Part III. General Descriptions of APAs Executed in 2023

[Pub. L. 106-170 § 521(b)(2)(D) and (E)]

Relationships between Controlled Parties

Non-U.S. Parent &

U.S. Parent &

Non-U.S. Subsidiary

U.S. Subsidiary

56%

37%

6% All Other Relationships 1%

As in prior years, more than half of the APAs executed in 2023 involved transactions between non-U.S. parents and U.S. subsidiaries.

Covered Transactions, Functions and Risks, and Tested Parties § 521(b)(2)(D)(ii-iii)

Types of Covered Transactions

All Other Types of

Sale of Tangible

Transactions

23% Sale of Tangible Property from the

2%

Provision of Services

by a Non-U.S. Entity

23%

U.S. 13% Use of Intangible Property by a U.S.

Entity

12%

U.S. Entity

by a U.S. Entity

6%

21%

Most of the transactions ¹⁰ covered in APAs executed in 2023 involve the sale of tangible goods or the provision of services. Eighteen percent of the transactions involve the use of intangible property, which can be among the most challenging transactions in APMA’s inventory.

In the majority of APAs, the covered transactions involve numerous business functions and risks. For instance, with respect to functions, APAs involving manufactured products typically involve a controlled group that conducts research and development (R&D), engages in product design and engineering, manufactures the product, markets and distributes the product, and performs support functions such as legal, fi nance, and human resources. Regarding risks, the controlled group may assume a variety of risks, including market risks, R&D risks, fi nancial risks, credit and collection risks, product liability risks, and general business risks. In the APA evaluation process, a signifi cant amount of time and effort is devoted to understanding how functions and risks are allocated among the controlled group of companies that are party to the covered transactions. For methods requiring the selection of a tested party, the tested party chosen generally will be the least complex of the controlled taxpayers.

10 APAs often cover more than one type of transaction.

April 15, 2024 916 Bulletin No. 2024–16

Types of Tested Parties

42% Non-U.S. Distributor

All Other Types of

10%

Tested Parties

1%

U.S. Manufacturer

13%

Non-U.S. Service

U.S. Service Provider

12%

Provider

22%

Consistent with prior years, a majority of tested parties ¹¹ in 2023 were U.S. distributors, U.S. manufacturers, or U.S. service providers.

Transfer Pricing Methods Used § 521(b)(2)(D)(iv)

In 2023, the most commonly used transfer pricing method (TPM) for both the sale of tangible property and the use of intangible property continued to be the comparable profi ts method/transactional net margin method (CPM/TNMM). The CPM/TNMM was used for 80 percent of these types of transactions.

As in recent years, for covered transactions involving tangible and intangible property that used the CPM/TNMM, the operating margin (OM) is still the most common profi t level indicator (PLI) used to benchmark results. It was used 60 percent of the time. Other PLIs, such as the Berry Ratio and return on total cost, made up the other 40 percent. As used here, “OM” is defi ned as the ratio of operating profi t to sales, ¹² and “Berry Ratio” is defi ned as the ratio of gross profi t to operating expenses. ¹³ Most services transactions (86 percent) also used the CPM/TNMM with the OM and operating profi t to operating expense being the most common PLIs (used 48 percent of the time). ¹⁴

Sour ces of Comparables, Comparables Selection Criteria, and Nature of Adjustments to Comparables or Tested Party Data § 521(b)(2)(D)(v-vii)

For t he APAs executed in 2023 that involved the CPM/TNMM with a North American tested party, the most widely used data source for comparables was Standard and Poor’s Compustat/Capital IQ database. Different sources were used in other cases (e.g., where the tested party was not a North American entity or where transaction-based methods were applied). Other commonly used databases are listed in the table below.

Table 5: Sources of Comparable Data

Bureau van Dijk (BvD) Orbis Capitaline TP

Global Vantage RoyaltySource

ktMINE RoyaltyStat

Ace TP

In making comparability adjustments, typical balance sheet adjustments, as identifi ed in Treas. Reg. §§ 1.482-1(d)(2) and 1.482-5(c) (2)(iv), were made in most cases, including, where appropriate, adjustments for payables, receivables, inventory, and fi xed assets. In addition, where appropriate, adjustments for different accounting practices were made to convert from LIFO to FIFO inventory accounting, and a small number of cases involved the accounting reclassifi cation of expenses, e.g., from COGS to operating expenses.

11 Not all the executed APAs involve a tested party. Whether an APA involves a tested party would depend on the transfer pricing method used.

12 See Treas. Reg. § 1.482-5(b)(4)(ii)(A).

13 See Treas. Reg. § 1.482-5(b)(4)(ii)(B).

14 The majority of APAs that covered services transactions also included tangible/intangible transactions, which were not tested under a separate PLI.

Bulletin No. 2024–16 917 April 15, 2024

Ranges and Adjustment Mechanisms § 521(b)(2)(D)(viii-ix)

Most transactions covered in APAs target an interquartile range as described in Treas. Reg. § 1.482-1(e)(2)(iii)(C), a point within the interquartile range, or another targeted arm’s length range. Where the transaction involves a royalty payment for the use of intangible property, both specific royalty rates and ranges have been used. Where the covered transaction is the sale or license of intangible property, and the payment for such transfer would be a royalty based solely on external comparable uncontrolled transactions, a secondary or confirming method, e.g., a test of the post-royalty operating margin or cost-plus mark-up, has sometimes also been used. The testing periods of the APAs executed in 2023 were either a single year, the term of the APA only, or the term of the APA plus rollback years.

APAs executed in 2023 included several mechanisms for making adjustments to the tested party’s results when the results fall outside the agreed range or do not match the point required by the APA. Examples of the mechanisms used include an adjustment bringing the tested party’s results for a single year to either the closer edge of the range or the median of the range, an adjustment to bring the results over the APA term to the closer edge of the range, or an adjustment to bring the results to a specified point or royalty rate.

Critical Assumptions § 521(b)(2)(D)(v)

The model APA used by the IRS (included as Appendix 1 of this report) includes standard critical assumptions that there will be no material changes to the taxpayer’s business or to its tax or financial accounting practices during the APA term. Some bilateral cases have also included critical assumptions tied to the taxpayer’s profitability in a certain year or over the term of the APA. Pursuant to § 7.06(3) of Rev. Proc. 2015-41, APMA will cancel an APA in the event of a failure of a critical assumption unless the parties agree to revise the APA.

Term Lengths of APAs Executed in 2023 § 521(b)(2)(D)(x)

Table 6: Term Lengths of APAs Executed in 2023

As described in § 3.03(1) of Rev. Proc. 2015-41, taxpayers should request an APA term that will cover at least five prospective taxable years and may also request that the APA be “rolled back” to cover one or more earlier taxable years, although the appropriate APA term is decided on a case-by-case basis. Of the APAs executed in 2023, 19 percent included rollback years. A substantial number of APAs with terms of greater than five years were submitted as a request for a five-year term, and the additional years were agreed to between the taxpayer and the IRS (or, in the case of a bilateral APA, between the IRS and the foreign government upon the taxpayer’s request) to ensure a reasonable amount of prospectivity in the APA term.

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Amount of Time Taken to Complete New and Renewal APAs § 521(b)(2)(E)

Table 7: Months to Complete New and Renewal APAs Executed in 2023

Months to Complete New and Renewal APAs Executed in 2023

50.0

40.0

30.0

20.0

10.0

0.0

Median completion time decreased in 2023 to 42.0 months (from 43.4 months in 2022).

Efforts to Ensure Compliance with APAs § 521(b)(2)(F)

As described in § 7.02(1) of Rev. Proc. 2015-41, taxpayers are required to fi le annual reports to demonstrate compliance with the terms and conditions of their APAs. The fi ling and review of these annual reports are critical parts of the APA process. Through annual report review, the APMA Program monitors taxpayer compliance with APAs on a contemporaneous basis. Annual report review also provides current information on the success or problems associated with the various TPMs adopted in the APA process.

Nature of Documentation Required in Annual Report § 521(b)(2)(D)(xi)

APAs require taxpayers to fi le timely and complete annual reports describing their operations and demonstrating compliance with the APA’s terms and conditions. Not every annual report will include each of the items listed in Appendix C of the Model APA; items are required to be included where the facts demonstrate a need for such documentation. The requirements for the information to be included in a specifi c APA annual report is included in Appendix C of the executed APA.

Approaches for Sharing of Currency or Other Risks § 521(b)(2)(D)(xii)

In appropriate cases, APAs may provide specifi c approaches for dealing with risks, including currency risk, such as adjustment mechanisms and/or critical assumptions.

Bulletin No. 2024–16 919 April 15, 2024

APPENDIX 1– Model APA

ADVANCE PRICING AGREEMENT

between

[ Insert Taxpayer’s Name ]

and

THE INTERNAL REVENUE SERVICE

PARTIES

The Parties to this Advance Pricing Agreement (APA) are the Internal Revenue Service (IRS) and [ Insert Taxpayer’s Name ], EIN ________.

RECITALS

[ Insert Taxpayer Name ] is the common parent of an affiliated group filing consolidated U.S. tax returns (collectively referred to as “Taxpayer”) and is entering into this APA on behalf of itself and other members of its consolidated group.

Taxpayer’s principal place of business is [ City, State ]. [ Insert general description of Taxpayer and other relevant parties ].

This APA contains the Parties’ agreement on the best method for determining arm’s-length prices of the Covered Issues under I.R.C. section 482, the Treasury Regulations thereunder, and any applicable tax treaties.

{If renewal, add} [Taxpayer and IRS previously entered into an APA covering taxable years ending _____ to ______, executed on ________.]

AGREEMENT

The Parties agree as follows:

1. Covered Issues. This APA applies to the Covered Issues, as defined in Appendix A.

2. Covered Methods. Appendix A sets forth the Covered Methods for the Covered Issues.

3. Term . This APA applies to the APA Term, as defined in Appendix A.

4. Operation.

a. Revenue Procedure 2015-41 governs the interpretation, legal effect, and administration of this APA.

b. Nonfactual oral and written representations, within the meaning of sections 6.04 and 6.05 of Revenue Procedure 2015-41 (including any proposals to use particular TPMs), made in conjunction with the APA Request constitute statements made in compromise negotiations within the meaning of Rule 408 of the Federal Rules of Evidence.

5. Compliance.

a. Taxpayer must report its taxable income in an amount that is consistent with Appendix A and all other requirements of this APA on its timely filed U.S. Return. However, if Taxpayer’s timely filed U.S. Return for any taxable year covered by this APA (APA Year) is filed prior to, or no later than 60 days after, the effective date of this APA, then Taxpayer must report its taxable income for that APA Year in an amount that is consistent with Appendix A and all other requirements of this APA: (i) on a timely-filed U.S. Return, (ii) on an amended U.S. Return filed no later than 120 days after the effective date of this APA, or (iii) by an alternative means (for example, by agreed adjustments with the IRS office with examination jurisdiction over the taxpayer for any APA year currently under examination).

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b. {Use or edit the following when U.S. Group or Foreign Group contains more than one member.} [This APA addresses the arm’s-length nature of prices charged or received in the aggregate between Taxpayer and Foreign Participants with respect to the Covered Issues. Except as explicitly provided, this APA does not address and does not bind the IRS with respect to prices charged or received, or the relative amounts of income or loss realized, by particular legal entities that are members of U.S. Group or that are members of Foreign Group.]

c. The IRS will not reconsider any Covered Method but will instead limit any examination of Taxpayer’s treatment of Covered Issues in their U.S. Return for any APA Year to, and may require that Taxpayer establish, the following: (i) Taxpayer’s compliance with the terms and conditions of this APA, (ii) the accuracy of material representations included in APA annual reports submitted pursuant to this APA, and (iii) the correctness of the supporting data and computations used to apply the Covered Method. The IRS may audit and propose adjustments to Taxpayer’s results as determined under this APA’s Covered Method without affecting the APA’s validity or applicability. Taxpayer may agree with the proposed adjustments in the same manner as any other adjustment, in which case the IRS will assess any resulting additional tax or refund any resulting overpayment of tax accordingly. If it does not agree with the proposed adjustment, Taxpayer may contest it through available administrative and judicial procedures. Taxpayer must include the audit adjustments as finally determined for the purpose of applying the Covered Method and must then make any resulting APA primary adjustments.

d. If Taxpayer does not comply with the terms and conditions of this APA, then the IRS may:

i. enforce the terms and conditions of this APA and make or propose allocations or adjustments under I.R.C. section 482 consistent with this APA;

ii. cancel or revoke this APA under section 7.06 of Revenue Procedure 2015-41; or

iii. revise this APA, if the Parties agree.

e. Taxpayer must timely file an Annual Report that includes a signed “penalties of perjury” declaration for each APA Year in accordance with Appendix C and section 7.02 of Revenue Procedure 2015-41. The Annual Report may be submitted only by electronic transmission pursuant to paragraph 15 and must include an image of an original signature or a digital signature that uses encryption techniques to provide proof of original and unmodified documentation. Taxpayer must file the Annual Report for all APA Years through the APA Year ending [insert year] by [insert date]. Taxpayer must file the Annual Report for each subsequent APA Year by [insert month and day] immediately following the close of that APA Year. (If any date falls on a weekend or holiday, the Annual Report shall be due on the next date that is not a weekend or holiday.) The IRS may request additional information reasonably necessary to clarify or complete the Annual Report. Taxpayer will provide such requested information within 30 days. Additional time may be allowed for good cause.

f. The IRS will determine whether Taxpayer has complied with this APA based on Taxpayer’s U.S. Returns, the Financial Statements, and other APA Records, for the APA Term and any other year necessary to verify compliance. For Taxpayer to comply with this APA, {use the following or an alternative} an independent certified public accountant must render an opinion that Taxpayer’s Financial Statements present fairly, in all material respects, Taxpayer’s financial position under applicable generally accepted accounting standards.

g. In accordance with section 7.04 of Revenue Procedure 2015-41, Taxpayer will (1) maintain the APA Records, and (2) make them available to the IRS in connection with an examination under section 7.03. Compliance with this subparagraph constitutes compliance with the record-maintenance provisions of I.R.C. sections 6038A and 6038C for the Covered Issues for any taxable year during the APA Term.

h. The True Taxable Income within the meaning of Treasury Regulations sections 1.482-1(a)(1) and (i)(9) of a member of an affiliated group filing a U.S. consolidated return will be determined under the I.R.C. section 1502 Treasury Regulations.

i. {Optional for US Parent Signatories} To the extent that Taxpayer’s compliance with this APA depends on certain acts of Foreign Group members, Taxpayer will ensure that each Foreign Group member will perform such acts.

