’ for ‘‘30
percent.’’ In the case of a CFC group, for
any specified period beginning in 2019
or 2020, paragraph (h)(2)(ii)(A) of this
section is applied by substituting ‘‘50
percent’’ for ‘‘30 percent.’’
*
*
*
*
*
(k) Definitions. The following
definitions apply for purposes of this
section.
(1) Applicable partnership. The term
applicable partnership has the meaning
provided in paragraph (g)(4)(iii) of this
section.
(2) Applicable specified taxable year.
The term applicable specified taxable

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

year has the meaning provided in
paragraph (c)(3)(iii) of this section.
(3) ATI adjustment amount. The term
ATI adjustment amount has the
meaning provided in paragraph (g)(4)(ii)
of this section.
(4)–(5) [Reserved].
(6) CFC group. The term CFC group
has the meaning provided in paragraph
(e)(2)(i) of this section.
(7) CFC group election. The term CFC
group election means the election
described in paragraph (e)(5) of this
section.
(8) CFC group member. The term CFC
group member has the meaning
provided in paragraph (e)(2)(ii) of this
section.
(9) [Reserved].
(10) Cumulative section 163(j) pregroup carryforward limitation. The term
cumulative section 163(j) pre-group
carryforward limitation has the meaning
provided in paragraph (c)(3)(iv)(A)(1) of
this section.
(11) Current group. The term current
group has the meaning provided in
paragraph (c)(3)(iv)(A)(2) of this section.
(12) Designated U.S. person. The term
designated U.S. person means—
(i) With respect to a stand-alone
applicable CFC, each controlling
domestic shareholder, as defined in
§ 1.964–1(c)(5)(i) of the applicable CFC;
or
(ii) With respect to a specified group,
the specified group parent, if the
specified group parent is a qualified
U.S. person, or each controlling
domestic shareholder, as defined in
§ 1.964–1(c)(5)(i), of the specified group
parent, if the specified group parent is
an applicable CFC.
(13) ECI deemed corporation. The
term ECI deemed corporation has the
meaning provided in paragraph (f)(1)(i)
of this section.
(14) Effectively connected income.
The term effectively connected income
(or ECI) means income or gain that is
ECI, as defined in § 1.884–1(d)(1)(iii),
and deduction or loss that is allocable
to, ECI, as defined in § 1.884–1(d)(1)(iii).
(15) Eligible amount. The term eligible
amount has the meaning provided in
paragraph (h)(3)(i) of this section.
(16) Former group. The term former
group has the meaning provided in
paragraph (c)(3)(iv)(A)(2) of this section.
(17) Loss member. The term loss
member has the meaning provided in
paragraph (c)(3)(iv)(A)(2) of this section.
(18) Payment amount. The term
payment amount has the meaning
provided in paragraph (g)(4)(i) of this
section.
(19) Pre-group disallowed business
interest expense carryforward. The term
pre-group disallowed business interest

PO 00000

Frm 00043

Fmt 4701

Sfmt 4700

5537

expense carryforward means, with
respect to a CFC group member and a
specified taxable year, any disallowed
business interest expense carryforward
of the CFC group member that arose in
a taxable year during which the CFC
group member (or its predecessor) was
not a CFC group member of the CFC
group.
(20) Qualified tentative taxable
income. The term qualified tentative
taxable income has the meaning
provided in paragraph (h)(4) of this
section.
(21) Qualified U.S. person. The term
qualified U.S. person has the meaning
provided in paragraph (d)(2)(iv) of this
section.
(22) Relevant period. The term
relevant period has the meaning
provided in paragraph (c)(3)(iv)(A)(2) of
this section.
(23) Safe-harbor election. The term
safe-harbor election has the meaning
provided in paragraph (h)(1) of this
section.
(24) Specified borrower. The term
specified borrower has the meaning
provided in paragraph (g)(4)(i) of this
section.
(25) Specified group. The term
specified group has the meaning
provided in paragraph (d)(2)(i) of this
section.
(26) Specified group member. The
term specified group member has the
meaning provided in paragraph (d)(3) of
this section.
(27) Specified group parent. The term
specified group parent has the meaning
provided in paragraph (d)(2)(iii) of this
section.
(28) Specified lender. The term
specified lender has the meaning
provided in paragraph (g)(4)(i) of this
section.
(29) Specified period—(i) In general.
Except as otherwise provided in
paragraph (k)(29)(ii) of this section, the
term specified period means, with
respect to a specified group—
(A) If the specified group parent is a
qualified U.S. person, the period ending
on the last day of the taxable year of the
specified group parent and beginning on
the first day after the last day of the
specified group’s immediately
preceding specified period; or
(B) If the specified group parent is an
applicable CFC, the period ending on
the last day of the specified group
parent’s required year described in
section 898(c)(1), without regard to
section 898(c)(2), and beginning on the
first day after the last day of the
specified group’s immediately
preceding specified period.
(ii) Short specified period. A specified
period begins no earlier than the first

