Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

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

(Also: Sections 42, 280G, 382, 467, 468, 482, 483, 642, 1288, 7520.)

Rev. Rul. 2018–01

This revenue ruling provides various prescribed rates for federal income tax purposes for January 2018 (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 short-term, 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 long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income 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%. 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. Finally, Table 6 contains the deemed rate of return for transfers made during calendar year 2018 to pooled income funds described in section 642(c)(5) that have been in existence for less than 3 taxable years immediately preceding the taxable year in which the transfer was made.

REV. RUL. 2018–01 TABLE 1 Applicable Federal Rates (AFR) for January 2018

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR 1.68% 1.67% 1.67% 1.66%

110% AFR 1.85% 1.84% 1.84% 1.83%

120% AFR 2.01% 2.00% 2.00% 1.99%

130% AFR 2.18% 2.17% 2.16% 2.16%

Mid-term

AFR 2.18% 2.17% 2.16% 2.16%

110% AFR 2.40% 2.39% 2.38% 2.38%

120% AFR 2.62% 2.60% 2.59% 2.59%

130% AFR 2.84% 2.82% 2.81% 2.80%

150% AFR 3.29% 3.26% 3.25% 3.24%

175% AFR 3.84% 3.80% 3.78% 3.77%

Long-term

AFR 2.59% 2.57% 2.56% 2.56%

110% AFR 2.85% 2.83% 2.82% 2.81%

120% AFR 3.10% 3.08% 3.07% 3.06%

130% AFR 3.37% 3.34% 3.33% 3.32%

REV. RUL. 2018–01 TABLE 2 Adjusted AFR for January 2018

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjusted AFR 1.24% 1.24% 1.24% 1.24%

Mid-term adjusted AFR 1.62% 1.61% 1.61% 1.60%

Long-term adjusted AFR 1.92% 1.91% 1.91% 1.90%

Bulletin No. 2018–2 275 January 8, 2018

REV. RUL. 2018–01 TABLE 3

Rates Under Section 382 for January 2018

Adjusted federal long-term rate for the current month 1.92%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal 1.96% long-term rates for the current month and the prior two months.)

REV. RUL. 2018–01 TABLE 4

Appropriate Percentages Under Section 42(b)(1) for January 2018

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 7.55%

Appropriate percentage for the 30% present value low-income housing credit 3.24%

REV. RUL. 2018–01 TABLE 5

Rate Under Section 7520 for January 2018

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

REV. RUL. 2018–01 TABLE 6

Deemed Rate for Transfers to New Pooled Income Funds During 2018

Deemed rate of return for transfers during 2018 to pooled income funds that have been in existence for less than 3 taxable years

2.6%

1.4%

Section 42.—Low-Income Housing Credit

The appropriate percentages under section 42(b)(1) are set forth for the month of January 2018. See Rev. Rul. 2018–01, page 275.

Section 280G.—Golden Parachute Payments

The applicable federal short-term, mid-term, and long-term rates are set forth for the month of January 2018. See Rev. Rul. 2018–01, page 275.

Section 382.—Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term rate is set forth for the month of January 2018. See Rev. Rul. 2018–01, page 275.

Section 467.—Certain Payments for the Use of Property or Services

The applicable federal short-term, mid-term, and long-term rates are set forth for the month of January 2018. See Rev. Rul. 2018–01, page 275.

Section 468.—Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The applicable federal short-term, mid-term, and long-term rates are set forth for the month of January 2018. See Rev. Rul. 2018–01, page 275.

Section 482.—Allocation of Income and Deductions Among Taxpayers

The applicable federal short-term, mid-term, and long-term rates are set forth for the month of January 2018. See Rev. Rul. 2018–01, page 275.

Section 483.—Interest on Certain Deferred Payments

The applicable federal short-term, mid-term, and long-term rates are set forth for the month of January 2018. See Rev. Rul. 2018–01, page 275.

Section 642.—Special Rules for Credits and Deductions

The deemed rate for transfers to new pooled income funds during 2018 is set forth. See Rev. Rul. 2018–01, page 275.

Section 1288.—Treatment of Original Issue Discount on Tax-Exempt Obligations

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2018. See Rev. Rul. 2018–01, page 275.

Section 7520.—Valuation Tables

The applicable federal rate under section 7520 is set forth for the month of January 2018. See Rev. Rul. 2018–01, page 275.

