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Private Letter Ruling Number: 202306003 Internal Revenue Service November 9, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202306003 Release Date: 2/10/2023 Index Number: 1400Z.02-00, 9100.00-00 [Third Party Communication: Date of Communication: Month DD, YYYY] Person To Contact: ID No. Telephone Number: Refer Reply To: CC:ITA:B04 PLR-109640-22 Date: November 09, 2022 Dear ******: This responds to Taxpayer's request dated April 29, 2022. Specifically, Taxpayer requests relief under Treasury Regulation §§ 301.9100-1 and 301.9100-3 granting an extension of time to make a timely election under Treasury Regulation § 1.1400Z-2(a)-1(a)(2)(i) to be certified as a Qualified Opportunity Fund (QOF), as defined in § 1400Z-2(d) of the Internal Revenue Code (Code). This letter ruling is being issued electronically in accordance with Rev. Proc. 2020-29, 2020-21 I.R.B. 859. A paper copy will not be mailed to Taxpayers. FACTS Taxpayer was organized as a limited liability company under the laws of State on Date 1 and it is classified as a partnership for federal income tax purposes. On Date 2, Taxpayer adopted a resolution to its operating agreement stating that the purpose of Taxpayer is to act as a Qualified Opportunity Fund and invest in a Qualified Opportunity Zone Business. Shortly thereafter, Taxpayer made an investment to acquire Qualified Opportunity Zone Property as defined in Code §1400Z-2(d)(2). Taxpayer's Manager retained Tax Advisor, a qualified tax advisor, to file Taxpayer's Form 1065 for the Year 1. Tax Advisor has multiple years of experience in both public and private accounting and has a high level of expertise for tax reporting. Manager does not have tax expertise and represents that he relied on Tax Advisor, who he believed had a high level of expertise in tax preparation and reporting. It has been represented that, at the time Tax Advisor was retained, Tax Advisor was made aware of Taxpayer's desire and intent to self-certify as a Qualified Opportunity Fund at the time of filing Taxpayer's Year 1 federal income tax return. Tax Advisor timely filed Taxpayer's Year 1 federal income tax return but failed to attach Form 8996 (which is required to certify Taxpayer as a Qualified Opportunity Fund for Year 1). On Date 3, Tax Advisor became aware of his failure to timely file Form 8996 with Taxpayer's federal income tax return for Year 1. Upon being made aware that Form 8996 had not been timely filed, Taxpayer submitted this request for relief. LAW AND ANALYSIS Section 1400Z-2(e)(4)(A) directs the Secretary to prescribe regulations for rules for the certification of QOFs. Treasury Regulation § 1.1400Z2(d)-1(a)(2)(i) provides that the self-certification of a QOF must be timely-filed and effectuated annually in such form and manner as may be prescribed by the Commissioner of Internal Revenue Service in forms or instructions, or in publications or guidance published in the Internal Revenue Bulletin. To self-certify as a QOF, a taxpayer must file Form 8996, Qualified Opportunity Fund, with its tax return for the year to which the certification applies. The Form 8996 must be filed by the due date of the tax return (including extensions). Because § 1.1400Z2(d)-1(a)(2)(i) sets forth the manner and timing for an entity to self-certify as a QOF, these elections are regulatory elections, as defined in § 301.9100-1(b). Sections 301.9100-1 through 301.9100-3 provide the standards that the Commissioner will use to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-3(a) provides that requests for extensions of time for regulatory elections (other than automatic extensions covered in § 301.9100-2) will be granted when the taxpayer provides evidence (including affidavits) to establish that the taxpayer acted reasonably and in good faith and the grant of relief will not prejudice the interests of the Government. Under § 301.9100-3(b) a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer requests relief before the failure to make the regulatory election is discovered by the Service, or reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make, the election. However, a taxpayer is not considered to have reasonably relied on a qualified tax professional if the taxpayer knew or should have known that the professional was not competent to render advice on the regulatory election or was not aware of all relevant facts. In addition, § 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted reasonably and in good faith if the taxpayer-- (i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under § 6662 at the time the taxpayer requests relief, and the new position requires or permits a regulatory election for which relief is requested; (ii) was fully informed in all material respects of the required election and related tax consequences but chose not to make the election; or (iii) uses hindsight in requesting relief. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Service will not ordinarily grant relief. Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable extension of time to make the regulatory election only when the interests of the Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i) provides that the interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Section 301.9100-3(c)(1)(ii) provides that the interests of the government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable year that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under § 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. Based on the facts and information submitted and the representations made, we conclude that Taxpayer has acted reasonably and in good faith, and that the granting of relief would not prejudice the interests of the government. Accordingly, based solely on the facts and information submitted, and the representations made in the ruling request, we grant Taxpayer an extension of 45 days from the date of this letter ruling to file an amended Year 1 income tax return to make the election under § 1400Z-2 and § 1.1400Z2(d)-1(a)(2)(i). The election is to be made on Form 8996. This ruling is based upon facts and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. This office has not verified any of the material submitted in support of the request for a ruling. However, as part of an examination process, the Service may verify the factual information, representations, and other data submitted. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, we express no opinion, either express or implied, concerning whether any investments made into Taxpayer are qualifying investments as defined in § 1.1400Z2 (a)-1(b)(34) or whether Taxpayer meets the requirements under § 1400Z-2 and the regulations thereunder to be a QOF. We express no opinion regarding the tax treatment of the instant transaction under the provisions of any other sections of the Code or regulations that may be applicable, or regarding the tax treatment of any conditions existing at the time of, or effects resulting from, the instant transaction. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. In accordance with the Power of Attorney on file with this office, a copy of this letter is being faxed to your authorized representative. Sincerely, Lisa Mojiri-Azad Senior Technician Reviewer, Branch 4 Office of Associate Chief Counsel (Income Tax and Accounting) cc:

Private Letter Ruling Number: 202343008 Internal Revenue Service July 27, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202343008 Release Date: 10/27/2023 Index Number: 2501.00-00, 2601.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:04 PLR-102049-23 Date: July 27, 2023 Dear ******: This letter responds to your authorized representative's letter dated December 27, 2022, and subsequent correspondence, requesting rulings concerning the federal gift and generation-skipping transfer tax consequences of a court-approved settlement agreement. FACTS The facts submitted and representations made are as follows. Settlor died testate on Date 1, a date prior to September 25, 1985. Settlor's Will consists of the original instrument dated Date 2, a first codicil dated Date 3, a second codicil dated Date 4, a third codicil dated Date 5, and a fourth codicil dated Date 6 (collectively, Settlor's Will). At his death, Article Fourth of Settlor's Will created separate trusts for the benefit of his three children, Child 1, Child 2, and Child 3 (collectively, Children), their spouses, and their descendants: Trust A for the benefit of Child 1; Trust B for the benefit of Child 2; and Trust C for the benefit of Child 3. In addition to the trusts for the primary benefit of Children, Article Third of Settlor's Will created a marital trust for Settlor's wife, Spouse, which granted Spouse a testamentary general power of appointment over any trust property remaining in the marital trust at the time of her death. Spouse exercised her power of appointment under Article VII of Spouse's Will, dated Date 7, with a first codicil dated Date 8 (collectively, Spouse's Will). Pursuant to Spouse's Will, upon Spouse's death on Date 9, the remaining property of the marital trust was divided into three separate trusts for the benefit of Children, their spouses, and their descendants: Trust D for the benefit of Child 1; Trust E for the benefit of Child 2; and Trust F for the benefit of Child 3. Section 8 of Article VI of Spouse's Will provides that to the extent not specifically stated otherwise, all trusts created by Spouse's Will would be governed by the provisions of Settlor's Will. Child 3 died on Date 10, leaving no surviving spouse or descendants. Upon Child 3's death, the property held in Trust C was divided into two equal shares and each share distributed to Trust A and Trust B. Similarly, the property of Trust F was divided into two equal shares and each share distributed to Trust D and Trust E. On Date 11, pursuant to a State Court order, Trust D for the primary benefit of Child 1 was divided into six separate trusts for the benefit of Child 1's six children and their respective descendants, as well as Child 1 and Child 1's spouse: Trust D1 for the benefit of Grandchild 1; Trust D2 for the benefit of Grandchild 2; Trust D3 for the benefit of Grandchild 3; Trust D4 for the benefit of Grandchild 4; Trust D5 for the benefit of Grandchild 5; and Trust D6 for the benefit of Grandchild 6. On Date 12, pursuant to a State Court order, Trust A for the primary benefit of Child 1 was divided into six separate trusts for the benefit of Child 1's six children and their respective descendants, as well as Child 1 and Child 1's spouse: Trust A1 for the benefit of Grandchild 1; Trust A2 for the benefit of Grandchild 2; Trust A3 for the benefit of Grandchild 3; Trust A4 for the benefit of Grandchild 4; Trust A5 for the benefit of Grandchild 5; and Trust A6 for the benefit of Grandchild 6. In a companion State Court order on the same date, Trust B for the primary benefit of Child 2 and Trust E for the primary benefit of Child 2, were divided into two separate trusts for the benefit of Child 2's two children, Grandchild 7 and Grandchild 8 and their respective descendants, as well as Child 2 and Child 2's spouse. The divided trusts were subsequently merged into two trusts known as Trust BE1 for the benefit of Grandchild 7 and Trust BE2 for the benefit of Grandchild 8. Article Fourth of Settlor's Will governs the distribution provisions of Trust A, Trust B, Trust D, Trust E, Trusts A1 through A6, Trusts D1 through D6, and Trusts BE1 and BE2 (collectively, the Family Trusts). Until a trust for whom a grandchild is named terminates, the Trustee has discretion to make distributions of income from such trust to the grandchild. The portion of income not distributed may be accumulated or may be distributed to the grandchild's spouse, the surviving parents of the grandchild, and the descendants of grandchild, in whole or in part, in the discretion of the Trustee. Trustee has unfettered discretion to make distributions of principal to a grandchild for whom a trust is established. A trust for whom a grandchild is named shall terminate upon the later to occur of the death of the grandchild or the grandchild's spouse, if any, and at such time the share for such grandchild shall be distributed to the descendants of such grandchild, per stirpes. Section 4 of Article Fifth of Settlor's Will provides that any trust established pursuant to Settlor's Will shall cease and terminate upon the expiration of twenty-one years after the death of the last surviving of Settlor's descendants who were in being at the time of Settlor's death, and if at the expiration of this period any property is still held in trust, such property shall immediately be distributed to and among the persons receiving or entitled to have the benefit of the income therefrom in equal shares. Pursuant to Article Fourth of Settlor's Will, if a grandchild of Settlor dies without a living spouse or descendants, the trust principal of such grandchild's trust will be distributed to Settlor's other descendants. Section 3 of Article Fifth of Settlor's Will provides as follows: The words "children" and "descendants" shall be deemed to refer to issue of the body born in lawful wedlock and to children adopted by legal proceedings of public record and to their children and descendants so defined. Of Settlor's eight grandchildren, Grandchild 5 and Grandchild 7 currently have biological descendants. Grandchild 2 adopted Adoptee 1 and Grandchild 3 adopted Adoptee 2 and Adoptee 3. Each adopted individual was adopted after reaching the age of majority (collectively, Adult Adoptees). The Trustee of each Family Trust is Trust Company. On Date 13, Trustee filed a petition with the State Court requesting an order construing the terms "children" and "descendants" under Section 3 of Article Fifth of Settlor's Will to determine whether individuals adopted as adults qualify as "descendants" under Settlor's Will. A controversy exists among the descendants of Settlor as to whether the Adult Adoptees are "descendants" of Settlor under Settlor's Will. If the Adult Adoptees are considered descendants of Settlor, the number of potential remainder beneficiaries increases and affects the per stirpital shares at the time of final distribution of the Family Trusts. On Date 14, State Court issued a memorandum opinion and order for evidentiary hearing to determine whether Grandchild 2 and/or Grandchild 3 functioned as parents to the Adult Adoptees before they reached age 18, based on State Law 1, which was enacted after Settlor's date of death. Grandchild 1, joined by other family members, filed a motion for summary judgment and amendment of the Date 14 order in objection to the State Court's application of State Law 1 rather than the law at the time of Settlor's date of death. State Law 1 provides that in construing a dispositive provision of a transferor who is not the adoptive parent, an adoptee is not considered the child of the adoptive parent unless the adoptive parent functioned as a parent of the adoptee before the adoptee reached 18 years of age. State Law 2 provides that the effective date of the title of State Law 1 is Date 15, a date that is after Settlor's date of death, and applies to any proceedings in court then pending or thereafter commenced regardless of the time of the death of decedent except to the extent that in the opinion of the court the former procedure should be made applicable in a particular case in the interest of justice or because of infeasibility of application of the procedure of the title. Over several years, the interested parties engaged in substantial litigation and other proceedings in preparation for trial, including filing cross motions for summary judgment, extensive discovery, and voluntary mediation. Based on the issue before State Court, the outcome of the litigation would be that the Adult Adoptees are determined to be or not be descendants of Settlor. After several attempts to resolve the contested issues, on Date 16 the parties entered into a Settlement Agreement resolving the litigation regarding the status of the Adult Adoptees as descendants of Settlor. The Settlement Agreement was revised on Date 17 (Revised Settlement Agreement). Both the Settlement Agreement and the Revised Settlement Agreement were approved by order of State Court and contingent upon receipt of a favorable private letter ruling from the Internal Revenue Service (IRS). All parties to the agreement were represented by legal counsel. The Revised Settlement Agreement provides for certain payments to and for the benefit of Adoptee 1. It provides that the amount of $a will be distributed outright and in cash to Adoptee 1 from Trusts A1 through A6 and Trusts D1 through D6 (each trust distributing $b). In addition, the amount of $a will be distributed outright and in cash to Grandchild 2 (adoptive parent of Adoptee 1) from Trust A2 and Trust D2 (each trust for the primary benefit of Grandchild 2 and each distributing $c), whereupon Grandchild 2, as settlor and transferor, will immediately establish (and contribute the $a in cash to) a special needs trust for the primary benefit of Adoptee 1. Finally, the amount of $d will be distributed outright and in cash to Adoptee 1 from Trust A2 and Trust D2 (each trust distributing $e). Upon receipt of cash in the amounts of $a and $d, Adoptee 1, as settlor and transferor, will immediately establish (and contribute the sum of $a and $d in cash to) a revocable trust for his primary benefit. The Revised Settlement Agreement provides for certain payments to and for the benefit of Adoptee 2 and Adoptee 3. It provides that the amount of $a will be distributed outright and in cash to each of Adoptee 2 and Adoptee 3 from Trusts A1 through A6 and Trusts D1 through D6 (each distributing $b). Further, after the cash distributions to Adoptee 2 and Adoptee 3 are made, the assets then making up Trust A3 and Trust D3 (collectively referred to going forward as the Grandchild 3 Settlement Trusts), each for the primary benefit of Grandchild 3 (adoptive parent of Adoptee 2 and Adoptee 3), will be kept separate and segregated from the assets of any other Family Trust. No further additions shall be made to the Grandchild 3 Settlement Trusts from any other Family Trust by reason of the death of any beneficiary of those other Family Trusts. Except for certain excluded property related to agricultural land and business interests in entities whose primary holding is agricultural land (Excluded Property), Adoptee 2 and Adoptee 3 are the named beneficiaries of the Grandchild 3 Settlement Trusts. Upon the death of the survivor of Child 1's spouse, Grandchild 3, and Grandchild 3's spouse, the remaining assets of the Grandchild 3 Settlement Trusts, less the Excluded Property, will be distributed in equal shares to Adoptee 2 and Adoptee 3, or all to the survivor. Adoptee 2 and Adoptee 3 have a testamentary power to appoint such individual's respective share of the Grandchild 3 Settlement Trusts to or for the benefit of such individual's spouse or descendants. If Adoptee 2 or Adoptee 3 does not exercise such power of appointment but has living descendants, the Trustee shall distribute such individual's respective share to such descendants, per stirpes. Any asset appointed under the terms of the Revised Settlement Agreement (including the assets of the Grandchild 3 Settlement Trusts) may not extend the time for vesting of that asset beyond a period of twenty-one years after the death of the last surviving descendant of Settlor who was in being on Date 18. Any remaining assets of the Grandchild 3 Settlement Trusts not otherwise distributed (including the Excluded Property) shall be distributed according to Settlor's Will without regard to any surviving Adult Adoptees or their descendants. Under the Revised Settlement Agreement, all claims by the Adult Adoptees with regard to Settlor and Settlor's Spouse's trusts and estates are resolved and, after obtaining a favorable private letter ruling from the IRS, Trustee will agree to dismiss the petition filed in State Court with prejudice and all parties will agree that State Court can enter the dismissal without awarding costs to any party and without further notice. It is represented that each Family Trust was irrevocable on September 25, 1985, and that there were no additions, constructive or actual, after that date. You have requested the following rulings: 1. The Revised Settlement Agreement, the State Court order approving the Revised Settlement Agreement, and the implementation and distributions made in accordance with the Revised Settlement Agreement, will not cause any of the Family Trusts to lose their status as trusts exempt from GST tax for purposes of chapter 13 of the Code. 2. Entering into the Revised Settlement Agreement will not cause any party to the Settlement Agreement to be treated as having made a gift to any other individual for purposes of chapter 12 of the Code. LAW AND ANALYSIS Ruling 1 Section 2601 imposes a tax on every generation-skipping transfer (GST), which is defined under § 2611 as a taxable distribution, a taxable termination, and a direct skip. Under § 1433(a) of the Tax Reform Act of 1986 (Act) and § 26.2601-1(a) of the Generation-Skipping Transfer Tax Regulations, the GST tax is generally applicable to GSTs made after October 22, 1986. However, under § 1433(b)(2)(A) of the Act and § 26.2601-1(b)(1)(i), the tax does not apply to a transfer under a trust (as defined in § 2652(b)) that was irrevocable on September 25, 1985, but only to the extent that such transfer is not made out of corpus added to the trust after September 25, 1985 (or out of income attributable to corpus so added). Section 26.2601-1(b)(4) provides rules for determining when a modification, judicial construction, settlement agreement, or trustee action with respect to a trust that is exempt from the GST tax under § 26.2601-1(b)(1), (b)(2), or (b)(3) will not cause the trust to lose its exempt status. The rules of § 26.2601-1(b)(4) are applicable only for purposes of determining whether an exempt trust retains its exempt status for GST tax purposes. They do not apply in determining, for example, whether the transaction results in a gift subject to gift tax, or may cause the trust to be included in the gross estate of a beneficiary, or may result in the realization of capital gain for purposes of § 1001. Section 26.2601-1(b)(4)(i)(B) provides that a court-approved settlement of a bona fide issue regarding the administration of a trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject to the provisions of chapter 13, if -- ( 1 ) The settlement is the product of arm's length negotiations; and ( 2 ) The settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement. A settlement that results in a compromise between the positions of the litigating parties and reflects the parties' assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes. In the present case, each Family Trust was created and was irrevocable before September 25, 1985. It is represented that no additions, constructive or actual, have been made to any of the Family Trusts on or after September 25, 1985. Consequently, each Family Trust is currently exempt from GST tax. In this case, each party was represented by separate legal counsel. The prospective beneficiaries had distinct and adverse economic and administrative interests. The parties were involved in protracted and substantial litigation to resolve the issue of the identity of Settlor's descendants under Settlor's Will. Settlement negotiations were carried out over several years until the Revised Settlement Agreement was reached. The parties have obtained State Court approval of the Revised Settlement Agreement pending the issuance of this private letter ruling. We conclude that the Revised Settlement Agreement constitutes a settlement of a bona fide issue regarding construction of the terms "children" and "descendants" in Settlor's Will. We further conclude that the terms of the Revised Settlement Agreement are the product of arm's length negotiations. Finally, we conclude that the Revised Settlement Agreement represents a compromise between the positions of the interested parties and reflects the assessments of the relative strengths of their positions; therefore, we additionally conclude that the Revised Settlement Agreement is within the range of reasonable outcomes under the governing instrument and the applicable State law addressing the issues resolved by the Revised Settlement Agreement. Accordingly, based on the facts submitted and the representations made, we rule that the Revised Settlement Agreement, the State Court order approving the Revised Settlement Agreement, and the implementation and distributions made in accordance with the Revised Settlement Agreement, will not cause any of the Family Trusts to lose their status as trusts exempt from GST tax for purposes of chapter 13 of the Code. Ruling 2 Section 2501 imposes a tax for each calendar year on the transfer of property by gift during such calendar year by any individual. Section 2511 provides that the tax imposed by § 2501 applies whether the transfer is in trust or otherwise, direct or indirect, and whether the property transferred is real or personal, tangible or intangible. Section 25.2511-1(c)(1) of the Gift Tax Regulations provides that any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax. Whether an agreement settling a dispute is effective for gift tax purposes depends on whether the settlement is based on a valid enforceable claim asserted by the parties and, to the extent feasible, produces an economically fair result. See Ahmanson Foundation v. United States, 674 F.2d 761, 774-775 (9 th Cir. 1981). Thus, state law must be examined to ascertain the legitimacy of each party's claim. A settlement that fairly reflects the relative merits and economic values of the various claims asserted by the parties and reaches a settlement that is within a range of reasonable settlements will not result in a transfer for gift tax purposes. As discussed above, the Revised Settlement Agreement represents the resolution of a bona fide controversy among the family members as beneficiaries of Settlor's Will. All interested parties have been represented in the proceedings that culminated in the Court Order approving the Revised Settlement Agreement. Further, based on the facts as presented, the terms of the Revised Settlement Agreement are the product of arm's length negotiations among all the interested parties. We conclude that the Revised Settlement Agreement reflects the rights of the parties under the applicable law of State that would be applied by the highest court of State. Accordingly, based on the facts submitted and representations made, we rule that implementation of the Revised Settlement Agreement will not result in a gift under § 2501 by the parties to the Revised Settlement Agreement. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. Sincerely, Karlene M. Lesho Karlene M. Lesho Chief, Branch 4 Office of Associate Chief Counsel (Passthroughs and Special Industries) Enclosures Copy for § 6110 purposes cc:

Private Letter Ruling Number: 202331003 Internal Revenue Service May 9, 2023 Department of the Treasury Internal Revenue Service Independent Office of Appeals 100 First Street Suite 2000 San Francisco, CA 94105 Release Number: 202331003 Release Date: 8/4/2023 Date: MAY 09 2023 Person to contact: Name: Employee ID Number: Phone: Fax: Employer ID number: Uniform issue list (UIL): 501.00-00 Certified Mail Dear ******: This is a final adverse determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). We have hereby revoked the favorable determination letter to you dated ****** and you are no longer exempt under IRC Section 501(a) effective ******. We made the adverse determination for the following reasons: Your organization is not operated exclusively for exempt purposes as described in IRC Section 501(c)(3) and your operations provided for more than insubstantial private benefit to an individual or shareholder. Contributions to your organization are not deductible under IRC Section 170. You're required to file federal income tax returns on Forms 1120, U.S. Corporation Income Tax Return. Mail your form to the appropriate Internal Revenue Service Center per the form's instructions. You can get forms and instructions by visiting our website at IRS.gov/forms or by calling 800-TAX-FORM (800-829-3676). We'll make this letter and the proposed adverse determination letter available for public inspection under IRC Section 6110 after deleting certain identifying information. We provided to you, in a separate mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in Notice 437. If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of IRC Section 7428 in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fillable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims- and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov U.S. District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Note: We will not delay processing income tax returns and assessing any taxes due even if you file a petition for declaratory judgment under IRC Section 7428. Taxpayer rights and sources for assistance The Internal Revenue Code (IRC) gives taxpayers specific rights. The Taxpayer Bill of Rights groups these into 10 fundamental rights. See IRC Section 7803(a)(3). IRS employees are responsible for being familiar with and following these rights. For additional information about your taxpayer rights, please see the enclosed Publication 1, Your Rights as a Taxpayer, or visit IRS.gov/taxpayer-bill-of-rights. The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and protects taxpayers' rights. TAS can offer you help if your tax problem is causing a financial difficulty, you've tried but been unable to resolve your issue with the IRS, or you believe an IRS system, process, or procedure isn't working as it should. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. To learn more, visit taxpayeradvocate.IRS.gov or call 877-777-4778. Tax professionals who are independent from the IRS may be able to help you. Low Income Taxpayer Clinics (LITCs) can represent low-income persons before the IRS or in court. LITCs can also help persons who speak English as a second language. Any services provided by an LITC must be for free or a small fee. To find an LITC near you: - Go to taxpayeradvocate.IRS.gov/litcmap; - Download IRS Publication 4134, Low Income Taxpayer Clinic List, available at IRS.gov/forms; or - Call the IRS toll-free at 800-829-3676 and ask for a copy of Publication 4134. State bar associations, state or local societies of accountants or enrolled agents, or other nonprofit tax professional organizations may also be able to provide referrals. TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. TAS cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States Court. If you have questions, contact the person at the top of this letter. Sincerely, Doug O'Donnell Acting Commissioner By Valeria B. Farr Valeria B. Farr Appeals Team Manager Enclosures: Publication 1 IRS Appeals Survey cc: Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: January 21, 2021 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact information: Name: ID number: Telephone: Response due date: February 21, 2021 CERTIFIED MAIL -- Return Receipt Requested Dear ******: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpaveradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, John A. Matias John A. Matias Supervisory, Internal Revenue Agent for Sean E. O'Reilly Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 Publication 892 Publication 3498 Copy of Determinations File Issues: 1. Whether the exempt status for ****** (henceforth referred to as "organization", "******", or "the organization") should be revoked for failure to operate exclusively in furtherance of exempt purposes. 2. Whether Organization's exempt status should be revoked retroactively to ******, the first date that the organization failed to qualify for exemption. Facts: Articles of Incorporation: The registered agent of the organization (as listed on the Articles of Incorporation filed with the application for exemption) is ******. The purpose of the organization listed in the articles is to: provide assistance to other charitable organizations and support activities described in IRC Section 501(c)(3). The articles were approved and filed with the State of ****** on ******. Form 1023: The F1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, was filed by the organization on ******. The primary contact listed on the F1023 is ******. The purpose of the organization as stated on the F1023 references the Articles of Incorporation. Exemption: The organization received L947 from the Internal Revenue Service (IRS) dated ******. The letter provides that the organization was granted exemption under internal Revenue Code 501(c)(3). The effective date of the exemption is listed as ******. Board: The board of directors of the organization consists of the following offices and individuals for the year of examination: - ****** -- President - ****** -- Vice President - ****** -- Treasurer ****** and ****** were also listed as the President and Vice President respectively for the ****** preceding years. Forms ******: ****** filed Forms ****** for the tax years ******, ******, and ******: Based on the expenses reported for grants for each year, charitable grants for the ******, ******, and ****** years were *** %, *** %, and *** % respectively when compared to the revenues reported by the organization. Based on the assets reported on the return, Investments -- other securities (donated LLC interests) accounted for *** %, *** %, and *** % of all assets of the organization for the ******, ******, and ****** years respectively. Cash Inflows and Outflows: The organization provided ****** statements (Acct. # ******) in response to the Government's request for the banking statements of the organization. The statements provided the following cash inflows and outflows for the year ended ******: The organization reported ****** in expenses on the Form ******, a figure which does not accurately reflect the amounts expended by the organization from its accounts per the account statements. LLC Cash Distributions to Organization and Subsequent Charitable Donations: The organization provided a list of total distributions of cash made by each LLC to charities for the year and also provided distribution requests made by each LLC to ******. The documentation provided also included one instance where payments were made directly from an LLC (******) to various charitable organizations. The documentation provided the following: The documentation provides that the LLCs paid out $ ****** to charities in the year of examination. The organization has provided documentation showing that $ ****** of the $ ****** was disbursed by ****** at the request of the LLCs and $ ****** was distributed directly by an LLC. The total expenditures as reported on the banking statements of the organization were $ ****** and as such, the total charitable distributions reported of $ ****** could not have been paid directly by ******. The reports and documents also show that ****** of the ****** LLCs (or *** %) did not make any distribution to charity. Furthermore, ****** of the ****** LLCs (or *** %) of the LLCs did not provide a request to ****** to disburse charitable funds. Lastly, ****** of the ****** LLCs had an asset value above ****** for the year ended ****** per documentation provided. Of these ****** LLCs, ****** LLCs did not make any distribution, ****** LLCs made distributions above the *** % required in the operating agreements, and ****** LLCs made distributions which were less than the *** % required by the operating agreements. The average distribution percentage made by all LLCs was *** %. Disbursement Requests: The organization provided copies of disbursement requests provided by the LLCs to ****** for charitable giving. The language of the disbursement requests vaired, but all followed the same pattern of transferring money to ****** and asking ****** to distribute that money to a charity. Below are some examples of such language: - It is our wish to have a distribution made from our donor advised fund to the following charities in the following amounts. We understand there is a $ ****** processing fee per check". - "Enclosed is our check in the amount of $ ______, payable to ****** Upon receipt of the funds, it is our wish to have a distribution made to the following charities in the following amounts". - We have transferred $ ______ from the XXX ****** account at ****** to the ****** account at ******. Upon receipt of these funds, it is our wish to have them distributed as follows". - "We will be transferring funds to ****** from the above named in the amount of $ ______. Upon receipt of the funds, it is our wish to have checks sent to the following charities". - "I will be transferring funds to ****** from the above named ****** in the amount of $ ______. Upon receipt of the funds, it is my wish to have a distribution made from my donor advised fund to the following charities". - "We have authorized a check payable to ****** in the amount of $ _______. Upon receipt, it is our request that you send a check in the amount of $ ______ directly to". - "It is our wish to have a donation in the amount of $ ______ made from XXX ****** to the following charities". Donated LLC Interest: The organization's primary source of revenues and assets as reported by the organization on its returns are derived from LLC interests donated to the organization. For the period ended ******, the organization has reported donated LLC interests from ****** separate and distinct entities. Of these ****** entities, ****** of the LLC interests (or approximately *** %) were previously donated to ****** (an unrelated 501(c)(3) organization) and were subsequently assigned to the organization by the LLC managers. See the discussion on amended operating agreements below for additional detail. How LLC Interest is Donated to Organization: In some instances where LLC interests were donated to the organization, an assignment of the interest from the owning LLC member, to the organization was completed using an assignment agreement. In other instances, the assignment was memorialized in the operating agreement for the LLC. The following table shows the types of units issued to an LLC, the number of units "assigned" by the manager(s) of the LLC to the organization, and other information provided in the assignment agreements where applicable: LLC Valuation Amounts: The donated interests were reported on the organization's Form ****** as an asset, specifically as "******". The total amount reported in the General Ledger of the organization for the donated interests was $ ******. The organization provided a breakdown of the total donated LLC interest. The organization also provided appraisals for the donated interest. The documentation provided amounts for each LLC as follows: Review of Appraisals: The appraisals provided by the organization for the donated LLC interests were prepared by ****** primarily by ****** (****** or *** %) with the remaining appraisals prepared by ******. The method of determining the value of the donated LLC interests is the same in all of the appraisals, the appraisers reduce the "FMV" of the assets for lack of control (initial value is reduced by *** % (******) or *** % (******)) and lack of marketability (remaining value is reduced by *** % (******) or *** % (******)) in all instances. Overall, both appraisers use the same method of discounting the value of the donated interest for both marketability and control using different percentages for each method of reduction. It is important to note that the amounts determined in both appraisals for the FMV were used in reporting the value of the assets as reported on the Form ****** of the organization for the period ended ****** even though the appraisals were not completed until ******. As such, it appears as though the appraisal amounts were determined by ****** and ****** prior to the preparation of the appraisal reports and provided to ****** for preparation of the annual Form ****** and reporting on the organizational books and records. Review of Operating Agreements: The organization provided operating agreements for each of the ****** LLCs for which it received donated interests. Of the ****** operating agreements, the examiner identified two distinct types of agreements with identical language which the examiner named ****** and ******. Of the agreements provided, ****** agreements were ****** and the remaining ****** agreements were ******. The ****** agreements appear to have been prepared by and/or provided by ****** and his related officials (******) and the ****** agreements appear to have been provided or drafted by the ****** (owned in part by ******, President of ******). Specific Language in the Operating Agreements The following sections of the operating agreements provide insight into the operation of the LLCs and their interaction with ******: Section ****** Company Purpose and Scope (******) The Company is organized as part of a charitable planned giving strategy designed to fund tax qualified charities chosen by the Manager, the initial Member, and the initial Member's successors in interest. The investments held inside of this Company including any insurance policy death benefit and/or other assets held in this Company must be distributed to one or more charities during the life or upon the death of the initial Member or his/her successor in interest until tax qualified charities have received distributions equal to the full amount of assets that the Company's non-charitable Members have contributed to the Company plus a market rate of return. For example, if the Company has been funded with $ ****** of marketable securities and this $ ****** value was used when a portion of the Company member interests were donated to charity at a time when the current long- term interest rates were *** %, then the Company must insure that at least the $ ****** plus *** % per year return will be distributed to third party charities before distributions are made from the Company to any non-charitable Members of the Company. While distributions must be restricted until third party charities receive assets in the Company plus a market rate of return, the Company manager may make secured loans of Company assets to qualified borrowers. Loan security must provide assurances that loans will be repaid so that the Company can distribute funds to charity equal to asset contributed by the members plus a market rate of return. The charity must maintain control over Company interests and receive income from the interests to satisfy the substantial present economic benefit test. Section ****** Classification of Membership interests (******) The Company shall issue Voting Membership Interests to the Voting Members. The Voting Members may vote upon all matters upon which Members have a right to vote under this Agreement, in proportion to their Voting Membership interests in the Company. The Company may issue Non-Voting Membership Interests. Members may own Voting Membership Interests, Non-Voting Membership interests, or both. Members who own only Non-Voting Membership Interests are Non-Voting Members and may not vote on any Company matters. Voting and Non-Voting Members have identical liquidation and distribution rights unless expressly provided to the contrary in this Agreement. Voting and Non-Voting Members have the same ownership rights except for voting rights. Section ****** Allocating Profits and Losses (******) Subject to the provisions of Section ****** and Section ******, all items of income, gain, loss, deduction, and credit, whether resulting from the Company's operations or in connection with its dissolution, must be allocated to the Members in proportion to their respective Membership Interests. If the special allocations have substantial economic effect as required by applicable federal tax law, the Voting Members, acting unanimously, may enter into agreements providing for the special allocation of items of income, gain, loss, deduction, or credit. The Voting Members may agree to allocate net profits and net losses in a way that conforms to adjustments made to the Percentage Interests because of: - ****** any loans made to the Company that have been converted to Capital Contributions; - ****** any distributions of cash; or - ****** any liquidated distributions. If the Percentage Interest of a Member is not the same throughout a given Taxable Year, the Manager shall determine the allocation of net profits and net losses to the Members, taking into account the Members' varying Percentage Interests during the year. The Manager shall make the determination consistent with the requirements of Internal Revenue Code Section 706(d). The Manager has the authority to change the allocation provisions of this Section if the Company's legal counsel advises the Company that this change is required under the Internal Revenue Code based on the manner in which the Members have agreed to bear losses and to share profits and distributions under this Agreement. The operating agreements contain the general LLC language, the name of the manager(s) of the LLC, and information on ownership percentages as well as the type of ownership (Voting, non-voting, general, etc.) for each LLC. Section ****** Distributions to Members (******) The Company's primary intent is to retain Company funds in amounts determined in the Manager's sole and absolute discretion to meet the reasonable needs of the business or investments of the Company and other needs as provided in this Agreement. No Member may demand distributions of any Company funds or assets. Without the unanimous consent of all Members, the Manager may not distribute more than the Company income for the previous tax year plus *** % of the value of the assets of the Company on the last day of the previous calendar year in any single year. Section ****** Mandatory Yearly Distributions (******) The Manager shall be required to distribute, on a pro-rata basis, a substantial present economic benefit of at least *** percent (*** %) of the total assets held by the Company on a yearly basis. If the optional distributions as set forth in Section ****** above on a yearly basis are more than *** percent (*** %) on a pro rata basis, then there shall be no mandatory distributions required under this paragraph. If the optional distributions set forth under Section ****** above are less than *** percent (*** %) on an annual basis, then the Manager shall be required to make distributions on a pro rata basis up to *** percent (*** %) of the value of the assets on a year to year basis. For purposes of this paragraph, the *** percent (*** %) value is determined as of the value of the assets of the Company as of January 1 of each calendar year. Furthermore, this mandatory distribution requirement shall not apply to the first partial year that this Company is in existence and shall only apply to each full calendar year that this Company is in existence. Section ****** Distributions to members (******) It is the primary intent of the Company to retain Company funds in amounts determined in the sole discretion of the Manager to meet the reasonable needs of the business or investments of the Company and other needs as provided in this Agreement. No Member shall have the right to demand distributions of any Company funds or assets. Section ****** Manager's General Authority (******) Subject to the specific rights given the Voting Members in this Agreement, the Manager may make all decisions concerning any matter affecting or arising out of the Company's business conduct. The Manager has the right and authority to manage, conduct, and operate the Company business; provided, however, that the manager shall make all financial decisions only with approval from the ****** ("******") board for as long as LLC interests are owned entirely or in part by ****** or its successor or assign, which must be tax exempt pursuant to Internal Revenue Code, 26 U.S. Code, Section 501, and a qualified charity as defined by Internal Revenue Code, 26 U.S. Code, Sections 170(c), 2055(a) and 2522(a). Section ****** Manager's Power to Amend (******) The Manager may, without the consent of the Members, amend any provision of this Agreement or the Articles of Organization and prepare and deliver any documents necessary to reflect: - A change in the name of the Company or the location of the principal office of the - Company; - The admission, substitution, or termination of Members according to this Agreement; - A change that the Manager in its sole discretion determines to be necessary or advantageous to qualify or to enable the Company to continue to qualify as a limited liability company, or a company in which the Members have limited liability under the laws of any jurisdiction, or to ensure that the tax treatment of the Company does not change, other than as provided in Article Two; - A change that does not adversely affect the Members in any material respect or that is required or contemplated by this Agreement; or - Any other amendments similar to the foregoing. Any other amendments will require the written consent of *** % of the Voting Membership Interests unless other provisions of this Agreement require a higher percentage of the Voting Members (such as the liquidation of the Company before the expiration of its term). Amendments: The operating agreements were reviewed to determine the stated members and ownership percentages. In addition to the original operating agreements, amendments to the agreements were provided for the following LLCs: a. First Amendment - The amendment changed the owner of the *** % interest in the ****** from the ****** (******) to ******. a. First Amendment - The amendment changed the owner of the *** % interest in the ****** from the ****** to ******. a. First Amendment - The amendment changed the owner of the *** % non-voting interest in the ****** from ****** to ******. b. Second Amendment - The amendment changed the owner of the *** % interest in the ****** from the ****** to ******. a. First Amendment - The amendment assigned *** % of the member interest in the ****** from the ****** to ******. b. Second Amendment - The amendment changed the owner of the *** % interest in the ****** from the ****** to ******. a. First Amendment - The amendment changed the owner of the *** % interest in the ****** from the ****** to ******. a. First Amendment - Only the last page of the amendment was provided. There was no detail on what was changed included in the amendment. a. First Amendment - In the first amendment ****** assigned his member interest in the ****** to ******. b. Second Amendment - In the second amendment ****** resigned as manager of the ****** and named ****** as the new manager. c. Third Amendment - In the third amendment ****** was removed as the investment advisor for the ****** and ****** (******) was delegated to be the investment advisor. d. Fourth Amendment - In the fourth amendment ****** transferred *** % of its member interest in the ****** to ******. a. First Amendment - In the first amendment ****** assigned his member interest to the ******. b. Second Amendment - In the second amendment ****** resigned as manager of the ****** and assigned ****** to act as manager of the ******. c. Third Amendment - In the third amendment ****** transferred *** % of its interest in the ****** to ******. a. First Amendment - In the first amendment ****** resigned as the manager of the ****** and transferred *** % of its ownership interest in the ****** to ******. ****** also was named as the new manager. a. First Amendment - In the first amendment ****** resigned as the manager of the LLC and transferred *** % of its ownership interest in the ****** to ******. ****** also was named as the new manager. a. First Amendment - In the first amendment ****** and ****** resigned as the managers of the ****** and appointed ****** as the manager. Additionally, they transferred their member interest in the ****** to ******. b. Second Amendment - In the second amendment ****** resigned as the manager of the ****** and transferred *** % of its ownership interest in the ****** to ******. ****** also was named as the new manager. a. First Amendment - In the first amendment the ****** resigned as the manager of the ****** and appointed ****** as the manager. Additionally, the trust transferred its member interest in the ****** to ******. b. Second Amendment - In the second amendment ****** resigned as the manager of the ****** and transferred *** % of its ownership interest in the ****** to ******. ****** also was named as the new manager. a. First Amendment - In the first amendment ****** resigned as the manager of the ****** and transferred *** % of its ownership interest in the ****** to ******. ****** also was named as the new manager. a. First Amendment - In the first amendment ****** resigned as the manager of the ****** and appointed ******. ****** also assigned his *** % member interest to ******. b. Second Amendment - In the second amendment ****** resigned as the manager of the LLC and transferred *** % of its ownership interest in the ****** to ******. ****** also was named as the new manager. a. First Amendment - In the first amendment ****** resigned as the manager of the ****** and transferred *** % of its ownership interest in the ****** to ******. ****** also was named as the new manager. a. First Amendment - In the first amendment ****** assigned a *** % non-Voting interest to ****** Ownership and Changes: The examiner reviewed the operating agreements and amendments to the agreements to determine the stated ownership of each LLC. The following information was obtained from the review: According to the operating agreements and related amendments, approximately *** % (******) of the LLC interests are owned *** % by ******. Of the *** % owned ****** interests *** or *** % were originally donated to ****** prior to being transferred to ******. The interests transferred from ****** to ****** were all dated to have occurred in the month of ******. Ownership Reported by other Entities: ******) (A Charity which was previously run by ******) filed a Form ****** return for the period ended ******. The organization reported owning member interests in the following entities (not an all-inclusive list) for the period: As such, ****** and ****** are both claiming ownership of the ****** listed above for the period ended ******. Additionally, ****** provided documentation showing that the member interest it received for these organizations was received from ****** and not ******. ****** About ******: During the examination the organization provided documentation which it provides to parties interested in donating LLC interest to ******. The documents included: - ****** Law Firm brochure - ****** Trifold - Planned Giving Trifold - Book on the "******" All of these documents are created and provided to potential clients by ****** through ****** Law (DBA ******) and ******. Each of these documents outlines methodologies used by ****** to solicit potential clients. ****** utilizes many forms of "tax planning" one of which is the same or substantially similar to the method used by ****** as outlined below. ****** received compensation from the clients for the initial setup of the structure used (formation of ******, preparation of appraisals, etc.) and continued support to each ****** (annual filings, gift receipts for "donations" etc.) It is also apparent that ****** has direct ties to ****** as evidenced by his acceptance of ****** interests from ****** which was run by ****** and the use of ****** as an appraiser for the donated ****** interests. ****** About ******: On ****** the United States of America, Plaintiff, filed a Complaint for Permanent Injunction and Other Relief against ******, Defendant. Per the complaint: 1. From ****** to the present, ****** ("******") has organized, promoted, and operated an elaborate-and bogus-charitable giving tax scheme throughout the United States. Through this scheme, ****** creates an entity for each scheme participant and advises them to transfer assets to the new entity. ****** then causes the participants to purportedly "donate" or "assign" an interest in these entities to charities that ****** controls. ****** then "appraises" the purportedly donated interests in a manner that fails to comply with the law and generally accepted appraisal standards. Finally, ****** prepares the federal income tax return documents to claim the bogus charitable contribution deductions. 2. This entire tax scheme occurs only on paper. Participants never actually transfer or donate anything to ****** purported charities. In some egregious instances, participants claim bogus charitable deductions for nonexistent, fictional assets that ****** fabricates. 3. Regardless of the purported form, ****** advises scheme participants to take unwarranted tax deductions for charitable donations that ******knows were never made, and, in some instances, for assets that did not exist. ****** sells this scheme to the clients of financial planners and Certified Public Accountants by misrepresenting his experience, his credentials, and the merits of his charitable giving tax scheme. In return, scheme participants pay substantial fees to ****** based on the purported value of the assets initially transferred to the entities. 4. ****** charitable giving tax scheme has harmed the United States by depriving the government of tax revenue. The IRS has identified specific transactions that, through ******, cost the United States Treasury more than $ ****** in lost tax revenue. And while the IRS has assessed and will continue to assess scheme participants with significant tax liabilities, it will likely never fully recover the monies ****** bilked from the Treasury. 5. The United States brings this Complaint pursuant to 26 U.S.C. §§ 7402, 7407, and 7408 to enjoin ****** and all persons and entities in active concert or participation with ****** from, among other things, directly or indirectly; a. Making or furnishing or causing another person to make or furnish a statement with respect to the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit, or otherwise providing tax advice, in exchange for compensation; b. Preparing (or assisting others in preparing) appraisals in connection with any federal tax matter; c. Acting as federal tax return preparers, or filing, assisting in, or directing the preparation or filing of federal tax returns, amended returns, or other related documents or forms for any person or entity other than his own tax returns; and d. Organizing or assisting in the organization of a partnership or other entity, any investment plan or arrangement, or any other plan m arrangement concerning charitable contribution deductions. The United States also seeks to disgorge the ill-gotten gains that ****** derived from this bogus charitable giving tax scheme. Since ******, ****** has established at least three purported charities in ******: (I) ****** (''******''); (2) ****** ("******"); and (3) ****** ("******") (collectively, the "******"). ****** controlled all ****** purported charities and operated them in the same manner. According to their respective Articles of Incorporation, the ****** were purportedly organized for charitable purposes. ****** submitted a Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code ("Tax Exempt Status Application"), on behalf of each of the ******. The IRS granted the ****** tax exempt status based on the Tax-Exempt Status Applications that ****** submitted. Over the years, ****** is listed on documents filed with the ****** Secretary of State's Office as an officer, treasurer, director, incorporator, or registered agent for the ******. ****** has also attempted to avoid IRS scrutiny by affiliating his parents or other individuals with the ****** on filings with the ****** Secretary of State's Office. At all times, however, ****** controlled the ****** and was the only true officer and director. The ****** had no employees. On ******, ****** executed an agreement with the IRS on behalf of ****** retroactively revoking ****** tax-exempt status as of ******. The IRS concluded, and ****** did not dispute, that ****** was not engaged primarily in activities for exempt purposes, and its net earnings inured to the benefit of private individuals i.e., him and his family. On ******, ******, on behalf of ******, stipulated to an entry of judgment against it in U.S. Tax Court for past due taxes for ****** and ******. ****** owed taxes on its income because it was not a tax-exempt entity. On ******, ****** executed agreements with the IRS on behalf of ****** and ****** retroactively revoking ****** and ****** tax exempt status as of ****** and ******, respectively, because ****** used ****** and ****** as tools for promoting, organizing, and executing his charitable giving tax scheme. ****** Transactions: Under the first step in ****** scheme, ****** creates a partnership or limited liability company (the "Entity" or "Entities") for scheme participants. Regardless of their form, the Entities are holding companies that exist solely to facilitate ****** scheme. ****** prepares and files all paperwork necessary to create the Entities, including the partnership or LLC agreements. Next, the scheme participants transfer "property" to the newly formed Entities using contractual documents prepared by ******. Some participants, at ****** direction, claim to transfer cash or real property to the Entities while others purportedly transfer backdated promissory notes and fabricated intellectual property. Over time, ****** varied how he executed this scheme step, but the variations were meaningless from both economic and federal income tax perspectives. ****** then drafts the paperwork necessary to cause the scheme participants to "donate" or "assign" an interest in the newly created Entities to one of the ******. Some participants purport to donate a *** % non-controlling interest in their Entity, while others a *** % interest. In some cases, ****** misrepresents the "transaction" to the participants, telling such participants that they were "contrbuting" a *** % non-controlling interest, when, in fact, ****** completed the transactional paperwork to show a *** % "contribution." ****** then causes the ****** to send contemporaneous written acknowledgments of the purported contributions to the scheme participants. ****** appraises each "contribution" to facilitate the bogus charitable deductions. Not only are the appraisals baseless, but ****** is prohibited by law from providing them. ****** completes, signs, and provides to each scheme participant IRS Forms 8283, Noncash Charitable Contributions ("Form 8283"), which are necessary to claim a non-cash charitable contribution of more than $ ****** sends the scheme participants the following instructions:" In following ****** instructions, the scheme participants then attach the ****** prepared Form 8283 to their personal federal income tax returns to claim unwarranted charitable deductions. The Forms 8283 are based entirely on the bogus appraisals that ****** prepares to facilitate this scheme. On paper, it appears that the participants donate something of value to the ******. ****** repeatedly advises the scheme participants to take actions to give his scheme substance. This was mere window dressing, however, designed to disguise ****** tax shelter. In reality, the scheme participants retain complete control over their Entities and their Entities' assets and continue to use the purportedly donated assets as if nothing ever happened. After executing the "transaction," the ****** do not take dominion or control over the Entities or their assets. The ****** are simply vehicles through which ****** executes his elaborate charitable giving tax scheme. Misrepresentation of Structure by ******: ****** to potential participants that they could establish Donor Advised Funds ("DAFs") through the ******, but this was a false statement. The internal Revenue Code defines DAFs as a fund or account "(i) which is separately identified by reference to contributions of a donor or donors, (ii) which is owned and controlled by a sponsoring organization, and (iii) with respect to which a donor... has... advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor's status as a donor." DAFs are not standalone entities. Each DAF is established by a sponsoring organization, which must be an Internal Revenue Code§ 501(c)(3) tax exempt organization. The sponsoring organization creates a separate DAF for each donor. The donor then makes a tax-deductible charitable contribution to the donor's DAF. The donor cannot use or otherwise access the donated property because the sponsoring organization maintains complete control over the DAF and its property. The donor retains "advisory privileges" regarding future DAF distributions, but the sponsoring organization is not required to honor the donor's requests and may only distribute DAF property to other Code§ 501(c)(3) tax exempt entities. After a donor makes a distribution request to a DAF, the DAF will make a distribution from the assets that the DAF controls after performing due diligence to ensure the intended recipient is a qualified charity. By advising potential participants that they could establish DAFs through the ******, ****** misrepresented the structure of his illegal tax shelter. The ****** did not qualify or operate as sponsoring organizations, and the Entities ****** established did not qualify or operate as DAFs. To be a sponsoring organization, the ****** were required to inform the IRS that they intended to be sponsoring organizations on their Tax-Exempt Status Applications. They did not. To be a sponsoring organization, the ****** were also required to describe its DAF program and the written materials provided to donors on the Tax-Exempt Status Applications. They did not. To be a sponsoring organization, the ****** were required to report certain information on the annual "tax return" for tax exempt entities-Form ****** ("Form ******."). They did not. Indeed, on the Forms ******, Part IV, Question 6, ****** stated that the ****** did not "maintain any donor advised funds or any similar funds or accounts for which donors have the right to provide advice on the distribution or investment of amounts in such funds or accounts." ****** completed the ****** Tax-Exempt Status Applications and Forms ****** and knew that the ****** did not report the required information to be a lawful sponsoring organization. Therefore, ****** knew that the ****** were not sponsoring organizations. To establish a DAF, the ****** were required to take control of the purportedly contributed Entity interests. As explained throughout this Complaint, the scheme participants never gave up control of the purportedly contributed assets, which ****** knew. If scheme participants actually wanted to make a donation to a charity through a ****** (which many participants did not do) ****** required them to send to him a ****** "******" along with a check made out to one of the ******. These '******" merely gave the appearance of a valid DAF, but a valid DAF would never have required an additional check from the participant. This process shows that the ****** never had dominion or control over any of the purported contributions. ****** Scheme Flagrantly Violates Internal Revenue Laws: Some participants in ****** tax scheme, upon ****** advice and with his assistance, have taken out substantial loans from their respective Entities even after transferring their ownership interest to one of the ******. These loans are made on beneficial terms and sometimes go unpaid. ****** testified in a ****** deposition that most participants borrowed their Entities' assets or used the assets as collateral for some other purpose. Consequently, participants in ****** scheme receive a large income tax deduction and still get the use and enjoyment of the assets that generated the deduction. Because each of ****** scheme participants claimed non-cash charitable contributions of over $ ****** on their tax returns based on the purported donation of their Entity interests to the ******, they were required to obtain qualified appraisals of the purportedly donated Entity interests from "qualified appraisers." In reality, ****** performs the appraisals for the scheme participants. ****** does not tell scheme participants that he is the appraiser prior to performing the appraisals. ****** completed and signed the Form 8283 for each of the participants, which ****** based entirely on the bogus appraisals he prepared. ****** often listed the following credentials on the Form 8283 after his signature: ******. ****** claims that he "implemented and consulted on over ****** charitable plans in ****** States encompassing $ ****** since ****** [and] performed over ****** qualified appraisals of closely-held businesses since ******." The appraisals ****** uses in his tax scheme are bogus because ****** is excluded by law from preparing appraisals in connection with this scheme, the appraisals are not qualified appraisals within the definition of the Internal Revenue Code, and the appraisals are based on unreliable methods. ****** profits from his scheme by charging a percentage fee based on the value of the purportedly donated assets. His standard fee is "*** % of net assets transferred (to the ******) up to but not in excess of $ ******, plus *** % of net assets transferred which exceed $ ******." Example of ****** Charitable Giving Scheme: ****** sold his charitable giving tax scheme to ******-based Participant 1 through Participant 1's financial planner. Participant1 claimed a $ ****** charitable contribution deduction on his ****** federal income tax return. ****** charged $ ****** for Participant 1 to participate in this scheme. Participant 1 decided to participate in ****** charitable giving tax scheme in ******. ****** used an existing LLC and illegally backdated every document he prepared for Participant 1 so that Participant 1 could claim a charitable deduction on his ****** federal income tax return. On ******, ****** and Participant 1 completed an LLC Agreement to transfer an LLC that ****** had previous established in ****** to Participant 1. ****** backdated the LLC Agreement to ******. Then, ****** drafted a promissory note through which Participant 1 promised to pay his LLC $ ******. ****** backdated the promissory note to ******. The promissory note was not secured by any collateral and charged a *** % interest rate on outstanding balances in ****** and *** % on any outstanding balances thereafter. ****** also drafted an assignment agreement through which Participant 1 purported to assign *** % of his LLC to ******. ****** backdated the assignment agreement as well to ******. Despite executing the assignment agreement, Participant 1 believed, based on ****** misrepresentations, that Participant 1 only assigned a non-controlling LLC interest to ******. On ******, Participant 1 opened a bank account in the LLC's name. Participant 1 was the only person with signature authority over this account. Participant 1 never gave ****** or anyone at ****** control over the account. Later in ******, Participant 1 transferred ****** to the LLC's bank account to "repay" the bogus note's principal. Participant 1 did not pay any interest. ****** then prepared an appraisal report backdated to ******. ****** --more than ****** months prior to the transfer of the LLC to Participant 1--in which ****** "appraised" Participant 1's purported gift of LLC units to ****** at $ ******. ****** backdated appraisal does not describe or analyze the LLC's only asset-- the promissory note. Rather, ****** applied his standard *** % discount for lack of control, despite stating that ****** owned *** % of Participant 1's LLC, and a *** % discount for lack of marketability. ****** provided no meaningful explanation for these discounts. ****** then prepared an IRS Form 8283 so that Participant 1 could claim a $ ****** charitable contribution for the purported donation to ****** on his federal income tax return. The IRS audited Participant 1's ****** tax return and disallowed the $ ****** charitable contribution. In ******, after the IRS initiated the audit of Participant 1's ****** tax return, Participant 1 made ****** charitable distributions totaling $ ****** to ******. In order to do so, Participant 1 completed ****** "******," but also sent a check to ****** in that amount. Additional information can be found at United States of America, Plaintiff, v. ******, Defendant. Case No.: ******. Permanent Injunction: On ******, the United States District Court Judge (******) issued a permanent injunction against ****** permanently barring him from directly or indirectly: a. Organizing (or assisting in the organization of), promoting, marketing, or selling the ****** or any plan or arrangement that is substantially similar, or participating (directly or indirectly) in the sale of any interest in the ****** or any plan or arrangement that is substantially similar; b. Making or furnishing, or causing another to make or furnish, any statements about the tax benefits of the ****** or any plan or arrangement that is substantially similar; c. Organizing (or assisting in the organization of), promoting, marketing, or selling any entity, plan, or arrangement involving charitable giving, or participating (directly or indirectly) in the sale of any interest in an entity, plan, or arrangement involving charitable contributions; d. Furnishing, or causing another to furnish, tax advice regarding charitable contributions; e. Organizing (or assisting in the organization of), promoting, marketing, or selling any entity, plan, or arrangement involving federal taxes that relies upon, requires customers to execute, or uses a standard set (or substantially similar version or set) of transaction documents; f. Making or furnishing, or causing another to make or furnish, any statements about the tax benefits of entities, plans, or arrangements that rely upon, require customers to execute, or use a standard set (or substantially similar version or set) of transaction documents; g. Making or furnishing, or causing another to make or furnish, any statements in connection with the organization or marketing of a transaction having a significant purpose of avoidance or evasion of federal taxes; h. Preparing (or assisting others in preparing) appraisals in connection with any federal tax matter; i. Representing anyone other than himself before the IRS; j. Acting as a federal tax return preparer, or filing, assisting in, or directing the preparation or filing of federal tax returns, amended tax returns, or other related documents or forms for any person or entity other than his own individual tax returns (or his joint tax return); k. Assisting or advising individuals or entities in seeking tax-exempt status from the IRS; l. Advising, performing work for, or receiving compensation from ******, ******, ******, ******, ******, or ******, ******; m. Advising, performing work for, or receiving compensation for work performed for individuals in connection with making assignments, donations, contributions, or transfers to ******, ******, ******, ******, ******, or ******; or n. Referring individuals to make assignments, donations, contributions, or transfers to ******, ******, ******, ******, ******, or Law: IRC Section 501(c)(3) provides for an exemption from tax for corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. Treasury Regulation (Treas. Regs.) Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Treas. Regs. Section 1.501(c)(3)-1(a)(2) provides that, the term exempt purpose or purposes, as used in this section, means any purpose or purposes specified in section 501(c)(3), as defined and elaborated in paragraph (d) of this section. Treas. Regs. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Treas. Regs. Section 1.501(c)(3)-1(d)(1) provides that in general: i. An organization may be exempt as an organization described in section 501(c)(3) if it is organized and operated exclusively for one or more of the following purposes: a. Religious, b. Charitable, c. Scientific, d. Testing for public safety, e. Literary, f. Educational, or g. Prevention of cruelty to children or animals ii. An organization is not organized or operated exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph unless it serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests. In Better Business Bureau of Washington D.C. v. U.S., 326 U.S. 279 (1945, the court found that the existence of a substantial nonexempt purpose, regardless of the number or importance of exempt purposes, will cause failure of the operational test. Notice 2004-30 The Internal Revenue Service and the Treasury Department are aware of a type of transaction, described below, in which S corporation shareholders attempt to transfer the incidence of taxation on S corporation income by purportedly donating S corporation nonvoting stock to an exempt organization, while retaining the economic benefits associated with that stock. This notice alerts taxpayers and their representatives that these transactions are tax avoidance transactions and identifies these transactions, and substantially similar transactions, as listed transactions for purposes of § 1.6011-4(b)(2) of the Income Tax Regulations and §§ 301.6111-2(b)(2) and 301.6112-1(b)(2) of the Procedure and Administration Regulations. This notice also alerts parties involved with these transactions to certain responsibilities that may arise from their involvement with these transactions. FACTS In a typical transaction, an S corporation, its shareholders, and an organization exempt from tax under § 501(a) and described in either § 501(c)(3) or § 401(a) of the Internal Revenue Code (such as a tax-qualified retirement plan maintained by a state or local government) (the exempt party) undertake the following steps. An S corporation issues, pro rata to each of its shareholders (the original shareholders), nonvoting stock and warrants that are exercisable into nonvoting stock. For example, the S corporation issues nonvoting stock in a ratio of 9 shares for every share of voting stock and warrants in a ratio of 10 warrants for every share of nonvoting stock. Thus, if the S corporation has 1,000 shares of voting stock outstanding, the S corporation would issue 9,000 shares of nonvoting stock and warrants exercisable into 90,000 shares of nonvoting stock to the original shareholders. The warrants may be exercised at any time over a period of years. The strike price on the warrants is set at a price that is at least equal to 90 percent of the purported fair market value of the newly issued nonvoting stock on the date the warrants are granted. For this purpose, the fair market value of the nonvoting stock is claimed to be substantially reduced because of the existence of the warrants. Shortly after the issuance of the nonvoting stock and the warrants, the original shareholders donate the nonvoting stock to the exempt party. The parties to the transaction claim that, after the donation of the nonvoting stock, the exempt party owns 90 percent of the stock of the S corporation. The parties further claim that any taxable income allocated on the nonvoting stock to the exempt party is not subject to tax on unrelated business income (UBIT) under §§ 511 through 514 (or the exempt party has offsetting UBIT net operating losses). The original shareholders might also claim a charitable contribution deduction under § 170 for the donation of the nonvoting stock to the exempt party. In some variations of this transaction, the S corporation may issue nonvoting stock directly to the exempt party. Pursuant to one or more agreements (typically redemption agreements, rights of first refusal, put agreements, or pledge agreements) entered into as part of the transaction, the exempt party can require the S corporation or the original shareholders to purchase the exempt party's nonvoting stock for an amount equal to the fair market value of the stock as of the date the shares are presented for repurchase. In some cases, the S corporation or the original shareholders guarantee that the exempt party will receive the fair market value of the nonvoting stock as of the date the stock was given to the exempt party if that amount is greater than the fair market value on the repurchase date. Because they own 100 percent of the voting stock of the S corporation, the original shareholders have the power to determine the amount and timing of any distributions made with respect to the voting and nonvoting stock. The original shareholders exercise that power to cause the S corporation to limit or suspend distributions to its shareholders while the exempt party purportedly owns the nonvoting stock. For tax purposes, however, during that period, 90 percent of the S corporation's income is allocated to the exempt party and 10 percent of the S corporation's income is allocated to the original shareholders. The transaction is structured for the original shareholders to exercise the warrants and dilute the shares of nonvoting stock held by the exempt party, or for the S corporation or the original shareholders to purchase the nonvoting stock from the exempt party at a value that is substantially reduced by reason of the existence of the warrants. In either event, the exempt party will receive a share of the total economic benefit of stock ownership that is substantially lower than the share of the S corporation income allocated to the exempt party. DISCUSSION The transaction described in this notice is designed to artificially shift the incidence of taxation on S corporation income away from taxable shareholders to the exempt party. In this manner, the original shareholders attempt to avoid paying income tax on most of the S corporation's income over a period of time. The Service intends to challenge the purported tax benefits from this transaction based on the application of various theories, including judicial doctrines such as substance over form. Under appropriate facts and circumstances, the Service also may argue that the existence of the warrants results in a violation of the single class of stock requirement of § 1361(b)(1)(D), thus terminating the corporation's status as an S corporation. See, e.g., §§ 1.1361-1(l)(4)(ii) and (iii). Transactions that are the same as, or substantially similar to, the transaction described in this notice are identified as "listed transactions" for purposes of §§ 1.6011-4(b)(2), 301.6111-2(b)(2), and 301.6112-1(b)(2) effective ****** the date this notice was released to the public. Independent of their classification as listed transactions, transactions that are the same as, or substantially similar to, the transaction described in this notice may already be subject to the disclosure requirements of § 6011 (§ 1.6011-4), the tax shelter registration requirements of § 6111 (§ 301.6111-1T and § 301.6111-2), or the list maintenance requirements of § 6112 (§ 301.6112-1). Under the authority of §1.6011-4(c)(3)(i)(A), the exempt party in the listed transaction described in this notice will also be treated as a participant in the transaction (whether or not otherwise a participant). The exempt party will be treated as participating in the transaction for the taxable year of the purported donation, the taxable year of the reacquisition, and all intervening taxable years. Pending further review and possible additional guidance, this notice does not apply to any investment in employer securities, as defined in § 409(l), by an employee stock ownership plan subject to the requirements of § 409(p). Persons who are required to register these tax shelters under § 6111 but have failed to do so may be subject to the penalty under § 6707(a). Persons who are required to maintain lists of investors under § 6112 but have failed to do so (or who fail to provide those lists when requested by the Service) may be subject to the penalty under § 6708(a). In addition, the Service may impose penalties on parties involved in these transactions or substantially similar transactions, including the accuracy-related penalty under § 6662. The Service and the Treasury Department recognize that some taxpayers may have filed tax returns taking the position that they were entitled to the purported tax benefits of the type of transaction described in this notice. These taxpayers should take appropriate corrective action and ensure that their transactions are disclosed properly. Taxpayer's Position: 1. The Taxpayer has not provided a position on the issue. 2. The Taxpayer has not provided a position on the issue. Government's Position: 1. That the exempt status for ****** should be revoked for failure to operate exclusively in furtherance of exempt purposes. Under IRC Section 501(c)(3) an exemption from tax is provided for organizations, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, and which does not participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public office. Treas. Regs. Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Treas. Regs. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Here the facts show that more than an insubstantial part of the organization's activities are not in furtherance of an exempt purpose. These activities include: 1. Participating in the S Corporation Tax Shelter Scheme 2. Operating as a vehicle to assist the promoter of the scheme (******) in carrying out his abusive charitable scheme These ****** activities disqualify the organization from exempt status under IRC Section 501(c)(3). Discussion on the disqualifying activities 1. The organization is a participant in the S Corporation Tax Shelter Scheme. Transactions that are the same or substantially similar to those described in Notice 2004-30 are designed to artificially shift the incidence of taxation on S corporation income away from taxable shareholders to the exempt party. In this manner, the original shareholders attempt to avoid paying income tax on most of the S corporation's income over a period of time. The shifting of taxation away from the taxable shareholders is possible due to the exempt party generally does not pay tax on its income. Since inception, ****** has not paid any tax on its income. Notice 2004-30 designated these type of transactions as listed transactions. In determining whether the donations of LLC membership units to the organization are the same or substantially similar to Notice 2004-30, the provisions in the Operating Agreements and other relevant facts are examined. These provisions include: - The original shareholders donated membership units to the organization. - The original shareholders retain control of the LLC via their holdings of exclusive management rights and/or ownership of voting units. - The original shareholders have the power to determine the amount and timing of any distributions. - The organization is allocated *** percent or more of the profit, while the original shareholders are allocated *** percent of the loss. - The LLCs have the first right to purchase the organizations membership units. With the original shareholders having exclusive management right, they can issue additional shares to dilute the shares held by the organization. Discussion of the above factors i. The original shareholders donated membership units to the organization. Similar to Notice 2004-30, the original shareholders donated membership units to the organization, while retaining complete and total control over the LLC units. As the holder of membership units, the organization has no voting rights and consent right. ii. The original shareholders retain control of the LLC via their exclusive management rights. Similar to Notice 2004-30, after the original shareholders donated membership units to the organization, they still maintain complete control over the assets of the LLC. In the majority of instances (*** LLCs or *** %) where interest was donated to the organization, a *** % non-voting interest was donated while a *** % Voting interest was maintained by the original donors. As such, the original donor maintains all voting rights and management rights of the LLC. This creates a situation where the donor can take a tax deduction for a "charitable contribution" while maintaining the economic benefit and control of the donated asset. iii. The original shareholders have the power to determine the amount and timing of any distributions. In Notice 2004-30, because they are the sole managers of the S Corporations, the original shareholders have the power to determine the amount and timing of any distributions. In this case, the original shareholders, also Manager of the LLCs, have the power to determine the amount and timing of distributions. Per the Type Operating Agreements, there are no required annual distributions for organizations operating under the Type 1 agreements. For organization's operating under Type 2 agreements, the manager shall be required to distribute, on a pro-rata basis, a substantial present economic benefit of at least *** percent (*** %) of the total assets held by the Company on a yearly basis. For purposes of this paragraph, the two percent (*** %) value is determined as of the value of the assets of the Company as of January 1 of each calendar year. Furthermore, this mandatory distribution requirement shall not apply to the first partial year that this Company is in existence and shall only apply to each full calendar year that this Company is in existence. In the year of examination, some LLCs did not make any distributions to the organization ******. Additionally, only ****** of the ****** LLCs (or *** %) made distributions at or above the required *** % with ****** LLCs making no distribution or a distribution which was less than the *** % required by the operating agreements. Overall, the average distribution for all LLCs was *** % of the value of the LLC at ******. Where distributions were made to charities; the timing, amount, and chosen charity were determined by the LLC manager (typically the original donor). Many of the LLCs made direct payments to their chosen charities without any notification to ****** and simply reported the expense to ****** at year end. Other entities transferred funds to ****** and also provided ****** with payout instructions on recipients and amounts to be paid. In these instances, ****** acted as a passthrough account with no oversight or involvement in the actual charitable giving process. ****** was unable to provide any documentation or substantiation of its involvement in the charitable giving or disbursement process other than its activities as a pass-through entity for a portion of the charitable giving activities so that it can show some form of charitable activity for the year. iv. The organization is allocated *** percent or more of the profit, while the original shareholders are allocated *** percent of the loss. The Special Allocation Provisions further allocate all passive income to the organization and all active income and deductions to the original shareholders, In this case, *** % - *** % of profits and losses are allocated to the exempt party and *** % - *** % are allocated to the original shareholders. However, none of the profits or losses are realized by the exempt party as the only funds received are the pass-through funds received as outlined in item #v above. v. With the original shareholders having exclusive management right, they can issue additional shares to dilute the shares held by the organization. In these LLCs, the donors, their spouse and/or family members are the sole managers of the LLCs. They have the power to issue additional membership units within the LLC. Such issuance of additional shares may dilute the value of those share already held by the organization. Given the organization has no consent rights, there's nothing it can do to prevent the issuance of additional units. In summary, the facts show the transactions in this case are the same or substantially similar to those described in Notice 2004-30. Therefore, it is concluded that ****** was a participant in the S-Corporation Tax Shelter scheme as described in Notice 2004-30. 2. ****** acts as a vehicle to assist the promoter of the scheme (******) in carrying out his abusive charitable scheme. As stipulated in United States of America v. ******, ****** charitable giving scheme is designed to assist his wealthy clients improperly reducing their tax liability by taking unwarranted charitable contribution deductions. Mr. ****** scheme has harmed the United States by depriving the government of tax revenue. The IRS has identified specific transactions that, through ******, cost the United States Treasury more than $ ****** in lost tax revenue. To facilitate his scheme, ****** needed a charity described under IRC § 501(c)(3) to take the bogus contributions, as contributions to such charity is tax deductible. In the beginning, ****** created his ******, ******, and ****** so he could facilitate his scheme. Once ****** scheme was exposed, the IRS revoked ******, ******, and I ****** tax exempt status, which ****** agreed to. Facts connecting ****** to ****** scheme included, but are not limited to: - Approximately ** % of the LLC interest "assigned" to ****** were originally "assigned" to ******, a charity which was involved in the ****** scheme until it was revoked by the IRS. - ****** appraised the value of ownership interest for many of the donors who donated their interest to the organization. ****** signed many of the Forms 8283 for the appraised assets. - ****** is the President of ****** which is named in the injunction against ******. It is clear from the injunction that ****** and ****** worked together to perpetrate the tax scheme concocted by ****** and that ****** is a promoter of the ****** scheme. In conclusion, the facts show that the organization was operated as a vehicle of bogus charitable scheme which is being promoted and carried out by ******. The ****** activities discussed above were more than an insubstantial part of ****** activities. These ****** activities did not further one or more exempt purposes described in IRC § 501(c)(3). Therefore, ****** exempt status under IRC § 501(c)(3) should be revoked. 2. That the Organization's exempt status should be revoked retroactively to ******, the first date that the organization failed to qualify for exemption. ****** activities remain the same in the year of examination as they were at the inception of the federal tax exemption on ******. The organization began accepting LLC interest donations in the ****** tax year based on their Form ****** reporting. This demonstrates that ****** became a participant in the tax avoidance scheme in ******. Therefore, it is warranted to revoke the exempt status of the organization retroactively to ****** the first date it was determined that the organization was not operated exclusively for exempt purposes. Conclusion: ****** is not operated exclusively in furtherance of an exempt purpose as outlined in IRC Section 501(c)(3). As such, its tax-exempt status should be revoked retroactively to ******. ****** is required to file Form 1120, U.S. Corporation Income Tax Return, for the tax years ******, ******, ******, and all future years.

Private Letter Ruling Number: 202118021 Internal Revenue Service February 10, 2021 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities PO Box 2508 Cincinnati, OH 45201 Number: 202118021 Release Date: 5/7/2021 UIL Number: 501.03-00, 501.03-05, 501.03-33 Date: February 10, 2021 Employer ID number: Form you must file: Tax years: Person to contact: Name: ID number: Telephone: Dear *******: This letter is our final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). Recently, we sent you a proposed adverse determination in response to your application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we didn't receive a protest within the required 30 days, the proposed determination is now final. Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't deduct contributions to you under IRC Section 170. We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by sending them a copy of this final letter along with the proposed determination letter. You must file the federal income tax forms for the tax years shown above within 30 days from the date of this letter unless you request an extension of time to file. For further instructions, forms, and information, visit www.irs.gov. We'll make this final adverse determination letter and the proposed adverse determination letter available for public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice 437 on how to notify us. If you agree with our deletions, you don't need to take any further action. If you have questions about this letter, you can call the contact person shown above. If you have questions about your federal income tax status and responsibilities, call our customer service number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements Enclosures: Notice 437 Redacted Letter 4034 Redacted Letter 4038 Department of the Treasury Internal Revenue Service P.O. Box 2508 Cincinnati, OH 45201 Date: December 15, 2020 Employer ID number: Contact person/ID number: Contact telephone number: Contact fax number: UIL: 501.03-00 501.03-05 501.03-33 Legend: B = State C = Date D = City Dear *******: We considered your application for recognition of exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(3). This letter explains the reasons for our conclusion. Please keep it for your records. Issues Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below. Facts You were incorporated in the state of B as a non-profit corporation on C. Your articles of incorporation state that your purpose is to "revitalize and redevelop the central business district of the Municipality." You conduct fundraising for the revitalization and redevelopment of the central business district of D. You support revitalization and redevelopment by financing projects that develop and promote the public good and general welfare, trade, commerce, industry, and employment opportunities in the district. This enhances the city and creates a climate favorable to the location of new industry, trade and commerce. Your other activities include an annual carnival with craft and food vendors and the annual You operate a grant funding program which is only available to landlords and businesses located in the central business district boundaries of D. Projects are funded through grants made to landlords and businesses. You have a grant committee that reviews and selects grantees. We sent a request for additional information clarifying your economic development activities, including, but not limited to, whether or not the area you are assisting is economically depressed, if you will target benefits towards a disadvantaged group, the crime rate of the area, how you select recipients, etc. Although you responded to prior requests, you did not respond to this request, or to telephone calls to follow up on our request. Your fundraising activities include community events, mail solicitations, personal solicitations, public and private grant solicitations, and government grant solicitations. Your budgets indicate that your income consists primarily of your festival vendor fees, proceeds from your carnival, and pageant fees. Your expenses consist of supplies, equipment rentals, contest winner grants, and grants to the City of D. Law IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net earnings may inure to the benefit of any private shareholder or individual. Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described in IRC Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in IRC Section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Treas. Reg. Section 1.501(c)(3)-1(d)(2) defines the term charitable as including the relief of the poor and distressed or of the underprivileged, and the promotion of social welfare by organizations designed to lessen neighborhood tensions, to eliminate prejudice and discrimination, or to combat community deterioration. The term "charitable" also includes lessening of the burdens of government. Revenue Procedure 2020-5, 2020-1 I.R.B. 241, Section 3 states that a determination letter or ruling on exempt status is issued based solely upon the facts and representations contained in the administrative record. The applicant is responsible for the accuracy of any factual representations contained in the application. Section 6 (and its predecessors) provides that a favorable determination letter or ruling will be issued to an organization only if its application and supporting documents establish that it meets the particular requirements of the section under which exemption from federal income tax is claimed. In Universal Life Church v. United States, 372 F.Supp. 770 (E.D. Cal. 1974), the court concluded that "one seeking a tax exemption has the burden of establishing his right to a tax-exempt status." Pius XII Academy, Inc. v. Commissioner, T.C. Memo. 1982-97, affd. 711 F.2d 1058 (6th Cir. 1983), provides that an organization must establish through the administrative record that it operates as an exempt organization. Denial of exemption may be based solely upon failure to provide information describing in adequate detail how the operational test will be met. In La Verdad v. Commissioner, 82 T.C. 215 (1984), the administrative record did not demonstrate that the organization would operate exclusively in furtherance of an exempt purpose. Therefore, denial of organization's request for tax-exempt status was reasonable. New Dynamics Foundation v. United States, 70 Fed.Cl. 782 (2006), was an action for declaratory judgment that the petitioner brought to challenge the denial of his application for exempt status. The court, in finding that the actual purposes displayed in the administrative record supported the Service's denial, stated "It is well-accepted that, in initial qualification cases such as this, gaps in the administrative record are resolved against the applicant." The court noted that if the petitioner had evidence that contradicted these findings, it should have submitted it as part of the administrative process. The court also highlighted the principle that exemptions from income tax are matters of legislative grace. Ohio Disability Association v. Commissioner, T.C. Memo 2009-261 (2009), states denial is justified because responses to requests for additional information failed to supplement the initial application or clarify purposes and activities, and generalizations did not provide sufficient detail to determine that the organization would be operated exclusively for exempt purposes. Application of law A ruling on exempt status is based solely on facts and representations in the administrative file. You have not provided supporting documentation to establish you meet the requirements of IRC Section 501(c)(3). As stated in Treas. Reg. 1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in IRC Section 501(c)(3). You do not meet the operational test under IRC Section 501(c)(3) because you are not operating exclusively for charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). You indicated that you will be revitalizing the downtown district of D. Revitalizing a business district is not deemed charitable unless the area being revitalized is historical or blighted, or if the revitalization can lessen neighborhood tensions. You also have not established that you are lessening the burdens of government. You have not established that you meet the requirements of Treas. Reg. Section 1.501(c)(3)-1(d)(2) because you failed to provide detailed information about your revitalization program. You have not established that your downtown revitalization activities are charitable in nature. Accordingly, you have not established that you meet the requirements of IRC Section 501(c)(3) as required by Rev. Proc. 2020-5. As in Universal Life Church, you have the burden of establishing that you qualify for tax exemption. In Pius XII Academy, Inc. and La Verdad, it was found that an organization must establish, through its administrative record, that it meets the requirements for exemption. Because you failed to provide sufficient details in your initial application and the additional information you provided did not meet the statutory and regulatory requirements for exemption, you have not established that you meet the requirements for exemption under IRC Section 501(c)(3). As provided in New Dynamics Foundation, any gaps in the administrative record will be resolved against the applicant. Similarly, in Ohio Disability Association, the court found that even when additional information was provided, but it contained generalizations and failed to clarify purposes, denial is justified. You did not provide supplemental information; therefore, we are unable to determine that you qualify for exemption. Conclusion Based on the information submitted, we conclude that you are not described in IRC Section 501(c)(3). You did not establish that you are operated exclusively for charitable purposes or are lessening the burdens of government. Therefore, you do not qualify for exemption under Section 501(c)(3). If you agree If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements. If you don't agree You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a protest within 30 days of the date of this letter. You must include: - Your name, address, employer identification number (EIN), and a daytime phone number - A statement of the facts, law, and arguments supporting your position - A statement indicating whether you are requesting an Appeals Office conference - The signature of an officer, director, trustee, or other official who is authorized to sign for the organization or your authorized representative - The following declaration: For an officer, director, trustee, or other official who is authorized to sign for the organization: Under penalties of perjury, I declare that I have examined this request, or this modification to the request, including accompanying documents, and to the best of my knowledge and belief, the request or the modification contains all relevant facts relating to the request, and such facts are true, correct, and complete. Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney. We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't given us a basis for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status. If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)). Where to send your protest Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address: U.S. mail: Internal Revenue Service EO Determinations Quality Assurance Mail Stop 6403 P.O. Box 2508 Cincinnati, OH 45201 Street address for delivery service: Internal Revenue Service EO Determinations Quality Assurance 550 Main Street, Mail Stop 6403 Cincinnati, OH 45202 You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that they received it. You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at the top of this letter. Contacting the Taxpayer Advocate Service The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements

Private Letter Ruling Number: 202331004 Internal Revenue Service May 8, 2023 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities PO Box 2508 Cincinnati, OH 45201 Release Number: 202331004 Release Date: 814/2023 UIL Code: 501.00-00, 501.04-00, 501.04-02, 503.00-00 Date: 05/08/2023 Employer ID number: Tax years: All Person to contact: Dear ******: This letter is our final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(4). Recently, we sent you a proposed adverse determination in response to your application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we didn't receive a protest within the required 30 days, the proposed determination is now final. You must file the federal income tax forms for the tax years shown above within 30 days from the date of this letter unless you request an extension of time to file. For further instructions, forms, and information, visit www.irs.gov. We'll make this final adverse determination letter and the proposed adverse determination letter available for public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us. If you agree with our deletions, you don't need to take any further action. If you have questions about this letter, you can call the contact person shown above. If you have questions about your federal income tax status and responsibilities, call our customer service number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933. We sent a copy of this letter to your representative as indicated in your power of attorney. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements Enclosures: Letter 437 Redacted Letter 4034 Redacted Letter 4038 cc: Department of the Treasury Internal Revenue Service PO Box 2508 Cincinnati, OH 45201 Date: February 21, 2023 Employer ID number: Person to contact: Name: ID number: Telephone: Fax: UIL: 501.00-00 501.04-00 501.04-02 513.00-00 Legend: B = company C = state D = date E = individual G = county H = company 2 J = date 2 K = company 3 L = company 4 Dear ******: We considered your application for recognition of exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(4). This letter explains the reasons for our conclusion. Please keep it for your records. Issues Do you qualify for exemption under IRC Section 501(c)(4)? No, for the reasons stated below. Facts Organizational Documents: Articles of Incorporation: You were formed under the nonprofit public benefit corporation law of the state of C on D. Article V of your Articles of Incorporation ("Articles") states that your purposes are: (i) offering pharmacy and medical health benefit coverage and related health benefits to the general public, governmental entities, ****** and employer groups through multiple accessible channels, and to carry on other social welfare activities associated with this purpose; (ii) addressing the pharmacy, medical and related health benefit needs of the uninsured and underinsured; (iii) providing pharmacy, medical and related health benefits in underserved communities and to small employers with limited access to pharmacy and related health benefits; and (iv) promoting the general health of the community and engaging in any activities that are reasonably related to or in furtherance of the foregoing social and welfare and community purpose. Article IX of your Articles provides that upon dissolution, your assets remaining after payment of debts and liabilities will be distributed to a nonprofit fund, foundation or corporation which is organized and operated exclusively for tax-exempt purposes as set forth in Code Sections 501(c)(3) or 501(c)(4). Bylaws: Your Bylaws that you submitted for review state that they were adopted on J. Article 3.2 of your Bylaws states your specific purpose is the same as stated in Article V of your Articles of Incorporation above. Article 4.1 of your Bylaws states that the initial number of directors constituting the Board shall be ****** people. Upon reaching various revenue milestones, the number of directors will increase as follows: Article 4.3 provides that the Nominating Committee shall appoint a simple majority of directors to the Board, who shall be leaders within a community served by the Corporation with experience in health or charitable services, representatives of non-profit organizations that qualify as public charities described in Section 509(a)(2) or (3) of the Code or representatives [sic] governmental units described in Section 170(c)(1) of the Code. Article 4.3 further provides that the remaining director positions ("E Family Directors") shall be appointed by E, and following his death or incapacity, by a majority vote of his spouse and his direct adult descendants (E, his spouse, and his direct adult descendants are collectively referred to as the "E Family"). In the event of a tie, the most senior E Family member's vote shall prevail. The E Family representation shall be capped at four (4) as the Board expansion milestones are met. Upon the passing of E and his wife, the E Family representatives shall be apportioned equally between their ****** children and the choice of the ****** representative will belong to the ****** line. For clarity, the E Family appointees can be non-family members, employees of B, a strategic partner or consultant, or any other person deemed appropriate by the E Family. If there is no direct descendant of the E Family, these positions will be equally apportioned to the Nominating Committee and B's Employees with any odd number being apportioned to B's Employees. The E Family shall adopt processes for selection of E Family appointees consistent with the guidelines above. The President and CEO shall each be eligible to serve as a director. At specified revenue milestones, one additional board member position shall be filled with an employee of the corporation elected by a majority vote of the employees. E Family Directors may serve an unlimited number of terms, while directors appointed by the nominating committee or elected by the employees may serve a maximum of ****** terms. Article 4.4 provides that not more than ****** percent *** %) of the persons serving on the Board of Directors at any time may be "interested persons." An "interested person" is (a) any person currently being compensated by the Corporation for services rendered to it within the previous ****** (***) months, whether as a full- or part-time employee, independent contractor or otherwise; or (b) any brother, sister, ancestor, descendant, spouse, brother-in-law, sister-in-law, daughter-in-law, mother-in-law, or father-in-law of any such person. Article 4.6 provides that the E Family, by simple majority vote may remove and replace any director at large at any time, with or without cause. Article 4.8 provides that members of the Board shall serve without compensation but shall be reimbursed for travel and lodging expenses in accordance with policies established by the Board. Article 6.6 provides that the Chief Executive Officer may be removed without cause by a ****** majority vote of the Directors or for cause by a simple majority vote. Article 6.7 provides similarly if the President is not the CEO. Article 7.2.2. provides that the Nominating Committee shall be comprised of one (1) representative from each of ****** (***) public charities ("Sponsoring Organization") and the Chief Executive Officer of the Corporation shall be a non-voting member of the Nominating Committee. Each Sponsoring Organization shall remain eligible to appoint a representative to the Nominating Committee so long as it remains exempt under Section 501(c)(3) of the Code and meets the requirements of a public charity under Section 170(b)(1)(A)(iii), (iv), (v) or (vi) of the Code. The Chief Executive Officer (or the President if there is none) shall chair the Nominating Committee. A Sponsoring Organization may be removed upon a majority vote of the Board, provided that at all times there shall be no less ****** (******) Sponsoring Organizations. Additional or replacement Sponsoring Organizations meeting the requirements of this Section 7.2(c) may be designated from time to time by a ****** - ****** (***) majority vote of the Board. The Nominating Committee shall appoint a simple majority of the members of the Board. The number of voting members on the Nominating Committee shall be governed by these Bylaws and shall not be subject to change, except by amendment to these Bylaws as prescribed in Article 12. Officers: E serves as President, CEO, and a director. E's spouse also serves as a director. There is also an individual serving as Treasurer and Secretary as well as three (3) additional directors. You state that one of your directors is the CEO of a client organization which is exempt under IRC Section 501(c)(3). You state that you will follow a conflict-of-interest policy. Conversion from For-Profit: You state you will acquire certain assets and business of B, a state of C Benefit Corporation. B has been in operation as a for-profit enterprise for over 17 years. Such acquisition will occur on or about ****** days after the issuance of a favorable determination letter that you meet the requirements under IRC Section 501(c)(4). The terms of the acquisition will be based upon a determination of the fair market value of the assets and business by an independent appraiser and upon approval of the independent members of your Board of Directors. Under the Term Sheet between B and you, B will transition all of its operations to you. Therefore, B's sole function will be to provide transition and support services to you. B will cease providing services to the public as this function will transition to you. You will acquire certain aspects of the assets and business of B. This will be embodied in a series of agreements involving licensing of intellectual property, leasing of certain equipment and one or more agreements transitioning such aspects of the business of B. You state that the terms of such agreements will be set at fair market value, in the manner described above and under terms approved by the independent members of the Board of Directors. These agreements include: - Leasing of furniture, moveable fixtures, computers and software at fair rental value with an option to purchase some or all of such leased property at the initial 3-year lease period, renewable for *** -year periods at adjusted fair rental value. - Licensing of all B's intellectual property under an exclusive license for a period of *** years, with perpetual rights of renewal. The license fee will be established for the initial license period by an independent appraiser and adjusted at the time of each renewal terms based on an updated independent appraisal. The intellectual property includes a number of patents and software developed by B as well as a number of proprietary products that it provides. - Sublease of physical office space to B to be used by B's employees. - Assumption of B's client contracts, network contracts, and client service contracts after an independent review to confirm that they are at arm's length and provide for reasonable compensation. - Assumption of B's contracts with third-party manufacturers. You included a schedule of projected financial expenses marked as a response to Part VI, Line 19. It is unclear if this relates to line 19 of Part V of your application where you entered "see attached itemized financial data." Your projected expenses indicate significant continued financial arrangements with your intended predecessor organization including: Operations: You claim that you will benefit the community and promote social welfare by reason of (i) enrollment that is open to individuals and small employer groups, (ii) serving low income, high risk, medically underserved and elderly persons, and (iii) providing prescription medications at demonstrably lower costs than the typical PBM. Overview of sector: You claim you will provide an alternative solution in the pharmacy benefit space occupied by traditional pharmacy benefit managers (PBMs). Pharmacy Benefit Managers are third party companies that function as intermediaries between insurance providers and pharmaceutical manufacturers. PBMs create formularies, negotiate rebates (discounts paid by a drug manufacturer to a PBM) with manufacturers, process claims, create pharmacy networks, review drug utilization, and occasionally manage mail-order specialty pharmacies. PBMs work in conjunction with drug manufacturers, wholesalers, pharmacies, and health insurance providers but play no direct role in the physical distribution of prescription drugs, only handling negotiations and payments within the supply chain. When a new drug is available, the manufacturer negotiates with wholesalers who then sell and distribute drugs to pharmacies. PBMs negotiate agreements with drug manufacturers on behalf of insurers and are paid rebates by drug manufacturers. Pharmacy Services Administrative Organizations (PSAOs) negotiate reimbursements with PBMs on behalf of pharmacies. PBMs then pay pharmacies on behalf of health insurance providers for drugs dispensed to patients. PSAOs and PBMs are both third party companies with different functions and purposes. PSAOs represent and offer services to independent pharmacies and PBMs represent health insurers. (Source: NAIC.com -- National Association of Insurance Commissioners). You appear to provide both PBM and PSAO services, as well as other similar services. You state: Pharmacy benefits and health management of patient use of prescription medications is a critical aspect of health care delivery that has not been adequately addressed by other non-profit healthcare organizations. The U.S. Dept. of Health & Human Services (HHS) estimates that prescription drug spending in the U.S. was approximately $457 billion in 2015, or 16.7 percent of overall personal health care services. Furthermore, HHS indicates that prescription expenditures are rising and are projected to rise faster than overall health care spending. The traditional PBM industry core business model is focused on driving utilization of prescription drugs, whereas [your] unique pharmacy services administration ("PSA") model emphasizes appropriate prescription drug use (for example, inappropriate prescription drug use is curtailed, thereby improving the health of the patient and reducing prescription drug costs). You state that you will use a proprietary Acquisition Cost Index (patent pending) and your network of approximately ****** pharmacies nationwide to set the cost of prescriptions that eliminates hidden spreads and can pass along rebates to the individual and group subscribers in a manner that is unlike traditional PBMs. You state that you believe healthcare is a social good and will provide discounted pharmaceutical products and services to the community served. These discounts will be made accessible by your unique Medical Benefit Manager ("MBM") class-of-trade, which will act as a certification of integrity and transparency of cost of care and encourage pharmaceutical manufacturers to work with you in ways that may not be available to traditional MBMs (e.g., providing discounts on drugs, devices, tests, and other products under the medical benefit). This broad access to discounts from industry will allow you to craft integrated healthcare solutions with clients that differentiates clients' plans from traditional health plans. These MBM products and services will encompass pharmacy services (prescription dispensing), claims adjudication, listing of drugs available and at what cost. You will strive to provide functionality that allows the community (including enrollees and Plan Sponsors) to administer their prescription drug benefits in an improved fashion (primarily resulting from processes pioneered by you that deliver greater integrity, transparency, and compliance with applicable federal safe harbor regulations). You further state that unlike the current traditional Pharmacy Benefit Manager (PBM), your MBM solution will allow pharmacy benefits to be delivered with true transparency related to acquisition cost of prescription drugs, transfer of pharmaceutical manufacturer discounts directly to the enrollee or Plan Sponsor without diversion (i.e., re-classification by PBM to divert part of the savings to additional compensation to the PBM), eliminate potential conflicts-of-interest that arise from PBM's ownership of their own pharmacies (you have no ownership in any pharmacy), and providing the tools to administer benefits to lower inappropriate prescription drug use (unlike the traditional PBM that focuses on driving up prescription drug utilization). You state you will be operated exclusively for the promotion of social welfare of the community. You state you will focus your efforts on "reaching the uninsured and underinsured" by offering affordable access to pharmacy benefits through: retail pharmacy networks offering your services to uninsured (or under-insured) individuals, state and local government-sponsored programs for the uninsured, non-profit hospitals that are designated as "disproportionate share hospitals" (those serving a significantly disproportionate number of low-income patients), and other similar programs benefiting the community as a whole. You further state you will also provide unique administrative tools that will allow eligible patients to access special government and non-governmental drug pricing programs such as 340B, Group Purchasing Organization (GPO) and Federal Supply Schedule (FSS) at lower costs. You state that this is in keeping with the need to develop innovative ways of making prescription drugs affordable. You state you will offer pharmacy and other health benefit coverage through an "arranger model," arranging for provision of pharmacy health services to enrollees through your proprietary national network of approximately ****** pharmacies. You defined your "proprietary network" of pharmacies to be those with whom you have contracted and who offer a negotiated discount to enrollees in your network, with the claims being administered at these negotiated rates by you. You further state that as your programs expand, you intend to utilize other for-profit or non-profit organizations to interface with program sponsors (employers, government agencies, etc.) in their respective geographic areas which will serve as the marketing arm for your PSA services. These licensing agreements will be reviewed by an independent advisor to confirm the compensation is reasonable in the market. You state your control will be by the community. A majority of the Board of Directors will be selected by a Nominating Committee appointed by public charities and your Bylaws provide more detail as described above. You state, through programs such as your current project with the G county's Dept. of Health Services, you will provide pharmacy benefits to indigent members of the community. You claim you will also pursue expansion of programs offering individual benefits through your network of pharmacies, similar to your initial program with H (described below), through which uninsured and underinsured individuals can access affordable pharmacy benefits. You state you will not decline coverage to any individual of the public based on health condition, nor will you discriminate on the basis of race, ethnicity, country of origin, gender, or gender identity or expression. You claim while you will offer your services to small and large employers, particularly tax-exempt organizations and governmental employers, that *** percent or more of your services will be providing a community benefit based on IRS guidance. You state based on your projected enrollees, the percentage of your PSA services provided to individuals and groups of individuals is as follows: You project that your enrollment in each of these categories will increase approximately *** percent a year, with a higher increase in critical access and sole community health systems, although, overall it appears that you project that the relative percentage of individuals receiving PSA benefits through each category will remain proportionately about the same. You state that your social welfare purpose is demonstrated by the fact that you will operate in many service areas that include medically underserved, low income, rural and high-risk persons. You state that approximately *** percent of the individuals receiving your PSA services are in "at-risk" categories (i.e. indigent (*** %), indigent Medicare enrollees (*** %) or Medicaid enrollees (*** %)). You support these conclusions by using data on the areas served and information on the percentage of individuals in these types of categories from data provided through the Service Center. You claim that the above-referenced activities are fully aligned with your purpose, which is to promote social welfare through offering affordable pharmacy health benefit coverage to individuals in the general public and to individuals who are part of employer groups through multiple, easily accessible channels. You state that all members of the public may access health coverage from you through available programs. In addition to providing a community benefit by going directly to the public, you argue that a community benefit is provided by your provision of health plan coverage to the employees and dependents of a significant number of small employers, governmental entities, and public charities. You state your commitment to ensuring that services are available to the entire community is evidenced by your marketing/community relations budget and marketing materials. You state that you will be focused heavily on expanding your pharmacy health care offerings in the individual market and to programs geared to indigents and/or underinsured individuals. Substantially all of your marketing budget and marketing personnel will be devoted to promoting your services to programs that benefit the community as a whole. You attached sample marketing materials including a promotion for H pharmacy benefits (discussed below) and materials with titles such as "******?" with the heading paragraph: Your materials mention various products and services available to your clients, including some described in your application materials as among your intellectual property and proprietary products that will be leased from your for-profit predecessor to you: Another flyer suggests clients can "******." The materials also provide examples of "clients" such as hospital systems that benefitted from employing B including substantial cost savings and improved customer service. You provided a copy of a broker contract which describes brokerage services to be provided to you to find suitable clients for your pharmacy benefit administration systems and claims processing services. You also provided examples of newsletters provided to your intended predecessor's clients with industry and medication information as well as educational materials in slideshow format with medication topics marked. You state you expect your marketing activities to result in significant growth in the categories of individuals, charitable and county and local government programs, Critical Access and Sole Community Health Systems, Federally Qualified Health Clinics, ******, cities and school districts, and small employer group plans in the coming years. In order to make your coverage more affordable for members of the public, you will strive to keep the cost for pharmacy benefits low compared to for-profit alternatives. You do this by keeping both profit and administrative expenses low and through effective use of automation and technology. You will operate in a "virtual" manner whereby, instead of employees coming in to work, the work is allocated to employees. This will relieve you of any geographic restriction on recruiting the best people (resulting in high service levels), while providing for competitive advantage through low infrastructure costs. You will also develop much of the proprietary technology and systems itself which eliminates dependence on others at extra cost (e.g., claims, network, rebates, pedigree programs (340B, GPO, FSS), analytics, etc.). You claim that additionally, you will provide benefits to the community beyond health care benefits through funding programs for the promotion of health and other charitable purposes. You state you have designated approximately *** percent of your budget for such purposes. You have not specified which programs are covered by this budget. Program with H: You state that you offer access to your services to individuals through programs such as your program with H. You state that your contractual arrangement with H allows individuals who are uninsured or underinsured, through the contracts you have negotiated with pharmaceutical manufacturers, to obtain their prescriptions at costs comparable to and in many instances more favorable than those available to a participant under a group health plan. This results in a reduction from the retail cost of prescription medications of up to *** %. For example, you have negotiated an *** % rebate for insulin prescriptions with the pharmaceutical manufacturer. A certain vial of insulin has a wholesale acquisition cost of $ ******; with your discount, the patient pays $ ******. You state that this requires a significant financial commitment by H in that it must allow the patient to realize the savings upon purchase and then H must await receipt of the pharmaceutical manufacturers rebate to fully recoup its cost for the prescription. H currently has approximately ****** in-store pharmacies throughout the country. You further state that through your provider network, approximately ****** of your ******pharmacies are also enrolled in this unique program with H throughout the country. You state that you supported H in allowing these other pharmacies to participate in the rebate pricing arrangements negotiated by you, resulting in approximately ****** additional pharmacies that are able to provide similar discounts with a membership to H's membership prescription program, greatly expanding the number of uninsured and underinsured individuals who are able to obtain their prescriptions substantially below the retail costs they would otherwise pay. You anticipate that the number of pharmacies participating will greatly increase over time. You provided a copy of a flyer from H reading as follows: The H Member Prescription Program is a prescription savings program for you and your family. It allows Members who have no prescription drug insurance or whose insurance does not cover all of their prescription medication to be the beneficiaries of H's commitment to member service, value, quality and product confidence. H is committed to passing on savings to the member and is able to do that by monitoring expenses, taking lower markups and negotiating manufacturer/supplier discounts and passing those savings back to H members. How It Works To Join Enroll at any participating H pharmacy. There is no additional charge for H members to participate in the Program. This program is NOT insurance. The program is a value-added benefit of H membership that provides eligible H members and their eligible dependents the ability to obtain lower prices for certain prescriptions on the Program's Preferred Drug List. Savings Savings are estimated up to *** % off and calculated at the time of sale. View some examples of savings that you and your family can begin taking advantage of immediately. The amount of any price reduction is determined at the time of purchase and may change from time to time. Contact your local H Pharmacist for current Program pricing information. The flyer you provided shows information and links about your company at the bottom. However, information currently available on H's website only on one page describes the benefits as provided by H and "powered by" your predecessor organization. Otherwise, the information provided by H on its member pharmacy benefits markets the program as provided by H internally. You provided a copy of a contract between you and H titled "Participating Pharmacy Provider Services" which appears to describe PSA services. The contract describes pharmacy services to be provided by H to eligible members of plan sponsors, for whom you manage pharmacy benefits. To be reimbursed for drugs dispensed, H must submit Claims for payment, whereupon you will pay the Pharmacy on behalf of the Plan Sponsors. Exhibit A describes how you are compensated under the contract such as a flat fee per drug product dispensed by the pharmacy less the amount paid by the customer for drugs on your Acquisition Cost Index (ACI) or a fee of percent plus $ ****** for drugs not on the ACI list, as well as small charges per claim for claim processing. Also attached is a list of specialty drugs and reimbursement terms. General internet research also indicates the availability of similar non-insurance pharmacy discount cards available to members of the public at retail pharmacy outlets which are offered by your direct competitors (e.g. K offered by L which also advertises it may be used at ****** pharmacies nationwide) as well as other companies claiming to lower the cost of prescription drugs by methods such as eliminating hidden costs. Law IRC Section 501(c)(4) purposes generally IRC Section 501(c)(4) provides for the exemption from federal income tax of organizations not organized for profit but operated exclusively for the promotion of social welfare. Further, exemption shall not apply to an entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual. Treasury Regulation Section 1.501(c)(4)-1(a)(1) states a civic league or organization may be exempt as an organization described in IRC Section 501(c)(4) if it is not organized or operated for profit and it is operated exclusively for the promotion of social welfare. Treas.Reg. Section 1.501(c)(4)-1(a)(2)(i) provides that an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this Section is one that is operated primarily for the purpose of bringing about civic betterments and social improvements. Treas.Reg. Section 1.501(c)(4)-1(a)(2)(ii) provides that promotion of social welfare doesn't include carrying on a business with the general public in a manner similar to organizations which are operated for profit. Revenue Ruling 54-394, 1954-2 C.B. 131, provides that a nonprofit community television antenna organization whose only activity was to provide television reception for its members was held not to be exempt as a social welfare organization since the benefits were only available to their members who were not the community in general. Rev.Rul. 68-46, 1968-1 C.B. 260, concluded that a war veterans' association did not qualify for exemption under IRC Section 501(c)(4) because it was primarily engaged in renting a commercial building and operating a public banquet and meeting hall. Rev.Rul. 70-535, 1970-2 C.B. 117, describes an organization formed to provide management, development and consulting services for low and moderate income housing projects for a fee. The revenue ruling held that the organization did not qualify under IRC Section 501(c)(4). The revenue ruling stated "Because the organization's primary activity is carrying on a business by managing low- and moderate-income housing projects in a manner similar to organizations operated for profit, the organization is not operated primarily for the promotion of social welfare. The fact that these services are being performed for tax-exempt corporations does not change the business nature of the activity." Rev.Rul. 70-535 denied exemption based on the following facts and circumstances: - The organization managed low- and moderate-income housing projects for a number of other exempt organizations. - They received all of their income from management fees and these funds were used for management service expenses. - This was their primary activity and was no different from the same type of services provided by for-profit corporations. - The fact this service was provided for other nonprofit organizations did not change the business nature of the activities. Therefore, exemption for the organization was denied because the conduct of a business was the organization's primary purpose. Rev.Rul. 76-441, 1976-2 C.B. 147, explained that an otherwise qualifying nonprofit organization that purchases or leases at fair market value the assets of a former for-profit school and employs the former owners, who are not related to the current directors, at salaries commensurate with their responsibilities is operated exclusively for educational and charitable purposes. However, an organization that takes over a school's assets and its liabilities, which exceed the value of the assets and include notes owed to the former owners and current directors of the school, is serving the directors' private interests and is not operated exclusively for educational and charitable purposes. Commissioner v. Lake Forest, Inc., 305 F.2d 814 (4th Cir. 1962), stated that while a social welfare organization necessarily benefits private individuals in the process of benefiting the community as a whole, even when the benefits are confined to a particular group of individuals, the organization may be exempt if the general community derives a substantial benefit. Conversely, an organization that benefits a large number of people will not necessarily be organized for social welfare purposes within the meaning of IRC Section 501(c)(4) because numbers are not necessarily determinative of social welfare objectives. Social welfare is the well-being of persons as a community and classification depends upon the character - as public or private - of the benefits bestowed, of the beneficiary, and of the benefactor. The court also concluded that Lake Forest did not meet the dictionary definition of "social" or "welfare," stating: It does not propose to offer a service or program for the direct betterment or improvement of the community as a whole. It is not a charitable corporation in law or equity, for its contribution is neither to the public at large nor of a public character. Lake Forest does, of course, furnish housing to a certain group of citizens but it does not do so on a community basis. It is a public-spirited but privately-devoted endeavor. Its work in part incidentally redounds to society but this is not the "social welfare" of the tax statute. Contracting Plumbers Cooperative Restoration Corp. v. United States, 488 F.2d 684, 686 (2nd Cir. 1973), cert. denied, 419 U.S.827 (1974), states that if an organization has at least one substantial non-exempt purpose, exemption under IRC Section 501(c)(4) will be precluded even though the organization may have other significant exempt purposes. Harding Hospital, Inc. v. United States, 505 F.2d 1068 (1974), held that a hospital that was a successor to a for-profit corporation was not entitled to tax exemption in part because net earnings inured to private individuals where doctor members of one association treated 90 to 95 percent of patients, that association leased office space, equipment and business office services from hospital at rentals that did not adequately compensate hospital and hospital paid annual salary to the association of doctors for hospital supervision. In Ruekwald Foundation, Inc. v. Commissioner, T.C. Memo 1974-298, the court held that an organization's purpose and leasing of equipment and real estate that was owned by its founder was prohibited inurement. The organization did not demonstrate it conducted any exempt activities. In Santa Cruz Building Association v. United States, 411 F.Supp.871 (E.D. Mo.1976), the district court stated, in reference to claims to exemption under IRC Section 501(c)(4), that "[o]rganizations primarily engaged in profit making and non-social welfare activities cannot take an exemption under this section." In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the organization entered into consultant-retainer relationships with five or six limited resource groups involved in the fields of health, housing, vocational skills and cooperative management. The organization's financing did not resemble that of the typical IRC Section 501(c)(3) organization. It had neither solicited, nor received, any voluntary contributions from the public. The court concluded that because its sole activity consisted of offering consulting services for a fee, set at or close to cost, to nonprofit, limited resource organizations, it did not qualify for exemption under Section 501(c)(3). Application of law You have not established that you are operated exclusively for social welfare purposes within the meaning of IRC Section 501(c)(4). Treas.Reg. Section 1.501(c)(4)-1(a)(1) states that an organization may be exempt as an organization described in Section 501(c)(4) if it is not organized or operated for profit and is operated exclusively for the promotion of social welfare. The promotion of social welfare includes being primarily engaged in promoting in some way the common good and general welfare of the people of the community (Treas.Reg. Section 1.501(c)(4)-1(a)(2)(i)). It further states that an organization is not operated primarily for the promotion of social welfare if its primary activity is carrying on a business with the general public in a manner similar to organizations which are operated for profit. Social welfare organizations are not precluded from engaging in business activities as a means of financing their social welfare programs. However, the regulations provide that an organization is not operated exclusively for the promotion of social welfare if its primary activity is carrying on a business with the general public. In Rev.Rul. 68-46 an organization that provides services for a fee was not exempt under IRC Section 501(c)(4) because its primary activity was carrying on a business in a manner similar to organizations operated for profit. In the same manner, your primary activity appears to be carrying on a pharmacy benefit administration business, and not promoting social welfare. This type of pharmaceutical business activity is commonly conducted to produce a profit. While you state that your primary activity is to provide an "alternative solution" in the pharmacy benefit space occupied by traditional pharmacy benefit managers (PBMs) you still appear to carry on a business with the general public in a similar manner, but with the goal to offer these services at a lower price point and in a socially conscious manner. You will be a successor of a long running for-profit organization for which it will transfer certain assets and business to you after you obtain a favorable determination under IRC Section 501(c)(4). You will purchase the assets of the existing company from its founder at fair market value. Your application and responses to our inquiries indicate that you will assume responsibility under the existing contracts of the for-profit entity with pharmacies and other businesses and continue to provide generally the same pharmacy benefit management and administrative services to these clients as the existing organization. You will also license various intellectual property, including various proprietary services which your application states are essential to your business model from the intended predecessor organization at fair market value. Your financial statements project that you will incur significant future expenses payable to your predecessor, most significantly allocated personnel costs, but also over a million in administrative fees per year. You state that your business model is focused on greater transparency and other methods such as virtual operations to provide pharmaceuticals at a lower cost, and while this may have admirable goals, your submissions do not demonstrate that your operations will be significantly distinguishable from your existing for-profit competitors in a manner that appears to be in furtherance of social welfare within the meaning of IRC Section 501(c)(4). You have not established how providing pharmacy benefit management, administrative, and similar services for lower fees, even if this results in lower prices for individual consumers, is an activity engaged in primarily for social welfare purposes even if affordability of drugs is a problem for society at large. See, for example, Santa Cruz Building Association v. United States. You will continue to use proprietary methods and products developed by the for-profit predecessor under a license of intellectual property to provide similar products and services as your competitors, but at a lower cost and with more consideration towards your ethical goals. You are still paid on the basis of negotiated fees under the terms of your various contractual arrangements, which you will assume from your predecessor. Your marketing materials indicate that you are directly competing for the same business as your for-profit competitors at a lower price and with better service. Your marketing materials you submitted in support of your application promote your ability to save clients money and time by use of your superior and proprietary products and services. You also submitted a broker contract under which a broker would find and solicit appropriate clients for your services. You do not negotiate to provide the products below cost to a charitable sector or otherwise, but rather provide the same products and services as other pharmacy benefit managers at lower costs, which are then passed on to the end consumer. You state you will focus your efforts on "reaching the uninsured and underinsured" by offering affordable access to pharmacy benefits through: retail pharmacy networks offering your services to uninsured (or under-insured) individuals, state and local government-sponsored programs for the uninsured, non-profit hospitals that are designated as "disproportionate share hospitals" (those serving a significantly disproportionate number of low-income patients), and other similar programs benefiting the community as a whole. You do not provide services exclusively for government or exempt organizations, but even if you did, this is not in and of itself a social welfare purpose. See Rev.Rul. 70-535, which describes an organization formed to provide management, development and consulting services for low- and moderate-income housing projects for a fee. The revenue ruling held that the organization did not qualify under IRC Section 501(c)(4). It stated that because the organization's primary activity is carrying on a business by managing low- and moderate-income housing projects in a manner similar to organizations operated for profit, the organization is not operated primarily for the promotion of social welfare. The fact that these services are being performed for tax-exempt corporations does not change the business nature of the activity. Your arguments also appear to be similar to the organization in B.S.W. Group, Inc. v. Commissioner, even though that organization was seeking exemption under IRC Section 501(c)(3). That organization entered into consultant-retainer relationships with five or six limited resource groups involved in the fields of health, housing, vocational skills, and cooperative management. It neither solicited nor received any voluntary contributions from the public. The court concluded that because its sole activity consisted of offering consulting services for a fee, set at or close to cost, to nonprofit, limited resource organizations, it did not qualify for exemption under Section 501(c)(3). This is similar to the prohibition on exemption under Section 501(c)(4) for organizations that are carrying on a business with the general public in a manner similar to organizations which are operated for profit (Treas.Reg. Section 1.501(c)(4)-1(a)(2)(ii)). You emphasize your program through H and other retail pharmacies that enables individuals to access your discounted pharmaceutical prices as a way that you directly provide individuals with access to affordable pharmaceuticals. However, the materials you submitted as well as materials available to the public on the internet indicate that individuals must have an H membership in order to access the pharmaceutical discounts. You have not demonstrated how H membership corresponds to the uninsured or underinsured individuals you state your program is targeted to reach. Further, H appears to advertise the pharmacy benefit program that you administer to its members as a benefit and encourages its members to transfer their prescriptions to H pharmacies in order to enjoy the discounts as a service that it provides to its members. The contract you provided, which presumably you would assume responsibility for after receiving a favorable ruling, provides for pharmacy benefit administrative services and claims processing services for negotiated fees. It further appears that H markets pharmacy benefit services similar to you ("powered by" your predecessor organization) to other employers' clients under the name "H Health Services." Presumably this is under licensing agreements such as those that you state you intend to pursue with both for-profit and non-profit entities in the future in order to expand the reach of your activities. You have not demonstrated how any of these activities further a social welfare purpose, or further how this arrangement does not provide a private benefit to H in the form of increased membership and/or clients for its health services line of business. Exemption under IRC Section 501(c)(4) is also precluded to an entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual. You have also not demonstrated how assuming the business arrangements of your intended predecessor organization will further social welfare purposes, or how the continuing license, rental and other arrangements do not provide inurement to the founder who will retain ownership of your for-profit predecessor, even if the licenses and other arrangements are provided at fair market value. The fact that arrangements are at fair market value does not preclude a finding of inurement, rather all facts and circumstances must be taken into account. See, for example, Harding Hospital, Inc. v. United States, Ruekwald Foundation, Inc. v Commissioner, and Rev.Rul. 76-441. Your founder will be bought out of the business at fair market value, but then continue to have a dedicated client and source of income for the patented and proprietary services and products developed by the for-profit company owned by the founder. You project you will incur over $ ****** annually in administrative fees to the for-profit as well as nearly another $ ****** allocated costs to your predecessor. Further, while your founder will not have majority control of the board, he or his family members will have a minority interest for life, while other members of the board are term limited. The E family members can also terminate any director at large with or without cause at any time. Moreover, it appears that individuals generally receive access to your discounted prices through your business activities as a third-party administrator for health plan sponsors, even if the plan sponsors include government or charitable employers, small employers, or Medicare and Medicaid. Providing services exclusively to a body of members is not a social welfare activity. See, for example, Rev.Rul. 54-394. Like the organization in Contracting Plumbers Cooperative Restoration Corp. v. United States, you are a middleman who receives your service fees from the for-profit companies, such as H, and the pharmaceutical companies when your members purchase the medications from them. Like the organization in Commissioner v. Lake Forest, Inc., your benefits are generally confined to a particular group of individuals, even if the group of individuals is large. The benefits of more affordable drug prices may incidentally redound to society, but such "public-spirited but privately-devoted" endeavors are not "social welfare" within the meaning of IRC Section 501(c)(4). It is also unclear what community you purport to serve as you both discuss the individual counties you service for plan sponsors as well as local government and charitable entities, but then also state that your community is nationwide. You state that through your program such as that sponsored by the G county's Dept. of Health Services you offer pharmacy benefits to indigent members of the community who are uninsured. It's unclear if this program is in furtherance of social welfare as you did not state if the indigent individuals still have to pay the retail prices as stated on your proprietary Acquisition Cost List or if the cost is subsidized by the government programs. Even if these programs are in furtherance of social welfare, you only project these programs to comprise about *** percent of your enrollees and to maintain a similar percentage of your overall enrollees in the future. You indicated that a further *** percent of your enrollees receiving your pharmacy administrative services through Medicare and a further *** percent of your enrollees receive your pharmacy services through Medicaid. You have not specifically demonstrated why providing your services to these individuals is a social welfare purpose other than stating that they are "at risk" populations. Even if such activities are in furtherance of social welfare purposes, these are not your primary activities. You project that a similar percentage of your overall enrollees will continue to fall into these categories in the future. Your non-exempt activities are more than insubstantial and thus prevent you from exemption under IRC Section 501(c)(4). Your position You state you believe healthcare is a social good and will provide discounted pharmaceutical products and services to the community you serve. These discounts will be made accessible by your unique Medical Benefit Manager ("MBM") class-of-trade, which will act as a certification of integrity and transparency of cost of care and encourage pharmaceutical manufacturers to work with you in ways that may not be available to traditional PBMs (e.g., providing discounts on drugs, devices, tests, and other products under the medical benefit). This broad access to discounts from industry will allow you to craft integrated healthcare solutions with your clients that truly differentiate clients' plans from traditional health plans. These MBM products and services will encompass pharmacy services (prescription dispensing), claims adjudication, listing of drugs available and at what cost. You claim you will strive to provide functionality that allows the community (including enrollees and Plan Sponsors) to administer their prescription drug benefits in an improved fashion (primarily resulting from processes pioneered by you that deliver greater integrity, transparency, and compliance with applicable federal safe harbor regulation). You state you will offer pharmacy and other health benefit coverage through an arranger model, similar to an HMO and arranging for provision of pharmacy health services to enrollees through your proprietary national network of approximately ****** pharmacies. You defined your "proprietary network" of pharmacies to be those with whom you have contracted and who offer a negotiated discount to enrollees in your pharmacy network, with the claims being administered at these negotiated rates by you. You cite GCM 39829 and now withdrawn examination guidelines from the 1999 Internal Revenue Manual as sources regarding when "health service providers" may be exempt under IRC Section 501(c)(4). You cite the factors of whether enrolment is open to individuals and small groups and whether the health service provider services low income, high risk, medically underserved, or elderly persons. You further cite ICH Health Plans, Inc. v. Commissioner, T.C. Memo 2001-246, aff'd, 325 F.3d 1188 (10th Cir. 2003), which involved an HMO denied exemption under IRC Section 501(c)(3), with the denial upheld by the courts, as ICH Health Plans was later granted tax exemption under Section 501(c)(4). You state you are like ICH Health Plans in that slightly over half of your enrollees are individuals or families, *** percent of your enrollees are indigent, you provide services to Medicaid and Medicare enrollees, and you are community controlled. You also state that you are different from the organization in Vision Service Plan, Inc. v. US, 2006-1 USTC ¶50,173 (E.D. Cal 2005), aff'd, 2008-1 USTC ¶50,160 (9th Cir. 2008), cert. denied, 129 S.Ct. 898 (2009), which was denied exemption under IRC Section 501(c)(4) by both the IRS and the Courts. You state that you are different from Vision Service Plan because it only offered vision services and was not controlled by tax-exempt organizations and its services and benefits were only open to its members. Our response to your position You are not an arranger HMO, or other HMO like ICH Health Plans. 1 1 Further IRS administrative rulings issued to another entity regarding its exempt status are applicable only to that entity and not precedential guidance applicable to other applications for exemption, each of which is decided on the particular facts and circumstances. "Health maintenance organizations issue contracts under which they agree to provide or arrange for a comprehensive set of medical services for subscribers in exchange for periodic payments that do not vary with the extent or type of services provided. HMOs provide medical care to subscribers through selected physicians, hospitals, and other providers who are affiliated with the HMO in one manner or another. Subscribers are "locked in" to the HMO-affiliated providers, and receive no benefits for nonemergency services obtained from outside providers without prior HMO authorization. It is this limitation, along with an increased emphasis on preventive care, that distinguishes HMOs from traditional health care insurance." GCM 39829. Stated differently, HMOs are voluntary prepaid health plans which provide individuals (or groups) with a vehicle to prepay medical expenses. The individual (or group) pays a fixed fee with the understanding that when the need for hospitalization or other medical services arises the prepaid health care plan will either cover the costs or provide the needed services. Arranger HMOs directly arrange services for members through contracted arrangements with providers at their own facilities. Further, not all HMOs qualify for exemption under IRC Section 501(c)(4). See, for example, Rev.Rul. 86-98 (holding that a physician-controlled IPA that contracted with HMOs did not qualify under Section 501(c)(4) because it operated primarily to benefit the physicians); see also GCM 38894, EE-75-78 (Sept. 3, 1982) (same result). You do not operate a prepaid health plan, nor do you provide or arrange for health care, nor do you utilize your own facilities. You provide third party administrative services which facilitate fulfilment of prescription drugs and similar medical items prescribed by unrelated providers using your contracted network of retail pharmacies, which presumably largely consist of for-profit entities. Your proprietary business model facilities offering the prescribed products at lower prices to the end consumer, which may be a laudable goal; however, the products are still being purchased at a negotiated price. You do not arrange for the products to be provided below cost but rather charge less fees than the middleman. For individuals to access your services through a plan sponsor, you arrange payment of that price through the plan sponsor. For individuals who access your services through an H membership or otherwise access your discounts at a retail pharmacy, the individual pays the negotiated price directly. While you may be structured to provide for majority control of your board by organizations exempt under IRC Section 501(c)(3), like Vision Service Plan you provide a specific service and you have not demonstrated how your primary purpose is other than to provide these services through plan sponsors or contractual arrangements for members of entities like H. You state that you provide your services through local government and charitable entities to indigent persons and to Medicare and Medicaid enrollees, however, even if these were found to be social welfare activities, these are not your primary services based on your projected enrollments. Further, the enrollees are the indirect beneficiaries of the lower prices that you negotiate on behalf of the plan sponsors for the Medicare and Medicaid enrollees, who compensate you for your administrative services and the costs of the prescribed drugs at the negotiated rates. Conclusion Even though you are organized as a nonprofit corporation, you are not and will not be operated exclusively for the promotion of social welfare. Therefore, you do not qualify under IRC Section 501(c)(4). If you agree If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements. If you don't agree You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a protest within 30 days of the date of this letter. You must include: - Your name, address, employer identification number (EIN), and a daytime phone number - A statement of the facts, law, and arguments supporting your position - A statement indicating whether you are requesting an Appeals Office conference - The signature of an officer, director, trustee, or other official who is authorized to sign for the organization or your authorized representative - The following declaration: For an officer, director, trustee, or other official who is authorized to sign for the organization: Under penalties of perjury, I declare that I have examined this request, or this modification to the request, including accompanying documents, and to the best of my knowledge and belief, the request or the modification contains all relevant facts relating to the request, and such facts are true, correct, and complete. Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney. We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't given us a basis for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)). Where to send your protest Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address: U.S. mail: Internal Revenue Service EO Determinations Quality Assurance Mail Stop 6403 PO Box 2508 Cincinnati, OH 45201 Street address for delivery service: Internal Revenue Service EO Determinations Quality Assurance 550 Main Street, Mail Stop 6403 Cincinnati, OH 45202 You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that they received it. You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at the top of this letter. Contacting the Taxpayer Advocate Service The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. We sent a copy of this letter to your representative as indicated in your power of attorney. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements cc:

Private Letter Ruling Number: 202419016 Internal Revenue Service February 9, 2024 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202419016 Release Date: 5/10/2024 Index Number: 368.04-00, 355.00-00 [Third Party Communication: Date of Communication: Month DD, YYYY] Person To Contact: ID No. Telephone Number: Refer Reply To: CC:CORP:2 PLR-121713-23 Date: February 9, 2024 Dear ******: This letter responds to your letter dated October 20, 2023, as supplemented by subsequent information and documentation, requesting rulings on certain U.S. federal income tax consequences of a series of proposed transactions (collectively, the "Proposed Transaction"). This letter is issued pursuant to Rev.Proc. 2017-52, 2017-41 I.R.B. 283, regarding one or more "Covered Transactions" under sections 355 and 368 of the Internal Revenue Code (the "Code"). This office expresses no opinion as to any issue not specifically addressed by the rulings below. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party. This office has not verified any of the materials submitted in support of the request for rulings. Verification of the information, representations, and other data may be required as part of the audit process. This office has made no determination regarding whether either the Controlled 1 Distribution (as defined below) or the Distribution (as defined below): (i) satisfies the business purpose requirement of Treas.Reg. § 1.355-2(b); (ii) is used principally as a device for the distribution of the earnings and profits of the distributing corporation or the controlled corporation or both (see section 355(a)(1)(B) and Treas.Reg. § 1.355-2(d)); or (iii) is part of a plan (or series of related transactions) pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent or greater interest in the distributing corporation or the controlled corporation, or any predecessor or successor of the distributing corporation or the controlled corporation, within the meaning of Treas.Reg. § 1.355-8 (see section 355(e)(2)(A)(ii) and Treas.Reg. § 1.355-7). Summary of Facts Distributing, a Country A publicly traded corporation, is the ultimate parent of a worldwide group that includes corporations, partnerships, and entities disregarded for U.S. federal income tax purposes from the sole regarded owner under Treas.Reg. § 301.7701-3 (each, a "DRE") (collectively, the "Distributing Group"). The Distributing Group's business operations consist of Business A, Business B, and Business C (Business A and Business C are collectively referred to as the "Remaining Businesses"). The operations associated with Business A are conducted in Country A, Country B, and Country C. The operations associated with Business B and Business C are conducted in Country A and Country B. Distributing has one class of common stock outstanding (the "Distributing Common Stock") and a separate series of preferred stock outstanding (the "Distributing Preferred Stock"). Distributing owns all of the Distributing 1 common stock (the "Distributing 1 Common Stock"). Distributing 1 owns all the stock of (i) Business B HoldCo, a Country A entity classified as a corporation for U.S. federal income tax purposes (the "Business B HoldCo Common Stock"), (ii) Remaining Businesses HoldCo, a State A corporation, (iii) FDRE 1, a Country A entity classified as a DRE, and (iv) directly and indirectly, the equity of corporations, partnerships, and DREs that conduct the Remaining Businesses. Distributing 1 also owns all the voting trust units of Trust, a Country A trust classified as a DRE. Trust facilitates third-party financing arrangements for the Distributing Group. FDRE 1 owns all the stock of FSub 1, a Country A entity classified as a corporation for U.S. federal income tax purposes. FSub 1 owns all the equity interests of FDRE 2, a Country A entity classified as a DRE. FDRE 2 owns all the equity interests of FDRE 3, a Country D LLC classified as a DRE, and FDRE 4, a Country E entity classified as a DRE. Business B HoldCo owns, directly and indirectly, the equity of corporations, partnerships, and DREs that conduct Business B. Business B HoldCo owns all of (i) the equity interests of Domestic Business B HoldCo, a State B LLC classified as a corporation for U.S. federal income tax purposes, (ii) the stock of Foreign Business B HoldCo, a Country A entity classified as a corporation for U.S. federal income tax purposes, (iii) the stock of FSub 2, a Country A entity classified as a corporation for U.S. federal income tax purposes, and (iv) the stock of FSub 3, a Country A entity classified as a corporation for U.S. federal income tax purposes. Foreign Business B HoldCo, FSub 2 and FSub 3, own, directly and indirectly, equity interests in partnerships that conduct the Country A portion of Business B (the "Business B Partnerships"). Domestic Business B HoldCo is (i) the parent company of a U.S. group of entities that includes corporations, partnerships, and DREs (collectively, the "Domestic Business B Group"), and (ii) the common parent of an affiliated group of corporations that files a consolidated U.S. federal income tax return in accordance with section 1502 (the "Business B Consolidated Group"). Domestic Business B HoldCo owns all the stock of Sub 1 and Sub 2, each of which is a State B corporation. The Domestic Business B Group conducts Domestic Business B. Sub 2 owns, among other things, all the membership interests of Sub 3, a State B LLC classified as a corporation for U.S. federal income tax purposes. For more than five years, the Distributing Group has conducted each of Business A and Business B. Financial information has been received indicating that Business A and B have each had gross receipts and operating expenses representing the active conduct of a trade or business for at least the past five years. Before Date 1, in transactions unrelated to the Internal Preparatory Transactions a nd the Proposed Transaction (described below), Sub 2 and Sub 3 transferred business assets to a member of the consolidated group engaged in one of the Remaining Businesses. Sub 2 and Sub 3 recognized losses under section 311 (as modified by Treas.Reg. § 1.1502-13) as a result of intercompany distributions (the deferred intercompany transactions or "DITs"). Internal Preparatory Transactions To facilitate the Proposed Transaction, the Distributing Group executed certain internal preparatory transactions. Specifically, the Distributing Group undertook a number of restructuring steps to (i) separate Domestic Business B from the Domestic Remaining Businesses, and (ii) combine Domestic Business B and Foreign Business B under Business B HoldCo (collectively, the "Internal Preparatory Transactions"). Among other transactions, the Internal Preparatory Transactions include the following steps: 1. Remaining Businesses HoldCo contributed the stock of Sub 1 and Sub 2 to newly formed Domestic Business B HoldCo in exchange for (i) Domestic Business B HoldCo stock, (ii) the assumption of liabilities, and (iii) the Domestic Business B HoldCo Securities. 2. Remaining Businesses HoldCo transferred the Domestic Business B HoldCo Securities to FDRE 3 in repayment of indebtedness in the amount of d. 3. Remaining Business HoldCo distributed all the stock of Domestic Business B HoldCo to Distributing 1. 4. Distributing 1 contributed its equity interests in the Business B Partnerships to newly formed Foreign Business B HoldCo in exchange for debt and equity of Foreign Business B HoldCo. 5. Distributing 1 contributed the following to newly formed Business B HoldCo in exchange for all the Business B HoldCo Common Stock: (i) the stock of FSub 2 and FSub 3, (ii) the stock of Foreign Business B HoldCo, and (iii) the stock of Domestic Business B HoldCo. 6. Prior to Transaction 1 (described below), (i) Domestic Business B HoldCo may make a distribution of cash to Business B HoldCo, and, in such case, (ii) Business B HoldCo would make a distribution of cash to Distributing 1. Any such distributions will be treated as section 301 distributions. Proposed Transaction For what are represented to be valid corporate business purposes (the "Corporate Business Purposes"), the Distributing Group proposes to separate Business B from the Remaining Businesses into Controlled, a separate, newly formed Country A publicly traded corporation (the "Separation"). Specifically, Distributing proposes to engage in the following steps to achieve the Separation--i.e., the Proposed Transaction: 1. FDRE 3 will transfer the Domestic Business B HoldCo Securities to Distributing 1. 2. Distributing 1 will use the Domestic Business B HoldCo Securities to repay a portion of its third-party debt. 3. Distributing 1 will file Articles of Amendment to create and authorize the issuance of (i) an unlimited number of new shares of Distributing 1 Common Stock, and (ii) an unlimited number of Distributing 1 preferred shares. The existing shares of Distributing 1 Common Stock held by Distributing will be exchanged for (i) new shares of Distributing 1 Common Stock and (ii) Distributing 1 preferred shares with a redemption value equal to the value of Business B HoldCo (the "Distributing 1 Special Shares"). 4. Distributing will transfer the Distributing 1 Special Shares to Controlled 1, a newly formed Country A corporation, in exchange for all the common stock of Controlled 1 (the "Controlled 1 Common Stock"). 5. Distributing 1 will transfer all of the Business B HoldCo Common Stock to Controlled 1 in exchange for Controlled 1 preferred shares with a redemption value equal to the value of Business B HoldCo (the "Controlled 1 Special Shares"). 6. Distributing 1 and Controlled 1 will each redeem their respective Special Shares in exchange for promissory notes of Distributing 1 and Controlled 1, respectively ("Transaction 1 Promissory Notes"), in payment of the redemption price of their respective Special Shares. 7. Transaction 1 Promissory Notes will then be set off against each other and cancelled. Steps 3 through 7 are collectively referred to as "Transaction 1." 8. Under Country A law, Distributing will undergo a reorganization of capital whereby the holders of Distributing Common Stock will exchange their existing Distributing Common Stock for (i) new shares of Distributing Common Stock and (ii) Distributing preferred shares with a redemption value equal to the value of Controlled 1 (the "Distributing Special Shares"). In addition, under the laws of Country A, the following Steps 9 through 12 will also occur. 9. Holders of Distributing Common Stock will transfer the Distributing Special Shares to Controlled, a newly formed Country A corporation, in exchange for all the common stock of Controlled (the "Controlled Common Stock"). 10. Distributing will transfer all of the Controlled 1 Common Stock to Controlled in exchange for Controlled preferred shares with a redemption value equal to the value of Controlled 1 (the "Controlled Special Shares"). 11. Distributing and Controlled will each redeem their respective Special Shares in exchange for promissory notes of Distributing and Controlled, respectively("Transaction 2 Promissory Notes"), in payment of the redemption price of their respective Special Shares. 12. Transaction 2 Promissory Notes will then be set off against each other and cancelled. Steps 8 through 12 are collectively referred to as "Transaction 2." 13. Foreign Business B HoldCo and Domestic Business B HoldCo, and their affiliates, will borrow approximately b from third-party lenders and will use such proceeds to repay the Historic Distributing Group Debt. All or a portion of these borrowings may occur prior to, or contemporaneous with, the other steps of the Proposed Transaction. In connection with the Proposed Transaction, it is anticipated that Distributing and Controlled (and their respective affiliates, as applicable) will enter into certain agreements that will address continuing arrangements between Distributing and Controlled (and their respective affiliates, as applicable) following the Separation (collectively, the "Continuing Arrangements"). All of the Continuing Arrangements will be based on arm's-length terms and conditions, including arm's-length pricing, except with respect to certain payments made pursuant to the transition services agreement that may be priced on a cost or cost-plus basis for a period not to exceed c years, other than as required to complete work orders or similar arrangements agreed during the initial period. Following the Proposed Transaction, Distributing and Controlled will operate as independent companies having separate boards of directors. Representations Distributing has made the following representations with respect to the Proposed Transaction. Transaction 1 With respect to Transaction 1, except as otherwise set forth below, Distributing makes all of the representations in Section 3 of Appendix A to Rev.Proc. 2017-52. Distributing makes each of the representations with the understanding that for U.S. federal income tax purposes, Transaction 1 will be treated as if (i) Distributing 1 contributed all the Business B HoldCo Common Stock to Controlled 1 in exchange for all the Controlled 1 Common Stock (the "Controlled 1 Contribution"), and (ii) Distributing 1 distributed all the Controlled 1 Common Stock to Distributing (the "Controlled 1 Distribution"). As such, the Controlled 1 Contribution and Controlled 1 Distribution should be deemed transactions for U.S. federal income tax purposes. Therefore, Distributing hereby modifies all representations it makes in section 3 of the Appendix to Rev.Proc. 2017-52 regarding the Controlled 1 Distribution and Controlled 1 Contribution to include the language "deemed" where applicable. Distributing has made the following alternative representations: Representations 3(a), 8(b), 11(a), 15(a), 22(a), 31(a), and 41(a). Distributing has not made the following representations, which do not apply to Transaction 1: Representations 7, 17, 19, 20, 24, 25, 35, 36, 38, 39, and 40. Distributing has made the following modified representations: Representation 32: Except for amounts payable under the Continuing Arrangements or liabilities arising in the ordinary course of business, no intercorporate debt will exist between Distributing 1 and Controlled 1 (and their respective affiliates, as applicable) at the time of, or subsequent to, the Controlled 1 Distribution (as defined below). Representation 33: Except pursuant to the Continuing Arrangements, payments made in connection with all continuing transactions between Distributing 1 and Controlled 1 (or their respective affiliates) after the Controlled 1 Distribution (as defined below) will be for fair market value based on arm's-length terms. Transaction 2 With respect to Transaction 2, except as otherwise set forth below, Distributing makes all of the representations in Section 3 of Appendix A to Rev.Proc. 2017-52. Distributing makes each of the representations with the understanding that for U.S. federal income tax purposes, Transaction 2 will be treated as if (i) Distributing contributed all the Controlled 1 Common Stock to Controlled in exchange for all the Controlled Common Stock (the "Contribution"), and (ii) Distributing distributed all the Controlled Common Stock to the holders of Distributing Common Stock (the "Distribution"). As such, the Contribution and Distribution should be deemed transactions for U.S. federal income tax purposes. Therefore, Distributing hereby modifies all representations it makes in section 3 of the Appendix to Rev.Proc. 2017-52 regarding the Distribution and Contribution to include the language "deemed" where applicable. Distributing has made the following alternative representations: Representations 3(a), 8(a), 11(a), 15(a), 22(a), 31(a), and 41(a). Distributing has not made the following representations, which do not apply to Transaction 2: Representations 7, 17, 19, 20, 24, 25, 35, 36, 38, 39, and 40. Distributing has made the following modified representations: Representation 32: Except for amounts payable under the Continuing Arrangements or liabilities arising in the ordinary course of business, no intercorporate debt will exist between Distributing and Controlled (and their respective affiliates, as applicable) at the time of, or subsequent to, the Distribution (as defined below). Representation 33: Except pursuant to the Continuing Arrangements, payments made in connection with all continuing transactions between Distributing and Controlled (or their respective affiliates) after the Distribution (as defined below) will be for fair market value based on arm's-length terms. Representation 37: Except for the DITs, there is no loss subject to Treas.Reg. § 1.1502-13 that will be taken into account as a result of a transaction related to the distribution. Rulings Based solely on the information submitted and the representations made, we rule as follows with respect to the Proposed Transaction: Transaction 1 1. For U.S. federal income tax purposes, Transaction 1 will be treated as if (i) Distributing 1 contributed all the Business B HoldCo Common Stock to Controlled 1 in exchange for all the Controlled 1 Common Stock ( i.e., the Controlled 1 Contribution), and (ii) Distributing 1 distributed all the Controlled 1 Common Stock to Distributing ( i.e., the Controlled 1 Distribution) (Rev.Rul. 77-191, 1971-1 C.B. 94; Rev.Rul. 57-311, 1957-2 C.B. 243). 2. The Controlled 1 Contribution, together with the Controlled 1 Distribution, will be a reorganization under section 368(a)(1)(D). Distributing 1 and Controlled 1 will each be a "party to a reorganization" within the meaning of section 368(b). 3. No gain or loss will be recognized by Distributing 1 in the Controlled 1 Contribution (section 361(a)). 4. No gain or loss will be recognized by Controlled 1 in the Controlled 1 Contribution (section 1032(a)). 5. The basis in each asset received by Controlled 1 in the Controlled 1 Contribution will be the same as the basis of that asset in the hands of Distributing 1 immediately before the Controlled 1 Contribution (section 362(b)). 6. The holding period in each asset received by Controlled 1 in the Controlled 1 Contribution will include the period during which Distributing 1 held that asset (section 1223(2)). 7. Distributing will recognize no gain or loss (and no amount will be includible in income) upon the receipt of Controlled 1 stock in the Controlled 1 Distribution (section 355(a)). 8. Distributing 1 will recognize no gain or loss upon the Controlled 1 Distribution (section 361(c)). 9. The holding period of the Controlled 1 Common Stock received by Distributing in the Controlled 1 Distribution will include the holding period of the Distributing 1 Common Stock with respect to which the distribution of Controlled 1 Common Stock will be made in the case of the Controlled 1 Distribution, provided that the Distributing 1 Common Stock is held as a capital asset on the date of the distribution (section 1223(1)). 10. Earnings and profits, if any, will be allocated between Distributing 1 and Controlled 1 in accordance with section 312(h) and Treas.Reg. § 1.312-10(a). Transaction 2 11. For U.S. federal income tax purposes, Transaction 2 will be treated as if (i) Distributing contributed all the Controlled 1 Common Stock to Controlled in exchange for all the Controlled Common Stock ( i.e., the Contribution), and (ii) Distributing distributed all the Controlled Common Stock to the holders of Distributing Common Stock ( i.e., the Distribution) (Rev.Rul. 77-191, 1971-1 C.B. 94; Rev.Rul. 57-311, 1957-2 C.B. 243). 12. The Contribution, together with the Distribution, will be a reorganization under section 368(a)(1)(D). Distributing and Controlled will each be a "party to a reorganization" within the meaning of section 368(b). 13. No gain or loss will be recognized by Distributing in the Contribution (section 361(a)). 14. No gain or loss will be recognized by Controlled in the Contribution (section 1032(a)). 15. The basis in each asset received by Controlled in the Contribution will be the same as the basis of that asset in the hands of Distributing immediately before the Contribution (section 362(b)). 16. The holding period in each asset received by Controlled in the Contribution will include the period during which Distributing held that asset (section 1223(2)). 17. Holders of Distributing Common Stock will recognize no gain or loss (and no amount will be includible in income) upon receipt of Controlled Common Stock in the Distribution (section 355(a)). 18. Distributing will recognize no gain or loss upon the Distribution (section 361(c)). 19. The aggregate basis of the Distributing Common Stock and the Controlled Common Stock in the hands of the holders of Distributing Common Stock immediately after the Distribution will be the same as the aggregate basis of the Distributing Common Stock held by holders of Distributing Common Stock immediately before the Distribution allocated between Distributing Common Stock and Controlled Common Stock in proportion to the fair market value of each immediately following the Distribution (Treas.Reg. § 1.358-2(a)(2); section 358(b)(2) and (c)). 20. The holding period of the Controlled Common Stock received by the Distributing shareholders in the Distribution will include the holding period of the Distributing Common Stock with respect to which the distribution of Controlled Common Stock will be made in the case of the Distribution, provided that the Distributing Common Stock is held as a capital asset on the date of the distribution (section 1223(1)). 21. Earnings and profits, if any, will be allocated between Distributing and Controlled in accordance with section 312(h) and Treas.Reg. § 1.312-10(a). Caveats Except as expressly provided herein, no opinion is expressed or implied concerning the tax treatment of the Proposed Transaction under any provision of the Code and regulations or the tax treatment of any condition existing at the time of, or effects resulting from, the Proposed Transaction that is not specifically covered by the above rulings. In addition, no opinion is expressed or implied concerning the tax treatment of the Internal Preparatory Transactions including the distribution of the stock or securities of Domestic Business B HoldCo (as well as any subsequent transfers of such securities). Procedural Statements The ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their returns that provides the date on and control number (PLR-121713-23) of the letter ruling. Pursuant to a Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives. Sincerely, Gerald B. Fleming Senior Technician Reviewer, Branch 2 (Corporate) cc:

Notice 2020-62 Internal Revenue Service 2020-35 I.R.B. 476 Safe Harbor Explanations - Eligible Rollover Distributions Notice 2020-62 I. PURPOSE This notice modifies the two safe harbor explanations in Notice 2018-74, 2018-40 I.R.B. 529, that may be used to satisfy the requirement under § 402(f) of the Internal Revenue Code (Code) that certain information be provided to recipients of eligible rollover distributions. The safe harbor explanations as modified by this notice take into consideration certain legislative changes, including changes related to the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which was enacted as part of the Further Consolidated Appropriations Act, 2020, Pub. L. 116-94, 133 Stat. 2534 (2019). The SECURE Act adds § 72(t)(2)(H) of the Code as a new exception to the 10% additional tax under § 72(t)(1) for qualified birth or adoption distributions. The SECURE Act also includes an amendment to § 401(a)(9)(C)(i)(I) of the Code that increases the age for required minimum distributions to age 72 for employees born after June 30, 1949. To assist with the implementation of the modified safe harbor explanations, this notice includes an appendix with two model safe harbor explanations: one for distributions that are not from a designated Roth account, and the other for distributions from a designated Roth account. II. BACKGROUND A. Section 402(f) Section 402(f) requires the plan administrator of a plan qualified under § 401(a) to provide the written explanation described in § 402(f)(1) to any recipient of an eligible rollover distribution, as defined in § 402(c)(4). In addition, §§ 403(a)(4)(B) and 457(e)(16)(B) require the plan administrator of a § 403(a) plan, or an eligible § 457(b) plan maintained by a governmental employer described in § 457(e)(1)(A), to provide the written explanation to any recipient of an eligible rollover distribution. Further, § 403(b)(8)(B) requires a payor under a § 403(b) plan to provide the written explanation to any recipient of an eligible rollover distribution. Section 1.402(f)-1, Q&A-1(a), provides that the plan administrator of a qualified plan is required, within a reasonable period of time before making an eligible rollover distribution, to provide the distributee with the written explanation described in § 402(f) (§ 402(f) notice). Notice 2018-74 sets forth two safe harbor explanations that reflect relevant law as of September 19, 2018: one safe harbor explanation is for payments not from a designated Roth account and the other safe harbor explanation is for payments from a designated Roth account. Notice 2018-74 provides that the safe harbor explanations may be used by plan administrators and payors to satisfy § 402(f) to the extent that the explanations accurately reflect current law. B. Recent Statutory Changes Related to Distributions 1. Qualified Birth or Adoption Distributions Section 72(t)(1) generally provides for a 10% additional tax on a distribution from a qualified retirement plan, unless the distribution qualifies for one of the exceptions in § 72(t)(2). Section 113 of the SECURE Act amended § 72(t)(2) of the Code to add § 72(t)(2)(H), which permits an individual to receive up to $5,000 for a qualified birth or adoption distribution from an applicable eligible retirement plan (defined in § 72(t)(2)(H)(vi)(I) as an eligible retirement plan as defined in § 402(c)(8)(B) other than a defined benefit plan). The distribution is not subject to the 10% additional tax under § 72(t)(1) to the extent it meets the requirements of a qualified birth or adoption distribution. A qualified birth or adoption distribution is defined in § 72(t)(2)(H)(iii)(I) as any distribution from an applicable eligible retirement plan to an individual if made during the 1-year period beginning on the date on which the child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized. Section 72(t)(2)(H)(v)(I) provides that the individual may recontribute a qualified birth or adoption distribution (not to exceed the amount of the distribution) to an applicable eligible retirement plan in which the taxpayer is a beneficiary and to which a rollover can be made. However, § 72(t)(2)(H)(vi)(II) provides that a qualified birth or adoption distribution is not treated as an eligible rollover distribution for purposes of the direct rollover rules of § 401(a)(31), the notice requirement under § 402(f), or the mandatory withholding rules under § 3405. Thus, although a qualified birth or adoption distribution generally may be recontributed to an applicable eligible retirement plan, a plan administrator is not required to provide a § 402(f) notice to a recipient of a qualified birth or adoption distribution. 2. Required Minimum Distributions Section 114 of the SECURE Act amended § 401(a)(9) of the Code to change the required beginning date applicable to § 401(a) plans and other eligible retirement plans described in § 402(c)(8), including a § 401(a) qualified plan, a § 403(a) annuity plan, a § 403(b) annuity contract, a § 457(b) plan maintained by a governmental employer, and an individual retirement account or annuity (IRA) described in § 408(a) or (b). The new required beginning date for an employee or an IRA owner is April 1 of the calendar year following the calendar year in which the individual attains age 72, rather than April 1 of the calendar year following the calendar year in which the individual attains age 701⁄2. This amendment to § 401(a)(9) is effective for distributions required to be made after December 31, 2019, with respect to individuals who will attain age 701⁄2 after that date. As a result of this change, employees and IRA owners who will attain age 701⁄2 in 2020 will not have a required beginning date of April 1, 2021. 3. Coronavirus-related Distributions Section 2202(a) of the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116-136, 134 Stat. 281 (2020) (CARES Act) permits an individual to receive a coronavirus-related distribution from an eligible retirement plan (as defined in § 402(c)(8)(B)). Section 2202(a)(4)(A) of the CARES Act defines a coronavirus-related distribution as any distribution from an eligible retirement plan made on or after January 1, 2020, and before December 31, 2020, to a qualified individual. Section 2202(a)(2) of the CARES Act limits the amount of the aggregate distributions from all eligible retirement plans that can be treated as coronavirus-related distributions to no more than $100,000. A coronavirus-related distribution under section 2202(a) of the CARES Act is not subject to the 10% additional tax under § 72(t)(1). In addition, the coronavirus-related distribution may be included in gross income ratably over the 3-year period beginning with the taxable year of the distribution. Section 2202(a)(3) of the CARES Act provides that a qualified individual may recontribute a coronavirus-related distribution (not to exceed the amount of the distribution) to an applicable eligible retirement plan in which the taxpayer is a beneficiary and to which a rollover can be made. However, a coronavirus-related distribution is not an eligible rollover distribution for purposes of the direct rollover rules of § 401(a)(31), the notice requirement under § 402(f), or the mandatory withholding rules under § 3405. Thus, although a coronavirus-related distribution generally may be recontributed to an applicable eligible retirement plan, a plan administrator is not required to provide a § 402(f) notice to a recipient of a coronavirus-related distribution. For more information relating to section 2202 of the CARES Act, see Notice 2020-50, 2020-28 I.R.B. 35. III. MODIFICATIONS TO THE SAFE HARBOR EXPLANATIONS Two updated safe harbor explanations are appended to this notice (see the Appendix). The safe harbor explanations modify the safe harbor explanations in Notice 2018-74 to reflect certain legislative changes made after October 1, 2018, including: (1) the exception to the 10% additional tax under § 72(t)(1) for qualified birth or adoption distributions, and (2) the increase to age 72 for minimum required distributions for employees born after June 30, 1949. The safe harbor explanations also include other minor modifications to improve their clarity, including adding that payments of certain premiums for health and accident insurance are not eligible rollover distributions, rearranging bullets for readability, and spelling out acronyms when first used. The updated safe harbor explanations provided in this notice may be used by plan administrators and payors to satisfy § 402(f). However, the updated safe harbor explanations will not satisfy § 402(f) to the extent the explanations are no longer accurate because of a change in the relevant law occurring after August 6, 2020. The first safe harbor explanation reflects the rules relating to distributions not from a designated Roth account. Thus, the first safe harbor explanation should be used only for a distribution that is not from a designated Roth account. The second safe harbor explanation reflects the rules relating to distributions from a designated Roth account. Thus, the second safe harbor explanation should be used only for a distribution from a designated Roth account. Both explanations should be provided to a participant if the participant is eligible to receive eligible rollover distributions from both a designated Roth account and an account other than a designated Roth account. The safe harbor explanation in this notice for distributions not from a designated Roth account meets the requirements of § 402(f) for an eligible rollover distribution that is not from a designated Roth account if provided to the recipient of the eligible rollover distribution within a reasonable period of time before the distribution is made. Similarly, the safe harbor explanation in this notice for distributions from a designated Roth account meets the requirements of § 402(f) for an eligible rollover distribution from a designated Roth account if provided to the recipient of the eligible rollover distribution within a reasonable period of time before the distribution is made. Section 1.402(f)-1, Q&A-2, provides, in general, that a reasonable period of time for providing an explanation is no less than 30 days (subject to waiver) and no more than 90 days before the date on which the distribution is made. However, proposed § 1.402(f)-1, Q&A-2(a), pursuant to section 1102(a)(1)(B) of the Pension Protection Act of 2006, Pub. L. 109-280, 120 Stat. 780 (2006), provides that a notice required to be provided under § 402(f) may be provided to a participant as much as 180 days before the date on which the distribution is made (or the annuity starting date). These proposed regulations further provide that, with respect to the extended period for notices, plans may rely on the proposed regulations for notices provided during the period beginning on the first day of the first plan year beginning on or after January 1, 2007, and ending on the effective date of final regulations. Thus, the § 402(f) notice may be provided as many as 180 days before the date on which the distribution is made (or the annuity starting date). A plan administrator or payor may customize a safe harbor explanation by omitting any information that does not apply to the plan. For example, if the plan does not hold after-tax employee contributions, it would be appropriate to eliminate the section "If your payment includes after-tax contributions" in the explanation for payments not from a designated Roth account. Similarly, if the plan does not provide for distributions of employer stock or other employer securities, it would be appropriate to eliminate the section "If your payment includes employer stock that you do not roll over." Other information that may not be relevant to a particular plan includes, for example, the sections "If your payment is from a governmental section 457(b) plan" and "If you are an eligible retired public safety officer and your payment is used to pay for health coverage or qualified long-term care insurance." In addition, the plan administrator or payor may provide additional information with a safe harbor explanation if the information is not inconsistent with § 402(f). Alternatively, a plan administrator or payor may satisfy § 402(f) by providing an explanation that is different from a safe harbor explanation. Any explanation must include the information required by § 402(f) and must be written in a manner designed to be easily understood. IV. EFFECT ON OTHER DOCUMENTS Notice 2018-74 is modified. DRAFTING INFORMATION The principal author of this notice is Vernon Carter of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxation). For further information regarding this notice, contact Mr. Carter at (202) 317-6799 (not a toll-free number). Appendix For Payments Not From a Designated Roth Account YOUR ROLLOVER OPTIONS You are receiving this notice because all or a portion of a payment you are receiving from the [INSERT NAME OF PLAN] (the "Plan") is eligible to be rolled over to an IRA or an employer plan. This notice is intended to help you decide whether to do such a rollover. This notice describes the rollover rules that apply to payments from the Plan that are not from a designated Roth account (a type of account in some employer plans that is subject to special tax rules). If you also receive a payment from a designated Roth account in the Plan, you will be provided a different notice for that payment, and the Plan administrator or the payor will tell you the amount that is being paid from each account. Rules that apply to most payments from a plan are described in the "General Information About Rollovers" section. Special rules that only apply in certain circumstances are described in the "Special Rules and Options" section. GENERAL INFORMATION ABOUT ROLLOVERS How can a rollover affect my taxes? You will be taxed on a payment from the Plan if you do not roll it over. If you are under age 591⁄2 and do not do a rollover, you will also have to pay a 10% additional income tax on early distributions (generally, distributions made before age 591⁄2), unless an exception applies. However, if you do a rollover, you will not have to pay tax until you receive payments later and the 10% additional income tax will not apply if those payments are made after you are age 591⁄2 (or if an exception to the 10% additional income tax applies). What types of retirement accounts and plans may accept my rollover? You may roll over the payment to either an IRA (an individual retirement account or individual retirement annuity) or an employer plan (a tax-qualified plan, section 403(b) plan, or governmental section 457(b) plan) that will accept the rollover. The rules of the IRA or employer plan that holds the rollover will determine your investment options, fees, and rights to payment from the IRA or employer plan (for example, IRAs are not subject to spousal consent rules, and IRAs may not provide loans). Further, the amount rolled over will become subject to the tax rules that apply to the IRA or employer plan. How do I do a rollover? There are two ways to do a rollover. You can do either a direct rollover or a 60-day rollover. If you do a direct rollover, the Plan will make the payment directly to your IRA or an employer plan. You should contact the IRA sponsor or the administrator of the employer plan for information on how to do a direct rollover. If you do not do a direct rollover, you may still do a rollover by making a deposit into an IRA or eligible employer plan that will accept it. Generally, you will have 60 days after you receive the payment to make the deposit. If you do not do a direct rollover, the Plan is required to withhold 20% of the payment for federal income taxes (up to the amount of cash and property received other than employer stock). This means that, in order to roll over the entire payment in a 60-day rollover, you must use other funds to make up for the 20% withheld. If you do not roll over the entire amount of the payment, the portion not rolled over will be taxed and will be subject to the 10% additional income tax on early distributions if you are under age 591⁄2 (unless an exception applies). How much may I roll over? If you wish to do a rollover, you may roll over all or part of the amount eligible for rollover. Any payment from the Plan is eligible for rollover, except: - Certain payments spread over a period of at least 10 years or over your life or life expectancy (or the joint lives or joint life expectancies of you and your beneficiary); - Required minimum distributions after age 701⁄2 (if you were born before July 1, 1949), after age 72 (if you were born after June 30, 1949), or after death; - Hardship distributions; - Payments of employee stock ownership plan (ESOP) dividends; - Corrective distributions of contributions that exceed tax law limitations; - Loans treated as deemed distributions (for example, loans in default due to missed payments before your employment ends); - Cost of life insurance paid by the Plan; - Payments of certain automatic enrollment contributions that you request to withdraw within 90 days of your first contribution; - Amounts treated as distributed because of a prohibited allocation of S corporation stock under an ESOP (also, there generally will be adverse tax consequences if you roll over a distribution of S corporation stock to an IRA); and - Distributions of certain premiums for health and accident insurance. The Plan administrator or the payor can tell you what portion of a payment is eligible for rollover. If I don't do a rollover, will I have to pay the 10% additional income tax on early distributions? If you are under age 591⁄2, you will have to pay the 10% additional income tax on early distributions for any payment from the Plan (including amounts withheld for income tax) that you do not roll over, unless one of the exceptions listed below applies. This tax applies to the part of the distribution that you must include in income and is in addition to the regular income tax on the payment not rolled over. The 10% additional income tax does not apply to the following payments from the Plan: - Payments made after you separate from service if you will be at least age 55 in the year of the separation; - Payments that start after you separate from service if paid at least annually in equal or close to equal amounts over your life or life expectancy (or the joint lives or joint life expectancies of you and your beneficiary); - Payments from a governmental plan made after you separate from service if you are a qualified public safety employee and you will be at least age 50 in the year of the separation; - Payments made due to disability; - Payments after your death; - Payments of ESOP dividends; - Corrective distributions of contributions that exceed tax law limitations; - Cost of life insurance paid by the Plan; - Payments made directly to the government to satisfy a federal tax levy; - Payments made under a qualified domestic relations order (QDRO); - Payments of up to $5,000 made to you from a defined contribution plan if the payment is a qualified birth or adoption distribution; - Payments up to the amount of your deductible medical expenses (without regard to whether you itemize deductions for the taxable year); - Certain payments made while you are on active duty if you were a member of a reserve component called to duty after September 11, 2001 for more than 179 days; - Payments of certain automatic enrollment contributions that you request to withdraw within 90 days of your first contribution; - Payments excepted from the additional income tax by federal legislation relating to certain emergencies and disasters; and - Phased retirement payments made to federal employees. If I do a rollover to an IRA, will the 10% additional income tax apply to early distributions from the IRA? If you receive a payment from an IRA when you are under age 591⁄2, you will have to pay the 10% additional income tax on early distributions on the part of the distribution that you must include in income, unless an exception applies. In general, the exceptions to the 10% additional income tax for early distributions from an IRA are the same as the exceptions listed above for early distributions from a plan. However, there are a few differences for payments from an IRA, including: - The exception for payments made after you separate from service if you will be at least age 55 in the year of the separation (or age 50 for qualified public safety employees) does not apply; - The exception for qualified domestic relations orders (QDROs) does not apply (although a special rule applies under which, as part of a divorce or separation agreement, a tax-free transfer may be made directly to an IRA of a spouse or former spouse); and - The exception for payments made at least annually in equal or close to equal amounts over a specified period applies without regard to whether you have had a separation from service. Additional exceptions apply for payments from an IRA, including: - Payments for qualified higher education expenses; - Payments up to $10,000 used in a qualified first-time home purchase; and - Payments for health insurance premiums after you have received unemployment compensation for 12 consecutive weeks (or would have been eligible to receive unemployment compensation but for self-employed status). Will I owe State income taxes? This notice does not address any State or local income tax rules (including withholding rules). SPECIAL RULES AND OPTIONS If your payment includes after-tax contributions After-tax contributions included in a payment are not taxed. If you receive a partial payment of your total benefit, an allocable portion of your after-tax contributions is included in the payment, so you cannot take a payment of only after-tax contributions. However, if you have pre-1987 after-tax contributions maintained in a separate account, a special rule may apply to determine whether the after-tax contributions are included in the payment. In addition, special rules apply when you do a rollover, as described below. You may roll over to an IRA a payment that includes after-tax contributions through either a direct rollover or a 60-day rollover. You must keep track of the aggregate amount of the after-tax contributions in all of your IRAs (in order to determine your taxable income for later payments from the IRAs). If you do a direct rollover of only a portion of the amount paid from the Plan and at the same time the rest is paid to you, the portion rolled over consists first of the amount that would be taxable if not rolled over. For example, assume you are receiving a distribution of $12,000, of which $2,000 is after-tax contributions. In this case, if you directly roll over $10,000 to an IRA that is not a Roth IRA, no amount is taxable because the $2,000 amount not rolled over is treated as being after-tax contributions. If you do a direct rollover of the entire amount paid from the Plan to two or more destinations at the same time, you can choose which destination receives the after-tax contributions. Similarly, if you do a 60-day rollover to an IRA of only a portion of a payment made to you, the portion rolled over consists first of the amount that would be taxable if not rolled over. For example, assume you are receiving a distribution of $12,000, of which $2,000 is after-tax contributions, and no part of the distribution is directly rolled over. In this case, if you roll over $10,000 to an IRA that is not a Roth IRA in a 60-day rollover, no amount is taxable because the $2,000 amount not rolled over is treated as being after-tax contributions. You may roll over to an employer plan all of a payment that includes after-tax contributions, but only through a direct rollover (and only if the receiving plan separately accounts for after-tax contributions and is not a governmental section 457(b) plan). You can do a 60-day rollover to an employer plan of part of a payment that includes after-tax contributions, but only up to the amount of the payment that would be taxable if not rolled over. If you miss the 60-day rollover deadline Generally, the 60-day rollover deadline cannot be extended. However, the IRS has the limited authority to waive the deadline under certain extraordinary circumstances, such as when external events prevented you from completing the rollover by the 60-day rollover deadline. Under certain circumstances, you may claim eligibility for a waiver of the 60-day rollover deadline by making a written self-certification. Otherwise, to apply for a waiver from the IRS, you must file a private letter ruling request with the IRS. Private letter ruling requests require the payment of a nonrefundable user fee. For more information, see IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs). If your payment includes employer stock that you do not roll over If you do not do a rollover, you can apply a special rule to payments of employer stock (or other employer securities) that are either attributable to after-tax contributions or paid in a lump sum after separation from service (or after age 591⁄2, disability, or the participant's death). Under the special rule, the net unrealized appreciation on the stock will not be taxed when distributed from the Plan and will be taxed at capital gain rates when you sell the stock. Net unrealized appreciation is generally the increase in the value of employer stock after it was acquired by the Plan. If you do a rollover for a payment that includes employer stock (for example, by selling the stock and rolling over the proceeds within 60 days of the payment), the special rule relating to the distributed employer stock will not apply to any subsequent payments from the IRA or, generally, the Plan. The Plan administrator can tell you the amount of any net unrealized appreciation. If you have an outstanding loan that is being offset If you have an outstanding loan from the Plan, your Plan benefit may be offset by the outstanding amount of the loan, typically when your employment ends. The offset amount is treated as a distribution to you at the time of the offset. Generally, you may roll over all or any portion of the offset amount. Any offset amount that is not rolled over will be taxed (including the 10% additional income tax on early distributions, unless an exception applies). You may roll over offset amounts to an IRA or an employer plan (if the terms of the employer plan permit the plan to receive plan loan offset rollovers). How long you have to complete the rollover depends on what kind of plan loan offset you have. If you have a qualified plan loan offset, you will have until your tax return due date (including extensions) for the tax year during which the offset occurs to complete your rollover. A qualified plan loan offset occurs when a plan loan in good standing is offset because your employer plan terminates, or because you sever from employment. If your plan loan offset occurs for any other reason (such as a failure to make level loan repayments that results in a deemed distribution), then you have 60 days from the date the offset occurs to complete your rollover. If you were born on or before January 1, 1936 If you were born on or before January 1, 1936 and receive a lump sum distribution that you do not roll over, special rules for calculating the amount of the tax on the payment might apply to you. For more information, see IRS Publication 575, Pension and Annuity Income. If your payment is from a governmental section 457(b) plan If the Plan is a governmental section 457(b) plan, the same rules described elsewhere in this notice generally apply, allowing you to roll over the payment to an IRA or an employer plan that accepts rollovers. One difference is that, if you do not do a rollover, you will not have to pay the 10% additional income tax on early distributions from the Plan even if you are under age 591⁄2 (unless the payment is from a separate account holding rollover contributions that were made to the Plan from a tax-qualified plan, a section 403(b) plan, or an IRA). However, if you do a rollover to an IRA or to an employer plan that is not a governmental section 457(b) plan, a later distribution made before age 591⁄2 will be subject to the 10% additional income tax on early distributions (unless an exception applies). Other differences include that you cannot do a rollover if the payment is due to an "unforeseeable emergency" and the special rules under "If your payment includes employer stock that you do not roll over" and "If you were born on or before January 1, 1936" do not apply. If you are an eligible retired public safety officer and your payment is used to pay for health coverage or qualified long-term care insurance If the Plan is a governmental plan, you retired as a public safety officer, and your retirement was by reason of disability or was after normal retirement age, you can exclude from your taxable income Plan payments paid directly as premiums to an accident or health plan (or a qualified long-term care insurance contract) that your employer maintains for you, your spouse, or your dependents, up to a maximum of $3,000 annually. For this purpose, a public safety officer is a law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew. If you roll over your payment to a Roth IRA If you roll over a payment from the Plan to a Roth IRA, a special rule applies under which the amount of the payment rolled over (reduced by any after-tax amounts) will be taxed. In general, the 10% additional income tax on early distributions will not apply. However, if you take the amount rolled over out of the Roth IRA within the 5-year period that begins on January 1 of the year of the rollover, the 10% additional income tax will apply (unless an exception applies). If you roll over the payment to a Roth IRA, later payments from the Roth IRA that are qualified distributions will not be taxed (including earnings after the rollover). A qualified distribution from a Roth IRA is a payment made after you are age 591⁄2 (or after your death or disability, or as a qualified first-time homebuyer distribution of up to $10,000) and after you have had a Roth IRA for at least 5 years. In applying this 5-year rule, you count from January 1 of the year for which your first contribution was made to a Roth IRA. Payments from the Roth IRA that are not qualified distributions will be taxed to the extent of earnings after the rollover, including the 10% additional income tax on early distributions (unless an exception applies). You do not have to take required minimum distributions from a Roth IRA during your lifetime. For more information, see IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), and IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). If you do a rollover to a designated Roth account in the Plan You cannot roll over a distribution to a designated Roth account in another employer's plan. However, you can roll the distribution over into a designated Roth account in the distributing Plan. If you roll over a payment from the Plan to a designated Roth account in the Plan, the amount of the payment rolled over (reduced by any after-tax amounts directly rolled over) will be taxed. In general, the 10% additional income tax on early distributions will not apply. However, if you take the amount rolled over out of the Roth IRA within the 5-year period that begins on January 1 of the year of the rollover, the 10% additional income tax will apply (unless an exception applies). If you roll over the payment to a designated Roth account in the Plan, later payments from the designated Roth account that are qualified distributions will not be taxed (including earnings after the rollover). A qualified distribution from a designated Roth account is a payment made both after you are age 591⁄2 (or after your death or disability) and after you have had a designated Roth account in the Plan for at least 5 years. In applying this 5-year rule, you count from January 1 of the year your first contribution was made to the designated Roth account. However, if you made a direct rollover to a designated Roth account in the Plan from a designated Roth account in a plan of another employer, the 5-year period begins on January 1 of the year you made the first contribution to the designated Roth account in the Plan or, if earlier, to the designated Roth account in the plan of the other employer. Payments from the designated Roth account that are not qualified distributions will be taxed to the extent of earnings after the rollover, including the 10% additional income tax on early distributions (unless an exception applies). If you are not a Plan participant Payments after death of the participant. If you receive a distribution after the participant's death that you do not roll over, the distribution generally will be taxed in the same manner described elsewhere in this notice. However, the 10% additional income tax on early distributions and the special rules for public safety officers do not apply, and the special rule described under the section "If you were born on or before January 1, 1936" applies only if the deceased participant was born on or before January 1, 1936. If you are a surviving spouse. If you receive a payment from the Plan as the surviving spouse of a deceased participant, you have the same rollover options that the participant would have had, as described elsewhere in this notice. In addition, if you choose to do a rollover to an IRA, you may treat the IRA as your own or as an inherited IRA. An IRA you treat as your own is treated like any other IRA of yours, so that payments made to you before you are age 591⁄2 will be subject to the 10% additional income tax on early distributions (unless an exception applies) and required minimum distributions from your IRA do not have to start until after you are age 701⁄2 (if you were born before July 1, 1949) or age 72 (if you were born after June 30, 1949). If you treat the IRA as an inherited IRA, payments from the IRA will not be subject to the 10% additional income tax on early distributions. However, if the participant had started taking required minimum distributions, you will have to receive required minimum distributions from the inherited IRA. If the participant had not started taking required minimum distributions from the Plan, you will not have to start receiving required minimum distributions from the inherited IRA until the year the participant would have been age 701⁄2 (if the participant was born before July 1, 1949) or age 72 (if the participant was born after June 30, 1949). If you are a surviving beneficiary other than a spouse. If you receive a payment from the Plan because of the participant's death and you are a designated beneficiary other than a surviving spouse, the only rollover option you have is to do a direct rollover to an inherited IRA. Payments from the inherited IRA will not be subject to the 10% additional income tax on early distributions. You will have to receive required minimum distributions from the inherited IRA. Payments under a QDRO. If you are the spouse or former spouse of the participant who receives a payment from the Plan under a QDRO, you generally have the same options and the same tax treatment that the participant would have (for example, you may roll over the payment to your own IRA or an eligible employer plan that will accept it). However, payments under the QDRO will not be subject to the 10% additional income tax on early distributions. If you are a nonresident alien If you are a nonresident alien and you do not do a direct rollover to a U.S. IRA or U.S. employer plan, instead of withholding 20%, the Plan is generally required to withhold 30% of the payment for federal income taxes. If the amount withheld exceeds the amount of tax you owe (as may happen if you do a 60-day rollover), you may request an income tax refund by filing Form 1040NR and attaching your Form 1042-S. See Form W-8BEN for claiming that you are entitled to a reduced rate of withholding under an income tax treaty. For more information, see also IRS Publication 519, U.S. Tax Guide for Aliens, and IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. Other special rules If a payment is one in a series of payments for less than 10 years, your choice whether to do a direct rollover will apply to all later payments in the series (unless you make a different choice for later payments). If your payments for the year are less than $200 (not including payments from a designated Roth account in the Plan), the Plan is not required to allow you to do a direct rollover and is not required to withhold federal income taxes. However, you may do a 60-day rollover. Unless you elect otherwise, a mandatory cashout of more than $1,000 (not including payments from a designated Roth account in the Plan) will be directly rolled over to an IRA chosen by the Plan administrator or the payor. A mandatory cashout is a payment from a plan to a participant made before age 62 (or normal retirement age, if later) and without consent, where the participant's benefit does not exceed $5,000 (not including any amounts held under the plan as a result of a prior rollover made to the plan). You may have special rollover rights if you recently served in the U.S. Armed Forces. For more information on special rollover rights related to the U.S. Armed Forces, see IRS Publication 3, Armed Forces' Tax Guide. You also may have special rollover rights if you were affected by a federally declared disaster (or similar event), or if you received a distribution on account of a disaster. For more information on special rollover rights related to disaster relief, see the IRS website at www.irs.gov. FOR MORE INFORMATION You may wish to consult with the Plan administrator or payor, or a professional tax advisor, before taking a payment from the Plan. Also, you can find more detailed information on the federal tax treatment of payments from employer plans in: IRS Publication 575, Pension and Annuity Income; IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs); IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs); and IRS Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans). These publications are available from a local IRS office, on the web at www.irs.gov, or by calling 1-800-TAX-FORM. For Payments From a Designated Roth Account YOUR ROLLOVER OPTIONS You are receiving this notice because all or a portion of a payment you are receiving from the [INSERT NAME OF PLAN] (the "Plan") is eligible to be rolled over to a Roth IRA or designated Roth account in an employer plan. This notice is intended to help you decide whether to do a rollover. This notice describes the rollover rules that apply to payments from the Plan that are from a designated Roth account. If you also receive a payment from the Plan that is not from a designated Roth account, you will be provided a different notice for that payment, and the Plan administrator or the payor will tell you the amount that is being paid from each account. Rules that apply to most payments from a designated Roth account are described in the "General Information About Rollovers" section. Special rules that only apply in certain circumstances are described in the "Special Rules and Options" section. GENERAL INFORMATION ABOUT ROLLOVERS How can a rollover affect my taxes? After-tax contributions included in a payment from a designated Roth account are not taxed, but earnings might be taxed. The tax treatment of earnings included in the payment depends on whether the payment is a qualified distribution. If a payment is only part of your designated Roth account, the payment will include an allocable portion of the earnings in your designated Roth account. If the payment from the Plan is not a qualified distribution and you do not do a rollover to a Roth IRA or a designated Roth account in an employer plan, you will be taxed on the portion of the payment that is earnings. If you are under age 591⁄2, a 10% additional income tax on early distributions (generally, distributions made before age 591⁄2) will also apply to the earnings (unless an exception applies). However, if you do a rollover, you will not have to pay taxes currently on the earnings and you will not have to pay taxes later on payments that are qualified distributions. If the payment from the Plan is a qualified distribution, you will not be taxed on any part of the payment even if you do not do a rollover. If you do a rollover, you will not be taxed on the amount you roll over and any earnings on the amount you roll over will not be taxed if paid later in a qualified distribution. A qualified distribution from a designated Roth account in the Plan is a payment made after you are age 591⁄2 (or after your death or disability) and after you have had a designated Roth account in the Plan for at least 5 years. In applying the 5-year rule, you count from January 1 of the year your first contribution was made to the designated Roth account. However, if you did a direct rollover to a designated Roth account in the Plan from a designated Roth account in another employer plan, your participation will count from January 1 of the year your first contribution was made to the designated Roth account in the Plan or, if earlier, to the designated Roth account in the other employer plan. What types of retirement accounts and plans may accept my rollover? You may roll over the payment to either a Roth IRA (a Roth individual retirement account or Roth individual retirement annuity) or a designated Roth account in an employer plan (a tax-qualified plan, section 403(b) plan, or governmental section 457 plan) that will accept the rollover. The rules of the Roth IRA or employer plan that holds the rollover will determine your investment options, fees, and rights to payment from the Roth IRA or employer plan (for example, Roth IRAs are not subject to spousal consent rules, and Roth IRAs may not provide loans). Further, the amount rolled over will become subject to the tax rules that apply to the Roth IRA or the designated Roth account in the employer plan. In general, these tax rules are similar to those described elsewhere in this notice, but differences include: - If you do a rollover to a Roth IRA, all of your Roth IRAs will be considered for purposes of determining whether you have satisfied the 5-year rule (counting from January 1 of the year for which your first contribution was made to any of your Roth IRAs). - If you do a rollover to a Roth IRA, you will not be required to take a distribution from the Roth IRA during your lifetime and you must keep track of the aggregate amount of the after-tax contributions in all of your Roth IRAs (in order to determine your taxable income for later Roth IRA payments that are not qualified distributions). - Eligible rollover distributions from a Roth IRA can only be rolled over to another Roth IRA. How do I do a rollover? There are two ways to do a rollover. You can either do a direct rollover or a 60-day rollover. If you do a direct rollover, the Plan will make the payment directly to your Roth IRA or designated Roth account in an employer plan. You should contact the Roth IRA sponsor or the administrator of the employer plan for information on how to do a direct rollover. If you do not do a direct rollover, you may still do a rollover by making a deposit (generally within 60 days) into a Roth IRA, whether the payment is a qualified or nonqualified distribution. In addition, you can do a rollover by making a deposit within 60 days into a designated Roth account in an employer plan if the payment is a nonqualified distribution and the rollover does not exceed the amount of the earnings in the payment. You cannot do a 60-day rollover to an employer plan of any part of a qualified distribution. If you receive a distribution that is a nonqualified distribution and you do not roll over an amount at least equal to the earnings allocable to the distribution, you will be taxed on the amount of those earnings not rolled over, including the 10% additional income tax on early distributions if you are under age 591⁄2 (unless an exception applies). If you do a direct rollover of only a portion of the amount paid from the Plan and a portion is paid to you at the same time, the portion directly rolled over consists first of earnings. If you do not do a direct rollover and the payment is not a qualified distribution, the Plan is required to withhold 20% of the earnings for federal income taxes (up to the amount of cash and property received other than employer stock). This means that, in order to roll over the entire payment in a 60-day rollover to a Roth IRA, you must use other funds to make up for the 20% withheld. How much may I roll over? If you wish to do a rollover, you may roll over all or part of the amount eligible for rollover. Any payment from the Plan is eligible for rollover, except: - Certain payments spread over a period of at least 10 years or over your life or life expectancy (or the joint lives or joint life expectancies of you and your beneficiary); - Required minimum distributions after age 701⁄2 (if you were born before July 1, 1949), after age 72 (if you were born after June 30, 1949), or after death; - Hardship distributions; - Payments of employee stock ownership plan (ESOP) dividends; - Corrective distributions of contributions that exceed tax law limitations; - Loans treated as deemed distributions (for example, loans in default due to missed payments before your employment ends); - Cost of life insurance paid by the Plan; - Payments of certain automatic enrollment contributions that you request to withdraw within 90 days of your first contribution; and - Amounts treated as distributed because of a prohibited allocation of S corporation stock under an ESOP (also, there generally will be adverse tax consequences if S corporation stock is held by an IRA); and - Distributions of certain premiums for health and accident insurance. The Plan administrator or the payor can tell you what portion of a payment is eligible for rollover. If I don't do a rollover, will I have to pay the 10% additional income tax on early distributions? If a payment is not a qualified distribution and you are under age 591⁄2, you will have to pay the 10% additional income tax on early distributions with respect to the earnings allocated to the payment that you do not roll over (including amounts withheld for income tax), unless one of the exceptions listed below applies. This tax is in addition to the regular income tax on the earnings not rolled over. The 10% additional income tax does not apply to the following payments from the Plan: - Payments made after you separate from service if you will be at least age 55 in the year of the separation; - Payments that start after you separate from service if paid at least annually in equal or close to equal amounts over your life or life expectancy (or the joint lives or joint life expectancies of you and your beneficiary); - Payments from a governmental plan made after you separate from service if you are a qualified public safety employee and you will be at least age 50 in the year of the separation; - Payments made due to disability; - Payments after your death; - Payments of ESOP dividends; - Corrective distributions of contributions that exceed tax law limitations; - Cost of life insurance paid by the Plan; - Payments made directly to the government to satisfy a federal tax levy; - Payments made under a qualified domestic relations order (QDRO); - Payments of up to $5,000 made to you from a defined contribution plan if the payment is a qualified birth or adoption distribution; - Payments up to the amount of your deductible medical expenses (without regard to whether you itemize deductions for the taxable year); - Certain payments made while you are on active duty if you were a member of a reserve component called to duty after September 11, 2001 for more than 179 days; - Payments of certain automatic enrollment contributions that you request to withdraw within 90 days of your first contribution; and - Payments excepted from the additional income tax by federal legislation relating to certain emergencies and disasters. If I do a rollover to a Roth IRA, will the 10% additional income tax apply to early distributions from the IRA? If you receive a payment from a Roth IRA when you are under age 591⁄2, you will have to pay the 10% additional income tax on early distributions on the earnings paid from the Roth IRA, unless an exception applies or the payment is a qualified distribution. In general, the exceptions to the 10% additional income tax for early distributions from a Roth IRA listed above are the same as the exceptions for early distributions from a plan. However, there are a few differences for payments from a Roth IRA, including: - The exception for payments made after you separate from service if you will be at least age 55 in the year of the separation (or age 50 for qualified public safety employees) does not apply; - The exception for qualified domestic relations orders (QDROs) does not apply (although a special rule applies under which, as part of a divorce or separation agreement, a tax-free transfer may be made directly to a Roth IRA of a spouse or former spouse); and - The exception for payments made at least annually in equal or close to equal amounts over a specified period applies without regard to whether you have had a separation from service. Additional exceptions apply for payments from an IRA, including: - Payments for qualified higher education expenses; - Payments up to $10,000 used in a qualified first-time home purchase; and - Payments for health insurance premiums after you have received unemployment compensation for 12 consecutive weeks (or would have been eligible to receive unemployment compensation but for self-employed status). Will I owe State income taxes? This notice does not address any State or local income tax rules (including withholding rules). SPECIAL RULES AND OPTIONS If you miss the 60-day rollover deadline Generally, the 60-day rollover deadline cannot be extended. However, the IRS has the limited authority to waive the deadline under certain extraordinary circumstances, such as when external events prevented you from completing the rollover by the 60-day rollover deadline. Under certain circumstances, you may claim eligibility for a waiver of the 60-day rollover deadline by making a written self-certification. Otherwise, to apply for a waiver from the IRS, you must file a private letter ruling request with the IRS. Private letter ruling requests require the payment of a nonrefundable user fee. For more information, see IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs). If your payment includes employer stock that you do not roll over If you receive a payment that is not a qualified distribution and you do not roll it over, you can apply a special rule to payments of employer stock (or other employer securities) that are paid in a lump sum after separation from service (or after age 591⁄2, disability, or the participant's death). Under the special rule, the net unrealized appreciation on the stock included in the earnings in the payment will not be taxed when distributed to you from the Plan and will be taxed at capital gain rates when you sell the stock. If you do a rollover to a Roth IRA for a nonqualified distribution that includes employer stock (for example, by selling the stock and rolling over the proceeds within 60 days of the distribution), you will not have any taxable income and the special rule relating to the distributed employer stock will not apply to any subsequent payments from the Roth IRA or, generally, the Plan. Net unrealized appreciation is generally the increase in the value of the employer stock after it was acquired by the Plan. The Plan administrator can tell you the amount of any net unrealized appreciation. If you receive a payment that is a qualified distribution that includes employer stock and you do not roll it over, your basis in the stock (used to determine gain or loss when you later sell the stock) will equal the fair market value of the stock at the time of the payment from the Plan. If you have an outstanding loan that is being offset If you have an outstanding loan from the Plan, your Plan benefit may be offset by the outstanding amount of the loan, typically when your employment ends. The offset amount is treated as a distribution to you at the time of the offset. Generally, you may roll over all or any portion of the offset amount. If the distribution attributable to the offset is not a qualified distribution and you do not roll over the offset amount, you will be taxed on any earnings included in the distribution (including the 10% additional income tax on early distributions, unless an exception applies). You may roll over the earnings included in the loan offset to a Roth IRA or designated Roth account in an employer plan (if the terms of the employer plan permit the plan to receive plan loan offset rollovers). You may also roll over the full amount of the offset to a Roth IRA. How long you have to complete the rollover depends on what kind of plan loan offset you have. If you have a qualified plan loan offset, you will have until your tax return due date (including extensions) for the tax year during which the offset occurs to complete your rollover. A qualified plan loan offset occurs when a plan loan in good standing is offset because your employer plan terminates, or because you sever from employment. If your plan loan offset occurs for any other reason (such as a failure to make level repayments that results in a deemed distribution), then you have 60 days from the date the offset occurs to complete your rollover. If you receive a nonqualified distribution and you were born on or before January 1, 1936 If you were born on or before January 1, 1936, and receive a lump sum distribution that is not a qualified distribution and that you do not roll over, special rules for calculating the amount of the tax on the earnings in the payment might apply to you. For more information, see IRS Publication 575, Pension and Annuity Income. If your payment is from a governmental section 457(b) plan If the Plan is a governmental section 457(b) plan, the same rules described elsewhere in this notice generally apply, allowing you to roll over the payment to an IRA or an employer plan that accepts rollovers. One difference is that, if you receive a payment that is not a qualified distribution and you do not roll it over, you will not have to pay the 10% additional income tax on early distributions with respect to the earnings allocated to the payment that you do not roll over, even if you are under age 591⁄2 (unless the payment is from a separate account holding rollover contributions that were made to the Plan from a tax-qualified plan, a section 403(b) plan, or an IRA). However, if you do a rollover to an IRA or to an employer plan that is not a governmental section 457(b) plan, a later distribution that is not a qualified distribution made before age 591⁄2 will be subject to the 10% additional income tax on earnings allocated to the payment (unless an exception applies). Other differences include that you cannot do a rollover if the payment is due to an "unforeseeable emergency" and the special rules under "If your payment includes employer stock that you do not roll over" and "If you were born on or before January 1, 1936" do not apply. If you receive a nonqualified distribution, are an eligible retired public safety officer, and your payment is used to pay for health coverage or qualified long-term care insurance If the Plan is a governmental plan, you retired as a public safety officer, and your retirement was by reason of disability or was after normal retirement age, you can exclude from your taxable income nonqualified distributions paid directly as premiums to an accident or health plan (or a qualified long-term care insurance contract) that your employer maintains for you, your spouse, or your dependents, up to a maximum of $3,000 annually. For this purpose, a public safety officer is a law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew. If you are not a Plan participant Payments after death of the participant. If you receive a distribution after the participant's death that you do not roll over, the distribution generally will be taxed in the same manner described elsewhere in this notice. However, whether the payment is a qualified distribution generally depends on when the participant first made a contribution to the designated Roth account in the Plan. Also, the 10% additional income tax on early distributions and the special rules for public safety officers do not apply, and the special rule described under the section "If you receive a nonqualified distribution and you were born on or before January 1, 1936" applies only if the deceased participant was born on or before January 1, 1936. If you are a surviving spouse. If you receive a payment from the Plan as the surviving spouse of a deceased participant, you have the same rollover options that the participant would have had, as described elsewhere in this notice. In addition, if you choose to do a rollover to a Roth IRA, you may treat the Roth IRA as your own or as an inherited Roth IRA. A Roth IRA you treat as your own is treated like any other Roth IRA of yours, so that you will not have to receive any required minimum distributions during your lifetime and earnings paid to you in a nonqualified distribution before you are age 591⁄2 will be subject to the 10% additional income tax on early distributions (unless an exception applies). If you treat the Roth IRA as an inherited Roth IRA, payments from the Roth IRA will not be subject to the 10% additional income tax on early distributions. An inherited Roth IRA is subject to required minimum distributions. If the participant had started taking required minimum distributions from the Plan, you will have to receive required minimum distributions from the inherited Roth IRA. If the participant had not started taking required minimum distributions, you will not have to start receiving required minimum distributions from the inherited Roth IRA until the year the participant would have been age 701⁄2 (if the participant was born before July 1, 1949) or age 72 (if the participant was born after June 30, 1949). If you are a surviving beneficiary other than a spouse. If you receive a payment from the Plan because of the participant's death and you are a designated beneficiary other than a surviving spouse, the only rollover option you have is to do a direct rollover to an inherited Roth IRA. Payments from the inherited Roth IRA, even if made in a nonqualified distribution, will not be subject to the 10% additional income tax on early distributions. You will have to receive required minimum distributions from the inherited Roth IRA. Payments under a QDRO. If you are the spouse or a former spouse of the participant who receives a payment from the Plan under a QDRO, you generally have the same options and the same tax treatment that the participant would have (for example, you may roll over the payment to your own Roth IRA or to a designated Roth account in an eligible employer plan that will accept it). If you are a nonresident alien If you are a nonresident alien, you do not do a direct rollover to a U.S. IRA or U.S. employer plan, and the payment is not a qualified distribution, the Plan is generally required to withhold 30% (instead of withholding 20%) of the earnings for federal income taxes. If the amount withheld exceeds the amount of tax you owe (as may happen if you do a 60-day rollover), you may request an income tax refund by filing Form 1040NR and attaching your Form 1042-S. See Form W-8BEN for claiming that you are entitled to a reduced rate of withholding under an income tax treaty. For more information, see also IRS Publication 519, U.S. Tax Guide for Aliens, and IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. Other special rules If a payment is one in a series of payments for less than 10 years, your choice whether to do a direct rollover will apply to all later payments in the series (unless you make a different choice for later payments). If your payments for the year (only including payments from the designated Roth account in the Plan) are less than $200, the Plan is not required to allow you to do a direct rollover and is not required to withhold federal income taxes. However, you can do a 60-day rollover. Unless you elect otherwise, a mandatory cashout from the designated Roth account in the Plan of more than $1,000 will be directly rolled over to a Roth IRA chosen by the Plan administrator or the payor. A mandatory cashout is a payment from a plan to a participant made before age 62 (or normal retirement age, if later) and without consent, where the participant's benefit does not exceed $5,000 (not including any amounts held under the plan as a result of a prior rollover made to the plan). You may have special rollover rights if you recently served in the U.S. Armed Forces. For more information on special rollover rights related to the U.S. Armed Forces, see IRS Publication 3, Armed Forces' Tax Guide. You also may have special rollover rights if you were affected by a federally declared disaster (or similar event), or if you received a distribution on account of a disaster. For more information on special rollover rights related to disaster relief, see the IRS website at www.irs.gov. FOR MORE INFORMATION You may wish to consult with the Plan administrator or payor, or a professional tax advisor, before taking a payment from the Plan. Also, you can find more detailed information on the federal tax treatment of payments from employer plans in: IRS Publication 575, Pension and Annuity Income; IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs); IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs); and IRS Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans). These publications are available from a local IRS office, on the web at www.irs.gov, or by calling 1-800-TAX-FORM.

Private Letter Ruling Number: 202327002 Internal Revenue Service April 12, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202327002 Release Date: 7/7/2023 Index Number: 2010.04-00, 9100.35-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B04 PLR-120372-22 Date: April 12, 2023 Dear ******: This letter responds to a letter dated October 4, 2022, and subsequent correspondence, submitted on behalf of Decedent's estate requesting an extension of time pursuant to § 301.9100-3 of the Procedure and Administration Regulations to make an election under § 2010(c)(5)(A) of the Internal Revenue Code (a "portability" election) to allow a Decedent's surviving Spouse to take into account Decedent's deceased spousal unused exclusion (DSUE) amount. The information submitted for consideration is summarized below. Decedent died on Date, survived by Spouse. It is represented that based on the value of Decedent's gross estate and taking into account any taxable gifts, Decedent's estate is not required under § 6018(a) to file an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return). It is further represented that there is an unused portion of Decedent's applicable exclusion amount and that a portability election is required to allow Spouse to take into account that amount (the "DSUE" amount)). A portability election is made upon the timely filing of a complete and properly prepared estate tax return, unless the requirements for opting out are satisfied. See § 20.2010-2(a)(2) of the Estate Tax Regulations. For various reasons, an estate tax return was not timely filed, and a portability election was not made. After discovery of this, Decedent's estate submitted this request for an extension of time under § 301.9100-3 to make a portability election. LAW AND ANALYSIS Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2010(a) provides that a credit of the applicable credit amount shall be allowed to the estate of every decedent against the tax imposed by § 2001. Section 2010(c)(1) provides that the applicable credit amount is the amount of the tentative tax that would be determined under § 2001(c) if the amount with respect to which such tentative tax is to be computed were equal to the applicable exclusion amount. On December 17, 2010, Congress amended § 2010(c), effective for estates of decedents dying and gifts made after December 31, 2010, to allow portability of a decedent's unused applicable exclusion amount between spouses. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, § 303, 124 Stat. 3296, 3302 (2010). Section 2010(c)(2) provides that the applicable exclusion amount is the sum of the basic exclusion amount, and, in the case of a surviving spouse, the DSUE amount. Section 2010(c)(3) provides the basic exclusion amount available to the estate of every decedent, an amount to be adjusted for inflation annually after calendar year 2011. Section 2010(c)(4) defines the DSUE amount to mean the lesser of (A) the basic exclusion amount, or (B) the excess of -- (i) the applicable exclusion amount of the last deceased spouse of the surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under § 2001(b)(1) on the estate of such deceased spouse. Section 2010(c)(5)(A) provides that a DSUE amount may not be taken into account by a surviving spouse under § 2010(c)(2) unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return that such amount may be so taken into account. The election, once made, shall be irrevocable. No election may be made if such return is filed after the time prescribed by law (including extensions) for filing such return. Section 20.2010-2(a)(1) provides that the due date of an estate tax return required to elect portability is nine months after the decedent's date of death or the last day of the period covered by an extension (if an extension of time for filing has been obtained). Further, an extension of time under § 301.9100-3 to make a portability election may be granted in the case of an estate that is not required to file an estate tax return under § 6018(a), as determined solely based on the value of the gross estate and any adjusted taxable gifts (and without regard to § 20.2010-2(a)). Under § 301.9100-1(c), the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-3 provides the standards the Commissioner will use to determine whether to grant an extension of time to make an election whose due date is prescribed by a regulation (and not expressly provided by statute). Requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. In this case, based on the representation as to the value of the gross estate and any adjusted taxable gifts, the time for filing the portability election is fixed by the regulations. Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an extension of time for Decedent's estate to elect portability, provided Decedent's estate establishes it acted reasonably and in good faith, the requirements of §§ 301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government. Information, affidavits, and representations submitted on behalf of Decedent's estate explain the circumstances that resulted in the failure to timely file a valid election. Based solely on the information submitted and the representations made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Therefore, we grant an extension of time of 120 days from the date of this letter in which to make the portability election. The election should be made by filing a complete and properly prepared Form 706 and a copy of this letter, within 120 days from the date of this letter, at the following address: Department of the Treasury, Internal Revenue Service, Stop 824G, 7940 Kentucky Drive, Florence, KY 41042-2915. For purposes of electing portability, a Form 706 filed by Decedent's estate within 120 days from the date of this letter will be considered to be timely filed. If it is later determined that, based on the value of the gross estate and taking into account any taxable gifts, Decedent's estate is required to file an estate tax return pursuant to § 6018(a), the Commissioner is without authority under § 301.9100-3 to grant an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void. See § 20.2010-2(a)(1). We neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, we express no opinion as to the DSUE amount to be potentially taken into account by Spouse. Any claimed DSUE amount will be included in the applicable exclusion amount of Spouse only to the extent that Spouse can substantiate such amount and will be subject to determination by the Director's office upon audit of relevant Federal gift or estate tax returns. See § 20.2010-3(c)(1) and (d). The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. Sincerely, Associate Chief Counsel Passthroughs & Special Industries Melissa C. Liquerman By: ______________________________ Melissa C. Liquerman Senior Counsel, Branch 04 Passthroughs & Special Industries Enclosure (1) Copy for §6110 purposes cc:

Treasury Decision 9992 Internal Revenue Service 2024-21 I.R.B. 1175 T.D. 9992 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Guidance on the Definition of Domestically Controlled Qualified Investment Entities AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains final regulations that address the determination of whether a qualified investment entity is domestically controlled, including the treatment of qualified foreign pension funds for this purpose. In particular, these final regulations provide guidance as to when foreign persons are considered to hold directly or indirectly stock in a qualified investment entity. The final regulations primarily affect foreign persons that own stock in a qualified investment entity that would be a United States real property interest if the qualified investment entity were not domestically controlled. DATES: Effective date: These regulations are effective on April 25, 2024. Applicability date: For the date of applicability, see§§1.897-1(a)(2) and 1.1445- 2(e). FOR FURTHER INFORMATION CONTACT: Milton Cahn at (202) 317-4934 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background On December 29, 2022, the Treasury Department and the IRS published proposed regulations (REG-100442-22), relating to the treatment of certain entities, including qualified foreign pension funds ("QFPFs"), for purposes of the exemption from taxation afforded to foreign governments under section 892 of the Internal Revenue Code (the "Code"), and the determination of whether a qualified investment entity ("QIE") is domestically controlled under section 897(h)(4)(B) of the Code, in the Federal Register (87 FR 80097) (the "proposed regulations"). This Treasury decision finalizes the proposed regulations, other than those portions addressing the section 892 exemption (which will be addressed in a separate rulemaking), after taking into account and addressing comments with respect to the proposed regulations. Terms used but not defined in this preamble have the meaning provided in the final regulations. Comments outside the scope of this rulemaking are generally not addressed but may be considered in connection with future regulations. All written comments received in response to the proposed regulations are available at www.regulations.gov or upon request. A public hearing on the proposed regulations was not held because there were no requests to speak. Summary of Comments and Explanation of Revisions The final regulations retain the general approach and structure of the proposed regulations, with certain revisions. This section of the preamble discusses the comments received in response to the proposed regulations and explains the revisions reflected in the final regulations. I. Domestic Corporation Look-Through Rule A. Background The proposed regulations set forth proposed rules for determining whether stock of a QIE is considered "held directly or indirectly" by foreign persons for purposes of defining a domestically controlled QIE under section 897(h)(4)(B). The proposed regulations defined stock in a QIE that is held "indirectly" by taking into account stock of the QIE held through certain entities under a limited "look-through" approach. As described in the preamble to the proposed regulations, this approach gives effect to both the policy of the exception for domestically controlled QIEs in section 897(h)(2) ("DC-QIE exception"), which is limited to QIEs controlled by United States persons, and the requirement in section 897(h)(4)(B) to take into account "indirect" ownership of QIE stock by foreign persons in determining whether a QIE is domestically controlled. 87 FR 80100. The preamble to the proposed regulations also explained that this approach prevents the use of intermediary entities to achieve results contrary to the purposes of the DC-QIE exception. Id. at 80100-01. The proposed regulations addressed the meaning of direct or indirect ownership by setting forth two categories of potential QIE owners, "look-through persons" and "non-look-through persons." Proposed§1.897-1(c)(3)(ii). The proposed regulations generally treated a "domestic C corporation," defined as any domestic corporation other than a regulated investment company ("RIC") under section 851, a real estate investment trust ("REIT") under section 856, or an S corporation under section 1361, as a non-look-through person. Proposed§1.897-1(c)(3)(v)(A) and (D). However, the proposed regulations treated non-publicly traded domestic C corporations as look-through persons if foreign persons hold a 25 percent or greater interest (by value) in the stock of the corporation (the "domestic corporation look-through rule"). Proposed§1.897-1(c)(3)(iii)(B) and (c)(3)(v)(B). Comments generally did not raise concerns with the general look-through approach for determining domestic control of a QIE as it applied to most entities (for example, the treatment of partnerships) but asserted that the domestic corporation look-through rule raises significant issues and should be withdrawn or, if retained, modified to reduce its scope. These comments are addressed in turn in parts I.B. and I.C. of this Summary of Comments and Explanation of Revisions. B. Comments recommending withdrawal of the domestic corporation look-through rule Comments generally recommended that the domestic corporation look-through rule be withdrawn on three related grounds: first, that the rule is based on an incorrect reading of the Code, which for this purpose does not permit look-through treatment for domestic C corporations, including because there are no explicit rules providing for constructive ownership (such as those in section 318) under section 897(h)(4)(B); second, that the enactment of other related legislation (or consideration of legislation) demonstrates the rule is inconsistent with congressional intent; and third, that the rule is not necessary because domestic C corporations are subject to U.S. tax. Certain comments also based their recommendation to withdraw the domestic corporation look-through rule on the contention that the rule would negatively impact the U.S. real estate market or otherwise harm the broader U.S. economy. The Treasury Department and the IRS have determined that it is necessary and appropriate to provide guidance regarding the meaning of "indirect" for determining whether foreign persons are considered to hold less than 50 percent of the value of the stock of a QIE. Every word in a statute must be given effect, and both the proposed and final regulations give effect to the term "indirectly" as used in section 897(h)(4)(B) by adopting a limited look-through approach that includes the domestic corporation look-through rule (as modified in the final regulations). The domestic corporation look-through rule does not apply specific constructive ownership rules like those in section 318. Rather, the guidance gives meaning to indirect ownership under section 897(h)(4)(B) in light of the purpose of the DC-QIE exception. Because the final regulations carry out the statute's mandate to determine indirect ownership rather than constructive ownership, the fact that other parts of section 897 refer to section 318 is irrelevant to the determination of whether a QIE is domestically controlled. The Treasury Department and the IRS do not agree that the enactment of section 897(h)(4)(E) in section 322(b)(1)(A) of the Protecting Americans from Tax Hikes Act of 2015, Public Law 114-113, div. Q (the "PATH Act"), informs whether the domestic corporation look-through rule should be applied under section 897(h)(4)(B). The rules added in section 897(h)(4)(E) do not prescribe how to interpret the meaning of "indirectly" in section 897(h)(4)(B), nor do they suggest that Congress intended for that provision to set out the only rules for QIE stock held by domestic corporations. Although section 897(h)(4)(E) provides certain rules for looking through QIE stock held by another QIE for purposes of the DC-QIE exception, the absence of other specific rules in the statute on whether domestic C corporations (or any other type of entity) should be looked through does not mean that all other entities should be non-look-through persons. The Treasury Department and the IRS also disagree with the observation in comments that Congress sanctioned the approach taken by a 2009 private letter ruling (the "2009 PLR") that treated QIE stock held by a domestic C corporation as owned by a domestic person. 1 The brief citation to that ruling in a report by the Joint Committee on Taxation is neutral and merely restates the holding in the ruling in its description of the then current law. See STAFF OF THE JOINT COMM. ON TAX'N, General Explanation of Tax Legislation Enacted in 2015 (JCS-1-16) 279 (2016) (the "JCT Report"). 2 The JCT Report did not express any view regarding the effect of the 2009 PLR or indicate that Congress endorsed a rule that precludes looking through domestic C corporations in all cases, and it caveated that a private letter ruling may only be relied on by the specific taxpayer to which it was issued and only provided "some indication of administrative practice." See section 6110(k)(3). This is in contrast to other instances where Congress has explicitly endorsed an approach taken by the IRS. See, for example, H.R. Rep. No. 103-111, at 727-29 (1993) (in enacting section 7701(l), citing Rev. Rul. 84-152, 1984-2 C.B. 381, Rev. Rul. 84-153 1984-2 C.B. 1, and Rev. Rul. 87-89, 1987-2 C.B. 195, in stating the "committee believes that the above-cited IRS rulings appropriately ignore conduit entities and properly recharacterize the transactions described therein."); S. Rep. No. 95-762, at 8 (1978) (stating that the IRS's "ruling position is correct" in enacting rules consistent with private letter rulings indicating that certain income earned by exempt organizations was not taxable as debt-financed income). Accordingly, the Treasury Department and the IRS have concluded that the JCT Report's reference to the 2009 PLR does not affect the application of the domestic corporation look-through rule. ******** 1 PLR 200923001 (February 26, 2009). 2 See also STAFF OF THE JOINT COMM. ON TAX'N, Technical Explanation of the Revenue Provisions of the Protecting Americans from Tax Hikes Act of 2015, House Amendment #2 to the Senate Amendment to H.R. 2029 (JCX-144-15) 186-87 (2015). As noted in the JCT Report, a Senate Committee on Finance report on an earlier, separate bill referenced the 2009 PLR in the same manner in describing provisions similar to those in section 322 of the PATH Act. See JCT Report at 277, note 943; S. Rep. No. 114-25, 6 (2015). ******** Likewise, the Treasury Department and the IRS disagree with comments that emphasized the discussion draft released by the Senate Committee on Finance in 2013 (the "2013 Discussion Draft") and the absence of any related changes to section 897 in the PATH Act. The relevant provision in the 2013 Discussion Draft would have replaced the "held directly or indirectly" language in section 897(h)(4)(B) with specific constructive ownership rules in section 318 (not just those applicable to corporations) to address uncertainty in the determination of indirect ownership. See STAFF OF THE JOINT COMM. ON TAX'N, Technical Explanation of the Senate Committee on Finance Chairman's Staff Discussion Draft of Provisions to Reform International Business Taxation (JCX-15-13) 84 (2013). The 2013 Discussion Draft, however, is not authoritative and has no relevance because it was neither introduced as a bill nor enacted into law. Moreover, Congress did not provide any explanation as to why constructive ownership rules under section 318, as proposed in the 2013 Discussion Draft, were not adopted in the PATH Act nor did it provide any indication as to its interpretation of "indirectly" under the statute, and nothing in the legislative history of the PATH Act or otherwise suggests draft legislation from more than two years earlier during a different Congress informed what was ultimately enacted in the PATH Act. See United States v. Wise, 370 U.S. 405, 411 (1962) ("[S]tatutes are construed by the courts with reference to the circumstances existing at the time of the passage. The interpretation placed upon an existing statute by a subsequent group of Congressmen who are promoting legislation and who are unsuccessful has no persuasive significance here."). The Treasury Department and the IRS also disagree with one comment's assertion that the legislative re-enactment doctrine bears on whether to issue the domestic corporation look-through rule. See Helvering v. Reynolds, 313 U.S. 428, 432 (1941) ("[The doctrine of legislative reenactment] does not mean that the prior construction has become so imbedded in the law that only Congress can effect a change."). 3 Accordingly, the Treasury Department and the IRS have determined that no changes to section 897 made in, or contemplated in connection with, the PATH Act, or any explanation of those changes, preclude, or otherwise affect, adoption of the domestic corporation look-through rule. ******** 3 See also Helvering v. Wilshire Oil Co., 308 U.S. 90, 100 (1939) (holding that the legislative reenactment doctrine applies where "it does not appear that the rule or practice has been changed by the administrative agency through exercise of its continuing rule-making power"); McCoy v. United States, 802 F.2d 762 (4th Cir. 1986); Interstate Drop Forge Co. v. Comm'r, 326 F2d 743 (7th Cir. 1964). ******** Finally, the Treasury Department and the IRS have determined that the domestic corporation look-through rule is the appropriate interpretation of the term "indirectly" in section 897(h)(4)(B) irrespective of whether the domestic C corporation is subject to U.S. tax on income derived from its QIE stock. As expressed through the statutory text, the policy underlying the DC-QIE exception looks to whether control of the QIE is held directly or indirectly by United States or foreign persons, which does not depend on whether United States persons are subject to U.S. tax with respect to income derived from their QIE stock. The determination of domestic control is likewise not affected by whether a foreign shareholder of the domestic C corporation is subject to tax on a disposition of its stock in the corporation under section 897. The purpose of the inquiry is to determine control, and the status of an entity as taxable is not determinative for this purpose. Accordingly, the Treasury Department and the IRS do not adopt the recommendation to withdraw the domestic corporation look-through rule. However, the final regulations modify the domestic corporation look-through rule as discussed in part I.C of this Summary of Comments and Explanation of Revisions. C. Comments recommending modifications to the domestic corporation look-through rule; explanation of revision Comments recommended that, if the final regulations retain a rule similar to the domestic corporation look-through rule, then the approach should be narrowed from what was proposed so that the final rule more directly addresses potentially inappropriate planning and is easier to comply with and administer. One comment suggested a variety of potential approaches to narrow the domestic corporation look-through rule. Under one such approach, a non-public domestic C corporation that owns 10 percent or less of a QIE (determined after applying constructive ownership rules under section 318, so as to prevent circumvention of the threshold) would be treated as a non-look-through person. The comment asserted that this approach would be less burdensome on taxpayers and the IRS than the proposed regulations and is premised on the view that a foreign person would not structure an investment through a taxable domestic C corporation so that an unrelated foreign person may apply the DC-QIE exception. The comment described an alternative approach, also intended to reduce compliance and administrative burdens, that would treat a non-public domestic C corporation as a look-through person only if there is at least one foreign person that is a non-look-through person that holds, directly or indirectly (using constructive ownership rules under section 318), 25 percent or more of the value of the corporation's stock. Under this alternative, look-through treatment would also apply only as to those foreign non-look-through persons. As another alternative, the comment suggested a look-through rule that would apply only if a foreign person or a foreign related party holds both a direct interest in the QIE and a substantial indirect interest in the QIE through a non-public domestic C corporation. A different comment also recommended an approach that focused on commonality of substantial ownership by a foreign person of the QIE and the domestic C corporation. Specifically, a domestic C corporation would be treated as a foreign person for purposes of section 897(h)(4)(B) (but not for section 897(h)(4)(C)), if more than 50 percent of its stock is owned, by voting power or value, by foreign persons that also hold stock of the QIE directly, or indirectly through one or more partnerships, grantor trusts, or QIEs. Under this comment's recommended approach, a foreign person would be included in the more than 50 percent control test if the domestic C corporation had actual knowledge that the foreign person has cross-ownership of the QIE after inquiry with any person that is at least a 5-percent shareholder of the domestic C corporation (after applying the rules of section 318(a)). The comment reasoned that foreign investors should be considered incidental and thus should not be counted when measuring direct or indirect foreign control of the QIE when they invest through a domestic C corporation and do not have cross-ownership of the QIE directly or through related parties, or do hold interests in both entities but do not individually or collectively control the domestic C corporation. Finally, one comment advocated that a look-through approach to a domestic C corporation should not apply when that corporation has material business activities unrelated to its investment in a QIE's stock with potential safe harbors such as where the corporation is registered as an investment adviser under the Investment Company Act of 1940 or the foreign owner of the domestic C corporation is actively traded on an established securities market outside of the United States. The comment reasoned that such cases are unlikely to be structured transactions of the type identified by the proposed regulations. Similarly, another comment also proposed that the look-through approach should not apply if a domestic C corporation would be treated as engaged in a U.S. trade or business if it had been a foreign corporation (such that the corporation is not a mere shell), and this exception could be further limited by ensuring that the value of the QIE stock held by the domestic C corporation is less than a certain threshold of the affiliated group's total assets. The final regulations do not adopt any of the recommended modifications to the domestic corporation look-through rule. Several suggested modifications would limit the application of the rule to situations that indicate that foreign persons are using a domestic C corporation to establish domestic control of a QIE so that their direct investments in the QIE benefit from the DC-QIE exception. However, as discussed in part I.A of this Summary of Comments and Explanation of Revisions, the proposed and final regulations serve a broader purpose by interpreting the meaning of "indirect" ownership under section 897(h)(4)(B) to effectuate the policy of the DC-QIE exception by ensuring that the exception is available only when a QIE is controlled by United States persons. The comments also proposed various modifications intended to limit or alter the application of the rule; the Treasury Department and the IRS are of the view that these would introduce additional complexity, such as requiring an examination of the business activities of a domestic C corporation. Furthermore, a modification that would treat domestic C corporations that own less than 10 percent of a QIE as a non-look-through person would not alleviate concerns regarding the ability to identify shareholders through multiple tiers of ownership, and could result in disparate and inconsistent results as to which foreign owners are taken into account in measuring domestic control of a QIE (for example, a foreign non-look-through person that wholly owns a domestic C corporation that owns 9 percent of a QIE would not be taken into account, while a foreign non-look-through person that owns 50 percent of a domestic C corporation that owns 10 percent of the QIE would be taken into account). The Treasury Department and the IRS also do not agree that the domestic corporation look-through rule should only apply if 25 percent or more of the corporation's stock is owned by a single foreign non-look-through person (taking into account section 318 constructive ownership rules), as the DC-QIE exception looks to any measure of foreign ownership of a QIE and such a high threshold would inappropriately exempt foreign persons owning significant indirect interests in QIEs from look-through treatment. Although the final regulations do not adopt any of the specific recommendations to the domestic corporation look-through rule, the Treasury Department and the IRS agree that the scope of the rule should be narrowed to address compliance concerns and to ensure the rule is more appropriately limited to situations where significant indirect ownership by foreign persons indicative of foreign control is present. After considering the various suggestions raised in comments, the Treasury Department and the IRS have determined that this is best achieved by increasing the amount of foreign ownership required to look through a non-public domestic C corporation from 25 percent or more to more than 50 percent. Increasing the threshold to more than 50 percent significantly narrows the scope of look-through treatment to non-public domestic C corporations that are controlled by foreign persons, and is consistent with the measurement of control for purposes of the domestically controlled QIE test. This change is also consistent with the policy of the DC-QIE exception and other provisions in section 897 that are based on a 50-percent threshold. See, for example, section 897(c)(2) (providing that a corporation is a United States real property holding corporation if the fair market value of its United States real property interests ("USRPIs") meets a 50 percent or greater threshold). Thus, rather than a "foreign-owned domestic corporation," the final regulations apply look-through treatment with respect to a "foreign-controlled domestic corporation," which is defined as any non-public domestic C corporation if foreign persons hold directly or indirectly more than 50 percent of the fair market value of that corporation's outstanding stock (the "final domestic corporation look-through rule").§1.897-1(c)(3)(v)(B). In addition, the final regulations adopt a transition rule for existing QIE structures, as discussed in part IV of this Summary of Comments and Explanation of Revisions. II. Effect of Section 897(l) on the DC-QIE Exception A. Background on section 897(l) and interaction with the DC-QIE exception Section 897(l) provides an exception to the application of section 897(a) for certain foreign pension funds and their wholly owned subsidiaries. As originally enacted in the PATH Act, section 897(l)(1) provided that section 897 does not apply to any USRPI held directly (or indirectly through one or more partnerships) by, or to any distribution received from a REIT by, a QFPF or any entity all of the interests of which are held by a QFPF. Congress later made several technical amendments to section 897(l) in section 101(q) of the Tax Technical Corrections Act of 2018, Public Law 115-141, div. U (the "2018 technical correction"). As amended by the 2018 technical correction, section 897(l) provides that neither a QFPF nor an entity all the interests of which are held by a QFPF is treated as a nonresident alien individual or foreign corporation for purposes of section 897. The proposed regulations addressed uncertainty as to whether QFPFs and entities wholly owned by one or more QFPFs ("QCEs"), which are treated as not "nonresident alien individuals or foreign corporations" for purposes of section 897, are treated as foreign persons for purposes of the DC-QIE exception. Specifically, proposed§1.897-1(c)(3)(iv)(A) provided that a QFPF, including any part of a QFPF, or a QCE is a foreign person for purposes of the DC-QIE exception (the "QFPF DC-QIE rule"). B. Comments regarding authority to issue the QFPF DC-QIE rule Although one comment stated that it was generally in agreement with the QFPF DC-QIE rule, other comments recommended that the rule be withdrawn because it is an incorrect reading of the statute and contrary to congressional intent. One comment contended that the preamble to the proposed regulations failed to consider the existing definition of "foreign person" in§1.897-9T(c) (which includes a foreign corporation, a foreign partnership, a foreign trust, or a nonresident alien individual) and noted that Congress is presumed to have knowledge of that regulatory definition. The comment also contended that the text of section 897(l) is clear and that, without any textual ambiguity, the Treasury Department and the IRS lack the authority to issue the QPFF DC-QIE rule. Another comment submitted that the legislative history and policy of section 897, including the DC-QIE exception and the section 897(l) exception for QFPFs, indicate that 50 percent or more ownership of a QIE by a QFPF results in the DC-QIE exception being available to other foreign investors. The comment's overall recommendation was to clarify the definition of foreign person in section 897(h)(4)(B) and (C) to have the same meaning as "a nonresident alien individual or a foreign corporation" in section 897(a). The comment included several reasons for its recommendation. First, section 897(l) refers generally to section 897, rather than solely to section 897(a), which the comment argued indicates that section 897(l) is intended to be given effect for all purposes under section 897. According to the comment, the effect of section 897(l) on the DC-QIE exception can be analogized to a special election in section 897(i) for a foreign corporation to be treated as a domestic corporation for purposes of section 897 because, when that election applies, it has effect for all of section 897 and can benefit other investors in QIEs even though they are not party to the election. The comment also noted that the 2018 technical correction should be presumed to be a more accurate reflection of the original intent of Congress, which was to align QFPFs with exempt U.S. pension funds. Finally, the comment noted that because a QFPF is not taxed under section 897(h)(1), there is no policy reason to treat it as a foreign person for other rules such as the DC-QIE exception, the foreign ownership percentage rule in section 897(h)(3) or the wash sale rule in section 897(h)(5). The Treasury Department and the IRS have determined that the QFPF DC-QIE rule reflects the proper interpretation of the statute and congressional intent. The term "nonresident alien individuals or foreign corporations" in section 897(l) (introduced only in the 2018 technical correction) differs from "foreign persons" in section 897(h)(4)(B), and the purposes of the two provisions also differ. Congress provided no indication that it intended for the definition of foreign person in§1.897-9T(c) to apply to confer non-foreign person status on QFPFs for purposes of the DC-QIE exception. Instead, the term "nonresident alien individuals or foreign corporations" appears in section 897(a) and similar provisions to refer to the persons that are directly subject to tax under FIRPTA. The Treasury Department and the IRS also do not agree that a QFPF is analogous to a foreign corporation that has elected to be treated as a domestic corporation under section 897(i) because that election explicitly treats a foreign corporation as a domestic corporation and therefore not a foreign person. In contrast, section 897(l) treats a QFPF as not a nonresident alien individual or a foreign corporation but does not address whether a QFPF is also not a foreign person. The Treasury Department and the IRS agree that it is reasonable to presume that the changes made in the 2018 technical correction are a more accurate reflection of original congressional intent, which the preamble to the proposed regulations described (allowing a QFPF and QCE to jointly own a USRPI and qualify for section 897(l) with respect to their partial USRPI interests, as well as clarifying that the section 897(l) exception applies to distributions from all QIEs and not just REITs). 87 FR 80100. However, the Treasury Department and the IRS disagree with the assertion that the 2018 technical correction should be interpreted to bestow the benefit of the DC-QIE exception on foreign investors that cannot claim the section 897(l) exception. Such an interpretation would be inconsistent with the intent of section 897(l) as originally enacted in the PATH Act, which was to provide an exception from section 897 to QFPFs (and QCEs). Where possible, as in this case, the technical correction should be viewed in a manner consistent with a core principle of the original legislation. See Fed. Nat'l Mortgage Assoc. v. United States, 56 Fed. Cl. 228, 234, 237 (2003), rev'd and remanded on other grounds, 379 F.3d 1303 (Fed. Cir. 2004) (''Congress turns to technical corrections when it wishes to clarify existing law or repair a scrivener's error, rather than to change the substantive meaning of the statute.... [A] technical correction that merely restores the rule Congress intended to enact cannot be construed as a fundamental change in the operation of the statute.''); STAFF OF THE JOINT COMM. ON TAX'N, Overview of Revenue Estimating Procedures and Methodologies Used by the Staff of the Joint Committee on Taxation (JCX-1-05) 33 (2005) (describing a technical correction as ''legislation that is designed to correct errors in existing law in order to fully implement the intended policies of previously enacted legislation'' and a change that ''conforms to and does not alter the intent'' of the underlying legislation). The comment discussed above asserts that there is no policy reason to treat a QFPF as a foreign person for other provisions in section 897(h) such as the DC-QIE exception, given that the QFPF is not taxed under section 897(h)(1). The Treasury Department and the IRS disagree based on the statute and its policy. As described earlier in this preamble, the policy of the DC-QIE exception looks to foreign control, not control by taxable persons. The presence or absence of taxation of the controlling persons is not determinative. Additionally, Congress expressed in section 897(l) an intent to provide a tax benefit specifically for QFPFs, and not for other owners of a DC-QIE that would benefit from the QFPF's treatment. Therefore, the Treasury Department and the IRS have determined that the appropriate interpretation of the statute is one that only gives effect to the purpose of section 897(l) to provide an exception from section 897 for QFPFs, rather than a construction that would give non-QFPF investors the ability to rely on section 897(l) to benefit under the DC-QIE exception. The DC-QIE exception is a separate provision with underlying policies that focus on foreign control rather than taxability of controlling persons, and these policies are inconsistent with treating a QFPF as a United States person for purposes of the DC-QIE exception. Accordingly, the final regulations do not adopt the comments' recommendations. III. Other Comments and Revisions A. Certain registered investment vehicles One comment noted that there are a large number of investment vehicles that are publicly registered with the Securities and Exchange Commission ("SEC") that own QIEs but are not regularly traded and asserted that the final regulations should treat these investment vehicles offered to retail investors (for example, non-traded publicly registered REITs, non-traded publicly registered RICs, or publicly registered open-ended funds) as non-look-through persons. The comment noted that the same reasoning for applying non-look-through treatment to public domestic C corporations and publicly traded partnerships - that is, difficulty in looking through to the entity's owners and the unlikelihood for use as an intermediary entity to establish domestic control - applied equally to those investment vehicles. The final regulations do not adopt this comment with respect to registered investment vehicles that are QIEs because section 897(h)(4)(E) already provides specific rules with respect to QIE ownership by other QIEs that are incorporated in the final regulations. In particular, under section 897(h)(4)(E)(ii), stock in a QIE held by certain public QIEs is treated as held by a foreign or United States person based on whether the public QIE is itself domestically controlled.§1.897-1(c)(3)(iii)(C). Section 897(h)(4)(E)(iii) provides that stock of a QIE held by a QIE that is not a public QIE is only treated as held by a United States person in proportion to the stock of the non-public QIE that is held by a United States person. Section 897(h)(4)(E)(iii) thus contemplates look-through treatment for non-public QIEs, even if such QIEs are publicly registered with the SEC, and this treatment is reflected in the final regulations.§1.897-1(c)(3)(v)(C). However, the Treasury Department and the IRS are of the view that the treatment of certain RICs that are not QIEs should be aligned with the treatment of other publicly held entities that are not QIEs. The proposed regulations provided that any RIC that is not a QIE, and thus not subject to the rules that apply to public QIEs, is treated as a look-through person. With respect to RICs whose shares are publicly traded or otherwise widely held, this treatment may be viewed as inconsistent with the treatment of publicly traded partnerships and public domestic C corporations, neither of which is subject to look-through treatment under the proposed regulations primarily due to compliance and administrability concerns. The final regulations therefore provide that a public RIC, generally defined as a RIC that is not a QIE and whose shares are (i) regularly traded on an established securities market or (ii) common stock that is continuously offered pursuant to a public offering and held by at least 500 shareholders, is generally treated as a non-look-through person.§1.897-1(c)(3)(v)(D) and (I). However, for reasons similar to those discussed in part I.C of this Summary of Comments and Explanation of Revisions (regarding foreign-controlled domestic corporations, which are treated as look-through persons), a RIC will not be a public RIC, and thus will be a look-through person, if the QIE being tested for domestically controlled status under§1.897-1(c)(3) has actual knowledge that the RIC is foreign controlled, which is determined by treating the RIC as a non-public domestic C corporation and applying§1.897-1(c)(3)(v)(B).§1.897-1(c)(3)(v)(I). B. Public entities The proposed regulations provided that a person holding less than five percent of U.S. publicly traded stock of a QIE at all times during the testing period, determined without regard to proposed§1.897-1(c)(3)(ii)(A), is treated as a United States person that is a non-look-through person with respect to that stock, unless the QIE has actual knowledge that such person is not a United States person. Section 897(h)(4)(E)(i); proposed§1.897-1(c)(3)(iii)(A). To prevent the avoidance of the actual knowledge exception to this rule, the final regulations modify the rule to provide that it will also not apply if the QIE has actual knowledge that such person is foreign controlled (treating any person that is not a non-public domestic C corporation as a non-public domestic C corporation for this purpose).§1.897-1(c)(3)(iii)(A). The proposed regulations also provided non-look-through treatment for public domestic C corporations and publicly traded partnerships, which were generally defined to include entities with a class of stock or interests regularly traded on an established securities market. Proposed§1.897-1(c)(3)(v)(D), (G) and (I). In the final regulations, these definitions exclude domestic entities that are known to be foreign controlled. Thus, consistent with the treatment of public RICs and for reasons similar to those discussed in part I.C of this Summary of Comments and Explanation of Revisions (regarding foreign-controlled domestic corporations, which are treated as look-through persons), a domestic C corporation or a domestic partnership will not be a public domestic C corporation or a publicly traded partnership, respectively, if the QIE being tested for domestically controlled status under§1.897-1(c)(3) has actual knowledge that the corporation or partnership is foreign controlled (treating the entity as a non-public domestic C corporation for this purpose).§1.897-1(c)(3)(v)(G) and (J). In such case, the domestic C corporation or domestic partnership will therefore be a look-through person.§1.897-1(c)(3)(v)(B) through (E). C. Certification by domestic C corporation One comment recommended that the final regulations provide guidance on how a domestic C corporation may certify to a QIE that it is not a foreign-owned domestic corporation. The comment suggested that the regulations provide a model certification to confirm that a domestic C corporation is not foreign owned, such as a revised Form W-9. The final regulations do not provide guidance regarding the procedures for determining whether a domestic C corporation is a foreign-controlled domestic corporation, nor do they provide any procedures generally for a QIE to identify its non-look-through person owners for purposes of determining whether the QIE is domestically controlled. A QIE must take appropriate measures to determine the identity of its direct and indirect shareholders in determining whether it is domestically controlled, and the final regulations do not prescribe a specific form or method as to how it solicits or receives information from its shareholders. Guidance with respect to the manner in which a QIE determines the identity of its relevant shareholders for purposes of establishing domestic control is beyond the scope of this rulemaking but may be considered in a separate guidance project. D. Section 1445 withholding on dispositions of USRPI Current regulations under section 1445 (imposing withholding of tax on dispositions of USRPI) provide the circumstances under which a transferee of property can ascertain that there is no duty to withhold under section 1445(a) because the transferor is not a foreign person, the property acquired is not a USRPI, or an exception to withholding applies.§1.1445-2. Section 1.1445-2(c)(3) provides that no withholding is required with respect to an acquisition of an interest in a domestic corporation if the transferor provides the transferee with a copy of a statement, issued by the corporation pursuant to§1.897-2(h), certifying that the interest in the corporation is not a USRPI. The transferor must request the statement before the transfer, which may be relied on if the statement is dated not more than 30 days before the date of the transfer. A transferee may also rely on a corporation's statement that is voluntarily provided by the domestic corporation in response to a request from the transferee, if that statement otherwise complies with the requirements of§§1.1445-2(c)(3) and 1.897-2(h). Under§1.897-2(h)(1), a foreign person holding an interest in a domestic corporation may request that the corporation inform the person whether the interest constitutes a USRPI, which the corporation is required to provide within a reasonable period after receipt of such a request. A statement must be provided by the domestic corporation to the foreign person indicating the corporation's determination, and notice must be provided to the IRS in accordance with§1.897-2(h)(2). Section 1.897-2(h)(3), however, provides that the requirements of§1.897-2(h) do not apply to "domestically-controlled REITs, as defined in section 897(h)(4)(B)," although a corporation not otherwise required to comply with the requirements of§1.897-2(h) may voluntarily choose to comply with the requirements of§1.897-2(h)(4) and attach a statement to its income tax return informing the IRS that it is not a United States real property holding corporation. The availability of the procedures in§1.1445-2(c)(3) to holders of stock in a domestically controlled QIE is unclear given its reference to a statement provided under§1.897-2(h), which is explicitly inapplicable to domestically controlled QIEs under§1.897-2(h)(3). Although§1.897-2(h) generally does not apply to domestically controlled QIEs pursuant to§1.897-2(h)(3) (and, therefore, the corporation is not required, upon request, to provide a statement to a person holding an interest in the corporation), this should not preclude the availability of the rules in§1.1445-2(c)(3) to transferors of interests seeking to avoid withholding under section 1445 when the corporation voluntarily provides a statement to an interest holder that otherwise complies with§1.897-2(h). Absent the availability of these procedures, the transferor would not be able to establish that it is transferring an interest in a domestically controlled QIE and is thus not subject to withholding under section 1445(a). The final regulations thus revise the rules in§§1.897-2(h)(3) and 1.1445-2(c)(3) to clarify the procedures available to a transferor to certify to a transferee that no withholding is required because the DC-QIE exception applies. As revised, the final regulations confirm that a domestic corporation may voluntarily provide a statement in response to a request from a transferor certifying that an interest in the corporation is not a USRPI because the corporation is a domestically controlled QIE, which the transferor may furnish to the transferee, provided the statement issued by the corporation otherwise complies with the requirements of§1.897-2(h). E. Revisions to examples A comment observed that proposed§1.897-1(c)(3)(vi)(D) ( Example 4 ) contained a mathematical error. The final version of this example corrects that error, which does not otherwise affect the overall conclusion that the entity at issue does not qualify as a domestically controlled QIE.§1.897-1(c)(3)(vii)(D) ( Example 4 ). The final regulations make other revisions to the examples in proposed§1.897-1(c)(3)(vi) to clarify the operation of certain rules, but which are not intended to alter the conclusions or substance of those examples. IV. Applicability Date and Transition Rules The proposed regulations generally were proposed to apply to transactions occurring on or after the date that those regulations are published as final regulations in the Federal Register ("the finalization date"). The preamble to the proposed regulations noted, however, that the rules applicable for determining whether a QIE is domestically controlled may be relevant for determining QIE ownership during periods before the finalization date to the extent the testing period related to a transaction that occurs on or after the finalization date includes periods before that date. Comments raised concerns with the proposed applicability date; in particular, they noted that it would have a retroactive effect because of the testing period element of the DC-QIE exception and argued that, if adopted, the domestic corporation look-through rule should apply on a fully prospective basis with no application to any portion of a testing period before the finalization date. Further, these comments characterized the proposed regulations as a change from existing law and asserted that applying the rules to existing structures would be inappropriate because restructuring to comply with the rules would be difficult and costly, and buyers may be less inclined to invest in a structure that may be "tainted" as failing to qualify for the DC-QIE exception. Comments generally advocated for the following types of transition relief: (i) for QIEs in existence on the date the proposed regulations were issued, provide an exception (subject to termination rules like those in§301.7701-2(d)) such that a foreign-owned domestic corporation is not treated as a look-through person; (ii) exempt foreign investors in existing QIEs from the domestic corporation look-through rule to the extent of existing ownership and capital commitments as of the date the proposed regulations were issued; (iii) only apply the domestic corporation look-through rule to QIE stock acquired by a foreign-owned domestic corporation after the finalization date; or (iv) delay application of the domestic corporation look-through rule to existing QIEs for some period ranging from at least 120 days after the finalization date to tax years beginning on or after January 1, 2028 (drawing from the general five-year testing period standard). The final regulations do not adopt the suggestion to delay application of the final domestic corporation look-through rule, which would exempt both existing and new QIE structures from the rule. However, the Treasury Department and the IRS have determined that, although the final domestic corporation look-through rule represents the appropriate application of section 897(h)(4)(B), its effect should be limited with respect to investors that may have entered into structures with the expectation that domestic control of a QIE would be determined without regard to that rule. Thus, consistent with the first three types of comments noted above, the final regulations include a transition rule that, for a ten-year period, exempts existing structures from the final domestic corporation look-through rule, provided they meet certain requirements.§1.897-1(c)(3)(vi). These requirements are intended to ensure that the final domestic corporation look-through rule does not apply to preexisting business arrangements, but only to the extent the QIE does not acquire a significant amount of new USRPIs and does not undergo a significant change in its ownership (subject to an exception for acquisitions of a USRPI or QIE interest pursuant to a previous binding commitment).§1.897-1(c)(3)(vi)(A) and (E). If either of these two thresholds is exceeded, the QIE at that time becomes subject to the final domestic corporation look-through rule like any other QIE.§1.897-1(c)(3)(vi)(B). A QIE is considered to have acquired a significant amount of new USRPIs if the total fair market value of the USRPIs it acquires directly and indirectly exceeds 20 percent of the fair market value of the USRPIs held directly and indirectly by the QIE as of April 24, 2024.§1.897-1(c)(3)(vi)(A)( 2 ). The final regulations provide that the value of the USRPIs held directly and indirectly by a QIE on April 24, 2024 is determined as of that date and that, for this purpose, taxpayers may use the most recently calculated amounts under the quarterly tests described in section 851(b)(3) or 856(c)(4), as applicable.§1.897-1(c)(3)(vi)(D). By using these existing rules the final regulations minimize the need to make additional or complex valuations. In determining whether there has been a significant change in the ownership of a QIE, the final regulations consider whether the direct or indirect ownership of the QIE by non-look-through persons (determined by applying the final domestic corporation look-through rule) has increased by more than 50 percentage points in the aggregate relative to the QIE stock owned by such non-look-through persons on April 24, 2024.§1.897-1(c)(3)(vi)(A)( 3 ). Because this rule applies on a percentage basis, a non-pro-rata issuance or redemption of stock is counted towards the 50 percentage point amount. To simplify the determination of changes in ownership of stock of a QIE that is publicly traded, the final regulations disregard transfers by any person (regardless of whether they are a non-look-through person) that owns a less than five-percent interest in the stock of the QIE, unless the QIE has actual knowledge of that person's ownership.§1.897-1(c)(3)(vi)(G). The transition rule applies until April 24, 2034, or, if earlier, until the requirements precluding significant acquisitions of USRPIs and changes in ownership are not met, at which time the final domestic corporation look-through rule applies in determining whether a QIE is domestically controlled.§1.897-1(c)(3)(vi)(B). The ten-year period is intended to provide sufficient time to mitigate the impact of the final domestic corporation look-through rule on existing QIEs and their investors, but ensures that all QIEs are eventually subject to the same rules. However, even after the transition rule no longer applies, the final domestic corporation look-through rule is prospective only and thus does not apply to any portion of a testing period during which the transition rule applied to a QIE.§1.897-1(c)(3)(vi)(C). Thus, for example, if the transition rule ceases to apply to a QIE due to a change in its ownership but, at such time, the QIE is a domestically controlled QIE notwithstanding the final domestic corporation look-through rule, the determination of domestic control for the testing period of a subsequent disposition of QIE stock may disregard the final domestic corporation look-through rule to the extent the transition rule applied. Special Analyses I. Regulatory Planning and Review -- Economic Analysis 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. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) generally requires that a Federal agency obtain the approval of the OMB before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. The collection of information in§1.1445-2(c)(3) is a statement provided by a domestic corporation that certifies that an interest in such corporation is not a U.S. real property interest. Section 1.1445-2(c)(3) clarifies that the existing procedure may also be used by a domestic corporation to certify that it is a domestically controlled QIE (as determined under§1.897-1(c)(3)), as long as the certification is voluntarily issued and otherwise complies with the existing requirements in§1.897-2(h). This modification to§1.1445-2(c)(3) clarifies the existing scope of the collection of information. For purposes of the PRA, the reporting burden associated with the collections of information in§1.1445-2(c)(3) will be reflected in the Paperwork Reduction Act Submissions associated with the section 1445 regulations (OMB control number 1545-0902). III. Regulatory Flexibility Act A. Succinct Statement of the Need for, and Objectives of, the Final Regulations As discussed in the preamble to the proposed regulations, there may be some uncertainty as to whether QFPFs and QCEs, which are treated as not "nonresident alien individuals or foreign corporations" for purposes of section 897, are treated as foreign persons for purposes of the DC-QIE exception. Treating QFPFs and QCEs as non-foreign investors for purposes of the DC-QIE exception has the potential to expand the effect of section 897(l) to foreign investors who are neither QFPFs nor QCEs (by exempting such investors from tax under section 897(a)). These regulations eliminate any uncertainty that taxpayers may have as to the proper classification of QFPFs and QCEs for purposes of the DC-QIE exception by providing that QFPFs and QCEs are treated as foreign persons for purposes of the DC-QIE exception. Also as discussed in the preamble to the proposed regulations, there is uncertainty regarding the determination of whether stock of a QIE is held "directly or indirectly" by foreign persons for purposes of the DC-QIE exception. These regulations provide rules to clarify this determination. Because there was a possibility of significant economic impact on a substantial number of small entities as a result of the rules relating to the treatment of QFPFs and QCEs for purposes of the DC-QIE exception and the definition of a domestically controlled QIE, the proposed regulations provided an initial regulatory flexibility analysis and requested comments from the public on the number of small entities that may be impacted and whether that impact will be economically significant. No comments were received. B. Small Entities to Which These Regulations Will Apply The regulation relating to the treatment of QFPFs and QCEs for purposes of the DC-QIE exception affects other foreign investors in QIEs. The regulation defining a domestically controlled QIE also affects foreign investors in QIEs. Because an estimate of the number of small businesses affected is not currently feasible, this final regulatory flexibility analysis assumes that a substantial number of small businesses will be affected. The Treasury Department and the IRS do not expect that these regulations will affect a substantial number of small nonprofit organizations or small governmental jurisdictions. C. Projected Reporting, Recordkeeping, and Other Compliance Requirements These regulations do not impose additional reporting or recordkeeping obligations. However, see Part II of this Special Analysis describing certain voluntary reporting that these regulations clarify is available in§1.1445-2(c)(3) by a domestic corporation to certify that it is a domestically controlled QIE. D. Steps Taken to Minimize Significant Economic Impact, Legal Reasons, and Alternatives Considered The final regulations address potential uncertainty under current law and do not impose an additional economic burden. Consequently, the rules represent the approach with the least economic impact. These regulations clarify the treatment of QFPFs and QCEs for purposes of the DC-QIE exception. The rules are intended to ensure that the exemption under section 897(l) does not inappropriately inure to non-QFPFs or non-QCEs by treating QFPFs and QCEs as domestic investors for purposes of the DC-QIE exception. These regulations also clarify whether stock of a QIE is held "directly or indirectly" by foreign persons in determining whether the DC-QIE exception applies. The legal basis for these regulations is contained in sections 897(l) and 7805. Section 897(a) applies to nonresident alien individuals and foreign corporations, and neither the statute nor prior regulations establish different rules for small entities. Moreover, the DC-QIE exception is measured based on the ownership interests in a QIE, regardless of the size of the investor. Because the DC-QIE exception takes into account all investors, regardless of size, the Treasury Department and the IRS have concluded that the DC-QIE exception should apply uniformly to large and small business entities. The Treasury Department and the IRS did not consider any significant alternative to the rule that provides for the treatment of QFPFs and QCEs under the DC-QIE exception. The Treasury Department and the IRS did consider alternatives for the rule that defines a domestically controlled QIE, including one alternative that generally would treat all domestic C corporations as non-look-through persons (that is, without the special rule for foreign-controlled domestic corporations discussed in part I of the Summary of Comments and Explanation of Revisions section of this preamble). However, the Treasury Department and the IRS concluded that the look-through approach in the final regulations best serves the purposes of the DC-QIE exception while also taking into account "indirect" ownership of QIE stock by foreign persons in determining whether a QIE is domestically controlled under section 897(h)(4)(B). IV. Section 7805(f) Pursuant to section 7805(f) of the Code, the proposed regulations (REG-100442-22) preceding these final regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on the impact on small businesses and no comments were received. V. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. The final regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold. VI. Executive Order 13132: Federalism Executive Order 13132 (entitled "Federalism") prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. The final regulations do not have federalism implications, do not impose substantial direct compliance costs on State and local governments, and do not preempt State law within the meaning of the Executive order. Statement of Availability of IRS Documents IRS Revenue Procedures, Revenue Rulings, Notices, and other guidance cited in this document are published in the Internal Revenue Bulletin or Cumulative Bulletin and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at www.irs.gov. Drafting Information The principal author of these final regulations is Arielle Borsos, Office of Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1--INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order for§§1.897-1, 1.897-2, and 1.1445-2 to read in part as follows: Authority: 26 U.S.C. 7805 * * * * * * * * Section 1.897-1 also issued under 26 U.S.C. 897 and 897(l)(3). Section 1.897-2 also issued under 26 U.S.C. 897. * * * * * Section 1.1445-2 also issued under 26 U.S.C. 1445. * * * * * Par. 2. Section 1.897-1 is amended by: 1. Revising paragraph (a)(2); 2. Removing and reserving paragraph (c)(2)(i); 3. Adding paragraphs (c)(3) and (4) and (k); 4. Revising and republishing paragraph (l); and 5. Adding paragraph (n). The revisions and additions read as follows:§1.897-1 Taxation of foreign investment in United States real property interests, definition of terms. (a) * * * (2) Applicability date. Except as otherwise provided in this paragraph (a)(2), the regulations set forth in this section and§§1.897-2 through 1.897-4 apply to transactions occurring after June 18, 1980. Except as otherwise provided in paragraph (c)(3)(vi) of this section, paragraphs (c)(3) and (4), (k), and (l) of this section apply to transactions occurring on or after April 25, 2024, and transactions occurring before April 25, 2024, resulting from an entity classification election under§301.7701-3 of this chapter that was effective on or before April 25, 2024, but was filed on or after April 25, 2024. For transactions occurring before April 25, 2024, see paragraphs (c)(2)(i) and (l) of this section and§1.897-9T(c) contained in 26 CFR part 1, as revised April 1, 2024. * * * * * (c) * * * (3) Domestically controlled QIE-- (i) In general. An interest in a domestically controlled qualified investment entity (QIE) is not a United States real property interest. A QIE is domestically controlled if foreign persons hold directly or indirectly less than 50 percent of the fair market value of the QIE's outstanding stock at all times during the testing period. For rules that apply to distributions by a QIE (including a domestically controlled QIE) attributable to gain from the sale or exchange of a United States real property interest, see section 897(h)(1). (ii) Look-through approach for determining QIE stock held directly or indirectly. The following rules apply for purposes of determining whether a QIE is domestically controlled: (A) Non-look-through persons considered holders. Only a non-look-through person is considered to hold directly or indirectly stock of the QIE. (B) Attribution from look-through persons. Stock of a QIE that, but for the application of paragraph (c)(3)(ii)(A) of this section, would be considered directly or indirectly held by a look-through person, is instead considered held directly or indirectly by the look-through person's shareholders, partners, or beneficiaries, as applicable, that are non-look-through persons based on the non-look-through person's proportionate interest in the look-through person. To the extent the shareholders, partners, or beneficiaries, as applicable, of the look-through person are also look-through persons, this paragraph (c)(3)(ii)(B) applies to such shareholders, partners, or beneficiaries as if they directly or indirectly held, but for the application of paragraph (c)(3)(ii)(A) of this section, their proportionate share of the stock of the QIE. (C) No attribution from non-look-through persons. Stock of a QIE considered held directly or indirectly by a non-look-through person is not considered held directly or indirectly by any other person. (iii) Special rules for applying look-through approach. The following additional special rules apply for purposes of determining whether a QIE is domestically controlled: (A) Certain holders of U.S. publicly traded QIE stock. Notwithstanding any other provision of this paragraph (c)(3), a person holding less than five percent of U.S. publicly traded stock of a QIE at all times during the testing period, determined without regard to paragraph (c)(3)(ii)(A) of this section, is treated as a United States person that is a non-look-through person with respect to that stock, unless the QIE has actual knowledge that such person is not a United States person or has actual knowledge that such person is foreign controlled as determined under paragraph (c)(3)(v)(B) of this section (treating any person that is not a non-public domestic C corporation as if it were a non-public domestic C corporation for this purpose). For an example illustrating the application of this paragraph (c)(3)(iii)(A), see paragraph (c)(3)(vii)(C) of this section ( Example 3 ). (B) Certain foreign-controlled domestic C corporations. A non-public domestic C corporation is treated as a look-through-person if it is a foreign-controlled domestic corporation. For an example illustrating the application of this paragraph (c)(3)(iii)(B), see paragraph (c)(3)(vii)(B) of this section ( Example 2 ). (C) Public QIEs. A public QIE is treated as a foreign person that is a non-look-through person. The preceding sentence does not apply, however, if the public QIE is a domestically controlled QIE as defined in this paragraph (c)(3), determined after the application of this paragraph (c)(3)(iii), in which case the public QIE is treated as a United States person that is a non-look-through person. For an example illustrating the application of this paragraph (c)(3)(iii)(C), see paragraph (c)(3)(vii)(C) of this section ( Example 3 ). (iv) Treatment of certain persons as foreign persons --(A) Qualified foreign pension fund or qualified controlled entity. For purposes of this paragraph (c)(3), a qualified foreign pension fund (including any part of a qualified foreign pension fund) or a qualified controlled entity is treated as a foreign person, irrespective of whether the fund or entity qualifies for the exception from section 897 provided in§1.897(l)-1(b)(1). For an example illustrating the application of this paragraph (c)(3)(iv)(A), see paragraph (c)(3)(vii)(A) of this section ( Example 1 ). See also paragraph (k) of this section for a definition of foreign person that applies for purposes of sections 897, 1445, and 6039C. (B) International organization. For purposes of this paragraph (c)(3), an international organization (as defined in section 7701(a)(18)) is treated as a foreign person. See§1.897-9T(e) (regarding the treatment of international organizations under sections 897, 1445, and 6039C), which provides that an international organization is not a foreign person with respect to United States real property interests, and is not subject to sections 897, 1445, and 6039C on the disposition of a United States real property interest. (v) Definitions. The following definitions apply for purposes of this paragraph (c)(3): (A) A domestic C corporation is any domestic corporation other than a regulated investment company (RIC) as defined in section 851, a real estate investment trust (REIT) as defined in section 856, or an S corporation as defined in section 1361. (B) A foreign-controlled domestic corporation is any non-public domestic C corporation if foreign persons hold directly or indirectly more than 50 percent of the fair market value of the non-public domestic C corporation's outstanding stock. For purposes of determining whether a non-public domestic C corporation is a foreign-controlled domestic corporation, the rules of paragraphs (c)(3)(ii)(A) through (C) and (c)(3)(iii)(C) of this section apply with the following modifications-- ( 1 ) In paragraphs (c)(3)(ii)(A) through (C) of this section, treating references to QIE as references to non-public domestic C corporation; and ( 2 ) A non-public domestic C corporation that is a foreign-controlled domestic corporation under this paragraph (c)(3)(v)(B) is treated as a look-through person for purposes of determining whether any other non-public domestic C corporation is a foreign-controlled domestic corporation. (C) A look-through person is any person other than a non-look-through person. Thus, for example, a look-through person includes a REIT that is not a public QIE, an S corporation, a partnership (domestic or foreign) that is not a publicly traded partnership, a RIC that is not a public RIC, and a trust (domestic or foreign, whether or not the trust is described in sections 671 through 679). For a special rule that treats certain non-public domestic C corporations as look-through persons, see paragraph (c)(3)(iii)(B) of this section. (D) A non-look-through person is an individual, a domestic C corporation (other than a foreign-controlled domestic corporation), a nontaxable holder, a foreign corporation (including a foreign government pursuant to section 892(a)(3)), a publicly traded partnership (domestic or foreign), a public RIC, an estate (domestic or foreign), an international organization (as defined in section 7701(a)(18)), a qualified foreign pension fund (including any part of a qualified foreign pension fund), or a qualified controlled entity. For special rules that treat certain holders of QIE stock as non-look-through persons, see paragraphs (c)(3)(iii)(A) and (C) of this section. (E) A non-public domestic C corporation is any domestic C corporation that is not a public domestic C corporation. (F) A nontaxable holder is-- ( 1 ) Any organization that is exempt from taxation by reason of section 501(a); ( 2 ) The United States, any State (as defined in section 7701(a)(10)), any territory of the United States, or a political subdivision of any State or any territory of the United States; or ( 3 ) Any Indian Tribal government (as defined in section 7701(a)(40)) or its subdivision (determined in accordance with section 7871(d)). (G) A public domestic C corporation is a domestic C corporation any class of stock of which is regularly traded on an established securities market within the meaning of§§1.897-1(m) and 1.897-9T(d). A domestic C corporation is not a public domestic C corporation, however, if the QIE whose status as domestically controlled is being determined under this paragraph (c)(3) has actual knowledge that the domestic C corporation is foreign controlled as determined under paragraph (c)(3)(v)(B) of this section (treating the domestic C corporation for this purpose as if it were a non-public domestic C corporation). (H) A public QIE is a QIE any class of stock of which is regularly traded on an established securities market within the meaning of§§1.897-1(m) and 1.897-9T(d), or that is a RIC that issues redeemable securities within the meaning of section 2 of the Investment Company Act of 1940. (I) A public RIC is a RIC that is not a QIE and any class of stock of which is either regularly traded on an established securities market within the meaning of§§1.897-1(m) and 1.897-9T(d), or common stock that is continuously offered pursuant to a public offering (within the meaning of section 4 of the Securities Act of 1933, as amended (15 U.S.C. 77a to 77aa)) and held by or for no fewer than 500 persons. A RIC is not a public RIC, however, if the QIE whose status as domestically controlled is being determined under this paragraph (c)(3) has actual knowledge that the RIC is foreign controlled as determined under paragraph (c)(3)(v)(B) of this section (treating the RIC for this purpose as if it were a non-public domestic C corporation). (J) A publicly traded partnership is a partnership any class of interest of which is regularly traded on an established securities market within the meaning of§§1.897-1(m) and 1.897-9T(d). A domestic partnership is not a publicly traded partnership, however, if the QIE whose status as domestically controlled is being determined under this paragraph (c)(3) has actual knowledge that the domestic partnership is foreign controlled as determined under paragraph (c)(3)(v)(B) of this section (treating the partnership for this purpose as if it were a non-public domestic C corporation). (K) A qualified controlled entity has the meaning set forth in§1.897(l)-1(e)(9). (L) A qualified foreign pension fund has the meaning set forth in§1.897(l)-1(c). (M) A QIE is a qualified investment entity, as defined in section 897(h)(4)(A). (N) Testing period has the meaning set forth in section 897(h)(4)(D). (O) U.S. publicly traded QIE stock is any class of stock of a QIE that is regularly traded on an established securities market within the meaning of§§1.897-1(m) and 1.897-9T(d), but only if the established securities market is in the United States. (vi) Transition rule for certain QIEs owned by foreign-controlled domestic corporations --(A) General rule. Except as provided in paragraph (c)(3)(vi)(B) of this section, paragraph (c)(3)(iii)(B) of this section does not apply with respect to a QIE that is in existence as of April 24, 2024, and satisfies the following requirements at all times on and after April 24, 2024-- ( 1 ) The QIE is domestically controlled (as determined under this paragraph (c)(3), but without regard to paragraph (c)(3)(iii)(B) of this section); ( 2 ) The aggregate fair market value of any United States real property interests acquired by the QIE directly and indirectly after April 24, 2024, is no more than 20 percent of the aggregate fair market value of the United States real property interests held directly and indirectly by the QIE as of April 24, 2024 (determined in accordance with paragraph (c)(3)(vi)(D) of this section); and ( 3 ) The percentage of the stock of the QIE held directly or indirectly by one or more non-look-through persons (determined based on fair market value and under the rules of paragraphs (c)(3)(ii) through (v) of this section and this paragraph (c)(3)(vi), including paragraph (c)(3)(iii)(B) of this section) does not increase by more than 50 percentage points in the aggregate over the percentage of stock of the QIE owned directly or indirectly by such non-look-through persons on April 24, 2024. (B) Termination of transition rule. The transition rule described in paragraph (c)(3)(vi)(A) of this section will cease to apply, and the rule in paragraph (c)(3)(iii)(B) of this section will apply for purposes of determining whether a QIE is domestically controlled, with respect to transactions occurring on or after the earlier of: ( 1 ) The date immediately following the date on which the QIE fails to meet any of the requirements described in paragraph (c)(3)(vi)(A) of this section; and ( 2 ) April 24, 2034. For an example illustrating the application of paragraph (c)(3)(vi)(A) of this section and this paragraph (c)(3)(vi)(B), see paragraph (c)(3)(vii)(E) of this section ( Example 5 ). (C) Effect of transition rule on testing period. If the transition rule described in paragraph (c)(3)(vi)(A) of this section ceases to apply to a QIE under paragraph (c)(3)(vi)(B) of this section, the rule in paragraph (c)(3)(iii)(B) of this section will not apply to the QIE with respect to the portion of any testing period during which the transition rule in this paragraph (c)(3)(vi) applied. (D) Determination of fair market value of United States real property interests. For purposes of paragraph (c)(3)(vi)(A)( 2 ) of this section, the fair market value of the United States real property interests held directly and indirectly by a QIE on April 24, 2024, is the value of such property interests as calculated under section 851(b)(3) or 856(c)(4) as of the close of the most recent quarter of the QIE's taxable year before April 24, 2024. For purposes of paragraph (c)(3)(vi)(A)( 2 ) of this section, the fair market value of any property acquired after the close of the most recent quarter of the QIE's taxable year before April 24, 2024, whether acquired before or after April 24, 2024, is determined on the date of such acquisition using a reasonable method, provided the QIE consistently uses the same method with respect to all of its United States real property interests when applying this paragraph (c)(3)(vi). (E) Binding commitments. For purposes of paragraphs (c)(3)(vi)(A)( 2 ) and ( 3 ) of this section, a direct or indirect acquisition of a United States real property interest or of stock of a QIE pursuant to a written agreement that was (subject to customary conditions) binding before April 24, 2024, and all times thereafter, or pursuant to a tender offer announced before April 24, 2024, that is subject to section 14(e) of the Securities and Exchange Act of 1934 (15 U.S.C. 78n(e)) and 17 CFR 240.14e-1 through 240.14e-8 (Regulation 14E), is treated as occurring on April 24, 2024. (F) Ownership by certain successors under section 368(a)(1)(F). For purposes of paragraph (c)(3)(vi)(A)( 3 ) of this section, the transferor corporation and the resulting corporation (as defined in§1.368 - 2(m)(1)) in a reorganization described under section 368(a)(1)(F) (whether engaged in by the QIE or by another corporation) are treated as the same corporation. (G) Ownership by less than five-percent public shareholders. For purposes of paragraph (c)(3)(vi)(A)( 3 ) of this section, in the case of any class of stock of a QIE that is regularly traded on an established securities market within the meaning of§§1.897-1(m) and 1.897-9T(d), all such stock owned by persons holding less than 5 percent of that class of stock, determined without regard to paragraph (c)(3)(ii)(A) of this section, is treated as stock owned by a single non-look-through person except to the extent that the QIE has actual knowledge regarding the ownership of any person. (vii) Examples. The rules of this paragraph (c)(3) are illustrated by the following examples. It is assumed that each entity has a single class of stock or other ownership interests, that the ownership described existed throughout the relevant testing period and that, unless otherwise stated, a QIE is not a public QIE as defined under paragraph (c)(3)(v)(H) of this section. (A) Example 1: QIE stock held by public domestic C corporation --( 1 ) Facts. USR is a REIT, 51 percent of the stock of which is held by X, a public domestic C corporation as defined in paragraph (c)(3)(v)(G) of this section, and 49 percent of the stock of which is held by nonresident alien individuals, which are foreign persons as defined in paragraph (k) of this section. ( 2 ) Analysis. Under paragraph (c)(3)(v)(M) of this section, USR is a QIE. Because X is a public domestic C corporation, it cannot be a foreign-controlled domestic corporation and, therefore, is a non-look-through person as defined under paragraph (c)(3)(v)(D) of this section. Thus, under paragraph (c)(3)(ii)(A) of this section X is considered as holding directly or indirectly stock of USR for purposes of determining whether USR is a domestically controlled QIE. Under paragraph (c)(3)(ii)(C) of this section, the USR stock held directly or indirectly by X is not considered held directly or indirectly by any other person, including the shareholders of X. Because X is not a foreign person as defined in paragraph (k) of this section and holds directly or indirectly 51 percent of the single class of outstanding stock of USR, foreign persons hold directly or indirectly less than 50 percent of the fair market value of the stock of USR, and USR therefore is a domestically controlled QIE under paragraph (c)(3)(i) of this section. ( 3 ) Alternative facts: QIE stock held by domestic partnership. The facts are the same as in paragraph (c)(3)(vii)(A)( 1 ) of this section ( Example 1 ), except that, instead of being a public domestic C corporation, X is a domestic partnership that is not a publicly traded partnership as defined in paragraph (c)(3)(v)(J) of this section. In addition, FC1, a foreign corporation, holds a 50 percent interest in X, and the remaining interests in X are held by U.S. citizens. X is not a non-look-through person as defined in paragraph (c)(3)(v)(D) of this section and, therefore, is a look-through person as defined in paragraph (c)(3)(v)(C) of this section. Accordingly, under paragraph (c)(3)(ii)(A) of this section, X is not considered as holding directly or indirectly stock of USR for purposes of determining whether USR is a domestically controlled QIE. Under paragraph (c)(3)(ii)(B) of this section, the stock of USR that, but for paragraph (c)(3)(ii)(A) of this section, is considered held by X, a look-through person, is instead considered held proportionately by X's partners that are non-look-through persons. Accordingly, because FC1 and the U.S. citizen partners in X are non-look-through persons as defined in paragraph (c)(3)(v)(D) of this section, 25.5 percent of the stock of USR is considered as held directly or indirectly by FC1 (50% x 51%), a foreign person as defined in paragraph (k) of this section, and 25.5 percent (in the aggregate) of the stock of USR is considered as held directly or indirectly by the U.S. citizen partners in X (50% x 51%), who are not foreign persons as defined in paragraph (k) of this section. Foreign persons therefore hold directly or indirectly 74.5 percent of the stock of USR (49 percent of the stock of USR held directly or indirectly by nonresident alien individuals, who are non-look-through persons as defined in paragraph (c)(3)(v)(D) of this section, plus the 25.5 percent held directly or indirectly by FC1), and USR is not a domestically controlled QIE under paragraph (c)(3)(i) of this section. The result described in this paragraph (c)(3)(vii)(A)( 3 ) would be the same if, instead of being a domestic partnership, X were a foreign partnership. ( 4 ) Alternative facts: QIE stock held by a qualified foreign pension fund. The facts are the same as in paragraph (c)(3)(vii)(A)( 3 ) of this section ( Example 1 ), except that, instead of being a foreign corporation, FC1 is a qualified foreign pension fund. The analysis is the same as in paragraph (c)(3)(vii)(A)( 3 ) ( Example 1 ) regarding the treatment of X as a look-through person as defined in paragraph (c)(3)(v)(C) of this section. In addition, FC1, a foreign person under paragraph (c)(3)(iv)(A) of this section, is a non-look-through person as defined in paragraph (c)(3)(v)(D) of this section. Because FC1 and the U.S. citizen partners in X are non-look-through persons, 25.5 percent of the stock of USR is considered as held directly or indirectly by FC1 (50% x 51%), and 25.5 percent (in the aggregate) of the stock of USR is considered as held directly or indirectly by the U.S. citizen partners in X (50% x 51%). Thus, for the same reasons described in paragraph (c)(3)(vii)(A)( 3 ) ( Example 1 ), foreign persons hold directly or indirectly 74.5 percent of the stock of USR, and USR is not a domestically controlled QIE under paragraph (c)(3)(i) of this section. (B) Example 2: QIE stock held by non-public domestic C corporation that is a foreign-controlled domestic corporation --( 1 ) Facts. USR is a REIT, 51 percent of the stock of which is held by X, a non-public domestic C corporation as defined in paragraph (c)(3)(v)(E) of this section, and 49 percent of the stock of which is held by nonresident alien individuals, which are foreign persons as defined in paragraph (k) of this section. FC1, a foreign corporation, holds 40 percent of the stock of X, and Y, a nonresident alien individual, holds 15 percent of the stock of X. The remaining 45 percent of the stock of X is held by U.S. citizens. ( 2 ) Analysis. Under paragraph (c)(3)(v)(M) of this section, USR is a QIE. X, a non-public domestic C corporation, is a non-look-through person as defined under paragraph (c)(3)(v)(D) of this section, unless paragraph (c)(3)(iii)(B) of this section applies to treat X as a look-through person because X is a foreign-controlled domestic corporation. FC1, Y, and the U.S. citizen shareholders of X are non-look-through persons as defined under paragraph (c)(3)(v)(D). Under paragraph (c)(3)(v)(B)( 1 ) of this section, FC1, Y, and the U.S. citizen shareholders are all considered as holding directly or indirectly stock of X for purposes of determining whether X is a foreign-controlled domestic corporation. Under paragraph (c)(3)(v)(B)( 1 ) of this section, the stock held directly or indirectly by FC1, Y, and the U.S. citizen shareholders is not considered held directly or indirectly by any other person. Because FC1 and Y, both foreign persons as defined in paragraph (k) of this section, hold directly or indirectly 40 percent and 15 percent of the stock of X, respectively, foreign persons hold directly or indirectly more than 50 percent of the fair market value of the stock of X, and X is a foreign-controlled domestic corporation under paragraph (c)(3)(v)(B) of this section. Accordingly, under paragraph (c)(3)(iii)(B) of this section, X is a look-through person as defined in paragraph (c)(3)(v)(C) of this section and, therefore, under paragraph (c)(3)(ii)(A) of this section is not considered as holding directly or indirectly stock of USR for purposes of determining whether USR is a domestically controlled QIE. Under paragraph (c)(3)(ii)(B) of this section, the stock of USR that, but for paragraph (c)(3)(ii)(A), is considered held by X, a look-through person, is instead considered held proportionately by X's shareholders that are non-look-through persons. Accordingly, because FC1, Y, and the U.S. citizen shareholders of X are non-look-through persons, 20.4 percent of the stock of USR is considered as held directly or indirectly by FC1 (40% x 51%), 7.65 percent of the stock of USR is considered as held directly or indirectly by Y (15% x 51%), and 22.95 percent (in the aggregate) of the stock of USR is considered as held directly or indirectly by the U.S. citizen shareholders (45% x 51%). Foreign persons therefore hold directly or indirectly 77.05 percent of the stock of USR (49 percent of the stock of USR held directly by nonresident alien individuals, who are foreign persons and non-look-through persons as defined in paragraph (c)(3)(v)(D), plus the 20.4 percent and 7.65 percent held indirectly by FC1 and Y, respectively), and USR is not a domestically controlled QIE under paragraph (c)(3)(i) of this section. The result described in this paragraph (c)(3)(vii)(B)( 2 ) would be different if Y were a U.S. citizen instead of a nonresident alien individual, in which case X would be a non-look-through person because it is not a foreign-controlled domestic corporation under paragraph (c)(3)(v)(B) (the only foreign non-look-through person to hold directly or indirectly stock in X is FC1, which holds a 40-percent interest). Consequently, USR would be a domestically controlled QIE under paragraph (c)(3)(i) of this section because foreign persons hold directly or indirectly less than 50 percent of the stock of USR. (C) Example 3: QIE stock held by public QIE that is a domestically controlled QIE --( 1 ) Facts. USR2 is a REIT, 51 percent of the stock of which is held by USR1, a REIT that is a public QIE as defined in paragraph (c)(3)(v)(H) of this section, and 49 percent of the stock of which is held by nonresident alien individuals, which are foreign persons as defined in paragraph (k) of this section. The stock of USR1 is U.S. publicly traded QIE stock as defined in paragraph (c)(3)(v)(O) of this section. FC1 and FC2, both foreign corporations, each hold 20 percent of the stock of USR1. The remaining 60 percent of the stock of USR1 is held by persons that each hold less than 5 percent of the stock of USR1 and with respect to which USR1 has no actual knowledge that such person is not a United States person or is foreign controlled (as determined under paragraph (c)(3)(v)(B) of this section by treating any person that is not a non-public domestic C corporation as if it were a non-public domestic C corporation for this purpose) (USR1 less than five-percent public shareholders). ( 2 ) Analysis. Under paragraph (c)(3)(v)(M) of this section, USR2 and USR1 are QIEs. Under paragraph (c)(3)(iii)(A) of this section, each of the USR1 less than five-percent public shareholders is treated as a United States person that is a non-look-through person. Consequently, under paragraph (c)(3)(i) of this section USR1 is a domestically controlled QIE because FC1 and FC2, each a foreign person as defined in paragraph (k) of this section that is a non-look-through person under paragraph (c)(3)(v)(D) of this section, together hold directly or indirectly only 40 percent of the stock of USR1 and, thus, foreign persons hold directly or indirectly less than 50 percent of the fair market value of the stock of USR1. In addition, the USR2 stock held by USR1 is treated as held directly or indirectly by a United States person that is a non-look-through person under paragraph (c)(3)(iii)(C) of this section. Because USR1 holds directly or indirectly 51 percent of the stock of USR2, foreign persons hold directly or indirectly less than 50 percent of the fair market value of the stock of USR2, and USR2 is a domestically controlled QIE under paragraph (c)(3)(i) of this section. ( 3 ) Alternative facts: QIE stock held by public QIE that is not a domestically controlled QIE. The facts are the same as in paragraph (c)(3)(vii)(C)( 1 ) of this section ( Example 3 ), except that 25 percent of the stock of USR1 is held by each of FC1 and FC2, with the remaining 50 percent of the stock of USR1 held by the USR1 less than five-percent public shareholders. Regardless of the treatment of the USR1 less than five-percent public shareholders, USR1 is not a domestically controlled QIE under paragraph (c)(3)(i) of this section because FC1 and FC2, each a foreign person as defined in paragraph (k) of this section that is a non-look-through person under paragraph (c)(3)(v)(D) of this section, together hold directly or indirectly 50 percent of the stock of USR1 and, thus, foreign persons do not hold directly or indirectly less than 50 percent of the fair market value of the stock of USR1. In addition, the USR2 stock held by USR1 is treated as held by a foreign person that is a non-look-through person under paragraph (c)(3)(iii)(C) of this section. Because USR1 holds directly or indirectly 51 percent of the stock of USR2, foreign persons do not hold directly or indirectly less than 50 percent of the fair market value of the stock of USR2, and USR2 is not a domestically controlled QIE under paragraph (c)(3)(i) of this section. (D) Example 4: QIE stock held by non-public QIE --( 1 ) Facts. USR2 is a REIT, 49 percent of the stock of which is held by nonresident alien individuals, and 51 percent of the stock of which is held by USR1, a REIT. USR1 is not a public QIE as defined in paragraph (c)(3)(v)(H) of this section. U.S. citizens hold 50 percent of the stock of USR1. The remaining 50 percent of the stock of USR1 is held by PRS, a domestic partnership, 50 percent of the interests in which are held by DC, a public domestic C corporation as defined in paragraph (c)(3)(v)(G) of this section, and 50 percent of the interests in which are held by nonresident alien individuals. ( 2 ) Analysis. Under paragraph (c)(3)(v)(M) of this section, USR2 and USR1 are QIEs. USR1 is not treated as a non-look-through person under paragraph (c)(3)(iii)(C) of this section because USR1 is not a public QIE as defined in paragraph (c)(3)(v)(H) of this section. Each of USR1 and PRS is a look-through person as defined in paragraph (c)(3)(v)(C) of this section that is not treated as holding directly or indirectly stock in USR2 for purposes of determining whether USR2 is a domestically controlled QIE under paragraph (c)(3)(ii)(A) of this section. Because the U.S. citizens who hold USR1 stock are non-look-through persons as defined in paragraph (c)(3)(v)(D) of this section, those U.S. citizens are treated under paragraph (c)(3)(ii)(B) of this section as holding directly or indirectly 25.5 percent of the stock of USR2 through their USR1 stock interest (50% x 51%) in accordance with paragraph (c)(3)(ii)(A) of this section. Similarly, because DC and the nonresident alien partners in PRS are non-look-through persons, each is treated under paragraph (c)(3)(ii)(B) of this section as holding directly or indirectly the stock of USR2 through its interest in PRS and PRS's interest in USR1. Thus, DC is treated as holding directly or indirectly 12.75 percent of the stock of USR2 (50% x 50% x 51%) and the nonresident alien individual partners, which are foreign persons as defined in paragraph (k) of this section, are treated as directly or indirectly holding a 12.75 percent aggregate interest in the stock of USR2 (50% x 50% x 51%). Foreign persons therefore hold directly or indirectly 61.75 percent of the stock of USR2 (the 49 percent stock in USR2 directly held by nonresident alien individuals, who are foreign persons and non-look-through persons as defined in paragraph (c)(3)(v)(D), plus the 12.75 percent in stock indirectly held by the nonresident alien individual partners in PRS), and USR2 is not a domestically controlled QIE under paragraph (c)(3)(i) of this section. (E) Example 5: Transition rule asset requirement --( 1 ) Facts. USR is a REIT formed on January 1, 2018. From formation, 51 percent of the stock of USR is held by X, a non-public domestic C corporation as defined in paragraph (c)(3)(v)(E) of this section, 25 percent of the stock of USR is held by FC1, a foreign corporation, and 24 percent of the stock of USR is held by nonresident alien individuals. FC2, a foreign corporation, and FC3, also a foreign corporation, each hold 50 percent of the stock of X. On April 24, 2024, USR's only property is Asset 1, a United States real property interest. The value of Asset 1, calculated under section 856(c)(4) as of the most recent quarter of USR's taxable year before April 24, 2024, is $100x. On January 1, 2026, USR borrows $30x and acquires Asset 2, a United States real property interest, for $30x. ( 2 ) Analysis. As of April 24, 2024, USR is a domestically controlled QIE under paragraph (c)(3)(i) of this section, because, as determined without regard to paragraph (c)(3)(iii)(B) of this section, X is a non-look-through person and, consequently, foreign persons hold directly or indirectly less than 50 percent of the stock of USR. Accordingly, USR satisfies the requirement under paragraph (c)(3)(vi)(A)( 1 ) of this section. USR also satisfies the requirements under paragraphs (c)(3)(vi)(A)( 2 ) and ( 3 ) of this section, respectively, as of such date, because USR has not acquired directly or indirectly any United States real property interests, and the ownership of stock of USR has not changed. Thus, as of April 24, 2024, USR qualifies for the transition relief under paragraph (c)(3)(vi)(A) of this section. However, on January 1, 2026, USR no longer meets the requirement for transition relief in paragraph (c)(3)(vi)(A)( 2 ) of this section because the fair market value of Asset 2, $30x, is 30 percent (which is more than 20 percent) of $100x, which (as calculated in accordance with paragraphs (c)(3)(vi)(A)( 2 ) and (c)(3)(vi)(D) of this section) is the fair market value of USR's United States real property interests, namely Asset 1, as of April 24, 2024. Therefore, under paragraph (c)(3)(vi)(B)( 1 ) of this section the transition rule ceases to apply to USR and, thus, paragraph (c)(3)(iii)(B) applies for purposes of determining whether USR is domestically controlled with respect to transactions occurring after January 1, 2026. Because FC2 and FC3 are non-look-through persons that hold more than 50 percent of the stock of X, X is a foreign-controlled domestic corporation under paragraph (c)(3)(iii)(B), and USR will not be a domestically controlled QIE under paragraph (c)(3)(i) of this section as of January 2, 2026, because foreign non-look-through persons (FC1, 25 percent, FC2, 25.5 percent, FC3, 25.5 percent, and the nonresident alien individuals, 24 percent) directly or indirectly hold more than 50 percent of the stock of USR. ( 3 ) Alternative facts: transition rule ownership requirement. The facts are the same as in paragraph (c)(3)(vii)(E)( 1 ) of this section ( Example 5 ), except that instead of USR borrowing funds and acquiring Asset 2, FC3 sells its 50-percent stock interest in X to FC2 on June 1, 2024, and, on January 1, 2026, FC1 sells its 25-percent stock interest in USR to FC4, a foreign corporation. Following FC3's sale of its X stock to FC2 on June 1, 2024, FC2's stock interest in USR has increased by 25.5 percentage points, from 25.5 percent on April 24, 2024 (which is 50 percent of 51 percent), to 51 percent. Following FC1's sale of its USR stock to FC4 on January 1, 2026, FC4's stock interest in USR has increased by 25 percentage points, from zero percent on April 24, 2024, to 25 percent. Accordingly, in the aggregate, non-look-through persons have increased their ownership in USR by 50.5 percentage points (25.5 percent and 25 percent for FC2 and FC4, respectively), and USR no longer meets the requirement for transition relief in paragraph (c)(3)(vi)(A)( 3 ) of this section as of January 1, 2026. Therefore, under paragraph (c)(3)(vi)(B)( 1 ) of this section the transition rule ceases to apply to USR and, thus, paragraph (c)(3)(iii)(B) of this section applies for purposes of determining whether USR is domestically controlled with respect to transactions occurring after January 1, 2026. Because FC2, a non-look-through person, holds more than 50 percent of the stock of X, X is a foreign-controlled domestic corporation under paragraph (c)(3)(iii)(B) of this section, and USR will not be a domestically controlled QIE under paragraph (c)(3)(i) of this section because foreign non-look-through persons (FC2, 51 percent, FC4, 25 percent, and the nonresident alien individuals, 24 percent) directly or indirectly hold more than 50 percent of the stock of USR. (4) Foreign ownership percentage. For purposes of calculating the foreign ownership percentage under section 897(h)(4)(C), the determination of the QIE stock that was held directly or indirectly by foreign persons is made under the rules of paragraphs (c)(3)(ii) through (vii) of this section. * * * * * (k) Foreign person. The term foreign person means a nonresident alien individual (including an individual subject to the provisions of section 877), a foreign corporation as defined in paragraph (l) of this section, a foreign partnership, a foreign trust or a foreign estate, as such persons are defined by section 7701 and the regulations in this chapter under section 7701. A resident alien individual, including a nonresident alien individual with respect to whom there is in effect an election under section 6013(g) or (h) to be treated as United States resident, is not a foreign person. With respect to the status of foreign governments and international organizations, see§1.897-9T(e). See paragraph (c)(3)(iv)(A) of this section regarding the treatment of qualified foreign pension funds and qualified controlled entities as foreign persons for purposes of section 897(h)(4)(B). (l) Foreign corporation. The term foreign corporation has the meaning ascribed to such term in section 7701(a)(3) and (5) and§ 301.7701-5. For purposes of sections 897 and 6039C, however, the term does not include a foreign corporation with respect to which there is in effect an election under section 897(i) and§1.897-3 to be treated as a domestic corporation. For purposes of section 897, the term does not include a qualified holder described in§1.897(l)-1(d); see paragraph (c)(3)(iv)(A) of this section regarding the treatment of qualified foreign pension funds and qualified controlled entities as foreign persons for purposes of section 897(h)(4)(B). * * * * * (n) Regularly traded cross-reference. See§1.897-9T(d) for a definition of regularly traded for purposes of sections 897, 1445, and 6039C. * * * * * Par. 3. Section 1.897-2 is amended by revising paragraph (h)(3) to read as follows:§1.897-2 United States real property holding corporations. * * * * * (h) * * * (3) Requirements not applicable. The requirements of this paragraph (h) do not apply to domestically-controlled qualified investment entities, as defined in section 897(h)(4)(B). But see§1.1445-2(c)(3) for rules providing that no withholding is required under section 1445(a) in certain cases when a statement is voluntarily issued by the corporation and otherwise complies with the requirements of this paragraph (h). The requirements of this paragraph (h) also do not apply to a corporation any class of stock in which is regularly traded on an established securities market at any time during the calendar year. However, such a corporation may voluntarily choose to comply with the requirements of paragraph (h)(4) of this section. * * * * * Par. 4. Section 1.897-9T is amended by: 1. Removing and reserving paragraph (c); and 2. Revising and republishing paragraph (e). The revision reads as follows:§1.897-9T Treatment of certain interest in publicly traded corporations, definition of foreign person, and foreign governments and international organizations (temporary). * * * * * (e) Foreign governments and international organizations. A foreign government shall be treated as a foreign person with respect to U.S. real property interests, and shall be subject to sections 897, 1445, and 6039C on the disposition of a U.S. real property interest except to the extent specifically otherwise provided in the regulations in this chapter issued under section 892. An international organization (as defined in section 7701(a)(18)) is not a foreign person with respect to U.S. real property interests, and is not subject to sections 897, 1445, and 6039C on the disposition of a U.S. real property interest. See§1.897-1(c)(3)(iv)(B) regarding the treatment of international organizations as foreign persons for purposes of section 897(h)(4)(B). Buildings or parts of buildings and the land ancillary thereto (including the residence of the head of the diplomatic mission) used by the foreign government for a diplomatic mission shall not be a U.S. real property interest in the hands of the respective foreign government. * * * * * Par. 5. Section 1.1445-2 is amended by: 1. Revising paragraph (c)(3)(i); and 2. Adding two sentences at the end of paragraph (e). The revision and additions read as follows:§1.1445-2 Situations in which withholding is not required under section 1445(a). * * * * * (c) * * * (3) * * * (i) In general. No withholding is required under section 1445(a) upon the acquisition of an interest in a domestic corporation, if the transferor provides the transferee with a copy of a statement, issued by the corporation pursuant to§1.897-2(h), certifying that the interest is not a U.S. real property interest, or if the transferor provides the transferee with a statement certifying that the corporation is a domestically controlled qualified investment entity (as determined under§1.897-1(c)(3)) that is voluntarily issued by the corporation but otherwise complies with the requirements of§1.897-2(h). In general, a corporation may issue such a statement only if the corporation was not a U.S. real property holding corporation at any time during the previous five years (or the period in which the interest was held by its present holder, if shorter), the corporation is a domestically controlled qualified investment entity (as determined under§1.897-1(c)(3)), or if interests in the corporation ceased to be United States real property interests under section 897(c)(1)(B). (A corporation may not provide such a statement based on its determination that the interest in question is an interest solely as a creditor.) See§1.897-2(f) and (h). The corporation may provide such a statement directly to the transferee at the transferor's request. The transferor must request such a statement before the transfer, and shall, to the extent possible, specify the anticipated date of the transfer. A corporation's statement may be relied upon for purposes of this paragraph (c)(3) only if the statement is dated not more than 30 days before the date of the transfer. A transferee may also rely upon a corporation's statement that is voluntarily provided by the corporation in response to a request from the transferee, if that statement otherwise complies with the requirements of this paragraph (c)(3) and§1.897-2(h). (e) * * * Paragraph (c)(3)(i) of this section applies with respect to dispositions of U.S. real property interests, and distributions described in section 897(h), occurring on or after April 25, 2024. For dispositions of U.S. real property interests, and distributions described in section 897(h), occurring before April 25, 2024, see§1.1445-2(c)(3)(i), as contained in 26 CFR part 1, revised as of April 1, 2024. Douglas W. O'Donnell, Deputy Commissioner. Approved: April 2, 2024. Aviva Aron-Dine, Acting Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register April 24, 2024, 8:45 a.m., and published in the issue of the Federal Register for April 25, 2024, 89 FR 31618)

Private Letter Ruling Number: 202248011 Internal Revenue Service May 25, 2022 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Number: 202248011 Release Date: 12/2/2022 UIL: 501.03-00 Date: May 25, 2022 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: CERTIFIED MAIL - RETURN RECEIPT REQUESTED Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective ******. Your determination letter dated ******, is revoked. Our adverse determination as to your exempt status was made for the following reasons: You are not described in IRC section 501(c)(3) because you are not organized and operated exclusively for exempt purposes within the meaning of IRC Section 501(c)(3) and Treasury Regulations Sections 1.501(c)(3)-1(b)(1) and 1.501(c)(3)-1(c)(1). You do not engage primarily in activities that accomplish one or more of the exempt purposes specified in Section 501(c)(3) and Treasury Regulations Section 1.501(c)(3)-1(d). Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit www.irs.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims or 3) the United States District Court for the District of Columbia. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. Keep the original letter for your records. Sincerely Lynn A. Binkley Acting Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 cc: Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: November 17, 2021 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Manager's contact information: Name: ID number: Telephone: Response due date: CERTIFIED MAIL - Return Receipt Requested: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, for Sean E. O'Reilly Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 ISSUES Whether ****** (the Organization) qualifies for exemption from federal income tax under Internal Revenue Code (IRC) Section (Sec.) 501(c)(3). FACTS Formation The Organization was incorporated as a nonprofit corporation on ****** in ****** using the generic Articles of Incorporation provided by the state and listed ******, ****** and ****** as the Board of Trustees/Directors. On ******, prior to its first meeting, the Organization submitted a "Certificate of Amendment to Articles of Incorporation for Nonprofit Corporations" to the state of ****** stating that its purpose was "to give youth incentive to work toward goals and receive experiences that improve their lives and (to) operate exclusively for charitable purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code." The Certificate of Amendment also included the requisite purpose and dissolution clauses, including the requisite language restricting private inurement and political activity. Application for Recognition of Exemption On ****** the Organization submitted a Form ******, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Under Part IV, "Narrative Description of Your Activities," in the attachment to the Form ******, the Organization provided the following: ****** is a nonprofit corporation organized and operated exclusively for educational and charitable purposes. The specific purpose of this organization is to instruct or train individuals, with a focus on youth, for the purpose of developing their goals and improving their lives. The remainder of the three-page description provided a detailed explanation of how the Organization would carry out its activities through Speaking Engagements and Online Empowerment, its two main programs. Exemption On ****** the Organization received recognition of exemption under IRC §501(c)(3) as a public charity, effective ******. Activities During the tax years ended ****** and ****** the Organization conducted speaking engagements at schools where ****** provided insights from his own life experiences as a child living through an abusive relationship in order to reach out to children and youth who might be living in similar abusive relationship. Afterwards, he met with those in need one on one to determine how to best meet their needs. When possible, affected children and youth were invited to attend a ****** camp, "******," to participate in fun activities and informal counseling sessions to help them break down the barriers created by abuse and empower them to move forward with their lives. These activities met the tax-exempt requirements as prescribed under IRC Sec. 501(c)(3). Financials Per Form [Note that the Organization didn't file a Form ****** for the tax year ended ******. Further, as discussed in the Examination section below, the Organization didn't consider the ****** file provided for ****** to be complete or reliable. As such, no financials are provided herein for the tax year ended ******.] Examination On ******, Revenue Agent ****** (RA ****** ) issued an initial contact letter, Information Document Request (IDR), and Publication 1 to inform the Organization of the examination and request an Initial Interview on ******. The initial contact letter package was returned as undeliverable to RA ****** on ******, so identified six different addresses for the officers as listed on the Form ****** and resent the package to those addresses on ****** requesting an Initial Interview on the same date, ******. Subsequently, RA ****** left the Service and the case was transferred to Revenue Agent ****** (RA ******) on ******. [Note that the case was subsequently transferred to Revenue Agent ****** (the Examiner) on ******.] ****** rescheduled the Initial Interview and conducted the interview on ****** with ******, the Organization's Secretary and point of contact for the examination, ******, CPA (POA ******), and ******, CPA (POA ******). During the Initial Interview, ****** confirmed that the Board of Directors listed on the Form ****** for the tax year ended ****** was correct but explained that he and ****** were currently the only board members left. ****** also stated that ****** and ****** were now married. [Note that for purposes of this document we will refer to ****** by ****** name, as ****** or ******, since that corresponds with ****** name of record for the years under examination.] ****** further stated during the Initial Interview that the Organization provided funds for ****** and ****** personal expenses. In addition, he indicated these personal expenses were commingled within the books and records of the Organization and that there was no form of tracking to bifurcate the personal expenses from the Organization's expenses. As stated in the Organization's Form ****** for the tax year ended ******, and further confirmed during the examination, ****** currently serves as the Organization's President and ****** currently serves as the Organization's Secretary. The Organization's Form ****** for the tax year ended ****** listed $ ****** for ****** and $ ****** for ****** as "Reportable compensation from the organization (W-2/1099)" on Part VII, Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors. ****** noted that the Organization hadn't filed a Form ****** for the tax year ended ****** prior to the beginning of the examination, so he asked why this was the case during the Initial Interview. ****** stated that the Organization was still trying to figure out its books and records for ******. ****** explained that ******, the Organization's Treasurer, was responsible for the Organization's books and records and for all of its required tax filings. ****** stated that she had filed the Form ****** for the tax year ended ****** without allowing him or ****** to review or approve the Form ******. ****** further explained that in ****** he and ****** discovered that ****** was misappropriating funds. When confronted, ****** departed abruptly and left the Organization's books and records that were still intact in disarray. As such, ****** indicated that he and ****** weren't sure if the books and records or the Form ****** for the tax year ended ****** were correct and were in the process of researching this information when the examination began. Thus, the Form ****** for the tax year ended ****** wasn't filed. A review of the Organization's records and documentation provided by ****** revealed that ****** received $ ****** and ****** received $ ****** as reasonable compensation for services provided in ******. These amounts were included in the agreed Employment Tax examination for the Organization with instructions to issue Forms W-2 to ****** in the amount of $ ****** and ****** in the amount of $ ******. Examination of the Organization's books and records and the Organization's bank records indicated that ****** was a signatory of the Organization's bank account number ****** and that she was provided a debit card ending in number ****** associated with the Organization's bank account number ******. A review of the Organization's books and records relative to this information revealed the following: 1. Besides the amount of reasonable compensation ****** received during the tax year ended ******, ****** also received bank transfers from the Organization's bank accounts totaling $ ****** and received checks written to her, or for personal items purchased or paid for by her, from the Organization totaling $ ******. 2. Besides the amount of reasonable compensation ****** received during the tax year ended ******, ****** also received checks written to her, or for personal items purchased or paid for by her, from the Organization totaling $ ****** and the Organization made a payment to the IRS on her behalf in the amount of $ ******. 3. During the tax year ended ****** the Organization transferred $ ****** and wrote three checks totaling $ ****** to ******, an entity controlled by ******. As such, these amounts have been included in the ****** Bank Transfers and Checks as payments made to ****** below. Further examination of the Organization's books and records for the tax year ended ******, taking into account the amount paid to ****** as compensation during ******, indicated that the Organization paid for the following purchases recorded on the aforementioned debit card assigned to ******: As such, the examination of the Organization's books and records for the tax years ended ****** and ****** revealed that ****** received additional income from the Organization as follows: Examination of the Organization's books and records revealed that ****** was provided debit cards ending in numbers ****** and ****** associated with the Organization's bank account number ******and a debit card ending in number ****** associated with the Organization's bank account number ******. A review of the Organization's books and records relative to this information revealed the following: 1. Besides the amount of reasonable compensation ****** received during the tax year ended ******, the Organization paid $ ****** for his life insurance and $ ****** to his ****** account. 2. Besides the amount of reasonable compensation ****** received during the tax year ended ******, the Organization paid $ ****** for his life insurance. Further examination of the Organization's books and records for the tax years ended ****** and ******, taking into account the amount paid to him as compensation during ****** and ******, indicated that the Organization paid for the following purchases recorded on the aforementioned debit cards assigned to ******: As such, the examination of the Organization's books and records for the tax years ended ****** and ****** revealed that ****** received additional income from the Organization as follows: LAW Internal Revenue Code (IRC) IRC Sec. 501(c)(3) exempts from income tax entities organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. Treasury Regulations (Treas.Reg.) Treas.Reg. Sec. 1.501(c)(3)-1(a)(1) states that in order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Treas.Reg. Sec. 1.501(c)(3)-1(c)(1) states that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Treas.Reg. Sec. 1.501(c)(3)-1(c)(2) states that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. For the definition of the words private shareholder or individual, see paragraph (c) of section 1.501(a)-1. Treas.Reg. Sec. 1.501(a)-1(c) states that the words private shareholder or individual in section 501 refer to persons having a personal and private interest in the activities of the organization. GOVERNMENT'S POSITION It is the Government's position that the Organization does not qualify for exemption under IRC Sec. 501(c)(3). For an organization to qualify for exemption under IRC Sec. 501(c)(3), no part of the net earnings of the organization can inure to the benefit of any private shareholder or individual. Under Treas.Reg. Sec. 1.501(c)(3)-1(c)(1), an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in IRC Sec. 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Under Treas.Reg. Sec. 1.501(c)(3)-1(c)(2) an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Under Treas.Reg. Sec. 1.501(a)-1(c) the words private shareholder or individual in section 501 refer to persons having a personal and private interest in the activities of the organization. Based on the facts and circumstances stated above, ****** and ****** are individuals that have a "personal and private interest in the activities of the organization" and, thus, are "private shareholders and individuals" of the Organization. Since ****** and ****** received additional income from the Organization over and above the amounts they received as reasonable compensation for services provided in ****** and ******, these amounts represent net earnings which "inure in whole or in part to the benefit of private shareholders or individuals," ****** and ******. As such, the Organization failed to meet the requirements for tax exemption under IRC Sec. 501(c)(3) and the Regulations thereunder. TAXPAYER'S POSITION The Examiner discussed his findings with ****** and POA ****** and explained that the Government will be recommending revocation of the Organization's exemption under IRC Sec. 501(c)(3). ****** stated that the Organization ceased operations in ****** due to COVID-19. As such, it appears the Organization will accept the proposed revocation. The Organization is being solicited for its position at this time. CONCLUSION The Organization does not qualify for exemption from federal income tax as it failed to substantiate that it is operated exclusively for one or more exempt purposes due to inurement, resulting in its failure to comply with the requirements of IRC Sec. 501(c)(3) and Treas.Reg. Sec. 1.501(c)(3)-1(c)(2). It is the Government's position that the Organization failed to operate exclusively to accomplish one or more of such exempt purposes specified in IRC Sec. 501(c)(3). Because the Organization was not operated exclusively for the exempt purpose under IRC Sec. 501(c)(3), its Federal tax-exempt status under such section should be revoked effective ******. The Organization is liable for filing Form ******, U.S. Corporation Income Tax Return, and paying any related tax liabilities for the tax year ended ****** and all years thereafter.

Revenue Procedure 2022-7 Internal Revenue Service 2022-1 I.R.B. 297 26 CFR§ 601.201: Rulings and determination letters Areas in which rulings will not be issued, Associate Chief Counsel (International). Rev. Proc. 2022-7 SECTION 1. PURPOSE.01 Purpose This revenue procedure updates Rev. Proc. 2021-7, 2021-1 I.R.B. 290, by providing a current list of those areas of the Internal Revenue Code under the jurisdiction of the Associate Chief Counsel (International) (hereinafter "the Office") relating to matters on which the Internal Revenue Service will not issue letter rulings or determination letters..02 Changes Section 4.01(5) related to the portfolio interest exemption for foreign corporations has been modified to include additional areas for which letter rulings and determination letters ordinarily will not be issued. SECTION 2. BACKGROUND AND SCOPE OF APPLICATION.01 Background In the interest of sound tax administration, the Service answers inquiries from individuals and organizations regarding their status for tax purposes and the tax effects of their acts or transactions before the filing of returns or reports that are required by the Internal Revenue Code. There are, however, areas where the Service will not issue letter rulings or determination letters, either because the issues are inherently factual or for other reasons. These areas are set forth in sections 3 and 4 of this revenue procedure. Section 3 lists areas in which letter rulings and determination letters will not be issued under any circumstances. Section 4 lists areas in which letter rulings and determination letters ordinarily will not be issued; in these areas, unique and compelling reasons may justify issuing a letter ruling or determination letter. A taxpayer who plans to request a letter ruling or determination letter in an area described in Section 4 should first contact the Office by telephone or in writing to discuss the unique and compelling reasons that the taxpayer believes justify issuing the letter ruling or determination letter. Although not required, a written submission is encouraged because it will enable Office personnel to arrive more quickly at an understanding of the unique facts of each case. A taxpayer who contacts the Office by telephone may be requested to provide a written submission. The Service may provide a general information letter in response to inquiries in areas on either the Section 3 or Section 4 list. These lists are not all-inclusive. Future revenue procedures may add or delete items. The Service may also decline to rule on an individual case for reasons peculiar to that case, and the decision will not be announced in the Internal Revenue Bulletin. See Rev. Proc. 2022-1, Section 6.02..02 Scope of Application This revenue procedure does not preclude the submission of requests for technical advice to the Office from other offices of the Service. SECTION 3. AREAS IN WHICH LETTER RULINGS OR DETERMINATION LETTERS WILL NOT BE ISSUED.01 Specific Questions and Problems (1) Section 861.--Income from Sources Within the United States. --A method for determining the source of a pension payment to a nonresident alien individual from a trust under a defined benefit plan that is qualified under§ 401(a) if the proposed method is inconsistent with§§ 4.01, 4.02, and 4.03 of Rev. Proc. 2004-37, 2004-1 C.B. 1099. (2) Section 862.--Income from Sources Without the United States. --A method for determining the source of a pension payment to a nonresident alien individual from a trust under a defined benefit plan that is qualified under§ 401(a) if the proposed method is inconsistent with§§ 4.01, 4.02, and 4.03 of Rev. Proc. 2004-37, 2004-1 C.B. 1099. (3) Section 871(g).--Special Rules for Original Issue Discount. --Whether a debt instrument having original issue discount within the meaning of§ 1273 is not an original issue discount obligation within the meaning of§ 871(g)(1)(B)(i) when the instrument is payable 183 days or less from the date of original issue (without regard to the period held by the taxpayer). (4) Section 894.--Income Affected by Treaty.--Whether a person that is a resident of a foreign country is entitled to benefits under the United States income tax treaty with that foreign country pursuant to the limitation on benefits article. However, the Service may rule regarding the legal interpretation of a particular provision within the relevant limitation on benefits article. (5) Section 954.--Foreign Base Company Income.--The effective rate of tax that a foreign country will impose on income. (6) Section 954. --Foreign Base Company Income. --Whether the facts and circumstances show that a controlled foreign corporation makes a substantial contribution through the activities of its employees to the manufacture, production, or construction of the personal property sold within the meaning of§ 1.954-3(a)(4)(iv). (7) Sections 7701(b) and 894.--Definition of Resident Alien and Nonresident Alien.--Whether an alien individual, whether or not a dual resident alien, is a nonresident of the United States, including whether the individual has met the requirements of the substantial presence test or exceptions thereto, or whether the alien is solely a nonresident under a United States income tax treaty. However, the Service may rule regarding the legal interpretation of a particular provision of§ 7701(b) or the regulations thereunder..02 General Areas. (1) The prospective application of the estate tax to the property or the estate of a living person, except that rulings may be issued on any international issues in a ruling request accepted pursuant to§ 5.06 of Rev. Proc. 2022-1, in this Bulletin. (2) Whether reasonable cause exists under Subtitle F (Procedure and Administration) of the Code. (3) Whether a proposed transaction would subject a taxpayer to criminal penalties. (4) Any area where the ruling request does not comply with the requirements of Rev. Proc. 2022-1. (5) Any area where the same issue is the subject of the taxpayer's pending request for competent authority assistance under a United States income tax treaty. (6) A "comfort" ruling will not be issued with respect to an issue that is clearly and adequately addressed by statute, regulations, decisions of a court, tax treaties, revenue rulings, or revenue procedures absent extraordinary circumstances (e.g., a request for a ruling required by a governmental regulatory authority in order to effectuate the transaction). (7) Any frivolous issue, as that term is defined in§ 6.10 of Rev. Proc. 2022-1. SECTION 4. AREAS IN WHICH LETTER RULINGS OR DETERMINATION LETTERS WILL NOT ORDINARILY BE ISSUED.01 Specific Questions and Problems (1) Section 367(a).--Transfers of Property from the United States.-- Whether a transferred corporation subject to a gain recognition agreement under§ 1.367(a)-8 has disposed of substantially all of its assets. (2) Section 367(b).--Other Transfers.--Whether and the extent to which regulations under§ 367(b) apply to an exchange involving foreign corporations, unless the ruling request presents a significant legal issue or subchapter C rulings are requested in the context of the exchange. (3) Section 864.--Definitions and Special Rules.--Whether a taxpayer is engaged in a trade or business within the United States, and whether income is effectively connected with the conduct of a trade or business within the United States; whether an instrument is a security as de-fined in§ 1.864-2(c)(2); whether a taxpayer effects transactions in the United States in stocks or securities under§ 1.864-2(c) (2); whether an instrument or item is a commodity for purposes of§ 1.864-2(d)(3); and for purposes of§ 1.864-2(d)(1) and (2), whether a commodity is of a kind customarily dealt in on an organized commodity exchange, and whether a transaction is of a kind customarily consummated at such place. (4) Section 871(h) - Repeal of Tax on Interest of Nonresident Alien Individuals Received from Certain Portfolio Debt Investments.--Whether a payment constitutes portfolio interest under§ 871(h); whether an obligation qualifies for any of the components of portfolio interest such as being in registered form; and whether the income earned on contracts that do not qualify as annuities or life insurance con-tracts because of the limitations imposed by§§ 72(s) and 7702(a) is portfolio interest as defined in§ 871(h). (5) Section 881(c)-- Repeal of Tax on Interest of Foreign Corporations Received from Certain Portfolio Debt Investments.-- Whether a payment constitutes portfolio interest under§ 881(c); whether an obligation qualifies for any of the components of portfolio interest such as being in registered form; and whether the in-come earned on contracts that do not qualify as annuities or life insurance contracts because of the limitations imposed by§§ 72(s) and 7702(a) is portfolio interest as defined in§ 881(c). (6) Section 892.--Income of Foreign Governments and of International Organizations.--Whether income derived by foreign governments and international organizations is excluded from gross in-come and exempt from taxation and any underlying issue related to that determination. (7) Section 893.--Compensation of Employees of Foreign Governments and International Organizations.--Whether wages, fees, or salary of an employee of a foreign government or of an international organization received as compensation for official services to such government or international organization is excluded from gross income and exempt from taxation and any underlying issue related to that determination. (8) Section 894.--Income Affected by Treaty.--Whether the income received by an individual in respect of services rendered to a foreign government or a political subdivision or a local authority thereof is exempt from federal income tax or withholding under any of the Unit-ed States income tax treaties that contain provisions applicable to such individuals. (9) Section 894.--Income Affected by Treaty.--Whether a taxpayer has a permanent establishment in the United States for purposes of any United States income tax treaty and whether income is attributable to a permanent establishment in the Unit-ed States. (10) Section 894.--Income Affected by Treaty.--Whether certain persons will be considered liable to tax under the laws of a foreign country for purposes of determining if such persons are residents within the meaning of any United States income tax treaty, including pursuant to Rev. Rul. 2000-59, 2000-2 C.B. 593. (11) Section 894.--Income Affected by Treaty.--Whether the income received by a nonresident alien student or trainee for services performed for a university or other educational institution is exempt from federal income tax or withholding under any of the United States income tax treaties that contain provisions applicable to such nonresident alien students or trainees. (12) Section 894.--Income Affected by Treaty.--Whether the income received by a nonresident alien performing research or teaching as personal services for a university, hospital or other research institution is exempt from federal income tax or withholding under any of the Unit-ed States income tax treaties that contain provisions applicable to such nonresident alien teachers or researchers. (13) Section 894.--Income Affected by Treaty.--Whether a recipient of a payment is the beneficial owner for purposes of any United States income tax treaty. (14) Section 894.--Income Affected by Treaty.--Whether an entity is treated as fiscally transparent by a foreign jurisdiction for purposes of§ 894(c) and the regulations thereunder or pursuant to any United States income tax treaty. (15) Section 895.--Income derived by a foreign central bank of issue from obligations of the United States or from bank deposits.--Whether income derived by a foreign central bank of issue is excluded from gross income and exempt from taxation and any underlying issue related to that determination. (16) Section 901.--Taxes of Foreign Countries and of Possessions of United States.--Whether a foreign levy meets the requirements of a creditable tax under§ 901. (17) Section 901.--Taxes of Foreign Countries and of Possessions of United States.--Whether a person claiming a credit has established, based on all of the relevant facts and circumstances, the amount (if any) paid by a dual capacity taxpayer under a qualifying levy that is not paid in exchange for a specific economic benefit. See§ 1.901-2A(c)(2). (18) Section 903.--Credit for Taxes in Lieu of Income, Etc., Taxes.-- Whether a foreign levy meets the requirements of a creditable tax under§ 903. (19) Sections 954(d), 993(c).--Manufactured Product. --Whether a product is manufactured or produced for purposes of§§ 954(d) and 993(c). (20) Section 937.--Definition of Bona Fide Resident.--Whether an individual is a bona fide resident of American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands. However, the Service may rule regarding the legal interpretation of a particular provision of§ 937(a) or the regulations thereunder. (21) Section 956.--Investment of Earnings in United States Property.-- Whether a pledge of the stock of a controlled foreign corporation is an indirect pledge of the assets of that corporation. See§ 1.956-2(c)(2). (22) Section 985. --Functional Currency.--Whether a currency is the functional currency of a qualified business unit. (23) Section 989(a).--Qualified Business Unit.--Whether a unit of the taxpayer's trade or business is a qualified business unit. (24) Section 1058.--Transfers of Securities Under Certain Agreements.-- Whether the amount of any payment described in§ 1058(b)(2) or the amount of any other payment made in connection with a transfer of securities described in§ 1058 is from sources within or without the United States; the character of such amounts; and whether the amounts constitute a particular kind of income for purposes of any United States income tax treaty. (25) Section 1059A.--Limitation on Taxpayer's Basis or Inventory Cost in Property Imported from Related Persons.--Whether a taxpayer's cost or inventory basis in property imported from a foreign affiliate will not be limited by§ 1059A due to differences between customs valuation and tax valuation. (26) Sections 1471, 1472, 1473, and 1474.--Taxes to Enforce Reporting on Certain Foreign Accounts.--Whether a taxpayer, withholding agent, or intermediary has properly applied the requirements of chapter 4 of the Internal Revenue Code (§§ 1471 through 1474, also known as "FATCA") or of an applicable intergovernmental agreement to implement FATCA. (27) Section 1503(d).--Dual Consolidated Loss.--Whether the income tax laws of a foreign country would deny any opportunity for the foreign use of a dual consolidated loss in the year in which the dual consolidated loss is incurred under§ 1.1503(d)-3(e)(1); whether no possibility of foreign use exists under§ 1.1503(d)-6(c)(1); whether an event presumptively constitutes a triggering event under§ 1.1503(d)-6(e)(1)(i)-(ix); whether the presumption of a triggering event is rebutted under§ 1.1503(d)-6(e)(2); and whether a domestic use agreement terminates under§ 1.1503(d)-6(j)(1). (28) Section 2501.--Imposition of Tax.--Whether a partnership interest is intangible property for purposes of§ 2501(a)(2) (dealing with transfers of intangible property by a nonresident not a citizen of the United States). (29) Section 7701.--Definitions.--Whether an estate or trust is a foreign estate or trust for federal income tax purposes. (30) Section 7701.--Definitions.--Whether an intermediate entity is a conduit entity under§ 1.881-3(a)(4); whether a transaction is a financing arrangement under§ 1.881-3(a)(4)(ii); whether the participation of an intermediate entity in a financing arrangement is pursuant to a tax avoidance plan under§ 1.881-3(b); whether an intermediate entity performs significant financing activities under§ 1.881-3(b)(3)(ii); whether an unrelated intermediate entity would not have participated in a financing arrangement on substantially the same terms under§ 1.881-3(c). (31) Section 7874.--Expatriated Entities and Their Foreign Parents. -- Whether, after the acquisition, the expanded affiliated group has substantial business activities in the foreign country in which, or under the law of which, the foreign entity is created or organized, when compared to the total business activities of the expanded affiliated group. (32) Section 7874.--Expatriated Entities and Their Foreign Parents. -- Whether a foreign corporation completes the direct or indirect acquisition of substantially all of the properties held directly or indirectly by a domestic corporation or substantially all of the properties constituting a trade or business of a domestic partnership..02 General Areas (1) Whether a taxpayer has a business purpose for a transaction or arrangement. (2) Whether a taxpayer uses a correct North American Industry Classification System (NAICS) code or Standard Industrial Classification (SIC) code. (3) Any transaction, or series of transactions, that is designed to achieve a different tax consequence or classification under U.S. tax law (including tax treaties) and the tax law of a foreign jurisdiction, where the results of that different tax consequence or classification are inconsistent with the purposes of U.S. tax law (including tax treaties). (4)(a) Situations where a taxpayer or a related party is domiciled or organized in a foreign jurisdiction with which the United States does not have an effective mechanism for obtaining tax information with respect to civil tax examinations and criminal tax investigations, which would preclude the Service from obtaining information located in such jurisdiction that is relevant to the analysis or examination of the tax issues involved in the ruling request. (b) The provisions of subsection 4.02(4)(a) above shall not apply if the taxpayer or affected related party (i) consents to the disclosure of all relevant information requested by the Service in processing the ruling request or in the course of an examination to verify the accuracy of the representations made and to otherwise analyze or examine the tax issues involved in the ruling request, and (ii) waives all claims to protection of bank or commercial secrecy laws in the foreign jurisdiction with respect to the information requested by the Service. In the event the taxpayer's or related party's consent to disclose relevant information or to waive protection of bank or commercial secrecy is determined by the Service to be ineffective or of no force and effect, then the Service may retroactively rescind any ruling rendered in reliance on such consent. (5) The federal tax consequences of proposed federal, state, local, municipal, or foreign legislation. (6)(a) Situations involving the interpretation of foreign law or foreign documents. The interpretation of a foreign law or foreign document means making a judgment about the import or effect of the foreign law or document that goes beyond its plain meaning. (b) The Service, at its discretion, may consider ruling requests that involve the interpretation of foreign laws or foreign documents. In these cases, the Service may request information in addition to that listed in§ 7.01(2) and (6) of Rev. Proc. 2022-1, including a discussion of the implications of any authority believed to interpret the foreign law or foreign document, such as pending legislation, treaties, court decisions, notices, or administrative decisions. (7) The treatment or effects of hook equity, as described in section 4. 02(11) of Rev. Proc. 2022-3, in this Bulletin. SECTION 5. EFFECT ON OTHER REVENUE PROCEDURES Rev. Proc. 2021-7 is superseded. SECTION 6. EFFECTIVE DATE This revenue procedure is effective January 3, 2022. SECTION 7. DRAFTING INFORMATION This revenue procedure was compiled by Nancy M. Galib of the Office of Associate Chief Counsel (International). For further information regarding this revenue procedure contact Ms. Galib at (202) 317-3800 (not a toll-free number).