6. Critical Assumptions. This APA’s critical assumptions, within the meaning of Revenue Procedure 2015-41, section 1.04, appear in Appendix B. If any critical assumption has not been met, then Revenue Procedure 2015-41, section 7.06, governs.

Bulletin No. 2024–16 921 April 15, 2024

7. Disclosure. An APA, any background information relating to the APA, and the taxpayer’s APA request and any supplementary materials submitted in conjunction with the APA request are subject to various sections of the I.R.C. and U.S. competent authority treaty obligations as more fully explained in section 9 of Rev. Proc. 2015-41.

8. Disputes. If a dispute arises concerning the interpretation of this APA, the Parties will seek a resolution by the IRS’s Director, Treaty and Transfer Pricing Operations, to the extent reasonably practicable, before seeking alternative remedies.

9. Materiality. In this APA the terms “material” and “materially” will be interpreted consistently with the definition of “material facts” in Revenue Procedure 2015-41, section 7.06(4).

10. Section Captions. This APA’s section captions, which appear in italics, are for convenience and reference only. The captions do not affect in any way the interpretation or application of this APA.

11. Terms and Definitions . Unless otherwise specified, terms in the plural include the singular and vice versa. Appendix D contains definitions for capitalized terms not elsewhere defined in this APA.

12. Entire Agreement and Severability. This APA is the complete statement of the Parties’ agreement. The Parties will sever, delete, or reform any invalid or unenforceable provision in this APA to approximate the Parties’ intent as nearly as possible.

13. Successor in Interest. This APA binds, and inures to the benefit of, any successor in interest to Taxpayer.

14. Notice. Any notices required by this APA or Revenue Procedure 2015-41 must be in writing. Taxpayer will send notices to the IRS at:

Commissioner, Large Business and International Division Internal Revenue Service 1111 Constitution Avenue, NW SE:LB:TTPO:APMA:K:APMA Director Washington, DC 20224 (Attention: APMA)

The IRS will send notices to the taxpayer at:

Taxpayer Corporation Attn: Jane Doe, Sr. Vice President (Taxes) 1000 Any Road Any City, USA 10000 (phone: __________)

15. Submission by electronic transmission. The form of electronic document transmittal will be one of the three alternatives described below. Regardless of the transmittal mode, Taxpayer must contact APMA by email at lbi.ttpo.apma.feedback@irs.gov to initiate the mode.

a . Taxpayer-Licensed Secure Portal. APMA prefers to send and receive documents to/from taxpayers through a taxpayer-licensed secure portal as this provides the highest degree of protection.

b. Email with encrypted attachments. When secure portal mode is not selected, Taxpayer may send and receive documents to and from APMA by email. Before employing this document transmittal mode, an APMA employee will authenticate that Taxpayer initiated the mode at the email noted above. After authentication, Taxpayer must then submit consent to transmit encrypted documents by email in the following form:

“I consent to receive encrypted documents by email from APMA employees for the duration of this APA/MAP request.”

c. Unencrypted email. Communication by unencrypted email is not secure, and therefore not encouraged. However, if Taxpayer chooses this mode, Taxpayer should:

i. Exclude sensitive information, including portions of Taxpayer’s TIN or name, from the subject line and body of emails.

April 15, 2024 922 Bulletin No. 2024–16

ii. Transmit any potentially sensitive information, including personally identifiable information, only via encrypted, pass word-protected attachments.

The User Guide at Sign and Send Documents Electronically | Internal Revenue Service (irs.gov) contains additional information about encrypting files and sending documents to IRS by email.

16. Effective Date and Counterparts. This APA is effective starting on the date, or later date of the dates, upon which all Parties execute this APA. The Parties may execute this APA in counterparts, with each counterpart constituting an original.

WITNESS,

The Parties have executed this APA on the dates below.

[Taxpayer Name in all caps]

By: ___________________________ Date: ________________, 202 Jane Doe Sr. Vice President (Taxes)

IRS By: ___________________________ Date: ________________, 202 John M. Wall Acting Director, APMA Program

Bulletin No. 2024–16 923 April 15, 2024

APPENDIX A

COVERED ISSUES AND COVERED METHOD

1. Covered Issues.

[Define the Covered Issues.]

2. APA Term. This APA applies to Taxpayer’s taxable years ending __________ through ________ (APA Term).

3. Covered Methods. {Note: If appropriate, adapt language from the following examples.}

[The Tested Party is __________.]

CUP Method

The covered method is the comparable uncontrolled price (CUP) method. The Arm’s Length Range of the price charged for _________ is between _______ and ___________ per unit.

CUT Method

The covered method is the CUT Method. The Arm’s Length Range of the royalty charged for the license of ______is between ____% and ___ % of [Taxpayer’s, Foreign Participants’, or other specified party’s] Net Sales Revenue. [Insert definition of net sales revenue or other royalty base.]

Resale Price Method (RPM)

The covered method is the resale price method (RPM). The Tested Party’s Gross Margin for any APA Year is defined as follows: the Tested Party’s gross profit divided by its sales revenue (as those terms are defined in Treasury Regulations sections 1.482-5(d)(1) and (2)) for that APA Year. The Arm’s Length Range is between ____% and ___ %, and the Median of the Arm’s Length Range is ___%.

Cost Plus Method

The covered method is the cost plus method. The Tested Party’s Cost Plus Markup is defined as follows for any APA Year: the Tested Party’s ratio of gross profit to production costs (as those terms are defined in Treasury Regulations sections 1.482-3(d)(1) and (2)) for that APA Year. The Arm’s Length Range is between % and%, and the Median of the Arm’s Length Range is___%.

CPM with Berry Ratio PLI

The covered method is the comparable profits method (CPM). The profit level indicator is a Berry Ratio. The Tested Party’s Berry Ratio is defined as follows for any APA Year: the Tested Party’s gross profit divided by its operating expenses (as those terms are defined in Treasury Regulations sections 1.482-5(d)(2) and (3)) for that APA Year. The Arm’s Length Range is between ___ % and ___ %, and the Median of the Arm’s Length Range is ___%

CPM using an Operating Margin PLI

The covered method is the comparable profits method (CPM). The profit level indicator is an operating margin. The Tested Party’s Operating Margin is defined as follows for any APA Year: the Tested Party’s operating profit divided by its sales revenue (as those terms are defined in Treasury Regulations section 1.482-5(d)(1) and (4)) for that APA Year. The Arm’s Length Range is between ____% and ___ %, and the Median of the Arm’s Length Range is ___.

April 15, 2024 924 Bulletin No. 2024–16

CPM using a Three-year Rolling Average Operating Margin PLI

The covered method is the comparable profits method (CPM). The profit level indicator is an operating margin. The Tested Party’s Three-Year Rolling Average operating margin is defined as follows for any APA Year: the sum of the Tested Party’s operating profit (within the meaning of Treasury Regulations section 1.482-5(d)(4) for that APA Year and the two preceding years, divided by the sum of its sales revenue (within the meaning of Treasury Regulations section 1.482-5(d)(1)) for that APA Year and the two preceding years. The Arm’s Length Range is between ____% and ____%, and the Median of the Arm’s Length Range is ___%.

Residual Profit Split Method

The covered method is the residual profit split method. [ Insert description of routine profit level determinations and residual profit-split mechanism ].

[ Insert additional provisions as needed. ]

4. Application of Covered Method.

For any APA Year, if the results of Taxpayer’s actual transactions produce a [price per unit, royalty rate for the Covered Issues] [or] [Gross Margin, Cost Plus Markup, Berry Ratio, Operating Margin, Three-Year Rolling Average Operating Margin for the Tested Party] within the Arm’s Length Range, then the amounts reported on Taxpayer’s U.S. Return must clearly reflect such results.

For any APA year, if the results of Taxpayer’s actual transactions produce a [price per unit, royalty rate] [or] [Gross Margin, Cost Plus Markup, Berry Ratio, Operating Margin, Three-Year Rolling Average Operating Margin for the Tested Party] outside the Arm’s Length Range, then amounts reported on Taxpayer’s U.S. Return must clearly reflect an adjustment that brings the [price per unit, royalty rate] [or] [Tested Party’s Gross Margin, Cost Plus Markup, Berry Ratio, Operating Margin, Three-Year Rolling Average Operating Margin] to the Median.

For purposes of this Appendix A, the “results of Taxpayer’s actual transactions” means the results reflected in Taxpayer’s and Tested Party’s books and records as computed under applicable generally accepted accounting standards [ insert another relevant accounting standard if applicable ], with the following adjustments:

(a) [The fair value of stock-based compensation as disclosed in the Tested Party’s audited Financial Statements shall be treated as an operating expense]; and

(b) To the extent that the results in any prior APA Year are relevant (for example, to compute a multi-year average), such results shall be adjusted to reflect the amount of any adjustment made for that prior APA Year under this Appendix A.

5. Conforming Adjustments

If Taxpayer makes an adjustment under paragraph 4 of this Appendix A (an “APA primary adjustment”, see Revenue Procedure 2015-41, section 7.01(1)), a conforming adjustment will be required as specified in Revenue Procedure 2015-41, section 7.01(2)(a). For this purpose, if there are multiple APA primary adjustments for an APA Year, those adjustments will first be netted to derive a net APA primary adjustment, for which a conforming adjustment will be required. In some cases, the conforming adjustment can be accomplished by a repatriation of funds as specified in Revenue Procedure 2015-41, section 7.01(2). Except as specified in this APA, conforming adjustments (including any repatriation of funds) are governed by the applicable rules under the I.R.C., including Rev. Proc. 99-32, 1992-2 C.B. 296, or successor guidance.

[ Per Revenue Procedure 2015-41, section 7.01(2)(d), the APA “will specify the terms of conforming adjustments, includ- ing, but not limited to, the terms of any repatriation of funds.” Also, any deviation from the treatment under the Code (e.g., no interest on repatriation payments) must be specified in the APA, and must be pursuant to a competent authority resolution (see Revenue Procedure 2015-41, section 7.01(2)(b)). ]

Bulletin No. 2024–16 925 April 15, 2024

APPENDIX B

CRITICAL ASSUMPTIONS

This APA’s critical assumptions are:

1. The business activities, functions performed, risks assumed, assets employed, and financial and tax accounting methods and classifications [and methods of estimation] of Taxpayer in relation to the Covered Issues will remain materially the same as described or used in Taxpayer’s APA Request. A mere change in business results will not be a material change.

[ Insert additional provisions as needed. ]

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APPENDIX C

APA RECORDS AND ANNUAL REPORT

APA Records

The APA Records will consist of all documents listed below for inclusion in the Annual Report, as well as all documents, notes, work papers, records, or other writings that support the information provided in such documents.

Annual Report

The Annual Report will include:

1. A properly completed APA Annual Report Summary in the form of Appendix E to this APA;

2. A table of contents, organized as follows; and

3. Statements that fully identify, describe, analyze, and explain:

a. All material differences between the U.S. Group’s business operations (including functions, risks assumed, markets, contractual terms, economic conditions, property, services, and assets employed) during the APA Year from the business operations described in the APA Request. If there have been no material differences, the Annual Report will include a statement to that effect.

b. All material differences between the U.S. Group’s accounting methods and classifications, and methods of estimation used during the APA Year, from those described or used in the APA Request. If any change was made to conform to changes in applicable generally accepted accounting standards (or other relevant accounting standards) Taxpayer will specifically identify the change. If there has been no material change in accounting methods and classifications or methods of estimation, the Annual Report will include a statement to that effect.

c. Any change to the Taxpayer notice information in paragraph 14 of this APA.

d. Any failure to meet any critical assumption. If there has been no failure, the Annual Report will include a statement to that effect.

e. Whether or not material information submitted while the APA Request was pending is discovered to be false, incorrect, or incomplete.

f. Any change to any entity classification for federal income tax purposes (including any change that causes an entity to be disregarded for federal income tax purposes) of any Worldwide Group member that is a party to the Covered Issues or is otherwise relevant to the covered method.

g. The following regarding any APA primary adjustments made under Appendix A for the APA Year:

i. The amounts of any APA primary adjustments;

ii. The circumstances that led to such APA primary adjustments being necessary;

iii. A calculation of the net APA primary adjustment as defined in Appendix A;

iv. A complete description of the means by which the conforming adjustment (see Appendix A) is accomplished, including:

A. a description of any accounts payable established in connection with a repatriation of funds pursuant to paragraph

5 of Appendix A and section 7.01(2) of Revenue Procedure 2015-41, including the entities involved and when the payables are established;

Bulletin No. 2024–16 927 April 15, 2024

B. a description of any amounts paid or deemed paid (including amounts paid in satisfaction of such accounts pay able), that specifies the entities involved, when the amounts are paid or deemed paid, and by what means any amounts are actually paid;

C. the character (such as capital, ordinary, income, expense, dividend, contribution to capital) and country source of

any payments and deemed payments, and the specific affected line item(s) of any affected U.S. Return.

h. The amounts, description, reason for, and financial analysis of any book-tax difference relevant to the covered method for the APA Year, as reflected on Schedule M-1 or Schedule M-3 of the U.S. Return for the APA Year.

i. Whether Taxpayer contemplates requesting, or has requested, to renew, modify, or cancel the APA.