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

5538

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

date on which a specified group exists.
A specified period ends on the date a
specified group ceases to exist under
paragraph (d)(2)(vii) of this section. If
the last day of a specified period, as
determined under paragraph (k)(29)(i) of
this section, changes, and, but for this
paragraph (k)(29)(ii), the change in the
last day of the specified period would
result in the specified period being
longer than 12 months, the specified
period ends on the date on which the
specified period would have ended had
the change not occurred.
(30) Specified taxable year. The term
specified taxable year means, with
respect to an applicable CFC that is a
specified group member of a specified
group and a specified period, a taxable
year of the applicable CFC that ends
with or within the specified period.
(31) Stand-alone applicable CFC. The
term stand-alone applicable CFC means
any applicable CFC that is not a
specified group member.
(32) Stock. The term stock has the
meaning provided in paragraph (d)(2)(v)
of this section.
(l) Examples. The following examples
illustrate the application of this section.
For each example, unless otherwise
stated, no exemptions from the
application of section 163(j) are
available, no foreign corporation has
ECI, and all relevant taxable years and
specified periods begin after December
31, 2020.
(1) Example 1. Specified taxable years
included in specified period of a
specified group—(i) Facts. As of June
30, Year 1, USP, a domestic corporation,
owns 60 percent of the common stock
of FP, which owns all of the stock of
FC1, FC2, and FC3. The remaining 40
percent of the common stock of FP is
owned by an unrelated foreign
corporation. FP has a single class of
stock. FP acquired the stock of FC3 from
an unrelated person on March 22, Year
1. The acquisition did not result in a
change in FC3’s taxable year or a close
of its taxable year. USP’s interest in FP
and FP’s interest in FC1 and FC2 has
been the same for several years. USP has
a taxable year ending June 30, Year 1,
which is not a short taxable year. Each
of FP, FC1, FC2, and FC3 are applicable
CFCs. Pursuant to section 898(c)(2), FP
and FC1 have taxable years ending May
31, Year 1. Pursuant to section 898(c)(1),
FC2 and FC3 have taxable years ending
June 30, Year 1.
(ii) Analysis—(A) Determining a
specified group and specified period of
the specified group. Pursuant to
paragraph (d) of this section, FP, FC1,
FC2, and FC3 are members of a
specified group, and FP is the specified
group parent. Because the specified

