Part I. Rulings — Internal Revenue Bulletin 2016-10

T.D. 9749

JOINT BOARD FOR THE ENROLLMENT OF ACTUARIES 20 CFR Part 900

Regulations Governing Organization of the Joint Board for the Enrollment of Actuaries

AGENCY: Joint Board for the Enrollment of Actuaries.

ACTION: Final rule.

SUMMARY: This document contains final regulations relating to the organization of the Joint Board for the Enrollment of Actuaries. The regulations are being amended in order to conform one provision of the regulations to the Bylaws of the Joint Board. These regulations solely address the internal management of the Joint Board and do not affect pension plans, plan participants, actuaries, or the general public.

DATES: Effective date : These regulations are effective April 25, 2016.

FOR FURTHER INFORMATION CONTACT: Patrick McDonough, Executive Director, Joint Board for the Enrollment of Actuaries, at (703) 414-2173 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation

The Joint Board for the Enrollment of Actuaries was established on October 31, 1974 pursuant to section 3041 of the Employee Retirement Income Security Act of 1974 (88 Stat. 829), Public Law 93–406 (ERISA). Section 3041 of ERISA provides that the Secretary of Labor and the Secretary of the Treasury shall, not later than the last day of the first calendar month beginning after the date of enactment of ERISA, establish a Joint Board for the Enrollment of Actuaries (Joint Board).

Regulations under ERISA section 3041 were published in the Federal Register on

April 30, 1975 (40 FR 18776) and are currently located in the Code of Federal Regulations at 20 CFR part 900 (the 1975 Joint Board regulations). These regulations provide that, pursuant to the Bylaws, three members are appointed by the Secretary of the Treasury, two members are appointed by the Secretary of Labor, the Chairman of the Joint Board is to be elected from among the Treasury Department representatives, and the Secretary is to be elected from among the Labor Department representatives.

On April 27, 1981, the Secretaries of Treasury and Labor approved restated Bylaws of the Joint Board (the 1981 Bylaws). Sections 3(b) and 3(c) of the 1981 Bylaws provide that the Chairman and Secretary, respectively, will be elected for a one-year term by the Joint Board from among its members, eliminating the requirement that the Chairman be a Treasury Department representative and the Secretary be a Labor Department representative.

These final regulations amend § 900.3 of the 1975 Joint Board regulations in order to conform the regulations to the 1981 Bylaws.

Special Analyses

These regulations are being published as a final rule because the amendments apply solely to the Joint Board’s organization and management. Moreover, the Joint Board finds good cause that these changes do not impose any requirements on any member of the public. These amendments are the most efficient means for the Joint Board to harmonize the regulations and Bylaws involving the Board’s internal election procedure.

Accordingly, pursuant to 5 U.S.C. 553(a)(2), 553(b)(3)(A), and 553(b)(3)(B), the Joint Board finds good cause that prior notice and other public procedures with respect to this rule are unnecessary. Because a notice of proposed rulemaking is not required, the provisions of the Regulatory Flexibility Act, 5 U.S.C. 601–612, do not apply.

This rule is not a significant regulatory action pursuant to Executive Order 12866,

as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact assessment is not required.

Adoption of Amendments to the Regulations

Accordingly, 20 CFR part 900 is amended as follows:

PART 900—STATEMENT OF ORGANIZATION

Paragraph 1. The authority citation for part 900 continues to read as follows:

Authority: Sec. 3041–2, Pub. L. 93–406, 88 Stat. 829, 1002 (29 U.S.C. 1241–2). Par. 2. Section 900.3 is revised to read as follows:

§ 900.3 Composition .

Pursuant to the Bylaws, the Joint Board consists of three members appointed by the Secretary of the Treasury and two members appointed by the Secretary of Labor. The Board elects a Chairman and a Secretary from among the Department of the Treasury and the Department of Labor members. The Pension Benefit Guaranty Corporation may designate a non-voting representative to sit with, and participate in, the discussions of the Board. All decisions of the Board are made by simple majority vote.

Approved: February 12, 2016.

Carolyn E. Zimmerman, Chairman, Joint Board for the

Enrollment of Actuaries.

(Filed by the Office of the Federal Register on February 22, 2016, 8:45 a.m., and published in the issue of the Federal Register for February 23, 2016, 81 F.R. 03655)

Bulletin No. 2016–10 373 March 7, 2016

T.D. 9750

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Reporting of Original Issue Discount on Tax-Exempt Obligations; Basis and Transfer Reporting by Securities Brokers for Debt Instruments and Options

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to information reporting by brokers for transactions involving debt instruments and options, including the reporting of original issue discount (OID) on tax-exempt obligations, the treatment of certain holder elections for reporting a taxpayer’s adjusted basis in a debt instrument, and transfer reporting for section 1256 options and debt instruments. The regulations in this document provide guidance to brokers and payors and to their customers.

DATES: Effective date : These regulations are effective on February 18, 2016.

Applicability dates : For the dates of applicability, see §§ 1.6045–1(n)(11)(i)(A), 1.6045–1(n)(11)(i)(B), 1.6045–1(n)(12)(ii), 1.6045A–1(b)(3)(x), 1.6045A–1(b)(4)(iv), and 1.6049–10(c).

FOR FURTHER INFORMATION CONTACT: Pamela Lew of the Office of the Associate Chief Counsel (Financial Institutions and Products) at (202) 3177053 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in §§ 1.6045–1(n) and 1.6045A– 1(b) of these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control

number 1545-2186. The collection of information is required to comply with the provisions of section 403 of the Energy Improvement and Extension Act of 2008, Division B of Public Law 110–343 (122 Stat. 3765, 3854 (2008)) (the Act). The information required under § 1.6045–1(n) minimizes the need for reconciliation between information reported by a broker to both a customer and the IRS and the amounts reported on the customer’s tax return. The information required under § 1.6045A–1 is necessary to allow brokers that effect sales of transferred section 1256 options and debt instruments that are covered securities to determine and report the adjusted basis of these securities in compliance with section 6045(g) of the Internal Revenue Code (Code). The burden for the collection of information contained in § 1.6049–10 of these final regulations will be reflected in the burden for Form 1099–OID, Original Issue Discount (OMB control number 1545-0117), when it is revised to request the additional information in the regulations. This information is required to enable the IRS to verify that a taxpayer is reporting the correct amount of tax-exempt interest each year for alternative minimum tax and other purposes. In addition, because this information is used to determine a taxpayer’s adjusted basis in a debt instrument for purposes of section 6045(g), this information is required to enable the IRS to verify that a taxpayer is reporting the correct amount of gain or loss upon the sale of a tax-exempt obligation.

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 control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by section 6103.

Background

Section 6045 generally requires a broker to report gross proceeds upon the sale of a security. Section 6045 was amended by section 403 of the Act to require the

reporting of adjusted basis for a covered security and whether any gain or loss upon the sale of the security is long-term or short-term. In addition, the Act added section 6045A of the Code, which requires certain information to be reported in connection with a transfer of a covered security to another broker, and section 6045B of the Code, which requires an issuer of a specified security to file a return relating to certain actions that affect the basis of the security. Section 6049 requires the reporting of interest payments (including accruals of OID treated as payments).

On November 25, 2011, the Treasury Department and the IRS published in the Federal Register proposed regulations relating to information reporting by brokers, transferors, and issuers of securities under sections 6045, 6045A, and 6045B for debt instruments, options, and securities futures contracts (REG–102988–11 at 76 FR 72652) (the 2011 proposed basis reporting regulations). On April 18, 2013, the Treasury Department and the IRS published in the Federal Register final regulations under sections 6045, 6045A, and 6045B (the 2013 final basis reporting regulations) and temporary regulations relating to information reporting for bond premium and acquisition premium under section 6049 (TD 9616 at 78 FR 23116) (the 2013 temporary interest reporting regulations). A notice of proposed rulemaking cross-referencing the 2013 temporary interest reporting regulations also was published in the Federal Register on April 18, 2013 (REG–154563–12 at 78 FR 23183) (the 2013 proposed interest reporting regulations).

On March 13, 2015, the Treasury Department and the IRS published in the Federal Register final regulations under sections 6045, 6045A, and 6049 (TD 9713 at 80 FR 13233) (the 2015 final basis reporting regulations, and, together with the 2013 final basis reporting regulations, the final basis reporting regulations). A number of commenters on the 2013 final basis reporting regulations requested changes to the basis reporting rules relating to certain debt elections. In addition, for purposes of section 6045A, several commenters requested that a transferring broker provide additional information on the transfer statement for a debt instru

March 7, 2016 374 Bulletin No. 2016–10

ment and that a transferring broker provide a transfer statement for a section 1256 option contract. Several commenters also suggested that the rules for reporting OID associated with a tax-exempt obligation be conformed to the rules regarding basis reporting for those debt instruments. Accordingly, TD 9713 also included temporary regulations relating to information reporting for debt instruments under sections 6045, 6045A, and 6049 (the 2015 temporary reporting regulations). A notice of proposed rulemaking cross-referencing the 2015 temporary reporting regulations was published in the Federal Register on March 13, 2015 (REG–143040–14 at 80 FR 13292) (the 2015 proposed reporting regulations). A correction to § 1.6045A– 1T(f) was published on June 5, 2015 (TD 9713 at 80 FR 31995), delaying the effective date of § 1.6045A–1T(f) from June 30, 2015, to January 1, 2016. Written comments were received on the 2015 proposed reporting regulations and are summarized below. No public hearing was requested or held. In general, these final regulations adopt the provisions of the 2015 proposed reporting regulations. These final regulations also remove the corresponding 2015 temporary reporting regulations.

After the publication of the 2015 final basis reporting regulations, the Treasury Department and the IRS received written comments on certain provisions of the final basis reporting regulations. In response to these comments, this document contains final regulations under section 6045 relating to the treatment of certain debt instruments as non-covered securities.

The written comments on the 2015 proposed reporting regulations and the 2015 final basis reporting regulations are available for public inspection at http:// www.regulations.gov or upon request.

Explanation of Provisions

A. Constant yield election for accruals of market discount .

Under section 1276(b)(2), a customer may elect to accrue market discount on a constant yield method rather than a ratable method. The election may be made on a debt instrument by debt instrument basis and must be made for the earliest taxable

year for which the customer is required to determine accrued market discount. The election may not be revoked once it has been made. In most cases, the use of a constant yield method backloads market discount and is therefore more taxpayer favorable than the use of a ratable method.

In response to comments on the 2013 final basis reporting regulations (which required the broker to assume that the customer had not made a constant yield election), § 1.6045–1T(n)(11)(i)(B) of the 2015 temporary reporting regulations provided that for a debt instrument acquired on or after January 1, 2015, brokers are required to assume that a customer has elected to determine accrued market discount using a constant yield method unless the customer notifies the broker otherwise. A customer that does not want to use a constant yield method to determine accrued market discount must, by the end of the calendar year in which the customer acquired the debt instrument in an account with the broker, notify the broker in writing that the customer wants the broker to use the ratable method to determine accrued market discount.