January 8, 2018 276 Bulletin No. 2018–2

26 CFR 48.4081–1(c)(3): Gasoline blendstocks. (Al- so: Sections 4041, 4081, 4083.)

Rev. Rul. 2018–02

ISSUE

Is a mixture of butane and gasoline an alternative fuel mixture that qualifies for the alternative fuel mixture credit under § 6426(e) of the Internal Revenue Code (Code)?

FACTS

A claimant (Producer) mixes gasoline and butane and sells it for use as a fuel. Producer claims the alternative fuel mixture credit under § 6426(e) for an open tax period ending on or before December 31, 2016, on the premise that the gasoline in the mixture is a taxable fuel and the butane in the mixture is a form of liquefied petroleum gas (LPG), an alternative fuel. Producer indicates in its claim that the basis for its position that butane is a form of LPG is the language in Chapter One of IRS Publication 510, “Excise Taxes (Including Fuel Tax Credits and Refunds),” which provides, in the “Other Fuels (Including Alternative Fuels)” section, that “[I]iquefied petroleum gas includes propane, butane, pentane, or mixtures of those products.”

LAW

Section 4081(a)(1)(A) imposes a tax on certain removals, entries, and sales of taxable fuel.

Section 4083(a)(1) provides that the term “taxable fuel” means gasoline, diesel fuel, and kerosene.

Section 4083(a)(2)(B) provides that the term “gasoline” includes, to the extent prescribed in the regulations, (i) any gasoline blend stock, and (ii) any product commonly used as an additive in gasoline (other than alcohol), and that for purposes of § 4083(a)(2)(B)(i), the term “gasoline blend stock” means any petroleum product component of gasoline.

Section 48.4081–1(b) of the Manufacturers and Retailers Excise Tax Regulations provides that “gasoline” means finished gasoline and gasoline blendstocks.

Section 48.4081–1(b) also provides that “finished gasoline” means all products that are commonly or commercially

known or sold as gasoline and are suitable for use as a motor fuel, other than products that have an American Society for Testing and Materials (ASTM) octane number of less than 75 as determined by the motor method.

Section 48.4081–1(c)(3)(i) provides that, except as provided in § 48.4081– 1(c)(3)(ii), “gasoline blendstocks” means (A) alkylate; (B) butane; (C) butene; (D) catalytically cracked gasoline; (E) coker gasoline; (F) ethyl tertiary butyl ether (ETBE); (G) hexane; (H) hydrocrackate; (I) isomerate; (J) methyl tertiary butyl ether (MTBE); (K) mixed xylene (not including any separated isomer of xylene); (L) natural gasoline; (M) pentane; (N) pentane mixture; (O) polymer gasoline; (P) raffinate; (Q) reformate; (R) straightrun gasoline; (S) straight-run naphtha; (T) tertiary amyl methyl ether (TAME); (U) tertiary butyl alcohol (gasoline grade) (TBA); (V) thermally cracked gasoline; (W) toluene; and (X) transmix containing gasoline.

Section 48.4081–1(c)(3)(ii) provides that the term “gasoline blendstocks” does not include any product that cannot, without further processing, be used in the production of finished gasoline.

Section 6426(a)(1) and (e)(1) allows a $0.50 credit against a claimant’s § 4081 tax liability for each gallon of alternative fuel used by the taxpayer to produce an alternative fuel mixture for sale or use in the taxpayer’s trade or business.

Section 6426(e)(2) provides that for purposes of § 6426, the term “alternative fuel mixture” means a mixture of alternative fuel and taxable fuel (as defined in § 4083(a)(1)(A), (B), or (C)) that is sold by the taxpayer producing such mixture to any person for use as a fuel, or used as a fuel by the taxpayer producing such mixture.

Section 6426(d)(2)(A) provides that the term “alternative fuel” includes LPG.

Section 2(b) of Notice 2006–92, 2006–2 C.B. 774, provides that an alternative fuel mixture requires a mixture of alternative fuel and at least 0.1 percent (by volume) of taxable fuel.

Section 6(a)(1) of Notice 2006–92 provides that a liquid alternative fuel is a liquid other than gas oil, fuel oil, or taxable fuel and is subject to the tax imposed by § 4041(a)(2) when it is sold for use or

used as fuel in a motor vehicle or motorboat.

Section 4041(a) generally imposes a tax on the sale or use of certain liquids, including LPG. The tax does not apply to any liquid taxed under § 4081.