Private Letter Ruling Number: 202318010 Internal Revenue Service February 1, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202318010 Release Date: 5/5/2023 Index Number: 61.00-00, 1001.00-00, 2501.00-00, 2601.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B4 PLR-116031-22 Date: February 01, 2023 Dear ******: This letter responds to the letter from your authorized representative dated August 5, 2022, requesting rulings with respect to the federal income, gift, and generationskipping transfer (GST) tax consequences of a court approved settlement agreement. The facts submitted and the representations made are as follows: Decedent died on Date 1, a date before September 25, 1985. Decedent's last will and testament (Will) established Trust. Article Eighth of Decedent's Will provides that upon the death of the last survivor of u named persons, the trustees shall divide the corpus of Trust "among the descendants in equal shares per stipes and not per capita, at that time surviving my [Daughter]." State Statute 1 provides: If a governing instrument requires property to be distributed "per stirpes," the property is divided into as many equal shares as there are: (1) surviving children of the designated ancestor; and (2) deceased children who left surviving descendants. Each surviving child is allocated one share. The share of each deceased child with surviving descendants is divided in the same manner, with subdivision repeating at each succeeding generation until the property is fully allocated among surviving descendants. State Statute 2 provides: The term "Descendant" of an individual means all of his progeny of all generations with a relationship of parent and child at each generation being determined by the definition of child and parent. Daughter, who is deceased, had v children, including Individual. Daughter had w grandchildren, of which x are living and y are deceased with surviving children (collectively, the "Presumptive Remainder Beneficiaries"). Individual, who is the sole survivor of Daughter's children and is z years old, is also the sole survivor of those u persons named in Article Eighth of Decedent's Will. Thus, pursuant to Article Eighth and State Statute 1, upon Individual's death, the trustees are required to make a per stirpital distribution to each of the Presumptive Remainder Beneficiaries. Article Eighth of the Will, however, is ambiguous as to whether under State law, the per stirpital division of Trust should be made at the generation of descendants who are the children of Daughter, or at the generation of descendants who are the grandchildren of Daughter. The phrase "among the descendants in equal shares per stirpes and not per capita," presents a conflict between the phrases "descendants in equal share," which connotes an intention of equal treatment of all of a grantor's descendants, and the Latin term "per stirpes," which connotes an intention of unequal treatment among a grantor's descendants. See Cite. The highest court in State has not ruled directly in any case that would resolve this ambiguity with any degree of certainty. State Statute 3 provides, in relevant part: [I]nterested persons may enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust.... only to the extent it does not violate a material purpose of the trust and incudes terms and conditions that could be properly approved by the court.... [and] [a]ny interested person may request the court to approve a nonjudicial settlement agreement. On Date 2, to avoid the possibility of lengthy and protracted legal proceedings to resolve the interpretation of the ambiguous text of Article Eighth, the Presumptive Remainder Beneficiaries entered into Settlement Agreement to set forth their agreement regarding the division of Trust. As such, Settlement Agreement falls between the two per stirpes divisions described above. Settlement Agreement is subject to the condition precedent that there continues to be a specific number of per stirpital shares at Individual's death. Under Settlement Agreement, no Presumptive Remainder Beneficiary receives more than what his or her best-case litigation outcome would have been, and all Presumptive Remainder Beneficiaries have settled for something less than their best-case litigation outcome. Further, the Settlement Agreement is the product of arm's length negotiations among the Presumptive Remainder Beneficiaries and is within the range of reasonable outcomes under the governing trust instrument in light of the governing State law. The trustees do not object to the manner in which the Settlement Agreement resolved the ambiguity. On Date 3, upon a finding that all interested persons were given notice, Court issued Order approving Settlement Agreement. Order is conditioned upon the receipt of a favorable private letter ruling by the Internal Revenue Service. It is represented that there have been no additions, constructive or actual, to Trust after September 25, 1985. Rulings Requested 1. Neither Settlement Agreement, nor Order, nor the implementation of Settlement Agreement and distributions made in accordance with Order upon termination of Trust will cause Trust to lose its exempt status for GST purposes, and these events will not cause Trust, the trustees of Trust, or the beneficiaries of Trust to become subject to GST tax under §§ 2601 and 2603. 2. Neither Settlement Agreement, nor Order, nor the implementation of Settlement Agreement and distributions made in accordance with Order upon termination of Trust will cause any beneficiary of Trust to be treated as having made a taxable gift to another beneficiary, and these events will not cause any beneficiary of Trust to become subject to gift tax under § 2501. 3. Neither Settlement Agreement, nor Order, nor the implementation of Settlement Agreement and distributions made in accordance with Order upon termination of Trust will result in the recognition of gain or loss to Trust or any beneficiary of Trust or otherwise be treated as a taxable sale, exchange or other disposition of property between or among any of them under § 1001. 4. The implementation of Settlement Agreement in accordance with Order upon termination of Trust will not result in the receipt of gross income under § 61 by any beneficiary to the extent terminating distributions from Trust are in excess of Trust distributable net income as defined in § 643. Law and Analysis Ruling Request 1 Section 2601 imposes a tax on every GST made after October 26, 1986. Section 2611(a) defines a GST as (1) a taxable distribution, (2) a taxable termination, and (3) a direct skip. Section 2603(a) provides that (1) in the case of taxable distribution, the tax imposed by § 2601 shall be paid by the transferee; (2) in the case of a taxable termination or direct skip from a trust, the tax shall be paid by the trustee; (3) in the case of a direct skip (other than a direct skip from a trust), the tax shall be paid by the transferor. Section 2603 (b) provides that unless otherwise directed pursuant to the governing instrument by specific reference to the tax imposed by chapter 13 of the Code, the tax imposed by chapter 13 on a GST transfer shall be charged to the property constituting such transfer. Section 2611(a) defines the term "generation-skipping transfer" as a taxable distribution, a taxable termination, and a direct skip. Under section 1433(a) of the Tax Reform Act of 1986 (Act) and § 26.2601-1(a) of the GST Tax Regulations, the GST tax is generally applicable to GSTs made after October 22, 1986. However, under § 1433(b)(2)(A) of the Act and § 26.2601-1(b)(1)(i), the tax does not apply to a transfer under a trust (as defined in § 2652(b)) that was irrevocable on September 25, 1985, but only to the extent that such transfer is not made out of corpus added to the trust after September 25, 1985 (or out of income attributable to corpus so added). Section 26.2601-1(b)(4) provides rules for determining when a modification, judicial construction, settlement agreement, or trustee action with respect to a trust that is exempt from the GST tax under § 26.2601-1(b)(1), (b)(2), or (b)(3) will not cause the trust to lose its exempt status. In general, unless specifically provided otherwise, the rules of § 26.2601-1(b)(4) are applicable only for purposes of determining whether an exempt trust retains its exempt status for GST tax purposes. They do not apply in determining, for example, whether the transaction results in a gift subject to gift tax or may cause the trust to be included in the gross estate of a beneficiary or may result in the realization of capital gain for purposes of § 1001. Section 26.2601-1(b)(4)(i)(B) provides that a court-approved settlement of a bona fide issue regarding the administration of a trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject to the provisions of chapter 13, if (1) the settlement is the product of arm's length negotiations; and (2) the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement. A settlement that results in a compromise between the positions of the litigating parties and reflects the parties' assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes. In the present case, Trust was created and was irrevocable before September 25, 1985. It is represented that no additions, constructive or actual, have been made to Trust on or after September 25, 1985. Consequently, Trust is currently exempt from GST tax. Settlement Agreement addresses a bona fide issue as to how Trust assets are to be distributed upon termination of Trust. To avoid the possibility of protracted litigation to resolve the interpretation of the ambiguous text, the Presumptive Remainder Beneficiaries engaged in arm's length negotiations. Settlement Agreement is a compromise between the positions of the beneficiaries and reflects their assessments of the relative strengths of their positions. Thus, Settlement Agreement is within the range of reasonable outcomes under the language of Trust and applicable State law addressing the issue. Accordingly, based upon the facts submitted and the representations made, neither Settlement Agreement, nor Order, nor the implementation of Settlement Agreement and distributions made in accordance with Order upon termination of Trust will cause Trust to lose its exempt status for GST tax purposes, and these events will not cause Trust, the trustees of Trust, or the beneficiaries of Trust to become subject to GST tax under §§ 2601 and 2603. Ruling Request 2 Section 2501 imposes a tax for each calendar year on the transfer of property by gift during such calendar year by any individual. Section 2511 provides that the tax imposed by § 2501 applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property transferred is real or personal, tangible or intangible. Section 25.2511-1(c)(1) of the Gift Tax Regulations provides that any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax. Whether an agreement settling a dispute is effective for gift tax purposes, depends on whether the settlement is based on a valid enforceable claim asserted by the parties and, to the extent feasible, produces an economically fair result. See Ahmanson Foundation v. U.S., 674 F.2d 761, 774-75 (9 th Cir. 1981), citing Commissioner v. Estate of Bosch, 387 U.S. 456 (1967). Thus, State law must be examined to ascertain the legitimacy of each party's claim. If it is determined that each party has a valid claim, the Service must determine that the settlement reflects the result that would apply under State law. If there is a difference, it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated. In the present case, the ambiguity created by the language of Trust, when read in conjunction with State Statutes 1 and 2, presents a bona fide issue as to how the trust assets are to be distributed upon termination of Trust. The highest court in State has not ruled directly on point in any case that would address the ambiguity in this case with any degree of certainty. Thus, each Presumptive Remainder Beneficiary has a legitimate claim, and it is uncertain what distribution he or she would receive if the question were litigated. Settlement Agreement reflects the result that would apply under State law based on the language of Trust and State Statutes 1 and 2, after considering the uncertainty of the results if the question were litigated. Accordingly, based upon the facts submitted and the representations made, neither Settlement Agreement, nor Order, nor the implementation of Settlement Agreement and distributions made in accordance with Order upon termination of Trust will cause any beneficiary of Trust to be treated as having made a taxable gift to another beneficiary, and these events will not cause any beneficiary of Trust to become subject to gift tax under § 2501. Ruling Request 3 Section 61(a)(3) and (14) provides that gross income includes gains derived from dealings in property and income from an interest in an estate or trust. Section 1001(a) provides that the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in § 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in § 1011 for determining loss over the amount realized. Section 1001(b) provides that the amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. Under § 1001(c), except as otherwise provided in subtitle A, the entire amount of gain or loss, determined under § 1001, on the sale or exchange of property shall be recognized. Section 1.1001-1(a) of the Income Tax Regulations provides that the gain or loss realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income or loss sustained. An exchange of property results in the realization of gain or loss under § 1001 if the properties exchanged are materially different. Cottage Savings Association v. Commissioner, 499 U.S. 554 (1991). A material difference exists when the exchanged properties embody legal entitlements different in kind or extent or if they confer different rights and powers. Id. at 565. In the present case, State Statutes 1 and 2, the language of Trust, and the remaining Trust beneficiaries create ambiguity as to how the Trust assets are to be distributed upon termination. Settlement Agreement provides for a distribution within reasonable outcomes based on the language of Trust. Further, Settlement Agreement does not extend beyond resolving the ambiguity. Accordingly, based upon the facts submitted and the representations made, neither Settlement Agreement, nor Order, nor the implementation of Settlement Agreement in accordance with Order upon termination of Trust will result in the recognition of gain or loss to Trust or any beneficiary of Trust or otherwise be treated as a taxable sale, exchange, or other disposition of property between or among any of them under § 1001. Ruling Request 4 As the implementation of Settlement Agreement in accordance with Order is not a taxable exchange under § 1001, implementation of Settlement Agreement upon termination of Trust will not result in the receipt of gross income under § 61 by any beneficiary to the extent terminating distributions from Trust are in excess of Trust distributable net income as defined in § 643. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. Sincerely, Leslie H. Finlow Senior Technician Reviewer, Branch 4 Office of the Associate Chief Counsel (Passthroughs & Special Industries) Enclosure (1) Copy for § 6110 purposes cc:

Proposed Regulation REG-107423-23 Internal Revenue Service 2024-3 I.R.B. 411 Section 45X Advanced Manufacturing Production Credit REG-107423-23 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and public hearing. SUMMARY: This document contains proposed regulations to implement the advanced manufacturing production credit established by the Inflation Reduction Act of 2022 to incentivize the production of eligible components within the United States. Eligible components include certain solar energy components, wind energy components, inverters, qualifying battery components, and applicable critical minerals. The proposed regulations would affect eligible taxpayers who produce and sell eligible components and intend to claim the benefit of an advanced manufacturing production credit, including by making elective payment or credit transfer elections. This document also provides notice of a public hearing on the proposed regulations. DATES: Written or electronic comments must be received by February 13, 2024. A public hearing on this proposed regulation has been scheduled for February 22, 2024, at 10 a.m. ET. Requests to speak and outlines of topics to be discussed at the public hearing must be received by February 13, 2024. If no outlines are received by February 13, 2024, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5 p.m. ET on February 20, 2024. The public hearing will be made accessible to people with disabilities. Requests for special assistance during the public hearing must be received by 5 p.m. ET on February 16, 2024. ADDRESSES: Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-107423-23) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the "Comments and 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 for public availability any comments submitted to the IRS's public docket. Send paper submissions to: CC:PA:01:PR (REG-107423-23), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Mindy Chou, John Deininger, or Alexander Scott at (202) 317-6853 (not a toll-free number); concerning submissions of comments or the public hearing, Vivian Hayes at (202) 317-6901 (not a toll-free number) or by email to publichearings@irs.gov (preferred). SUPPLEMENTARY INFORMATION: Background This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) to implement section 45X of the Internal Revenue Code (Code). Section 45X was added to the Code on August 16, 2022, by section 13502(a) of Public Law 117-169, 136 Stat. 1818, 1971, commonly referred to as the Inflation Reduction Act of 2022 (IRA). Section 13502(c) of the IRA provides that section 45X applies to components produced and sold after December 31, 2022. I. Overview of Section 45X Section 45X(a)(1) provides that, for purposes of the general business credit under section 38 of the Code, the advanced manufacturing production credit (section 45X credit) for any taxable year is an amount equal to the sum of the credit amounts determined under section 45X(b) with respect to each eligible component, as defined in section 45X(c)(1), which is produced by the taxpayer, and during the taxable year, sold by such taxpayer to an unrelated person. Section 45X(a)(2) provides that any eligible component produced and sold by the taxpayer is taken into account only if the production and sale is in a trade or business of the taxpayer. Section 45X(a)(3) provides rules regarding the sale of components to an unrelated person, and generally provides a special rule that, for purposes of section 45X(a), treats a taxpayer as selling a component to an unrelated person if that component is sold to the unrelated person by a person related to the taxpayer. Under section 45X(a)(3)(B), if a taxpayer makes an election in the form and manner prescribed by the Secretary of the Treasury or her delegate (Secretary), a sale of components by the taxpayer to a related person will be treated as if made to an unrelated person for purposes of section 45X(a) (Related Person Election). As a condition of, and prior to, a taxpayer making the Related Person Election, the Secretary may require such information or registration as the Secretary deems necessary for purposes of preventing duplication, fraud, or any improper or excessive credit amount. Section 45X(b)(1)(A) through (M) and section 45X(b)(2) set forth the credit amounts for each type of eligible component, which amounts, except for purposes of determining the credit amount for any applicable critical mineral, are subject to phase out rules set forth in section 45X(b)(3). For any eligible component (except applicable critical minerals) sold after December 31, 2029, the credit amount for such component equals the product of the amount determined under section 45X(b)(1) for such component multiplied by the applicable phase out percentage under section 45X(b)(3)(B)(i) through (iv). In the case of an eligible component sold during calendar year 2030, 2031, and 2032, the phase out percentages are 75 percent, 50 percent, and 25 percent, respectively. In the case of an eligible component sold after December 31, 2032, the phase out percentage is zero percent. Thus, current law provides no section 45X credit after 2032 for eligible components other than for applicable critical minerals. Section 45X(b)(4) provides capacity limitations used to compute the credit amount for eligible battery cells and battery modules under sections 45X(b)(1)(K)(ii) and (L)(ii). To compute the credit for these eligible components, section 45X(b)(4)(A) provides that the capacity determined with respect to a battery cell or battery module must not exceed a capacity-to-power-ratio of 100:1. Section 45X(b)(4)(B) defines the term "capacity-to-power-ratio" as the ratio of the capacity of a battery cell or battery module to the maximum discharge amount of such cell or module. Section 45X(c)(1)(A) defines the term "eligible component" to mean any solar energy component, any wind energy component, any inverter described in section 45X(c)(2)(B) through (G), any qualifying battery component, and any applicable critical mineral. Section 45X(c)(1)(B) clarifies that the term "eligible component" does not include any property that is produced at a facility if the basis of any property that is part of such facility is taken into account for purposes of the qualifying advanced energy project credit allowed under section 48C after August 16, 2022 (the date of enactment of the IRA). Section 45X(c)(2)(A) generally defines an "inverter" as an end product that is suitable to convert direct current (DC) electricity from one or more solar modules or certified distributed wind energy systems into alternating current (AC) electricity. Section 45X(c)(2)(B) through (G) define the following different types of eligible inverters: central inverter, commercial inverter, distributed wind inverter, microinverter, residential inverter, and utility inverter. Section 45X(c)(3)(A) defines a "solar energy component" as a solar module, photovoltaic cell, photovoltaic wafer, solar grade polysilicon, torque tube, structural fastener, or polymeric backsheet. Section 45X(c)(3)(B) defines these different types of eligible solar energy components as well as the term "solar tracker." Section 45X(c)(4)(A) defines a "wind energy component" as blades, nacelles, towers, offshore wind foundations, and related offshore wind vessels. Section 45X(c)(4)(B) defines these different types of eligible wind energy components. Section 45X(c)(5)(A) defines a "qualifying battery component" as electrode active materials, battery cells, and battery modules. Section 45X(c)(5)(B) defines these different types of qualifying battery components. Section 45X(c)(6) provides the following list of 50 minerals that if converted or purified to specified purities are considered an "applicable critical mineral" for purposes of the section 45X credit: aluminum, antimony, arsenic, barite, beryllium, bismuth, cerium, cesium, chromium, cobalt, dysprosium, erbium, europium, fluorspar, gadolinium, gallium, germanium, graphite, hafnium, holmium, indium, iridium, lanthanum, lithium, lutetium, magnesium, manganese, neodymium, nickel, niobium, palladium, platinum, praseodymium, rhodium, rubidium, ruthenium, samarium, scandium, tantalum, tellurium, terbium, thulium, tin, titanium, tungsten, vanadium, ytterbium, yttrium, zinc, and zirconium. Section 45X(d) provides special rules that are applicable to the section 45X credit. Section 45X(d)(1) provides that persons are treated as related to each other if they would be treated as a single employer under the regulations prescribed under section 52(b) of the Code. Section 52(b) generally provides that trades or businesses that are partnerships, trusts, estates, corporations, or sole proprietorships under common control are members of a controlled group and are treated as a single employer. See §1.52-1(b). Section 52(b) requires the regulations under section 52(b) to be based on principles similar to the principles that apply for purposes of section 52(a), which generally provides that corporations that are members of a controlled group of corporations are treated as a single employer. Section 52(a) provides that a controlled group of corporations is defined with reference to section 1563(a) of the Code. Section 52(b) and §1.52-1 provide rules similar to those under section 52(a), but with certain modifications to account for different types of ownership interests. Section 45X(d)(2) provides that sales of eligible components are taken into account under section 45X only for eligible components that are produced within the United States (including continental shelf areas described in section 638(1) of the Code), or a U.S. territory (including continental shelf areas described in section 638(2)). (For purposes of this document, the term "U.S. territory" has the meaning of the term "possession" as defined in section 638(2).) Section 45X(d)(3) directs the Secretary to promulgate regulations adopting rules similar to the rules of section 52(d) to apportion credit amounts between estates or trusts and their beneficiaries on the basis of the income of the estates or trusts allocable to each, and to pass-thru any apportioned credit amounts to the beneficiaries. Section 45X(d)(4) provides that for purposes of the section 45X credit, a person is treated as having sold an eligible component to an unrelated person if such component is integrated, incorporated, or assembled into another eligible component that is sold to an unrelated person. II. Notice 2022-47 On October 24, 2022, the Treasury Department and the IRS published Notice 2022-47, 2022-43 I.R.B. 312. The notice requested general comments on issues arising under section 45X, as well as specific comments concerning: (1) definitions (including the definitions of eligible components); (2) the Related Person Election; (3) capacity-to-power ratios for battery cells or battery modules; (4) credit amount for components used in systems of varying capacity; (5) offshore wind vessels; (6) applicable critical minerals; and (7) apportionment and pass-thru of credit amounts to beneficiaries of estates or trusts. The Treasury Department and the IRS received over 300 comments from industry participants and other stakeholders. The Treasury Department and the IRS appreciate the commenters' interest and engagement on these issues. These comments have been carefully considered in the preparation of these proposed regulations. III. Notices 2023-18 and 2023-44 On March 6, 2023, the Treasury Department and the IRS published Notice 2023-18, 2023-10 I.R.B. 508, to establish the qualifying advanced energy projects program (section 48C(e) program). On June 20, 2023, the Treasury Department and the IRS published Notice 2023-44, 2023-25 I.R.B. 924, to provide additional guidance on the section 48C(e) program, including rules for the interaction between sections 45X and 48C. The rules regarding the interaction between sections 45X and 48C provided in Notices 2023-18 and 2023-44 have been incorporated into these proposed regulations and upon finalization of this rulemaking, section 5.05 of Notice 2023-18 and section 3 of Notice 2023-44 will be superseded. Explanation of Provisions I. Overview of Proposed Regulations Consistent with section 45X(a)(1), these proposed regulations would provide that for purposes of section 38, the section 45X credit for any taxable year is an amount equal to the sum of the credit amounts determined under section 45X(b) with respect to each eligible component, as defined in section 45X(c), produced by the taxpayer, and, during the taxable year, sold by that taxpayer to an unrelated person. Consistent with section 45X(a)(2), only eligible components that are produced and sold in a trade or business of the taxpayer are taken into account for purposes of the section 45X credit. These proposed regulations are organized into four sections, proposed §§1.45X-1 through 1.45X-4. Proposed §1.45X-1 would provide general rules applicable to the section 45X credit, including the definition of the term "produced by the taxpayer" for both primary and secondary production. Primary production involves producing an eligible component using non-recycled materials while secondary production involves producing an eligible component using recycled materials. Proposed §1.45X-2 would provide rules for sales to unrelated persons through a person related to the taxpayer, including the rules for a taxpayer to make an election to treat sales of eligible components to related persons (Related Person Election) as if made to unrelated persons. Proposed §1.45X-3 would provide definitions and credit amounts for certain eligible components, including solar energy components, wind energy components, inverters, and qualifying battery components, and phase-out rules. Proposed §1.45X-4 would provide definitions and credit amounts for applicable critical minerals that are eligible components. II. General rules applicable to the advanced manufacturing production credit A. Overview Proposed §1.45X-1(a) would provide an overview of the general rules regarding the advanced manufacturing production credit under section 45X. B. Credit amount Proposed §1.45X-1(b) would explain how to calculate the amount of the credit provided under section 45X for any taxable year. C. Definition of produced by the taxpayer Proposed §1.45X-1(c) would define the term "produced by the taxpayer" for both primary and secondary production. Proposed §1.45X-1(c)(1) would provide the general definition of the term. Proposed §1.45X-1(c)(1)(i) would state that partial transformation that does not result in a substantial transformation of inputs into a complete and distinct eligible component is not included in the definition of "produced by the taxpayer." Proposed §1.45X-1(c)(1)(ii) would state that neither minor assembly of constituent inputs nor superficial modification of a final eligible component are included in the definition of "produced by the taxpayer." Proposed §1.45X-1(c)(1)(iii) would provide examples illustrating the definition of "produced by the taxpayer." Proposed §1.45X-1(c)(2) would provide a special rule for applying the definition of "produced by the taxpayer" for solar grade polysilicon, electrode active materials, and applicable critical minerals. Proposed §1.45X-1(c)(3)(i) would state that the taxpayer claiming a section 45X credit with respect to an eligible component must be the person that performs the actual production activities that bring about a substantial transformation resulting in the eligible component and that sells such eligible component to an unrelated person. Proposed §1.45X-1(c)(3)(ii)(A) would provide that if the production of an eligible component is performed in whole or in part subject to a contract that is a contract manufacturing arrangement, then the party to such contract that may claim the section 45X credit with respect to such eligible component, provided all other requirements in section 45X are met, is the taxpayer that performs the actual production activities that bring about a substantial transformation resulting in the eligible component. This proposed rule is intended to provide an administrable rule that provides taxpayers clarity and certainty in determining which taxpayer may claim the section 45X credit in a contract manufacturing arrangement. Proposed §1.45X-1(c)(3)(ii)(B) would define the term "contract manufacturing arrangement" to mean any agreement providing for the production of an eligible component if the agreement is entered into before the production of the eligible component to be delivered under the contract is completed. Proposed §1.45X-1(c)(3)(ii)(B) would further provide that a routine purchase order for off-the-shelf property is not treated as a contract manufacturing arrangement for purposes of proposed §1.45X-1(c)(3). Proposed §1.45X-1(c)(3)(ii)(B) would also provide that an agreement will be treated as a routine purchase order for off-the-shelf property if the contractor is required to make no more than de minimis modifications to the property to tailor it to the customer's specific needs, or if at the time the agreement is entered into, the contractor knows or has reason to know that the contractor can satisfy the agreement out of existing stocks or normal production of finished goods. This definition of the term "routine purchase order" is based on the definition found in §1.263A-2(a)(1)(ii)(B)(2)(ii). The Treasury Department and the IRS request comments on whether this definition should be further clarified or modified. Proposed §1.45X-1(c)(3)(iii) would explain the special rule allowing parties to a contract manufacturing arrangement to agree on which party to the contract will claim the section 45X credit for eligible components produced subject to such contract. Proposed §1.45X-1(c)(3)(iv) would explain the certification requirements for the special rule. Proposed §1.45X-1(c)(3)(v) would provide examples illustrating the application of the special rule. Proposed §1.45X-1(c)(4)(i) would explain the requirements for the timing of production and sale of eligible components. Proposed §1.45X-1(c)(4)(ii) would provide an example illustrating the application of these requirements. D. Produced in the United States Proposed §1.45X-1(d)(1) would state that sales are taken into account for purposes of the section 45X credit only for eligible components produced within the United States, as defined in section 638(1) of the Code, or a United States territory, which for purposes of section 45X has the meaning of the term "possession" provided in section 638(2) of the Code. Proposed §1.45X-1(d)(2) would clarify that constituent elements, materials and subcomponents used in the production of eligible components are not subject to the domestic production rule. It would also be permissible for elements, materials, and subcomponents used in the production of eligible components to be recycled rather than newly created elements, materials, and subcomponents. E. Production and sale in a trade or business Proposed §1.45X-1(e) would state that an eligible component must be produced and sold in a trade or business of the taxpayer, with the term "trade or business" defined as a trade or business within the meaning of section 162 of the Code. F. Integrated, incorporated, or assembled Proposed §1.45X-1(f)(1) would state that a taxpayer is treated as having produced and sold an eligible component to an unrelated person if such component is integrated, incorporated, or assembled into another eligible component that is then sold to an unrelated person. This proposed rule would further define the term "integrated, incorporated, or assembled" to mean the production activities by which eligible components that are constituent elements, materials, or subcomponents are substantially transformed into another complete and distinct eligible component functionally different from that which would result from mere assembly or superficial modification of the eligible components used as elements, materials or subcomponents and other elements, materials or subcomponents. Proposed §1.45X-1(f)(2)(i) would clarify that a taxpayer may claim a section 45X credit for each eligible component the taxpayer produces and sells to an unrelated person, including any eligible component the taxpayer produces that was used as a constituent element, material, or subcomponent and integrated, incorporated, or assembled into another complete and distinct eligible component or another complete and distinct product that the taxpayer also produces and sells to an unrelated person. Proposed §1.45X-1(f)(2)(ii) would provide an example of the credit eligibility of a sale of a product with incorporated eligible components to an unrelated person. G. Interaction between sections 48C and 45X Proposed §1.45X-1(g)(1) would, consistent with section 45X(c)(1)(B), provide that for purposes of section 45X, an eligible component must be produced at a section 45X facility and does not include any property (produced property) that is produced at a facility if the basis of any property that is part of the production unit that produces the produced property is eligible property that is included in a section 48C facility and is taken into account for purposes of a credit allowed under section 48C (section 48C credit) after August 16, 2022. Proposed §1.45X-1(g)(2)(i) would define a section 45X facility to include all tangible property that comprises an independently functioning production unit that produces one or more eligible components. Proposed §1.45X-1(g)(2)(ii) would provide that a production unit is comprised of the tangible property that substantially transforms material inputs to complete the production process of an eligible component. Proposed §1.45X-1(g)(3)(i) would define a section 48C facility to include all eligible property included in a qualifying advanced energy project for which a taxpayer receives an allocation of section 48C credits and claims such credits after August 16, 2022. Proposed §1.45X-1(g)(3)(ii) would define eligible property included in a section 48C facility. Proposed §1.45X-1(g)(4) would provide examples to illustrate the application of these rules. H. Pass-thru from estates and trusts The Treasury Department and the IRS intend to provide rules addressing how the section 45X credit applies in the case of pass-thru from estates and trusts. The Treasury Department and the IRS request comments on how such rules should be implemented and whether there are any special considerations for estates and trusts claiming the section 45X credit. Proposed §1.45X-1(h) is reserved for this purpose. I. Anti-abuse rule Proposed §1.45X-1(i)(1) provides a general anti-abuse rule that would make the section 45X credit unavailable in extraordinary circumstances in which, based on a consideration of all the facts and circumstances, the primary purpose of the production and sale of an eligible component is to obtain the benefit of the section 45X credit in a manner that is wasteful, such as discarding, disposing of, or destroying the eligible component without putting it to a productive use. In cases where the cost of producing certain eligible components is less than the amount of the section 45X credit that would be available, the Treasury Department and the IRS are concerned that taxpayers may have an incentive to produce such components solely for the purpose of exploiting the section 45X credit in a manner that is inconsistent with a purpose of section 45X, which is to provide an incentive to produce eligible components that contribute to the development of secure and resilient supply chains. Producing and selling eligible components with the primary purpose of obtaining the benefit of the section 45X credit in a wasteful manner would not satisfy the requirement for the eligible component to be produced and sold in a trade or business of the taxpayer under section 45X(a)(2) in certain circumstances. Proposed §1.45X-1(i)(2) would provide an example illustrating this anti-abuse rule. III. Sale to an unrelated person Proposed §1.45X-2(a) would state the general rule that the amount of the section 45X credit for any taxable year is equal to the sum of the credit amounts determined under section 45X(b) (and described in §§1.45X-3 and 1.45X-4) with respect to each eligible component that is produced by the taxpayer and, during the taxable year, sold by the taxpayer to an unrelated person (as defined in section 45X(a)(3) and described in §1.45X-2(b)(3)). A. Definitions Section 45X(d)(1) provides that persons are treated as related to each other if such persons would be treated as a single employer under the regulations prescribed under section 52(b). Proposed §1.45X-2(b) would provide definitions of the terms "person," "related person," and "unrelated person" for purposes of the section 45X credit. B. Special rule for sale to related person Section 45X(a)(3)(A) provides a special rule for purposes of section 45X that a taxpayer is treated as selling components to an unrelated person if such component is sold to such person by a person related to the taxpayer. Proposed §1.45X-2(c) would provide this rule and an example to illustrate its application. C. Related person election Section 45X(a)(3)(B)(i) provides that at the election of the taxpayer (in such form and manner as the Secretary may prescribe), a sale of components by such taxpayer to a related person is treated as if made by the taxpayer to an unrelated person for purposes of section 45X(a) (Related Person Election). Thus, the Related Person Election is only available if an eligible component is sold by a taxpayer to a related person. The Related Person Election is not available if a taxpayer does not actually sell the eligible component to another person, for example, if an eligible component is transferred between a person and an entity that is not regarded as separate from the person under §301.7701-3 of the Procedure and Administration Regulations (26 CFR part 301) or between divisions of a single corporation. Section 45X(a)(3)(B)(ii) provides that as a condition of, and prior to, any election described in clause (i), the Secretary may require such information or registration as the Secretary deems necessary for purposes of preventing duplication, fraud, or any improper or excessive amount determined under section 45X(a)(1). Proposed §1.45X-2(d)(1) would provide that the Related Person Election must be made in the form and manner prescribed in guidance. The term "guidance" is defined as guidance published in the Federal Register or Internal Revenue Bulletin, as well as administrative guidance such as forms, instructions, publications, or other guidance on the IRS.gov website. See §§601.601 and 601.602 of the Statement of Procedural Rules (26 CFR part 601). For members of a consolidated group (as defined in §1.1502-1(h)), the election is made by each member, in the manner set forth in proposed §1.45X-2(d)(3)(ii). In addition, if a member of a consolidated group sells eligible components to another member of the group, the selling member may make the Related Person Election to claim the section 45X credit in the taxable year of sale. Proposed §1.45X-2(d)(1) would also provide that as a condition of, and prior to, a taxpayer making a Related Person Election, the Secretary may require such information or registration as the Secretary deems necessary for purposes of preventing duplication, fraud, or any improper or excessive credit amount determined under section 45X(a)(1). Proposed §1.45X-2(d)(2) would provide the time and manner for a taxpayer to make the Related Person Election. Proposed §1.45X-2(d)(2)(i) would state that a taxpayer must make an affirmative Related Person Election annually in the form and manner prescribed in guidance (currently Form 7207, Advanced Manufacturing Production Credit, and its instructions), and filed with the taxpayer's timely filed original Federal income tax return, including extensions. Proposed §1.45X-2(d)(2)(i) would also provide that the Related Person Election will be applicable to all sales of eligible components to related persons by the taxpayer for each trade or business that the taxpayer engages in during the taxable year that resulted in a credit claim and for which the taxpayer has made the Related Person Election. Proposed §1.45X-2(d)(2)(ii) would provide the required information to make a Related Person Election. Proposed §1.45X-2(d)(3) would describe the scope and effect of the Related Person Election and provide that a separate Related Person Election must be made with respect to related person sales made by a taxpayer in each eligible trade or business of the taxpayer. Proposed §1.45X-2(d)(3) would also provide that a Related Person Election applies to all sales to related persons (including between members of the same consolidated group, notwithstanding the rules provided in §1.1502-13) of eligible components produced by the taxpayer during the taxable year for which that election is made and is irrevocable for that taxable year. Additionally, proposed §1.45X-2(d)(3) would provide that a Related Person Election applies solely for purposes of the section 45X credit, the provisions of proposed §§1.45X-1 through 1.45X-4, and so much of sections 6417 and 6418 and the regulations under sections 6417 and 6418 related to the section 45X credit. Proposed §1.45X-2(d)(3)(ii) and (iii) would apply the provisions of proposed §1.45X-2(d)(2) and (d)(3)(i) to consolidated groups and partnerships. Proposed §1.45X-2(d)(3)(ii) would apply the provisions of proposed §1.45X-2(d)(2) and (d)(3)(i) to consolidated groups by providing that for a trade or business of a consolidated group (as defined in §1.1502-1(h)), a Related Person Election is made by the agent for the group on behalf of the member claiming the section 45X credit and filed with the group's timely filed original Federal income tax return, including extensions, with respect to each trade or business that the consolidated group conducts. See §1.1502-77 (providing rules regarding the status of the common parent as agent for its members). A separate election must be filed on behalf of each member claiming the section 45X credit, and each election must include the name and employer identification number (EIN) of the agent for the group and the member on whose behalf the form is being filed. Proposed §1.45X-2(d)(3)(iii) would apply the provisions of proposed §1.45X-2(d)(2) and (d)(3)(i) to partnerships by stating that an election for a partnership must be filed with the partnership's timely filed original Federal income tax return, including extensions, with respect to each trade or business that the partnership conducts. Additionally, proposed §1.45X-2(d)(3)(iii) provides that an election by a partnership does not apply to any trade or business conducted by a partner outside the partnership. Proposed §1.45X-2(d)(4) would provide an anti-abuse rule for the Related Person Election that is necessary for preventing duplication, fraud, or any improper or excessive amount of the section 45X credit. This anti-abuse rule would make the Related Person Election unavailable in extraordinary cases where a taxpayer seeks to use the Related Person Election to exploit the section 45X credit in an improper and wasteful manner or sell defective components to a related person. Proposed §1.45X-2(d)(4)(i) would provide that a Related Person Election may not be made if the taxpayer fails to provide the information required by proposed §1.45X-2(d)(2) with respect to the relevant eligible components, the taxpayer provides information that shows such components were put to an improper use or were defective, or such components were actually put to an improper use or were defective. Proposed §1.45X-2(d)(4)(ii) would provide that an eligible component is put to an improper use if it is so used by the related person to which the eligible component is sold. The term "improper use" would mean a use that is wasteful, such as discarding, disposing of, or destroying the eligible component without putting it to a productive use. As discussed previously, in cases in which the cost of producing certain eligible components may be less than the amount of the section 45X credit that is available, the Treasury Department and the IRS are concerned that taxpayers may have an incentive to produce such components solely for the purpose of exploiting the section 45X credit without putting such components to a productive use. In such cases, the Related Person Election would remove an important safeguard against the improper and wasteful production of eligible components that an unrelated-person-sale requirement would provide. The Treasury Department and the IRS request comments on this definition of the term "improper use" and whether any clarifications to its scope are necessary. Proposed §1.45X-2(d)(4)(iii) would provide that an eligible component is "defective" if it does not meet the requirements of section 45X. The Treasury Department and the IRS are concerned that the Related Person Election may be used by taxpayers to claim a credit for eligible components that are defective, not capable of being used for its intended purpose, do not meet the requirements for the section 45X credit, and therefore are not eligible for the section 45X credit. For example, a taxpayer that mass produces a large quantity of an eligible component may find that some of those components are defective, cannot be used for its intended purposes, and are not eligible for the section 45X. Such components could also be difficult to sell to an unrelated person because they are defective. In such cases, the Related Person Election would remove an important safeguard against improper credit claims for defective components that an unrelated-person-sale requirement would provide. The Treasury Department and the IRS request comments on the definition of the term "defective components" and whether clarifications to its scope are necessary. D. Related person sale of integrated components Section 45X(d)(4) provides that for purposes of section 45X, a person is treated as having sold an eligible component to an unrelated person if such component is integrated, incorporated, or assembled into another eligible component that is sold to an unrelated person. See part II.F of this Explanation of Provisions for rules applicable to eligible components that are integrated, incorporated or assembled into other eligible components and sold to an unrelated person. Proposed §1.45X-2(e)(1) would provide that a taxpayer that produces and then sells an eligible component to a related person who then integrates, incorporates, or assembles the taxpayer's eligible component into another complete and distinct eligible component that is subsequently sold to an unrelated person may claim a section 45X credit in the taxable year of the sale to the unrelated person. Proposed §1.45X-2(e)(2) would provide examples to illustrate the treatment of sales of multiple incorporated eligible components to related and unrelated persons. Proposed §1.45X-2(e)(3)(i) would provide that if a taxpayer makes the Related Person Election and produces and sells an eligible component to a related person who then integrates, incorporates, or assembles the taxpayer's eligible component into another complete and distinct eligible component that is subsequently sold to an unrelated person, the taxpayer's sale of the eligible component to the related person would be treated as if made to an unrelated person in the taxable year in which the sale to the related person occurs. Proposed §1.45X-2(e)(3)(ii) would provide an example to illustrate the treatment of sales of multiple integrated eligible components to related and unrelated persons with a Related Person Election. IV. Eligible components For solar energy components, wind energy components, inverters, and qualifying battery components, proposed §1.45X-3 would provide definitions, rules for determining the credit amount, and documentation requirements. Proposed §1.45X-3 would also provide rules for applying the phase out of the section 45X credit. Proposed §1.45X-4 would provide such information for applicable critical minerals (other than rules for applying the phase out which do not apply to applicable critical minerals). A. Eligible Components Generally Proposed §1.45X-3(a) defines the term "eligible component" as any solar energy component, any wind energy component, any inverter, any qualifying battery component, and any applicable critical mineral. B. Solar Proposed §1.45X-3(b) would define the term "solar energy component" as a solar module, photovoltaic cell, photovoltaic wafer, solar grade polysilicon, torque tube, structural fastener, or polymeric backsheet. Proposed §1.45X-3(b) would clarify the definition of each type of solar energy component. Proposed §1.45X-3(b) would also clarify the calculation of the credit amount for each type of solar energy component. Proposed §1.45X-3(b)(1)(ii) and (b)(5)(ii) would require the capacity of a solar module or photovoltaic cell to be determined by the nameplate capacity in direct current watts using Standard Test Conditions, as defined by the International Electrotechnical Commission. Proposed §1.45X-3(b) would also require taxpayers to maintain specific documentation with respect to certain solar energy components. For example, for structural fasteners to be eligible for the section 45X credit, section 45X(c)(3)(B)(vii)(II) provides that structural fasteners must be used (1) to connect the mechanical and drive system components of a solar tracker to the foundation of such solar tracker, (2) to connect torque tubes to drive assemblies, or (3) to connect segments of torque tubes to one another. Proposed §1.45X-3(b)(8)(iii) would require taxpayers to document that a structural fastener meets this use requirement with a bill of sale, or other similar documentation that explicitly describes such use. Proposed §1.45X-3(b)(7)(iii) would apply similar documentation rules to torque tubes because section 45X(c)(3)(B)(vii)(I)(aa) requires a torque tube to be "part of a solar tracker" to be eligible for the section 45X credit. C. Wind Proposed §1.45X-3(c) would define the term "wind energy component" as a blade, nacelle, tower, offshore wind foundation, or related offshore wind vessel. Proposed §1.45X-3(c) would clarify the definition of each type of wind energy component. Proposed §1.45X-3(c)(4)(i) would clarify the definition of the term "related offshore wind vessel." Section 45X(c)(4)(B)(iv) defines the term "related offshore wind vessel" as any vessel that is purpose-built or retrofitted for purposes of the development, transport, installation, operation, or maintenance of offshore wind energy components. Proposed §1.45X-3(c)(4)(i) would clarify that a vessel is purpose-built for development, transport, installation, operation, or maintenance of offshore wind energy components if it is built to be capable of performing such functions and it is of a type that is commonly used in the offshore wind industry. Proposed §1.45X-3(c)(4)(i) would further clarify that a vessel is retrofitted for development, transport, installation, operation, or maintenance of offshore wind energy components if such vessel was incapable of performing such functions prior to being retrofitted, the retrofit causes the vessel to be capable of performing such functions, and the retrofitted vessel is of a type that is commonly used in the offshore wind industry. Proposed §1.45X-3(c) would also clarify the calculation of the credit amount for each type of wind energy component. The credit amount for a blade, nacelle, tower, or offshore wind foundation is based on the total rated capacity of the completed wind turbine for which such component is designed. Proposed §1.45X-3(c)(6) would define "total rated capacity of the completed wind turbine" as, for the completed wind turbine for which a blade, nacelle, offshore wind foundation, or tower was manufactured and sold, the nameplate capacity at the time of sale as certified to the relevant national or international standards, such as International Electrotechnical Commission (IEC) 61400, or ANSI/ACP 101-1-2021, the Small Wind Turbine Standard. Certification of the turbine to such standards must be documented by a certificate issued by an accredited certification body. The total rated capacity of a wind turbine must be expressed in watts. For a related offshore wind vessel, the credit amount is equal to 10 percent of the sales price of the vessel. The sales price of the vessel does not include the price of maintenance or other services that may be sold with the vessel. Proposed §1.45X-3(c)(4)(ii) would confirm that, for a related offshore wind vessel with respect to which a Related Person Election (as discussed in part III.C of this Explanation of Provisions) has been made, the effect of the election is limited to allowing the related person sale to qualify for a credit under section 45X (despite the fact that it is not actually between unrelated persons) and, therefore, the election does not also treat the sale price as an arm's length price that was determined between uncontrolled taxpayers for purposes of section 482 of the Code and the regulations thereunder. For blades, nacelles, offshore wind foundations, or towers, proposed §1.45X-3(c)(7) would require a taxpayer to document the turbine model for which such component is designed and the total rated capacity of the completed wind turbine in technical documentation associated with the sale of such component. D. Inverters Proposed §1.45X-3(d) would define the term "inverter " as an end product that is suitable to convert DC electricity from one or more solar modules or certified distributed wind energy systems into AC electricity. An end product is suitable to convert DC electricity from one or more solar modules or certified distributed wind energy systems into AC electricity if, in the form sold by the manufacturer, it is able to connect with such modules or systems and convert DC electricity to AC electricity from such connected source. For purposes of section 45X, the term inverter includes a central inverter, commercial inverter, distributed wind inverter, microinverter, or residential inverter. Proposed §1.45X-3(d) would clarify the definition of each of these types of inverters. Section 45X(c)(2) requires certain types of inverters be "suitable to" or "suitable for" a statutorily required use or application to be considered an eligible component. For example, section 45X(c)(2)(B) requires a central inverter to be "suitable for large utility-scale systems." Proposed §1.45X-3(d)(2)(i) would clarify that an inverter is suitable for large utility-scale systems if, in the form sold by the manufacturer, it is capable of serving as a component in a large utility-scale system and meets the core engineering specifications for such application. Proposed §1.45X-3(d)(5) would clarify that a direct current optimized inverter system (DC optimized inverter system) may qualify as a microinverter. Proposed §1.45X-3(d)(5)(i) would define a microinverter as an inverter that is suitable to connect with one solar module, has a rated output of 120 or 240 volt single-phase power, or 208 or 480 volt three-phase power, and has a capacity, expressed on an AC watt basis, that is not greater than 650 watts. Proposed §1.45X-3(d)(5)(iii)(A) would clarify that an inverter is suitable to connect to one solar module if, in the form sold by the manufacturer, it is capable of connecting to one or more solar modules and regulating the DC electricity from each module independently before that electricity is converted into alternating current electricity. Proposed §1.45X-3(d)(5)(iii)(B) would provide that a DC optimized inverter system is an inverter that is comprised of an inverter connected to multiple DC optimizers that are each designed to connect to one solar module. Proposed §1.45X-3(d)(5)(iv)(B) would clarify how to determine the credit amount for a DC optimized inverter system that qualifies as a microinverter. For a DC optimized inverter system to qualify as a microinverter, the inverter must meet the requirements of section 45X(c)(2)(E) and a taxpayer must produce and sell the inverter and the DC optimizers in the DC optimized inverter system together as a single end product. Proposed §1.45X-3(d)(5) would clarify that, similar to a DC optimized inverter system, a multi-module inverter may also qualify as a microinverter. The term "multi-module inverter" means an inverter that is comprised of an inverter with independent connections and DC optimizing components for two or more modules. Proposed §1.45X-3(d)(5)(iv)(C) would provide that the credit amount for a multi-module inverter that qualifies as a microinverter is equal to the product of 11 cents multiplied by the total alternating current capacity of the DC optimizers in the multi-module inverter when paired with the inverter in the multi-module inverter. Proposed §1.45X-3(d) would also clarify the calculation of the credit amount for each type of inverter. In general, the credit amount for each type of inverter would be equal to the product of the inverter's total rated capacity and the amount prescribed in section 45X(b)(2)(B) for such inverter. Proposed §1.45X-3(d) would generally require taxpayers to document whether an inverter is suitable to or suitable for a statutorily required use or application, the inverter's rated output, and the inverter's capacity, as applicable, in a specification sheet, bill of sale, or other similar documentation. E. Battery components Proposed §1.45X-3(e)(1) would define the term "qualifying battery component" as electrode active materials, battery cells, or battery modules. Proposed §1.45X - 3(e)(2)(i)(A) would define the term "electrode active materials" to include cathode electrode materials, anode electrode materials, and electrochemically active materials that contribute to the electrochemical processes necessary for energy storage. In general, electrode active materials are materials that are capable of being used within a battery for energy storage. Proposed §1.45X-3(e)(2)(i)(A) would also provide that the following materials in a battery or vehicle would not qualify for the section 45X credit as an electrode active material: battery management systems, terminal assemblies, cell containments, gas release valves, module containments, module connectors, compression plates, straps, pack terminals, bus bars, thermal management systems, and pack jackets. Proposed §1.45X - 3(e)(2)(i)(B) would define "cathode electrode materials " to mean the materials that comprise the cathode of a commercial battery technology, such as binders, and current collectors (that is, cathode foils). Proposed §1.45X-3(e)(2)(i)(C) would define "anode electrode materials" to mean the materials that comprise the anode of a commercial battery technology, including anode foils. Proposed §1.45X - 3(e)(2)(i)(D) would define "electrochemically active materials that contribute to the electrochemical processes necessary for energy storage" to mean the battery-grade materials that enable the electrochemical storage within a commercial battery technology. In addition to the list of electrochemically active materials provided in section 45X(c)(5)(B)(i) (solvents, additives, and electrolytic salts), these may include electrolytes, catholytes, anolytes, separators, and metal salts and oxides. Proposed §1.45X-3(e)(2)(i)(E) would also include an example illustrating this concept. Proposed §1.45X-3(e)(2)(i)(F) would define "battery-grade materials " to mean the processed materials found in a final battery cell or an analogous unit, or the direct battery-grade precursors to those processed materials. Proposed §1.45X-3(e)(2)(v) would clarify that a taxpayer may claim only one section 45X credit with respect to a material that qualifies as both an electrode active material and an applicable critical mineral. F. Production costs incurred Proposed §1.45X-3(e)(2)(ii) would provide that for an electrode active material the credit amount is equal to 10 percent of the costs incurred by the taxpayer with respect to production of such materials. Proposed §1.45X-3(e)(2)(iii) would also provide the definition of purified and converted with respect to electrode active materials. Proposed §1.45X-3(e)(2)(iv) would clarify that the costs incurred for purposes of determining the credit amount includes costs as defined in §1.263A-1(e) that are paid or incurred within the meaning of section 461 of the Code by the taxpayer for the production of an electrode active material only. Thus, production costs with respect to an electrode active material would not include any costs incurred after the production of the electrode active material. For example, the costs to incorporate the electrode active material into a battery component would not be taken into account as costs incurred in producing the electrode active material. These proposed regulations apply section 263A and the regulations under section 263A (section 263A regulations) solely to identify the types of costs that are includible in production costs incurred for purposes of computing the amount of the section 45X credit, but do not apply section 263A or the section 263A regulations for any other purposes, such as to determine whether a taxpayer is engaged in production activities. Direct material costs as defined in §1.263A-1(e)(2)(i)(A), or indirect material costs as defined in §1.263A-1(e)(3)(ii)(E), and any costs related to the extraction or acquisition of raw materials would not be taken into account as production costs. A wide range of costs that are attributable to the production of an electrode active material would be taken into account as a cost incurred in producing the electrode active material, including, but not limited to, labor, electricity used in the production of the electrode active material, storage costs, depreciation or amortization, recycling, and overhead. However, the cost of acquiring the raw material used to produce the electrode active material, the cost of materials used for conversion, purification, or recycling of the raw material, and other material costs related to the production of the electrode active material would not be taken into account. The Treasury Department and the IRS seek to appropriately provide a credit for the costs associated with production activities that add value to the electrode active material and are conducted by the taxpayer that produces the electrode active material. Merely purchasing raw materials may enable a taxpayer to produce an electrode active material but it is not by itself an activity that adds value. Excluding material costs would also mitigate the risk of crediting the same costs multiple times. For example, if material costs are included in production costs for electrode active materials, the costs of producing an applicable critical mineral that is later incorporated into an electrode active material could be credited more than once, and such material costs could make up a significant share of the cost of producing the electrode active material. The Treasury Department and the IRS recognize that a wide range of costs are incurred in the production of electrode active materials. The Treasury Department and the IRS request comments on this proposed rule for determining the costs incurred with respect to the production of electrode active materials, specifically whether and how extraction and other similar value-added activities in the production of raw materials used in electrode active materials should be taken into account. The Treasury Department and the IRS welcome an assessment of the magnitude of extraction costs and other direct and indirect material costs relative to the overall costs incurred in the production of an electrode active material, and the extent to which these costs are incurred by the taxpayer that also produces the electrode active material and add value to the electrode active material. The Treasury Department and the IRS also welcome comments on how extraction should be defined for this purpose, and whether it should be defined consistent with proposed §1.30D-3(c)(8). The Treasury Department and the IRS are considering including in production costs the costs of extraction and other similar value-added activities in the production of raw materials used in electrode active materials. However, such costs would only be included if the IRS could effectively administer such an approach and there are sufficient assurances that adopting such an approach would pose a limited risk of (i) crediting the same production costs multiple times and (ii) increasing other forms of fraud, waste, and abuse. The Treasury Department and the IRS request comments on whether and to what extent including these costs might raise such risks. The Treasury Department and the IRS intend for the production cost incurred rules in proposed §1.45X-3(e)(2) to apply to a credit claimant in a contract manufacturing arrangement. The Treasury Department and the IRS request comments on whether the proposed rules need further clarification or modification as applied to contract manufacturing arrangements. G. Battery cells and modules Proposed §1.45X-3(e)(3) and (4) would provide definitions, rules for measuring capacity, and documentation requirements for battery cells and battery modules. Proposed §1.45X-3(e)(4)(i) would define a "battery module" as a module, in the case of a module using battery cells, with two or more battery cells that are configured electrically, in series or parallel, to create voltage or current, as appropriate, to a specified end use, or a module with no battery cells, and, in each case, with an aggregate capacity of not less than 7 kilowatt-hours (or, in the case of a module for a hydrogen fuel cell vehicle, not less than 1 kilowatt-hour). Proposed §1.45X-3(e)(4)(i)(A) would define a "module using battery cells" as a module with two or more battery cells that are configured electrically, in series or parallel, to create voltage or current (as appropriate), to a specified end use, meaning an end-use configuration of battery technologies. An end-use configuration is the product that ultimately serves a specified end use. It is the collection of interconnected cells, configured to that specific end-use and interconnected with the necessary hardware and software required to deliver the required energy and power (voltage and current) for that use. As applied to batteries commonly used in electric vehicles, proposed §1.45X-3(e)(4)(i)(A) would permit a credit for the production and sale of the battery pack in the electric vehicle, but it would not permit a credit for the production of a module that is not the end-use configuration. The Treasury Department and the IRS request comments on this proposed interpretation of the phrase "to a specified end use" in section 45X(c)(5)(B)(iii)(I)(aa). Proposed §1.45X-3(e)(4)(i)(B) would define the term "module with no battery cells" as a product with a standardized manufacturing process and form that is capable of storing and dispatching useful energy, that contains an energy storage medium that remains in the module (for example, it is not consumed through combustion), and that is not a custom-built electricity generation or storage facility. This proposed definition would allow battery technologies such as flow batteries and thermal batteries to be eligible for the section 45X credit, but it would not permit technologies that do not meet this definition such as standalone fuel storage tanks or fuel tanks connected to engines or generation systems to qualify as a module with no battery cells. Proposed §1.45X-3(e) would clarify how capacity must be determined for battery cells and battery modules. Proposed §1.45X-3(e)(3)(ii) would provide that taxpayers must measure the capacity of a battery cell in accordance with a national or international standard, such as IEC 60086-1 (Primary Batteries), or an equivalent standard. Taxpayers can reference the United States Advanced Battery Consortium (USABC) Battery Test Manual for additional guidance. Proposed §1.45X-3(e)(4)(ii)(A) would provide that, for modules using battery cells, taxpayers must measure the capacity of a module using battery cells with a testing procedure that complies with a national or international standard published by a recognized standard setting organization. The capacity of a battery module using battery cells may not exceed the total capacity of the battery cells in the module. Proposed §1.45X-3(e)(4)(ii)(B) would provide that, for modules with no battery cells, taxpayers must measure the capacity using a testing procedure that complies with a national or international standard published by a recognized standard setting organization. If no such standard applies to a type of module with no battery cells, taxpayers must measure the capacity of such module as the Secretary may prescribe in regulations or other guidance. The Treasury Department and the IRS request comments on what recognized national or international standards are currently available for measuring capacity of modules with no battery cells and whether further guidance may be required. H. Phase Out Proposed §1.45X-3(f) would provide the rules for the phase out of the section 45X credit. In the case of any eligible component that is not an applicable critical mineral and is sold after December 31, 2029, the amount of the section 45X credit determined with respect to such eligible component would be equal to the product of the amount determined under proposed §1.45X-3 with respect to such eligible component, multiplied by the phase out percentage. Proposed §1.45X-3(f)(2) would provide the phase out percentages. The phase out percentage would be equal to 75 percent for eligible components sold during calendar year 2030; 50 percent for eligible components sold during calendar year 2031; 25 percent for eligible components sold during calendar year 2032, and zero percent for eligible components sold after calendar year 2032. The phase out percentages would be determined based on the year the eligible component is sold rather than the year in which the eligible component is produced by the taxpayer. Proposed §1.45X-3(f)(3) would clarify that the phase out rules described in proposed §1.45X-3(f) do not apply to applicable critical minerals as defined in proposed §1.45X-4(b). V. Applicable critical minerals A. In general Section 45X(c)(6) defines applicable critical minerals that are eligible components for purposes of the section 45X credit. Congress enacted section 45X to incentivize the domestic production of eligible components, including certain applicable critical minerals, that are vital to strengthening the country's renewable energy and energy storage supply chains. In addition, Congress amended section 30D in the IRA to provide that section 30D credit eligibility and credit amount is based in part on the sourcing of applicable critical minerals contained in the battery of new clean vehicles from secure and resilient supply chains, with applicable critical minerals defined by cross-reference to section 45X(c)(6). See section 30D(d)(7)(A) and (e)(1). The Treasury Department and the IRS interpret the applicable critical minerals described in section 45X(c)(6) through this lens. Proposed §1.45X-4(b) adopts, with some clarifications, the definitions of applicable critical minerals provided in section 45X(c)(6). In particular, section 45X(c)(6)(N) provides that the term "graphite" means graphite (both natural and synthetic) that is purified to a minimum purity of 99.9 percent graphitic carbon by mass. Some stakeholders have questioned whether this definition could be interpreted to refer to a particular crystalline structure of carbon, that is, 99.9 percent carbon in a graphitic form. After consulting with experts at the Department of Energy, U.S. Geological Survey, and Department of the Interior, the Treasury Department and the IRS are unaware of a current application in the energy sector for graphite that is at least 99.9 percent carbon in the graphitic form. However, graphite that is at least 99.9 percent carbon by mass is used in electric vehicle batteries to facilitate the electrochemical processes necessary for energy storage, as well as in other energy sector applications. Consistent with the general intent of section 45X, proposed §1.45X-4(b)(14) would clarify that the term "99.9 percent graphitic carbon by mass" means graphite that is 99.9 percent carbon by mass. This interpretation reflects that various forms of matter are 99.9 percent carbon, such as carbon black, so the word "graphitic" is providing additional clarification regarding the particular application of the carbon. This interpretation provides an incentive for the domestic production of the type of graphite that is used in the renewable energy and energy storage industry, including both synthetic and natural graphite for use in electric vehicle batteries. This interpretation also supports the secure supply chain objectives expressed by Congress in amendments to section 30D that cross-reference the section 45X definition of applicable critical minerals. Section 45X(c)(6)(A) provides that aluminum that is converted from bauxite to a minimum purity of 99 percent alumina by mass or purified to a minimum purity of 99.9 percent aluminum by mass, qualifies as an applicable critical mineral. Some stakeholders have requested clarification whether commercial grade aluminum that is 99.7 percent aluminum by mass may qualify as an applicable critical mineral under section 45X(c)(6)(A). Section 45X(c)(6)(A) should be interpreted in light of the dynamics of the aluminum industry and the role that critical materials like aluminum play in the renewable energy and energy storage industry. Aluminum oxide, commonly known as alumina, is a form of aluminum that is referred to in section 45X(c)(6)(A)(i). Proposed §1.45X-4(b)(1) would interpret section 45X(c)(6)(A) to mean aluminum, including commodity-grade aluminum, described in section 45X(c)(6)(A)(i) and (ii). Proposed §1.45X-4(b)(1) would define "commodity-grade aluminum" as aluminum that has been produced directly from aluminum that is described in proposed §1.45X-4(b)(1)(i) or (ii) and is in a form that is sold on international commodity exchanges, which would include commercial grade aluminum that is 99.7 percent aluminum by mass. Proposed §1.45X-4(b)(1) clarifies that the term "commodity-grade aluminum" is limited to primary production of unwrought forms by specifying that commodity-grade aluminum must be "produced directly" from certain forms of aluminum. The Treasury Department and the IRS currently understand that the ability to ascertain and substantiate the process or processes used in an earlier point in the lifecycle of feedstock aluminum for secondary production is limited. Such limitations would pose significant substantiation and administrability issues if secondary production were permitted for commodity-grade aluminum under proposed §1.45X-4(b)(1). Excluding secondary production would also avoid significant administrability challenges that would arise if the process or processes used at previous points in the lifecycle of feedstock aluminum used in secondary production had to be verified to determine eligibility for the section 45X credit. The Treasury Department and the IRS request comments on this interpretation of section 45X(c)(6)(A). B. Credit amount Section 45X(b)(1) generally provides the credit amount determined with respect to any eligible component, including any eligible component it incorporates, subject to the credit phase out provided at section 45X(b)(3). Section 45X(b)(3)(C) provides that the credit phase out does not apply with respect to any applicable critical mineral. Section 45X(b)(1)(M) provides that in the case of any applicable critical mineral, the credit amount is an amount equal to 10 percent of the costs incurred by the taxpayer with respect to production of such mineral. Proposed §1.45X-4(c)(1) would provide that for an applicable critical mineral the credit amount is equal to 10 percent of the costs incurred by the taxpayer with respect to production of such materials. Proposed §1.45X-4(c)(2) would provide definitions of production processes for applicable critical minerals. Proposed §1.45X-1(c)(2)(i) would provide that for purposes of section 45X, the term "conversion" means a chemical transformation from one species to another. Proposed §1.45X-1(c)(2)(ii) would provide that for purposes of section 45X, the term "purification " means increasing the mass fraction of a certain element. C. Production costs incurred Proposed §1.45X-4(c)(3) would clarify that the costs incurred for purposes of determining the credit amount includes costs as defined in §1.263A-1(e) that are paid or incurred within the meaning of section 461 of the Code by the taxpayer for the production of an applicable critical mineral only. Thus, production costs with respect to an applicable critical mineral would not include any costs incurred after the production of the applicable critical mineral. For example, the costs to incorporate the applicable critical mineral into another product would not be taken into account as costs incurred in producing the applicable critical mineral. These proposed regulations apply section 263A and the section 263A regulations solely to identify the types of costs that are includible in production costs incurred for purposes of computing the credit amount, but do not apply section 263A or the section 263A regulations for any other purposes, such as to determine whether a taxpayer is engaged in production activities. Direct or indirect materials costs as defined in §1.263A-1(e)(2)(i)(A) and (e)(3)(ii)(E), respectively, and any costs related to the extraction or acquisition of raw materials would not be taken into account as production costs. A wide range of costs that are attributable to the production of an applicable critical mineral would be taken into account as a cost incurred in producing the applicable critical mineral, including, but not limited to, labor, electricity used in the production of the applicable critical mineral, storage costs, depreciation or amortization, recycling, and overhead. However, the cost of acquiring the raw material used to produce the applicable critical mineral, the cost of materials used for conversion, purification, or recycling of the raw material, and other material costs related to the production of the applicable critical mineral would not be taken into account. The Treasury Department and the IRS seek to appropriately provide a credit for the costs associated with production activities that add value to the applicable critical mineral and are conducted by the taxpayer that produces the applicable critical mineral. Merely purchasing raw materials may enable a taxpayer to produce an applicable critical mineral but it is not by itself an activity that adds value. Excluding material costs would also mitigate the risk of crediting the same costs multiple times. For example, if material costs are included in production costs for an applicable critical mineral, the costs of producing an applicable critical mineral that is later incorporated into another applicable critical mineral could be credited more than once, and such material costs could make up a significant share of the cost of producing the applicable critical mineral. This might be the case if, for instance, Taxpayer 1 produces Applicable Critical Mineral 1 and then sells it to Taxpayer 2 who uses it to create Applicable Critical Mineral 2. The cost of producing Applicable Critical Mineral 1 would be credited twice if material costs are included in production costs, once by Taxpayer 1 for the initial production of Applicable Critical Mineral 1 and then again by Taxpayer 2 because Taxpayer 2 would include its cost of purchasing Applicable Critical Mineral 1 in its production costs for Applicable Critical Mineral 2. The Treasury Department and the IRS recognize that a wide range of costs are incurred in the production of applicable critical minerals. The Treasury Department and the IRS request comments on this proposed rule for determining the costs incurred with respect to the production of applicable critical minerals, specifically whether and how extraction and other similar value-added activities in the production of raw materials used in applicable critical minerals should be taken into account. The Treasury Department and the IRS welcome an assessment of the magnitude of extraction costs and other direct and indirect material costs relative to the overall costs incurred in the production of an applicable critical mineral, and the extent to which these costs are incurred by the taxpayer that also produces the applicable critical mineral and add value to the applicable critical mineral. The Treasury Department and the IRS also welcome comments on how extraction should be defined, and whether it should be defined consistent with proposed §1.30D-3(c)(8). The Treasury Department and the IRS are considering including in production costs the costs of extraction and other similar value-added activities in the production of raw materials used in applicable critical minerals. However, such costs would only be included if the IRS could effectively administer such an approach and there are sufficient assurances that adopting such an approach would pose a limited risk of (i) crediting the same production costs multiple times and (ii) increasing other forms of fraud, waste, and abuse. The Treasury Department and the IRS request comments on whether and to what extent including these costs might raise such risks. Proposed §1.45X-4(c)(3) would also provide that the rules regarding ownership and property produced under a contract with a taxpayer under §1.263A-2(a)(1)(ii) that are used to determine whether a taxpayer is engaged in production or resale activities for purposes of section 263A do not apply for purposes of determining the taxpayer that is engaged in production activities for purposes of section 45X and the section 45X regulations. D. Substantiation Proposed §1.45X-4(c)(4) would require the taxpayer to document that their product meets the criteria for an applicable critical mineral as described in section 45X(c)(6) with a certificate of analysis (COA) provided by the taxpayer to the person to which the taxpayer sold the applicable critical mineral. The Treasury Department and the IRS request comments on this substantiation requirement, including whether a similar requirement should be applied to electrode active materials. VI. Substantiation required under section 6001 Section 6001 of the Code provides that every person liable for any tax imposed by the Code, or for the collection thereof, must keep such records as the Secretary may from time to time prescribe. Section 1.6001-1(a) provides that any person subject to income tax must keep such permanent books of account or records as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax. Section 1.6001-1(e) provides that the books and records required by §1.6001-1 must be retained so long as the contents thereof may become material in the administration of any internal revenue law. Various provisions under proposed §§1.45X-1 through 1.45X-4 would require taxpayers to maintain specific documentation regarding certain eligible components that are produced by a taxpayer. These requirements would be part of the general recordkeeping requirements under section 6001 and the regulations under section 6001. Severability If any provision in this proposed rulemaking is held to be invalid or unenforceable facially, or as applied to any person or circumstance, it shall be severable from the remainder of this rulemaking, and shall not affect the remainder thereof, or the application of the provision to other persons not similarly situated or to other dissimilar circumstances. Effect on Other Documents Section 5.05 of Notice 2023-18 and section 3 of Notice 2023-44, which relate to the interaction between sections 45X and 48C, will be superseded upon the publication in the Federal Register of a Treasury Decision addressing the interaction between sections 45X and 48C. Proposed Applicability Dates Each of proposed §§1.45X-1 through 1.45X-4 is proposed to apply to eligible components for which production is completed and sales occur after December 31, 2022, and during taxable years ending on or after the date of publication of the final regulations in the Federal Register. Special Analyses I. Regulatory Planning and Review--Economic Analysis 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. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) generally requires that a Federal agency obtain the approval of the Office of Management and Budget (OMB) before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. The collections of information in these proposed regulations contain reporting and recordkeeping requirements that are required to validate eligibility to claim a section 45X credit. These collections of information would generally be used by the IRS for tax compliance purposes and by taxpayers to facilitate proper reporting and compliance. The general recordkeeping requirements mentioned within these proposed regulations are considered general tax records under §1.6001-1(e). Specific certification statements under §1.45X-1(c)(3) are considered general tax records and are required for the IRS to validate the taxpayer that may claim a section 45X credit. For PRA purposes, general tax records are already approved by OMB under 1545-0074 for individuals, 1545-0123 for business entities, and under 1545-0092 for trust and estate filers. These proposed regulations also provide reporting requirements related to making the Related Person Election as described in §1.45X-2(d) and calculating the section 45X credit amount as described in §1.45X-1. The Related Person Election will be made by taxpayers with Forms 1040, 1041, 1120-S, 1065, and 1120, on Form 7207 (or any successor forms); and credit calculations will be made on Form 3800 and supporting forms including Form 7207 (and any successor forms). These forms are approved under 1545-0074 for individuals, 1545-0123 for business entities, 1545-2306 for trust and estate filers of Form 7207, and 1545-0895 for trust and estate filers of Form 3800. These proposed regulations are not changing or creating new collection requirements not already approved by OMB or will be approved under 5 CFR 1320.10 by OMB. III. Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) (RFA) imposes certain requirements with respect to Federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq. ) and that are likely to have a significant economic impact on a substantial number of small entities. Unless an agency determines that a proposal is not likely to have a significant economic impact on a substantial number of small entities, section 603 of the RFA requires the agency to present an initial regulatory flexibility analysis (IRFA) of the proposed rule. The Treasury Department and the IRS have not determined whether the proposed rule, when finalized, will likely have a significant economic impact on a substantial number of small entities. This determination requires further study. However, because there is a possibility of significant economic impact on a substantial number of small entities, an IRFA is provided in these proposed regulations. The Treasury Department and the IRS invite comments on both the number of entities affected and the economic impact on small entities. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel of the Office of Advocacy of the Small Business Administration for comment on its impact on small business. A. Need for and objectives of the rule The proposed regulations would provide greater clarity to taxpayers that intend to claim a section 45X credit. The proposed regulations would provide necessary definitions, the time and manner to make the Related Person Election and rules regarding the determination of credit amounts. The Treasury Department and the IRS intend and expect that giving taxpayers guidance that allows them to claim the section 45X credit will beneficially impact various industries. In particular, the section 45X credit encourages the domestic production of eligible components and incentivizes taxpayers to invest in clean energy projects that generate eligible credits. B. Affected small entities The RFA directs agencies to provide a description of, and if feasible, an estimate of, the number of small entities that may be affected by the proposed rules, if adopted. The Small Business Administration's Office of Advocacy estimates in its 2023 Frequently Asked Questions that 99.9 percent of American businesses meet its definition of a small business. The applicability of these proposed regulations does not depend on the size of the business, as defined by the Small Business Administration. As described more fully in the preamble to this proposed regulation and in this IRFA, section 45X and these proposed regulations may affect a variety of different entities across several different clean energy industries as multiple types of eligible components are provided for under the statute and manufacturers may produce more than one type. Although there is uncertainty as to the exact number of small businesses within this group, the current estimated number of respondents to these proposed rules is 13,450 taxpayers. The estimated total annual reporting burden and estimated average annual burden per respondent will be computed when Form 7207 and the instructions to Form 7207 are updated to reflect these proposed regulations. The Treasury Department and the IRS expect to receive more information on the impact on small businesses through comments on this proposed rule and after taxpayers start to claim the section 45X credit using the guidance and procedures provided in these proposed regulations. C. Impact of the rules The proposed regulations provide rules for how taxpayers can claim the section 45X credit. Taxpayers that claim the section 45X credit will have administrative costs related to reading and understanding the rules as well as recordkeeping and reporting requirements because of the Related Person Election, computation of the section 45X credit and tax return requirements. The costs will vary across different-sized entities and across the type of production activities in which such entities are engaged. The Related Person Election allows a taxpayer to make an irrevocable election annually with their Federal income tax return by providing the information required on Form 7207 (or any successor form), including, for example, the name, EIN of the taxpayer; a description of the taxpayer's trade or business; the name, address and EINs of all related persons; a list of the eligible components that are sold, and the intended purpose of the eligible components sold by the related person. To make the Related Person Election and claim the section 45X credit, the taxpayer must file an annual Federal income tax return. The reporting and recordkeeping requirements for that Federal income tax return would be required for any taxpayer that is claiming a general business credit, regardless of whether the taxpayer was making a Related Person Election under section 45X. D. Alternatives considered The Treasury Department and the IRS considered alternatives to the proposed regulations. For example, the Treasury Department and the IRS considered whether to impose certain pre-return filing requirements as a condition of making the Related Person Election as authorized in section 45X(a)(3)(B)(ii) to prevent duplication, fraud, or improper or excessive credits. The proposed regulations were designed to minimize burdens for taxpayers while ensuring that the IRS has sufficient information to determine eligibility for the section 45X credit. The Treasury Department and the IRS determined that requiring registration before a taxpayer makes the Related Person Election is unnecessary at this time. The proposed regulations would allow taxpayers to make an irrevocable Related Person Election annually with their Federal income tax return by providing the information required on Form 7207 (or any successor form), which would provide the IRS with sufficient information to assist in preventing duplication, fraud, or the claiming of improper or excessive credits if eligible components are produced and then sold to related persons. Comments are requested on the requirements in the proposed regulations, including specifically, whether there are less burdensome alternatives that ensure the IRS has sufficient information to administer the advanced manufacturing production credit. E. Duplicative, overlapping, or conflicting Federal rules The proposed rule would not duplicate, overlap, or conflict with any relevant Federal rules. As discussed above, the proposed rule would merely provide procedures and definitions to allow taxpayers to claim the section 45X credit. The Treasury Department and the IRS invite input from interested members of the public about identifying and avoiding overlapping, duplicative, or conflicting requirements. IV. 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 Indian 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 Indian Tribal governments, or by the private sector in excess of that threshold. V. 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. VI. Executive Order 13175: Consultation and Coordination With Indian Tribal Governments Executive Order 13175 (Consultation and Coordination With Indian Tribal Governments) prohibits an agency from publishing any rule that has Tribal implications if the rule either imposes substantial, direct compliance costs on Indian Tribal governments, and is not required by statute, or preempts Tribal law, unless the agency meets the consultation and funding requirements of section 5 of the Executive order. This proposed rule does not have substantial direct effects on one or more federally recognized Indian tribes and does not impose substantial direct compliance costs on Indian Tribal governments within the meaning of the Executive order. 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 in this preamble 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 with respect to this notice of proposed rulemaking has been scheduled for February 22, 2024, beginning at 10 a.m. ET, in the Auditorium at the Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, D.C. Due to 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 may alternatively attend the public hearing by telephone. The rules of 26 CFR 601.601(a)(3) apply to the public hearing. Persons who wish to present oral comments at the public hearing must submit an outline of the topics to be discussed and the time to be devoted to each topic by February 13, 2024. A period of 10 minutes will be allotted 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 available free of charge at the public hearing. If no outline of the topics to be discussed at the public hearing is received by February 13, 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 REG-107423-23 and the language TESTIFY In Person. For example, the subject line may say: Request to TESTIFY In Person at Hearing for REG-107423-23. 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 public hearing. The subject line of the email must contain the regulation number REG-107423-23 and the language TESTIFY Telephonically. For example, the subject line may say: Request to TESTIFY Telephonically at Hearing for REG-107423-23. Individuals who want to attend the public hearing in person without testifying must also 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 REG-107423-23 and the language ATTEND In Person. For example, the subject line may say: Request to ATTEND Hearing In Person for REG-107423-23. Requests to attend the public hearing must be received by 5 p.m. ET on February 20, 2024. Individuals who want to attend the public hearing by telephone without testifying must also send an email to publichearings@irs.gov to receive the telephone number and access code for the public hearing. The subject line of the email must contain the regulation number REG-107423-23 and the language ATTEND Hearing Telephonically. For example, the subject line may say: Request to ATTEND Hearing Telephonically for REG-107423-23. Requests to attend the public hearing must be received by 5 p.m. ET on February 20, 2024. Public hearings will be made accessible to people with disabilities. To request special assistance during a public hearing please contact the Publications and Regulations Branch of the Office of Associate Chief Counsel (Procedure and Administration) by sending an email to publichearings@irs.gov (preferred) or by telephone at (202) 317-6901 (not a toll-free number) and must be received by 5 p.m. ET on February 16, 2024. 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 authors of these proposed regulations are Mindy Chou, John Deininger and Alexander Scott, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the Treasury Department and the IRS participated in their development. 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: PART 1--INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order for §§1.45X-1 through 1.45X-4 to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.45X-1 also issued under 26 U.S.C. 45X. Section 1.45X-2 also issued under 26 U.S.C. 45X(b) and (d) and 1502. Section 1.45X-3 also issued under 26 U.S.C. 45X(b) and (c). Section 1.45X-4 also issued under 26 U.S.C. 45X(b) and (c). * * * * * Par. 2. Sections 1.45X-0 through 1.45X-4 are added to read as follows: Sec. * * * * * 1.45X-0 Table of contents. 1.45X-1 General rules applicable to the advanced manufacturing production credit. 1.45X-2 Sale to unrelated person. 1.45X-3 Eligible components. 1.45X-4 Applicable critical minerals. * * * * * §1.45X-0 Table of contents. This section lists the captions contained in §§1.45X-1 through 1.45X-4. §1.45X-1 General rules applicable to the advanced manufacturing production credit. (a) Overview. (b) Credit amount. (c) Definition of produced by the taxpayer. (d) Produced in the United States. (e) Production and sale in a trade or business. (f) Sale of integrated components. (g) Interaction between sections 45X and 48C. (h) [Reserved] (i) Anti-abuse rule. (j) Severability. (k) Applicability date. §1.45X-2 Sale to unrelated person. (a) In general. (b) Definitions. (c) Special rule for sale to related person. (d) Related person election. (e) Sales of integrated components to related person. (f) Severability. (g) Applicability date. §1.45X-3 Eligible components. (a) In general. (b) Solar energy components. (c) Wind energy components. (d) Inverters. (e) Qualifying battery component. (f) Phase out rule. (g) Severability. (h) Applicability date. §1.45X-4 Applicable critical minerals. (a) In general. (b) Definitions. (c) Credit amount. (d) Severability. (e) Applicability date. §1.45X-1 General rules applicable to the advanced manufacturing production credit. (a) Overview --(1) In general. This section provides general rules regarding the advanced manufacturing production credit determined under section 45X of the Code (section 45X credit). Paragraph (a)(2) of this section provides definitions of certain terms that apply for purposes of section 45X and the section 45X regulations (defined in paragraph (a)(2)(xiv) of this section). Paragraphs (b) through (j) of this section provide the basic rules regarding the section 45X credit, including the definition of the term produced by the taxpayer, and rules to determine the taxpayer that produces an eligible component and whether such taxpayer is entitled to claim a section 45X credit in contract manufacturing arrangements; where the production of eligible components must occur; the treatment of integrated, incorporated or assembled eligible components; and the interaction between sections 45X and 48C of the Code. See §1.45X-2 for rules regarding sales to unrelated persons, sales to related persons, and the Related Person Election, including rules regarding the time, place, and manner of making the Related Person Election. See §1.45X-3 for the definitions of all eligible components (except applicable critical minerals) and the credit amounts available for each of these eligible components, including certain phase-out percentages. See §1.45X-4 for the definitions of applicable critical minerals and the rules regarding the determination of the credit amount for applicable critical minerals. (2) Generally applicable definitions. This paragraph (a)(2) provides definitions of terms that apply for purposes of section 45X and the section 45X regulations. (i) Applicable critical mineral. The term applicable critical mineral means any of the minerals that are listed in section 45X(c)(6) and defined in §1.45X-4(b). (ii) Code. The term Code means the Internal Revenue Code. (iii) Contract manufacturing arrangement. The term contract manufacturing arrangement is defined in paragraph (c)(3)(ii)(B) of this section. (iv) Electrode active materials. The term electrode active materials is defined in §1.45X-3(e)(2). (v) Eligible component. The term eligible component is defined in section 45X(c)(1)(A) and described in §§1.45X-3 and 1.45X-4. (vi) Eligible taxpayer. The term e ligible taxpayer is defined in paragraph (c)(3) of this section. (vii) Guidance. The term guidance means guidance published in the Federal Register or Internal Revenue Bulletin, as well as administrative guidance such as forms, instructions, publications, or other guidance on the IRS.gov website. See §§601.601 and 601.602 of this chapter. (viii) IRA. The term IRA means Public Law 117-169, commonly known as the Inflation Reduction Act of 2022. (ix) IRS. The term IRS means the Internal Revenue Service. (x) Produced by the taxpayer. The term produced by the taxpayer is defined in paragraph (c) of this section, and the related terms production activities and production process have the meaning given those terms in paragraph (c) of this section. (xi) Related person. The term related person is defined in §1.45X-2(b)(2). (xii) Related Person Election. The term Related Person Election is defined in §1.45X-2(d)(1). (xiii) Secretary. The term Secretary means the Secretary of the Treasury or her delegate. (xiv) Section 45X regulations. The term section 45X regulations means the provisions of this section, §§1.45X-2 through 1.45X-4, and the regulations in this chapter under sections 6417 and 6418 of the Code that relate to the section 45X credit. (xv) Unrelated person. The term unrelated person is defined in section 45X(a)(3) and described in §1.45X-2(b)(3). (b) Credit amount. Except as otherwise provided in section 45X(b)(3) and §1.45X-3(f), for purposes of section 38 of the Code, the amount of the section 45X credit for any taxable year is equal to the sum of the credit amounts provided under section 45X(b) and described in §§1.45X-3 and 1.45X-4 with respect to each eligible component that is produced by the taxpayer and, within the taxable year, sold by the taxpayer to an unrelated person. See §1.45X-2 for rules regarding sales of eligible components to related persons that may be treated as if sold to unrelated persons for purposes of section 45X(a). (c) Definition of produced by the taxpayer --(1) In general. The term produced by the taxpayer means a process conducted by the taxpayer that substantially transforms constituent elements, materials, or subcomponents into a complete and distinct eligible component that is functionally different from that which would result from mere assembly or superficial modification of the elements, materials, or subcomponents. (i) Partial transformation. The term produced by the taxpayer does not include partial transformation that does not result in substantial transformation of constituent elements, materials, or subcomponents into a complete and distinct eligible component as described in this paragraph (c)(1). (ii) Mere assembly or superficial modification. The term produced by the taxpayer does not include minor assembly of two or more constituent elements, materials, or subcomponents, or superficial modification of the final eligible component, if the taxpayer does not also engage in the process resulting in a substantial transformation described in this paragraph (c)(1). (iii) Examples. The following examples illustrate the application of this paragraph (c)(1). (A) Example 1. Taxpayers X, Y, and Z each produce one of three sections of a wind tower that together make up the wind tower. No taxpayer has produced an eligible component within the meaning of section 45X(a)(1)(A) because no taxpayer has produced all sections of the wind tower. (B) Example 2. Same facts as paragraph (c)(1)(iii)(A) of this section ( Example 1 ), but taxpayers X, Y, and Z instead form Partnership XYZ. Partnership XYZ produces all three sections of the wind tower. Partnership XYZ has produced an eligible component within the meaning of section 45X(a)(1)(A). (C) Example 3. Taxpayer V puts the external casing on a battery module (within the meaning of §1.45X-3(e)(4)(i)(A)) that already had cells, battery management systems, and other components integrated into it. Taxpayer V has engaged in minor assembly and has not produced an eligible component within the meaning of section 45X(a)(1)(A). (D) Example 4. Taxpayer U purchases two finished halves of a wind turbine nacelle and combines them into a single nacelle. Taxpayer U has engaged in minor assembly and has not produced an eligible component within the meaning of section 45X(a)(1)(A). (E) Example 5. Taxpayer T purchases a dry cell battery and fills the electrolyte of the battery. Taxpayer T has engaged in minor assembly and has not produced an eligible component within the meaning of section 45X(a)(1)(A). (F) Example 6. Taxpayer W purchases a prefabricated wind turbine blade and applies paint and finishes. Taxpayer W has engaged in superficial modification of the blade and has not produced an eligible component within the meaning of section 45X(a)(1)(A). (2) Special rule for certain eligible components. For solar grade polysilicon, electrode active materials, and applicable critical minerals, the term produced by the taxpayer means processing, conversion, refinement, or purification of source materials, such as brines, ores, or waste streams, to derive a distinct eligible component. (3) Eligible taxpayer-- (i) In general. Except as otherwise provided in paragraph (c)(3)(iii) of this section, a taxpayer claiming a section 45X credit with respect to an eligible component must be the taxpayer that directly performs the production activities that bring about a substantial transformation resulting in the eligible component, and must sell such eligible component to an unrelated person. (ii) Contract manufacturing arrangement --(A) In general. If the production of an eligible component is performed in whole or in part pursuant to a contract that is a contract manufacturing arrangement, then, provided the other requirements of section 45X are met, the party to such contract that may claim the section 45X credit with respect to such eligible component is the party that performs the actual production activities that bring about a substantial transformation resulting in the eligible component. (B) Contract manufacturing arrangement defined. The term contract manufacturing arrangement means any agreement (or agreements) providing for the production of an eligible component if the agreement is entered into before the production of the eligible component to be delivered under the contract is completed. A routine purchase order for off-the-shelf property is not treated as a contract manufacturing arrangement for purposes of this paragraph (c)(3). An agreement will be treated as a routine purchase order for off-the-shelf property if the contractor is required to make no more than de minimis modifications to the property to tailor it to the customer's specific needs, or if at the time the agreement is entered into, the contractor knows or has reason to know that the contractor can satisfy the agreement out of existing stocks or normal production of finished goods. (iii) Special rule for contract manufacturing arrangements. If an eligible component is produced by a taxpayer pursuant to a contract manufacturing arrangement, the parties to such agreement may determine by agreement the party that may claim the section 45X credit. If a taxpayer enters into contract manufacturing arrangements with multiple fabricators to produce an eligible component, the parties to such agreements may determine by agreement the party that may claim the section 45X credit. The IRS will not challenge the agreement of the parties provided all the parties submit signed certification statements (as described in paragraph (c)(3)(iv) of this section) indicating that all parties agree as to the party that may claim the section 45X credit. (iv) Certification statement requirements. A certification statement indicating that all parties to a contract manufacturing arrangement agree as to the party that will claim the section 45X credit must include-- (A) All required information set forth in guidance; and (B) A properly signed penalty of perjury statement. (v) Examples. The following examples illustrate the application of this paragraph (c)(3). (A) Example 1: Contract manufacturing with sale. Taxpayers X, Y and Z are unrelated C corporations that have calendar year taxable years. In 2024, pursuant to a contract manufacturing arrangement as described in paragraph (c)(3)(ii)(B) of this section, X hires Y to produce a solar module. The contract is a tolling arrangement and provides that Y will produce the solar module according to X's designs and specifications and using the materials and subcomponents that X provides. X and Y enter an agreement providing that X is the sole party that may claim a section 45X credit for the production and sale of the solar module, and X and Y each sign a certification statement as described in paragraph (c)(3)(iv) of this section reflecting this agreement. In 2025, Y produces and delivers the solar module to X, and in 2026, X sells the solar module to Z. X may claim a section 45X credit in taxable year 2026 for the solar module it sold to Z provided all other requirements of section 45X are met and the certification statements signed by X and Y meet the requirements described in paragraph (c)(3)(iv) of this section and are properly submitted by X. Similarly, Y could claim a section 45X credit if the agreement between X and Y had designated Y as the sole party that could claim a section 45X credit for the production and sale of the solar module provided all other requirements of section 45X are met and the certification statements signed by X and Y meet the requirements described in paragraph (c)(3)(iv) of this section and are properly submitted by Y. (B) Example 2: Contract manufacturing with no sale. Assume the facts are the same as in paragraph (c)(3)(v)(A) of this section ( Example 1 ), except that X does not sell the solar module and instead X uses it to generate electricity for use in X's trade or business. Because there has been no sale, neither X nor Y may claim a section 45X credit for the solar module regardless of whether X and Y submit signed certification statements described in paragraph (c)(3)(iv) of this section. (C) Example 3: Multiple contract manufacturing arrangements. Taxpayers V, W, X, Y and Z are unrelated C corporations that have calendar year taxable years. In 2024, pursuant to three separate contract manufacturing arrangements as described in paragraph (c)(3)(ii)(B) of this section, V hires W, X, and Y to produce the bottom, middle and top segments, respectively, of a single wind tower that V designed. W, X, Y and V enter into an agreement providing that V is the sole party that may claim a section 45X credit for the production and sale of the wind tower, and W, X, Y and V each sign a certification statement as described in paragraph (c)(3)(iv) of this section reflecting this agreement. In 2024, W and X both produce and deliver their respective wind tower segments to the installation site, and in 2025, Y produces and delivers its wind tower segment to the installation site. In 2026, V sells the completed wind tower to Z. V may claim a section 45X credit in taxable year 2026 for the wind tower it sold to Z provided all other requirements of section 45X are met and the certification statements signed by V, W, X and Y meet the requirements described in paragraph (c)(3)(iv) of this section and are properly submitted by V. Similarly, W or X or Y could be the party that could claim a section 45X credit if the agreement between V, W, X and Y had designated W or X or Y as the sole party that could claim a section 45X credit for the production and sale of the wind tower provided all other requirements of section 45X are met and the certification statements signed by V, W, X and Y meet the requirements described in paragraph (c)(3)(iv) of this section and are properly submitted by the party designated as the sole party that could claim a section 45X credit. (4) Timing of production and sale --(i) In general. Production of eligible components for which a taxpayer is claiming a section 45X credit may begin before December 31, 2022. Production of eligible components must be completed, and sales of eligible components must occur, after December 31, 2022. (ii) Example. Taxpayer X has a calendar year taxable year. Taxpayer X begins production of a related offshore wind vessel (as defined in section 45X(4)(B)(iv) and described in §1.45X-3(c)(4)) in January 2022. Production is completed in December 2024 and the sale to an unrelated person occurs in 2025. Taxpayer X is eligible to claim the section 45X credit in 2025, assuming that all other requirements of section 45X are met. (d) Produced in the United States --(1) In general. Sales are taken into account for purposes of the section 45X credit only for eligible components that are produced within the United States, as defined in section 638(1) of the Code, or a United States territory, which for purposes of section 45X and the section 45X regulations has the meaning of the term possession provided in section 638(2). (2) Subcomponents. Constituent elements, materials, and subcomponents used in the production of eligible components are not subject to the domestic production requirement provided in paragraph (d)(1) of this section. (e) Production and sale in a trade or business. An eligible component produced and sold by the taxpayer is taken into account for purposes of the section 45X credit only if the production and sale are in a trade or business (within the meaning of section 162 of the Code) of the taxpayer. (f) Sale of integrated components --(1) In general. For purposes of the section 45X credit, section 45X(d)(4) provides that a taxpayer is treated as having produced and sold an eligible component to an unrelated person if such component is integrated, incorporated, or assembled into another eligible component that is then sold to an unrelated person. (i) Integrated, incorporated, or assembled. The term integrated, incorporated, or assembled means the production activities by which an eligible component that is a constituent element, material, or subcomponent is substantially transformed into another complete and distinct eligible component that is not solar grade polysilicon, an electrode active material, or an applicable critical mineral. The term integrated, incorporated, or assembled does not mean the mere assembly or superficial modification of an eligible component used as an element, material, or subcomponent and other elements, materials, or subcomponents that results in a distinct product. (ii) Special rule for eligible components resulting in solar grade polysilicon, electrode active materials, or applicable critical minerals. For solar grade polysilicon, electrode active material, and applicable critical minerals, the term integrated, incorporated, or assembled means the production activities in which an eligible component is processed, converted, refined, or purified to derive a distinct eligible component that is solar grade polysilicon, an electrode active material, or an applicable critical mineral. The term integrated, incorporated, or assembled does not mean mere assembly or superficial modification of an eligible component used as an element, material, or subcomponent and other elements, materials, or subcomponents that results in a distinct product. (2) Application --(i) In general. A taxpayer may claim a section 45X credit for each eligible component the taxpayer produces and sells to an unrelated person, including any eligible component the taxpayer produces that was used as a constituent element, material, or subcomponent and integrated, incorporated, or assembled into another complete and distinct eligible component or another complete and distinct product (that is not itself an eligible component) that the taxpayer also produces and sells to an unrelated person. (ii) Example: Sale of product with incorporated eligible components to unrelated person. In 2022, X, a domestic corporation that has a calendar year taxable year, begins production of electrode active materials (EAMs) that are completed in 2023 and incorporated into battery cells that X also produces. In 2024, X incorporates those battery cells into battery modules (within the meaning of §1.45X-3(e)(4)(i)(A)) and integrates the battery modules into electric vehicles. X sells the electric vehicles to Z, an unrelated person, in 2024. X may claim a section 45X credit for the EAMs, the battery cells, and the battery modules in 2024. (g) Interaction between sections 45X and 48C --(1) In general. For purposes of the section 45X credit, consistent with section 45X(c)(1)(B), an eligible component-- (i) Must be produced by a section 45X facility; and (ii) Does not include any property (produced property) that is produced at a facility if the basis of any property that is part of the production unit (within the meaning of paragraph (g)(2)(ii) of this section) that produces the produced property-- (A) Is eligible property that is included in a section 48C facility; and (B) Is taken into account for purposes of the credit allowed under section 48C (section 48C credit) after August 16, 2022. (2) Section 45X facility --(i) In general. A section 45X facility includes all tangible property that comprises an independently functioning production unit that produces one or more eligible components. (ii) Production unit. The production unit is the tangible property that substantially transforms the material inputs to complete the production process of an eligible component. (3) Section 48C facility --(i) In general. A section 48C facility includes all eligible property included in a qualifying advanced energy project for which a taxpayer receives an allocation of section 48C credits under the allocation program established under section 48C(e) and claims such credits after August 16, 2022. (ii) Eligible property. Eligible property is property that-- (A) Is necessary for the production or recycling of property described in section 48C(c)(1)(A)(i), re-equipping an industrial or manufacturing facility described in section 48C(c)(1)(A)(ii), or re-equipping, expanding, or establishing an industrial facility described in section 48C(c)(1)(A)(iii); (B) Is tangible personal property, or other tangible property (not including a building or its structural components), but only if such property is used as an integral part of the qualified investment credit facility; and (C) With respect to which depreciation (or amortization in lieu of depreciation) is allowable. (4) Examples. The following examples illustrate the application of this paragraph (g): (i) Example 1: Two independent production units --(A) Facts. Taxpayer owns and operates a manufacturing site that contains Production Unit A and Production Unit B, each of which function independently and are arranged in serial fashion. Photovoltaic wafers produced by Production Unit A are utilized in Production Unit B to manufacture photovoltaic cells. Taxpayer was allocated a section 48C credit under the section 48C(e) program for a section 48C facility that includes Production Unit A and subsequently placed the section 48C facility and Production Unit A in service in taxable year 2026. Taxpayer claimed a section 48C credit for Production Unit A for taxable year 2026. (B) Analysis. Production Unit A is eligible property that is include in Taxpayer's section 48C facility. Therefore, Production Unit A cannot qualify as a section 45X facility under section 45X(c)(1)(B) and paragraph (g)(2) of this section. Production Unit B, however, is tangible property that comprises an independently functioning production unit that produces eligible components. Production Unit B can be treated as a section 45X facility because the tangible property comprising Production Unit B is not eligible property that is included in a section 48C facility. (ii) Example 2: Single production unit --(A) Facts. Taxpayer owns and operates two manufacturing sites. Manufacturing Site 1 includes tangible property that forms ingots from polysilicon to partially produce photovoltaic wafers. Manufacturing Site 2 completes the production process of the photovoltaic wafers. Taxpayer was allocated a section 48C credit under the section 48C(e) program for tangible property that is used to produce the ingots at Manufacturing Site 1. (B) Analysis. Manufacturing Site 1 and Manufacturing Site 2 comprise a single production unit. As a result, Taxpayer may not claim the section 45X credit for the photovoltaic wafers it produced at Manufacturing Site 1 and Manufacturing Site 2 because Taxpayer claimed the section 48C credit for the tangible property that was used to produce the ingots at Manufacturing Site 1, which is part of a single production unit. (iii) Example 3: Independent production units and production of subcomponent --(A) Facts. Taxpayer owns and operates two manufacturing sites. Manufacturing Site 1 contains Production Unit A and Production Unit B, which are arranged in parallel fashion and each produce photovoltaic cells. Manufacturing Site 2 contains Production Unit C and Production Unit D, which are arranged in serial fashion. Production Unit C produces photovoltaic cells. Production Unit D produces solar modules, in part, by combining the photovoltaic cells produced by Production Units A, B and C. Taxpayer was allocated a section 48C credit under the section 48C(e) program for a section 48C facility that includes Production Unit C. Subsequently, Taxpayer places the section 48C facility and Production Unit C in service in taxable year 2026. Taxpayer claimed a section 48C credit for Production Unit C in taxable year 2026. (B) Analysis. Production Units A and B each comprise a single production unit that produces eligible components. Production Units A and B can be treated as a section 45X facility because the tangible property comprising Production Units A and B are not eligible property that is included in a section 48C facility. Production Unit C cannot qualify as a section 45X facility under section 45X(c) because Production Unit C is eligible property that is included in a section 48C facility. Production Unit D is tangible property that comprises an independently functioning production unit that produces eligible components utilizing subcomponents produced by Taxpayer in a separate, independently functioning production unit. Therefore, Production Unit D can be treated as a section 45X facility because the tangible property comprising Production Unit D is not eligible property that is included in a section 48C facility. (iv) Example 4: Two independent production units manufacturing under a contract manufacturing arrangement --(A) Facts. X is hired by Y to manufacture photovoltaic cells. X owns and operates a manufacturing site that contains Production Unit A and Production Unit B. Production Unit A and Production Unit B function independently and are arranged in serial fashion. Photovoltaic wafers produced by Production Unit A are utilized in Production Unit B to manufacture photovoltaic cells. X was allocated a section 48C credit under the section 48C(e) program for a section 48C facility that includes Production Unit A and subsequently placed the section 48C Facility and Production Unit A in service in taxable year 2026. X claimed a section 48C credit for Production Unit A in taxable year 2026. (B) Analysis. Production Unit A is eligible property that is included in X's section 48C facility. Therefore, Production Unit A cannot qualify as a section 45X facility under section 45X(c)(1)(B) and paragraph (g)(2) of this section and X does not qualify for a section 45X credit with respect to Production Unit A. Production Unit B is, however, tangible property that comprises an independently functioning production unit that produces eligible components. Production Unit B can be treated as a section 45X facility by X, the party who produces the eligible components, because the tangible property comprising Production Unit B is not eligible property that is included in a section 48C facility. (v) Example 5: Two independent production units manufacturing under a contract manufacturing arrangement --(A) Facts. Assume the facts are the same as in paragraph (g)(4)(iv) of this section ( Example 4 ), except that Y owns Production Units A and B and hires X to operate Production Units A and B to produce the eligible components. (B) Analysis. Production Unit A is eligible property that is included in Y's section 48C facility. Y claimed a section 48C credit for Production Unit A in taxable year 2026. Therefore, Production Unit A cannot qualify as a section 45X facility under section 45X(c)(1)(B) and paragraph (g)(2) of this section and X does not qualify for a section 45X credit with respect to Production Unit A. Production Unit B, however, is tangible property that comprises an independently functioning production unit that produces eligible components. Production Unit B can be treated as a section 45X facility by X (and not Y) because the tangible property comprising Production Unit B is not eligible property that is included in a section 48C facility. (h) [Reserved] (i) Anti-abuse rule --(1) In general. The rules of section 45X and the section 45X regulations must be applied in a manner consistent with the purposes of section 45X and the section 45X regulations (and the regulations in this chapter under sections 6417 and 6418 related to the section 45X credit). A purpose of section 45X and the section 45X regulations (and the regulations in this chapter under sections 6417 and 6418 related to the section 45X credit) is to provide taxpayers an incentive to produce eligible components in a manner that contributes to the development of secure and resilient supply chains. Accordingly, the section 45X credit is not allowable if the primary purpose of the production and sale of an eligible component is to obtain the benefit of the section 45X credit in a manner that is wasteful, such as discarding, disposing of, or destroying the eligible component without putting it to a productive use. A determination of whether the production and sale of an eligible component is inconsistent with the purposes of section 45X and the section 45X regulations (and the regulations in this chapter under sections 6417 and 6418 related to the section 45X credit) is based on all facts and circumstances. (2) Example --(i) Facts. Taxpayer is engaged in the activity of producing and selling multiple units of Eligible Component 1 (EC1). Taxpayer engages in no other activities. The cost of producing each unit of EC1 is less than the amount of the section 45X credit that would be available if each EC1 qualified for the section 45X credit. Taxpayer sells some of its units of EC1 to related persons and makes a Related Person Election pursuant to section 45X(a)(3)(B)(i). Taxpayer also sells some of its units of EC1 to unrelated persons. Taxpayer sells all units of EC1 at an amount equal to cost plus a markup to reflect an anticipated accommodation fee and establishes corresponding accounts receivable at the time of the respective sales. In addition, Taxpayer knows or reasonably expects that after acquiring the units of EC1, the related and unrelated transferees will not resell the units of EC1 or use them in their trades or businesses. Taxpayer intends to obtain the benefit from the section 45X credit by claiming such credits itself or monetizing such credits through an election under sections 6417 or 6418. Taxpayer eliminates the aforementioned accounts receivable at the time it claims the section 45X credit or receives related payments attributable to the section 45X credit, and further makes payments to the related and unrelated transferees as accommodation fees computed as a percentage of such benefits. (ii) Analysis. Based on all of the facts and circumstances in paragraph (i)(2)(i) of this section, the primary purpose of Taxpayer's production and sale of EC1 is to obtain the benefit of the section 45X credit in a manner that is wasteful and will not be treated as the production and sale of eligible components in a trade or business of Taxpayer for purposes of section 45X(a)(1) and (2). Taxpayer is not eligible for the section 45X credit with respect to units of EC1 that it produced and sold. See sections 6417(d)(6) (excessive payments) and 6418(g)(2) (excessive credit transfer). (j) Severability. The provisions of this section are separate and severable from one another. If any provision of this section is stayed or determined to be invalid, it is the agencies' intention that the remaining provisions shall continue in effect. (k) Applicability date. This section applies to eligible components for which production is completed and sales occur after December 31, 2022, and during a taxable year ending on or after [date of publication of final regulations in the Federal Register ]. §1.45X-2 Sale to unrelated person. (a) In general. The amount of the section 45X credit for any taxable year is equal to the sum of the credit amounts determined under section 45X(b) (and described in §§1.45X-3 and 1.45X-4) with respect to each eligible component that is produced by the taxpayer and, during the taxable year, sold by the taxpayer to an unrelated person. Applicable Federal income tax principles apply to determine whether a transaction is in substance a sale (or the provision of a service, or some other disposition). See §1.45X-1(d) and (e) for additional requirements relating to sales. (b) Definitions. This paragraph (b) provides definitions of terms that apply for purposes of this section. (1) Person. The term person means an individual, a trust, estate, partnership, association, company or corporation, as provided in section 7701(a)(1) of the Code. For purposes of this section, an entity disregarded as separate from a person (for example, under §301.7701-3 of this chapter) is not a person. (2) Related person. The term related person means a person who is related to another person if such persons would be treated as a single employer under the regulations in this chapter under section 52(b) of the Code. (3) Unrelated person. The term unrelated person means a person who is not a related person as defined in paragraph (b)(2) of this section. (c) Special rule for sale to related person --(1) In general. For purposes of section 45X(a), a taxpayer is treated as selling an eligible component to an unrelated person if such component is sold to such person by a person who is a related person with respect to the taxpayer. (2) Example. X and Y are members of a group of trades or businesses under common control under section 52(b), and thus are related persons under section 45X(d)(1). Each of X and Y has a calendar year taxable year. Z is an unrelated person. X is in the trade or business of producing and selling solar modules. X produces and sells solar modules to Y in 2023. Y sells the solar modules to Z in 2024. X may claim a section 45X credit for the sale of the solar modules in 2024, the taxable year of X in which Y sells the solar modules to Z. (d) Related person election --(1) Availability of election --(i) In general. In such form and manner as the Secretary may prescribe, a taxpayer may make an election under section 45X(a)(3)(B) (Related Person Election), to treat a sale of eligible components by such taxpayer to a related person as if made to an unrelated person. As a condition of, and prior to, a taxpayer making a Related Person Election (as described in paragraph (d)(2) of this section), the Secretary may require such information or registration as the Secretary deems necessary for purposes of preventing duplication, fraud, or any improper or excessive credit amount determined under section 45X(a)(1). (ii) Members of a consolidated group. A Related Person Election is made by a member of a consolidated group (as defined in §1.1502-1(h)) in the manner described in paragraph (d)(3)(ii) of this section. A member of a consolidated group that sells eligible components in an intercompany transaction (as defined in §1.1502-13(b)(1)) may make the Related Person Election to claim the section 45X credit in the year of the intercompany sale. For the treatment of the selling member's gain or loss from that sale, see §1.1502-13. (2) Time and manner of making election --(i) In general. A taxpayer must make an affirmative Related Person Election annually on the taxpayer's timely filed original Federal income tax return, including extensions in such form and in such manner as may be prescribed in Internal Revenue Service forms or instructions or in publications or guidance published in the Internal Revenue Bulletin. See §601.601 of this chapter. The Related Person Election will be applicable to all sales of eligible components to related persons by the taxpayer for each trade or business that the taxpayer engages in during the taxable year that resulted in a credit claim and for which the taxpayer has made the Related Person Election. (ii) Required information. For all sales of eligible components to related persons, the taxpayer must provide all required information set forth in guidance. Such information may include, for example, the taxpayer's name, employer identification number (EIN), a description of the taxpayer's trade or business (including principal business activity code); the name(s) and EINs of all related persons; a listing of the eligible components that are sold; and the intended purpose of any sales of eligible components to or from related persons. (3) Scope and effect of election-- (i) In general. A separate Related Person Election must be made with respect to related person sales made by a taxpayer for each eligible trade or business of the taxpayer. The election applies only to such trade or business for which the Related Person Election is made. An election under this section applies to all sales to related persons (including between members of the same consolidated group) of eligible components produced by the taxpayer during the taxable year with respect to each trade or business for which the Related Person Election is made and is irrevocable for the taxable year for which the election is made. An election under paragraph (d)(2)(i) of this section applies solely for purposes of the section 45X credit and the section 45X regulations (and the regulations in this chapter under sections 6417 and 6418 related to the section 45X credit). (ii) Application to consolidated groups. For a trade or business of a consolidated group, a Related Person Election must be made by the agent for the group on behalf of the members claiming the section 45X credit and filed with the group's timely filed original Federal income tax return, including extensions, with respect to each trade or business that the consolidated group conducts. See §1.1502-77 (providing rules regarding the status of the common parent as agent for its members). A separate election must be filed on behalf of each member claiming the section 45X credit, and each election must include the name and EIN of the agent for the group and the member on whose behalf the election is being made. (iii) Application to partnerships. The Related Person Election for a partnership must be made on the partnership's timely filed original Federal income tax return, including extensions, with respect to each trade or business that the partnership conducts. The election applies only to such trade or business for which the Related Person Election is made. An election by a partnership does not apply to any trade or business conducted by a partner outside the partnership. (4) Anti-abuse rule --(i) In general. A Related Person Election may not be made if, with respect to the eligible components relevant to such election, the taxpayer fails to provide the information described in paragraph (d)(2) of this section, provides information described in paragraph (d)(2) of this section that shows that such components are described in paragraph (d)(4)(ii) or (iii) of this section, or such components are described in paragraph (d)(4)(ii) or (iii) of this section. (ii) Improper use. For purposes of this paragraph (d)(4) the term improper use means a use that is wasteful, such as discarding, disposing of, or destroying the eligible component without putting it to a productive use by the related person to which the eligible component is sold. (iii) Defective components. The term defective component means a component that does not meet the requirements of section 45X and the section 45X regulations. (e) Sales of integrated components to related person --(1) In general. For purposes of section 45X and the section 45X regulations (and the regulations in this chapter under sections 6417 and 6418 related to the section 45X credit), a taxpayer that produces and then sells an eligible component to a related person, who then integrates, incorporates, or assembles the taxpayer's eligible component into another complete and distinct eligible component that is subsequently sold to an unrelated person, may claim a section 45X credit (or make an election under section 6417 or 6418) with respect to the taxable year in which the related person's sale to the unrelated person occurs. (2) Examples. The following examples illustrate the rules provided in paragraph (e)(1) of this section. (i) Example 1: Sales of multiple incorporated eligible components to related persons. X and Y are C corporations that are members of a group of trades or businesses under common control under section 52(b), and thus are related persons under section 45X(d)(1) and paragraph (b)(2) of this section. Each of X and Y has a calendar year taxable year. Z is an unrelated person. X and Y are in the trade or business of producing and selling photovoltaic wafers and cells. X produces and sells photovoltaic wafers to Y in 2023. Y incorporates the photovoltaic wafers into photovoltaic cells and sells the photovoltaic cells to Z in 2024. X may claim a section 45X credit for the sale of the photovoltaic wafers in 2024, the taxable year of X in which Y sells the photovoltaic cells to Z. (ii) Example 2: Sales of multiple incorporated eligible components to related and unrelated persons. W, X, and Y are domestic C corporations that are members of a group of trades or businesses under common control under section 52(b), and thus are related persons under section 45X(d)(1) and paragraph (b)(2) of this section. Each of W, X, and Y has a calendar year taxable year. W produces electrode active materials (EAMs) and sells the EAMs to X in 2023. In 2024, X incorporates the EAMs into battery cells that it produces and sells the battery cells to Y. In 2025, Y incorporates the battery cells into battery modules (within the meaning of §1.45X-3(e)(4)(i)(A)) that it produces and sells the battery modules to Z, an unrelated person. W may claim a section 45X credit for EAMs sold to X, X may claim a section 45X credit for the battery cells sold to Y, and Y may claim a section 45X credit for the battery modules sold to Z in 2025, the taxable year of each of W, X, and Y in which the battery modules are sold to Z. (3) Special rules applicable to related person election --(i) In general. If a taxpayer makes a valid Related Person Election under section 45X(a)(3)(B)(i) and paragraph (d)(2) of this section, and the taxpayer produces and then sells an eligible component to a related person, who then integrates, incorporates, or assembles the taxpayer's eligible component into another complete and distinct eligible component that is subsequently sold to an unrelated person, the taxpayer's sale of the eligible component to the related person is treated (solely for purposes of the section 45X credit and the section 45X regulations, and the regulations in this chapter under sections 6417 and 6418 related to the section 45X credit) as if made to an unrelated person in the taxable year in which the sale to the related person occurs. (ii) Example: Sales of multiple integrated eligible components to related and unrelated persons with a related person election. W, X, and Y are domestic C corporations that are members of a group of trades or businesses under common control and thus are related persons under section 45X(d)(1) and paragraph (b)(2) of this section. Each of W, X, and Y has a calendar year taxable year. W produces electrode active materials (EAMs) and sells the EAMs to X in 2023. W makes a valid Related Person Election under paragraph (d)(2) of this section in 2023 with regard to the sale. In 2024, X incorporates the EAMs into battery cells that it produces and sells the battery cells to Y. X makes a valid Related Person Election under paragraph (d)(2) of this section in 2024 with regard to the sale. In 2025, Y incorporates the battery cells into battery modules that it produces and sells the battery modules to Z, an unrelated person. W may claim a section 45X credit for the sale of the EAMs in 2023 because the sale to X is treated as if made to an unrelated person solely for purposes of section 45X(a). X may claim a section 45X credit for the sale of the battery cells in 2024 because the sale to Y is treated as if made to an unrelated person solely for purposes of section 45X(a). Y may claim a section 45X credit for the sale of battery modules in 2025 because Z is an unrelated person. (f) Severability. The provisions of this section are separate and severable from one another. If any provision of this section is stayed or determined to be invalid, it is the agencies' intention that the remaining provisions shall continue in effect. (g) Applicability date. This section applies to eligible components for which production is completed and sales occur after December 31, 2022, and during a taxable year ending on or after [date of publication of the final regulations in the Federal Register ]. §1.45X-3 Eligible components. (a) In general. For purposes of the section 45X credit, eligible component means any solar energy component (as defined in paragraph (b) of this section), any wind energy component (as defined in paragraph (c) of this section), any inverter (as defined in paragraph (d) of this section), any qualifying battery component (as defined in paragraph (e) of this section), and any applicable critical mineral (as defined in §1.45X-4(b)). See paragraph (f) of this section for certain phase-out rules applicable to eligible components other than applicable critical minerals. (b) Solar energy components. Solar energy component means a solar module, photovoltaic cell, photovoltaic wafer, solar grade polysilicon, torque tube, structural fastener, or polymeric backsheet, each as defined in this paragraph (b). (1) Photovoltaic cell --(i) Definition. Photovoltaic cell means the smallest semiconductor element of a solar module that performs the immediate conversion of light into electricity that is either a thin film photovoltaic cell or a crystalline photovoltaic cell. (ii) Credit amount. For a photovoltaic cell, the credit amount is equal to the product of 4 cents multiplied by the capacity of such photovoltaic cell. The capacity of each photovoltaic cell is expressed on a direct current watt basis. Capacity is the nameplate capacity in direct current watts using Standard Test Conditions, as defined by the International Electrotechnical Commission. In the case of a tandem technology produced in serial fashion, such as a monolithic multijunction cell composed of two or more sub-cells, capacity must be measured at the point of sale at the end of the single cell production unit. In the case of a four-terminal tandem technology produced by mechanically stacking two distinct cells or interconnected layers, capacity must be measured for each cell at each point of sale. (iii) Substantiation. The taxpayer must document the capacity of a photovoltaic cell in a bill of sale or design documentation, such as an International Electrotechnical Commission certification (for example, IEC 61215 or IEC 60904). (2) Photovoltaic wafer --(i) Definition. Photovoltaic wafer means a thin slice, sheet, or layer of semiconductor material of at least 240 square centimeters that comprises the substrate or absorber layer of one or more photovoltaic cells. A photovoltaic wafer must be produced by a single manufacturer by forming an ingot from molten polysilicon (for example, Czochralski method) and then subsequently slicing it into wafers, forming molten or evaporated polysilicon into a sheet or layer, or depositing a thin-film semiconductor photon absorber into a sheet or layer (that is, thin-film deposition). (ii) Credit amount. For a photovoltaic wafer, the credit amount is $12 per square meter. (3) Polymeric backsheet --(i) Definition. Polymeric backsheet means a sheet on the back of a solar module that acts as an electric insulator and protects the inner components of such module from the surrounding environment. (ii) Credit amount. For a polymeric backsheet, the credit amount is 40 cents per square meter. (4) Solar grade polysilicon --(i) Definition. Solar grade polysilicon means silicon that is suitable for use in photovoltaic manufacturing and purified to a minimum purity of 99.999999 percent silicon by mass. (ii) Credit amount. For solar grade polysilicon, the credit amount is $3 per kilogram. (5) Solar module --(i) Definition. Solar module means the connection and lamination of photovoltaic cells into an environmentally protected final assembly that is-- (A) Suitable to generate electricity when exposed to sunlight; and (B) Ready for installation without an additional manufacturing process. (ii) Credit amount. For a solar module, the credit amount is equal to the product of 7 cents multiplied by the capacity of such module. The capacity of each solar module is expressed on a direct current watt basis. Capacity is the nameplate capacity in direct current watts using Standard Test Conditions, as defined by the International Electrotechnical Commission. (iii) Substantiation. The taxpayer must document the capacity of a solar module in a bill of sale or design documentation, such as an International Electrotechnical Commission certification (for example, IEC 61215 or IEC 61646). (6) Solar tracker. Solar tracker means a mechanical system that moves solar modules according to the position of the sun and to increase energy output. A torque tube (as defined in paragraph (b)(7) of this section) or structural fastener (as defined in paragraph (b)(8) of this section) are solar tracker components that are eligible components for purposes of the section 45X credit. (7) Torque tube --(i) Definition. Torque tube means a structural steel support element (including longitudinal purlins) that-- (A) Is part of a solar tracker; (B) Is of any cross-sectional shape; (C) May be assembled from individually manufactured segments; (D) Spans longitudinally between foundation posts; (E) Supports solar panels and is connected to a mounting attachment for solar panels (with or without separate module interface rails); and (F) Is rotated by means of a drive system. (ii) Credit amount. For a torque tube, the credit amount is 87 cents per kilogram. (iii) Substantiation. The taxpayer must document that a torque tube is part of a solar tracker with a specification sheet, bill of sale, or other similar documentation that explicitly describes its application as part of a solar tracker. (8) Structural fastener --(i) Definition. Structural fastener means a component that is used-- (A) To connect the mechanical and drive system components of a solar tracker to the foundation of such solar tracker; (B) To connect torque tubes to drive assemblies; or (C) To connect segments of torque tubes to one another. (ii) Credit amount. For a structural fastener, the credit amount is $2.28 per kilogram. (iii) Substantiation. The taxpayer must document that a structural fastener is used in a manner described in paragraph (b)(8)(i)(A), (B), or (C) of this section with a bill of sale or other similar documentation that explicitly describes such use. (c) Wind energy components. Wind energy component means a blade, nacelle, tower, offshore wind foundation, or related offshore wind vessel, each as defined in this paragraph (c). (1) Blade --(i) Definition. Blade means an airfoil-shaped blade that is responsible for converting wind energy to low-speed rotational energy. (ii) Credit amount. For a blade, the credit amount is equal to the product of 2 cents multiplied by the total rated capacity of the completed wind turbine for which the blade is designed. (2) Offshore wind foundation --(i) Definition. Offshore wind foundation means the component (including transition piece) that secures an offshore wind tower and any above-water turbine components to the seafloor using-- (A) Fixed platforms, such as offshore wind monopiles, jackets, or gravity-based foundations; or (B) Floating platforms and associated mooring systems. (ii) Credit amount. For a fixed offshore wind foundation platform, the credit amount is equal to the product of 2 cents multiplied by the total rated capacity of the completed wind turbine for which the fixed offshore wind foundation platform is designed. For a floating offshore wind foundation platform, the credit amount is equal to the product of 4 cents multiplied by the total rated capacity of the completed wind turbine for which the floating offshore wind foundation platform is designed. (3) Nacelle --(i) Definition. Nacelle means the assembly of the drivetrain and other tower-top components of a wind turbine (with the exception of the blades and the hub) within their cover housing. (ii) Credit amount. For a nacelle, the credit amount is equal to the product of 5 cents multiplied by the total rated capacity of the completed wind turbine for which the nacelle is designed. (4) Related offshore wind vessel --(i) Definition. Related offshore wind vessel means any vessel that is purpose-built or retrofitted for purposes of the development, transport, installation, operation, or maintenance of offshore wind energy components. A vessel is purpose-built for development, transport, installation, operation, or maintenance of offshore wind energy components if it is built to be capable of performing such functions and it is of a type that is commonly used in the offshore wind industry. A vessel is retrofitted for development, transport, installation, operation, or maintenance of offshore wind energy components if such vessel was incapable of performing such functions prior to being retrofitted, the retrofit causes the vessel to be capable of performing such functions, and the retrofitted vessel is of a type that is commonly used in the offshore wind industry. (ii) Credit amount. For a related offshore wind vessel, the credit amount is equal to 10 percent of the sales price of the vessel. The sales price of the vessel does not include the price of maintenance, services, or other similar items that may be sold with the vessel. For a related offshore wind vessel with respect to which an election under section 45X(a)(3)(B)(i) has been made, such election shall not cause the sale price of such vessel to be treated as having been determined with respect to a transaction between uncontrolled taxpayers for purposes of section 482 of the Code and the regulations in this chapter. (5) Tower --(i) Definition. Tower means a tubular or lattice structure that supports the nacelle and rotor of a wind turbine. (ii) Credit amount. For a tower, the credit amount is equal to the product of 3 cents multiplied by the total rated capacity of the completed wind turbine for which the tower is designed. (6) Total rated capacity of the completed wind turbine. For purposes of this section, total rated capacity of the completed wind turbine means, for the completed wind turbine for which a blade, nacelle, offshore wind foundation, or tower was manufactured and sold, the nameplate capacity at the time of sale as certified to the relevant national or international standards, such as International Electrotechnical Commission (IEC) 61400, or ANSI/ACP 101-1-2021, the Small Wind Turbine Standard. Certification of the turbine to such standards must be documented by a certificate issued by an accredited certification body. The total rated capacity of a wind turbine must be expressed in watts. (7) Substantiation. Taxpayers must maintain specific documentation regarding wind energy components for which a section 45X credit is claimed. For blades, nacelles, offshore wind foundations, or towers, a taxpayer must document the turbine model for which such component is designed and the total rated capacity of the completed wind turbine in technical documentation associated with the sale of such component. (d) Inverters --(1) In general. Inverter means an end product that is suitable to convert direct current (DC) electricity from 1 or more solar modules or certified distributed wind energy systems into alternating current electricity. An end product is suitable to convert DC electricity from 1 or more solar modules or certified distributed wind energy systems into alternating current electricity if, in the form sold by the manufacturer, it is able to connect with such modules or systems and convert DC electricity to alternating current electricity from such connected source. The term inverter includes a central inverter, commercial inverter, distributed wind inverter, microinverter, or residential inverter. Only an inverter that meets at least one of the requirements in paragraphs (d)(2) through (7) of this section is an eligible component for purposes of the section 45X credit. (2) Central inverter --(i) Definition. Central inverter means an inverter that is suitable for large utility-scale systems and has a capacity that is greater than 1,000 kilowatts. The capacity of a central inverter is expressed on an alternating current watt basis. An inverter is suitable for large utility-scale systems if, in the form sold by the manufacturer, it is capable of serving as a component in a large utility-scale system and meets the core engineering specifications for such application. (ii) Credit amount. For a central inverter the total rated capacity of which is expressed on an alternating current watt basis, the credit amount is equal to the product of 0.25 cents multiplied by the total rated capacity of the central inverter. (iii) Substantiation. The taxpayer must document that a central inverter meets the core engineering specifications for use in a large utility-scale system and has a capacity that is greater than 1,000 kilowatts with a specification sheet, bill of sale, or other similar documentation that explicitly describes such specifications and capacity. (3) Commercial inverter --(i) Definition. Commercial inverter means an inverter that-- (A) Is suitable for commercial or utility-scale applications; (B) Has a rated output of 208, 480, 600, or 800 volt three-phase power; and (C) Has a capacity expressed on an alternating current watt basis that is not less than 20 kilowatts and not greater than 125 kilowatts. (ii) Suitable for commercial or utility-scale applications. An inverter is suitable for commercial or utility-scale applications if, in the form sold by the manufacturer, it is capable of serving as a component in commercial or utility-scale systems and meets the core engineering specifications for such application. (iii) Credit amount. For a commercial inverter the total rated capacity of which is expressed on an alternating current watt basis, the credit amount is equal to the product of 2 cents multiplied by the total rated capacity of the commercial inverter. (iv) Substantiation. The taxpayer must document that a commercial inverter meets the core engineering specifications for use in commercial or utility-scale applications, the inverter's rated output, and the inverter's capacity in a specification sheet, bill of sale, or other similar documentation. (4) Distributed wind inverter --(i) In general. Distributed wind inverter means an inverter that is used in a residential or non-residential system that utilizes 1 or more certified distributed wind energy systems and has a total rated output, expressed on an alternating current watt basis, of not greater than 150 kilowatts. (ii) Certified distributed wind energy system. Certified distributed wind energy system means a wind energy system that is certified by an accredited certification agency to meet Standard 9.1-2009 of the American Wind Energy Association; International Electrotechnical Commission 61400-1, 61400-2, 61400-11, 61400-12; or ANSI/ACP 101-1-2021, the Small Wind Turbine Standard, including any subsequent revisions to or modifications of such Standard that have been approved by the American National Standards Institute. (iii) Credit amount. For a distributed wind inverter the total rated capacity of which is expressed on an alternating current watt basis, the credit amount is equal to the product of 11 cents multiplied by the total rated capacity of the distributed wind inverter. (iv) Substantiation. The taxpayer must document that a distributed wind inverter is used in a residential or non-residential system that utilizes one or more certified distributed wind energy systems with a specification sheet, bill of sale, or other similar documentation that explicitly describes such use and the total rated output of the inverter on an alternating current watt basis. (5) Microinverter --(i) Definition. Microinverter means an inverter that-- (A) Is suitable to connect with one solar module; (B) Has a rated output described in paragraph (d)(5)(ii) of this section; and (C) Has a capacity, expressed on an alternating current watt basis, that is not greater than 650 watts. (ii) Rated output. For purposes of paragraph (d)(5)(i)(B) of this section, for an inverter to be a microinverter, the inverter must have a rated output of-- (A) 120 or 240 volt single-phase power; or (B) 208 or 480 volt three-phase power. (iii) Suitable to connect to one solar module --(A) In general. An inverter is suitable to connect to one solar module if, in the form sold by the manufacturer, it is capable of connecting to one or more solar modules and regulating the DC electricity from each module independently before that electricity is converted into alternating current electricity. (B) Application to direct current (DC) optimized inverter systems. A DC optimized inverter system means an inverter that is comprised of an inverter connected to multiple DC optimizers that are each designed to connect to one solar module. A DC optimized inverter system is suitable to connect with one solar module if, in the form sold by the manufacturer, it is capable of connecting to one or more solar modules and regulating the DC electricity from each module independently before that electricity is converted into alternating current electricity. (C) Application to multi-module inverters. A multi-module inverter means an inverter that is comprised of an inverter with independent connections and DC optimizing components for two or more modules. A multi-module microinverter is suitable to connect with one solar module if it is capable of connecting to one or more solar modules and regulating the DC electricity from each module independently before that electricity is converted into alternating current electricity. (iv) Credit amount --(A) In general. For a microinverter the total rated capacity of which is expressed on an alternating current watt basis, the credit amount is equal to the product of 11 cents multiplied by the total rated capacity of the microinverter. (B) DC optimized inverter systems. A DC optimized inverter system qualifies as a microinverter if it meets the requirements of paragraph (d)(5)(i) of this section. For purposes of paragraph (d)(5)(i)(C) of this section, a DC optimized inverter system's capacity is determined separately for each DC optimizer paired with the inverter in a DC optimized inverter system. If each DC optimizer paired with the inverter in a DC optimized inverter system meets the requirements of paragraph (d)(5)(i) of this section, then the DC optimized inverter system qualifies as a microinverter. The credit amount for a DC optimized inverter system that qualifies as a microinverter is equal to the product of 11 cents multiplied by the lesser of the sum of the alternating current capacity of each DC optimizer when paired with the inverter in the DC optimized inverter system or the alternating current capacity of the inverter in the DC optimized inverter system. For purposes of this paragraph (d)(5)(iv)(B), capacity must be measured in watts of alternating current converted from DC electricity by the inverter in a DC optimized inverter system. For a DC optimized inverter system to qualify as a microinverter, a taxpayer must produce and sell the inverter and the DC optimizers in the DC optimized inverter system together as a combined end product. (C) Multi-module inverters. A multi-module inverter qualifies as a microinverter if it meets the requirements of paragraph (d)(5)(i) of this section. For purposes of paragraph (d)(5)(i)(C) of this section, a multi-module inverter's capacity is determined separately for each internal DC optimizer paired with the inverter. The credit amount for a multi-module inverter is equal to the product of 11 cents multiplied by the total alternating current capacity of the DC optimizers in the multi-module inverter when paired with the inverter in the system. For purposes of this paragraph (d)(5)(iv)(C), capacity must be measured in watts of alternating current converted from DC electricity by the inverter in a multi-module microinverter. (v) Substantiation. The taxpayer must document that a microinverter meets the core engineering specifications to be suitable to connect with one solar module, the inverter's rated output, and the inverter's capacity in a specification sheet, bill of sale, or other similar documentation. In the case of a DC optimized inverter system, the taxpayer must also document that the DC optimizers and the inverter in such system were sold as a combined end product. (6) Residential inverter --(i) Definition. Residential inverter means an inverter that-- (A) Is suitable for a residence; (B) Has a rated output of 120 or 240 volt single-phase power; and (C) Has a capacity expressed on an alternating current watt basis that is not greater than 20 kilowatts. (ii) Suitable for a residence. An inverter is suitable for a residence if, in the form sold by the manufacturer, it is capable of serving as a component in a residential system and meets the core engineering specifications for such application. (iii) Credit amount. For a residential inverter the total rated capacity of which is expressed on an alternating current watt basis, the credit amount is equal to the product of 6.5 cents multiplied by the total rated capacity of the residential inverter. (iv) Substantiation. The taxpayer must document that a residential inverter meets the core engineering specifications for use in a residence, the inverter's rated output, and the inverter's capacity in a specification sheet, bill of sale, or other similar documentation. (7) Utility inverter --(i) Definition. Utility inverter means an inverter that -- (A) Is suitable for commercial or utility-scale systems; (B) Has a rated output of not less than 600 volt three-phase power; and (C) Has a capacity expressed on an alternating current watt basis that is greater than 125 kilowatts and not greater than 1000 kilowatts. (ii) Suitable for commercial or utility-scale systems. An inverter is suitable for commercial or utility-scale systems if, in the form sold by the manufacturer, it is capable of serving as a component in such systems and meets the core engineering specifications for such application. (iii) Credit amount. For a utility inverter the total rated capacity of which is expressed on an alternating current watt basis, the credit amount is equal to the product of 1.5 cents multiplied by the total rated capacity of the utility inverter. (iv) Substantiation. The taxpayer must document that a utility inverter meets the core engineering specifications for use in commercial or utility-scale systems, the inverter's rated output, and the inverter's capacity in a specification sheet, bill of sale, or other similar documentation. (e) Qualifying battery component --(1) In general. Qualifying battery component means electrode active materials, battery cells, or battery modules, each as defined in this paragraph (e). (2) Electrode active materials --(i) Definitions --(A) Electrode active materials. Electrode active materials means cathode electrode materials, anode electrode materials, and electrochemically active materials that contribute to the electrochemical processes necessary for energy storage. Electrode active materials do not include battery management systems, terminal assemblies, cell containments, gas release valves, module containments, module connectors, compression plates, straps, pack terminals, bus bars, thermal management systems, and pack jackets. (B) Cathode electrode materials. Cathode electrode materials means the materials that comprise the cathode of a commercial battery technology, such as binders, and current collectors (for example, cathode foils). (C) Anode electrode materials. Anode electrode materials means the materials that comprise the anode of a commercial battery technology, including anode foils. (D) Electrochemically active materials. Electrochemically active materials that contribute to the electrochemical processes necessary for energy storage means battery-grade materials that enable the electrochemical storage within a commercial battery technology. In addition to solvents, additives, and electrolyte salts, electrochemically active materials that contribute to the electrochemical processes necessary for energy storage may include electrolytes, catholytes, anolytes, separators, and metal salts and oxides. (E) Example. A commercial battery technology contains Cathode Active Material (CAM), which is a powder used in the battery that is made by processing and combining Battery-Grade Materials A and B. Battery-Grade Material A is a derivative of Material C, which has been refined to the necessary level to enable electrochemical storage. The production costs for CAM and its direct inputs (Battery-Grade Material A and Battery-Grade Material B) are eligible for the section 45X credit for electrode active materials, but the unrefined Material C is not. (F) Battery-grade materials. Battery-grade materials means the processed materials found in a final battery cell or an analogous unit, or the direct battery-grade precursors to those processed materials. (ii) Credit amount. For an electrode active material, the credit amount is equal to 10 percent of the costs incurred by the taxpayer with respect to production of such materials. (iii) Production processes for electrode active materials --(A) Conversion. For purposes of section 45X, the term conversion means a chemical transformation from one species to another. (B) Purification. For purposes of section 45X, the term purification means increasing the mass fraction of a certain element. (iv) Production costs incurred. Costs incurred by the taxpayer with respect to production of electrode active materials includes all costs as defined in §1.263A-1(e) that are paid or incurred within the meaning of section 461 of the Code by the taxpayer for the production of an electrode active material only, except direct materials costs as defined in §1.263A-1(e)(2)(i)(A), or indirect materials costs as defined in §1.263A-1(e)(3)(ii)(E), and any costs related to the extraction of raw materials. Section 263A of the Code and the regulations in this chapter under section 263A apply solely to identify the types of costs that are includible in production costs incurred for purposes of computing the amount of the section 45X credit, but do not apply for any other purpose, such as to determine whether a taxpayer is engaged in production activities. (v) Materials that are both electrode active materials and applicable critical minerals --(A) In general. A material that qualifies as an electrode active material and an applicable critical material is eligible for the section 45X credit. A taxpayer may claim the section 45X credit with respect to such material either as an electrode active material or an applicable critical material, but not both. (B) Example. Lithium carbonate is an electrode active material because it is a direct battery-grade precursor to electrolyte salts, which are processed materials found in a final battery cell. Lithium carbonate is also eligible for the 45X critical minerals credit. A taxpayer who produces and sells lithium carbonate may claim either the electrode active material credit or the critical mineral credit for its production and sale of lithium carbonate but may not take both credits. (3) Battery cells-- (i) Definition. Battery cell means an electrochemical cell -- (A) Comprised of one or more positive electrodes and one or more negative electrodes; (B) With an energy density of not less than 100 watt-hours per liter; and (C) Capable of storing at least 12 watt-hours of energy. (ii) Capacity measurement. Taxpayers must measure the capacity of a battery cell in accordance with a national or international standard, such as IEC 60086-1 (Primary Batteries), or an equivalent standard. Taxpayers can reference the United States Advanced Battery Consortium (USABC) Battery Test Manual for additional guidance. (iii) Credit amount. For a battery cell, the credit amount is equal to the product of $35 multiplied by the capacity of such battery cell, subject to the limitation provided in paragraph (e)(5) of this section. The capacity of a battery cell is expressed on a kilowatt-hour basis. (4) Battery module definitions and applicable rules --(i) Battery module defined. The term battery module means a module described in paragraph (e)(4)(i)(A) or (B) of this section with an aggregate capacity of not less than 7 kilowatt-hours (or, in the case of a module for a hydrogen fuel cell vehicle, not less than 1 kilowatt-hour). (A) Modules using battery cells. A module using battery cells, is a module with two or more battery cells that are configured electrically, in series or parallel, to create voltage or current, as appropriate, to a specified end use, meaning an end-use configuration of battery technologies. An end-use configuration is the product that ultimately serves a specified end use. It is the collection of interconnected cells, configured to that specific end-use and interconnected with the necessary hardware and software required to deliver the required energy and power (voltage and current) for that use. (B) Modules with no battery cells. A module with no battery cells means a product with a standardized manufacturing process and form that is capable of storing and dispatching useful energy, that contains an energy storage medium that remains in the module (for example, it is not consumed through combustion), and that is not a custom-built electricity generation or storage facility. For example, neither standalone fuel storage tanks nor fuel tanks connected to engines or generation systems qualify as modules with no battery cells. (ii) Capacity measurement --(A) Modules using battery cells. Taxpayers must measure the capacity of a module using battery cells with a testing procedure that complies with a national or international standard published by a recognized standard setting organization. The capacity of a battery module may not exceed the total capacity of the battery cells in the module. Taxpayers must measure the capacity of a battery cell in accordance with a national or international standard, such as IEC 60086-1 (Primary Batteries), or an equivalent standard. Taxpayers can reference the USABC Battery Test Manual for additional guidance. (B) Modules with no battery cells. Taxpayers must measure the capacity of a module with no battery cells with a testing procedure that complies with a national or international standard published by a recognized standard setting organization. If no such standard applies to a type of module with no battery cells, taxpayers must measure the capacity of such module as the Secretary may prescribe in regulations or other guidance. (iii) Credit amount --(A) Modules using battery cells. For a battery module with cells, the credit amount is equal to the product of $10 multiplied by the capacity of such battery module, subject to the limitation provided in paragraph (e)(5) of this section. The capacity of each battery module is expressed on a kilowatt-hour basis. (B) Modules with no battery cells. For a battery module without cells, the credit amount is equal to the product of $45 multiplied by the capacity of such battery module, subject to the limitation provided in paragraph (e)(5) of this section. The capacity of each battery module is expressed on a kilowatt-hour basis. (5) Limitation on capacity of battery cells and battery modules --(i) In general. For purposes of paragraphs (e)(3)(iii) and (e)(4)(iii) of this section, the capacity determined with respect to a battery cell or battery module must not exceed a capacity-to-power ratio of 100:1. (ii) Capacity to power ratio. For purposes of paragraph (e)(5)(i) of this section, capacity-to-power ratio means, with respect to a battery cell or battery module, the ratio of the capacity of such cell or module to the maximum discharge amount of such cell or module. (f) Phase out rule --(1) In general. Except as provided in paragraph (f)(3) of this section, in the case of any eligible component sold after December 31, 2029, the amount of the section 45X credit determined with respect to such eligible component must be equal to the product of-- (i) The amount determined under this section with respect to such eligible component, multiplied by; (ii) The phase out percentage under paragraph (f)(2) of this section. (2) Phase out percentages. The phase out percentage is equal to 75 percent for eligible components sold during calendar year 2030; 50 percent for eligible components sold during calendar year 2031; 25 percent for eligible components sold during calendar year 2032, and zero percent for eligible components sold after calendar year 2032. (3) Exception for applicable critical minerals. The phase out rules described in paragraphs (f)(1) and (2) of this section apply to all eligible components except applicable critical minerals. (g) Severability. The provisions of this section are separate and severable from one another. If any provision of this section is stayed or determined to be invalid, it is the agencies' intention that the remaining provisions shall continue in effect. (h) Applicability date. This section applies to eligible components for which production is completed and sales occur after December 31, 2022, and during a taxable year ending on or after [date of publication of the final regulations in the Federal Register ]. §1.45X-4 Applicable critical minerals. (a) In general. The term applicable critical mineral means any of the minerals that are listed in section 45X(c)(6) and defined in paragraph (b) of this section. (b) Definitions --(1) Aluminum. The term commodity-grade aluminum means aluminum that has been produced directly from aluminum described in paragraph (b)(1)(i) or (ii) of this section and is in a form that is sold on international commodity exchanges. The term aluminum means aluminum, including commodity-grade aluminum, that is-- (i) Converted from bauxite to a minimum purity of 99 percent alumina by mass; or (ii) Purified to a minimum purity of 99.9 percent aluminum by mass. (2) Antimony. The term antimony means antimony that is-- (i) Converted to antimony trisulfide concentrate with a minimum purity of 90 percent antimony trisulfide by mass; or (ii) Purified to a minimum purity of 99.65 percent antimony by mass. (3) Barite. The term barite means barite that is barium sulfate purified to a minimum purity of 80 percent barite by mass. (4) Beryllium. The term beryllium means beryllium that is -- (i) Converted to copper-beryllium master alloy; or (ii) Purified to a minimum purity of 99 percent beryllium by mass. (5) Cerium. The term cerium means cerium that is -- (i) Converted to cerium oxide that is purified to a minimum purity of 99.9 percent cerium oxide by mass; or (ii) Purified to a minimum purity of 99 percent cerium by mass. (6) Cesium. The term cesium means cesium that is -- (i) Converted to cesium formate or cesium carbonate; or (ii) Purified to a minimum purity of 99 percent cesium by mass. (7) Chromium. The term chromium means chromium that is -- (i) Converted to ferrochromium consisting of not less than 60 percent chromium by mass; or (ii) Purified to a minimum purity of 99 percent chromium by mass. (8) Cobalt. The term cobalt means cobalt that is -- (i) Converted to cobalt sulfate; or (ii) Purified to a minimum purity of 99.6 percent cobalt by mass. (9) Dysprosium. The term dysprosium means dysprosium that is -- (i) Converted to not less than 99 percent pure dysprosium iron alloy by mass; or (ii) Purified to a minimum purity of 99 percent dysprosium by mass. (10) Europium. The term europium means europium that is -- (i) Converted to europium oxide that is purified to a minimum purity of 99.9 percent europium oxide by mass; or (ii) Purified to a minimum purity of 99 percent of europium by mass. (11) Fluorspar. The term fluorspar means fluorspar that is -- (i) Converted to fluorspar that is purified to a minimum purity of 97 percent calcium fluoride by mass; or (ii) Purified to a minimum purity of 99 percent fluorspar by mass. (12) Gadolinium. The term gadolinium means gadolinium that is -- (i) Converted to gadolinium oxide that is purified to a minimum purity of 99.9 percent gadolinium oxide by mass; or (ii) Purified to a minimum purity of 99 percent gadolinium by mass. (13) Germanium. The term germanium means germanium that is -- (i) Converted to germanium tetrachloride; or (ii) Purified to a minimum purity of 99.99 percent germanium by mass. (14) Graphite. The term graphite means natural or synthetic graphite that is purified to a minimum purity of 99.9 percent graphitic carbon by mass. The term 99.9 percent graphitic carbon by mass means graphite that is 99.9 percent carbon by mass. (15) Indium. The term indium means indium that is -- (i) Converted to -- (A) Indium tin oxide; or (B) Indium oxide that is purified to a minimum purity of 99.9 percent indium oxide by mass; or (ii) Purified to a minimum purity of 99 percent indium by mass. (16) Lithium. The term lithium means lithium that is -- (i) Converted to lithium carbonate or lithium hydroxide; or (ii) Purified to a minimum purity of 99.9 percent lithium by mass. (17) Manganese. The term manganese means manganese that is -- (i) Converted to manganese sulphate; or (ii) Purified to a minimum purity of 99.7 percent manganese by mass. (18) Neodymium. The term neodymium means neodymium that is -- (i) Converted to neodymium-praseodymium oxide that is purified to a minimum purity of 99 percent neodymium-praseodymium oxide by mass; (ii) Converted to neodymium oxide that is purified to a minimum purity of 99.5 percent neodymium oxide by mass; or (iii) Purified to a minimum purity of 99.9 percent neodymium by mass. (19) Nickel. The term nickel means nickel that is -- (i) Converted to nickel sulphate; or (ii) Purified to a minimum purity of 99 percent nickel by mass. (20) Niobium. The term niobium means niobium that is -- (i) Converted to ferronibium; or (ii) Purified to a minimum purity of 99 percent niobium by mass. (21) Tellurium. The term tellurium means tellurium that is -- (i) Converted to cadmium telluride; or (ii) Purified to a minimum purity of 99 percent tellurium by mass. (22) Tin. The term tin means tin that purified to low alpha emitting tin that -- (i) Has a purity of greater than 99.99 percent by mass; and (ii) Possesses an alpha emission rate of not greater than 0.01 counts per hour per centimeter square. (23) Tungsten. The term tungsten means tungsten that is converted to ammonium paratungstate or ferrotungsten. (24) Vanadium. The term vanadium means vanadium that is converted to ferrovanadium or vanadium pentoxide. (25) Yttrium. The term yttrium means yttrium that is -- (i) Converted to yttrium oxide that is purified to a minimum purity of 99.999 percent yttrium oxide by mass; or (ii) Purified to a minimum purity of 99.9 percent yttrium by mass. (26) Other minerals. The following minerals are also applicable critical minerals provided that such mineral is purified to a minimum purity of 99 percent by mass: (i) Arsenic. (ii) Bismuth. (iii) Erbium. (iv) Gallium. (v) Hafnium. (vi) Holmium. (vii) Iridium. (viii) Lanthanum. (ix) Lutetium. (x) Magnesium. (xi) Palladium. (xii) Platium. (xiii) Praseodymium. (xiv) Rhodium. (xv) Rubidium. (xvi) Ruthemium. (xvii) Samarium. (xviii) Scandium. (xix) Tantalum. (xx) Terbium. (xxi) Thulium. (xxii) Titanium. (xxiii) Ytterbium. (xxiv) Zinc. (xxv) Zirconium. (c) Credit amount --(1) In general. For any applicable critical mineral, the credit amount is equal to 10 percent of the costs incurred by the taxpayer with respect to production of such mineral. (2) Production processes for applicable critical minerals --(i) Conversion. For purposes of section 45X, the term conversion means a chemical transformation from one species to another. (ii) Purification. For purposes of section 45X, the term purification means increasing the mass fraction of a certain element. (3) Production costs incurred. Costs incurred by the taxpayer with respect to the production of applicable critical minerals includes all costs as defined in §1.263A-1(e) that are paid or incurred within the meaning of section 461 of the Code by the taxpayer for the production of an applicable critical mineral only, except direct or indirect materials costs as defined in §1.263A-1(e)(2)(i)(A) and (e)(3)(ii)(E), respectively, and any costs related to the extraction of raw materials. Section 263A of the Code and the regulations in this chapter under section 263A apply solely to identify the types of costs that are includible in production costs incurred for purposes of computing the amount of the section 45X credit, but do not apply for any other purpose, such as to determine whether a taxpayer is engaged in production activities. (4) Substantiation. The taxpayer must document that an applicable critical mineral meets the requirements of section 45X(c)(6) with a certificate of analysis provided by the taxpayer to the person to which the taxpayer sold the applicable critical mineral. (d) Severability. The provisions of this section are separate and severable from one another. If any provision of this section is stayed or determined to be invalid, it is the agencies' intention that the remaining provisions shall continue in effect. (e) Applicability date. This section applies to eligible components for which production is completed and sales occur after December 31, 2022, and during a taxable year ending on or after [date of publication of the final regulations in the Federal Register ]. Douglas W. O'Donnell, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register December 14, 2023, 8:45 a.m., and published in the issue of the Federal Register for December 15, 2023, 88 FR 86844)

Private Letter Ruling Number: 202053019 Internal Revenue Service May 15, 2019 Department of the Treasury Internal Revenue Service Appeals Office Date: May 15, 2019 Number: 202053019 Release Date: 12/31/2020 Employer Identification Number: Person to Contact: Employee ID Number: Tel: Fax: UIL Code: 0501.03-00, 501.35-00 Certified Mail Dear *******: This is a final adverse determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (the "Code") section 501(a) as an organization described in Section 501(c)(3) of the Code. We made the adverse determination for the following reason(s): Your organization's operations are not exempt under Section 501(c)(3) of the code because a substantial part of your planned operations violate public policy. Contributions to your organization are not deductible under section 170 of the Code. You're required to file Federal income tax returns on Forms [1120, U.S. Corporation Income Tax Return, OR 1041. U.S. Income Tax Return for Estates and Trusts]. Mail your form to the appropriate Internal Revenue Service Center per the form's Instructions. You can get forms and instructions by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). We'll make this letter and the proposed adverse determination letter available for public inspection under Code section 6110 after deleting certain identifying information. We have provided to you, in a separate mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in Notice 437. If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of section 7428 of the Code in either: - United States Tax Court, - The United States Court of Federal Claims, - The United States District Court for the District of Columbia. You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment. You can write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 US Court of Federal Claims 717 Madison Place, NW Washington, DC 20005 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Note: We will not delay processing income tax returns and assessing any taxes due even if you file petition for declaratory judgment under section 7428 of the Code. Please refer to the enclosed Publication 892, How to Appeals an IRS Determination on Tax -Exempt Status, for more information about the Appeals process. You also have the right to contact the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this letter. You If you qualify for TAS assistance, which is always free,. TAX will do everything possible to help you. Visit www.taxpaveradvocate.irs.gov or call 877-777-4778. TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. TAS cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States Court. If you have any questions, contact the person at the top of this letter. Sincerely, Appeals Team Manager Enclosure: Publication 892 Department of the Treasury Internal Revenue Service P.O. Box 2508 Cincinnati, OH 45201 Date: May 15, 2019 Employer ID number: Contact person/ID number: Contact telephone number Contact fax number: UIL: 501.03-00 501.35-00 Legend: X = Y = Dear *******: We considered your application for recognition of exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(3). This letter explains the reasons for our conclusion. Please keep it for your records. Issues Do you qualify for exemption under Section 501(c)(3) of the Code? No, for the reasons stated below. Facts You submitted Form 1023-EZ, Streamline Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. With Form 1023-EZ you attested that you are organized and operated exclusively to further charitable purposes. You attested that you have not conducted and will not conduct prohibited activities under Section 501(c)(3). Specifically, and among other things, you attested that you will not further non-exempt purposes more than insubstantially. Your Form 1023-EZ was selected for further development. You previously applied for exemption using Form 1023-EZ, but that application was not accepted for processing because your mission/most significant activities statement indicated you were ineligible to file Form 1023-EZ. You resubmitted Form 1023-EZ with a revised description of your mission or most significant activities. Your revised activities narrative states that you are a religious organization providing a means for your members to learn about and practice a universal religious doctrine and to attend faith-based retreats. You foster the development of a *******. You were incorporated on X in the state of Y. Your stated purpose as indicated in your Articles of Incorporation is charitable, educational, religious, or scientific within the meaning of Section 501(c)(3) of the Code. Your board will dispose of all assets under Section 501(c)(3). You describe yourself as a nationwide religious organization consisting of people who share a similar religious doctrine or spiritual and scientific perspective that the utilization of Sacraments is a fundamental aspect of not only their personal religion, but of being human. This doctrine predates any major religion of doctrine currently practiced in today's world. You practice traditional aspects of numerous religions and draw upon several religious texts. You said you do not believe it is right for people who want to ******* You indicated that everybody has the right to utilize Sacraments in any way, shape or form so long as it is responsible and not done in such a way that results in undue harm to themselves or others. You have devoted members and allies in every state in America who depend on you for the Sacraments required to practice their religion, or to "exercise the unalienable right to Life, Liberty, and Happiness." You accept numerous natural organic plants and fungi and their constituents as Sacraments *******. You said you operate under the status of a "free church" adhering to the standard operating guidelines of Section 501(c)(3) of the Code. However, you are not seeking exemption as a "church" classified under Sections 509(a)(1) and 170(b)(1)(A)(i); rather, you are seeking classification as a public charity as described in Sections 509(a)(1) and 170(b)(1)(A)(vi). You are a membership organization. You offer courses, ceremonies/retreats, and counseling for your members. Courses can be taken and viewed on your website. Completion of established courses is required before members may participate in your ceremonies/retreats. The Sacraments you offer will help advance the human experience and are indisputably an essential piece of what you do. These Sacraments are central to your established religious beliefs and sacred ceremonies. You will insure that those who participate in your ceremonies or personal counseling where controlled substances are present are your members. You said that those under 18 years old will not be admitted to ceremonies where controlled substances are present unless all the following requirements are fulfilled: - The Medicine Man/Woman gives specific permission for their attendance - A parent or legal guardian attends with them and takes full responsibility for their care and well-being - The minor person is a member, and - A document stating these (above) things must be signed by all affected parties. You state you are not a religion. You are a religious organization consisting of people who share a similar religious doctrine, or spiritual and scientific perspective that Sacrament utilization is a fundamental aspect of not only then personal religion, but of being human. You said that many of your members identify as Christian, Hindus, Muslims, Buddhists, etc. and many members choose to not place any title on their beliefs or disbeliefs. You provide members with Sacraments that can be used for their own religious practices. People are only considered for eligibility after they have completed your Sacrament courses, have agreed to utilize them within the context detailed in the courses, submitted their constitutional and religious proclamation, completed the steps of *******, uploaded as photo of ******* completed the online congregation participation requirements in the forum, completed other acts and steps in the courses, and so forth. Financial support derives from contributions from members. Law Section 501(c)(3) of the Code provides for the exemption from federal income tax of corporations organized and operated exclusively for charitable or educational purposes, provided no part of the net earnings inures to the benefit of any private shareholder or individual. Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that to be exempt as an organization described in Section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or more exempt purpose. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Treas.Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization operates exclusively for exempt purposes only if it engages primarily in activities that accomplish exempt purposes specified in Section 501(c)(3) of the Code. An organization will not be operated exclusively for exempt purpose if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Treas.Reg. Section 1.501(c)(3)-1(d)(2) defines charitable as it is used in its generally accepted legal sense. It continues to describe the generally accepted legal sense as the relief of the poor and distressed, advancement of religion, advancement of education or science, erection or maintenance of public buildings, lessening the burdens of government, or promoting social welfare if it is an organization designed to accomplish one of the above causes or to lessen neighborhood tensions, defend human and civil rights, or combat community deterioration and juvenile delinquency. 21 United States Code (U.S.C.) Section 802(16)(A) defines marijuana as "all parts of the plant Cannabis sativa L. whether growing or not; the seeds thereof; the resin extracted from any part of such pant; and every compound, manufacture, salt, derivative, mixture or preparation of such plant, its seeds or resin." 21 U.S.C. Section 812(b)(1) Schedule I substance is a substance that (1) has a high potential for abuse; (2) has no currently accepted medical use in treatment in the United States; and (3) there is a lack of accepted safety for use of the drug under medical supervision, Section (c)(10) and (c)(12) of Schedule I lists marijuana and peyote, respectively, as hallucinogenic substances and includes them on schedule I of the Schedules of Controlled Substances. 21 U.S.C. Section 841(a)(1), known as The Controlled Substances Act, states that it is illegal for anyone to knowingly or intentionally manufacture, distribute or dispense or possess with intent to manufacture, distribute or dispense a controlled substance. 42 U.S.C. Section 1996a(b)(1) provides that notwithstanding any other provision of law, the use, possession, or transportation of peyote by an Indian for bona fide traditional ceremonial purposes in connection with the practice of a traditional Indian religion is lawful and shall not be prohibited by the United States or any State. Revenue Ruling 71-447, 1971-2 C.B. 230, states that under common law, the term "charity" encompasses all three major categories of religious, educational, and charitable purposes. All charitable trusts, educational or otherwise, including religious trusts, are subject to the requirement that the purpose o the trust may not be illegal or contrary to public policy. Citing Restatement (Second), Trusts (1959) Sec. 377, Comment c: "A Trust for a purpose the accomplishment of which is contrary to public policy, although not forbidden by law, is invalid." Rev.Rul. 75-384, 1975-2 C.B. 204, provides that an organization that induces or encourages the commission of criminal ats by planning and sponsoring such events cannot be exempt under Section 501(c)(3) since it violates the common understanding of a charitable trust. In Ould v. Washington Hospital for Foundlings, 95 U.S. 303 (1877), the Court noted that "[a] charitable use, where neither law nor public policy forbids, may be applied to almost anything that tends to promote the well-doing and well-being of a social man." In Better Business Bureau of Washington, D.C., Inc. v. United States 326 U.S. 279 (1945), the Supreme Court held that the presence of a single nonexempt purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt purposes. In Bob Jones University v. United States, 461 U.S. 574 (1983), the Supreme Court held that racially discriminatory education is contrary to public policy and the University therefore could not be viewed as providing public benefit within the charitable concept. United States v. Oakland Cannabis Buyers' Cooperative, 532 U.S. 483 (2001), reiterates that there is only one exception from the Act for cannabis: Government-approved research projects. "It is clear from the text of the Act that Congress has made a determination that marijuana has no medical benefits worthy of an exception." In Mysteryboy Inc. v. Commissioner, T.C. Memo 2010-13 (2010), the Tax Court held that the organization that encouraged sexual activity with minors with the goal to repeal child pornography and rape laws was not exempt from federal income taxation; activities of the organization violated public policy as reflected is federal and state laws. Application of law As stated in Treas.Reg. Section 1.501(c)(3)-1(a)(1), to qualify for exemption under Section 501(c)(1) of the Code an organization must be both organized and operated exclusively for purposes described in Section 501(c)(3). You are not operated exclusively for exempt purposes as described in Treas.Reg. Section 1.501(c)(3)-1(c)(1) because more than an insubstantial part of your activities involves the provision of federally illegal substances to your members, which does not further an exempt purpose. To be exempt under Section 501(c)(3) of the code an organization must be operated for a charitable or educational purpose as they are defined by statute and regulation and interpreted by the Service and the courts. In the tax code, charity is interpreted in its generally accepted legal sense, as defined in Treas.Reg. Section 1.501(c)(3)-1(d)(2). This includes the requirement for all charitable trusts, including religious and educational trusts, that their purposes may not be illegal or contrary to public policy. Your membership is available to anyone who can access your website and take your courses. You do not require that your members have any particular religious beliefs. Your activities and membership are not limited to people defined in the Code as Indian and who use peyote for traditional ceremonial purposes in connection with their traditional Indian Religion; therefore, your use of peyote is illegal per 42 U.S.C. Section 1996a(b)(1). Federal law does not recognize any health benefits of cannabis or peyote and classifies them as controlled substances, as detailed in 21 U.S.C. Section 512, Schedule 1(c)(10) and (c)(12), respectively. Federal law, under 21 U.S.C Section 841, prohibits the manufacture, distribution, possession, or dispensing of a controlled substance. You engage in illegal activities by distributing illegal substances across the country, which precludes exemption per 21 U.S.C. Sections 802(16), 812(b), and 841(a). The Controlled Substance Act. Additionally, as detailed in Oakland Cannabis Buyers' Cooperative, Congress has determined that marijuana, as defined in 21 U.S.C. Section 802(16), has no medical benefits worthy of an exception to the general rule that tile manufacture and distribution of cannabis is illegal. Rev.Rul. 71-447, which cites the Restatement (Second) of Trusts, states that a trust formed for a purpose the accomplishment of which is contrary to public policy, although not forbidden by law, is invalid. This ruling is further clarified by Rev.Rul. 75-384, which provides that an organization that induces or encourages the commission of criminal acts cannot be exempt under Section 501(c)(3) of the Code since it violates the common understanding of a charitable trust. These principles were later upheld in the Supreme Court case Bob Jones University, where in reaching its decision, the Court indicated that entitlement to tax exemption depends on meeting certain common law standards of charity - namely, that an institution seeking tax-exempt status must serve a public purpose and not be contrary to established public policy. The Supreme Court noted in Ould, a Section 501(c)(3) organization cannot be formed for a purpose that is illegal. Providing your members across the United States with Sacraments, including illegal ones such as cannabis and peyote, is one of your primary purposes. Current federal law prohibits the use of cannabis except in limited circumstances; those limited circumstances do not include the use of cannabis for Sacramental purposes. The fact that state legalized distribution of cannabis to a limited extent is not determinative because under federal law, distribution of cannabis is illegal. You are like the organization described in Mysteryboy Inc, because you engage in activities that violate public policy as reflected in federal law. Your activities are illegal and are contrary to public policy because current federal law prohibits the use of cannabis and peyote. Because you advocate and engage in activities that contravene federal law, you serve a substantial nonexempt purpose. You are like the organization described in Better Business Bureau. The presence of a single nonexempt purpose, if substantial, will preclude exemption regardless of the number of important truly exempt purposes. Conclusion Based on the facts and information submitted, you are not operated exclusively for exempt purposes within the meaning of Section 501(c)(3) of the Code. You fail the operational test because your primary purpose furthers a substantial nonexempt purpose because the possession, distribution, and use of controlled substances violates federal law and public policy. Therefore, you are not described in Section 501(c)(3) of the Code. If you agree If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements. If you don't agree You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a protest within 30 days of the date of this letter. You must include: - Your name, address, employer identification number (EIN), and a daytime phone number - A statement of the facts, law, and arguments supporting your position. - A statement indicating whether you are requesting an Appeals Office conference - The signature of an officer, director, trustee, or other official who is authorized to sign for the organization or your authorized representative - The following declaration: For an officer, director, trustee, or other official who is authorized to sign for the organization: Under penalties of perjury, I declare that I have examined this request, or this modification to the request., including accompanying documents, and to the best of my knowledge and belief, the request or the modification contains all relevant facts relating to the request, and such facts are true, correct, and complete. Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney. We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't given us a basis for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status. If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the law requires that you use the IRC administrative process first (IRC Section 7428(b)(2). Where to send your protest Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address: U.S. Mail: Internal Revenue Service EO Determinations Quality Assurance Mail Stop 6403 P.O. Box 2508 Cincinnati, OH 45201 Street address for delivery service: Internal Revenue Service: EO Determinations Quality Assurance 550 Main Street, Mail Stop 6403 Cincinnati, OH 45202 You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that they received it. You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at the top of this letter. Contacting the Taxpayer Advocate Service The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements

Internal Revenue Service - Information Release IR-2023-159 IRS: Those impacted by Idalia qualify for tax relief; Oct. 16 deadline, other dates postponed to Feb. 15 August 30, 2023 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS: Those impacted by Idalia qualify for tax relief; Oct. 16 deadline, other dates postponed to Feb. 15 IR-2023-159, August 30, 2023 WASHINGTON -- The Internal Revenue Service today announced tax relief for individuals and businesses affected by Idalia in parts of Florida. These taxpayers now have until Feb. 15, 2024, to file various federal individual and business tax returns and make tax payments. The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA). Currently, 46 of Florida's 67 counties qualify. Individuals and households that reside or have a business in these counties qualify for tax relief, but any area added later to the disaster area will also qualify. The current list of eligible localities is always available on the disaster relief page on IRS.gov. Filing and Payment Relief The tax relief postpones various tax filing and payment deadlines that occurred from Aug. 27, 2023, through Feb. 15, 2024, (postponement period). As a result, affected individuals and businesses will have until Feb. 15, 2024, to file returns and pay any taxes that were originally due during this period. This means, for example, that the Feb. 15, 2024, deadline will now apply to: - Individuals who had a valid extension to file their 2022 return due to run out on Oct. 16, 2023. The IRS noted, however, that because tax payments related to these 2022 returns were due on April 18, 2023, those payments are not eligible for this relief. - Quarterly estimated income tax payments normally due on Sept. 15, 2023, and Jan. 16, 2024. - Quarterly payroll and excise tax returns normally due on Oct. 31, 2023, and Jan. 31, 2024. - Calendar-year partnerships and S corporations whose 2022 extensions run out on Sept. 15, 2023. - Calendar-year corporations whose 2022 extensions run out on Oct. 16, 2023. - Calendar-year tax-exempt organizations whose extensions run out on Nov. 15, 2023. In addition, penalties for the failure to make payroll and excise tax deposits due on or after Aug. 27, 2023, and before Sept. 11, 2023, will be abated as long as the deposits are made by Sept. 11, 2023. The Disaster Assistance and Emergency Relief for Individuals and Businesses page has details on other returns, payments and tax-related actions qualifying for relief during the postponement period. The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. These taxpayers do not need to contact the agency to get this relief. It is possible an affected taxpayer may not have an IRS address of record located in the disaster area, for example, because they moved to the disaster area after filing their return. In these kinds of unique circumstances, the affected taxpayer could receive a late filing or late payment penalty notice from the IRS for the postponement period. The taxpayer should call the number on the notice to have the penalty abated. In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization. Additional Tax Relief Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2023 return normally filed next year), or the return for the prior year (2022). Taxpayers have extra time - up to six months after the due date of the taxpayer's federal income tax return for the disaster year (without regard to any extension of time to file) - to make the election. Be sure to write the FEMA declaration number - DR-3596-EM on any return claiming a loss. See Publication 547, Casualties, Disasters, and Thefts, for details. Qualified disaster relief payments are generally excluded from gross income. In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents. See Publication 525, Taxable and Nontaxable Income, for details. Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow. The IRS may provide additional disaster relief in the future. The tax relief is part of a coordinated federal response to the damage caused by this storm and is based on local damage assessments by FEMA. For information on disaster recovery, visit DisasterAssistance.gov.

Internal Revenue Service - Information Release IR-2021-94 Electronic options on IRS.gov are available 24/7; save time online for filing information and help April 27, 2021 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 Electronic options on IRS.gov are available 24/7; save time online for filing information and help IR-2021-94, April 27, 2021 WASHINGTON -- The Internal Revenue Service today urged taxpayers and tax professionals to continue using electronic options to speed the processing of tax returns, refunds and payments. IRS.gov showcases many task-based tools and features to help people navigate their taxes. All are available 24/7/365. Timely processing of tax returns and refund issuance is especially important during the pandemic. To speed refunds and avoid delays in processing, the IRS strongly advises taxpayers to file electronically with direct deposit as soon as they have the information they need. Simple options to make filing easier - Check IRS.gov for the latest tax information, including the latest on Economic Impact Payments and tax refund status. There is no need to call. - Consider IRS Free File. Taxpayers who want to prepare and file their tax returns electronically for free can use IRS Free File. This program offers brand-name tax software for taxpayers with an income of $72,000 or less in 2020. Those who earned more can use Free File Fillable Forms, the electronic version of IRS paper forms. Some people will need to file a return to get a third Economic Impact Payment and Free File gives people the ability to do that for free. - Check payment options on IRS.gov. Several electronic payment options are available to taxpayers. View an account and learn about other ways to pay such as an online installment agreement. - Find answers to many tax questions using the Interactive Tax Assistant. The ITA is a tool that provides answers to several tax law questions specific to an individual's circumstances. - Online tools for tax professionals. e-Services is a suite of web-based tools that allow tax professionals, reporting agents, mortgage industry, payers and others to complete transactions online with the IRS. Other useful tools and features - Get My Payment. People can find out when their third Economic Impact Payment is scheduled to be sent, or when and how IRS sent it with the Get My Payment application. Get My Payment updates once a day, usually overnight. - Filing options. Find complete tax filing information for individuals, business and self-employed taxpayers, charities and non-profits, International taxpayers and government entities. - Get an Identity Protection PIN. IP PINs are available to all taxpayers. An IP PIN is a six-digit number that prevents someone else from filing a tax return using another taxpayers' Social Security number. The IP PIN is known only to the taxpayer and the IRS and helps the IRS verify the identity of a taxpayer when filing an electronic or paper tax return. - View an account. Online account is an online system that allows people to securely access their individual account information. Taxpayers can view taxes owed, balance details, information on a most recent tax return, payment plan details and more. - Get a tax record. Request a copy of a tax return online. The Get Transcript Service is for individual taxpayers to retrieve their own transcripts for their own purposes. - Download tax forms and instructions. Current and prior years' forms are available. Other online options include IRS e-Books and accessible versions for people with disabilities. - Tax Withholding Estimator. Use of this tool can help people bring their taxes paid closer to what is owed. The IRS encourages everyone to perform a "paycheck checkup" to be sure the right amount of tax is withheld based on their personal situation. Free options for the military and some veterans MilTax, Military OneSource's tax service, provides online software for eligible individuals to electronically file a federal return and up to three state returns for free. Military OneSource is a program funded by the Department of Defense that provides a range of free resources for military members, veterans and their families. More information about OneSource is available at MilitaryOneSource.mil. Tax deadline is May 17 Although the tax filing deadline has been extended to May 17, 2021, from April 15, the IRS continues to process electronic tax returns, issue direct deposit refunds and accept electronic payments. As of April 16, the IRS received over 110 million tax returns and issued over $210 billion in refunds. Overall, the IRS anticipates nine out of 10 taxpayers will receive their refund within 21 days of when they file electronically with direct deposit if there are no issues with their tax return.

Private Letter Ruling Number: 202414007 Internal Revenue Service January 10, 2024 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities PO Box 2508 Cincinnati, OH 45201 Release Number: 202414007 Release Date: 4/5/2024 UIL Code: 501.03-30, 501.32-01, 501.33-00, 503.00-00 Date: 01/10/2024 Employer ID number: Tax years: All Person to contact: Dear ******: This letter is our final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). Recently, we sent you a proposed adverse determination in response to your application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we didn't receive a protest within the required 30 days, the proposed determination is now final. Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't deduct contributions to you under IRC Section 170. We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by sending them a copy of this final letter along with the proposed determination letter. You must file the federal income tax forms for the tax years shown above within 30 days from the date of this letter unless you request an extension of time to file. For further instructions, forms, and information, visit www.irs.gov. We'll make this final adverse determination letter and the proposed adverse determination letter available for public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us. If you agree with our deletions, you don't need to take any further action. If you have questions about this letter, you can call the contact person shown above. If you have questions about your federal income tax status and responsibilities, call our customer service number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements Enclosures: Letter 437 Redacted Letter 4034 Redacted Letter 4038 Department of the Treasury Internal Revenue Service PO Box 2508 Cincinnati, OH 45201 Date: November 13, 2023 Employer ID number: Person to contact: Name: ID number: Telephone: Fax: UIL: 501.03-30 501.32-01 501.32-01 501.33-00 503.00-00 Legend: C = state D = date E = university F = date range 1 G = date range 2 w percent = number 1 x percent = number 2 y percent = number 3 Dear ******: We considered your application for recognition of exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(3). This letter explains the reasons for our conclusion. Please keep it for your records. Issues Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below. Facts You are a nonprofit organization incorporated in C on D. You were formed to engage student athletes at the college level to lend their Name, Image and Likeness (NIL) to other charitable organizations in the vicinity. This arrangement for student athletes is to monetize their NIL by matching the selected students with deals in which they are paid by you to promote local charitable organizations. The student athletes selected will make personal appearances and social media posts for the charity. Initially you will work with student athletes at the E. Your revised budget indicates approximately w percent of your gross receipts will be paid to student athletes for their services. You expect no more than x percent of your total gross receipts will be paid to student athletes utilizing their NIL. Your website states that you are a registered 501(c)(3) non-profit NIL collective that instills the importance of humanitarian work and philanthropy into its student-athletes. Your website also states that donations are tax deductible, and that you enable athletes to earn compensation for their NIL by partnering with other Section 501(c)(3) organizations who better your community. As more charitable opportunities are created you will impact the future success and retention of E student athletes. You assert that not only will student-athletes benefit monetarily from NIL opportunities by working with you, but also, the community will benefit as well. The proposed NIL approach to philanthropy will create relationships with charitable and educational organizations which will advance the economic interests of the charities and benefit education as well. You will bring together private donors, local businesses and fans with student athletes from the E. You will instill in student athletes the importance of humanitarian work and philanthropy as a part of education. This exempt purpose may be accomplished by creating an NIL platform with student athletes and other charities in the community. The student athletes will benefit monetarily from the NIL opportunity, and the community will also thrive through this philanthropic and educational approach to giving. The student athletes who are engaged will sign an Independent Contractor (IC) agreement with you. The IC agreement will spell out in detail the effective dates of the engagement and amount of compensation for the student athlete. The charity will sign a Letter of Understanding (LOU) with you which will contain the representations and terms of the agreement. The representations in the LOU will include a scope of work statement which will define the NIL services by the student athlete on behalf of the charity. Also, there will be some oversight by the charity, and you will be notified promptly if the student athlete fails to complete the NIL services. You submitted a financial data statement with Form 1023 which was later superseded by an updated financial data statement. The initial financials with data from (F) showed that y percent of revenues were paid out to student athletes as compensation. The revised financials for the period (G) forecast that about w percent of revenues would be paid to student athletes as compensation. You expect that no more than x percent of your total gross receipts will be paid to student athletes for the use of their NIL. The compensation to student athletes will be for personal appearances and speaking engagements on behalf of the charities. You do not impose a cap on payments to student athletes. You expect that the efforts by the student athletes will lead to an increased level of public donations to the charities with the overall result benefiting the charities and the community. You plan to engage in direct contact with existing charitable and educational organizations, implementing "sports clinics targeted to community youth." You also stated that you plan on directly funding, in the future, charitable and educational initiatives maintained by other tax-exempt organizations in the community. Your funding will come from fans, alumni of the E and generous private donors. You anticipate direct advertisement to the students and the public will also be used but that has not yet been developed. Law IRC Section 501(c)(3) provides exemption under section 501(a) for organizations organized and operated exclusively for one or more of the exempt purposes set forth in section 501(c)(3). Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described in IRC Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or operational test, it is not exempt. Treas.Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Treas.Reg. Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest. To meet this requirement, an organization must establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests. Rev.Rul. 61-170, 1961-2 C.B. 112 (1961), held that an association of professional nurses that operated a nurses' registry to provide greater employment opportunities to its members and to organize an adequate and available nursing placement service for the community did not qualify for exemption under section 501(c)(3). By operating an employment service principally for the benefit of its members, the organization served private interests more than insubstantially and consequently was not organized and operated exclusively for charitable or other exempt purposes. Rev.Rul. 70-186, 1970-1 C.B. 128 held that an organization formed to preserve a lake as a public recreational facility qualified for exemption under section 501(c)(3), even though the organization's activities also benefited lakefront property owners. The Service determined that the benefits of the organization's activities flowed principally to the general public and that it would have been impossible for the organization to accomplish its exempt purposes without providing some benefit to the lakefront property owners. Rev.Rul. 75-286, 1975-2 C.B. 210, held that an organization formed by the residents of a city block to beautify and preserve that block did not qualify for exemption under section 501(c)(3). The restricted nature of the organization's membership and the limited area in which its improvements were made indicated that the organization was organized and operated to serve private interests by enhancing the value of its members' property rights. Rev.Rul. 76-152, 1976-1 C.B. 151, held that an organization formed by art patrons to promote community understanding of modern art trends did not qualify for exemption under section 501(c)(3). The organization exhibited and sold the artwork of local artists, who received 90 percent of sales proceeds. This provision of direct benefits served the private interests of the artists and could not be dismissed as being merely incidental to its other purposes and activities, and therefore the organization was not operated exclusively for educational purposes. Rev.Rul. 76-206, 1976-1 C.B. 154, held that an organization formed to generate community interest in the retention of classical music programs by a local for-profit radio station did not qualify for exemption under section 501(c)(3). The organization's activities enabled the radio station to increase its total revenue and, by increasing its listening audience, would enhance the value and salability of the station's airtime. The organization's activities benefited the station in a more than incidental way and served a private rather than a public interest. Better Business Bureau of Washington D.C. Inc. v. United States, 326 U.S. 279 (1945), held that the presence of a single nonexempt purpose, if substantial in nature, will preclude exemption regardless of the number or importance of truly exempt purposes. B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), held that the purpose towards which an organization's activities are directed, and not the nature of the activities themselves, is ultimately dispositive of the organization's right to be classified as a section 501(c)(3) organization. Christian Manner International, Inc. v. Commissioner, 71 T.C. 661 (1979), held that an organization whose primary activity was the publication and sale of religious books written by its founder did not qualify for exemption under section 501(c)(3). The Tax Court noted in this case that when an activity furthers both an exempt and nonexempt purpose, qualification for exemption depends on whether the nonexempt purpose is so incidental to the exempt purpose as not to disqualify the organization for exemption. Est of Hawaii v. Commissioner, 71 T.C. 1067(1979), held that an organization created to disseminate educational programs, the rights to which were owned by for-profit corporations, furthered the commercial, private purposes of the for-profit entities and did not qualify for exemption under section 501(c)(3). The Tax Court noted that the critical inquiry was not whether the payments to the for-profit corporations were reasonable, but whether the for-profit entities benefited substantially from the organization's operations. In Goldsboro Art League, Inc. v. Commissioner of Internal Revenue, 75 T.C. 337, 344 (1980), the organization exhibited in its two public galleries, "an artists more daring works in a part of the country where there were no nearby art museums or galleries." Due to the "difficulty attracting artists to exhibit their work," the organization offered the displayed works for sale. Moreover, the organization conducted numerous arts education activities and displayed its own permanent collection of art throughout various public buildings. Under these specific circumstances, the tax court found that the private benefit to the artists for the sale of their artwork was secondary and incidental to the primary purpose of educating the public on art. American Campaign Academy v. Commissioner, 92 T.C. 1053, 1076 (1989) held that a school that trained individuals for careers as political campaign professionals was not described in section 501(c)(3) because its operations benefited the private interests of entities and candidates associated with a single political party. The Tax Court observed that an organization's conferral of benefits on disinterested persons (i.e. unrelated third parties) may cause the organization to serve private rather than public interests. In City of Galveston, Texas v. United States, 33 Fed.Cl. 685, 707-08 (1995), the court indicated that "[a] taxpayer cannot premise its right to an exemption by showing that others have been treated more generously, leniently or even erroneously by the IRS." Application of law IRC Section 501(c)(3) and Treas.Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests for an organization to be recognized as exempt. An organization must be both organized and operated exclusively for purposes described in Section 501(c)(3). Based on the information provided in your application and supporting documentation, we conclude that you fail the operational test. Qualification for exemption under IRC Section 501(c)(3) requires that an organization operate exclusively for exempt purposes. Exclusivity with respect to Section 501(c)(3) does not mean "solely" or "without exception" but rather contemplates that any non-exempt activities be only incidental and less than substantial. See Treas.Reg. Section 1.501(c)(3)-1(c)(1). Based on the facts presented in your application, you serve a private rather than a public interest, because you confer benefits primarily on student athletes of a particular university's sports teams for the use of their NIL. You have not demonstrated that these student athletes belong to a charitable class. To qualify for exemption under IRC Section 501(c)(3), you must serve a public, rather than private interest, as described in Treas.Reg. Section 1.501(c)(3)-1(d)(1)(ii). Because you plan to spend between w percent and x percent of your funds to acquire the NIL rights of student athletes, you operate substantially for a private interest rather than a public interest. Similar to Rev.Rul. 61-170, in which an organization operated to increase the employment opportunities available to its members, your primary activity is to increase the number of paid NIL opportunities for the student athletes of one particular university. You focus your efforts on arranging NIL deals between local charities and student athletes to further the nonexempt purpose of providing student athletes with compensation. Thus, a substantial and non-incidental part of your activities furthers private interests. You are unlike the organization in Rev.Rul. 70-186, which was formed to preserve a lake as a public recreational facility. The organization's activities clearly benefited the public at large, but they also provided some benefit to private individuals owning lakefront property. The benefit to private interests was qualitatively incidental. The benefit to private interests was a necessary concomitant of the exempt activity because it would have been impossible to accomplish the exempt purpose without benefiting the lakefront property owners. The benefit to private interests was indirect and clearly incidental to the organization's overriding purpose of preserving the lake. In contrast, your activities result in a direct monetary benefit to E student athletes. In addition, you have not established how exclusively benefiting the student athletes of one school is a necessary concomitant of providing promotional/marketing services to local charities. There are alternative means by which you could promote local charities without conferring a substantial private benefit on these student athletes, such as by encouraging volunteerism. Therefore, the private benefit from your activities is not qualitatively incidental to exempt purposes. As in Rev.Rul. 75-286, your activities result in a direct benefit to a limited group of individuals; therefore, the private benefit from your activities is not qualitatively incidental to the exempt purposes. Just like the artists in Rev.Rul. 76-152, who directly benefited by the exhibition and sale of their works, the student athletes who are engaged in your activities are directly benefited by the compensation they receive for use of their NIL. Given that you plan on spending up to x percent of your gross receipts to acquire NIL rights of student athletes, compensating student athletes for their NIL rights is one of your substantial activities and is serving the private interests of those student athletes who participate. This direct monetary benefit to student athletes is substantial and cannot be considered merely incidental. See Rev.Rul. 76-152, 1976-1 C.B. 151 (1976) "[T]he artists in subject case are being directly benefited by the exhibition and sale of their works, with the result that a major activity of the organization is serving private interests of those artists whose works are displayed for sale. Since ninety percent of all sale proceeds are turned over to individual artists, such direct benefits are substantial by any measure and the organization's provision of them cannot be dismissed as being merely incidental to its other purposes and activities." Similarly, you provide a direct monetary benefit to student athletes that is substantial and cannot be considered merely incidental. Similar to the organization described in Rev.Rul. 76-206, whose activities were intentionally designed to benefit the for-profit radio station so that it could continue broadcasting classical music, your activities are designed to increase the number of paid NIL opportunities for the student athletes. The intentional private benefit from your activities cannot be considered qualitatively incidental to the accomplishment of an exempt purpose. You plan on implementing "sports clinics targeted to community youth" and other charitable and educational initiatives. However, under Better Business Bureau of Washington, D.C., Inc v. United States, even if these activities further an exempt purpose (which they might not if these activities also substantially benefit the private interests of the student athletes by providing them with more opportunities for monetary compensation), the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt purposes. As noted in American Campaign Academy v. Commissioner when an organization operates for the benefit of private interests, the organization, by definition, does not operate exclusively for exempt purposes. In American Campaign Academy, the organization operated a program to educate and/or train people to work for political campaigns; however, the court decided that the organization was not exempt as an organization that furthers educational purposes because the organization's program was a feeder program for one specific political party, and thus, the primary activity of the organization substantially furthered private interests. Like in American Campaign Academy, your activities are aimed at benefiting a designated group, namely student athletes of one university. Similarly, one of your substantial activities, providing promotional, marketing, and publicity services to charities, does not make you exempt as charitable because this activity provides substantial private benefit to the student athletes. As described above, your activities are directed at benefiting student athletes. As described in B.S.W. Group Inc v. Commissioner, 70 T.C. 352 (1978), the purpose towards which an organization's activities are directed, and not the nature of the activities themselves, is ultimately dispositive of the organization's right to be classified as a section 501(c)(3) organization. As in Christian Manner International, Inc. v. Commissioner you also further a non-exempt purpose that is not incidental to an exempt purpose. Your payments to student-athletes in exchange for the use of their NIL does not further an exempt purpose. As in Est of Hawaii v. Commissioner of Internal Revenue, the critical inquiry is not whether the payments to the student athletes are reasonable, but whether the student athletes benefited substantially from the organization's operations. You have stated that it is your purpose to develop financial opportunities for members of the university's sports teams, and that you intend to distribute at least w percent of your gross receipts (and up to x percent) to these student athletes. Your entire enterprise, therefore, is carried on in such a manner that the student athletes benefit substantially from your operations. This indicates that your activities impermissibly serve private rather than public interests, and that you are not operated exclusively for exempt purposes. Your position You stated that the students you were compensating were of a charitable class because, statistically, most college students are considered to be poor and/or distressed. You stated that you do not pay student athletes for providing services for charities. You engage the student athletes to conduct activities which promote the mission of selected charities by utilizing the student athlete's NIL. These activities include social media posts and personal appearances on behalf of the charity. You state such activities are not services to the charities by you or the student athlete but are actions on behalf of the charity designed to expand the charity's visibility in the community. You indicated that you are similar to the organization described in Goldsboro Art League, Inc. v. Commissioner of Internal Revenue, and therefore, the private benefit to the student athletes is incidental to your primary charitable purpose. You stated that various "peer institutions", similar to your organization, have been recognized as tax exempt under Section 501(c)(3) and therefore you should be granted such exempt status. Our response to your position You have not demonstrated that these student athletes belong to a charitable class. You have not indicated that you will offer paid opportunities to student athletes based on a demonstrated need; rather, you plan on compensating all the student athletes regardless of their financial need. Based on the facts presented in your application, you serve a private, rather than a public interest, because you confer benefits primarily on student athletes of a particular university's sports teams for the use of their NIL. No contract exists between the student athlete and the charity. However, you do have an independent contractor agreement with each athlete and obtain a "Letter of Understanding" between you and the charity regarding services you will provide to the charity using your independent contractor, the student athlete. This "Letter of Understanding" is an agreement that indicates the services you will perform, using your independent contractor, on behalf of the charity. You are not like the organization in Goldsboro Art League v. Commissioner (1980). Unlike the organization in Goldsboro Art League, you intend to spend between w and x percent of your gross receipts to compensate E student athletes. You have not established that the private benefit from your activities is clearly secondary and incidental to exempt purposes. Rather, the information you provided indicates that providing paid opportunities for E student athletes is one of your primary purposes. Even if the student athletes engaged in your activities are independent contractors and are not private shareholders or organizational insiders, that fact is not determinative of whether you serve private interests. As recognized by the Tax Court in American Campaign Academy, the conferral of benefits on disinterested persons (i.e. unrelated third-parties) may cause an organization to serve private interests. Since you distribute the majority of funds received to student athletes, and not for a charitable purpose, you have a substantial non-exempt purpose. Therefore, you fail the operational test for IRC section 501(c)(3). Regarding the tax-exempt status of other organizations, each application for exemption is evaluated based on its own specific facts and circumstances. Furthermore, as indicated in City of Galveston, Texas v. United States, 33 Fed.Cl. 685, 707-08 (1995), "[a] taxpayer cannot premise its right to an exemption by showing that others have been treated more generously, leniently or even erroneously by the IRS." Conclusion Based on the above facts and analysis, you do not qualify for exemption under IRC Section 501(c)(3) because you are operated for substantial non-exempt purposes and fail the operational test. Specifically, you are operated for the private benefit of student athletes attending E. Accordingly, you do not qualify for exemption under Section 501(c)(3). If you agree If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements. If you don't agree You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a protest within 30 days of the date of this letter. You must include: - Your name, address, employer identification number (EIN), and a daytime phone number - A statement of the facts, law, and arguments supporting your position - A statement indicating whether you are requesting an Appeals Office conference - The signature of an officer, director, trustee, or other official who is authorized to sign for the organization or your authorized representative - The following declaration: For an officer, director, trustee, or other official who is authorized to sign for the organization: Under penalties of perjury, I declare that I have examined this request, or this modification to the request, including accompanying documents, and to the best of my knowledge and belief, the request or the modification contains all relevant facts relating to the request, and such facts are true, correct, and complete. Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney. We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't given us a basis for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)). Where to send your protest Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address: U.S. mail: Internal Revenue Service EO Determinations Quality Assurance Mail Stop 6403 PO Box 2508 Cincinnati, OH 45201 Street address for delivery service: Internal Revenue Service EO Determinations Quality Assurance 550 Main Street, Mail Stop 6403 Cincinnati, OH 45202 You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that they received it. You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at the top of this letter. Contacting the Taxpayer Advocate Service The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements

Private Letter Ruling Number: 202240023 Internal Revenue Service June 28, 2021 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Number: 202240023 Release Date: 10/7/2022 Date: June 28, 2021 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: UIL: 501.07-00 CERTIFIED MAIL - RETURN RECEIPT REQUESTED Dear ******: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(7), for the tax periods above. Your determination letter dated ******, is revoked. Our adverse determination as to your exempt status was made for the following reasons: You have not established that you are operated substantially for pleasure and recreation of your members or other nonprofitable purposes and no part of the earnings inures to the benefit of any private shareholder within the meaning of IRC section 501(c)(7). You have exceeded the non-member income test for tax years ending ****** and ******. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit www.irs.gov. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims or 3) the United States District Court for the District of Columbia. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Taxpayer Advocate Office Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. Keep the original letter for your records. Sincerely, Sean E. O'Reilly Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: March 12, 2021 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact information: Name: ID number: Telephone: Response due date: CERTIFIED MAIL -- Return Receipt Requested Dear ******: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(7). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(7) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, Sean E. O'Reilly Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 Form 4621-A Pub 892 Pub 3498 ISSUE Whether ****** continue to qualify for exemption under IRC (IRC) § 501(c)(7)? FACTS A compliance examination for the year ending ****** and ****** for the return form ****** Short Form Return was conducted for ****** (hereinafter, "EO", "Taxpayer", "Organization"). The ****** is exempt as an organization described in IRC § 501(c)(7) to provide social, recreational and other activities to its members. The relevant facts apply."). The ****** was incorporated in the State of ****** on ******. The organization received its exemption in ****** by submitting form ****** exemption application. Certificate of Incorporation: Per the organizing documents the purpose for which this ****** is formed are to awaken an interest in the history and genealogy of families surnamed ****** (including all Variations in the orthography of the name); of affording an opportunity for the presentation of papers etc. which may interest its members and encourage further research; of recording whatever is honorable in the lives of past and present generations of extending the advantages of friendly intercourse; of renewing and perpetuating the principles of spiritual and mental freedom for which our ancestors stood. Constitution: The objective of the ****** is to research and record genealogical data from all sources pertaining to the ******; to report such information in papers read before the ******; and to publish such information in pamphlet or book form for distribution to the ****** membership or to other genealogical societies thus perpetuating the story of the ancestors of the ****** and their contribution to the history of the ******, ******, ****** and other parts of the World. Exemption application: The EO was approved for exemption under IRC code section 501(c)(7) and the determination letter was dated ******. ****** return: The EO form ****** for ****** was received on ******. The return reflected ****** on line L of the form and ****** for Investment income Line 4 of section ****** Part I. The form ****** was filed for the year ending ****** on ******. On Part I of the ****** under Revenue ****** was reported for Investment income on line 4 and ****** was reported on line 9 for total revenue. Examination: On ****** the EO was mailed Letter 3611 informing the organization that a correspondence audit was opened on the year ending ******. A phone interview was conducted on ****** with the Treasurer of the EO. During the phone interview the EO was asked. What is the primary source of income for the organization? The EO stated Investment accounts. The EO is a membership organization that members pay a ****** dollar one-time payment for lifetime or they can pay ****** dollars every ****** years. In response to the First IDR request the EO provided a membership application on ******, page ****** of the application has a written statement that "The National Organization is maintained by the membership dues and by an Endowment Fund, which pays about ****** of the operating expenses. The Endowment Fund continues to grow through donations and Investments." Form 4564 was mailed to the EO on ******, informing the EO the audit is be expanded to include the year ending ******. ( Exhibit 1 Membership application pg.2 ) Books and Records: EO provided year end statements of Financial accounts and spreadsheets for all accounts. From the review of books and records the dividend income was overstated for both years under examination. The EO counted the qualified dividends separately from the ordinary dividends. EO has ****** Investment accounts with the investment objective of growth and income for ****** and the objective change to growth in ******. ( see Exhibits at conclusion of report. Exhibit 2 Investment accounts ******, Exhibit 3 Investment accounts ****** and Exhibit 4 Investment accounts ******. ) The chart below is Gross receipts for years under examination. LAW: IRC § 501(c)(7) exempts from federal income tax clubs organized for pleasure, recreation, and other non-profitable purposes, substantially all of the activities of which are for such purposes and not part of the net earnings of which inures to the benefit of any private shareholder. Section 1.501(c)(7) of the Regulations provides that, in general, the exemption extends to social and recreation clubs supported solely by membership fees, dues and assessments. However, a club that engages in a business, such as making its social and recreational facilities open to the general public, is not organized and operated exclusively for pleasure, recreation and other non-profitable purposes, and is not exempt under section 501(a). Prior to its amendment in 1976, IRC § 501(c)(7) required that social clubs be operated exclusively for pleasure, recreation and other nonprofitable purposes. Public Law 94-568 amended the "exclusive" provision to read "substantially" in order to allow an IRC § 501(c)(7) organization to receive up to 35 percent of its gross receipts, including investment income, from sources outside its membership without losing its tax exempt status. The Committee Reports for Public Law 94-568 (Senate Report No. 94-1318 2d Session, 1976-2 C.B. 597) further states; (a) Within the 35 percent amount, not more than 15 percent of the gross receipts should be derived from the use of a social club's facilities or services by the general public. This means that an exempt social club may receive up to 35 percent of its gross receipts from a combination of investment income and receipts from non-members, so long as the latter do not represent more than 15 percent of total receipts. (b) Thus, a social club may receive investment income up to the full 35 percent of its gross receipts if no income is derived from non-members' use of club facilities. (c) In addition, the Committee Report states that where a club receives unusual amounts of income, such as from the sale of its clubhouse or similar facilities, that income is not to be included in the 35 percent formula. Rev. Rul. 66-149, 1966-1 C.B. 146 States a social club is not exempt from Federal income tax as an organization described in section 501(c)(7) of the Internal Revenue Code of 1954 where it regularly derives a substantial part of its income from nonmember sources such as, for example, dividends and interest on investments which it owns. However, a club's right to exemption under section 501(c)(7) of the Code is not affected by the fact that for a relatively short period a substantial part of its income is derived from investment of the proceeds of the sale of its former clubhouse pending the acquisition of a new home for the club. TAXPAYER'S POSITION Taxpayer's position has not been provided. GOVERNMENT'S POSITION Based on the examination, the organization does not qualify for exemption as a social club described in IRC §501(c)(7) and Treas. Reg. §1.501(c)(7) which provides that in general, this exemption extends to social and recreation clubs which are supported solely by membership fees, dues, and assessments. Rev. Rul. 66-149 support this position stating that a social club where it regularly derives a substantial part of its income from nonmember sources such as dividends and interest on investments which it owns, is not exempt as an organization described in 501(c)(7). The EO Investment income as stated on the membership application that the Endowment fund pays about ****** of the operating expenses. When asked in interview what is the EO main support the EO stated the investments. For the year ending ****** the investment income percentage was ** % and, in the year, ending ****** the investment income percentage was ** %. The investment income is from ****** different investment portfolios that are both invested in growth and income objectives, showing the purpose for the investments are to support the organization. The organization has exceeded the ** % of its gross receipts threshold of investment income as outlined in Public Law 94-568, on a recurring basis during tax years ending ****** and ******. Accordingly, it is proposed that the ****** tax exempt status be revoked effective ******. CONCLUSION ****** no longer qualifies for exemption under § 501(c)(7) of the Code as your investment income has exceeded the ** % investment income threshold on a continuous basis. Therefore, it is proposed that your exempt status under § 501(c)(7) of the Code be revoked effective ******. Should this revocation be upheld, Form ****** must be filed starting with tax periods ending ****** and ******.

Treasury Decision 9971 Internal Revenue Service 2023-3 I.R.B. 346 26 CFR 1.897(l)-1, 26 CFR 1.1441-3, 26 CFR 1.1445-2, 26 CFR 1.1445-5, 26 CFR 1.1445-8, 26 CFR 1.1446-7 T.D. 9971 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Exception for Interests Held by Foreign Pension Funds AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains final regulations regarding gain or loss of a qualified foreign pension fund attributable to certain interests in United States real property. The final regulations also include rules for certifying that a qualified foreign pension fund is not subject to withholding on certain dispositions of, and distributions with respect to, certain interests in United States real property. The final regulations affect certain holders of interests in United States real property and withholding agents that are required to withhold tax on dispositions of, and distributions with respect to, such property. DATES: Effective Date: These regulations are effective on December 29, 2022. Applicability dates: For dates of applicability, see§§1.897(l)-1(g), 1.1441-3(c)(4)(iii), 1.1445-2(e), 1.1445-5(h), 1.1445-8(j), 1.1446-7. FOR FURTHER INFORMATION CONTACT: Arielle M. Borsos or Milton Cahn at (202) 317-6937 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background Section 897(l) was added to the Internal Revenue Code (the "Code") by section 323(a) of the Protecting Americans from Tax Hikes Act of 2015, Pub. L. 114-113, div. Q (the "PATH Act"), and amended by section 101(q) of the Tax Technical Corrections Act of 2018, Pub. L. 115-141, div. U. In the preamble to the updated section 1445 regulations that were published in the Federal Register (81 FR 8398-01, as corrected at 81 FR 24484-01) on February 19, 2016, the Department of the Treasury (the "Treasury Department") and the IRS requested comments regarding what regulations, if any, should be issued pursuant to section 897(l)(3). The Treasury Department and the IRS considered all of the comments received in response to this request and, on June 7, 2019, published proposed regulations under sections 897(l), 1441, 1445 and 1446 in the Federal Register (84 FR 26605) (the "proposed regulations"). The proposed regulations contained rules relating to the qualification for the exemption under section 897(l), as well as rules relating to withholding requirements under sections 1441, 1445 and 1446, for dispositions of United States real property interests ("USRPIs") by foreign pension funds and their subsidiaries and distributions described in section 897(h). This Treasury decision finalizes the proposed regulations, after taking into account and addressing comments received by the Treasury Department and the IRS with respect to the proposed regulations. Terms used but not defined in this preamble have the meaning provided in the final regulations. Comments outside the scope of this rulemaking are generally not addressed but may be considered in connection with future regulations. All written comments received in response to the proposed regulations are available at www.regulations.gov or upon request. Summary of Comments and Explanation of Revisions The final regulations retain the general approach and structure of the proposed regulations, with certain revisions. This Summary of Comments and Explanation of Revisions section discusses the revisions as well as comments received in response to the solicitation of comments in the proposed regulations. I. Comments and Revisions Related to the Scope of the Exception A. Qualified controlled entities Under the proposed regulations, and consistent with section 897(l), gain or loss of a qualified foreign pension fund ("QFPF") or a qualified controlled entity ("QCE") (under the proposed regulations, each generally a "qualified holder") from the disposition of a USRPI is not subject to section 897(a). Prop.§1.897(l)-1(b)(1). The proposed regulations defined a QCE as a trust or corporation organized under the laws of a foreign country, 1 all of the interests of which are held directly by one or more QFPFs or indirectly through one or more QCEs or partnerships. Prop.§1.897(l)-1(d)(9). ******** 1 For consistency with other guidance, the final regulations adopt the term "foreign jurisdiction" instead of "foreign country." See§1.897(l)-1(e)(4). See also Part II.C. of this Summary of Comments and Explanation of Revisions for a description of how the final regulations treat subnational tax regimes. ******** 1. Ownership by Non-QFPFs Several comments received in response to the proposed regulations addressed the ownership requirement with respect to QCEs. The proposed regulations did not permit ownership of a QCE by a person other than a QFPF or another QCE, declining to adopt a comment received before the publication of the proposed regulations requesting that de minimis ownership of a QCE by other persons be disregarded under certain circumstances, such as when de minimis ownership by managers or directors is required by corporate law in certain jurisdictions. The Treasury Department and the IRS determined that permitting a person other than a QFPF or another QCE to own an interest in a QCE would impermissibly expand the scope of the exception in section 897(l) by allowing investors other than QFPFs to avoid tax under section 897(a). However, under the proposed regulations, a QFPF could invest in USRPIs with non-QFPFs through a partnership and still qualify for the exemption under section 897(l). Comments received in response to the proposed regulations similarly requested that the final regulations allow a de minimis exception for the ownership of a QCE by other persons. One comment reiterated that de minimis ownership, including by managers or directors, may be required by corporate law in certain jurisdictions and suggested that the final regulations include a rule that would permit an entity to be treated as a QCE if a small amount (for example, five percent) of the entity is held by a non-QFPF. The comment also suggested that, in order to prevent non-QFPF entities from inappropriately accessing the exemption under section 897(l), a non-QFPF de minimis owner of a QCE could be required to recognize gain or loss on any disposition of a USRPI held through the QCE under section 897(a). The comment asserted that there is no policy reason to differentiate between entities with QFPF and non-QFPF owners/beneficiaries because the entity is a corporation or trust rather than a partnership, and that permitting de minimis non-QFPF ownership of a QCE would allow QFPFs flexibility with regard to the form of entity chosen for investment purposes. Another comment asserted that a de minimis exception should be allowed because certain jurisdictions may require or otherwise allow investment arrangements in which foreign pension funds pool investments with non-QFPFs. The comment argued that such investment arrangements should not be precluded from qualifying for the exception under section 897(l), especially if those arrangements are allowed or required by local law and are consistent with generally accepted investment practice. The comment suggested that the final regulations permit a non-QFPF to have a de minimis level of ownership (for example, five percent) in a QCE. If a de minimis exception were not adopted, the comment suggested several alternatives to prevent minority investors from tainting the QFPF status for the majority QFPF investors, including that the final regulations allow QFPFs to qualify for the exception under section 897(l) on their share of income or gains distributed by an investment vehicle, provided the investment vehicle is majority owned by QFPFs. The comment also suggested that the QCE ownership requirement be modified to permit an eligible fund that is a non-QFPF solely because it has a single qualified recipient with a right to more than five percent of the assets or income of the eligible fund to be an owner of a QCE. The comment requested that, in that circumstance, the final regulations look through to the owners of the non-QFPF and apply the prohibition on a single five-percent beneficiary or participant by reference to the would-be QCE rather than the non-QFPF. An additional comment suggested that a QFPF should be able to claim the section 897(l) exemption with respect to gains derived by an entity in which the QFPF is an investor where the entity is not a partnership and also is not a QCE because it is not wholly owned by QFPFs. The comment noted that, in certain foreign government facilitated arrangements involving a partnership formed under local law through which multiple foreign government entities jointly invest, the investment entity may be a per se corporation under§301.7701-2(b)(6) that would not qualify as a QCE if not all of the government investors were QFPFs. The comment asserted that, in such circumstance, investors would be forced to include a non-government partner so that the investment entity could be treated as a partnership for U.S. federal tax purposes. To address this concern, the comment recommended that the final regulations provide that, if an entity is treated as a partnership under the law of the country in which the QFPF is formed, the QFPF should be able to treat its distributive share of partnership Foreign Investment in Real Property Tax Act ("FIRPTA") gains as exempt under section 897(l). The Treasury Department and the IRS continue to believe that allowing any exception with respect to the ownership of a QCE would impermissibly expand the scope of the exception in section 897(l) by allowing investors other than QFPFs to avoid tax under section 897. Section 897(l)(1) expressly provides that an entity must be wholly owned by a QFPF to constitute a QCE and qualify for the exception under section 897(l). Accordingly, the final regulations do not provide a de minimis exception to the ownership of a QCE. For the same reasons, the final regulations do not adopt other suggested approaches that would permit an entity to be a QCE despite limited non-QFPF ownership, such as a tracing approach that would require non-QFPF owners of an entity to be subject to section 897(a) and allow only QFPF owners to benefit from the section 897(l) exemption, or a look-through approach that would allow a non-QFPF that cannot qualify as a QFPF because it violates the rule against having a single five-percent beneficiary or participant to own an interest in a QCE. The final regulations also do not adopt the recommendation to permit a QFPF to benefit from the section 897(l) exemption with respect to interests in an entity that is classified as a corporation for U.S. federal tax purposes but that does not qualify as a QCE due to ownership by non-QFPFs by treating the entity as a partnership in accordance with its treatment under applicable foreign law. In addition to expanding the definition of a QCE to permit ownership by non-QFPFs, such a rule would contradict the classification of the entity for U.S. federal tax purposes. 2. Investment Arrangements with QFPFs The proposed regulations permitted multiple QFPFs to wholly own a QCE, either directly or indirectly through one or more other QCEs, in recognition that it is common for QFPFs to pool their investments. One comment discussed the interaction between the requirement that QCEs must be wholly owned by QFPFs and the various requirements that an eligible fund must meet to maintain its status as a QFPF. The comment stated that a QFPF that invests with other QFPFs in a QCE might fail to qualify for the section 897(l) exemption solely because one of its co-investors fails to qualify as a QFPF in any given year. The comment noted that QFPFs would be required to negotiate complex protections to shield against another co-investor from tainting the QCE's status. The comment further noted that investing through a partnership (which would allow the QFPF to invest with other non-QFPFs) may not be feasible because a foreign jurisdiction may have regulatory restrictions regarding the types of legal entities in which pension funds may invest or the entity may be wholly owned by QFPFs that form part of a single government (and thus may be a per se corporation under§301.7701-2(b)(6)). The comment therefore recommended that the final regulations provide a rule that a QCE that inadvertently fails to constitute a qualified holder because one of its owners ceases to be treated as a QFPF be permitted, for a limited time, to partially benefit from section 897(l) to the extent that it continues to be owned by QFPFs. The final regulations do not provide an exception to the requirement that a QCE be wholly owned by a QFPF to insulate QFPF investors from the risk of losing QCE status in investment arrangements with other QFPFs. As with a de minimis exception to the ownership of a QCE, the Treasury Department and the IRS believe that any such rule would impermissibly expand the scope of the section 897(l) exception to allow investors other than QFPFs to avoid tax under section 897. The Treasury Department and the IRS also believe that the changes to the final regulations described in Parts II.A.2 and II.A.3 of this Summary of Comments and Explanation of Revisions will appropriately alleviate concerns with respect to the risk that a QFPF may inadvertently fail to satisfy the requirements to constitute a QFPF. 3. Non-economic Ownership As referenced in the preamble to the proposed regulations, given the absence of an express provision to the contrary, the definition of an "interest" for purposes of determining whether an entity is a QCE is determined in accordance with§1.897-1(d)(5), which provides that an interest in an entity means an interest in such entity other than an interest solely as a creditor. Section 1.897-1(d)(3) provides that an interest in an entity other than solely as a creditor is: (A) stock of a corporation; (B) an interest in a partnership as a partner within the meaning of section 761(b) and the regulations thereunder; (C) an interest in a trust or estate as a beneficiary within the meaning of section 643(c) and the regulations thereunder or an ownership interest in any portion of a trust as provided in sections 671 through 679 and the regulations thereunder; (D) an interest which is, in whole or in part, a direct or indirect right to share in the appreciation in value of an interest in an entity described in subdivision (A), (B), or (C) of§1.897-1(d)(3)(i) or a direct or indirect right to share in the appreciation in value of assets of, or gross or net proceeds or profits derived by, the entity; or (E) a right (whether or not presently exercisable) directly or indirectly to acquire, by purchase, conversion, exchange, or in any other manner, an interest described in subdivision (A), (B), (C), or (D) of§1.897-1(d)(3)(i). One comment requested that the final regulations clarify that non-economic interests in an entity are not taken into account in determining whether an entity is a QCE. The comment noted that such a situation might arise when a foreign partnership that elects to be treated as a corporation for U.S. federal income tax purposes has a general partner that holds no economic interest in the entity. The comment recommended that the final regulations provide that interests in a QCE that do not entitle the holders to share in the income or assets of the QCE should be ignored in determining whether the QCE is a qualified holder, noting that such fully non-economic interests do not present potential for abuse and that disregarding those interests would be consistent with congressional intent to accommodate a variety of foreign pension fund structures under section 897(l). The Treasury Department and the IRS do not believe that additional guidance is necessary regarding the ownership interests taken into account in determining whether an entity constitutes a QCE. Thus, an "interest" for purposes of determining whether an entity is a QCE is determined under§1.897-1(d)(3). Whether an interest in an entity constitutes one of the interests listed under§1.897-1(d)(3) or is instead disregarded is determined based on the facts, taking into account general tax principles. B. Qualified holder rule The proposed regulations provided that a qualified holder does not include any entity or governmental unit that, at any time during the testing period, determined without regard to this limitation, was not a QFPF, a part of a QFPF, or a QCE (the "qualified holder rule"). See Prop.§1.897(l)-1(d)(11)(ii). For this purpose, the proposed regulations provided that the testing period is the shortest of (i) the period beginning on the date that section 897(l) became effective (December 18, 2015), and ending on the date of a disposition described in section 897(a) or a distribution described in section 897(h); (ii) the ten-year period ending on the date of the disposition or the distribution; or (iii) the period during which the entity (or its predecessor) was in existence. See Prop.§1.897(l)-1(d)(14). Under the proposed regulations, the qualified holder rule does not apply to an entity or governmental unit that did not own a USRPI as of the date it became a QCE, a QFPF, or part of a QFPF. The preamble to the proposed regulations explained that the qualified holder rule is necessary to prevent the inappropriate avoidance of section 897(a) through QFPFs indirectly acquiring USRPIs held by foreign corporations that would not have otherwise qualified for the exception under section 897(l). Comments recommended that the final regulations either modify the qualified holder rule or implement one of several alternatives. Comments agreed that the QFPF exception should not apply to exempt gain that would otherwise have been subject to tax under section 897. However, the comments argued that the qualified holder rule in the proposed regulations was overbroad because it could apply to any failure to qualify as a QFPF or QCE in the testing period, even if the failure was unintentional or had no potential for abuse. One comment requested that the final regulations provide a tolling period if there is an inadvertent failure to qualify as a QFPF and that failure is remedied in the following year. Another comment requested that the final regulations provide an exception to the qualified holder rule to exclude the situation in which a QFPF does not qualify solely because it fails to meet the requirements in proposed§1.897(l)-1(c)(2) (relating to the requirements an eligible fund must satisfy to be treated as a QFPF). The comment further recommended allowing a mark-to-market approach, whereby an election to recognize any net built-in gain at the time a QFPF acquires a non-QFPF that owns a USRPI could be made so that the non-QFPF could then be treated as a QCE with respect to any future disposition of its USRPI (similar to§1.337(d)-7(a) for the conversion of certain corporations to regulated investment companies ("RIC") or real estate investment trusts ("REIT")). In addition, the comment requested that the qualified holder rule be limited to apply only to USRPIs held by non-QFPFs when such non-QFPFs are acquired by a QFPF, resulting in a tracing approach that would prevent section 897(l) from applying only to a disposition of those specific USRPIs. The comment also recommended that the final regulations shorten the maximum testing period from ten to five years, which is consistent with the five-year maximum testing period for a RIC or REIT to be a domestically controlled qualified investment entity under section 897(h)(4). As alternatives to the qualified holder rule, one comment requested that the Treasury Department and the IRS either allow a mark-to-market approach at the taxpayer's election (similar to that suggested by other comments), under which the entity acquired by the QFPF would account for the gain when the entity is acquired by the QFPF, or require tracing the unrealized gain when the entity is acquired by a QFPF or QCE so that section 897(a) can apply to the pre-acquisition gain upon a subsequent sale or exchange. Under the final regulations, the substance of the qualified holder rule is the same as it was in the proposed regulations; however, for greater clarity, the final regulations identify the qualified holder rule as a separate requirement to qualify for the section 897(l) exemption rather than as part of the definitions.§1.897(l)-1(d). To be a qualified holder, a QFPF or a QCE must satisfy one of two alternative tests at the time of the disposition of the USRPI or the distribution described in section 897(h).§1.897(l)-1(d)(1). Under the first test, a QFPF or a QCE is a qualified holder if it owned no USRPIs as of the earliest date during an uninterrupted period ending on the date of the disposition or distribution during which it qualified as a QFPF or a QCE.§1.897(l)-1(d)(2). Alternatively, if a QFPF or a QCE held USRPIs as of the earliest date during the period described in the preceding sentence, it can be a qualified holder only if it satisfies the applicable testing period requirement, which is unchanged from the proposed regulations.§1.897(l)-1(d)(3). The final regulations also include two transition rules. First, with respect to any period from December 18, 2015, to the date when the requirements of section 1.897(l)-1(c)(2) or (e)(9) first apply to a QFPF or QCE, as applicable (but in any event no later than December 29, 2022, in the case of section 1.897(l)-1(c)(2), and no later than June 6, 2019, in the case of section 1.897(l)-1(e)(9)), the QFPF or QCE is deemed to satisfy the requirements of section 1.897(l)-1(c)(2) and (e)(9), as applicable, for purposes of section 1.897(l)-1(d)(2) and (3) if the QFPF or QCE satisfies the requirements of section 897(l)(2) based on a reasonable interpretation of those requirements (including determining any applicable valuations using a consistent method). Second, in determining whether a QCE is a qualified holder, solely with respect to the two tests in section 1.897(l)-1(d)(2) and (3), the final regulations allow the QCE to disregard a de minimis interest owned by any person that provides services to the QCE from December 18, 2015 to February 27, 2023 (the "transition period").§1.897(l)-1(d)(4)(ii). This second transition rule does not apply for purposes of determining QCE status under section 1.897(l)-1(e)(9) at the time of any disposition or distribution involving a USRPI. Thus, its application is limited to cases in which a trust or corporation failed to qualify as a QCE (and, therefore, as a qualified holder) during the transition period solely because of a de minimis interest owned by any person that provides services to the QCE (such as a manager or director). In that case, the transition rule allows the trust or corporation to eliminate the service provider's ownership within the transition period and thereby avoid having to apply the tests for qualified holder status under section 1.897(l)-1(d)(2) or (3) by reference to the date that the service provider's interest is eliminated. This may, for example, prevent the restarting of a ten-year testing period on the date that the service provider's interest is eliminated. Any disposition of USRPIs during the period when the trust or corporation had the service provider as an interest holder still would not qualify for the section 897(l) exemption. The Treasury Department and the IRS agree that the application of the qualified holder rule to an inadvertent failure to qualify as a QFPF could produce inappropriate results, particularly in the case where an eligible fund fails to meet the requirements in§1.897(l)-1(c)(2)(ii)(B)( 2 ) because it unexpectedly projects that it will provide less than 85 percent retirement and pension benefits. Although the final regulations ultimately adopt the qualified holder rule without the changes recommended by the comments, the final regulations provide relief in the following ways: - adding an alternative calculation to the requirements in§1.897(l)-1(c)(2)(ii)(B)( 2 ) and ( 3 ) based on the average of the present values of the future benefits expected to be provided, as determined in the 48 months preceding (and including) the most recent valuation (the "48-month alternative calculation," described further in Part II.A.2 of this Summary of Comments and Explanation of Revisions); - adding a definition of retirement and pension benefits; - clarifying the scope of ancillary benefits; and - allowing an eligible fund to provide a de minimis amount of non-ancillary benefits (described further in Part II.A.3 of this Summary of Comments and Explanation of Revisions). Together, these changes provide relief to eligible funds that would otherwise unexpectedly fail to qualify as a QFPF in any given year and alleviate the underlying concerns regarding the breadth of the qualified holder rule. In light of the changes described in the preceding paragraph, the final regulations do not adopt the recommendation to allow a tolling period to remedy the loss of QFPF status. For the same reasons, the final regulations also do not adopt the recommendation to provide an exception to the qualified holder rule for any failure to meet the requirements in§1.897(l)-1(c)(2) or to have the qualified holder rule apply only to USRPIs owned by non-QFPFs when such non-QFPFs are acquired by a QFPF. The section 897(l) exception provides a substantial benefit to investors, and it is appropriate to require an eligible fund to meet the requirements in the final regulations for a ten-year maximum testing period before obtaining tax-free treatment to ensure the exception is not claimed inappropriately. Cf. section 877 (requiring taxpayer to be subject to potential additional U.S. taxation for ten years after relinquishing U.S. citizenship);§§1400Z-2 (allowing taxpayer to receive a step-up in basis of property equal to its fair market value if held for ten years); 1.937-2(f) (requiring individual to be bona fide resident of a territory for 10 years before sale of property is sourced to territory and receives beneficial tax rate). Accordingly, the final regulations also do not adopt a maximum testing period that is shorter than ten years. With respect to the suggested alternatives to the qualified holder rule, the preamble to the proposed regulations explained that the mark-to-market and tracing approaches both imposed greater compliance and administrative costs relative to the testing-period approach without providing any accompanying general economic benefit. Even if the investor is given the option to elect a mark-to-market approach, it would still present compliance and administrative barriers because fair market valuations of real property are not readily available. The tracing approach would similarly impose compliance and administrative burdens, as such an approach would require obtaining a fair market valuation of real property when an entity became a QCE, as well as tracking the USRPIs that were acquired before the entity became a QCE so that the pre-acquisition built-in gain could be recognized upon a later disposition. Accordingly, the final regulations do not adopt the mark-to-market or tracing alternatives. C. Qualified segregated accounts The proposed regulations provided that a qualified holder is exempt from section 897(a) only with respect to gain or loss that is attributable to one or more qualified segregated accounts maintained by the qualified holder. Prop.§1.897(l)-1(b)(2). The proposed regulations defined a qualified segregated account as an identifiable pool of assets maintained for the sole purpose of funding qualified benefits (that is, retirement, pension, or ancillary benefits) to qualified recipients (generally, plan participants and beneficiaries). See Prop.§1.897(l)-1(d)(13)(i). The proposed regulations provided separate standards for determining whether an identifiable pool of assets is maintained for the sole purpose of funding qualified benefits depending on whether the pool of assets is maintained by an eligible fund (including an eligible fund that satisfies the requirements to be treated as a QFPF) or a QCE. See Prop.§1.897(l)-1(d)(13)(ii); Prop.§1.897(l)-1(d)(13)(iii). Comments requested that the final regulations clarify the standards that apply for determining whether an identifiable pool of assets is maintained for the sole purpose of funding qualified benefits, and one comment recommended removing the standards altogether. Specifically, comments identified several situations in which qualified segregated accounts are maintained for the sole purpose of funding qualified benefits to qualified recipients, but where the funds could nevertheless be disbursed for other purposes or to non-qualified recipients. For example, one comment noted that an eligible fund could rebate an overfunded amount by a foreign defined benefit pension fund to an employer. Another comment noted that assets might not be disbursed to qualified recipients or used to pay reasonable plan expenses if a potential change in foreign law impacts how fund assets can be used. One comment highlighted that assets might revert to sponsoring employers if employees cease participating in the plan before their benefits have vested. Another comment cited the possibility that upon a dissolution of the eligible fund, assets could revert to the employer after satisfying its obligations to qualified recipients and creditors. In each such situation, the comments recommended that the final regulations clarify that a pool of assets would not fail to qualify as a qualified segregated account. One comment further recommended that the final regulations eliminate the requirement that all income and assets maintained in a qualified segregated account of an eligible fund be used to fund the provision of qualified benefits to qualified recipients because such a provision is unnecessary to ensure that income and assets of an eligible fund do not inure to inappropriate recipients. The Treasury Department and the IRS agree that in certain situations the reversion of funds to a governmental unit or an employer, after satisfaction of liabilities to creditors and qualified recipients, should not disqualify the account from being treated as maintained for the sole purpose of funding qualified benefits to be provided to qualified recipients. Accordingly, the final regulations clarify that a qualified segregated account that is held by an eligible fund is treated as maintained for the sole purpose of funding qualified benefits to be provided to qualified recipients notwithstanding that funds may revert (such as upon dissolution or the benefits failing to vest) to the governmental unit or employer in accordance with applicable foreign law so long as contributions to the plan are not more than what is reasonably necessary to fund the qualified benefits to be provided to qualified recipients.§1.897(l)-1(e)(13)(i). This requirement ensures that a governmental unit or employer does not qualify for benefits under section 897(l) to the extent it inappropriately overfunds the plan. One comment further recommended that the final regulations treat an eligible fund's interest in a corporation as a qualified segregated account. This recommendation was made to resolve the issue, described in Part I.A.1 of this Summary of Comments and Explanation of Revisions, that arises when multiple foreign government entities, some of which are QFPFs and some of which are not, jointly invest in USRPIs through a foreign partnership that is treated as a per se corporation for U.S. federal tax purposes (pursuant to§301.7701-2(b)(6)), but cannot qualify as a QCE because not all of the investors are QFPFs. The final regulations do not adopt this recommendation for several reasons. First, the suggestion contemplates a situation that is contrary to the requirement in section 897(l)(1) that requires an entity to be wholly owned by a QFPF in order to qualify for the exception under section 897(l). Thus, the recommendation potentially allows the exemption from taxation under section 897(a) to inure to non-QFPFs. Second, the issue described in the comment ultimately arises because of the rule under§301.7701-2(b)(6) rather than the final regulations, and therefore a modification to the final regulations is not the appropriate resolution. Third, the recommendation does not ensure that the assets or income of the corporation are used only for the purpose of providing benefits to qualified recipients, a key purpose of the qualified segregated account rules. II. Comments and Revisions Relating to Requirements Applicable to a QFPF A. Established to provide retirement and pension benefits The proposed regulations allowed pension funds established by one or more employers and government-sponsored public pension funds to be considered QFPFs. Specifically, the proposed regulations provided that an eligible fund must be established by either (i) the foreign country in which it is created or organized to provide retirement or pension benefits to participants or beneficiaries that are current or former employees or persons designated by such employees as a result of services rendered by such employees to their employers ("government-established fund"), or (ii) one or more employers to provide retirement or pension benefits to participants or beneficiaries that are current or former employees or persons designated by such employees in consideration for services rendered by such employees to such employers ("employer fund"). Prop.§1.897(l)-1(c)(2)(ii)(A). The language in proposed§1.897(l)-1(c)(2)(ii)(A) generally reflected the statutory language in section 897(l)(2)(B). 1. Pension Funds Eligible for Section 897(l)(2)(B) a. "Established by" requirement One comment requested that the final regulations clarify the requirement that an eligible fund be "established by" a foreign government in the case of a government-established fund. The comment expressed concern that the "established by" requirement in the proposed regulations could exclude the national pension systems of certain countries under which accounts in the names of individual participants are maintained by private entities. The comment explained that some foreign countries have pension systems in which all employees (or employees working in a certain sector of the economy) are required by law to establish a pension account held and managed by a private pension administrator. Although the arrangement is created by government mandate and subject to government regulation, the private pension administrators form the investment vehicles, select the investment advisors, and receive, invest, and disburse the funds. The extent of additional government involvement varies, but could include the government being the conduit through which contributions by employers and employees are funneled into the plans or benefits are disbursed. The comment asserted that such an arrangement should be treated as "established by" the foreign government for purposes of qualifying as a government-established fund and that each private pension administrator, the investment vehicles that it establishes, and any government office that is within the flow of funds should be treated as part of an "arrangement" that maintains qualified segregated accounts. According to the comment, if participation in the pension system is mandatory, a foreign government should meet the "established by" requirement for a government-established fund even if the government does not actually receive contributions and disburse benefits or hold or invest the funds. The comment recommended that the final regulations clarify that an arrangement created pursuant to a foreign government mandate, but in which private investment managers hold and invest contributions, should be treated as "established by" the foreign government. The Treasury Department and the IRS recognize that eligible funds in foreign countries may be established and administered in numerous ways. The Treasury Department and the IRS also continue to believe that the purpose of section 897(l) is best served by permitting a broad range of structures to be treated as a QFPF. Accordingly, the final regulations clarify that an eligible fund may be established by, or at the direction of, a foreign jurisdiction for purposes of qualifying as a government-established fund.§1.897(l)-1(c)(2)(ii)(A)( 1 )( i ). If an eligible fund is established at the direction of a foreign jurisdiction to provide benefits to the establishing entity's employees in consideration for services rendered to the establishing entity, the final regulations clarify that the fund will be considered an employer fund only.§1.897(l)-1(c)(2)(ii)(A)( 2 ). Finally, the final regulations clarify that an eligible fund is treated as being established by a foreign jurisdiction or an employer notwithstanding that one or more persons that are not the foreign jurisdiction or employer administers the eligible fund.§1.897(l)-1(c)(2)(ii)(A)( 3 ). Thus, an arrangement created pursuant to a foreign government mandate in which private investment managers hold and invest contributions is treated as "established by" the foreign government. b. Employer fund established by foreign government One comment indicated that, under the proposed regulations, it was not clear that a QFPF could include pension arrangements established by governmental units in their function as employers, while also noting that such funds could potentially qualify as both a government-established fund and an employer fund. The comment recommended clarifying that an otherwise qualifying pension fund can be established by government employers. The final regulations clarify that an eligible fund can be established by a governmental unit acting in its capacity as an employer, and specify that such a fund constitutes an employer fund.§1.897(l)-1(c)(2)(ii)(A). 2. Purpose of Eligible Fund Proposed§1.897(l)-1(c)(2)(ii)(B) required that all of the benefits that an eligible fund provides are qualified benefits to qualified recipients (the "100 percent threshold"), and that at least 85 percent of the present value of the qualified benefits that the eligible fund reasonably expects to provide in the future are retirement or pension benefits (the "85 percent threshold"). For this purpose, qualified benefits were defined as retirement, pension, or ancillary benefits. Prop.§1.897(l)-1(d)(8). As discussed in the preamble to the proposed regulations, the Treasury Department and the IRS adopted the 85 percent threshold because it was more administrable and provided more certainty to taxpayers than a subjective standard. The preamble to the proposed regulations indicated that the calculation of the 85 percent threshold would be made on an annual basis, but the proposed regulations did not explicitly identify a period for making this determination. a. Comments received Several comments stated that a strict numerical threshold created a cliff effect and caused uncertainty as to whether an eligible fund would qualify as a QFPF on a consistent basis over several years. Particular concern was expressed by one comment that an annual test may cause disqualification as a QFPF for reasons not entirely within the eligible fund's control, such as when the population of qualified recipients changes. Other comments stated that the present value calculation in the proposed regulations was vague, and one comment stated that the proposed regulations did not clearly identify the frequency with which the reasonable expectation of present value should be calculated. Based on these observations, several comments suggested that the objective 85 percent threshold should be replaced with a subjective test assessing the fund's purpose. These comments suggested that instead of the 85 percent threshold, a fund's purpose should be determined, considering all the facts and circumstances, by assessing whether the fund was established to provide retirement and pension benefits. Comments also suggested that the 85 percent threshold could be used as a safe harbor; a fund that does not meet that requirement would then have to show that it was established to provide retirement and pension benefits given all the facts and circumstances. One comment suggested another safe harbor whereby any fund that did not meet the 85 percent threshold could still qualify as a QFPF on a proportionate basis by comparing the present value of the retirement and pension benefits the fund reasonably expects to pay to the present value of all benefits it reasonably expects to pay. Several comments stated that if the 85 percent threshold were retained, the final regulations should provide guidance on the assumptions that may be made in making the present value calculation, including the frequency of the calculation. One comment suggested that forecasts of anticipated future benefits that are already prepared by the eligible fund should be considered reasonable if they are based on data that the fund prepares for general business purposes in accordance with internal procedures. Another comment suggested that reasonable actuarial standards applied in good faith could be a basis for this calculation. In addition, several comments requested that the final regulations provide relief if a fund does not qualify as a QFPF in a particular year. These comments suggested that a look-back rule allow eligible funds to calculate compliance with the 85 percent threshold over a multi-year period, such as three years, rather than on an annual basis. One comment suggested other alternatives, such as providing a grace period during which a fund could regain compliance as a QFPF without losing its exempt status or the granting of proportionate eligibility as a QFPF. b. 85 percent threshold The Treasury Department and the IRS continue to believe that the 85 percent threshold is more administrable and provides more certainty than a subjective standard for determining whether an eligible fund is established to provide retirement and pension benefits. The Treasury Department and the IRS also continue to believe that this threshold allows an appropriate margin for nonconforming benefits. Accordingly, the final regulations retain the 100 percent threshold and 85 percent threshold, and do not adopt a subjective standard.§1.897(l)-1(c)(2)(ii)(B). However, several other comments suggesting further clarity or relief with respect to the 85 percent threshold are incorporated in the final regulations, as described in paragraphs II.A.2.c. and II.A.2.d. of this Summary of Comments and Explanation of Revisions. c. Clarifications regarding present valuation The Treasury Department and the IRS believe that further guidance with respect to determining the present value of benefits that an eligible fund reasonably expects to provide is appropriate. To clarify what this calculation is intended to value, the final regulations state that the eligible fund must measure the present value of benefits to be provided during the entire period during which the fund is expected to be in existence.§1.897(l)-1(c)(2)(ii)(C)( 1 ). Comments articulated different, though potentially overlapping, benchmarks for determining what valuation methods would be considered reasonable--for example, making the determination based on data prepared for general business purposes in accordance with internal procedures or based on actuarial standards applied in good faith. As a result, the Treasury Department and the IRS have decided to use a broad standard that would accommodate all such suggestions by providing that an eligible fund may utilize any reasonable method for determining present value. Id. Although the final regulations are intended to provide flexibility as to the method used for determining present value, the Commissioner may determine that the present valuation requirement is not satisfied if the relevant facts and circumstances indicate that the method used was unreasonable (for example, it may be relevant that the method used results in a percentage calculation of retirement and pension benefits that differs materially from the actual percentage of the retirement and pension benefits provided before the most recent present valuation date). See also§1.897(l)-1(c)(3)(iii) for the requirement that an eligible fund maintain records to show it meets the requirements of§1.897(l)-1(c)(2), which is discussed in Part III.B. of this Summary of Comments and Explanation of Revisions. The Treasury Department and the IRS believe that further guidance is also appropriate with respect to the frequency with which the valuation needs to be made. The final regulations state that such a determination must be made on at least an annual basis.§1.897(l)-1(c)(2)(ii)(C)( 1 ). Thus, for example, if an eligible fund changes its taxable year and has a short taxable year, the eligible fund may make its present value determination for the short taxable year provided that it makes another present value determination within one year. Consistent with the above, the final regulations clarify that an eligible fund must use its most recent present value determination (or its most recent 48-month alternative calculation, described in Part II. A.2.d. of this Summary of Comments and Explanation of Revisions) with respect to dispositions of USRPIs or distributions described in section 897(h) that occur during the twelve months that succeed such present value determination (or 48-month alternative calculation), or until a new present value determination is made, whichever occurs first.§1.897(l)-1(c)(2)(ii)(C)( 3 ). d. 48-month average alternative Finally, the Treasury Department and the IRS agree that because unanticipated events may cause a fund to fail the 85 percent threshold in any one year, the fund should still qualify as a QFPF if it shows that is has consistently qualified as such over an extended period. The final regulations therefore adopt a 48-month alternative calculation test as another means to satisfy the 85 percent threshold.§1.897(l)-1(c)(2)(ii)(C)( 2 ). The 48-month alternative calculation test is satisfied if the average of the present values of the retirement and pension benefits the eligible fund reasonably expected to provide over its life, as determined by the valuations performed over the 48 months preceding (and including) the most recent present valuation, satisfies the 85 percent threshold. 2 The determination of such average is based on the values (not percentages) of the qualified benefits the eligible fund reasonably expected to provide. In addition, the 48-month alternative calculation must be determined using a weighted average whereby values are adjusted, if necessary, when the length of valuation periods differs. 3 If an eligible fund has been in existence for less than 48 months, the 48-month alternative calculation is applied to the period the eligible fund has been in existence. The 48-month alternative calculation may be satisfied based on any reasonable determination of the present valuation for any period that starts before the date that the valuation requirements first apply to an organization or arrangement and ends on or before December 29, 2022. ******** 2 The Commissioner may determine that the 48-month alternative calculation is not satisfied if, as discussed in Part II.A.2.c of this Summary of Comments and Explanation of Revisions, the relevant facts and circumstances indicate that the method used to determine present value was unreasonable. 3 The length of the valuation periods may differ if the eligible fund performs valuations more than once a year. ******** While the comments and related changes to the final regulations described above apply to the 85 percent threshold, similar rules have also been added for consistency with respect to the new category of non-ancillary benefits added to the final regulations and further described in Part II.A.3.b of this Summary of Comments and Explanation of Revisions. 3. Qualified Benefits a. Retirement and pension benefits The proposed regulations did not provide a definition of retirement and pension benefits. Rather, in the preamble to the proposed regulations, the Treasury Department and the IRS requested comments on whether the regulations should define retirement and pension benefits (for example, with reference to whether there are penalties for early withdrawals). Although one comment suggested that the term retirement and pension benefits was clear and did not require a definition, most comments requested that the final regulations provide a definition of retirement and pension benefits. Comments recommended several sources that the final regulations might refer to in defining retirement and pension benefits, including the Employee Retirement Income Security Act of 1974 ("ERISA"), U.S. federal income tax law principles (for example, Chapter 1, Subchapter D of the Code and corresponding Treasury Regulations), and income tax treaties. One comment suggested that the final regulations provide separate definitions of retirement and pension benefits based in part on these sources of U.S. tax law. This comment generally proposed defining retirement benefits as those benefits that are paid after reaching a predetermined retirement age that are provided in return for services rendered or contributions made. The comment generally proposed defining pension benefits as those benefits paid after the participant retires due to a proven disability before having reached a predetermined retirement age or paid to surviving beneficiaries if the participant dies before reaching the predetermined retirement age and that are provided in return for services rendered or contributions made. In response to these comments and to provide greater clarity, the final regulations provide a definition of retirement and pension benefits. Furthermore, the final regulations adopt a broad definition of retirement and pension benefits to ensure that a wide variety of pension funds and foreign laws are accommodated. Thus, the final regulations provide that retirement and pension benefits mean benefits payable to qualified recipients after reaching retirement age under the terms of the eligible fund, or after an event in which the eligible fund recognizes that a qualified recipient is permanently unable to work, and including any such distribution made to a surviving beneficiary of the qualified recipient.§1.897(l)-1(e)(14). The inclusion of payments of accrued benefits after a specified event that results in a permanent disability (such that the qualified recipient is unable to work) or survivor benefits in the definition of retirement and pension benefits is intended to resolve concerns expressed in comments regarding the potential overlap of such benefits with the benefits listed in the definition of ancillary benefits in proposed§1.897(l)-1(d)(1) (for example, the proposed definition of ancillary benefits included death and disability benefits). To provide additional clarity regarding the factors that would indicate whether a benefit is a retirement and pension benefit, as well as the distinction between retirement and pension benefits and ancillary benefits, the final regulations also provide that retirement and pension benefits are generally based on contributions and investment performance, as well as factors such as years of service with an employer and compensation received by the qualified recipient. Id. The final regulations do not require retirement and pension benefits to be paid in a particular manner (that is, an annuity versus a lump-sum). b. Ancillary and non-ancillary benefits The proposed regulations defined ancillary benefits to mean benefits payable upon the diagnosis of a terminal illness, death benefits, disability benefits, medical benefits, unemployment benefits, or similar benefits. Prop.§1.897(l)-1(d)(1). As discussed in Part II.A.2 of this Summary of Comments and Explanation of Revisions, numerous comments requested that the final regulations provide clarifications and incorporate flexibility into the definition of ancillary benefits in light of the cliff effect caused by the use of the 100 percent and 85 percent thresholds to determine whether an eligible fund qualifies as a QFPF. Comments highlighted that the funds may be allowed, or required, to provide certain benefits to its participants or beneficiaries that are not enumerated in the definition of ancillary benefits, such as limited withdrawals to fund a first home. Comments expressed concern that the provision of such a benefit would disqualify the plan from the exemption under section 897(l) because such a benefit is not listed in the definition of ancillary benefits, it is not certain whether such benefit is a "similar benefit," and the numerical thresholds do not allow for the provision of any benefits other than retirement and pension or ancillary benefits. The comments argued that the provision of such benefits should not disqualify the plan from the exemption under section 897(l) because, generally, the provision of such benefits is not the main purpose of the plan and represents only a small portion of the benefits paid out by the plan. Comments suggested clarifying the scope of the term "similar benefits" in the definition of ancillary benefits and expanding the definition of ancillary benefits to include any benefits that are allowed or required to be paid under the laws of the foreign jurisdiction in which the fund is created or organized. Comments also argued that a broad category of ancillary or other benefits tied to the benefits allowed under foreign law is needed to accommodate potential changes to the type of benefits allowed under foreign pension regimes. One comment recommended that such a rule also apply where pension plans and non-qualifying plans providing for other types of benefits are required by foreign law to be pooled into one fund or arrangement, which might otherwise preclude an eligible entity from being a QFPF even though it is predominantly a pension fund. Several comments recommended that the final regulations allow for a fund to provide a de minimis amount of benefits that are neither retirement and pension benefits nor any of the benefits listed under the definition of ancillary benefits in the proposed regulations. One comment recommended permitting a de minimis percentage of the total benefits provided by a fund (for example, up to five percent) to be any benefits that are not retirement and pension benefits or specifically listed in the definition of ancillary benefits, provided the benefits are required or allowed to be paid under the laws of the foreign jurisdiction where the fund is created or organized. Another comment, citing the broad range of foreign pension arrangements and the lack of clear guidance in certain jurisdictions regarding the potential benefits that can be provided by pension arrangements, suggested a de minimis amount (for example, three percent) of total benefits be allowed for non-ordinary benefits that fall outside the scope of the definition of ancillary benefits. Several comments also noted that certain of the benefits enumerated in the definition of ancillary benefits in the proposed regulations may be more closely related to the payment of retirement and pension benefits. For example, one comment noted that a participant or beneficiary may be eligible to make withdrawals of their retirement and pension benefits before reaching retirement age upon permanent disability or diagnosis of a terminal illness. These and other types of similar benefits, such as survivor benefits (that is, payments of the beneficiary or participant's retirement and pension benefits to a surviving designee upon the death of the beneficiary or participant), are paid in recognition of past service or because the plan participant is unable to continue working or care for their dependents. In such cases, the benefit is effectively being paid as a retirement and pension benefit, but such benefit could improperly be considered an ancillary benefit under the definition in proposed§1.897(l)-1(d)(1). Another comment similarly noted that ancillary benefits should not refer to annuities payable to surviving beneficiaries or on early retirement because of a disability and suggested that the definition of ancillary benefits be modified to refer only to certain one-time payments made in connection with disability, terminal illness, or death. One comment noted that many benefits that otherwise might be ancillary benefits, such as medical and disability benefits, are often available principally to retirees. Thus, comments recommended that the definition of ancillary benefits be clarified such that benefits that are more appropriately characterized as retirement and pension benefits are not inappropriately treated as ancillary benefits. In response to the comments, the final regulations provide additional clarity with respect to the types of benefits permitted to be provided by a QFPF. First, as discussed in Part II.A.3.a of this Summary of Comments and Explanation of Revisions, the final regulations provide a definition of retirement and pension benefits, which is intended to clarify that certain benefits that may have potentially been categorized as ancillary benefits under the proposed regulations are retirement and pension benefits. This definition should assist in distinguishing retirement and pension benefits from ancillary benefits and, because more benefits should be characterized as retirement and pension benefits, should lessen the concern that the provision of ancillary benefits will jeopardize qualification as a QFPF. Second, the final regulations modify the definition of ancillary benefits by providing a more detailed list of specific types of benefits that meet the ancillary benefits definition.§1.897(l)-1(e)(1). The revised definition clarifies that, in addition to benefits payable upon the diagnosis of a terminal illness, medical benefits, or unemployment benefits, ancillary benefits also include incidental death benefits (for example, funeral expenses), short-term disability benefits, life insurance benefits, and shutdown or layoff benefits. To distinguish between unemployment, shutdown, or layoff benefits that might also be considered retirement and pension benefits, the final regulations state that those types of benefits will be considered ancillary benefits only if they do not continue past retirement age and do not affect the payment of accrued retirement and pension benefits.§1.897(l)-1(e)(1)(i)(B). In addition, the final regulations clarify what benefits are considered similar to the specifically identified ancillary benefits by indicating that such similar benefits should also be either health-related or unemployment benefits.§1.897(l)-1(e)(1)(i)(C). Lastly, for the avoidance of doubt, the final regulations resolve any potential overlap between the definitions of retirement and pension benefits and ancillary benefits by providing that if any benefits fall within both definitions, they are only considered to be retirement and pension benefits.§1.897(l)-1(e)(1)(ii). The Treasury Department and the IRS intend for this rule to have limited application given the definitions of retirement and pension benefits and ancillary benefits provided in the final regulations. Third, the Treasury Department and the IRS have determined that it is appropriate to permit a limited amount of benefits that are outside the scope of retirement and pension benefits and ancillary benefits. The final regulations therefore allow an eligible fund to provide a limited amount of non-ancillary benefits, which the final regulations define as any benefits provided by the eligible fund as permitted or required under the laws of the foreign jurisdiction in which the fund is established or operates that do not otherwise fall within the definition of retirement and pension benefits or ancillary benefits.§1.897(l)-1(e)(6). The final regulations provide that no more than five percent of the present value of the qualified benefits the eligible fund reasonably expects to provide to qualified recipients during the entire period during which the eligible fund is expected to be in existence can be non-ancillary benefits.§1.897(l)-1(c)(2)(ii)(B)( 3 ). This measurement of non-ancillary benefits is determined under the same rules that apply to the present valuation of retirement and pension benefits for purposes of the 85 percent threshold, which are described in Part II.A.2 of this Summary of Comments and Explanation of Revisions. The final regulations incorporate the allowance for non-ancillary benefits into the 100 percent threshold by revising the definition of "qualified benefits" in the proposed regulations. Specifically, non-ancillary benefits and ancillary benefits, together with the new definition of retirement and pension benefits, comprise the "qualified benefits" that an eligible fund must provide to meet the 100 percent threshold.§1.897(l)-1(e)(8). c. Other distributions and early withdrawals The proposed regulations did not explicitly address how early withdrawals from a QFPF should be treated for purposes of determining the amount of retirement or other benefits paid by the QFPF. Specifically, the proposed regulations did not discuss how to treat withdrawals made from one retirement plan and rolled over into a different retirement plan, early withdrawals that certain plans may permit in accordance with country-specific laws, or loans made by an eligible fund. One comment suggested that rollover distributions should not be considered as benefits paid by a plan and thus should be excluded when determining an eligible fund's eligibility as a QFPF. The comment also recommended that in-service plan withdrawals or loans should not be taken into account in calculating the benefits paid by an eligible fund provided that in-service withdrawals before retirement age are permissible under the plan terms or relevant law. The Treasury Department and the IRS have considered these recommendations and generally agree that the types of withdrawals described above should not be taken into account when calculating the 100 percent threshold, the 85 percent threshold, or the limitation on non-ancillary benefits. As a result, the final regulations add three categories of distributions that are excluded when making these determinations.§1.897(l)-1(c)(2)(ii)(D). The first category is a loan to a qualified recipient pursuant to terms set by the eligible fund. Because there is an expectation of repayment, these types of loans should not be included when making threshold benefit determinations. This category, however, excludes a loan that a qualified recipient is not required to repay, in full or in part, upon default (which would generally constitute the provision of a non-ancillary benefit), unless such a default is subject to tax and penalty in a foreign jurisdiction. The second category is a distribution permitted under the laws of the foreign jurisdiction in which the eligible fund is established or operates and made before the participant or beneficiary reaches the retirement age as determined under relevant foreign laws, but only if the distribution is to a qualified holder or other retirement or pension arrangement subject to similar distribution or tax rules under the laws of the foreign jurisdiction. Such rollover distributions are simply shifting funds between one eligible fund and another similar fund (even if such fund does not qualify as a QFPF) and thus should also be excluded when making the 100 percent and 85 percent threshold determinations. The third category is a withdrawal of funds before the participant or beneficiary reaches retirement age to satisfy a financial need under principles similar to the U.S. hardship distribution rules permitted under the laws of the foreign jurisdiction in which the eligible fund is established or operates, provided the distribution (or at least the portion of the distribution exceeding basis) is subject to tax and penalty in such foreign jurisdiction. Because the qualified recipient bears some or all of the financial burden with regard to such hardship withdrawals, they are excluded when making threshold benefit determinations. 4. Qualified Recipient Proposed§1.897(l)-1(c)(2)(ii)(B)( 1 ) required that all the benefits that an eligible fund provides be qualified benefits to qualified recipients. With respect to a government-established fund, proposed§1.897(l)-1(d)(12)(i)(A) defined a qualified recipient as any person eligible to be treated as a participant or beneficiary of such eligible fund and any person designated by such person to receive qualified benefits. Thus, the determination of whether a person was a qualified recipient of a government-established fund was made without regard to an individual's status as a current or former employee. With respect to an employer fund, proposed§1.897(l)-1(d)(12)(i)(B) defined a qualified recipient as a current or former employee or any person designated by such current or former employee to receive qualified benefits. Several comments stated that the proposed regulations were too restrictive because they did not allow for the possible participation of individuals in an employer fund if they were neither current nor former employees, as allowed in some countries. The comments noted, however, that individuals who have never been employees represent only a minority of members in any fund. One comment suggested that the definition of qualified recipient be expanded accordingly to include any individual allowed to participate in an eligible fund under the laws of the foreign jurisdiction in which the fund is created or organized. Another comment requested that the definition of qualified recipient include a de minimis threshold for members of an eligible fund that are neither current nor former employees. For example, an eligible fund could qualify for the section 897(l) exemption (assuming all other requirements were met) if more than 70 percent of its members were current or former employees measured annually. The comment also recommended that spouses of eligible participants or beneficiaries should be explicitly identified as qualified recipients as defined in proposed§1.897(l)-1(d)(12). Another comment stated that, as to government-established funds, the term qualified recipient could potentially be read as encompassing a broad group of participants in other types of government programs beyond just pension funds. The comment requested that the final regulations make explicit that a recipient (or person designating the recipient) must both have been employed and be receiving benefits by reason of his or her employment. Finally, one comment noted that the proposed regulations appropriately treated a self-employed individual as both an employer and an employee. Prop.§1.897(l)-1(c)(2)(ii)(C). The comment requested that proposed§1.897(l)-1(e), example 1, be altered to clarify that the retirement benefits provided under the facts of the example were provided as a result of citizens' services as employed or self-employed individuals. The Treasury Department and the IRS agree that the proposed regulations may unnecessarily restrict arrangements, permitted in certain countries, that allow for the participation of individuals who were never employees in an employer fund. Further, the Treasury Department and the IRS understand that such individuals represent only a minority of members in any fund. The Treasury Department and the IRS believe that unlimited or significant participation by individuals who were never employees or their designees would be inappropriate. The final regulations therefore allow individuals who were never employees to constitute up to five percent of participants in plans established by employers (and therefore to be treated as qualified recipients).§1.897(l)-1(e)(12)(i)(C). The final regulations also include spouses of current or former employees in the definition of qualified recipients.§1.897(l)-1(e)(12)(i)(B). The Treasury Department and the IRS do not believe that further changes are necessary to (1) make explicit that a qualified recipient (or person designating the recipient) with respect to a government-established fund must both have been employed and be receiving benefits by reason of his or her employment, or (2) to modify proposed§1.897(l)-1(e), example 1, to state that the retirement and pension benefits provided by the government-established fund were provided as a result of citizens' services as employed or self-employed individuals. As provided in the proposed regulations, a government-established fund must be established to provide retirement or pension benefits to participants or beneficiaries that are current or former employees or persons designated by such employees as a result of services rendered by such employees to their employers, but may include participants on a basis broader than an employee relationship. The comments seeking to narrow the scope of qualified recipients for government-established funds are inconsistent with the request to broaden the definition of a qualified recipient with respect to an employer fund to include (within limits) individuals who were never employees. At the same time, the Treasury Department and the IRS believe that an explicit connection between the work of an employee and the qualified benefits provided by an eligible fund is reflected in the final regulations through the definition of a government-established fund, as well as the requirement that all eligible funds must reasonably expect to provide 85 percent retirement and pension benefits, which are defined in the final regulations at§1.897(l)-1(e)(14). These requirements provide an appropriate safeguard to ensure that government programs other than retirement and pension programs do not form the basis for exemption from tax under section 897(l). Finally, the Treasury Department and the IRS believe that the rule reflected in§1.897(l)-1(c)(2)(ii)(E)( 1 ) (previously at proposed§1.897(l)-1(c)(2)(ii)(C)( 1 )), which explicitly states that a self-employed individual is considered both an employer and employee, makes adding a reference to self-employed individuals in proposed§1.897(l)-1(e), example 1, unnecessary. B. Regulation and information reporting The proposed regulations provided that an eligible fund satisfies the information reporting requirement in section 897(l)(2)(D) only if the eligible fund annually provides to the relevant tax authorities in the foreign country in which the fund is established or operates the amount of qualified benefits provided to each qualified recipient by the eligible fund (if any), or such information is otherwise available to those authorities. Prop.§1.897(l)-1(c)(iv)(B). An eligible fund is not treated as failing to satisfy such requirement if the eligible fund is not required to provide information to the relevant tax authorities in a year in which no qualified benefits are provided to qualified recipients. Id. An eligible fund is also treated as satisfying the information reporting requirement in section 897(l)(2)(D) only if the eligible fund is required to provide the information required by proposed§1.897(l)-1(c)(iv)(B), or such information is otherwise available, to one or more governmental units. Prop.§1.897(l)-1(c)(iv)(C). One comment highlighted that the rules in the proposed regulations are inadvertently inconsistent when an eligible fund is required by foreign law to provide information to a governmental unit (satisfying proposed§1.897(l)-1(c)(iv)(C)), but does not actually provide such information (not fulfilling proposed§1.897(l)-1(c)(iv)(B)), and requested that the final regulations clarify how these provisions are intended to work. Proposed§1.897(l)-1(c)(iv)(B) and proposed§1.897(l)-1(c)(iv)(C) were not intended to function as two separate conditions that were required to be met. Rather, the provisions were intended to provide flexibility to eligible funds that provided the relevant information to tax authorities or other governmental units. To clarify this intent, the final regulations combine the two separate provisions into a single provision (§1.897(l)-1(c)(iv)(A)). Thus, the information reporting requirement in section 897(l)(2)(D) is satisfied if a fund annually provides information about the amount of qualified benefits provided to qualified recipients to the relevant tax authorities or other relevant governmental units, or such information is otherwise available to the relevant tax authorities or other relevant governmental units.§1.897(l)-1(c)(iv)(A). A fund will not fail to satisfy such requirement if it is not required to provide information to the relevant tax authorities or other relevant governmental units in a year in which no qualified benefits are provided to qualified recipients. Id. C. Subnational tax regime For purposes of the requirement that a QFPF be subject to preferential tax treatment, the proposed regulations provided that, for purposes of section 897(l)(2)(E), references to a foreign country do not include references to a state, province, or political subdivision of a foreign country. The preamble to the proposed regulations explained that subnational taxes generally constitute a minor component of an entity's overall tax burden in a foreign jurisdiction and therefore should not satisfy the requirement of section 897(l)(2)(E) when such preference had only a minimal impact on reducing the fund's overall tax burden. Upon further consideration, the Treasury Department and the IRS have determined that, to the extent the subnational tax law is covered under an income tax treaty with the United States, it should constitute a sufficient component of the foreign jurisdiction's taxation regime to be able to satisfy the requirement of section 897(l)(2)(E). Accordingly, the final regulations maintain the approach that subnational taxes generally do not satisfy the requirement of section 897(l)(2)(E), but provide that those taxes can satisfy the requirement of section 897(l)(2)(E) if they are covered taxes under an income tax treaty between that foreign jurisdiction and the United States. See§1.897(l)-1(c)(2)(v)(E). III. Other Comments and Revisions A. Withholding rules 1. Withholding on foreign partnerships Comments requested that the final regulations allow QFPFs that hold interests in USRPIs through foreign partnerships, which are not qualified holders under proposed§1.897(l)-1(d)(11) because they cannot be QCEs, to avoid withholding by providing a certification of non-foreign status (including on a Form W-8EXP). The comments highlighted the difference in withholding when a QFPF invests through a foreign partnership, which would result in withholding (even if the foreign partnership was wholly owned by QFPFs), as opposed to through a foreign corporation that constitutes a QCE or a domestic partnership, neither of which would result in withholding under section 1445. One comment recommended that, for purposes of withholding under section 1445, the final regulations should implement rules similar to the regulations that implement the withholding regime under section 1446(f), which includes a form of look-through rule. Another comment recommended that the final regulations provide that a foreign partnership that is wholly owned by QFPFs either be treated as a QCE, and therefore a qualified holder, or otherwise be excluded from the definition of a foreign person under section 1445 such that a foreign partnership could certify its non-foreign status to a transferee. The Treasury Department and the IRS agree that a foreign partnership that is held entirely by qualified holders should not be subject to withholding under section 1445 because the ultimate owners should qualify in full for the exemption under section 897(l). Accordingly, the final regulations provide that a qualified holder (under§1.897(l)-1(d)) and a foreign partnership all of the interests of which are held by qualified holders, including through one or more partnerships, may certify its status as a withholding qualified holder that is not treated as a foreign person for purposes of withholding under section 1445 (and section 1446, as relevant).§1.1445-1(g)(11). To the extent any non-qualified holders hold interests in a foreign partnership, such foreign partnership does not qualify as a withholding qualified holder. However, qualified holders who hold interests in USRPIs through a foreign partnership that is not a withholding qualified holder would still be eligible for the section 897(l) exemption on their distributive share of FIRPTA gains. Under the existing regulations in§1.1445-3, a transferor may, in appropriate cases, reduce withholding by obtaining a withholding certificate from the IRS. 2. Documentation requirements The proposed regulations permitted a qualified holder to certify that it is exempt from withholding under section 1445 by providing a certification of non-foreign status. The proposed regulations also stated that the IRS intended to revise Form W-8EXP, "Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding or Reporting," to permit qualified holders to be exempt from withholding under section 1445 by establishing their status under section 897(l). Prop.§§1.1445-2(b)(2), 1.1445-2(b)(v), 1.1445-5(b)(3)(ii), and 1.1445-8(e). Under the final regulations, a withholding qualified holder may submit a certification of non-foreign status to establish withholding qualified holder status for purposes of section 1445(a) pursuant to§1.1445-2(b)(2)(i), with certain modifications. Specifically, the requirements under§1.1445-2(b)(2)(i) are modified to require the transferor to state that it is not treated as a foreign person because it is a withholding qualified holder, and to permit the transferor to provide its foreign taxpayer identification number if it does not have a U.S. taxpayer identification number. The final regulations also clarify that a Form W-8EXP is a type of certification of non-foreign status within the meaning of§1.1445-2(b)(2)(i). Accordingly, the Form W-8EXP is subject to the general rules pertaining to certifications of non-foreign status, such as the period for retaining the certification in§1.1445-2(b)(3) and the rules pertaining to liability of agents in§1.1445-4. Because the final regulations require a transferor to represent its status as a withholding qualified holder on the certification of non-foreign status, the final regulations do not permit a transferor to submit a Form W-9, "Request for Taxpayer Identification Number and Certification," to establish its status as a withholding qualified holder. See§1.1445-2(b)(2)(vi). Before the release of revised Form W-8EXP, a certification of non-foreign status described in§1.1445-2(b)(2)(i) (but not a Form W-9) should be used by a transferor to establish its status as a withholding qualified holder for purposes of section 1445. Once revised, a withholding qualified holder may certify its non-foreign status with either a certification of non-foreign status described in§1.1445-2(b)(2)(i) (but not a Form W-9) or a Form W-8EXP. The final regulations provide similar rules for certifications of non-foreign status that establish withholding qualified holder status for purposes of section 1445(e) withholding. See§§1.1445-5(b)(3)(ii) and 1.1445-8(e). 3. Coordination with 1441 and 1442 The proposed regulations provided that distributions made by a United States real property holding company ("USRPHC") or qualified investment entity ("QIE") to a qualified holder are not subject to the coordination rules under§1.1441-3(c)(4) and are instead subject only to the requirements of section 1441. Prop.§1.1441-3(c)(4)(iii). Because a qualified holder is treated as a foreign person for purposes of section 1441, but not for purposes of 1445, the proposed rule was intended to subject a distribution to a qualified holder exclusively to the rules in section 1441 to determine if withholding applies. The Treasury Department and the IRS have determined that, for greater clarity, certain changes should be made to proposed§1.1441-3(c)(4) to reach the result intended by the proposed regulations. Rather than provide that the coordination rules under§1.1441-3(c)(4) do not apply to qualified holders, the final regulations amend the coordination rules to provide that withholding qualified holders are not subject to section 1445 on distributions from USRPHCs that are not treated as dividends (for example, a distribution that is treated as gain from the sale or exchange of property under section 301(c)(3)) and on distributions from REITs or other QIEs that are capital gain dividends that are treated as gain attributable to the sale or exchange of USRPIs.§1.1441-3(c)(4)(i)(B)( 2 ),§1.1441-3(c)(4)(i)(C). Dividends from USRPHCs and dividends from REITs or other QIEs that are not capital gain dividends continue to be subject to withholding under section 1441.§1.1441-3(c)(4)(i)(A),§1.1441-3(c)(4)(i)(C). Section 1.1441-3(c)(4)(i) is also clarified to provide that a USRPHC (other than a REIT or other QIE) satisfies its obligations under sections 1441 and 1445 by following either§1.1441-3(c)(4)(i)(A) or§1.1441-3(c)(4)(i)(B), but a USRPHC that is a REIT or other QIE must follow the coordination provision in§1.1441-3(c)(4)(i)(C). The final regulations also clarify that, to the extent a capital gain dividend from a REIT or other QIE is excluded from withholding under section 1445 because it is made with respect to stock that is regularly traded on an established securities market in the United States to an individual or corporation that did not own more than 5 percent of the stock (see the second sentence of section 897(h)(1)), withholding will apply under section 1441. See sections 852(b)(3)(E) and 857(b)(3)(E);§1.1441-3(c)(4)(i)(C). B. Additional requests regarding qualification under section 897(l) and recordkeeping Comments recommended that the Treasury Department and the IRS allow foreign entities that believe they are QFPFs or QCEs to apply for letter rulings on their qualifications under section 897(l). While the comment acknowledged the need for administrable standards, it noted that, in light of the wide range of possible arrangements under foreign law, certain funds that a "reasonable observer" would consider a QFPF could be excluded. Another comment recommended that the Treasury Department and the IRS adopt a "white list" regime (similar to the United Kingdom's Qualifying Recognized Overseas Pension Scheme) whereby pension plan regimes regulated in a list of countries could automatically be treated as QFPFs or be subject to a reduced set of qualifying requirements. The final regulations do not adopt either of these recommendations. The Treasury Department and the IRS do not believe that a private letter ruling program specific to QFPF qualification or a "white list" regime is necessary, as the final regulations provide flexible standards such that a wide variety of funds can constitute eligible funds. Another comment requested that the final regulations provide that, to the extent life insurance companies or other investment companies hold and invest assets of one or more QFPFs, those life insurance companies or investment companies themselves should qualify as QFPFs. To qualify as a QFPF, an eligible fund must satisfy all of the requirements in§1.897(l)-1(c)(2), and the final regulations do not adopt any special rule for life insurance companies or investment companies, including whether such assets are held as part of an arrangement comprising a QFPF. In addition, the final regulations require an eligible fund to maintain records consistent with section 6001 to show that it is eligible for the exemption under section 897(l) and which the Commissioner may request upon examination. The recordkeeping requirement is consistent with general recordkeeping requirements for U.S. taxpayers and is appropriate in light of the flexible standards provided in the final regulations. C. Clarification with respect to the applicability of the section 897(l) regulations These regulations reflect the particular policies and objectives underlying section 897(l) (as opposed to other areas of tax law that relate to pension funds). To clarify this,§1.897(l)-1(a) provides that the definitions and requirements in§1.897(l)-1 apply only for purposes of the regulations themselves, including applicable cross-references from other sections, and that no inference is to be drawn with respect to the definitions and requirements in§1.897(l)-1, including with respect to the meaning of a pension fund, for any other purpose. IV. Applicability Dates The final regulations apply with respect to dispositions of USRPIs and distributions described in section 897(h) occurring on or after December 29, 2022. However, in accordance with the applicability date incorporated in§1.897(l)-1(g)(2), the rule in§1.897(l)-1(b)(1), the qualified holder rule in§1.897(l)-1(d) (previously proposed§1.897(l)-1(d)(11)), as well as the definitions of governmental unit (§1.897(l)-1(e)(5)) and QCE (§1.897(l)-1(e)(9)) apply with respect to dispositions of USRPIs and distributions described in section 897(h) occurring on or after June 6, 2019, the date the proposed regulations were filed with the Federal Register. See section 7805(b)(1)(B). An eligible fund may choose to apply the final regulations with respect to dispositions and distributions occurring on or after December 18, 2015, and before the applicability date of the final regulations, if the eligible fund, and all persons bearing a relationship to the eligible fund described in section 267(b) or 707(b), consistently apply the rules in the final regulations in their entirety for all relevant years. An eligible fund that chooses to apply the final regulations before their applicability date must apply the principles of§1.897(l)-1(d)(4)(i) to any valuation requirements with respect to dates preceding December 18, 2015. Special Analyses I. Regulatory Planning and Review - Economic Analysis These regulations are not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. II. Paperwork Reduction Act In accordance with the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. ("PRA"), information collection requirements contained in these final regulations are in§§1.1441-3, 1.1445-2, 1.1445-5, 1.1445-8, and 1.1446-1. These collections of information retain the collections of information in the proposed regulations, with a refinement to§1.1441-3(c)(4) to clarify that the portions of distributions made by a USRPHC or QIE to a withholding qualified holder (as defined in§1.1445-1(g)(11)) that are attributable to the disposition of USRPIs are not subject to section 1445 and that the portions of distributions made by a USRPHC or QIE to a withholding qualified holder that are not attributable to the disposition of a USRPI are subject to section 1441. No written comments regarding the information collection requirements were received in response to the solicitation of comments in the proposed regulations. A. Information collections contained in§1.1441-3(c)(4)(iii) The final regulations provide that dividends from a USRPHC and dividends from REITs and other QIEs that are not capital gain dividends to a withholding qualified holder are subject only to the requirements of section 1441.§1.1441-3(c)(4)(i),§1.1441-3(c)(4)(i)(B)( 2 ),§1.1441-3(c)(4)(i)(C). The final regulations further provide that withholding qualified holders are not subject to section 1445 on distributions from USRPHCs that are not treated as dividends (for example, a distribution that is treated as gain from the sale or exchange of property under section 301(c)(3)) and on distributions from REITs or QIEs that are capital gain dividends that are treated as gain attributable to the sale or exchange of USRPIs.§1.1441-3(c)(4)(i)(B)( 2 ),§1.1441-3(c)(4)(i)(C). A USRPHC or QIE making a distribution to a qualified holder would be required to report the distribution on Form 1042-S, "Foreign Person's U.S. Source Income Subject to Withholding," and file Form 1042, "Annual Withholding Tax Return for U.S. Source Income of Foreign Persons." For purposes of reporting the portion of the distributions that are exempt from section 1445 withholding, the IRS revised Form 1042-S to include an exemption code designating payments that are exempt under section 897(l). No revisions are being made to Form 1042 in connection with payments that are exempt under section 897(l). For purposes of the PRA, the reporting burden associated with§1.1441-3(c)(4) will be reflected in the PRA submissions for Form 1042 (OMB control numbers 1545-0123 for business filers and 1545-0096 for all other Form 1042 filers) and Form 1042-S (OMB control number 1545-0096). B. Information collections in§§1.1445-2, 1.1445-5, 1.1445-8, and 1.1446-1 Sections 1.1445-2, 1.1445-5, 1.1445-8, and 1.1446-1 would require a qualified holder wishing to claim an exemption under section 897(l) to provide a withholding agent with either a Form W-8EXP or a certificate of non-foreign status containing similar information to the Form W-8EXP. The IRS plans to revise Form W-8EXP for use by qualified holders. For purposes of the PRA, the reporting burden associated with§§1.1445-2, 1.1445-5, 1.1445-8, and 1.1446-1, will be reflected in the PRA submission for Form W-8EXP (OMB control number 1545-1621). The reporting burdens associated with the information collections in the final regulations are included in the aggregate burden estimates for OMB control numbers 1545-0096 (which represents a total estimated burden time for all forms and schedules of 6.46 million hours) and 1545-1621 (which represents a total estimated burden time, including all other related forms and schedules for other filers, of 30.5 million hours). The overall burden estimates for the OMB control numbers are aggregate amounts that relate to the entire package of forms associated with the applicable OMB control number and will in the future include, but not isolate, the estimated burden of the tax forms that will be or have been revised as a result of the information collections in the final regulations. These numbers are therefore unrelated to the future calculations needed to assess the burden imposed by the final regulations. These burdens have been reported for other regulations related to the taxation of cross-border income, and the Treasury Department and the IRS urge readers to recognize that these numbers are duplicates and to guard against overcounting the burden that international tax provisions impose. An agency may not conduct or sponsor and a person is not required to respond to a collection of information unless it displays a valid OMB control number. III. Regulatory Flexibility Act Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that this rulemaking will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act. This certification is based on the fact that the final regulations affect foreign pension funds, including sovereign funds, which are entities that are created or organized outside of the United States, with no place of business in the United States, and which operate primarily outside of the United States. Accordingly, the entities affected by the final regulations are not considered small entities, and a regulatory flexibility analysis under the Regulatory Flexibility Act is not required. IV. Section 7805(f) Pursuant to section 7805(f) of the Code, the proposed regulations (REG-109826-17) preceding these final regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on the impact on small businesses and no comments were received. V. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. The final regulations do not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. VI. Executive Order 13132: Federalism Executive Order 13132 (entitled "Federalism") prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. The final regulations do not have federalism implications, do not impose substantial direct compliance costs on state and local governments, and do not preempt state law within the meaning of the Executive order. Statement of Availability of IRS Documents IRS Revenue Procedures, Revenue Rulings, Notices, and other guidance cited in this document are published in the Internal Revenue Bulletin or Cumulative Bulletin and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at www.irs.gov. Drafting Information The principal authors of these final regulations are Arielle Borsos and Milton Cahn, Office of Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1--INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * * * * * * Section 1.897(l)-1 also issued under 26 U.S.C. 897(l). * * * * * Par. 2. Section 1.897(l)-1 is added to read as follows:§1.897(l)-1 Exception for interests held by foreign pension funds. (a) Scope and overview. This section provides rules regarding the exception from section 897 for qualified holders. The definitions and requirements in this section apply only for purposes of this section (including as applicable by cross-reference from other sections), and no inference is to be drawn with respect to the definitions and requirements in this section, including with respect to the meaning of a pension fund, for any other purpose. Paragraph (b) of this section provides the general rule excepting qualified holders from section 897. Paragraph (c) of this section provides the requirements that an eligible fund must satisfy to be treated as a qualified foreign pension fund. Paragraph (d) of this section provides the requirements that a qualified foreign pension fund or a qualified controlled entity must satisfy to be treated as a qualified holder. Paragraph (e) of this section provides definitions. Paragraph (f) of this section provides examples illustrating the application of the rules of this section. Paragraph (g) of this section provides applicability dates. For rules applicable to a qualified foreign pension fund or qualified controlled entity claiming an exemption from withholding under chapter 3, see generally§§1.1441-3, 1.1445-2, 1.1445-5, 1.1445-8, 1.1446-1, and 1.1446-2. (b) Exception from section 897 --(1) In general. Gain or loss of a qualified holder from the disposition of a United States real property interest, including gain from a distribution described in section 897(h), is not subject to section 897(a). (2) Limitation. Paragraph (b)(1) of this section applies solely with respect to gain or loss that is attributable to one or more qualified segregated accounts maintained by a qualified holder. (c) Qualified foreign pension fund requirements --(1) In general. An eligible fund is a qualified foreign pension fund if it satisfies the requirements of this paragraph (c). Paragraph (c)(2) of this section provides rules regarding the application of the requirements of section 897(l)(2) to an eligible fund. Paragraph (c)(3) of this section provides rules on the application of the requirements in paragraph (c)(2) of this section, including rules regarding the application of those requirements to an eligible fund that is an organization or arrangement and rules regarding recordkeeping. (2) Applicable requirements --(i) Created or organized. An eligible fund must be created, organized, or established under the laws of a foreign jurisdiction. For purposes of this paragraph (c)(2)(i), a governmental unit is treated as created or organized in the foreign jurisdiction with respect to which it is, or is a part of, the foreign government. (ii) Establishment of eligible fund --(A) General requirement --( 1 ) Purpose of and parties establishing eligible fund. An eligible fund must be established -- ( i ) By, or at the direction of, the foreign jurisdiction in which it is created or organized to provide retirement and pension benefits to participants or beneficiaries that are current or former employees or persons designated by such employees as a result of services rendered by such employees to their employers; or ( ii ) By one or more employers (including a governmental unit in its capacity as an employer) to provide retirement and pension benefits to participants or beneficiaries that are current or former employees or persons designated by such employees in consideration for services rendered by such employees to such employers. ( 2 ) Identification of type of eligible fund. An eligible fund that is described in both paragraphs (c)(2)(ii)(A)( 1 )( i ) and ( ii ) of this section shall be treated solely as described in the latter paragraph. ( 3 ) Role of parties other than the foreign jurisdiction or employer. For purposes of paragraph (c)(2)(ii)(A)( 1 ) of this section, the determination of whether an eligible fund is established by, or at the direction of, a foreign jurisdiction or established by an employer is made without regard to whether one or more persons that are not the foreign jurisdiction or employer administer or otherwise provide services with regard to the eligible fund (including holding assets in a qualified segregated account as part of or on behalf of the eligible fund). (B) Established to provide retirement or pension benefits. An eligible fund is established to provide retirement or pension benefits for purposes of the general requirement in paragraph (c)(2)(ii)(A) of this section if-- ( 1 ) All of the benefits that an eligible fund provides are qualified benefits provided to qualified recipients; ( 2 ) At least 85 percent of the present value of the qualified benefits that the eligible fund reasonably expects to provide to qualified recipients in the future are retirement and pension benefits; and ( 3 ) No more than five percent of the present value of the qualified benefits the eligible fund reasonably expects to provide to qualified recipients in the future are non-ancillary benefits. (C) Present valuation.--( 1 ) In general. For purposes of satisfying the requirements in paragraphs (c)(2)(ii)(B)( 2 ) and ( 3 ) of this section, an eligible fund must determine, on at least an annual basis, the present value of the qualified benefits that the eligible fund reasonably expects to provide to qualified recipients during the entire period during which the eligible fund is expected to be in existence. An eligible fund may utilize any reasonable method for performing the present valuation. ( 2 ) 48-month average alternative calculation. An eligible fund that does not satisfy the requirements of paragraph (c)(2)(ii)(B)( 2 ) or ( 3 ) of this section based on the present value determination under paragraph (c)(2)(ii)(C)( 1 ) of this section may satisfy the requirements of paragraph (c)(2)(ii)(B)( 2 ) or ( 3 ) of this section based on the alternative calculation in this paragraph (c)(2)(ii)(C)( 2 ). The alternative calculation in this paragraph is satisfied if the average of the present values of the future qualified benefits that the eligible fund reasonably expected to provide, as determined during the 48-month period preceding (and including) the most recent present valuation determination, satisfies the requirements of paragraph (c)(2)(ii)(B)( 2 ) or ( 3 ) of this section, respectively. The determination of such average must be based on the valuations described in paragraph (c)(2)(ii)(C)( 1 ) of this section that were carried out during the 48-month period preceding (and including) the most recent present value determination, and must use the values (not percentages) of the qualified benefits the eligible fund reasonably expected to provide. The determination described in this paragraph must be calculated using a weighted average whereby values are adjusted if the relevant valuations are applicable for different periods (as described in paragraph (c)(2)(ii)(C)( 3 ) of this section) because an eligible fund performs valulations more frequently than on an annual basis. If an eligible fund has been in existence for less than 48 months, this paragraph (c)(2)(ii)(C)( 2 ) is applied to the period that the eligible fund has been in existence. The alternative calculation in this paragraph (c)(2)(ii)(C)( 2 ) may be satisfied based on any reasonable determination of the present valuation described in paragraph (c)(2)(ii)(C)( 1 ) of this section for any period that starts before the date that the requirements of paragraph (c)(2)(ii)(C) of this section first apply to an organization or arrangement and ends on or before December 29, 2022. ( 3 ) Application of present valuation. An eligible fund must use the present value determination made as of the most recent valuation under paragraph (c)(2)(ii)(C)( 1 ) of this section or the alternative calculation provided in paragraph (c)(2)(ii)(C)( 2 ) of this section (to the extent the eligible fund did not satisfy the requirements of paragraphs (c)(2)(ii)(B)( 2 ) and ( 3 ) of this section in the most recent valuation) for purposes of meeting the requirements in paragraphs (c)(2)(ii)(B)( 2 ) and ( 3 ) of this section with respect to dispositions of United States real property interests or distributions described in section 897(h) occurring in the twelve months succeeding the most recent valuation, or until a new present value determination is made, whichever occurs first. (D) Certain distributions from eligible funds. The following distributions are not taken into account for purposes of determining whether an eligible fund satisfies the requirements of paragraph (c)(2)(ii)(B) of this section-- ( 1 ) A loan to a qualified recipient pursuant to terms set by the eligible fund (other than a loan with respect to which a qualified recipient defaults and is not required to repay in whole or part, unless the default is subject to tax and penalty in such foreign jurisdiction); ( 2 ) A distribution (as permitted by the laws of the foreign jurisdiction in which the eligible fund is established or operates) made before the participant or beneficiary reaches the retirement age (as determined under the relevant foreign laws), provided that the distribution is to a designee that is a qualified holder or to another arrangement subject to similar distribution or tax rules under the laws of the foreign jurisdiction; and ( 3 ) A withdrawal of funds before the participant or beneficiary reaches the retirement age (as determined under the relevant foreign laws) to satisfy a financial need (under principles similar to the U.S. hardship distribution rules, see§1.401(k)-1(d)(3)) as permitted under the laws of the foreign jurisdiction in which the eligible fund is established or operates, provided the distribution (or at least the portion of the distribution exceeding basis) is subject to tax and penalty in such foreign jurisdiction. (E) Certain employers and employees. For purposes of this section, the following rules apply-- ( 1 ) A self-employed individual is treated as both an employer and an employee; ( 2 ) Employees of an individual, trust, corporation, or partnership that is a member of an employer group are treated as employees of each member of the employer group that includes the individual, trust, corporation, or partnership; and ( 3 ) An eligible fund established by a trade union, professional association, or similar group, either alone or in combination with the employer or group of employers, is treated as established by any employer that funds, in whole or in part, the eligible fund. (iii) Single participant or beneficiary --(A) In general. An eligible fund may not have a single qualified recipient that has a right to more than five percent of the assets or income of the eligible fund. (B) Constructive ownership. For purposes of paragraph (c)(2)(iii)(A) of this section, an individual is considered to have a right to the assets or income of an eligible fund to which any person who bears a relationship to the individual described in section 267(b) or 707(b) has a right. (iv) Regulation and information reporting --(A) In general. The eligible fund must be subject to government regulation and annually provide to the relevant tax authorities (or other relevant governmental units) in the foreign jurisdiction in which the eligible fund is established or operates information about the amount of qualified benefits (if any) provided to each qualified recipient by the eligible fund, or such information must otherwise be available to the relevant tax authorities (or other relevant governmental units). An eligible fund is not treated as failing to satisfy the requirement of this paragraph (c)(2)(iv)(A) as a result of the eligible fund not being required to provide information to the relevant tax authorities (or other relevant governmental units) in a year in which no qualified benefits are provided to qualified recipients. (B) Treatment of certain eligible funds established by foreign jurisdictions. An eligible fund that is described in paragraph (c)(2)(ii)(A)( 1 )( i ) of this section is deemed to satisfy the requirements of paragraph (c)(2)(iv)(A) of this section. (v) Tax treatment --(A) In general. The tax laws of the foreign jurisdiction in which the eligible fund is established or operates must provide that, due to the status of the eligible fund as a retirement or pension fund, either-- ( 1 ) Contributions to the eligible fund that would otherwise be subject to tax under such laws are deductible or excluded from the gross income of the eligible fund or taxed at a reduced rate; or ( 2 ) Taxation of any investment income of the eligible fund is deferred or excluded from the gross income of the eligible fund or such income is taxed at a reduced rate. (B) Income subject to preferential tax treatment. An eligible fund is treated as satisfying the requirement of paragraph (c)(2)(v)(A) of this section in a taxable year if, under the tax laws of the foreign jurisdiction in which the eligible fund is established or operates-- ( 1 ) At least 85 percent of the contributions to the eligible fund are subject to the tax treatment described in paragraph (c)(2)(v)(A)( 1 ) of this section, or ( 2 ) At least 85 percent of the investment income of the eligible fund is subject to the tax treatment described in paragraph (c)(2)(v)(A)( 2 ) of this section. (C) Income not subject to tax. An eligible fund is treated as satisfying the requirement of paragraph (c)(2)(v)(A) of this section if the eligible fund is exempt from the income tax of the foreign jurisdiction in which it is established or operates or the foreign jurisdiction in which it is established or operates has no income tax. (D) Other preferential tax regimes. An eligible fund that does not receive the tax treatment described in either paragraph (c)(2)(v)(A)( 1 ) or ( 2 ) of this section is nonetheless treated as satisfying the requirement of paragraph (c)(2)(v)(A) of this section if the eligible fund establishes that each of the conditions described in paragraphs (c)(2)(v)(D)( 1 ) and ( 2 ) of this section is satisfied: ( 1 ) Under the tax laws of the foreign jurisdiction in which the eligible fund is established or operates, the eligible fund is subject to a preferential tax regime due to its status as a retirement or pension fund; and ( 2 ) The preferential tax regime described in paragraph (c)(2)(v)(D)( 1 ) of this section has a substantially similar effect as the tax treatment described in paragraphs (c)(2)(v)(A)( 1 ) or ( 2 ) of this section. (E) Tax law of subnational jurisdictions. Solely for purposes of this paragraph (c)(2)(v), a reference to the tax law of a foreign jurisdiction includes the tax law of a political subdivision or other local authority of a foreign jurisdiction, provided that income taxes imposed under the subnational tax law are treated as covered taxes under an income tax treaty between that foreign jurisdiction and the United States. (3) Operating rules --(i) Rules on the application of the requirements in paragraph (c)(2) of this section --(A) Organizations or arrangements. An organization or arrangement is treated as a single entity for purposes of determining whether the requirements of paragraph (c)(2) of this section are satisfied, except that each person or governmental unit that is part of or party to an organization or arrangement must satisfy the requirement of paragraph (c)(2)(i) of this section. (B) Relevant income, assets, and functions. The determination of whether an eligible fund satisfies the requirements of paragraph (c)(2) of this section is made solely with respect to the assets and income of the eligible fund held in one or more qualified segregated accounts, the qualified benefits funded by the qualified segregated accounts, the information reporting and regulation related to the qualified segregated accounts, and the qualified recipients whose benefits are funded by the qualified segregated accounts. For this purpose, all assets held by an eligible fund in qualified segregated accounts (within the meaning of paragraph (e)(13)(ii) of this section) are treated as a single qualified segregated account. (ii) Aggregate approach to partnerships. For purposes of this section, assets held by a partnership shall be treated as held proportionately by its partners, and activities conducted by a partnership shall be treated as conducted by its partners. (iii) Recordkeeping. An eligible fund that claims the exemption under section 897(l) must have records sufficient to establish that it satisfies the requirements of paragraph (c)(2) of this section. See section 6001 and§1.6001-1, requiring records to be maintained. (d) Qualified holder requirements --(1) In general. With respect to a disposition described in section 897(a) or a distribution described in section 897(h), a qualified foreign pension fund (including a part of a qualified foreign pension fund) or a qualified controlled entity is a qualified holder only if it satisfies the requirement of paragraph (d)(2) or (3) of this section. (2) Qualified holders that did not hold U.S. real property interests. The requirement of this paragraph (d)(2) is satisfied if the qualified foreign pension fund or qualified controlled entity owned no United States real property interests as of the earliest date during an uninterrupted period, ending on the date of the disposition or distribution, in which the qualified foreign pension fund or qualified controlled entity satisfied the requirements of paragraph (c)(2) of this section or paragraph (e)(9) of this section, as applicable. (3) Qualified holders that satisfy the testing period --(i) In general. The requirement of this paragraph (d)(3) is satisfied if the qualified foreign pension fund or qualified controlled entity continuously satisfies the requirements of paragraph (c)(2) of this section or paragraph (e)(9) of this section, as applicable, for the duration of the testing period. (ii) Testing Period. The term testing period means whichever of the following periods is the shortest: (A) The period beginning on December 18, 2015, and ending on the date of the disposition or the distribution; (B) The ten-year period ending on the date of the disposition or the distribution; and, (C) The period beginning on the date the entity (or its predecessor) was created or organized and ending on the date of the disposition or the distribution. (4) Transition Rules --(i) Qualified foreign pension fund or qualified controlled entity requirements. With respect to any period from December 18, 2015, to the date when the requirements of paragraph (c)(2) or (e)(9) of this section first apply to a qualified foreign pension fund or qualified controlled entity under paragraph (g) of this section, as applicable (but in any event no later than December 29, 2022, in the case of paragraph (c)(2) of this section, and no later than June 6, 2019, in the case of paragraph (e)(9) of this section), the qualified foreign pension fund or qualified controlled entity is deemed to satisfy the requirements of paragraphs (c)(2) and (e)(9) of this section, as applicable, for purposes of paragraphs (d)(2) and (3) of this section if the qualified foreign pension fund or qualified controlled entity satisfies the requirements of section 897(l)(2) based on a reasonable interpretation of those requirements (including determining any applicable valuations using a consistent method). (ii) Ownership of qualified controlled entity by service providers. Solely for purposes of paragraphs (d)(2) and (3) of this section, the determination of whether a corporation or trust is a qualified controlled entity will not include stock or interests held directly or indirectly by any person that provides services to such corporation or trust, provided that such stock or interests are, in the aggregate, no more than five percent (by vote or value) of the stock or interests of such corporation or trust. This paragraph (d)(4)(ii) applies to interests held from December 18, 2015 until February 27, 2023. (e) Definitions. The following definitions apply for purposes of this section. (1) Ancillary benefits --(i) I n general. The term ancillary benefits means-- (A) Benefits payable upon the diagnosis of a terminal illness, incidental death benefits (for example, funeral expenses), short-term disability benefits, life insurance benefits, and medical benefits; (B) Unemployment, shutdown, or layoff benefits that do not continue past retirement age and do not affect the payment of accrued retirement and pension benefits; and (C) Other health-related or unemployment benefits that are similar to the benefits described in paragraphs (e)(1)(i) and (ii) of this section. (ii) Overlap with retirement and pension benefits. Ancillary benefits do not include any benefits that could also be defined as retirement and pension benefits within the meaning of paragraph (e)(14) of this section. (2) Eligible fund. The term eligible fund means a trust, corporation, or other organization or arrangement that maintains one or more qualified segregated accounts. (3) Employer group. The term employer group means all individuals, trusts, partnerships, and corporations with a relationship to each other specified in section 267(b) or section 707(b). (4) Foreign jurisdiction. The term foreign jurisdiction means a jurisdiction other than the United States, including a country, a state, province, or political subdivision of a foreign country, and a territory of the United States. (5) Governmental unit. The term governmental unit means any foreign government or part thereof, including any person, body, group of persons, organization, agency, bureau, fund, or instrumentality, however designated, of a foreign government. (6) Non-ancillary benefits. The term non-ancillary benefits means benefits that are neither ancillary benefits (within the meaning of paragraph (e)(1) of this section) nor retirement and pension benefits (within the meaning of paragraph (e)(14) of this section), and are provided by the eligible fund as permitted or required under the laws of the foreign jurisdiction in which the eligible fund is established or operates. (7) Organization or arrangement. The term organization or arrangement means one or more trusts, corporations, governmental units, or employers. (8) Qualified benefits. The term qualified benefits means retirement and pension benefits, ancillary benefits and non-ancillary benefits. However, the portions of qualified benefits consisting of ancillary benefits and non-ancillary benefits provided by a qualified foreign pension fund are limited as provided in paragraph (c)(2)(ii)(B) of this section. (9) Qualified controlled entity. The term qualified controlled entity means a trust or corporation created or organized under the laws of a foreign jurisdiction all of the interests of which are held by one or more qualified foreign pension funds directly or indirectly through one or more qualified controlled entities. (10) Qualified foreign pension fund. The term qualified foreign pension fund means an eligible fund that satisfies the requirements of paragraph (c) of this section. (11) Qualified holder. The term qualified holder means a qualified foreign pension fund or qualified controlled entity that satisfies the requirements of paragraph (d) of this section. (12) Qualified recipient --(i) In general. The term qualified recipient means-- (A) With respect to an eligible fund described in paragraph (c)(2)(ii)(A)( 1 )( i ) of this section, any person eligible to be treated as a participant or beneficiary of such eligible fund and any person designated by such participant or beneficiary to receive qualified benefits, and (B) With respect to an eligible fund described in paragraph (c)(2)(ii)(A)( 1 )( ii ) of this section, a current or former employee, a spouse of a current or former employee, and any person designated by such participants or beneficiaries to receive qualified benefits. (C) To the extent not already described in paragraph (e)(12)(i)(B) of this section, with respect to an eligible fund described in paragraph (c)(2)(ii)(A)( 1 )( ii ) of this section, any person eligible to be treated as a participant or beneficiary of such fund and any person designated by such participant or beneficiary to receive qualified benefits, so long as such recipients do not exceed five percent of the eligible fund's total qualified recipients or have a right to more than five percent of the assets or income of the eligible fund. An eligible fund must make a determination for purposes of this paragraph (e)(12)(i)(C) on at least an annual basis and may utilize any reasonable method in doing so. An eligible fund must use its most recent determination under this paragraph with respect to dispositions of United States real property interests or distributions described in section 897(h) occurring in the twelve months succeeding such determination, or until a new determination is made, whichever occurs first. (ii) Special rule regarding automatic designation. For purposes of paragraph (e)(12)(i) of this section, a person is treated as designating another person to receive qualified benefits if the other person is, by reason of such person's relationship or other status with respect to the first person, entitled to receive benefits pursuant to the terms applicable to the eligible fund or pursuant to the laws of the foreign jurisdiction in which the eligible fund is created or organized, whether or not the first person expressly designated such person as a beneficiary. (13) Qualified segregated account --(i) In general. The term qualified segregated account means an identifiable pool of assets maintained by an eligible fund or a qualified controlled entity for the sole purpose of funding and providing qualified benefits to qualified recipients. (ii) Assets held by eligible funds. For purposes of paragraph (e)(13)(i) of this section, an identifiable pool of assets of an eligible fund is treated as maintained for the sole purpose of funding qualified benefits to qualified recipients, and hence as a qualified segregated account, only if the terms applicable to the eligible fund or the laws of the foreign jurisdiction in which the eligible fund is established or operates require that all the assets in the pool, and all the income earned with respect to such assets, be used exclusively to fund the provision of qualified benefits to qualified recipients or to satisfy necessary reasonable expenses of the eligible fund, and that such assets or income may not inure to the benefit of a person other than a qualified recipient. For purposes of this paragraph (e)(13)(ii), the fact that assets or income may inure to the benefit of a governmental unit by operation of escheat or similar laws, or may revert (such as upon plan termination or dissolution (after all obligations to qualified recipients and creditors have been satisfied) or the qualified recipients' benefits failing to vest) to the governmental unit or employer in accordance with applicable foreign law is ignored, so long as contributions to the plan are not more than reasonably necessary to fund the qualified benefits to be provided to qualified recipients. (iii) Assets held by qualified controlled entities. For purposes of paragraph (e)(13)(i) of this section, the assets of a qualified controlled entity are treated as an identifiable pool of assets maintained for the sole purpose of funding qualified benefits to qualified recipients only if both of the following requirements are satisfied: (A) All of the net earnings of the qualified controlled entity are credited to its own account or to the qualified segregated account of a qualified foreign pension fund or another qualified controlled entity, with no portion of the net earnings of the qualified controlled entity inuring to the benefit of a person other than a qualified recipient; and (B) Upon dissolution, all of the assets of the qualified controlled entity, after satisfaction of liabilities to persons having interests in the entity solely as creditors, vest in a qualified segregated account of a qualified foreign pension fund or another qualified controlled entity. (14) Retirement and pension benefits. The term retirement and pension benefits means distributions to qualified recipients that are made after the qualified recipient reaches retirement age as determined under or in accordance with the laws in the foreign jurisdiction in which the eligible fund is established or operates (including a benefit paid to a qualified recipient who retires on or after a stated early retirement age), or after a specified event that results in a qualified recipient being permanently unable to work, and includes any such distribution made to a surviving beneficiary of the qualifying recipient. Retirement and pension benefits may be based on one or more of the following factors: contributions, investment performance, years of service with an employer, or compensation received by the qualified recipient. (f) Examples. This paragraph (f) provides examples that illustrate the rules of this section. The examples do not illustrate the application of the applicable withholding rules, including sections 1445 and 1446 and the regulations thereunder. It is assumed that no person is entitled to more than five percent of any eligible fund's assets or income, taking into account the constructive ownership rules in paragraph (c)(2)(iii)(B) of this section, and that the eligible fund owns no United States real property interests other than as described. (1) Example 1: No legal entity --(i) Facts. On January 1, 2023, Country A establishes Retirement Plan for the sole purpose of providing retirement and pension benefits to citizens of Country A aged 65 or older. Retirement Plan is composed of Asset Pool and Agency. Asset Pool is a group of accounts maintained on the balance sheet of the government of Country A. Pursuant to the laws of Country A, income and gain earned by Asset Pool is used solely to support the provision of retirement and pension benefits by Retirement Plan. Agency is a Country A agency that administers the provision of benefits by Retirement Plan and manages Asset Pool's investments. Under the laws of Country A, investment income earned by Retirement Plan is not subject to Country A's income tax. At the end of each calendar year, Retirement Plan performs a present valuation of the retirement and pension benefits it reasonably expects to provide in the future, and all of the benefits that Retirement Plan reasonably expects to provide are retirement and pension benefits. On January 1, 2024, Agency purchases Property, which is an interest in real property located in the United States owned by Asset Pool. On June 1, 2026, Agency sells Property, realizing $100x of gain with respect to Property that would be subject to tax under section 897(a) unless paragraph (b) of this section applies with respect to the gain. (ii) Analysis. (A) Retirement Plan, which is composed of Asset Pool and Agency, includes one or more governmental units described in paragraph (e)(5) of this section. Accordingly, Retirement Plan is an organization or arrangement described in paragraph (e)(7) of this section. Furthermore, Retirement Plan maintains a qualified segregated account in the form of Asset Pool, an identifiable pool of assets maintained for the sole purpose of funding retirement and pension benefits to beneficiaries of the Retirement Fund (qualified recipients as defined in paragraph (e)(12)(i)(A) of this section). Therefore, Retirement Plan is an eligible fund within the meaning of paragraph (e)(2) of this section. (B) Paragraph (c)(3)(i) of this section applies for purposes of determining whether Retirement Plan is an eligible fund that satisfies the requirements of paragraph (c)(2) of this section and would therefore be treated as a qualified foreign pension fund. Accordingly, the activities of Asset Pool and Agency are integrated and treated as undertaken by a single entity to determine whether the requirements of paragraph (c)(2) of this section are met. However, Asset Pool and Agency must independently satisfy the requirement of paragraph (c)(2)(i) of this section. (C) Retirement Plan is composed of Asset Pool and Agency, each of which is a governmental unit and treated as created or organized under the laws of Country A for purposes of paragraph (c)(2)(i) of this section. Accordingly, Retirement Plan satisfies the requirement of paragraph (c)(2)(i) of this section. (D) Retirement Plan is established by Country A as an eligible fund described in paragraph (c)(2)(ii)(A)( 1 )( i ) of this section to provide retirement and pension benefits, which are qualified benefits described in paragraph (e)(8) of this section, to citizens of Country A, who are qualified recipients described in paragraph (e)(12)(i)(A) of this section because they are eligible to be participants or beneficiaries of Retirement Plan. Accordingly, all of the benefits that Retirement Plan provides are qualified benefits provided to qualified recipients. In addition, Retirement Plan satisfies the requirements of the present valuation test as described in paragraphs (c)(2)(ii)(B) and (C) of this section. Accordingly, Retirement Plan satisfies the requirement of paragraph (c)(2)(ii) of this section. (E) Retirement Plan provides retirement and pension benefits to citizens of Country A aged 65 or older, with no citizen entitled to more than five percent of Retirement Fund's assets or to more than five percent of the income of the eligible fund. Accordingly, Retirement Plan satisfies the requirement of paragraph (c)(2)(iii) of this section. (F) Retirement Plan is composed solely of governmental units within the meaning of paragraph (e)(5) of this section. Accordingly, under paragraph (c)(2)(iv)(B) of this section, Retirement Plan is treated as satisfying the requirements of paragraph (c)(2)(iv)(A) of this section. (G) Investment income earned by Retirement Plan is not subject to income tax in Country A. Accordingly, Retirement Plan satisfies the requirement of paragraph (c)(2)(v) of this section. (H) Because Retirement Plan satisfies the requirements of paragraph (c)(2) of this section, Retirement Plan is a qualified foreign pension fund. Because Retirement Plan held no United States real property interests as of January 1, 2023, the earliest date during an uninterrupted period ending on June 1, 2026, the date of the disposition, in which it satisfied the requirements of paragraph (c)(2) of this section, Retirement Plan is a qualified holder under paragraph (d)(2) of this section. Retirement Plan's gain with respect to Property is attributable solely to Asset Pool, a qualified segregated account maintained by Retirement Plan. Accordingly, under paragraph (b) of this section, the $100x gain realized by Retirement Plan attributable to the disposition of Property is not subject to section 897(a). (2) Example 2: Fund established by an employer --(i) Facts. Employer, a corporation organized in Country B, establishes Fund to provide retirement and pension benefits to current and former employees of Employer and S1, a Country B corporation that is wholly owned by Employer. On January 1, 2023, Fund is established as a trust under the laws of Country B, and Employer retains discretion to invest assets and to administer benefits on Fund's behalf. Fund receives contributions from Employer and S1 and contributions from employees of Employer and S1 who are beneficiaries of Fund. All contributions to Fund and all of Fund's earnings are separately accounted for on Fund's books and records and are required by Fund's organizational documents to exclusively fund the provision of benefits to Fund's beneficiaries, except as necessary to satisfy reasonable expenses of Fund. Fund currently has over 100 beneficiaries, a number that is reasonably expected to grow as Employer expands. Fund will pay benefits to employees upon retirement based on years of service and employee contributions, but, if a beneficiary dies before retirement, Fund will pay an incidental death benefit in addition to payment of any accrued retirement and pension benefits to the beneficiary's designee (or deemed designee under local laws if the beneficiary fails to identify a designee). Fund annually performs a present valuation of the benefits it reasonably expects to provide to Fund's beneficiaries, and the valuation concludes that more than 85 percent of the present value of the total benefits it reasonably expects to pay to its beneficiaries in the future are retirement and pension benefits. In addition, it is reasonably expected that the incidental death benefits paid by Fund will account for less than fifteen percent of the present value of the total benefits that Fund expects to provide in the future, and Fund does not reasonably expect to pay any other types of benefits to its beneficiaries in the future. Fund annually provides to the tax authorities of Country B the amount of benefits distributed to each participant (or designee). Country B's tax authorities prescribe rules and regulations governing Fund's operations. Under the laws of Country B, Fund is not taxed on its investment income. On January 1, 2024, Fund purchases Property, which is an interest in real property located in the United States. On June 1, 2026, Fund sells Property, realizing $100x of gain with respect to Property that would be subject to tax under section 897(a) unless paragraph (b) of this section applies with respect to the gain. (ii) Analysis. (A) Fund is a trust that maintains an identifiable pool of assets for the sole purpose of funding retirement and pension benefits and ancillary benefits to current and former employees of the employer group (within the meaning of paragraph (e)(3) of this section) that includes Employer and S1 (current and former employees of Employer and S1 constitute qualified recipients, as defined in paragraph (e)(12)(i)(B) of this section). All assets held by Fund and all income earned by Fund are used to provide such benefits. Therefore, Fund is a trust that maintains a qualified segregated account within the meaning of paragraph (e)(13) of this section. Accordingly, Fund is an eligible fund within the meaning of paragraph (e)(2) of this section. (B) Because Fund is created or organized under the laws of Country B, Fund satisfies the requirement of paragraph (c)(2)(i) of this section. (C) The only benefits that Fund provides are retirement and pension benefits described in paragraph (e)(14) of this section and ancillary benefits (that is, the incidental death benefits) described in paragraph (e)(1) of this section, both of which constitute qualified benefits described in paragraph (e)(8) of this section, to qualified recipients, described in paragraph (e)(12)(i)(B) of this section. Furthermore, Fund satisfies the requirements of the present valuation test as described in paragraphs (c)(2)(ii)(B) and (C) of this section. Accordingly, Fund is established by Employer to provide retirement and pension benefits to qualified recipients in consideration for services rendered by such qualified recipients to Employer and S1, and Fund satisfies the requirement of paragraph (c)(2)(ii) of this section. (D) No single qualified recipient has a right to more than five percent of the assets or income of the eligible fund. Accordingly, Fund satisfies the requirement of paragraph (c)(2)(iii) of this section. (E) Fund is regulated and annually provides to the relevant tax authorities in the foreign jurisdiction in which it is established or operates the amount of qualified benefits provided to each qualified recipient by the eligible fund. Accordingly, Fund satisfies the requirements of paragraph (c)(2)(iv) of this section. (F) Fund is not subject to income tax on its investment income. Accordingly, Fund satisfies the requirement of paragraph (c)(2)(v) of this section. (G) Because Fund meets the requirements of paragraph (c)(2) of this section, Fund is treated as a qualified foreign pension fund. Furthermore, because Fund held no United States real property interests as of January 1, 2023, the earliest date during an uninterrupted period ending on June 1, 2026, the date of the disposition, in which it satisfied the requirements of paragraph (c)(2) of this section, Fund is a qualified holder under paragraph (d)(2) of this section. All of Fund's assets are held in a qualified segregated account within the meaning of paragraph (e)(13) of this section. Accordingly, under paragraph (b) of this section, the $100x gain attributable to the disposition of Property is not subject to section 897(a). (3) Example 3: Fund established by an employer at the direction of a foreign jurisdiction --(i) Facts. The facts are the same as in paragraph (f)(2) of this section ( Example 2 ), except that Fund was established by Employer at the direction of Country B and, in addition to being established to provide retirement and pension benefits to current and former employees of Employer and S1, Fund was also established to provide retirement and pension benefits to other employees. All employees that are beneficiaries provide contributions to Fund. Fund makes a determination on at least an annual basis using a reasonable method to measure the number of participants in the Fund who are not current and former employees of Employer and S1. Each time such a determination is made, Fund finds that such employees constitute less than five percent of Fund's total qualified recipients and do not have a right to more than five percent of the assets or income of Fund. (ii) Analysis. Fund satisfies the requirements of paragraph (c)(2)(ii)(A)( 1 )( i ) of this section because it was established by, or at the direction of, Country B to provide retirement and pension benefits to participants or beneficiaries that are current or former employees or persons designated by such employees as a result of services rendered by such employees to their employers. Fund also satisfies the requirements of paragraph (c)(2)(ii)(A)( 1 )( ii ) of this section because it was established by Employer to provide retirement and pension benefits to participants or beneficiaries that are current or former employees or persons designated by such employees in consideration for services rendered by such employees to Employer and S1. Because it satisfies the requirements of both such provisions, under paragraph (c)(2)(ii)(A)( 2 ) of this section, Fund will be treated solely as an eligible fund under paragraph (c)(2)(ii)(A)( 1 )( ii ) of this section. As a result, Fund must meet the reporting requirements described in paragraph (c)(2)(iv)(A) of this section and must apply the definition of qualified recipient described in paragraphs (e)(12)(i)(B) and (C) of this section. Because Fund makes a determination on at least an annual basis using a reasonable method to measure the number of participants in the Fund who are not current and former employees of Employer and S1, finding that such employees constitute less than five percent of Fund's total qualified recipients and do not have a right to more than five percent of the assets or income of Fund, the requirement of paragraph (c)(2)(ii)(B)( 1 ) of this section, requiring that all of the benefits that an eligible fund provides are provided to qualified recipients, is considered satisfied. Because Fund meets the requirements of paragraph (c)(2) of this section, Fund is treated as a qualified foreign pension fund under paragraph (b) of this section. Accordingly, the $100x gain attributable to the disposition of Property is not subject to section 897(a). (4) Example 4: Employer controlled organization or arrangement --(i) Facts. The facts are the same as in paragraph (f)(2) of this section ( Example 2 ), except that S2, a Country B corporation that is wholly owned by Employer, performs all tax compliance functions for Employer, S1, and S2, including information reporting with respect to Fund participants. (ii) Analysis. For purposes of the requirements of paragraph (c)(2) of this section, Fund and S2 are an organization or arrangement that is treated as a single entity under paragraph (c)(3)(i)(A) of this section and an eligible fund under paragraph (e)(2) of this section with respect to the qualified segregated account held by Fund. Because the eligible fund composed of Fund and S2 satisfies the requirements of paragraph (c)(2) of this section (including the rule under paragraph (c)(3)(i)(A) of this section that each entity satisfy the foreign organization requirement of paragraph (c)(2)(i) of this section) with respect to the qualified benefits provided to the qualified recipients out of the eligible fund's qualified segregated account (determined in accordance with paragraph (c)(3)(i)(B) of this section), the eligible fund that is composed of Fund and S2 constitutes a qualified foreign pension fund. Furthermore, the requirements for qualified holder status are satisfied, as described in paragraph (f)(2) of this section. Thus, under paragraph (b) of this section, the $100x gain attributable to the disposition of Property is not subject to section 897(a). (5) Example 5: Third-party assumption of pension liabilities --(i) Facts. The facts are the same as in paragraph (f)(2) of this section ( Example 2 ), except that Fund does not purchase Property on January 1, 2024. In addition, Fund anticipates $100x of qualified benefits will be paid each year beginning on January 1, 2028. Fund enters into an agreement with Guarantor, a privately held Country B corporation, which provides that Fund will, on January 30, 2023, cede a portion of its assets to Guarantor in exchange for annual payments of $100x beginning on January 1, 2028 and continuing until one or more previously identified participants (and their designees) ceases to be eligible to receive benefits. Guarantor has discretion to invest the ceded assets as it chooses, subject to certain agreed upon investment restrictions. Pursuant to its agreement with Fund, Guarantor must maintain Segregated Pool, a pool of assets securing its obligations under its agreement with Fund. The value of Segregated Pool must exceed a specified amount (determined based on an agreed upon formula) until Guarantor's payment obligations are completed, and any remaining assets in Segregated Pool (that is, assets exceeding the required payments to Fund) are retained by Guarantor. Guarantor bears all investment risk with respect to Segregated Pool. Accordingly, Guarantor is required to make annual payments of $100x to Fund regardless of the performance of Segregated Pool. On January 1, 2024, Guarantor purchases stock in Company A, a United States real property holding company that is a United States real property interest, and holds the Company A stock in Segregated Pool. On June 1, 2027, Guarantor sells the stock in Company A, realizing a gain of $100x. (ii) Analysis. The Segregated Pool is not a qualified segregated account, because it is not maintained for the sole purpose of funding qualified benefits to qualified recipients, and because income attributable to assets in the Segregated Pool (including the Company A stock) may inure to Guarantor, which is not a qualified recipient. Accordingly, Fund and Guarantor do not qualify as an organization or arrangement that is an eligible fund with respect to the Company A stock. Therefore, Guarantor is not exempt under paragraph (b) of this section with respect to the $100x of gain realized in connection with the sale of its shares in Company A. (6) Example 6: Asset manager --(i) Facts. The facts are the same as in paragraph (f)(5) of this section ( Example 5 ) except that instead of ceding legal ownership of a portion of its assets to Guarantor, Fund transfers the assets into Trust with respect to which Fund is the sole beneficiary on January 30, 2023, and Trust purchases stock in Company A on January 1, 2024. Guarantor has exclusive management authority over the Trust assets and is entitled to a reasonable fixed management fee which it withdraws annually from Trust's assets. On June 1, 2027, Trust sells the stock in Company A, realizing a gain of $100x. (ii) Analysis. For purposes of testing the requirements of paragraph (c)(2) of this section, Fund and Trust are an organization or arrangement that is treated as a single entity under paragraph (c)(3)(i)(A) of this section and an eligible fund under paragraph (e)(2) of this section. Assets held by Trust are held in a qualified segregated account, and those assets are the assets that are relevant for purposes of determining whether the eligible fund composed of Fund and Trust meets the requirements of paragraph (c)(2) of this section. The eligible fund that is composed of Fund and Trust is treated as established by Employer notwithstanding that Guarantor provides management services. See paragraph (c)(2)(ii)(A)( 3 ) of this section. Paragraph (e)(13)(ii) of this section provides that the assets held by an eligible fund in a qualified segregated account may be used to satisfy reasonable expenses of the eligible fund, such that the reasonable fixed management fee paid to Guarantor does not cause the assets held in Trust to fail to be treated as held in a qualified segregated account. All of the other requirements for qualified foreign pension fund status are satisfied by the eligible fund that is composed of Fund and Trust, as described in paragraph (f)(2) of this section. The eligible fund that is composed of Fund and Trust is a qualified holder under paragraph (d)(2) of this section because it held no United States real property interests on January 1, 2023, the earliest date during an uninterrupted period ending on June 1, 2027, the date of the disposition of Company A stock, in which it satisfied the requirements of paragraph (c)(2) of this section. The eligible fund that is composed of Fund and Trust is therefore exempt under paragraph (b) of this section with respect to the $100x of gain realized in connection with the sale by Trust of the shares in Company A. (7) Example 7: Partnership --(i) Facts. The facts are the same as in paragraph (f)(5) of this section ( Example 5 ) except that instead of ceding legal ownership of the assets to Guarantor, Fund contributes the assets to a partnership (PRS) formed with Guarantor and PRS purchases stock in Company A on January 30, 2023. Guarantor receives a profits interest in the partnership that is reasonable in light of Guarantor's management activity. Guarantor has no direct or indirect ownership in PRS assets, and the partnership agreement provides that upon dissolution, PRS assets would be distributed to Fund. Guarantor serves as the general partner of PRS and has discretionary authority to buy and sell PRS assets without approval from Fund. On June 1, 2027, PRS sells the stock in Company A, realizing a gain of $100x. (ii) Analysis. All of Fund's assets, including the assets held by PRS that are treated as held proportionately by Fund under paragraph (c)(3)(ii) of this section, are held in a qualified segregated account within the meaning of paragraph (e)(13) of this section. See paragraph (f)(2)(ii)(A) of this section ( Example 2 ). The eligible fund that is composed of Fund is treated as established by Employer notwithstanding that Guarantor provides management services to PRS. See paragraphs (c)(2)(ii)(A)( 3 ) and (c)(3)(ii) of this section. All of the other requirements for qualified foreign pension fund status are satisfied by Fund as described in paragraphs (f)(2)(ii)(B) through (F) of this section, and Fund is a qualified holder as described in paragraph (f)(2)(ii)(G) of this section. Accordingly, Fund is exempt under paragraph (b) of this section with respect to its allocable share of the $100x of gain realized in connection with the sale by PRS of the shares in Company A. Guarantor is not exempt under paragraph (b) of this section with respect to its allocable share of the $100x of gain realized in connection with the sale by PRS of the shares in Company A because Guarantor is neither part of the organization or arrangement that forms Fund nor a qualified holder under paragraph (d) of this section that maintains qualified segregated accounts. (8) Example 8: Not a qualified holder --(i) Facts. Fund is a qualified foreign pension fund organized in Country C that meets the requirements of paragraph (c)(2) of this section. Fund owns all the outstanding stock of OpCo, a manufacturing corporation organized in Country C, in a qualified segregated account maintained by Fund. OpCo was originally formed by a person other than Fund on January 1, 2023. Fund purchased all of the stock of OpCo on November 1, 2023 for the purpose of conducting the manufacturing business and utilizing the business profits to fund pension liabilities. During the period from January 1, 2023, through October 31, 2023, OpCo was not a qualified foreign pension fund, a part of a qualified foreign pension fund, or a qualified controlled entity. On January 30, 2023, OpCo purchased Property A, a United States real property interest, from a third party. For all periods after Fund acquired OpCo, OpCo must either retain or distribute to Fund all of its net earnings, and upon dissolution, must distribute all of its assets to its stockholder (that is, Fund) after satisfaction of liabilities to its creditors. On June 1, 2024, OpCo realizes $100x of gain on the disposition of Property A. (ii) Analysis. (A) A qualified controlled entity described in paragraph (e)(9) of this section includes any corporation organized under the laws of a foreign jurisdiction all the interests of which are owned by one or more qualified foreign pension funds directly or indirectly through one or more qualified controlled entities. Fund is a qualified foreign pension fund that wholly owns OpCo. Accordingly, OpCo is a qualified controlled entity for the period when it is owned by Fund beginning on November 1, 2023. (B) Under paragraph (d)(1) of this section, a qualified controlled entity is a qualified holder only if either, under paragraph (d)(2) of this section, the qualified controlled entity owned no United States real property interests as of the earliest date during an uninterrupted period ending on the date of the disposition or distribution in which the qualified controlled entity satisfied the requirements of paragraph (e)(9) of this section, or, under paragraph (d)(3) of this section, the qualified controlled entity satisfies the requirements of paragraph (e)(9) of this section throughout the entire testing period. Because OpCo owned a United States real property interest as of November 1, 2023, the earliest date during an uninterrupted period ending on the date of the disposition during which it satisfied the requirements of paragraph (e)(9) of this section, OpCo cannot satisfy the requirements of paragraph (d)(2) of this section and must instead satisfy the requirements of paragraph (d)(3) of this section to be a qualified holder. Under paragraph (d)(3) of this section, a qualified holder does not include any entity that was not a qualified foreign pension fund, a part of a qualified foreign pension fund, or a qualified controlled entity at any time during the testing period. The testing period with respect to OpCo is the period from January 1, 2023 (the date of OpCo's formation), to June 1, 2024 (the date of the disposition). Because OpCo was not a qualified foreign pension fund, a part of a qualified foreign pension fund, or a qualified controlled entity from January 1, 2023, to October 31, 2023, OpCo was not a qualified foreign pension fund, a part of a qualified foreign pension fund, or a qualified controlled entity at all times during the testing period. Accordingly, OpCo is not a qualified holder with respect to the disposition of Property A, and the $100x of gain recognized by OpCo is not exempt from tax under section 897(l), regardless of the amount of unrealized gain in Property A as of November 1, 2023. (9) Example 9: 48-month alternative test --(i) Facts. Fund is a qualified foreign pension fund organized in Country C that, except as otherwise noted, meets the requirements of paragraph (c)(2) of this section. Fund owns all the outstanding stock of OpCo, a manufacturing corporation organized in Country C and formed by Fund on January 1, 2023, in a qualified segregated account maintained by Fund. On January 30, 2023, OpCo purchased Property A, a United States real property interest, from a third party. OpCo either retains or distributes to Fund all of its net earnings, and upon dissolution, must distribute all of its assets to its stockholder (that is, Fund) after satisfaction of liabilities to its creditors. On June 1, 2027, OpCo realizes $100x of gain on the disposition of Property A. Fund reasonably expected to provide $90x of retirement and pension benefits and $100x of qualified benefits for the valuations that it performed pursuant to paragraph (c)(2)(ii)(C)( 1 ) of this section on December 31, 2023, December 31, 2024, and December 31, 2025. Fund reasonably expected to provide $160x of retirement and pension benefits and $200x of qualified benefits for the valuation that it performed pursuant to paragraph (c)(2)(ii)(C)( 1 ) of this section on December 31, 2026. (ii) Analysis. In each of the years ending on December 31, 2023, December 31, 2024, and December 31, 2025, the valuation performed pursuant to paragraph (c)(2)(ii)(C)( 1 ) of this section demonstrates that that the requirements of paragraph (c)(2)(ii)(B)( 2 ) of this section have been met because $90x of retirement and pension benefits constitutes 90 percent of the total $100x of qualified benefits. For the year ending on December 31, 2026, the valuation performed pursuant to paragraph (c)(2)(ii)(C)( 1 ) of this section does not demonstrate that that the requirements of paragraph (c)(2)(ii)(B)( 2 ) of this section have been met because $160x of retirement and pension benefits constitutes only 80 percent of the total $200x of qualified benefits. Thus, Fund does not meet the requirements of paragraph (c)(2)(ii)(C)( 1 ) of this section for the year ending on December 31, 2026. However, under the 48-month alternative calculation in paragraph (c)(2)(ii)(C)( 2 ) of this section, Fund satisfies the requirement that it reasonably expects to provide 85 percent retirement and pension benefits to qualified recipients as of December 31, 2026. This is because when averaging the values (not percentages) of the qualified benefits and retirement and pension benefits that Fund reasonably expected to provide from the valuations performed over the preceding 48 months (including the most recent valuation), Fund divides the total retirement and pension benefits of $430x ($90x + $90x + $90x + $160x) by the total qualified benefits that it reasonably expected to provide of $500x ($100x + $100x + $100x + $200x) for an average of 86 percent. Under paragraph (c)(2)(ii)(C)( 3 ) of this section, Fund may rely on either the most recent present valuation described in paragraph (c)(2)(ii)(C)( 1 ) of this section or the alternative calculation in paragraph (c)(2)(ii)(C)( 2 ) of this section, both of which are determined as of December 31, 2026. Because Fund satisfies the requirements of paragraph (c)(2)(ii)(B)( 2 ) of this section under the test in paragraph (c)(2)(ii)(C)( 2 ) of this section, even though it does not do so under the test in paragraph (c)(2)(ii)(C)( 1 ) of this section, Fund is a qualified foreign pension fund with respect to the disposition on June 1, 2027. Because OpCo is held by a qualified foreign pension fund as of the date of the disposition, OpCo is a qualified controlled entity within the meaning of paragraph (e)(9) of this section. Accordingly, the $100x of gain realized by OpCo is exempt from tax under section 897(l). (10) Example 10: 48-month alternative test with multiple valuations in the same year --(i) Facts. The facts are the same as in paragraph (f)(9) of this section (Example 9), except that in the year ending December 31, 2023, Fund carried out two valuations pursuant to paragraph (c)(2)(ii)(C)( 1 ) of this section, one on June 30, 2023 and the second on December 31, 2023. For each valuation, Fund reasonably expected to provide $90x of retirement and pension benefits and $100x of qualified benefits. In addition, in the year ending on December 31, 2026, pursuant to a valuation carried out under paragraph (c)(2)(ii)(C)( 1 ) of this section, Fund reasonably expected to provide $150x retirement and pension benefits and $200x of qualified benefits. (ii) Analysis. In each of the years ending on December 31, 2023, December 31, 2024, and December 31, 2025 (including the two valuations performed in 2023), the valuation performed pursuant to paragraph (c)(2)(ii)(C)( 1 ) of this section demonstrates that the requirements of paragraph (c)(2)(ii)(B)( 2 ) of this section have been met because $90x of retirement and pension benefits constitutes 90 percent of the total $100x of qualified benefits. For the year ending on December 31, 2026, the valuation performed pursuant to paragraph (c)(2)(ii)(C)( 1 ) of this section does not demonstrate that the requirements of paragraph (c)(2)(ii)(B)( 2 ) of this section have been met because $150x of retirement and pension benefits constitutes 75 percent of the total $200x of qualified benefits. Thus, Fund does not meet the requirements of paragraph (c)(2)(ii)(C)( 1 ) of this section for the year ending on December 31, 2026. Under the 48-month alternative calculation in paragraph (c)(2)(ii)(C)( 2 ) of this section, Fund also does not satisfy the requirement that it reasonably expects to provide 85 percent retirement and pension benefits to qualified recipients as of December 31, 2026. This is because when averaging the values (not percentages) of the qualified benefits and retirement and pension benefits that Fund reasonably expected to provide from the valuations performed over the preceding 48 months (including the most recent valuation), Fund must use a weighted average whereby values are adjusted when the length of valuation periods differs. In this case, each of the two valuations in 2023 must be divided by two for a total weighted average for each valuation of $45x retirement and pension benefits and $50x of qualified benefits. When Fund then divides the total retirement and pension benefits that it reasonably expected to provide of $420x ($45x + $45x + $90x + $90x + $150x) by the total qualified benefits that it reasonably expected to provide of $500x ($50x + $50x + $100x + $100x + $200x), the average is 84 percent. Because Fund does not satisfy the requirements of paragraph (c)(2)(ii)(B)( 2 ) of this section under the test in paragraph (c)(2)(ii)(C)( 2 ) of this section or the test in paragraph (c)(2)(ii)(C)( 1 ) of this section, Fund is not a qualified foreign pension fund with respect to the disposition on June 1, 2027. Because OpCo is not held by a qualified foreign pension fund as of the date of the disposition, OpCo is not a qualified controlled entity within the meaning of paragraph (e)(9) of this section. Accordingly, the $100x of gain realized by OpCo is not exempt from tax under section 897(l). (11) Example 11: Qualified foreign pension fund as qualified holder --(i) Facts. The facts are the same as in paragraph (f)(10) of this section (Example 10), except that OpCo does not dispose of Property A on June 1, 2027 and Fund reasonably expects to provide 85 percent of retirement and pension benefits to qualified recipients in the future in each of the annual present valuations it performs as of December 31, 2027 through December 31, 2033. Fund also satisfies the other requirements of paragraph (c)(2) of this section during this period. On April 1, 2029, Fund purchases Property B, a United States real property interest, and holds it in a qualified segregated account. On June 1, 2034, Fund realizes $100x of gain on the disposition of Property B and OpCo realizes $100x of gain on the disposition of Property A. At least 85 percent and no more than five percent of the actual value of the aggregate benefits provided by Fund before December 31, 2033, the most recent present value determination, were retirement and pension benefits and non-ancillary benefits, respectively. (ii) Analysis. (A) Because Fund reasonably expected to provide 85 percent of retirement and pension benefits to qualified recipients as of the valuation performed on December 31, 2033, and it met the other requirements of paragraph (c)(2) of this section, Fund is a qualified foreign pension fund under paragraph (c)(2)(ii)(C)( 3 ) of this section for the twelve months succeeding the most recent valuation, which includes June 1, 2034, the date of the disposition of Property A and Property B. (B) Fund is a qualified holder under paragraph (d)(2) of this section because Fund did not own any United States real property interests as of December 31, 2027, the earliest date during the uninterrupted period ending on the date of the disposition, June 1, 2034, during which it satisfied the requirements of paragraph (c)(2) of this section and therefore qualified as a qualified foreign pension fund. Fund is eligible for the exemption under section 897(l) with respect to the disposition of Property B because it held Property B in a qualified segregated account. Thus, the $100x of gain realized by Fund on the disposition of Property B is exempt from tax under section 897(l). (C) Because OpCo owned Property A, a United States real property interest, as of December 31, 2027, the earliest date during an uninterrupted period ending on the date of the disposition, June 1, 2034, during which it was a qualified controlled entity, OpCo cannot satisfy the requirements of paragraph (d)(2) of this section and must instead satisfy the requirements of paragraph (d)(3) of this section to be a qualified holder. The testing period with respect to OpCo, determined under paragraph (d)(3)(ii) of this section, ends on June 1, 2034 (the date of the disposition) and begins on June 1, 2024 (the date that is ten years before the disposition date). Because Fund failed to qualify as a qualified foreign pension fund as of December 31, 2026, OpCo was not continuously owned by a qualified foreign pension fund for the duration of the testing period, and thus did not qualify as a qualified foreign pension fund, part of a qualified foreign pension fund, or a qualified controlled entity for the duration of the testing period. As a result, OpCo is not a qualified holder under paragraph (d)(3) of this section. Accordingly, the $100x of gain recognized by OpCo on the disposition of Property A is not exempt from tax under section 897(l). (12) Example 12: Qualified controlled entity as qualified holder --(i) Facts. Fund is a qualified foreign pension fund organized in Country C that meets the requirements of paragraph (c)(2) of this section as of December 31, 2022 and December 31, 2023. Fund purchases an interest in Company A, a United States real property holding company, on June 1, 2024. As of December 31, 2024, Fund fails to satisfy the present valuation requirement of paragraph (c)(2)(ii)(B)( 2 ) of this section and does not satisfy the alternative calculation under paragraph (c)(2)(ii)(C)( 2 ) of this section. From December 31, 2025, through December 31, 2030, Fund satisfies the present valuation requirement of paragraph (c)(2)(ii)(B)( 2 ) of this section and meets all other requirements in paragraph (c)(2) of this section to be treated as a qualified foreign pension fund. On June 1, 2026, Fund purchases all of the stock of Company B, a Country C corporation that owns no United States real property interests and is not a qualified foreign pension fund, a part of a qualified foreign pension fund, or a qualified controlled entity. On January 1, 2027, Company B purchases Property D, a United States real property interest. Company B retains or distributes to Fund all of its net earnings, and upon dissolution, must distribute all of its assets to its stockholders (that is, Fund) after satisfaction of liabilities to its creditors. On June 1, 2031, Fund realizes $100x of gain on the disposition of stock in Company A, and Company B realizes $100x of gain on the disposition of Property D. (ii) Analysis. (A) Fund owned Company A, a United States real property holding company, as of December 31, 2025, the earliest date during an uninterrupted period ending on the date of the disposition, June 1, 2031, during which Fund satisfied the requirements of paragraph (c)(2) of this section. Accordingly, to be a qualified holder, Fund must satisfy the requirements of paragraph (d)(3) of this section. The testing period with respect to Fund, determined under paragraph (d)(3) of this section, ends on June 1, 2031 (the date of disposition) and begins on June 1, 2021 (the date that is ten years before the disposition date). Fund is not a qualified holder because it failed to satisfy the requirements of paragraph (c)(2) of this section as of December 31, 2024 and, thus, has not satisfied the requirements of paragraph (c)(2) of this section continuously for the duration of the testing period. Accordingly, the $100x of gain realized by Fund on the disposition of the stock of Company A is not exempt from tax under section 897(l). (B) Although Fund is not a qualified holder as of June 1, 2031, the date of Company B's disposition of Property D, Fund is still a qualified foreign pension fund because it satisfies the requirements of paragraph (c)(2) of this section. Company B is therefore a qualified controlled entity within the meaning of paragraph (e)(9) of this section as of June 1, 2031, because it is wholly owned by Fund, a qualified foreign pension fund. Notwithstanding that Fund is not a qualified holder under either paragraph (d)(2) or (3) of this section, Company B is a qualified holder under paragraph (d)(2) of this section because Company B did not own a United States real property interest as of June 1, 2026, the earliest date during an uninterrupted period ending on June 1, 2031 (the date of the disposition) during which Company B was a qualified controlled entity. Lastly, all of Company B's assets constitute a qualified segregated account. Accordingly, the $100x of gain realized by Company B on the disposition of Property D is exempt from tax under section 897(l). (g) Applicability date --(1) In general. Except as otherwise provided in paragraph (g)(2) of this section, this section applies to dispositions of United States real property interests and distributions described in section 897(h) occurring on or after December 29, 2022. (2) Certain provisions. Paragraphs (b)(1), (d), (e)(5) and (e)(9) of this section apply with respect to dispositions of United States real property interests and distributions described in section 897(h) occurring on or after June 6, 2019. (3) Early application. An eligible fund may choose to apply this section with respect to dispositions and distributions occurring on or after December 18, 2015, and before December 29, 2022, provided that the eligible fund, and all persons bearing a relationship to the eligible fund described in section 267(b) or 707(b), consistently apply the rules in this section for all relevant years. An eligible fund that chooses to apply this section pursuant to this paragraph (g)(3) must apply the principles of paragraph (d)(4)(i) of this section to any valuation requirements with respect to dates preceding December 18, 2015. Par. 3. Section 1.1441-3 is amended by revising paragraphs (c)(4)(i) introductory text, (c)(4)(i)(B)( 2 ), and (c)(4)(i)(C) and adding paragraph (c)(4)(iii) to read as follows:§1.1441-3 Determination of amounts to be withheld. * * * * * (c) * * * (4) * * * (i) In general. A distribution from a U.S. Real Property Holding Corporation (USRPHC) (or from a corporation that was a USRPHC at any time during the five-year period ending on the date of distribution) with respect to stock that is a U.S. real property interest under section 897(c) or from a Real Estate Investment Trust (REIT) or other entity that is a qualified investment entity (QIE) under section 897(h)(4) with respect to its stock is subject to the withholding provisions under section 1441 (or section 1442 or 1443) and section 1445. A USRPHC (other than a REIT or other entity that is a QIE) making a distribution shall be treated as satisfying its withholding obligations under both sections if it withholds in accordance with one of the procedures described in either paragraph (c)(4)(i)(A) or (B) of this section. A USRPHC must apply the same withholding procedure to all the distributions made during the taxable year. However, the USRPHC may change the applicable withholding procedure from year to year. For rules regarding distributions by REITs and other entities that are QIEs, see paragraph (c)(4)(i)(C) of this section. To the extent withholding under sections 1441, 1442, or 1443 applies under this paragraph (c)(4)(i) to any portion of a distribution that is a withholdable payment, see paragraph (a)(2) of this section for rules coordinating withholding under chapter 4. * * * * * (B) * * * ( 2 ) Withhold under section 1445(e)(3) and§1.1445-5(e) on the remainder of the distribution (except for any portion paid to a withholding qualified holder (as defined in§1.1445-1(g)(11)) or on such smaller portion based on a withholding certificate obtained in accordance with§1.1445-5(e)(3)(iv). (C) Coordination with REIT/QIE withholding. In the case of a distribution from a REIT or other entity that is a QIE, withholding is required as described in paragraph (c)(4)(i)(C)( 1 ) and ( 2 ) of this section. ( 1 ) Withholding is required under section 1441 (or 1442 or 1443) on-- ( i ) The portion of the distribution that is not designated (for REITs) or reported (for regulated investment companies that are QIEs) as a capital gain dividend, a return of basis, or a distribution in excess of a shareholder's adjusted basis in the stock of the REIT or QIE that is treated as a capital gain under section 301(c)(3); and ( ii ) Any portion of a capital gain dividend from a REIT or other entity that is a QIE that is not treated as gain attributable to the sale or exchange of a U.S. real property interest pursuant to the second sentence of section 897(h)(1)). ( 2 ) Withholding is required under section 1445 with respect to-- ( i ) A distribution in excess of a shareholder's adjusted basis in the stock of the REIT or QIE is, unless the interest in the REIT or QIE is not a U.S. real property interest (for example, an interest in a domestically controlled REIT or QIE under section 897(h)(2)) or the distribution is paid to a withholding qualified holder (as defined in§1.1445-1(g)(11)); and ( ii ) Any portion of a capital gain dividend that is attributable to the sale or exchange of a U.S. real property interest under section 897(h)(1), unless it is paid to a withholding qualified holder (as defined in§1.1445-1(g)(11)). See§1.1445-8. * * * * * (iii) Applicability date. Paragraphs (c)(4)(i), (c)(4)(i)(B)( 2 ), and (c)(4)(i)(C) of this section apply to distributions made by a USRPHC or a QIE occurring on or after December 29, 2022. For distributions made by a USRPHC or a QIE occurring before December 29, 2022, see§1.1441-3(c)(4)(i), (c)(4)(i)(B)( 2 ), and (c)(4)(i)(C), as contained in 26 CFR part 1, revised as of April 1, 2021. * * * * * Par. 4. Section 1.1445-1 is amended by adding paragraph (g)(11) to read as follows:§1.1445-1 Withholding on dispositions of U.S. real property interests by foreign persons: In general. * * * * * (g) * * * (11) Withholding qualified holder. A withholding qualified holder means a qualified holder (under§1.897(l)-1(d)), and a foreign partnership all of the interests of which are held by qualified holders (under§1.897(l)-1(d)), including through one or more partnerships. * * * * * Par. 5. Section 1.1445-2 is amended by: 1. Revising paragraph (b)(2)(i); 2. Adding paragraph (b)(2)(vi); and 3. Adding two sentences at the end of paragraph (e). The revisions and addition read as follows:§1.1445-2 Situations in which withholding is not required under section 1445(a). * * * * * (b) * * * (2) * * * (i) In general. The rules in this paragraph (b)(2)(i) apply for purposes of the transferor's certification of non-foreign status (including a certification of non-foreign status provided by a withholding qualified holder (as defined in§1.1445-1(g)(11)). (A) A transferee of a U.S. real property interest is not required to withhold under section 1445(a) if, before or at the time of the transfer, the transferor furnishes to the transferee a certification that is signed under penalties of perjury and - ( 1 ) States that the transferor is not a foreign person; and ( 2 ) Sets forth the transferor's name, identifying number and home address (in the case of an individual) or office address (in the case of an entity). (B) For purposes of paragraph (b)(2)(i)(A) of this section, a foreign person is a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, or foreign estate, except that a withholding qualified holder (as defined in§1.1445-1(g)(11)) is not a foreign person. Additionally, a foreign corporation that has made a valid election under section 897(i) is generally not treated as a foreign person for purposes of section 1445. In this regard, see§1.1445-7. Pursuant to§1.897-1(p), an individual's identifying number is the individual's Social Security number and any other person's identifying number is its U.S. employer identification number (EIN), or, if the transferor is a withholding qualified holder (as defined in§1.1445-1(g)(11)) that does not have a U.S. taxpayer identification number, a foreign tax identification number issued by its jurisdiction of residence. A certification pursuant to this paragraph (b) must be verified as true and signed under penalties of perjury by a responsible officer in the case of a corporation, by a general partner in the case of a partnership, and by a trustee, executor, or equivalent fiduciary in the case of a trust or estate. No particular form is needed for a certification pursuant to this paragraph (b), nor is any particular language required, so long as the document meets the requirements of this paragraph (b)(2)(i), except that, with respect to a certification submitted by a withholding qualified holder (as defined in§1.1445-1(g)(11)), the transferor must state on the certification that it is treated as a non-foreign person because it is a withholding qualified holder and must further specify whether it qualifies as a withholding qualified holder because it is a qualified holder under§1.897(l)-1(d) or a foreign partnership that satisfies the requirements of§1.1445-1(g)(11). Samples of acceptable certifications are provided in paragraph (b)(2)(iv) of this section. * * * * * (vi) Form W-8EXP. A certification of non-foreign status may be made by a withholding qualified holder (as defined under§1.1445-1(g)(11)) as provided in paragraph (b)(2)(i) of this section to certify its qualified holder status. A certification of non-foreign status under paragraph (b)(2)(i) of this section also includes a certification made on a Form W-8EXP (or its successor) that states that the transferor is treated as a non-foreign person because it is a withholding qualified holder and must further specify whether it qualifies as a withholding qualified holder because it is a qualified holder under§1.897(l)-1(d) or a foreign partnership that satisfies the requirements of§1.1445-1(g)(11). The certification must also meet all of the other requirements for a valid Form W-8EXP (or its successor) as provided on the form and the instructions to the form. A qualified holder may not provide a certification of non-foreign status on a Form W-9 (or its successor) as permitted in paragraph (b)(2)(v) of this section. * * * * * (e) * * * Paragraphs (b)(2)(i) and (b)(2)(vi) of this section, apply with respect to dispositions of U.S. real property interests and distributions described in section 897(h) occurring on or after December 29, 2022. For dispositions of U.S. real property interests and distributions described in section 897(h) occurring before December 29, 2022, see§1.1445-2(b)(2)(i) and (b)(2)(vi), as contained in 26 CFR part 1, revised as of April 1, 2021. Par. 6. Section 1.1445-5 is amended by revising paragraphs (b)(3)(ii)(A), (B), and (D) and adding two sentences at the end of paragraph (h) to read as follows:§1.1445-5 Special rules concerning distributions and other transactions by corporations, partnerships, trusts, and estates. * * * * * (b) * * * (3) * * * (ii) * * * (A) In general. For purposes of this section, an entity or fiduciary may treat any holder of an interest in the entity as a U.S. person if that interest-holder furnishes to the entity or fiduciary a certification stating that the interest-holder is not a foreign person, in accordance with the provisions of paragraph (b)(3)(ii)(B) of this section. In general, a foreign person is a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, or foreign estate, except that a withholding qualified holder (as defined in§1.1445-1(g)(11)) is not a foreign person for purposes of this section. (B) Procedural rules. The rules in this paragraph (b)(3)(ii)(B) apply for purposes of the interest-holder's certification of non-foreign status (including a certification of non-foreign status provided by a withholding qualified holder (as defined in§1.1445-1(g)(11)). ( 1 ) An interest-holder's certification of non-foreign status must be signed under penalties of perjury and must state - ( i ) That the interest-holder is not a foreign person; and ( ii ) The interest-holder's name, identifying number, home address (in the case of an individual), or office address (in the case of an entity), and place of incorporation (in the case of a corporation). ( 2 ) For purposes of paragraph (b)(3)(ii)(B)( 1 ) of this section, an individual's identifying number is the individual's Social Security number and any other person's identifying number is its U.S. employer identification number (see§ 1.897-1(p)), or, if the interest-holder is a withholding qualified holder (as defined in§1.1445-1(g)(11)) that does not have a U.S. taxpayer identification number, a foreign tax identification number issued by its jurisdiction of residence. The certification must be signed by a responsible officer in the case of a corporation, by a general partner in the case of a partnership, and by a trustee, executor, or equivalent fiduciary in the case of a trust or estate. No particular form is needed for a certification pursuant to this paragraph (b)(3)(ii), nor is any particular language required, so long as the document meets the requirements of this paragraph, except that, with respect to certification submitted by a withholding qualified holder (as defined in§1.1445-1(g)(11)), the transferor must state on the certification that it is treated as a non-foreign person because it is a withholding qualified holder and must further specify whether it qualifies as a withholding qualified holder because it is a qualified holder under§1.897(l)-1(d) or a foreign partnership that satisfies the requirements of§1.1445-1(g)(11). Samples of acceptable certifications are provided in paragraph (b)(3)(ii)(E) of this section. ( 3 ) An entity may rely upon a certification pursuant to this paragraph (b)(3)(ii)(B) for a period of two calendar years following the close of the calendar year in which the certification was given. If an interest holder becomes a foreign person (or no longer is treated as a withholding qualified holder (as defined in§1.1445-1(g)(11)) and therefore is no longer treated as a non-foreign person for purposes of withholding under section 1445 within the period described in the preceding sentence, the interest-holder must notify the entity before any further dispositions or distributions and upon receipt of such notice (or any other notification of the foreign status of the interest-holder) the entity may no longer rely upon the prior certification. An entity that obtains and relies upon a certification must retain that certification with its books and records for a period of three calendar years following the close of the last calendar year in which the entity relied upon the certification. * * * * * (D) Form W-8EXP. A certification of non-foreign status can be made by a withholding qualified holder (as defined in§1.1445-1(g)(11)) as provided in this paragraph (b)(3)(ii) to certify its qualified holder status. A certification of non-foreign status under this paragraph (b)(3)(ii) also includes a certification made on a Form W-8EXP that states that the interest-holder is treated as a non-foreign person because it is a withholding qualified holder and must further specify whether it qualifies as a withholding qualified holder because it is a qualified holder under§1.897(l)-1(d) or a foreign partnership that satisfies the requirements of§1.1445-1(g)(11). The certification must also meet all of the other requirements for a valid Form W-8EXP as provided on the form and the instructions to the form. A qualified holder may not provide a certification of non-foreign status on a Form W-9, as described in paragraph (b)(3)(iv) of this section. * * * * * (h) * * * Paragraph (b)(3)(ii)(A) of this section applies with respect to dispositions of U.S. real property interests and distributions described in section 897(h) occurring on or after December 29, 2022. For dispositions of U.S. real property interests and distributions described in section 897(h) occurring before December 29, 2022, see§1.1445-5(b)(3)(ii)(A), as contained in 26 CFR part 1, revised as of April 1, 2021. Par. 7. Section 1.1445-8 is amended by revising paragraph (e) and adding two sentences after the first sentence in paragraph (j) to read as follows:§1.1445-8 Special rules regarding publicly traded partnerships, publicly traded trusts and real estate investment trusts (REITs). * * * * * (e) Determination of non-foreign status by withholding agent. A withholding agent may rely on a certification of non-foreign status pursuant to§1.1445-5(b)(3)(ii) to determine whether an interest holder is not a foreign person. Reliance on these documents will excuse the withholding agent from liability imposed under section 1445(e)(1) in the absence of actual knowledge that the interest holder is a foreign person. A withholding agent may also employ other means to determine the status of an interest holder, but, if the agent relies on such other means and the interest holder proves, in fact, to be a foreign person (or, is not a withholding qualified holder (as defined in§1.1445-1(g)(11)) and therefore is not treated as a non-foreign person for purposes of withholding under section 1445), then the withholding agent is subject to any liability imposed pursuant to section 1445 and the regulations thereunder for failure to withhold. See also§1.1445-5(b)(3)(ii)(B)( 3 ) for the period during which a withholding agent may rely on a certification of non-foreign status submitted by a withholding qualified holder (as defined in§1.1445-1(g)(11)), which applies under this paragraph (e). * * * * * (j) * * * Paragraph (e) of this section applies with respect to distributions made on or after December 29, 2022. For distributions made before December 29, 2022, see§1.1445-8(e) as contained in 26 CFR part 1, as revised April 1, 2021.* * * Par. 8. Section 1.1446-1 is amended by revising the second sentence of paragraph (c)(2)(ii)(G) and by revising paragraph (c)(2)(ii)(H) to read as follows:§1.1446-1 Withholding tax on foreign partners' share of effectively connected taxable income. * * * * * (c) * * * (2) * * * (ii) * * * (G) * * * However, except as set forth in§1.1446-2(b)(4)(iii) (regarding withholding qualified holders (as defined in§1.1445-1(g)(11)) and§1.1446-3(c)(3) (regarding certain tax-exempt organizations described in section 501(c)), the submission of Form W-8EXP (or successor) will have no effect on whether there is a 1446 tax due with respect to such partner's allocable share of partnership ECTI. * * * (H) Foreign corporations, certain foreign trusts, and foreign estates. Consistent with the rules of this paragraph (c)(2) and paragraph (c)(3) of this section, a foreign corporation, a foreign trust (other than a foreign grantor trust described in paragraph (c)(2)(ii)(E) of this section), or a foreign estate may generally submit any appropriate Form W-8 (for example, Form W-8BEN-E or Form W-8IMY) to the partnership to establish its foreign status for purposes of section 1446. In addition, a foreign entity may also submit a certification of non-foreign status (including a Form W-8EXP) described in§1.1445-5(b)(3)(ii) for purposes of documenting itself as a withholding qualified holder (as defined in§1.1445-1(g)(11)). * * * * * Par. 9. Section 1.1446-2 is amended by adding paragraph (b)(4)(iii) to read as follows:§1.1446-2 Determining a partnership's effectively connected taxable income allocable to foreign partners under section 704. * * * * * (b) * * * (4) * * * (iii) Special rule for qualified holders. With respect to a foreign partner that is a withholding qualified holder (as defined in§1.1445-1(g)(11)), the foreign partner's allocable share of partnership ECTI does not include gain or loss that is not taken into account under§1.897(l)-1(b) and that is not otherwise treated as effectively connected with a trade or business in the United States. The partnership must have received from the partner a valid certificate of non-foreign status (including a Form W-8EXP) described in§1.1445-2(b)(2)(i) or§1.1445-5(b)(3)(ii). See§1.1446-1(c)(2)(ii)(G) and (H) regarding documentation of withholding qualified holders. * * * * * Par. 10. Section 1.1446-7 is amended by adding two sentences at the end to read as follows:§1.1446-7 Applicability dates. * * * Sections 1.1446-1(c)(2)(ii)(G) and (H) and 1.1446-2(b)(4)(iii) apply with respect to dispositions of U.S. real property interests and distributions described in section 897(h) occurring on or after December 29, 2022. For dispositions of U.S. real property interests and distributions described in section 897(h) occurring before December 29, 2022, see§§1.1446-1(c)(2)(ii)(G) and (H), as contained in 26 CFR part 1, revised as of April 1, 2021. Melanie R. Krause, Acting Deputy Commissioner for Services and Enforcement. Approved: December 9, 2022 Lily Batchelder, Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on December 28, 2022, 8:45 a.m., and published in the issue of the Federal Register for December 29, 2022, 87 FR 80042)