No comments were received on the substantive rules in § 1.6045–1T(n)(11)(i)(B). Accordingly, the rules in the final regulations in this document are the same as the rules in § 1.6045–1T(n)(11)(i)(B). Several commenters requested permission to apply the default constant yield method to debt instruments acquired on or after January 1, 2014, which was the first date for which a broker was required to report accrued market discount under section 6045, provided that the broker had not reported accrued market discount to a customer for the 2014 calendar year using the ratable method. According to the commenters, the use of a single method to compute market discount accruals for all covered securities with market discount would simplify the calculation of accrued market discount and the reporting of this information to their customers.

The final regulations in this document permit, but do not require, a broker to apply the default constant yield method to a debt instrument acquired on or after January 1, 2014, and before January 1, 2015, provided the broker was not informed that the customer had made a section 1278(b) election (the election to in

clude market discount in income as it accrues rather than upon a disposition or receipt of a partial principal payment), there were no principal payments on the debt instrument during the 2014 calendar year, and the broker therefore had not reported accrued market discount to the customer for the 2014 calendar year using the ratable method.

B. Transfer statements .

Under § 1.6045A–1T(e) of the 2015 temporary reporting regulations, a transferring broker is required to provide a transfer statement upon the transfer of a section 1256 option to ensure that the receiving broker has all of the information required for purposes of section 6045. The temporary regulations provide that a transfer statement is required for the transfer of a section 1256 option that occurs on or after January 1, 2016. The temporary regulations also list the data specific to section 1256 options that must be provided.

One commenter asserted that including the fair market value information on a transfer statement for a section 1256 option is unnecessary because the receiving broker can look up the information if it is needed and suggested saving space on the transfer statement by eliminating this data item. After considering the suggestion, the Treasury Department and IRS decline to adopt this suggestion. Providing fair market value information on a transfer statement will help ensure that the receiving broker is reporting an amount of realized but unrecognized gain or loss from the prior year that is consistent with the amount reported in the prior year by the transferring broker, which will minimize the possibility of double counting or omission of gain or loss.

No other comments were received on § 1.6045A–1T of the 2015 temporary reporting regulations. The rules in the final regulations in this document are substantively the same as the rules in the 2015 temporary regulations. However, the rules in § 1.6045A–1T(e) are in § 1.6045A– 1(b)(4)(iv) of the final regulations in this document and the rules in § 1.6045A–1T(f) are in § 1.6045A–1(b)(3)(x) of the final regulations in this document.

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C. Reporting of OID on a tax-exempt obligation .

To coordinate the reporting of OID under section 6049 with the reporting of basis for tax-exempt obligations under section 6045, § 1.6049–10T of the 2015 temporary reporting regulations provides that a payor must report under section 6049 the daily portions of OID on a taxexempt obligation. The daily portions of OID are determined as if section 1272 and § 1.1272–1 applied to a tax-exempt obligation. A payor must determine whether a tax-exempt obligation was issued with OID and the amount that accrues for each relevant period. In addition, OID on a tax-exempt obligation is determined without regard to the de minimis rule in section 1273(a)(3) and § 1.1273–1(d). Because the temporary regulations require the reporting of OID, payors also must report amortized acquisition premium (which offsets OID) on a tax-exempt obligation. A broker may report either a gross amount for both OID and amortized acquisition premium, or a net amount of OID that reflects the offset of the OID by the amount of amortized acquisition premium allocable to the OID. Section 1.6049–10T of the 2015 temporary reporting regulations applies to a taxexempt obligation acquired on or after January 1, 2017.

No comments were received on the substantive rules in § 1.6049–10T. Accordingly, the rules in the final regulations in this document are the same as the rules in § 1.6049–10T. However, several commenters requested that, for taxable years beginning after December 31, 2016, a broker be permitted to report on Form 1099– OID the OID and acquisition premium on a tax-exempt obligation that is a covered security acquired before January 1, 2017. According to the commenters, customers might be confused because of the difference between the date that a tax-exempt obligation generally became a covered security (that is, an obligation acquired on or after January 1, 2014), and the date after which a tax-exempt obligation that is a covered security becomes subject to mandatory reporting of OID and acquisition premium (that is, an obligation acquired on or after January 1, 2017). Because a broker is required to track basis for a

tax-exempt obligation that is a covered security for purposes of section 6045, the broker is responsible for calculating OID on a tax-exempt obligation acquired on or after January 1, 2014, even if the broker has no obligation to report the obligation’s OID to the customer for purposes of section 6049. To simplify the reporting of OID and acquisition premium and to minimize any customer confusion, the commenters requested that the final regulations permit a broker to report OID and acquisition premium on all tax-exempt bonds that are covered securities.

After considering the requests, for taxable years beginning after December 31, 2016, the final regulations in this document permit, but do not require, a broker to report OID and acquisition premium for a tax-exempt obligation that is a covered security acquired before January 1, 2017.

D. Treatment of certain debt instruments subject to January 1, 2016, reporting .

Under § 1.6045–1(n)(3) of the 2013 final basis reporting regulations, certain debt instruments are subject to basis reporting only if the debt instrument is acquired by a customer on or after January 1, 2016. For example, § 1.6045–1(n)(3) applies to a contingent payment debt instrument, a debt instrument that is not issued by a U.S. issuer, and a debt instrument the terms of which are not reasonably available to a broker within 90 days of acquisition of the debt instrument by the customer.

Several commenters on the 2013 final basis reporting regulations requested guidance for a debt instrument the terms of which are not reasonably available to the broker. The commenters stated that they would not have the information necessary to comply with the information reporting rules for these instruments. Several commenters stated that information for a debt instrument issued by a non-U.S. issuer and for a tax-exempt obligation is particularly difficult to obtain. One commenter noted that under SEC Release 34–67908, issued on September 21, 2012 (77 FR 59427), issuers of municipal securities are required to provide certain data to the Electronic Municipal Market Access system set up by the Municipal Securities Rulemaking Board for new issu

ances, but there is no requirement to file similar information for issuances already outstanding as of the November 1, 2012, effective date of the release.

The Treasury Department and the IRS agree that a broker may not always be able to obtain information for a debt instrument issued by a non-U.S. issuer or for a tax-exempt obligation issued before January 1, 2014. The final regulations in this document therefore provide that a debt instrument issued by a non-U.S. issuer or a tax-exempt obligation issued before January 1, 2014, is treated as a noncovered security (and, therefore, is not subject to basis reporting under section 6045) if the terms of the debt instrument are not reasonably available to the broker within 90 days of the date the debt instrument was acquired by the customer. The Treasury Department and the IRS believe that the information necessary for section 6045 compliance should be available for other debt instruments.

Applicability Dates

The final regulations under section 6045 in this document (other than § 1.6045–1(n)(12)) apply to a debt instrument acquired on or after January 1, 2015. Section 1.6045–1(n)(12) applies to a debt instrument acquired on or after February 18, 2016. The final regulations under section 6049 in this document apply to a tax-exempt obligation that is a covered security acquired on or after January 1, 2017. The final regulations under section 6045A in this document apply to a transfer of a section 1256 option that occurs on or after January 1, 2016, and to a transfer of a debt instrument that occurs on or after January 1, 2016.

Special Analyses

Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations.

It is hereby certified that the final regulations in this document will not have a significant economic impact on a substan

March 7, 2016 376 Bulletin No. 2016–10

tial number of small entities. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. It is anticipated that the requirements in the final regulations in this document, except in the case of the notification by a customer discussed in the next paragraph, will fall only on financial services firms with annual receipts greater than the $38.5 million threshold and, therefore, on no small entities.

Section 403(a) of the Act requires a broker to report the adjusted basis of a debt instrument that is a covered security. Although a holder of a debt instrument (customer) is permitted to make a number of elections that affect how basis is computed, a broker only is required to take into account specified elections in reporting the adjusted basis of a debt instrument, including the election under section 1276(b)(2) to determine accruals of market discount on a constant yield method. Under the 2013 final basis reporting regulations, a customer was required to notify the broker that the customer had made the section 1276(b)(2) election. However, § 1.6045–1(n)(11)(i)(B) requires a broker to take into account the election under section 1276(b)(2) in reporting a debt instrument’s adjusted basis unless the customer timely notifies the broker that the customer has not made the election. The notification must be in writing, which includes a writing in electronic format. In most cases, this election results in a more taxpayer-favorable result than the default ratable method. It is anticipated that this collection of information in the regulations will not fall on a substantial number of small entities, especially because fewer customers will need to notify brokers about the election. Further, the regulations implement the statutory requirements for reporting adjusted basis under section 403 of the Act. Moreover, any economic impact is expected to be minimal because it should take a customer no more than seven minutes to satisfy the informationsharing requirement in these regulations.

Section 403(c) of the Act added section 6045A, which requires applicable persons to provide a transfer statement in connection with the transfer of custody of a covered security. Section 1.6045A–1 effectuates the Act by giving the broker who

receives the transfer statement the information necessary to determine and report adjusted basis and whether any gain or loss with respect to a debt instrument or section 1256 option is long-term or shortterm as required by section 6045 when the security is subsequently sold. Consequently, § 1.6045A–1 does not add to the impact on small entities imposed by the statutory provisions. Instead, the regulations limit the information to be reported to only those items necessary to effectuate the statutory scheme.

The information required under § 1.6049–10 will enable the IRS to verify that a taxpayer is reporting the correct amount of tax-exempt interest each year for alternative minimum tax and other purposes. In addition, because this information is used to determine a taxpayer’s adjusted basis in a debt instrument for purposes of section 6045(g), this information is required to enable the IRS to verify that a taxpayer is reporting the correct amount of gain or loss upon the sale of a tax-exempt obligation. Any economic impact on small entities is expected to be minimal because a broker already is required to determine the accruals of OID and acquisition premium for purposes of determining and reporting a customer’s adjusted basis on Form 1099–B under section 6045. Moreover, any effect on small entities of the rules in the final regulations flows from section 6049 and section 403 of the Act. Therefore, because the final regulations in this document will not have a significant economic impact on a substantial number of small entities, a regulatory flexibility analysis is not required.

Pursuant to section 7805(f) of the Internal Revenue Code, the proposed regulations preceding the final regulations in this document were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses. No comments were received.

Drafting Information

The principal author of these regulations is Pamela Lew, Office of Associate Chief Counsel (Financial Institutions and Products). However, other personnel from the Treasury Department and the IRS participated in their development.