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

group parent, FP, is an applicable CFC,
the specified period of the specified
group is the period ending on June 30,
Year 1, which is the last day of FP’s
required year described in section
898(c)(1), without regard to section
898(c)(2), and beginning on July 1, Year
0, which is the first day following the
last day of the specified group’s
immediately preceding specified period
(June 30, Year 0). See paragraph
(k)(29)(i)(B) of this section.
(B) Determining the specified taxable
years with respect to the specified
period. Pursuant to paragraph (d)(3) of
this section, because each of FP and FC1
are included in the specified group on
the last day of their taxable years ending
May 31, Year 1, and such taxable years
end with or within the specified period
ending June 30, Year 1, FP and FC1 are
specified group members with respect to
the specified period ending June 30,
Year 1, for their entire taxable years
ending May 31, Year 1, and those
taxable years are specified taxable years.
Similarly, because each of FC2 and FC3
are included in the specified group on
the last day of their taxable years ending
June 30, Year 1, and such taxable years
end with or within the specified period
ending June 30, Year 1, FC2 and FC3 are
specified group members with respect to
the specified period ending June 30,
Year 1, for their entire taxable years
ending June 30, Year 1, and those
taxable years are specified taxable years.
The fact that FC3 was acquired on
March 22, Year 1, does not prevent FC3
from being a specified group member
with respect to the specified period for
the portion of its specified taxable year
before March 22, Year 1.
(2) Example 2. CFC groups—(i) Facts.
The facts are the same as in Example 1
in paragraph (l)(1)(i) of this section
except that, in addition, a CFC group
election is in place with respect to the
specified period ending June 30, Year 1.
(ii) Analysis. Because a CFC group
election is in place for the specified
period ending June 30, Year 1, pursuant
to paragraph (e)(2)(ii) of this section,
each specified group member is a CFC
group member with respect to its
specified taxable year ending with or
within the specified period.
Accordingly, FP, FC1, FC2, and FC3 are
CFC group members with respect to the
specified period ending June 30, Year 1,
for their specified taxable years ending
May 31, Year 1, and June 30, Year 1,
respectively. Pursuant to paragraph
(e)(2)(i) of this section, the CFC group
for the specified period ending June 30,
Year 1, consists of FP, FC1, FC2, and
FC3 for their specified taxable years
ending May 31, Year 1, and June 30,
Year 1, respectively. Pursuant to

PO 00000

Frm 00044

Fmt 4701

Sfmt 4700

paragraph (c)(2) of this section, a single
section 163(j) limitation is computed for
the specified period ending June 30,
Year 1. That section 163(j) calculation
will include FP and FC1’s specified
taxable years ending May 31, Year 1,
and FC2 and FC3’s specified taxable
years ending June 30, Year 1.
(3) Example 3. Application of antiabuse rule—(i) Facts. USP, a domestic
corporation, owns all of the stock of
CFC1 and CFC2. Thus, USP is the
specified group parent of a specified
group, the specified group members of
which are CFC1 and CFC2. USP has a
calendar year taxable year. All specified
group members also have a calendar
year taxable year and a functional
currency of the U.S. dollar. CFC1 is
organized in, and a tax resident of, a
jurisdiction that imposes no tax on
certain types of income, including
interest income. With respect to Year 1,
USP expects to pay no residual U.S. tax
on its income inclusion under section
951A(a) (GILTI inclusion amount) and
expects to have unused foreign tax
credits in the category described in
section 904(d)(1)(A). A CFC group
election is not in effect for Year 1. With
a principal purpose of reducing USP’s
Federal income tax liability in
subsequent taxable years, on January 1,
Year 1, CFC1 loans $100x to CFC2. On
December 31, Year 1, CFC2 pays interest
of $10x to CFC1 and repays the
principal of $100x. Absent the
application of paragraph (g)(4)(i) of this
section, all $10x of CFC2’s interest
expense would be disallowed business
interest expense and, therefore, CFC2
would have $10x of disallowed business
interest expense carryforward to Year 2.
In Year 2, CFC2 disposes of one of its
businesses at a substantial gain that
gives rise to tested income (within the
meaning of section 951A(c)(2)(A) and
§ 1.951A–2(b)(1)). As a result of the gain
being included in the ATI of CFC2,
absent the application of paragraph
(g)(4)(i) of this section, CFC2 would be
allowed to deduct the entire $10x of
disallowed business interest expense
carryforward and therefore reduce the
amount of its tested income. Also, USP
would pay residual U.S. tax on its GILTI
inclusion amount in Year 2, without
regard to the application of paragraph
(g)(4)(i) of this section.
(ii) Analysis. The $10x of business
interest expense paid in Year 1 is a
payment amount described in paragraph
(g)(4)(i) of this section because it is
between specified group members,
CFC1 and CFC2. Furthermore, the
requirements of paragraphs (g)(4)(i)(A),
(B), and (C) of this section are satisfied
because the $10x of business interest
expense is incurred with a principal