Private Letter Ruling Number: 202205005 Internal Revenue Service November 5, 2021 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202205005 Release Date: 2/4/2022 Index Number: 856.00-00, 9100.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:FIP:B03 PLR-110459-21 Date: November 05, 2021 Dear ********: This letter responds to a letter dated May 6, 2021, and subsequent correspondence, submitted on behalf of Taxpayer, Subsidiary A, and Subsidiary B (collectively, "Taxpayers"). Taxpayers request an extension of time under sections 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make elections to treat each of Subsidiary A and Subsidiary B as a taxable REIT subsidiary (TRS) of Taxpayer under section 856(l) of the Internal Revenue Code (the Code) effective as of Date 4. FACTS Taxpayer is a State limited liability company formed on Date 3 that has elected to be treated as a real estate investment trust ("REIT") for federal income tax purposes beginning with Taxpayer's taxable year ended Date 6. Taxpayer owns and operates, through its subsidiaries, apartment communities, focusing on the ownership of stabilized multi-family properties located in different geographic markets. Taxpayer conducts substantially all of its operations through a subsidiary operating partnership, Operating Partnership, in which Taxpayer owns a a% interest. Prior to Date 4, Taxpayer was indirectly owned by OldParent. On Date 4, OldParent distributed all of the outstanding shares of common stock of Taxpayer's parent entity to the stockholders of OldParent on a pro rata basis. Taxpayer currently owns its real property holdings indirectly through several subsidiaries, including Operating Partnership. Subsidiary A is a State corporation formed on Date 1 that is wholly owned by Operating Partnership through disregarded entities. Subsidiary A owns interests in various real properties and provides property management and other services to its own properties and those held by other entities in which Taxpayer holds an indirect interest. OldParent and Subsidiary A previously elected to treat Subsidiary A as a TRS of OldParent. Taxpayers represent that Subsidiary A and Taxpayer intended to treat Subsidiary A as a TRS of Taxpayer effective as of Date 4. Subsidiary B is a State limited liability company formed on Date 2 that has elected to be classified as an association taxable as a corporation for federal income tax purposes and that is owned in part by Operating Partnership. Subsidiary B owns interests in various real properties and provides property management and other services to its own properties and those held by other entities in which Taxpayer holds an indirect interest. Taxpayers represent that Subsidiary B and Taxpayer intended to treat Subsidiary B as a TRS of Taxpayer effective as of Date 4. To make TRS elections for Subsidiary A and Subsidiary B effective as of Date 4, Forms 8875, Taxable REIT Subsidiary Election, should have been properly completed and filed with the Service by Date 8. Taxpayers represent that the Forms 8875 for Subsidiary A and Subsidiary B were filed prior to Date 8 on Date 7. Each Form 8875 was signed by an individual who was then an officer of Taxpayer, Subsidiary A, and Subsidiary B, but only in the officer's capacity as an officer of the electing TRS. On Date 9, Accounting Firm, the accounting firm responsible for auditing Taxpayer's financial statements, discovered that the filed copies of the Forms 8875 were missing a signature on the line provided in each form for the signature of an officer of the electing REIT. The signing officer was not aware that two signatures on each Form 8875 were required: one in their capacity as an officer of the electing TRS and one in their capacity as an officer of the electing REIT. When Accounting Firm discovered the missing signature on each Form 8875, Taxpayer contacted Law Firm to discuss the best course of action to rectify the situation. Law Firm advised Taxpayer to (i) file new Forms 8875 as soon as possible with the earliest possible effective date and with the officer's signature on both signature lines of each form, and (ii) request an extension of time under sections 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make elections under section 856(l) of the Code to treat each of Subsidiary A and Subsidiary B as a TRS of Taxpayer effective as of Date 4. On Date 10, Taxpayers filed the new Forms 8875 electing to treat each of Subsidiary A and Subsidiary B as a TRS of Taxpayer effective as of Date 5. These Forms 8875 were signed by an officer on both the line provided in the form for signature of an officer of the electing TRS and the line provided in the form for signature by an officer of the electing REIT. However, the Form 8875 electing to treat Subsidiary A as a TRS of Taxpayer inadvertently incorrectly indicated on line 12 that Subsidiary A did not previously file a U.S. federal income tax return. Accordingly, Law Firm submitted a request on behalf of Taxpayers to the Service seeking a private letter ruling granting a reasonable extension of time for Taxpayers to elect under section 856(l) to treat Subsidiary A as a TRS of Taxpayer, and to treat Subsidiary B as a TRS of Taxpayer, in each case effective as of Date 4. REPRESENTATIONS Taxpayers make the following representations in connection with this request for an extension of time: 1. The request for relief was filed by Taxpayers before the failure to make the regulatory election was discovered by the Service. 2. Granting the relief will not result in Taxpayers having a lower tax liability in the aggregate for all years to which the regulatory election applies than they would have had if the election had been timely made (taking into account the time value of money). 3. Taxpayers did not seek to alter a return position for which an accuracy-related penalty has been or could have been imposed under section 6662 of the Code at the time they requested relief and the new position requires or permits a regulatory election for which relief is requested. 4. Being fully informed of the required regulatory elections and related tax consequences, Taxpayers did not choose to not file the elections. 5. Taxpayers are not using hindsight in requesting this relief. No specific facts have changed since the due date for making the elections that make these elections advantageous to Taxpayers. 6. The period of limitations on assessment under section 6501(a) of the Code has not expired for Taxpayers for the taxable year for which the elections should have been filed, nor for any taxable years that would have been affected by the elections had they been timely made. In addition, affidavits on behalf of Taxpayers have been provided as required by section 301.9100-3(e)(2) and (3). LAW AND ANALYSIS Section 856(l) provides that a REIT and a corporation (other than a REIT) may jointly elect to treat such corporation as a TRS. To be eligible for treatment as a TRS, section 856(l)(1) provides that the REIT must directly or indirectly own stock in the corporation, and the REIT and the corporation must jointly elect such treatment. The election is irrevocable once made, unless both the REIT and the subsidiary consent to its revocation. In addition, section 856(l) specifically provides that the election, and any revocation thereof, may be made without the consent of the Secretary. In Announcement 2001-17, 2001-1 C.B. 716, the Service announced the availability of new Form 8875, Taxable REIT Subsidiary Election. According to the Announcement, this form is to be used for taxable years beginning after 2000 for eligible entities to elect treatment as a TRS. The instructions to Form 8875 provide that the subsidiary and the REIT can make the election at any time during the taxable year. However, the effective date of the election depends on when the Form 8875 is filed. The instructions further provide that the effective date cannot be more than 2 months and 15 days prior to the date of filing the election, or more than 12 months after the date of filing the election. If no date is specified on the form, the election is effective on the date the form is filed with the Service. Section 301.9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Code except subtitles E, G, H, and I. Section 301.9100-1(b) defines a regulatory election as an election whose due date is prescribed by regulations or by a revenue ruling, a revenue procedure, a notice, or an announcement published in the Internal Revenue Bulletin. Section 301.9100-3(a) through (c)(1) sets forth rules that the Service generally will use to determine whether, under the particular facts and circumstances of each situation, the Commissioner will grant an extension of time for regulatory elections that do not meet the requirements of section 301.9100-2. Section 301.9100-3(a) provides that requests for relief subject to this section will be granted when the taxpayer provides the evidence (including affidavits described in section 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government. Section 301.9100-3(b) provides that a taxpayer is generally deemed to have acted reasonably and in good faith if the taxpayer (i) requests relief under this section before the failure to make the regulatory election is discovered by the Service; (ii) failed to make the election because of intervening events beyond the taxpayer's control; (iii) failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer's experience and the complexity of the return or issue), the taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the written advice of the Service; or (v) reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election. A taxpayer will be deemed to have not acted reasonably and in good faith, however, if the taxpayer (i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested; (ii) was informed in all material respects of the required election and related tax consequences, but chose not to file the election; or (iii) uses hindsight in requesting relief. Section 301.9100-3(c)(1) provides that a reasonable extension of time to make a regulatory election will be granted only when the interests of the Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i) provides that the interests of the Government are prejudiced if granting relief would result in the taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Section 301.9100-3(c)(1)(ii) provides that the interests of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under section 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. Under all the facts and circumstances of this case as presented by Taxpayer, Subsidiary A, and Subsidiary B, we have determined that the interests of the Government are not prejudiced under the standards set forth in section 301.9100-3(c)(1)(i). CONCLUSION Based on the information submitted and representations made, we conclude that Taxpayers have satisfied the requirements for granting a reasonable extension of time so that (i) Taxpayer can elect under section 856(l) to treat Subsidiary A as a TRS of Taxpayer as of Date 4, and (ii) Taxpayer can elect under section 856(l) to treat Subsidiary B as a TRS of Taxpayer as of Date 4. Accordingly, due to the reasonable extension of time granted to Taxpayer and Subsidiary A, Taxpayer and Subsidiary A have 90 calendar days from the date of this letter to make the intended election to treat Subsidiary A as a TRS of Taxpayer effective as of Date 4. Due to the reasonable extension of time granted to Taxpayer and Subsidiary B, the Form 8875 filed by Taxpayer and Subsidiary B on Date 10 will be considered timely filed, and the effective date of the TRS election is Date 4. CAVEATS This ruling is limited to the timeliness of the filing of the Forms 8875. This ruling's application is limited to the facts, representations, and Code and regulation sections cited herein. Except as provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, no opinion is expressed or implied regarding whether Taxpayer qualifies as a REIT, or whether either Subsidiary A or Subsidiary B otherwise qualifies as a TRS of Taxpayer under part II of subchapter M of chapter 1 of the Code. No opinion is expressed with regard to whether the tax liability of Taxpayer is not lower in the aggregate for all years to which the election applies than such tax liability would have been if the election had been timely made (taking into account the time value of money). Upon audit of the U.S. federal income tax returns involved, the director's office will determine such tax liability for the years involved. If the director's office determines that such tax liability is lower, that office will determine the federal income tax effect. The ruling contained in this letter is based upon information submitted and representations made by Taxpayer, Subsidiary A, and Subsidiary B and accompanied by penalties of perjury statements executed by the appropriate parties. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent. In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your authorized representative. Sincerely, ___________________________ Grace Cho Assistant to the Branch Chief, Branch 3 Office of Associate Chief Counsel (Financial Institutions & Products) cc:

Treasury Decision 9966 Internal Revenue Service 2022-44 I.R.B. 380 26 CFR 300.0 (amended), 300.5 (amended), 300.6 (amended), and 300.10 (amended) T.D. 9966 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 300 User Fees Relating to Enrolled Agents and Enrolled Retirement Plan Agents AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: These final regulations amend existing regulations relating to user fees for enrolled agents and enrolled retirement plan agents. The final regulations increase the renewal user fee for enrolled retirement plan agents from $67 to $140. In addition, the final regulations increase both the enrollment and renewal of enrollment user fees for enrolled agents from $67 to $140. These regulations affect individuals who are or apply to become enrolled agents and individuals who are enrolled retirement plan agents. The Independent Offices Appropriation Act of 1952 authorizes charging user fees. DATES: Effective date: These regulations are effective October 31, 2022. Applicability date: For the date of applicability, see§§ 300.5(d), 300.6(d), and 300.09(d). FOR FURTHER INFORMATION CONTACT: Mark Shurtliff at (202) 317-6845 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background This document contains amendments to the regulations in 26 CFR part 300 - User Fees. On March 1, 2022, a notice of proposed rulemaking (REG-114209-21) and notice of public hearing was published in the Federal Register (87 FR 11366). The document proposed amending the regulations relating to the user fees for enrolled agents and enrolled retirement plan agents. The document proposed increasing the amount of the renewal user fee for enrolled retirement plan agents from $67 to $140. In addition, the document proposed increasing both the enrollment and renewal of enrollment user fees for enrolled agents from $67 to $140. The notice contains a detailed explanation of the legal background and user fee calculations regarding the amendments to these regulations. Six comments responding to the notice of proposed rulemaking were received, including comments from the National Association of Enrolled Agents (NAEA). On May 3, 2022, representatives from the NAEA, Department of the Treasury (Treasury Department), the IRS, and the Small Business Administration (SBA), held a teleconference to listen to NAEA's comments about the proposed rulemaking. In addition, two requests to speak at the scheduled public hearing were received. A public hearing was held on May 11, 2022. After consideration of the written comments, teleconference comments, and testimony at the public hearing, the Treasury Department and the IRS have decided to adopt without modification the regulations proposed by the notice of proposed rulemaking. Summary of Comments The six comments submitted in response to the notice of proposed rulemaking and a summary of the teleconference comments are available at www.regulations.gov or upon request. Some of the comments that were submitted did not seek modification or clarification of the user fee as set forth in the proposed regulations. One commenter expressed concern with how the special enrollment examination for enrolled agents (EA SEE) is being administered. The commenter also recommended using the user fees in these regulations to provide resources for tax professionals that would improve the service they provide to their clients. The user fees in these regulations are not used by the Treasury Department or the IRS to administer the EA SEE, or to provide resources for tax professionals that improve the service they provide to their clients. Therefore, comments regarding the EA SEE and additional resources identified by the commenter are outside the scope of these regulations. Another commenter suggested that the IRS should raise the amount of the user fee to apply for or renew a preparer tax identification number (PTIN) in order to (1) lower the cost of user fees relating to enrolled agents and (2) encourage more individuals to become enrolled agents. These regulations do not relate to the PTIN user fee or the PTIN program. Therefore, comments regarding the PTIN program and related user fees are outside the scope of these regulations. Finally, one commenter suggested that it is inconsistent for the IRS to charge user fees in order to administer the enrollment and renewal of enrollment program but not charge user fees for other programs (for example, participation in the Annual Filing Season Program). Again, comments regarding programs other than the enrollment and renewal of enrollment program are outside the scope of these regulations. The summary of comments below addresses those comments that make recommendations concerning or seeking clarification of the user fees set forth in the proposed regulations relating to the user fees for enrolled agents and enrolled retirement plan agents. A. Amount of User Fees Four commenters expressed concern with the overall amount of the proposed enrollment and renewal of enrollment user fees and requested information regarding why the user fees are required. The Independent Offices Appropriation Act of 1952 (IOAA) (31 U.S.C. 9701) authorizes each agency to promulgate regulations establishing the charge for services provided by the agency. The IOAA states that the services provided by an agency should be self-sustaining to the extent possible. 31 U.S.C. 9701(a). The IOAA provides that user fee regulations are subject to policies prescribed by the President, which are currently set forth in the Office of Management and Budget (OMB) Circular A-25 (OMB Circular), 58 FR 38142 (July 15, 1993). Section 6a(1) of OMB Circular A-25 states that when a service offered by a Federal agency provides special benefits to identifiable recipients beyond those accruing to the general public, the agency should establish a user fee to recover the full cost of providing the service. An agency that seeks to impose a user fee for government-provided services must calculate the full cost of providing those services. In accordance with OMB Circular A-25, the IRS Return Preparer Office (RPO) completed its 2021 biennial review of the enrollment and renewal of enrollment user fees associated with enrolled agents and enrolled retirement plan agents. As discussed in the notice of proposed rulemaking, during its review the RPO took into account the increase in labor, benefits, and overhead costs incurred in connection with providing enrollment services to individuals who enroll or renew enrollment as enrolled agents and renew enrollment as enrolled retirement plan agents since the user fee was last increased in 2019. The proposed increase took into account the additional staffing that allows the RPO to provide a higher quality of service to individuals seeking to enroll or renew enrollment. The RPO also took into account a reallocation of certain labor costs in their methodology. The RPO followed the generally accepted accounting principles established by the Federal Accounting Standards Advisory Board. The RPO determined that the full cost of administering the program for enrolled agents and enrolled retirement plan agents has increased from $67 to $140 per application for enrollment or renewal of enrollment. That amounts to a $73 increase per application for enrollment or renewal of enrollment. The enrollment user fee is a one-time cost, and renewal of enrollment user fees are due once every three years, so the increase amounts to an additional $24.33 per year. B. OMB Circular A-25 Requirements Two of the commenters stated that the IRS did not fully comply with OMB Circular A-25. Two of the commenters questioned whether the service related to the user fees in these regulations confers a special benefit on enrolled agents and enrolled retirement plan agents. One of the commenters indicated that the service the IRS provides under these regulations benefits the general public rather than a specific beneficiary (that is, enrolled agents and enrolled retirement plan agents). Finally, two of the commenters stated that OMB Circular A-25 allows for an exception to the user fee requirement. The Treasury Department and the IRS disagree with the comments regarding OMB Circular A-25. Section 6a(1) of OMB Circular A-25 states that when a service offered by a Federal agency provides special benefits to identifiable recipients beyond those accruing to the general public, the agency should establish a user fee to recover the full cost of providing the service. An agency that seeks to impose a user fee for government-provided services must calculate the full cost of providing those services. Under OMB Circular A-25, a user fee should be set at an amount that recovers the full cost of providing a service, unless the OMB grants an exception. The full cost of providing a service includes both the direct and indirect costs of providing the service. The IRS provides enrollment and renewal of enrollment services to specific, identifiable recipients: enrolled agents and enrolled retirement plan agents. An individual who has been granted enrollment as an enrolled agent or an enrolled retirement plan agent may practice before the IRS, including representing taxpayers. The IRS confers benefits on individuals who are enrolled agents or enrolled retirement plan agents beyond those that accrue to the general public by allowing them to practice before the IRS. Because the ability to practice before the IRS is a special benefit that does not accrue to the general public, the IRS charges a user fee to recover the full cost associated with administering the enrollment and renewal of enrollment program. An agency is required to set the user fee at an amount that recovers the full cost of providing the service unless the agency requests, and the OMB grants, an exception to the full-cost requirement. Under section 6c(2) of OMB Circular A-25, the OMB may grant exceptions when the cost of collecting the fees would represent an unduly large part of the fee for the activity or when any other conditions exist that, in the opinion of the agency head, justifies an exception. When the OMB grants an exception, the agency does not collect the full cost of providing the service and must fund the remaining cost of providing the service from other available funding sources. Consequently, the agency subsidizes the cost of the service to the recipients of reduced-fee services even though the service confers a special benefit on those recipients who would otherwise be required to pay the full cost of receiving the benefit as provided by OMB Circular A-25. The cost of collecting the user fees in these regulations does not represent an unduly large part of the fee. In addition, the Treasury Department and the IRS have not identified any conditions that exist that would justify an exception to the full-cost requirement. Therefore, it is appropriate for the IRS to recover the full cost it incurs to provide enrollment and renewal of enrollment services to individuals seeking to practice before the IRS as enrolled agents or enrolled retirement plan agents. C. Justification for Increasing the User Fees One of the commenters expressed concern with the amount by which the user fees have increased since 2019. Specifically, user fees were increased from $30 to $67 in 2019, and the notice of proposed rulemaking for these final regulations proposed to increase the user fees from $67 to $140. The commenter questioned how the RPO's reallocation of labor costs could account for the increases. The amount of the user fee increases can be explained, in part, by certain reallocations of labor costs and how other user fees have affected the user fees relating to the enrollment and renewal of enrollment program for enrolled agents and enrolled retirement plan agents. On September 30, 2010, the Treasury Department and the IRS published two final regulations in the Federal Register: (1) final regulations (TD 9501, 75 FR 60309) that required tax return preparers who prepare for compensation all or substantially all of a tax return or claim for refund to obtain a PTIN and (2) final regulations (TD 9503, 75 FR 60316) that required a user fee to apply for or renew a PTIN. Individuals applying for, or renewing, a PTIN were to be subject to Federal tax-compliance and suitability checks and were required to pay a $50 user fee (plus an additional amount payable directly to a third-party vendor) to obtain or renew a PTIN. All enrolled agents and certain enrolled retirement plan agents were required to obtain a PTIN as a condition of enrollment and renewal of enrollment. TD 9527, 76 FR 32286; Notice 2011-91, 2011-47 I.R.B. 792. On April 19, 2011, the Treasury Department and the IRS published in the Federal Register (76 FR 21805) a final regulation (TD 9523) that reduced the amount of the user fees for the initial enrollment and renewal of enrollment for enrolled agents and enrolled retirement plan agents from $125 to $30. The user fee to enroll or renew enrollment was reduced because certain procedures, including Federal tax-compliance and suitability checks, which were previously performed as part of the enrolled agent and enrolled retirement plan agent enrollment application process, were to be performed as part of the required process to obtain a PTIN. As required by the IOAA and OMB Circular A-25, the RPO conducted a biennial review of the enrollment and renewal of enrollment user fees associated with enrolled agents and enrolled retirement plan agents in 2017. During its review the RPO took into account the increase in labor, benefits, and overhead costs incurred in connection with providing services to individuals who enroll or renew enrollment as enrolled agents and enrolled retirement plan agents since the user fee was changed in 2011. In addition, the RPO determined that costs associated with Federal tax-compliance checks and suitability checks on applicants for enrollment and renewal should be recovered as part of the user fee for administering the enrollment and renewal of enrollment programs (and not the PTIN user fee). The 2017 biennial review also took into account new costs associated with administering the program for enrolled agents and enrolled retirement plan agents, including the costs of operating a dedicated toll-free helpline in the RPO for enrollment and renewal of enrollment matters. The RPO determined that the full cost of administering the program for enrolled agents and enrolled retirement plan agents had increased from $30 to $67 per application for enrollment or renewal of enrollment. On May 13, 2019, the Treasury Department and the IRS published in the Federal Register (84 FR 20801-01) a final regulation (TD 9858) that established the current $67 user fee per enrollment or renewal of enrollment. The user fee complied with the directive in OMB Circular A-25 to recover the full cost of providing a service that confers special benefits on identifiable recipients beyond those accruing to the general public. The user fees for enrollment and renewal of enrollment were $125 prior to the RPO's reallocation of certain labor costs related to the PTIN user fee in 2011. The proposed user fee of $140 recovers many of the same costs associated with the RPO's administration of the enrollment and renewal of enrollment program that were recovered in the enrollment and renewal of enrollment user fees prior to the reallocation of certain labor costs to the PTIN user fee, as well as additional staffing and services the RPO currently provides associated with enrollment and renewal of enrollment. Even though the RPO has increased its staff to provide a higher quality of service, and now provides additional services, the user fee for enrollment and renewal of enrollment is only $15 more than the enrollment and renewal of enrollment fees in 2011. One of the commenters expressed concern about the number of full-time equivalent (FTE) employees assigned to the enrollment and renewal of enrollment program, FTE activities, and the ratio of managers to staff employees. The commenter stated that there were 17 FTEs assigned to the enrollment and renewal of enrollment program, including three managers and 14 staff employees. The commenter questioned whether that number of managers and FTEs was necessary to administer the enrollment and renewal of enrollment program. The employment and management figures cited by the commenter are not accurate. There are 14 employees assigned entirely to the enrollment and renewal of enrollment program, including two managers that oversee the 12 other employees. One of the managers is a director who oversees five FTEs, but only two of those FTEs are assigned fully to the enrollment and renewal of enrollment program (and whose salary, benefits, and associated overhead are charged to the enrollment and renewal of enrollment program). Because the director oversees three FTEs who are not fully assigned to the enrollment and renewal of enrollment program, not all of the director's salary is charged to the enrollment and renewal of enrollment program. The other manager is a frontline manager who oversees 10 FTEs, all of whom are dedicated entirely to the enrollment and renewal of enrollment program. The IRS determines the cost of its services and the activities involved in producing them through a cost-accounting system that tracks costs to organizational units. The lowest organizational unit in the IRS's cost-accounting system is called a cost center. There are two cost centers related to the enrollment and renewal of enrollment program: the Policy and Management Cost Center and the Enrollment Cost Center. The Policy and Management Cost Center includes three FTEs: one director, one senior analyst, and one administrative assistant. The director oversees the entire enrollment and renewal of enrollment program. The senior analyst manages inventory, handles system administrator duties for the toll-free helpline, and is responsible for reporting requirements for the enrollment and renewal of enrollment program. The administrative assistant provides administrative support to the director and staff, processes mail (including applications, checks, and general correspondence), uploads mail to be distributed to legal instrument examiners, and other administrative support duties (including managing the director's calendar and filing personnel documents). The Enrollment Cost Center includes one manager, one clerk, and nine legal instrument examiners. The manager is responsible for work assignments, work reviews, employee evaluations, leave approvals, and other managerial tasks. The clerk processes mail, prints and mails enrollment and renewal of enrollment certificates and cards, updates enrolled agent and enrolled retirement plan agent account information, makes electronic copies of paper documents, and provides clerical assistance with issuing notices to enrolled agents and enrolled retirement plan agents. The nine legal instrument examiners process enrollment and renewal of enrollment forms, make referrals to the RPO's suitability department for Federal tax-compliance checks and criminal background checks (if necessary), document findings and eligibility status in the RPO's case-tracking software, answer calls on the toll-free helpline, and respond to emails from enrolled agents and enrolled retirement plan agents. In addition, to improve the level of service for processing, the toll-free telephone operations staffing has increased, quality review programs have been implemented, and correspondence backlogs have been eliminated. The RPO has determined that these managers and other employees are necessary to effectively administer the enrollment and renewal of enrollment program and provide high-quality service to individuals seeking to enroll or renew enrollment. The same commenter also questioned a reallocation of costs that partially accounted for the proposed increased fee for enrollment or renewal of enrollment. This reallocation refers to a portion of oversight and support costs that had previously been recovered through other funding sources. During the biennial review, the RPO determined that these costs were associated with the enrollment and renewal of enrollment program and thus were appropriately recovered through the enrollment and renewal of enrollment user fees. D. Impact of User Fees on Enrollment and Renewal of Enrollment of Enrolled Agents and Enrolled Retirement Plan Agents Four of the commenters opined that the Treasury Department and the IRS should take into account that enrolled agents help improve the Federal tax system. For example, enrolled agents are required to take continuing education courses, which enable them to accurately prepare tax returns and efficiently resolve taxpayer disputes with the IRS. The four commenters expressed concern that the proposed user fee increases may discourage individuals from enrolling as enrolled agents or renewing their enrollment. The Treasury Department and the IRS recognize the valuable service enrolled agents and enrolled retirement plan agents provide to taxpayers as well as the contributions they make to improving the Federal tax system. As discussed in Section A of this preamble, despite the service enrolled agents and enrolled retirement plan agents provide to taxpayers, OMB Circular A-25 states that when a service offered by a Federal agency provides special benefits to identifiable recipients beyond those accruing to the general public, the agency should establish a user fee to recover the full cost of providing the service (unless the agency requests, and the OMB grants, an exception to the full-cost requirement). As discussed in Section B of this preamble, the IRS confers benefits on individuals who are enrolled agents and enrolled retirement plan agents beyond those that accrue to the general public by allowing them to practice before the IRS. The Treasury Department and the IRS comply with OMB Circular A-25 by charging user fees to recover the full cost of overseeing the enrollment and renewal of enrollment program. The Treasury Department and the IRS have not requested an exception from the OMB because there is no data that indicates that the user fee for enrollment or renewal of enrollment is cost prohibitive or that any other condition exists that justifies an exception. E. Regulatory Flexibility Act (RFA) Compliance One commenter stated that the Treasury Department and the IRS should have conducted an initial regulatory flexibility analysis pursuant to the RFA, based on the assumption that these regulations will have a significant economic impact on a substantial number of small entities. The commenter explained that it surveyed the enrolled agent community and found that 53 percent of enrolled agents are sole practitioners and 46 percent work for a firm. In the commenter's view, sole proprietorships should be considered small entities and the firms that employ enrolled agents (which sometimes reimburse enrolled agents for their user fees) are generally small businesses. Therefore, the commenter concluded that the user fees in these regulations would have a significant economic impact on a substantial number of small entities. The Treasury Department and the IRS disagree that these regulations will have a significant economic impact on a substantial number of small entities. As discussed in the notice of proposed rulemaking, only individuals, not businesses, can be enrolled agents or enrolled retirement plan agents. Accordingly, the user fee primarily affects individuals who are enrolled agents, apply to become enrolled agents, or are enrolled retirement plan agents. Since individuals are not "small entities" for purpose of the RFA, any economic impact of the user fees on small entities generally will occur only when an enrolled agent or enrolled retirement plan agent owns a small business or when a small business employs enrolled agents or enrolled retirement plan agents and reimburses them for their user fees. Even if a substantial number of small businesses are affected by reimbursing enrolled agents or enrolled retirement plan agents for their user fees, a regulatory flexibility analysis would not be required because the economic impact on small entities is not significant. The economic impact on any small entities affected would be limited to paying, triennially, the $73 difference in cost between the $140 user fee and the previous $67 user fee (for each enrolled agent or enrolled retirement plan agent who a small entity employs and reimburses). The RFA does not define the term "significant economic impact;" however, the SBA has provided guidance for government agencies on how to comply with the RFA, including determining whether a regulation will have a significant economic impact. The SBA's guidance is available at https://cdn.advocacy.sba.gov/wp-content/uploads/2019/06/21110349/How-to-Comply-with-the-RFA.pdf. The SBA's guidance explains that one measure for determining the economic impact is the percentage of revenue or percentage of gross revenues affected. For example, if the cost of implementing a particular rule represents three percent of the profits in a particular sector of the economy and the profit margin in that industry is two percent of gross revenues (an economic structure that occurs in the food marketing industry, where profits are often less than two percent), the implementation of the proposal would drive many businesses out of business (all except the ones that beat a three percent profit margin). According to the SBA's guidance, the regulation in this example would have a significant economic impact. The SBA's guidance further explains that the economic impact does not have to completely erase profit margins to be significant. For example, the implementation of a rule might reduce the ability of the firm to make future capital investment, thereby severely harming its competitive ability, particularly against larger firms. This scenario may occur in the telecommunications industry, where a regulatory regime that harms the ability of small companies to invest in needed capital will not put them out of business immediately, but over time may make it impossible for them to compete against companies with significantly larger capitalizations. The impact of that rule would then be significant for smaller telecommunications companies. Finally, the SBA's guidance explains that other measures may be used. For example, the impact could be significant if the cost of the proposed regulation (a) eliminates more than 10 percent of the businesses' profits; (b) exceeds one percent of the gross revenues of the entities in a particular sector; or (c) exceeds five percent of the labor costs of the entities in the sector. While data relevant to the SBA's guidance is limited, the Treasury Department and the IRS have carefully considered public information related to the economic impact of the proposed user fees. For example, Surgent, an organization that provides preparation courses for the EA SEE, states on its website at http://www.surgent.com that the average salary for an enrolled agent as of December 2021 is $59,020. The triennial user fee for enrolled agents and enrolled retirement plan agents is $140, or approximately $47 per year. Thus, the annualized cost of enrollment as an EA is approximately 0.0008 percent of the average yearly salary of an enrolled agent. The triennial user fee has increased from $67 to $140 per application for enrollment or renewal of enrollment. That amounts to a $73 increase per application for enrollment or renewal of enrollment. The increase amounts to $24.33 per year, or 0.0004 percent of the average yearly salary of an enrolled agent. Based on the foregoing considerations, the Treasury Department and the IRS conclude that the rule is not expected to have a significant economic impact on a substantial number of small entities, and a regulatory flexibility analysis is not required. After consideration of the comments, the proposed regulations are adopted without change. Special Analyses I. Regulatory Planning and Review These regulations are not significant and are not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the OMB regarding review of tax regulations. II. Regulatory Flexibility Act Pursuant to the RFA (5 U.S.C. chapter 6), it is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. As discussed in Section E of this preamble, the Treasury Department and the IRS have determined that the rule is not expected to have a significant economic impact on a substantial number of small entities and a regulatory flexibility analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking was submitted to the Chief Counsel of the Office of Advocacy of the SBA for comment on its impact on small business. The Chief Counsel for the Office of Advocacy of the SBA did not provide any written comments; however, they reached out to the Treasury Department and the IRS regarding comments they received from the NAEA. 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 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 final regulations do not have federalism implications and do not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive order. Drafting Information The principal author of these regulations is Mark Shurtliff, Office of the Associate Chief Counsel (Procedure and Administration). Other personnel from the Treasury Department and the IRS participated in the development of the regulations. List of Subjects in 26 CFR Part 300 Reporting and recordkeeping requirements, User fees. Adoption of Amendments to the Regulations Accordingly, the Treasury Department and the IRS amend 26 CFR part 300 as follows: PART 300 -- USER FEES Paragraph. 1. The authority citation for part 300 continues to read as follows: Authority: 31 U.S.C. 9701. Par. 2. Section 300.5 is amended by revising paragraphs (b) and (d) to read as follows:§300.5 Enrollment of enrolled agent fee. * * * * * (b) Fee. The fee for initially enrolling as an enrolled agent with the IRS is $140. * * * * * (d) Applicability date. This section is applicable beginning October 31, 2022. Par. 3. Section 300.6 is amended by revising paragraphs (b) and (d) to read as follows:§300.6 Renewal of enrollment of enrolled agent fee. * * * * * (b) Fee. The fee for renewal of enrollment as an enrolled agent with the IRS is $140. * * * * * (d) Applicability date. This section is applicable beginning October 31, 2022. Par. 4. Section 300.9 is amended by revising paragraphs (b) and (d) to read as follows:§300.9 Renewal of enrollment of enrolled retirement plan agent fee. * * * * * (b) Fee. The fee for renewal of enrollment as an enrolled retirement plan agent with the IRS is $140. * * * * * (d) Applicability date. This section is applicable beginning October 31, 2022. Paul J. Mamo, Assistant Deputy Commissioner for Services and Enforcement. Approved: September 20, 2022. Lily L. Batchelder, Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on September 27, 2022, 8:45 a.m., and published in the issue of the Federal Register for September 29, 2022, 87 F.R. 58968)

Internal Revenue Service - Information Release IR-2021-103 More than 1.1 million additional Economic Impact Payments disbursed under the American Rescue Plan; payments total approximately 164 million May 5, 2021 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 More than 1.1 million additional Economic Impact Payments disbursed under the American Rescue Plan; payments total approximately 164 million IR-2021-103, May 5, 2021 WASHINGTON -- Today, the Internal Revenue Service, the U.S. Department of the Treasury, and the Bureau of the Fiscal Service announced they are disbursing more than 1.1 million payments in the eighth batch of Economic Impact Payments from the American Rescue Plan. Today's announcement brings the total disbursed so far to approximately 164 million payments, with a total value of approximately $386 billion, since these payments began rolling out to Americans in batches as announced on March 12. The eighth batch of payments began processing on Friday, April 30, with an official payment date of May 5, with some people receiving direct payments in their accounts earlier as provisional or pending deposits. Here is additional information on this batch of payments: - In total, this batch includes more than 1.1 million payments with a value of more than $2 billion. - More than 585,000 payments, with a value of over $1.2 billion, went to eligible individuals for whom the IRS previously did not have information to issue an Economic Impact Payment but who recently filed a tax return. - This batch also includes additional ongoing supplemental payments for people who earlier this year received payments based on their 2019 tax returns but are eligible for a new or larger payment based on their recently processed 2020 tax returns. This batch included more than 570,000 of these "plus-up" payments, with a value of nearly $1 billion. - Overall, this eighth batch of payments contains about 600,000 direct deposit payments (with a total value of $1.1 billion) with the remainder on paper payments. Additional information is available on the first seven batches of Economic Impact Payments from the American Rescue Plan, which processed weekly on April 23, April 16, April 9, April 2, March 26, March 19 and March 12. The IRS will continue to make Economic Impact Payments on a weekly basis. Ongoing payments will be sent to eligible individuals for whom the IRS previously did not have information to issue a payment but who recently filed a tax return, as well to people who qualify for "plus-up" payments. Special reminder for those who don't normally file a tax return Although payments are automatic for most people, the IRS continues to urge people who don't normally file a tax return and haven't received Economic Impact Payments to file a 2020 tax return to get all the benefits they're entitled to under the law, including tax credits such as the 2020 Recovery Rebate Credit, the Child Tax Credit, and the Earned Income Tax Credit. Filing a 2020 tax return will also assist the IRS in determining whether someone is eligible for an advance payment of the 2021 Child Tax Credit, which will begin to be disbursed this summer. For example, some federal benefits recipients may need to file a 2020 tax return - even if they don't usually file - to provide information the IRS needs to send payments for a qualifying dependent. Eligible individuals in this group should file a 2020 tax return as quickly as possible to be considered for an additional payment for their qualifying dependents. People who don't normally file a tax return and don't receive federal benefits may qualify for these Economic Impact Payments. This includes those experiencing homelessness, the rural poor, and others. Individuals who didn't get a first or second round Economic Impact Payment or got less than the full amounts may be eligible for the 2020 Recovery Rebate Credit, but they'll need to file a 2020 tax return. See the special section on IRS.gov: Claiming the 2020 Recovery Rebate Credit if you aren't required to file a tax return. Free tax return preparation is available for qualifying people. The IRS reminds taxpayers that the income levels in this third round of Economic Impact Payments have changed. This means that some people won't be eligible for the third payment even if they received a first or second Economic Impact Payment or claimed a 2020 Recovery Rebate Credit. Payments will begin to be reduced for individuals making $75,000 or above in Adjusted Gross Income ($150,000 for married filing jointly). The payments end at $80,000 for individuals ($160,000 for married filing jointly); people with Adjusted Gross Incomes above these levels are ineligible for a payment. Individuals can check the Get My Payment tool on IRS.gov to see the payment status of these payments. Additional information on Economic Impact Payments is available on IRS.gov.

Private Letter Ruling Number: 202406006 Internal Revenue Service February 13, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202406006 Release Date: 2/9/2024 Index Number: 118.01-00, 305.04-00, 2501.00-00, 2511.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:CORP:2 PLR-115607-22 Date: February 13, 2023 Dear ******: This letter responds to your authorized representative's letter dated August 10, 2022, requesting rulings under sections 118, 305, 2501, 2511, 2512, and 2702 of the Internal Revenue Code (the "Code"). The information provided in that letter and in later correspondence is summarized below. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party. This office has not verified any of the material submitted in support of the request for rulings, but such material is subject to verification on examination. Summary of Facts Company is a State A corporation and the parent of an affiliated group of corporations that files a consolidated U.S. federal income tax return on a calendar year basis. Company was incorporated in Year 1. Company is engaged in Business A. Executive is an executive of Company. On Date 1, Executive established Trust 1 for the benefit of Family Member. Also on Date 1, Executive established Trust 2 for the benefit of the Family Beneficiaries. On Date 2 and Date 4, Executive established Trust 3 and Trust 4, respectively, for the benefit of Family Member. On Date 3, Executive established Trust 5 for the benefit of Person 1. Also on Date 2, Executive established GRAT (Grantor Retained Annuity Trust) 1 for the benefit of Executive and Person 1. On Date 8, Executive established GRAT 2 and GRAT 3 for the benefit of Executive, Person 2, Person 3, Person 4, and a trust, not part of this ruling request, for Person 2, Person 3, and Person 4. On Date 9, Executive established GRAT 4 for the benefit of Trust 2. Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, GRAT 1, GRAT 2, GRAT 3, and GRAT 4 are hereinafter referred to collectively as "Trusts". Executive's interest in GRAT 4 is a "qualified interest" under section 2702(b). Executive's interests in GRAT 1, GRAT 2, and GRAT 3 are not subject to the special valuation rules of section 2702(a) because the beneficiaries of GRAT 1, GRAT 2, and GRAT 3 are not members of Executive's family as defined in section 2702(e) and section 2704(c)(2). On Date 5, Company formed LLC, which is disregarded as an entity separate from Company for U.S. federal income tax purposes. LLC was formed for Company Purpose. However, Company is not required under the operating agreement to use LLC for Company Purpose and may dissolve LLC at any time. Company has three classes of common stock outstanding: Stock A, Stock B, and Stock C. Stock A is widely held and, since Date 7, has been publicly traded on the Exchange. The shares of Stock A and Stock B are identical other than the voting power. Each share of Stock B has a times the voting power of each share of Stock A. Stock B is held, in part, by Executive and GRATs 1 through 4, and Trusts 1 through 4. Trust 5 owns shares of Stock A. All of the issued shares of Stock C are held by LLC and are not considered outstanding for U.S. federal income tax purposes. Stock C has no voting rights except as otherwise required by law. Upon the transfer to a holder other than LLC or another subsidiary of Company, shares of Stock C will automatically convert on a share-for-share basis into shares of Stock A. On Date 6, Company made an initial contribution of b newly-issued shares of Stock C to LLC. On Date 10, Company announced that its board of directors approved a share repurchase program with authorization to purchase Company's Stock A at the discretion of Company's management (the " Share Repurchase Program "). None of the Contributing Shareholders (defined below) have participated in the Share Repurchase Program. The Share Repurchase Program and the Proposed Transaction are each driven by separate valid business purposes. Executive, Trusts, and Company intend to enter into a binding agreement ("Agreement") wherein Executive and Trusts will each surrender c percent (valued at approximately $d) of their shares of Stock A or Stock B, as the case may be, to Company. Company will subsequently retire those contributed shares and will transfer a like number of newly issued shares of Stock C to LLC. Proposed Transaction For what are represented to be valid business purposes, the following transaction has been proposed (the "Proposed Transaction"): (i) Trusts and Executive (each a " Contributing Shareholder ", and collectively, the " Contributing Shareholders ") will contribute in one or more installments a portion of their Stock A or Stock B to the capital of Company for the benefit of LLC. Executive intends to contribute stock of an amount equal to approximately $d or c percent of shares of Stock B owned by Executive. The Trusts will contribute a number of shares to Company that is proportionate on a percentage basis to the number of shares contributed by Executive (collectively, the " Contribution ") or approximately c percent of their shares of Stock A or Stock B, as the case may be, to the capital of Company. The Contributing Shareholders and Company will enter into a binding agreement pursuant to which the Contribution will be effected (the " Contribution Agreement " or " Agreement "). The Contribution may take place in more than one installment. The Contributing Shareholders and Company will enter into a new Contribution Agreement for each separate contribution, if any. The shareholders of Company other than the Contributing Shareholders are referred to as the " Non-Contributing Shareholders ". (ii) When Company receives shares from Contributing Shareholders pursuant to the Contribution Agreement, Company will retire such shares and transfer a like number of newly issued shares of Stock C to LLC. (iii) LLC will use cash derived from Stock C for Company Purpose. (iv) Company owns all of the membership interests of the LLC and therefore will control the policies of LLC related to the Company Purpose. Representations Company and the Contributing Shareholders make the following representations regarding the Proposed Transaction: (a) The Contributing Shareholders will not receive any consideration from Company with respect to the surrender of their stock to the capital of Company in the Proposed Transaction. (b) The stock surrendered to the capital of Company in the Proposed Transaction will be canceled and such stock or similar shares of stock of Company will not be returned to the Contributing Shareholders following the Proposed Transaction. (c) Company does not intend to fund LLC with property other than Stock C or cash. (d) GRAT 1, GRAT 2, GRAT 3, and GRAT 4 each have the terms necessary to satisfy the requirements to be a qualified interest under § 25.2702-3 of the Gift Tax Regulations. (e) There is no plan to transfer the shares of Stock C to any employee or independent contractor in connection with the performance of services within the meaning of section 83 or otherwise. (f) The Contributing Shareholders are not related to any of the Non-Contributing Shareholders such that stock ownership of a Contributing Shareholder would be attributed to a Non-Contributing Shareholder pursuant to section 318(a)(1) or section 267(c)(2). (g) There is no reason to believe that any of the stock purchases pursuant to the Share Repurchase Program will be taxed as dividends to the participating shareholders and there is no reason to believe that such stock purchases are dividends within the meaning of sections 301 and 302. (h) The Proposed Transaction is an isolated transaction that is not related to any other past or future transactions. (i) The Proposed Transaction is motivated solely by the Contributing Shareholders' and Company's business considerations and is not motivated by any intent to confer a U.S. federal income tax benefit on any shareholder, including as a substitute for a dividend. (j) The Proposed Transaction is not part of a plan to periodically increase the proportionate share of any shareholder in the assets or earnings and profits of Company. (k) There is no plan for the Contributing Shareholders to make contributions to Company that are not otherwise described herein. (l) If the Contributions pursuant to the Proposed Transaction occur in more than one installment, the final contribution will occur within a e month period of the first contribution. (m) Persons 1 through 4 are not employees of Company or Executive. Transactional Rulings Based solely on the information and representations submitted, we rule as follows: (1) The surrenders of Stock A or Stock B by the Contributing Shareholders to Company in the Proposed Transaction are a non-taxable contribution to the capital of Company and accordingly, the Contributing Shareholders will not recognize gain or loss on such contribution. See Commissioner v. Fink, 483 U.S. 89 (1987). (2) Each Contributing Shareholder's basis in the shares surrendered in the Proposed Transaction will be allocated to the Contributing Shareholder's basis in their remaining shares. See Commissioner v. Fink, 483 U.S. 89 (1987). (3) Company's receipt of shares of Stock A or B from the Contributing Shareholders will not be taxable to Company. See section 118(a). (4) The Non-Contributing Shareholders will not recognize any income as a result of the Proposed Transaction and the Contributing Shareholders' surrender of shares to Company will not be treated as a distribution of property to the Non-Contributing Shareholders. See Treas.Reg. §§ 1.305-3(b)(3) and 1.305-3(e), Example (13). See also Rev.Rul. 77-19, 1979-1 C.B. 83. Gift Tax Rulings Ruling 5 Under section 2501(a)(1) of the Code, tax is imposed for each calendar year on the transfer of property by gift during such calendar year by any individual, resident, or nonresident. Under section 2511(a), the tax imposed by section 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. Under section 2512(b), where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. Section 25.2511-1(c)(1) of the Gift Tax Regulations provides that any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax. Under § 25.2511-1(g)(1), the gift tax is not applicable to a transfer for a full and adequate consideration in money or money's worth, or to ordinary business transactions, described in § 25.2512-8. Under § 25.2511-1(h), a transfer of property by B to a corporation generally represents gifts by B to the other individual shareholders of the corporation to the extent of their proportionate interests in the corporation. Under § 25.2512-8, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money's worth. In Rev.Rul. 80-196, 1980-2 C.B. 32, two shareholders transferred stock to three employees as a bonus in consideration of past services to the corporation. The two shareholders were not related to the three employees, nor did any special personal relationship exist between the shareholders and the three employees. The ruling holds, for gift tax purposes, that the transfers to the three employees were in the ordinary course of business under § 25.2512-8 because the transfers were motivated by a valid business reason, that is, retaining valuable personnel in the employment of the corporation. Therefore, the transfers were not subject to gift tax. In Anderson v. Commissioner, 8 T.C. 706 (1947), senior executives of a corporation sold shares to junior executives as part of a plan to shift management responsibilities to the junior executives. The Tax Court held that the sale was not subject to gift tax because it was made in the ordinary course of business. See Galluzzo v. Commission, 43 T.C.M. 199 (T.C. 1981). Company is owned by Executive, Trusts, and Non-Contributing Shareholders. In Agreement, Executive and Trusts agree to surrender shares to Company in order to fund LLC. By entering into Agreement, Executive and Trusts are increasing the value of the shares held by the Non-Contributing Shareholders. For gift tax purposes, this transfer is characterized as an indirect transfer of property from Executive and Trusts to Non-Contributing Shareholders. See §§ 25.2511-1(c)(1) and 25.2511-1(h). See also Rev.Rul. 71-443, 1971 C.B. 337; Bosca v. Commissioner, T.C. Memo. 1998-251; Kincaid v. United States, 682 F.2d 1220 (5 th Cir. 1982); Estate of Trenchard, T.C. Memo. 1995-121. Under § 25.2512-8, a transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent), will be considered as made for adequate and full consideration in money or money's worth. Under the facts presented in this ruling, the transfer made through Agreement satisfies all three of the requirements to be considered as made in the ordinary course of business. First, Agreement is for the bona fide business purpose of furthering Company Purpose. Second, the transfer from Executive and Trusts to Non-Contributing Shareholders is at arm's length because the transaction is a business transaction, the parties act in their own self-interest and are not subject to pressure from the other parties, and the Non-Contributing Shareholders are not related to Executive or Trusts. Finally, the transfer is made without donative intent because the transfer is made for the sole purpose of furthering Company Purpose. Accordingly, the indirect transfer from Executive and Trusts to the Non-Contributing Shareholders is deemed to be made for adequate and full consideration in money or money's worth. Therefore, based on the facts presented and the representations made, the transfers made to the Non-Contributing Shareholders pursuant to Agreement do not constitute gifts from Executive or Trusts. By entering into Agreement, each party is increasing the value of the shares held by others (i.e., Executive is increasing the value of the shares held by Trusts, Trusts are increasing the value of shares held by Executive, and each individual trust is increasing the value of each other individual trust). The transfers between Executive and Trusts are not at arm's length, and, therefore, they are not made in the ordinary course of business. However, under Agreement, Executive and Trusts are each surrendering an equal proportion of their shares of Company, and, consequently, the value of the indirect transfers made by each of the parties to the Agreement will be equal to the value of the indirect transfers received by each party. Accordingly, the indirect transfers made from Executive to Trusts and from Trusts to Executive (and each other trust) are made for full and adequate consideration in money or money's worth. Therefore, based on the facts presented and the representations made, the Contributing Shareholders will not be subject to gift tax under sections 2501, 2511, 2512, and regulations thereunder as a result of the Proposed Transaction. Ruling 6 Section 2702(a)(1) provides that solely for purposes of determining whether a transfer of an interest in trust to (or for the benefit of) a member of the transferor's family is a gift (and the value of such transfer), the value of any interest in such trust retained by the transferor or any applicable family member (as defined in section 2701(e)(2)) shall be determined as provided in section 2702(a)(2). Section 2702(a)(2)(A) provides that the value of any retained interest which is not a qualified interest shall be treated as being zero. Section 2702(b) provides that the term "qualified interest" means: (1) any interest which consists of the right to receive fixed amounts payable not less frequently than annually, (2) any interest which consists of the right to receive amounts which are payable not less frequently than annually and are a fixed percentage of the fair market value of the property in the trust (determined annually), and (3) any noncontingent remainder interest if all of the other interests in the trust consist of interests described in paragraph (1) or (2). Section 25.2702-2(a)(6) provides, in part, that a qualified interest means a qualified annuity interest, a qualified unitrust interest, or a qualified remainder interest. Section 25.2702-3(b)(1) provides that an interest is a qualified annuity interest only if it meets the requirements of this paragraph and § 25.2702-3(d). A qualified annuity interest is an irrevocable right to receive a fixed amount. The annuity amount must be payable to (or for the benefit of) the holder of the annuity interest at least annually. Under § 25.2702-3(d)(3), the governing instrument must prohibit distributions from the trust to or for the benefit of any person other than the holder of the qualified annuity or unitrust interest during the term of the qualified interest. The terms of GRAT 4 prohibit distributions to anyone other than Executive during the term of Executive's interest in GRAT 4 in accordance with § 25.2702-3(d)(3). Under the terms of Agreement, the contribution of shares to Company and resulting indirect transfer from GRAT 4 to Executive and Non-Contributing Shareholders will be made for adequate and full consideration in money or money's worth within the meaning of § 25.2511-1(g)(1). Accordingly, such transfers are not characterized as distributions from GRAT 4. These transfers are deemed investments because GRAT 4 receives or is deemed to receive value in money or money's worth equal to the transfer. As a result, GRAT 4 will not violate the terms of the trust instruments or the requirement under § 25.2702-3(d)(3) prohibiting a distribution for the benefit of any person other than Executive during the term of Executive's qualified interest. Therefore, based on the facts presented and the representations made, Executive's interest in GRAT 4 will not cease to qualify as a qualified interest under § 25.2702-3 or otherwise under section 2702(b) as a result of the Proposed Transaction. Caveats Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Procedural Statements This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. Sincerely, Gerald B. Fleming Senior Technician Reviewer, Branch 2 (Corporate) cc:

Internal Revenue Service - Information Release IR-2023-10 Check tax withholding now to avoid paying future quarterly estimated payments January 19, 2023 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 Check tax withholding now to avoid paying future quarterly estimated payments IR-2023-10, January 19, 2023 WASHINGTON -- The Internal Revenue Service reminds taxpayers who earn wages to use the Tax Withholding Estimator now to adjust their 2023 withholding. People's tax situations occasionally change through marriage or divorce, adding a child or having one move out on their own. Checking now and making necessary adjustments early in the year may help them avoid the need for quarterly estimated tax payments. The Tax Withholding Estimator online tool helps taxpayers see if they may get a refund or need to make a payment directly to the IRS to avoid a tax bill and penalties next year. Income taxes are pay-as-you-go and are normally paid during the year as income is received through withholding from paychecks, pension payments, Social Security benefits or certain other government payments. Having a second job or non-wage income from unemployment, self-employment, annuity income, the gig economy or digital assets may require taxpayers make quarterly estimated tax payments to avoid a balance due when they file. In addition, various financial transactions, especially late in the year, can have an unexpected tax impact. Examples include year-end and holiday bonuses, stock dividends, capital gain distributions from mutual funds and stocks, bonds, virtual currency, real estate or other property sold at a profit. Tax Withholding Estimator The Tax Withholding Estimator, also available in Spanish, can help wage earners determine if they have too much or too little tax withheld. Taxpayers may use the estimate to change their withholding amount and submit a new Form W-4, Employee's Withholding Certificate, to their employer. The tool offers those who earn wages step-by-step help for tailoring the amount of income tax they should have withheld from their paycheck. Make a tax payment The fastest and easiest way to make an estimated tax payment is to do so electronically using IRS Direct Pay or the Treasury Department's Electronic Federal Tax Payment System (EFTPS). For information on other payment options, visit Pay Online. If paying by check, be sure to make the check payable to the "United States Treasury." Other items may affect 2023 taxes Some unforeseen life events can trigger a need to make withholding adjustments. Here are some tools to help taxpayers know how to make adjustments due to different scenarios: - Tips for using the IRS Tax Withholding Estimator. - What to do with your Tax Withholding Estimator results. - About Form W-4, Employee's Withholding Certificate - including recent updates, related forms and instructions on how to file. - Coronavirus tax relief - help for taxpayers, businesses, tax-exempt organizations and others - including health plans - affected by the coronavirus (COVID-19). - Disaster Assistance and Emergency Relief for Individuals and Businesses - special tax law provisions when the federal government declares their location a major disaster area. - IRS Publication 4128, Tax Impact of Job Loss PDF - explains how this unfortunate circumstance can create new tax issues. - Workers moving into the gig economy due to the pandemic - advises people earning income in the gig economy. - Publication 505, Tax Withholding and Estimated Tax, has additional details, including worksheets and examples, that can be helpful to those who have special situations. More Information: - Fact Sheet 2023-01, How to get tax withholding right

Notice 2022-1 Internal Revenue Service 2022-2 I.R.B. 304 Instructions for Lenders and Loan Servicers Regarding Certain Discharged Student Loans Notice 2022-1 SECTION 1: PURPOSE This notice directs lenders or servicers of student loans that they should not file information returns or furnish payee statements under section 6050P of the Internal Revenue Code (Code) to report the discharge of certain student loans when the discharge is excluded from gross income under section 108(f)(5) of the Code, as amended by the American Rescue Plan Act of 2021 (ARP), Pub. L. 117-2, 135 Stat. 4 (March 11, 2021), for taxable years 2021 to 2025. SECTION 2: BACKGROUND Section 9675(a) of the ARP amended section 108 of the Code, Income from discharge of indebtedness, to provide a special rule for discharges of certain student loan debt under section 108(f)(5). Under this special rule, gross income does not include any amount which would otherwise be includible in gross income by reason of the discharge (in whole or in part) after December 31, 2020, and before January 1, 2026, of loans provided for postsecondary educational expenses, whether the loan was provided through the educational institution or directly to the borrower. Such loans must have been made, insured, or guaranteed by the United States, or an instrumentality or agency thereof, a State, territory, or possession of the United States, or the District of Columbia, or any political subdivision thereof, or an eligible educational institution. Additionally, certain private education loans and loans made by certain educational organizations qualify for this special rule. SECTION 3: INFORMATION REPORTING Generally, section 6050P of the Code and §§ 1.6050P-1 and 1.6050P-2 of the Income Tax Regulations require an applicable entity (as defined in section 6050P(c)(1)) that discharges at least $600 of a borrower's indebtedness to file a Form 1099-C, Cancellation of Debt, with the Internal Revenue Service (IRS), and to furnish a payee statement to the borrower. For purposes of this reporting requirement, § 1.6050P-1(c) provides that "indebtedness" means any amount owed to an applicable entity, including stated principal, fees, stated interest, penalties, administrative costs, and fines. When all or a portion of a student loan described in section 108(f)(5) is discharged after December 31, 2020 and before January 1, 2026, an applicable entity is not required to, and should not, file a Form 1099-C information return with the IRS or furnish a payee statement to the borrower under section 6050P as a result of the discharge. The filing of an information return with the IRS, although not required, could result in the issuance of an underreporter notice (IRS Letter CP2000) to the borrower through the IRS's Automated Underreporter program, and the furnishing of a payee statement to the borrower could cause confusion for a taxpayer with a tax-exempt discharge of debt. SECTION 4: DRAFTING INFORMATION The principal author of this announcement is Blaise Dusenberry of the Office of the Associate Chief Counsel (Procedure and Administration). For further information regarding this announcement, contact Blaise Dusenberry at (202) 317-6845 (not a toll-free number).

Private Letter Ruling Number: 202101004 Internal Revenue Service October 14, 2020 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202101004 Release Date: 1/8/2021 Index Number: 9100.22-00, 336.05-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:CORP:04 PLR-111116-20 Date: October 14, 2020 Dear ********: This letter responds to a letter dated April 30, 2020, submitted on behalf of Purchaser, S Corporation Target, and Sellers (collectively, the "Parties"), requesting an extension of time under §301.9100-3 of the Procedure and Administration Regulations to file an election. The Parties are requesting an extension of time to properly execute the agreement referenced in §1.336-2(h)(3)(i) of the Income Tax Regulations (the "Agreement") and to file an election statement under §1.336-2(h)(3)(iii) ("Election Statement") with respect to Purchaser's acquisition of all of the stock of S Corporation Target from Sellers on Date 1. Additional information was submitted subsequently. The material information submitted is summarized below. On Date 1, Sellers sold all the stock of S Corporation Target to Purchaser, a limited liability company treated as a partnership for federal income tax purposes (the "Disposition"). It has been represented that the Disposition qualified as a "qualified stock disposition" as defined in §1.336-1(b)(6). After the Disposition, S Corporation Target converted under state law from a corporation to a limited liability company ("LLC") that is disregarded for federal income tax purposes. The Parties intended that a section 336(e) election would be made with respect to the Disposition. However, for various reasons, the tax return was not timely filed and a section 336(e) election was not timely made. Subsequently, a request was submitted under §301.9100-3 for an extension of time to enter into the Agreement and file the Election Statement. The Parties each represented that they are not seeking to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662 at the time of the request for relief. Regulations promulgated under section 336(e) permit certain sales, exchanges, or distributions of stock of a corporation to be treated as asset dispositions if: (1) the disposition is a "qualified stock disposition" as defined in §1.336-1(b)(6); and (2) a section 336(e) election is made. Section 1.336-2(h)(3) provides that a section 336(e) election for an S corporation target is made by: (i) all of the S corporation shareholders, including those who do not dispose of any stock in the qualified stock disposition, and the S corporation target entering into a written, binding agreement, on or before the due date (including extensions) of the federal income tax return of the S corporation target for the taxable year that includes the disposition date, to make a section 336(e) election; (ii) the S corporation target retaining a copy of the written agreement; and (iii) the S corporation target attaching the section 336(e) election statement, described in § 1.336-2(h)(5) and (6), to its timely filed (including extensions) federal income tax return for the taxable year that includes the disposition date. Under §301.9100-1(c), the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-1(a). Section 301.9100-2 provides automatic extensions of time for making certain elections. Requests for relief under §301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. Section 301.9100-3(a). The time for entering into the Agreement and filing the Election Statement is fixed by the regulations ( i.e., §1.336-2(h)(3)(i) and (iii)). Therefore, the Commissioner has discretionary authority under §301.9100-3 to grant an extension of time to enter into the Agreement and to file the Election Statement, provided the Parties acted reasonably and in good faith, the requirements of §§301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government. Information, affidavits, and representations submitted by the Parties, Company Officials, and Tax Professional explain the circumstances that resulted in the failure to enter into the Agreement and file the Election Statement. The information establishes the request for relief was filed before the failure to timely enter into the Agreement and file the Election Statement was discovered by the Internal Revenue Service. See §301.9100-3(b)(1)(i). Based on the facts and information submitted, including the representations made, we conclude that the Parties have acted reasonably and in good faith, the requirements of §§301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government. Accordingly, an extension of time is granted under §301.9100-3, until 75 days from the date on this letter, to enter into the Agreement and file the Election Statement with respect to the Disposition. WITHIN 75 DAYS OF THE DATE ON THIS LETTER, S Corporation Target must enter into a written, binding agreement in accordance with §1.336-2(h)(3)(i) to make the section 336(e) election, and S Corporation Target must file the Election Statement in accordance with §1.336-2(h)(3)(iii). The Election Statement must be attached to S Corporation Target's tax return for the tax year including Date 1. In addition, a copy of this letter must be attached to S Corporation Target's return. Alternatively, if S Corporation Target files its return electronically, it may satisfy the requirement of attaching a copy of this letter to the return by attaching a statement to its return that provides the date on, and control number of (PLR-111116-20), this letter ruling. WITHIN 150 DAYS OF THE DATE ON THIS LETTER, all relevant parties must file or amend, as applicable, all returns and amended returns (if any) necessary to report the transaction consistently with the making of a section 336(e) election for the tax year in which the transaction was consummated (and for any other affected tax year). The above extension of time is conditioned on all relevant parties' tax liabilities (if any) being not lower, in the aggregate, for all years to which the section 336(e) election applies than it would have been if the Agreement had been timely entered into and the Election Statement had been timely filed (taking into account the time value of money). No opinion is expressed as to the taxpayers' tax liabilities for the years involved. A determination thereof will be made by the applicable Director's office upon audit of the federal income tax returns involved. We express no opinion as to: (1) whether the Disposition qualifies as a "qualified stock disposition"; or (2) any other tax consequences arising from the section 336(e) election. In addition, we express no opinion as to the tax consequences of filing the return or making the section 336(e) election late under the provisions of any other section of the Code and regulations, or as to the tax treatment of any conditions existing at the time of, or resulting from, filing the section 336(e) election late that are not specifically set forth in the above ruling. For purposes of granting relief under §301.9100-3, we have relied on certain statements and representations made by the Parties, Company Officials, and Tax Professional. However, the Director should verify all essential facts. In addition, notwithstanding that an extension is granted under §301.9100-3 to file the section 336(e) election, penalties and interest that would otherwise be applicable, if any, continue to apply. This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. Sincerely, Thomas I. Russell Chief, Branch 1 Office of Associate Chief Counsel (Corporate) cc:

Private Letter Ruling Number: 202124002 Internal Revenue Service March 19, 2021 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202124002 Release Date: 6/18/2021 Index Number: 1362.04-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:03 PLR-120410-20 Date: March 19, 2021 Dear *******: This letter responds to a letter dated September 14, 2020, and subsequent correspondence submitted on behalf of Company by its authorized representatives, requesting a ruling under § 1362(f) of the Internal Revenue Code (Code). FACTS The information submitted states Company was organized on Date 1, as a limited liability company under the laws of State. On Date 2, Company elected to be an S corporation effective for Date 3. On Date 4, the Company adopted an operating agreement ("Agreement") that included provisions in contemplation of Company being treated as a partnership for Federal income tax purposes. However, the applicability of those provisions was not limited to such a situation. The Agreement included the following partnership provisions: 1.2.4. "Capital Account" of a Member means the capital account maintained for the Member in accordance with Article 3.6. 1.2.5. "Capital Unit" means any Unit that would give the holder thereof a share of the proceeds if the Company's assets were sold at fair market value (determined as of the date on which such Unit is received) and then the proceeds were distributed in a complete liquidation of the Company. 1.2.15. "Profits Interest" represents an interest in Company profits and losses from operations, distributions from operations and an interest in future appreciation or depreciation in Company asset values but which does not represent an interest in any existing capital of the Company (as described in Revenue Procedure 93-27, 1993-2 C.B. 343 and Revenue Procedure 2001-43.2001-2 C.B. 191. 1.2.16. "Profits Interest Unit" means, as of any date of determination of the number of outstanding Profits Interest Units, that portion of an outstanding Profits Interest that entitles the holder thereof to receive distributions from the Company equal to the distributions to which the holder of one Unit is then entitled to receive pursuant to this Agreement. 3.1. Initial Capital Contributions. The Members shall make capital contributions to the Company, in cash, services, or property, in the amounts set forth in the attached Exhibit A. 3.2. Members' Units in Company Capital. The interest of each Member in the capital of the Company shall be equal to such Member's Membership Interest, which is comprised of part or all of one or more Units. As of the date of this Agreement, the Units are allocated among the Members as set forth on Exhibit A. 3.3.1. Profits Interest Units. This Article 3.3 shall constitute a written compensation plan and agreement within the meaning of Rule 701 under the Securities Act of 1933, as amended (the "1933 Act"), and under State law pursuant to which Profits Interests may be issued as determined by the Managers, for zero consideration in order to align the interests of the holders of Profits Interest Units with the interests of the other Members and to provide an additional incentive for the holders of Profits Interest Units to build value for the Company and achieve its business goals. The provisions of this Article 3.3 shall apply to any issuance of Profits Interest Units, as determined by the Managers in accordance with the terms of this Agreement. A holder of a Profits Interest Unit is a Member for all purposes of this Agreement. 3.3.2. Profits Interest Grants. The Profits Interest Units be [sic] issued pursuant to a profits interest grant agreement in substantially the form attached hereto as Exhibit B (with such modifications as the Managers may determine, the "Profits Interest Grant Agreement"). Each Member who receives a Profits Interest Unit is willing to subject each such Profits Interest Unit to the terms and conditions of the Profits Interest Grant Agreement. 3.3.3. Capital Account. It is intended that the Profits Interest Units will participate in distributions pari passu with the Capital Units; provided, however, that each holder of a Profits Interest Unit will have an initial zero balance in its Capital Account as of the date of grant (the "Grant Date') with respect to such interest in the Company. Because each holder of Profits Interest Units has a zero balance in his Capital Account as of the Grant Date, each holder of Profits Interest Units would not be entitled to a share of the proceeds if the Company assets were sold at fair market value as of the Grant Date or any date before the Grant Date and the proceeds were distributed in a complete liquidation of the Company. The number of Profits Interest Units granted to a holder shall be set forth on Exhibit A, which may be amended by the Managers from time to time without any additional consent of the Members. 3.3.4. Tax Liability. With respect to each holder of Profits Interest Units, the Company will treat each such holder of Profits Interest Units as the owner of all of the Profits Interest Units granted to such holder from each applicable Grant Date for all federal income tax purposes and such holder will take into account his distributive share of the Company's items of income, gain, loss, deduction, and credit associated with such interest in computing such holder's federal income tax liability for the entire period during which the holder has Profits Interest Units. 3.7. Capital Accounts of the Members. A separate Capital Account shall be maintained for each Member in accordance with the Code and the Regulations thereunder. Capital Accounts will be: 3.7.1. Increased by: (i) the amount of any money the Member contributes to the Company's capital; (ii) the fair market value of any property the Member contributes to the Company's capital, net of any liabilities the Company assumes or to which the property is subject; and (iii) the Member's share of Profits and any separately stated items of income or gain; and 3.7.2. Decreased by: (i) the amount of any money the Company distributes to the Member; (ii) the fair market value of any property the Company distributes to the Member, net of any liabilities the Member assumes or to which the property is subject; and (iii) the Member's share of Losses and any separately stated items of deduction or loss. 3.8. Revaluation of Capital Accounts Upon Occurrence of Certain Events. In accordance with the provisions of the Regulations, if, after the initial capital is contributed pursuant to Article 3.1, money or property in other than a de minimis amount is contributed to the Company, or distributed by the Company to a Member, the Capital Accounts of the Members and carrying values of all the Company's property may be adjusted to reflect the fair market value of the company property on the date of adjustment, as set forth in the Regulations. 4.1. Allocation of Profits and Losses Between the Members. After giving effect to the special allocations contained in Article 4.2 and any others required to be made by the Code or the Regulations, Profits and Losses for each tax year shall be allocated between the Members in proportion to their Membership Units. 4.2. Special Allocations. Notwithstanding anything to the contrary contained herein. the following special allocations shall be made if the circumstances require. 4.2.1. Qualified Income Offset. Notwithstanding anything to the contrary contained herein, if a Member unexpectedly receives any adjustments, allocations, or distributions described in Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6) of the Regulations or any amendment thereto, or receives an allocation of loss which produces a negative Capital Account for any Member while any other Member has a positive Capital Account, then items of Company income, including gross income, shall be specially allocated to such Member to the extent necessary to eliminate any Capital Account deficit. This article is intended to constitute a "qualified income offset" within the meaning of Section 1.704-1(b)(2)(ii)(d) of the Regulations. 4.2.2. Minimum Gain Chargeback. Notwithstanding anything to the contrary contained herein. if there is a net decrease in Company "minimum gain," as defined in Sections 1.704-2(b)(2) and 1.704-2(d) of the Regulations, during a taxable year, each Member shall be specially allocated, before any other allocation, items of income and gain for such taxable year (and, if necessary. subsequent years) in proportion to each Member's share of the net decrease in Company "minimum gain." This article is intended to comply with the "minimum gain chargeback" provisions of Section 1.704-(2)(1) of the Regulations. 4.2.3. Section 704(c) Allocation. Notwithstanding anything to the contrary contained herein, items of income, gain, loss, and deduction with respect to property contributed to the Company's capital will be allocated between the Members so as to take into account any variation between book value and basis, to the extent and in the manner prescribed by Section 704(c) of the Code and related Regulations. 4.2.4. Member Nonrecourse Deductions. Items of the Company's loss, deductions, and expenditures described in Section 705(a)(2)(B) of the Code that are attributable to the Company's nonrecourse debt and are characterized as Member nonrecourse deductions under Section 1.704-2(i) of the Regulations will be allocated to the Members Capital Accounts in accordance with Section 1.704-2(i) of the Regulations. 4.2.5. Adjustments for Special Allocations. If the special allocations result in Capital Account balances that are different from the Capital Account balances the Members would have had if the special allocations were not required. The Company will allocate other items of income, gain, loss, and deduction in any manner it considers appropriate to offset the effects of the special allocations on the Members' Capital Account balances. Any offsetting allocation required by this article is subject to and must be consistent with the special allocations. 4.3. Tax Allocations. For federal income tax purposes, unless the Code or Regulations require otherwise, each item of the Company's income, gain, loss, or deduction will be allocated to the Members in proportion to their allocations of the Company's Profit or Loss. 4.5. Substantial Economic Effect. The various provisions of this article are intended and will be construed to ensure that the allocations of the Company's income, gain, losses, deductions, and credits have substantial economic effect under the Regulations promulgated under Section 704(b) of the Code. 10.4. Tax Matters Partner. The Members shall designate a Member to be the "Tax Matters Partner" of the Company pursuant to Section 6231(a)(7) of the Code. The Member so designated is authorized to take such actions as are permitted by Sections 6221 through 6233 of the Code. The initial Tax Matters Partner shall be *******. The Tax Matters Partner may be removed by the Members at any time with or without cause. A Member is eligible to serve as the Tax Matters Partner only if the Member (or, if a revocable trust is a Member. the trustor of such trust) is then serving as a Manager, or no Member is then serving as a Manager. The Tax Matters Partner will inform the Members of all administrative and judicial proceedings pertaining to the determination of the Company's tax items and will provide the Members with copies of all notices received from the Internal Revenue Service regarding the commencement of a Company-level audit or a proposed adjustment of any of the Company's tax items. The Tax Matters Partner may extend the statute of limitations for assessment of tax deficiencies against the Members attributable to any adjustment of any tax item. The Company will reimburse the Tax Matters Partner for reasonable expenses properly incurred while acting within the scope of the Tax Matters Partner's authority. 11.3.3. Duties and Authority of Liquidator. The liquidator will make adequate provision for the discharge of all of the Company's debts. obligations, and liabilities (including liabilities to Members who are creditors). The liquidator may sell, encumber, or retain for distribution in kind any of the Company's assets. Any gain or loss recognized on the sale of assets will be allocated to the Members' Capital Accounts in accordance with the provisions of Article 4.1. With respect to any asset the liquidator determines to retain for distribution in kind, the liquidator will allocate to the Members·Capital Accounts the amount of gain or loss that would have been recognized had the asset been sold at its fair market value. 11.3.4. Final Distribution. The liquidator will distribute any assets remaining after the discharge or accommodation of the Company's debts, obligations. and liabilities to the Members in proportion to their positive Capital Account balances. Notwithstanding the foregoing, distributions made pursuant to this Article 11.3.4 shall in all cases take into account any adjustments to the Capital Accounts of the Members required under Article 3.7 and as otherwise may be required under any other provision of this Agreement, the Code, or any guidance issued by the Internal Revenue Service, as determined by the Managers in their reasonable discretion, to ensure that any Member holding Profits Interest Units (i) receives in respect of such Profits Interest Units only amounts economically earned by the Company after receipt of such Profits Interest Units by such Member, and (ii) does not in respect of such Profits Interest Units share in any amount that would have been distributed by the Company if, immediately after the receipt of such Profits Interest Units by such Member, the Company's assets were sold for their fair market values and the proceeds (net of any liabilities of the Company) were then distributed in a complete liquidation of the Company. The liquidator will distribute any assets distributable in kind to the Members in undivided interests as tenants in common. A Member whose Capital Account is negative will have no liability to the Company, the Company's creditors, or any other Member with respect to the negative balance. Company represents that Company and its shareholders have filed tax returns consistent with Company having a valid S corporation election in effect as of Date 3. Company and its shareholders represent that Company and its shareholders will file amended returns for Years as needed to reflect units that vested in Years and as necessary to reflect additional income and taxes resulting from the vesting of those units. Company also represents that it will amend Agreement to provide for identical rights to distribution and liquidation proceeds in accordance with § 1.1361-1(l). Company further represents that the circumstances that led to the termination of its S election were inadvertent and not motivated by tax avoidance. Company and each person who has been a shareholder of it at any time on or after Date 3, through the date of this request have consented to any adjustments as may be required by the Secretary. Company requests relief pursuant to § 1362(f) due to its governing provisions creating more than one class of stock. LAW AND ANALYSIS Section 1361(a)(1) provides that the term "S corporation" means, with respect to any taxable year, a small business corporation for which an election under § 1362(a) is in effect for such year. Section 1361(b)(1) provides that for purposes of subchapter S, the term "small business corporation" means a domestic corporation, which is not an ineligible corporation and does not have (A) more than 100 shareholders, (B) have as a shareholder a person (other than an estate, a trust described in § 1361(c)(2), or an organization described in subsection § 1361(c)(6)) who is not an individual, (C) have a nonresident alien as a shareholder, and (D) have more than 1 class of stock. Section 1.1361-1(l)(1) provides, in part, that a corporation is generally treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds. Section 1.1361-1(l)(2)(i) provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter, articles of incorporation, bylaws, applicable state laws, and binding agreements relating to distribution and liquidation proceeds (collectively, governing provisions). Section 1362(a)(1) provides that, except as provided in § 1362(g), a small business corporation may elect, in accordance with the provisions of § 1362, to be an S corporation. Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated whenever (at any time on or after the 1st day of the 1st taxable year for which the corporation is an S corporation) such corporation ceases to be a small business corporation. Section 1362(f) provides, in part, that if (1) an election under § 1362(a) by any corporation (i) was not effective for the taxable year for which made (determined without regard to § 1362(b)(2)) by reason of a failure to meet the requirements of § 1361(b), or (ii) was terminated under § 1362(d)(2) or (3); (2) the Secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent; (3) no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination, steps were taken so that the corporation for which the election was made or the termination occurred is a small business corporation; and (4) the corporation for which the election was made or the termination occurred, and each person who was a shareholder of the corporation at any time during the period specified pursuant to § 1362(f), agree to make the adjustments (consistent with the treatment of the corporation as an S corporation as may be required by the Secretary with respect to this period, then, notwithstanding the circumstances resulting in such ineffectiveness or termination, the corporation shall be treated as an S corporation during the period specified by the Secretary. CONCLUSION Based on the facts submitted and representations made, we conclude that the termination of Company's S election as a result of Agreement creating a second class of stock was inadvertent within the meaning of § 1362(f). Accordingly, under § 1362(f), Company will be treated as an S corporation from Date 3, and thereafter, provided the S election for Company was otherwise valid on Date 3 and has not otherwise terminated under § 1362(d). Except as specifically ruled above, we express or imply no opinion as to the federal income tax consequences of the facts described above under any other provision of the Code, including Company's eligibility to be a valid S corporation. The ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the ruling request, it is subject to verification on examination. This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. Pursuant to the power of attorney on file, a copy of this letter is being sent to Company's authorized representative. Sincerely, Associate Chief Counsel (Passthroughs & Special Industries) By: __________________________________ Wendy Kribell Senior Technician Reviewer, Branch 3 Office of Associate Chief Counsel (Passthroughs & Special Industries) Enclosures (2): Copy of this letter Copy of this letter for § 6110 purposes cc:

Treasury Decision 9918 Internal Revenue Service 2020-45 I.R.B. 979 26 CFR 1.67-4; 26 CFR 1.642(h)-2 T.D. 9918 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Effect of Section 67(g) on Trusts and Estates AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains final regulations clarifying that the following deductions allowed to an estate or non-grantor trust are not miscellaneous itemized deductions: costs paid or incurred in connection with the administration of an estate or non-grantor trust that would not have been incurred if the property were not held in the estate or trust, the personal exemption of an estate or non-grantor trust, the distribution deduction for trusts distributing current income, and the distribution deduction for estates and trusts accumulating income. Therefore, these deductions are not affected by the suspension of the deductibility of miscellaneous itemized deductions for taxable years beginning after December 31, 2017, and before January 1, 2026. The final regulations also provide guidance on determining the character, amount, and allocation of deductions in excess of gross income succeeded to by a beneficiary on the termination of an estate or non-grantor trust. The final regulations affect estates, non-grantor trusts (including the S portion of an electing small business trust), and their beneficiaries. DATES: Effective date: These regulations are effective on October 19, 2020. Applicability dates: For dates of applicability, see §§ 1.67-4(d), 1.642(h)-2(f) and 1.642(h)-5(c). FOR FURTHER INFORMATION CONTACT: Margaret Burow at (202) 317-5279 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background This document contains amendments to Income Tax Regulations (26 CFR part 1) under sections 67 and 642 of the Internal Revenue Code (Code). On May 11, 2020, the Department of Treasury (Treasury Department) and the IRS published a notice of proposed rulemaking (REG-113295-18) in the Federal Register (85 FR 27693) containing proposed regulations under sections 67 and 642(h) (proposed regulations). The Summary of Comments and Explanation of Revisions section of this preamble summarizes the provisions of sections 67 and 642(h) and the provisions of the proposed regulations, which are explained in greater detail in the preamble to the proposed regulations. On July 17, 2020, the Treasury Department and the IRS published in the Federal Register (85 FR 43512) a notice of public hearing on the proposed regulations scheduled for August 12, 2020. The Treasury Department and the IRS received no requests to speak at a hearing in response to that notice. On August 5, 2020, the Treasury Department and the IRS published in the Federal Register (85 FR 47323) a cancellation of the notice of public hearing. The Treasury Department and the IRS received written and electronic comments in response to the proposed regulations. All comments were considered and are available at www.regulations.gov or upon request. After full consideration of the comments received, this Treasury decision adopts the proposed regulations with modifications described in the Summary of Comments and Explanation of Revisions. Summary of Comments and Explanation of Revisions Most of the comments addressing the proposed regulations are summarized in this Summary of Comments and Explanation of Revisions. Comments merely summarizing or interpreting the proposed regulations or recommending statutory revisions are not discussed in this preamble. The Treasury Department and the IRS continue to study comments on issues related to sections 67 and 642(h) that are beyond the scope of these regulations, which may be discussed in future guidance if guidance on those issues is published. The scope of the proposed regulations and these regulations is limited to the effect of section 67(g) on the deductibility of certain expenses described in section 67(b) and (e) that are incurred by estates and non-grantor trusts and the treatment of excess deductions on termination of an estate or trust under section 642(h). This Summary of Comments and Explanation of Revisions also describes each of the final rules contained in this document. A. Section 67 Section 67(g) was added to the Code on December 22, 2017, by section 11045(a) of Public Law 115-97, 131 Stat. 2054, 2088 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA). Section 67(g) prohibits individual taxpayers from claiming miscellaneous itemized deductions for any taxable year beginning after December 31, 2017, and before January 1, 2026. Prior to the TCJA, miscellaneous itemized deductions were allowable for any taxable year only to the extent that the sum of such deductions exceeded two percent of adjusted gross income. See section 67(a). Section 67(b) defines miscellaneous itemized deductions as itemized deductions other than those listed in section 67(b)(1) through (12). Section 67(e) provides that, for purposes of section 67, an estate or trust computes its adjusted gross income in the same manner as that of an individual, except that the following additional deductions are treated as allowable in arriving at adjusted gross income: (1) the deductions for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such estate or trust, and (2) deductions allowable under section 642(b) (concerning the personal exemption of an estate or non-grantor trust), section 651 (concerning the deduction for trusts distributing current income), and section 661 (concerning the deduction for estates and trusts accumulating income). Accordingly, section 67(e) removes the deductions described in section 67(e)(1) and (2) from the definition of itemized deductions under section 63(d), and thus from the definition of miscellaneous itemized deductions under section 67(b), and treats them as deductions allowable in arriving at adjusted gross income under section 62(a). Section 67(e) further provides regulatory authority to make appropriate adjustments in the application of part I of subchapter J of chapter 1 of the Code to take into account the provisions of section 67. The proposed regulations under § 1.67-4 clarify that expenses described in section 67(e) remain deductible in determining the adjusted gross income of an estate or non-grantor trust during the taxable years in which section 67(g) applies. Accordingly, section 67(g) does not deny an estate or non-grantor trust (including the S portion of an electing small business trust) a deduction for expenses described in section 67(e)(1) and (2) because such deductions are allowable in arriving at adjusted gross income and are not miscellaneous itemized deductions under section 67(b). Commenters agreed with the proposed amendments. These regulations adopt the proposed regulations under § 1.67-4 without modification. Two commenters requested that the regulations address the treatment of deductions described in section 67(e)(1) and (2) in determining an estate or non-grantor trust's income for alternative minimum tax (AMT) purposes. The commenters suggested that such deductions are allowable as deductible in computing the AMT. The treatment of deductions described in section 67(e) for purposes of determining the AMT is outside the scope of these regulations concerning the effects of section 67(g); therefore, these regulations do not address the AMT. Further, no conclusions should be drawn from the absence of a discussion of the AMT in these regulations regarding the treatment of deductions described in section 67(e) for purposes of determining the AMT. One commenter suggested that the Treasury Department and the IRS exercise their regulatory authority under section 67(e) to exempt cemetery trusts under section 642(i) and qualified funeral trusts (QFTs) under section 685 from the application of section 67(g). The commenter stated that the primary type of expense incurred by these trusts is investment advisory expenses, the tax treatment of which differs under the Code from management expenses. That is, trust management expenses generally are allowable in computing adjusted gross income under section 67(e)(1), while trust investment advisory expenses are miscellaneous itemized deductions. See § 1.67-4(b)(4). The commenter asserted that it was not the intent of Congress to disallow investment advisory expenses incurred by cemetery and funeral trusts when Congress enacted section 67(g). The commenter suggested that exercising the regulatory authority under section 67(e) in this manner would be consistent with the exercise of regulatory authority under section 1411 to exempt section 642(i) cemetery perpetual care funds and QFTs. See § 1.1411-3(b)(1) (providing that certain types of trusts, including section 642(i) cemetery perpetual care funds, are excepted from the net investment income tax) and § 1.1411-3(b)(2) (providing a special rule for QFTs that, for purposes of calculating any tax under section 1411, section 1411 and the regulations thereunder are applied to each QFT by treating each beneficiary's interest in the trust as a separate trust). As stated in the preamble to TD 9644 (78 FR 72393), the Treasury Department and the IRS exercised their regulatory authority under section 1411 to exclude cemetery trusts from the net investment income tax because, by benefiting an operating company, such trusts are considered similar to the business trusts that are excluded from the operation of section 1411. The preamble also states that QFTs are not excluded from the application of the net income investment tax, but that the section 1411 tax is calculated consistent with the taxation of QFTs under chapter 1. The commenter noted that they advocated for the treatment of each beneficiary's interest in the QFT as a separate trust because such treatment reduces the likelihood of the QFT beneficiaries being subject to the net investment income tax. The Treasury Department and the IRS continue to consider these comments but providing an exemption for cemetery and funeral trusts under section 67(g) is outside the scope of these regulations. B. Section 642(h) 1. In general Section 642(h) provides that if, on the termination of an estate or trust, the estate or trust has: (1) a net operating loss carryover under section 172 or a capital loss carryover under section 1212, or (2) for the last taxable year of the estate or trust, deductions (other than the deductions allowed under section 642(b) (relating to the personal exemption) or section 642(c) (relating to charitable contributions)) in excess of gross income for such year, then such carryover or excess will be allowed as a deduction, in accordance with the regulations prescribed by the Secretary of the Treasury or his delegate (Secretary), to the beneficiaries succeeding to the property of the estate or trust. Section 1.642(h)-2(a), as articulated in the proposed regulations and these final regulations, provides that if, on termination of an estate or trust, the estate or trust has for its last taxable year deductions (other than the deductions allowed under section 642(b) or section 642(c)) in excess of gross income, the excess deductions are allowed under section 642(h)(2) as items of deduction to the beneficiaries succeeding to the property of the terminated estate or trust. 2. Character and amount of excess deductions Section 1.642(h)-2(b)(1) of the proposed regulations provides that each deduction comprising the excess deductions under section 642(h)(2) retains, in the hands of the beneficiary, its character (specifically, as allowable in arriving at adjusted gross income, as a non-miscellaneous itemized deduction, or as a miscellaneous itemized deduction) while in the estate or trust. The character of these deductions does not change when succeeded to by a beneficiary on termination of the estate or trust. Furthermore, an item of deduction succeeded to by a beneficiary remains subject to any limitation applicable under the Code in the computation of the beneficiary's tax liability. One commenter noted that section 642(h) states that excess deductions on termination of an estate or trust are to be "allowed as a deduction, in accordance with regulations prescribed by the Secretary" and that there is no express authority to treat excess deductions as miscellaneous or non-miscellaneous itemized deductions (or tax preference items for AMT purposes). The Treasury Department and the IRS disagree with this comment. The characterization of these excess deductions as a single miscellaneous itemized deduction in the current regulations was made before the enactment of section 67(g) and served as an administrative convenience. Making a change to that characterization is now appropriate to reflect the temporary disallowance of miscellaneous itemized deductions under section 67(g) since the regulations were written and is a proper exercise of the Secretary's specific grant of regulatory authority in section 642(h). Another commenter requested that non-miscellaneous itemized deductions included in excess deductions be fully deductible by the beneficiary and not subject to a second level of limitation applicable on the beneficiary's return, because the amounts already would have been subject to limitation on the return of the estate or trust. The commenter provided an example of a terminated trust that paid $25,000 of state income tax, for which the trust is limited to a $10,000 deduction under section 164(b)(6)(B) for taxable years beginning after December 31, 2017, and before January 1, 2026. In the commenter's example, the entire amount of the allowable $10,000 deduction was passed through to the beneficiary as an excess deduction on termination of the trust. The excess of state income tax over the $10,000 limitation ($15,000) would not pass through as an excess deduction to the beneficiaries in this circumstance because the excess amount was not deductible to the trust. Excess state income tax on termination of the estate or trust may, however, pass through to a beneficiary if the estate or trust had insufficient income to absorb the entire $10,000 of state income tax deduction. In that circumstance, the commenter opined that the limitation under section 164(b)(6)(B), having already been applied at the trust level, should not again be applied at the beneficiary level. The Treasury Department and the IRS carefully considered the comment but determined that beneficiaries remain subject to the limitation in section 164(b)(6)(B). The Treasury Department and the IRS found no authority to exempt such items from the application of any limitations applicable to the beneficiary under the Code. The excess deductions retain their character in the hands of the beneficiary on termination of the trust, and all applicable limitations apply to all of the beneficiary's items of that character, regardless of their origin. One commenter noted that, under § 1.641(c)-1(j), if an electing small business trust (ESBT) election terminates or is revoked and the S portion has a net operating loss or capital loss carryover or deductions in excess of gross income, then any such loss, carryover or excess deductions are allowed as a deduction, in accordance with the regulations under section 642(h), to the trust or to the beneficiaries succeeding to the property of the trust if the entire trust terminates. However, the commenter also noted that under the TCJA, section 641(c)(2)(E) was amended to provide that ESBT charitable contributions are deductible under section 170, rather than under section 642(c), so that, unlike other trust charitable deductions, an ESBT's charitable deduction could constitute part of the excess deductions on termination of the trust. The commenter stated that neither the legislative history nor the explanation of the staff of the Joint Committee on Taxation addressed whether this result was intended. The Treasury Department and the IRS note that charitable contribution deductions under both sections 170 and 642(c) are non-miscellaneous itemized deductions under sections 63(d) and 67(b)(4) to the estate or trust and maintain that such character is retained in the hands of the beneficiary in these regulations. Although the Treasury Department and the IRS continue to consider the application of section 170 to ESBT charitable contributions under section 641(c)(2)(E), this issue is outside the scope of these regulations. Another commenter requested clarification of whether an excess deduction on termination of a trust or estate that is allowed in determining the net investment income under section 1411 of the estate or trust remains deductible in the hands of the beneficiary in determining the net investment income of the beneficiary under section 1411. These final regulations provide that each excess deduction retains its separate character as a section 67(e) deduction, non-miscellaneous itemized deduction, or miscellaneous itemized deduction in the hands of the beneficiary. Whether a deduction retains its character as allowable in computing the net investment income of the beneficiary, however, is outside the scope of these regulations. 3. Reporting of excess deductions Section 1.642(h)-2(b)(1) of the proposed regulations provides that an item of deduction succeeded to by a beneficiary remains subject to any additional applicable limitation under the Code and must be separately stated if it could be so limited, as provided in the instructions to Form 1041, U.S. Income Tax Return for Estates and Trusts, and the Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credit, etc. Commenters requested that the Treasury Department and the IRS provide guidance on how the excess deductions are to be reported by both the terminated estate or trust and by its beneficiaries. The Treasury Department and the IRS released instructions for beneficiaries that chose to claim excess deductions on Form 1040 in the 2019 or 2018 taxable year based on the proposed regulations. In addition, the Treasury Department and the IRS plan to update the instructions for Form 1041, Schedule K-1 (Form 1041), and Form 1040, U.S. Individual Income Tax Return, for the 2020 and subsequent tax years to provide for the reporting of excess deductions that are section 67(e) expenses or non-miscellaneous itemized deductions. The Treasury Department and the IRS are aware that the income tax laws of some U.S. states do not conform to the Code with respect to section 67(g), such that beneficiaries may need information on miscellaneous itemized deductions of a terminated estate or trust. However, because miscellaneous itemized deductions are currently not allowed for Federal income tax purposes, that information is not needed for Federal income tax purposes. Therefore, it would not be appropriate to modify Federal income tax forms to require or accommodate the collection of such information while this deduction is suspended. Estates, trusts, and beneficiaries are advised to consult the relevant state taxing authority for information about deducting miscellaneous itemized expenses on their state tax returns. 4. Determinations of deductions in year of termination of the estate or trust Section 1.642(h)-2(b)(2) of the proposed regulations provides that the provisions of § 1.652(b)-3 are used to allocate each item of deduction among the classes of income in the year of termination for purposes of determining the character and amount of the excess deductions under section 642(h)(2). Accordingly, the amount of each separate deduction remaining after application of § 1.652(b)-3 comprises the excess deductions available to the beneficiaries succeeding to the property of the estate or trust as provided under section 642(h)(2). In addition, as previously explained, an item of deduction succeeded to by a beneficiary remains subject to any additional applicable limitation under the Code. Furthermore, § 1.642(h)-2(c) of the proposed regulations provides that excess deductions are allowable only in the taxable year of the beneficiary in which or with which the estate or trust terminates. That is, excess deductions of a terminated estate or trust may not carry over to a subsequent year of the beneficiary. One commenter requested that these regulations provide an ordering rule clarifying whether excess deductions on termination of an estate or trust allowed as a deduction to the beneficiary are claimed before, after, or ratably with the beneficiary's other deductions, particularly when the amount of the excess deductions and other deductions exceed the beneficiary's gross income. These final regulations clarify that beneficiaries may claim all or part of the excess deductions under section 642(h)(2) before, after, or together with the same character of deductions separately allowable to the beneficiary under the Code. That commenter also requested that the final regulations include an exception for investment interest expense under section 163(d) from the general rule that excess deductions on termination of a trust or estate may be claimed only in the beneficiary's taxable year during which the trust or estate terminated. That section permits the carryforward of investment interest under section 163(d)(2) to the taxpayer's subsequent taxable years if the taxpayer is unable to deduct the investment interest in the current taxable year. The commenter stated that the disallowance of the carryover of section 642(h)(2) excess deductions should not apply to those excess deductions that are no longer treated as miscellaneous itemized deductions under the proposed regulations, and that carryover should be permitted to the extent otherwise permitted under the Code. The preamble to the proposed regulations states that addressing suspended deductions under section 163(d) is beyond the scope of the regulations and the same is true of these final regulations. A commenter requested that the amount of a beneficiary's net operating loss carryover to a later taxable year under section 172 should include all of the beneficiary's section 642(h)(2) excess deductions that are section 67(e) deductions, as deductions that are attributable to the beneficiary's trade or business and thus deductions attributable to a trade or business under section 172(d)(4). Section 642(h) makes it clear that a net operating loss carryover under paragraph (1) of that section is separate and distinct from the excess deductions on termination described in paragraph (2) of that section. Furthermore, § 1.642(h)-2(d) provides that a deduction based upon a net operating loss carryover generally will not be allowed to beneficiaries under both paragraphs (1) and (2) of section 642(h). Therefore, an excess deduction allowable to the beneficiary under section 642(h)(2) is not a net operating loss carryover succeeded to by the beneficiary under section 642(h)(1) and (with one exception) a net operating loss carryover is not an excess deduction on termination. Moreover, these regulations provide that it is the character of the excess deductions as section 67(e) deductions, non-miscellaneous itemized deductions, and miscellaneous itemized deductions, and not the character of a deduction as attributable to a trade or business, that is retained in the hands of the beneficiary. Thus, whether section 642(h)(2) excess deductions that are section 67(e) deductions may be included in a beneficiary's net operating loss carryovers under section 172, separate from those it succeeds to from a terminated estate or trust, is beyond the scope of these regulations. Because § 1.642(h)-2(a) is clear that excess deductions on termination of an estate or trust are not carried over to future years and that such deductions are separate from a net operating loss carryover from the estate or trust, the Treasury Department and the IRS do not adopt this comment. 5. Example 1 Section 1.642(h)-5(a), Example 1, of the proposed regulations ( Example 1 ) updates an existing example illustrating computations under section 642(h) when there is a net operating loss. Section 1.642-5(a)(2)(ii) of Example 1 explains that the beneficiaries of the estate cannot carry back any of the net operating loss of the terminating estate that was made available to them under section 642(h)(1). Two commenters requested that Example 1 be revised to take into account the amendments to section 172(b)(1)(D) under sec. 2302(b) of the Coronavirus Aid, Relief, and Economic Security Act, Public Law 116-136, 134 Stat. 281 (2020) (CARES Act), by allowing a beneficiary to carry back the net operating loss carryover the beneficiary succeeds to under section 642(h)(1) for net operating losses arising in taxable years beginning after December 31, 2017, and before January 1, 2021. Under section 2303 of the CARES Act, net operating losses arising in taxable years beginning after December 31, 2017, and before January 1, 2021, generally may be carried back five years before being carried forward. One of these commenters further requested confirmation that a beneficiary is allowed a carryback of the net operating loss under section 642(h)(1) for net operating losses of an estate or trust arising in taxable years ending before January 1, 2018, to the extent the beneficiary succeeds to a net operating loss carryover attributable to those net operating losses on a termination of the estate or trust between January 1, 2018, and December 31, 2020. Unless otherwise provided under the Code, a net operating loss incurred by a taxpayer may only be used as a deduction by that taxpayer and cannot be transferred to another taxpayer for use by that other taxpayer. Calvin v. U.S. 354 F.2d 202 (10th Cir. 1965), Mellott v. U.S., 257 F.2d 798 (3d Cir. 1958). As an exception to this general principle, section 642(h) provides that if, on termination of an estate or trust, the estate or trust has a net operating loss carryover under section 172, then such carryover is allowed as a deduction, in accordance with the regulations prescribed by the Secretary, to the beneficiaries succeeding to the property of the estate or trust. Section 1.642(h)-1(a) provides that if, on the termination of an estate or trust, a net operating loss carryover under section 172 would be allowable to the estate or trust in a taxable year subsequent to the taxable year of termination but for the termination, a carryover is allowed under section 642(h)(1) to the beneficiaries succeeding to the property of the estate or trust. In addition, § 1.642(h)-1(b) provides that the first taxable year of the beneficiary to which the net operating loss will be carried over is the taxable year of the beneficiary in which or with which the estate or trust terminates. Section 642(h)(1) provides a specific rule that allows the beneficiary to succeed to a net operating loss carryover of the estate or trust and deduct the amount of the net operating loss over the remaining carryover period that would have been allowable to the estate or trust but for the termination of the estate or trust. The phrase in section 642(h)(1) "the estate or trust has a net operating loss carryover '" means that the estate or trust incurred a net operating loss and either already carried it back to the earliest allowable year under section 172 or elected to waive the carryback period under section 172(b)(3), and now is limited to carrying over the remaining net operating loss. Accordingly, because the net operating loss is a carryover for the estate or trust, the beneficiary succeeding to that net operating loss may, under section 642(h)(1), only carry it forward. The CARES Act amendments to section 172(b) mentioned by the commenters allow taxpayers a five-year carryback of certain net operating losses incurred by that taxpayer. The CARES Act amendments do not change the result that a beneficiary succeeding to the net operating loss carryover of a terminated estate or trust may only carryover that net operating loss in the same manner as the terminated estate or trust, but for the termination. Consequently, the Treasury Department and the IRS do not adopt these comments and add a citation to § 1.642(h)-1 to reference the rule that a beneficiary that succeeds to a net operating loss carryover of a terminated estate or trust may only carry forward the net operating loss. 6. Example 2 Section § 1.642(h)-5(b), Example 2, of the proposed regulations ( Example 2 ) demonstrates computations under section 642(h)(2). The expenses in Example 2 include rental real estate taxes in an attempt to illustrate a deduction subject to limitation under section 164(b)(6) to the beneficiary that must be separately stated as provided in § 1.642(h)-2(b)(1). Multiple commenters noted that Example 2 raises several issues that could be potentially relevant to that example, such as whether the decedent was in a trade or business and the application of section 469 to estates and trusts. To avoid these issues, which are extraneous to the point being illustrated, one commenter suggested that the example be revised so that the entire amount of real estate expenses on rental property equals the amount of rental income. The Treasury Department and the IRS did not intend to raise such issues in the example and consider both issues to be outside the scope of these regulations. Accordingly, the Treasury Department and the IRS adopt the suggestion by the commenter and modify Example 2 to avoid these issues by having rental real estate expenses entirely offset rental income with no unused deduction. Commenters also noted that Example 2 does not properly allocate rental real estate expenses because the example characterizes the rental real estate taxes as itemized deductions. These commenters asserted that real estate taxes on property held for the production of rental income are not itemized deductions but instead are allowed in computing gross income and cited to section 62(a)(4) as providing that ordinary and necessary expenses paid or incurred during the taxable year for the management, conservation, or maintenance of property held for the production of income under section 212(2) that are attributable to property held for the production of rents are deductible as above-the-line deductions in arriving at adjusted gross income. One commenter suggested that, if the goal of Example 2 is to illustrate state and local taxes passing through to the beneficiary, then the example should include state income taxes rather than real estate taxes on rental real estate. The Treasury Department and the IRS have revised this example in the final regulations to include personal property tax paid by the trust rather than taxes attributable to rental real estate. Lastly, commenters noted that Example 2 does not demonstrate the broad range of trustee discretion in § 1.652(b)-3(b) and (d) for deductions that are not directly attributable to a class of income, or deductions that are, but which exceed such class of income, respectively. In response to these comments, the Treasury Department and the IRS have modified Example 2 to illustrate the application of trustee discretion as found in § 1.652(b)-3(b) and (d). C. Applicability Dates The proposed regulations provide that the changes to §§ 1.67-4, 1.642(h)-2, and 1.642(h)-5 apply to taxable years beginning after the date the regulations are published as final. The preamble to the proposed regulations explains that estates, non-grantor trusts, and their beneficiaries may rely on the proposed regulations under section 67 for taxable years beginning after December 31, 2017, and on or before the date these regulations are published as final. Taxpayers may also rely on the proposed regulations under section 642(h) for taxable years of beneficiaries beginning after December 31, 2017, and on or before the date the regulations are published as final, in which an estate or trust terminates. One commenter requested that § 1.642(h)-2 of the proposed regulations be applied retroactively not only to taxable years beginning after December 31, 2017, but to all open years. The commenter asserted that the existing regulation treating excess deductions on termination of an estate or trust as a miscellaneous itemized deduction was in error. As an example, the commenter argues that the current regulations mistakenly describe section 67(e) expenses as an exception to the rules applicable to miscellaneous itemized deductions, and therefore requested that the final regulations be applicable to all open years. The Treasury Department and the IRS have the authority to treat an excess deduction on termination of an estate or trust as a single miscellaneous itemized deduction. See section 642(h). The suspension under section 67(g) of miscellaneous itemized deductions caused the Treasury Department and the IRS to reconsider the treatment of excess deductions under section 642(h)(2) because the Treasury Department and the IRS do not interpret section 67(g) as suspending such deductions allowable under section 642(h)(2). The Treasury Department and the IRS interpret section 67(g) as not disallowing excess deductions succeeded to beneficiaries from terminated estates and trusts under section 642(h)(2). Therefore, taxpayers may rely on these regulations as of the effective date of section 67(g), but not for earlier periods. The final regulations apply to taxable years beginning after October 19, 2020. Pursuant to section 7805(b)(7), taxpayers may choose to apply the amendments to § 1.67-4 and §§ 1.642(h)-2 and 1.642(h)-5 set forth in this Treasury decision to taxable years beginning after December 31, 2017, and on or before October 19, 2020. Special Analysis These regulations are not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. Therefore, a regulatory impact assessment is not required. Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the amount of time necessary to report the required information will be minimal in that it requires fiduciaries of estates and trusts to provide on the Schedule K-1 (Form 1041) issued to beneficiaries information that is already maintained and reported to the IRS on Form 1041. Moreover, it should take an estate or trust no more than 2 hours to satisfy the information requirement in these regulations. Accordingly, the Secretary certifies that the rule will not have a significant economic impact on a substantial number of small entities. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking that preceded these regulations was submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small businesses, and no comments were received. Paperwork Reduction Act (PRA) The collection of information related to these regulations under section 642(h) is reported on Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc., and has been reviewed in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) and approved by the Office of Management and Budget under control number 1545-0092. The collection of information in these regulations is in § 1.642(h)-2(b)(1). The IRS requires this information to ensure that excess deductions on an estate's or trust's termination that are subject to additional applicable limitations retain their character when taken into account by beneficiaries on their returns. The respondents will be estates, trusts, and their fiduciaries. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by section 6103. Drafting Information The principal author of these regulations is Margaret Burow of the Office of Associate Chief Counsel (Passthroughs and Special Industries). Other personnel from the Treasury Department and the IRS, however, participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1--INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding entries for §§ 1.67-4, 1.642(h)-2, and 1.642(h)-5 in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.67-4 also issued under 26 U.S.C. 67(e). * * * * * Section 1.642(h)-2 also issued under 26 U.S.C. 642(h). Section 1.642(h)-5 also issued under 26 U.S.C. 642(h). * * * * * Par. 2. Section 1.67-4 is amended by revising paragraph (a) and the heading of paragraph (d) and adding two sentences to the end of paragraph (d) to read as follows: § 1.67-4 Costs paid or incurred by estates or non-grantor trusts. (a) Deductions-- (1) Section 67(e) deductions --(i) In general. An estate or trust (including the S portion of an electing small business trust) not described in § 1.67-2T(g)(1)(i) (a non-grantor trust) must compute its adjusted gross income in the same manner as an individual, except that the following deductions (section 67(e) deductions) are allowed in arriving at adjusted gross income: (A) Costs that are paid or incurred in connection with the administration of the estate or trust that would not have been incurred if the property were not held in such estate or trust; and (B) Deductions allowable under section 642(b) (relating to the personal exemption) and sections 651 and 661 (relating to distributions). (ii) Not disallowed under section 67(g). Section 67(e) deductions are not itemized deductions under section 63(d) and are not miscellaneous itemized deductions under section 67(b). Therefore, section 67(e) deductions are not disallowed under section 67(g). (2) Deductions subject to 2-percent floor. A cost is not a section 67(e) deduction and thus is subject to both the 2-percent floor in section 67(a) and section 67(g) to the extent that it is included in the definition of miscellaneous itemized deductions under section 67(b), is incurred by an estate or non-grantor trust (including the S portion of an electing small business trust), and commonly or customarily would be incurred by a hypothetical individual holding the same property. (d) Applicability date. * * * Paragraph (a) of this section applies to taxable years beginning after October 19, 2020. Taxpayers may choose to apply paragraph (a) of this section to taxable years beginning after December 31, 2017, and on or before October 19, 2020. Par. 3. Section 1.642(h)-2 is amended by: 1. Revising paragraph (a). 2. Redesignating paragraph (b) as paragraph (d) and adding a heading for newly redesignated paragraph (d). 3. Redesignating paragraph (c) as paragraph (e) and adding a heading for newly redesignated paragraph (e). 4. Adding new paragraphs (b) and (c) and paragraph (f). The revisions and additions read as follows: § 1.642(h)-2 Excess deductions on termination of an estate or trust. (a) Excess deductions --(1) In general. If, on the termination of an estate or trust, the estate or trust has for its last taxable year deductions (other than the deductions allowed under section 642(b) (relating to the personal exemption) or section 642(c) (relating to charitable contributions)) in excess of gross income, the excess deductions as determined under paragraph (b) of this section are allowed under section 642(h)(2) as items of deduction to the beneficiaries succeeding to the property of the estate or trust. (2) Treatment by beneficiary. A beneficiary may claim all or part of the amount of the deductions provided for in paragraph (a) of this section, as determined after application of paragraph (b) of this section, before, after, or together with the same character of deductions separately allowable to the beneficiary under the Internal Revenue Code for the beneficiary's taxable year during which the estate or trust terminated as provided in paragraph (c) of this section. (b) Character and amount of excess deductions --(1) Character. The character and amount of the excess deductions on termination of an estate or trust will be determined as provided in this paragraph (b). Each deduction comprising the excess deductions under section 642(h)(2) retains, in the hands of the beneficiary, its character (specifically, as allowable in arriving at adjusted gross income, as a non-miscellaneous itemized deduction, or as a miscellaneous itemized deduction) while in the estate or trust. An item of deduction succeeded to by a beneficiary remains subject to any additional applicable limitation under the Internal Revenue Code and must be separately stated if it could be so limited, as provided in the instructions to Form 1041, U.S. Income Tax Return for Estates and Trusts, and the Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credit, etc., or successor forms. (2) Amount. The amount of the excess deductions in the final year is determined as follows: (i) Each deduction directly attributable to a class of income is allocated in accordance with the provisions in § 1.652(b)-3(a); (ii) To the extent of any remaining income after application of paragraph (b)(2)(i) of this section, deductions are allocated in accordance with the provisions in § 1.652(b)-3(b) and (d); and (iii) Deductions remaining after the application of paragraph (b)(2)(i) and (ii) of this section comprise the excess deductions on termination of the estate or trust. These deductions are allocated to the beneficiaries succeeding to the property of the estate or trust in accordance with § 1.642(h)-4. (c) Year of termination --(1) In general. The deductions provided for in paragraph (a) of this section are allowable only in the taxable year of the beneficiary in which or with which the estate or trust terminates, whether the year of termination of the estate or trust is of normal duration or is a short taxable year. (2) Example. Assume that a trust distributes all its assets to B and terminates on December 31, Year X. As of that date, it has excess deductions of $18,000, all characterized as allowable in arriving at adjusted gross income under section 67(e). B, who reports on the calendar year basis, could claim the $18,000 as a deduction allowable in arriving at B's adjusted gross income for Year X. However, if the deduction (when added to other allowable deductions that B claims for the year) exceeds B's gross income, the excess may not be carried over to any year subsequent to Year X. (d) Net operating loss carryovers. * * * (e) Items included in net operating loss or capital loss carryovers. * * * (f) Applicability date. Paragraphs (a) through (c) of this section apply to taxable years beginning after October 19, 2020. The rules applicable to taxable years beginning on or before October 19, 2020, are contained in § 1.642(h)-2 as in effect prior to October 19, 2020 (see 26 CFR part 1 revised as of April 1, 2020). Taxpayers may choose to apply paragraphs (a) through (c) of this section to taxable years beginning after December 31, 2017, and on or before October 19, 2020. Par. 4. Section 1.642(h)-5 is revised to read as follows: § 1.642(h)-5 Examples. Paragraphs (a) and (b) of this section ( Examples 1 and 2 ) illustrate the application of section 642(h). (a) Example 1: Computations under section 642(h) when an estate has a net operating loss --(1) Facts. On January 31, 2020, A dies leaving a will that provides for the distribution of all of A's estate equally to B and an existing trust for C. The period of administration of the estate terminates on December 31, 2020, at which time all the property of the estate is distributed to B and the trust. For tax purposes, B and the trust report income on a calendar year basis. During the period of administration, the estate has the following items of income and deductions: (2) Computation of net operating loss. (i) The amount of the net operating loss carryover is computed as follows: (ii) Under section 642(h)(1), B and the trust are each allocated $1,000 of the $2,000 unused net operating loss carryover of the terminated estate in 2020, with the allowance of any net operating loss carryover to B and the trust determined under section 172. Neither B nor the trust can carry back any of the net operating loss of A's estate made available to them under section 642(h)(1). See § 1.642(h)-1(b). (3) Section 642(h)(2) excess deductions. The $7,300 of non-business deductions not taken into account in determining the net operating loss of the estate are excess deductions on termination of the estate under section 642(h)(2). Under § 1.642(h)-2(b)(1), such deductions retain their character as section 67(e) deductions. Under § 1.642(h)-4, B and the trust each are allocated $3,650 of excess deductions based on B's and the trust's respective shares of the burden of each cost. (4) Consequences for C. The net operating loss carryover and excess deductions are not allowable directly to C, the trust beneficiary. To the extent the distributable net income of the trust is reduced by the net operating loss carryover and excess deductions, however, C may receive an indirect benefit from the carryover and excess deductions. (b) Example 2: Computations under section 642(h)(2) --(1) Facts. D dies in 2019 leaving an estate of which the residuary legatees are E (75%) and F (25%). The estate's income and deductions in its final year are as follows: (2) Determination of character. Pursuant to § 1.642(h)-2(b)(2), the character and amount of the excess deductions is determined by allocating the deductions among the estate's items of income as provided under § 1.652(b)-3. Under § 1.652(b)-3(a), the $2,000 of rental real estate expenses is allocated to the $2,000 of rental income. In the exercise of the executor's discretion pursuant to § 1.652(b)-3(b), D's executor allocates $3,500 of personal property taxes and $1,000 of section 67(e) deductions to the remaining income. As a result, the excess deductions on termination of the estate are $11,000, all consisting of section 67(e) deductions. (3) Allocations among beneficiaries. Pursuant to § 1.642(h)-4, the excess deductions are allocated in accordance with E's (75 percent) and F's (25 percent) interests in the residuary estate. E's share of the excess deductions is $8,250, all consisting of section 67(e) deductions. F's share of the excess deductions is $2,750, also all consisting of section 67(e) deductions. (4) Separate statement. If the executor instead allocated $4,500 of section 67(e) deductions to the remaining income of the estate, the excess deductions on termination of the estate would be $11,000, consisting of $7,500 of section 67(e) deductions and $3,500 of personal property taxes. The non-miscellaneous itemized deduction for personal property taxes may be subject to limitation on the returns of both B and C's trust under section 164(b)(6)(B) and would have to be separately stated as provided in § 1.642(h)-2(b)(1). (c) Applicability date. This section is applicable to taxable years beginning after October 19, 2020. Taxpayers may choose to apply this section to taxable years beginning after December 31, 2017, and on or before October 19, 2020. Sunita Lough, Deputy Commissioner for Services and Enforcement. Approved: September 16, 2020. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on October 16, 2020, 8:45 a.m., and published in the issue of the Federal Register for October 19, 2020, 85 F.R. 66219)