Adoption of 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 is amended by removing the entries for §§ 1.6045A–1T and 1.6049–10T and adding an entry for § 1.6049–10 to read in part as follows:

Authority: 26 U.S.C. 7805 - - Section 1.6049–10 also issued under 26 U.S.C. 6049(a). - - Par. 2. Section 1.6045–1 is amended by:

Adding a sentence at the end of paragraph (n)(4) introductory text.
Revising the last sentence in paragraph (n)(4)(iv).
Revising the last sentence in paragraph (n)(5)(i).
Revising the second sentence in paragraph (n)(6)(i).
Adding a sentence at the end of paragraph (n)(6)(ii).
Revising the last sentence in paragraph (n)(7)(iii).
Revising “§ 1.6049–9T” to read “§ 1.6049–9” in two places in paragraph (n)(9).
Revising paragraph (n)(11).
Adding paragraph (n)(12). The revisions and additions read as follows:

§ 1.6045–1 Returns of information of brokers and barter exchanges .

- - - (n) - - (4) - - - See paragraph (n)(11) of this section for the treatment of an election described in paragraph (n)(4)(iii) of this section (election to accrue market discount based on a constant yield) and an election described in paragraph (n)(4)(iv) of this section (election to treat all interest as OID).

(iv) - - - However, see paragraph (n)(11)(i)(A) of this section for a debt instrument acquired on or after January 1, 2014.

- - - (5) - -

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(i) - - - However, see paragraph (n)(11) of this section for the treatment of an election described in paragraph (n)(4)(iii) of this section (election to accrue market discount based on a constant yield) and an election described in paragraph (n)(4)(iv) of this section (election to treat all interest as OID).

- - - (6) - - (i) - - - See paragraphs (n)(5) and (n)(11)(i)(B) of this section to determine whether the amount reported should take into account a customer election under section 1276(b)(2). - - (ii) - - - See paragraphs (n)(5) and (n)(11)(i)(B) of this section to determine whether the amount reported should take into account a customer election under section 1276(b)(2).

(7) - - (iii) - - - However, if a broker took into account a customer election under § 1.1272–3 in 2014, the broker must decrease the customer’s basis in the debt instrument by the amount of acquisition premium that is taken into account each year to reduce the amount of the original issue discount that is otherwise includible in the customer’s income for that year in accordance with §§ 1.1272–2(b)(5) and 1.1272–3.

- - - (11) Additional rules for certain holder elections —(i) In general . For purposes of this section, the rules in this paragraph (n)(11) apply notwithstanding any other rule in paragraph (n) of this section.

(A) Election to treat all interest as OID . A broker must report the information required under paragraph (d) of this section without taking into account any election described in paragraph (n)(4)(iv) of this section (the election to treat all interest as OID in § 1.1272–3). As a result, for example, a broker must determine the amount of any acquisition premium taken into account each year for purposes of this section in accordance with § 1.1272–2(b)(4). This paragraph (n)(11)(i)(A) applies to a debt instrument acquired on or after January 1, 2015. A broker, however, may rely on this paragraph (n)(11)(i)(A) for a debt instrument acquired on or after January 1, 2014, and before January 1, 2015.

(B) Election to accrue market dis- count based on a constant yield . A broker must report the information required under paragraph (d) of this section by assuming that a customer has made the election described in paragraph (n)(4)(iii) of this section (the election to accrue market discount based on a constant yield). However, if a customer notifies a broker in writing that the customer does not want the broker to take into account this election, the broker must report the information required under paragraph (d) of this section without taking into account this election. The customer must provide this notification to the broker by the end of the calendar year in which the customer acquired the debt instrument in an account with the broker. This paragraph (n)(11)(i)(B) applies to a debt instrument acquired on or after January 1, 2015. A broker, however, may rely on this paragraph (n)(11)(i)(B) to report accrued market discount for a debt instrument that is a covered security acquired on or after January 1, 2014, and before January 1, 2015, if the customer had not informed the broker that the customer had made a section 1278(b) election and there were no principal payments on the debt instrument during this period.

(ii) [Reserved]. (12) Certain debt instruments treated as noncovered securities —(i) In general . Notwithstanding paragraph (a)(15) of this section, a debt instrument is treated as a noncovered security for purposes of this section if the terms of the debt instrument are not reasonably available to the broker within 90 days of the date the debt instrument was acquired by the customer and the debt instrument is either—

(A) A debt instrument issued by a nonU.S. issuer; or

(B) A tax-exempt obligation issued before January 1, 2014.

(ii) Effective/applicability date . Paragraph (n)(12)(i) of this section applies to a debt instrument described in paragraph (n)(12)(i)(A) or (B) of this section that is acquired on or after February 18, 2016. However, a broker may rely on paragraph (n)(12)(i) of this section for a debt instrument described in paragraph (n)(12)(i)(A)

or (B) of this section acquired before February 18, 2016.

- - - Par. 3. Section 1.6045–1T is amended by revising paragraphs (h) through (p) to read as follows:

§ 1.6045–1T Returns of information of brokers and barter exchanges (temporary) .

- - - (h) through (p) [Reserved]. For further guidance, see § 1.6045–1(h) through (p).
- - - Par. 4. Section 1.6045A–1 is amended by:

Removing “and” at the end of paragraph (b)(3)(viii), removing the period at the end of paragraph (b)(3)(ix) and adding “; and” in its place, and adding paragraph (b)(3)(x).
Removing “and” at the end of paragraph (b)(4)(ii), removing the period at the end of paragraph (b)(4)(iii) and adding “; and” in its place, and adding paragraph (b)(4)(iv).
Removing paragraphs (e) and (f). The additions read as follows:

§ 1.6045A–1 Statements of information required in connection with transfers of securities .

- - - (b) - - (3) - - (x) For a transfer that occurs on or after January 1, 2016, the last date on or before the transfer date that the transferor made an adjustment for a particular item (for example, the last date on or before the transfer date that bond premium was amortized). A broker, however, may rely on this paragraph (b)(3)(x) for a transfer of a covered security that occurs on or after June 30, 2015, and before January 1,

(4) - - (iv) For a transfer of an option described in § 1.6045–1(m)(3) (section 1256 option) that occurs on or after January 1, 2016, the original basis of the option and the fair market value of the option as of the end of the prior calendar year.

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§ 1.6045A–1T [Removed]

Par. 5. Section 1.6045A–1T is removed.

Par. 6. Section 1.6049–10 is added to read as follows:

§ 1.6049–10 Reporting of original issue discount on a tax-exempt obligation .

(a) In general . For purposes of section 6049, a payor (as defined in § 1.6049– 4(a)(2)) of original issue discount (OID) on a tax-exempt obligation (as defined in section 1288(b)(2)) is required to report the daily portions of OID on the obligation as if the daily portions of OID that accrued during a calendar year were paid to the holder (or holders) of the obligation in the calendar year. The amount of the daily portions of OID that accrues during a calendar year is determined as if section 1272 and § 1.1272–1 applied to a taxexempt obligation. Notwithstanding any other rule in section 6049 and the regulations thereunder, a payor must determine whether a tax-exempt obligation was issued with OID and the amount of OID that accrues for each relevant period. As prescribed by section 1288(b)(1), OID on a tax-exempt obligation is determined without regard to the de minimis rules in section 1273(a)(3) and § 1.1273–1(d).

(b) Acquisition premium . A payor is required to report acquisition premium amortization on a tax-exempt obligation in accordance with the rules in § 1.6049–9(c) as if section 1272 applied to a tax-exempt obligation. See paragraph (a) of this section to determine the amount of OID allocable to an accrual period.

(c) Effective/applicability date . This section applies to a tax-exempt obligation that is a covered security (within the meaning of § 1.6045–1(a)(15) and (n)(12)) acquired on or after January 1, 2017. For a taxable year beginning after December 31, 2016, a broker, however, may rely on this section to report OID and acquisition premium for a tax-exempt obligation that is a covered security acquired before January 1, 2017.

§ 1.6049–10T [Removed]

Par. 7. Section 1.6049–10T is removed.

John Dalrymple, Deputy Commissioner for Services and Enforcement.

Approved: January 13, 2016.

Mark J. Mazur, Assistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on February 17, 2016, 8:45 a.m., and published in the issue of the Federal Register for February 18, 2016, 81 F.R. 8149)

T.D. 9751

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

PATH Act Changes to Section 1445

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final and temporary regulations relating to the taxation of, and withholding on, foreign persons upon certain dispositions of, and distributions with respect to, United States real property interests (USRPIs). The regulations reflect changes made by the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). In addition, the regulations update certain mailing addresses listed in regulations under sections 897 and 1445. These regulations affect certain holders of USRPIs and withholding agents that are required to withhold tax on certain dispositions of, and distributions with respect to, USRPIs. This document also requests comments on certain other aspects of the PATH Act that apply to dispositions of, and distributions with respect to, USRPIs.

DATES: Effective date : These regulations are effective on February 19, 2016.

Applicability date : For dates of applicability, see §§ 1.1445–1(h), 1.1445–2(e), and 1.1445–5(h).

ADDRESSES: Send submissions to: CC: PA:LPD:PR (REG–101329–16), room

5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be handdelivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA: LPD:PR (REG–101329–16), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224, or sent electronically via the Federal eRulemaking Portal at http://www.regulations. gov (IRS REG–101329–16).

FOR FURTHER INFORMATION CONTACT: Milton M. Cahn or David A. Levine, (202) 317-6937; concerning submissions of comments, Regina Johnson, (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations were previously reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) under control numbers 1545-0123, 1545-0902, and 1545-1797 in conjunction with Treasury decisions 7999 (49 FR 50689, Dec. 31, 1984), 8113 (51 FR 46620, Dec. 24, 1986), and 9082 (68 FR 46081, Aug. 5, 2003), respectively. There are no proposals for substantive changes to these collections of information.

Books or records relating to a collection of information must be retained as long as their contents might become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Background

Section 897(a)(1) provides, in general, that gain or loss of a nonresident alien individual or foreign corporation from the disposition of a United States real property interest (USRPI) shall be taken into account under section 871(b)(1) or 882(a)(1), as applicable, as if the nonres

Bulletin No. 2016–10 379 March 7, 2016

ident alien individual or foreign corporation were engaged in a trade or business within the United States during the taxable year and such gain or loss were effectively connected with that trade or business.

Section 897(c)(1)(A) defines a USRPI to include any interest (other than solely as a creditor) in any domestic corporation unless the taxpayer establishes that such corporation was at no time a United States real property holding corporation (USRPHC) during the applicable testing period (generally, the five-year period ending on the date of the disposition of the USRPHC). Under section 897(c)(2), a USRPHC means any corporation if the fair market value of its USRPIs equals or exceeds 50 percent of the total fair market value of its USRPIs, its interests in real property located outside the United States, and any other assets that are used or held for use in a trade or business. However, section 897(c)(1)(B) generally provides that an interest in a corporation is not a USRPI if the corporation does not hold USRPIs as of the date its stock is sold and the corporation disposed of all of the USRPIs that it held during the applicable testing period in transactions in which the full amount of gain, if any, was recognized (the cleansing exception).