E:\FR\FM\19JAR4.SGM

19JAR4

khammond on DSKJM1Z7X2PROD with RULES4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
purpose of reducing USP’s Federal
income tax liability; absent the
application of paragraph (g)(4)(i) of this
section, the effect of CFC2 treating the
$10x of business interest expense as
disallowed business interest expense in
Year 1 would be to reduce USP’s
Federal income tax liability in Year 2;
and no CFC group election is in effect
with respect to the specified group in
Year 1. Because the requirements of
paragraphs (g)(4)(i)(A), (B), and (C) of
this section are satisfied, CFC2’s ATI for
Year 1 is increased by the ATI
adjustment amount, or $33.33x, which
is the amount equal to 3 1⁄3 multiplied
by $10x (the lesser of the payment
amount of $10x and the disallowed
business interest expense of $10x). As a
result, the $10x of business interest
expense is not disallowed business
interest expense of CFC2 in Year 1, and
therefore does not give rise to a
disallowed business interest expense
carryforward to Year 2.
(m) Applicability dates—(1) General
applicability date. Except as provided in
paragraph (m)(2) of this section, this
section applies for a taxable year of a
foreign corporation beginning on or after
November 13, 2020.
(2) Exception. Paragraphs (a), (c)(1),
(c)(2)(i) and (ii), and (c)(3) through (5),
(d), (e), (f)(1), (g)(3) and (4), (h), and
(k)(1) through (3), (6) through (8), and
(10) through (32) of this section apply
for a taxable year of a foreign
corporation beginning on or after March
22, 2021.
(3) Early application—(i) Rules for
paragraphs (b) and (g)(1) and (2) of this
section. Taxpayers and their related
parties, within the meaning of sections
267(b) (determined without regard to
section 267(c)(3)) and 707(b)(1), may
choose to apply the rules in paragraphs
(b) and (g)(1) and (2) of this section for
a taxable year beginning after December
31, 2017, and before November 13,
2020, provided that those taxpayers and
their related parties consistently apply
all of those rules and the rules described
in paragraph (m)(4) of this section for
that taxable year. If a taxpayer and its
related parties apply the rules described
in paragraph (m)(4) of this section, as
contained in T.D. 9905 (§§ 1.163(j)–0
through 1.163(j)–11, effective November
13, 2020), they will be considered as
applying the rules described in
paragraph (m)(4) of this section for
purposes of this paragraph (m)(3)(i).
(ii) Rules for certain other paragraphs
in this section. Taxpayers and their
related parties, within the meaning of
sections 267(b) (determined without
regard to section 267(c)(3)) and
707(b)(1), may choose to apply the rules
in paragraphs (a), (c)(1), (c)(2)(i) and (ii),

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

and (c)(3) through (5), (d), (e), (f)(1),
(g)(3) and (4), (h), and (k)(1) through (3),
(6) through (8), and (10) through (32) of
this section for a taxable year beginning
after December 31, 2017, and before
March 22, 2021, provided that those
taxpayers and their related parties
consistently apply all of those rules and
the rules described in paragraph (m)(4)
of this section for that taxable year and
for each subsequent taxable year. If a
taxpayer and its related parties apply
the rules described in paragraph (m)(4)
of this section, as contained in T.D.
9905 (§§ 1.163(j)–0 through 1.163(j)–11,
effective November 13, 2020) as
modified by T.D. 9943 (effective January
13, 2021),they will be considered as
applying the rules described in
paragraph (m)(4) of this section for
purposes of this paragraph (m)(3)(ii).
(4) Additional rules that must be
applied consistently. The rules
described in this paragraph (m)(4) are
the section 163(j) regulations and, if
applicable, §§ 1.263A–9, 1.263A–15,
1.381(c)(20)–1, 1.382–1, 1.382–2, 1.382–
5, 1.382–6, 1.382–7, 1.383–0, 1.383–1,
1.469–9, 1.469–11, 1.704–1, 1.882–5,
1.1362–3, 1.1368–1, 1.1377–1, 1.1502–
13, 1.1502–21, 1.1502–36, 1.1502–79,
1.1502–91 through 1.1502–99 (to the
extent they effectuate the rules of
§§ 1.382–2, 1.382–5, 1.382–6, and
1.383–1) and 1.1504–4.
(5) Election for prior taxable years
and specified periods. Notwithstanding
paragraph (e)(5)(iii) or (h)(5)(i) of this
section, in the case of a specified period
of a specified group or a taxable year of
a stand-alone applicable CFC that ends
with or within a taxable year of a
designated U.S. person ending before
November 13, 2020, a CFC group
election or a safe-harbor election may be
made on an amended Federal income
tax return filed on or before the due date
(taking into account extensions, if any)
of the original Federal income tax return
for the first taxable year of each
designated U.S. person ending on or
after November 13, 2020.
■ Par. 8. Section 1.163(j)–10 is amended
by:
■ 1. Redesignating paragraph
(c)(5)(ii)(D) as paragraph (c)(5)(ii)(D)(1).
■ 2. Adding a subject heading for
paragraph (c)(5)(ii)(D).
■ 3. Adding paragraph (c)(5)(ii)(D)(2).
■ 4. Redesignating paragraph (f) as
paragraph (f)(1).
■ 5. Adding a subject heading for
paragraph (f).
■ 6. Revising the subject heading for
redesignated paragraph (f)(1).
■ 7. Adding paragraph (f)(2).
The revisions and additions read as
follows:

PO 00000

Frm 00045

Fmt 4701

Sfmt 4700

5539

§ 1.163 (j)–10 Allocation of interest
expense, interest income, and other items
of expense and gross income to an
excepted trade or business.

*

*
*
*
*
(c) * * *
(5) * * *
(ii) * * *
(D) Limitations on application of lookthrough rules. * * *
(2) Limitation on application of lookthrough rule to C corporations. Except
as provided in § 1.163(j)–9(h)(4)(iii) and
(iv) (for a REIT or a partnership making
the election under § 1.163(j)–9(h)(1) or
(7), respectively), for purposes of
applying the look-through rules in
paragraph (c)(5)(ii)(B) and (C) of this
section to a non-consolidated C
corporation (upper-tier entity), that
upper-tier entity may not apply these
look-through rules to a lower-tier nonconsolidated C corporation if a principal
purpose for borrowing funds at the
upper-tier entity level or adding an
upper-tier or lower-tier entity to the
ownership structure is increasing the
amount of the taxpayer’s basis allocable
to excepted trades or businesses. For
example, P wholly and directly owns S1
(the upper-tier entity), which wholly
and directly owns S2. Each of S1 and S2
is a non-consolidated C corporation to
which the small business exemption
does not apply, and S2 is engaged in an
excepted trade or business. With a
principal purpose of increasing the
amount of basis allocable to its excepted
trades or businesses, P has S1 (rather
than S2) borrow funds from a third
party. S1 may not look through the stock
of S2 (and may not apply the asset basis
look-through rule described in
paragraph (c)(5)(ii)(B)(2)(iv) of this
section) for purposes of P’s allocation of
its basis in its S1 stock between
excepted and non-excepted trades or
businesses; instead, S1 must treat its
stock in S2 as an asset used in a nonexcepted trade or business for that
purpose. However, S1 may look through
the stock of S2 for purposes of S1’s
allocation of its basis in its S2 stock
between excepted and non-excepted
trades or businesses.
*
*
*
*
*
(f) Applicability dates.
(1) In general. * * *
(2) Paragraph (c)(5)(ii)(D)(2). The
rules contained in paragraph
(c)(5)(ii)(D)(2) of this section apply for
taxable years beginning on or after
March 22, 2021. However, taxpayers
may choose to apply the rules in
paragraph (c)(5)(ii)(D)(2) of this section
to a taxable year beginning after
December 31, 2017, and before March
22, 2021, provided that those taxpayers
and their related parties consistently

E:\FR\FM\19JAR4.SGM

19JAR4

5540

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations

apply all of the rules in the section
163(j) regulations as contained in T.D.
9905 (§§ 1.163(j)–0 through 1.163(j)–11,
effective November 13, 2020) as
modified by T.D. 9943 (effective January
13, 2021), and, if applicable, §§ 1.263A–
9, 1.263A–15, 1.381(c)(20)–1, 1.382–1,
1.382–2, 1.382–5, 1.382–6, 1.383–0,
1.383–1, 1.469–9, 1.704–1, 1.882–5,
1.1362–3, 1.1368–1, 1.1377–1, 1.1502–
13, 1.1502–21, 1.1502–79, 1.1502–91
through 1.1502–99 (to the extent they
effectuate the rules of §§ 1.382–2, 1.382–
5, 1.382–6, and 1.383–1), and 1.1504–4
contained in T.D. 9905 as modified by
T.D. 9943, to that taxable year and each
subsequent taxable year.
■ Par. 9. Section 1.469–4 is amended by
adding paragraph (d)(6) to read as
follows:
§ 1.469–4

Definition of activity.