4. The Financial Statements, and any necessary account detail to show compliance with the covered method, including consolidating financial statements, segmented financial data, records from the general ledger, or similar information if the assets, liabilities, income, or expenses relevant to showing compliance with the covered method are a subset of the assets, liabilities, income, or expenses presented in the Financial Statements.

5. {Use the following or the alternative prescribed by paragraph 5(f) of this APA:} A copy of the independent certified public accountant’s opinion required by paragraph 5(f) of this APA.

6. A financial analysis that reflects Taxpayer’s covered method calculations for the APA Year. The calculations must reconcile with and reference the information required under item 4 above in sufficient account detail to allow the IRS to determine whether Taxpayer has complied with the covered method.

7. An organizational chart for the Worldwide Group, revised annually to reflect all ownership or structural changes of entities that are parties to the Covered Issues or are otherwise relevant to the covered method.

8. A copy of the APA and any amendment.

9. A penalty of perjury statement, executed in accordance with Revenue Procedure 2015-41, section 7.02(8) and (9).

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APPENDIX D

DEFINITIONS

The following definitions control for all purposes of this APA. The definitions appear alphabetically below:

Bulletin No. 2024–16 929 April 15, 2024

APPENDIX E

APA ANNUAL REPORT SUMMARY FORM

The APA Annual Report Summary on the next page is a required APA Record. The APA Team Leader supplies some of the information requested on the form. Taxpayer is to supply the remaining information requested by the form and submit the form as part of its Annual Report.

April 15, 2024 930 Bulletin No. 2024–16

Internal Revenue Service APMA Case No. Large Business and International Division Reviewer Treaty & Transfer Pricing Operations Team Leader Advance Pricing Mutual Agreement Program Economist Other APA Team Members

APA Information

U.S. Taxpayer’s Name U.S. Taxpayer’s EIN U.S. Taxpayer’s NAICS Unilateral/Bilateral/Multilateral Original or Renewal APA Common Name, if any APA Request Filing Date Date APA Executed APA Term (date-to-date, inclusive) Foreign Country(ies) Involved Annual Report Due Dates for years ending on or before [date]: Annual Report Due Dates for other years: [last month of tax year] 15 following close of year Covered Methods Summary Description (e.g., CPM, operating margin 2%-5%) Taxpayer’s Principal Representative

APA Annual Report Information

Year(s) covered by this Annual Report Issues for APMA’s special attention (or “None”)

Taxpayer Notice Person Name Title If necessary, include a Address current Form 2848 for the City/State/Zip Notice Person Phone/Fax Email Current Representative, if any Name Title Include a current Form 2848 Address for the representative City/State/Zip Phone/Fax Email

Date Annual Report Filed (to be filled in by APMA):

Bulletin No. 2024–16 931 April 15, 2024

Correction to REG-101552-24, I.R.B. 2024-13

This document contains corrections to REG-101552-24 as published on Monday, March 25, 2024 (I.R.B. 2024-13, 741). In particular, this announcement corrects the following administrative items.

Correction 1:

In the Explanation of Provisions, the second sentence of the second column on page 743 incorrectly describes the requirement that members in an unincorporated organization reserve the right separately to take in kind or dispose of their pro rata shares of electricity produced, extracted or used, or any associated renewable energy credits or similar credits. The sentence is corrected to read, “Second, the unincorporated organization’s members must enter into a joint operating agreement with respect to the applicable credit property in which the members reserve the right separately to take in kind or dispose of their pro rata shares of the electricity produced, extracted, or used, and any associated renewable energy credits or similar credits.”

Correction 2:

Proposed §1.761-2(a)(4)(ii)(B) incorrectly requires that members in an unincorporated organization reserve the right separately to take in kind or dispose of their pro rata shares of electricity produced, extracted or used, or any associated renewable energy credits or similar credits. The sentence is corrected to read, “(B) The members of which enter into a joint operating agreement in which the members reserve the right separately to take in kind or dispose of their pro rata shares of the electricity produced, extracted, or used, and any associated renewable energy credits or similar credits,”.

April 15, 2024 932 Bulletin No. 2024–16

Charitable Remainder Annuity Trust Listed Transaction

REG-108761-22

AGENCY : Internal Revenue Service (IRS), Treasury.

ACTION : Notice of proposed rulemaking and public hearing.

SUMMARY : This document contains proposed regulations that would identify certain charitable remainder annuity trust (CRAT) transactions and substantially similar transactions as listed transactions, a type of reportable transaction. Material advisors and certain participants in these listed transactions would be required to file disclosures with the IRS and would be subject to penalties for failure to disclose. The proposed regulations would affect participants in these transactions as well as material advisors but provide that certain organizations whose only role or interest in the transaction is as a charitable remainderman will not be treated as participants in the transaction or as parties to a prohibited tax shelter transaction subject to excise taxes and disclosure requirements. Finally, this document provides notice of a public hearing on the proposed regulations.

DATES : Comments : Electronic or written comments must be received by May 24, 2024. Public Hearing : A public hearing on the proposed regulation is scheduled for July 11, 2024, at 10 a.m. ET. Requests to speak and outlines of topics to be discussed at the public hearing must be received by May 24, 2024. If no outlines are received by May 24, 2024, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5 p.m. on July 9, 2024.

ADDRESSES : Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at https://regulations.gov (indicate IRS and REG-108761-22) by following the online instructions for submitting comments. Requests for a public

hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. Once submitted to the Federal eRulemaking Portal comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish availability any comments submitted to the IRS’s public docket. Send paper submission to CC:PA:01:PR (REG-10876122) room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT : Concerning the proposed regulations, Charles D. Wien of the Office of Associate Chief Counsel (Passthroughs & Special Industries), (202) 317-5279; concerning submissions of comments and requests for hearing, Vivian Hayes at (202) 317-6901 (not toll-free numbers) or by sending an email to publichearings@ irs.gov (preferred).

SUPPLEMENTARY INFORMATION :

Background

This document contains proposed additions to 26 CFR part 1 (Income Tax Regulations) under section 6011 of the Internal Revenue Code (Code). The additions identify certain transactions as “listed transactions” for purposes of section 6011.

I. Disclosure of Reportable Transactions by Participants and Penalties for Failure to Disclose

Section 6011(a) generally provides that, when required by regulations prescribed by the Secretary of the Treasury or her delegate (Secretary), “any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary. Every person required to make a return or statement shall include therein the information required by such forms or regulations.”

Section 1.6011-4(a) provides that every taxpayer that has participated in a reportable transaction within the meaning of §1.6011-4(b) and who is required to file a tax return must file a disclosure

statement within the time prescribed in §1.6011-4(e).

Reportable transactions are identified in §1.6011-4 and include listed transactions, confidential transactions, transactions with contractual protection, loss transactions, and transactions of interest. See §1.6011-4(b)(2) through (6). Section 1.6011-4(b)(2) defines a listed transaction as a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction.

Section 1.6011-4(c)(4) provides that a transaction is “substantially similar” if it is expected to obtain the same or similar types of tax consequences and is either factually similar or based on the same or similar tax strategy. Receipt of an opinion regarding the tax consequences of the transaction is not relevant to the determination of whether the transaction is the same as or substantially similar to another transaction. Further, the term substantially similar must be broadly construed in favor of disclosure. For example, a transaction may be substantially similar to a listed transaction even though it may involve different entities or use different Code provisions.

Section 1.6011-4(c)(3)(i)(A) provides that a taxpayer has participated in a listed transaction if the taxpayer’s tax return reflects tax consequences or a tax strategy described in the published guidance that lists the transaction under §1.60114(b)(2). Published guidance may identify other types or classes of persons that will be treated as participants in a listed transaction. Published guidance also may identify types or classes of persons that will not be treated as participants in a listed transaction.

Section 1.6011-4(d) and (e) provide that the disclosure statement Form 8886, Reportable Transaction Disclosure State- ment (or successor form), must be attached to the taxpayer’s tax return for each taxable year for which a taxpayer participates in a reportable transaction. A copy of the disclosure statement must be sent to the IRS’s Office of Tax Shelter Analysis (OTSA) at the same time that any disclosure statement is first filed by the taxpayer

Bulletin No. 2024–16 933 April 15, 2024

pertaining to a particular reportable transaction.

Section 1.6011-4(e)(2)(i) provides that, if a transaction becomes a listed transaction after the filing of a taxpayer’s tax return reflecting the taxpayer’s participation in the listed transaction and before the end of the period of limitations for assessment for any taxable year in which the taxpayer participated in the listed transaction, then a disclosure statement must be filed with OTSA within 90 calendar days after the date on which the transaction becomes a listed transaction. This requirement extends to an amended return and exists regardless of whether the taxpayer participated in the transaction in the year the transaction became a listed transaction. The Commissioner of Internal Revenue (Commissioner) also may determine the time for disclosure of listed transactions in the published guidance identifying the transaction.

Participants required to disclose these transactions under §1.6011-4 who fail to do so are subject to penalties under section 6707A of the Code. Section 6707A(b) provides that the amount of the penalty is 75 percent of the decrease in tax shown on the return as a result of the reportable transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes), subject to minimum and maximum penalty amounts. The minimum penalty amount is $5,000 in the case of a natural person and $10,000 in any other case. For a listed transaction, the maximum penalty amount is $100,000 in the case of a natural person and $200,000 in any other case.

Additional penalties also may apply. In general, section 6662A of the Code imposes a 20 percent accuracy-related penalty on any understatement (as defined in section 6662A(b)(1)) attributable to an adequately disclosed reportable transaction. If the taxpayer had a requirement to disclose participation in the reportable transaction but did not adequately disclose the transaction in accordance with the regulations under section 6011, the taxpayer is subject to an increased penalty rate equal to 30 percent of the understatement. See section 6662A(c). Section 6662A(b) (2) provides that section 6662A applies to any item that is attributable to any listed transaction and any reportable transaction

(other than a listed transaction) if a significant purpose of such transaction is the avoidance or evasion of Federal income tax.

Participants required to disclose listed transactions who fail to do so also are subject to an extended period of limitations under section 6501(c)(10) of the Code. That section provides that the time for assessment of any tax with respect to the transaction shall not expire before the date that is one year after the earlier of the date the participant discloses the transaction or the date a material advisor discloses the participation pursuant to a written request under section 6112(b)(1)(A) of the Code.

II. Disclosure of Reportable Transactions by Material Advisors and Penalties for Failure to Disclose

Section 6111(a) provides that each material advisor with respect to any reportable transaction shall make a return setting forth: (1) information identifying and describing the transaction, (2) information describing any potential tax benefits expected to result from the transaction, and (3) such other information as the Secretary may prescribe. Such return shall be filed not later than the date specified by the Secretary.

Section 301.6111-3(a) of the Procedure and Administration Regulations provides that each material advisor with respect to any reportable transaction, as defined in §1.6011-4(b), must file a return as described in §301.6111-3(d) by the date described in §301.6111-3(e).

Section 301.6111-3(b)(1) provides that a person is a material advisor with respect to a transaction if the person provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and directly or indirectly derives gross income in excess of the threshold amount as defined in §301.6111-3(b)(3) for the material aid, assistance, or advice. Under §301.6111-3(b)(2)(i) and (ii), a person provides material aid, assistance, or advice if the person provides a tax statement, which is any statement (including another person’s statement), oral or written, that relates to a tax aspect of a transaction that causes the transaction to be a reportable

transaction as defined in §1.6011-4(b)(2) through (7).

Material advisors must disclose transactions on Form 8918, Material Advisor Disclosure Statement (or successor form), as provided in §301.6111-3(d) and (e). Section 301.6111-3(e) provides that the material advisor’s disclosure statement for a reportable transaction must be filed with the OTSA by the last day of the month that follows the end of the calendar quarter in which the advisor becomes a material advisor with respect to a reportable transaction or in which the circumstances necessitating an amended disclosure statement occur. The disclosure statement must be sent to the OTSA at the address provided in the instructions for Form 8918 (or successor form).

Section 301.6111-3(d)(2) provides that the IRS will issue to a material advisor a reportable transaction number with respect to the disclosed reportable transaction. Receipt of a reportable transaction number does not indicate that the disclosure statement is complete, nor does it indicate that the transaction has been reviewed, examined, or approved by the IRS. Material advisors must provide the reportable transaction number to all taxpayers and material advisors for whom the material advisor acts as a material advisor as defined in §301.6111-3(b). The reportable transaction number must be provided at the time the transaction is entered into, or, if the transaction is entered into prior to the material advisor’s receipt of the reportable transaction number, within 60 calendar days from the date the reportable transaction number is mailed to the material advisor.

Section 6707(a) of the Code provides that a material advisor who fails to file a timely disclosure, or files an incomplete or false disclosure statement, is subject to a penalty. Pursuant to section 6707(b) (2), for listed transactions, the penalty is the greater of (A) $200,000, or (B) 50 percent of the gross income derived by such person with respect to aid, assistance, or advice that is provided with respect to the listed transaction before the date the return is filed under section 6111.

Additionally, section 6112(a) provides that each material advisor with respect to any reportable transaction shall (whether or not required to file a return under sec

April 15, 2024 934 Bulletin No. 2024–16

tion 6111 with respect to such transaction) maintain a list (1) identifying each person with respect to whom such advisor acted as a material advisor with respect to such transaction and (2) containing such other information as the Secretary may by regulations require. Material advisors must furnish such lists to the IRS in accordance with §301.6112-1(e).

A material advisor may be subject to a penalty under section 6708 of the Code for failing to maintain a list under section 6112(a) and failing to make the list available upon written request to the Secretary in accordance with section 6112(b) within 20 business days after the date of such request. Section 6708(a) provides that the penalty is $10,000 per day for each day of the failure after the 20th day. However, no penalty will be imposed with respect to the failure on any day if such failure is due to reasonable cause.