Section 1445(a) generally imposes a withholding tax obligation on the transferee when a foreign person disposes of a USRPI. Section 1445(f)(3) provides that a foreign person is any person other than a United States person. Section 1445(e)(3) generally imposes a withholding obligation on a domestic corporation that is a USRPHC on distributions to foreign persons to which section 302 or sections 331 through 346 apply. Section 1445(e)(3) also provides that similar rules are applicable to distributions to foreign persons under section 301 that are not made out of the earnings and profits of the domestic corporation. Section 1445(e)(4) generally requires a domestic or foreign partnership, the trustee of a domestic or foreign trust, or the executor of a domestic or foreign estate to withhold on the distribution of any USRPI to a partner or beneficiary who is a foreign person. Under section 1445(e)(5), the transferee of a partnership interest or of a beneficial interest in a trust or estate is required to deduct and withhold tax

to the extent provided in regulations. Any amounts withheld under section 1445 are credited against the foreign transferor’s U.S. tax liability. § 1.1445–1(f)(1).

Before the enactment of the Protecting Americans from Tax Hikes Act of 2015, Public Law 114–113 (the PATH Act), the withholding rate under sections 1445(a), 1445(e)(3), 1445(e)(4), and 1445(e)(5) was 10 percent of either the amount realized or the fair market value of the interest, as applicable. Section 324(a) of the PATH Act increased the withholding rate under these sections from 10 percent to 15 percent. This new rate applies to dispositions after February 16, 2016. Section 324(b) of the PATH Act, however, retained the 10-percent withholding rate in the case of a disposition of property that is acquired by the transferee for his or her use as a residence with respect to which the amount realized is greater than $300,000 but does not exceed $1 million.

Section 325 of the PATH Act provides that the cleansing exception will not apply to dispositions on or after December 18, 2015, if the corporation or its predecessor was a real estate investment trust or a regulated investment company at any time during the shorter of the period that the shareholder held the interest or the fiveyear period ending on the date of the disposition of the shareholder’s interest in the corporation.

Section 323(a) of the PATH Act added section 897(l), which provides that section 897 does not apply (i) to USRPIs held directly (or indirectly through one or more partnerships) by, or (ii) to distributions received from a real estate investment trust by, a qualified foreign pension fund or an entity wholly owned by a qualified foreign pension fund. Section 897(l)(2) defines a qualified foreign pension fund for purposes of section 897(l), and section 897(l)(3) provides that the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of section 897(l). In addition, section 323(b) of the PATH Act amended the definition of foreign person in section 1445(f)(3) to provide that entities described in section 897(l) are not treated as foreign persons for purposes of section 1445, except as otherwise provided by the Secretary. The amendments in section 323 of the PATH Act are applicable to dispo

sitions and distributions after December 18, 2015.

Explanation of Provisions

These regulations update § 1.897–2 and §§ 1.1445–1 through 1.1445–5, and append an informational footnote to § 1.1445–11T(d)(2)(iii), to reflect changes made by the PATH Act.

Additionally, for certain filings that are described in regulations under sections 897 and 1445, these regulations provide that the mailing address is the address specified in the Instructions for Form 8288 under the heading “Where To File.”

Applicability Dates

Consistent with the PATH Act, the revisions to § 1.1445–2 to incorporate the exemption under section 1445(f)(3) for entities described in section 897(l) apply to dispositions and distributions after December 18, 2015, and the revisions to § 1.897–2 regarding the cleansing exception apply to dispositions on or after December 18, 2015. The new withholding rates described in these regulations apply to dispositions of, and distributions with respect to, USRPIs that occur after February 16, 2016.

Beginning after February 19, 2016, taxpayers are required to use the revised mailing address provided in these regulations. However, the IRS will not assert penalties against taxpayers that use the mailing address previously specified in the regulations on or before June 20, 2016. Any prior timely filings made pursuant to the regulations under sections 897 and 1445 that were mailed to the address specified in the Instructions for Form 8288 under the heading “Where To File,” instead of the address previously specified in the regulations, have been accepted by the IRS.

Request for Comments

The Treasury Department and the IRS request comments regarding what regulations, if any, should be issued pursuant to section 897(l)(3). All comments that are submitted as prescribed in this preamble under the “Addresses” heading will be available at www.regulations.gov or upon request.

March 7, 2016 380 Bulletin No. 2016–10

Special Analyses

Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact assessment is not required. Because no notice of proposed rulemaking is required, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.

The Treasury Department and the IRS have determined that section 553(b) of the Administrative Procedure Act (APA) (5 U.S.C. chapter 5) does not apply to these regulations, including because good cause exists under section 553(b)(B) of the APA. Section 553(b)(B) of the APA provides that an agency is not required to publish a notice of proposed rulemaking in the Federal Register when the agency, for good cause, finds that notice and public comment thereon are impracticable, unnecessary, or contrary to the public interest. These regulations are necessary to ensure that existing regulations for trans

ferees and other parties properly reflect the changes implemented by the PATH Act. Because these regulations merely conform the regulations to certain changes made by the PATH Act, and update certain mailing addresses, prior notice and public comment is unnecessary. Accordingly, good cause exists for dispensing with notice and public comment pursuant to section 553(b) of the APA. For the same reasons that section 553(b) of the APA does not apply, including because good cause exists under section 553(d)(3) of the APA, the requirements in section 553(d) of the APA for a delayed effective date are inapplicable.

Drafting Information

The principal authors of these regulations are Milton M. Cahn and David A. Levine of the Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development.

Adoption of 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 1.897–2 is amended as follows:

By removing “, and” at the end of paragraph (f)(2)(i) and adding a semicolon in its place.
By removing the period at the end of paragraph (f)(2)(ii) and adding “; and” in its place.
By adding paragraph (f)(2)(iii) before the existing undesignated paragraph.
In each of the paragraphs listed in the first column by removing the language in the “Remove” column and adding in its place the language in the “Add” column.

Paragraph Remove Add

(h)(2)(v), third sentence the Director, Philadelphia Service Center, the address specified in the InstrucP.O. Box 21086, Drop Point 8731, tions for Form 8288 under the FIRPTA Unit, Philadelphia, heading “Where To File” PA 19114-0586

(h)(4)(ii), first sentence the Director, Philadelphia Service Center, P.O. Box 21086, Drop Point 8731, FIRPTA Unit, Philadelphia, PA 19114-0586

The addition reads as follows:

§ 1.897–2 United States real property holding corporations .

- - - (f) - - (2) * * * (i) - -

(ii) - - (iii) If the disposition occurs on or after December 18, 2015, neither the corporation nor any predecessor of the corporation was a regulated investment company or a real estate investment trust at any time during the shorter of the periods described in section 897(c)(1)(A)(ii).

the address specified in the Instructions for Form 8288 under the heading “Where To File”

§ 1.897–3 [Amended]

Par. 3. Section 1.897–3 is amended in each of the paragraphs listed in the first column by removing the language in the “Remove” column and adding in its place the language in the “Add” column.

Bulletin No. 2016–10 381 March 7, 2016

Paragraph Remove Add

(c) introductory text, first sen- with the Director, Philadelphia Service at the address specified tence Center, P.O. Box 21086, Drop Point for Form 8288 under

with the Director, Philadelphia Service Center, P.O. Box 21086, Drop Point 8731, FIRPTA Unit, Philadelphia, at the address specified in the Instructions for Form 8288 under the heading “Where To File”

(d)(1), fourth sentence the Philadelphia Service Center the address specified in the Instructions for Form 8288 under the heading “Where To File”

(f)(1), second sentence addressed to the Director, Philadelphia delivered to the address specified in the Service Center, P.O. Box 21086, Drop Instructions for Form 8288 under the headPoint 8731, FIRPTA Unit, Philadel- ing “Where To File” phia, PA 19114-0586

(f)(1), fifth sentence the Director, Philadelphia Service Center

the address specified in the Instructions for Form 8288 under the heading “Where To File”

Par. 4. Section 1.1445–1 is amended as follows:

By revising the first sentence and removing the last sentence of paragraph (b)(1).
By redesignating paragraphs (b)(2) through (4) as paragraphs (b)(3) through (5) respectively.
By adding a new paragraph (b)(2).
By revising paragraph (g)(10).
By revising the heading and adding two sentences after the first sentence in paragraph (h).
In each of the paragraphs listed in the first column by removing the language

in the “Remove” column and adding in its place the language in the “Add” column.

Paragraph Remove Add

(a), second sentence 10 percent 15 percent (10 percent in the case of dispositions described in paragraph (b)(2) of this section)

newly designated (b)(4)(iii), first 10 percent 15 percent sentence

newly designated (b)(4)(iii), second sentence

§ 1.1445–1(b)(3)(iii) paragraph (b)(4)(iii)

(c)(2)(i)(A), first sentence 10 percent 15 percent (10 percent in the case of dispositions described in paragraph (b)(2) of this section )

(c)(2)(i)(B), third sentence 10 percent 15 percent (10 percent in the case of dispositions described in paragraph (b)(2) of this section)

The additions and revisions read as follows:

§ 1.1445–1 Withholding on dispositions of U.S. real property interests by foreign persons: In general .

- - - (b) Duty to withhold —(1) In general . Except as provided in paragraph (b)(2) and §§ 1.1445–2 and 1.1445–3, transferees of U.S. real property interests are required to deduct and withhold a tax equal to 15 percent of the amount realized by the transferor if the transferor is a foreign person.* -

(2) Reduced rate for certain resi- dences . Transferees of U.S. real property interests are required to deduct and withhold a tax equal to 10 percent of the amount realized by the transferor if the transferor is a foreign person and the following requirements are satisfied:

(i) the property is acquired by the transferee for use by the transferee as a residence;

(ii) the amount realized for the property does not exceed $1,000,000; and

(iii) section 1445(b)(5) does not apply to the disposition. See § 1.1445–2(d)(1).

- - - (g) - -

(10) Address for correspondence . Any written communication to the Internal Revenue Service described in this section is to be mailed to the address specified in the Instructions for Form 8288 under the heading “Where To File.”

(h) Applicability dates . * * * The withholding rates set forth in paragraphs (a), (b)(1), (b)(2), (b)(4)(iii), (c)(2)(i)(A), and (c)(2)(i)(B) of this section apply to dispositions after February 16, 2016. For dispositions on or before February 16, 2016, see paragraphs (a), (b)(1), (b)(3)(iii), (c)(2)(i)(A), and (c)(2)(i)(B) of this section as contained in 26 CFR part 1 revised as of April 1, 2015.