Section 48.4041–8(f)(1)(i) provides that the term “special motor fuel” includes “[a]ny [LPG] (such as propane, butane, pentane, or mixtures of the same).”

Section 48.4041–8(f)(2) further provides that the term “special motor fuel” does not include any product taxable under the provisions of § 4081.

ANALYSIS

Every gallon of gasoline sold in the United States contains butane. Gasoline contains some butane naturally from the typical refining process. Butane is also commonly blended with gasoline to achieve correct vapor pressure properties depending on where and when the gasoline will be used.

Under the facts presented, Producer blended butane with gasoline and contends that the mixture qualifies for the alternative fuel mixture credit under § 6246(e) because the gasoline in the mixture is a taxable fuel and the butane in the mixture is LPG, an alternative fuel.

Section 4083(a)(1) provides that gasoline is a taxable fuel. Section 4083(a) (2)(B) provides that, to the extent prescribed in regulations, gasoline includes any gasoline blendstock, and that for purposes of § 4083(a)(2)(B)(i), a gasoline blendstock includes any petroleum product component of gasoline. Section 48.4081–1(c)(3)(i), which was issued in 1996, states that butane is a gasoline blendstock. See T.D. 8659, 1996–1 C.B. 264. Accordingly, butane is and has been a taxable fuel since before the enactment of § 6426(d) and (e) in 2005 as part of the Safe, Accountable, Flexible, Efficient Transportation Equity Act. See 119 Stat. 1144, P.L. 109–59 (2005). A mixture of butane, a taxable fuel, with gasoline, a taxable fuel, is a mixture of two taxable fuels, not a mixture of a taxable fuel and an alternative fuel, as required by § 6426(e)(2). Therefore, Producer may not claim the alternative fuel mixture credit under § 6426(e) for

Bulletin No. 2018–2 277 January 8, 2018

the mixture of butane and gasoline. See Notice 2006–92.

Producer nevertheless cites to IRS Publication 510 to support its contention that the gasoline in its mixture is a taxable fuel and the butane is LPG, which is an alternative fuel. The term “liquefied petroleum gas” as used in § 6426(d)(2)(A) is not defined in the Code or the regulations. Section 48.4041–8(f)(1)(i) provides that the term “special motor fuel” includes any LPG, “such as propane, butane, pentane, or mixtures of the same.” However, the following subsection, § 48.4041–8(f)(2), provides that the term “special motor fuel” does not include any product taxable under the provisions of § 4081. Thus, the language in § 48.4041–8(f) that suggests that butane is a type of LPG also contains an express exception for products taxable under § 4081. IRS Publication 510, although not authoritative guidance, is consistent with this conclusion because it lists butane as a type of LPG in the section called “Other Fuels (Including Alternative Fuels)” but also provides that the term “other fuels,” which include alternative fuels, “means any liquid except gas oil, fuel oil, or any product taxable under § 4081” (emphasis added).

Since Producer used butane in the production of finished gasoline, the butane is a gasoline blendstock. See § 48.4081–1(c) (3)(i) and (ii). Because gasoline blendstocks are taxable under § 4081, Producer’s butane is a taxable fuel and not an alternative fuel. See Notice 2006–92; s ee also § 4041(a)(2). Producer’s mixture is not an alternative fuel mixture for purposes of § 6426(e) because Producer blended two taxable fuels, not a taxable fuel and an alternative fuel. This conclusion is supported by §§ 6426(e), 4081(a), 4083(a), 48.4081–1(b), and 48.4081–1(c)(3), as well as the language in § 48.4041–8(f). Moreover, to view butane as an alternative fuel within the meaning of section 6426(d)(2)(A) would mean that Congress intended to allow a mixture of gasoline (a taxable fuel) and a gasoline blendstock, i.e., butane (a taxable fuel) to qualify for the alternative fuel mixture credit.

HOLDING

A mixture of butane (or other gasoline blendstock as defined in § 48.4081– 1(c)(3)(i)) and gasoline is a mixture of

two taxable fuels. Therefore, it is not an alternative fuel mixture and does not qualify for the alternative fuel mixture credit under § 6426(e) of the Code.

DRAFTING INFORMATION

The principal author of this revenue ruling is Amanda F. Dunlap of the Office of the Associate Chief Counsel (Passthroughs & Special Industries). For further information about this revenue ruling, please contact Branch 7 of Passthroughs & Special Industries at (202) 317-6855 (not a toll-free number).