III. Tax-Exempt Entities as Parties to Prohibited Tax Shelter Transactions

Section 4965 of the Code is intended to deter certain “tax-exempt entities” (as defined in section 4965(c)) from facilitating “prohibited tax shelter transactions,” which include listed transactions. Section 4965(a)(1), in part, imposes an excise tax on a tax-exempt entity for the taxable year in which the tax-exempt entity becomes a party to a transaction that is a “prohibited tax shelter transaction” at the time it becomes a party to the transaction, and for any subsequent taxable year, in the amount determined under section 4965(b) (1) (section 4965 tax). Tax-exempt entities subject to the section 4965 tax are listed in section 4965(c)(1) through (3) and include, among others, entities and governmental units described in sections 501(c) and 170(c) of the Code (other than the United States). A tax-exempt entity that is a party to a prohibited tax shelter transaction generally also is subject to various reporting and disclosure obligations.

Additionally, section 4965(a)(2) imposes an excise tax on an “entity manager” if the manager approves the tax-exempt entity as a party (or otherwise causes

the tax-exempt entity to be a party) to a prohibited tax shelter transaction and knows or has reason to know that the transaction is a prohibited tax shelter transaction. The amount of this excise tax is determined under section 4965(b)(2) (entity manager tax).

A. The section 4965 tax

The amount of the section 4965 tax owed by a tax-exempt entity depends on whether the tax-exempt entity knows, or has reason to know, that a transaction is a prohibited tax shelter transaction at the time the entity becomes a party to the transaction. A tax-exempt entity is treated as knowing or having reason to know that a transaction is a prohibited tax shelter transaction if one or more of its entity managers knew or had reason to know that the transaction was a prohibited tax shelter transaction at the time the entity manager(s) approved the tax-exempt entity as (or otherwise caused the entity to be) a party to the transaction. ¹ The tax-exempt entity also is attributed the knowledge or reason to know of certain entity managers—those persons with authority or responsibility similar to that exercised by an officer, director, or trustee of an organization—even if the entity manager does not approve the entity as (or otherwise cause the entity to be) a party to the transaction.

Section 53.4965-4(a)(1) provides that a tax-exempt entity is a “party” to a prohibited tax shelter transaction if it facilitates a prohibited tax shelter transaction by reason of its tax-exempt, tax-indifferent, or tax-favored status. In addition, under §53.4965-4(a)(2) and (b), the Secretary may issue published guidance to identify tax-exempt entities by type, class, or role that will or will not be treated as parties to a prohibited tax shelter transaction.

If the tax-exempt entity unknowingly becomes a party to a prohibited tax shelter transaction, the section 4965 tax generally equals the greater of (1) the product of the highest rate of tax under section 11 of the Code (currently 21 percent) and the tax-exempt entity’s net income attribut

able to the prohibited tax shelter transaction, or (2) the product of the highest rate of tax under section 11 and 75 percent of the proceeds received by the tax-exempt entity that are attributable to the prohibited tax shelter transaction. If the tax-exempt entity knew or had reason to know that the transaction was a prohibited tax shelter transaction at the time the tax-exempt entity became a party to the transaction, the section 4965 tax increases to the greater of (1) 100 percent of the tax-exempt entity’s net income attributable to the prohibited tax shelter transaction, or (2) 75 percent of the tax-exempt entity’s proceeds attributable to the prohibited tax shelter transaction.

The terms “net income” and “proceeds” are defined in §53.4965-8. In general, a tax-exempt entity’s net income attributable to a prohibited tax shelter transaction is its gross income derived from the transaction, reduced by those deductions that are attributable to the transaction and that would be allowed by chapter 1 of the Code (chapter 1) if the tax-exempt entity were treated as a taxable entity for this purpose, and further reduced by the taxes imposed by subtitle D of the Code (other than the section 4965 tax) with respect to the transaction. In the case of a tax-exempt entity that is a party to the transaction by reason of facilitating a prohibited tax shelter transaction by reason of its tax-exempt, tax-indifferent, or tax-favored status, the term “proceeds,” solely for purposes of section 4965, means the gross amount of the tax-exempt entity’s consideration for facilitating the transaction, not reduced for any costs or expenses attributable to the transaction. Published guidance with respect to a particular prohibited tax shelter transaction may designate additional amounts as proceeds from the transaction for purposes of section 4965. In addition, for all tax-exempt entities that are parties to a prohibited tax shelter transaction, any amount that is a gift or a contribution to a tax-exempt entity and that is attributable to a prohibited tax shelter transaction is treated as proceeds for purposes of section 4965, unreduced by any associated expenses.

1 Section 53.4965-6 of the Foundation and Similar Excise Tax Regulations (26 CFR part 53) provides factors to be considered in determining whether an entity manager knows or has reason to know that a transaction is a prohibited tax shelter transaction.

Bulletin No. 2024–16 935 April 15, 2024

B. Entity manager tax

The amount of the entity manager tax determined under section 4965(b)(2) on an entity manager (as defined in section 4965(d)) equals $20,000 for each instance that the manager approves the tax-exempt entity as (or otherwise causes such entity to be) a party to a prohibited tax shelter transaction and knows or has reason to know that the transaction is a prohibited tax shelter transaction. This liability is not joint and several.

C. Disclosures

Section 53.6011-1 requires that a tax-exempt entity subject to the section 4965 excise tax must file Form 4720, Return of Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, to report the liability and pay the tax due under section 4965(a)(1). Under §1.60335, a tax-exempt entity that is a party to a prohibited tax shelter transaction must file Form 8886-T, Disclosure by Tax-Exempt Entity Regarding Prohibited Tax Shelter Transaction, to disclose that it is a party to a prohibited tax shelter transaction, the identity of any other party (whether taxable or tax-exempt) to such transaction that is known to the tax-exempt entity, and certain other information. Under §1.60332, if the tax-exempt entity is required to file Form 990, Return of Organization Exempt From Income Tax, it must disclose on that form that it is a party to a prohibited tax shelter transaction, whether any taxable party notified the tax-exempt entity that it was or is a party to a prohibited tax shelter transaction, and whether the tax-exempt entity filed Form 8886-T.

Section 6011(g) and §301.6011(g)-1 provide that any taxable party to a prohibited tax shelter transaction must disclose to each tax-exempt entity that the taxable party knows or has reason to know is a party to such transaction that the transaction is a prohibited tax shelter transaction.

IV. Charitable Remainder Annuity Trusts (CRATs)

For purposes of section 664 of the Code, section 664(d)(1) provides that a charitable remainder annuity trust (CRAT) is a trust:

(A) From which a sum certain (which is not less than 5 percent nor more than 50 percent of the initial fair market value (FMV) of all property placed in trust) is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c), and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals;

(B) From which no amount other than the payments described in section 664(d)(1)(A) and other qualified gratuitous transfers described in section 664(d)(1)(C) may be paid to or for the use of any person other than an organization described in section 170(c); (C) Whose remainder interest, following the termination of the payments described in section 664(d)(1) (A), is to be transferred to, or for the use of, an organization described in section 170(c) or is to be retained by the trust for such a use or, to the extent the remainder interest is in qualified employment securities (as defined by section 664(g)(4)), all or part of such securities are to be transferred to an employee stock ownership plan (as defined in section 4975(e)(7) of the Code) in a qualified gratuitous transfer (as defined by 664(g)); and

(D) Whose remainder interest has a value (determined under section 7520) of at least 10 percent of the initial net FMV of all property placed in the trust. Section 664(b) provides, in part, that amounts distributed by a CRAT are considered as having the following characteristics in the hands of a beneficiary to whom the annuity described in section 664(d)(1)(A) is paid: (1) First, as amounts of income (other than gains, and amounts treated as gains, from the sale or other disposition of capital assets) includible in gross income to the extent of such income of the trust for the year and such undistributed income of the trust for prior years;

(2) Second, as a capital gain to the extent of the capital gain of the trust for

the year and the undistributed capital gain of the trust for prior years;

(3) Third, as other income to the extent of such income of the trust for the year and such undistributed income of the trust for prior years; and

(4) Fourth, as a distribution of trust corpus. Under section 664(c)(1), a CRAT is not subject to any tax imposed by subtitle A of the Code. Section 664(c)(2), in part, imposes an excise tax on a CRAT that has unrelated business taxable income (within the meaning of section 512, determined as if part III of subchapter F of chapter 1 applies to such trust) for a taxable year. That excise tax is equal to the amount of such unrelated business taxable income.

V. Tax Avoidance Transactions using a CRAT

The Treasury Department and the IRS are aware of transactions in which taxpayers attempt to use a CRAT and a single premium immediate annuity (SPIA) to permanently avoid recognition of ordinary income and/or capital gain. Taxpayers engaging in these transactions claim that distributions from the trust are not taxable to the beneficiaries as ordinary income or capital gain under section 664(b) because the distributions constitute the trust’s unrecovered investment in the SPIA, thus claiming that a significant portion of the distributions is excluded from gross income under section 72(b)(2) of the Code. Taxpayers also claim that the trust qualifies as a CRAT and thus is not subject to tax on the trust’s realized ordinary income or capital gain under section 664(c)(1), even though the trust may not meet all of the requirements of section 664(d)(1). In these transactions, a grantor creates a trust purporting to qualify as a CRAT under section 664. Generally, the grantor funds the trust with property having a FMV in excess of its basis (appreciated property) such as interests in a closely-held business, and/or assets used or produced in a trade or business. The trust then sells the appreciated property and uses some or all of the proceeds from the sale of the contributed property to purchase an annuity. On a Federal income tax return, the beneficiary of the trust treats

April 15, 2024 936 Bulletin No. 2024–16

the annuity amount payable from the trust as if it were, in whole or in part, an annuity payment subject to section 72 ², instead of as carrying out to the beneficiary amounts in the ordinary income and capital gain tiers of the trust in accordance with section 664(b).

As result of treating section 72 as applying to the amounts received (typically paid by an insurance company) as part of the annuity amount, the beneficiary reports as income only a small portion of the amount the beneficiary received from the SPIA. The beneficiary treats the balance of the annuity amount as an excluded portion representing a return of investment. ³ The beneficiary thus claims that the beneficiary is taxed as if the beneficiary were the owner of the SPIA, rather than the SPIA being an asset owned by the CRAT, which the trustee purchased to fund the annuity amount payable from the trust. Under the beneficiary’s theory, until the entire investment in the SPIA has been recovered, the only portion of the annuity amount includable in the beneficiary’s income is that portion of the SPIA annuity required to be included in income under section 72. The beneficiary also maintains that the distribution is not subject to section 664(b), which would treat a substantial portion of the annuity amount as gain attributable to the sale of the appreciated property contributed to the CRAT.

The trustee also might take the position that the transfer of the appreciated property to the purported CRAT gives those assets a step-up in basis to FMV as if they had been sold to the trust. The transfer of property to a CRAT, however, does not give those assets a step-up in basis to FMV, as if they had been sold to the trust, giving the trust a cost basis under section 1012 of the Code. Instead, the transfer to the CRAT is a gift for Federal tax purposes. When a grantor transfers appreciated property to a CRAT, the CRAT’s basis in the assets is determined under section 1015 of the Code. Under section 1015(a) and (d), property transferred by gift (whether or not in trust) retains its basis in the hands of the donor, increased

(but not above FMV) by any gift tax paid on the transfer.

The claimed application of sections 664 and 72 to the transaction is incorrect. Proper application of the rules of sections 664 and 72 to the transaction results in annual ordinary income from the annuity payments from the SPIA being added to the section 664(b)(1) (ordinary income) tier of the CRAT’s income each year, and a one-time amount being added to the section 664(b)(2) (capital gains) tier at the time of the sale of the property by the CRAT (assuming the asset is of a kind to produce capital gain). Assuming no other activity in the CRAT, under section 664(b), the beneficiary of the CRAT must treat the annuity amount each year as first consisting of the ordinary income portion of the annuity payments from the SPIA. The balance of the annuity amount must be treated as consisting of any accumulated ordinary income of the CRAT, then accumulated capital gain, and then other income of the CRAT, only reaching non-taxable corpus to the extent these three accounts have been exhausted.

In addition, certain features of the trust may cause the trust to fail to meet all of the requirements of section 664(d)(1). While the trust instrument generally resembles one of the eight sample CRAT forms provided in Rev. Proc. 2003-53, 2003-2 C.B. 230; Rev. Proc. 2003-54, 2003-2 C.B. 236; Rev. Proc, 2003-55, 2003-2 C.B. 242; Rev. Proc. 2003-56, 2003-2 C.B. 249; Rev. Proc. 2003-57, 2003-2 C.B. 257; Rev. Proc. 2003-58, 2003-2 C.B. 262; Rev. Proc. 2003-59, 2003-2 C.B 268; and Rev. Proc. 2003-60, 2003-2 C.B. 274 (Sample CRAT Revenue Procedures), it might have one or more significant modifications. For example, the trust instrument might provide that, in each taxable year of the trust, the trustee must pay to the beneficiary during the annuity period, an annuity amount equal to the greater of (1) an amount which meets the requirements of section 664(d)(1)(A) or (2) the payments received by the trustee from one or more SPIAs purchased by the trustee.

The trust instrument also might provide for a current payment to an organization described in section 170(c) (Charitable Remainderman) in lieu of the payment of the remainder interest described in section 664(d)(1)(C). For example, the trust instrument might state that, in lieu of transferring the remainder amount required pursuant to section 664(d)(1) (C) (Remainder Interest) to the Charitable Remainderman, the trustee, upon the availability of adequate funding, currently may pay to the Charitable Remainderman a cash sum equal to at least 10 percent of the initial FMV of the trust property plus a nominal amount of cash. The trust agreement also might provide that the trustee cannot make a distribution in kind to satisfy this cash distribution. This payment, equal to at least 10 percent of the initial FMV of the trust property, would be the only payment to the Charitable Remainderman. The governing instrument of a CRAT may provide for an amount other than the annuity amount described in §1.664-2(a)(1) to be paid (or to be paid in the discretion of the trustee) to an organization described in §170(c) provided that, in the case of distributions in kind, the adjusted basis of the property distributed is fairly representative of the adjusted basis of the property available for payment on the date of payment. See §1.664-2(a)(4). However, nowhere in section 664(d)(1)(D) does it permit a current payment, determined based on the value of the trust at its funding, to be made in lieu of, and as a substitute for, the required payment of the remainder interest (that is, the entire corpus of the trust at termination of the annuity period) described in section 664(d)(1)(C) to the Charitable Remainderman.