March 7, 2016 382 Bulletin No. 2016–10

Par. 5. Section 1.1445–2 is amended as follows:

By revising the first sentence in the undesignated paragraph following paragraph (b)(2)(i)(C).
In paragraph (b)(4)(iv), by adding a sentence after the last sentence.
In paragraph (e), by revising the heading and adding two sentences after the first sentence.
In each of the paragraphs listed in the first colum by removing the language in the “Remove” column and adding in its place the language in the “Add” column.

Paragraph Remove Add

(b)(4)(iv), second sentence 10 percent 15 percent

(b)(4)(iv), third sentence 10 percent 15 percent

(b)(4)(iv), fourth sentence 10 percent 15 percent

(c)(3)(iii), second sentence 10 percent 15 percent

(c)(3)(iii), third sentence 10 percent 15 percent

(c)(3)(iii), fourth sentence 10 percent 15 percent

(d)(2)(i)(B), first sentence provides a copy of the transferor’s mails a copy of the transferor’s notice to the notice to the Director, Philadelphia Internal Revenue Service Service Center

(d)(3)(i)(A) introductory text, first sentence

(d)(3)(i)(A) introductory 10 percent 15 percent (10 percent in the case of dispositext, first sentence tions described in § 1.1445–1(b)(2))

(d)(3)(i)(B) introductory 10 percent 15 percent (10 percent in the case of dispositext, first sentence tions described in § 1.1445–1(b)(2))

10 percent 15 percent (10 percent in the case of dispositions described in § 1.1445–1(b)(2))

The additions and revision read as follows:

§ 1.1445–2 Situations in which withholding is not required under section 1445(a) .

- - - (b) - - (2) - - (i) - - (C) - - In general, a foreign person is a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, or foreign estate, but not a qualified foreign

pension fund (as defined in section 897(l)) or an entity all of the interests of which are held by a qualified foreign pension fund. - - (4) - - (iv) * * * For dispositions described in § 1.1445–1(b)(2), this paragraph shall be applied by replacing “15 percent” with “10 percent” each time it appears.

- - - (e) Applicability dates . - - - The exclusion of entities described in section 897(l) from the definition of foreign person in paragraph (b)(2)(i) of this section applies to dispositions and distributions after December 18, 2015, and the with

holding rates set forth in paragraphs (b)(4)(iv), (c)(3)(iii), and (d)(3)(i) of this section apply to dispositions after February 16, 2016. For dispositions on or before February 16, 2016, see paragraphs (b)(4)(iv), (c)(3)(iii), and (d)(3)(i) of this section as contained in 26 CFR part 1 revised as of April 1, 2015.

§ 1.1445–3 [Amended]

Par. 6. Section 1.1445–3 is amended in each of the paragraphs listed in the first column by removing the language in the “Remove” column and adding in its place the language in the “Add” column.

Paragraph Remove Add

(b)(1), first sentence to the Director, Philadelphia Service Center, at to

(f)(1), first sentence to the Director, Philadelphia Service Center, at to

(f)(2)(iii), heading by the Director, Philadelphia Service Center, on behalf of the Service

(f)(2)(iii), first sentence by the Director, Philadelphia Service Center or his delegate on behalf of the Service

(g) introductory text, third sentence addressed to the Director, Philadelphia Service Center, at delivered to

§ 1.1445–4 [Amended]

Par. 7. Section 1.1445–4 is amended in each of the paragraphs listed in the first

column by removing the language in the “Remove” column and adding in its place the language in the “Add” column.

Bulletin No. 2016–10 383 March 7, 2016

Paragraph Remove Add

(c)(1), tenth sentence from a foreign person must withhold from a foreign a tax equal to 10 percent ary 16, 2016, must

(c)(1), tenth sentence from a foreign person must withhold from a foreign person after Februa tax equal to 10 percent ary 16, 2016, must withhold a tax

equal to 15 percent (10 percent in the case of dispositions described in § 1.1445–1(b)(2))

(c)(1), thirteenth sentence 10 percent tax 15 percent tax (10 percent tax in the case of dispositions described in § 1.1445–1(b)(2))

(c)(2), second sentence to the Director, Philadelphia Service to Center, at

Par. 8. Section 1.1445–5 is amended as follows:

In each of the paragraphs listed in the first column, by removing the language in the “Remove” column and add

ing in its place the language in the “Add” column.

Paragraph Remove Add

(b)(2)(ii) introductory text, first sentence to the Director, Philadelphia Service Center, at to

(c)(3)(iv) introductory text, second sentence 10 percent 15 percent

(c)(3)(v), first sentence with the Director, Philadelphia Service Center, at at

(c)(3)(v), fifth sentence with the Director, Philadelphia Service Center, at at

(e)(1) introductory text, first sentence 10 percent 15 percent

In paragraph (h), by revising the heading and adding two sentences after the first sentence.

The revision and additions read as follows: § 1.1445–5 Special rules concerning distributions and other transactions by corporations, partnerships, trusts, and estates .

(h) Applicability dates . * * * The withholding rates set forth in paragraphs (c)(3)(iv) and (e)(1) of this section apply to distributions after February 16, 2016. For distributions on or before February 16, 2016, see paragraphs (c)(3)(iv) and (e)(1) of this section as contained in 26 CFR part 1 revised as of April 1, 2015.

§ 1.1445–6 [Amended]

Par. 9. Section 1.1445–6 is amended in each of the paragraphs listed in the first column by removing the language in the “Remove” column and adding in its place the language in the “Add” column.

Paragraph Remove Add

(f)(1), first sentence to the Director, Philadelphia Service Center, at to

(f)(2)(iii), heading by the Director, Philadelphia Service Center on behalf of the Service

(f)(2)(iii), first sentence by the Director, Philadelphia Service Center, or his dele- on behalf of the Service gate

(g) introductory text, second sentence addressed to the Director, Philadelphia Service Center, at delivered to

§ 1.1445–11T [Amended]

Par. 10. Section 1.1445–11T is amended in paragraph (d)(2)(iii) by adding footnote “1” after the last sentence to read as follows:

§ 1.1445–11T Special rules requiring withholding under § 1.1445–5 (temporary) .

- - - (d) - -

(2) - - (iii) - -

John Dalrymple, Deputy Commissioner for Services and Enforcement.

Approved: February 12, 2016.

Mark J. Mazur, Assistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on February 17, 2016, 4:15 p.m., and published in the issue of the Federal Register for February 19, 2016, 81 F.R. 03421)

1 Section 324(a) of the Protecting Americans from Tax Hikes Act of 2015 (Public Law 114–113) increased the withholding rate under section 1445(e)(5) to 15 percent, applicable to dispositions after February 16, 2016.

March 7, 2016 384 Bulletin No. 2016–10

T.D. 9752

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Reporting of Specified Foreign Financial Assets

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations providing guidance regarding the requirements for certain domestic entities to report specified foreign financial assets to the Internal Revenue Service. These regulations set forth the conditions under which a domestic entity will be considered a specified domestic entity required to undertake such reporting. These regulations affect certain domestic corporations, partnerships, and trusts.

DATES: Effective date : These regulations are effective on February 23, 2016.

Applicability date : For dates of applicability, see §§ 1.6038D–2(g) and 1.6038D–6(e).

FOR FURTHER INFORMATION CONTACT: Joseph S. Henderson, (202) 317-6942 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Section 6038D was enacted by section 511 of the Hiring Incentives to Restore Employment (HIRE) Act, Public Law 111–147 (124 Stat. 71). Section 6038D(a) requires certain individuals to report information about specified foreign financial assets. Section 6038D(f) provides that, to the extent provided by the Secretary in regulations or other guidance, section 6038D shall apply to any domestic entity which is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if the entity were an individual.

On December 19, 2011, the Department of the Treasury (Treasury Depart

ment) and the Internal Revenue Service (IRS) published temporary regulations (the “2011 temporary regulations”) (TD 9567) and a notice of proposed rulemaking by cross-reference to temporary regulations (REG–130302–10) in the Federal Register (76 FR 78553 and 76 FR 78594, respectively) addressing the reporting requirements under section 6038D. The notice of proposed rulemaking also included proposed § 1.6038D–6, which set forth the conditions under which a domestic entity will be considered a specified domestic entity and, therefore, required to report specified foreign financial assets in which it holds an interest. Corrections to the 2011 temporary regulations were published on February 21, 2012, in the Fed- eral Register (77 FR 9845). Corrections to proposed § 1.6038D–6 were published on February 21, 2012, and February 22, 2012, in the Federal Register (77 FR 9877 and 77 FR 10422, respectively). The 2011 temporary regulations were issued as final regulations (TD 9706; 79 FR 73817) on December 12, 2014 (the “2014 final regulations”). The Treasury Department and the IRS did not adopt proposed § 1.6038D–6 (REG–144339–14) as a final regulation at that time.

The Treasury Department and the IRS received written comments on proposed § 1.6038D–6. All comments are available at www.regulations.gov or upon request. Because no requests to speak were received, no public hearing was held. After consideration of the comments received, the Treasury Department and the IRS adopt proposed § 1.6038D–6 as a final regulation with the modifications described herein.

Summary of Comments and Explanation of Revisions

I. Organizational Changes Regarding the Reporting Threshold

Proposed §§ 1.6038D–6(b)(1)(i) and 1.6038D–6(c)(1) provide that, in order to be treated as a specified domestic entity, an entity must have an interest in specified foreign financial assets (excluding assets excepted under § 1.6038D–7T) that exceeds the reporting threshold in § 1.6038D–2T(a)(1). Under the proposed regulations, a domestic entity applies the reporting threshold in § 1.6038D–2T(a)(1)

to determine whether it is a specified domestic entity. In making this determination, the proposed regulations require a corporation or partnership to take into account the aggregation rules in proposed § 1.6038D– 6(b)(4)(i). Proposed §§ 1.6038D–6(b)(1)(i) and 1.6038D–6(c)(1), however, suggested that a specified domestic entity is required to again apply § 1.6038D–2T(a)(1) to determine whether it has a reporting requirement.

The Treasury Department and the IRS did not intend for domestic entities to apply the reporting threshold described in § 1.6038D–2(a)(1) twice in order to determine their section 6038D reporting responsibilities. Therefore, these final regulations eliminate the requirement to apply § 1.6038D–2(a)(1) as part of determining whether an entity is a specified domestic entity. Instead, a domestic entity that meets the definition of a specified domestic entity, which under these final regulations is determined without regard to whether the reporting threshold in § 1.6038D–2(a)(1) is met, applies the reporting threshold under § 1.6038D–2(a)(1) once, as part of determining whether it has a filing obligation. The aggregation rule for corporations and partnerships and the rule excluding assets excepted under § 1.6038D–7 from the reporting threshold have been moved to § 1.6038D–2(a)(6). These changes are organizational and no change is intended to the substantive reporting requirements for a specified domestic entity.