26 CFR 1.199–3: Domestic production gross re- ceipts.

Rev. Rul. 2018–03

ISSUE

May a package of films licensed to customers in the normal course of business be an item under § 1.199–3(d)(1)(i) of the Income Tax Regulations for determining the domestic production activities deduction under § 199 of the Internal Revenue Code (Code)?

FACTS

X Corporation ( X ) licenses a package of films (for example, a television channel) to customers for a fee in the normal course of its business. X’ s package contains films licensed to X by unrelated third parties and films produced by X . X pays license fees for distribution rights of the licensed films.

LAW AND ANALYSIS

Under § 199(c)(4)(A)(i)(II) and § 1.199– 3(a)(1)(ii), domestic production gross receipts (DPGR) are the gross receipts of the taxpayer that are derived from any lease, rental, license, sale, exchange, or other disposition (collectively, “disposition”) of any qualified film produced by the taxpayer.

Under § 1.199–3(d)(1), for purposes of §§ 1.199–1 through 1.199–9, a taxpayer may use any reasonable method satisfactory to the Secretary based on all facts and circumstances to determine whether gross receipts qualify as DPGR on an item-by-item basis (and not, for example, on a division

by-division, product line-by-product line, or transaction-by-transaction basis).

Section 1.199–3(d)(1)(i) provides that the term “item” means the property offered by the taxpayer in the normal course of the taxpayer’s business for disposition to customers, if the gross receipts from the disposition of such property qualify as DPGR.

Section 1.199–3(d)(1)(ii) provides that, if § 1.199–3(d)(1)(i) does not apply to the property, then any component of the property described in § 1.199–3(d)(1)(i) is treated as the item, provided that the gross receipts from the disposition of the property described in § 1.199–3(d)(1)(i) that are attributable to such component qualify as DPGR. Each component that meets the requirements of § 1.199–3(d)(1)(ii) must be treated as a separate item and may not be combined with a component that does not meet these requirements.

Section 1.199–3(d)(2)(i) provides that, for purposes of § 1.199–3(d)(1)(i), in no event may a single item consist of two or more properties unless those properties are offered for disposition, in the normal course of the taxpayer’s business, as a single item (regardless of how the properties are packaged).

Together, § 199(c)(6) and § 1.199– 3(k)(1) and (9) provide that the term “qualified film” means any motion picture film or video tape under § 168(f)(3), or live or delayed television programming (film), if not less than 50 percent of the total compensation relating to the production of such film is compensation for services performed in the United States by actors, production personnel, directors, and producers. A qualified film does not include property with respect to which records are required to be maintained under 18 U.S.C. § 2257.

Section 1.199–3 provides guidance on the determination of DPGR with specific rules for qualified film provided in § 1.199–3(k).

Section 1.199–3(k)(4) provides, for purposes of § 1.199–3(k), the term “compensation for services” means all payments for services performed by actors, production personnel, directors, and producers relating to the production of the film, including participations and residuals. Payments for services include all elements of compensation as provided in

January 8, 2018 278 Bulletin No. 2018–2

§ 1.263A–1(e)(2)(i)(B) and (3)(ii)(D). Compensation for services is not limited to W–2 wages and includes compensation paid to independent contractors.

Section 1.199–3(k)(6) provides the general rule for determining whether a qualified film will be treated as produced by the taxpayer for purposes of § 199(c)(4) (A)(i)(II). A taxpayer meets this requirement if the film production activity performed by the taxpayer is substantial in nature within the meaning of § 1.199–3(g)(2). For purposes of § 1.199–3(g)(2), the relative value added by affixing trademarks or trade names as defined in § 1.197– 2(b)(10)(i) will be treated as zero and is not a factor for determining whether a taxpayer’s film production activity is substantial in nature.

Section 1.199–3(k)(7) provides a safe harbor under which film is treated as qualified film under § 1.199–3(k)(1) and as produced by the taxpayer under § 1.199– 3(k)(6) if the taxpayer meets the requirements of § 1.199–3(k)(7)(i) and (ii). A taxpayer that chooses to use this safe harbor must apply all the provisions of § 1.199–3(k)(7).

Generally, § 1.199–3(k)(7)(i) provides that a film will be treated as a qualified film produced by the taxpayer if not less than 50 percent of the total compensation for services paid by the taxpayer is compensation for services performed in the United States and the taxpayer satisfies the safe harbor in § 1.199–3(g)(3). Section 1.199–3(k)(7)(ii) provides that the not-less-than-50-percentof-the-total-compensation requirement under § 1.199–3(k)(7)(i) is calculated using a fraction, the numerator of which is the compensation for services paid by the taxpayer for services performed in the United States and the denominator is the total compensation for services paid by the taxpayer regardless of where the production activities are performed.