Proposed Regulation REG-122793-19 Internal Revenue Service 2023-38 I.R.B. 829 Notice of Proposed Rulemaking REG-122793-19 Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and notice of public hearing. SUMMARY: This document contains proposed regulations regarding information reporting, the determination of amount realized and basis, and backup withholding, for certain digital asset sales and exchanges. Based on existing authority as well as changes to the applicable tax law made by the Infrastructure Investment and Jobs Act, these proposed regulations would require brokers, including digital asset trading platforms, digital asset payment processors, and certain digital asset hosted wallets, to file information returns, and furnish payee statements, on dispositions of digital assets effected for customers in certain sale or exchange transactions. These proposed regulations would also require real estate reporting persons, who are treated as brokers with respect to reportable real estate transactions, to include on filed information returns and furnished payee statements the fair market value of digital asset consideration received by real estate sellers in reportable real estate transactions. Additionally, these real estate reporting persons would also be required to file information returns and furnish payee statements with respect to real estate purchasers who use digital assets to acquire real estate in these transactions. DATES: Written or electronic comments must be received by October 30, 2023. A public hearing on this proposed regulation has been scheduled for November 7, 2023, at 10 a.m. ET. If the number of requests to speak at the hearing exceed the number that can be accommodated in one day, a second public hearing date for this proposed regulation will be held on November 8, 2023. Requests to speak and outlines of topics to be discussed at the public hearing must be received by October 30, 2023. If no outlines are received by October 30, 2023, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5 p.m. ET on November 3, 2023. The public hearing will be made accessible to people with disabilities. Requests for special assistance during the public hearing must be received by 5 p.m. ET on November 2, 2023. ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-122793-19) by following the online instructions for submitting comments. 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:LPD:PR (REG-122793-19), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-122793-19), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations under sections 1001 and 1012, Kyle Walker, (202) 317-4718, or Harith Razaa, (202) 317-7006, of the Office of the Associate Chief Counsel (Income Tax and Accounting); concerning the international sections of the proposed regulations under sections 3406 and 6045, John Sweeney or Alan Williams of the Office of the Associate Chief Counsel (International) at (202) 317-6933, and concerning the remainder of the proposed regulations under sections 3406, 6045, 6045A, 6045B, 6050W, 6721, and 6722, Roseann Cutrone of the Office of the Associate Chief Counsel (Procedure and Administration) at (202) 317-5436 (not toll-free numbers). Concerning submissions of comments and requests to participate in the public hearing, Vivian Hayes at publichearings@irs.gov (preferred) or at (202) 317-5306 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background These proposed regulations extend the information reporting rules in§1.6045-1 to brokers who, in the ordinary course of a trade or business, act as agents, principals, or digital asset middlemen for others to effect sales or exchanges of digital assets for cash, broker services, or property of a type that is subject to reporting by the brokers (including different digital assets, securities, and real estate) under section 6045 of the Internal Revenue Code (Code) or effect on behalf of customers payments of digital assets associated with payment card and third party network transactions subject to reporting under section 6050W of the Code. These proposed regulations also clarify that the definition of broker for purposes of section 6045 includes digital asset trading platforms, digital asset payment processors, certain digital asset hosted wallet providers, and persons who regularly offer to redeem digital assets that were created or issued by that person. In addition, these proposed regulations would require real estate reporting persons to report on real estate purchasers who use digital assets to acquire real estate in a reportable real estate transaction and extend the information that must be reported under§1.6045-4 with respect to sellers of real estate to include the fair market value of digital assets received by sellers in exchange for real estate. Additionally, in the case of a transaction involving the exchange of digital assets for goods (other than digital assets) or services, these proposed regulations treat the provision of the goods or services as reportable under section 6050W and the disposition of the digital assets as reportable under proposed§1.6045-1 and not under section 6050W. These proposed regulations also provide that exchanges of digital assets for property or services are generally not reportable as barter exchange transactions under the existing rules under§1.6045-1(e). Finally, these proposed regulations provide specific rules under section 1001 for determining the amount realized in a sale, exchange, or other disposition of digital assets and under section 1012 for calculating the basis of digital assets. These proposed regulations concern Federal tax laws under the Internal Revenue Code only. No inference is intended with respect to any other legal regime, including the Federal securities laws and the Commodity Exchange Act, which are outside the scope of these regulations. I. Background on Digital Assets and Virtual Currency Digital assets are digital representations of value that use cryptography to secure transactions that are digitally recorded using distributed ledger technology on a distributed ledger, such as a blockchain or similar technology. Digital assets do not exist in physical form. Depending on the particular digital asset, individual units of a digital asset may be referred to as coins or tokens. Some digital assets are referred to as virtual currency or as cryptocurrency. Virtual currency is defined in Notice 2014-21, 2014-16 I.R.B. 938 (April 14, 2014) (Notice 2014-21 or Notice), for Federal income tax purposes as a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value other than the U.S. dollar or a foreign currency (fiat currency). The Notice provides that convertible virtual currency (that is, virtual currency that has an equivalent value in real currency or that acts as a substitute for real currency) is treated as property for Federal income tax purposes. A digital asset account or wallet generally provides its owner or custodian with the ability to store the public and private keys to digital asset holdings. These keys are required to conduct transactions with the digital assets associated with those keys and thus to control the ability to transfer those digital assets. References in this preamble and these proposed regulations to an owner holding digital assets generally or holding digital assets in a wallet or account are meant to refer to holding or controlling, whether directly or indirectly through a custodian, the keys to the digital assets and, thus, the ability to transfer those digital assets. Some wallets may provide additional or different capabilities beyond storing keys. Wallets can be digital (software) or physical (hardware) and can be connected to the Internet (hot) or disconnected from the Internet (cold). Wallets can be custodial (hosted) or non-custodial (unhosted). Unhosted wallets are sometimes referred to as self-hosted or self-custodial wallets. Some owners use the services of a hosted wallet provider that stores their public and private keys. A hosted wallet provider may also maintain balance information, provide cybersecurity services, and facilitate the owners' ability to own, and conduct transactions using, digital assets. These services may also include providing owners with online platforms that directly link owners to third party services that allow owners to buy and sell digital assets held in their hosted wallets. Other owners do not use the services of a hosted wallet provider and instead store private keys in a software program or written record, often referred to as an unhosted wallet. In general, only the user of an unhosted wallet has access to both the public and private keys necessary to effect transactions in the digital assets associated with those keys. Additionally, some providers of unhosted wallets also provide their unhosted wallet users with online platform services, which may include links or other mechanisms for direct access to third party services that allow users to buy and sell digital assets held in their unhosted wallets. A person that operates a trading platform or website that allows users to exchange digital assets in return for different digital assets or cash (meaning the U.S. dollar or foreign currency) is referred to in this preamble as a digital asset trading platform. Some digital asset trading platforms also offer hosted wallet services. In some circumstances, the custodial digital asset trading platform will match up buy and sell orders from separate users, whereas in other circumstances, the digital asset trading platform will settle users' orders using the digital asset trading platform's own account. In either circumstance, the digital asset trading platform could elect to require users to deposit with the trading platform the digital assets traded on the platform. Users typically pay these digital asset trading platforms a transaction fee (sometimes in digital assets). A custodial digital asset trading platform might often record its users' digital asset sale and exchange transactions on a centralized, omnibus ledger without also recording the transactions on the relevant distributed ledgers of the digital asset sold or exchanged. In other instances, however, the custodial digital asset trading platform might record user transactions directly on the distributed ledgers of the applicable digital assets involved in the transaction. These custodial digital asset trading platforms may provide users with valuations (in fiat currency) of the digital asset involved in these exchanges and keep records of each user's exchange activity. Some digital asset trading platforms do not have access to the private keys and, therefore, do not take custody of their users' digital assets. 1 Owners of digital assets using these non-custodial trading platforms can buy, sell, and trade digital assets directly with others using automatically executing contracts (so-called smart contracts) to ensure that transactions are executed as agreed. For example, some peer-to-peer trading platforms facilitate transactions between owners of digital assets by matching buyers and sellers without holding the funds or digital assets of buyers or sellers. Some peer-to-peer trading platforms use software that connects buyers and sellers, who then effect the desired transactions off the platform. Other non-custodial trading platforms use automated market maker (AMM) systems that rely on liquidity pools or liquidity providers to automatically facilitate buy and sell orders on a platform. Some non-custodial trading platforms involve persons (operators) who provide services beyond that provided by software that merely facilitates digital asset trading. For example, to enhance secure transactions, non-custodial trading platform operators might process a transaction by communicating (or providing software that will communicate) with the wallets of buyers and sellers. Operators of non-custodial trading platforms may charge fees for some or all of these services, which may also include advertising or other services closely related to the facilitation of sales of digital assets. ******** 1 Some digital asset trading platforms that do not claim to offer custodial services may be able to exercise effective control over a user's digital assets. See Treasury Department, Illicit Finance Risk Assessment of Decentralized Finance (April 2023), https://home.treasury.gov/system/files/136/DeFi-Risk-Full-Review.pdf. No inference is intended as to the meaning or significance of custody under any other legal regime, which are outside the scope of these regulations. ******** In addition to buying, selling, and exchanging digital assets, taxpayers can participate in an increasing number and type of transactions that involve digital assets. For example, taxpayers can purchase or enter into derivative transactions involving digital assets, such as options, regulated futures contracts, and forward contracts. Some digital asset owners also use digital assets to make payments, including to purchase goods or services from merchants or to pay taxes or other fees to government entities. Digital assets may also be used as payment in consideration for the purchase of real estate. These payment transactions can be made directly to the seller through the use of smart contracts that can execute a transaction without an intermediary party, or through an intermediary that can process payments in digital assets (digital asset payment processor). To effect payment transactions using digital assets, some digital asset payment processors will, for a fee, accept digital assets directly from payors in exchange for the payment of cash at predetermined exchange rates to payment recipients or will facilitate the transfer of the payor's digital assets as part of a payment transaction. In some instances, digital asset payment processors will instead direct payors to transfer the digital asset payment directly to payment recipients, who may have the right to exchange the received digital asset for cash with the digital asset payment processors at predetermined fixed exchange rates. II. Application of Existing Information Reporting Rules to Virtual Currency or Other Digital Assets Notice 2014-21 provides guidance on the application of the current information reporting requirements when virtual currency is used to pay wages (requiring the filing of Forms W-2, Wage and Tax Statement ), to make miscellaneous payments (requiring the filing of Forms 1099-MISC, Miscellaneous Income ), and to settle third party network transactions (requiring the filing of Forms 1099-K, Payment Card and Third Party Network Transactions ). The guidance provided by the Notice, however, focuses only on information reporting for virtual currency payments received by payees. The guidance does not address the information reporting requirements for income realized by persons who dispose of virtual currency or other digital assets. Although there are several existing information reporting provisions in the Code that do, or may, apply to dispositions of virtual currency and other digital assets, those provisions do not provide clear and comprehensive rules for consistent reporting of these dispositions. A. Sections 1001 and 1012 Section 1001 of the Code provides rules for determining the amount of gain or loss recognized in a sale or exchange transaction. Under section 1001(a), gain from the sale or other disposition of property equals the excess of the amount realized from the transaction over the adjusted basis of the property, and loss from the sale or other disposition of property equals the excess of the adjusted basis of the property over the amount realized. Section 1.1001-1(a) provides that "[e]xcept as otherwise provided in subtitle A of the Code, the gain or loss realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income or as loss sustained." These regulations do not specifically address the determination of gain or loss with respect to digital assets. Section 1012 of the Code provides that the basis of property is the cost of the property. The existing regulations under section 1012 provide special rules regarding the calculation of basis for certain types of property. These regulations do not expressly address the calculation of basis for digital assets. B. Section 6041 Section 6041 of the Code requires any person who, in the course of a trade or business, makes payments of $600 or more that are deemed to be fixed or determinable income to file information returns, and furnish statements to the payee (payee statements), setting forth the amount of gains, profits, and income resulting from that payment and the name and address of the recipient of that payment. Published guidance states that the amount of gains, profits, or income resulting from a payment made in consideration for a capital asset is not fixed or determinable under section 6041 if the payor has no way of ascertaining the payee's basis in that asset. See, for example, Rev. Rul. 80-22, 1980-1 C.B. 286 (January 21, 1980). Thus, a payor otherwise required to report on a payment made in exchange for digital assets is required to report the payee's gain from that transaction under section 6041 if the payor has a way to ascertain the payee's basis and if the gain (in addition to any other payments made by that payor to the payee during the calendar year) is equal to $600 or more. Reporting under section 6041, however, does not apply to brokers with respect to payments made to customers. See§1.6041-3(b). If a payment that is reportable under section 6041 is also subject to the information reporting rules under section 6050W,§1.6041-1(a)(1)(iv) provides that the transaction must instead be reported under section 6050W. C. Sections 6045, 6045A, and 6045B Section 6045 and the regulations thereunder require a person doing business as a broker to file information returns, and furnish payee statements, in accordance with regulations, for each customer for whom the broker has sold stocks, certain commodities, options, regulated futures contracts, securities futures contracts, forward contracts or debt instruments, in exchange for cash, showing each customer's name and address, details regarding gross proceeds, the adjusted basis of certain categories of assets sold, and other information as the Secretary of the Treasury or her delegate (Secretary) may require by forms or regulations. Section 80603 of the Infrastructure Investment and Jobs Act, Pub. L. 117-58, 135 Stat. 429, 1339 (2021) (Infrastructure Act) made several changes to the broker reporting provisions under section 6045 to clarify the rules regarding how certain digital asset transactions should be reported by brokers, and to expand the categories of assets for which basis reporting is required to include all digital assets. These changes are discussed below in Part III of this Background. This Part II.C. of this Background discusses the rules in place prior to the changes made by the Infrastructure Act. The term broker is defined by section 6045(c)(1) to include a dealer, a barter exchange, and any other person who (for a consideration) regularly acts as a middleman with respect to property or services. The existing regulations under section 6045 (existing regulations), further refine the meaning of a broker. Under existing§1.6045-1(a)(1), a broker is defined to mean "any person..., U.S. or foreign, that, in the ordinary course of a trade or business during the calendar year, stands ready to effect sales to be made by others." The term effect, as defined under existing§1.6045-1(a)(10), means either to act as a principal with respect to a sale (for example, a dealer in securities who buys a security from one customer and then sells that security to another customer) or to act as an agent with respect to a sale if the nature of the agency is such that the agent ordinarily would know the gross proceeds of the sale. Accordingly, the term broker for purposes of gross proceeds reporting includes persons that may not otherwise be considered to act as a broker, including certain securities custodians, escrow agents, and stock transfer agents. The term broker for this purpose also includes persons that are not custodians. For example, a non-custodial executing broker that acts as an agent for customers to effect sales of securities is included in this definition. Finally, an obligor that regularly issues and retires its own debt obligations and a corporation (such as a mutual fund described in existing§1.6045-1(b) Example 1 (i)) that regularly redeems its own stock also are treated as brokers under existing§1.6045-1(a)(1). The term commodity is defined in existing§1.6045-1(a)(5) to mean any type of personal property (or interest therein), the trading of regulated futures contracts in which has been approved by the Commodities Futures Trading Commission (CFTC). At the time existing§1.6045-1(a)(5) was promulgated, affirmative CFTC approval was required to list new regulated futures contracts on a commodities exchange. Since that time, however, the CFTC has revised its approval procedures pursuant to the Commodity Futures Modernization Act ("CFMA"), Pub. L. 106-554, 114 Stat. 2763 (2000). The CFTC now also allows new contracts to be listed if the listing market self-certifies that the new contracts comply with the Commodity Exchange Act, 7 U.S.C. 1 et seq., and the CFTC's regulations. See CFTC, Listing of New Contracts by Self-Certification, https://cftc.gov/IndustryOversight/ContractsProducts/index.htm and 17 CFR 40.2. Section 1.6045-1(a)(5) does not explicitly address whether digital assets, the trading of regulated futures contracts in which is permitted pursuant to the CFTC's self-certification procedures, are commodities subject to reporting. For brokers required to file an information return with respect to the sale of a covered security, section 6045(g) requires that the return include the adjusted basis of the security and whether any gain or loss with respect to the security is long-term or short-term (adjusted basis reporting). With the exception of stock, covered securities are defined under section 6045(g)(3) as specified securities that are acquired on or after January 1, 2013, or such later date as determined by the Secretary. For stock to be included in the definition of covered securities, it must be acquired on or after either January 1, 2011, or January 1, 2012, depending on whether the average basis method is permissible with respect to the stock under section 1012. Under section 6045(g)(3)(B), specified securities generally include: (i) shares of corporate stock, (ii) notes, bonds, debentures, and other evidence of indebtedness, (iii) commodities, contracts, or derivatives with respect to commodities, if the Secretary determines that adjusted basis reporting is appropriate, and (iv) any other financial instrument with respect to which the Secretary determines that adjusted basis reporting is appropriate. The existing regulations under section 6045 do not specifically include digital assets as a specified security. Section 6045A of the Code generally requires applicable persons who transfer securities that are covered securities in the hands of those applicable persons to a broker (the receiving broker) to furnish to the receiving broker a written statement setting forth such information as the Secretary may by regulations require. Existing§1.6045A-1(b) requires transfer statements to include the name of the person effecting the transfer, the receiving broker, the name and account number of the customer for whom the security is transferred, as well as information about the security itself, including the transfer date, the adjusted basis, and the original acquisition date of the security. Prior to amendments made by the Infrastructure Act, section 6045A did not address the extent to which these requirements applied to transfers of digital assets. These amendments are discussed below in Part III of this Background. Section 6045B of the Code requires certain securities issuers to report to the IRS as well as to shareholders or their nominees the effect on basis of certain organizational actions (such as a stock split, merger, or acquisition) that impact the basis of issued securities. These rules also do not explicitly address the reporting requirements with respect to digital assets. Any organization with members or clients that contract with each other or with the organization to trade or barter property or services is a barter exchange under existing§1.6045-1(a)(4). A barter exchange must file information returns, and furnish payee statements, with respect to the exchange of property or services by its members or clients. Property or services are considered exchanged through a barter exchange if payment is made by means of a credit on the books of the barter exchange or a scrip issued by the barter exchange, or if the barter exchange arranges a direct exchange of property or services between members. See existing§1.6045-1(e)(2). Section 6045(e) requires real estate reporting persons to file information returns, and furnish payee statements, including the seller's name and address, the gross proceeds paid to the seller, and other information as the Secretary may require by forms or regulations with respect to certain real estate transactions. A real estate reporting person is defined in section 6045(e)(2) to mean the person responsible for closing the transaction or, if no such person exists, the mortgage lender, the transferor's broker, the transferee's broker, or the person designated by the Secretary pursuant to regulations. Real estate reporting persons are treated as brokers under section 6045(e)(2) for purposes of the reporting obligations under section 6045. An exception to this real estate reporting rule is made for real estate reporting persons who rely on seller certifications setting forth written assurances in compliance with Rev. Proc. 2007-12, 2007-1 C.B. 357 (January 22, 2007), that the real estate being sold is the seller's principal residence and the full amount of the gain on the sale or exchange of the principal residence is excludable from gross income under section 121 of the Code, which generally permits individuals to exclude from gross income gain up to $250,000 (and married individuals filing joint returns gain up to $500,000) on the sale or exchange of a principal residence if certain conditions are met. Section 1.6045-4(i) also limits gross proceeds reporting required under section 6045(e) to cash received and cash to be received (also referred to in the existing regulations as consideration treated as cash) by or on behalf of the real estate seller in connection with the real estate transaction. As a result, these rules do not require the reporting of payments using digital assets made to real estate sellers in partial or full consideration for the sale of real estate, except to the extent that a digital asset falls within the definition of consideration treated as cash under existing§1.6045-4(i)(1). The definition of broker in existing regulations generally excludes a person described as a non-U.S. payor or non-U.S. middleman under§1.6049-5(c)(5) with respect to a sale that is effected by the broker on behalf of a customer at an office outside the United States. Additionally, under existing regulations, regardless of a broker's status as U.S. or non-U.S. broker, a broker is not required to file an information return under section 6045 with respect to a sale for a customer whom the broker may treat as an exempt foreign person based primarily on documentation requirements that depend on whether the sale is effected at an office of the broker inside or outside the United States. 2 Generally, the effect of these rules is that non-U.S. securities brokers (other than controlled foreign corporations (CFCs) and a limited class of other brokers with U.S. activities, such as U.S. branches of foreign brokers) are not required to report information to the IRS on their customers, and that both U.S. and non-U.S. securities brokers are not required to report information to the IRS on non-U.S. customers under section 6045. ******** 2 See Part I.I.4 of the Explanation of Provisions footnote 5 regarding the Bank Secrecy Act (31 U.S.C. 5311 et seq.) and the Financial Crimes Enforcement Network's (FinCEN) implementing regulations thereunder. ******** D. Section 6050W Section 6050W requires payment settlement entities to file information returns, and furnish payee statements, with respect to each participating payee to whom they have made one or more payments in settlement of reportable payment transactions. Payment settlement entities are merchant acquiring entities, which are banks or other organizations that are contractually obligated to make payments to participating payees in settlement of payment card transactions, and third party settlement organizations (TPSOs). TPSOs are central organizations that are contractually obligated to make payments to participating payees with respect to third party network transactions for the purchase of goods or services sold through a third party payment network. Payments by TPSOs to settle third party network transactions are required to be reported only if they exceed a de minimis threshold. Section 9674(a) of the American Rescue Plan Act of 2021, Pub. L. 117-2, 135 Stat. 4, 185 (ARP), lowered and modified this threshold for calendar years beginning after December 31, 2021. Under the prior threshold, payments by TPSOs to settle third party network transactions were required to be reported only if the aggregate number of transactions with a payee exceeded 200 and the aggregate amount to be reported with respect to those transactions exceeded $20,000 for a calendar year. Under the ARP provision, TPSOs must report third party network transactions with any participating payee that exceed a minimum threshold of $600 in aggregate payments, regardless of the aggregate number of these transactions. The rules under section 6050W, however, do not expressly address whether exchanges of digital assets for cash, services, or property effected through TPSOs are subject to reporting under section 6050W or whether the information reporting provisions under section 6045 would apply to such exchanges. III. Infrastructure Investment and Jobs Act Section 80603 of the Infrastructure Act clarifies and expands the rules regarding how digital assets should be reported by brokers under sections 6045 and 6045A to improve IRS and taxpayer access to gross proceeds and adjusted basis information when taxpayers dispose of digital assets in transactions involving brokers. First, section 80603(a) of the Infrastructure Act clarifies the definition of broker to include any person who, for consideration, is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person. Second, section 80603(b)(1) of the Infrastructure Act modifies the definition of specified securities under section 6045(g) to explicitly include digital assets and to provide that these specified securities are treated as covered securities for purposes of basis reporting if they are acquired on or after January 1, 2023. Third, section 80603(b)(1)(B) of the Infrastructure Act defines a digital asset broadly to mean any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary, except as otherwise provided by the Secretary. Fourth, section 80603(b)(2) of the Infrastructure Act clarifies that transfer statement reporting under section 6045A(a) applies to covered securities that are digital assets, and also adds a new information reporting provision under section 6045A(d) to provide for broker reporting on transfers of digital assets that are covered securities, provided the transfer is not a sale and is not to an account maintained by a person that the broker knows or has reason to know is also a broker. Section 80603(c) of the Infrastructure Act provides that these amendments apply to returns required to be filed, and statements required to be furnished, after December 31, 2023. Finally, section 80603(d) of the Infrastructure Act provides a rule of construction which states that these statutory amendments shall not be construed to create any inference for any period prior to the effective date of the amendments with respect to whether any person is a broker under section 6045(c)(1) or whether any digital asset is property which is a specified security under section 6045(g)(3)(B). IV. Reasons for New Information Reporting Rules for Digital Assets Digital assets have grown in popularity as both a payment method and an investment or trading asset. Proponents believe that digital assets may offer potential benefits over traditional fiat currencies, such as lower transaction costs and faster transaction speeds. Digital assets may also be popular, however, because the distributed ledger record of transactions does not include the identity of the parties involved in the transactions. This pseudonymity creates a significant risk to tax administration. Digital assets are increasingly common in ordinary course transactions of a type that may be subject to information reporting if carried out using fiat currency or traditional financial assets. For example, several payment processors and credit card issuers that handle large volumes of payments now facilitate payments made using digital assets. Taxpayers can buy and sell digital assets directly or invest in digital assets through investment funds. Taxpayers can also trade derivatives, including futures and option contracts, on digital assets. A number of traditional financial institutions are offering, or have announced plans to offer, custody and trading services with respect to digital assets for institutional investors. In addition, some institutions are converting, or tokenizing, stock and security ownership interests into digital tokens. These tokenized stock and security interests trade on some digital asset trading platforms, and other trading platforms offer unique digital assets referred to as non-fungible tokens (NFTs) for sale in exchange for cash or other digital assets. Transactions of these kinds by U.S. taxpayers may take place either on U.S. custodial or non-custodial trading platforms or with U.S. financial intermediaries, or on foreign custodial or non-custodial trading platforms or with foreign financial intermediaries. According to the Government Accountability Office (GAO), limits on third party information reporting to the IRS is an important factor contributing to the tax gap, which is the difference between taxes legally owed and taxes actually paid. GAO, Tax Gap: Multiple Strategies Are Needed to Reduce Noncompliance, GAO-19-558T at 6 (Washington, D.C.: May 9, 2019). Third party information reporting generally leads to higher levels of taxpayer compliance because the income earned by taxpayers is made transparent to both the IRS and taxpayers (who will use the furnished information to avoid both inadvertent errors and intentional misstatements). With third party information reporting that specifically identifies digital asset transactions, the IRS could more easily identify taxpayers with digital asset transactions that are otherwise difficult to discover. An information reporting regime requiring reporting to the IRS on digital asset transactions would benefit tax compliance by helping to close the information gap with respect to digital assets. See TIGTA, Ref. No. 2020-30-066, The Internal Revenue Service Can Improve Taxpayer Compliance for Virtual Currency Transactions, 10 (Sept. 2020); GAO, Virtual Currencies: Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance, 28, GAO-20-188 (Washington, D.C.: Feb. 2020). In addition to the loss of information with respect to the recipients of digital asset payments that the IRS otherwise might receive if these transactions were carried out using fiat currency or traditional investment assets, these transactions give rise to a separate tax compliance concern because the disposition of digital assets is itself a taxable event that may give rise to gain or loss to the transferor that is reportable on a tax return. Existing information reporting rules do not specifically address how certain transactions involving digital assets must be reported to the party who disposes of the digital assets in exchange for cash, services, stored-value cards, or other property (including different digital assets). Expanding information reporting for digital assets also benefits taxpayers. First, taxpayers use information provided to them by brokers to prepare their tax returns. The lack of such information reporting for digital assets may make it difficult for taxpayers to properly track and report their gain or loss from dispositions of digital assets. Publicly available information indicates that this gap is being filled in part by voluntary tax reporting to customers by some digital asset platforms, and by digital asset tax service providers, including providers of tax software, who charge for the preparation of tax information. The existence of these services illustrates the benefits of information reporting to taxpayers because the same information that is reported by brokers to the IRS on dispositions of digital assets must also be furnished by brokers to their customers. A second benefit to taxpayers from information reporting is that it enables the IRS to focus its audit efforts on taxpayers who are more likely to have underreported their income from digital asset transactions. Consequently, tax compliance would be increased if brokers, including digital asset trading platforms, digital asset payment processors, certain digital asset hosted wallet providers, and persons who regularly offer to redeem digital assets that were created or issued by that person, were required to file information returns, and furnish payee statements, under section 6045 with respect to digital asset dispositions in exchange for cash, broker services, or other property the sale of which is separately subject to reporting under section 6045 or with respect to transactions that are subject to reporting (with respect to the digital asset recipient) under section 6050W. Thus, for example, a digital asset trading platform, including an operator of a peer-to-peer or AMM trading platform, that facilitates a digital asset sale on behalf of a customer should be required to file an information return, and furnish a payee statement with respect to that sale, reporting the gross proceeds realized by the customer as a result of that sale. In addition, reporting should be required by digital asset payment processors who facilitate the use of digital assets to make payments of cash to others by either effecting the sale of digital assets on behalf of the person making payment (and paying the cash to the payment recipient) or by agreeing with the recipient of a digital asset payment in advance of the payment to exchange the digital assets received by that recipient for cash at a predetermined exchange rate. Further, digital asset payment processors who facilitate payments that are potentially subject to reporting under the existing section 6050W regulations should be required to report on the payor's exchange of digital assets in those transactions as well. Additionally, a stockbroker who accepts digital assets from a customer as payment for the customer's purchase of stock should be required to file an information return, and furnish a payee statement, reporting the gross proceeds realized by the customer as a result of that customer's exchange of digital assets for stock. Reporting should also be required in this example if the broker accepts digital assets in exchange for the broker's services (for example, transaction fees or commissions). Finally, to facilitate the filing by taxpayers of accurate information returns with respect to digital asset dispositions, substantive rules are needed for determining gain or loss in a digital asset sale or exchange transaction and for calculating the basis of digital assets. Explanation of Provisions The Treasury Department and the IRS expect to make the changes to broker reporting for digital assets in multiple phases. These proposed regulations generally focus on changes to existing§1.6045-1 to require brokers to report on digital asset sales. Later phases will generally focus on implementing transfer statement reporting under section 6045A(a) and broker information reporting under section 6045A(d) for covered security transfers that are not transfers to accounts maintained by persons known to be brokers or subject to reporting as sales. I. Proposed§1.6045-1 These proposed regulations generally follow the framework and concepts of the existing rules for broker information reporting but differ from those rules as necessary to reflect both the unique nature of digital assets and the clarifications and changes made to section 6045 by the Infrastructure Act. These proposed regulations do not address every transaction involving digital assets that may give rise to income, such as the receipt of digital assets in hard forks, because it is more appropriate to address those transactions under other provisions of the Code. A. Expansion of the types of property subject to reporting Under existing§1.6045-1(a)(9), brokers are generally required to file an information return for each sale effected on behalf of a customer. A disposition is treated as a sale subject to reporting only if the property disposed of is a security, commodity, option, regulated futures contract, securities futures contract, or forward contract and the disposition is for cash. These proposed regulations provide that reporting under section 6045 is also required for certain dispositions of digital assets that are made in exchange for cash, different digital assets, stored-value cards, broker services, or property subject to reporting under existing section 6045 regulations. 1. Definition of Digital Assets The definition of digital assets in these proposed regulations follows the definition in section 80603(b)(1)(B) of the Infrastructure Act. Specifically, proposed§1.6045-1(a)(19)(i) defines a digital asset as a digital representation of value that is recorded on a cryptographically secured distributed ledger (or similar technology). These proposed regulations also provide that a digital asset does not include cash, for example, a fiat currency in digital form such as funds in a bank or payment processor account accessed through the Internet. In addition, under these proposed regulations, the determination of whether an asset is a digital asset is made without regard to whether each individual transaction involving that digital asset is actually recorded on the cryptographically secured distributed ledger. The use of cryptography, through the use of public and private keys to transfer assets, distinguishes digital assets as defined by the Infrastructure Act from other virtual assets and is therefore an essential part of the definition. By not limiting the definition of digital assets to only those digital representations of value for which each transaction is actually recorded or secured on a cryptographically secured distributed ledger, the definition of digital assets covers transactions involving digital representations of value that are recorded by a broker only on its own centralized internal ledger. For example, a broker may hold a number of units of a digital asset in its own name, similar to holding shares of stock in street name, and carry out transactions between customers that wish to buy or sell units of that digital asset by first matching transactions internally and executing only net purchases or sales on the distributed ledger. Additionally, the definition covers transactions involving digital representations of value that are recorded on ledgers that may or may not be widely or publicly distributed. The definition of digital assets includes digital representations of value that are capable of being recorded using technology that is similar to technology that uses cryptography to secure transactions. These proposed regulations include this similar technology standard to ensure that the definition of digital assets captures digital representations of value that reflect advancements to the techniques, methods, and technology, upon which digital assets are based. Section 80603(b)(1)(B) of the Infrastructure Act provides authority to the Secretary to modify the definition of digital assets for purposes of reporting under section 6045. The Treasury Department and the IRS considered applying these regulations to only virtual currency or a variant thereof rather than to all digital assets. The Treasury Department and the IRS also considered whether newer forms of digital assets, such as those referred to as stablecoins or NFTs, should be subject to the section 6045 broker reporting rules. The proposed regulations would require broker reporting for all types of digital assets, for multiple reasons. First, the definition of digital assets in the Infrastructure Act is expansive. Second, because the disposition of digital assets may give rise to gain or loss, reporting of gross proceeds and basis information is useful to taxpayers as well as the IRS. For example, some NFTs are readily being bought and sold, often as speculative investments on digital asset trading platforms, giving rise to gain or loss that is subject to reporting by taxpayers. The Treasury Department and the IRS are aware of concerns that applying these proposed regulations to such NFTs would create disparate reporting of transactions involving the subject of the NFT (such as ownership or license interests in artwork or sports memorabilia) depending on whether those interests are transferred using an NFT or as a traditional sale or license contract. But given that NFTs are popular investments, the buying and selling of NFTs raise tax administration concerns similar to the concerns associated with other types of digital assets that the physical analogues of NFTs do not. For example, like other digital assets, NFTs can readily be transferred to a private wallet or an offshore account, while the transfer of a physical artwork or trading card may be more difficult or costly. Third, there is a continuing evolution in the types of digital assets that can be used for payment transactions, investment, or for other purposes and this inclusive approach is designed to provide clarity as these types of digital assets continue to evolve. For example, a taxpayer may acquire an NFT to enjoy its artistic merit or for investment, or both. The treatment of any particular type of digital asset as reportable under these proposed regulations is not intended to imply any characterization of that type of digital asset as a matter of substantive law. See Part I.K of this Explanation of Provisions for further discussion of the reasons why privately issued stablecoins are treated as digital assets for purposes of these regulations. Finally, it is intended that the definition of digital assets used in these proposed regulations would not apply to other types of virtual assets, such as assets that exist only in a closed system (such as video game tokens that can be purchased with U.S. dollars or other fiat currency but can be used only in-game and that cannot be sold or exchanged outside the game or sold for fiat currency). It is also intended that the regulations would not apply to uses of distributed ledger technology or similar technology for ordinary commercial purposes that do not create new transferable assets, such as tracking inventory or processing orders for purchase and sale transactions, which are unlikely to give rise to sales as defined for purposes of the regulations. Comments are requested on whether the proposed definition of digital assets accurately and appropriately defines the type of assets to which these regulations should apply. 2. Coordination with Reporting Rules for Securities, Commodities, and Real Estate The Treasury Department and the IRS are aware that many provisions of the Code incorporate references to the terms security or commodity, and that questions exist as to whether, and if so, when, a digital asset may be treated as a security or a commodity for purposes of those Code sections. Apart from the rules proposed under sections 1001 and 1012 discussed in Part II of this Explanation of Provisions, these proposed regulations are information reporting regulations, and are therefore not the appropriate vehicle for answering those questions. Because the existing regulations under section 6045 require reporting with respect to sales for cash of securities and certain commodities, and with respect to real estate transactions in which gross proceeds are paid in cash (or consideration treated as cash), coordination rules have been included to provide certainty to brokers with respect to whether a particular transaction, or portion thereof, is reportable under those existing rules or under the proposed rules for digital assets and to avoid duplicate reporting obligations. Accordingly, the treatment of an asset as reportable as a security, commodity, digital asset or otherwise in these proposed rules applies only for purposes of sections 1001, 1012, 3406, 6045, 6045A, 6045B, 6050W, 6721, and 6722 and should not be construed to apply for any other purpose of the Code to determine whether a digital asset should or should not be properly classified as a security, commodity, option, securities futures contract, regulated futures contract, or forward contract. See proposed§1.6045-1(a)(19)(ii). Similarly, the potential characterization of digital assets as securities, commodities, or derivatives for purposes of any other legal regime, such as the Federal securities laws and the Commodity Exchange Act, is outside the scope of these proposed regulations. The Treasury Department and the IRS are aware that some digital asset tokens may be classified as securities for U.S. Federal income tax purposes, and that it is possible that tokens constituting securities issued by certain U.S. issuers or companies could be traded on certain digital asset trading platforms that are subject to these rules. If those tokens are securities for Federal income tax purposes, and also qualify as digital assets (as defined in proposed§1.6045-1(a)(19)), the sale of those tokens for cash could be subject to the existing regulations requiring brokers to provide information reporting with respect to the sale of securities for cash (that is, gross proceeds and basis information) as well as to these proposed regulations relating to the sale of digital assets. The Treasury Department and the IRS considered several different alternatives for addressing this potential overlap. The Treasury Department and the IRS considered providing a rule that would treat the sale for cash of any digital asset treated as a security under current law as a sale of securities and not a sale of digital assets for purposes of these proposed regulations. The Treasury Department and the IRS, however, have not issued guidance addressing when a digital asset should be treated as a security for substantive U.S. Federal income tax purposes. Because digital asset trading platforms may not be certain whether a particular asset should be reported as a security or as a digital asset without that guidance, and for the additional reasons described in the next paragraph, the Treasury Department and the IRS determined that this alternative would not provide the clarity and certainty necessary for information reporting purposes. The Treasury Department and the IRS also considered providing a more limited exception to the definition of digital assets for digital representations of value that represent interests in one or more units of a security to provide the same information reporting rules for a sale of stock for cash as for a sale of tokenized stock for cash. This alternative would have several undesirable results. First, digital asset trading platforms that trade both tokenized stock and other digital assets would be subject to two different sets of reporting rules when such assets were sold for cash. Second, tokenized stock would be subject to one set of reporting rules if sold for cash - that is, the existing regulations relating to the reporting of sales of securities for cash - and to a different set of reporting rules if sold for another digital asset or other consideration - that is, these proposed regulations for sales of digital assets. Moreover, the tax compliance concerns associated with transactions in digital assets are different from the tax compliance concerns associated with trading in conventional or non-digital asset securities, including as a result of the common market practice of transferring digital assets from a centralized platform to a private wallet and back again. Accordingly, different reporting rules are warranted for digital assets regardless of whether they would also qualify as a security. As a result of these considerations, these proposed regulations make no changes to the definition of the term security (as defined in existing§1.6045-1(a)(3)) but instead provide a coordination rule in proposed§1.6045-1(c)(8)(i) applicable to transactions involving the sale of a digital asset that also constitutes a sale of a security as so defined (other than options that constitute contracts covered by section 1256(b)). Under this proposed coordination rule, the broker must report the sale of an asset that qualifies both as such a security and as a digital asset only as a sale of a digital asset and not as a sale of a security. See Part I.B of this Explanation of Provisions, however, for a discussion of the additional information that the broker may be required to provide for transactions involving the sale of a digital asset that also constitutes a sale of such a security. See Part I.B.3 of this Explanation of Provisions for a discussion of the applicable rules for digital assets that are also financial contracts, including contracts that are section 1256 contracts within the meaning of section 1256(b). The Treasury Department and the IRS are aware that the financial services industry is exploring the use of distributed ledger technology or similar technology, such as a blockchain or a shared ledger, to process orders associated with conventional or non-digital asset securities transactions. Using distributed ledger technology or similar technology to process orders associated with securities transactions may require the temporary creation of digital representations of securities that may fit within the definition of digital assets in these proposed regulations. It may be appropriate for these regulations not to apply to these transactions because these transactions would typically involve securities being transferred from one traditional brokerage or custodial account to another. Nonetheless, these proposed regulations do not provide a specific exception for these transactions because the Treasury Department and the IRS would like to understand whether an exception is necessary. Comments are requested on whether the definition of digital asset or the reporting requirements with respect to digital assets inadvertently capture transactions involving conventional or non-digital asset securities that may use distributed ledger technology, shared ledgers, or similar technology merely to facilitate the processing, clearing, or settlement of orders. Comments also are requested on whether and, if so, how the definitions or reporting rules should be modified to address other transactions involving tokenized or digitized financial instruments that are used to facilitate back-office processing of the transaction. If an exception for these types of transactions is necessary, the Treasury Department and the IRS would also like to understand how it should be drafted so that it does not sweep in other transactions (such as tokenized securities, or other digital assets treated as securities) that should not be exempted from reporting. The Treasury Department and the IRS also considered how to apply section 6045A and section 6045B to assets that qualify both as specified securities under existing§1.6045-1(a)(14)(i) through (iv) for basis reporting purposes and as digital assets under proposed§1.6045-1(a)(19) (dual classification assets) for the period of time until rules are promulgated dealing with the application of sections 6045A and 6045B to digital assets. Although the existing regulations under section 6045A operate to provide important information to brokers required to report adjusted basis information to the IRS (and taxpayers), it is unclear whether digital asset brokers currently have the mechanisms in place to provide transfer statements to receiving brokers that receive these dual classification assets in transfers that are recorded on a blockchain. With regard to section 6045B, issuers of dual classification assets may not have procedures in place to report information affecting basis. Accordingly, the Treasury Department and the IRS have decided to delay transfer statement reporting under section 6045A(a) and issuer reporting under section 6045B for these dual classification assets and will consider rules for dual classification assets as part of the implementation of more general transfer statement reporting and issuer reporting rules for digital asset brokers as part of a later phase of information reporting guidance for broker effected digital asset transfers. Proposed§§1.6045A-1(a)(1)(vi) and 1.6045B-1(a)(6) have been added to specifically exempt from transfer and issuer reporting any specified security that is also a digital asset. See Proposed§§1.6045A-1 and 1.6045B-1 in Part IV of this Explanation of Provisions. The definition of commodity under existing§1.6045-1(a)(5) was first promulgated in 1983 as part of TD 7873, 48 FR 10302, 10304 (Mar. 11, 1983). Under that definition, the term includes any type of personal property or interest therein, the trading of futures contracts in which have been approved by the CFTC. Sometime after the promulgation of this definition, the CFTC added a new self-certification mechanism under which new exchange-traded contracts become subject to the jurisdiction of the CFTC. Some digital asset trading platforms have taken the position that assets underlying futures contracts that are subject to the jurisdiction of the CFTC pursuant to the CFTC's self-certification procedures are not commodities under existing§1.6045-1(a)(5) because the CFTC did not affirmatively approve the listing of these contracts on an exchange. The Treasury Department and the IRS believe that the reporting regulations should reflect the current practice of the CFTC and therefore have modified this rule in proposed§1.6045-1(a)(5)(i) to ensure that assets that are subject to the jurisdiction of the CFTC pursuant to the CFTC's self-certification procedures are included in the definition of commodity for purposes of information reporting under section 6045. This modification applies broadly to all types of commodities subject to the jurisdiction of the CFTC for purposes of section 6045. However, because there has been some uncertainty about the scope of the term commodity for purposes of section 6045, reporting under section 6045 for sales of commodities as to which contracts have been self-certified to the CFTC is proposed to apply to any sale that occurs on or after January 1, 2025, without regard to the date the self-certification procedures were undertaken. Thus, if an asset became subject to the jurisdiction of the CFTC pursuant to the CFTC's self-certification procedures prior to January 1, 2025, sales of that asset for cash on or after January 1, 2025, will be subject to reporting as a result of the revised definition of commodity under proposed§1.6045-1(a)(5). This change to the definition of commodity does not affect the broker's obligation under existing§1.6045-1(a)(9) and (c) to report on regulated futures contracts. For a detailed discussion of the broker reporting rules for financial contracts, see Part I.A.3 of this Explanation of Provisions. Consequently, a digital asset, the trading of regulated futures contracts in which has been approved by or, pursuant to proposed§1.6045-1(a)(5)(i), self-certified to the CFTC, would be treated as a commodity for purposes of reporting under section 6045 absent other changes to the existing regulations. Those assets would also be digital assets for purposes of these regulations. This dual classification could result in confusion as to whether sales of these digital assets should be reported as sales of commodities on Form 1099-B, sales of digital assets on a form prescribed by the Secretary for digital asset sales, or both--potentially resulting in duplicative reporting. To avoid confusion and potential duplicative reporting of sales made on or after January 1, 2025, these proposed regulations provide a coordination rule in proposed§1.6045-1(c)(8)(i) applicable to transactions involving the sale of a digital asset that also constitutes a sale of a commodity. Under this proposed coordination rule, the broker must report the sale of an asset that qualifies both as a commodity and as a digital asset only as a sale of a digital asset (along with the additional information that this characterization requires) and not as a sale of a commodity. Finally, the Treasury Department and the IRS are aware that distributed ledger technology or similar technology may be used in connection with transactions involving real estate. Using distributed ledger technology or similar technology to settle real estate transactions requires the creation of digital representations of real estate that may fit within the definition of digital assets in these proposed regulations. To avoid duplicative reporting for digital assets that also constitute reportable real estate and to avoid having real estate reporting persons report seller proceeds under an entirely new reporting regime, proposed§1.6045-1(c)(8)(ii) provides a coordination rule applicable to transactions involving the sale of a digital asset that also constitutes reportable real estate (as defined under existing§1.6045-4(b)(2)) that is subject to reporting under existing§1.6045-4(a). Under this coordination rule, the broker must report the sale of reportable real estate only as a sale of reportable real estate (and not as a sale of a digital asset). 3. Rules Applicable to Financial Contracts on Digital Assets To ensure reporting of sales of financial contracts involving or referencing digital assets, these proposed regulations expand the existing rules for certain financial products, such as options, futures, and forward contracts. Proposed§1.6045-1(m)(1) expands the type of option transactions subject to reporting to generally include options on digital assets and options on derivatives with a digital asset as an underlying property. Generally, under these proposed regulations, how an option transaction is reported will depend on: (i) whether the option is a section 1256 contract within the meaning of section 1256(b) (section 1256 contract); (ii) whether the transaction is a disposition of the option itself or whether the transaction involves the delivery of the underlying property; and (iii) whether the option is itself a digital asset (digital asset option) or is not a digital asset (non-digital asset option). For a disposition of an option that is not a section 1256 contract, the nature of the option itself determines the appropriate reporting treatment; that is, reporting would be required under proposed§1.6045-1(a)(9)(i) if the option itself is a non-digital asset option and under proposed§1.6045-1(a)(9)(ii) if the option itself is a digital asset option. Because the asset that is disposed of is the option itself, this proposed reporting treatment applies without regard to whether the digital asset option or non-digital asset option was issued with respect to digital asset or non-digital asset underlying property. In contrast, when an option that is not a section 1256 contract is settled by the delivery of the underlying property, reporting under these proposed regulations is based on the nature of the underlying property, with the delivery of non-digital asset underlying property reportable as a sale under proposed§1.6045-1(a)(9)(i) and the delivery of digital asset underlying property reportable as a sale under proposed§1.6045-1(a)(9)(ii). Because the asset that is disposed of is the asset underlying the option, this proposed reporting treatment for the sale of underlying property that is physically delivered applies without regard to whether the option is itself a digital asset option or a non-digital asset option. Because the Treasury Department and the IRS are currently unaware of any digital asset options that are also section 1256 contracts, these proposed regulations do not provide new rules for such options. Rather, proposed§1.6045-1(c)(8)(iii) provides that reporting of these dual classification options should be under the existing rules for options that are section 1256 contracts and not under the proposed rules for digital assets. Accordingly, for a disposition of an option that is a section 1256 contract, reporting is required under existing§1.6045-1(c)(5) regardless of whether the option disposed of is a non-digital asset option or a digital asset option or whether the option was issued with respect to digital asset or non-digital asset underlying property. Further, as required by existing§1.6045-1(m)(3) and proposed§1.6045-1(a)(9)(i) and (c)(8)(iii), when an option that is a section 1256 contract is settled by the delivery of the underlying property, the profit or loss on the contract itself is reportable under existing§1.6045-1(c)(5), but the underlying sale will be subject to reporting under these proposed regulations based on the nature of the underlying property, with the delivery of non-digital asset underlying property reportable under proposed§1.6045-1(a)(9)(i) and the delivery of digital asset underlying property reportable under proposed§1.6045-1(a)(9)(ii). The Treasury Department and the IRS invite comments regarding the above-described option transactions, including comments about how common are digital asset options that are also section 1256 contracts. Comments are also requested regarding whether there are other less burdensome alternatives for reporting the above-described option transactions. For example, whether it would be less burdensome to allow brokers to report transactions involving section 1256 contracts that are also digital assets or the delivery of non-digital assets that underlie a digital asset option as a sale under proposed§1.6045-1(a)(9)(ii). No changes have been made to the rules relating to regulated futures contracts in the existing regulations because the definition of a regulated futures contract in existing§1.6045-1(a)(6) can apply to a regulated futures contract on digital assets and to regulated futures contracts that are themselves digital assets. Accordingly, pursuant to proposed§1.6045-1(c)(8)(iii), regulated futures contracts will continue to be reported under the rules in existing§1.6045-1(c)(5) and not under the proposed rules for digital assets. Proposed§1.6045-1(a)(7)(iii) expands the definition of a forward contract subject to reporting to include executory contracts requiring delivery of digital assets in exchange for cash, different digital assets, or any other property or services that would result in a sale of digital assets under proposed§1.6045-1(a)(9)(ii) if the exchange occurred at the time the contract was executed. When a forward contract is disposed of without delivery of its underlying property, the nature of the forward contract itself determines the appropriate reporting treatment. Specifically, reporting is required under proposed§1.6045-1(a)(9)(i) if the forward contract itself is a non-digital asset forward contract and under proposed§1.6045-1(a)(9)(ii) if the forward contract is a digital asset forward contract. Because the asset that is disposed of is the forward contract itself, this proposed reporting treatment applies without regard to whether the forward contract was issued with respect to digital asset or non-digital asset underlying property. The reporting on the delivery of the underlying property with respect to a forward contract, in contrast, does turn on the nature of that underlying property. That is, when the underlying asset is non-digital asset property, the delivery is reportable under proposed§1.6045-1(a)(9)(i); whereas when the underlying asset is digital asset property, the delivery is reportable under proposed§1.6045-1(a)(9)(ii). Because the asset that is disposed of when there is delivery is the asset underlying the forward contract, this proposed reporting treatment for the sale of underlying property that is physically delivered applies without regard to whether or not the forward contract is itself a digital asset. The Treasury Department and the IRS request comments with respect to whether there is anything factually unique in the way short sales of digital assets, options on digital assets, and other financial product transactions involving digital assets are undertaken compared to similar transactions involving non-digital assets, and whether these transactions with respect to digital assets raise any additional reporting issues that have not been addressed in these proposed regulations. B. Definition of brokers required to report As described in Part II.C. of the Background, prior to the Infrastructure Act, section 6045(c)(1) defined the term broker to include a dealer, a barter exchange, and any other person who (for a consideration) regularly acts as a middleman with respect to property or services. Existing regulations under section 6045 apply the "middleman" portion of this definition to treat as a broker effecting a sale a person that as part of the ordinary course of a trade or business acts as an agent with respect to a sale if the nature of the agency is such that the agent ordinarily would know the gross proceeds of the sale. See existing§1.6045-1(a)(1) and (a)(10)(i)(A). Section 80603(a) of the Infrastructure Act clarifies that the definition of broker under section 6045 includes any person who, for consideration, is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person. According to a report by the Joint Committee on Taxation published in the Congressional Record prior to the enactment of the Infrastructure Act, the change clarified prior law to resolve uncertainty over whether certain market participants are brokers. The change was not intended to limit the Secretary's authority to interpret the definition of broker. 167 Cong. Rec. S5702, 5703 (daily ed. Aug. 3, 2021) (Joint Committee on Taxation, Technical Explanation of Section 80603 of the Infrastructure Act). To reflect this clarification made by the Infrastructure Act, proposed§1.6045-1(a)(1) retains the existing definition of broker as any person that in the ordinary course of a trade or business stands ready to effect sales to be made by others. However, the definition of effect under existing§1.6045-1(a)(10)(i) and (ii), which sets forth the various roles under which a broker may take actions on behalf of customers, has been revised to provide that any person that provides facilitative services that effectuate sales of digital assets by customers will be considered a broker, provided the nature of the person's service arrangement with customers is such that the person ordinarily would know or be in a position to know the identity of the party that makes the sale and the nature of the transaction potentially giving rise to gross proceeds. This definition is similar to the definition in the existing regulations with respect to agents and is similarly intended to limit the definition of broker to persons who have the ability to obtain information that is relevant for tax compliance purposes. The modified definition of effect takes into account whether a person is in a position to know information about the identity of a customer, rather than whether a person ordinarily would know such information, in recognition of the fact that some digital asset trading platforms that have a policy of not requesting customer information or requesting only limited information have the ability to obtain information about their customers by updating their protocols as they do with other upgrades to their platforms. The ability to modify the operation of a platform to obtain customer information is treated as being in a position to know that information. The Treasury Department and the IRS expect that this clarified proposed definition will ultimately require operators of some platforms generally referred to as decentralized exchanges to collect customer information and report sales information about their customers, if those operators otherwise qualify as brokers. This decision was made because the reasons for requiring information reporting on dispositions of digital assets do not depend on the manner by which a business operating a platform effects customers' transactions. Customers need information about gross proceeds and basis to prepare their tax returns; the IRS needs that information in order to collect the taxes that are imposed under laws enacted by Congress and in order to focus its compliance efforts on taxpayers who fail to comply with their obligations to report their tax liability; and policy makers need that information in order to understand what taxpayers are doing so that they can make informed judgments about further laws or other guidance relating to digital assets. Moreover, if the manner in which a digital asset trading platform operates reduces or eliminates its obligation to report information on customer transactions, digital asset trading platforms might modify their operations to avoid reporting or customers who wish to evade taxes might elect to use a non-reporting platform in order to reduce the IRS's ability to identify them as non-compliant. The Treasury Department and the IRS recognize that some stakeholders may have concerns that providing personal identity information may raise privacy concerns, and request comments on whether there are alternative approaches that would satisfy tax compliance objectives while reducing privacy concerns. The Treasury Department and the IRS also request comments on any technological or other technical issues that might affect the ability of a non-custodial digital asset trading platform that is a person who qualifies as a broker to obtain and transmit the information required under these proposed regulations and how these issues might be overcome. The Treasury Department and the IRS understand that digital asset trading platforms operate with varying degrees of centralization and effective control by founders or others, and request comments on whether the application of reporting rules only to "persons" (as described in the next paragraph) adequately limits the scope of reporting obligations to platforms that have one or more individuals or entities that can update, amend, or otherwise cause the platform to carry out the diligence and reporting rules of these proposed regulations. As used in these proposed regulations, the term person generally has the meaning provided by section 7701(a)(1), which provides that the term generally includes an individual, a legal entity, and an unincorporated group or organization through which any business, financial operation or venture is carried on, such as a partnership. The term person includes a business entity that is treated as an association or a partnership for Federal tax purposes under§301.7701-3(b). Accordingly, a group of persons providing facilitative services that are in a position to know the customer's identity and the nature of the transaction effectuated by customers may be treated as a broker whether or not the group operates through a legal entity if the group is treated as a partnership or other person for U.S. Federal income tax purposes. These clarifying changes are intended to apply the reporting rules to digital asset trading platforms that provide facilitative services and that are in a position to know the customer's identity and the nature of the transaction effectuated by customers regardless of the manner in which they are organized or operate if the platform or its operator (or operators) is a person subject to reporting. Thus, for example, the reporting rules apply to custodial digital asset trading platforms that act as their customers' legal agents in trading their customers' digital assets as well as to operators of non-custodial trading platforms that provide digital asset middleman services that bring buyers and sellers together and rely on smart contracts to execute the transactions without further intervention from the operators, despite the fact that such digital asset middlemen may not necessarily be acting as legal agents of the customers in those transactions. Accordingly, under this definition, in addition to acting as either a principal with respect to sales of digital assets in the ordinary course of a trade or business, or as an agent (including as a custodial agent) if the nature of the agency is such that the agent ordinarily would know the gross proceeds of the sale, a broker also includes a person who acts as a digital asset middleman for a party in a sale of digital assets. Proposed§1.6045-1(a)(21)(i) defines a digital asset middleman as any person who provides a facilitative service with respect to a sale wherein the nature of the arrangement is such that the person ordinarily would know or be in a position to know the identity of the party that makes the sale and the nature of the transaction potentially giving rise to gross proceeds from the sale. A facilitative service is defined in proposed§1.6045-1(a)(21)(iii)(A) as any service that directly or indirectly effectuates a sale of digital assets, such as providing: a party in the sale with access to an automatically executing contract or protocol; access to digital asset trading platforms; order matching services; market making functions to offer buy and sell prices; or escrow or escrow-like services to ensure both parties to an exchange act in accordance with their obligations. Because some persons providing these services or products may not be in a position to know the identity of the parties making a sale and the nature of the transaction, proposed§1.6045-1(a)(21)(iii)(A) specifically excludes from the definition of facilitative service persons solely engaged in the business of providing distributed ledger validation services--whether through proof-of-work, proof-of-stake, or any other similar consensus mechanism--without providing other functions or services. For the same reason, proposed§1.6045-1(a)(21)(iii)(A) also excludes from the definition of facilitative service persons solely engaged in the business of selling hardware or licensing software for which the sole function is to permit persons to control private keys which are used for accessing digital assets on a distributed ledger. This latter exclusion does not, therefore, exclude wallet software providers from the definition of facilitative service if the software also provides users with direct access to trading platforms from the wallet platform. The Treasury Department and the IRS invite comments regarding whether the provision of connection software by wallet providers to trading platforms (that customers of the trading platforms can then use to access their wallets from the trading platform) should be considered a facilitative service resulting in the wallet provider being treated as a broker. In addition, the Treasury Department and the IRS invite comments regarding what additional functions wallet providers might provide that would be considered facilitative services. Finally, the definition of customer under proposed§1.6045-1(a)(2) has also been revised to include persons that make sales of digital assets using brokers who act as digital asset middlemen. Under proposed§1.6045-1(a)(21)(ii)(A), a person is in a position to know the identity of the party that makes the sale if that person maintains sufficient control or influence over the facilitative services provided so as to have the ability to set or change the terms under which its services are provided to request that the party making the sale provide that party's name, address, and taxpayer identification number, in advance of the sale. This rule is similar to the standard, recommended by the Financial Action Task Force (FATF), to be used to determine whether a creator, owner, operator, or other person involved in a decentralized application providing financial services should be considered to be a virtual asset service provider and should, thus, be subject to anti-money laundering (AML) and counter-terrorist financing (CFT) requirements. FATF (2021), Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, p. 26-28, FATF, Paris. https://www.fatf-gafi.org/publications/fatfrecommendations/documents/guidance-rba-virtual-assets-2021.html. Similarly, under proposed§1.6045-1(a)(21)(ii)(B), a person is in a position to know the nature of the transaction potentially giving rise to gross proceeds from a sale if that person maintains sufficient control or influence over the facilitative services provided so as to have the ability to determine whether and the extent to which the transfer of digital assets involved in a transaction gives rise to gross proceeds. Thus, a person will be considered to be in a position to know the nature of the transaction potentially giving rise to gross proceeds from a sale if the person can determine that the transaction is a sale (and the gross proceeds from that sale) based on the consideration received when a sale transaction is completed. As a result, a person will be considered to be in a position to know the nature of the transaction potentially giving rise to gross proceeds from a sale if the person has the ability to modify an automatically executing contract or protocol to which that person provides access to ensure that this information is provided upon the execution of a sale. For both of these standards, a person will be considered as maintaining sufficient control or influence over the provided facilitative services so as to have the ability to determine customer identities or the nature of transactions if that person has the ability to change the fees charged for the facilitative services, whether by modifying the existing service arrangement or by substituting a new service arrangement. The fact that a digital asset trading platform operator has modified an automatically executing contract or protocol in the past, or has replaced such a contract with another contract in its protocol, strongly suggests that the operator has sufficient control or influence over the facilitative services provided to obtain the information about either the identity of the party that makes the sale or whether and the extent to which the transfer of digital assets involved in a transaction gives rise to gross proceeds. The Treasury Department and the IRS invite comments regarding what other factors should be considered relevant to determining whether a person maintains sufficient control or influence over provided facilitative services. The Treasury Department and the IRS understand that in some cases tokens that enable those who hold them to control the ability to change the underlying protocol of a platform described as a decentralized exchange (referred to as governance tokens) may be held in significant part by founders, development teams, or one or more investors and that in other cases those governance tokens may be more widely distributed. There may also be fact patterns in which a holder of a significant amount of governance tokens routinely takes actions that benefit the platform, for example reimbursing users whose tokens have been stolen, which actions are then ratified by or compensated by the broader group of holders of governance tokens. Consequently, there can be a range of effective control that ownership of governance tokens can provide, based on how widely the tokens are disbursed and whether or not a group of persons (normally the founders/development teams/investors) retain enough tokens as a group to make decisions. Some decentralized autonomous organizations (DAOs) are an example of this organizational structure. Even in structures where governance tokens may be widely distributed, individuals or groups of token holders can have the ability to maintain practical control. In addition, in some cases, so-called "administration keys" exist to allow developers or founders to modify or replace the automatically executing contracts or protocols underpinning digital asset trading platforms without requiring the vote of governance token holders. The Treasury Department and the IRS invite comments regarding the circumstances under which an operator does or does not maintain sufficient control or influence over the facilitative services offered by a digital asset trading platform. Additionally, comments are requested regarding whether, and if so, how should the ability of users of the platform, shareholders or holders of governance tokens to vote on aspects of the platform's operations be considered. Finally, comments are requested regarding whether this conclusion should be impacted by the existence of full or even partial-access administration keys or the ability of the operator to replace the existing protocol with a new or modified protocol if that replacement does not require holding a vote of governance tokens or complying with these voting restrictions. As noted, the statutory definition of broker under section 6045(c)(1)(C) refers to a person who "for a consideration" regularly acts as a middleman. The revised definition of broker under the Infrastructure Act also refers to a person who, "for consideration," is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person. The definition of broker under existing and proposed§1.6045-1(a)(1) implements this "for consideration" qualification by limiting the definition of broker to a person who effects sales made by others "in the ordinary course of a trade or business." Persons engaged in a trade or business necessarily are "those so engaged for gain or profit." See e.g., Treas. Reg.§1.6041-1(b)(1); Groetzinger v. Commissioner, 480 U.S. 23 (1987). A business may receive different forms of consideration for its goods and services. The receipt of fees may be a relevant factor in determining whether a person is engaged in the ordinary course of a trade or business. However, there may be persons who facilitate transfers of digital assets for a fee or other consideration, such as individuals who occasionally facilitate transfers but do not do so on a regular basis, who are not engaged in a business activity. It is intended that this "trade or business" requirement will result in a more limited definition of broker than that which would apply under a less restrictive "for consideration" standard. Accordingly, as long as a broker effects the sales made by others in the ordinary course of its trade or business, it will have a reporting obligation under section 6045. Proposed§1.6045-1(a)(10)(i)(B) also revises the definition of effect to clarify that a person who acts as a principal with respect to a sale is to be treated as effecting a sale only to the extent such person is acting in the sale as a broker. Thus, for example, because an obligor that regularly issues and retires its own debt obligations is a broker, that obligor will be treated as effecting a sale when it retires its own debt as part of those regular activities. Similarly, a corporation that regularly issues and redeems its own stock will be treated as effecting a sale when it redeems its own shares as part of these regular activities. Additionally, an issuer of digital assets that regularly offers to redeem those digital assets will be treated as effecting a sale when it redeems those digital assets as part of these regular activities. Finally, proposed§1.6045-1(a)(10)(i)(C) has been revised to clarify that a person who acts as a principal in a sale will be treated as effecting sales only if that principal is acting as a dealer with respect to the sale that is subject to reporting under section 6045. Thus, for example, a retailer who accepts digital assets from a customer as payment for the sale of goods is not effecting the sale of digital assets on behalf of that customer if that retailer is not otherwise a dealer of digital assets. Similarly, an artist in the business of creating and selling NFTs that represent interests in the artist's work is not effecting the sale of digital assets on behalf of purchasers, provided that artist is not otherwise a dealer in digital assets. This result is appropriate regardless of whether the artist regularly sells NFTs to the purchasers directly or through digital asset brokers. Proposed§1.6045-1(b)(1)(vi) through (xi) adds examples of persons who are generally considered to be brokers under the above definition. Specifically, digital asset trading platforms that also provide custodial (hosted wallet) services, operators of non-custodial trading platforms (including platforms that effect transactions through automatically executing contracts or protocols), digital asset payment processors, and operators and owners of digital asset kiosks are included as examples of persons who in the ordinary course of their trade or business stand ready to effect sales of digital assets on behalf of customers. These examples also clarify that even if a person's principal business does not meet the definition of broker, the person will be considered a broker under the definition if that person also regularly stands ready to effect sales of digital assets on behalf of customers. Thus, digital asset hosted wallet providers and persons who sell or license software to unhosted wallet users will be considered brokers if they also facilitate or offer services to facilitate the purchase or sale of digital assets. Conversely, proposed§1.6045-1(b)(2)(viii) through (x) illustrate that the term broker does not extend to merchants who sell goods or services in return for digital assets, persons who are solely engaged in the business of validating distributed ledger transactions through proof-of-work, proof-of-stake, or any other consensus mechanism, without providing other functions or services, and persons who are solely engaged in the business of selling hardware or licensing software, the sole function of which is to permit a person to control private keys which are used for accessing digital assets on a distributed ledger, without providing other functions or services. 1. Digital Asset Broker Proposed§1.6045-1(a)(1) provides that a broker means any person that in the ordinary course of a trade or business during the calendar year stands ready to effect sales to be made by others. As applied to brokers standing ready to effect sales for others of digital assets (referred to in the preamble as a digital asset broker) the term includes not only businesses with physical locations, such as digital asset kiosks and other brick and mortar facilities, but also online businesses, such as operators of trading platforms that hold custody of their customers' digital assets and operators with sufficient control or influence over non-custodial trading platforms that effect sales of digital assets made for others by providing access to automatically executing contracts, protocols, or other software programs that automatically effect sales. As noted in the definition of effect discussed in Part I.B of this Explanation of Provisions, operators of non-custodial trading platforms would know or be in a position to know the identity of their customers and the gross proceeds of their sales, for example, because these operators have the ability to request that new potential customers provide this information and can require that their customers use automatically executing exchange contracts that provide these operators with the gross proceeds information. As noted, the term person generally includes an individual, a legal entity, and an unincorporated group or organization through which any business, financial operation or venture is carried on. Accordingly, an operator of a digital asset trading platform that is an individual or legal entity may be treated as a broker, and an operator of a digital asset trading platform that is comprised of a group that shares fees from the operation of the trading platform, or is otherwise treated as an association or a partnership under§301.7701-3(b), may also be treated as a broker even though there is no centralized legal entity through which trades are carried out. For example, a DAO may be a person that could be treated as a broker under these proposed regulations. For a discussion of digital asset trading platforms that issue governance tokens providing holders with the power to vote on major platform decisions--such as new features to be offered or revised governance rights, see Part I.B of this Explanation of Provisions. The Treasury Department and the IRS request comments regarding the extent to which holders of governance tokens should be treated as operating a digital asset trading platform business as an unincorporated group or organization. A merchant that accepts digital assets directly from a customer as payment for its provision of goods or services generally is not a broker under these rules. A person is treated as a broker with respect to digital assets only if it effects sales of digital assets for customers. As described in Part I.C of this Explanation of Provisions, a sale by a broker generally includes a disposition of digital assets for cash, one or more stored-value cards, broker services, or certain other property (including different digital assets) that are subject to reporting under section 6045. While a merchant who provides goods, services, or other property (rather than digital assets or cash) in exchange for a customer's digital assets may be facilitating the disposition of the customer's digital assets, that merchant generally would not be treated as effecting sales of digital assets for customers as a broker because the customer's digital assets are not being exchanged for cash or the types of assets that cause the transaction to be treated as a sale under the proposed regulations. If the merchant's exchange of goods or services for digital assets is effected through a digital asset payment processor, however, the digital assets payment processor may be treated as a broker. 2. Digital Asset Hosted Wallet Providers Under existing regulations, a broker includes an agent with respect to a sale in the ordinary course of a trade or business if the nature of the agency is such that the agent ordinarily would know the gross proceeds of the sale. Consequently, under current law, certain securities custodians and other agents are treated as brokers. Under the multiple broker rule of existing§1.6045-1(c)(3)(iii), which exempts brokers who conduct sales on behalf of other brokers, only the broker that has the closest relationship to the customer is required to report information under section 6045. In the digital asset industry, some persons stand ready in the ordinary course of a trade or business to take custody of and electronically store the public and private keys to digital assets held on behalf of others. These digital asset hosted wallet providers in some cases also effect sales or possess information regarding the digital asset sales of their customers in much the way a bank custodian or other custodian does for securities. The proposed definition of broker includes such a digital asset hosted wallet provider to the extent that the digital asset hosted wallet provider also functions as a principal in the sale of digital assets, acts as an agent for a party in the sale if it would ordinarily know the gross proceeds from the sale, or acts as a digital asset middleman and would ordinarily know or be in a position to know the identity of the party that makes the sale and the gross proceeds from the sale. If a hosted wallet provider solely holds and transfers digital assets on behalf of its customers, without possessing, or having the ability to possess, any knowledge of gross proceeds from sales, the hosted wallet provider would not qualify as a broker. 3. Digital Asset Payment Processors A number of payment processors permit customers to make payment in digital assets. These transactions may take various forms. In many cases the customer pays in digital assets, and the payment processor exchanges those digital assets for a U.S. dollar amount that is then paid to a merchant, for example, in exchange for goods or services, or to another intermediary recipient as with a payment card purchase. In other cases, the payment processor transfers the digital assets to the merchant or other recipient. In both cases, the customer has disposed of its digital assets in a transaction that ordinarily is a gain (or loss) recognition transaction. These proposed regulations would require digital asset payment processors to provide information on those dispositions. Payment processors (and in certain circumstances merchant acquiring entities within the same network as payment card issuers) may separately be required to provide information on the merchant transaction under section 6050W, which requires reporting by TPSOs and merchant acquiring entities. Therefore, for example, where a TPSO effects a transaction involving the exchange of merchandise for digital assets, the TPSO will need to report on the disposition of the merchandise under section 6050W and on the digital asset disposition under section 6045, assuming no exceptions apply. A digital asset payment processor is defined in proposed§1.6045-1(a)(22)(i)(A) as a person who in the ordinary course of its business regularly stands ready to effect digital sales by facilitating payments from one party to a second party by receiving digital assets from the first party and exchanging them into different digital assets or cash paid to the second party, such as a merchant. In some cases, payment recipients are willing to receive payments in digital assets rather than cash and those payments are facilitated by an intermediary. To facilitate a payment transaction in these circumstances, a digital asset payment processor might provide the payment recipient with a temporarily fixed exchange rate on a digital assets payment that is transferred directly from a customer to that payment recipient. This temporarily fixed exchange rate may also be available to the merchant if it wishes to immediately exchange the digital assets for cash. In a transaction of this kind, similar to other merchant transactions involving intermediaries that provide cash to the merchants in exchange for the merchant's provision of goods or services to the customer, the customer disposes of its digital assets in a transaction that gives rise to gain (or loss) and receives goods or services, while the merchant receives or can choose to receive cash. This customer consequently has the same obligation to determine and report its gain or loss as in the other type of merchant transaction, and similar reporting rules therefore should apply to the digital asset payment processor. To address these transactions, for purposes of the definition of a digital asset payment processor, these proposed regulations treat the transfer of digital assets by a customer directly to a second person (such as a vendor of goods or services) pursuant to a processor agreement that provides for the temporary fixing of the exchange rate to be applied to the digital assets received by the second person as if the digital assets were transferred by the customer to the digital asset payment processor in exchange for different digital assets or cash paid to the second person. This characterization of the transaction as a transfer of digital assets by the customer to the digital asset payment processor in exchange for the payment of different digital assets or cash to the second person applies solely for purposes of certain definitions in these regulations, to ensure that customer dispositions of digital assets for consideration are subject to reporting regardless of the details of the arrangements made by the merchant for receiving payment. No inference is intended with respect to whether these transactions should or may be treated as dispositions for cash for any other purpose of the Code. The characterization of the transaction as involving a payment of cash to the merchant for purposes of these proposed regulations will apply regardless of whether the merchant subsequently exchanges the digital assets received pursuant to the temporarily fixed exchange rate, because the fixed exchange rate provided by the digital asset payment processor both facilitates the transaction and serves as a foundation to determine the fair market value received by the customer in the exchange. Accordingly, to meet their information reporting obligations in these alternatively structured payment transactions, digital asset payment processors will need to ensure that they obtain the required personal identifying information (that is, name, address, and tax identification number) from the customer (that is, the party making the payment in digital assets) in advance of these transactions. It is anticipated that digital asset payment processors will report gross proceeds from the disposition of digital assets by customers but may not have the information necessary or available to report the basis of the disposed-of digital assets unless they also hold digital assets for those customers. In addition, because a payment processor knows the gross proceeds with respect to an exchange transaction when it is participating in a transaction that is potentially reportable under existing§1.6050W-1(a)(1), the definition of a digital asset payment processor also includes certain payment settlement entities and certain entities that make payments to payment settlement entities that are potentially subject to reporting under section 6050W. First, proposed§1.6045-1(a)(22)(i)(B) provides that a digital asset payment processor includes a TPSO (as defined in§1.6050W-1(c)(2)) that makes (or submits instructions to make) payments using one or more digital assets in settlement of reportable payment transactions as described in§1.6050W-1(a)(2). This treatment of a TPSO as a digital asset payment processor applies whether or not the TPSO actually makes (or provides the instructions to make) the payment or contracts with a third-party electronic payment facilitator, pursuant to§1.6050W-1(d)(2), to make (or provide the instructions to make) the payment. In addition, this treatment of a TPSO as a digital asset payment processor applies without regard to whether the payment to the merchant is below the de minimis threshold described in section 6050W(e) and, thus, not reportable under section 6050W. Second, the definition of a digital asset payment processor in proposed§1.6045-1(a)(22)(i)(C) includes a payment card issuer that makes (or submits the instruction to make) payments in one or more digital assets to a merchant acquiring entity, as defined under§1.6050W-1(b)(2), in a transaction that is associated with a reportable payment transaction under§1.6050W-1(a)(2) that is effected by the merchant acquiring bank. Whether a transaction is associated with a reportable payment transaction is determined without regard to whether the merchant acquiring bank contracts with an agent to make (or submit the instructions to make) its payments to the merchant. Proposed§1.6045-1(a)(2)(ii)(A) clarifies that the customer in a digital assets payment processor transaction includes the person who transfers the digital assets or directs the transfer of the digital assets to the digital asset payment processor to make payment to the second person. Thus, for example, a digital asset payment processor's customer is the person who transfers the digital assets to that processor even if the processor has a contractual arrangement with only the second person, that is, the person who will ultimately receive the cash in the payment transaction. The Treasury Department and the IRS recognize that some stakeholders may have concerns that providing personal identity information in transactions where the payment processor is an agent of a merchant may raise privacy concerns and request comments on whether there are alternative approaches that would satisfy tax compliance objectives while reducing privacy concerns. The Treasury Department and the IRS considered whether a de minimis threshold should apply to the reporting of merchant transactions of the kind described above, taking into account that the cost and effort to build a reporting system may increase if numerous small transactions must be reported. Whether there would in fact be an increase in cost and effort is uncertain, as in some other information reporting contexts reporting entities have elected not to take advantage of de minimis thresholds in order to avoid the need to monitor the size or amount of the reportable item. Moreover, taxpayers are required to report gain from dispositions of digital assets on their tax returns regardless of the amount disposed of, and a taxpayer that engages in many small dispositions of digital assets may have an aggregate amount of gain for the taxable year that is significant. Because information reporting assists customers in determining the proper amount of gain or loss attributable to such dispositions, these proposed regulations do not include a de minimis rule for reporting these merchant transactions. 4. Other Brokers The definition of broker in existing§1.6045-1(a)(1) is proposed to be modified to include persons that regularly offer to redeem digital assets that were created or issued by that person, such as in an initial coin offering or redemptions by an issuer of a so-called stablecoin. A stablecoin is a form of digital asset that is intended to have a stable value relative to another asset or assets, typically a fiat currency. Some stablecoin issuers effect redemptions on behalf of all, or some, of their customers and know the gross proceeds paid to their customers. Stablecoin issuers that redeem their stablecoins are included in the definition of broker because, notwithstanding the nomenclature "stablecoin," the value of a stablecoin may not always be stable and therefore may give rise to gain or loss. See Additional Definitional Changes in Part I.K of this Explanation of Provisions. These proposed regulations apply to persons that regularly offer to redeem digital assets rather than persons who regularly carry out redemptions to ensure reporting on the occasional redemptions by digital asset issuers that may not regularly redeem their issued digital assets. The Treasury Department and the IRS request comments on the frequency with which creators or issuers of digital assets redeem digital assets. In addition, the Treasury Department and the IRS request comments regarding whether the broker reporting regulations should apply to include initial coin offerings, simple agreements for future tokens, and similar contracts. 5. Real Estate Reporting Persons Proposed§1.6045-1(a)(1) was also modified to provide that a real estate reporting person is a broker with respect to digital assets used as consideration in a real estate transaction if the reporting person would be required to make an information return with respect to that real estate transaction under proposed§1.6045-4(a), without regard to any reporting exceptions provided under section 6045(e)(5) or proposed or existing§1.6045-4(c) or (d), such as the exception for certain sales of principal residences or the exception for exempt real estate sellers. Thus, for example, a real estate reporting person would be required to report on a real estate buyer's exchange of digital assets for real estate as a sale of those digital assets even though the real estate reporting person is not required to report on the real estate seller's exchange of the real estate for digital assets due to the fact that the seller of that real estate is an exempt seller, such as a corporation, under existing§1.6045-4(d). C. Expansion of the types of sales subject to reporting Digital assets are unique among the types of assets that are subject to reporting under section 6045 because it is common for digital assets to be exchanged for different digital assets. In addition, some digital assets can readily function as a payment method as well as an investment asset. Digital assets can be exchanged for cash, stored-value cards, services, or other property (including different digital assets). To avoid gaps in information reporting with respect to this broad range of taxable exchanges, proposed§1.6045-1(a)(9)(ii) expands the definition of a sale subject to reporting. Proposed§1.6045-1(a)(9)(ii)(A)( 1 ) and ( 2 ) provide that a sale includes the disposition of a digital asset in exchange for cash, one or more stored-value cards, or a different digital asset. An exchange for cash for these purposes includes a payment received through the use of a check, credit card, or debit card. Proposed§1.6045-1(a)(25) defines a stored-value card as a card--whether in physical or digital form--with a prepaid value in U.S. dollars, any convertible foreign currency, or any digital asset. A stored-value card includes a gift card. The Treasury Department and the IRS request comments on whether the types of consideration for which digital assets may be exchanged in a sale transaction is sufficiently broad to capture current and anticipated transactions in which taxpayers regularly dispose of digital assets for consideration. In addition, proposed§1.6045-1(a)(9)(ii)(B) provides that a sale of a digital asset includes the disposition of a digital asset by a customer in exchange for property (including securities and real property) of a type that is subject to reporting under section 6045. Thus, for example, if a stockbroker accepts a digital asset from a customer as payment for the customer's purchase of stock, that disposition of the digital asset in exchange for stock will be treated as a sale of the digital asset by that customer for purposes of section 6045. Similarly, if a real estate reporting person, as defined in existing§1.6045-4(e), is involved in a real estate transaction in which the real estate buyer uses digital assets as consideration in the exchange for real property, that disposition of digital assets in exchange for real property will be treated as a sale of the digital assets by that real estate buyer for purposes of section 6045. Proposed§1.6045-1(a)(9)(ii)(C) provides that a sale of digital assets also includes a disposition of digital assets by a customer in consideration for the services of a broker as defined in proposed§1.6045-1(a)(1). Whether a person is a broker for purposes of this rule, however, is determined without regard to whether that person regularly as part of its trade or business accepts digital assets in consideration for its services. Thus, if a stockbroker accepts a digital asset as payment for the commission charged for a stock purchase, the customer's disposition of the digital asset in exchange for the broker's services will be treated as a sale of the digital asset for purposes of section 6045 because the stockbroker is a broker due to the fact that it regularly effects sales of stock (not because it regularly accepts digital assets for services). In contrast, if a landscaper accepts a digital asset as payment for landscaping services, the customer's disposition of the digital asset in exchange for the landscaper's services will not be treated as a sale of digital assets for purposes of section 6045 because the determination of whether the landscaper is a broker is made without regard to whether that landscaper regularly accepts digital assets in consideration for landscaping services as part of a trade or business. Proposed§1.6045-1(a)(2)(ii)(B) provides that the customer in these sales is the person who transfers the digital assets or directs the transfer of the digital assets to the broker regardless of whether the broker is a digital asset broker. Proposed§1.6045-1(a)(2)(ii)(C) provides that in the case of a broker that is a real estate reporting person with respect to a real estate transaction, the customer is the person who transfers the digital assets or directs the transfer of the digital assets to the seller of the real estate (or the seller's nominee or agent) to acquire the real estate. Finally, to ensure that these sales of digital assets are treated as effected by a broker, proposed§1.6045-1(a)(21)(iii)(B) provides that the acceptance of digital assets in consideration for the above-described property or services provided by a broker is a facilitative service. As a result, the broker will be treated as effecting these sales of digital assets as a digital asset middleman under proposed§1.6045-1(a)(10)(i)(D). In certain circumstances, a digital asset broker (other than a digital asset payment processor discussed earlier in Part I.B.3 of this Explanation of Provisions ) such as a digital asset broker providing hosted wallet services might transfer digital assets without knowing that the transfer was part of a sale transaction. For example, a customer might direct such a custodial broker to transfer digital assets to the wallet of a merchant in connection with the purchase of goods or services from that merchant. The definition of effect in proposed§1.6045-1(a)(10) limits the sales for which such brokers must make a report to those transactions in which the broker (as agent) would ordinarily know the gross proceeds from the sale or (as digital asset middleman) would ordinarily know or be in a position to know the identity of the party that makes the sale and the gross proceeds from the sale. Although the custodial broker in this example would ordinarily know or be in a position to know the identity of its customer, it is not in a position to know that the transfer was associated with a sale or exchange transaction or the amount that the customer received as gross proceeds from the exchange (that is, the amount the customer received in consideration for the digital assets surrendered). Accordingly, the transfer of digital assets by that custodial broker to the wallet of the merchant does not constitute effecting a sale of digital assets by that broker. In contrast, a digital asset payment processor would typically know whether the transfer was part of a sale transaction because that broker would have a contractual relationship with the payment recipient as well as with the transferor of the payment. Accordingly, in these cases the transfer of digital assets by the digital asset payment processor (or the direction to the customer by the digital asset payment processor to transfer digital assets) to the wallet of the merchant would constitute effecting a sale. In view of the increasing use of digital assets to make payments for goods and services or to satisfy other payment obligations through the intermediation of digital asset payment processors, digital asset payment processors (which may also function in other contexts as digital asset trading platforms) are subject to these rules. To achieve this result, proposed§1.6045-1(a)(9)(ii)(D) provides that a sale includes payments of a digital asset by the customer to a digital asset payment processor in exchange for that processor's payment of a different digital asset or cash to a second person. A sale also includes the transfer of a digital asset by a customer directly to a second person (such as a vendor of goods or services) pursuant to a processor agreement that provides for the temporary fixing of the exchange rate to be applied to the digital asset received by the second person, which is treated (under the rules setting forth the definition of a digital asset payment processor ) as if the digital asset was paid by the customer to the digital asset payment processor in exchange for a different digital asset or cash paid to that second person. In the case of a digital asset payment processor that is a TPSO, a sale also includes a customer's payment in digital assets to the digital asset payment processor (or pursuant to instructions provided by that digital asset payment processor or its agent) as part of a transaction in which the digital asset payment processor pays (or is treated as paying) the digital assets to a merchant in settlement of a reportable payment transaction under§1.6050W-1(a)(2). This payment is a sale of digital assets by the customer under these proposed regulations without regard to whether the amount paid to the merchant during the calendar year exceeds the de minimis threshold described in section 6050W(e) or whether the digital asset payment processor contracts with a third party to make (or provide instructions to make) the payment to the merchant pursuant to§1.6050W-1(d)(2). Finally, to account for payments that are reportable under section 6050W with respect to payment card transactions where a digital asset payment processor is also a payment card issuer, a sale of digital assets also includes a payment made in digital assets by a customer to the payment card issuer (or pursuant to instructions provided by that card issuer or its agent) in a transaction associated with a reportable payment transaction under§1.6050W-1(a)(2). This treatment of the customer's payment as a sale in this case is determined without regard to whether the merchant acquiring bank contracts with an agent to make (or submit the instructions to make) payment to the ultimate payee. Thus, under this rule, in the case of a payment card purchase at a merchant, the buyer's payment in a digital asset to the payment card issuer will be a sale even if that payment card issuer pays the merchant acquiring entity in the same type of digital asset because the subsequent payment (whether in cash or in digital assets) by the merchant acquiring entity (or its agent) to the merchant is a reportable payment transaction under§1.6050W-1(a)(2). A broker's customer may enter into executory contracts, or other derivative contracts involving the future delivery of a digital asset, where delivery under the contract also should be subject to reporting as a digital asset sale under these proposed regulations. To ensure that these executory or other derivative contracts do not circumvent the proposed information reporting rules for digital assets, proposed§1.6045-1(a)(9)(ii)(A)( 3 ) defines a sale to include the delivery of a digital asset pursuant to the settlement of a forward contract, option, regulated futures contract, any similar instrument, or any other executory contract that would be treated as a sale of the digital asset under the regulation if the contract had not been executory. 3 The rules in existing§1.6045-1(a)(9), redesignated in these proposed regulations as proposed§1.6045-1(a)(9)(i), applicable to making or taking delivery (for example, treating a closing transaction as one or two sales depending on the nature of the contract) are cross-referenced to apply to the delivery of digital assets pursuant to transactions described in proposed§1.6045-1(a)(9)(ii)(A)( 3 ). Additionally, the rules in existing§1.6045-1(a)(9) applicable to the circumstances under which a transaction is treated as a sale with respect to certain contracts and options are cross-referenced to apply to determine if similar transactions related to digital assets constitute sales described in proposed§1.6045-1(a)(9)(ii)(A). Accordingly, the entering into of a digital asset contract that requires delivery of personal property, the initial grant or purchase of a digital asset option, or the exercise of a purchased digital asset call option for physical delivery (except for a contract described in section 988(c)(5)) is not included in the definition of sale under proposed§1.6045-1(a)(9)(ii)(A). ******** 3 No inference is intended as to when a sale of a digital asset occurs under any other legal regime, including the Federal securities laws and the Commodity Exchange Act, or to otherwise impact the interpretation or applicability of those laws, which are outside the scope of these regulations. ******** Thus, for example, the closing of a regulated futures contract that involves making a delivery of digital assets will be treated as two sales, one under redesignated proposed§1.6045-1(a)(9)(i) with respect to the profit or loss on the contract, and the other under proposed§1.6045-1(a)(9)(ii)(A)( 3 ) on the delivery of the digital assets. The Treasury Department and the IRS invite comments addressing the extent to which these rules create logistical concerns for the reporting on contracts involving the delivery of digital assets. Additionally, the delivery of a digital asset under an executory contract will be treated as a sale of the digital asset under these rules if the underlying terms of the contract (for example, an exchange of one digital asset for a different digital asset) would have given rise to a sale under these rules if the contract had been executed when made. In contrast, if the underlying terms of the contract would not have been treated as a sale under these rules (for example, the direct payment of a digital asset by a consumer to a merchant in exchange for merchandise without the involvement of a digital asset payment processor), then the delivery of the digital asset pursuant to this type of executory contract will not be treated as a sale. The Treasury Department and the IRS invite comments regarding how frequently forward contracts involving digital assets are traded in practice, and whether there are any additional issues that should be considered to enable brokers to report on these transactions. Finally, there are several types of transactions that the definition of sale under proposed§1.6045-1(a)(9)(ii) does not include. For example, the definition does not include a transaction in which a customer receives new digital assets without disposing of something else in exchange. Thus, for example, a sale does not include a hard fork transaction, in which a customer receives new digital assets as part of a protocol change in previously held digital assets without disposing of different digital assets in exchange. Similarly, the receipt by a customer of digital assets from an airdrop (or simultaneous distribution of units of digital assets to the distributed ledger addresses of multiple taxpayers) does not constitute the sale of digital assets under proposed§1.6045-1(a)(9)(ii) even if the customer's holdings in existing digital assets are the basis on which the new digital assets were received. Additionally, the definition of sale under proposed§1.6045-1(a)(9)(ii) does not include a transaction in which a broker's customer receives digital assets in return for the performance of services. Thus, for example, a sale does not include the receipt by a broker's customer of new digital assets as a reward in return for certain marketing-related services such as taking a survey. The Treasury Department and the IRS are aware that the transactions described in this Part I.C of this Explanation of Provisions do not address every type of transaction involving digital assets that taxpayers engage in through entities defined in these proposed regulations as brokers. For example, these proposed regulations do not specify whether a loan of digital assets is required to be reported. These proposed regulations also do not specifically address whether reporting is required for transactions involving the transfer of digital assets to and from a liquidity pool by a liquidity pool provider, or the wrapping and unwrapping of a digital asset, in light of the absence of guidance on those transactions. Comments are requested on whether the definition of sale or other parts of the regulations should be revised to address transactions not described in these proposed regulations. D. Information to be reported for digital asset sales Several new subparagraphs have been added to the rules contained in existing§1.6045-1(d)(2)(i) to address the information required to be reported with respect to digital asset sales. Much of the information required to be reported is similar to the information that is currently required to be reported on the Form 1099-B with respect to securities. For example, proposed§1.6045-1(d)(2)(i)(B) requires that for each digital asset sale for which a broker is required to file an information return, the broker must report on the form prescribed by the Secretary the following information: - The customer's name, address, and taxpayer identification number; - The name or type of the digital asset sold and the number of units of the digital asset sold; - The sale date and time; - The gross proceeds of the sale; and - Any other information required by the form or instructions in the manner required by the form or instructions. Additionally, to aid the IRS in verifying valuations provided for reported gross proceeds and in determining whether the basis claimed by taxpayers in connection with transactions for which adjusted basis information is not reported by the broker, proposed§1.6045-1(d)(2)(i)(B) also requires that the broker report: - The transaction identification (transaction ID or transaction hash) associated with the digital asset sale, if any; - The digital asset address (or digital asset addresses if multiple) from which the digital asset was transferred in connection with the sale, if any; and - Whether the consideration received was cash, different digital assets, other property, or services. In addition to these listed items, if the transaction involves the sale of a digital asset that also constitutes a sale of a security, the broker must also provide certain information that is relevant to the sale of securities as required by the form or instructions. It is anticipated that this additional information will be required only for digital assets that are digital representations of other assets that constitute securities. To the extent the sale is of a digital asset that was held by the broker in a hosted wallet on behalf of the customer and that digital asset was previously transferred into that account (transferred-in digital asset), the broker must also report the date and time of such transfer-in transaction, the transaction ID of such transfer-in transaction, the digital asset address (or digital asset addresses if multiple) from which the transferred-in digital asset was transferred, and the number of units transferred in by the customer as part of that transfer-in transaction. The Treasury Department and the IRS intend to except brokers from reporting this additional information with respect to the sale of transferred-in digital assets once rules have been promulgated under section 6045A with respect to brokers who receive transfer statements under section 6045A for digital assets. Until that time, this information would be used by the IRS to verify the basis claimed by the taxpayer in connection with the sale of the transferred-in digital asset. For purposes of the above reporting requirements, proposed§1.6045-1(a)(20) defines a digital asset address as the unique set of alphanumeric characters that is generated by the wallet into which the digital asset will be transferred. Some digital asset addresses may be referred to as wallet addresses. Additionally, proposed§1.6045-1(a)(26) defines a transaction identification, or transaction ID, as the unique set of alphanumeric identification characters that a digital asset distributed ledger associates with a transaction involving the transfer of a digital asset from one digital asset address to another. A transaction ID is alternatively referred to as a "Txid" or "transaction hash." The Treasury Department and the IRS recognize that the requirement to report transaction ID information and digital asset addresses with respect to digital asset sales and certain digital asset transfer-in transactions may be burdensome under certain circumstances. Accordingly, the Treasury Department and the IRS request comments regarding whether there are other less burdensome alternatives that would allow the IRS the ability to investigate or verify basis information provided by taxpayers. For example, should the Treasury Department and the IRS consider an annual aggregate digital asset sale threshold, above which the broker would report transaction ID information and digital asset addresses? If so, what should that threshold be and why? When available, drafts of the form prescribed by the Secretary will be posted for comment at www.irs.gov/draftforms. Brokers will only be required to file the form following approval of the information collection under the Paperwork Reduction Act. The Paperwork Reduction Act approval process requires the IRS to publish a 60-day notice and request for comments in the Federal Register and subsequently publish a 30-day notice and request for comments in the Federal Register for the Office of Management and Budget's (OMB) review and clearance. Proposed§301.6721-1(g)(3)(iii) (failure to file correct information returns) and proposed§301.6722-1(d)(2)(viii) (failure to furnish correct payee statements) have been modified to include the form prescribed by the Secretary pursuant to proposed§1.6045-1(d)(2)(i)(B) in the list of forms subject to those penalties. For sales of digital assets that are effected when recorded on a broker's internal accounting ledger, proposed§1.6045-1(d)(4)(ii) provides that the broker must report the sale as of the date and time the sale was recorded on that internal ledger regardless of whether that sale is later recorded on a distributed ledger. Reporting the time of the transaction under a uniform time standard would eliminate any confusion that would be caused by reporting transactions by the same taxpayer in different local time zones. The Treasury Department and the IRS understand that transaction timestamps undertaken on blockchains are generally recorded using Coordinated Universal Time (UTC). Accordingly, proposed§1.6045-1(d)(4)(ii) provides that the reported date and time should generally be set forth in hours, minutes, and seconds using UTC unless otherwise directed in the form prescribed by the Secretary pursuant to proposed§1.6045-1(d)(2)(i)(B) or instructions. It is anticipated that the time standard required by this form prescribed by the Secretary or instructions will correspond to any successor convention for time generally used by the industry. Proposed§1.6045-1(d)(4)(iii) provides examples of a broker reporting time using the UTC time convention based on a 12-hour clock (designating a.m. and p.m. as appropriate). The Treasury Department and the IRS request comments regarding whether it would be less burdensome to report the time using a 24-hour clock and the extent to which all brokers should be required to use the same 12-hour or 24-hour clock for these purposes. The Treasury Department and the IRS also request comments regarding whether a uniform time standard is overly burdensome and the extent to which there are circumstances under which more flexibility should be provided. For example, if a particular customer's transactions are carried out only in one time zone, the customer might prefer reporting that is based on that time zone, particularly for transactions for which the exact date and time of acquisition or disposition affect the determination of the customer's tax liability, such as transactions that take place just before the end of the customer's taxable year or that relate to the customer's holding period for the disposed-of digital asset. The Treasury Department and the IRS request comments regarding whether there are alternatives to basing the transaction date on the UTC for customers who are present in a different time zone known to the broker at the time of the transaction. These information reporting rules will require digital asset brokers to expend resources to develop and implement information reporting systems to comply with the required reporting. Balancing on the other side of that consideration is the concern that limited information reporting by brokers has made it difficult, time-consuming, and expensive for taxpayers to calculate their gains or losses on these transactions and has contributed to significant underreporting by taxpayers of gain generated by digital asset sale and exchange transactions. Accordingly, these changes are proposed to apply to sales and exchanges of digital assets effected on or after January 1, 2025. No inference should be drawn from these proposed rules concerning the reporting requirements for digital asset sale transactions entered into before the regulations become applicable. E. Gross proceeds in digital asset transactions 1. Determining the Gross Proceeds in a Sale Transaction The information reporting rules for determining the gross proceeds in a sale transaction generally follow the substantive rules for computing the amount realized from transactions involving the sale or other disposition of digital assets. These substantive rules are provided under proposed§1.1001-7(b) and discussed in Part II of this Explanation of Provisions. Accordingly, proposed§1.6045-1(d)(5)(ii)(A) defines gross proceeds to be reported by a broker with respect to a customer's sale of digital assets as the sum of: (i) the total amount in U.S. dollars paid to the customer or credited to the customer's account as a result of the sale; (ii) the fair market value of any property received or, in the case of a debt instrument issued in exchange for the digital asset and subject to§1.1001-1(g), the amount realized attributable to the debt instrument as determined under proposed§1.1001-7(b)(1)(iv) (in general, the issue price of the debt instrument); and (iii) the fair market value of any services received, including services giving rise to digital asset transaction costs; reduced by the amount of the allocable digital asset transaction costs as discussed in Part I.E.3 of this Explanation of Provisions. Part I.E.2 of this Explanation of Provisions provides the rules applicable to determining the fair market value of property or services received in an exchange transaction. In the case of a sale effected by a digital asset payment processor on behalf of one party, proposed§1.6045-1(d)(5)(iii) provides that the amount of gross proceeds to be reported by the digital asset payment processor is equal to the sum of the amount paid in cash, or the fair market value of the amount paid in digital assets by the digital asset payment processor to a second party, plus any digital asset transaction costs withheld (whether withheld from the digital assets transferred by the first party or withheld from the amount due to the second party), reduced by the amount of the allocable digital asset transaction costs as discussed in Part I.E.3 of this Explanation of Provisions. For purposes of this calculation, the amount paid by a digital asset payment processor to a second person includes the amount treated as paid to the second person pursuant to a processor agreement that temporarily fixes the exchange rate between that second person and a digital asset payment processor, which amount is determined by reference to the fixed exchange rate. 2. Determining the Fair Market Value of Property or Services Received in an Exchange Transaction In determining the fair market value of property or services received by the customer in an exchange transaction involving digital assets, the information reporting rules generally follow the substantive rules provided under proposed§1.1001-7(b) discussed in Part II of this Explanation of Provisions. Accordingly, proposed§1.6045-1(d)(5)(ii)(A) provides that in determining gross proceeds under these rules, the fair market value should be measured as of the date and time the transaction was effected. Additionally, except in the case of services giving rise to digital asset transaction costs, to determine the fair market value of services or property (including different digital assets or real property) paid to the customer in exchange for digital assets, proposed§1.6045-1(d)(5)(ii)(A) provides that the broker must use a reasonable valuation method that looks to the contemporaneous evidence of value of the services, stored-value cards, or other property. In contrast, because the value of digital assets used to pay for digital asset transaction costs is likely to be significantly easier to determine than any other measure of the value of services giving rise to those costs, the Treasury Department and the IRS have determined for administrability purposes that brokers must look to the fair market value of the digital assets used to pay for digital asset transaction costs in determining the fair market value of services (including the services of any broker or validator involved in executing or validating the transfer) giving rise to those costs. The Treasury Department and the IRS, however, request comments regarding whether there are circumstances under which an alternative valuation rule would be more appropriate. In the case of one digital asset exchanged for a different digital asset, proposed§1.6045-1(d)(5)(ii)(A) provides that the broker may rely on valuations performed by a digital asset data aggregator using a reasonable valuation method. For this purpose, a reasonable valuation method looks to the exchange rate and the U.S. dollar valuations generally applied by the broker effecting the exchange as well as other brokers, taking into account the pricing, trading volumes, market capitalization, and other relevant factors in conducting the valuation. Because taking into account these described factors from small volume exchangers could provide skewed valuations of a digital asset, proposed§1.6045-1(d)(5)(ii)(C) provides that a valuation method is not a reasonable method if the method over-weighs prices from exchangers that have low trading volumes or if the method under-weighs exchange prices that lie near the median price value. A valuation method also is not a reasonable method if it inappropriately weighs factors associated with a price that would make that price an unreliable indicator of value. For example, if trading prices on a digital asset trading platform are affected by structured trading that tends to increase the price of assets beyond the price that an unrelated purchaser with knowledge of the facts would pay, using the prices from that digital asset trading platform may not be part of a reasonable valuation method. Consistent with the substantive rules discussed in Part II of this Explanation of Provisions, if in a digital asset exchange transaction there is a disparity between the value of the services or property received and the value of the digital asset transferred, proposed§1.6045-1(d)(5)(ii)(B) provides that the broker must look to the fair market value of the services or property received. If the broker reasonably determines that the value of services or property received cannot be valued with reasonable accuracy, proposed§1.6045-1(d)(5)(ii)(B) provides that the fair market value of the received services or property must be determined by reference to the fair market value of the transferred digital asset. If the broker reasonably determines that neither the digital asset nor the services or other property exchanged for the digital asset can be valued with reasonable accuracy, proposed§1.6045-1(d)(5)(ii)(B) provides that the broker must report an undeterminable value for gross proceeds from the transferred digital asset. 3. Determining Digital Asset Transaction Costs Allocable to the Sale in an Exchange Transaction Many digital asset brokers will charge a single transaction fee in the case of an exchange of one digital asset for a different digital asset. In some cases, these fees may be adjusted depending on the type of digital asset acquired or disposed of in the exchange, with transactions involving less commonly traded digital assets carrying higher transaction fees than transactions involving more commonly traded digital assets. The Treasury Department and the IRS considered various approaches to allocating transaction fees and other digital asset transaction costs that are charged in an exchange of one digital asset for a different digital asset. Ultimately, to avoid the administrative complexities associated with distinguishing between special broker fee allocations that appropriately reflect the economics of the transaction and broker fee allocations that reflect tax-motivated requests, proposed§1.6045-1(d)(5)(iv) provides that in the case of a sale or disposition of digital assets, the total digital asset transaction costs paid by the customer are generally allocable to the disposition of the digital assets. An exception applies, however, in an exchange of one digital asset for another digital asset differing materially in kind or in extent. In that case, one-half of any digital asset transaction cost paid by the customer in cash or property to effect the exchange should be allocable to the disposition of the transferred digital asset and the other half should be allocable to the acquisition of the received digital asset. These rules are consistent with the substantive rules provided under proposed§1.1001-7(b) and proposed§1.1012-1(h) discussed in Part II of this Explanation of Provisions. Finally, proposed§1.6045-1(d)(5)(iv) defines the term digital asset transaction costs to mean the amount paid to effect the disposition or acquisition of a digital asset and includes transaction fees paid to a digital asset broker, any transfer taxes that apply, and any other commissions or other costs paid to effect the disposition or acquisition of a digital asset. F. Adjusted basis reporting for digital assets and certain financial contracts on digital assets 1. Mandatory Broker Reporting Section 6045(g) requires a broker that is otherwise required to make a return under section 6045(a) with respect to covered securities to report the adjusted basis with respect to those securities. Under section 6045(g)(3)(A), a covered security is any specified security acquired on or after the acquisition applicable date if the security was either acquired through a transaction in the account in which the security is held or was transferred to that account from an account in which the security was a covered security, but only if the broker received a transfer statement under section 6045A with respect to that security. Prior to the amendments made by the Infrastructure Act, the term specified security was defined by section 6045(g)(3)(B) to mean any share of stock in a corporation; any note, bond, debenture, or other evidence of indebtedness; any commodity or commodity derivative if the Secretary determines that adjusted basis reporting is appropriate; and any other financial instrument with respect to which the Secretary determines that adjusted basis reporting is appropriate. For stock in a corporation, sections 6045(g)(3)(C)(i) and (ii) provide that the acquisition applicable date is either January 1, 2011, or January 1, 2012, depending on whether the average basis method is permissible under section 1012. Prior to the amendments made by the Infrastructure Act, section 6045(g)(3)(C)(iii) provided the acquisition applicable date for specified securities other than stock, including for any other financial instrument with respect to which the Secretary determines that adjusted basis reporting is appropriate, was January 1, 2013, or such later date as determined by the Secretary. Under the existing regulations, reporting of adjusted basis is required only for stock, debt instruments, options on stock and debt and related financial attributes such as interest rates or dividend yields, and securities futures contracts. The Treasury Department and the IRS intend to issue a separate notice of proposed rulemaking to implement the legislative changes to section 6045A which would require applicable persons, including brokers, to provide transfer statements under section 6045A when digital assets are transferred. These transfer statements are needed for digital assets that are acquired by taxpayers in one account and transferred to another account to provide the brokers who effect sales of digital assets with the information necessary to report the adjusted basis of the sold digital assets. Section 6045A addresses this information shortfall with respect to transferred securities by requiring that the acquiring broker or other applicable person provide the purchase date and basis information for a transferred security to the receiving broker. The legislative changes to section 6045A made in section 80603(b)(2)(A) of the Infrastructure Act not only clarify that transfer statement reporting under section 6045A(a) applies to covered securities that are digital assets, but also add a new reporting provision under section 6045A(d) to provide for broker information reporting to the IRS on transfers of digital assets that are covered securities, provided the transfer is not a sale and is not to an account maintained by a person that the broker knows or has reason to know is also a broker. a. Digital assets acquired by custodial brokers and certain financial contracts on digital assets Brokers who acquire digital assets for customers, provide custodial services for these digital assets, and continue to hold those digital assets until sale have the necessary information to determine the customers' adjusted basis in these digital assets. By contrast, brokers who receive a transfer of a customer's digital assets that were acquired for that customer by another broker may not have that information. As a result, the Treasury Department and the IRS have determined that mandatory basis reporting under these proposed regulations should apply only to sales of digital assets that were previously acquired, held until sale, and then sold by a custodial broker for the benefit of a customer. Accordingly, until rulemaking under section 6045A is complete, the definition of a covered security for purposes of digital asset basis reporting is limited under proposed§1.6045-1(a)(15)(i)(J) to digital assets that are acquired in a customer's account by a broker providing hosted wallet services. Therefore, sale transactions effected by custodial brokers of digital assets that were not previously acquired in the customer's account and sale transactions effected by non-custodial brokers, such as those that taxpayers may refer to as decentralized exchanges, are not subject to these mandatory basis reporting rules. In contrast to digital assets, financial contracts (such as options and forward contracts) on digital assets that are not themselves digital assets are not held by brokers on behalf of customers in hosted wallets. Accordingly, the definition of a covered security subject to mandatory basis reporting for these non-digital asset options and forward contracts on digital assets is not limited to contracts held by brokers providing hosted wallet services. Instead, basis reporting for these financial contracts is required under these proposed regulations pursuant to the expanded definition of a covered security under proposed§1.6045-1(a)(15)(i)(H) (non-digital asset options) and proposed§1.6045-1(a)(15)(i)(K) (non-digital asset forward contracts) as long as they are granted, entered into, or acquired in a customer's account at a broker or custodian pursuant to the rules in existing§1.6045-1(a)(15)(ii). b. Acquisition applicable date The recordkeeping burden for taxpayers transacting in digital assets can be significant. To determine whether a sale or exchange of a digital asset gives rise to gain or loss and the holding period for the asset, the taxpayer must know both the gross proceeds from the transaction as well as the adjusted basis and acquisition date of the digital asset. Determining a taxpayer's adjusted basis in a digital asset or portion of a digital asset sold or exchanged can be a complex endeavor, particularly for taxpayers that carry out frequent acquisitions and sales or exchanges of digital assets, as the taxpayer may need to track every transaction the taxpayer has carried out with respect to that digital asset both in the current taxable year and in prior taxable years. This is particularly true for interchangeable digital asset units for which minute fractions of previously purchased units can be sold on different dates. Complexity is further increased when transaction fees paid in digital assets give rise to separate digital asset sale transactions of the digital assets used to pay the transaction fees. Given these recordkeeping complexities, the Treasury Department and the IRS have determined that adjusted basis reporting by brokers for digital assets would both improve tax administration and assist taxpayers who sell or exchange digital assets to comply with their own basis tracking and reporting requirements, as well as assisting the IRS to determine whether a taxpayer has properly reported its gain or loss. Accordingly, these proposed regulations provide that for each sale of a digital asset that is a covered security for which a broker is required to make a return of information, the broker must also report the adjusted basis of the digital asset sold, the date and time the digital asset was purchased, and whether any gain or loss with respect to the digital asset sold is long-term or short-term (within the meaning of section 1222 of the Code). The remainder of the discussion in this Part I.F.1.b of this Explanation of Provisions describes when a digital asset is treated as a covered security under these proposed regulations. Section 80603(b)(1) of the Infrastructure Act adds digital assets to the list of specified securities for which basis reporting is specifically required, provided that the digital asset is acquired on or after January 1, 2023 (the acquisition applicable date for digital assets). January 1, 2023, is prior to the date on which these proposed regulations may be finalized. Accordingly, the Treasury Department and the IRS considered whether the acquisition date on or after which brokers should be required to track and report basis for digital assets acquired in a customer's account should be January 1, 2023 or should instead be a date after the finalization of these proposed regulations. In considering that question, the Treasury Department and the IRS have taken into account that while few digital assets have been in existence for more than a few years, the value of some of those digital assets has fluctuated significantly over relatively short periods of time. In addition, unlike the securities industry, in which the oldest records were first created on paper many decades ago and were then often stored physically on paper or microfilm, the oldest records created and stored by digital asset brokers were created and continue to be stored electronically as a matter of business practice. Thus, a digital asset broker has the ability to provide information regarding acquisition date, time, and cost (adjusted basis information) to customers with respect to digital assets previously acquired by that broker on behalf of its customers. The Treasury Department and the IRS understand that some digital asset brokers currently voluntarily provide this information to customers in response to customer requests for that information. Moreover, digital asset platforms have been aware since the enactment of the Infrastructure Act that digital assets would be treated as covered securities if acquired on or after January 1, 2023, and providing basis information for digital assets acquired on or after that date will assist taxpayers to properly prepare their tax returns for future sales of those assets. See section 6045(g)(3)(C)(iii). Accordingly, proposed§1.6045-1(a)(15)(i)(J) expands the definition of a covered security for which adjusted basis reporting will be required under proposed§1.6045-1(d)(2)(i)(C) to include digital assets acquired in a customer's account on or after January 1, 2023, by a broker providing hosted wallet services. As discussed in Part I.F.1.a of this Explanation of Provisions, these proposed regulations also expand the definition of a covered security for which adjusted basis reporting will be required under proposed§1.6045-1(d)(2)(i)(C) to include certain non-digital asset options on digital assets and non-digital asset forward contracts on digital assets. Proposed§1.6045-1(a)(15)(i)(H) expands the definition of a covered security to include non-digital asset options on digital assets to the extent they are granted or acquired in an account on or after January 1, 2023, and proposed§1.6045-1(a)(15)(i)(K) expands the definition of a covered security to include non-digital asset forward contracts on digital assets to the extent they are granted or acquired in an account on or after January 1, 2023. Notwithstanding the proposed use of January 1, 2023 as the acquisition date on or after which brokers should be required to track and report basis for digital assets acquired in a customer's account, proposed§1.6045-1(d)(2)(i)(C) would require adjusted basis reporting for sales of digital assets treated as covered securities and for non-digital asset options and forward contracts on digital assets only to the extent the sales are effected on or after January 1, 2026, in order to allow brokers additional time to build appropriate reporting and basis retrieval systems. That is, under these proposed regulations a broker providing custodial services for digital assets would be required to provide adjusted basis reporting for sales of digital assets effected on or after January 1, 2026, if the digital asset is acquired and continuously held by that broker in the customer's account on or after January 1, 2023. Additionally, any type of broker effecting sales of non-digital asset options on digital assets and non-digital asset forward contracts on digital assets would be required to provide adjusted basis reporting for sales of these assets if they were granted, entered into, or acquired on or after January 1, 2023. 2. Voluntary Broker Reporting Some brokers may be capable of providing the information required in these regulations with respect to digital asset sales prior to the applicability dates, and some brokers may be capable of providing the information required in these regulations for digital assets that are not covered securities. To encourage reporting by digital asset brokers that are not subject to mandatory basis reporting, these proposed regulations apply the same penalty waiver rule to digital asset brokers that voluntarily report adjusted basis information on noncovered securities as currently applies to securities brokers. Accordingly, under proposed§1.6045-1(d)(2)(iii)(A), brokers that voluntarily report adjusted basis information with respect to sales of digital asset-related noncovered securities (that is, digital assets acquired prior to January 1, 2023, options on digital assets granted or acquired in an account prior to January 1, 2023, and forward contracts on digital assets entered into or acquired in an account on or prior to January 1, 2023, which assets are not covered securities under proposed§1.6045-1(a)(15)(i)(H), (J) or, (K)), are not subject to penalties under section 6721 or 6722 for failure to report or furnish the adjusted basis information correctly. Additionally, proposed§1.6045-1(d)(2)(iii)(B) provides that brokers that choose to report sales of digital assets before the applicability date of these regulations (that is, gross proceeds from the sale of digital assets effected prior to January 1, 2025, or adjusted basis information with respect to sales effected prior to January 1, 2026), will not be subject to penalties under section 6721 or 6722 for failure to report or furnish that information correctly. Brokers that choose to report on sales of digital assets before the applicability date of these regulations can make that report on either the Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or, if available in time for this reporting, the form prescribed by the Secretary pursuant to proposed§1.6045-1(d)(2)(i)(B). 3. Determining the Adjusted Basis To ensure that the rules governing the calculation of adjusted basis apply to digital asset transactions, these proposed regulations modify existing§1.6045-1(d)(6)(i) and (d)(6)(ii)(A), which provide the general rules for determining the adjusted basis of a security and detail how to calculate the initial basis of a security. First, proposed§1.6045-1(d)(6)(i) and (d)(6)(ii)(A) clarify that the rules therein apply for determining the adjusted basis of a specified security that is subject to the broker basis reporting rules, whether or not the asset is within the definition of security under existing§1.6045-1(a)(3). Additionally, proposed§1.6045-1(d)(6)(ii)(A) is modified to add, in the case of a digital asset sale, digital asset transaction costs to the list of costs that are included in calculating the initial basis of a specified security. Accordingly, under proposed§1.6045-1(d)(6)(ii)(A), the initial basis of a specified security that is a digital asset and that is acquired for cash is the total amount paid by the customer (or credited against the customer's account) for the specified security, increased by any commissions, transfer taxes, and digital asset transaction costs related to its acquisition. The existing regulations do not permit brokers to adjust the basis of securities acquired to reflect income recognized upon the exercise of a compensatory option or the vesting or exercise of other equity-based compensation arrangements, to the extent the securities were granted or acquired on or after January 1, 2014. This decision was made because compensation information is not generally accessible to most brokers, and, in many situations, a broker would have to accept customer-provided information to track the compensation-related status of these arrangements. Additionally, requiring basis reporting for securities acquired as part of equity-based compensation arrangements would have required extensive reprogramming of brokers' underlying databases and reporting systems. TD 9616, 78 FR 23116, 23122 (Apr. 18, 2013). For the same reasons, proposed§1.6045-1(d)(6)(ii)(A) adds digital asset-based compensation arrangements to the types of services arrangements for which brokers are prohibited from adjusting to reflect income recognized. These proposed regulations provide special rules for determining the initial basis of digital assets acquired in exchange for property, including different digital assets or real property. These rules are provided to avoid discrepancies associated with transactions in which the fair market value of property, including different digital assets, transferred is not equal to the fair market value of the digital assets received. See Proposed§§1.1001-7, 1.1012-1(h), and 1.1012-1(j) in Part II of this Explanation of Provisions in connection with exchanges of digital assets for different digital assets. In accordance with the principles described there, proposed§1.6045-1(d)(6)(ii)(C)( 1 ) provides that the initial basis of a digital asset received in an exchange for property that is not a debt instrument described in proposed§1.1012-1(h)(1)(v) is the fair market value of the digital asset received at the time of the exchange, increased by any digital asset transaction costs allocable to the acquisition of that digital asset. Proposed§1.6045-1(d)(6)(ii)(C)( 2 ) provides that the total digital asset transaction costs paid by the customer in an acquisition of digital assets are allocable to the digital assets received. An exception is provided, however, in the case of an exchange of one digital asset for a different digital asset differing materially in kind or in extent. Rather, in the case of an exchange of one digital asset for a different digital asset differing materially in kind or in extent, one-half of any digital asset transaction costs paid in cash or property to effect the exchange is allocable to the disposition of the transferred digital asset and one-half is allocable to the acquisition of the received digital asset for the purpose of determining basis under proposed§1.6045-1(d)(6)(ii)(C)( 1 ). These allocation rules are consistent with the rules provided in proposed§1.1012-1(h) discussed in Part II of this Explanation of Provisions. Finally, proposed§1.6045-1(d)(6)(ii)(C)( 1 ) provides that for digital assets acquired in exchange for a debt instrument described in proposed§1.1012-1(h)(1)(v), the initial basis of the digital asset attributable to the debt instrument is equal to the amount determined under the rules provided in§1.1012-1(g) (generally equal to the issue price of the debt instrument) plus any allocable digital asset transaction costs. In determining the initial basis of a digital asset acquired in an exchange, if the broker or digital asset data aggregator reasonably determines that the value of the digital asset received cannot be determined with reasonable accuracy, proposed§1.6045-1(d)(6)(ii)(C)( 1 ) provides that the fair market value of the digital asset received must be determined by reference to the property transferred at the time of the exchange. If the broker or digital asset data aggregator reasonably determines that neither the value of the digital asset received, nor the value of the property transferred can be determined with reasonable accuracy, proposed§1.6045-1(d)(6)(ii)(C)( 1 ) provides that the broker must report zero for the initial basis of the received digital asset. Finally, these proposed regulations reserve two paragraphs at proposed§1.6045-1(d)(6)(vii) and (ix) to accommodate final regulations implementing safe harbor exceptions for de minimis errors on information returns and payee statements, which are expected to be finalized before these proposed regulations are finalized. G. Ordering rules Proposed§1.6045-1(d)(2)(ii)(B) provides ordering rules that are consistent with the ordering rules under proposed§1.1012-1(j)(3) for a broker to determine which units of the same digital asset should be treated as sold when the customer previously acquired, or had transferred in, multiple units of that same digital asset on different dates or at different prices. Under these rules, a broker must report a sale of less than the customer's entire position in an account in accordance with a customer's identification of the digital assets to be sold. These proposed regulations provide, similar to the rules for identifying lots of stock that are sold when a taxpayer sells less than all of its shares in a particular company, that an adequate identification is made if a customer notifies the broker no later than the date and time of sale which units of a type of digital asset it is selling. See Proposed§§1.1001-7, 1.1012-1(h), and 1.1012-1(j) in Part II of this Explanation of Provisions. In cases where a customer does not provide an adequate identification by the date and time of sale, proposed§1.6045-1(d)(2)(ii)(B) provides that the units of the digital asset sold are the earliest units of that type of digital asset either purchased within or transferred into the customer's account with the broker. For purposes of this ordering rule, units of a digital asset are treated as transferred into the customer's account as of the date and time of the transfer. Once rules have been promulgated under section 6045A, it is anticipated that brokers who receive transfer statements under section 6045A with respect to transferred-in digital assets would be permitted to use the actual purchase date of these digital assets for purposes of determining which units are the earliest units of that type of digital asset held in the customer's account with the broker. H. Exceptions to reporting These proposed regulations leave unchanged for digital asset brokers the exceptions to reporting provided under existing§1.6045-1(c) for exempt recipients and excepted sales. Thus, for example, no reporting is required for sales of digital assets effected on behalf of certain customers, such as certain corporations, financial institutions, tax exempt organizations, or governments or political subdivisions thereof. The Treasury Department and the IRS considered adding registered money services businesses (MSBs), as defined in 31 CFR 1010.100(ff), to the list of recipients a broker may treat as exempt from reporting under existing§1.6045-1(c)(3)(i)(B) but did not do so because the Treasury Department and the IRS are not aware of any public method for determining whether a registered MSB is compliant with its obligations under the Bank Secrecy Act. See Part I.I.4 of this Explanation of Provisions for a discussion of some of the obligations of registered MSBs under the Bank Secrecy Act. A registered MSB that is not compliant with its obligations under the Bank Secrecy Act may also fail to comply with its obligations to report information to the IRS. The special multiple broker rule under existing§1.6045-1(c)(3)(iii) provides that a broker is not required to file a return of information if it is instructed to initiate a sale on behalf of a customer by a person that is an exempt recipient under existing§1.6045-1(c)(3)(i)(B)( 6 ) (registered dealer in securities or commodities), existing§1.6045-1(c)(3)(i)(B)( 7 ) (registered futures commission merchant), or existing§1.6045-1(c)(3)(i)(B)( 11 ) (financial institution). This rule is intended to avoid duplicative reporting. Although the avoidance of duplicative reporting is also a desirable goal for digital asset reporting, there are some practical considerations that impede the extension of the multiple broker rule to digital asset brokers that are not exempt recipients under the existing regulations. First, in some cases it may be difficult for a broker to determine whether a particular digital asset platform also qualifies as a broker for purposes of these proposed regulations. Second, even if a digital asset broker can determine that the person that instructed the broker to initiate a sale on behalf of a customer is also a digital asset broker, there is a higher level of risk that the multiple broker rule would result in no reporting of the sale than is the case with traditional financial institutions. Unlike the three types of listed exempt recipients, digital asset brokers are not necessarily subject to the type of prudential or supervisory regulation that would tend to provide assurance to the IRS that the broker will comply with its tax reporting obligations. Accordingly, while the Treasury Department and the IRS considered whether to add digital asset brokers to the list of exempt recipients for which the multiple broker rule would apply, it was decided that it was not appropriate at this time to expand the rule in this way. The Treasury Department and the IRS, however, welcome suggestions that could work to avoid duplicative broker reporting without sacrificing the certainty that at least one of the multiple brokers will report. Specifically, to what extent will a broker know with certainty that another party involved in a transaction is also a broker with a reporting obligation under these rules. I. Sales effected at an office outside the United States or on behalf of exempt foreign persons This Part I.I describes the provisions in these proposed regulations relating to when U.S. brokers and, in some cases, non-U.S. brokers may treat a customer as an exempt foreign person and therefore not be required to report on digital asset sales effected for the customer. These rules are based on the rules in the existing regulations that provide that reporting is not required with respect to customers that may be treated as exempt foreign persons. The Organisation for Economic Development and Co-operation has developed and approved the Crypto-Asset Reporting Framework (CARF), which is a framework for the reporting and automatic exchange of information on crypto-assets. The Treasury Department and the IRS are currently considering how the United States could implement the CARF, so that the IRS could receive information on sales effected for U.S. taxpayers by non-U.S. brokers through an automatic exchange of information with other countries that have implemented the CARF. It is anticipated that implementation of CARF by the United States would require the modification of the proposed regulations described in this Part I.I to ensure that U.S. brokers collect the information required to be exchanged under the framework, to the extent that the collection of that information is permitted under U.S. law, and to exempt some non-U.S. brokers from collecting certain information required under the proposed regulations. For example, the modifications may require reporting by U.S. brokers of certain information on transactions effected for customers that are treated under these proposed regulations as exempt foreign persons and relieve certain non-U.S. brokers of reporting under section 6045 on sales effected for U.S. customers if the IRS is entitled to receive information on such transactions from a foreign tax administration pursuant to an automatic exchange of information mechanism. Any modified rules would be reissued for notice and comment. Under existing§1.6045-1(a)(1), a U.S. payor or middleman is considered a broker (and therefore subject to the reporting rules under section 6045) with respect to sales effected at an office inside the United States and sales effected at an office outside the United States, while a non-U.S. payor or middleman is considered a broker (and therefore subject to the reporting rules under section 6045) only with respect to sales it effects at an office inside the United States. A U.S. payor or middleman includes a U.S. person (including a foreign branch of a U.S. person), a controlled foreign corporation (as defined in§1.6049-5(c)(5)(i)(C)), certain U.S. branches, a foreign partnership with controlling U.S. partners or a U.S. trade or business, and a foreign person for which 50 percent or more of its gross income is effectively connected with a U.S. trade or business. A non-U.S. payor or middleman is a payor or middleman other than a U.S. payor or middleman. A sale is treated as effected at an office located outside the United States under existing§1.6045-1(g)(3)(iii)(A) if the broker completes the acts necessary to effect the sale outside the United States pursuant to instructions directly transmitted to that office from outside the United States by the broker's customer. If, however, specified indicia of U.S.-based activity are associated with a customer's sale (such as if the customer has transmitted instructions to the foreign office of the broker from within the United States, or gross proceeds are transferred into an account maintained by the customer in the United States), the sale (which would otherwise be treated as effected at an office outside the United States) will be treated as effected at an office inside the United States. See existing§1.6045-1(g)(3)(iii)(B). Even when a sale is treated as effected at an office inside the United States by a broker that is a non-U.S. payor or middleman, existing§1.6045-1(c)(3)(ii)(B) excepts the sale from reporting if the broker is a foreign financial institution that reports with respect to the account of the customer for which the sale was effected under the broker's requirements under chapter 4 of the Code or an applicable intergovernmental agreement to implement the provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) of the Hiring Incentives to Restore Employment Act of 2010, Pub. L. 111-147, 124 Stat. 71 (Mar. 18, 2010). Regardless of the location of the sale and whether a broker is a U.S. or non-U.S. payor, reporting under section 6045 also does not apply to sales effected for a customer that a broker may treat as an exempt recipient or as an exempt foreign person. See existing§1.6045-1(c)(3) and (g)(1). Under existing§1.6045-1(c)(3)(i)(C), a broker may treat a customer as an exempt recipient based on a Form W-9, Request for Taxpayer Identification Number and Certification, the broker's actual knowledge that the customer is an exempt recipient, or applicable indicators, depending on the type of exempt recipient status. Except in circumstances under which a broker is permitted to presume a customer is a foreign person, to treat the customer as an exempt foreign person a broker must obtain for a customer a beneficial owner withholding certificate, such as a Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). Alternatively, for a sale effected at an office outside the United States, brokers may use documentary evidence to establish that a customer is an exempt foreign person. Documentary evidence can include a driver's license, other government issued identification, or certain other information supporting the customer's foreign status. See existing§§1.6045-1(g)(1)(i) (referencing the documentation requirements of§1.6049-5(c)) and 1.6049-5(d)(2) and (3) (presumption rules applicable in absence of reliable documentation). Finally, payments that are reportable under section 6045 may also be subject to backup withholding under section 3406, generally when a broker has failed to obtain a valid Form W-9 for a customer, subject to certain exceptions. The existing regulations under section 6045 rules were written based on a business model for securities that assumed that brokers would have offices at physical locations where customer transactions may be booked, and that brokers would generally have direct, in-person contact with their customers. In comparison to the business model of securities brokers that existed at the time the existing regulations were promulgated, digital asset brokers typically interact with, and effect sales on behalf of, customers entirely online, without any in-person interactions with the customer. This business model means that brokers can transact with customers across jurisdictional borders, without necessarily having a branch or place of business in the jurisdiction where the customers are located. These proposed regulations therefore provide rules to adapt the concept of effecting a sale at an office outside the United States and the rules relating to exempt foreign persons to the digital asset broker business model. Under these proposed regulations, the determination of whether a sale is effected at an office inside or outside the United States is generally not based on the physical location where the acts necessary to effect a sale of digital assets are undertaken. Instead, proposed§1.6045-1(g)(4) classifies a broker as a U.S. digital asset broker, a CFC digital asset broker, or a non-U.S. digital asset broker, and provides rules for determining the location of a digital asset sale for each type of broker. That is, the determination of whether a sale is treated as effected at an office outside the United States begins with reference to the classification of the broker under these proposed regulations, rather than being an independent determination based on the location of the brokers' activities. In general, sales by U.S. digital asset brokers are treated as effected at an office inside the United States, and sales by CFC digital asset brokers and non-U.S. digital asset brokers are treated as effected at an office outside the United States, although there are circumstances under which sales effected by such brokers are treated as effected at an office inside the United States. These proposed regulations also incorporate certain modifications to the requirements for how each of these three types of brokers determine the foreign status of a customer for purposes of determining when the customer may be treated as an exempt foreign person. For CFC digital asset brokers and non-U.S. digital asset brokers, sales generally are not subject to backup withholding tax under proposed regulations under section 3406, although notable exceptions apply when the broker is considered to be conducting substantial business within the United States or when the broker has actual knowledge that the customer is a U.S. person. 1. Rules for U.S. Digital Asset Brokers Under proposed§1.6045-1(g)(4)(i)(A), a U.S. digital asset broker is a U.S. payor or middleman (as defined in§1.6049-5(c)(5)), other than a controlled foreign corporation within the meaning of§1.6049-5(c)(5)(i)(C), that effects sales of digital assets for customers. A U.S. payor or middleman that is considered a U.S. digital asset broker for this purpose includes a U.S. person (including a foreign branch of a U.S. person), a U.S. branch of a foreign entity described in§1.1441-1(b)(2)(iv) that is treated as a U.S. person for purposes of withholding and reporting on specified payments under chapters 3, 4, and 61 of the Code, a foreign partnership with controlling U.S. partners or a U.S. trade or business, and a foreign person for which 50 percent or more of its gross income is effectively connected with a U.S. trade or business. As U.S. payors, U.S. digital asset brokers are treated as brokers under proposed§1.6045-1(a)(1) with respect to all sales of digital assets they effect for their customers. Proposed§1.6045-1(g)(4)(ii) provides rules for a U.S. digital asset broker to determine the location of digital asset sales and the foreign status of its customers. Under these rules, all sales of digital assets effected by a U.S. digital asset broker are considered effected at an office inside the United States. Under these proposed regulations, a U.S. digital asset broker is required to report information with respect to sales effected for its customers unless the broker can treat the customer as an exempt recipient under existing§1.6045-1(c)(3) or as an exempt foreign person. Finally, a payment by a U.S. digital asset broker that is reportable under section 6045 may also be subject to backup withholding under section 3406 when the broker has failed to obtain a valid Form W-9 for a customer, subject to certain exceptions. To treat a customer as an exempt foreign person, unless there is an applicable presumption rule that allows that treatment under proposed§1.6045-1(g)(4)(vi)(A)( 2 ), a U.S. digital asset broker must obtain from the customer a valid beneficial owner withholding certificate described in§1.1441-1(e)(2)(i) and (ii), such as a Form W-8BEN for a customer who is an individual, and must apply the reliance rules under proposed§1.6045-1(g)(4)(vi) with respect to the beneficial owner withholding certificate. Similar to the existing rules for securities brokers, proposed§1.6045-1(g)(4)(ii)(B) provides that a broker that obtains a beneficial owner withholding certificate from an individual may rely on the beneficial owner withholding certificate only if it includes a certification that the beneficial owner has not been, and at the time the beneficial owner withholding certificate is furnished reasonably expects not to be, present in the United States for a period aggregating 183 days or more during each calendar year to which the beneficial owner withholding certificate pertains. This certification is incorporated onto Form W-8BEN through the representation on that form that the person signing the form is an exempt foreign person in accordance with the instructions to the form, which instructions reference this requirement. U.S. digital asset brokers may not rely on documentary evidence such as a foreign driver's license or a government identification card to determine whether a customer may be treated as an exempt foreign person. The rules described in the preceding paragraph are generally similar to those that apply under existing law for securities brokers that are U.S. payors or middlemen, except with respect to sales effected at an office outside the United States. The proposed rules for U.S. digital asset brokers differ from the rules for securities brokers in this case because securities brokers that are U.S. payors may rely on documentary evidence for sales effected at an office outside the United States. This approach was not adopted in these proposed regulations because of the difficulty of determining whether a sale of a digital asset is effected at an office inside or outside the United States. The Treasury Department and the IRS request comments on the approach adopted by these proposed regulations. If a commenter offers suggestions for an alternative approach that could be used to differentiate between a U.S. digital asset broker's U.S. business and non-U.S. business for purposes of allowing different documentation to be used for the broker's non-U.S. business, the Treasury Department and the IRS request that the commenter explain how the alternative approach could be objectively applied and why the alternative would not be readily subject to manipulation. See Part I.I.5 of this Explanation of Provisions for further discussion of the documentation, reliance, and presumption rules that U.S. digital asset brokers must apply to treat their customers as exempt foreign persons. 2. Rules for CFC Digital Asset Brokers Not Conducting Activities as Money Services Businesses Under proposed§1.6045-1(g)(4)(i)(B), a CFC digital asset broker is a controlled foreign corporation (as defined in§1.6049-5(c)(5)(i)(C)) that effects sales of digital assets for customers. Under these proposed regulations, a CFC digital asset broker must use different rules to determine the place of a digital asset sale and the foreign status of its customers based on whether the CFC digital asset broker is considered under these proposed regulations to be conducting activities as an MSB (conducting activities as an MSB), with respect to sales of digital assets. See Part I.I.4 of this Explanation of Provisions for discussion of the rules for CFC digital asset brokers conducting activities as MSBs with respect to sales of digital assets as well as the rationale behind those rules. Under these proposed regulations, a sale effected by a CFC digital asset broker not conducting activities as an MSB is considered a sale effected at an office outside the United States. These CFC digital asset brokers, like U.S. digital asset brokers, report on all sales other than sales effected for an exempt recipient (as defined in existing§1.6045-1(c)(3)(i)(B)) or an exempt foreign person. See proposed§1.6045-1(a)(1) (providing that for a sale effected at an office outside the United States, a broker includes only a U.S. payor or U.S. middleman). Requiring CFC digital asset brokers generally to report all sales, like U.S. digital asset brokers, is consistent with the existing regulations for securities brokers, which treat controlled foreign corporations as U.S. payors or middlemen, and which require U.S. payors or middlemen to report both on sales effected at an office inside the United States and on sales effected an office outside the United States (unless an exception applies). Under these proposed regulations, a CFC digital asset broker not conducting activities as an MSB is permitted to rely on documentary evidence, rather than a withholding certificate, to determine whether a customer is an exempt foreign person. This rule is also consistent with the existing regulations for securities brokers, under which a broker may rely on documentary evidence to determine that a customer is an exempt foreign person if the broker effects the sale at an office outside the United States. The existing regulations for traditional brokers determine where a sale is effected by looking to, among other things, the location of the office that completes the acts necessary to effect the sale. A securities broker that is a controlled foreign corporation is likely to effect sales at an office outside the United States and thus may rely on documentary evidence to treat a customer as an exempt foreign person. Therefore, although these proposed regulations have a different framework than the existing regulations, unless the CFC digital asset broker is conducting activities as an MSB (as discussed in Part I.I.4 of this Explanation of Provisions ), the same basic principles generally apply to controlled foreign corporations under both the proposed and existing regulations. Finally, also unlike a U.S. digital asset broker, a CFC digital asset broker not conducting activities as an MSB is not subject to backup withholding with respect to reportable sales unless it has actual knowledge that the customer is a U.S. person. Thus, if a CFC digital asset broker not conducting activities as an MSB has actual knowledge that a customer is a U.S. person, and the customer does not provide a valid Form W-9 to the broker, the broker must both report a sale or exchange of a digital asset by that customer to the IRS and backup withhold on the gross proceeds of the transaction. 3. Rules for Non-U.S. Digital Asset Brokers That Are Not Conducting Activities as Money Services Businesses A non-U.S. payor or non-U.S. middleman under§1.6049-5(c)(5) that effects sales of digital assets on behalf of customers is a non-U.S. digital asset broker under proposed§1.6045-1(g)(4)(i)(C). A non-U.S. digital asset broker must use different rules to determine the location of its digital asset sales and, for sales that are effected within the United States, the foreign status of its customers is based on whether the broker is considered conducting activities as an MSB. See Part I.I.4 of this Explanation of Provisions for discussion of the rules for non-U.S. digital asset brokers conducting activities as MSBs as well as the rationale behind those rules. Under these proposed regulations, a sale effected by a non-U.S. digital asset broker not conducting activities as an MSB is generally treated as effected at an office outside the United States unless the broker collects documentation or information that indicates that the customer has connections to the United States or may be a U.S. person. For a sale effected at an office outside the United States, a non-U.S. digital asset broker not conducting activities as an MSB would not be considered a broker under proposed§1.6045-1(a)(1) and would not be required to report the sale under proposed§1.6045-1(c). These proposed regulations do not require non-U.S. digital asset brokers that are not conducting activities as MSBs to obtain documentation from customers prior to making a payment to the customer. However, these non-U.S. digital asset brokers may be obligated to collect documentation or information from customers under applicable anti-money laundering laws or other applicable laws (referred to as an AML program), or may otherwise collect information on customers under the broker's policies and procedures, and that documentation or information may include information that indicates that a customer has connections to the United States or may be a U.S. person (as described in the following paragraph). In such a case, these proposed regulations treat the sale as effected at an office inside the United States and require the non-U.S. digital asset broker to report a sale effected on behalf of this customer after the broker obtains that documentation or information, unless the broker determines that the customer is an exempt foreign person or an exempt recipient (as defined in existing§1.6045-1(c)(3)(i)(B)) or the broker closes the account before effecting the sale for the customer. However, these proposed regulations limit the indicators of a connection to the United States to those that are contained in the documentation or information that is part of the broker's account information for the customer. This is intended to limit the efforts that a broker must make to determine if there are U.S. indicia for the customer and to allow brokers to automate their searches for U.S. indicia. Additionally, a non-U.S. digital asset broker not conducting activities as an MSB is not subject to backup withholding with respect to reportable sales unless it has actual knowledge that the customer is a U.S. person. Thus, if a non-U.S. digital asset broker not conducting activities as an MSB has actual knowledge that a customer is a U.S. person, and the customer does not provide a valid Form W-9 to the broker, the broker must both report a sale or exchange of a digital asset by that customer to the IRS and backup withhold on the gross proceeds of the transaction. Under proposed§1.6045-1(g)(4)(iv), a digital asset sale effected by a non-U.S. digital asset broker that is not conducting activities as an MSB will be considered effected at an office inside the United States (and thus potentially subject to reporting and backup withholding as described in the prior paragraph) if, before the payment is made, the broker collects documentation or other information that is part of the broker's account information for the customer and the documentation or information that shows any of the following U.S. indicia: (i) a customer's communication with the broker using a device (such as a computer, smart phone, router, server or similar device) that the broker has associated with an Internet Protocol (IP) address or other electronic address indicating a location within the United States; (ii) a U.S. permanent residence or mailing address for the customer, current U.S. telephone number and no non-U.S. telephone number for the customer, or the broker's classification of the customer as a U.S. person in its records; (iii) cash paid to the customer by a transfer of funds into an account maintained by the customer at a bank or financial institution in the United States, cash deposited with the broker by a transfer of funds from such an account, or if the customer's account is linked to a bank or financial account maintained within the United States; (iv) one or more digital asset deposits into the customer's account at the broker were transferred from, or digital asset withdrawals from the customer's account were transferred to, a digital asset broker that the broker knows or has reason to know to be organized within the United States, or the customer's account is linked to a digital asset broker that the broker knows or has reason to know to be organized within the United States; or (v) an unambiguous indication of a U.S. place of birth for the customer. The U.S. indicia listed in the preceding paragraph differ from the U.S. indicia that apply to traditional brokers under existing regulations under section 6045 because of the digital nature of digital asset brokers and the technological developments that have been made since the issuance of the existing regulations. Unlike traditional brokers, digital asset brokers typically interact with customers primarily through digital means, and do not usually communicate through the mail with customers. Digital asset brokers also typically do not have a physical office from which business is conducted with the customer. Instead, IP addresses are commonly reviewed by tax and other investigators as possible indicators of a person's physical presence and may be taken into account as part of an AML program. Transfers of cash or digital assets to or from a U.S. bank or digital asset broker also are considered potential indicators of U.S. presence or connections. The Treasury Department and the IRS welcome comments on the appropriateness and sufficiency of the U.S. indicia listed in proposed§1.6045-1(g)(4)(iv)(B)( 1 ) through ( 5 ). The Treasury Department and the IRS also welcome comments on whether the regulations should define when a broker has reason to know that a digital asset broker is organized within the United States, and suggestions for objective indicators that a broker can use to determine if a digital asset broker is organized in the United States. For a sale considered effected at an office inside the United States (that is, a sale effected for a customer for which the broker has documentation or information prior to the payments indicating U.S. indicia), a non-U.S. digital asset broker not conducting activities as an MSB will nonetheless not be required to report the sale under existing§1.6045-1(c) if the broker determines that it can treat the customer as an exempt recipient under existing§1.6045-1(c)(3). Additionally, a non-U.S. digital asset broker not conducting activities as an MSB is not required to report the sale if it obtains certain documentation to treat the customer as an exempt foreign person or if it may presume that the customer is a foreign person, pursuant to the requirements described in Part I.I.5 of this Explanation of Provisions (discussing the presumption rules, documentation requirements, and reliance rules that brokers must apply to treat their customers as exempt foreign persons). The types of documentation on which a broker may rely to treat a customer as an exempt foreign person despite U.S. indicia depends on the particular U.S. indicator contained in the customer's account information. If any of the U.S. indicia described in proposed§1.6045-1(g)(4)(iv)(B)( 1 ) through ( 4 ) (U.S. indicia other than an unambiguous indication of a U.S. place of birth) is present, the broker may treat the customer as an exempt foreign person if the broker, prior to the payment of any proceeds to the customer, obtains either: (i) a beneficial owner withholding certificate, or (ii) documentary evidence for the customer described in§1.1471-3(c)(5)(i) (for example, an identification document issued by a foreign government), and also a signed statement from the customer stating that the customer is not a U.S. person, that the customer understands that a false statement or misrepresentation of tax status by a U.S. person could lead to penalties under U.S. law, and that the customer agrees to notify the broker within 30 days of a change in the customer's status. If the broker's account information for the customer includes a U.S. indicator described in proposed§1.6045-1(g)(4)(iv)(B)( 5 ) (an unambiguous indication of a U.S. place of birth), proposed§1.6045-1(g)(4)(iv)(D)( 2 ) provides that the broker may nevertheless treat the customer as an exempt foreign person if, prior to the payment of any proceeds to the customer, the broker obtains documentary evidence described in§1.1471-3(c)(5)(i)(B) evidencing citizenship in a country other than the United States (for example, a foreign passport) and either (i) a copy of the customer's Certificate of Loss of Nationality of the United States, or (ii) a valid beneficial ownership withholding certificate and either a reasonable written explanation of the customer's renunciation of U.S. citizenship or the reason the customer did not obtain U.S. citizenship at birth. The rules in proposed§1.6045-1(g)(4)(vi) (described in Part I.I.5 of this Explanation of Provisions ) also apply to documentation obtained by a non-U.S. digital asset broker not conducting activities as an MSB; however, such a broker is not required to treat documentation as incorrect or unreliable solely as a result of the U.S. indicator that required the broker to obtain this documentation with respect to a customer. Additionally, these brokers are not required to collect additional documentation or to report a sale if they obtain U.S. indicia after a sale has taken place, although the rules described earlier apply with respect to any future sales by that customer. 4. Rules for CFC Digital Asset Brokers and Non-U.S. Digital Asset Brokers Conducting Activities as Money Services Businesses CFC digital asset brokers and non-U.S. digital asset brokers may be MSBs under the Bank Secrecy Act (31 U.S.C. 5311 et seq.). An MSB is defined in regulations issued by the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department as a person, wherever located, that is doing business wholly or in substantial part within the United States in the capacity of a dealer in foreign exchange; a check casher; an issuer or seller of traveler's checks or money orders; an issuer, seller, or redeemer of stored value; or a money transmitter. 31 CFR 1010.100(ff). This includes, but is not limited to, maintenance of any agent, agency, branch, or office within the United States. Accordingly, a foreign person with no physical operations in the United States may nevertheless be an MSB under FinCEN regulations. An MSB is required under FinCEN regulations to develop, implement, and maintain an effective AML program that is reasonably designed to prevent the MSB from being used to facilitate the financing of terrorist activities and money laundering. 31 CFR 1022.210(a). AML programs generally include, among other things, obtaining customer-related information necessary to determine the risk profile of a customer. MSBs are also required to make certain reports to FinCEN, register with the Treasury Department, and maintain certain records about transmittals of funds. See 31 CFR part 1022. Because CFC digital asset brokers and non-U.S. digital asset brokers conducting activities as MSBs may conduct business with customers located in the United States, even when the brokers have no branch or other fixed place of business in the United States, proposed§1.6045-1(g)(4)(v) generally subjects these brokers to the same rules as U.S. digital asset brokers with respect to their sales of digital assets. Accordingly, a CFC digital asset broker conducting activities as an MSB and a non-U.S. digital asset broker conducting activities as an MSB must apply the rules for U.S. digital asset brokers to determine the place of sale of digital assets and the foreign status of its customers. With the exception of sales effected at certain kiosks located outside the United States (described in the next paragraph), the sales of digital assets are treated as effected at an office inside the United States. Therefore, these brokers are treated as brokers under proposed§1.6045-1(a)(1) with respect to all sales of digital assets and are required to report information with respect to sales effected for their customers unless the broker can treat the customer as an exempt recipient under existing§1.6045-1(c)(3) or as an exempt foreign person under proposed§1.6045-1(g)(4)(ii). Unless there is an applicable presumption rule, these brokers conducting activities as MSBs must obtain a beneficial owner withholding certificate to treat a customer as an exempt foreign person and are subject to the same backup withholding rules with respect to reportable sales as those applicable to U.S. digital asset brokers. Under proposed§1.6045-1(g)(4)(i)(D), a CFC digital asset broker or a non-U.S. digital asset broker is conducting activities as an MSB with respect to a sale of digital assets if it is registered with the Treasury Department under 31 CFR 1022.380 as an MSB. 4 An exception applies, however, in the case of a sale that is effected at a digital asset kiosk that is physically located outside the United States and owned or operated by the broker conducting activities as an MSB, unless that broker is required under the Bank Secrecy Act to implement an AML program, file reports, or otherwise comply with the requirements for MSBs under the Bank Secrecy Act with respect to sales effected at that kiosk. See proposed§1.6045-1(g)(4)(i)(E). With respect to sales effected at a foreign kiosk as described in the preceding sentence, CFC digital asset brokers and non-U.S. digital asset brokers are not treated as conducting activities as MSBs with respect to those sales for purposes of proposed§1.6045-1(g)(4). This foreign kiosk exception allows CFC digital asset brokers and non-U.S. digital asset brokers that effect sales at foreign kiosks to apply the diligence and documentation rules that are generally applicable to CFC digital asset brokers and non-U.S. digital asset brokers, respectively, to those sales because these sales are less likely to have a connection to the United States. ******** 4 No inference is intended as to whether a CFC digital asset broker or a non-U.S. digital asset broker that is not registered with FinCEN as an MSB (and therefore is not conducting activities as an MSB within the meaning of the proposed regulations) may be required to register as an MSB under the Bank Secrecy Act and FinCEN's implementing regulations, which are outside the scope of these regulations. ******** These proposed regulations adopt this approach for CFC digital asset brokers and non-U.S. digital asset brokers that conduct activities as MSBs because the Treasury Department and the IRS have determined that a broker that is doing business wholly or in substantial part within the United States and is consequently subject to regulation by FinCEN should be subject to the same rules as U.S.-based digital asset brokers with respect to the part of its business that is subject to FinCEN regulation. The Treasury Department and the IRS are not aware of a reliable method for distinguishing the U.S. and non-U.S. parts of such a broker's business for purposes of determining whether the broker should be subject to reporting under section 6045 in light of the fact that almost all or all of a digital asset broker's activities take place electronically. The special rule for sales at foreign kiosks recognizes that in those limited circumstances it is possible to determine that a sale is effected at an office outside the United States because the kiosk and the customer are physically present outside the United States. The overall approach in these proposed regulations is consistent with the principles underlying the existing regulations, which treat a broker as a U.S. payor when it has a substantial nexus with the United States. The Treasury Department and the IRS request comments on administrable rules that would allow CFC digital asset brokers and non-U.S. digital asset brokers that conduct activities as MSBs to apply different rules to their U.S. and non-U.S. business activities while still ensuring that they are reporting on transactions of their U.S. customers. The Treasury Department and the IRS are considering applying similar rules to CFC digital asset brokers and non-U.S. digital asset brokers that are regulated by other U.S. regulators, such as the Securities and Exchange Commission, the Commodity Futures Trading Commission, and banking regulators such as the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. As is the case with CFC digital asset brokers and non-U.S. digital asset brokers that are registered as MSBs, such digital asset brokers may have sufficient contacts with the United States and a U.S. customer base that warrants the application of the same diligence and reporting rules as for U.S. digital asset brokers with respect to the U.S. part of their business. The Treasury Department and the IRS request comments on what CFC digital asset brokers and non-U.S. digital asset brokers should be subject to these rules. Separate from the decision to require that CFC digital asset brokers and non-U.S. digital asset brokers conducting activities as MSBs with respect to sales of digital assets apply the rules applicable to U.S. digital asset brokers, the Treasury Department and the IRS also considered whether to adopt different diligence and documentation rules for these brokers. On the one hand, CFC digital asset brokers and non-U.S. digital asset brokers are foreign persons and may conduct a substantial part of their business with non-U.S. customers. On the other hand, a different rule for these brokers, particularly those with substantial U.S. customer business, might incentivize U.S. customers to move their digital asset transactions to non-U.S.-based brokers, which might make it more difficult for the IRS to verify that taxpayers are properly reporting those transactions. Accordingly, the Treasury Department and the IRS determined that the same rules should apply to these brokers as apply for U.S. digital asset brokers, to impose similar obligations on CFC digital asset brokers and non-U.S. digital asset brokers with active U.S. operations regardless of where they are organized and in light of the difficulty referred to earlier in distinguishing between U.S. and non-U.S. business operations. The Treasury Department and the IRS request comments on whether different diligence and documentation rules should apply to CFC digital asset brokers and non-U.S. digital asset brokers conducting activities as MSBs with respect to the non-U.S. part of their business, and if so, on what basis should a determination be made as to when these different diligence and documentation rules would apply. 5. Documentation, Reliance, and Presumption Rules Applicable to Digital Asset Brokers As described in Parts I.I.1 through I.I.4 of this Explanation of Provisions, U.S. digital asset brokers and CFC digital asset brokers generally must report a sale of digital assets unless the broker can treat the customer as an exempt foreign person or another exception applies (for example, the exception for exempt recipients in existing§1.6045-1(c)(3)). For sales treated as effected at an office inside the United States, a non-U.S. digital asset broker is required to report a sale of digital assets unless the broker can treat the customer as an exempt foreign person (or another exception applies). In all cases, the broker may generally treat a customer as an exempt foreign person based on documentation obtained from the customer or, in some cases, based on a presumption that the customer is a foreign person. For example, if a broker does not have documentation from a customer, the broker is required to presume that the customer is classified in a specified manner (such as an individual or an entity), and then is required to presume that the customer is a U.S. or foreign person under rules that depend on how the customer has been classified. If the customer is presumed to be a foreign person, a broker generally is not required to report information on sales by that customer. In contrast, if the customer is presumed to be a U.S. person that is not an exempt recipient under existing§1.6045-1(c)(3), the broker must report information on sales by that customer under these proposed regulations, unless the broker obtains documentation on which it may rely to treat the customer as an exempt foreign person. As described in Parts I.I.1 through I.I.4 of this Explanation of Provisions, the types of documentation on which a broker may rely depends on whether the broker is a U.S. digital asset broker, a CFC digital asset broker, or a non-U.S. digital asset broker, and for a CFC digital asset broker and a non-U.S. digital asset broker, whether the broker is conducting activities as an MSB with respect to sales of digital assets. In general, U.S. digital asset brokers, as well as CFC digital asset brokers and non-U.S. digital asset brokers conducting activities as MSBs, may rely on withholding certificates to treat a customer as an exempt foreign person, while CFC digital asset brokers and non-U.S. digital asset brokers not conducting activities as MSBs (for sales effected at offices inside the United States) may rely on either a withholding certificate or documentary evidence, such as identification document from a foreign government, to establish a customer's foreign status. While the type of documentation on which these brokers may rely differs, all these brokers are subject to similar requirements to ensure that the documentation is reliable. The existing regulations for securities brokers generally cross-reference to general provisions of regulations under sections 1441 and 6049 for rules on what documentation a broker may obtain to treat a customer as an exempt foreign person and for rules relating to reliance and validity of documentation. As described in Parts I.I.1 through I.I.4 of this Explanation of Provisions, these proposed regulations provide explicit rules on the type of documentation on which a broker may rely, rather than referring to regulations under sections 1441 and 6049 as in the existing regulations for securities brokers. However, for rules on reliance, validity, and other matters, these proposed regulations cross-reference in some cases to certain existing regulations under sections 1441 and 6049, with some modifications to take into account the differences between the rules for digital asset brokers in proposed§1.6045-1(g)(4) and the rules for securities brokers in existing§1.6045-1(g)(1) through (3). The benefit of referring to rules under section 1441 is that these rules have well-established and understood standards for reliance, validity, and other matters that will already be familiar to many brokers and U.S. tax advisors. a. Valid documentation of foreign status In general, a broker may rely on documentation if (i) the documentation is valid, (ii) the broker can reliably associate the documentation with a payment, and (iii) the broker does not know or have reason to know that the documentation is incorrect or unreliable. Proposed§1.6045-1(g)(4)(vi)(A)( 1 ) refers to§§1.1441-1(e)(4)(i) through (ix) and 1.6049-5(c)(1)(ii) for documentation requirements that generally apply to digital asset brokers, with certain modifications (as described in this Part I.I.5). Additionally,§1.1441-1(e)(4)(ii) provides rules regarding the period of time during which a broker may rely on a withholding certificate or documentary evidence. Section 1.1441-1(e)(4) also contains other rules specific to withholding certificates, such as rules on who may sign a withholding certificate (and when the certificate may be electronically signed), when a substitute withholding certificate (rather than an IRS form) may be obtained, when a taxpayer identification number must be included on a withholding certificate, and when a prior version of a withholding certificate may be used. Section 1.1441-1(e)(4) also contains permissive rules for documentation, such as when documentation may be obtained through electronic transmission or from a third party repository. Some of the rules in§1.1441-1(e)(4) provide more favorable treatment to a financial institution than to other persons obtaining documentation for a payment because of the high volume of accounts held at withholding agents that are financial institutions. In light of the fact that digital asset brokers, like financial institutions, may have a high volume of customer accounts to document, these proposed regulations allow digital asset brokers to apply§1.1441-1(e)(4)(viii) (reliance rules for documentation) and (ix) (certificates to be furnished to a withholding agent for each obligation unless exception applies) regardless of whether the digital asset broker is a financial institution. Sections 1.1441-1(e)(4)(iii) and 1.6049-5(c)(1)(ii) are incorporated by cross-reference for the rules regarding the length of time that a broker must retain a withholding certificate and for procedures to obtain, review, and maintain documentary evidence. Finally,§1.1441-1(e)(4)(viii) provides that documentation may be relied upon without having to inquire into the veracity of the information contained on the documentation unless the person obtaining the documentation knows or has reason to know that the information is incorrect. These proposed regulations incorporate this rule but provide specific rules for when a broker has reason to know that documentation is incorrect or unreliable. Proposed§1.6045-1(g)(4)(vi)(A)( 1 ) cross-references to§1.1441-1(b)(2)(vii)(A) for when a broker may reliably associate a payment of gross proceeds with documentation. In general, this rule provides that a broker can reliably associate a payment with valid documentation if, prior to the payment, it holds valid documentation (either directly or through an agent), it can reliably determine how much of the payment relates to the valid documentation, and it has no actual knowledge or reason to know that any of the information, certifications, or statements in, or associated with, the documentation are incorrect. b. Presumption rules If a broker does not have documentation from a customer, or the documentation it has obtained is not valid or cannot be reliably associated with a payment of gross proceeds, these proposed regulations provide presumption rules. The presumption rules also apply when documentation that the broker possesses has expired or the broker may no longer rely on the documentation because the broker knows or has reason to know that the documentation is incorrect or unreliable. Proposed§1.6045-1(g)(4)(vi)(A)( 2 ) provides that a broker must determine the classification of a customer (as an individual, entity, etc.) by applying the presumption rules of§1.1441-1(b)(3)(ii), with certain modifications. Section 1.1441-1(b)(3)(ii)(B) provides that if there is no reliable indication that a person is an individual, trust, or an estate, the person must be presumed to be an exempt recipient if it can be so treated without the need to furnish documentation. However,§1.1441-1(b)(3)(ii)(B) cross references to regulations under section 6049 for the definition of an exempt recipient. Because the categories of exempt recipients under section 6045 are different from the categories that apply for purposes of section 6049, these proposed regulations provide that§1.1441-1(b)(3)(ii)(B) is applied by replacing the references to exempt recipients under section 6049 with the exempt recipient categories in existing§1.6045-1(c)(3). Proposed§1.6045-1(g)(4)(vi)(A)( 2 ) also provides presumption rules to determine whether a customer is presumed to be a U.S. or foreign person in the absence of documentation. Existing regulations under section 6045 for securities brokers cross-reference to§1.6049-5(d)(2), which generally requires a broker to presume a person classified as an individual to be a U.S. person (by cross-referencing to§1.1441-1(b)(3)(iii), which presumes a payee to be a U.S. person unless another rule applies). However, for certain amounts paid outside the United States with respect to an offshore obligation,§1.6049-5(d)(2)(i) provides that an individual payee shall be presumed a U.S. person only when there are certain U.S. indicia for the individual. These proposed regulations do not incorporate the concept of a payment outside the United States or an offshore obligation because digital asset activities overwhelmingly are conducted online and therefore are not located in an identifiable location. Instead, these proposed regulations apply this presumption rule depending on the status of the broker (including whether a broker other than a U.S. digital asset broker is conducting activities as an MSB) rather than the location of the customer's obligation or where the broker makes the payment. Proposed§1.6045-1(g)(4)(vi)(A)( 2 ) provides that with respect to a customer that the broker has classified as an individual in the absence of documentation, a broker that is a U.S. digital asset broker, or a CFC digital asset broker or a non-U.S. digital asset broker conducting activities as an MSB, must treat the customer as a U.S. person; however, a broker that is a CFC digital asset broker or a non-U.S. digital asset broker not conducting activities as an MSB with respect to a sale of a digital asset is required to presume that a customer that it has classified as an individual is a U.S. person only when the broker has certain U.S. indicia for the customer. With respect to a customer that may be presumed to be an entity, these proposed regulations provide that a broker may generally determine the status of the customer as U.S. or foreign by applying the presumption rules in§§1.1441-1(b)(3)(iii)(A) and 1.1441-5(d) and (e)(6), except that the presumption rule in§1.1441-1(b)(3)(iii)(A)( 1 )( iv ) (which presumes that a payee is a foreign person if the payment is made with respect to an offshore obligation) does not apply. Under existing regulations, presumption rules for offshore obligations are generally not applicable to payments of gross proceeds by securities brokers. See§1.6049-5(d)(2)(i) (providing that the presumption rules in§1.1441-1(b)(3)(iii)(D) and (b)(3)(vii)(B) for payments with respect to offshore obligations do not apply to a payment of an amount not subject to withholding under chapter 3 of the Code, unless it is a withholdable payment made to an entity payee). These proposed regulations thereby apply a generally similar presumption rule for digital asset brokers as the rule that applies to securities brokers without applying the concept of a payment made with respect to an offshore obligation because digital asset activities overwhelmingly are conducted online and therefore are not located in an identifiable location. c. Grace period for obtaining documentation These proposed regulations include a grace period to allow a broker time to obtain documentation (or additional documentation when the original documentation relied upon is incorrect or unreliable). Proposed§1.6045-1(g)(4)(vi)(A)( 3 ) provides that a broker may apply the grace period described in§1.6049-5(d)(2)(ii), which allows a payor to treat an account as owned by a foreign person until the earlier of (i) 90 days from the date the payor first credits an account (for a new account) or the date the payor first credits the account after the existing documentation can no longer be relied upon (for an existing account), or (ii) the date when the remaining balance in the account is equal to or less than the applicable statutory backup withholding rate (currently 24 percent) of the total amounts credited during the grace period. Also under§1.6049-5(d)(2)(ii), a payor may use the grace period only if at the beginning of the grace period: (i) the address that the payor has in its records for the account holder is in a foreign country, (ii) the payor has been furnished the information contained in a withholding certificate described in§1.1441-1(e)(2), or (iii) the payor holds a withholding certificate that is no longer reliable other than because the validity period has expired. By cross-referencing§1.6049-5(d)(2)(ii), these proposed regulations apply the same grace period to digital asset brokers as the grace period that applies to payors under section 6049 that hold securities in customers' accounts and securities brokers effecting sales of securities under section 6045. d. Standards of knowledge for reliance on withholding certificates These proposed regulations provide that a broker may rely on documentation only if it does not know or have reason to know that the documentation is incorrect or unreliable. Proposed§1.6045-1(g)(4)(vi)(A)( 1 )( iii ) provides that in applying the reliance rules in§1.1441-1(e)(4)(viii) for documentation, references to§1.1441-7(b)(4) through (6) are replaced by the provisions of proposed§1.6045-1(g)(4)(vi)(B) (relating to beneficial owner withholding certificates) and (C) (relating to documentary evidence), as applicable. Proposed§1.6045-1(g)(4)(vi)(B) specifies that a digital asset broker may rely on a beneficial owner withholding certificate to treat a customer as an exempt foreign person, unless the broker has actual knowledge or has reason to know that the beneficial owner withholding certificate is unreliable or incorrect. For this purpose, these proposed regulations limit when a digital asset broker has reason to know that information on a withholding certificate is unreliable or incorrect to when there are specific indicia of U.S. status in the broker's account files. The existing regulations limit when a securities broker has reason to know that information on a withholding certificate is unreliable or incorrect based on specific indicia set forth in§1.1441-7(b)(3), which contain limitations on reason to know for financial institutions. However, a digital asset broker's reason to know standard is based on the same U.S. indicia set forth in proposed§1.6045-1(g)(4)(iv)(B)( 1 ) through ( 5 ) for determining when a non-U.S. digital asset broker is required to treat a sale as effected at an office inside the United States, rather than the U.S. indicia applicable to traditional brokers (which are in§1.1441-7(b)(5) and (8)) to take into account the differences between traditional brokers and digital asset brokers. These proposed regulations also prescribe the additional documentation that a broker may collect to continue to rely on the withholding certificate if there are U.S. indicia. That documentation is similar to the documentation specified for that purpose for securities brokers in§1.1441-7(b)(5), but with certain modifications to eliminate distinctions in the additional documentation permitted to be collected that are based on whether a payment is made outside the United States with respect to an offshore obligation under§1.1441-7(b)(5). Proposed§1.6045-1(g)(4)(vi)(B) provides that if the broker collects documentation or information associated with the customer or the customer's account at the broker that shows U.S. indicia described in proposed§1.6045-1(g)(4)(iv)(B)( 1 ) through ( 4 ), then the broker may not rely on the beneficial owner withholding certificate unless the broker can obtain documentary evidence establishing foreign status (as described in§1.1471-3(c)(5)(i) (for example, identification from a foreign government)) that does not contain a U.S. address and the individual customer provides the broker with a reasonable explanation, in writing, supporting the claim of foreign status. However, if the broker previously classified an individual customer as a U.S. person in its account information, the broker may treat the customer as an exempt foreign person only if it has in its possession documentation described in§1.1471-3(c)(5)(i)(B) evidencing citizenship in a country other than the United States. If the customer is an entity, the broker may treat the customer as an exempt foreign person if it has in its possession documentation that substantiates that the entity is organized or created under the laws of a foreign country. Additionally, and regardless of whether a customer is an individual or entity, a broker that is a non-U.S. person may treat a customer as an exempt foreign person if the broker reports the payment to the customer to the jurisdiction in which the customer is resident under that jurisdiction's tax reporting requirements, provided that the jurisdiction has a tax information exchange agreement or income tax treaty in effect with the United States. If the broker collects information with respect to the customer showing an unambiguous indication of a U.S. place of birth, proposed§1.6045-1(g)(4)(vi)(B)( 2 ) provides, however, that the broker may treat the customer as an exempt foreign person only if the broker has in its possession documentary evidence described in§1.1471-3(c)(5)(i)(B) evidencing citizenship (for example, a passport) in a foreign country and either a copy of the customer's Certificate of Loss of Nationality of the United States or a reasonable written explanation of the customer's renunciation of U.S. citizenship or the reason the customer did not obtain U.S. citizenship at birth. e. Standards of knowledge for reliance on documentary evidence Proposed§1.6045-1(g)(4)(vi)(C) provides the rules for when a broker has reason to know that documentary evidence is unreliable or incorrect. As with the rules applicable to when a broker has reason to know that a beneficial owner withholding certificate is unreliable or incorrect, reason to know that documentary evidence is unreliable or incorrect is limited to when the U.S. indicia in proposed§1.6045-1(g)(4)(iv)(B)( 1 ) through ( 5 ) are present in the broker's account files for a customer. Proposed§1.6045-1(g)(4)(vi)(C)( 1 ) and ( 2 ) specify the additional documentation a broker is required to collect to continue to rely on the documentary evidence notwithstanding the presence of the U.S. indicia (similar to the documentation specified for that purpose in§1.1441-7(b)(8), but with modifications similar to those that apply to reliance on a withholding certificate under these proposed regulations, except that a broker is permitted to obtain a withholding certificate in certain cases in lieu of obtaining additional documentary evidence). f. Joint owners These proposed regulations provide that in the case of amounts paid to customers that are joint account holders for which a certificate or documentation is required as a condition for being exempt from reporting under proposed§1.6045-1(g)(4)(ii)(B) or (g)(4)(iv)(D), the amounts are presumed paid to U.S. payees who are not exempt recipients when the conditions of existing§1.6045-1(g)(3)(i) are met. The effect of this rule is to apply to digital asset brokers the same rule that applies to securities brokers for amounts paid to their customers that are joint account holders. g. Foreign intermediaries, foreign flow-through entities, and certain U.S. branches Proposed§1.6045-1(g)(4)(vi)(E) provides rules for a broker to determine whether a customer is a foreign intermediary, foreign flow-through entity, or U.S. branch (other than a U.S. branch that is the beneficial owner of a payment of gross proceeds), and, if so, whether the customer may be treated as an exempt foreign person. The rules in these proposed regulations reach a similar result as those that apply to securities brokers under existing regulations but provide more detail on the procedures for brokers to determine that a customer is a foreign intermediary, foreign flow-through entity, or U.S. branch. Under proposed§1.6045-1(g)(4)(vi)(E)( 1 ), a broker may rely on a valid foreign intermediary withholding certificate described in§1.1441-1(e)(3)(ii) or (iii), with one modification, to determine the classification of a customer as a foreign intermediary. Section 1.1441-1(e)(3)(iii) provides that a foreign intermediary withholding certificate from a nonqualified intermediary is not valid unless the intermediary has attached the withholding certificates and other appropriate documentation for all persons to whom the certificate relates. Proposed§1.6045-1(g)(4)(vi)(E)( 1 ) provides that a broker does not need to obtain from the foreign intermediary the withholding certificates or other documentation for the intermediary's account holders. The Treasury Department and the IRS are considering requiring brokers to obtain documentation on account holders of customers that are foreign intermediaries in order to avoid circumvention of these proposed regulations by U.S. persons selling digital assets through a foreign intermediary. The Treasury Department and the IRS request comments on whether the transparency gained by adding this rule would justify the increased burden on brokers, and whether that trade-off would be different for digital asset-only brokers, securities-only brokers, or brokers that effect sales or exchanges in both categories. The Treasury Department and the IRS also request comments on how frequently and in what circumstances securities brokers rely on the existing section 6045 regulations to not document account holders of customers that are foreign intermediaries. If a broker does not obtain a valid foreign intermediary withholding certificate or valid beneficial owner withholding certificate from the customer, it must determine under presumption rules whether the customer is treated as a beneficial owner or an intermediary, and whether the customer has the status of U.S. or foreign. The applicable presumption rules depend on whether the broker is a U.S. or foreign broker to provide rules similar to those applicable to securities brokers. Under proposed§1.6045-1(g)(4)(vi)(E)( 1 ), if a broker is a U.S. digital asset broker or a non-U.S. digital asset broker or CFC digital asset broker that in each case is conducting activities as an MSB, then the broker must apply the presumption rules in§1.1441-1(b)(3)(ii)(B), which would result in a presumption that the entity is not an intermediary. If a broker is a non-U.S. digital asset broker or a CFC digital asset broker that in each case is not conducting activities as an MSB, then the broker may determine the status of a customer as an intermediary by presuming that the entity is an intermediary to the extent permitted by§1.1441-1(b)(3)(ii)(C) (providing rules treating certain payees as not beneficial owners), with certain modifications. These modifications (i) allow a broker to apply§1.1441-1(b)(3)(ii)(C) without regard to the requirement in that section that limits its application to payments on offshore obligations, and (ii) substitute the references in§1.1441-1(b)(3)(ii)(C) to exempt recipient categories under section 6049 with the exempt recipient categories in existing§1.6045-1(c)(3)(i). The first modification is made to conform the rule for digital asset brokers to the rule for securities brokers. See§1.6049-5(d)(2)(i) for the rule applicable to securities brokers. The second modification is needed because§1.1441-1(b)(3)(ii)(C) cites to regulations under section 6049 for exempt recipients, but the categories of exempt recipients under section 6045 are different from the categories that apply for purposes of section 6049. If a customer is presumed to be an intermediary, these proposed regulations provide that a broker must determine the intermediary's status as U.S. or foreign by applying the presumption rules in§1.1441-1(b)(3)(iii). If a broker is required to treat a customer as a foreign intermediary under proposed§1.6045-1(g)(4)(vi)(E)( 1 ), the broker must treat the foreign intermediary as an exempt foreign person except to the extent required by existing§1.6045-1(g)(3)(iv) (providing that a broker may not treat a foreign intermediary as an exempt foreign person if the broker has actual knowledge that the person for whom the intermediary acts is a U.S. person who is not an exempt recipient, and providing for reporting that may be required by the foreign intermediary). Proposed§1.6045-1(g)(4)(vi)(E)( 2 ) provides the documentation and presumption rules for brokers paying gross proceeds to foreign flow-through entities. Under these proposed regulations, a broker may rely on a valid foreign flow-through withholding certificate described in§1.1441-5(c)(3)(iii) (relating to nonwithholding foreign partnerships) or (e)(5)(iii) (relating to foreign simple trusts and foreign grantor trusts that are nonwithholding foreign trusts) to determine the status of a customer as a foreign flow-through entity. Proposed§1.6045-1(g)(4)(vi)(E)( 2 ) provides that a broker does not need to obtain from the foreign flow-through entity the withholding certificates or other documentation for the entity's partners to treat the withholding certificate as valid. The Treasury Department and the IRS are considering requiring brokers to obtain documentation on partners, beneficiaries, or owners (as applicable) of customers that are foreign flow-through entities in order to avoid circumvention of these proposed regulations by U.S. persons holding interests in foreign flow-through entities selling digital assets. The Treasury Department and the IRS request comments on whether the transparency gained by adding this rule would justify the increased burden on brokers, and whether that trade-off would be different for digital asset-only brokers, securities-only brokers, or brokers that effect sales or exchanges in both categories. The Treasury Department and the IRS also request comments on how frequently and in what circumstances securities brokers rely on the existing section 6045 regulations to not document partners, beneficiaries, or owners (as applicable) of customers that are foreign flow-through entities. If a broker does not obtain a valid foreign flow-through withholding certificate, the broker may determine the status of a customer as a foreign flow-through entity based on the presumption rules in§1.1441-1(b)(3)(ii)(B) (relating to entity classification) and§1.1441-5(d) (relating to partnership status as U.S. or foreign) and (e)(6) (relating to the status of trusts and estates as U.S. or foreign). If a broker is permitted to treat a customer as a foreign flow-through entity, the broker must treat the payment as made to an exempt foreign person except to the extent required by§1.6049-5(d)(3)(ii) (providing that a broker may not treat a foreign flow-through entity as an exempt foreign person if the broker has actual knowledge that the partner to which the payment is allocated is a U.S. person who is not an exempt recipient and the broker has actual knowledge of the amount allocable to such person). Proposed§1.6045-1(g)(4)(vi) provides the documentation, presumptions, and reliance rules applicable to payments to a customer that is a U.S. branch (as described in§1.1441-1(b)(2)(iv)). When a U.S. branch is the beneficial owner of the payment, the rules in proposed§1.6045-1(g)(4)(vi) other than paragraph (g)(4)(vi)(E) apply. When a U.S. branch is not the beneficial owner of a payment, proposed§1.6045-1(g)(4)(vi)(E)( 3 ) provides that a broker may rely on a valid U.S. branch withholding certificate described in§1.1441-1(e)(3)(v) to determine the status of a customer as a U.S. branch that is not a beneficial owner of a payment, without regard to whether the withholding certificate contains a withholding statement and withholding certificates or other documentation for each person for whom the branch receives the payment. If a U.S. branch certifies on a valid U.S. branch withholding certificate that it agrees to be treated as a U.S. person under§1.1441-1(b)(2)(iv)(A), the broker may treat the U.S. branch as an exempt foreign person. If a U.S. branch does not certify on a valid U.S. branch withholding certificate, the broker may treat the U.S. branch as an exempt foreign person except to the extent required by existing§1.6045-1(g)(3)(iv) (providing that a broker may not treat a U.S. branch as an exempt foreign person if the broker has actual knowledge that the person for whom the U.S. branch receives the payment is a U.S. person who is not an exempt recipient, and providing for reporting that may be required by the U.S. branch). 6. Coordination with Rules Applicable to Sales of Securities In determining whether a sale is effected at an office inside or outside the United States or whether a broker may treat a customer as an exempt foreign person, brokers that effect sales of both securities and digital assets for customers may find it difficult to apply both the rules in existing§1.6045-1(g)(1) through (3) for sales of securities and those in proposed§1.6045-1(g)(4) for sales of digital assets. This fact pattern could arise if a traditional securities broker also effected sales of digital assets for customers. The difficulty of complying both with the reporting and documentation rules for securities and with the reporting and documentation rules for digital assets might be particularly acute when a customer uses the same broker to effect both types of transactions. The Treasury Department and the IRS considered including a coordination rule that would allow brokers that effect transactions involving both securities and digital assets, as those terms are defined under section 6045, to apply the rules of proposed§1.6045-1(g)(4) to determine whether sales of both securities and digital assets are effected at an office inside or outside the United States and whether brokers may treat the customers as exempt foreign persons. These proposed regulations do not propose this coordination rule because it was determined that more extensive coordination between the rules for sales of securities and sales of digital assets would be required and because the rules proposed for sales of digital assets have been drafted based on the characteristics of digital asset transactions and may not apply seamlessly to a securities broker. For example, the U.S. indicia applicable to digital asset brokers differ from the U.S. indicia applicable to security brokers. The Treasury Department and the IRS request comments on whether a coordination provision would be helpful to brokers that effect sales of both securities and digital assets for customers, and if so, which proposed rules applicable to digital asset brokers should apply to securities brokers. 7. Transition Period To provide digital asset brokers with sufficient time to obtain necessary documentation from existing customers to establish exempt foreign status under these proposed regulations, proposed§1.6045-1(g)(4)(vi)(F) provides that for sales of digital assets effected before January 1, 2026, that were held in an account established at a broker before January 1, 2025, digital asset brokers may treat a customer as an exempt foreign person provided that the customer has not previously been classified as a U.S. person by the broker, and the information that the broker has for the customer in the account opening files or other files pertaining to the account, including documentation collected for purposes of an AML program, includes a residence address that is not a U.S. address. J. Special rules for barter exchanges that effect certain digital asset exchanges Any person with members or clients that contract with each other or with the organization to trade or barter property or services either directly (member to member) or through the organization is a barter exchange under existing§1.6045-1(a)(4). A merchant that provides goods or services in exchange for a customer's digital asset is not acting as a barter exchange for purposes of this definition. Property or services are considered exchanged through a barter exchange if payment is made by means of a credit on the books of the barter exchange or a scrip issued by the barter exchange, or if the barter exchange arranges a direct exchange of property or services between members. Existing regulations provide limited guidance on the application of these rules and do not explicitly address whether the barter exchange rules apply to digital asset exchange transactions under which digital assets are exchanged for property (including different digital assets) or services. Consequently, it is possible that a particular exchange transaction might qualify both as a sale under proposed§1.6045-1(a)(9)(ii) effected by a broker under these regulations and also as an exchange transaction effected by a barter exchange. Alternatively, a particular exchange transaction could be considered both a reportable payment transaction facilitated by a TPSO under section 6050W as well as an exchange transaction effected by a barter exchange. To avoid duplicative reporting, proposed§1.6045-1(e)(2)(iii) provides coordination rules applicable to a barter exchange that is also a broker subject to reporting under proposed§1.6045-1(c). Under these rules, exchange transactions involving the exchange of one digital asset held by one customer of a broker for a different digital asset held by a second customer of the same broker are treated as sales under proposed§1.6045-1(a)(9)(ii) subject to reporting under proposed§1.6045-1(c) and (d) (reporting by brokers) with respect to both customers and not as an exchange of personal property through a barter exchange subject to reporting under proposed§1.6045-1(e) and (f) (reporting by barter exchanges). Additionally, in circumstances involving exchanges of digital assets for personal property or services where the digital asset payment is also a reportable payment transaction subject to reporting by the barter exchange under§1.6050W-1(a)(1), these proposed regulations provide rules for reporting each member's or client's disposition under rules other than under the barter exchange rules under proposed§1.6045-1(e) and (f) depending on whether the member is disposing of digital assets on the one hand or personal property or services on the other. For the member or client disposing of personal property or services, proposed§1.6045-1(e)(2)(iii) provides that the exchange must be treated as a reportable payment transaction that must be reported under proposed§1.6050W-1(a)(1) and not as an exchange through a barter exchange subject to reporting under proposed§1.6045-1(e). With respect to the member or client disposing of digital assets in this exchange, proposed§1.6045-1(e)(2)(iii) provides that the exchange must be treated as a sale under proposed§1.6045-1(a)(9)(ii)(D) subject to reporting under proposed§1.6045-1(c) and not as an exchange through a barter exchange subject to reporting under proposed§1.6045-1(e). The purpose of these rules is to have brokers report all digital asset exchange transactions that are also subject to reporting under the barter exchange provisions reported under proposed§1.6045-1(c) and (d). No inference is intended as to whether exchanges involving digital assets do or do not constitute exchanges subject to the reporting under the barter exchange rules under existing§1.6045-1(e). The Treasury Department and the IRS request comments on the extent to which there are additional broker-facilitated transactions involving digital assets that would still be subject to reporting under the barter exchange rules after the applicability date of these proposed regulations. For example, are there any broker-mediated transactions that are not reportable payment transactions under§1.6050W-1(a)(1) with respect to the client that receives the digital assets as payment? K. Additional definitions and definitional changes As noted in Part I of the Background, references in these proposed regulations to an owner holding digital assets generally or holding digital assets in a wallet or account are meant to refer to holding or controlling, whether directly or indirectly through a custodian, the keys to the digital assets. Proposed§1.6045-1(a)(23) adds this clarification to the regulation by providing a definition for held in a wallet or account. Under this provision, a digital asset is considered held in a wallet or account if the wallet, whether hosted or unhosted, or account stores the private keys necessary to transfer access to, or control of, the digital asset. A digital asset associated with a digital asset address that is generated by a wallet, and a digital asset associated with a sub-ledger account of a wallet, are similarly considered held in a wallet. References to variations of held in a wallet or account, such as held at a broker, held with a broker, held by the user of a wallet, held on behalf of another, acquired in a wallet or account, acquired in a customer's wallet or account, or transferred into a wallet or account, each have a similar meaning. Proposed§1.6045-1(a)(24) provides that a hosted wallet is a custodial service provided to a user that electronically stores the private keys to digital assets held on behalf of others. Hosted wallets are sometimes referred to as custodial wallets. Proposed§1.6045-1(a)(27) provides that an unhosted wallet is a non-custodial means of storing, electronically or otherwise, a user's private keys to digital assets held by or for the user. Unhosted wallets can be provided through software that is connected to the Internet (a hot wallet) or through hardware or physical media that is disconnected from the Internet (a cold wallet). Proposed§1.6045-1(a)(12) revises the definition of cash to include U.S. dollars and any convertible foreign currency that is issued by a government or a central bank, whether in physical or digital form. Pursuant to that definition, a central bank digital currency may be treated as cash for purposes of these proposed regulations and not as digital assets. The revised definition is also intended to exclude privately-issued digital assets from the definition of cash for purposes of the reporting requirements under existing§1.6045-1. No inference is intended, however, as to the treatment of a central bank digital currency or other digital asset for other purposes of the Code. For purposes of these regulations, the definition of cash (including the U.S. dollar and foreign currency) does not include so-called stablecoins, which are a form of digital assets in which the underlying value of the coins generally are linked to another asset or assets. Stablecoins are treated as digital assets for purposes of these proposed regulations because stablecoins take multiple forms, may be backed by several different types of assets that are not limited to currencies, may not be fully collateralized or supported fully by reserves by the underlying asset, do not necessarily have a constant value, are frequently used in connection with transactions involving other types of digital assets, are held and transferred in the same manner as other digital assets and, therefore, raise similar tax compliance concerns. The Treasury Department and the IRS considered whether to exclude transactions involving the disposition of stablecoins that are linked to the U.S. dollar or to other foreign currencies from the definition of a sale for which reporting is required, which would parallel the manner in which dispositions of U.S. dollars or other foreign currencies are treated for purposes of section 6045, that is, as dispositions that are generally not subject to reporting. These proposed regulations do not exclude stablecoin transactions from the definition of sale because a broker may not be able to identify which stablecoins will perfectly and consistently reflect the value of the currencies to which they are linked, if any. The Treasury Department and the IRS are aware that legislative or regulatory rules are being considered in a number of jurisdictions that might more closely tie the value of a stablecoin to a fiat currency, and request comments on whether stablecoins, or a subset of stablecoins, should not be treated as digital assets for purposes of these rules. Additionally, comments are requested on whether the regulations should exclude from reporting transactions involving the disposition of U.S. dollar related stablecoins that give rise to no gain or loss, and if so, how should those stablecoin transactions be identified. Finally, comments are requested regarding whether any other changes would need to be made to the regulations or other rules to ensure adequate reporting of transactions involving the receipt or disposition of stablecoins. The Treasury Department and the IRS also request comments on the structure and use of tokenized deposits or other tokenized assets that are closely linked to cash held in an account. Additionally, the list of governmental exempt recipients in existing§1.6045-1(c)(3)(i)(B) is clarified by listing the specific territorial jurisdictions to which the existing exemption for "a possession of the United States" applies, and the definitions for security, barter exchange, regulated futures contract, closing transaction, person, debt instrument, and securities futures contract, are republished in proposed§1.6045-1(a)(3), (4), (6), (8), (13), (17), and (18), respectively, to add headings and, where necessary, to reformat paragraph numbering and make other non-substantive changes. Finally, where the existing regulations provide rules that do not apply to digital assets, such as existing§1.6045-1(d)(2)(iv) governing the use by brokers of information furnished on a transfer statement described in§1.6045A-1, these proposed regulations clarify that those existing rules do not apply to digital assets by limiting the existing rules to securities only or specifically excluding digital assets from the existing rules. These changes are not intended to change the way the proposed regulations apply to assets currently covered by the existing regulations. II. Proposed§§1.1001-7, 1.1012-1(h), and 1.1012-1(j) In general, existing regulations and other guidance under sections 1001 and 1012 provide the tax rules for determining a taxpayer's amount realized on the disposition of digital assets and basis in purchased digital assets. For example, a taxpayer's transfer of digital assets from one of the taxpayer's wallets into a different wallet owned by the same taxpayer is not a sale or other disposition pursuant to section 1001, whereas the payment of a transfer fee with digital assets to effectuate that transfer is a sale or other disposition of the digital assets used to pay the fee resulting in gain or loss pursuant to section 1001. In some fact patterns, however, taxpayers may benefit from additional clarifying guidance. Those fact patterns include exchanges of digital assets for services or other property, including different digital assets, and dispositions of less than all of a taxpayer's holdings of a particular digital asset if the taxpayer purchased those holdings at different times or for different prices. A. Amount realized Proposed§1.1001-7(b)(1)(i) provides the general rule for determining the amount realized on a sale or disposition of digital assets for cash, other property differing materially either in kind or in extent, or services. Under these rules, the amount realized is the sum of: (i) the cash received; (ii) the fair market value of any property received (including digital assets) or, in the case of a debt instrument issued in exchange for the digital assets and subject to§1.1001-1(g), the issue price of the debt instrument, as provided under the rules of§1.1001-1(g); and (iii) the fair market value of any services received; reduced by the allocable digital asset transaction costs. Digital assets are defined in this proposed regulation by cross-reference to the digital assets definition contained in proposed§1.6045-1(a)(19). Proposed§1.1001-7(b)(1)(ii) provides that the disposition of digital assets (including digital assets withheld) to pay digital asset transaction costs is a disposition of digital assets for services. Proposed§1.1001-7(b)(1)(iii) applies the general rule included in proposed§1.1001-7(b)(1)(i) to different fact patterns depending on whether cash, services, digital assets, or other property is received as consideration for the sale or disposition of the digital assets. Proposed§1.1001-7(b)(1)(iv) provides the rule for calculating the amount attributable to a debt instrument issued in exchange for digital assets. Under this rule, the amount attributable to a debt instrument issued in exchange for digital assets is determined by cross-reference to the rules in§1.1001-1(g) (in general the issue price of the debt instrument). As provided in the general rule set forth in proposed§1.1001-7(b)(1)(i), in computing the amount realized from the sale or exchange of digital assets, the amount determined to have been received in exchange for the digital assets must be reduced by any digital asset transaction costs allocable to the disposed-of digital asset. Proposed§1.1001-7(b)(2)(i) defines digital asset transaction costs as the amount paid, in cash, or property (including digital assets), to effect the disposition or acquisition of a digital asset and includes transaction fees, transfer taxes, and any other commissions. Proposed§1.1001-7(b)(2)(ii) provides rules for allocating digital asset transaction costs to the disposition or acquisition of a digital asset. These allocation rules apply to any digital asset transaction costs paid on the sale or disposition of a digital asset used or withheld to pay other digital asset transaction costs. Proposed§1.1001-7(b)(2)(ii)(A) provides the general rule for allocating digital asset transaction costs on dispositions of digital assets in exchange for cash, services, debt instruments issued in exchange for the digital assets, or other property (other than digital assets). In these instances, the total digital asset transaction costs paid by the taxpayer are allocated to the disposition of the digital assets. The reference to total digital asset transaction costs in this rule is intended to avoid the further allocation of cascading digital asset transaction costs (that is, a digital asset transaction cost paid with respect to the use of a digital asset to pay for a digital asset transaction cost). The Treasury Department and the IRS request comments regarding whether it is appropriate to treat all such costs as digital asset transaction costs associated with the original transaction. The Treasury Department and the IRS understand that brokers that effect exchanges of one digital asset for a different digital asset may charge a single digital asset transaction cost for the exchange. In this case, the digital asset transaction cost is associated both with the disposition of one digital asset and the acquisition of a different digital asset. The Treasury Department and the IRS considered whether these regulations should permit taxpayers or brokers to designate how to allocate digital asset transaction costs but determined that a single uniform rule would be easier to administer and less susceptible to manipulation. Consideration was also given to allocating the costs either entirely to reduce the amount realized or entirely to increase basis; however, this allocation would not reflect the economic reality that the costs are allocable to a particular transaction that includes both the purchase of one digital asset and the disposition of a different digital asset. Accordingly, proposed§1.1001-7(b)(2)(ii)(B) provides that if digital asset transaction costs are paid to effect the exchange of one digital asset for a digital asset differing materially in kind or in extent, any allocation or assignment made by the parties or the entity effecting the exchange is disregarded. Instead, one-half of the total digital asset transaction costs paid by the taxpayer is allocable to the disposition of the transferred digital asset for purposes of determining the amount realized and one-half is allocable to the acquisition of the received digital asset for purposes of determining the basis of that received digital asset under§1.1012-1(h). The Treasury Department and the IRS request comments on whether this allocation of digital asset transaction costs to exchanges of one digital asset for a different digital asset is administrable and whether alternative allocations, such as a 100 percent allocation of digital asset transaction costs to the disposed-of digital assets, would be less burdensome. In some circumstances, taxpayers may incur a transfer fee associated with a transfer of digital assets that does not involve a sale or an exchange. For example, a transfer of digital assets from an unhosted wallet owned by a taxpayer to a hosted wallet in an account that is also owned by the taxpayer may incur a distributed ledger transaction fee that must be paid in digital assets, notwithstanding that the underlying transfer is not a taxable event under section 1001. To the extent that a digital asset is used to pay this fee in exchange for the recordation of the transfer on the distributed ledger, the exchange of the digital asset to pay this fee is a taxable event under section 1001 resulting in gain or loss. Finally, proposed§1.1001-7(b)(3) and (4) provide rules for determining the fair market value of digital assets and for determining the fair market value of services or property received in consideration for digital assets. Specifically, under proposed§1.1001-7(b)(3), the fair market value of a digital asset is determined as of the date and time of the exchange or disposition of the digital asset. Under proposed§1.1001-7(b)(4), when the fair market value of the property (including digital assets but excluding debt instruments subject to§1.1001-1(g)) or services received in exchange for digital assets cannot be determined with reasonable accuracy, the fair market value of such property or services must be determined by reference to the fair market value of the digital assets transferred as of the date and time of the exchange. B. Basis The starting point for determining basis of property is its cost, that is, what is transferred in consideration for what is received, under section 1012. Proposed§1.1012-1(h) provides the general rules for determining the cost basis of digital assets that are acquired in a purchase for cash, a transfer in connection with the performance of services, an exchange for digital assets or other property differing materially in kind or extent, an exchange for a debt instrument, or in a part sale and part gift transfer. Ordinarily, the value of property in exchange for other property received should be equal in value. Under Federal income tax law principles, in an exchange of property, both the amount realized on the property transferred and the basis of the property received in an exchange ordinarily are determined by reference to the fair market value of the property received. See United States v. Davis, 370 U.S. 65 (1962); Philadelphia Park Amusement Co. v. United States, 126 F. Supp. 184 (Ct. Cl. 1954); Rev. Rul. 55-757, 1955-2 C.B. 557. This rule ensures that the sum of any gain or loss realized by the taxpayer in an exchange transaction in which property is received plus the gain or loss realized by the taxpayer in a subsequent transaction in which the property received in the first transaction is later sold will be equivalent to the customer's economic gain on the combined transactions. Accordingly, proposed§1.1012-1(h)(1) provides that the basis of digital assets acquired in an exchange is generally equal to the cost of the digital assets received at the date and time of the exchange. Basis also takes into account allocable digital asset transaction costs. Proposed§1.1012-1(h)(3) provides that if a taxpayer receives digital assets in exchange for property differing materially in kind or in extent (including digital assets and non-digital asset property), the cost of the digital assets received is the same as the fair market value used in determining the amount realized on a sale or disposition of the transferred digital assets for the purposes of section 1001. Proposed§1.1012-1(h)(1)(i), (iii), and (iv) apply the general rule included in proposed§1.1012-1(h)(1) to different fact patterns depending on whether cash or certain other property is used to acquire the digital assets. Specifically, under proposed§1.1012-1(h)(1)(i), when digital assets are purchased for cash, the basis of the digital assets purchased is the amount of cash paid plus any allocable digital asset transaction costs. Under proposed§1.1012-1(h)(1)(iii), the basis of digital assets acquired in exchange for property other than digital assets is the cost of the acquired digital assets plus any allocable digital asset transaction costs. Under proposed§1.1012-1(h)(1)(iv), the basis of digital assets received in exchange for other digital assets differing materially in kind or in extent is the cost of the acquired digital assets, plus one-half of the total allocable digital asset transaction costs pursuant to the rules provided in proposed§1.1012-1(h)(2)(ii)(B), discussed later in this section. Proposed§1.1012-1(h)(3), discussed below, explains how to determine the cost of digital assets received in an exchange described in either proposed§1.1012-1(h)(1)(iii) or (iv). Proposed§1.1012-1(h)(1)(ii), (v), and (vi) apply special rules for determining the basis of digital assets received in other select fact patterns. Proposed§1.1012-1(h)(1)(ii) provides that when digital assets are received in exchange for the performance of services, taxpayers should follow the rules set forth in§§1.61-2(d)(2) and 1.83-4(b) for purposes of determining basis. Proposed§1.1012-1(h)(1)(v) provides the rule for determining the basis of digital assets acquired in exchange for the issuance of a debt instrument. Under these rules, the cost of the digital asset attributable to the debt instrument is the amount determined under§1.1012-1(g) (which generally looks to the issue price of the debt instrument as determined under the rules under either section 1273 or section 1274, whichever is applicable) plus any allocable digital asset transaction costs pursuant to the rules in proposed§1.1012-1(h)(2) described in the next paragraph. Lastly, if digital assets are received in a transfer, which is in part a sale and in part a gift, proposed§1.1012-1(h)(1)(vi) provides that taxpayers should look to the rules for transfers that are in part a sale and in part a gift under§1.1012-2. Proposed§1.1012-1(h)(2)(ii) provides rules for allocating digital asset transaction costs to acquisitions of digital assets. Except in the case of an exchange of digital assets for other digital assets differing materially in kind or in extent, proposed§1.1012-1(h)(2)(ii)(A) provides that digital asset transaction costs paid by the taxpayer are entirely allocable to the digital assets received. In contrast, as a corollary to the split digital asset transaction cost rule provided under proposed§1.1001-7(b)(2)(ii)(B), when digital assets are received in exchange for other digital assets that differ materially in kind or extent, one-half of the total digital asset transaction costs paid by the taxpayer is allocable to the acquisition of the received digital assets for purposes of determining the basis of those received digital assets. Accordingly, if a taxpayer exchanges digital asset DE for digital asset ST and pays digital asset transaction costs, the basis of the digital asset ST is computed using the fair market value of the digital asset ST received, plus one-half of the total digital asset transaction costs. Finally, proposed§1.1012-1(h)(3) provides the rules for determining the cost of digital assets received in an exchange described in either proposed§1.1012-1(h)(1)(iii) or (iv). Under these rules, the cost of the digital assets received equals the fair market value of those digital assets as of the date and time of the exchange. Additionally, when the fair market value of a digital asset received cannot be determined with reasonable accuracy, proposed§1.1012-1(h)(3) provides that the fair market value of the digital asset received must be determined with reference to the property transferred. This rule is analogous to the rule provided in proposed§1.1001-7(b)(4) with respect to the determination of the fair market value of property received. C. Identification rules These proposed regulations provide rules for identifying which units of a particular digital asset held in a single wallet or account as defined in proposed§1.6045-1(a)(23) are sold, disposed of, or transferred when less than all units of that digital asset are sold, disposed of, or transferred. Proposed§1.1012-1(j)(1) and (2) provide rules for units of a digital asset that are left in an unhosted wallet and proposed§1.1012-1(j)(3) provides rules for units of a digital asset left in the custody of a broker. For units held in unhosted wallets and therefore not left in the custody of a broker, proposed§1.1012-1(j)(1) provides that if a taxpayer sells, disposes of, or transfers less than all the units of the same digital asset held within a single wallet, the units disposed of for purposes of determining basis and holding period are determined by a specific identification of the units of the particular digital asset in the wallet or account that the taxpayer intends to sell, dispose of, or transfer. For a taxpayer that does not specifically identify the units to be sold, disposed of, or transferred, the units in the wallet or account disposed of are determined in order of time from the earliest purchase date of the units of that same digital asset. For purposes of making this determination, the dates the units were transferred into the taxpayer's wallet or account are disregarded. Proposed§1.1012-1(j)(2) provides that a specific identification of the units of a digital asset sold, disposed of, or transferred is made if, no later than the date and time of sale, disposition, or transfer, the taxpayer identifies on its books and records the particular units to be sold, disposed of, or transferred by reference to any identifier, such as purchase date and time or the purchase price for the unit, that is sufficient to identify the basis and holding period of the units sold, disposed of, or transferred. A specific identification can be made only if adequate records are maintained for all units of a specific digital asset held in a single wallet or account to establish that a unit is removed from the wallet or account for purposes of subsequent transactions. The Treasury Department and the IRS request comments on methods by which taxpayers using unhosted wallets can more easily track purchase dates, times, and/or basis of specific units of a digital asset upon the transfer of some or all of the units between custodial brokers and unhosted wallets. The Treasury Department and the IRS also request comments on whether the above ordering rules for unhosted wallets should be applied on a wallet-by-wallet basis as proposed, or whether these rules should instead be applied on a digital asset address-by-digital asset address basis or some other basis. Additionally, the Treasury Department and the IRS request comments on alternative proposals for these ordering rules if unhosted wallets have systems that can otherwise account for their customers' transactions. For multiple units of a type of digital asset that are left in the custody of a broker, proposed§1.1012-1(j)(3)(ii) provides that the taxpayer can make an adequate identification of the units sold, disposed of, or transferred by specifying to the broker, no later than the date and time of sale, disposition, or transfer, the particular units of the digital asset to be sold, disposed of, or transferred by reference to any identifier (such as purchase date and time or purchase price paid for the units) that the broker designates as sufficiently specific to allow it to determine the basis and holding period of those units. The units so identified are treated as the units of the digital asset sold, disposed of, or transferred to determine the basis and holding period of such units. This identification must also be taken into consideration in identifying the taxpayer's remaining units of the digital asset for purposes of subsequent sales, dispositions, or transfers. Identifying the units sold, disposed of, or transferred solely on the taxpayer's books or records is not an adequate identification of the digital assets if the assets are held in the custody of a broker. The Treasury Department and the IRS request comments on whether this ordering rule for digital assets left in the custody of a broker should apply on an account-by-account basis or whether brokers have systems that can otherwise account for their customers' transactions. Additionally, comments are also requested regarding whether exceptions should be made to the ordering rule for digital assets left in the custody of a broker to allow brokers to take into account reasonably reliable purchase date information received from outside sources, and if so, what types of purchase date information should be considered reasonably reliable. For customers that do not provide the broker with an adequate identification of the units sold, disposed of, or transferred, proposed§1.1012-1(j)(3)(i) provides that the units disposed of for purposes of determining the basis and holding period of such units is determined in order of time from the earliest units of that same digital asset purchased within or transferred into the taxpayer's account with the broker. For this purpose, units of a particular digital asset are treated as transferred into the taxpayer's account as of the date and time of the transfer. Once transfer statement reporting under section 6045A is required, however, the Treasury Department and the IRS anticipate that these rules would be revised to take into account the basis and holding period information provided to the broker on the transfer statement. A rule of that kind would conform the substantive rules applicable to taxpayers to the reporting required from brokers. Lastly, proposed§1.1012-1(j)(4) clarifies that the taxpayer's method of specifically identifying the units of a particular digital asset sold, disposed of, or transferred is not a method of accounting. This means that each time a taxpayer sells, disposes of, or transfers units of a particular digital asset, the taxpayer can decide how to specifically identify those units, for example, by the earliest acquired, the latest acquired, or the highest basis. Therefore, a change in the method of specifically identifying the digital asset sold, disposed of, or transferred is not a change in method of accounting to which sections 446 and 481 of the Code apply. III. Proposed§1.6045-4 In addition to reporting on dispositions by real estate buyers of digital assets in exchange for real estate under the proposed§1.6045-1 rules described earlier, real estate reporting persons should also report on the fair market value of digital assets received by transferors (sellers) of real estate in real estate transactions. Accordingly, these proposed regulations expand the information real estate reporting persons are required to report on information returns filed, and payee statements furnished, with respect to real estate transactions. Proposed§1.6045-4(h)(1)(vii) provides that for payments made to a transferor using digital assets, a real estate reporting person should report the name and number of units of the digital asset used to make the payment, the date and time the payment was made, the transaction identification of the digital asset transfer as defined in proposed§1.6045-1(a)(26), and the digital asset address (or addresses) as defined in proposed§1.6045-1(a)(20) into which the digital assets are transferred. Additionally, proposed§1.6045-4(i) expands the definition of gross proceeds to be reported to include payments using digital assets received by the real estate transferor. For purposes of proposed§1.6045-4, a digital asset has the same meaning set forth in proposed§1.6045-1(a)(19). Under existing§1.6045-4(i)(1), the term gross proceeds means the total cash received and to be received by or on behalf of the transferor in connection with the real estate transaction. These proposed regulations make three main changes to this definition to ensure all payments using digital assets will be included in the amount reported. First, proposed§1.6045-4(i)(1) clarifies that the total cash received by, or on behalf of, the transferor in connection with a real estate transaction includes cash received from a digital asset payment processor (as defined in proposed§1.6045-1(a)(22)(i)) in exchange for the digital assets paid to that processor by the real estate buyer. Thus, if a buyer purchases real estate using a digital asset payment processor that accepts digital assets in return for the payment of cash to the real estate transferor, the cash received by that transferor includes the cash amount received from the digital asset payment processor. Second, although existing§1.6045-4(i)(1) uses the phrase "cash... to be received," the remainder of the regulation uses the phrase "consideration treated as cash" to refer to what is meant by "cash... to be received." To maintain consistency throughout the regulation, proposed§1.6045-4(i)(1) replaces the "cash... to be received" phrase with "consideration treated as cash" in the two places where the former phrase appears in the regulation. The Treasury Department and the IRS intend this change as a clarification and not as a substantive change to any information that is currently required to be reported under the existing regulation. Finally, proposed§1.6045-4(i)(1) provides that gross proceeds also include the value of digital assets received by, or on behalf of, the transferor in connection with the real estate transaction. Proposed§1.6045-4(i)(1)(ii) provides that the value of digital assets received includes the fair market value of digital assets actually received. In addition, when a transferor receives an obligation to pay digital assets to, or for the benefit of, the transferor in the future, the value of digital assets received includes the fair market value, as of the date and time the obligation is entered into, of the digital assets to be paid as stated principal under the obligation. Digital assets actually received by, or on behalf of, the transferor from or at the direction of a digital asset payment processor are included in digital assets received for purposes of this rule. The fair market value of digital assets received by, or on behalf of, the transferor must be determined by the broker based on the valuation techniques provided in proposed§1.6045-1(d)(5)(ii). See Parts I.E.2 and II of this Explanation of Provisions. In a change unrelated to transactions involving digital assets, proposed§1.6045-4 is also updated to reflect the section 6045(e)(5) exception from reporting for gross income up to $250,000 of gain on the sale or exchange of a principal residence if certain conditions are met. Section 6045(e)(5) was added to the Code by section 312 of the Taxpayer Relief Act of 1997, Pub. L. 105-34, 111 Stat. 788 (Aug. 5, 1997), as amended by the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat. 805 (July 22, 1998). Proposed§1.6045-4(c)(2)(iv) provides that no information return is required with respect to a sale or exchange of an interest in a principal residence provided the real estate reporting person obtains from the seller a written certification consistent with guidance designated by the Secretary. This guidance is currently provided in Rev. Proc. 2007-12, 2007-1 C.B. 357. In addition, proposed§1.6045-4(c)(2)(iv) also provides that if a residence has more than one owner, the real estate reporting person must either obtain a certification from each owner (whether married or not) or file an information return and furnish a payee statement for any owner that does not make the certification. The certification must be retained by the reporting person for four years after the year of the sale or exchange of the residence to which the certification applies. Finally, proposed§1.6045-4(c)(2)(iv) provides that a reporting person who relies on a certification made in compliance with paragraph (c)(2)(iv) will not be liable for penalties under section 6721 for failure to file an information return, or under section 6722 for failure to furnish a payee statement to the seller, unless the reporting person has actual knowledge, or reason to know, that any assurance is incorrect. Additionally, proposed§1.6045-4 is updated to reflect the statutory changes made to section 6045(e)(3), which provides that it is unlawful for any real estate reporting person to separately charge any customer for complying with the reporting under section 6045. Section 6045(e)(3) was modified by section 1704(o)(1) of the Small Business Job Protection Act of 1996, Pub. L. 104-188, 110 Stat. 1755 (Aug. 20, 1996), to provide that notwithstanding the prohibition against real estate reporting persons separately charging customers for complying with section 6045 reporting obligations, real estate reporting persons may take their costs of complying with the requirements of section 6045 into account in establishing their charge for performing services in connection with real estate transactions. Proposed§1.6045-4(o) has been revised to reflect this statutory change. Finally, in another change unrelated to transactions involving digital assets, the list of governmental exempt transferors in existing§1.6045-4(d)(2)(ii)(A) is clarified by listing the specific territorial jurisdictions to which the existing exemption for "a possession of the United States" applies. IV. Proposed§§1.6045A-1 and 1.6045B-1 As discussed in the introductory paragraph to this Explanation of Provisions, these proposed regulations do not provide guidance or otherwise implement the changes made by the Infrastructure Act that require transfer statement reporting in the case of digital asset transfers under section 6045A(a) or broker information reporting under section 6045A(d) for digital asset transfers that are not sales or are not transfers to accounts maintained by persons that the transferring broker knows or has reason to know are also brokers. Additionally, as discussed in Part I.A.2. of this Explanation of Provisions, because it is unclear whether sections 6045A and 6045B are currently being applied to assets that qualify both as digital assets and specified securities under the existing rules, the Treasury Department and the IRS have decided to delay transfer statement reporting under section 6045A(a) and issuer reporting under section 6045B for these dual classification assets until regulations or other guidance is issued. Accordingly, proposed§1.6045A-1(a)(1)(vi) has been added to specifically exempt from transfer statement reporting any specified security that is also a digital asset. Transferors that nonetheless choose to provide a transfer statement reporting some or all of the information described in section 6045A are not subject to penalties under section 6722 for failure to report this information correctly. In addition, proposed§1.6045B-1(a)(6) similarly exempts issuers from reporting on any specified security that is also a digital asset. Accordingly, under these rules, the transfer of a specified security within the meaning of proposed§1.6045-1(a)(14)(i) through (iv) or an issuer of a specified security within the meaning of proposed§1.6045-1(a)(14)(i) through (iv) will not be subject to the section 6045A and section 6045B reporting rules if the specified security also falls within the definition of a digital asset under proposed§1.6045-1(a)(19). Issuers that nonetheless choose to provide this reporting are not subject to penalties under either section 6721 or section 6722 for failure to report or furnish this information correctly. The Treasury Department and the IRS will consider guidance for these dual classification assets as part of the implementation of more general transfer statement reporting under section 6045A(a), broker information reporting under section 6045A(d), and digital asset issuer reporting under section 6045B as part of a later phase of information reporting guidance. Comments are requested as to whether sections 6045A and 6045B should be made applicable for securities that are also digital assets prior to the implementation of this later phase of the information reporting guidance. Comments are requested regarding who would be the responsible party required to provide the reporting if section 6045B is made applicable to securities that are also digital assets prior to the implementation of this later phase of information reporting guidance. V. Proposed§1.6050W-1 Some digital asset brokers currently treat payments of cash for digital assets, or exchanges of one digital asset for a different digital asset, as reportable payments under section 6050W. These proposed regulations do not take a position regarding the appropriateness under existing regulations of treating payments of cash for digital assets, or payments of one digital asset in exchange for a different digital asset, as reportable payments under section 6050W. To the extent these transactions are reportable under proposed§1.6045-1 after the applicability date of these proposed regulations, however, these transactions must be reported under section 6045. Therefore, to avoid duplicative reporting, proposed§1.6050W-1(c)(5)(i)(A) provides that in the case of a payor that makes a payment using digital assets as part of a third party network transaction involving the exchange of the payor's digital assets for goods or services, if that payment constitutes a sale of digital assets by the payor under the broker reporting rules under section 6045, the amount paid to that payor in settlement of that exchange will be subject to the broker reporting rules (including any exemptions from these rules) and not section 6050W. Additionally, for goods or services provided by a payee that are digital assets, proposed§1.6050W-1(c)(5)(i)(B) provides that if the exchange is a sale of digital assets by the payee under the broker reporting rules under section 6045, the payment to the payee in settlement of that exchange will be reportable under the broker reporting rules (including any exemptions from these rules) and not section 6050W. Accordingly, the broker reporting rules (and not the section 6050W rules) will apply to both the payor and the payee in an exchange of digital assets for different digital assets. Rules avoiding duplication are also provided for certain exchanges involving digital assets for goods or services that could potentially be treated as barter exchanges. As noted, if the purchaser of the goods or services in this type of exchange is subject to reporting under proposed§1.6045-1 due to the use of digital assets to make payment, proposed§1.6050W-1(c)(5)(i)(A) provides that reporting is not required under section 6050W. To avoid duplicative reporting under proposed§§1.6045-1(e) and 1.6050W-1(a) with respect to the payee who sells goods and services in this type of exchange (that is, in return for digital assets), proposed§1.6050W-1(c)(5)(i)(B) also provides that any digital asset that is paid to a person (payee) in a third party network transaction that is reportable under proposed§1.6045-1(e) (without regard to whether the payee is an exempt recipient under proposed§1.6045-1(f)(2)(ii) or an exempt foreign person under proposed§1.6045-1(g)) must be reported under section 6050W and not the barter exchange rules under proposed§1.6045-1(e). As a result, reporting will be required under section 6050W with respect to a payee who sells goods or services (other than digital assets) in exchange for digital assets in third party network transactions to the extent the fair market value of the aggregate payments made to that payee exceed the de minimis exception as provided in section 6050W(e) for reportable payments made on or after January 1, 2023. See Notice 2023-10, 2023-3 I.R.B. 403 (January 17, 2023) (delaying the effective date of the modified de minimis exception under section 6050W(e) for payments made during calendar year 2022). The de minimis exception under section 6050W is not applicable to the reporting of information required with respect to digital asset sales or exchanges under section 6045. In certain circumstances, such as when a TPSO functions as a digital asset payment processor as described in proposed§1.6045-1(a)(22)(i)(B), a payment made with digital assets by a customer directly to a TPSO's participating payee may be a third party network transaction subject to reporting. For example, if a customer makes a payment pursuant to instructions provided by a TPSO that has an agreement with a participating payee to receive digital assets as payment, the payment to that payee should be treated as a payment made in settlement of a reportable payment transaction despite the fact that the payment was not first made to the TPSO. To clarify that reporting under section 6050W is required in this example with respect to the participating payee, proposed§1.6050W-1(a)(2) provides that in the case of a TPSO that has the contractual obligation to make payments to participating payees, a payment in settlement of a reportable payment transaction includes the submission of an instruction to a purchaser to transfer funds directly to the account of the participating payee for purposes of settling the reportable payment transaction. VI. Proposed§§31.3406(b)(3)-2, 31.3406(g)-2, and 31.3406(g)-1 Section 3406 of the Code requires certain payors of reportable payments, including payments required to be reported by a broker or a barter exchange under section 6045, to deduct and withhold a tax on the payment at the statutory backup withholding rate (currently 24 percent) if the payee fails to provide a TIN or provides an incorrect TIN. The existing rules under§31.3406(b)(3)-2(a) provide generally that any payment made by a broker or barter exchange that is required to be reported under section 6045 is a reportable payment that is subject to backup withholding, and that the amount subject to backup withholding is the amount of gross proceeds as determined under existing§1.6045-1(d)(5). Except for the addition of digital assets to the title to proposed§31.3406(b)(3)-2, these proposed regulations do not make any substantive changes to these general rules under§31.3406(b)(3)-2 because they are broad enough to cover digital asset transactions that are reportable under section 6045. The remainder of§31.3406(b)(3)-2 provides the backup withholding rules for specific types of transactions reportable under section 6045. Specifically,§31.3406(b)(3)-2(b)(2) provides backup withholding rules for brokers reporting on foreign currency contracts and regulated futures contracts subject to section 1256. The text of these existing rules is broad enough to also apply to forward contracts calling for the delivery of digital assets as well as forward contracts that are cryptographically recorded on a distributed ledger. Additionally,§31.3406(b)(3)-2(b)(3) and (4) provide backup withholding rules for brokers reporting on securities sales made through a margin account and security short sales. Because these rules are limited to securities, they do not apply to most digital assets. 5 Comments are requested as to whether any changes should be made to these rules, either to address digital assets that may also be treated as securities for Federal income tax purposes or to address short sales of digital assets. The Treasury Department and the IRS also request comments regarding whether any additional rules are needed to address how backup withholding should apply to transactions involving digital assets. ******** 5 No inference is intended as to whether a digital asset is treated as a security for any other legal regime, including the Federal securities laws and the Commodity Exchange Act, or to otherwise impact the interpretation or applicability of those laws, which are outside the scope of these regulations. ******** Existing§31.3406(g)-2(e) provides that real estate reporting persons are not required to backup withhold on a payment made with respect to a real estate transaction that is subject to reporting under section 6045(a) and (e) and existing§1.6045-4. This rule was intended to apply to the reportable payment made to the transferors, or sellers, of real estate. Proposed§31.3406(g)-2(e) has been revised to clarify that this rule does not apply to reportable payments made with respect to the disposition of digital assets by a real estate buyer to purchase real estate. Rather, sales of digital assets in return for real estate that are effected by brokers should be subject to backup withholding under proposed§31.3406(b)(3)-2 to ensure that all customers who exchange digital assets for services or property in transactions effected by a broker are treated consistently without regard to the type of property acquired. Accordingly, proposed§31.3406(g)-2(e) provides that real estate reporting persons must backup withhold under section 3406 and in accordance with the rules in proposed§31.3406(b)(3)-2 on reportable payments made with respect to real estate buyers who exchange digital assets for real estate. Under existing§31.3406(g)-1(e), an exception provides that a payor is not required to backup withhold on gross proceeds if the sale is effected at an office outside the United States (as defined in existing§1.6045-1(g)(3)(iii)) unless the payor has actual knowledge that the payee is a U.S. person. These proposed regulations amend§31.3406(g)-1(e) to apply this exception to a sale of digital assets effected at an office outside the United States by a CFC digital asset broker that is not conducting activities as an MSB with respect to that sale and to a sale of digital assets effected by a non-U.S. digital asset broker that is not conducting activities as an MSB with respect to that sale. These proposed regulations also clarify that, with respect to sales other than sales of digital assets, the reference to existing§1.6045-1(g)(3)(iii) is intended to encompass sales described in that section without regard to whether the sale is considered effected at an office inside the United States under existing§1.6045-1(g)(3)(iii)(B). VII. Request for Comments Comments are requested on all aspects of these proposed regulations, including the following: A. Questions from the Explanation of Provisions The comments specially requested throughout the discussion in the Explanation of Provisions are consolidated here in this Part VII Request for Comments. Comments are requested on the following questions: 1. Does the proposed definition of digital asset accurately and appropriately define the type of assets to which these regulations should apply? See Part I.A.1 of this Explanation of Provisions. 2. Does the definition of digital asset or the reporting requirements with respect to digital assets inadvertently capture transactions involving non-digital asset securities that may use distributed ledger technology, shared ledger, or similar technology to process orders without effecting sales? Should any definitions or reporting rules be modified to address other transactions involving tokenized or digitized financial instruments that are used to facilitate back-office processing of the transaction? See Part I.A.2. of this Explanation of Provisions. 3. If an exception is necessary for transactions involving non-digital asset securities that may use distributed ledger technology or similar technology to process orders without effecting sales, how should it be drafted so that it does not sweep in other transactions (such as tokenized securities, or other digital assets that are securities) that should not be exempted from the reporting requirements? For example, should, and if so how should, reporting requirements distinguish between, and thus avoid double-counting of, sales of digital assets from use of distributed ledger technology or similar technology for mere recordkeeping, clearing, or settlement of tokenized securities or other assets? See Part I.A.2. of this Explanation of Provisions. 4. How common are digital asset options that are also section 1256 contracts? Are there less burdensome alternatives for reporting these digital asset option transactions? For example, would it be less burdensome to allow brokers to report transactions involving section 1256 contracts that are also digital assets or the delivery of non-digital assets that underlie a digital asset option as a sale under proposed§1.6045-1(a)(9)(ii)? See Part I.A.3 of this Explanation of Provisions. 5. Is there is anything factually unique in the way short sales of digital assets, options on digital assets, and other financial product transactions involving digital assets are undertaken compared to similar transactions involving non-digital assets, and do these transactions raise any additional reporting issues that have not been addressed in these proposed regulations? See Part I.A.3 of this Explanation of Provisions. 6. Are there alternative information reporting approaches that could be used by digital asset trading platforms that collect and retain no information or collect and retain limited information about the identity of their customers that would satisfy tax compliance objectives while reducing privacy concerns? See Part I.B of this Explanation of Provisions. 7. Are there any technological or other technical issues that might affect the ability of a non-custodial digital asset trading platform that is a person who qualifies as a broker to obtain and transmit the information required under these proposed regulations, and how might these issues be overcome? See Part I.B of this Explanation of Provisions. 8. In light of the fact that digital asset trading platforms operate with varying degrees of centralization and effective control by founders or others, does the application of reporting rules only to "persons" (as described in Part I.B of this Explanation of Provisions ) adequately limit the scope of reporting obligations to platforms that have one or more individuals or entities that can update, amend, or otherwise cause the platform to carry out the diligence and reporting rules of these proposed regulations? See Part I.B of this Explanation of Provisions. 9. Should the provision of connection software by a wallet provider to a trading platform (that customers of the trading platform can then use to access their wallets from the trading platform) be considered a facilitative service resulting in the wallet provider being treated as a broker? See Part I.B of this Explanation of Provisions. 10. What additional functions potentially provided by wallet software should be considered sufficient to treat the wallet provider as providing facilitative services? See Part I.B of this Explanation of Provisions. 11. What other factors should be considered relevant to determining whether a person maintains sufficient control or influence over provided facilitative services to be considered being in a position to know either the identity of the party that makes a sale or the nature of the transaction potentially giving rise to gross proceeds from a sale? See Part I.B of this Explanation of Provisions. 12. Under what circumstances should an operator of a digital asset trading platform be considered to maintain or not to maintain sufficient control or influence over the facilitative services offered by that platform? Should, and if so how should, the ability of users of the platform, shareholders or holders of governance tokens to vote on aspects of the platform's operation be considered? How are these decentralized organizational and governance structures similar to or different from other existing organizational or governance structures (e.g., shareholder votes, mutual organizations)? Should this conclusion be impacted by the existence of full or even partial-access administration keys or the ability of the operator to replace the existing protocol with a new or modified protocol if that replacement does not require holding a vote of governance token holders or complying with these voting restrictions? See Part I.B of this Explanation of Provisions. 13. To what extent should holders of governance tokens be treated as operating a digital asset trading platform business as an unincorporated group or organization? Please provide examples of fact patterns involving governance tokens and explain any differences in those fact patterns relevant to assessing the degree of control or influence exercisable by holders of those tokens. See Part I.B.1 of this Explanation of Provisions. 14. Are there alternative information reporting approaches that could be used by digital asset payment processors effecting payments to merchants on behalf of customers in transactions where the payment processor is an agent of a merchant that would satisfy tax compliance objectives while reducing privacy concerns? See Part I.B.3 of this Explanation of Provisions. 15. What is the frequency with which creators or issuers of digital assets redeem digital assets? See Part I.B.4 of this Explanation of Provisions. 16. Should the broker reporting regulations apply to initial coin offerings, simple agreements for future tokens, and similar contracts? See Part I.B.4 of this Explanation of Provisions. 17. Are the types of consideration for which digital assets may be exchanged in a sale transaction sufficiently broad to capture current and anticipated transactions in which taxpayers regularly dispose of digital assets for consideration? See Part I.C of this Explanation of Provisions. 18. Are there any logistical concerns about the reporting on contracts involving the delivery of digital assets created by these proposed regulations? See Part I.C of this Explanation of Provisions. 19. What is the frequency with which forward contracts involving digital assets are traded in practice? Are there any additional issues that should be considered to enable brokers to report on these transactions? See Part I.C of this Explanation of Provisions. 20. Should the definition of sale or other parts of these proposed regulations be revised to address transactions not addressed in these proposed regulations, such as the transfer of digital assets to and from a liquidity pool by a liquidity pool provider, or the wrapping and unwrapping of digital assets? See Part I.C of this Explanation of Provisions. 21. Are there other less burdensome alternatives to reporting transaction ID information and digital asset addresses with respect to digital asset sales and certain digital asset transfer-in transactions that would still ensure the IRS receives the information necessary to determine taxpayers' gains and losses? See Part I.D of this Explanation of Provisions. 22. Should an annual digital asset sale threshold, above which the broker would report transaction ID information and digital asset addresses, be used? If so, what should that threshold be? See Part I.D of this Explanation of Provisions. 23. Should the time reported using UTC time be reported using a 12-hour clock (designating a.m. or p.m. as appropriate) or a 24-hour clock? To what extent should all brokers be required to use the same 12-hour or 24-hour clock for these purposes? See Part I.D of this Explanation of Provisions. 24. Is a uniform time standard overly burdensome, and are there circumstances under which more flexibility should be provided? See Part I.D of this Explanation of Provisions. 25. Are there alternatives to basing the transaction date on the UTC for customers who are present in different time zones known to the broker at the time of the transaction? See Part I.D of this Explanation of Provisions. 26. Should the fair market value of services giving rise to digital asset transaction costs (including the services of any broker or validator involved in executing or validating the transfer) be determined by looking to the fair market value of the digital assets used to pay for the transaction costs? Are there circumstances under which an alternative valuation rule would be more appropriate? See Part I.E.2 of this Explanation of Provisions. 27. Are there any suggestions that could work to avoid duplicative multiple broker reporting for sale transactions involving digital asset brokers without sacrificing the certainty that at least one of the multiple brokers will report? See Part I.H of this Explanation of Provisions. 28. Is there an alternative approach that could be objectively applied to differentiate between a U.S. digital asset broker's U.S. business and non-U.S. business for purposes of allowing different documentation to be used for the broker's non-U.S. business, and how could this alternative approach avoid being readily subject to manipulation? See Part I.I.1 of this Explanation of Provisions. 29. Are the U.S. indicia listed in proposed§1.6045-1(g)(4)(iv)(B)( 1 ) through ( 5 ) appropriate and sufficient? See Part I.I.3 of this Explanation of Provisions. 30. Should the regulations define when a broker has reason to know that a digital asset broker is organized within the United States, and are there suggestions for objective indicators that a digital asset broker is organized in the United States? See Part I.I.3 of this Explanation of Provisions. 31. Are there administrable rules that would allow CFC and non-U.S. digital asset brokers conducting activities as MSBs to apply different rules to their U.S. and non-U.S. business activities while still ensuring that they are reporting on transactions of their U.S. customers? See Part I.I.4 of this Explanation of Provisions. 32. Should different diligence and documentation rules apply to CFC and non-U.S. digital asset brokers conducting activities as MSBs with respect to the non-U.S. part of their business, and if so, on what basis should a determination be made as to when these different diligence and documentation rules would apply? See Part I.I.4 of this Explanation of Provisions. 33. What U.S. regulatory schemes applicable to a CFC digital asset broker or a non-U.S. digital asset broker other than registration with FinCEN should be sufficient to cause such a digital asset broker to be subject to the same diligence, documentation and reporting rules as a digital asset broker conducting activities as an MSB? How can such digital asset brokers be identified by the IRS? Please also address questions 31 and 32 relating to digital asset brokers conducting activities as an MSB. 34. Would a rule requiring brokers to obtain documentation on account holders or partners, beneficiaries, or owners (as applicable) of customers that are foreign intermediaries or foreign flow-through entities increase transparency sufficiently to justify the increased burden on brokers? Is that trade-off different for digital asset-only brokers, securities-only brokers, or brokers that effect sales or exchanges in both categories? How frequently and in what circumstances do securities brokers rely on the existing section 6045 regulations to not document account holders or partners, beneficiaries, or owners (as applicable) of customers that are foreign intermediaries or foreign flow-through entities? See Part I.I.5.g of this Explanation of Provisions. 35. Would a coordination provision for brokers that effect transactions involving both non-digital asset securities and digital assets be helpful to brokers, and if so, which proposed rules applicable to digital asset brokers should apply to non-digital asset securities brokers? See Part I.I.6 of this Explanation of Provisions. 36. Are there additional broker-facilitated transactions involving digital assets that would still be subject to reporting under the barter exchange rules after the applicability date of these proposed regulations? For example, are there broker-mediated transactions that are not reportable payment transactions under§1.6050W-1(a)(1) with respect to the client that receives the digital assets as payment? See Part I.J of this Explanation of Provisions. 37. Is it appropriate to treat stablecoins, or a subset of stablecoins, as digital assets for purposes of these regulations? What characteristics should be considered when assessing whether stablecoins, or a subset of stablecoins, should be treated as digital assets under these regulations? See Part I.K of this Explanation of Provisions. 38. Should the regulations exclude reporting on transactions involving the disposition of U.S. dollar related stablecoins that give rise to no gain or loss, and if so, how should those stablecoin transactions be identified? See Part I.K of this Explanation of Provisions. 39. Should any other changes be made to the regulations or other rules to ensure adequate reporting of transactions involving the receipt or disposition of stablecoins? See Part I.K of this Explanation of Provisions. 40. In the case of cascading digital asset transaction costs (that is, a digital asset transaction cost paid with respect to the use of a digital asset to pay for a digital asset transaction cost), should all such costs be treated as digital asset transaction costs associated with the original transaction? See Part II.A of this Explanation of Provisions. 41. Is the allocation of one-half of total digital asset transaction costs paid to the disposition of digital assets for purposes of determining the amount realized and the allocation of the other half to the acquisition of the received digital assets for purposes of determining basis administrable? See Part II.A of this Explanation of Provisions. 42. Would a 100 percent allocation of digital asset transaction costs to the disposed-of digital asset in an exchange of one digital asset for a different digital asset be less burdensome? See Part II.A of this Explanation of Provisions. 43. Are there methods or functionalities that unhosted wallets can provide to assist taxpayers with the tracking of purchase dates, times, and/or basis of specific units of a digital asset upon the transfer of some or all of those units between custodial brokers and unhosted wallets? See Part II.C of this Explanation of Provisions. 44. Should the ordering rules for unhosted wallets be applied on a wallet-by-wallet basis as proposed, or should these rules be applied on a digital asset address-by-digital asset address basis or some other basis? See Part II.C of this Explanation of Provisions. 45. Are there any alternatives to requiring that the ordering rules for digital assets left in the custody of a broker be followed on an account-by-account basis; for example, if brokers have systems that can otherwise account for their customers' transactions? See Part II.C of this Explanation of Provisions. 46. Should exceptions be made to the ordering rule for digital assets left in the custody of a broker to allow brokers to take into account reasonably reliable purchase date information received from outside sources? If so, what types of purchase date information should be considered reasonably reliable? See Part II.C of this Explanation of Provisions. 47. Should the current rules under section 6045A applicable to transfers of securities from one broker to another remain applicable for securities that are also digital assets prior to the implementation of a later phase of the information reporting guidance? See Part IV of this Explanation of Provisions. 48. Who would be the responsible party required to provide the reporting if section 6045B is made applicable to securities that are also digital assets prior to the implementation of this later phase of information reporting guidance? See Part IV of this Explanation of Provisions. 49. Should any changes be made to the backup withholding rules under existing§31.3406(b)(3)-2(b)(3) or (4) to address digital assets that may also be treated as securities for Federal income tax purposes or to address short sales of digital assets? Are any additional rules needed to address how backup withholding should apply to transactions involving digital assets? See Part VI of this Explanation of Provisions. B. Additional questions Comments are also requested on any other aspect of these proposed regulations not specifically discussed in these proposed regulations, including on the following questions: 1. Are there any suggestions for what the IRS should consider in planning for the receipt, storage, retrieval, and usage of the information required to be reported under these proposed regulations? 2. These proposed regulations anticipate that reporting brokers may voluntarily engage with acquiring brokers to obtain basis information with respect to transactions in which the reporting broker does not already have adjusted basis information. What would encourage reporting brokers to voluntarily obtain and provide this information? Applicability Dates The regulations regarding computation of gain or loss and the basis of digital assets under sections 1001 and 1012 are proposed to apply to taxable years for all sales and acquisitions of digital assets on or after January 1 of the calendar year immediately following the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. Taxpayers, however, may rely on these proposed regulations under sections 1001 and 1012 for dispositions in taxable years ending on or after August 29, 2023, provided the taxpayer consistently follows the proposed regulations under sections 1001 and 1012 in their entirety and in a consistent manner for all taxable years through the applicability date of the final regulations. The proposed§1.6045-1 regulations require brokers to report the gross proceeds from the sale of digital assets if the sale is effected on or after January 1, 2025. According to the terms of proposed§1.6045-1(d)(2)(i)(C), brokers are required to report the adjusted basis and the character of any gain or loss with respect to a sale if the sale or exchange is effected on or after January 1, 2026. For assets that are commodities pursuant to the Commodity Futures Trading Commission's certification procedures described in 17 CFR 40.2, these regulations are proposed to apply to sales of such commodities on or after January 1, 2025, without regard to the date such certification procedures were undertaken. The changes made by the proposed§1.6045-4 regulations, applicable to reporting on real estate transactions, are proposed to apply to real estate transactions with dates of closing occurring on or after January 1, 2025. The changes made by these proposed regulations applicable to transfer statements (proposed§1.6045A-1) and organizational actions (proposed§1.6045B-1), applicable to specified securities described in proposed§1.6045-1(a)(14)(i) through (iv) that are also digital assets as defined in proposed§1.6045-1(a)(19), are proposed to apply on or following the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. The regulations applicable to payments made in settlement of payment card and third party network transactions (proposed§1.6050W-1) are proposed to apply to payments made using digital assets on or after January 1, 2025. The regulations applicable to the penalties for failing to file or furnish an information return (proposed§§1.6721-1 and 1.6722-2) are proposed to apply to information returns required to be filed with respect to sales effected on or after January 1, 2025. Finally, the regulations applicable to backup withholding (proposed§§31.3406(b)(3)-2, 31.3406(g)-1(e), and 31.3406(g)-2(e)) are proposed to apply to sales of digital assets on or after January 1, 2025. Special Analyses These proposed regulations were subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. I. Regulatory Planning and Review - Economic Analysis Executive Orders 13563 and 12866 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. These proposed regulations were designated by the Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) (MOA) between the Treasury Department and the Office of Management and Budget (OMB) regarding review of tax regulations. OIRA designated these regulations as significant under section 1(c) of the MOA. Accordingly, OMB reviewed these regulations. A. Background A digital asset is a representation of value that uses cryptography to verify transactions and maintain records using a distributed ledger as opposed to a centralized authority. Digital assets have gained popularity in recent years as both a method of payment and as an investment vehicle. Their popularity has grown due to the potential for low transaction fees, decentralization (that is, a lack of association with a central government and lack of intermediation by financial institutions), and because the distributed ledger record of transactions does not include the identities of the parties involved in the transaction. A "distributed ledger technology" is a decentralized infrastructure used to store and maintain data as opposed to using one centralized server. One example of distributed ledger technology is a blockchain. A blockchain refers to a cryptographically secured digital ledger that maintains a record of transactions that occur on the network. Transactions are recorded in "blocks" and added to a "chain" that represents the entire history of transactions. This history is then shared and synchronized across many nodes, which then each keep a copy of the blockchain. When transactions are added to the blockchain, they include unique codes called "public keys" that identify the digital asset addresses involved. While a public key is unique to a digital asset owner, it does not reveal personal information such as a name or physical address. In this way, the blockchain preserves a layer of confidentiality that allows digital asset owners to feel their privacy is better protected on the distributed ledger. The confidentiality which helped digital assets gain popularity presents challenges for tax compliance. Because the distributed ledger does not identify digital asset owners past a public key, compliance currently relies primarily on self-reported information. B. Need for these proposed regulations Information reporting is essential to the integrity of the tax system. The Internal Revenue Service (IRS) estimated in its 2019 tax gap analysis that net misreporting as a percent of income for income with little to no third-party information reporting is 55 percent. In comparison, misreporting for income with some information reporting, such as capital gains, is 17 percent, and for income with substantial information reporting, such as dividend and interest income, is just five percent. Prior to these proposed regulations, many transactions involving digital assets were outside the scope of information reporting rules. Digital assets are treated as property for Federal income tax purposes. The regulations under section 6045 of the Internal Revenue Code (Code) require brokers to file information returns for customers that sell certain types of property noting gross proceeds and, in some cases, adjusted basis. However, the existing regulations do not specify digital assets as a type of property for which information reporting is required. Section 6045 also requires information returns for real estate transactions, but the existing regulations do not require reporting of amounts received in digital assets. Section 6050W of the Code requires information reporting by payment settlement entities on certain payments made with respect to payment card and third party network transactions. However, the existing regulations are silent as to whether certain exchanges involving digital assets are reportable payments under section 6050W. C. Overview These proposed regulations add digital assets to the list of property for which brokers must file information returns under section 6045. In effect, these proposed regulations would require brokers to report sales of digital assets if, in return, customers receive cash, stored-value cards, different digital assets, services, or other property that is subject to reporting under section 6045. Real estate persons would also be required to file information returns reporting digital assets received in real estate transactions. Finally, to avoid duplicative reporting, a broker who is also a payment settlement entity would be required to report the sale of digital assets used to make a payment associated with a payment card or third party network transaction under section 6050W, to the extent the payment is not subject to reporting under section 6045. Furthermore, these proposed regulations provide the tax rules for determining a taxpayer's amount realized on the disposition of digital assets and basis in purchased digital assets. Specifically, the proposed regulations address exchanges of digital assets for services or other property, including different digital assets, and dispositions of less than all of a taxpayer's holdings of a particular digital asset if the taxpayer purchased those holdings at different times or for different prices. The proposed regulations also provide rules for allocating transaction costs when one digital asset is exchanged for another digital asset. These provisions are analyzed in Part D of these Special Analyses. D. Economic analysis 1. Baseline In this analysis, the Treasury Department and the IRS assess the benefits and costs of these proposed regulations compared to a no-action baseline that reflects anticipated Federal income tax-related behavior in the absence of these regulations. a. Economic Effects of these Proposed Regulations The worldwide digital asset market is estimated to be valued at around $1 trillion as of January 2023. 6 It is currently unknown how much of the global market cap or what share of monthly transactions is held by U.S. taxpayers. ******** 6 See CryptoSlate.com and CoinMarketCap.com. ******** b. Alternatives considered for the definition of digital assets A digital asset is defined in the Infrastructure Investment and Jobs Act, Pub. L. 117-58, 135 Stat. 429 (2021) (IIJA) to be any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary of the Treasury. The definition of digital assets in these proposed regulations does not include other types of virtual assets, such as those that exist only in a closed system (such as a video game). The proposed definition is not intended to include uses of distributed ledger technology for ordinary commercial purposes that do not create new transferable assets, such as tracking inventory, which may be unlikely to give rise to sales as defined for purposes of the regulations. These proposed regulations extend the information reporting rules under section 6045 to brokers who, in the ordinary course of a trade or business, act as agents, principals, or digital asset middlemen for others to effect sales or exchanges of digital assets for cash, broker services, or property of a type that is subject to reporting by the brokers (including different digital assets, securities, and real estate) under section 6045 or to effect on behalf of customers payments of digital assets associated with payment card and third party network transactions subject to reporting under section 6050W. These proposed regulations also clarify that the definition of broker for purposes of section 6045 includes certain digital asset trading platforms, digital asset payment processors, certain digital asset hosted wallet providers, and persons who regularly offer to redeem digital assets that were created or issued by that person. In addition, these proposed regulations would require real estate reporting persons to report on real estate purchasers who use digital assets to acquire real estate in a reportable real estate transaction and extend the information that must be reported with respect to sellers of real estate to include the fair market value of digital assets received by sellers in exchange for real estate. Finally, in the case of a transaction involving the exchange of digital assets for goods (other than digital assets) or services, these proposed regulations treat the provision of the goods or services as reportable under section 6050W and the disposition of the digital assets as reportable under section 6045. The Treasury Department and the IRS considered whether newer forms of digital assets, such as those referred to as stablecoins, should be subject to the section 6045 broker reporting rules. A stablecoin is a form of digital asset that is generally designed to track the value of another asset and is intended to have a stable value. It was determined that broker reporting should be required for stablecoins. However, the principal reporting on stablecoins is likely to come from platforms that facilitate the purchase and sale of other digital assets along with stablecoins. Stablecoin issuers that redeem stablecoins are included in the definition of broker because, notwithstanding their nomenclature, the value of a stablecoin is not always stable and therefore may give rise to gain or loss. Stablecoin issuers effect these redemptions on behalf of their customers and know the gross proceeds paid to their customers. The Treasury Department and the IRS considered whether to carve out transactions involving stablecoins that are linked to the U.S. dollar or to other foreign currencies from the definition of a sale for which reporting is required. These proposed regulations do not carve out stablecoin transactions from the definition of sale because a broker may not be able to identify which stablecoins will perfectly and consistently reflect the value of the currencies to which they are linked. The Treasury Department and the IRS also considered whether transactions featuring non-fungible tokens (NFTs) should be subject to the proposed regulations. NFTs differ from some other digital assets, including cryptocurrency, due to their non-fungible nature--that is, they are unique and, thus, not directly interchangeable with other NFTs. For purposes of these proposed regulations, NFTs also are digital assets that may represent artwork; antiques; written compositions, articles, or commentarie s; music; videos; films; fashion designs; or sports or other entertainment memorabilia, the sale of which is not currently subject to reporting under section 6045. However, there is no indication in the IIJA or its legislative history that Congress intend ed to exclude certain digital assets from section 6045 reporting. NFTs are digital assets that are bought, sold, and traded on digital asset trading platforms similar to other digital assets. The disposition of NFTs may give rise to gain or loss, and the reporting of gross proceeds and basis information is equally useful to taxpayers and the IRS as reporting on other digital assets. Ultimately, the Treasury Department and the IRS decided that transactions involving NFTs should be included under the proposed regulations. c. Alternatives considered for allocating transaction costs While the majority of the proposed regulations deal with information reporting rules for brokers, the proposed regulations also deal with operative rules of substantive tax law for customers conducting the underlying transactions being reported, including rules with respect to the allocation of digital asset transaction costs. The term digital asset transaction costs (including transaction fees, transfer taxes, and commissions) means the amount paid in cash or property (including digital assets) to effect the disposition or acquisition of a digital asset. Some digital asset brokers will charge a single transaction fee in the case of an exchange of one digital asset for a different digital asset. In some cases, these transaction fees may be adjusted depending on the type of digital asset acquired or disposed of in the exchange, with transactions involving less commonly traded digital assets carrying higher transaction fees than transactions involving more commonly traded digital assets. The Treasury Department and the IRS considered various approaches to allocating digital asset transaction costs that are charged in an exchange of one digital asset for another. Consideration was given to whether these proposed regulations should permit taxpayers or brokers to designate how to allocate digital asset transaction costs by, for example, entirely reducing the amount realized or entirely increasing basis; however, this allocation would not reflect the economic reality that the costs are allocable to a particular transaction that includes both the purchase of one digital asset and the disposition of a different digital asset. Furthermore, a single uniform rule is easier to administer and less susceptible to manipulation. Ultimately, to avoid the administrative complexities associated with distinguishing between special broker fee allocations that appropriately reflect the economics of the transaction and broker fee allocations that reflect tax-motivated requests, these proposed regulations provide that in an exchange of one digital asset for a different digital asset, one-half of any digital asset transaction cost paid in cash or property to effect the exchange is allocable to the disposition of the transferred digital asset for purposes of determining the amount realized and one-half is allocable to the acquisition of the received digital asset for purposes of determining the basis of that received digital asset. To clarify, these proposed regulations provide that in an exchange of two different digital assets where transaction costs are paid or withheld, the amount realized from the exchange is the cash received plus the fair market value of other property (including digital assets), or services received, reduced by one half of the total digital asset transaction costs. Economically, this decision likely has little effect on the market since prices will adjust to reflect the relative elasticities of supply and demand. d. Economic effects on brokers The Treasury Department and the IRS estimate that approximately 600 to 9,500 brokers will be impacted by these proposed regulations. The lower bound of this estimate is derived using Form 1099 issuer data through 2021 and statistics from CoinMarketCap.com. The upper bound of this estimate is based on IRS data for brokers with nonzero revenue who may deal in digital assets. These proposed regulations increase costs for brokers who do not already maintain records of customers' digital asset transactions. These proposed regulations will require brokers to collect and store customers' information, including names, addresses, and tax identification numbers. Brokers will also be required to collect and store information about customers' digital asset transactions. While the ongoing costs of reporting information to the IRS may be small, there will be larger costs associated with the initial setup for brokers. To the extent that they do not have such a system in place, brokers will need to build a system of collecting and storing this information, as well as reporting this information to the IRS and taxpayers, or will need to find a service provider to do so. They will also need to develop and maintain the ability to backup withhold and deposit withheld tax with the IRS for applicable taxpayers. Some of these costs may be curtailed by working with existing third parties that currently assist some brokers with voluntary reporting. These regulations may also increase costs for those brokers who do voluntarily report under the current rules, since these brokers will need to ensure that their current reporting systems are compliant with the proposed reporting rules. A reasonable burden estimate for the average time to complete these forms for each customer is between 7.5 minutes and 10.5 minutes, with a mid-point of 9 minutes (or 0.15 hours). The Treasury Department and the IRS estimate that 13 to 16 million customers will be impacted by these proposed regulations. Taking the mid-points of the ranges for the number of taxpayers that are expected to report gain (or loss) from digital asset transactions (i.e., form recipients) and number of brokers expected to be impacted by these regulations (14.5 million recipients and 5,050 brokers, respectively), we expect the average broker to incur 425 hours of time burden and $27,000 of monetized burden for the ongoing costs per year based on calculations using wage and compensation data from the Bureau of Labor Statistics that capture the wage, benefit, and overhead costs of a typical tax preparer. 7 The total estimated aggregate annual burden is 2,146,250 hours. The total estimated monetized annual burden is $136,350,000. These estimates are based on survey data collected from filers of similar information returns, such as Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, and Form 1099-K, Payment Card and Third Party Network Transactions. Although these estimates are likely to change once these proposed regulations are effective, the Treasury Department and the IRS do not have data that would allow for an accurate estimate of these changes. ******** 7 See https://www.bls.gov/oes/tables.htm and https://www.bls.gov/news.release/ecec.toc.htm. ******** Additionally, start-up costs are estimated to be between three and eight times annual costs. Given that we expect per firm annual estimated burden hours to be 425 hours and $27,000 of estimated monetized burden, we estimate per firm start-up aggregate burden hours to range from 1,275 to 3,400 hours and $81,000 to $216,000 of aggregate monetized burden. Using the mid-points, start-up total estimated aggregate burden hours is 11,804,375 and total estimated monetized burden is $749,925,000. However, these proposed regulations also work to mitigate some potential compliance costs for brokers. First, the clarity provided by these proposed regulations on which types of transactions (namely those involving digital assets) are subject to reporting will allow brokers to create a consistent reporting plan and not collect additional information for other types of transactions that do not otherwise require information reporting. Second, the application of one fixed rule for allocating transaction costs gives brokers a clear rule to follow and resolves any uncertainty with how to treat those transaction costs for reporting purposes. Prior to these proposed regulations, brokers who chose to report on digital asset transactions took different approaches to collecting information and reporting due to a lack of clear policy guidelines. Any economic inefficiencies created by this uncertainty (such as competition between brokers regarding collecting personal information) would now be resolved. e. Economic effects on digital asset owners The Treasury Department and the IRS estimate that 13 to 16 million digital asset owners will be impacted by these proposed regulations. This estimated range may be low, since it relies on information reported on Forms 8949, Sales and Other Dispositions of Capital Assets, by individuals, Forms 1099-B, Forms 1099-K, Forms 1099-MISC, Miscellaneous Income, and Forms 1099-NEC, Nonemployee Compensation, provided by brokers and/or payment settlement entities prior to the passage of IIJA and individuals that checked yes on the Form 1040, U.S. Individual Income Tax Return, question regarding virtual currency transactions. Because the existing regulations were previously silent as to the information reporting obligations of brokers for many digital asset transactions prior to IIJA, these data are likely not complete even for those who did file. Payment settlement entities were also only required to file a Form 1099-K if the payee had more than 200 transactions and $20,000 in gross proceeds, further limiting the information available. The Treasury Department and the IRS do not have adequate data to estimate the level of noncompliance regarding digital asset reporting by digital asset owners. These proposed regulations will have different effects on different types of digital asset owners. The majority of digital asset owners will see greatly reduced costs of monitoring and tracking their own digital asset portfolios. These reduced costs and the increased confidence potential digital asset owners will gain as a result of brokers being compliant with Federal tax laws will likely increase the number of digital asset owners and may increase existing owners' trade volume. Due to the volatile nature of digital asset values, and due to the precision allowed for digital asset holdings, digital asset owners currently must closely monitor and maintain records of all their transactions to correctly report their tax liability at the end of the year. This is a complicated and time-consuming task that is prone to error. Those potential digital asset owners who have little experience with accounting for digital assets may have been unwilling to enter the market due to the high learning and record maintenance costs. Eliminating these high entry costs will allow more potential digital asset owners to enter the market. These proposed regulations also make clear which types of digital assets are subject to reporting requirements and which are not. Without this clarification, digital asset owners may have failed to properly maintain records for some of their transactions, believing them to not be subject to reporting per the existing regulations. Similarly, these digital asset owners may have also overallocated resources to monitoring taxable transactions that are now required to be reported, adding unnecessary costs to using digital assets. On the other hand, those digital asset owners who prefer to use digital assets due to the pseudonymity of the blockchain will see an additional privacy cost of making transactions with digital assets, since brokers will be required to collect information from them for tax reporting purposes. These digital asset owners may decrease their volume of digital asset trading through brokers. II. Paperwork Reduction Act The collections of information in these proposed regulations are required under section 6045 of the Internal Revenue Code (the Code). The collection of information with respect to dispositions of digital assets in these proposed regulations is set forth in proposed§1.6045-1 and the collection of information with respect to dispositions of real estate in consideration for digital assets in these proposed regulations is set forth in proposed§1.6045-4. Responses to these collections of information are mandatory. Section 1.6045-1(d) of these proposed regulations would generally require brokers to report to the customer and the IRS the gross proceeds paid to the customer or credited to the customer's account upon the broker's sale of digital assets on behalf of the customer, as well as, in certain circumstances, the customer's adjusted basis in, and date of purchase of, the digital assets sold. This information is necessary to allow the customer and the IRS to determine the amount and character of the customer's gain (or loss) from the sale of digital assets. Section 1.6045-4(i) of these proposed regulations would generally require real estate reporting persons (treated as brokers for purposes of proposed§1.6045-1) to report to the real estate transferor and to the IRS the fair market value of digital assets paid to the transferor as consideration in a real estate transaction. This information is necessary to allow the transferor and the IRS to determine the total gross proceeds from digital assets paid in the real estate transaction. The IRS intends that the collection of information pursuant to proposed§1.6045-1 will be conducted through a form prescribed by the Secretary for digital asset sales, and that the collection of information pursuant to proposed§1.6045-4 will be conducted through a revised Form 1099-S, Proceeds From Real Estate Transactions. For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), the reporting burden associated with the collection of information with respect to proposed§§1.6045-1 and 1.6045-4 will be reflected in the Paperwork Reduction Act Submissions associated with those Forms. The OMB Control Number for the Form 1099-S is 1545-0997. Currently, there is no OMB Control Number for the form that will be prescribed by the Secretary for the collection of information pursuant to proposed§1.6045-1. The form prescribed by the Secretary for digital asset sales will be used by all digital asset brokers, digital asset payment processors, and certain other brokers with a reporting requirement. The revised Form 1099-S will be used by all real estate reporting persons with a reporting requirement. The Treasury Department and the IRS request comments on all aspects of information collection burdens related to these proposed regulations. In addition, when available, drafts of IRS forms will be posted for comment at www.irs.gov/draftforms. Regarding the form that will be prescribed by the Secretary for sales of digital assets, the burden estimate must reflect the continuing costs of collecting and reporting the information required by these regulations as well as the upfront or start-up costs associated with creating the systems to collect and report the information. A reasonable burden estimate for the average time to complete these Forms for each customer is between 7.5 minutes and 10.5 minutes, with a mid-point of 9 minutes (or 0.15 hours). The Treasury Department and the IRS estimate that 13 to 16 million customers will be impacted by these proposed regulations. Taking the mid-points of the ranges for the number of taxpayers that are expected to report gain (or loss) from digital asset transactions (i.e., form recipients) and number of brokers expected to be impacted by these regulations (14.5 million recipients and 5,050 brokers, respectively), we expect the average broker to incur 425 hours of time burden and $27,000 of monetized burden for the ongoing costs per year. The total estimated aggregate annual burden hours is 2,146,250. The total estimated monetized annual burden is $136,350,000. These estimates are based on survey data collected from filers of similar information returns, such as Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, and Form 1099-K, Payment Card and Third Party Network Transactions. Although these estimates are likely to increase once these proposed regulations are effective, the Treasury Department and the IRS do not have data that would allow for an accurate estimate of these increases. Additionally, start-up costs are estimated to be between three to eight times annual costs. Given that we expect per firm annual estimated burden hours to be 425 hours and $27,000 of estimated monetized burden, we estimate per firm start-up aggregate burden hours to range from 1,275 to 3,400 hours and $81,000 to $216,000 of aggregate monetized burden. Using the mid-points, start-up total estimated aggregate burden hours is 11,804,375 and total estimated monetized burden is $749,925,000. Based on the most recent OMB burden estimate for the average time to complete Form 1099-S, it was estimated that the IRS received a total number of 2,573,400 Form 1099-S responses with a total estimated time burden for those responses of 411,744 hours (or 9.6 minutes per Form). See https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201806-1545-024. Neither a material change in the average time to complete the revised Form, nor a material increase in the number of Forms that will be filed is expected once these proposed regulations are effective. No material increase is expected in the start-up costs and it is anticipated that less than 1 percent of Form 1099-S issuers will be impacted by this change. There is no available data to predict the increase in the number of Forms to be filed. The Treasury Department and the IRS request comments on all aspects of these estimates. Written comments and recommendations for the proposed information collection may be submitted via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-122793-19) by following the online instructions for submitting comments and may also be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of information should be received by October 30, 2023. Comments are specifically requested concerning: Whether the proposed collection of information is necessary for the proper performance of the duties of the IRS, including whether the information will have practical utility (including underlying assumptions and methodology); The accuracy of the estimated burden associated with the proposed collection of information; How the quality, utility, and clarity of the information to be collected may be enhanced; How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. III. Regulatory Flexibility Act When the IRS issues a proposed rulemaking imposing a collection of information requirement on small entities, the Regulatory Flexibility Act (RFA) requires the agency to "prepare and make available for public comment an initial regulatory flexibility analysis," which will "describe the impact of the proposed rule on small entities." 5 U.S.C. 603(a). Unless an agency determines that a proposal will not have a significant economic impact on a substantial number of small entities, section 603 of the RFA requires the agency to present an initial regulatory flexibility analysis (IRFA) of the proposed rule. As discussed in Part I.D.2.c. of this Special Analyses, the expected number of impacted issuers of information returns under these proposed regulations is between 600 and 9,500 (mid-point 5,050). Small Business Administration regulations provide small business size standards by North American Industry Classification System (NAICS) Industry. See 13 CFR 121.201. The NAICS includes virtual currency exchange services in the NAICS code for Commodity Contracts Dealing (523130). According to Small Business Administration regulations, the maximum annual receipts for a concern and its affiliates to be considered small in this NAICS code is $41.5 million. Based on tax return data, only 150 of the 9,500 firms identified as impacted issuers in the upper bound estimate exceed the $41.5 million threshold. This implies there could be 450 to 9,350 impacted small business issuers under the Small Business Administration small business size standards. Notwithstanding these estimates and analysis, the Treasury Department and the IRS have not yet determined whether the proposed rule, when finalized, will likely have a significant economic impact on a substantial number of small entities. The determination of whether reporting by small brokers and real estate reporting persons on certain digital asset transactions will have a significant economic impact on a substantial number of these entities requires further study. However, because there is a possibility of significant economic impact on a substantial number of small entities, an Initial Regulatory Flexibility Analysis is provided in these proposed regulations. The Treasury Department and the IRS invite comments on both the number of entities affected and the economic impact on small entities. A. Need for and objectives of the rule As discussed earlier in this preamble, the existing information reporting rules do not address how certain transactions involving digital assets must be reported to the party who disposes of the digital assets in exchange for cash, services, stored-value cards, or other property (including different digital assets). Information reporting by brokers and real estate reporting persons under section 6045 of the Code with respect to certain digital asset dispositions and digital asset payments received by real estate transferors would lead to higher levels of taxpayer compliance because the income earned by taxpayers engaging in transactions involving digital assets would be made transparent to both the IRS and taxpayers. Clear information reporting rules that report gross proceeds and, in some cases, adjusted basis for taxpayers who engage in digital asset transactions will help the IRS to identify taxpayers who have engaged in these transactions, and thereby help to reduce the overall tax gap. The proposed rule is also expected to facilitate the preparation of tax returns (and reduce the number of inadvertent errors or intentional misstatements shown on those returns) by taxpayers who engage in digital asset transactions. B. Affected small entities As discussed above, we anticipate 9,350 of the 9,500 (or 98 percent) impacted issuers in the upper bound estimate could be small businesses. C. Impact of the rule and alternatives considered 1. Proposed reporting and compliance requirements Section 1.6045-1(d) of these proposed regulations would generally require brokers to report to the IRS and the customer the gross proceeds paid to the customer or credited to the customer's account upon the broker's sale of digital assets on behalf of the customer, as well as, in certain circumstances, the customer's adjusted basis in, and date of purchase of, the digital assets sold. This information is necessary to allow the IRS and the customer to determine the amount and character of the customer's gain (or loss) from the sale of digital assets. Section 1.6045-4(i) of these proposed regulations would also generally require real estate reporting persons (treated as brokers for purposes of proposed§1.6045-1) to report to the IRS and the real estate transferor the fair market value of digital assets paid to the real estate transferor as consideration in a real estate transaction. This information is necessary to allow the IRS and the real estate transferor to determine the total gross proceeds from digital assets paid in the real estate transaction and assist the IRS and the real estate transferor to determine whether, and to what extent, the gross proceeds are taxable income to the real estate transferor. As previously stated in the Paperwork Reduction Act section of this preamble, the form prescribed by the Secretary for reporting sales of digital assets pursuant to§1.6045-1(d) of these proposed regulations is expected to create an average estimated per customer burden on brokers of between 7.5 minutes and 10.5 minutes, with a mid-point of 9 minutes (or 0.15 hours). In addition, the form is expected to create an average estimated per broker burden of between 1,275 and 3,400 hours in start-up costs to build processes to comply with the information reporting requirements. The revised Form 1099-S prescribed by the Secretary for reporting gross proceeds from the payment of digital assets paid to real estate transferors as consideration in a real estate transaction pursuant to§1.6045-4(i) of these proposed regulations is not expected to materially change overall costs to complete the revised Form. Because we expect that filers of revised Form 1099-S will already be filers of the form, we do not expect them to incur a material increase in start-up costs associated with the revised form. Although small businesses may engage tax reporting services to complete, file, and furnish information returns to avoid the start-up costs associated with building an internal information return reporting system for sales of digital assets, it remains difficult to predict whether the economies of scale efficiencies of using these services will offset the somewhat more burdensome ongoing costs associated with using third party contractors. 2. Reporting alternatives considered for small businesses The Treasury Department and the IRS considered alternatives to these proposed regulations that would have created an exception to reporting, or a delayed applicability date, for small businesses but decided against such alternatives for several reasons. As discussed above, we anticipate 9,350 of the 9,500 (or 98 percent) impacted issuers in the upper bound estimate could be small businesses. First, one purpose of these proposed regulations is to eliminate the overall tax gap. Any exception or delay to the information reporting rules for small business brokers, which may comprise the vast majority of impacted issuers, would reduce the effectiveness of these proposed regulations. In addition, such an exception or delay could have the unintended effect of incentivizing taxpayers to move their business to excepted small businesses, thus thwarting IRS efforts to identify taxpayers engaged in digital asset transactions. Additionally, because the information reported on statements furnished to customers will likely be an aid to tax return preparation by those customers, small business brokers will be able to offer their customers the same amount of useful information as their larger competitors. Finally, to the extent investors in digital asset transactions are themselves small businesses, these proposed regulations will help these businesses with their own tax return preparation efforts. D. Duplicate, overlapping, or relevant Federal rules The proposed rule would not conflict or overlap with any relevant Federal rules. As discussed above, in certain instances, the proposed rule ensures duplicative reporting is not required. The Treasury Department and the IRS invite comments on any impact this rule would have on small entities. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small entities. IV. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. 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. V. Executive Order 13132: Federalism Executive Order 13132 (entitled "Federalism") prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. This proposed rule does not have federalism implications, does not impose substantial direct compliance costs on State and local governments, and does not preempt State law within the meaning of the Executive order. Comments and Requests to Participate in the Public Hearing Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to 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 rules. All comments that are submitted by the public 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 November 7, 2023, beginning at 10 a.m. ET, in the Auditorium at the Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. If the number of requests to speak at the hearing exceed the number that can be accommodated in one day, a second public hearing date for this proposed regulation will be held on November 8, 2023. In this event and to the extent possible, persons requesting to testify in person will be assigned to speak on the first day of the public hearing. Due to 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 public hearing starts. Participants may alternatively attend the public hearing by telephone. The rules of 26 CFR 601.601(a)(3) apply to the public hearing. Persons who wish to present oral comments at the public hearing must submit written or electronic comments and an outline of the topics to be discussed as well as the time to be devoted to each topic by October 30, 2023, as prescribed in the preamble under the ADDRESSES section. For those requesting to speak during the public hearing, send an outline of topic submissions electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-122793-19). If no outlines are received by October 30, 2023, 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 REG-122793-19 and the language "TESTIFY In Person". For example, the subject line may say: "Request to TESTIFY In Person at Hearing for REG-122793-19". 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 public hearing. The subject line of the email must contain the regulation number "REG-122793-19" and the language "TESTIFY Telephonically". For example, the subject line may say: "Request to TESTIFY Telephonically at Hearing for REG-122793-19". The email by persons requesting to testify either in person or telephonically should include a copy of the speaker's public comments and outline of topics. A period of ten minutes will be allocated to each person for making comments. After the deadline for receiving outlines has passed, the IRS will prepare an agenda containing the schedule of speakers. Copies of the agenda with the order of the speakers will be made available free of charge at the public hearing and will also be uploaded to https://www.regulations.gov. Individuals who want to attend the public hearing in person without testifying must also send an email to publichearings@irs.gov to have their names added to the building access list. The subject line of the email must contain the regulation number "REG-122793-19" and the words "ATTEND in Person". For example, the subject line may say: "Request to ATTEND Hearing in Person for REG-122793-19". Requests to attend the public hearing must be received by 5 p.m. ET on November 3, 2023. Individuals who want to attend the public hearing by telephone without testifying must also send an email to publichearings@irs.gov to receive the telephone number and access code for the public hearing. The subject line of the email must contain the regulation number "REG-122793-19" and the words "ATTEND Hearing Telephonically". For example, the subject line may say: "Request to ATTEND Hearing Telephonically for REG-122793-19". Requests to attend the public hearing must be received by 5 p.m. ET on November 3, 2023. Hearings will be made accessible to people with disabilities. To request special assistance during the telephonic hearing, contact the Publications and Regulations Branch of the Office of Associate Chief Counsel (Procedure and Administration) by sending an email to publichearings@irs.gov (preferred) or by telephone at (202) 317-5306 (not a toll-free number) by November 2, 2023. Statement of Availability of IRS Documents IRS Revenue Procedures, Revenue Rulings, Notices and other guidance cited in this document are published in the Internal Revenue Bulletin and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov. Drafting Information The principal authors of these regulations are Roseann Cutrone, Office of the Associate Chief Counsel (Procedure and Administration) and Kyle Walker and Harith Razaa, Office of the Associate Chief Counsel (Income Tax and Accounting). However, other personnel from the Treasury Department and the IRS, including John Sweeney and Alan Williams, Office of Associate Chief Counsel (International), and Pamela Lew, Office of Associate Chief Counsel (Financial Institutions and Products), participated in their development. List of Subjects 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. 26 CFR Part 31 Employment taxes, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements, Social security, Unemployment compensation. 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 the IRS propose to amend 26 CFR parts 1, 31, and 301 as follows: PART 1--INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.1001-1 is amended by adding a sentence at the end of paragraph (a) to read as follows:§1.1001-1 Computation of gain or loss. (a) * * * For rules determining the amount realized for purposes of computing the gain or loss upon the sale, exchange, or other disposition of digital assets, as defined in§1.6045-1(a)(19), see§1.1001-7. * * * * * Par. 3. Section 1.1001-7 is added to read as follows:§1.1001-7 Computation of gain or loss for digital assets. (a) In general. This section provides rules to determine the amount realized for purposes of computing the gain or loss upon the sale, exchange, or other disposition of digital assets, as defined in§1.6045-1(a)(19). (b) Amount realized in a sale, exchange, or other disposition of digital assets for cash, other property, or services - (1) Computation of amount realized - (i) In general. If digital assets are sold or otherwise disposed of for cash, other property differing materially in kind or in extent, or services, the amount realized is the excess of: (A) The sum of: ( 1 ) Any cash received; ( 2 ) The fair market value of any property received or, in the case of a debt instrument described in paragraph (b)(1)(iv) of this section, the amount determined under paragraph (b)(1)(iv) of this section; and ( 3 ) The fair market value of any services received; over (B) The amount of digital asset transaction costs, as defined in paragraph (b)(2)(i) of this section, allocable to the sale or disposition of the transferred digital asset, as determined under paragraph (b)(2)(ii) of this section. (ii) Digital assets used to pay digital asset transaction costs. If digital assets are used (including withheld) to pay digital asset transaction costs, as defined in paragraph (b)(2)(i) of this section, such use is a disposition of the digital assets for services. (iii) Application of general rule to certain sales, exchanges, or other dispositions of digital assets. The following paragraphs apply the rules of this section to certain sales, exchanges, or other dispositions of digital assets. (A) Sales or other dispositions of digital assets for cash. The amount realized from the sale of digital assets for cash is the sum of the amount of cash received plus the fair market value of services received described in paragraph (b)(1)(ii) of this section, reduced by the amount of digital asset transaction costs allocable to the disposition of the transferred digital assets, as determined under paragraph (b)(2)(ii) of this section. (B) Exchanges or other dispositions of digital assets for services, or certain property. The amount realized on the exchange or other disposition of digital assets for services or property differing materially in kind or in extent, other than digital assets or debt instruments described in paragraph (b)(1)(iv) of this section, is the sum of the fair market value of such property and services received (including services received described in paragraph (b)(1)(ii) of this section), reduced by the amount of digital asset transaction costs allocable to the disposition of the transferred digital assets, as determined under paragraph (b)(2)(ii) of this section. (C) Exchanges of digital assets. The amount realized on the exchange of one digital asset for another digital asset differing materially in kind or in extent is the sum of the fair market value of the digital asset received plus the fair market value of services received described in paragraph (b)(1)(ii) of this section, reduced by the amount of digital asset transaction costs allocable to the disposition of the transferred digital asset, as determined under paragraph (b)(2)(ii) of this section. (iv) Debt instrument issued in exchange for digital assets. For purposes of this section, if a debt instrument is issued in exchange for digital assets and the debt instrument is subject to§1.1001-1(g), the amount attributable to the debt instrument is determined under§1.1001-1(g) (in general, the issue price of the debt instrument). (2) Digital asset transaction costs --(i) Definition. The term digital asset transaction costs means the amount paid in cash or property (including digital assets) to effect the disposition or acquisition of a digital asset. Digital asset transaction costs include transaction fees, transfer taxes, and commissions. (ii) Allocation of digital asset transaction costs. This paragraph (b)(2)(ii) provides the rules for allocating digital asset transaction costs to the disposition or acquisition of a digital asset. (A) In general. Except as provided in paragraph (b)(2)(ii)(B) of this section, in the case of a sale or disposition of digital assets, the total digital asset transaction costs paid by the taxpayer are allocable to the disposition of the digital assets. Such costs include any digital asset transaction costs paid by the taxpayer on the sale or disposition of a digital asset used or withheld to pay other digital asset transaction costs. (B) Special rule for certain exchanges. In the case of an exchange of digital assets described in paragraph (b)(1)(iii)(C) of this section, one-half of the total digital asset transaction costs paid by the taxpayer to effect the exchange are allocable to the disposition of the transferred digital assets, and the other half of such costs are allocable to the acquisition of the received digital assets for purposes of determining basis under§1.1012-1(a). See§1.1012-1(h). Such costs include any digital asset transaction costs paid by the taxpayer on the sale or disposition of a digital asset used or withheld to pay other digital asset transaction costs. Accordingly, any other allocation or specific assignment of digital asset transaction costs is disregarded. (3) Time for determining fair market value of digital assets. Generally, the fair market value of a digital asset is determined as of the date and time of the exchange or disposition of the digital asset. (4) Special rule when the fair market value of property or services cannot be determined. If the fair market value of the property (including digital assets) or services received in exchange for digital assets cannot be determined with reasonable accuracy, the fair market value of such property or services must be determined by reference to the fair market value of the digital assets transferred as of the date and time of the exchange. This paragraph (b)(4), however, does not apply to a debt instrument described in paragraph (b)(1)(iv) of this section. (5) Examples. The following examples illustrate the application of paragraphs (b)(1) through (3) of this section. Unless the facts specifically state otherwise, the transactions described in the following examples occur after the applicability date set forth in paragraph (c) of this section. For purposes of the examples under this paragraph (b)(5), assume that TP is a digital asset investor, and each unit of digital asset A, B, and C is materially different in kind or in extent from the other units. See§1.1012-1(h)(4) for examples illustrating the determination of basis of digital assets. (i) Example 1: Exchange of digital assets for services --(A) Facts. TP owns a total of 20 units of digital asset A, and each unit has an adjusted basis of $0.50. X, an unrelated person, agrees to perform cleaning services for TP in exchange for 10 units of digital asset A. The fair market value of the services performed by X equals $10. X then performs the services, and TP transfers 10 units of digital asset A to X. Additionally, TP pays, in cash, $1 of transaction fees to dispose of digital asset A. (B) Analysis. Under paragraph (b)(1) of this section, TP has a disposition of 10 units of digital asset A for services received. Under paragraphs (b)(2)(i) and (b)(2)(ii)(A) of this section, TP has digital asset transaction costs of $1, which must be allocated to the disposition of digital asset A. Under paragraph (b)(1)(i) of this section, TP's amount realized on the disposition of the units of digital asset A is $9, which is the fair market value of the services received, $10, reduced by the digital asset transaction costs allocated to the disposition of digital asset A, $1. TP recognizes a gain of $4 on the exchange ($9 amount realized reduced by $5 adjusted basis in 10 units). (ii) Example 2: Digital asset transaction costs paid in cash in an exchange of digital assets --(A) Facts. TP owns a total of 10 units of digital asset A, and each unit has an adjusted basis of $0.50. TP uses BEX, an unrelated third party, to effect the exchange of 10 units of digital asset A for 20 units of digital asset B. At the time of the exchange, each unit of digital asset A has a fair market value of $2 and each unit of digital asset B has a fair market value of $1. BEX charges $2 per transaction, which BEX requires its customers to pay in cash. At the time of the transaction, TP pays BEX $2 in cash. (B) Analysis. Under paragraph (b)(2)(i) of this section, TP has digital asset transaction costs of $2. Under paragraph (b)(2)(ii)(B) of this section, TP must allocate one-half of such costs ($1) to the disposition of the 10 units of digital asset A and must allocate the remaining one-half ($1) to the acquisition of the 20 units of digital asset B. Under paragraphs (b)(1)(i) and (b)(3) of this section, TP's amount realized from the exchange is $19, which is the fair market value of the 20 units of digital asset B received ($20) as of the date and time of the transaction, reduced by the digital asset transaction costs allocated to the disposition of digital asset A ($1). TP recognizes a gain of $14 on the exchange ($19 amount realized reduced by $5 adjusted basis in the 10 units of digital asset A). (iii) Example 3: Digital asset transaction costs paid with digital assets in an exchange of digital assets-- (A) Facts. The facts are the same as in paragraph (b)(5)(ii)(A) of this section (the facts in Example 2 ), except that BEX requires its customers to pay transaction costs using units of digital asset C. TP has an adjusted basis in each unit of digital asset C of $0.50. TP transfers 2 units of digital asset C to BEX to effect the exchange of digital asset A for digital asset B. TP also pays to BEX an additional unit of digital asset C to effect the disposition of digital asset C for payment of the transaction costs. The fair market value of each unit of digital asset C is $1. (B) Analysis. TP disposes of 3 units of digital asset C for services described in paragraph (b)(1)(ii) of this section. Therefore, under paragraph (b)(2)(i) of this section, TP has digital asset transaction costs of $3. Under paragraph (b)(2)(ii)(B) of this section, TP must allocate one-half of such costs ($1.50) to the disposition of the 10 units of digital asset A and the remaining one-half ($1.50) to the acquisition of the 20 units of digital asset B. None of the digital asset transaction costs are allocable to the disposition of digital asset C. Under paragraphs (b)(1)(i) and (b)(3) of this section, TP's amount realized on the disposition of digital asset A is $18.50, which is the excess of the fair market value of the 20 units of digital asset B received ($20) as of the date and time of the transaction over the allocated digital asset transaction costs ($1.50). Under paragraph (b)(1)(i) of this section, TP's amount realized on the disposition of the 3 units of digital asset C is $3, which is the fair market value of the services received as of the date and time of the transaction. TP recognizes a gain of $13.50 on the disposition of 10 units of digital asset A ($18.50 amount realized over $5 adjusted basis) and a gain of $1.50 on the disposition of the 3 units of digital asset C ($3 amount realized over $1.50 adjusted basis). (iv) Example 4: Digital asset transaction costs withheld from the transferred digital assets in an exchange of digital assets --(A) Facts. The facts are the same as in paragraph (b)(5)(ii)(A) of this section (the facts in Example 2 ), except that BEX requires its payment be withheld from the units of the digital asset transferred. At the time of the transaction, BEX withholds 1 unit of digital asset A. TP exchanges the remaining 9 units of digital asset A for 18 units of digital asset B. (B) Analysis. The withholding of 1 unit of digital asset A is a disposition of a digital asset for services within the meaning of paragraph (b)(1)(ii) of this section. Under paragraph (b)(2)(i) of this section, TP has digital asset transaction costs of $2. Under paragraph (b)(2)(ii)(B) of this section, TP must allocate one-half of such costs to the disposition of the 10 units of digital asset A and must allocate the other half of such costs to the acquisition of the 18 units of digital asset B. Under paragraphs (b)(1)(i) and (b)(3) of this section, TP's amount realized on the 10 units of digital asset A is $19, which is the excess of the fair market value of the 18 units of digital asset B received ($18) and the fair market value of services received ($2) as of the date and time of the transaction over the allocated digital asset transaction costs ($1). TP recognizes a gain on the 10 units of digital asset A transferred of $14 ($19 amount realized reduced by $5.00 adjusted basis in the 10 units). (c) Applicability date. This section applies to all sales, exchanges, and dispositions of digital assets on or after January 1 of the calendar year immediately following [date of publication of final regulations in the Federal Register ]. Par. 4. Section 1.1012-1 is amended by: 1. Adding paragraph (h); 2. Adding reserved paragraph (i); and 3. Adding paragraph (j). The additions read as follows:§1.1012-1 Basis of property. * * * * * (h) Determination of basis of digital assets - (1) Overview and general rule. This paragraph (h) provides rules to determine the basis of digital assets, as defined in§1.6045-1(a)(19), received in a purchase for cash, a transfer in connection with the performance of services, an exchange for digital assets or other property differing materially in kind or in extent, an exchange for a debt instrument described in paragraph (h)(1)(v) of this section, or in a part sale and part gift transfer described in paragraph (h)(1)(vi) of this section. Except as provided in paragraph (h)(1)(ii), (v), or (vi) of this section, the basis of digital assets received in a purchase or exchange is generally equal to the cost thereof at the date and time of the purchase or exchange, plus any allocable digital asset transaction costs as determined under paragraph (h)(2)(ii) of this section. (i) Basis of digital assets purchased for cash. The basis of digital assets purchased for cash is the amount of cash used to purchase the digital assets plus any allocable digital asset transaction costs as determined under paragraph (h)(2)(ii)(A) of this section. (ii) Basis of digital assets received in connection with the performance of services. For rules regarding digital assets received in connection with the performance of services, see§§1.61-2(d)(2) and 1.83-4(b). (iii) Basis of digital assets received in exchange for property other than digital assets. The basis of digital assets received in exchange for property differing materially in kind or in extent, other than digital assets, is the cost as described in paragraph (h)(3) of this section of the digital assets received plus any allocable digital asset transaction costs as determined under paragraph (h)(2)(ii)(A) of this section. (iv) Basis of digital assets received in exchange for other digital assets. The basis of digital assets received in an exchange for other digital assets differing materially in kind or in extent is the cost as described in paragraph (h)(3) of this section of the digital assets received plus one-half of the total allocable digital asset transaction costs as determined under paragraph (h)(2)(ii)(B) of this section. (v) Basis of digital assets received in exchange for the issuance of a debt instrument. If a debt instrument is issued in exchange for digital assets, the cost of the digital assets attributable to the debt instrument is the amount determined under paragraph (g) of this section, plus any allocable digital asset transaction costs as determined under paragraph (h)(2)(ii)(A) of this section. (vi) Basis of digital assets received in a part sale and part gift transfer. To the extent digital assets are received in a transfer, which is in part a sale and in part a gift, see§1.1012-2. (2) Digital asset transaction costs --(i) Definition. The term digital asset transaction costs under paragraph (h) of this section has the same meaning as in§1.1001-7(b)(2)(i). (ii) Allocation of digital asset transaction costs. This paragraph (h)(2)(ii) provides the rules for allocating digital asset transaction costs to the acquisition of digital assets described in paragraph (h)(1) of this section. (A) Allocation of digital asset transaction costs on a purchase or exchange for digital assets. Except for an exchange described in paragraph (h)(2)(ii)(B) of this section, the total digital asset transaction costs paid by the taxpayer are allocable to the digital assets received. (B) Special rule for the allocation of digital asset transaction costs on an exchange of digital assets for other digital assets. In the case of an exchange of digital assets for other digital assets differing materially in kind or in extent, one-half of the total digital asset transaction costs paid by the taxpayer is allocable to the disposition of the transferred digital assets for purposes of determining the amount realized under§1.1001-7(b)(1). The other half of such costs is allocable to the acquisition of the digital assets for purposes of determining the basis of such digital assets under paragraph (h)(1) of this section. Accordingly, any other allocation or specific assignment of digital asset transaction costs is disregarded. (3) Determining the cost of the digital assets received. In the case of an exchange described in either paragraph (h)(1)(iii) or (iv) of this section, the cost of the digital assets received is the same as the fair market value used in determining the amount realized on the sale or disposition of the transferred property for purposes of section 1001 of the Code. Generally, the cost of a digital asset received is determined at the date and time of the exchange. The special rule in§1.1001-7(b)(4) also applies in this section for purposes of determining the fair market value of a received digital asset when it cannot be determined with reasonable accuracy. (4) Examples. The following examples illustrate the application of this section. Unless the facts specifically state otherwise, the transactions described in the following examples occur after the applicability date set forth in paragraph (h)(5) of this section. For purposes of the examples under this paragraph (h)(4), assume that TP is a digital asset investor, and that digital assets A, B, and C are materially different in kind or in extent from each other. See§1.1001-7(b)(5) for examples illustrating the determination of the amount realized and gain or loss in a sale or disposition of a digital asset for cash, other property differing materially in kind or in extent, or services. (i) Example 1: Transaction fee paid in cash --(A) Facts. TP uses BEX, an unrelated third party, to exchange 10 units of digital asset A for 20 units of digital asset B. At the time of the exchange, a unit of digital asset A has a fair market value of $2, and a unit of digital asset B has a fair market value of $1. BEX charges TP a transaction fee of $2, which TP pays to BEX in cash at the time of the exchange. (B) Analysis. Under paragraph (h)(2)(i) of this section, TP has digital asset transaction costs of $2. Under paragraph (h)(2)(ii)(B) of this section, TP allocates one-half of the digital asset transaction costs ($1) to the disposition of the 10 units of digital asset A and allocates the other half of such costs ($1) to the acquisition of 20 units of digital asset B. Under paragraphs (h)(1)(iv) and (h)(3) of this section, TP's basis in the 20 units of digital asset B received is $21, which is the sum of the fair market value of the 20 units of digital asset B received ($20), plus the allocated digital asset transaction costs ($1). (ii) Example 2: Transaction fee paid in other property --(A) Facts. The facts are the same as in paragraph (h)(4)(i)(A) of this section (the facts in Example 1 ), except that BEX requires its customers to pay transaction fees using units of digital asset C. TP pays the transaction fees using 2 units of digital asset C that TP holds. At the time TP pays the transaction fees, each unit of digital asset C has a fair market value of $1. TP acquires 20 units of digital asset B with a fair market value of $20 in the exchange. (B) Analysis. Under paragraph (h)(2)(i) of this section, TP has digital asset transaction costs of $2. Under paragraph (h)(2)(ii)(B) of this section, TP must allocate one-half of the digital asset transaction costs ($1) to the disposition of the 10 units of digital asset A and must allocate the remaining one-half of such costs ($1) to the acquisition of the 20 units of digital asset B. Under paragraphs (h)(1)(iv) and (h)(3) of this section, TP's basis in the 20 units of digital asset B is $21, which is the sum of the fair market value of the 20 units of digital asset B received ($20) plus the allocated digital asset transaction costs ($1). (iii) Example 3: Digital asset transaction costs withheld from the transferred digital assets --(A) Facts. The facts are the same as in paragraph (h)(4)(i)(A) of this section (the facts in Example 1 ), except that BEX withholds 1 unit of digital asset A in payment of the transaction fees and TP receives 18 units of digital asset B. (B) Analysis. Under paragraph (h)(2)(i) of this section, TP has digital asset transaction costs of $2. Under paragraph (h)(2)(ii)(B) of this section, TP must allocate one-half of the digital asset transaction costs ($1) to the disposition of the 10 units of digital asset A and must allocate the remaining one-half of such costs ($1) to the acquisition of the 18 units of digital asset B received. Under paragraphs (h)(1)(iv) and (h)(3) of this section, TP's total basis in the digital asset B units is $19, which is the sum of the fair market value of the 18 units of digital asset B received ($18) plus the allocated digital asset transaction costs ($1). (5) Applicability date. This paragraph (h) is applicable to all acquisitions and dispositions of digital assets on or after January 1 of the calendar year immediately following [date of publication of final regulations in the Federal Register ]. * * * * * (j) Sale, disposition, or transfer of digital assets - (1) In general. Except as provided in paragraph (j)(3) of this section for digital assets in the custody of a broker, if a taxpayer sells, disposes of, or transfers less than all units of the same digital asset, as defined in§1.6045-1(a)(19), held in a single wallet or account, as defined in§1.6045-1(a)(23), the basis and holding period of the disposed units are determined by making a specific identification of the units in the wallet or account that are sold, disposed of, or transferred, as provided in paragraph (j)(2) of this section. If a specific identification is not made, units in the wallet or account are disposed of in order of time from the earliest acquired. For purposes of the preceding sentence, the date the units were transferred into the taxpayer's wallet or account is disregarded. (2) Specific identification of digital assets. A specific identification of the units of a digital asset sold, disposed of, or transferred is made if, no later than the date and time of the sale, disposition, or transfer, the taxpayer identifies on its books and records the particular units to be sold, disposed of, or transferred by reference to any identifier, such as purchase date and time or the purchase price for the unit, that is sufficient to identify the units sold, disposed of, or transferred in order to determine the basis and holding period of such units. A specific identification can be made only if adequate records are maintained for all units of a specific digital asset held in a single wallet or account to establish that a disposed unit is removed from the wallet or account for purposes of subsequent transactions. (3) Digital assets in the custody of a broker - (i) Unit of a digital asset sold, disposed of, or transferred. Notwithstanding the general rule set forth in paragraph (j)(1) of this section, where multiple units of the same digital asset are left in the custody of a broker, as defined in§1.6045-1(a)(1), and, no later than the date and time of sale, disposition, or transfer, the taxpayer does not provide the broker with an adequate identification of which units are sold, disposed of, or transferred, as provided in paragraph (j)(3)(ii) of this section, the basis and holding period of the units disposed of, sold, or transferred must be determined in order of time from the earliest units acquired of that same digital asset in the taxpayer's account with the broker. (ii) Identification of units. Where multiple units of the same digital asset are left in the custody of a broker, an adequate identification occurs if, no later than the date and time of the sale, disposition, or transfer, the taxpayer specifies to the broker having custody of the digital assets the particular units of the digital asset to be sold, disposed of, or transferred by reference to any identifier, such as purchase date and time or purchase price that the broker designates as sufficiently specific to determine the units transferred in order to determine the basis and holding period of such units. The taxpayer is responsible for maintaining records to substantiate the identification. (4) Method for specifically identifying units of a digital asset. A method of specifically identifying the units of a digital asset sold, disposed of, or transferred under this paragraph (j), for example, by the earliest acquired, the latest acquired, or the highest basis, is not a method of accounting. Therefore, a change in the method of specifically identifying the digital asset sold, disposed of, or transferred, for example, from the earliest acquired to the latest acquired, is not a change in method of accounting to which sections 446 and 481 apply. (5) Examples. The following examples illustrate the application of this section. Unless the facts specifically state otherwise, the transactions described in the following examples occur after the applicability date set forth in paragraph (j)(6) of this section. For purposes of the examples under this paragraph (j)(5), assume that TP is a digital asset investor. (i) Example 1: Identification of the digital asset not in the custody of a broker --(A) Facts. On September 1, Year 2, TP transfers two lots of digital asset DE to a newly opened digital asset wallet that is not in the custody of a broker, as defined in§1.6045-1(a)(1). The first lot transferred into TP's wallet, with a transaction ID 1114ABC, comes from digital asset address AAA123 and consists of 10 units of digital asset DE, with a purchase date of January 1, Year 1, and a basis of $2 per unit. The second lot transferred into TP's wallet, with transaction ID 9996XYZ, comes from digital asset address BBB456 and consists of 20 units of digital asset DE, with a purchase date of January 1, Year 2, and a basis of $5 per unit. On September 2, Year 2, when the DE units have a fair market value of $10 per unit, TP purchases $100 worth of consumer goods from Merchant M. To make payment, TP transfers 10 units of digital asset DE from TP's wallet to CPP, a digital asset payment processor that then pays $100 to M. Prior to making the transfer to CPP, TP keeps a record that the 10 units of DE sold in this transaction were from the second lot of units transferred into TP's wallet, that is, from digital asset address BBB456 and purchased with transaction ID 9996XYZ. (B) Analysis. Under the facts in paragraph (j)(5)(i)(A) of this section, TP's notation in its records on the date of sale, specifying that the 10 units sold were from the 20 units acquired in transaction ID 9996XYZ, is a specific identification within the meaning of paragraph (j)(2) of this section. TP's notation in its records that the 10 units sold were from the 20 units that had previously been at digital asset address BBB456 is also a specific identification within the meaning of paragraph (j)(2) of this section. Either of these notations is sufficient to identify the basis and holding period of the 10 units of digital asset DE sold. Accordingly, TP has identified the units disposed of for purposes of determining the basis ($5 per unit) and holding period (one year or less) of the units sold in order to purchase the merchandise. (ii) Example 2: Identification of digital assets not in the custody of a broker --(A) Facts. The facts are the same as in paragraph (j)(5)(i)(A) of this section (the facts in Example 1 ), except in making the transfer to CPP, TP did not keep a record of the specific 10 units of digital asset DE that TP intended to sell. (B) Analysis. TP did not make a specific identification within the meaning of paragraph (j)(2) of this section for the 10 units of digital asset DE that were sold. Pursuant to the ordering rule provided in paragraph (j)(1) of this section, the units disposed of are the earliest acquired. Accordingly, TP must treat the 10 units sold as the 10 units with a purchase date of January 1, Year 1, and a basis of $2 per unit, transferred into the wallet with transaction ID 1114ABC (that is, the units previously held in digital asset address AAA123). (iii) Example 3: Identification of the digital asset sold at broker --(A) Facts. On August 1, Year 1, TP opens an account at CRX, a broker within the meaning of§1.6045-1(a)(1) and purchases through CRX 10 units of digital asset DE for $9 per unit. On January 1, Year 2, TP opens an account at BEX, an unrelated broker and purchases through BEX 20 units of digital asset DE for $5 per unit. On August 1, Year 3, TP transfers the digital assets TP holds with CRX into TP's account with BEX. BEX does not account for its customers' digital asset holdings by transaction ID, but rather keeps a centralized account of its customers' holdings. BEX has a policy that purchase or transfer date and time, if necessary, is a sufficiently specific identifier for customers to determine the basis and holding period of units sold, disposed of, or transferred. On September 1, Year 3, TP directs BEX to sell 10 units of digital asset DE for $10 per unit and specifies that BEX sell the units that were transferred into TP's account with BEX on August 1, Year 3. BEX effects the sale. (B) Analysis. No later than the date and time of the sale, TP specified to BEX the particular units of digital assets to be sold. Accordingly, under paragraph (j)(3)(ii) of this section, TP provided an adequate identification of the 10 units of digital asset DE sold. (iv) Example 4: Identification of the digital asset sold at a broker --(A) Facts. The facts are the same as in paragraph (j)(5)(iii)(A) of this section (the facts in Example 3 ) except that TP directs BEX to sell 10 units of digital asset DE but does not make any identification of which units to sell. (B) Analysis. Because TP did not specify to BEX no later than the date and time of the sale the particular units of digital assets to be sold, TP did not make an adequate identification within the meaning of paragraph (j)(3)(ii) of this section. Thus, TP must use the ordering rule provided in paragraph (j)(3)(i) of this section to determine the units of digital asset DE sold. Pursuant to this rule, the units sold must be attributed to the earliest units of digital asset DE purchased within or transferred into the TP's account with BEX. The 10 units of digital asset DE sold must be attributed to 10 of the 20 units of digital asset DE purchased by TP at BEX on January 1, Year 2, which are the earliest units of digital asset DE acquired in TP's account. (6) Applicability date. This paragraph (j) is applicable to all acquisitions and dispositions of digital assets on or after January 1 of the calendar year immediately following [date of publication of final regulations in the Federal Register ]. Par. 5. Section 1.6045-0 is added to read as follows:§1.6045-0 Table of contents. In order to facilitate the use of§1.6045-1, this section lists the paragraphs contained in§1.6045-1.§1.6045-1 Returns of information of brokers and barter exchanges. (a) Definitions. (1) Broker. (2) Customer. (i) In general. (ii) Special rules for payment transactions involving digital assets. (3) Security. (4) Barter exchange. (5) Commodity. (6) Regulated futures contract. (7) Forward contract. (8) Closing transaction. (9) Sale. (i) In general. (ii) Sales with respect to digital assets. (A) In general. (B) Dispositions of digital assets for certain property. (C) Dispositions of digital assets for certain services. (D) Special rule for sales effected by digital asset payment processors. (10) Effect. (i) In general. (ii) Actions relating to certain options and forward contracts. (11) Foreign currency. (12) Cash. (13) Person. (14) Specified security. (15) Covered security. (i) In general. (ii) Acquired in an account. (iii) Corporate actions and other events. (iv) Exceptions. (16) Noncovered security. (17) Debt instrument, bond, debt obligation, and obligation. (18) Securities futures contract. (19) Digital asset. (i) In general. (ii) No inference. (20) Digital asset address. (21) Digital asset middleman. (i) In general. (ii) Position to know. (A) Identity. (B) Nature of the transaction. (iii) Facilitative service. (A) In general. (B) Special rule involving sales of digital assets under paragraphs (a)(9)(ii)(B) and (C) of this section. (22) Digital asset payment processor. (i) In general. (ii) Special rule for digital asset transfers pursuant to paragraph (a)(22)(i)(A) of this section. (iii) Processor agreement. (23) Held in a wallet or account. (24) Hosted wallet. (25) Stored-value card. (26) Transaction identification. (27) Unhosted wallet. (b) Examples. (c) Reporting by brokers. (1) Requirement of reporting. (2) Sales required to be reported. (3) Exceptions. (i) Sales effected for exempt recipients. (A) In general. (B) Exempt recipient defined. (C) Exemption certificate. ( 1 ) In general. ( 2 ) Limitation for corporate customers. (ii) Excepted sales. (iii) Multiple brokers. (iv) Cash on delivery transactions. (v) Fiduciaries and partnerships. (vi) Money market funds. (A) In general. (B) Effective/applicability date. (vii) Obligor payments on certain obligations. (viii) Foreign currency. (ix) Fractional share. (x) Certain retirements. (xi) Short sales. (A) In general. (B) Short sale closed by delivery of a noncovered security. (C) Short sale obligation transferred to another account. (xii) Cross reference. (xiii) Short-term obligations issued on or after January 1, 2014. (xiv) Certain redemptions. (4) Examples. (5) Form of reporting for regulated futures contracts. (i) In general. (ii) Determination of profit or loss from foreign currency contracts. (iii) Examples. (6) Reporting periods and filing groups. (i) Reporting period. (A) In general. (B) Election. (ii) Filing group. (A) In general. (B) Election. (iii) Example. (7) Exception for certain sales of agricultural commodities and commodity certificates. (i) Agricultural commodities. (ii) Commodity Credit Corporation certificates. (iii) Sales involving designated warehouses. (iv) Definitions. (A) Agricultural commodity. (B) Spot sale. (C) Forward sale. (D) Designated warehouse. (8) Special coordination rules for certain information returns relating to digital assets. (i) Digital assets that constitute securities or commodities. (ii) Digital assets that constitute real estate. (iii) Digital assets that constitute contracts covered by section 1256(b). (iv) Examples. (d) Information required. (1) In general. (2) Transactional reporting. (i) Required information. (A) General rule for sales described in paragraph (a)(9)(i) of this section. (B) Required information for digital asset transactions. (C) Acquisition information for sales of certain digital assets. (D) Penalty relief for certain digital asset reporting. (ii) Specific identification of specified securities. (A) In general. (B) Specific identification of digital assets. (iii) Penalty relief for reporting information not subject to reporting. (A) Noncovered securities. (B) Digital assets sold before applicability date. (iv) Information from other parties and other accounts. (A) Transfer and issuer statements for securities. (B) Other information with respect to securities. (v) Failure to receive a complete transfer statement for securities. (vi) Reporting by other parties after a sale of securities. (A) Transfer statements. (B) Issuer statements. (C) Exception. (vii) Examples. (3) Sales between interest payment dates. (4) Sale date and time. (i) In general. (ii) Special rules for digital asset sales. (iii) Examples. (5) Gross proceeds. (i) In general. (ii) Sales of digital assets. (A) In general. (B) Consideration value not readily ascertainable. (C) Reasonable valuation method for digital assets. (D) Digital asset data aggregator. (iii) Digital asset transactions effected by digital asset payment processors. (iv) Allocation of digital asset transaction costs. (v) Examples. (6) Adjusted basis. (i) In general. (ii) Initial basis. (A) Cost basis for specified securities acquired for cash. (B) Basis of transferred securities. ( 1 ) In general. ( 2 ) Securities acquired by gift. (C) Digital assets acquired in exchange for property. ( 1 ) In general. ( 2 ) Allocation of digital asset transaction costs. (iii) Adjustments for wash sales. (A) In general. (B) Securities in different accounts. (C) Effect of election under section 475(f)(1). (D) Reporting at or near the time of sale. (iv) Certain adjustments not taken into account. (v) Average basis method adjustments. (vi) Regulated investment company and real estate investment trust adjustments. (vii) [Reserved] (viii) Examples. (ix) [Reserved] (x) Examples. (7) Long-term or short-term gain or loss. (i) In general. (ii) Adjustments for wash sales. (A) In general. (B) Securities in different accounts. (C) Effect of election under section 475(f)(1). (D) Reporting at or near the time of sale. (iii) Constructive sale and mark-to-market adjustments. (iv) Regulated investment company and real estate investment trust adjustments. (v) No adjustments for hedging transactions or offsetting positions. (8) Conversion into United States dollars of amounts paid or received in foreign currency. (i) Conversion rules. (ii) Effect of identification under§1.988-5(a), (b), or (c) when the taxpayer effects a sale and a hedge through the same broker. (iii) Example. (9) Coordination with the reporting rules for widely held fixed investment trusts under§1.671-5. (e) Reporting of barter exchanges. (1) Requirement of reporting. (2) Exchanges required to be reported. (i) In general. (ii) Exemption. (iii) Coordination rules for exchanges of digital assets made through barter exchanges. (f) Information required. (1) In general. (2) Transactional reporting. (i) In general. (ii) Exception for corporate member or client. (iii) Definition. (3) Exchange date. (4) Amount received. (5) Meaning of terms. (6) Reporting period. (g) Exempt foreign persons. (1) Brokers. (2) Barter exchanges. (3) Applicable rules. (i) Joint owners. (ii) Special rules for determining who the customer is. (iii) Place of effecting sale. (A) Sale outside the United States. (B) Sale inside the United States. (iv) Special rules where the customer is a foreign intermediary or certain U.S. branches. (4) Rules for sales of digital assets. (i) Definitions. (A) U.S. digital asset broker. (B) CFC digital asset broker. (C) Non-U.S. digital asset broker. (D) Conducting activities as a money services business. (E) Foreign kiosk. (ii) Rules for U.S. digital asset brokers. (A) Place of effecting sale. (B) Determination of foreign status. (iii) Rules for CFC digital asset brokers not conducting activities as MSBs. (A) Place of effecting sale. (B) Determination of foreign status. (iv) Rules for non-U.S. digital asset brokers not conducting activities as MSBs. (A) Sale outside the United States. (B) Sale treated as effected at an office inside the United States as a result of U.S. indicia. (C) Consequences of treatment as sale effected at an office inside the United States. (D) Type of documentation that may be obtained where there are U.S. indicia. ( 1 ) Collection of U.S. indicia other than U.S. place of birth. ( 2 ) Collection of information showing U.S. place of birth. (v) Rules for CFC digital asset brokers and non-U.S. digital asset brokers conducting activities as MSBs. (vi) Rules applicable to brokers that obtain or are required to obtain documentation for a customer and presumption rules. (A) In general. ( 1 ) Documentation of foreign status. ( 2 ) Presumption rules. ( 3 ) Grace period to collect valid documentation in the case of indicia of a foreign customer. ( 4 ) Blocked income. (B) Reliance on beneficial ownership withholding certificates to determine foreign status. (C) Reliance on documentary evidence to determine foreign status. (D) Joint owners. (E) Special rules for customer that is a foreign intermediary, a flow-through entity, or certain U.S. branches. ( 1 ) Foreign intermediaries. ( 2 ) Foreign flow-through entities. ( 3 ) U.S. branches that are not beneficial owners. (F) Transition rule for obtaining documentation to treat a customer as an exempt foreign person. (vii) Barter exchanges. (5) Examples. (6) Examples. (h) Identity of customer. (1) In general. (2) Examples. (i) [Reserved] (j) Time and place for filing; cross-references to penalty and magnetic media filing requirements. (k) Requirement and time for furnishing statement; cross-reference to penalty. (1) General requirements. (2) Time for furnishing statements. (3) Consolidated reporting. (4) Cross-reference to penalty. (l) Use of magnetic media. (m) Additional rules for option transactions. (1) In general. (2) Scope. (i) In general. (ii) Delayed effective date for certain options. (iii) Compensatory option. (3) Option subject to section 1256. (4) Option not subject to section 1256. (i) Physical settlement. (ii) Cash settlement. (iii) Rules for warrants and stock rights acquired in a section 305 distribution. (iv) Examples. (5) Multiple options documented in a single contract. (6) Determination of index status. (n) Reporting for debt instrument transactions. (1) In general. (2) Debt instruments subject to January 1, 2014, reporting. (i) In general. (ii) Exceptions. (iii) Remote or incidental. (iv) Penalty rate. (3) Debt instruments subject to January 1, 2016, reporting. (4) Holder elections. (i) Election to amortize bond premium. (ii) Election to currently include accrued market discount. (iii) Election to accrue market discount based on a constant yield. (iv) Election to treat all interest as OID. (v) Election to translate interest income and expense at the spot rate. (5) Broker assumptions and customer notice to brokers. (i) Broker assumptions if the customer does not notify the broker. (ii) Effect of customer notification of an election or revocation. (A) Election to amortize bond premium. (B) Other debt elections. (iii) Electronic notification. (6) Reporting of accrued market discount. (i) Sale. (ii) Current inclusion election. (7) Adjusted basis. (i) Original issue discount. (ii) Amortizable bond premium. (A) Taxable bond. (B) Tax-exempt bonds. (iii) Acquisition premium. (iv) Market discount. (v) Principal and certain other payments. (8) Accrual period. (9) Premium on convertible bond. (10) Effect of broker assumptions on customer. (11) Additional rules for certain holder elections. (i) In general. (A) Election to treat all interest as OID. (B) Election to accrue market discount based on a constant yield. (ii) [Reserved] (12) Certain debt instruments treated as noncovered securities. (i) In general. (ii) Effective/applicability date. (o) [Reserved] (p) Electronic filing. (q) Applicability date. (r) Cross-references. Par. 6. Section 1.6045-1 is amended by: 1. Revising paragraphs (a), (b), (c)(3)(i)(B)( 3 ), and (c)(3)(i)(C)( 2 ) introductory text; 2. In paragraph (c)(3)(xi)(A), removing the language "(d)(2)(i)" and adding the language "(d)(2)(i)(A)" in its place, wherever it appears; 3. Adding paragraph (c)(8); 4. Revising paragraphs (d)(2)(i) through (iii); 5. In paragraph (d)(2)(iv)(A), revising the heading and the first sentence; 6. Revising the heading in paragraph (d)(2)(iv)(B); 7. In paragraph (d)(2)(v), revising the heading and the first sentence; 8. Revising the heading of paragraph (d)(2)(vi); 9. In paragraph (d)(2)(vii), revising the introductory text and designating Examples 1 and 2 as paragraphs (d)(2)(vii)(A) and (B), respectively; 10. In newly designated paragraphs (d)(2)(vii)(A) and (B), redesignating the paragraphs in the first column as the paragraphs in the second column: 11. In newly redesignated paragraph (d)(2)(vii)(B)( 2 ), removing the language "(d)(2)(i)" and "(d)(2)(iii)" and adding the language "(d)(2)(i)(A)" and "(d)(2)(iii)(A)" in their places, respectively; 12. Adding paragraphs (d)(2)(vii)(C) through (F); 13. Revising paragraphs (d)(4) and (5); 14. In paragraph (d)(6)(i), revising the first and second sentences; 15. In paragraph (d)(6)(ii)(A), revising the heading and the first sentence and removing the language "on or after January 1, 2014," and adding the language "on or after January 1, 2014, or upon the vesting or exercise of a digital asset-based compensation arrangement granted or acquired on or after January 1, 2025," in its place; 16. Adding paragraph (d)(6)(ii)(C); 17. In paragraph (d)(6)(iii)(A), revising the first sentence; 18. Redesignating paragraph (d)(6)(vii) as paragraph (d)(6)(viii); 19. Adding new reserved paragraph (d)(6)(vii); 20. In newly redesignated paragraph (d)(6)(viii), designating Examples 1 through 4 as paragraphs (d)(6)(viii)(A) through (D), respectively; 21. In newly designated paragraphs (d)(6)(viii)(A) and (C), redesignating the paragraphs in the first column as the paragraphs in the second column: 22. In newly redesignated paragraph (d)(6)(viii)(B), removing the language " Example 1 " and "(d)(2)(iii)" and adding the language "paragraph (d)(6)(viii)(A)( 1 ) of this section (the facts in Example 1 )" and "(d)(2)(iii)(A)" in their places, respectively; 23. Adding reserved paragraph (d)(6)(ix) and paragraph (d)(6)(x); 24. In paragraph (d)(7)(ii)(A), removing the language "covered securities" and adding the language "covered securities described in paragraphs (a)(15)(i)(A) through (G) of this section" in its place; 25. Adding paragraph (e)(2)(iii); 26. Revising paragraph (g)(1) introductory text; 27. In the first sentence of paragraphs (g)(1)(i) and (iii), removing the language "With respect to a sale" and adding the language "With respect to a sale as defined in paragraph (a)(9)(i) of this section (relating to sales other than sales of digital assets) that is" in its place; 28. Revising paragraph (g)(2); 29. In paragraph (g)(3)(ii), removing the language "this paragraph (g)" and adding the language "paragraph (g)(1) of this section" in its place; 30. In paragraph (g)(3)(iii)(A), revising the first sentence; 31. Redesignating paragraph (g)(4) as paragraph (g)(5) and adding a new paragraph (g)(4); 32. In newly redesignated paragraph (g)(5): i. Removing the language "this paragraph (g)" in the introductory text and adding the language "paragraphs (g)(1) through (3) of this section" in its place; and ii. Designating Examples 1 through 8 as paragraphs (g)(5)(i) through (viii), respectively; 33. In newly designated paragraph (g)(5)(ii), removing " Example 1 " and adding "paragraph (g)(5)(i) of this section (the facts in Example 1 )" in its place; 34. In newly designated paragraph (g)(5)(iii), removing " Example 2 " and adding "paragraph (g)(5)(ii) of this section (the facts in Example 2 )" in its place; 35. In newly designated paragraph (g)(5)(iv), removing " Example 1 " and adding "paragraph (g)(5)(i) of this section (the facts in Example 1 )" in its place; 36. In newly designated paragraphs (g)(5)(v) and (vi), removing " Example 4 " and adding "paragraph (g)(5)(iv) of this section (the facts in Example 4 )" in its place; 37. In newly designated paragraphs (g)(5)(vii) and (viii), redesignating the paragraphs in the first column as the paragraphs in the second column: 38. In newly designated paragraph (g)(5)(viii) introductory text, removing " Example 7 " and adding "paragraph (g)(5)(vii) of this section (the facts in Example 7 )" in its place; 39. Adding paragraph (g)(6); 40. Revising paragraphs (j) and (m)(1); 41. Adding paragraph (m)(2)(ii)(C); 42. In paragraph (n)(6)(i), removing the language "(a)(9)" and adding the language "(a)(9)(i)" in its place; 43. Revising paragraph (q); and 44. Adding paragraph (r). The revisions and additions read as follows:§1.6045-1 Returns of information of brokers and barter exchanges. (a) Definitions. The following definitions apply for purposes of this section and§§1.6045-2 and 1.6045-4. (1) Broker. The term broker means any person (other than a person who is required to report a transaction under section 6043 of the Code), U.S. or foreign, that, in the ordinary course of a trade or business during the calendar year, stands ready to effect sales to be made by others. A broker includes an obligor that regularly issues and retires its own debt obligations, a corporation that regularly redeems its own stock, or a person that regularly offers to redeem digital assets that were created or issued by that person. A broker also includes a real estate reporting person under§1.6045-4(e) who (without regard to any exceptions provided by§1.6045-4(c) and (d)) would be required to make an information return with respect to a real estate transaction under§1.6045-4(a). However, with respect to a sale (including a redemption or retirement) effected at an office outside the United States under paragraph (g)(3)(iii) of this section (relating to sales other than sales of digital assets) or under paragraph (g)(4) of this section (relating to sales of digital assets), a broker includes only a person described as a U.S. payor or U.S. middleman in§1.6049-5(c)(5). In addition, a broker does not include an international organization described in§1.6049-4(c)(1)(ii)(G) that redeems or retires an obligation of which it is the issuer. (2) Customer - (i) In general. The term customer means, with respect to a sale effected by a broker, the person (other than such broker) that makes the sale, if the broker acts as-- (A) An agent for such person in the sale; (B) A principal in the sale; (C) The participant in the sale responsible for paying to such person or crediting to such person's account the gross proceeds on the sale; or (D) A digital asset middleman, as defined in paragraph (a)(21) of this section, that effects the sale of a digital asset for such person. (ii) Special rules for payment transactions involving digital assets. In addition to the persons defined as customers in paragraph (a)(2)(i) of this section, the term customer includes: (A) The person who transfers, or is treated under paragraph (a)(22)(ii) of this section as transferring, digital assets to a digital asset payment processor in a sale described in paragraph (a)(9)(ii)(D) of this section; (B) The person who transfers digital assets or directs the transfer of digital assets-- ( 1 ) In exchange for property of a type the later sale of which, if effected by such broker, would constitute a sale of that property under paragraph (a)(9) of this section; or ( 2 ) In exchange for the acquisition of services performed by such broker; and (C) In the case of a real estate reporting person under§1.6045-4(e) with respect to a real estate transaction as defined in§1.6045-4(b)(1), the person who transfers digital assets or directs the transfer of digital assets to the transferor of real estate (or the seller's nominee or agent) to acquire such real estate. (3) Security. The term security means: (i) A share of stock in a corporation (foreign or domestic); (ii) An interest in a trust; (iii) An interest in a partnership; (iv) A debt obligation; (v) An interest in or right to purchase any of the foregoing in connection with the issuance thereof from the issuer or an agent of the issuer or from an underwriter that purchases any of the foregoing from the issuer; (vi) An interest in a security described in paragraph (a)(3)(i) or (iv) of this section (but not including executory contracts that require delivery of such type of security); (vii) An option described in paragraph (m)(2) of this section; or (viii) A securities futures contract. (4) Barter exchange. The term barter exchange means any person with members or clients that contract either with each other or with such person to trade or barter property or services either directly or through such person. The term does not include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis. (5) Commodity. The term commodity means: (i) Any type of personal property or an interest therein (other than securities as defined in paragraph (a)(3) of this section) the trading of regulated futures contracts in which has been approved by or has been certified to the Commodity Futures Trading Commission ( see 17 CFR 40.3 or 40.2); (ii) Lead, palm oil, rapeseed, tea, tin, or an interest in any of the foregoing; or (iii) Any other personal property or an interest therein that is of a type the Secretary determines is to be treated as a commodity under this section, from and after the date specified in a notice of such determination published in the Federal Register. (6) Regulated futures contract. The term regulated futures contract means a regulated futures contract within the meaning of section 1256(b) of the Code. (7) Forward contract. The term forward contract means: (i) An executory contract that requires delivery of a commodity in exchange for cash and which contract is not a regulated futures contract; (ii) An executory contract that requires delivery of personal property or an interest therein in exchange for cash, or a cash settlement contract, if such executory contract or cash settlement contract is of a type the Secretary determines is to be treated as a forward contract under this section, from and after the date specified in a notice of such determination published in the Federal Register; or (iii) An executory contract that-- (A) Requires delivery of a digital asset in exchange for cash, stored-value cards, a different digital asset, or any other property or services described in paragraph (a)(9)(ii)(B) or (C) of this section; and (B) Is not a regulated futures contract. (8) Closing transaction. The term closing transaction means a lapse, expiration, settlement, abandonment, or other termination of a position. For purposes of the preceding sentence, a position includes a right or an obligation under a forward contract, a regulated futures contract, a securities futures contract, or an option. (9) Sale - (i) In general. The term sale means any disposition of securities, commodities, options, regulated futures contracts, securities futures contracts, or forward contracts and includes redemptions of stock, retirements of debt instruments (including a partial retirement attributable to a principal payment received on or after January 1, 2014), and enterings into short sales, but only to the extent any of these actions are conducted for cash. In the case of an option, a regulated futures contract, a securities futures contract, or a forward contract, a sale under this paragraph (a)(9)(i) includes any closing transaction. When a closing transaction for a contract described in section 1256(b)(1)(A) involves making or taking delivery, there are two sales, one resulting in profit or loss on the contract, and a separate sale on the delivery. When a closing transaction for a contract described in section 988(c)(5) of the Code involves making delivery, there are two sales, one resulting in profit or loss on the contract, and a separate sale on the delivery. For purposes of the preceding sentence, a broker may assume that any customer's functional currency is the U.S. dollar. When a closing transaction in a forward contract involves making or taking delivery, the broker may treat the delivery as a sale without separating the profit or loss on the contract from the profit or loss on the delivery, except that taking delivery for U.S. dollars is not a sale. The term sale does not include entering into a contract that requires delivery of personal property or an interest therein, the initial grant or purchase of an option, or the exercise of a purchased call option for physical delivery (except for a contract described in section 988(c)(5)). For purposes of this section only, a constructive sale under section 1259 and a mark to fair market value under section 475 or 1296 are not sales. (ii) Sales with respect to digital assets - (A) In general. In addition to the specific rules provided in paragraphs (a)(9)(ii)(B) through (D) of this section, the term sale also includes: ( 1 ) Any disposition of a digital asset in exchange for cash or stored-value cards; ( 2 ) Any disposition of a digital asset in exchange for a different digital asset; and ( 3 ) The delivery of a digital asset pursuant to the settlement of a forward contract, option, regulated futures contract, any similar instrument, or any other executory contract which would be treated as a sale of a digital asset under this paragraph (a)(9)(ii) if the contract had not been executory. For transactions involving a contract described in the previous sentence, see paragraph (a)(9)(i) of this section for rules applicable to determining whether a sale has occurred or how to report the making or taking delivery of the underlying asset. (B) Dispositions of digital assets for certain property. Solely in the case of a broker that is a real estate reporting person defined in§1.6045-4(e) with respect to real property or is in the business of effecting sales of property for others, which sales when effected would constitute sales under paragraph (a)(9)(i) of this section, the term sale also includes any disposition of a digital asset in exchange for such property. (C) Dispositions of digital assets for certain services. The term sale also includes any disposition of a digital asset in consideration for any services provided by a broker that is a real estate reporting person defined in§1.6045-4(e) with respect to real property or is in the business of effecting sales of property described in paragraph (a)(9)(i), paragraphs (a)(9)(ii)(A) and (B), or paragraph (a)(9)(ii)(D) of this section. (D) Special rule for sales effected by digital asset payment processors. In the case of a digital asset payment processor as defined in paragraph (a)(22) of this section, the term sale also includes the payment by a party of a digital asset to a digital asset payment processor in return for the payment of cash or a different digital asset to a second party, or the treatment under paragraph (a)(22)(ii) of this section of the digital asset as paid by a party to the digital asset payment processor in exchange for cash or a different digital asset paid to a second party. In the case of a digital asset payment processor defined in either paragraph (a)(22)(i)(B) or (C) of this section, a sale of a digital asset includes any payment by a party of a digital asset to that digital asset payment processor, or to a second party pursuant to instructions provided by that digital asset payment processor or its agent in exchange for goods or services provided to the first party. (10) Effect - (i) In general. The term effect means, with respect to a sale, to act as-- (A) An agent for a party in the sale wherein the nature of the agency is such that the agent ordinarily would know the gross proceeds from the sale; (B) In the case of a broker described in the second sentence of paragraph (a)(1) of this section, a person that is an obligor retiring its own debt obligations, a corporation redeeming its own stock, or an issuer of digital assets redeeming those digital assets; (C) A principal that is a dealer in such sale; or (D) A digital asset middleman as defined in paragraph (a)(21) of this section for a party in a sale of digital assets. (ii) Actions relating to certain options and forward contracts. For purposes of paragraph (a)(10)(i) of this section, acting as an agent, principal or digital asset middleman with respect to grants or purchases of options, exercises of call options, or enterings into contracts that require delivery of personal property or an interest therein is not of itself effecting a sale. A broker that has on its books a forward contract under which delivery is made effects such delivery. (11) Foreign currency. The term foreign currency means currency of a foreign country. (12) Cash. The term cash means United States dollars or any convertible foreign currency that is issued by a government or a central bank, whether in physical or digital form. (13) Person. The term person includes any governmental unit and any agency or instrumentality thereof. (14) Specified security. The term specified security means: (i) Any share of stock (or any interest treated as stock, including, for example, an American Depositary Receipt) in an entity organized as, or treated for Federal tax purposes as, a corporation, either foreign or domestic (provided that, solely for purposes of this paragraph (a)(14)(i), a security classified as stock by the issuer is treated as stock, and if the issuer has not classified the security, the security is not treated as stock unless the broker knows that the security is reasonably classified as stock under general Federal tax principles); (ii) Any debt instrument described in paragraph (a)(17) of this section, other than a debt instrument subject to section 1272(a)(6) of the Code (certain interests in or mortgages held by a real estate mortgage investment conduit (REMIC), certain other debt instruments with payments subject to acceleration, and pools of debt instruments the yield on which may be affected by prepayments) or a short-term obligation described in section 1272(a)(2)(C); (iii) Any option described in paragraph (m)(2) of this section; (iv) Any securities futures contract; (v) Any digital asset as defined in paragraph (a)(19) of this section; or (vi) Any forward contract described in paragraph (a)(7)(iii) of this section requiring the delivery of a digital asset. (15) Covered security. The term covered security means a specified security described in this paragraph (a)(15). (i) In general. Except as provided in paragraph (a)(15)(iv) of this section, the following specified securities are covered securities: (A) A specified security described in paragraph (a)(14)(i) of this section acquired for cash in an account on or after January 1, 2011, except stock for which the average basis method is available under§1.1012-1(e). (B) Stock for which the average basis method is available under§1.1012-1(e) acquired for cash in an account on or after January 1, 2012. (C) A specified security described in paragraphs (a)(14)(ii) and (n)(2)(i) of this section (not including the debt instruments described in paragraph (n)(2)(ii) of this section) acquired for cash in an account on or after January 1, 2014. (D) A specified security described in paragraphs (a)(14)(ii) and (n)(3) of this section acquired for cash in an account on or after January 1, 2016. (E) Except for an option described in paragraph (m)(2)(ii)(C) of this section (relating to an option on a digital asset), an option described in paragraph (a)(14)(iii) of this section granted or acquired for cash in an account on or after January 1, 2014. (F) A securities futures contract described in paragraph (a)(14)(iv) of this section entered into in an account on or after January 1, 2014. (G) A specified security transferred to an account if the broker or other custodian of the account receives a transfer statement (as described in§1.6045A-1) reporting the security as a covered security. (H) An option on a digital asset described in paragraphs (a)(14)(iii) and (m)(2)(ii)(C) of this section (other than an option described in paragraph (a)(14)(v) of this section) granted or acquired in an account on or after January 1, 2023. (I) [Reserved] (J) A specified security described in paragraph (a)(14)(v) of this section that is acquired in a customer's account by a broker providing hosted wallet services on or after January 1, 2023, in exchange for cash, stored-value cards, different digital assets, or any other property or services described in paragraph (a)(9)(ii)(B) or (C) of this section, respectively. (K) A specified security described in paragraph (a)(14)(vi) of this section, not described in paragraph (a)(14)(v) of this section, that is entered into or acquired in an account on or after January 1, 2023. (ii) Acquired in an account. For purposes of this paragraph (a)(15), a security is considered acquired in a customer's account at a broker or custodian if the security is acquired by the customer's broker or custodian or acquired by another broker and delivered to the customer's broker or custodian. Acquiring a security in an account includes granting an option and entering into a forward contract or short sale. (iii) Corporate actions and other events. For purposes of this paragraph (a)(15), a security acquired due to a stock dividend, stock split, reorganization, redemption, stock conversion, recapitalization, corporate division, or other similar action is considered acquired for cash in an account. (iv) Exceptions. Notwithstanding paragraph (a)(15)(i) of this section, the following specified securities are not covered securities: (A) Stock acquired in 2011 that is transferred to a dividend reinvestment plan (as described in§1.1012-1(e)(6)) in 2011. However, a covered security acquired in 2011 that is transferred to a dividend reinvestment plan after 2011 remains a covered security. (B) A specified security, other than a specified security described in paragraph (a)(14)(v) or (vi) of this section, acquired through an event described in paragraph (a)(15)(iii) of this section if the basis of the acquired security is determined from the basis of a noncovered security. (C) A specified security that is excepted at the time of its acquisition from reporting under paragraph (c)(3) or (g) of this section. However, a broker cannot treat a specified security as acquired by an exempt foreign person under paragraph (g)(1)(i) or paragraphs (g)(4)(ii) through (v) of this section at the time of acquisition if, at that time, the broker knows or should have known (including by reason of information that the broker is required to collect under section 1471 or 1472 of the Code) that the customer is not a foreign person. (D) A security for which reporting under this section is required by§1.6049-5(d)(3)(ii) (certain securities owned by a foreign intermediary or flow-through entity). (E) Digital assets in a sale required to be reported under paragraph (g)(4)(vi)(E) of this section by a broker making a payment of gross proceeds from the sale to a foreign intermediary, flow-through entity, or U.S. branch. (16) Noncovered security. The term noncovered security means any specified security that is not a covered security. (17) Debt instrument, bond, debt obligation, and obligation. For purposes of this section, the terms debt instrument, bond, debt obligation, and obligation mean a debt instrument as defined in§1.1275-1(d) and any instrument or position that is treated as a debt instrument under a specific provision of the Internal Revenue Code (Code) (for example, a regular interest in a REMIC as defined in section 860G(a)(1) and§1.860G-1). Solely for purposes of this section, a security classified as debt by the issuer is treated as debt. If the issuer has not classified the security, the security is not treated as debt unless the broker knows that the security is reasonably classified as debt under general Federal tax principles or that the instrument or position is treated as a debt instrument under a specific provision of the Code. (18) Securities futures contract. For purposes of this section, the term securities futures contract means a contract described in section 1234B(c) whose underlying asset is described in paragraph (a)(14)(i) of this section and which is entered into on or after January 1, 2014. (19) Digital asset - (i) In general. For purposes of this section, the term digital asset means any digital representation of value that is recorded on a cryptographically secured distributed ledger (or any similar technology), without regard to whether each individual transaction involving that digital asset is actually recorded on that ledger, and that is not cash. (ii) No inference. Nothing in this paragraph (a)(19) or elsewhere in this section may be construed to mean that a digital asset is or is not properly classified as a security, commodity, option, securities futures contract, regulated futures contract, or forward contract for any other purpose of the Code. (20) Digital asset address. For purposes of this section, the term digital asset address means the unique set of alphanumeric characters, in some cases referred to as a quick response or QR Code, that is generated by the wallet into which the digital asset will be transferred. (21) Digital asset middleman - (i) In general. The term digital asset middleman means any person who provides a facilitative service as described in paragraph (a)(21)(iii) of this section with respect to a sale of digital assets wherein the nature of the service arrangement is such that the person ordinarily would know or be in a position to know the identity of the party that makes the sale and the nature of the transaction potentially giving rise to gross proceeds from the sale. (ii) Position to know - (A) Identity. A person ordinarily would know or be in a position to know the identity of the party that makes the sale if that person maintains sufficient control or influence over the facilitative services provided to have the ability to set or change the terms under which its services are provided to request that the party making the sale provide that party's name, address, and taxpayer identification number upon request. For purposes of the previous sentence, a person with the ability to change the fees charged for facilitative services is an example of a person that maintains sufficient control or influence over provided facilitative services to have the ability to set or change the terms under which its services are provided to request that the party making the sale provide that party's name, address, and taxpayer identification number upon request. (B) Nature of the transaction. A person ordinarily would know or be in a position to know the nature of the transaction potentially giving rise to gross proceeds from a sale if that person maintains sufficient control or influence over the facilitative services provided to have the ability to determine whether and the extent to which the transfer of digital assets involved in a transaction gives rise to gross proceeds, including by reference to the consideration that the person receives or pursuant to the operations of or modifications to an automatically executing contract or protocol to which the person provides access. For purposes of the previous sentence, a person with the ability to change the fees charged for facilitative services is an example of a person that maintains sufficient control or influence over provided facilitative services to have the ability to determine whether and the extent to which the transfer of digital assets involved in a transaction gives rise to gross proceeds. (iii) Facilitative service - (A) In general. A facilitative service includes the provision of a service that directly or indirectly effectuates a sale of digital assets, such as providing a party in the sale with access to an automatically executing contract or protocol, providing access to digital asset trading platforms, providing an automated market maker system, providing order matching services, providing market making functions, providing services to discover the most competitive buy and sell prices, or providing escrow or escrow-like services to ensure both parties to an exchange act in accordance with their obligations. A facilitative service does not include validating distributed ledger transactions (whether through proof-of-work, proof-of-stake, or any other similar consensus mechanism) without providing other functions or services if provided by a person solely engaged in the business of providing such validating services. A facilitative service also does not include the selling of hardware or the licensing of software for which the sole function is to permit persons to control private keys which are used for accessing digital assets on a distributed ledger if such functions are conducted by a person solely engaged in the business of selling such hardware or licensing such software. Software that provides users with direct access to trading platforms from the wallet platform is not an example of software with the sole function of providing users with the ability to control private keys to send and receive digital assets. (B) Special rule involving sales of digital assets under paragraphs (a)(9)(ii)(B) and (C) of this section. A facilitative service includes the acceptance or processing of digital assets as payment for property of a type which when sold would constitute a sale under paragraph (a)(9)(i) of this section by a broker that is in the business of effecting sales of such property. A facilitative service also includes any service performed by a real estate reporting person as defined in§1.6045-4(e) with respect to a real estate transaction in which digital assets are paid by the real estate buyer in full or partial consideration for the real estate. Finally, a facilitative service includes the acceptance or processing of digital assets as payment for any service provided by a broker described in paragraph (a)(1) of this section determined without regard to any sales under paragraph (a)(9)(ii)(C) of this section that are effected by such broker. (22) Digital asset payment processor - (i) In general. For purposes of this section, the term digital asset payment processor means a person who in the ordinary course of a trade or business stands ready to effect sales of digital assets as defined in paragraph (a)(9)(ii)(D) of this section by: (A) Regularly facilitating payments from one party to a second party by receiving digital assets from the first party and exchanging those digital assets into cash or different digital assets paid to the second party; (B) Acting as a third party settlement organization (as defined in§1.6050W-1(c)(2)) that facilitates payments, either by making or submitting instructions to make payments, using one or more digital assets in settlement of a reportable payment transaction under§1.6050W-1(a)(2), without regard to whether the third party settlement organization contracts with an agent to make, or to submit the instructions to make, such payments; or (C) Acting as a payment card issuer that facilitates payments, either by making or submitting the instruction to make payments, in one or more digital assets to a merchant acquiring entity as defined under§1.6050W-1(b)(2) in a transaction that is associated with a payment made by the merchant acquiring entity, or its agent, in settlement of a reportable payment transaction under§1.6050W-1(a)(2). (ii) Special rule for digital asset transfers pursuant to paragraph (a)(22)(i)(A) of this section. For purposes of paragraph (a)(22)(i)(A) of this section, the transfer of a digital asset from one party to a second party, such as a vendor of goods or services, pursuant to a processor agreement between that second person and a payment processor must be treated as if the digital asset was paid by the first party to the payment processor in exchange for cash or a different digital asset paid to the second party. (iii) Processor agreement. For purposes of paragraph (a)(22)(ii) of this section, the term processor agreement means an agreement between a payment processor and a second party, such as a vendor of goods or services, that in order to facilitate one party's payment to that second party provides for the temporary fixing of the exchange rate to be applied to the digital asset received by that second party from the first party as payment in a transaction. (23) Held in a wallet or account. For purposes of this section, a digital asset is considered held in a wallet or account if the wallet, whether hosted or unhosted, or account stores the private keys necessary to transfer control of the digital asset. A digital asset associated with a digital asset address that is generated by a wallet, and a digital asset associated with a sub-ledger account of a wallet, are similarly considered held in a wallet. References to variations of held in a wallet or account, such as held at a broker, held with a broker, held by the user of a wallet, held on behalf of another, acquired in a wallet or account, or transferred into a wallet or account, each have a similar meaning. (24) Hosted wallet. A hosted wallet is a custodial service provided to a user that electronically stores the private keys to digital assets held on behalf of others. (25) Stored-value card. For purposes of this section, the term stored-value card means a card, including any gift card, with a prepaid value in U.S. dollars, any convertible foreign currency, or any digital asset, without regard to whether the card is in physical or digital form. (26) Transaction identification. For purposes of this section, the term transaction identification, or transaction ID, means the unique set of alphanumeric identification characters that a digital asset distributed ledger associates with a transaction involving the transfer of a digital asset from one digital asset address to another. A transaction ID includes terms such as a "Txid" or "transaction hash." (27) Unhosted wallet. An unhosted wallet is a non-custodial means of storing, electronically or otherwise, a user's private keys to digital assets held by or for the user. Unhosted wallets, sometimes referred to as self-hosted or self-custodial wallets, can be provided through software that is connected to the Internet (a hot wallet) or through hardware or physical media that is disconnected from the Internet (a cold wallet). (b) Examples. The following examples illustrate the definitions in paragraph (a) of this section. (1) Example 1. The following persons generally are brokers within the meaning of paragraph (a)(1) of this section-- (i) A mutual fund, an underwriter of the mutual fund, or an agent for the mutual fund, any of which stands ready to redeem or repurchase shares in such mutual fund. (ii) A professional custodian (such as a bank) that regularly arranges sales for custodial accounts pursuant to instructions from the owner of the property. (iii) A depositary trust or other person who regularly acts as an escrow agent in corporate acquisitions, if the nature of the activities of the agent is such that the agent ordinarily would know the gross proceeds from sales. (iv) A stock transfer agent for a corporation, which agent records transfers of stock in such corporation, if the nature of the activities of the agent is such that the agent ordinarily would know the gross proceeds from sales. (v) A dividend reinvestment agent for a corporation that stands ready to purchase or redeem shares. (vi) A person who in the ordinary course of a trade or business provides users with hosted wallet services to the extent such person stands ready to effect the sale of digital assets on behalf of its customers, including by acting as an agent for a party in the sale wherein the nature of the agency is as described in paragraph (a)(10)(i)(A) of this section or as a digital asset middleman as defined in paragraph (a)(21) of this section. (vii) A digital asset payment processor as described in paragraph (a)(22) of this section. (viii) A person who in the ordinary course of a trade or business either owns or operates one or more physical electronic terminals or kiosks that stand ready to act on behalf of other persons to effect the sale of digital assets for cash, stored-value cards, or different digital assets, regardless of whether the other person is the disposer or the acquirer of the digital assets in such an exchange. (ix) A person who in the ordinary course of a trade or business operates a non-custodial trading platform or website that stands ready to effect sales of digital assets for others by allowing persons to exchange digital assets directly with other persons for cash, stored-value cards, or different digital assets, including by providing access to automatically executing contracts, protocols, or other software programs that automatically effect such sales. (x) A person who in the ordinary course of a trade or business stands ready at a physical location to effect sales of digital assets on behalf of others. (xi) A person who sells or licenses software to unhosted wallet users if that person as part of its trade or business also offers services to such wallet users that effect sales of digital assets, provided the person would ordinarily know or be in a position to know the identity of the wallet users that effect the sales and the nature of the transactions potentially giving rise to gross proceeds from the sales as described in paragraphs (a)(21)(ii)(A) and (B) of this section. (2) Example 2. The following persons are not brokers within the meaning of paragraph (a)(1) of this section in the absence of additional facts that indicate the person is a broker-- (i) A stock transfer agent for a corporation, which agent daily records transfers of stock in such corporation, if the nature of the activities of the agent is such that the agent ordinarily would not know the gross proceeds from sales. (ii) A person (such as a stock exchange) that merely provides facilities in which others effect sales. (iii) An escrow agent or nominee if such agent is not in the ordinary course of a trade or business. (iv) An escrow agent, otherwise a broker, which agent effects no sales other than such transactions as are incidental to the purpose of the escrow (such as sales to collect on collateral). (v) A floor broker on a commodities exchange, which broker maintains no records with respect to the terms of sales. (vi) A corporation that issues and retires long-term debt on an irregular basis. (vii) A clearing organization. (viii) A merchant who is not otherwise required to make a return of information under section 6045 of the Code and who regularly sells goods or other property (other than digital assets) or services in return for digital assets. (ix) A person solely engaged in the business of validating distributed ledger transactions, through proof-of-work, proof-of-stake, or any other similar consensus mechanism, without providing other functions or services. (x) A person solely engaged in the business of selling hardware or licensing software, the sole function of which is to permit a person to control private keys which are used for accessing digital assets on a distributed ledger, without providing other functions or services. (3) Example 3: Barter exchange. A, B, and C belong to a carpool in which they commute to and from work. Every third day, each member of the carpool provides transportation for the other two members. Because the carpool arrangement provides solely for the informal exchange of similar services on a noncommercial basis, the carpool is not a barter exchange within the meaning of paragraph (a)(4) of this section. (4) Example 4: Barter exchange. X is an organization whose members include retail merchants, wholesale merchants, and persons in the trade or business of performing services. X's members exchange property and services among themselves using credits on the books of X as a medium of exchange. Each exchange through X is reflected on the books of X by crediting the account of the member providing property or services and debiting the account of the member receiving such property or services. X also provides information to its members concerning property and services available for exchange through X. X charges its members a commission on each transaction in which credits on its books are used as a medium of exchange. X is a barter exchange within the meaning of paragraph (a)(4) of this section. (5) Example 5: Commodity, forward contract. A warehouse receipt is an interest in personal property for purposes of paragraph (a) of this section. Consequently, a warehouse receipt for a quantity of lead is a commodity under paragraph (a)(5)(ii) of this section. Similarly, an executory contract that requires delivery of a warehouse receipt for a quantity of lead is a forward contract under paragraph (a)(7)(ii) of this section. (6) Example 6: Customer. The only customers of a depository trust acting as an escrow agent in corporate acquisitions, which trust is a broker, are shareholders to whom the trust makes payments or shareholders for whom the trust is acting as an agent. (7) Example 7: Customer. The only customers of a stock transfer agent, which agent is a broker, are shareholders to whom the agent makes payments or shareholders for whom the agent is acting as an agent. (8) Example 8: Customer. D, an individual not otherwise exempt from reporting, is the holder of an obligation issued by P, a corporation. R, a broker, acting as an agent for P, retires such obligation held by D. Such obligor payments from R represent obligor payments by P. D, the person to whom the gross proceeds are paid or credited by R, is the customer of R. (9) Example 9: Covered security. E, an individual not otherwise exempt from reporting, maintains an account with S, a broker. On June 1, 2012, E instructs S to purchase stock that is a specified security for cash. S places an order to purchase the stock with T, another broker. E does not maintain an account with T. T executes the purchase. Custody of the purchased stock is transferred to E's account at S. Under paragraph (a)(15)(ii) of this section, the stock is considered acquired for cash in E's account at S. Because the stock is acquired on or after January 1, 2012, under paragraph (a)(15)(i) of this section, it is a covered security. (10) Example 10: Covered security. F, an individual not otherwise exempt from reporting, is granted 100 shares of stock in F's employer by F's employer. Because F does not acquire the stock for cash or through a transfer to an account with a transfer statement (as described in§1.6045A-1), under paragraph (a)(15) of this section, the stock is not a covered security. (11) Example 11: Covered security. G, an individual not otherwise exempt from reporting, owns 400 shares of stock in Q, a corporation, in an account with U, a broker. Of the 400 shares, 100 are covered securities and 300 are noncovered securities. Q takes a corporate action to split its stock in a 2-for-1 split. After the stock split, G owns 800 shares of stock. Because the adjusted basis of 600 of the 800 shares that G owns is determined from the basis of noncovered securities, under paragraphs (a)(15)(iii) and (a)(15)(iv)(B) of this section, these 600 shares are not covered securities and the remaining 200 shares are covered securities. (12) Example 12: Digital asset payment processor, sale, and customer --(i) Facts. Company Z is an online retailer of merchandise that accepts digital asset DE as a form of payment. To facilitate the use of digital asset DE as payment, Z contracts with CPP, an unrelated party that is in the business of facilitating payments using digital assets. Under Z's contractual agreement with CPP, when purchasers of merchandise initiate payment on Z's website using DE, they are directed to CPP's website to complete the payment part of the transaction. Customer R seeks to purchase merchandise from Z that is priced at $15 (or 15 units of DE). After R initiates purchase, R is directed to CPP's website where R is directed to transfer 15 units of DE to a digital asset address controlled by CPP. CPP then pays $15 in cash to Z, who in turn processes R's merchandise order. (ii) Analysis. CPP is a digital asset payment processor within the meaning of paragraph (a)(22)(i)(A) of this section because CPP, in the ordinary course of its business, effects payments from customers to retailers by receiving digital assets from customers in exchange for cash paid to retailers. CPP is also a broker under paragraph (a)(1) of this section because CPP stands ready to effect sales of digital assets to be made by others. R's payment of 15 units of DE to CPP in return for the payment of $15 cash to Z is a sale of digital assets under paragraph (a)(9)(ii)(D) of this section. Additionally, because R transferred digital assets to CPP in a sale described in paragraph (a)(9)(ii)(D) of this section, R is CPP's customer under paragraph (a)(2)(ii)(A) of this section. Finally, CPP's payment to Z may also be a third party network transaction under§1.6050W-1(c) subject to reporting under§1.6050W-1(a) if CPP is a third party settlement organization under the definition in§1.6050W-1(c)(2). (13) Example 13: Digital asset payment processor, sale, and customer --(i) Facts. The facts are the same as in paragraph (b)(12)(i) of this section (the facts in Example 12 ), except that under Z's contractual arrangement with CPP, when Z's purchasers seek to make payments using DE and are directed to CPP's website, they are instructed to transfer their units of DE to a digital asset address owned by Z pursuant to a temporarily fixed exchange rate of DE for cash, which CPP communicates to Z and which Z passes along to its purchasers. Additionally, the purchasers are required to provide CPP with the information CPP will need, such as name, address, and taxpayer identification number, to report the purchaser's sale of DE. To effect the purchase of Z's merchandise, R transfers 15 units of DE directly to Z's wallet. CPP provides similar services to other retail purchasers and merchants. (ii) Analysis. CPP is a digital asset payment processor within the meaning of paragraph (a)(22) of this section because CPP, in the ordinary course of its business, effects payments from customers (Z's purchasers) in exchange for digital assets paid to a second person (Z) pursuant to a processor agreement that provides for the temporary fixing of the exchange rate to be applied to the digital assets received by the retailer (Z). Such transactions are treated for purposes of paragraph (a)(22)(i) of this section as if R paid the digital assets to CPP in exchange for cash or different digital assets. R's payment of digital assets directly to Z pursuant to a temporarily fixed exchange rate of DE for cash is a sale of the digital assets within the meaning of paragraph (a)(9)(ii)(D) of this section because the transaction is treated for purposes of paragraph (a)(22)(i) of this section as if R paid the digital assets to CPP in exchange for cash or different digital assets. R's payment of digital assets directly to Z pursuant to the temporarily fixed exchange rate of DE for cash is a sale without regard to whether Z, after the payment is made, decides to exchange the digital assets pursuant to that fixed exchange rate. R is CPP's customer under paragraph (a)(2)(ii)(A) of this section because R is the person who is treated as transferring digital assets to a digital asset payment processor in a sale as defined in paragraph (a)(9)(ii)(D) of this section. Finally, the transfer of DE units by R to Z pursuant to CPP's instructions may also be a third party network transaction under§1.6050W-1(c) subject to reporting under§1.6050W-1(a) if CPP is a third party settlement organization under the definition in§1.6050W-1(c)(2). (14) Example 14: Third party settlement organization as digital asset payment processor --(i) Facts. The facts are the same as in paragraph (b)(12)(i) of this section (the facts in Example 12 ) except that CPP is also a third party settlement organization, as defined in§1.6050W-1(c)(2), with respect to the payments it makes (or submits instructions for others to make) to Z. To process R's payment and settle the transaction, CPP submits instructions to R to transfer 15 units of digital asset DE to a digital asset address held in a wallet owned by Z. Z, in turn, processes R's merchandise order. Z does not have any arrangement with CPP to temporarily fix the exchange rate of DE for cash. (ii) Analysis. CPP is a digital asset payment processor as defined in paragraph (a)(22)(i)(B) of this section because it is a third party settlement organization that submitted an instruction to R to make payment to Z in settlement of a reportable payment transaction under§1.6050W-1(a)(2) using digital asset DE. Accordingly, CPP is a broker under paragraph (a)(1) of this section, and the transaction is a sale of R's 15 units of digital asset DE under paragraph (a)(9)(ii)(D) of this section. (15) Example 15: Broker. The facts are the same as in paragraph (b)(12)(i) of this section (the facts in Example 12 ), except that Z accepts digital asset DE from its purchasers directly without the services of CPP or any other digital asset payment processor. To pay for the merchandise R purchases on Z's website, R is directed by Z to transfer 15 units of DE directly to Z's digital asset address. Z is not a broker under the definition of paragraph (a)(1) of this section because Z does not stand ready as part of its trade or business to effect sales as defined in paragraph (a)(9) of this section made by others. That is, the sales that Z is in the business of conducting are of property that is not subject to reporting under section 6045. (16) Example 16: Payment card issuer as digital asset payment processor --(i) Facts. Customer S purchases goods for 10 units of digital asset DE from merchant M using a digital asset DE credit card issued by Bank X. Merchant M is one of a network of unrelated persons that has agreed to accept credit cards issued by Bank X as payment under an agreement that provides standards and mechanisms for settling the transaction between a merchant acquiring bank and the persons who accept the cards. Under these standards, payments are made by customers, to the issuing bank, and by the issuing bank to the merchant acquiring bank in units of DE. Bank MAB is the merchant acquiring entity within the meaning of§1.6050W-1(b)(2) with the contractual obligation to make payments to merchant M for goods provided to S in this transaction. The arrangement between merchant M and Bank MAB provides that M may direct Bank MAB to make payment to M in either digital asset DE or cash. To make payment for S's purchase of goods from merchant M, at Bank X's direction, S transfers 10 units of digital asset DE to Bank X. Bank X pays the 10 units of DE, less its processing fee, to Bank MAB, which amount Bank MAB pays, less its processing fee, to M. (ii) Analysis. Bank MAB is a merchant acquiring entity under§1.6050W-1(b)(2), and the payment made by Bank MAB to merchant M is in settlement of a reportable payment transaction under§1.6050W-1(a)(2). Accordingly, Bank X is a digital assets payment processor as defined in paragraph (a)(22)(i)(C) of this section because Bank X is a payment card issuer that made payment to Bank MAB in DE in a transaction that is associated with Bank MAB's reportable payment transaction under§1.6050W-1(a)(2). Additionally, S's payment of DE is a sale transaction under paragraph (a)(9)(ii)(D) of this section because that payment was made pursuant to the instructions provided by Bank X. (17) Example 17: Effect and digital asset middleman --(i) Facts. P2X, a business that is jointly operated by several individuals, created a website that regularly provides online services to customers in order to match would-be sellers of digital assets with would-be buyers. As part of this business, P2X directs matched buyers and sellers to use automatically executing contracts to settle the desired exchange without any additional services from P2X. The software underlying the automatically executing contracts was originally developed and then open-sourced by Z, a person unrelated to P2X. Z does not maintain the software and does not receive any fee when transactions are settled using the software. Customers undertaking transactions using the automatically executing contracts are charged a small percentage of the transaction value as a fee that is transferred to unrelated persons (miners) who validate transactions on the applicable blockchains. Additionally, P2X has modified the software so that buyers and sellers using P2X's platform are charged an additional 1% transaction fee, which is automatically taken from the accounts of buyers and sellers and transferred to P2X when transactions are executed. (ii) Analysis with respect to P2X. The group of individuals that operate P2X are treated for U.S. Federal income tax purposes as a business entity that is a partnership, or as a sole proprietorship, depending on the facts, and therefore as a person within the meaning of paragraph (a)(13) of this section. P2X provides facilitative services as described in paragraph (a)(21)(iii)(A) of this section because it provides buyers and sellers a digital marketplace for digital assets as well as automatically executing contracts to effectuate sales of digital assets. P2X is in a position to know the identity of the parties that make sales on its platform within the meaning of paragraph (a)(21)(ii)(A) of this section because it can request the name, address, and taxpayer identification number of each digital asset buyer and seller in advance of the sale. P2X is also in a position to know the nature of the transactions potentially giving rise to gross proceeds from sales within the meaning of paragraph (a)(21)(ii)(B) of this section because it can determine that information from the transaction fees P2X collects from each transaction. Accordingly, P2X acts as a digital asset middleman within the meaning of paragraph (a)(21) of this section to effect sales of digital assets on behalf of others on its platform within the meaning of paragraph (a)(10)(i)(D) of this section. (iii) Analysis with respect to Z. Although the software developed by Z that underlies the automatically executing contracts facilitates sales of digital assets on P2X's platform, Z is not in a position to know the identity of the parties that make sales using these contracts within the meaning of paragraph (a)(21)(ii)(A) of this section because Z open-sourced the software and has no connection to P2X. As a result, Z does not have the power to set or change the terms under which its software can be used. Accordingly, Z is not a digital asset middleman within the meaning of paragraph (a)(21) of this section. (18) Example 18: Digital asset middleman --(i) Facts. The facts are the same as in paragraph (b)(17)(i) of this section (the facts in Example 17 ) except Individual K utilizes P2X's website to find a counterparty and to trade 10 units of digital asset DE, which are held in a personal unhosted wallet, for 50 units of digital asset ST. When the transfer of K's 10 units of DE to the counterparty is validated on the blockchain, a small percentage of the 10 units are withheld from the amount received by K's counterparty and are, instead, transferred to Miner M, who performed the validation of the transaction on the DE blockchain. (ii) Analysis. The validation services provided by M are not facilitative services under paragraph (a)(21)(iii)(A) of this section. Accordingly, M is not a digital asset middleman within the meaning of paragraph (a)(21) of this section and is also not a broker under paragraph (a)(1) of this section. (19) Example 19: Digital asset middleman --(i) Facts. The facts are the same as in paragraph (b)(17)(i) of this section (the facts in Example 17 ), except that P2X's automatically executing contract charges a flat transaction fee (instead of a fee that is contingent on the value of the transaction) that is paid to P2X upon the execution of a trade. (ii) Analysis with respect to P2X. For the same reasons discussed in paragraph (b)(17)(ii) of this section (the analysis in Example 17 ), P2X provides facilitative services and is in a position to know the identity of the parties that make sales on its platform. Although P2X cannot determine the nature of the transactions potentially giving rise to gross proceeds from sales within the meaning of paragraph (a)(21)(ii)(B) of this section that are undertaken on its website from the flat transaction fees P2X collects from each transaction, P2X has the ability to alter the automatically executing contracts to provide that information to P2X. Additionally, because P2X provides facilitative services that matches would-be sellers of digital assets with would-be buyers, P2X is in a position to know the nature of the transactions potentially giving rise to gross proceeds from sales. Accordingly, P2X acts as a digital asset middleman under paragraph (a)(21) of this section to effect transactions on behalf of P2X platform users. (20) Example 20: Effect --(i) Facts. Individual J is an artist in the business of creating non-fungible tokens (NFTs) representing ownership interests in J's artwork for sale. Transfers of J's NFTs are recorded on a cryptographically secured distributed ledger called the DE blockchain. J regularly sells these newly created NFTs to buyers in return for units of digital asset DE. To find buyers and to execute these transactions, J uses the services of P2X, an unrelated digital asset broker that provides a digital marketplace for NFT sellers to find buyers and automatically executing contracts in return for a transaction fee. J does not perform any other services with respect to these transactions. Using P2X's platform, buyer K purchases J's NFT-4 for 1,000 units of DE. At the direction of P2X, J and K execute their exchange using an automatically executing contract, which automatically transfers J's NFT-4 to K and K's 1,000 units of DE to J. The contract also automatically transfers P2X's transaction fee from K's wallet to P2X. (ii) Analysis. NFT-4 is a digital representation of value that is recorded on a cryptographically secured distributed ledger and is not cash. Accordingly, NFT-4 is a digital asset under paragraph (a)(19) of this section. Although J is a principal in the exchange of the NFT-4 for 1,000 units of DE, J is not acting as an obligor retiring its own debt obligations, a corporation redeeming its own stock, or an issuer of digital assets that is redeeming those digital assets, as described in paragraph (a)(10)(i)(B) of this section. Because J creates the NFTs as part of J's business, J is also not acting as a dealer as described in paragraph (a)(10)(i)(C) of this section in these transactions. Accordingly, J is not effecting sales of digital assets on behalf of others under the definition of effect under paragraph (a)(10)(i)(B) or (C) of this section. (21) Example 21: Digital asset middleman --(i) Facts. Corporation H is solely engaged in the business of developing and selling H-brand unhosted hardware wallets. H-brand wallets permit users to store private keys used for accessing digital assets on hardware devices that can either be connected to or disconnected from the Internet. Users who seek to transfer digital assets controlled by an H-brand hardware wallet must connect the H-brand wallet to the Internet and use connecting software (not licensed by H) to execute the transfer. Once H sells a hardware wallet to a customer, H does not have access to any information about transactions the customer undertakes using the connecting software not licensed by H. (ii) Analysis. The sale by H of the H-brand wallets is not a facilitative service under paragraph (a)(21)(iii)(A) of this section. Accordingly, H is not acting as a digital asset middleman under paragraph (a)(21) of this section with respect to digital asset sale transactions made by H-brand wallet users. (22) Example 22: Digital asset middleman --(i) Facts. Corporation S is engaged in the business of operating and maintaining a website that licenses S-brand unhosted wallets (or S-Wallets) that are accessible online and allow users to control private keys to digital assets and transfer (and receive) digital assets directly from (and into) their S-Wallets. S requests each user's name, address, and tax identification number when first licensing its S-Wallets. S also provides each S-Wallet user a digital asset trading service (S-Trades) that compares pricing at several unrelated non-custodial trading platforms to facilitate access to the most competitive buy and sell prices offered by these unrelated platforms. Sales of digital assets from S-Wallets using S-Trade are automatically executed from digital assets held in S-Wallets using contracts that deduct and pay a 1% transaction fee to S from digital assets transferred out of the S-Wallets. This fee is in addition to any fees charged by the unrelated non-custodial trading platforms. (ii) Analysis. The access provided by S to unrelated digital asset brokers and market-making services are facilitative services as described in paragraph (a)(21)(iii)(A) of this section. Because S has the ability to request each wallet user's name, address, and taxpayer identification number, S is in a position to know the identity of the S-Wallet users under paragraph (a)(21)(ii)(A) of this section. S is also in a position to know the nature of the transactions potentially giving rise to gross proceeds of S-Wallet users from digital asset sales using S-Trade under paragraph (a)(21)(ii)(B) of this section because S can determine the gross proceeds from the 1% transaction fee it collects on each transaction by operation of the automatically executing contract to which it provides access. Accordingly, S is acting as a digital asset middleman with respect to the sale transactions made by S-Wallet users using S-Trade. (23) Example 23: Digital asset middleman --(i) Facts. The facts are the same as in paragraph (b)(22)(i) of this section (the facts in Example 22 ), except S does not provide the S-Trade digital asset trading service, with wallet connection services, or with direct platform access to any digital asset trading platform that facilitates the purchase or sale of digital assets. S-Wallet users seeking to make exchanges of digital assets from their S-Wallets at one of these unrelated non-custodial trading platforms must initiate the trade on the unrelated trading platform, which in turn will provide the functionality for users of S-Wallets to trade digital assets held in their S-Wallets using the services of that unrelated trading platform. Trades using these unrelated trading platforms are completed directly from the users' S-Wallets using automatically executing contracts that deduct and pay a 0.9% transaction fee to the non-custodial trading platforms. The unrelated trading platforms do not pay compensation to S for the wallet connection service these platforms provide to S-Wallet users in making trades on the unrelated trading platforms. (ii) Analysis. Because the software licensed by S provides S-Wallet users solely with the ability to control digital assets directly from their S-Wallets, S does not provide S-Wallet users with a facilitative service as described in paragraph (a)(21)(iii)(A) of this section. Accordingly, S is a not acting as a digital asset middleman under paragraph (a)(21) of this section with respect to sale transactions made by S-Wallet users on unrelated trading platforms. (24) Example 24: Digital asset middleman and effect --(i) Facts. SBK is in the business of effecting sales of stock and other securities on behalf of customers. To open an account with SBK, each customer must provide SBK with their name, address, and tax identification number. SBK accepts 20 units of digital asset DE from Customer P as payment for 10 shares of AB stock. Additionally, P pays SBK an additional 1 unit of digital asset DE as a commission for SBK's services. (ii) Analysis. SBK's acceptance of 20 units of DE as payment for the AB stock is a facilitative service under paragraph (a)(21)(iii)(B) of this section because the payment is for property (the AB stock) that when sold would constitute a sale under paragraph (a)(9)(i) of this section by a broker that is in the business of effecting sales of stock and other securities. Because SBK is a broker under paragraph (a)(1) of this section with respect to any type of sale under paragraph (a)(9) of this section, SBK's acceptance of 1 unit of DE as payment for SBK's commission is also a facilitative service under paragraph (a)(21)(iii)(B) of this section. Additionally, SBK is in a position to know, under paragraphs (a)(21)(ii)(A) and (B) of this section, P's identity and the nature of P's transaction involving the 20 units of DE and the commission payment. Accordingly, SBK is acting as a digital asset middleman to effect P's sale of 10 units of DE in return for the AB stock and P's sale of 1 unit of DE as payment for SBK's commission under paragraphs (a)(10)(i)(D) and (a)(21) of this section. (25) Example 25: Digital asset middleman and effect --(i) Facts. B is an individual that purchases real estate from individual S in exchange for cash and 1,000 units of digital asset DE. The transaction is a real estate transaction under§1.6045-4(b) and is closed by closing attorney CA, who is a real estate reporting person under§1.6045-4(e). As part of performing its services as closing attorney, CA requests the name, address, and tax identification number from both B and S. (ii) Analysis. The closing services provided by CA are facilitative services under paragraph (a)(21)(iii)(B) of this section because CA is performing services as a real estate reporting person as defined in§1.6045-4(e) with respect to a real estate transaction in which the real estate buyer (B) pays digital assets in full or partial consideration for the real estate. As part of its services in closing the real estate transaction, CA is in a position to know B's identity and the nature of B's real estate transaction under paragraphs (a)(21)(ii)(A) and (B) of this section. Accordingly, CA is acting as a digital asset middleman under paragraph (a)(21) of this section to effect B's sale of 1,000 DE units under paragraph (a)(10)(i)(D) of this section. These conclusions are not impacted by whether or not CA is required to report the sale of the real estate by S under§1.6045-4(a). (26) Example 26: Digital asset and cash --(i) Facts. Y is a privately held corporation that issues DL, a digital representation of value designed to track the value of the U.S. dollar. DL is backed in part or in full by U.S. dollars held by Y, and Y offers to redeem units of DL for U.S. dollars at par at any time. Transactions involving DL utilize cryptography to secure transactions that are digitally recorded on a cryptographically secured distributed ledger called the DL blockchain. CRX is a digital asset broker that also provides hosted wallet services for its customers seeking to make trades of digital assets using CRX. R is a customer of CRX. R exchanges 100 units of DL for $100 in cash from CRX. CRX does not record this transaction on the DL blockchain, but instead records the transaction on CRX's own centralized private ledger. (ii) Analysis. DL is not cash under paragraph (a)(12) of this section because it is not issued by a government or central bank. DL is a digital asset under paragraph (a)(19) of this section because it is a digital representation of value that is recorded on a cryptographically secured distributed ledger. The fact that CRX recorded R's transaction on its own private ledger and not on the DL blockchain does not change this conclusion. (27) Example 27: Digital asset and security. M owns 10 units of a fund that was formed to invest in digital assets. M's units of the fund are held in a securities brokerage account and are not recorded using cryptographically secured distributed ledger technology. Although the fund's underlying investments are comprised of one or more digital assets, M's investment is in units of the fund, which are not digital assets under paragraph (a)(19) of this section because transactions involving these fund units are not secured using cryptography and are not digitally recorded on a distributed ledger, such as a blockchain. (28) Example 28: Forward contract, closing transaction, and sale --(i) Facts. On February 24, Year 1, J contracts with broker CRX to sell J's 10 units of digital asset DE to CRX at an agreed upon price, with delivery under the contract to occur at 4 pm on March 10, Year 1. Pursuant to this agreement, J delivers the 10 units of DE to CRX, and CRX pays J the agreed upon price in cash. (ii) Analysis. Under paragraph (a)(7)(iii) of this section, the contract between J and CRX is a forward contract. J's delivery of digital asset DE pursuant to the forward contract is a closing transaction described in paragraph (a)(8) of this section that is treated as a sale of the underlying digital asset DE under paragraph (a)(9)(ii)(A)( 3 ) of this section. Pursuant to the rules of paragraphs (a)(9)(ii)(A)( 3 ) and (a)(9)(i) of this section, CRX may treat the delivery of DE as a sale without separating the profit or loss on the forward contract from the profit or loss on the delivery. (29) Example 29: Digital asset --(i) Facts. On February 7, Year 1, J purchases a regulated futures contract on digital asset DE through futures commission merchant FCM. The contract is not recorded using cryptographically secured distributed ledger technology. The contract expires on the last Friday in June, Year 1. On May 1, Year 1, J enters into an offsetting closing transaction with respect to the regulated futures contract. (ii) Analysis. Although the regulated futures contract's underlying assets are comprised of digital assets, J's investment is in the regulated futures contract, which is not a digital asset under paragraph (a)(19) of this section because transactions involving the contract are not secured using cryptography and are not digitally recorded using cryptographically secured distributed ledger technology, such as a blockchain. When J disposes of the contract, the transaction is a sale of a regulated futures contract covered by paragraph (a)(9)(i) of this section. (30) Example 30: Closing transaction and sale --(i) Facts. On January 15, Year 1, J purchases digital asset DE through Broker. On March 1, Year 1, J sells a regulated futures contract on DE through Broker. The contract expires on the last Friday in June, Year 1, at an exercise price of $5,000 for the contract. On the last Friday in June, Year 1, the fair market value of the DE covered by the regulated futures contract is $5,050. J delivers the DE in settlement of the regulated futures contract. (ii) Analysis. J's delivery of the DE pursuant to the regulated futures contract is a closing transaction described in paragraph (a)(8) of this section that is treated as a sale of the regulated futures contract under paragraph (a)(9)(i) of this section. In addition, under paragraph (a)(9)(ii)(A)( 3 ) of this section, J's delivery of digital asset DE pursuant to the settlement of the regulated futures contract is a sale of the underlying digital asset DE. (c) * * * (3) * * * (i) * * * (B) * * * ( 3 ) The United States or a State, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the Commonwealth of Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa, a political subdivision of any of the foregoing, a wholly owned agency or instrumentality of any one or more of the foregoing, or a pool or partnership composed exclusively of any of the foregoing; (C) * * * ( 2 ) Limitation for corporate customers. For sales of covered securities acquired on or after January 1, 2012, a broker may not treat a customer as an exempt recipient described in paragraph (c)(3)(i)(B)( 1 ) of this section based on the indicators of corporate status described in§1.6049-4(c)(1)(ii)(A). However, for sales of all securities and for sales of digital assets, a broker may treat a customer as an exempt recipient if one of the following applies-- (8) Special coordination rules for certain information returns relating to digital assets - (i) Digital assets that constitute securities or commodities. For any sale of a digital asset under paragraph (a)(9)(ii) of this section that also constitutes a sale under paragraph (a)(9)(i) of this section of a security not described in paragraph (c)(8)(iii) of this section or of a commodity, the broker must report the sale only as a sale of a digital asset under paragraph (a)(9)(ii) of this section. See paragraph (d)(2)(i)(B) of this section for the information required to be reported for such a sale. (ii) Digital assets that constitute real estate. For any transaction involving a sale of a digital asset under paragraph (a)(9)(ii) of this section that also constitutes a sale of reportable real estate under§1.6045-4(b)(2) that is subject to reporting under§1.6045-4(a), the broker must report the transaction as a sale only of reportable real estate under§1.6045-4(b)(2). (iii) Digital assets that constitute contracts covered by section 1256(b). For a sale of a digital asset that is also a contract covered by section 1256(b), the broker must report the sale only under paragraph (c)(5) of this section including, as appropriate, the application of the rules in paragraph (m)(3) of this section. (iv) Examples. The following examples illustrates the rules of this paragraph (c)(8): (A) Example 1: Digital asset securities --( 1 ) Facts. Digital asset broker CRX effects on behalf of its customers sales of DSK, which is a security within the meaning of paragraph (a)(3) of this section. Transactions involving DSK are recorded on a cryptographically secured distributed ledger called the DSK blockchain. L is an individual customer of CRX that is not otherwise exempt from reporting. Using CRX's services, L exchanges 100 units of DSK for $200 in cash. CRX does not record this transaction on the DSK blockchain, but instead records the transaction on CRX's private ledger. ( 2 ) Analysis. DSK is both a security under paragraph (a)(3) of this section and a digital asset under paragraph (a)(19) of this section. L's sale of 100 units of DSK for $200 in cash constitutes a sale of securities for cash under paragraph (a)(9)(i) of this section and a sale of digital assets in exchange for cash under paragraph (a)(9)(ii)(A)( 1 ) of this section. Accordingly, pursuant to the coordination rule set forth in paragraph (c)(8)(i) of this section, CRX is required to report this transaction as a sale of digital assets under paragraph (a)(9)(ii) of this section and not as a sale of securities. (B) Example 2: Digital asset representing real estate --( 1 ) Facts. Digital asset broker CRX effects on behalf of its customers sales of tokenized real estate interests, including RE, which is a digital representation of value representing a partial ownership interest in a physical building in City X. Transactions involving RE are recorded on a cryptographically secured distributed ledger called the Z blockchain. S is an individual customer of CRX that is not otherwise exempt from reporting. S sells 1 unit of RE for $20,000 in cash to another customer of CRX, Individual B. The transfer of the RE token from S's digital asset address to B's digital asset address is recorded on the Z blockchain. ( 2 ) Analysis. RE is both an interest in reportable real estate under§1.6045-4(b)(2) and a digital asset under paragraph (a)(19) of this section. Although the sale of the RE unit by L to B for $20,000 in cash constitutes a sale of a digital asset in exchange for cash under paragraph (a)(9)(ii)(A)( 1 ) of this section, L's sale of the RE unit also constitutes a real estate transaction under§1.6045-4(b)(1) that is subject to reporting under§1.6045-4(a). Accordingly, pursuant to the coordination rule set forth in paragraph (c)(8)(ii) of this section, CRX is required to report this transaction as a sale of a reportable real estate interest under§1.6045-4(a) and not as a sale of a digital asset. (C) Example 3: Digital asset representing real estate --( 1 ) Facts. The facts are the same as in paragraph (c)(8)(iv)(B) of this section (the facts in Example 2 ), except that S's sale of the RE token to B is for $500 instead of $20,000 in cash. ( 2 ) Analysis. Although RE constitutes both an interest in reportable real estate under§1.6045-4(b)(2) and a digital asset under paragraph (a)(19) of this section, S's sale of RE is for a total consideration of less than $600. Pursuant to the de minimis transaction rule under§1.6045-4(c)(1)(iii), the sale of RE is not subject to reporting under§1.6045-4(a). Accordingly, CRX is required to report this transaction as a sale of a digital asset under paragraph (c) of this section. (d) * * * (2) * * * (i) Required information - (A) General rule for sales described in paragraph (a)(9)(i) of this section. Except as provided in paragraph (c)(5) of this section, for each sale described in paragraph (a)(9)(i) of this section for which a broker is required to make a return of information under this section, the broker must report on Form 1099-B, "Proceeds From Broker and Barter Exchange Transactions," or any successor form, the name, address, and taxpayer identification number of the customer, the property sold, the Committee on Uniform Security Identification Procedures (CUSIP) number of the security sold (if applicable) or other security identifier number that the Secretary may designate by publication in the Federal Register or in the Internal Revenue Bulletin ( see§601.601(d)(2) of this chapter), the adjusted basis of the security sold, whether any gain or loss with respect to the security sold is long-term or short-term (within the meaning of section 1222 of the Code), the gross proceeds of the sale, the sale date, and other information required by the form in the manner and number of copies required by the form. In addition, for a sale of a covered security on or after January 1, 2014, a broker must report on Form 1099-B whether any gain or loss is ordinary. See paragraph (m) of this section for additional rules related to options and paragraph (n) of this section for additional rules related to debt instruments. See paragraph (c)(8) of this section for rules related to sales of securities or sales of commodities under paragraph (a)(9)(i) of this section that are also sales of digital assets under paragraph (a)(9)(ii) of this section. (B) Required information for digital asset transactions. For each sale of a digital asset described in paragraph (a)(9)(ii) of this section for which a broker is required to make a return of information under this section, the broker must report on the form prescribed by the Secretary the name, address, and taxpayer identification number of the customer; the name and number of units of the digital asset sold; the sale date and time; the gross proceeds amount (after reduction for the allocable digital asset transaction costs as defined and allocated pursuant to paragraph (d)(5)(iv) of this section); the transaction ID as defined in paragraph (a)(26) of this section in connection with the sale, if any; the digital asset address as defined in paragraph (a)(20) of this section (or digital asset addresses if multiple) from which the digital asset was transferred in connection with the sale, if any; whether the sale was for cash, stored-value cards, or in exchange for services, or other property; and any other information required by the form in the manner and number of copies required by the form or instructions. In the case of any sale described in the previous sentence that is also described in paragraph (c)(8)(i) of this section, the broker must also report any information required under paragraph (d)(2)(i)(A) of this section to the extent required by the form or instructions. For each such sale of a digital asset that was held by the broker in a hosted wallet on behalf of a customer and was previously transferred into an account at the broker (transferred-in digital asset), the broker must also report the date and time of such transfer in; the transaction ID of such transfer in, if any; the digital asset address (or digital asset addresses if multiple) from which the digital asset was transferred, if any; and the number of units transferred in by the customer. If a sale of a digital asset gives rise to digital asset transaction costs that are paid using digital assets, the sale of the digital asset to pay for the digital asset transaction costs must also be reported as a sale. (C) Acquisition information for sales of certain digital assets. For each sale described in paragraph (a)(9) of this section on or after January 1, 2026, of a covered security defined in paragraph (a)(15)(i)(H), (J), or (K) of this section, for which a broker is required to make a return of information under paragraph (d)(2)(i) of this section, the broker must also report the adjusted basis of the covered security sold calculated in accordance with paragraph (d)(6) of this section, the date and time such covered security was purchased, and whether any gain or loss with respect to the covered security sold is long-term or short-term (within the meaning of section 1222). (ii) Specific identification of specified securities - (A) In general. Except as provided in§1.1012-1(e)(7)(ii), for a specified security described in paragraph (a)(14)(i) of this section sold on or after January 1, 2011, or for a specified security described in paragraph (a)(14)(ii) of this section sold on or after January 1, 2014, a broker must report a sale of less than the entire position in an account of a specified security that was acquired on different dates or at different prices consistently with a customer's adequate and timely identification of the security to be sold. See§1.1012-1(c). If the customer does not provide an adequate and timely identification for the sale, the broker must first report the sale of securities in the account for which the broker does not know the acquisition or purchase date followed by the earliest securities purchased or acquired, whether covered securities or noncovered securities. (B) Specific identification of digital assets. For a specified security described in paragraph (a)(14)(v) of this section, a broker must report a sale of less than the entire position in an account of such specified security that was acquired on different dates or at different prices consistently with the adequate identification of the digital asset to be sold. See§1.1012-1(j)(3)(ii) for rules relating to the identification of units sold, exchanged, or transferred. If the customer does not provide an adequate and timely identification for the sale, the broker must first report the sale of the earliest units of the digital asset purchased within or transferred into the customer's account at the broker. Units of a digital asset are transferred into the customer's account as of the date and time of the transfer. (iii) Penalty relief for reporting information not subject to reporting - (A) Noncovered securities. A broker is not required to report adjusted basis and the character of any gain or loss for the sale of a noncovered security if the return identifies the sale as a sale of a noncovered security. A broker that chooses to report this information for a noncovered security is not subject to penalties under section 6721 or 6722 of the Code for failure to report this information correctly if the return identifies the sale as a sale of a noncovered security. For purposes of this paragraph (d)(2)(iii)(A), a broker must treat a security for which a broker makes the single-account election described in§1.1012-1(e)(11)(i) as a covered security. (B) Digital assets sold before applicability date. A broker is not required to report the gross proceeds from the sale of a digital asset as described in paragraph (a)(9)(ii) of this section if the sale is effected prior to January 1, 2025, or the adjusted basis and the character of any gain or loss with respect to a sale of a covered security described in paragraph (a)(15)(i)(H), (J), or (K) of this section if the sale is effected prior to January 1, 2026. A broker that chooses to report this information on either the Form 1099-B, "Proceeds From Broker and Barter Exchange Transactions," or when available the form prescribed by the Secretary pursuant to paragraph (d)(2)(i)(B) of this section is not subject to penalties under section 6721 or 6722 for failure to report this information correctly. (iv) * * * (A) Transfer and issuer statements for securities. When reporting a sale of a covered security other than a digital asset described in paragraph (a)(19) of this section, a broker must take into account all information, other than the classification of the security (such as stock), furnished on a transfer statement (as described in§1.6045A-1) and all information furnished or deemed furnished on an issuer statement (as described in§1.6045B-1), unless the statement is incomplete or the broker has actual knowledge that it is incorrect. * * * (B) Other information with respect to securities. * * * (v) Failure to receive a complete transfer statement for securities. A broker that has not received a complete transfer statement as required under§1.6045A-1(a)(3) for a transfer of a specified security described in paragraphs (a)(14)(i) through (iv) of this section must request a complete statement from the applicable person effecting the transfer unless, under§1.6045A-1(a), the transferor has no duty to furnish a transfer statement for the transfer. * * * (vi) Reporting by other parties after a sale of securities -- * * * (vii) Examples. The following examples illustrate the rules of this paragraph (d)(2). Unless otherwise indicated, all events and transactions described in paragraphs (d)(2)(vii)(C) through (F) of this section ( Examples 3 through 6 ) occur after the applicability date set forth in paragraph (q) of this section. (C) Example 3: Reporting required by broker providing hosted wallet services --( 1 ) Facts. TRX is a digital asset broker that also provides hosted wallet services. As part of TRX's regular operations, TRX does not record customer purchases of DE on the DE blockchain, but instead holds all digital assets in a TRX omnibus account. TRX, in turn, keeps a centralized record on which it allocates digital assets held on behalf of each of its customers. K, an individual not otherwise exempt from reporting, purchases 100 units of digital asset DE in a hosted wallet account at TRX. On March 9, Year 1, K directs TRX to transfer the 100 units to CRX, another digital asset broker that owns and operates a digital asset trading platform and provides hosted wallet services. CRX does not record customer purchases of DE on the DE blockchain, but instead holds all digital assets in a CRX omnibus account and keeps a centralized record on which it allocates digital assets held on behalf of each of its customers. The transaction ID of this transfer to CRX is kbcsj123. The digital asset address from which the units were transferred is 2hh77100. K directs CRX to sell the 100 units of DE on April 1, Year 1. CRX does not record K's sale on the DE blockchain, but instead reallocates the 100 units of DE previously allocated to K back to CRX's omnibus account. ( 2 ) Analysis. Under paragraph (d)(2)(i)(B) of this section, CRX is required to make a return of information with respect to K's sale of 100 units of DE. CRX must report the gross proceeds from the sale, the date (April 1, Year 1) and time of the sale, the name of the digital asset (DE) sold, and the number of units (100) sold, and any other information required by the form prescribed by the Secretary pursuant to paragraph (d)(2)(i)(B) of this section. CRX is not required to report the transaction ID of the sale transaction or the digital asset address from which the units were transferred because CRX did not record K's sale on the DE blockchain (and therefore there is no transaction ID or digital asset address in connection with the sale). Because K previously transferred the DE units treated as sold into K's account at CRX, paragraph (d)(2)(i)(B) of this section requires that CRX also report the transaction ID (kbcsj123) associated with the transferred-in digital assets, the digital asset address (2hh77100) from which the digital assets were transferred, and the date (March 9, Year 1) and time the units were transferred to CRX. (D) Example 4: Reporting required by broker not providing hosted wallet services --( 1 ) Facts. J, an individual not otherwise exempt from reporting, purchases 500 units of digital asset DE in an unhosted wallet. Of these 500 units purchased, 350 are held at digital asset address 1ss9925 and 150 are held at digital asset address 2tt8875. On April 28, Year 1, J exchanges all 500 units of DE for 500 units of ST using the services of P2X, a digital asset broker that effects sales of digital assets directly between customers by providing customers with access to automatically executing contracts. The transaction ID of J's exchange is ghj789. ( 2 ) Analysis. Under paragraph (d)(2)(i)(B) of this section, P2X is required to make a return of information with respect to J's sale of 500 units of DE. P2X must report the gross proceeds from the sale, the date (April 28, Year 1) and time of the sale, the name of the digital asset (DE) sold, the number of units (500) sold, and any other information required by the form prescribed by the Secretary pursuant to paragraph (d)(2)(i)(B) of this section. Additionally, P2X must also report the transaction ID (ghj789) of the sale transaction and the digital asset addresses (350 units from 1ss9925 and 150 units from 2tt8875) from which the digital assets were transferred. (E) Example 5: Reporting required by real estate reporting person --( 1 ) Facts. J, an unmarried individual not otherwise exempt from reporting, agrees to exchange with B, an individual not otherwise exempt from reporting, J's principal residence, Blackacre, which has a fair market value of $225,000 for digital assets with a value of $225,000. Prior to closing, J provides CA with the certifications required under§1.6045-4(c)(2)(iv) (to exempt the transaction from reporting under§1.6045-4(a) due to Blackacre being J's principal residence). At closing, B transfers the digital assets directly from B's wallet to J's wallet. CA is the closing attorney and real estate reporting person under§1.6045-4 with respect to the transaction. ( 2 ) Analysis. Although CA is not required to file an information report with respect to the gross proceeds received by J as a result of the exception to reporting provided under§1.6045-4(c)(2), CA is required to report on the form prescribed by the Secretary pursuant to paragraph (d)(2)(i)(B) of this section the gross proceeds received by B ($225,000) in exchange for B's sale of digital assets in this transaction because B's exchange of digital assets for Blackacre is a sale under paragraph (a)(9)(ii)(B) of this section and CA is a broker under paragraph (a)(1) of this section notwithstanding the exception from reporting to J. (F) Example 6: Ordering rule --( 1 ) Facts. On August 1, Year 1, TP opens a hosted wallet account at CRX, a digital asset broker that owns and operates a digital asset trading platform, and purchases within the account 10 units of digital asset DE for $1 per unit. On January 1, Year 2, TP opens a hosted wallet account at BEX, another digital asset broker that owns and operates a digital asset trading platform, and purchases within this account 20 units of digital asset DE for $5 per unit. On August 1, Year 3, TP transfers the digital asset units held in TP's hosted wallet account with CRX into TP's hosted wallet account with BEX. On August 3, Year 3, TP directs BEX to sell 10 units of DE but does not specify which units are to be sold. BEX effects the sale on TP's behalf for $10 per unit. ( 2 ) Analysis. TP did not make an adequate identification of the units to be sold in a sale of DE units that was less than TP's entire position in digital asset DE. Therefore, BEX must treat the units of digital asset DE sold according to the ordering rule provided in paragraph (d)(2)(ii)(B) of this section. Pursuant to that rule, the units sold must be attributed to the earliest units of digital asset DE purchased within or transferred into TP's account. Accordingly, the 10 units sold must be attributed to 10 of the 20 DE units purchased by TP on January 1, Year 2, in the BEX account because based on the information known to BEX these units were purchased prior to the date (August 1, Year 3) when TP transferred the other units purchased at CRX into the account. (4) Sale date and time - (i) In general. For sales of property that are reportable under this section other than digital assets, a broker must report a sale as occurring on the date the sale is entered on the books of the broker. (ii) Special rules for digital asset sales. For sales of digital assets that are effected when digitally recorded using cryptographically secured distributed ledger technology, such as a blockchain or similar technology, the broker must report the date and time of sale as the date and time when the transactions are recorded on the ledger. For sales of digital assets that are effected on a system outside of a blockchain, the broker must report the date and time of sale as the date and time when the transactions are recorded on that outside system without regard to the date and time that the transactions may be later recorded on a blockchain. Unless otherwise specified on the form prescribed by the Secretary pursuant to paragraph (d)(2)(i)(B) of this section or its instructions, all dates and times reported with respect to a digital asset transaction should be set forth in hours, minutes, and seconds using Coordinated Universal Time (UTC). (iii) Examples. The following examples illustrate the rules of this paragraph (d)(4). Unless otherwise indicated, all events and transactions in the following examples occur after the applicability date set forth in paragraph (q) of this section. (A) Example 1: Digital assets sale date and time --( 1 ) Facts. J, an individual not otherwise exempt from reporting, purchases 500 units of digital asset DE in an unhosted wallet. On April 28, Year 1, J initiates an exchange of these 500 units of DE for 500 units of ST using the services of P2X, a digital asset broker that effects sales of digital assets by providing customers with access to automatically executing contracts. The completed exchange is recorded on the DE blockchain at 10:00:00 a.m. UTC on April 28, Year 1. ( 2 ) Analysis. Under paragraph (d)(4) of this section, the date and time P2X must report with respect to J's sale is April 28, Year 1, at 10:00:00 a.m. UTC because that is the time the sale transaction was recorded on the DE distributed ledger. (B) Example 2: Digital assets sale date and time --( 1 ) Facts. The facts are the same as in paragraph (d)(4)(iii)(A)( 1 ) of this section (the facts in Example 1 ), except J initiates the exchange on December 31, Year 1, at 10:00:00 p.m. Eastern Standard Time (EST), which is the time zone J was in at the time of the exchange. The completed exchange is recorded on the DE blockchain at 3:00:00 a.m. UTC on January 1, Year 2. ( 2 ) Analysis. Under paragraph (d)(4) of this section, P2X must report the date and time of the transaction using UTC time. Because the transaction was recorded at 3:00:00 a.m. UTC on January 1, Year 2, P2X must report J's sale in calendar year of Year 2 as of that UTC date and time and not in calendar year of Year 1. (C) Example 3: Digital assets sale date and time --( 1 ) Facts. TRX is a digital asset broker that also provides hosted wallet services. As part of TRX's regular operations, TRX does not record customer purchases of DE on the DE blockchain, but instead holds all digital assets in a TRX omnibus account. TRX, in turn, keeps a centralized record on which it allocates digital assets held on behalf of each of its customers. On January 1, Year 1, K, an individual not otherwise exempt from reporting, purchases 100 units of digital asset DE in a hosted wallet account at TRX. On March 9, Year 4, K directs TRX to sell, and TRX sells, the 100 units of DE. TRX does not record K's sale on the DE blockchain, but instead debits from K's account the 100 units of DE previously allocated to K's account. TRX's records reflect that this debit was recorded on March 9, Year 4, at 10:45:00 a.m. UTC. ( 2 ) Analysis. Under paragraph (d)(4) of this section, the date and time TRX must report with respect to K's sale is March 9, Year 4, at 10:45:00 a.m. UTC because that is the time the sale transaction was recorded on TRX's internal records. (D) Example 4: Information reporting required --( 1 ) Facts. The facts are the same as in paragraph (d)(4)(iii)(C)( 1 ) of this section (the facts in Example 3 ), except TRX keeps its records using Eastern Standard Time (EST), and those records reflect that the debited units associated with K's transaction was recorded on March 9, Year 4, at 9:45:00 a.m. EST. ( 2 ) Analysis. Under paragraph (d)(4) of this section, TRX must convert the time recorded in its records using EST into UTC time. Because 9:45:00 a.m. EST on March 9, Year 4, is equivalent to 2:45:00 p.m. UTC, the date and time TRX must report with respect to K's sale is March 9, Year 4, at 2:45:00 p.m. UTC. (5) Gross proceeds - (i) In general. Except as otherwise provided in paragraph (d)(5)(ii) of this section with respect to digital asset sales, for purposes of this section, gross proceeds on a sale are the total amount paid to the customer or credited to the customer's account as a result of the sale reduced by the amount of any qualified stated interest reported under paragraph (d)(3) of this section and increased by any amount not paid or credited by reason of repayment of margin loans. In the case of a closing transaction (other than a closing transaction related to an option) that results in a loss, gross proceeds are the amount debited from the customer's account. For sales before January 1, 2014, a broker may, but is not required to, reduce gross proceeds by the amount of commissions and transfer taxes, provided the treatment chosen is consistent with the books of the broker. For sales on or after January 1, 2014, a broker must reduce gross proceeds by the amount of commissions and transfer taxes related to the sale of the security. For securities sold pursuant to the exercise of an option granted or acquired before January 1, 2014, a broker may, but is not required to, take the option premiums into account in determining the gross proceeds of the securities sold, provided the treatment chosen is consistent with the books of the broker. For securities sold pursuant to the exercise of an option granted or acquired on or after January 1, 2014, or for the treatment of an option granted or acquired on or after January 1, 2014, see paragraph (m) of this section. A broker must report the gross proceeds of identical stock (within the meaning of§1.1012-1(e)(4)) by averaging the proceeds of each share if the stock is sold at separate times on the same calendar day in executing a single trade order and the broker executing the trade provides a single confirmation to the customer that reports an aggregate total price or an average price per share. However, a broker may not average the proceeds if the customer notifies the broker in writing of an intent to determine the proceeds of the stock by the actual proceeds per share and the broker receives the notification by January 15 of the calendar year following the year of the sale. A broker may extend the January 15 deadline but not beyond the due date for filing the return required under this section. (ii) Sales of digital assets. The rules contained in paragraphs (d)(5)(ii)(A) through (D) of this section apply solely for purposes of this section. (A) In general. Except as otherwise provided in this section, gross proceeds from the sale of a digital asset are equal to the sum of the total amount in U.S. dollars paid to the customer or credited to the customer's account from the sale plus the fair market value of any property or services received (including services giving rise to digital asset transaction costs), reduced by the amount of digital asset transaction costs, as defined and allocated under paragraph (d)(5)(iv) of this section. In the case of a debt instrument issued in exchange for the digital asset and subject to§1.1001-1(g), the amount realized attributable to the debt instrument is determined under§1.1001-7(b)(1)(iv) rather than by reference to the fair market value of the debt instrument. See paragraph (d)(5)(iv) of this section for a special rule setting forth how digital asset transaction costs are to be allocated in an exchange of one digital asset for a different digital asset. Fair market value is measured at the date and time the transaction was effected. Except as provided in the next sentence, in determining the fair market value of services or property received or credited in exchange for a digital asset, the broker must use a reasonable valuation method that looks to contemporaneous evidence of value, such as the purchase price of the services, goods or other property, the exchange rate, and the U.S. dollar valuation applied by the broker to effect the exchange. In determining the fair market value of services giving rise to digital asset transaction costs, the broker must look to the fair market value of the digital assets used to pay for such transaction costs. In determining the fair market value of a digital asset, the broker may perform its own valuations or rely on valuations performed by a digital asset data aggregator as defined in paragraph (d)(5)(ii)(D) of this section, provided such valuations apply a reasonable valuation method for digital assets as described in paragraph (d)(5)(ii)(C) of this section. (B) Consideration value not readily ascertainable. When valuing services or property (including digital assets) received in exchange for a digital asset, the value of what is received should ordinarily be identical to the value of the digital asset exchanged. If there is a disparity between the value of services or property received and the value of the digital asset exchanged, the gross proceeds received by the customer is the fair market value at the date and time the transaction was effected of the services or property, including digital assets, received. If the broker or digital asset data aggregator, in the case of digital assets, reasonably determines that the fair market value of the services or property received cannot be determined with reasonable accuracy, the fair market value of the received services or property must be determined by reference to the fair market value of the transferred digital asset at the time of the exchange. See§1.1001-7(b)(4). If the broker or digital asset data aggregator, in the case of a digital asset, reasonably determines that neither the value of the received services or property nor the value of the transferred digital asset can be determined with reasonable accuracy, the broker must report that the received services or property has an undeterminable value. (C) Reasonable valuation method for digital assets. A reasonable valuation method for digital assets is a method that considers and appropriately weighs the pricing, trading volumes, market capitalization and other factors relevant to the valuation of digital assets traded through digital asset trading platforms. A valuation method is not a reasonable valuation method for digital assets if it, for example, gives an underweight effect to exchange prices lying near the median price value, an overweight effect to digital asset trading platforms having low trading volume, or otherwise inappropriately weighs factors associated with a price that would make that price an unreliable indicator of value. (D) Digital asset data aggregator. A digital asset data aggregator is an information service provider that provides valuations of digital assets based on any reasonable valuation method. (iii) Digital asset transactions effected by digital asset payment processors. The amount of gross proceeds under paragraph (d)(5)(ii) of this section received by a party who sells a digital asset through a digital asset payment processor is equal to: the sum of the amount paid in cash, or the fair market value of the amount paid in digital assets by that digital asset payment processor to a second party, plus any digital asset transaction costs withheld (whether withheld from the digital assets transferred by the first party or withheld from the amount due to the second party); and reduced by the amount of digital asset transaction costs paid by or withheld from the first party, as defined and allocated under the rules of paragraph (d)(5)(iv) of this section. For purposes of this paragraph (d)(5)(iii), if a digital asset payment processor transfers digital assets to a second person pursuant to a processor agreement that temporarily fixes the exchange rate in a transaction described in paragraph (a)(22)(ii) of this section, the fair market value of the amount paid in digital assets is the amount determined by reference to the fixed exchange rate. (iv) Allocation of digital asset transaction costs. The term digital asset transaction costs means the amount paid in cash or property (including digital assets) to effect the disposition or acquisition of a digital asset. Digital asset transaction costs include transaction fees, transfer taxes, and commissions. Except as provided in the following sentence, in the case of a sale or disposition of digital assets, the total digital asset transaction costs paid by the customer are allocable to the disposition of the digital assets. In an exchange of one digital asset for another digital asset differing materially in kind or in extent, one-half of any digital asset transaction costs paid by the customer in cash or property to effect the exchange is allocable to the disposition of the transferred digital asset and the other half of such costs is allocable to the acquisition of the received digital asset. (v) Examples. The following examples illustrate the rules of this paragraph (d)(5). Unless otherwise indicated, all events and transactions in the following examples occur after the applicability date set forth in paragraph (q) of this section. (A) Example 1: Determination of gross proceeds --( 1 ) Facts. CRX, a digital asset broker, buys, sells, and exchanges various digital assets for cash or different digital assets on behalf of its customers. For this service, CRX charges a transaction fee equal to 1 unit of CRX's proprietary digital asset CM per transaction. Using the services of CRX, customer K, an individual not otherwise exempt from reporting, purchases 15 units of CM and 10 units of digital asset DE. On April 28, Year 1, when the CM units have a value of $2 per unit, the DE units have a value of $8 per unit, and digital asset ST units have a value of $0.80 per unit, K instructs CRX to exchange K's 10 units of DE for 100 units of digital asset ST. CRX charges K one unit of CM as a transaction fee for the exchange. ( 2 ) Analysis. Under paragraph (d)(5)(iv) of this section, K has digital asset transaction costs of $2, which is the value of 1 CM unit. Under paragraph (d)(5)(ii)(A) of this section, the gross proceeds amount that CRX must report from K's sale of the 10 units of DE is equal to the fair market value of the 100 units of ST that K received (less one-half of the value of the CM unit sold to pay the digital asset transaction cost to CRX). The fair market value of the 100 units of ST at the date and time the transaction was effected is equal to $80 (the product of $0.80 and 100 units). One-half of such costs ($1) is allocable to the sale of the DE units. Accordingly, CRX must report gross proceeds of $79 from K's sale of the 10 units of DE. CRX must also report the gross proceeds from K's sale of one CM unit to pay for CRX's services. Under paragraph (d)(5)(ii)(A) of this section, the gross proceeds from K's sale of one unit of CM is equal to the fair market value of the digital assets used to pay for such transaction costs. Accordingly, CRX must report $2 as gross proceeds from K's sale of one unit of CM. (B) Example 2: Determination of gross proceeds --( 1 ) Facts. CPP, a digital asset payment processor, offers debit cards to its customers who hold digital asset FE in their accounts with CPP. The debit cards allow CPP's customers to use digital assets held in accounts with CPP to make payments to merchants who do not accept digital assets. CPP charges its card holders a 2% transaction fee for purchases made using the debit card and sets forth in its terms and conditions the process CPP will use to determine the exchange rate provided at the date and time of its customers' transactions. CPP has issued a debit card to B, an individual not otherwise exempt from reporting, who wants to make purchases using digital assets. B transfers 1,000 units of FE into B's account with CPP. B then uses the debit card to purchase merchandise from a U.S. retail merchant STR for $1,000. An exchange rate of 1 FE = $2 USD is applied to effect the transaction, based on the exchange rate at that date and time and pursuant to B's account agreement. To settle the transaction, CPP removes 510 units of FE from B's account equal to $1,020 ($1,000 plus a 2% transaction fee equal to $20). CPP then pays STR $1,000 in cash. ( 2 ) Analysis. Under paragraph (d)(5)(iv) of this section, B paid digital asset transaction costs of $20. Under paragraph (d)(5)(iii) of this section, the gross proceeds amount that CPP must report with respect to B's sale of the 510 units of FE to purchase the merchandise is $1,000, which is the sum of the amount of cash paid by CPP to STR plus the $20 digital asset transaction costs withheld by CPP, reduced by the $20 digital asset transaction costs as allocated under paragraph (d)(5)(iv). CPP's payment of cash to STR is also a payment card transaction under§1.6050W-1(b) subject to reporting under§1.6050W-1(a). (C) Example 3: Determination of gross proceeds --( 1 ) Facts. STR, a U.S. retail corporation, advertises that it accepts digital asset FE as payment for its merchandise. Customers making purchases at STR using digital asset FE are directed to create an account with digital asset payment processor CXX, which, pursuant to a preexisting agreement with STR, accepts digital asset FE in return for payments in cash made to STR. CXX charges a 2% transaction fee, which is paid by STR and not STR's customers. S, an individual not otherwise exempt from reporting, seeks to purchase merchandise from STR for $1,000. To effect payment, S is directed by STR to CXX, with whom S has an account. An exchange rate of 1 FE = $2 USD is applied to effect the purchase transaction. Pursuant to this exchange rate, S then transfers 500 units of FE to CXX, which, in turn, pays STR $980 ($1,000 less a 2% transaction fee equal to $20). ( 2 ) Analysis. Under paragraph (d)(5)(iii) of this section, the gross proceeds amount that CXX must report with respect to this sale is $1,000, which is the sum of the amount in U.S. dollars paid by CPP to STR ($980) plus the $20 digital asset transaction costs withheld from the payment due to STR. Under paragraph (d)(5)(iv) of this section, S has no allocable digital asset transaction costs. Therefore, the $980 amount is not reduced by any digital asset transaction costs charged to STR because that fee was not paid by S. In addition, CXX's payment of cash to STR (plus the withheld transaction fee) may be reportable under§1.6050W-1(a) as a third party network transaction under§1.6050W-1(c) if CXX is a third party settlement organization under the definition in§1.6050W-1(c)(2). (D) Example 4: Determination of gross proceeds in a real estate transaction --( 1 ) Facts. J, an unmarried individual not otherwise exempt from reporting, agrees to exchange with B, an individual not otherwise exempt from reporting, J's principal residence, Blackacre, which has a fair market value of $300,000 for cash in the amount of $75,000 and digital assets with a value of $225,000. At closing, B transfers the digital assets directly from B's wallet to J's wallet. CA is the closing attorney, real estate reporting person under§1.6045-4, and broker under paragraph (a)(1) of this section with respect to the transaction. ( 2 ) Analysis. CA is required to report on the form prescribed by the Secretary pursuant to paragraph (d)(2)(i)(B) of this section the gross proceeds received by B in exchange for B's sale of digital assets in this transaction. The gross proceeds amount to be reported under paragraph (d)(5)(ii)(A) of this section is equal to $225,000, which is the $300,000 value of Blackacre less $75,000 that B paid in cash. In addition, under§1.6045-4, CA is required to report on Form 1099-S the $300,000 of gross proceeds received by J ($75,000 cash and $225,000 in digital assets) as consideration for J's disposition of Blackacre. (6) * * * (i) * * * For purposes of this section, the adjusted basis of a specified security is determined from the initial basis under paragraph (d)(6)(ii) of this section as of the date the specified security is acquired in an account, increased by the commissions and transfer taxes related to its sale to the extent not accounted for in gross proceeds as described in paragraph (d)(5) of this section. A broker is not required to consider transactions or events occurring outside the account except for an organizational action taken by an issuer of a specified security other than a digital asset during the period the broker holds custody of the security (beginning with the date that the broker receives a transferred security) reported on an issuer statement (as described in§1.6045B-1) furnished or deemed furnished to the broker. * * * (ii) * * * (A) Cost basis for specified securities acquired for cash. For a specified security acquired for cash, the initial basis generally is the total amount of cash paid by the customer or credited against the customer's account for the specified security, increased by the commissions, transfer taxes, and digital asset transaction costs related to its acquisition. * * * * * * * * (C) Digital assets acquired in exchange for property - ( 1 ) In general. This paragraph (d)(6)(ii)(C) applies solely for purposes of this section. For a digital asset acquired in exchange for property that is not a debt instrument described in§1.1012-1(h)(1)(v), the initial basis of the digital asset is the fair market value of the digital asset received at the time of the exchange, increased by any digital asset transaction costs allocable to the acquisition of the digital asset pursuant to the rules under paragraph (d)(6)(ii)(C)( 2 ) of this section. The fair market value of the digital asset received must be determined using a reasonable valuation method as of the date and time the exchange transaction was effected. In valuing the digital asset received, the broker may perform its own valuations or rely on valuations performed by a digital asset data aggregator as defined in paragraph (d)(5)(ii)(D) of this section, provided such valuations apply a reasonable valuation method for digital assets as described in paragraph (d)(5)(ii)(C) of this section. If the broker or digital asset data aggregator reasonably determines that the fair market value of the digital asset received cannot be determined with reasonable accuracy, the fair market value of the digital asset received must be determined by reference to the property transferred at the time of the exchange. If the broker or digital asset data aggregator reasonably determines that neither the value of the digital asset received nor the value of the property transferred can be determined with reasonable accuracy, the fair market value of the received digital asset must be treated as zero. For a digital asset acquired in exchange for a debt instrument described in§1.1012-1(h)(1)(v), the initial basis of the digital asset attributable to the debt instrument is the amount determined under§1.1012-1(h)(1)(v). ( 2 ) Allocation of digital asset transaction costs. Except as provided in the following sentence, in the case of an acquisition of digital assets, the total digital asset transaction costs paid by the customer are allocable to the digital assets received. In an exchange of one digital asset for a different digital asset differing materially in kind or in extent, one-half of the total digital asset transaction costs paid by the customer in cash or property to effect the exchange is allocable to the disposition of the transferred digital asset and one-half of such costs is allocable to the acquisition of the received digital asset for the purpose of determining basis. (iii) * * * (A) * * * A broker must apply the wash sale rules under section 1091 of the Code if both the sale and purchase transactions are of covered securities described in paragraphs (a)(15)(i)(A) through (G) of this section with the same CUSIP number or other security identifier number that the Secretary may designate by publication in the Federal Register or in the Internal Revenue Bulletin ( see§601.601(d)(2) of this chapter). * * * * * * * * (x) Examples. The following examples illustrate the rules of paragraphs (d)(5) and (6) of this section as applied to digital assets. Unless otherwise indicated, all events and transactions in the following examples occur using the services of CRX, an entity that owns and operates a digital asset trading platform and provides digital asset broker and hosted wallet services. In performing these services, CRX holds and records all customer purchase and sale transactions using CRX's centralized omnibus account. CRX does not record any of its customer's purchase or sale transactions on the relevant cryptographically secured distributed ledgers. Additionally, unless otherwise indicated, all events and transactions in the following examples occur after the applicability date for reporting acquisition information set forth in paragraph (d)(2)(i)(C) of this section. (A) Example 1: Determination of basis in digital assets --( 1 ) Facts. As a digital asset broker, CRX generally charges transaction fees equal to 1 unit of CRX's proprietary digital asset CM per transaction. CRX does not, however, charge transaction fees for the purchase of CM. On March 9, Year 1, K, an individual not otherwise exempt from reporting, purchases 20 units of CM for $20 in K's account at CRX. A week later, on March 16, Year 1, K uses CRX's services to purchase 10 units of digital asset DE for $80 in cash. To pay for CRX's transaction fee, K directs CRX to debit 1 unit of CM (worth $1 at the time of transfer) from K's account. ( 2 ) Analysis. The units of CM purchased by K are covered securities under paragraph (a)(15)(i) of this section because they were purchased in K's account at CRX by a broker (CRX) providing hosted wallet services. Accordingly, under paragraphs (d)(2)(i)(B) and (C) of this section, CRX must report the disposition by K of 1 unit of CM as a sale by K. The gross proceeds from that sale is equal to the fair market value of the CM units on March 16, Year 1 ($1), and the adjusted basis of that unit is equal to the amount K paid in cash for the CM unit on March 9, Year 1 ($1). This reporting is required regardless of the fact that there is $0 of gain or loss associated with this sale. Additionally, K's adjusted basis in the 10 units of DE acquired is equal to the initial basis in DE, $80 plus the $1 value of 1 unit of CM paid as a digital asset transaction cost for the purchase of the DE units. (B) Example 2: Determination of basis in digital assets --( 1 ) Facts. The facts are the same as in paragraph (d)(6)(x)(A)( 1 ) of this section (the facts in Example 1 ), except that on June 12, Year 2, K instructs CRX to exchange K's 10 units of DE for 50 units of digital asset ST. CRX effects this exchange using its own omnibus account holdings of ST at an exchange rate of 1 DE = 5 ST. The total value of the 50 units of ST received by K is $100. K directs CRX to debit 1 CM unit (worth $2 at the time of the transfer) from K's account to pay CRX for the transaction fee. ( 2 ) Analysis. Under paragraph (d)(5)(iv) of this section, K has digital asset transaction costs of $2, which is the value of 1 unit of CM. Under paragraphs (d)(2)(i)(B) and (C) of this section, CRX must report the gross proceeds from K's exchange of DE for ST (as a sale of K's 10 units of DE) and the gross proceeds from K's disposition of 1 unit of CM for CRX's services. Additionally, because the units of DE and CM were purchased in K's account at CRX by a broker (CRX) providing hosted wallet services, the units of DE and CM are covered securities under paragraph (a)(15)(i) of this section, and CRX must report K's adjusted basis in the 10 units of DE and 1 unit of CM. Under paragraph (d)(5)(ii)(A) of this section, the gross proceeds from K's sale of the DE units is $99 (the fair market value of the 50 units of ST that K received less one-half of the $2 digital asset transaction costs paid by K, or $1, paid in CM), that is allocable to the sale of the DE units. The gross proceeds from K's sale of the single unit of CM is $2. Under paragraph (d)(6) of this section, K's adjusted basis in the 10 units of DE is $81, resulting in a long-term capital gain to K of $18 ($99 - $81). K's adjusted basis in the ST units under paragraph (d)(6)(ii)(C) of this section is equal to the initial basis in ST, which is $101. (C) Example 3: Basis reporting for digital assets --( 1 ) Facts. On August 26, 2023, Customer P purchases 10 units of DE for $2 per unit in cash in an account at CRX. CRX charges P a fixed transaction fee of $5 in cash for the exchange. DE is a digital representation of value, the transfer of which is recorded on Blockchain DE, a cryptographically secured distributed ledger. On October 26, 2027, P directs CRX to exchange P's 10 units of DE for units of digital asset FG. At the time of the exchange, CRX determines that each unit of DE has a fair market value of $100 and each unit of FG has a fair market value of $50. As a result of this determination, CRX effects an exchange of P's 10 units of DE for 20 units of FG. CRX charges P a fixed transaction fee of $20 in cash for the exchange. ( 2 ) Analysis. DE is a digital asset under paragraph (a)(19) of this section because it is a digital representation of value that is recorded on a cryptographically secured distributed ledger and, therefore, a specified security under paragraph (a)(14)(v) of this section. Because the 10 units of DE that P exchanged for FG through CRX were acquired in an account at CRX on August 26, 2023, which is after January 1, 2023, these units are covered securities under paragraph (a)(15)(i)(J) of this section. Under paragraph (d)(5)(iv) of this section, P has digital asset transaction costs of $20. For the transaction that took place on October 26, 2027, under paragraph (d)(2)(i)(B) of this section, CRX must report the amount of gross proceeds from the sale of DE in the amount of $990 (the $1,000 fair market value of FG received on the date and time of transfer, less one-half of the digital asset transaction costs of $20, or $10 allocated to the sale). CRX must also report the $10 digital asset transaction costs allocated to the sale. Additionally, CRX must also report the adjusted basis of P's DE units under paragraph (d)(2)(i)(C) of this section because they are covered securities. Under paragraph (d)(6)(ii)(C) of this section, the adjusted basis of P's DE units is equal to $25, which is the $20 paid in cash for the 10 units increased by the $5 digital asset transaction costs allocable to that purchase. Finally, P's adjusted basis in the 20 units of FG is equal to the fair market value of the FG received, $1,000, plus one-half of the $20 transaction fee, or $10, which is allocated under paragraph (d)(6)(ii)(C)( 2 ) of this section to the acquisition of P's FG units. * * * * * (e) * * * (2) * * * (iii) Coordination rules for exchanges of digital assets made through barter exchanges. Exchange transactions involving the exchange of one digital asset held by one customer of a broker for a different digital asset held by a second customer of the same broker must be treated as a sale under paragraph (a)(9)(ii) of this section subject to reporting under paragraphs (c) and (d) of this section, and not as an exchange of personal property through a barter exchange subject to reporting under paragraphs (e) and (f) of this section, with respect to both customers involved in the exchange transaction. In the case of an exchange transaction that involves the transfer of a digital asset for personal property or services that are not also digital assets, if the digital asset payment also is a reportable payment transaction subject to reporting by the barter exchange under§1.6050W-1(a)(1), the exchange transaction must be treated as a reportable payment transaction and not as an exchange of personal property through a barter exchange subject to reporting under paragraphs (e) and (f) of this section with respect to the member or client disposing of personal property or services. Additionally, an exchange transaction described in the previous sentence must be treated as a sale under paragraph (a)(9)(ii)(D) of this section subject to reporting under paragraphs (c) and (d) of this section and not as an exchange of personal property through a barter exchange subject to reporting under paragraphs (e) and (f) of this section with respect to the member or client disposing of the digital asset. Nothing in this paragraph (e)(2)(iii) may be construed to mean that any broker is or is not properly classified as a barter exchange. * * * * * (g) * * * (1) * * * No return of information is required to be made by a broker with respect to a customer who is considered to be an exempt foreign person under paragraphs (g)(1)(i) through (iii) or paragraph (g)(4) of this section. See paragraph (a)(1) of this section for when a person is not treated as a broker under this section for a sale effected at an office outside the United States. See paragraphs (g)(1)(i) through (g)(3) of this section for rules relating to sales as defined in paragraph (a)(9)(i) of this section and see paragraph (g)(4) of this section for rules relating to sales of digital assets. * * * * * (2) Barter exchanges. No return of information is required by a barter exchange under the rules of paragraphs (e) and (f) of this section with respect to a client or a member that the barter exchange may treat as an exempt foreign person pursuant to the procedures described in paragraph (g)(1) of this section. (3) * * * (iii) * * * (A) * * * For purposes of this paragraph (g), a sale as defined in paragraph (a)(9)(i) of this section (relating to sales other than sales of digital assets) is considered to be effected by a broker at an office outside the United States if, in accordance with instructions directly transmitted to such office from outside the United States by the broker's customer, the office completes the acts necessary to effect the sale outside the United States. * * * * * * * * (4) Rules for sales of digital assets. The rules of this paragraph (g)(4) apply to a sale of a digital asset as defined in paragraph (a)(9)(ii) of this section. See paragraph (a)(1) of this section for when a person is treated as a broker under this section with respect to a sale of a digital asset. See paragraph (c) of this section for rules requiring brokers to report sales. See paragraph (g)(1) of this section providing that no return of information is required to be made by a broker effecting a sale of a digital asset for a customer who is considered to be an exempt foreign person under this paragraph (g)(4). (i) Definitions. The following definitions apply for purposes of this section. (A) U.S. digital asset broker. A U.S. digital asset broker is a U.S. payor or U.S. middleman as defined in§1.6049-5(c)(5), other than a controlled foreign corporation within the meaning of§1.6049-5(c)(5)(i)(C), that effects sales of digital assets on behalf of others. (B) CFC digital asset broker. A CFC digital asset broker is a controlled foreign corporation within the meaning of§1.6049-5(c)(5)(i)(C) that effects sales of digital assets on behalf of others. (C) Non-U.S. digital asset broker. A non-U.S. digital asset broker is a non-U.S. payor or non-U.S. middleman as defined in§1.6049-5(c)(5) that effects sales of digital assets on behalf of others. (D) Conducting activities as a money services business. A CFC digital asset broker or a non-U.S. digital asset broker is conducting activities as a money services business (conducting activities as a money services business (MSB)) under this paragraph (g)(4) with respect to its sales of digital assets, except as provided in the next sentence, if it is registered with the Department of the Treasury under 31 CFR 1022.380 or any successor guidance as an MSB, as defined in 31 CFR 1010.100(ff) or any successor guidance. Notwithstanding any registration as an MSB described in the preceding sentence, solely for purposes of this paragraph (g)(4), CFC digital asset brokers and non-U.S. digital asset brokers may not be treated as conducting activities as an MSB with respect to any sale of a digital asset that is effected by that broker on behalf of a customer at a foreign kiosk to the extent provided in paragraph (g)(4)(i)(E) of this section. (E) Foreign kiosk. A foreign kiosk means a physical electronic terminal that is located outside the United States and is owned or operated by a CFC digital asset broker or a non-U.S. digital asset broker that is not required under the Bank Secrecy Act to implement an anti-money laundering program (AML program), file reports, or otherwise comply with requirements for MSBs under the Bank Secrecy Act with respect to sales effected on behalf of its customers at the foreign kiosk. (ii) Rules for U.S. digital asset brokers - (A) Place of effecting sale. For purposes of this section, a sale of a digital asset that is effected by a U.S. digital asset broker is considered a sale effected at an office inside the United States. (B) Determination of foreign status. A U.S. digital asset broker may treat a customer as an exempt foreign person with respect to a sale effected at an office inside the United States provided that, prior to the payment to such customer of the gross proceeds from the sale, the broker has a beneficial owner withholding certificate described in§1.1441-1(e)(2)(i) that the broker may treat as valid under§1.1441-1(e)(2)(ii) and that satisfies the requirements of paragraph (g)(4)(vi) of this section. Additionally, a U.S. digital asset broker may treat a customer as an exempt foreign person with respect to a sale effected at an office inside the United States under an applicable presumption rule as provided in paragraph (g)(4)(vi)(A)( 2 ) of this section. A beneficial owner withholding certificate provided by an individual must include a certification that the beneficial owner has not been, and at the time the certificate is furnished reasonably expects not to be, present in the United States for a period aggregating 183 days or more during each calendar year to which the certificate pertains. See paragraphs (g)(4)(vi)(A) through (D) of this section for additional rules applicable to withholding certificates, when a broker may rely on a withholding certificate, presumption rules that apply in the absence of documentation, and rules for customers that are joint account holders. See paragraph (g)(4)(vi)(E) of this section for the extent to which a U.S. digital asset broker may treat a customer as an exempt foreign person with respect to a payment treated as made to a foreign intermediary, flow-through entity or certain U.S. branches. See paragraph (g)(4)(vi)(F) of this section for a transition rule for preexisting accounts. (iii) Rules for CFC digital asset brokers not conducting activities as MSBs. This paragraph (g)(4)(iii) applies to CFC digital asset brokers that are not conducting activities as MSBs. See paragraph (g)(4)(v) of this section for rules applicable to CFC digital asset brokers that are conducting activities as MSBs. (A) Place of effecting sale. For purposes of this section, a sale of a digital asset that is effected by a CFC digital asset broker subject to the rules of this paragraph (g)(4)(iii) is considered to be effected at an office outside the United States. See§31.3406(g)-1(e) of this chapter for an exception to backup withholding on gross proceeds from a sale of a digital asset effected at an office outside the United States by a CFC digital asset broker unless the broker has actual knowledge that the payee is a U.S. person. (B) Determination of foreign status. A CFC digital asset broker subject to the rules of this paragraph (g)(4)(iii) may treat a customer as an exempt foreign person with respect to a sale provided that, prior to the payment to such customer of the gross proceeds from the sale, the broker has either a beneficial owner withholding certificate described in paragraph (g)(4)(ii)(B) of this section or the documentary evidence described in§1.1471-3(c)(5)(i) to support the customer's foreign status, pursuant to the requirements of paragraph (g)(4)(vi) of this section. Additionally, a CFC digital asset broker may treat the customer as an exempt foreign person with respect to a sale under an applicable presumption rule as provided in paragraph (g)(4)(vi)(A)( 2 ) of this section. See paragraphs (g)(4)(vi)(A) through (D) of this section for additional rules applicable to withholding certificates and documentary evidence, when a broker may rely on documentation, presumption rules that apply in the absence of documentation, and rules for customers that are joint account holders. See paragraph (g)(4)(vi)(E) of this section for the extent to which a CFC digital asset broker subject to the rules of this paragraph (g)(4)(iii) may treat a customer as an exempt foreign person with respect to a payment treated as made to a foreign intermediary, flow-through entity or certain U.S. branches. See paragraph (g)(4)(vi)(F) of this section for a transition rule for preexisting accounts. (iv) Rules for non-U.S. digital asset brokers not conducting activities as MSBs. This paragraph (g)(4)(iv) applies to non-U.S. digital asset brokers that are not conducting activities as MSBs. See paragraph (g)(4)(v) of this section for rules applicable to non-U.S. digital asset brokers that are conducting activities as MSBs. (A) Sale outside the United States. For purposes of this section and except as provided in paragraph (g)(4)(iv)(B) of this section, a digital asset sale that is effected by a non-U.S. digital asset broker subject to the rules of this paragraph (g)(4)(iv) is considered to be effected at an office outside the United States. (B) Sale treated as effected at an office inside the United States as a result of U.S. indicia. For purposes of this section, a sale that is otherwise considered to be effected at an office outside the United States under paragraph (g)(4)(iv)(A) of this section by a non-U.S. digital asset broker must nevertheless be considered to be effected by that broker at an office inside the United States if, before the sale is effected, the broker collects documentation or has other information that is part of the broker's account information for the customer (including information collected with respect to the customer pursuant to the broker's compliance with applicable AML program requirements that show any of the following indicia (referred to in this paragraph (g)(4) as U.S. indicia)): ( 1 ) A customer's communication with the broker using a device (such as a computer, smart phone, router, or server) that the broker has associated with an Internet Protocol (IP) address or other electronic address indicating a location within the United States; ( 2 ) A permanent residence address (as defined in§1.1441-1(c)(38)) in the U.S. or a U.S. mailing address for the customer, a current U.S. telephone number and no non-U.S. telephone number for the customer, or the broker's classification of the customer as a U.S. person in its records; ( 3 ) Cash paid to the customer by a transfer of funds into an account maintained by the customer in the United States, or cash deposited with the broker by a transfer of funds from such an account, or if the customer's account is linked to a bank or financial account maintained within the United States. For purposes of the preceding sentence, an account maintained by the customer in the United States includes an account at a bank or financial institution maintained within the United States but does not include an international account as defined in§1.6049-5(e)(4); ( 4 ) One or more digital asset deposits into the customer's account at the broker were transferred from, or one or more digital asset withdrawals from the customer's account were transferred to, a digital asset broker that the broker knows or has reason to know to be organized within the United States, or the customer's account is linked to a digital asset broker that the broker knows or has reason to know to be organized within the United States; or ( 5 ) An unambiguous indication of a U.S. place of birth for the customer. (C) Consequences of treatment as sale effected at an office inside the United States. If a non-U.S. digital asset broker subject to the rules of this paragraph (g)(4)(iv) is required to treat a sale as effected at an office inside the United States pursuant to paragraph (g)(4)(iv)(B) of this section, the broker is required to report the sale to the extent required by paragraph (c) of this section unless the broker determines the customer is an exempt foreign person. See, however,§31.3406(g)-1(e) of this chapter for an exception to backup withholding on gross proceeds from a sale of a digital asset effected by a non-U.S. digital asset broker that is not conducting activities as an MSB unless the broker has actual knowledge that the payee is a U.S. person. The broker can treat the customer as an exempt foreign person if it obtains documentation permitted under paragraph (g)(4)(iv)(D) of this section and applies the rules of paragraphs (g)(4)(vi)(A) through (D) of this section with respect to the documentation, or when the broker may treat the customer as an exempt foreign person under an applicable presumption rule as provided in paragraph (g)(4)(vi)(A)( 2 ) of this section. In applying paragraph (g)(4)(vi)(B) (relating to reliance on beneficial owner withholding certificates) or (C) of this section (relating to reliance on documentary evidence), however, the broker is not required to treat documentation as incorrect or unreliable solely as a result of the U.S. indicia that required the broker to obtain such documentation with respect to a customer. See paragraph (g)(4)(vi)(E) of this section for the extent to which a non-U.S. digital asset broker subject to the rules of this paragraph (g)(4)(iv) may treat a customer as an exempt foreign person with respect to a payment treated as made to a foreign intermediary, flow-through entity or certain U.S. branches. See paragraph (g)(4)(vi)(F) of this section for a transition rule for preexisting accounts. (D) Type of documentation that may be obtained where there are U.S. indicia - ( 1 ) Collection of U.S. indicia other than U.S. place of birth. A non-U.S. digital asset broker subject to the rules of this paragraph (g)(4)(iv) that is considered to effect a sale at an office inside the United States under paragraph (g)(4)(iv)(B) of this section due to the collection of a document or possession of other information showing any of the U.S. indicia that is described in paragraphs (g)(4)(iv)(B)( 1 ) through ( 4 ) of this section may treat the customer as an exempt foreign person provided that, prior to the payment to such customer, the broker has either a valid beneficial owner withholding certificate described in paragraph (g)(4)(ii)(B) of this section for the customer, or both-- ( i ) The documentary evidence described in§1.1471-3(c)(5)(i) to support the customer's foreign status; and ( ii ) A written representation from the customer stating that: "I, the account owner represent and warrant that I am not a U.S. person for purposes of U.S. Federal income tax and that I am not acting for, or on behalf of, a U.S. person. I understand that a false statement or misrepresentation of tax status by a U.S. person could lead to penalties under U.S. law. If my tax status changes and I become a U.S. citizen or a resident, I agree to notify [insert broker's name] within 30 days." ( 2 ) Collection of information showing U.S. place of birth. A non-U.S. digital asset broker subject to the rules of this paragraph (g)(4)(iv) that is considered to effect a sale at an office inside the United States due to the collection of a document or possession of information showing the U.S. indicia that is described in paragraph (g)(4)(iv)(B)( 5 ) of this section with respect to a customer may treat the customer as an exempt foreign person if it obtains documentary evidence described in§1.1471-3(c)(5)(i)(B) evidencing the customer's citizenship in a country other than the United States and either-- ( i ) A copy of the customer's Certificate of Loss of Nationality of the United States; or ( ii ) A valid beneficial owner withholding certificate described in paragraph (g)(4)(ii)(B) of this section for the customer and a reasonable written explanation of the customer's renunciation of U.S. citizenship or the reason the customer did not obtain U.S. citizenship at birth. (v) Rules for CFC digital asset brokers and non-U.S. digital asset brokers conducting activities as MSBs. A CFC digital asset broker or a non-U.S. digital asset broker that is conducting activities as an MSB as described in paragraph (g)(4)(i)(D) of this section with respect to a sale of a digital asset must apply the rules in paragraph (g)(4)(ii) of this section to that sale as if that broker were a U.S. digital asset broker to determine the location where the sale is effected and the foreign status of the customer. (vi) Rules applicable to brokers that obtain or are required to obtain documentation for a customer and presumption rules - (A) In general. Paragraph (g)(4)(vi)(A)( 1 ) of this section describes rules applicable to documentation permitted to be used under this paragraph (g)(4) to determine whether a customer may be treated as an exempt foreign person. Paragraph (g)(4)(vi)(A)( 2 ) of this section provides presumption rules that apply if the broker does not have documentation on which the broker may rely to determine a customer's status. Paragraph (g)(4)(vi)(A)( 3 ) of this section provides a grace period for obtaining documentation in circumstances where there are indicia that a customer is a foreign person. Paragraph (g)(4)(vi)(A)( 4 ) of this section provides rules relating to blocked income. Paragraph (g)(4)(vi)(B) of this section provides rules relating to reliance on beneficial ownership withholding certificates to determine whether a customer is an exempt foreign person. Paragraph (g)(4)(vi)(C) of this section provides rules relating to reliance on documentary evidence to determine whether a customer is an exempt foreign person. Paragraph (g)(4)(vi)(D) of this section provides rules relating to customers that are joint account holders. Paragraph (g)(4)(vi)(E) of this section provides special rules for a customer that is a foreign intermediary, a flow-through entity, or certain U.S. branches. Paragraph (g)(4)(vi)(F) of this section provides a transition rule for obtaining documentation to treat a customer as an exempt foreign person. ( 1 ) Documentation of foreign status. A broker may treat a customer as an exempt foreign person when the broker obtains valid documentation permitted to support a customer's foreign status as described in paragraph (g)(4)(ii), (iii) or (iv) of this section that the broker can reliably associate (within the meaning of§1.1441-1(b)(2)(vii)(A)) with a payment of gross proceeds, provided that the broker is not required to treat the documentation as unreliable or incorrect under paragraph (g)(4)(vi)(B) or (C) of this section. For rules regarding the validity period of a withholding certificate or documentary evidence, retention of documentation, electronic transmission of documentation, information required to be provided on a withholding certificate, who may sign a withholding certificate, when a substitute withholding certificate may be accepted, and general reliance rules on documentation (including when a prior version of a withholding certificate may be relied upon), the provisions of§§1.1441-1(e)(4)(i) through (ix) and 1.6049-5(c)(1)(ii) apply, with the following modifications-- ( i ) The provisions in§1.1441-1(e)(4)(i) through (ix) apply by substituting the terms "broker" and "customer" for the terms "withholding agent" and "payee," respectively, and disregarding the fact that the provisions under§1.1441-1 apply only to amounts subject to withholding under chapter 3 of the Code; ( ii ) The provisions of§1.6049-5(c)(1)(ii) (relating to general requirements for when a payor may rely upon and must maintain documentary evidence with respect to a payee) apply by substituting the terms "broker" and "customer" for the terms "payor" and "payee," respectively; ( iii ) To apply§1.1441-1(e)(4)(viii) (reliance rules for documentation), the reference to§1.1441-7(b)(4) through (6) is replaced by the provisions of paragraph (g)(4)(vi)(B) or (C) of this section, as applicable, and the reference to§1.1441-6(c)(2) is disregarded; and ( iv ) To apply§1.1441-1(e)(4)(viii) (reliance rules for documentation) and (ix) (certificates to be furnished to a withholding agent for each obligation unless an exception applies), the provisions applicable to a financial institution apply to a broker described in this paragraph (g)(4) whether or not it is a financial institution. ( 2 ) Presumption rules. If a broker is not permitted to treat a customer as an exempt foreign person under paragraph (g)(4)(vi)(A)( 1 ) of this section because the broker has not collected the documentation permitted to be collected under this paragraph (g)(4) or is not permitted to rely on the documentation it has collected, the broker must determine the classification of a customer (as an individual, entity, etc.) by applying the presumption rules of§1.1441-1(b)(3)(ii), except that references in§1.1441-1(b)(3)(ii)(B) to exempt recipient categories under section 6049 are replaced by the exempt recipient categories in paragraph (c)(3)(i) of this section. With respect to a customer that the broker has classified as an individual, a broker that is a U.S. digital asset broker or that is a CFC digital asset broker or a non-U.S. digital asset broker that in each case is conducting activities as an MSB must treat the customer as a U.S. person. A broker that is a CFC digital asset broker or a non-U.S. digital asset broker that in each case is not conducting activities as an MSB is required to treat a customer that it has classified as an individual as a U.S. person only when the broker has documentation or other information that is part of the broker's account information for the customer (including information collected with respect to the customer pursuant to the broker's compliance with applicable AML program requirements) or a withholding certificate that show any of the U.S. indicia described in paragraphs (g)(4)(iv)(B)( 1 ) through ( 5 ) of this section. With respect to a customer that the broker has classified as an entity, the broker must determine the status of the customer as U.S. or foreign by applying§§1.1441-1(b)(3)(iii)(A) and 1.1441-5(d) and (e)(6), except that§1.1441-1(b)(3)(iii)(A)( 1 )( iv ) does not apply. Notwithstanding the preceding provisions of this paragraph (g)(4)(vi)(A)( 2 ), a broker may not treat a customer as a foreign person under this paragraph (g)(4)(vi)(A)( 2 ) if the broker has actual knowledge that the customer is a U.S. person. For presumption rules to treat a payment as made to an intermediary or flow-through entity and whether the payment is also treated as made to an exempt foreign person, see paragraph (g)(4)(vi)(E) of this section. ( 3 ) Grace period to collect valid documentation in the case of indicia of a foreign customer. If a broker has not obtained valid documentation that it can reliably associate with a payment of gross proceeds to a customer to treat the customer as an exempt foreign person, or if the broker is unable to rely upon documentation under the rules described in paragraph (g)(4)(vi)(A)( 1 ) of this section or is required to treat documentation obtained for a customer as unreliable or incorrect (after applying paragraphs (g)(4)(vi)(B) and (C) of this section), the broker may apply the grace period described in§1.6049-5(d)(2)(ii) (generally allowing in certain circumstances a payor to treat an account as owned by a foreign person for a 90 day period). In applying§1.6049-5(d)(2)(ii), references to "securities described in§1.1441-6(c)(2)" are replaced with "digital assets." ( 4 ) Blocked income. A broker may apply the provisions in paragraph (g)(1)(iii) of this section to treat a customer as an exempt foreign person when the proceeds are blocked income as described in§1.1441-2(e)(3). (B) Reliance on beneficial ownership withholding certificates to determine foreign status. For purposes of determining whether a customer may be treated as an exempt foreign person under this section, except as otherwise provided in this paragraph (g)(4)(vi)(B), a broker may rely on a beneficial owner withholding certificate described in paragraph (g)(4)(ii)(B) of this section unless the broker has actual knowledge or reason to know that the certificate is unreliable or incorrect. Reason to know is limited to when the broker has in its account opening files or other files pertaining to the account (account information), including documentation collected for purposes of an AML program or the beneficial owner withholding certificate, any of the U.S. indicia set forth in paragraphs (g)(4)(iv)(B)( 1 ) through ( 5 ) of this section. A broker will not be considered to have reason to know that a certificate is unreliable or incorrect based on documentation collected for an AML program until the date that is 30 days after the account is opened. A broker may rely, however, on a beneficial owner withholding certificate notwithstanding the presence of any of the U.S. indicia set forth in paragraphs (g)(4)(iv)(B)( 1 ) through ( 5 ) of this section on the withholding certificate or in the account information for a customer in the following circumstances: ( 1 ) With respect to any of the U.S. indicia described in paragraphs (g)(4)(iv)(B)( 1 ) through ( 4 ) of this section, the broker has in its possession for a customer who is an individual documentary evidence establishing foreign status (as described in§1.1471-3(c)(5)(i)) that does not contain a U.S. address and the customer provides the broker with a reasonable explanation (as defined in§1.1441-7(b)(12)) from the customer, in writing, supporting the claim of foreign status. Notwithstanding the preceding sentence, in a case in which the broker classified an individual customer as a U.S. person in its account information, the broker may treat the customer as an exempt foreign person only if it has in its possession documentary evidence described in§1.1471-3(c)(5)(i)(B) evidencing citizenship in a country other than the United States. In the case of a customer that is an entity, the broker may treat the customer as an exempt foreign person if it has in its possession documentation establishing foreign status that substantiates that the entity is actually organized or created under the laws of a foreign country. Additionally, regardless of whether the customer is an individual or an entity, a broker may rely on a beneficial owner withholding certificate for purposes of this paragraph (g)(4)(vi)(B)( 1 ) when-- ( i ) The broker is a non-U.S. person; ( ii ) The broker is required to report the payment made to the customer annually on a tax information statement that is filed with the tax authority of the country where the customer is resident as part of that country's resident reporting requirements; and ( iii ) That country has a tax information exchange agreement or income tax treaty in effect with the United States. ( 2 ) With respect to the U.S. indicia described in paragraph (g)(4)(iv)(B)( 5 ) of this section, the broker has in its possession documentary evidence described in§1.1471-3(c)(5)(i)(B) evidencing citizenship in a country other than the United States and the broker has in its possession either a copy of the customer's Certificate of Loss of Nationality of the United States or a reasonable written explanation of the customer's renunciation of U.S. citizenship or the reason the customer did not obtain U.S. citizenship at birth. (C) Reliance on documentary evidence to determine foreign status. For purposes of treating a customer as an exempt foreign person under this section, except as otherwise provided in this paragraph (g)(4)(vi)(C), a broker may rely on documentary evidence described in§1.1471-3(c)(5)(i) (when the broker is otherwise permitted to do so under paragraph (g)(4)(iii)(B) or (g)(4)(iv)(B) of this section) unless the broker has actual knowledge or reason to know that the documentary evidence is unreliable or incorrect. Reason to know is limited to when the broker has in its account opening files or other files pertaining to the account, including documentation collected for purposes of an AML program, any of the U.S. indicia set forth in paragraphs (g)(4)(iv)(B)( 1 ) through ( 5 ) of this section. A broker will not be considered to have reason to know that documentary evidence is unreliable or incorrect based on documentation collected for an AML program until the date that is 30 days after the account is opened. A broker may rely, however, on documentary evidence notwithstanding the presence of any of U.S. indicia set forth in paragraphs (g)(4)(iv)(B)( 1 ) through ( 5 ) of this section on the documentary evidence or in the account information for a customer in the following circumstances: ( 1 ) With respect to any of the U.S. indicia described in paragraphs (g)(4)(iv)(B)( 1 ) through ( 4 ) of this section, the broker has in its possession for a customer who is an individual additional documentary evidence establishing foreign status (as described in§1.1471-3(c)(5)(i)) that does not contain a U.S. address and the customer provides the broker with a reasonable explanation (as defined in§1.1441-7(b)(12)), in writing, supporting the claim of foreign status. In the case of a customer that is an entity, the broker may treat the customer as an exempt foreign person if the broker has in its possession documentation establishing foreign status that substantiates that the entity is actually organized or created under the laws of a foreign country. In lieu of the documentary evidence or documentation described in this paragraph (g)(4)(vi)(C)( 1 ), a broker may treat a customer (regardless of whether an individual or entity) as an exempt foreign person if-- ( i ) The broker has in its possession a beneficial owner withholding certificate described in paragraph (g)(4)(ii)(B) of this section for the customer that contains a permanent residence address (as defined in§1.1441-1(c)(38)) outside the United States and a mailing address outside the United States (or if a mailing address is inside the United States the customer provides a reasonable explanation in writing or additional documentary evidence sufficient to establish the customer's foreign status); or ( ii ) The broker is a non-U.S. person and the conditions specified in paragraphs (g)(4)(vi)(B)( 1 )( ii ) and ( iii ) of this section are satisfied. ( 2 ) With respect to the U.S. indicia described in paragraph (g)(4)(iv)(B)( 5 ) of this section, the broker has in its possession documentary evidence described in§1.1471-3(c)(5)(i)(B) evidencing citizenship in a country other than the United States and either-- ( i ) A copy of the customer's Certificate of Loss of Nationality of the United States; or ( ii ) A valid beneficial owner withholding certificate described in paragraph (g)(4)(ii)(B) of this section for the customer and a reasonable written explanation of the customer's renunciation of U.S. citizenship or the reason the customer did not obtain U.S. citizenship at birth. (D) Joint owners. In the case of amounts paid to customers that are joint account holders for which a certificate or documentation is required as a condition for being exempt from reporting under this paragraph (g)(4), such amounts are presumed made to U.S. payees who are not exempt recipients (as defined in paragraph (c)(3)(i)(B) of this section) when the conditions of paragraph (g)(3)(i) of this section are met. (E) Special rules for customer that is a foreign intermediary, a flow-through entity, or certain U.S. branches - ( 1 ) Foreign intermediaries. For purposes of this paragraph (g)(4), a broker may determine the status of a customer as a foreign intermediary (as defined in§1.1441-1(c)(13)) by reliably associating (under§1.1441-1(b)(2)(vii)) a payment of gross proceeds with a valid foreign intermediary withholding certificate described in§1.1441-1(e)(3)(ii) or (iii), without regard to whether the withholding certificate contains a withholding statement and withholding certificates or other documentation for each account holder. A broker that is a U.S. digital asset broker and a non-U.S. digital asset broker or a CFC digital asset broker that in each case is conducting activities as an MSB, that does not have a valid foreign intermediary withholding certificate or a valid beneficial owner withholding certificate described in paragraph (g)(4)(ii)(B) of this section for the customer applies the presumption rules in§1.1441-1(b)(3)(ii)(B) (which would presume that the entity is not an intermediary). A broker that is a non-U.S. digital asset broker or a CFC digital asset broker that in each case is not conducting activities as an MSB may alternatively determine the status of a customer as an intermediary by presuming that the entity is an intermediary to the extent permitted by§1.1441-1(b)(3)(ii)(C) (providing rules treating certain payees as not beneficial owners), without regard to the requirement in§1.1441-1(b)(3)(ii)(C) that any documentation be furnished with respect to an offshore obligation, and applying§1.1441-1(b)(3)(ii)(C) by substituting the references to exempt recipient categories under section 6049 with the exempt recipient categories in paragraph (c)(3)(i) of this section. See§1.1441-1(b)(3)(iii) for presumption rules relating to the U.S. or foreign status of a customer that is presumed to be an intermediary. In the case of a payment of gross proceeds from a sale of a digital asset that a broker treats as made to a foreign intermediary under this paragraph (g)(4)(vi)(E)( 1 ), the broker must treat the foreign intermediary as an exempt foreign person except to the extent required by paragraph (g)(3)(iv) of this section (rules for when a broker is required to treat a payment as made to a U.S. person that is not an exempt recipient under paragraph (c)(3) of this section and for reporting that may be required by the foreign intermediary). ( 2 ) Foreign flow-through entities. For purposes of this paragraph (g)(4), a broker may determine the status of a customer as a foreign flow-through entity (as defined in§1.1441-1(c)(23)) by reliably associating (under§1.1441-1(b)(2)(vii)) a payment of gross proceeds with a valid foreign flow-through withholding certificate described in§1.1441-5(c)(3)(iii) (relating to nonwithholding foreign partnerships) or (e)(5)(iii) (relating to foreign simple trusts and foreign grantor trusts that are nonwithholding foreign trusts), without regard to whether the withholding certificate contains a withholding statement and withholding certificates or other documentation for each partner. A broker may alternatively determine the status of a customer as a foreign flow-through entity based on the presumption rules in§§1.1441-1(b)(3)(ii)(B) (relating to entity classification) and 1.1441-5(d) (relating to partnership status as U.S. or foreign) and (e)(6) (relating to the status of trusts and estates as U.S. or foreign). In the case of a payment of gross proceeds from a sale of a digital asset that a broker treats as made to a foreign flow-through entity under this paragraph (g)(4)(vi)(E)( 2 ), the broker must treat the foreign flow-through entity as an exempt foreign person except to the extent required by§1.6049-5(d)(3)(ii) (rules for when a broker is required to treat a payment as made to a U.S. person other than an exempt recipient (substituting "exempt recipient under§1.6045-1(c)(3)" for "exempt recipient described in§1.6049-4(c)")). ( 3 ) U.S. branches that are not beneficial owners. For purposes of this paragraph (g)(4), a broker may determine the status of a customer as a U.S. branch (as described in§1.1441-1(b)(2)(iv)) that is not a beneficial owner (as defined in§1.1441-1(c)(6)) of a payment of gross proceeds by reliably associating (under§1.1441-1(b)(2)(vii)) the payment with a valid U.S. branch withholding certificate described in§1.1441-1(e)(3)(v) without regard to whether the withholding certificate contains a withholding statement and withholding certificates or other documentation for each person for whom the branch receives the payment. If a U.S. branch certifies on a U.S. branch withholding certificate described in the preceding sentence that it agrees to be treated as a U.S. person under§1.1441-1(b)(2)(iv)(A), the broker provided the certificate must treat the U.S. branch as an exempt foreign person. If a U.S. branch does not certify as described in the preceding sentence on its U.S. branch withholding certificate, the broker provided the certificate must treat the U.S. branch as an exempt foreign person except to the extent required by paragraph (g)(3)(iv) of this section (rules for when a broker is required to treat a payment as made to a U.S. person that is not an exempt recipient under paragraph (c)(3) of this section and for reporting that may be required by the U.S. branch). In a case in which a broker cannot reliably associate a payment of gross proceeds made to a U.S. branch with a U.S. branch withholding certificate described in§1.1441-1(e)(3)(v) or a valid beneficial owner withholding certificate described in paragraph (g)(4)(ii)(B) of this section, see paragraph (g)(4)(vi)(E)( 1 ) of this section for determining the status of the U.S. branch as a beneficial owner or intermediary. (F) Transition rule for obtaining documentation to treat a customer as an exempt foreign person. Notwithstanding the rules of this paragraph (g)(4) for determining the status of a customer as an exempt foreign person, for a sale of a digital asset effected before January 1, 2026, that was held in an account established for the customer by a broker before January 1, 2025, the broker may treat the customer as an exempt foreign person provided that the customer has not previously been classified as a U.S. person by the broker, and the information that the broker has in the account opening files or other files pertaining to the account, including documentation collected for purposes of an AML program, includes a residence address for the customer that is not a U.S. address. (vii) Barter exchanges. No return of information is required by a barter exchange under the rules of paragraphs (e) and (f) of this section with respect to a client or a member that the barter exchange may treat as an exempt foreign person pursuant to the procedures described in paragraph (g)(4) of this section. * * * * * (6) Examples. The application of the provisions of paragraph (g)(4) of this section with respect to sales of digital assets may be illustrated by the following examples. All events and transactions in the following examples occur after the applicability date set forth in paragraph (q) of this section. (i) Example 1: Foreign digital asset broker conducting activities as an MSB --(A) Facts. Foreign corporation (FKS) owns and operates several digital asset kiosks physically located within the United States. FKS is not a controlled foreign corporation within the meaning of§1.6049-5(c)(5)(i)(C). In addition to the digital asset kiosks located in the United States, FKS owns and operates an online digital asset trading platform and provides digital asset hosted wallet services for online customers who want to purchase, hold, and exchange various digital assets for cash or other digital assets. FKS does not own or operate kiosks located outside of the United States. FKS is registered as a money service business (MSB) with the Department of the Treasury. ( 1 ) Customer L: No withholding certificate. L, an individual who is a non-U.S. resident visiting the United States, utilizes one of FKS's digital asset kiosks located in the United States in order to effect a sale of digital asset DE for cash. L has not previously done business with FKS and does not hold digital assets in an online account with FKS. L represents to FKS that L is a foreign individual. FKS requests a beneficial owner withholding certificate from L as part of FKS's procedures for effecting transactions with customers that use FKS's digital asset kiosks located in the United States. L does not provide FKS with a valid beneficial owner withholding certificate described in paragraph (g)(4)(ii)(B) of this section. FKS executes the sale of L's DE on behalf of L and pays the gross proceeds to L. ( 2 ) Customer L: Withholding certificate. The facts are the same as in paragraph (g)(6)(i)(A)( 1 ) of this section, except that prior to the payment of sale proceeds, L provides FKS with a beneficial owner withholding certificate described in paragraph (g)(4)(ii)(B) of this section that FKS may treat as valid under§1.1441-1(e)(2)(ii) and that satisfies the requirements of paragraph (g)(4)(vi) of this section. ( 3 ) Customer J. J is an individual that opened an account with FKS to use FKS's online digital asset trading platform. As part of performing FKS's account opening procedures FKS collected from J a copy of a driver's license issued by country Y and a valid beneficial owner withholding certificate described in paragraph (g)(4)(ii)(B) of this section. Shortly after opening J's account, FKS obtains information showing that J's communications to FKS come from an IP address located within the United States that becomes part of FKS's account file for J. After obtaining the information described in the preceding sentence, FKS effects a sale of digital asset DE for cash on behalf of J, and credits the gross proceeds to J's account with FKS. (B) Broker's status and requirements. FKS is a non-U.S. digital asset broker under paragraph (g)(4)(i)(C) of this section because it is a non-U.S. payor under§1.6049-5(c)(5) that effects sales of digital assets on behalf of customers. Because FKS is registered as an MSB with the Department of the Treasury, FKS is conducting activities as an MSB under paragraph (g)(4)(i)(D) of this section with respect to its sales of digital assets. As a result, FKS is subject to the requirements of a U.S. digital asset broker under paragraph (g)(4)(ii) of this section with respect to those sales rather than the requirements of a non-U.S. digital asset broker under paragraph (g)(4)(iv) of this section (which apply to a non-U.S. digital asset broker not conducting activities as an MSB). Moreover, FKS is subject to the requirements of paragraph (g)(4)(ii) of this section with respect to all sales of digital assets it effects for its customers because FKS does not own or operate any digital asset kiosks physically located outside of the United States. See paragraphs (g)(4)(i)(D) and (E) of this section. (C) Broker's obligation to report - ( 1 ) Customer L: No withholding certificate. Because FKS must apply the requirements of paragraph (g)(4)(ii) of this section with respect to L's sale, FKS must make an information return for the sale under section 6045 unless FKS can treat L as an exempt recipient under paragraph (c)(3) of this section (which applies to only certain specified entities) or as an exempt foreign person. Because FKS has not collected documentation for L on which FKS may rely to treat L as an exempt foreign person, FKS must apply the presumption rules in paragraph (g)(4)(vi)(A)( 2 ) of this section. FKS presumes that L is an individual because L appears to be an individual based on L's name in the customer file. As an individual, L cannot be treated as an exempt recipient under paragraph (c)(3) of this section. Because FKS has classified L as an individual and FKS is a non-U.S. digital asset broker conducting activities as an MSB that is subject to the rules in paragraph (g)(4)(ii) of this section with respect to L's sale, FKS must treat L as a U.S. person under the presumption rule applicable to individuals described in paragraph (g)(4)(vi)(A)( 2 ) of this section. Thus, FKS may not treat L as an exempt foreign person with respect to L's sale of digital asset DE and must make an information return for the sale under section 6045. See paragraph (r) of this section for cross references to requirements for backup withholding under section 3406 that may apply to a sale required to be reported under section 6045. In connection with applying the requirements for backup withholding, because sales of DE effected by FKS for L are considered effected at an office inside the United States under paragraph (g)(4)(ii)(B) of this section, FKS may not apply the exception to backup withholding provided in§31.3406(g)-1(e) of this chapter to the sale effected on behalf of L. ( 2 ) Customer L: Withholding certificate. As provided in paragraph (g)(4)(ii)(B) of this section, FKS may treat L as an exempt foreign person because FKS has a valid withholding certificate for L described in paragraph (g)(4)(ii)(B) of this section that satisfies the requirements of paragraph (g)(4)(vi) of this section. Accordingly, FKS is not required to make an information return under section 6045 with respect to L's sale. ( 3 ) Customer J. As described in paragraph (g)(6)(i)(B) of this section, FKS must apply the requirements of paragraph (g)(4)(ii) of this section with respect to J's sale. Although FKS collected a valid beneficial owner withholding certificate with respect to J in accordance with paragraph (g)(4)(ii)(B) of this section, FKS has reason to know that the withholding certificate is incorrect or unreliable because FKS has U.S. indicia described in paragraph (g)(4)(iv)(B)( 1 ) of this section in J's account file. FKS may continue to rely on the withholding certificate if FKS obtains from J documentary evidence establishing foreign status (as described in§1.1471-3(c)(5)(i)) that does not contain a U.S. address and a reasonable explanation (as defined in§1.1441-7(b)(12)) from J, in writing, supporting the claim of foreign status. Alternatively, FKS may rely on the withholding certificate if FKS reports J to country Y and the conditions specified in paragraphs (g)(4)(vi)(B)( 1 )( ii ) and ( iii ) of this section are satisfied. FKS has a driver's license for J issued by country Y but does not have the reasonable explanation. FKS does not report J to country Y or satisfy the other conditions in paragraphs (g)(4)(vi)(B)( 1 )( ii ) and ( iii ) of this section. Therefore, FKS may not rely on the beneficial owner withholding certificate to treat J as an exempt foreign person. However, FKS may rely on the grace period described in paragraph (g)(4)(vi)(A)( 3 ) of this section (which in turn references the requirements of§1.6049-5(d)(2)(ii)) to treat J as an exempt foreign person for a 90-day period because FKS has a withholding certificate for J that is no longer reliable (other than because the validity period has expired), provided that the remaining balance of J's account with FKS is equal to or greater than the statutory backup withholding rate applied to the amount of gross proceeds credited to the account. See§1.6049-5(d)(2)(ii). The 90-day grace period begins on the date that the withholding certificate may no longer be relied upon because of the communications from a U.S. IP address. If the sale is effected after the end of the grace period, FKS must apply the presumption rules in paragraph (g)(4)(vi)(A)( 2 ) of this section. FKS must presume that J is an individual because FKS has a driver's license for J. As an individual, J cannot be treated as an exempt recipient under paragraph (c)(3) of this section. FKS must treat J as a U.S. person under the presumption rules applicable to individuals in paragraph (g)(4)(vi)(A)( 2 ) of this section. Thus, FKS may not treat J as an exempt foreign person with respect to J's sale of digital asset DE and must make an information return for the sale under section 6045. See paragraph (r) of this section for cross references to requirements for backup withholding under section 3406 that may apply to a sale required to be reported under section 6045. In connection with applying the requirements for backup withholding, because sales of DE effected by FKS for J are considered effected at an office inside the United States under paragraph (g)(4)(ii)(B) of this section, FKS may not apply the exception to backup withholding provided in§31.3406(g)-1(e) of this chapter to the sale effected on behalf of J. (ii) Example 2: Foreign digital asset broker registered as MSB effecting sales at digital asset kiosks located outside the United States --(A) Facts. The facts are the same as in paragraph (g)(6)(i)(A) of this section (the facts in Example 1 ), except that FKS also effects sales of digital assets for customers through digital asset kiosks physically located in country Y that FKS owns and operates. FKS is not required to implement an AML program, file reports, or otherwise comply with requirements for MSBs under the Bank Secrecy Act with respect to sales effected at digital asset kiosks physically located in country Y that FKS owns and operates. ( 1 ) Customer C. C, an individual, utilizes a digital asset kiosk operated by FKS in country Y to sell C's digital asset DE for cash. C does not have any interaction with other parts of FKS's business (such as FKS's online digital asset trading platform or hosted wallet service). As part of FKS's documentation procedures, including the performance of local country AML program requirements, FKS collects from C a copy of C's driver's license issued by country Y and a copy of C's passport issued by country Y. FKS does not have in its account file for C any document or other information with respect to C showing any of the U.S. indicia described in paragraphs (g)(4)(iv)(B)( 1 ) through ( 5 ) of this section. ( 2 ) Customer K. K, an individual, utilizes a digital asset kiosk operated by FKS in country Y to sell K's digital asset DE for cash. As part of FKS's documentation procedures, including the performance of local country AML program requirements, FKS collects from K an address in country Y, a copy of K's driver's license issued by country Y, and a copy of K's U.S. passport that indicates a place of birth for K in the United States. (B) Broker's status and requirements. As indicated in paragraph (g)(6)(i)(B) of this section ( Example 1 ), FKS is a non-U.S. digital asset broker under paragraph (g)(4)(i)(C) of this section that is conducting activities as an MSB under paragraph (g)(4)(i)(D) of this section. As a result, FKS is subject to the requirements of paragraph (g)(4)(ii) of this section except with respect to sales it effects through foreign kiosks that are described in paragraph (g)(4)(i)(E) of this section since FKS is not required under the Bank Secrecy Act to implement an AML program, file reports, or otherwise comply with requirements for MSBs under the Bank Secrecy Act with respect to sales effected at the kiosks. Accordingly, FKS is subject to the requirements of a non-U.S. digital asset broker under paragraph (g)(4)(iv) of this section with respect to sales that it effects through its foreign kiosks. (C) Broker's obligation to report - ( 1 ) Customer C. Because FKS is subject to the requirements of paragraph (g)(4)(iv) of this section with respect to C's sale at FKS's foreign kiosk and because none of the documents or other information in FKS's account file for C include any of the U.S. indicia described in paragraphs (g)(4)(iv)(B)( 1 ) through ( 5 ) of this section, FKS may treat the sale of digital asset DE on behalf of C as effected at an office outside the United States under paragraph (g)(4)(iv)(A) of this section. Accordingly, FKS is not considered a broker under paragraph (a)(1) of this section with respect to the sale, and FKS is therefore not required to make an information return under section 6045 with respect to C's sale. The result would be the same regardless of whether FKS collected documentation for C, provided that information in the account file does not show U.S. indicia. ( 2 ) Customer K. FKS is subject to the requirements of paragraph (g)(4)(iv) of this section with respect to K's sale at FKS's foreign kiosk. FKS collected an unambiguous indication of a U.S. place of birth for K (that is, K's U.S. passport showing a U.S. place of birth) in performing its documentation procedures. Accordingly, FKS has U.S. indicia described in paragraph (g)(4)(iv)(B)( 5 ) of this section as part of its account information for K and must treat K's sale of DE as effected inside the United States under paragraph (g)(4)(iv)(B) of this section. As a result, FKS is treated as a broker under paragraph (a)(1) of this section with respect to K's sale and must apply the requirements of paragraph (g)(4)(iv)(C) of this section to determine whether it must report K's sale under section 6045. Under paragraph (g)(4)(iv)(D)( 2 ) of this section, FKS may treat K as an exempt foreign person if FKS collects, prior to making the payment to K, documentary evidence described in§1.1471-3(c)(5)(i)(B) evidencing K's citizenship in a country other than the United States and either a copy of K's Certificate of Loss of Nationality of the United States, or both a valid beneficial owner withholding certificate described in paragraph (g)(4)(ii)(B) of this section for K and a reasonable written explanation of K's renunciation of U.S. citizenship or the reason K did not obtain U.S. citizenship at birth. FKS does not have the documentary evidence described in the preceding sentence for K. FKS must therefore apply the presumption rules in paragraph (g)(4)(vi)(A)( 2 ) of this section to determine whether it may treat K as an exempt foreign person. FKS must presume that K is an individual because FKS has a driver's license for K. As an individual, K cannot be treated as an exempt recipient under paragraph (c)(3) of this section. FKS must treat K as a U.S. person under the presumption rules applicable to individuals in paragraph (g)(4)(vi)(A)( 2 ) of this section because FKS has U.S. indicia associated with K's account information. Therefore, FKS must make an information return under section 6045 with respect to K's sale. However, FKS has no obligation to backup withhold on the proceeds from the sale based on the exemption under§31.3406(g)-1(e) of this chapter, unless FKS has actual knowledge that K is a U.S. person that is not an exempt recipient under paragraph (c)(3) of this section. (iii) Example 3: CFC digital asset broker that is not conducting activities as an MSB --(A) Facts. Corporation G (GFC) is a controlled foreign corporation under§1.6049-5(c)(5)(i)(C) that operates a business as an online digital asset broker. Several of GFC's customers have online accounts with GFC through which they effect sales of digital assets. GFC does not register as an MSB with the Department of the Treasury. (B) Broker's status and requirements. Because GFC is a controlled foreign corporation under§1.6049-5(c)(5)(i)(C) that effects sales of digital assets on behalf of customers, GFC is a CFC digital asset broker as defined in paragraph (g)(4)(i)(B) of this section. Because GFC does not register as an MSB with the Department of the Treasury, GFC is not conducting activities as an MSB under paragraph (g)(4)(i)(D) of this section. As a result, GFC is subject to the requirements of a CFC digital asset broker under paragraph (g)(4)(iii) of this section with respect to sales of digital assets it effects for its customers. (C) Broker's obligation to report. Because GFC is subject to the requirements of a CFC digital asset broker under paragraph (g)(4)(iii) of this section, GFC must make an information return for the sales it effects for its customers under section 6045 unless GFC can treat a customer as an exempt recipient under paragraph (c)(3) of this section or an exempt foreign person. Under paragraph (g)(4)(iii)(B) of this section, GFC may treat a customer (other than a foreign intermediary, foreign flow-through entity, or certain U.S. branches) as an exempt foreign person by obtaining with respect to the customer either a valid beneficial owner withholding certificate described in paragraph (g)(4)(ii)(B) of this section or the documentary evidence described in§1.1471-3(c)(5)(i) supporting the customer's foreign status and upon which GFC may rely, pursuant to the requirements of paragraph (g)(4)(vi) of this section. If GFC does not obtain the withholding certificate or documentary evidence described in the preceding sentence prior to a customer's sale, GFC may be permitted under a presumption rule as provided in paragraph (g)(4)(vi)(A)( 2 ) of this section to treat a customer as an exempt foreign person (unless GFC has actual knowledge that the customer is a U.S. person). GFC may, instead of applying the earlier-described provisions of this paragraph (g)(6)(iii)(C), treat a customer as a foreign intermediary, foreign flow-through entity, or certain U.S. branches and an exempt foreign person when it is permitted to do under paragraph (g)(4)(vi)(E) of this section. As GFC's sales are considered effected at an office outside of the United States under paragraph (g)(4)(iii)(A) of this section, GFC has no obligation to backup withhold on the proceeds from a reportable sale based on the exemption under§31.3406(g)-1(e) of this chapter, unless GFC has actual knowledge that customer is a U.S. person that is not an exempt recipient under paragraph (c)(3) of this section. * * * * * (j) Time and place for filing; cross-references to penalty and magnetic media filing requirements. Forms 1096 and 1099 required under this section shall be filed after the last calendar day of the reporting period elected by the broker or barter exchange and on or before February 28 of the following calendar year with the appropriate Internal Revenue Service Center, the address of which is listed in the instructions for Form 1096. For a digital asset sale effected prior to January 1, 2025, for which a broker chooses under paragraph (d)(2)(iii)(B) of this section to file an information return, Form 1096 and the Form 1099-B, "Proceeds From Broker and Barter Exchange Transactions," or if available the form prescribed by the Secretary pursuant to paragraph (d)(2)(i)(B) of this section, must be filed on or before February 28 of the calendar year following the year of that sale. See paragraph (l) of this section for the requirement to file certain returns on magnetic media. For provisions relating to the penalty provided for the failure to file timely a correct information return under section 6045(a), see§301.6721-1 of this chapter. See§301.6724-1 of this chapter for the waiver of a penalty if the failure is due to reasonable cause and is not due to willful neglect. * * * * * (m) * * * (1) In general. This paragraph (m) provides rules for a broker to determine and report the information required under this section for an option that is a covered security under paragraph (a)(15)(i)(E) or (H) of this section. (2) * * * (ii) * * * (C) Notwithstanding paragraph (m)(2)(i) of this section, if an option is an option on a digital asset or an option on derivatives with a digital asset as an underlying property, paragraph (m) of this section applies to the option if it is granted or acquired on or after January 1, 2023. * * * * * (q) Applicability date. Except as otherwise provided in this paragraph (q) or paragraphs (m)(2)(ii) and (n)(12)(ii) of this section, this section applies on or after January 6, 2017. (For rules that apply after June 30, 2014, and before January 6, 2017, see§1.6045-1 in effect and contained in 26 CFR part 1, as revised April 1, 2016.) For sales of digital assets, this section applies on or after January 1, 2025. For assets that are commodities pursuant to the Commodity Futures Trading Commission's certification procedures described in 17 CFR 40.2, this section applies to sales of such commodities on or after January 1, 2025, without regard to the date such certification procedures were undertaken. (r) Cross-references. For provisions relating to backup withholding for reportable transactions under this section, see§31.3406(b)(3)-2 of this chapter for rules treating gross proceeds as reportable payments,§31.3406(d)-1 of this chapter for rules with respect to backup withholding obligations, and§31.3406(h)-3 of this chapter for the prescribed form for the certification of information required under this section. Par. 7. Section 1.6045-4 is amended by: 1. Revising the section heading and paragraph (b)(1); 2. Removing the period at the end of paragraph (c)(2)(i) and adding a semicolon in its place; 3. Removing the word "or" at the end of paragraph (c)(2)(ii); 4. Removing the period at the end of paragraph (c)(2)(iii) and adding "; or" in its place; 5. Adding paragraph (c)(2)(iv); 6. Revising paragraph (d)(2)(ii)(A); 7. In paragraphs (e)(3)(iii)(A) and (B), adding the language "or digital asset" after the language "cash", wherever it appears; 8. Revising paragraphs (h)(1)(v)(A) and (B); 9. Redesignating paragraphs (h)(1)(vii) and (viii) as paragraphs (h)(1)(viii) and (ix), respectively, and adding new paragraph (h)(1)(vii); 10. Adding paragraph (h)(2)(iii); 11. Revising paragraphs (i)(1) and (2), (i)(3)(ii), and (o); 12. In paragraph (r), redesignating Examples 1 through 9 as paragraphs (r)(1) through (9), respectively; 13. In newly designated paragraph (r)(3), removing "section (b)(1)" and adding "paragraph (b)(1)" in its place; 14. Removing and reserving newly designated paragraph (r)(5); 15. Revising newly designated paragraph (r)(7); 16. In newly designated paragraph (r)(8), removing "example (6)" and adding "paragraph (r)(6) of this section (the facts in Example 6 )" in its place; 17. In newly designated paragraph (r)(9), removing "example (8)" and adding "paragraph (r)(8) of this section (the facts in Example 8 )" in its place; 18. Adding paragraph (r)(10); and 19. In paragraph (s), adding a sentence to the end of the paragraph. The revisions and additions read as follows:§1.6045-4 Information reporting on real estate transactions. * * * * * (b) * * * (1) In general. A transaction is a real estate transaction under this section if the transaction consists in whole or in part of the sale or exchange of reportable real estate (as defined in paragraph (b)(2) of this section) for money, indebtedness, property other than money, or services. The term sale or exchange shall include any transaction properly treated as a sale or exchange for Federal income tax purposes, whether or not the transaction is currently taxable. Thus, for example, a sale or exchange of a principal residence is a real estate transaction under this section even though the transferor may be entitled to the special exclusion of gain up to $250,000 (or $500,000 in the case of married persons filing jointly) from the sale or exchange of a principal residence provided by section 121 of the Code. * * * * * (c) * * * (2) * * * (iv) A principal residence (including stock in a cooperative housing corporation) provided the reporting person obtain from the transferor a written certification consistent with guidance that the Secretary has designated or may designate by publication in the Federal Register or in the Internal Revenue Bulletin ( see§601.601(d)(2) of this chapter). If a residence has more than one owner, a real estate reporting person must either obtain a certification from each owner (whether married or not) or file an information return and furnish a payee statement for any owner that does not make the certification. The certification must be retained by the reporting person for four years after the year of the sale or exchange of the residence to which the certification applies. A reporting person who relies on a certification made in compliance with this paragraph (c)(2)(iv) will not be liable for penalties under section 6721 of the Code for failure to file an information return, or under section 6722 of the Code for failure to furnish a payee statement to the transferor, unless the reporting person has actual knowledge or reason to know that any assurance is incorrect. (d) * * * (2) * * * (ii) * * * (A) The United States or a State, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the Commonwealth of Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa, a political subdivision of any of the foregoing, or any wholly owned agency or instrumentality of any one or more of the foregoing; or * * * * * (h) * * * (1) * * * (v) * * * (A) Received (or will, or may, receive) property (other than cash, consideration treated as cash, and digital assets in computing gross proceeds) or services as part of the consideration for the transaction; or (B) May receive property (other than cash and digital assets) or services in satisfaction of an obligation having a stated principal amount; or * * * * * (vii) In the case of a payment made to the transferor using digital assets, the name and number of units of the digital asset, the date and time the payment was made, the transaction identification as defined in§1.6045-1(a)(26) and the digital asset address (or addresses) as defined in§1.6045-1(a)(20) into which the digital assets are transferred; * * * * * (2) * * * (iii) Digital assets. For purposes of this section, a digital asset has the meaning set forth in§1.6045-1(a)(19). (i) * * * (1) In general. Except as otherwise provided in this paragraph (i), the term gross proceeds means the total cash received, including cash received from a digital asset payment processor as described in§1.6045-1(a)(22)(i), consideration treated as cash received, and the value of any digital asset received by or on behalf of the transferor in connection with the real estate transaction. (i) Consideration treated as cash. For purposes of this paragraph (i), consideration treated as cash received by or on behalf of the transferor in connection with the real estate transaction includes the following amounts: (A) The stated principal amount of any obligation to pay cash to or for the benefit of the transferor in the future (including any obligation having a stated principal amount that may be satisfied by the delivery of property (other than cash) or services); (B) The amount of any liability of the transferor assumed by the transferee as part of the consideration for the transfer or of any liability to which the real estate acquired is subject (whether or not the transferor is personally liable for the debt); and (C) In the case of a contingent payment transaction, as defined in paragraph (i)(3)(ii) of this section, the maximum determinable proceeds, as defined in paragraph (i)(3)(iii) of this section. (ii) Digital assets received. For purposes of this paragraph (i), the value of any digital asset received means the fair market value in U.S. dollars of the digital asset actually received. Additionally, if the consideration received by the transferor includes an obligation to pay a digital asset to, or for the benefit of, the transferor in the future, the value of any digital asset received includes the fair market value, as of the date and time the obligation is entered into, of the digital assets to be paid as stated principal under such obligation. The fair market value of any digital asset received must be determined based on the valuation rules provided in§1.6045-1(d)(5)(ii). (iii) Other property. Gross proceeds does not include the value of any property (other than cash, consideration treated as cash, and digital assets) or services received by, or on behalf of, the transferor in connection with the real estate transaction. See paragraph (h)(1)(v) of this section for the information that must be included on the Form 1099 required by this section in cases in which the transferor receives (or will, or may, receive) property (other than cash, consideration treated as cash, and digital assets) or services as part of the consideration for the transfer. (2) Treatment of sales commissions and similar expenses. In computing gross proceeds, the total cash, consideration treated as cash, and digital assets received by or on behalf of the transferor shall not be reduced by expenses borne by the transferor (such as sales commissions, amounts paid or withheld from consideration received to effect the digital asset transfer as described in§1.1001-7(b)(2), expenses of advertising the real estate, expenses of preparing the deed, and the cost of legal services in connection with the transfer). (3) * * * (ii) Contingent payment transaction. For purposes of this section, the term contingent payment transaction means a real estate transaction with respect to which the receipt, by or on behalf of the transferor, of cash, consideration treated as cash under paragraph (i)(1)(i)(A) of this section, or digital assets under paragraph (i)(1)(ii) of this section is subject to a contingency. * * * * * (o) No separate charge. A reporting person may not separately charge any person involved in a real estate transaction for complying with any requirements of this section. A reporting person may, however, take into account its cost of complying with such requirements in establishing its fees (other than in charging a separate fee for complying with such requirements) to any customer for performing services in the case of a real estate transaction. * * * * * (r) * * * (7) Example 7: Gross proceeds (contingencies). The facts are the same as in paragraph (r)(6) of this section (the facts in Example 6 ), except that the agreement does not provide for adequate stated interest. The result is the same as in paragraph (r)(6) (the results in Example 6 ). * * * * * (10) Example 10: Gross proceeds (exchange involving digital assets) --(i) Facts. K, an individual, agrees to pay 140 units of digital asset DE with a fair market value of $280,000 to J, an unmarried individual who is not an exempt transferor, in exchange for Whiteacre, which has a fair market value of $280,000. No liabilities are involved in the transaction. P is the reporting person with respect to both sides of the transaction. (ii) Analysis. With respect to the payment by K of 140 units of digital asset DE to J, P must report gross proceeds received by J of $280,000 (140 units of DE). Additionally, to the extent K is not an exempt recipient under§1.6045-1(c) or an exempt foreign person under§1.6045-1(g), P is required to report gross proceeds paid to K, with respect to K's sale of 140 units of digital asset DE, in the amount of $280,000 pursuant to§1.6045-1. (s) * * * The amendments to paragraphs (b)(1), (c)(2)(iv), (d)(2)(ii), (e)(3)(iii), (h)(1)(v) through (ix), (h)(2)(iii), (i)(1) and (2), (i)(3)(ii), (o), and (r) of this section apply to real estate transactions with dates of closing occurring on or after January 1, 2025. Par. 8. Section 1.6045A-1 is amended by: 1. In paragraph (a)(1)(i), removing the language "paragraphs (a)(1)(ii) through (v) of this section," and adding the language "paragraphs (a)(1)(ii) through (vi) of this section," in its place; and 2. Adding paragraph (a)(1)(vi). The addition reads as follows:§1.6045A-1 Statements of information required in connection with transfers of securities. (a) * * * (1) * * * (vi) Exception for transfers of specified securities that are digital assets. No transfer statement is required under paragraph (a)(1)(i) of this section with respect to a specified security that is also a digital asset as defined in§1.6045-1(a)(19). A transferor that chooses to provide a transfer statement reporting some or all of the information described in paragraph (b) of this section is not subject to penalties under section 6722 of the Code for failure to report this information correctly. * * * * * Par. 9. Section 1.6045B-1 is amended by revising paragraph (a)(1) introductory text and adding paragraph (a)(6) to read as follows:§1.6045B-1 Returns relating to actions affecting basis of securities. (a) * * * (1) * * * Except as provided in paragraphs (a)(3) through (6) of this section, an issuer of a specified security within the meaning of§1.6045-1(a)(14)(i) through (iv) that takes an organizational action that affects the basis of the security must file an issuer return setting forth the following information and any other information specified in the return form and instructions: * * * * * (6) Exception for specified securities that are digital assets. No reporting is required under this paragraph (a) with respect to a specified security that is also a digital asset as defined in§1.6045-1(a)(19). An issuer that chooses to provide the reporting and furnish statements described in this section is not subject to penalties under section 6721 or 6722 of the Code for failure to report this information correctly. * * * * * Par. 10. Section 1.6050W-1 is amended by: 1. Adding a sentence to the end of paragraph (a)(2); 2. Adding paragraph (c)(5); and 3. Revising paragraph (j). The additions and revision read as follows:§1.6050W-1 Information reporting for payments made in settlement of payment card and third party network transactions. (a) * * * (2) * * * In the case of a third party settlement organization that has the contractual obligation to make payments to participating payees, a payment in settlement of a reportable payment transaction includes the submission of instructions to a purchaser to transfer funds directly to the account of the participating payee for purposes of settling the reportable payment transaction. * * * * * (c) * * * (5) Coordination with information returns required under section 6045 of the Code - (i) Reporting on exchanges involving digital assets. Notwithstanding the provisions of paragraph (c) of this section, the reporting of a payment made in settlement of a third party network transaction in which the payment by a payor is made using digital assets as defined in§1.6045-1(a)(19) or the goods or services provided by a payee are digital assets must be as follows: (A) Reporting on payors with respect to payments made using digital assets. If a payor makes a payment using digital assets and the exchange of the payor's digital assets for goods or services is a sale of digital assets by the payor under§1.6045-1(a)(9)(ii), the amount paid to the payor in settlement of that exchange is subject to the rules as described in§1.6045-1 (including any exemption from reporting under§1.6045-1) and not this section. (B) Reporting on payees with respect to the sale of goods or services that are digital assets. If the goods or services provided by a payee in an exchange are digital assets and the exchange is a sale of digital assets by the payee under§1.6045-1(a)(9)(ii), the amount paid to the payee in settlement of that exchange is subject to the rules as described in§1.6045-1 (including any exemption from reporting under§1.6045-1) and not this section. (ii) Examples. The following examples illustrate the rules of this paragraph (c)(5) of this section. (A) Example 1 --( 1 ) Facts. CRX is a "shared-service" organization that performs accounts payable services for numerous purchasers that are unrelated to CRX. A substantial number of sellers of goods and services, including Seller S, have established accounts with CRX and have agreed to accept payment from CRX in settlement of their transactions with purchasers. The agreement between sellers and CRX includes standards and mechanisms for settling the transactions and guarantees payment to the sellers, and the arrangement enables purchasers to transfer funds to providers. Pursuant to this seller agreement, CRX accepts cash from purchasers as payment as well as digital assets, which it exchanges into cash for payment to sellers. P, an individual not otherwise exempt from reporting, purchases one month of services from S through CRX's organization. S is also an individual not otherwise exempt from reporting. S's services are not digital assets under§1.6045-1(a)(19). To effect this transaction, P transfers 100 units of DE, a digital asset as defined in§1.6045-1(a)(19), to CRX. CRX, in turn, exchanges the 100 units of DE for $1,000, based on the fair market value of the DE units, and pays $1,000 to S. ( 2 ) Analysis with respect to CRX's status. CRX's arrangement constitutes a third party payment network under paragraph (c)(3) of this section because a substantial number of persons that are unrelated to CRX, including S, have established accounts with CRX, and CRX is contractually obligated to settle transactions for the provision of goods or services by these persons to purchasers, including P. Thus, under paragraph (c)(2) of this section, CRX is a third party settlement organization and the transaction involving P's purchase of S's services using 100 units of digital asset DE is a third party network transaction under paragraph (c)(1) of this section. Additionally, CRX is a digital asset payment processor as defined in§1.6045-1(a)(22) and, therefore, a broker under§1.6045-1(a)(1). ( 3 ) Analysis with respect to the reporting on P. Because CRX is a digital asset payment processor under§1.6045-1(a)(22), P's payment of 100 units of DE to CRX in exchange for CRX's payment of $1,000 to S is a sale of the DE units as defined in§1.6045-1(a)(9)(ii)(D). Accordingly, pursuant to the rules under paragraph (c)(5)(i)(A) of this section, CRX must file an information return under§1.6045-1 with respect to P's sale of the DE units. CRX is not required to file an information return under paragraph (a)(1) of this section with respect to P. ( 4 ) Analysis with respect to the reporting on S. S's services are not digital assets as defined in§1.6045-1(a)(19). Accordingly, pursuant to the rules under paragraph (c)(5)(i)(B) of this section, CRX's payment of $1,000 to S in settlement of the reportable payment transaction is subject to the reporting rules under paragraph (a)(1) of this section and not the reporting rules as described in§1.6045-1. (B) Example 2 --( 1 ) Facts. The facts are the same as in paragraph (c)(5)(ii)(A)( 1 ) of this section (the facts in Example 1 ) except that S's agreement with CRX provides that S will also accept digital assets, including digital asset DE, as payment for S's services. To process P's payment for the purchase of one month of services from S, CRX instructs P to transfer 100 units of DE directly to S's account. ( 2 ) Analysis. CRX's instruction to P to transfer the 100 units of DE directly to S's account constitutes the making of a payment in settlement of the reportable payment transaction under paragraph (c)(2) of this section. The payment is also a sale of the DE units under§1.6045-1(a)(9)(ii)(D). Accordingly, the reporting set forth in paragraph (c)(5)(ii)(A)( 2 ) of this section (the analysis in Example 1 ) remains applicable under these facts. (C) Example 3 --( 1 ) Facts. CRX is an entity that owns and operates a digital asset trading platform and provides digital asset broker services under§1.6045-1(a)(1). CRX takes custody of and exchanges, on behalf of customers, digital assets under§1.6045-1(a)(19), including non-fungible tokens, referred to as NFTs, representing ownership in unique digital artwork, video, or music. Exchange transactions undertaken by CRX on behalf of its customers are considered sales under§1.6045-1(a)(9)(ii) that are effected by CRX and subject to reporting by CRX under§1.6045-1. A substantial number of NFT sellers have accounts with CRX, into which their NFTs are deposited for sale. None of these sellers are related to CRX, and all have agreed to settle transactions for the sale of their NFTs in digital asset DE, or other forms of consideration, and according to the terms of their contracts with CRX. Buyers of NFTs also have accounts with CRX, into which digital assets are deposited for later use as consideration to acquire NFTs. Once a buyer decides to purchase an NFT for a price agreed to by the NFT seller, CRX effects the requested exchange of the buyer's consideration for the NFT, which allows CRX to guarantee delivery of the bargained for consideration to both buyer and seller. CRX charges a transaction fee on every NFT sale, which is paid by the buyer in additional units of digital asset DE. Seller J, an individual not otherwise exempt from reporting, sells NFTs representing artwork on CRX's digital asset trading platform. J does not perform any other services with respect to these transactions. Buyer B, also an individual not otherwise exempt from reporting, seeks to purchase J's NFT-4 using units of DE. Using CRX's platform, buyer B and seller J agree to exchange J's NFT-4 for B's 100 units of DE (with a value of $1,000). At the direction of J and B, CRX executes this exchange, with B paying CRX's transaction fee using additional units of DE. ( 2 ) Analysis with respect to CRX's status. CRX's arrangement with J and the other NFT sellers constitutes a third party payment network under paragraph (c)(3) of this section because a substantial number of providers of goods or services who are unrelated to CRX, including J, have established accounts with CRX, and CRX is contractually obligated to settle transactions for the provision of goods or services, such as NFTs, by these persons to purchasers. Thus, under paragraph (c)(2) of this section, CRX is a third party settlement organization and the sale of J's NFT-4 for 100 units of DE is a third party network transaction under paragraph (c)(1) of this section. Therefore, CRX is a payment settlement entity under paragraph (a)(4)(i)(B) of this section. ( 3 ) Analysis with respect to the reporting on B. The exchange of B's 100 units of DE for J's NFT-4 is a sale under§1.6045-1(a)(9)(ii)(A)( 2 ) by B of the 100 DE units. Accordingly, under paragraph (c)(5)(i)(A) of this section, the amount paid to B in settlement of the exchange is subject to the rules as described in§1.6045-1, and CRX must file an information return under§1.6045-1 with respect to B's sale of the 100 DE units. CRX is not required to also file an information return under paragraph (a)(1) of this section with respect to the amount paid to B even though CRX is a third party settlement organization. ( 4 ) Analysis with respect to the reporting on J. The exchange of J's NFT-4 for 100 units of DE is a sale under§1.6045-1(a)(9)(ii) by J of a digital asset under§1.6045-1(a)(19). Accordingly, under paragraph (c)(5)(i)(B) of this section, the amount paid to J in settlement of the exchange is subject to the rules as described in§1.6045-1, and CRX must file an information return under§1.6045-1 with respect to J's sale of the NFT-4. CRX is not required to also file an information return under paragraph (a)(1) of this section with respect to the amount paid to J even though CRX is a third party settlement organization. * * * * * (j) Applicability date. Except with respect to payments made using digital assets, the rules in this section apply to returns for calendar years beginning after December 31, 2010. For payments made using digital assets, this section applies on or after January 1, 2025. PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE Par. 11. The authority citation for part 31 continues to read in part as follows: Authority: 26 U.S.C. 7805. * * * * * Par. 12. Section 31.3406(b)(3)-2 is amended by revising the section heading to read as follows:§31.3406(b)(3)-2 Reportable barter exchanges and gross proceeds of sales of securities, commodities, or digital assets by brokers. * * * * * Par. 13. Section 31.3406(g)-1 is amended by revising paragraphs (e) and (f) to read as follows:§31.3406(g)-1 Exception for payments to certain payees and certain other payments. * * * * * (e) Certain reportable payments made outside the United States by foreign persons, foreign offices of United States banks and brokers, and others. For reportable payments made after June 30, 2014, other than gross proceeds from sales of digital assets (as defined in§1.6045-1(a)(19) of this chapter), a payor or broker is not required to backup withhold under section 3406 of the Code on a reportable payment that is paid and received outside the United States (as defined in§1.6049-4(f)(16) of this chapter) with respect to an offshore obligation (as defined in§1.6049-5(c)(1) of this chapter) or on the gross proceeds from a sale effected at an office outside the United States as described in§1.6045-1(g)(3)(iii) of this chapter (without regard to whether the sale is considered effected inside the United States under§1.6045-1(g)(3)(iii)(B) of this chapter). For a reportable payment made on or after January 1, 2025, from a sale of a digital asset, a payor or broker is not required to backup withhold under section 3406 on a sale of a digital asset that is either effected by a CFC digital asset broker (as defined in§1.6045-1(g)(4)(i)(B) of this chapter) that is not conducting activities as a money services business (as described in§1.6045-1(g)(4)(i)(D) of this chapter) with respect to the sale or by a non-U.S. digital asset broker (as defined in§1.6045-1(g)(4)(i)(C) of this chapter) that is not conducting activities as a money services business with respect to the sale. The exceptions to backup withholding described in the preceding two sentences of this paragraph (e) do not apply when a payor or broker has actual knowledge that the payee is a United States person. Further, no backup withholding is required on a reportable payment of an amount already withheld upon by a participating FFI (as defined in§1.1471-1(b)(91) of this chapter) or another payor in accordance with the withholding provisions under chapter 3 or 4 of the Code and the regulations under those chapters even if the payee is a known U.S. person. For example, a participating FFI is not required to backup withhold on a reportable payment allocable to its chapter 4 withholding rate pool (as defined in§1.6049-4(f)(5) of this chapter) of recalcitrant account holders (as described in§1.6049-4(f)(11) of this chapter), if withholding was applied to the payment (either by the participating FFI or another payor) pursuant to§1.1471-4(b) or§1.1471-2(a) of this chapter. For rules applicable to notional principal contracts, see§1.6041-1(d)(5) of this chapter. For rules applicable to reportable payments made before July 1, 2014, see§31.3406(g)-1(e) in effect and contained in 26 CFR part 1 revised April 1, 2013. (f) Applicability date. Except with respect to sales of digital assets, this section applies on or after January 6, 2017. (For payments made after June 30, 2014, and before January 6, 2017, see§31.3406(g)-1 in effect and contained in 26 CFR part 1 revised April 1, 2016.) For sales of digital assets, this section applies on or after January 1, 2025. Par. 14. Section 31.3406(g)-2 is amended by adding a sentence to the end of paragraphs (e) and (h) to read as follows:§31.3406(g)-2 Exception for reportable payment for which withholding is otherwise required. * * * * * (e) * * * Notwithstanding the previous sentence, a real estate reporting person must withhold under section 3406 of the Code and pursuant to the rules under§31.3406(b)(3)-2 on a reportable payment made in a real estate transaction with respect to a purchaser that exchanges digital assets for real estate to the extent that the exchange is treated as a sale of digital assets subject to reporting under§1.6045-1 of this chapter. * * * * * (h) * * * For sales of digital assets, this section applies on or after January 1, 2025. PART 301--PROCEDURE AND ADMINISTRATION Par. 15. The authority citation for part 301 continues to read in part as follows: Authority: 26 U.S.C. 7805. * * * * * Par. 16. Section 301.6721-1 is amended by revising paragraph (g)(3)(iii) and adding a sentence to the end of paragraph (h) to read as follows:§301.6721-1 Failure to file correct information returns. * * * * * (g) * * * (3) * * * (iii) Section 6045(a) or (d) (relating to returns of brokers, generally reported on Form 1099-B, "Proceeds From Broker and Barter Exchange Transactions," for broker transactions not involving digital assets; the form prescribed by the Secretary pursuant to§1.6045-1(d)(2)(i)(B) of this chapter for broker transactions involving digital assets; Form 1099-S, "Proceeds From Real Estate Transactions," for gross proceeds from the sale or exchange of real estate; and Form 1099-MISC, "Miscellaneous Income," for certain substitute payments and payments to attorneys); * * * * * (h) * * * Paragraph (g)(3)(iii) of this section applies to returns required to be filed on or after January 1, 2026. Par. 17. Section 301.6722-1 is amended by revising paragraphs (d)(2)(viii) and (e) to read as follows:§301.6722-1 Failure to furnish correct payee statements. * * * * * (d) * * * (2) * * * (viii) Section 6045(a) or (d) (relating to returns of brokers, generally reported on Form 1099-B, "Proceeds From Broker and Barter Exchange Transactions," for broker transactions not involving digital assets; the form prescribed by the Secretary pursuant to§1.6045-1(d)(2)(i)(B) of this chapter for broker transactions involving digital assets; Form 1099-S, "Proceeds From Real Estate Transactions," for gross proceeds from the sale or exchange of real estate; and Form 1099-MISC, "Miscellaneous Income," for certain substitute payments and payments to attorneys); * * * * * (e) Applicability date. The reference in paragraph (d)(3) of this section to Form 8805 shall apply to partnership taxable years beginning after April 29, 2008. Paragraph (d)(2)(viii) of this section applies to payee statements required to be furnished on or after January 1, 2026. Douglas W. O'Donnell, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register August 25, 2023, 8:45 a.m., and published in the issue of the Federal Register for August 29, 2023, 88 FR 59576)

Private Letter Ruling Number: 202225002 Internal Revenue Service March 17, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202225002 Release Date: 6/24/2022 Index Number: 9100.35-00, 2010.04-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:4 PLR-119584-21 Date: March 17, 2022 Dear *******: This letter responds to a letter dated August 18, 2021, submitted on behalf of Decedent's estate, requesting an extension of time pursuant to § 301.9100-3 of the Procedure and Administration Regulations to make an election on behalf of Decedent's estate. Decedent's estate is requesting to make an election under § 2010(c)(5)(A) of the Internal Revenue Code (a "portability" election) to allow a decedent's surviving spouse's estate to take into account decedent's deceased spousal unused exclusion (DSUE) amount. The information submitted for consideration is summarized below. Decedent died on Date, survived by Spouse. It is represented that based on the value of Decedent's gross estate and taking into account any taxable gifts, Decedent's estate is not required under § 6018(a) to file an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return). It is further represented that there is an unused portion of Decedent's applicable exclusion amount and that a portability election is required to allow Spouse to take into account that amount (the "DSUE" amount). A portability election is made upon the timely filing of a complete and properly prepared estate tax return, unless the requirements for opting out are satisfied. See § 20.2010-2(a)(2) of the Estate Tax Regulations. An estate tax return was not filed on behalf of Decedent. After discovery of this, Decedent's estate submitted this request for an extension of time under § 301.9100-3 to make a portability election. LAW AND ANALYSIS Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2010(a) provides that a credit of the applicable credit amount shall be allowed to the estate of every decedent against the tax imposed by § 2001. Section 2010(c)(1) provides that the applicable credit amount is the amount of the tentative tax that would be determined under § 2001(c) if the amount with respect to which such tentative tax is to be computed were equal to the applicable exclusion amount. On December 17, 2010, Congress amended § 2010(c), effective for estates of decedents dying and gifts made after December 31, 2010, to allow portability of a decedent's unused applicable exclusion amount between spouses. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, § 303, 124 Stat. 3296, 3302 (2010). Section 2010(c)(2) provides that the applicable exclusion amount is the sum of the basic exclusion amount, and, in the case of a surviving spouse, the DSUE amount. Section 2010(c)(3) provides the basic exclusion amount available to the estate of every decedent, an amount to be adjusted for inflation annually after calendar year 2011. Section 2010(c)(4) defines the DSUE amount to mean the lesser of (A) the basic exclusion amount, or (B) the excess of -- (i) the applicable exclusion amount of the last deceased spouse of the surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under § 2001(b)(1) on the estate of such deceased spouse. Section 2010(c)(5)(A) provides that a DSUE amount may not be taken into account by a surviving spouse under § 2010(c)(2) unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return that such amount may be so taken into account. The election, once made, shall be irrevocable. No election may be made if such return is filed after the time prescribed by law (including extensions) for filing such return. Section 20.2010-2(a)(1) provides that the due date of an estate tax return required to elect portability is nine months after the decedent's date of death or the last day of the period covered by an extension (if an extension of time for filing has been obtained). Under § 20.2010-2(a)(1), an extension of time under § 301.9100-3 to make a portability election may be granted in the case of an estate that is not required to file an estate tax return under § 6018(a), as determined solely based on the value of the gross estate and any adjusted taxable gifts (and without regard to § 20.2010-2(a)). Under § 301.9100-1(c), the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-3 provides the standards the Commissioner will use to determine whether to grant an extension of time to make an election whose due date is prescribed by a regulation (and not expressly provided by statute). Requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. In this case, based on the representation as to the value of the gross estate and any adjusted taxable gifts, the time for filing the portability election is fixed by the regulations. Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an extension of time for Decedent's estate to elect portability, provided Decedent's estate establishes it acted reasonably and in good faith, the requirements of §§ 301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government. Information and representations submitted on behalf of Decedent's estate explain the circumstances that resulted in the failure to timely file a valid election. Based solely on the information submitted and the representations made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Therefore, we grant an extension of time of 120 days from the date of this letter in which to make the portability election. The election should be made by filing a complete and properly prepared Form 706 and a copy of this letter, within 120 days from the date of this letter, with the Kansas City Service Center, at the following address: Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999. For purposes of electing portability, a Form 706 filed by Decedent's estate within 120 days from the date of this letter will be considered to be timely filed. If it is later determined that, based on the value of the gross estate and taking into account any taxable gifts, Decedent's estate is required to file an estate tax return pursuant to § 6018(a), the Commissioner is without authority under § 301.9100-3 to grant an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void. See § 20.2010-2(a)(1). We neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, we express no opinion as to the DSUE amount to be potentially taken into account by Spouse. Any claimed DSUE amount will be included in the applicable exclusion amount of Spouse only to the extent that Spouse can substantiate such amount and will be subject to determination by the Director's office upon audit of relevant Federal gift or estate tax returns. See § 20.2010-3(c)(1) and (d). The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, we have sent a copy of this letter to your authorized representatives. Sincerely, Associate Chief Counsel (Passthroughs & Special Industries) By: Leslie H. Finlow Leslie H. Finlow, Senior Technician Reviewer Branch 4 Office of the Associate Chief Counsel (Passthroughs & Special Industries) Enclosure Copy for § 6110 purposes cc:

Internal Revenue Service - Fact Sheet FS-2020-6 New credits fund employers for Coronavirus-related paid leave May 2020 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 New credits fund employers for Coronavirus-related paid leave FS-2020-06, May 2020 The Families First Coronavirus Response Act provides tax credits to reimburse employers for the costs of providing paid sick leave and paid family and medical leave to employees unable to work because of the coronavirus (COVID-19). These credits are refundable. That means if the amount of the credit exceeds the amount of tax owed, the remainder is refunded to the business or organization. The law is intended to allow employers to keep employees on their payrolls, while at the same time making sure employees aren't forced to choose between their paychecks and public health measures needed to combat COVID-19. These credits are available to eligible employers beginning April 1, 2020, for qualifying leave they provide between April 1, 2020, and December 31, 2020. Covered employers Eligible employers are businesses and tax-exempt organizations with fewer than 500 full-time and part-time employees within the United States or any U.S. territory or possession and that have to meet employer paid leave requirements. The Questions and Answers and regulations issued by the U.S. Department of Labor have more information about the 500-employee threshold and the paid leave requirements. The law allows equivalent credits for self-employed individuals in similar circumstances. For details, see specific provisions related to self-employed individuals in the COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs. Paid sick leave requirement and credit Employees of eligible employers who are unable to work or telework because they're quarantined or experiencing COVID-19 symptoms and seeking a medical diagnosis can receive up to 80 hours of paid sick leave. This pay is at their regular rate of pay or, if higher, the applicable minimum wage, up to $511 per day and $5,110 in total. Employees can receive up to 80 hours of paid sick leave at 2/3 of their regular pay or, if higher, the applicable minimum wage, up to $200 per day and $2,000 in total. Employees can receive this benefit if they need to care for: - an individual subject to quarantine, - a child whose school or place of care is closed, or - a child whose child-care provider is unavailable, due to COVID-19 or because they're experiencing similar conditions as specified by the U.S. Department of Health and Human Services. An employee is eligible for paid sick leave, regardless of length of employment. The eligible employer is entitled to a fully refundable tax credit equal to the required paid sick leave wages. Eligible employers can also get an additional credit for the employer's share of Medicare tax imposed on the qualfied sick leave wages and the cost of maintaining health insurance coverage for the employee during the sick leave period. The employer is not subject to the employer portion of Social Security tax on those wages. Paid family and medical leave requirement and credit In addition to the paid sick leave credit, an employee who is unable to work or telework because of a need to care for a child whose school or place of care is closed or whose child-care provider is unavailable due to COVID-19, is entitled to paid family and medical leave equal to 2/3 of the employee's regular pay, up to $200 per day and $10,000 in total. Up to 10 weeks of qualifying leave can be counted toward the paid family leave credit. An employee qualifies for paid family and medical leave if they've been on an employer's payroll for 30 calendar days or more. The eligible employer is entitled to a fully refundable tax credit equal to the required paid family leave wages. Eligible employers can also get an additional credit for the employer's share of Medicare tax imposed on those wages and its cost of maintaining health insurance coverage for the employee during the family leave period. The eligible employer isn't subject to the employer portion of Social Security tax on those wages. Example. An employee's child-care provider is unavailable indefinitely due to the COVID-19 outbreak, leaving the employee unable to work or telework because of the need to care for their child. For up to the first 80 hours of any period of leave to care for their child, the employee is entitled to qualified sick leave wages, up to $200 per day and $2,000 in total. After that, the employee is entitled to qualified family leave wages for up to 10 weeks of additional leave needed, up to $200 per day and $10,000 in total. How to claim the credits Eligible employers report their total qualified leave wages and the related credits for each quarter on their federal employment tax return, usually Form 941, Employer's QUARTERLY Federal Tax Return. They can receive the benefit of the credits by reducing their federal employment tax deposits for that quarter by the amount of the qualified leave wages, allocable qualified health plan expenses, and the employer's share of Medicare tax on the wages. They'll account for the reduction in deposits due to the leave credits on the Form 941 they file at the end of the quarter. The IRS recently posted Frequently Asked Questions about the ability both to reduce deposits for the credits and to defer the deposit of all of the employer's portion of Social Security tax due before January 1, 2021 under a separate provision in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. If employers don't have enough federal employment taxes to cover the amount of the credits, after they have deferred deposits of employer Social Security taxes under the CARES Act as discussed in the Frequently Asked Questions, they may request an advance payment of the credits from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. They may fax their completed forms to 855-248-0552. Examples: An eligible employer is entitled to a credit of $5,000 for paying qualified sick leave wages and qualified family leave wages (and allocable health plan expenses) and is otherwise required to deposit $8,000 in federal employment taxes withheld from all of its employees for wage payments made during the same quarter as the $5,000 in qualified leave wages. The employer may keep up to $5,000 of the $8,000 of taxes it was going to deposit, and it will not owe a penalty (PDF) for keeping the $5,000. The eligible employer will claim the credit and reflect the reduced liability for the $5,000 when it files Form 941. An eligible employer is entitled to a credit of $10,000 for paying qualified leave wages (and allocable qualified health plan expenses) and is otherwise required to deposit $8,000 in federal employment taxes withheld from all of its employees on wage payments made during the same quarter. The employer can keep the entire $8,000 of taxes that it was otherwise required to deposit without penalties as a portion of the credits it is otherwise entitled to claim on Form 941. The employer may file a request for an advance credit for the remaining $2,000 by completing Form 7200. Keep records to substantiate claims Eligible employers claiming the credits must keep records and documentation supporting each employee's leave. The COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs has more information about the documents needed to support the employee's leave and the employer's credit. An employer should keep all employment tax records for at least four years. The Questions and Answers issued by the U.S. Department of Labor have more information about the leave requirements. More information: - Coronavirus Tax Relief - IR-2020-57, Treasury, IRS and Labor announce plan to implement coronavirus-related paid leave for workers and tax credits for small and midsize businesses to swiftly recover the cost of providing coronavirus-related leave

Private Letter Ruling Number: 202052021 Internal Revenue Service April 24, 2020 DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE 1100 Commerce Street, MC 4920DAL Dallas, TX 75242 Number: 202052021 Release Date: 12/24/2020 UIL: 501.07-00 Date: April 24, 2020 Taxpayer ID Number: Form: For Tax Period(s) Ending: Person to Contact: Identification Number: Telephone Number: Fax Number: CERTIFIED MAIL -- Return Receipt Requested LAST DAY FOR FILING A PETITION WITH THE TAX COURT: Dear ********: This is a final determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(7) for the tax period(s) above. Your determination letter dated July 19XX is revoked. Our adverse determination as to your exempt status was made for the following reasons: You have not established that you are operated substantially for pleasure and recreation of its members or other non-profitable purposes and no part of the earnings inures to the benefit of private shareholder within the meaning of IRC Section 501(c)(7). You have exceeded the non-member income test for tax year ending December 31, 20XX. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov. If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication 892. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20005 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. You may be eligible for help from the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778. Taxpayer Advocate assistance can't be used as substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determination, nor extend the time fixed by law that you have to file a petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM (800-829-3676) or visiting our website at www.irs.gov/forms-pubs. If you have any questions about this letter, please contact the person whose name and telephone number are shown in the heading of this letter. Sincerely, Maria D. Hooke Director, EO Examinations Enclosures: Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Exempt Organizations Examinations Date: October 8, 2019 Taxpayer Identification Number: Form: Tax Year(s) Ended: Person to Contact: Employee ID: Telephone: Fax: Manager's Contact Information: Employee ID: Telephone: Response Due Date: CERTIFIED MAIL -- Return Receipt Requested Dear ******: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(7). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(7) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, Maria Hooke Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 PRIMARY ISSUE: Whether ****** (******), an organization exempt under IRC 501(c)(7) continues to qualify for exemption given the fact that substantially all its income is from investment income? FACTS: ****** is recognized as a section IRC 501(c)(7) tax exempt organization. Form 990s for the years ending ****** and ****** show investment income of $0 and $0, respectively. The amounts shown were reported on Form 990s, item 4 and 5a. The investment income accounts for ****** of the organization's gross income in ****** and ******. LAW: Internal Revenue Code Section 501(c)(7) provides exemption to clubs "organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes, and no part of the net earnings of which inures to the benefit of any private shareholder." Income Tax Regulation 1.501(c)(7)-1(a) states, in part, exemption is provided only to "clubs which are organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes..." and "... exemption extends to social clubs and recreation clubs which are supported solely by membership fees, dues, and assessments." The Committee Reports for Public Law 94-568 (Senate Report No. 94-1318 2d Session, 1976-2 C.B. 597) states that it is intended that social clubs be permitted to receive up to 35% of their gross receipts, including investment income, from sources outside of their membership without losing their tax-exempt status. Revenue Ruling 66-149 states, in part, a social club is not exempt from Federal income tax as an organization described in section 501(c)(7) of the Code where it regularly derives a substantial part of its income from nonmember sources such as, for example, dividends and interest on investments which it owns. Taxpayer's Position: Organization provided a letter, received September 23, 20XX, stating the following: "The organization did not meet the income limitations noted because the organization was unaware of the regulation. This was an unintentional oversight. Government Position: The organization has exceeded the 35% gross receipts limitation on a continuous basis and therefore, does not qualify for exempt status under section 501(c)(7). Organization received nonmember income in the form of investment income as follows: -Tax Year Ended ******, investment income totaled $0, representing ****** 0% of total revenue, ****** -Tax Year Ended ******, investment income totaled $0, representing ****** 0% of total revenue, ****** Conclusion: Based on our review of all facts and circumstances and the legislative support referenced above, it is the government's position that ****** exempt status should be revoked because it regularly derives a substantial part of its income from nonmember sources such as, for example, dividends and interest on investments which it owns. Accordingly, the organization's exempt status is revoked effective January 1, 20XX. Form 1120 returns should be filed for the tax periods ending on or after January 1, 20XX.