II. Elimination of Principal Purpose Test

Proposed § 1.6038D–6(b)(1)(iii) provides that a corporation or partnership is treated as formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets if either: (1) at least 50 percent of the corporation or partnership’s gross income or assets is passive; or (2) at least 10 percent of the corporation or partnership’s gross income or assets is passive and the corporation or partnership is formed or availed of by a specified individual with a principal purpose of avoiding section 6038D (the principal purpose test). Under proposed § 1.6038D–6(b)(1)(iii), all facts and circumstances are taken into account to determine whether a specified individual has

Bulletin No. 2016–10 385 March 7, 2016

a principal purpose of avoiding section 6038D. The Treasury Department and the IRS believe that a 50-percent passive assets or income threshold appropriately captures situations in which specified individuals may use a domestic corporation or partnership to circumvent the reporting requirements of section 6038D. Furthermore, the Treasury Department and the IRS have concluded that taxpayers should be able to determine their reporting requirements under section 6038D based on objective requirements rather than a subjective principal purpose test. Therefore, these final regulations eliminate the principal purpose test for determining whether a corporation or partnership is a specified domestic entity. However, the Treasury Department and the IRS will continue to monitor whether domestic corporations and partnerships not required to report under these final regulations are being used inappropriately by specified individuals to avoid reporting under section 6038D. If needed, the Treasury Department and the IRS may expand the definition of a specified domestic entity in future guidance.

III. Definition of Passive Income

Proposed § 1.6038D–6(b)(2) defines “passive income” by listing specific items of income that are treated as passive. Following the issuance of proposed § 1.6038D–6(b)(2), on February 15, 2012, comprehensive regulations (77 FR 9022 (REG–121647–10)) were proposed under sections 1471 through 1474, which were also enacted as part of the HIRE Act that enacted section 6038D. A definition of passive income was included in the proposed regulations under section 1472 for purposes of identifying certain active nonfinancial foreign entities (NFFEs), which are excepted from withholding under section 1472(a) and therefore do not have to report their substantial U.S. owners in order to avoid withholding. The definition of passive income in proposed § 1.1472– 1(c)(1)(v) contained a list of items that was similar, although not identical, to the list contained in proposed § 1.6038D– 6(b)(2). On January 28, 2013, the proposed regulations under sections 1471 through 1474 were finalized (78 FR 5874,

TD 9610). In the final regulations, the Treasury Department and the IRS clarified the scope of the definition of passive income, made modifications in response to comments received, and moved the provision to § 1.1472–1(c)(1)(iv)(A). In addition, exceptions for look-through payments and dealers were added in § 1.1472–1(c)(1)(iv)(B).

The definitions of passive income under sections 1472 and 6038D serve a similar function, which is to identify entities that have a high risk of being used for tax evasion and to reduce compliance burdens for active entities. Therefore, these final regulations in § 1.6038D–6(b)(2) adopt several of the modifications to the term “passive income” that were included in § 1.1472–1(c)(1)(iv)(A). Specifically, these modifications: (1) Clarify that “dividends” includes substitute dividends and expand “interest” to cover income equivalent to interest, including substitute interest, (2) add a new exception for certain active business gains or losses from the sale of commodities, and (3) define notional principal contracts by adding a reference to § 1.446–3(c)(1). In addition, these final regulations add the exception for dealers that is described in § 1.1472– 1(c)(1)(iv)(B)( 2 ). In addition, the proposed regulations under both sections 1472 and 6038D excluded from the definition of passive income rents or royalties derived in the active conduct of a trade or business conducted by employees of the relevant entity. A comment submitted in response to proposed § 1.6038D–6(b)(2)(iii) expressed concern that the exception applies only to rents and royalties derived in an active trade or business conducted exclusively by a corporation’s or partnership’s employees, and noted that it is difficult to find a trade or business that is conducted solely by a business’s employees. These final regulations provide, consistent with § 1.1472–1(c)(1)(iv)(A)( 4 ), that rents and royalties derived in the active conduct of a trade or business conducted “at least in part” by employees of the corporation or partnership will not be considered passive income.

The exception for certain look-through income from related persons in § 1.1472– 1(c)(1)(iv)(B)( 1 ) is not adopted in these final regulations because § 1.6038D–6(b)(3)(ii) al

ready eliminates passive income or assets arising from related party transactions for purposes of applying the passive income and asset thresholds to a corporation or partnership with related entities.

Finally, the proposed regulations did not specify how to determine whether 50 percent of a corporation’s or partnership’s assets are passive assets. The Treasury Department and the IRS believe that the weighted average test for active NFFEs in the regulations under section 1472 provides an administrable way to determine the passive asset percentage. Therefore, these final regulations provide that the passive asset percentage is determined based on a weighted average approach similar to the rule in § 1.1472–1(c)(1)(iv). Under this test, corporations or partnerships may use either fair market value or book value (as reflected on the entity’s balance sheet and as determined under either a U.S. or an international financial accounting standard) to determine the value of their assets. Corporations or partnerships may be required to substantiate their determination of the passive asset percentage upon request by the IRS. See section 6001.

IV. Annual Determination of Specified Person’s Interest in a Domestic Partnership

Proposed § 1.6038D–6(a) provides that whether a domestic partnership is a specified domestic entity is determined annually, and proposed § 1.6038D– 6(b)(3)(ii) provides that a partnership is closely held if at least 80 percent of the capital or profits interest in the partnership is held directly, indirectly, or constructively by a specified individual on the last day of the partnership’s taxable year.

A commenter recommended that a partner’s interest in a partnership should be calculated on a year-by-year basis for purposes of determining whether a domestic partnership is a specified domestic entity. The comment noted that it is often difficult to determine the precise capital or profits interest of a partner because it may shift depending on the performance of the partnership.

The requirement to determine a partner’s capital or profits interest on a partic

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ular day is present in other provisions of the Internal Revenue Code, Treasury regulations, and published guidance, and the Treasury Department and the IRS believe it is an appropriate measure of an individual’s economic interest in a partnership and, in general, is not overly complex. Accordingly, these final regulations retain the rule in the proposed regulations for determining if a domestic partnership is closely held.

V. Clarification to Aggregation Rules

Proposed § 1.6038D–6(b)(4) provides aggregation rules for purposes of applying proposed § 1.6038D–6(b)(1)(i), the § 1.6038D–2(a)(1) reporting threshold, and the passive income and asset thresholds under proposed § 1.6038D– 6(b)(1)(iii). The proposed regulations provide that, for purposes of applying proposed § 1.6038D–6(b)(1)(i) and the reporting threshold, all domestic corporations and domestic partnerships that have an interest in specified foreign financial assets and are closely held by the same specified individual are treated as a single entity, and each such related corporation or partnership is treated as owning the specified foreign financial assets held by all such related corporations or partnerships. Similarly, the proposed regulations provide that, for purposes of applying the passive income and asset thresholds, all domestic corporations and domestic partnerships that are closely held by the same specified individual and connected through stock or partnership interest ownership with a common parent corporation or partnership are treated as a single entity, and each member of such a group is treated as owning the combined assets and receiving the combined income of all members of that group.

The Treasury Department and the IRS have determined that it is not necessary both to treat a group as a single entity and to attribute the assets or income of members of the group to an entity. Therefore, these final regulations simplify the aggregation rules by eliminating the reference to treating all domestic corporations and partnerships as a single entity.

VI. Domestic Trusts

Proposed § 1.6038D–6(c) provides that a trust described in section 7701(a)(30)(E) is a specified domestic entity if and only if the trust has one or more specified persons as a current beneficiary. The term current beneficiary means, with respect to the taxable year, any person who at any time during such taxable year is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust (determined without regard to any power of appointment to the extent that such power remains unexercised at the end of the taxable year). The Treasury Department and the IRS intend that a specified domestic entity include a trust whereby a specified person has an immediately exercisable general power of appointment, even if such specified person is not technically a beneficiary. Therefore, these final regulations clarify that the term current beneficiary also includes any holder of a general power of appointment, whether or not exercised, that was exercisable at any time during the taxable year, but does not include any holder of a general power of appointment that is exercisable only on the death of the holder.

VII. Expanding the Exceptions for Domestic Entities

Proposed § 1.6038D–6(d) excepts certain entities from being treated as a specified domestic entity. A commenter recommended that the final regulations expand proposed § 1.6038D–6(d) to also except certain domestic trusts that are not required to file a Form 1041, “U.S. Fiduciary Income Tax Return,” or any information returns. The Treasury Department and the IRS do not adopt this comment because the 2014 final regulations already address the commenter’s concerns. The 2014 final regulations provide in § 1.6038D–2(a)(7) that a specified person, including a specified domestic entity, is not required to file Form 8938, “Statement of Specified Foreign Financial Assets,” with respect to a taxable year if the specified person is not required to file an annual return with the IRS with respect to that taxable year. In the case of a specified domestic entity, the term “annual return”

means an annual federal income tax return or information return filed with the IRS, including returns required under section 6012. See § 1.6038D–1(a)(11). A Form 1041 is an annual return for purposes of § 1.6038D–1(a)(11) of the final regulations.

A commenter recommended that the final regulations except publicly traded partnerships from being specified domestic entities because they are similar to publicly traded corporations described in section 1473(3), which are excepted from the definition of specified domestic entity under proposed § 1.6038D–6(d)(1). The Treasury Department and the IRS do not adopt this comment. The requirement under proposed § 1.6038D–6(b) that to be a specified domestic entity at least 80 percent of the capital or profits interest in a partnership must be held by a specified individual on the last day of the partnership’s taxable year establishes appropriate general criteria that, as a practical matter, should exempt most publicly traded partnerships from being specified domestic entities.

A commenter recommended that the final regulations except an employer trust established for the benefit of more than a minimum number of employees, such as 50, from being a specified domestic entity even if the employer trust holds stock of a foreign company. The Treasury Department and the IRS believe the exception under proposed § 1.6038D–6(d)(1) for domestic entities that are not “specified United States persons” pursuant to section 1473(3), together with the exception for trusts whose trustees satisfy the supervisory oversight requirements and the income tax and information return filing requirements under proposed § 1.6038D–6(d)(2), are sufficiently broad to except employer trusts that represent a low risk of tax avoidance from characterization as a specified domestic entity. Therefore, this comment is not adopted.