The significant modifications identified in the prior paragraphs deviate from the Sample CRAT Revenue Procedures in ways that prevent the qualification of the trust as a valid CRAT under section 664, regardless of the actual administration of the CRAT. These modifications are made in these transactions in order to effectuate the structure. Specifically, a

2 Section 72 governs the tax treatment of payments received as an annuity, and generally causes only the portion of each payment in excess of the investment in the contract (basis) to be included in the recipient’s gross income.

3 The beneficiary also claims that section 72(u) does not apply because the SPIA is an “immediate annuity” under section 72(u)(3)(E).

Bulletin No. 2024–16 937 April 15, 2024

provision authorizing the payment of an annuity amount in excess of the amount described in section 664(d)(1)(A), and a provision authorizing a current payment in lieu of the payment of the remainder interest described in section 664(d)(1) (C), violate mandatory requirements of a valid CRAT.

VI. Purpose of Proposed Regulations

On March 3, 2022, the Sixth Circuit issued an order in Mann Construction v. United States, 27 F.4th 1138, 1147 (6th Cir. 2022), holding that Notice 2007-83, 2007-2 C.B. 960, which identified certain trust arrangements claiming to be welfare benefit funds and involving cash value life insurance policies as listed transactions, violated the Administrative Procedure Act (APA), 5 U.S.C. 551-559, because the notice was issued without following the notice-and-comment procedures required by section 553 of the APA. The Sixth Circuit reversed the decision of the district court, which held that Congress had authorized the IRS to identify listed transactions without notice and comment. See Mann Construction, Inc. v. United States, 539 F.Supp.3d 745, 763 (E.D. Mich. 2021).

Relying on the Sixth Circuit’s analysis in Mann Construction, three district courts and the Tax Court have concluded that IRS notices identifying listed transactions were improperly issued because they were issued without following the APA’s notice and comment procedures. See Green Rock, LLC v. IRS, 2023 WL 1478444 (N.D. AL., February 2, 2023) (Notice 2017-10); GBX Associates, LLC, v. United States, 1:22cv401 (N.D. Ohio, Nov. 14, 2022) (same); Green Valley Investors, LLC, et al. v. Commissioner, 159 T.C. No. 5 (Nov. 9, 2022) (same); see also CIC Services, LLC v. IRS, 2022 WL 985619 (E.D. Tenn. March 21, 2022), as modified by 2022 WL 2078036 (E.D. Tenn. June 2, 2022) (Notice 2016-66, identifying a transaction of interest).

The Treasury Department and the IRS disagree with the Sixth Circuit’s decision in Mann Construction and the subsequent decisions that have applied that reasoning to find other IRS notices invalid and are continuing to defend the validity of notices identifying transactions as listed transac

tions in circuits other than the Sixth Circuit. At the same time, however, to avoid any confusion and to ensure consistent enforcement of the tax laws throughout the nation, the Treasury Department and the IRS are issuing these proposed regulations to identify certain charitable remainder trust transactions as listed transactions for purposes of all relevant provisions of the Code and Treasury Regulations.

These proposed regulations propose to identify the charitable remainder trust transactions described in proposed §1.6011-15(b), and substantially similar transactions, as listed transactions for purposes of §1.6011-4(b)(2) and sections 6111 and 6112. In addition, they inform taxpayers that participate in these transactions, and persons who act as material advisors with respect to these transactions, that they would need to disclose the transaction in accordance with the final regulations and the regulations issued under sections 6011 and 6111. Material advisors must also maintain lists as required by section 6112.

Explanation of Provisions

I. Charitable Remainder Annuity Trust Transaction

Proposed §1.6011-15(a) would identify a transaction that is the same as, or substantially similar to, the transaction described in proposed §1.6011-15(b) as a listed transaction for purposes of §1.60114(b)(2). “Substantially similar” is defined in §1.6011-4(c)(4) to include any transaction that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or a similar tax strategy.

A transaction is described in proposed §1.6011-15(b) if it includes the following elements:

(i) The grantor creates a trust purporting to qualify as a CRAT under section 664;

(ii) The grantor funds the trust with property having a FMV in excess of its basis (contributed property);

(iii) The trustee sells the contributed property;

(iv) The trustee uses some or all of the proceeds from the sale of the contributed property to purchase an annuity; and

(v) On a Federal income tax return, the beneficiary of the trust (Beneficiary) treats the amount payable from the trust as if it were, in whole or in part, an annuity payment subject to section 72, instead of as carrying out to the Beneficiary amounts in the ordinary income and capital gain tiers of the trust in accordance with section 664(b).

II. Participants

Whether a taxpayer has participated in the listed transaction described in proposed §1.6011-15(b) is determined under §1.6011-4(c)(3)(i)(A). Participants include any person whose tax return reflects tax consequences or a tax strategy described in proposed §1.6011-15(b). These tax consequences include those tax consequences described in proposed §1.6011-15(b) that would affect any gift tax return, whether or not such gift tax return was filed. See §25.6011-4. A taxpayer also has participated in a transaction described in proposed §1.6011-15(b) if the taxpayer knows or has reason to know that the taxpayer’s tax benefits are derived directly or indirectly from tax consequences, or a tax strategy, described in proposed §1.6011-15(b).

III. Material Advisors

Material advisors who make a tax statement with respect to transactions identified as listed transactions in proposed §1.6011-15(b) would have disclosure and list maintenance obligations under sections 6111 and 6112. See §§301.6111-3 and 301.6112-1. One of the requirements to be a material advisor under section 6111(b)(1) is that the person must directly or indirectly derive gross income in excess of the threshold amount provided in 6111(b)(1)(B) for providing material aid, assistance, or advice with respect to the listed transaction. That threshold in the case of a listed transaction is reduced to $10,000 if substantially all of the tax benefits are provided to natural persons (looking through any partnerships, S corporations, or trusts), or to $25,000 for any other transaction. See §301.6111-3(b)(3) (i)(B). The regulations under section 6111 provide that gross income includes all fees for a tax strategy, for services for advice

April 15, 2024 938 Bulletin No. 2024–16

(whether or not tax advice), and for the implementation of a reportable transaction. See §301.6111-3(b)(2)(ii). However, a fee does not include amounts paid to a person, including an advisor, in that person’s capacity as a party to the transaction. See §301.6111-3(b)(3)(ii).

IV. Effect of Participating in Listed Transaction Described in Proposed §1.6011-15(b)

Participants required to disclose these transactions under §1.6011-4 who fail to do so will be subject to penalties under section 6707A. Such disclosure also must include any gift tax consequences. See §25.6011-4. Participants required to disclose these transactions under §1.6011-4 who fail to do so also are subject to an extended period of limitations under section 6501(c)(10). Material advisors required to disclose these transactions under section 6111 who fail to do so are subject to penalties under section 6707. Material advisors required to maintain lists of investors under section 6112 who fail to do so (or who fail to provide such lists when requested by the IRS) are subject to penalties under section 6708(a). In addition, the IRS may impose other penalties on persons involved in these transactions or substantially similar transactions, including accuracy-related penalties under section 6662 or section 6662A, the penalty under section 6694 for understatements of a taxpayer’s liability by a tax return preparer, the penalty under section 6700 for promoting abusive tax shelters, and the penalty under section 6701 for aiding and abetting understatement of tax liability.

In addition, material advisors have disclosure requirements with regard to transactions occurring in prior years. However, notwithstanding §301.6111-3(b)(4)(i) and (iii), material advisors are required to disclose only if they have made a tax statement on or after [ DATE 6 YEARS BEFORE DATE OF PUBLICATION OF FINAL RULE].

Because the IRS will take the position that taxpayers are not entitled to the purported tax benefits of the listed transactions described in the proposed regulations, taxpayers who have filed tax returns taking the position that they were entitled

to the purported tax benefits should consider filing amended returns or otherwise ensure that their transactions are disclosed properly.

V. Role of Charitable Remainderman in the Transaction

As stated in section 1 of this Explanation of Provisions, the transaction described in proposed §1.6011-15(b) attempts to use a CRAT under section 664 to permanently avoid recognition of ordinary income and/ or capital gain on the sale of contributed property having a FMV in excess of its basis. Under the mandatory requirements of section 664(d), a trust does not qualify as a CRAT unless, following the termination of the annuity payments described in section 664(d)(1)(A), the Remainder Interest is to be transferred to or for the use of an organization described in section 170(c).

A. Charitable Remainderman as a Party to a Transaction under Section 4965

As stated in section III of the Background, section 4965 provides, in part, that, if a transaction is a prohibited tax shelter transaction at the time a tax-exempt entity (which includes an organization described in section 170(c), other than the United States) becomes a party to the transaction, the entity must pay the section 4965 tax for the taxable year and any subsequent taxable year as determined under section 4965(b)(1). Section 4965(e)(1) provides in part that the term “prohibited tax shelter transaction” means any listed transaction (within the meaning of section 6707A(c)(2)). A tax-exempt entity that is a party to a prohibited tax shelter transaction generally is subject to various reporting and disclosure obligations. Additionally, an entity manager is subject to the entity manager tax imposed by section 4965(a)(2) if the entity manager approves the tax-exempt entity as a party (or otherwise causes the entity to be a party) to a prohibited tax shelter transaction and knows or has reason to know that the transaction is a prohibited tax shelter transaction. Section 53.4965-4(a) provides in part that a tax-exempt entity is a “party” to a prohibited tax shelter transaction if it facilitates a prohibited tax shelter

transaction by reason of its tax-exempt, tax-indifferent, or tax-favored status.

The trust used in a transaction identified as a listed transaction in proposed §1.6011-15(a) would not qualify as a CRAT unless the entire Remainder Interest is required to be transferred to or for the use of a Charitable Remainderman. Thus, the tax-exempt entity that the CRAT designates for the Remainder Interest facilitates the transaction by reason of its tax-exempt status because, absent that status, the CRAT would not satisfy the mandatory requirement of section 664(d)(1) (C). Accordingly, that designated tax-exempt entity would meet the definition of a party to a prohibited tax shelter transaction in §53.4965-4(a)(1).

However, notwithstanding the general rule in §53.4965-4(a), §53.4965-4(b) provides that published guidance may identify, by type, class, or role, which tax-exempt entities will or will not be treated as parties to a prohibited tax shelter transaction. The Treasury Department and the IRS understand that, in a transaction described in proposed §1.601115(b), an organization described in section 170(c) that is designated as the Charitable Remainderman might not become aware of its Remainder Interest in the purported CRAT until it receives a distribution from the trust. In that situation, it may be difficult for the organization described in section 170(c) to determine when section 4965 excise taxes and related reporting requirements apply. For this reason, these proposed regulations would provide that an organization described in section 170(c) that the purported CRAT designates as the recipient of the Remainder Interest will not be treated as a party under section 4965 to the listed transaction described in proposed §1.6011-15 solely by reason of its status as a Charitable Remainderman.

B. Participation by a Charitable Remainderman

As stated in section II of the Background, a taxpayer has participated in a listed transaction if the taxpayer’s tax return reflects tax consequences or a tax strategy described in this proposed regulation. See §1.6011-4(c)(3)(i)(A). Published guidance may identify other types or classes of persons that will be treated

Bulletin No. 2024–16 939 April 15, 2024

In Person”. For example, the subject line may say: Request to TESTIFY In Person at Hearing for REG-108761-22.

Individuals who want to testify by telephone at the public hearing must send an email to publichearings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG-108761-22 and the language “TESTIFY Telephonically”. For example, the subject line may say: Request to TESTIFY Telephonically at Hearing for REG108761-22. Individuals who want to attend the public hearing in person without testifying also must send an email to publichear- ings@irs.gov to have their names added to the building access list. The subject line of the email must contain the regulation number REG-108761-22 and the language “ATTEND in Person”. For example, the subject line may say: Request to ATTEND Hearing In Person REG-108761-22. Requests to attend the public hearing must be received by 5 p.m. ET on July 9, 2024.

Individuals who want to attend the public hearing by telephone without testifying also must send an email to pub- lichearings@irs.gov to receive the telephone number and access code for the hearing. The subject line of email must contain the regulation number (REG108761-22 and the language “ATTEND Hearing Telephonically”. For example, the subject line may say: Request to ATTEND Hearing Telephonically for REG-108761-22. Requests to attend the public hearing must be received by 5 p.m. ET on July 9, 2024.

Hearings will be made accessible to people with disabilities. To request special assistance during a hearing, please contact the Publication and Regulations Section of the Office of Associate Chief Counsel (Procedure and Administration) by sending an email to publichearings@irs.gov (preferred) or by telephone at (202) 3176901 (not a toll-free number) at least July 8, 2024.

Applicability Date

Proposed §1.6011-15 would identify charitable remainder annuity trust transactions described in proposed §1.601115(b), and transactions that are substan

as participants in a listed transaction. Published guidance also may identify types or classes of persons that will not be treated as participants in a listed transaction. In general, the Treasury Department and the IRS do not expect that an organization described in section 170(c), whose only role or interest in the transaction described in these proposed regulations is as a Charitable Remainderman, would meet the definition of a participant under §1.6011-4(c)(3)(i)(A). Nevertheless, to avoid potential uncertainty, the proposed regulations provide that an organization described in section 170(c) that the purported CRAT designates as the recipient of the Remainder Interest is not treated as a participant in the listed transaction described in these proposed regulations solely by reason of its status as a Charitable Remainderman.

C. Charitable Remainderman as a Material Advisor

As stated in section III of the Background, a person is a material advisor with respect to a transaction if the person provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and directly or indirectly derives gross income in excess of the threshold amount for the material aid, assistance, or advice. See section 6111(b) (1)(A). The regulations provide that gross income includes all fees for a tax strategy, for services or advice (whether or not tax advice), and for the implementation of a reportable transaction. However, a fee does not include amounts paid to a person, including an advisor, in that person’s capacity as a party to the transaction. See §301.6111-3(b)(3)(ii)).