In the situation described above, the package of films is property offered in the normal course of X ’s business for disposition to customers. Thus, the package of films can be an item under § 1.199– 3(d)(1)(i) if the gross receipts that X derives from licensing the package of films qualify as DPGR.

The gross receipts that X derives from licensing the package of films may qualify as DPGR under § 199(c)(4)(A)(i)(II) and

§ 1.199–3(a)(1)(ii) if X establishes that the package of films meets the criteria established under the general rules in § 1.199–3(k)(1) and § 1.199–3(k)(6) or, alternatively, under the safe harbor in § 1.199–3(k)(7) (including the safe harbor in § 1.199–3(g)(3)).

If X relies on the safe harbor in § 1.199–3(k)(7), the “not-less-than-50percent-of-the-total-compensation” requirement in § 1.199–3(k)(7)(i) is a fraction where the numerator is the compensation X paid to actors, production personnel, directors, and producers for services performed in the United States that are directly related to the films in X ’s package and the denominator is such compensation regardless of where the film production activities were performed. Furthermore, to satisfy the safe harbor in § 1.199–3(g)(3), X ’s direct labor and overhead for the package of films must be 20 percent or more of X ’s unadjusted depreciable basis in the package of films, or 20 percent or more of X ’s cost of goods sold (CGS) of the package of films if X has CGS for the package of films. Direct labor and overhead include the costs for any films that are treated as self-produced by X, and do not include license fees of the licensed films. Under § 1.199–3(g)(3) (ii), “unadjusted depreciable basis” includes the costs that create basis under § 1012 and adjusted basis under § 1011 without regard to any adjustments described in § 1016(a)(2) or (3). This means that all costs that X paid or incurred for the package of films, including any fees X paid to unrelated third parties to license films included in the package, are included in unadjusted depreciable basis. Thus, X ’s unadjusted depreciable basis includes costs of selfproduced films plus license fees X paid to acquire distribution rights in the licensed films (CGS would also include these costs, in a transaction with CGS). Costs reasonably attributable to transmission and distribution activities should not be included in X ’s direct labor, overhead, or unadjusted depreciable basis (or CGS, in a transaction with CGS).

X ’s films are treated as self-produced if X engaged in the film production activities, or if the films were produced pursuant to a contract with an unrelated party

and X had the benefits and burdens of ownership as required under § 1.199– 3(k)(8) and § 1.199–3(g)(4). X ’s film production activities include the following activities carried out by actors, production personnel, directors, and producers engaged in film: (1) pre-production (ideation, planning, and scripting); (2) production (shooting and recording images and sounds); and (3) post-production (film editing, scene sequencing, and the addition of audio/visual effects for selfproduced films). X ’s transmission and distribution activities are not film production activities. Transmission and distribution activities include, for example: formatting the channel feed; assembly and transmission of the channel signal by collecting films by satellite, fiber optic cable, tape, and other means; decoding; reviewing; assessing; performing quality control for incoming and outgoing signals; converting to/from high definition and for viewing on mobile and other platforms; compressing and encoding signals for distribution; transmitting signals to customers; creating a seamless viewing format; adding overlay of special features and digital technologies; and inserting transition material.

If the gross receipts do not qualify as DPGR, then § 1.199–3(d)(1)(ii) applies, and X can treat any individual film included in the package of films as an item, provided the gross receipts attributable to the individual film qualify as DPGR. X cannot combine films that meet the requirements under § 1.199– 3(d)(1)(ii) with films that do not meet the requirements.

HOLDING

A package of films licensed to customers in the normal course of business may be an item under § 1.199–3(d)(1)(i) for determining the domestic production activities deduction under § 199.

This holding does not affect the characterization of the property at issue for any other purpose of the Code. For example, this holding does not mean that the package of films is described in § 168(f)(3) or constitutes one motion picture film or video tape for purposes of § 168(f)(3).

Bulletin No. 2018–2 279 January 8, 2018

DRAFTING INFORMATION

The principal authors of this revenue ruling are James A. Holmes and James W.

Rider of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding

this revenue ruling, contact Mr. Rider at (202) 317-4137 (not a toll-free number).

January 8, 2018 280 Bulletin No. 2018–2