Special Analyses

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It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act (5 U.S.C. chapter 6). In the case of domestic corporations and partnerships, these regulations apply only when two separate tests are met. The first requires that at least 80 percent of the entity must be owned, directly, indirectly, or constructively, by a specified individual, generally a U.S. citizen or resident. The second test compares the entity’s business income and assets with its passive income and assets. If more than 50 percent of the entity’s annual gross income for the year is active business income and more than 50 percent of its assets for the taxable year are assets that produce or are held for the production of active income, then the entity is not subject to the reporting requirements under section 6038D. This two-part test reduces the burden imposed by these final regulations on domestic small business entities because closely-held domestic corporations and partnerships that are predominantly engaged in an active business generally will be excluded from reporting. Furthermore, small not-for-profit organizations that are tax-exempt under section 501(a) of the Internal Revenue Code and small governmental jurisdictions are not subject to these regulations.

For closely-held domestic corporations and partnerships that meet both tests, these final regulations limit the burden imposed. First, reporting is required only when the aggregate value of the entity’s interests in specified foreign financial assets exceeds the reporting threshold under § 1.6038D–2(a)(1). Second, the final regulations exclude the value of specified foreign financial assets reported on one or more of the following forms from being taken into consideration in determining whether the small entity satisfies the reporting threshold under § 1.6038D– 2(a)(1): Form 3520, “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts“; Form 3520–A, “Annual Information Return of Foreign Trust With a U.S. Owner”; Form 5471, “Information Return of U.S. Persons With Respect To Certain Foreign Corporations”; Form 8621, “Information Return by a Shareholder of a Passive For

eign Investment Company or Qualified Electing Fund”; or Form 8865, “Return of U.S. Persons With Respect to Certain Foreign Partnerships.” Third, small entities that hold specified foreign financial assets generally will be excepted from reporting such assets if the assets are reported on one or more of the these forms, thereby further limiting the burden imposed by the final regulations on small entities. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Joseph S. Henderson, Office of Associate Chief Counsel (International). However, other personnel from the IRS and Treasury Department participated in their development.

Adoption of 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 is amended by adding an entry for § 1.6038D–6 in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 - - Section 1.6038D–6 is also issued under 26 U.S.C. 6038D.

Par. 2. Section 1.6038D–0 is amended by:

Revising the entry for § 1.6038D– 1(a)(12).
Adding entries for § 1.6038D– 2(a)(6)(i) and (ii).
Revising the entry for § 1.6038D–6. The revisions and additions read as follows:

§ 1.6038D–0 Outline of regulation provisions

§ 1.6038D–1 Reporting with respect to specified foreign financial assets, definition of terms .

(a) - -

- - - (12) Specified domestic entity.

§ 1.6038D–2 Requirement to report specified foreign financial assets .

(a) - -

- - - (6) - - (i) Specified individual. (ii) Specified domestic entity.

§ 1.6038D–6 Specified domestic entities .

(a) Specified domestic entity. (b) Corporations and partnerships. (1) Formed or availed of. (2) Closely held. (i) Domestic corporation. (ii) Domestic partnership. (iii) Constructive ownership. (3) Determination of passive income and assets.

(i) Definition of passive income. (ii) Exception from passive income treatment for dealers.

(iii) Related entities. (4) Examples. (c) Domestic trusts. (d) Excepted domestic entities. (1) Certain persons described in section 1473(3).

(2) Certain domestic trusts. (3) Domestic trusts owned by one or more specified persons.

(e) Effective/applicability dates.

- - - Par. 3. Section 1.6038D–1(a)(12) is revised to read as follows:

§ 1.6038D–1 Reporting with respect to specified foreign financial assets, definition of terms .

(a) - -

- - - (12) Specified domestic entity . The term specified domestic entity has the meaning set forth in § 1.6038D–6.

March 7, 2016 388 Bulletin No. 2016–10

Par. 4. Section 1.6038D–2 is amended by:

Redesignating the text of paragraph (a)(6) as paragraph (a)(6)(i) and adding a paragraph heading to newly redesignated paragraph (a)(6)(i).
Adding paragraph (a)(6)(ii).
Revising paragraph (g). The additions and revision read as follows:

§ 1.6038D–2 Requirement to report specified foreign financial assets .

(a) - - (6) Aggregate value calculation in case of specified foreign financial asset ex- cluded from reporting —(i) Specified indi- vidual . - - (ii) Specified domestic entity . The value of any specified foreign financial asset in which a specified domestic entity has an interest and that is excluded from reporting on Form 8938 pursuant to § 1.6038D– 7(a) (concerning certain assets reported on another form) is excluded for purposes of determining the aggregate value of specified foreign financial assets. For purposes of determining the aggregate value of specified foreign financial assets, a specified domestic entity that is a corporation or partnership and that has an interest in any specified foreign financial asset is treated as owning all the specified foreign financial assets (excluding specified foreign financial assets excluded from reporting on Form 8938 pursuant to § 1.6038D–7(a)) held by all domestic corporations and domestic partnerships that are closely held by the same specified individual as determined under § 1.6038D–6(b)(2).

- - - (g) Effective/applicability dates . This section, with the exception of § 1.6038D– 2(a)(6)(ii), applies to taxable years ending after December 19, 2011. Section 1.6038D– 2(a)(6)(ii) applies to taxable years beginning after December 31, 2015. Taxpayers may elect to apply the rules of this section, with the exception of § 1.6038D–2(a)(6)(ii), to taxable years ending on or prior to December 19, 2011.

Par 5. Section 1.6038D–6 is added to read as follows:

§ 1.6038D–6 Specified domestic entities .

(a) Specified domestic entity . A specified domestic entity is a domestic corporation, a domestic partnership, or a trust described in section 7701(a)(30)(E), if such corporation, partnership, or trust is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets. Whether a domestic corporation, a domestic partnership, or a trust described in section 7701(a)(30)(E) is a specified domestic entity is determined annually.

(b) Corporations and partnerships (1) Formed or availed of . Except as otherwise provided in paragraph (d) of this section, a domestic corporation or a domestic partnership is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets if and only if—

(i) The corporation or partnership is closely held by a specified individual as determined under paragraph (b)(2) of this section; and

(ii) At least 50 percent of the corporation’s or partnership’s gross income for the taxable year is passive income or at least 50 percent of the assets held by the corporation or partnership for the taxable year are assets that produce or are held for the production of passive income as determined under paragraph (b)(3) of this section (passive assets). For purposes of this paragraph (b)(1)(ii), the percentage of passive assets held by a corporation or partnership for a taxable year is the weighted average percentage of passive assets (weighted by total assets and measured quarterly), and the value of assets of a corporation or partnership is the fair market value of the assets or the book value of the assets that is reflected on the corporation’s or partnership’s balance sheet (as determined under either a U.S. or an international financial accounting standard).

(2) Closely held —(i) Domestic corpo- ration . A domestic corporation is closely held by a specified individual if at least 80 percent of the total combined voting power of all classes of stock of the corporation entitled to vote, or at least 80 percent of the total value of the stock of the corporation, is owned, directly, indirectly, or constructively, by a specified individual

on the last day of the corporation’s taxable year.

(ii) Domestic partnership . A partnership is closely held by a specified individual if at least 80 percent of the capital or profits interest in the partnership is held, directly, indirectly, or constructively, by a specified individual on the last day of the partnership’s taxable year.

(iii) Constructive ownership . For purposes of this paragraph (b)(2), sections 267(c) and (e)(3) apply for the purpose of determining the constructive ownership of a specified individual in a corporation or partnership, except that section 267(c)(4) is applied as if the family of an individual includes the spouses of the individual’s family members.

(3) Determination of passive income and assets —(i) Definition of passive in- come . Except as provided in paragraph (b)(3)(ii) of this section, for purposes of paragraph (b)(1)(ii) of this section, passive income means the portion of gross income that consists of—

(A) Dividends, including substitute dividends;

(B) Interest; (C) Income equivalent to interest, including substitute interest;

(D) Rents and royalties, other than rents and royalties derived in the active conduct of a trade or business conducted, at least in part, by employees of the corporation or partnership;

(E) Annuities; (F) The excess of gains over losses from the sale or exchange of property that gives rise to passive income described in paragraphs (b)(3)(i)(A) through (b)(3)(i)(E) of this section;

(G) The excess of gains over losses from transactions (including futures, forwards, and similar transactions) in any commodity, but not including—

( 1 ) Any commodity hedging transaction described in section 954(c)(5)(A), determined by treating the corporation or partnership as a controlled foreign corporation; or

( 2 ) Active business gains or losses from the sale of commodities, but only if substantially all the corporation or partnership’s commodities are property described in paragraph (1), (2), or (8) of section 1221(a);

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(H) The excess of foreign currency gains over foreign currency losses (as defined in section 988(b)) attributable to any section 988 transaction; and

(I) Net income from notional principal contracts as defined in § 1.446–3(c)(1).

(ii) Exception from passive income treatment for dealers . Notwithstanding paragraph (b)(3)(i) of this section, in the case of a corporation or partnership that regularly acts as a dealer in property described in paragraph (b)(3)(i)(F) of this section (referring to the sale or exchange of property that gives rise to passive income), forward contracts, option contracts, or similar financial instruments (including notional principal contracts and all instruments referenced to commodities), the term passive income does not include—

(A) Any item of income or gain (other than any dividends or interest) from any transaction (including hedging transactions and transactions involving physical settlement) entered into in the ordinary course of such dealer’s trade or business as such a dealer; and

(B) If such dealer is a dealer in securities (within the meaning of section 475(c)(2)), any income from any transaction entered into in the ordinary course of such trade or business as a dealer in securities.

(iii) Related entities . For purposes of applying the passive income and asset thresholds of paragraph (b)(1)(ii) of this section, all domestic corporations and domestic partnerships that are closely held by the same specified individual as determined under paragraph (b)(2) of this section and that are connected through stock or partnership interest ownership with a common parent corporation or partnership are treated as owning the combined assets and receiving the combined income of all members of that group. For purposes of the preceding sentence, assets relating to any contract, equity, or debt existing between members of such a group, as well as any items of gross income arising under or from such contract, equity, or debt, are eliminated. A domestic corporation or a domestic partnership is considered connected through stock or partnership interest ownership with a common parent corporation or partnership if stock representing at least 80 percent of the total

combined voting power of all classes of stock of the corporation entitled to vote or of the value of such corporation, or partnership interests representing at least 80 percent of the profits interests or capital interests of such partnership, in each case other than stock of or partnership interests in the common parent, is owned by one or more of the other connected corporations, connected partnerships, or the common parent.

(4) Examples . The following examples illustrate the application of this section:

Example 1 . Closely held and constructive own- ership . (i) Facts . DC1 is a domestic corporation the total value of the stock of which is owned 60% by A, a specified individual, 30% by B, a member of A’s family for purposes of section 267(c)(2) who is not a specified individual, and 10% by FC1, a foreign corporation. DC1 owns 90% of the total value of the stock of DC2, a domestic corporation. FC2, a foreign corporation, owns 10% of DC2. Neither A nor B owns, directly, indirectly, or constructively, any stock in FC1 or FC2.