The Treasury Department and the IRS request comments on whether the Charitable Remainderman ever provides material aid, assistance, or advice with respect to transactions described in proposed §1.6011-15(b) and the nature of the services being provided. The Treasury Department and the IRS also request comments on what fees the Charitable Remainderman receives, either directly or indirectly, for providing such material aid, assistance or advice.

Comments and Public Hearing

Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to comments regarding the notice of proposed rulemaking that are submitted timely to the IRS as prescribed under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. All comments will be made available at https://www.regulations. gov. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn.

A public hearing has been scheduled for July 11, 2024, beginning at 10 a.m. ET, in the Auditorium at the Internal Revenue Service Building, 1111 Constitution Avenue, NW. Washington, DC. Due to the building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. Participants alternatively may attend the public hearing by telephone.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present comments at the hearing must submit an outline of the topics to be discussed and the time to be devoted to each topic by May 24, 2024. A period of 10 minutes will be allocated to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be free of charge at the hearing. If no outline of topics to be discussed at the hearing is received by May 24, 2024, the public hearing will be cancelled. If the public hearing is cancelled, a notice of cancellation of the public hearing will be published in the Federal Register .

Individuals who want to testify in person at the public hearing must send an email to publichearings@irs.gov to have your name added to the building access list. The subject line of the email must contain the regulation number (REG108761-22) and the language “TESTIFY

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tially similar to those transactions, as listed transactions, effective as of the date the final regulations are published in the Federal Register .

Special Analyses

I. Paperwork Reduction Act

The estimated number of taxpayers impacted by these proposed regulations is between 50 to 100 per year. No burden on these taxpayers is imposed by these proposed regulations. Instead, the collection of information contained in these proposed regulations is reflected in the collection of information for Forms 8886 and 8918 that have been reviewed and approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act (44 U.S.C. 3507(c)) under control numbers 1545-1800 and 1545-0865.

To the extent there is a change in burden as a result of these regulations, the change in burden will be reflected in the updated burden estimates for Forms 8886 and 8918. The requirement to maintain records to substantiate information on Forms 8886 and 8918 already is contained in the burden associated with the control number for the forms and remains unchanged.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

II. Regulatory Flexibility Act

When an agency issues a proposed rulemaking, the Regulatory Flexibility Act (5 U.S.C. chapter 6) (Act) requires the agency to “prepare and make available for public comment an initial regulatory flexibility analysis” that “describe[s] the impact of the proposed rule on small entities.” 5 U.S.C. 603(a). The term “small entities” is defined in 5 U.S.C. 601 to mean “small business,” “small organization,” and “small governmental jurisdiction,” which are also defined in 5 U.S.C. 601. Small business size standards define whether a business is “small” and have been established for types of economic activities, or industry, generally under the North American Industry Classification

System (NAICS). See Title 13, Part 121 of the Code of Federal Regulations (titled “Small Business Size Regulations”). The size standards look at various factors, including annual receipts, number of employees, and amount of assets, to determine whether the business is small. See Title 13, Part 121.201 of the Code of Federal Regulations for the Small Business Size Standards by NAICS Industry.

Section 605 of the Act provides an exception to the requirement to prepare an initial regulatory flexibility analysis if the agency certifies that the proposed rulemaking will not have a significant economic impact on a substantial number of small entities. The Treasury Department and the IRS hereby certify that these proposed regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the majority of the effect of the proposed regulations falls on trusts. Further, the Treasury Department and the IRS expect that the reporting burden is low; the information sought is necessary for regular annual return preparation and ordinary recordkeeping.

Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business.

III. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million (updated annually for inflation). This proposed rule does not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

IV. Executive Order 13132: Federalism

Executive Order 13132 (Federalism) prohibits an agency from publishing any

rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. This proposed rule does not have federalism implications and does not impose substantial direct compliance costs on State and local governments or preempt State law within the meaning of the Executive order.

V. Regulatory Planning and Review

Pursuant to the Memorandum of Agreement, Review of Treasury Regulations under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6 of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required.

Statement of Availability of IRS Documents

Guidance cited in this preamble is published in the Internal Revenue Bulletin and is available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www. irs.gov .

Drafting Information

The principal author of these proposed regulations is Charles D. Wien, Office of Associate Chief Counsel (Passthroughs & Special Industries). However, other personnel from the IRS and the Treasury Department participated in the development of these regulations.

List of Subjects in 26 CFR Part 1

Income Taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:

Bulletin No. 2024–16 941 April 15, 2024

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 * * *

• ---

Section 1.6011-15 also issued under 26 U.S.C. 6001 and 26 U.S.C. 6011 * * *

• ---

Par. 2. Section 1.6011-15 is added to read as follows:

§1.6011-15 Charitable Remainder Annuity Trust Listed Transaction .

(a) In general . Transactions that are the same as, or substantially similar to, a transaction described in paragraph (b) of this section are identified as listed transactions for purposes of §1.6011-4(b)(2).

(b) Charitable remainder annuity trusts . A transaction is described in this paragraph (b) if:

(1) The grantor creates a trust purporting to qualify as a charitable remainder annuity trust under section 664(d)(1) of the Internal Revenue Code (Code);

(2) The grantor funds the trust with property having a fair market value in excess of its basis (contributed property);

(3) The trustee sells the contributed property;

(4) The trustee uses some or all of the proceeds from the sale of the contributed property to purchase an annuity; and

(5) On a Federal income tax return, the beneficiary of the trust treats the annuity amount payable from the trust as if it were, in whole or in part, an annuity payment subject to section 72 of the Code, instead of as carrying out to the beneficiary amounts in the ordinary income and capital gain tiers of the trust in accordance with section 664(b).

(c) Participation —(1) In general . A taxpayer has participated in a transaction identified as a listed transaction in paragraph (a) of this section if the taxpayer’s tax return reflects tax consequences or a tax strategy described in this section as provided under §1.6011-4(c)(3)(i)(A). These tax consequences include those tax consequences that would affect any gift tax return, whether or not such gift tax return was filed. See §25.6011-4 of this chapter.

(2) Treatment of charitable remaind- erman . An organization described in section 170(c) of the Code that the purported Charitable Remainder Annuity Trust designates as a recipient of the remainder interest described in section 664(d)(1) is not treated as a participant under §1.60114(c)(3)(i)(A) in the transaction described in this section solely by reason of its status as a recipient of the remainder interest described in section 664(d)(1).

(d) Treatment of charitable remaind- erman under section 4965 . A tax-exempt entity (as defined in section 4965 of the Code) that is an organization described in section 170(c) and that the purported Charitable Remainder Annuity Trust designates as a recipient of the remainder interest described in section 664(d)(1) is not treated as a party to the transaction described in this section for purposes of section 4965 solely by reason of its status as a recipient of the remainder interest described in section 664(d)(1).

(e) Applicability date . This section’s identification of transactions that are the same as, or substantially similar to, the transaction described in paragraph (b) of this section as listed transactions for purposes of §1.6011-4(b)(2) is effective on

[date of publication of final regulations in the Federal Register ].

Douglas W. O’Donnell, Deputy Commissioner for Services and

Enforcement

that the IRS must provide to a taxpayer in advance of IRS contact with a third party with respect to the determination or collection of the taxpayer’s tax liability, to reflect amendments made to the applicable tax law by the Taxpayer First Act of 2019. The regulations would affect taxpayers to whom the IRS must provide advance notice of IRS contact with such third parties.

DATES: Electronic or written comments and requests for a public hearing must be received by May 21, 2024.

ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and IRS REG-117542-22) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for Public Hearing” section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish any comments submitted electronically or on paper to the public docket. Send paper submissions to : CC:PA:01:PR (REG117542-22), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT : Concerning the proposed regulations, Brittany Harrison of the Office of the Associate Chief Counsel (Procedure and Administration), (202) 317-6833 (not toll-free number); concerning the submission of comments and requests for a public hearing, Vivian Hayes, (202) 3176901 (not toll-free number) or by sending an email to publichearings@irs.gov (preferred).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed regulations that would amend the Procedure and Administration Regulations (26 CFR part 301) relating to the advance notice of

(Filed by the Office of the Federal Register March 5, 2024, 8:45 a.m., and published in the issue of the Federal Register for March 11, 2024, 89 FR 17613)

Advance Notice of Third- Party Contacts

REG-117542-22

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations relating to the notice

April 15, 2024 942 Bulletin No. 2024–16

IRS contact with third parties that must be provided to taxpayers under section 7602(c) of the Internal Revenue Code (Code).

Generally, the Federal tax system relies upon taxpayers’ self-assessment and reporting of their tax liabilities. The expansive information-gathering authority that Congress has granted to the Secretary of the Treasury or her delegate (Secretary) under the Code includes the IRS’s broad examination and summons authority, which allows the IRS to determine the accuracy of that self-assessment. See United States v. Arthur Young & Co., 465 U.S. 805, 816 (1984). Section 7602(a) provides that, for the purpose of ascertaining the correctness of any return, making a return in cases in which none has been made, determining the liability of any person for any internal revenue tax, or collecting any such liability, the Secretary is authorized to examine books and records, issue summonses seeking documents and testimony, and take testimony from witnesses under oath as may be relevant or material. Section 7602(b) further provides that the purposes for which the Secretary may examine books and records, issue summonses, and take testimony under oath include the purpose of inquiring into any offense connected with the administration or enforcement of the internal revenue laws.

Section 7602(c) was added to the Code by section 3417 of the Internal Revenue Service Restructuring and Reform Act of 1998, Public Law 105-206, 112 Stat. 685 (RRA 98). Section 7602(c)(1), as added by RRA 98, required that the IRS provide the taxpayer “reasonable notice in advance” before it contacted a third party with respect to the determination or collection of the tax liability of such taxpayer. Final regulations interpreting and implementing section 7602(c) as enacted by RRA 98 were promulgated in 2002. TD 9028 (67 FR 77419). Section 301.7602-2(d)(1) of the Procedure and Administration Regulations provides that the pre-contact notice may be given either orally or in writing. If notice is written, it may be given in any manner that the IRS employee who gives such notice reasonably believes will be received by the taxpayer prior to the contact with the third party. Written notice is considered

reasonable if it is mailed to the taxpayer’s last known address, given in person, left at the taxpayer’s dwelling or usual place of business, or actually received by the taxpayer. Section 301.7602-2(d)(2) provides that taxpayers need not be given pre-contact notice for contacts with third parties of which advance notice otherwise has been provided to the taxpayer pursuant to another statute, regulation, or administrative procedure.

Section 1206 of the Taxpayer First Act of 2019 (TFA), Public Law 116-25 (133 Stat. 981), which was enacted into law on July 1, 2019, amended section 7602(c)(1) to provide that IRS officers or employees may not contact a third party with respect to the determination or collection of the tax liability of a taxpayer unless the IRS first provides the taxpayer with advance notice meeting certain requirements. The notice must specify the period, not to exceed one year, during which the IRS intends to make the contact. The IRS must provide the notice to the taxpayer no later than 45 days before the beginning of such period, except as otherwise provided by the Secretary. The IRS may issue multiple notices to the same taxpayer with respect to the same tax liability that, taken together, cover an aggregate period greater than one year. The IRS may not issue a notice under section 7602(c) unless the IRS intends, at the time the notice is issued, to contact third parties during the period specified in that notice. The IRS may meet this intent requirement based on the assumption that the information sought to be obtained by the contact will not be obtained by other means before such contact. The TFA amendments apply to notices provided, and contacts made, after August 15, 2019.

Explanation of Provisions

I. Overview

These proposed regulations would update the regulations in §301.7602-2(a) and (d) pertaining to the advance notice that must be provided to taxpayers prior to IRS contact with third parties to conform to the new statutory language of section 7602(c). These proposed regulations also would provide, pursuant to the Secretary’s authority in section 7602(c)(1)(B), exceptions to the 45-day advance notice require

ment if delaying contact with third parties for 45 days after providing notice to the taxpayer would impair tax administration. In these situations, the 45-day advance notice period is proposed to be reduced or eliminated to ensure sufficient time for the IRS to properly conduct certain time-sensitive examination or collection activities.

II. Notice of Third-party Contacts

The proposed regulations would amend §301.7602-2(a) and (d) pertaining to third-party contacts to implement the amendments made to section 7602(c)(1) by section 1206 of the TFA. Like existing §301.7602-2(a), proposed §301.76022(a)(1) would provide that, subject to the exceptions in existing §301.7602-2(f), IRS officers or employees may not contact third parties with respect to the determination or collection of the tax liability of a taxpayer unless the requirements of section 7602(c) and proposed §301.76022(d) have been satisfied. The exceptions in existing §301.7602-2(f) implement the statutory exceptions set forth in section 7602(c)(3) prior to, and unaffected by, the TFA.

In cases not covered by the exceptions in section 7602(c)(3) and existing §301.7602-2(f), proposed §301.7602-2(d) (1) would implement the requirements of section 7602(c)(1) as amended by the TFA that IRS officers or employees may not contact third parties with respect to the determination or collection of the tax liability of a taxpayer unless the IRS provides advance notice to the taxpayer (third-party contact notice). The thirdparty contact notice must specify a period, not to exceed one year, during which the contact is intended to occur and inform the taxpayer that third-party contacts are intended to be made during such period. Proposed §301.7602-2(d)(1) further provides that the third-party contact notice must be in writing. The requirement that the third-party contact notice be in writing is intended to ensure compliance with the advance notice requirement and to eliminate any potential confusion as to the date on which notice was provided to the taxpayer or the contents of the third-party contact notice. Subject to certain enumerated exceptions described in part III of this Explanation of Provisions, proposed

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§301.7602-2(d)(1)(iii) would implement the requirement of section 7602(c)(1)(B) that the third-party contact notice generally must be provided to the taxpayer no later than 45 days before the beginning of the period in which the contact is intended to be made (45-day advance notice period). Proposed §301.7602-2(d) (2) would further provide the methods by which the IRS will provide a third-party contact notice to the taxpayer, which are similar to the methods set forth in existing §301.7602-2(d)(1)(i) through (iv).