Proposed Regulation REG-120730-21 Internal Revenue Service 2023-33 I.R.B. 491 Notice of Proposed Rulemaking REG-120730-21 Short-Term, Limited-Duration Insurance; Independent, Noncoordinated Excepted Benefits Coverage; Level-Funded Plan Arrangements; and Tax Treatment of Certain Accident and Health Insurance AGENCY: Internal Revenue Service, Department of the Treasury; Employee Benefits Security Administration, Department of Labor; Centers for Medicare & Medicaid Services, Department of Health and Human Services. ACTION: Proposed rules. SUMMARY: This document sets forth proposed rules that would amend the definition of short-term, limited-duration insurance, which is excluded from the definition of individual health insurance coverage under the Public Health Service Act. This document also sets forth proposed amendments to the requirements for hospital indemnity or other fixed indemnity insurance to be considered an excepted benefit in the group and individual health insurance markets. This document further sets forth proposed amendments to clarify the tax treatment of certain benefit payments in fixed amounts received under employer-provided accident and health plans. Finally, this document solicits comments regarding coverage only for a specified disease or illness that qualifies as excepted benefits, and comments regarding level-funded plan arrangements. DATES: To be assured consideration, comments must be received at one of the addresses provided below by September 11, 2023. ADDRESSES: In commenting, please refer to file code CMS-9904-P. Comments, including mass comment submissions, must be submitted in one of the following three ways (please choose only one of the ways listed): 1. Electronically. You may submit electronic comments on this regulation to https://www.regulations.gov. Follow the "Submit a comment" instructions. 2. By regular mail. You may mail written comments to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-9904-P, P.O. Box 8010, Baltimore, MD 21244-8010. Please allow sufficient time for mailed comments to be received before the close of the comment period. 3. By express or overnight mail. You may send written comments to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-9904-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850. For information on viewing public comments, see the beginning of the "SUPPLEMENTARY INFORMATION" section. FOR FURTHER INFORMATION CONTACT: Elizabeth Schumacher or Rebecca Miller, Employee Benefits Security Administration, Department of Labor at (202) 693-8335; Jason Sandoval, Internal Revenue Service, Department of the Treasury at (202) 317-5500; Cam Clemmons, Centers for Medicare & Medicaid Services, Department of Health and Human Services at (206) 615-2338; Geraldine Doetzer, Centers for Medicare & Medicaid Services, Department of Health and Human Services at (667) 290-8855. SUPPLEMENTARY INFORMATION: Inspection of Public Comments: Comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post comments received before the close of the comment period on the following website as soon as possible after they have been received: https://www.regulations.gov. Follow the search instructions on that website to view comments. We will not post on Regulations.gov comments that make threats to individuals or institutions or suggest that the individual will take actions to harm the individual. We continue to encourage individuals not to submit duplicative comments. We will post acceptable comments from multiple unique commenters even if the content is identical or nearly identical to other comments. I. Background These proposed rules set forth proposed revisions to the definition of "short-term, limited-duration insurance" (STLDI) for purposes of its exclusion from the definition of "individual health insurance coverage" in 26 CFR part 54, 29 CFR part 2590, and 45 CFR part 144. The definition of STLDI is also relevant for purposes of the disclosure and reporting requirements in section 2746 of the Public Health Service Act (the PHS Act), which require health insurance issuers offering individual health insurance coverage or STLDI to disclose to enrollees in such coverage, and to report annually to the Department of Health and Human Services (HHS), any direct or indirect compensation provided by the issuer to an agent or broker associated with enrolling individuals in such coverage. These proposed rules also set forth proposed amendments to the requirements for hospital indemnity and other fixed indemnity insurance to be treated as an excepted benefit in the group and individual health insurance markets (fixed indemnity excepted benefits coverage). 1 Further, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) propose to clarify the tax treatment under 26 CFR part 1 of fixed amounts received by a taxpayer through certain employment-based accident or health insurance that are paid without regard to the amount of medical expenses incurred. 1 For simplicity and readability, this preamble refers to hospital indemnity or other fixed indemnity insurance that meets all requirements to be considered an excepted benefit under the federal framework as "fixed indemnity excepted benefits coverage" in order to distinguish it from hospital indemnity or other fixed indemnity insurance that does not meet all such requirements. Lastly, comments are solicited regarding coverage only for a specified disease or illness that qualifies as excepted benefits (specified disease excepted benefits coverage), 2 and regarding level-funded plan arrangements to better understand the key features and characteristics of these arrangements and whether additional guidance or rulemaking is needed to clarify plan sponsors' obligations with respect to coverage provided through these arrangements. 2 For simplicity and readability, this preamble refers to specified disease or illness insurance coverage that meets all requirements to be considered an excepted benefit under the federal framework as "specified disease excepted benefits coverage" in order to distinguish it from specified disease or illness insurance that does not meet all such requirements. The Treasury Department, the Department of Labor, and HHS (collectively, the Departments) propose these revisions to define and more clearly distinguish STLDI and fixed indemnity excepted benefits coverage from comprehensive coverage. Comprehensive coverage is subject to the federal consumer protections and requirements established under chapter 100 of the Internal Revenue Code (Code), part 7 of the Employee Retirement Income Security Act of 1974 (ERISA), and title XXVII of the PHS Act, 3 such as the prohibition on exclusions for preexisting conditions, the prohibition on health status discrimination, the requirement to cover certain preventive services without cost sharing, and many others. The Departments propose these revisions to promote equitable access to high-quality, affordable, comprehensive coverage by increasing consumers' understanding of their health coverage options and reducing misinformation about STLDI and fixed indemnity excepted benefits coverage, consistent with Executive Orders 14009 and 14070 as described in section I.B of this preamble. Similarly, clarifying the tax treatment of benefit payments in fixed amounts under hospital indemnity or other fixed indemnity coverage purchased on a pre-tax basis when those benefits are paid without regard to the medical expenses incurred is also an important means by which to distinguish that coverage from comprehensive coverage and should serve to promote the purchase of comprehensive coverage in the group market. 3 While STLDI is generally not subject to the federal consumer protections and requirements for comprehensive coverage that apply to individual health insurance coverage, the agent and broker compensation disclosure and reporting requirements in section 2746 of the PHS Act apply to health insurance issuers offering individual health insurance coverage or STLDI. A. General Statutory Background The Health Insurance Portability and Accountability Act of 1996 (HIPAA) (Pub. L. 104-191, August 21, 1996) added chapter 100 to the Code, part 7 to ERISA, and title XXVII to the PHS Act, which set forth portability and nondiscrimination rules with respect to health coverage. These provisions of the Code, ERISA, and the PHS Act were later augmented by other laws, including the Mental Health Parity Act of 1996 (Pub. L. 104-204, September 26, 1996), the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA) (Pub. L. 110-343, October 3, 2008), the Newborns' and Mothers' Health Protection Act (Pub. L. 104-204, September 26, 1996), the Women's Health and Cancer Rights Act (Pub. L. 105-277, October 21, 1998), the Genetic Information Nondiscrimination Act of 2008 (Pub. L. 110-233, May 21, 2008), the Children's Health Insurance Program Reauthorization Act of 2009 (Pub. L. 111-3, February 4, 2009), Michelle's Law (Pub. L. 110-381, October 9, 2008), the Patient Protection and Affordable Care Act (Pub. L. 111-148, March 23, 2010) (as amended by the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152, March 30, 2010) (collectively known as the Affordable Care Act (ACA)), and Division BB of the Consolidated Appropriations Act, 2021 (CAA, 2021) (Pub. L. 116-260, December 27, 2020), which includes the No Surprises Act. The ACA reorganized, amended, and added to the provisions of Part A of title XXVII of the PHS Act relating to group health plans and health insurance issuers in the group and individual markets. The ACA added section 9815 of the Code and section 715 of ERISA to incorporate the provisions of Part A of title XXVII of the PHS Act, as amended or added by the ACA, into the Code and ERISA, making them applicable to group health plans and health insurance issuers providing health insurance coverage in connection with group health plans. The provisions of the PHS Act incorporated into the Code and ERISA, as amended or added by the ACA, are sections 2701 through 2728. In addition to marketwide provisions applicable to group health plans and health insurance issuers in the group and individual markets, the ACA established Health Benefit Exchanges (Exchanges) aimed at promoting access to high-quality, affordable, comprehensive coverage. Section 1401(a) of the ACA added section 36B to the Code, providing a premium tax credit (PTC) for certain individuals with annual household income that is at least 100 percent but not more than 400 percent of the Federal poverty level (FPL) who enroll in, or who have one or more family members enrolled in, an individual market qualified health plan (QHP) through an Exchange, who are not otherwise eligible for minimum essential coverage (MEC). Section 1402 of the ACA provides for, among other things, reductions in cost sharing for essential health benefits for qualified low- and moderate-income enrollees in silver-level QHPs purchased through the individual market Exchanges. This section also provides for reductions in cost sharing for American Indians enrolled in QHPs purchased through the individual market Exchanges at any metal level. Section 5000A of the Code, added by section 1501(b) of the ACA, provides that individuals must maintain MEC, or make a payment known as the individual shared responsibility payment with their Federal tax return for the year in which they did not maintain MEC, if they are not otherwise exempt. 4 On December 22, 2017, the Tax Cuts and Jobs Act (Pub. L. 115-97) was enacted, which included a provision under which the individual shared responsibility payment under section 5000A of the Code was reduced to $0, effective for months beginning after December 31, 2018. 4 Section 5000A of the Code and Treasury regulations at 26 CFR 1.5000A-3 provide exemptions from the requirement to maintain MEC for the following individuals: (1) members of recognized religious sects; (2) members of health care sharing ministries; (3) exempt noncitizens; (4) incarcerated individuals; (5) individuals with no affordable coverage; (6) individuals with household income below the income tax filing threshold; (7) members of federally recognized Indian tribes; (8) individuals who qualify for a hardship exemption certification; and (9) individuals with a short coverage gap of a continuous period of less than 3 months in which the individual is not covered under MEC. The eligibility standards for exemptions can be found at 45 CFR 155.605. The American Rescue Plan Act of 2021 (ARP) (Pub. L. 117-2) was enacted on March 11, 2021. Among other policies intended to address the health care and economic needs of the country during the coronavirus disease-2019 (COVID-19) pandemic, the ARP increased the PTC amount for individuals with annual household income at or below 400 percent of the FPL and extended PTC eligibility for the first time to individuals with annual household incomes above 400 percent of the FPL. Although the expanded PTC subsidies under the ARP were applicable only for 2021 and 2022, the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169, August 16, 2022) extended the subsidies for an additional 3 years, through December 31, 2025. The No Surprises Act was enacted on December 27, 2020, as title I of Division BB of the CAA, 2021. The No Surprises Act added new provisions in Subchapter B of chapter 100 of the Code, Part 7 of ERISA, and Part D of title XXVII of the PHS Act, applicable to group health plans and health insurance issuers offering group or individual health insurance coverage. These provisions provide protections against surprise medical bills for certain out-of-network services and generally require plans and issuers and providers and facilities to make certain disclosures regarding balance billing protections to the public and to individual participants, beneficiaries, and enrollees. In addition to the new provisions applicable to group health plans and issuers of group or individual health insurance coverage, the No Surprises Act added a new Part E to title XXVII of the PHS Act, establishing corresponding requirements applicable to health care providers, facilities, and providers of air ambulance services. The CAA, 2021 also amended title XXVII of the PHS Act to, among other things, add section 2746, which requires health insurance issuers offering individual health insurance coverage or STLDI to disclose the direct or indirect compensation provided by the issuer to an agent or broker associated with enrolling individuals in such coverage to the enrollees in such coverage as well as to report it annually to HHS. The Secretaries of HHS, Labor, and the Treasury have authority to promulgate regulations as may be necessary or appropriate to carry out the parallel Federal consumer protections and requirements for comprehensive coverage established under the Code, ERISA, and the PHS Act (hereinafter referred to as the "Federal consumer protections and requirements for comprehensive coverage"). 5,6 5 Sections 2701 through 2728 of the PHS Act, incorporated into section 715 of ERISA and section 9815 of the Code; section 104 of HIPAA; sections 408(b)(2), 505, 734, and 716-717 of ERISA; sections 2746, 2761, 2792, 2799A-1-2, and 2799B1-B2 of the PHS Act; section 1321(a)(1) and (c) of ACA; sections 7805, 9816-9817, and 9822 of the Code; and sections 2746, 2799A-1-2, and 2799B1-B2 of the PHS Act. 6 See also 64 FR 70164 (December 15, 1999). B. Recent Executive Orders On January 28, 2021, President Biden issued Executive Order 14009, "Strengthening Medicaid and the Affordable Care Act," which directed the Departments to review policies to ensure their consistency with the Administration's goal of protecting and strengthening the ACA and making high-quality health care accessible and affordable for every American. 7 Executive Order 14009 also directed Federal agencies to examine policies or practices that may undermine protections for people with preexisting conditions and that may reduce the affordability of coverage or financial assistance for coverage. Executive Order 14009 also revoked the previous Administration's Executive Order 13813, "Promoting Healthcare Choice and Competition Across the United States," which directed agencies to expand the availability of STLDI. 8 On April 5, 2022, President Biden issued Executive Order 14070, "Continuing to Strengthen Americans' Access to Affordable, Quality Health Coverage," which directed the heads of Federal agencies with responsibilities related to Americans' access to health coverage to examine polices or practices that make it easier for all consumers to enroll in and retain coverage, understand their coverage options, and select appropriate coverage; that strengthen benefits and improve access to health care providers; that improve the comprehensiveness of coverage and protect consumers from low-quality coverage; and that help reduce the burden of medical debt on households. 9 7 Executive Order 14009 of January 28, 2021, 86 FR 7793. 8 Executive Order 13813 of October 12, 2017, 82 FR 48385. 9 Executive Order 14070 of April 5, 2022, 87 FR 20689. In addition, on January 21, 2021, President Biden issued Executive Order 13995, "Ensuring an Equitable Pandemic Response and Recovery," which directed the Secretaries of Labor and HHS, and the heads of all other agencies with authorities or responsibilities relating to the COVID-19 pandemic response and recovery, to consider any barriers that have restricted access to preventive measures, treatment, and other health services for populations at high risk for COVID-19 infection, and modify policies to advance equity. 10 10 Executive Order 13995 of January 21, 2021, 86 FR 7193. Consistent with these executive orders, the Departments have reviewed the regulatory provisions related to STLDI and fixed indemnity excepted benefits coverage, and propose amendments to those provisions in these proposed rules. The Departments also solicit comments on specified disease excepted benefit coverage (for example, cancer-only policies) in section III.B.2 of this preamble and on level-funded plan arrangements in section III.C of this preamble. C. Short-Term, Limited-Duration Insurance (STLDI) STLDI is a type of health insurance coverage sold by health insurance issuers that is primarily designed to fill temporary gaps in coverage that may occur when an individual is transitioning from one plan or coverage to another, such as transitioning between employment-based coverages. Section 2791(b)(5) of the PHS Act provides "[t]he term 'individual health insurance coverage' means health insurance coverage offered to individuals in the individual market, but does not include short-term, limited-duration insurance." 11 The PHS Act does not, however, define the phrase "short-term, limited-duration insurance." Sections 733(b)(4) of ERISA and 2791(b)(4) of the PHS Act provide that group health insurance coverage means "in connection with a group health plan, health insurance coverage offered in connection with such plan." Sections 733(a)(1) of ERISA and 2791(a)(1) of the PHS Act provide that a group health plan is generally any plan, fund, or program established or maintained by an employer (or employee organization or both) for the purpose of providing medical care to employees or their dependents (as defined under the terms of the plan) directly, or through insurance, reimbursement, or otherwise. There is no corresponding provision excluding STLDI from the definition of group health insurance coverage. Thus, any health insurance that is sold in the group market and purports to be STLDI must comply with applicable Federal group market consumer protections and requirements for comprehensive coverage, unless the coverage satisfies the requirements of one or more types of group market excepted benefits. 11 The definition of individual health insurance coverage (and its exclusion of STLDI) has some limited relevance with respect to certain provisions that apply to group health plans and group health insurance issuers over which the Departments of Labor and the Treasury also have jurisdiction. For example, an individual who loses coverage due to moving out of a health maintenance organization (HMO) service area in the individual market precipitates a special enrollment right into a group health plan. See 26 CFR 54.9801-6(a)(3)(i)(B), 29 CFR 2590.701-6(a)(3)(i)(B), and 45 CFR 146.117(a)(3)(i)(B). Because STLDI is not individual health insurance coverage, it is generally exempt from the applicable Federal individual market consumer protections and requirements for comprehensive coverage. STLDI is not subject to many PHS Act provisions that apply to individual health insurance coverage under the ACA including, for example, the prohibition of preexisting condition exclusions or other discrimination based on health status (section 2704 of the PHS Act), the prohibition on discrimination against individual participants and beneficiaries based on health status (section 2705 of the PHS Act), nondiscrimination in health care (section 2706 of the PHS Act), and the prohibition on lifetime and annual dollar limits on essential health benefits (section 2711 of the PHS Act). In addition, STLDI is not subject to the Federal consumer protections and requirements added to the PHS Act by other laws that apply to individual health insurance coverage, including MHPAEA (Pub. L. 110-343, October 3, 2008) (section 2726 of the PHS Act), and the No Surprises Act, as added by the CAA, 2021. Thus, individuals who enroll in STLDI are not guaranteed these key consumer protections under Federal law. 12 This feature of STLDI is especially problematic when it is not readily apparent to consumers deciding whether to purchase STLDI or comprehensive individual health insurance coverage. 12 Some state laws apply some consumer protections and requirements that parallel those in the ACA to STLDI. In 1997, the Departments issued interim final rules implementing the portability and renewability requirements of HIPAA (1997 HIPAA interim final rules). 13 Those interim final rules included definitions of individual health insurance coverage, as well as STLDI. That definition of STLDI, which was finalized in rules issued in 2004 and applied through 2016, defined "short-term, limited-duration insurance" as "health insurance coverage provided pursuant to a contract with an issuer that has an expiration date specified in the contract (taking into account any extensions that may be elected by the policyholder without the issuer's consent) that is less than 12 months after the original effective date of the contract." 14 13 62 FR 16894 (April 8, 1997). 14 62 FR 16894 at 16928, 16942, 16958 (April 8, 1997); see also 69 FR 78720 (December 30, 2004). To address the issue of STLDI being sold as a type of primary coverage, as well as concerns regarding possible adverse selection impacts on the individual market risk pools that were created under the ACA, 15 the Departments published proposed rules on June 10, 2016 in the Federal Register titled "Expatriate Health Plans, Expatriate Health Plan Issuers, and Qualified Expatriates; Excepted Benefits; Lifetime and Annual Limits; and Short-Term, Limited-Duration Insurance" (2016 proposed rules). Those rules proposed to revise the Federal definition of STLDI by shortening the permitted duration of such coverage, and adopting a consumer notice provision. 16 On October 31, 2016, the Departments finalized the 2016 proposed rules related to STLDI without change in final rules published in the Federal Register titled "Excepted Benefits; Lifetime and Annual Limits; and Short-Term, Limited-Duration Insurance" (2016 final rules). 17 The 2016 final rules amended the definition of STLDI to specify that the maximum coverage period must be less than 3 months, taking into account any extensions that may be elected by the policyholder with or without the issuer's consent. 18 In addition, the 2016 final rules stated that the following notice must be prominently displayed in the contract and in any application materials provided in connection with enrollment in STLDI, in at least 14 point type: 15 See Pub. L. 111-148, section 1312(c)(1) and 45 CFR 156.80. 16 81 FR 38019 (June 10, 2016). 17 81 FR 75316 (October 31, 2016). 18 Id. at 75317 - 75318. "THIS IS NOT QUALIFYING HEALTH COVERAGE ("MINIMUM ESSENTIAL COVERAGE") THAT SATISFIES THE HEALTH COVERAGE REQUIREMENT OF THE AFFORDABLE CARE ACT. IF YOU DON'T HAVE MINIMUM ESSENTIAL COVERAGE, YOU MAY OWE AN ADDITIONAL PAYMENT WITH YOUR TAXES." 19 19 Id. On June 12, 2017, HHS published a request for information (RFI) in the Federal Register titled "Reducing Regulatory Burdens Imposed by the Patient Protection and Affordable Care Act & Improving Healthcare Choices to Empower Patients," 20 which solicited comments about potential changes to existing regulations and guidance that could promote consumer choice, enhance affordability of coverage for individual consumers, and affirm the traditional regulatory authority of the States in regulating the business of health insurance, among other goals. 21 In response to this RFI, HHS received comments that recommended maintaining the definition of STLDI adopted in the 2016 final rules, and comments that recommended expanding the definition to allow for a longer period of coverage. Commenters in support of maintaining the definition adopted in the 2016 final rules expressed concern that changing the definition could leave enrollees in STLDI at risk for significant out-of-pocket costs, and cautioned that expanding the definition of STLDI could facilitate its sale to individuals as their primary form of health coverage, even though such insurance lacks key consumer protections under Federal law that apply to individual health insurance coverage. Commenters in favor of maintaining the definition in the 2016 final rules also suggested that amending the 2016 final rules to include coverage lasting 3 months or more could have the effect of pulling healthier people out of the individual market risk pools, thereby increasing overall premium costs for enrollees in individual health insurance coverage and destabilizing the individual market. 20 82 FR 26885 (June 12, 2017). 21 See also Executive Order 13813 of October 12, 2017 82 FR 48385. (Directing the Secretaries of the Treasury, Labor and HHS " to consider proposing regulations or revising guidance, consistent with law, to expand the availability of [STLDI]. To the extent permitted by law and supported by sound policy, the Secretaries should consider allowing such insurance to cover longer periods and be renewed by the consumer.") In contrast, several other commenters stated that changes to the 2016 final rules may provide an opportunity to achieve the goals outlined in the RFI (for example, to promote consumer choice, enhance affordability, and affirm the traditional authority of the States in regulating the business of insurance). These commenters stated that shortening the permitted length of STLDI policies in the 2016 final rules had deprived individuals of affordable coverage options. One commenter explained that due to the increased costs of comprehensive coverage, many financially stressed individuals could be faced with a choice between purchasing STLDI and going without any coverage at all. One commenter highlighted the need for STLDI for individuals who are between jobs for a relatively long period and for whom enrolling in Consolidated Omnibus Budget Reconciliation Act (COBRA) 22 continuation coverage is financially infeasible. Another commenter noted that States have the primary responsibility to regulate STLDI and encouraged the Departments to defer to the States' authority with respect to such coverage. 22 Pub. L. 99-272, April 7, 1986. On February 21, 2018, the Departments published proposed rules in the Federal Register titled "Short-Term, Limited-Duration Insurance" (2018 proposed rules) in which the Departments proposed changing the definition of STLDI to provide that such insurance may have a maximum coverage period of less than 12 months after the original effective date of the contract, taking into account any extensions that may be elected by the policyholder without the issuer's consent. 23 Among other things, the Departments solicited comments on whether the maximum length of STLDI should be less than 12 months or some other duration and under what conditions issuers should be able to allow such coverage to continue for 12 months or longer. In addition, the Departments proposed to revise the content of the consumer notice that must appear in the contract and any application materials provided in connection with enrollment in STLDI. The 2018 proposed rules included two variations of the consumer notice - one for policies that had a coverage start date before January 1, 2019, and the other for policies that had a coverage start date on or after January 1, 2019, which excluded language referencing the individual shared responsibility payment (which was reduced to $0 for months beginning after December 2018). 24 23 83 FR 7437 (February 21, 2018). 24 Pub. L. 115-97, December 22, 2017. Some commenters on the 2018 proposed rules acknowledged that STLDI fills an important role by providing temporary coverage, but that such insurance should not take the place of comprehensive coverage. These commenters expressed concern that allowing STLDI to be marketed as a viable alternative to comprehensive coverage would subject uninformed consumers to potentially severe financial risks. Commenters who opposed the proposed changes to the definition also expressed concern that such plans would siphon off healthier individuals from the market for individual health insurance coverage, thereby raising premiums for individual health insurance coverage. Many of these commenters also expressed concerns about the lack of protections for consumers who purchase STLDI, stating that such policies are not a viable option for people with serious or chronic medical conditions due to potential coverage exclusions and benefit limitations in STLDI policies. These commenters further observed that STLDI policies can discriminate against individuals with serious illnesses or preexisting conditions, including individuals with mental health and substance use disorders, older consumers, women, transgender patients, persons with gender identity-related health concerns, and victims of rape and domestic violence. Many of these commenters also expressed concern about aggressive and deceptive marketing practices utilized by marketers of STLDI. Other commenters highlighted the important role that STLDI could play in providing temporary coverage to individuals who would otherwise be uninsured. These commenters, who supported the proposed changes to the definition, also noted that such changes would allow purchasers of STLDI to obtain the coverage they want at a more affordable price for a longer period. With respect to the maximum length of the initial contract term for STLDI, most commenters opposed extending the maximum duration beyond 3 months. Others suggested periods such as less than 6 or 8 months. However, most commenters who supported extending the maximum initial contract term beyond 3 months suggested it should be 364 days. A few commenters suggested more than 1 year. Other commenters stated the maximum length of coverage should be left to the States. Commenters who supported the 2018 proposed rules generally favored permitting renewals of STLDI policies, while those who opposed the 2018 proposed rules generally opposed permitting such renewals. After reviewing comments and feedback received from interested parties, on August 3, 2018, the Departments published final rules in the Federal Register titled "Short-Term, Limited-Duration Insurance" (2018 final rules) 25 with some modifications from the 2018 proposed rules. Specifically, in the 2018 final rules, the Departments amended the definition of STLDI to provide that STLDI is coverage with an initial term specified in the contract that is less than 12 months after the original effective date of the contract, and taking into account renewals or extensions, has a duration of no longer than 36 months in total. 26 The 2018 final rules also finalized the provision that issuers of STLDI must display one of two versions of a notice prominently in the contract and in any application materials provided in connection with enrollment in such coverage, in at least 14-point type. Under the 2018 final rules, the notice must read as follows (with the final two sentences omitted for policies sold on or after January 1, 2019): 25 83 FR 38212 (August 3, 2018). 26 Id. "This coverage is not required to comply with certain Federal market requirements for health insurance, principally those contained in the Affordable Care Act. Be sure to check your policy carefully to make sure you are aware of any exclusions or limitations regarding coverage of preexisting conditions or health benefits (such as hospitalization, emergency services, maternity care, preventive care, prescription drugs, and mental health and substance use disorder services). Your policy might also have lifetime and/or annual dollar limits on health benefits. If this coverage expires or you lose eligibility for this coverage, you might have to wait until an open enrollment period to get other health insurance coverage. Also, this coverage is not "minimum essential coverage." If you don't have minimum essential coverage for any month in 2018, you may have to make a payment when you file your tax return unless you qualify for an exemption from the requirement that you have health coverage for that month." D. Independent, Noncoordinated Excepted Benefits: Hospital Indemnity or Other Fixed Indemnity Insurance and Specified Disease or Illness Coverage Section 9831 of the Code, section 732 of ERISA, and sections 2722(b)-(c) and 2763 of the PHS Act provide that the respective Federal consumer protections and requirements for comprehensive coverage do not apply to any individual coverage or any group health plan (or group health insurance coverage offered in connection with a group health plan) in relation to its provision of certain types of benefits, known as "excepted benefits." These excepted benefits are described in section 9832(c) of the Code, section 733(c) of ERISA, and section 2791(c) of the PHS Act. HIPAA defined certain types of coverage as "excepted benefits" that were exempt from its portability requirements. 27 The same definitions are applied to describe benefits that are not required to comply with some of the ACA requirements. 28 There are four statutory categories of excepted benefits: independent, noncoordinated excepted benefits, which are the subject of these proposed rules; benefits that are excepted in all circumstances; 29 limited excepted benefits; 30 and supplemental excepted benefits. 31 The category "independent, noncoordinated excepted benefits" includes coverage for only a specified disease or illness (such as cancer-only policies) and hospital indemnity or other fixed indemnity insurance. These benefits are excepted under section 9831(c)(2) of the Code, section 732(c)(2) of ERISA, and section 2722(c)(2) of the PHS Act only if all of the following conditions are met: (1) the benefits are provided under a separate policy, certificate, or contract of insurance; (2) there is no coordination between the provision of such benefits and any exclusion of benefits under any group health plan maintained by the same plan sponsor; and (3) the benefits are paid with respect to an event without regard to whether benefits are provided with respect to such event under any group health plan maintained by the same plan sponsor or, with respect to individual coverage, under any health insurance coverage maintained by the same health insurance issuer. 32 In addition, under the existing regulations, hospital indemnity and other fixed indemnity insurance in the group market must pay a fixed dollar amount per day (or other period) of hospitalization or illness, regardless of the amounts of expenses incurred, to be considered an excepted benefit. 33 In the individual market, under the existing regulations, hospital indemnity and other fixed indemnity insurance must pay benefits in a fixed dollar amount per period of hospitalization or illness and/or per-service (for example, $100/day or $50/visit), regardless of the amount of expense incurred, to be considered an excepted benefit. 34 27 See sections 9831(b) - (c) and 9832(c) of the Code, sections 732(b) - (c) and 733(c) of ERISA, and sections 2722(b) - (c), 2763 and 2791(c) of the PHS Act. 28 Section 1551 of the ACA. See also section 1563(a) and (b)(12) of the ACA. Excepted benefits are also not subject to the consumer protections and other federal requirements that apply to comprehensive coverage, including MHPAEA, the Newborns' and Mothers' Health Protection Act, the Women's Health and Cancer Rights Act, the Genetic Information Nondiscrimination Act of 2008, the Children's Health Insurance Program Reauthorization Act of 2009, Michelle's Law, and Division BB of the CAA, 2021 29 Under section 9832(c)(1) of the Code, section 733(c)(1) of ERISA, and section 2791(c)(1) of the PHS Act, this category includes, for example, accident and disability income insurance, automobile medical payment insurance, liability insurance and workers compensation, as well as "[o]ther similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits." 30 Under section 9832(c)(2) of the Code, section 733(c)(2) of ERISA, and section 2791(c)(2) of the PHS Act, this category includes limited scope vision or dental benefits, benefits for long-term care, nursing home care, home health care, or community-based care, or other, similar limited benefits specified by the Departments through regulation. 31 Under section 9832(c)(4) of the Code, section 733(c)(4) of ERISA, and section 2791(c)(4) of the PHS Act, this category includes Medicare supplemental health insurance (also known as Medigap), TRICARE supplemental programs, or ''similar supplemental coverage provided to coverage under a group health plan.'' 32 See also section 2763(b) of the PHS Act (providing that "[the] requirements of this part [related to the HIPAA individual market reforms] shall not apply to any health insurance coverage in relation to its provision of excepted benefits described in paragraph (2), (3), or (4) of section 2791(c) if the benefits are provided under a separate policy, certificate or contract of insurance."). 33 26 CFR 54.9831-1(c)(4), 29 CFR 2590.732(c)(4), and 45 CFR 146.145(b)(4). 34 45 CFR 148.220(b)(4). The proposals in these rules related to independent, noncoordinated excepted benefits coverage are focused on the conditions that must be met for hospital indemnity and other fixed indemnity insurance in the group or individual markets to be considered excepted benefits under the Federal regulations. Additionally, in section III.B.2 of this preamble, the Departments solicit comments regarding specified disease excepted benefits coverage in the group and individual markets to inform potential future guidance or rulemaking related to such coverage, but are not proposing changes to the Federal regulations governing such coverage in this rulemaking. 1. Fixed Indemnity Excepted Benefits Coverage Like other forms of excepted benefits, fixed indemnity excepted benefits coverage does not provide comprehensive coverage. Rather, its primary purpose is to provide income replacement benefits. 35 Benefits under this type of coverage are paid in a flat ("fixed") cash amount following the occurrence of a health-related event, such as a period of hospitalization or illness, subject to the terms of the contract. In addition, benefits are typically provided at a pre - determined level regardless of any actual health care costs incurred by a covered individual with respect to the qualifying event. Although a benefit payment may equal all or a portion of the cost of care related to an event, it is not necessarily designed to do so, and the benefit payment is made without regard to the amount of medical expense incurred. 36 35 See, e.g., 62 FR 16903 (April 8, 1997) and 79 FR 15818 (July 8, 2014). 36 Jost, Timothy (2017). "ACA Round-Up: Market Stabilization, Fixed Indemnity Plans, Cost Sharing Reductions, and Penalty Updates," Health Affairs, available at: https://www.healthaffairs.org/do/10.1377/forefront.20170208.058674/full. ("Fixed indemnity coverage is excepted benefit coverage that pays a fixed amount per-service or per-time period of service without regard to the cost of the service or the type of items or services provided."). Traditionally, benefits under fixed indemnity excepted benefits coverage are paid directly to a policyholder, rather than to a health care provider or facility, and the policyholder has discretion over how to use such benefits - including using the benefits to cover non-medical expenses that may or may not be related to the event that precipitated the payment of benefits. 37 Because fixed indemnity excepted benefits coverage is capped at a maximum benefit payment, design features aimed at reducing risk to the plan or issuer that are common in comprehensive coverage (such as medical management techniques, use of a preferred network of providers, or cost-sharing requirements) are unnecessary and are generally absent in this coverage. 38 37 AHIP (2019). "Supplemental Health Insurance: Hospital or Other Fixed Indemnity, Accident-Only, Critical Illness," available at: https://www.ahip.org/documents/Supplemental-Health-Insurance-Fast-Facts.pdf. 38 Young, Christen Linke and Kathleen Hannick (2020). "Fixed Indemnity Coverage is a Problematic Form of "Junk" Insurance," USC-Brookings Schaeffer Initiative for Health Policy, available at: https://www.brookings.edu/blog/usc-brookings-schaeffer-on-health-policy/2020/08/04/fixed-indemnity-health-coverage-is-a-problematic-form-of-junk- insurance. ("Consumers are often seeking a product that transfers catastrophic financial risk to the health plan, but fixed indemnity products - almost by definition - do not do this. They set a payment amount associated with a specific service or kind of service [that] is received, and consumers are responsible for any difference between this set payment amount and the actual cost of care."). a. Group Market Regulations and Guidance The Departments' 1997 interim final rules implementing the portability and renewability requirements of HIPAA codified at 26 CFR 54.9831-1(c)(4), 29 CFR 2590.732(c)(4), and 45 CFR 146.145(b)(4) established requirements for hospital indemnity and other fixed indemnity insurance to qualify as an excepted benefit in the group market. These requirements, which were effective until February 27, 2005, provided that coverage for hospital indemnity or other fixed dollar indemnity insurance is excepted only if it meets each of the following conditions: (1) the benefits are provided under a separate policy, certificate or contract of insurance; (2) there is no coordination between the provision of the benefits and an exclusion of benefits under any group health plan maintained by the same plan sponsor; and (3) the benefits are paid with respect to an event without regard to whether benefits are provided with respect to the event under any group health plan maintained by the same plan sponsor. 39 39 62 FR 16894 at 16903, 16939 through 16940, 16954, and 16971 (April 8, 1997). The Departments' group market regulations for fixed indemnity excepted benefits coverage were first amended in the 2004 HIPAA group market final rules. Those amendments added language to further clarify that to be hospital indemnity or other fixed indemnity insurance that is an excepted benefit, the insurance must pay a fixed dollar amount per day (or per other time period) of hospitalization or illness (for example, $100/day) regardless of the amount of expenses incurred. 40 An illustrative example was also codified as part of these amendments clarifying that a policy providing benefits only for hospital stays at a fixed percentage of hospital expenses up to a maximum amount per day does not qualify as an excepted benefit. 41 As explained in the 2004 HIPAA group market final rules, the result is the same even if, in practice, the policy pays the maximum for every day of hospitalization. 42 40 69 FR 78720 at 78735, 78762, 78780, and 78798 - 78799 (December 30, 2004). 41 Id. See also 26 CFR 54.9831-1(c)(4)(iii), 29 CFR 2590.732(c)(4)(iii), and 45 CFR 146.145(b)(4)(iii). 42 Id. The Departments later released an FAQ on January 24, 2013, to offer additional guidance on the types of hospital indemnity or other fixed indemnity insurance that meet the criteria for fixed indemnity excepted benefits coverage. 43 The Departments issued the FAQ in response to reports that policies were being advertised as fixed indemnity coverage but were paying a fixed amount on a per-service basis (for example, per doctor visit or surgical procedure) rather than a fixed amount per period (for example, per day or per week). The FAQ affirmed that, under the 2004 HIPAA group market final rules, to qualify as fixed indemnity excepted benefits coverage, the policy must pay benefits on a per-period basis as opposed to on a per-service basis. 44 It also affirmed that group health insurance coverage that provides benefits in varying amounts based on the type of procedure or item, such as the type of surgery actually performed or prescription drug provided, does not qualify as fixed indemnity excepted benefits coverage because it does not meet the condition that benefits be provided on a per-period basis, regardless of the amount of expenses incurred. 45 43 Frequently Asked Questions about Affordable Care Act Implementation (Part XI) (Jan. 24, 2013), Q7, available at: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-xi.pdf and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs11. 44 Id. 45 Id. The Departments proposed amendments to the group market regulations for fixed indemnity excepted benefits coverage in the 2016 proposed rules. 46 As explained in those proposed rules, the Departments were concerned that some individuals may mistake these policies for comprehensive coverage that would be considered MEC. 47 To avoid this confusion, the Departments proposed to adopt a notice requirement to inform enrollees and potential enrollees that the coverage is a supplement to, rather than a substitute for, comprehensive coverage, and also proposed to codify two illustrative examples to further clarify the condition that benefits be provided on a per-period basis. 48 The Departments also requested comments on whether the conditions for hospital indemnity or other fixed indemnity insurance to be considered excepted benefits should be more substantively aligned between the group and individual markets. 49 After consideration of comments, the Departments did not finalize the proposed changes to the group market regulation but noted their intention to address hospital indemnity and other fixed indemnity insurance in future rulemaking. 50 46 81 FR 38019 at 38031-38032, 38038, 38042-38043, and 38045-38046 (June 10, 2016). 47 Id. at 38031- 38032. 48 Id. at 38031- 38032, 38038, 38042- 38043, and 38045- 38046. 49 As described in section I.D.1.b of this preamble, HHS amended the individual market fixed indemnity excepted benefits coverage regulation to provide additional flexibility, subject to several additional requirements that do not apply in the group market. 79 FR 30239 (May 27, 2014). 50 81 FR 75316 at 75317 (October 31, 2016). b. Individual Market Regulations and Guidance HHS also issued an interim final rule in 1997 establishing the regulatory framework for the HIPAA individual market Federal requirements and addressing the requirements for hospital indemnity and other fixed indemnity insurance to qualify as an excepted benefit in the individual market. 51 The initial HIPAA individual market fixed indemnity excepted benefits coverage regulation, which was effective until July 27, 2014, provided an exemption from the Federal individual market consumer protections and requirements for comprehensive coverage if the hospital indemnity or other fixed indemnity insurance provided benefits under a separate policy, certificate, or contract of insurance and met the noncoordination-of-benefits requirements outlined in the HHS group market excepted benefits regulations. 52 51 62 FR 16985 at 16992 and 17004 (April 8, 1997). 52 Id.; 45 CFR 146.145(b)(4)(ii)(B) and (b)(4)(ii)(C). Following issuance of the Departments' January 24, 2013 FAQ, 53 State insurance regulators and industry groups representing health insurance issuers expressed concerns that prohibiting hospital indemnity and other fixed indemnity insurance from payment on a per-service basis in order to qualify as an excepted benefit could limit consumer access to an important supplemental coverage option. 54 Based on this feedback, HHS announced in an FAQ released in January 2014 that it intended to propose amendments to the individual market fixed indemnity excepted benefits coverage regulation to allow hospital indemnity or other fixed indemnity insurance sold in the individual market to be considered an excepted benefit if four conditions were met. 55 First, such coverage would be sold only to individuals who have other health coverage that is MEC, within the meaning of section 5000A(f) of the Code. Second, no coordination between the provision of benefits and an exclusion of benefits under any other health coverage would be permitted. Third, benefits would be paid in a fixed dollar amount regardless of the amount of expenses incurred and without regard to whether benefits are provided with respect to an event or service under any other health insurance coverage. Finally, a notice would have to be prominently displayed to inform policyholders that the coverage is not MEC and would not satisfy the individual shared responsibility requirements of section 5000A of the Code. HHS explained that if these proposed revisions were implemented, hospital indemnity or other fixed indemnity insurance in the individual market would no longer have to pay benefits solely on a per-period basis to qualify as an excepted benefit. 53 Frequently Asked Questions about Affordable Care Act Implementation (Part XI) (Jan. 24, 2013), available at: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-xi.pdf and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs11. 54 While the FAQ only addressed fixed indemnity insurance sold in the group market, the same statutory framework and legal analysis also applies to hospital indemnity and fixed indemnity insurance sold in the individual market. 55 Frequently Asked Questions about Affordable Care Act Implementation (Part XXVIII) and Mental Health Parity Implementation (Jan. 9, 2014), Q11, available at: https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/aca-part-xviii.pdf and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs18. In the proposed rule, titled "Patient Protection and Affordable Care Act; Exchange and Insurance Market Standards for 2015 and Beyond" (2014 proposed rule), HHS proposed to amend the criteria in 45 CFR 148.220 for fixed indemnity insurance to be treated as an excepted benefit in the individual market. 56 Consistent with the framework outlined in the January 2014 FAQ, the amendments proposed to eliminate the requirement that individual market fixed indemnity excepted benefits coverage must pay benefits only on a per-period basis (as opposed to a per-service basis) and instead proposed to require, among other things, that it be sold only as secondary to other health coverage that is MEC to qualify as an excepted benefit. 57 56 79 FR 15807 at 15818-15820, 15869 (March 21, 2014). 57 Id. On July 28, 2014, in the rule titled "Patient Protection and Affordable Care Act; Exchange and Insurance Market Standards for 2015 and Beyond; Final Rule" (2014 final rule), HHS finalized the proposed amendments to 45 CFR 148.220(b)(4) with some modifications. Pursuant to the finalized amendments, hospital indemnity or other fixed indemnity insurance in the individual market may qualify as fixed indemnity excepted benefits coverage if it is paid on either a per-period or per-service basis subject to several additional requirements that do not apply to fixed indemnity excepted benefits coverage in the group market. 58 Under 45 CFR 148.220(b)(4)(i), to qualify as excepted benefits coverage, benefits under an individual market hospital indemnity or other fixed indemnity insurance policy may only be provided to individuals who attest in their application that they have other health coverage that is MEC within the meaning of section 5000A(f) of the Code, or that they are treated as having MEC due to their status as a bona fide resident of any possession of the United States pursuant to section 5000A(f)(4)(B) of the Code. 59 Further, to qualify as an excepted benefit, 45 CFR 148.220(b)(4)(iv) requires specific notice language be prominently displayed in the application materials for individual market hospital indemnity or other fixed indemnity insurance. Finally, consistent with the group market fixed indemnity excepted benefits coverage regulations, 45 CFR 148.220(b)(4)(ii) implements the statutory noncoordination standard and requires that there is no coordination between the provision of benefits under the individual market fixed indemnity excepted benefits insurance policy and an exclusion of benefits under any other health coverage. 58 79 FR 30239 (May 27, 2014). 59 As discussed later in this section and in section III.B.1.a of this preamble, the U.S. Court of Appeals for the District of Columbia vacated the requirement at 45 CFR 148.220(b)(4)(i) that an individual attest to having MEC prior to purchasing a fixed indemnity policy in order for the policy to qualify as an excepted benefit. Central United Life Insurance v. Burwell, 827 F.3d 70 (D.C. Cir. 2016). HHS made these changes in the 2014 final rule for two reasons. First, as stated previously, interested parties, including State insurance regulators and industry groups representing health insurance issuers, communicated to HHS that fixed indemnity plans that paid benefits on a per-service basis were widely available as a complement to comprehensive coverage in the group and individual markets. The National Association of Insurance Commissioners (NAIC) also expressed that State insurance regulators believed fixed indemnity plans that paid benefits on a per-service basis provided consumers an important supplemental coverage option by helping consumers that purchase MEC pay for out-of-pocket costs. 60 Second, beginning in 2014, most consumers were required to have MEC in order to avoid being subject to an individual shared responsibility payment under section 5000A of the Code. HHS adopted the MEC attestation requirement to prevent fixed indemnity excepted benefits coverage in the individual market from being offered as a substitute for comprehensive coverage while also accommodating the concerns of interested parties who supported allowing fixed indemnity excepted benefits coverage in the individual market to pay benefits on a per-service basis, rather than only on a per-period basis. 61 However, in its 2016 decision in Central United Life Insurance Company v. Burwell, the U.S. Court of Appeals for the District of Columbia invalidated the requirement at 45 CFR 148.220(b)(4)(i) that an individual must attest to having MEC prior to purchasing fixed indemnity excepted benefits coverage in the individual market. 62 The Court did not engage in a severability analysis to determine whether HHS would have intended to leave the remaining provisions of the regulation in place, and left intact the language permitting fixed indemnity excepted benefits coverage in the individual market to be provided on a per-service basis. 60 National Association of Insurance Commissioners (2013). "Letter to Secretaries of Labor, Treasury, and Health and Human Services," available at: https://naic.soutronglobal.net/Portal/Public/en-GB/RecordView/Index/23541. ("State regulators believe hospital and other fixed indemnity coverage with variable fixed amounts based on service type could provide important options for consumers as supplemental coverage. Consumers who purchase comprehensive coverage that meets the definition of 'minimum essential coverage' may still wish to buy fixed indemnity coverage to help meet out-of-pocket medical and other costs."). 61 79 FR 30239 at 30255 (May 27, 2014). 62 827 F.3d 70 (D.C. Cir. July 1, 2016). 2. Specified Disease Excepted Benefits Coverage Like hospital indemnity or other fixed indemnity insurance, coverage only for a specified disease or illness that meets the requirements under section 9831(c)(2) of the Code, section 732(c)(2) of ERISA, and section 2722(c)(2) of the PHS Act qualifies as a form of independent, noncoordinated excepted benefits coverage. 63 Specified disease excepted benefits coverage is also not an alternative to comprehensive coverage, but rather provides a cash benefit related to the diagnosis or the receipt of items or services related to the treatment of one or more medical conditions specified in the insurance policy, certificate, or contract of insurance. The Departments are aware of various forms of coverage being marketed to consumers as specified disease or illness coverage under a number of labels, including "specified disease," "critical illness," and "dread disease" coverage (or insurance). 64 Some forms of specified disease excepted benefits coverage pay benefits based on diagnosis or treatment for a single condition (such as diabetes), while others pay benefits related to diagnosis or treatment for a disease category (such as cancer). 63 See also section 2763(b) of the PHS Act. 64 See Healthinsurance.org (2023). "Glossary: What is a Critical Illness Plan?," available at: https://www.healthinsurance.org/glossary/critical-illness-plan. See also American Council of Life Insurers (2021). "Model 171 Benefits Overview: Presented to the NAIC Accident and Sickness Minimum Standards (B) Subgroup," available at: https://content.naic.org/sites/default/files/call_materials/Supplemental%20Benefits%20Overview.pdf. The Departments codified requirements for coverage only for a specified disease or illness to qualify as an excepted benefit in the group market in the 1997 HIPAA interim final rules. 65 To qualify as excepted benefits in the group market, specified disease or illness coverage (for example, cancer-only policies) must provide benefits under a separate policy, certificate, or contract of insurance; there must be no coordination between the provision of the benefits and an exclusion of benefits under any group health plan maintained by the same plan sponsor; and benefits must be paid with respect to an event without regard to whether benefits are provided with respect to the event under any group health plan maintained by the same plan sponsor. 66,67 HHS codified similar requirements for specified disease or illness coverage to qualify as an excepted benefit in the individual market in the 1997 interim final rule that established the regulatory framework for the HIPAA individual market. 68 Unlike fixed indemnity excepted benefits coverage, the Departments have not issued subsequent rulemaking or guidance regarding specified disease excepted benefits coverage. 65 62 FR 16894 at 16903 (April 8, 1997). 66 See 26 CFR 54.9831-1(c)(4)(i) and (ii), 29 CFR 2590.732(c)(4)(i) and (ii), and 45 CFR 146.145(b)(4)(i) and (ii). 67 The Departments' group market regulations for specified disease excepted benefits coverage were later affirmed, without change, in the 2004 HIPAA group market final rules. See 69 FR 78720 at 78762, 78780, and 78798-- 78799 (December 30, 2004). See also 45 CFR 148.220(b)(3). 68 62 FR 16985 at 16992, 17004 (April 8, 1997). See also section 2763(b) of the PHS Act. In the preamble to the 2016 proposed rules, the Departments solicited comments on whether a policy covering multiple specified diseases or illnesses may be considered to be excepted benefits, but did not propose changes to the rules governing specified disease excepted benefits coverage. The Departments sought comments on whether such policies should be considered excepted benefits and, if so, whether protections were needed to ensure they were not mistaken for comprehensive coverage, expressing concern that individuals who purchase a specified disease policy covering multiple diseases or illnesses may incorrectly believe they are purchasing comprehensive coverage when, in fact, these polices are not subject to Federal consumer protections and requirements for comprehensive coverage. 69 The Departments declined to address specified disease excepted benefits coverage in the 2016 final rules, but noted that they might address such coverage in future regulations or guidance. 70 69 81 FR 38019, 38032 (June 10, 2016). 70 81 FR 75316, 75317, footnote 12 (October 31, 2016). E. Tax Treatment and Substantiation Requirements for Amounts Received from Fixed Indemnity Insurance and Certain Other Arrangements Hospital indemnity or other fixed indemnity insurance and coverage only for a specified disease or illness are treated as "accident or health insurance" under sections 104, 105, and 106 of the Code whether or not they are excepted benefits. Premiums paid by an employer (including by salary reduction pursuant to section 125 of the Code) for accident or health insurance are excluded from an employee's gross income under section 106 of the Code. Amounts received from accident or health insurance are excluded from a taxpayer's gross income under section 104(a)(3) of the Code if the premiums are paid for on an after-tax basis. The exclusion from gross income for these amounts under section 104(a)(3) of the Code does not apply to amounts attributable to contributions by an employer that were not includible in the gross income of the employee or amounts paid directly by the employer. This means that the exclusion under section 104(a)(3) of the Code does not apply where the premiums or contributions paid for the accident or health insurance are paid on a pre-tax basis. The taxation of amounts received by an employee from accident or health insurance where the premiums or contributions are paid on a pre-tax basis is determined under section 105 of the Code. Section 105(a) of the Code provides that amounts received by an employee through accident or health insurance for personal injuries or sickness are included in gross income, except as otherwise provided in section 105. Section 105(b) of the Code excludes from gross income amounts paid by the employer to reimburse an employee's expenses for medical care (as defined in section 213(d) of the Code). Under 26 CFR 1.105-2, the exclusion from gross income in section 105(b) of the Code "applies only to amounts which are paid specifically to reimburse the taxpayer for expenses incurred by him for the prescribed medical care. Thus, section 105(b) does not apply to amounts which the taxpayer would be entitled to receive irrespective of whether or not he incurs expenses for medical care" and "section 105(b) is not applicable to the extent that such amounts exceed the amount of the actual expenses for such medical care." Further, under longstanding regulations and guidance issued by the Treasury Department and the IRS, amounts for medical expenses within the meaning of section 213(d) of the Code must be substantiated if reimbursed by employment-based accident or health insurance that would not be excluded from a taxpayer's gross income but for the application of section 105(b) of the Code. 71 71 See, e.g., 84 FR 28888, 28917 (June 20, 2019) (describing substantiation requirements for employer-sponsored health reimbursement arrangements); see also Q44-55 of IRS Notice 2017-67, 2017-47 IRB 517; Prop.Treas.Reg. § 1.125-6; IRS Notice 2002-45, 2002-2 CB 93. F. Level-Funded Plan Arrangements The Departments understand that an increasing number of group health plan sponsors are utilizing a type of self-funded arrangement in which the plan sponsor makes set monthly payments to a service provider to cover estimated claims costs, administrative costs, and premiums for stop-loss insurance for claims that surpass a maximum dollar amount beyond which the plan sponsor is no longer responsible for paying claims (attachment point). This funding mechanism or plan type, known as level-funding, is increasingly utilized by small employers in particular. Stop-loss insurance is used by employers or group health plans as part of these plan arrangements to limit their financial responsibility, and the arrangements typically involve both employer and employee contributions. When the total dollar amount of the claims paid during the year is lower than the total amount of contributions attributed to claims costs, the plan or plan sponsor generally will receive a refund or carry the surplus over to the next plan year. When annual claims exceed projected claims, the subsequent year's monthly payments may, and oftentimes do, increase to adjust to the plan's claims experience. II. Promoting Access to High-Quality, Affordable, and Comprehensive Coverage The Departments recognize that STLDI can provide temporary health insurance coverage for individuals who are experiencing brief periods without health coverage (for example, due to application of an employer waiting period), and that fixed indemnity excepted benefits coverage can provide consumers with income replacement that can be used to cover out-of-pocket expenses not covered by comprehensive coverage or to defray non-medical expenses (for example, mortgage or rent) in the event of an unexpected or serious health event. Both STLDI and fixed indemnity excepted benefits coverage generally provide limited benefits at lower premiums than comprehensive coverage, 72 and enrollment is typically available at any time (sometimes subject to medical underwriting) rather than being restricted to open and special enrollment periods. However, given significant changes in the legal landscape and market conditions since the Departments last addressed STLDI and fixed indemnity excepted benefits coverage, and the low value that STLDI and fixed indemnity excepted benefits coverage provide to consumers when used as a substitute for comprehensive coverage, the Departments have determined that it is now necessary and appropriate to propose to amend the existing Federal regulations governing both types of coverage to more clearly distinguish them from comprehensive coverage and increase consumer awareness of coverage options that include the full range of Federal consumer protections. 72 Although it is typically true that the unsubsidized premium price for comprehensive coverage is greater than STLDI or fixed indemnity excepted benefits coverage, consistent with the greater level of benefits provided under comprehensive coverage, see the additional discussion in this section of this preamble regarding the availability of financial subsidies to reduce the premium and out-of-pocket costs for comprehensive coverage purchased on an Exchange for eligible individuals. A. Access to Affordable Coverage In the preamble to the 2018 final rules, the Departments explained the decision to amend the definition of STLDI to expand access to such policies by citing STLDI as an important means to provide more affordable coverage options and more choices for consumers. 73 The Departments cited a 21 percent increase in individual health insurance coverage premiums between 2016 and 2017, and a 20 percent decrease in average monthly enrollment for individuals who did not receive PTC, along with a 10 percent overall decrease in monthly enrollment during the same period. 74 Additionally, the Departments noted that in 2018 about 26 percent of enrollees (living in 52 percent of counties) had access to just one issuer on the Exchange. 75 73 83 FR 38212, at 38217 (October 2, 2018). 74 Id. at 38214, citing CMS (2018). "Trends in Subsidized and Unsubsidized Individual Health Insurance Market Enrollment," available at: https://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Marketplaces/Downloads/2018-07-02-Trends-Report-2.pdf. 75 Id., citing KFF (2017). "Insurer Participation on ACA Marketplaces, 2014-2018," now available at: https://www.kff.org/private-insurance/issue-brief/insurer-participation-on-the-aca-marketplaces-2014-2021/. However, since the publication of the 2018 final rules, comprehensive coverage for individuals has generally become more accessible and affordable. For example, a study examining issuer participation trends from 2014 to 2021 in every county in the United States found that the number of consumers with multiple issuer options for individual health insurance coverage on the Exchanges has grown consistently since 2018. In 2021, 78 percent of enrollees (living in 46 percent of counties) had a choice of three or more health insurance issuers, up from 67 percent of enrollees in 2020 and 58 percent of enrollees in 2019. Only 3 percent of enrollees (residing in 10 percent of counties) resided in single-issuer counties - down from 26 percent of enrollees (residing in 52 percent of counties). 76 The Centers for Medicare & Medicaid Services (CMS) reported that a record 16.4 million people enrolled in Exchange coverage during the 2023 Open Enrollment Period, including 3.7 million consumers (23 percent of total enrollments) who were new to Exchanges in 2023, and 12.7 million returning customers. Over 1.8 million more consumers signed up for coverage during the 2023 Open Enrollment Period compared to the same period in 2022 (a 13 percent increase), and nearly 4.4 million more consumers signed up compared to the 2021 Open Enrollment Period (a 36 percent increase). 77 As noted in section I.A of this preamble, enrollment gains during 2023 were influenced by the expansion of PTC subsidies, as first expanded under the ARP and then extended through 2025 under the IRA. 78 In an analysis prior to the passage of the IRA, the Congressional Budget Office stated that if the ARP subsidies were made permanent, they would attract 4.8 million new people to the Exchanges each year, and that 2.2 million fewer individuals would be without health insurance, on average, over the period from 2023-2032. 79 76 McDermott, Daniel and Cynthia Cox (2020). "Insurer Participation on the ACA Marketplaces, 2014-2021," KFF, available at: https://www.kff.org/private-insurance/issue-brief/insurer-participation-on-the-aca-marketplaces-2014-2021. 77 CMS (2023). "Health Insurance Marketplaces, 2023 Open Enrollment Report," available at: https://www.cms.gov/files/document/health-insurance-exchanges-2023-open-enrollment-report-final.pdf. 78 Although unsubsidized premiums for 2023 increased on average between 2.2 percent and 4.7 percent compared to the previous year, after four years of declines, PTC under the IRA largely shielded consumers from these slight increases. See Ortaliza, Jared, Justin Lo, Krutika Amin, and Cynthia Cox (2022). "How ACA Marketplace Premiums Are Changing By County in 2023," KFF, available at: https://www.kff.org/private-insurance/issue-brief/how-aca-marketplace-premiums-are-changing-by-county-in-2023. 79 Congressional Budget Office (2022). "Letter from Phillip L. Swagel to Rep. Mike Crapo, "Re: Health Insurance Policies," available at: https://www.cbo.gov/system/files?file=2022-07/58313-Crapo_letter.pdf. Additionally, on October 13, 2022, the IRS and the Treasury Department issued final regulations under section 36B of the Code to provide that affordability of employer-sponsored MEC for family members of an employee is determined based on the employee's share of the cost of covering the employee and those family members, not the cost of covering only the employee (2022 affordability rule). 80 It was estimated that this rule change, aimed at addressing the issue often called the "family glitch," will increase the number of individuals with PTC-subsidized Exchange coverage by approximately 1 million per year for the next 10 years. 81 These anticipated enrollment trends and the availability of the enhanced subsidies allay the accessibility and affordability concerns expressed by the Departments in the preamble to the 2018 final rules regarding the availability of affordable options for comprehensive coverage, and offer further support for the proposals in these proposed rules aimed at helping consumers differentiate between comprehensive coverage and other forms of more limited health coverage. 80 87 FR 61979 (October 13, 2022). 81 Id. at 61999. Although access to affordable comprehensive coverage has improved in recent years, the Departments recognize that affordability concerns continue to persist among consumers, including among consumers who are enrolled in comprehensive coverage. A 2022 national survey conducted by the Commonwealth Fund found that 29 percent of people with employer coverage and 44 percent of those with coverage purchased in the individual market were underinsured, meaning that their coverage did not provide them with affordable access to health care. 82 The Departments believe that it is important to ensure consumers have access to a wide range of tools that can support access to affordable health care. However, neither STLDI nor fixed indemnity excepted benefits coverage represents a complete solution to larger issues of affordable access to health care and health coverage. Consumers who enroll in these plans as a substitute for comprehensive coverage or under the misapprehension that STLDI and fixed indemnity excepted benefits are a lower-cost equivalent to comprehensive coverage are at risk of being exposed to significant financial liability in the event of a costly or unexpected health event, often without knowledge of the risk associated with such coverage. 82 Collins, Sara, Lauren Haynes, and Relebohile Masitha (2022). "The State of U.S. Health Insurance in 2022: Findings from the Commonwealth Fund Biennial Health Insurance Survey," Commonwealth Fund, available at: https://www.commonwealthfund.org/publications/issue-briefs/2022/sep/state-us-health-insurance-2022-biennial-survey. Specifically, this study defined a person as "underinsured" if they were insured all year but one of the following applied: 1) Out-of-pocket costs over the prior 12 months, excluding premiums, were equal to 10 percent or more of household income; 2) Out-of-pocket costs over the prior 12 months, excluding premiums, were equal to 5 percent or more of household income for individuals living under 200 percent of the FPL ($27,180 for an individual or $55,500 for a family of four in 2022); or 3) The deductible constituted 5 percent or more of household income. B. Risks to Consumers As noted in the introduction to section II of this preamble, the limitations on benefits and coverage under STLDI or fixed indemnity excepted benefits coverage may allow some issuers to offer such coverage at lower monthly premiums than comprehensive coverage. The Departments are concerned about additional costs to consumers who enroll in STLDI or fixed indemnity excepted benefits coverage and incur medical expenses that are not covered by such coverage. The typical limits on coverage provided by STLDI and fixed indemnity excepted benefits coverage can lead to more and higher uncovered medical bills than consumers enrolled in comprehensive coverage would incur, exposing consumers to greater financial risk. 83 Healthy consumers who enroll in STLDI or fixed indemnity excepted benefits coverage as an alternative to comprehensive coverage may not realize their STLDI or fixed indemnity excepted benefits coverage excludes or limits coverage for preexisting conditions (including conditions the consumer did not know about when they enrolled), or conditions contracted after enrollment, such as COVID-19. 83 Palanker, Dania, JoAnn Volk, and Kevin Lucia (2018). "Short-Term Health Plan Gaps and Limits Leave People at Risk," Commonwealth Fund, available at: https://www.commonwealthfund.org/blog/2018/short-term-health-plan-gaps-and-limits-leave-people-risk. (Describing STLDI marketing materials that list coverage limits that would fall far short of typical costs to a consumer, including $1,000 a day for hospital room and board coverage, $1,250 a day for the intensive care unit, $50 a day for doctor visits while in the hospital, $100 a day for inpatient substance abuse treatment, and $250 for ambulance transport). Additionally, a consumer enrolled in STLDI may discover that a newly-diagnosed medical condition is categorized as a preexisting condition, and related medical expenses will not be covered by, or will be only partially covered by, their STLDI policy. 84 For example, a consumer in Illinois who was diagnosed with Stage IV cancer a month after enrolling in STLDI was denied coverage for treatment by the STLDI issuer, both for treatments that led to his successful remission and for a potentially life-saving bone marrow transplant. In his case, the STLDI issuer of his policy determined that his cancer was a preexisting condition because he had disclosed experiencing back pain of undiagnosed cause to the broker who sold him his STLDI policy - leaving him with $800,000 of medical debt and without meaningful health coverage as he continued to fight his illness. 85 84 See Lueck, Sarah (2018). "Key Flaws of Short-Term Health Plans Pose Risks to Consumers," Center on Budget and Policy Priorities, available at: https://www.cbpp.org/research/health/key-flaws-of-short-term-health-plans-pose-risks-to-consumers. See also Hall, Mark and Michael McCue (2022). "Short-Term Health Insurance and the ACA Market," Commonwealth Fund, available at: https://www.commonwealthfund.org/blog/2022/short-term-health-insurance-and-aca-market. See also Partnership to Protect Coverage (2021). "Under-Covered: How 'Insurance-Like' Products are Leaving Patients Exposed," available at: https://www.nami.org/NAMI/media/NAMI-Media/Public%20Policy/Undercovered_Report_03252021.pdf. 85 Partnership to Protect Coverage (2021). "Under-Covered: How 'Insurance-Like' Products are Leaving Patients Exposed," available at: https://www.nami.org/NAMI/media/NAMI-Media/Public%20Policy/Undercovered_Report_03252021.pdf. The financial risk for consumers that encounter newly diagnosed conditions or a significant medical event while enrolled in STLDI increases with the length of their policy. In fact, researchers found that because the maximum annual limitation on an individual's cost sharing for essential health benefits under section 1302(c)(1) of the ACA does not apply to STLDI, the maximum out-of-pocket health care spending limit for STLDI was on average nearly three times that of comprehensive coverage in 2020. 86 A 2020 report found that over 60 percent of the STLDI policies surveyed had a maximum out-of-pocket limit greater than the $7,900 limit that was permitted for self-only comprehensive coverage in 2019, and 15 percent had limits in excess of $15,000; as is typical for STLDI, these limits apply only to the coverage period, which in some cases was only 6 months, compared to the annual limits required under the ACA. 87 Consumers enrolled in STLDI who ultimately require medical care are more likely to incur higher out-of-pocket costs than if they had enrolled in comprehensive coverage. 88 86 Dieguez, Gabriela and Dane Hansen (2020). "The Impact of Short-term Limited-duration Policy Expansion on Patients and the ACA Individual Market," Milliman, available at: https://www.milliman.com/en/insight/the-impact-of-short-term-limited-duration-policy-expansion-on-patients-and-the-aca-individual-market. 87 Id. See also, Palanker, Dania, Kevin Lucia, and Emily Curran (2017). "New Executive Order: Expanding Access to Short-Term Health Plans Is Bad for Consumers and the Individual Market," Commonwealth Fund, available at https://www.commonwealthfund.org/blog/2017/new-executive-order-expanding-access-short-term-health-plans-bad-consumers-and-individual. ("When considering the deductible, the best-selling plans have out-of-pocket maximums ranging from $7,000 to $20,000 for just three months of coverage. In comparison, the ACA limits out-of-pocket maximums to $7,150 for the entire [2017 calendar] year."). 88 Id. As noted in section I.D.1 of this preamble, consumers who enroll in fixed indemnity excepted benefits coverage as an alternative to comprehensive coverage bear similar risk and exposure to significant out-of-pocket expenses due to their health care costs exceeding the fixed cash benefit to which they may be entitled, if benefits are even provided for their illness or injury. While issuers of fixed indemnity excepted benefits coverage may emphasize the potential for cash benefits that sound generous outside of the context of the true costs of a significant medical event - such as a product suggesting that a consumer could receive a flat payment in excess of $10,000 following a five-day hospitalization - fixed indemnity excepted benefits coverage is not designed to, and typically does not, provide benefits relative to the full cost of such events. As noted by one expert, hospitalization costs can exceed $10,000 per day, even without accounting for provider services. 89 A consumer who relied on fixed indemnity excepted benefits coverage and who required hospitalization would be left with tens of thousands of dollars in unpaid medical bills, and without comprehensive coverage designed to cover any long-term follow-up care costs. 89 Appleby, Julie (2017). "Brokers Tout Mix-And-Match Coverage To Avoid High-Cost ACA Plans," KFF, available at: https://kffhealthnews.org/news/brokers-tout-mix-and-match-coverage-to-avoid-high-cost-aca-plans. Consumers enrolled in STLDI and fixed indemnity excepted benefits coverage may experience financial hardship when their medical bills are unaffordable. 90 Notably, the protections against balance billing and out-of-network cost sharing for certain out-of-network services established under the No Surprises Act, which are intended to shield consumers from surprise bills that can drive medical debt, 91 do not apply to STLDI or fixed indemnity excepted benefits coverage. 92 Because STLDI is typically subject to medical underwriting and not guaranteed renewable, consumers enrolled in STLDI as an alternative to comprehensive coverage may also be unable to renew STLDI at the end of the coverage period, increasing the risk of periods during which they are uninsured. Such consumers may not be able to purchase comprehensive coverage in the individual market until an open enrollment or special enrollment period occurs. Therefore, STLDI serves better as a bridge between different sources of comprehensive coverage than as an alternative to comprehensive coverage. Similarly, as noted in section I.D.1 of this preamble, fixed indemnity excepted benefit coverage serves best as an income replacement policy 93 that supplements comprehensive coverage rather than as an alternative to comprehensive coverage. 90 Unaffordable medical debt increasingly impacts members of disadvantaged and marginalized communities. See Lopes, Lunna, Audrey Kearney, Alex Montero, Liz Hamel, and Mollyann Brodie (2022). "Health Care Debt In The U.S.: The Broad Consequences Of Medical And Dental Bills," KFF, available at: https://www.kff.org/health-costs/report/kff-health-care-debt-survey. See also Himmelstein, David, Samuel Dickman, Danny McCormick, David Bor, Adam Gaffney, and Steffie Woolhandler (2022). "Prevalence and Risk Factors for Medical Debt and Subsequent Changes in Social Determinants of Health in the US," JAMA Network Open, Volume 5 Issue 9:e2231898, available at: https://jamanetwork.com/journals/jamanetworkopen/fullarticle/2796358. 91 Families USA (2019). "Surprise Medical Bills, Results from a National Survey," available at https://familiesusa.org/wp-content/uploads/2019/11/Surprise-Billing-National-Poll-Report-FINAL.pdf. 92 See 26 CFR 54.9816-2T, 29 CFR 2590.716(b), and 45 CFR 149.20(b). 93 As an income replacement policy, the policyholder typically has broad discretion in how to use the fixed cash benefits provided, including but not limited to reimbursement for medical expenses not covered by comprehensive coverage (for example, deductibles, coinsurance, copays) or to defray non-medical costs (for example, mortgage or, rent). In the preamble to the 2018 final rules, the Departments stated that individuals who purchased STLDI rather than being uninsured would potentially experience improved health outcomes and have greater protection from catastrophic health care expenses. 94 However, recent experience with the COVID-19 public health emergency (PHE) 95 has prompted the Departments to reassess the degree of protection generally afforded by coverage that is not subject to the Federal consumer protections and requirements for comprehensive coverage, such as STLDI and fixed indemnity excepted benefits coverage, and to reassess the value of a framework that instead encourages uninsured individuals to purchase comprehensive coverage. Enrollees in STLDI and fixed indemnity excepted benefits coverage with COVID-19 typically face significant limitations on coverage for COVID-19 related treatments, and high out-of-pocket expenses. 96 For example, neither STLDI nor fixed indemnity excepted benefits coverage was subject to requirements under section 6001 of the Families First Coronavirus Response Act (Pub. L. 116-127, March 18, 2020), as amended by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. 116-136, March 27, 2020), to cover COVID-19 diagnostic testing, without cost sharing, furnished during the COVID-19 PHE; 97 or the requirement under section 3203 of the CARES Act to cover qualifying coronavirus preventive services, including COVID-19 vaccines, without cost sharing. Instead, both of these important coverage expansions enacted by Congress as part of the nation's response to the COVID-19 PHE only applied to comprehensive coverage. Any coverage of COVID-19 vaccines, diagnostic testing, or treatment by STLDI or fixed indemnity excepted benefits coverage was subject to the discretion of individual plans and issuers of these policies and applicable State law. Notably, the Health Resources and Services Administration's COVID-19 Coverage Assistance Fund, which reimbursed eligible health care providers for providing COVID-19 vaccines to underinsured individuals, 98 included enrollees in STLDI and excepted benefits coverage within the definition of underinsured. 99 The CARES Act also amended the definition of "uninsured individual" in Social Security Act section 1902(ss) to include individuals enrolled only in STLDI. Even individuals enrolled in STLDI or fixed indemnity excepted benefits coverage who are generally healthy are at risk of needing health care, and thus at risk of incurring unaffordable medical bills at any time. The COVID-19 PHE has underscored the unpredictability of when the need for medical care will arise, and the importance of encouraging individuals to enroll in comprehensive coverage. 94 83 FR 38212, 38229 (October 2, 2018). 95 On January 31, 2020, HHS Secretary Alex M. Azar II declared that as of January 27, 2020, a nationwide public health emergency (PHE) exists as a result of the 2019 novel coronavirus (COVID-19). See HHS Office of the Assistant Secretary for Preparedness and Response, Determination of the HHS Secretary that a Public Health Emergency Exists, available at: https://www.phe.gov/emergency/news/healthactions/phe/Pages/2019-nCoV.aspx. This declaration was last renewed by HHS Secretary Xavier Becerra on October 13, 2022, following previous renewals on April 21, 2020, July 23, 2020, October 2, 2020, January 7, 2021, April 15, 2021, July 20, 2021, and October 18, 2021, January 14, 2022, April 12, 2022, and July 15, 2022. See HHS Office of the Assistant Secretary for Preparedness and Response, Renewal of Determination That A Public Health Emergency Exists, available at: https://aspr.hhs.gov/legal/PHE/Pages/covid19-13Oct2022.aspx. On January 30, 2023 and February 9, 2023, the Biden-Harris Administration announced that it intended to end the PHE at the end of the day on May 11, 2023. See Executive Office of the President, Office of Management and Budget, Statement of Administration Policy: H.R. 382 and H.J. Res. 7 (Jan. 30, 2023), available at: https://www.whitehouse.gov/wp-content/uploads/2023/01/SAP-H.R.-382-H.J.-Res.-7.pdf; Letter to U.S. Governors from HHS Secretary Xavier Becerra on renewing COVID-19 Public Health Emergency (PHE) (Feb. 9, 2023), available at: https://www.hhs.gov/about/news/2023/02/09/letter-us-governors-hhs-secretary-xavier-becerra-renewing-covid-19-public-health-emergency.html. The PHE did in fact end at the end of the day on May 11, 2023. 96 See, e.g., Curran, Emily, Kevin Lucia, JoAnn Volk, and Dania Palanker (2020). "In the Age of COVID-19, Short-Term Plans Fall Short for Consumers," Commonwealth Fund, available at: https://www.commonwealthfund.org/blog/2020/age-covid-19-short-term-plans-fall-short-consumers. This study found that STLDI policies provide less financial protection than comprehensive coverage if an enrollee needs treatment for COVID-19. The study found that, among the 12 brochures reviewed for STLDI policies being sold in Georgia, Louisiana, and Ohio, 11 excluded nearly all coverage for prescription drugs, with some providing limited coverage of inpatient drugs. The study further found that STLDI imposed high cost sharing, with deductibles ranging from $10,000 to $12,500 (which did not count toward the enrollees' maximum out-of-pocket costs) and that enrollees may be required to meet separate deductibles for emergency room treatment, forcing some enrollees to face out-of-pocket costs of more than $30,000 over a 6-month period. Additionally, the study found that STLDI did not cover services related to preexisting conditions. 97 FAQs about Families First Coronavirus Response Act and Coronavirus Aid, Relief, and Economic Security Act Implementation Part 42, Q1 (April 11, 2020), available at: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-42.pdf and https://www.cms.gov/files/document/FFCRA-Part-42-FAQs.pdf; Additional Policy and Regulatory Revisions in Response to the COVID-19 Public Health Emergency, 85 FR 71142, 71173 (Nov. 6, 2020); FAQs about Affordable Care Act Implementation Part 51, Families First Coronavirus Response Act and Coronavirus Aid, Relief, and Economic Security Act Implementation (Jan. 10, 2022), available at: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-51.pdf and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQs-Part-51.pdf (FAQs Part 51); and FAQs about Families First Coronavirus Response Act, Coronavirus Aid, Relief, and Economic Security Act and Health Insurance Portability and Accountability Act Implementation (FAQs Part 58), available at: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-58 and https://www.cms.gov/cciio/resources/fact-sheets-and-faqs/downloads/faqs-part-58.pdf. Note that the COVID-19 PHE ended on May 11, 2023. 98 Underinsured individuals are defined for this purpose as having a health plan that either does not include COVID-19 vaccine administration as a covered benefit or covers COVID-19 vaccine administration but with cost sharing. See Health Resources and Services Administration, "FAQs for The HRSA COVID-19 Coverage Assistance Fund," available at: https://www.hrsa.gov/provider-relief/about/covid-19-coverage-assistance/faq. 99 Health Resources and Services Administration, "FAQs for The HRSA COVID-19 Coverage Assistance Fund," available at: https://www.hrsa.gov/provider-relief/about/covid-19-coverage-assistance/faq. The Departments have also become aware of potentially deceptive or aggressive marketing of STLDI and fixed indemnity excepted benefits coverage to consumers who may be unaware of the limits of these plans or the availability of Federal subsidies that could reduce the costs of premiums and out-of-pocket health care expenditures for comprehensive coverage purchased through an Exchange. 100 The Departments note that these concerns are not limited to individual market consumers considering STLDI or fixed indemnity excepted benefits coverage. Reports that employers are increasingly offering fixed indemnity coverage alongside a plan that offers only a very limited set of primary or preventive care benefits (or in some cases, as the only form of health coverage) have also raised similar concerns about consumers who obtain this health coverage through their employers. 101 Consumers who are unaware of the coverage limitations of these arrangements, or who are employed by employers who are similarly unaware, can be faced with overwhelming medical costs if they require items and services that are not covered by their group health plan, because the fixed indemnity excepted benefits coverage provides only fixed cash benefits that may be far lower than the costs of medical services, rather than coverage intended to cover the costs of the medical services themselves. For example, a Texas consumer who was enrolled in two forms of health insurance through his employer received a $67,000 hospital bill after he experienced a heart attack. Although he believed his two policies would provide comprehensive coverage, he learned that his coverage was provided through a group health plan that covered only preventive services and prescription drugs and a fixed indemnity excepted benefits coverage policy that provided a cash benefit of less than $200 per day of hospitalization. 102 Additionally, employers may incur penalties if they erroneously treat fixed indemnity policies as excepted benefits when the policies do not meet the requirements for excepted benefits (for example, when they are not offered as independent, noncoordinated benefits) and fail to comply with applicable group market Federal consumer protections and requirements for comprehensive coverage, such as the requirement to provide participants, beneficiaries, and enrollees with a summary of benefits and coverage that meets applicable content requirements or the prohibition on lifetime and annual dollar limits on essential health benefits. 103 In light of research revealing significant disparities in health insurance literacy among certain underserved racial and ethnic groups and people with incomes below the FPL, 104 the Departments are also concerned that underserved populations may be particularly vulnerable to misleading or aggressive sales and marketing tactics that obscure the differences between comprehensive coverage and STLDI or fixed indemnity excepted benefits coverage, exposing these populations to higher levels of health and financial risks. As noted in Executive Order 13995, the COVID-19 pandemic has "exposed and exacerbated severe and pervasive health and social inequities in America," highlighting the urgency with which such inequities must be addressed. These concerns continue amid the Medicaid unwinding period that began on April 1, 2023 during which State Medicaid programs have 12 months to initiate, and 14 months to complete, a renewal for all individuals enrolled in Medicaid, the Children's Health Insurance Program (CHIP), and, if applicable, the Basic Health Program (BHP). 105 HHS has estimated that 15 million beneficiaries will lose Medicaid, CHIP, or BHP coverage as a result of Medicaid unwinding. 106 The Departments are concerned that the large population of individuals at risk of losing Medicaid and those other forms of coverage, due to a loss of eligibility or as a result of administrative churn, may be susceptible to these marketing and sales tactics, and might therefore mistakenly enroll in STLDI or fixed indemnity excepted benefits coverage in lieu of comprehensive coverage. ******** 100 Palanker, Dania and Kevin Lucia (2021). "Limited Plans with Minimal Coverage Are Being Sold as Primary Coverage, Leaving Consumers at Risk," Commonwealth Fund, available at: https://www.commonwealthfund.org/blog/2021/limited-plans-minimal-coverage-are-being-sold-primary-coverage-leaving-consumers-risk. (Noting (noting that fixed indemnity insurance may be "bundled" with other non-comprehensive insurance products in such a way that "the plans look like comprehensive coverage" while still offering limited benefits). See also ); Palanker, Dania, JoAnn Volk, and Maanasa Kona (2019). "Seeing Fraud and Misleading Marketing, States Warn Consumers About Alternative Health Insurance Products," Commonwealth Fund, available at: https://www.commonwealthfund.org/blog/2019/seeing-fraud-and-misleading-marketing-states-warn-consumers-about-alternative-health. 101 Young, Christen Linke and Kathleen Hannick (2020). "Fixed Indemnity Coverage is a Problematic Form of "Junk" Insurance," USC-Brookings Schaeffer Initiative for Health Policy, available at: https://www.brookings.edu/blog/usc-brookings-schaeffer-on-health-policy/2020/08/04/fixed-indemnity-health-coverage-is-a-problematic-form-of-junk- insurance. 102 Avila, Jaie (2019). "Show Me Your Bill Helps Wipe Out $70K in Charges After Heart Attack," News 4 San Antonio, available at https://news4sanantonio.com/news/trouble-shooters/show-me-your-bill-helps-wipe-out-70k-in-charges-after-heart-attack. 103 See 26 CFR 54.9815-2715(e); 29 CFR 2590.715-2715(e); 45 CFR 147.200(e). See also section 2711 of the PHS Act and section 4980D of the Code. 104 Edward, Jean, Amanda Wiggins, Malea Hoepf Young, Mary Kay Rayens (2019). "Significant Disparities Exist in Consumer Health Insurance Literacy: Implications for Health Care Reform," Health Literacy Research and Practice, available at: https://pubmed.ncbi.nlm.nih.gov/31768496/. See also Villagra, Victor and Bhumika Bhuva (2019). "Health Insurance Literacy: Disparities by Race, Ethnicity, and Language Preference," The American Journal of Managed Care, available at: https://www.ajmc.com/view/health-insurance-literacy-disparities-by-race-ethnicity-and-language-preference. 105 As a condition of receiving a temporary Federal Medical Assistance Percentage (FMAP) increase under section 6008 of the Families First Coronavirus Response Act, states were required to maintain enrollment of nearly all Medicaid enrollees during the COVID-19 PHE. This "continuous enrollment condition" was decoupled from the COVID-19 PHE and ended on March 31, 2023 under the Consolidated Appropriations Act, 2023. See CMS, Center for Consumer Information and Insurance Oversight, Temporary Special Enrollment Period (SEP) for Consumers Losing Medicaid or the Children's Health Insurance Program (CHIP) Coverage Due to Unwinding of the Medicaid Continuous Enrollment Condition- Frequently Asked Questions (FAQ) (Jan. 27, 2023), available at: https://www.cms.gov/technical-assistance-resources/temp-sep-unwinding-faq.pdf. 106 HHS, Assistant Secretary for Planning and Evaluation, Office of Health Policy, "Unwinding the Medicaid Continuous Enrollment Provision: Projected Enrollment Effects and Policy Approaches," August 19, 2022, available at: https://aspe.hhs.gov/sites/default/files/documents/404a7572048090ec1259d216f3fd617e/aspe-end-mcaid-continuous-coverage_IB.pdf. ******** C. Impact on Risk Pools At the time the 2018 final rules were issued, the Departments acknowledged that expanding access to STLDI could have potential negative effects on the risk pools for individual health insurance coverage and on individuals who find themselves insufficiently protected by the typically limited benefits of an STLDI policy. The Departments were of the view that the affordability and access challenges facing consumers at that time necessitated action to increase access to STLDI to provide an alternative option for individuals who were unable or disinclined to purchase comprehensive coverage. As discussed earlier in this section II, access to affordable comprehensive coverage has significantly improved since the 2018 final rules were published. However, research based on individual market data for plan year 2020 has substantiated concerns about the negative impact that the shift of healthier individuals from comprehensive coverage to STLDI has on individuals remaining in the individual market risk pools. 107 Because healthier individuals are more likely to enroll in STLDI than individuals with known medical needs, the extended contract terms and renewal periods of STLDI under the current Federal regulations result in healthier consumers leaving (or opting out of) the individual market risk pools for extended periods of time. This has resulted in increased premiums for individuals seeking to purchase individual health insurance coverage. 108 For unsubsidized individuals, the costs are borne directly by the consumer, and for subsidized individuals, the costs are borne to a large extent by the Federal Government in the form of increased per capita PTC spending associated with increased individual health insurance coverage premiums. Likewise, the increased reports and anecdotes about fixed indemnity excepted benefits coverage being marketed and sold as an alternative to comprehensive coverage raise concerns about the potential for such practices having a similar impact on the small group and individual market risk pools. 107 See Dieguez, Gabriela and Dane Hansen (2020). "The Impact of Short-term Limited-duration Policy Expansion on Patients and the ACA Individual Market," Milliman, available at: https://www.milliman.com/en/insight/the-impact-of-short-term-limited-duration-policy-expansion-on-patients-and-the-aca-individual-market. 108 Id. ("Carrier expectations for the impact of [regulatory actions including the expansion of short-term, limited-duration insurance policies and other loosely regulated insurance and the repeal of the federal individual shared responsibility payment being reduced to $0] on premiums in the ACA individual market for 2020 are approximately 4 percent in states that have not restricted the sale or duration of STLD policies Among the states that have limited the impact of loosely regulated insurance through reinstating an individual mandate or by restricting STLD expansion, carriers have assumed an average premium impact in 2020 due to regulatory actions that is about 5 percent lower than other states.") As noted in section VII.B.2.e of this preamble, this study also found that the few carriers that explicitly included a premium adjustment because of the adoption of the new federal definition of STLDI in the 2018 final rules increased premiums by between 0.5 percent and 2 percent in 2020. Another study looking at States that have adopted policies that restrict STLDI to shorter durations than allowed under the current Federal regulations found that, from 2018 to 2020, States that restricted or prohibited the sale of STLDI saw fewer consumers enroll in such insurance, were able to keep more healthy people in the individual health insurance coverage market, and saw a greater decline in average medical costs for enrollees in individual health insurance coverage. 109 The study reported that, as a result, the risk score - a measurement of the relative medical costs expected for the populations covered by comprehensive coverage in each State, both on- and off-Exchange - decreased by 40 percent more in States with more regulation of STLDI than States with less regulation. 110 As of January 20, 2020, 12 States had enacted legislation prohibiting health status underwriting for STLDI, effectively banning the sale of STLDI in those States. 111 Thirteen States and the District of Columbia prohibited the sale of STLDI policies with initial contract terms longer than 3 months. 112 109 See Hall, Mark and Michael McCue (2022). "Short-Term Health Insurance and the ACA Market," Commonwealth Fund, available at: https://www.commonwealthfund.org/blog/2022/short-term-health-insurance-and-aca-market. 110 Id. 111 National Association of Insurance Commissioners (2023). "Short-Term Limited-Duration Health Plans," available at: https://content.naic.org/cipr-topics/short-term-limited-duration-health-plans. 112 Id. In addition to ensuring that consumers can clearly distinguish STLDI from comprehensive coverage, this new evidence provides an additional basis for the Departments' conclusion that it is important to amend the Federal definition of STLDI. D. Need for Rulemaking For the reasons described in this section II, the Departments are of the view that it is necessary to amend the Federal definition of STLDI to ensure that consumers can clearly distinguish STLDI from comprehensive coverage, protect the risk pools and stabilize premiums in the individual market, and promote access to affordable comprehensive coverage. With respect to individual market fixed indemnity excepted benefits coverage, the combination of the decision in the Central United case and the reduction of the individual shared responsibility payment to $0 for months beginning after December 31, 2018 under the Tax Cuts and Jobs Act increased the risk that individuals would purchase fixed indemnity excepted benefits coverage as a substitute for comprehensive coverage. The Departments are of the view that these changes necessitate rulemaking with respect to fixed indemnity excepted benefits coverage. Further, while the Departments did not finalize the proposed amendments to the group market fixed indemnity excepted benefits coverage regulations outlined in the 2016 proposed rules, the Departments noted their intention to address fixed indemnity excepted benefits coverage in future rulemaking. 113 The Departments have continued to monitor the impact of these coverage options and remain concerned about the negative impacts of fixed indemnity excepted benefits coverage on consumers when such products are sold as an alternative to comprehensive coverage. In light of the Departments' ongoing concerns about the numerous negative impacts of STLDI and fixed indemnity excepted benefits coverage being offered as an alternative to comprehensive coverage, as well as the significant changes in market conditions and in the legal landscape since the Departments' last regulatory actions addressing these products, the Departments are proposing changes to the Federal individual and group market regulations governing STLDI and fixed indemnity excepted benefits coverage. For similar reasons, as discussed in more detail in section IV.A of this preamble, the Treasury Department and the IRS propose to clarify the tax treatment of fixed amounts received by a taxpayer through certain employment-based accident or health insurance that are paid without regard to the amount of medical expenses incurred. In addition, the Departments solicit comments on specified disease excepted benefits coverage, as discussed in section III.B.2 of this preamble, and on level-funded plan arrangements, as discussed in section III.C of this preamble. 113 Excepted Benefits; Lifetime and Annual Limits; and Short-Term, Limited-Duration Insurance; Final Rule, 81 FR 75316 at 75317 (October 31, 2016). III. Overview of the Proposed Rules on Short-Term, Limited-Duration Insurance and Fixed Indemnity Excepted Benefits Coverage; Comment Solicitations Regarding Specified Disease Excepted Benefits Coverage and Level-Funded Plan Arrangements - The Departments of the Treasury, Labor, and Health and Human Services A. Short-Term, Limited-Duration Insurance The Departments are proposing the following amendments to the Federal regulations at 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103 defining "short-term, limited-duration insurance" to better distinguish STLDI from individual health insurance coverage. These amendments would apply to new STLDI policies, certificates, or contracts of insurance sold or issued on or after the effective date of the final rules; that is, the date that is 75 days after publication of the final rules. 114 STLDI policies, certificates, or contracts of insurance sold or issued before the effective date of the final rules (including any subsequent renewals or extensions consistent with applicable law) could still have an initial contract term of less than 12 months and maximum duration of up to 36 months (taking into account any renewals or extensions), subject to any limits under applicable State law, but would be required to comply with the revised notice requirement for renewals and extensions. 114 For purposes of this document, the term "effective date of the final rules" refers to the date that is 75 days after the date of publication of the final rules. 1. "Short-term" Under the current Federal regulations, contracts for STLDI must specify an expiration date that is less than 12 months after the original effective date of the contract, and, taking into account renewals or extensions, must have a duration of no longer than 36 months in total. 115 The Departments, however, are no longer of the view that permitting the longer duration for STLDI is in the best interests of consumers. 115 See 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103. See also 83 FR 38212 (August 3, 2018). Taking into account the potential risk to individuals who enroll in STLDI, the increased availability of affordable comprehensive coverage options, the potential impact on the individual market risk pools, and consumer challenges in differentiating STLDI from individual health insurance coverage, the Departments propose to reinterpret the phrase "short-term" to refer to a contract term of no more than 3 months. More specifically, the Departments propose to amend the Federal definition for STLDI under 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103 such that the coverage would have an expiration date specified in the policy, certificate, or contract of insurance that is no more than 3 months after the original effective date. As discussed further in section III.A.2 of this preamble, the Departments also propose to amend the Federal de f nition of STLDI to reinterpret the phrase "limited-duration" to mean that the maximum permitted duration for STLDI is no longer than 4 months in total, taking into account any renewals or extensions. Further, the new proposed Federal definition would provide that a renewal or extension includes the term of a new STLDI policy, certificate, or contract of insurance issued by the same issuer to the same policyholder within a 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance. As described further in section III.A.6 of this preamble, these proposed rules would adopt a bifurcated approach to the applicability date that distinguishes between new STLDI that is sold or issued on or after the effective date of the final rules, 116 and existing STLDI sold or issued before the effective date of the final rules. The proposed new Federal definition and maximum duration framework in these proposed rules would apply for new STLDI policies, certificates, or contracts of insurance sold or issued on or after the effective date of the final rules. Under the framework in these proposed rules, existing policies, certificates, or contracts of insurance sold or issued before the effective date (including any subsequent renewals or extensions consistent with applicable law) could still have an initial contract term of less than 12 months, and a maximum duration of up to 36 months (taking into account any renewals or extensions), subject to any limits under applicable State law. In the preamble to the 2018 final rules, the Departments discussed the importance of ensuring that consumers clearly understand the differences between these types of coverage in order to select the type of coverage that suits their needs. However, particularly in light of recent reports regarding deceptive marketing practices (as discussed in section III.A.3 of this preamble) and the risk of consumer confusion, the Departments are now of the view that interpreting "short-term" in a manner that prevents STLDI from having terms that are similar in length to a 12-month policy year for comprehensive individual health insurance coverage is the most important tool for consumers to distinguish between STLDI and comprehensive coverage. 116 The Departments are of the view that an effective date that is 75 days after the date of publication of the final rule provides sufficient time for interested parties to review, understand, and meet their obligations under the final rule, without unnecessarily delaying the implementation of policies that are proposed to be finalized on the effective date. See sections III.A.6 (STLDI) and III.B.1.g (fixed indemnity excepted benefits coverage) for additional discussion of applicability proposals. In addition, the Departments expressed in the preamble to the 2018 final rules an expectation that the amended definition of STLDI would result in STLDI being distinguishable from comprehensive coverage because of the differences in their initial contract terms; the maximum duration of a policy itself; the types of notice requirements applicable to each type of coverage; and the classification of comprehensive coverage, but not STLDI, as MEC. 117 However, since the 2018 final rules became effective, and in light of the changes in the legal landscape and market conditions discussed in section II of this preamble, the Departments are now of the view that the current Federal definition of STLDI contributes to confusion between STLDI and comprehensive coverage and that confusion results in consumer harm. The Departments' proposal to reinterpret "short-term" to refer to coverage with a term of no more than 3 months is one change that would help ensure consumers are better able to distinguish between the two types of coverage and therefore make better informed coverage purchasing decisions. 117 83 FR at 38215 (August 3, 2018). The Departments are concerned that the current interpretation and definition is too expansive and contributes to confusion regarding whether a policy is STLDI or comprehensive coverage. The combination of deceptive marketing practices (as discussed in section III.A.3 of this preamble) and the near-identical length of coverage for the initial contract term has proven to be confusing for consumers. As such, STLDI policies that include an initial term just shy of 12 months have not been easily distinguishable by consumers from comprehensive coverage available in the individual market, which generally has a 12-month policy year. 118 In addition, the ability to renew or extend STLDI policies for up to 36 months is also somewhat similar to the structure of comprehensive coverage sold in the individual and group markets and makes STLDI harder to distinguish from comprehensive coverage options. As a result, STLDI is being sold in situations, including as a long-term replacement for comprehensive coverage, that the exception from the definition of individual health insurance coverage was not intended to address. 119 In some instances, individuals may mistakenly purchase STLDI as long-term health insurance coverage. 120 118 45 CFR 144.103 (defining policy year for non-grandfathered health plans offered in the individual health insurance market as a calendar year). 119 See, e.g., Palanker, Dania, and Volk JoAnn (2021). "Misleading Marketing of Non-ACA Plans Continued During COVID-19 Special Enrollment Period," Center on Health Insurance Reforms, available at: https://georgetown.app.box.com/s/mn7kgnhibn4kapb46tqmv6i7putry9gt. See also Fernandez, Bernadette, Vanessa Forsberg, and Annie Mach (2018). "Background Information on Health Coverage Options Addressed in Executive Order 13813," Congressional Research Service, available at: https://crsreports.congress.gov/product/pdf/R/R45216. See also Corlette, Sabrina, Kevin Lucia, Dania Palanker, and Olivia Hoppe (2019). "The Marketing of Short-Term Health Plans: An Assessment of Industry Practices and State Regulatory Responses," Urban Institute, available at: https://www.urban.org/research/publication/marketing-short-term-health-plans-assessment-industry-practices-and-state-regulatory-responses. 120 Government Accountability Office (2022). "Private Health Insurance: Limited Data Hinders Understanding Short-Term Plans Role and Value During the COVID-19 Pandemic," available at: https://www.gao.gov/assets/730/720774.pdf. In determining the appropriate length of STLDI for the proposed amended Federal definition, and giving meaning to "short-term," the Departments reflected on instances when individuals may experience a temporary gap in coverage. For example, a college student enrolled in student health insurance coverage that does not provide coverage during the summer when they are not enrolled in classes, or a teacher who changes jobs and has to wait until the fall to enroll in new coverage, would experience a temporary gap in coverage of roughly 3 months and would benefit from access to STLDI during that period. Individuals transitioning between other types of jobs may also experience a temporary break in coverage, even if their break in employment is negligible. In particular, section 2708 of the PHS Act and its implementing regulations permit a group health plan or health insurance issuer offering group health insurance coverage to apply a waiting period (as defined in section 9801(b)(4) of the Code, section 701(b)(4) of ERISA, and 2704(b)(4) of the PHS Act) of up to 90 days. 121 In addition, the implementing regulations allow for a reasonable and bona fide employment-based orientation period not to exceed 1 month. These provisions can result in a delay of approximately 3 to 4 months before coverage of an individual, who is otherwise eligible to enroll under the terms of a group health plan, can become effective. 121 26 CFR 54.9815-2708, 29 CFR 2590.715-2708, and 45 CFR 147.116. Therefore, the Departments propose to amend the Federal definition of "short-term, limited-duration insurance" in 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103 to reflect a new interpretation of the phrase "short-term" to mean a policy, certificate, or contract of insurance with an issuer that has an expiration date specified in the policy, certificate, or contract of insurance that is no more than 3 months after the original effective date of the policy, certificate, or contract of insurance. This approach is consistent with the group market rules regarding the 90-day waiting period limitation provision under the ACA and with STLDI's role of serving as temporary coverage for individuals transitioning between other types of comprehensive coverage. It also is similar to the less-than-3-month maximum term in the Federal definition of STLDI adopted in the 2016 final rules and already enacted in a number of States, 122 and aligns with the goal of Executive Order 14009 to support protections for people with preexisting conditions, as there are no Federal prohibitions or restrictions on preexisting condition limitations with respect to STLDI. 122 Pollitz, Karen, Michelle Long, Ashley Semanskee, and Rabah Kamal (2018). "Understanding Short-Term Limited Duration Health Insurance," KFF, available at: https://www.kff.org/health-reform/issue-brief/understanding-short-term-limited-duration-health-insurance/. It is reasonable to look to the group market waiting period rules to guide the proposed amendments to the Federal definition of STLDI in giving meaning to "short-term," because a waiting period is the type of coverage gap that STLDI was initially intended to cover. 123 For longer gaps in coverage, the guaranteed availability protections established under the ACA, COBRA continuation coverage for individuals who were enrolled in employer-based coverage, and the special enrollment period requirements for group health plan and individual health insurance coverage provide individuals various opportunities to enroll in comprehensive coverage through or outside of an Exchange. 123 81 FR 38020 at 38032 (June 10, 2016) (the intent of the initial regulation defining STLDI was to refer to coverage that filled temporary coverage gaps when an individual was transitioning from one plan or coverage to another). The Departments request comments on the proposed interpretation of the phrase "short-term." The Departments also request comments on whether the interpretation of "short - term" in the proposed definition of STLDI should instead be no more than 4 months or some other length, and why. 2. "Limited-Duration" Under the definition adopted in the 2018 final rules, the Departments interpreted the phrase "limited-duration" to preclude renewals or extensions of STLDI that extended a policy beyond a total of up to 36 months, with the total number of consecutive days of coverage under a single (that is, the same) insurance contract being the relevant metric to calculate the permissible duration of coverage. The Departments now propose an update to the Federal definition of "short-term, limited-duration insurance" under 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103 that would adopt a different interpretation of the phrase "limited-duration." The Departments propose to reinterpret "limited-duration" to refer to a maximum coverage period that is no longer than 4 months in total, taking into account any renewals or extensions. This approach would allow STLDI to be extended, when consistent with applicable State law, to avoid a temporary gap in coverage if, for example, an employer implemented a bona fide employment-based orientation period of up to 1 month under the 90-day waiting period limitation provision under the ACA. An STLDI policy would meet the Federal definition of "limited-duration" so long as the coverage was not renewed or extended beyond a total of 4 months from the original effective date of the policy, certificate, or contract of insurance, regardless of whether the coverage has an initial term of 1, 2, or 3 months. For example, an STLDI policy could have an initial term of 3 months and a renewal term of 1 month, or an initial term of 2 months and a renewal term of 2 months, consistent with the proposed amended Federal definition of STLDI. For this purpose, the Departments propose that a renewal or extension would include the term of a new STLDI policy, certificate, or contract of insurance issued by the same issuer to the same policyholder within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance. In this context, the phrase "same issuer" would refer to the entity licensed to sell the policy, consistent with the definition of health insurance issuer in 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103. Under this proposal, the relevant metric to calculate whether the duration of coverage satisfies the new Federal "limited-duration" standard is the total number of days of coverage (either consecutive or non-consecutive) that a policyholder is enrolled in an STLDI policy with the same issuer. That calculation would apply regardless of whether the coverage is a renewal or extension under the same policy, certificate, or contract of insurance, or if it involves the issuance of a new STLDI policy, certificate, or contract of insurance to the same policyholder within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance. In the 2018 final rules, the Departments took the position that the maximum length of COBRA continuation coverage serves as an appropriate benchmark for interpreting the term "limited-duration" with respect to STLDI. The 2018 final rules likened the limited-duration maximum to the maximum duration that employers are required to provide COBRA continuation coverage to qualified beneficiaries (18, 29, or 36 months depending on the nature of the qualifying event that precipitates the temporary coverage period). 124 However, unlike STLDI, COBRA requires, and employees expect, that the elected COBRA continuation coverage provides the same benefits as the employee's employment-based coverage, and that the qualified beneficiaries may elect either the same coverage they had the day before the qualifying event occurred or coverage options provided to similarly situated current employees/participants. 125 Additionally, Federal consumer protections and requirements for comprehensive coverage generally apply to COBRA continuation coverage. In contrast, STLDI is primarily designed to fill shorter gaps in coverage, such as when an individual is between enrollment in employment-based coverage, and it is generally not required to comply with Federal consumer protections and requirements for comprehensive coverage, 126 or provide robust, comprehensive benefits. 124 For example, when a qualified employee loses coverage due to the termination of an employee's employment for any reason other than gross misconduct, or a reduction in the number of hours of employment, the group health plan must provide the qualified employee and their covered dependents an opportunity to elect COBRA continuation coverage for up to 18 months. A spouse or dependent child of a covered employee would have the opportunity to elect COBRA continuation coverage for up to 18 months if they lost coverage due to the termination of the covered employee's employment for any reason other than gross misconduct, a reduction in the hours worked by the covered employee, divorce or legal separation of the spouse from the covered employee, or death of the covered employee. In addition, if a child loses coverage because of a loss of dependent child status, the child would have the opportunity to elect up to 36 months of COBRA continuation coverage. The group health plan is required to provide up to 29 months of COBRA continuation coverage only if one of the qualified beneficiaries is disabled and meets certain requirements. A maximum COBRA period of 36 months is only available to a spouse and dependents in limited circumstances such as the occurrence of a second qualifying event (for instance, the death of the covered employee, the divorce or legal separation of a covered employee and spouse, or a loss of dependent child status under the plan). 125 26 CFR 54.4980B-5. 126 As noted above, health insurance issuers offering STLDI are subject to the new agent and broker compensation disclosure and reporting requirements in section 2746 of the PHS Act. In response to the 2016 and 2018 proposed rules, the Departments received comments requesting that the Departments not only limit renewals of the same policy, certificate, or contract of insurance, but also prohibit issuers from offering STLDI to consumers who have previously purchased STLDI from the same or different issuer, to prevent consumers from stringing together multiple consecutive policies, a practice commonly referred to as stacking. 127 The Departments share the commenters' concern that stacking STLDI in effect lengthens the duration of coverage without offering the benefits and consumer protections of comprehensive coverage. As those commenters pointed out, this practice effectively circumvents the rules related to maximum duration and makes it more challenging for consumers to distinguish STLDI from comprehensive coverage, concerns that interested parties have reiterated in 2021 and 2022. 128 If an issuer strings together multiple STLDI policies (whether of a 12-month or 4-month maximum) the coverage could be stacked to look very similar to the annual renewals that are common for comprehensive coverage but without the benefits the consumer would receive from comprehensive coverage. For example, when stacking new policies, an issuer could increase premiums and cost sharing and reset the deductible every 4 months. In contrast, if enrolled in comprehensive health insurance coverage, a consumer is guaranteed a stable level of coverage and cost sharing throughout the 12-month plan year, and the coverage is subject to Federal consumer protections and requirements that prohibit practices common to STLDI, including medical underwriting and coverage rescissions. Consumers that have already purchased STLDI policies from the same issuer may not be aware of, and may be less likely, to explore other coverage options that provide more comprehensive coverage at a better price. As a result, some consumers may enroll in STLDI mistaking it for comprehensive coverage or not understanding the limitations of the coverage. 127 The Departments declined to prohibit stacking in the 2016 final rules because the requirement that individuals obtain MEC in order to avoid making an individual shared responsibility payment was an adequate deterrent to discourage consumers from purchasing multiple successive STLDI policies. See 81 FR at 75318. In the Department's view, reconsideration of such a prohibition is now warranted because the individual shared responsibility payment was reduced to $0 by the Tax Cuts and Jobs Act. 128 Partnership to Protect Coverage (2021). "Under-Covered: How 'Insurance-Like' Products are Leaving Patients Exposed," available at: https://www.nami.org/NAMI/media/NAMI-Media/Public%20Policy/Undercovered_Report_03252021.pdf. ("STLDI plans should not be renewable or allowed to continue for more than three months because of the significant financial risk posed to consumers by their combination of extraordinary deductibles and limited catastrophic financial protection."). See also Letter from 29 organizations to Sec. Xavier Becerra (January 31, 2022), available at: https://www.lung.org/getmedia/8a510945-cd82-41fe-968e-d83faf2292eb/013122-Letter-to-HHS-Re-Regulation-of-STLDI-policy-preferences-FINAL.pdf. ("Allowing short-term plans to be renewed or to be sold such that nominally separate policies run consecutively known as "stacking" -- contributes to consumer confusion, increased premiums, and financial risk for consumers."). In response to these concerns and continued reports about the impact of the existing Federal definition of STLDI discussed in section III.A.I of this preamble, under the Departments' authority to interpret the phrase "limited-duration," the Departments propose to add new language that provides that, for purposes of applying the new Federal definition, a renewal or extension includes the term of a new STLDI policy, certificate, or contract of insurance issued by the same issuer to the same policyholder within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance. 129 As explained elsewhere in this preamble section, under this proposal, the relevant metric to calculate and evaluate if the duration of coverage (taking into account any renewals or extensions) satisfies the proposed permitted maximum duration of no more than 4 months is the total number of days (either consecutive or non-consecutive) of coverage that a policyholder is enrolled in an STLDI policy with the same issuer within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance, regardless of whether the coverage issued to the policyholder is under the same or a new policy, certificate, or contract of insurance. This calculation, however, would not include an STLDI policy, contract, or certificate of insurance sold to the same policyholder by a different issuer. This distinction would effectively limit stacking of policies sold by the same issuer, would be easier for issuers to track and comply with, and would allow consumers the flexibility to purchase subsequent STLDI policies from other issuers within a 12-month period. The Departments are of the view that subsequent sales to the same policyholder by the same issuer should be treated comparably to renewals for purposes of calculating and applying the maximum-duration standard. To do otherwise would undermine the maximum-duration requirements by allowing issuers to stack policies, and would contravene the initial purpose of STLDI policies to fill temporary gaps in comprehensive coverage. 129 In response to the 2018 proposed rules, the Departments received comments regarding renewal guarantees. As explained in the preamble to the 2018 final rules, renewal guarantees generally permit a policyholder, when purchasing his or her initial insurance contract, to pay an additional amount in exchange for a guarantee that the policyholder can elect to purchase, for periods of time following expiration of the initial contract, another policy or policies at some future date, at a specific premium that would not require any additional underwriting. See 83 FR at 38219 - 38220 (Aug. 3, 2018). These proposed rules would not directly regulate renewal guarantees. However, the Departments acknowledge that the proposed revisions to the federal definition--including the proposal to count the term of a new STLDI contract issued by the same issuer to the policyholder within the same 12- month period beginning on the original effective date of the initial policy, contract, or certificate of insurance toward the total maximum duration of STLDI--would limit the guarantees that such instruments may be able to provide. The Departments solicit comments on the proposed revisions to the Federal definition of "short-term, limited-duration insurance," including the new proposed interpretation of the phrase "limited-duration," and whether there are circumstances under which issuers should be allowed to renew or extend STLDI for periods of time beyond what would be permitted in these proposed rules. The Departments also solicit comments on whether there are additional ways to differentiate STLDI from comprehensive coverage options, including information on State approaches or limits on the sale of STLDI by a different issuer, and how the subsequent issuer would determine whether or not an applicant had previous STLDI with another issuer. The Departments also solicit comments on whether to broaden the limits on stacking to include issuers that are members of the same controlled group. 3. Sales and Marketing Practices The Departments are concerned by reports of aggressive and deceptive sales and marketing practices related to STLDI. According to these reports, STLDI is often marketed as a substitute for comprehensive coverage, 130 despite being exempt from most of the Federal individual market consumer protections and requirements for comprehensive coverage. For example, some websites selling STLDI utilized logos of well-known issuers even when not affiliated with such issuers, and claimed to provide comprehensive health insurance or be providers of government-sponsored health insurance policies. Misleading marketing includes tactics such as designing websites to suggest the product for sale is comprehensive coverage and using the websites to gather personal information for call centers or brokers that later push consumers to make quick decisions about purchasing STLDI without disclosing that the insurance is not comprehensive coverage. 131 130 Federal Trade Commission (2018). "FTC Halts Purveyors of Sham Health Insurance Plans," available at: https://www.ftc.gov/news-events/news/press-releases/2018/11/ftc-halts-purveyors-sham-health-insurance-plans. 131 Palanker, Dania, JoAnn Volk, and Maanasa Kona (2019). "Seeing Fraud and Misleading Marketing, States Warn Consumers About Alternative Health Insurance Products," Commonwealth Fund, available at: https://www.commonwealthfund.org/blog/2019/seeing-fraud-and-misleading-marketing-states-warn-consumers-about-alternative-health. See also, Federal Trade Commission (2022). "FTC Action Against Benefytt Results in $100 Million in Refunds for Consumers Tricked into Sham Health Plans and Charged Exorbitant Junk Fees," available at: https://www.ftc.gov/news-events/news/press-releases/2022/08/ftc-action-against-benefytt-results-100-million-refunds-consumers-tricked-sham-health-plans- charged. As another example, consumers shopping for health insurance online are often directed to websites selling STLDI or other plans that are not comprehensive coverage, using terms like "Obamacare plans" and "ACA enroll." Websites use those terms in an effort to associate STLDI with the Federal consumer protections and requirements for comprehensive coverage. 132 A report from the Government Accountability Office (GAO) uncovered brokers engaging in deceptive marketing practices that misrepresented or omitted information about products or claimed that preexisting conditions were covered when plan documents reflected that they were not. 133 The GAO study also found that brokers have a financial incentive to enroll their clients in STLDI because brokers receive higher commissions for selling that coverage than for selling comprehensive coverage. 134 For example, the financial incentive could be up to 10 times higher commissions when compared to individual market QHPs purchased through an Exchange. 135 State regulators have also received complaints alleging that brokers engaged in deceptive practices to enroll consumers in STLDI over the phone. These practices prevent consumers from making an informed choice about their coverage. 136 132 Corlette, Sabrina, Kevin Lucia, Dania Palanker, and Olivia Hoppe (2019). "The Marketing of Short-Term Health Plans: An Assessment of Industry Practices and State Regulatory Responses," Urban Institute, available at: https://www.urban.org/research/publication/marketing-short-term-health-plans-assessment-industry-practices-and-state-regulatory-responses. 133 Government Accountability Office (2020). "Private Health Coverage: Results of Covert Testing for Selected Offerings," available at: https://www.gao.gov/products/gao-20-634r. 134 Ibid. 135 Keith, Katie (2020). "New Congressional Investigation of Short-Term Plans," Health Affairs, available at: https://www.healthaffairs.org/do/10.1377/forefront.20200626.227261/full/. 136 Palanker, Dania, JoAnn Volk, and Maanasa Kona (2019). "Seeing Fraud and Misleading Marketing, States Warn Consumers About Alternative Health Insurance Products," Commonwealth Fund, available at: https://www.commonwealthfund.org/blog/2019/seeing-fraud-and-misleading-marketing-states-warn-consumers-about-alternative-health. In addition, the Departments have received feedback that the low levels of health insurance literacy, particularly among younger adults and underserved populations, exacerbate the harm caused by deceptive marketing practices of STLDI by issuers and agents and brokers. 137 Consumers have complained they were unaware that the issuer could decide not to renew or issue a new policy, certificate, or contract of insurance to the same consumer at the end of the contract term. 138 Some consumers unwittingly purchase STLDI with fewer protections and less robust benefits than comprehensive coverage because they do not understand the difference between these two types of coverage. 139 137 Government Accountability Office (2020). "Private Health Coverage: Results of Covert Testing for Selected Offerings," available at: https://www.gao.gov/products/gao-20-634r. 138 Id. 139 Id. In the Departments' view, this risk of misleading consumers could be further minimized if STLDI was not marketed or sold to consumers during certain periods when a consumer is eligible to enroll in comprehensive coverage, such as the individual market open enrollment period. Allowing STLDI to be marketed or sold during open enrollment can confuse consumers by causing them to perceive STLDI as a substitute for comprehensive coverage, rather than an option to fill temporary gaps in coverage. Inadvertent enrollment in STLDI may subject uninformed consumers to potentially severe financial risks, and cause them not to enroll in comprehensive coverage when eligible to do so. In addition, some healthier individuals may also inadvertently enroll in STLDI instead of comprehensive coverage, and in so doing, either leave or not enter an individual market risk pool. As discussed in section II.C of this preamble, this affects the risk pools for individual health insurance coverage, leading to increased premiums. The Departments solicit comments on additional ways to help consumers distinguish between STLDI and comprehensive coverage. In particular, the Departments are interested in feedback on ways to prevent or otherwise mitigate the potential for direct competition between STLDI and comprehensive coverage during the open enrollment period for individual market coverage. For example, some States have prohibited the sale of STLDI during open enrollment. 140 The Departments are particularly interested in comments related to experience in States that have prohibited enrollment in STLDI during specific periods of time, including whether prohibiting enrollment has increased enrollment in comprehensive coverage, reduced deceptive marketing practices, or resulted in any premium changes for comprehensive coverage. In addition, the Departments request comments on what additional steps the Departments can take to help consumers better understand and distinguish between comprehensive coverage and other forms of health insurance coverage, as well as what steps can be taken to further support State efforts to protect consumers from misleading and deceptive marketing and sales practices. 140 Washington and Maine prohibit the sale of STLDI during open enrollment. In addition, Hawaii prohibits the sale of STLDI to individuals who were eligible to purchase an Exchange plan during open enrollment in the previous calendar year. See U.S. House of Representatives Committee on Energy and Commerce (2020). "Shortchanged: How the Trump Administration's Expansion of Junk Short-Term Health Insurance Plans Is Putting Americans at Risk," available at: https://democrats-energycommerce.house.gov/newsroom/press-releases/ec-investigation-finds-millions-of-americans-enrolled-in-junk-health. 4. Notice Under the 2018 final rules, to satisfy the definition of STLDI, issuers must display prominently in the contract and in any application materials provided in connection with enrollment in STLDI a specific notice in at least 14-point type. 141 The 2018 final rules finalized two notices. The first notice (Notice 1) was for policies with a coverage start date before January 1, 2019, and includes language related to the individual shared responsibility payment under section 5000A of the Code. The second notice (Notice 2), which is for policies with a coverage start date on or after January 1, 2019, omits the language related to the individual shared responsibility payment because, effective for months beginning after December 31, 2018, the individual shared responsibility payment was reduced to $0. 142 The Departments propose a non-substantive technical amendment to remove Notice 1, because the period during which Notice 1 was applicable has ended; thus, that provision no longer has any effect. 141 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103. See section I.C of this preamble for further discussion of this requirement. 142 See Pub. L. 115-97, December 22, 2017. The Departments continue to be of the view that the notice is important to help consumers distinguish between comprehensive coverage and STLDI. Therefore, the Departments propose to amend the notice to further clarify the differences between STLDI and comprehensive coverage, and identify options for consumers to obtain comprehensive coverage in concise, understandable language that would be meaningful to them. The proposed amendments to the notice would apply to all STLDI policies sold or issued on or after the effective date of the final rules. The proposed amendments to the notice would only apply to existing policies in connection with notices required to be provided upon renewal or extension of existing STLDI coverage on or after the effective date of the final rules. After consulting with plain-language experts regarding improvements to the current required notice, the Departments propose the following revisions to both the content and formatting of the notice to inform consumers considering purchasing STLDI about the differences between STLDI and comprehensive coverage, support informed coverage purchasing decisions, and promote readability. The Departments propose that issuers must prominently display the notice (in either paper or electronic form) in at least 14-point font, on the first page of the policy, certificate, or contract of insurance, including for renewals or extensions. The Departments further propose that issuers must prominently display the notice in any marketing and application materials provided in connection with enrollment in such coverage, including on websites that advertise or enroll individuals in STLDI, and in any enrollment materials that are provided at or before the time an individual has the opportunity to enroll. In addition, if an individual is required to reenroll for purposes of renewal or extension of STLDI, the notice must be prominently displayed in the reenrollment materials (in either paper or electronic form) that are provided to the individual at or before the time the individual is given the opportunity to reenroll in coverage, as well as on any websites used to facilitate reenrollment in STLDI. The notice would not affect any separate notice requirements under applicable State law, except to the extent that a State notice requirement would prevent application of any Federal notice requirement. The text of the proposed STLDI notice is as follows: "Notice to Consumers About Short-Term, Limited-Duration Insurance IMPORTANT: This is short-term, limited-duration insurance. This is temporary insurance. It isn't comprehensive health insurance. Review your policy carefully to make sure you understand what is covered and any limitations on coverage. - This insurance might not cover or might limit coverage for: - preexisting conditions; or - essential health benefits (such as pediatric, hospital, emergency, maternity, mental health, and substance use services, prescription drugs, or preventive care). - You won't qualify for Federal financial help to pay for premiums or out-of-pocket costs. - You aren't protected from surprise medical bills. - When this policy ends, you might have to wait until an open enrollment period to get comprehensive health insurance. Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) to review your options for comprehensive health insurance. If you're eligible for coverage through your employer or a family member's employer, contact the employer for more information. Contact your State department of insurance if you have questions or complaints about this policy." These proposals to revise and enhance the required notice aim to increase consumer understanding of STLDI and combat potential misinformation related to such coverage for all consumers, including historically underserved communities. As noted in section II.B of this preamble, individuals belonging to historically underserved communities often experience more health care challenges, and greater obstacles accessing and using health care services compared to the general population. Underserved communities experience worse health outcomes, higher rates of chronic conditions, lower access to health care, and have more frequent experiences of discrimination in health care settings. 143 The COVID-19 PHE amplified these longstanding inequities, resulting in disparate rates of COVID-19 infection, hospitalization, and death. 144 In addition, research has uncovered significant disparities in health insurance literacy rates nationwide, particularly among those who identify as female, members of underserved racial and ethnic groups, individuals with income below the FPL, and Spanish-speaking enrollees. 145 Because low health insurance literacy increases the likelihood of consumers not fully understanding the differences between comprehensive coverage and STLDI, as well as the potential health and financial risks of STLDI coverage, 146 and in light of Executive Order 13985 which requires the Administration to promote access to equity for underserved communities, 147 the Departments are concerned that members of underserved communities may be particularly vulnerable to misinformation or misleading or aggressive sales tactics. In light of these concerns, it is important for the notice to provide clear and easily readable information alerting consumers to the differences between STLDI coverage and comprehensive coverage. The Departments are of the view that the notice must also provide resources where consumers can access additional information about STLDI coverage and other health coverage options so consumers can make informed choices after considering a range of available health coverage options. 143 See CMS Office of Minority Health (2022). "The Path Forward: Improving Data to Advance Health Equity Solutions," available at: https://www.cms.gov/files/document/path-forwardhe-data-paper.pdf. 144 Moore, Jazmyn, Carolina Luna-Pinto, Heidi Cox, Sima Razi, Michael St. Louis, Jessica Ricaldi, and Leandris Liburd (2021). "Promoting Health Equity During the COVID-19 Pandemic, United States," Bulletin of the World Health Organization, available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8795842. 145 See, Edward, Jean, Amanda Wiggins, Malea Hoepf Young, Mary Kay Rayens (2019). "Significant Disparities Exist in Consumer Health Insurance Literacy: Implications for Health Care Reform," Health Literacy Research and Practice, available at: https://pubmed.ncbi.nlm.nih.gov/31768496/. See also Villagra, Victor and Bhumika Bhuva (2019). "Health Insurance Literacy: Disparities by Race, Ethnicity, and Language Preference," The American Journal of Managed Care, available at: https://www.ajmc.com/view/health-insurance-literacy-disparities-by-race-ethnicity-and-language-preference. 146 Edward, Jean, Robin Thompson, and Amanda Wiggins (2022). "Health Insurance Literacy Levels of Information Intermediaries: How Prepared are They to Address the Growing Health Insurance Access Needs of Consumers?," Health Literacy Research and Practice, 6(1), available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8919673/. 147 See, Executive Order 13985 of January 20, 2021, 86 FR 7009. The Departments propose to add language to the notice to help consumers identify where and how they might be able to enroll in comprehensive coverage. The Departments propose to add a website link and telephone number for HealthCare.gov to the notice as reliable resources for consumers to get information on the different types of available health coverage options. The Departments are also considering that the notice be tailored to specify a telephone number and a link to the State Exchange's website if the STLDI is filed in a State that does not use HealthCare.gov. 148 The Departments seek comments on this approach, including the proposed requirement to provide the notice in the marketing, application, and enrollment (or reenrollment) materials, including the extension of the notice requirement to websites that advertise or offer the opportunity to enroll (or reenroll) in STLDI and on the associated administrative burden for issuers, agents, brokers, or others who will be involved in providing the notice to consumers. 148 Currently, 33 states use HealthCare.gov. See, https://www.healthcare.gov/marketplace-in-your-state/. If, under any future final rules, the notice must be customized to specify the website and telephone number for HealthCare.gov or the State Exchange's website and telephone number, as applicable, the Departments would state that STLDI sold through associations 149 include a link to the website of the Exchange that operates in the State in which the individual to whom the STLDI is sold or marketed resides, regardless of the State in which the association has filed the insurance product. The Departments are considering this approach for coverage sold through associations because association coverage is sold across numerous States, and consumers interested in other coverage options would enroll through the Exchange of the State in which the consumer resides. 149 See discussion in section III.A.5 of this preamble regarding coverage sold through associations. The proposed revised notice would also remind consumers that if they are eligible to enroll in employment-based coverage they should contact their employer or family member's employer about the health coverage offered by the employer. In addition, the Departments propose to add language to the notice that directs consumers to contact the State department of insurance for questions and complaints about the STLDI. The Departments seek comments on whether this part of the notice should also be tailored to include the name and phone number of the State department of insurance of the State in which the product is filed. If the State-specific information must be included, for products that are filed in multiple States, the Departments propose that the notice include the name and the phone number of the State department of insurance of the State of residence of the individual to whom the STLDI is sold or marketed, unless the product is not filed in that State. If the product is not filed in the State of residence of the individual to whom the STLDI is sold or marketed, the notice would include the name and the phone number of the State department of insurance of the State in which the product is filed. The current regulations already state that the applicable notice must be displayed prominently in the contract and in any application materials provided in connection with enrollment in such coverage in at least 14-point type. However, based on information that consumers are not receiving adequate information prior to enrollment in an STLDI policy, 150 the Departments are concerned that the current standard is too subjective and may be contributing to consumers not understanding the limits of STLDI and being unable to distinguish it from comprehensive coverage. Ensuring that issuers, agents, brokers or others who will be involved in providing the notice to consumers also prominently display the notice on the first page of marketing materials would increase consumer awareness, limit the impact of any deceptive marketing practices, and support informed decision making and purchasing decisions by consumers. The Departments therefore propose that the notice be prominently displayed, in at least 14-point font, on the first page of any marketing materials used in connection with enrollment (or reenrollment) in STLDI. The Departments propose to consider the notice to be prominently displayed if it would be reasonably noticeable to a typical consumer within the context of the page on which it is displayed. For example, the notice would be prominently displayed if it uses a font color that contrasts with the background of the document, is not obscured by any other written or graphic content on the page, and when displayed on a website, is viewable without clicking on an additional link. For this purpose, the Departments would consider marketing materials to include any documents or website pages that advertise the benefits or opportunity to enroll (or reenroll) in STLDI coverage. The Departments seek comments on the benefits and burdens of applying the notice requirements to marketing materials, including websites used in connection with advertising or enrollment (or reenrollment) in STLDI coverage, and on the proposed definition of what would be considered marketing materials. 150 See, Corlette, Sabrina, Kevin Lucia, Dania Palanker, and Olivia Hoppe (2019). "The Marketing of Short-Term Health Plans: An Assessment of Industry Practices and State Regulatory Responses," Urban Institute, available at: https://www.urban.org/research/publication/marketing-short-term-health-plans-assessment-industry-practices-and-state-regulatory-responses. The Departments are considering adding a statement to the STLDI notice describing the maximum permitted length of STLDI under Federal rules, explaining that STLDI cannot be renewed or extended beyond the maximum allowable duration, and explaining that the length of STLDI may be shorter subject to State law. Adding this proposed additional language may reduce the impact of deceptive marketing practices on consumers that may otherwise be unaware or misinformed about the length of STLDI before renewing or extending an existing STLDI policy or enrolling in a new STLDI policy. However, including such language would also add to the length of the notice. The Departments seek comment on whether information about the maximum permitted length of new or existing STLDI and options regarding renewal and extensions would be included in enrollment materials (or reenrollment materials) provided to enrollees as part of the normal course of business. The Departments seek comment on this approach, including how best to clearly and concisely communicate such this information to consumers, including on how to address the bifurcated applicability dates with respect to the proposals around maximum initial contract length and maximum duration, whether such information is already included elsewhere in the plan documents; and on the associated administrative burden for issuers, agents, brokers, or others who would be involved in providing the notice to consumers. The Departments also solicit comments on whether it would be beneficial to consumers to require issuers to include language on the notice that clearly informs consumers that the notice is an officially required document, such as "This notice is required by Federal law". The Departments seek comments on all aspects of the proposed amendments to the notice and the proposed new Federal definition of STLDI, including whether the proposed language and proposed placement of the notice would achieve the stated aims of helping to inform consumers of the nature of the coverage and combat potential deceptive marketing practices as described in section III.A.3 of this preamble, and whether alternative or additional language, formatting, or mechanisms for delivery of the notice could better accomplish these goals. For example, the Departments request feedback on whether a different presentation, such as a chart comparing the protections that apply to comprehensive coverage and STLDI, would result in a more useful, consumer-friendly notice than the format proposed in these rules. As an illustrative example of this different presentation, the Departments offer for consideration an alternative format for this notice that would aim to succinctly show important differences between STLDI and comprehensive coverage using a table. This alternative STLDI notice would include all of the information discussed earlier in this section of the preamble, but it would simplify word choice and reduce sentence length in order to further improve readability. The Departments request feedback on which version of the notice more effectively communicates information to individuals and how the notice format would impact accessibility, particularly for individuals who are vision-impaired or rely on screen readers or other technology to review written documents. The text of the alternative proposed STLDI notice is as follows: " WARNING This is not comprehensive insurance. This is short-term, limited-duration insurance. This plan has fewer protections than comprehensive insurance options you can find on HealthCare.gov. Questions? - For more info about comprehensive coverage, visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325). - For more info about your employer's coverage, or a family member's employer coverage, contact the employer. - For questions or complaints about this policy, contact your State department of insurance." The Departments seek comments on whether additional changes to the notice language would improve readability or further help individuals distinguish STLDI from comprehensive coverage, and whether there are practical or logistical barriers that would present any challenges to compliance with the new proposed notice standards. The Departments are also interested in comments on whether the proposed placement requirements would substantially improve the likelihood that consumers have a meaningful opportunity to review the notice and their health coverage options before applying, enrolling, or reenrolling in STLDI, as well as any practical or logistical barriers to providing this notice as proposed. The Departments particularly seek comments from members of underserved communities, and organizations that serve such communities, on whether the language accessibility, formatting, and content of the notice sufficiently mitigate barriers that exist to ensuring all individuals can read, understand, and consider the full range of their health coverage options. The Departments also solicit comments on the prevalence of instances where agents and brokers complete sales transactions with consumers for STLDI before distributing the applicable notice, and solicit comments on additional standards that would encourage salespeople, agents and brokers to notify individuals of the limitations of STLDI in accordance with these proposed rules. 5. Short-Term, Limited-Duration Insurance Sold Through Associations The Departments understand that most sales of STLDI occur through group trusts or associations that are not related to employment (sometimes referred to as individual membership associations). 151 Under these arrangements, out-of-State issuers file insurance products for approval in one State and then sell the same policies in other States through an association, many times with few requirements for participation in the association by consumers, other than payment of association dues. Many State regulators have reported they lack the authority to track sales of policies made through out-of-State associations, and are unable to approve or regulate such policies when offered for sale by issuers that are not licensed by their State. Further, The Departments have received feedback that many issuers are taking advantage of the ambiguity about which State's jurisdiction applies, to avoid local State regulation. For example, one study found that in a review of 34 policy brochures for STLDI, 28 of the brochures included references to associations. 152 Consumers may not understand that some STLDI marketed in their States is not regulated by their State and does not include State-based consumer protections. 151 See U.S. House of Representatives Committee on Energy and Commerce (2020). "Shortchanged: How the Trump Administration's Expansion of Junk Short-Term Health Insurance Plans Is Putting Americans at Risk," available at: https://democrats-energycommerce.house.gov/newsroom/press-releases/ec-investigation-finds-millions-of-americans-enrolled-in-junk-health. 152 Curran, Emily, Dania Palanker, and Sabrina Corlette (2019). "Short-term Plans Sold Through Out-of-State Associations Threaten Consumer Protections," Commonwealth Fund, available at: https://www.commonwealthfund.org/blog/2019/short-term-health-plans-sold-through-out-state-associations-threaten-consumer-protections. Coverage that is provided to or through associations, but not related to employment, and is sold to individuals, either as certificate holders or policyholders, is not group coverage under section 9832 of the Code, section 733(b)(4) of ERISA, and section 2791(b)(4) of the PHS Act. 153 If the coverage is offered to an association member other than in connection with a group health plan, the coverage is considered coverage in the individual market under Federal law, regardless of whether it is considered group coverage under State law. Thus, any health insurance sold to individuals through a group trust or association, other than in connection with a group health plan, or sold to a group trust or association to the extent the insurance is intended to cover association members who are individuals, must meet the definition of STLDI at 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103, or else be considered individual health insurance coverage that is subject to all the Federal individual market consumer protections and requirements for comprehensive coverage. 153 45 CFR 144.102(c). The Departments are aware that some group trusts and associations have also marketed STLDI policies to employers as a form of employer-sponsored coverage. As explained in section I.C of this preamble, there is no provision excluding STLDI from the Federal definition of group health insurance coverage. 154 Thus, any health insurance that is sold to or through a group trust or association in connection with a group health plan and which purports to be STLDI would in fact be group health insurance coverage that must comply with the Federal consumer protections and requirements for comprehensive coverage applicable to the group market. 154 See section 2791(b)(5) of the PHS Act, which excludes STLDI from the definition of "individual health insurance coverage." The Departments are not proposing any policies or policy changes specific to STLDI sold through associations, but request comments on what steps, if any, can be taken to support State oversight of STLDI sold to or through associations. 6. Applicability Dates In 26 CFR 54.9833-1, 29 CFR 2590.736, and 45 CFR 146.125 and 148.102, the Departments propose applicability dates for the proposed amendments to the Federal definition of STLDI that distinguishes between new and existing STLDI. The Departments also propose a technical amendment to 26 CFR 54.9833-1, 29 CFR 2590.736, and 45 CFR 146.125 to remove outdated language that references revisions to 45 CFR parts 144 and 146 that became effective on October 1, 2004 but were superseded by subsequent revisions that became effective on July 1, 2005. The Departments propose the technical amendment would apply to all coverage (that is, both new and existing STLDI) as of the effective date of the final rules. For new STLDI sold or issued on or after the effective date of the final rules, the amendments to the definition of STLDI would apply for coverage periods beginning on or after such date. The Departments are of the view that timely implementation of the new Federal definition of STLDI, including both the maximum duration and revised notice provisions, for new coverage sold or issued on or after the effective date of the final rules, is critical to maximize the number of individuals benefiting from the consumer protections described throughout this preamble. This proposal would prevent delays in implementation of the new Federal definition of STLDI, while providing a sufficient transition period for interested parties to implement the new definition for new coverage sold on or after the effective date of the final rules. However, for STLDI sold or issued before the effective date of the final rules (including any subsequent renewal or extension consistent with applicable law), the current Federal definition of such coverage would continue to apply with respect to the maximum allowable duration. Therefore, existing STLDI could continue to have an initial contract term of less than 12 months and a maximum duration of up to 36 months (taking into account any renewals or extensions), subject to any limits under applicable State law. The Departments propose this applicability date with respect to the maximum allowable duration for existing STLDI (including renewals and extensions) to minimize disruption for individuals who purchased or were enrolled in STLDI prior to the effective date of the final rules. The Departments recognize that consumers already enrolled in STLDI may have anticipated having the option of continuing such coverage for a given period of time, consistent with the current rules. The proposal to permit such individuals to remain covered under STLDI for the maximum initial contract term, as well as for renewals and extensions to the extent permitted under the current regulations, subject to any limits under applicable State law, would promote continuous enrollment in coverage and ensure that these consumers have adequate time to transition to comprehensive coverage. The Departments propose that the amendments to the notice provision at paragraph (2) of the definition of "short-term, limited-duration insurance" in 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103 would apply for coverage periods beginning on or after the effective date of the final rules, regardless of whether the coverage was sold or issued before, on, or after the effective date of the final rules. 155 The Departments are of the view that the benefit to consumers, including those currently enrolled in STLDI, of a timely notice update outweighs the burden to issuers of implementing these changes by the effective date of the final rules. Given that the updates to the notice are aimed at alerting consumers to the differences between comprehensive coverage and STLDI and providing consumers with the information necessary to make an informed decision about their coverage options, a delayed applicability date of the proposed changes to the notice could result in unnecessary harm to consumers. 155 As noted above, the proposed revised notice would also apply to new STLDI coverage periods beginning on or after the effective date of the final rules. The Departments seek comments on whether the proposed revised notice should apply to only new STLDI or should apply to both new STLDI and existing coverage upon renewal or extension, and whether the application of the proposed revised notice to existing STLDI should instead be delayed until January 1, 2025, or some other date. The Departments seek comments on whether all STLDI policies and any renewals or extensions of such coverage, including existing coverage sold or issued prior to the effective date of the final rules, should instead end upon the effective date of the final rules or some other date. The Departments also seek comments on whether an applicability date that would provide a longer transition period for consumers with policies, certificates, or contracts of STLDI sold or issued before the effective date of the final rules could help alleviate any potential market disruption; for example, allowing consumers to renew existing coverage for an additional 12-month period after any renewals under their original coverage are exhausted. The Departments also seek comments on whether it would be more reasonable for all STLDI policies and any renewals or extensions of such coverage in effect before the date the final rules are published to end before January 1, 2025, or some other date. 7. Severability In the event that any portion of the final rules implementing one or more proposals in these proposed rules is declared invalid or unenforceable, by its terms or as applied to any entity or circumstance, or stayed pending further agency action, the Departments intend that the proposed amendments to the definition of "short-term, limited-duration insurance" be severable, and that the proposed amendments to the definition of "short-term, limited-duration insurance" in 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103 would continue even if one or more aspects of the proposed changes is found invalid. To capture this intent, the Departments propose to add a severability provision to the proposed amended definition of "short-term, limited-duration insurance" at 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103. The severability of these provisions is discussed in more detail in section VI of this preamble. B. Independent, Noncoordinated Excepted Benefits Coverage 1. Fixed Indemnity Excepted Benefits Coverage As described in section I.D of this preamble, Congress identified various types of excepted benefits, each of which is not subject to the Federal consumer protections and requirements for comprehensive coverage. 156 In so doing, Congress established an exemption for those types of coverage that offer more limited and narrow benefits than comprehensive coverage. 157 Insurance that pays a fixed amount under specified conditions without regard to other insurance (that is, "hospital indemnity or other fixed indemnity insurance") is considered an excepted benefit if offered on an independent, noncoordinated basis, and such insurance coverage is exempt from Federal consumer protections and requirements for comprehensive coverage. 158 156 See sections 9831(b) - (c) and 9832(c) of the Code, sections 732(b) - (c) and 733(c) of ERISA, and sections 2722(b) - (c), 2763 and 2791(c) of the PHS Act. 157 See Interim Rules for Health Insurance Portability for Group Health Plans; Interim Rules, 62 FR 16894, 16903 (April 8, 1997). 158 See sections 9831(b) - (c) and 9832(c) of the Code, sections 732(b) - (c) and 733(c) of ERISA, and sections 2722(c)(2), 2763(b) and 2791(c)(3)(B) of the PHS Act. See also 26 CFR 54.9831-1(c)(4), 29 CFR 2590.732(c)(4), 45 CFR 146.145(b)(4), and 45 CFR 148.220(b)(4). In order to address reports of troubling marketing and sales tactics and the creation of new benefit designs that mislead consumers to believe that hospital indemnity or other fixed indemnity insurance constitutes comprehensive coverage, 159 as well as the changes in market conditions and in the legal landscape that have taken place since the last regulatory activity on this coverage (discussed in sections I and II of this preamble), the Departments are proposing amendments to the Federal regulations at 26 CFR 54.9831-1(c)(4), 29 CFR 2590.732(c)(4), and 45 CFR 146.145(b)(4) that outline the conditions for hospital indemnity and other fixed indemnity insurance to qualify as an excepted benefit in the group market. HHS is also proposing several amendments to the regulation at 45 CFR 148.220(b)(4) that outline the conditions for such insurance to qualify as excepted benefits coverage in the individual market. These proposals would provide greater clarity regarding what it means for fixed indemnity excepted benefits coverage to be offered on an "independent, noncoordinated" basis and to provide benefits in a "fixed" amount, consistent with the statutory purpose of exempting this type of coverage from the Federal consumer protections and requirements for comprehensive coverage. 159 See, e.g., Young, Christen Linke and Kathleen Hannick (2020). "Fixed Indemnity Coverage is a Problematic Form of "Junk" Insurance," USC-Brookings Schaeffer Initiative for Health Policy, available at: https://www.brookings.edu/blog/usc-brookings-schaeffer-on-health-policy/2020/08/04/fixed-indemnity-health-coverage-is-a-problematic-form-of-junk- insurance. See also Partnership to Protect Coverage (2021). "Under-Covered: How 'Insurance-Like' Products are Leaving Patients Exposed," available at: https://www.nami.org/NAMI/media/NAMI-Media/ Public%20Policy/Undercovered_Report_03252021.pdf. Specifically, HHS proposes to require that fixed indemnity excepted benefits coverage in the individual market must provide benefits that are paid only on a per-period basis. This change to the HHS individual market regulations for excepted benefits would align the standard for individual market fixed indemnity excepted benefits coverage with the Departments' current group market regulations for such coverage. 160 160 See 26 CFR 54.9831-1(c)(4)(i), 29 CFR 2590.732(c)(4)(i), and 45 CFR 146.145(b)(4)(i). Additionally, the Departments propose to amend the group market regulations for hospital indemnity and other fixed indemnity insurance to qualify as an excepted benefit, including proposing new standards governing the payment of fixed benefits and examples to clarify these new proposed standards. HHS similarly proposes to amend the standards governing the payment of fixed benefits under such coverage in the individual market. The Departments further propose to add a new example to the group market regulations to address the prohibition on coordination between fixed indemnity excepted benefits coverage and any group health plan maintained by the same plan sponsor. This example illustrates the Departments' proposed interpretation of the "noncoordination" requirements for hospital indemnity or other fixed indemnity coverage to qualify as excepted benefits and the extension of this interpretation to situations that do not involve a formal coordination-of-benefits arrangement. HHS similarly proposes to apply this interpretation of the "noncoordination" requirement to individual market fixed indemnity excepted benefits coverage. As detailed in section III.B.1.e of this preamble, HHS further proposes to modify the requirement at current 45 CFR 148.220(b)(4)(ii) to align with the statutory requirement that "noncoordinated, excepted benefits" in the individual market be provided without regard to whether benefits are provided under any health insurance coverage maintained by the same health insurance issuer. 161, 162 161 See section 2722(c)(2)(C) of the PHS Act. 162 As discussed in section III.B.1.f of this preamble, HHS is also proposing a technical amendment to redesignate 45 CFR 148.220(b)(4)(ii) as 45 CFR 148.220(b)(4)(i). The Departments also propose to require a consumer notice be provided when offering fixed indemnity excepted benefits coverage in the group market, in alignment with the existing requirement to provide such a notice in connection with fixed indemnity excepted benefits coverage offered in the individual market. HHS also proposes changes to the consumer notice that must be provided when offering fixed indemnity excepted benefits coverage in the individual market. 163 163 The consumer notice for individual market fixed indemnity excepted benefits coverage is currently codified at 45 CFR 148.220(b)(4)(iv). If HHS finalizes the proposed amendments to the individual market fixed indemnity excepted benefit regulation as proposed, the individual market consumer notice would be revised and moved to 45 CFR 148.220(b)(iii). See section III.B.1.d of this preamble for more details. These proposed changes are generally intended to more clearly distinguish fixed indemnity excepted benefits coverage from comprehensive coverage in order to reduce confusion and misinformation related to fixed indemnity excepted benefits coverage, increase consumers' understanding of their health coverage options, and provide more information to support consumers in making informed coverage purchasing decisions. In addition, as noted in section II.B of this preamble, the recent experience with the COVID-19 PHE has highlighted the value of a framework that encourages individuals to enroll in comprehensive coverage and also prompted the Departments to examine the Federal regulations governing fixed indemnity excepted benefits coverage. The proposed amendments are also designed to align the fixed indemnity excepted benefits coverage regulations across the individual and group markets when practical and appropriate and clarify the conditions applicable to fixed indemnity excepted benefits coverage for all interested parties, including consumers, issuers, employers, agents, brokers, and State regulators. a. Per-Period Basis Fixed Payment Standard HHS proposes to amend 45 CFR 148.220(b)(4) to reinstate the condition that to qualify as an excepted benefit in the individual market, hospital indemnity or other fixed indemnity insurance must pay fixed benefits only on a per-period basis and to remove the current option for such coverage to pay fixed benefits on a per-service basis. 164 As proposed, HHS would move the fixed payment standard currently captured in 45 CFR 148.220(b)(4)(iii) to a new proposed paragraph at 45 CFR 148.220(b)(4)(ii) and revise it to require that benefits are paid in a fixed dollar amount per day (or per other time period) of hospitalization or illness (for example, $100/day). 165 164 As discussed further in section III.B.1.b of this preamble, HHS proposes other amendments to the new proposed paragraph at 45 CFR 148.220(b)(4)(ii) to capture the proposed new additional payment standards for hospital indemnity or other fixed indemnity insurance to qualify as excepted benefits. As part of other amendments to 45 CFR 148.220(b), HHS also proposes to revise and move the consumer notice requirement applicable to individual market fixed indemnity excepted benefits coverage. See section III.B.1.d of this preamble for further details. As part of other technical and conforming amendments to the individual market regulation, HHS also proposes to move and modify the existing individual market "noncoordination" standard from its current location at 45 CFR 148.220(b)(4)(ii) to 45 CFR 148.220(b)(4)(i). See section III.B.1.e and III.B.1.f of this preamble for further details. 165 As discussed further in section III.B.1.b of this preamble, HHS proposes other amendments to the new proposed paragraph at 45 CFR 148.220(b)(4)(ii) to capture the proposed new additional payment standards for hospital indemnity or other fixed indemnity insurance to qualify as excepted benefits. Fixed indemnity excepted benefits coverage is intended to serve as a source of income replacement or financial support, paying benefits at a fixed amount per qualifying medical event. This type of coverage is not comprehensive coverage, and benefit payments under fixed indemnity excepted benefits coverage are paid without regard to the actual amount of expenses incurred by a covered individual. 166 HHS is of the view that hospital indemnity or other fixed indemnity insurance products made available in the individual market that closely resemble comprehensive coverage, by incorporating features typically included in comprehensive coverage, obscure the difference between fixed indemnity excepted benefits coverage and comprehensive coverage. HHS is no longer of the view that the value of providing issuers with the flexibility to offer fixed indemnity excepted benefits coverage in the individual market that pays benefits on a per-service basis outweighs the potential harm to consumers who may purchase fixed indemnity excepted benefits coverage as a substitute for, or under the misapprehension that they are purchasing, comprehensive coverage. Because fixed indemnity excepted benefits coverage typically provides benefits that are far below actual medical expenses, individuals who rely on this type of coverage as their primary form of health insurance are at risk of financial harm. 167 166 26 CFR 54.9831-1(c)(4)(i), 29 CFR 2590.732(c)(4)(i), 45 CFR 146.145(b)(4)(i), and); 45 CFR 148.220(b)(4)(iii). 167 See Young, Christen Linke and Kathleen Hannick (2020). "Fixed Indemnity Coverage is a Problematic Form of "Junk" Insurance," USC-Brookings Schaeffer Initiative for Health Policy, available at: https://www.brookings.edu/blog/usc-brookings-schaeffer-on-health-policy/;2020/08/04/fixed-indemnity-health-coverage-is-a-problematic-form-of-junk- insurance. Significant legal and market developments since the 2014 final rule was published have altered the landscape in which fixed indemnity excepted benefits coverage is marketed and sold to consumers. 168 The Departments are of the view that these changes have increased the likelihood that individual market consumers may purchase fixed indemnity excepted benefits coverage as a substitute for comprehensive coverage, rather than as a form of income replacement or financial support that supplements comprehensive coverage. Therefore, these changes have also altered the balance that HHS intended to achieve with the amendments to the individual market fixed indemnity excepted benefits coverage regulation in its 2014 final rule. 168 See discussion elsewhere in this preamble (for example, in sections I.A, I.D.1 and II of this preamble) related to such developments, including the enactment of the Tax Cuts and Jobs Act and the decision in Central United Life v. Burwell. In addition to these changes, HHS has observed concerning trends in how fixed indemnity excepted benefits coverage in the individual market is designed and marketed. As noted in the preamble to the 2014 proposed rule, hospital indemnity or other fixed indemnity insurance policies that pay benefits on a "per-service" basis have been widely available in the individual market for many years, including prior to the 2014 final rule, in part because many State regulators determined that consumers valued the ability to purchase per-service hospital indemnity or other fixed indemnity insurance to complement MEC, emphasizing its value as a supplement to (rather than a replacement for) comprehensive coverage. 169 Since the 2014 final rule was finalized, however, HHS has seen products marketed and sold in the individual market as fixed indemnity excepted benefits coverage with features that make the products more closely resemble comprehensive coverage than traditional forms of fixed indemnity excepted benefits coverage, but without many of the required consumer protections of comprehensive coverage. 169 National Association of Insurance Commissioners (2013). "Letter to Secretaries of Labor, Treasury, and Health and Human Services," available at: https://naic.soutronglobal.net/Portal/Public/en-GB/RecordView/Index/23541. For example, some issuers now offer individual market fixed indemnity policies that pay benefits on the basis of extensive, variable schedules with tens or hundreds of thousands of different benefit amounts that vary by item or service. 170 Some benefits associated with particular items and services appear to be based on Medicare fee-for-service or Diagnosis Related Group (DRG) service descriptions. 171 Some marketing materials claim that benefits are based on "relative value units," an apparent reference to an element of Medicare's physician fee schedule formula, and that exact benefits will vary by the Current Procedural Terminology (R) (CPT) code submitted by the health care provider furnishing the relevant service, suggesting that benefit levels are based on either actual or estimated costs of care. Benefits under this coverage might be provided related to the receipt of items and services outside the scope of a traditional understanding of "hospitalization or illness," such as preventive cancer screenings, pediatric vaccines, or wellness visits, which further increases the likelihood that a consumer could confuse the coverage with comprehensive coverage. 170 See Appleby, Julie (2021). "New Health Plans Offer Twists on Existing Options, With a Dose of 'Buyer Beware'," KFF Health News, available at: https://khn.org/news/article/new-health-plans-offer-twists-on-existing-options-with-a-dose-of-buyer-beware. 171 Young, Christen Linke and Kathleen Hannick (2020). "Fixed Indemnity Coverage is a Problematic Form of "Junk" Insurance," USC-Brookings Schaeffer Initiative for Health Policy, available at: https://www.brookings.edu/blog/usc-brookings-schaeffer-on-health-policy/2020/08/04/fixed-indemnity-health-coverage-is-a-problematic-form-of-junk- insurance. Common benefit designs for individual market fixed indemnity coverage include fixed benefit schedules (for example, $50 per office visit, $100 per surgical procedure, or $20 per generic prescription), payments made on a percentage basis up to a cap that might itself vary based on benefit category (for example, 25 percent of a fixed amount for a hospitalization, capped at $5,000), or on the basis of "tiers" of complexity (for example, $500 for a lower-complexity "Tier 7" surgery such as a tonsillectomy or up to $50,000 for a major organ transplant categorized as a "Tier 1" procedure). Some issuers of hospital indemnity or other fixed indemnity insurance in the individual market advertise the availability of a network of providers that accept a lower rate of reimbursement. Additionally, some hospital indemnity or other fixed indemnity insurance pay benefits directly to the health care provider or facility that furnished services to the covered individual, rather than directly to the policyholder (as would be expected if the benefits were actually functioning as income replacement or a supplement to comprehensive coverage). 172 In this manner, these policies operate in a way that is similar to the way in which plans and issuers frequently reimburse providers under comprehensive coverage. 172 See section III.B.1.c of this preamble for a discussion of the Departments' concerns with respect to benefit designs for hospital indemnity or other fixed indemnity insurance that provides direct reimbursement to health care providers and facilities. Therefore, to limit the practice of designing complex, fee-for-service style fixed indemnity plans that are marketed and sold as an alternative to comprehensive coverage, HHS proposes to reinterpret what it means for hospital indemnity or other fixed indemnity insurance to provide "fixed" benefits in the individual market and remove the language that permits individual market fixed indemnity excepted benefits coverage to provide fixed benefits on a per-service basis. HHS also proposes to update the parenthetical reference that captures the allowance for issuers to provide fixed benefits per other period, to refer to per other "time" period, to further emphasize the prohibition on providing benefits on a per-service or per-item basis. To implement these changes, HHS proposes to move the current fixed payment standard from 45 CFR 148.220(b)(4)(iii) to a new proposed paragraph at 45 CFR 148.220(b)(4)(ii) and revise it to require that benefits are paid in a fixed dollar amount per day (or per other time period) of hospitalization or illness (for example, $100/day). 173 173 As discussed in section III.B.1.b of this preamble, HHS proposes other amendments to the new proposed paragraph at 45 CFR 148.220(b)(4)(ii) to capture the proposed new additional payment standards for hospital indemnity or other fixed indemnity insurance to qualify as excepted benefits in the individual market. Under this proposal, issuers may offer coverage similar to hospital indemnity or other fixed indemnity insurance that pays benefits on a per-service basis, subject to applicable State law requirements, but under Federal law these plans would not be considered excepted benefits and would be required to comply with the Federal consumer protections and requirements for comprehensive coverage. HHS seeks comments on these proposed changes. In particular, HHS seeks comments on how the proposed amendment to require individual market fixed indemnity excepted benefits coverage to pay fixed benefits only on a per-period basis may affect consumers' ability to make an informed choice regarding health insurance options and how it may impact affordability or access to health coverage or care. b. Additional Fixed Payment Standards The Departments propose to amend the group market fixed indemnity excepted benefits coverage provisions at 26 CFR 54.9831-1(c)(4), 29 CFR 2590.732(c)(4), and 45 CFR 146.145(b)(4) to recodify existing payment standards and to establish additional standards related to the payment of benefits under fixed indemnity excepted benefits coverage in the group market. These proposals are intended to provide greater clarity and reduce the potential for consumers to mistakenly enroll in excepted benefits coverage as a replacement for or alternative to comprehensive coverage by further interpreting what it means for hospital indemnity or other fixed indemnity insurance to provide "fixed" benefits. Specifically, these proposed rules provide that to be hospital indemnity or other fixed indemnity insurance that qualifies as an excepted benefit in the group market, the benefits must also meet each of the additional fixed payment standards specified in new proposed 26 CFR 54.9831-1(c)(4)(ii)(D)( 1 ), 29 CFR 2590.731-1 (c)(4)(ii)(D)( 1 ), and 45 CFR 146.145(b)(4)(ii)(D)( 1 ). 174 These new proposed rules would retain and amend 175 the existing per-period fixed payment standard to require that benefits under hospital indemnity or other fixed indemnity insurance be paid as a fixed dollar amount per day (or per other time period) of hospitalization or illness (for example, $100 day) regardless of the amount of expenses incurred. 176 In doing so, these proposed rules would require that benefits be offered as "fixed" amounts, align with the statutory condition that the coverage be offered on a noncoordinated basis, 177 and distinguish fixed indemnity excepted benefits coverage from coverage for actual health care costs incurred or services received. These proposed rules thus reflect that fixed indemnity excepted benefits coverage is intended to offer income replacement or financial support for medical expenses not covered by comprehensive coverage or for non - medical related expenses in the event of an unexpected or serious health event. 174 To qualify as excepted benefits coverage in the group market, hospital indemnity or other fixed indemnity insurance would continue to be required to satisfy each of the conditions currently captured in 26 CFR 54.9831-1(c)(4)(ii)(A)-(C), 29 CFR 2590.731-1(c)(4)(ii)(A)-(C), and 45 CFR 146.145(b)(4)(ii)(A)-(C). If these proposed rules are finalized as proposed, the issuer would also be required to comply with the consumer notice requirements in new proposed 26 CFR 54.9831-1(c)(4)(ii)(D)( 2 )-( 4 ), 29 CFR 2590.731-1(c)(4)(ii)(D)( 2 )-( 4 ), and 45 CFR 146.145(b)(4)(ii)(D)( 2 )-( 4 ). 175 Similar to the individual market fixed indemnity excepted benefits coverage regulation, the Departments propose to update the parenthetical reference that captures the allowance for plans and issuers to provide fixed benefits per other period to refer to per other "time" period, to further emphasize the prohibition on providing benefits on a per- service or per-item basis. 176 26 CFR 54.9831-1(c)(4)(i), 29 CFR 2590.731-1(c)(4)(i), and 45 CFR 146.145(b)(4)(i). 177 Section 9832(c)(3) of the Code, section 733(c)(3) of ERISA, and section 2791(c)(3) of the PHS Act. See also section 9831(c)(2) of the Code, section 732(c)(2) of ERISA, and sections 2722(c)(2) and 2763(b) of the PHS Act. Rather than transferring risk for health care costs from a participant, beneficiary, or enrollee to the issuer or plan sponsor or otherwise providing comprehensive coverage, fixed indemnity excepted benefits coverage is intended to provide a fixed, pre-determined level of cash benefits. These benefits payments are made upon the occurrence of a health-related event, such as a period of hospitalization or illness, but are otherwise unrelated to expenses incurred or health care services received. Coverage that varies benefits based on health care costs, services received, or benefits paid under other forms of coverage does not provide the kind of "fixed" benefits that are fixed indemnity excepted benefits exempt from the Federal consumer protections and requirements for comprehensive coverage. The Departments therefore propose to expand the existing payment standards for group market fixed indemnity excepted benefits coverage to further interpret what it means to provide "fixed" benefits. The Departments also propose to require that benefits under fixed indemnity excepted benefits coverage in the group market be paid regardless of the actual or estimated amount of expenses incurred, services or items received, severity of illness or injury experienced by a covered participant or beneficiary, or any other characteristics particular to a course of treatment received by a covered participant or beneficiary. The Departments further propose to amend the group market fixed indemnity excepted benefit regulations to affirm that benefits cannot be paid on any other basis (such as on a per-item or per-service basis). The Departments propose to set forth these new payment standards for group market fixed indemnity excepted benefits coverage at 26 CFR 54.9831-1(c)(4)(ii)(D)( 1 ), 29 CFR 2590.732(c)(4)(ii)(D)( 1 ), and 45 CFR 146.145(b)(4)(ii)(D)( 1 ). HHS proposes parallel amendments to similarly expand the payment standards for individual market fixed indemnity excepted benefits coverage in 45 CFR 148.220(b)(4)(ii). These new proposed payment standards are designed to further distinguish fixed indemnity excepted benefits coverage from comprehensive coverage, in order to reduce the potential for consumer confusion that can result in consumers mistakenly enrolling in hospital indemnity or other fixed indemnity insurance as a replacement for or alternative to comprehensive coverage. Additionally, these proposals would ensure that hospital indemnity or other fixed indemnity insurance that qualifies as excepted benefits is providing benefits in a "fixed" amount per-day or per other time period. These proposals also would help to prevent attempts to circumvent otherwise applicable Federal consumer protections and requirements for comprehensive coverage by labeling a policy that provides extensive benefits that vary based on expenses incurred, services or items received, or other clinical or diagnostic criteria as fixed indemnity excepted benefits coverage. 178 The Departments are aware of some policies sold as hospital indemnity or other fixed indemnity insurance in the group market that appear to label benefits as though they are being paid on a "per-period" basis, when benefits are effectively based on the types of services or items received. For example, a policy may provide a fixed payment of $25 "per day" that a participant or beneficiary fills a prescription, receives a medical exam, or undergoes a wellness screening. In these cases, the benefit is effectively provided on a per-service basis because typically an individual does not fill a prescription or receive a medical exam or wellness screening more than once per day; therefore, merely affixing "per day" (or per other period) to the benefit description does not serve to limit payment to a per-period benefit in any meaningful sense. 178 When analyzing whether a policy, certificate, or contract of insurance is subject to the federal consumer protections and requirements for comprehensive coverage, the Departments look past the label used, to examine whether the policy, certificate, or contract of insurance meets applicable requirements or conditions to qualify as an excepted benefit, or whether it is comprehensive coverage that is subject to the federal consumer protections and requirements applicable to such coverage. In addition, some issuers offering these policies pay benefits according to a "tiered" payment schedule under which the benefit amount increases (or decreases) based on the severity of the participant's, beneficiary's, or enrollee's condition or the complexity of a service or item received, with exact benefit amounts based on the relative value unit for the exact service code for the service or item provided. Similarly, a structure that provides higher benefit amounts as a result of a covered individual taking air versus ground transportation services represents another example of a benefit and payment structure for hospital indemnity or other fixed indemnity insurance that varies based on actual costs or estimated cost of services or severity of the illness, injury or condition of a covered participant or beneficiary. The Departments are of the view that these benefit designs and practices circumvent the requirement that fixed indemnity excepted benefits coverage provide benefits on a fixed, per-period basis. The proposed regulatory amendments and changes to the interpretation of what it means to provide benefits in a "fixed" amount, particularly the proposal that benefits be paid without regard to items or services received, would further safeguard against practices designed to evade the existing per-period requirement in the group market and would strengthen the proposed parallel requirement in the individual market. The proposed update to the parenthetical reference in new proposed 26 CFR 54.9831-1(c)(4)(ii)(D)(1), 29 CFR 2590.732(c)(4)(ii)(D)(1), and 45 CFR 146.145(b)(4)(ii)(D)(1) that captures the allowance for plans and issuers to provide fixed benefits per other period, to refer to per other "time" period, further emphasizes the prohibition on providing benefits on a per-service or per-item basis. Additionally, the proposed new example at 26 CFR 54.9831-1(c)(4)(iv)(B), 29 CFR 2590.732(c)(4)(iv)(B), and 45 CFR 146.145(b)(4)(iii)(B), and discussed elsewhere in this preamble section, specifically provides that merely appending a "per day" (or per other time period) label to a benefit that is being paid on the basis of the provision of an item or service does not meet the requirement that fixed indemnity excepted benefits coverage provide benefits on the basis of a period of hospitalization or illness. The Departments will closely examine as part of potential enforcement actions whether any product offered as fixed indemnity excepted benefits coverage in the group market that claims to provide benefits per day (or other period) of hospitalization or illness is in effect making payment on any other basis, such as a per-service or per-item basis, for example, by simply affixing a "per day" term to benefits offered that are related to the receipt of specific items and services. HHS will take a similar approach with respect to products offered as fixed indemnity excepted benefits in the individual market if the proposal to require that individual market fixed indemnity excepted benefits be paid only on a per-period basis is finalized. In addition, some interested parties have suggested that a fixed indemnity plan that pays benefits on a per-service schedule is paying benefits regardless of the amount of expenses incurred if the plan does not vary benefits based on the actual amounts charged for services received. However, varying benefits based on items or services increases the risk that consumers will confuse fixed indemnity excepted benefits coverage with comprehensive coverage, undermining a central reason for exempting this type of coverage from the Federal consumer protections and requirements for comprehensive coverage. The provisions of these proposed rules to require that fixed indemnity excepted benefits coverage pay benefits in a fixed amount regardless of the actual or estimated amount of expenses incurred, services or items received, or severity of illness or injury experienced would help further distinguish fixed indemnity excepted benefits coverage from comprehensive coverage, mitigate the potential for consumers to confuse the two types of coverage, and thereby reduce the risk that a consumer would enroll in fixed indemnity excepted benefits coverage as a replacement for or alternative to comprehensive coverage. The Departments are also considering whether the requirement that hospital or other fixed indemnity insurance pay a fixed dollar amount "per day (or per other period) of hospitalization or illness" in the group market regulations 179 should be interpreted as a requirement that benefits be paid on the basis of an actual period of time during which a covered individual experiences a qualifying period of hospitalization or illness (subject to the terms of the contract) in order to qualify as an excepted benefit. Under this interpretation, hospital or fixed indemnity insurance that pays a fixed dollar benefit on a per-period basis but not specifically related to a period of "hospitalization or illness" - such as $50 per day that an individual receives one or more specified screening tests - would not qualify as fixed indemnity excepted benefits. For example, benefit payments that are provided solely on the basis of the receipt of a surgical service or medical exam rather than a period of time during which a covered individual is hospitalized or experiences an illness would not qualify as fixed indemnity excepted benefits under the approach the Departments are considering. 179 26 CFR 54.9831-1(c)(4)(i), 29 CFR 2590.731-1(c)(4)(i), and 45 CFR 146.145(b)(4)(i). The Departments seek comment on this interpretation, including how adopting this approach would affect existing products that are sold and marketed as fixed indemnity excepted benefits coverage and how such an interpretation would enhance or detract from consumer access to high-quality, affordable health care. HHS similarly requests comment on the effects of applying this interpretation of the phrase "per day (or per other period) of hospitalization or illness" in the individual market regulation at 45 CFR 148.220(b)(ii), 180 if the proposal to require that individual market fixed indemnity excepted benefits be paid only on a per-period basis is finalized and the Departments finalize this additional interpretation of what it means to provide benefit payments in a "fixed" amount. 180 As discussed in section III.B.1.f of this preamble, HHS is also proposing a technical amendment to redesignate 45 CFR 148.220(b)(4)(ii) as 45 CFR 148.220(b)(4)(i). Finally, the Departments propose to amend the payment standards for fixed indemnity excepted benefits coverage to require that benefits be paid in a fixed amount regardless of any other characteristics particular to a course of treatment received by the covered participant or beneficiary. This standard is proposed as part of the proposed new payment standards in the group market regulations at 26 CFR 54.9831-1(c)(4)(ii)(D)(1), 29 CFR 2590.732(c)(4)(ii)(D)(1), and 45 CFR 146.145(b)(4)(ii)(D)(1). For purposes of this proposal, a "course of treatment" refers to a coordinated series of items or services intended to treat a particular health condition over a fixed period of time or indefinitely, pursuant to a plan of care established and managed by a health care professional or team of health care professionals. For example, an oncologist may establish a course of treatment for an individual with a cancer diagnosis that includes a sequence of surgery, chemotherapy, and radiation, scheduled to begin and end over a set period of months; or a psychiatrist and therapist may work together to establish a course of treatment for an individual with a chronic mental health condition that includes prescription medication and group and individual talk therapy on an ongoing basis without a specified end date. Because a course of treatment is a set of coordinated services, interpreting "fixed" benefits to exclude payments based on a course of treatment is aligned with and strengthens the proposal to require that benefits be paid regardless of items or services received. Such interpretation also prevents plans and issuers of hospital indemnity or other fixed indemnity insurance from basing payment on a set of multiple items or services, thereby circumventing the requirement that payment not be based on items or services received. It is similarly aligned with the proposals to require that benefits be paid regardless of actual or estimated cost of services and regardless of the severity of illness or injury. Additionally, consumers are more likely to have difficulty distinguishing between comprehensive coverage and fixed indemnity excepted benefits coverage that adopts such benefit designs and are therefore more likely to enroll in fixed indemnity excepted benefits coverage under the mistaken belief that it is a suitable replacement for or alternative to comprehensive coverage. The Departments are concerned about the practice among some issuers, employers, agents, brokers, and associations of offering fixed indemnity excepted benefits coverage as a package in combination with other products (including other excepted benefits) in order to appear to provide comprehensive coverage. 181 In addition, as discussed in section III.B.1.e of this preamble, the Departments are concerned about the practice among some employers and issuers of presenting a group health plan that includes only limited benefits coupled with an extensive fixed indemnity policy. In light of the potential harm to consumers who may enroll in fixed indemnity excepted benefits coverage under the mistaken impression that they have access to comprehensive coverage because it was paired with a limited employer-sponsored group health plan, the Departments are of the view that prohibiting fixed indemnity excepted benefits coverage from paying benefits on the basis of a course of treatment would further reduce the risk that this coverage would be packaged with other forms of coverage to circumvent Federal consumer protections and requirements for comprehensive coverage. Therefore, the Departments propose to adopt a new interpretation of what it means for fixed indemnity excepted benefits coverage to provide "fixed" benefits and require such coverage to also pay benefits in a "fixed" amount that does not vary based on the characteristics particular to a course of treatment received by a covered participant or beneficiary. The Departments seek comments on whether this proposal is a necessary complement to the other additional fixed payment standards in these proposed rules. 181 Palanker, Dania and Kevin Lucia (2021). "Limited Plans with Minimal Coverage Are Being Sold as Primary Coverage, Leaving Consumers at Risk," Commonwealth Fund, available at: https://www.commonwealthfund.org/blog/2021/limited-plans-minimal-coverage-are-being-sold-primary-coverage-leaving-consumers-risk. The Departments also propose including a new example (Example 2) in the group market regulations, at new proposed 26 CFR 54.9831-1(c)(4)(iv)(B), 29 CFR 2590.732(c)(4)(iv)(B), 45 CFR 146.145(b)(4)(iii)(B), to illustrate the requirement that fixed indemnity excepted benefits coverage in the group market must pay a fixed dollar amount per day (or per other period) of hospitalization or illness. This proposed example would also illustrate the new payment standards proposed in these rules that fixed indemnity excepted benefits coverage in the group market pay benefits without regard to services received. This new example describes a group health plan or health insurance issuer offering coverage through an insurance policy that provides benefits related to the receipt of specific items and services in a fixed amount, such as $50 per blood test or $100 per visit. The example concludes that the policy would not qualify as fixed indemnity excepted benefits coverage, because the benefits are not paid in a fixed dollar amount per day (or per other time period) of hospitalization or illness. The proposed example also explains that the conclusion would be the same even if the policy added a per day (or per other time period) term to the benefit description, such as "$50 per blood test per day," because the benefits are not paid regardless of the services or items received. The Departments also propose to retain, while making technical and conforming amendments to, the existing example (which the Departments propose to designate as Example 1) in the group market rules. 182 182 The Departments propose to retain the existing example describing a group health plan that provides benefits only for hospital stays at a fixed percentage of expenses up to a maximum of $100 a day in new proposed 26 CFR 54.9831-1(c)(4)(iv)(A), 29 CFR 2590.732(c)(4)(iv)(A), and 45 CFR 146.145(b)(4)(iii)(A). Consistent with the conclusion reflected in the Departments' current group market regulations, even if the benefits under such a policy satisfy the other applicable conditions, because the policy pays benefits based on a percentage of expenses incurred, the policy does not qualify as excepted benefits coverage. This is the result even if, in practice, the policy pays the maximum of $100 for every day of hospitalization. HHS also proposes parallel amendments to the individual market fixed indemnity excepted benefits coverage regulation at new proposed 45 CFR 148.220(b)(4)(ii) to require that fixed indemnity excepted benefits coverage in the individual market provide benefits in a "fixed" amount regardless of the actual or estimated amount of expenses incurred, services or items received, severity of illness or injury experienced by a covered individual, or any other characteristics particular to a course of treatment received by a covered individual. In addition, and as discussed in greater detail in section III.B.1.e of this preamble, HHS proposes to include language in new proposed 45 CFR 148.220(b)(4)(ii) to align with section 2722(c)(2)(C) of the PHS Act, which provides that benefits under fixed indemnity excepted benefits coverage in the individual market must also be paid without regard to whether benefits are provided with respect to the event under any other health insurance coverage maintained by the same health insurance issuer. HHS further proposes in new proposed 45 CFR 148.220(b)(4)(ii) to affirm that benefits cannot be paid on any other basis (such as on a per-item or per-service basis). For the same reasons as described in this section with respect to the Departments' parallel changes to the group market regulations, HHS is of the view that these changes to the interpretation of what it means to provide benefits in a "fixed" amount are necessary to ensure that issuers of fixed indemnity excepted benefits coverage in the individual market are not able to circumvent the fixed payment standards at new proposed 45 CFR 148.220(b)(4)(ii) that the coverage be provided on a per-period basis. These proposed changes would also align the payment standards for what it means to provide "fixed" benefits across the group and individual markets and serve to further distinguish fixed indemnity excepted benefits coverage from comprehensive coverage in both markets. The Departments request comments on all aspects of these proposed additional standards for fixed payment as they would apply to fixed indemnity excepted benefits coverage offered in the group and individual markets, as well as the proposed new example to illustrate the proposed new "fixed" payment standards. Specifically, the Departments seek comments on the effectiveness of the proposed additional fixed payment standards in furthering the Departments' goal of differentiating fixed indemnity excepted benefits coverage from comprehensive coverage to reduce the likelihood that consumers would enroll in fixed indemnity excepted benefits coverage as an alternative to or replacement for comprehensive coverage, including feedback on each proposed payment standard. Additionally, the Departments seek comments on how the proposed payment standards, if finalized, would interact with the existing requirement that group market fixed indemnity excepted benefits coverage provide benefits on a per-period basis only, either individually or collectively, and whether the proposed payment standards would support the effectiveness of the per-period basis requirement and prevent issuers from attempting to circumvent Federal requirements. Similarly, HHS seeks comments on how the proposed additional fixed payment standards would interact with the proposed requirement that individual market fixed indemnity excepted benefits coverage offer benefits on a per-period basis only, if the per-period-only requirement were finalized, including whether the proposed additional payment standards would support the effectiveness of the proposed per-period payment standard, either individually or collectively. c. Payments Made Directly to Providers The Departments are aware that some hospital indemnity and other fixed indemnity insurance in the group and individual markets labeled as excepted benefits pay benefits directly to the providers or facilities providing the services or items, rather than to the participant, beneficiary, or enrollee. These arrangements may remove participants, beneficiaries, and enrollees from the payment transaction entirely, if the benefit amount under the hospital indemnity or other fixed indemnity insurance is less than or equal to the provider's or facility's billed charges for care. In other cases, the hospital indemnity or other fixed indemnity insurance may pay benefits directly to the provider or facility as a form of reimbursement for items and services, and issue any balance of benefits to the participant, beneficiary, or enrollee after paying the provider or facility. For example, one fixed indemnity insurance issuer provides policyholders with a debit card that allows for payment of benefits at the point of service in the form of a temporary advance of the benefits the policyholder may ultimately be eligible to receive. In these cases, the policyholder cannot access any benefit payment under the fixed indemnity insurance until the advance payment to the provider or facility is reconciled with the actual costs and a final determination of benefits is made. Other products labeled as fixed indemnity insurance advertise plan ID cards that participants, beneficiaries, or enrollees are encouraged to use to allow providers to file claims directly with the plan or third-party administrator. 183 Another fixed indemnity plan advertises that members who go to an "in-network" retail clinic or urgent care clinic for covered services for the cost of a flat "co-pay" will avoid a "balance bill," suggesting that the fixed indemnity coverage is providing direct payment for "in-network" services. 183 Young, Christen Linke, and Kathleen Hannick (2020). "Fixed Indemnity Coverage is a Problematic Form of "Junk" Insurance," USC-Brookings Schaeffer Initiative for Health Policy, available at: https://www.brookings.edu/blog/usc-brookings-schaeffer-on-health-policy/2020/08/04/fixed-indemnity-health-coverage-is-a-problematic-form-of-junk- insurance. By providing direct reimbursement for health care items and services to a provider or facility, these arrangements further obscure the differences between fixed indemnity excepted benefits coverage and comprehensive coverage. In the Departments' view, these arrangements generally are not structured in a way that would meet the current requirement in the group market for benefits to be paid on a per-period basis or the parallel proposed requirement for the individual market. Because the amount of any payment to a provider is often based on the amount reimbursed by another plan or coverage, these arrangements may also be structured in a way that does not meet the statutory requirement that benefits be noncoordinated and paid without regard to whether benefits are provided with respect to the event under any group health plan maintained by the same plan sponsor, or with respect to individual health insurance coverage, under any health insurance coverage offered by the same health insurance issuer. 184 The Departments are also concerned that some of these arrangements may not meet the existing requirement for fixed indemnity excepted benefits coverage to pay a fixed amount regardless of the amount of the expenses incurred. 185 184 See section 9831(c)(2)(C) of the Code, section 732(c)(2)(C) of ERISA, and sections 2722(c)(2)(B)-(C) of the PHS Act. 185 See 26 CFR 54.9831-1(c)(4)(i), 29 CFR 2590.732(c)(4)(i), 45 CFR 146.145(b)(4)(i), and 45 CFR 148.220(b)(4)(iii). The Departments reiterate that it is important to look past the label used on any given product to examine whether the coverage meets applicable requirements to qualify as an excepted benefit or is instead coverage that is subject to the Federal consumer protections and requirements for comprehensive coverage. The Departments will closely examine as part of enforcement actions 186 whether any product labeled as fixed indemnity excepted benefits coverage actually satisfies all the applicable requirements, including products that employ a design feature (as opposed to a case-by-case assignment of benefits specifically made by a covered participant, beneficiary, or enrollee) under which benefits are paid directly to health care providers and facilities rather than to the policyholder or participant. HHS intends to follow a similar approach for examining whether any given individual market product meets applicable requirements to qualify as an excepted benefit or is instead comprehensive coverage subject to the Federal consumer protections and requirements for comprehensive coverage. 186 For an overview of applicable enforcement mechanisms, see Staman, Jennifer (2020). "Federal Private Health Insurance Market Reforms: Legal Framework and Enforcement," Congressional Research Service, available at https://crsreports.congress.gov/product/pdf/R/R46637. Although these proposed rules do not include policy or regulatory changes specific to the payment of benefits to providers under fixed indemnity excepted benefits coverage, the Departments seek comments on changes that interested parties think may be useful in this context. The Departments also seek comments on whether additional guidance or rulemaking is needed with respect to such payment arrangements. d. Notice To further ensure that consumers purchasing fixed indemnity excepted benefits coverage are aware of the limitations of the coverage and that it is not mistakenly purchased as an alternative or replacement for comprehensive coverage, the Departments propose to require that a consumer notice be provided in relation to group market fixed indemnity excepted benefits coverage. By requiring a notice be provided to consumers considering enrolling or re-enrolling in group market fixed indemnity excepted benefits coverage, the Departments aim to reduce the potential for consumers to mistakenly enroll in hospital indemnity or other fixed indemnity insurance as their primary source of coverage and increase consumer understanding of the differences between fixed indemnity excepted benefits coverage and comprehensive coverage. As noted in section II.B of this preamble, individuals belonging to historically marginalized populations often experience greater health challenges, as well as greater challenges accessing and using health care services, compared to the general population, including worse health outcomes, higher rates of chronic conditions, lower access to health care, and more frequent experiences of discrimination in health care settings. 187 The Departments are concerned that members of these populations may be particularly vulnerable to misinformation or misleading or aggressive sales tactics. The COVID-19 PHE amplified these longstanding inequities, resulting in disparate rates of COVID-19 infection, hospitalization, and death. 188 In light of these concerns, as well as research identifying disparities in health insurance literacy among certain racial and ethnic minorities and people with incomes below the FPL, 189 these proposals aim to ensure that all consumers, including those in underserved communities, have the necessary information to make an informed choice after considering and comparing the full range of health coverage options available to them. 187 See CMS Office of Minority Health (2022). "The Path Forward: Improving Data to Advance Health Equity Solutions," available at: https://www.cms.gov/files/document/path-forward-he-data-paper.pdf. 188 Moore, Jazmyn, Carolina Luna-Pinto, Heidi Cox, Sima Razi, Michael St. Louis, Jessica Ricaldi, and Leandris Liburd (2021). "Promoting Health Equity During the COVID-19 Pandemic, United States," Bulletin of the World Health Organization, available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8795842. 189 Edward, Jean, Amanda Wiggins, Malea Hoepf Young, and Mary Kay Rayens (2019). "Significant Disparities Exist in Consumer Health Insurance Literacy: Implications for Health Care Reform," Health Literacy Research and Practice, available at: https://pubmed.ncbi.nlm.nih.gov/31768496/. See also Villagra, Victor and Bhumika Bhuva (2019). "Health Insurance Literacy: Disparities by Race, Ethnicity, and Language Preference," The American Journal of Managed Care, available at: https://www.ajmc.com/view/health-insurance-literacy-disparities-by-race-ethnicity-and-language-preference. The current notice requirement, which applies only in the individual market, requires that the following language be provided in application materials in at least 14-point type: "THIS IS A SUPPLEMENT TO HEALTH INSURANCE AND IS NOT A SUBSTITUTE FOR MAJOR MEDICAL COVERAGE. LACK OF MAJOR MEDICAL COVERAGE (OR OTHER MINIMUM ESSENTIAL COVERAGE) MAY RESULT IN AN ADDITIONAL PAYMENT WITH YOUR TAXES." 190 190 45 CFR 148.220(b)(4)(iv). In these proposed rules, HHS proposes to revise and move the individual market consumer notice to 45 CFR 148.220(b)(4)(iii). In order to align the notice with the changes made by the Tax Cuts and Jobs Act to section 5000A of the Code, and to clarify the message to consumers, the Departments propose to require the following consumer notice for group market fixed indemnity excepted benefits coverage: "Notice to Consumers About Fixed Indemnity Insurance IMPORTANT: This is fixed indemnity insurance. This isn't comprehensive health insurance coverage and doesn't have to include most Federal consumer protections for health insurance. Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) to review your options for comprehensive health insurance. If you're eligible for coverage through your employer or a family member's employer, contact the employer for more information. Contact your State department of insurance if you have questions or complaints about this policy." This proposed notice would not affect any separate notice requirements under applicable State law, except to the extent that a State notice requirement would prevent application of any Federal notice requirement. In developing the proposed notice language, the Departments sought to balance the goals of distinguishing fixed indemnity excepted benefits coverage from comprehensive coverage and combatting potential sources of misinformation by directing consumers to appropriate resources to learn more about comprehensive coverage, with the need to provide a concise, understandable notice that would be meaningful to and actionable by consumers. After consulting with plain- language experts, the Departments propose to require the notice as proposed in this section of the preamble, including both the content and formatting of the notice, in order to promote readability, including requiring the notice be provided in sentence case rather than all-caps case (except for the lead-in word "IMPORTANT") and requiring the limited use of bold formatting. 191 191 Arbel, Yonathan and Andrew Toler (2020). "ALL-CAPS," Journal of Empirical Legal Studies, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3519630. (Finding that all-caps clauses in consumer contracts fail to appreciably improve consumer understanding or information recall, and may have a disproportionately harmful effect on older consumers). The Departments propose to require that plans and issuers prominently display the notice (in either paper or electronic form, including on a website) in at least 14-point font, on the first page of any marketing, application, and enrollment materials that are provided to participants at or before the time participants are given the opportunity to enroll in the coverage. For this purpose, the Departments would consider marketing materials to include any documents or website pages that advertise the benefits or opportunity to enroll (or reenroll) in fixed indemnity excepted benefits coverage. The Departments are of the view that requiring plans and issuers offering fixed indemnity excepted benefits coverage in the group market to provide the proposed notice to participants (rather than to both participants and any beneficiaries) would appropriately balance the need to ensure that consumers who are considering whether to enroll themselves and their beneficiaries in such coverage are sufficiently informed of their health coverage options with the administrative burden on plans and issuers to provide the notice. The Departments propose to consider the notice to be prominently displayed if it would be easily noticeable to a typical consumer within the context of the page (either print or electronic) on which it is displayed (for example, using a font color that contrasts with the background of the document; ensuring the notice is not obscured by any other written or graphic content on the page; and, when displayed on a website, ensuring the notice is visible without requiring the viewer to click on a link to view the notice). Additionally, if participants are required to reenroll (in either paper or electronic form) for purposes of renewal or reissuance of the group market fixed indemnity excepted benefits coverage, the notice would be required to be displayed in the reenrollment materials that are provided to the participants at or before the time they are given the opportunity to reenroll in coverage. If a plan or issuer provides the required group market notice in accordance with the timeframes in these proposed rules, the obligation to provide the notice would be satisfied for both the plan and issuer. HHS also proposes to revise the existing individual market consumer notice requirement to use the same content and formatting proposed to be required for the group market fixed indemnity excepted benefits coverage notice and to move the individual market notice requirement to new proposed 45 CFR 148.220(b)(4)(iii). With respect to the individual market fixed indemnity excepted benefits coverage notice, HHS proposes to require that issuers prominently display the notice (in either print or electronic form) in at least 14-point font on the first page of any marketing, application, and enrollment materials that are provided at or before the time an individual has the opportunity to enroll or re-enroll in coverage, in alignment with the proposed group market notice requirements set out in this section of the preamble. For this purpose, HHS would also consider marketing materials to include any documents or website pages that advertise the benefits or opportunity to enroll (or reenroll) in fixed indemnity excepted benefits coverage. HHS further proposes that the individual market notice must also be provided on the first page of the policy, certificate, or contract of insurance, including any documents related to renewals or extensions of fixed indemnity excepted benefit coverage. Similar to the proposed group market notice requirement, the proposed individual market notice would not affect any separate notice requirements under applicable State law, except to the extent that a State notice requirement would prevent the application of any Federal notice requirement. The Departments are proposing slightly different placement requirements with respect to the group market consumer notice compared to those proposed by HHS with respect to the individual market consumer notice. These different proposed placement requirements are intended to reflect the differences between the types of documents that consumers in the individual market typically receive when considering enrolling or reenrolling in fixed indemnity excepted benefits coverage compared to participants in the group market. Because the group policy, certificate, or contract of insurance in the group market is often provided to the plan sponsor or the group health plan administrator, the Departments do not propose to require that plans and issuers include the consumer notice in these documents for group market fixed indemnity excepted benefits coverage. Rather, the Departments propose to require that plans and issuers provide this notice on the first page of any marketing, application and enrollment materials (including on a website advertising or offering an opportunity to enroll in fixed indemnity excepted benefits coverage) provided to participants at or before the time they are given the opportunity to enroll. In addition, if participants are required to reenroll (in either paper or electronic form) for purposes of renewal or reissuance of group market fixed indemnity excepted benefits coverage, the notice must be displayed in all reenrollment materials that are provided to the participants at or before the time participants are given the opportunity to reenroll in coverage. With respect to individual market fixed indemnity excepted benefits coverage, HHS proposes that issuers in the individual market also provide the notice on the first page of the policy, certificate, or contract of insurance, including renewals or extensions, because individual market consumers are likely to receive these documents upon enrollment. This is in addition to providing the notice in all marketing, application and enrollment (or reenrollment) materials for individual market excepted benefit coverage, and also includes prominently displaying the notice on websites that advertise or offer an opportunity to enroll (or reenroll) in fixed indemnity excepted benefits coverage. These proposed requirements related to notice placement are intended to ensure that the notice is provided on documents that consumers are most likely to have the opportunity to review before application, enrollment or reenrollment, based on the Departments' and HHS' understanding of how consumers receive information related to group market versus individual market fixed indemnity excepted benefits coverage. The Departments also solicit comments on whether it would be beneficial to consumers to require plans and issuers to include some language on the notice that clearly informs consumers that the notice is an officially required document, such as "This notice is required by Federal law." The Departments seek comments on all aspects of the proposed consumer notice for both individual and group market fixed indemnity excepted benefits coverage, including whether its language, formatting, and placement would achieve the stated aims of informing consumers of the nature of the coverage and reducing misinformation, and whether alternative or additional language or mechanisms or timing for delivery could better accomplish these goals. For example, the Departments seek comments on whether providing more detailed information about the Federal consumer protections and requirements for comprehensive coverage versus fixed indemnity excepted benefits coverage, similar to the proposed amendments to the consumer notice for STLDI discussed in section III.A.4 of this preamble, would be valuable to consumers; and if so, what details would be most helpful to highlight for consumers and what format (such as a chart, list, or other presentation) would be most effective to convey this more detailed information. In addition, the Departments seek comment on alternative language to convey the information in the proposed notice. The Departments offer for consideration an illustrative example. This alternative notice would include the information in the proposed notice, with simplified word choice and reduced sentence length in order to further improve readability. The Departments request feedback on which version of the notice more effectively communicates information to individuals. The text of the alternative proposed fixed indemnity excepted benefits coverage notice is as follows: "WARNING This is not comprehensive health insurance. This is fixed indemnity insurance. This may provide a cash benefit when you are sick or hospitalized. It is not intended to cover the cost of your care. Contact your State department of insurance if you have questions or complaints about this policy. For info on comprehensive health insurance coverage options: - Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) - Contact your employer or family member's employer" Similar to the proposed consumer notice for STLDI, the Departments are also considering whether the fixed indemnity excepted benefits consumer notice should include State - specific contact language. The Departments therefore also seek comments on any benefits or burdens associated with requiring plans and issuers of fixed indemnity excepted benefits coverage to direct consumers to State-specific resources, including requiring that the notice identify the applicable State Exchange, if the fixed indemnity excepted benefits coverage is filed in a State that does not use HealthCare.gov. The Departments also seek comments on any burdens that would be created by a requirement to provide State-specific contact information for the State agency responsible for regulating fixed indemnity excepted benefits coverage in the State where the coverage is filed, rather than a generic reference to the consumer's State department of insurance, as is proposed. If the notice were finalized to require State-specific information, for products that are filed in multiple States, the Departments are considering and solicit comments on whether the notice should include the name of and the phone number for the State department of insurance of the State in which the individual to whom the fixed indemnity excepted benefits coverage is sold or marketed resides, unless the product is not filed in that State. If the product is not filed in the State in which the individual to whom the fixed indemnity excepted benefits coverage is sold or marketed resides, under this approach, if adopted, the Departments would require that the notice include the name and phone number for the department of insurance of the State in which the fixed indemnity excepted benefits coverage policy is filed. The Departments particularly seek comments from members of underserved communities, and organizations that serve such communities, on whether the language accessibility, formatting, and content of the notice sufficiently mitigate barriers that exist to help all individuals read, understand, and consider the full range of their health coverage options. The Departments also seek comments on the proposed requirement to provide the notice in the marketing, application, and enrollment (or reenrollment) materials for group market coverage, and in the policy, certificate, or contract of insurance, as well as in the marketing, application and enrollment (or reenrollment) materials, for individual market coverage, including the extension of the notice requirement to websites that advertise or offer the opportunity to enroll (or reenroll) in fixed indemnity excepted benefits coverage in the individual and group markets. The Departments are also interested in comments on whether the proposed placement requirements would substantially improve the likelihood that consumers have a meaningful opportunity to review the notice and their health coverage options before applying, enrolling, or reenrolling in the fixed indemnity excepted benefits coverage, as well as any practical or logistical barriers to providing this notice requirement as proposed. e. "Noncoordination" Requirements To be considered excepted benefits coverage, hospital indemnity or other fixed indemnity insurance must provide benefits on an independent, noncoordinated basis. 192 Thus, benefits under the coverage must be provided under a separate policy, certificate, or contract of insurance. 193 In addition, consistent with section 9831(c)(2)(B) of the Code, section 732(c)(2)(B) of ERISA, and section 2722(c)(2)(B) of the PHS Act, the group market regulations at 26 CFR 54.9831-1(c)(4)(ii)(B), 29 CFR 2590.732(c)(4)(ii)(B), and 45 CFR 146.145(b)(4)(ii)(B) prohibit coordination between the provision of benefits under fixed indemnity excepted benefits coverage and an exclusion of benefits under any group health plan maintained by the same plan sponsor. Consistent with section 9831(c)(2)(C) of the Code, section 732(c)(2)(C) of ERISA, and section 2722(c)(2)(C) of the PHS Act, the group market regulations at 26 CFR 54.9831-1(c)(4)(ii)(C), 29 CFR 2590.732(c)(4)(ii)(C), and 45 CFR 146.145(b)(4)(ii)(C) further provide that benefits under fixed indemnity excepted benefits coverage must be paid with respect to an event without regard to whether benefits are provided with respect to such an event under any group health plan maintained by the same plan sponsor. ******** 192 See section 9832(c) of the Code, section 733(c)(3) of ERISA, and sections 2722(c), 2763(b) and 2791(c)(3) of the PHS Act. 193 Id. ******** Despite these statutory and regulatory requirements regarding noncoordination, the Departments are aware that some employers offer employees a "package" of coverage options that include a non-excepted benefit group health plan that provides minimal coverage (for example, coverage of preventive services only) with fixed indemnity insurance that provides benefits associated with receiving a broad category of other services, but is labeled as an excepted benefit. An employee's coverage associated with any non-preventive service provided under the fixed indemnity insurance is typically treated by the plan or issuer as exempt from the Federal consumer protections and requirements for comprehensive coverage because the insurance has been labeled an excepted benefit. 194 The Departments are concerned that some employers are attempting to circumvent the Federal consumer protections and requirements for comprehensive coverage that otherwise apply to group health plans by offering most benefits associated with receiving health care services as fixed indemnity insurance with an excepted benefit label, potentially leaving employees without crucial Federal consumer protections. This is particularly concerning if the employees are under the impression or are misled to believe that their employee health benefits package or plan provides comprehensive coverage and therefore forgo pursuing other available options that would provide comprehensive coverage. ******** 194 The Departments note that such an arrangement would not be treated as providing minimum value if it failed to provide substantial coverage of inpatient hospital services and physician services. 26 CFR 1.36B-6; 45 CFR 156.145. ******** To further address this concern and capture the Departments' interpretation of the requirement that hospital indemnity and other fixed indemnity insurance must offer "noncoordinated" benefits to be considered an excepted benefit, the Departments propose to include a new example (Example 3) in the group market regulations at 26 CFR 54.9831-1(c)(4)(iii)(C), 29 CFR 2590.731-1(c)(4)(iii)(C), and 45 CFR 146.145(b)(4)(iii)(C). 195 This new example illustrates the Departments' proposed interpretation of the "noncoordination" requirements for hospital indemnity or other fixed indemnity coverage to qualify as excepted benefits and reflects that the prohibition on coordination of benefits is not limited to only those situations involving a formal coordination of benefits arrangement, but rather also encompasses other situations that involve "coordination." ******** 195 As detailed in section III.B.1.b of this preamble, the Departments also propose including another new example (Example 2) in the group market regulations, at new proposed 26 CFR 54.9831-1(c)(4)(iv)(B), 29 CFR 2590.732(c)(4)(iv)(B), and 45 CFR 146.145(b)(4)(B)(iii), to illustrate the new proposed payments standards for fixed indemnity excepted benefits coverage. ******** In this proposed new example, an employer sponsors a group health plan that provides two benefit packages. The first benefit package excludes benefits associated with all services other than preventive services. 196 The second benefit package provides coverage through an insurance policy that pays a fixed dollar amount per day of hospitalization or illness, for a wide variety of illnesses that are not preventive services covered under the first benefit package. The two benefit packages are offered to employees at the same time and can be elected together. The benefit packages are not subject to a coordination-of-benefits arrangement. However, as explained in the new example, because the benefits under the fixed indemnity insurance are designed to fill coverage gaps in, and are effectively tied to an exclusion of benefits under, the group health plan maintained by the same plan sponsor (in this case, the preventive services benefit package), the benefits offered under the fixed indemnity insurance would not satisfy the "noncoordination" requirements. Instead, under this arrangement, there is coordination between the provision of benefits under the fixed indemnity insurance with an exclusion(s) of benefits under a group health plan maintained by the same plan sponsor. This arrangement violates the "noncoordination" requirements because benefits under the fixed indemnity insurance are provided, and therefore paid, with respect to an event with regard to (rather than without regard to) whether benefits are provided with respect to the event under a group health plan maintained by the same plan sponsor. Therefore, the insurance policy under the second benefit package is not hospital indemnity or other fixed indemnity insurance that is an excepted benefit under the Federal framework. The proposed new example also notes that the conclusion would be the same even if the benefit packages were not offered to employees at the same time or if the second benefit option's insurance policy did not pay benefits associated with a wide variety of illnesses. ******** 196 The Departments are aware that some large employers offer group health plans that cover only preventive services, as reflected in the hypothetical example, and are not directly addressing such plans in these proposed rules, which are instead focused on the accompanying coverage, labeled "fixed indemnity" insurance in the example. However, the Departments discourage the provision of such limited coverage because it exposes employees to significant health and financial risk in the event that they require any health care services other than preventive services. See, e.g., Hancock, Jay (2015). "How Not to Find Out Your Health Plan Lacks Hospital Benefits," KFF, available at: https://khn.org/news/how-not-to-find-out-your-health-plan-lacks-hospital-benefits. Additionally, such coverage would not provide minimum value, such that the employer may be subject to an assessable payment under 4980H(b) of the Code if one or more full-time employees is certified as having enrolled in a qualified health plan for which a premium tax credit or cost-sharing reduction is allowed. ******** The term "noncoordination" (or "coordination") for purposes of hospital indemnity or other fixed indemnity insurance to be considered excepted benefits is not defined in the relevant statutory provisions or enacting legislation. While the current examples make clear that the existing framework prohibits coordination of benefits when there is a formal coordination of benefits arrangement, the current group market regulations do not directly address other situations that involve coordination and therefore violate the "noncoordination" requirements. The new proposed example, which would be added to the group market fixed indemnity excepted benefits coverage regulations, reflects the Departments' proposed interpretation of the undefined term "noncoordination," when applied to fixed indemnity excepted benefits coverage, as also including a scenario in which a sponsor of a group health plan offers both hospital indemnity or other fixed indemnity insurance along with a second benefit package that excludes benefits with respect to events that are covered by the hospital indemnity or other fixed indemnity insurance. In these cases, the hospital indemnity or other fixed indemnity insurance and the other benefit package offered by the same group health plan sponsor to the same employees (and their dependents, if applicable) are reasonably considered to be "coordinated" in terms of providing complementary benefits. It is the Departments' view that these arrangements violate the "noncoordination" requirements for hospital indemnity or other fixed indemnity insurance to be considered an excepted benefit, even though they do not involve formal coordination of benefits. As explained elsewhere in this preamble section, these arrangements violate these requirements because they involve coordination between the provision of benefits under the hospital indemnity or other fixed indemnity insurance and an exclusion of benefits under a group health plan maintained by the same plan sponsor. Under these arrangements, benefits are provided, and therefore paid, under the fixed indemnity insurance with respect to an event with regard (rather than without regard) to whether benefits are provided with respect to the event under a group health plan maintained by the same plan sponsor. Thus, as reflected in the proposed new example, the Departments would not consider the hospital indemnity or other fixed indemnity insurance offered as part of this arrangement to be an excepted benefit that is exempt from the Federal consumer protections and requirements for comprehensive coverage. The Departments seek comments on the proposed addition of this example to the group market regulations and the proposal to interpret the term "noncoordination" (or "coordination") to also prohibit situations involving benefit coordination beyond those that involve formal coordination-of-benefits arrangements. Although the proposed example would be added to the group market regulations, parallel statutory and regulatory requirements related to "noncoordination" apply in the individual market. Under 2722(c)(2)(C) of the PHS Act, "noncoordinated, excepted benefits" with respect to individual market hospital indemnity or other fixed indemnity excepted benefits coverage must be paid with respect to an event without regard to whether benefits are provided under any health insurance coverage maintained by the same health insurance issuer. Consistent with the interpretation and application of the statutory requirement that fixed indemnity excepted benefits coverage in the individual market must be offered on a noncoordinated basis, HHS is proposing to modify the requirement at current 45 CFR 148.220(b)(4)(ii) 197 to specify that benefits under fixed indemnity excepted benefits coverage must be paid with respect to an event without regard to whether benefits are provided with respect to such an event under any other health coverage "maintained by the same issuer". For this purpose, HHS proposes that the phrase "same issuer" would refer to the entity licensed to sell the policy, consistent with the definition of health insurance issuer in 45 CFR 144.103. HHS solicits comments on whether to broaden the limits on coordination to include issuers that are members of the same controlled group. ******** 197 As discussed in section III.B.1.f of this preamble, HHS is also proposing a technical amendment to redesignate 45 CFR 148.220(b)(4)(ii) as 45 CFR 148.220(b)(4)(i). ******** In parallel with this proposed amendment, HHS proposes to apply the same interpretation of the term "noncoordination" to individual market fixed indemnity excepted benefits coverage as proposed in this preamble section for group market fixed indemnity excepted benefits. If this proposal is finalized, benefits that are paid under fixed indemnity insurance with respect to an event with regard to whether benefits are provided with respect to the event under any other health coverage maintained by the same issuer would not meet the requirement that individual market fixed indemnity excepted benefits coverage be provided on a noncoordinated basis, regardless of whether there is a formal coordination-of-benefits arrangement between the fixed indemnity insurance and any other coverage. HHS seeks comment on these proposals. f. Technical Amendments The Departments propose to strike the last sentence in 26 CFR 54.9831-1(c)(4)(i), 29 CFR 2590.732(c)(4)(i), and 45 CFR 146.145(b)(4)(i), in order to consolidate the requirements that are specific to hospital indemnity or other fixed indemnity insurance to qualify as an excepted benefit in a new proposed paragraph at 26 CFR 54.9831-1(c)(4)(ii)(D), 29 CFR 2590.732(c)(4)(ii)(D), and 45 CFR 146.145(b)(4)(ii)(D). This current fixed payment standard would be retained as part of the fixed payment standards proposed to be captured in new proposed 26 CFR 54.9831-1(c)(4)(ii)(D)( 1 ), 29 CFR 2590.732(c)(4)(ii)(D)( 1 ), and 45 CFR 146.145(b)(4)(ii)(D)( 1 ). The Departments also propose technical amendments to clarify certain language in the existing example (now proposed Example 1) at new proposed 26 CFR 54.9831-1(c)(4)(iii)(A), 29 CFR 2590.732(c)(4)(iii)(A), and 45 CFR 146.146(b)(4)(iii)(A). The proposed technical amendments would clarify that the insurance policy in the example provides benefits only "related to" hospital stays (as opposed to "for" hospital stays), and emphasize the requirement that such benefits must be provided on a per-period basis. The general facts and ultimate conclusion in this example, however, remain the same. HHS further proposes a technical amendment to the individual market excepted benefits rules to remove the existing requirement at 45 CFR 148.220(b)(4)(i) that fixed indemnity excepted benefits coverage must be provided only to individuals who attest, in their fixed indemnity insurance application, that they have other health coverage that is MEC, or that they are treated as having MEC due to their status as a bona fide resident of any possession of the United States pursuant to section 5000A(f)(4)(B) of the Code. This proposal would remove the regulatory provision that was invalidated in Central United v. Burwell. 198 As an accompanying conforming technical amendment, HHS also proposes to move the proposed revised noncoordination requirement described in section III.B.1.e of this preamble, that there is no coordination between the provision of benefits under the individual market hospital indemnity or other fixed indemnity insurance and an exclusion of benefits under any other health coverage maintained by the same issuer, from 45 CFR 148.220(b)(4)(ii) to paragraph (b)(4)(i). ******** 198 827 F.3d 70 (D.C. Cir July 1, 2016). ******** g. Applicability Dates In 26 CFR 54.9831-1(c)(4)(iv), 29 CFR 2590.732(c)(4)(iv), and 45 CFR 146.145(b)(4)(iv), the Departments are proposing applicability dates that distinguish between new and existing fixed indemnity excepted benefits coverage in the group market. HHS proposes a similar approach to applicability with respect to new and existing fixed indemnity excepted benefits coverage in the individual market at 45 CFR 148.220(b)(iv). The applicability date proposals described in this section of the preamble are similar to the bifurcated approach for STLDI applicability dates proposed at 26 CFR 54.9833-1, 29 CFR 2590.736, and 45 CFR 146.125 and 148.102 and described in section III.A.6 of this preamble. The Departments propose that the proposed amendments related to group market fixed indemnity excepted benefits coverage would apply to new coverage that is sold or issued on or after the effective date of the final rules with respect to plan years that begin on or after such date. HHS proposes the same applicability date for the proposed amendments related to individual market fixed indemnity excepted benefits coverage for new coverage that is sold or issued on or after the effective date of the final rules. The Departments are of the view that timely implementation of the proposed amendments to the fixed indemnity excepted benefits coverage regulations is essential for maximizing the number of individuals benefiting from the consumer protections described throughout this preamble. The Departments propose that the proposed amendments related to group market fixed indemnity excepted benefit coverage would apply to existing coverage that is sold or issued before the effective date of the final rules with respect to plan years that begin on or after January 1, 2027, except with respect to the new group market notice requirements proposed at 26 CFR 54.9831-1(c)(4)(ii)(D)( 2 )-( 4 ), 29 CFR 2590. 732 -1(c)(4)(ii)(D)( 2 )-( 4 ), and 45 CFR 146.145(b)(4)(ii)(D)( 2 ) - ( 4 ), the technical amendments described in section III.B.1.f of this preamble, and the proposed severability provision at 26 CFR 54.9831-1(c)(4)(v), 29 CFR 2590.732-1(c)(4)(v), and 45 CFR 146.145(b)(4)(v). The Departments propose that the provisions related to the notice would apply for plan years beginning on or after the effective date of the final rules and the technical amendments and severability provision would apply to new and existing group market fixed indemnity excepted benefits coverage beginning on the effective date of the final rules. As discussed further in this preamble section, HHS proposes to adopt a similar bifurcated approach to the applicability date for the proposed amendments related to individual market fixed indemnity excepted benefits coverage. The Departments are aware that the proposed amendments to the group and individual market regulations for fixed indemnity excepted benefits coverage could, if finalized, affect hospital or other fixed indemnity insurance coverage that was sold or issued before the effective date of the final rules. In these cases, consumers may have chosen to purchase or enroll in fixed indemnity excepted benefits coverage in reliance on a framework that could be altered by the final rules. The Departments recognize that these proposed rules, if finalized, could also affect existing policies, including coverage or costs. Therefore, the Departments are of the view that the proposed bifurcated approach to the applicability date that provides for a more extended transition period for existing coverage to come into compliance with the applicable new payment standards and noncoordination requirements is appropriate with respect to fixed indemnity excepted benefits coverage sold or issued before the effective date of the final rules. This period is intended to provide plans, issuers, and those currently enrolled in group and individual market fixed indemnity excepted benefits with sufficient time to consider the effects and prepare for implementation of these proposed rules with respect to existing fixed indemnity excepted benefits coverage, without unnecessarily delaying their applicability to new coverage. However, the Departments propose that the proposed notice requirement at 26 CFR 54.9831-1(c)(4)(ii)(D)( 2 )-( 4 ), 29 CFR 2590. 732 -1(c)(4)(ii)(D)( 2 )-( 4 ), and 45 CFR 146.145(b)(4)(ii)(D)( 2 ) - ( 4 ) would apply with respect to all group market fixed indemnity excepted benefits coverage that was sold or issued before the effective date of the final rules (including renewals) for plan years that begin on or after the effective date of the final rules. HHS proposes a similar applicability date for the revised individual market fixed indemnity excepted benefits coverage notice at 45 CFR 148.220(b)(4)(iii). As such, the proposed notice requirements would apply to both new and existing fixed indemnity excepted benefit coverage in the group or individual market for notices required to be provided for coverage periods (including renewals) beginning on or after the effective date of the final rules. In the Departments' view, the benefit to consumers, including those currently enrolled in group market fixed indemnity excepted benefits coverage, of this information outweighs the burden to plans and issuers of implementing these changes for existing fixed indemnity excepted benefits coverage by the effective date of the final rules. The Departments also propose that the technical amendments to the group market regulations described in section III.B.1.f of this preamble would apply to group market fixed indemnity excepted benefits on the effective date of the final rules. These changes are primarily aimed at consolidating and clarifying existing requirements and aligning regulatory language with current legal standards, and would impose limited if any additional burden on interested parties, if finalized. Therefore, the Departments are of the view that a longer transition period is unnecessary, and a bifurcated approach could contribute to confusion without benefitting interested parties. For similar reasons, the Departments propose that the severability provision proposed at 26 CFR 54.9831-1(c)(4)(v), 29 CFR 2590.731-2(c)(4)(v), and 45 CFR 146.145(b)(4)(v) would apply on the effective date of the final rules. This provision is intended to ensure that, in the event of any successful legal challenge to one or more discrete provisions of the final rules, remaining provisions of the final rules can continue to be successfully implemented. The Departments are of the view that delaying the applicability date of this provision for fixed indemnity excepted benefits coverage sold or issued prior to the effective date of the final rules would be confusing and difficult to implement in the event of a legal challenge and would not provide any clear benefit to consumers, issuers, States, or other interested parties. HHS similarly proposes that the proposed amendments related to individual market fixed indemnity excepted benefits coverage would generally apply to coverage that is sold or issued before the effective date of the final rule beginning on the first renewal on or after January 1, 2027. However, the changes related to the notice proposed at 45 CFR 148.220(b)(4)(iii) would apply to notices required to be provided in connection with the first renewal on or after the effective date of the final rules. The technical amendments to the individual market regulation described in section III.B.1.f of this preamble and the severability provision proposed at 45 CFR 148.220(b)(4)(v) would also become effective on the effective date of the final rules for existing individual market excepted benefits coverage. Under the proposed bifurcated applicability date, all of the proposed amendments related to individual market fixed indemnity excepted benefits coverage would apply to new coverage that is sold or issued on or after the effective date of the final rules beginning with coverage periods (including renewals) on or after the effective date of the final rules. The Departments seek comments on their approach to applicability for fixed indemnity excepted benefits coverage, including whether applying the updated fixed indemnity excepted benefits regulations to fixed indemnity excepted benefits coverage sold or issued on or after the effective date of the final rules would provide a sufficient transition period in the group and individual markets for new coverage, or whether delaying the applicability date, such as for plan years or coverage periods beginning on or after January 1, 2025, would ensure a smoother transition to the new Federal standards for the sale of new fixed indemnity excepted benefits coverage. Additionally, the Departments seek comments on whether delaying applicability of most of the proposed changes to the fixed indemnity excepted benefits regulations for existing fixed indemnity excepted benefits coverage until plan years beginning on or after January 1, 2027 provides a sufficient transition period or if it should be modified to provide a shorter transition. In particular, the Departments are interested in feedback on whether the proposed January 1, 2027 effective date would leave consumers with this coverage at risk of harm generally, or with respect to any specific proposal, and if so, whether a more immediate applicability date (such as the effective date of the final rules or an interim date such as January 1, 2025), would strike a better balance by applying new consumer protections sooner while still providing a smooth transition to the new requirements. The Departments also seek comment on the proposal to apply the proposed notice requirements to existing fixed indemnity excepted benefits coverage beginning with plan years or coverage periods (including renewals) on or after the effective date of the final rules, and whether a different applicability date (such as January 1, 2027 or an interim date such as January 1, 2025) for the notice requirements would be appropriate for this cohort since they already opted to enroll in such coverage and would be permitted to continue their existing coverage or could seek to enroll in new coverage on or after the effective date of the final rules. h. Severability In the event that any portion of the final rules implementing one or more proposals in these proposed rules is declared invalid, the Departments intend that the proposals related to group market fixed indemnity excepted benefits coverage in these proposed rules be severable, and that the amendments the Departments propose with respect to the Federal regulations at 26 CFR 54.9831-1(c)(4), 29 CFR 2590.732(c)(4), and 45 CFR 146.145(b)(4) that outline the conditions for hospital indemnity and other fixed indemnity insurance to qualify as an excepted benefit in the group market would continue even if one or more aspects of the proposed changes is found invalid. To capture this intent, the Departments propose to add a severability provision at 26 CFR 54.9831-1(c)(4)(v), 29 CFR 2590.731-2(c)(4)(v), and 45 CFR 146.145(b)(4)(v). Similarly, HHS intends that its proposed amendments to the regulation at 45 CFR 148.220(b)(4) that outlines the conditions for such insurance to qualify as excepted benefits coverage in the individual market continue even if one or more of the proposed changes is found invalid. To capture this intent, HHS proposes to add a severability provision at 45 CFR 148.220(b)(4)(v). The severability of these provisions is discussed in more detail in section VI of these proposed rules. 2. Specified Disease Excepted Benefits Coverage These proposed rules do not propose amendments to the Federal regulations regarding specified disease excepted benefits coverage. However, the Departments solicit comments on whether the proposed changes to fixed indemnity excepted benefits coverage in these proposed rules could have unintended consequences that would affect the market for specified disease excepted benefits coverage, if finalized. For example, would such changes have the effect of shifting consumers from hospital indemnity or other fixed indemnity insurance to specified disease excepted benefits coverage as an alternative to or replacement for comprehensive coverage? Would the proposed changes incentivize issuers, agents, and brokers that offer specified disease excepted benefits coverage to shift the misleading or aggressive sales, advertising, and marketing tactics to encourage enrollment in specified disease excepted benefits coverage as an alternative to or replacement for comprehensive coverage? The Departments also seek comments on whether and what additional protections or clarifications are necessary or would be helpful to more clearly distinguish specified disease excepted benefits coverage from comprehensive coverage and to increase consumer understanding of the differences between these two types of health coverage. Additionally, the Departments seek comments on typical benefit design features of specified disease excepted benefits coverage. For example, under what circumstances would that coverage pay benefits based on a diagnosis versus on the basis of receipt of services for one or more specified medical conditions, and which design is more common? Under what circumstances and how common is it for specified disease excepted benefits coverage to pay benefits in a hybrid fashion, meaning some benefits are paid based on a diagnosis, and other benefits are paid based on receipt of services for one or more specified medical conditions? To the extent benefits under specified disease excepted benefits coverage policies are paid based on receipt of services for one or more specified medical conditions, are benefits typically paid to the policyholder or to the provider of the services? If the latter, do the issuers typically require use of a provider network for the enrollee to receive benefits (or more favorable benefits) under the specified disease excepted benefits coverage policy? The Departments also seek comments on potential sources of information and data related to specified disease excepted benefits coverage policies offered for sale in the group and individual markets, including the number of policies sold, the types of individuals who typically purchase this coverage, the reasons for which they purchase it, and the types of common benefit exclusions or limitations. C. Level-Funded Plan Arrangements As stated in section I.F of this preamble, the Departments understand that an increasing number of group health plan sponsors, particularly small employers, are utilizing a funding mechanism or plan arrangement known as level-funding. According to the KFF Employer Health Benefits Survey, 42 percent of small employers (defined as having 3-199 workers) reported offering a level-funded plan in 2021, compared to just 13 percent in 2020. 199 This figure remained at approximately the same level in 2022, with 38 percent of small employers reporting that they offered a level-funded plan. 200 These arrangements are often marketed to small employers on the premise that level - funding provides predictable, and generally lower, costs and risk associated with potential high-dollar claims for plan sponsors, relative to traditional methods of self-funding. ******** 199 KFF (2021). "2021 Employer Health Benefits," available at: https://www.kff.org/report-section/ehbs-2021-section-10-plan-funding/. 200 KFF (2022). "2022 Employer Health Benefits," available at: https://www.kff.org/report-section/ehbs-2022-section-10-plan-funding/. ******** As the uptake of level-funded plan arrangements increases, the Departments have heard concerns and received questions from interested parties related to level-funded arrangements' status as self-funded plans. Because level-funded arrangements purport to be, and are often regulated as, self-funded plans, they are typically not regulated by States. 201 ******** 201 The Departments further recognize that increased uptake of level-funded plans among small employers with fewer than 20 employees has caused continuation- of- coverage issues. This is because (i) the federal COBRA rules do not apply to such plan sponsors, and (ii) a plan that is a level-funded plan is treated as self-insured, such that state continuation-of- coverage rules would not apply. ******** In general, ERISA applies to private, employment-based group health plans. 202,203 Therefore, in a level-funded plan arrangement sponsored by a private employer, the self-funded plan is the entity that is legally responsible for compliance with ERISA group health plan requirements. The parallel group market PHS Act requirements apply to health insurance issuers offering group health insurance coverage and also generally apply to non-Federal Governmental plans. 204,205 In a self-insured, level-funded arrangement sponsored by a public employer, the plan sponsor or employer is the entity legally responsible for compliance with applicable group health plan requirements under the PHS Act. 206 ******** 202 Section 3(1) of Title I of ERISA defines the term "employee welfare benefit plan" to include: "[A]ny plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise " 203 The PHS Act cross-references ERISA in its definitions. See, e.g., the definitions for "group health plan", "group health insurance coverage", "employer", "employee", "church plan", "governmental plan", "participant", and "plan sponsor" in section 2791(a)(1), (b)(4), (d)(5) - (d)(8), (d)(11) and (d)(13) of the PHS Act, respectively. 204 The definition of "non-federal governmental plan" at section 2791(d)(8)(C) of the PHS Act incorporates the definition of "government plan" under ERISA section 3(32). 205 Sponsors of self-funded non-federal governmental group health plans are permitted to elect to exempt those plans from ("opt out of") certain provisions of title XXVII of the PHS Act. See, e.g., section 2722(a)(2) of the PHS Act, as amended by the Consolidated Appropriations Act, 2023 (Pub. L. 117-328), and 45 C.F.R. § 146.180. Also see the Patient Protection and Affordable Care Act; Exchange and Insurance Market Standards for 2015 and Beyond; Proposed Rule, 79 FR 15807 at 15814 - 15815 (March 21, 2014) and https://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Market-Reforms/nonfedgovplans. 206 See, e.g., 45 CFR 150.305. ******** Interested parties have raised concerns that stop-loss coverage, a product traditionally purchased by large employers sponsoring self-funded plans, is not required to comply with the Federal consumer protections and requirements applicable to group health plans or health insurance issuers offering group health insurance coverage, or meet requirements under State regulations that apply to health insurance coverage. Interested parties have expressed that these concerns are exacerbated when small employers utilize level-funded plan arrangements with stop-loss coverage that has low attachment points. This is because the majority of the benefits covered under such an arrangement would be provided via the stop-loss coverage, which may deny or limit the individual's claim in a way that would be prohibited under the group market Federal consumer protections and requirements. This means that if the stop-loss insurer defines the scope of coverage more narrowly than otherwise permitted by the Federal consumer protections and requirements applicable to group health plans or health insurance issuers offering group health insurance coverage (for example, by including a preexisting condition exclusion), the small employer remains liable for the claim for coverage, yet may be unprepared to absorb such costs. This is in large part due to the complexity of level-funding arrangements; because small employers typically pay a monthly amount that resembles a premium, they may not understand whether their health plan is self-funded or insured and, furthermore, that coverage of certain benefits may vary depending on where the attachment point is set. In addition, covered individuals generally do not know whether their claim is being paid by the group health plan itself or by the stop-loss coverage. This raises additional concerns when an extensive portion of the individuals' claims are covered by the stop loss coverage that is not subject to the group market Federal consumer protections and requirements and has a low attachment point. For example, the stop loss coverage might deny a claim due to application of a lifetime or annual dollar limit in a way that would be prohibited under the group market Federal consumer protections and requirements. Level-funded plans are most commonly adopted by small employers who are leaving the small group health insurance market, where policies must cover State- and Federally - mandated benefits and include various essential health benefits and consumer protections such as those included in MHPAEA. 207 Interested parties have expressed that small employers that switch from fully-insured coverage to level-funded arrangements may be unaware that the self-funded plans they are offering to their employees may not include certain benefits that would have to be covered if the plan were fully-insured. ******** 207 MHPAEA does not apply directly to plans offered by small employers. Code section 9812(c)(1), ERISA section 712(c)(1), and PHS Act section 2716(c)(1). However, most plans offered by small employers are insured and therefore subject to MHPAEA through regulations implementing the essential health benefit coverage requirements. 45 CFR 156.115(a)(3). In the case of a level-funded plan, if the entire arrangement is treated as self-insured, the essential health benefit requirements would not apply. ******** The Departments are also aware of interested parties' concerns that if level-funded plan arrangements are marketed only to small employer plan sponsors with relatively low expected claims costs, this may lead to adverse selection in the State's small group health insurance market and may destabilize the States' small group market risk pools. The potential for adverse selection caused by the increasing use of these level-funded plan arrangements is further compounded by the fact that these arrangements are not generally treated as being subject to the guaranteed renewability and single risk pool requirements that apply to fully-insured small group market coverage. The Departments also acknowledge interested parties' concerns that if level-funded plan sponsors' contributions are not properly segregated from other funds held by the plans' service providers, those service providers might inadvertently be establishing multiple employer welfare arrangements, which would result in the plans being subject to a wide range of State regulation and additional requirements under ERISA. 208 If they are unaware that their plan is a multiple employer welfare arrangement, they may not be complying with all of the applicable requirements. ******** 208 See ERISA section 3(40); see also ERISA section 514(b)(6); see also U.S. Department of Labor, Employee Benefits Security Administration (2022). "MEWAs: Multiple Employer Welfare Arrangements under the Employee Retirement Income Security Act (ERISA): A Guide to Federal and State Regulation," available at: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/mewa-under-erisa-a-guide-to-federal-and-state- regulation.pdf. ******** Given the growing number of level-funded plans, the Departments are soliciting comments to better understand the prevalence of level-funded plans, such plans' designs and whether additional guidance or rulemaking is needed to clarify a plan sponsor's obligation with respect to coverage provided through a level-funded plan arrangement. The Departments solicit comments on the following issues: How prevalent are level-funded group health plans among private and public employers? How many individuals are covered under level-funded plans? The Departments are also interested in information or data on whether the percentage of plan sponsors offering level-funded plans varies by State, geographic area, or other factors. Are there data other than KFF's Employer Health Benefits Survey that the Departments should consider? What factors are leading an increasing number of plan sponsors, particularly small employers, to utilize level-funded plans? What are the administrative costs associated with offering level-funded plans, and how do these costs compare to the administrative costs associated with offering fully-insured plans? What types of benefits are commonly offered or not offered by level-funded plans? What kinds of level-funded benefit options are generally made available to plan sponsors? How do the benefit packages differ from fully-insured plans? Do level-funded plan arrangements offer robust benefits similar to the comprehensive coverage offerings of fully-insured plans? Are benefits provided by level-funded plans generally as comprehensive as fully-insured plans available to small employers? What benefits and consumer protections are generally no longer included when a small employer converts its plan from fully-insured coverage to a level-funded arrangement? Are changes in benefits and consumer protections communicated to plan participants and beneficiaries, and if so, how? Are additional safeguards needed with respect to level-funded arrangements to ensure that individuals and/or small employers are not subjected to unexpected costs resulting from the stop-loss coverage failing to comply with Federal group health plan requirements? How do level-funded plans determine anticipated administrative costs and expected claims costs? With respect to stop-loss coverage, how, and by whom, is the attachment point determined and what factors are considered in setting the attachment point? What impact, if any, does the use of level-funding for plans offered by small employers have on the insured small group market? How do plans' service providers manage plan sponsors' contributions for level-funded plans, including amounts that exceed actual plan costs (that is, costs for claims, administrative fees, and stop-loss premiums)? Are such arrangements consistent with section 403 of ERISA? How are the amounts of any refunds paid to plan sponsors by stop-loss providers determined? Are refunds remitted to participants and beneficiaries who have made contributions under the plan? If so, how are they determined and remitted? How do plan sponsors of level-funded arrangements account for compliance with the consumer protections and mandated benefits that would apply to health benefits provided by a plan sponsor through a level-funded arrangement that is reimbursed through stop-loss insurance? Do employers offering level-funded plans generally understand and comply with any applicable reporting requirements under sections 6055 and 6056 of the Code? IV. Overview of the Proposed Rules on Tax Treatment and Substantiation Requirements for Fixed Indemnity Insurance and Certain Other Accident or Health Insurance - Department of the Treasury and the IRS The Treasury Department and the IRS are proposing amendments to the rules under section 105(b) of the Code. These amendments would clarify the tax treatment of amounts received by a taxpayer through employment-based accident or health insurance that are paid without regard to the amount of incurred medical expenses under section 213(d) of the Code and where the premiums or contributions for the coverage are paid on a pre-tax basis. These amendments would also clarify that, under longstanding regulations and guidance issued by the Treasury Department and the IRS, the substantiation requirements for reimbursement of qualified medical expenses apply to reimbursements under section 105(b) of the Code in order for those reimbursements to be excluded from an individual's gross income. Additionally, the amendments would update several cross-references in the rules implementing section 105(b) of the Code to reflect statutory changes since the rules were first issued. 209 ******** 209 The current rules reference section 105(d) of the Code, which has been repealed. The rules also reference the definition of a dependent in section 152(f) which may, in some circumstances, not include children up to the age of 26 that must be eligible to enroll in a group health plan or group or individual health insurance coverage under section 2714 of the PHS Act (which is incorporated by reference in section 9815 of the Code) if the plan or coverage makes available dependent coverage of children. ******** The Treasury Department and the IRS are aware of certain arrangments that purport to avoid income and employment taxes by characterizing income replacement benefits or other cash benefits as amounts paid for reimbursement of medical care, even though those amounts are paid without regard to the actual amount of any incurred, and otherwise unreimbursed, medical expenses. Frequently, these arrangements are marketed as supplemental coverage that saves employers and employees money by avoiding employment taxes when replacing income lost by an employee due to a health-related event experienced by the employee. In some arrangements, employees are paid an amount every month, purportedly for medical expenses, even if they do not incur any medical expenses, or if they simply complete certain health-related activities. Fixed indemnity excepted benefits 210 coverage pays pre-determined benefits upon the occurrence of certain health-related events. Benefits under this type of coverage in the group market must be paid in a fixed amount on a per period basis. 211 Although a benefit payment at the pre-determined level under that coverage may incidentally cover all or a portion of the cost of medical care stemming from the precipitating health-related event, it is typically not designed to do so and is paid without regard to the amount of the medical care expense incurred. Some specified disease excepted benefits coverage operates in a similar manner. For example, coverage only for a specified disease or illness might offer lump sum payments upon a specific diagnosis or on the basis of treatment received, or it might offer fixed payments per day or other time period of hospitalization or illness. 212 ******** 210 Excepted benefits are described in section 9832 of the Code. Excepted benefits are generally not subject to the consumer protections under Chapter 100 of the Code, part 7 of ERISA, and title XXVII of the PHS Act. 211 26 CFR 54.9831-1(c)(4). 212 Id. ******** The principle that these types of accident or health insurance are not generally intended to provide reimbursement for incurred medical expenses is further illustrated by the fact that taxpayers covered by these arrangments will, in many cases, receive benefits upon the occurrence of a health-related event under these arrangements even if any incurred expenses associated with that event are already reimbursed through other coverage. This is because these types of group market excepted benefits must be "noncoordinated" such that benefits are paid with respect to an event without regard to whether benefits are provided for that same event under any group health plan maintained by the same plan sponsor. 213 Thus, for example, if a particular medical expense incurred during hospitalization is reimbursed by a taxpayer's primary, comprehensive coverage and the taxpayer also receives a benefit in a fixed amount for the hospitalization from fixed indemnity or specified disease excepted benefits coverage, the taxpayer would receive the fixed benefit without having any need to use the fixed amount received to pay for that medical expense. ******** 213 Id. ******** These amendments are being proposed in response to ongoing questions about the proper tax treatment of payments pursuant to these arrangements. While these arrangments are sold under a variety of names, they are commonly sold as fixed indemnity excepted benefits coverage or specified disease excepted benefits coverage. However, the changes in these proposed amendments would not be limited to these types of coverage. The Treasury Department and the IRS note that it is important to look past the label on any given accident or health insurance product to determine whether amounts received by an employee are, in fact, for reimbursement of medical expenses or whether the amounts could be used for any purpose. For example, even if a benefit payment under the arrangement is used to reimburse an employee's medical expenses, if the amount of the payment is not tied to the amount of the expense incurred and the employee is entitled to keep any amounts by which the benefit payment exceeds the incurred expenses, that would indicate that the benefit is not actually a reimbursement for medical expenses. The Treasury Department and the IRS request comments on whether additional clarification is needed regarding how these rules would apply to types of benefits provided through employment-based accident or health insurance other than fixed indemnity excepted benefits coverage or specified disease excepted benefits coverage, including incentives offered through wellness programs, where the insurance, those programs, or both provide benefits without regard to the amount of medical expenses incurred and where the premiums are paid on a pre-tax basis. A. Tax Treatment of Benefits As described in section I.E of this preamble, hospital indemnity and other fixed indemnity insurance and coverage only for a specified disease or illness are treated as accident or health insurance under sections 104, 105, and 106 of the Code whether or not they are excepted benefits. Amounts received from accident or health insurance are excluded from a taxpayer's gross income under section 104(a)(3) of the Code if the premiums are paid for on an after-tax basis. The taxation of amounts received by an employee from accident or health insurance where the premiums or contributions are paid on a pre-tax basis by the employer or through salary reduction under a cafeteria plan is determined under section 105 of the Code. Under section 105(a) of the Code, amounts received by an employee through accident or health insurance for personal injuries or sickness are included in gross income; however, section 105(b) of the Code excludes from gross income amounts received by an employee to reimburse the employee's medical expenses under section 213(d) of the Code. As is noted in section I.E of this preamble, 26 CFR 1.105-2 provides that the exclusion from gross income in section 105(b) of the Code "applies only to amounts that are paid specifically to reimburse the taxpayer for expenses incurred by him for the prescribed medical care. Thus, section 105(b) does not apply to amounts that the taxpayer would be entitled to receive irrespective of whether or not he incurs expenses for medical care." Further, 26 CFR 1.105-2 also provides that "section 105(b) is not applicable to the extent that such amounts exceed the actual expenses for such medical care." The Treasury Department and the IRS are cognizant that the language in the current rule has led to confusion among taxpayers about the circumstances under which benefits from accident or health insurance may be excluded from an individual's gross income when the premiums for the coverage were paid on a pre-tax basis and the benefits are not directly related to a medical expense incurred by an employee. In particular, some have interpreted the current rule to mean that benefits provided to a taxpayer through an accident or health insurance policy that provides benefits without regard to the amount of medical expenses incurred, such as fixed indemnity excepted benefits coverage or specified disease excepted benefits coverage, are nonetheless excluded from the taxpayer's gross income because they are paid upon the occurrence of a health-related event. Others have interpreted the current rule to mean that benefits can be excluded from gross income so long as the amount received does not exceed the amount of the medical expense arising from the occurrence of a health-related event. 214 ******** 214 Revenue Ruling 69-154, 1969-1 CB 46, provides that section 105(b) of the Code is not applicable to the extent that amounts received from accident or health insurance exceed the amount of the actual expenses for the medical care. The facts of the revenue ruling concerned a medical expense reimbursed by multiple coverages, with neither coverage paying the entire expense but the combination of coverages paying more than the amount of the medical expense. Nevertheless, the Treasury Department and the IRS are aware that some individuals have relied on the ruling to support their claims that section 105(b) allows for an exclusion from gross income for all benefits provided by accident or health insurance up to the amount of medical expenses with only the excess "indemnification" being included in gross income, even when the taxpayer is enrolled in only one coverage. ******** The Treasury Department and the IRS interpret section 105(b) of the Code to not apply to benefits paid without regard to the actual amount of incurred and otherwise unreimbursed section 213(d) medical expenses. Because payment of these amounts is not a reimbursement of section 213(d) medical expenses, the amount of reimbursement is immaterial, with the result that the payment is not excluded from gross income under section 105(b) of the Code. The benefits would, therefore, be included in the taxpayer's gross income. Thus, the Treasury Department and the IRS propose to amend 26 CFR 1.105-2 to clarify that the exclusion from gross income under section 105(b) of the Code does not apply to amounts received from accident or health insurance that pays an amount or distributes a benefit if the benefit is paid without regard to the actual amount of section 213(d) medical expenses incurred by the employee. This interpretation would apply, for example, to benefit payments under fixed indemnity excepted benefits coverage and to benefit payments under specified disease excepted benefits coverage that pays benefits without regard to the amount of medical expenses incurred. Payments that are excludible from gross income under sections 104 or 105(b) of the Code and under section 3121(a) of the Code are excluded from wages subject to Federal Insurance Contributions Act (FICA) taxes under sections 3101 and 3111. Similarly, under section 3306(b) of the Code, these payments are not wages subject to Federal Unemployment Tax Act (FUTA) taxes under section 3301 of the Code. Also, under section 3401(a) of the Code, they are not wages subject to income tax withholding under section 3402 of the Code. Temporary 26 CFR 32.1 provides rules governing the application of FICA taxes to payments on account of sickness or accident disability. Section 32.1(a) provides, in effect, that payments to or on behalf of an employee on account of sickness or accident disability are not excluded from wages unless the payments are received under a workers' compensation law or qualify for an exception under section 3121(a)(4) of the Code (payments on account of sickness or accident disability made after the expiration of 6 calendar months). Section 32.1(d) provides that for purposes of 26 CFR 32.1(a) "payments on account of sickness or accident disability" subject to FICA tax include payments includible in gross income under section 105(a) of the Code and, thus, does not include any amount that is not expended for medical care as described in section 105(b) of the Code and 26 CFR 1.105-2. Under the proposed amendment to 26 CFR 1.105-2, accident and health insurance payments that would not be excluded from employees' gross income under section 105(b) because the amounts were paid without regard to the actual amount of incurred or otherwise unreimbursed section 213(d) medical care expenses would be wages subject to FICA, FUTA, and income tax withholding. Thus, if these rules are finalized as proposed, taxpayers would need to consider the impact this proposal would have on determinations of whether amounts received under accident and health plans constitute wages for employment tax and income tax withholding purposes. B. Substantiation Requirement 26 CFR 1.105-2 currently states, in part, that "[i]f the amounts are paid to the taxpayer solely to reimburse him for expenses which he incurred for the prescribed medical care, section 105(b) is applicable even though such amounts are paid without proof of the amount of the actual expenses incurred by the taxpayer " This language has been interpreted by certain interested parties to suggest that substantiation of a taxpayer's incurred medical expenses is not required for the exclusion under section 105(b) of the Code to apply. In this rulemaking, the Treasury Department and the IRS propose to amend 26 CFR 1.105-2 to clarify that, for amounts to be excluded from income under section 105(b) of the Code, the payment or reimbursement must be substantiated. Longstanding regulations and guidance issued by the Treasury Department and the IRS have confirmed that amounts paid to reimburse medical expenses under section 213(d) of the Code by employment-based accident or health insurance must be substantiated to be excluded under section 105(b) of the Code. 215 Further, if there were not a substantiation requirement under section 105(b) of the Code, the other proposed clarification that would be made to 26 CFR 1.105-2--that amounts received from accident or health insurance must be for reimbursement of incurred medical expenses for section 105(b) of the Code to apply--could be manipulated. The Treasury Department and the IRS understand that, in most circumstances, substantiation of medical expenses typically occurs prior to reimbursement but are of the view that substantiation must occur at least within a reasonable period thereafter. The Treasury Department and the IRS request comments on whether any final rules should specifically address timing requirements for substantiation. ******** 215 See, e.g., 84 FR 28888, 28917 (June 20, 2019) (describing substantiation requirements for employer-sponsored health reimbursement arrangements); see also Q44-55 of IRS Notice 2017-67, 2017-47 IRB 517; Prop.Treas.Reg. § 1.125-6; IRS Notice 2002-45, 2002-2 CB 93. ******** C. Applicability Date Generally, the proposed modifications to the tax treatment of employer reimbursements of employee medical expenses under certain accident and health plans are a clarification of long-standing Treasury Department and IRS rules and guidance limiting the exclusion from gross income to amounts that are fully substantiated and paid only with respect to the actual amount of section 213(d) medical care expenses incurred by the employee. However, in recognition that some plan sponsors and issuers may not have understood the requirements and may require time to come into compliance with the proposed amendments to 26 CFR 1.105-2, assuming that they are finalized as proposed, it is proposed that these amendments would apply as of the later of the date of publication of the final regulations or January 1, 2024. V. Response to Comments Because of the large number of comments the Departments normally receive on Federal Register documents, the Departments are not able to acknowledge or respond to them individually. The Departments will consider all comments received by the date and time specified in the "DATES" section of the preamble, and, when the Departments proceed with a subsequent document, the Departments will respond to the comments in the preamble to that document. VI. Severability As previously described, the Departments are proposing to amend the Federal definition of "short-term, limited-duration insurance" and the conditions for hospital indemnity and other fixed indemnity insurance to qualify as an excepted benefit in the group market, for the purpose of distinguishing STLDI and fixed indemnity excepted benefits coverage from comprehensive coverage. Similarly, HHS is proposing to amend the conditions for hospital indemnity and other fixed indemnity insurance to qualify as an excepted benefit in the individual market for the same purpose. The Departments and HHS are also proposing certain technical amendments to the regulations governing fixed indemnity excepted benefits in the group and individual markets, respectively, in order to consolidate and clarify existing requirements and align the individual market regulations with the decision of the U.S. Court of Appeals for the District of Columbia in Central United Life Insurance Company v. Burwell. The Departments' and HHS' authority to propose these amendments is well-established in law and practice, and should be upheld in any legal challenge. However, in the event that any portion of the final rules related to any of the proposals in this notice of proposed rulemaking is declared invalid, the Departments intend that the other provisions would be severable. For example, if any proposed provision in this rulemaking related to STLDI is held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further agency action, it shall be considered severable from its section and other sections of these rules; and it shall not affect the remainder thereof or the application of the provision to other entities not similarly situated or to dissimilar conditions. Thus, if the Departments were to finalize the portion of the STLDI definition that limits the sale of multiple consecutive policies exceeding a total duration of 4 months by the same issuer to the same policyholder within a 12-month period, and a court were to find that portion or any other aspect of the new Federal STLDI definition to be unlawful, the Departments intend the remaining aspects of these proposed rules related to STLDI would stand, if finalized. Similarly, the Departments propose that if any proposed provision in this rulemaking related to group market fixed indemnity excepted benefits coverage is held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further agency action, it shall be considered severable from its section and it shall not affect the remainder thereof or the application of the provision to other entities not similarly situated or to dissimilar conditions. For example, if the Departments were to finalize all proposals related to additional fixed payment standards for group market fixed indemnity excepted benefits coverage and a court were to find one or more of those payment standards to be unlawful, the Departments intend that the other payment standards, along with the other proposals related to fixed indemnity excepted benefits coverage in the group market set forth in these proposed rules would stand, if finalized. Similarly, HHS proposes that if any proposed provision in this rulemaking related to individual market fixed indemnity excepted benefits is held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further agency action, it shall be considered severable from its section and it shall not affect the remainder thereof or the application of the provision to other entities not similarly situated or to dissimilar conditions. For example, if HHS were to finalize all proposals related to the additional fixed payment standards for individual market fixed indemnity excepted benefits coverage and a court were to find one or more of the payment standards to be unlawful, HHS intends that the other payment standards for individual market fixed indemnity excepted benefits coverage, along with the other proposals related to fixed indemnity excepted benefits coverage in the individual market set forth in these proposed rules would stand, if finalized. The Departments also intend for the STLDI proposals in this rulemaking to be severable from the fixed indemnity excepted benefits coverage proposals, and vice versa. VII. Regulatory Impact Analysis A. Summary - Departments of Health and Human Services and Labor These proposed rules would revise the Federal definition of STLDI for new policies, certificates, or contracts of insurance to require the coverage to have an expiration date specified in the policy, certificate, or contract of insurance that is no more than 3 months after the original effective date. These proposed rules would also revise the Federal definition of STLDI so that the maximum total coverage duration, taking into account any renewals or extensions, is no longer than 4 months. For purposes of this definition, a renewal or extension would include the term of a new STLDI policy, certificate, or contract of insurance issued by the same issuer to the same policyholder within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance. For new STLDI, meaning policies, certificates, or contracts of STLDI sold or issued on or after the effective date of the final rules, the maximum duration amendments to the definition of STLDI in these proposed rules would apply for coverage periods beginning on or after the effective date of the final rules. Under these proposed rules, existing STLDI, meaning policies, certificates, or contracts of STLDI sold or issued before the effective date of the final rules (including any subsequent renewals or extensions consistent with applicable law) could still have an initial contract term of less than 12 months and a maximum duration of up to 36 months (taking into account any renewals or extensions), subject to any limits under applicable State law. These proposed rules would also revise the notice that must be prominently displayed (in either paper or electronic form) in at least 14-point font on the first page of the policy, certificate, or contract of insurance and in any marketing, application, and enrollment materials including for renewals or extensions (including on websites that advertise or enroll individuals in STLDI) for both new and existing STLDI for coverage periods beginning on or after the effective date of the final rules. These proposed rules also would require that to be fixed indemnity excepted benefits coverage, the insurance must pay only a fixed dollar amount per day (or per other time period) of hospitalization or illness (for example, $100/day), and not on a per-service or per-item basis, as is possible under the current HHS excepted benefit regulation applicable to the individual market. Further, for hospital indemnity or other fixed indemnity insurance to be considered an excepted benefit in the group or individual market under these proposed rules, payment must be made regardless of the actual or estimated amount of expenses incurred, services or items received, severity of illness or injury experienced by a covered participant, beneficiary, or enrollee, or other characteristics particular to a course of treatment, or on any other basis (such as per-item or per-service). All of these proposed provisions and amendments, if finalized, would apply to new group and individual market fixed indemnity excepted benefits coverage sold or issued on or after the effective date of the final rules. For existing group market fixed indemnity excepted benefits coverage sold or issued before the effective date of the final rules, the proposed provisions generally would apply with respect to plan years beginning on or after January 1, 2027. The technical amendments to the group market regulations described in section III.B.1.f of this preamble and the severability provision at 26 CFR 54.9831-1(c)(4)(v), 29 CFR 2590.732-1(c)(4)(v), and 45 CFR 146.145(b)(4)(v) would apply beginning on the effective date of the final rules. HHS similarly proposes that these requirements generally would apply to individual market fixed indemnity excepted benefits coverage sold before the effective date of the final rule upon the first renewal on or after January 1, 2027, except the technical amendments to the individual market regulation described in section III.B.1.f of this preamble and the severability provision at 45 CFR 148.220(b)(4)(v) would apply beginning on the effective date of the final rule. Additionally, these proposed rules would revise the notices that must be prominently displayed (in either paper or electronic form) on the first page of the policy, certificate, or contract of insurance, and any marketing and application materials provided in connection with enrollment (or re - enrollment) in fixed indemnity excepted benefits coverage in the individual market and would require a similar notice be provided for fixed indemnity excepted benefits coverage in the group market. The Departments propose that the new notice requirements for group market fixed indemnity coverage be applicable to both new and existing coverage for notices required to be provided with respect to plan years (including renewals) beginning on or after the effective date of the final rules. Similarly, HHS proposes that the changes to the notice requirements for individual market fixed indemnity coverage be applicable to existing individual market fixed indemnity coverage for notices required to be provided beginning upon the first renewal on or after the effective date of the final rule. For new individual market fixed indemnity coverage sold or issued on or after the effective date of the final rules, HHS proposes to apply the updated notice requirements with respect to coverage periods (including renewals) beginning on or after the effective date of the final rules. The Departments have examined the effects of these proposed rules as required by Executive Order 12866 on Regulatory Planning and Review (September 30, 1993), 216 Executive Order 13563 on Improving Regulation and Regulatory Review (January 18, 2011), 217 Executive Order 14094 (April 6, 2023), 218 the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, section 202 of the Unfunded Mandates Reform Act of 1995 (March 22, 1995, Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 1999). 219 ******** 216 Executive Order 12866 of September 30, 1993, 58 FR 51735. 217 Executive Order 13563 of January 18, 2011, 76 FR 3821. 218 Executive Order 14094 of April 6, 2023, 88 FR 21879. 219 Executive Order 13132 of August 4, 1999, 64 FR 43255. ******** B. Executive Orders 12866, 13563, and 14094 - Departments of Health and Human Services and Labor Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 14094 on Modernizing Regulatory Review amends section 3(f) of Executive Order 12866 (Regulatory Planning and Review). The amended section 3(f) of Executive Order 12866 defines a "significant regulatory action" as an action that is likely to result in a rule: (1) having an annual effect on the economy of $200 million or more in any 1 year (adjusted every 3 years by the Administrator of the Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget (OMB) for changes in gross domestic product), or adversely affecting in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, Territorial, or Tribal governments or communities; (2) creating a serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising legal or policy issues for which centralized review would meaningfully further the President's priorities or the principles set forth in this Executive Order, as specifically authorized in a timely manner by the Administrator of OIRA in each case. A regulatory impact analysis (RIA) must be prepared for rules with significant regulatory action or with significant effects as per section 3(f)(1) ($200 million or more in any 1 year). Based on the Departments' estimates, OMB's OIRA has determined this rulemaking is significant under section 3(f)(1) as measured by the $200 million threshold in any 1 year. With respect to Subtitle E of the Small Business Regulatory Enforcement Fairness Act of 1996, also known as the Congressional Review Act, OMB's OIRA has also determined that these rules fall within the definition provided by 5 U.S.C. 804(2). Therefore, OMB has reviewed these proposed rules, and the Departments have provided the following assessment of their impact. 1. Need for Regulatory Action The 2018 final rules permit enrollment in an STLDI policy with a total duration that could extend up to 36 months (including renewals or extensions). This insurance might therefore be viewed as a substitute for (and, in some cases, has been deceptively marketed as) comprehensive coverage, rather than as a way to bridge a temporary gap in comprehensive coverage. 220 Evidence shows the number of consumers buying STLDI increased following the effective date of the 2018 final rules. Data from the NAIC indicate that the number of individuals covered by STLDI sold to individuals more than doubled between 2018 and 2019, from approximately 87,000 to 188,000, and further increased to approximately 238,000 in 2020 before declining to approximately 173,000 in 2021 following the expansion of PTC subsidies provided through the ARP. 221 While these figures do not capture the total number of individuals covered by STLDI throughout each year (rather, only at the end of the calendar year), and do not include individuals covered by STLDI sold to or through associations, they do show the trend of increased enrollment in STLDI following the implementation of the 2018 final rules. Projections by the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) suggest that 1.5 million people could currently be enrolled in STLDI, 222 and CMS previously estimated that 1.9 million individuals would enroll in STLDI by 2023. 223 However, as noted in section VII.B.2.b, these projections were developed prior to the expansion of PTC subsidies provided through the ARP and the IRA. ******** 220 For one example of deceptive marketing practices, see Federal Trade Commission (2022). "FTC Action Against Benefytt Results in $100 Million in Refunds for Consumers Tricked into Sham Health Plans and Charged Exorbitant Junk Fees," available at: https://www.ftc.gov/news-events/news/press-releases/2022/08/ftc-action-against-benefytt-results-100-million-refunds-consumers-tricked-sham-health-plans- charged. 221 National Association of Insurance Commissioners (2021). "Accident and Health Policy Experience Reports for 2018-2021," available at: https://naic.soutronglobal.net/portal/Public/en-US/Search/SimpleSearch. 222 Congressional Budget Office (2020). "CBO's Estimates of Enrollment in Short-Term, Limited-Duration Insurance," available at: https://www.cbo.gov/publication/56622, CBO and JCT projected that enrollment in STLDI would reach 1.6 million by 2028. See Congressional Budget Office (2019). "How CBO and JCT Analyzed Coverage Effects of New Rules for Association Health Plans and Short-Term Plans," available at: https://www.cbo.gov/publication/54915. 223 CMS Office of the Actuary (2018). "Estimated Financial Effects of the Short-Term, Limited-Duration Policy Proposed Rule," available at: https://www.cms.gov/Research-Statistics-Data-and-Systems/Research/ActuarialStudies/Downloads/STLD20180406.pdf. ******** Given that STLDI generally is not subject to the Federal consumer protections and requirements for comprehensive coverage sold in the individual market, STLDI policies tend to offer limited benefit coverage and have relatively low actuarial values. 224 These plans therefore expose enrollees to the risk of high out-of-pocket health expenses and medical debt. 225 ******** 224 See, e.g., Dieguez, Gabriela and Dane Hansen (2020). "The Impact of Short-Term Limited-Duration Policy Expansion on Patients and the ACA Individual Market," Milliman, available at: https://www.milliman.com/en/insight/the-impact-of-short-term-limited-duration-policy-expansion-on-patients-and-the-aca-individual-market. 225 See, e.g., Deam, Jenny (2021). "He Bought Health Insurance for Emergencies. Then He Fell Into a $33,601 Trap," ProPublica, available at: https://www.propublica.org/article/junk-insurance. ******** In recent years, fixed indemnity excepted benefits coverage is increasingly being designed to resemble comprehensive coverage and might therefore also be mistakenly viewed as a substitute for comprehensive coverage, rather than as independent, noncoordinated benefits that are supplemental to comprehensive coverage. 226 ******** 226 See, e.g., Young, Christen Linke and Kathleen Hannick (2020). "Fixed Indemnity Health Coverage Is a Problematic Form of "Junk Insurance" USC-Brookings Schaeffer Initiative for Health Policy, available at: https://www.brookings.edu/blog/usc-brookings-schaeffer-on-health-policy/2020/08/04/fixed-indemnity-health-coverage-is-a-problematic-form-of-junk- insurance/. ******** Because both types of coverage are sold outside of the Exchanges and are not generally subject to the Federal consumer protections and requirements for comprehensive coverage, consumers may have limited information about the limitations, value, and quality of the coverage being sold. 227 The recent reports of consumer confusion regarding STLDI and fixed indemnity excepted benefits coverage 228 support the need to improve consumer understanding of these types of coverage (and their coverage limitations) compared to comprehensive coverage. These proposed rules would revise the notice that must be prominently displayed (in either paper or electronic form) in at least 14-point font, on the first page of the policy, certificate, or contract of insurance and in any marketing, application, and enrollment materials provided at or before the time an individual has the opportunity to enroll (or reenroll) in STLDI, including on any websites used to advertise or enroll (or reenroll) individuals in STLDI. These proposed rules would also revise the notice that must be prominently displayed (in either paper or electronic form) in at least 14-point font on the first page of any marketing, application, and enrollment materials provided in connection with fixed indemnity excepted benefits coverage in the individual market, and on the first page of the policy, certificate, or contract of insurance of such coverage. ******** 227 See Williams, Jackson (2022). "Addressing Low-Value Insurance Products With Improved Consumer Information: The Case of Ancillary Health Products," National Association of Insurance Commissioners, Journal of Insurance Regulation, available at: https://content.naic.org/sites/default/files/cipr-jir-2022-9.pdf. 228 Regarding consumer confusion related to short-term, limited-duration insurance, see, e.g., Deam, Jenny (2021). "He Bought Health Insurance for Emergencies. Then He Fell Into a $33,601 Trap," ProPublica, available at: https://www.propublica.org/article/junk-insurance. See also Palanker, Dania and Kevin Lucia (2021). "Limited Plans with Minimal Coverage Are Being Sold as Primary Coverage, Leaving Consumers at Risk," Commonwealth Fund, available at: https://www.commonwealthfund.org/blog/2021/limited-plans-minimal-coverage-are-being-sold-primary-coverage-leaving-consumers-risk. See also Schwab, Rachel and Maanasa Kona (2018). "State Insurance Department Consumer Alerts on Short-Term Plans Come Up Short," Center on Health Insurance Reforms, available at: https://chirblog.org/state-insurance-department-consumer-alerts-short-term-plans-come-short/. See also Corlette, Sabrina, Kevin Lucia, Dania Palanker, and Olivia Hoppe (2019). "The Marketing of Short-Term Health Plans: An Assessment of Industry Practices and State Regulatory Responses," Urban Institute, available at: https://www.urban.org/research/publication/marketing-short-term-health-plans-assessment-industry-practices-and-state-regulatory-responses. For a discussion of consumer confusion related to fixed indemnity excepted benefits coverage, see, e.g., Young, Christen Linke and Kathleen Hannick (2020). "Fixed Indemnity Health Coverage Is a Problematic Form of "Junk Insurance," USC-Brookings Schaeffer Initiative for Health Policy, available at: https://www.brookings.edu/blog/usc-brookings-schaeffer-on-health-policy/2020/08/04/fixed-indemnity-health-coverage-is-a-problematic-form-of-junk- insurance/. ******** These proposed rules would also require the same notice be provided in the same manner in connection with fixed indemnity excepted benefits coverage in the group market in any marketing, application, or enrollment materials provided to participants at or before the time participants are given an opportunity to enroll in the coverage. The fixed indemnity excepted benefits coverage required notices would also be required to be prominently displayed on websites used in connection with advertising or enrolling (or re-enrolling) individuals in such coverage. This would help ensure that consumers can better understand and properly distinguish fixed indemnity excepted benefits coverage from comprehensive coverage. These proposed rules would encourage enrollment in comprehensive coverage and lower the risk that STLDI and fixed indemnity excepted benefits coverage are viewed or marketed as a substitute for comprehensive coverage. 229 ******** 229 As discussed in section I.B of this preamble, these proposed rules would build on Executive Order 14009, "Strengthening Medicaid and the Affordable Care Act" and Executive Order 14070, "Continuing to Strengthen Americans' Access to Affordable, Quality Health Coverage" by encouraging enrollment in high-quality, comprehensive coverage. The Departments also note that the affordability of comprehensive coverage offered in the individual market has increased for many consumers in recent years, due in part to the expanded PTC subsidies provided through the ARP and the IRA, as discussed in section II of this preamble. Further, as discussed in section II of this preamble, the COVID-19 PHE has highlighted the importance of encouraging enrollment in comprehensive coverage. ******** 2. Summary of Impacts The expected benefits, costs, and transfers associated with these proposed rules are summarized in Table 1 and discussed in detail later in this section of this preamble. TABLE 1: Accounting Table Table 2 presents the estimated effects of the provisions regarding STLDI on enrollment in and gross premiums for individual health insurance coverage purchased on an Exchange and on Federal spending on the PTC (by calendar year), as discussed further in sections VII.B.2.c and VII.B.2.e of this preamble. TABLE 2: Estimated Effects of the Provisions Regarding STLDI on Enrollment in and Gross Premiums for Individual Health Insurance Coverage Purchased on an Exchange and on Federal Spending on the PTC a. Background STLDI and fixed indemnity excepted benefits coverage generally are not subject to the Federal consumer protections and requirements for comprehensive coverage as discussed in more detail in section I.A of this preamble. STLDI and fixed indemnity excepted benefits coverage therefore expose enrollees to financial and health risks, as discussed in this section and section II.B of this preamble. STLDI and fixed indemnity excepted benefits coverage typically do not cover all essential health benefits (including, for example, prescription drugs, maternity services, and mental health and substance use disorder services), and typically do not cover preexisting conditions. 230 STLDI can offer fewer benefits overall. 231 While fixed indemnity excepted benefits coverage is designed to provide a source of income replacement or financial support following a covered illness or injury, fixed indemnity benefits are often far below a covered individual's incurred costs. 232 Both STLDI and fixed indemnity excepted benefits coverage typically have lower medical loss ratios (MLRs) or lower actuarial values than coverage subject to the Federal consumer protections and requirements for comprehensive coverage. In one study of the medical claims of approximately 47 million enrollees in commercial plans in 2016, for example, the implied actuarial value of the STLDI coverage in the study was 49 percent, compared to an implied actuarial value of approximately 74 percent for off-Exchange comprehensive coverage plans and an implied actuarial value of 87 percent for on-Exchange plans. 233 Additionally, according to an NAIC report, across 28 issuers of STLDI for individuals in 2021, the nationwide loss ratio was approximately 70 percent. 234 Across 95 issuers of other non-comprehensive coverage for individuals, which includes fixed indemnity excepted benefits coverage, the nationwide loss ratio was approximately 40 percent in 2021. 235 By contrast, according to data from MLR annual reports for the 2021 MLR reporting year, the average MLR in the individual market for comprehensive coverage was approximately 87 percent in 2021. 236 230 See, e.g., Dieguez, Gabriela and Dane Hansen (2020). "The Impact of Short-Term Limited-Duration Policy Expansion on Patients and the ACA Individual Market," Milliman, available at: https://www.milliman.com/en/insight/the-impact-of-short-term-limited-duration-policy-expansion-on-patients-and-the-aca-individual-market. See also Pollitz, Karen, Michelle Long, Ashley Semanskee, and Rabah Kamal (2018). "Understanding Short-Term Limited Duration Health Insurance," KFF, available at: https://www.kff.org/health-reform/issue-brief/understanding-short-term-limited-duration-health-insurance/. See also Sanger-Katz, Margot (2018). "What to Know Before You Buy Short-Term Health Insurance," The New York Times, available at: https://www.nytimes.com/2018/08/01/upshot/buying-short-term-health-insurance-what-to-know.html. See also Young, Christen Linke and Kathleen Hannick (2020). "Fixed Indemnity Health Coverage Is a Problematic Form of "Junk Insurance," USC-Brookings Schaeffer Initiative for Health Policy, available at: https://www.brookings.edu/blog/usc-brookings-schaeffer-on-health-policy/2020/08/04/fixed-indemnity-health-coverage-is-a-problematic-form-of-junk- insurance. See also Partnership to Protect Coverage (2021). "Under-Covered: How 'Insurance Like' Products are Leaving Patients Exposed," available at: https://www.nami.org/NAMI/media/NAMI-Media/Public%20Policy/Undercovered_Report_03252021.pdf. 231 See, e.g., Dieguez, Gabriela and Dane Hansen (2020). "The Impact of Short-Term Limited-Duration Policy Expansion on Patients and the ACA Individual Market," Milliman, available at: https://www.milliman.com/en/insight/the-impact-of-short-term-limited-duration-policy-expansion-on-patients-and-the-aca-individual-market. 232 See Williams, Jackson (2022). "Addressing Low-Value Insurance Products With Improved Consumer Information: The Case of Ancillary Health Products," National Association of Insurance Commissioners, Journal of Insurance Regulation, available at: https://content.naic.org/sites/default/files/cipr-jir-2022-9.pdf. 233 Pelech, Daria and Karen Stockley (2022). "How Price and Quantity Factors Drive Spending in Nongroup and Employer Health Plans," Health Services Research, available at: https:// onlinelibrary.wiley.com/doi/10.1111/1475-6773.13962. 234 National Association of Insurance Commissioners (2022). "2021 Accident and Health Policy Experience Report," available at: https://content.naic.org/sites/default/files/publication-ahp-lr-accident-health-report.pdf. Data regarding issuers of STLDI and non-comprehensive coverage are only available for the individual market. 235 Id. 236 Based on internal calculations. Source: CMS, Medical Loss Ratio Data and System Resources, available at: https://www.cms.gov/CCIIO/Resources/Data-Resources/mlr. These statistics suggest that relative to issuers of comprehensive coverage, issuers of STLDI and fixed indemnity excepted benefits coverage tend to spend a lower percentage of premium dollars on health care items and services or, in the case of fixed indemnity excepted benefits coverage, payment of benefits. Such insurance might therefore be highly profitable for issuers, 237 depending on the extent to which issuers incur costs related to marketing (including agent/broker compensation 238 ), policy underwriting, and overhead. At the same time, the limited coverage provided through most STLDI and fixed indemnity excepted benefits coverage exposes individuals enrolled in such plans to health and financial risks, including the risk of high medical bills and high out-of-pocket expenses. These high out-of-pocket expenses, in turn, could contribute to an increased risk of medical debt and bankruptcy, which is particularly problematic given the extent of medical debt already present in the United States. 239 237 See Appleby, Julie (2018). "Short-Term Health Plans Boost Profits For Brokers And Insurers," NPR, available at: https://www.npr.org/sections/health-shots/2018/12/21/678605152/short-term-health-plans-boost-profits-for-brokers-and-insurers. See also Pear, Robert (2018). "'Short Term' Health Insurance? Up to 3 Years Under New Trump Policy," The New York Times, available at: https://www.nytimes.com/2018/08/01/us/politics/trump-short-term-health-insurance.html. 238 Compensation includes commissions, fees, or other incentives (for example, rewards or bonuses) as established in the relevant contract between an issuer and the agent or broker. 239 See, e.g., Consumer Financial Protection Bureau (2022). "Medical Debt Burden in the United States," available at: https://files.consumerfinance.gov/f/documents/cfpb_medical-debt-burden-in-the-united-states_report_2022-03.pdf. Compensation for agents and brokers from sales of STLDI can also be significant, incentivizing aggressive and/or deceptive marketing tactics that may mislead customers into enrolling in STLDI instead of comprehensive coverage. 240,241,242 One study suggests that commissions for STLDI are up to 10 times higher than those obtained for enrollment in individual health insurance coverage (averaging approximately 23 percent for STLDI, compared to 2 percent for individual health insurance coverage). 243 Data that specify compensation levels for agents and brokers selling fixed indemnity excepted benefits coverage are not available. However, one survey suggests that lead-generating websites direct consumers to insurance brokers selling both STLDI and other types of non-comprehensive coverage, including fixed indemnity excepted benefits coverage, and that both types of coverage are often marketed to resemble comprehensive coverage. 244 240 See, e.g., Appleby, Julie (2018). "Short-Term Health Plans Boost Profits For Brokers And Insurers," NPR, available at: https://www.npr.org/sections/health-shots/2018/12/21/678605152/short-term-health-plans-boost-profits-for-brokers-and-insurers. 241 Government Accountability Office (2020). "Private Health Coverage: Results of Covert Testing for Selected Offerings," available at: https://www.gao.gov/products/gao-20-634r. 242 However, even as some issuers offer higher compensation for STLDI, many brokers continue to refuse to sell products they view as overly risky for consumers, like STLDI. See, e.g., Corlette, Sabrina, Erik Wengle, Ian Hill, and Olivia Hoppe (2020). "Perspective from Brokers: The Individual Market Stabilizes While Short-Term and Other Alternative Products Pose Risks," Urban Institute, available at: https://www.urban.org/research/publication/perspective-brokers-individual-market-stabilizes-while-short-term-and-other-alternative-products-pose-risks. 243 U.S. House of Representatives Committee on Energy and Commerce (2020). "Shortchanged: How the Trump Administration's Expansion of Junk Short-Term Health Insurance Plans is Putting Americans at Risk," available at: https://democrats-energycommerce.house.gov/newsroom/press-releases/ec-investigation-finds-millions-of-americans-enrolled-in-junk-health. 244 Corlette, Sabrina, Kevin Lucia, Dania Palanker, and Olivia Hoppe (2019). "The Marketing of Short-Term Health Plans: An Assessment of Industry Practices and State Regulatory Responses," Urban Institute, available at: https://www.urban.org/research/publication/marketing-short-term-health-plans-assessment-industry-practices-and-state-regulatory-responses. Misleading marketing of STLDI and fixed indemnity excepted benefits coverage is reported to have taken place during individual health insurance coverage open enrollment periods or special enrollment periods (including during the COVID-19 special enrollment period, under which the Exchanges that used the Federal eligibility and enrollment platform operationalized functionality during a 6-month period in 2021 to make a special enrollment period available on HealthCare.gov to allow qualified individuals to enroll in 2021 individual health insurance coverage through those Exchanges amid the COVID-19 PHE). 245 For example, one study showed that enrollment in STLDI policies by brokers increased by approximately 60 percent in December 2018 and by more than 120 percent in January 2019, suggesting that overall enrollment in STLDI spiked during the ACA open enrollment season. 246 245 See Palanker, Dania and JoAnn Volk. (2021). "Misleading Marketing of Non-ACA Health Plans Continued During COVID-19 Special Enrollment Period," Center on Health Insurance Reforms, available at: https://georgetown.app.box.com/s/mn7kgnhibn4kapb46tqmv6i7putry9gt. See also Corlette, Sabrina, Kevin Lucia, Dania Palanker, and Olivia Hoppe (2019). "The Marketing of Short-Term Health Plans: An Assessment of Industry Practices and State Regulatory Responses," Urban Institute, available at: https://www.urban.org/research/publication/marketing-short-term-health-plans-assessment-industry-practices-and-state-regulatory-responses. Regarding the COVID-19 special enrollment period, see E.O. 14009; see also CMS (2021). "2021 Special Enrollment Period in Response to the COVID-19 Emergency," available at: https://www.cms.gov/newsroom/fact-sheets/2021-special-enrollment-period-response-covid-19-emergency. Regarding the extension of the COVID-19 special enrollment period (to the 6-month period between February 15, 2021 and August 15, 2021), see CMS (2021). "Extended Access Opportunity to Enroll in More Affordable Coverage Through HealthCare.gov," available at: https://www.cms.gov/newsroom/fact-sheets/extended-access-opportunity-enroll-more-affordable-coverage-through-healthcaregov. 246 U.S. House of Representatives Committee on Energy and Commerce (2020). "Shortchanged: How the Trump Administration's Expansion of Junk Short-Term Health Insurance Plans Is Putting Americans at Risk," available at: https://democrats-energycommerce.house.gov/newsroom/press-releases/ec-investigation-finds-millions-of-americans-enrolled-in-junk-health. In order to protect consumers, a number of States and the District of Columbia enacted legislation or issued regulations regarding STLDI after the 2018 final rules were published. 247 State regulatory actions regarding such coverage have been wide-ranging. For example, according to one report, as of January 2020, 5 States prohibited underwritten STLDI, 9 States limited the total duration of enrollment in underwritten STLDI (including renewals or extensions) to less than 364 days, and 11 States limited the initial contract term for enrollment in STLDI to less than 364 days. 248 Other State regulatory actions on STLDI have included banning coverage rescissions (except in cases such as fraud on the part of the enrollee), adding preexisting condition protections, and requiring a certain MLR, among other restrictions. 249 Lastly, some States have largely aligned their regulations regarding STLDI with the 2018 final rules. 250 In some States that allow sales of STLDI, but otherwise regulate STLDI, issuers do not offer STLDI. 251 247 Norris, Louise (2020). "'So Long' to Limits on Short-Term Plans," Healthinsurance.org, available at: https://www.healthinsurance.org/so-long-to-limits-on-short-term-plans/. See also Dieguez, Gabriela and Dane Hansen (2020). "The Impact of Short-Term Limited-Duration Policy Expansion on Patients and the ACA Individual Market," Milliman, available at: https://www.milliman.com/en/insight/the-impact-of-short-term-limited-duration-policy-expansion-on-patients-and-the-aca-individual-market. 248 As of January 2020. Giovannelli, Justin, Jo Ann Volk, and Kevin Lucia (2020). "States Work to Make Individual Market Health Coverage More Affordable, But Long-Term Solutions Call for Federal Leadership," Commonwealth Fund, available at: https://www.commonwealthfund.org/publications/issue-briefs/2020/jan/states-make-individual-coverage-more-affordable-federal-needed. 249 Palanker, Dania, Maanasa Kona, and Emily Curran (2019). "States Step Up to Protect Insurance Markets and Consumers from Short-Term Health Plans," Commonwealth Fund, available at: https://www.commonwealthfund.org/publications/issue-briefs/2019/may/states-step-up-protect-markets-consumers-short-term-plans. 250 Norris, Louise (2020). "'So Long' to Limits on Short-Term Plans," Healthinsurance.org, available at: https://www.healthinsurance.org/so-long-to-limits-on-short-term-plans/. 251 See Dieguez, Gabriela and Dane Hansen (2020). "The Impact of Short-Term Limited-Duration Policy Expansion on Patients and the ACA Individual Market," Milliman, available at: https://www.milliman.com/en/insight/the-impact-of-short-term-limited-duration-policy-expansion-on-patients-and-the-aca-individual-market. Recent analysis has found that States that allow the initial contract term of STLDI to last up to 364 days have seen a 27 percent reduction in enrollment, on average, in non-Exchange plans that are subject to the ACA Federal consumer protections and requirements for comprehensive coverage from 2018 to 2020, compared with a 4 percent reduction in enrollment, on average, in those plans in States that banned STLDI or limited its duration to 6 months or less. 252 This analysis also found that market-wide risk scores (a measure of relative expected health care costs for a population) declined more in States that banned or limited STLDI coverage (-11.8 percent) than in States with less restrictions on STLDI (-8.3 percent), suggesting that the less restrictive States saw more healthier individuals enroll in STLDI policies in lieu of comprehensive coverage, which put upward pressure on the average expected health care costs among those with comprehensive coverage. 252 Hall, Mark and Michael McCue (2022). "Short-Term Health Insurance and the ACA Market," Commonwealth Fund, available at: https://www.commonwealthfund.org/blog/2022/short-term-health-insurance-and-aca-market. b. Number of Affected Entities These proposed rules would directly impact individuals who are currently enrolled in STLDI or fixed indemnity excepted benefits coverage or who may choose to purchase or consider purchasing such coverage in the future. The Departments have limited information about the number of individuals currently enrolled in STLDI. Data from the NAIC indicate that approximately 173,000 individuals were covered by STLDI sold to individuals at the end of 2021. 253 However, as noted in section VII.B.1, this figure does not capture the total number of individuals covered by STLDI throughout the year, and does not include individuals covered by STLDI sold to or through associations. As noted in section VII.B.1, projections by CBO and JCT suggest that 1.5 million people could currently be enrolled in STLDI, 254 and CMS previously estimated that 1.9 million individuals would enroll in STLDI by 2023. 255 However, the CBO and JCT and CMS estimates were developed prior to the expansion of PTC subsidies provided through the ARP and the IRA, which likely supported increased enrollment in individual health insurance coverage purchased on an Exchange in lieu of STLDI and other forms of health insurance not subject to the Federal consumer protections and requirements for comprehensive coverage. 256 The number of enrollees in STLDI might have also been affected by any changes in State law or regulation that occurred since the 2018 final rules were issued. The Departments are unaware of any estimates or sources of information for the number of individuals enrolled in fixed indemnity excepted benefits coverage. 253 National Association of Insurance Commissioners (2022). "2021 Accident and Health Policy Experience Report," available at: https://content.naic.org/sites/default/files/publication-ahp-lr-accident-health-report.pdf. 254 Congressional Budget Office (2020). "CBO's Estimates of Enrollment in Short-Term, Limited-Duration Insurance," available at: https://www.cbo.gov/publication/56622. CBO and JCT projected that enrollment in STLDI would reach 1.6 million by 2028. See Congressional Budget Office (2019). "How CBO and JCT Analyzed Coverage Effects of New Rules for Association Health Plans and Short-Term Plans," available at: https://www.cbo.gov/publication/54915. 255 CMS Office of the Actuary (2018). "Estimated Financial Effects of the Short-Term, Limited-Duration Policy Proposed Rule," available at: https://www.cms.gov/Research-Statistics-Data-and-Systems/Research/ActuarialStudies/Downloads/STLD20180406.pdf. 256 See, e.g., Ortaliza, Jared, Krutika Amin, and Cynthia Cox (2022). "As ACA Marketplace Enrollment Reaches Record High, Fewer Are Buying Individual Market Coverage Elsewhere," KFF, available at: https://www.kff.org/policy-watch/as-aca-marketplace-enrollment-reaches-record-high-fewer-are-buying-individual-market-coverage-elsewhere/. These proposed rules would also directly impact issuers of STLDI and fixed indemnity excepted benefits coverage, and agents and brokers who enroll consumers in that coverage. The NAIC reported that there were at least 28 issuers of STLDI for individuals across the U.S. in 2021. 257 Due to a lack of data, the Departments are unable to estimate the number of issuers of individual market fixed indemnity excepted benefits coverage that would be affected by these proposed rules, though as noted earlier in this section of this preamble, the NAIC reported that there were at least 95 issuers of "other non-comprehensive coverage" (including fixed indemnity excepted benefits coverage) for individuals across the U.S. in 2021. 258 The Departments also lack data about the number of agents and brokers that currently enroll individuals in STLDI or fixed indemnity excepted benefits coverage. 257 National Association of Insurance Commissioners (2022). "2021 Accident and Health Policy Experience Report," available at: https://content.naic.org/sites/default/files/publication-ahp-lr-accident-health-report.pdf. 258 Id. Lastly, these proposed rules could also indirectly impact consumers enrolled in comprehensive coverage due to the effects of increased enrollment in comprehensive coverage on risk pools, premiums, plan offerings, or issuer participation in the markets for that coverage. While the Departments are unable to estimate whether or how these proposed rules would impact plan offerings or issuer participation in the markets for comprehensive coverage, in sections VII.B.2.c and VII.B.2.e of this preamble, the Departments discuss the estimated effects of the provisions regarding STLDI included in these proposed rules on enrollment in and premiums for individual health insurance coverage purchased on an Exchange. The Departments seek comments on the number of entities that would be affected by these proposed rules. In particular, the Departments seek comments on the number of issuers and the number of associations offering STLDI, the number of issuers offering individual market fixed indemnity excepted benefits coverage, the number of issuers offering group market fixed indemnity excepted benefits coverage, the number of enrollees in each type of coverage, and the number of agents and brokers that enroll individuals in these types of non-comprehensive coverage options. c. Benefits These proposed rules are expected to reduce the harm caused to consumers who are misled into enrolling in STLDI or fixed indemnity excepted benefits coverage as an alternative to or replacement for comprehensive coverage. The proposed notices would improve consumer understanding of STLDI and fixed indemnity excepted benefits coverage in relation to comprehensive coverage. The Departments are of the view that the proposed notices would help ensure individuals are made aware that these plans are not comprehensive coverage. This is also expected to reduce the level of deceptive marketing of STLDI and fixed indemnity excepted benefits coverage. Consumers who switch from STLDI or fixed indemnity excepted benefits coverage to comprehensive coverage would have better access to health care, better consumer protections, more robust benefits, and therefore would be expected to experience better health outcomes. The Departments anticipate these proposed rules would lead to an increase in enrollment in high-quality, affordable, comprehensive coverage that is subject to the Federal consumer protections and requirements for comprehensive coverage. Individuals would be less likely to wait until after they incur major medical expenses or develop a medical condition to switch from STLDI or fixed indemnity excepted benefits coverage to comprehensive coverage. This could lead to more stable markets for comprehensive coverage and improved market risk pools for such coverage. However, as noted earlier in this section of this preamble, the expanded PTC subsidies provided through the ARP and the IRA have likely already resulted in increased enrollment in individual health insurance coverage purchased on an Exchange in lieu of STLDI or fixed indemnity excepted benefits coverage, so the immediate overall effects of these proposed rules on enrollment, market stability, and risk pools are expected to be limited in 2024 and 2025. 259 The CMS Office of the Actuary (OACT) estimates that, relative to current law, the proposed provisions regarding STLDI would not affect enrollment in individual health insurance coverage purchased on an Exchange in 2024 and 2025, but would increase enrollment by approximately 60,000 people in 2026, 2027, and 2028. 260 259 See, e.g., Ortaliza, Jared, Krutika Amin, and Cynthia Cox (2022). "As ACA Marketplace Enrollment Reaches Record High, Fewer Are Buying Individual Market Coverage Elsewhere," KFF, available at: https://www.kff.org/policy-watch/as-aca-marketplace-enrollment-reaches-record-high-fewer-are-buying-individual-market-coverage-elsewhere/. 260 In developing these estimates, OACT assumed that STLDI coverage would be significantly less expensive than individual health insurance coverage purchased on an Exchange (where available) and would be an attractive option for individuals and families with relatively low health care costs and little to no subsidies. Using their health reform model, OACT estimated that, under current law, about 60,000 people would move from individual health insurance coverage purchased on an Exchange to STLDI in 2026, when the additional PTC subsidies available through 2025 through the IRA expire. In addition, since those switching to STLDI are assumed to be healthier than average, the average premium for individual health insurance coverage purchased on an Exchange would increase by roughly 0.5 percent. Changing the maximum duration of an STLDI policy, certificate, or contract of insurance to no more than 3 months, as proposed in these proposed rules, would negate these effects. To the extent that these proposed rules would lead to an increase in enrollment in comprehensive coverage that is subject to the Federal consumer protections and requirements for comprehensive coverage, these rules would likely result in a reduction in out-of-pocket expenses, medical debt, and risk of medical bankruptcy for consumers switching to comprehensive coverage. These proposed rules could also lead to a reduction in surprise bills from out-of-network providers in certain circumstances, to the extent the proposed rules lead to an increase in enrollment in coverage that is subject to the surprise billing protections for consumers under the No Surprises Act. By encouraging enrollment in comprehensive coverage, these proposed rules could also reduce the number of coverage rescissions, claims denials, premium increases, or coverage exclusions that are common for STLDI. d. Costs Individuals with STLDI or fixed indemnity excepted benefits coverage who switch to individual health insurance coverage--particularly those individuals who are not eligible for the PTC--might incur higher premium costs depending on their choice of available Exchange and off-Exchange comprehensive coverage plans, their PTC eligibility (if applicable), and the amount of advance payment of the PTC they receive (if any). 261 261 This might occur if premiums for STLDI are lower than premiums for individual health insurance coverage. One study, for example, showed that by screening out individuals with preexisting conditions and providing fewer comprehensive benefits, issuers may be able to offer STLDI at rates 54 percent below those for (unsubsidized) comprehensive coverage. See Levitt, Larry, Rachel Fehr, Gary Claxton, Cynthia Cox, and Karen Pollitz (2018). "Why do Short-Term Health Insurance Plans Have Lower Premiums than Plans that Comply with the ACA?," KFF, available at: https://files.kff.org/attachment/Issue-Brief-Why-Do-Short-Term-Health-Insurance-Plans-Have-Lower-Premiums-Than-Plans-That-Comply-with-the-ACA. These proposed rules could also lead to an increase in the number of individuals without some form of health insurance coverage, if some individuals with STLDI or fixed indemnity excepted benefits coverage lose coverage and have to wait until the next open enrollment period to purchase comprehensive coverage (for example, if an individual with existing coverage exhausts their renewal options outside of an open enrollment period), or choose to become uninsured. Those individuals who become uninsured could face an increased risk of higher out-of-pocket expenses and medical debt, reduced access to health care, and potentially worse health outcomes. To the extent that these proposed rules would lead to an increase in enrollment in comprehensive coverage, they could result in an increase in overall health care utilization and spending, given that this coverage tends to have higher MLRs and actuarial values and might offer lower cost-sharing requirements and more generous benefits. 262 262 As noted earlier in this RIA, many STLDI policies offer limited benefits coverage and have relatively low actuarial values. Many STLDI issuers spend a relatively high percentage of premium dollars on administration and overhead See National Association of Insurance Commissioners (2022). "Accident and Health Policy Experience Report for 2021," available at: https://content.naic.org/sites/default/files/publication-ahp-lr-accident-health-report.pdf. Regarding the differences in cost-sharing requirements and out-of-pocket expenses between STLDI and individual health insurance coverage, see, e.g., Dieguez, Gabriela and Dane Hansen (2020). "The Impact of Short-Term Limited-Duration Policy Expansion on Patients and the ACA Individual Market," Milliman, available at: https://www.milliman.com/en/insight/the-impact-of-short-term-limited-duration-policy-expansion-on-patients-and-the-aca-individual-market. Additionally, these proposed rules could impose costs on States that change their laws regarding STLDI or fixed indemnity excepted benefits coverage in response to the proposed provisions included in these proposed rules. The Departments seek comments on the magnitude of the costs that States might incur associated with enacting new legislation, implementing new laws, and updating existing regulations regarding STLDI and fixed indemnity excepted benefits coverage. The Departments expect that plans and issuers would incur minimal costs to replace the existing notices with the revised ones (which would be provided by the Departments, as discussed in section VII.D of this preamble). The Departments also expect that since plans and issuers change their policy documents routinely, the costs to plans and issuers to change their policy documents in response to these proposed rules would be part of plans' and issuers' usual business costs. e. Transfers Individuals currently enrolled in STLDI may be healthier on average than individuals enrolled in comprehensive coverage, as STLDI policies are not subject to Federal requirements that would prohibit them from excluding individuals or charging individuals higher premiums on the basis of health status, gender, and other factors. These proposed rules might cause some of these individuals to switch to comprehensive coverage. If such a switch occurs, it would improve the individual market (or merged market) risk pools and lead to lower overall premiums for individual health insurance coverage. CMS previously estimated that gross premiums for individual health insurance coverage purchased on an Exchange in 2022 would be 6 percent higher under the 2018 proposed rules than they would have been in the absence of those rules. 263 CBO and JCT previously estimated that the 2018 final rules for STLDI, in conjunction with changes made through the 2018 Department of Labor rule entitled "Definition of 'Employer' Under Section 3(5) of ERISA--Association Health Plans", 264 would increase premiums in the individual and small group health insurance coverage markets by around 3 percent. 265 An analysis of individual health insurance coverage rate filing materials for 2020 also found that the few carriers that explicitly included a premium adjustment because of the 2018 final rules increased premiums by between 0.5 percent and 2 percent in 2020. 266 These analyses suggest that these proposed rules could have an effect in the opposite direction, potentially reducing gross premiums for individual health insurance coverage. However, since the expanded PTC subsidies provided through the ARP and the IRA have likely already led to a reduction in enrollment in STLDI and fixed indemnity excepted benefits coverage and an increase in enrollment in individual health insurance coverage purchased on an Exchange, the Departments anticipate that the premium impact of these proposed rules would be relatively small. OACT estimates that the proposed provisions regarding STLDI would not affect gross premiums for individuals with individual health insurance coverage purchased on an Exchange in 2024 and 2025, but would reduce gross premiums by approximately 0.5 percent in 2026, 2027, and 2028. 267 263 CMS Office of the Actuary (2018). "Estimated Financial Effects of the Short-Term, Limited-Duration Policy Proposed Rule," available at: https://www.cms.gov/Research-Statistics-Data-and-Systems/Research/ActuarialStudies/Downloads/STLD20180406.pdf. 264 83 FR 28912 (June 21, 2018). The District Court of D.C. vacated this rule. See State of New York, et al. v. United States Department of Labor, et al., 363 F.Supp.3d 109 (D.D.C. 2019). 265 Congressional Budget Office (2019). "How CBO and JCT Analyzed Coverage Effects of New Rules for Association Health Plans and Short-Term Plans," available at: https://www.cbo.gov/publication/54915. 266 Dieguez, Gabriela and Dane Hansen (2020). "The Impact of Short-Term Limited-Duration Policy Expansion on Patients and the ACA Individual Market," Milliman, available at: https://www.milliman.com/en/insight/the-impact-of-short-term-limited-duration-policy-expansion-on-patients-and-the-aca-individual-market. 267 This estimate accounts for the end of the expanded PTC subsidies provided through the IRA. The proposed provisions regarding STLDI are expected to reduce Federal spending on PTC after the end of the expanded PTC subsidies provided through the IRA. These proposed provisions are expected to reduce gross premiums for individual health insurance coverage purchased on an Exchange and therefore lower per capita PTC spending. This effect would be partly offset by an increase in the number of individuals enrolling in Exchange coverage that would be eligible to receive the PTC (by approximately 20,000 in 2026, 2027, and 2028). On net, OACT estimates that these proposed provisions would have no impact on Federal spending on PTC in 2024 and 2025 given the expanded PTC subsidies provided through the IRA, but would reduce Federal spending on the PTC by approximately $120 million in 2026, 2027, and 2028. 268 This reduction in Federal spending on the PTC would be viewed as a reduction in the amount of the transfer from the Federal government to individuals. 268 In fiscal year terms, this would be a reduction in federal spending of $90 million in 2026, $120 million in 2027, and $120 million in 2028. These proposed rules could also lead to a transfer in the form of reduced out-of-pocket expenses from issuers to consumers who switch from STLDI or fixed indemnity excepted benefits coverage to comprehensive coverage, since more health care services would be covered under comprehensive coverage and the cost-sharing requirements for comprehensive coverage might be lower than those for STLDI or fixed indemnity excepted benefits coverage. 269 269 As noted in the Costs subsection of this RIA, regarding the differences in cost-sharing requirements and out-of-pocket expenses between STLDI and individual health insurance coverage, see, e.g., Dieguez, Gabriela and Dane Hansen (2020). "The Impact of Short-Term Limited-Duration Policy Expansion on Patients and the ACA Individual Market," Milliman, available at: https://www.milliman.com/en/insight/the-impact-of-short-term-limited-duration-policy-expansion-on-patients-and-the-aca-individual-market. f. Uncertainty As noted throughout this preamble, due to a lack of data and information, there are several areas of uncertainty regarding the potential impacts of these proposed rules. The Departments are unable to forecast how all of the provisions of these proposed rules would affect enrollment in STLDI and fixed indemnity excepted benefits coverage, as the Departments are uncertain how many individuals are currently enrolled in these types of coverage and would switch to comprehensive coverage, how many individuals would try to find another issuer of STLDI once their current policy ends, how many individuals would choose to remain enrolled in fixed indemnity excepted benefits coverage (particularly if their employers restructure their plan offerings in response to these proposed rules), or how many individuals would choose not to purchase any form of coverage as a result of these proposed rules. 270 As a result, there is also some uncertainty about the potential impact on risk pools, premiums, Federal expenditures on PTC, and compensation for agents and brokers selling STLDI, fixed indemnity excepted benefits coverage, and individual health insurance coverage. The Departments seek comments on all of these areas of uncertainty regarding the impacts of these proposed rules. 270 Previous studies have estimated the impact of the STLDI definition adopted in the 2018 final rules on enrollment in individual health insurance coverage, but in conjunction with the impact of elimination of the individual shared responsibility payment. See Dieguez, Gabriela and Dane Hansen (2020). "The Impact of Short-Term Limited-Duration Policy Expansion on Patients and the ACA Individual Market," Milliman, available at: https://www.milliman.com/en/insight/the-impact-of-short-term-limited-duration-policy-expansion-on-patients-and-the-aca-individual-market. g. Health Equity Impact Due to the typical underwriting practices and plan eligibility requirements in the market for STLDI, individuals might face higher premiums or might not be able to purchase STLDI because of preexisting health conditions, gender, or other factors. 271 STLDI and fixed indemnity excepted benefits coverage typically do not cover certain essential health benefits including prescription drugs, mental health and substance use disorder services, or maternity services, 272 which could contribute to disparities in access to health care and health outcomes (regarding mental health, maternal health, or infant health, for instance). 273 271 See, e.g., Barnes, Justin and Fumiko Chino (2022). "Short-term Health Insurance Plans Come Up Short for Patients with Cancer," JAMA Oncology, Vol 8 Issue 8: 1101-1103, available at: https://jamanetwork.com/journals/jamaoncology/article-abstract/2793127. 272 Dieguez, Gabriela and Dane Hansen (2020). "The Impact of Short-Term Limited-Duration Policy Expansion on Patients and the ACA Individual Market," Milliman, available at: https://www.milliman.com/en/insight/the-impact-of-short-term-limited-duration-policy-expansion-on-patients-and-the-aca-individual-market. 273 See, e.g., Hill, Latoya, Samantha Artiga, and Usha Ranji (2022). "Racial Disparities in Maternal and Infant Health: Current Status and Efforts to Address Them," KFF, available at: https://www.kff.org/racial-equity-and-health-policy/issue-brief/racial-disparities-in-maternal-and-infant-health-current-status-and-efforts-to-address- them/. Consumers with low health literacy, which disproportionately includes consumers with low incomes, may also be misled into purchasing STLDI or fixed indemnity excepted benefits coverage under the mistaken impression that it would lower their out-of-pocket costs while providing comprehensive coverage with lower premiums. Consumers with low income or who are members of underserved racial and ethnic groups are more likely to be uninsured and face barriers in accessing care. 274 Individuals in these populations arguably face the greatest health and financial consequences in the event that STLDI or fixed indemnity excepted benefits coverage proves inadequate. These individuals are also potentially most vulnerable to practices like post-claims underwriting and rescission that are common in the STLDI market, which could leave them without any coverage in a health crisis. 274 See Tolbert, Jennifer, Kendal Orgera, and Anthony Damico (2020). "Key Facts about the Uninsured Population," KFF, available at: https://www.kff.org/uninsured/issue-brief/key-facts-about-the-uninsured-population/. See also Artiga, Samantha, Latoya Hill, Kendal Orgera, and Anthony Damico (2021). "Health Coverage by Race and Ethnicity, 2010-2019," KFF, available at: https://www.kff.org/racial-equity-and-health-policy/issue-brief/health-coverage-by-race-and-ethnicity/. See also KFF (2021). "Adults Who Report Not Having a Personal Doctor/Health Care Provider by Race/Ethnicity," available at: https://www.kff.org/other/state-indicator/percent-of-adults-reporting-not-having-a-personal-doctor-by-raceethnicity/. See also KFF (2021). "Adults Who Report Not Seeing a Doctor in the Past 12 Months Because of Cost by Race/Ethnicity," available at: https://www.kff.org/other/state-indicator/percent-of-adults-reporting-not-seeing-a-doctor-in-the-past-12-months-because-of-cost-by-raceethnicity/. These proposed rules would partly address these health inequities by increasing regulation of issuers offering STLDI and fixed indemnity excepted benefits coverage and encouraging enrollment in comprehensive coverage. The Departments seek comments on the potential health equity implications of these proposed rules. h. Regulatory Review Cost Estimation If regulations impose administrative costs on entities, such as the time needed to read and interpret rules, regulatory agencies should estimate the total cost associated with regulatory review. The Departments assume that approximately 250 entities will review these proposed rules, including 28 issuers of STLDI, 275 95 issuers of other non-comprehensive coverage, 276 and other interested parties (for example, State insurance departments, State legislatures, industry associations, and advocacy organizations). The Departments acknowledge that this assumption may understate or overstate the number of entities that will review these proposed rules. 275 National Association of Insurance Commissioners (2022). "2021 Accident and Health Policy Experience Report," available at: https://content.naic.org/sites/default/files/publication-ahp-lr-accident-health-report.pdf. 276 Id. The Departments assume that all issuers of other non-comprehensive coverage will review these proposed rules. Using wage information from the Bureau of Labor Statistics, for Business Operations Specialists, All Other (Code 13-1199), to account for average labor costs (including a 100 percent increase for the cost of fringe benefits and other indirect costs), the Departments estimate that the cost of reviewing these proposed rules will be $76.20 per hour. 277 The Departments estimate that it will take each reviewing individual approximately 4 hours to review these proposed rules, with an associated cost of approximately $305 (4 hours x $76.20). Therefore, the Departments estimate that the (one-time) total cost of reviewing these proposed rules will be approximately $76,200 (250 x $305). 277 See Bureau of Labor Statistics (2022). "National Occupational Employment and Wage Estimates," available at: https://www.bls.gov/oes/current/oes_nat.htm. The Departments welcome comments on this approach to estimating the total burden and cost for interested parties to read and interpret these proposed rules. C. Regulatory Alternatives - Departments of Health and Human Services and Labor In developing the proposed rules, the Departments considered various alternative approaches. With respect to the proposed amendments to the definition of STLDI, the Departments considered leaving in place the duration standards established in the 2018 final rules, but concluded that the 2018 final rules' duration standards were too lengthy for the reasons described in section III.A.2 of this preamble. The Departments also considered proposing to limit the maximum duration of STLDI policies to a less-than-6-month period to minimize disruption for consumers in some (but not all) States that have implemented a less - than-6-month period, a less-than-3-month period as implemented in the 2016 final rules, or otherwise shortening the maximum duration to a time period shorter than allowed under current regulations. However, the Departments ultimately decided to propose a maximum duration of no more than 4 months to align with the rules regarding the 90-day waiting period limitation and the optional reasonable and bona fide employment-based orientation period that is permitted under the ACA. 278 278 26 CFR 54.9815-2708, 29 CFR 2590.715-2708, and 45 CFR 147.116. The Departments considered proposing to limit stacking of STLDI coverage, whether sold by the same or different issuer. However, after considering the potential challenges issuers and State regulators would face in attempting to determine whether an individual had previously enrolled in an STLDI policy with a different issuer, the Departments decided to propose to limit stacking only where STLDI is sold to an individual by the same issuer, while seeking comments on whether the Departments should extend the limit on stacking to STLDI sold to an individual by issuers that are members of the same controlled group. The Departments considered proposing a limit on the marketing and/or sale of STLDI during the individual health insurance coverage open enrollment period. The Departments are concerned that aggressive and deceptive marketing practices by some issuers have lured consumers, looking for comprehensive coverage, into enrolling in STLDI, exposing them to financial risk. The Departments solicit comments on how the Departments can support State efforts to limit the marketing and/or sale of STLDI during the open enrollment period. With respect to the proposed amendments to the notices provided to consumers considering enrolling in STLDI, the Departments considered including a complete list of Federal protections that apply to consumers enrolled in comprehensive coverage versus STLDI. This approach would more fully distinguish STLDI from comprehensive coverage and highlight in greater detail the risks to consumers of enrolling in STLDI instead of comprehensive coverage. However, after consulting with plain language experts, the Departments are of the view that providing a complete comparison of protections that a consumer would forego by enrolling in STLDI rather than comprehensive coverage would result in a lengthy, complex notice that could be difficult for the typical consumer to understand. Increasing the length and complexity of the notice would also increase burden for issuers to provide the notice on policy documents and marketing and application materials as proposed in these rules. However, the Departments are soliciting comments on all aspects of the revised notice, including whether a different format or presentation would result in a more useful, consumer-friendly notice. The Departments considered proposing a more detailed notice be provided to consumers who are considering enrolling in fixed indemnity excepted benefits coverage, including language that would highlight in greater detail the differences between fixed indemnity excepted benefits coverage and comprehensive coverage and include a reference to potential financial support available for Exchange coverage, similar to the proposed consumer notice for STLDI. However, the Departments ultimately determined that the value of providing a more concise, readable notice for fixed indemnity excepted benefits coverage outweighed the benefits of providing that more detailed information. Because fixed indemnity excepted benefits coverage differs so significantly in purpose and scope from comprehensive coverage, the Departments were also concerned that providing the additional details could suggest to consumers that fixed indemnity excepted benefits coverage is something more than a form of income replacement or financial support. The Departments also considered proposing alternative applicability dates for the proposed changes to the fixed indemnity excepted benefits regulations, including a uniform applicability date for new and existing coverage, either aligned with the effective date of the final rules or with a longer transition. The Departments acknowledge that consumers may have purchased fixed indemnity excepted benefits coverage in reliance on requirements in place prior to the publication of the final rules, and that changes to the regulations may affect the availability of such coverage, benefit design, and costs. Plans and issuers, similarly, have designed and sold fixed indemnity excepted benefits coverage on the basis of the current regulatory framework, on which State regulators have also developed enforcement policies. In light of these reliance interests, the Departments are of the view that it is appropriate to adopt the special rule for existing coverage to delay applicability for certain changes to January 1, 2027, in order to provide a transition period with respect to fixed indemnity excepted benefits coverage sold or issued before the effective date of the final rules. However, such reliance interests would not be present with respect to new fixed indemnity excepted benefits coverage sold or issued on or after the effective date of the final rules. Further, delaying application of the final rules prolongs the risk of harm to new consumers and would frustrate the purpose of these proposed rules to distinguish between comprehensive coverage and fixed indemnity excepted benefits coverage and promote consumer access to high-quality, affordable, comprehensive coverage. In addition, as discussed in section III.B.1.g of this preamble, there are certain proposed changes (such as the applicable notice requirements, technical amendments, and the severability provisions) that do not raise concerns about reliance interests and therefore the Departments propose an earlier applicability date for those proposals for fixed indemnity excepted benefits coverage sold or issued before the effective date of the final rules. The Departments considered proposing to apply the fixed indemnity excepted benefits coverage proposals in these proposed rules to specified disease excepted benefits coverage, to apply uniform standards to both statutorily-defined forms of independent, noncoordinated excepted benefits. However, the Departments determined that additional information about specified disease excepted benefits coverage would be useful prior to engaging in rulemaking. Therefore, the Departments have included a comment solicitation aimed at gathering information about specified disease excepted benefits coverage, including whether additional guidance or rulemaking on this type of coverage may be necessary. D. Paperwork Reduction Act These proposed rules provide that to be considered STLDI for coverage periods beginning on or after the effective date of the final rules, a revised consumer notice must be prominently displayed (in either paper or electronic form) on the first page of the policy, certificate, or contract of insurance and in any marketing, application, and enrollment materials (including reenrollment materials) provided to individuals at or before the time an individual has the opportunity to enroll (or reenroll) in the coverage. These proposed rules also provide that to be considered fixed indemnity excepted benefits coverage in the group market for plan years beginning on or after the effective date of the final rules, a notice must be included in any marketing, application, or enrollment materials provided to participants at or before the time participants are given an opportunity to enroll in the coverage. The notice would indicate that the hospital indemnity or other fixed indemnity insurance is not comprehensive coverage and does not have to include most Federal consumer protections for health insurance, outline the availability of other health coverage options, and explain that individuals may contact the State department of insurance for questions or complaints. These proposed rules would propose revisions, comparable to the group market standards, for the notice that must be provided for hospital indemnity and other fixed indemnity insurance to be considered an excepted benefit in the individual market for notices required with respect to coverage periods beginning on or after the effective date of the final rules. The proposed rules provide that the individual market fixed indemnity excepted benefits notice must be included on the first page of any marketing, application, and enrollment or reenrollment materials that are provided at or before the time an individual has the opportunity to enroll or reenroll in the coverage, and on the first page of the policy, certificate, or contract of insurance. The Departments propose to provide the exact text for these notices, and the language would not need to be customized. The burden associated with these notices would therefore not be subject to the Paperwork Reduction Act of 1995 in accordance with 5 CFR 1320.3(c)(2) because they do not contain a "collection of information" as defined in 44 U.S.C. 3502(3). Consequently, this document need not be reviewed by OMB under the authority of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ). These proposed rules also amend 26 CFR 1.105-2 to clarify that, for amounts to be excluded from income under section 105(b) of the Code, the payment or reimbursement must be substantiated by the health plan. Any information required to substantiate the expenses under this regulation is considered a usual and customary business practice and a record provided during the normal course of business in administering health plans. These customary business records impose no additional burden on respondents and are not required to be reviewed by OMB in accordance with 5 CFR 1320.3(b)(2). The Departments seek comments on potential burden on issuers if the final rules were to include required notices with language that would need to be customized. E. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA), (5 U.S.C. 601, et seq.), requires agencies to analyze options for regulatory relief of small entities to prepare an initial regulatory flexibility analysis to describe the impact of a proposed rule on small entities, unless the head of the agency can certify that the rule will not have a significant economic impact on a substantial number of small entities. The RFA generally defines a "small entity" as (1) a proprietary firm meeting the size standards of the Small Business Administration (SBA), (2) a not-for-profit organization that is not dominant in its field, or (3) a small government jurisdiction with a population of less than 50,000. States and individuals are not included in the definition of "small entity." HHS uses a change in revenues of more than 3 to 5 percent as its measure of significant economic impact on a substantial number of small entities. The provisions in these proposed rules would affect issuers of STLDI and issuers of fixed indemnity excepted benefits coverage. Health insurance issuers are generally classified under the North American Industry Classification System (NAICS) code 524114 (Direct Health and Medical Insurance Carriers). According to SBA size standards, 279 entities with average annual receipts of $47 million or less are considered small entities for this NAICS code. The Departments expect that few, if any, insurance companies underwriting health insurance policies fall below these size thresholds. Based on data from MLR annual report submissions for the 2021 MLR reporting year, approximately 87 out of 483 issuers of health insurance coverage nationwide had total premium revenue of $47 million or less. 280 However, it should be noted that over 77 percent of these small companies belong to larger holding groups, and many, if not all, of these small companies are likely to have non-health lines of business that will result in their revenues exceeding $47 million. The Departments expect this to be the case for issuers of STLDI and issuers of fixed indemnity excepted benefits coverage. However, as noted earlier in this RIA, due to a lack of data, the Departments are unable to estimate how many small issuers of STLDI and small issuers of fixed indemnity excepted benefits coverage would be affected by these proposed rules. The Departments seek comments on this analysis, and seek information on the number of small issuers of STLDI and the number of small issuers of fixed indemnity excepted benefits coverage. 279 Small Business Administration (2023). "Table of Size Standards (last updated March 2023)," available at: https://www.sba.gov/document/support--table-size-standards. 280 Based on internal calculations. Source: CMS, Medical Loss Ratio Data and System Resources, available at: https://www.cms.gov/CCIIO/Resources/Data-Resources/mlr.html. Agents and brokers would be classified under NAICS code 524210 (Insurance Agencies and Brokerages), with a size standard of $15 million or less. There is the potential for the compensation 281 of small agents and brokers associated with the sale of STLDI and fixed indemnity excepted benefits coverage to be negatively affected by these proposed rules, if there is a reduction in sales of that coverage. There is also the potential for the compensation of small agents and brokers associated with the sale of individual health insurance coverage to be positively affected by these proposed rules, if there is an increase in sales of that coverage. However, due to a lack of data, the Departments are unable to precisely estimate how many agents and brokers might be affected by these proposed rules and the magnitudes of the potential changes in compensation. 282 The Departments seek information on the number of agents and brokers who sell STLDI, fixed indemnity excepted benefits coverage, and individual health insurance coverage, respectively, and how their compensation might be affected by these proposed rules, if finalized. 281 Compensation includes commissions, fees, or other incentives (for example, rewards or bonuses) as established in the relevant contract between an issuer and the agent or broker. 282 Previously, in 86 FR 51730, 51756, the Departments noted that a total of 55,541 agents and brokers work with issuers. Many of these agents and brokers are likely to be employed by small entities. In addition, section 1102(b) of the Social Security Act requires agencies to prepare a regulatory impact analysis if a rule may have a significant economic impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 603 of the RFA. While these rules are not subject to section 1102 of the Social Security Act, the Departments are of the view that these proposed rules would not have a significant impact on the operations of a substantial number of small rural hospitals. The Departments seek comments on this F. Special Analyses - Department of the Treasury 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. Pursuant to section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. G. 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 proposed rule that includes any Federal mandate that may result in expenditures in any 1 year by State, local, or Tribal governments, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. That threshold is approximately $177 million in 2023. The Departments anticipate the combined impact on State, local, or Tribal governments and the private sector would not be above the threshold. H. Federalism Executive Order 13132 establishes certain requirements that Federal agencies must meet when they issue proposed rules that impose substantial direct costs on State and local governments, preempt State law, or otherwise have Federalism implications. In compliance with the requirement of Executive Order 13132 that agencies examine closely any policies that may have Federalism implications or limit the policy-making discretion of the States, the Departments have engaged in efforts to consult with and work cooperatively with affected States, including participating in conference calls with and attending conferences of the NAIC. In the Departments' view, these proposed rules have Federalism implications because they would have direct effects on the States, the relationship between the national government and the States, or on the distribution of power and responsibilities among various levels of government. Under these proposed rules, health insurance issuers offering STLDI or fixed indemnity excepted benefits coverage would be required to follow the minimum Federal standards for such coverage to not be subject to the Federal consumer protections and requirements for comprehensive coverage. In general, through section 514, ERISA supersedes State laws to the extent that they relate to any covered employee benefit plan, and preserves State laws that regulate insurance, banking, or securities. While ERISA prohibits States from regulating an employee benefit plan as an insurance or investment company or bank, the preemption provisions of section 731 of ERISA and sections 2724 and 2762 of the PHS Act (implemented in 29 CFR 2590.731(a) and 45 CFR 146.143(a) and 148.210(b)) apply so that the Federal consumer protections and requirements for comprehensive coverage are not to be construed to supersede any provision of State law which establishes, implements, or continues in effect any standard or requirement solely relating to health insurance issuers in connection with individual or group health insurance coverage except to the extent that such standard or requirement prevents the application of a Federal requirement. 283 The conference report accompanying HIPAA, when this Federal preemption standard was first established for the requirements in title XXVII of the PHS Act, indicates that this is intended to be the "narrowest" preemption of State laws. 284 283 A similar preemption provision was established for the Exchange and other federal health insurance requirements that are codified outside of title XXVII of the PHS Act. See section 1311(k) and 1321(d) of the ACA. 284 See House Conf. Rep. No. 104-736, at 205, reprinted in 1996 U.S. Code Cong. & Admin. News 2018 and available at https://www.congress.gov/congressional-report/104th-congress/house-report/736/1. States may continue to apply State law requirements except to the extent that such requirements prevent the application of the Federal requirements that are the subject of this rulemaking. In general, State insurance requirements that are more stringent or more consumer protective than the Federal requirements are unlikely to "prevent the application of" the Federal provisions, and therefore are unlikely to be preempted. 285 Accordingly, States have significant latitude to impose requirements on health insurance issuers that are more restrictive or more consumer protective than the Federal requirements. 286 States that have current requirements for STLDI or fixed indemnity excepted benefits coverage that are the same as or more restrictive or consumer protective than the Federal standards in these proposed rules could thus continue to apply such State law requirements. States would also have the flexibility to require additional consumer disclosures and to establish additional restrictions under State law in response to market-specific needs or concerns, as long as those requirements would not prevent the application of the Federal requirements. For example, a State law or regulation cannot require issuers to remove language from the Federal consumer notice, as that would prevent the application of the Federal notice requirements. 285 See, e.g., 62 FR 16904 (April 8, 1997), 69 FR 78739 (Dec. 30, 2004), 79 FR 10303 (Feb. 24, 2014), and 86 FR 36872, 36887 (July 13, 2021). 286 Ibid. These proposed rules, if finalized, would not impose requirements on STLDI. Rather, they would define STLDI. Therefore, to the extent a State were to permit or require an issuer of STLDI to issue a policy, certificate, or contract of insurance that has a longer initial contract term or a longer total coverage period than these proposed rules, if finalized, would specify, that would not constitute a State law that is more generous or consumer-protective than Federal requirements. Rather, any such policy would not fall within the Federal definition of STLDI, and the policy would therefore be subject to all the Federal consumer protections and requirements that apply to individual health insurance coverage. The Departments are of the view that there is a need for regulatory action at the Federal level given, among other factors, the prevalence of marketing of and enrollment in STLDI through out-of-State associations, and the potential inability of States to regulate and collect information about these associations. 287 There is also limited State-level information about STLDI enrollment and premiums. 288 287 Keith, Katie (2020). "New Congressional Investigation of Short-Term Plans," Health Affairs, available at: https://www.healthaffairs.org/do/10.1377/forefront.20200626.227261/full/. See also Curran, Emily, Dania Palanker, and Sabrina Corlette (2019). "Short-Term Health Plans Sold Through Out-of-State Associations Threaten Consumer Protections," Commonwealth Fund, available at: https://www.commonwealthfund.org/blog/2019/short-term-health-plans-sold-through-out-state-associations-threaten-consumer-protections. 288 Government Accountability Office (2022). "Private Health Insurance: Limited Data Hinders Understanding of Short-Term Plans' Role and Value During the COVID-19 Pandemic," available at: https://www.gao.gov/products/gao-22-104683. See also Palanker, Dania and Christina Goe (2020). "States Don't Know What's Happening in Their Short-Term Health Plan Markets and That's a Problem," Commonwealth Fund, available at: https://www.commonwealthfund.org/blog/2020/states-dont-know-whats-happening-their-short-term-health-plan-markets-and-thats-problem. See also Congressional Budget Office (2020). "CBO's Estimates of Enrollment in Short-Term, Limited-Duration Insurance," available at: https://www.cbo.gov/publication/56622. While developing these proposed rules, to the extent feasible within the applicable preemption provisions, the Departments have attempted to balance States' interests in regulating health insurance issuers and their health insurance markets, with Congress' intent to provide uniform minimum protections to consumers in every State. By doing so, it is the Departments' view that they have complied with the requirements of Executive Order 13132. Douglas W. O'Donnell, Deputy Commissioner for Services and Enforcement, Internal Revenue Service. Lisa M. Gomez, Assistant Secretary, Employee Benefits Security Administration, Department of Labor. Chiquita Brooks-LaSure, Administrator, Centers for Medicare & Medicaid Services. Xavier Becerra, Secretary Department of Health and Human Services. (Filed by the Office of the Federal Register July 7, 2023, 8:45 a.m., and published in the issue of the Federal Register for July 12, 2023, 88 FR 44596) List of Subjects 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements 26 CFR Part 54 Excise taxes, Health care, Health Insurance, Pensions, Reporting and recordkeeping requirements. 29 CFR Part 2590 Child support, Employee benefit plans, Health care, Health insurance, Maternal and child health, Penalties, Pensions, Privacy, Reporting and recordkeeping requirements. 45 CFR Part 144 Health care, Health insurance, Reporting and recordkeeping requirements. 45 CFR Part 146 Health care, Health insurance, Reporting and recordkeeping requirements. 45 CFR Part 148 Administrative practice and procedure, Health care, Health insurance, Insurance companies, Penalties, Reporting and recordkeeping requirements. DEPARTMENT OF THE TREASURY Internal Revenue Service Proposed Amendments to the Regulations Accordingly, the Treasury Department and the IRS propose to amend 26 CFR parts 1 and 54 as follows: PART 1-- INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805. * * * Par 2. Section 1.105-2 is revised to read as follows: § 1.105-2 Amounts expended for medical care. (a) In general. Section 105(b) provides an exclusion from gross income with respect to the amounts referred to in section 105(a) (see § 1.105-1) which are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred for the medical care (as defined in section 213(d)) of the taxpayer, the taxpayer's spouse, the taxpayer's dependents (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) (dependents), and any child of the taxpayer who, as of the end of the taxable year, has not attained age 27. Any child to whom section 152(e) applies shall be treated as a dependent of both parents for purposes of section 105(b). (All references to the taxpayer's medical expenses in this section include the medical expenses of the taxpayer, the taxpayer's spouse, the taxpayer's dependents, and any child of the taxpayer who, as of the end of the taxable year, has not attained age 27.) However, the exclusion does not apply to amounts which are attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year. See section 213 and the regulations thereunder. Section 105(b) applies only to amounts which are paid specifically to reimburse the taxpayer for section 213(d) medical care expenses that have been incurred by the taxpayer and that are substantiated by the plan. Thus, section 105(b) does not apply to amounts that the taxpayer would be entitled to receive irrespective of the amount of medical care expenses the taxpayer incurs or that are paid to reimburse the taxpayer for incurred section 213(d) medical care expenses if the medical care expenses have not been substantiated by the plan. For example, if under a wage continuation plan the taxpayer is entitled to regular wages during a period of absence from work due to sickness or injury, amounts received under such plan are not excludable from the taxpayer's gross income under section 105(b) even though the taxpayer may have incurred medical expenses during the period of illness. Any amounts received under a fixed indemnity plan treated as an excepted benefit under section 9832(c)(3), or any plan that pays amounts regardless of the amount of section 213(d) medical care expenses actually incurred, are not payments for medical care under section 105(b) and are included in the employee's gross income under section 105(a). If the taxpayer incurs an obligation for medical care, payment to the obligee in discharge of such obligation shall constitute indirect payment to the taxpayer as reimbursement for medical care. Similarly, payment to or on behalf of the taxpayer's spouse or dependents or any child of the taxpayer who, as of the end of the taxable year, has not attained age 27 shall constitute indirect payment to the taxpayer. (b) Applicability date. These regulations apply as of the later of the date of the publication of the final regulations or January 1, 2024. PART 54--PENSION AND EXCISE TAX Par 3. The authority citation for part 54 continues to read as follows: Authority: 26 U.S.C. 7805 * * * Par. 4. Section 54.9801-2 is amended by revising the definition of "Short-term, limited-duration insurance" to read as follows: § 54.9801-2 Definitions. Short-term, limited-duration insurance means health insurance coverage provided pursuant to a policy, certificate, or contract of insurance with an issuer that: (1) Has an expiration date specified in the policy, certificate, or contract of insurance that is no more than 3 months after the original effective date of the policy, certificate, or contract of insurance, and taking into account any renewals or extensions, has a duration no longer than 4 months in total. For purposes of this paragraph (1), a renewal or extension includes the term of a new short-term, limited-duration insurance policy, certificate, or contract of insurance issued by the same issuer to the same policyholder within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance; and (2) Displays prominently on the first page (in either paper or electronic form, including on a website) of the policy, certificate, or contract of insurance, and in any marketing, application, and enrollment materials (including reenrollment materials) provided to individuals at or before the time an individual has the opportunity to enroll (or reenroll) in the coverage, in at least 14-point font, the language in the following notice: "Notice to Consumers About Short-Term, Limited-Duration Insurance IMPORTANT: This is short-term, limited-duration insurance. This is temporary insurance. It isn't comprehensive health insurance. Review your policy carefully to make sure you understand what is covered and any limitations on coverage. - This insurance might not cover or might limit coverage for: preexisting conditions; or essential health benefits (such as pediatric, hospital, emergency, maternity, mental health, and substance use services, prescription drugs, or preventive care). - You won't qualify for Federal financial help to pay for premiums or out-of-pocket costs. - You aren't protected from surprise medical bills. - When this policy ends, you might have to wait until an open enrollment period to get comprehensive health insurance. Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) to review your options for comprehensive health insurance. If you're eligible for coverage through your employer or a family member's employer, contact the employer for more information. Contact your State department of insurance if you have questions or complaints about this policy." (3) If any provision of this definition of "short-term, limited-duration insurance" is held to be invalid or unenforceable by its terms, or as applied to any entity or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, along with other provisions not found invalid or unenforceable, including as applied to entities not similarly situated or to dissimilar circumstances, unless such holding is that the provision is invalid and unenforceable in all circumstances, in which event the provision shall be severable from the remainder of the definition and shall not affect the remainder thereof. Par. 5. Section 54.9831-1 is amended by: a. Revising paragraph (c)(4)(i); b. Adding paragraph (c)(4)(ii)(D); c. Revising paragraph (c)(4)(iii); and d. Adding paragraphs (c)(4)(iv) and (c)(4)(v). The revisions and additions read as follows: § 54.9831-1 Special rules relating to group health plans. (c) * * * (4) * * * (i) Excepted benefits that are not coordinated. Coverage for only a specified disease or illness (for example, cancer-only policies) or hospital indemnity or other fixed indemnity insurance is excepted only if it meets each of the applicable conditions specified in paragraph (c)(4)(ii) of this section. (ii) * * * (D) With respect to hospital indemnity or other fixed indemnity insurance - ( 1 ) The benefits are paid in a fixed dollar amount per day (or per other time period) of hospitalization or illness (for example, $100/day) regardless of the actual or estimated amount of expenses incurred, services or items received, severity of illness or injury experienced by a covered participant or beneficiary, or other characteristics particular to a course of treatment received by a covered participant or beneficiary, and not on any other basis (such as on a per-item or per-service basis). ( 2 ) The plan or issuer displays prominently on the first page (in either paper or electronic form, including on a website) of any marketing, application, and enrollment materials that are provided to participants at or before the time participants are given the opportunity to enroll in the coverage, in at least 14-point font, the language in the following notice: "Notice to Consumers About Fixed Indemnity Insurance IMPORTANT: This is fixed indemnity insurance. This isn't comprehensive health insurance coverage and doesn't have to include most Federal consumer protections for health insurance. Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) to review your options for comprehensive health insurance. If you're eligible for coverage through your employer or a family member's employer, contact the employer for more information. Contact your State department of insurance if you have questions or complaints about this policy." ( 3 ) If participants are required to reenroll (in either paper or electronic form) for purposes of renewal or reissuance of the insurance, the notice described in paragraph (c)(4)(ii)(D)( 2 ) of this section is displayed in any marketing and reenrollment materials provided at or before the time participants are given the opportunity to reenroll in coverage. (4 ) If a plan or issuer provides a notice satisfying the requirements in paragraph (c)(4)(ii)(D)( 2 ) and ( 3 ) of this section to a participant, the obligation to provide the notice is considered to be satisfied for both the plan and issuer. (iii) Examples. The rules of this paragraph (c)(4) are illustrated by the following examples: (A) Example 1-- (1) Facts. An employer sponsors a group health plan that provides coverage through an insurance policy. The policy provides benefits only related to hospital stays at a fixed percentage of hospital expenses up to a maximum of $100 a day. ( 2 ) Conclusion. Even if the other conditions in paragraph (c)(4)(ii) of this section are satisfied, because benefits are paid based on a percentage of expenses incurred rather than a fixed dollar amount per day (or per other time period, such as per week), the policy does not qualify as an excepted benefit under this paragraph (c)(4). This is the result even if, in practice, the policy pays the maximum of $100 for every day of hospitalization. (B) Example 2-- ( 1 ) Facts. An employer sponsors a group health plan that provides coverage through an insurance policy. The policy provides benefits when a person receives certain specific items and services in a fixed amount, such as $50 per blood test or $100 per visit. The fixed amounts apply to each specific item or service and are not paid per day or per other time period of hospitalization or illness. ( 2 ) Conclusion. Even if the other conditions in paragraph (c)(4)(ii) of this section are satisfied, the policy does not qualify as an excepted benefit under this paragraph (c)(4) because the benefits are not paid in a fixed dollar amount per day (or per other time period) of hospitalization or illness, and are not paid without regard to the services or items received. The conclusion would be the same even if the policy added a per day (or per other time period) term to the benefit description (for example, "$50 per blood test per day"), because the benefits are not paid regardless of the services or items received. (C) Example 3-- ( 1 ) Facts. An employer sponsors a group health plan that provides two benefit packages. The first benefit package includes benefits only for preventive services and excludes benefits for all other services. The second benefit package provides coverage through an insurance policy that pays a fixed dollar amount per day of hospitalization for a wide variety of illnesses that are not preventive services covered under the first benefit package. The two benefit packages are offered to employees at the same time and can be elected together. The benefit packages are not subject to a formal coordination of benefits arrangement. ( 2 ) Conclusion. Even if the other conditions in paragraph (c)(4)(ii) of this section are satisfied, the second benefit package's insurance policy does not qualify as an excepted benefit under this paragraph (c)(4) because the benefits under the second benefit package are coordinated with an exclusion of benefits under another group health plan maintained by the same plan sponsor (that is, the preventive-services-only benefit package). The conclusion would be the same even if the benefit packages were not offered to employees at the same time or if the second benefit package's insurance policy did not pay benefits associated with a wide variety of illnesses. (iv) Applicability date -- (A) For hospital indemnity or other fixed indemnity insurance sold or issued on or after a date 75 days after the date of publication of the final rule, the requirements of this paragraph (c)(4) apply for plan years beginning on or after the date 75 days after the date of publication of the final rule. (B) For hospital indemnity or other fixed indemnity insurance sold or issued before [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL], the requirements of this paragraph (c)(4) apply for plan years beginning on or after January 1, 2027, except that the requirements of paragraphs (c)(4)(ii)(D)( 2 )-( 4 ) and (c)(4)(v) of this section, apply for plan years beginning on or after [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL]. (C) Until the relevant applicability date for the requirements of this paragraph (c)(4), plans and issuers are required to continue to comply with the corresponding section of § 54.9831-1(c)(4) contained in the 26 CFR, part 54, edition revised as of April 1, 2023. (v) Severability. If any provision of this paragraph (c)(4) is held to be invalid or unenforceable by its terms, or as applied to any entity or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, along with other provisions not found invalid or unenforceable, including as applied to entities not similarly situated or to dissimilar circumstances, unless such holding is that the provision is invalid and unenforceable in all circumstances, in which event the provision shall be severable from the remainder of this paragraph (c)(4) and shall not affect the remainder thereof. DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Chapter XXV For the reasons stated in the preamble, the Department of Labor proposes to amend 29 CFR part 2590 as set forth below: PART 2590--RULES AND REGULATIONS FOR GROUP HEALTH PLANS 6. The authority citation for part 2590 continues to read as follows: Authority: 29 U.S.C. 1027, 1059, 1135, 1161-1168, 1169, 1181-1183, 1181 note, 1185, 1185a, 1185b, 1191, 1191a, 1191b, and 1191c; sec. 101(g), Pub. L. 104-191, 110 Stat. 1936; sec. 401(b), Pub. L. 105-200, 112 Stat. 645 (42 U.S.C. 651 note); sec. 512(d), Pub. L. 110-343, 122 Stat. 3881; sec. 1001, 1201, and 1562(e), Pub. L. 111-148, 124 Stat. 119, as amended by Pub. L. 111-152, 124 Stat. 1029; Division M, Pub. L. 113-235, 128 Stat. 2130; Secretary of Labor's Order 1-2011, 77 FR 1088 (Jan. 9, 2012). 7. Section 2590.701-2 is amended by revising the definition of "short-term, limited-duration insurance" to read as follows: § 2590.701-2 Definitions. Short-term, limited-duration insurance means health insurance coverage provided pursuant to a policy, certificate, or contract of insurance with an issuer that: (1) Has an expiration date specified in the policy, certificate, or contract of insurance that is no more than 3 months after the original effective date of the policy, certificate, or contract of insurance, and taking into account any renewals or extensions, has a duration no longer than 4 months in total. For purposes of this paragraph (1), a renewal or extension includes the term of a new short-term, limited-duration insurance policy, certificate, or contract of insurance issued by the same issuer to the same policyholder within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance; and (2) Displays prominently on the first page (in either paper or electronic form, including on a website) of the policy, certificate, or contract of insurance, and in any marketing, application, and enrollment materials (including reenrollment materials) provided to individuals at or before the time an individual has the opportunity to enroll (or reenroll) in the coverage, in at least 14-point font, the language in the following notice: "Notice to Consumers About Short-Term, Limited-Duration Insurance IMPORTANT: This is short-term, limited-duration insurance. This is temporary insurance. It isn't comprehensive health insurance. Review your policy carefully to make sure you understand what is covered and any limitations on coverage. - This insurance might not cover or might limit coverage for: preexisting conditions; or essential health benefits (such as pediatric, hospital, emergency, maternity, mental health, and substance use services, prescription drugs, or preventive care). - You won't qualify for Federal financial help to pay for premiums or out-of-pocket costs. - You aren't protected from surprise medical bills. - When this policy ends, you might have to wait until an open enrollment period to get comprehensive health insurance. Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) to review your options for comprehensive health insurance. If you're eligible for coverage through your employer or a family member's employer, contact the employer for more information. Contact your State department of insurance if you have questions or complaints about this policy." (3) If any provision of this definition of "short-term, limited-duration insurance" is held to be invalid or unenforceable by its terms, or as applied to any entity or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, along with other provisions not found invalid or unenforceable, including as applied to entities not similarly situated or to dissimilar circumstances, unless such holding is that the provision is invalid and unenforceable in all circumstances, in which event the provision shall be severable from the remainder of the definition and shall not affect the remainder thereof. 8. Section 2590.732 is amended by: a. Revising paragraph (c)(4)(i); b. Adding paragraph (c)(4)(ii)(D); c. Revising paragraph (c)(4)(iii); and d. Adding paragraphs (c)(4)(iv) and (c)(4)(v). The revisions and additions read as follows: § 2590.732 Special rules relating to group health plans. (c) * * * (4) * * * (i) Excepted benefits that are not coordinated. Coverage for only a specified disease or illness (for example, cancer-only policies) or hospital indemnity or other fixed indemnity insurance is excepted only if it meets each of the applicable conditions specified in paragraph (c)(4)(ii) of this section. (ii) * * * (D) With respect to hospital indemnity or other fixed indemnity insurance - ( 1 ) The benefits are paid in a fixed dollar amount per day (or per other time period) of hospitalization or illness (for example, $100/day) regardless of the actual or estimated amount of expenses incurred, services or items received, severity of illness or injury experienced by a covered participant or beneficiary, or other characteristics particular to a course of treatment received by a covered participant or beneficiary, and not on any other basis (such as on a per-item or per-service basis). ( 2 ) The plan or issuer displays prominently on the first page (in either paper or electronic form, including on a website) of any marketing, application, and enrollment materials that are provided to participants at or before the time participants are given the opportunity to enroll in the coverage, in at least 14-point font, the language in the following notice: "Notice to Consumers About Fixed Indemnity Insurance IMPORTANT: This is fixed indemnity insurance. This isn't comprehensive health insurance coverage and doesn't have to include most Federal consumer protections for health insurance. Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) to review your options for comprehensive health insurance. If you're eligible for coverage through your employer or a family member's employer, contact the employer for more information. Contact your State department of insurance if you have questions or complaints about this policy." ( 3 ) If participants are required to reenroll (in either paper or electronic form) for purposes of renewal or reissuance of the insurance, the notice described in paragraph (c)(4)(ii)(D)( 2 ) of this section is displayed in any marketing and reenrollment materials provided at or before the time participants are given the opportunity to reenroll in coverage. (4 ) If a plan or issuer provides a notice satisfying the requirements in paragraph (c)(4)(ii)(D)( 2 ) and ( 3 ) of this section to a participant, the obligation to provide the notice is considered to be satisfied for both the plan and issuer. (iii) Examples. The rules of this paragraph (c)(4) are illustrated by the following examples: (A) Example 1-- (1) Facts. An employer sponsors a group health plan that provides coverage through an insurance policy. The policy provides benefits only related to hospital stays at a fixed percentage of hospital expenses up to a maximum of $100 a day. ( 2 ) Conclusion. Even if the other conditions in paragraph (c)(4)(ii) of this section are satisfied, because benefits are paid based on a percentage of expenses incurred rather than a fixed dollar amount per day (or per other time period, such as per week), the policy does not qualify as an excepted benefit under this paragraph (c)(4). This is the result even if, in practice, the policy pays the maximum of $100 for every day of hospitalization. (B) Example 2-- ( 1 ) Facts. An employer sponsors a group health plan that provides coverage through an insurance policy. The policy provides benefits when a person receives certain specific items and services in a fixed amount, such as $50 per blood test or $100 per visit. The fixed amounts apply to each specific item or service and are not paid per day or per other time period of hospitalization or illness. ( 2 ) Conclusion. Even if the other conditions in paragraph (c)(4)(ii) of this section are satisfied, the policy does not qualify as an excepted benefit under this paragraph (c)(4) because the benefits are not paid in a fixed dollar amount per day (or per other time period) of hospitalization or illness, and are not paid without regard to the services or items received. The conclusion would be the same even if the policy added a per day (or per other time period) term to the benefit description (for example, "$50 per blood test per day"), because the benefits are not paid regardless of the services or items received. (C) Example 3-- ( 1 ) Facts. An employer sponsors a group health plan that provides two benefit packages. The first benefit package includes benefits only for preventive services and excludes benefits for all other services. The second benefit package provides coverage through an insurance policy that pays a fixed dollar amount per day of hospitalization for a wide variety of illnesses that are not preventive services covered under the first benefit package. The two benefit packages are offered to employees at the same time and can be elected together. The benefit packages are not subject to a formal coordination of benefits arrangement. ( 2 ) Conclusion. Even if the other conditions in paragraph (c)(4)(ii) of this section are satisfied, the second benefit package's insurance policy does not qualify as an excepted benefit under this paragraph (c)(4) because the benefits under the second benefit package are coordinated with an exclusion of benefits under another group health plan maintained by the same plan sponsor (that is, the preventive-services-only benefit package). The conclusion would be the same even if the benefit packages were not offered to employees at the same time or if the second benefit package's insurance policy did not pay benefits associated with a wide variety of illnesses. (iv) Applicability dates. (A) For hospital indemnity or other fixed indemnity insurance sold or issued on or after [ THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL ], the requirements of this paragraph (c)(4) apply for plans beginning on or after [ THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL ]. (B) For hospital indemnity or other fixed indemnity insurance sold or issued before [ THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL ], the requirements of this paragraph (c)(4) apply for plan years beginning on or after January 1, 2027, except that the requirements of paragraphs (c)(4)(ii)(D)( 2 )-( 4 ) and (c)(4)(iii)(A) of this section, apply for plan years beginning on or after [ THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL ]. (C) Until the relevant applicability date for the requirements of this paragraph (c)(4), plans and issuers are required to continue to comply with the corresponding section of § 2590.732(c)(4) contained in the 29 CFR, parts 1927 to end, edition revised as of July 1, 2022. (v) Severability. If any provision of this paragraph (c)(4) is held to be invalid or unenforceable by its terms, or as applied to any entity or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, along with other provisions not found invalid or unenforceable, including as applied to entities not similarly situated or to dissimilar circumstances, unless such holding is that the provision is invalid and unenforceable in all circumstances, in which event the provision shall be severable from the remainder of this paragraph (c)(4) and shall not affect the remainder thereof. * * * * * 9. Section 2590.736 is revised to read as follows: § 2590.736 Applicability dates. Sections 2590.701-1 through 2590.701-8 and 2590.731 through 2590.736 are applicable for plan years beginning on or after July 1, 2005. Until the applicability date for this regulation, plans and issuers are required to continue to comply with the corresponding sections of 29 CFR part 2590, contained in the 29 CFR, parts 1927 to end, edition revised as of July 1, 2022. Notwithstanding the previous sentence, for short-term, limited-duration insurance sold or issued on or after [ THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL ], the definition of "short-term, limited-duration insurance" in § 2590.701-2 applies for coverage periods beginning on or after [ THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL ]. For short-term, limited - duration insurance sold or issued before [ THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL ] (including any subsequent renewal or extension consistent with applicable law), the definition of "short-term, limited-duration insurance" in the corresponding section of § 2590.701-2 of this subchapter contained in the 29 CFR, parts 1927 to end, edition revised as of July 1, 2022, continues to apply, except that paragraph (2) of the definition of short-term, limited-duration insurance in § 2590.701-2 of this subchapter applies for coverage periods beginning on or after [ THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL ]. DEPARTMENT OF HEALTH AND HUMAN SERVICES For the reasons stated in the preamble, the Department of Health and Human Services proposes to amend 45 CFR parts 144, 146, and 148 as set forth below: PART 144--REQUIREMENTS RELATING TO HEALTH INSURANCE COVERAGE 10. The authority citation for part 144 continues to read as follows: Authority: Secs. 2701 through 2763, 2791, and 2792 of the Public Health Service Act, 42 U.S.C. 300gg through 300gg-63, 300gg-91, and 300gg-92. 11. Section 144.103 is amended by revising the definition of "short-term, limited-duration insurance" to read as follows: § 144.103 Definitions. * * * * * Short-term, limited-duration insurance means health insurance coverage provided pursuant to a policy, certificate, or contract of insurance with an issuer that: (1) Has an expiration date specified in the policy, certificate, or contract of insurance that is no more than 3 months after the original effective date of the policy, certificate, or contract of insurance, and taking into account any renewals or extensions, has a duration no longer than 4 months in total. For purposes of this paragraph (1), a renewal or extension includes the term of a new short-term, limited-duration insurance policy, certificate, or contract of insurance issued by the same issuer to the same policyholder within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance; and (2) Displays prominently on the first page (in either paper or electronic form, including on a website) of the policy, certificate, or contract of insurance, and in any marketing, application, and enrollment materials (including reenrollment materials) provided to individuals at or before the time an individual has the opportunity to enroll (or reenroll) in the coverage, in at least 14-point font, the language in the following notice: "Notice to Consumers About Short-Term, Limited-Duration Insurance IMPORTANT: This is short-term, limited-duration insurance. This is temporary insurance. It isn't comprehensive health insurance. Review your policy carefully to make sure you understand what is covered and any limitations on coverage. - This insurance might not cover or might limit coverage for: preexisting conditions; or essential health benefits (such as pediatric, hospital, emergency, maternity, mental health, and substance use services, prescription drugs, or preventive care). - You won't qualify for Federal financial help to pay for premiums or out-of-pocket costs. - You aren't protected from surprise medical bills. - When this policy ends, you might have to wait until an open enrollment period to get comprehensive health insurance. Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) to review your options for comprehensive health insurance. If you're eligible for coverage through your employer or a family member's employer, contact the employer for more information. Contact your State department of insurance if you have questions or complaints about this policy." (3) If any provision of this definition of "short-term, limited-duration insurance" is held to be invalid or unenforceable by its terms, or as applied to any entity or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, along with other provisions not found invalid or unenforceable, including as applied to entities not similarly situated or to dissimilar circumstances, unless such holding is that the provision is invalid and unenforceable in all circumstances, in which event the provision shall be severable from the remainder of the definition and shall not affect the remainder thereof. * * * * * PART 146--REQUIREMENTS FOR THE GROUP HEALTH INSURANCE MARKET 12. The authority citation for part 146 continues to read as follows: Authority: Secs. 2702 through 2705, 2711 through 2723, 2791, and 2792 of the Public Health Service Act (42 U.S.C. 300gg-1 through 300gg-5, 300gg-11 through 300gg- 23, 300gg-91, and 300gg-92). 13. Section 146.125 is revised to read as follows: § 146.125 Applicability dates. Section 144.103, §§ 146.111 through 146.119, 146.143, and 146.145 are applicable for plan years beginning on or after July 1, 2005 ( But see § 146.145(b)(4)(iv) for the applicability dates for hospital indemnity or other fixed indemnity insurance offered in the group market). Notwithstanding the previous sentence, for short-term, limited-duration insurance sold or issued on or after [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL], the definition of "short-term, limited-duration insurance" in § 144.103 of this subchapter applies for coverage periods beginning on or after [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL]. For short-term, limited-duration insurance sold or issued before [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL] (including any subsequent renewal or extension consistent with applicable law), the definition of "short-term, limited-duration insurance" in the corresponding section of § 144.103 of this subchapter contained in the 45 CFR, parts 1 to 199, edition revised as of October 1, 2021, continues to apply, except that paragraph (2) of the definition of short-term, limited-duration insurance in § 144.103 of this subchapter applies for coverage periods beginning on or after [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL]. 14. Section 146.145 is amended by-- a. Revising paragraph (b)(4)(i); b. Adding paragraph (b)(4)(ii)(D); c. Revising paragraph (b)(4)(iii); and d. Adding paragraphs (b)(4)(iv) and (b)(4)(v). The revisions and additions read as follows: § 146.145 Special rules relating to group health plans. * * * * * (b) * * * (4) * * * (i) Excepted benefits that are not coordinated. Coverage for only a specified disease or illness (for example, cancer-only policies) or hospital indemnity or other fixed indemnity insurance is excepted only if it meets each of the applicable conditions specified in paragraph (b)(4)(ii) of this section. (ii) * * * (D) With respect to hospital indemnity or other fixed indemnity insurance - ( 1 ) The benefits are paid in a fixed dollar amount per day (or per other time period) of hospitalization or illness (for example, $100/day) regardless of the actual or estimated amount of expenses incurred, services or items received, severity of illness or injury experienced by a covered participant or beneficiary, or other characteristics particular to a course of treatment received by a covered participant or beneficiary, and not on any other basis (such as on a per-item or per-service basis). ( 2 ) The plan or issuer displays prominently on the first page (in either paper or electronic form, including on a website) of any marketing, application, and enrollment materials that are provided to participants at or before the time participants are given the opportunity to enroll in the coverage, in at least 14-point font, the language in the following notice: "Notice to Consumers About Fixed Indemnity Insurance IMPORTANT: This is fixed indemnity insurance. This isn't comprehensive health insurance coverage and doesn't have to include most Federal consumer protections for health insurance. Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) to review your options for comprehensive health insurance. If you're eligible for coverage through your employer or a family member's employer, contact the employer for more information. Contact your State department of insurance if you have questions or complaints about this policy." ( 3 ) If participants are required to reenroll (in either paper or electronic form) for purposes of renewal or reissuance of the insurance, the notice described in paragraph (b)(4)(ii)(D)( 2 ) of this section is displayed in any marketing and reenrollment materials provided at or before the time participants are given the opportunity to reenroll in coverage. (4 ) If a plan or issuer provides a notice satisfying the requirements in paragraph (b)(4)(ii)(D)( 2 ) and ( 3 ) of this section to a participant, the obligation to provide the notice is considered to be satisfied for both the plan and issuer. (iii) Examples. The rules of this paragraph (b)(4) are illustrated by the following examples: (A) Example 1-- (1) Facts. An employer sponsors a group health plan that provides coverage through an insurance policy. The policy provides benefits only related to hospital stays at a fixed percentage of hospital expenses up to a maximum of $100 a day. ( 2 ) Conclusion. Even if the other conditions in paragraph (b)(4)(ii) of this section are satisfied, because benefits are paid based on a percentage of expenses incurred rather than a fixed dollar amount per day (or per other time period, such as per week), the policy does not qualify as an excepted benefit under this paragraph (b)(4). This is the result even if, in practice, the policy pays the maximum of $100 for every day of hospitalization. (B) Example 2-- ( 1 ) Facts. An employer sponsors a group health plan that provides coverage through an insurance policy. The policy provides benefits when a person receives certain specific items and services in a fixed amount, such as $50 per blood test or $100 per visit. The fixed amounts apply to each specific item or service and are not paid per day or per other time period of hospitalization or illness. ( 2 ) Conclusion. Even if the other conditions in paragraph (b)(4)(ii) of this section are satisfied, the policy does not qualify as an excepted benefit under this paragraph (b)(4) because the benefits are not paid in a fixed dollar amount per day (or per other time period) of hospitalization or illness, and are not paid without regard to the services or items received. The conclusion would be the same even if the policy added a per day (or per other time period) term to the benefit description (for example, "$50 per blood test per day"), because the benefits are not paid regardless of the services or items received. (C) Example 3-- ( 1 ) Facts. An employer sponsors a group health plan that provides two benefit packages. The first benefit package includes benefits only for preventive services and excludes benefits for all other services. The second benefit package provides coverage through an insurance policy that pays a fixed dollar amount per day of hospitalization for a wide variety of illnesses that are not preventive services covered under the first benefit package. The two benefit packages are offered to employees at the same time and can be elected together. The benefit packages are not subject to a formal coordination of benefits arrangement. ( 2 ) Conclusion. Even if the other conditions in paragraph (b)(4)(ii) of this section are satisfied, the second benefit package's insurance policy does not qualify as an excepted benefit under this paragraph (b)(4) because the benefits under the second benefit package are coordinated with an exclusion of benefits under another group health plan maintained by the same plan sponsor (that is, the preventive-services-only benefit package). The conclusion would be the same even if the benefit packages were not offered to employees at the same time or if the second benefit package's insurance policy did not pay benefits associated with a wide variety of illnesses. (iv) Applicability dates. (A) For hospital indemnity or other fixed indemnity insurance sold or issued on or after [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL], the requirements of this paragraph (b)(4) apply for plan years beginning on or after [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL]. (B) For hospital indemnity or other fixed indemnity insurance sold or issued before [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL], the requirements of this paragraph (b)(4) apply for plan years beginning on or after January 1, 2027, except that the requirements of paragraphs (b)(4)(ii)(D)( 2 )-( 4 ) of this section apply for plan years beginning on or after [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL]. (C) Until the relevant applicability date for the requirements of this paragraph (b)(4), plans and issuers are required to continue to comply with the corresponding section of § 146.145(b)(4) contained in the 45 CFR, parts 1 to 199, edition revised as of October 1, 2021. (v) Severability. If any provision of this paragraph (b)(4) is held to be invalid or unenforceable by its terms, or as applied to any entity or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, along with other provisions not found invalid or unenforceable, including as applied to entities not similarly situated or to dissimilar circumstances, unless such holding is that the provision is invalid and unenforceable in all circumstances, in which event the provision shall be severable from the remainder of this paragraph (b)(4) and shall not affect the remainder thereof. * * * * * PART 148--REQUIREMENTS FOR THE INDIVIDUAL HEALTH INSURANCE MARKET 15. The authority citation for part 148 continues to read as follows: Authority: Secs. 2701 through 2763, 2791, and 2792 of the Public Health Service Act (42 U.S.C. 300gg through 300gg-63, 300gg-91, and 300gg-92), as amended. 16. Section 148.102 is amended by revising paragraph (b) to read as follows: § 148.102 Scope and applicability dates. * * * * * (b) Applicability dates. Except as provided in § 148.124 (certificate of creditable coverage), § 148.170 (standards relating to benefits for mothers and newborns), and § 148.180 (prohibition of health discrimination based on genetic information), the requirements of this part apply to health insurance coverage offered, sold, issued, renewed, in effect, or operated in the individual market after June 30, 1997. Notwithstanding the previous sentence, for short-term, limited-duration insurance sold or issued on or after [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL], the definition of "short-term, limited-duration insurance" in § 144.103 of this subchapter applies for coverage periods beginning on or after [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL]. For short-term, limited-duration insurance sold or issued before [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL] (including any subsequent renewal or extension consistent with applicable law), the definition of "short-term, limited-duration insurance" in the corresponding section of § 144.103 of this subchapter contained in the 45 CFR, parts 1 to 199, edition revised as of October 1, 2021, continues to apply, except that paragraph (2) of the definition of "short-term, limited-duration insurance" in § 144.103 of this subchapter applies for coverage periods beginning on or after [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL]. 17. Section 148.220 is amended by revising paragraph (b)(4) to read as follows: § 148.220 Excepted benefits. * * * * * (b) * * * (4) Hospital indemnity or other fixed indemnity insurance only if - (i) There is no coordination between the provision of benefits and an exclusion of benefits under any other health coverage maintained by the same issuer with respect to the same policyholder. (ii) The benefits are paid in a fixed dollar amount per day (or per other time period) of hospitalization or illness (for example, $100/day) regardless of the actual or estimated amount of expenses incurred, services or items received, severity of illness or injury experienced by a covered individual, or any other characteristics particular to a course of treatment received by the covered individual and not on any other basis (such as on a per-item or per-service basis), and without regard to whether benefits are provided with respect to the event under any other health insurance coverage maintained by the same health insurance issuer with respect to the same policyholder. (iii) The issuer displays prominently on the first page of any marketing, application, and enrollment or reenrollment materials that are provided at or before the time an individual has the opportunity to apply, enroll or reenroll in coverage, and on the first page of the policy, certificate, or contract of insurance, in at least 14-point font, the language in the following notice: "Notice to Consumers About Fixed Indemnity Insurance IMPORTANT: This is fixed indemnity insurance. This isn't comprehensive health insurance coverage and doesn't have to include most Federal consumer protections for health insurance. Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) to review your options for comprehensive health insurance. If you're eligible for coverage through your employer or a family member's employer, contact the employer for more information. Contact your State department of insurance if you have questions or complaints about this policy." (iv)(A) For hospital indemnity or other fixed indemnity insurance sold or issued on or after [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL], the requirements of this paragraph (b)(4) apply for coverage periods beginning on or after [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL]. (B) For hospital indemnity or other fixed indemnity insurance sold or issued before [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL], the requirements of this paragraph (b)(4) apply for coverage periods beginning on or after January 1, 2027, except that the requirements of paragraph (b)(4)(iii) of this section apply for coverage periods beginning on or after [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL]. (C) Until the relevant applicability date for the requirements of this paragraph (b)(4), issuers are required to continue to comply with the corresponding section of § 148.220(b)(4) contained in the 45 CFR, parts 1 to 199, edition revised as of October 1, 2021. (v) Severability. If any provision of this paragraph (b)(4) is held to be invalid or unenforceable by its terms, or as applied to any entity or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, along with other provisions not found invalid or unenforceable, including as applied to entities not similarly situated or to dissimilar circumstances, unless such holding is that the provision is invalid and unenforceable in all circumstances, in which event the provision shall be severable from the remainder of this paragraph (b)(4) and shall not affect the remainder thereof. * * * * *