(ii) Closely held ownership determination . A is considered to own 90% and 81% of the total value of DC1 and DC2, respectively, by application of the rules of section 267(c) and this section. DC1 and DC2 are closely held by A within the meaning of paragraph (b)(2) of this section because A, a specified individual, is considered to own more than 80% of their total value.

Example 2 . Application of aggregation rule and reporting threshold . (i) Facts . L is a specified individual. In Year X, L wholly owns DC1, a domestic corporation, and also owns a 90% capital interest in DP, a domestic partnership. DC1 owns 80% of the sole class of stock of DC2, a domestic corporation. DC1 has no assets other than its interest in DC2. DC2’s only assets are assets that produce passive income, with a maximum value in Year X of $40,000 on October 12. DC2’s assets are comprised in relevant part of specified foreign financial assets with a maximum value in Year X of $15,000 on October 12. DP’s only assets are assets that produce passive income and that are specified foreign financial assets with a maximum value of $90,000 in Year X on October 12.

(ii) Specified domestic entity status —(A) DC1 and DC2 . DC1 and DC2 are closely held by a specified individual for purposes of paragraph (b)(2) of this section. DC1 and DC2 are considered related entities that are connected through stock ownership with a common parent corporation under paragraph (b)(3)(iii) of this section, because DC1 and DC2 are closely held by L, and DC2 is connected with DC1 through DC1’s ownership of stock of DC2 representing at least 80% of the voting power or value of DC2. As a result, for purposes of applying paragraph (b)(1)(ii) of this section, each of DC1 and DC2 is considered as owning the combined assets, and receiving the combined income, of both DC1 and DC2; however, DC1’s equity interest in DC2 is disregarded for this purpose under paragraph (b)(3)(iii) of this section. Therefore, DC1 and DC2 each satisfies the passive asset threshold of para

graph (b)(1)(ii) of this section, because 100 percent of each company’s assets is passive. DC1 and DC2 are specified domestic entities for Year X.

(B) DP . DP is closely held by a specified individual for purposes of paragraph (b)(2) of this section. DP is not considered a related entity with DC1 and DC2 under paragraph (b)(3)(iii) of this section, because DC1 and DP are not owned by a common parent corporation or partnership. As a result, whether the passive income or passive asset threshold of paragraph (b)(1)(ii) of this section is met with respect to DP is determined solely by reference to DP’s separately earned passive income and separately held passive assets. DP holds only passive assets during Year X and therefore satisfies paragraph (b)(1)(ii) of this section. DP is a specified domestic entity for Year X.

(iii) Reporting requirements —(A) DC1 . Under § 1.6038D–2(a)(6)(ii), DC1 is not treated as owning the specified foreign financial assets held by DC2 and DP for purposes of applying the reporting threshold of § 1.6038D–2(a)(1), because DC1 does not have an interest in any specified foreign financial assets. DC1 is not required to file Form 8938 because DC1 does not satisfy the reporting threshold of § 1.6038D–2(a)(1).

(B) DC2 and DP . Under § 1.6038D–3, DC2 and DP each has an interest in specified foreign financial assets. For purposes of applying the reporting threshold of § 1.6038D–2(a)(1), § 1.6038D–2(a)(6)(ii) provides that DC2 is treated as owning in addition to its own assets the assets of DP, and DP is treated as owning in addition to its own assets the assets of DC2. As a result, DC2 and DP each satisfies the reporting threshold of § 1.6038D–2(a)(1), because the value of the specified foreign financial assets each is considered as owning for purposes of § 1.6038D–2(a)(1) is $105,000 on October 12, Year X, which exceeds DC2’s and DP’s $75,000 reporting threshold. DC2 and DP must each file Form 8938 for Year X to report their respective specified foreign financial assets in which they have an interest and disclose their maximum values as provided in § 1.6038D–4 ($15,000 in the case of DC2 and $90,000 in the case of DP).

Example 3 . Application of aggregation rule and entity with an active trade or business . (i) Facts . The facts are the same as in Example 2, except that DC2 also owns an active business. The assets attributable to the business are not passive assets and constitute at least 60% of the value of DC2’s assets at all times during Year X. The income from the business is not passive income and constitutes at least 60% of the gross income generated by DC2 in Year X.

(ii) Specified domestic entity status —(A) DC1 and DC2 . DC1 and DC2 are considered related entities that are connected through stock ownership with a common parent corporation under paragraph (b)(3)(iii) of this section because DC1 and DC2 are closely held by L, and DC2 is connected with DC1 though DC1’s ownership of stock of DC2 representing at least 80% of the voting power or value of DC2. As a result, for purposes of applying paragraph (b)(1)(ii) of this section, each of DC1 and DC2 is treated as owning the combined assets, and receiving the combined income, of both DC1 and DC2; however, DC1’s equity interest in DC2 is disregarded for this purpose under paragraph (b)(3)(iii) of this sec

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tion. As a result, no more than 40 percent of the value of DC1’s and DC2’s assets at all times during Year X are passive and no more than 40 percent of DC1’s and DC2’s gross income for Year X is passive. DC1 and DC2 do not satisfy the passive income or passive asset threshold in paragraph (b)(1)(ii) of this section for Year X. DC1 and DC2 are not specified domestic entities for Year X.

(B) DP . For the reasons described in paragraph (ii)(B) of Example 2, DP is a specified domestic entity for Year X.

(iii) Reporting requirements —(A) DC1 and DC2 . DC1 and DC2 are not specified domestic entities for Year X, and are not required to file Form 8938. (B) DP . Under § 1.6038D–3, DP has an interest in specified foreign financial assets. Under § 1.6038D–2(a)(6)(ii), DP is treated as owning in addition to its own assets the assets of DC2. As a result, DP satisfies the reporting threshold of § 1.6038D–2(a)(1) because the value of the specified foreign financial assets it is considered to own for purposes of § 1.6038D–2(a)(1) is $105,000 on October 12, Year X, which exceeds DP’s $75,000 reporting threshold. DP must file Form 8938 for Year X to report the specified foreign financial assets in which it has an interest and disclose their maximum values as provided in § 1.6038D–4, which is $90,000.

(c) Domestic trusts . Except as otherwise provided in paragraph (d) of this section, a trust described in section 7701(a)(30)(E) is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets if and only if the trust has one or more specified persons as a current beneficiary. The term current beneficiary means, with respect to the taxable year, any person who at any time during such taxable year is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust (determined without regard to any power of appointment to the extent that such power remains unexercised at the end of the taxable year). The term current beneficiary also includes any holder of a general power of appointment, whether or not exercised, that was exercisable at any time during the taxable year, but does not include any holder of a general power of appointment that is exercisable only on the death of the holder.

(d) Excepted domestic entities . An entity is not considered to be a specified domestic entity if the entity is—

(1) Certain persons described in sec- tion 1473(3) . An entity, except for a trust that is exempt from tax under section 664(c), that is excepted from the definition of the term “specified United States person” under section 1473(3) and the regulations issued under that section;

(2) Certain domestic trusts . A trust described in section 7701(a)(30)(E) provided that the trustee of the trust—

(i) Has supervisory authority over or fiduciary obligations with regard to the specified foreign financial assets held by the trust;

(ii) Timely files (including any applicable extensions) annual returns and information returns on behalf of the trust; and

(iii) Is (A) A bank that is examined by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, or the National Credit Union Administration;

(B) A financial institution that is registered with and regulated or examined by the Securities and Exchange Commission; or

(C) A domestic corporation described in section 1473(3)(A) or (B), and the regulations issued with respect to those provisions.

(3) Domestic trusts owned by one or more specified persons . A trust described in section 7701(a)(30)(E) to the extent such trust or any portion thereof is treated as owned by one or more specified persons under sections 671 through 678 and the regulations issued under those sections.

(e) Effective/applicability dates . This section applies to taxable years beginning after December 31, 2015.

Karen M. Schiller, Deputy Commissioner for Services and Enforcement.

Approved: January 19, 2016.

Mark J. Mazur, Assistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on February 22, 2016, 8:45 a.m., and published in the issue of the Federal Register for February 23, 2016, 81 F.R. 03795)

Section 1274.— Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.)

Rev. Rul. 2016–07

This revenue ruling provides various prescribed rates for federal income tax purposes for March 2016 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the shortterm, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the longterm tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the lowincome housing credit described in section 42(b)(1) for buildings placed in service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, shall not be less than 9%. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.

Bulletin No. 2016–10 391 March 7, 2016

REV. RUL. 2016–07 TABLE 1 Applicable Federal Rates (AFR) for March 2016

Period for Compounding Annual Semiannual Quarterly Monthly

Short-term

AFR .65% .65% .65% .65%

110% AFR .72% .72% .72% .72%

120% AFR .78% .78% .78% .78%

130% AFR .85% .85% .85% .85%

Mid-term

AFR 1.48% 1.47% 1.47% 1.47%

110% AFR 1.63% 1.62% 1.62% 1.61%

120% AFR 1.77% 1.76% 1.76% 1.75%

130% AFR 1.92% 1.91% 1.91% 1.90%

150% AFR 2.22% 2.21% 2.20% 2.20%

175% AFR 2.59% 2.57% 2.56% 2.56%

Long-term

AFR 2.33% 2.32% 2.31% 2.31%

110% AFR 2.57% 2.55% 2.54% 2.54%

120% AFR 2.80% 2.78% 2.77% 2.76%

130% AFR 3.04% 3.02% 3.01% 3.00%

REV. RUL. 2016–07 TABLE 2

Adjusted AFR for March 2016

Period for Compounding Annual Semiannual Quarterly Monthly

Short-term adjusted AFR .55% .55% .55% .55%

Mid-term adjusted AFR 1.12% 1.12% 1.12% 1.12%

Long-term adjusted AFR 2.27% 2.26% 2.25% 2.25%

REV. RUL. 2016–07 TABLE 3 Rates Under Section 382 for March 2016

Adjusted federal long-term rate for the current month 2.27%

Long-term tax-exempt rate for ownership changes during the current month (the highest 2.65% of the adjusted federal long-term rates for the current month and the prior two months.)

REV. RUL. 2016–07 TABLE 4 Appropriate Percentages Under Section 42(b)(1) for March 2016

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

Appropriate percentage for the 70% present value low-income housing credit 7.44%

Appropriate percentage for the 30% present value low-income housing credit 3.19%

REV. RUL. 2016–07 TABLE 5 Rate Under Section 7520 for March 2016

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

1.8%

March 7, 2016 392 Bulletin No. 2016–10

Section 42.—Low-Income Housing Credit