*

*
*
*
*
(d) * * *
(6) Activities described in section
163(d)(5)(A)(ii). With respect to any
taxpayer that is an individual, trust,
estate, closely held C corporation or
personal service corporation, an activity
described in § 1.469–1T(e)(6) and
subject to section 163(d)(5)(A)(ii) that
involves the conduct of a trade or
business which is not a passive activity
of the taxpayer and with respect to
which the taxpayer does not materially
participate may not be grouped with any
other activity or activities of the
taxpayer, including any other activity
described in § 1.469–1T(e)(6) and
subject to section 163(d)(5)(A)(ii).
*
*
*
*
*
■ Par. 10. Section 1.469–9 is amended
by adding paragraphs (b)(2)(ii)(A) and
(B) to read as follows:
§ 1.469–9 Rules for certain rental real
estate activities.

khammond on DSKJM1Z7X2PROD with RULES4

*

*
*
*
*
(b) * * *
(2) * * *
(ii) * * *
(A) Real property development. The
term real property development means
the maintenance and improvement of
raw land to make the land suitable for
subdivision, further development, or
construction of residential or
commercial buildings, or to establish,
cultivate, maintain or improve
timberlands (that is, land covered by
timber-producing forest). Improvement
of land may include any clearing (such
as through the mechanical separation
and removal of boulders, rocks, brush,
brushwood, and underbrush from the
land); excavation and gradation work;
diversion or redirection of creeks,
streams, rivers, or other sources or
bodies of water; and the installation of

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

roads (including highways, streets,
roads, public sidewalks, and bridges),
utility lines, sewer and drainage
systems, and any other infrastructure
that may be necessary for subdivision,
further development, or construction of
residential or commercial buildings, or
for the establishment, cultivation,
maintenance or improvement of
timberlands.
(B) Real property redevelopment. The
term real property redevelopment means
the demolition, deconstruction,
separation, and removal of existing
buildings, landscaping, and
infrastructure on a parcel of land to
return the land to a raw condition or
otherwise prepare the land for new
development or construction, or for the
establishment and cultivation of new
timberlands.
*
*
*
*
*
■ Par. 11. Section 1.469–11 is amended
by revising paragraphs (a)(1) and (4) to
read as follows:
§ 1.469–11 Applicability date and
transition rules.

(a) * * *
(1) The rules contained in §§ 1.469–1,
1.469–1T, 1.469–2, 1.469–2T, 1.469–3,
1.469–3T, 1.469–4, but not § 1.469–
4(d)(6), 1.469–5 and 1.469–5T, apply for
taxable years ending after May 10, 1992.
The rules contained in § 1.469–4(d)(6)
apply for taxable years beginning on or
after March 22, 2021. However,
taxpayers and their related parties,
within the meaning of sections 267(b)
(determined without regard to section
267(c)(3)) and 707(b)(1), may choose to
apply the rules in § 1.469–4(d)(6) to a
taxable year beginning after December
31, 2017, and before March 22, 2021,
provided that those taxpayers and their
related parties consistently apply all of
the rules in the section 163(j)
regulations as contained in T.D. 9905
(§§ 1.163(j)–0 through 1.163(j)–11,
effective November 13, 2020) as
modified by T.D. 9943 (effective January
13, 2021), and, if applicable, §§ 1.263A–
9, 1.263A–15, 1.381(c)(20)–1, 1.382–1,
1.382–2, 1.382–5, 1.382–6, 1.383–0,
1.383–1, 1.469–9, 1.704–1, 1.882–5,
1.1362–3, 1.1368–1, 1.1377–1, 1.1502–
13, 1.1502–21, 1.1502–79, 1.1502–91
through 1.1502–99 (to the extent they
effectuate the rules of §§ 1.382–2, 1.382–
5, 1.382–6, and 1.383–1), and 1.1504–4
contained in T.D. 9905 as modified by
T.D. 9943, to that taxable year and each
subsequent taxable year.
*
*
*
*
*
(4) The rules contained in § 1.469–
9(b)(2), other than paragraphs
(b)(2)(ii)(A) and (B), apply to taxable
years beginning on or after November