Private Letter Ruling Number: 202052011 Internal Revenue Service September 22, 2020 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202052011 Release Date: 12/24/2020 Index Number: 852.00-00, 9100.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:FIP:B01 PLR-112068-20 Date: September 22, 2020 Dear *******: This ruling responds to a letter dated April 29, 2020, submitted on behalf of Taxpayer. Taxpayer requests an extension of time under sections 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make an election under section 852(b)(8)(A) of the Internal Revenue Code (the "Code") ("section 852(b)(8)(A) election") for Year 1. FACTS Taxpayer is a corporation organized under the laws of State and is a nondiversified, closed-end management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940. Taxpayer has elected to be a regulated investment company ("RIC") under subchapter M of chapter 1 of the Code. Taxpayer has operated in a manner intended to qualify as a RIC at all times since it commenced operations. Taxpayer uses a fiscal year ending September 30 as its taxable year and an accrual method as its overall method of accounting. Advisor, an affiliate of Taxpayer, manages Taxpayer pursuant to an advisory and management agreement. Administrator, also an affiliate of Taxpayer, provides administrative services to Taxpayer pursuant to an administration agreement. None of Taxpayer, Advisor, or Administrator has an internal tax department. Taxpayer has engaged Firm 1 to perform income tax compliance and consulting services. Taxpayer's federal income tax return, Form-1120 RIC, U.S. Income Tax Return for Regulated Investment Companies, for Year 1 ("Year 1 Return") was due on Date 1. Taxpayer timely filed Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns to extend the due date of its Year 1 Return to Date 2. Taxpayer provided Firm 1 with the information necessary to prepare Taxpayer's Year 1 Return. Based on discussions between Firm 1 and Taxpayer's Chief Financial Officer, Firm 1 understood that Taxpayer intended to make a section 852(b)(8)(A) election for Year 1 to defer its "qualified late-year loss" (as defined in section 852(b)(8)(B)), consisting of its "post-October capital loss" (as defined in section 852(b)(8)(C)). Accordingly, in completing Schedule M-1, Reconciliation of Income (Loss) per Books with Income per Return ("Schedule M-1"), Line 5, Expenses recorded on books this year not included on this return (itemize) ("Line 5"), and associated Statement 6, Firm 1 reported that Taxpayer deferred a post-October net capital loss in the amount of x. However, due to an administrative oversight, Firm 1 inadvertently failed to complete Schedule K, Other Information ("Schedule K"), line 12, Section 852(b)(8) election. On or about Date 3, Firm 1 provided Taxpayer with a draft of the Year 1 Return. During its review, Taxpayer failed to discover that Schedule K, line 12, had not been completed. On or about Date 4, Taxpayer provided Firm 1 with review comments on the draft Year 1 Return. On Date 5, Firm 1 transmitted the final version of the Year 1 Return to Taxpayer. During its final reviews of the Year 1 Return, neither Taxpayer nor Firm 1 management identified that Schedule K, line 12, had not been completed. Taxpayer timely filed its Year 1 Return on Date 2. On Date 6, as part of its audit of Taxpayer's financial statements for Year 1, a partner at Firm 2, Taxpayer's financial auditor, observed that Taxpayer's Year 1 Return reflected that Taxpayer had deferred the Taxpayer's post-October net capital loss, but that Taxpayer had not completed Schedule K, line 12, indicating that Taxpayer was making a section 852(b)(8)(A) election. Taxpayer's management immediately contacted Firm 1 to determine if the Year 1 Return that Taxpayer provided to Firm 2 was a complete copy, and if so, what remedial actions, if any, could be taken to ensure a valid section 852(b)(8)(A) election was in place for Year 1. Firm 1 confirmed that the Year 1 Return provided to Firm 2 was a complete copy, and a managing director at Firm 1 notified Taxpayer of the possibility of requesting relief for a late section 852(b)(8)(A) election under sections 301.9100-1 through 301.9100-3. Taxpayer makes the following additional representations: 1. The request for relief was filed before the failure to make the regulatory election was discovered by the Internal Revenue Service ("Service"). 2. Granting the relief requested will not result in Taxpayer having a lower tax liability in the aggregate for all years to which the election apply than it would have had if the election had been timely made (taking into account the time value of money). 3. Taxpayer does not seek to alter a return position for which an accuracy-related penalty has been or could have been imposed under section 6662 at the time it requested relief and the new position requires or permits a regulatory election for which relief is requested. 4. Being fully informed of the required regulatory election and related tax consequences, Taxpayer did not choose to not file the election. 5. Taxpayer is not using hindsight in requesting relief. No specific facts have changed since the due date for making the election that make the election more advantageous to Taxpayer. 6. The period of limitations on assessment under section 6501(a) has not expired for Taxpayer for the taxable year in which the election should have been filed, nor for any taxable year(s) that would have been affected by the election had it been timely filed. In addition, affidavits on behalf of Taxpayer and Firm 1 have been provided as required by sections 301.9100-3(e)(2) and (3). LAW AND ANALYSIS Section 852(b)(8)(A) provides that a RIC may elect for any taxable year to treat any portion of any qualified late-year loss for such taxable year as arising on the first day of the following taxable year. The term "qualified late-year loss" means (i) any post-October capital loss, and (ii) any late-year ordinary loss. See section 852(b)(8)(B). The term "post-October capital loss" means (i) any net capital loss attributable to the portion of the taxable year after October 31, or (ii) if there is no such loss, (I) any net long-term capital loss attributable to such portion of the taxable year, or (II) any net short-term capital loss attributable to such portion of the taxable year. See section 852(b)(8)(C). Notice 2015-41, 2015-24 I.R.B. 1058, provides that, pending further guidance, a RIC makes a section 852(b)(8)(A) election for a taxable year by giving effect to its elective deferral in computing its capital gains and losses for that taxable year and by completing its income tax return (including any necessary schedules) for the taxable year in accordance with the instructions for those items applicable to the election. Section 301.9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Code except subtitles E, G, H, and I. Section 301.9100-1(b) defines a regulatory election as an election whose due date is prescribed by regulations or by a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin. Section 301.9100-3(a) through (c)(1) sets forth rules that the Service generally will use to determine whether, under the particular facts and circumstances of each situation, the Commissioner will grant an extension of time for regulatory elections that do not meet the requirements of section 301.9100-2. Section 301.9100-3(a) provides that requests for relief subject to this section will be granted when the taxpayer provides the evidence (including affidavits described in section 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government. Section 301.9100-3(b) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer (i) requests relief under this section before the failure to make the regulatory election is discovered by the Service; (ii) failed to make the election because of intervening events beyond the taxpayer's control; (iii) failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer's experience and the complexity of the return or issue), the taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the written advice of the Service; or (v) reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election. A taxpayer is deemed to have not acted reasonably and in good faith if the taxpayer (i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested; (ii) was informed in all material respects of the required election and related tax consequences, but chose not to file the election; or (iii) uses hindsight in requesting relief. Section 301.9100-3(c)(1) provides that a reasonable extension of time to make a regulatory election will be granted only when the interests of the Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i) provides that the interests of the Government are prejudiced if granting relief would result in the taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Section 301.9100-3(c)(1)(ii) provides that the interests of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under section 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. CONCLUSION Based upon the information submitted and representations made, we conclude that Taxpayer has satisfied the requirements for granting a reasonable extension of time to make a section 852(b)(8)(A) election. Accordingly, Taxpayer has 90 days from the date of this letter to make its intended election. This ruling is limited to the timeliness of the filing of the section 852(b)(8)(A) election. This ruling's application is limited to the facts, representations, Code sections, and regulations cited herein. No opinion is expressed with regard to whether Taxpayer otherwise qualifies as a RIC under subchapter M of chapter 1 of the Code. No opinion is expressed with regard to whether the tax liability of Taxpayer is not lower in the aggregate for all years to which the election applies than such tax liability would have been if the election had been timely made (taking into account the time value of money). Upon audit of the federal income tax returns involved, the director's office will determine such tax liability for the years involved. If the director's office determines that such tax liability is lower, that office will determine the federal income tax effect. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. Sincerely, Steven Harrison Branch Chief, Branch 1 Office of Associate Chief Counsel (Financial Institutions & Products) cc:

Private Letter Ruling Number: 202301007 Internal Revenue Service October 12, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202301007 Release Date: 1/6/2023 Index Number: 336.05-00, 9100.22-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:CORP:3 PLR-109953-22 Date: October 12, 2022 Dear ******: This letter responds to a letter dated May 13, 2022, submitted on behalf of LLC (as successor of S Corporation Target), Shareholder, and Purchaser (collectively, "the Parties"), requesting an extension of time under §301.9100-3 of the Procedure and Administration Regulations to file an election. The Parties are requesting an extension of time to file the election statement under §1.336-2(h)(3)(iii) of the Income Tax Regulations ("Election Statement") with respect to Purchaser's acquisition of all the stock of S Corporation Target from Shareholder on Date 1. The material information submitted is summarized below. S Corporation Target was a limited liability company that elected to be treated as an S corporation for federal tax purposes. Purchaser is a limited liability company that is classified as a partnership for federal tax purposes. On Date 1, Purchaser, through DE1 and DE2 (disregarded entities for federal tax purposes), acquired all the stock of S Corporation Target from Shareholder (the "Stock Disposition"). It has been represented that the Stock Disposition qualified as a "qualified stock disposition" as defined in §1.336-1(b)(6). Subsequently, S Corporation Target merged into LLC, a limited liability company that is a disregarded entity for federal tax purposes wholly owned by DE2. The Parties intended to make a section 336(e) election for the Stock Disposition but, for various reasons, a timely election was not fully made. Subsequently, this request was submitted, under §301.9100-3, for an extension of time to file the Election Statement. The Parties each represented that they are not seeking to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662. Regulations promulgated under section 336(e) permit certain sales, exchanges, or distributions of stock of a corporation to be treated as asset dispositions if: (1) the disposition is a "qualified stock disposition" as defined in §1.336-1(b)(6); and (2) a section 336(e) election is made. Section 1.336-2(h)(3) provides that a section 336(e) election for an S corporation target is made by: (i) all of the S corporation shareholders, including those who do not dispose of any stock in the qualified stock disposition, and the S corporation target entering into a written, binding agreement, on or before the due date (including extensions) of the federal income tax return of the S corporation target for the taxable year that includes the disposition date, to make a section 336(e) election; (ii) the S corporation target retaining a copy of the written agreement; and (iii) the S corporation target attaching the section 336(e) election statement, described in §1.336-2(h)(5) and (6), to its timely filed (including extensions) federal income tax return for the taxable year that includes the disposition date. Under §301.9100-1(c), the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-1(a). Section 301.9100-2 provides automatic extensions of time for making certain elections. Requests for relief under §301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. Section 301.9100-3(a). The time for filing the Election Statement is fixed by the regulations ( i.e., §1.336-2(h)(3)(iii)). Therefore, the Commissioner has discretionary authority under §301.9100-3 to grant an extension of time to file the Election Statement, provided the Parties acted reasonably and in good faith, the requirements of §§301.9100-1 and 301.9100-3 are satisfied, and granting relief would not prejudice the interests of the government. Information, affidavits, and representations submitted by the Parties, Company Official, and Tax Professional explain the circumstances that resulted in the failure to timely file the Election Statement. The information establishes that the Parties reasonably relied on a qualified tax professional who failed to file, or advise them to timely file, the Election Statement and that the request for relief was filed before the failure to file the Election Statement was discovered by the Internal Revenue Service. See §301.9100-3(b)(1)(i) and (v). Based on the facts and information submitted, including the representations made, we conclude that the Parties have acted reasonably and in good faith, the requirements of §§301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government. Accordingly, an extension of time is granted under §301.9100-3, until 75 days from the date on this letter, to file the Election Statement. WITHIN 75 DAYS OF THE DATE ON THIS LETTER, LLC, as successor of S Corporation Target, must file the Election Statement in accordance with §1.336-2(h)(iii). The Election Statement must be attached to S Corporation Target's tax return for the taxable year including Date 1. In addition, a copy of this letter must be attached to S Corporation Target's return. Alternatively, if S Corporation Target's return is filed electronically, the requirement of attaching a copy of this letter to the return may be satisfied by attaching a statement to its return that provides the date on, and control number (PLR-109953-22) of, this letter ruling. WITHIN 150 DAYS OF THE DATE ON THIS LETTER, all relevant parties must file or amend, as applicable, all returns and amended returns (if any) necessary to report the transaction consistently with the making of a section 336(e) election for the taxable year in which the transaction was consummated (and for any other affected taxable year). The above extension of time is conditioned on the Parties' tax liabilities (if any) being not lower, in the aggregate, for all years to which the section 336(e) election applies than it would have been if the Election Statement had been timely filed (taking into account the time value of money.) No opinion is expressed as to the taxpayers' tax liabilities for the years involved. A determination thereof will be made by the applicable Director's office upon audit of the federal income tax returns involved. We express no opinion as to: (1) whether the Stock Disposition qualifies as a "qualified stock disposition"; or (2) any other tax consequences arising from the section 336(e) election. In addition, we express no opinion as to the tax consequences of filing the return or making the section 336(e) election late under the provisions of any other section of the Code and regulations, or as to the tax treatment of any conditions existing at the time of, or resulting from, filing the section 336(e) election late that are not specifically set forth in the above ruling. For purposes of granting relief under §301.9100-3, we have relied on certain statements and representations made by the Parties, Company Official, and Tax Professional. However, the Director should verify all essential facts. In addition, notwithstanding that an extension is granted under §301.9100-3 to file the section 336(e) election, penalties and interest that would otherwise be applicable, if any, continue to apply. This letter is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent. Pursuant to the Power of Attorney on file in this office, a copy of this letter is being sent to your authorized representatives. Sincerely, Thomas I. Russell Thomas I. Russell Chief, Branch 1 Office of Associate Chief Counsel (Corporate) cc:

Private Letter Ruling Number: 202417023 Internal Revenue Service January 29, 2024 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Exempt Organizations Examinations 550 Main Street Cincinnati, OH 45202-3222 Release Number: 202417023 Release Date: 4/26/2024 UIL Code: 501.03-00 Date: January 29, 2024 Taxpayer ID number (last 4 digits): Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Last day to file petition with United States Tax Court: April 28, 2024 CERTIFIED MAIL - Return Receipt Requested Dear ******: Why we are sending, you this letter This is a final determination that you don't qualify for exemption front federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective ******. Your determination letter dated ******, is revoked. Our adverse determination as to your exempt status was made for the following reasons: Organizations described in IRC Section 501(c)(3) and exempt from tax under Section 501(a) must be both organized and operated exclusively for exempt purposes and no part of the net earnings may inure to the benefit of any private shareholder or individual. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. You have not demonstrated that you are both organized and operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(1). As such, you failed to meet the requirement of IRC Section 501(c)(3) and Treasury Regulations Section 1.501(c)(3)-1(a). Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov. Contributions to your organization are no longer deductible tinder IRC Section 170. What you must do if you disagree with this determination It you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fillable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: US Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Taxpayer Advocate Office Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies. Keep the original letter for your records. Sincerely, Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 cc: Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities 550 Main Street Cincinnati OH 45202-3222 Date: 08/18/2023 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact information: Name: ID number: Telephone: Response due date: September 18, 2023 CERTIFIED MAIL -- Return Receipt Requested Dear ******: Why you're receiving this letter If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3)] for the periods above. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, for Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 ISSUES: Should the tax-exempt status of ****** (EO) be revoked because it ceased to operate as Internal Revenue Code Section 501(c)(3) organization? FACTS: EO was incorporated ******, in the state of ******. EO was established exclusively for charitable and educational purposes. EO's articles of incorporation state that the property of the corporation is irrevocably dedicated to charitable purposes and upon dissolution of organization, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code and no part of the net income or assets of this corporation shall ever inure to the benefit of any director, officer, or member or to the benefit of any private person. EO submitted ******, on ******. On ******, the IRS issued a determination letter determining that EO was exempt under IRC section 501(a) as an organization described in IRC Section 501(c)(3). EO filed ****** for the years ending ******. EO was Dissolved Administratively in the State of ****** on ****** per Certificate of Administrative Dissolution/Revocation. Assets of EO have not been distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code. EO stopped providing day care services and ceased operations at the end of ****** and subsequently became a ******. ****** initially reported as a Schedule C sole proprietorship on EO officer ****** personal tax return and after that made the S-Corporation Election and has filed ****** for ******. There are no meeting minutes for this period. EO was advised to close its bank accounts and merge all existing transactions into the ****** bank account, but it still had assets at the end of ******, so a ****** return was filed. EO was advised to wrap up its affairs and close its accounts each year but as of the end of this had not been done. There are no publications. There are no contracts. There has not been any solicitation of funds. EO received it's funding from state government agencies before and after ******, and fees paid by its customers prior to ******. EO continued to receive income and pay expenses in ******. Income received and expenses incurred were all for the benefit of ****** and were journaled over to its books and reported on its tax return. The same occurred in ******. LAW: Internal Revenue Code §501(a) exempts from tax organizations described in section 501(c)(3). §501(c)(3) provides for the exemption from federal income tax of organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, provided that no part of their net earnings inures to the benefit of any private shareholder or individual. Treasury Regulations §1.501(c)(3)-1(c)(2) Operational test, Distribution of earnings (1) organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. GOVERNMENT'S POSITION: EO has been administratively dissolved by the state of ******. EO has ceased operation as an exempt organization under IRC 501(c)(3). EO has not distributed its assets for one or more exempt purposes. The assets were distributed to the EO officers for profit organization. EO is now operating as a for profit entity. EO exempt status should be revoked. TAXPAYER'S POSITION: EO has agreed to the revocation of its IRC 501(c)(3) status. EO officer has signed and acknowledged form 6018 - Consent to Proposed Action. CONCLUSION: EO exempt status as an IRC 501(c)(3) organization should be revoked as of ******. The organization will be required to filed ******.

Private Letter Ruling Number: 202321007 Internal Revenue Service February 23, 2023 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Exempt Organizations Examinations Release Number: 202321007 Release Date: 5/26/2023 UIL Code: 501.03-00 Date: February 23, 2023 Taxpayer ID number (last 4 digits): Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Last day to file petition with United States Tax Court: May 24, 2023 CERTIFIED MAIL - Return Receipt Requested Dear ******: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective ******. Your determination letter dated ******, is revoked. Our adverse determination as to your exempt status was made for the following reasons: You have failed to produce documents to establish that you are operated exclusively for exempt purposes within the meaning of IRC Section 501(c)(3), and that no part of your net earnings inure to the benefit of private shareholders or individuals. Also, you have failed to keep adequate books and records as required by IRC Section 6001 and the regulations thereunder. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a finable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: US Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies. Keep the original letter for your records. Sincerely, Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: September 29, 2022 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact information: Name: ID number: Telephone: Response due date: October 31, 2022 CERTIFIED MAIL -- Return Receipt Requested Dear ******: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, for Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 Form 4621-A Publications 892 & 3498-A State Information Date of Notice: Issues: Whether ****** (the organization), which qualified for exemption from Federal income tax under Section 501(c)(3) of the Internal Revenue Code, should be revoked due to its failure to respond and produce records? Facts: ****** applied for tax-exempt status by filing the ******, on ******, and was granted tax-exempt status as a 501(c)(3) on ******, with an effective date of ******. An organization exempt under 501(c)(3) needs to be organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes and to foster national and amatuer sports competition. The organization was selected for audit to ensure that the activities and operations align with their approved exempt status. The organization failed to respond to the Internal Revenue Service attempts to obtain information to perform an audit of ****** for the tax year ******. The organization has not filed a ****** series return for the tax years ****** and ******. The ****** list the phone number of ****** for the president, ****** of ******. Per the ****** website, it lists the organization as active but has not filed an annual report since it's organization. A copy is attached from the state website. - Correspondence for the audit was as follows: o ****** with attachments, was mailed to the organization on ******, with a response date of ******. This letter was not return by the post office as being undeliverable. o ****** with attachments, was mailed certified to ****** on ******, with a response date ******, Article Number ******. Per the ****** tracking, this was picked up at the ****** on ****** at ****** pm. The return receipt was received back at the Internal Revenue Service whose date stamp cannot be read. o ******, ******, was mailed to ******, on ******, with a response date of ******. This letter was forwarded on to the organization's new address and shows as being received and signed for on ******. Letter sent certified with certificate number: ******. ****** tracking service shows certified letter received on ******. o ****** with copy of ******, ****** and other attachments was mailed to the organization on ******, to the new address of ******. It was sent certified with certified number: ******. ****** Tracking report indicates certified ****** was received on ******. o ****** with copy of ******, ******, and ******, ******, and ****** enclosed. Letter was addressed to the organization's current address with a certified certificate attached. The certified number is: ******. ****** tracking service shows it being delivered on ******. o ****** was sent to organization for them to complete the compilation of material requested be sent in. A copy of the ****** was included with the letter since it had not been addressed yet. The letter was sent to the new address but was not sent certified. - Telephone contact for the audit was as follows: o ******, Tax Compliance Officer (TCO) called the phone number listed on the ****** and ****** for ****** for the President of ****** and received ******. Left a message for an officer of the organization to return my phone call. o ******, based on information received in a prior contact attempt, I called ****** the president at ****** and the Director, ****** and left a voice message to call me back as soon as possible. o ******, called the phone number listed on ****** and ****** for the President of ****** as well as the Director's number ****** and received a voice message for numbers. Left a message for the president and the director to return my phone call. o ******, I called the president, and he did pick up the phone call and told me they moved, along with the organization and he gave me their new address as ******. He asked that I send a letter to him requesting the information again which I said I would do so. I called the director to let her know we would be sending ****** along with the ****** to their new address and asked her to call me back. o ******, I called ****** the president ****** and the director ****** and left a message to inform them I tracked their and saw it was delivered to their new address and signed for on ******. I asked ****** to give me a call as soon as it was possible. o ******, I called ****** the president ****** and the director ****** and left a voice message to both to call me back otherwise I would be proceeding with revocation procedures. o ******, Upon receiving the ****** with attachments the President of the organization called and aske me what we needed from them. I informed him everything requested was in the Form 4564 that was delivered with the ****** sent to them shortly after ****** was issued. o ******, I received a call from ******, who said she was ****** of the directors of the organization. She asked if they still had time to send in the information I had request to avoid revocation. I told her if they sent me the information that was on the ****** it would be helpful in completing the examination. She said they would try and get the information to me. Law: Internal Revenue Code (IRC) §501(c)(3) of the Code provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual. IRC §511 of the Internal Revenue Code imposes a tax at corporate rates under section 11 on the unrelated business taxable income of certain tax-exempt organizations. IRC §6001 of the Code provides that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. IRC §6033(a)(1) of the Code provides, except as provided in section 6033(a)(2), every organization exempt from tax under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts and disbursements, and such other information for the purposes of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, and keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Treasury Regulations (Regulation) 1.501(c)(3)-1 In order to be exempt under §501(c)(3) the organization must be both organized and operated exclusively for one or more of the purposes specified in the section. (religious, charitable, scientific, testing for public safety, literary or educational). Regulation §1.501(c)(3)-1(a)(1) of the regulations states that in order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Regulation 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will not be regarded as "operated exclusively" for one or more exempt purposes described in section 501(c)(3) of the Code if more than an insubstantial part of its activities is not in furtherance of a 501(c)(3) purpose. Accordingly, the organization does not qualify for exemption under section 501(c)(3) of the Code. Regulation §1.6001-1(c) of the Code provides that such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and §§ 1.6033-1 through 1.6033-3. Regulation §1.6001-1(e) of the Code provides that the books or records required by this section shall be kept at all time available for inspection by authorized internal revenue officers or employees, and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law. Regulation §1.6033-1(h)(2) of the regulations provides that every organization which has established its right to exemption from tax, whether or not it is required to file an annual return of information, shall submit such additional information as may be required by the district director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter F (section 501 and the following), chapter 1 of the Code and section 6033. Regulation §1.61-1 of the regulations provides that Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. Rev.Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Organization's Position Taxpayer's position is unknown at this time. Government's Position Based on the above facts, the organization did not respond to verify that they are organized and operated exclusively for one or more of the purposes specified in IRC Section 501(c)(3). If an organization fails to meet either the organizational test or the operational test, it is not exempt. In accordance with the above-cited provisions of the Code and regulations under sections 6001 and 6033, organizations recognized as exempt from federal income tax must meet certain reporting requirements. These requirements relate to the filing of a complete and accurate annual information (and other required federal tax forms) and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated business income tax. Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations shall submit additional information for the purpose on enabling the Internal Revenue Service to inquire further into its exempt status. Using the rationale that was developed in Revenue Ruling 59-95, the Organization's failure to provide requested information should result in the termination of exempt status. Conclusion: Based on the foregoing reasons, the organization does not qualify for exemption under section 501(c)(3) and its tax-exempt status should be revoked. It is the IRS's position that the organization failed to establish that it meets the reporting requirements under IRC §§ 6001 and 6033 to be recognized as exempt from federal income tax under IRC § 501(c)(3). Furthermore, the organization has not established that it is observing the conditions required for the continuation of its exempt status or that it is organized and operated exclusively for an exempt purpose. Accordingly, the organization's exempt status is revoked effective ******. Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods after ******.

Private Letter Ruling Number: 202233017 Internal Revenue Service May 10, 2021 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Release Number: 202233017 Release Date: 8/19/2022 UIL Code: 501.04-00 Date: May 10, 2021 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: CERTIFIED MAIL - RETURN RECEIPT REQUESTED: Dear *******: Why we are sending you this letter This is a final determination explaining why your organization doesn't qualify as an organization described in Internal Revenue Code (IRC) Section 501(c)(4) for the tax periods above. In the future, if you believe your organization qualifies for tax-exempt status and would like a determination letter from the Internal Revenue Service, you can request a determination by filing Form 1024, Application for Recognition of Exemption Under Section 501(a), or Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code, (as applicable) and paying the required user fee. Our adverse determination as to your exempt status was made for the following reasons: During our examination of the return indicated above, we determined that your organization was not described in IRC Section 501(c)(4) for the tax period and therefore, it does not qualify for exemption from federal income tax. This letter is not a determination of your exempt status under IRC Section 501 for any period other than the tax period listed above. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit www.irs.gov. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims or 3) the United States District Court for the District of Columbia. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Taxpayer Advocate Office Or call TAS at 877-777-4778 For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. Keep the original letter for your records. Sincerely, Sean E. O'Reilly Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: 06/15/2020 Taxpayer ID number: Form: Tax periods ended: Person to contact: Employee ID: Telephone: Fax: Manager's contact information: Employee ID: Response due date: 07/10/2020 CERTIFIED MAIL -- Return Receipt Requested Dear *******: Why you're receiving this letter If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(4) for the periods above. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800 TAX FORM (800 829 3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, Sean E. O'Rilley Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 ISSUE Should ****** (******) remain classified as a public charity described in section 501(c)(4) of the Internal Revenue Code. FACTS ****** was incorporated in the State of ****** in ******. It submitted an application to the ****** to be classified as a tax-exempt entity, which was approved by the State of ******. ****** then began sending Form ****** annually to the IRS. Upon receipt of said form, the IRS performed due diligence and realized that no determination had ever been issued regarding the tax-exempt status of the organization. In other words, ****** never filed an application (e.g., Form 1023) to be granted exemption [e.g., 501(c)(3)] formally. The IRS then adjudicated ****** with Section 501(c)(4), since an application is not required for this tax-exempt status. ****** provides educational resources. A review of its website shows that ****** states it is a tax-exempt organization under Section 501(c)(3). During the initial interview, Revenue Agent discussed with the President the discrepancy between its stated tax-exempt status [i.e., 501(c)(3)] and its classification with the IRS [i.e., 501(c)(4)]. LAW Section 501(c)(3) of the Internal Revenue Code described an organization as being tax-exempt if it is organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes. Section 501(c)(4)(A) of the Internal Revenue Code describes as being tax-exempt those civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare or local associations of employees..., and the net earnings of which are devoted exclusively to charitable, educational or recreational purposes. GOVERNMENT'S POSITION ****** self-declared as a tax-exempt organization when it began to file Form ****** soon after its incorporation; however, it never submitted an application for a determination to be made regarding its status. Without an application for determination on file, the IRS branded ****** as tax exempt under Section 501(c)(4), since it does not require an application for this status. Upon due diligence by the Revenue Agent and after initial interview, it is determined that ****** does not qualify for tax exemption under Section 501(c)(4). The entity will be disqualified. TAXPAYER'S POSITION ****** agrees with disqualification of its tax-exempt status. CONCLUSION After initial interview and due diligence, Revenue Agent spoke with President and stated that would be disqualifying ****** as a tax-exempt organization under Section 501(c)(4). The effective date of this disqualification is ******.

Private Letter Ruling Number: 202014004 Internal Revenue Service August 26, 2019 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202014004 Release Date: 4/3/2020 Index Number: 671.02-00, 2501.00-00, 2514.00-00, 2041.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:01 PLR-103341-19 Date: August 26, 2019 Dear ********: This responds to a letter dated February 21, 2019, and subsequent correspondence, requesting rulings under the Internal Revenue Code. Facts The information submitted states that on Date, Grantor created Trust, an irrevocable trust, for the benefit of Grantor and the following class of beneficiaries: Nephew and his issue, Niece 1 and her issue, Niece 2 and her issue, and Friend (collectively, the Beneficiaries). A corporate trustee located in State 1 is Trustee of Trust. Trust is initially governed under the law of State 1 and Grantor resides in State 2. Trust is a United States person under § 7701(a)(30)(E) of the Internal Revenue Code. Part III, Article THIRD of the Trust provides for the creation of a Power of Appointment Committee. The initial members of the Power of Appointment Committee are Grantor, Nephew, Niece 1, Guardian, and Friend. Guardian is acting on behalf of Niece 2, who is a minor. If at any time the Power of Appointment Committee includes three or more members, other than the Grantor, then all the members of the Power of Appointment Committee including the Grantor may by unanimous vote, at any time and from time to time, add one or more members to Power of Appointment Committee provided that such members are Beneficiaries (i.e., descendants of Nephew, Niece 1, or Niece 2) and, provided further that, if any one or more of them is a minor, the members of the Power of Appointment Committee shall by unanimous vote designate an individual to serve as guardian for such minor. Each member of the Power of Appointment Committee may resign without prior approval of any court or the consent of any person. If such a member resigns or fails or ceases to serve, then the position will remain vacant. The members of the Power of Appointment Committee shall not serve or act in a fiduciary capacity. Under Part III, Article FOURTH(d) and (g), under no circumstances shall Grantor or any of the Beneficiaries act as a guardian and upon the beneficiary attaining age eighteen years, his or her guardian shall cease to serve and the beneficiary shall serve as a member of the Power of Appointment Committee. Part II, Article THIRD of the Trust provides that the Power of Appointment Committee shall cease to exist upon the first to occur of the date of the Grantor's death or the date on which the Power of Appointment Committee has fewer than two (2) members other than the Grantor. Part I, Article FIRST(a)(1) and Part III, Article THIRD(f) of Trust provides that while the Power of Appointment Committee is in existence, then, until the Distribution Date (defined as the date of Grantor's death) at any time or times, Trustee shall distribute to the Beneficiaries and/or Grantor such amounts of net income and principal (including the whole thereof) as the Power of Appointment Committee appoints. While the Power of Appointment Committee is in existence, Trust shall make no distributions except as the Power of Appointment Committee appoints. Any appointment to one or more Beneficiaries and/or Grantor must be made in writing either: (1) as executed by Grantor and by a majority of the Committee members (Grantor's Consent Power); or (2) as executed by all then serving members of Committee (Unanimous Member Power). In addition, any appointment to Grantor may also be made in writing, executed by any one member of the Committee who is also an Adverse Party (Adverse Party Power). Adverse Party is defined in Part II, Article FIRST(c) as having the meaning set forth in § 672(a) of the Internal Revenue Code. The Power of Appointment Committee may appoint income or principal equally or unequally to or for the benefit of Grantor or any one or more of the Beneficiaries to the exclusion of others. Part I, Article FIRST(b)(1) provides that if and only if the Power of Appointment Committee is in existence, Grantor shall have the power in a non-fiduciary capacity, at any time and from time to time, to appoint to any one or more of the Beneficiaries such amounts of the principal (including the whole thereof) as Grantor deems advisable to provide for the health, maintenance, support and education of the Beneficiaries (Grantor's First Sole Power). Part I, Article FIRST(a)(2), (a)(3), and (b)(2) provide that if and only if the Power of Appointment Committee ceases to exist, then, until the Distribution Date: (1) Trustee may, pursuant to a written instrument, at any time or times, distribute to the Beneficiaries such amounts of the net income or principal of Trust (including the whole thereof) as Trustee determines. In determining whether to make any distributions to the Beneficiaries, Trustee is required to take into consideration the distributee's own income and property and any other income or property which any individual provides or is obligated to provide; (2) Trustee may, with and only with the consent of an Adverse Party, distribute to Grantor such amounts of the net income or principal of Trust (including the whole thereof) as Trustee determines; (3) Grantor shall have the power in a non-fiduciary capacity, at any time and from time to time, to appoint such amounts of the net income or principal of Trust (including the whole thereof) to any one or more of the Grantor's Family, other than Grantor, Grantor's estate, Grantor's creditors or the creditors of Grantor's estate (Grantor's Second Sole Power). Grantor's Family is defined in Part II, Article FIRST(q) as the Grantor, the issue of the Grantor's grandparents, all Close Persons and all charities. A Close Person is defined in Part II, Article FIRST(j) as an individual determined by the Trustee to be a close personal, business or professional associate of the Grantor and each of the issue of any such individual other than any such issue who is expressly excluded by the Trustee. Additionally, under Part I, Article FIRST(a)(1) and (c)(1) the Power of Appointment Committee and Trustee have the power, until the Distribution Date, to appoint all or any portion of Trust to any one or more Qualified Trusts. Part II, Article FIRST(dd) defines a Qualified Trust as a trust that benefits one or more members of the Grantor's Family and complies with certain other technical requirements. The Power of Appointment Committee may exercise this power under the Grantor's Consent Power, the Unanimous Member Power, and the Adverse Party Power. Under Part II, Article THIRD(a), no distribution by Trustee to a beneficiary and no distributions to a beneficiary pursuant to a power of appointment granted hereunder, shall discharge any individual's legal obligation to support the beneficiary. Part II, Article EIGHTH(j)(2) provides that any power retained by Grantor shall be exercisable in a non-fiduciary capacity. Part I, Article FIRST(e) provides that upon the death of the Grantor, Trustee shall distribute the remainder of the trust to or for the benefit of any person or entity or entities, other than the Grantor's estate, the Grantor's creditors, or the creditors of the Grantor's estate, as Grantor appoints by will. Part I, Article FIRST(f) provides that, in default of this appointment, ten percent of any undistributed property will be distributed in trust for Friend, if Friend is then serving on the Power of Appointment Committee, and the balance in equal shares in trust for Nephew and his issue, Niece 1 and her issue, and Niece 2 and her issue (Grantor's Testamentary Power). You have requested the following rulings: 1. As long as the Power of Appointment Committee is serving, no portion of the items of income, deductions, and credits against tax of the Trust shall be included in computing under § 671 the taxable income, deductions, and credits of Grantor or any member of the Power of Appointment Committee. 2. The contribution of property to Trust by Grantor will not be a completed gift subject to federal gift tax. 3. Any distribution of property by the Power of Appointment Committee from Trust to Grantor will not be a completed gift, subject to federal gift tax, by any member of the Power of Appointment Committee. 4. Any distribution of property by the Power of Appointment Committee from Trust to any beneficiary of Trust, other than to Grantor, will not be a completed gift subject to federal gift tax, by any member of the Power of Appointment Committee. 5. No member of the Power of Appointment Committee upon his or her death will include in his or her estate any property held in Trust because such member is deemed to have a general power of appointment within the meaning of § 2041 over property held in Trust. RULING 1 Section 671 provides that where it is specified in subpart E of part I of subchapter J that the grantor or another person shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter 1 in computing taxable income or credits against the tax of an individual. Section 672(a) provides, for purposes of subpart E, the term "adverse party" means any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust. Sections 673 through 677 specify the circumstances under which the grantor is treated as the owner of a portion of a trust. Section 673(a) provides that the grantor shall be treated as the owner of any portion of a trust in which the grantor has a reversionary interest in either the corpus or the income therefrom, if, as of the inception of that portion of the trust, the value of such interest exceeds five (5) percent of the value of such portion. Section 674(a) provides, in general, that the grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without the approval or consent of any adverse party. Section 674(b) provides that § 674(a) shall not apply to the powers described in § 674(b) regardless of whom held. Section 674(b)(3) provides that § 674(a) shall not apply to a power exercisable only by will, other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse party, or both, without the approval or consent of any adverse party. Section 674(b)(5) provides that § 674(a) shall not apply to a power to distribute corpus to or for a beneficiary, provided that the power is limited by a reasonably definite standard. Under § 675 and applicable regulations, the grantor is treated as the owner of any portion of a trust if, under the terms of the trust agreement or circumstances attendant on its operation, administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust. Section 676(a) provides that the grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under any other provision of part I, subchapter J, chapter 1, where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse party, or both. Section 677(a) provides, in general, that the grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under § 674, whose income without the approval or consent of any adverse party is, or, in the discretion of the grantor or a nonadverse party, or both, may be (1) distributed to the grantor or the grantor's spouse; (2) held or accumulated for future distribution to the grantor or the grantor's spouse; or (3) applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor's spouse. Section 678(a) provides that a person other than the grantor shall be treated as the owner of any portion of a trust with respect to which: (1) such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself, or (2) such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would, within the principles of §§ 671-677, inclusive, subject a grantor of a trust to treatment as the owner thereof. Section 679(a) provides that a United States person who directly or indirectly transfers property to a foreign trust shall be treated as the owner for his taxable year of the portion of such trust attributable to such property if for such year there is a United States beneficiary of any portion of the trust. Based solely on the facts and representations submitted and except as caveated below, we conclude an examination of Trust reveals none of the circumstances that would cause Grantor to be treated as the owner of any portion of Trust under §§ 673, 674, 676, 677, or 679 as long as Trust is a domestic trust and the Power of Appointment Committee remains in existence and serving. Because none of the members of Power of Appointment Committee have a power exercisable by himself to vest trust income or corpus in himself, none shall be treated as the owner of Trust under § 678(a). We further conclude that an examination of Trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of Grantor under § 675. Thus, the circumstances attendant on the operation of Trust will determine whether Grantor will be treated as the owner of any portion of Trust under § 675. This is a question of fact, the determination of which must be deferred until the federal income tax returns of the parties involved have been examined by the office with responsibility for such examination. Lastly, no opinion is expressed or implied regarding the income tax consequences of any provision permitting the Trustee to distribute income or principal pursuant to the Power of Appointment Committee's exercise of the Adverse Party Power. Further, no opinion is expressed or implied regarding the income tax consequences of any other provision of Trust not referenced in this private letter ruling. RULINGS 2 AND 3 Section 2501(a)(1) provides for the imposition of a gift tax on the transfer of property by gift. Section 2511(a) provides that the gift tax applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. Section 25.2511-2(b) of the Gift Tax Regulations provides that a gift is complete as to any property with respect to which the donor has so parted with dominion and control as to leave the donor with no power to change the disposition of the property, whether for the donor's own benefit, or for the benefit of another. But if upon a transfer of property (whether in trust or otherwise) the donor reserves any power over its disposition, the gift may be wholly incomplete, or may be partially complete and partially incomplete, depending upon all the facts in the particular case. Accordingly, in every case of a transfer of property subject to a reserved power, the terms of the power must be examined and its scope determined. Section 25.2511-2(b) provides an example, where the donor transfers property in trust to pay the income to the donor, or accumulate it in the discretion of the trustee, and the donor retains a testamentary power to appoint the remainder among the donor's descendants. The regulation concludes that no portion of the transfer is a completed gift. However, if the donor had not retained a testamentary power of appointment, but had instead provided that the remainder should go to X or his heirs, the entire transfer would be a completed gift. Section 25.2511-2(c) provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title in himself or herself. A gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed or ascertainable standard. Section 25.2511-2(f) provides that the relinquishment or termination of a power to change the beneficiaries of transferred property, occurring otherwise than by death of the donor, is regarded as an event which completes the gift and causes the gift tax to apply. Section 25.2511-2(g) provides that if a donor transfers property to himself as trustee (or to himself and some other person, not possessing a substantial adverse interest, as trustees), and retains no beneficial interest in the trust property and no power over it except fiduciary powers, the exercise or nonexercise of which is limited by a fixed or ascertainable standard, to change the beneficiaries of the transferred property, the donor has made a completed gift. Under § 25.2511-2(e), a donor is considered as possessing a power if it is exercisable by the donor in conjunction with any person not having a substantial adverse interest in the disposition of the transferred property. Section 25.2511-2(f) provides that the relinquishment or termination of a power to change the beneficiaries of transferred property, occurring otherwise than by death of the donor, is regarded as the event which completes the gift and causes the gift tax to apply. Section 25.2511-2(e) does not define "substantial adverse interest." Section 25.2514-3(b)(2) provides, in part, that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power. Section 25.2514-3(b)(2) also provides that a co-holder of a power is considered as having an adverse interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate. In Estate of Sanford v. Commissioner, 308 U.S. 39 (1939), the taxpayer created a trust for the benefit of named beneficiaries and reserved the power to revoke the trust in whole or in part, and to designate new beneficiaries other than himself. Six years later, in 1919, the taxpayer relinquished the power to revoke the trust, but retained the right to change the beneficiaries. In 1924, the taxpayer relinquished the right to change the beneficiaries. The Court stated that the taxpayer's gift is not complete, for purposes of the gift tax, when the donor has reserved the power to determine those others who would ultimately receive the property. Accordingly, the Court held that the taxpayer's gift was complete in 1924, when he relinquished his right to change the beneficiaries of the trust. A's retention of a power to change the beneficial interests in a trust causes the transfer to the trust to be incomplete for gift tax purposes, even though the power may be defeated by the actions of third parties. Goldstein v. Commissioner, 37 T.C. 897 (1962). See also Estate of Goelet v. Commissioner, 51 T.C. 352 (1968). In this case, Grantor retained the Grantor's Consent Power over the income and principal of Trust. Under § 25.2511-2(e), a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse interest in the disposition of the transferred property or the income therefrom. Power of Appointment Committee members are not takers in default for purposes of § 25.2514-3(b)(2). They are merely co-holders of the power. Under § 25.2514-3(b)(2), a co-holder of a power is only considered as having an adverse interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate. In this case, the Power of Appointment Committee ceases to exist upon Grantor's death. Accordingly, the Power of Appointment Committee members do not have interests adverse to Grantor under § 25.2514-3(b)(2) and for purposes of § 25.2511-2(e). Therefore, Grantor is considered as possessing the power to distribute income and principal to any beneficiary himself because he retained the Grantor's Consent Power. Grantor also retained Grantor's First Sole Power over the principal of Trust (held while the Power of Appointment Committee is in existence) and Grantor's Second Sole Power over the income and principal of Trust (held after the Power of Appointment Committee dissolves). Under § 25.2511-2(c), a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed or ascertainable standard. In this case, the Grantor's First and Second Sole Powers give Grantor the power to change the interests of the beneficiaries. Grantor's First and Second Sole Powers are non-fiduciary powers. Even though Grantor will relinquish Grantor's First Sole Power, Grantor reserves Grantor's Second Sole Power over a different class of appointees. Accordingly, the retention of Grantor's First and Second Sole Powers causes the transfer of property to Trust to be wholly incomplete for federal gift tax purposes when Grantor contributes property to Trust. The transfer will continue to be incomplete in the event that the Power of Appointment Committee dissolves prior to Grantor's death. Further, Grantor retained Grantor's Testamentary Power to appoint the property in Trust to any persons, other than Grantor's estate, Grantor's creditors, or the creditors of Grantor's estate. Under § 25.2514-3(b)(2), the retention of a testamentary power to appoint the remainder of a trust is considered a retention of dominion and control over the remainder. Accordingly, the retention of this power causes the transfer of property to Trust to be incomplete with respect to the remainder in Trust for federal tax purposes. Finally, the Power of Appointment Committee members possess the Unanimous Member Power and the Adverse Party Power over income and principal. These powers are not conditions precedent to Grantor's powers. Grantor's powers over the income and principal are presently exercisable and not subject to a condition precedent. Grantor retains dominion and control over the income and principal of Trust until the Power of Appointment Committee members exercise their Unanimous Member Power or Adverse Party Power. Accordingly, the Unanimous Member Power and the Adverse Party Power do not cause the transfer of property to be complete with respect to the income and principal interests in Trust for federal gift tax purposes. If the Power of Appointment Committee ceases to exist, the Trustee, in its fiduciary capacity, also has the power to distribute net income or principal to one or more Beneficiaries. The powers of the Trustee are not conditions precedent to the Grantor's powers. Grantor's Consent Power over income and principal and Grantor's First Sole Power over principal are presently exercisable and not subject to a condition precedent. Additionally, Grantor's Second Sole Power over income and principal is exercisable immediately after the Power of Appointment Committee ceases to exist and is not subject to a condition precedent. Accordingly, Grantor retains dominion and control over the principal of Trust until the Trustee exercises its power to appoint income or principal. Thus, the Trustee's power to distribute net income or principal does not cause the transfer of property to Trust to be complete for federal gift tax purposes. Accordingly, the retention of the Grantor's Consent Power, the Grantor's First Sole Power, and the Grantor's Second Sole Power causes the transfer of property to Trust to be wholly incomplete for federal gift tax purposes. Accordingly, based on the facts submitted and the representations made, we conclude that the contribution of property to Trust by Grantor is not a completed gift subject to federal gift tax. Any distribution from Trust to Grantor is merely a return of Grantor's property. Therefore, we conclude that any distribution of property by the Power of Appointment Committee from Trust to Grantor will not be a completed gift subject to federal gift tax, by any member of the Power of Appointment Committee. Further, upon Grantor's death, the fair market value of the property in Trust is includible in Grantor's gross estate for federal estate tax purposes. RULINGS 4 AND 5 Section 2514(b) provides that the exercise or release of a general power of appointment created after October 21, 1942, shall be deemed a transfer of property by the individual possessing such power. Section 2514(c) provides that the term "general power of appointment" means a power which is exercisable in favor of the individual possessing the power (possessor), the possessor's estate, the possessor's creditors, or the creditors of the possessor's estate. Section 25.2514-1(c)(1) provides that a power of appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors, or the possessor's estate or the creditors of the estate. Section 2514(c)(3)(A) provides that, in the case of a power of appointment created after October 21, 1942, if the power is exercisable by the possessor only in conjunction with the creator of the power, such power is not deemed a general power of appointment. Section 2514(c)(3)(B) provides, that in the case of a power of appointment created after October 21, 1942, if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject to the power, which is adverse to the exercise of the power in favor of the possessor, such power shall not be deemed a general power of appointment. For purposes of § 2514(c)(3)(B), a person who, after the death of the possessor, may be possessed of a power of appointment (with respect to the property subject to the possessor's power) which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor's power. Section 25.2514-3(b)(2) provides, in part, that a co-holder of a power has no adverse interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power. However, a co-holder of a power is considered as having an adverse interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate. Thus, for example, if X, Y, and Z held a power jointly to appoint among a group of persons which includes themselves and if on the death of X the power will pass to Y and Z jointly, then Y and Z are considered to have interests adverse to the exercise of the power in favor of X. Similarly, if on Y's death the power will pass to Z, Z is considered to have an interest adverse to the exercise of the power in favor of Y. Section 2041(a)(2) provides that the value of the gross estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of death a general power of appointment created after October 21, 1942, or with respect to which the decedent has at any time exercised or released such a power by a disposition which is of such nature that if it were a transfer of property owned by the decedent, such property would be includible in the decedent's gross estate under §§ 2035 to 2038, inclusive. Under § 2041(b)(1), the term "general power of appointment" is defined, in relevant part, to mean a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate. Section 2041(b)(1)(C)(ii) provides, however, that in the case of a power of appointment created after October 21, 1942, if the power is not exercisable by the decedent except in conjunction with a person having a substantial interest in the property, subject to the power, which is adverse to the exercise of the power in favor of the decedent--such power shall not be deemed a general power of appointment. For purposes of § 2041(b)(1)(C)(ii), a person who, after the death of the decedent, may be possessed of a power of appointment (with respect to the property subject to the decedent's power) which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the decedent's power. Section 20.2041-3(c)(2) of the Estate Tax Regulations provides, in part, that a co-holder of a power of appointment has no adverse interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power. However, a co-holder of a power is considered as having an adverse interest where he may possess the power after the decedent's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate. Thus, for example, if X, Y, and Z held a power jointly to appoint among a group of persons which includes themselves and if on the death of X the power will pass to Y and Z jointly, then Y and Z are considered to have interests adverse to the exercise of the power in favor of X. Similarly, if on Y's death the power will pass to Z, Z is considered to have an interest adverse to the exercise of the power in favor of Y. The powers held by the Power of Appointment Committee members under the Grantor's Consent Power are powers that are exercisable only in conjunction with the creator, Grantor. Accordingly, under §§ 2514(b) and 2041(a)(2), the Power of Appointment Committee members do not possess general powers of appointment by virtue of possessing this power. The powers held by the Power of Appointment Committee members under the Unanimous Member Power are not general powers of appointment for purposes of §§ 2514(b) and 2041(a)(2). As in the examples in §§ 25.2514-3(b)(2) and 20.2041-3(c)(2), the Power of Appointment Committee members have substantial adverse interests in the property subject to this power. The powers held by the Power of Appointment Committee members under the Adverse Party Power are not general powers of appointment for purposes of §§ 2514(b) and 2041(a)(2). Sections 2514(c) and 2041(b)(1) provide that the term general power of appointment means a power which is exercisable in favor of the individual possessing the power (possessor), the possessor's estate, the possessor's creditors, or the creditors of the possessor's estate. Under the terms of the Adverse Party Power, the power is only exercisable by someone who is an adverse party with respect to the distribution. The possessor of a power cannot be an adverse party with respect to a distribution to himself, his estate, his creditors or the creditors of his estate. Therefore, the Adverse Party Power can never be exercised in favor of the possessor, his estate, his creditors or the creditors of estate, and, as a result, is not a general power of appointment. Accordingly, any distributions made from Trust to a beneficiary pursuant to the exercise of these powers (the Grantor's Consent Power, the Unanimous Member Powers and the Adverse Party Power) are not gifts by the Power of Appointment Committee members. Based on the facts submitted and representations made, we conclude that any distribution of property by the Power of Appointment Committee from Trust to any beneficiary of Trust, other than Grantor, will not be a completed gift subject to federal gift tax, by any member of the Power of Appointment Committee. Further, we conclude that any distribution of property from Trust to a beneficiary other than Grantor will be a completed gift by Grantor. Finally, we conclude that the powers held by the Power of Appointment Committee are not general powers of appointment for purposes of § 2041(a)(2) and, accordingly, no member of the Power of Appointment Committee upon his or her death will include in his or her estate any property held in Trust because such member is deemed to have a general power of appointment within the meaning of § 2041 over property held in Trust. Except as specifically ruled herein, we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the Code. Specifically, we express no opinion on the trust provisions permitting Trustee to distribute income or principal to trustees of other qualified trusts (decanting). Sincerely, Faith P. Colson Faith P. Colson Senior Counsel, Branch 1 (Passthroughs & Special Industries) Enclosures (2) Copy of this Letter. Copy for § 6110 purposes

Revenue Procedure 2024-11 Internal Revenue Service 2024-13 I.R.B. 721 NOTE. This revenue procedure will be reproduced as the next revision of IRS Publication 4436, General Rules and Specifications for Substitute Form 941, Schedule B (Form 941), Schedule D (Form 941), Schedule R (Form 941), and Form 8974. Rev. Proc. 2024-11 TABLE OF CONTENTS Part 1 Section 1.1 - Purpose.01 The purpose of this revenue procedure is to provide general rules and specifications from the IRS for paper and computer-generated substitutes for Form 941, Employer ' s QUARTERLY Federal Tax Return; Schedule B (Form 941), Report of Tax Liability for Semiweekly Schedule Depositors (referred to in this revenue procedure as " Schedule B " ); Schedule D (Form 941), Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations (referred to in this revenue procedure as " Schedule D " ); Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers (referred to in this revenue procedure as " Schedule R " ); and Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. Caution. Before creating a substitute Form 941, see Pub. 1167, General Rules and Specifications for Substitute Forms and Schedules, for additional rules and specifications for payment vouchers (Vouchers), printing in margins (Marginal Printing), and additional instructions (Additional Instructions for All Forms). Note. Substitute Spanish-language forms (for example, Form 941 (sp) and Schedule B (Form 941) (sp)) should also generally conform to the specifications outlined in this revenue procedure. However, some of the measurements provided in the exhibits, later, may need to be adjusted for substitute Spanish-language forms..02 This revenue procedure provides information for substitute Form 941, Schedule B, Schedule D, Schedule R, and Form 8974. If you need more in-depth information on who must complete these forms and how to complete them, see the Instructions for Form 941, the Instructions for Schedule B, the Instructions for Schedule D, the Instructions for Schedule R, the Instructions for Form 8974, and Pub. 15, Employer ' s Tax Guide, or go to IRS.gov. Note. Failure to produce acceptable substitutes of the forms and schedules listed in this revenue procedure may result in delays in processing. This may result in penalties..03 Forms that completely follow the guidelines in this revenue procedure and are exact replicas of the official IRS forms do not need to be submitted to the IRS for specific approval. Substitute forms and schedules need to be scanned using IRS scanning equipment. If you are uncertain of any specification and want clarification, do the following. 1. Submit a letter citing the specification. 2. State your understanding of the specification. 3. Enclose an example (if appropriate) of how the form would appear if produced using your understanding. 4. Be sure to include your name, complete address, phone number, and, if applicable, your email address with your correspondence. Send your request to SCRIPS@IRS.gov or Substitute- Forms@IRS.gov, or use the following address. Internal Revenue Service Attn: Substitute Forms Program SE:W:CAR:MP:P:TP:TP ATSC 4800 Buford Highway, Mail Stop 061-N Chamblee, GA 30341 Note. Allow at least 30 days for the IRS to respond..04 However, software developers and form producers should send a blank copy of their substitute Form 941, Schedule B, and Schedule R in Portable Document Format (PDF) to SCRIPS@IRS. gov. The purpose is not specifically for approval but to assist the IRS in preparing to scan these problem forms. Submitters will only receive comments if a significant is discovered through this process. Submitters are not expected to delay marketing their forms in order to receive feedback. Submitters must not include any " live " taxpayer data on any substitute form submitted for review..05 Form 941, Schedule B, Schedule R, and Form 8974 have a six-digit form ID code in the upper right-hand corner. The first two digits of the form ID code represent whether the form is an official paper form or a substitute 6x10 grid. The third and fourth digits of the form ID code are a unique identifier that is subject to change each quarter when changes are made to a page of the form. The fifth and six digits of the form ID code generally represent the year in which the IRS made major formatting changes to the layout of a page of the form. The following six-digit form ID codes, some of which have been updated for the first quarter of 2024, are currently used on Form 941, Schedule B, Schedule R, and Form 8974. - Official paper forms: 950124 (Form 941, page 1); 950224 (Form 941, page 2); 960311 (Schedule B); 950424 (Schedule R, page 1); 950524 (Schedule R, page 2); and 951823 (Form 8974). - Substitute 6x10 grids: 970124 (Form 941, page 1); 970224 (Form 941, page 2); 970311 (Schedule B); 970424 (Schedule R, page 1); 970524 (Schedule R, page 2); and 971823 (Form 8974). You must always use the form ID code provided on the current form for the applicable quarter for which you are creating a substitute form, even if this revenue procedure is not superseded to reflect a change to a form ID code..06 This revenue procedure will be updated only if there are major formatting changes to the layout of the forms (that is, changes to the measurements provided in the exhibits at the end of this revenue procedure) or there are other changes that impact the processing of substitute forms. This revenue procedure won ' t be updated solely because a line is changed to " Reserved for future use " or solely because a form ID code changes without major formatting changes. Section 1.2 - What's New.01 Form 941 was revised to delete all lines related to the credit for qualified sick and family leave wages, as enacted under the Families First Coronavirus Response Act (FFCRA) and amended and extended by the COVID-related Tax Relief Act of 2020, for leave taken after March 31, 2020, and before April 1, 2021, and the credit for qualified sick and family leave wages under sections 3131, 3132, and 3133 of the Internal Revenue Code, as enacted under the American Rescue Plan Act of 2021 (the ARP), for leave taken after March 31, 2021, and before October 1, 2021. Additionally, all lines that were previously " Reserved for future use " have been deleted. Form 941 is now a two- page form instead of a three-page form..02 The Privacy Act and Paperwork Reduction Act Notice was removed from Form 941. The Privacy Act and Paperwork Reduction Act Notice is now in the Instructions for Form 941..03 Forms 941-SS and 941-PR were discontinued after 2023. Employers in the U.S. territories will file Form 941, or if they prefer their form in Spanish, they can file new Form 941 (sp). Section 1.3 - Reminders.01 Draft forms. Draft forms can be found at IRS.gov/DraftForms. Section 1.4 - General Requirements for Reproducing IRS Official Form 941, Schedule B, Schedule D, Schedule R, and Form 8974.01 Submit substitute Form 941, Schedule B, Schedule D, Schedule R, and Form 8974 to the IRS for specifications review. Substitute Form 941, Schedule B, Schedule D, Schedule R, and Form 8974 that completely conform to the specifications contained in this revenue procedure do not require prior approval from the IRS, but should be submitted to SCRIPS@IRS.gov to ensure that they conform to IRS format and scanning specifications..02 Print the form on standard 8.5-inch wide by 11-inch paper..03 Use white paper that meets generally accepted weight, color, and quality standards (minimum 20 lb. white bond paper). Note. Reclaimed fiber in any percentage is permitted provided that the requirements of this standard are met..04 The IRS prefers printing Form 941 on both sides of a single sheet of paper, but it is acceptable to print on one side of each of two separate sheets of paper..05 Make the substitute paper form as identical to the official form as possible..06 Print the substitute form using nonreflective black (not blue or other-colored) ink. Printing in an ink color other than black may reduce readability in the scanning process. This may result in figures being too faint to be.07 Use typefaces that are substantially identical in size and shape to the official form and use rules and shading (if used) that are substantially identical to those on the official form. Use font size as large as possible within the fields..08 In the same location as shown on the official IRS forms, print the six-digit form ID code (if one exists on the official form) on each form using nonreflective black, carbon-based, 12-point font. The use of non-OCR-A font may reduce readability for scanning. Use the official form to develop your substitute form. Note. Maintain as much white space as possible around the form ID code. Do not allow character strings to print adjacent to the code. The following six-digit form ID codes are used on Form 941, Schedule B, Schedule R, and Form 8974 for the first quarter of 2024. Print " 950124 " on Form 941, page 1; " 950224 " on Form 941, page 2; " 960311 " on Schedule B; " 950424 " on Schedule R, page 1; " 950524 " on Schedule R, page 2; and " 951823 " on Form 8974. You must always use the form ID code provided on the current form for the applicable quarter for which you are creating a substitute form, even if this revenue procedure is not superseded to reflect a change to a form ID code. See Section 1.5 for information on form ID codes for software-generated forms..09 Print the OMB number in the same location as on the official form. Be sure to include the OMB number on Form 941, Schedule B, Schedule D, Schedule R, and Form 8974..10 Print all entry boxes and checkboxes exactly as shown (location and size) on the official forms. Note. Instead of a four-sided checkbox for the entry, just the bottom line of the box can be used as long as the location and size remain the same..11 Print " For Privacy Act and Paperwork Reduction Act Notice, see separate instructions. " at the bottom of page 1 of Form 941..12 Print " For Paperwork Reduction Act Notice, see separate instructions. " at the bottom of Schedule B and Schedule D..13 Print " For Paperwork Reduction Act Notice, see the separate instructions. " at the bottom of Schedule R..14 Print " For Paperwork Reduction Act Notice, see the separate instructions. " at the bottom of Form 8974..15 Do not print the form catalog number ( " Cat. No. " ) at the bottom of the forms or instructions. Instead, print your IRS-issued three-letter substitute form source code in place of the catalog number on the left at the bottom of page 1 of Form 941, Schedule B, Schedule D, Schedule R, and Form 8974. Note. You can obtain a three-letter substitute form source code by requesting it by email at SubstituteForms@IRS.gov. Enter " Substitute Forms " on the subject line..16 Do not print the Government Publishing Office (GPO) symbol at the bottom of the forms or instructions. Section 1.5 - Reproducing Form 941, Schedule B, Schedule D, Schedule R, and Form 8974 for Software-Generated Paper Forms.01 You may use the PDF files to develop the layout for your forms. Draft forms found at IRS. gov/DraftForms can be used to develop interim formats until the forms are finalized. When forms become finalized, they are posted and can be found at IRS.gov/Forms. You m ay use 6x10 grid formats to develop software versions of Form 941, Schedule B, Schedule D, Schedule R, and Form 8974. Please follow the specifications exactly to develop the fields..02 If you are developing software using the 6x10 grid, the following six-digit form ID codes are used on Form 941, Schedule B, Schedule R, and Form 8974 for the first quarter of 2024. - " 970124 " for Form 941, page 1; " 970224 " for Form 941, page 2; " 970311 " for Schedule B; " 970424 " for Schedule R, page 1; " 970524 " for Schedule R, page 2; and " 971823 " for Form 8974. You must always use the form ID code provided on the current form, with the first two digits changed to " 97 " when using a 6x10 grid, for the applicable quarter for which you are creating a substitute form, even if this revenue procedure is not superseded to reflect a change to a form ID code. Note. Maintain as much white space as possible around the form ID code. Do not allow char- acter strings to print adjacent to the code. - Place all 6x10 grid boxes and entry spaces in the same field locations as indicated on the offi- cial forms. - Use single lines for " Employer Identification Number (EIN) " and other entry areas in the entity section of Form 941, pages 1 and 2; Schedule B; Schedule R, pages 1 and 2; and Form 8974. - Reverse type is not needed as shown on the official form. - Do not pre-print decimal points in the data boxes. However, where the amounts are required, the amounts should be printed with decimal points and place holders for cents. - Delete the pre-printed formatting in any " date " boxes. - Use a single box for " Personal Identification Number (PIN) " on Form 941. - You may delete all shading when using the 6x10 grid format..03 If producing both the form and the data or the form only, print your three-letter source code at the bottom of Form 941, page 1; Schedule B; Schedule D; Schedule R, page 1; or Form 8974. See Section 1.4.15..04 If producing only the data on the form, print your four-digit software industry vendor code on Form 941. The four-digit vendor code preceded by four zeros and a slash (0000/9876) must be pre-printed. If you have a valid vendor code issued to you through the National Association of Computerized Tax Processors (NACTP), you should use that code. If you do not have a valid vendor code, contact the NACTP via email at president@nactp.org for information on these codes..05 Print " For Privacy Act and Paperwork Reduction Act Notice, see separate instructions. " at the bottom of Form 941, page 1..06 Print " For Paperwork Reduction Act Notice, see separate instructions. " at the bottom of Schedule B and Schedule D..07 Print " For Paperwork Reduction Act Notice, see the separate instructions. " at the bottom of Schedule R, page 1..08 Print " For Paperwork Reduction Act Notice, see the separate instructions. " at the bottom of Form 8974..09 Be sure to print the OMB number in the same location as on the official forms on substitute Form 941, Schedule B, Schedule D, Schedule R, and Form 8974..10 Do not print the form catalog number ( " Cat. No. " ) at the bottom of the forms or instructions..11 Do not print the Government Publishing Office (GPO) symbol at the bottom of the forms or instructions..12 To ensure accurate scanning and processing, enter data on Form 941, Schedule B, Schedule D, Schedule R, and Form 8974 as follows. - Display/print the name and EIN on all pages and attachments in the proper associated fields. - Use 12-point (minimum 10-point) Courier font (where possible). - Omit dollar signs. Commas are optional. - Except for Form 941, lines 1, 2, and 12, leave blank any data field with a value of zero. How- ever, employers in American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, and Puerto Rico may leave line 2 blank, unless they have employees who are subject to U.S. income tax withholding. - Enter negative amounts with a minus sign. For example, report " -10.59 " instead of " (10.59). " Note. The IRS prefers that you use a minus sign for negative amounts instead of parentheses or some other means. However, if your software only allows for parentheses in reporting negative amounts, you may use them. Section 1.6 - Specific Instructions for Schedule D.01 To properly file and to reduce delays and contact from the IRS, Schedule D must be produced as close as possible to the official form..02 Use Schedule D to explain why you have certain discrepancies. See the Instructions for Schedule D for more information. In many cases, the information on Schedule D helps the IRS resolve discrepancies without contacting you..03 If a substitute Schedule D is not submitted in similar format to the official IRS schedule, the substitutes may be returned, you may be contacted by the IRS, delays in processing may occur, and you may be subject to penalties. Section 1.7 - Specific Instructions for Schedule R.01 To properly file and to reduce delays and contact from the IRS, Schedule R and Continuation Sheets for Schedule R must be produced as close as possible to the official form. Note. Do not present the information in spreadsheet or similar format. We may not be able to properly process nonconforming documents with an excessive number of entries. Complete as many Continuation Sheets for Schedule R (Schedule R, page 2) as necessary. If Continuation Sheets are not used or they vary in form from the official form, processing may be delayed and you may be subject to penalties..02 Use Schedule R to allocate the aggregate information reported on Form 941 to each client. If you have more than 5 clients, complete as many Continuation Sheets for Schedule R as necessary. Attach Schedule R, including any Continuation Sheets, to your aggregate Form 941 and file it with your return. Enter your business information carefully. Make sure all information exactly matches the information shown on the aggregate Form 941. Compare the total of each column on Schedule R, line 9 (including your information on line 8), to the amounts reported on the aggregate Form 941. For each column total of Schedule R, the relevant line from Form 941 is noted in the column heading. The March 2024 revision of Schedule R now has some columns that are used only when Schedule R is attached to Form 941-X. If the totals on Schedule R, line 9, do not match the totals on Form 941, there is an error that must be corrected before submitting Form 941 and Schedule R..03 Do: - Develop and submit only conforming Schedules R; - Follow the format and fields exactly as on the official Schedule R, even if this revenue proce- dure is not superseded to reflect and change in column heading on Schedule R; - Maintain the same number of entry lines on the substitute Schedule R as on the official form..04 Do not: - Add or delete entry lines; - Submit spreadsheets, database printouts, or similar formatted documents instead of using the Schedule R format to report data; and - Reduce or expand font size to add or delete extra data or lines..05 If substitute Schedules R and Continuation Sheets for Schedule R are not submitted in similar format to the official schedule, the substitutes may be returned, you may be contacted by the IRS, delays in processing may occur, and you may be subject to penalties. Section 1.8 - Specific Instructions for Form 8974.01 To properly file and to reduce delays and contact from the IRS, Form 8974 must be produced as close as possible to the official form..02 Use Form 8974 only if you are claiming the qualified small business payroll tax credit for increasing research activities..03 If a substitute Form 8974 is not submitted in similar format to the official IRS form, the substitutes may be returned, you may be contacted by the IRS, delays in processing may occur, and you may be subject to penalties. Section 1.9 - Office of Management and Budget (OMB) Requirements for Substitute Forms.01 The Paperwork Reduction Act (the Act) of 1995 (P.L. 104-13) requires the following. - OMB approves all IRS tax forms that are subject to the Act. - Each IRS form contains the OMB approval number, if assigned. The official OMB numbers may be found on the official IRS-printed forms. - Each IRS form (or its instructions) states: 1. Why the IRS needs the information, 2. How it will be used, and 3. Whether or not the information is required to be furnished to the IRS..02 This information must be provided to any users of official or substitute IRS forms or instructions..03 The OMB requirements for substitute IRS forms are the following. - Any substitute form or substitute statement to a recipient must show the OMB number as it appears on the official form. - For Form 941, Schedule B, Schedule D, Schedule R, and Form 8974,the OMB number (1545- 0029) must appear exactly as shown on the official form. - For Form 941, Schedule B, Schedule D, Schedule R, and Form 8974,the OMB number must use one of the following formats. 1. OMB No. 1545-0029 (preferred). 2. OMB # 1545-0029 (acceptable)..04 If no instructions are provided to users of your forms, you must furnish to them the exact text of the Privacy Act and Paperwork Reduction Act Notice. Section 1.10 - Order Forms and Instructions.01 You can order forms and instructions at IRS.gov/OrderForms. Section 1.11 - Effect on Other Documents.01 Revenue Procedure 2023-13, 2023-13 I.R.B. 581, dated March 27, 2023, is superseded. Section 1.12 - Helpful Information.01 Please follow the specifications and guidelines to produce substitute Form 941, Schedule B, Schedule D, Schedule R, and Form 8974..02 These forms are subject to review and possible changes, as required. Therefore, employers are cautioned against overstocking supplies of privately printed substitutes..03 Here is a review of references that were listed throughout this document.

Private Letter Ruling Number: 202220011 Internal Revenue Service February 22, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202220011 Release Date: 5/20/2022 Index Number: 2010.04-00, 9100.35-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B04 PLR-122232-21 Date: February 22, 2022 Dear *******: This letter responds to a letter dated October 22, 2021, submitted on behalf of Decedent's estate, requesting an extension of time pursuant to § 301.9100-3 of the Procedure and Administration Regulations to make an election. Decedent's estate is requesting to make an election under § 2010(c)(5)(A) of the Internal Revenue Code (a "portability" election) to allow a decedent's surviving spouse to take into account decedent's deceased spousal unused exclusion (DSUE) amount. The information submitted for consideration is summarized below. Decedent died on Date, survived by Spouse. It is represented that based on the value of Decedent's gross estate and taking into account any taxable gifts, Decedent's estate is not required under § 6018(a) to file an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return). It is further represented that there is an unused portion of Decedent's applicable exclusion amount and that a portability election is required to allow Spouse to take into account that amount (the "DSUE" amount). A portability election is made upon the timely filing of a complete and properly prepared estate tax return, unless the requirements for opting out are satisfied. See § 20.2010-2(a)(2) of the Estate Tax Regulations. For various reasons, an estate tax return was not timely filed and a portability election was not made. After discovery of this, Decedent's estate submitted this request for an extension of time under § 301.9100-3 to make a portability election. LAW AND ANALYSIS Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2010(a) provides that a credit of the applicable credit amount shall be allowed to the estate of every decedent against the tax imposed by § 2001. Section 2010(c)(1) provides that the applicable credit amount is the amount of the tentative tax that would be determined under § 2001(c) if the amount with respect to which such tentative tax is to be computed were equal to the applicable exclusion amount. On December 17, 2010, Congress amended § 2010(c), effective for estates of decedents dying and gifts made after December 31, 2010, to allow portability of a decedent's unused applicable exclusion amount between spouses. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, § 303, 124 Stat. 3296, 3302 (2010). Section 2010(c)(2) provides that the applicable exclusion amount is the sum of the basic exclusion amount, and, in the case of a surviving spouse, the DSUE amount. Section 2010(c)(3) provides the basic exclusion amount available to the estate of every decedent, an amount to be adjusted for inflation annually after calendar year 2011. Section 2010(c)(4) defines the DSUE amount to mean the lesser of (A) the basic exclusion amount, or (B) the excess of -- (i) the applicable exclusion amount of the last deceased spouse of the surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under § 2001(b)(1) on the estate of such deceased spouse. Section 2010(c)(5)(A) provides that a DSUE amount may not be taken into account by a surviving spouse under § 2010(c)(2) unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return that such amount may be so taken into account. The election, once made, shall be irrevocable. No election may be made if such return is filed after the time prescribed by law (including extensions) for filing such return. Section 20.2010-2(a)(1) provides that the due date of an estate tax return required to elect portability is nine months after the decedent's date of death or the last day of the period covered by an extension (if an extension of time for filing has been obtained). Under § 20.2010-2(a)(1), an extension of time under § 301.9100-3 to make a portability election may be granted in the case of an estate that is not required to file an estate tax return under § 6018(a), as determined solely based on the value of the gross estate and any adjusted taxable gifts (and without regard to § 20.2010-2(a)). Under § 301.9100-1(c), the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-3 provides the standards the Commissioner will use to determine whether to grant an extension of time to make an election whose due date is prescribed by a regulation (and not expressly provided by statute). Requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. In this case, based on the representation as to the value of the gross estate and any adjusted taxable gifts, the time for filing the portability election is fixed by the regulations. Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an extension of time for Decedent's estate to elect portability, provided Decedent's estate establishes it acted reasonably and in good faith, the requirements of §§ 301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government. Information, affidavits, and representations submitted on behalf of Decedent's estate explain the circumstances that resulted in the failure to timely file a valid election. Based solely on the information submitted and the representations made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Therefore, we grant an extension of time of 120 days from the date of this letter in which to make the portability election. The election should be made by filing a complete and properly prepared Form 706 and a copy of this letter, within 120 days from the date of this letter, with the Kansas City Service Center, at the following address: Department of the Treasury, Internal Revenue Service Center, Kansas City, MO 64999. For purposes of electing portability, a Form 706 filed by Decedent's estate within 120 days from the date of this letter will be considered to be timely filed. If it is later determined that, based on the value of the gross estate and taking into account any taxable gifts, Decedent's estate is required to file an estate tax return pursuant to § 6018(a), the Commissioner is without authority under § 301.9100-3 to grant an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void. See § 20.2010-2(a)(1). We neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, we express no opinion as to the DSUE amount to be potentially taken into account by Spouse. Any claimed DSUE amount will be included in the applicable exclusion amount of Spouse only to the extent that Spouse can substantiate such amount and will be subject to determination by the Director's office upon audit of relevant Federal gift or estate tax returns. See § 20.2010-3(c)(1) and (d). The rulings contained in this letter are based upon information and representations submitted by the Taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the Taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, we have sent a copy of this letter to your authorized representatives. Sincerely, Associate Chief Counsel Passthroughs and Special Industries _________________________ By: Leslie H. Finlow Senior Technician Reviewer, Branch 4 Office of the Associate Chief Counsel (Passthroughs and Special Industries) Enclosure Copy for § 6110 purposes cc:

Private Letter Ruling Number: 202002006 Internal Revenue Service October 9, 2019 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202002006 Release Date: 1/10/2020 Index Number: 9100.00-00, 9100.22-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:CORP:1 PLR-110264-19 Date: October 09, 2019 Dear ********: This letter responds to a letter dated April 29, 2019, submitted on behalf of Parent, requesting an extension of time under §§301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations to make an election. The extension is being requested for Parent to make an election under §1.1502-21(b)(3)(i) of the Income Tax Regulations to relinquish the entire carryback period for the consolidated net operating loss ("CNOL") for the consolidated group of which Parent is the common parent (the "Parent Group") for the tax year ending Date1 (the "Election"). Additional information was submitted subsequently. The material information is summarized below. Parent Group incurred a CNOL in the tax year ending Date1. Parent intended to relinquish the carryback period for its consolidated group's CNOL on its tax return for the tax year ending Date1. All returns for Parent Group were filed consistent with a valid Election having been made. However, for various reasons, a valid Election was not filed. After Date2, the date that the Election was due, it was discovered that a valid election was not filed. Subsequently, this request was submitted for an extension of time to file a valid election. Parent has represented that the Parent Group has not carried back, and will not carry back, any portion of the CNOL for the tax year ending on Date1 to a prior consolidated return year of the Parent Group. Appropriate representations have been received from Parent and other parties indicating that no portion of the CNOL for the tax year ending on Date1 has been or will be carried back to a prior separate return year (within the meaning of §1.1502-1(e)) of any member of the Parent Group. Parent also has represented that it is not seeking to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662. Section 1.1502-21(b)(3)(i) provides that a consolidated group may make an irrevocable election under section 172(b)(3) to relinquish the entire carryback period with respect to a CNOL for any consolidated return year. The election is made in a separate statement entitled "THIS IS AN ELECTION UNDER §1.1502-21(b)(3)(i) TO WAIVE THE ENTIRE CARRYBACK PERIOD PURSUANT TO SECTION 172(b)(3) FOR THE [insert consolidated return year] CNOLs OF THE CONSOLIDATED GROUP OF WHICH [insert name and employer identification number of common parent] IS THE COMMON PARENT." Section 1.1502-21(b)(3)(i) also provides that the statement must be filed with the group's income tax return for the consolidated return year in which the loss arises. Under §301.9100-1(c), the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-1(a). Section 301.9100-2 provides automatic extensions of time for making certain elections. Section 301.9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of §301.9100-2. Requests for relief under §301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. Section 301.9100-3(a). In this case, the time for filing the Election is fixed by the regulations ( i.e., §1.1502-21(b)(3)(i)). Therefore, the Commissioner has discretionary authority under §301.9100-1 to grant an extension of time for Parent to file the Election, provided Parent acted reasonably and in good faith, the requirements of §§301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government. Information, affidavits, and representations submitted by Parent, Company Official, and Tax Professional explain the circumstances that resulted in the failure to timely file a valid election. The information establishes that Parent reasonably relied on a qualified tax professional who failed to make, or advise Parent to make, the Election, and that the request for relief was filed before the failure to timely make the Election was discovered by the Internal Revenue Service. See §§301.9100-3(b)(1)(i) and (v). Based on the facts and information submitted, including the representations made, we conclude that Parent has shown it acted reasonably and in good faith, the requirements of §§301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government. Accordingly, an extension of time is granted under §301.9100-1, until 60 days from the date on this letter, for Parent to file the election with respect to the relinquishment of the entire carryback period for the CNOL for the tax year ending Date1, as described above. The above extension of time is conditioned on the taxpayers' (Parent and the members of the Parent Group) tax liability (if any) being not lower, in the aggregate, for all years to which the Election applies, than it would have been if the Election had been timely made (taking into account the time value of money). No opinion is expressed as to the taxpayers' tax liability for the years involved. A determination thereof will be made by the Director's office upon audit of the Federal income tax returns involved. Parent must file the Election in accordance with §1.1502-21(b)(3)(i). The Parent Group's tax return for the tax year ending Date1 must be amended to attach the election statement required by §1.1502-21(b)(3)(i). A copy of this letter must be attached to the election statement. Alternatively, if the Parent Group files its returns electronically, Parent may satisfy this latter requirement by attaching a statement to its return that provides the date and control number (PLR-110264-19) of this letter ruling. We express no opinion as to the tax effects or consequences of filing the Election late under the provisions of any other section of the Code and regulations, or as to the tax treatment of any conditions existing at the time of, or resulting from, filing the Election late that are not specifically set forth in the above ruling. For purposes of granting relief under §301.9100-1, we have relied on certain statements and representations made by Parent, Company Official, Tax Professional, and other parties. However, the Director should verify all essential facts. Moreover, notwithstanding that an extension is granted under §301.9100-1 to file the Election, penalties and interest that would otherwise be applicable, if any, continue to apply. This letter is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent. Pursuant to the power of attorney on file in the office, a copy of this letter is being sent to your authorized representative. Sincerely, _____________________________ T. Ian Russell Chief, Branch 1 Office ofAsociate ChiefCounsel (Corporate)

Internal Revenue Service - Information Release IR-2022-137 Extension filers: IRS.gov is the source for summertime tax help; agency encourages people to file soon July 13, 2022 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 Extension filers: IRS.gov is the source for summertime tax help; agency encourages people to file soon IR-2022-137, July 13, 2022 WASHINGTON -- With millions of people still waiting to file their tax returns, the IRS reminds them to file as soon as possible and take advantage of special tools available on IRS.gov that can help them file. Summer may be a busy time for many, but it's a great time to start tax planning - whether you still need to file a 2021 tax return or start planning for next year's tax season. The IRS website is the fastest and most convenient way to get tax-related information and help. The online tools are available any time, so taxpayers can use them at their convenience. Here are some important reasons for taxpayers to visit IRS.gov this summer. Get tax information 24/7 Taxpayers can use IRS.gov to: - View the filing page to get information on most federal income tax topics. - Access the Interactive Tax Assistant tool for answers to many tax law questions. - Sign into their individual IRS online account to view their balance an tax records, manage communication preferences, make payments and more. - Find the most up-to-date information about their tax refunds using the Where's My Refund? tool. Taxpayers can check the status of their refund 24 hours after the IRS acknowledges receipt of an e-filed return. Taxpayers can also download the official IRS mobile app, IRS2Go, to check their refund status, make payments, find free tax preparation assistance, sign up for helpful tax tips and more. Adjust withholding now to avoid tax surprises next year Summer is a great time for taxpayers to check their withholding to avoid a tax surprise next filing season. Life events like marriage, divorce, having a child or a change in income can affect taxes. The IRS Tax Withholding Estimator on IRS.gov helps employees assess their income tax, credits, adjustments and deductions, and determine whether they need to change their withholding. If a change is recommended, the estimator will provide instructions to update their withholding with their employer either online or by submitting a new Form W-4, Employee's Withholding Allowance Certificate. File electronically Taxpayers who requested an extension to October 17 or missed the April 18 deadline can still prepare and e-file returns for free with IRS Free File, if they qualify. The IRS accepts electronically filed returns 24/7. There's no reason to wait until October 17 if filers have all the information and documentation they need to file an accurate return today. They can get their refund faster by choosing direct deposit. Taxpayers who missed the April 18 deadline and owe should file and pay electronically as soon as possible to reduce penalties and interest. Taxpayers can make payments or set up payment plans online. Find a taxpayer assistance center The Taxpayer Assistance Center Locator tool has a new look and feel, featuring a dynamic map, a directions button and two tabs for inputting search criteria. It's important to remember that Taxpayer Assistance Centers operate by appointment only. Taxpayers can make an appointment by calling the number for the office they want to visit. Read information in other languages Many IRS webpages are now available in Spanish, Vietnamese, Russian, Korean, Haitian Creole and Chinese. Some of the multilingual resources include the Taxpayer Bill of Rights, e-file resources and many tax forms and publications. Access the Alternative Media Center At the online Alternative Media Center (AMC), taxpayers will find a variety of accessible products to help with the use of assistive technology such as screen reading software, refreshable Braille displays and screen magnifying software. These products include tax forms, instructions and publications that can be downloaded or viewed online as Section 508 compliant PDFs, HTML, eBraille, text and large print. Please note that every product is not available in all formats. For example, tax forms are not available as HTML. To request paper copies of tax forms or instructions or publications in Braille or large print, taxpayers can call the tax form telephone number at 800-829-3676. Taxpayers can complete Form 9000, Alternative Media Preference PDF, to choose to receive their IRS tax notices in Braille, large print, audio or electronic formats. This includes notices about additional taxes or penalties owed. Taxpayers can include the completed form with their tax return, mail it as a standalone form to the IRS or they can call 800-829-1040. Keep current with IRS Tax Tips Taxpayers can subscribe to IRS Tax Tips to get easy-to-read articles sent directly to their e-mail from the IRS. Tax Tips are brief, to the point and cover various tax topics, like year-round tax planning and understanding taxpayer rights. More helpful links: - Gig Economy Tax Center - Child and Dependent Care Credit - About Form W-2

Private Letter Ruling Number: 202406013 Internal Revenue Service February 13, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202406013 Release Date: 2/9/2024 Index Number: 118.01-00, 305.04-00, 2501.00-00, 2511.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:CORP:2 PLR-115616-22 Date: February 13, 2023 Dear ******: This letter responds to your authorized representative's letter dated August 10, 2022, requesting rulings under sections 118, 305, 2501, 2511, 2512, and 2702 of the Internal Revenue Code (the "Code"). The information provided in that letter and in later correspondence is summarized below. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party. This office has not verified any of the material submitted in support of the request for rulings, but such material is subject to verification on examination. Summary of Facts Company is a State A corporation and the parent of an affiliated group of corporations that files a consolidated U.S. federal income tax return on a calendar year basis. Company was incorporated in Year 1. Company is engaged in Business A. Executive is an executive of Company. On Date 1, Executive established Trust 1 for the benefit of Family Member. Also on Date 1, Executive established Trust 2 for the benefit of the Family Beneficiaries. On Date 2 and Date 4, Executive established Trust 3 and Trust 4, respectively, for the benefit of Family Member. On Date 3, Executive established Trust 5 for the benefit of Person 1. Also on Date 2, Executive established GRAT (Grantor Retained Annuity Trust) 1 for the benefit of Executive and Person 1. On Date 8, Executive established GRAT 2 and GRAT 3 for the benefit of Executive, Person 2, Person 3, Person 4, and a trust, not part of this ruling request, for Person 2, Person 3, and Person 4. On Date 9, Executive established GRAT 4 for the benefit of Trust 2. Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, GRAT 1, GRAT 2, GRAT 3, and GRAT 4 are hereinafter referred to collectively as "Trusts". Executive's interest in GRAT 4 is a "qualified interest" under section 2702(b). Executive's interests in GRAT 1, GRAT 2, and GRAT 3 are not subject to the special valuation rules of section 2702(a) because the beneficiaries of GRAT 1, GRAT 2, and GRAT 3 are not members of Executive's family as defined in section 2702(e) and section 2704(c)(2). On Date 5, Company formed LLC, which is disregarded as an entity separate from Company for U.S. federal income tax purposes. LLC was formed for Company Purpose. However, Company is not required under the operating agreement to use LLC for Company Purpose and may dissolve LLC at any time. Company has three classes of common stock outstanding: Stock A, Stock B, and Stock C. Stock A is widely held and, since Date 7, has been publicly traded on the Exchange. The shares of Stock A and Stock B are identical other than the voting power. Each share of Stock B has a times the voting power of each share of Stock A. Stock B is held, in part, by Executive and GRATs 1 through 4, and Trusts 1 through 4. Trust 5 owns shares of Stock A. All of the issued shares of Stock C are held by LLC and are not considered outstanding for U.S. federal income tax purposes. Stock C has no voting rights except as otherwise required by law. Upon the transfer to a holder other than LLC or another subsidiary of Company, shares of Stock C will automatically convert on a share-for-share basis into shares of Stock A. On Date 6, Company made an initial contribution of b newly-issued shares of Stock C to LLC. On Date 10, Company announced that its board of directors approved a share repurchase program with authorization to purchase Company's Stock A at the discretion of Company's management (the " Share Repurchase Program "). None of the Contributing Shareholders (defined below) have participated in the Share Repurchase Program. The Share Repurchase Program and the Proposed Transaction are each driven by separate valid business purposes. Executive, Trusts, and Company intend to enter into a binding agreement ("Agreement") wherein Executive and Trusts will each surrender c percent (valued at approximately $d) of their shares of Stock A or Stock B, as the case may be, to Company. Company will subsequently retire those contributed shares and will transfer a like number of newly issued shares of Stock C to LLC. Proposed Transaction For what are represented to be valid business purposes, the following transaction has been proposed (the "Proposed Transaction"): (i) Trusts and Executive (each a " Contributing Shareholder ", and collectively, the " Contributing Shareholders ") will contribute in one or more installments a portion of their Stock A or Stock B to the capital of Company for the benefit of LLC. Executive intends to contribute stock of an amount equal to approximately $d or c percent of shares of Stock B owned by Executive. The Trusts will contribute a number of shares to Company that is proportionate on a percentage basis to the number of shares contributed by Executive (collectively, the " Contribution ") or approximately c percent of their shares of Stock A or Stock B, as the case may be, to the capital of Company. The Contributing Shareholders and Company will enter into a binding agreement pursuant to which the Contribution will be effected (the " Contribution Agreement " or " Agreement "). The Contribution may take place in more than one installment. The Contributing Shareholders and Company will enter into a new Contribution Agreement for each separate contribution, if any. The shareholders of Company other than the Contributing Shareholders are referred to as the " Non-Contributing Shareholders ". (ii) When Company receives shares from Contributing Shareholders pursuant to the Contribution Agreement, Company will retire such shares and transfer a like number of newly issued shares of Stock C to LLC. (iii) LLC will use cash derived from Stock C for Company Purpose. (iv) Company owns all of the membership interests of the LLC and therefore will control the policies of LLC related to the Company Purpose. Representations Company and the Contributing Shareholders make the following representations regarding the Proposed Transaction: (a) The Contributing Shareholders will not receive any consideration from Company with respect to the surrender of their stock to the capital of Company in the Proposed Transaction. (b) The stock surrendered to the capital of Company in the Proposed Transaction will be canceled and such stock or similar shares of stock of Company will not be returned to the Contributing Shareholders following the Proposed Transaction. (c) Company does not intend to fund LLC with property other than Stock C or cash. (d) GRAT 1, GRAT 2, GRAT 3, and GRAT 4 each have the terms necessary to satisfy the requirements to be a qualified interest under § 25.2702-3 of the Gift Tax Regulations. (e) There is no plan to transfer the shares of Stock C to any employee or independent contractor in connection with the performance of services within the meaning of section 83 or otherwise. (f) The Contributing Shareholders are not related to any of the Non-Contributing Shareholders such that stock ownership of a Contributing Shareholder would be attributed to a Non-Contributing Shareholder pursuant to section 318(a)(1) or section 267(c)(2). (g) There is no reason to believe that any of the stock purchases pursuant to the Share Repurchase Program will be taxed as dividends to the participating shareholders and there is no reason to believe that such stock purchases are dividends within the meaning of sections 301 and 302. (h) The Proposed Transaction is an isolated transaction that is not related to any other past or future transactions. (i) The Proposed Transaction is motivated solely by the Contributing Shareholders' and Company's business considerations and is not motivated by any intent to confer a U.S. federal income tax benefit on any shareholder, including as a substitute for a dividend. (j) The Proposed Transaction is not part of a plan to periodically increase the proportionate share of any shareholder in the assets or earnings and profits of Company. (k) There is no plan for the Contributing Shareholders to make contributions to Company that are not otherwise described herein. (l) If the Contributions pursuant to the Proposed Transaction occur in more than one installment, the final contribution will occur within a e month period of the first contribution. (m) Persons 1 through 4 are not employees of Company or Executive. Transactional Rulings Based solely on the information and representations submitted, we rule as follows: (1) The surrenders of Stock A or Stock B by the Contributing Shareholders to Company in the Proposed Transaction are a non-taxable contribution to the capital of Company and accordingly, the Contributing Shareholders will not recognize gain or loss on such contribution. See Commissioner v. Fink, 483 U.S. 89 (1987). (2) Each Contributing Shareholder's basis in the shares surrendered in the Proposed Transaction will be allocated to the Contributing Shareholder's basis in their remaining shares. See Commissioner v. Fink, 483 U.S. 89 (1987). (3) Company's receipt of shares of Stock A or B from the Contributing Shareholders will not be taxable to Company. See section 118(a). (4) The Non-Contributing Shareholders will not recognize any income as a result of the Proposed Transaction and the Contributing Shareholders' surrender of shares to Company will not be treated as a distribution of property to the Non-Contributing Shareholders. See Treas.Reg. §§ 1.305-3(b)(3) and 1.305-3(e), Example (13). See also Rev.Rul. 77-19, 1979-1 C.B. 83. Gift Tax Rulings Ruling 5 Under section 2501(a)(1) of the Code, tax is imposed for each calendar year on the transfer of property by gift during such calendar year by any individual, resident, or nonresident. Under section 2511(a), the tax imposed by section 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. Under section 2512(b), where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. Section 25.2511-1(c)(1) of the Gift Tax Regulations provides that any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax. Under § 25.2511-1(g)(1), the gift tax is not applicable to a transfer for a full and adequate consideration in money or money's worth, or to ordinary business transactions, described in § 25.2512-8. Under § 25.2511-1(h), a transfer of property by B to a corporation generally represents gifts by B to the other individual shareholders of the corporation to the extent of their proportionate interests in the corporation. Under § 25.2512-8, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money's worth. In Rev.Rul. 80-196, 1980-2 C.B. 32, two shareholders transferred stock to three employees as a bonus in consideration of past services to the corporation. The two shareholders were not related to the three employees, nor did any special personal relationship exist between the shareholders and the three employees. The ruling holds, for gift tax purposes, that the transfers to the three employees were in the ordinary course of business under § 25.2512-8 because the transfers were motivated by a valid business reason, that is, retaining valuable personnel in the employment of the corporation. Therefore, the transfers were not subject to gift tax. In Anderson v. Commissioner, 8 T.C. 706 (1947), senior executives of a corporation sold shares to junior executives as part of a plan to shift management responsibilities to the junior executives. The Tax Court held that the sale was not subject to gift tax because it was made in the ordinary course of business. See Galluzzo v. Commission, 43 T.C.M. 199 (T.C. 1981). Company is owned by Executive, Trusts, and Non-Contributing Shareholders. In Agreement, Executive and Trusts agree to surrender shares to Company in order to fund LLC. By entering into Agreement, Executive and Trusts are increasing the value of the shares held by the Non-Contributing Shareholders. For gift tax purposes, this transfer is characterized as an indirect transfer of property from Executive and Trusts to Non-Contributing Shareholders. See §§ 25.2511-1(c)(1) and 25.2511-1(h). See also Rev. Rul. 71-443, 1971 C.B. 337; Bosca v. Commissioner, T.C. Memo. 1998-251; Kincaid v. United States, 682 F.2d 1220 (5 th Cir. 1982); Estate of Trenchard, T.C. Memo. 1995-121. Under § 25.2512-8, a transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent), will be considered as made for adequate and full consideration in money or money's worth. Under the facts presented in this ruling, the transfer made through Agreement satisfies all three of the requirements to be considered as made in the ordinary course of business. First, Agreement is for the bona fide business purpose of furthering Company Purpose. Second, the transfer from Executive and Trusts to Non-Contributing Shareholders is at arm's length because the transaction is a business transaction, the parties act in their own self-interest and are not subject to pressure from the other parties, and the Non-Contributing Shareholders are not related to Executive or Trusts. Finally, the transfer is made without donative intent because the transfer is made for the sole purpose of furthering Company Purpose. Accordingly, the indirect transfer from Executive and Trusts to the Non-Contributing Shareholders is deemed to be made for adequate and full consideration in money or money's worth. Therefore, based on the facts presented and the representations made, the transfers made to the Non-Contributing Shareholders pursuant to Agreement do not constitute gifts from Executive or Trusts. By entering into Agreement, each party is increasing the value of the shares held by others (i.e., Executive is increasing the value of the shares held by Trusts, Trusts are increasing the value of shares held by Executive, and each individual trust is increasing the value of each other individual trust). The transfers between Executive and Trusts are not at arm's length, and, therefore, they are not made in the ordinary course of business. However, under Agreement, Executive and Trusts are each surrendering an equal proportion of their shares of Company, and, consequently, the value of the indirect transfers made by each of the parties to the Agreement will be equal to the value of the indirect transfers received by each party. Accordingly, the indirect transfers made from Executive to Trusts and from Trusts to Executive (and each other trust) are made for full and adequate consideration in money or money's worth. Therefore, based on the facts presented and the representations made, the Contributing Shareholders will not be subject to gift tax under sections 2501, 2511, 2512, and regulations thereunder as a result of the Proposed Transaction. Ruling 6 Section 2702(a)(1) provides that solely for purposes of determining whether a transfer of an interest in trust to (or for the benefit of) a member of the transferor's family is a gift (and the value of such transfer), the value of any interest in such trust retained by the transferor or any applicable family member (as defined in section 2701(e)(2)) shall be determined as provided in section 2702(a)(2). Section 2702(a)(2)(A) provides that the value of any retained interest which is not a qualified interest shall be treated as being zero. Section 2702(b) provides that the term "qualified interest" means: (1) any interest which consists of the right to receive fixed amounts payable not less frequently than annually, (2) any interest which consists of the right to receive amounts which are payable not less frequently than annually and are a fixed percentage of the fair market value of the property in the trust (determined annually), and (3) any noncontingent remainder interest if all of the other interests in the trust consist of interests described in paragraph (1) or (2). Section 25.2702-2(a)(6) provides, in part, that a qualified interest means a qualified annuity interest, a qualified unitrust interest, or a qualified remainder interest. Section 25.2702-3(b)(1) provides that an interest is a qualified annuity interest only if it meets the requirements of this paragraph and § 25.2702-3(d). A qualified annuity interest is an irrevocable right to receive a fixed amount. The annuity amount must be payable to (or for the benefit of) the holder of the annuity interest at least annually. Under § 25.2702-3(d)(3), the governing instrument must prohibit distributions from the trust to or for the benefit of any person other than the holder of the qualified annuity or unitrust interest during the term of the qualified interest. The terms of GRAT 4 prohibit distributions to anyone other than Executive during the term of Executive's interest in GRAT 4 in accordance with § 25.2702-3(d)(3). Under the terms of Agreement, the contribution of shares to Company and resulting indirect transfer from GRAT 4 to Executive and Non-Contributing Shareholders will be made for adequate and full consideration in money or money's worth within the meaning of § 25.2511-1(g)(1). Accordingly, such transfers are not characterized as distributions from GRAT 4. These transfers are deemed investments because GRAT 4 receives or is deemed to receive value in money or money's worth equal to the transfer. As a result, GRAT 4 will not violate the terms of the trust instruments or the requirement under § 25.2702-3(d)(3) prohibiting a distribution for the benefit of any person other than Executive during the term of Executive's qualified interest. Therefore, based on the facts presented and the representations made, Executive's interest in GRAT 4 will not cease to qualify as a qualified interest under § 25.2702-3 or otherwise under section 2702(b) as a result of the Proposed Transaction. Caveats Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Procedural Statements This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. Sincerely, Gerald B. Fleming Senior Technician Reviewer, Branch 2 (Corporate) cc:

Private Letter Ruling Number: 202223004 Internal Revenue Service December 17, 2021 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202223004 Release Date: 6/10/2022 Index Number: 355.00-00, 368.04-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:CORP:B04 PLR-110954-21 Date: December 17, 2021 Dear *******: This letter responds to a letter dated May 14, 2021, submitted on behalf of Distributing, its affiliates, and its shareholders, requesting rulings (the "Ruling Request") on certain federal income tax consequences of a series of proposed transactions (the "Proposed Transactions," as defined below). The material information submitted in the Ruling Request and in subsequent correspondence is summarized below. This letter is issued pursuant to Rev. Proc. 2017-52, 2017-41 I.R.B. 283, as amplified and modified by Rev. Proc. 2018-53, 2018-43 I.R.B. 667, regarding one or more "Covered Transactions" under section 355 and/or section 368 of the Internal Revenue Code (the "Code"). This office expresses no opinion as to any issue not specifically addressed by the rulings below. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This office has made no determination regarding whether each of the distributions in the Proposed Transactions (defined below): (i) satisfies the business purpose requirement of Treas. Reg. § 1.355-2(b); (ii) is used primarily as a device for the distribution of the earnings and profits of the distributing corporation or the controlled corporation or both (see section 355(a)(1)(B) and Treas. Reg. § 1.355-2(d)); or (iii) is part of a plan (or series of related transactions) pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent or greater interest in the distributing corporation or the controlled corporation, or any predecessor or successor of the distributing corporation or the controlled corporation, within the meaning of Treas. Reg. § 1.355-8 (see section 355(e)(2)(A)(ii) and Treas. Reg. § 1.355-7). SUMMARY OF FACTS Distributing, a publicly traded domestic corporation, is the parent company of a worldwide group of domestic and foreign affiliates (the "Distributing Group"). Distributing is the common parent of an affiliated group of corporations that join in the filing of a consolidated federal income tax return (the "Distributing Consolidated Group"). Distributing has a single class of common stock issued and outstanding (the "Distributing Common Stock"), approximately a% of which is held by DRE 4, an indirect, wholly owned subsidiary of Distributing that is classified as an entity disregarded as separate from its owner for federal tax purposes (the "Hook Stock"). Approximately b% of the outstanding Distributing Common Stock is held in the Rabbi Trusts, which provide deferred compensation for employees and directors. As grantor of the Rabbi Trusts, Distributing is treated as the owner for federal income tax purposes of the Distributing Common Stock held by the Rabbi Trusts. Accordingly, Distributing treats the Distributing Common Stock held by the Rabbi Trusts as disregarded for federal income tax purposes. Distributing also has issued and outstanding publicly listed depositary shares, each of which represents a c% interest in a share of mandatory convertible preferred stock of Distributing (the "Distributing Preferred Stock"). Pursuant to the terms of the Distributing Preferred Stock, each share of Distributing Preferred Stock that has not been converted into Distributing Common Stock on Date 1 will automatically convert into a number of shares of Distributing Common Stock at a ratio determined under the terms of the Distributing Preferred Stock. Prior to the Proposed Transactions (defined below), Distributing and its subsidiaries will be engaged in the Controlled Business (including Business A and Business B) and the Non-Controlled Business (including Business C, Business D, Business E, Business F, and Business G). Distributing directly owns all the outstanding stock of Sub 1, Sub 2, and Sub 3. Sub 1 directly owns all the outstanding stock of Sub 4. Sub 3 directly owns all the outstanding stock of Sub 5, which directly owns all the outstanding stock of Sub 6 and Sub 7. Sub 2, Sub 3, and Sub 6 directly own approximately d%, e%, and f%, respectively, of the outstanding common stock of Sub 8. Sub 2 and Sub 4 directly own approximately g% and h%, respectively, of the outstanding voting preferred stock of Sub 8. The Sub 8 stock held by Sub 2 and Sub 4 currently represents approximately i% of the total combined voting power (and approximately j% of the total value) of all Sub 8 stock. Sub 8 directly owns all the outstanding stock of Sub 9. Each of Sub 1, Sub 2, Sub 3, Sub 4, Sub 5, Sub 6, Sub 7, Sub 8, and Sub 9 is a member of the Distributing Consolidated Group. Sub 6 directly owns all the outstanding equity interests in DRE 1 and DRE 2, each of which is classified as an entity disregarded as separate from its owner for federal tax purposes. DRE 1 owns all the outstanding equity interests in DRE 3, which is classified as an entity disregarded as separate from its owner for federal tax purposes. Sub 9 directly owns all the outstanding stock of FSub 1 and FSub 2, each of which is classified as a corporation for federal tax purposes. FSub 1 owns all the outstanding equity interests in DRE 4, which is classified as an entity disregarded as separate from its owner for federal tax purposes. FSub 2 directly owns all the outstanding equity interests in DRE 5, which is classified as an entity disregarded as separate from its owner for federal tax purposes, and k% of the outstanding stock of FSub 3, which is classified as a corporation for federal tax purposes. DRE 5 directly owns the remaining l% of the outstanding stock of FSub 3. FSub 3 directly owns all the outstanding equity interests in DRE 6, which is classified as an entity disregarded as separate from its owner for federal tax purposes, and indirectly (through other disregarded entities) owns all the outstanding equity interests in DRE 7, which is classified as an entity disregarded as separate from its owner for federal tax purposes. DRE 7 has a branch in Jurisdiction A. DRE 6 directly owns all the outstanding equity interests in DRE 8, which is classified as an entity disregarded as separate from its owner for federal tax purposes. DRE 8 directly owns all the outstanding equity interests in DRE 9 and DRE 10, both of which are classified as an entity disregarded as separate from its owner for federal tax purposes. DRE 9 directly owns all the outstanding equity interests in DRE 11, which is classified as an entity disregarded as separate from its owner for federal tax purposes. DRE 11 directly owns all the outstanding equity interests in DRE 12, which is classified as an entity disregarded as separate from its owner for federal tax purposes. DRE 12 has a branch in Jurisdiction B. DRE 10 directly owns all the outstanding equity interests in DRE 13, which is classified as an entity disregarded as separate from its owner for federal tax purposes. DRE 13 directly owns all the outstanding equity interests in DRE 14 and DRE 15, both of which are classified as an entity disregarded as separate from its owner for federal tax purposes, and indirectly (through another disregarded entity) owns all the outstanding equity interests in DRE 16, which is classified as an entity disregarded as separate from its owner for federal tax purposes. As of Date 2, which was 60 days prior to the first public announcement of the Separation (defined below), Distributing had amounts outstanding under the A Notes, B Notes, C Notes, D Notes, E Notes, F Notes, G Notes, H Notes, I Notes, J Notes, K Notes, L Notes, M Notes, N Notes, and O Notes (together, the "Distributing Debt"). None of the Distributing Debt was issued in anticipation of the Proposed Transactions (defined below). For purposes of satisfying the active trade or business requirements of section 355(b) with respect to each of the distributions discussed below, financial information has been submitted in accordance with Rev. Proc. 2017-52 indicating that each of Business A, Business B, Business C, Business D, Business E, Business F, and Business G has had gross receipts and operating expenses representing the active conduct of a trade or business for each of the past five years. The Jurisdiction B branch of DRE 12 is engaged in Business A. Sub 2 is engaged in Business B. Sub 5, Sub 7, DRE 1, and DRE 2 are engaged in Business C. Sub 6, DRE 1, DRE 2, and DRE 3 are engaged in Business D. Sub 2 is engaged in Business E. The Jurisdiction A branch of DRE 7 is engaged in Business F. DRE 13, DRE 14, DRE 15, and DRE 16 are engaged in Business G. PROPOSED TRANSACTIONS The following transactions (the "Proposed Transactions") have occurred or will occur to separate the Controlled Business from the Distributing Group (the "Separation"): Step 1: Distributing formed a new, wholly owned, domestic corporation, Controlled 1. Step 2: Controlled 1 formed a new, wholly owned, domestic entity, Controlled 3, which is initially treated as a disregarded entity. Step 3: Controlled 1 formed a new, wholly owned, domestic entity, Controlled 4, which is initially treated as a disregarded entity. Step 4: Distributing formed a new, wholly owned, domestic entity, DRE 17, which is treated as a disregarded entity. DRE 17 will form a new, wholly owned, foreign entity, Controlled 2, which will make an initial entity classification election to be classified as a disregarded entity, effective as of the date of its formation. DRE 17 will transfer all the equity interests in Controlled 2, while Controlled 2 holds de minimis assets and liabilities, to FSub 3 for de minimis consideration. Step 5: Certain Controlled Business assets and liabilities, including the equity interests in DRE 12, will be transferred from disregarded entities owned directly or indirectly by FSub 3 to various newly formed foreign disregarded entities that will be formed by or transferred to Controlled 2. Step 6: Controlled 2 will elect to be classified as a corporation for federal tax purposes. Consequently, for federal income tax purposes, FSub 3 will be deemed to contribute to Controlled 2 all the assets held directly and indirectly by Controlled 2 in exchange for (i) all the stock of Controlled 2 (the "Controlled 2 Stock") and (ii) the assumption by Controlled 2 of liabilities related to the transferred assets (the "First Controlled 2 Contribution"). Step 7: FSub 3 will distribute approximately k% of the Controlled 2 Stock to FSub 2 and the remaining approximately l% of the Controlled 2 Stock to DRE 5 (the "First Controlled 2 Distribution"). Step 8: DRE 5 will distribute to FSub 2 all the Controlled 2 Stock that it receives from FSub 3 in the First Controlled 2 Distribution. Step 9: FSub 2 will contribute to Controlled 2 (i) the equity interests in certain newly formed foreign disregarded entities holding Controlled Business assets and liabilities and (ii) the stock of certain newly formed foreign corporations holding Controlled Business assets and liabilities in exchange for (x) the actual or constructive issuance of Controlled 2 Stock and (y) the deemed assumption of liabilities related to the transferred assets (the "Second Controlled 2 Contribution"). Step 10: FSub 2 will distribute all the Controlled 2 Stock to Sub 9 (the "Second Controlled 2 Distribution"). Step 11: DRE 17 will form a new, wholly owned, foreign entity, DRE 18, which will make an initial entity classification election to be classified as a disregarded entity, effective as of the date of its formation. DRE 17 will transfer all the equity interests in DRE 18, while DRE 18 holds de minimis assets and liabilities (including the equity interests in other newly formed, foreign disregarded entities that also will hold only de minimis assets and liabilities), to FSub 1 for de minimis consideration. FSub 1 (or other Distributing Group members) will transfer, directly or indirectly, certain assets and liabilities principally related to the distribution of Controlled Business products in non-U.S. markets to DRE 18 (or newly formed, foreign disregarded entities owned by DRE 18) (the "DRE 18 Asset Transfers"). Subsequently, the equity interests in DRE 18 will be transferred, directly or indirectly, to Distributing in exchange for cash (the "DRE 18 Transfer"). FSub 1 may also transfer equity interests in other disregarded entities owning assets related to the Controlled Business, to Distributing in exchange for cash (together with the DRE 18 Transfer, the "FSub 1 Transfer"). Any such assets and liabilities deemed transferred pursuant to the FSub 1 Transfer are ancillary to, and of de minimis value in relation to, the Controlled Business. Any such equity interests in disregarded entities will be contributed by Distributing to Controlled 1 in Step 20. Step 12: Controlled 1 will transfer all the equity interests in Controlled 3, while Controlled 3 is a disregarded entity that holds de minimis assets and liabilities, to Sub 9 for de minimis consideration. Thereafter, Controlled 3 will elect to be classified as a corporation for federal tax purposes. Sub 9 will contribute all the Controlled 2 stock to Controlled 3 in exchange for the actual or constructive issuance of stock of Controlled 3 (such stock, the "Controlled 3 Stock," and the contribution, the "Controlled 3 Contribution"). Step 13: Sub 9 will distribute all the Controlled 3 Stock to Sub 8 (the "First Controlled 3 Distribution"). Step 14: Sub 8 will distribute all the Controlled 3 Stock to Sub 3 in partial redemption of the stock of Sub 8 held by Sub 3 (the "Second Controlled 3 Distribution"). Step 15: Sub 3 will distribute all the Controlled 3 Stock to Distributing (the "Third Controlled 3 Distribution"). Step 16: Controlled 1 will transfer all the equity interests in Controlled 4, while Controlled 4 is a disregarded entity that holds de minimis assets and liabilities, to Sub 2 for de minimis consideration. Sub 2 will contribute to Controlled 4 certain assets and liabilities related to the Controlled Business, including all the assets related to Business B. Step 17: Controlled 4 will elect to be classified as a corporation for federal tax purposes. Consequently, for federal income tax purposes, Sub 2 will be deemed to contribute to Controlled 4 all the assets held by Controlled 4 in exchange for (i) all the stock of Controlled 4 (the "Controlled 4 Stock") and (ii) the assumption by Controlled 4 of liabilities related to the transferred assets (the "Controlled 4 Contribution"). Step 18: Sub 2 will distribute all the Controlled 4 Stock to Distributing (the "Controlled 4 Distribution"). Step 19: Distributing will contribute certain assets and liabilities related to the Controlled Business to DRE 19, a newly formed, domestic disregarded entity that is owned by Distributing. Distributing will contribute certain other assets and liabilities related to the Controlled Business to Controlled 4 in exchange for the actual or constructive issuance of Controlled 4 Stock. Step 20: Distributing will contribute all the Controlled 3 Stock, all the Controlled 4 Stock, all the equity interests in DRE 19, all the equity interests in DRE 18, and any interests in other disregarded entities owned by Distributing that own Controlled Business assets to Controlled 1 in exchange for (i) the actual or constructive issuance of shares of Controlled 1 stock (the "Controlled 1 Stock"), (ii) the deemed assumption of liabilities of DRE 18, which were incurred in the ordinary course of business and are associated with the Controlled Business assets held by DRE 18 or one or more other disregarded entities directly or indirectly owned by DRE 18 (the "DRE 18 Liabilities"), (iii) the deemed assumption of liabilities of DRE 19, which were incurred in the ordinary course of business and are associated with the Controlled Business assets held by DRE 19 or one or more other disregarded entities directly or indirectly owned by DRE 19 (the "DRE 19 Liabilities"), (iii) the distribution of cash described in Step 22, and potentially (iv) the debt instruments of Controlled 1 that qualify as securities within the meaning of section 361(a) (such securities, the "Controlled 1 Securities," and the contribution, the "Controlled 1 Contribution"). DRE 18 will elect to be classified as a corporation for federal tax purposes, effective after the Controlled 1 Contribution. Step 21: Controlled 1 will borrow cash pursuant to (i) issuances of debt instruments to third-party investors in the capital markets and/or (ii) borrowings under new credit facilities entered into with one or more third-party financial institutions (the "Debt Issuances"). Step 22: Controlled 1 will distribute to Distributing some or all of the net proceeds from the Debt Issuances (the amount so distributed, the "Controlled 1 Proceeds"). Step 23: In a pro rata distribution, Distributing will distribute shares of Controlled 1 Stock (representing 80% or more of the total combined voting power of all Controlled 1 Stock (determined without taking into consideration any Controlled 1 Stock that, in form, may be distributed to DRE 4)) to holders of Distributing Common Stock (the "External Distribution"). Prior to and in connection with the External Distribution, DRE 4 will either (i) surrender the Hook Stock shares and receive shares of a newly issued class of Distributing stock that will not participate in the External Distribution and will contain anti-dilution provisions such that, upon the External Distribution, the newly issued shares will represent a greater proportional ownership interest in Distributing, or (ii) retain the Hook Stock but enter into a binding agreement with Distributing providing that DRE 4 will immediately upon receipt of Controlled 1 Stock transfer all such Controlled 1 Stock back to Distributing in exchange for cash approximately equal to the fair market value of such Controlled 1 Stock. In the latter case, Distributing will, under a pre-existing binding agreement, transfer such Controlled 1 Stock to Controlled 1 for no consideration (such transactions described in (i) and (ii), the "Hook Stock Transactions). The Rabbi Trusts will not hold Distributing Common Stock at the time of the External Distribution. Prior to and in connection with the External Distribution, Distributing will exchange the Distributing Common Stock held by the Rabbi Trusts for shares of a newly issued class of Distributing stock that will not participate in the External Distribution (the "Recapitalization"). After the External Distribution, these newly issued shares may be converted back into Distributing Common Stock at a ratio determined pursuant to an anti-dilution formula. Step 24: As expeditiously as is commercially reasonable, and in any event within m months after the External Distribution, Distributing will use an amount of cash (which may come from its general accounts) equal to or greater than the amount of the Controlled 1 Proceeds to repay outstanding Distributing Debt, make distributions to Distributing shareholders other than DRE 4, and/or repurchase shares of Distributing Common Stock other than those held by DRE 4 (the "Controlled 1 Proceeds Purge"). Step 25: To the extent Controlled 1 issues Controlled 1 Securities in the Controlled 1 Contribution and to the extent Distributing holds any Controlled 1 Stock following the External Distribution (such Controlled 1 Stock, the "Controlled 1 Exchange Stock"), Distributing will exchange all the Controlled 1 Securities and all the Controlled 1 Exchange Stock for certain Distributing Debt (the exchanged Distributing Debt, the "Distributing Exchange Debt," and such exchanges, the "Debt Exchanges"), such that Distributing will no longer hold any Controlled 1 Securities or Controlled 1 Stock following the completion of such exchanges. The Debt Exchanges will be completed as expeditiously as is commercially reasonable, and in any event within m months after the External Distribution. If Distributing disposes of any Controlled 1 Securities or Controlled 1 Exchange Stock in the Debt Exchanges, the Distributing Exchange Debt that is exchanged for the Controlled 1 Securities or Controlled 1 Stock will have been purchased on the open market by various investment banks (the "Exchange Banks") at least one day before the date of the Debt Exchanges. In connection with the Proposed Transactions, Distributing (and/or one or more of its direct or indirect subsidiaries) and Controlled 1 (and/or one or more of its direct or indirect subsidiaries) will enter into agreements (the "Post-Separation Agreements") intended to govern certain of their relationships (and that of their respective subsidiaries) following consummation of the Proposed Transactions and to manage an orderly transition in the operation of the Controlled Business. The Post-Separation Agreements will include an agreement that will govern the allocation of various items including liabilities resulting from the operations of Distributing's and Controlled 1's respective businesses, as well as certain customary agreements with Controlled 1 regarding tax and employee matters. The Post-Separation Agreements will also include (i) agreements related to assets, liabilities, and regulatory authorizations that cannot be transferred prior to the Proposed Transactions; (ii) transition and logistical services agreements, providing for the provision by Distributing and Controlled 1 to each other of certain customary limited transition services, consistent with commonly shared services, including but not limited to those related to information technology, procurement, customer service, quality and regulatory affairs, accounting, human resources, and distribution and logistics; and (iii) certain manufacturing, supply, services, lease, intellectual property and other related agreements intended to achieve a successful separation of the Controlled Business, including (a) the Facility A and Facility B Agreements, (b) the Facility C Agreement, (c) the Facility D Agreement, (d) the Facility E, Facility F, and Facility G Agreements, (e) the Component A Supply Agreement, (f) the Component B Supply Agreement, (g) the Product A Supply Agreement, (h) the Product B Supply Agreement, (i) the Brand Licensing Agreement, and (j) the IP Agreements. In general, with the exception of the Facility A and Facility B Agreements, the Facility C Agreement, the Facility D Agreement, certain of the Facility E, Facility F, and Facility G Agreements, the Component A Supply Agreement, the Component B Supply Agreement, the Product A Supply Agreement, the Product B Supply Agreement, the Brand Licensing Agreement, and the IP Agreements, the terms of such Post-Separation Agreements are not expected to exceed n years following the date of the External Distribution but, in some instances, may be shorter or longer. In the case of Post-Separation Agreements providing for transition services, they are generally intended to last no longer than is necessary to achieve a successful separation of the Controlled Business. Following the External Distribution, officers of Distributing and members of the Distributing board of directors will in no case constitute a majority of the board of directors of Controlled 1. REPRESENTATIONS The following representations have been made with respect to the Proposed Transactions: 1. Except as otherwise provided below, Distributing has made each of the representations provided in section 3 of the Appendix to Rev. Proc. 2017-52 with respect to the First Controlled 2 Distribution, the Second Controlled 2 Distribution, the First Controlled 3 Distribution, the Second Controlled 3 Distribution, the Third Controlled 3 Distribution, the Controlled 4 Distribution, and the External Distribution. For purposes of the representations below, terms used but not otherwise defined herein have the meanings set forth in Rev. Proc. 2017-52. (a) With respect to the First Controlled 2 Distribution: (i) Distributing has made the following alternative representations: Representations 3(a), 8(b), 11(a), 15(b), 22(a), 31(a), and 41(a). (ii) Distributing has not made the following representations: Representations 7, 24, 25, 35, 36, 37, 38, 39, 40, and 43 (but provided the required explanations). (iii) Distributing has made the following modified representations: (1) Representation 32: No intercorporate debt will exist between FSub 3 and Controlled 2 at the time of, or subsequent to, the First Controlled 2 Distribution, except for short-term accounts payable and accounts receivable arising subsequent to the First Controlled 2 Distribution under the Post-Separation Agreements. (2) Representation 33: Any payments made in connection with all continuing transactions, if any, between FSub 3 and Controlled 2 after the First Controlled 2 Distribution will be for fair market value based on arm's-length terms or a mutually agreed upon cost-plus pricing arrangement that is commercially reasonable with respect to certain Post-Separation Agreements. (b) With respect to the Second Controlled 2 Distribution: (i) Distributing has made the following alternative representations: Representations 3(a), 8(b), 11(a), 15(b), 22(a), 31(a), and 41(a). (ii) Distributing has not made the following representations: Representations 7, 24, 25, 35, 36, 37, 38, 39, 40, and 43 (but provided the required explanations). (iii) Distributing has made the following modified representations: (1) Representation 32: No intercorporate debt will exist between FSub 2 and Controlled 2 at the time of, or subsequent to, the Second Controlled 2 Distribution, except for short-term accounts payable and accounts receivable arising subsequent to the Second Controlled 2 Distribution under the Post-Separation Agreements. (2) Representation 33: Any payments made in connection with all continuing transactions, if any, between FSub 2 and Controlled 2 after the Second Controlled 2 Distribution will be for fair market value based on arm's-length terms or a mutually agreed upon cost-plus pricing arrangement that is commercially reasonable with respect to certain Post-Separation Agreements. (c) With respect to the First Controlled 3 Distribution: (i) Distributing has made the following alternative representations: Representations 3(a), 8(a), 11(a), 15(b), 22(a), 31(a), and 41(a). (ii) Distributing has not made the following representations: Representations 7, 24, 25, 35, and 40 (but provided the required explanations). (iii) Distributing has made the following modified representations: (1) Representation 32: No intercorporate debt will exist between Sub 9 and Controlled 3 at the time of, or subsequent to, the First Controlled 3 Distribution, except for short-term accounts payable and accounts receivable arising subsequent to the First Controlled 3 Distribution under the Post-Separation Agreements. (2) Representation 33: Any payments made in connection with all continuing transactions, if any, between Sub 9 and Controlled 3 after the First Controlled 3 Distribution will be for fair market value based on arm's-length terms or a mutually agreed upon cost-plus pricing arrangement that is commercially reasonable with respect to certain Post-Separation Agreements. (d) With respect to the Second Controlled 3 Distribution: (i) Distributing has made the following alternative representations: Representations 3(a), 8(a), 11(a), 15(b), 22(a), 31(a), and 41(a). (ii) Distributing has not made the following representations: Representations 6, 19, 20, 24, 25, 26, 35, and 40 (but provided the required explanations). (iii) Distributing has made the following modified representations: (1) Representation 32: No intercorporate debt will exist between Sub 8 and Controlled 3 at the time of, or subsequent to, the Second Controlled 3 Distribution, except for short-term accounts payable and accounts receivable arising subsequent to the Second Controlled 3 Distribution under the Post-Separation Agreements. (2) Representation 33: Any payments made in connection with all continuing transactions, if any, between Sub 8 and Controlled 3 after the Second Controlled 3 Distribution will be for fair market value based on arm's-length terms or a mutually agreed upon cost-plus pricing arrangement that is commercially reasonable with respect to certain Post-Separation Agreements. (e) With respect to the Third Controlled 3 Distribution: (i) Distributing has made the following alternative representations: Representations 3(a), 8(a), 11(a), 15(b), 22(a), 31(a), and 41(a). (ii) Distributing has not made the following representations: Representations 7, 19, 20, 24, 25, 26, 35, and 40 (but provided the required explanations). (iii) Distributing has made the following modified representations: (1) Representation 32: No intercorporate debt will exist between Sub 3 and Controlled 3 at the time of, or subsequent to, the Third Controlled 3 Distribution, except for short-term accounts payable and accounts receivable arising subsequent to the Third Controlled 3 Distribution under the Post-Separation Agreements. (2) Representation 33: Any payments made in connection with all continuing transactions, if any, between Sub 3 and Controlled 3 after the Third Controlled 3 Distribution will be for fair market value based on arm's-length terms or a mutually agreed upon cost-plus pricing arrangement that is commercially reasonable with respect to certain Post-Separation Agreements. (f) With respect to the Controlled 4 Distribution: (i) Distributing has made the following alternative representations: Representations 3(a), 8(b), 11(a), 15(b), 22(b), 31(a), and 41(a). (ii) Distributing has not made the following representations: Representations 7, 24, 25, 35, and 40 (but provided the required explanations). (iii) Distributing has made the following modified representations: (1) Representation 32: No intercorporate debt will exist between Sub 2 and Controlled 4 at the time of, or subsequent to, the Controlled 4 Distribution, except for short-term accounts payable and accounts receivable arising subsequent to the Controlled 4 Distribution under the Post-Separation Agreements. (2) Representation 33: Any payments made in connection with all continuing transactions, if any, between Sub 2 and Controlled 4 after the Controlled 4 Distribution will be for fair market value based on arm's-length terms or a mutually agreed upon cost-plus pricing arrangement that is commercially reasonable with respect to certain Post-Separation Agreements. (g) With respect to the External Distribution: (i) Distributing has made the following alternative representations: Representations 3(a), 11(a), 15(b), 22(b), 31(a), and 41(a). (ii) Distributing has not made the following representations: Representations 7, 24, 25, and 40 (but provided the required explanations). (iii) Distributing has made the following modified representations: (1) Representation 2: Distributing will (i) distribute to its shareholders, on the same day, at least 80% of the issued and outstanding Controlled 1 Stock that it holds immediately before the External Distribution, and (ii) transfer to its creditors, pursuant to the same plan, the Controlled 1 Exchange Stock and all the Controlled 1 Securities that it holds immediately before the External Distribution. (2) Representation 4: Distributing will transfer to its creditors, pursuant to the plan of reorganization, the Controlled 1 Securities that it holds immediately before the External Distribution. (3) Representation 5: None of the Controlled 1 Stock, Controlled 1 Securities, or Other Property to be distributed in the External Distribution will be received in any capacity other than that of a shareholder of Distributing, except for the Controlled 1 Proceeds, which may be transferred to Distributing's creditors pursuant to the Controlled 1 Proceeds Purge, and the Controlled 1 Exchange Stock and Controlled 1 Securities, which will be transferred to Distributing's creditors pursuant to the Debt Exchanges. (4) Representation 8: Distributing has securities outstanding, and it may distribute Controlled 1 Exchange Stock, Controlled 1 Securities, and Controlled 1 Proceeds to one or more holders of such securities, in connection with the External Distribution, in satisfaction thereof. (5) Representation 32: No intercorporate debt will exist between Distributing and Controlled 1 at the time of, or subsequent to, the External Distribution, except for short-term accounts payable and accounts receivable arising subsequent to the External Distribution under the Post-Separation Agreements. (6) Representation 33: Any payments made in connection with all continuing transactions, if any, between Distributing and Controlled 1 after the External Distribution will be for fair market value based on arm's-length terms or a mutually agreed upon cost-plus pricing arrangement that is commercially reasonable with respect to certain Post-Separation Agreements. (7) Representation 35: The payment of cash in lieu of fractional shares of Controlled 1 Stock is solely for the purpose of avoiding the expense and inconvenience of issuing fractional shares and does not represent separately bargained-for consideration. The fractional share interests of each Distributing shareholder will be aggregated and no Distributing shareholder of record will receive cash in an amount equal to or greater than the value of one full share of Controlled 1 Stock (with the possible exception of shareholders who hold Distributing stock in multiple accounts or with multiple brokers). (8) Representation 46: Controlled 1 will not issue stock or securities to a person other than Distributing in anticipation of the External Distribution, with the possible exception of the issuances of debt instruments by Controlled 1 to third-party investors in the capital markets pursuant to the Debt Issuances, which instruments may constitute Controlled 1 Securities. 2. Distributing has made each of the following representations provided in section 3.04 of Rev. Proc. 2018-53. For purposes of the representations below, terms used but not otherwise defined herein have the meanings set forth in Rev. Proc. 2018-53. (a) With respect to the First Controlled 2 Contribution and the First Controlled 2 Distribution: (i) Distributing has made Representations 1, 3, 5, and 7 with respect to any liabilities of FSub 3 deemed assumed for federal income tax purposes by Controlled 2 in the First Controlled 2 Contribution (the "FSub 3 Liabilities"). (ii) Distributing has not made Representation 2 with respect to the deemed assumption of the FSub 3 Liabilities by Controlled 2 because a portion of the FSub 3 Liabilities may be liabilities incurred in the ordinary course of business that relate to intercompany financing or trading transactions that may be held by a Related Person. (iii) Distributing has not made Representation 4 with respect to the deemed assumption of the FSub 3 Liabilities by Controlled 2 because a portion of the FSub 3 Liabilities will be incurred through the date of the First Controlled 2 Distribution, but such liabilities will be incurred in the ordinary course of business and will be associated with any assets transferred. (iv) Distributing has not made Representation 6 with respect to the deemed assumption of the FSub 3 Liabilities because FSub 3 will not receive (or be deemed to receive) any consideration from Controlled 2 in the First Controlled 2 Contribution other than Controlled 2 Stock and the deemed assumption of the FSub 3 Liabilities. (b) With respect to the Second Controlled 2 Contribution and the Second Controlled 2 Distribution: (i) Distributing has made Representations 1, 3, 5, and 7 with respect to any liabilities of FSub 2 assumed or deemed assumed for federal income tax purposes by Controlled 2 in the Second Controlled 2 Contribution (the "FSub 2 Liabilities"). (ii) Distributing has not made Representation 2 with respect to the assumption or deemed assumption of the FSub 2 Liabilities by Controlled 2 because a portion of the FSub 2 Liabilities may be liabilities incurred in the ordinary course of business that relate to intercompany financing or trading transactions that may be held by a Related Person. (iii) Distributing has not made Representation 4 with respect to the assumption or deemed assumption of the FSub 2 Liabilities by Controlled 2 because a portion of the FSub 2 Liabilities will be incurred through the date of the Second Controlled 2 Distribution, but such liabilities will be incurred in the ordinary course of business and will be associated with any assets transferred. (iv) Distributing has not made Representation 6 with respect to the assumption or deemed assumption of the FSub 2 Liabilities because FSub 2 will not receive (or be deemed to receive) any consideration from Controlled 2 in the Second Controlled 2 Contribution other than Controlled 2 Stock and the assumption or deemed assumption of the FSub 2 Liabilities. (c) With respect to the Controlled 4 Contribution and the Controlled 4 Distribution: (i) Distributing has made Representations 1, 3, 5, and 7 with respect to any liabilities of Sub 2 deemed assumed for federal income tax purposes by Controlled 4 in the Controlled 4 Contribution (the "Sub 2 Liabilities"). (ii) Distributing has not made Representation 2 with respect to the deemed assumption of the Sub 2 Liabilities by Controlled 4 because a portion of the Sub 2 Liabilities may be liabilities incurred in the ordinary course of business that relate to intercompany financing or trading transactions that may be held by a Related Person. (iii) Distributing has not made Representation 4 with respect to the deemed assumption of the Sub 2 Liabilities by Controlled 4 because a portion of the Sub 2 Liabilities will be incurred through the date of the Controlled 4 Distribution, but such liabilities will be incurred in the ordinary course of business and will be associated with any assets transferred. (iv) Distributing has not made Representation 6 with respect to the deemed assumption of the Sub 2 Liabilities because Sub 2 will not receive (or be deemed to receive) any consideration from Controlled 4 in the Controlled 4 Contribution other than Controlled 4 Stock and the deemed assumption of the Sub 2 Liabilities. (d) With respect to the Controlled 1 Contribution and the External Distribution: (i) Distributing has made Representations 1, 5, and 7. (ii) Distributing has made Representation 2 with respect to holders of Distributing Debt that will be assumed or satisfied in the Controlled 1 Proceeds Purge or the Debt Exchanges. Distributing has not made Representation 2 with respect to the deemed assumption of the DRE 18 Liabilities or the DRE 19 Liabilities by Controlled 1 because a portion of the DRE 18 Liabilities and the DRE 19 Liabilities may be liabilities incurred in the ordinary course of business that relate to intercompany financing or trading transactions and, therefore, may be held by a Related Person. (iii) Distributing has made Representation 3 with respect to the DRE 18 Liabilities and the DRE 19 Liabilities. With respect to Distributing Debt that will be assumed or satisfied in the Controlled 1 Proceeds Purge or the Debt Exchanges, Distributing has made the following modified representation: The holder of Distributing Debt that will be assumed or satisfied will not hold the debt for the benefit of Distributing, Controlled 1, or any Related Person. With respect to the Debt Exchanges, the Exchange Banks will not acquire Distributing Exchange Debt from Distributing, Controlled 1, or any Related Person. Neither Distributing, Controlled 1, nor any Related Person will participate in any profit gained by the Exchange Banks upon an exchange of Section 361 Consideration; nor will any such profit be limited by agreement or other arrangement. The value of the Section 361 Consideration received by the Exchange Banks in satisfaction of the Distributing Exchange Debt will be determined pursuant to arm's-length negotiations. (iv) Distributing has made Representation 4 with respect to the Distributing Debt. Distributing has not made Representation 4 with respect to the deemed assumption of the DRE 18 Liabilities or the DRE 19 Liabilities by Controlled 1 because a portion of the DRE 18 Liabilities and the DRE 19 Liabilities will be incurred through the date of the External Distribution, but such liabilities will be incurred in the ordinary course of business and will be associated with any assets transferred. (v) Distributing has not made Representation 6 with respect to the Controlled 1 Proceeds Purge or the Debt Exchanges because there are one or more substantial business reasons for any delay in satisfying Distributing Debt with Section 361 Consideration. Distributing will complete each of the Controlled 1 Proceeds Purge and the Debt Exchanges in connection with, and no later than m months after, the External Distribution. (e) Distributing has not made any representations provided in section 3.04 of Rev. Proc. 2018-53 with respect to the First Controlled 3 Distribution, the Second Controlled 3 Distribution, or the Third Controlled 3 Distribution. 3. Distributing makes the following additional representations: (a) Distributing expects that FSub 1 and each other Distributing Group member that transfers Controlled Business assets and liabilities to DRE 18 (or disregarded entities owned by DRE 18) in the DRE 18 Asset Transfers will each recognize net gain (and no loss) as a result of the DRE 18 Asset Transfers or FSub 1 Transfer. In the aggregate, the total amount of net gain recognized as a result of the DRE 18 Asset Transfers and the FSub 1 Transfer is expected to be approximately $o. (b) Distributing does not expect any gain recognized in the DRE 18 Asset Transfers and the FSub 1 Transfer to cause the adjusted tax basis in the stock of any Distributing Group member to exceed the fair market value of such stock. (c) Distributing expects that, at the time of the External Distribution, the gross and net assets transferred to DRE 18 (and disregarded entities owned by DRE 18) in the DRE 18 Asset Transfers will represent less than p% of the aggregate fair market value of the Controlled 1 separate affiliated group's gross and net assets, respectively. (d) The assets and liabilities transferred in the DRE 18 Asset Transfers and FSub 1 Transfer will be principally composed of assets and liabilities related to the distribution of Controlled Business products in non-U.S. markets. (e) Distributing has no plan or intention to dispose of the stock of FSub 1 or any other member of the Distributing Group that will transfer (or be treated as transferring through a disregarded entity) assets and liabilities in the DRE 18 Asset Transfers, other than a transfer of such stock to a member of the Distributing Group in which any additional basis in such stock resulting from the DRE 18 Asset Transfers, the FSub 1 Transfer, or the Hook Stock Transactions would not be utilized to reduce the amount of income or gain (or increase the amount of loss) recognized by the transferor. RULINGS Based solely on the information submitted and the representations set forth above, we rule as follows: The First Controlled 2 Contribution and the First Controlled 2 Distribution 1. The First Controlled 2 Contribution, together with the First Controlled 2 Distribution, will be a reorganization within the meaning of section 368(a)(1)(D). FSub 3 and Controlled 2 will each be "a party to a reorganization" under section 368(b). 2. No gain or loss will be recognized by FSub 3 on the First Controlled 2 Contribution. Section 361(a). 3. No gain or loss will be recognized by Controlled 2 on the First Controlled 2 Contribution. Section 1032(a). 4. The basis in each asset received by Controlled 2 in the First Controlled 2 Contribution will equal the basis of that asset in the hands of FSub 3 immediately before the transfer. Section 362(b). 5. The holding period in each asset received by Controlled 2 in the First Controlled 2 Contribution will include the period during which that asset was held by FSub 3. Section 1223(2). 6. No gain or loss will be recognized by FSub 3 upon the distribution of the Controlled 2 Stock in the First Controlled 2 Distribution. Section 361(c). 7. No gain or loss will be recognized by (and no amount will be included in the income of) FSub 2 upon the receipt of Controlled 2 Stock in the First Controlled 2 Distribution. Section 355(a). 8. The holding period of FSub 2 in the Controlled 2 Stock received in the First Controlled 2 Distribution will include the holding period of the FSub 3 stock held by FSub 2 with respect to which the distribution of the Controlled 2 Stock is made, provided that such FSub 3 stock is held as a capital asset on the date of the First Controlled 2 Distribution. Section 1223(1). 9. Earnings and profits of FSub 3, if any, will be allocated between FSub 3 and Controlled 2 in accordance with section 312(h) and Treas. Reg. § 1.312-10(a). The Second Controlled 2 Contribution and the Second Controlled 2 Distribution 10. The Second Controlled 2 Contribution, together with the Second Controlled 2 Distribution, will be a reorganization within the meaning of section 368(a)(1)(D). FSub 2 and Controlled 2 will each be "a party to a reorganization" under section 368(b). 11. No gain or loss will be recognized by FSub 2 on the Second Controlled 2 Contribution. Sections 357(a), 361(a). 12. No gain or loss will be recognized by Controlled 2 on the Second Controlled 2 Contribution. Section 1032(a). 13. The basis in each asset received by Controlled 2 in the Second Controlled 2 Contribution will equal the basis of that asset in the hands of FSub 2 immediately before the transfer. Section 362(b). 14. The holding period in each asset received by Controlled 2 in the Second Controlled 2 Contribution will include the period during which that asset was held by FSub 2. Section 1223(2). 15. No gain or loss will be recognized by FSub 2 upon the distribution of the Controlled 2 Stock in the Second Controlled 2 Distribution. Section 361(c). 16. No gain or loss will be recognized by (and no amount will be included in the income of) Sub 9 upon the receipt of Controlled 2 Stock in the Second Controlled 2 Distribution. Section 355(a). 17. The holding period of Sub 9 in the Controlled 2 Stock received in the Second Controlled 2 Distribution will include the holding period of the FSub 2 stock held by Sub 9 with respect to which the distribution of the Controlled 2 Stock is made, provided that such FSub 2 stock is held as a capital asset on the date of the Second Controlled 2 Distribution. Section 1223(1). 18. Earnings and profits of FSub 2, if any, will be allocated between FSub 2 and Controlled 2 in accordance with section 312(h) and Treas. Reg. § 1.312-10(a). The Controlled 3 Contribution and the First Controlled 3 Distribution 19. The Controlled 3 Contribution, together with the First Controlled 3 Distribution, will be a reorganization within the meaning of section 368(a)(1)(D). Sub 9 and Controlled 3 will each be "a party to a reorganization" under section 368(b). 20. No gain or loss will be recognized by Sub 9 on the Controlled 3 Contribution. Sections 357(a), 361(a). 21. No gain or loss will be recognized by Controlled 3 on the Controlled 3 Contribution. Section 1032(a). 22. The basis in each asset received by Controlled 3 in the Controlled 3 Contribution will equal the basis of that asset in the hands of Sub 9 immediately before the transfer. Section 362(b). 23. The holding period in each asset received by Controlled 3 in the Controlled 3 Contribution will include the period during which that asset was held by Sub 9. Section 1223(2). 24. No gain or loss will be recognized by Sub 9 upon the distribution of the Controlled 3 Stock in the First Controlled 3 Distribution. Section 361(c). 25. No gain or loss will be recognized by (and no amount will be included in the income of) Sub 8 upon the receipt of Controlled 3 Stock in the First Controlled 3 Distribution. Section 355(a). 26. The holding period of Sub 8 in the Controlled 3 Stock received in the First Controlled 3 Distribution will include the holding period of the Sub 9 stock held by Sub 8 with respect to which the distribution of the Controlled 3 Stock is made, provided that such Sub 9 stock is held as a capital asset on the date of the First Controlled 3 Distribution. Section 1223(1). 27. Earnings and profits of Sub 9, if any, will be allocated between Sub 9 and Controlled 3 in accordance with section 312(h) and Treas. Reg. § 1.312-10(a). The Second Controlled 3 Distribution 28. No gain or loss will be recognized by Sub 8 upon the distribution of the Controlled 3 Stock in the Second Controlled 3 Distribution. Section 355(c). 29. No gain or loss will be recognized by (and no amount will be included in the income of) Sub 3 upon the receipt of Controlled 3 Stock in the Second Controlled 3 Distribution. Section 355(a). 30. The holding period of Sub 3 in the Controlled 3 Stock received in the Second Controlled 3 Distribution will include the holding period of the Sub 8 stock exchanged therefor, provided that such Sub 8 stock is held as a capital asset on the date of the Second Controlled 3 Distribution. Section 1223(1). 31. Earnings and profits of Sub 8, if any, will be allocated between Sub 8 and Controlled 3 in accordance with section 312(h) and Treas. Reg. § 1.312-10(b). The Third Controlled 3 Distribution 32. No gain or loss will be recognized by Sub 3 upon the distribution of the Controlled 3 Stock in the Third Controlled 3 Distribution. Section 355(c). 33. No gain or loss will be recognized by (and no amount will be included in the income of) Distributing upon the receipt of Controlled 3 Stock in the Third Controlled 3 Distribution. Section 355(a). 34. The holding period of Distributing in the Controlled 3 Stock received in the Third Controlled 3 Distribution will include the holding period of the Sub 3 stock held by Distributing with respect to which the distribution of the Controlled 3 Stock is made, provided that such Sub 3 stock is held as a capital asset on the date of the Third Controlled 3 Distribution. Section 1223(1). 35. Earnings and profits of Sub 3, if any, will be allocated between Sub 3 and Controlled 3 in accordance with section 312(h) and Treas. Reg. § 1.312-10(b). The Controlled 4 Contribution and the Controlled 4 Distribution 36. The Controlled 4 Contribution, together with the Controlled 4 Distribution, will be a reorganization within the meaning of section 368(a)(1)(D). Sub 2 and Controlled 4 will each be "a party to a reorganization" under section 368(b). 37. No gain or loss will be recognized by Sub 2 on the Controlled 4 Contribution. Sections 357(a), 361(a). 38. No gain or loss will be recognized by Controlled 4 on the Controlled 4 Contribution. Section 1032(a). 39. The basis in each asset received by Controlled 4 in the Controlled 4 Contribution will equal the basis of that asset in the hands of Sub 2 immediately before the transfer. Section 362(b). 40. The holding period in each asset received by Controlled 4 in the Controlled 4 Contribution will include the period during which that asset was held by Sub 2. Section 1223(2). 41. No gain or loss will be recognized by Sub 2 upon the distribution of the Controlled 4 Stock in the Controlled 4 Distribution. Section 361(c). 42. No gain or loss will be recognized by (and no amount will be included in the income of) Distributing upon the receipt of Controlled 4 Stock in the Controlled 4 Distribution. Section 355(a). 43. The holding period of Distributing in the Controlled 4 Stock received in the Controlled 4 Distribution will include the holding period of the Sub 2 stock held by Distributing with respect to which the distribution of the Controlled 4 Stock is made, provided that such Sub 2 stock is held as a capital asset on the date of the Controlled 4 Distribution. Section 1223(1). 44. Earnings and profits of Sub 2, if any, will be allocated between Sub 2 and Controlled 4 in accordance with section 312(h) and Treas. Reg. § 1.312-10(a). The Controlled 1 Contribution and the External Distribution 45. The Controlled 1 Contribution, together with the External Distribution, will be a reorganization within the meaning of section 368(a)(1)(D). Distributing and Controlled 1 will each be "a party to a reorganization" under section 368(b). 46. No gain or loss will be recognized by Distributing on the Controlled 1 Contribution. Sections 357(a), 361(a) and (b). 47. No gain or loss will be recognized by Controlled 1 on the Controlled 1 Contribution. Section 1032(a). 48. The basis in each asset received by Controlled 1 in the Controlled 1 Contribution will equal the basis of that asset in the hands of Distributing immediately before the transfer. Section 362(b). 49. The holding period in each asset received by Controlled 1 in the Controlled 1 Contribution will include the period during which that asset was held by Distributing. Section 1223(2). 50. No gain or loss will be recognized by Distributing upon the distribution of the Controlled 1 Stock in the External Distribution. Section 361(c). 51. No gain or loss will be recognized by (and no amount will be included in the income of) holders of Distributing Common Stock upon the receipt of Controlled 1 Stock in the External Distribution. Section 355(a). 52. The aggregate basis of the Distributing Common Stock and the Controlled 1 Stock in the hands of a holder of Distributing Common Stock immediately after the External Distribution will be the same as the basis of the Distributing Common Stock immediately before the External Distribution on which such distribution was made, allocated in proportion to the fair market values of the Distributing Common Stock and the Controlled 1 Stock. Section 358(b) and (c); Treas. Reg. § 1.358-1(a). 53. If a holder of Distributing Common Stock that purchased or acquired shares on different dates or at different prices is not able to identify which particular share of Controlled 1 Stock is received as a distribution with respect to a particular share of Distributing Common Stock, the holder may designate which particular share of Controlled 1 Stock is received as a distribution with respect to a particular share of Distributing Common Stock, provided the designation is consistent with the terms of the External Distribution. Treas. Reg. § 1.358-2(a)(2). 54. The holding period of each holder of Distributing Common Stock in the Controlled 1 Stock received in the External Distribution will include the holding period of the Distributing Common Stock with respect to which the distribution of the Controlled 1 Stock is made, provided that such Distributing Common Stock is held as a capital asset on the date of the External Distribution. Section 1223(1). 55. Earnings and profits of Distributing, if any, will be allocated between Distributing and Controlled 1 in accordance with section 312(h), Treas. Reg. § 1.312-10(a), and Treas. Reg. § 1.1502-33(e)(3). Debt Exchanges 56. No gain or loss will be recognized by Distributing in the Debt Exchanges other than any (i) deductions attributable to the fact that the Distributing Exchange Debt may be redeemed at a premium, (ii) income attributable to the fact that the Distributing Exchange Debt may be redeemed at a discount, and (iii) interest expense accrued with respect to the Distributing Exchange Debt. Section 361(c). CAVEATS Except as expressly provided herein, no opinion is expressed or implied concerning the tax treatment of the Proposed Transactions under any other provisions of the Code or regulations or the tax treatment of any conditions existing at the time of, or effects resulting from, the Proposed Transactions that are not specifically addressed by this letter. In particular, no opinion is expressed as to the tax treatment of the Hook Stock Transactions, the Recapitalization, the DRE 18 Asset Transfers, or the FSub 1 Transfer. PROCEDURAL STATEMENTS This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. A copy of this letter must be attached to any federal income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number (PLR-110954-21) of this letter ruling. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives. Sincerely, Richard M. Heinecke Richard M. Heinecke Branch Chief, Branch 5 Office of Associate Chief Counsel (Corporate) cc:

Private Letter Ruling Number: 202248016 Internal Revenue Service April 28, 2022 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Number: 202248016 Release Date: 12/2/2022 Date: April 28, 2022 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: UIL: 501.03-00 CERTIFIED MAIL - RETURN RECEIPT REQUESTED Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective ******. Your determination letter dated ****** is revoked. Our adverse determination as to your exempt status was made for the following reasons: You have failed to provide adequate documentation to establish that you are organized and operated exclusively for exempt purposes within the meaning of IRC Section 501(c)(3) and that no part of your net earnings inures to the benefit of private shareholders or individuals. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit www.irs.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims or 3) the United States District Court for the District of Columbia. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. Keep the original letter for your records. Sincerely, Lynn A. Brinkley Acting Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: 12/01/2021 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Managers contact information: Name: ID number: Telephone: Response due date: CERTIFIED MAIL -- Return Receipt Requested Dear ******: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, Supervisory IRS Agent EO ******, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 Form 4621-A Pub 892 Pub 3498 ISSUE Whether the organization, located in ******, continues to qualify for exemption under Section 501(c)(3) of the Internal Revenue Code? Issue 1 Do you pass the operational test required of 501(c)(3) organizations? No, for the reasons described below. Issue 2 Do you maintain adequate records showing sufficient control and discretion to ensure that your distributions are used exclusively for charitable, educational, and religious purposes as described in section 501(c)(3) of the Code? No, for the reasons described below. Issue 3 Do your net earnings inure to the benefit of insiders, precluding exemption under section 501(c)(3) of the Code? Yes, for the reasons described below. FACTS ****** was granted tax-exempt status in ****** under Internal Revenue Code Section (IRC or Code) Section § 501(a) as an organization described in § 501(c)(3). ****** conducted its operations out of ****** until they submitted an "Application by a foreign corporation for authorization to transact business in ******" on ******. The organization has been operating from ****** since then. According to its Articles of Incorporation dated ******, the purposes of the organization are as follows. ****** filed Form ****** for the year ended ****** on ******. As of ******, they have filed Forms ****** for all the years that they have been exempt and required to file a ****** return. ****** does not have any other filling requirements. The originally filed Form ****** for ****** shows the following: We began an examination on ******. We issued a first request for information (Information Document Request, or IDR) on ******. Governance ****** reported ****** officers/directors on the ****** Secretary of State annual report. Officer/Director names are as follows: ******, ******, ******, ******, and ******, ****** and ****** are ******. ******, and ******, ******, are ******. ******, is not related to any of the other officers. Operations ****** was formed to do 4 things: 1. Provide education training for ******. 2. To promote financial integrity and to help Non-government entities (hereinafter "NGO's") in ****** to operate in a more ****** style and accounting law. 3. Move goods into ******. ****** would put goods into shipping containers, ship overseas to ******, and then distribute these goods to ****** people. Some of the goods shipped were educational supplies (books & school supplies), clothing, car(s), etc. 4. To help teach ****** people to start businesses so they can create jobs and provide for themselves. There has been a consistent effort by ****** to help people start businesses. ****** conducted their own activities in the early years. However, because of the diminished financial support, ****** focus now is on providing financial support. ****** maintains an active website at ******. This four-page website contains two primary pages. The homepage contains a "What We Do" section and the information on "******" that ****** is currently conducting as one of their activities in ******. Website also contains a "contact" link and a "donate" button. ****** (hereinafter "******"), a domestic organization, works in conjunction with ****** (hereinafter "******"). ****** is a separately organized foreign entity. ****** was organized in ****** as an ****** and operates from the city of ******. ****** does not work with any domestic exempt organization(s). ******, Treasurer stated in the initial interview, held on ******, that ****** is a "Sister organization" to ******, and that the two organizations are "related spiritually." ******, Board Chairman stated in the interview, held on ******, that ****** is an arm of ****** in ******, and that there is "****** relationship between entities." ****** manager on the ground, ****** (******), carries out the mission on behalf of ******. ****** supplies ****** and workers (of his choosing) funds and materials for services he (******) provides to the people of ******. ****** provides the funds to ****** via wire transfers with expectations on how to spend the money. Once the money is received, ****** is given control and discretion over funds and how to spend them (purchase materials and distribute them). ******, Treasurer informed us that ****** provides a monthly report to ****** on how he spent the money. No supporting documentation for spent funds is sent with the report and none is required by the ****** Board of Directors. However, part of the accounting ****** submits in addition to the reports are pictures, which are forwarded to the Chairman of the Board. ****** stated that no written contracts or agreements exist between ******, ******, and ******. ******, Treasurer informed us that ****** compensates ****** for the work he does on their behalf. Compensation is $ ****** dollars ($ ******/year) a month minus expenses. ******'s salary is part of the quarterly allocation which is based on expense reports ****** submits to ****** does not have an official leadership or employment role within ******. ****** is not listed on the return or the annual reports as one of the officers or directors of the ******. However, ****** website contains a picture of the current officers and ****** on the homepage of "What We Do" section. The ****** return provides that no salaries, other compensation, and employee benefits were paid out during the year. As stated before, no written formal compensation agreement exists between ****** and ******. During the exam we found no specific amounts referenced in the general ledger or bank transactions as payments to ******. Copies of all progress and expense reports, including pictures, that ****** (******) submitted to ****** (******) between ****** through to the last report available were requested for the exam in the information document request dated ******. The response from the organization to this information document request stated that the monthly information reports have been provided before. We noted one instance of expenses and other money matters mentioned by ****** in the emails (meeting minutes). Schedule O of ****** Form ****** for ****** provided that total funds expanded to ****** operations was $ ******. No other expense reports were noted in the meeting minutes or provided by the organization. Expenses and other money matters in the meeting minutes for ****** related to the following: 1. ******. a. Registration $ ****** a year due now. ****** asked if ****** can fund this expense because he did this on his expense last year. b. Auto insurance $ ****** a year due now. 2. ****** Registration balance due a. Cost was $ ****** (******). 3. Government a. ****** explains that they can get one for $ ****** and one for $ ******. 4. An unidentified individual was requesting if she can get ****** months $ ****** support or if the board can help her get her ****** for the school and home. 5. ****** was asking if the board can look into increasing allocation for calls and internet because ****** Government increased taxes on both ****** companies that force ****** to also increase their tariff by ** %. 6. ****** Revenue Authority ******) taxes on withholding increase due to the high rate, causing ****** take home pay to decrease at $ ****** or $ ****** at a time. 7. Trash pickup is $ ****** per month. 8. ****** was asking for an increase in salary. ****** provided salary breakdown and take-home pay. 9. ****** Registration - $ ****** due to complete the registration process. 10. ****** accreditation - $ ******. Note: The ****** for ****** (******) is a standard developed by the ******) to describe the protocols for second-generation (2G) ****** networks used by ****** such as ****** and ******. Wire Transfers ****** provided copies of wire transfer statements that were completed through their ****** bank account. These wire transfer statements list the recipient of funds is an individual named ******. ****** (******) is the President of ****** and the ****** of ******. ******, Treasurer is listed as the originator of the wire transfers. ****** does not appear as the recipient on the wire transfer statements. Additionally, wire transfers are sent to ******. Our web research indicates this address belongs to a company called ******. ****** is a registered ******, standard travels and tours agency in ******. ****** handles all aspect of travels and tours related business such as booking for flight tickets, securing transit and tourist VISAS. ****** officers ****** and ****** stated in the interview held on ****** that the wire transfers are sent to ****** account in ******. ****** stated that she lived in ****** for ** years. In the last ** years that she lived there she helped with ******. During that time, this wire transfer account was set up. ****** set it up in her name and is the primary beneficiary. ****** is the secondary person listed on the account. The account was set up this way so that either one (******) can handle the transactions in ******. ****** and ****** stated that ****** is the one who handles the money in ******. ****** stated that she last travelled to ****** in ******. ****** explained that ****** location contains various kinds of business and homes. ****** was also ****** address when ****** lived in ******. ****** and ****** further explained that ****** might be able to change recipient's address for the wire transfers. However, they have been hesitant to do so and kept it the same all these years because wiring funds to ****** is a complicated process. Wire transfers to ****** totaled $ ****** in ******. Expenses incurred in the United States totaled $ ******. Total Expenses reported for ****** were $ ******. Annual Registration During the interview with ******, held on ******, ****** stated that ****** has to file an annual registration with the ****** government. Part of that registration included submitting an annual report to the ****** government. However, when copies of these annual reports were requested for review, ******, who is responsible for renewing these annual registrations, informed us that when applying for these certificates, no report is submitted, only a photocopy of the past year's certificate. Our web research indicates that there is a type of annual report that needs to be submitted to the ****** government. During the interview, conducted on ******, ****** also stated that there is a report that needs to be filed every year. ****** stated that she believed the copies of these reports can be located and provided for the exam. Copies of the ******, ****** and ****** reports ****** filed with the ****** government were requested in the information document request but never provided by ******. ****** provided the following certificates handed out to ****** by the ****** government: - Certificate of Re-Accreditation for ****** and ******. - Certificate of Business Registration (Non for Profit (NGO)) for ******, ****** and ******. However, as stated, ****** never provided copies of reports that were submitted by ****** to the ****** government to be granted these aforementioned certifications. Property "****** Property" is the name of the compound from which ****** operates. The following information has been gathered about the property: Property is in ******, in the city of ******. It is a** acre walled off property. ****** owns and operates from the property. ****** company ****** operates from the property. ******, an ****** in ******, is another organization that uses this property. ****** in ****** villages (******). ****** extended an invitation to ****** to use this property after they got evicted from another property they used by the ****** government. The ****** government claimed the other property for themselves. In the response to the information document request, dated ******, ****** explained that they provided the funds to acquire the ****** property but the property has never been titled to ******. ****** stated that the property has always belonged to the ****** because the ****** legal code does not allow ****** of ******. ****** states that since they do not own the property, they do not have continuing financial interest in the said property. In the initial interview ******, Treasurer stated that ****** board and ****** make decisions on how the property is used. ****** helps maintain the ****** property on behalf of ****** by sending money to ****** to keep the property going. ****** stated that there are ** guest houses on the property. One is occupied by ****** and the other is occupied by ******. ****** also has a business located on the property; "******" which is discussed later in this report. Meeting minutes discuss ****** property and whether the officers/board should allow ****** to build a personal residence on the property. ****** asked the officers/board to be allowed to build on ****** the property. Meeting minutes list one of the benefits of having ****** living onsite would be an increase in the oversight of the property. During the interview with ******, ****** stated ****** will allow ****** to build a personal residence for himself on the property. ****** planned to pay for the building himself. Review of emails exchanged between officers/directors (meeting minutes) identified that ****** was asking for an increase in his salary. ****** officers/directors discussed the rental potential of the ****** property and giving ****** a percentage of rentals as a bonus to his salary. In the initial interview with ****** conducted on ******, ****** stated that there are no rental agreements or any other legally binding agreements between his organization and any other entity/individual that currently has right to use this property. Subsequent web research and interview with ****** and ****** discovered that ****** rents the ****** guest houses on the ****** property. Our web research shows listings of guest room ** and ** are advertised on ******, ******, and ****** websites. Rooms are listed as "******" type accommodation and the listings indicate that anyone can rent these rooms. ****** and ****** stated in the interview, conducted on ******, that rooms are rented to various visitors to ****** who provide important social service and aid to ****** programs and people. The rental program started in ******, and the monthly information reports prepared by ****** in ****** reflect the rental income ****** has received during the month. In the response to the information document request, dated ******, ****** states that none of the rental income accrues to or is transferred to the ******. Rental income provides for operating and maintenance cost of the Compound in ******. There are no lease, rental, or service agreements. Rooms are rented on a daily cash basis in ******. There are no codified restrictions for rental of rooms. Additionally, there are no specific reports regarding progress and expense relative to the rental activity. ****** reports ****** gross income from rentals on the monthly information reports. ****** does not functionalize reporting for the rental rooms; thus, all expensed of the various activities are provided on an object account basis. Information document request provided the ****** rental income reported by ****** as follows: Project ****** website describes this project as a four-step project. The website provides the following information: - STEP 1 - STEP 2 - STEP 3 - STEP 4 Email discussions (meeting minutes) provide the following information on the project: - Establish a baseline with reported cases of ****** for children and young adults. - Provide a bio-based insect repellent for two orphanages in ****** during the duration of the peak ****** season (****** through ******) for ******. - Ensure that daily applications and proper use of the product is being maintained. - Track the product applications and monitor the health of each of the participants. - Document the results of the project and identify any improvements needed. - Establish next steps and future projects in ******. The short-term goal is to validate the effectiveness of the product during the season. The product is not intended as a replacement to current methods of prevention. ******, ******, ******, and ****** are all key components to an effective strategy in combating ****** and should be maintained if they are already in use. The ****** is considered to be yet another layer in the defense strategy. The long-term goal is to create microbusinesses to provide employment for the ****** people through local packaging and distribution of the ****** product. The long-term goal would be to setup portable local manufacturing ****** in ******. The result of local manufacturing would be the ability to manufacture in ****** and ****** produce the product at a cost-effective rate. The expectation is local manufacturing would result in an increase in employment, facilitate commerce and help improve the health of the ****** people through use of the ****** product. ****** is engaged in a business endeavor via a company he created called "******". ****** is a foreign organization incorporated by ****** and operated from the ****** property in ******. ****** is working on manufacturing and selling a brand of a ****** using raw materials, manufactured in the United States, by a for-profit company called ******. ****** officers/directors referred to the "******" and "******" as the same activity. ****** is a for-profit corporation, originally formed in ******. It merged with a corporation of the same name in ******. It is currently operating out of ****** as a foreign corporation. ****** website states that they "******." ****** stated that ****** is currently unable to manufacture their repellant in U.S. due to struggles with EPA regulations. Our web research indicates that ****** is struggling with EPA regulations. Meeting minutes show that ****** officers/directors conducted meetings with ****** founder ****** to discuss ****** history and its connection to ******. Meeting minutes also show that ****** board and officers discussed marketing and selling a brand of ****** called ******. Our web research indicated that ****** has manufactured a product under the ****** label. ****** loaned the funds to ****** to get the ****** business started. We noted transaction number ****** in the ****** general ledger that was recorded on ******. Transaction is described as "Registration of corporation". This transaction debited "******: ****** Start up Costs" account for $ ****** and credited "******: ******" account for $ ******. Wire transfer to ****** then occurred on ******, for $ ******. In the response to the information document request, dated ******, ****** states that transaction ****** was the recording of the wire transfer on ****** of $ ****** sent to ******, included was $ ****** to pay the registration of the ******, "******". ****** stated that there is no source document (an invoice, receipt, etc.) for this transaction. Funds were sent to the ****** bank which were used by ****** to pay the ****** registration fees. ****** was recipient of the funds. There are no organizing documents for the ****** Corporation held in the US corporation. ****** and ****** both stated that ****** business is almost operational. ****** stated that ****** and ****** officers/board have weekly contacts/conversations about ****** and work on budgeting/planning together. Review of minutes dated ******; ****** identified a conversation regarding the ****** units of inventory that needs to be sold. Sale and movement of this inventory appears to be connected to ******. Product's price point was discussed as well. Minutes discuss the need to be successful with the initial vendor and prove the profitably of the business before adding support resources to ******. ****** stated that ****** plans to partner with ****** to facilitate the distribution of this raw material to ****** through ******. ****** will order the product from ****** in ****** and assemble the product on site (****** property) as individual ******. Business expenses, associated with this activity, are paid for by ******. We noted that ****** purchased a finished product from ****** in the form of ******. ****** provided a copy of the invoice from ****** dated ****** for $ ******. ******, Board Chairman stated that ****** put a rule in place that if you are going to produce and sell a product in ****** you have to be registered as a Non-Government Entity in ******. ****** can give away the product for free as much as they want but cannot produce it themselves, they have to go through ******. ****** cost about ** cents to produce and ****** hopes to sell them for ****** cents. Product is created as one day application. ******, Board Chairman stated that ****** and ****** hope to generate enough sales to be able to give the product away for free. ****** Cloth Program and ****** Fabric Cloth Sales ******, Board Chairman stated this was a program in which individuals buy clothes and resell them. ****** helped some of these individuals establish their businesses, however, ****** no longer engages in this activity. ****** stated in the interview that he and ****** are acquainted with an individual by the name of ****** brought a piece of ****** over from ****** to United States. ****** and ****** liked the ******, so they bought it from ******. Check was made to ****** who in turn remitted the funds to ******. We noted that expense was recorded in general ledger on ****** for $ ****** and noted account name associated with this expense to be ******. Check number was ****** but organization did not provide check image nor an invoice receipt for this transaction. ****** primary checking account ending in ****** shows a withdrawal occurred on ****** for $ ******. Additionally, we noted that ****** accepted two donations in the amount of $ ****** dollars and then recorded these donations in the general ledger as restricted donations for ******. One donation was from ****** and the other from another individual. ****** owned a ****** building whose physical location was ******. ******provided a copy of the settlement statement for this purchase. Settlement date for the purchase is ******. ****** purchased the property for $ ****** from ******. No physical address has been recorded for ****** the settlement statement but our web research pulls up a church with that name and the address of ******. Funds for purchase were loaned by ****** of the officers, ****** for $ ****** and ****** for $ ******. A specific repayment schedule was not included. ****** stated that the ****** Board approved the purchase at the time. There was no written agreement. There was a verbal agreement to get the principal repaid to the officers at no interest charged. ****** stated that ****** bought that property to have their own location from which to operate and to store goods destined for ******. However, the property ended up not being used because luckily ****** was able to ship the goods/merchandise via the help of another board member. That board member (******) had access to dock and shipping containers which were used to ship supplies to ******. ****** had this access via his company, a business called "******." The organization stopped shipping to ****** in ****** due to changes in policies that made shipping items in a container to ****** too cumbersome and expensive for ******. ****** gave permission to a ****** to use the property during the duration of the time that the property was owned by ******. The ****** was allowed to stay there at no cost as long as they paid utility and maintenance expenses. That ****** (******) later merged with another ****** (******) and they no longer needed to use the property so the property was sold as it had no use to ******. The property was sold on ******. The buyer of the property is an organization named as "******." Translated in English, it means "******." ******, Chairman of the Board, was empowered and authorized to sign the transfer of the property on behalf of the ******. Web Research and the Secretary of State research shows that ****** is a non-profit organization and is currently operating from this property. It also appears this organization is a ******. Web research shows this organization's tax-exempt status is currently revoked as of ******. The organization initially received their determination letter on ****** as a 501(c)(3) organization. ****** Vehicles ******, Board Chairman stated that in the early years, ****** purchased ****** vehicles with a 4-wheel drive and the plan was to ship them to ****** to help with transportation of goods. ****** does not have many highways or paved roads and the roads there need a vehicle that can handle the road conditions during rainy seasons. ****** used an independent shipper who managed to ship one ****** vehicle to ******. The independent shipper however was not comfortable shipping the rest of the vehicles to ****** because they were ****** vehicles. When ****** was unable to ship the rest of the vehicles, they tried selling them. ****** states that the vehicles were parked in storage. Gradually they were sold, stolen, or simply "salvaged" for parts. The $ ****** of sale of assets was a sale of ****** of the remaining vehicles. The invoices for the sold vehicles were requested for the exam but were never provided. Scholarships & Grants ****** sponsors an individual in ****** called ****** (whose name appears frequently on the list of financial transactions), and at least one more individual ******. ******, Treasurer explained that ****** is a student attending ****** of ******. In the response to the information document request, dated ******, ****** provided that ****** is a native ****** college student, whose education costs were provided by one of ****** donors. For the calendar year ******, ****** provided $ ****** directly to******. Allocations were provided periodically and used to fund various school expenses. In the initial interview with ******, Treasurer, ****** stated that ****** issues grants and purchases materials by using funds sent to him by ****** donors. ****** stated that ****** does not have any grant-making procedures implemented. ****** does not have any written contracts or agreements between themselves, donors and/or recipients with respect to grant-making procedures. LAW IRC § 501(c)(3) exempts from federal income tax organizations which are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which insures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. Tax Reg. § 1.501(c)(3)-1 (a)(1) of the regulations provides that in order to be exempt as an organization described in section 501(c)(3) of the Code, the organization must be one that is both organized and operated exclusively for one or more of the purposes specified in that section. Tax Reg. § 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). Tax Reg. § 1.501(c)(3)-1(c)(2) of regulations explains the prohibition against private inurement as follows: Distribution of earnings. An organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private individuals. Tax Reg. § 1.501(c)(3)-1(d)(1)(i) of the regulations states that an organization may be exempt as an organization described in 501(c)(3) if it is organized and operated exclusively for one or more of the following purposes: religious, charitable, scientific, testing for public safety, literary, educational, or prevention of cruelty to children or animals. Tax Reg. § 1.501(c)(3)-1(d)(1)(ii) of the regulations states that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest. The organization must demonstrate that it is not organized or operated to benefit private interests such as "designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests." Thus, if an organization is operated to benefit private interests rather than for public purposes or is operated so that there is prohibited inurement of earnings to the benefit of private shareholders or individuals, it may not retain its exempt status. Rev.Rul. 56-304, 1956-2 C.B. 306 states that an organization which otherwise meets the requirements for exemption from federal income tax is not precluded from making distributions of their funds to individuals, provided such distributions are made on a true charitable basis in furtherance of the purposes for which they are organized. However, organizations of this character which make such distributions should maintain adequate records and case histories to show the name and address of each recipient of aid; the amount distributed to each; the purpose for which the aid was given; the manner in which the recipient was selected and the relationship, if any, between the recipient and (1) members, officers, or trustees of the organization, (2) a grantor or substantial contributor to the organization or a member of the family of either, and (3) a corporation controlled by a grantor or substantial contributor, in order that any or all distributions made to individuals can be substantiated upon request by the Internal Revenue Service. Revenue Ruling 63-252, 1963-2 C.B. 101, held that contributions to a charity organized in the United States that transfers some or all of its funds to a foreign charitable organization are deductible only if the contribution was to or for the use of the domestic organization, and that the domestic organization was not serving as an agent for, or conduit of, a foreign charitable organization. In order to satisfy the requirements of § 170(c)(2)(A), a qualifying organization may not be a mere conduit to a foreign charitable organization. The revenue ruling states that the requirements of § 170(c)(2)(A) would be nullified if contributions inevitably committed to go to a foreign organization were deductible solely because, in the course of transmittal to the foreign organization, they came to rest momentarily in a qualifying domestic organization. Rev.Rul. 64-274,1964-2 C.B. 141, (1964), describes a corporation which is organized and operated on a nonprofit basis. It provides worthy and needy students with free housing facilities and with funds for the purchase of books and instructional supplies or equipment on a gift, or loan basis, without interest. Accordingly, it is held that the corporation is exempt from Federal income tax under section 501(a) of the Code as an organization described in section 501(c)(3) of the Code, since it has been shown that it is organized and operated exclusively for charitable purposes. Rev.Rul. 66-79, 1966-1 C.B. 48, amplifies Rev.Rul. 63-252 to provide that contributions to a domestic charity described in section 170(c)(2) of the Internal Revenue Code of 1954 which are solicited for a specific project of a foreign charitable organization are deductible under section 170 of the Code where the domestic charity has reviewed and approved the project as being in furtherance of its own exempt purposes and has control and discretion as to the use of the contributions. Rev.Rul. 67-367, 1967-2 C.B. 188 provides that a nonprofit organization whose sole activity is the operation of a 'scholarship' plan for making payments to pre-selected, specifically named individuals does not qualify for exemption from Federal income tax under section 501(c)(3) of the Internal Revenue Code of 1954. Rev.Rul. 68-489, 1968-2 C.B. 210 describes an organization exempt from federal income tax under section 501(c)(3) of the Code that distributes part of its funds to organizations not themselves exempt under that provision. The exempt organization ensured use of the funds for section 501(c)(3) purposes by limiting distributions to specific projects that are in furtherance of its own exempt purposes. It retains control and discretion as to the use of the funds and maintains records establishing that the funds were used for section 501(c)(3) purposes. Held, the distributions did not jeopardize the organization's exemption under section 501(c)(3) of the Code. In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court held that the presence of private benefit, if substantial in nature, will destroy an organization's tax-exempt status regardless of the organization's other charitable purposes or activities. In Church in Boston v. Commissioner, 71 T.C. 102 (1978), the court found that the organization's officers received amounts of money in the form of "grants." These grants carried with them no legal obligation to repay any interest or principal. Petitioner contended, as it had during the administrative proceeding before the Service, that the grants were made in furtherance of a charitable purpose: to assist the poor who were in need of food, clothing, shelter, and medical attention. However, petitioner was unable to furnish any documented criteria which would demonstrate the selection process of a deserving recipient, the reason for specific amounts given, or the purpose of the grant. The only documentation contained in the administrative record was a list of grants made during one of the three years in question which included the name of the recipient, the amount of the grant, and the "reason" for the grant which was specified as either unemployment, moving expenses, school scholarship, or medical expense. This information was insufficient in determining whether the grants were made in an objective and nondiscriminatory manner and whether the distribution of such grants was made in furtherance of an exempt purpose. The failure to develop criteria for "grant" disbursements or to keep adequate records of each recipient can result in abuse. Accordingly, it was found that the organization failed to establish that their disbursements constituted an activity in furtherance of an exempt purpose under section 501(c)(3) of the Code. In Retired Teachers Legal Defense Fund v. Commissioner, 78 T.C. 280, 286 (1982), the Court stated that the private benefit prohibition of section 501(c)(3) of the Code applies to all kinds of persons and groups, not just those "insiders" subject to the stricter inurement proscription. Prohibited private benefit may include an "advantage; profit; fruit; privilege; gain or interest." In Airlie Foundation v. Commissioner, 283 F.Supp.2d 58 (D.D.C., 2003), the court relied on the "commerciality" doctrine in applying the operational test. Because of the commercial manner in which this organization conducted its activities, the court found that it was operated for a non-exempt commercial purpose, rather than for a tax-exempt purpose. GOVERNMENT'S POSITION Impact on IRC § 501(c)(3) tax-exempt status Issue 1 Section 1.501(c)(3)-1(a)(1) of the regulations states that if an organization fails to meet either the organizational test or the operational test, it is not exempt. Although your Articles of Incorporation contain adequate provisions to meet the organizational test, you do not meet the operational test as explained below. Tax Reg. § 1.501(c)(3)-1(c)(1) provides that to be exempt under section 501(c)(3), an organization must be both organized and "operated exclusively" for one or more exempt purposes specified in the section. Tax Reg. § 1.501(c)(3)-1(d)(1)(i) lists these exempt purposes. You have not shown that you are organized and operated exclusively for exempt purposes and not for the private benefit of your creators, designated individuals or organizations controlled by such private interests. The presence of a single nonexempt purpose, if substantial, will preclude exemption regardless of the number or importance of exempt purposes. See Better Business Bureau ruling. You stated that your main activity and focus is providing financial support in ******. Your support is provided via wire transfers to a separately organized entity in ****** called ******. Our research did not return any additional information about an organization called "******." We took into consideration the information that was provided during the exam, but we were unable to confirm that this organization conducts charitable activities. An organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities that accomplish one or more purposes specified in section 501(c)(3). You did not provide evidence (written agreements or annual reports) that you review and approve the projects, conducted by ****** (******), ahead of time as being in furtherance of your own exempt purposes. You did not provide evidence (written agreements or annual reports) that ****** (******) engage primarily in activities that accomplish one or more purposes specified in section 501(c)(3). Your operations, with respect to ****** and ****** company ******, show factors indicative of prohibited inurement and private benefit. Section 1.501(c)(3)-1(d)(1)(ii) of the regulations states that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest. The lending of funds to ****** business ****** to help start and bolster the business is a commercial, non-exempt purpose and serves private interests. Conduct of business is not a charitable activity. Partnering with for-profit business ****** to help package and distribute the ****** product is not an inherently exempt activity but is a business that is ordinarily carried on by commercial ventures organized for profit. Using your organization as a conduit to conduct personal transactions with individuals such as ****** is a non-exempt activity and it serves private interests. Lack of any written contracts or agreements between ****** and ****** is concerning. ****** is in a position to personally benefit from your organization's support of his company ******. This activity is adversely affecting your organization's IRC § 501(c)(3) tax-exempt status and is grounds for a revocation. You are unlike an organization that was described in Rev.Rul. 68-489, in that you distribute part of your funds to organizations not themselves exempt under section 501(c)(3). You do not show evidence that you ensure use of the funds for section 501(c)(3) purposes by limiting distributions to specific projects that are in furtherance of your own exempt purposes. Without adequate documentation (written agreements, annual or financial reports), we cannot substantiate that your financial support of ****** furthers exempt purposes as specified in section 501(c)(3). You are similar to the organization described in Better Business Bureau of Washington, D.C., Inc. v. United States. Although you may have some charitable and educational purposes, the presence of the non-exempt commercial and private purposes of aligning with a for profit company and focusing your efforts on ****** business precludes exemption under IRC Section 501(c)(3). You did not provide any supporting documents or reports that would substantiate that ****** activities are in furtherance of such exempt purposes specified in IRC Section 501(c)(3). You are similar to an organization described in Airlie Foundation v. Commissioner, 283 F.Supp.2d 58 (D.D.C., 2003). We took into consideration your statement that ****** and ****** hope to provide employment to the ****** people and generate enough sales to be able to give the product away for free. The information derived from meeting minutes shows discussions about price points, profitability, and growing the business. Because of the commercial manner in which ****** appears to conduct its activities, we found that they are operated for a non-exempt commercial purpose, rather than for a tax-exempt purpose. Without adequate supporting documentation (written agreements, financial reports), we cannot substantiate that your financial support of ****** furthers your exempt purposes as specified in section 501(c)(3). Unlike the organizations discussed in Rev.Rul. 56-304, which made distributions on a truly charitable basis, you have not established that your distributions will be for charitable or educational purposes. An organization is not exempt merely because its operations are not conducted for the purpose of producing a profit. To satisfy the 'operational test' the organization's resources must be devoted to purposes that qualify as exclusively charitable within the meaning of section 501(c)(3) of the Code and the applicable regulations. Therefore, based on our analysis, you do not satisfy the operational requirements of the Code and Regulations to be recognized as exempt under section 501(c)(3) of the Code. Issue 2 You are similar to the organization described in Example 1 of Rev.Rul. 63-252. You have little or no control over who receives the cash in the foreign country of ******, or how much they receive. Like Example 1 in Rev.Rul. 63-252, you simply send the funds to ****** (******), who distributes it as they wish. You are like the organization in Church in Boston v. Commissioner, which described an organization that made distributions and failed to maintain adequate records. The court held that the grants the organization made were not in furtherance of an exempt purpose because the organization was unable to furnish adequate documentation in support of the funds given. You do not have any written procedures for issuing grants to individuals such as ******. Therefore, you do not have an independent grant selection committee consisting of members who are not in a position to derive private benefit. You have been unable to furnish any documented criteria which would demonstrate the selection process of a deserving recipient, the reason for specific amounts given, or the purpose of the grant. The potential recipient's classification as a member of such a class is dependent solely on the assertion of the member that a loan is needed. Like the organization discussed in Rev.Rul. 64-274, objective criteria must be used to establish merit or need for the services of a charitable organization. You do not maintain adequate records required for exemption as found in Rev.Rul. 56-304. This ruling provides records and case histories should be maintained to show the name and address of each recipient of aid; the amount distributed to each; the purpose for which the aid was given; the manner in which the recipient was selected and the relationship, if any, between the recipient and organization insiders. As required by Revenue Ruling 56-304, you do not keep adequate records to substantiate that the grants and contributions you make further a 501(c)(3) purpose. The evidence shows you have sent funds via wire transfers to ****** in foreign country of ******. You stated that ****** provided directly to ****** allocations periodically to fund various school expenses. However, you do not track the distributed cash to individuals. You have no records to show who actually received the final distributions or what the funds were used for. Therefore, it is clear that you do not keep adequate records as required by Rev.Rul. 56-304. Another example of your organization's inadequate record keeping concerns the sales of ****** vehicles. The invoices for the sold vehicles were never provided for exam. Therefore, we cannot substantiate that the sales of these vehicles did not benefit private individuals/entities. Additionally, you do not have written agreements concerning loans from your officers that were used to purchase the ****** building in ******. Considering the substantial amount of money that was loaned to you, some proper written agreements between your officers and your organization should have been enacted. Another item of concern is the wire transfer statements that list the recipient of funds in ****** as ******. ****** is the President of ****** and the ****** of ****** who is listed as the originator of the wire transfers. These are questionable payments and transactions because there is no substantive supporting evidence provided to establish that all the funds were received by ****** in ******. Although Rev.Rul. 56-304 describes requirements for distributions of funds to individuals these requirements are nonetheless applicable to distributions made to organizations to show any distributions are made on a true charitable basis. Aside from bank statements and a general ledger, you have provided very little documentation supporting financial transactions, including loans, donations, or personal expenses. Your Form ****** for ****** provided that total funds expanded to ****** operations was $ ******. These payments and transactions total ** % of all disbursements for which no substantiation was provided to establish whether the funds were used for 501(c)(3) purposes. We have determined that the records and financial materials you have provided show that you do not maintain sufficient records and controls to detail your activities and financial transactions and, therefore, are unable to show that you exclusively further 501(c)(3) exempt activities. Issue 3 Per section 1.501(c)(3)-1(c)(2) of the regulations, an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private individuals. Where an activity provides a direct benefit to private insiders, it does not matter that the benefit may be quantitatively insubstantial. Even a small amount of inurement is fatal to exemption. You are similar to the organization described in Revenue Ruling 63-252, 1963-2 C.B. 101. You stated that ****** is a ****** college student, whose education costs were provided by one of your donors. You stated that you do not have grant making procedures in place. Therefore, you do not have an independent grant selection committee consisting of members who are not in a position to derive private benefit. You stated that ****** makes decisions with respect to grant recipients. Based on available facts and circumstances; your grants to pre-designated individuals such as ******, and lack of discretion and control over use of funds, in general, will adversely affect your IRC § 501(c)(3) tax-exempt status. Restricting funds to send to designated individuals in the form of grants violates "conduit" and "earmarking" restrictions. If the program awards are not based on need or merit with a pool of candidates, it is not sufficient to avoid private benefit. If the payments are made to pre-selected, specifically named individuals, exemption is precluded. See Rev.Rul. 67-367, 1967-2 C.B. 188. As stated in the cited case Retired Teachers Legal Defense Fund v. Commissioner, the private benefit prohibition of section 501(c)(3) of the Code applies to all kinds of persons and groups, not just those "insiders" subject to the stricter inurement proscription. Prohibited private benefit may include an "advantage; profit; fruit; privilege; gain or interest." In this way, you are providing the substantial private benefit of profit, privilege, and gain to individuals such as ******, ******, and ******. In contradiction to Revenue Ruling 66-79, the funds you raise are not used for the purposes of the domestic organization (you), but rather for the purposes of the foreign organizations (****** & ******) receiving the grant from the domestic organization (you). By your own admission, your activities consist of providing financial support to ****** and ******. You receive donations from your donors and then distribute funds to ****** who has ultimate control over how the funds are used. By allowing ****** to control your financial decisions, including complete control and discretion over funds and how to spend them (purchase materials and distribute them or issue grants) an environment for allowing your funds to be used for private benefit is created. By not requiring supporting documentation for how the funds were spent, and only accepting reports and pictures submitted by ******, demonstrates your existence privately benefits ******. Additionally, ****** resides on the ****** property compound, in one of the guest houses, that you paid for and maintain. ****** office is located on the ****** Property from which ****** conducts his business. Your minutes discussed the rental potential of the ****** property and giving ****** a percentage of rentals as a bonus to ****** salary. You also stated that you will allow ****** to build a house on the property. We took into consideration your statement that ****** will pay for the house with ****** own funds. However, your organization is serving a private interest by allowing ****** to operate ****** business and build ****** house from the property. The nature of ****** control over financial transactions and ****** financial intertwining with you make it impossible to separate. Through your lack of control and discretion over your funds, you have created an environment for allowing your funds to be used for private benefit to insiders such as ******. This precludes exemption under IRC Section 501(c)(3). TAXPAYER'S POSITION The taxpayer's position is unknown at this time. CONCLUSION You have failed to provide adequate documentation that you exclusively further 501(c)(3) exempt activities. Therefore, we have no reason to believe that you are operating for exempt purposes. As a result of the examination, we have determined that you are not operating for exempt purposes as a §501(c)(3) organization. Accordingly, we are proposing revocation of your tax-exempt status. Since your organization will no longer have tax-exempt status, you are liable for filing Form ******, U.S. Corporation Income Tax Return. If the proposed revocation becomes final, appropriate state officials will be notified of such action in accordance with §6104(c) of the Internal Revenue Internal Revenue Code.

Internal Revenue Service - Information Release IR-2022-144 Security Summit: Tell-tale signs of identity theft tax pros should watch for August 2, 2022 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 Security Summit: Tell-tale signs of identity theft tax pros should watch for IR-2022-144, August 2, 2022 WASHINGTON -- With identity thieves continuing to target the tax community, Internal Revenue Service Security Summit partners today urged tax professionals to learn the signs of data theft so they can react quickly to protect clients. The IRS, state tax agencies and the tax industry - working together as the Security Summit - reminded tax professionals that they should contact the IRS immediately when there's an identity theft issue while also contacting insurance or cybersecurity experts to assist them with determining the cause and extent of the loss. "Tax pros must be vigilant to protect their systems from identity thieves who continue to look for ways to steal data," said IRS Commissioner Chuck Rettig. "Practitioners can take simple steps to remain on the lookout for signs of data and identity theft. It's critical for tax pros to watch out for these details and to quickly take action when tell-tale signs emerge. This can be critical to protect their business as well as their clients against identity theft." This is the third in a summer series of five Security Summit news releases aimed at raising awareness among tax professionals about data security. The special Protect Your Client; Protect Yourself campaign is designed to help protect against tax-related identity theft by increasing attention on basic security steps that tax professionals and others should take to protect sensitive information. One common concern the IRS hears from tax professionals is that they did not immediately recognize the signs of data theft. Summit partners are urging tax professionals to watch out for these critical signs: - Client e-filed returns rejected because client's Social Security number was already used on another return. - More e-file acknowledgements received than returns the tax pro filed. - Clients responded to emails the tax pro didn't send. - Slow or unexpected computer or network responsiveness such as: Software or actions take longer to process than usual, Computer cursor moves or changes numbers without touching the mouse or keyboard, Unexpectedly locked out of a network or computer. Tax professionals should also watch for warning signs when clients report they've received: - IRS Authentication letters (5071C, 6331C, 4883C, 5747C) even though they haven't filed a return. - A refund even though they haven't filed a return. - A tax transcript they didn't request. - Emails or calls from the tax pro that they didn't initiate. - A notice that someone created an IRS online account for the taxpayer without their consent. - A notice the taxpayer wasn't expecting that: Someone accessed their IRS online account, The IRS disabled their online account, Balance due or other notices from the IRS that are not correct based on return filed or if a return had not been filed. These are just a few examples. Tax pros should ensure they have the highest security possible and react quickly if they sense or see something amiss. If the tax pro or their firm are the victim of data theft, immediately: - Report it to the local IRS Stakeholder Liaison Liaisons will notify IRS Criminal Investigation and others within the agency on the practitioner's behalf. Speed is critical. If reported quickly, the IRS can take steps to block fraudulent returns in the clients' names and will assist tax pros through the process. - Email the Federation of Tax Administrators at StateAlert@taxadmin.org Get information on how to report victim information to the states. Most states require that the state attorney general be notified of data breaches. This notification process may involve multiple offices. - Be pro-active with clients that could have been impacted and suggest appropriate actions, such as obtaining an IP PIN or completing a Form 14039, Identity Theft Affidavit if applicable. See the early Security Summit reminder about the importance of IP PINs. Find more information at Data Theft Information for Tax Professionals. Additional resources - Publication 5293, Data Security Resource Guide for Tax Professionals PDF, provides an overview resources about how to avoid data theft. - Tax professionals can also get help with security recommendations by reviewing IRS Publication 4557, Safeguarding Taxpayer Data PDF, and the IRS Identity Theft Central pages for tax pros. - Tax pros should also review Small Business Information Security: The Fundamentals PDF by the National Institute of Standards and Technology - Also, tax professionals should stay connected to the IRS through subscriptions to e-News for Tax Professionals and Social Media. - For more information, see Boost Security Immunity: Fight Against Identity Theft.

Private Letter Ruling Number: 202342005 Internal Revenue Service July 25, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202342005 Release Date: 10/20/2023 Index Number: 9100.00-00, 1400Z.02-00, 1400Z.01-00, 1400Z.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:ITA:B04 PLR-101986-23 Date: July 25, 2023 Dear ******: This responds to Taxpayer's request, dated Date 2, for a private letter ruling. Specifically, Taxpayer requests relief, under sections 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations, for an extension of time to file Taxpayer's Form 8996, Qualified Opportunity Fund, for purposes of making the election to: (1) self-certify Taxpayer as a qualified opportunity fund ("QOF"), as defined in section 1400Z-2(d) of the Internal Revenue Code ("Code"); and (2) be treated as a QOF, effective as of the month Taxpayer was formed, as provided under Code section 1400Z-2 and Treasury Regulation section 1.1400Z(d)-1(a). 1 ******** 1 Hereinafter, all references to sections are to the Internal Revenue Code or the Treasury Regulations (26 CFR Part 1) or (26 CFR Part 301) as applicable. ******** FACTS According to the facts and representations provided, Taxpayer was organized as a limited liability company under the laws of State Z on Date 1 and is classified as a partnership for Federal tax purposes. Taxpayer's overall accounting method is the cash method and has a tax year end of Tax Year. Member A and Member B, each own % of Taxpayer. Taxpayer was organized for the purpose of qualifying as an QOF and investing in qualified opportunity zone property as defined in section 1400-2(d)(2). Taxpayer engaged Advisor to prepare and file Taxpayer's Year 1 and Year 2 Federal income tax return, including any forms and elections to certify Taxpayer as a QOF. For Year 1 and Year 2, Advisor prepared and timely filed Form 1065, U.S. Return of Partnership Income, but failed to include a completed Form 8996, Qualified Opportunity Fund to self-certify as a QOF. In Year 3, Advisor sold his accounting practice to Accounting Firm. In Month X of Year 4, Member B received a Form 6502 letter from the Service indicating that the Service had no record of Taxpayer's QOF status. Accounting Firm reviewed Taxpayer's previous Federal income tax returns and discovered that Form 8996 was not attached to Taxpayer's Federal income tax returns for Year 1 and Year 2. Taxpayer then instructed Accounting Firm to prepare this request for an extension of time for Taxpayer to file its Form 8996 for Year 1 and Year 2. Additionally, Accounting Firm completed and filed Taxpayer's Year 3 Federal income tax return and attached the Form 8996. LAW AND ANALYSIS Section 1400Z-2(e)(4)(A) directs the Secretary to prescribe regulations for rules for the certification of QOFs. Section 1.1400Z2(d)-1(a)(2)(i) provides that the self-certification of a QOF must be timely filed and effectuated annually in such form and manner as may be prescribed by the Commissioner of Internal Revenue in the Internal Revenue Service forms or instructions, or in publications or guidance published in the Internal Revenue Bulletin. To self-certify as a QOF, a taxpayer must file Form 8996 with its tax return for the year to which the certification applies. The Form 8996 must be filed by the due date of the tax return (including extensions). The information provided indicates that Taxpayer's inadvertent failure to file a Form 8996 by the due date of its income tax return (including extensions) for Year 1 and Year 2 was through circumstances beyond Taxpayer's control. Because section 1.1400Z2(d)-1(a)(2)(i) sets forth the manner and timing for an entity to self-certify as a QOF, these elections are regulatory elections, as defined in section 301.9100-1(b). Sections 301.9100-1 through 301.9100-3 provide the standards that the Commissioner will use to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-3(a) provides that requests for extensions of time for regulatory elections (other than automatic extensions covered in section 301.9100-2) will be granted when the taxpayer provides evidence (including affidavits) to establish that the taxpayer acted reasonably and in good faith and the grant of relief will not prejudice the interests of the Government. Section 301.9100-3(b)(1) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer-- (i) Requests relief before the failure to make the regulatory election is discovered by the Service; (ii) Failed to make the election because of intervening events beyond the taxpayer's control; (iii) Failed to make the election because, after exercising reasonable diligence, the taxpayer was unaware of the necessity for the election; (iv) Reasonably relied on the written advice of the Service; or (v) Reasonably relied on a qualified tax professional, and the professional failed to make, or advise the taxpayer to make, the election. Under section 301.9100-3(b)(3), a taxpayer will not be considered to have acted reasonably and in good faith if the taxpayer-- (i) Seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662 at the time the taxpayer requests relief and the new position requires a regulatory election for which relief is requested; (ii) Was informed in all material respects of the required election and related tax consequences, but chose not to file the election; or (iii) Uses hindsight in requesting relief. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Service will not ordinarily grant relief. Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable extension of time to make a regulatory election only when the interests of the Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i) provides that the interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Section 301.9100-3(c)(1)(ii) provides that the interests of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable year that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under section 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. CONCLUSION Based on the facts and information submitted and the representations made, we conclude that Taxpayer has acted reasonably and in good faith, and the granting of relief would not prejudice the interests of the Government. Accordingly, Taxpayer has satisfied the requirements of the regulations for the granting of relief. Based solely on the facts and information submitted, and representations made in the ruling request, we grant Taxpayer an extension of 60 days from the date of this letter ruling to file Form 8996 for Year 1 and Year 2 to self-certify as a QOF under section 1400Z-2 and section 1.1400Z2(d)-1(a)(2)(i). The election must be made on a completed Form 8996 attached to the Taxpayer's amended tax returns or administrative-adjustment requests (as applicable). This ruling is based upon facts and representations submitted by Taxpayer and accompanied by penalty of perjury statements executed by appropriate parties. This office has not verified any of the material submitted in support of the request for a ruling. However, as part of an examination process, the Service may verify the factual information, representations, and other data submitted. Except as expressly provided herein, no opinion is either expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, we have no opinion, either express nor implied, concerning whether any investments made into Taxpayer are qualifying investments as defined in section 1.1400Z2 (a)-1(b)(34), or whether Taxpayer meets the requirements under section 1400Z-2 and the regulations thereunder to be a QOF. In addition, we also express no opinion on whether any interest owned in any entity by Taxpayer qualifies as qualified opportunity zone property, as defined in section 1400Z-2(d)(2), or whether such entity would be treated as a qualified opportunity zone business, as defined in section 1400Z-2(d)(3). We express no opinion regarding the tax treatment of the instant transaction under the provisions of any other sections of the Code or Treasury Regulations that may be applicable, or regarding the tax treatment of any conditions existing at the time of, or effects resulting from, the instant transaction. A copy of this letter must be attached to any tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent. Enclosed is a copy of the letter ruling showing the deletions proposed to be made when it is disclosed under section 6110. In accordance with the Form 2848, Power of Attorney and Declaration of Representative on file with this office, we are sending an electronic copy of this letter to Taxpayer's authorized representative. This letter is being issued electronically in accordance with Rev. Proc. 2020-29, 2020-21 I.R.B. 859 and Rev. Proc. 2023-1, 2023-1 I.R.B. 1. A paper copy will not be mailed to the taxpayer. Sincerely, Mon L. Lam Senior Counsel Office of Associate Chief Counsel (Income Tax & Accounting) cc:

Private Letter Ruling Number: 202339004 Internal Revenue Service June 26, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202339004 Release Date: 9/29/2023 Index Number: 9100.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:ITA:B05 PLR-101705-23 Date: June 26, 2023 Dear ******: This responds to the request by Taxpayer, dated Date 1 for relief under § 301.9100-3 of the Procedure and Administration Regulations to file Form 8996, Qualified Opportunity Fund. Specifically, Taxpayer requests that the Internal Revenue Service (Service) grant to Taxpayer an extension of time to make an election under § 1400Z-2 of the Internal Revenue Code (Code) and § 1.1400Z2(d)-1(a)(2) of the Income Tax Regulations to self-certify Taxpayer as a Qualified Opportunity Fund (QOF), effective as of Date 2. FACTS The information and affidavits submitted reflect the following facts. Taxpayer is a limited partnership that was formed under the law of State A on Date 3. GP is Taxpayer's general partner and there are N1 limited partners who hold ownership interests in Taxpayer proportionate to their contributions to Taxpayer. Individual Manager is the manager of GP. Section N2 of Taxpayer's operating agreement provides that Taxpayer was formed in order to invest in and hold at least N3% of its assets in qualified opportunity zone property, as required by § 1400Z-2(d)(1) & (2) and the implementing regulations. Section N4 of Taxpayer's operating agreement states that each partner acknowledges and agrees that the partnership is intended to meet the requirements to be a QOF pursuant to § 1400Z-2 and related regulations. The operating agreement further authorizes Taxpayer to hold limited partnership interests in qualified opportunity zone business interests, and manage, supervise and dispose of the qualified opportunity zone business interests. Taxpayer's sole asset is an interest in QOZB LP which was formed to acquire land and develop real estate in a qualified opportunity zone in City, State B. Beginning on Date 4, the partners of Taxpayer began investing eligible gains into Taxpayer and, as of the end of Year 1, partners invested $N5 in Taxpayer. Taxpayer invested the monies in QOZB LP, which in turn developed real property located in a qualified opportunity zone. The partners of Taxpayer retained Accounting Firm to assist in the structuring of Taxpayer. Accounting Firm was also retained to handle the tax filings of a number of business entities related to Taxpayer, including GP and QOZB, all of which have names that begin with ABBR (the "ABBR Entities"). At the time of Taxpayer's formation and funding, Individual Manager had conversations with AP1, an accountant-partner at Accounting Firm, about two qualified opportunity funds, including Taxpayer. AP1 may have informed Individual Manager that Accounting Firm would be handling the tax filing for Taxpayer. Individual manager relied upon Accounting Firm and the representations of AP1 respecting the filings required to be made with the Service so that Taxpayer would meet the requirements to be a QOF. Taxpayer, GP and QOZB did not employ any accountant, law firm or preparer other than Accounting Firm to perform tax filings. AP1 terminated his relationship with Accounting Firm in Month 1, Year 2 and began working for a different firm. AP2, an accountant-partner from Accounting Firm, was assigned to assist with the tax filings of the ABBR Entities in late Month 2, Year 2, which was after the deadline for filing partnership returns for Year 1. C1, the controller of H and acting on behalf of Taxpayer and other ABBR Entities, sent to AP2 a list of the business entities for which tax returns would need to be filed. Subsequently, during Month 3, Year 2 when preparing to perform tax filings for a number of entities, AP2 learned of Taxpayer's existence. On or about Date 5, AP2 realized that Taxpayer had not requested an extension of time to file a Form 1065, U.S. Partnership Return of Income, for Year 1. As a result, no Form 8996 was filed for Taxpayer for Year 1, with the result that Taxpayer was not self-certified as a QOF for the month and year during which partners began investing gains into Taxpayer. AP2 promptly notified Individual Manager of the error. During Month 3, Year 2 Individual Manager was advised that a timely filed Form 1065 was required in order for Taxpayer to be self-certified as a QOF. Individual Manager consulted with Accounting Firm respecting the remedial measures available for self-certifying Taxpayer as a QOF and was advised to file a request for a private letter ruling and request relief pursuant to § 9100 of the Procedure and Administration Regulations. On Date 6 Taxpayer filed with the Service a Form 1065 to which a Form 8996 was attached for Year 1. Taxpayer represents that the Service has not notified Taxpayer of its failure to self-certify itself as a QOF for Year 1. LAW AND ANALYSIS Section 1400Z-2(e)(4)(A) of the Code directs the Secretary to prescribe regulations to carry out the statute's purposes, including rules for the certification of QOFs. Section 1.1400Z2(d)-1(a)(2) of the Income Tax Regulations provides the rules for an entity to self-certify as a QOF. Section 1.1400Z2(d)-1(a)(2)(i) provides that the entity electing to be certified as a QOF must do so annually on a timely filed return in such form and manner as may be prescribed by the Commissioner of Internal Revenue in the forms or instructions, or in publications or guidance of the Service, published in the Internal Revenue Bulletin. To self-certify as a QOF, a taxpayer must file Form 8996 with its tax return for the year to which the certification applies. The Form 8996 must be filed by the due date of the tax return (including extensions). Because § 1.1400Z2(d)-1(a)(2)(i) sets forth the manner and timing for an entity to self-certify as a QOF, these elections are regulatory elections, as defined in § 301.9100-1(b) of the Procedure and Administration Regulations. Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations provide the standards that the Commissioner will use to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-3(a) provides that requests for extensions of time for regulatory elections, other than automatic extensions covered in § 301.9100-2, will be granted when the taxpayer provides evidence (including affidavits) to establish that the taxpayer acted reasonably and in good faith and the grant of relief will not prejudice the interests of the Government. Under § 301.9100-3(b) of the Procedure and Administration Regulations, a taxpayer is deemed to have acted reasonably and in good faith if, among other circumstances not relevant here, the taxpayer requests relief before the failure to make the regulatory election is discovered by the Service, or although exercising reasonable diligence (taking into account the taxpayer's experience and the complexity of the return or issue), the taxpayer was unaware of the necessity for an election. A taxpayer may alternatively demonstrate good faith actions if he reasonably relies on a qualified tax professional and the professional failed to make, or advise the taxpayer to make, the election. A taxpayer is deemed not to have acted reasonably and in good faith pursuant to the provision in § 301.9100-3(b)(3) of the Procedure and Administration Regulations if the taxpayer-- (i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under § 6662 of the Code at the time the taxpayer requests relief, and the new position requires or permits a regulatory election for which relief is requested; (ii) was informed in all material respects of the required election and related tax consequences but chose not to make the election; or (iii) uses hindsight in requesting relief. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Service will not ordinarily grant relief. Section 301.9100-3(c)(1) of the Procedure and Administration Regulations provides that the Commissioner will grant a reasonable extension of time to make the regulatory election only when the interests of the Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i) of the Procedure and Administration Regulations provides that the interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Section 301.9100-3(c)(1)(ii) of the Procedure and Administration Regulations provides that the interests of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable year that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under § 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. Based on the facts and information submitted and the representations made, we conclude that Taxpayer has acted reasonably and in good faith, and that the granting of relief will not prejudice the interests of the Government. Accordingly, based solely on the facts and information submitted, and the representations made in the ruling request, Taxpayer has satisfied the requirements for the granting of relief. Consequently, the Form 8996 attached to Taxpayer's return for Year 1, filed with the Service on or about Date 6 is considered timely filed and Taxpayer has thereby made the election under § 1400Z-2 and § 1.1400Z2(d)-1(a)(2)(i) to self-certify as a QOF as of Date 2. Taxpayer should submit a copy of this letter ruling to the Service Center where Taxpayer files its returns along with a cover letter requesting that the Service associate this ruling with the Year 1 return. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, we express no opinion, either express or implied, concerning whether any investments made into Taxpayer are qualifying investments as defined in § 1.1400Z2(a)-1(b)(34) of the Income Tax Regulations or whether Taxpayer meets the requirements under § 1400Z-2 of the Code and the regulations thereunder to be a QOF. We express no opinion regarding the tax treatment of the instant transaction under the provisions of any other sections of the Code or regulations that may be applicable, or regarding the tax treatment of any conditions existing at the time of, or effects resulting from, the instant transaction. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. The rulings contained in this letter are based upon information and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. Sincerely, Christina M. Glendening Senior Counsel, Branch 5 Office of Associate Chief Counsel (Income Tax & Accounting) cc:

Private Letter Ruling Number: 202243012 Internal Revenue Service October 26, 2021 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Release Number: 202243012 Release Date: 10/28/2022 UIL Code: 501.07-00 Date: October 26, 2021 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: CERTIFIED MAIL - RETURN RECEIPT REQUESTED Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(7), for the tax periods above. Your determination letter dated ******, is revoked. Our adverse determination as to your exempt status was made for the following reasons: You have not established that you are operated substantially for the pleasure and recreation of your members or for other nonprofitable purposes, and that no part or your net earnings inures to the benefit of any private shareholder within the meaning of IRC Section 501(c)(7). You have regularly received a substantial portion of your income from nonmember sources, and thus, you are no longer qualified for exemption under Section 501(c)(7). Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit www.irs.gov. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims or 3) the United States District Court for the District of Columbia. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. Keep the original letter for your records. Sincerely, Sean E. O'Reilly Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 cc: Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: February 26, 2021 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone Fax: Address: Manager's contact information: Name: ID number: Response due date: March 28, 2021 Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(7). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(7) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in ****** and ******, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, Sean E. O'Reilly Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 Publications 892 and 3498 ISSUE(S): Whether ****** continues to qualify for exemption from federal income tax under section 501(a) of the Internal Revenue Code as a social club described in Code section 501(c)(7). FACTS: ****** was formed ****** in ******. The organization is located in ******, ****** where it currently owns over ****** acres of land. In ****** the Internal Revenue Service granted ****** exemption from Federal income tax under section 501(c)(7) of the Code. The purpose of the ****** as stated in the Articles of Incorporation is: a) promote and enjoy the sports of hunting and fishing and to promote social and athletic recreation for members; b) to cooperate with the ****** Game Commission and the ****** Commission in obtaining respect for and observance of fish and game laws; c) to acquire, sell, own, lease, operate and mortgage real estate and improvements thereon, including water rights and rights of way; d) all other purposes necessary and incident to those purposes already stated. The corporation does not contemplate pecuniary gain or profit, incidental or other-wise, to its members. According to Article III Section of the Amended Bylaws dated ******, membership to ****** is limited to ****** members. However, member's offspring who become of age and is interested, are eligible for membership. ****** currently has ****** members. ****** charges new members an initiation fee of $ ******. Aside from the initiation fee, members are charged other dues and assessments uniformly at the organization's discretion. Section 4(d) of the Amended Bylaw's state upon termination of membership, whether by death, resignation, or expulsion the corporation shall pay to the member or to their estate the sum of $ ****** (****** dollars) which shall be complete and final settlement of their membership. ****** activities consists of ******, ******, land maintenance acquisition and improvement. ****** has an investment fund which is professionally managed by ******. The funds originated from a lump sum payment received in ****** for a **-year (******, ******, ******) Lease. The funds are used to expand, improve, and maintain the land for their members social and recreational purposes. The chart below shows the income received by ****** per the Form ****** returns: ****** reported their investment income shown above on their Form(s) ******, Exempt Organization Business Income Tax Return. ****** has not identified any amounts as set aside income per Form(s) ******-Schedule-******. In ******, the increase in investment income was due to the organization selling a portion of their publicly traded securities that were held in the professionally managed investment fund. ****** has received over *** % of its gross receipts, including investment income, from sources outside of its membership for the years ******-******. APPLICABLE LAW: Section 501(c)(7) of the Code provides exemption from Federal income tax for clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all the activities of which are for such purposes and no part of the net earnings of which insures to the benefit of any private shareholder. The enactment of Public Law 94-568 in 1976 which changed the term "exclusively" to "substantially all". This change, as incorporated in the Code, allows for an insubstantial amount of income from activities that do not further the club's exempt purposes. Activities which constitute an unrelated trade or business include the use of the club facilities by the general public. Senate Report No. 94-1318 (1976), 2d Session, 1976-2 C.B. 597, at page 599 defines "substantially all" and explains that a social club is permitted to receive up to 35% of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status. It is also intended that within this 35% not more than 15% of the gross receipts should be derived from the use of a social club's facilities or services by the general public (nonmembers). The Senate Report defines the term "gross receipts" as those receipts from the traditional, normal, and usual activities of the club. Gross receipts include membership fees, dues, and assessments; charges, admissions, investment income (such as interest, dividends, rents and similar receipts) and normal recurring gains on investments. Treas.Reg. §1.501(c)(7)-1(a) further provides that in general, this exemption extends to social and recreation clubs which are supported solely by membership fees, dues, and assessments. However, a club otherwise entitled to exemption will not be disqualified because it raises revenue from members using club facilities or in connection with club activities. A social club that opens its facilities to the public is deemed to be not organized and operated exclusively* for pleasure, recreation, and other nonprofitable purposes, and is not exempt under section 501(a). Solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure, recreation, or social purposes. However, an incidental sale of property will not deprive a club of its exemption. See Reg. §1.501(c)(7)-1(b). Revenue Ruling 58-589, C.B. 1958-2, 266, sets forth the criteria for exemption under section 501(c)(7) of the Code and provides that a club must have a membership of individuals, personal contacts, and fellowship. A commingling of members must play a material part in the activities of the organization. Although fellowship need not be present between each member and every other member of the club, it must constitute a material part of the organization's activities. In this respect, statewide or nationwide organizations made up of individuals, but broken up into local groups, satisfy the requirement if fellowship constitutes a material part of the activities of each local group. The requirement of individual membership derives from the requirement of personal contacts and fellowship between members. It is evident that fellowship between members cannot play a material part in the activities of an organization composed of artificial entitles". Revenue Ruling 56-305, 1956-2 C.B. 307 provides that an organization that owns and operates a building and conducts club activities for the benefit of a tax-exempt lodge may itself be exempt as a social club. Revenue Ruling 66-149, 1966-1 C.B. 146 provides that a social club is not exempt from Federal income tax as an organization described in section 501(c)(7) of the Code where it regularly derives a substantial part of its income from nonmember sources such as, for example, dividends and interest on investments which it owns. However, a club's right to exemption under section 501(c)(7) of the Code is not affected by the fact that for a relatively short period a substantial part of its income is derived from investment of the proceeds of the sale of its former clubhouse pending the acquisition of a new home for the club. Rev. Proc. 71-17, 1971 WL 26186, 1971-1 C.B. 683 sets forth guidelines for determining the effect gross receipts derived from use of a social club's facilities by the general public have on the club's exemption from federal income tax under section 501(c)(7) of the Code. The club must maintain books and records of each such use and the amount derived therefrom. While the Senate Reports mandate the application of a "facts and circumstances test" in the event that gross receipts from nonmember and/or investment income reach the prohibited levels, they do not specify any of the relevant facts and circumstances that should be considered. However, in Pittsburgh Press Club v. US, 536 F.2d 572, (1976); 579 F.2d 751 (1978); and 615 F.2d 600 (1980), the court noted certain factors to consider in determining exempt status. Factors to consider in applying this test include: - The actual percentage of nonmember receipts and/or investment income. - The frequency of nonmember use of club facilities. (An unusual or single event (that is, non-recurrent on a year to year basis) that generates all the nonmember income should be viewed more favorably than nonmember income arising from frequent use by nonmembers). - The number of years the percentage has been exceeded. (The record over a period of years is also relevant. The high percentage in one year, with the other years being within the permitted levels, should be viewed more favorably to the organization than a consistent pattern of exceeding the limits, even by relatively small amounts). - The purposes for which the club's facilities were made available to nonmembers. - Whether the nonmember income generates net profits for the organization. Profits derived from nonmembers, unless set aside, subsidize the club's activities for members and result in inurement within the meaning of IRC 501(c)(7). Section 170(c)(4) Charitable contribution defined: In the case of a contribution or gift by an individual, a domestic fraternal society, order, or association operating under the lodge system, but only if such contribution or gift is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. GOVERNMENT'S POSITION: In ****** the IRS granted ****** exemption from Federal income tax under section 501(c)(7) of the Code. The examination of the ****** Form ****** return filed by ****** reveals that the organization derives little revenue from membership dues, assessments, or similar types of income. ****** main source of income is from investments. In ****** entered a ***-year ****** (******) Lease. From which ****** received a lump sum of money. The proceeds were invested in stocks and securities. ****** did not identify or record any set aside amounts, nor has any amounts of the investment income received in ****** by ****** been identified as set aside income on Schedule ****** of the Form ******. A 501(c)(7) social club is permitted to receive up to *** % of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status. ****** has exceeded this limitation for several consecutive years. The investment income earned by ****** is substantial, recurring, and routinely exceeds the non-member income limitations imposed on social clubs exempt under section 501(c)(7) of the Code. See Rev.Proc. 71-17 and Pittsburgh Press Club v. U.S. See also Rev.Rul. 66-149. Furthermore, the investment income effectively inures to the benefit of members because it enables the organization to finance operations without imposing dues, fees or other assessments on its members. Based on the application of the law to the facts and circumstances presented herein, it is the Government's position that ****** no longer qualifies for exemption as a social club described in section 501(c)(7) of the Code. TAXPAYER'S POSITION: ****** agrees with the IRS position regarding the proposed revocation of the organization's tax-exempt status by signing Form 6018. CONCLUSION: For the reasons stated above, the IRS has determined that ****** no longer qualifies for exemption from federal income tax under section 501(c)(7) of the Code. The IRS proposes to revoke the tax-exempt status of ****** effective ******, the ****** day of the ****** tax year under examination. Form(s) ******, U.S. Corporation Income Tax, should be filed for tax period ending ****** and thereafter.

Private Letter Ruling Number: 202407003 Internal Revenue Service November 15, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202407003 Release Date: 2/16/2024 Index Number: 614.04-00, 9100.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B6 PLR-111072-23 PLR-111073-23 Date: November 15, 2023 Dear ******: This letter replies to the Taxpayer's ruling request, dated Date 12. The Taxpayer has requested the following rulings: (1) An extension of time under § 301.9100-3 of the Procedure and Administration Regulations to submit an application for permission to aggregate separate nonoperating mineral interests under § 614(e) of the Internal Revenue Code and § 1.614-5(d) of the Income Tax Regulations. 1 ******** 1 Unless otherwise specified, all "section" references will be to the Internal Revenue Code, the Income Tax Regulations, or the Procedure and Administration Regulations. ******** (2) In the event that the relief requested in (1) is granted, permission under § 614(e) and § 1.614-5(d) to aggregate nonoperating mineral interests pursuant to the followings Leases: (a) Lease 1 and Lease 2, effective Date 1; and (b) Lease 1, Lease 2, and Lease 3, effective Date 2. The request is submitted in respect of nonoperating mineral interests held in Location. FACTUAL BACKGROUND Taxpayer represents the following facts: Taxpayer is organized as a limited liability company, treated as a partnership, and incorporated pursuant to the laws of State. Taxpayer is organized primarily for the object and purpose of making investments in assets of all types. Taxpayer is a calendar year taxpayer, utilizes the accrual method of accounting and prepares its financial statements using the U.S. Generally Accepted Accounting Principles. On Date 3, Taxpayer entered into a royalty agreement with Corporation 1, a corporation formed under the laws of Location. Taxpayer paid consideration of a to Corporation 1 in exchange for future royalties on certain lands based on the sale of A that has been converted from the B extracted from lands in the leases covered by the royalty agreement. Corporation 1 acted as the developer, producer, and marketer of B. Shortly after Date 3, Taxpayer inquired with Corporation 1 which leases were actively producing B. On Date 13, Corporation 1 notified Taxpayer that the only lease actively producing B is Lease 1. On Date 14, Corporation 3 confirmed that Lease 1 is the only lease producing B. On Date 4, Taxpayer and Corporation 1 amended the royalty agreement, whereby Taxpayer paid Corporation 1 an additional b in exchange for an increased royalty rate. The total consideration Taxpayer paid to Corporation 1 was c. On Date 5, Corporation 1 and Corporation 2 amalgamated to form Corporation 3. Corporation 3 became the successor royalty grantor of the royalty agreement with Taxpayer with ultimate responsibility for economic performance to Taxpayer. On Date 6, Corporation 3 indicated to Taxpayer that Lease 3 began producing B on Date 7. On Date 8, Corporation 3 indicated to Taxpayer that Lease 2 has been producing B since Date 9. For U.S. federal income tax purposes, the properties covered in Lease 1, Lease 2, and Lease 3, consist of mineral royalty interests, and each property has both currently producing and currently nonproducing portions. All the Leases that Taxpayer seeks to aggregate in this request are located in Location and classified by Corporation 3 as producing lands, for which Corporation 3 actively extracts B. Taxpayer is seeking permission to aggregate Lease 1 and Lease 2 effective on Date 1 because both Lease 1 and Lease 2 were producing B during taxable Year 1. Taxpayer was not aware that it was required to submit an application for permission to aggregate separate nonoperating mineral interests in Lease 1 and Lease 2 until Date 8. Taxpayer is also seeking permission to aggregate Lease 3 with Lease 1 and Lease 2 effective Date 2 because Lease 3 began producing B during taxable Year 2. Taxpayer was not aware that it was required to submit an application for permission to aggregate separate nonoperating mineral interests in Lease 1, Lease 2, and Lease 3 until Date 6. Taxpayer acknowledges that its aggregation requests are filed after the deadline set forth in § 1.614-5(e), and as such, Taxpayer is requesting an extension under § 301.9100-3. Taxpayer provided a map showing that the lands included in Lease 1, Lease 2, and Lease 3 are contiguous. Taxpayer notes that each of the properties is currently producing B or is expected to be producing B in the near future on at least some portion of the property; however, the royalty interests acquired by Taxpayer do not provide any royalties on production. Taxpayer has claimed cost depletion in respect of the royalty payments received from Corporation 3 and has not claimed percentage depletion deductions in respect of any properties. These requests seek the aggregation of the nonoperating mineral interests held at each of the properties, each treated as one property for U.S. federal income tax purposes, to enable Taxpayer to compute its cost depletion deduction in accordance with §§ 611 and 612 and § 1.611-2. Aggregation of the royalty interests at the properties is necessary to compute cost depletion because reserve information is not available to Taxpayer on a separate property-by-property basis. The adjusted basis for the aggregated property that will be used to calculate Taxpayer's cost depletion will be the cost allocated to the leases with current production. Taxpayer's combined adjusted basis in Lease 1 and Lease 2 is equal to d, the allocated portion of consideration paid to Corporation 1. Taxpayer's adjusted basis in Lease 3 is equal to e, the allocated portion of consideration paid to Corporation 1. Taxpayer's combined adjusted basis in Lease 1, Lease 2, and Lease 3 is equal to f. Taxpayer represents that granting permission to aggregate nonoperating mineral interests at each of the properties would reduce Taxpayer's administrative burden in calculating depletion and would allow Taxpayer to implement consistent treatment for financial accounting and U.S. federal income tax purposes. Taxpayer represents that tax avoidance is not the principal purpose of its aggregation requests and provides that the two separate requested aggregations do not reduce Taxpayer's federal tax liability. Taxpayer further provides that the sole reason in requesting the aggregation is to ease Taxpayer's administrative burden of calculating the depletion deduction for federal income tax purposes. RULINGS REQUESTED 1. Whether Taxpayer is entitled to an extension of time, under § 301.9100-3 to submit an application for permission to aggregate separate nonoperating mineral interests under § 614(e) and § 1.614-5(d). 2. If the ruling requested in (1) is granted, whether Taxpayer is entitled under § 614(e) and § 1.614-5(d) to aggregate nonoperating mineral interests pursuant to the followings Leases: (a) Lease 1 and Lease 2, effective Date 1; and (b) Lease 1, Lease 2, and Lease 3, effective Date 2. LAW AND ANALYSIS 1. Ruling #1: Request for Extension of Time under § 301.9100-3 Under § 614(e) and § 1.614-5(d), a taxpayer that owns two or more separate nonoperating mineral interests in a single tract or parcel of land or in two or more adjacent tracts or parcels of land may request permission to aggregate all the interests and treat them as one property. Section 1.614-5(e) provides that an application for permission to aggregate separate nonoperating interests under § 614(e) and § 1.614-5(d) must be made in writing to the Commissioner and must be filed within 90 days after the beginning of the first taxable year beginning after December 31, 1957, for which aggregation is desired or within 90 days after the acquisition of one of the nonoperating mineral interests that is to be included in the aggregation, whichever is later. Under § 301.9100-1(c), the Commissioner in exercising the Commissioner's discretion may grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Code, except subtitles E, G, H, and I. Sections 301.9100-2 and 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time under § 301.9100-1(a) to make a regulatory election. Section 301.9100-2 provides automatic extensions of time for making certain elections. Section 301.9100-3 provides extensions of time for making elections that do not meet the requirements of § 301.9100-2. Requests for relief under § 301.9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government. Here, based on the Taxpayer's representations, Taxpayer was not timely aware of the need to submit an aggregation request for Lease 1 and Lease 2, effective Date 1; or an aggregation request for Lease 1, Lease 2, and Lease 3, effective Date 2. Under § 1.614-5(e), the deadline to file an aggregation request for Lease 1 and Lease 2 was on Date 10. However, Taxpayer did not learn of the need to submit an aggregation request until Date 8, when Corporation 3 notified Taxpayer that Lease 2 has been producing B since Date 9. Date 8 was after Date 10. Under § 1.614-5(e), the deadline to file an aggregation request for Lease 3 with Lease 1 and Lease 2 was on Date 11. However, Taxpayer did not learn of the need to submit an aggregation request until Date 6, when Corporation 3 notified Taxpayer that Lease 3 began producing B on Date 7. Date 6 was after Date 11. Based solely on the information submitted and the representations made, we conclude that Taxpayer acted reasonably and in good faith and that the relief does not prejudice the interests of the Government, as the aggregation request does not provide a tax benefit to the Taxpayer. Therefore, we conclude that the requirements of § 301.9100-3 have been satisfied. Accordingly, Taxpayer is granted an extension of time to submit an application for permission to aggregate separate nonoperating mineral interests under § 614(e) and § 1.614-5(d). We consider Taxpayer's ruling request, dated Date 12, to be a timely submitted application for permission to aggregate nonoperating mineral interests. 2. Ruling #2: Aggregation Requests In the case of mines, wells, and other natural deposits, § 614(a) and § 1.614-1(a)(1) define the term "property" to mean each separate interest owned by the taxpayer in each mineral deposit in each separate tract of parcel of land. Section 1.614-1(a)(2) defines the term "interest" as an economic interest in a mineral deposit. It includes working interests or operating interests, royalties, overriding royalties, net profits interests, and, to the extent not treated as loans under § 636, production payments. Section 614(e) provides that if a taxpayer owns two or more separate nonoperating mineral interests in a single tract or parcel of land or in two or more adjacent tracts or parcels of land, the Secretary shall, on a showing by the taxpayer that a principal purpose of forming the aggregation is not the avoidance of tax, permit the taxpayer to treat all such interests as one property for all subsequent taxable years unless the Secretary consents to a different treatment. Section 614(e)(2) and § 1.614-5(g) define the term "nonoperating mineral interests" to include only interests described in § 614(a) that are not operating mineral interests within the meaning of § 1.614-2. Section 1.614-2(b) defines the term "operating mineral interest" to mean a separate mineral interest as described in § 614, in respect of which the costs of production are required to be taken into account by the taxpayer for purposes of computing the limitation of 50 percent of taxable income from the property in determining the deduction for percentage depletion under § 613, or such costs would be so required to be taken into account if the mine, well, or other natural deposit were in the production stage. The term does not include royalty interests or similar interests, such as production payments or net profits interests. Section 1.614-5(d) provides that upon proper showing to the Commissioner, a taxpayer who owns two or more separate nonoperating mineral interest in a single tract or parcel of land, or in two or more adjacent tracts or parcels of land, shall be permitted, under § 614(e), to form an aggregation of all such interests in each separate kind of mineral deposit and treat such aggregation as one property. Permission shall be granted by the Commissioner only if the taxpayer establishes that a principal purpose in forming the aggregation is not the avoidance of tax. The fact that the aggregation of nonoperating mineral interests will result in a substantial reduction in tax is evidence that the avoidance of tax is a principal purpose of the taxpayer. An aggregation formed under § 1.614-5(d) shall be considered as one property for all purposes of the Internal Revenue Code. In no event may nonoperating interests in tracts or parcels of land that are not adjacent be aggregated and treated as one property. The term "two or more adjacent tracts or parcels of land" means tracts or parcels of land that are in reasonably close proximity to each other depending on the facts and circumstances of each case. Adjacent tracts or parcels of land do not necessarily have any common boundaries, and may be separated by intervening mineral rights. Section 1.614-5(e)(1) provides that an application for permission to aggregate separate nonoperating interests under § 614(e) and § 1.614-5(d) must be made in writing to the Commissioner and must be filed within 90 days after the beginning of the first taxable year beginning after December 31, 1957, for which aggregation is desired or within 90 days after the acquisition of one of the nonoperating mineral interests that is to be included in the aggregation, whichever is later. Section 1.614-5(e)(4) provides that the application for permission to aggregate nonoperating mineral interests under § 614(e) and § 1.614-5(d) shall include a complete statement of the facts upon which the taxpayer relies to show that the avoidance of tax is not a principal purpose of forming the aggregation. Such application shall also include a description of the nonoperating mineral interests within the tract or tracts of land involved. A general description, accompanied by maps appropriately marked, which accurately circumscribes the scope of the mineral interests in a particular kind of mineral deposit within the tract or tracts of land involved will be sufficient. If the Commissioner grants permission, a copy of the letter granting permission shall be attached to the taxpayer's return for the first taxable year for which such permission applies. If the taxpayer has already filed such return, a copy of the letter of permission shall be filed with the district director for the district in which such return was filed and shall be accompanied by an amended return or returns if necessary or, if appropriate, a claim for credit or refund. Section 1.614-5(e)(5) provides that the election to aggregate separate nonoperating mineral interests under § 614(e) and § 1.614-5(d) is binding upon the taxpayer for the first taxable year for which the request is made and for all subsequent taxable years unless consent to make a change is obtained from the Commissioner. Taxpayer has represented that it acquired multiple royalty interests through Leases 1, 2, and 3. Taxpayer also represents that the interests at each property are owned in two or more tracts of parcels of land that are "adjacent" or "in reasonably close proximity to each other" as provided in § 1.614-5(d). Additionally, Taxpayer represents that the maps for each property included in the ruling request demonstrate that the nonoperating interests at each property are in reasonably close proximity to each other, as these interests are either contiguous, touch at a corner, or are separated by intervening mineral rights but included in a single operating mine. Finally, Taxpayer represents that the principal purpose of forming the requested aggregation at each property is not tax avoidance. The purpose of forming the requested aggregation is to reduce administrative burden in calculating depletion and allow Taxpayer to implement consistent treatment for financial accounting and federal income tax purposes. Based on the representations made and consideration of the descriptions and maps submitted, we conclude that the requirements of § 614(e) and § 1.614-5 have been met. Based solely on the facts and representations submitted, we grant consent for Taxpayer to: (a) Aggregate the separate nonoperating mineral interests in Lease 1 and Lease 2, effective Date 1, such that each of the properties is treated as one property for U.S. federal income tax purposes. The election applies for Taxpayer's taxable year ending after Date 1 and all subsequent taxable years unless Taxpayer obtains the Commissioner's consent to make a change. (b) Aggregate the separate nonoperating mineral interests in Lease 1, Lease 2, and Lease 3, effective Date 2, such that each of the properties is treated as one property for U.S. federal income tax purposes. The election applies for Taxpayer's taxable year ending after Date 2 and all subsequent taxable years unless Taxpayer obtains the Commissioner's consent to make a change. CONCLUSION Based on the foregoing, we conclude that: (1) Taxpayer is granted an extension of time to submit an application for permission to aggregate separate nonoperating mineral interests under § 614(e) and § 1.614-5(d). (2) Taxpayer is granted consent to: (a) Aggregate the separate nonoperating mineral interests in Lease 1 and Lease 2, effective Date 1, such that each of the properties is treated as one property for U.S. federal income tax purposes. The election applies for Taxpayer's taxable year ending after Date 1 and all subsequent taxable years unless Taxpayer obtains the Commissioner's consent to make a change. (b) Aggregate the separate nonoperating mineral interests in Lease 1, Lease 2, and Lease 3, effective Date 2, such that each of the properties is treated as one property for U.S. federal income tax purposes. The election applies for Taxpayer's taxable year ending after Date 2 and all subsequent taxable years unless Taxpayer obtains the Commissioner's consent to make a change. Except as specifically set forth above, no opinion is expressed or implied concerning the federal income tax consequences of the above-described facts under any other provision of the Code or regulations. Specifically, we neither express nor imply any opinion concerning Taxpayer's calculation of depletion or whether Taxpayer's interests in the properties are economic interests. This ruling is conditioned on each royalty interest qualifying as an economic interest under § 611 of the Code before the aggregation. General descriptions of the nonoperating interests accompanied by maps are to be on file with the books and other records that are necessary for examination by the Service. The rulings contained in this letter are directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. The rulings contained in this letter are based upon information and representations submitted by Taxpayer and accompanied by penalty of perjury statements executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your authorized representatives. We are also sending a copy of this letter to the appropriate Industry Director, LB&I. A copy of this ruling must be attached to any federal income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. Sincerely, Maggie M. Stehn Senior Counsel, Branch 6 Office of the Associate Chief Counsel (Passthroughs & Special Industries) Enclosure: Copy for § 6110 purposes cc:

Private Letter Ruling Number: 202141001 Internal Revenue Service July 15, 2021 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202141001 Release Date: 10/15/2021 Index Number: 168.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B06 PLR-101169-21 Date: July 15, 2021 Dear *******: This letter responds to a request for a private letter ruling dated January 13, 2021, and submitted on behalf of Taxpayer regarding § 168(i)(9) of the Internal Revenue Code and § 1.167(l)-1 of the Income Tax Regulations (together, the "Normalization Rules"), and Section 13001(d) of Pub. L. 115-97 (131 Stat 2054) ("TCJA") and Rev. Proc. 2020-39, 2020-36 IRB 546, regarding the scope of the deferred tax normalization requirements and computations required to comply with the average rate assumption method ("ARAM"). The relevant facts as represented in your submission are set forth below. FACTS Taxpayer is an investor-owned regulated utility incorporated under the laws of State A. Taxpayer is an accrual basis taxpayer and reports on a calendar year basis. Taxpayer is wholly owned by Parent. Parent is a State A corporation. Taxpayer is included in a consolidated federal income tax return of which Parent is the common parent. Taxpayer is principally engaged in the business of supplying electricity in State A. Taxpayer is subject to regulation as to rates and conditions of service by Commission A as well as Commission B. Both of these regulators establish Taxpayer's rates based on its costs, including a provision for a return on the capital employed by Taxpayer in its regulated businesses. Commission A and Commission B treat accumulated deferred federal income tax liabilities ("ADFIT") and excess deferred federal income tax liabilities ("EDFIT") as a reduction to rate base in setting the allowed return for the utilities that they regulate. Taxpayer has claimed accelerated depreciation on its public utility property to the full extent those deductions have been available. Taxpayer has normalized the federal income taxes deferred as a result of it claiming these deductions in accordance with the Normalization Rules. Commission B has adopted the Uniform Systems of Accounts "USOAs" and all electric utilities under the jurisdiction of Commission A, including Taxpayer, follow the USOAs. The USOAs contain several definitions relevant to Taxpayer's request. Specifically, the USOAs define cost of removal "COR" as: the cost of demolishing, dismantling, tearing down or otherwise removing electric plant, including the cost of transportation and handling incidental thereto. "salvage value" as: the amount received for property retired, less any expenses incurred in connection with the sale or in preparing the property for sale. "net salvage value" as: the salvage of property retired less the cost of removal. "service value" as: the difference between original cost and net salvage value of electric plant. "service life" as: the time between the date electric plant is includible in electric plant in service, or electric plant leased to others, and the date of its retirement. and "depreciation" as: the loss in service value not restored by current maintenance, incurred in connection with the consumption or prospective retirement of electric plant in the course of service from causes which are known to be in current operation and against which the utility is not protected by insurance. Therefore, for the purposes of regulatory reporting, the net positive value or net cost of disposing of an asset at the end of its life is incorporated into the annual depreciation charge. COR is, therefore, a component of establishing the applicable depreciation rate. Taxpayer breaks out the COR and salvage rates separately from depreciation. The net rate is considered the Life Rate that is approved by Commission A. The COR and salvage reserves are tracked separately from accumulated depreciation in Taxpayer's continuing property records. In order to fund its future COR, Taxpayers estimates the future COR and then spreads the estimated cost ratably over the life of the asset through adding the COR to the annual depreciation charge used by commission A to calculate the allowable rate for Taxpayer to charge its customers. If the COR is greater than the salvage value of the public utility property, then the Taxpayer's property will in effect have a negative salvage value - which will create a negative depreciation rate (i.e. a depreciation rate that is greater than the value of asset). Alternately, if the net salvage value is positive it too will be reflected in Taxpayer's depreciation rate. The deprecation rate will then be utilized by Commission A in computing the allowable rates for Taxpayer to charge its customers. In most cases the COR is negative, and therefore a component of establishing the annual depreciation charge. The COR reserve is reflected as an addition to Taxpayer's accumulated depreciation account. When the COR is actually incurred, the amount expended is debited to that same account, thereby reducing the balance. For tax purposes, COR is deductible only when actually incurred. Taxpayer, therefore, reports its customer collections that fund the COR reserve as taxable income over the operating life of an asset, claiming an offsetting tax deduction only at the end of the life of that asset when the asset is removed. Since COR is normalized in setting rates, customers are provided a tax benefit commensurate with their funding of COR. In other words, they are provided a COR tax benefit as they fund the COR reserve - prior to the time Taxpayer actually claims that benefit on its tax return. The tax effect of COR funding as described creates a deferred tax asset ("DTA"). This represents the future benefit to be derived from the eventual COR tax deduction. The COR-related DTA is included in Taxpayer's overall plant-related ADFIT account that reduces Taxpayer's ADFIT balance. Prior to the Tax Cut and Jobs Act ("TCJA"), Taxpayer incorporated the COR into the annual depreciation charge without identifying the separate components of the deprecation and COR reserve charges. However, Taxpayer did maintain records that identified the separate components of non-COR and COR related depreciation that was reflected in the Taxpayers book depreciation balances. Consequently, Taxpayer distinguishes between COR book/tax differences and depreciation method/life differences even though they are both derived from Taxpayer's book depreciation rates and expense. Taxpayer's system can, therefore, track the reversals of these differences separately. Prior to the enactment of the TCJA, Taxpayer paid income tax at a 35 percent rate on the recovery of the COR portion of book depreciation (and provided its customers a tax benefit at that tax rate). However, as a result of the tax rate reduction enacted as part of the TCJA, Taxpayer will only receive a 21 percent benefit when the COR deduction is claimed or when any over-accrual is refunded and will pay only a 21 percent tax on the recovery of any COR under-accrual. In other words, in the case of COR, the tax rate reduction enacted as part of the TCJA has produced both a deferred tax shortfall as well as an excess tax reserve. Because Taxpayer will not recover the 14 percent "excess" tax it paid on its recovery of the COR component of book depreciation from the government when it claims its COR deduction, it will recover it from its customers. Conversely, because Taxpayer will not pay the 14 percent "excess" deferred tax it accrued on its obligation to refund over-accrued COR, it must restore the amount to its customers (that is, it also has COR-related excess deferred taxes). In anticipation of complying with the TCJA excess deferred tax Normalization Rules and the subsequent return of the TCJA Section 13001(d) excess tax reserve ("ETR") to customers, Taxpayer used its historical plant-related records in its regulatory books of account to separately compute both (1) its DTA related to COR and the associated excess tax deficit to be recovered from customers and (2) its DTL related to method/life differences and the associated ETR to be returned to customers, which included gross salvage value. Taxpayer's Recent Commission A Proceeding In Year A, Taxpayer filed an application with Commission A to set its rates for Period A. Upon the enactment of the TCJA in 2017, Taxpayer updated its filing with Commission A to reflect the impact of the lowered corporate tax rate. Among the impacts considered by Commission A was the proper computation of the ETR. Specifically, when computing the ARAM (as per TCJA Section 13001(d)(3)(B)), should the COR be included or not. Ultimately, Commission A and Taxpayer did not reach an agreement on the inclusion of COR into the ETR and the resulting disagreements relating to the COR-related EDFIT. In summary, Commission A's proposed method of computing the return of ADFIT to customers under ARAM included the accrual for COR, resulting in a larger amount of book depreciation in all years (and an earlier return of ETR to customers) than under the computational method proposed by Taxpayer. Commission A, In Month A of Year B, stated that it intended that Taxpayer comply with the Normalization rules at all times, and permitted Taxpayer to request a private letter ruling from the Internal Revenue Service. RULINGS REQUESTED 1) Whether, under the circumstances described above, Taxpayer's DTA for cumulative timing differences between (a) recognition of accrued gross COR with respect to public utility property as an increase in depreciation expense in its regulatory books of account and (b) the subsequent tax deduction of such costs upon disposition is subject to the normalization rules of Code Section 168(i)(9) and whether the associated excess deferred tax amount is subject to the normalization rules of TCJA Section 13001(d)? 2) Whether, under the circumstances described above, Taxpayer's DTL for the cumulative timing differences between (a) recognition of accrued gross salvage value with respect to public utility property as a reduction of depreciation expense in its regulatory books of account and (b) the subsequent taxation of such salvage amounts upon disposition is subject to the normalization rules of Code Section 168(i)(9) and whether the associated excess deferred tax amount is subject to the normalization rules of TCJA Section 13001(d) regardless of whether the gross salvage value timing differences are partially or fully offset by gross COR timing differences and whether the DTL related to gross salvage value differences is partially or fully offset by the DTA for gross COR differences? 3) Whether, under the circumstances described above, the computation of the reversal of the excess tax reserve for depreciation method and life differences for public utility property based on book depreciation amounts inclusive of an accrual of gross COR pursuant to the State Commission Method is consistent with the normalization requirements? 4) Whether, under the circumstances described above, computation of the reversal of the excess tax reserve for depreciation method and life differences for public utility property based on book depreciation amounts reflecting estimated gross salvage value but not an accrual of estimated gross COR pursuant to the Proposed Approach complies with or violates the normalization rules of TCJA Section 13001(d)? LAW AND ANALYSIS Section 168(f)(2) of the Internal Revenue Code, provides that the depreciation deduction determined under § 168 shall not apply to any public utility property (within the meaning of § 168(i)(10)) if the taxpayer does not use a normalization method of accounting. In order to use a normalization method of accounting, § 168(i)(9)(A)(i) requires the taxpayer, in computing its tax expense for establishing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account, to use a method of depreciation with respect to public utility property that is the same as, and a depreciation period for such property, that is not shorter than, the method and period used to compute its depreciation expense for such purposes. Under § 168(i)(9)(A)(ii), if the amount allowable as a deduction under § 168 differs from the amount that would be allowable as a deduction under § 167 using the method, period, first and last year convention, and salvage value used to compute regulated tax expense under § 168(i)(9)(A)(i), the taxpayer must make adjustments to a reserve to reflect the deferral of taxes resulting from such difference. Former § 167(l) generally provided that public utilities were entitled to use accelerated methods for depreciation if they used a "normalization method of accounting." A normalization method of accounting was defined in former § 167(l)(3)(G) in a manner consistent with that found in § 168(i)(9)(A). Treas. Reg. § 1.167(l)-1(a)(1) provides that the normalization requirements for public utility property pertains only to the deferral of federal income tax liability resulting from the use of an accelerated method of depreciation for computing the allowance for depreciation under § 167 and the use of straight-line depreciation for computing tax expense and depreciation expense for purposes of establishing cost of services and for reflecting operating results in regulated books of account. These regulations do not pertain to other book-tax timing differences with respect to state income taxes, F.I.C.A. taxes, construction costs, or any other taxes and items. Section 13001(a) of the TCJA reduced the corporate tax rate from 35 percent to 21 percent for taxable years beginning after December 31, 2017. TCJA Section 13001(d)(1) provides that a normalization method of accounting shall not be treated as being used with respect to any public utility property for purposes of § 167 or § 168 if the taxpayer, in computing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account, reduces the ETR more rapidly or to a greater extent than such reserve would be reduced under the average rate assumption method (ARAM). TCJA Section 13001(d)(3)(A) provides that ''excess tax reserve'' means the excess of reserve for deferred taxes (as described in § 168(i)(9)(A)(ii) as of the day before the corporate rate reductions provided in the amendments made by TCJA Section 13001(a) take effect, over the amount which would be the balance in such reserve, if the amount of such reserve were determined by assuming that the corporate tax rate reductions provided in the TCJA were in effect for all prior periods. TCJA Section 13001(d)(3)(B) defines ARAM as the method under which the excess in the reserve for deferred taxes is reduced over the remaining lives of the property as used in its regulated books of account which gave rise to the reserve for deferred taxes. Under such a method, during the time period in which the timing differences for the property reverse, the amount of the adjustment to the reserve for the deferred taxes is calculated by multiplying - the ratio of the aggregate deferred taxes for the property to the aggregate timing differences for the property as of the beginning of the period in question, by the amount of the timing differences which reverse during such period. Rev. Proc. 2020-39, Section 4.01 provides that under Section 13001(d)(1) of the TCJA, taxpayers must use ARAM to calculate the reversal of their ETR, if the taxpayer's regulatory books are based upon the vintage account data necessary to use ARAM. However, if the taxpayer's regulatory books are not based upon the vintage account data that is necessary for the ARAM, use of the ARAM is not required. Rev. Proc. 2020-39, Section 4.02 provides that the determination of whether a taxpayer's regulatory books contain sufficient vintage account data necessary to use the ARAM is determined based on all the facts and circumstances. Rev. Proc. 2020-39, Section 5 states that the TCJA ETR normalization requirements are part of the overall pre-existing deferred tax Normalization Rules and that the revenue procedure is intended to be consistent with those rules. For the COR-related amounts at issue in this request, the amounts are not protected by the Normalization Rules. Generally, § 168(i)(9)(A) does not refer to COR. Moreover, there is no acceleration of taxes for COR, but rather, a deferral. While COR may be a component of the calculation of the amount treated as book depreciation, it is a deduction under § 162 and has nothing to do with actual accelerated tax depreciation. While method and life differences closely related to depreciation are created and reversed solely through depreciation, such is not the case with COR. While the COR timing differences may often originate as a component of book depreciation, it reverses through the incurred COR expenditure. Taxpayer's request 2 addresses the question of whether COR-related DTA (determined above to not be subject to the Normalization Rules) impacts the application of those rules to salvage value. While COR is not protected under the Normalization Rules, salvage value is specifically included - see § 168(i)(9)(A)(ii) - as a protected part of the normalized ETR. Neither the Internal Revenue Code nor the regulations require or direct that salvage value must be affected by or is necessarily related to the computation of COR, for purposes of the application of the Normalization Rules. Because of their similarity, we address requests 3 and 4 together. The ETR created by the TCJA is the excess of the reserve for deferred taxes under § 168(i)(9)(A)(ii), as of the date before the corporate rate reductions under TCJA take effect, over the amount the reserve balance would be if the rate reductions had been in effect for all prior periods. The ETR is reduced over the remaining lives of the property which gave rise to such reserve for deferred taxes based on the reversal of the underlying depreciation method and life differences subject to the normalization rules of Code Section 168(i)(9)(A)(ii). Thus, because COR is not subject to normalization, as concluded above, including the COR-related amounts in the excess taxes used to compute the ETR does not satisfy the requirements of TCJA Section 13001(d). Conversely, leaving the COR out of the ETR computation does satisfy the requirements of TCJA Section 130001(d). Based on the forgoing we conclude that: 1) Taxpayer's DTA for cumulative timing differences between (a) recognition of accrued gross COR with respect to public utility property as an increase in depreciation expense in its regulatory books of account and (b) the subsequent tax deduction of such costs upon disposition is not subject to the normalization rules of Code Section 168(i)(9) and the associated excess deferred tax amount is not subject to the normalization rules of TCJA Section 13001(d). 2) Taxpayer's DTL for cumulative timing differences between (a) recognition of accrued gross salvage value with respect to public utility property as a reduction of depreciation expense in its regulatory books of account and (b) the subsequent taxation of such salvage amounts upon disposition is subject to the normalization rules of Code Section 168(i)(9) and the associated excess deferred tax amount is subject to the normalization rules of TCJA Section 13001(d) regardless of whether the gross salvage value timing differences are partially or fully offset by gross COR timing differences and whether the DTL related to gross salvage value differences is partially or fully offset by the DTA for gross COR differences. 3) The computation of the reversal of the excess tax reserve for depreciation method and life differences for public utility property based on book depreciation amounts inclusive of an accrual of gross COR pursuant to the State Commission Method is not consistent with the normalization rules of TCJA Section 13001(d). 4) The computation of the reversal of the excess tax reserve for depreciation method and life differences for public utility property based on book depreciation amounts reflecting estimated gross salvage value but not an accrual of estimated gross COR pursuant to the Proposed Approach complies with the normalization rules of TCJA Section 13001(d). Except as specifically set forth above, no opinion is expressed or implied concerning the federal income tax consequences of the above described facts under any other provision of the Code or regulations. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. This ruling is based upon information and representations submitted by Taxpayer and accompanied by penalty of perjury statements executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your authorized representatives. Sincerely, Patrick S. Kirwan Chief, Branch 6 Office of Associate Chief Counsel (Passthroughs & Special Industries) cc:

Internal Revenue Service - Information Release IR-2024-160 IRS: West Virginia storm victims qualify for tax relief; various deadlines postponed to Nov. 1 June 7, 2024 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS: West Virginia storm victims qualify for tax relief; various deadlines postponed to Nov. 1 IR-2024-160, June 7, 2024 WASHINGTON -- The Internal Revenue Service announced today tax relief for individuals and businesses in parts of West Virginia affected by severe storms, straight-line winds, tornadoes, flooding, landslides and mudslides that began on April 2, 2024. These taxpayers now have until Nov. 1, 2024, to file various federal individual and business tax returns and make payments. The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA). Currently, individuals and households that reside or have a business in Boone, Brooke, Cabell, Fayette, Hancock, Kanawha, Lincoln, Marshall, Nicholas, Ohio, Preston, Putnam, Tyler, Wayne and Wetzel counties qualify for tax relief. Among other things, this means that individuals and many businesses will now have until Nov. 1, 2024, to file their 2023 returns and pay any tax due. This includes taxpayers in Boone and Kanawha counties, who, due to a prior declaration, already had until June 17, 2024, to file and pay. The same relief will be available to any other counties added later to the disaster area. The current list of eligible localities is always available on the Tax relief in disaster situations page on IRS.gov. Filing and payment relief The tax relief postpones various tax filing and payment deadlines that occurred from April 2, 2024, through Nov. 1, 2024 (postponement period). As a result, affected individuals and businesses will have until Nov. 1, 2024, to file returns and pay any taxes that were originally due during this period. This means, for example, that the Nov. 1, 2024, deadline will now apply to: - Individual income tax returns and payments normally due on April 15, 2024. - 2023 contributions to IRAs and health savings accounts for eligible taxpayers. - Quarterly estimated income tax payments normally due on April 15, June 17 and Sept. 16, 2024. - Quarterly payroll and excise tax returns normally due on April 30, July 31 and Oct. 31, 2024. - Calendar year corporation and fiduciary returns and payments normally due on April 15, 2024. - Calendar year tax-exempt organization returns normally due on May 15, 2024. In addition, penalties for failing to make payroll and excise tax deposits due on or after April 2, 2024, and before April 17, 2024, will be abated as long as the deposits were made by April 17, 2024. The Disaster assistance and emergency relief for individuals and businesses page has details on other returns, payments and tax-related actions qualifying for relief during the postponement period. The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. These taxpayers do not need to contact the agency to get this relief. It is possible an affected taxpayer may not have an IRS address of record located in the disaster area, for example, because they moved to the disaster area after filing their return. In these kinds of unique circumstances, the affected taxpayer could receive a late filing or late payment penalty notice from the IRS for the postponement period. The taxpayer should call the number on the notice to have the penalty abated. In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization. Disaster area tax preparers with clients located outside the disaster area can choose to use the bulk requests from practitioners for disaster relief option, described on IRS.gov. Additional tax relief Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2024 return normally filed next year), or the return for the prior year (2023). Taxpayers have extra time - up to six months after the due date of the taxpayer's federal income tax return for the disaster year (without regard to any extension of time to file) - to make the election. For individual taxpayers, this means Oct. 15, 2025. Be sure to write the FEMA declaration number - 4783-DR on any return claiming a loss. See Publication 547, Casualties, Disasters, and Thefts, for details. Qualified disaster relief payments are generally excluded from gross income. In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents. See Publication 525, Taxable and Nontaxable Income, for details. Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow. The IRS may provide additional disaster relief in the future. The tax relief is part of a coordinated federal response to the damage caused by these storms and is based on local damage assessments by FEMA. For information on disaster recovery, visit DisasterAssistance.gov. Reminder about tax return preparation options - Eligible individuals or families can get free help preparing their tax return at Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) sites. To find the closest free tax help site, use the VITA Locator Tool or call 800-906-9887. Note that normally, VITA sites cannot help claim disaster losses. - To find an AARP Tax-Aide site, use the AARP Site Locator Tool or call 888-227-7669. - Any individual or family whose adjusted gross income (AGI) was $79,000 or less in 2023 can use IRS Free File's guided tax software at no cost. There are products in English and Spanish. - Another Free File option is Free File Fillable Forms. These are electronic federal tax forms, equivalent to a paper 1040 and are designed for taxpayers who are comfortable filling out IRS tax forms. Anyone, regardless of income, can use this option. - MilTax, a Department of Defense program, offers free return preparation software and electronic filing for federal tax returns and up to three state income tax returns. It's available for all military members and some veterans, with no income limit.

Internal Revenue Service - Information Release IR-2024-42 IRS: Michigan taxpayers impacted by severe storms, tornadoes and flooding qualify for tax relief; various deadlines postponed to June 17 February 15, 2024 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS: Michigan taxpayers impacted by severe storms, tornadoes and flooding qualify for tax relief; various deadlines postponed to June 17 IR-2024-42, Feb. 15, 2024 WASHINGTON -- The Internal Revenue Service today announced tax relief for individuals and businesses in parts of Michigan affected by severe storms, tornadoes and flooding that began on Aug. 24, 2023. These taxpayers now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments. The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA). Currently, this includes Eaton, Ingham, Ionia, Kent, Livingston, Macomb, Monroe, Oakland and Wayne counties. Individuals and households that reside or have a business in these localities qualify for tax relief. The same relief will be available to any other Michigan localities added later to the disaster area. The current list of eligible localities is always available on the disaster relief page on IRS.gov. Filing and payment relief The tax relief postpones various tax filing and payment deadlines that occurred from Aug. 24, 2023, through June 17, 2024 (postponement period). As a result, affected individuals and businesses will have until June 17, 2024, to file returns and pay any taxes that were originally due during this period. This means the June 17, 2024, deadline will now apply to: - Individual income tax returns and payments normally due on April 15, 2024. - 2023 contributions to IRAs and health savings accounts for eligible taxpayers. - Quarterly estimated income tax payments normally due on Sept. 15, 2023, Jan. 16, 2024, and April 15, 2024. - Quarterly payroll and excise tax returns normally due on Oct. 31, 2023, Jan. 31, 2024, and April 30, 2024. - Calendar-year partnership and S corporations that had a valid tax-year 2022 extension that ran out on Sept. 15, 2023, or have a 2023 return normally due on March 15, 2024. - Calendar-year corporations and fiduciaries that had a valid tax-year 2022 extension that ran out on Oct. 16, 2023, or have a 2023 return and payment normally due on April 15, 2024. - Calendar-year tax-exempt organizations that had a valid tax-year 2022 extension that ran out on Nov. 15, 2023, or have a 2023 return normally due on May 15, 2024. In addition, individuals and businesses that had an extension to file their 2022 returns will also have until June 17, 2024, to file them. However, tax-year 2022 tax payments are not eligible for this relief because they were originally due last spring, before the disaster occurred. In addition, penalties for failing to make payroll and excise tax deposits due on or after Aug. 24, 2023, and before Sept. 8, 2023, will be abated as long as the deposits were made by Sept. 8, 2023. The IRS disaster relief page has details on other returns, payments and tax-related actions qualifying for relief during the postponement period. The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. These taxpayers do not need to contact the agency to get this relief. It is possible an affected taxpayer may not have an IRS address of record located in the disaster area, for example, because they moved to the disaster area after filing their return. In these kinds of unique circumstances, the affected taxpayer could receive a late filing or late payment penalty notice from the IRS for the postponement period. The taxpayer should call the number on the notice to have the penalty abated. In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization. The IRS urges anyone who needs an additional tax-filing extension, beyond June 17, for their 2023 federal income tax return to request it electronically by April 15. Though a disaster-area taxpayer qualifies to request an extension between April 15 and June 17, a request filed during this period can only be submitted on paper. Whether requested electronically or on paper, the taxpayer will then have until Oct. 15, 2024, to file, though payments are still due on June 17. Visit IRS.gov/extensions for details. Additional tax relief Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2023 return normally filed this year), or the return for the prior year (2022). Taxpayers have extra time - up to six months after the due date of the taxpayer's federal income tax return for the disaster year (without regard to any extension of time to file) - to make the election. For individual taxpayers, this means Oct. 15, 2024. Be sure to write the FEMA declaration number - 4757-DR on any return claiming a loss. See Publication 547, Casualties, Disasters, and Thefts, for details. Qualified disaster relief payments are generally excluded from gross income. In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents. See Publication 525, Taxable and Nontaxable Income, for details. Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow. The IRS may provide additional disaster relief in the future. The tax relief is part of a coordinated federal response to the damage caused by these storms and is based on local damage assessments by FEMA. For information on disaster recovery, visit DisasterAssistance.gov.

Private Letter Ruling Number: 202338012 Internal Revenue Service April 4, 2023 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Number: 202338012 Release Date: 9/22/2023 UIL: 501.03-00 Date: 04/04/2023 Taxpayer ID number (last 4 digits): Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Last day to the petition with United States Tax Court: CERTIFIED MAIL - Return Receipt Requested Dear ******: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective ******, ******. Your determination letter dated ******, ******, is revoked. Our adverse determination as to your exempt status was made for the following reasons: Organizations described in IRC Section 501(c)(3) and exempt under IRC Section 501(a) must be both organized and operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3). You have not demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3) and that no part of your net earnings inure to the benefit of private shareholders or individuals. You failed to respond to repeated reasonable requests to allow the Internal Revenue Service to examine your records regarding your receipts, expenditures, or activities as required by IRC sections 6001, 6033(a)(1) and Rev.Rul. 59-95, 1959-1 C.B. 627. Organizations that we not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a finable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: US Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Taxpayer Advocate Office Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies. Keep the original letter for your records. Sincerely, ****** for Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: November 18, 2022 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact information: Name: ID number: Telephone: Response due date: CERTIFIED MAIL -- Return Receipt Requested - Dear ******: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, ****** for Lynn A. Brinkley Acting Director Exempt Organizations Examinations Enclosures: Form 886-A and Attachments Form 6018 Issue: Whether ****** (******) continues to qualify for exemption from Federal income tax under section 501(a) of the Internal Revenue Code (Code) as a charitable organization described in Code section 501(c)(3). Facts: ****** was incorporated in the State of ****** as a Nonprofit Public Benefit Corporation on ******, ******. ****** organizing document, the Articles of Incorporation, provides in article 4b that the specific purpose of the corporation is: Article 5 of ****** organizing document contains additional provisions that specify, in pertinent part, that the corporation is organized and operated exclusively for the purposes set forth in article 4 within the meaning of Internal Revenue Code section 501(c)(3). Article 5 also provides for a dissolution clause intended to allow ****** to satisfy the organizational requirements for Federal exemption. A copy of ****** Articles of Incorporation, which was secured as a public document from the state website, is appended as Exhibit A. ****** Articles of Incorporation identifies the incorporator as ******. ****** is also appointed as the registered agent for ******. The organizing document requires that applicants provide a complete business address that cannot be a P.O. Box or "in care of" an individual or entity. ****** provided the following street address for both the organization and its agent, ******: The address referenced above provided by ****** in its Articles of Incorporation corresponds to a retail store named ******, which offers mailbox services for its customers including a street address and mail forwarding services. A copy of the pertinent website content posted for ****** is appended as Exhibit B. The initial mailing address for the organization provided by ****** on the Articles of Incorporation filed with the state is: The address in ******, ****** corresponds to a United Parcel Service (UPS) retail store which offers mailbox services. A copy of the pertinent website content posted by or on behalf of the UPS store is appended as Exhibit C. As described in Exhibit C, the following mailbox services are offered by UPS at its retail store located at ****** in ******, ******: - A real street address in lieu of a P.O. Box. - Package and mail receipt notifications - Mail holding and forwarding - Call-in mail check In ******, ****** filed Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, with the Internal Revenue Service (IRS). The Form 1023-EZ application is signed by ****** as the Executive Director according to the declaration on page 3. Part I of the Form 1023-EZ requires applicant organizations to list the names, titles and mailing addresses of all officers, directors, and trustees. ****** is listed as the Executive Director. Two other individuals, ****** and ******, are also listed in Part I with the titles Director and Finance Director, respectively. ****** has a mailing address in ******, ******. ****** has a mailing address in ******, ******. The mailing address furnished by ****** on its Form 1023-EZ application for both the organization and ****** is: As noted above, ****** address in ****** corresponds to a UPS retail store which offers mailbox services. This is the same mailing address provided by ****** on the Articles of Incorporation filed with the State of ******. In its Form 1023-EZ application, ****** attested that it is both organized and operated exclusively for charitable purposes. ****** did not furnish a copy of its Articles of Incorporation since the organizing document is not required to be filed with the streamlined Form 1023-EZ application. Based on the representations and attestations made by ****** in its Form 1023-EZ, the IRS issued a favorable determination letter dated ******, ******, granting recognition of exemption under section 501(c)(3) of the Code effective ******, ******. ****** was classified as a public charity under sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code based on its attestation regarding public support in Part IV of the Form 1023-EZ. IRS records show that ****** filed Form 990-N, Electronic Notice (e-Postcard), for the ****** and ****** calendar tax years. ****** filed Form 990-N in lieu of a Form 990 or Form 990-EZ return. The organization indicated on Form 990-N that its gross receipts are normally $ ******, ****** or less. The address reported by ****** on its Forms 990-N is the same address reported on the Form 1023 application - ******, ******, ******. In ******, the Tax Exempt and Governmental Entities (TE/GE) division of the IRS selected ****** for examination of its books and records covering the ****** calendar year. The notice of examination package, which is dated ******, ******, consists of IRS letter #6031, Form 4564, Information Document Request (IDR), Publication 1, Your Rights as a Taxpayer, Notice 609, Privacy Act Notice, and Publication 3498-A, The Examination Process (Audits by Mail). The notice of examination package was mailed to ****** at the last known address on file for the organization, which is as follows: As noted on page 1 of the 2-page IDR issued with the examination notice, the examination of ****** books and records is intended to verify that the organization: 1. Operates in accordance with section 501(c)(3) of the Code 2. Is eligible to file Form 990-N based on gross receipts, and 3. Filed all required returns including information returns. As part of standard audit procedures, the IRS examiner requested that ****** furnish certain records and information needed to determine whether the organization is operating in furtherance of charitable and other exempt purposes described in section 501(c)(3) of the Code. IDR #1 issued to ****** on ******, ******, requests copies of the following records and information covering the ****** calendar year under examination: - Chart of accounts - General ledger - Adjusted trial balance - Cash disbursements journal. - Monthly bank statements for ****** primary operating (checking) account together with canceled checks or check images furnished by the bank. - Monthly statements for all credit cards that may have been issued to ******. - Minutes of meetings held by ****** Board of Directors and committees of the Board. - Internal policies and procedures regarding the handling and recording of cash donations. - Lease agreements and other information relating to any office or other facility used by ****** to conduct activities. - Contracts and other arrangements with individuals and/or organizations which solicit and raise funds for ****** including, but not limited to, professional fundraising organizations. - The organization's website address, if any, and the identity of the party that hosts the website. If no website is maintained, ****** was requested to provide copies of records which describe the activities conducted in ******. In the absence of formal marketing and fundraising materials, ****** was asked to provide a statement describing the activities, services, programs, and events conducted by the organization in ******. - Information regarding the accounting software used by ****** for preparation of its books and records. The response due date for IDR #1 was ******, ******. ****** did not respond to the IDR or otherwise contact the IRS examiner or the group manager by the due date. In accordance with established IRS procedures, a follow-up "Delinquency Notice" letter was issued to ****** with a copy of IDR #1 on ******, ******, with a response due date of ******, ******. The delinquency notice states, in part, that if the organization does not fully respond to the IDR by the response due date, the IRS will propose revocation of ****** exempt status. The delinquency notice was not returned by the post office as undeliverable. ****** did not respond to the delinquency notice or otherwise contact the IRS examiner. Neither the IRS examiner nor the group manager subsequently received any of the requested records and information from ****** or any other officer or director of ******. There is no evidence that ****** is an affiliate or chapter of any other exempt organization or network of charities that operate within the United States. ****** did not identify a website on Form 990-N filed for ****** and ******. A search of the State of ****** corporate database, which provides information on the status of entities incorporated under state law, shows that ****** is currently suspended and in inactive status. A copy of the entity status search secured from the state's online database is appended as Exhibit D. Applicable Law: Section 501(c)(3) of the Code provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual. Section 1.501(c)(3)-1(a)(1) of the Treasury Regulations states that to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section - charitable, religious, educational, scientific, literary, testing for public safety, or for the prevention of cruelty to children or animals. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Section 1.501(c)((3)-1(c) of the regulations describes the operational test requirements for 501(c)(3) exemption. The operational test focuses on how the organization is actually operated, regardless of whether it is properly organized for tax-exempt purposes. Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. This is referred to as the "primary activities" test. Section 1.501(c)(3)-1(c)(2) of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Section 511 of the Code imposes a tax at corporate rates under section 11 on the unrelated business taxable income of certain tax-exempt organizations. Section 6001 of the Code provides, in part, that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. Section 1.6001-1(c) of the regulations provides that in addition to such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and regulations sections 1.6033-1 through 1.6033-3. Section1.6001-1(e) of the regulations provides that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and, shall be retained as long as the contents thereof may be material in the administration of any internal revenue law. Section 6033 of the Code provides, in general, that every organization exempt under IRC 501(a) shall file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the Internal Revenue laws as the Secretary may by forms of regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Section 6033 of the Code provides an exception to the annual filing requirement in the case of an organization described in section 501(c) (other than a private foundation or a supporting organization described in section 509(a)(3)) the gross receipts of which in each taxable year are normally not more than $50,000. See section 1.6033-2(g)(1)(iii) of the regulations. Section 1.6033-2(g)(5) of the regulations provide that an organization that is not required to file an annual return by virtue of the gross receipts exception must submit an annual electronic notice notification as described in section 6033(i) of the Code. Section 1.6033-2(i)(2) of the regulations provides that every organization which is exempt from tax, whether or not it is required to file an annual information return, shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status and administering the provisions of subchapter F (section 501 and following), chapter 1 of subtitle A of the Code and section 6033. Rev.Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Organization's Position: ****** position is unknown at this time. Government's Position: Analysis The facts indicate that received recognition of exemption under section 501(c)(3) of the Code in ****** based on information presented in its Form 1023-EZ application. ****** attested that it is both organized and operated exclusively for charitable purposes. The TE/GE division of the IRS maintains an examination program for exempt organizations to determine whether they are complying with statutory requirements regarding their tax-exempt status, the proper filing of returns, and other tax reporting matters. ****** filed Form 990-N, an electronic notice, for the ****** calendar year. Operational Test Not Met ****** was selected for audit to ensure that the organization's activities and operations align with their approved exempt status and to verify that the filing of Form 990-N was proper based on the organization's gross receipts. Section 6001 of the Code and the regulations thereunder impose requirements on exempt organizations to keep books and records to substantiate information required under section 6033 of the Code. Although ****** filed an electronic notice in lieu of a return, the organization is nevertheless required to produce records and other information requested by the IRS to verify that it operates in furtherance of its exempt purpose. See regulations section 1.6033-2(i)(2). As part of standard audit procedures, the IRS examiner requested basic financial records including books of account, minutes of Board meetings and records and information pertaining to ****** activities. Such records and information are needed to verify whether ****** continues to be operated exclusively for one or more of the exempt purposes specified in section 501(c)(3) of the Code. ****** failed to respond to repeated reasonable requests to allow the IRS to examine its books and records including its receipts, disbursements, and other items required to be kept and maintained pursuant to sections 6001 and 6033(a)(1) of the Code. Accordingly, ****** has failed to meet the requirements of section 501(c)(3) of the Code and sections 1.501(c)(3)-1(a) and 1.501(c)(3)-1(c) of the regulations, in that the organization has not established that it is operated exclusively for exempt purposes and that no part of its net earnings inures to the benefit of private shareholders or individuals. See also Rev.Rul. 59-95. Conclusion: For the reasons stated above, the IRS has determined that ****** is no longer exempt from Federal income tax under section 501(a) of the Code as an organization described in Code section 501(c)(3). The IRS is proposing to revoke ****** 501(c)(3) tax-exempt status effective ******, ******, the first day of the ****** calendar year under examination. Please note that this Form 886-A, Explanation of Items, which is also known as the revenue agent report (RAR), constitutes an integral part of the attached 30-day letter #3618. Please refer to the attached letter #3618 for additional information including appeals rights and other options available to the organization and, the instructions for how to respond.

Internal Revenue Service - Information Release IR-2022-66 IRS has $1.5 billion in refunds for people who have not filed a 2018 federal income tax return; April deadline approaches March 25, 2022 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS has $1.5 billion in refunds for people who have not filed a 2018 federal income tax return; April deadline approaches IR-2022-66, March 25, 2022 WASHINGTON -- Unclaimed income tax refunds totaling almost $1.5 billion may be waiting for an estimated 1.5 million taxpayers who did not file a 2018 Form 1040 federal income tax return, but people must act before the April tax deadline, according to the Internal Revenue Service. "The IRS wants to help people who are due refunds but haven't filed their 2018 tax returns yet," said IRS Commissioner Chuck Rettig. "But people need to act quickly. By law, there's only a three-year window to claim these refunds, which closes with this year's April tax deadline. We want to help people get these refunds, but they need to file a 2018 tax return before this critical deadline." The IRS estimates the midpoint for the potential refunds for 2018 to be $813 -- that is, half of the refunds are more than $813 and half are less. In cases where a federal income tax return was not filed, the law provides most taxpayers with a three-year window of opportunity to claim a tax refund. If they do not file a tax return within three years, the money becomes the property of the U.S. Treasury. For 2018 tax returns, the window closes April 18, 2022, for most taxpayers. Taxpayers living in Maine and Massachusetts have until April 19, 2022. The law requires taxpayers to properly address, mail and ensure the tax return is postmarked by that date. The IRS reminds taxpayers seeking a 2018 tax refund that their checks may be held if they have not filed tax returns for 2019 and 2020. In addition, the refund will be applied to any amounts still owed to the IRS or a state tax agency and may be used to offset unpaid child support or past due federal debts, such as student loans. By failing to file a tax return, people stand to lose more than just their refund of taxes withheld or paid during 2018. Many low- and moderate-income workers may be eligible for the Earned Income Tax Credit (EITC). For 2018, the credit was worth as much as $6,431. The EITC helps individuals and families whose incomes are below certain thresholds. The thresholds for 2018 were: - $49,194 ($54,884 if married filing jointly) for those with three or more qualifying children; - $45,802 ($51,492 if married filing jointly) for people with two qualifying children; - $40,320 ($46,010 if married filing jointly) for those with one qualifying child; and - $15,270 ($20,950 if married filing jointly) for people without qualifying children. Tax year 2018 returns must be filed with the IRS center listed on the last page of the current Form 1040 instructions PDF. Current and prior year tax forms (such as the tax year 2018 Form 1040, 1040-A and 1040-EZ) and instructions are available on the IRS.gov Forms and Publications page or by calling toll-free 800-TAX-FORM ( 800-829-3676 ). However, taxpayers can e-file tax year 2019 and later returns. Taxpayers who are missing Forms W-2, 1098, 1099 or 5498 for the years 2018, 2019 or 2020 should request copies from their employer, bank or other payer. Taxpayers who are unable to get missing forms from their employer or other payer can order a free wage and income transcript at IRS.gov using the Get Transcript Online tool. Alternatively, they can file Form 4506-T to request a wage and income transcript. A wage and income transcript shows data from information returns received by the IRS, such as Forms W-2, 1098, 1099, Form 5498 and IRA contribution information. Taxpayers can use the information from the transcript to file their tax return. State-by-state estimates of individuals who may be due 2018 income tax refunds State or District Estimated Number of Individuals Median Potential Refund Total Potential Refunds * Alabama 24,474 $796 $23,028,940 Alaska 5,515 $969 $6,185,637 Arizona 38,182 $718 $33,577,964 Arkansas 13,727 $762 $12,567,925 California 148,938 $776 $139,660,163 Colorado 30,836 $787 $28,979,238 Connecticut 15,020 $864 $15,243,386 Delaware 5,764 $793 $5,486,810 District of Columbia 4,011 $802 $3,967,443 Florida 98,979 $818 $94,578,672 Georgia 51,034 $735 $46,467,229 Hawaii 8,199 $873 $8,317,290 Idaho 7,026 $686 $5,982,194 Illinois 55,767 $840 $54,850,831 Indiana 34,770 $839 $33,534,332 Iowa 14,843 $840 $14,255,896 Kansas 14,813 $822 $14,125,094 Kentucky 20,030 $836 $19,137,456 Louisiana 24,292 $793 $23,609,986 Maine 5,851 $772 $5,241,197 Maryland 30,224 $814 $29,637,361 Massachusetts 32,234 $908 $33,569,901 Michigan 49,252 $812 $47,228,525 Minnesota 22,685 $771 $20,920,613 Mississippi 13,007 $730 $11,753,943 Missouri 33,858 $783 $31,284,396 Montana 4,914 $758 $4,560,800 Nebraska 7,647 $809 $7,204,243 Nevada 17,919 $792 $16,896,077 New Hampshire 6,755 $920 $7,022,858 New Jersey 39,046 $872 $39,628,243 New Mexico 9,893 $804 $9,613,090 New York 77,315 $896 $79,825,137 North Carolina 50,069 $776 $45,990,818 North Dakota 4,011 $893 $4,139,793 Ohio 56,285 $793 $51,974,509 Oklahoma 21,529 $824 $21,075,857 Oregon 23,552 $715 $20,729,323 Pennsylvania 59,459 $865 $58,993,909 Rhode Island 4,011 $893 $4,099,614 South Carolina 18,063 $720 $16,288,951 South Dakota 3,872 $858 $3,718,677 Tennessee 30,693 $788 $28,459,178 Texas 145,616 $856 $147,059,248 Utah 11,644 $757 $10,648,614 Vermont 3,089 $832 $2,905,786 Virginia 41,663 $776 $39,285,545 Washington 42,272 $863 $43,022,251 West Virginia 6,968 $880 $7,146,354 Wisconsin 21,753 $755 $19,535,856 Wyoming 3,258 $912 $3,486,358 Totals 1,514,627 $813 $1,456,503,511 * Excluding credits.