As provided in the second sentence of section 7602(c)(1), proposed §301.76022(d)(3) provides that the IRS is not prevented from issuing successive notices to the same taxpayer with respect to the same tax liability for periods (each not greater than one year) that, in the aggregate, exceed one year.

As provided in the third and fourth sentences of section 7602(c)(1), proposed §301.7602-2(d)(4) would provide that no third-party contact notice will be issued under proposed §301.7602-2(d) unless there is an intent at the time such notice is issued to contact persons other than the taxpayer during the period specified in such notice, which intent may be met by the IRS on the basis of the assumption that the information sought to be obtained by the third-party contact will not be obtained by other means before such contact.

III. Exceptions to the 45-Day Advance Notice Requirement

Proposed §301.7602-2(d)(5) provides several exceptions to the 45-day advance notice requirement, in particular with respect to the IRS’s fuel compliance program, nonjudicial redemption investigations, and in limited time-sensitive circumstances involving assessment or collection of tax.

A. Fuel compliance program

Section 4081 of the Code imposes an excise tax on certain motor and aviation fuels. Section 4082 of the Code exempts diesel fuel and kerosene from such tax if used for certain nontaxable purposes specified in section 4082(b), including fuel sold for use or used in a train, school bus, or intracity transportation; for farm

use; or for an off-highway business use, as defined in section 6421(e)(2) of the Code, except mobile machinery, as defined in section 6421(e)(2)(C). Tax-exempt fuel is required to be indelibly dyed in a minimum concentration specified in §48.40821(b)(1) of the Manufacturers and Retailers Excise Tax Regulations (26 CFR part 48) or otherwise pre-approved by the IRS. Section 4083(d) of the Code provides that in administering sections 4081 through 4084 of the Code the Secretary may enter any place at which taxable fuel is produced or is stored (or may be stored) for purposes of examining the equipment used to determine the amount or composition of such fuel and the equipment used to store such fuel, taking and removing samples of such fuel, and inspecting any books and records and any shipping papers pertaining to fuel. Section 4083(d) further provides that the Secretary may also detain, for these purposes, any container that contains or may contain any taxable fuel. Refusal to admit entry or other refusal to permit an action authorized by section 4083(d) may result in certain penalties under sections 6717 and 7342 of the Code.

Section 6715(a) of the Code provides that a penalty in the amount prescribed in section 6715(b) will be imposed, in addition to any tax, if (1) any dyed fuel is sold or held for sale by any person for any use which such person knows or has reason to know is not a nontaxable use of such fuel, (2) any dyed fuel is held for use or used by any person for a use other than a nontaxable use and such person knew, or had reason to know, that such fuel was so dyed, (3) any person willfully alters, chemically or otherwise, or attempts to so alter, the strength or composition of any dye or marking done pursuant to section 4082 in any dyed fuel, or (4) any person who has knowledge that a dyed fuel which has been altered (as described in section 6715(a)(3)) sells or holds for sale such fuel for any use which the person knows or has reason to know is not a nontaxable use of such fuel. Section 6715(d) provides that if a penalty is imposed under section 6715 on any business entity, each officer, employee, or agent of such entity who willfully participated in any act giving rise to such penalty is jointly and severally liable with such entity for such penalty.

Section 6715A of the Code provides that a person who tampers with a mechanical dye injection system used to indelibly dye fuel for purposes of section 4082, or any operator of a mechanical dye injection system used to indelibly dye fuel for purposes of section 4082 who fails to maintain the security standards for such system as established by the Secretary, must pay a penalty in the amount prescribed in section 6715A(b) in addition to any tax. As with section 6715, if a penalty is imposed under section 6715A on any business entity, each officer, employee, or agent of such entity who willfully participated in any act giving rise to such penalty is jointly and severally liable with such entity for such penalty.

Section 6720A(a) of the Code provides that any person who knowingly transfers for resale, sells for resale, or holds out for resale any liquid for use in a diesel-powered highway vehicle or a diesel-powered train that does not meet applicable Environmental Protection Agency regulations must pay, in addition to any tax, a penalty of $10,000 for each such transfer, sale, or holding out for resale. In addition, section 6720A(b) provides that any person who knowingly holds out for sale (other than for resale) any liquid described in section 6720A(a) must pay a penalty of $10,000 for each such holding out for sale, in addition to any tax on such liquid.

Under the IRS’s Fuel Compliance Program, fuel compliance officers and agents (FCO/As) conduct field inspections authorized under section 4083(d). If they discover an improper use of dyed fuel or an improper dye concentration, they determine how the fuel came to be in the vehicles inspected. The individuals and entities inspected by FCO/As may be classified as either taxpayers or third parties, depending on the facts of a given inspection. FCO/As typically cannot know how to classify the parties involved until the inspection is conducted.

One type of inspection conducted by FCO/As occurs after fuel is removed via a terminal rack into a transporting truck or railcar. A terminal is a taxable fuel storage and distribution facility that is supplied by pipeline or vessel and from which taxable fuel may be removed at a rack. A rack is a mechanism capable of delivering taxable fuel, usually through pipes, into a means

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of transport other than a pipeline or vessel. See §48.4081-1(b). The owner of the terminal rack could be liable for a penalty if the dye concentration is incorrect. Because the transport truck drivers are typically not employed by the owner of the terminal, they may be considered third parties relative to the owner of the terminal. FCO/ As require immediate access to the fuel in the loaded transport trucks to determine the correct dye concentration prior to the fuel being delivered into the fuel distribution system. FCO/As also conduct inspections of various vehicles other than those leaving the terminal racks; for example, they may inspect a truck at a weigh station to determine if the truck contains dyed fuel. In such situations FCO/As require the ability to quickly investigate the origin of dyed fuel if impermissible dyed fuel is discovered. For example, if the driver of the vehicle is a company employee and the driver tells the FCO/A that the company owner instructed the driver to use dyed fuel, then the FCO/A ordinarily would want to conduct an investigation at the company’s yard as soon as possible to determine culpability.

Requiring that the IRS provide 45 days advance notice of third-party contacts in the context of these fuel compliance examinations would significantly impair the enforcement work performed by FCO/ As. Because these inspections are conducted in real time and are not based on a tax return, it is imperative that FCO/ As have the ability to obtain information, develop facts, and determine potential liability in real time, given the risk that any delay would result in an inability to properly conduct the examination as information dissipates. For example, dyed diesel fuel may be removed or replaced from an oil drilling rig before the FCO/A is able to complete an investigation. Proposed §301.7602-2(d)(5)(i) therefore would provide that the IRS may provide sameday third-party contact notices to the taxpayer with respect to contacts intended to be made by the IRS, which would be made after the provision of the third-party contact notice on that day, in connection with investigations involving potential liability for penalties under section 6715, 6715A, or 6720A or in connection with the IRS’s exercise of authority under section 4083(d). The IRS would therefore be

able to make third-party contacts in these types of investigations immediately after providing the taxpayer with a third-party contact notice.

B. Nonjudicial sale redemption investigations

Creditors may foreclose on property through judicial or nonjudicial processes, as provided by State law. Pursuant to section 7425(b) of the Code, a nonjudicial foreclosure sale will discharge a junior Federal tax lien from real or personal property if a notice of Federal tax lien has been filed more than 30 days before the sale and the foreclosing creditor gives the IRS notice of the sale at least 25 days in advance. Under section 7425(d) of the Code, however, the IRS has 120 days from the date of the nonjudicial foreclosure sale (or longer if provided by State law) to redeem real property from the purchaser. Redemption is accomplished by paying the purchaser the amount paid at the sale, interest, and certain expenses. The purpose of the redemption is for the IRS to sell the real property for a higher amount, a result which would benefit the taxpayer as well, as any additional sale proceeds would satisfy more of the taxpayer’s liability or potentially lead to a surplus over the amount of the liability.

Prior to redeeming the property, the IRS must undertake an investigation in order to determine the potential benefits and viability of a potential redemption. The IRS’s Civil Enforcement Advisory and Support Office (CEASO) has primary responsibility for receiving and screening nonjudicial sale notices for redemption potential. Generally, if the property value significantly exceeds the nonjudicial sale price, the CEASO refers the case to a revenue officer for a more thorough investigation and, if appropriate, redemption action. Such an investigation may involve the CEASO or the assigned revenue officer discussing the property and foreclosure with third parties. For example, it may be necessary for the IRS to determine the value of the property by researching records or consulting valuation specialists; to gather information about the nonjudicial sale by researching the balances of encumbrances against the property and inquiring about issues that

could affect the amount realized through a redemption sale, for example, renter’s claims; to notify the nonjudicial sale purchaser of the possible redemption; to secure a guaranteed bidder for the post-redemption sale by contacting prospective bidders or advertising for bids; to obtain management approval for the redemption; to secure funding for the redemption from the revolving fund for redemption of real property under section 7810 of the Code; to deliver the redemption check to the sale purchaser; and to complete the redemption by filing the necessary documentation with the recording office within 120 days from the date of sale. Some of these contacts may be considered third party contacts subject to the 45-day advance notice requirement.

The 45-day advance notice requirement of section 7602(c) would jeopardize the IRS’s ability to redeem property. The redemption investigation cannot begin in earnest until after the foreclosure sale, at which point the sale price is known, and which commences the 120-day redemption period. The earliest date that the IRS could give the taxpayer advance notice of third-party contacts is on the date the CEASO receives notice of the sale. The 45-day advance notice period would thus necessarily start after the beginning of the 120-day redemption period, and the IRS may not be able to notify the sale purchaser of the possible redemption until the 46th day of the redemption period. As a consequence, the IRS would have fewer than 74 days to fully determine the redemption potential, negotiate with the purchaser on potentially releasing the IRS’s redemption rights, canvas for bidders, secure funding, and complete the redemption process. This is highly unlikely to be feasible. Therefore, proposed §301.7602-2(d) (5)(ii) would reduce the 45-day advance notice period to 10 days of advance notice in these situations.

C. Statutory period for assessment expiring in one year or less

Section 6501(a) of the Code provides that the IRS generally has three years after an original return is filed or three years from the due date of the original return, whichever is later, within which to assess tax with respect to a particular

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tax year (statutory assessment period). Taxpayers and the IRS may extend the statutory assessment period by agreement under section 6501(c)(4). If the IRS needs to contact third parties in situations in which certain circumstances are present and one year or less remains on the statutory assessment period, tax administration would be impaired if the IRS were required to provide 45 days advance notice to the taxpayer before contacting the third parties.

1. Certain Examination Cases

Proposed §301.7602-2(d)(5)(iii) would reduce the 45-day advance notice requirement to 10 days of advance notice in certain examinations in which the statutory assessment period will expire one year or less from the date the IRS intends to contact third parties and delaying such contacts for 45 days will impair the government’s ability to expeditiously determine and assess tax. This proposed reduction would allow the IRS to move forward and promptly conduct examination activities in cases in which the time to do so is limited and a delay will impair the government’s ability to expeditiously determine and assess tax.

The 45-day advance notice period would be reduced to 10 days of advance notice if both the IRS has requested that the taxpayer provide, and the taxpayer has not provided within the time requested, a Form 872, Consent to Extend the Time to Assess Tax, to extend the statutory assessment period for a period necessary to complete the examination and other administrative actions, and the IRS case involves an issue or issues with respect to which the burden of proof would rest with the IRS in a court proceeding. The amount of evidence necessary to support the IRS’s position will generally be greater in cases in which the IRS would have the burden of proof if a case were to proceed to trial (for example, in cases involving unreported income). The IRS therefore needs additional time within which to attempt to gather this evidence through the use of, among other things, contacts with third parties. Requiring the IRS to wait 45 days prior to making contact with third parties after notifying the taxpayer that such contacts are intended to be made would hin

der the IRS’s ability to complete its investigation prior to the end of the statutory assessment period and would negatively impact its ability to meet its burden. Proposed §301.7602-2(d)(5)(iii) would therefore reduce the 45-day advance notice period to 10 days of advance notice in these situations.

2. Trust Fund Recovery Penalty Cases

Proposed §301.7602-2(d)(5)(iv) would reduce the 45-day advance notice period to 10 days of advance notice in cases in which the IRS’s contact with third parties is made as part of an investigation into potential liability for the trust fund recovery penalty (TFRP) under section 6672 of the Code that includes one or more tax periods with one year or less remaining on the assessment statute of limitations as of the date the IRS intends to contact third parties. A revenue officer investigating potential TFRP liability must determine whether a person is both responsible and willful, and multiple persons may be liable for the same TFRP liability, making such investigations highly fact-intensive and challenging. As a result, an investigating revenue officer who is faced with a statutory assessment period that is ending will need to obtain information and documentation from third parties expeditiously in order to identify all responsible persons liable for the TFRP before the statutory assessment period ends. Waiting 45 days to contact third parties may prevent the revenue officer from identifying all responsible persons and from completing the TFRP investigation before the statutory assessment period ends. For example, if a potentially responsible person does not provide requested information and documentation by the deadline set by the revenue officer, provides only part of the information and documentation by the deadline, or asks for one or more extensions of time to respond, a revenue officer faced with a statutory assessment period that is ending will need to obtain information and documentation from third parties. Waiting 45 days before contacting third parties could result in assessments against some but not all responsible persons, assessments made against persons who were not responsible, or assessments against responsible persons who were not

willful for some of the tax periods for which the trust fund taxes were not turned over to the IRS.

D. Statutory period for collection expiring in one year or less

Section 6502 of the Code provides that the length of the period for collection after assessment of a tax liability generally is 10 years (statutory collection period). The end of the statutory collection period ends the government’s right to pursue collection of an unpaid tax liability. If the IRS needs to contact third parties in situations in which certain circumstances are present and one year or less remains on the statutory collection period, tax administration would be impaired if the IRS were required to provide 45 days advance notice to the taxpayer before contacting the third parties.