PO 00000

Frm 00046

Fmt 4701

Sfmt 4700

13, 2020. Section 1.469–9(b)(2)(ii)(A)
and (B) applies to taxable years
beginning on or after March 22, 2021.
However, taxpayers and their related
parties, within the meaning of sections
267(b) (determined without regard to
section 267(c)(3)) and 707(b)(1), may
choose to apply the rules in § 1.469–
9(b)(2), other than paragraphs
(b)(2)(ii)(A) and (B), to a taxable year
beginning after December 31, 2017, and
on or before November 13, 2020 and
may choose to apply the rules in
§ 1.469–9(b)(2)(ii)(A) and (B) to taxable
years beginning after December 31,
2017, and before March 22, 2021,
provided that those taxpayers and their
related parties consistently apply all of
the rules in the section 163(j)
regulations contained in T.D. 9905
(§§ 1.163(j)–0 through 1.163(j)–11,
effective November 13, 2020) as
modified by T.D. 9943 (effective January
13, 2021), and, if applicable, §§ 1.263A–
9, 1.263A–15, 1.381(c)(20)–1, 1.382–1,
1.382–2, 1.382–5, 1.382–6, 1.383–0,
1.383–1, 1.469–9, 1.704–1, 1.882–5,
1.1362–3, 1.1368–1, 1.1377–1, 1.1502–
13, 1.1502–21, 1.1502–79, 1.1502–91
through 1.1502–99 (to the extent they
effectuate the rules of §§ 1.382–2, 1.382–
5, 1.382–6, and 1.383–1), and 1.1504–4,
contained in T.D. 9905 as modified by
T.D. 9943, to that taxable year and each
subsequent taxable year.
*
*
*
*
*
■ Par. 12. Section 1.1256(e)–2 is added
to read as follows:
§ 1.1256 (e)–2

Special rules for syndicates.

(a) Allocation of losses. For purposes
of section 1256(e)(3), syndicate means
any partnership or other entity (other
than a corporation that is not an S
corporation) if more than 35 percent of
the losses of such entity during the
taxable year are allocated to limited
partners or limited entrepreneurs
(within the meaning of section
461(k)(4)).
(b) Determination of loss amount. For
purposes of section 1256(e)(3), the
amount of losses to be allocated under
paragraph (a) of this section is
calculated without regard to section
163(j).
(c) Example. The following example
illustrates the rules in this section:
(1) Facts. Entity is an S corporation
that is equally owned by individuals A
and B. A provides all of the goods and
services provided by Entity. B provided
all of the capital for Entity but does not
participate in Entity’s business. For the
current taxable year, Entity has gross
receipts of $5,000,000, non-interest
expenses of $4,500,000, and interest
expense of $600,000.

E:\FR\FM\19JAR4.SGM

19JAR4

Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
(2) Analysis. Under paragraph (b) of
this section, Entity has a net loss of
$100,000 ($5,000,000 minus $5,100,000)
for the current taxable year. One half (50
percent) of this loss is allocated to B, a
limited owner. Therefore, for the current
taxable year, Entity is a syndicate within
the meaning of section 1256(e)(3)(B).
(d) Applicability date. This section
applies to taxable years beginning on or

after March 22, 2021. However,
taxpayers and their related parties,
within the meaning of sections 267(b)
(determined without regard to section
267(c)(3)) and 707(b)(1), may choose to
apply the rules in this section for a
taxable year beginning after December
31, 2017, and before March 22, 2021,
provided that those taxpayers and their
related parties consistently apply all of

the rules of this section to that taxable
year and each subsequent taxable year.
Sunita Lough,
Deputy Commissioner for Services and
Enforcement.
Approved: December 30, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2021–00150 Filed 1–13–21; 4:15 pm]

khammond on DSKJM1Z7X2PROD with RULES4

BILLING CODE 4830–01–P

VerDate Sep<11>2014

19:59 Jan 17, 2021

Jkt 253001

PO 00000

Frm 00047

Fmt 4701

Sfmt 9990

5541

E:\FR\FM\19JAR4.SGM

19JAR4