Private Letter Ruling Number: 202223015 Internal Revenue Service March 17, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202223015 Release Date: 6/10/2022 Index Number: 2010.04-00, 9100.35-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B4 PLR-124281-21 Date: March 17, 2022 Dear *******: This letter responds to a letter dated September 23, 2021, submitted on behalf of Decedent's estate, requesting an extension of time pursuant to § 301.9100-3 of the Procedure and Administration Regulations to make an election. Decedent's estate is requesting to make an election under § 2010(c)(5)(A) of the Internal Revenue Code (a "portability" election)) to allow a decedent's surviving spouse to take into account that decedent's deceased spousal unused exclusion (DSUE) amount. The information submitted for consideration is summarized below. Decedent died on Date, survived by Spouse. It is represented that based on the value of Decedent's gross estate and taking into account any taxable gifts, Decedent's estate is not required under § 6018(a) to file an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return). It is further represented that there is an unused portion of Decedent's applicable exclusion amount and that a portability election is required to allow Spouse to take into account that amount (the "DSUE" amount)). A portability election is made upon the timely filing of a complete and properly prepared estate tax return, unless the requirements for opting out are satisfied. See § 20.2010-2(a)(2) of the Estate Tax Regulations. For various reasons, an estate tax return was not timely filed and a portability election was not made. After discovery of this, Decedent's estate submitted this request for an extension of time under § 301.9100-3 to make a portability election. LAW AND ANALYSIS Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2010(a) provides that a credit of the applicable credit amount shall be allowed to the estate of every decedent against the tax imposed by § 2001. Section 2010(c)(1) provides that the applicable credit amount is the amount of the tentative tax that would be determined under § 2001(c) if the amount with respect to which such tentative tax is to be computed were equal to the applicable exclusion amount. On December 17, 2010, Congress amended § 2010(c), effective for estates of decedents dying and gifts made after December 31, 2010, to allow portability of a decedent's unused applicable exclusion amount between spouses. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, § 303, 124 Stat. 3296, 3302 (2010). Section 2010(c)(2) provides that the applicable exclusion amount is the sum of the basic exclusion amount, and, in the case of a surviving spouse, the DSUE amount. Section 2010(c)(3) provides the basic exclusion amount available to the estate of every decedent, an amount to be adjusted for inflation annually after calendar year 2011. Section 2010(c)(4) defines the DSUE amount to mean the lesser of (A) the basic exclusion amount, or (B) the excess of -- (i) the applicable exclusion amount of the last deceased spouse of the surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under § 2001(b)(1) on the estate of such deceased spouse. Section 2010(c)(5)(A) provides that a DSUE amount may not be taken into account by a surviving spouse under § 2010(c)(2) unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return that such amount may be so taken into account. The election, once made, shall be irrevocable. No election may be made if such return is filed after the time prescribed by law (including extensions) for filing such return. Section 20.2010-2(a)(1) provides that the due date of an estate tax return required to elect portability is nine months after the decedent's date of death or the last day of the period covered by an extension (if an extension of time for filing has been obtained). Further, an extension of time under § 301.9100-3 to make a portability election may be granted in the case of an estate that is not required to file an estate tax return under § 6018(a), as determined solely based on the value of the gross estate and any adjusted taxable gifts (and without regard to § 20.2010-2(a)). Under § 301.9100-1(c), the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-3 provides the standards the Commissioner will use to determine whether to grant an extension of time to make an election whose due date is prescribed by a regulation (and not expressly provided by statute). Requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. In this case, based on the representation as to the value of the gross estate and any adjusted taxable gifts, the time for filing the portability election is fixed by the regulations. Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an extension of time for Decedent's estate to elect portability, provided Decedent's estate establishes it acted reasonably and in good faith, the requirements of §§ 301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government. Information, affidavits, and representations submitted on behalf of Decedent's estate explain the circumstances that resulted in the failure to timely file a valid election. Based solely on the information submitted and the representations made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Therefore, we grant an extension of time of 120 days from the date of this letter in which to make the portability election. The election should be made by filing a complete and properly prepared Form 706 and a copy of this letter, within 120 days from the date of this letter, with the Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999. For purposes of electing portability, a Form 706 filed by Decedent's estate within 120 days from the date of this letter will be considered to be timely filed. If it is later determined that, based on the value of the gross estate and taking into account any taxable gifts, Decedent's estate is required to file an estate tax return pursuant to § 6018(a), the Commissioner is without authority under § 301.9100-3 to grant an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void. See § 20.2010-2(a)(1). We neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, we express no opinion as to the DSUE amount to be potentially taken into account by Spouse. Any claimed DSUE amount will be included in the applicable exclusion amount of Spouse only to the extent that Spouse can substantiate such amount and will be subject to determination by the Director's office upon audit of relevant Federal gift or estate tax returns. See § 20.2010-3(c)(1) and (d). The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, we have sent a copy of this letter to your authorized representative. Sincerely, Associate Chief Counsel Passthroughs & Special Industries By: _____________________________ Leslie H. Finlow Senior Technician Reviewer Office of the Associate Chief Counsel (Passthroughs & Special Industries) Enclosure (1) Copy for § 6110 purposes cc:

Private Letter Ruling Number: 202242014 Internal Revenue Service July 30, 2021 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Number: 202242014 Release Date: 10/21/2022 Date: July 30, 2021 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: UIL: 501.03-00 CERTIFIED MAIL - RETURN RECEIPT REQUESTED Dear ******: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective ******. Your determination letter dated ******, is revoked. Our adverse determination as to your exempt status was made for the following reasons: You have not established that you are operated exclusively for an exempt purpose within the meaning of IRC Section 501(c)(3). You have failed to keep and retain records to determine whether you have been operating in accordance to the requirements for organizations exempt under IRC Section 501(c)(3), and to provide records to the Internal Revenue Service upon reasonable requests as required by IRC Sections 6001 and 6033(a)(1). Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit www.irs.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims or 3) the United States District Court for the District of Columbia. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. Keep the original letter for your records. Sincerely, Sean E. O'Reilly Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: June 8, 2020 Taxpayer ID number Form: Tax periods owed: Person to contact: Name: ID number: Telephone: Fax: Address: Managers contact information: Name: ID number: Telephone: Response due date: CERTIFIED MAIL -- Return Receipt Requested Dear ******: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, Sean E. O'Reilly Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 Form 4621 Publication 1 ISSUES: Whether ****** continues to qualify for exemption as an organization described in the Internal Revenue Code (IRC) Section 501(c)(3) as a Public Charity? FACTS: Organizational History The ****** was Incorporated on ****** in the State of ******. ****** applied for tax-exempt status by filing Form ****** - Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, on ******. The Internal Revenue Service (IRS) determined on ****** that the organization will be classified as exempt under Section 501(c)(3) of the Internal Revenue Code effective ****** as a Public charity under IRC Section 170(b)(1)(A)(vi). The exemption allows donors to deduct contributions to the organization under IRC Section 170. Operation History The original name of the organization was "******". The organization was created by ******, the founder. ****** started the first ******, from his ****** after the completion of ****** degree and upon returning from the ******. ****** stated that ****** converted ****** personal home in ****** into a ****** at the initial stage. As the organization activities increases and additional funding were donated, ****** expanded operations to opening ****** and ****** in ******. As the organization evolved, the ****** was created from the "******". The founder stated that ****** was created to help fund the donations for creating ******, ****** and ****** in ****** further stated that the "******" built ****** and ****** so far in ******. Related Entity The ****** is an extension of "******". The operation and activities of the organization are all being conducted in ******. On the last form ****** filed by "******", their calendar year was ****** to ******. Their purpose was to remodel and build additions to existing ****** and ****** and to improve infrastructure in ******. Per Internal Revenue Service records, "******" was revoked for not filing tax returns for more than years. During the interview, ******, founder of the ******, stated that the ****** was created from "******" in order to handle the financial activities of the organization. ****** stated that both ****** and ******, are the same entity and that the activities of the ****** are currently been conducted in ******. "******" name, is no longer used and per IRS purposes, that organization has been revoked. Board of Directors The officers, directors and trustees on the board are: Financial Report Per Form ****** for tax year ******, the ****** reported the following financial information: Per the Statement of Revenues & Functional Expenses, the ****** had the following Revenue: Per Form ****** for tax year ******, the ****** reported the following financial information: Incomplete returns The ****** filed a Form ****** - Short Form of Organization Exempt from Income Tax return for tax year ****** on ******. The Form ****** was received by the Internal Revenue Service on ******. On ******, the Internal Revenue Service sent the ****** a letter stating that they were returning the Form ******, Short Form of Organization Exempt from Income Tax because the return filed was incomplete. The organization failed to include all the required information. Also, the letter stated that the total assets or gross receipts are greater than the amount applicable to Form ******. ****** stated that the ****** was planning to prepare a revised Form ****** for tax year ****** with the correct information and return a complete Form ****** to the Internal Revenue Service for processing. On ******, the ****** filed a Form ****** return for the tax year ****** with the Internal Revenue Service. The Internal Revenue Service received the ****** Form ****** return on ******. On ******, the Internal Revenue Service issued out a letter to the ****** stating that they can't process Form ****** because Schedule A was not prepared. Current Operations On the original Form ******, the organization stated that the ****** would be organized and operated exclusively to further the charitable and educational purposes of the organization. In the original filed ****** Form ****** return, the organization described its mission as ******. In the amended ****** return, the organization described its mission as "******". In the original filed ****** Form ****** return, the organization described the primary exempt purpose as "******" During the initial interview, ****** stated that the ****** is still operating its exempt purpose but activities are being conducted in ****** provided the revenue agent with pamphlets and booklets describing the building of ****** and ****** in ****** and showing the physical locations to visit. ****** also stated that there were no activities in the ****** and that all activities were being conducted in ******. There were no indications on the organization's ****** Form ****** and ****** Form ****** tax returns that the organization is actively engaged in building facilities in another country and furthermore, no financial activities were listed on the return to verify exempt activity. The organization did not provide supporting documentation for expenses incurred. The balance sheet did not reflect any assets that matched the value of ****** and ****** as described by the organization as their main exempt activities. The balance sheet reflects only a total of $ ****** and $ ****** cash and savings balance respectively in ****** and ****** year end. No value was reported for land, building, or equipment in both years. During the interview with ****** on ****** regarding sources of income and fundraising, ****** stated that ****** had received some donations, but could not remember how much ****** had contributed on ****** own. Listed below are the names and amounts of the individuals that donated to the ******: Listed below is the ****** test, to meet public support test: Donated building ****** had personal property that ****** donated to the "****** on ****** but did not take a deduction on ****** personal return. From the internet, the property value at that time was $ ******. ****** stated that ****** wanted to turn the property into a museum, and have it marked as a historical site. Then on ******, the ****** quit claim the personal property donated by ****** to the Trustee of ****** because the county and ****** could not come to an agreement on the property lines delineation for real estate taxes on a residential property versus exempt property. The value of the property at this time was ****** $ ******. The value of the property from the time it was donated to the ****** versus being quit claim to the Trustee of ****** was $ ******. The property value had decreased. The organization did not list any property owned or any gain or loss from property on the ****** - tax return. ****** also stated that all exempt activities are conducted in ****** and that the workers from the ****** were hired to help with the construction of facilities. On ******, during an interview with POA ******, ****** stated that ****** explained to ****** that while ****** was employed as a ******, ****** would receive donations from patients as ****** was about to retire. ****** then put those donations in a box that ****** stored at ****** personal residence. ****** later misplaced the box with money given from patients and later found the box and deposited the money in the Foundation's bank account. LAW: IRC section 170(b)(1)(A) In the case of an individual, the deduction provided in subsection (a) shall be limited as provided in the succeeding subparagraphs. Any charitable contribution to-- (i) a church or a convention or association of churches, (ii) an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on, (iii) an organization the principal purpose or functions of which are the providing of medical or hospital care or medical education or medical research, if the organization is a hospital, or if the organization is a medical research organization directly engaged in the continuous active conduct of medical research in conjunction with a hospital, and during the calendar year in which the contribution is made such organization is committed to spend such contributions for such research before January 1 of the fifth calendar year which begins after the date such contribution is made, (iv) an organization which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from the United States or any State or political subdivision thereof or from direct or indirect contributions from the general public, and which is organized and operated exclusively to receive, hold, invest, and administer property and to make expenditures to or for the benefit of a college or university which is an organization referred to in clause (ii) of this subparagraph and which is an agency or instrumentality of a State or political subdivision thereof, or which is owned or operated by a State or political subdivision thereof or by an agency or instrumentality of one or more States or political subdivisions, (v) a governmental unit referred to in subsection (c)(1) (vi) charities that normally receive a substantial part of their support from governmental units and/or from direct or indirect contributions from the general public. Internal Revenue Service section 501(c)(3) exempts from federal income tax organizations which are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. Internal Revenue Service section 507(d)(2)(A) For purposes of paragraph (1), the term "substantial contributor" means any person who contributed or bequeathed an aggregate amount of more than $5,000 to the private foundation, if such amount is more than 2 percent of the total contributions and bequests received by the foundation before the close of the taxable year of the foundation in which the contribution or request is received by the foundation from such person. Internal Revenue Service section 508(b) Except as provided in subsection (c), any organization (including an organization in existence on October 9, 1969) which is described in section 501(c)(3) and which does not notify the Secretary, at such time and in such manner as the Secretary may by regulations prescribe, that it is not a private foundation shall be presumed to be a private foundation. Internal Revenue Service section 509(a) For purposes of this title, the term "private foundation" means a domestic or foreign organization described in section 501(c)(3) other than-- (1) an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)); (2) an organization which-- normally receives more than one-third of its support in each taxable year from any combination of-- (i) gifts, grants, contributions, or membership fees, and (ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization's support in such taxable year, from persons other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) Income Tax Regulations ("Treas.Reg.") Treas.Reg. Section 1.501(c)(3)-1(d)(i) states that an organization may be exempt as an organization described in 501(c)(3) if it is organized and operated exclusively for one or more of the following purposes: religious, charitable, scientific, testing for public safety, literary, educational, or prevention of cruelty to children or animals. Treas.Reg. Section 1.501(c)(3)-1(a)(1) of the regulations provides that in order to be exempt as an organization described in section 501(c)(3) of the Code, the organization must be one that is both organized and operated exclusively for one or more of the purposes specified in that section. Treas.Reg. Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3) Treas.Reg. Section 1.501(c)(3)-1(d)(1)(ii) is an organization is not organized or operated exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph unless it serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests. Revenue Ruling 63-252, 1963-2 C.B. 101 Deductibility of contributions by individuals to a charity organized in the United States which thereafter transmits some or all of its funds to a foreign charitable organization. Revenue Ruling 68-165, 1968-1 C.B. 253 A domestic nonprofit corporation (composed of educational, civic, business, and other groups) that joins with a counterpart group in a country in Latin America to promote student and cultural exchanges and to provide technical and material assistance for self-help projects designed to improve the living conditions of underprivileged people in Latin America may be exempt from Federal income tax under section 501(c)(3) Revenue Ruling 71-460, 1971-2 C.B. 231 A domestic corporation that conducts a part or all of its charitable activities in a foreign country is not precluded from exemption under section 501(c)(3) of the Code. Revenue Ruling 72-369 states, in part, that in order for an organization to pass the operational test, the organization's resources must be devoted to purposes that qualify as exclusively charitable. Revenue Ruling 80-286 An otherwise qualifying organization that was formed to foster the cultural and educational development of children by arranging for and participating in the temporary exchange of children between families of a foreign country and the U.S. qualifies for exemption under section 501(c)(3) of the Code Christian Manner International Inc. v. Commissioner, 71. T.C. 661, exemption denied because principle activity not verified as in furtherance of exempt purpose. Principle activity not an education purpose activity. Mysteryboy Inc. v. Comm'r, 2010 Tax Ct., exemption was denied because the corporation was not exempt from tax under section 501(a) because it was not an organization described in section 501(c)(3). TAXPAYER'S POSITION: ****** position has not been provided. GOVERNMENT'S POSITION: An organization exempt from federal income taxes as described in IRC section 501(c)(3) must be organized exclusively for one or more of the following classifications: - Religious - Charitable - Scientific - Testing for Public Safety - Literary - Educational - Fostering of national or international amateur - Sports, and - Prevention of cruelty to animals and children In order to meet the operational test, an organization must show that they engaged primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3) of the Internal Revenue Code. ****** received exemption to be organized and operated exclusively to further their charitable and educational purposes. ****** has not been conducting any exempt activities as requested in the exempt application during the ****** and ****** tax years. ****** has not provided any evidence that the organization has conducted any other activities that would be exempt under IRC Section 501(c)(3). In order to remain a public charity (and not a private foundation), a Section 501(c)(3) organization must obtain at least 1/3 of its donated revenue from a fairly broad base of public support. The public support can be from individuals, companies and/or other public charities. The public support fraction for the ****** shows $ ****** or ** % for ******. This is well below the 1/3 required for the organization to qualify as a publicly supported organization under IRC Sections 509(a)(1) and Section 170(b)(1)(A)(vi). Similarly, a larger percentage of the donations came from ****** in ******. After reviewing and comparing the Foundation's books and records with the returns filed for the periods ending ****** and ******; the organization did not provide any convincing evidence that confirmed the organization engaged in any exempt activities such as building of ****** and ******, as claimed. There was no documentation to show the construction of facilities that was under construction or already built; the cost of materials used to build the facilities and cost for individuals hired to build the facilities. The organization did not provide supporting documentation to prove that the expenses incurred were in fact for legitimate exempt activities. As noted, the balance sheet did not reflect any assets that matched the value of ****** and ****** as described by the organization that they engaged in building ****** and ****** facilities. The balance sheet reflects only a total of $ ****** and $ ****** cash and savings balance respectively in ****** and ****** year end. As such, the ****** did not provide any record to support the fact that they are engaged in any significant exempt charitable activities. ****** stated that individuals in ****** were hired to build facilities. There were no cancelled checks provided, no W2 or Form ****** filed with the IRS that would have suggested that the ****** paid for services rendered or that those payments actually occurred here in United States or ******. The booklet and pamphlets provided with the ****** name on the front, reflected the value of the ****** and ****** in ******. However, the value of those facilities was not listed on the Foundation's books and records and on returns filed for tax years ****** and ******. ****** stated that all the activities of the ****** were being performed in ****** but there was no evidence on the books and records that such exempt activities were being conducted. The review of ****** returns for periods ending in ****** and ****** along with the review of previous returns filed by ******, disclosed the organizations did not engage exclusively for charitable exempt purpose. The ****** and ****** returns did not reflect any evidence that the organization is conducting exempt activities nor that the building or facilities in ****** are being used for education purposes or caring for sick and elderly. Based on Christian Manner International Inc. v. Commissioner, 71. T.C. 661, The ****** doesn't meet the requirements of a 501(c)(3) because the organization does not have an exempt purpose and did not engage in any exempt activities during the years examined. Although conducting a part or all of an organization's charitable activities in a foreign country does not preclude exemption under IRC Section 501(c)(3) per Revenue Ruling 71-460, 1971-2 C.B. 231. However, the organization must have an exempt purpose and must be actively involved in the conduct of the exempt activities for which it received an exempt status either in United States or in a foreign country. There must be adequate records to support the activities conducted either in United States or in a foreign country. In this case, the supporting records were not provided by ******. In order for an organization to pass the operational test, the organization's resources must be devoted to purposes that qualify as exclusively charitable as discussed in Revenue Ruling 72-369 whereas ****** operation failed the operational test because the organization is not engaged primarily in the conduct of exempt activities. Therefore, the organization is not furthering any exempt purpose under IRC Section 501(c)(3). CONCLUSION: Accordingly, ****** exempt status as an organization described under IRC Section 501(c)(3) should be revoked, effective ****** because the ****** could not demonstrate that it operated for an exempt purpose. The ****** has not established that it is observing the conditions required for the continuation of exempt status under IRC Section 501(c)(3). Form ****** U.S. Corporate. Income Tax Return should be filed for the periods ending on ****** and ******

Proposed Regulation REG-100908-23 Internal Revenue Service 2023-39 I.R.B. 931 Increased Credit or Deduction Amounts for Satisfying Certain Prevailing Wage and Registered Apprenticeship Requirements REG-100908-23 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and public hearing. SUMMARY: This document contains proposed regulations regarding increased credit or deduction amounts available for taxpayers satisfying prevailing wage and registered apprenticeship (collectively, PWA) requirements established by the Inflation Reduction Act of 2022 (IRA). These proposed regulations would affect taxpayers intending to satisfy the PWA requirements for increased Federal income tax credits or deductions. These proposed regulations would also affect taxpayers intending to satisfy the prevailing wage requirements for increased Federal income tax credit amounts that do not have associated apprenticeship requirements. Additionally, these proposed regulations would affect taxpayers who initially fail to satisfy the PWA or prevailing wage requirements and subsequently comply with the correction and penalty procedures in order to be deemed to satisfy the PWA or prevailing wage requirements. Finally, the proposed regulations address specific PWA or prevailing wage recordkeeping and reporting requirements. The proposed regulations would affect taxpayers intending to claim increased credit or deduction amounts pursuant to the IRA, including those intending to make elective payment elections for available credit amounts, and those intending to transfer increased credit amounts. This document also provides notice of a public hearing on the proposed regulations. DATES: Written or electronic comments and requests for a public hearing must be received by October 30, 2023. A public hearing on these proposed regulations is scheduled to be held on November 21, 2023, at 10 a.m. ET. Requests to speak and outlines of topics to be discussed at the public hearing must be received by October 30, 2023. If no outlines are received by October 30, 2023, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5 p.m. ET on November 17, 2023. The public hearing will be made accessible to people with disabilities. Requests for special assistance during the hearing must be received by November 16, 2023. ADDRESSES: Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at https://www.regulations (indicate IRS and REG-100908-23) 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 for public availability any comments submitted to the IRS's public docket. Send paper submissions to: CC:PA:LPD:PR (REG-100908-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, the Office of Associate Chief Counsel (Passthroughs & Special Industries) at (202) 317-6853 (not a toll-free number); concerning submissions of comments or the public hearing, Vivian Hayes at (202) 317-6901 (not a toll-free number) or by email to publichearings@irs.gov (preferred). SUPPLEMENTARY INFORMATION: Background I. Overview This document contains proposed regulations to amend the Income Tax Regulations (26 CFR part 1) under sections 30C, 45, 45L, 45U, 45V, 45Y, 45Z, 48C, 48E, and 179D of the Internal Revenue Code (Code) and proposed amendments to the Income Tax Regulations (26 CFR part 1) under sections 45Q and 48 (proposed regulations). The Inflation Reduction Act of 2022 (IRA), Public Law 117-169, 136 Stat. 1818 (August 16, 2022), amended sections 30C, 45, 45L, 45Q, 48, 48C, and 179D to provide increased credit or deduction amounts for taxpayers who satisfy certain requirements and added sections 45U, 45V, 45Y, 45Z, and 48E to the Code to provide new credits, which also contain provisions for increased credit amounts for taxpayers who satisfy certain requirements. Increased credit amounts are available under sections 30C, 45, 45Q, 45V, 45Y, 45Z, 48, 48C, and 48E, and an increased deduction is available under section 179D, for taxpayers satisfying certain prevailing wage and registered apprenticeship (PWA) requirements. Increased credit amounts are available under sections 45L and 45U for taxpayers satisfying certain prevailing wage requirements. 1 The IRA includes correction and penalty provisions available in certain situations if taxpayers have failed to satisfy the PWA requirements, and they are not otherwise eligible for the increased credit or deduction because they do not qualify for an exception. ******** 1 The increased credit provisions in sections 45L and 45U do not contain apprenticeship requirements. For simplicity, where possible, the preamble to the proposed regulations uses the acronym PWA to refer to the prevailing wage and apprenticeship requirements generally, including the prevailing wage requirements in sections 45L and 45U. ******** The increased credit amounts are also generally available under sections 45, 45Y, 48, and 48E with respect to certain facilities with a maximum net output (or capacity for energy storage technology under section 48E) of less than one megawatt (One Megawatt Exception). Additionally, increased credit and deduction amounts are available under sections 30C, 45, 45Q, 45V, 45Y, 48, 48E and 179D if beginning of installation or beginning of construction (BOC) occurs before January 29, 2023 (BOC Exception). II. Prior Guidance On October 24, 2022, the Treasury Department and the IRS issued Notice 2022-51, 2022-43 I.R.B. 331, requesting comments on aspects of the increased credits and deduction amounts enacted by the IRA, including the PWA provisions. Section 3.01 of Notice 2022-51 requested comments regarding the applicability of subchapter IV of chapter 31 of title 40 of the United States Code, which is commonly known as the Davis-Bacon Act; the special correction and penalty procedures generally provided for under section 45(b)(7)(B); any documentation or substantiation that should be required to show compliance with the prevailing wage requirements; and any other topics relating to the prevailing wage requirements that may require guidance. Section 3.02 of Notice 2022-51 requested comments addressing factors to be considered in regard to the appropriate duration of employment of individuals for construction, alteration, or repair work for purposes of the Participation Requirement; clarification regarding the Good Faith Effort Exception; factors to be considered in administering and promoting compliance with the Good Faith Effort Exception; whether methods exist to facilitate reporting requirements for the Good Faith Effort Exception; documentation or substantiation taxpayers maintain or could create to demonstrate compliance with the apprenticeship requirements or the Good Faith Effort Exception; and any other topics relating to the apprenticeship requirements that may require guidance. Comments received in response to Notice 2022-51 were considered in the drafting of these proposed regulations. On November 30, 2022, the Treasury Department and the IRS published Notice 2022-61. 87 FR 73580, corrected in 87 FR 75141 (Dec. 7, 2022). Notice 2022-61 provided guidance on the PWA requirements that generally apply under sections 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, and 48E, and 179D. Additionally, Notice 2022-61 established the 60-day period described in sections 30C(g)(1)(C)(i), 45(b)(6)(B)(ii), 45Q(h)(2), 45V(e)(2)(A)(i), 45Y(a)(2)(B)(ii), 48(a)(9)(B)(ii), 48E(a)(2)(A)(ii)(II) and (a)(2)(B)(ii)(II), and 179D(b)(3)(B)(i). Specifically, Notice 2022-61 started the 60-day period applicable for determining if taxpayers qualify for the increased credit or deduction amounts by satisfying the BOC Exception. To be eligible for the BOC Exception, as indicated in Notice 2022-61, taxpayers must have begun construction or installation of a facility (as defined in Notice 2022-61) before January 29, 2023. Finally, Notice 2022-61 provided guidance for determining the beginning of construction under sections 30C, 45, 45Q, 45V, 45Y, 48, and 48E, and the beginning of installation under section 179D. III. Inflation Reduction Act A. In general Prior to enactment of the IRA, the Code provided for certain temporary credits and deductions with respect to energy related facilities, projects, equipment, and investments under sections 30C, 45, 45L, 45Q, 48, 48C, and 179D. Congress had extended these provisions multiple times and for varying types of qualified facilities, energy projects, equipment, and investments. The IRA further amended these sections, generally adjusting the credit or deduction amounts, expiration dates, and qualifying activities. Under the IRA, Congress also enacted new credits under sections 45U, 45V, 45Y, 45Z, (production tax credits) and 48E (investment tax credit). The IRA provides increased credit or deduction amounts that generally apply for taxpayers who satisfy (i) certain PWA requirements regarding the construction, installation, alteration, or repair of a qualified facility, qualified property, qualified project, or qualified equipment, or with respect to certain facilities, (ii) the One Megawatt Exception, or (iii) the BOC Exception. Generally, if a taxpayer satisfies the PWA requirements or meets the One Megawatt Exception or the BOC Exception, the amount of credit or deduction determined is equal to the otherwise determined amount of the underlying credit or deduction multiplied by five. B. PWA provisions 1. In General The principal PWA requirements are set forth in section 45(b)(6), (7), and (8). In general, section 45(b)(6) provides the increased credit amount for taxpayers satisfying the PWA requirements or meeting one of the exceptions, section 45(b)(7) provides the prevailing wage requirements (Prevailing Wage Requirements), and section 45(b)(8) provides the apprenticeship requirements (Apprenticeship Requirements). 2 ******** 2 The prevailing wage requirements in sections 30C(g), 45L(g), 45Q(h), 45U(d), 45V(e), 48(a)(10), 48C(e), and 179D(b) are substantially similar to the requirements provided under section 45(b)(7). Sections 45Y(g)(9) and 45Z(f)(6)(A) adopt by cross-reference the Prevailing Wage Requirements under section 45(b)(7). Section 48E(d)(3) adopts by cross-reference the Prevailing Wage Requirements under section 48(a)(10). Section 48(a)(10) provides for a special 5-year recapture rule that applies for purposes of the prevailing wage requirements with respect to sections 48 and 48E. ******** Section 45 provides a credit for taxpayers producing and selling electricity from renewable resources to unrelated persons during the taxable year (section 45 credit). The section 45 credit is generally equal to 0.3 cents multiplied by the kilowatt hours of electricity (i) produced by the taxpayer from qualified energy resources and at a qualified facility during the 10-year period beginning on the date the facility was originally placed in service, and (ii) sold by the taxpayer to an unrelated person during the taxable year. If a taxpayer satisfies the PWA requirements, the One Megawatt Exception, or the BOC Exception, then the credit determined under section 45(a) for electricity produced at a qualified facility is multiplied by five. 2. Prevailing Wage Requirements Under section 45(b)(6), in the case of a qualified facility that satisfies the PWA requirements of section 45(b)(7) and (b)(8), the One Megawatt Exception, or the BOC Exception, the credit under section 45(a) "shall be equal to such amount multiplied by five." Section 45(b)(7)(A) provides that with respect to any qualified facility, the taxpayer shall ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in - (i) the construction of such facility, and (ii) with respect to any taxable year, for any portion of such taxable year that is within the 10-year period beginning on the date the qualified facility is originally placed in service, the alteration or repair of such facility, shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such facility is located as most recently determined by the Secretary of Labor, in accordance with subchapter IV of chapter 31 of title 40, United States Code. 3. Correction and Penalty Related to Failure to Satisfy Prevailing Wage Requirements Under section 45(b)(7)(B), a taxpayer who is not eligible for the One Megawatt Exception or the BOC Exception and fails to satisfy the Prevailing Wage Requirements under section 45(b)(7)(A) is "deemed" to have satisfied those requirements if, for "any laborer or mechanic who was paid wages at a rate below the [required prevailing rate] for any period" during any year of the construction, alteration, or repair of the facility, the taxpayer makes a correction payment to the laborer or mechanic and pays a penalty to the Secretary of the Treasury or her delegate (Secretary). Under section 45(b)(7)(B)(i)(I), the amount of the correction payment is the sum of (i) the difference between the amount of wages paid to the laborer or mechanic during the period and the amount of wages required to be paid to the laborer or mechanic during that period in order to meet the Prevailing Wage Requirements; and (ii) interest on the amount under (i) at the underpayment rate established under section 6621 (determined by substituting "6 percentage points" for "3 percentage points" in section 6621(a)(2)) for the applicable period. Under section 45(b)(7)(B)(i)(II), the amount of the penalty is "$5,000 multiplied by the total number of laborers and mechanics who were paid wages at a rate below the [prevailing wage] rate described in [section 45(b)(7)(A)] for any period" during the year. Deficiency procedures do not apply "with respect to the assessment or collection" of this penalty pursuant to section 45(b)(7)(B)(ii). Under section 45(b)(7)(B)(iii), if the Secretary determines that the failure to satisfy the Prevailing Wage Requirements is due to "intentional disregard" of those requirements, then the correction payment to the laborer or mechanic is three times the amount that would otherwise be determined under section 45(b)(7)(B)(i)(I), and $10,000 is substituted for $5,000 in calculating the penalty under section 45(b)(7)(B)(i)(II). Section 45(b)(7)(B)(iv) provides that, "pursuant to rules issued by the Secretary, in the case of a final determination by the Secretary with respect to any failure... to satisfy [the Prevailing Wage Requirements]," the correction and penalty provisions do not apply, "unless the payments... are made by the taxpayer on or before the date which is 180 days after the date of such determination." 4. Apprenticeship Requirements Under section 45(b)(8), in order to satisfy the Apprenticeship Requirements, certain requirements with respect to labor hours, apprentice-to-journeyworker ratios, and participation by apprentices must be satisfied. 3 ******** 3 Sections 30C(g)(3), 45Q(h)(4), 45V(e)(4), 45Y(g)(10), 45Z(f)(7), 48(a)(11), 48C(e)(6), 48E(d)(4), and 179D(b)(5) cross-reference the apprenticeship requirements in section 45(b)(8). Sections 45L and 45U do not have apprenticeship requirements. ******** a. Labor Hours Requirement Section 45(b)(8)(A)(i) provides that "[t]axpayers shall ensure that, with respect to construction of any qualified facility, not less than the applicable percentage of the total labor hours of the construction, alteration, or repair work (including such work performed by any contractor or subcontractor) with respect to such facility shall, subject to [section 45(b)(8)(B)] be performed by qualified apprentices" (Labor Hours Requirement). For purposes of the Labor Hours Requirement, section 45(b)(8)(A)(ii) provides that the applicable percentage is: (i) in the case of a qualified facility the construction of which begins before January 1, 2023, 10 percent, (ii) in the case of a qualified facility the construction of which begins after December 31, 2022, and before January 1, 2024, 12.5 percent, and (iii) in the case of a qualified facility the construction of which begins after December 31, 2023, 15 percent. Section 45(b)(8)(E)(i) defines "labor hours" as the "total number of hours devoted to the performance of construction, alteration, or repair work by any individual employed by the taxpayer or by any contractor or subcontractor, and exclud[ing] any hours worked by foremen, superintendents, owners, or persons employed in a bona fide executive, administrative, or professional capacity (within the meaning of those terms in part 541 of title 29, Code of Federal Regulations)." Section 45(b)(8)(E)(ii) defines "qualified apprentice" as "an individual who is employed by the taxpayer or by any contractor or subcontractor and who is participating in a registered apprenticeship program, as defined in section 3131(e)(3)(B)." Section 3131(e)(3)(B) defines a registered apprenticeship program as an apprenticeship program registered under the Act of August 16, 1937 (commonly known as the National Apprenticeship Act, 50 Stat. 664, chapter 663, 29 U.S.C. 50 et seq. ) that meets the standards of subpart A of part 29 and part 30 of title 29 of the Code of Federal Regulations. 4 ******** 4 Effective November 25, 2022, 29 CFR part 29 is no longer divided into subparts A and B because subpart B (Industry Recognized Apprenticeship Programs) was rescinded in a final rule published on September 26, 2022 (87 FR 58269). ******** b. Ratio Requirement Under section 45(b)(8)(B), the Labor Hours Requirement is subject to any applicable requirements for apprentice-to-journeyworker ratios of the U.S. Department of Labor (DOL) or the applicable State apprenticeship agency (Ratio Requirement). c. Participation Requirement Under section 45(b)(8)(C), each taxpayer, contractor, or subcontractor who employs four or more individuals to perform construction, alteration, or repair work with respect to the construction of a qualified facility must employ one or more qualified apprentices to perform such work (Participation Requirement). 5. Exceptions to Apprenticeship Requirements a. In general Under section 45(b)(8)(D)(i), a taxpayer is not treated as failing to satisfy the Apprenticeship Requirements in section 45(b)(8) if: (i) the taxpayer satisfies the requirements described in section 45(b)(8)(D)(ii) (Good Faith Effort Exception), or (ii) in the case of any failure by the taxpayer to satisfy the Labor Hours Requirement under section 45(b)(8)(A) and the Participation Requirement under section 45(b)(8)(C), the taxpayer makes a penalty payment to the Secretary (Apprenticeship Cure Provision). b. Good Faith Effort Exception Under the Good Faith Effort Exception provided by section 45(b)(8)(D)(ii), a taxpayer is deemed to have satisfied the Apprenticeship Requirements with respect to a qualified facility if the taxpayer has requested qualified apprentices from a registered apprenticeship program, as defined in section 3131(e)(3)(B), and: (i) such request has been denied, provided that such denial is not the result of a refusal by the taxpayer or any contractors or subcontractors engaged in the performance of construction, alteration, or repair work with respect to such qualified facility to comply with the established standards and requirements of the registered apprenticeship program, or (ii) the registered apprenticeship program fails to respond to such request within five business days after the date on which such registered apprenticeship program received such request. c. Apprenticeship Cure Provision Under section 45(b)(8)(D)(i)(II), if the Good Faith Effort Exception does not apply, then the taxpayer will not be treated as failing to satisfy the Labor Hours Requirement or the Participation Requirement if the taxpayer makes a penalty payment to the Secretary in an amount equal to the product of $50 multiplied by the total labor hours for which the Labor Hours Requirement or the Participation Requirement was not satisfied with respect to the construction, alteration, or repair work on the qualified facility. Under section 45(b)(8)(D)(iii), if the Secretary determines that the failure was due to intentional disregard of the Labor Hours Requirement or Participation Requirement, then the penalty amount increases to $500 multiplied by the total labor hours for which the requirement was not satisfied. C. One Megawatt Exception Under the One Megawatt Exception in section 45(b)(6)(B)(i), a qualified facility that has a maximum net output of less than one megawatt (as measured in alternating current) is eligible for the increased credit amount. A qualified facility's nameplate capacity determines whether the facility meets the One Megawatt Exception. Similar exceptions apply for a qualified facility under sections 45Y(a)(2)(B)(i) and 48E(a)(2)(A)(ii)(I) with a maximum net output of less than one megawatt (as measured in alternating current); a qualified project under section 48(a)(9)(B)(i) with a maximum net output of less than one megawatt of electrical (as measured in alternating current) or thermal energy; and energy storage technology under section 48E(a)(2)(B)(ii)(I) with a capacity of less than one megawatt. D. Beginning of Construction Exception Under the BOC Exception in section 45(b)(6)(B)(ii), a qualified facility the construction of which began prior to the date that is 60 days after the Secretary publishes guidance with respect to the requirements of section 45(b)(7)(A) and (8) is eligible for the increased credit amount in section 45(b)(6). On November 30, 2022, the IRS and the Treasury Department published Notice 2022-61, providing guidance with respect to the PWA requirements in section 45(b)(7)(A) and (8), including initial guidance for determining the beginning of construction for section 45 and other credits and the beginning of installation under section 179D. Therefore, if a taxpayer began construction or installation of a facility 5 before January 29, 2023, then the taxpayer is eligible for the increased credit amount without satisfying the PWA requirements, provided the taxpayer is otherwise eligible for the credit. Similar exceptions apply under sections 30C, 45Q, 45V, 45Y, 48, 48E, and 179D. ******** 5 Notice 2022-61 defines "facility" as qualified facility, property, project, or equipment. ******** For purposes of determining when construction or installation begins, Notice 2022-61 incorporates by reference the notices issued under sections 45, 45Q, and 48 (collectively, IRS Notices). 6 The IRS Notices describe two methods of establishing that construction of a facility has begun: (i) starting physical work of a significant nature (Physical Work Test), and (ii) paying or incurring five percent or more of the total cost of the facility (Five Percent Safe Harbor). ******** 6 Notice 2013-29, 2013-20 I.R.B. 1085 (section 45); Notice 2020-12, 2020-11 I.R.B. 495 (section 45Q); Notice 2018-59, 2018-28 I.R.B. 196 (section 48). ******** The IRS Notices, as clarified and modified by Notice 2021-41, 2021-29 I.R.B. 17, provide that for purposes of the Physical Work Test and Five Percent Safe Harbor, taxpayers must demonstrate either continuous construction or continuous efforts (Continuity Requirement) regardless of whether the Physical Work Test or the Five Percent Safe Harbor was used to establish the beginning of construction. Whether a taxpayer meets the Continuity Requirement under either test is determined by the relevant facts and circumstances. The IRS Notices, as subsequently clarified and modified, also provide for a "Continuity Safe Harbor" under which a taxpayer will be deemed to satisfy the Continuity Requirement provided a qualified facility is placed in service no more than four calendar years after the calendar year during which construction of the qualified facility began for purposes of sections 45 and 48, and no more than six calendar years after the calendar year during which construction of the qualified facility or carbon capture equipment began for purposes of section 45Q. For purposes of the Continuity Safe Harbor, certain offshore projects and projects built on Federal land under sections 45 and 48 satisfy the Continuity Requirement if such a project is placed into service no more than 10 calendar years after the calendar year during which construction of the project began. Until the Treasury Department and the IRS issue further guidance on determining when construction or installation begins, taxpayers may continue to rely on the guidance provided in Notice 2022-61 and the IRS Notices. Specifically, to determine when construction begins for purposes of sections 30C, 45V, 45Y, and 48E, principles similar to those under Notice 2013-29 regarding the Physical Work Test and Five Percent Safe Harbor apply, and taxpayers satisfying either test will be considered to have begun construction. In addition, principles similar to those provided in the IRS Notices regarding the Continuity Requirement for purposes of sections 30C, 45V, 45Y, and 48E apply. Whether a taxpayer meets the Continuity Requirement under either test is determined by the relevant facts and circumstances. Similar principles to those under section 3 of Notice 2016-31 regarding the Continuity Safe Harbor also apply for purposes of sections 30C, 45V, 45Y, and 48E. Taxpayers may rely on the Continuity Safe Harbor with respect to those sections, provided the facility is placed in service no more than four calendar years after the calendar year during which construction began. For purposes of section 179D, installation of energy efficient commercial building property has begun if a taxpayer generally satisfies principles similar to the two tests described in section 2.02 of Notice 2022-61 regarding the beginning of construction under Notice 2013-29 (Physical Work Test and Five Percent Safe Harbor). The relevant facts and circumstances will ultimately determine whether a taxpayer has begun installation. For purposes of sections 45, 45Q, and 48, the IRS Notices will continue to apply under each respective Code section, including application of the Physical Work Test and Five Percent Safe Harbor, and the rules regarding the Continuity Requirement and Continuity Safe Harbors. IV. Davis-Bacon Act The Davis-Bacon Act (40 U.S.C. 3141 et seq.) (DBA), enacted in 1931, requires the payment of minimum prevailing wages determined by the DOL to laborers and mechanics working on contracts entered into by Federal agencies and the District of Columbia that are in excess of $2,000 and are for the construction, alteration, or repair of public buildings and public works. The Copeland Act, Public Law 73-324 (40 U.S.C. 3145), was enacted in 1934 to add a requirement that contractors working on contracts covered by the DBA submit weekly certified payroll records to the contracting agency for work performed on the contract. Congress has included DBA requirements in other laws, often referred to as the Davis-Bacon Related Acts (Related Acts), under which Federal agencies provide assistance for construction projects through grants, loans, insurance, and other methods. The Wage and Hour Division of the DOL is responsible for administering the DBA and has adopted regulations for the determination of prevailing wages as well as compliance with and enforcement of DBA labor standards requirements under 29 CFR parts 1, 3, and 5. Section 3142 of the DBA requires that Federal agencies entering into contracts covered by the DBA include the requirements of the DBA in the contract, including the requirement to incorporate the applicable wage determinations that set forth the prevailing wages to be paid to laborers and mechanics performing work, and the Copeland Act, 40 U.S.C. 3145, sets forth the requirement to submit certified weekly payroll records to the contracting Federal agency. Under regulations implementing the DBA (29 CFR parts 1 and 5), the contracting agency and the Wage and Hour Division have responsibility to ensure compliance with prevailing wage requirements by engaging in periodic audits or investigations of contracts, including examination of payroll data. The Wage and Hour Division determines the wage rates that are "prevailing" for purposes of section 3142(b) of the DBA for each classification of covered laborers and mechanics on similar projects in the geographic area in which work is to be performed. A prevailing wage is the combination of the basic hourly rate and any fringe benefit rate listed on the wage determination. The Wage and Hour Division generally makes its determinations of the prevailing rates based on survey information provided by contractors and other interested parties. The prevailing wage determinations made by the Wage and Hour Division are published on the DOL-approved website for wage determinations (currently https://www.sam.gov ). Under the DBA, contracting agencies follow specified procedures for incorporating wage determinations into covered contracts. The applicable prevailing wage determination generally applies for the duration of the contract. In accordance with the DBA, certain apprentices may be paid wages at a lower wage rate than journeyworker laborers and mechanics. Under 29 CFR 5.5(a)(4), an apprentice from a registered apprentice program may be paid at not less than the rate specified in the registered program for the apprentice's level of progress in the apprenticeship program, expressed as a percentage of the journeyworker hourly rate specified in the applicable wage determination. Apprentices may also be paid bona fide fringe benefits in accordance with the provisions of the registered apprenticeship program, but if the registered apprenticeship program does not specify bona fide fringe benefits, apprentices must be paid the full amount of bona fide fringe benefits listed on the wage determination for the applicable classification. Sections 3143 and 3144 of the DBA also provide for certain enforcement authority and remedies to ensure compliance with payment of prevailing wage rates. When a contracting agency or the Wage and Hour Division finds there has been an underpayment of wages, the contracting agency and the Wage and Hour Division can seek to recover the underpayments from the contractor responsible, including but not limited to the prime contractor. If the underpayment of wages to laborers and mechanics is not promptly remedied, then the contracting agency may withhold payments that are otherwise due under the contract or under another contract with the same prime contractor in order to compensate the laborers and mechanics for the underpayments. Contractors who have been found to have disregarded their obligations to employees and subcontractors, including by violating prevailing wage requirements, may also be subject to debarment from future Federal contracts under 40 U.S.C. 3144(b) and 29 CFR 5.12. Explanation of Provisions I. Overview A. Incorporation of certain DBA guidance Under section 45(b)(7)(A), the increased credit is available with respect to a qualified facility if a taxpayer ensures that laborers and mechanics are "paid wages at rates not less than the prevailing rates... in accordance with [the DBA]." The phrase "in accordance with" means "in agreement or harmony with; in conformity to; according to." 7 In interpreting the "in accordance with" language, the Treasury Department and the IRS propose to incorporate in these regulations certain requirements of the DBA that are relevant for the purposes of section 45(b)(7)(A) and the intent of the IRA, and that are necessary for, and consistent with, sound tax administration. ******** 7 In accordance with, Oxf o rd English D icti o nary, https://www.oed.com/search/dictionary/?scope=Entries&q=in+accordance+with (last visited Aug. 8, 2023); see Accordance, Merriam-W e bst e r's Co ll e giat e D icti o nary (11 th ed. 2006) ("agreement, conformity"). ******** Under the DBA, a contractor must agree to pay prevailing wages at the commencement of the project as a condition of a Federal contract award. Conversely, under section 45, the requirements related to payment of prevailing wages are generally triggered at the beginning of construction and continue during the entire course of a project, but the requirement becomes binding only when a tax return claiming the increased credit is filed. The Code does not require taxpayers who do not seek an increased credit under section 45(b)(6) to pay prevailing wages in the construction, alteration, or repair of a facility. The proposed regulations seek to strike the appropriate balance in determining when DBA requirements are relevant for purposes of the PWA requirements and when they are not. The proposed regulations would incorporate DBA statutory and regulatory guidance that is relevant for purposes of claiming the increased tax credit and consistent with sound tax administration. For example, the proposed regulations would largely adopt DBA guidance relating to wage determinations and the meaning of pertinent terms such as "laborer" and "mechanic"; "construction, alteration, or repair"; "wages"; and "employed". The proposed regulations would not adopt DBA guidance if the result of doing so would not be in furtherance of sound tax administration or the aims of the IRA. For example, the proposed regulations would not incorporate the rules under the DBA regarding provisions required to be included in contracts, those provisions related to the reporting of certified payroll records by contractors to contracting agencies, and the various enforcement processes that are available to the DOL and the contracting agencies to address noncompliance. Additionally, the DBA's $2,000 monetary coverage threshold has not been incorporated. 8 ******** 8 The Treasury Department and the IRS interpret the One Megawatt Exception as addressing small business taxpayers who would be excluded under the $2,000 minimum contract requirement under the DBA. ******** The statutory language of the IRA does not reflect any intent to include exceptions from the PWA requirements, other than the One Megawatt Exception and the BOC Exception. Consequently, the Treasury Department and the IRS have not proposed a rule exempting Tribal governments or the Tennessee Valley Authority (TVA) from the PWA requirements in section 45. The Treasury Department and the IRS request comments on the need for any exceptions, including for Tribal governments or the TVA, from the PWA requirements in addition to those expressly described in the statute. Such comments should detail the specific circumstances requiring the proposed exception as well as how its design would limit its application only to those circumstances. In addition, the Treasury Department and the IRS will hold Tribal consultation specifically to address the prevailing wage and apprenticeship requirements in these proposed regulations, which will inform the development of the final regulations. See part VI. of the Special Analyses section. B. Applicability of PWA requirements to the taxpayer The proposed regulations would provide that in order to earn the increased credit under section 45(b)(6) by satisfying the PWA requirements, the taxpayer would be solely responsible for: (i) ensuring that the relevant laborers and mechanics are paid wages not less than the prevailing rate whether employed directly by the taxpayer, or by a contractor, or a subcontractor, and (ii) ensuring that the Apprenticeship Requirements are satisfied. The proposed regulations would also provide that the taxpayer would be solely responsible for the PWA recordkeeping requirements, the correction and penalty provisions under the Prevailing Wage Requirements, and the Good Faith Effort Exception and penalty provisions under the Apprenticeship Requirements. However, nothing in these proposed regulations is intended to supersede requirements that might otherwise apply to a taxpayer, contractor, or subcontractor by State or Federal law. Generally, the proposed regulations would define the term "taxpayer" to mean any taxpayer as defined in section 7701(a)(14), including applicable entities described in section 6417(d)(1)(A). This will generally be the entity that claims the credit (as increased under section 45(b)(6)), or makes an election under section 6417 with respect to such credit amount on a Federal income tax return. The section 45 credit, including the increased credit amount available under section 45(b)(6), is an eligible credit subject to the newly enacted section 6418. Section 6418 allows "eligible taxpayers" to elect to transfer certain credits to unrelated taxpayers rather than using the credits against their Federal income tax liabilities. In the case of credits transferred under section 6418, these proposed regulations would provide that the term "taxpayer" also means the eligible taxpayer that determines the eligible credit to be transferred and makes a transfer election under section 6418 to transfer any specified credit portion (including 100 percent) of an eligible credit determined with respect to any eligible credit property of such eligible taxpayer for any taxable year. Section 6418(a) provides that, in the case of an eligible taxpayer that elects to transfer all (or any specified portion) of an eligible credit determined with respect to the taxpayer for any taxable year to an unrelated transferee taxpayer, the transferee taxpayer specified in such election (and not the eligible taxpayer) is treated as the taxpayer with respect to such credit (or such portion thereof). The Treasury Department and the IRS published proposed regulations in the Federal Register (88 FR 40496 (June 21, 2023)) that would implement the statutory provisions of section 6418 (6418 Proposed Regulations). As explained in the 6418 Proposed Regulations, the Treasury Department and the IRS view inclusion of the word "determined" as instructive. Only credits determined with respect to an eligible taxpayer can be transferred by the eligible taxpayer. The 6418 Proposed Regulations would provide that Code sections relating to the determination of an eligible credit, such as sections 49 and 50(b), generally impact the amount of an eligible credit that an eligible taxpayer can transfer. A transferee taxpayer is generally not subject to those Code sections, but a transferee taxpayer is subject to Code sections that would limit the amount of an eligible credit that is allowed, such as sections 38(c) and 469. In making a transfer election, the 6418 Proposed Regulations also would require an eligible taxpayer to report the determined credit as part of the taxpayer's return, including filing properly completed credit source forms, a properly completed Form 3800, General Business Credit, and a schedule showing the amount of eligible credit transferred for each eligible credit property. The 6418 Proposed Regulations also would apply with respect to the entire credit determined under section 45, where the amount of credit determined would include increased credit amounts available under section 45(b)(6). As the rules for determining an eligible credit apply to the eligible taxpayer and not the transferee taxpayer under section 6418, these proposed regulations would provide consistency with respect to the rules relating to the determination of the section 45 credit. Thus, while a transferee taxpayer would claim a transferred eligible credit (or portion thereof) on a tax return, the requirements of section 45 relevant to determining the credit, including the correction and penalty provisions described in section 45(b)(7)(B) and 45(b)(8)(D), would remain with the eligible taxpayer who determined the credit. The Treasury Department and the IRS request comments on the application of the PWA penalty and cure provisions, including to transferees and eligible taxpayers, in the context of transferred credits. II. Prevailing Wage Requirements Under Section 45(b)(7)(A) A. In general Section 45(b)(7)(A) requires that taxpayers who are seeking an increased credit ensure that laborers and mechanics employed by the taxpayer, or any contractor or subcontractor in the construction, alteration, or repair of a facility are paid wages at rates that are not less than the prevailing rates determined by the DOL in accordance with the DBA. 9 The proposed regulations would provide that a taxpayer would satisfy the Prevailing Wage Requirements with respect to the construction, alteration, or repair of a facility by ensuring that all laborers and mechanics employed by the taxpayer, or any contractor or subcontractor, in the construction, alteration, or repair of a facility are paid wages at rates that are not less than the prevailing rates determined by the DOL in accordance with the DBA. ******** 9 The requirement to pay prevailing wages with respect to alteration or repair applies for any portion of a taxable year that is within the 10-year period beginning on the date the qualified facility is placed in service. ******** The proposed regulations would largely incorporate the definitions of contractor and subcontractor from the DBA and would provide that: (i) a contractor would be any person that enters into a contract with the taxpayer for the construction, alteration, or repair of a qualified facility, and (ii) a subcontractor would be any contractor that agrees to perform or be responsible for the performance of any part of a contract entered into with the taxpayer (or contractor) with respect to the construction, alteration, or repair of a facility. Consistent with the DBA and 29 CFR 5.2, and solely for purposes of the Prevailing Wage Requirements, the proposed regulations would provide that a laborer or mechanic would be considered employed by the taxpayer, contractor, or subcontractor if the individual performs the duties of a laborer or mechanic for the taxpayer, contractor, or subcontractor (as applicable), regardless of whether the individual would be characterized as an employee or an independent contractor for other Federal tax purposes. The definition of employed for purposes of the Prevailing Wage Requirements would generally be different and broader than the definition used elsewhere in the Code, for example with respect to employment taxes, as well as the associated reporting and withholding obligations. Laborers and mechanics who are independent contractors for employment tax purposes may be considered employed for purposes of the Prevailing Wage Requirements. Whether an individual is considered employed for purposes of the Prevailing Wage Requirements and these proposed regulations is not relevant when determining whether an individual is an employee or an independent contractor for other Federal tax purposes. B. Determining the prevailing wage rate 1. In General Under the proposed regulations, prevailing wage rates would be determined by the DOL in accordance with the DBA when they are issued and published by the DOL as a general wage determination or when issued to a taxpayer as part of a supplemental wage determination or pursuant to a request for a wage rate for an additional classification. The proposed regulations would require taxpayers to use the general wage determination in effect when the construction of the facility begins but would not require taxpayers to update the applicable prevailing wage rates during construction of the facility in the event a new general wage determination is published by the DOL after construction of the facility begins. However, a new general wage determination would be required to be used when a contract is changed to include additional, substantial construction, alteration, or repair work not within the scope of work of the original contract, or to require work to be performed for an additional time period not originally obligated, including where an option to extend the term of a contract for the construction, alteration, or repair is exercised. This is consistent with DOL guidance under the DBA, which generally requires the contracting agency to incorporate the applicable wage determinations as part of the contract that is awarded to the contractor with the applicable rates valid through the duration of the contract. The proposed regulations also would provide that taxpayers would need to update the applicable wage rate(s), as necessary, with respect to any alteration or repair of a facility that begins after the facility has been placed in service. Taxpayers would do this by ensuring that wages are paid for such alteration or repair based on the general wage determination in effect when the alteration or repair begins. 2. General Wage Determinations The proposed regulations would provide that a general wage determination would be one issued and published by the DOL that includes a list of wage and bona fide fringe benefit rates determined to be prevailing for laborers and mechanics for the various classifications of work performed with respect to a specified type of construction in a geographic area. Generally, the DOL determines the prevailing rate based on wage rate data submitted by contractors, contractors' associations, labor organizations, public officials, and other interested parties. In general, the proposed regulations would provide that taxpayers would need to use the general wage determination(s) published by the DOL under the DBA on a DOL approved website, to determine the applicable prevailing wage rates. The current approved website for publishing general wage determinations is https://www.sam.gov. The proposed regulations would largely incorporate the definition of wages from 29 CFR 5.2 for the Prevailing Wage Requirements. Under 29 CFR 5.2, wages are defined as the basic hourly rate of pay; any contribution irrevocably made by a contractor or subcontractor to a trustee or to a third person pursuant to a bona fide fringe benefit fund, plan, or program; and the rate of costs to the contractor or subcontractor that may be reasonably anticipated in providing bona fide fringe benefits to laborers and mechanics pursuant to an enforceable commitment to carry out a financially responsible plan or program, which was communicated in writing to the laborers and mechanics affected. Whether amounts are wages for purposes of the Prevailing Wage Requirements is not relevant in determining whether amounts are wages or compensation for other Federal tax purposes. 3. Supplemental Wage Determinations and Rates for Additional Classifications The proposed regulations would provide special procedures for the limited circumstances in which a general wage determination does not provide an applicable wage rate(s) for the work to be performed on the facility. These circumstances include when no general wage determination has been issued for the geographic area or for the specified type of construction, or when the Secretary of Labor has issued a general wage determination for the relevant geographic area and type of construction, but one or more labor classifications necessary for the construction, alteration, or repair work that will be done on the facility by laborers or mechanics is not listed as part of that determination. The proposed regulations would provide that under these circumstances, a taxpayer, contractor, or subcontractor would need to request a supplemental wage determination or request a prevailing wage rate for an additional classification from the DOL. A taxpayer satisfies section 45(b)(7)(A) by ensuring that laborers and mechanics are paid wages at rates not less than the rates determined by the DOL pursuant to a request for a supplemental wage determination or pursuant to a request for a prevailing wage rate for an additional classification. The DOL has advised the Treasury Department and the IRS that most taxpayers will likely not need to use the process for requesting a supplemental wage determination or request a rate for an additional classification because of the availability of general wage determinations. The request for a prevailing wage rate for an additional classification would only be appropriate when the work to be performed by the classification is not performed by a classification in the applicable general wage determination and the classification is used in the area by the construction industry. In addition, a prevailing wage rate for an additional classification would only be approved when the proposed wage rate, including any bona fide fringe benefits, bears a reasonable relationship to the wage rates contained in the general wage determination. A request for a prevailing wage rate for additional classification would not be permitted to be used to split, subdivide, or otherwise avoid application of classifications listed in a general wage determination. Under the proposed regulations, the procedures for requesting a supplemental wage determination or a prevailing wage rate for an additional classification from the DOL would correspond to the provisions of 29 CFR 1.5(b) and 5.5(a)(1)(iii). The Treasury Department and the IRS expect that the construction of some facilities may span two or more adjacent geographic areas, and more than one general wage determination could apply to the facility. In such circumstances, a taxpayer would be able to satisfy the Prevailing Wage Requirements by ensuring that laborers and mechanics are paid wages at the highest rate for each classification provided under the general wage determinations. A taxpayer would also be permitted to request a supplemental wage determination with respect to the facility and pay the rates determined by the DOL pursuant to the request. The proposed regulations would also provide a special rule for qualified facilities located offshore so taxpayers would not need to request a supplemental wage determination for offshore facilities. In lieu of requesting a supplemental wage determination for a facility located in an offshore area within the outer continental shelf of the United States, a taxpayer, contractor, or subcontractor would be permitted to rely on the general wage determination for the relevant category of construction that is applicable in the geographic area closest to the area in which the qualified facility will be located. The process for requesting a supplemental wage determination or a prevailing wage rate for an additional classification provided for in the proposed regulations would be consistent with the process described in Notice 2022-61 while addressing the different context of the PWA regime wherein taxpayers, contractors, and subcontractors, rather than a contracting agency, will seek additional wage rates for purposes of complying with the Prevailing Wage Requirements of section 45. Under the DBA, the request for a project wage determination applicable under 29 CFR 1.5(b) or for a conformance under 29 CFR 5.5(a)(1)(iii) is made by the contracting agency rather than the contractor and will often occur after the contracting agency and the contractor have conferred about the need for the project wage determination or for the conformance of an additional classification. Because there is no contracting agency in the tax credit regime, the proposed regulations would set forth an analogous process for taxpayers, contractors, and subcontractors to request a supplemental wage determination, or a request for a prevailing wage rate for an additional classification, by submitting the request and supporting material directly to the Wage and Hour Division of the DOL. The proposed regulations would provide that the request for a supplemental wage determination or a request for a prevailing wage rate for an additional classification would need to include information consistent with the information that is required to be provided by a contracting agency when requesting a project wage determination or a conformance for purposes of the DBA. This information would include a description of the type of work to be performed, the geographic area where the facility is located, the start date for the construction, alteration, or repair of the facility, the labor classification(s) needed for performance of the work on the facility for which wage rates are not available on an applicable general wage determination, pertinent wage payment information that may be available with respect to the classifications, and any information the taxpayer wants the DOL to consider for determining the applicable classifications and prevailing wage rates. After review, the Wage and Hour Division will notify the taxpayer as to the labor classifications and wage rates to be used for the type of work in question in the geographic area in which the facility is located. The proposed regulations would adopt, by cross reference, the review and appeal procedures available to any interested party under the DBA with respect to wage determinations generally. Any interested party would be able to seek reconsideration and review of a supplemental wage determination, or a prevailing wage rate for an additional classification, by the DOL Administrator of the Wage and Hour Division and appeal any decision of the Administrator of the Wage and Hour Division to the DOL Administrative Review Board. In general, the Treasury Department and the IRS expect that supplemental wage determinations and requests for prevailing wage rates for an additional classification will be requested no more than 90 days prior to the beginning of the construction, alteration, or repair of the facility, as applicable. However, the Treasury Department and the IRS recognize that taxpayers may not reasonably determine until after construction, alteration, or repair begins that a supplemental wage determination or request for a prevailing wage rate for an additional classification is necessary. In these instances, the Treasury Department and the IRS would expect taxpayers, contractors, or subcontractors to make a request as soon as practicable after determining the need for a supplemental wage determination or prevailing wage rate for additional classifications. The proposed regulations would provide that when a supplemental wage determination or a prevailing wage rate for an additional classification is issued by the DOL after construction, alteration, or repair of the facility has begun, the applicable prevailing rates would apply retroactively to the date that the applicable construction, alteration, or repair work that is the subject of the request began. The taxpayer would be required to ensure that wages (including bona fide fringe benefits where appropriate) are paid at appropriate prevailing wage rates to all laborers and mechanics performing work on the project from the first day on which work is performed in the classification. The Treasury Department and the IRS request comments on the proposed procedures for requesting supplemental wage determinations and prevailing wage rates for additional classifications. C. Paying wages in accordance with an applicable wage determination 1. In General Under the proposed regulations, the applicable wage determination for a type of construction in a geographic area would provide the prevailing wage rates that apply to laborers or mechanics for the construction, alteration, or repair of a facility in that geographic area. The proposed regulations would provide that for purposes of satisfying the Prevailing Wage Requirements, all laborers and mechanics would need to be paid in the time and manner consistent with the regular payroll practices of the taxpayer, contractor, or subcontractor, as applicable. For purposes of satisfying section 45(b)(7)(A), the proposed regulations would provide that a taxpayer would need to ensure that the wages paid to laborers and mechanics employed by the taxpayer, contractor, or subcontractor on the construction, alteration, or repair of the facility must be "not less than the prevailing rates... in the locality in which such facility is located." The proposed regulations would define the terms: (i) laborer and mechanic, (ii) types of construction, (iii) construction, alteration, or repair, and (iv) locality, generally consistent with the DBA definitions. The proposed regulations would define the terms "laborer" and "mechanic" as those individuals whose duties are manual or physical in nature. Laborers and mechanics would include apprentices and helpers. Working forepersons who devote more than 20 percent of their time during a workweek to laborer or mechanic duties and who do not meet the criteria for exemption under 29 CFR part 541 would also be considered laborers and mechanics for the time spent conducting laborer and mechanic duties. However, laborers and mechanics would not include individuals whose duties are primarily administrative, executive, or clerical, and persons employed in a bona fide executive, administrative, or professional capacity as those terms are defined in 29 CFR part 541. The Treasury Department and the IRS request comments on the treatment of working forepersons or owners performing the duties of laborers and mechanics under certain circumstances, and other executive or administrative personnel who also perform duties of a manual or physical nature, in the construction, alteration, or repair of a qualified facility. The proposed regulations would provide that the type of construction would be the general category of construction as established by the DOL for the publication of general wage determinations. Specific types of construction currently include building, residential, heavy, and highway. The Treasury Department and the IRS contemplate that the construction, alteration, or repair of most facilities eligible for the increased credit under section 45(b)(6) would be either building or heavy construction. The proposed regulations would provide that the term construction, alteration, or repair would generally mean construction, prosecution, completion, or repair as provided under 29 CFR 5.2. Under this definition, construction, alteration, or repair would mean all types of work performed at the location of the facility and includes, but is not limited to: constructing, altering, remodeling, installing of items fabricated offsite; painting and decorating; and manufacturing or furnishing of materials, articles, and supplies or equipment at the location of the facility. Additionally, the proposed regulations would provide that construction, alteration, or repair would not include maintenance work that occurs after the facility is placed in service. Under the proposed regulations, maintenance would be work that is ordinary and regular in nature and designed to maintain existing functionality of a facility as opposed to an isolated or infrequent repair of a facility to restore specific functionality or adapt it for a different or improved use. Further, the proposed regulations would provide that this definition of construction, alteration, or repair would be solely for purposes of the PWA requirements and has no bearing on any other provision under the Code, including any determination of construction, alteration, repair, or maintenance under section 162 or 263. The proposed regulations would provide that a locality or geographic area would be the county, independent city, or other civil subdivision of the State in which the facility or secondary site is located. Geographic area would also include offshore areas, including areas located within the outer continental shelf of the United States, and the U.S. territories. If construction, alteration, or repair is performed in multiple counties, independent cities, or other civil subdivisions, then the geographic area would also include all counties, independent cities, or other civil subdivisions in which the work will be performed. Under section 45(b)(7)(A)(ii), the prevailing wage rates that are required to be paid with respect to such construction, alteration, or repair are determined by reference to "the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such facility is located." The proposed regulations would also use the DBA's "site of the work" definition to clarify the scope of the requirement under section 45(b)(7)(A) to pay prevailing wage rates. Under the DBA, the requirement to pay prevailing wages is limited by statute to laborers and mechanics "employed directly on the site of the work." 40 U.S.C. 3142. By comparison, section 45(b)(7)(A)(i) and (ii) requires the payment of prevailing wages generally in the "construction of [a qualified] facility" and the "alteration or repair of such facility." Over the years, the DOL has updated its rules to address developments in the construction industry that have enabled contractors to build large portions of a building or project on one or more secondary sites away from the primary site of the work. The DBA rules now provide that a secondary construction site is considered part of the site of the work, if a significant portion of a building or work is constructed at the secondary site for specific use in the designated building or work and the site either was established specifically for the performance of the covered contract or project or dedicated exclusively, or nearly so, to the covered contract or project. 29 CFR 5.2. The Treasury Department and the IRS view the DBA's site of the work requirement to be helpful for purposes of interpreting the language in section 45(b)(7)(A) that the applicable prevailing wage rates for the construction, alteration, or repair of the facility are rates not less than those prevailing "in the locality in which such facility is located." As with certain construction subject to the DBA, the Treasury Department and the IRS expect that taxpayers similarly may use multiple construction sites in the construction, alteration, or repair of a facility and in certain cases prefabricate large portions of the facility offsite for later installation at the facility's location. Some of these secondary sites will be dedicated solely to the construction of a facility while others may service multiple clients and facilities. While the language of section 45(b)(7)(A) could be interpreted to support an expansive reading of construction such that all construction of a facility, wherever located and however small, is subject to the Prevailing Wage Requirements, such a reading would result in significantly broader coverage than under the DBA and likely would entail substantial compliance costs and discourage taxpayers from seeking the increased credits or deduction available under the IRA. Thus, the Treasury Department and the IRS understand the DBA approach to "site of the work" to strike an appropriate balance between the requirements of section 45(b)(7)(A) and existing construction practices and thus propose to largely adopt the DBA approach for purposes of defining the scope of the Prevailing Wage Requirements. Therefore, under the proposed regulations, taxpayers would be subject to the requirement to ensure that laborers and mechanics are paid not less than prevailing wage rates with respect to the construction, alteration, or repair at the locality in which the facility is located, which would be defined to include any secondary sites where a significant portion of the construction, alteration, or repair of the facility occurs, provided that the secondary site either was established specifically for, or dedicated exclusively for a specific period of time to, the construction, alteration, or repair of the facility. Under 29 CFR 1.6(b)(1), the prevailing wage rate that applies to laborers or mechanics engaged in the construction, alteration, or repair work at a secondary site is determined by the geographic area of the secondary site. The proposed regulations would similarly provide that when a secondary site is established specifically for, or dedicated exclusively for a specific period of time to, the construction, alteration, or repair of the facility, the prevailing wage rate applicable to laborers and mechanics engaged in the construction, alteration, or repair of the facility at the secondary site would be determined by the applicable wage rate for that laborer or mechanic classification based on the geographic area of the secondary site. 2. Wages for Apprentices Section 45(b)(8)(E)(ii) provides generally that a qualified apprentice is an individual who is employed by the taxpayer, contractor, or subcontractor and who is participating in a registered apprenticeship program, as defined in section 3131(e)(3)(B). For purposes of the DBA, an apprentice may also include an individual in the first 90 days of probationary employment as an apprentice in a registered apprenticeship program, who is not individually registered in the program, but who has been certified by the DOL's Office of Apprenticeship or a State apprenticeship agency (where appropriate) to be eligible for probationary employment as an apprentice. A registered apprenticeship program is a program that has been registered by the DOL's Office of Apprenticeship or a recognized State apprenticeship agency, pursuant to the basic standards and requirements in 29 CFR parts 29 and 30. Program registration is evidenced by a Certificate of Registration or other written indicia of registration. The proposed regulations would adopt 29 CFR 5.5(a)(4)(i) allowing the payment of wages that differ from the applicable prevailing wage rate to apprentices who are participating in a registered apprenticeship program. The proposed regulations would also provide that the calculation of the apprentice wage rate would be in accordance with 29 CFR 5.5(a)(4)(i). For purposes of determining whether apprentices may be paid the apprentice wage rate rather than the full prevailing wage for other laborers and mechanics of the same classification, the proposed regulations would provide the apprentice must be participating in a registered apprentice program as demonstrated by a written apprenticeship agreement with the registered apprenticeship program containing the terms and conditions of the employment and training of the apprentice. The terms and conditions of the agreement would be required to comply with 29 CFR 29.7. The registered apprenticeship program would be required to be registered with the DOL or a recognized State apprenticeship agency in accordance with 29 CFR parts 29 and 30. If the apprentice is working in a classification that is not in an occupation that is part of the registered apprenticeship program, to satisfy the Prevailing Wage Requirements, the apprentice would need to be paid the full prevailing wage for laborers or mechanics for that classification in that location. The proposed regulations would provide that taxpayers and contractors or subcontractors who employ apprentices who are not in a registered apprenticeship program or who employ apprentices in excess of applicable ratios permitted by the registered apprenticeship program would need to pay those apprentices the full prevailing wage rate listed for the classification of the work performed in the applicable wage determination. D. Correction and penalty provisions 1. General Rule Under section 45(b)(7)(B)(i) and the proposed regulations, taxpayers would cure a failure to meet the Prevailing Wage Requirements by making the correction and penalty payments described in Section III.B.3. Section 45(b)(7)(B)(i) provides that "[i]n the case of any taxpayer which fails to satisfy the requirement under subparagraph (A) such taxpayer shall be deemed to have satisfied such requirement under such subparagraph with respect to such facility for any year if, with respect to any laborer or mechanic who was paid wages at a rate below the [prevailing rate] for any period during such year," the taxpayer makes the applicable correction payments and pays the penalty. The phrase "[i]n the case of any taxpayer which fails to satisfy the requirement under subparagraph (A) for any period" suggests that a failure to pay prevailing wages immediately triggers the applicability of the correction and penalty provisions if the increased credit is claimed on a return after a facility is placed in service. The proposed regulations would require the payment of prevailing wages at the time work is performed with respect to the construction, alteration, or repair of a facility in order to claim the increased credit. The proposed regulations would also provide that the requirement becomes binding only when the increased credit is claimed on a return. This is consistent with tax administration regarding the underlying credit. Thus, the correction and penalty payment requirements of section 45(b)(7)(B)(i) would become applicable to a taxpayer upon the occurrence of the taxpayer's failure to satisfy the Prevailing Wage Requirements of section 45(b)(7)(A), which occurs whenever wages are paid to a laborer or mechanic below the prevailing wage rates. That failures will occur, and the obligation to make correction and penalty payments will have arisen, during the course of the construction, alteration, or repair of a qualified facility must be viewed in the context of taxpayers not needing to satisfy the Prevailing Wage Requirements in the absence of an increased credit being claimed on a return. Thus, the proposed regulations would provide that the obligation to make correction payments and pay the penalty would not become binding until a return is filed claiming the increased credit, and the proposed regulations would not require payment of the correction payment or the penalty until the time the increased credit is claimed. The earliest time that a taxpayer can make a penalty payment to the IRS is at the time of filing a tax return claiming the increased credit. However, taxpayers would retain the option of making correction payments to laborers and mechanics at any time after the initial payments were made and in advance of the filing of a tax return claiming the increased credit in order to limit the amount of additional interest the taxpayer must pay at the elevated rates set forth in section 45(b)(7)(B)(i)(I)(bb). In general, taxpayers would be obligated to make any necessary correction payments to any laborer and mechanic on or before the date a return is filed claiming an increased credit amount. A taxpayer would also be obligated to make any penalty payments owed with respect to a failure to meet the Prevailing Wage Requirements at the time a return is filed claiming the increased credit amount. Under the proposed regulations, whether taxpayers make the necessary correction payments and pay the penalty amounts promptly is one of the facts and circumstances that would be considered for purposes of the increased penalties for intentional disregard. The proposed regulations would also provide a deadline for a taxpayer's ability to use the correction and penalty provisions to rectify a failure to comply with the Prevailing Wage Requirements when the IRS makes a final determination that a taxpayer has failed to satisfy the Prevailing Wage Requirements. Under section 45(b)(7)(B)(iv), once the IRS makes a final determination that a taxpayer has failed to satisfy the Prevailing Wage Requirements, the taxpayer must make the correction and penalty payments within 180 days after the final determination to be eligible to for the increased credit. The proposed regulations would clarify that this final determination would come in the form of a notice sent by the IRS. As provided in section 45(b)(7)(B)(ii), under the proposed regulations, deficiency procedures would not apply to any penalty payment required to be made in connection with a failure to meet the Prevailing Wage Requirements. The proposed regulations would clarify that although deficiency procedures would not apply to the penalty payment, deficiency procedures would apply to any determination by the IRS disallowing a taxpayer's claim for the increased credit. 2. Special Circumstances Involving Correction and Penalty Payments Section 45(b)(7)(B)(i) states that a taxpayer will be deemed to satisfy the prevailing wage requirement "if, with respect to any laborer or mechanic who was paid wages at a rate below the rate described in such subparagraph for any period during such year, such taxpayer-- makes payment to such laborer or mechanic " in the amount of the correction payment and makes the required penalty payment to the IRS. The Treasury Department and the IRS are aware that the construction of a qualified facility may occur over the course of several years and some taxpayers who fail to meet the Prevailing Wage Requirements may be unable to locate all laborers and mechanics to which the correction payment must be made. However, section 45(b)(7)(B)(i) does not excuse taxpayers from the requirement to make the correction payment, even if the taxpayer is unable to locate the laborer or mechanic. The proposed regulations would not provide for an exception to the statutory requirement. The Treasury Department and the IRS expect that taxpayers will be able to establish correction payments even when a former laborer or mechanic cannot be located. In general, States have developed specific rules for the payment of wages to former laborers and mechanics who cannot be located. These rules can include diligence requirements to locate the laborer or mechanic, information reporting obligations to relevant State agencies on the amount of unclaimed wages, and requirements to remit any unclaimed wage amounts to State control as unclaimed property after defined holding periods. Taxpayers may also be able to establish that correction payments were made by demonstrating compliance with any withholding and information reporting requirements with respect to the payments. The Treasury Department and the IRS request public comments concerning appropriate rules for situations in which laborers and mechanics who are owed wages cannot be located and how taxpayers may establish that they have made the correction payment described in section 45(b)(7)(B)(i)(I). The Treasury Department and the IRS expect that some taxpayers will have made requests to the DOL for a supplemental wage determination or a prevailing wage rate for an additional classification. It is possible that the DOL's response to these requests will not be issued until after laborers and mechanics have started working on the facility. The laborers and mechanics who are the subject of the requests will have already been engaged in the construction, alteration, or repair, and may have already been paid wages below the rates later determined to be prevailing by the DOL. In this circumstance, the proposed regulations would provide that the taxpayer would not be considered to have failed to meet the Prevailing Wage Requirements with respect to any mechanics or laborers whose wage rate was subject to the request and who were paid below the prevailing wage rate before the determination by the DOL if the taxpayer requests the supplemental wage determination or prevailing wage rate for an additional classification before the beginning of construction (or as soon as practicable after the start of construction) and makes a correction payment within 30 days of the determination to each laborer or mechanic equal to the difference between the amount of wages paid to such laborer or mechanic before the determination and the amount of wages required by the Prevailing Wage Requirements to be paid to such laborer or mechanic during such period. This exception is intended to mitigate a rule that would require taxpayers to make correction and penalty payments for failures to pay a prevailing wage rate that could not be timely determined by the taxpayer. As previously described, for purposes of transfers pursuant to section 6418, the proposed regulations would clarify that the requirement to make correction and penalty payments would continue to apply to an eligible taxpayer who (i) transfers an increased credit amount under section 45(b)(6) as part of a specified credit portion and (ii) fails to meet the prevailing wage requirement of section 45(b)(7)(A) with respect to such increased credit amount. Additionally, the proposed regulations would provide that the obligation to satisfy the Prevailing Wage Requirements would not become binding on an eligible taxpayer until the earlier of: (i) the filing of the eligible taxpayer's return for the taxable year for which the specified credit portion is determined with respect to the eligible taxpayer, or (ii) the filing of the return of the transferee taxpayer for the year in which the specified credit portion is taken into account. The proposed regulations would also provide that a taxpayer who determines the underlying credit amount would have no obligation to comply with the correction and penalty provisions if the IRS later determines that the taxpayer was not entitled to the increased credit amount. Additionally, if the taxpayer does not correct and, therefore, is not subsequently granted the increased credit amount, no penalty is assessed under section 45(b)(7)(B). 3. Intentional Disregard Section 45(b)(7)(B)(iii) provides that if the failure to ensure that the laborers and mechanics are paid at the prevailing wage rate is found to be due to intentional disregard, then the amount of the correction payment is tripled and the amount of the penalty payment is doubled. The proposed regulations would provide that failures to meet the Prevailing Wage Requirements would be due to intentional disregard if they are knowing or willful, which is a determination that must be made by considering all relevant facts and circumstances. The proposed regulations would provide a non-exhaustive list of facts that may be relevant to this determination. The proposed regulations would explain that the facts and circumstances would include consideration of whether the failure was part of a pattern of conduct and whether the taxpayer has been required to pay the penalty in previous years. The Treasury Department and the IRS believe that failures that occur despite a taxpayer exercising reasonable diligence weigh against a finding of a knowing or willful failure. Under the proposed regulations, taxpayers would demonstrate reasonable diligence by taking appropriate steps to determine the applicable classifications and wage rates and by seeking to promptly correct any failures when discovered. Last, the proposed regulations would seek to draw from behavior that is generally required of contractors under the DBA and that the Treasury Department and the IRS believe would be best practices of taxpayers seeking to comply with the Prevailing Wage Requirements. These behaviors would include posting prevailing wage rates in a prominent place for the duration of the construction, alteration, or repair or otherwise notifying employees of the applicable prevailing wage rates; incorporating provisions in any contracts entered with contractors that require payment of prevailing wage rates by the contractors and any subcontractors; and undertaking quarterly, or more frequent, reviews of wages paid to laborers and mechanics to ensure that prevailing wages are being paid. The Treasury Department and the IRS request comments on additional criteria that might be used as part of a facts and circumstances analysis of intentional disregard in this context. The proposed regulations would also provide that there would be a rebuttable presumption against a finding of intentional disregard if the taxpayer makes the correction and penalty payments before receiving a notice of an examination with respect to a return that claimed the underlying increased credit. The presumption of no intentional disregard would be intended to encourage taxpayers who discover a failure to meet the Prevailing Wage Requirements after filing a return to use the correction and penalty provisions promptly. The Treasury Department and the IRS request comments on intentional disregard, including but not limited to additional criteria that might be used as part of a facts and circumstances analysis of intentional disregard and the applicability of a presumption against a finding of intentional disregard in certain situations. 4. Penalty Waiver In general, the IRS may exercise its discretion to waive or decline to assert penalties in the interest of sound tax administration. The proposed regulations would use that discretion to provide limited penalty waivers for instances in which the failures to pay prevailing wages to laborers and mechanics for the construction, alteration, or repair of a facility were small in amount or occurred in a limited number of pay periods. The Treasury Department and the IRS would use the waiver authority in a manner that assists taxpayers seeking to be eligible for the increased credit while remaining consistent with the statutory requirement to ensure that laborers and mechanics are paid at prevailing wage rates. The Treasury Department and the IRS understand that taxpayers intending to pay prevailing wage rates may make payroll errors. These errors are likely to range in scope and frequency. It is also possible that taxpayers may make classification errors with respect to work that is performed by certain laborers or mechanics. The proposed regulations would seek to account for these likelihoods while continuing to ensure that laborers and mechanics are paid according to the applicable prevailing wage rates. The proposed regulations would provide that the penalty payment requirement would be waived with respect to the construction, alteration, or repair performed by a laborer or mechanic during a calendar year if (i) the taxpayer makes the required correction payment (back wages and interest) by the earlier of (a) 30 days after the taxpayer became aware of the error or (b) the date on which the tax return claiming the increased credit is filed; and (ii) either: (a) the laborer or mechanic is paid below the prevailing wage rate for not more than 10 percent of all pay periods of the calendar year (or part thereof) during which the laborer or mechanic worked on the construction, alteration, or repair of the facility; or (b) the difference between the amount the laborer or mechanic was paid for the calendar year (or part thereof) during which the laborer or mechanic worked on the construction, alteration, or repair of the facility and the amount required to be paid by the Prevailing Wage Requirements for the calendar year is not greater than 2.5 percent of the amount required under the Prevailing Wage Requirements. The proposed regulations would use calendar years to measure any failures because taxpayers, contractors, and subcontractors performing construction may have different taxable years and laborers and mechanics are generally paid on a calendar year basis. The Treasury Department and the IRS request comments on the proposed use of calendar years in place of taxable years for this purpose. Pre-hire project labor agreements may be used to incentivize stronger labor standards and worker protections in the types of construction projects for which taxpayers may seek the increased credit, and having a project labor agreement in place may also help ensure compliance with PWA requirements. For these reasons, the proposed regulations would also provide that the penalty payment requirement would not apply with respect to a laborer or mechanic employed under a project labor agreement that meets certain requirements and any correction payment owed to the laborer or mechanic is paid on or before a return is filed claiming an increased credit amount. The Treasury Department and the IRS request comments on the proposed treatment of project labor agreements, other ways taxpayers might use project labor agreements to meet the PWA requirements, and the definition of a qualifying project labor agreement. The proposed regulations would use the IRS's general enforcement discretion to allow taxpayers to correct limited failures to pay prevailing wages if the taxpayers pay the mechanics and laborers back wages and interest in a timely manner before the increased credit is claimed. The proposed regulations would not provide for waiver of the penalty after a return has been filed claiming the increased credit. The proposed regulations would seek to create incentives for taxpayers to self-correct and promptly pay prevailing wages. III. Apprenticeship Requirements A. In general To satisfy the requirements of section 45(b)(8), taxpayers must ensure that, with respect to the construction of any qualified facility, the Labor Hours Requirement, Ratio Requirement, and Participation Requirement are satisfied. The proposed regulations would clarify the interaction among these requirements. The proposed regulations would explain that the Labor Hours Requirement generally would be subject to the Ratio Requirement. The proposed regulations would further explain that the Participation Requirement would apply in addition to the Labor Hour Requirement and the Ratio Requirement. Therefore, in order to meet the requirements of section 45(b)(8), a taxpayer generally would be subject to all three components of the Apprenticeship Requirements. If a taxpayer satisfies the applicable Labor Hours Requirement but fails the Participation Requirement, then the taxpayer would not be eligible for the increased credit unless the taxpayer complies with the penalty provisions of section 45(b)(8)(D) with respect to the total hours that are not met with respect to the Participation Requirement or meets the Good Faith Effort Exception. 1. Labor Hours Requirement The proposed regulations would reiterate that under the Labor Hours Requirement, the taxpayer must ensure that the "applicable percentage" of the total labor hours are performed by qualified apprentices. The Treasury Department and the IRS understand that certain jurisdictions and trades have developed pre-apprenticeship programs that are designed to help individuals prepare for and succeed in registered apprenticeship programs but that are not registered with the DOL under the Act of August 16, 1937 (commonly known as the "National Apprenticeship Act"; 50 Stat. 664, chapter 663; 29 U.S.C. 50 et seq.). Section 45(b)(8)(E)(ii) defines a qualified apprentice as an individual who is employed by the taxpayer or by any contractor or subcontractor and who is participating in a registered apprenticeship program, which is defined in section 3131(e)(3)(B) as apprenticeship programs that are registered under the National Apprenticeship Act. Thus, under the proposed regulations, pre-apprenticeship programs would not qualify as registered apprenticeship programs for purposes of section 45(b)(8) and hours worked as part of a pre-apprenticeship program would not count towards the Labor Hour Requirement. 2. Ratio Requirement Under the Ratio Requirement, a taxpayer must ensure that any applicable apprenticeship-to-journeyworker ratio is satisfied. Section 45(b)(8)(B) provides that the applicable apprenticeship-to-journeyworker ratio is determined by reference to the ratios of the DOL or the applicable State apprenticeship agency. Under 29 CFR part 29, registered apprenticeship programs prescribe a numeric ratio of apprentices to journeyworkers in their standards of apprenticeship. This ratio is intended to ensure that there are enough journeyworkers to oversee the work of apprentices. The Treasury Department and the IRS understand that the DOL and State apprenticeship agencies review and approve the prescribed ratio requirements. As stated in Notice 2022-61, the applicable ratios set by registered apprenticeship programs generally apply on a daily basis. The proposed regulations reiterate this requirement and would provide that the applicable ratio established by the apprenticeship program would need to be satisfied each day during construction, alteration, or repair of the qualified facility for which apprentice labor hours are being claimed. This means that the number of apprentices would not be permitted to exceed the number set forth in the ratio because the ratio sets the minimum number of journeyworkers needed for each apprentice, to ensure adequate safety and supervision. For example, for a 1:1 apprentice to journeyworker ratio, having two apprentices and three journeyworkers on a given day would satisfy the ratio requirement whereas having three apprentices and two journeyworkers on a given day would not. The proposed regulations would provide that if the Ratio Requirement is not met on any day, then registered apprentices in excess of the applicable ratio who perform work on a facility would be required to be paid the full prevailing wage rate for the hours worked for purposes of the Prevailing Wage Requirement. Additionally, the hours worked by the apprentices on a day where the applicable ratio was not satisfied would not be counted as apprentice hours for purposes of calculating the applicable percentage under the Labor Hours Requirement. For purposes of the Ratio Requirement, the proposed regulations would adopt the DOL definition of journeyworker in 29 CFR 29.2, which defines a journeyworker as a laborer or mechanic who has attained a level of skill, abilities and competencies recognized within an industry as having mastered the skills and competencies required for the occupation. A mentor, technician, specialist, or other skilled individual who has documented sufficient skills and knowledge of an occupation, either through formal apprenticeship or through practical on-the-job experience and formal training may also be a journeyworker. The Treasury Department and the IRS request comments on the application of the Ratio Requirement for purposes of satisfying the Apprenticeship Requirement. 3. Participation Requirement The Treasury Department and the IRS propose to interpret the Participation Requirement as designed to prevent taxpayers from satisfying the Labor Hours Requirement by only hiring apprentices to preform one type of work and instead encourages taxpayers to use apprentices across the full range of work performed with respect to the facility. The proposed regulations would clarify that the Participation Requirement would be satisfied as long as the taxpayer, contractor, or subcontractor employs one or more apprentices to perform work on the facility and would not be a daily requirement. The proposed regulations would also clarify that it would be the responsibility of the taxpayer to ensure that any contractor or subcontractor performing work on the facility with four or more employees who perform such work on the facility has hired one or more apprentices in accordance with the Participation Requirement of section 45(b)(8)(C). Taxpayers who fail to meet the Participation Requirement would be subject to the penalty provisions of section 45(b)(8)(D) even if the taxpayer otherwise satisfies the applicable Labor Hours Requirement unless the Good Faith Effort Exception applies. B. Exceptions 1. In General Section 45(b)(8)(D) and the proposed regulations would allow taxpayers who fail to meet the Apprenticeship Requirements to nonetheless qualify for the increased credit by curing their failures. To cure a failure to meet the Apprenticeship Requirements, taxpayers would be required to satisfy the Good Faith Effort Exception from the Apprenticeship Requirements or pay a penalty if they do not qualify for the Good Faith Effort Exception. 2. Good Faith Effort Exception Section 45(b)(8)(D)(ii) provides that taxpayers are deemed to satisfy the Apprenticeship Requirements if they have requested qualified apprentices from a registered apprenticeship program and such request has been denied for reasons other than the taxpayer, contractor, or subcontractor's refusal to comply with the program's standards and requirements, or if the program fails to respond within five business days of receiving a request. Notice 2022-61 provided that taxpayers could satisfy the Good Faith Effort Exception if the taxpayer requested qualified apprentices "in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry." The Treasury Department and the IRS believe that additional guidance explaining the "usual and customary" standard would be useful. The proposed regulations would require the taxpayer, contractor, or subcontractor to make a written request to at least one registered apprenticeship program that has a geographic area of operation that includes the location of the facility, or that can reasonably be expected to provide apprentices to the location of the facility, trains apprentices in the occupation(s) needed by the taxpayer, contractors, or subcontractors performing construction, alteration, or repair with respect to the facility, and has a usual and customary business practice of entering into agreements with employers for the placement of apprentices in the occupation for which they are training, pursuant to its standards and requirements. The Treasury Department and the IRS anticipate that a taxpayer may need to submit a request to more than one apprenticeship program in order to meet the Good Faith Effort Exception based on the size of the project, the number of contractors or subcontractors and the anticipated number of labor hours for which apprentices are needed. Although it may be possible for a taxpayer to meet all of its Labor Hours Requirement from one apprenticeship program, it is likely that given the multiple occupations involved in the construction, alteration, or repair of a qualified facility, the taxpayer would need to request apprentices from more than one apprenticeship program in order to satisfy the Labor Hours Requirement and the Participation Requirement with respect to that facility. This is in part because a registered apprenticeship program typically trains apprentices in a single occupation, whereas more than one occupation may be needed to meet the Labor Hours Requirement and the Participation Requirement. A taxpayer, contractor, or subcontractor would be expected to estimate the number of apprentices needed and the occupations for which they are needed, and to submit its request for apprentices accordingly. The proposed regulations would require the written request to include information concerning the dates of employment, the occupation or classification needed, the location and type of work to be performed, the number of apprentices needed, the number of hours the apprentices will work, and the name and contact information of the person requesting the apprentices. The written request would also be required to include a statement that the request for apprentices is made with an intent to employ apprentices in the occupation for which they are being trained and in accordance with the requirements and standards of the registered apprenticeship program. The Good Faith Effort Exception's requirement to request qualified apprentices from a registered apprenticeship program would necessitate that the taxpayer ascertain its workforce needs to determine how many qualified apprentices it needs to employ in order to meet the Apprenticeship Requirements, identify registered apprenticeship programs in the occupations needed by the taxpayer and its contractors and subcontractors, and demonstrate capacity to employ apprentices in the occupations for which apprentices are requested. A denial of a request by a taxpayer, contractor, or subcontractor for a qualified apprentice would not automatically qualify the taxpayer for the Good Faith Effort Exception. The proposed regulations would require the taxpayer, contractor, or subcontractor to submit an additional request within 120 days of a previously denied request. The proposed regulations would also clarify that a denial of a request means that the registered apprenticeship program denied the request in its entirety. A registered apprenticeship program's response that it could partially fulfill the request in the occupation(s) for which it trains apprentices would not constitute a denial of the request with respect to the parts of the request that could be fulfilled. Under the proposed regulations, the Good Faith Effort Exception would be specific to the request for apprentices made by the taxpayer, contractor, or subcontractor, including the number of apprentice hours for which the request for apprentices has been made to a registered apprenticeship program. Thus, the Good Faith Effort Exception would apply to the specific portion of the request for apprentices that was denied or not responded to and would be subject to the requirement to submit an additional request after 120 days. The Treasury Department and the IRS request comments on this proposed approach. Consistent with section 45(b)(8)(D)(ii)(I), the proposed regulations would require that the request cannot have been denied because of a refusal of the taxpayer or any contractor or subcontractor to comply with the requirements and standards of the apprenticeship program. For example, if a registered apprenticeship program requires a requesting employer to enter into an agreement with the registered apprenticeship program, then a denial of the request because the employer refused to enter into the agreement would not be a valid denial for purposes of the Good Faith Effort Exception. Section 45(b)(8)(D)(ii) provides that taxpayers may also be deemed to satisfy the Good Faith Effort Exception if a registered apprenticeship program fails to respond to a request for a qualified apprentice. The proposed regulations explain that an acknowledgement of receipt by a registered apprenticeship program would constitute a response for purposes of section 45(b)(8)(D)(ii)(II), and a taxpayer would be unable to rely upon the Good Faith Effort Exception in such circumstances. The Treasury Department and the IRS understand that apprenticeship programs are not uniform across industries and localities, including the manner and processes by which apprentices may be requested and supplied for purposes of satisfying the Apprenticeship Requirements. The Treasury Department and the IRS also understand that in many cases employers are sponsors of registered apprenticeship programs and directly employ apprentices. In those instances, a taxpayer, contractor, or subcontractor would likely obtain apprentices to meet the labor hours and participation requirements through their own registered apprenticeship programs rather than requesting apprentices from other registered apprenticeship programs. In addition, the Treasury Department and the IRS are aware that the DOL's Office of Apprenticeship, as well as State apprenticeship agencies, routinely provide technical expertise on registered apprenticeship program matters, including identifying registered apprenticeship programs, and assisting employers seeking to register their own programs. 10 The Treasury Department and the IRS request comments on whether and how the proposed Good Faith Effort Exception might take into account a situation where a taxpayer contacts the DOL's Office of Apprenticeship or the appropriate State apprenticeship agency regarding their apprenticeship request, in addition to contacting a specific registered apprenticeship program or programs. The Treasury Department and the IRS also request comments on how the proposed Good Faith Effort Exception will align with current practices with respect to utilization of apprentices in the construction, alteration, or repair of facilities. In particular, the Treasury Department and the IRS request comments on the role of collective bargaining agreements, project labor agreements, and other agreements to satisfy the request for apprentices under the Good Faith Effort Exception. ******** 10 Information is available at https://www.apprenticeship.gov/about-us/apprenticeship-system. ******** 3. Opportunity to Cure If a taxpayer does not qualify for the Good Faith Effort Exception under section 45(b)(8)(D)(ii), section 45(b)(8)(D)(i)(II) provides that the taxpayer is not treated as failing to satisfy the requirements of section 45(b)(8)(A) and (C) if the taxpayer pays a penalty to the Secretary. The proposed regulations explain that, with respect to failures to satisfy the Labor Hours Requirement or the Participation Requirement, the amount of the penalty would be equal to $50 multiplied by the total labor hours for which the taxpayer failed to meet the Labor Hours Requirement and the Participation Requirement. The proposed regulations would provide that the total labor hours by which the taxpayer failed to meet the Labor Hours Requirement would be calculated by subtracting the total labor hours worked by all qualified apprentices consistent with the Ratio Requirement from the total labor hours that should have been worked by qualified apprentices under section 45(b)(8)(A)(ii) to satisfy the applicable percentage. Section 45(b)(8)(C) does not specify the number of hours that apprentices must work to satisfy the Participation Requirement. The proposed regulations would address this issue by providing that the number of labor hours that an apprentice was required to work for purposes of calculating the penalty for failing to satisfy the Participation Requirement would be equal to the total number of labor hours performed for the taxpayer, contractor, or subcontractor during construction, alteration, or repair of the facility divided by the total number of individuals employed by that taxpayer, contractor, or subcontractor who performed construction, alteration, or repair work on the facility. This calculation would be specific to the taxpayer, contractor, or subcontractor who failed to meet the Participation Requirement. For example, if the taxpayer failed to meet the Participation Requirement, then the penalty would be calculated with reference to the total number of labor hours performed only by those individuals who worked directly for the taxpayer, and would not include the labor hours worked by any individuals who worked directly for a contractor or subcontractor that satisfied the Participation Requirement. If the taxpayer failed to meet both the Labor Hours Requirement and the Participation Requirement, then the penalty would equal the sum of the penalty for the failure to meet the Labor Hours Requirement plus the penalty for failure to meet the Participation Requirement. If the failure to meet the Labor Hours Requirement or the Participation Requirement is determined to be the result of intentional disregard, then the amount of the penalty payment is enhanced tenfold - from $50 to $500 per labor hour. The proposed regulations would provide that failures to meet the Apprenticeship Requirements would be due to intentional disregard if they are knowing or willful, considering all relevant facts and circumstances. The proposed regulations would provide a non-exhaustive list of facts and circumstances that may be relevant to determining whether the failure was knowing or willful. The proposed regulations would also provide the penalty payment requirement for failures to meet the Labor Hours Requirement or the Participation Requirement would not apply if there is in place a project labor agreement that meets certain requirements. The proposed regulations also state that there would be a rebuttable presumption against a finding of intentional disregard if the taxpayer makes the penalty payments before receiving a notice of an examination with respect to the claim for the increased credit. The presumption of no intentional disregard is intended to incentivize taxpayers who initially fail to meet the Apprenticeship Requirements to make use of the cure provision promptly. Consistent with the correction and penalty payments under the Prevailing Wage Requirements, the hiring of qualified apprentices is a factor in the taxpayer's eligibility for the increased credit and therefore applicable to determining the credit. Additionally, although the Apprenticeship Requirements must be satisfied contemporaneously with the construction, alteration, or repair of the qualified facility and before the filing of the taxpayer's tax return, the obligation to meet the Apprenticeship Requirements is not binding on the eligible taxpayer until the earlier of: (i) the filing of the eligible taxpayer's return for the taxable year for which the specified credit portion is determined with respect to the eligible taxpayer, or (ii) the filing of the return of the transferee taxpayer for the year in which the specified credit portion is taken into account. As a result, the proposed regulations would provide that a penalty payment that is required to retain the increased credit because of the failure of the eligible taxpayer to satisfy the Apprenticeship Requirements would remain the responsibility of the eligible taxpayer following a transfer of a specified credit portion pursuant to section 6418. IV. Other Code Sections Applying PWA Provisions for Increased Credit and Deduction Amounts A. Section 30C Section 30C provides a credit for the cost of any qualified alternative fuel vehicle refueling property placed in service during the taxable year. For properties placed in service before January 1, 2023, the credit is equal to 30 percent. For properties placed in service after December 31, 2022, the credit is equal to 30 percent (6 percent for property of a character subject to depreciation). If a taxpayer satisfies the PWA requirements or the BOC Exception, then the credit determined under section 30C(a) for any qualified alternative fuel vehicle refueling property of a character subject to an allowance for depreciation that is part of such project is multiplied by five. To satisfy the Prevailing Wage Requirements under section 30C(g)(2)(A), a taxpayer must ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the construction of any qualified alternative fuel vehicle refueling property that is part of such project are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which the project is located. Section 30C(g)(2)(B) provides that rules similar to section 45(b)(7)(B) apply for purposes of the correction and penalty related to the failure to satisfy the Prevailing Wage Requirements. Section 30C(g)(3) provides that rules similar to section 45(b)(8) apply for purposes of the Apprenticeship Requirements. The proposed regulations would provide that if a taxpayer satisfies the PWA requirements, then the credit determined under section 30C(a) for any qualified alternative fuel vehicle refueling property of a character subject to an allowance for depreciation that is part of such project would be multiplied by five. B. Section 45L Section 45L provides a credit for a qualified new energy efficient home (qualified home) that is constructed by an eligible contractor and acquired by a person from that eligible contractor for use as a residence during the taxable year. Under section 45L(b)(2), a qualified home is a dwelling unit located in the United States, the construction of which is substantially completed after August 8, 2005, and that meets the energy saving requirements of section 45L(c). Under section 45L(b)(1), an eligible contractor is the person who constructed the qualified home, or in the case of a qualified home that is a manufactured home, the manufactured home producer of that home. For a qualified home acquired after December 31, 2022, and before January 1, 2033, that is part of a building eligible to participate in the Energy Star Multifamily New Construction Program and meets the energy saving requirements under section 45L(c)(1)(A), the credit is $500 ($2,500 if the taxpayer satisfies the Prevailing Wage Requirements). For a qualified home acquired after December 31, 2022, and before January 1, 2033, that is part of a building eligible to participate in the Energy Star Multifamily New Construction Program and meets the energy saving requirements under section 45L(c)(1)(B), the credit is $1,000 ($5,000 if the taxpayer satisfies the Prevailing Wage Requirements). To satisfy the Prevailing Wage Requirements under section 45L(g)(2)(A), a taxpayer must ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the construction of any qualified home described in section 45L(a)(2)(B) are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which the qualified home is located. Section 45L(g)(2)(B) provides that rules similar to section 45(b)(7)(B) apply for purposes of the correction and penalty related to the failure to satisfy the Prevailing Wage Requirements. There are no Apprenticeship Requirements with respect to section 45L. The proposed regulations would provide that if a taxpayer satisfies the Prevailing Wage Requirements, then for a qualified home that is part of a building eligible to participate in the Energy Star Multifamily New Construction Program acquired after December 31, 2022, and before January 1, 2033, the credit would be $2,500 if the qualified home meets the energy saving requirements under section 45L(c)(1)(A), and the credit would be $5,000 if the qualified home meets the energy saving requirements under section 45L(c)(1)(B). C. Section 45Q Section 45Q provides a credit for the capture and sequestration of qualified carbon oxide. The credit is the sum of the specified dollar amount, as provided by section 45Q(a) or (b), multiplied by the metric ton of each qualified carbon oxide specified under section 45Q(a). If a taxpayer satisfies the PWA requirements or the BOC Exception with respect to any qualified facility or any carbon capture equipment placed in service at that facility, then the credit determined under section 45Q(a) is multiplied by five. For carbon capture equipment that will be placed in service at a qualified facility, the construction of which begins on or after January 29, 2023, the section 45Q(a) credit is multiplied by five only if the PWA requirements are satisfied with respect to both the qualified facility and the carbon capture equipment. For carbon capture equipment, the construction of which begins on or after January 29, 2023, that will be placed in service at a qualified facility, the construction of which began before January 29, 2023, the PWA requirements apply only to the carbon capture equipment. To satisfy the Prevailing Wage Requirements under section 45Q(h)(3)(A), the attributable taxpayer described in section 45Q(f)(3)(A) and §1.45Q-1(h)(1) must ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in: (i) the construction of any qualified facility and any carbon capture equipment placed in service at that facility, and (ii) the alteration or repair of that facility or equipment (with respect to any taxable year, for any portion of such taxable year that is within the 12-year period beginning on the date the facility or equipment is originally placed in service), are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which that facility and equipment are located. Section 45Q(h)(3)(B) provides that rules similar to section 45(b)(7)(B) apply for purposes of the correction and penalty related to the failure to satisfy the Prevailing Wage Requirements. Section 45Q(h)(4) provides that rules similar to section 45(b)(8) apply for purposes of the Apprenticeship Requirements. The proposed regulations would provide rules based on the statutory rules. D. Section 45U Section 45U provides a credit for electricity produced by the taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year. Generally, for taxable years beginning after December 31, 2023, the credit is equal to the amount by which the product of 0.3 cents multiplied by the kilowatt hours of electricity produced by the taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year, exceeds the applicable "reduction amount" for such taxable year that is determined under section 45U(b)(2). If a taxpayer satisfies the Prevailing Wage Requirements, then the credit determined under section 45U(a) for a qualified nuclear power facility is multiplied by five. To satisfy the Prevailing Wage Requirements under section 45U(d)(2)(A), a taxpayer must ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the alteration or repair of any qualified nuclear power facility are paid wages at rates not less than the prevailing rates for alteration or repair of a similar character in the locality in which that facility is located. Section 45U(d)(2)(B) provides that rules similar to section 45(b)(7)(B) apply for purposes of the correction and penalty related to the failure to satisfy the Prevailing Wage Requirements. There are no Apprenticeship Requirements with respect to section 45U. The proposed regulations would provide that if a taxpayer satisfies the Prevailing Wage Requirements, then the credit determined under section 45U(a) for any qualified nuclear power facility would be multiplied by five. E. Section 45V Section 45V provides a credit for the production of qualified clean hydrogen by the taxpayer during the taxable year at a qualified clean hydrogen production facility during the 10-year period beginning on the date the facility was originally placed in service. In general, for hydrogen produced after December 31, 2022, the credit is the product of the kilograms of qualified clean hydrogen produced multiplied by the applicable amount. The applicable amount is equal to the applicable percentage of $0.60, which is determined under section 45V(b)(2). If a taxpayer satisfies either the PWA requirements, or the BOC Exception and the Prevailing Wage Requirements for alterations or repairs occurring after January 29, 2023, then the credit amount determined under section 45V(a) for any qualified clean hydrogen produced by the taxpayer during the taxable year at a qualified clean hydrogen production facility is multiplied by five. A taxpayer must satisfy the Prevailing Wage Requirements with respect to an alteration or repair that occurs after January 29, 2023, notwithstanding the BOC Exception regarding the construction of that qualified facility. To satisfy the Prevailing Wage Requirements under section 45V(e)(3)(A), a taxpayer must ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in: (i) the construction of any qualified clean hydrogen production facility, and (ii) the alteration or repair of that facility (with respect to any taxable year, for any portion of such taxable year that is within the 10-year credit period beginning on the date that the facility was originally placed in service), 11 are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which that facility is located. Section 45V(e)(3)(B) provides that rules similar to section 45(b)(7)(B) apply for purposes of the correction and penalty related to the failure to satisfy the Prevailing Wage Requirements. Section 45V(e)(4) provides that rules similar to section 45(b)(8) apply for purposes of the Apprenticeship Requirements. ******** 11 Section 45V(e)(3)(A)(ii) requires the payment of wages at prevailing rates "with respect to any taxable year, for any portion of such taxable year which is within the period described in subsection (a)(2)", with respect to the alteration or repair of such facility. There is no "period described in subsection (a)(2)." The Treasury Department and the IRS propose to interpret the reference to "subsection (a)(2)" as a reference to section 45V(a)(1) where the 10-year credit period is identified, and the proposed regulations would apply to the period described in section 45V(a)(1). ******** The proposed regulations would provide that if a taxpayer satisfies either the PWA requirements, or the BOC Exception and the Prevailing Wage Requirements for alterations or repairs occurring after January 29, 2023, then the credit amount determined under section 45V(a) for any qualified clean hydrogen produced by the taxpayer during the taxable year at a qualified clean hydrogen production facility would be multiplied by five. F. Section 45Y Section 45Y provides a credit for clean electricity produced by the taxpayer at a qualified facility and sold to an unrelated person, or in the case of a qualified facility which is equipped with a metering device which is owned and operated by an unrelated person, sold, consumed, or stored by the taxpayer during the taxable year, for facilities placed in service after December 31, 2024. Generally, the credit for any taxable year is the product of the kilowatt hours of electricity multiplied by 0.3 cents. If a taxpayer satisfies the PWA requirements, the One Megawatt Exception, or the BOC Exception, then the applicable amount under section 45Y(a)(2) equals 1.5 cents. Section 45Y(g)(9) provides that rules similar to section 45(b)(7) apply for purposes of the Prevailing Wage Requirements. Section 45Y(g)(10) provides that rules similar to section 45(b)(8) apply for purposes of the Apprenticeship Requirements. The proposed regulations would provide that if a taxpayer satisfies the PWA requirements, then the applicable amount under section 45Y(a)(2) would equal 1.5 cents. G. Section 45Z Section 45Z provides a credit for clean transportation fuel produced by the taxpayer at a qualified facility after December 31, 2024, and sold to an unrelated person in a manner described in section 45Z(a)(4). Generally, the credit is the product of the applicable amount (determined under section 45Z(a)(2)) per gallon(s) of transportation fuel multiplied by the emission factor for the fuel (determined under section 45Z(b)). If a taxpayer satisfies the PWA requirements (modified for qualified facilities placed in service before January 1, 2025), then the applicable amount determined under section 45Z(a)(2)(B) is $1.00, otherwise the applicable amount is 20 cents. In general, section 45Z(f)(6)(A) provides that rules similar to section 45(b)(7) apply for purposes of the Prevailing Wage Requirements. However, section 45Z(f)(6)(B) provides a special rule for qualified facilities placed in service before January 1, 2025. Under section 45Z(f)(6)(B), the Prevailing Wage Requirements do not apply with respect to construction of that facility but do apply to the alteration or repair of that facility with respect to any taxable year beginning after December 31, 2024, for which the section 45Z credit is allowed with respect to that facility. Section 45Z(f)(7) provides that rules similar to section 45(b)(8) apply for purposes of the Apprenticeship Requirements. The proposed regulations would provide that if a taxpayer satisfies the PWA requirements, then the applicable amount determined under section 45Z(a)(2)(B) would equal $1.00. H. Section 48 Section 48 provides a credit for an energy property placed in service during a taxable year. For properties placed in service after December 31, 2022, the credit is generally six percent of the basis of property described in section 48(a)(2)(A)(i) and two percent of the basis of property described in section 48(a)(2)(A)(ii). If a taxpayer satisfies the PWA requirements, the One Megawatt Exception, or the BOC Exception, then the credit determined under section 48(a) for the basis of each energy property placed in service during the taxable year is multiplied by five. To satisfy the Prevailing Wage Requirements under section 48(a)(10)(A), a taxpayer must ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in: (i) the construction of any energy project, and (ii) the alteration or repair of that energy project (for the five-year period beginning on the date such project is originally placed in service), are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which that energy project is located. Section 48(a)(10)(B) provides that rules similar to section 45(b)(7)(B) apply for purposes of the correction and penalty related to the failure to satisfy the Prevailing Wage Requirements. Section 48(a)(10)(C) provides a special recapture rule with respect to alterations or repairs that occur during the five-year period after the energy project is placed in service if that taxpayer does not satisfy the Prevailing Wage Requirements. In general, the section 48(a)(10)(C) recapture is determined under similar rules to those provided for in section 50. Subject to the section 48(a)(10)(C) recapture, the taxpayer is deemed at the time the qualified energy project is placed in service to satisfy the Prevailing Wage Requirements for alterations or repairs for the five-year period beginning after such project is originally placed in service. Section 48(a)(11) provides that rules similar to section 45(b)(8) apply for purposes of the Apprenticeship Requirements. The proposed regulations would provide that if a taxpayer satisfies the PWA requirements, then the credit determined under section 48 for any qualified energy project would be multiplied by five. I. Section 48C Section 48C provides a credit for a qualified investment in a qualifying advanced energy project for that taxable year (Section 48C Credit). The IRA added section 48C(e) to the Code, extending the Section 48C Credit to provide an additional Section 48C Credit allocation of $10 billion. Generally, the credit amount for Section 48C Credits allocated pursuant to section 48C(e) is equal to six percent of the basis of the eligible property. If a taxpayer satisfies the PWA requirements, then the credit amount determined under section 48C(a) is 30 percent. To satisfy the Prevailing Wage Requirements under section 48C(e)(5)(A), a taxpayer must ensure that with respect to a qualifying advanced energy project, any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the re-equipping, expansion, or establishment of a manufacturing facility are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which the project is located. Section 48C(e)(5)(B) provides that rules similar to section 45(b)(7)(B) apply for purposes of the correction and penalty related to the failure to satisfy the Prevailing Wage Requirements. Section 48C(e)(6) provides that rules similar to section 45(b)(8) apply for purposes of the Apprenticeship Requirements. The Treasury Department and the IRS issued Notice 2023-18, 2023-10 I.R.B. 508, and Notice 2023-44, 2023-25 I.R.B. 924, to provide guidance under section 48C(e). These notices provide a process for the IRS to allocate Section 48C Credits. To prevent an overallocation of Section 48C Credits, section 5.07 of Notice 2023-18 requires a taxpayer that applies for a Section 48C Credit allocation at the 30 percent credit amount to confirm that the taxpayer intends to satisfy the PWA requirements. Section 5.07 of Notice 2023-18 additionally requires that when the taxpayer provides notification that it placed the project in service, the taxpayer must also confirm that it satisfied the PWA requirements. The proposed regulations would provide that if a taxpayer satisfies both the PWA requirements and the PWA confirmation requirements provided in Notice 2023-18 (or any subsequent guidance), then the credit amount for Section 48C Credits allocated pursuant to section 48C(e) would be equal to 30 percent. J. Section 48E Section 48E provides a clean electricity investment credit for the investment in qualified facilities and energy storage technology placed in service for the taxable year after December 31, 2024. The credit is generally six percent of the qualified investment. If a taxpayer satisfies the PWA requirements, the One Megawatt Exception, or the BOC Exception, then the credit amount determined under section 48E(a) for a qualified investment is 30 percent. Section 48E(d)(3) provides that rules similar to section 48(a)(10) apply for purposes of the Prevailing Wage Requirements. Section 48E(d)(4) provides that rules similar to section 45(b)(8) apply for purposes of the Apprenticeship Requirements. The proposed regulations would provide that if a taxpayer satisfies the PWA requirements, then the credit amount determined under section 48E(a) for a qualified investment would be equal to 30 percent. K. Section 179D Section 179D(a) provides a deduction for the cost of energy efficient commercial building property placed in service during the taxable year. Section 179D(f) provides an alternative deduction for energy efficient building retrofit property (alternative deduction). For taxable years beginning after December 31, 2022, section 179D(b) provides that the deduction cannot exceed the excess (if any) of the product of the applicable dollar value, and the square footage of the building, over the aggregate amount of deductions under section 179D(a) and section 179D(f) with respect to the building for the three taxable years immediately preceding the taxable year (or for any taxable year ending during the four-taxable-year period ending with such taxable year, if the deduction is allowed to a person other than the taxpayer). The alternative deduction is an amount equal to the lesser of the "excess" described in section 179D(b) (determined by substituting "energy use intensity" for "total annual energy and power costs") or the aggregate adjusted basis (determined after taking into account all adjustments with respect to the taxable year other than the reduction under section 179D(e)) of energy efficient building retrofit property placed in service by the taxpayer pursuant to a qualified retrofit plan. The applicable dollar value is $0.50 increased by $0.02 (but not above $1.00) for each percentage point by which the total annual energy and power costs (or energy use intensity, in the case of the alternative deduction) for the building are certified to be reduced by a percentage greater than 25 percent. If a taxpayer satisfies the PWA requirements or the beginning of installation exception, then the applicable dollar value of the deduction determined under section 179D(b)(2) is $2.50 increased by $0.10 (but not above $5.00). To satisfy the Prevailing Wage Requirements under section 179D(b)(4)(A), a taxpayer must ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the installation of any property are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which the property is located. Section 179D(b)(4)(B) provides that rules similar to section 45(b)(7)(B) apply for purposes of the correction and penalty related to the failure to satisfy the Prevailing Wage Requirements. Section 179D(b)(5) provides that rules similar to section 45(b)(8) apply for purposes of the Apprenticeship Requirements. The proposed regulations would provide that if a taxpayer satisfies the PWA requirements, then the applicable dollar value of the deduction determined under section 179D(b)(2) would be $2.50 increased by $0.10 (but not above $5.00). V. Recordkeeping Requirements A. In general Section 45(b)(12) authorizes the Secretary to issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of section 45(b), including regulations or other guidance that provide requirements for recordkeeping or information reporting for purposes of administering the requirements of section 45(b). Section 6001 provides that every person liable for any tax imposed by the Code, or for the collection thereof, must keep such records as the Secretary may from time to time prescribe. Section 1.6001-1(a) provides that any person subject to income tax must keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax. Section 1.6001-1(e) provides that the books and records required by §1.6001-1 must be retained so long as the contents thereof may become material in the administration of any Internal Revenue law. B. Recordkeeping with respect to Prevailing Wage Requirements The Copeland Act requires contractors and subcontractors subject to the DBA to submit certified weekly payroll records reflective of work performed on a covered contract to the contracting agency. This requirement to comply with the DBA is statutory and inherent in the award of a contract and the submission of weekly payroll records becomes part of the terms of the awarded contract. In contrast, under section 45(b)(7)(A), although the requirement to pay prevailing wages is triggered by the beginning of construction and continues over the entire course of a project, the requirement to pay prevailing wages becomes binding only when a tax return claiming the increased credit is filed. Thus, because the increased credit is not claimed until the time of filing a return, which will only occur after a qualified facility is placed in service, the proposed regulations would not adopt the Copeland Act requirement to report payroll records to the IRS on a weekly basis in advance of claiming an increased credit. The Treasury Department and the IRS understand that adoption of the Copeland Act reporting regime for purposes of section 45(b)(7)(A) would not assist the IRS with administering the provision. Instead, the proposed regulations would provide that taxpayers would be required to establish compliance with the Prevailing Wage Requirements at the time a return claiming the increased credit is filed. The proposed regulations would provide that a taxpayer would be required to do so on such forms and in such manner as the Commissioner provides in IRS forms, publications, or other guidance. The Treasury Department and the IRS expect that taxpayers will be required to report at the time of filing a return the following information: (i) the location and type of qualified facility; (ii) the applicable wage determinations for the type and location of the facility; (iii) the wages paid (including any correction payments) and hours worked for each of the laborer or mechanic classifications engaged in the construction, alteration, or repair of the facility; (iv) the number of workers who received correction payments; (v) the wages paid and hours worked by qualified apprentices for each of the laborer or mechanic classifications engaged in the construction, alteration, or repair of the facility; (vi) the total labor hours for the construction, alteration, or repair of the facility by any laborer or mechanic employed by the taxpayer or any contractor or subcontractor; and (vii) the total credit claimed. The DBA has comprehensive recordkeeping requirements that assist the DOL in its oversight of Prevailing Wage Requirements. The DBA recordkeeping regime is consistent with what the IRS would ordinarily expect taxpayers to preserve to be able to substantiate that the Prevailing Wage Requirements have been satisfied. The proposed regulations would impose recordkeeping requirements that are generally consistent with the recordkeeping requirements under the DBA regime for purposes of the Prevailing Wage Requirements. The proposed regulations would require taxpayers to maintain and preserve sufficient records to establish compliance with the requirement that all laborers and mechanics were paid wages at rates not less than the applicable prevailing rates. Records sufficient to establish compliance would include payroll records that reflect the hours worked in each classification and the wages paid to each laborer and mechanic performing construction, alteration, or repair work on the facility (including any correction payments made to each laborer and mechanic). The Treasury Department and the IRS expect that most taxpayers will use contractors and subcontractors in the construction, alteration, or repair of facilities and that construction may occur for several years before a facility is placed in service. The proposed regulations would provide that it would be the responsibility of the taxpayer to maintain payroll records that reflect the wages paid to labors and mechanics engaged in the construction, alteration, or repair of the qualified facility, regardless of whether the laborers and mechanics are employed by the taxpayer, a contractor, or a subcontractor. The proposed regulations would also impose recordkeeping requirements related to correction and penalty payments. The proposed regulations include a non-exhaustive list of facts and circumstances that would be relevant to the IRS in determining whether a failure to meet the Prevailing Wage Requirements was due to intentional disregard. To demonstrate that a failure was not due to intentional disregard, taxpayers would need to maintain and preserve records sufficient to document the failure and the actions they took to prevent, mitigate, or remedy the failure (for example, records demonstrating that the taxpayer regularly reviewed payroll practices, included requirements to pay prevailing wages in contracts with contractors, and posted prevailing wage rates in a prominent place on the job site). The proposed regulations would also waive penalties for certain limited failures. To the extent taxpayers intend to rely on these penalty waiver provisions, they would need to maintain records sufficient to demonstrate when a failure occurred and proof that the taxpayer made the required correction payment. C. Recordkeeping with respect to Apprenticeship Requirements The proposed regulations would require taxpayers subject to the Apprenticeship Requirements to maintain sufficient records to establish compliance with the Labor Hours Requirement, Ratio Requirement, and Participation Requirement. Records sufficient to establish compliance with the Apprenticeship Requirements include copies of any written requests for apprentices by the taxpayer, contractor, or subcontractor, any agreement entered by the taxpayer, contractor, or subcontractor with a registered apprenticeship program, documents reflecting any registered apprenticeship program sponsored by the taxpayer, contractor, or subcontractor, documents verifying participation in a registered apprenticeship program by each apprentice, records reflecting the required ratio of apprentices to journeyworkers prescribed by each registered apprenticeship program from which qualified apprentices are employed, records reflecting the daily ratio of apprentices to journeyworkers, and the payroll records for any work performed by apprentices. The proposed regulations provide that it would be the responsibility of the taxpayer to maintain the relevant records for each apprentice engaged in the construction, alteration, or repair on the qualified facility, regardless of whether the apprentice is employed by the taxpayer, a contractor, or a subcontractor. D. Recordkeeping for credits transferred under section 6418 Because an eligible taxpayer determines any increased credit amount applicable to the prevailing wage and apprenticeship requirements, the general recordkeeping requirements under these proposed regulations would remain with an eligible taxpayer who transfers a specified credit portion that includes an increased credit amount. The increased credit amount that is determined by an eligible taxpayer would be reported on the applicable forms on the return of the eligible taxpayer. The minimum required documentation to be provided to the transferee taxpayer is a separate requirement under the 6418 Proposed Regulations that does not impact the requirements in these proposed regulations. VI. Effect on Other Documents The provisions of sections 3 and 4 of Notice 2022-61 would be obsoleted for facilities, property, projects, or equipment the construction, or installation of which begins after the date the Treasury Decision adopting these regulations as final regulations is published in the Federal Register. The proposed regulations would not otherwise affect Notice 2022-61. VII. Proposed Applicability Date These regulations are proposed to apply to facilities, property, projects, or equipment placed in service in taxable years ending after the date these regulations are published as final in the Federal Register and the construction or installation of which begins after the date these regulations are published as final regulations in the Federal Register. However, taxpayers may rely on these proposed regulations with respect to construction or installation of a facility, property, project, or equipment beginning on or after January 29, 2023, and on or before the date these regulations are published as final regulations in the Federal Register, provided, that beginning after the date that is 60 days after August 29, 2023, taxpayers follow the proposed regulations in their entirety and in a consistent manner. Special Analyses I. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) generally requires that a federal agency obtain the approval of the Office of Management and Budget (OMB) before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. The collections of information in these proposed regulations would include reporting, recordkeeping, and third-party disclosure requirements. These collections are required for purposes of claiming an increased credit or deduction amount; and are necessary for the IRS to validate that taxpayers have met the regulatory requirements and are entitled to claim the increased credit amounts. The likely respondents are individual, business, trust and estate filers, and tax-exempt organizations. The proposed regulations would set forth procedures for requesting supplemental wage determinations and wage rates for additional classifications from the DOL. This collection is approved by OMB under the DOL's Control Number 1235-0034. This IRS proposed regulation does not alter any of the DOL collections approved under this control number. The proposed regulations would include requirements to keep records sufficient to demonstrate that PWA requirements have been met as detailed in §1.45-12. For purposes of the PRA, the recordkeeping requirements of §1.45-12 are considered general tax records. These general tax records are approved annually under 1545-0074 for individuals/sole proprietors, 1545-0123 for business entities, and 1545-0047 for tax-exempt organizations. IRS will seek OMB approval under a new OMB Control Number (1545-NEW) for the burden for trust and estate filers. The proposed regulations would include reporting requirements that taxpayers provide a statement with the tax return that claims an increased credit or deduction amount that includes aggregate information as detailed in §1.45-12. The Secretary may issue forms and instructions in future guidance for the purpose of meeting these reporting requirements. These reporting requirements will be covered under 1545-0074 for individuals/sole proprietors, 1545-0123 for business entities. IRS will solicit public comments on this requirement and the associated burden for trusts and estates filers as reflected below; and will seek OMB approval under a new OMB Control Number (1545-NEW) for trust and estate filers. The proposed regulations would include third-party disclosures that include notifying laborers and mechanics of the applicable prevailing wage rates as detailed in §1.45-7. The proposed regulations would also include third-party disclosures for taxpayers requesting the dispatch of apprentices from a registered apprenticeship program as detailed in §1.45-8. IRS will solicit public comment on this requirement and associated burden for all filers reflected below; and will seek OMB approval under a new OMB Control Number (1545-NEW) for all filers for the disclosure requirement. The collections of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act. Commenters are strongly encouraged to submit public comments electronically. Written comments and recommendations for the proposed information collection should be sent to https://www.reginfo.gov/public/do/PRAMain, with copies to the Internal Revenue Service. Find this particular information collection by selecting " Currently under Review - Open for Public Comments " then by using the search function. Submit electronic submissions for the proposed information collection to the IRS via email at pra.comments@irs.gov (indicate REG-100908-23 on the Subject line). Comments on the collection of information should be received by October 30, 2023. Comments are specifically requested concerning: Whether the proposed collection of information is necessary for the proper performance of the functions of the IRS, including whether the information will have practical utility. The accuracy of the estimated burden associated with the proposed collection of information. How the quality, utility, and clarity of the information to be collected may be enhanced. How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information. The IRS estimates that 70 trust and estates may claim the increased credit and that it could take approximately 40 hours to compile the data needed for the statement attached to their return. Estimated total annual reporting and recordkeeping burden for trusts and estates filers: 2,800 hours. Estimated average annual burden per respondent: 40 hours. Estimated number of respondents: 70. Estimated frequency of responses: Annual. The IRS estimates that 70,000 filers may claim the increased credit and that it could take approximately two hours to display the prevailing wage rates and to request the dispatch of apprentices. Estimated total annual third-party disclosure burden for all other filers: 140,000 hours. Estimated average annual burden per respondent: Two hours. Estimated number of respondents: 70,000. Estimated frequency of responses: Once. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget. II. Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) (RFA) imposes certain requirements with respect to Federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq. ) and that are likely to have a significant economic impact on a substantial number of small entities. Unless an agency determines that a proposal is not likely to have a significant economic impact on a substantial number of small entities, section 603 of the RFA requires the agency to present an initial regulatory flexibility analysis (IRFA) of the proposed rule. The Treasury Department and the IRS have not determined whether the proposed rule, when finalized, will likely have a significant economic impact on a substantial number of small entities. This determination requires further study. However, because there is a possibility of significant economic impact on a substantial number of small entities, an IRFA is provided in these proposed regulations. The Treasury Department and the IRS invite comments on both the number of entities affected and the economic impact on small entities. Pursuant to section 7805(f), this notice of proposed rulemaking has been submitted to the Chief Counsel of Advocacy of the Small Business Administration for comment on its impact on small business. A. Need for and objectives of the rule The proposed regulations would provide guidance to taxpayers intending to satisfy the PWA requirements to qualify for an increased credit or deduction under sections 30C, 45, 45Q, 45V, 45Y, 45Z, 48, 48C, 48E, and 179D and for those taxpayers intending to satisfy the Prevailing Wage Requirements to qualify for the increased credit under sections 45L and 45U. The proposed regulations would provide needed guidance for taxpayers on the use of wage determinations issued by the DOL, on the time and manner for reporting compliance with the PWA requirements, as well as needed definitions. The proposed regulations would also provide guidance concerning correction and penalty payments that can be made by taxpayers who initially fail to satisfy the PWA requirements in order to qualify for the increased credit and deduction amounts. The Treasury Department and the IRS intend and expect that the increased credit amount of five times the base credit for taxpayers that ensure the payment of paying prevailing wages and hiring apprentices in the construction, alteration, or repair of qualified facilities provides financial incentives that will beneficially impact various industries involved in the production of and investment in clean energy. These proposed regulations would provide clarifying guidance that will assist taxpayers seeking to comply with the statutory prevailing wage and apprenticeship requirements in order to take advantage of the financial incentives. The Treasury Department and IRS expect that the increased credit amounts available to taxpayers as financial incentives will exceed the costs of the additional recordkeeping and reporting obligations that would be imposed on taxpayers by these proposed regulations. The Treasury Department and the IRS also expect the financial incentives for taxpayers to ensure payment of prevailing wage rates and using apprentices will deliver benefits across the economy by creating increased opportunities for contractors and subcontractors as well as laborers and mechanics to become involved in clean energy production. Allowing these increased credits and an increased deduction for taxpayers who satisfy prevailing wage and apprenticeship requirements will incentivize expansion of clean energy resources and will reduce economy wide greenhouse gas emissions. B. Affected small entities The RFA directs agencies to provide a description of, and where feasible, an estimate of, the number of small entities that may be affected by the proposed rules, if adopted. The Small Business Administration's Office of Advocacy estimates in its 2023 Frequently Asked Questions that 99.9 percent of American businesses meet its definition of a small business. The applicability of these proposed regulations does not depend on the size of the business, as defined by the Small Business Administration. As described more fully in the preamble to this proposed regulation and in this IRFA, section 45 and these proposed regulations may affect a variety of different entities across several different green energy industries as there are 12 different credits with increased credit amount provisions. Although there is uncertainty as to the exact number of small businesses within this group, the current estimated number of respondents to these proposed rules is 70,000 taxpayers as described in the Paperwork Reduction Act section of the preamble. The Treasury Department and the IRS expect to receive more information on the impact on small businesses through comments on this proposed rule. C. Impact of the rules The proposed regulations provide rules for how taxpayers can satisfy the PWA requirements in order to seek the increased credits under section 45 as well as the increased credit or deduction available under sections 30C, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, 48E, and 179D. Taxpayers that seek to claim the increased credit or deduction will have administrative costs related to reading and understanding these proposed rules, as well as increased costs for the recordkeeping and reporting requirements necessary to establish compliance with the PWA requirements. The costs will vary across different-sized taxpayers and across the type of facilities and projects in which such taxpayers are engaged. The Prevailing Wage Requirements would require the taxpayer to obtain the published wage determination issued by the DOL for the county in which the facility is located. To the extent a wage determination does not include a required classification, or if no wage determination has been published, the taxpayer would be required to contact the DOL to obtain a supplemental wage determination or a wage rate for an additional classification. The taxpayer would be required to ensure that any contractor or subcontractor that works on the construction, alteration, or repair of a facility has paid hourly wages in accordance with the wage determination for each classification required to complete such work. In order to be eligible for certain proposed cure provisions, the taxpayer would be required to know or be able to determine whether the laborers and mechanics employed for construction, alteration, or repair of the facility were paid in accordance with the applicable wage determination. Additionally, the taxpayer would be required to retain records sufficient to establish compliance with these proposed regulations for as long as may be relevant. The Treasury Department and the IRS expect that some of the recordkeeping that would be required under these proposed rules will be consistent with recordkeeping requirements already imposed under the DBA and the Fair Labor Standards Act, 29 U.S.C. 201 et seq. For the Apprenticeship Requirements, the taxpayer, contractor, and subcontractor, would be required to contact a registered apprenticeship program for purposes of requesting the dispatch of qualified apprentices to work on the construction, alteration, or repair of the facility. Whether or not the registered apprenticeship program dispatches apprentices, the taxpayer would be required to retain records to establish compliance with these proposed regulations for as long as may be relevant. The taxpayer claiming the increased credit would be required to report the payment of prevailing wages and the utilization of apprentices consistent with the forms and instructions of the IRS. Although the Treasury Department and the IRS do not have sufficient data to determine precisely the likely extent of the increased costs of compliance, the estimated burden of complying with the recordkeeping and reporting requirements are described in the Paperwork Reduction Act section of the preamble. D. Alternatives considered The Treasury Department and the IRS considered alternatives to the proposed regulations. The proposed regulations were designed to minimize burdens for taxpayers while ensuring that laborers and mechanics are paid the applicable wage rates and that the IRS has sufficient information to administer the increased credits and deduction provisions. The proposed regulations would not adopt the DBA requirement of submitting weekly certified payroll records to the IRS. The Treasury Department and IRS determined that submission of weekly payroll records to the IRS by taxpayers would not assist the IRS with the efficient administration of the increased credit provisions. The Treasury Department and the IRS also considered a requirement that taxpayers submit payroll records for all laborers and mechanics at the time of filing a return that claims an increased credit. The Treasury Department and the IRS determined that per laborer and per mechanic payroll records would not provide the IRS with useful information and would also involve substantial burdens for taxpayers to report such information. Comments are requested on the requirements in the proposed regulations, including specifically, whether there are less burdensome alternatives that ensure the IRS has sufficient information to administer the increased credit claimed under section 45 as well as the increased credit and deduction amounts that are claimed under sections 30C, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, 48E, and 179D. E. Duplicative, overlapping, or conflicting Federal rules For energy facilities built under contracts with the Federal Government, or with Federal financial or other assistance provided under a Davis-Bacon Related Act, the proposed regulations may overlap with the rules under the DBA, 29 CFR parts 1, 5, and 7. In all other instances, the proposed regulations would not duplicate, overlap, or conflict with any relevant Federal rules. The Treasury Department and the IRS invite input from interested members of the public about identifying and avoiding overlapping, duplicative, or conflicting requirements. III. Section 7805(f) Pursuant to section 7805(f), 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. IV. 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. V. 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. VI. Executive Order 13175: Consultation and Coordination With Indian Tribal Governments Executive Order 13175 (Consultation and Coordination With Indian Tribal Governments) prohibits an agency from publishing any rule that has Tribal implications if the rule either imposes substantial, direct compliance costs on Indian Tribal governments, and is not required by statute, or preempts Tribal law, unless the agency meets the consultation and funding requirements of section 5 of the Executive order. The Treasury Department and the IRS will hold a consultation with Tribal leaders related to the prevailing wage and apprenticeship requirements in these proposed regulations, which will inform the development of the final regulations. VII. 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. 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 in the preamble 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 November 21, 2023, beginning at 10 a.m. ET, in the Auditorium at the Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. Due to 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 may alternatively attend the public hearing by telephone. The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit an outline of the topics to be discussed and the time to be devoted to each topic by October 30, 2023. A period of 10 minutes will be allotted 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 available free of charge at the hearing. If no outline of the topics to be discussed at the hearing is received by October 30, 2023, 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 REG-100908-23 and the language TESTIFY in Person. For example, the subject line may say: Request to TESTIFY in Person at Hearing for REG-100908-23. 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-100908-23 and the language TESTIFY Telephonically. For example, the subject line may say: Request to TESTIFY Telephonically at Hearing for REG-100908-23. Individuals who want to attend the public hearing in person without testifying must also 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 REG-100908-23 and the language ATTEND In Person. For example, the subject line may say: Request to ATTEND Hearing in Person for REG-100908-23. Requests to attend the public hearing must be received by 5:00 p.m. EST on November 17, 2023. Hearings will be made accessible to people with disabilities. To request special assistance during a hearing please contact the Publications and Regulations Branch of the Office of Associate Chief Counsel (Procedure and Administration) by sending an email to publichearings@irs.gov (preferred) or by telephone at (202) 317-6901 (not a toll-free number) by at least November 15, 2023. 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 the Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the Treasury Department and the IRS participated in the development of the proposed 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: PART 1--INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding entries for §§1.30C-3, 1.45-6 through 1.45-8, 1.45-12, 1.45L-3, 1.45Q-6, 1.45U-3, 1.45V-3, 1.45Y-3, 1.45Z-3, 1.48-13, and 1.179D-3 in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.30C-3 also issued under 26 U.S.C. 30. * * * * * Section 1.45-6 also issued under 26 U.S.C. 45. Section 1.45-7 also issued under 26 U.S.C. 45. Section 1.45-8 also issued under 26 U.S.C. 45. Section 1.45-12 also issued under 26 U.S.C. 45. * * * * * Section 1.45L-3 also issued under 26 U.S.C. 45L. * * * * * Section 1.45Q-6 also issued under 26 U.S.C. 45Q. Section 1.45U-3 also issued under 26 U.S.C. 45U. Section 1.45V-3 also issued under 26 U.S.C. 45V. Section 1.45Y-3 also issued under 26 U.S.C. 45Y. Section 1.45Z-3 also issued under 26 U.S.C. 45Z. * * * * * Section 1.48-13 also issued under 26 U.S.C. 48. * * * * * Section 1.179D-3 also issued under 26 U.S.C. 179D. * * * * * Par. 2. Sections 1.30C-1 through 1.30C-3 are added to read as follows: §§1.30C-1 - 1.30C-2 [Reserved] §1.30C-3 Rules relating to the increased credit amount for prevailing wage and apprenticeship. (a) In general. If any qualified alternative fuel vehicle refueling project placed in service during the taxable year satisfies the requirements in paragraph (b) of this section, the credit determined under section 30C(a) for any qualified alternative fuel vehicle refueling property of a character subject to an allowance for depreciation that is part of such project is multiplied by five. (b) Qualified project requirements. A qualified alternative fuel vehicle refueling project satisfies the requirements of this paragraph (b) if it is one of the following-- (1) A project the construction of which began prior to January 29, 2023; or (2) A project that meets the prevailing wage requirements of section 45(b)(7) and §1.45-7, the apprenticeship requirements of section 45(b)(8) and §1.45-8, and the recordkeeping and reporting requirements of §1.45-12. (c) Applicability date. This section applies to projects placed in service in taxable years ending after [date final rule publishes in the Federal Register ], and the construction of which begins after [date final rule publishes in the Federal Register ]. Par. 3. Sections 1.45-0 through 1.45-12 are added to read as follows: Sec. * * * * * 1.45-0 Table of contents. 1.45-1 - 1.45-5 [Reserved] 1.45-6 Increased credit amount. 1.45-7 Prevailing wage requirements. 1.45-8 Apprenticeship requirements. 1.45-9 - 1.45.11 [Reserved] 1.45-12 Recordkeeping and reporting. * * * * * §1.45-0 Table of contents. This section lists the table of contents for §§1.45-1 through 1.45-12. §§1.45-1 - 1.45-5 [Reserved] §1.45-6 Increased credit amount. (a) In general. (b) Qualified facility requirements. (c) Definition of nameplate capacity for purposes of determining maximum net output under section 45(b)(6)(B)(i). (d) Applicability date. §1.45-7 Prevailing wage requirements. (a) In general. (b) Wage determinations. (c) Curing a failure to satisfy the prevailing wage requirements. (d) Definitions. (e) Applicability date. §1.45-8 Apprenticeship requirements. (a) In general. (b) Labor hours requirement. (c) Application of apprentice-to-journeyworker ratio. (d) Participation requirement. (e) Exceptions to the Apprenticeship Requirements. (f) Definitions. (g) Applicability date. §§ 1.45-9 - 1.45-11 [Reserved] §1.45-12 Recordkeeping and reporting. (a) In general. (b) Recordkeeping for prevailing wage and apprenticeship requirements. (c) Recordkeeping for prevailing wage requirements. (d) Recordkeeping for apprenticeship requirements. (e) Applicability date. §§1.45-1 - 1.45-5 [Reserved] §1.45-6 Increased credit amount. (a) In general. If a qualified facility (as defined in section 45(d)) satisfies the requirements in paragraph (b) of this section, the amount of the renewable electricity production credit determined under section 45(a) (after the application of sections 45(b)(1) through (5)) is equal to the credit determined under section 45(a) multiplied by five. (b) Qualified facility requirements. A qualified facility satisfies the requirements of this paragraph (b) if it is one of the following - (1) A facility with a maximum net output (as determined under paragraph (c) of this section) of less than one megawatt (as measured in alternating current); (2) A facility the construction of which began prior to January 29, 2023; or (3) A facility that meets the prevailing wage requirements of section 45(b)(7) and §1.45-7, the apprenticeship requirements of section 45(b)(8) and §1.45-8, and the recordkeeping and reporting requirements of §1.45-12. (c) Definition of nameplate capacity for purposes of determining maximum net output under section 45(b)(6)(B)(i). For purposes of determining whether a facility has a maximum net output of less than one megawatt (as measured in alternating current) for purposes of section 45(b)(6)(B)(i), nameplate capacity is determinative. Nameplate capacity for an electrical generating unit means the maximum electrical generating output in megawatts (MW) that the unit is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer and consistent with the definition provided in 40 CFR 96.202. Where applicable, the International Standard Organization (ISO) conditions are used to measure the maximum electrical generating output or usable energy capacity. (d) Applicability date. This section applies facilities placed in service in taxable years ending after [date final rule publishes in the Federal Register ], and the construction of which begins after [date final rule publishes in the Federal Register ]. §1.45-7 Prevailing wage requirements. (a) In general. In order for the increased credit under section 45(b)(6)(B)(iii) with respect to any qualified facility to be claimed, the taxpayer must satisfy the requirements of section 45(b)(7) and this section (the "Prevailing Wage Requirements") by ensuring that all laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the construction of such facility, and with respect to any taxable year, for any portion of such taxable year that is within the 10-year period beginning on the date the facility was placed in service, the alteration or repair of such facility, are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such facility is located. Prevailing rates are those rates most recently determined by the Secretary of Labor in accordance with 40 U.S.C. chapter 31, subchapter IV (Davis-Bacon Act), and as set forth in paragraphs (b)(2) and (3) of this section. For purposes of determining the increased credit under section 45(b)(6) for a taxable year, the Prevailing Wage Requirements applicable to alteration or repair work with respect to the taxable year(s) in which the alteration or repair of the qualified facility occurs apply. See paragraph (d) of this section for definitions of terms used in this section. (b) Wage determinations --(1) In general. A taxpayer satisfies the Prevailing Wage Requirements if the taxpayer ensures that laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the construction, alteration, or repair of a facility are paid wages at rates not less than those set forth in the applicable wage determination issued by the Secretary of Labor pursuant to 40 U.S.C. 3142, 29 CFR part 1, and other implementing guidance for the specified type of construction in the geographic area where that facility is located. When the construction, alteration, or repair of a facility occurs in more than one geographic area, the taxpayer, contractor, or subcontractor must use the applicable wage determination for the work performed in each geographic area. Subject to the requirements of this section, the applicable wage determination is a general wage determination described in paragraph (b)(2) of this section (including any additional classifications and wage rates described in paragraph (b)(3) of this section), or a supplemental wage determination described in paragraph (b)(3) of this section. (2) General wage determinations. Except as provided in paragraph (b)(3) of this section, to satisfy the Prevailing Wage Requirements described in paragraph (a) of this section, taxpayers must ensure that laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the construction, alteration, or repair of a facility are paid wages at rates not less than those set forth in the applicable general wage determination(s) published by the U.S. Department of Labor on the approved website. The applicable general wage determination is the wage determination in effect for the specified type of construction in the geographic area when the construction, alteration, or repair of the facility begins. (3) Supplemental wage determinations and rates --(i) Use of supplemental wage determinations and rates. In the event the Secretary of Labor has not published a general wage determination for the relevant geographic area and type of construction for the facility, or the Secretary of Labor has issued a general wage determination for the relevant geographic area and type of construction, but one or more labor classifications for the construction, alteration, or repair work that will be done on the facility by laborers or mechanics is not listed, the taxpayer must ensure that laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the construction, alteration, or repair of a facility are paid wages at rates not less than those set forth in a supplemental wage determination or in an additional classification and wage rate issued to the taxpayer by the U.S. Department of Labor upon request by the taxpayer, contractor, or subcontractor in accordance with paragraph (b)(3)(ii) of this section. A taxpayer, contractor, or subcontractor may also request a supplemental wage determination if the location of the facility involves work by covered laborers and mechanics that spans more than one contiguous geographic areas. (ii) Request for supplemental wage determinations and additional classifications and rates-- (A) Manner of making request. A taxpayer, contractor, or subcontractor requesting a supplemental wage determination or additional classification and wage rate under paragraph (b)(3)(i) of this section must submit the request to the U.S. Department of Labor at, U.S. Department of Labor, Wage and Hour Division, Branch of Construction Wage Determinations, Washington, D.C. 20210, by email at IRAprevailingwage@dol.gov, or such other address as may be prescribed in guidance and instructions issued by the Administrator of the Wage and Hour Division of the U.S. Department of Labor (Wage and Hour Division). A taxpayer, contractor, or subcontractor should make such requests no more than 90 days before the beginning of construction, alteration, or repair, as appropriate (or as soon as practicable after the start of construction, alteration, or repair, in the instance where the taxpayer, contractor, or subcontractor cannot reasonably determine prior to the start of construction, alteration, or repair that a supplemental wage determination or an additional classification and wage rate is necessary). After review, the Wage and Hour Division will notify the taxpayer, contractor, or subcontractor as to the supplemental wage determination or the labor classifications and wage rates to be used for the type of work in question in the geographic area in which the facility is located. (B) Required information. The request for a supplemental wage determination or additional classification and wage rate must include the following information: ( 1 ) The name of the taxpayer, contractor, or subcontractor requesting the supplemental wage determination or wage rate; ( 2 ) The general wage determination(s), if any, applicable to construction, alteration, or repair of the facility; ( 3 ) A description of the work to be performed, including the type(s) of construction involved and, if the project involves multiple types of construction, information indicating the expected cost breakdown by type of construction; ( 4 ) The geographic area in which the facility is being constructed, altered, or repaired, including the name and address of the facility (if known); ( 5 ) The start date of construction, alteration, or repair at the facility; ( 6 ) The labor classification(s) needed for performance of the work on the facility (excluding those for which wage rates are available on an applicable general wage determination); ( 7 ) The duties to be performed by each such labor classification on the facility; ( 8 ) The proposed wage rate, including any bona fide fringe benefits, for each such labor classification; ( 9 ) Any pertinent wage payment information that may be available; ( 10 ) Any additional relevant information otherwise required by forms and instructions published by the U.S. Department of Labor; and ( 11 ) Any additional information the taxpayer wants the U.S. Department of Labor to consider. (iii) Special rule for qualified facilities located offshore. If a general wage determination is not available, in lieu of requesting a supplemental wage determination for a facility located in an offshore area within the outer continental shelf of the United States, a taxpayer, contractor, or subcontractor may rely on the general wage determination for the relevant category of construction that is applicable in the geographic area closest to the area in which the qualified facility will be located. (4) Reconsideration and review. A taxpayer may seek reconsideration and review by the Administrator of the Wage and Hour Division of a general wage determination, or a determination issued with respect to a request for a supplemental wage determination or additional classification and wage rate in accordance with the procedures set forth in 29 CFR 1.8 and 5.13 and any subsequent guidance issued by the U.S. Department of Labor. A taxpayer may appeal the decision of the Administrator of the Wage and Hour Division to the U.S. Department of Labor's Administrative Review Board in accordance with the procedures set forth in 29 CFR part 7 and any subsequent guidance issued by the U.S. Department of Labor. Questions regarding wage determinations and rates may be referred to the Administrator of the Wage and Hour Division. (5) Timing of wage determination. The applicable prevailing wage rates on a general wage determination are those in effect at the time construction, alteration, or repair of the facility begins, and generally remain valid for the duration of the work performed with respect to the construction, alteration, or repair of the facility by the taxpayer, contractor, or subcontractor. Taxpayers who perform any alteration or repair of a facility after the facility is placed in service must use the applicable wage determination in effect at the time the alteration or repair work begins. A new wage determination would be required to be used when work on a facility is changed to include additional construction, alteration, or repair work not within the scope of work of the original project, or to require work to be performed for an additional time period not originally obligated, including where an option to extend the term of a contract for the construction, alteration, or repair is exercised. General wage determinations published on the U.S. Department of Labor approved website contain no expiration date and remain valid until revised, superseded, or canceled. Any supplemental wage determination or additional classification and wage rate issued under paragraph (b)(3) of this section applies from the time the taxpayer begins the construction, alteration, or repair of the facility. If a supplemental wage determination or additional classification and wage rate is issued after construction, alteration, or repair of the facility has begun, the applicable prevailing rates apply retroactively to the date construction began. (6) Payment of wages. All laborers and mechanics working on a qualified facility must be paid in the time and manner consistent with the regular payroll practices of the taxpayer, contractor, or subcontractor. The payment of wages must be made without subsequent deduction or rebate on any account (except such payroll deductions as are required by the law or permitted by regulations issued by the Secretary of Labor), and must consist of the full amount of wages (including bona fide fringe benefits or cash equivalents thereof) due at time of payment computed at rates not less than those contained in the applicable wage determination of the Secretary of Labor. A taxpayer may discharge its wage obligations for the payment of wages by paying the full amount in cash, by making payments to a bona fide fringe benefit provider or incurring costs for bona fide fringe benefits, or by a combination thereof. The taxpayer is solely responsible for ensuring that laborers and mechanics are paid wages not less than the prevailing rate whether employed directly by the taxpayer, a contractor, or a subcontractor in the construction, alteration, or repair of the facility for purposes of claiming the increased credit under section 45(b)(6). The rules set forth in 29 CFR 5.25 through 5.33, and subsequent guidance issued by the U.S. Department of Labor apply with respect to costs for bona fide fringe benefits that may be credited for purposes of the payment of wages. (7) Apprentices --(i) Rate of pay. Apprentices who perform work with respect to the construction, alteration, or repair of a facility consistent with the requirements of section 45(b)(8) and §1.45-8 and individuals in the first 90 days of probationary employment as an apprentice in a registered apprenticeship program who have been certified by the U.S. Department of Labor's Office of Apprenticeship or a State apprenticeship agency to be eligible for probationary employment as an apprentice, may be paid at less than the predetermined rate for the work they perform when they are employed pursuant to and individually registered in a bona fide apprenticeship program registered with the U.S. Department of Labor's Office of Apprenticeship, or with a State apprenticeship agency recognized by the U.S. Department of Labor's Office of Apprenticeship. Every apprentice must be paid at not less than the rate specified by the registered apprenticeship program for the apprentice's level of progress, expressed as a percentage of the journeyworker hourly rate specified for the apprentice's classification in the applicable wage determination. If the apprentice is working in a classification that is not part of the occupation of the registered apprenticeship program, the apprentice must be paid at the full applicable wage rate determination for laborers or mechanics working in that classification. Any individual listed on payroll at an apprenticeship wage, who is not registered with a registered apprenticeship program, must be paid not less than the applicable wage rate on the wage determination for the classification of work actually performed to satisfy the Prevailing Wage Requirements. In the event the U.S. Department of Labor's Office of Apprenticeship or a State apprenticeship agency recognized by the U.S. Department of Labor's Office of Apprenticeship withdraws approval of an apprenticeship program, the taxpayer, contractor, or subcontractor will no longer satisfy the Prevailing Wage Requirements by paying apprentices less than the applicable predetermined rate for the work performed until an acceptable program is approved. (ii) Bona fide fringe benefits. To satisfy the Prevailing Wage Requirements, apprentices must be paid bona fide fringe benefits in accordance with the provisions of the registered apprenticeship program. If the apprenticeship program does not specify the payment of bona fide fringe benefits, apprentices must be paid the full amount of bona fide fringe benefits listed on the wage determination for the applicable classification in cash or in kind. (iii) Apprenticeship ratio. The allowance for payment of wages to apprentices at rates less than the applicable prevailing wage rates determined by the U.S. Department of Labor is subject to any applicable ratio of apprentices to journeyworkers required under the registered apprenticeship program and consistent with section 45(b)(8)(B) and §1.45-8. Any apprentice performing work on the job site in excess of the ratio permitted under the registered program or the ratio applicable to the geographic area of the facility pursuant to 29 CFR 5.5(a)(4)(i) must be paid not less than the applicable wage rate on the wage determination for the work actually performed to satisfy the Prevailing Wage Requirements. (iv) Reciprocity of ratios and wage rates. If a taxpayer, contractor, or subcontractor is performing construction, alteration, or repair work on a facility in a geographic area other than the geographic area in which an apprenticeship program is registered, the ratios and wage rates (expressed in percentages of the journeyworker's hourly rate) applicable within the geographic area in which the construction, alteration, or repair work is being performed must be observed. If there is no applicable ratio or wage rate for the geographic area of the facility, the ratio and wage rate (expressed in percentages of the journeyworker's hourly rate) specified in the registered apprenticeship program standard must be observed. (c) Curing a failure to satisfy the prevailing wage requirements --(1) In general. If a taxpayer fails to ensure that all laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the construction, alteration, or repair of a qualified facility are paid wages at rates not less than those set forth in the applicable wage determination(s), such taxpayer will be deemed to have satisfied the Prevailing Wage Requirements with respect to such facility for any year if the taxpayer makes the correction and penalty payments provided in paragraphs (c)(1)(i) and (ii) of this section. (i) Correction payment. The taxpayer must pay any laborer or mechanic who was paid wages at a rate below the rate described in paragraph (b) of this section for any pay period during such year an amount equal to the sum of: (A) The difference between the amount of wages paid to such laborer or mechanic for all hours worked during such period and the amount of wages required to be paid to such laborer or mechanic pursuant to paragraph (a) of this section for all hours worked during such period; and (B) Interest on the amount determined under paragraph (c)(1)(i)(A) of this section at the Federal short-term rate as determined under section 6621 but substituting "6 percentage points" for "3 percentage points" in section 6621(a)(2). (ii) Penalty payment. The taxpayer must pay a penalty equal to $5,000 multiplied by the total number of laborers and mechanics who were paid wages at a rate below the rate described in paragraph (b) of this section for any period during such year. (iii) Correction and penalty payments not required if taxpayer ineligible for increased credit under section 45(b)(6)(B)(iii). If the taxpayer claims the increased credit under section 45(b)(6)(B)(iii) and does not satisfy the Prevailing Wage Requirements for the claimed increased credit amount, then the obligation to make correction and penalty payments under paragraphs (c)(1)(i) and (ii) of this section applies in order for the taxpayer to retain the credit. If the IRS determines that a taxpayer claiming the increased credit under section 45(b)(6)(B)(iii) failed to meet the Prevailing Wage Requirements and the taxpayer does not make the correction and penalty payments provided in paragraphs (c)(1)(i) and (ii) of this section, then no penalty is assessed under paragraph (c)(1)(ii) of this section, and the taxpayer is not entitled to the increased credit under section 45(b)(6)(B)(iii). Taxpayers that are not entitled to claim the increased credit amount may still be entitled to the base amount of the renewable electricity production credit under section 45(a) if they meet the requirements to claim the credit. (iv) Correction and penalty payments in the event of a transfer pursuant to section 6418. To the extent an eligible taxpayer, as defined in section 6418(f)(2), has determined an increased credit amount under section 45(b)(6) and transferred such increased credit amount as part of a specified credit portion, the obligation to make correction and penalty payments under paragraphs (c)(1)(i) and (ii) of this section remains with the eligible taxpayer. The obligation for an eligible taxpayer to satisfy the Prevailing Wage Requirements becomes binding upon the earlier of the filing of the eligible taxpayer's return for the taxable year for which the specified credit portion is determined with respect to the eligible taxpayer, or the filing of the return of the transferee taxpayer for the year in which the specified credit portion is taken into account. If the IRS determines that the eligible taxpayer failed to meet the Prevailing Wage Requirements and the eligible taxpayer does not then make the correction and penalty payments provided in paragraphs (c)(1)(i) and (ii) of this section, then no penalty is assessed under paragraph (c)(1)(ii) of this section, and the eligible taxpayer is not entitled to the increased credit amount determined under section 45(b)(6)(B)(iii). Section 6418 and the regulations in this part under section 6418 control for determining the impact of an eligible taxpayer's failure to cure on any transferee taxpayer. The eligible taxpayer that is not entitled to claim the increased credit amount may still be entitled to the base amount of the renewable electricity production credit under section 45(a) if they meet the requirements to claim the credit. (v) Examples. The provisions of this paragraph (c)(1) may be illustrated by the following examples, which do not take into account any possible application of the enhanced correction and penalty payment requirements in the case of intentional disregard under paragraph (c)(3) of this section, the exception for wages paid before a determination by the U.S. Department of Labor under paragraph (c)(5) of this section, or the penalty waiver under paragraph (c)(6) of this section. In each example, assume that the taxpayer uses the calendar year as the taxpayer's taxable year. (A) Example 1. Taxpayer A begins construction of a qualified facility on February 3, 2023. The facility is placed in service on October 10, 2023, and A claims the increased credit under section 45(b)(6) on its 2023 tax return. Laborer X was employed in the construction, alteration, or repair of the facility in calendar year 2023 for 20 weeks and was paid on a weekly basis. X was paid wages below the prevailing wage rate for all pay periods in calendar year 2023. All other laborers and mechanics were paid at the prevailing wage rate. The aggregate difference between the amount of wages X was paid and the amount required to be paid under paragraph (a) of this section is $400 (i.e., X worked 20 weeks during the year and was underpaid by $20 in each of those weeks). The amount of the correction payment A must make to X is equal to $400 plus interest from the date of each underpayment at the rate as determined under section 6621 but substituting "6 percentage points" for "3 percentage points" in section 6621(a)(2). The total number of laborers underpaid for any period in 2023 was one, so the total amount of the penalty payment that A must pay to the IRS to retain the increased credit is $5,000. (B) Example 2. Taxpayer B begins construction of a qualified facility on January 30, 2023. The facility is placed in service on February 2, 2024. Taxpayer B files a claim for the increased credit under section 45(b)(6) with its 2024 tax return. Taxpayer B paid workers on a biweekly basis. Five laborers employed in the construction of the facility were paid wages below the prevailing wage rates in 2023, with the difference between the amount they were paid and the amount of wages required to be paid under paragraph (a) of this section being $500 per laborer. One of those laborers remained employed in the construction of the facility in 2024 and was paid wages below the prevailing wage rate, with the difference between the amount the laborer was paid and the amount of wages required to be paid under paragraph (a) of this section being $100. All other laborers and mechanics involved in the construction, alteration, or repair of the facility were paid at the prevailing wage rates. B must make correction payments of $500 plus interest from the date of each underpayment at the rate as determined under section 6621 but substituting "6 percentage points" for "3 percentage points" in section 6621(a)(2) to each of the five laborers that were underpaid in 2023, and a correction payment of $100 plus interest from the date of each underpayment at the rate as determined under section 6621 but substituting "6 percentage points" for "3 percentage points" in section 6621(a)(2) to the laborer that was underpaid in 2024. The total amount of the penalty payment that B must pay to the IRS to retain the increased credit is $30,000, which includes $5,000 for each of the laborers underpaid in 2023 and $5,000 for the one laborer underpaid in 2024. (C) Example 3. Taxpayer B begins construction of a qualified facility on January 30, 2023. The facility is placed in service on February 2, 2024. Taxpayer B files a claim for the increased credit under section 45(b)(6) with its 2024 tax return. Taxpayer B paid workers on a biweekly basis. Laborer X was employed by the taxpayer in the construction of the facility for 22 weeks in 2023 was paid wages below the prevailing wage rates for the first 20 weeks of her employment in the amount of $500 (i.e., X was underpaid $50 in each of the 10 biweekly periods). For the last biweekly pay period, Taxpayer B paid X the correct prevailing rate for the work performed during the period, plus $500 for the amounts that were underpaid in the first 10 periods. All other laborers and mechanics involved in the construction, alteration, or repair of the facility were paid at the prevailing wage rates. Taxpayer B is required to make a correction payment to X in the amount of the interest from the date of each underpayment. To retain the increased credit, B must make a penalty payment of $5,000 to the IRS with respect to Laborer X. (2) Deficiency procedures not to apply. The penalty payment required by paragraph (c)(1)(ii) of this section may be assessed and collected without regard to the deficiency procedures provided by subchapter B of chapter 63 of the Code. Any determination by the IRS disallowing a claim for the increased credit under section 45(b)(6) will be subject to the deficiency procedures of subchapter B of chapter 63. (3) Intentional disregard --(i) Application of section 45(b)(7)(B)(iii). If the IRS determines that any failure to satisfy the Prevailing Wage Requirements in paragraph (a) of this section is due to intentional disregard of the requirement-- (A) The correction payment under paragraph (c)(1)(i) of this section is increased to three times the sum determined in paragraph (c)(1)(i) of this section; and (B) The penalty payment under paragraph (c)(1)(ii) of this section is increased to $10,000 multiplied by the total number of laborers and mechanics who were paid wages at a rate below the rate described in paragraph (b) of this section for any period during such year. (ii) Meaning of intentional disregard. A failure to ensure that any laborer or mechanic employed in the construction, alteration, or repair of a qualified facility is paid wages at the prevailing wage rate is due to intentional disregard if it is knowing or willful. (iii) Facts and circumstances considered. The facts and circumstances that are considered in determining whether a failure to satisfy the Prevailing Wage Requirements is due to intentional disregard include, but are not limited to-- (A) Whether the failure was part of a pattern of conduct that includes repeated or systemic failures to ensure that the laborers and mechanics were paid wages at or above the applicable prevailing wage rate; (B) Whether the taxpayer failed to take steps to determine the applicable classifications of laborers and mechanics; (C) Whether the taxpayer failed to take steps to determine the applicable prevailing wage rate(s) for laborers and mechanics; (D) Whether the taxpayer promptly cured any failures to ensure that laborers and mechanics were paid wages not less than the applicable prevailing rates; (E) Whether the taxpayer has been required to make a penalty payment under paragraph (c)(1)(ii) of this section in previous years; (F) Whether the taxpayer undertook a quarterly, or more frequent, review of wages paid to mechanics and laborers to ensure that wages not less than the applicable prevailing wage rate were paid; (G) Whether the taxpayer included provisions in any contracts entered into with contractors that required the contractors and any subcontractors retained by the contractors to pay laborers and mechanics at or above the prevailing wage rates and maintain records to ensure the taxpayer's compliance with recordkeeping requirements set forth in §1.45-12; (H) Whether the taxpayer posted in a prominent place at the facility or otherwise provided written notice to laborers and mechanics during the construction, alteration, or repair of the facility, of the applicable wage rate(s) as determined by the U.S. Department of Labor for all classifications of work to be performed for the construction, alteration, or repair of the facility, and that in order to be eligible to claim certain tax benefits, employers must ensure that laborers and mechanics are paid wages at rates not less than such wage rates; and (I) Whether the taxpayer had in place procedures whereby laborers and mechanics could report suspected failures to pay prevailing wages and/or suspected failures to classify workers in accordance with the wage determination of workers to appropriate personnel departments or managers without retaliation or adverse action. (iv) Rebuttable presumption of no intentional disregard. If a taxpayer makes the correction and penalty payments required by paragraphs (c)(1)(i) and (ii) of this section before receiving notice of an examination from the IRS with respect to a claim for the increased credit under section 45(b)(6), the taxpayer will be presumed not to have intentionally disregarded the Prevailing Wage Requirements in paragraph (a) of this section. (4) Limitation on the availability of cure --(i) 180-day limit. In the case of a final determination by the IRS with respect to any failure by the taxpayer to satisfy the Prevailing Wage Requirements in paragraph (a) of this section, the cure provision in paragraph (c)(1) of this section does not apply unless the correction and penalty payments described in paragraphs (c)(1)(i) and (ii) of this section are made by the taxpayer on or before the date that is 180 days after the date of such determination. (ii) Final determination. For purposes of paragraph (c)(4)(i) of this section, a final determination occurs on the date the IRS sends to the taxpayer a notice stating that the taxpayer has failed to satisfy the Prevailing Wage Requirements under paragraph (a) of this section. (5) Exception for wages paid before a wage determination by the U.S. Department of Labor. If a taxpayer has requested a supplemental wage determination or an additional classification and wage rate from the U.S. Department of Labor in accordance with paragraph (b)(3)(ii) of this section and the U.S. Department of Labor makes a wage determination after the construction, alteration, or repair of the facility has started, the taxpayer will not be considered to have failed to meet the Prevailing Wage Requirements under paragraph (a) of this section with respect to wages paid to any mechanic or laborer whose wage rate was subject to the request and who was paid below the prevailing wage rate before the determination by the U.S. Department of Labor if the taxpayer makes a payment within 30 days of the determination to each laborer or mechanic equal to the difference between the amount of wages paid to such laborer or mechanic before the determination and the amount of wages required to be paid to such laborer or mechanic pursuant to paragraph (a) of this section during such period. (6) Waiver of the penalty --(i) Availability of waiver. The penalty payment required by paragraph (c)(1)(ii) of this section to cure a failure to satisfy the Prevailing Wage Requirements in paragraph (a) of this section is waived with respect to a laborer or mechanic employed in the construction, alteration, or repair of a qualified facility during a calendar year if the taxpayer makes the correction payment required by paragraph (c)(1)(i) of this section by the earlier of 30 days after the taxpayer became aware of the error or the date on which the increased credit is claimed under section 45(b)(6), and: (A) The laborer or mechanic is paid wages at rates less than the amount required to be paid under paragraph (b) of this section for not more than 10 percent of all pay periods of the calendar year (or part thereof) during which the laborer or mechanic was employed in the construction, alteration, or repair of the qualified facility; or (B) The difference between the amount the laborer or mechanic was paid during the calendar year (or part thereof) and the amount required to be paid under paragraph (b) of this section is not greater than 2.5 percent of the amount required to be paid under paragraph (b) of this section. (ii) Project labor agreements. The penalty payment required by paragraph (c)(1)(ii) of this section to cure a failure to satisfy the Prevailing Wage Requirements in paragraph (a) of this section shall not apply with respect to a laborer or mechanic employed in the construction, alteration, or repair work of a qualified facility if the work is done pursuant to a pre-hire collective bargaining agreement with one or more labor organizations that establishes the terms and conditions of employment for a specific construction project (Qualifying Project Labor Agreement) and any correction payment owed to any laborer or mechanic is paid on or before the date on which the increased credit is claimed under section 45(b)(6). In order to be considered a Qualifying Project Labor Agreement, such agreement must at a minimum: (A) Bind all contractors and subcontractors on the construction project through the inclusion of appropriate specifications in all relevant solicitation provisions and contract documents; (B) Contain guarantees against strikes, lockouts, and similar job disruptions; (C) Set forth effective, prompt, and mutually binding procedures for resolving labor disputes arising during the term of the project labor agreement; (D) Contain provisions to pay prevailing wages; (E) Contain provisions for referring and using qualified apprentices consistent with section 45(b)(8)(A) through (C) and guidance issued thereunder; and (F) Be a collective bargaining agreement with one or more labor organizations (as defined in 29 U.S.C. 152(5)) of which building and construction employees are members, as described in 29 U.S.C. 158(f). (iii) Examples. The provisions of this paragraph (c)(6) may be illustrated by the following examples, which do not take into account any possible application of the enhanced correction and penalty payment requirements in the case of intentional disregard under paragraph (c)(3) of this section or the exception for wages paid before a determination by the U.S. Department of Labor under paragraph (c)(5) of this section. In each example, assume that the taxpayer uses the calendar year as the taxpayer's taxable year. (A) Example 1. Taxpayer A begins construction of a qualified facility on February 1, 2023. The facility is placed in service on October 10, 2023, and A claims the increased credit under section 45(b)(6) on its 2023 tax return filed on April 18, 2024. Taxpayer A employs laborer W in the construction of the facility for a total of 36 weekly pay periods. Taxpayer A pays W at or above the prevailing wage rate for all pay periods except for the pay periods ending on April 8, April 22, and May 20. Under the applicable prevailing wage rate, W should have been paid a total of $35,000 in 2023, but was instead paid only $30,000. Taxpayer A ensures that all other laborers and mechanics employed in the construction, alteration, or repair of the facility are paid at the prevailing wage rate. Taxpayer A becomes aware of the failure on June 1, 2023, and on June 19, 2023, A pays W the correction payment required by paragraph (c)(1)(i) of this section. The penalty waiver applies to A. Although the difference between the amount W was paid in 2023 and the amount required to be paid under the applicable prevailing wage rate was $5,000, which is 14.29% of the amount required to be paid under the applicable prevailing wage rate, W was paid below the prevailing wage rate for only three out of 36 pay periods, or 8.3%. Furthermore, A made the correction payment within 30 days of discovering the failure on June 1, 2023, and before filing the tax return claiming the increased credit on April 18, 2024. (B) Example 2. Taxpayer B begins construction of a qualified facility on February 1, 2024. The facility is placed in service on October 10, 2024, and B claims the increased credit under section 45(b)(6) on its 2024 tax return filed on April 15, 2025. Taxpayer B hires contractor M to assist in the construction, and contractor M employs laborer X in the construction of the facility for a total of 36 pay periods. M pays X at or above the prevailing wage rate for all pay periods except for the pay periods ending on February 24 and March 2. Under the applicable prevailing wage rate, X should have been paid a total of $50,000 in 2024, but was instead paid only $49,000. All other laborers and mechanics employed in the construction, alteration, or repair of the facility are paid at the prevailing wage rate. B learns on January 1, 2025, that X was not paid at the prevailing wage rate, and on January 19, 2025, B pays X the correction payment required by paragraph (c)(1)(i) of this section. The penalty waiver applies to B. Y was paid below the prevailing wage rate for two out of 36 pay periods, or 5.5%, and the difference between the amount X was paid in 2024 and the amount required to be paid under the applicable prevailing wage rate was $1,000, which is only 2% of the amount required to be paid under the applicable prevailing wage rate. Although B did not learn that that M was paying X below the prevailing wage rate until after the end of the year, once B learned of the underpayment, B made the correction payment within 30 days and before filing the tax return claiming the increased credit on April 15, 2025. (C) Example 3. Taxpayer C begins the construction of a qualified facility on April 5, 2024. The facility is placed in service on December 1, 2024, and C claims the increased credit under section 45(b)(6) on its 2024 tax return filed on April 15, 2025. Taxpayer C employs laborer Y in the construction of the facility for a total of 35 pay periods. Due to a failure to classify workers in accordance with the wage determination, C pays Y below the prevailing wage rate for all 35 pay periods. Under the applicable prevailing wage rate, Y should have been paid $65,000 in 2024, but was instead paid only $63,500. All other laborers and mechanics employed in the construction, alteration, or repair of the facility were paid at the prevailing wage rate. Taxpayer C becomes aware of the failure on January 10, 2025, and on January 20, 2025, C pays Y the correction payment required by paragraph (c)(1)(i) of this section. The penalty waiver applies to C. Although Y was paid below the prevailing wage rate 100% of the pay periods Y worked in 2024, the difference between the amount Y was paid in 2024 and the amount required to be paid under the applicable prevailing wage rate was $1,500, which is only 2.3% of the amount required to be paid under the applicable prevailing wage rate. Additionally, once C learned of the underpayment, C made the correction payment within 30 days and before filing the tax return claiming the increased credit on April 15, 2025. (D) Example 4. Taxpayer D begins construction of a qualified facility on August 29, 2024. The facility is placed in service on June 30, 2025, and D claims the increased credit under section 45(b)(6) on its 2025 tax return. Taxpayer D employs laborer Z in the construction of the facility for a total of 25 weekly pay periods in 2025. Taxpayer D pays Z at or above the prevailing wage rate for all pay periods except for the pay periods ending on March 15, May 10, and June 14. Under the applicable prevailing wage rate, Z should have been paid $25,000 in 2025, but was instead paid only $20,000. Taxpayer D ensures that all other laborers and mechanics employed in the construction, alteration, or repair of the facility are paid at the prevailing wage rate. Taxpayer D has in place a pre-hire collective bargaining agreement, but the agreement does not contain a provision for referring and using qualified apprentices. Taxpayer D becomes aware of the failure to pay Z at the prevailing wage rate on June 30, 2025, and on July 4, 2025, D pays Z the correction payment required by paragraph (c)(1)(i) of this section. The penalty waiver does not apply to D. The difference between the amount Z was paid in 2025 and the amount required to be paid under the applicable prevailing wage rate was $5,000, which is 20% of the amount required to be paid under the applicable prevailing wage rate. Z was paid below the prevailing wage rate for three out of 25 pay periods, or 12%. D does not have in place a qualifying project labor agreement because the pre-hire collective bargaining agreement does not contain a provision for referring and using qualified apprentices as required by paragraph (c)(6)(ii)(E) of this section. Although the correction payment was made within 30 days of discovering the failure on June 30, 2025, and before filing the tax return claiming the increased credit on April 15, 2026, Taxpayer D failed to satisfy the requirements of paragraphs (c)(6)(i)(A) and (B) or paragraph (c)(6)(ii) of this section. (d) Definitions. Solely for purposes of this section, the following definitions apply: (1) Bona fide fringe benefits. The term bona fide fringe benefits means fringe benefits described in 29 CFR part 5. Bona fide fringe benefits include medical or hospital care, pensions on retirement or death, compensation for injuries or illness resulting from occupational activity, or insurance to provide any of the foregoing; unemployment benefits; life insurance, disability insurance, sickness insurance, or accident insurance; vacation or holiday pay; defraying costs of apprenticeship or other similar programs; or other bona fide fringe benefits (each as described in 29 CFR part 5 and other U.S. Department of Labor guidance). Consistent with 29 CFR 5.29, bona fide fringe benefits do not include benefits required by other Federal, State, or local law. (2) Construction, alteration, or repair --(i) In general. The term construction, alteration, or repair generally means construction, prosecution, completion, or repair as defined in 29 CFR 5.2. Construction, alteration, or repair does not include work that is ordinary and regular in nature that is designed to maintain and preserve existing functionalities of a facility after it is placed in service. Work designed to maintain and preserve functionality of a facility after it is placed in service includes basic maintenance such as regular inspections of the facility, regular cleaning and janitorial work, replacing materials with limited lifespans such as filters and light bulbs, and the calibration of any equipment. However, such work that occurs before the facility is placed in service may constitute construction for which prevailing wages must be paid in order to claim the increased credit. Maintenance does not include work that improves a facility, adapts it for a different use, or restores functionality as a result of inoperability. This definition has no bearing on any other sections of the Code, including any determination of construction, alteration, repair, or maintenance under section 162 or 263. (ii) Example. Taxpayer T employs a contractor X to construct a 500 megawatt solar farm that is a qualified facility under section 45. X employs numerous laborers and mechanics during construction and ensures that wages are paid to the laborers and mechanics at not less than the prevailing rate for the geographic area of the solar farm, as set forth in the applicable wage determination. After the solar farm is placed in service, an inverter malfunctions and requires a replacement part. T employs laborers and mechanics to replace the malfunctioning part to restore the inverter's functionality. The replacement work is not considered ordinary maintenance, and T must ensure those laborers and mechanics engaged in the replacement work are paid wages not less than the prevailing rate for the geographic area of the solar farm to satisfy the Prevailing Wage Requirements. (3) Contractor. The term contractor means any person that enters into a contract with the taxpayer for the construction, alteration, or repair of a qualified facility. (4) Employed. The term employed means performing the duties of a laborer or mechanic for the taxpayer, contractor, or subcontractor (as applicable), regardless of whether the individual would be characterized as an employee or an independent contractor for other Federal tax purposes. (5) General wage determination. The term general wage determination means a wage determination issued by the U.S. Department of Labor and published on the approved website. A general wage determination provides the minimum hourly wage rates (both the basic hourly rate of pay and bona fide fringe benefit rates) that the U.S. Department of Labor has determined are prevailing for laborers and mechanics in specified types of construction in a given geographic area. (6) Geographic area and locality. The terms geographic area and locality mean the county, independent city, or other civil subdivision of the State in which the facility is located. The terms geographic area and locality also include areas located offshore of the United States and within the outer continental shelf of the United States and the U.S. territories. If construction, alteration, or repair work is performed in multiple counties, independent cities, or other civil subdivisions, the geographic area may include all counties, independent cities, or other civil subdivisions in which the work will be performed. The locality in which a facility is located is the primary construction site of the facility, defined as the physical place or places where the facility will be placed in service and remain. The locality of the facility also includes secondary construction site(s), where a significant portion of the facility is constructed, altered, or repaired provided that such construction is for specific use at that facility and does not simply reflect the manufacture or construction of a product made available to the general public, and provided further that the site is either established specifically for, or dedicated exclusively for a specific period of time to, the construction, alteration, or repair of the facility. A significant portion means one or more entire portion(s) or module(s) of the facility, such as a completed room or structure, with minimal construction work remaining other than the installation and/or final assembly of the portions or modules at the place where the facility will be placed in service and remain. A significant portion does not include materials or prefabricated component parts. A specific period of time means a period of weeks, months, or more, and does not include circumstances where a site at which multiple facilities are in progress is shifted exclusively so to a single facility for a few hours or days in order to meet a deadline. The locality of the facility also includes any adjacent or virtually adjacent dedicated support sites, including job headquarters, tool yards, batch plants, borrow pits, and similar facilities of a taxpayer, contractor, or subcontractor that are established specifically for or dedicated exclusively to the construction, alteration, or repair of the facility, and adjacent or virtually adjacent to either a primary construction site or a secondary construction site. (7) Laborer and mechanic. The terms laborer and mechanic mean those individuals whose duties are manual or physical in nature (including those individuals who use tools or who are performing the work of a trade). The terms laborer and mechanic include apprentices and helpers. The terms do not apply to individuals whose duties are primarily administrative, executive, or clerical, rather than manual. Persons employed in a bona fide executive, administrative, or professional capacity as defined in 29 CFR part 541 are not deemed to be laborers or mechanics. Working forepersons who devote more than 20 percent of their time during a workweek to laborer or mechanic duties, and who do not meet the criteria for exemption of 29 CFR part 541, are considered laborers and mechanics for the time spent conducting laborer and mechanic duties. (8) Subcontractor. The term subcontractor means any contractor that agrees to perform or be responsible for the performance of any part of a contract entered into with the taxpayer (or the taxpayer's contractor) with respect to the construction, alteration, or repair of a facility. (9) Taxpayer. The term taxpayer means any taxpayer as defined in section 7701(a)(14), including applicable entities described in section 6417(d)(1)(A). In the case of a credit transferred under section 6418, the term taxpayer means the eligible taxpayer that determines the eligible credit to be transferred and makes a transfer election under section 6418 to transfer any specified credit portion (including 100 percent) of an eligible credit determined with respect to any eligible credit property of such eligible taxpayer for any taxable year. (10) Type of construction. The type of construction is the general category of construction as established by the U.S. Department of Labor for the publication of general wage determinations. Specific types of construction may include, but are not limited to, building, residential, heavy, and highway. (11) Wages. The term wages generally means wages as defined in 29 CFR 5.2. In general, wages means the basic hourly rate of pay; any contribution irrevocably made by a taxpayer, contractor, or subcontractor to a trustee or to a third person pursuant to a bona fide fringe benefit fund, plan, or program; and the rate of costs to the taxpayer, contractor, or subcontractor that may be reasonably anticipated in providing bona fide fringe benefits to laborers and mechanics pursuant to an enforceable commitment to carry out a financially responsible plan or program, provided the commitment was communicated in writing to the laborers and mechanics affected. Whether amounts are wages for prevailing wage purposes is not relevant in determining whether amounts are wages or compensation for other Federal tax purposes. (e) Applicability date. This section applies to facilities placed in service in taxable years ending after [date final rule publishes in the Federal Register ], and the construction of which begins after [date final rule publishes in the Federal Register ]. §1.45-8 Apprenticeship requirements. (a) In general. Except as provided in paragraph (e) of this section, a taxpayer claiming or transferring (under section 6418) the increased credit amount under section 45(b)(6)(B)(iii) with respect to any qualified facility must satisfy the requirements of section 45(b)(8) and this section (the "Apprenticeship Requirements"). The taxpayer is solely responsible for ensuring that the Apprenticeship Requirements are satisfied. See paragraph (f) of this section for definitions of terms used in this section. (b) Labor hours requirement -- (1) Percentage of total hours. A taxpayer claiming or transferring (under section 6418) the increased credit amount under section 45(b)(6) must ensure that qualified apprentices (hired by the taxpayer, contractor, or subcontractor) perform not less than the applicable percentage of the total labor hours of the construction, alteration, or repair work (including work performed by any contractor or subcontractor) of any qualified facility, subject to the apprentice-to-journeyworker ratio described in paragraph (c) of this section. (2) Applicable percentage. For purposes of paragraph (b)(1) of this section, the applicable percentage is-- (i) 10 percent in the case of a qualified facility, the construction of which begins before January 1, 2023; (ii) 12.5 percent in the case of a qualified facility, the construction of which begins after December 31, 2022, and before January 1, 2024; and (iii) 15 percent in the case of a qualified facility, the construction of which begins after December 31, 2023. (c) Application of apprentice-to-journeyworker ratio --(1) In general. The labor hours requirement under paragraph (b) of this section is subject to any applicable requirements for apprentice-to-journeyworker ratios of the U.S. Department of Labor or the applicable State apprenticeship agency. (2) Ratio. The allowable ratio of apprentices-to-journeyworkers on the job site in any occupation and its corresponding classification on any day must comply with the applicable apprentice-to-journeyworker ratio of the registered apprenticeship program in accordance with 29 CFR part 29. (3) Failure to meet ratio requirements. For purposes of section 45(b)(8)(B), if on any day the ratio of apprentices to journeyworkers exceeds the ratio established in accordance with paragraph (c)(2) of this section, and subject to the requirements of the registered apprenticeship program, the labor hours performed by any qualified apprentice in excess of the ratio may not be counted as hours performed by apprentices for purposes of the labor hours requirement of paragraph (b) of this section. (d) Participation requirement. Each taxpayer, contractor, or subcontractor who employs four or more individuals to perform construction, alteration, or repair work with respect to the construction of a qualified facility must employ one or more qualified apprentices to perform work with respect to the construction, alteration, or repair of the facility. (e) Exceptions to the Apprenticeship Requirements. If a taxpayer fails to satisfy the Apprenticeship Requirements in paragraph (a) of this section with respect to the construction of any qualified facility or with respect to the alteration or repair of a facility, the taxpayer will nonetheless be deemed to have satisfied the Apprenticeship Requirements if the taxpayer has made a good faith effort to meet the Apprenticeship Requirements as described in paragraph (e)(1) of this section (the "Good Faith Effort Exception") or made the penalty payment provided in paragraph (e)(2) of this section for any failures to which the Good Faith Effort Exception does not apply. (1) Good Faith Effort Exception --(i) In general. A taxpayer is deemed to have satisfied the Apprenticeship Requirements of this section with respect to a request for qualified apprentices if the taxpayer meets the following requirements: (A) Request for apprentices. The taxpayer, contractor, or subcontractor must submit a written request for qualified apprentices to at least one registered apprenticeship program, as defined in paragraph (f)(4) of this section, which has a geographic area of operation that includes the location of the facility, or to a registered apprenticeship program that can reasonably be expected to provide apprentices to the location of the facility; trains apprentices in the occupation(s) needed to perform construction, alteration, or repair with respect to the facility; and has a usual and customary business practice of entering into agreements with employers for the placement of apprentices in the occupation for which they are training, pursuant to its standards and requirements. Such request must be in writing and sent electronically or by registered mail. ( 1 ) Content of request. The request of the taxpayer, contractor, or subcontractor must include the proposed dates of employment, occupation of apprentices needed, location of the work to be performed, number of apprentices needed, the expected number of labor hours to be performed by the apprentices, and the name and contact information of the taxpayer, contractor, or subcontractor requesting employment of apprentices from the registered apprenticeship program. The request must also state that the request for apprentices is made with an intent to employ apprentices in the occupation for which they are being trained and in accordance with the requirements and standards of the registered apprenticeship program. ( 2 ) Duration of request. If the taxpayer, contractor, or subcontractor submits a request in accordance with paragraph (e)(1)(i)(A) of this section and the request is denied or not responded to, the taxpayer will be deemed to have exercised a Good Faith Effort with respect to the request for a period of 120 days from the date of the request. The taxpayer will not be deemed to have exercised a Good Faith Effort beyond 120 days of a previously denied request unless the taxpayer submits an additional request. (B) Denial of request. If a taxpayer, contractor, or subcontractor submits a request in accordance with paragraph (e)(1)(i)(A) of this section and the request is denied, the taxpayer will be deemed to satisfy the requirements of section 45(b)(8)(A) through (C), provided that such denial is not the result of a refusal by the taxpayer or any contractors or subcontractors engaged in the performance of construction, alteration, or repair work with respect to such qualified facility to comply with the established standards and requirements of the registered apprenticeship program. The denial of a request is only valid for purposes of establishing a Good Faith Effort with respect to the portion(s) of the request that were denied. (C) Failure to respond. If the registered apprenticeship program fails to respond to a request submitted in accordance with paragraph (e)(1)(i)(A) of this section within five business days after the date on which such registered apprenticeship program received the taxpayer's (or its contractor or subcontractor) request, then such request is deemed to be denied. Acknowledgement, whether in writing or otherwise, by the registered apprenticeship program of receipt of such request submitted in accordance with paragraph (e)(1)(i)(A) of this section is a sufficient response for purposes of this paragraph (e)(1)(i)(C). (ii) Examples. The provisions of paragraph (e)(1) of this section may be illustrated by the following examples. (A) Example 1. Taxpayer A submits a request to a registered apprenticeship program by email. The registered apprenticeship program responds three days later, but reply emails from the registered apprenticeship program are auto forwarded to taxpayer A's spam or junk mail folder. Taxpayer A claims that the registered apprenticeship program failed to respond within five business days and claims the good faith effort exception. Taxpayer A would not qualify for the Good Faith Effort Exception of this section because the registered apprenticeship program did respond within five business days. (B) Example 2. Contractor C makes a request for qualified apprentices from a registered apprenticeship program outside the geographic area of the qualified facility and the registered apprenticeship program cannot reasonably be expected to provide apprentices to the location of the facility. As a result, Contractor C's request is denied. Contractor C's request would not qualify for the Good Faith Effort Exception of this section because the registered apprenticeship program could not reasonably be expected to provide apprentices to the location of the facility. (C) Example 3. Contractor D submits a request to a registered apprenticeship program. The registered apprenticeship program requires contractors to enter into an agreement to partner with that registered apprenticeship program. Contractor D refuses to enter into the agreement and as a result, the registered apprenticeship program denies the Contractor D's request. Contractor D's request would not qualify for the Good Faith Effort Exception of this section because Contractor D refused to comply with the established standards of the registered apprenticeship program. (D) Example 4. Contractor E enters into an agreement with a registered apprenticeship program with standards of apprenticeship for a specific occupation. Contractor E then requests apprentices from that registered apprenticeship program for a different occupation in which they do not have standards of apprenticeship or an agreement. Contractor E's request would not qualify for the Good Faith Effort Exception of this section. (E) Example 5. Taxpayer F, a tax equity investor in the partnership that owns the facility, makes a request to a registered apprenticeship program. Taxpayer F's request is denied because it was not made with an intent to employ apprentices in the occupation for which they are being trained and in accordance with the requirements and standards of the registered apprenticeship program. Rather, the contractor (or subcontractor) that will employ and train the apprentices in the construction, alteration, or repair of the facility is the proper party to request apprentices from the registered apprenticeship program. Taxpayer F's request would not qualify for the Good Faith Effort Exception of this section. (F) Example 6. Contractor G submits a request for apprentices from a registered apprenticeship program. Contractor's request states that it seeks to employ four apprentices for a period of 180 days for a total of 4,160 hours (1,040 hours x four apprentices). The registered apprenticeship program informs Contractor G that it can supply two apprentices for the 26 weeks and denies the request for the other two apprentices. Contractor G does not submit any additional requests for apprentices from a registered apprenticeship program after 120 days. Contractor G's request would qualify for the Good Faith Effort Exception of 693 hours for each of the two requested apprentices that were denied for the 120-day period after the request was submitted (120/180 x 1,040 hours = 693 hours for each denied apprentice). The request would not qualify for the Good Faith Effort Exception of this section after 120 days because Contractor G did not submit an additional request with respect to the portion of the request that was denied. (2) Penalty payment --(i) In general. The taxpayer must pay the Internal Revenue Service (IRS) a penalty equal to $50 multiplied by the total labor hours for which the requirements described in paragraph (b) or (d) of this section were not satisfied with respect to the construction, alteration, or repair work on such qualified facility to retain the increased credit. (A) Total labor hours for which the percentage requirement is not met. For failures to meet the percentage of total labor hours requirement in paragraph (b)(1) of this section, the total labor hours for which the requirement was not satisfied is calculated as the difference between the total labor hours that would be required to meet the applicable percentage under paragraph (b)(2) of this section and the total labor hours actually worked by all qualified apprentices consistent with the applicable ratio of apprentices to journeyworkers. (B) Total labor hours for which the participation requirement is not met. For failures to meet the participation requirement in paragraph (d) of this section, the total labor hours for which the requirement was not satisfied is calculated as the total labor hours of construction, alteration, or repair worked by all individuals employed by the taxpayer, contractor, or subcontractor who failed to meet the participation requirement of the qualified facility divided by the number of individuals employed by the taxpayer, contractor, or subcontractor who performed construction, alteration, or repair work on the facility. (C) Penalty payment not required if taxpayer ineligible for increased credit under section 45(b)(6)(B)(iii). If the taxpayer claims the increased credit under section 45(b)(6)(B)(iii) and does not satisfy the Apprenticeship Requirements for the claimed increased credit amount, then the obligation to make the penalty payment under paragraph (e)(2)(i) of this section applies. If the IRS determines that a taxpayer claiming the increased credit under section 45(b)(6)(B)(iii) failed to meet the Apprenticeship Requirements and the taxpayer does not make the penalty payment required under this paragraph (e)(2)(i), then no penalty is assessed under this paragraph (e)(2)(i), and the taxpayer is not entitled to the increased credit under section 45(b)(6)(B)(iii). Taxpayers that are not entitled to claim the increased credit amount may still be entitled to the base amount of the renewable electricity production credit under section 45(a) if they meet the requirements to claim the credit. (D) Examples. The provisions of this paragraph (e)(2)(i) may be illustrated by the following examples, which do not take into account any possible application of the exception for Good Faith Effort Exception under paragraph (e)(1) of this section, the enhanced penalty payment requirement in the case of intentional disregard under paragraph (e)(2)(ii) of this section, or the inapplicability of the penalty in the case of a qualifying project labor agreement under paragraph (e)(2)(v) of this section. In each example, assume that the taxpayer uses the calendar year as the taxpayer's taxable year. ( 1 ) Example 1. Taxpayer A begins construction of a qualified facility on April 1, 2023. The facility is placed in service on April 1, 2025, and A claims the increased credit on its 2025 tax return. All individuals who performed the construction, alteration, or repair work were employed directly by taxpayer A, including one qualified apprentice. At the time A claims the increased credit, a total of 50,000 labor hours were spent on the construction, alteration, or repair work of the facility, 6,000 of which were performed by qualified apprentices. Taxpayer A has satisfied the participation requirement because A has employed at least one apprentice. Taxpayer A failed to satisfy the percentage requirement under paragraph (b)(2) of this section because less than 12.5% of the total labor hours were performed by qualified apprentices. Qualified apprentices must have performed at least 6,250 labor hours, so the total labor hours by which the percentage requirement was not satisfied is 250. To cure A's failure to meet the percentage requirement, A must pay a penalty of $12,500. ( 2 ) Example 2. Taxpayer B begins construction of a qualified facility on February 10, 2023. The facility is placed in service on February 10, 2026, and B claims the increased credit on its 2026 tax return. B employs 10 individuals to perform construction, alteration, or repair work of the facility, two of whom are qualified apprentices. Taxpayer B also hires contractor M, who employs five individuals to perform construction, alteration, or repair work of the facility, none of whom are qualified apprentices. At the time B claims the increased credit, a total of 50,000 labor hours were spent on the construction, alteration, or repair work of the facility, 6,500 of which were performed by qualified apprentices. Of the total 50,000 labor hours, 33,000 labor hours were performed by individuals employed by B and 17,000 labor hours were performed by individuals employed by M. B has satisfied the percentage requirement under paragraph (b)(2) of this section because more than 12.5% of the total labor hours were performed by qualified apprentices. B failed to satisfy the participation requirement under paragraph (d) of this section because contractor M employed five individuals but no qualified apprentices. The total labor hours for which the participation requirement was not satisfied is 3,400, which is equal to the total labor hours performed by individuals employed by M (17,000) divided by the number of individuals employed by M (five). To cure B's failure to meet the Apprenticeship Requirements, B must pay a penalty of $170,000. ( 3 ) Example 3. Taxpayer C begins construction of a qualified facility on January 1, 2024. The facility is placed in service on January 1, 2025, and C claims the increased credit on its 2025 tax return. C employs 15 individuals to perform construction, alteration, or repair work of the facility, none of whom is a qualified apprentice. Taxpayer C also hires contractor N, who employs five individuals to perform construction, alteration, or repair work of the facility, one of whom is a qualified apprentice. At the time C claims the increased credit, a total of 20,000 labor hours were spent on the construction, alteration, or repair work of the facility, 1,000 of which were performed by qualified apprentices. Of the 50,000 total labor hours, 15,000 labor hours were performed by individuals employed by C and 5,000 labor hours were performed by individuals employed by N. C failed to satisfy the percentage requirement under paragraph (b)(2) of this section because less than 15% of the total labor hours were performed by qualified apprentices. Qualified apprentices must have performed at least 3,000 labor hours, so the total labor hours by which the percentage requirement was not satisfied is 2,000. C also failed to satisfy the participation requirement under paragraph (d) of this section because C employed 15 individuals but zero qualified apprentices. The total labor hours for which the participation requirement was not satisfied is 1,000, which is equal to the total labor hours performed by individuals employed by C - 15,000 - divided by the number of individuals employed by C - 15. The total labor hours by which C failed to meet the percentage and participation requirements is 3,000. To cure C's failure to meet the Apprenticeship Requirements, C must pay a penalty of $150,000. ( 4 ) Example 4. Taxpayer D begins construction of a qualified facility on April 1, 2023. The facility is placed in service on January 1, 2024, and D files a claim for the increased credit with its 2024 tax return. D does not employ any individuals to perform construction, alteration, or repair work of the facility, but hires contractors O, P, and Q. Contractor O employs 10 journeyworkers who work 10,000 hours and one qualified apprentice who works 400 hours. Contractor P employs four journeyworkers who work 4,000 hours and five qualified apprentices who work 2,000 hours. Contractor Q employs three journeyworkers who work 3,000 hours and one qualified apprentice who works 400 hours. The registered apprenticeship program for all of the apprentices has prescribed a 1:1 apprentice to journeyworker ratio. For each day, all journeyworkers and apprentices employed by the contractors are on the job site. The contractors have satisfied the participation requirement because they each employed one or more qualified apprentices. The total labor hours are 19,800 hours, and the total hours worked by qualified apprentices are 2,800. However, Contractor P employed one apprentice in excess of the apprentice-to-journeyworker ratio (five qualified apprentices: four journeyworkers) that was prescribed by the apprenticeship program. Because Contractor P employed one apprentice in excess of the apprentice-to-journeyworker ratio, 400 of the apprentice hours worked by Contractor P do not count towards the labor hour requirement. Thus, Taxpayer D has failed to meet the percentage requirement because only 2,400 hours worked by apprentices are counted for purposes of the percentage requirement. The total labor hours by which D failed to meet the percentage requirement is 75 (19,800 total hours x 12.5% - 2,400 apprentice hours). To cure D's failure to meet the Apprenticeship Requirements, D must pay a penalty of $3,750. (ii) Intentional disregard --(A) Application of section 45(b)(8)(D)(iii). If the IRS determines that any failure to satisfy the Apprenticeship Requirements in paragraph (b) or (d) of this section is due to intentional disregard of those requirements, the amount of the penalty payment under paragraph (e)(2) of this section is increased to $500 multiplied by the total labor hours for which the requirements described in paragraph (b) or (d) of this section were not satisfied with respect to the construction, alteration, or repair work on such qualified facility. (B) Meaning of intentional disregard. A failure to satisfy the Apprenticeship Requirements of paragraph (b) or (d) of this section is due to intentional disregard if it is knowing or willful. (C) Facts and circumstances considered. The facts and circumstances that are considered in determining whether a failure to satisfy the Apprenticeship Requirements is due to intentional disregard include, but are not limited to-- ( 1 ) Whether the failure was part of a pattern of conduct that includes repeated and systemic failures to comply with the Apprenticeship Requirements; ( 2 ) Whether the taxpayer failed to take steps to determine the applicable percentage of labor hours required to be performed by qualified apprentices; ( 3 ) Whether the taxpayer sought to promptly cure any failures; ( 4 ) Whether the taxpayer has been required to make a penalty payment under paragraph (e)(2) of this section in previous years; ( 5 ) Whether the taxpayer included provisions in any contracts entered into with contractors that required the employment of apprentices by the contractor and any subcontractors consistent with the labor hour requirement of section 45(b)(8)(A) and the participation requirement of section 45(b)(8)(C); and ( 6 ) Whether the taxpayer made no attempt to comply with the Apprenticeship Requirements. (D) Rebuttable presumption of no intentional disregard. If a taxpayer makes the penalty payment required by paragraph (e)(2) of this section before receiving notice of an examination from the IRS with respect to a claim for the increased credit under section 45(b)(6), the taxpayer will be presumed not to have intentionally disregarded the Apprenticeship Requirements in paragraphs (b) and (d) of this section. (iii) Deficiency procedures to apply. The penalty payment required by paragraph (e)(2) of this section is subject to deficiency procedures of subchapter B of chapter 63 of the Code. (iv) Penalty payments in the event of a transfer pursuant to section 6418. To the extent an eligible taxpayer, as defined in section 6418(f)(2), has determined an increased credit amount under section 45(b)(6) and transferred such increased credit amount as part of a specified credit portion, the obligation to make a penalty payment under paragraph (e)(2)(i) of this section remains with the eligible taxpayer. The obligation for an eligible taxpayer to satisfy the Apprenticeship Requirements becomes binding upon the earlier of the filing of the eligible taxpayer's return for the taxable year for which the specified credit portion is determined with respect to the eligible taxpayer, or the filing of the return of the transferee taxpayer for the year in which the specified credit portion is taken into account. If the IRS determines that the eligible taxpayer failed to meet the Apprenticeship Requirements and the eligible taxpayer does not then make the penalty payments provided in paragraph (e)(2)(i) of this section, then no penalty is assessed under paragraph (e)(2)(i) of this section, and the eligible taxpayer is not entitled to the increased credit amount determined under section 45(b)(6)(B)(iii). Section 6418 and the regulations in this part under section 6418 control for determining the impact of an eligible taxpayer's failure to cure on any transferee taxpayer. (v) Project labor agreements. The penalty payment required by paragraph (e)(2)(i) of this section to cure a failure to satisfy the Apprenticeship Requirements in paragraphs (b) and (d) of this section shall not apply with respect to the construction, alteration, or repair work of a qualified facility if the work is done pursuant to a Qualifying Project Labor Agreement as defined in § 1.45-7(c)(6)(ii). (f) Definitions. Solely for purposes of this section, the following definitions apply: (1) Journeyworker. The term journeyworker means an individual who has attained a level of skill, abilities, and competencies recognized within an industry as having mastered the skills and competencies required for the occupation. Use of the term may also refer to a mentor, technician, specialist or other skilled individual who has documented sufficient skills and knowledge of an occupation, either through formal apprenticeship or through practical on-the-job experience and formal training. (2) Labor hours. The term labor hours means the total number of hours devoted to the performance of construction, alteration, or repair work by any individual employed by the taxpayer or by any contractor or subcontractor. Labor hours do not include hours worked by foremen, superintendents, owners, or persons employed in bona fide executive, administrative, or professional capacities (as defined in 29 CFR part 541). (3) Qualified apprentice. The term qualified apprentice means an individual who is employed by the taxpayer or by any contractor or subcontractor who is participating in a registered apprenticeship program. Participating in a registered apprentice program means the apprentice has entered into a written agreement with a registered apprenticeship program containing the terms and conditions of the employment and training of the apprentice and has been registered as an apprentice with the U.S. Department of Labor's Office of Apprenticeship or a State apprenticeship agency during the time period in which work is performed by the apprentice for the taxpayer, contractor, or subcontractor. (4) Registered apprenticeship program. A registered apprenticeship program means a program that has been registered by the U.S. Department of Labor's Office of Apprenticeship or a recognized State apprenticeship agency, pursuant to the National Apprenticeship Act and its implementing regulations for registered apprenticeship at 29 CFR parts 29 and 30, as meeting the basic standards and requirements of the Department of Labor for approval of such program for Federal purposes. Registration of a program is evidenced by a Certificate of Registration or other written indicia. (5) State apprenticeship agency. The term State apprenticeship agency means an agency of a State government that has responsibility and accountability for apprenticeship within the State and that has been recognized and authorized by the U.S. Department of Labor's Office of Apprenticeship to register and oversee apprenticeship programs and agreements for Federal purposes. (6) Taxpayer. The term taxpayer has the same meaning as in §1.45-7(d)(9). (g) Applicability date. This section applies to facilities placed in service in taxable years ending after [date final rule publishes in the Federal Register ], and the construction of which begins after [date final rule publishes in the Federal Register ]. §§1.45-9 - 1.45.11 [Reserved] §1.45-12 Recordkeeping and reporting. (a) In general. The increased credit must be claimed in such form and manner as may be prescribed in Internal Revenue Service forms or instructions or in publications or guidance published in the Internal Revenue Bulletin. See §601.601 of this chapter. Consistent with sections 45 and 6001, a taxpayer claiming or transferring (under section 6418) an increased credit under section 45(b)(6)(A) must retain records sufficient to establish compliance with the applicable requirements in section 45(b)(6)(B), as applicable. In the case of any increased credit transferred under section 6418, the requirement to maintain and preserve sufficient records demonstrating compliance with the applicable prevailing wage and apprenticeship requirements remains with the eligible taxpayer that determined and transferred the credit. For definitions of terms used in this section, see §1.45-7(d) with respect to the prevailing wage requirements, and §1.45-8(f) with respect to the apprenticeship requirements. (b) Recordkeeping for prevailing wage and apprenticeship requirements. With respect to each qualified facility for which a taxpayer is claiming or transferring (under section 6418) an increased credit under section 45(b)(6)(A), unless section 45(b)(6)(B)(i) or 45(b)(6)(B)(ii) applies, the taxpayer must maintain and preserve records sufficient to demonstrate compliance with the applicable prevailing wage and apprenticeship requirements in §§1.45-7 and 1.45-8, respectively. At a minimum, those records include payroll records for each laborer and mechanic (including each qualified apprentice) employed by the taxpayer, contractor, or subcontractor in the construction, alteration, or repair of the qualified facility. (c) Recordkeeping for prevailing wage requirements. In addition to payroll records otherwise maintained by the taxpayer, records sufficient to demonstrate compliance with the applicable prevailing wage requirements in §1.45-7 may include the following information for each laborer and mechanic (including each qualified apprentice) employed by the taxpayer, a contractor, or subcontractor with respect to each qualified facility: (1) Identifying information, including the name, social security or tax identification number, address, telephone number, and email address; (2) The location and type of qualified facility; (3) The labor classification(s) the taxpayer applied to the laborer or mechanic for determining the prevailing wage rate and documentation supporting the applicable classification, including the applicable wage determination; (4) The hourly rate(s) of wages paid (including rates of contributions or costs for bona fide fringe benefits or cash equivalents thereof) for each applicable labor classification; (5) Records to support any contribution irrevocably made on behalf of a laborer or mechanic to a trustee or other third person pursuant to a bona fide fringe benefit program, and the rate of costs that were reasonably anticipated in providing bona fide fringe benefits to laborers and mechanics pursuant to an enforceable commitment to carry out a plan or program described in 40 U.S.C. 3141(2)(B), including records demonstrating that the enforceable commitment was provided in writing to the laborers and mechanics affected; (6) The total number of labor hours worked per pay period; (7) The total wages paid for each pay period (including identifying any deductions from wages); (8) Records to support wages paid to any apprentices at less than the applicable prevailing wage rates, including records reflecting the registration of the apprentices with a registered apprenticeship program and the applicable wage rates and apprentice-to-journeyworker ratios prescribed by the apprenticeship program; and (9) The amount and timing of any correction payments and documentation reflecting the calculation of the correction payments. (d) Recordkeeping for apprenticeship requirements. Records sufficient to demonstrate compliance with the applicable apprenticeship requirements in §1.45-8 may include the following information for each apprentice employed by the taxpayer, contractor, or subcontractor with respect to each qualified facility: (1) Any written requests for the employment of apprentices from registered apprenticeship programs, including any contacts with the U.S. Department of Labor's Office of Apprenticeship or a State apprenticeship agency regarding requests for apprentices from registered apprenticeship programs; (2) Any agreements entered into with registered apprenticeship programs with respect to the construction, alteration, or repair of the facility; (3) Documents reflecting the standards and requirements of any registered apprenticeship program, including the applicable ratio requirement prescribed by each registered apprenticeship program from which taxpayers, contractors, or subcontractors employ apprentices; (4) The total number of labor hours worked by apprentices; and (5) Records reflecting the daily ratio of apprentices to journeyworkers. (e) Applicability date. This section applies to facilities placed in service in taxable years ending after [date final rule publishes in the Federal Register ], and the construction of which begins after [date final rule publishes in the Federal Register ]. Par. 4. Sections 1.45L-1 through 1.45L-3 are added to read as follows: §§1.45L-1 - 1.45L-2 [Reserved] §1.45L-3 Rules relating to the increased credit amount for prevailing wage. (a) In general. With respect to a qualified new energy efficient home described in section 45L(a)(2)(B), the credit determined under section 45L(a)(2)(B)(i) is $2,500 and the credit determined under section 45L(a)(2)(B)(ii) is $5,000 if the qualified new energy efficient home described in section 45L(a)(2)(B)-- (1) Meets the requirements under section 45L(c)(1)(A) or 45L(c)(1)(B), as applicable; (2) Is constructed by an eligible contractor; (3) Is acquired by a person for use as a residence during the taxable year; and (4) Satisfies the prevailing wage requirements of section 45(b)(7) and §1.45-7, and the recordkeeping and reporting requirements of §1.45-12. (b) Definitions-- (1) Qualified new energy efficient home. For purposes of this section, a qualified new energy efficient home means a qualified new energy efficient home described in section 45L(b)(2). (2) Eligible contractor. For purposes of this section, an eligible contractor means an eligible contractor described in section 45L(b)(1). (c) Applicability date. This section applies to qualified new energy efficient homes acquired for use in taxable years ending after [date final rule publishes in the Federal Register ], and the construction of which begins after [date final rule publishes in the Federal Register ]. Par. 5. Section 1.45Q-6 is added to read as follows: §1.45Q-6 Rules relating to the increased credit amount for prevailing wage and apprenticeship. (a) In general. If the requirements in paragraph (b) of this section are satisfied with respect to any qualified facility or any carbon capture equipment placed in service at that facility, then the credit determined under section 45Q(a) is multiplied by five. (b) Qualified facility and carbon capture equipment requirements. The requirements of this paragraph (b) are satisfied if any of the following requirements are met -- (1) With respect to a qualified facility the construction of which begins on or after January 29, 2023, and any carbon capture equipment placed in service at such facility, the taxpayer meets the prevailing wage requirements of section 45(b)(7) and §1.45-7 with respect to such facility and equipment, the apprenticeship requirements of section 45(b)(8) and §1.45-8 with respect to the construction of such facility and equipment, and the recordkeeping and reporting requirements of §1.45-12; (2) With respect to any carbon capture equipment the construction of which begins on or after January 29, 2023, and which is installed at a qualified facility the construction of which began prior to such date, the taxpayer meets the prevailing wage requirements of section 45(b)(7) and §1.45-7 with respect to such equipment, the apprenticeship requirements of section 45(b)(8) and §1.45-8 with respect to the construction of such equipment, and the recordkeeping and reporting requirements of §1.45-12; or (3) The construction of carbon capture equipment begins prior to January 29, 2023, and such equipment is installed at a qualified facility the construction of which begins prior to January 29, 2023. (c) Applicability date. This section applies to facilities or equipment placed in service in taxable years ending after [date final rule publishes in the Federal Register ], and the construction of which begins after [date final rule publishes in the Federal Register ]. Par. 6. Sections 1.45U-1 through 1.45U-3 are added to read as follows: §§1.45U-1 - 1.45U-2 [Reserved] §1.45U-3 Rules relating to the increased credit amount for prevailing wage. (a) In general. If a qualified nuclear power facility satisfies the prevailing wage requirements of section 45(b)(7) and §1.45-7 in the alteration or repair of such facility, and the recordkeeping and reporting requirements of §1.45-12, then the amount of the zero-emission nuclear power production credit for the taxable year is equal to the credit amount determined under section 45U(a) multiplied by five. (b) Applicability date. This section applies to qualified nuclear power facilities that produce and sell electricity during the taxable year and the alteration or repair of which occurs after [date final rule publishes in the Federal Register ]. Par. 7. Sections 1.45V-1 through 1.45V-3 are added to read as follows: §§1.45V-1 - 1.45V-2 [Reserved] §1.45V-3 Rules relating to the increased credit amount for prevailing wage and apprenticeship. (a) In general. If any qualified clean hydrogen production facility satisfies the requirements in paragraph (b) of this section, then the amount of the credit for producing qualified clean hydrogen determined under section 45V(a) with respect to qualified clean hydrogen described in section 45V(b)(2) is equal to the credit amount determined under section 45V(a) multiplied by five. (b) Qualified clean hydrogen production facility requirements. A qualified clean hydrogen production facility satisfies the requirements of this paragraph (b) if it is one of the following -- (1) A facility the construction of which began prior to January 29, 2023, and that meets the prevailing wage requirements of section 45(b)(7) and §1.45-7 with respect to an alteration or repair of the facility that occurs after January 29, 2023 (to the extent applicable), and that meets the recordkeeping and reporting requirements of §1.45-12; or (2) A facility that meets the prevailing wage requirements of section 45(b)(7) and §1.45-7, the apprenticeship requirements of section 45(b)(8) and §1.45-8, and the recordkeeping and reporting requirements of §1.45-12. (c) Applicability date. This section applies to facilities placed in service in taxable years ending after [date final rule publishes in the Federal Register ], and the construction of which begins after [date final rule publishes in the Federal Register ]. Par. 8. Sections 1.45Y-1 through 1.45Y-3 are added to read as follows: §§1.45Y-1 - 1.45Y-2 [Reserved] §1.45Y-3 Rules relating to the increased credit amount for prevailing wage and apprenticeship. (a) In general. If any qualified clean electricity production facility satisfies the requirements in paragraph (b) of this section, the amount of the credit for producing clean electricity determined under section 45Y(a)(2) equals 1.5 cents. (b) Qualified clean electricity production facility requirements. A qualified facility satisfies the requirements of this paragraph (b) if it is one of the following -- (1) A facility with a maximum net output of less than one megawatt (as measured in alternating current); (2) A facility the construction of which began prior to January 29, 2023; or (3) A facility that meets the prevailing wage requirements of section 45(b)(7) and §1.45-7, the apprenticeship requirements of section 45(b)(8) and §1.45-8, and the recordkeeping and reporting requirements of §1.45-12. (c) Applicability date. This section applies to facilities placed in service in taxable years ending after [date final rule publishes in the Federal Register ], and the construction of which begins after [date final rule publishes in the Federal Register ]. Par. 9. Sections 1.45Z-1 through 1.45Z-3 are added to read as follows: §§1.45Z-1 - 1.45Z-2 [Reserved] §1.45Z-3 Rules relating to the increased credit amount for prevailing wage and apprenticeship. (a) In general. If any qualified facility for clean fuel production satisfies the requirements in paragraph (b) of this section, the clean fuel production credit determined under section 45Z(a) is multiplied by five. (b) Qualified facility for clean fuel production. A qualified facility for clean fuel production satisfies the requirements of this paragraph (b) if it is one of the following -- (1) A qualified facility that begins construction on or after January 29, 2023, and is placed in service after December 31, 2024, that meets the prevailing wage requirements of section 45(b)(7) and §1.45-7, the apprenticeship requirements of section 45(b)(8) and §1.45-8, and the recordkeeping and reporting requirements of §1.45-12; or (2) A qualified facility that is placed in service before January 1, 2025, that meets the prevailing wage requirements of section 45(b)(7) and §1.45-7, the apprenticeship requirements of section 45(b)(8) and §1.45-8, and the recordkeeping and reporting requirements of §1.45-12, with respect to any alteration or repair of the facility with respect to any taxable year beginning after December 31, 2024, for which the credit is allowed under section 45Z. (c) Applicability date. This section applies to facilities placed in service in taxable years ending after [date final rule publishes in the Federal Register ], and the construction of which begins after [date final rule publishes in the Federal Register ]. Par. 10. Section 1.48-13 is added to read as follows: §1.48-13 Rules relating to the increased credit for prevailing wage and apprenticeship. (a) In general. If a qualified energy project satisfies the requirements in paragraph (b) of this section, the amount of the energy credit determined under section 48(a), after the application of sections 48(a)(1) through (8), and 48(a)(15), is equal to the credit determined under section 48(a) (section 48 credit) multiplied by five. (b) Qualified energy project requirements. A qualified energy project satisfies the requirements of this paragraph (b) if it is one of the following -- (1) A project with a maximum net output of less than one megawatt (as measured in alternating current) or thermal energy; (2) A project the construction of which began prior to January 29, 2023; or (3) A project that meets the prevailing wage requirements of section 48(a)(10)(A) and §1.45-7(b)-(d), the apprenticeship requirements of section 45(b)(8) and §1.45-8, and the recordkeeping and reporting requirements of §1.45-12. (c) Special rule applicable to general prevailing wage requirements --(1) In general. In addition to satisfying the prevailing wage requirements under §1.45-7(b) through (d), a taxpayer must ensure that any laborers and mechanics employed (within the meaning of §1.45-7) by the taxpayer or any contractor or subcontractor in the construction of such energy project, and for the five-year period beginning on the date such project is placed in service, the alteration or repair of such project, are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such project is located as most recently determined by the Secretary of Labor, in accordance with 40 U.S.C. chapter 31, subchapter IV. Subject to recapture under paragraph (c)(3) of this section, for purposes of determining the increased credit amount under section 48(a)(9)(B)(iii), the taxpayer is deemed to satisfy the prevailing wage requirements at the time such project is placed in service. (2) Exception. For purposes of satisfying the wage requirements of paragraph (b)(3) of this section, §1.45-7(a) does not apply. (3) Recapture. The increased section 48 credit amount is subject to recapture for any project that does not satisfy the prevailing wage requirements in §1.45-7 with respect to an alteration or repair of such project for the five-year period beginning on the date such project is originally placed in service (but which does not cease to be investment credit property within the meaning of section 50(a) of the Code). (d) Applicability date. This section applies to projects placed in service in taxable years ending after [date final rule publishes in the Federal Register ], and the construction of which begins after [date final rule publishes in the Federal Register ]. Par. 11. Sections 1.48C-1 through 1.48C-3 are added to read as follows: §§1.48C-1 - 1.48C-2 [Reserved] §1.48C-3 Rules relating to the increased credit amount for prevailing wage and apprenticeship. (a) In general. If any qualifying advanced energy project satisfies the prevailing wage requirements of section 45(b)(7) and §1.457, the apprenticeship requirements of section 45(b)(8) and §1.45-8, and the recordkeeping and reporting requirements of §1.45-12, the qualifying advanced energy project credit determined under section 48C(a) for any taxable year with respect to credits allocated pursuant to section 48C(e) is an amount equal to 30 percent of the qualified investment for the taxable year. (b) Applicability date. This section applies to qualifying advanced energy projects placed in service in taxable years ending after [date final rule publishes in the Federal Register ], and the construction of which begins after [date final rule publishes in the Federal Register ]. Par. 12. Sections 1.48E-1 through 1.48E-3 are added to read as follows: §§1.48E-1 - 1.48E-2 [Reserved] §1.48E-3 Rules relating to the increased credit for prevailing wage and apprenticeship. (a) In general. If any clean electricity investment with respect to a qualified facility or energy storage technology satisfies the requirements in paragraph (b) of this section, the applicable percentage of the qualified clean electricity investment credit determined under section 48E(a) for the taxable year equals 30 percent. (b) Qualified clean electricity investment requirements. A qualified clean electricity investment satisfies the requirements of this paragraph (b) if it is one of the following -- (1) A facility with a maximum net output of less than one megawatt (as measured in alternating current); (2) A facility the construction of which began prior to January 29, 2023; (3) A facility that meets the prevailing wage requirements of §1.48-13(c), the apprenticeship requirements of section 45(b)(8) and §1.45-8, and the recordkeeping and reporting requirements of §1.45-12; (4) Energy storage technology with a capacity of less than one megawatt; (5) Energy storage technology the construction of which began prior to January 29, 2023; or (6) Energy storage technology that satisfies the prevailing wage requirements of §1.48-13(c), the apprenticeship requirements of section 45(b)(8) and §1.45-8, and the recordkeeping and reporting requirements of §1.45-12. (c) Applicability date. This section applies to facilities and energy storage technologies placed in service in taxable years ending after [date final rule publishes in the Federal Register ], and the construction of which begins after [date final rule publishes in the Federal Register ]. Par. 13. Sections 1.179D-1 through 1.179D-3 are added to read as follows: §§1.179D-1 - 1.179D-2 [Reserved] §1.179D-3 Rules relating to the increased deduction for prevailing wage and apprenticeship. (a) In general. If any energy efficient commercial building property, energy efficient building retrofit property, or property installed pursuant to a qualified retrofit plan satisfies the requirements in paragraph (b) of this section, the applicable dollar value for determining the maximum amount of the deduction under section 179D(b)(2) is multiplied by five. (b) Certain energy efficient commercial building property requirements. Energy efficient commercial building property, energy efficient building retrofit property, or property installed pursuant to a qualified retrofit plan satisfies the requirements of this paragraph (b) if it is one of the following -- (1) Property the installation of which began prior to January 29, 2023; or (2) Property that meets the prevailing wage requirements of section 45(b)(7) and §1.45-7, the apprenticeship requirements of section 45(b)(8) and §1.45-8, and the recordkeeping and reporting requirements of §1.45-12. (c) Applicability date. This section applies to property placed in service in taxable years ending after [date final rule publishes in the Federal Register ], and the installation of which begins after [date final rule publishes in the Federal Register ]. Douglas W. O'Donnell, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register August 29, 2023, 8:45 a.m., and published in the issue of the Federal Register for August 30, 2023, 88 FR 60018)

Private Letter Ruling Number: 202228010 Internal Revenue Service April 12, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202228010 Release Date: 7/15/2022 Index Number: 2601.00-00, 2518.00-00, 2501.00-00, 2041.00-00, 2038.00-00, 2037.00-00, 2036.00-00, 1001.00-00, 61.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B04 PLR-121271-21 Date: April 12, 2022 Dear ********: This letter responds to your authorized representative's letter dated September 28, 2021, and subsequent correspondence, requesting federal tax rulings on certain proposed transactions involving Trust. The facts and representations submitted are summarized as follows: On Date 1, Settlor and Settlor's Spouse (collectively, the "Settlors") created an irrevocable trust, Trust, for the benefit of Son (generally referred to in the trust instrument as the "Beneficiary"). Date 1 is a date prior to October 21, 1942. Trust is governed by the laws of State. Article III, Section 1 of Trust provides that the Beneficiary has no right to the corpus of Trust and does not have a right to partition, divide, or dissolve Trust. The Beneficiary has no right with respect to Trust other than to receive distributions of net earnings awarded him by the trustee with the consent of Trust's Advisory Board and the right to distribution of the trust estate made by the trustee at the termination of Trust. Article III, Section 2 provides that the death, insolvency or bankruptcy of the Beneficiary hereunder, or the transfer of his interest in any manner, or by descent or otherwise, during the continuance of Trust, shall not operate as a dissolution of, nor terminate Trust, nor shall it have any effect whatever upon the trust estate, its operation or mode of business, nor shall it entitle his heirs or assigns or representatives to take any action in the courts of law or equity against the estate, its trustees or property or its business operations of any kind, all of which shall remain intact and undistributed thereby; but shall succeed only to the rights of the original Beneficiary. Article III, Section 3 provides that at the time of the death of the Beneficiary, his equitable interest in the trust estate, unless disposed of otherwise by said Beneficiary, shall pass to and vest in his heirs in accordance with the laws of descent and distribution then in force, applicable to the equitable interest of such Beneficiary in the trust estate. Section 3 further provides that the term "Beneficiary" applies not only to Son but to all of his successors to beneficial interests under Trust. Article IV, Section 3 provides that Trust will continue until the death of Son, and for twenty-one years after Son's death. At the expiration of that period, the trustee is to distribute the trust corpus among the then existing beneficiaries. Article IV, Section 4 provides that the Beneficiary may receive from time to time a portion of the net profits accruing from time to time to the trust estate, as the trustee, acting with the advice and consent of the Advisory Board, may see fit to pay over and deliver to the Beneficiary. No duty is imposed upon the trustee to make distributions of net profits, but the power is conferred upon the trustee, acting with the advice and consent of the Advisory Board. In exercising this discretion, the trustee and Advisory Board will give full consideration to the interest of both the Beneficiary and the trust estate. By order dated Date 2 (Date 2 Order), Court modified the terms of Trust and approved a completely restated trust agreement. In the Date 2 Order, Court made several significant findings and holdings with respect to Trust. Specifically, Court found that Trust expressly provides that the term "Beneficiary" applies not only to Son but to all his successors to beneficial interests under Trust. The Court further found that the heirs of Son who succeed to his equitable interest in Trust will be referred to as "Successor Beneficiaries." In addition, Court found that, (i) upon Son's death, Son's equitable interest in Trust will pass to and vest in Son's heirs in accordance with the laws of descent and distribution of State then in force, applicable to his equitable interest in Trust; (ii) upon Son's death, Trust will be divided into separate shares for each of his heirs; if Son's Spouse survives him, one-third of Trust will be allocated to a share for Son's Spouse and the other two-thirds will be divided into shares for the children and descendants of Son, in accordance with the laws of descent and distribution of State then in force; and (iii) each such share for Son's heirs will be separate, and the Successor Beneficiaries of Trust will not become common beneficiaries of an undivided trust. Consequently, the interests and powers of a Successor Beneficiary with respect to his or her share extend only to that Successor Beneficiary's respective share and not to any share held for any other Successor Beneficiary. Trust is administered by Trustee and a three-person Advisory Board. An individual serving as a trustee is also a member of the Advisory Board. In the event Trustee should fail or cease to serve, the remaining members of the Advisory Board will appoint a new member to fill the vacancy on the board. Then the Advisory Board will appoint one of its members or a Qualified Family Trust Company to serve as trustee. The Beneficiary and individuals related and subordinate to the Beneficiary within the meaning of § 672(c) of the Internal Revenue Code (Code) may serve on the Advisory Board but may not serve as a trustee. Currently, Son is married to Son's Spouse and they have five children (Grandchildren 1 through 5), sixteen Grandchildren (Great Grandchildren 1 through 16), and thirty-two Great Grandchildren (Great-Great Grandchildren 1 through 32). Under Article III, Section 3, as construed by Court (discussed below), Son is determined to possess a testamentary general power of appointment over Trust. Son intends to allow his power of appointment over Trust to lapse at his death. Further, one or more of the Successor Beneficiaries plans to irrevocably and unqualifiedly disclaim, in accordance with State Statute 1 and § 2518 of the Code, in a writing delivered to Trustee, all or an undivided portion of his or her beneficial interest in Trust no later than nine months after Son's death. A Successor Beneficiary disclaiming his or her interest in Trust will not (i) accept an interest in or any benefits from the property subject to the disclaimer; or (ii) voluntarily assign, convey, encumber, pledge or transfer the interest in property subject to the disclaimer or contract to do any of the foregoing. As a result of the disclaimer, the disclaimed interest will pass without any direction from the Successor Beneficiary disclaiming his or her interest in Trust, and the interest will pass to someone other than the Successor Beneficiary disclaiming his or her interest in Trust. Finally, a Successor Beneficiary disclaiming his or her interest in Trust will not serve on the Advisory Board or as a trustee of Trust. On Date 3, Trustee filed in Court a petition for construction and modification of terms of Trust. Trustee proposes to make certain modifications to Trust in order to facilitate the administration of Trust after the death of Son. Trust currently provides that Trust will terminate twenty-one years after Son's death and will then be distributed outright to the Successor Beneficiaries. It is represented that the amounts distributed upon termination of Trust will be substantial, and that if a Successor Beneficiary is under the age of x, it would not be in his or her best interest to receive his or her share outright. Son and the Successor Beneficiaries have consented to the proposed modifications. State Statute 1 provides that if an interest in property passes because of the death of a decedent, a disclaimer of the interest takes effect as of the time of the decedent's death, and relates back for all purposes to the time of the decedent's death. State Statute 2 provides that on the petition of a trustee or a beneficiary, a court may order that the terms of the trust be modified if, because of circumstances not known to or anticipated by the settlor, the order will further the purposes of the trust. State Statute 3 provides that the court may not take the action permitted by State Statute 2 unless all beneficiaries of the trust have consented to the order or are deemed to have consented to the order. Further, a minor, incapacitated, unborn, or unascertained beneficiary is deemed to have consented if a person representing the beneficiary's interest has consented or if a guardian ad litem appointed to represent the beneficiary's interest consents on the beneficiary's behalf. State Statute 4 provides that when distributing trust property or dividing or terminating a trust, a trustee may make distributions in divided or undivided interests, and allocate particular assets in proportionate or disproportionate shares. On Date 4, Court issued an order ("Court Order") approving the following construction and modification of Trust ("Trust Construction and Modification"), subject to a favorable private letter ruling from the Internal Revenue Service. Trust Construction In Court Order, Court ruled as follows: (1) Upon Son's death, Trust shall be divided into separate trusts (hereinafter, "Successor Trusts") for each Successor Beneficiary, and that upon the subsequent death of a Successor Beneficiary during the twenty-one year term following Son's death, the Successor Trusts of which the deceased Successor Beneficiary was an income beneficiary shall be similarly divided into separate Successor Trusts. (2) Trust grants Son a general power of appointment with respect to Trust and Successor Beneficiaries hold the same general power of appointment with respect to his or her Successor Trust. (3) After Son's death, each Successor Beneficiary will have three separate beneficial interests in his or her Successor Trust: (i) a discretionary income interest for twenty-one years after Son's death; (ii) a remainder interest which vests in possession twenty-one years after Son's death; and (iii) a general power of appointment. Each of the beneficial interests may be disclaimed independently of the others. (4) The class of a disclaiming Successor Beneficiary's descendants who are heirs of Son shall remain open to new members born to such disclaiming Successor Beneficiary during the twenty-one years after the death of Son, including descendants born to a disclaiming Successor Beneficiary who has no children or other descendants living on the death of Son. (5) Upon a Successor Beneficiary's disclaimer of a beneficial interest in his or her Successor Trust, the following will apply: (i) If a Successor Beneficiary disclaims an interest in Trust and survives Son, the disclaimed interest will pass, at Son's death, to Son's heirs (which would exclude a Successor Beneficiary's spouse) determined as though the disclaiming beneficiary did not survive Son ( i.e., to the beneficiary's descendants who survive Son). (ii) If a Successor Beneficiary disclaims an interest in Trust, survives Son but dies within twenty-one years after Son's death, the disclaimed interest will not be affected by the Successor Beneficiary's death. (iii) If a Successor Beneficiary survives Son but dies within twenty-one years after Son's death, the Successor Beneficiary's retained interest in Trust will pass to Successor Beneficiary's heirs at law, which include Successor Beneficiary's spouse. (6) Successor Trust shall be divided and funded in the following manner: (i) Where no disclaimers are made, the separate trusts created for Successor Beneficiaries will hold equal percentages of income and remainder interests and the undistributed income produced by a particular portion will be added to principal of that particular portion. (ii) Where a Successor Beneficiary disclaims an equal portion of his or her income and remainder interests, the retained and disclaimed interests would be administered similarly, and the undistributed income produced by a particular portion will be added to principal of that particular portion. (iii) Where a Successor Beneficiary disclaims a greater percentage of the remainder interest than an income interest, at least two trusts will be created for the disclaimant. Under one trust, the disclaimant will be both the income and remainder beneficiary of the trust. Under the second trust, the disclaimant will have an income interest in the trust but no remainder interest. The remainder interest in the second trust will belong to the heirs of the beneficiary immediately preceding the disclaimant in interest (that is, the "prior beneficiary") who are descendants of the disclaiming beneficiary, determined as if the disclaiming beneficiary predeceased the prior beneficiary. (7) When Trustee divides Trust into separate trusts after Son's death, or after the death of one of the Successor Beneficiaries, Trustee shall create the least number of trusts under each family branch of a particular child of Son (Grandchild 1 through 5) that can be established with only one income beneficiary of each trust. (8) If an income beneficiary of a separate trust dies within twenty-one years after Son's death with an heir at law who is already an income beneficiary of a separate trust, then such heir's share of the deceased income beneficiary's trust shall be added to his or her existing trust of which he or she is the income beneficiary in conformance with the general rule in Construction #7. (9) If, during the twenty-one year term after Son's death, a new beneficiary is born into the class of beneficiaries who are lineal descendants of the disclaimant (the "Disclaimant Class") and a trust or trusts are in existence with members of the Disclaimant Class as income beneficiaries, a new trust is created for the new beneficiary. (10) The terms "net earnings" and "net profits" as they appear in Trust are construed to mean trust "income" under State Trust Code and State law. Trust Modification In Court Order, Court modified Trust as follows: (1) A new Section 6 of Article IV of Trust is added to provide that when Trust terminates twenty-one years after the death of Son, any share distributable to a beneficiary who is then under the age of x (a "Continuing Beneficiary") shall be held in a trust (a "Continuing Trust") until such Continuing Beneficiary attains the age of x. If the Continuing Beneficiary survives Son but dies before reaching the age of x, he or she shall have a general testamentary power of appointment over his or her Continuing Trust. Any Continuing Trust shall terminate when the Continuing Beneficiary attains x years of age or dies, whichever event occurs first. At that time, the trustee shall deliver all remaining property in Continuing Trust to the Continuing Beneficiary, or if not living, as the Continuing Beneficiary may appoint by will (including to the Continuing Beneficiary's estate or the creditors of the Continuing Beneficiary or the creditors of the Continuing Beneficiary's estate). If the Continuing Beneficiary dies before reaching age x and does not exercise his or her general testamentary power of appointment, the Continuing Trust is distributed to the Continuing Beneficiary's estate. Equitable title to the property held in the Continuing Beneficiary's Continuing Trust shall be vested in the Continuing Beneficiary and shall be alienable. No power shall be exercised so as to violate any rule against perpetuities or rule against restraint against alienation. (Modification #1) (2) A new Section 7 of Article IV of Trust is added governing the succession of trustees with respect to each Continuing Trust as described under new Section 6. A Continuing Beneficiary will have the power to remove the trustee of his or her Continuing Trust and replace the trustee with a trustee of his or her choosing, other than the Continuing Beneficiary. Until a Continuing Beneficiary attains the age of eighteen, the Continuing Beneficiary's parent or legal guardian will hold this power. (Modification #2) (3) Section 10 of Article I of Trust provides that as near as possible after the close of each calendar year, Trust must have the books and records of Trust audited by a certified public accountant (the "Audit Requirement"). After Son's death, the trust estate will be divided into several Successor Trusts and the Audit Requirement will be burdensome and costly given the number of separate trusts subject to the Audit Requirement. Accordingly, Section 10 of Article I of Trust is modified to eliminate the Audit Requirement for separate trusts with assets under $A and make the Audit Requirement optional for trusts whose beneficiaries were not an adult party to the petition filed on Date 3 and with assets under $A. (Modification #3) It is represented that no actual or constructive additions within the meaning of § 26.2601-1(b) of the Generation-Skipping Transfer Tax Regulations have been made to Trust after September 25, 1985. You have requested the following rulings: 1. Trust is exempt from chapter 13 pursuant to § 2601. 2. Trust grants Son and each Successor Beneficiary of Trust a power of appointment that is a general power of appointment created before October 21, 1942, under §§ 2041(a)(1) and 2514(a), so that the lapse or complete release of the power of appointment will not subject any portion of Trust to federal estate, gift, or generation-skipping transfer (GST) tax. 3. The proposed disclaimer by any one or more of the Successor Beneficiaries of Trust will (a) be a qualified disclaimer under § 2518; (b) not result in a taxable gift by any of Successor Beneficiaries disclaiming his or her interest in Trust, and will not subject any portion of Trust to federal estate tax in the gross estate of a Successor Beneficiary disclaiming his or her interest; and (c) not result in a loss of GST exempt status with respect to any portion of Trust. 4. The assets of a Continuing Trust created pursuant to Modification #1 after Son's death will be includible in the gross estate of any Continuing Beneficiary of such Continuing Trust under § 2041(a)(2) if the Continuing Beneficiary dies before the Continuing Trust terminates. 5. Trust Construction and Modification will not cause Trust or any Successor Trust to be subject to GST tax pursuant to chapter 13. 6. Trust Construction and Modification will not result in any Successor Beneficiary of Trust making a taxable gift. 7. Trust Construction and Modification will not result in inclusion of any asset of, or interest in Trust or any Successor Trusts in the gross estate of any Successor Beneficiary whose death occurs prior to the termination of Trust under § 2036, 2037 or 2038. 8. The non-pro rata distribution of assets from Trust to one or more Successor Trusts created for the benefit of any Successor Beneficiaries will not be treated as a pro rata distribution of assets followed by a taxable sale and exchange of assets between the Successor Trusts. LAW AND ANALYSIS Ruling #1 Section 2601 imposes a tax on every generation-skipping transfer (GST) which is defined under § 2611 as a taxable distribution, taxable termination, and a direct skip. Section 1433(b)(2)(A) of the Tax Reform Act of 1986 (Act) and § 26.2601-1(b)(1) of the Generation-Skipping Transfer Tax Regulations provide that the GST tax shall not apply to any GST under a trust that was irrevocable on September 25, 1985, but shall apply to the extent that the transfer is not made out of corpus added to the trust after September 25, 1985 (or out of income attributable to corpus so added). Section 26.2601-1(b)(1)(i) provides that a trust qualifies for transitional rule relief from the provisions of chapter 13 if the trust was irrevocable on September 25, 1985, and no addition (actual or constructive) was made to the trust after that date. Section 26.2601-1(b)(1)(iv) provides that an addition made after September 25, 1985, to an irrevocable trust will subject to the provisions of chapter 13 a proportionate amount of distributions from, and terminations of interest in, property held in the trust. In this case, Trust was in existence and irrevocable prior to September 25, 1985. Additionally, it is represented that no actual or constructive additions within the meaning of § 26.2601-1(b) have been made to Trust after September 25, 1985. Therefore, based upon the facts submitted and representations made, we conclude that Trust is exempt from the application of chapter 13 pursuant to § 2601. Ruling #2 Section 2041(a)(1) provides, in part, that the value of the gross estate includes the value of all property to the extent of any property with respect to which a general power of appointment created on or before October 21, 1942, is exercised by the decedent by will; but the failure to exercise such a power or the complete release of such a power is not deemed an exercise thereof. See § 20.2041-2(d) of the Estate Tax Regulations. Section 2041(b)(1) provides that, for purposes of § 2041(a), the term "gener al power of appointment" means a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate. Section 20.2041-1(b) provides that a power of appointment includes all powers that are in substance and effect powers of appointment, regardless of the nomenclature used in creating the power. Section 20.2041-1(e) provides that a power of appointment created by an inter vivos instrument is considered created on the date the instrument takes effect. The power is not treated as created at a future date merely because the power is not exercisable on the date the instrument takes effect or because the identity of the powerholder is not ascertainable until a later date. Example 3 of § 20.2041-1(e) provides an illustration of the above rule. In the example, F creates an irrevocable inter vivos trust created before October 21, 1942, providing for payment of income to G for life with the remainder as G appoints by will, but in default of G's appointment, the trust will pass with income to H for life and the remainder as H shall appoint by will. If G dies after October 2, 1942, without exercising the power of appointment, H's power is considered a power created on or before October 21, 1942, even though H's power of appointment was only a contingent interest until G's death. Section 20.2041-2(d) provides that a failure to exercise a general power of appointment created on or before October 21, 1942, or a complete release of the power is not an exercise of the power. The phrase "a complete release" means a release of all powers over all or a portion of the property subject to the power of appointment, as distinguished from a reduction of a power of appointment to a lesser power. Thus, if the decedent completely relinquished all powers over one-half of the property subject to a power of appointment, the power is completely released as to that one-half. Section 2514(a) provides that an exercise of a general power of appointment created on or before October 21, 1942, is deemed a transfer of the property by the individual possessing such power for gift tax purposes, but the failure to exercise such power or the complete release of such power is not deemed an exercise thereof. Section 25.2514-2(c) of the Gift Tax Regulations provides that a failure to exercise a general power of appointment created on or before October 21, 1942, or a complete release of such power is not considered to be an exercise of a general power of appointment. The phrase "complete release" means a release of all powers over all or a portion of the property subject to the power of appointment, as distinguished from the reduction of a power of appointment to a lesser power. Thus, if the possessor completely relinquished all powers over one-half of the property subject to a power of appointment, the power is completely released as to that one-half. Section 26.2601-1(b)(1)(v)(A) provides that where any portion of a trust remains in trust after the post-September 25, 1985, release, exercise, or lapse of a power of appointment over that portion of the trust, and the release, exercise, or lapse is treated to any extent as a taxable transfer under chapter 11 or chapter 12, the value of the entire portion of the trust subject to the power that was released, exercised, or lapsed will be treated as if that portion had been withdrawn and immediately retransferred to the trust at the time of the release, exercise, or lapse. In this case, Trust was executed on a date prior to October 21, 1942. Article III, Section 3 of Trust provides that at the time of the death of the Beneficiary, his equitable interest in Trust, unless disposed of otherwise by such Beneficiary, shall pass to and vest in his heirs in accordance with the laws of descent and distribution then in force, applicable to the equitable interest of such Beneficiary in the trust estate. The language of Trust indicates that Settlors intended for Son to have the power to dispose of his equitable interest, without limitation. Further, Trust indicates that the Settlors intended each Successor Beneficiary to have the same rights with respect to his or her share of Trust as Son, including a general power of appointment over such Successor Beneficiary's interest in his or her Successor Trust. In the Court order, Court construed Trust as granting Son and Successor Beneficiaries a testamentary power of appointment to appoint such beneficiary's interest in Trust to any appointee. Trust was executed prior to October 21, 1942, hence Son's power of appointment is a power created before October 21, 1942. Successor Beneficiaries of Trust possess a general power of appointment that is contingent on surviving Son's death. As in the case of Example 3 of § 20.2041-1(e), the power of appointment held by Successor Beneficiaries is considered a power created before October 21, 1942. Accordingly, based upon the facts submitted and representations made, we conclude that Son and each Successor Beneficiary possess a general power of appointment created before October 21, 194 2. Son proposes to allow his testamentary general power of appointment to lapse. Under §§ 2041(a)(1) and 2514(a), the lapse or complete release of Son's general power of appointment will not cause Son to be treated as making a taxable gift or cause any portion of Trust to be included in Son's gross estate for federal estate tax purposes. Therefore, based upon the facts submitted and representations made, we conclude that the lapse (or complete release) of Son's general power of appointment will not subject any portion of Trust to federal estate or gift tax under §§ 2041(a)(1) and 2514(a). If one or more Successor Beneficiaries allow his or her power to lapse or completely releases his or her power of appointment, under §§ 2041(a)(1) and 2514(a), the lapse or complete release of a Successor Beneficiary's general power of appointment will not cause a Successor Beneficiary to be treated as making a taxable gift or cause any portion of Trust to be included in a Successor Beneficiary's gross estate for federal estate tax purposes. Therefore, based upon the facts submitted and representations made, we conclude that the lapse (or complete release) of a Successor Beneficiary's general power of appointment will not subject any portion of Trust to federal estate or gift tax under §§ 2041(a)(1) and 2514(a). Finally, in this case, Trust was irrevocable prior to September 25, 1985. It is represented that there have been no additions (actual or constructive) to Trust after September 25, 1985. The lapse or complete release of a general power of appointment by Son or a Successor Beneficiary will not be a taxable lapse or release of a general power of appointment because the power of appointment was created prior to October 21, 1942. Therefore, based upon the facts submitted and the representations made, we conclude that the lapse or complete release of a general power of appointment by Son or a Successor Beneficiary will not be treated as a constructive addition to Trust and will not result in a loss of GST exempt status with respect to any portion of the trust over which such powers lapsed or were released. Ruling #3 Section 2046 provides that for estate tax purposes, disclaimers of property interests passing upon death are treated as provided in § 2518. Section 2518(a) provides that if a person makes a qualified disclaimer with respect to any interest in property, subtitle B shall apply with respect to such interest as if the interest had never been transferred to such person. Section 2518(b) provides that the term "qualified disclaimer" means an irrevocable and unqualified refusal by a person to accept an interest in property but only if (1) the refusal is in writing; (2) the writing is received by the transferor of the interest, his legal representative, or the holder of the legal title to the property to which the interest relates not later than the date that is nine months after the later of (A) the date on which the transfer creating the interest in the person is made, or (B) the day on which the person attains age 21; (3) the person has not accepted the interest or any of its benefits; and (4) as a result of such refusal, the interest passes without any direction on the part of the person making the disclaimer and passes either (A) to the spouse of the decedent, or (B) to a person other than the person making the disclaimer. Section 2518(c)(1) provides that a disclaimer with respect to an undivided portion of an interest which meets the requirements of § 2518(b) shall be treated as a qualified disclaimer of such portion of the interest. Section 2518(c)(2) provides that a power over property is to be treated as an interest in that property. Section 25.2518-1(b) provides, in relevant part, that if a person makes a qualified disclaimer as described in § 2518(b) and § 25.2518-2, for purposes of the federal estate, gift, and GST provisions, the disclaimed interest in property is treated as if it had never been transferred to the person making the qualified disclaimer. Instead, it is considered as passing directly from the transferor of the property to the person entitled to receive the property as a result of the disclaimer. Accordingly, a person making a qualified disclaimer is not treated as making a gift. Similarly, the value of a decedent's gross estate for purposes of the federal estate tax does not include the value of property with respect to which the decedent, or the decedent's executor or administrator on behalf of the decedent, has made a qualified disclaimer. Section 25.2518-2(c)(3) provides, in relevant part, that the nine-month period for making a disclaimer generally is to be determined with reference to the transfer creating the interests in the disclaimant. With respect to inter vivos transfers, a transfer creating an interest occurs when there is a completed gift for federal gift tax purposes regardless of whether a gift tax is imposed on the completed gift. With respect to transfers made by a decedent at death or transfers that become irrevocable at death, the transfer creating the interest occurs on the date of the decedent's death, even if an estate tax is not imposed on the transfer. Section 25.2518-2(c)(3) further provides that if a person to whom an interest in property passes by reason of the exercise, release, or lapse of a general power of appointment desires to make a qualified disclaimer, the disclaimer must be made within a nine-month period after the exercise, release, or lapse regardless of whether the exercise, release, or lapse is subject to estate or gift tax. A person who receives an interest in property as the result of a qualified disclaimer of the interest must disclaim the previously disclaimed interest no later than nine months after the date of the transfer creating the interest in the preceding disclaimant. Thus, if A were to make a qualified disclaimer of a specific bequest and as a result of the qualified disclaimer the property passed as part of the residue, the beneficiary of the residue could make a qualified disclaimer no later than nine months after the date of the testator's death. Section 25.2518-3(a)(1)(i) provides that if the requirements of the section are satisfied, the disclaimer of all or an undivided portion of any separate interest in property may be a qualified disclaimer, even if the disclaimant has another interest in the same property. Under 25.2518-3(a)(1)(iii), a power of appointment with respect to property is treated as a separate interest in such property and such power of appointment with respect to all or an undivided portion of such property may be disclaimed independently from any other interests separately created by the transferor in the property. Further, a disclaimer of a power of appointment with respect to property is a qualified disclaimer only if any right to direct the beneficial enjoyment of the property which is retained by the disclaimant is limited by an ascertainable standard. Section 25.2518-3(a)(2) provides that a disclaimer of an undivided portion of an interest in a trust may be a qualified disclaimer. Under § 25.2518-3(b), the disclaimer of an undivided portion of a disclaimant's separate interest in property will be a qualified disclaimer if the undivided portion consists of a fraction or percentage of each and every substantial interest or right owned by the disclaimant in the property and extends over the entire term of the disclaimant's interest in the property. A disclaimer of some specific rights while retaining other rights with respect to an interest in property is not a qualified disclaimer of an undivided portion of the disclaimant's interest in the property. In this case, as construed by Court, Son's power of appointment under Trust was created before October 21, 1942, and is a general power of appointment as described in §§ 2041(a)(1) and 2514(a). Under the terms of Trust, Son's heirs cannot succeed to any interests in Trust until Son's death. If Son lets his power lapse at his death, as proposed, the lapse will create various interests, including a testamentary general power of appointment, in Trust for Successor Beneficiaries. See § 2518(c)(2). For purposes of § 2518, these powers will be considered as created on the date of Son's death, the date when Son's general power of appointment lapses. One or more of the Successor Beneficiaries propose to disclaim an undivided portion of or all of the interest in Trust to which he or she may be entitled to at Son's death. A disclaiming Successor Beneficiary will not accept an interest in or any benefit from the property subject to the disclaimer or voluntarily assign, convey, encumber, pledge, or transfer the interest or property subject to the disclaimer. Further, each disclaimer will be irrevocable and in writing delivered to the trustee. As a result, the proposed disclaimer will pass without any direction from the disclaiming Successor Beneficiary and the interest will pass to someone other than the disclaiming Successor Beneficiary. Finally, a disclaiming Successor Beneficiary will be prohibited from serving on the Advisory Board of Trust or as a trustee of Trust. Accordingly, based on the facts submitted and representations made, we conclude that the proposed disclaimer by any one or more Successor Beneficiary will not result in a taxable gift by the disclaimant and will not subject any portion of Trust to estate tax in the gross estate of the disclaimant. Under § 25.2518-1(b), the disclaimed interest in property is treated as if it had never been transferred to the person making the qualified disclaimer. Instead, it is considered as passing directly from the transferor of the property to the person entitled to receive the property as a result of the disclaimer. Therefore, the disclaimant is not a transferor, as defined in § 2652 and is not treated as making a constructive addition to Trust. Accordingly, we conclude that a proposed disclaimer by any one or more Successor Beneficiary will not result in Trust losing GST exempt status. Ruling #4 Section 2041(a)(2) provides that to the extent of any property with respect to which the decedent has at the time of his death a general power of appointment created after October 21, 1942, or with respect to which the decedent has at any time exercised or released such a power of appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent, such property would be includible in the decedent's gross estate under §§ 2035 to 2038, inclusive. Trust currently provides for outright distribution to the Successor Beneficiaries on Trust's termination. Under Modification #1, any share upon Trust's termination distributable to a Successor Beneficiary under the age of x is to be held in a Continuing Trust until that Continuing Beneficiary reaches the age of x. If the Continuing Beneficiary survives Son but dies before reaching age x, Continuing Trust grants the Continuing Beneficiary a general power of appointment to appoint the assets of his or her Continuing Trust to any appointee, including the Continuing Beneficiary's estate or the creditors of the Continuing Beneficiary or the creditors of the Continuing Beneficiary's estate. Thus, if the Continuing Beneficiary survives the twenty-one year term following Son's death but dies before the termination of Continuing Trust, the remaining assets in the Continuing Trust are includible in the gross estate of the Continuing Beneficiary under § 2041(a)(2). Based upon the facts submitted and representations made, we conclude that the assets of a Continuing Trust created pursuant to Modification #1 after Son's death will be includible in the gross estate for federal estate tax purposes of any Continuing Beneficiary of such Continuing Trust under § 2041(a)(2) if the Continuing Beneficiary dies before the Continuing Trust terminates. Ruling #5 Section 26.2601-1(b)(4) provides rules for determining when a modification, judicial construction, settlement agreement, or trustee action with respect to a trust that is exempt from GST tax under § 26.2601-1(b)(1), (2), or (3) will not cause the trust to lose its exempt status. The rules in § 26.2601-1(b)(4) are applicable only for purposes of determining whether an exempt trust retains its exempt status for GST purposes. The rules do not apply, for example, in determining whether the transaction results in a gift subject to gift tax, or may cause the trust to be included in the gross estate of a beneficiary, or may result in the realization of gain for purposes of § 1001. Section 26.2601-1(b)(4)(i)(C) provides that judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument will not cause an exempt trust to be subject to the provisions of chapter 13 if the judicial action involves a bona fide issue and the construction is consistent with applicable state law that would be applied by the highest court of the state. Section 26.2601-1(b)(4)(i)(D)(1) provides that a modification of the governing instrument of an exempt trust by judicial reformation, or nonjudicial reformation that is valid under applicable state law, will not cause an exempt trust to be subject to the provisions of chapter 13, if the modification does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the modification, and the modification does not extent the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. Section 26.2601-1(b)(4)(i)(D)(2) provides that a modification of an exempt trust will result in a shift in a beneficial interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a GST transfer or the creation of a new GST transfer. To determine whether a modification of an irrevocable trust will shift a beneficial interest in a trust to a beneficiary who occupies a lower generation, the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification. If the effect of the modification cannot be immediately determined, it is deemed to shift a beneficial interest in the trust to a beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the modification. A modification that is administrative in nature that only indirectly increases the amount transferred (for example, by lowering administrative costs or income taxes) will not be considered to shift a beneficial interest in the trust. Section 26.2601-1(b)(4)(i)(E), Example 10 considers the following situation. In 1980, Grantor established an irrevocable trust for the benefit of Grantor's issue, naming a bank and five other individuals as trustees. In 2002, the appropriate local court approves a modification of the trust that decreases the number of trustees which results in lower administrative costs. The modification pertains to the administration of the trust and does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the modification. In addition, the modification does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. Therefore, the trust will not be subject to the provisions of chapter 13. In this case, Trust Construction by Court resolves ambiguities in the terms of the trust instrument. The judicial action involved bona fide issues regarding whether Son and the Successor Beneficiaries possess general powers of appointment and whether such powers were created before October 21, 1942. Trust Construction is consistent with applicable state law that would be applied by the highest court of the state. Further, Modification #1 grants each beneficiary of a Continuing Trust a general power of appointment which will cause the assets of a Continuing Trust to be includible in the gross estate of such beneficiary under § 2041(a)(2). Therefore, Modification #1 does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the modification, and the modification does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. Modification #2 and #3 relate to the appointment and replacement of successor trustees in Continuing Trust and the application of the Audit Requirement after Trust is divided into separate trusts. Modifications #2 and #3 are administrative in nature and under § 26.2601-1(b)(4)(i)(D)(2), will not be considered to shift a beneficial interest to a lower generation in the trust or extend the time for vesting of any beneficial interest in the trust beyond the period provided for in Trust. See Example 10 of § 26.2601-1(b)(4)(i)(E). Therefore, based upon the facts submitted and representations made, we conclude that Trust Construction and Modification by Court will not cause Trust or any Successor Trusts to be subject to GST tax pursuant to chapter 13. Ruling #6 Section 2501 provides that a tax is imposed for each calendar year on the transfer of property by gift during such calendar year by any individual, resident or nonresident. Section 2511(a) provides that the tax imposed by § 2501 will apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible on intangible. Section 25.2511-1(c) provides that any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax. Section 2512(a) provides that if the gift is made in property, the value thereof at the date of the gift is considered the amount of the gift. Section 2512(b) provides that where property is transferred for less than adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration is deemed to be a gift and is included in computing the amount of gifts made during the calendar year. In this case, Trust Construction and Modification by Court do not change the beneficial interests in Trust. Accordingly, based upon the facts submitted and representations made, we conclude that the Trust Construction and Modification will not cause Son or any of the Successor Beneficiaries to have made a taxable gift for purposes of § 2501. Ruling #7 Section 2036(a) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death: (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom. Section 2037(a) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, if: (1) possession or enjoyment of the property can, through ownership of such interest, be obtained only by surviving the decedent, and (2) the decedent has retained a reversionary interest in the property, and the value of such reversionary interest immediately before the death of the decedent exceeds five percent of the value of such property. Section 2038(a)(1) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished during the 3-year period ending on the date of the decedent's death. In order for §§ 2036, 2037 and 2038 to apply, a decedent must have made a transfer of property of any interest therein (except in case of a bona fide sale for adequate and full consideration in money or money's worth) under which the decedent retained an interest in, or power over, the income or corpus of the transferred property. In this case, Trust Construction and Modification do not constitute transfers within the meaning of §§ 2036, 2037 and 2038. Accordingly, based upon the facts submitted and representations made, we conclude that Trust Construction and Modification by Court will not result in inclusion of any asset of, or interest in Trust or any Successor Trusts in the gross estate of any beneficiary whose death occurs prior to the termination of Trust under § 2036, 2037 or 2038. Ruling #8 Section 61(a) defines gross income as "all income from whatever source derived." Under section 61(a)(3), gross income includes "[g]ains derived from dealings in property." Section 1001(a) provides that the gain from the sale or other disposition of property is the excess of the amount realized over the adjusted basis provided in § 1011 for determining gain, and the loss is the excess of the adjusted basis provided in § 1011 for determining loss over the amount realized. Under § 1001(c), the entire amount of gain or loss must be recognized, except as otherwise provided. Section 1.1001-1(a) of the Income Tax Regulations provides that, except as otherwise provided in subtitle A of the Code, the gain or loss realized from the exchange of property for other property differing materially either in kind or in extent is treated as income or as loss sustained. Under § 1.1001-1(h), the severance of a trust, occurring on or after August 2, 2007, is not an exchange of property for other property differing materially either in kind or in extent, if (i) an applicable state statute or the governing instrument authorizes or directs the trustee to sever the trust; and (ii) any non-pro rata funding of the separate trusts resulting from the severance, whether mandatory or in the discretion of the trustee, is authorized by an applicable state statute or the governing instrument. In the present case, the Trust will be severed into multiple trusts, Successor Trusts, on a non-pro rata basis. Trustees represent that the contemplated trust severance is authorized by the agreement governing Trust. Trustee further represents that the nonpro rata funding of Successor Trusts is authorized under State Statute 4 which allows a trustee to make distributions in divided or undivided interest and to allocate assets in proportionate or disproportionate shares. The proposed transaction is consistent with the criteria set forth in § 1.1001-1(h)(1). Accordingly, based upon the facts submitted and representations made, we conclude that the severance of the Trust and non-pro rata funding of the Successor Trusts should not be treated as pro rata distributions followed by a taxable sale and exchange of assets between the Successor Trusts and, therefore, will not be subject to recognition of gain or loss from a sale or other disposition of property under § 1001. In accordance with the Powers of Attorney on file with this office, we have sent copies of this letter to your representatives. Except as expressly provided herein, we neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. The rulings contained in this letter are based upon information and representations submitted by the taxpayers accompanied by penalty of perjury statements executed by the appropriate parties. While this office has not verified the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer requesting it. Section 6100(k)(3) provides that it may not be used as precedent. Sincerely, Leslie H. Finlow _______________________________ Leslie H. Finlow Senior Technician Reviewer, Branch 4 Office of Associate Chief Counsel (Passthroughs & Special Industries) Enclosure Copy for § 6110 purposes cc:

Private Letter Ruling Number: 202303012 Internal Revenue Service October 18, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202303012 Release Date: 1/20/2023 Index Number: 1001.00-00, 1015.00-00, 1015.03-00, 1015.03-01, 1223.00-00, 2036.00-00, 2036.01-00, 2038.00-00, 2038.01-00, 2038.01-01, 2501.00-00, 2501.01-00, 2601.00-00, 2601.01-00, 61.00-00, 661.00-00, 662.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:4 PLR-110419-22 Date: October 18, 2022 Dear ******: This letter responds to your authorized representatives' letter of May 19, 2022, and subsequent correspondence, requesting rulings regarding the income, estate, gift, and generation-skipping transfer (GST) tax consequences of the proposed division of Trust 1. The facts and representations submitted are as follows: Grandparent died on Date 1, leaving the residue of Grandparent's probate estate in equal shares to Trust 1 and Trust 2, testamentary trusts established under Will. Trust 1 is held for the benefit of Grandchild 1 and Grandchild 1's descendants, and Trust 2 is held for the benefit of Grandchild 2 and Grandchild 2's descendants. Grandchild 1 has five children, Great-Grandchild 1, Great-Grandchild 2, Great-Grandchild 3, Great-Grandchild 4, and Great-Grandchild 5. Grandchild 2 has one child, Great-Grandchild 6. Neither Grandchild 1 nor Grandchild 2 has any deceased children. Trustees serve as trustees of Trust 1. Trust 1 is the subject of this ruling request. Section 9(a) of Trust 1 provides that Trustees may distribute the net income of Trust 1 to or for the benefit of Grandchild 1 and Grandchild 1's descendants in such proportions and at such times as Trustees determine is desirable or necessary, considering their needs, best interests, and other sources of income, or may annually accumulate and add all or part of the net income to the principal of Trust 1. Section 9(b) of Trust 1 provides that Trustees may distribute the principal of Trust 1 to or for the benefit of Grandchild 1 and Grandchild 1's descendants in such proportions and at such times as Trustees determine is desirable or necessary for their medical care, comfortable maintenance, education, or general support and welfare, considering their other resources. Section 9(c) of Trust 1 provides that Trust 1 will terminate 21 years after the death of the survivor of Grandchild 1 and Grandchild 2, and the principal of Trust 1 will be distributed to Grandchild 1's descendants, per stirpes. If, however, Grandchild 1 and Grandchild 1's descendants all die before that date, Trust 1 will terminate early, and the principal of Trust 1 will be distributed to Trust 2. Grandchild 1's descendants have differing personal and financial situations and, consequently, Trustees, propose to divide Trust 1 along family lines into five separate shares (Resulting Trusts), one for the benefit of each of Grandchild 1's children and their respective descendants plus Grandchild 1, and to fund each Resulting Trust with one-fifth of each asset of Trust 1 (Proposed Division). Any distribution to Grandchild 1 from a Resulting Trust will be made pro rata from each Resulting Trust. The provisions of each Resulting Trust otherwise will be identical and unchanged from the provisions of Trust 1. In accordance with Trust 1, each Resulting Trust will terminate 21 years after the death of the survivor of Grandchild 1 and Grandchild 2, and the principal will be distributed to the child of Grandchild 1 for whom Resulting Trust was created or, if such child is deceased, to the child's descendants, per stirpes. If, however, Grandchild 1, the child of Grandchild 1 for whom Resulting Trust was created, and such child's descendants all die before that date, Resulting Trust will terminate early, and the principal will be distributed equally among the other Resulting Trusts. If Grandchild 1 and Grandchild 1's descendants all die before that date, the principal instead will be distributed to Trust 2. Under the authority of Statutes, Court issued Order on Date 2 and Amended Order on Date 3 authorizing the Proposed Division upon receipt of a favorable private letter ruling from the Internal Revenue Service. Trust 1 was irrevocable prior to September 25, 1985, and no additions, actual or constructive, have been made to Trust 1. You request the following rulings: 1. Proposed Division will not cause Trust 1 or any Resulting Trust to lose grandfathered status for purposes of the GST tax, or otherwise become subject to GST tax. 2. Proposed Division will not be treated as a distribution and cause any Resulting Trust to recognize income, gain or loss from a sale or other disposition of property under § 61, § 661, § 662, or § 1001. 3. The adjusted basis and holding period of each of the Resulting Trust assets will be the same as the adjusted basis and holding periods of the Trust 1 assets under § 1015 and § 1223(2). 4. Proposed Division will not cause such assets to be includable in the gross estate of any of the beneficiaries under § 2036, § 2037, or § 2038. 5. Proposed Division will not constitute a transfer subject to federal gift tax under § 2501. Ruling 1 Section 2601 imposes a tax on every GST, which is defined under § 2611 as a taxable distribution, a taxable termination, and a direct skip. Under § 1433(a) of the Tax Reform Act of 1986 (Act) and § 26.2601-1(a) of the Generation-Skipping Transfer Tax Regulations, the GST tax is generally applicable to generation-skipping transfers made after October 22, 1986. However, under § 1433(b)(2)(A) of the Act and § 26.2601-1(b)(1)(i), the tax does not apply to a transfer under a trust that was irrevocable on September 25, 1985, but only to the extent that such transfer is not made out of corpus added to the trust after September 25, 1985 (or out of income attributable to corpus so added). Section 26.2601-1(b)(4)(i) provides rules for determining when a modification, judicial construction, settlement agreement, or trustee action with respect to a trust that is exempt from the GST tax will not cause the trust to lose its exempt status. In general, unless specifically provided otherwise, the rules contained in this paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for GST tax purposes. Thus (unless specifically noted), the rules do not apply in determining, for example, whether the transaction results in a gift subject to gift tax, or may cause the trust to be included in the gross estate of a beneficiary, or may result in the realization of gain for purposes of § 1001. Section 26.2601-1(b)(4)(i)(D) provides that a modification of the governing instrument of an exempt trust (including a trustee distribution, settlement, or construction that does not satisfy § 26.2601-1(b)(4)(i)(A), (B), or (C)) by judicial reformation, or nonjudicial reformation that is valid under applicable state law, will not cause an exempt trust to be subject to the provisions of chapter 13, if the modification does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the modification, and the modification does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. A modification of an exempt trust will result in a shift in beneficial interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a GST or the creation of a new GST. Section 26.2601-1(b)(4)(i)(E), Example 5, provides as follows. In 1980, Trustor established an irrevocable trust for the benefit of his two children, A and B, and their issue. Under the terms of the trust, the trustee has the discretion to distribute income and principal to A, B, and their issue in such amounts as the trustee deems appropriate. On the death of the last to die of A and B, the trust principal is to be distributed to the living issue of A and B, per stirpes. In 2002, the appropriate local court approved the division of the trust into two equal trusts, one for the benefit of A and A's issue and one for the benefit of B and B's issue. The trust for A and A's issue provides that the trustee has the discretion to distribute trust income and principal to A and A's issue in such amounts as the trustee deems appropriate. On A's death, the trust principal is to be distributed equally to A's issue, per stirpes. If A dies with no living descendants, the principal will be added to the trust for B and B's issue. The trust for B and B's issue is identical (except for the beneficiaries), and terminates at B's death at which time the trust principal is to be distributed equally to B's issue, per stirpes. If B dies with no living descendants, principal will be added to the trust for A and A's issue. The division of the trust into two trusts does not shift any beneficial interest in the trust to a beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the division. In addition, the division does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. Therefore, the two partitioned trusts resulting from the division will not be subject to the provisions of chapter 13. In the present case, Trust 1 was irrevocable on September 25, 1985. It is represented that no additions, actual or constructive, have been made to Trust 1 after that date. Proposed Division is substantially similar to the situation described in § 26.2601-1(b)(4)(i)(E), Example 5. Under Proposed Division, Resulting Trusts will, except as described above, be administered under the original provisions of Trust 1. Based on the facts submitted and the representations made, we conclude that Proposed Division will not shift any beneficial interest in Trust 1 to a person who occupies a lower generation than the persons holding the beneficial interest prior to Proposed Division. In addition, Proposed Division will not extend the time for vesting of any beneficial interest beyond the period provided for in Trust 1. Accordingly, Proposed Division will not cause Trust 1 or any Resulting Trust to lose grandfathered status for purposes of the GST tax, or otherwise become subject to GST tax. Ruling 2 Section 61(a)(3) and (15) provides that gross income includes gains derived from dealings in property and income from an interest in a trust. Section 661(a) provides that in any taxable year a deduction is allowed in computing the taxable income of a trust (other than a trust to which subpart B applies), for the sum of (1) the amount of income for such taxable year required to be distributed currently; and (2) any other amounts properly paid or credited or required to be distributed for such taxable year. Section 1.661(a)-2(f) of the Income Tax Regulations provides that gain or loss is realized by the trust or estate (or the other beneficiaries) by reason of a distribution of property in kind if the distribution is in satisfaction of a right to receive a distribution of a specific dollar amount, of specific property other than that distributed, or of income as defined under § 643(b) and the applicable regulations, if income is required to be distributed currently. Section 662 provides that there shall be included in the gross income of a beneficiary to whom an amount specified in § 661(a) is paid, credited, or required to be distributed (by an estate or trust described in § 661), the sum of the following amounts: (1) the amount of income for the taxable year required to be distributed currently to such beneficiary, whether distributed or not; and (2) all other amounts properly paid, credited, or required to be distributed to such beneficiary for the taxable year. Section 1001(a) provides that the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in § 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in § 1011 for determining loss over the amount realized. Section 1001(b) states that the amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. Under § 1001(c), except as otherwise provided in subtitle A, the entire amount of gain or loss, determined under § 1001, on the sale or exchange of property shall be recognized. Section 1.1001-1(a) provides that the gain or loss realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income or loss sustained. A partition of jointly owned property is not a sale or other disposition of property where the co-owners of the joint property sever their joint interests, but do not acquire a new or additional interest as a result thereof. Thus, neither gain nor loss is realized on a partition. See Rev. Rul. 56-437, 1956-2 C.B. 507 (conversion of a joint tenancy in stock to a tenancy in common in order to eliminate the survivorship feature and the partition of a joint tenancy in stock are not sales or exchanges). Similarly, divisions of trusts are also not sales or exchanges of trust interests where each asset is divided pro rata among the new trusts. See Rev. Rul. 69-486, 1969-2 C.B. 159 ( pro rata distribution of trust assets not a sale or exchange). In the present case, the legal entitlements, as well as the rights and powers, of the beneficiaries will remain the same in kind and extent after Proposed Division. Accordingly, based on the facts submitted and representations made, Proposed Division will not result in the realization of gain or loss under § 61 and § 1001. Moreover, based solely on the facts submitted and representations made, we conclude that Proposed Division is not a distribution under § 661 or § 1.661(a)-2(f). We further conclude that Proposed Division will not cause Trust 1, Resulting Trusts, or the beneficiaries of Trust 1 or any Resulting Trust to recognize any income under § 662. Ruling 3 Section 1015(b) provides that if property is acquired after December 31, 1920, by a transfer in trust (other than a transfer in trust by a gift, bequest, or devise), the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer. Section 1.1015-2(a)(1) provides that in the case of property acquired after December 31, 1920, by transfer in trust (other than by transfer in trust by gift, bequest, or devise), the basis of property so acquired is the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer under the law applicable to the year in which the transfer was made. If the taxpayer acquired the property by transfer in trust, this basis applies whether the property is in the hands of the trustee or the beneficiary, and whether acquired prior to termination of the trust and distribution of the property, or thereafter. Section 1223(2) provides that in determining the period for which the taxpayer has held property, however it is acquired, there shall be included the period for which the property was held by any other person, if under this chapter such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of the other person. Based on the facts submitted and the representations made, we conclude that because § 1001 does not apply to Proposed Division, under § 1015 the basis of the assets received by Resulting Trusts will be the same as the respective basis of the assets held by Trust 1. We further conclude that under § 1223(2) the holding periods of the assets received by Resulting Trusts will be the same as the holding periods of the assets in Trust 1. Ruling 4 Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2033 provides that the value of the gross estate includes the value of all property to the extent of the interest therein of the decedent at the time of death. Section 2036(a) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom. Section 2037(a) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, if (1) possession or enjoyment of the property can, through ownership of such interest, be obtained only by surviving the decedent, and (2) the decedent has retained a reversionary interest in the property, and the value of such reversionary interest immediately before the death of the decedent exceeds 5 percent of the value of such property. Section 2038(a)(1) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of decedent's death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, revoke, or terminate, or where the decedent relinquished any such power during the 3-year period ending on the date of the decedent's death. In order for § 2036 through § 2038 to apply, the decedent must have made a transfer of property or any interest therein (except in the case of a bona fide sale for an adequate and full consideration in money or money's worth) under which the decedent retained an interest in, or power over, the income or corpus of the transferred property. In the present case, the beneficiaries of Resulting Trusts will have the same interests after Proposed Division that they had as beneficiaries under Trust 1. The distribution, management, and termination provisions of each Resulting Trust will be substantially similar to the current distribution, management, and distribution provisions of Trust 1. Accordingly, based on the facts submitted and the representations made, we conclude that Proposed Division will not cause any portion of the assets of Resulting Trusts to be includible in the gross estate of any of the beneficiaries of Resulting Trusts under § 2036, § 2037, or § 2038. Ruling 5 Section 2501 imposes a tax for each calendar year on the transfer of property by gift during such calendar year by any individual, resident or nonresident. Section 2511 provides that, subject to certain limitations, the gift tax applies whether the transfer is in trust or otherwise, direct or indirect, and whether the property transferred is real or personal, tangible or intangible. Section 2512(a) provides that if the gift is made in property, the value thereof at the date of the gift is considered the amount of the gift. Section 2512(b) provides that where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration is deemed a gift that is included in computing the amount of gifts made during the calendar year. In the present case, the beneficial interests, rights, and expectancies of the beneficiaries will be substantially the same, both before and after Proposed Division. Thus, no transfer of property will be deemed to occur as a result of Proposed Division. Accordingly, based on the facts submitted and representations made, we conclude that Proposed Division will not result in a transfer by any beneficiary of Trust 1 that is subject to the gift tax under § 2501. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives. Sincerely, Associate Chief Counsel (Passthroughs & Special Industries) By: Melissa C. Liquerman Melissa C. Liquerman Senior Counsel, Branch 4 Office of the Associate Chief Counsel (Passthroughs & Special Industries) Enclosure Copy for § 6110 purposes cc:

Notice 2022-5 Internal Revenue Service 2022-5 I.R.B. 457 Notice 2022-5 I. PURPOSE Because of the Coronavirus Disease 2019 (COVID-19) pandemic, the Department of the Treasury and the Internal Revenue Service issued Notice 2021-12, 2021-6 I.R.B. 828, as clarified by Notice 2021-17, 2021-14 I.R.B. 984, to provide temporary relief from certain requirements under § 42 of the Internal Revenue Code (Code) for qualified low-income housing projects and under §§ 142(d) and 147(d) of the Code for qualified residential rental projects. In response to the continuing presence of the pandemic and precautions necessitated by new disease variants, this notice provides certain new relief and extends the temporary relief for certain requirements addressed in Notice 2021-12. Section III of this notice describes the persons eligible for the relief granted in sections IV through VI of this notice. II. BACKGROUND A. Qualified low-income housing projects In this notice, the terms "Agency," and "Owner" have the same meanings as described in section 5 of Rev. Proc. 2014-49, 2014-37 I.R.B. 535. For background on the requirements under § 42 that are receiving an extension under this notice of the relief provided under Notice 2021-12, refer to Section II.A of Notice 2021-12. An additional requirement under § 42 relating to an Agency's inspection of low-income units as provided in § 1.42-5(c)(2)(iii)(C)(2) of the Income Tax Regulations is the 15-day reasonable notice requirement described in § 1.42-5(c)(2)(iii)(C)(3). Section 1.42-5(c)(2)(iii)(C)(2) provides that an Agency must select the low-income units to inspect and low-income certifications to review in a manner that does not give advance notice that a particular low-income unit (or low-income certifications for a particular low-income unit) will or will not be inspected (or reviewed) for a particular year. The Agency may notify the owner of the low-income units for on-site inspection only on the day of inspection. However, the Agency may give an owner reasonable notice that there will be an inspection of the project and of not-yet-identified low-income units or a review of low-income certifications of not-yet-identified low-income units. The notice serves to enable the owner to assemble needed documentation for low-income certifications for review and to notify tenants of the possibility of physical inspection of their units. Section 1.42-5(c)(2)(iii)(C)(3) provides that reasonable notice is generally no more than 15 days. Under § 42(m)(1)(A)(i), an Agency's qualified allocation plan (QAP) must have been approved by the governmental unit of which the Agency is a part. This approval is to be made in accordance with rules similar to certain rules in § 147(f)(2), other than § 147(f)(2)(B)(ii). Because approval under § 147(f)(2)(B)(i) involves a public hearing, such a hearing is also required for purposes of § 42(m)(1)(A)(i). In response to the COVID-19 pandemic, hearings under § 147 were permitted to be conducted telephonically. See Rev. Proc. 2021-39, 2021-38 I.R.B. 426. In addition, Notice 2021-12 permitted hearings under § 42(m)(1)(A)(i) to be conducted telephonically. B. Qualified residential rental projects financed by bonds In this notice, the terms "Issuer" and "Operator" have the same meanings as described in section 4 of Rev. Proc. 2014-50, 2014-37 I.R.B. 540. For background on the requirements under §§ 142(d) and 147(d) that are receiving an extension under this notice of the relief provided under Notice 2021-12, refer to Section II.B of Notice 2021-12. C. Postponement of certain deadlines by reason of Presidentially declared disasters On March 13, 2020, the President of the United States issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), 42 U.S.C. 5121 et seq., in response to the ongoing COVID-19 pandemic (Emergency Declaration). 1 The Emergency Declaration instructed the Secretary of the Treasury "to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate, pursuant to 26 U.S.C. 7508A(a)." Subsequent to the Emergency Declaration, the President issued major disaster declarations under the authority of the Stafford Act with respect to all 50 States, the District of Columbia, and 5 territories (Major Disaster Declarations). 2 In addition, under § 1.42-13(a), the Secretary of the Treasury or her delegate has the general authority to issue guidance and provide relief to carry out the purposes of § 42. ******** 1 See https://www.fema.gov/news-release/20200514/president-donald-j-trump-directs-fema-support-under- emergency-declaration. 2 See https://www.fema.gov/coronavirus/disaster-declarations. ******** In the context of a Presidentially-declared Major Disaster, Rev. Proc. 2014-49 provides temporary relief from certain requirements of § 42 for Agencies and Owners of low-income housing projects. Under section 8 of Rev. Proc. 2014-49, in the case of a casualty loss suffered due to a Major Disaster that has reduced a low-income building's qualified basis, the Agency that has jurisdiction over the building must determine what constitutes a reasonable restoration period. The reasonable restoration period established by the Agency must not extend beyond the end of the 25th month following the close of the month of the Major Disaster declaration (25-month reasonable restoration period). Until the restoration is completed, to determine the credit amount allowable during the reasonable restoration period for a building described in section 8 of Rev. Proc. 2014-49, an Owner must use the building's qualified basis at the end of the taxable year immediately preceding the first day of the incident period for the Major Disaster. Rev. Proc. 2014-49 also provides emergency housing relief for individuals who are displaced by a Major Disaster from their principal residences in certain Major Disaster Areas. See Rev. Proc. 2014-49, sections 12-14. In the context of a Presidentially-declared Major Disaster, Rev. Proc. 2014-50 provides temporary relief from certain requirements under § 142(d) for qualified residential rental projects financed with exempt facility bonds issued by State and local governments under § 142. Rev. Proc. 2014-50 also provides emergency housing relief for individuals who are displaced by a Major Disaster from their principal residences in certain Major Disaster Areas. See Rev. Proc. 2014-50, sections 5-7. Notice 2020-23, 2020-18 I.R.B. 742, published on April 27, 2020, provided certain relief to affected taxpayers and postponed due dates until July 15, 2020, with respect to certain tax filings and payments, certain time-sensitive government actions, and all time-sensitive actions listed in Rev. Proc. 2018-58, 2018-50 I.R.B. 990 (Dec. 10, 2018), that were due to be performed on or after April 1, 2020, and before July 15, 2020, including certain actions under § 42 for qualified low-income housing projects. Notice 2020-53, 2020-30 I.R.B. 151, published on July 20, 2020, extended until December 31, 2020, the relief provided in Notice 2020-23 for § 42 qualified low-income housing projects, as well as providing until December 31, 2020, additional relief under § 42 and under §§ 142(d) and 147(d) for qualified residential rental projects. Notice 2021-12, published on February 8, 2021, extended the temporary relief provided in Notice 2020-53, and also provided temporary relief from additional § 42 requirements not previously addressed in Notice 2020-53. Notice 2021-17, published on April 5, 2021, clarified Notice 2021-12 by providing a more precise citation in Section IV.E of that notice. III. SCOPE OF THE RELIEF GRANTED IN THIS NOTICE Sections IV.A through F of this notice apply to certain deadlines related to low-income housing projects under § 42. Sections V.A through D apply to relief involving operational waivers for low-income housing projects, and Section V.E applies to relief involving operational waivers both for those projects and for qualified rental projects under § 142(d). Sections VI.A and B apply to private activity bonds that are issued for the acquisition of buildings intended to be qualified residential rental projects and that are qualified bonds (as defined in § 141(e)) if the applicable requirements of §§ 142(d) and 147(d)(2) are satisfied. All of the provisions in Sections IV through VI also apply to Agencies, Owners, Issuers, and Operators that have responsibilities with respect to those projects and bonds. IV. GRANT OF RELIEF FOR DEADLINES RELATED TO THE LOW-INCOME HOUSING CREDIT In this Section IV, "original deadline" means the deadline without regard to any extension under Notice 2020-23, Notice 2020-53, or Notice 2021-12 (as clarified by Notice 2021-17). A. THE 10-PERCENT TEST FOR CARRYOVER ALLOCATIONS - For purposes of § 42(h)(1)(E)(ii), if the original deadline for an Owner of a building with a carryover allocation to meet the 10-percent test is on or after April 1, 2020, and on or before December 31, 2020, the deadline is extended to the original deadline plus two years. - If the original deadline is on or after January 1, 2021, and before December 31, 2022, the deadline is extended to December 31, 2022. B. THE § 42(e) 24-MONTH MINIMUM REHABILITATION EXPENDITURE PERIOD - For purposes of § 42(e)(3)(A)(ii), if the original deadline for the 24-month minimum rehabilitation expenditure period for a building originally is on or after April 1, 2020, and is on or before December 31, 2021, then that deadline is extended to the original date plus 18 months. - If the original deadline for this requirement is on or after January 1, 2022, and on or before June 30, 2022, then that deadline is extended to June 30, 2023. - If the original deadline for this requirement is on or after July 1, 2022, and on or before December 31, 2022, then that deadline is extended to the original date plus 12 months. - If the original deadline for this requirement is on or after January 1, 2023, and on or before December 30, 2023, then that deadline is extended to December 31, 2023. C. PLACED IN SERVICE DEADLINE - For purposes of § 42(h)(1)(E)(i), if the original deadline for a low-income building to be placed in service is the close of calendar year 2020, the new deadline is the close of calendar year 2022 (that is, December 31, 2022). - If the original placed-in-service deadline is the close of calendar year 2021 and the original deadline for the 10-percent test in § 42(h)(1)(E)(ii) was before April 1, 2020, the new placed-in-service deadline is the close of calendar year 2022 (that is, December 31, 2022). - If the original placed-in-service deadline is the close of calendar year 2021 and the original deadline for the 10-percent test in § 42(h)(1)(E)(ii) was on or after April 1, 2020, and on or before December 31, 2020, then the new placed-in-service deadline is the close of calendar year 2023 (that is, December 31, 2023). - If the original placed-in-service deadline is the close of calendar year 2022 (and thus the original deadline for the 10-percent test was in 2021), then the new placed-in-service deadline is the close of calendar year 2023 (that is, December 31, 2023). D. REASONABLE PERIOD FOR RESTORATION OR REPLACEMENT IN THE EVENT OF CASUALTY LOSS For purposes of § 42(j)(4)(E) both in the case of a casualty loss not due to a pre-COVID-19-pandemic Major Disaster and in situations governed by section 8.02 of Rev. Proc. 2014-49 in the case of a casualty loss due to a pre-COVID-19-pandemic Major Disaster, if a low-income building's qualified basis is reduced by reason of the casualty loss and the reasonable period to restore the loss by reconstruction or replacement that was originally set by the HCA (original Reasonable Restoration Period) ends on or after April 1, 2020, then the last day of the Reasonable Restoration Period is postponed by eighteen months but not beyond December 31, 2022. Notwithstanding the preceding sentence, the Agency may require a shorter extension, or no extension at all. For purposes of determining the credit amount allowable under § 42(a) in the case of a credit year that ends on or after April 1, 2020, and not later than the end of the Reasonable Restoration Period (taking into account any extension under the preceding paragraph), if the Owner restores the building by the end of that extended Reasonable Restoration Period, then for taxable years ending after the first day of the casualty and before the completion of the restoration, the Owner must use the building's qualified basis at the end of the taxable year immediately preceding the first day of the casualty as the building's qualified basis for that credit year. E. EXTENSION TO SATISFY OCCUPANCY OBLIGATIONS If the close of the first year of the credit period with respect to a building is on or after April 1, 2020, and on or before December 31, 2022, then, for purposes of § 42(f)(3)(A)(ii), the qualified basis for the building for the first year of the credit period is calculated by taking into account any increase in the number of low-income units by the close of the 6-month period following the close of that first year. F. CORRECTION PERIOD For purposes of § 1.42-5, if a correction period that was set by the Agency ends on or after April 1, 2020, and before December 31, 2021, then the end of the correction period (including as already extended, if applicable) is extended by a year, but not beyond December 31, 2022. If the correction period originally set by the Agency ends during 2022, the end of the period is extended to December 31, 2022. Notwithstanding the preceding sentences, the Agency may require a shorter extension, or no extension at all. V. GRANT OF RELIEF FOR OPERATIONAL PROVISIONS A. COMPLIANCE-MONITORING--REVIEW OF TENANT FILES For purposes of § 1.42-5, an Agency is not required to review tenant files in the period beginning on April 1, 2020, and ending on December 31, 2021. The Agency must have resumed tenant-file review as due under § 1.42-5 as of January 1, 2022. For purposes of § 1.42-5(c)(2)(iii)(C)(3), between April 1, 2020, and the end of 2022, when the Agency gives an Owner reasonable notice that it will review low-income certifications of not-yet-identified low-income units, it may treat reasonable notice as being up to 30 days. Beginning on January 1, 2023, for this purpose reasonable notice again is generally no more than 15 days. B. COMPLIANCE-MONITORING--PHYSICAL INSPECTIONS For purposes of § 1.42-5, an Agency is not required to conduct compliance-monitoring physical inspections in the period beginning on April 1, 2020, and ending on June 30, 2022. Because of high State-to-State and intra-State variability of COVID-19 transmission, an Agency, in consultation with public health experts, may extend the waiver in the preceding sentence if the level of transmission makes such an extension appropriate. Depending on varying rates of transmission, the extension may be State-wide, may be limited to specific locales, or may be on a project-by-project basis. No such extension may go beyond December 31, 2022. The Agency must resume compliance-monitoring reviews as due under § 1.42-5 once the waiver expires. For purposes of § 1.42-5(c)(2)(iii)(C)(3), between April 1, 2020, and the end of 2022 only, when the Agency gives an Owner reasonable notice that it will physically inspect not-yet-identified low-income units, it may treat reasonable notice as being up to 30 days. Beginning on January 1, 2023, for this purpose reasonable notice again is generally no more than 15 days. C. COMMON AREAS AND AMENITIES A temporary full or partial unavailability or closure of an amenity or common area in a low-income building or project does not result in a reduction of eligible basis of the affected building if the unavailability or closure is during some or all of the period from April 1, 2020, to December 31, 2022, and is in response to the COVID-19 pandemic and not because of other noncompliance with § 42. During the above period, an Agency may deny any application of the above waiver or, based on public health criteria, may limit the waiver to partial closure, or to limited or conditional access of an amenity or common area. (For example, the Agency may apply the waiver to access an amenity or common area that is limited to persons wearing masks or to persons fully vaccinated against COVID-19.) D. PERMISSION FOR AGENCIES TO CONDUCT HEARINGS IN THE SAME MANNER AND UNDER THE SAME PROCEDURES AS PRIVATE-ACTIVITY-BOND HEARINGS Beginning on April 1, 2020, for the purposes of QAP approval under § 42(m)(1)(A), if a public hearing is conducted in a manner and under procedures such that § 1.147(f)-1(d) would be satisfied, taking into account the date on which the hearing is held, then the manner and procedures of the hearing are acceptable for QAP approval under § 42(m)(1)(A). 3 Continued application of the preceding sentence is not dependent on the continuation of the COVID-19 pandemic. ******** 3 For example, while Rev. Proc. 2021-39 is in effect, satisfying the hearing procedures in that revenue procedure satisfies the procedural requirements for QAP hearings. ******** E. EMERGENCY HOUSING FOR MEDICAL PERSONNEL AND OTHER ESSENTIAL WORKERS If individuals are medical personnel or other essential workers (as defined by State or local governments) that provide services during the COVID-19 pandemic, then, for purposes of providing emergency housing from April 1, 2020, to December 31, 2022, under Rev. Proc. 2014-49 or under Rev. Proc. 2014-50, Agencies, Issuers, Owners, and Operators of low-income housing projects may treat these individuals as if they were Displaced Individuals (defined under section 5.02 of Rev. Proc. 2014-49 or section 4.04 of Rev. Proc. 2014-50, as applicable). That is, Agencies, Issuers, Owners, and Operators may provide emergency housing for these individuals pursuant to the provisions of the applicable revenue procedure. See sections 12, 13, and 14 of Rev. Proc. 2014-49 and sections 5, 6, and 7 of Rev. Proc. 2014-50. VI. GRANT OF RELIEF FOR DEADLINES ASSOCIATED WITH QUALIFIED RESIDENTIAL RENTAL PROJECTS In this Section VI, "originally" means without regard to any extension under Notice 2020-23, Notice 2020-53, or Notice 2021-12 (as clarified by Notice 2021-17). A. THE 12-MONTH TRANSITION PERIOD TO MEET SET-ASIDES FOR QUALIFIED RESIDENTIAL RENTAL PROJECTS For purposes of section 5.02 of Rev. Proc. 2004-39, if the last day of a 12-month transition period for a qualified residential rental project originally was on or after April 1, 2020, and before December 31, 2022, then that last day is postponed to December 31, 2022. B. THE § 147(d) 2-YEAR REHABILITATION EXPENDITURE PERIOD FOR BONDS USED TO PROVIDE QUALIFIED RESIDENTIAL RENTAL PROJECTS If a bond is used to provide a qualified residential rental project and if the last day of the § 147(d) 2-year rehabilitation expenditure period for the bond originally was on or after April 1, 2020, and before December 31, 2023, then that last day is postponed to the earlier of eighteen months from the original due date or December 31, 2023. VII. EFFECT ON OTHER DOCUMENTS Notice 2020-23, Notice 2020-53, Notice 2021-12, Notice 2021-17, Rev. Proc. 2004-39, Rev. Proc. 2014-49, and Rev. Proc. 2014-50 are amplified. VIII. DRAFTING INFORMATION The principal authors of this notice are Dillon Taylor and Michael Torruella Costa, Office of Associate Chief Counsel (Passthroughs & Special Industries) and David White, Office of the Associate Chief Counsel (Financial Institutions and Products). For further information regarding this notice relating to the low-income housing credit, please contact Dillon Taylor or Michael Torruella Costa at (202) 317-4137 (not a toll-free call); for further information regarding this notice relating to qualified residential rental projects, please contact David White at (202) 317-4562 (not a toll-free number).

Private Letter Ruling Number: 202308011 Internal Revenue Service October 25, 2022 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Number: 202308011 Release Date: 2/24/2023 Date: October 25, 2022 Taxpayer ID number (last 4 digits): Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Last day to file petition with United States Tax Court: UIL: 501.03-00 CERTIFIED MAIL - Return Receipt Requested Dear ******: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective ******. Your determination letter dated ******, is revoked. Our adverse determination as to your exempt status was made for the following reasons: In our letters dated ******, ******, ****** and ******, we requested information necessary to conduct an examination of your Form ****** for the year ended ******. We have not received the requested information. Section 1.6033-2(i)(2) of the Income Tax Regulations provides, in part, that every organization which is exempt from tax, shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status. Since you have not provided the requested information, you have failed to establish that you are operated exclusively for exempt purposes within the meaning of IRC Section 501(c)(3) and that no part of your net earnings inure to the benefit of private shareholders or individuals. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fillable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: US Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Taxpayer Advocate Office Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies. Keep the original letter for your records. Sincerely, Lynn A. Brinkley Acting Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: 05/03/2022 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address Manager's contact information: Name: ID number: Telephone: Response due date: CERTIFIED MAIL -- Return Receipt Requested Dear ******: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, for Lynn A. Brinkley Acting Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 Form 4621-A Publication 892 Publication 3498-A Date of Notice: Issues: Whether ****** (the organization), which qualified for exemption from Federal income tax under Section 501(c)(3) of the Internal Revenue Code, should be revoked due to its failure to respond and produce records to substantiate that the organization is meeting the organizational and operational tests? Facts: ****** applied for tax-exempt status by filing the Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, on ******, and was granted tax-exempt status as a 501(c)(3) on ******, with an effective date of ******. An organization exempt under 501(c)(3) needs to be organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes and to foster national and amatuer sports competition. The organization was selected for audit to ensure that the activities and operations align with their approved exempt status. The organization failed to respond to the Internal Revenue Service attempts to obtain information to perform an audit of Form ****** for the tax year ******. The Form 1023-EZ application list the phone number of (***) ****-**** for the president of ******. Per the State of ****** website, we can view the Articles of Incorporation. The State of ****** website also lists the organization as ****** and not in good standing, copy attached from state website. - Correspondence for the audit was as follows: o Letter 6031 (Rev. 11-2020) with attachments, was mailed to the organization on ******, with a response date of ******. This letter was not return by the post office as being undeliverable. o Letter 3844-A (Rev. 12-2015) with attachments, was mailed certified to the ****** on ******, with a response date of ******, Article Number ******. Per the United States Postal Service (USPS) tracking, this was delivered to an individual at the address at ****** am on ******. o Letter 5077 -B (1-2017), TE/GE IDR Delinquency Notice, with attachments, was mailed certified to the ******, per Form 1023-EZ application, on ******, with a response date of ******. Article Number ******. Per USPS tracking this package was held at Post Office at customer request, refused, max hold time expired; then returned to the Internal Revenue Service on ******, at ****** pm. This letter was received back at the Internal Revenue Service on ******. o Letter 5077 -B (1-2017), TE/GE IDR Delinquency Notice, with attachments, was mailed certified to the ****** c/o ******/President, to the address on record due to no new address could be found. Letter was mailed on ******, with a response date of ******. Article Number ******. Per USPS tracking this package was held at Post Office at customer requested on ******, at ****** am. This package is being held at the ****** Post Office. o Letter 5077 -B (1-2017), TE/GE IDR Delinquency Notice, with attachments, was mailed certified to the ****** c/o ******/Vice President, per external research, a different address found on ******, with a response date of ******. Article Number ******. Per USPS tracking this package was delivered to an individual at the address on ******, at ****** pm. - Telephone contact for the audit was as follows: o ******, Tax Compliance Officer (TCO) called the phone number listed on the Form 1023-EZ application for ******/President at ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO) called the phone number listed on the Form 1023-EZ application for ******/President at ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO) called the phone number listed on the Form 1023-EZ application for ******/President at ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO) called the phone number listed on the Form 1023-EZ application for ******/President at ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO) called the phone number listed on the Form 1023-EZ application for ******/President at ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO) called the phone number listed on the Form 1023-EZ application for ******/President at ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO) called the phone number listed on the Form 1023-EZ application for ******/President of ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO), through external research located a different phone number for the ******/Vice President at ****** and ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO) called the phone number listed on the Form 1023-EZ application for ******/President at ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO) called the phone number for ******/Vice President at ****** and ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO) called the phone number listed on the Form 1023-EZ application for ******/President at ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO) called the phone number for ******/Vice President at ****** and ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO), called the phone number listed on the Form 1023-EZ application for ******/President at ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO) called the phone number for ******/Vice President at ****** and ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO), called the phone number listed on the Form 1023-EZ application for ******/President at ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO), called the phone number for ******/Vice President at ****** and ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO), called the phone number listed on the Form 1023-EZ application for ******/President at ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO), called the phone number for ******/Vice President at ****** and ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO), called the phone number listed on the Form 1023-EZ application for ******/President at ****** and received VMS. Left a message for an officer of the organization to return my phone call. o ******, Tax Compliance Officer (TCO), called the phone number for ******/Vice President at ****** and ****** and received VMS. Left a message for an officer of the organization to return my phone call. Law: Internal Revenue Code (IRC) §501(c)(3) of the Code provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual. IRC §511 of the Internal Revenue Code imposes a tax at corporate rates under section 11 on the unrelated business taxable income of certain tax-exempt organizations. IRC §6001 of the Code provides that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. IRC §6033(a)(1) of the Code provides, except as provided in section 6033(a)(2), every organization exempt from tax under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts and disbursements, and such other information for the purposes of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, and keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Treasury Regulations (Regulation) 1.501(c)(3)-1 In order to be exempt under §501(c)(3) the organization must be both organized and operated exclusively for one or more of the purposes specified in the section. (religious, charitable, scientific, testing for public safety, literary or educational). Regulation §1.501(c)(3)-1(a)(1) of the regulations states that in order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Regulation 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will not be regarded as "operated exclusively" for one or more exempt purposes described in section 501(c)(3) of the Code if more than an insubstantial part of its activities is not in furtherance of a 501(c)(3) purpose. Accordingly, the organization does not qualify for exemption under section 501(c)(3) of the Code. Regulation §1.6001-1(c) of the Code provides that such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and §§ 1.6033-1 through 1.6033-3. Regulation §1.6001-1(e) of the Code provides that the books or records required by this section shall be kept at all time available for inspection by authorized internal revenue officers or employees, and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law. Regulation §1.6033-1(h)(2) of the regulations provides that every organization which has established its right to exemption from tax, whether or not it is required to file an annual return of information, shall submit such additional information as may be required by the district director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter F (section 501 and the following), chapter 1 of the Code and section 6033. Regulation §1.61-1 of the regulations provides that Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. Rev. Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Organization's Position Taxpayer's position is unknown at this time. Government's Position Based on the above facts, the organization did not respond to verify that they are organized and operated exclusively for one or more of the purposes specified in IRC Section 501(c)(3). If an organization fails to meet either the organizational test or the operational test, it is not exempt. In accordance with the above-cited provisions of the Code and regulations under sections 6001 and 6033, organizations recognized as exempt from federal income tax must meet certain reporting requirements. These requirements relate to the filing of a complete and accurate annual information (and other required federal tax forms) and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated business income tax. Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations shall submit additional information for the purpose on enabling the Internal Revenue Service to inquire further into its exempt status. Using the rationale that was developed in Revenue Ruling 59-95, the Organization's failure to provide requested information should result in the termination of exempt status. Conclusion: Based on the foregoing reasons, the organization does not qualify for exemption under section 501(c)(3) and its tax-exempt status should be revoked. It is the IRS's position that the organization failed to establish that it meets the reporting requirements under IRC §§ 6001 and 6033 to be recognized as exempt from federal income tax under IRC § 501(c)(3). Furthermore, the organization has not established that it is observing the conditions required for the continuation of its exempt status or that it is organized and operated exclusively for an exempt purpose. Accordingly, the organization's exempt status is revoked effective ******. Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods after ******.

Private Letter Ruling Number 202424019 Internal Revenue Service March 19, 2024 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202424019 Release Date: 6/14/2024 Index Number: 1400Z.02-00, 9100.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:ITA:B08 PLR-122862-23 Date: March 19, 2024 Dear ******: This ruling responds to Taxpayer's request for a letter ruling dated Date 1. Specifically, Taxpayer requests an extension of time under sections 301.9100-1 and 301.9100-3 of the Income Tax Regulations, to (1) make a timely election under section 1.1400Z2(d)-1(a)(2)(i) to be certified as a qualified opportunity fund (QOF), as defined in section 1400Z-2(d) of the Internal Revenue Code, and (2) for Taxpayer to be treated as a Qualified Opportunity Fund (QOF), effective as of Date 2, as provided by section 1400Z-2(d) and section 1.1400Z2(d)-1(a) of the Income Tax Regulations. FACTS According to the affidavits and additional information provided to us, Taxpayer has represented that the facts are as follows. Taxpayer is a limited liability company organized under the laws of State. Taxpayer is classified as a partnership for U.S. Federal income tax purposes and was formed for the purpose of investing in qualified opportunity zone property and serving as a QOF. Taxpayer's annual accounting period is the calendar year and uses the accrual method of accounting. Taxpayer was formed on Date 2. Year is the first year of Taxpayer's operation and filing obligation. Accounting Firm 1 had been engaged to satisfy tax compliance obligations for Taxpayer for Year. On or about Date 3, Taxpayer's managing member had a meeting with Accounting Firm 1 to discuss the plans and overall tax structure for Taxpayer to qualify as a QOF during Year. They decided during this discussion to have Taxpayer own a subsidiary entity that would qualify as a qualified opportunity zone business. Taxpayer felt confident that Accounting Firm 1 could successfully qualify Taxpayer as a QOF, given Accounting Firm 1's knowledge of the tax code and long-term business relationship with Taxpayer's managing member. Following this initial meeting to discuss the plans for Taxpayer to qualify as a QOF, Taxpayer's managing member met with Accounting Firm 1 multiple times to confirm the tax structure, qualifications, and criteria of a QOF. Accounting Firm 1 indicated that it understood the criteria associated with qualifying Taxpayer as a QOF as well as the associated tax return preparation and tax filing requirements. In early Date 4, Accounting Firm 1 filed an extension for Taxpayer's managing member's personal tax returns for the Year tax year but did not file an extension for Taxpayer or its subsidiary entity's tax returns for Year. Taxpayer's managing member was not aware that a return was due for Taxpayer or that an extension of time was needed to make a timely QOF election for Taxpayer. Accounting Firm 1 had erroneously concluded that there were no tax filings required for Taxpayer or its subsidiary entity because no income had been generated during Year. On Date 5, Taxpayer's managing member decided to reach out to a different certified public accountant, given the overall complexity associated with QOFs and what appeared to be a lack of experience on the part of Accounting Firm 1. On Date 6, Taxpayer reached out to Accounting Firm 1 to request a copy of Year tax returns for Taxpayer and its subsidiary. Accounting Firm 1 indicated that no tax returns had been filed for Year for Taxpayer. At all times prior to this consultation with Accounting Firm 2, Taxpayer was unaware that a tax return, QOF election, or extension was required for the Taxpayer for Year and relied on Accounting Firm 1 for purposes of filing all returns, elections, and extensions to properly qualify Taxpayer as a QOF for the Year tax year. Accounting Firm 2 told Taxpayer's managing member that Taxpayer was not a valid QOF during Year, and that the only potential means to resolve the issue would be to file for a Private Letter Ruling. As a result of the missed filing and election for Taxpayer, Taxpayer has not yet filed the tax return for Taxpayer. As of the date of Taxpayer's submission of this ruling request, there has been no notice from the IRS with respect to Taxpayer's tax return for Year. Taxpayer represents that granting of the relief under section 301.9100-3 will not result in a lower tax liability for the years affected by the election. LAW AND ANALYSIS Section 1400Z-2(e)(4)(A) of the Internal Revenue Code directs the Secretary to prescribe regulations for rules for the certification of QOFs. Section 1.1400Z2(d)-1(a)(2) of the Income Tax Regulations provides the rules for an entity to self-certify as a QOF. Section 1.1400Z2(d)-1(a)(2)(i) provides that the entity electing to be certified as a QOF must do so annually on a timely filed return in such form and manner as may be prescribed by the Commissioner of Internal Revenue in the Internal Revenue Service forms or instructions, or in publications or guidance published in the Internal Revenue Bulletin. To self-certify as a QOF, a taxpayer must file Form 8996, with its tax return for the year to which the certification applies. The Form 8996 must be filed by the due date of the tax return (including extensions). The information provided indicates that Taxpayer did not file its Form 1065 and Form 8996 by the due date of its federal income tax return (including extensions) due to miscommunication between Accounting Firm and Taxpayer. Because section 1.1400Z2(d)-1(a)(2)(i) sets forth the manner and timing for an entity to self-certify as a QOF, these elections are regulatory elections, as defined in section 301.9100-1(b). Sections 301.9100-1 through 301.9100-3 provide the standards that the Commissioner will use to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-3(a) provides that requests for extensions of time for regulatory elections (other than automatic extensions covered in section 301.9100-2) will be granted when the taxpayer provides evidence (including affidavits) to establish that the taxpayer acted reasonably and in good faith and the grant of relief will not prejudice the interests of the government. Under section 301.9100-3(b), a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer requests relief before the failure to make the regulatory election is discovered by the Service, or reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make, the election. However, a taxpayer is not considered to have reasonably relied on a qualified tax professional if the taxpayer knew or should have known that the professional was not competent to render advice on the regulatory election or was not aware of all relevant facts. In addition, section 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted reasonably and in good faith if the taxpayer-- (i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662 at the time the taxpayer requests relief, and the new position requires or permits a regulatory election for which relief is requested; (ii) was fully informed in all material respects of the required election and related tax consequences but chose not to make the election; or (iii) uses hindsight in requesting relief. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Service will not ordinarily grant relief. Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable extension of time to make the regulatory election only when the interests of the Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i) provides that the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Section 301.9100-3(c)(1)(ii) provides that the interests of the government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable year that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under section 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. Based on the facts and information submitted and the representations made, we conclude that Taxpayer has acted reasonably and in good faith, and that the granting of relief would not prejudice the interests of the government. Accordingly, based solely on the facts and information submitted, and the representations made in the ruling request, we grant Taxpayer an extension of 60 days from the date of this letter ruling to file a Form 8996 to make the election to self-certify as a QOF under section 1400Z-2 and section 1.1400Z2(d)-1(a)(2)(i). The election must be made on a completed Form 8996 attached to Taxpayer's tax return. This letter ruling grants an extension of time to file a Form 8996. This letter ruling does not grant an extension of time to file Taxpayer's Form 1065. This ruling is based upon facts and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. This office has not verified any of the material submitted in support of the request for a ruling. However, as part of an examination process, the Service may verify the factual information, representations, and other data submitted. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, we express no opinion, either express or implied, concerning whether any investments made into Taxpayer are qualifying investments as defined in section 1.1400Z2(a)-1(b)(34) or whether Taxpayer meets the requirements under section 1400Z-2 and the regulations thereunder to be a QOF. Further, we also express no opinion on whether any interest owned by Taxpayer qualifies as qualified opportunity zone property, as defined in section 1400Z(d)(2), or whether such interest would be treated as a qualified opportunity zone business, as defined in section 1400Z-2(d)(3). We express no opinion regarding the tax treatment of the instant transaction under the provisions of any other sections of the Code or regulations that may be applicable, or regarding the tax treatment of any conditions existing at the time of, or effects resulting from, the instant transaction. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Powers of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. Sincerely, Erika C. Reigle Senior Technician Reviewer, Branch 8 Office of Associate Chief Counsel (Income Tax and Accounting) cc:

Private Letter Ruling Number: 202226007 Internal Revenue Service April 1, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202226007 Release Date: 7/1/2022 Index Number: 9100.04-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:ITA:B05 PLR-123147-21 Date: April 01, 2022 Dear ********: This is in response to a Request for A Private Letter Ruling dated November 3, 2021, filed by your authorized representative on behalf of Taxpayer. This request is filed pursuant to Revenue Procedure 2021-1. Specifically, Taxpayer is requesting that the Internal Revenue Service ("IRS") exercise its authority under § 301.9100-3 of the Procedure and Administration Regulations (Regulations) to grant an extension of time within which to file an election to not be treated as a tax-exempt controlled entity for purposes of the tax-exempt use property rules ("§168(h)(6) Election") under § 168(h)(6)(F)(ii) of the Internal Revenue Code ("IRC"). FACTS Taxpayer is a domestic corporation. Taxpayer's annual accounting period ends on December 31 of each year. Taxpayer maintains its accounting books and files its federal income tax returns on an accrual basis. Sole Shareholder is the sole shareholder of Taxpayer. Sole Shareholder's annual accounting period ends on December 31 of each year. Sole Shareholder maintains its accounting books and files its federal income tax returns on an accrual basis. Taxpayer owns a percent of Managing Member. LLC also owns a percent of Managing Member. Managing Member's annual accounting period ends on December 31 of each year. Managing Member is b percent owner and the managing member of Partnership. Nominee owns c percent Partnership. Partnership owns and operates a mixed income housing project ("Project") located in City. Sole Shareholder is a tax-exempt entity under IRC §501(c)(3), formed in Year 1 in City. Its mission is to develop and operate housing projects for persons of low income. In Year 1, Sole Shareholder formed Taxpayer, as its wholly owned corporation. In Year 2, Taxpayer filed its initial Year 1 Form 1120, U.S. Corporation Income Tax Return and continued its filing of Form 1120 each year thereafter. In Year 1, Taxpayer and LLC formed Managing Member, a partnership for U.S. federal income tax purposes. In Year 1, Managing Member and Nominee, an unrelated party, formed Partnership to own and operate Project, a mixed-income housing project in City. Project was constructed and is rented to mixed-income tenants. Project operates in a manner necessary to qualify for federal low-income housing tax credits as provided under IRC § 42. Because Project was nearing a predictable placed-in-service date, in Year 2 Taxpayer engaged Tax Preparer. An Accountant's Certificate Regarding the §168(h)(6) Election ("Certificate"), was signed by Partner 1, a partner in Tax Preparer on Date 1. Certificate was circulated at the closing of Project in Year 2 to Taxpayer and the Managing Member of the Partnership, is part of the Partnership's company records, and was incorporated into Partnership's closing binder. An election notice regarding the §168(h)(6) Election ("Election Notice"), dated Date 2 and addressed to the IRS was also part of Partnership's closing binder. Election Notice was inadvertently not sent out to the IRS when it was signed on Date 2. Certificate discussed Taxpayer's intention to make a §168(h)(6) Election, which was to take effect on or before Date 2. However, Project experienced rolling placed in service dates throughout Year 3 and was finished being placing in service on Date 3. Although the initial plan had been to make the §168(h)(6) Election on Taxpayer's tax return for the tax year immediately preceding Tax Year, filing the §168(h)(6) Election with the IRS was not necessary until Taxpayer's Tax Year return. Taxpayer did not have any previous experience filing the §168(h)(6) Election. Partner 1, the Tax Preparer partner in charge of Tax Preparer's engagement team assisting Tax Preparer with tax preparation, retired from the firm before the return was due for Tax Year. Due to the delay in the Project being placed in service and transition of the return to a new preparation team, the §168(h)(6) Election was inadvertently not included with Taxpayer's tax return for the year prior to Tax Year nor was the §168(h)(6) Election made with the return for Tax Year. Taxpayer's Form 1120 returns for all tax years prior to Tax Year were reviewed and approved by both the Chief Financial Officer ("CFO"') and Asset Manager of Development LLC, an affiliate of the Managing Member, and thereby, also an affiliate of Partnership, prior to their filing. Both prior to and in response to the discovery of the error, Managing Member experienced executive turnover. Taxpayer's Form 1120 return for the tax year prior to Tax Year and for Tax Year were reviewed and approved by the then-Director of Finance of LLC prior to their filing. During the relevant time period, none of the appropriate parties at the Taxpayer, Managing Member, or Development LLC were aware that a §168(h)(6) Election must be included with the tax return of a corporate, tax-exempt-controlled partner in the tax year that Project is placed in service. The CFO, Chief Operating Officer (the "COO"), and President have been in place at Managing Member since before Year 1 and through to the present; the Asset Manager exited Development LLC during the first quarter of Year 3 and had been responsible for reviewing, approving, and signing tax returns during the Asset Manager's time with Development LLC. The Director of Finance of Development LLC held the role from the first quarter of Year 3 through Date 5. The Director of Finance assumed some of the responsibilities of the Asset Manager, including tracking and reviewing tax returns. Development LLC's Director of Finance reviews and approves the tax returns prior to filing. Development LLC's Chief Operating Officer has more than thirteen years in development and managing low-income housing tax credit project properties. Partnership has, at all times, depreciated its site improvements for Project using the 150 percent declining balance method of depreciation, and its furniture, fixtures and equipment property using the double declining balance method of depreciation. The erroneous omission of the §168(h)(6) Election from Taxpayer's Tax Year Form 1120 was brought to Taxpayer's attention by Investor, an investor in Partnership, on Date 4, after the extended due date of Taxpayer's return for Tax Year. As a result of the error, Partnership would be required to treat a portion of the Project's fixed assets as tax-exempt use property, subject to the alternative depreciation system of depreciation. Taxpayer requests a ruling granting an extension of time to make the election under IRC §168(h), to ninety (90) days from the date of the ruling. If this request is granted, Taxpayer will continue to utilize the present depreciation methods used on Partnership's Forms 1065. Taxpayer will file an amendment with the IRS to include the §168(h)(6) Election for Tax Year. From well before Project was placed in service, Taxpayer's intent was to timely file the §168(h)(6) Election. Failure to make the election was inadvertent. The submission notes that Certificate, providing that the §168(h)(6) Election was to be made by Taxpayer in conjunction with the filing of its tax return for the tax year prior to Tax Year, was signed by a Tax Preparer partner on Date 1; is part of Partnership's company records; and is incorporated into Partnership's closing binder with a copy of the Election Notice dated Date 2 and addressed to the IRS. Certificate discussed Taxpayer's intention to make the §168(h)(6) Election, which was to take effect on or before Date 2. Date 2 was intended to coincide with Project's placed-in-service date. As stated above, Project experienced rolling placed in service dates and was actually finished placing in service on Date 3. In Election Notice, which requires Taxpayer to make the §168(h)(6) Election not to be treated as a tax-exempt entity, was drafted and addressed to the IRS, though inadvertently never sent. This omission has not been raised by the IRS in an audit. To guard against future similar errors, Taxpayer's affiliates have updated and improved staffing and practices with respect to reviewing tax issues: Development LLC has hired a new Director of Finance and new accounting staff; Development LLC holds weekly calls to review open tax issues, which include the Chief Operating Officer of Development LLC; Development LLC has improved its overall internal tracking methods in order to help to prevent any similar errors on future elections. Taxpayer represents that the interests of the Government would not be prejudiced under the standards set forth in §301.9100-3(c)(1)(ii) of the Regulations because the relief sought here will only allow Taxpayer to depreciate its property as a non-tax-exempt controlled entity, with total depreciation across all years remaining consistent using the same depreciation method taken pursuant to its tax returns. In addition, Taxpayer represents that its intent was to timely make the §168(h)(6) Election. Failure to make the election was inadvertent, the evidence of which is consistently reflected in the underlying Project documents as described above. In support of this ruling request, Taxpayer has submitted an affidavit from Partner 2, a knowledgeable representative of Tax Preparer. Taxpayer requests that the Internal Revenue Service issue a ruling granting a 90-day extension of time pursuant to §§ 301.9100-1 and 3 to make a §168(h)(6) Election, and to allow Taxpayer's election to be effective as of Tax Year. APPLICABLE LAW AND ANALYSIS Section 168(h)(6)(A) provides that, for purposes of § 168(h), if any property that is not tax-exempt use property is owned by a partnership having both a tax-exempt entity and a nontax-exempt entity as partners, and any allocation to the tax-exempt entity is not a qualified allocation, then an amount equal to such tax-exempt entity's proportionate share of such property shall be treated as tax-exempt use property. Section 168(h)(6)(F)(i) of the Income Tax Regulations provides generally that any tax-exempt controlled entity shall be treated as a tax-exempt entity for purposes of §§ 168(h)(5) and (6). Section 168(h)(6)(F)(iii)(I) provides that a tax-exempt controlled entity is any corporation if 50 percent or more (in value) of the stock is held by 1 or more tax-exempt entities. Under § 168(h)(6)(F)(ii), a tax-exempt controlled entity may elect to not be treated as a tax-exempt entity. Such an election is irrevocable and will bind all tax -exempt entities holding an interest in the tax-exempt controlled entity. Because Sole Shareholder is a tax-exempt entity which owns all of the membership interests of Taxpayer, Taxpayer is a tax-exempt controlled entity within the meaning of § 168(h)(6)(F)(iii)(I). As such, Taxpayer is eligible to make the § 168(h)(6) election. Under § 301.9100-7T(a)(2)(i) of the Regulations, an election under § 168(h)(6)(F)(ii) must be made by the due date of the tax return for the first taxable year for which the election is to be effective. Section 301.9100-1(a) of the Regulations provides that the Commissioner of Internal Revenue has discretion to grant a reasonable extension of time to make a regulatory election. Section 301.9100-1(b) defines the term "regulatory election" as including any election the due date for which is prescribed by a regulation. The election allowed by § 168(h)(6)(F)(ii) election is a regulatory election. Sections 301.9100-1 through 301.9100-3 of the Regulations provide the standards that the Service will use to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-3(a) provides that requests for extensions of time for regulatory elections (other than automatic changes covered in § 301.9100-2) will be granted when the taxpayer provides evidence (including affidavits) to establish that the taxpayer acted reasonably and in good faith and granting relief will not prejudice the interests of the Government. Section 301.9100-3(b)(1) of the Regulations provides that a taxpayer will be deemed to have acted reasonably and in good faith if the taxpayer - (i) requests relief before the failure to make the regulatory election is discovered by the Internal Revenue Service; (ii) failed to make the election because of intervening events beyond the taxpayer's control; (iii) failed to make the election because, after exercising due diligence, the taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the written advice of the Internal Revenue Service; or (v) reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make the election. Under § 301.9100-3(b)(3) of the Regulations, a taxpayer will not be considered to have acted reasonably and in good faith if the taxpayer - (i) seeks to alter a return position for which an accuracy-related penalty could be imposed under § 6662 of the Code at the time the taxpayer requests relief and the new position requires a regulatory election for which relief is requested; (ii) was fully informed of the required election and related tax consequences, but chose not to file the election; or (iii) uses hindsight in requesting relief. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Internal Revenue Service will not ordinarily grant relief. Section 301.9100-3(c) of the Regulations provides that the Internal Revenue Service will grant a reasonable extension of time only when the interests of the Government will not be prejudiced by the granting of relief. The interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made. CONCLUSION From the materials submitted, including the affidavits submitted by Taxpayer and other relevant parties, it is clear that Taxpayer at all times intended to make a § 168(h)(6) Election. Upon discovering its failure, Taxpayers promptly sought an extension of time in which to file the election. Based on the materials submitted, our office concludes that Taxpayer's failure to make the § 168(h)(6) Election with its original return for Tax Year was inadvertent and based upon its reliance of tax professionals. In addition, Taxpayer is not using hindsight in requesting relief. Moreover, Taxpayer requested relief before the failure to make the election was discovered by the IRS. Taxpayer has acted reasonably and in good faith. Finally, the interests of the Government will not be prejudiced by the granting of relief under § 301.9100-3. Based solely on the facts as represented and the applicable law, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 of the Regulations have been met. Taxpayer is granted an extension of 90 days from the date of this ruling to file the § 168(h)(6) Election statement with the appropriate service center containing the information required in § 301.9100-7T(a)(3) for that election to be effective for Tax Year. Taxpayer must attach a copy of this letter to its § 168(h)(6) Election statement. The letter ruling should be attached for all subsequent returns (and amended returns) for all taxable years to which this ruling is relevant. Pursuant to § 301.9100-7T(a)(3)(ii) of the Regulations, a copy of that election statement should be attached to the federal income tax returns of all tax-exempt shareholders or holders of membership interests in Taxpayer. This ruling is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement signed by an appropriate party. Although this office has not verified any of the material submitted in support of the request for ruling, it is subject to verification on examination. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Enclosed is a copy of the letter showing the deletions proposed to be made when it is disclosed under § 6110 of the Code. If you have any questions concerning this matter, please contact the individual whose name and telephone number appear at the beginning of the letter. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. Sincerely, Erika C. Reigle Senior Technician Reviewer, Branch 5 Office of Chief Counsel (Income Tax & Accounting) Enclosure (1) cc:

Private Letter Ruling Number: 202149021 Internal Revenue Service May 18, 2018 DEPARTMENT OF THE TFREASURY INTERNAL REVENUE SERVICE TEGE EO Examinations Mail Stop 4920 DAL 1100 Commerce St. Dallas, Texas 75242 TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION Number: 202149021 Release Date: 12/10/2021 UIL: 501.03-00 Date: May 18, 2018 Tax Year Ending: Taxpayer Identification Number: Person to Contact: Employee Identification Number: Employee Telephone Number: ******* (Phone) ******* (Fax) CERTIFIED MAIL-- RETURN RECEIPT Dear *******: This is a final determination that you do not qualify for exemption from Federal income tax under Internal Revenue Code (the "Code") section 501(a) as an organization described in Code section 501(c)(3) effective Match 21, 20XX. Your determination letter dated October 22, 20XX is revoked. The revocation of your exempt status was made for the following reason(s): Organizations described in section 501(c)(3) of the Internal Revenue Code and exempt from tax under section 501(a) must be both organized and operated exclusively for one of more of the purposes identified in section 501(c)(3). Your constitutive document provides your purpose is to improve the health, welfare, and morale of the members and family of a specified work unit. Your principal activities have consisted of staging social and recreational gatherings designed to boost the morale or the members of the work unit. These purposes and activities do not fulfill the organizational and operational requirements for an organization described in section 501(c)(3). Accordingly, your exempt status is revoked effective March 21, 20XX. Contributions to your organization are no longer deductible under IRC §170 after March 21, 20XX. Organizations that are not exempt under section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information, please visit www.irs.gov. If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination letter was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication 892. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, N.W. Washington, D.C. 20217 U.S. Court of Federal Claims 717 Madison Place, N.W. Washington, D.C. 20439 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, D.C. 20001 Processing of Income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under section 7428 of the Internal Revenue Code. The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778. If you have any questions about this letter, please contact the person whose name and telephone number are shown in the heading of this letter. Sincerely, Maria Hooke Director, EO Examinations Enclosure: Publication 892 Department of the Treasury Internal Revenue Service TE/GE Exempt organizations Date: October 27 2017 Taxpayer Identification Number: Form: Tax year(s) ended: Person to contact/ ID number: Contact numbers- Toll Free Long Distance Fax Manager's name/ ID number: Manager's contact number Response due date: Certified Mail - Return Receipt Requested Dear *******: Why you are receiving this letter We propose to revoke your status as an organization described in section 501(c)(3) of the Internal Revenue Code (Code). Enclosed is our report of examination explaining the proposed action. What you need to do if you agree If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action --Section 7428, and return it to the contact person at the address listed above (unless you have already provided us a signed Form 6018). We'll issue a final revocation letter determining that you aren't an organization described in section 501(c)(3). After we issue the final revocation letter, we'll announce that your organization is no longer eligible for contributions deductible under section 170 of the Code. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final revocation letter. Failing to respond to this proposal will adversely impact your legal standing to seek a declaratory judgment because you failed to exhaust your administrative remedies. Effect of revocation status If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax year(s) shown above as well as for subsequent tax years. What you need to do if you disagree with the proposed revocation If you disagree with our proposed revocation, you may request a meeting or telephone conference with the supervisor of the IRS contact identified in the heading of this letter. You may also file a protest with the IRS Appeals office by submitting a written request to the contact person at the address listed above within 30 calendar days from the date of this letter. The Appeals office is independent of the Exempt Organizations division and resolves most disputes informally. For your protest to be valid, it must contain certain specific information including a statement of the facts, the applicable law, and arguments in support of your position. For specific information needed for a valid protest, please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498, The Examination Process. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in Publication 3498 generally doesn't apply after we issue this letter. You also may request that we refer this matter for technical advice as explained in Publication 892. Please contact the individual identified on the first page of this letter if you are considering requesting technical advice. If we issue a determination letter to you based on a technical advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no further IRS administrative appeal will be available to you. Contacting the Taxpayer Advocate Office is a taxpayer right You have the right to contact the office of the Taxpayer Advocate. Their assistance isn't a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by law) to file a petition in a United States court. They can, however, see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling. You may call toll free 1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may contact your local Taxpayer Advocate at: Internal Revenue Service Office of the Taxpayer Advocate For additional information If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you. Thank you for your cooperation. Sincerely, For Maria Hooke Director, Exempt Organizations Examinations Enclosures: Report of Examination Form 6018 Form 886-A Publication 892 Publication 3498 Date of Notice: October 27, 20XX Issues: Whether *******, (*******), which qualified for exemption from Federal income tax under Section 501(c)(3) of the Internal Revenue Code, should be revoked due to its failure to respond and produce records to substantiate that they meet the organizational and operational test? Facts: *******, (*******) applied for tax-exempt status by filing the form 1023 EZ on October 1, 20XX, and was granted tax exempt status as a 501(c)(3) on October 22, 20XX, with an effective date of March 21, 20XX. An organization exempt under 501(c)(3) needs to be organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes and to foster national and amatuer sports competition. The organization was selected for audit to ensure that the activities and operations align with their approved exempt status. The organization failed to respond to the Internal Revenue Service attempts to obtain information to perform an audit of Form 990-N for the tax year December 31, 20XX. The Form 1023-EZ application list the phone number of ******* for the president of (*******). No response came from the president at this number but I then had contact with the treasurer from a returned call at the number *******. Per the State of ******* web-site, it indicates the organization does not exists on their records, copy attached from state web site. Your formation document, your Bylaws, in part, state your purpose and objectives are: To improve the health, welfare, and morale of the member of the and their families. In furtherance of your purposes, you host two BBQ parties to help boost the morale of the maintenance squadron. Any donations from individuals or companies are used to provide for the two BBQs, parties, or going away gifts for people leaving the squadron. - Correspondence for the audit was as follows: o Letter 3606 (Rev. 6-2012) with Form 4564, Information Document Request, (IDR) and publication 1, was mailed to the organization on June 6, 20XX, with a response date of July 6, 20XX. This letter was received by the ******* organization. o Received partial response from organization on October 21, 20XX. This included the Constitution and By Laws of the organization (neither one being state stamped or state approved), a list of activities, a budget for the year, and a copy of one formal meeting minutes. o Letter 3844-B (Rev. 11-2015) with attachments, was mailed certified to the organization on January 25, 20XX, with a response date of February 27, 20XX, Article Number *******. Per the United States Postal Service (USPS) tracking, this was received on January 30, 20XX at 9:55 as delivered to agent. However, this letter was received back at the Internal Revenue Service on February 21, 20XX showing as insufficient address on the envelope, with the return receipt received, unsigned, on February 2, 20XX. o Letter 3844-B (11-2015), February 23, 20XX, Letter returned as undeliverable due to insufficient address. o March 23, 20XX, I received another partial response from the organization. This contained a more detailed financial report of revenues and expenses for the year under examination. o May 5, 20XX, Letter 3844-B (11-2015), with 2nd IDR. The letter including the organization's determination files, was mailed certified to the organization, per the address located on IDRS, with a respond date of June 7, 20XX. Article Number *******. Per USPS tracking this was received by the organization on May 12, 20XX, at 9.56 am. - Telephone contact for the audit was as follows: o July 13, 20XX, I called the phone number listed on the Form 1023 application for the President of ******* and left a voice message for the president to please call me back. o July 25, 20XX, I received a voice message back from the Treasurer/Secretary and he left a phone number, *******. I attempted to return the call to this officer of the org and had to leave a message of my own. I left my name, phone number, and best time to call. o August 17, 20XX, No response. I called the phone number listed on the Form 1023-EZ application for the President and phone number for the Treasurer/Secretary and had to leave a voice message because no one answered either line. o August 18, 20XX, received a call back from the Treas./Sec. I explained that we needed better worded articles of association (Purpose and Dissolution Clauses) with date signed by officers. I also asked if there was just one meeting minutes for the year, to which he said that was all. He indicated he would get that information to me within the week. o August 29, 20XX, No reply. Called number of the Treas./Sec. and left a voice message to call me. o September 27, 20XX, Still no reply. Called and spoke with Treas./Sec. and explained we still did not receive our information. He said because they are on an ******* that the mail is sometimes slow going out or coming in. I said we would wait another week. o November 1, 20XX, after receiving a response and still having questions, I called both the President and Treas./Sec. and left a message that I needed to talk to them. o November 2, 20XX, I spoke with Treas./Sec. to explain what was needed and he indicated he would get the information to me as soon as he could. o February 23, 20XX, I left a voice message with Treas./Sec. to obtain additional information from the org. o February 28, 20XX, I stayed later to contact officer of organization. I explained we needed additional information and what I was. Treas./Sec. said he would mail information to me within the week. o April 4, 20XX, Had to leave another voice message to Treas./Sec. to call me back. o July 24 & 25, 20XX, Attempted to contact Treas./Sec. and left messages to have him call me. o August 1, 20XX, Contacted Treas./Sec. to ask if they were going to reply to the last IDR I sent them. He knew nothing about it and checked his mailroom and found it, after sitting there over a month. He said he would look at it and respond to me. I gave him until August 17, 20XX to reply. o August 21, 20XX, No reply from org. I called and left a message with another military officer at the base to have the Treas./Sec. call me. o September 12, 20XX, I attempted a conference call with upper management and with the officer of the organization and finally reached them. Was unable to connect all three of us. Asked about them responding and he indicated they are extremely busy with hurricanes in *******. Their group is getting planes maintained for trips to ******* for aide to the area thickened. I gave him until October 15, 20XX to respond or letter of revocation would be going out to them. Law: Internal Revenue Code (IRC) §501(c)(3) of the Code provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual. IRC §511 of the Internal Revenue Code imposes a tax at corporate rates under section 11 on the unrelated business taxable income of certain tax-exempt organizations. IRC §6001 of the Code provides that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. IRC §6033(a)(1) of the Code provides, except as provided in section 6033(a)(2), every organization exempt from tax under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts and disbursements, and such other information for the purposes of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, and keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Treasury Regulations (Regulation) 1.501(c)(3)-1 In order to be exempt under §501(c)(3) the organization must be both organized and operated exclusively for one or more of the purposes specified in the section. (religious, charitable, scientific, testing for public safety, literary or educational). Regulation §1.501(c)(3)-1(a)(1) of the regulations states that in order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Regulation 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will not be regarded as "operated exclusively" for one or more exempt purposes described in section 501(c)(3) of the Code if more than an insubstantial part of its activities is not in furtherance of a 501(c)(3) purpose. Accordingly, the organization does not qualify for exemption under section 501(c)(3) of the Code. Regulation §1.6001-1(c) of the Code provides that such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and §§ 1.6033-1 through 1.6033-3. Regulation §1.6001-1(e) of the Code provides that the books or records required by this section shall be kept at all time available for inspection by authorized internal revenue officers or employees, and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law. Regulation §1.6033-1(h)(2) of the regulations provides that every organization which has established its right to exemption from tax, whether or not it is required to file an annual return of information, shall submit such additional information as may be required by the district director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter F (section 501 and the following), chapter I of the Code and section 6033. Regulation §1.61-1 of the regulations provides that Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. Rev.Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Organization's Position Taxpayer's position is unknown at this time. Government's Position Based on the above facts, the organization did not respond to verify that they are organized and operated exclusively for one or more of the purposes specified in IRC Section 501(c)(3). If an organization fails to meet either the organizational test or the operational test, it is not exempt. In accordance with the above-cited provisions of the Code and regulations under sections 6001 and 6033, organizations recognized as exempt from federal income tax must meet certain reporting requirements. These requirements relate to the filing of a complete and accurate annual information (and other required federal tax forms) and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated business income tax. Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations shall submit additional information for the purpose on enabling the Internal Revenue Service to inquire further into its exempt status. Using the rationale that was developed in Revenue Ruling 59-95, the Organization's failure to provide requested information should result in the termination of exempt status. Conclusion: Based on the foregoing reasons, the organization does not qualify for exemption under section 501(c)(3) and its tax exempt status should be revoked. It is the IRS's position that the organization failed to establish that it meets the reporting requirements under IRC §§ 6001 and 6033 to be recognized as exempt from federal income tax under IRC § 501(c)(3). Furthermore, the organization has not established that it is observing the conditions required for the continuation of its exempt status or that it is organized and operated exclusively for an exempt purpose. Accordingly, the organization's exempt status is revoked effective January 1, 20XX. Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods after January 1, 20XX.