Proposed §301.7602-2(d)(5)(v) would reduce the 45-day advance notice requirement to 10 days of advance notice in two situations in which there is one year or less remaining before the statutory collection period ends as of the date the IRS intends to make contact with third parties. The first situation is if providing 45 days advance notice would prevent the IRS from having sufficient time to prepare a suit referral and deliver it to the Department of Justice (DOJ). The second situation is if reducing the 45-day advance notice period to 10 days of advance notice is necessary to allow sufficient time for collection activities.

1. Preparation and delivery of suit referral to DOJ

Proposed §301.7602-2(d)(5)(v)(A) would reduce the 45-day advance notice period to 10 days of advance notice in cases in which one year or less remains before the statutory collection period ends as of the date the IRS intends to contact third parties and the IRS plans to prepare a suit referral requesting that DOJ file suit to reduce assessments to judgment or to foreclose Federal tax liens before the statutory collection period ends. In these types of cases, collection cannot be accomplished by administrative methods within the normal statutory period. The United States’ success in litigation, how

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ever, is highly dependent upon the full and complete development of factual and legal issues before the suit is filed. The IRS therefore needs as much time as possible to develop its case prior to making the referral, and requiring a revenue officer to wait 45 days to contact third parties after notifying the taxpayer that such contact is intended to be made would impair the IRS’s ability to timely make the referral. A suit recommendation to foreclose Federal tax liens against specific property titled in the name of someone other than the taxpayer, for example, may require a revenue officer to develop evidence, including by issuing third-party summonses, to prove the taxpayer’s property was fraudulently transferred or that a person holds the property as the taxpayer’s nominee. The IRS’s Office of Chief Counsel must then review and approve the suit recommendation before a referral is made to DOJ. Finally, DOJ reviews the recommendation, drafts the pleadings, and files suit. Depending on the complexity of facts, this process can take a significant amount of time. Therefore, in these situations, proposed §301.7602-2(d)(5)(v)(A) would provide that the IRS may contact the third parties 10 days after providing the third-party contact notice to the taxpayer.

2. Insufficient time for collection activities

Proposed §301.7602-2(d)(5)(v)(B) would reduce the 45-day advance notice period to 10 days of advance notice in cases in which there is one year or less remaining before the statutory collection period ends as of the date the revenue officer intends to contact third parties and the revenue officer is unable to contact the taxpayer or the taxpayer refuses to pay, if the revenue officer concludes that the period should be reduced in order to maximize the amount of unpaid tax that can be collected by levy within the time remaining before the statutory collection period expires. This reduction in advance notice will allow the IRS sufficient time for investigative work, including to serve collection summonses, to find assets on which to levy, and to execute levies. Proposed §301.7602-2(d)(5)(vi) would provide that a revenue officer is considered unable to contact the taxpayer if

the taxpayer fails to respond to the revenue officer’s reasonable attempts to contact the taxpayer directly within the time requested by the revenue officer.

Proposed §301.7602-2(d)(5)(vii) would provide that the category of taxpayers who are considered to have refused to pay includes: (1) taxpayers who have the ability to pay their currently due and owing taxes including required tax deposits and estimated tax payments and to pay their delinquent taxes through an alternative collection method but will not do so; (2) taxpayers who cannot pay currently due taxes or pay their delinquent taxes, but who have assets in excess of amounts exempt from levy that will yield net proceeds and are unwilling or unable to borrow against or liquidate these assets; (3) taxpayers who are accruing employment tax liabilities without making required tax deposits; (4) taxpayers who use frivolous tax arguments and continue to resist the requirements to file and pay; (5) taxpayers who will not cooperate with the IRS (for example, taxpayers that evade contact or will not provide financial information); (6) taxpayers who will not comply with the results of the IRS’s financial analysis or will not enter into an installment agreement or offer in compromise; (7) taxpayers who are wage earners who have not paid their tax liability and will not adjust their withholdings to prevent future delinquencies; (8) taxpayers who are self-employed, have not paid their tax liability, and will not make estimated tax payments to prevent future delinquencies; and (9) taxpayers who do not meet their commitments (without a valid reason) as required by an installment agreement, offer in compromise, or extension of time to pay. Proposed §301.7602-2(d)(5)(vii) does not provide an exhaustive list of taxpayers who are considered to have refused to pay, and taxpayers who engage in conduct not specifically listed in the text of proposed §301.7602-2(d)(5)(vii) may be considered to have refused to pay.

In these situations, the IRS faces significant delays in carrying out its collection activities and often must contact third parties. Requiring the IRS to wait 45 days prior to making contact with third parties after notifying the taxpayer that such contacts are intended to be made would hinder the IRS’s ability to complete its collec

tion activities in time. Therefore, in these situations, proposed §301.7602-2(d)(5)(v) (B) and (d)(5)(vii) would provide the IRS the ability to contact third parties 10 days after providing the third-party contact notice to the taxpayer.

Proposed Applicability Date

The proposed regulations are proposed to apply to any contacts made on or after the date 30 days after the date of publication of final regulations in the Federal Register .

Special Analyses

I. Regulatory Planning and Review

Pursuant to the Memorandum of Agreement, Review of Treasury Regulations under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6 of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required.

II. Regulatory Flexibility Act

The Secretary of the Treasury hereby certifies that these proposed regulations will not have a significant economic impact on a substantial number of small entities pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6). This certification is based on the fact that the regulation solely provides for the elimination or reduction of the time period between when the IRS informs a taxpayer that it intends to contact third parties and when the actual contact may take place in certain situations. Accordingly, a regulatory flexibility analysis under the Regulatory Flexibility Act is not required.

Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

III. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and

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benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. This rule does not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

IV. Executive Order 13132: Federalism

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. These proposed regulations do not have federalism implications and do not impose substantial direct compliance costs on State and local governments or preempt State law within the meaning of the Executive order.

Comments and Requests for Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the Treasury Department and the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. Any electronic and paper comments submitted will be available at https://www.regulations.gov or upon request.

A public hearing will be scheduled if requested in writing by any person that timely submits electronic or written comments. Requests for a public hearing are encouraged to be made electronically. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

Announcement 2023–16, 2023–20 I.R.B. 854 (May 15, 2023), provides that public hearings will be conducted in per

son, although the IRS will continue to provide a telephonic option for individuals who wish to attend or testify at a hearing by telephone. Any telephonic hearing will be made accessible to people with disabilities.

Drafting Information

The principal author of these temporary regulations is Brittany Harrison of the Office of the Associate Chief Counsel (Procedure and Administration). However, other personnel from the Treasury Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and IRS propose to amend 26 CFR part 301 as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805. Par. 2. Section 301.7602-2 is amended by revising paragraphs (a), (d), and (g) to read as follows:

§301.7602-2 Third party contacts.

(a) Advance notice of third-party con- tacts ―(1) In general . Subject to the exceptions in paragraph (f) of this section, no officer or employee of the Internal Revenue Service (IRS) may contact any person other than the taxpayer with respect to the determination or collection of such taxpayer’s tax liability unless the requirements of section 7602(c) of the Internal Revenue Code (Code) and paragraph (d) of this section have been satisfied.

(2) Record of contacts . A record of persons so contacted must be made and

given to the taxpayer upon the taxpayer’s request in accordance with paragraph (e) of this section.

• ---

(d) Notice of third-party contacts ―(1) In general . An officer or employee of the IRS may not make third-party contacts with respect to the determination or collection of the liability of a taxpayer unless such contact occurs during a period (not greater than one year) that is specified in a written notice (third-party contact notice) that—

(i) The IRS provides to the taxpayer in accordance with paragraph (d)(2) of this section;

(ii) Informs the taxpayer that thirdparty contacts are intended to be made during such period; and

(iii) Except as set forth in paragraph (d)(5) of this section, is provided to the taxpayer no later than 45 days before the beginning of such period (45-day advance notice period).

(2) Provision of third-party contact notice . A third-party contact notice must be—

(i) Mailed to the taxpayer’s last known address;

(ii) Given in person to the taxpayer; (iii) Left at the taxpayer’s dwelling or usual place of business; or

(iv) Actually received by the taxpayer. (3) Successive notices . Nothing in paragraph (d)(1) of this section prevents the IRS from issuing successive notices to the same taxpayer with respect to the same tax liability for periods (each not greater than one year) that, in the aggregate, exceed one year.

(4) Intent to contact. A third-party contact notice will not be issued under paragraph (d) of this section unless there is an intent at the time such notice is issued to contact persons other than the taxpayer during the period specified in such notice. Nothing in the preceding sentence will prevent the issuance of a third-party contact notice if the requirement of such sentence is met on the basis of the assumption that the information sought to be obtained by such contact will not be obtained by other means before such contact.

(5) Exceptions to 45-day advance notice period . The 45-day advance notice period of section 7602(c)(1)(B) of the Code and paragraph (d)(1) of this sec

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tion is reduced in the case of third-party contacts described in paragraphs (d)(5)(i) through (v) of this section.

(i) Fuel compliance program . The 45-day advance notice period is reduced to zero days, and the IRS may make a third-party contact at any time after the third-party contact notice has been given to the taxpayer, if—

(A) The IRS officer or employee intends to make a third-party contact in connection with its investigation of potential liability for penalties under section 6715, 6715A, or 6720A of the Code; or (B) The IRS officer or employee intends to make a third-party contact in connection with its exercise of authority under section 4083(d) of the Code.

(ii) Nonjudicial sale redemption inves- tigations . The 45-day advance notice period is reduced to 10 days if the IRS officer or employee intends to make a third-party contact in connection with an investigation into a potential nonjudicial sale redemption.

(iii) Examination cases involving cer- tain issues in which statutory period for assessment expiring within one year or less . The 45-day advance notice period is reduced to 10 days in cases under examination in which there is one year or less remaining before the expiration of the period for assessment under section 6501(a) of the Code determined with regard to extensions (statutory assessment period) for any period included in the examination as of the date the IRS intends to make a third-party contact if:

(A) The case involves an issue with respect to which the IRS would have the burden of proof in any court proceeding; and

(B) The IRS has requested that the taxpayer provide the IRS with an unrestricted, signed Form 872, Consent to Extend the Time to Assess Tax, to extend the statutory assessment period by a period necessary to complete the examination and other administrative actions, and the taxpayer has not provided the requested signed Form 872 within the time requested.

(iv) Trust fund recovery penalty inves- tigations in which statutory period for assessment expiring within one year or less . The 45-day advance notice period is reduced to 10 days in investigations into

potential liability for penalties under section 6672 of the Code if there is one year or less remaining before the expiration of the statutory assessment period for any period included in the investigation as of the date the IRS intends to make a thirdparty contact.

(v) Statutory period for collection expiring within one year or less . The 45-day advance notice period is reduced to 10 days if there is one year or less remaining in the time period (or, in cases involving multiple time periods, in any time period in the case) under section 6502 of the Code within which the IRS may collect an assessed tax by levy or by a proceeding in court (statutory collection period) as of the date the IRS intends to make a third-party contact and either—

(A) The IRS intends to prepare and deliver to the Department of Justice (DOJ) a suit referral requesting that DOJ file suit to reduce assessments to judgment or to foreclose Federal tax liens before the expiration of the statutory collection period; or

(B) The revenue officer is unable to contact the taxpayer (as defined in paragraph (d)(5)(vi) of this section), or the taxpayer refuses to pay (as defined in paragraph (d)(5)(vii) of this section), and the revenue officer concludes that the advance notice period should be reduced in order to maximize the amount of unpaid tax that can be collected by levy within the time remaining before the statutory collection period expires.

(vi) Unable to contact the taxpayer . The revenue officer is unable to contact the taxpayer for purposes of paragraph (d)(5)(v)(B) of this section if the taxpayer fails to respond to the revenue officer’s reasonable attempts to contact the taxpayer directly within the time requested by the revenue officer.

(vii) Taxpayer refuses to pay. The category of taxpayers who are considered to have refused to pay for purposes of paragraph (d)(5)(v)(B) of this section includes taxpayers described in this paragraph (d) (5)(vii). This paragraph (d)(5)(vii) is not an exhaustive list of taxpayers considered to have refused to pay, and taxpayers who engage in conduct not specifically described in this paragraph (d)(5)(vii) may be considered to have refused to pay.

(A) Taxpayers who have the ability to pay their currently due and owing taxes including required tax deposits and estimated tax payments and to pay their delinquent taxes through an alternative collection method but will not do so.

(B) Taxpayers who cannot pay currently due taxes or pay their delinquent taxes, but who have assets in excess of amounts exempt from levy that will yield net proceeds and are unwilling or unable to borrow against or liquidate these assets.

(C) Taxpayers who are accruing employment tax liabilities without making required tax deposits.

(D) Taxpayers who use frivolous tax arguments and continue to resist the requirements to file returns and pay their tax liability.

(E) Taxpayers who will not cooperate with the IRS (for example, taxpayers that evade contact or will not provide financial information).

(F) Taxpayers who will not comply with the results of the IRS’s financial analysis or will not enter into an installment agreement or offer in compromise.

(G) Taxpayers who are wage earners who have not paid their tax liability and will not adjust their withholdings to prevent future delinquencies.

(H) Taxpayers who are self-employed, have not paid their tax liability, and will not make estimated tax payments to prevent future delinquencies.

(I) Taxpayers who do not meet their commitments (without a valid reason) as required by an installment agreement, offer in compromise, or extension of time to pay.

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(g) Applicability dates ―(1) In general . Except as provided for in paragraph (g)(2) of this section, this section is applicable on December 18, 2002.

(2) Exceptions . Paragraphs (a)(1) and (d) of this section apply to third-party contacts made on or after 30 days after [DATE OF PUBLICATION OF FINAL RULE].

(Filed by the Office of the Federal Register March 21, 2024, 8:45 a.m., and published in the issue of the Federal Register for March 22, 2024, 89 FR 20371)

Douglas W. O’Donnell, Deputy Commissioner for Services and

Enforcement.

Bulletin No. 2024–16 949 April 15, 2024