Revenue Procedure 2020-25 Internal Revenue Service 2020-19 I.R.B. 785 26 CFR 1.168(k)-2: Additional first year depreciation deduction for property acquired and placed in service after September 27, 2017. (Also Part I, §§ 168, 446; 1.446-1) Rev. Proc. 2020-25 SECTION 1. PURPOSE This revenue procedure provides guidance allowing a taxpayer to change its depreciation under § 168 of the Internal Revenue Code (Code) for qualified improvement property placed in service by the taxpayer after December 31, 2017, in its taxable year ending in 2018 (2018 taxable year), 2019 (2019 taxable year), or 2020 (2020 taxable year). This revenue procedure also allows a taxpayer to make a late election, or to revoke or withdraw an election, under § 168(g)(7), (k)(5), (k)(7), or (k)(10) of the Code for the taxpayer's 2018 taxable year, 2019 taxable year, or 2020 taxable year. SECTION 2. BACKGROUND.01 Qualified Improvement Property. (1) Section 13204 of Public Law 115-97, 131 Stat. 2054, 2109 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), amended § 168(b)(3), (e), and (k) effective for property placed in service after December 31, 2017. See TCJA § 13204(h)(1). Section 168(b)(3), as amended by § 13204(a)(2) of the TCJA, provides that qualified improvement property as described in § 168(e)(6) is depreciated by using the straight-line method of depreciation for purposes of the general depreciation system under § 168(a) (GDS). Section 168(e)(6), as added by § 13204(a)(4)(B)(i) the TCJA, provides the definition of qualified improvement property. Section 168(k)(2)(A)(i)(IV) and (k)(3), which had provided that qualified improvement property was a separate class of property eligible for the additional first year depreciation deduction under § 168(k) prior to amendment by the TCJA, were repealed by § 13204(a)(4)(A)(iii) and (B)(ii) of the TCJA, respectively. Because the amendments made by §§12001(b)(13), 13201(a), (b)(1), (2)(B)-(g), 13203(a), (b), 13205(a), and 13504(b)(1) of the TCJA also did not specify a class of property under § 168(e) for qualified improvement property placed in service after December 31, 2017, such property was classified as nonresidential real property under § 168(e)(2)(B) and, consequently, not eligible for the additional first year depreciation deduction under § 168(k). (2) Section 2307 of the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116-136, 134 Stat. 281 (March 27, 2020) (CARES Act) amended § 168(e)(3)(E), (e)(6), and (g)(3)(B). Section 2307(a)(1)(A) of the CARES Act added a new clause (vii) to the end of § 168(e)(3)(E) to provide that qualified improvement property is classified as 15-year property. Section 2307(a)(1)(B) of the CARES Act amended the definition of qualified improvement property in § 168(e)(6) by providing that the improvement must be "made by the taxpayer." In addition, section 2307(a)(2) of the CARES Act amended the table in § 168(g)(3)(B) to provide a recovery period of 20 years for qualified improvement property for purposes of the alternative depreciation system under § 168(g) (ADS). These amendments to § 168(e) and (g) are effective as if included in § 13204 of the TCJA. (Hereinafter, all references in this revenue procedure to qualified improvement property are references to qualified improvement property as defined in § 168(e)(6) as amended by the CARES Act unless otherwise indicated.) (3) As a result of the amendments to § 168(e) and (g) made by § 2307 of the CARES Act, the depreciation of qualified improvement property placed in service by the taxpayer after December 31, 2017, has changed. Such property is depreciated under the GDS using the straight-line method of depreciation, a 15-year recovery period, and the half-year or mid-quarter convention, as applicable, pursuant to § 168(b)(3), (c), and (d), and is depreciated under the ADS using the straight-line method of depreciation, a 20-year recovery period, and the half-year or mid-quarter convention, as applicable, pursuant to § 168(g)(2) and (3)(B). Further, assuming all requirements of § 168(k) and § 1.168(k)-2 of the Income Tax Regulations are met, qualified improvement property acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer after December 31, 2017, is eligible for the additional first year depreciation deduction under § 168(k), as amended by the TCJA. Similarly, assuming all requirements of § 168(k), prior to amendment by the TCJA, and § 1.168(k)-1 are met, qualified improvement property, as defined in § 168(k)(3) as in effect prior to amendment by the TCJA, acquired by the taxpayer before September 28, 2017, and placed in service by the taxpayer after December 31, 2017, is eligible for the additional first year depreciation deduction under § 168(k) as in effect prior to amendment by the TCJA..02 Elections under § 168(g)(7) and (k). (1) Section 168(g)(7) allows a taxpayer to make an election to depreciate under the ADS any class of property placed in service by the taxpayer during the taxable year (§ 168(g)(7) election). If the § 168(g)(7) election is made, the election applies to all property that is in the same class of property and placed in service in the same taxable year. However, for nonresidential real property and residential rental property, the election may be made separately for each property. Once made, the § 168(g)(7) election is irrevocable. See § 168(g)(7)(B). Section 301.9100-7T(a)(2) and (3) of the Procedure and Administration Regulations provide the time and manner of making the § 168(g)(7) election. Such election is made by the due date, including extensions, of the Federal income tax return or Form 1065, U.S. Return of Partnership Income, for the taxable year in which the property is placed in service by the taxpayer, and is made by attaching a statement to such return. The instructions to Form 4562, Depreciation and Amortization, provide that the § 168(g)(7) election is made by completing line 20 of Form 4562. (2) Section 168(k)(5)(A) allows a taxpayer to make an election to apply the special rules of § 168(k)(5) to one or more specified plants that are planted, or grafted to a plant that has already been planted, by the taxpayer in the ordinary course of its farming business, as defined in § 263A(e)(4) (§ 168(k)(5) election). The rules and procedures for making the § 168(k)(5) election are set forth in § 1.168(k)-2(f)(2). Pursuant to § 1.168(k)-2(f)(2)(ii), the § 168(k)(5) election is made by the due date, including extensions, of the Federal income tax return or Form 1065 for the taxable year in which the taxpayer planted or grafted the specified plant to which the § 168(k)(5) election applies, and is made in the manner prescribed on Form 4562 and its instructions. For specified plants planted, or grafted to a plant that was previously planted, by the taxpayer before the applicability date set forth in § 1.168(k)-2(h) for § 1.168(k)-2, section 4.05 of Rev. Proc. 2017-33, 2017-19 I.R.B. 1236, provides the time and manner for making the § 168(k)(5) election and such procedures are the same as in § 1.168(k)-2(f)(2)(ii). Further, if a taxpayer timely filed its Federal income tax return or Form 1065 for the taxpayer's taxable year beginning in 2017 and ending on or after September 28, 2017, sections 4.01(2) and 4.02 of Rev. Proc. 2019-33, 2019-34 I.R.B. 662, provide special procedures to allow the taxpayer to make a deemed § 168(k)(5) election or a late § 168(k)(5) election for a specified plant planted, or grafted to a plant that was previously planted, by the taxpayer after September 27, 2017. (3) Section 168(k)(7) allows a taxpayer to make an election not to deduct the additional first year depreciation for any class of property that is qualified property placed in service during the taxable year (§ 168(k)(7) election). The rules and procedures for making the § 168(k)(7) election are set forth in § 1.168(k)-2(f)(1). Section 1.168(k)-2(f)(1)(ii) defines "class of property" for purposes of the § 168(k)(7) election. Under § 1.168(k)-2(f)(1)(ii), qualified improvement property is included in the 15-year property class and is not a separate class of property. However, qualified improvement property, as defined in § 168(k)(3) as in effect prior to amendment by the TCJA, acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer before January 1, 2018, is a separate class of property under § 1.168(k)-2(f)(1)(ii)(D). Pursuant to § 1.168(k)-2(f)(1)(iii), the § 168(k)(7) election is made by the due date, including extensions, of the Federal income tax return or Form 1065 for the taxable year in which the qualified property is placed in service by the taxpayer, and is made in the manner prescribed on Form 4562 and its instructions. For qualified property placed in service by the taxpayer before the applicability date set forth in § 1.168(k)-2(h) for § 1.168(k)-2, section 4.04 of Rev. Proc. 2017-33 provides the time and manner for making the § 168(k)(7) election and such procedures are the same as in § 1.168(k)-2(f)(1)(iii). Further, if a taxpayer timely filed its Federal income tax return or Form 1065 for the taxpayer's taxable year beginning in 2017 and ending on or after September 28, 2017, sections 5.02(2) and 5.03 of Rev. Proc. 2019-33 provide special procedures to allow the taxpayer to make a deemed § 168(k)(7) election or a late § 168(k)(7) election for a class of property that is qualified property acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer during such taxable year. (4) Section 168(k)(10) allows a taxpayer to make an election to deduct 50 percent, instead of 100 percent, additional first year depreciation for: (a) all qualified property acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer during its taxable year that includes September 28, 2017; and (b) all specified plants that are planted, or grafted to a plant that has already been planted, after September 27, 2017, by the taxpayer in the ordinary course of the taxpayer's farming business during its taxable year that includes September 28, 2017, if the taxpayer makes the § 168(k)(5) election for that taxable year (§ 168(k)(10) election). The rules and procedures for making the § 168(k)(10) election are set forth in § 1.168(k)-2(f)(3). Pursuant to § 1.168(k)-2(f)(3)(ii), the § 168(k)(10) election is made by the due date, including extensions, of the Federal income tax return or Form 1065 for the taxpayer's taxable year that includes September 28, 2017, and is made in the manner prescribed on the 2017 Form 4562 and its instructions. For qualified property placed in service, and specified plants planted, or grafted to a plant that was previously planted, by the taxpayer before the applicability date set forth in § 1.168(k)-2(h) for § 1.168(k)-2, section 6.02 of Rev. Proc. 2019-33 provides the time and manner for making the § 168(k)(10) election and such procedures are the same as in § 1.168(k)-2(f)(3)(ii). Further, if a taxpayer timely filed its Federal income tax return or Form 1065 for the taxpayer's taxable year beginning in 2017 and ending on or after September 28, 2017, sections 6.03(2) and 6.04 of Rev. Proc. 2019-33 provide special procedures to allow the taxpayer to make a deemed § 168(k)(10) election or a late § 168(k)(10) election for all qualified property acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer during such taxable year, or for all specified plants planted, or grafted to a plant that was previously planted, by the taxpayer after September 27, 2017. (5) Section 1.168(k)-2(f)(5) provides that, in general, the § 168(k)(5) election, § 168(k)(7) election, and § 168(k)(10) election, once made, may be revoked only by filing a request for a private letter ruling and obtaining the written consent of the Commissioner of Internal Revenue (Commissioner) to revoke the election. Further, if a taxpayer timely filed its Federal income tax return or Form 1065 for the taxpayer's taxable year beginning in 2017 and ending on or after September 28, 2017, sections 4.03, 5.04, and 6.05 of Rev. Proc. 2019-33 provide special procedures to allow the taxpayer to revoke its § 168(k)(5) election, § 168(k)(7) election, and § 168(k)(10) election, respectively, made for such taxable year. As noted in section 2.02(1) of this revenue procedure, section 168(g)(7)(B) provides that the § 168(g)(7) election, once made, is irrevocable..03 Method of accounting. (1) Section 446(e) and § 1.446-1(e)(2) require a taxpayer to secure the consent of the Commissioner before changing a method of accounting for Federal income tax purposes. Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions necessary to permit a taxpayer to obtain consent to change a method of accounting. (2) Section 2.05 of Rev. Proc. 2015-13, 2015-5 I.R.B 419, 425, provides that a taxpayer may not request, or otherwise make, a retroactive change in method of accounting, unless specifically authorized by the Commissioner or by statute. (3) Section 1.446-1(e)(2)(ii)( d )( 3 )( iii ) provides that the making of a late depreciation election or the revocation of a timely valid depreciation election is not a change in method of accounting, except as otherwise expressly provided by the Code, the regulations under the Code, or other guidance published in the Internal Revenue Bulletin. (4) With the enactment of the CARES Act, immediate guidance is needed under § 168 for taxpayers who are affected by the various amendments to the Code, including, for example, the retroactive changes made to § 168(e) and (g) for qualified improvement property. Accordingly, this revenue procedure permits certain taxpayers to file an amended return, administrative adjustment request under section 6227 (AAR), or a Form 3115, Application for Change in Accounting Method, to change their depreciation of qualified improvement property placed in service after December 31, 2017, in the taxpayers' 2018, 2019, or 2020 taxable year. See section 3 of this revenue procedure for the procedures for changing the depreciation of qualified improvement property. Further, this revenue procedure permits taxpayers to make a late election under § 168(g)(7), (k)(5), (k)(7), or (k)(10), to revoke an election under § 168(k)(5), (k)(7), or (k)(10), or to withdraw an election under § 168(g)(7), for property placed in service by the taxpayer during its 2018, 2019, or 2020 taxable year, for a limited period of time. Because of the administrative burden of filing amended returns and AARs, the Department of the Treasury and the Internal Revenue Service (IRS) also have determined that it is appropriate to treat the making of a late election under § 168(g)(7), (k)(5), (k)(7), or (k)(10), or the revocation of the revocable election under § 168(k)(5), (k)(7), or (k)(10), for property placed in service by taxpayers during their 2018, 2019, or 2020 taxable years, as a change in method of accounting with a § 481(a) adjustment for a limited period of time. See sections 4 and 5 of this revenue procedure for the procedures to make these late elections, to revoke these elections, or to withdraw the irrevocable election under § 168(g)(7). SECTION 3. QUALIFIED IMPROVEMENT PROPERTY.01 Scope. This section 3 applies to qualified improvement property placed in service by the taxpayer after December 31, 2017, in the taxpayer's 2018, 2019, or 2020 taxable year. However, this section 3 does not apply to: (1) Qualified improvement property placed in service after December 31, 2017, by a taxpayer that made a late election, or withdrew an election, under § 163(j)(7)(B) (electing real property trade or business) or § 163(j)(7)(C) (electing farming business) for the taxable year in which the qualified improvement property is placed in service by the taxpayer, in accordance with Rev. Proc. 2020-22, 2020-18 I.R.B. 745 (April 27, 2020), released on www.irs.gov on April 10, 2020. Any changes to depreciation for such qualified improvement property, or other depreciable property, affected by the late election or withdrawn election under § 163(j)(7)(B) or 163(j)(7)(C) are made in accordance with sections 4.02 and 4.03, or 5.02 of Rev. Proc. 2020-22, as applicable; or (2) Qualified improvement property for which the taxpayer deducted or deducts the cost or other basis of such property as an expense..02 Impermissible method to permissible method of determining depreciation. (1) In general. A taxpayer changing the depreciation of qualified improvement property within the scope of this section 3 to the depreciation method, recovery period, and convention described in section 2.01(3) of this revenue procedure is changing from an impermissible method of accounting to a permissible method of accounting. Similarly, a change from not claiming to claiming the additional first year depreciation deduction under § 168(k) for qualified improvement property that is within the scope of this section 3 and is eligible for the additional first year depreciation deduction is a change from an impermissible method of accounting to a permissible method of accounting. (2) One-year qualified improvement property. For qualified improvement property that is within the scope of this section 3 and is placed in service by the taxpayer in the taxable year immediately preceding the year of change, as defined in section 3.19 of Rev. Proc. 2015-13 (1-year QIP), the taxpayer may change from the impermissible method of determining depreciation to the permissible method of determining depreciation for the 1-year QIP by filing a Form 3115 for this change in accordance with section 3.02(3)(b) of this revenue procedure, provided the § 481(a) adjustment reported on the Form 3115 includes the amount of any adjustment attributable to all property, including the 1-year QIP, subject to the Form 3115. Alternatively, the taxpayer may change from the impermissible method of determining depreciation to the permissible method of determining depreciation for the 1-year QIP by filing an amended return or AAR in accordance with section 3.02(3)(a) of this revenue procedure. (3) Changing to the permissible method of determining depreciation. The taxpayer may change from the impermissible method of determining depreciation to the permissible method of determining depreciation for qualified improvement property within the scope of this section 3 by filing either: (a) Except as provided in Rev. Proc. 2020-23, 2020-18 I.R.B. 749, (April 27, 2020), released on www.irs.gov on April 8, 2020, regarding the time to file amended returns by a partnership subject to the centralized partnership audit regime enacted as part of the Bipartisan Budget Act of 2015 (BBA partnership) for taxable years beginning in 2018 and 2019, a Federal amended income tax return or amended Form 1065 for the placed-in-service year of the qualified improvement property on or before October 15, 2021, but in no event later than the applicable period of limitations on assessment for the taxable year for which the amended return is being filed. In the case of a BBA partnership that chooses not to file an amended Form 1065 as permitted under Rev. Proc. 2020-23 or that cannot file an amended Form 1065 because the placed-in-service year of the qualified improvement property is a taxable year that is not within the scope of Rev. Proc. 2020-23, the BBA partnership may file an AAR for the placed-in-service year of the qualified improvement property on or before October 15, 2021, but in no event later than the applicable period of limitations on making adjustments under § 6235 for the reviewed year as defined in § 301.6241-1(a)(8). This amended return or AAR must include the adjustment to taxable income for the change in determining depreciation of the qualified improvement property and any collateral adjustments to taxable income or to tax liability. Such collateral adjustments also must be made on original or amended Federal returns or AARs for any affected succeeding taxable years; or (b) A Form 3115 with the taxpayer's timely filed Federal income tax return or Form 1065 under the automatic change procedures in Rev. Proc. 2015-13. See section 6.03(1) of this revenue procedure for the procedures for making this change in method of accounting. SECTION 4. AUTOMATIC EXTENSION OF TIME TO FILE CERTAIN ELECTIONS UNDER SECTION 168.01 Scope. This section 4 applies to: (1) A taxpayer that (a) placed in service depreciable property during its 2018, 2019, or 2020 taxable year, (b) timely filed its Federal income tax return or Form 1065 for the placed-in-service year of such depreciable property and such return was filed on or before April 17, 2020, (c) wants to make a § 168(g)(7) election, § 168(k)(5) election, or § 168(k)(7) election for such depreciable property, and (d) did not previously revoke or withdraw such election(s) in accordance with section 5.02 of this revenue procedure. The taxpayer makes the § 168(g)(7) election, § 168(k)(5) election, or § 168(k)(7) election in accordance with section 2.02(1), (2), or (3), respectively, of this revenue procedure or under section 4.02 of this revenue procedure; or (2) A taxpayer that (a) timely filed its Federal income tax return or Form 1065 for the taxpayer's taxable year that includes September 28, 2017, (b) wants to make a § 168(k)(10) election for such taxable year, and (c) did not previously revoke a § 168(k)(10) election for such taxable year in accordance with section 5.02 of this revenue procedure. The taxpayer makes the § 168(k)(10) in accordance with section 2.02(4) of this revenue procedure or under section 4.02 of this revenue procedure..02 Time and manner of making a late § 168(g)(7), (k)(5), (k)(7), or (k)(10) election. A taxpayer within the scope of this section 4 may make the late § 168(g)(7), (k)(5), (k)(7), or (k)(10) election by filing either: (1) Except as provided in Rev. Proc. 2020-23 regarding the time to file amended returns by BBA partnerships for taxable years beginning in 2018 and 2019, a Federal amended income tax return or amended Form 1065 for the placed-in-service year of the property on or before October 15, 2021, but in no event later than the applicable period of limitations on assessment for the taxable year for which the amended return is being filed. In the case of a BBA partnership that chooses not to file an amended Form 1065 as permitted under Rev. Proc. 2020-23 or that cannot file an amended Form 1065 because the placed-in-service year of the property is a taxable year that is not within the scope of Rev. Proc. 2020-23, the BBA partnership may file an AAR for the placed-in-service year of the property on or before October 15, 2021, but in no event later than the applicable period of limitations on making adjustments under § 6235 for the reviewed year as defined in § 301.6241-1(a)(8). This amended return or AAR must include the adjustment to taxable income for the late election and any collateral adjustments to taxable income or to tax liability. Such collateral adjustments also must be made on original or amended Federal returns or AARs for any affected succeeding taxable years; or (2) A Form 3115 with the taxpayer's timely filed original Federal income tax return or Form 1065 (a) for the taxpayer's first or second taxable year succeeding the taxable year in which the taxpayer placed in service the property, or (b) that is filed on or after April 17, 2020, and on or before October 15, 2021. The late § 168(g)(7), (k)(5), (k)(7), or (k)(10) election under this section 4.02(2) will be treated as a change in method of accounting with a § 481(a) adjustment only during this limited period of time. The time and manner of making this late election are described in section 6.03(2) of this revenue procedure. SECTION 5. CONSENT TO REVOKE OR WITHDRAW CERTAIN ELECTIONS UNDER SECTION 168.01 Scope. This section 5 applies to: (1) A taxpayer that (a) placed in service depreciable property during its 2018, 2019, or 2020 taxable year, (b) made a § 168(k)(5) election or § 168(k)(7) election on its timely filed original Federal income tax return or Form 1065 for the placed-in-service year of such depreciable property and such return was filed on or before April 17, 2020, or made a § 168(k)(5) election or § 168(k)(7) election in accordance with section 4 or 5 of Rev. Proc. 2019-33, respectively, for the placed-in-service year of such depreciable property on or before April 17, 2020, and (c) wants to revoke such election. If the taxpayer revokes the § 168(k)(7) election in accordance with section 5.02(2) of this revenue procedure, the revocation applies to all property included in the class of property and placed in service during the same taxable year; (2) A taxpayer that made a § 168(k)(10) election on its timely filed original Federal income tax return or Form 1065 for the taxpayer's taxable year that includes September 28, 2017, and such return was filed on or before April 17, 2020, or made a § 168(k)(10) election in accordance with section 6 of Rev. Proc. 2019-33 for the taxpayer's taxable year that includes September 28, 2017, on or before April 17, 2020, and that wants to revoke the § 168(k)(10) election. If the taxpayer revokes the § 168(k)(10) election in accordance with section 5.02(2) of this revenue procedure, the revocation applies to (a) all qualified property acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer during its taxable year that includes September 28, 2017, and (b) all specified plants that are planted, or grafted to a plant that has already been planted, after September 27, 2017, by the taxpayer in the ordinary course of the taxpayer's farming business during its taxable year that includes September 28, 2017, if the taxpayer made the § 168(k)(5) election for that taxable year; or (3) A taxpayer that (a) placed in service depreciable property during its 2018, 2019, or 2020 taxable year, (b) made a § 168(g)(7) election on its timely filed original Federal income tax return or Form 1065 for the placed-in-service year of such depreciable property and such return was filed on or before April 17, 2020, and (c) wants to withdraw such election. If the taxpayer withdraws the § 168(g)(7) election in accordance with section 5.02(3) of this revenue procedure, the taxpayer will be treated as if the election was never made for all property included in the class of property and placed in service during the same taxable year. However, if the taxpayer withdraws the § 168(g)(7) election for an item of nonresidential real property or residential rental property in accordance with section 5.02(3) of this revenue procedure, the taxpayer will be treated as if the election was not made for that specific item of nonresidential real property or residential rental property..02 Consent granted to revoke or withdraw election. (1) In general. The Commissioner grants a taxpayer within the scope of this section 5 consent to revoke its § 168(k)(5) election, § 168(k)(7) election, or § 168(k)(10) election, or consent to withdraw its § 168(g)(7) election, provided the taxpayer makes this revocation or withdrawal, as applicable, in the time and manner described in this section 5.02. (2) Revocation of § 168(k)(5), (7), or (10) election. A taxpayer within the scope of this section 5 may revoke its § 168(k)(5) election, § 168(k)(7) election, or § 168(k)(10) election by filing either: (a) Except as provided in Rev. Proc. 2020-23 regarding the time to file amended returns by BBA partnerships for taxable years beginning in 2018 and 2019, a Federal amended income tax return or amended Form 1065 for the placed-in-service year of the property on or before October 15, 2021, but in no event later than the applicable period of limitations on assessment for the taxable year for which the amended return is being filed. In the case of a BBA partnership that chooses not to file an amended Form 1065 as permitted under Rev. Proc. 2020-23 or that cannot file an amended Form 1065 because the placed-in-service year of the property is a taxable year that is not within the scope of Rev. Proc. 2020-23, the BBA partnership may file an AAR for the placed-in-service year of the property on or before October 15, 2021, but in no event later than the applicable period of limitations on making adjustments under § 6235 for the reviewed year as defined in § 301.6241-1(a)(8). This amended return or AAR must include the adjustment to taxable income for the revocation of the § 168(k)(5), (k)(7), or (k)(10) election and any collateral adjustments to taxable income or to tax liability. Such collateral adjustments also must be made on original or amended Federal returns or AARs for any affected succeeding taxable years; or (b) A Form 3115 with the taxpayer's timely filed original Federal income tax return or Form 1065 (i) for the taxpayer's first or second taxable year succeeding the taxable year in which the taxpayer placed in service the property, or (ii) that is filed on or after April 17, 2020, and on or before October 15, 2021. The revocation of the § 168(k)(5), (k)(7), or (k)(10) election under this section 5.02(2)(b) will be treated as a change in method of accounting with a § 481(a) adjustment only during this limited period of time. The time and manner of making this revocation are described in section 6.03(2) of this revenue procedure. (3) Withdrawal of § 168(g)(7) election. A taxpayer within the scope of this section 5 may withdraw a § 168(g)(7) election by filing an amended Federal income tax return, amended Form 1065, or AAR, as applicable. Except as provided in Rev. Proc. 2020-23 regarding the time to file amended returns by BBA partnerships for taxable years beginning in 2018 and 2019, the Federal amended income tax return or amended Form 1065 for the placed-in-service year of the property must be filed on or before October 15, 2021, but in no event later than the applicable period of limitations on assessment for the taxable year for which the amended return is being filed. In the case of a BBA partnership that chooses not to file an amended Form 1065 as permitted under Rev. Proc. 2020-23 or that cannot file an amended Form 1065 because the placed-in-service year of the property is a taxable year that is not within the scope of Rev. Proc. 2020-23, the BBA partnership may file an AAR for the placed-in-service year of the property on or before October 15, 2021, but in no event later than the applicable period of limitations on making adjustments under § 6235 for the reviewed year as defined in § 301.6241-1(a)(8). This amended return or AAR must include the adjustment to taxable income for the withdrawal of the § 168(g)(7) election and any collateral adjustments to taxable income or to tax liability. Such collateral adjustments also must be made on original or amended Federal returns or AARs for any affected succeeding taxable years. SECTION 6. CHANGE IN METHOD OF ACCOUNTING.01 In general. The making of a late election, or the revocation of an election, under sections 4.02(2) and 5.02(2)(b) of this revenue procedure is treated as a change in method of accounting for a limited period of time to which §§ 446(e) and 481, and the corresponding regulations, apply. A taxpayer that wants to make a late election, or revoke an election, under sections 4.02(2) and 5.02(2)(b) of this revenue procedure must use the automatic change procedures in Rev. Proc. 2015-13 or its successor..02 Modifications to existing automatic changes. (1) Section 6.01(1)(c) of Rev. Proc. 2019-43, 2019-48 I.R.B. 1107, is modified by: (a) At the end of section 6.01(1)(c)(xv), deleting "or"; (b) At the end of section 6.01(1)(c)(xvi), deleting the period and adding ";" in its place; (c) Adding new sections 6.01(1)(c)(xvii) and (xviii) to read as follows: (xvii) any qualified improvement property, as defined in § 168(e)(6), placed in service by the taxpayer after December 31, 2017, to which section 6.19 of this revenue procedure applies; or (xviii) any property to which section 4 or 5 of Rev. Proc. 2020-22, 2020-18 I.R.B. 745, applies. (See sections 4.02 and 4.03, or 5.02 of Rev. Proc. 2020-22, as applicable, for making any changes to depreciation for such property.) (2) Section 6.04 of Rev. Proc. 2019-43 is modified by revising 6.04(1) to read as follows: (1) Description of change. (a) Applicability. This change applies to a taxpayer that wants to change the method of accounting for general asset account treatment of MACRS property (as defined in § 1.168(b)-1(a)(2)) to the method of accounting provided in § 1.168(i)-1(c)(2)(ii)(I) or § 1.168(i)-1(h)(2), which applies when there is a change in the use of MACRS property pursuant to § 1.168(i)-4(d). (b) Inapplicability. The changes described in section 6.04(1)(a) of this revenue procedure do not apply to any property to which section 4 or 5 of Rev. Proc. 2020-22, 2020-18 I.R.B. 745, applies. (See sections 4.02 and 4.03, or 5.02 of Rev. Proc. 2020-22, as applicable, for making such changes for such property.) (3) Section 6.05 of Rev. Proc. 2019-43 is modified by revising 6.05(1) to read as follows: (1) Description of change. (a) Applicability. This change applies to a taxpayer that wants to (i) change the method of accounting for depreciation of MACRS property (as defined in § 1.168(b)-1(a)(2)) to the method of accounting for depreciation provided in § 1.168(i)-4, which applies when there is a change in the use of MACRS property, or (ii) revoke the election provided in § 1.168(i)-4(d)(3)(ii) to disregard a change in the use of MACRS property. See § 1.168(i)-4(g)(2). (b) Inapplicability. The change described in section 6.05(1)(a)(i) of this revenue procedure does not apply to any property to which section 4 or 5 of Rev. Proc. 2020-22, 2020-18 I.R.B. 745, applies. (See sections 4.02 and 4.03, or 5.02 of Rev. Proc. 2020-22, as applicable, for making such change for such property.).03 New automatic changes. (1) Rev. Proc. 2019-43 is modified to add new section 6.19 to read as follows: 6.19 Qualified improvement property placed in service after December 31, 2017. (1) Description of change. (a) Applicability. This change applies to a taxpayer that wants to change from an impermissible to a permissible method of accounting for depreciation of any item of qualified improvement property, as defined in § 168(e)(6): (i) that is placed in service by the taxpayer after December 31, 2017; (ii) for which the taxpayer used the impermissible method of accounting in at least two taxable years immediately preceding the year of change (but see section 6.19(1)(b) of this revenue procedure for qualified improvement property placed in service in the taxable year immediately preceding the year of change); and (iii) that is owned by the taxpayer at the beginning of the year of change (but see section 6.07 of this revenue procedure for property disposed of before the year of change). (b) Taxpayer has not adopted a method of accounting for the qualified improvement property. If a taxpayer does not satisfy section 6.19(1)(a)(ii) of this revenue procedure for an item of qualified improvement property because the item of qualified improvement property is placed in service by the taxpayer in the taxable year immediately preceding the year of change (1-year QIP), the taxpayer may change from the impermissible method of determining depreciation to the permissible method of determining depreciation for the 1-year QIP by filing a Form 3115 for this change, provided the § 481(a) adjustment reported on the Form 3115 includes the amount that is attributable to all property (including the 1-year QIP) subject to the Form 3115. Alternatively, the taxpayer may change from the impermissible method of determining depreciation to the permissible method of determining depreciation for the 1-year QIP by filing an amended Federal income tax return, or an administrative adjustment request under section 6227 (AAR), for the property's placed-in-service year prior to the date the taxpayer files its Federal income tax return or Form 1065, as applicable, for the taxable year succeeding the placed-in-service year. In addition, if the 1-year QIP is within the scope of section 3 of Rev. Proc. 2020-25, 2020-19 I.R.B. 785, the taxpayer may change from the impermissible method of determining depreciation to the permissible method of determining depreciation for the 1-year QIP by filing a Federal amended income tax return, amended Form 1065, or AAR, as applicable, in accordance with section 3.02(3)(a) of Rev. Proc. 2020-25. (c) Inapplicability. This change does not apply to: (i) any qualified improvement property placed in service by a taxpayer that made a late election, or withdrew an election, under § 163(j)(7)(B) (electing real property trade or business) or § 163(j)(7)(C) (electing farming business) for the taxable year in which the qualified improvement property is placed in service by the taxpayer, in accordance with Rev. Proc. 2020-22, 2020-18 I.R.B. 745. Any changes to depreciation for such qualified improvement property, or other depreciable property, affected by the late election or withdrawn election under § 163(j)(7)(B) or (C) are made in accordance with sections 4.02 and 4.03, or 5.02 of Rev. Proc. 2020-22, as applicable; (ii) any qualified improvement property for which the taxpayer is changing from deducting the cost or other basis as an expense to capitalizing and depreciating the cost or other basis, or vice versa; or (iii) any qualified improvement property for which the taxpayer is changing its method of accounting for depreciation to the method of accounting for depreciation provided in § 1.168(i)-4, which applies when there is a change in use of the property (but see section 6.04 or 6.05 of this revenue procedure for making this change). (2) Certain eligibility rules temporarily inapplicable. For an item of qualified improvement property placed in service by the taxpayer after December 31, 2017, in its taxable year ending in 2018, 2019, or 2020, the eligibility rules in section 5.01(1)(d) and (f) of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, do not apply to this change for the taxpayer's first or second taxable year succeeding the taxable year in which the item of qualified improvement property is placed in service by the taxpayer or, if later, for any taxable year for which the taxpayer timely files an original Federal income tax return or Form 1065, as applicable, on or after April 17, 2020, and on or before October 15, 2021. (3) Reduced filing requirement. A taxpayer making a change under this section 6.19 is required to complete only the following information on Form 3115 (Rev. December 2018): (a) The identification section of page 1 (above Part I); (b) The signature section at the bottom of page 1; (c) Part I; (d) Part II, all lines except lines 11, 12, 13, 15, 16, 17, and 19; (e) Part IV, all lines; and (f) Schedule E, all lines except lines 1, 4b, 5, and 6. (4) Concurrent automatic change. (a) A taxpayer making this change for more than one asset for the same year of change should file a single Form 3115 for all such assets and provide a single net § 481(a) adjustment for all the changes included in that Form 3115. (b) A taxpayer making this change and the change in section 6.01 or 6.20 of this revenue procedure for the same year of change should file a single Form 3115 for all such changes and must enter the designated automatic accounting method change numbers on the appropriate line on the Form 3115. See section 6.03(1)(b) of Rev. Proc. 2015-13 for information on making concurrent changes. (5) Designated automatic accounting method change number. The designated automatic accounting method change number for a change to the method of accounting under this section 6.19 is "244." (6) Contact information. For further information regarding a change under this section, contact Elizabeth R. Binder at (202) 317-7005 (not a toll-free number). (2) Rev. Proc. 2019-43 is modified to add new section 6.20 to read as follows: 6.20 Late elections under § 168(g)(7), (k)(5), (k)(7), and (k)(10) or revocation of elections under § 168(k)(5), (k)(7), and (k)(10). (1) Description of change. (a) Applicability. This change applies to a taxpayer within the scope of section 4 of Rev. Proc. 2020-25, 2020-19 I.R.B. 785, that wants to make a late election provided in section 4.02(2) of Rev. Proc. 2020-25 under § 168(g)(7), (k)(5), (k)(7), or (k)(10). This change also applies to a taxpayer within the scope of section 5 of Rev. Proc. 2020-25 that wants to revoke an election provided in section 5.02(2)(b) of Rev Proc. 2020-25 under § 168(k)(5), (k)(7), or (k)(10). (b) Inapplicability. The IRS will treat the making of a late election provided in section 4 of Rev. Proc. 2020-25 under § 168(g)(7), (k)(5), (k)(7), and (k)(10), or the revocation of an election provided in section 5 of Rev. Proc. 2020-25 under § 168(k)(5), (k)(7), and (k)(10), as a change in method of accounting with a § 481(a) adjustment only for the taxable years specified in section 6.20(2) of this revenue procedure. This treatment does not apply to a taxpayer that makes these late elections or revocations before or after the time specified in section 6.20(2) of this revenue procedure, and any such late election or revocation is not a change in method of accounting pursuant to § 1.446-1(e)(2)(ii)( d )( 3 )( iii ). (2) Time for making the change. The change under this section 6.20 must be made for (a) the taxpayer's first or second taxable year succeeding the taxable year in which the taxpayer placed in service the property affected by the late election under § 168(g)(7), (k)(5), (k)(7), or (k)(10), as applicable, or revocation of the election under § 168(k)(5), (k)(7), or (k)(10), as applicable, or, if later, (b) any taxable year for which the taxpayer timely files an original Federal income tax return or Form 1065, as applicable, on or after April 17, 2020, and on or before October 15, 2021. (3) Certain eligibility rules inapplicable. The eligibility rules in section 5.01(1)(d) and (f) of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, do not apply to this change for the taxpayer's first or second taxable year succeeding the taxable year in which the taxpayer placed in service the property affected by the late election under § 168(g)(7), (k)(5), (k)(7), or (k)(10), as applicable, or revocation of the election under § 168(k)(5), (k)(7), or (k)(10), as applicable, or if later, for any taxable year for which the taxpayer timely files an original Federal income tax return or Form 1065, as applicable, on or after April 17, 2020, and on or before October 15, 2021. (4) Reduced filing requirement. A taxpayer making a change under this section 6.20 is required to complete only the following information on Form 3115 (Rev. December 2018): (a) The identification section of page 1 (above Part I); (b) The signature section at the bottom of page 1; (c) Part I; (d) Part II, all lines except lines 11, 12, 13, 15, 16, 17, and 19; (e) Part IV, all lines; and (f) Schedule E, all lines except lines 1, 4b, 5, and 6. (5) Concurrent automatic change. (a) A taxpayer making one or more late elections, and/or revoking one or more elections, under sections 4 and 5 of Rev. Proc. 2020-25 for the same year of change should file a single Form 3115 for all such changes. The single Form 3115 must provide a single net § 481(a) adjustment for all such changes. (b) A taxpayer making this change and the change in section 6.01 or 6.19 of this revenue procedure for the same year of change should file a single Form 3115 for all such changes and must enter the designated automatic accounting method change numbers on the appropriate line on the Form 3115. See section 6.03(1)(b) of Rev. Proc. 2015-13 for information on making concurrent changes. (6) Designated automatic accounting method change number. The designated automatic accounting method change number for a change to the method of accounting under this section 6.20 is "245." (7) Contact information. For further information regarding a change under this section 6.20, contact Elizabeth R. Binder at (202) 317-7005 (not a toll-free number). SECTION 7. REMODEL-REFRESH SAFE HARBOR.01 Section 5.02(3)(b)(ii) of Rev. Proc. 2015-56, 2015-49 I.R.B. 827, is modified to read as follows: (ii) Classification under § 168(e). For purposes of determining the appropriate classification under § 168(e) for property placed in service by the taxpayer after December 31, 2017, the capital expenditure portion is treated as qualified improvement property (as defined in § 168(e)(6)) under § 168(e)(3)(E)(vii), only to the extent that the taxpayer can substantiate that the capital expenditure portion is qualified improvement property. For property placed in service by the taxpayer before January 1, 2018, the capital expenditure portion is treated as qualified leasehold improvement property (as defined in § 168(e)(6) prior to amendment by Public Law 115-97, 131 Stat. 2054 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA)) under § 168(e)(3)(E)(iv) prior to amendment by the TCJA, as qualified restaurant property (as defined in § 168(e)(7) prior to amendment by the TCJA) under § 168(e)(3)(E)(v) prior to amendment by the TCJA, or as qualified retail improvement property (as defined in § 168(e)(8) prior to amendment by the TCJA) under § 168(e)(3)(E)(ix) prior to amendment by the TCJA, as applicable, only to the extent that the taxpayer can substantiate that the capital expenditure portion is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property, as applicable. The remaining capital expenditure portion is classified as nonresidential real property under § 168(e)(2)(B). Also, if § 168(e)(3)(E)(iv), (v), or (ix) (prior to amendment by the TCJA), or § 168(e)(3)(E)(vii), as applicable, is not in effect when the taxpayer places in service the capital expenditure portion, the capital expenditure portion is classified as nonresidential real property under § 168(e)(2)(B). SECTION 8. EFFECT ON OTHER DOCUMENTS.01 Section 5.02(3)(b)(ii) of Rev. Proc. 2015-56 is modified..02 Section 6 of Rev. Proc. 2019-43 is modified to include the modifications provided in section 6.02 of this revenue procedure and the accounting method changes provided in section 6.03 of this revenue procedure. SECTION 9. EFFECTIVE DATE This revenue procedure is effective April 17, 2020. SECTION 10. DRAFTING INFORMATION The principal authors of this revenue procedure are Kathleen Reed and Elizabeth Binder of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue procedure, contact Ms. Binder at (202) 317-4869 (not a toll-free call) or Ms. Reed at (202) 317-4660 (not a toll-free number).

Private Letter Ruling Number: 202227002 Internal Revenue Service March 24, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202227002 Release Date: 7/8/2022 Index Number: 168.24-01 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B06 PLR-119555-21 Date: March 24, 2022 Dear *******: This letter responds to a request for a private letter ruling dated September 22, 2021, and additional submission dated November 19, 2021, submitted on behalf of Taxpayer for rulings under § 168(i)(9) of the Internal Revenue Code and § 1.167(l)-1 of the Income Tax Regulations regarding the application of the deferred tax normalization requirements and the appropriate methodology for the reduction of the accumulated deferred income tax ("ADIT") balance that decreases rate base computation when a net operating loss carryforward ("NOLC") exists. An earlier letter ruling (PLR 202010002, dated December 3, 2019, "2020 Ruling") to Taxpayer addressed this issue, but judicial and regulatory developments since the issuance of the 2020 Ruling have clarified pertinent regulatory matters and must be taken into account to apply the normalization rules. Taxpayer's representations in the earlier letter ruling and those in the current request are as follows: Taxpayer is a water and wastewater utility company that operates in State with rates set by Commission for the furnishing or sale of water or sewage disposal services through a combination of periodic general rate case proceedings (resulting in what are commonly referred to as "base rates") and infrastructure surcharge proceedings (resulting in surcharges that are added to base rates). Under State statute and Commission rulemaking, eligible water corporations may petition Commission and utilize an Infrastructure System Replacement Surcharge ("Surcharge") to recover the costs of eligible water utility main replacements and relocations. For both general rate case proceedings and Surcharge proceedings, Taxpayer computes a revenue requirement subject to Commission approval based on recovery of a debt-and equity-based return on investment in rate base, including the cost of plant assets less accumulated book depreciation and ADIT, and a recovery of operating expenses, including depreciation expense, property tax expense, and income tax expense. A State statute authorizes Commission to enter an order authorizing the water corporation to impose a Surcharge that is sufficient to recover "appropriate pretax revenues." The State statute defines the revenue requirement set in a Surcharge proceeding and provides that "appropriate pretax revenues" are "the revenues necessary to produce net operating income equal to... the water corporation's weighted cost of capital multiplied by the net original cost of eligible infrastructure system replacements, including recognition of accumulated deferred income taxes and accumulated depreciation associated with eligible infrastructure system replacements... " among other items. In the request resulting in the 2020 Ruling, Taxpayer represented that Commission and the State courts have interpreted this statute in a strict manner thereby limiting the costs eligible for recovery or to earn a return in a Surcharge proceeding and causing costs not eligible for ratemaking consideration in a Surcharge proceeding to only be eligible for recovery or return in the next base rate proceeding. As described below, a court decision after issuance of the 2020 Ruling has clarified the applicable interpretation of this statute. The deferred tax normalization matters in the original request and in this request pertain to the Surcharge proceeding initiated by Taxpayer in Month 1 Year 1 (the "Surcharge Case") and resulting in a Commission order on Date 1 (the "Date 1 Order"). The Surcharge Case relates to additions of certain property placed in service from Date 2 through Date 3 and accumulated depreciation and estimated ADIT on such assets was through Date 4. The Surcharge resulting from the Surcharge Case became effective on Date 5. On a consolidated basis, Parent incurred tax losses in various years from Year 2 to Year 3 and, as of Date 6, had an NOLC of approximately $a. On a separate company basis, Taxpayer incurred tax losses in various tax years from Year 2 to Year 4 and, as of Date 6, had a separate company NOLC of approximately $b (after taxsharing payments). For Year 1, Parent (on a consolidated basis) and Taxpayer (on a separate company basis) estimated and then ultimately reported that taxable income was earned and, thus, NOLC was utilized. As of the date of the rate base determination (Date 4), a taxable loss of approximately $c had been incurred with respect to the plant-related expenditures with rates set by the Surcharge Case and associated Surcharge revenues as of such date. However, Taxpayer reported taxable income for the tax year that included the Surcharge Case test period on the basis of all of the gross income and deductions from Commission-regulated operations. The NOLC reflected in ratemaking for the base rate case proceeding with rates effective in Month 2 Year 1 was based on the estimated NOLC as of the end of Year 4 of $d, including an estimated Year 4 tax loss of $e. The actual Year 4 tax loss reported on the Year 4 tax return was $f. The excess of the actual Year 4 tax loss over the estimated Year 4 tax loss had yet to be reflected in ratemaking at the time of the Surcharge Case but was reflected in the subsequent base rate case. Issues disputed by participants in the Surcharge Case included whether the tax effect of an NOLC must, pursuant to the normalization requirements, decrease the ADIT reduction to rate base related to the expenditures in the Surcharge Case and, if so, the methodology to determine the amount of the NOLC adjustment subject to the normalization requirements. The revenue requirement approved in Commission's Date 1 Order was lower than the revenue requirement sought by Taxpayer and is entirely attributable to differing ADIT calculations with respect to the NOLC and the resulting effects on rate base and allowed return. The approved revenue requirement in the Surcharge case was based on a rate base computation that reflects the gross ADIT liabilities associated with depreciation-related and repair-related book/tax differences, but did not reflect an ADIT asset for any portion of Taxpayer's NOLC as of the date that rate base was determined (Date 4), including the tax loss resulting from the infrastructure expenditures addressed in the Surcharge Case. On Date 7, Taxpayer filed an Application for Rehearing and Motion to Defer Ruling, asking the Commission for the time to seek a private letter ruling form of guidance from the Service to address any uncertainties regarding the application of the deferred tax normalization requirements to the rate base treatment of the NOLC-related ADIT asset in computing the Surcharge case revenue requirement. On Date 8, the Commission denied Taxpayer's request for rehearing. Taxpayer filed a notice of appeal by Date 9, that initiated an appeal of the order in the Surcharge case to the State Court of Appeals. Taxpayer filed a private letter ruling request that resulted in the 2020 Ruling. Taxpayer received the 2020 Ruling on Date 10 and notified the Commission that it had been received by way of correspondence dated Date 11. On Date 12, Taxpayer filed a petition with Commission seeking to establish a Surcharge rate to provide for the recovery of costs for eligible infrastructure system replacements and relocations for a test period that included such date. In addition, Taxpayer sought to recover the incremental revenue requirement associated with the Surcharge Case attributable to the holdings of the 2020 Ruling. As part of this Surcharge proceeding, Commission Staff filed its recommendation and memorandum agreeing with Taxpayer's calculations and recommending the Commission approve Taxpayer's requested rate changes including an adjustment related to the NOLC normalization matter in the Surcharge Case and subsequent Surcharge proceedings prior to the Surcharge proceeding initiated on Date 12. Another participant in the regulatory proceeding filed its objections and a request for an evidentiary hearing. The Commission conducted an evidentiary hearing and issued an order on Date 13 with respect to this Surcharge proceeding ("Date 13 Order") that permitted the rate recovery sought by Taxpayer with respect to the NOLC-related normalization matter addressed in the 2020 Ruling for the periods covered by the Surcharge Case and subsequent Surcharge proceedings prior to the Surcharge proceeding initiated on Date 12. The participant in the regulatory proceeding that had filed objections during this Surcharge proceeding subsequently filed a motion for rehearing related to the Date 13 Order. The Commission denied the application for rehearing. This participant then filed a Notice of Appeal with Commission and initiated litigation against the Commission and Taxpayer in the State Court of Appeals with respect to the Date 13 Order. On Date 14, the State Court of Appeals rendered an opinion requiring the Commission to reduce its revenue requirement calculation for the Surcharge Case to eliminate the component attributable to the NOLC-related normalization matter ("Date 14 Decision"). The State Court of Appeals held that the Commission misinterpreted holding 9 of the 2020 Ruling and further held that whether an NOL exists for a test period is based on the entirety of the taxpayer's Commission-regulated operations, not simply the gross income and deductions for a particular Surcharge proceeding. The Date 14 Decision remands the Date 13 Order to the Commission and orders reduction of Taxpayer's computation of rate base for the Surcharge Case by reflecting depreciation-related ADIT subject to the deferred tax normalization requirements without reduction for Taxpayer's NOLC. On Date 15, Taxpayer filed an Application for Rehearing or Motion to Transfer with State Court of Appeals, asking that the Court rehear the matter or, in the alternative, transfer the case to the State Supreme Court. On Date 16, the State Court of Appeals denied the motion for rehearing and denied transfer of the case to the State Supreme Court. On Date 17, Taxpayer filed an Application for Transfer to the State Supreme Court and on Date 18, the State Supreme Court denied the application. Taxpayer has no further avenues to appeal the Date 14 Decision. In accordance with the Date 14 Decision, the Date 13 Order was remanded back to Commission, and Commission had 60 days (subject to extension) to issue a revised order. At the time this ruling request was submitted to this office, Taxpayer expected Commission to comply with the Date 14 Decision and revise the Surcharge Case revenue requirement computation in a manner contradictory to holding 9 of the 2020 Ruling. On Date 19, Commission issued an order on remand, effective Date 20, with respect to the rate refund resulting from the Date 14 Decision. As expected, the Commission ordered Taxpayer to refund amounts that were previously recovered from customers in accordance with the original interpretation by Taxpayer and the Commission of holding 9 of the 2020 Ruling. Taxpayer intends to set prices in accordance with this order. Holding 9 of the 2020 Ruling was premised on Taxpayer's interpretation of the statute and applicable regulatory and judicial precedent that considered Taxpayer's NOLC to be increasing during the Surcharge Case test period for purposes of setting the Surcharge. Based on the clarification provided by the Date 14 Decision, Taxpayer submitted a revision to its facts represented in the earlier ruling request to reflect that Taxpayer is instead considered to have decreased its NOLC during the Surcharge Case test period for purposes of setting the Surcharge. Thus, the analysis resulting in holding 9 of the 2020 Ruling must be reconsidered. RULINGS REQUESTED Taxpayer requests that the Service rule: Under the circumstances described, in order to comply with the normalization method of accounting within the meaning of § 168(i)(9), the amount of depreciationrelated ADIT reducing rate base used to determine the revenue requirement set in the Surcharge Case is not required to be decreased to reflect any portion of Taxpayer's NOLC existing during the test period for the Surcharge Case because Taxpayer expected to decrease its NOLC during the Surcharge Case test period and the remaining depreciation-related NOLC was reflected in ADIT used to compute rate base in the base rate proceedings immediately preceding and immediately subsequent to the Surcharge Case. LAW AND ANALYSIS Section 168(f)(2) of the Code provides that the depreciation deduction determined under § 168 shall not apply to any public utility property (within the meaning of § 168(i)(10)) if the taxpayer does not use a normalization method of accounting. In order to use a normalization method of accounting, § 168(i)(9)(A)(i) of the Code requires the taxpayer, in computing its tax expense for establishing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account, to use a method of depreciation with respect to public utility property that is the same as, and a depreciation period for such property that is not shorter than, the method and period used to compute its depreciation expense for such purposes. Under § 168(i)(9)(A)(ii), if the amount allowable as a deduction under § 168 differs from the amount that would be allowable as a deduction under § 167 using the method, period, first and last year convention, and salvage value used to compute regulated tax expense under § 168(i)(9)(A)(i), the taxpayer must make adjustments to a reserve to reflect the deferral of taxes resulting from such difference. Former § 167(l) of the Code generally provided that public utilities were entitled to use accelerated methods for depreciation if they used a "normalization method of accounting." A normalization method of accounting was defined in former § 167(l)(3)(G) in a manner consistent with that found in § 168(i)(9)(A). Section 1.167(l)-1(a)(1) of the Regulations provides that the normalization requirements for public utility property pertain only to the deferral of federal income tax liability resulting from the use of an accelerated method of depreciation for computing the allowance for depreciation under § 167 and the use of straight-line depreciation for computing tax expense and depreciation expense for purposes of establishing cost of services and for reflecting operating results in regulated books of account. These regulations do not pertain to other book-tax timing differences with respect to state income taxes, F.I.C.A. taxes, construction costs, or any other taxes and items. Section 1.167(l)-1(h)(1)(i) provides that the reserve established for public utility property should reflect the total amount of the deferral of federal income tax liability resulting from the taxpayer's use of different depreciation methods for tax and ratemaking purposes. Section 1.167(l)-1(h)(1)(iii) provides that the amount of federal income tax liability deferred as a result of the use of different depreciation methods for tax and ratemaking purposes is the excess (computed without regard to credits) of the amount the tax liability would have been had the depreciation method for ratemaking purposes been used over the amount of the actual tax liability. This amount shall be taken into account for the taxable year in which the different methods of depreciation are used. If, however, in respect of any taxable year the use of a method of depreciation other than a subsection (l) method for purposes of determining the taxpayer's reasonable allowance under § 167(a) results in a NOL carryover to a year succeeding such taxable year which would not have arisen (or an increase in such carryover which would not have arisen) had the taxpayer determined his reasonable allowance under § 167(a) using a subsection (l) method, then the amount and time of the deferral of tax liability shall be taken into account in such appropriate time and manner as is satisfactory to the district director. Section 1.167(l)-1(h)(2)(i) provides that the taxpayer must credit this amount of deferred taxes to a reserve for deferred taxes, a depreciation reserve, or other reserve account. This regulation further provides that, with respect to any account, the aggregate amount allocable to deferred tax under § 167(l) shall not be reduced except to reflect the amount for any taxable year by which Federal income taxes are greater by reason of the prior use of different methods of depreciation. That section also notes that the aggregate amount allocable to deferred taxes may be reduced to reflect the amount for any taxable year by which federal income taxes are greater by reason of the prior use of different methods of depreciation under § 1.167(l)-1(h)(1)(i) or to reflect asset retirements or the expiration of the period for depreciation used for determining the allowance for depreciation under § 167(a). Section 1.167(l)-(h)(6)(i) provides that, notwithstanding the provisions of subparagraph (1) of § 1.167(l)-(h), a taxpayer does not use a normalization method of regulated accounting if, for ratemaking purposes, the amount of the reserve for deferred taxes under § 167(l) which is excluded from the base to which the taxpayer's rate of return is applied, or which is treated as no-cost capital in those rate cases in which the rate of return is based upon the cost of capital, exceeds the amount of such reserve for deferred taxes for the period used in determining the taxpayer's expense in computing cost of service in such ratemaking. Section 1.167(l)-(h)(6)(ii) provides that, for the purpose of determining the maximum amount of the reserve to be excluded from the rate base (or to be included as no-cost capital) under subdivision (i) of § 1.167(l)-(h)(6), above, if solely an historical period is used to determine depreciation for Federal income tax expense for ratemaking purposes, then the amount of the reserve account for that period is the amount of the reserve (determined under § 1.167(l)-1(h)(2)(i)) at the end of the historical period. If such determination is made by reference both to an historical portion and to a future portion of a period, the amount of the reserve account for the period is the amount of the reserve at the end of the historical portion of the period and a pro rata portion of the amount of any projected increase to be credited or decrease to be charged to the account during the future portion of the period. Therefore, § 1.167(l)-1(h) requires that a utility must maintain a reserve reflecting the total amount of the deferral of federal income tax liability resulting from the taxpayer's use of different depreciation methods for tax and ratemaking purposes. The normalization requirements pertain only to deferred income taxes for public utility property resulting from the use of accelerated depreciation for tax purposes and the use of straight-line depreciation for establishing cost of service and reflecting the operating results in regulated books of account. Generally, amounts that do not actually defer tax because of the existence of an NOL need to be reflected as offsetting entries to the ADIT account to show the portion of tax losses which did not actually defer tax due to accelerated depreciation. Section 1.167(l)-1(h)(6)(i) provides that a taxpayer does not use a normalization method of regulated accounting if, for ratemaking purposes, the amount of the reserve for deferred taxes which is excluded from the base to which the taxpayer's rate of return is applied, or which is treated as no-cost capital in those rate cases in which the rate of return is based upon the cost of capital, exceeds the amount of such reserve for deferred taxes for the period used in determining the taxpayer's expense in computing cost of service in such ratemaking. Because the reserve account for deferred taxes (ADIT), reduces rate base, it is clear that the portion of the NOLC that is attributable to accelerated depreciation must be taken into account in calculating the amount of the ADIT account balance. Thus, the ADIT asset resulting from the NOLC should be included in rate base, given the inclusion in rate base of the full amount of the ADIT liability resulting from accelerated tax depreciation. Section 1.167(l)-1(h)(1)(iii) makes clear that the effects of an NOLC must be taken into account for normalization purposes. Section 1.167(l)-1(h)(1)(iii) provides generally that, if, in respect of any year, the use of other than regulatory depreciation for tax purposes results in an NOLC carryover (or an increase in an NOLC which would not have arisen had the taxpayer claimed only regulatory depreciation for tax purposes), then the amount and time of the deferral of tax liability shall be taken into account in such appropriate time and manner as is satisfactory to the district director. At issue in the Surcharge Case is the computation of the amount by which Taxpayer's NOLC as of the rate base determination date for the Surcharge Case is attributable to depreciation-related book/tax differences pertaining to expenditures for public utility property which are reflected in the Surcharge Case and subject to § 1.167(l)-1(h)(1)(iii). Based on the State statute and judicial decisions, whether an NOL exists for a Surcharge proceeding test period and, thus, whether an overall NOLC existing prior to such test period is increasing or decreasing during a Surcharge proceeding test period are based on gross income and deductions related to all of Taxpayer's Commission-regulated operations during such test period and are not limited to the gross income and deductions pertaining to the Surcharge Case in isolation. Taxpayer has indicated that all of the property placed in service in the test period for the Surcharge Case was placed in service in Year 1. During Year 1, gross income of Taxpayer exceeded deductions allowed of Taxpayer and, thus, an NOL as defined in § 172(c) of the Code did not occur. Similarly, gross income of the consolidated group exceeded deductions allowed of the consolidated group and, thus, an NOL as defined in § 172(c) of the Code did not occur on a consolidated basis either. Accordingly, during Year 1, both Taxpayer and its consolidated group utilized a portion of their NOLCs existing at the end of Year 4. No portion of the NOLC of Taxpayer at the beginning or end of the test period for the Surcharge Case is attributable to depreciation of public utility property with rates set in the Surcharge Case. Instead, depreciation of Surcharge Case public utliity property reduced current-year (Year 1) taxable income. On this basis, taxable income rather than an NOL resulted during the Surcharge Case test period and, thus, Taxpayer's NOLC decreased during the Surcharge Case test period. The NOLC normalization requirement of § 1.167(l)-1(h)(1)(iii) does not apply to depreciation-related book/tax differences pertaining to expenditures for public utility property reflected in the Surcharge Case because Taxpayer's NOLC did not arise or increase due to the Surcharge Case depreciation-related book/tax differences with respect to public utility property. Significantly, Taxpayer's depreciation-related NOLC is reflected in the ADIT amount used to compute rate base in the base rate proceedings immediately preceding and immediately subsequent to the Surcharge Case. CONCLUSION Based on the foregoing, we conclude as follows: Under the circumstances described, in order to comply with the normalization method of accounting within the meaning of § 168(i)(9), the amount of depreciationrelated ADIT reducing rate base used to determine the revenue requirement set in the Surcharge Case is not required to be decreased to reflect any portion of Taxpayer's NOLC existing during the test period for the Surcharge Case because Taxpayer expected to decrease its NOLC during the Surcharge Case test period and the remaining depreciation-related NOLC was reflected in ADIT used to compute rate base in the base rate proceedings immediately preceding and immediately subsequent to the Surcharge Case. Except as specifically set forth above, no opinion is expressed or implied concerning the federal income tax consequences of the above described facts under any other provision of the Code or regulations. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. This ruling is based upon information and representations submitted by Taxpayer and accompanied by penalty of perjury statements executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your authorized representative. Sincerely, /S/ Patrick S. Kirwan Chief, Branch 6 Office of the Associate Chief Counsel (Passthroughs and Special Industries) Enclosure: Copy for § 6110 purposes cc:

Private Letter Ruling Number: 202336003 Internal Revenue Service June 9, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202336003 Release Date: 9/8/2023 Index Number: 9100.35-00, 2010.04-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:4 PLR-101809-23 Date: June 09, 2023 Dear ******: This letter responds to a letter dated December 27, 2022, and subsequent correspondence, submitted on behalf of Decedent's estate, requesting an extension of time pursuant to § 301.9100-3 of the Procedure and Administration Regulations to make an election. Decedent's estate is requesting to make an election under § 2010(c)(5)(A) of the Internal Revenue Code (a "portability" election) to allow a decedent's surviving spouse to take into account that decedent's deceased spousal unused exclusion (DSUE) amount. The information submitted for consideration is summarized below. Decedent died on Date, survived by Spouse. It is represented that based on the value of Decedent's gross estate and taking into account any taxable gifts, Decedent's estate is not required under § 6018(a) to file an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return). It is further represented that there is an unused portion of Decedent's applicable exclusion amount and that a portability election is required to allow Spouse to take into account that amount (the "DSUE" amount). A portability election is made upon the timely filing of a complete and properly prepared estate tax return, unless the requirements for opting out are satisfied. See § 20.2010-2(a)(2) of the Estate Tax Regulations. For various reasons, an estate tax return was not timely filed and a portability election was not made. After discovery of this, Decedent's estate submitted this request for an extension of time under § 301.9100-3 to make a portability election. LAW AND ANALYSIS Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2010(a) provides that a credit of the applicable credit amount shall be allowed to the estate of every decedent against the tax imposed by § 2001. Section 2010(c)(1) provides that the applicable credit amount is the amount of the tentative tax that would be determined under § 2001(c) if the amount with respect to which such tentative tax is to be computed were equal to the applicable exclusion amount. On December 17, 2010, Congress amended § 2010(c), effective for estates of decedents dying and gifts made after December 31, 2010, to allow portability of a decedent's unused applicable exclusion amount between spouses. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, § 303, 124 Stat. 3296, 3302 (2010). Section 2010(c)(2) provides that the applicable exclusion amount is the sum of the basic exclusion amount, and, in the case of a surviving spouse, the DSUE amount. Section 2010(c)(3) provides the basic exclusion amount available to the estate of every decedent, an amount to be adjusted for inflation annually after calendar year 2011. Section 2010(c)(4) defines the DSUE amount to mean the lesser of (A) the basic exclusion amount, or (B) the excess of -- (i) the applicable exclusion amount of the last deceased spouse of the surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under § 2001(b)(1) on the estate of such deceased spouse. Section 2010(c)(5)(A) provides that a DSUE amount may not be taken into account by a surviving spouse under § 2010(c)(2) unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return that such amount may be so taken into account. The election, once made, shall be irrevocable. No election may be made if such return is filed after the time prescribed by law (including extensions) for filing such return. Section 20.2010-2(a)(1) provides that the due date of an estate tax return required to elect portability is nine months after the decedent's date of death or the last day of the period covered by an extension (if an extension of time for filing has been obtained). Further, an extension of time under § 301.9100-3 to make a portability election may be granted in the case of an estate that is not required to file an estate tax return under § 6018(a), as determined solely based on the value of the gross estate and any adjusted taxable gifts (and without regard to § 20.2010-2(a)). Under § 301.9100-1(c), the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-3 provides the standards the Commissioner will use to determine whether to grant an extension of time to make an election whose due date is prescribed by a regulation (and not expressly provided by statute). Requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. In this case, based on the representation as to the value of the gross estate and any adjusted taxable gifts, the time for filing the portability election is fixed by the regulations. Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an extension of time for Decedent's estate to elect portability, provided Decedent's estate establishes it acted reasonably and in good faith, the requirements of §§ 301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government. Information, affidavits, and representations submitted on behalf of Decedent's estate explain the circumstances that resulted in the failure to timely file a valid election. Based solely on the information submitted and the representations made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Therefore, we grant an extension of time of 120 days from the date of this letter in which to make the portability election. The election should be made by filing a complete and properly prepared Form 706 and a copy of this letter, within 120 days from the date of this letter, with the Kansas City Service Center, at the following address: Department of the Treasury, Internal Revenue Service Center, Kansas City, MO 64999. For purposes of electing portability, a Form 706 filed by Decedent's estate within 120 days from the date of this letter will be considered to be timely filed. If it is later determined that, based on the value of the gross estate and taking into account any taxable gifts, Decedent's estate is required to file an estate tax return pursuant to § 6018(a), the Commissioner is without authority under § 301.9100-3 to grant an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void. See § 20.2010-2(a)(1). We neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, we express no opinion as to the DSUE amount to be potentially taken into account by Spouse. Any claimed DSUE amount will be included in the applicable exclusion amount of Spouse only to the extent that Spouse can substantiate such amount and will be subject to determination by the Director's office upon audit of relevant Federal gift or estate tax returns. See § 20.2010-3(c)(1) and (d). The ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, we have sent a copy of this letter to your authorized representative. Sincerely, Associate Chief Counsel (Passthroughs & Special Industries) By: Karlene M. Lesho Karlene M. Lesho Chief, Branch 4 Office of the Associate Chief Counsel (Passthroughs & Special Industries) Enclosure Copy for § 6110 purposes cc:

Private Letter Ruling Number: 202346001 Internal Revenue Service August 17, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202346001 Release Date: 11/17/2023 Index Number: 1400Z.02-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:ITA:B05 PLR-102156-23 Date: August 17, 2023 Dear ******: This ruling responds to Taxpayer's request for a letter ruling dated Date 1. Specifically, Taxpayer requests an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administrations Regulations to (1) make a timely election under § 1.1400Z2(d)-1(a)(2)(i) of the Income Tax Regulations to be certified as a qualified opportunity fund (QOF), as defined in § 1400Z-2(d) of the Internal Revenue Code (Code); and (2) for Taxpayer to be treated as a QOF, effective as of the month Taxpayer was formed in Year 1, as provided under § 1400Z-2(d) of the Code and § 1.1400Z2(d)-1(a) of the Income Tax Regulations. FACTS Taxpayer is a limited liability company classified as a partnership for Federal income tax purposes, organized under the laws of State on Date 2. Taxpayer is a cash method taxpayer and reports income on a calendar year basis. Taxpayer was formed to operate as a QOF as defined in § 1400Z-2(d) of the Code and to hold qualified opportunity zone property, as defined in § 1400Z-2(d)(2)(A) of the Code. Taxpayer is comprised of 3 members: Member 1, Member 2, and Member 3. Taxpayer is managed by Manager. Taxpayer retained the services of Advisor 1 to prepare its Federal Income Tax return for Year 1. Advisor 1 timely filed Taxpayer's Form 1065 on or before Date 3 but failed to include a Form 8996, Qualified Opportunity Fund, (Form 8996) with its return for Year 1. As a result, Taxpayer did not make the regulatory election to self-certify as a QOF for Year 1. Advisor 1 passed away approximately one month after filing Taxpayer's return for Year 1. Shortly after, Taxpayer enlisted the services of Advisor 2 to timely file its Form 1065 for Year 2 and Year 3. After review of Taxpayer's previously filed returns, Advisor 2 discovered that Taxpayer failed to include a Form 8996 with its Federal Income Tax return for Year 1. Upon discovering that Taxpayer failed to include the Form 8996 with its Year 1 Federal income tax return, Advisor 2 advised Taxpayer to file amended returns including the Form 8996 for Year 1, Year 2, and Year 3. On Date 4, Advisor 2 electronically filed amended returns on behalf of Taxpayer for Year 1, Year 2, and Year 3, including the Form 8996. Shortly after, Taxpayer engaged Firm to pursue relief under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations. Taxpayer represents that it acted reasonably and in good faith and granting of the relief will not prejudice the interests of the government. Taxpayer and Advisor 3 represents that granting of an extension to make a timely election under § 1.1400Z2(d)-1(a)(2)(i) of the Income Tax Regulations to be certified as a QOF for Year 1 will not change any tax liabilities of the Taxpayer, or as reported to its investors, as Taxpayer intended to elect to be a QOF beginning in Year 1, and Taxpayer has acted consistently as a QOF since Taxpayer was formed. Taxpayer and Advisor 3 represent that granting the relief under § 301.9100-3 of the Procedure and Administration Regulations for Year 1 will not result in a lower tax liability for Taxpayer or its investors in the aggregate for Year 1, and subsequent taxable years affected by the election, than if the election had been made timely as Taxpayer has acted consistently with the intended election. To the best of Taxpayer and Advisor 3's knowledge, the investors of Taxpayer have also acted consistently with a valid election by Taxpayer to be a QOF as of Year 1. LAW AND ANALYSIS Section 1400Z-2(e)(4)(A) of the Code directs the Secretary to prescribe regulations for the certification of QOFs. Section 1.1400Z2(d)-1(a)(2) of the Income Tax Regulations provides the rules for an entity to self-certify as a QOF. Section 1.1400Z2(d)-1(a)(2)(i) provides that the entity electing to be certified as a QOF must do so annually on a timely field return in in such form and manner as may be prescribed by the Commissioner of Internal Revenue in the Internal Revenue Service forms or instructions, or in publications or guidance of the Service, published in the Internal Revenue Bulletin. To self-certify as a QOF, a taxpayer must file Form 8996 with its tax return for the year to which the certification applies. The Form 8996 must be filed by the due date of the Federal income tax return (including extensions). Because § 1.1400Z2(d)-1(a)(2)(i) of the Income Tax Regulations sets forth the manner and timing for an entity to self-certify as a QOF, these elections are regulatory elections, as defined in § 301.9100-1(b) of the Procedure and Administration Regulations. Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations provide the standards that the Commissioner will use to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-3(a) provides that requests for extensions of time for regulatory elections, other than automatic extensions covered in § 301.9100-2, will be granted when the taxpayer provides evidence (including affidavits) to establish that the taxpayer acted reasonably and in good faith and the grant of relief will not prejudice the interests of the Government. Under section § 301.9100-3(b) a taxpayer is deemed to have acted reasonably and in good faith if, the taxpayer requests relief before the failure to make the regulatory election is discovered by the Service, or reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make the election. However, a taxpayer is not considered to have reasonably relied on a qualified tax professional if the taxpayer knew or should have known that the professional was not competent to render advice on the regulatory election or was not aware of all relevant facts. In addition, section § 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted reasonably and in good faith if the taxpayer - (i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under § 6662 at the time the taxpayer requests relief, and the new position requires or permits a regulatory election for which relief is requested; (ii) was fully informed in all material respects of the required election and related tax consequences but chose not to make the election; or (iii) uses hindsight in requesting relief. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Service will not ordinarily grant relief. Section 301.9100-3(c)(1) of the Procedure and Administration Regulations provides that the Commissioner will grant a reasonable extension of time to make the regulatory election only when the interests of the Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i) of the Procedure and Administration Regulations provides that the interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Section 301.9100-3(c)(1)(ii) of the Procedure and Administration Regulations provides that the interests of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable year that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under § 6501(a) of the Code before the taxpayer's receipt of a ruling granting relief under this section. The IRS may condition a grant of relief on the taxpayer providing the IRS with a statement from an independent auditor providing an affidavit, in accordance with section 301.9100-3(e)(3) of the Procedure and Administration Regulations, certifying that the interests of the Government are not prejudiced pursuant to section 301.9100-3(c)(1)(i) of the Procedure and Administration Regulations. Based on the facts and information submitted and the representations made, we conclude that Taxpayer has acted reasonably and in good faith, and that the granting of relief would not prejudice the interests of the government. Accordingly, based solely on the facts and information submitted, and the representations made in the ruling request, Taxpayer has satisfied the requirements of the regulations for the granting of relief and Taxpayer's Form 8996, filed on Date 4, is considered timely filed, and Taxpayer has thereby made the election under § 1400Z-2 and § 1.1400Z2(d)-1(a)(2)(i) to self-certify as a QOF for Year 1. Taxpayer should submit a copy of this letter ruling to the Service Center where Taxpayer files its returns along with a cover letter requesting that the Service associate this ruling with the Year 1 return. This ruling is based upon facts and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by all appropriate parties. This office has not verified any of the material submitted in support of the request for a ruling. However, as part of an examination process, the Service may verify the factual information, representations, and other data submitted. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, we express no opinion, either express or implied, concerning whether any investments made into Taxpayer are qualifying investments as defined in § 1.1400Z2(a)-1(b)(34) of the Income Tax Regulations or whether the taxpayer meets the requirements under § 1400Z-2 of the Code and the regulations thereunder to be a QOF. Further, we also express no opinion on whether any interest in any QOZB owned by Taxpayer qualifies as qualified opportunity zone property, as defined in § 1400Z-2(d)(2), or whether any business would be treated as a qualified opportunity zone business, as defined in § 1400Z-2(d)(3). We express no opinion regarding the tax treatment of the instant transaction under the provisions of any other sections of the Code or regulations that may be applicable, or regarding the tax treatment of any conditions existing at the time of, or effects resulting from, the instant transaction. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. Sincerely, Kyle C. Griffin Senior Counsel, Branch 5 Office of Associate Chief Counsel (Income Tax and Accounting) cc:

Internal Revenue Service - Fact Sheet FS-2024-4 Updates to frequently asked questions about the Premium Tax Credit February 2024 Internal Revenue Service Media Relations Office Washington, D.C. Media Contact: 202.317.4000 Public Contact: 800.829.1040 www.IRS.gov/newsroom Updates to frequently asked questions about the Premium Tax Credit FS-2024-04, February 2024 Updates to frequently asked questions about the Premium Tax Credit Note: These FAQs supersede earlier FAQs that were posted in FS 2022-13 o n February 24, 2022. This Fact Sheet updates frequently asked questions (FAQs) for the Premium Tax Credit. The revisions and additions are as follows: - Updated Eligibility FAQs: Q5, Q7, Q8, Q9 - New section: Affordability of employer coverage for employees and for family members of employees o Updated: Q11, Q15, Q18 o Added: Q12, Q13, Q14, Q22 - Updated Reporting, Claiming and Reconciling FAQs: Q30 - Updated Unemployment Compensation 2020 and 2021 FAQs: Q45 These FAQs are being issued to provide general information to taxpayers and tax professionals as expeditiously as possible. Accordingly, these FAQs may not address any particular taxpayer's specific facts and circumstances, and they may be updated or modified upon further review. Because these FAQs have not been published in the Internal Revenue Bulletin, they will not be relied on or used by the IRS to resolve a case. Similarly, if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer's case, the law will control the taxpayer's tax liability. Nonetheless, a taxpayer who reasonably and in good faith relies on these FAQs will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax. Any later updates or modifications to these FAQs will be dated to enable taxpayers to confirm the date on which any changes to the FAQs were made. Additionally, prior versions of these FAQs will be maintained on IRS.gov to ensure that taxpayers, who may have relied on a prior version, can locate that version if they later need to do so. More information about reliance is available. These FAQs were announced in IR-2024-37. Questions and answers on the Premium Tax Credit - The basics: Questions 1-4 - Eligibility: Questions 5-10 - Affordability of employer coverage for employees and for family members of employees: Questions 11-22 - Computing the amount: Questions 23-27 (added February 9, 2024) - Reporting, claiming and reconciling: Questions 28-34 - Suspension of repayment of excess advance payments of the Premium Tax Credit (excess APTC) for tax year 2020: Questions 35-41 - Unemployment Compensation 2020 and 2021: Questions 42-49 The basics Q1. What is the Premium Tax Credit? (updated February 24, 2022) A1. The Premium Tax Credit is a refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace, also known as the Exchange. The size of your Premium Tax Credit is based on a sliding scale. Those who have a lower income get a larger credit to help cover the cost of their insurance. When you enroll in Marketplace insurance, you can choose to have the Marketplace compute an estimated credit that is paid to your insurance company to lower what you pay for your monthly premiums (advance payments of the Premium Tax Credit, or APTC). Or, you can choose to get all of the benefit of the credit when you file your tax return for the year. If you choose to have advance payments of the Premium Tax Credit made on your behalf, you will reconcile the amount paid in advance with the actual credit you compute when you file your tax return for the year. Either way, you will complete Form 8962, Premium Tax Credit (PTC) and attach it to your tax return for the year. Note: For tax year 2020 only, you are not required to attach Form 8962 with your 2020 tax return unless your PTC is more than the APTC paid on your behalf for 2020 (called net Premium Tax Credit or net PTC) and you are claiming net PTC. See link below for information specific to tax year 2020. The credit is "refundable" because, if the amount of the credit is more than the amount of your tax liability, you will receive the difference as a refund. If you owe no tax, you can get the full amount of the credit as a refund. However, if advance credit payments were made to your insurance company and your actual allowable credit on your return is less than your advance credit payments, the difference, subject to certain repayment caps, will be subtracted from your refund or added to your balance due for tax years other than 2020. See the Coronavirus Tax Relief section on this page for information specific to tax year 2020. Q2. What is the Health Insurance Marketplace? A2. The Health Insurance Marketplace, also called simply the Marketplace, is the place where you will find information about private health insurance options, purchase health insurance, and obtain help with premiums and out-of-pocket costs if you are eligible. The Department of Health and Human Services (HHS) administers the requirements for the Marketplace and the health plans offered. Generally, you purchase health insurance at the Marketplace during an open enrollment period. After an open enrollment period is over, individuals who experience certain life events may qualify for a special enrollment period to buy a health plan through a Marketplace. For details about who is eligible for a special enrollment period, for information about future open enrollment periods, and to learn more about the Marketplace, visit HealthCare.gov. Q3. How do I get advance payments of the Premium Tax Credit? (updated February 24, 2022) A3. When you or a family member applies for Marketplace coverage, the Marketplace will estimate the amount of the Premium Tax Credit that you may be able to claim for the tax year, using information you provide about your family composition, projected household income, and other factors, such as whether those whom you are enrolling are eligible for other, non-Marketplace coverage. Based upon that estimate, you can decide if you want to have all, some, or none of your estimated credit paid in advance directly to your insurance company to lower your monthly premiums. If you choose to have advance credit payments made on your behalf, you will be required to file Form 8962 with your income tax return to reconcile the amount of advance payments with the Premium Tax Credit that you may claim based on your actual household income and family size, with an exception for certain taxpayers whose 2020 APTC is more than their 2020 PTC. See the Coronavirus Tax Relief section on this page for information specific to tax year 2020. If you do not opt for advance credit payments or the Marketplace determines that you were not eligible for advance payments at the time of enrollment, you should determine if you are eligible to claim the credit because your circumstances changed during the year. To claim the credit, you must file Form 8962 when you file your tax return for the year, which will either lower the amount of taxes owed on that return or increase your refund. Q4. What happens if my income, family size or other circumstances changes during the year? (updated February 24, 2022) Q4. The actual Premium Tax Credit for the year will differ from the advance credit amount estimated by the Marketplace if your family size or household income as estimated at the time of enrollment is different from the family size or household income you report on your return. The more your family size or household income differs from the Marketplace estimates used to compute your advance credit payments, the more significant the difference will be between your advance credit payments and your actual credit. Other changes in circumstances, such as marriage or divorce, may also affect your credit amount. If your actual allowable credit on your return is less than your advance credit payments, the difference, subject to certain repayment caps, will be subtracted from your refund or added to your balance due for years other than 2020. If your actual allowable credit is more than your advance credit payments, the difference will be added to your refund or subtracted from your balance due. Notifying the Marketplace about changes in circumstances as soon as they occur will allow the Marketplace to update the information used to determine your expected amount of the Premium Tax Credit and adjust your advance payment amount. This adjustment will decrease the likelihood of a significant difference between your advance credit payments and your actual Premium Tax Credit. Changes in circumstances that can affect the amount of your actual Premium Tax Credit include: - Increases or decreases in your household income. Events that could result in a significant increase to household income include: o Lump sum payments of Social Security benefits, including Social Security Disability Insurance o Lump sum taxable distributions from an individual retirement account or other retirement arrangement o Debt forgiveness or cancellation, such as the cancellation of credit card debt. - Marriage - Divorce - Birth or adoption of a child - Other changes to your household composition - Gaining or losing eligibility for government sponsored or employer sponsored health care coverage - Moving to another address Eligibility Q5. Who is eligible for the Premium Tax Credit? (updated February 9, 2024) A5. You are eligible for the Premium Tax Credit if you meet all of the following requirements: - Have household income that meets certain requirements (see Q7 ) or for 2021, you, or your spouse (if filing a joint return), received, or were approved to receive, unemployment compensation for any week beginning during 2021. - Do not file a Married Filing Separately tax return ((unless you qualify for a special rule that allows certain victims of domestic abuse and spousal abandonment to claim the Premium Tax Credit using the Married Filing Separately filing status (see Q9 and Q10 ); - Cannot be claimed as a dependent by another person; and - In the same month, you, or a family member: o Enroll in coverage (excluding "catastrophic" coverage) through a Marketplace o Are not able to get affordable coverage through an eligible employer-sponsored plan that provides minimum value (see Q11-15 ) o Are not eligible for coverage through a government program, like Medicaid, Medicare, CHIP or TRICARE o Pay the share of premiums not covered by advance credit payments Q6. Who is a family member for purposes of the Premium Tax Credit? A6. For purposes of the Premium Tax Credit, your "family" consists of yourself, your spouse if filing jointly, and all other individuals whom you claim as dependents. Your "family size" is the number of individuals in your "family." Q7. What are the income limits? (Updated February 9, 2024) A7. In general, individuals and families may be eligible for the Premium Tax Credit if their household income for the year is at least 100 percent but no more than 400 percent of the federal poverty line for their family size. For tax year 2021, if a taxpayer or the taxpayer's spouse (if filing a joint return), received, or was approved to receive, unemployment compensation for any week beginning during 2021, the amount of the taxpayer's household income is considered to be no greater than 133 percent of the federal poverty line for his or her family size and the taxpayer is considered to have met the household income requirements for being allowed a Premium Tax Credit. For tax years 2021 through 2025, Congress temporarily expanded eligibility for the Premium Tax Credit by eliminating the requirement that a taxpayer's household income may not be more than 400 percent of the federal poverty line. Under this rule, taxpayers with household income of more than 400 percent of the federal poverty line for their family size may be allowed to claim a Premium Tax Credit, if otherwise eligible (see Q5 ). Note: The federal poverty guidelines -- sometimes referred to as the "federal poverty line" or FPL -- state an income amount considered poverty level for the year based on family size. The Department of Health and Human Services (HHS) determines the federal poverty guideline amounts annually. The government generally adjusts the income limits annually for inflation. The Federal Register publishes a chart reflecting these amounts at the beginning of each calendar year. You can also find this information on the HHS website. HHS provides three federal poverty guidelines: one for residents of the 48 contiguous states and D.C., one for Alaska residents and one for Hawaii residents. For purposes of the Premium Tax Credit, eligibility for a certain year is based on the most recently published set of federal poverty guidelines on the first day of the annual open enrollment period. For example, the tax credit for 2018 is based on the 2017 FPL. See the instructions for Form 8962 for more information. See the Unemployment Compensation section: Questions 42-49 for information specific to unemployment compensation. Q8. What is household income? (updated February 9, 2024) A8. For purposes of the Premium Tax Credit, your household income is your modified adjusted gross income for the year plus that of every other member of your family (see Q6 ) who is required to file a federal income tax return. Modified adjusted gross income is the adjusted gross income on your federal income tax return plus any excluded foreign income, nontaxable Social Security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest received or accrued during the taxable year. It does not include Supplemental Security Income (SSI). See Q45 and Q46 for information about unemployment compensation and household income. If the source of your income is within Puerto Rico or was effectively connected with the conduct of a trade or business within Puerto Rico, the income is not included in your modified adjusted gross income and is not used in determining your household income. This limitation is specific to the computation of modified adjusted gross income for purposes of the Premium Tax Credit. For additional information see Publication 570. See the Unemployment Compensation section: Questions 42-49 for information specific to unemployment compensation. Q9. Am I definitely ineligible for the Premium Tax Credit if I'm married but I file my tax return using the filing status married filing separately? (updated February 9, 2024) A9. No. If you are married and you file your tax return using the filing status married filing separately, you may be eligible for the Premium Tax Credit if you meet the criteria in section 1.36B-2(b)(2) of the Income Tax Regulations, which allows certain victims of domestic abuse and spousal abandonment to claim the Premium Tax Credit using the married filing separately filing status. You can claim this relief from the joint filing requirement if you meet all of the following criteria: - You are living apart from your spouse at the time you file your tax return. - You are unable to file a joint return because you are a victim of domestic abuse or spousal abandonment (see Q10 ). - You certify on your return that you are a victim of domestic abuse or spousal abandonment. To certify that you are a victim of domestic abuse or spousal abandonment and qualify for relief from the joint return filing requirement, you should check the box at the top of Form 8962, Premium Tax Credit (PTC), which you will use to claim the credit. You should not attach documentation of the abuse or abandonment to your tax return but should keep any documentation you may have with your tax return records. For examples of what documentation to keep, see Publication 974, Premium Tax Credit (PTC). Taxpayers may claim this relief from the joint filing requirement for no more than three consecutive years. For more information on this relief, see the instructions to Form 8962, Premium Tax Credit (PTC). Note: Generally, a married taxpayer who lives apart from his or her spouse for the last six months of the taxable year is considered unmarried if he or she files a separate return, maintains as the taxpayer's home a household that is also the main home of a dependent child for more than half the year, and furnishes over half the cost of the household during the taxable year. Q10. For purposes of the relief from the joint filing requirement for certain victims of domestic abuse and spousal abandonment, how are domestic abuse and spousal abandonment defined? A10. Domestic abuse includes physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate, or to undermine the victim's ability to reason independently. All the facts and circumstances are considered in determining whether an individual is abused, including the effects of alcohol or drug abuse by the victim's spouse. Depending on the facts and circumstances, abuse of the victim's child or other family member living in the household may constitute abuse of the victim. A taxpayer is a victim of spousal abandonment for a taxable year if, taking into account all facts and circumstances, the taxpayer is unable to locate his or her spouse after reasonable diligence. Affordability of employer coverage for employees and for family members of employees Q11. How do I know if the insurance offered by my employer is affordable? (updated February 9, 2024) A11. If you are an employee ad your employer offers coverage to you (sometimes called "an employer-sponsored plan) that coverage generally is affordable for you if the portion of the annual premium you must pay for self-only coverage that satisfies the minimum value requirement (see Q15 ) does not exceed 9.5 percent of your household income, but this percentage is adjusted annually. For plan years beginning in: - 2015, the percentage is- 9.56 percent see Revenue Procedure 2014-37 - 2016, the percentage is 9.66 percent - see Revenue Procedure 2014-62 - 2017, the percentage is 9.69 percent - see Revenue Procedure 2016-24 - 2018, the percentage is 9.56 percent - see Revenue Procedure 2017-36 - 2019, the percentage is 9.86 percent - see Revenue Procedure 2018-34 - 2020, the percentage is 9.78 percent - see Revenue Procedure 2019-29 - 2021, the percentage is 9.83 percent - see Revenue Procedure 2020-36 - 2022, the percentage is 9.61 percent - see Revenue Procedure 2021-36 - 2024, the percentage is 8.39 percent - see Revenue Procedure 2023-29 (See Q8, Q45 and Q46 ) f or what is included in household income.) If the employer offers multiple health coverage options, the affordability test applies to the lowest-cost option available to you that also satisfies the minimum value requirement. If your employer offers any wellness programs (including programs based on a health factor or requiring that the wellness incentive be earned), the affordability test is based on the premium you would pay if you received the maximum discount for any tobacco cessation programs and did not receive any other discounts based on wellness programs. Q12. How do I know if the coverage offered to me by an employer of someone else, such as my spouse's or parent's employer, is affordable for me? (added February 9, 2024) A12. If you are an individual who may enroll in coverage offered by an employer because you are a family member of an employee whose employer offers the coverage (see Q6 for who is a family member of the employee), that coverage generally is affordable for you if the portion of the annual premium the employee must pay for family coverage that satisfies the minimum value requirement (see Q15) does not exceed a percentage of the employee's household income. The percentage you use to determine the affordability of the family coverage is the same percentage the employee uses in Q11 to determine if the coverage is affordable to the employee. The family coverage premium amount you use to determine affordability is the amount the employee must pay to cover the employee and all family members of the employee who are offered coverage that also satisfies the minimum value requirement. If the employer offers multiple health coverage options, the affordability test applies to the lowest-cost option available that covers the employee and all family members of the employee offered the coverage that also satisfies the minimum value requirement. If the employer offers any wellness programs (including programs based on a health factor or requiring that the wellness incentive be earned), the affordability test is based on the premium the employee would pay if the employee received the maximum discount for any tobacco cessation programs and did not receive any other discounts based on wellness programs. If you are an individual who may enroll in coverage offered by someone else's employer, but you are not a family member of the employee offered the coverage (for example, you are an adult non-dependent child of the employee), that coverage is affordable for you only if you enroll in it. Q13. What if I receive an offer of coverage from multiple employers (added February 9, 2024) A13. If you receive offers of coverage from multiple employers, whether the coverage is offered by your employer or someone else's employer, you are generally considered to have an offer of affordable coverage if at least one of the offers of coverage is affordable for you. Q14. How is the affordability of employer coverage affected if the Marketplace makes a determination that the employer coerage is unaffordable? (added February 9, 2024) A14. The regulations under Internal Revenue Code section 36B provide a safe harbor for certain affordability determinations made by the Marketplace. Under the safe harbor, employer-sponsored coverage is treated as unaffordable for an individual if when the individual enrolled in Marketplace coverage (1) the individual (or someone else on the individual's behalf) provided accurate information to the Marketplace about the cost of employer-sponsored coverage for the individual (and other family members, if applicable) and (2) the Marketplace determined that advance payments of the Premium Tax Credit (APTC) could be made for the individual's Marketplace coverage because the employer-sponsored coverage was unaffordable based on projected household income. Under these circumstances, a Premium Tax Credit would still be allowed for the individual's Marketplace coverage if the other eligibility criteria are met, even though the employer-sponsored coverage would have been affordable based on actual household income. The safe harbor does not apply to you if, with reckless disregard for the facts, incorrect information was provided to the Marketplace concerning the portion of the annual premium for your coverage under the plan. Q15. How do individuals know if the employer coverage offered to them provides minimum value? (updated February 9, 2024 A15. An eligible employer-sponsored plan provides minimum value if the plan covers at least 60 percent of the expected total allowed costs for covered services. The plan also must provide substantial coverage of in-patient hospitalization and physician services. Your employer is required to provide you with a document called a Summary of Benefits and Coverage. That document will give you information about the benefits and coverage under your employer-sponsored plan, including whether the plan provides minimum value. Also, under the Fair Labor Standards Act, most employers will provide employees with a one-time notice about their options in the Marketplace and their potential eligibility for a Premium Tax Credit. This one-time notice will include information about whether the employer has a plan that provides minimum value. Q16. Employer X offers affordable, minimum value coverage to X's employees. X has stated, however, that if employee attempts to enroll in the employer-sponsored coverage, X will terminate employee's employment. Is employee considered eligible for X's employer-sponsored coverage and, consequently, ineligible for a Premium Tax Credit? A16. No. The regulations under § 36B provide that an individual is not considered eligible for employer-sponsored coverage unless the individual may enroll in the coverage. Employee cannot enroll in X's employer-sponsored coverage unless employee is an employee of X, and X will terminate employee's employment if employee attempts to enroll in X's coverage. Consequently, employee cannot enroll in X's coverage and is not considered eligible for X's employer-sponsored coverage. employee will be allowed a Premium Tax Credit if Eemployee meets the other eligibility requirements for the credit. Q17. Spouse is married to employee. Employee's employer, Y, offers affordable, minimum value coverage to Y's employees and their family members. Y has stated, however, that if employee attempts to enroll spouse in the employer-sponsored coverage, Y will terminate employee's employment. Is spouse considered eligible for Y's employer-sponsored coverage and, consequently, ineligible for a Premium Tax Credit? A17. No. The regulations under § 36B provide that an individual is not considered eligible for employer-sponsored coverage unless the individual may enroll in the coverage. Spouse cannot be enrolled in Y's employer-sponsored coverage unless employee is an employee of Y, and Y will terminate employee's employment if employee attempts to enroll spouse in Y's coverage. Consequently, spouse cannot be enrolled in Y's coverage and is not considered eligible for Y's employer-sponsored coverage. Spouse will be allowed a Premium Tax Credit if spouse meets the other eligibility requirements for the credit. Q18. Employee is married to spouse and they have one child (dependent). Employee's employer, Y, offers coverage to its employees and their family members, and the coverage provides minimum value and is affordable for employee, spouse and dependent. Y's plan permits spouses and dependents to enroll in the employer-sponsored coverage only if the employee enrolls in the coverage. Employee chooses not to enroll in Y's employer-sponsored coverage, and, as a result, spouse and dependent are not permitted to enroll in Y's coverage under the rules of Y's plan. If the Spouse or Dependent enrolls in Marketplace coverage, are they eligible for a Premium Tax Credit? (updated February 9, 2024) A18. No. Spouse and Dependent are not eligible for a Premium Tax Credit for their Marketplace coverage. The regulations under § 36B provide that an employee who may enroll in an eligible employer-sponsored plan and a family member of the employee who may enroll in the plan are eligible for minimum essential coverage under the employer-sponsored plan if the plan is affordable and provides minimum value. Additionally, an employee and a family member are not eligible for a Premium Tax Credit for their Marketplace coverage if they could have enrolled in employer-sponsored coverage that is affordable and provides minimum value. Because all three family members could have enrolled in Y's employer-sponsored coverage through employee's enrollment, and the coverage was affordable and provided minimum value, they are not eligible for a Premium Tax Credit for their Marketplace coverage. Q19. Am I eligible for the Premium Tax Credit if I enroll in coverage through an employer and also enroll in coverage through the Marketplace? A19. If you enroll in an employer-sponsored plan, including retiree coverage, that is minimum essential coverage you are not eligible for the Premium Tax Credit for your Marketplace coverage, even if the employer plan is unaffordable or fails to provide minimum value. You may be eligible for a Premium Tax Credit for coverage of another member of your family who enrolls in Marketplace coverage and is not enrolled in the employer plan. Q20. Can I get the Premium Tax Credit for coverage through a Marketplace if I am eligible for coverage through my former employer, such as COBRA or retiree coverage? A20. If your coverage is from a former employer, such as COBRA or retiree coverage, you can decline the employer coverage, even if it is affordable and provides minimum value, and may be eligible for the Premium Tax Credit for your Marketplace coverage. Q21. What if the retiree coverage consists of a retiree-only Health Reimbursement Arrangement (HRA)? A21. If you are provided a retiree-only HRA, you cannot claim a Premium Tax Credit for the months you are provided the HRA. Q22. Am I allowed a Premium Tax Credit for Marketplace coverage if my employer offers me an Individual Coverage Health Reimbrsement Arrangement (ICHRA)? (added February 9, 2024) A22. If your employer offered you an ICHRA, you are not allowed a Premium Tax Credit for Marketplace coverage unless 1) the ICHRA is considered unaffordable and 2) you opt-out of receiving reimbursements under the ICHRA and. Section 1.36B-2(c)(5) of the Income Tax Regulations provides rules for when an ICHRA is considered affordable. Computing the amount Q23. Am I allowed a Premium Tax Credit if my employer provides me with a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) for one or more months of the year? A23. If you enroll in Marketplace coverage and are provided a QSEHRA that constitutes affordable coverage, you are not allowed a Premium Tax Credit for your Marketplace coverage for the months the QSEHRA constitutes affordable coverage. If the QSEHRA does not constitute affordable coverage and you are allowed a Premium Tax Credit for a month you are provided the QSEHRA, you must reduce your PTC for the month by the monthly permitted benefit provided to you under the QSEHRA. Notice 2017-67, questions 65-71, provides more information on how to determine if a QSEHRA is affordable and how to compute your Premium Tax Credit if the QSEHRA is unaffordable. Q24. How is the amount of the Premium Tax Credit computed? A24. The amount of the Premium Tax Credit is generally equal to the premium for the second lowest cost silver plan available through the Marketplace that applies to the members of your coverage family, minus a certain percentage of your household income. However, the credit cannot be more than the premiums for the Marketplace plan or plans in which you or your family enroll (called your enrollment premiums). Your coverage family consists of the members of your family who are enrolled in coverage through the Marketplace and ineligible for non-Marketplace coverage such as Medicare, Medicaid or affordable employer-sponsored coverage. (See Q6 f or information on who is in your family.) Q25. What is the second lowest cost silver plan if only one silver plan is available where I reside, or the premiums for the two lowest cost silver plans are exactly the same? A25. If there is only one silver plan, that plan is treated as the second lowest cost silver plan. If the two lowest cost silver plans have identical premiums, that premium is the premium for the second lowest cost silver plan. Q26. I am a smoker. Is the amount of my Premium Tax Credit based on the higher premiums for smokers? A26. Higher premiums for smokers are not counted in determining the amount of the second lowest cost silver plan that applies to your family. Therefore, if the monthly premium for the applicable second lowest cost silver plan is $1,200 for smokers and $900 for non-smokers, the $900 non-smoker premium is the second lowest cost silver plan premium used to compute your credit. However, the amount of your enrollment premiums, which might limit the amount of your Premium Tax Credit, are the amount you are actually being charged. For example, if your monthly enrollment premiums are $650 because you are a tobacco user but would be $500 if you did not use tobacco, the monthly enrollment premiums you use in computing your Premium Tax Credit are $650. Q27. Am I eligible for the Premium Tax Credit for my coverage if I enroll in the middle of the month? A27. To be eligible for a credit amount for a particular month, you generally must be enrolled in a qualified health plan through the Marketplace on the first day of that month. However, if an individual enrolls in a qualified health plan and the enrollment is effective on the date of the individual's birth, adoption, or placement for adoption or in foster care, or on the effective date of a court order, the individual is treated as enrolled as of the first day of that month. Reporting, Claiming and Reconciling Q28. Will I have to file a federal income tax return and attach Form 8962 to get the Premium Tax Credit for a tax year other than the 2020 tax year (updated February 24, 2022) A28. Yes. For tax years other than 2020, if you have APTC in any amount, you must file a Form 8962, and attach it to your federal income tax return for that year. You will use Form 8962 to reconcile the difference between the APTC made on your behalf and the actual amount of the credit that you may claim on your return. This filing requirement applies whether or not you would otherwise be required to file a return. For tax years other than 2020, if APTC is made on behalf of you or an individual in your family, and you do not file a tax return, you will not be eligible for APTC to help pay for your Marketplace health insurance coverage in future years. This means that you will be responsible for the full cost of your monthly premiums. To claim a Premium Tax Credit for any tax year in which no APTC was paid on your behalf, you must file a Form 8962 an d attach it to your federal income tax return for the year you claim the Premium Tax Credit. Also, for all tax years, if APTC is paid on your behalf but your Premium Tax Credit is more than the APTC, you have net PTC. To claim a net PTC, you must file a Form 8962 and attach it to your federal income tax return for the year. Claiming a net PTC will lower the amount of tax you owe or increase your refund to the extent it is more than the amount of tax you owe. See the Coronavirus Tax Relief section on this page for information specific to tax year 2020. Q29. If I get insurance through the Marketplace, how will I know if need to file a federal tax return and what to report on my return? A29. If you purchased coverage through the Marketplace you should receive Form 1095-A, Health Insurance Marketplace Statement from your Marketplace by early February. If this form shows APTC was paid on behalf of a member of your family, you are required to complete Form 8962, Premium Tax Credit (PTC), to reconcile those advance credit payments. Form 1095-A provides information you will need when completing Form 8962. If you have questions about the information on Form 1095-A, or about receiving Form 1095-A, you should contact your Marketplace directly. The IRS will not be able to answers questions about the information on your Form 1095-A or about missing or lost forms. Filing electronically is the easiest way to file a complete and accurate tax return. Electronic Filing options include free Volunteer Assistance, IRS Free File, commercial software and professional assistance. Q30. How do I reconcile APTC with the actual Premium Tax Credit on my return? (updated February 9, 2024) A30. When you complete your tax return, you will figure your credit and compare it to the amount of APTC on Form 8962. If your actual allowable credit on your return is less than your APTC, called excess APTC, the difference, subject to certain repayment caps, will be subtracted from your refund or added to your balance due. If your actual allowable credit is more than your APTC, the difference will be added to your refund or subtracted from your balance due. (See Q4 for information on changes in circumstances and Q35 for information on reconciling for 2020). Q31. What are the repayment caps? (updated February 24, 2022) A31. The repayment caps limit how much of the excess APTC you must repay and are based on your household income and filing status. For tax years other than 2020, if your household income reported on your tax return is 400 percent of the FPL (which is based on household income and family size) or higher, you must repay the full amount of APTC that exceeds your Premium Tax Credit. See Publication 974 for more information on the repayment caps. Q32. If I am not allowed a Premium Tax Credit because I file my tax return using the married filing separately filing status (and I do not qualify for the relief described in questions 9 and 10), do I include my spouse in my family size when determining if there is a cap on the amount I must repay? A32. If you use the married filing separately filing status, your family size includes your spouse only if you claim a personal exemption deduction for your spouse. Otherwise, your family size does not include your spouse. Q33. What happens if I have a balance due from an excess advance payment of the Premium Tax Credit, but I cannot afford to make the payment when filing my tax return? A33. The vast majority of individuals who need to repay excess advance payments will satisfy that balance through a reduction in their expected income tax refund. However, if you owe a balance in excess of your refund, you should be aware that the IRS routinely works with taxpayers who owe amounts they cannot afford to pay. The ability to make a payment arrangement for these underpayments is identical to the provisions for other tax balances. See Publication 4849, Can't Pay the Tax You Owe? for further information on how to pay your past due federal income tax liability. Q34. I enrolled in a qualified health plan with APTC based on a Marketplace determination or assessment that I was ineligible for Medicaid or CHIP coverage. Subsequently, I was determined eligible for Medicaid and was enrolled for several months while I was enrolled in the qualified health plan. Am I treated as eligible for Medicaid and therefore ineligible for the Premium Tax Credit for these months? A34. Generally, no. If a Marketplace makes a determination or assessment that an individual is ineligible for Medicaid or CHIP and eligible for APTC when the individual enrolls in a qualified health plan, the individual is treated as not eligible for Medicaid or CHIP for purposes of the Premium Tax Credit for the duration of the period of coverage under the qualified health plan (generally, the rest of the plan year). Accordingly, if you were enrolled in both Medicaid coverage and in a qualified health plan for which advance credit payments were made for one or more months of the year following a Marketplace determination or assessment that you were ineligible for Medicaid, you can claim the Premium Tax Credit for these months, if you are otherwise eligible. The Marketplace may periodically check state Medicaid data to identify consumers who may be dual-enrolled, and direct them to return to the Marketplace to discontinue their APTC. If you believe that you may currently be enrolled in both Medicaid and a qualified health plan with advance credit payments, you should contact the Marketplace immediately. Suspension of repayment of excess advance payments of the Premium Tax Credit (excess APTC) for tax year 2020 Q35. Who should file Form 8962 with their 2020 tax return? (added May 14, 2021) A35. If you are claiming net Premium Tax Credit (PTC) on Form 1040 or 1040-SR, Schedule 3, Line 8, you must file Form 8962 with your return and report net PTC on Line 26. You are eligible to claim net PTC if: - You are allowed a PTC for 2020 but were not eligible for, or chose not to receive the benefit of, APTC at enrollment in Marketplace coverage for 2020, or - You received the benefit of APTC for 2020 but your PTC allowed for 2020 is more than the APTC paid on your behalf for 2020. The IRS needs the information on Form 8962 to process the tax return for taxpayers claiming a net PTC. If you have net PTC and receive a letter asking for more information, you should respond to the letter so that the IRS can finish processing your 2020 tax return and, if applicable, issue any refund due. Q36. Who should not file Form 8962 with their 2020 tax return? (added May 14, 2021) A36. If you have excess APTC for 2020, you should not file Form 8962 when you file your 2020 tax return and you should not include an amount on Form 1040 or Form 1040-SR, Schedule 2, Line 2. The IRS will process your tax return without Form 8962 and will not add any excess APTC repayment amount to the 2020 tax liability. You should disregard letters from the IRS asking for a missing Form 8962 if you have excess APTC for tax year 2020. If your total PTC on Form 8962, line 24, is less than your APTC on line 25, then you are not eligible for net PTC. For tax year 2020 only, you don't have to repay the excess APTC amount. Do not file Form 8962 with your return. The amount that you would have entered on Form 8962, line 29, is the amount of your excess APTC that you are now not required to repay due to the American Rescue Plan Act. Do not complete Part III of Form 8962, and do not follow the instructions for that part. Leave line 2 of Schedule 2 (Form 1040) blank. Q37. I received the benefit of APTC in 2020. I already filed my 2020 tax return and reported and paid my excess APTC repayment amount. Should I file an amended return to get this money back? (updated February 24, 2022) A37. No. If you have already filed your 2020 tax return and reported excess APTC or made an excess APTC repayment, you do not need to file an amended tax return or contact the IRS. The IRS will reduce the excess APTC repayment amount to zero with no further action needed by you. The IRS will refund the excess APTC repayment amount you paid on your 2020 tax return and you'll get a letter from the IRS explaining the changes we made. There is no need to contact the IRS about this issue. This effort to issue refunds to those who paid an excess APTC repayment amount on their 2020 return is ongoing and will continue. Q38. I filed my 2020 tax return and got a letter from the IRS asking for Form 8962 because I have excess APTC. What should I do? (updated February 24, 2022) A38. If you filed your 2020 tax return and received a letter about a missing Form 8962 for 2020, you may disregard the letter if you have excess APTC for 2020. The IRS will process tax returns without Form 8962 for tax year 2020 by reducing the excess APTC repayment amount to zero. There is no need to contact the IRS. Your 2020 tax return will be adjusted to reflect this change with no further action needed by you and no further contact from the IRS about this change to your return. Q39. I filed my 2020 tax return without Form 8962 and did not get a letter from the IRS asking for it but think I have excess APTC. What should I do? (added May 14, 2021) A39. If you reported an excess APTC repayment amount on your 2020 tax return, but didn't file Form 8962, the IRS will reduce the excess APTC repayment amount to zero and process the return even if you didn't get a letter about a missing Form 8962. The IRS will process the 2020 tax return without Form 8962. There is no need to contact the IRS. Your 2020 tax return will be adjusted to reflect this change with no further action needed by you and no further contact from the IRS about this change to your return. If you filed your 2020 tax return without reporting an excess APTC repayment amount or attaching Form 8962 and think you may have excess APTC for tax year 2020, you don't need to contact the IRS. The IRS will not include an amount for excess APTC repayment and will process your 2020 return without Form 8962. If you do receive an IRS letter about excess APTC repayment for tax year 2020, you may disregard the letter. Q40. I filed my 2020 tax return, claimed a net PTC, and received a letter from the IRS. What should I do? (added May 14, 2022) A40. Do not disregard the letter from the IRS if you are claiming a net PTC. If you have net PTC for 2020, you should review and respond to the IRS letter so that the IRS can finish processing your 2020 tax return and, if applicable, issue any refund due. If you computed PTC on your return that's more than the APTC paid on your behalf during 2020, the difference is a net PTC. Claiming a net PTC will increase your refund or lower the amount of tax you owe. Net PTC is reported on Form 1040, Schedule 3, Line 8. Taxpayers claiming a net PTC must file Form 8962 and report an amount on Line 26 of the form when filing their 2020 tax return. If you claimed a net PTC, you must file Form 8962 when you file your 2020 tax return. If you filed a 2020 tax return and claimed a net PTC but did not file Form 8962 with your return, you should respond to the IRS letter you received or will soon receive. The IRS may need more information to process your 2020 return if there's an amount claimed on Form 1040 or 1040-SR, Schedule 3, Line 8. Q41. What should I do if I have excess APTC for a tax year other than 2020? Do I need to report or repay that excess amount and file Form 8962? (added May 14, 2021) A41. The suspension of the requirement to repay excess APTC applies only for tax year 2020. If you received the benefit of APTC for a tax year other than 2020, you must file Form 8962 to reconcile your APTC and PTC for the year when you file that tax year's federal income tax return even if you otherwise are not required to file a tax return for that year. The IRS continues to process prior year tax returns and correspond for missing information. If the IRS sends you a letter about a 2019 Form 8962, that means we need more information from you to finish processing your 2019 tax return. You should respond to the letter so that the IRS can finish processing the tax return and, if applicable, issue any refund you may be due. Unemployment compensation - 2020 and 2021 2020 Unemployment compensation Q42. Under ARPA, I am an eligible taxpayer who was allowed to exclude from income up to $10,200 of unemployment compensation for the 2020 tax year. Is the $10,200 of unemployment compensation also excluded from my modified adjusted gross income for purposes of computing the Premium Tax Credit for 2020? (added February 24, 2022) A42. Yes. ARPA allowed an exclusion of up to $10,200 of unemployment compensation received by an eligible taxpayer in 2020 on their 2020 Form 1040, 1040-SR, or 1040-NR. If you are an eligible taxpayer, the $10,200 of unemployment compensation also is excluded from your modified adjusted gross income for purposes of computing the Premium Tax Credit for 2020. Q43. I already filed my 2020 tax return and attached Form 8962 without excluding $10,200 of unemployment compensation on the return. Should I file an amended return to report the exclusion? (added February 24, 2022) A43. ARPA allowed an exclusion of up to $10,200 of unemployment compensation received by an eligible taxpayer in 2020 on their 2020 Form 1040, 1040-SR, or 1040-NR. Beginning in July 2021, the IRS reviewed tax returns filed prior to the enactment of ARPA to identify tax returns on which both excludible unemployment compensation and excess APTC repayments was reported by the taxpayer. Taxpayers received letters from the IRS, generally within 30 days of the adjustment, informing them of what kind of adjustment was made (such as a refund, a payment of IRS debt payment or a payment offset for other authorized debts) and the amount of the adjustment. For taxpayers who reported both excludible unemployment income and APTC, the adjustment should have covered both items even though the IRS's communication to the taxpayer may have mentioned only unemployment compensation. However, if, because of the excluded unemployment compensation, taxpayers are now eligible for deductions or credits not claimed on the original return, they should file a Form 1040-X, Amended U.S. Individual Income Tax Return for tax year 2020. See 2020 Unemployment Compensation Exclusion FAQs -- Topic D: Amended Return (Form 1040-X) for more information. 2021 Unemployment compensation Q44. I received, or was approved to receive, unemployment compensation for a week beginning during 2021. Is the amount of my household income considered to be no greater than 133 percent of the federal poverty line for my family size and am I considered to have met the income limits for Premium Tax Credit eligibility? (added February 24, 2022) A44. Yes. If you, (or your spouse (if filing a joint return), received, or were approved to receive, unemployment compensation for any week beginning during 2021, the amount of your household income is considered to be no greater than 133 percent of the federal poverty line for your family size and you are considered to have met the household income requirements for being allowed a Premium Tax Credit. Check the box on line A, above Part I of 2021 Form 8962, if you, or your spouse (if filing a joint return), received, or were approved to receive, unemployment compensation for any week beginning during 2021. By checking this box, you are certifying that you, or your spouse (if filing a joint return), received, or were approved to receive, unemployment compensation for any week beginning during 2021. For more information, see Publication 974. Keep any supporting documentation related to the receipt of or approval to receive unemployment compensation with your tax return records. Q45. I claim a dependent on my tax return. My dependent was the only person in my family who received or was approved to receive unemployment compensation for a week beginning during 2021. Have I met the household income limits for Premium Tax Credit eligibility and am I considered an applicable taxpayer because of my dependent's unemployment compensation? (updated February 9, 2024) A45. No, your dependent's receipt of, or approval to receive, unemployment compensation during 2021 does not cause you to meet the household income limits for Premium Tax Credit eligibility or make you an applicable taxpayer. As discussed in Q44, under section 36B(g)(1) (section 9663 of ARPA), if you or your spouse (if filing a joint return) received or were approved to receive unemployment compensation for a week beginning during 2021, the amount of your household income is considered to be no greater than 133 percent of the federal poverty line for your family size and you are an applicable taxpayer for purposes of being allowed a Premium Tax Credit. Therefore, if your dependent was the only person in your family who received or was approved to receive unemployment compensation for a week beginning during 2021, you cannot check the box on line A, above Part I of 2021 Form 8962. Q46. If my dependent was the only person in my family who received or was approved to receive unemployment compensation for a week beginning during 2021, is my dependent's unemployment compensation included in determining the amount of my household income? (added February 24, 2022) A46. It depends. As discussed in Q8, your household income is your modified adjusted gross income plus that of the other members of your family required to file a federal income tax return, and modified adjusted gross income is adjusted gross income plus certain untaxed items. Unemployment compensation is included in modified adjusted gross income and the section 36B(g)(1) unemployment rule does not affect the determination of modified adjusted gross income. Consequently, if your dependent received unemployment compensation for 2021 and is required to file a tax return for 2021, your household income would include your dependent's unemployment compensation. If your dependent is not required to file a tax return for 2021, your household income would not include your dependent's unemployment compensation. Q47. I received or was approved to receive unemployment compensation in 2021 and my household income was less than 100 percent of the federal poverty line. Am I eligible for the Premium Tax Credit? (added February 24, 2022) A47. Yes, if you meet the other eligibility requirements (see Q5 ), you are eligible for Premium Tax Credit for 2021, because you are a treated as an applicable taxpayer. Q48. I applied for unemployment compensation for 2021 but my initial application was denied. I appealed the decision and in 2022 was approved to receive my 2021 unemployment compensation. Am I eligible to check the box on line A, above Part I of 2021 Form 8962 relating to unemployment compensation? (added February 24, 2022) A48. Yes. You were approved to receive unemployment compensation for a week beginning during 2021 and are eligible to check the box on line A, above Part I of 2021 Form 8962. Keep the letter or other documentation you received that shows your appeal resulted in your approval to receive your 2021 unemployment compensation. Q49. I received unemployment compensation in 2021 but had to repay it because my state could not verify my employment status. Am I considered to have received unemployment compensation for a week beginning in 2021? (added February 24, 2022) A49. It depends. If in 2021 you paid back all of the unemployment compensation you received in 2021, you did not receive unemployment compensation for a week beginning in 2021. But if you did not pay back all of the 2021 unemployment compensation until 2022, you received unemployment compensation for a week beginning in 2021 and are eligible to check the box on line A, above Part I of 2021 Form 8962.

Internal Revenue Service - Information Release IR-2023-98 IRS offers special Saturday face-to-face help May 13 at many Taxpayer Assistance Centers; people don't need an appointment for special day May 8, 2023 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS offers special Saturday face-to-face help May 13 at many Taxpayer Assistance Centers; people don't need an appointment for special day IR-2023-98, May 8, 2023 WASHINGTON -- Although the tax filing deadline has passed, some taxpayers may still need help with a tax concern or have questions about an IRS notice. To help, the IRS is opening many IRS Taxpayer Assistance Centers (TACs) across the nation during a special Saturday opening from 9 a.m. to 4 p.m. on May 13. The IRS plans to open more than 40 locations in over 25 states, the District of Columbia and Puerto Rico on Saturday to provide additional face-to-face assistance for people who need help. "IRS employees worked hard this tax season to provide more help for people, and the Saturday hours helped many taxpayers outside of normal business hours," said IRS Commissioner Danny Werfel. "The special Saturday hours this weekend are part of a larger effort underway as we continue to improve and work on transforming the IRS to serve taxpayers and the nation." The IRS has added hundreds of employees to Taxpayer Assistance Centers across the nation following passage of the Inflation Reduction Act last year, and the IRS has reopened or opened more than 25 local TAC offices since last year. The IRS will continue to add more employees at these locations in the months ahead. Normally, these IRS offices are open during the week, and people should have appointments in advance to receive services. But during these Saturday hours, walk-ins will be accepted for all services routinely offered at an IRS office, except for making cash payments. Before visiting on Saturday, the IRS encouraged people to visit IRS.gov where they'll find many online resources that are safe, secure, convenient and may help resolve some issues without a trip. This information is available in multiple languages. The IRS noted that because appointments aren't necessary for these special Saturday hours, some locations may see high demand and wait times can be longer than usual. To help with this and avoid delays, the IRS encourages people to plan ahead, review the key tips below and come prepared with needed information. IRS employees will be working hard to serve as many people as quickly as possible. Services provided The IRS Contact Your Local Office page lists all services provided at specific TACs. If someone has questions about a tax bill or IRS audit or they need help resolving a tax problem, they'll receive assistance from IRS employees specializing in those services. If these employees aren't available, the individual will receive a referral for these services. IRS Taxpayer Advocate Service employees may also be available to help with some issues. Professional foreign language interpretation will be available in many languages through an over-the-phone translation service. For deaf or hard of hearing individuals who need sign language interpreter services, IRS staff will schedule appointments for a later date. Alternatively, these individuals can call TTY/TDD 800-829-4059 to make an appointment. For more information on the special Saturday openings, visit IRS.gov/saturdayhours. For a snapshot of the most requested customer service topics, see Publication 5136, IRS Services Guide PDF. Come prepared Individuals should bring the following documents with them: - Current government-issued photo identification, - Social Security cards or individual taxpayer identification numbers (ITINs) for themselves and all members of their household, including their spouse and dependents (if applicable), - Any IRS letters or notices received and related documents, - For identity verification services, two forms of identification and, if filed, a copy of the tax return for the year in question. During the visit, IRS staff may also request the following information: - A current mailing address, - Proof of bank account information included on a tax return to receive payments or refunds by direct deposit. Tax return preparation options While tax return preparation is not a service offered at IRS TACs, help is available through community partners, IRS Free File and MilTax. Anyone who still needs to file a 2022 federal tax return, even though the April 18 tax deadline has passed, can use these free, safe and convenient resources: 1. Eligible individuals or families can get free help preparing their tax return at open Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) sites. To find free tax return preparation help, use the VITA Locator Tool or call 800-906-9887. 2. Any individual or family earning $73,000 or less in 2022 can use tax software through IRS Free File at no cost. There are products in English and Spanish. 3. MilTax, a Department of Defense program, offers free return preparation software and electronic filing for federal tax returns and up to three state income tax returns. It's available for all military members, and some veterans, with no income limit through mid-October. Low Income Taxpayer Clinics, known as LITCs, also may be available to help people. Help available 24/7 at IRS.gov The IRS encourages people to explore IRS.gov before traveling to an office. It's the fastest and easiest way for people to get the help they need. They can learn about the many self-service tools and resources available to resolve common tax concerns online. Some include IRS identity protection services, requesting Individual Taxpayer Identification Numbers (ITIN), refunds, transcripts and payment options. Available resources include: - Where's My Refund?, check refund status and estimated delivery date. - Direct Pay, make tax payments or estimated tax payments for free from a checking or savings account. - Electronic Federal Tax Payment System, individuals or businesses can make all types of federal tax payments. - Online Payment Agreement, set up installment payments to pay taxes owed. - Where's My Amended Return, track the status of an amended return. - Interactive Tax Assistant and FAQs, get answers to many tax law questions. - All IRS Forms and Publications, find and download current tax forms, instructions and publications. Those without access to the internet can call 800-829-3676 to order tax forms by mail.

Private Letter Ruling Number: 202005001 Internal Revenue Service August 12, 2019 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202005001 Release Date: 1/31/2020 Index Number: 2010.04-00, 9100.35-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B04 PLR-101842-19 Date: August 12, 2019 Dear ********: This letter responds to the letter from your authorized representative dated January 31, 2019, requesting an extension of time pursuant to § 301.9100-3 of the Procedure and Administration Regulations to make an election under § 2010(c)(5)(A) of the Internal Revenue Code to allow Decedent's surviving spouse (Spouse) to take into account the deceased spousal unused exclusion (DSUE) amount. The information submitted for consideration is summarized below. Decedent and Spouse were married on Date 1, and remained married until Decedent's death on Date 2. At the time of death, Decedent had assets with a value of Amount 1 and Spouse had assets with a total value of Amount 2. In the year of Decedent's death, the estate tax basic exclusion amount exceeded the value of Decedent's estate and Decedent made no lifetime gifts. As Spouse was the sole heir of Decedent's estate, none of Decedent's exclusion amount was used due to the full marital deduction. Spouse was appointed executor of Decedent's estate and engaged a licensed certified public accountant (Accountant), who was experienced in estate and fiduciary income tax matters. Accountant had provided tax advice and prepared income tax returns for Decedent and Spouse from Year 1 until Decedent's death. The purpose of engaging Accountant was to "advise [Spouse] regarding the Estate's tax obligations and elections available to the Estate and the Taxpayer." Spouse submitted Decedent's financial information to Accountant. Accountant was aware that the estate could elect to transfer the DSUE amount to Spouse; however, Accountant neither advised Spouse of the availability of such an election nor prepared Form 706, United States Estate (and Generation-Skipping Transfer Tax) Return so that a portability election could be made. Spouse had no knowledge of the availability of an election regarding portability of a DSUE amount until Year 2 when the son of Decedent and Spouse became aware of the election and asked if it had been made after Decedent's death. After hearing of the possibility of a portability election, Spouse sought the counsel of an attorney (Attorney) to determine if the election was applicable to Decedent's estate. After discussion with Attorney, Spouse concluded that proper advice regarding electing portability of the Decedent's DSUE amount had not been given and retained counsel to assist with a request for an extension of time to elect portability of Decedent's unused exclusion. LAW AND ANALYSIS Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2010(a) provides that a credit of the applicable credit amount shall be allowed to the estate of every decedent against the tax imposed by § 2001. Section 2010(c)(1) provides that the applicable credit amount is the amount of the tentative tax that would be determined under § 2001(c) if the amount with respect to which such tentative tax is to be computed were equal to the applicable exclusion amount. On December 17, 2010, Congress amended § 2010(c), effective for estates of decedents dying and gifts made after December 31, 2010, to allow portability of a decedent's unused applicable exclusion amount between spouses. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, § 303, 124 Stat. 3296, 3302 (2010). Section 2010(c)(2) provides that the applicable exclusion amount is the sum of the basic exclusion amount and, in the case of a surviving spouse, the DSUE amount. Section 2010(c)(3) provides that the basic exclusion amount, is which to be adjusted for inflation annually after calendar year 2011. Section 2010(c)(4) defines the DSUE amount to mean the lesser of (A) the basic exclusion amount, or (B) the excess of -- (i) the applicable exclusion amount of the last deceased spouse of the surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under § 2001(b)(1) on the estate of such deceased spouse. Section 2010(c)(5)(A) provides that a DSUE amount may not be taken in to account by a surviving spouse under § 2010(c)(2) unless the executor of a decedent's estate files an estate tax return on which the DSUE amount is computed and elects that the DSUE amount may be taken into account. The election, once made, is irrevocable. No election may be made if such return is filed after the time prescribed by law (including extensions) for filing such return. Section 2010(c)(6) provides that the Secretary shall prescribe regulations as may be necessary or appropriate to implement § 2010(c). Section 20.2010-2(a) of the Estate Tax Regulations provides that to allow a decedent's surviving spouse to take into account that decedent's DSUE amount, the executor of the decedent's estate must elect portability of the DSUE amount on a timely filed Form 706. Under § 20.2010-2(a)(1), the due date of an estate tax return required to elect portability is nine months after the decedent's date of death or the last day of the period covered by an extension (if an extension of time for filing has been granted). Section 20.2010-2(a)(1) further provides that an extension of time to elect portability may be available, under the procedures applicable under §§ 301.9100-1 and 301.9100-3, for estates not required to file an estate tax return under § 6018(a). Section 20.2010-2(a)(2) provides that the portability election is made by timely filing a complete and properly prepared estate tax return, unless the executor satisfies the requirements for the election not to apply in § 20.2010-2(a)(3)(i). Section 301.9100-1(c) provides that the Commissioner may grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Code, except subtitles E, G, H, and I. Section 301.9100-3 provides the standards the Commissioner will use to determine whether to grant an extension of time to make an election whose due date is prescribed by a regulation (and not expressly provided by statute). Requests for relief under §301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. Section 301.9100-3(b)(1)(iii) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer's experience and the complexity of the return or issue), the taxpayer was unaware of the necessity for the election. Section 6018(a) requires the filing of an estate tax return in all cases where the gross estate exceeds the basic exclusion amount in effect under § 2010(c) for the calendar year which includes the date of death. For purposes of this determination, under § 6018(a)(3), the basic exclusion amount is reduced, but not below zero, by the sum of (A) the amount of adjusted taxable gifts (within the meaning of § 2001(b)) made by the Decedent after December 31, 1976, plus (B) the aggregate amount allowed as a specific exemption under § 2521 (as in effect before its repeal by the Tax Reform Act of 1976) with respect to gifts made by the Decedent after September 8, 1976. In this case, based on the representation as to the value of the gross estate, the time for filing the portability election is fixed by the regulations. Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an extension of time for Decedent's estate to elect portability. Based on the facts submitted and the representations made, we conclude the requirements of § 301.9100-3 have been satisfied. Accordingly, we grant an extension of time of 120 days from the date of this letter in which to elect portability under § 2010(c)(5). The election should be made by filing a complete and properly prepared Form 706 and a copy of this letter, within 120 days from the date of this letter, at the Kansas City Service Center, at the following address: Department of the Treasury, Internal Revenue Center, Kansas City, MO 64999. For purposes of electing portability, a Form 706 filed by Decedent's estate with 120 days of this letter will be considered timely filed. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. If it is later determined that, based on the value of the gross estate and taking into account any taxable gifts, the Decedent's estate is required to file an estate tax return pursuant to § 6018(a), the Commissioner is without authority under § 301.9100-3 to grant an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void. See § 20.2010-2(a)(1). This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. Sincerely, Holly Porter Associate Chief Counsel (Passthroughs & Special Industries) By: Melissa Liquerman Melissa Liquerman Chief, Branch 4 Office of Associate Chief Counsel (Passthroughs & Special Industries) Enclosures (2) Copy of this letter Copy for section 6110 purposes cc:

Private Letter Ruling Number: 202336022 Internal Revenue Service March 28, 2023 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Number 202336022 Release Date: 9/8/2023 Date: 03/28/2023 Taxpayer ID number (last 4 digits): Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Last day to file petition with United States Tax Court: UIL: 501.03-00 CERTIFIED MAIL - Return Receipt Requested Dear ******: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective ****** Your determination letter dated ******, is revoked. Our adverse determination as to your exempt status was made for the following reasons: Organizations described in IRC Section 501(c)(3) and exempt under IRC Section 501(a) must be both organized and operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3). You have not demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3) and that no part of your net earnings inure to the benefit of private shareholders or individuals. You failed to respond to repeated reasonable requests to allow the Internal Revenue Service to examine your records regarding your receipts, expenditures, or activities as required by IRC sections 6001, 6033(a)(1) and Rev.Rul. 59-95, 1959-1 C.B. 627. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to fie your action for declaratory judgment If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either - The United States Tax Court, - The United Stales Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fillable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: US Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies. Keep the original letter for your records. Sincerely, ****** for Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Exempt Organizations Examinations Date: May 17, 2022 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact information: Name: ID number: Telephone: Response due date: CERTIFIED MAIL -- Return Receipt Requested Dear ******: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpaveradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, ****** for Lynn A. Brinkley Acting Director Exempt Organizations Examinations Enclosures: Form 886-A and Attachments Form 6018 Issue: Whether ****** (****** continues to qualify for exemption from Federal income tax under section 501(a) of the Internal Revenue Code (Code) as a charitable organization described in Code section 501(c)(3). Facts: ****** was incorporated in the ****** under the state's ****** law. The Articles of Incorporation filed with ****** provide that the corporate purpose for which ****** was formed is to ******. An attachment to ****** Articles of Incorporation provides that the organization is organized exclusively for charitable and other purposes specified in section 501(c)(3) of the Code. The attachment also provides for a dissolution clause intended to allow ****** to satisfy the organizational requirements for Federal exemption. Articles of Incorporation identifies three incorporators including ****** is also appointed as the statutory agent for ****** with an address of ******. In ****** filed Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, with the Internal Revenue Service (IRS). The Form 1023 application is signed by ****** according to the declaration on page of the Form 1023 application. ****** is ****** individuals listed as directors in Part V of Form 1023, which requires applicant organizations to list the names, titles and mailing addresses of all officers, directors, and trustees. All ****** directors have a mailing address located in ****** The address of the organization as reported on the Form 1023 is ****** The Form 1023 application is accompanied by a conformed copy of ****** Articles of Incorporation and several attachments providing narrative responses to certain questions in Form 1023. According to the attachment providing a narrative description of past, present, and planned activities as requested in Part IV of Form 1023, ****** states the following: Based on the Form 1023 application and accompanying records filed by ****** the IRS issued a favorable determination letter dated ****** granting ****** recognition of exemption under section 501(c)(3) of the Code. ****** was classified as a public charity under sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code based on its planned fundraising programs and projected financial support. IRS records show that ****** filed Form 990-N, Electronic Notice (e-Postcard), beginning with the ****** filed Form 990-N in lieu of a Form 990 or Form 990-EZ return. The organization indicated on Form 990-N that its gross receipts are normally $ ****** The address for ****** as reported on Forms 990-N filed for ****** and ****** is the same address reported on the Form 1023 application - ****** The address in ****** furnished by ****** corresponds to a ****** (****** retail store which offered ****** services. According to information posted by ****** on the Internet, the retail store located at ****** has closed permanently. ****** retail stores typically offer the following ****** services: - Package and mail receipt notifications - Mail holding and forwarding - Call-in mail check In ****** the Tax Exempt and Governmental Entities (TE/GE) division of the IRS selected for examination of its books and records covering the ****** The notice of examination package, which is dated ****** consists of IRS letter #6031, Form 4564, Information Document Request (IDR), Publication 1, Your Rights as a Taxpayer, Notice 609, Privacy Act Notice, and Publication 3498-A, The Examination Process (Audits by Mail). The notice of examination package was mailed to ****** at the last known address on file for the organization, which is as follows: ****** changed its address from the ****** based in ****** to the current address in ****** when it filed its ****** Form 990-N with the IRS. The ****** address furnished by ****** also corresponds to a ****** retail store which offers ****** services described above. A copy of the pertinent website content posted by or on behalf of the ****** store located in ****** is appended as Exhibit A. As noted on page ****** IDR issued with the examination notice, the examination of ****** books and records is intended to verify that the organization: 1. Operates in accordance with section 501(c)(3) of the Code 2. Is eligible to file Form 990-N based on gross receipts, and 3. Filed all required returns including information returns. As part of standard audit procedures, the ****** requested that ****** furnish certain records and information needed to determine whether the organization is operating in furtherance of charitable and other exempt purposes described in section 501(c)(3) of the Code. IDR issued to ****** on ****** requests copies of the following records and information covering the ****** under examination: - Chart of accounts - General ledger - Adjusted trial balance - Cash disbursements journal. - Monthly bank statements for ****** primary operating (checking) account together with canceled checks or check images furnished by the bank. - Monthly statements for all credit cards that may have been issued to ****** - Minutes of meetings held by ****** Board of Directors and committees of the Board. - Internal policies and procedures regarding the handling and recording of cash donations. - Lease agreements and other information relating to any office or other facility used by ****** to conduct activities. - Contracts and other arrangements with individuals and/or organizations which solicit and raise funds for ****** including, but not limited to, professional fundraising organizations. - The organization's website address, if any, and the identity of the party that hosts the website. - Information regarding the accounting software used by ****** for preparation of its books and records. Due to the Covid-19 pandemic, ****** was given additional time to compile and furnish the records and information requested by the ****** The response due date on the IDR was ****** On ****** the ****** received a telephone call from an officer of ****** With ****** consent, the ****** conferenced in the ****** assigned to the case. ****** acknowledged receipt of the IRS notice of examination package for ****** However, he did not discuss the finances or activities of the organization. Instead, he described circumstances that he believed warranted an extension of time to compile records and respond to the initial IDR. The ****** granted an extension to ****** ****** did not respond to the IDR or otherwise contact the ****** or the ****** by the extended due date. In early ****** the ****** attempted to contact ****** by telephone using the contact telephone numbers that he provided. ****** did not answer the phone and the ****** did not subsequently receive a return call. Neither the ****** nor the ****** subsequently received any of the requested records and information from ****** or any other officer or director of ****** In accordance with established IRS procedures, a follow-up "Delinquency Notice" letter was issued to ****** with a copy of IDR ****** on ******. The delinquency notice states, in part, that if the organization does not fully respond to the IDR by the response due date, the IRS will propose revocation of ****** exempt status. ****** did not respond to the delinquency notice or otherwise contact the ****** The delinquency notice was not returned by the post office as undeliverable. A search of the ****** corporate database, which provides information on the status of entities incorporated under ******, shows that ****** corporate charter was canceled effective ****** for failure to maintain a statutory agent in accordance with state law. See Exhibit B attached which includes a letter addressed to ****** providing notification of the cancellation. The ****** subsequently reinstated the corporate charter on ******, ****** when another ****** officer, ****** was appointed as the ****** statutory agent. ****** is listed as the principal officer on the ****** Form 990-N filed by ****** with the same ****** mailing address listed above. However, ****** indicated that she is an ****** resident on the entity reinstatement document filed with state officials. See Exhibit C. According to the ****** is an active entity as of ****** See the attachment labeled Exhibit D. The current address provided for the statutory agent, ******, also corresponds to a ****** retail store which offers ****** services including a street address. See Exhibit E attached. Despite its name, there is no evidence that ****** is an ****** of the ****** that operate within the United States. The ****** a website which allows users to search for ******. ****** is not among the ****** listed. The ****** Form 990-N filed by ****** with the IRS in ****** identifies a website address ******) in section E. The ****** was not able to locate the website domain address referenced on the ****** Form 990-N. The ****** Form 990-N filed by ****** does not identify any website address. Applicable Law: Section 501(c)(3) of the Code provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual. Section 1.501(c)(3)-1(a)(1) of the Treasury Regulations states that to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section - charitable, religious, educational, scientific, literary, testing for public safety, or for the prevention of cruelty to children or animals. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Section 1.501(c)((3)-1(c) of the regulations describes the operational test requirements for 501(c)(3) exemption. The operational test focuses on how the organization is actually operated, regardless of whether it is properly organized for tax-exempt purposes. Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. This is referred to as the "primary activities" test. Section 1.501(c)(3)-1(c)(2) of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Section 511 of the Code imposes a tax at corporate rates under section 11 on the unrelated business taxable income of certain tax-exempt organizations. Section 6001 of the Code provides, in part, that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may form time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. Section 1.6001-1(c) of the regulations provides that in addition to such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and regulations sections 1.6033-1 through 1.6033-3. Section1.6001-1(e) of the regulations provides that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and, shall be retained as long as the contents thereof may be material in the administration of any internal revenue law. Section 6033 of the Code provides, in general, that every organization exempt under IRC 501(a) shall file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the Internal Revenue laws as the Secretary may by forms of regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Section 6033 of the Code provides an exception to the annual filing requirement in the case of an organization described in section 501(c) (other than a private foundation or a supporting organization described in section 509(a)(3)) the gross receipts of which in each taxable year are normally not more than $50,000. See section 1.6033-2(g)(1)(iii) of the regulations. Section 1.6033-2(g)(5) of the regulations provide that an organization that is not required to file an annual return by virtue of the gross receipts exception must submit an annual electronic notice notification as described in section 6033(i) of the Code. Section 1.6033-2(i)(2) of the regulations provides that every organization which is exempt from tax, whether or not it is required to file an annual information return, shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status and administering the provisions of subchapter F (section 501 and following), chapter 1 of subtitle A of the Code and section 6033. Rev.Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Organization's Position: Taxpayer's position is unknown at this time. Government's Position: Analysis The facts indicate that ****** received recognition of exemption under section 501(c)(3) of the Code in ****** based on information presented in its Form 1023 application and accompanying attachments. The TE/GE division of the IRS maintains an examination program for exempt organizations to determine whether they are complying with statutory requirements regarding their tax-exempt status, the proper filing of returns, and other tax reporting matters. ****** filed Form 990-N, an electronic notice, with the IRS for the ****** was selected for audit to ensure that the organization's activities and operations align with their approved exempt status and to verify that the filing of Form 990-N was proper based on the organization's gross receipts. Section 6001 of the Code and the regulations thereunder impose requirements on exempt organizations to keep books and records to substantiate information required under section 6033 of the Code. Although ****** filed an electronic notice in lieu of a return, the organization is nevertheless required to produce records and other information requested by the IRS to verify that it operates in furtherance of its exempt purpose. See regulations section 1.6033-2(i)(2). ****** failed to respond to repeated reasonable requests to allow the IRS to examine its books and records including its receipts, disbursements, and other items required to be kept and maintained pursuant to sections 6001 and 6033(a)(1) of the Code. Accordingly, ****** has failed to meet the requirements of section 501(c)(3) of the Code and sections 1.501(c)(3)-1(a) and 1.501(c)(3)-1(c) of the regulations, in that the organization has not established that it is operated exclusively for exempt purposes and that no part of its net earnings inures to the benefit of private shareholders or individuals. See also Rev.Rul. 59-95. 1959-1 C.B. 627. Conclusion: For the reasons stated above, the IRS has determined that ****** is no longer exempt from Federal income tax under section 501(a) of the Code as an organization described in Code section 501(c)(3). The IRS is proposing to revoke ****** 501(c)(3) tax-exempt status effective ****** the ****** of the ****** under examination. Please note that this Form 886-A, Explanation of Items, which is also known as the revenue agent report (RAR), constitutes an integral part of the attached 30-day letter #3618. Please refer to the attached letter #3618 for additional information including appeals rights and other options available to the organization and, the instructions for how to respond.

Proposed Regulation REG-121709-19 Internal Revenue Service 2023-17 I.R.B. 789 Notice of Proposed Rulemaking Rules for Supervisory Approval of Penalties REG-121709-19 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. SUMMARY: This document contains proposed regulations regarding supervisory approval of certain penalties assessed by the IRS. The proposed regulations are necessary to address uncertainty regarding various aspects of supervisory approval of penalties that have arisen due to recent judicial decisions. The proposed regulations affect the IRS and persons assessed certain penalties by the IRS. DATES: Electronic or written comments and requests for a public hearing must be received by July 10, 2023. Requests for a public hearing must be submitted as prescribed in the " Comments and Requests for a Public Hearing " section. ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-121709-19) by following the online instructions for submitting comments. 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 and comments submitted on paper, to the public docket. Send paper submissions to: CC:PA:LPD:PR (REG-121709-19), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, David Bergman, (202) 317-6845; concerning submissions of comments and requests for a public hearing, Vivian Hayes (202) 317-5306 (not toll-free numbers) or by email at publichearings@irs.gov (preferred). SUPPLEMENTARY INFORMATION: Background This document contains proposed amendments to the Regulations on Procedure and Administration (26 CFR part 301) under section 6751(b) of the Internal Revenue Code (Code). No regulations have previously been issued under section 6751. 1. Legislative overview. Section 6751 was added to the Code by section 3306 of the Internal Revenue Service Restructuring and Reform Act of 1998 (1998 Act), Public Law 105-206, 112 Stat. 685, 744 (1998). Section 6751(a) sets forth the content of penalty notices. Section 6751(b) provides procedural requirements for the Secretary of the Treasury or her delegate (Secretary) to assess certain penalties, including additions to tax or additional amounts under the Code. See section 6751(c). Section 6751(b)(1), as added by the 1998 Act, provides that "[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate." As an exception to this rule, section 6751(b)(2), as added by the 1998 Act, provides that section 6751(b)(1) "shall not apply to-- (A) any addition to tax under section 6651, 6654, or 6655 [of the Code]; or (B) any other penalty automatically calculated through electronic means." The report of the United States Senate Committee on Finance regarding the 1998 Act (1998 Senate Finance Committee Report) provides that Congress enacted section 6751(b)(1) because of its concern that, "[i]n some cases, penalties may be imposed without supervisory approval." S. Rep. No. 105-174, at 65 (1998), 1998-3 C.B. 537, 601. The report further states that "[t]he Committee believes that penalties should only be imposed where appropriate and not as a bargaining chip." Id. The report provides that, to achieve this goal, section 6751(b)(1) "requires the specific approval of IRS management to assess all non-computer generated penalties unless excepted." Section 212 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which was enacted as Division EE of the Consolidated Appropriations Act, 2021, Public Law 116-260, 134 Stat. 1182, 3067 (2020), expanded the list of penalties in section 6751(b)(2)(A) excepted from the supervisory approval requirement of section 6751(b)(1) by revising the end of section 6751(b)(2)(A) to read "6654, 6655, or 6662 (but only with respect to an addition to tax by reason of subsection (b)(9) thereof);" (relating to the addition to tax under section 6662(b)(9) of the Code with regard to the special charitable contribution deduction under section 170(p) of the Code for taxable years of individuals beginning in 2021). Section 605 of Division T of the Consolidated Appropriations Act, 2023, Public Law 117-328, 136 Stat. 4459, 5395 (2022), further amended section 6751(b)(2)(A) by striking "subsection (b)(9)" and inserting "paragraph (9) or (10) of subsection (b)." Section 6662(b)(10) imposes an accuracy-related penalty on underpayments attributable to any disallowance of a deduction by reason of section 170(h)(7). 2. Judicial treatment. In 2016, a United States Tax Court (Tax Court) majority read section 6751(b)(1)'s silence about when supervisory approval is required to mean that no specific timing requirement exists and, thus, the approval need only be obtained at some time, but no particular time, prior to assessment. Graev v. Commissioner, 147 T.C. 460, 477-81 (2016), superseded by 149 T.C. 485 (2017). The United States Court of Appeals for the Second Circuit (Second Circuit) rejected the Graev court's interpretation of section 6751(b)(1), finding ambiguity in the statute's phrase "initial determination of such assessment." Chai v. Commissioner, 851 F.3d 190, 218-19 (2d Cir. 2017). The Second Circuit held that, with respect to penalties subject to deficiency procedures, section 6751(b)(1) requires written approval of the initial penalty determination no later than the date the IRS issues the notice of deficiency (or files an answer or amended answer asserting such penalty). Id. at 221. The Second Circuit reasoned that for supervisory approval to be given force, it must be obtained when the supervisor has the discretion to give or withhold it, and, for penalties determined in a notice of deficiency, this discretion no longer exists upon the issuance of the notice. Id. at 220. In Graev III, 149 T.C. 485 (2017), the Tax Court reversed its earlier interpretation of section 6751(b) and followed Chai. Since then, the Tax Court has imposed increasingly earlier deadlines by which supervisory approval of the initial penalty determination must be obtained to be considered timely under the statute, formulating tests that are difficult for IRS employees to apply. In Clay v. Commissioner, 152 T.C. 223, 249-50 (2019), the Tax Court held that supervisory approval of penalties was too late where it was obtained before the IRS issued a notice of deficiency but after the revenue agent sent the petitioner a "30-day letter" proposing penalties and giving the petitioner an opportunity to request an administrative appeal. In Belair Woods, LLC v. Commissioner, 154 T.C. 1, 13 (2020), the Tax Court held that supervisory approval must be obtained before the IRS sends a notice that "formally communicates to the taxpayer, the [IRS] Examination Division's unequivocal decision to assert a penalty." In subsequent cases, the Tax Court has held that supervisory approval must be obtained before the first communication to the taxpayer that demonstrates that an initial determination has been made. See, e.g., Beland v. Commissioner, 156 T.C. 80 (2021); Kroner v. Commissioner, T.C. Memo. 2020-73, rev'd 48 F. 4th 1272 (11th Cir. 2022); Carter v. Commissioner, T.C. Memo. 2020-21, rev'd 2022 WL 4232170 (11th Cir. Sept. 14, 2022). The Tax Court has applied this timing rule to penalties subject to pre-assessment review in the Tax Court, as well as to assessable penalties. Recently the United States Court of Appeals for the Ninth Circuit (Ninth Circuit), the United States Court of Appeals for the Tenth Circuit (Tenth Circuit), and the United States Court of Appeals for the Eleventh Circuit (Eleventh Circuit) reversed the Tax Court's "formal communication" timing rule, noting that it has no basis in the text of the statute. Laidlaw's Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th Cir. 2022), reh'g en banc denied, No. 20-73420 (9th Cir. July 14, 2022); Minemyer v. Commissioner, Nos. 21-9006 & 21-9007, 2023 WL 314832 (10th Cir. Jan. 19, 2023); Kroner v. Commissioner, 48 F. 4th 1272 (11th Cir. 2022). In Laidlaw's, the Ninth Circuit held that the statute requires approval before the assessment of a penalty or, if earlier, before the relevant supervisor loses discretion whether to approve the penalty assessment, and noted that "[t]he statute does not make any reference to the communication of a proposed penalty to the taxpayer, much less a 'formal' communication." Laidlaw's, 29 F. 4th at 1072. In Minemyer, the Tenth Circuit, in an unpublished opinion, held that the statute requires approval before the IRS issues a notice of deficiency asserting a penalty. Minemyer, 2023 WL 314832 at *4-5. In Kroner, the Eleventh Circuit held that the statute only requires approval before assessment, finding that a deadline of assessment is "consistent with the meaning of the phrase 'initial determination of such assessment,'.... reflects the absence of any express timing requirement in the statute... [and] is a workable reading in light of the statute's purpose." Kroner, 48 F.4th at 1276. The Tax Court has continued to use its "formal communication" timing rule subsequent to Laidlaw's and Kroner. See, e.g., Simpson v. Commissioner, T.C. Memo 2023-4; Castro v. Commissioner, T.C. Memo. 2022-120. Recent cases have also addressed other issues under section 6751(b)(1), including (but not limited to) clarification as to who is an immediate supervisor, see, e.g., Sand Investment Co. v. Commissioner, 157 T.C. 136 (2021); what constitutes personal, written approval, see, e.g., PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018); whether particular Code sections impose a "penalty" subject to section 6751(b)(1), see, e.g., Grajales v. Commissioner, 156 T.C. 55 (2021), aff'd 2022 WL 3640274 (2d Cir. 2022); and what constitutes a penalty "automatically calculated through electronic means." See, e.g., Walquist v. Commissioner, 152 T.C. 61 (2019). Explanation of Provisions The Treasury Department and the IRS have concluded that it is in the interest of sound tax administration to have clear and uniform regulatory standards regarding the penalty approval requirements under section 6751(b). In the absence of such regulatory standards, caselaw has developed rules for the application of section 6751(b). Such judicial holdings are subject to unanticipated but frequent change, making it difficult for IRS employees to apply them in a consistent manner. The difficulty in applying or anticipating how courts will construe these rules has resulted in otherwise appropriate penalties on taxpayers not being sustained and has undermined the efficacy of these penalties as a tool to enhance voluntary compliance by taxpayers. In addition, the evolving standards regarding interpretations of section 6751(b) have served to increase litigation, which consumes significant government resources. The recent Ninth Circuit and Eleventh Circuit rulings also create a different test to satisfy the requirements of section 6751(b) in cases appealable to those circuits as opposed to other cases that come before the Tax Court. See Laidlaw's Harley Davidson Sales, 29 F.4th at 1066; Kroner v. Commissioner,48 F. 4th at 1276. The proposed regulations are intended to clarify the application of section 6751(b) in a manner that is consistent with the statute and its legislative history, has nationwide uniformity, is administrable for the IRS, and is easily understood by taxpayers. 1. Timing issues The proposed regulations would adopt three rules regarding the timing of supervisory approval of penalties under section 6751(b) that are based on objective and clear standards. One rule addresses penalties that are included in a pre-assessment notice that is subject to the Tax Court's review, such as a statutory notice of deficiency. One rule is for penalties that the IRS raises in an answer, amended answer, or amendment to the answer to a Tax Court petition. And one rule is for penalties assessed without prior opportunity for review by the Tax Court. A. Penalties subject to pre-assessment review in the Tax Court Proposed §301.6751(b)-1(c) provides that, for penalties that are included in a pre-assessment notice issued to a taxpayer that provides the basis for jurisdiction in the Tax Court upon timely petition, supervisory approval may be obtained at any time before the notice is issued by the IRS. Section 6751(b) clearly provides that there be supervisory approval before the assessment of a penalty and contains no express requirement that the "written approval be obtained at any particular time prior to assessment." Chai, 851 F.3d at 218. Courts have noted that there is ambiguity in the statutory phrase "initial determination of such assessment [of the penalty]" that a supervisor must approve. See, e.g., Chai, 851 F.3d at 218-19 (noting that since an "assessment" is the formal recording of a taxpayer's tax liability, one can determine a deficiency and whether to make an assessment, but one cannot "determine" an assessment); Roth v. Commissioner, 922 F.3d 1126, 1132 (10th Cir. 2019) ("[W]e agree with the Second Circuit that the plain language of § 6751(b) is ambiguous...."). But courts have not agreed that an ambiguity about what constitutes an initial determination provides an opportunity to craft a deadline for approval of an initial determination from the statute's legislative history. Compare Chai, 851 F.3d at 219 with Laidlaw's Harley Davidson Sales, 29 F.4th at 1072. Instead, courts have agreed that a supervisor can approve a penalty only at a time that the supervisor has discretion to give or withhold approval. See, e.g., Chai, 851 F.3d at 220; Laidlaw's Harley Davidson Sales, 29 F.4th at 1074; Cf., Kroner, 48 F. 4th at 1276, n.1 (holding that approval is required before assessment but declining to address whether the supervisor must have discretion at the time of approval because it was undisputed in that case that the supervisor did). Prior to the Second Circuit's ruling in Chai, the Tax Court interpreted section 6751(b) merely to require supervisory approval prior to assessment, which is the only definitive deadline provided in the statute and which, for penalties determined in a notice of deficiency, occurs after the opportunity for Tax Court review of a penalty. See Graev v. Commissioner, 147 T.C. 460 (2016), superseded by 149 T.C. 485 (2017). The Treasury Department and the IRS acknowledge that approval of a penalty after the IRS issues a notice subject to Tax Court review is counter to the statutory scheme for Tax Court review. Once a taxpayer petitions to the Tax Court a notice that includes a penalty, section 6215(a) of the Code directs that the Tax Court decides whether the penalty will be assessed. In that case, a supervisor no longer has discretion that will control. Further, as a practical matter, the IRS has no general process for supervisory approval of a penalty after issuing a pre-assessment notice to a taxpayer subject to review by the Tax Court that includes the penalty, such as a notice of deficiency. If a taxpayer does not timely petition the Tax Court, the IRS will simply assess any penalty determined in the notice. Therefore, the Treasury Department and the IRS conclude that a penalty appearing in a pre-assessment notice issued to a taxpayer subject to Tax Court review should be subject to supervisory approval before the notice is issued. This interpretation is consistent with the Second Circuit's holding in Chai and provides for penalty review while the IRS still has discretion regarding penalties. See also Laidlaw's Harley Davidson Sales, 29 F.4th at 1074 ("Accordingly, we hold that §6751(b)(1) requires written supervisory approval before the assessment of the penalty or, if earlier, before the relevant supervisor loses discretion whether to approve the penalty assessment."). The proposed regulations do not require written approval of an initial determination of a penalty that is subsequently included in a pre-assessment notice subject to review by the Tax Court by any deadline earlier than the issuance of the notice to the taxpayer. As already mentioned, no language in the statute imposes any such earlier deadline, and the statutory scheme for assessing such penalties does not deprive a supervisor of discretion to approve an initial determination before the issuance of a pre-assessment notice subject to review by the Tax Court. The Treasury Department and the IRS have concluded that an earlier deadline for approval of an initial determination of a penalty would not best serve the legislative purpose of section 6751(b). The lack of any deadline in the statute other than the deadline that approval must come before assessment indicates that Congress did not intend an earlier deadline. No earlier deadline is mentioned in the legislative history. To create earlier deadlines, the caselaw relies on a single statement in the limited legislative history that "[t]he Committee believes that penalties should only be imposed where appropriate and not as a bargaining chip." See Belair Woods, 154 T.C. at 7 (citing S. Rep. No. 105-174, at 65 (1998)). But the earlier deadlines created by the Tax Court do not ensure that penalties are only imposed where appropriate. First, the supervisory approval deadlines the Tax Court has created are unclear in application. One formulation sets the deadline for approval to occur before the IRS "formally communicates to the taxpayer, the Examination Division's unequivocal decision to assert a penalty." Belair Woods, 154 T.C. at 13. Prior to assessment, it is unclear what constitutes this unequivocal decision other than a notice that gives the taxpayer the right to petition the Tax Court. For any notice before the right to petition the Tax Court, the taxpayer is free to present more evidence or arguments to the Examination Division as to why a penalty should not apply, which could lead the IRS supervisor charged with approving an initial determination to conclude that a penalty should not be asserted. Second, if the "Examination Division's unequivocal decision to assert a penalty," id., means that the Examination Division was finished with its work and could or would not change its mind upon receiving further information, there is no harm in delaying approval in writing until sometime after that moment. There would be no possibility of a change to the penalty during the period after the Examination Division has completed its work. The Tax Court's imposition of an approval deadline immediately after the Examination Division has completed its work rather than sometime later would do nothing to prevent an attempt to bargain because the Examination Division could not consider a bargain if it has already completed its work Third, none of the deadlines the Tax Court has imposed actually ensure that penalties could never be used as a bargaining chip because each formulation of what constitutes an "initial determination" has been tied to a written communication. Although it would violate longstanding IRS Policy Statements and would contradict the Internal Revenue Manual's (IRM) instructions, in theory a penalty could be used as a bargaining chip if conveyed orally, and the deadlines the Tax Court has created do not come into play without written communication. As a result, the Tax Court opinions imposing deadlines are not effective to prevent bargaining. Fourth, the courts' struggles to determine a consistent deadline has undermined the legislative purpose that penalties be imposed "where appropriate." S. Rep. No. 105-714 at 65. The Tax Court has found no evidence that an IRS employee actually attempted to use a penalty as a bargaining chip in any of the cases in which it invalidated a penalty for section 6751(b) noncompliance. Instead, the Tax Court has consistently removed penalties when IRS employees simply obtained written supervisory approval after deadlines the Tax Court created and applied retroactively without any indication that the penalty was improper. See, e.g., Kroner, T.C. Memo. 2020-73, rev'd 48 F. 4th 1272 (11th Cir. 2022); Carter, T.C. Memo. 2020-21, rev'd 2022 WL 4232170 (11th Cir. Sept. 14, 2022). In one case, the Tax Court explicitly noted that imposition of the penalty would be proper but for the IRS's failure to obtain written supervisory approval by the deadline created by the Tax Court. See Becker v. Commissioner, T.C. Memo. 2018-69 (stating that "Mr. Becker's fraud is evident" and that, but for section 6751(b) compliance, the court's analysis "would normally lead to a holding that sustains the Commissioner's civil fraud penalty determinations..."). In contrast, by allowing a supervisor to approve the initial determination of a penalty up until the time the IRS issues a pre-assessment notice subject to review by the Tax Court, the proposed rule ensures that penalties are "only [ ] imposed where appropriate." S. Rep. No. 105-714 at 65. With this deadline, the supervisor has the opportunity to consider a taxpayer's defense against a penalty, if applicable, and decide whether to approve the penalty. If the facts of the case suggest that a penalty should have been considered but none is imposed, the supervisor's later review would allow the supervisor to question why none was recommended. Furthermore, this bright-line rule relieves supervisors from having to predict whether approval at a certain point will be too early or too late, thereby risking that an otherwise appropriate penalty may not be upheld by a court. Pre-assessment notices that provide a basis for Tax Court jurisdiction are well known to supervisors, and the proposed rule will be clear in application to both IRS employees and taxpayers. Finally, the rule in proposed §301.6751(b)-1(c) is consistent with longstanding IRS Policy Statements. Penalty Policy Statement 20-1 has, since 2004, included the following direction to IRS employees: "The [IRS] will demonstrate the fairness of the tax system to all taxpayers by: a. Providing every taxpayer against whom the [IRS] proposes to assess penalties with a reasonable opportunity to provide evidence that the penalty should not apply; b. Giving full and fair consideration to evidence in favor of not imposing the penalty, even after the [IRS]'s initial consideration supports imposition of a penalty; and c. Determining penalties when a full and fair consideration of the facts and the law support doing so. Note: This means that penalties are not a "bargaining point" in resolving the taxpayer's other tax adjustments. Rather, the imposition of penalties in appropriate cases serves as an incentive for taxpayers to avoid careless or overly aggressive tax reporting positions." IRM 1.2.1.12.1 (9). As reflected in this Policy Statement and the language of section 6751(b) itself, it may not be until the IRS has had the opportunity to develop the facts in support of or against the penalty that a supervisor is in the best position to approve an initial determination to assert a penalty as appropriate. Therefore, the Treasury Department and the IRS have concluded that the deadline for providing approval for penalties appearing in a pre-assessment notice that entitles a taxpayer to petition the Tax Court should be no earlier than issuance of such notice. B. Penalties raised in the Tax Court after a petition Proposed §301.6751(b)-1(d) provides that, for penalties raised in the Tax Court after a petition, supervisory approval may be obtained at any time prior to the Commissioner requesting that the court determine the penalty. The proposed rule gives full effect to the language in both sections 6214 and 6751(b)(1) because once a penalty is raised, the Tax Court decision will control whether it is assessed. Section 6214(a) permits the Commissioner to raise penalties in an answer or amended answer that were not included in a notice that provides the basis for Tax Court jurisdiction upon timely petition. The proposed rule allows the exercise of this statutory grant of independent judgment by the IRS Office of Chief Counsel (Counsel) attorney, while maintaining the intent of Congress that penalties be imposed only where appropriate, and with meaningful supervisory review. Any concern about a Counsel attorney using penalties raised in an answer or amended answer as a bargaining chip is mitigated by the requirement in proposed §301.6751(b)-1(d) for supervisory approval within Counsel before the answer or amended answer is filed. Moreover, by raising a penalty on answer, amended answer, or amendment to the answer to, the Commissioner will likely bear the burden of proof at trial regarding the application of the penalty, thus reducing further the possibility that Counsel will attempt to use a penalty as a bargaining chip in a docketed case. See Tax Court Rule 142. Furthermore, Tax Court Rule 33(b) provides that signature of counsel on a pleading constitutes a certificate by the signer that the pleading is not interposed for any improper purpose, thus diminishing the potential for abuse. No case has found that a penalty raised on answer, amended answer, or amendment to the answer was untimely under section 6751(b). C. Penalties not subject to pre-assessment review in the Tax Court Proposed §301.6751(b)-1(b) provides that supervisory approval for penalties that are not subject to pre-assessment review in the Tax Court may be obtained at any time prior to assessment. This includes penalties that could have been included in a pre-assessment notice that provides the basis for Tax Court jurisdiction upon timely petition, but which were not included in such a notice because the taxpayer agreed to their immediate assessment. Unlike penalties subject to deficiency procedures before assessment, there is no Tax Court or potential Tax Court decision that would make approval of an immediately assessable penalty by an IRS supervisor meaningless. Instead, consistent with the language of section 6751(b), supervisory approval can be made at any time before assessment without causing any tension in the statutory scheme for assessing penalties. The proposed rule is also consistent with congressional intent that penalties not be used as a bargaining chip. Most penalties not subject to pre-assessment review in the Tax Court cannot be used as a bargaining chip because they are not in addition to a tax liability. Rather, the penalty is the sole liability at issue. 2. Exceptions to the rule requiring supervisory approval of penalties Proposed §301.6751(b)-1(a)(2) provides a list of penalties excepted from the requirements of section 6751(b). Proposed §301.6751(b)-1(a)(2) excepts those penalties listed in section 6751(b)(2)(A), along with penalties imposed under section 6673 of the Code. Penalties under section 6673 are imposed at the discretion of the court and are designed to deter bad behavior in litigation and conserve judicial resources. Section 6673 penalties are not determined by the Commissioner, and the applicable Federal court may impose them regardless of whether the Commissioner moves for their imposition. The proposed rule excepts penalties under section 6673 from the requirements of section 6751(b)(1) because section 6751(b)(1) was not intended as a mechanism to restrain Federal courts. This rule is consistent with the Tax Court's holding in Williams v. Commissioner, 151 T.C. 1 (2018). 3. Definitions A. Immediate supervisor and designated higher level officials Section 6751(b)(1) requires approval by "the immediate supervisor" of the individual who makes the initial penalty determination, or such higher level official as the Secretary may designate. The statute does not define the term immediate supervisor. The 1998 Senate Finance Committee Report only provides that section 6751(b) requires the approval of "IRS management." In Sand Investment, the Tax Court held that for purposes of section 6751(b) the "immediate supervisor" is the individual who directly supervises the examining agent's work in an examination. In the Tax Court's view, the legislative history of section 6751(b) supports the conclusion that the person with the greatest familiarity with the facts and legal issues presented by the case is the immediate supervisor. 157 T.C. at 142. Proposed §301.6751(b)-1(a)(3)(iii) defines the term "immediate supervisor" as any individual with responsibility to approve another individual's proposal of penalties without the proposal being subject to an intermediary's approval. The proposed rule does not limit the term immediate supervisor to a single individual. To limit the term to a single individual within the IRS would restrict section 6751(b)(1) in a way that does not reflect how the IRS operates and would invite unwarranted disputes about which specific individual was most appropriate in situations where multiple individuals could fairly be considered an "immediate supervisor." Instead, the term is better understood to refer to any person who, as part of their job, directly approves a penalty proposed by another. This includes acting supervisors operating under a proper delegation of authority. This approach is consistent with the intent of Congress to prevent IRS examining agents from operating alone. The proposed rule further ensures that the person giving the approval has appropriate supervisory responsibility with respect to the penalty. Proposed §301.6751(b)-1(a)(4) designates as a higher level official authorized to approve an initial penalty determination for purposes of section 6751(b)(1) any person who has been directed via the IRM or other assigned job duties to approve another individual's proposal of penalties before they are included in a notice prerequisite to Tax Court jurisdiction, an answer to a Tax Court petition, or are assessed without need for such inclusion. Proposed §301.6751(b)-1(a)(3)(iv) defines a higher level official as any person designated as such under proposed §301.6751(b)-1(a)(4). With respect to "higher level officials" who may provide penalty approval in lieu of the immediate supervisor, the statute does not specify whether the official needs to be at a "higher level" than the individual making the initial penalty determination, or at a higher level than that individual's supervisor. Read in light of the statute's legislative purpose and the structure and operations of the IRS, it is appropriate to understand that term as referring to an official at a higher level than the individual making the initial penalty determination. To do otherwise would be to exclude a large group of individuals the IRS has assigned to review proposed penalties. This approach is consistent with the legislative history and allows IRS employees to operate within the scope of their assigned duties. To be able to identify which supervisor should approve an initial penalty determination, it must be clear which individual made the "initial determination of [a penalty] assessment." Proposed §301.6751(b)-1(a)(3)(ii) provides that the individual who first proposes a penalty is the individual who section 6751(b)(1) references as the individual making the initial determination of a penalty assessment. Proposed §301.6751(b)-1(a)(3)(ii) also provides that a proposal includes those made either to a taxpayer or to the individual's supervisor or a designated higher level official. This approach will allow for easy identification of the appropriate supervisor or higher level official. Proposed §301.6751(b)-1(a)(3)(ii) also makes clear that the assessment of a penalty must be attributable to an individual's proposal for that individual to be considered as the individual who made the "initial determination of such assessment." If a proposal of a penalty is not tied to an ultimate assessment, then it should not be treated as the "initial determination of such assessment." This approach allows the IRS the flexibility to pursue penalties when new information is received that alters earlier thinking on whether a penalty is appropriate. It also allows for more than one set of an individual employee and supervisor to exercise independent judgment about whether a penalty should be assessed. This situation is illustrated by an example in proposed §301.6751(b)-1(e)(4). B. Personally approved (in writing) Section 6751(b)(1) requires that the immediate supervisor "personally approve (in writing)" the initial determination to assert a penalty. Proposed §301.6751(b)-1(a)(3)(v) provides that "personally approved (in writing)" means any writing, including in electronic form, that is made by the writer to signify the writer's assent and that reflects that it was intended as approval. The proposed rule reflects a straightforward, plain language interpretation of the term, and is consistent with the legislative history's requirement that "specific approval" be given. The plain language of the statute requires only personal approval in writing, not any particular form of signature or even any signature at all. The plain language of the statute also contains no requirement that the writing contain the supervisor's substantive analysis, nor does the statute require the supervisor to follow any specific procedure in determining whether to approve the penalty. Thus, for example, a supervisor's signature on a cover memorandum or a letter transmitting a report containing penalties is sufficient approval of the penalties contained in the report. The proposed rule is consistent with existing caselaw on this issue. See PBBM-Rose Hill, 900 F.3d at 213; Deyo v. Commissioner, 296 Fed. Appx. 157 (2d Cir. 2008); Thompson v. Commissioner, T.C. Memo. 2022-80; Raifman v. Commissioner, T.C. Memo. 2018-101. C. Automatically calculated through electronic means Section 6751(b)(2) exempts from the penalty approval requirements penalties under sections 6651, 6654, 6655, 6662(b)(9), and 6662(b)(10) and "any other penalty automatically calculated through electronic means." The term is not defined in the statute and the legislative history only provides that approval is required of "all non-computer generated penalties." Proposed §301.6751(b)-1(a)(3)(vi) provides that a penalty is "automatically calculated through electronic means" if it is proposed by an IRS computer program without human involvement. Proposed §301.6751(b)-1(a)(3)(vi) provides that a penalty is no longer considered "automatically calculated through electronic means" if a taxpayer responds to a computer-generated notice proposing a penalty and challenges the penalty or the amount of tax to which the penalty is attributable, and an IRS employee works the case. Current IRS computer software, including but not limited to the Automated Correspondence Exam (ACE) program using Report Generation Software (RGS) and the Automated Underreporter (AUR) program, is capable of automatically proposing certain penalties to taxpayers without the involvement of an IRS examiner. Penalties that can be proposed in this way are then assessed without review by an IRS examiner. Requiring supervisory approval for these penalties would disrupt the automated process of determining a penalty and would not square with the statutory text requiring approval by the immediate supervisor of the "individual" making an initial penalty determination. When an IRS computer program sends a taxpayer a notice proposing a penalty and the taxpayer responds to that notice, an IRS examiner often considers the taxpayer's response. If the taxpayer's response questions the validity of the penalty or the adjustments to which the penalty relates, and an examiner considers the response, any subsequent assessment of the penalty would not be based solely on the automatic calculation of the penalty by the computer program. Instead, it would be at least partially based on a choice made by an IRS employee as to whether the penalty is appropriate. Therefore, the exception for penalties automatically calculated through electronic means does not apply, and supervisory approval is required in that situation. This rule is consistent with the Tax Court's holding in Walquist, 152 T.C. at 73. Proposed Applicability Dates The proposed rules are proposed to apply to penalties assessed on or after the date of publication of the Treasury decision adopting the proposed rules as final regulations in the Federal Register. Special Analyses I. Regulatory Planning and Review It has been determined that this notice of proposed rulemaking is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. II. Regulatory Flexibility Act Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that this regulation will not have a significant economic impact on a substantial number of small entities. This certification is based on this regulation imposing no obligations on small entities and the effectiveness of the regulation in having supervisors ensure that penalties for violations of other provisions of tax law are appropriate and not used as a bargaining chip. Because only appropriate penalties will apply with the proper application of this regulation, the proposed regulations do not impose a significant economic impact on a substantial number of small entities. Pursuant to section 7805(f) of the Internal Revenue 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 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 a Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to 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 rules. All comments will be available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing also are encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register. Announcement 2020-4, 2020-17 I.R.B 1, provides that, until further notice, public hearings conducted by the IRS will be held telephonically. Any telephonic hearing will be made accessible to people with disabilities. Drafting Information The principal author of these regulations is David Bergman 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 Amendment to the Regulations Accordingly, the Treasury Department and the 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 301.6751(b)-1 is added to read as follows: §301.6751(b)-1 Supervisory and higher level official approval for penalties. (a) Approval requirement --(1) In general. Except as provided in paragraph (a)(2) of this section, section 6751(b) of the Internal Revenue Code (Code) generally bars the assessment of a penalty unless the initial determination of the assessment of the penalty is personally approved (in writing) by the immediate supervisor of the individual making the initial determination or such higher level official as the Secretary of the Treasury or her delegate (Secretary) may designate. Paragraph (a)(2) of this section lists penalties not subject to section 6751(b)(1) and this paragraph (a)(1). Paragraph (a)(3) of this section provides definitions of terms used in section 6751(b) and this section. Paragraph (a)(4) of this section designates the higher level officials described in this paragraph (a)(1). Paragraphs (b), (c), and (d) of this section apply section 6751(b)(1) and this paragraph (a)(1) to penalties not subject to pre-assessment review in the Tax Court, penalties that are subject to pre-assessment review in the Tax Court, and penalties raised in the Tax Court after a petition, respectively. Paragraph (e) of this section provides examples illustrating the application of section 6751(b) and this section. Paragraph (f) of this section provides dates of applicability of this section. (2) Exceptions. Under section 6751(b)(2), section 6751(b)(1) and this section do not apply to: (i) Any penalty under section 6651, 6654, 6655, 6673, 6662(b)(9), or 6662(b)(10) of the Code; or (ii) Any other penalty automatically calculated through electronic means. (3) Definitions. For purposes of section 6751(b) and this section, the following definitions apply-- (i) Penalty. The term penalty means any penalty, addition to tax, or additional amount under the Code. (ii) Individual who first proposed the penalty. Except as otherwise provided in this paragraph (a)(3)(ii), the individual who first proposed the penalty is the individual who section 6751(b)(1) and paragraph (a)(1) of this section reference as the individual making the initial determination of a penalty assessment. A proposal of a penalty can be made to either a taxpayer (or the taxpayer's representative) or to the individual's supervisor or designated higher level official. A proposal of a penalty, as defined in paragraph (a)(3)(i) of this section, to a taxpayer does not include mere requests for information relating to a possible penalty or inquiries of whether a taxpayer wants to participate in a general settlement initiative for which the taxpayer may be eligible, but does include offering the taxpayer an opportunity to agree to a particular penalty in a particular amount other than a penalty under a settlement initiative offered to a class of taxpayers. An individual who first proposed the penalty is not the individual whom section 6751(b)(1) and paragraph (a)(1) of this section reference as the individual making the initial determination of a penalty assessment if the assessment of the penalty is attributable to an independent proposal made by a different individual. (iii) Immediate supervisor. The term immediate supervisor means any individual with responsibility to approve another individual's proposal of penalties, as defined in paragraph (a)(3)(i) of this section, without the proposal being subject to an intermediary's approval. (iv) Higher level official. The term higher level official means any person designated under paragraph (a)(4) of this section as a higher level official authorized to approve a penalty for purposes of section 6751(b)(1). (v) Personally approved (in writing). The term personally approved (in writing) means any writing, including in electronic form, made by the writer to signify the writer's assent. No signature or particular words are required so long as the circumstances of the writing reflect that it was intended as approval. (vi) Automatically calculated through electronic means. A penalty, as defined in paragraph (a)(3)(i) of this section, is automatically calculated through electronic means if an IRS computer program automatically generates a notice to the taxpayer that proposes the penalty. If a taxpayer responds in writing or otherwise to the automatically-generated notice and challenges the proposed penalty, or the amount of tax to which the proposed penalty is attributable, and an IRS employee considers the response prior to assessment (or the issuance of a notice of deficiency that includes the penalty), then the penalty is no longer considered "automatically calculated through electronic means." (4) Higher level official. Any person who has been directed by the Internal Revenue Manual or other assigned job duties to approve another individual's proposal of penalties before they are included in a pre-assessment notice prerequisite to United States Tax Court (Tax Court) jurisdiction, an answer, amended answer, or amendment to the answer to a Tax Court petition, or are assessed without need for such inclusion, is designated as a higher level official authorized to approve the penalty for purposes of section 6751(b)(1). (b) Penalties not subject to pre-assessment review in the Tax Court. The requirements of section 6751(b)(1) and paragraph (a)(1) of this section are satisfied for a penalty that is not subject to pre-assessment review in the Tax Court if the immediate supervisor of the individual who first proposed the penalty personally approves the penalty in writing before the penalty is assessed. Alternatively, a person designated as a higher level official as described in paragraph (a)(4) of this section may provide the approval otherwise required by the immediate supervisor. (c) Penalties subject to pre-assessment review in the Tax Court. The requirements of section 6751(b)(1) and paragraph (a)(1) of this section are satisfied for a penalty that is included in a pre-assessment notice that provides a basis for Tax Court jurisdiction upon timely petition if the immediate supervisor of the individual who first proposed the penalty personally approves the penalty in writing on or before the date the notice is mailed. Alternatively, a person designated as a higher level official as described in paragraph (a)(4) of this section may provide the approval otherwise required by the immediate supervisor. Examples of a pre-assessment notice described in this paragraph (c) include a statutory notice of deficiency under section 6212 of the Code, a notice of final partnership administrative adjustment under former section 6223 of the Code, and a notice of final partnership adjustment under section 6231 of the Code. (d) Penalties raised in the Tax Court after a petition. The requirements of section 6751(b)(1) and paragraph (a)(1) of this section are satisfied for a penalty that the Commissioner raises in the Tax Court after a petition ( see section 6214(a) of the Code) if the immediate supervisor of the individual who first proposed the penalty personally approves the penalty in writing no later than the date on which the Commissioner requests that the court determine the penalty. Alternatively, a person designated as a higher level official as described in paragraph (a)(4) of this section may provide the approval otherwise required by the immediate supervisor. (e) Examples. The following examples illustrate the rules of this section. (1) Example 1. In the course of an audit regarding a penalty not subject to pre-assessment review in the Tax Court, Revenue Agent A concludes that Taxpayer T should be subject to the penalty under section 6707A of the Code for failure to disclose a reportable transaction. A sends T a letter giving T the options to agree to the penalty; submit additional information to A about why the penalty should not apply; or request within 30 days that the matter be sent to the Independent Office of Appeals (Appeals) for consideration. After T requests that Appeals consider the case, A prepares the file for transmission, and B (who is A's immediate supervisor, as defined in paragraph (a)(3)(iii) of this section) signs a cover memorandum informing Appeals of the Office of Examination's proposed penalty and asking Appeals to consider it. The Appeals Officer upholds the penalty, and it is assessed. The requirements of section 6751(b)(1) are satisfied because B's signature on the cover memorandum is B's personal written assent to the penalty proposed by A and was given before the penalty was assessed. (2) Example 2. In the course of an audit, Revenue Agent A concludes that Taxpayer T should be subject to an accuracy-related penalty for substantial understatement of income tax under section 6662(b)(2). A sends T a Letter 915, Examination Report Transmittal, along with an examination report that includes the penalty. The Letter 915 gives T the options to agree to the examination report; provide additional information to be considered; discuss the report with A or B (who is A's immediate supervisor, as defined in paragraph (a)(3)(iii) of this section); or request a conference with an Appeals Officer. T agrees to assessment of the penalty and signs the examination report to consent to the immediate assessment and collection of the amounts shown on the report. B provides written supervisory approval of the penalty after T signs the examination report, but before the penalty is assessed. Paragraph (b) of this section applies because T's agreement to assessment of the penalty excepts it from pre-assessment review in the Tax Court. Because B provided written supervisory approval before assessment of the penalty, the requirements of section 6751(b) are satisfied. (3) Example 3. In the course of an audit of Taxpayer T by a team of revenue agents, Revenue Agent A concludes that T should be subject to an accuracy-related penalty for negligence under sections 6662(b)(1) and 6662(c). Supervisor B is the issue manager and is assigned the duty to approve the Notice of Proposed Adjustment for any penalty A would propose. A reports to B, but B is not responsible for the overall management of the audit of T. C is the case manager of the team auditing T and is responsible for the overall management of the audit of T. C may assign tasks to A and other team members, and has responsibility for approving any examination report presented to T. (i) Only B approves the penalty in writing before the mailing to T of a notice of deficiency that includes the penalty. Under paragraph (a)(3)(iii) of this section, B qualifies as the immediate supervisor of A with respect to A's penalty proposal, and the requirements of section 6751(b)(1) are met. (ii) Only C approves the penalty in writing before the mailing to T of a notice of deficiency that includes the penalty. Because C has responsibility to approve A's proposal of the penalty as part of approving the examination report, C qualifies as a higher level official designated under paragraph (a)(4) of this section to approve the penalty proposed by A, and the requirements of section 6751(b)(1) are met. (4) Example 4. In the course of an audit, Revenue Agent A concludes that Taxpayer T should be subject to a penalty for negligence under section 6662(c). A recommends the penalty to her immediate supervisor B, who thinks more factual development is needed to support the penalty but must close the audit immediately due to the limitations period on assessment expiring soon. The IRS issues a statutory notice of deficiency without the penalty and T petitions the Tax Court. In reviewing the case file and conducting discovery, IRS Chief Counsel Attorney C concludes that the facts support imposing a negligence penalty under section 6662(c). Attorney C proposes to her immediate supervisor, D, that the penalty should apply and should be raised in an Answer pursuant to section 6214(a). D agrees and signs the Answer that includes the penalty before it is filed. The section 6662(c) penalty at issue is subject to pre-assessment review in the Tax Court and was raised in the Tax Court after a petition under paragraph (d) of this section. Therefore, written supervisory approval under paragraph (d) of this section was required prior to filing the written pleading that includes the penalty. Attorney C is the individual who first proposed the penalty for purposes of section 6751(b)(1) and paragraphs (d) and (a)(3)(ii) of this section, and she secured timely written supervisory approval from D, the immediate supervisor, as defined in paragraph (a)(3)(iii) of this section, so the requirements of section 6751(b)(1) are met. Revenue Agent A did not make the initial determination of the penalty assessment because any assessment would not be attributable to A's proposal but would be based on the independent proposal of Attorney C raised pursuant to section 6214(a). (5) Example 5. The IRS's Automated Underreporter (AUR) computer program detects a discrepancy between the information received from a third party and the information contained on Taxpayer T's return. AUR automatically generates a CP2000, Notice of Underreported Income, that includes an adjustment based on the unreported income and a proposed penalty under section 6662(d) that is mailed to T. The CP2000 gives T 30 days to respond to contest the proposed adjustments and the penalty. T submits a response to the CP2000, asking only for more time to respond. More time is granted but no further response is received from T, and a statutory notice of deficiency that includes the adjustments and the penalty is automatically generated and issued to T. The section 6662(d) penalty at issue is automatically calculated through electronic means under paragraphs (a)(2)(ii) and (a)(3)(vi) of this section. The penalty was proposed by the AUR computer program, which generated a notice to T that proposed the penalty. Although T submitted a response to the CP2000, the response did not challenge the proposed penalty, or the amount of tax to which the proposed penalty is attributable. Therefore, the penalty was automatically calculated through electronic means and written supervisory approval was not required. (f) Applicability date. The rules of this section apply to penalties assessed on or after [the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register ]. Douglas W. O'Donnell, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register April 10, 2023, 8:45a.m., and published in the issue of the Federal Register for April 11, 2023, 88 FR 21564)

Private Letter Ruling Number: 202343029 Internal Revenue Service July 26, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202343029 Release Date: 10/27/2023 Index Number: 2652.01-00, 2652.01-02, 2632.03-00, 2654.00-00, 9100.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B04 PLR-108845-23 Date: July 26, 2023 Dear ******: This letter responds to a letter from your authorized representative dated March 16, 2023, and subsequent correspondence, requesting an extension of time under § 301.9100-3 of the Procedure and Administration Regulations to make a reverse qualified terminable interest property (QTIP) election under § 2652(a)(3) of the Internal Revenue Code (Code). The facts and representations submitted are summarized as follows: Decedent and his spouse, Spouse, (collectively, the grantors) executed Trust, a revocable trust, on Date 1. Trust was most recently amended on Date 2. Decedent died on Date 3, survived by Spouse and children. Accountant was appointed co-executor of Decedent's estate, along with one of Decedent's children. Article 6 of Trust directs the trustee, upon the death of the first grantor to die, to use Trust property to satisfy the specific legacies made under such grantor's Will, and thereafter divide the remaining Trust property into three separate trusts: Survivor's Trust, Marital Trust, and Decedent's Trust. Article 6.2 provides that the assets allocated to Survivor's Trust shall consist of: (i) Spouse's share of the community property portion of the trust estate and Spouse's separate property portion of the trust estate, if any, and (ii) specific items of Decedent's personal property. Article 6.2 provides further that the assets allocated to Marital Trust shall consist of the minimum dollar amount (if any) necessary as a marital deduction to eliminate (or reduce to the extent possible) any federal estate tax payable at Decedent's death. The balance of Trust assets, after payment of estate and inheritance taxes, are allocated to Decedent's Trust. Article 6.4 directs the trustee to distribute to Spouse the entire net income of Marital Trust, at least annually, and to distribute Marital Trust principal to Spouse for Spouse's health, education, support, and maintenance, as the trustee considers necessary. Article 7.4 directs the trustee, at Spouse's death, to distribute the accrued and undistributed income of Marital Trust to such one or more persons and entities, in any amounts and proportions that Spouse may appoint, or otherwise to Spouse's estate, and to distribute the balance then remaining, if any, of Marital Trust principal to such one or more of the group consisting of the grantors' issue or any charitable organizations as Spouse may appoint (pursuant to a limited power of appointment). Article 12.1 provides, in relevant part, that the grantors intend that Marital Trust qualify for the marital deduction allowable under federal estate tax law. Article 12.3 authorizes the trustee to elect to have Marital Trust treated as QTIP. If the trustee makes an election to have Marital Trust treated as QTIP, Article 13.1 further authorizes the trustee to make a reverse QTIP election under § 2652(a)(3) to treat the Decedent as the transferor of such property for purposes of the Generation-Skipping Transfer (GST) Tax. If the trustee makes such an election and if the value of Marital Trust exceeds the amount of Decedent's GST Exemption available at the Decedent's death and not otherwise allocated, Article 13.1 directs the trustee to divide Marital Trust into two separate trusts: (i) "Exempt Marital Trust" consisting of that amount of property equal in value to the amount of the Decedent's GST Exemption not otherwise allocated and available at the Decedent's death for allocation to Exempt Marital Trust, and (ii) "Non-Exempt Marital Trust" consisting of the balance of Marital Trust's assets. Pursuant to Article 4 of Trust, Marital Trust became irrevocable upon Decedent's death. Accountant, in his capacity as co-executor of Decedent's estate, prepared Decedent's Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return and was aware of the terms of Trust when doing so. It has been represented that the taxpayer relied on Accountant's tax expertise in preparing and filing Decedent's Form 706. On Schedule M (Bequests to Surviving Spouse) of Decedent's timely filed Form 706, Accountant identified Marital Trust as property subject to the QTIP election under § 2056(b)(7). However, Accountant failed to advise the taxpayer with respect to the reverse QTIP election under § 2652(a)(3), and, as a result, no Schedule R (Generation-Skipping Transfer Tax) was filed with Decedent's Form 706 and no reverse QTIP election was made with respect to Marital Trust. Decedent's estate requests an extension of time under § 301.9100-3 to make a reverse QTIP election under § 2652(a)(3) with respect to Exempt Marital Trust. LAW AND ANALYSIS Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2056(a) provides that, for purposes of the tax imposed by § 2001, the value of the taxable estate shall, except as limited by § 2056(b), be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to the surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate. Section 2056(b)(1) provides, in pertinent part, that no deduction is allowed under § 2056(a) where, on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur, an interest passing to the surviving spouse will terminate or fail. Section 2056(b)(7)(A) provides that, in the case of QTIP, for purposes of § 2056(a), such property shall be treated as passing to the surviving spouse, and for purposes of § 2056(b)(1)(A), no part of such property shall be treated as passing to any person other than the surviving spouse. Section 2056(b)(7)(B)(i) defines "qualified terminable interest property" as property: (I) which passes from the decedent; (II) in which the surviving spouse has a qualifying income interest for life as defined in § 2056(b)(7)(B)(ii); and (III) to which an election under § 2056(b)(7) applies. Section 2056(b)(7)(B)(v) provides that an election under § 2056(b)(7) with respect to any property shall be made by the executor on the return of tax imposed by § 2001. The election, once made, is irrevocable. Section 2601 imposes a tax on every GST. A GST is defined under § 2611(a) as: (1) a taxable distribution; (2) a taxable termination; and (3) a direct skip. Section 2602 provides that the amount of GST tax is the taxable amount multiplied by the applicable rate. Section 2641(a) defines "applicable rate" as the product of the maximum federal estate tax rate and the inclusion ratio with respect to the transfer. Section 2631(a) provides that, for purposes of determining the inclusion ratio, every individual shall be allowed a GST exemption amount which may be allocated by the individual (or the individual's executor) to any property with respect to which the individual is the transferor. Section 2631(b) provides that any allocation under § 2631(a), once made, shall be irrevocable. Section 2632(a)(1) provides that any allocation by an individual of GST exemption under § 2631(a) may be made at any time on or before the date prescribed for filing the estate tax return for the individual's estate (determined with regard to extensions), regardless of whether an estate tax return is required to be filed. Under § 2632(e) and § 26.2632-1(d)(2), an individual's unused GST exemption is automatically allocated on the due date to the extent not otherwise allocated by the individual's executor on or before that date. The unused exemption is allocated: (A) first to property which is the subject of a direct skip occurring at such individual's death, and (B) second to trusts with respect to which such individual is the transferor and from which a taxable distribution or a taxable termination might occur at or after such individual's death. However, no automatic allocation of GST exemption is made to a trust that will have a new transferor with respect to the entire trust prior to the occurrence of any GST with respect to the trust. Section 2642(a)(1) defines "inclusion ratio" as the excess (if any) of 1 over the applicable fraction. Under § 2642(a)(2), the "applicable fraction" is a fraction the numerator of which is the amount of the GST exemption allocated to the trust and the denominator of which is the value of the property transferred to the trust reduced by the sum of any federal estate tax or state death tax actually recovered from the trust attributable to such property and any charitable deduction allowed under § 2055 or 2522 with respect to such property. Section 2652(a)(1) provides that, for GST tax purposes, an individual shall be treated as transferring any property with respect to which the individual is the transferor. Under § 2652(a)(1), the "transferor" is the decedent with respect to any property subject to federal estate tax and the donor with respect to any property subject to federal gift tax. However, under § 2652(a)(3), in the case of any trust for which a marital deduction is allowed to the decedent by reason of § 2056(b)(7), the estate of the decedent may elect to treat all of the property in the trust for GST tax purposes as if the QTIP election had not been made. The election under § 2652(a)(3) is referred to as a "reverse QTIP election." The consequence of a reverse QTIP election is that, for GST tax purposes, the decedent, not the surviving spouse, is the transferor of the trust for which the QTIP election is made, and the decedent's GST exemption may be allocated to the trust. Section 26.2652-2(a) provides, in part, that a reverse QTIP election is not effective unless it is made with respect to all of the property in the trust to which the QTIP election applies. Under § 26.2652-2(b), the reverse QTIP election is made on the return of tax on which the QTIP election is made. Section 26.2654-1(b)(1) provides, in part, that the severance of a trust that is included in the transferor's gross estate (or created under the transferor's will) into two or more trusts is recognized for GST tax purposes if the trust is severed pursuant to a direction in the governing instrument providing that the trust is to be divided upon the death of the transferor. Section 301.9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due date is prescribed by a regulation (and not expressly provided by statute). Requests for relief under § 301.9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the government. Section 301.9100-3(b)(1)(v) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election. In this case, the terms of Trust direct the severance of Marital Trust into Exempt Marital Trust and Non-Exempt Marital Trust. Therefore, under § 26.2654-1(b)(1)(i), the severance of Marital Trust into Exempt Marital Trust and Non-Exempt Marital Trust is recognized for GST tax purposes. As a result of the QTIP election made on Form 706, and pursuant to § 2519 or § 2044(a), Spouse will become the transferor of Exempt Marital Trust for GST tax purposes prior to the occurrence of any GST, thereby precluding allocation of Decedent's GST exemption to Exempt Marital Trust. However, if Decedent's estate is granted an extension of time to make a reverse QTIP election, Decedent will remain the transferor of Exempt Marital Trust for GST tax purposes. Based on the facts submitted and the representations made, we conclude that the requirements of § 301.9100-3 have been satisfied. Therefore, Decedent's estate is granted an extension of time of 120 days from the date of this letter to make a reverse QTIP election with respect to Exempt Marital Trust. The reverse QTIP election should be made on a supplemental Form 706. The supplemental Form 706 should be filed with the Service Center at the following address: Internal Revenue Service Center, Attn: E&G, Stop 824G, 7940 Kentucky Drive, Florence, KY 41042-2915. A copy of this letter should be attached to the supplemental Form 706. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. Sincerely, Associate Chief Counsel Passthroughs and Special Industries _________________________ By: Daniel J. Gespass Senior Technician Reviewer, Branch 4 Office of the Associate Chief Counsel (Passthroughs and Special Industries) Enclosure Copy for §6110 purposes cc:

Private Letter Ruling Number: 202314015 Internal Revenue Service January 12, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202314015 Release Date: 4/7/2023 Index Number: 9100.00-00, 9100.09-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:ITA:B4 PLR-122238-22 Date: January 12, 2023 Dear ******: This letter ruling refers to your request that the Internal Revenue Service grant an extension of time, under the authority in § 301.9100-3 of the Regulations on Procedure and Administration, to file Form 1128, Application to Adopt, Change, or Retain a Tax Year. Taxpayer, a partnership, requests an extension of time to file Form 1128 to make an election under Internal Revenue Code (Code) § 442, Treas. Reg. § 1.442-1(b), and Rev.Proc. 2006-46 to change its accounting period, for federal income tax purposes, from a taxable year ending December 31 to a taxable year ending March 31, effective March 31, Year 2. Taxpayer is owned by Corporation and a number of individuals. In July Year 1, Corporation purchased an additional X percent interest in Taxpayer. As a result of the additional acquisition, Corporation became the majority partner. Corporation has a fiscal year ending March 31. Prior to Corporation becoming the majority partner, Taxpayer had a tax year ending December 31. Taxpayer hired external tax professionals to prepare its tax returns for Year 1 and Year 2. The tax professionals did not become aware of a statutory requirement to change the Taxpayer's taxable year to that of the majority interest taxable year until the Summer of Year 3. Although the tax professionals filed the short period return for the tax year ending March 31, Year 2, and the fiscal year return for the tax year ending March 31, Year 3, consistent with the accounting period of its new majority shareholder, the returns were filed late. Additionally, the tax professionals overlooked the requirement to file Form 1128 and the required filing date of Form 1128 to effect the change in accounting period. Thus, the Taxpayer has requested an extension of time to file its Form 1128 under § 301.9100-3. Section 301.9100-3(a) provides that requests for extensions of time for regulatory elections that do not meet the requirements of § 301.9100-2 (automatic extensions), such as the instant case, must be made under the rules of § 301.9100-3. Requests for relief subject to § 301.9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good faith, and that the granting of relief will not prejudice the interests of the government. Based on the facts and information submitted and the representations made, we conclude that Taxpayer has acted reasonably and in good faith under § 301.9100-3(b), and that the interests of the Government will not be prejudiced by the granting of relief under § 301.9100-3(c). Accordingly, Taxpayer has satisfied the requirements of the regulations for the granting of relief, and the Service will consider Taxpayer's late filed Form 1128 requesting permission to change to a tax year ending March 31, effective March 31, Year 2, timely filed. However, the granting of an extension of time is not a determination that Taxpayer is otherwise eligible to make the election. See § 301.9100-1(a). Revenue Procedure 2006-46, 2006-45 I.R.B. 859, provides the exclusive procedures for certain taxpayers, including partnerships, to obtain an automatic approval to adopt, change, or retain its annual accounting period under § 442 of the Internal Revenue Code and § 1.442-1(b) of the Income Tax Regulations. Section 7.02(2) of Revenue Procedure 2006-46 provides that the Form 1128 must be filed no earlier than the day following the end of the first effective year and no later than the due date (including extensions) for filing the federal income tax return for the first effective year. Because the Taxpayer did not file Form 1128 by the due date (including extensions) of the short period return for the first effective year, the Taxpayer does not qualify to make the change automatically under Rev.Proc. 2006-46. The Taxpayer must file its Form 1128 under Rev.Proc. 2002-39, 2002-22 I.R.B. 1046, and pay the additional user fee required by Appendix A of Rev.Proc. 2023-1, 2023-1 I.R.B. 1, 85. The taxpayer must file its Form 1128 within 30 days of the date of this letter to be considered timely under Rev. Proc 2002-39, section 6.02. This ruling addresses the granting of § 301.9100-3 relief only. We express no opinion regarding the tax treatment of the instant transaction under the provisions of any other section of the Code or the regulations that may be applicable, or regarding the tax treatment of any conditions existing at the time of, or effects resulting from, the instant transaction. Specifically, this ruling expresses no opinion as to whether the Code and applicable regulations, or Rev.Proc. 2002-39, permit the Taxpayer to change to the tax year requested in the Form 1128. This ruling is based upon facts and representations submitted by the Taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. This office has not verified any of the material submitted in support of the request for a ruling. However, as part of an examination process, the Service may verify the factual information, representations, and other data submitted. This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. Enclosed is a copy of the letter ruling showing the deletions proposed to be made when it is disclosed under § 6110. In accordance with the Power of Attorney on file with this office, we are sending a copy of this letter to your authorized representatives. Sincerely, Angella L. Warren Branch Chief, Branch 4 Office of Associate Chief Counsel (Income Tax & Accounting) cc:

Treasury Decision 9997 Internal Revenue Service 2024-25 I.R.B. 1730 26 CFR 300.11: Fee for obtaining a preparer tax identification number T.D. 9997 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 300 Preparer Tax Identification Number (PTIN) User Fee Update AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final rule. SUMMARY: This document contains final regulations relating to the imposition of certain user fees on tax return preparers. The final regulations adopt without change the text of interim final and proposed regulations that reduced the user fee to apply for or renew a preparer tax identification number (PTIN) from $21 to $11. The final regulations affect individuals who apply for or renew a PTIN. The Independent Offices Appropriation Act of 1952 authorizes the charging of user fees. DATES: Effective date: These regulations are effective on June 14, 2024. Applicability date: For date of applicability, see§ 300.11(d). FOR FURTHER INFORMATION CONTACT: Concerning the final regulations, Jamie Song at (202) 317-6845; concerning cost methodology, Michael A. Weber at (202) 803-9738 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains amendments to 26 CFR part 300 - User Fees. On October 4, 2023, the Department of the Treasury (Treasury Department) and the IRS published in the Federal Register (88 FR 68525) a notice of proposed rulemaking (proposed regulations) by cross-reference to an interim final rule (REG-106203-23) proposing amendments to regulations under 26 CFR part 300. On the same date, the Treasury Department and the IRS published in the Federal Register (88 FR 68456) an interim final rule (TD 9980) that reduced the PTIN user fee from $21 per application or application for renewal to $11, plus the fee payable directly to a third-party contractor. The interim final rule and the proposed regulations took into account the February 2023 memorandum opinion of the United States District Court for the District of Columbia in Steele v. United States, 657 F.Supp.3d 23 (D.D.C. 2023). The preamble to the interim final rule contains a detailed explanation of the legal background and user fee calculations regarding the amendments to these regulations. No public hearing was requested or held, and no comments were received on the proposed regulations. These final regulations therefore adopt the text of the interim final rule and proposed regulations without change. Special Analyses I. Regulatory Planning and Review The OMB's Office of Information and Regulatory Analysis has determined that these final regulations are not significant and are not subject to review under section 6(b) of Executive Order 12866, as amended. II. Regulatory Flexibility Act Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these final regulations will not have a significant economic impact on a substantial number of small entities. Accordingly, a regulatory flexibility analysis is not required. These regulations affect all individuals who prepare or assist in preparing all or substantially all of a tax return or claim for refund for compensation. Only individuals, not businesses, can have a PTIN. Thus, the economic impact of these regulations on any small entity generally will be a result of an individual tax return preparer who is required to have a PTIN owning a small business or a small business otherwise employing an individual tax return preparer who is required to have a PTIN. The Treasury Department and the IRS estimate that approximately 847,555 individuals will apply annually for an initial or renewal PTIN. Although these regulations will likely affect a substantial number of small entities, the economic impact on those entities is not significant. These regulations establish an $11 fee per application or application for renewal (plus the fee payable directly to the third-party contractor), which is a reduction from the previously established fee, and will therefore not have a significant economic impact on small entities. Accordingly, a regulatory flexibility analysis is not required. 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 in 1995 dollars, updated annually for inflation. These final regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold. 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 final regulations do not have federalism implications and do not impose substantial direct compliance costs on State and local governments or preempt State law within the meaning of the Executive order. V. Submission to Small Business Administration Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking and the interim final rule that preceded these final regulations was submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business. No comments were received on the proposed regulations or the interim final rule. VI. Congressional Review Act Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), the Office of Information and Regulatory Affairs designated this rule as not a major rule, as defined by 5 U.S.C. 804(2). Drafting Information The principal author of these regulations is Jamie Song, Office of the Associate Chief Counsel (Procedure and Administration). Other personnel from the Treasury Department and the IRS participated in the development of the regulations. List of Subjects in 26 CFR Part 300 Estate taxes, Excise taxes, Fees, Gift taxes, Income taxes, Reporting and recordkeeping requirements. PART 300--USER FEES Accordingly, the interim rule amending 26 CFR part 300, which was published at 88 FR 68456 on October 4, 2023, is adopted as final without change. Douglas W. O'Donnell, Deputy Commissioner. Approved: April 28, 2024. Aviva R. Aron-Dine, Acting Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register May 14, 2024, 8:45 a.m., and published in the issue of the Federal Register for May 15, 2024, 26 FR 42362)

Private Letter Ruling Number: 202343036 Internal Revenue Service July 28, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202343036 Release Date: 10/27/2023 Index Number: 7701.02-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: No. Telephone Number: Refer Reply To: CC:INTL:B05 PLR-118823-22 Date: July 28, 2023 Dear ******: This is in response to your letter, dated X, as supplemented by additional information statements, requesting that the Entity (1) is not classified as a corporation pursuant to Treas.Reg. § 301.7701-2(b)(6), and (2) is not classified as a corporation pursuant to Treas.Reg. § 301.7701-2(b)(7) by reason of section 892(a)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). FACTS General Partner 1 and General Partner 2 represent that the facts are as follows: The Entity is a general partnership organized on date Y pursuant to the laws of the Province in the Country. 1 The Entity has one or more members without limited liability pursuant to the Province's law and the Entity's operating agreement. The Entity will serve as an investment vehicle to hold the invested assets of General Partner 1 and General Partner 2 (together, the "General Partners"). The Entity has not yet made any investments. The Entity's income or loss will be divided between the General Partners in proportion to their respective interests in the partnership capital. ******** 1 To provide the Investors, as defined herein, with legal certainty and economy of scale, the Manager has a strong commercial and administrative preference to use investment vehicles organized under Province law to hold the Investors' assets. ******** The Entity is an unincorporated organization formed to enable the General Partners to join together to carry on investment activities and to divide the profits and losses therefrom. The General Partners represent that the Entity does not constitute a governing authority and, therefore, does not constitute an integral part of the Province within the meaning of Treas.Reg. § 1.892-2T(a)(2). Each of the General Partners is a corporation organized under Province law and is an association taxable as a corporation for U.S. federal tax purposes. The General Partners represent that each of them is a "controlled entity" of the Province within the meaning of Treas.Reg. § 1.892-2T(a)(3), and each will certify to the Entity on a Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting, indicating that it is classified as a "controlled entity" and not an "integral part" of the Province. In addition, the General Partners represent that General Partner 2 is a "qualified foreign pension fund" under section 897(l) and a "qualified holder" within the meaning of Treas.Reg. § 1.897(l)-1(e)(11) (together, a "QFPF"). General Partner 1 is beneficially owned by the General Partner 1 Investors, and General Partner 2 is beneficially owned by the General Partner 2 Investors (together, the "Investors"). The General Partners represent that each of the Investors is classified as a foreign government under Treas.Reg. § 1.892-2T(a) by reason of its relationship to the Province, and that each of the General Partner 2 Investors is also a QFPF. The Manager holds the legal title to the interests in the General Partners on behalf of the Investors. 2 ******** 2 The Manager is the bare trustee and nominee on behalf of the Investors with respect to their interest in the General Partners. The arrangement is an administrative convenience intended to facilitate the Entity's management without the need to seek shareholder approval. ******** The Manager is an asset manager organized by the Province to invest funds on behalf of public sector clients, including the Investors, located in the Province. The Manager will make geographically disparate investments for the Investors that are managed from its headquarters in the Province. The General Partners represent that the Manager is classified as a foreign government under Treas.Reg. § 1.892-2T(a) by reason of its relationship to the Province. The Manager organized investment vehicles to hold the Investors' assets because the Investors commonly invest in large, complex infrastructure, private equity, and real estate transactions with complicated governance and financing arrangements. These investments historically included a significant allocation to U.S. real estate, infrastructure, and timber assets. The Entity's investment program contemplates the purchase, holding, and disposition of stock in U.S. corporations that are classified as "United States real property holding corporations" described in section 897(c)(2) and as "controlled commercial entities" described in section 892(a)(2)(B) (a "controlled USRPHC"). If the Entity were classified as an association taxable as a corporation for U.S. federal tax purposes, no gain from a controlled USRPHC that otherwise would be subject to section 897 would be eligible for exemption under section 897(l). The Investors that are QFPFs are exempt from taxation imposed by the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"), 3 which exemption would not be available to such Investors if they pooled their interests with non-QFPF Investors in a vehicle classified as an association taxable as a corporation for U.S. federal tax purposes. 4 The QFPF Investors will be eligible for the exemption from FIRPTA, however, if they pool their interests with non-QFPF Investors in an entity classified as a partnership for U.S. federal tax purposes. 5 ******** 3 Pub. L. No. 96-499, 94 Stat. 2599, 2682 (Dec. 5, 1980). 4 See Treas.Reg. § 1.897(l)-1(e)(9). 5 See Treas.Reg. § 1.897(l)-1(c)(3)(ii). ******** LAW AND ANALYSIS Issue 1 - Whether the Entity is a corporation pursuant to Treas.Reg. § 301.7701-2(b)(6). Treas.Reg. § 301.7701-2(b)(6) provides that, for U.S. federal tax purposes, the term corporation means a business entity wholly owned by a U.S. state or any political subdivision thereof, or a business entity wholly owned by a foreign government or any other entity described in Treas.Reg. § 1.892-2T. Before the promulgation of Treas.Reg. § 301.7701-2(b)(6) in 1996, the Treasury Department and the IRS were concerned that organizations wholly owned by a U.S. state that were not integral parts of that U.S. state were claiming integral part status and thereby circumventing taxation of income not excluded by section 115. 6 Section 115(1) provides that gross income does not include income derived from the exercise of any essential governmental function and accruing to a U.S. state or any political subdivision thereof. To address that concern, Treas.Reg. § 301.7701-2(b)(6) requires an organization that is wholly owned by a U.S. state and that is not an integral part of that U.S. state to be recognized as an association taxable as a corporation for U.S. federal tax purposes. The income of such an organization is exempt from U.S. federal income tax only to the extent it can, pursuant to section 115, demonstrate that such income is derived from the exercise of any essential governmental function and accrues to a U.S. state or any political subdivision thereof. ******** 6 Simplification of Entity Classification Rules, 61 Fed.Reg. 21989, 21991 (May 13, 1996). See Treas.Reg. § 301.7701-1(a)(3), which provides that an organization wholly owned by a U.S. state is not recognized as a separate entity for U.S. federal tax purposes if it is an integral part of the U.S. state. Revenue Ruling 87-2, 1987-1 C.B. 18, provides that income earned by a U.S. state, a political subdivision of a U.S. state, or an integral part of a U.S. state or of a political subdivision of a U.S. state is generally not taxable in the absence of specific statutory authorization for taxing such income. ******** Similar concerns about foreign governments taking advantage of the favorable treatment afforded to integral parts arose for purposes of section 892. 7 Treas.Reg. § 1.892-2T(a) defines the term foreign government to mean only the integral parts 8 or controlled entities 9 of a foreign sovereign. Both an integral part and a controlled entity of a foreign sovereign are eligible for the section 892 exemption. An integral part of a foreign sovereign, however, does not lose its ability to claim the exemption with respect to income not derived from commercial activities even if the integral part engages in commercial activities (within the meaning of Treas.Reg. § 1.892-4T). 10 In contrast, if a controlled entity of a foreign sovereign conducts (or is treated as conducting) commercial activities, it loses the exemption under section 892 with respect to all of its income, including any income not derived from commercial activities. 11 The exemption does not apply to income derived from the conduct of any commercial activity (whether within or outside the United States), received by or received (directly or indirectly) from a controlled commercial entity (as defined in section 892(a)(2)(B), a "CCE"), or derived from the disposition of any interest in a CCE. 12 ******** 7 T.D. 9012, 67 Fed.Reg. 49862, 49864 (Aug. 1, 2002). See Clarification of Entity Classification Rules, 66 Fed.Reg. 2854, 2856 (Jan. 12, 2001). 8 See Treas.Reg. § 1.892-2T(a)(2). 9 See Treas.Reg. § 1.892-2T(a)(3). 10 See Treas.Reg. § 1.892-5T(d)(4), Example 1(a). 11 See id., Example 1(c). 12 See section 892(a)(2)(A). ******** Before Treas.Reg. § 301.7701-2(b)(6) was amended to include a business entity wholly owned by a foreign government, it was possible for an integral part of a foreign sovereign to form a disregarded entity for U.S. federal tax purposes and claim the exemption under section 892 with respect to income not derived from commercial activities, even if the disregarded entity was conducting commercial activities. The preamble to Prop.Treas.Reg. § 301.7701-2(b)(6) published in 2001, 13 which brought foreign government entities within scope, explains that: ******** 13 Clarification of Entity Classification Rules, 66 Fed.Reg. 2854, 2856 (Jan. 12, 2001). ******** The IRS and Treasury believe that it is appropriate to treat a foreign government similarly to a [U.S.] State in this context. Thus, to achieve parallel tax treatment under the check-the-box regulations of a business entity wholly owned by a [U.S.] State or any of its political subdivisions and a business entity wholly owned by a foreign government, these proposed regulations provide that a business entity wholly owned by a foreign government cannot elect to be treated as a disregarded entity. 14 ******** 14 66 Fed.Reg. at 2855. ******** When Treas.Reg. § 301.7701-2(b)(6) was amended in 2002 to include a business entity wholly owned by a foreign government, the "parallel tax treatment under the check-the-box regulations of a business entity wholly owned by a [U.S.] State or any of its political subdivisions and a business entity wholly owned by a foreign government" was accomplished by ensuring that a business entity wholly owned by a foreign government "cannot elect to be treated as a disregarded entity" for U.S. federal tax purposes. 15 Hence, the purpose of the modification was to ensure that a business entity whose sole owner is either an integral part or a controlled entity, and which otherwise would be treated as a disregarded entity, is a corporation (and thus subject to the CCE rules). The language of Treas.Reg. § 301.7701-2(b)(6) ("wholly owned by a foreign government or any other entity described in Treas.Reg. § 1.892-2T") may be read consistently with this intent, as the reference to "other entity described in § 1.892-2T" would be unnecessary unless the drafters considered it needed in order to include a controlled entity because they used the term "foreign government" to include only an integral part. Accordingly, the phrase "business entity wholly owned by a foreign government or any other entity described in § 1.892-2T" is properly construed as a business entity that is wholly owned directly by a single controlled entity or integral part and that thus does not have two or more owners. ******** 15 Id. ******** The Treasury Department and the IRS recognized that use of partnerships by foreign governments could present concerns similar to those presented by disregarded entities but chose to address those concerns differently. Rather than providing a special entity classification rule for partnerships similar to that provided by Treas.Reg. § 301.7701-2(b)(6) for disregarded entities, the Treasury Department and the IRS chose to address concerns presented by partnerships by treating them as potentially CCEs, in a separate rule that was promulgated in 2002 together with Treas.Reg. § 301.7701-2(b)(6). 16 Treas.Reg. § 1.892-5(a)(3) provides that, for purposes of section 892(a)(2)(B) (defining a CCE), the term "entity" means and includes a corporation, a partnership, a trust (including a pension trust described in Treas.Reg. § 1.892-2T(c)) and an estate. Before this regulation was finalized in T.D. 9012 on August 1, 2002, the term "entity" did not include a partnership. 17 Thus, concerns about foreign governments using partnerships to circumvent limitations within section 892 were addressed by adding "partnerships" to the types of entities that could be a CCE, which are not eligible for the exemption under section 892, 18 rather than (as in the case of disregarded entities) classifying them as corporations. As a result, classifying a partnership as a corporation pursuant to contemporaneously issued Treas.Reg. § 301.7701-2(b)(6) was unnecessary to protect the purposes of section 892. ******** 16 T.D. 9012, 67 Fed.Reg. 49862, 49864 (Aug. 1, 2002). 17 See T.D. 8211, 53 Fed.Reg. 24060, 24064 (June 27, 1988). The flush text under former Treas.Reg. § 1.892-5T(a) stated: "For purposes of this paragraph, the term 'entity' encompasses corporations and trusts (including pension trusts described in § 1.892-2T(c)) and estates." We note that Prop. Treas.Reg. § 1.892-5(a)(1), however, states: "For purposes of section 892 and the regulations thereunder, the term entity means and includes a corporation, a partnership, a trust (including a pension trust described in § 1.892-2T(c)), and an estate, and the term controlled commercial entity means any entity (including a controlled entity as defined in § 1.892-2T(a)(3)) engaged in commercial activities (as defined in §§ 1.892-4 and 1.892-4T) (whether conducted within or outside the United States)..." 76 Fed.Reg. 68119, 68122 (Nov. 3, 2011). The purpose for which the term "entity" is defined in this proposed regulation appears to be broader than is set forth in the temporary and final regulations, but the position of the sentence within the CCE rules suggests that it was intended to apply solely for CCE purposes. 18 See Clarification of Entity Classification Rules, 66 Fed.Reg. 2854, 2855 (Jan. 12, 2001) ("To ensure that investments in the United States by a foreign government through separate juridical entities are treated similarly, these proposed regulations under § 1.892-5(a) provide that, for purposes of section 892(a)(2)(B), the term entity also includes a partnership."). This rule was finalized in T.D. 9012, 67 Fed.Reg. 49862, 49864 (Aug. 1, 2002). If the Entity were to conduct (or be treated as conducting) commercial activities within the meaning of Treas.Reg. §§ 1.892-4T or 1.892-5T, it could be a CCE. ******** Each of the General Partners is an association taxable as a corporation for U.S. federal tax purposes and each will certify to the Entity on a Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting, indicating that it is classified as a "controlled entity" and not an "integral part" of the Province for purposes of section 892. Thus, the Entity has at least two owners (such that it could not be potentially classified as a disregarded entity for U.S. federal tax purposes) and hence should not be considered "wholly owned" within the meaning of Treas.Reg. § 301.7701-2(b)(6). Issue 2 - Whether the Entity is a corporation pursuant to Treas.Reg. § 301.7701-2(b)(7) by reason of section 892(a)(3). Treas.Reg. § 301.7701-2(b)(7) provides that, for U.S. federal tax purposes, the term corporation means a business entity that is taxable as a corporation under a provision of the Code other than section 7701(a)(3). Section 892(a)(3) provides that, for purposes of the Code, a foreign government shall be treated as a corporate resident of its country. 19 The provision also provides that a foreign government shall be so treated for purposes of any income tax treaty obligation of the United States if such government grants equivalent treatment to the Government of the United States. ******** 19 Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, §§ 1012(t), 1019(a), 102 Stat. 3342 (Nov. 10, 1988); Pub. L. No. 99-514, 100 Stat. 2085 (Oct. 22, 1986). ******** The phrase "corporate resident" is not used elsewhere in the Code, but Treasury regulations have interpreted it to mean that a foreign government is treated as a foreign corporation. 20 As a corporate controlled entity generally already would enjoy treaty protection (and a partnership as a general rule would not qualify as a treaty resident because it is not liable for tax), the purpose of section 892(a)(3) appears to be to clarify the treatment of an integral part. ******** 20 See, e.g., Treas.Reg. §§ 1.884-0(a), 1.1446-1(c)(1), and 1.1446-1(c)(2)(ii)(G). These Treasury regulations, however, do not distinguish between controlled entities and integral parts. ******** Under Treas.Reg. § 1.892-2T(a)(1), a foreign government "means only the integral parts or controlled entities of a foreign sovereign." While the word "only" conveys a limiting meaning, the sentence suggests that each controlled entity is considered the foreign government for purposes of section 892, in which case each controlled entity might be considered a corporate resident of its jurisdiction by reason of section 892(a)(3). However, there is no evidence that Congress, in enacting section 892(a)(3), intended that the entity classification of a controlled entity not otherwise classified as a corporation be changed to a corporation. To the contrary, such a construction of section 892(a)(3) would be inconsistent with the section 892(a)(3) treatment of a foreign government as a treaty resident, as noted above. Thus, the term "foreign government" in section 892(a)(3) may have been intended to be read as referring only to integral parts and not to controlled entities. If that were not the case, and the term "foreign government" in section 892(a)(3) were read as including not only integral parts but also controlled entities, the issue would arise whether a partnership is included within the term "controlled entity" such that section 892(a)(3) would reclassify the partnership on that basis. Treas.Reg. § 1.892-2T(a)(3) defines the term "controlled entity" as an "entity" that meets certain conditions, including that it directly or indirectly be wholly owned and controlled, but does not include a definition of the term "entity" for its purposes. Generally, the term "entity" for U.S. federal income tax purposes does include a partnership. 21 Nevertheless, it is possible that the term has a narrower meaning in a certain context. We also note that, whether a partnership is treated as an entity (or, instead as an aggregate of its partners) for purposes of a particular provision of the Code depends on which treatment is most appropriate to carry out the purposes of that provision. 22 ******** 21 For example, the term "business entity" for entity classification purposes is generally defined in terms of an "entity" that is recognized for U.S. federal income tax purposes. Treas.Reg. § 301.7701-2(a). Numerous Code and regulatory provisions use the term "entity" as including partnerships. 22 See H.R. CONF. REP. NO. 2543, 83rd Cong., 2d Sess. at 59 (1954); Holiday Village Shopping Center v. United States, 5 Cl. Ct. 566, 570 (1984), aff'd 773 F.2d 276 (Fed.Cir. 1985) (for purposes of section 1250); Casel v. Comm'r, 79 T.C. 424, 432-33 (1982) (for purposes of section 267). ******** With the exception of Treas.Reg. § 1.892-5(a)(3) (discussed below, defining a CCE), partnerships generally have been treated as aggregates rather than separate entities for purposes of section 892. 23 Such aggregate treatment of partnerships was evident beginning with the promulgation of the 1988 temporary regulations interpreting section 892. For example, the definition of the term "entity" for purposes of section 892(a)(2)(B) did not include partnerships until 2002. 24 A second example demonstrating the aggregate treatment of partnerships for purposes of section 892 are the rules attributing commercial activities, which treat "subsidiary controlled entities" differently than partnerships. Treas.Reg. § 1.892-5T(d)(2)(i) provides that commercial activities of a subsidiary controlled entity are not attributed to its parent, whereas Treas.Reg. § 1.892-5T(d)(3) provides that commercial activities of a partnership are attributable to its general and limited partners for purposes of section 892. 25 ******** 23 See, e.g., Treas.Reg. § 1.892-5T(d)(3) (attributing commercial activities of a partnership to its general and limited partners for purposes of section 892 but excepting therefrom partners of publicly traded partnerships). Exceptions to the general rule treating partnerships as aggregates are provided where the foreign government's relationship to the activities of the partnership supports treating the partnership as an entity. See, e.g., Prop.Treas.Reg. § 1.892-5(d)(5)(iii). 24 T.D. 9012, 67 Fed.Reg. 49862, 49864 (Aug. 1, 2002). 25 But see Income of Foreign Governments and International Organizations, 76 Fed.Reg. 68119, 68121 (Nov. 3, 2011) (proposed regulations providing that an entity that is not otherwise engaged in commercial activities will not be treated as engaged in commercial activities solely because it holds an interest as a limited partner in a limited partnership). ******** Aggregate rather than entity treatment of partnerships for purposes of Treas.Reg. § 1.892-2T(a)(3) - as for other purposes of section 892 where entity treatment of partnerships is not expressly provided - is consistent with the purpose and history of the concept of "controlled entity." That concept was developed to address uncertainty as to whether the section 892 exemption was available to entities separate from a foreign sovereign that would, but for the exemption, have been subject to U.S. tax on their income. The statutory language of section 892 generally exempts from U.S. tax certain income of foreign governments and does not expressly exempt any income of separate entities. Thus, the issue arose as to whether corporations owned by a foreign sovereign could claim exemption from U.S. tax on their income. This issue generally did not arise for partnerships owned by foreign sovereigns, because partnerships, unlike corporations, generally are not subject to U.S. tax on their income. 26 Thus, partnerships did not present the issue that the concept of a "controlled entity" was intended to address: whether an entity that otherwise would have been subject to U.S. tax on its investment income could rely on the section 892 exemption. ******** 26 See section 701, which was enacted in 1954 and states that "[a] partnership as such shall not be subject to the income tax imposed by this chapter." Section 701 refers to "this chapter" (chapter 1) while section 892(a)(1) states that certain income of foreign governments is exempt "under this subtitle." However, the taxes for which section 892 provides an exemption (section 892(a)(1)) are in fact described in chapter 1 of the subtitle. ******** Accordingly, the guidance issued by the IRS before the concept of "controlled entity" was introduced by Treasury regulations interpreting section 892 involved entities treated as corporations; that guidance considered whether a corporation wholly owned by a foreign government could qualify for the exemption under section 892. 27 The IRS issued Revenue Ruling 75-298 in the context of considering whether corporations wholly owned by a foreign government were exempt under section 892. 28 When the concept of a "controlled entity" for purposes of section 892 was introduced by proposed Treasury regulations in 1978, the preamble thereto stated that "[i]n most respects, the requirements relating to controlled entities parallel the requirements of Rev.Rul. 75-298, relating to certain organizations created by foreign governments that are eligible for the section 892 exemption." 29 ******** 27 See, e.g., S. REP. NO. 163, 87th Cong., 1st Sess. (1961), 1961-2 C.B. 351, 352-53 (describing the IRS's positions with respect to a corporation wholly owned by a foreign government). 28 Rev.Rul. 75-298, 1975-2 C.B. 290, revoking Rev.Rul. 66-73, 1966-1 C.B. 174 (examining whether an organization constitutes a corporation for purposes of section 892). 29 Income of Foreign Governments, 43 Fed.Reg. 36111, 36112 (Aug. 15, 1978). The definition of a "controlled entity" in the 1978 proposed regulations substantially mirrors that of the 1988 temporary regulations. Compare Treas.Reg. § 1.892-2T(a)(3) (not requiring, for example, that the organization not engage in the United States in commercial activities on more than a de minimis basis). ******** The addition of partnerships to the regulatory definition of the term "entity" for purposes of a CCE under section 892(a)(2)(B) was a limited departure from the treatment of partnerships as aggregates for purposes of section 892 and does not dictate the meaning of the term "entity" in the phrase "controlled entity." The change applied to a different and broader class of partnerships through which foreign governments invested and was not limited to controlled entities as defined in Treas.Reg. § 1.892-2T(a)(3). Specifically, a CCE includes any entity at least 50 percent owned by a foreign government, while only an entity that is 100 percent owned by a foreign sovereign can be a controlled entity. For purposes of section 892(a)(2)(B) only, Treas.Reg. § 1.892-5(a)(3) reflects the decision that treatment of a partnership as an entity is most appropriate for that provision. In reaching the conclusion that partnerships were not within the intended scope of "controlled entity," it is necessary to consider the reference to "partnerships" in the flush text under the definition of a "controlled entity" in Treas.Reg. § 1.892-2T(a)(3), which states: "[a] controlled entity does not include partnerships or any other entity owned and controlled by more than one foreign sovereign." Before the 1988 temporary regulations, such flush text stated only that a controlled entity "does not include any entity wholly owned and controlled by more than one foreign sovereign." 30 The 1988 temporary regulations revised this flush text to state that a controlled entity "does not include partnerships or any other entity wholly owned and controlled by more than one foreign sovereign." This reference to partnerships might be interpreted as referring only to partnerships owned by more than one foreign sovereign. In light of the analysis above that relies on the historic aggregate treatment of partnerships for purposes of section 892 and the history and purpose of the concept of "controlled entity" to construe section 892(a)(3) and interpret the regulations, however, this flush text should not be read to imply that a partnership wholly owned and controlled by a single foreign sovereign (indirectly through multiple controlled entities) is itself a "controlled entity." ******** 30 See T.D. 7707, 45 Fed.Reg. 48882, 48883 (July 22, 1980) (reciting then-Treas.Reg. § 1.892-1(b)(3)). ******** The General Partners represent that the Entity is an unincorporated organization formed to enable the General Partners to join together to carry on investment activities and to divide the profits and losses therefrom. The General Partners also represent that the Entity does not constitute a governing authority and, therefore, does not constitute an integral part of the Province within the meaning of Treas.Reg. § 1.892-2T(a)(2). Each of the General Partners is an association taxable as a corporation for U.S. federal tax purposes and each will certify to the Entity on a Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting, indicating that it is classified as a "controlled entity" and not an "integral part" of the Province for purposes of section 892. RULING Based solely on the information submitted and the representations made, the Entity is not classified as a corporation pursuant to Treas.Reg. § 301.7701-2(b)(6) or pursuant to Treas.Reg. § 301.7701-2(b)(7) by reason of section 892(a)(3). CAVEATS The ruling contained in this letter is based upon information and representations submitted by the Entity, the General Partners, and the Manager, and accompanied by a penalty of perjury statement executed by an appropriate party. This office has not verified any of the material submitted in support of the ruling request, and it is subject to verification on examination. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Furthermore, except as expressly provided in the ruling, no opinion is expressed or implied concerning the entity classification for U.S. federal tax purposes of any entity or party discussed herein. No opinion is expressed or implied concerning whether the Entity is treated as an integral part under Treas.Reg. § 1.892-2T(a)(2) or whether the General Partners, the Investors, or the Manager are treated as integral parts or controlled entities under Treas.Reg. § 1.892-2T(a) or controlled commercial entities under section 892(a)(2)(B), or whether any such entities satisfy the definitions under section 897(l) and Treas.Reg. § 1.897(l)-1(e)(11). No opinion is expressed or implied concerning whether any income received by any party qualifies for exemption from U.S. federal income tax under section 892 or section 897, or whether any party conducted commercial activities within the meaning of Treas.Reg. § 1.892-4T. This letter ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that this letter ruling may not be used or cited as precedent. This let ter ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter ruling. See Section 11 of Rev.Proc. 2023-1. If the taxpayer can demonstrate that the criteria in Section 11 of Rev.Proc. 2023-1 are satisfied, a letter ruling is not revoked or modified retroactively except in rare or unusual circumstances. A copy of this letter must be attached to any income tax return to which it is relevant. In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your authorized representatives. Sincerely, Joel S. Deuth Senior Counsel, Branch 5 Office of the Associate Chief Counsel (International) cc:

Private Letter Ruling Number: 202150028 Internal Revenue Service February 27, 2019 DEPARTMENT OF THE TREASURY INTERNAL REVENUE SEJWICE 1100 Commerce Street, MC 4920DAL Dallas, TX 75242 TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION Number: 202150028 Release Date: 12/17/2021 Date. Feb 27, 2019 Person to Contact: Identification Number: Contact Telephone Number: Telephone Number: Fax: EIN: UIL: 501.03 00 CERTIFIED MAIL - Return Receipt Requested Dear *******: This is a final determination that you do not qualify for exemption from Federal income tax under Internal Revenue Code (the "Code") section 501(a) as an organization described in Code section 501(c)(4) for the taxable year ended December 31, 20XX. Our adverse determination as to your exempt status was made for the following reason(s): You have not established that you were operated exclusively for exempt purposes within the meaning of Internal Revenue Code section 501(c)(4) and that no part of your net earnings inured to the benefit of private shareholders or individuals. You failed to respond to repeated reasonable requests to allow the Internal Revenue Service to examine your records regarding your receipts, expenditures, and activities as required by I.R.C. §§ 6001 and 6033(a)(1) and Rev.Rul. 59-95, 1959 1 C.B. 627. You also failed to respond to questions about the nature of your activities. In addition, your primary purpose was to benefit your members, not the community. Specifically, you did not extend access to your common areas to the general public and you have not established that you conferred benefit on the community and that you did not conduct exterior maintenance on private residences. As such, you failed to meet the requirements of I.R.C. § 501(c)(4) in that you have not established that you were operated exclusively for exempt purposes and that no part of your net earnings inured to the benefit of private shareholders or individuals. Organizations that are not exempt under section 501 generally are required to file federal income tax returns (Form 1120 or Form 1041) and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov. If you decide to contest this determination in court, you must initiate a suit for declaratory judgment under the provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination letter was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication 892. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 US Court of Federal Claims 717 Madison Place, NW Washington, DC 20005 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessment of any taxes due will not be delayed should a petition for declaratory judgment be filed under section 7428 of the Internal Revenue Code. You may also be eligible for help from the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778. If you have any questions, please contact the person whose name and telephone number are shown in the heading of this letter. Sincerely yours, Maria Hooke Director, EO Examinations Enclosures: Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Division Exempt Organizations Examination Date: August 21, 2018 Taxpayer ID number: Form: Tax periods ended: Person to contact: Employee ID number: Telephone number: Fax: Address: Manager's contact information: Employee ID number: Telephone number: Response due date: CERTIFIED MAIL -- Return Receipt Requested Dear *******: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that your organization doesn't qualify as an organization described in Internal Revenue Code (IRC) Section 501(c)(4). This letter is not a determination of your tax-exempt status under IRC Section 501 for any period other than the tax periods above. If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. Well issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(4) for the periods above. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. In the future, if you believe your organization qualifies for tax-exempt status and would like a status determination letter from the IRS, you can request a determination by filing Form 1024, Application for Recognition of Exemption Under Section 501(a), and paying the required user fee Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, for Maria Hooke Director, Exempt Organizations Examinations Enclosures: Form 6018 Form 4621-A Report of Examination Form 886-A Publication 892 Publication 3498-A Date of Notice: August 21, 20XX Issues: Whether ******* (the organization), which qualified for exemption from Federal income tax under Section 501(c)(4) of the Internal Revenue Code, should be revoked due to its failure to respond and produce records? Facts: ******* was incorporated on September 13, 20XX in the State of ******* to function as a homeowners' association The Articles of Incorporation, in part states that the organization was formed for the purpose to govern the affairs of that certain property. ******* applied for tax-exempt status by filing the Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, on September 26, 20XX, and was granted tax-exempt status as a 501(c)(3) on October 17, 20XX, with an effective date of September 13, 20XX. An organization exempt under 501(c)(3) needs to be organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes and to foster national and amatuer sports competition. ******* sent a letter on December 30, 20XX indicating the exemption approval letter dated October 17, 20XX was issued in error as ******* is neither a charity nor a private foundation, but a homeowner's association for the benefit of the members of the association only. ******* respectfully requested that Form 1023-EZ be rescinded along with the 501(c)(3) approval. In its place the organization is submitting the correct application, Form 1024 to be classified as a 501(c)(4). ******* applied for tax-exempt status by filing the Form 1024, Application for Recognition of Exemption Under Section 501(a) of the Internal Revenue Code, on January 14, 20XX. An organization exempt under 501(c)(4) as a homeowner's association must be able to show it serves the community rather than the private interest of its members. April 29, 20XX, ******* sent a written letter to withdraw the Form 1024 application along with Form 8940 Request for Miscellaneous Determination to terminate their 501(c)(3), private foundation status. May 29, 20XX, Letter 2244 was issued to *******, indicating the withdrawal of Form 1024 application would be requested in accordance with the organizations request. ******* filed Form 990-EZ with an Internal Revenue Service received date of May 15, 20XX. The return indicated the tax-exempt status as a 501(c)(4) organization. The return was signed and dated by *******, the President/Director on April 12, 20XX. ******* filed Form 990-N with an Internal Revenue Service received date of April 2, 20XX. The Form 990-N was submitted by ******* Organizations that have not received a ruling or determination letter granting tax-exempt status and that have filed a Form 990-EZ/990-N self-declaring their tax-exempt status can be disqualified from tax-exempt status for the specific self-declared tax years if it fails to qualify. The organization was selected for audit to ensure that the activities and operations align with their approved exempt status. The organization failed to respond to the Internal Revenue Service attempts to obtain information to perform an audit of Form 990-N for the tax year December 31, 20XX. The organization has not filed a Form 990 series return for the tax years January 1, 20XX through December 31, 20XX tax year. The Form 1023-EZ application and Form 1024 list the phone number of******* for *******, the Director of *******. - Correspondence for the audit was as follows: o Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization on February 7, 20XX, with a response date of March 7, 20XX. This letter was not returned by the post office as being undeliverable. o Letter 3844-A (Rev. 12-2015) with attachments, was mailed certified to the Director, ******* on March 13, 20XX, with a response date of April 13, 20XX, Article Number *******. Per the United States Postal Service (USPS) tracking, this item arrived at the Post Office at 8:00 am on March 26, 20XX in *******, *******. This letter was not returned by the post office as being undeliverable. o Letter 3844-A (12-2015), with attachments, was mailed certified to the Director, *******, per Form 1023 application, on March 13, 20XX, with a respond date of April 13, 20XX Article Number ******* This was signed for on March 20, 20XX, the signature was unreadable. o Letter 3844-A (12-2015), with attachments, was mailed to the Director, *******, on March 13, 20XX, with a respond date of April 13, 20XX. Article Number ******* This was signed for on March 23, 20XX by ******* o Letter 3844 A (12 2015), with attachments, was mailed to the President, *******, on March 13, 20XX, with a respond date of April 13, 20XX Article Number *******. This was signed for on March 23, 20XX, the signature was unreadable. o Letter 5077-B (1-2017), TE/GE IDR Delinquency Notice, with attachments Form 4564, Information Documents request, Form 1023-EZ, Letter 5437 and the Form 990-EZ was mailed to the *******, on April 17, 20XX, with a respond date of May 9, 20XX. Article Number *******. Per the United States Postal Service (USPS) tracking, this item was unclaimed and returned to the Internal Revenue Service on May 23, 20XX. o Letter 5077-B (1-2017), TE/GE IDR Delinquency Notice, with attachments Form 4564, Information Documents request, Form 1024, Form 8940, Request for Miscellaneous Determination, Letter 2244 and the Form 990-N was mailed to the *******, on August 13, 20XX with a respond date of August 27, 20XX. Article Number *******. - Telephone contact for the audit was as follows: o March 8, 20XX, Tax Compliance Officer (TCO) called the phone number listed on the Form 1023-EZ application for the Director of ******* and received VMS. Left a message for an officer of the organization to return my phone call. o March 13, 20XX, called the phone number listed on the Form 1023-EZ application for the Director of ******* and received VMS. Left a message for the Director to return my phone call. Called the phone number listed on the 990-EZ that was filed for the tax-period ending December 31, ******* for the President/Director, ******* of ******* and received VMS. Left a message for the President/Director to return my phone call. o April 5, 20XX, called the phone number listed on the Form 1023-EZ application for the Director of ******* and received VMS. Left a message for a return call. o April 10, 20XX, called the phone number listed on the Form 1023-EZ application for the Director of ******* and received VMS. Left a message for a return call. Law Section 501(c)(4) of the Internal Revenue Code provides that civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes and no part of the net earnings of such entity inures to the benefit of any private shareholder or individual may be exempt from federal income tax. Treasury Regulation section 1.501(c)(4)-1 provides that an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements and is not an action organization as set forth in paragraph (c)(3) of Regulation section 1.501(c)(3)-1. Treas.Reg. Section 1.501(c)(4)-1(a)(2)(i) provides that an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one, which is operated primarily for the purpose of bringing about civic betterments and social improvements. Rev.Rul. 69-280, 1969-1 CB 152, describes an organization formed to provide maintenance of exterior walls and roofs of homes of members who owned houses in a development. It was held that the organization was operated primarily for the private benefit of members and not operated primarily for the common good and general welfare of the people of the community. The services provided to members included maintenance of the exterior walls and roofs of the individual units. If a person purchases a unit in the housing development, he is required to become a member of the organization. The organization is supported entirely by annual dues charged members. The dues are based on the estimated expenses of the organization plus an amount for reserves to cover large expenditures, such as replacement of roofs. In Rev.Rul. 72-102, 1972-1 C.B. 149, an organization that was formed to preserve the appearance of a housing development and to maintain streets, sidewalks and common areas for use of the residents in the development was determined to qualify for exemption under Section 501(c)(4) of the Code. In Revenue Ruling 74-17, 1974-1 C.B. 130, an organization formed by the unit owners of a condominium housing project to provide for the management, maintenance, and care of the common areas of the project with membership assessments paid by the unit owners does not qualify for exemption under section 501(c)(4) of the Code. Condominium ownership involves ownership in common by all condominium unit owners of a great many so called common areas, the maintenance and care of which necessarily constitutes the provision of private benefits for the unit owners. Since the organization's activities are for the private benefit of its members, it cannot be said to be operated exclusively for the promotion of social welfare. Rev.Rul. 74-99, 1974-1 C.B. 131, modified Rev.Rul. 72-102 and held that a homeowners association, in order to qualify for exemption under Section 501(c)(4) of the Code, must, in addition to otherwise qualifying for exemption under Section 501(c)(4), satisfy the following requirements: (1) It must engage in activities that confer benefit on a community comprising a geographical unit which bears a reasonably recognizable relationship to an area ordinarily identified as a governmental subdivision or a unit or district thereof; (2) it must not conduct activities directed to the exterior maintenance of private residences; and (3) it owns and maintains only common areas or facilities such as roadways and parklands, sidewalks and street lights, access to, or the use and enjoyment of which is extended to members of the general public and is not restricted to members of the homeowners' association. IRC §6001 of the Code provides that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. IRC §6033(a)(1) of the Code provides, except as provided in section 6033(a)(2), every organization exempt from tax under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts and disbursements, and such other information for the purposes of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, and keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Regulation §1.6001-1(c) of the Code provides that such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and §§ 1.6033-1 through 1.6033-3. Regulation §1.6001-1(e) of the Code provides that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees, and shall he retained as long as the contents thereof may be material in the administration of any internal revenue law Regulation §1.6033-1(h)(2) of the regulations provides that every organization which has established its right to exemption from tax, whether or not it is required to file an annual return of information, shall submit such additional information as may be required by the district director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter F (section 501 and the following), chapter 1 of the Code and section 6033. Rev.Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Organization's Position Taxpayer's position is unknown at this time. Government's Position In accordance with the above-cited provisions of the Code and regulations under sections 6001 and 6033, organizations recognized as exempt from federal income tax must meet certain reporting requirements. These requirements relate to the filing of a complete and accurate annual information (and other required federal tax forms) and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated business income tax. Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations shall submit additional information for the purpose on enabling the Internal Revenue Service to inquire further into its exempt status. Using the rationale that was developed in Revenue Ruling 59-95, the Organization's failure to provide requested information should result in the termination of exempt status. Conclusion: It is the IRS's position that the organization failed to establish that it meets the reporting requirements under IRC §§ 6001 and 6033 to be recognized as exempt from federal income tax under IRC § 501(c)(4). Furthermore, the organization has not established that it is observing the conditions required for the continuation of its exempt status or that it is organized and operated exclusively for an exempt purpose. Accordingly, the organization's exempt status is revoked effective January 1, 20XX. Form 1120-H, U.S. Corporation Income Tax Return, should be filed for the tax periods after January 1, 20XX.

Private Letter Ruling Number: 202007013 Internal Revenue Service October 2, 2019 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202007013 Release Date: 2/14/2020 Index Number: 2632.00-00, 2642.00-00, 9100.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B04 PLR-109000-19 Date: October 02, 2019 Dear ********: This letter responds to your personal representative's letter of April 18, 2019, requesting an extension of time under § 2642(g) of the Internal Revenue Code (Code) and § 301.9100-3 of the Procedure and Administration Regulations to elect out of the generation-skipping transfer (GST) exemption automatic allocation rules with respect to certain transfers to trusts. The facts and representations submitted are as follows: On Date 1 of Year 1, Taxpayer established Trust 1, Trust 2 and Trust 3. Trust 1 benefits Child 1 and her issue, Trust 2 benefits Child 2 and her issue, and Trust 3 benefits Child 3 and her issue. Trust 1, Trust 2 and Trust 3 have GST Tax potential. Also on Date 1 of Year 1, Taxpayer established and funded three Irrevocable grantor retained annuity trusts (GRATs), GRAT 1, GRAT 2 and GRAT 3. Under the terms of GRAT 1, Taxpayer's retained interest terminated and any remaining principal passed to Trust 1 on Date 1 of Year 3. Under the terms of GRAT 2, Taxpayer's retained interest terminated and any remaining principal passed to Trust 2 on Date 1 of Year 3. Under the terms of GRAT 3, Taxpayer's retained interest terminated and any remaining principal passed to Trust 3 on Date 1 of Year 3. Thus, for GST tax purposes, the estate tax inclusion period (ETIP) with respect to GRATs 1 through 3 closed on Date 1 of Year 3. On Date 2 of Year 2, Taxpayer established and funded three additional GRATs, GRAT 4, GRAT 5 and GRAT 6. Under the terms of GRAT 4, Taxpayer's retained interest terminated and any remaining principal passed to Trust 1 on Date 2 of Year 4. Under the terms of GRAT 5, Taxpayer's retained interest terminated and any remaining principal passed to Trust 2 on Date 2 of Year 4. Under the terms of GRAT 6, Taxpayer's retained interest terminated and any remaining principal passed to Trust 3 on Date 2 of Year 4. Thus, for GST tax purposes, the ETIP with respect to GRATs 4 through 6 closed on Date 2 of Year 4. On Date 3 of Year 3, Taxpayer established and funded three additional GRATs, GRAT 7, GRAT 8 and GRAT 9. Under the terms of GRAT 7, Taxpayer's retained interest terminated and any remaining principal passed to Trust 1 on Date 3 of Year 5. Under the terms of GRAT 8, Taxpayer's retained interest terminated and any remaining principal passed to Trust 2 on Date 3 of Year 5. Under the terms of GRAT 9, Taxpayer's retained interest terminated and any remaining principal passed to Trust 3 on Date 3 of Year 5. Thus, for GST tax purposes, the ETIP with respect to GRATs 7 through 9 closed on Date 3 of Year 5. On Date 4 of Year 4, Taxpayer established and funded three additional GRATs, GRAT 10, GRAT 11 and GRAT 12. Under the terms of GRAT 10, Taxpayer's retained interest terminated and any remaining principal passed to Trust 1 on Date 4 of Year 6. Under the terms of GRAT 11, Taxpayer's retained interest terminated and any remaining principal passed to Trust 2 on Date 4 of Year 6. Under the terms of GRAT 12, Taxpayer's retained interest terminated and any remaining principal passed to Trust 3 on Date 4 of Year 6. Thus, for GST tax purposes, the ETIP with respect to GRATs 10 through 12 closed on Date 4 of Year 6. On Date 5 of Year 5, Taxpayer established and funded three additional GRATs, GRAT 13, GRAT 14 and GRAT 15. Under the terms of GRAT 13, Taxpayer's retained interest terminated and any remaining principal passed to Trust 1 on Date 5 of Year 7. Under the terms of GRAT 14, Taxpayer's retained interest terminated and any remaining principal passed to Trust 2 on Date 5 of Year 7. Under the terms of GRAT 15, Taxpayer's retained interest terminated and any remaining principal passed to Trust 3 on Date 5 of Year 7. Thus, for GST tax purposes, the ETIP with respect to GRATs 13 through 15 closed on Date 5 of Year 7. On Date 6 of Year 6, Taxpayer established and funded three additional GRATs, GRAT 16, GRAT 17 and GRAT 18. Under the terms of GRAT 16, Taxpayer's retained interest terminated and any remaining principal passed to Trust 1 on Date 6 of Year 8. Under the terms of GRAT 17, Taxpayer's retained interest terminated and any remaining principal passed to Trust 2 on Date 6 of Year 8. Under the terms of GRAT 18, Taxpayer's retained interest terminated and any remaining principal passed to Trust 3 on Date 6 of Year 8. Thus, for GST tax purposes, the ETIP with respect to GRATs 16 through 18 closed on Date 6 of Year 8. On Date 7 of Year 7, Taxpayer established and funded three additional GRATs, GRAT 19, GRAT 20 and GRAT 21. Under the terms of GRAT 19, Taxpayer's retained interest terminated and any remaining principal passed to Trust 1 on Date 7 of Year 9. Under the terms of GRAT 20, Taxpayer's retained interest terminated and any remaining principal passed to Trust 2 on Date 7 of Year 9. Under the terms of GRAT 21, Taxpayer's retained interest terminated and any remaining principal passed to Trust 3 on Date 7 of Year 9. Thus, for GST tax purposes, the ETIP with respect to GRATs 19 through 21 closed on Date 7 of Year 9. On Date 8 of Year 8, Taxpayer established and funded three additional GRATs, GRAT 22, GRAT 23 and GRAT 24. Under the terms of GRAT 22, Taxpayer's retained interest terminated and any remaining principal passed to Trust 1 on Date 8 of Year 10. Under the terms of GRAT 23, Taxpayer's retained interest terminated and any remaining principal passed to Trust 2 on Date 8 of Year 10. Under the terms of GRAT 24, Taxpayer's retained interest terminated and any remaining principal passed to Trust 3 on Date 8 of Year 10. Thus, for GST tax purposes, the ETIP with respect to GRATs 22 through 24 closed on Date 8 of Year 10. Taxpayer retained Accountant 1 to provide advice with respect to the tax consequences of the transfers to GRATs 1 through 3 and GRATs 10 through 24 and to file any necessary tax returns. Accountant 1 failed to advise Taxpayer of the rules under § 2632(c) regarding the automatic allocation of GST exemption and the ability to elect out of the automatic allocation of GST exemption by making an election under § 2632(c)(5). As a result, Taxpayer did not elect out of the automatic allocation of GST exemption on her Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return) for the transfers to GRATs 1 through 3 in Year 1 or GRATs 10 through 24 in Years 4 through 8. Taxpayer retained Accountant 2 to provide advice with respect to the tax consequences of the transfers to GRATs 4 through 9 and to file any necessary tax returns. Accountant 2 failed to advise Taxpayer of the rules under § 2632(c) regarding the automatic allocation of GST exemption and the ability to elect out of the automatic allocation of GST exemption by making an election under § 2632(c)(5). As a result, Taxpayer did not elect out of the automatic allocation of GST exemption on her Form 709 for the transfers to GRATs 4 through 9 in Year 2 and Year 3. GST exemption was automatically allocated to transfers made by Taxpayer to GRATs 1 through 24 at the expiration of the ETIP of each GRAT as a result of Taxpayer's failure to elect out of the GST exemption automatic allocation rules for the transfers to GRATs 1 through 24. The Taxpayer's personal representatives request the following rulings: 1. An extension of time under § 2642(g) and § 301.9100-3 to elect out of automatic allocation of GST exemption for the Year 1 transfers to GRATs 1 through 3. 2. An extension of time under § 2642(g) and § 301.9100-3 to elect out of automatic allocation of GST exemption for the Year 2 transfers to GRATs 4 through 6. 3. An extension of time under § 2642(g) and § 301.9100-3 to elect out of automatic allocation of GST exemption for the Year 3 transfers to GRATs 7 through 9. 4. An extension of time under § 2642(g) and § 301.9100-3 to elect out of automatic allocation of GST exemption for the Year 4 transfers to GRATs 10 through 12. 5. An extension of time under § 2642(g) and § 301.9100-3 to elect out of automatic allocation of GST exemption for the Year 5 transfers to GRATs 13 through 15. 6. An extension of time under § 2642(g) and § 301.9100-3 to elect out of automatic allocation of GST exemption for the Year 6 transfers to GRATs 16 through 18. 7. An extension of time under § 2642(g) and § 301.9100-3 to elect out of automatic allocation of GST exemption for the Year 7 transfers to GRATs 19 through 21. 8. An extension of time under § 2642(g) and § 301.9100-3 to elect out of automatic allocation of GST exemption for the Year 8 transfers to GRATs 22 through 24. Law and Analysis Section 2601 imposes a tax on every GST. A GST is defined under § 2611(a) as, (1) a taxable distribution, (2) a taxable termination, and (3) a direct skip. Section 2631(a) provides that, for purposes of determining the inclusion ratio, every individual shall be allowed a GST exemption amount which may be allocated by such individual (or his executor) to any property with respect to which such individual is the transferor. Section 2631(b) provides that any allocation under § 2631(a), once made, shall be irrevocable. Section 2632(c)(1) provides that if any individual makes an "indirect skip" during such individual's lifetime, any unused portion of such individual's GST exemption is treated as allocated to the property transferred to the extent necessary to make the inclusion ratio for such property zero. If the amount of the indirect skip exceeds such unused portion, the entire unused portion shall be allocated to the property transferred. Under § 2632(c)(3)(A), the term "indirect skip" means any transfer of property (other than a direct skip) subject to the tax imposed by chapter 12 made to a GST trust, as defined in § 2632(c)(3)(B). Under § 2632(c)(3)(B), a GST trust is a trust that could have GST potential with respect to the transferor unless the trust satisfies any of the exceptions listed in § 2632(c)(3)(B)(i)-(vi). Section 2632(c)(4) provides that for purposes of § 2632(c), an indirect skip to which § 2642(f) applies shall be deemed to have been made only at the close of the ETIP. The fair market value of such transfer shall be the fair market value of the trust property at the close of the ETIP. Section 2632(c)(5)(A)(i) provides, in part, that an individual may elect to have § 2632(c) not apply to an indirect skip or any or all transfers made by such individual to a particular trust. Section 2632(c)(5)(B)(ii) provides that the election may be made on a timely filed gift tax return for the calendar year for which the election is to become effective. Section 26.2632-1(b)(2)(i) of the Generation-Skipping Transfer Tax Regulations provides that, in the case of an indirect skip made after December 31, 2000, to which § 2642(f) (relating to transfers subject to the estate tax inclusion period or ETIP) does not apply, the transferor's unused GST exemption is automatically allocated to the property transferred (but not in excess of the fair market value of the property on the date of the transfer). This automatic allocation is effective whether or not a Form 709 is filed reporting the transfer, and is effective as of the date of the transfer to which it relates. An automatic allocation is irrevocable after the due date of the Form 709 for the calendar year in which the transfer is made. Section 26.2632-1(b)(2)(ii) provides that, except as otherwise provided, the transferor may prevent the automatic allocation of GST exemption with regard to an indirect skip by making an election as provided in § 26.2632-1(b)(2)(iii). Section 26.2632-1(b)(2)(iii)(A) provides, in relevant part, that a transferor may prevent (1) the automatic allocation of GST exemption (elect out) with respect to one or more (or all) current-year transfers made by the transferor to a specified trust or trusts and (2) the automatic allocation of GST exemption (elect out) with respect to all future transfers made by the transferor to a specified trust or trusts. Section 26.2632-1(b)(2)(iii)(B) provides that to elect out, the transferor must attach an election out statement to a Form 709 filed within the time period provided in § 26.2632-1(b)(2)(iii)(C). In general, the election out statement must identify the trust, and specifically must provide that the transferor is electing out of the automatic allocation of GST exemption with respect to the described transfer or transfers. Under § 26.2632-1(b)(2)(iii)(C), to elect out, the Form 709 with the attached election out statement must be filed on or before the due date for timely filing the Form 709 for the calendar year in which (1) for a transfer subject to § 2642(f), the ETIP closes or (2) for all other elections out, the first transfer to be covered by the election out was made. Section 26.2632-1(c)(1)(i) provides that a direct skip or an indirect skip that is subject to an ETIP is deemed to have been made only at the close of the ETIP. The transferor may prevent the automatic allocation of GST exemption to a direct skip or an indirect skip by electing out of the automatic allocation rules at any time prior to the due date of the Form 709 for the calendar year in which the close of the ETIP occurs (whether or not any transfer was made in the calendar year for which the Form 709 was filed, and whether or not a Form 709 otherwise would be required to be filed for that year). Section 2642(b)(1)(A) provides that, except as provided in § 2642(f), if the allocation of the GST exemption to any transfers of property is made on a gift tax return filed on or before the date prescribed by § 6075(b) for such transfer or is deemed to be made under § 2632(b)(1) or (c)(1), the value of such property for purposes of § 2642(a) shall be its value as finally determined for purposes of chapter 12 (within the meaning of § 2001(f)(2)), or, in the case of an allocation deemed to have been made at the close of an ETIP, its value at the time of the close of the ETIP. Section 2642(f)(1) provides that, for purposes of determining the inclusion ratio, if an individual makes an inter vivos transfer of property, and the value of such property would be includible in the gross estate of such individual under chapter 11 if such individual died immediately after making such transfer (other than by reason of § 2035), any allocation of GST exemption to such property shall not be made before the close of the ETIP (and the value of such property shall be determined under § 2642(f)(2)). If such transfer is a direct skip, such skip shall be treated as occurring as of the close of the ETIP. Section 2642(f)(3) provides that, for purposes of § 2642(f), the term "estate tax inclusion period" means any period after the transfer described in § 2642(f)(1) during which the value of the property involved in such transfer would be includible in the gross estate of the transferor under chapter 11 if he died. Section 2642(g)(1)(A) provides, generally, that the Secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of GST exemption described in § 2642(b)(1) or (2), and an election under § 2632(b)(3) or (c)(5). Section 2642(g)(1)(B) provides that in determining whether to grant relief under § 2642(g)(1), the Secretary shall take into account all relevant circumstances, including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the Secretary deems relevant. For purposes of determining whether to grant relief, the time for making the allocation (or election) shall be treated as if not expressly prescribed by statute. Notice 2001-50, 2001-2 C.B. 189, provides that, under § 2642(g)(1)(B), the time for allocating the GST exemption to lifetime transfers and transfers at death, the time for electing out of the automatic allocation rules, and the time for electing to treat any trust as a generation-skipping transfer trust are to be treated as if not expressly prescribed by statute. The Notice further provides that taxpayers may seek an extension of time to make an allocation described in § 2642(b)(1) or (b)(2) or an election described in § 2632(b)(3) or (c)(5) under the provisions of § 301.9100-3. Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make an election. Section 301.9100-2 provides an automatic extension of time for making certain elections. Section 301.9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation (and not expressly provided by statute). In accordance with § 2642(g)(1)(B) and Notice 2001-50, a taxpayer may seek an extension of time to make an allocation described in § 2642(b)(1) or (b)(2) or an election described in § 2632(b)(3) or (c)(5) under the provisions of § 301.9100-3. Section 301.9100-3(a) provides, in part, that requests for relief subject to § 301.9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government. Section 301.9100-3(b)(1)(v) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election. Based on the facts submitted and representations made, we conclude that the requirements of § 301.9100-3 have been satisfied for Ruling No. 1, Ruling No. 2, Ruling No. 3, Ruling No. 4, Ruling No. 5, Ruling No. 6, Ruling No. 7 and Ruling No. 8. Accordingly, Taxpayer is granted an extension of time of 120 days from the date of this letter to elect out of the automatic allocation rules with respect to the Year 1 transfers to GRATs 1 through 3, the Year 2 transfers to GRATs 4 through 6, the Year 3 transfers to GRATs 7 through 9, the Year 4 transfers to GRATs 10 through 12, the Year 5 transfers to GRATs 13 through 15, the Year 6 transfers to GRATs 16 through 18, the Year 7 transfers to GRATs 19 through 21, and the Year 8 transfers to GRATs 22 through 24. Each election should be made on an amended Form 709 and filed with the Cincinnati Service Center at the following address: Internal Revenue Service, Cincinnati Service Center - Stop 82, Cincinnati, OH 45999. A copy of this letter should be attached to the Form 709's. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives. Sincerely, Associate Chief Counsel Passthroughs and Special Industries Leslie H. Finlow By: Leslie H. Finlow Senior Technician Reviewer, Branch 4 Office of the Associate Chief Counsel (Passthroughs and Special Industries) Enclosures (2): Copy for § 6110 purposes Copy of this letter cc:

Private Letter Ruling Number: 202131004 Internal Revenue Service May 4, 2021 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202131004 Release Date: 8/6/2021 Index Number: 168.24-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B06 PLR-110019-20 Date: May 04, 2021 Dear *******: This letter responds to your request dated April 15, 2020, for a ruling regarding the application of Internal Revenue Code (Code) § 168(i)(10) and former § 46(f) to the facts described below. The relevant facts as represented in your submission are set forth below. FACTS Taxpayer, a State A corporation, is the parent company of a group of corporations (Group), the members of which include regulated natural gas and electric utility companies operating in a states. The Group files a consolidated federal income tax return on a calendar year basis using accrual methods of accounting. Company is a State B limited liability company wholly owned by Taxpayer and treated as a disregarded entity for federal income tax purposes. Company primarily operates as a natural gas and electric utility in State B and is regulated by Commission 1. As part of its plan to replace a substantial portion of its coal-fueled electric generating fleet, Company intends to invest in and purchase electricity from solar projects. These projects are intended to qualify for investment tax credits with respect to energy property under § 48. As of the date of this ruling request, Company expected to enter into a Build Transfer Agreement with an independent third party (Developer) in Month Year. Under the Build Transfer Agreement, Developer will develop the Facility. Company and an independent investor (Tax Equity Investor) will enter into a joint venture by forming Partnership, a limited liability company, that will be treated as a partnership for federal income tax purposes. Company and Tax Equity Investor will each contribute cash to Partnership. Company will assign its rights, interests, and obligations under the Build Transfer Agreement to Partnership. Partnership will purchase the Facility from Developer. The Facility will sell the energy generated directly to Company under either a wholesale power purchase agreement with a per megawatt hour charge or a fixed monthly price charge (Service Agreement). The Service Agreement will have a term of at least b years and will constitute a wholesale contract under the jurisdiction of Commission 2. The Service Agreement will be subject to separate approval by Commission 2 because Partnership will be making wholesale sales of energy to Company. The Service Agreement will have to be separately approved under Commission 2's process (under Statute 1) for assessing the justness and reasonableness of an affiliate contract. Prior to commencing sales pursuant to the Service Agreement, Partnership will obtain market-based rate authority from Commission 2, allowing it to make sales of electricity, capacity, and ancillary services at market-based rates, rather than cost-based rates with a regulated rate of return. Under the Service Agreement, Company will purchase c% of the electric output, capacity, and other marketable products or capabilities of the Facility. Prices under the Service Agreement will be determined on an arm's-length negotiated basis pursuant to market-based rate authority granted to Partnership by Commission 2 and will not be determined on a cost-of-service basis. The Service Agreement will also be submitted to Commission 1 for approval because the costs associated with Company's contractual purchases will be passed through to Company's retail customers. The costs associated with the purchase of electricity from Partnership will be included in Commission 1 Clause as a pass through to Company customers. Company's sale of electricity to its retail customers will be subject to regulation by Commission 1, and Company's equity interest in Partnership will be included in its rate base. Commission 1 will not have jurisdiction over sales of electricity between Partnership and Company, however. As it will purchase c% of the Facility's electrical power through the term of the Service Agreement, Company will make ongoing, periodic payments to Partnership pursuant to the Service Agreement. Partnership's profits, losses, cash, and investment tax credits will be allocated to Company and Tax Equity Investor in accordance with the LLC Agreement. At a future date, Company will have an option to purchase all of Tax Equity Investor's interests in Partnership for fair market value in accordance with the terms of the LLC Agreement. If the option is exercised, Company will then own d% of Partnership. The transactions described herein are contingent on Partnership receiving from Commission 2 both market-based authority for all of its sales of electricity, capacity, and ancillary services, as well as separate approval of the Service Agreement. RULING REQUESTED Taxpayer requests the following ruling: To the extent power is sold from the Facility under the Service Agreement, the Facility will not be public utility property under § 168(i)(10), and therefore, related depreciation deductions and investment tax credits will not be subject to the normalization rules of § 168 or former § 46(f). LAW AND ANALYSIS Section 168(f)(2) provides that the depreciation deduction determined under § 168 shall not apply to any public utility property (within the meaning of § 168(i)(10)) if the taxpayer does not use a normalization method of accounting. Section 168(i)(10) defines, in part, public utility property as property used predominantly in the trade or business of the furnishing or sale of electrical energy if the rates for such furnishing or sale, as the case may be, have been established or approved by a state or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any state or political subdivision thereof. Prior to the Revenue Reconciliation Act of 1990, § 168(i)(10) defined public utility property by means of a cross reference to § 167(l)(3)(A). Section 167(l)(3)(A) as then in effect contained the same definition of public utility property that is currently in § 168(i)(10). Section 1.167(l)-1(b) provides that under § 167(l)(3)(A), property is public utility property during any period in which it is used predominantly in a § 167(l) public utility activity. The term "section 167(l) public utility activity" means, in part, the trade or business of the furnishing or sale of electrical energy if the rates for such furnishing or sale, as the case may be, are regulated, i.e., have been established or approved by a regulatory body described in § 167(l)(3)(A). The term "regulatory body described in section 167(l)(3)(A)" means a state (including the District of Columbia) or political subdivision thereof, any agency or instrumentality of the United States, or a public service or public utility commission or other body of any state or political subdivision thereof similar to such a commission. The term "established or approved" includes the filing of a schedule of rates with a regulatory body which has the power to approve such rates, even though such body has taken no action on the filed schedule or generally leaves undisturbed rates filed by the taxpayer. The definitions of public utility property contained in § 168(i)(10) and former § 46(f)(5) are essentially the same. Pursuant to § 50(d)(2), rules similar to the rules of former § 46(f), as in effect on November 5, 1990, continue to determine whether an asset is public utility property for purposes of the investment tax credit normalization rules. As in effect at that time, former § 46(f)(5) defined public utility property by reference to former § 46(c)(3)(B). The regulations under former § 46 (of continuing applicability by virtue of § 50(d)(2)) contain an expanded definition of regulated rates in § 1.46-3(g)(2)(iii). This expanded definition embodies the notion of rates established or approved on a rate-of-return basis, where rate of return includes a fair return on the taxpayer's investment in providing such goods and services. Furthermore, rates are not "regulated" if they are established or approved on the basis of maintaining competition within an industry, insuring adequate service to customers of an industry, or charging "reasonable" rates within an industry. In addition to the definition in the § 46 regulations, there is an expressed reference to rate of return in § 1.167(l)-1(h)(6)(i). The operative rules for normalizing timing differences relating to use of different methods and periods of depreciation are only logical in the context of rate-of-return regulation. The normalization method, which must be used for public utility property to be eligible for the depreciation allowance available under § 168, is defined in terms of the method the taxpayer uses in computing its tax expense for purposes of establishing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account. Therefore, for purposes of the application of the normalization rules, the definition of public utility property is the same for purposes of the investment tax credit and depreciation. Thus, under both the depreciation and the investment tax credit normalization rule definitions, a facility must meet three requirements to be considered public utility property: 1. It must be used predominantly in the trade or business of the furnishing or sale of, inter alia, electrical energy; 2. The rates for such furnishing or sale must be established or approved by a state or political subdivision thereof, any agency or instrumentality of the United States, or by a public service or public utility commission or similar body of any state or political subdivision thereof; and 3. The rates so established or approved must be determined on a rate-of-return basis. The Facility will meet the first requirement as it will be used predominantly in the trade or business of the furnishing or sale of electrical energy. The Facility will also meet the second requirement as it will be subject to the jurisdiction of Commission 2. The Facility will not meet the third requirement because Partnership will use the Facility to sell the power the Facility generates at rates established on a market basis (and not on a rate-of-return or cost basis) under the wholesale Service Agreement. Such sales will be regulated by Commission 2 under market-based rates. Commission 1 will not be able to influence the contractual rates that Company will pay for electricity from the Facility as sales between Partnership and Company will not be subject to its jurisdiction. Accordingly, we conclude that: To the extent power is sold from the Facility under the Service Agreement, the Facility will not be public utility property under § 168(i)(10), and therefore, related depreciation deductions and investment tax credits will not be subject to the normalization rules of § 168 or former § 46(f). Except as explicitly determined above, no opinion is expressed or implied concerning the federal income tax consequences of the matters described above under any other provisions of the Code (including other subsections of § 168). Specifically, Taxpayer has not requested a ruling regarding whether Partnership will be respected as a partnership for federal income tax purposes nor provided a final partnership agreement for Partnership. Accordingly, nothing in this letter should be construed as providing a ruling or other determination that Partnership will be respected as a partnership or that any purported owner will be respected as a partner of Partnership for federal income tax purposes. In addition, no opinion is expressed concerning whether Partnership is eligible to elect out of partnership treatment under § 761 or whether the Service Agreement constitutes a service contract under § 7701(e). This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent. This ruling is based upon information and representations submitted on behalf of Taxpayer and accompanied by penalties of perjury statements executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for a ruling, it is subject to verification upon examination. In accordance with the power of attorney on file with this office, copies of this letter are being sent to your authorized representatives. We are also sending a copy of this letter to Director. Sincerely, Jennifer A. Records Senior Technician Reviewer, Branch 6 Office of the Associate Chief Counsel (Passthroughs and Special Industries) cc:

Private Letter Ruling Number: 202021005 Internal Revenue Service February 13, 2020 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202021005 Release Date: 5/22/2020 Index Number: 9100.02-00, 9100.04-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: Telephone Number: Refer Reply To: CC:ITA:B07 PLR-119271-19 Date: February 13, 2020 Dear ********: This letter ruling responds to a letter dated August 5, 2019, and supplemental correspondence, submitted by and on behalf of P and its affiliated entities, X1, X2, X3, X4, X5, X6, X7, and X8 (collectively referred to as "Taxpayer"), requesting an extension of time pursuant to §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make (1) an election not to deduct the additional first year depreciation under § 168(k) of the Internal Revenue Code for all classes of qualified property placed in service in the Taxable Year and (2) an election under § 59(e) to amortize qualified mining exploration and qualified development expenditures incurred in the Taxable Year over a ten-year period. All references in this letter to § 168(k) are treated as a reference to § 168(k) as in effect: (i) prior to amendment by the Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054 (December 22, 2017) (TCJA), and after amendment by § 143(b) of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), enacted as part of the Consolidated Appropriations Act, 2016, Division Q, Pub. L. 114-113, 129 Stat. 2242 (December 18, 2015), for property placed in service after December 31, 2015 and acquired before September 28, 2017. See § 143(b)(7)(A) of the PATH Act; or (ii) after amendment by § 13201 of the TCJA for property acquired and placed in service after September 27, 2017. See § 13201(h)(1) of the TCJA, as applicable. FACTS P represents that the facts are as follows: P is the common parent of an affiliated group of corporations that includes X1, X2, X3, X4, X5, X6, X7, and X8, and that files a consolidated federal income tax return. Taxpayer uses an accrual method of accounting. Taxpayer is a mining company that owns and operates precious metal mines and various exploration projects in Countries. Due to large losses incurred by Taxpayer, it desired to choose to make the election under § 168(k)(7) not to deduct additional first year depreciation for the Taxable Year and to elect under § 59(e) to amortize its qualified mining exploration and qualified development expenditures incurred during the Taxable Year over a ten-year period. Taxpayer has in prior years timely elected under § 59(e) to amortize its qualified mining exploration and qualified development expenditures over ten years. P had engaged Firm A to perform income tax compliance services for the Prior Years. After ending its tax services engagement with Firm A, on Date 1, P engaged Firm B to prepare its U.S. tax returns for the Taxable Year. Upon being engaged, Firm B promptly requested that Firm A transfer Taxpayer's electronic tax file information to Firm B in order to electronically file with the IRS. Despite multiple requests, Firm B did not obtain the information by the due date for filing IRS Form 7004, Application for Automatic Extension of Time, for the Taxable Year. As a result, Firm B determined it was most efficient to prepare P's Form 7004 for the Taxable Year in a PDF format and requested that P file the form by mail before the deadline. Firm B emailed a PDF copy of the completed Form 7004 to P on Date 2, together with six state tax extension forms. P timely mailed all state extensions, but unbeknownst to both P and Firm B, P either inadvertently failed to mail the Form 7004 or failed to retain proof of such mailing. Not realizing that Form 7004 was not filed, P filed IRS Form 1120 by Date 3, with all required forms and statements attached, including the election under § 168(k)(7) not to deduct additional first year depreciation and the election under § 59(e) to amortize mining exploration and developments expenditures over ten years. On Date 4, P received a notice from the IRS indicating that the tax return for the Taxable Year was late because the IRS did not have a record of receiving P's Form 7004 for the Taxable Year on or before the due date for such form. Upon receiving this information and reviewing its records, P located its registered mail receipts providing it had timely mailed all of its state tax extension forms; however, P was unable to locate any proof of mailing related to its Form 7004 for the Taxable Year. RULING REQUESTED Accordingly, Taxpayer requests an extension of time pursuant to §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make the election not to deduct the additional first year depreciation under § 168(k) for all classes of qualified property placed in service by P, X6, X7, and X8 in the Taxable Year and to make the election under § 59(e) to amortize mining exploration and development expenditures incurred by Taxpayer for the Taxable Year ratably over ten years. LAW AND ANALYSIS Section 168(k)(1) allows, in the taxable year that qualified property is placed in service, a 50-percent (or 100-percent upon amendment by §13201 of the TCJA) additional first year depreciation deduction for qualified property placed in service by the taxpayer during the Taxable Year. Section 168(k)(7) allows a taxpayer to elect out of additional first year depreciation for any class of property placed in service during the taxable year. For property acquired before September 28, 2017, section 4.04 of Rev. Proc. 2017-33, 2017-19 I.R.B. 1236, 1240, provides guidance regarding the election under § 168(k)(7) not to deduct the additional first year depreciation (the § 168(k)(7) election). Section 4.04(1) of Rev. Proc. 2017-33 provides that the rules for making the § 168(k)(7) election are similar to the rules for making the election under § 168(k)(2)(D)(iii) as in effect before the enactment of the PATH Act. As a result, the § 168(k)(7) election applies to all qualified property that is in the same class of property and placed in service in the same taxable year. Section 4.04(2) of Rev. Proc. 2017-33 provides that rules generally similar to the rules in § 1.168(k)-1(e)(2), (3), (5) and (7) of the Income Tax Regulations apply for purposes of § 168(k)(7) (prior to TCJA). Section 1.168(k)-1(e)(2) defines the term "class of property" as meaning, among other things, each class of property described in § 168(e) (for example, 5-year property). As a result of the amendments to § 168(k) by § 143(b) of the PATH Act, the term "class of property" also includes qualified improvement property as defined in § 168(k)(3) and depreciated under § 168. Section 1.168(k)-1(e)(3)(i) provides that the election not to deduct additional first year depreciation must be made by the due date (including extensions) of the federal tax return for the taxable year in which the property is placed in service by the taxpayer. Section 1.168(k)-1(e)(3)(ii) provides that the election not to deduct additional first year depreciation must be made in the manner prescribed on Form 4562, "Depreciation and Amortization," and its instructions. The instructions to Form 4562 for the Taxable Year provide that the election not to deduct the additional first year depreciation is made by attaching a statement to the taxpayer's timely filed tax return indicating that the taxpayer is electing not to deduct the additional first year depreciation and the class of property for which the taxpayer is making the election. Section 1.168(k)-1(e)(7)(i) provides that an election not to deduct the additional first year depreciation for a class of property that is qualified property, once made, may be revoked only with the written consent of the Commissioner of Internal Revenue. To seek the Commissioner's consent, the taxpayer must submit a request for a letter ruling. For property acquired after September 27, 2017, § 1.168(k)-2(f)(1) provides the rules for making the § 168(k)(7) election. Pursuant to § 1.168(k)-2(f)(1)(i), the § 168(k)(7) election applies to all qualified property that is in the same class of property and placed in service in the same taxable year. Section 1.168(k)-2(f)(1)(ii) defines the term "class of property" as meaning, among other things, each class of property described in § 168(e) (for example, 5-year property). The term "class of property" also includes qualified improvement property that is acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer after September 27, 2017, and before January 1, 2018. Section 1.168(k)-2(f)(1)(iii) provides the time and manner of making the § 168(k)(7) election. The rules in § 1.168(k)-2(f)(1)(iii) are similar to the above-mentioned rules in § 1.168(k)-1(e)(3). Section 616(a) allows a taxpayer, in general, to deduct expenditures paid or incurred during the taxable year for the development of a mine or other natural deposit (other than an oil or gas well) if paid or incurred after the existence of ores or minerals in commercially marketable quantities has been disclosed. Section 617(a) allows a taxpayer, in general, an election to deduct expenditures paid or incurred during the taxable year for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral; and paid or incurred before the beginning of the development stage of the mine. Section 617(a) further provides that in no case shall this subsection apply with respect to amounts paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of oil or gas or of any mineral with respect to which a deduction for percentage depletion is not allowable under § 613. Section 1.617-1(c)(1) provides that a taxpayer may elect to deduct exploration expenditures by deducting the expenditures either in the taxpayer's return for such taxable year or in an amended return filed before the expiration of the period for filing a claim for credit or refund of income tax for such taxable year. Section 1.617-1(c)(1)(ii) requires a taxpayer who makes an election to deduct the expenditures to state clearly on the taxpayer's income tax return for each taxable year for which the taxpayer deducts exploration expenditures the amount of the deduction claimed under § 617(a) with respect to each property or mine. Section 1.617-1(c)(2) provides that the election under § 617(a) may be made at any time before the expiration of the period prescribed for filing a claim for refund of the tax imposed by chapter 1 for the first taxable year for which the taxpayer desires to deduct exploration expenditures under § 617(a). Section 59(e)(1) allows a taxpayer, in general, to deduct ratably over the 10-year period any qualified expenditure to which an election under § 59(e) applies, beginning with the taxable year in which such expenditure was made. Section 59(e)(2)(D) includes in the definition of "qualified expenditure" any amount which, but for an election under § 59(e), would have been allowable as a deduction for the taxable year in which paid or incurred under § 616(a) (relating to the development of a mine or other natural deposits). Section 59(e)(2)(E) includes in the definition of "qualified expenditure" any amount which, but for an election under § 59(e), would have been allowable as a deduction for the taxable year in which paid or incurred under § 617(a) (relating to exploration for ore or other mineral deposits). Section 59(e)(3) specifically prohibits the deduction of the qualified expenditures under any other section of the Code if the option under § 59(e) is elected. Section 59(e)(4)(A) provides that an election under § 59(e)(1) may be made with respect to any portion of any qualified expenditure. Section 59(e)(4)(B) provides that an election made under § 59(e) may be revoked only with the consent of the Secretary. Section 1.59-1(b)(1) prescribes the time and manner of making the election under § 59(e). According to § 1.59-1(b)(1), an election under § 59(e) shall only be made by attaching a statement to the taxpayer's income tax return (or amended return) for the taxable year in which the amortization of the qualified expenditures subject to the § 59(e) election begins. The taxpayer must file the statement no later than the date prescribed by law for filing the taxpayer's original income tax return (including any extensions of time) for the taxable year in which the amortization of the qualified expenditures subject to the § 59(e) election begins and include certain required information. Section 1.59-1(b)(2) provides, in part, that a taxpayer may make an election under § 59(e) with respect to any portion of any qualified expenditure paid or incurred by the taxpayer in the taxable year to which the election applies. An election under § 59(e) must be for a specific dollar amount and the amount subject to an election under § 59(e) may not be made by reference to a formula. Under § 301.9100-1(a), the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election. Section 301.9100-1(b) provides that the term "regulatory election" includes an election whose due date is prescribed by a regulation published in the Federal Register. Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make an election. Section 301.9100-2 provides automatic extensions of time for making certain elections. Section 301.9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of § 301.9100-2. Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the Government. CONCLUSION Based solely on the information submitted and representations made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Accordingly, Taxpayer is granted an extension of time to make (1) the election not to deduct the additional first year depreciation under § 168(k) for all classes of qualified property placed in service by P, X6, X7, and X8 in the Taxable Year, and (2) the election under § 59(e) to deduct development and mining exploration expenditures described in §§ 616(a) and 617(a) incurred by Taxpayer for the Taxable Year ratably over a 10-year period. In this regard, we will consider these elections made by Taxpayer on P's consolidated federal income tax return for the Taxable Year filed on Date 3, to be timely made. Except as specifically ruled upon above, no opinion is expressed or implied concerning the tax consequences of the facts described above under any other provisions of the Code (including other subsections of § 168). Specifically, no opinion is expressed or implied on (1) whether any item of depreciable property placed in service by Taxpayer in the Taxable Year, is eligible for the 50-percent or 100-percent additional first year depreciation deduction under § 168(k) or (2) whether Taxpayer's classification of any item of depreciable property under § 168(e) or Rev. Proc. 87-56, 1987-2 C.B. 674, is correct. Furthermore, we express or imply no opinion on whether Taxpayer satisfies the requirements of § 59(e), § 616(a), or § 617(a). Moreover, this letter ruling does not grant an extension of time for filing P's consolidated federal income tax return for the Taxable Year. The rulings contained in this letter are based upon information and representations submitted by P and accompanied by penalty of perjury statements executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter ruling is being sent to your authorized representatives. We also are sending a copy of this letter ruling to the appropriate operating division director. A copy of this letter must be attached to any federal income tax return to which it is relevant. Alternatively, a taxpayer filing its federal return electronically may satisfy this requirement by attaching a statement to the return that provides the date and control number of the letter ruling. Sincerely, Kathleen Reed Kathleen Reed Branch Chief, Branch 7 Office of Associate Chief Counsel (Income Tax & Accounting) Enclosures (2): Copy for section 6110 purposes Copy of this letter cc:

Revenue Ruling 2022-17 Internal Revenue Service 2022-36 I.R.B. 182 Section 1274.--Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property (Also Sections 42, 280G, 382, 467, 468, 482, 483, 1288, 7520, 7872.) Rev. Rul. 2022-17 This revenue ruling provides various prescribed rates for federal income tax purposes for September 2022 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(1) for buildings placed in service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, shall not be less than 9%. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.

Private Letter Ruling Number: 202326016 Internal Revenue Service March 28, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202326016 Release Date: 6/30/2023 Index Number: 2632.00-00, 2642.00-00, 9100.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:4 PLR-122977-22 Date: March 28, 2023 Dear ******: This letter responds to your authorized representatives' letter dated October 3, 2022, and subsequent correspondence, requesting an extension of time under § 2642(g) of the Internal Revenue Code and § 301.9100-3 of the Procedure and Administration Regulations to elect out under § 2632(c)(5) of the generation-skipping transfer (GST) exemption automatic allocation rules with respect to certain transfers to trusts. The facts and representations submitted are as follows: On Date 1 in Year 1, a date after December 31, 2000, Taxpayer established and funded Trust 1, an irrevocable trust. Trust 1 provided for the payment of an annuity to Taxpayer for a term of years. Upon expiration of the term, Trust 1 provided for allocation of the remainder to separate trusts, one for the benefit of each of Taxpayer's Children and the child's descendants (Children's Trusts). Children's Trusts have GST potential. For GST tax purposes, the estate tax inclusion period (ETIP) closed on Date 1 of Year 3 with respect to Trust 1. On Date 1 in Year 2, Taxpayer established and funded Trust 2, an irrevocable trust. Trust 2 provided for the payment of an annuity to Taxpayer for a term of years. Upon expiration of the term, the remainder of Trust 2 was distributed in equal shares to Children's Trusts. For GST tax purposes, the ETIP closed on Date 1 of Year 4 with respect to Trust 2. On Date 1 of Year 3, Taxpayer established and funded Trust 3, an irrevocable trust. Trust 3 provided for the payment of an annuity to Taxpayer for a term of years. Upon expiration of the term, the remainder of Trust 3 was distributed in equal shares to Children's Trusts. For GST tax purposes, the ETIP closed on Date 1 of Year 5 with respect to Trust 3. On Date 1 of Year 4, Taxpayer established and funded Trust 4, an irrevocable trust. Trust 4 provided for the payment of an annuity to Taxpayer for a term of years. Upon expiration of the term, the remainder of Trust 4 was distributed in equal shares to Children's Trusts. For GST tax purposes, the ETIP closed on Date 1 of Year 6 with respect to Trust 4. On Date 2 of Year 5, Taxpayer established and funded Trust 5, an irrevocable trust. Trust 5 provided for the payment of an annuity to Taxpayer for a term of years. Upon expiration of the term, the remainder of Trust 5 was distributed in equal shares to Children's Trusts. For GST tax purposes, the ETIP closed on Date 2 of Year 7 with respect to Trust 5. On Date 2 of Year 5, Taxpayer also established and funded Trust 6, an irrevocable trust. Trust 6 provided for the payment of an annuity to Taxpayer for a term of years. Upon expiration of the term, the remainder of Trust 6 was distributed in equal shares to Children's Trusts. For GST tax purposes, the ETIP closed on Date 2 of Year 10 with respect to Trust 6. On Date 2 of Year 6, Taxpayer established and funded Trust 7, an irrevocable trust. Trust 7 provided for the payment of an annuity to Taxpayer for a term of years. Upon expiration of the term, the remainder of Trust 7 was distributed in equal shares to Children's Trusts. For GST tax purposes, the ETIP closed on Date 2 of Year 8 with respect to Trust 7. On Date 3 of Year 8, Taxpayer established and funded Trust 8, an irrevocable trust. Trust 8 provided for the payment of an annuity to Taxpayer for a term of years. Upon expiration of the term, the remainder of Trust 8 was distributed in equal shares to Children's Trusts. For GST tax purposes, the ETIP closed on Date 3 of Year 10 with respect to Trust 8. On Date 4 of Year 8, Taxpayer also made gifts to Children's Trusts. On Date 5 of Year 9, Taxpayer established and funded Trust 9, an irrevocable trust. Trust 9 provided for the payment of an annuity to Taxpayer for a term of years. Upon expiration of the term, the remainder of Trust 9 was distributed in equal shares to Children's Trusts. For GST tax purposes, the ETIP closed on Date 4 of Year 11 with respect to Trust 9. Taxpayer represents that, to date, no taxable distributions, taxable terminations, or any other events have occurred with respect to Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, Trust 6, Trust 7, Trust 8, and Trust 9 that would give rise to a GST tax liability. In addition, Taxpayer represents that no transfers other than those described above have been made to Children's Trusts. Taxpayer and Spouse retained Firm to provide tax advice with respect to the creation and funding of Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, Trust 6, Trust 7, Trust 8, Trust 9, and Children's Trusts and to prepare Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Returns, for Years 1 through 11. On the Forms 709 for Years 1 through 11, Taxpayer and Spouse signified their consent to treat all of the gifts occurring in Years 1 through 11 as having been made one-half by each of them under § 2513. Taxpayer and Spouse did not intend for any portion of GST exemption to be applied to the transfers made to Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, Trust 6, Trust 7, Trust 8, Trust 9, and Children's Trusts. Firm, however, did not advise Taxpayer and Spouse of the rules under § 2632(c) regarding the automatic allocation of GST exemption and the ability to elect out of automatic allocation by making an election under § 2632(c)(5). As a result, Taxpayer and Spouse failed to elect out of the automatic allocation of GST exemption for the transfers to Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, Trust 6, Trust 7, Trust 8, Trust 9, and Children's Trusts. In Year 12, Firm discovered the failure to make an election under § 2632(c)(5) to elect out of the automatic allocation of GST exemption. Taxpayer requests an extension of time under § 2642(g) and § 301.9100-3 to elect out of the automatic allocation of GST exemption under § 2632(c)(5)(A)(i)(I) for the transfers to Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, Trust 6, Trust 7, Trust 8, and Trust 9 and under § 2632(c)(5)(A)(i)(II) for the transfers to Children's Trusts. Law and Analysis Section 2513(a)(1) provides that a gift made by one spouse to any person other than his spouse shall be considered as made one-half by him and one-half by his spouse, but only if at the time of the gift each spouse is a citizen or resident of the United States. Under § 2513(a)(2), paragraph (a)(1) only applies if both spouses have signified their consent to the application of paragraph (a)(1) in the case of all such gifts made during the calendar year by either while married to the other. Section 2601 imposes a tax on every GST. A GST is defined under § 2611(a) as, (1) a taxable distribution, (2) a taxable termination, and (3) a direct skip. Section 2602 provides that the amount of GST tax is the taxable amount multiplied by the applicable rate. Section 2641(a) defines applicable rate as the product of the maximum federal estate tax rate and the inclusion ratio with respect to the transfer. Section 2631(a) provides that, for purposes of determining the inclusion ratio, every individual shall be allowed a GST exemption amount which may be allocated by such individual (or their executor) to any property with respect to which such individual is the transferor. Section 2631(b) provides that any allocation under § 2631(a), once made, shall be irrevocable. Section 2652(a)(1) provides, in part, that the term "transferor" means in the case of any property subject to the tax imposed by chapter 12, the donor. Section 2652(a)(2) provides that if, under § 2513, one-half of a gift is treated as made by an individual and one-half of such gift is treated as made by the spouse of such individual, such gift shall be so treated for purposes of chapter 13. Section 2632(a)(1) provides that any allocation by an individual of GST exemption under § 2631(a) may be made at any time on or before the date prescribed for filing the estate tax return for such individual's estate (determined with regard to extensions), regardless of whether such a return is required to be filed. Section 2632(c)(1) provides that if any individual makes an indirect skip during such individual's lifetime, any unused portion of such individual's GST exemption shall be allocated to the property transferred to the extent necessary to make the inclusion ratio for such property zero. If the amount of the indirect skip exceeds such unused portion, the entire unused portion shall be allocated to the property transferred. Under § 2632(c)(3)(A), the term "indirect skip" means any transfer of property (other than a direct skip) subject to the tax imposed by chapter 12 made to a GST trust. Section 2632(c)(3)(B) provides, in part, that the term "GST trust" means a trust that could have a generation-skipping transfer with respect to the transferor unless an exception enumerated in § 2632(c)(3)(B)(i)-(vi) applies. Section 2632(c)(4) provides that for purposes of § 2632(c), an indirect skip to which § 2642(f) applies shall be deemed to have been made only at the close of the ETIP. The fair market value of such transfer shall be the fair market value of the trust property at the close of the ETIP. Section 2632(c)(5)(A)(i) provides, in relevant part, that an individual may elect to have § 2632(c) not apply to (I) an indirect skip, or (II) any and all transfers made by such individual to a particular trust. Section 2632(c)(5)(B)(i) provides that an election under § 2632(c)(5)(A)(i)(I) shall be deemed to be timely if filed on a timely filed gift tax return for the calendar year in which the transfer was deemed to have been made pursuant to § 2632(c)(4). Section 2632(c)(5)(B)(ii) provides that an election under § 2632(c)(5)(A)(i)(II) may be made on a timely filed gift tax return for the calendar year for which the election is to become effective. Section 26.2632-1(b)(2)(i) of the Generation-Skipping Transfer Tax Regulations provides that, in the case of an indirect skip made after December 31, 2000, to which § 2642(f) (relating to transfers subject to an ETIP) does not apply, the transferor's unused GST exemption is automatically allocated to the property transferred (but not in excess of the fair market value of the property on the date of the transfer). This automatic allocation is effective whether or not a Form 709 is filed reporting the transfer, and is effective as of the date of the transfer to which it relates. An automatic allocation is irrevocable after the due date of the Form 709 for the calendar year in which the transfer is made. In the case of an indirect skip to which section 2642(f) does apply, the indirect skip is deemed to be made at the close of the ETIP and the GST exemption is deemed to be allocated at that time. Section 26.2632-1(b)(2)(ii) provides that, except as otherwise provided, the transferor may prevent the automatic allocation of GST exemption with regard to an indirect skip (including indirect skips to which section 2642(f) may apply) by making an election as provided in § 26.2632-1(b)(2)(iii). Section 26.2632-1(b)(2)(iii)(A) provides, in relevant part, that a transferor may prevent the automatic allocation of GST exemption (elect out) with respect to any transfer or transfers constituting an indirect skip made to a trust or to one or more separate shares that are treated as separate trusts under § 26.2654-1(a)(1). A transferor may elect out with respect to - (1) one or more prior-year transfers subject to § 2642(f) (regarding ETIPs) made by the transferor to a specified trust or trusts; (2) one or more (or all) current year transfers made by the transferor to a specified trust or trusts; (3) one or more (or all future transfers made by the transferor to a specified trust or trusts; (4) all future transfers made by the transferor to all trusts (whether or not in existence at the time of the election out); or (5) any combination of (1) through (4). Section 26.2632-1(b)(2)(iii)(B) provides that to elect out, the transferor must attach an election out statement to a Form 709 filed within the time period provided in § 26.2632-1(b)(2)(iii)(C). In general, the election out statement must identify the trust, and specifically must provide that the transferor is electing out of the automatic allocation of GST exemption with respect to the described transfer or transfers. Under § 26.2632-1(b)(2)(iii)(C), to elect out, the Form 709 with the attached election out statement must be filed on or before the due date for timely filing the Form 709 for the calendar year in which the ETIP closes. Section 26.2632-1(c)(1)(i) provides that a direct skip or an indirect skip that is subject to an ETIP is deemed to have been made only at the close of the ETIP. The transferor may prevent the automatic allocation of GST exemption to a direct skip or an indirect skip by electing out of the automatic allocation rules at any time prior to the due date of the Form 709 for the calendar year in which the close of the ETIP occurs (whether or not any transfer was made in the calendar year for which the Form 709 was filed, and whether or not a Form 709 otherwise would be required to be filed for that year). Section 2642(b)(1)(A) provides that, except as provided in § 2642(f), if the allocation of the GST exemption to any transfers of property is made on a gift tax return filed on or before the date prescribed by § 6075(b) for such transfer or is deemed to be made under § 2632(b)(1) or (c)(1), the value of such property for purposes of § 2642(a) shall be its value as finally determined for purposes of chapter 12 (within the meaning of § 2001(f)(2)), or, in the case of an allocation deemed to have been made at the close of an ETIP, its value at the time of the close of the ETIP. Section 2642(f)(1) provides that for purposes of determining the inclusion ratio, if an individual makes an inter vivos transfer of property, and the value of such property would be includible in the gross estate of such individual under chapter 11 if such individual died immediately after making such transfer (other than by reason of § 2035), any allocation of GST exemption to such property shall not be made before the close of the ETIP (and the value of such property shall be determined under § 2642(f)(2)). Section 2642(f)(3) provides that for purposes of § 2642(f), the term "estate tax inclusion period" means any period after the transfer described in paragraph (1) during which the value of the property involved in such transfer would be includible in the gross estate of the transferor under chapter 11 if the transferor died. Section 2642(g)(1)(A) provides, generally, that the Secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an election under § 2632(c)(5). Section 2642(g)(1)(B) provides that in determining whether to grant relief under § 2642(g)(1), the Secretary shall take into account all relevant circumstances, including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the Secretary deems relevant. For purposes of determining whether to grant relief, the time for making the allocation (or election) shall be treated as if not expressly prescribed by statute. Notice 2001-50, 2001-2 C.B. 189, provides that, under § 2642(g)(1)(B), the time for allocating the GST exemption to lifetime transfers and transfers at death, the time for electing out of the automatic allocation rules, and the time for electing to treat any trust as a GST trust are to be treated as if not expressly prescribed by statute. The Notice further provides that taxpayers may seek an extension of time to make an allocation described in § 2642(b)(1) or (2) or an election described in § 2632(b)(3) or (c)(5) under the provisions of § 301.9100-3. Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make an election. Section 301.9100-2 provides an automatic extension of time for making certain elections. Section 301.9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation (and not expressly provided by statute). In accordance with § 2642(g)(1)(B) and Notice 2001-50, a taxpayer may seek an extension of time to make an allocation described in § 2642(b)(1) or (b)(2) or an election described in § 2632(b)(3) or (c)(5) under the provisions of § 301.9100-3. Section 301.9100-3(a) provides, in part, that requests for relief subject to § 301.9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government. Under § 301.9100-3(b)(1)(v), a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election. Based upon the facts submitted and representations made, we conclude that the requirements of § 301.9100-3 have been satisfied. Accordingly, Taxpayer is granted an extension of time of 120 days from the date of this letter to elect out of the automatic allocation rules under § 2632(c)(5)(A)(i)(I) with respect to the Year 1 transfer to Trust 1, Year 2 transfer to Trust 2, Year 3 transfer to Trust 3, Year 4 transfer to Trust 4, Year 5 transfers to Trust 5 and Trust 6, Year 6 transfer to Trust 7, Year 8 transfer to Trust 8, and Year 9 transfer to Trust 9 and under § 2632(c)(5)(A)(i)(II) with respect to the Year 8 transfers to Children's Trusts. Each election should be made on an amended Form 709 for the year in which the ETIP closed. Taxpayer should file the amended Forms 709 with the Internal Revenue Service Center at the following address: Internal Revenue Service Center, Attn: E&G, Stop 824G, 7940 Kentucky Drive, Florence, KY 41042-2915. Taxpayer should attach a copy of this letter to the amended Forms 709. The rulings contained in this letter are based upon information and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives. Sincerely, Associate Chief Counsel (Passthroughs & Special Industries) By: Karlene M. Lesho Karlene M. Lesho Chief, Branch 4 Office of the Associate Chief Counsel (Passthroughs & Special Industries) Enclosure Copy for § 6110 purposes cc:

Internal Revenue Service - Information Release IR-2024-163 2024 IRS Nationwide Tax Forum: Educational seminars, special events announced focusing on tax security, scams, practice management and beneficial ownership information June 12, 2024 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 2024 IRS Nationwide Tax Forum: Educational seminars, special events announced focusing on tax security, scams, practice management and beneficial ownership information Early bird registration rate expires June 17 IR-2024-163, June 12, 2024 WASHINGTON -- The Internal Revenue Service today announced the continuing education agenda for the 2024 Nationwide Tax Forum featuring 45 seminars on a wide array of topics that will help tax professionals serve their clients. This year's agenda, featuring speakers from the IRS and leading tax associations, includes topics ranging from tax law updates to managing client examinations, from digital assets to the Secure Act 2.0, and from the Employee Retention Credit to clean energy credits. In the keynote address and plenary session, IRS leadership will focus on the agency's ongoing work to improve service and transform enforcement and compliance activities. In addition to the regular tax law update and ethics courses, this year's forum is hosting two panel discussions on cybersecurity: "Tax Pros and Security - Real-Life Threats and Steps to Protect Your Business" and "IRS Security Summit and the Written Information Security Plan." In addition, experts from the Pell Center will present "Cybersecurity for Tax Professionals." The Nationwide Tax Forum will also equip tax pros to join in the fight against abusive scams, schemes and fraud with three seminars on the topic. Six of this year's most popular topics will be presented in both English and Spanish. Altogether, attendees can earn up to 19 continuing education credits by attending one of the five forums in Chicago, Orlando, Baltimore, Dallas or San Diego. In addition to the regular seminar lineup, attendees at the Nationwide Tax Forum can attend all of the following special events: Practice management / Prácticas de administración Monday: English from 5 p.m. -6:30 p.m.; Spanish from 7 p.m. -8:30 p.m. Looking for ways to grow or improve your tax business? Maximize your time at the forum by participating in this special Monday session. Tax forum association partners from the National Association of Enrolled Agents, National Association of Tax Professionals, National Society of Accountants, National Society of Tax Professionals and Padgett Business Services will present ideas on how you can attract and manage customers, increase your productivity and have a more satisfying work-life balance. ¿ Busca formas de hacer crecer o mejorar su negocio de impuestos ? Maximice su tiempo en el foro participando en esta sesión especial el lunes a las 5 p.m. ( en inglés ). A las 7 p.m. se llevará a cabo la sesión en español, con colaboradores de Advanced Accounting & Tax Services, American Tax Club, BMS of Arizona Corp., Freedom Tax Resolution, Latin Tax Academy, Latino Tax Professional, Midland LDU Insurance and Tax Services, National Association of Enrolled Agents, NAVA School of Business, Noba Digital Academy y Tax Solutions & Bookkeeping LLC. Scams and schemes panel discussion with CERCA Wednesday: 12 p.m. -1 p.m. Have you been victimized by a tax scam? Scammers are targeting the tax pro community. Join CERCA's members from the tax and software community and IRS leaders for a panel discussion that will equip tax professionals to protect themselves and their clients. National Taxpayer Advocate Town Hall Wednesday: 4:30 p.m.-5:30 p.m. Join National Taxpayer Advocate Erin Collins during the Nationwide Tax Forum Networking Reception to discuss emerging issues facing taxpayers and tax professionals. She wants to hear from the tax professional community and welcomes tax pro participation in addressing these concerns. The program includes a Q&A session. Beneficial ownership information reporting Wednesday: 5:45 p.m.-6:45 p.m. A new law affecting many small businesses - including many tax practices - went into effect in 2024 requiring companies to report ownership information to the Treasury Department's Financial Crimes Enforcement Network (FinCEN). This bonus session, featuring representatives from FinCen and the IRS, will explain what tax professionals need to do to comply with the new reporting requirements. The special events do not convey continuing education credit. Early bird deadline approaching Register by 5 p.m. ET on June 17 to take advantage of the early bird rate of $255 per person. That's a savings of $54 off the $309 standard rate and $135 off the on-site registration rate of $390. Standard pricing begins on June 17 after 5 p.m. ET and ends two weeks before the start of each forum. For more information and to register online, visit www.irstaxforum.com. Association members save an additional $10 Members of the following participating associations can save an additional $10 off the early bird rate if they register by June 17. Those interested should contact their association directly for more information: - American Bar Association (ABA) - American Institute of Certified Public Accountants (AICPA) - National Association of Enrolled Agents (NAEA) - National Association of Tax Professionals (NATP) - National Society of Accountants (NSA) - National Society of Tax Professionals (NSTP) Location Forum dates Deadline for $309 standard rate Chicago, IL July 9-11 June 25 Orlando, FL July 30-Aug. 1 July 16 Baltimore, MD Aug. 13-15 July 30 Dallas, TX Aug. 20-22 Aug. 6 San Diego, CA Sept. 10-12 Aug. 27 The IRS provides continuing education credits to enrolled agents, certified public accountants, Annual Filing Season Program participants and California Tax Education Council participants. To learn more about the IRS Nationwide Tax Forum, see these YouTube videos: - 2024 IRS Nationwide Tax Forums: Transforming tax services for professionals - 5 things to know: With John Lipold and Patricia Young, presented by Tax Talk Today For more information and to register online, visit www.irstaxforum.com.

Private Letter Ruling Number: 202229021 Internal Revenue Service April 12, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202229021 Release Date: 7/22/2022 Index Number: 2601.00-00, 2518.00-00, 2501.00-00, 2041.00-00, 2038.00-00, 2037.00-00, 2036.00-00, 1001.00-00, 61.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B04 PLR-121264-21 Date: April 12, 2022 Dear *******: This letter responds to your authorized representative's letter dated September 28, 2021, and subsequent correspondence, requesting federal tax rulings on certain proposed transactions involving Trust. The facts and representations submitted are summarized as follows: On Date 1, Settlor and Settlor's Spouse (collectively, the "Settlors") created an irrevocable trust, Trust, for the benefit of Son (generally referred to in the trust instrument as the "Beneficiary"). Date 1 is a date prior to October 21, 1942. Trust is governed by the laws of State. Article III, Section 1 of Trust provides that the Beneficiary has no right to the corpus of Trust and does not have a right to partition, divide, or dissolve Trust. The Beneficiary has no right with respect to Trust other than to receive distributions of net earnings awarded him by the trustee with the consent of Trust's Advisory Board and the right to distribution of the trust estate made by the trustee at the termination of Trust. Article III, Section 2 provides that the death, insolvency or bankruptcy of the Beneficiary hereunder, or the transfer of his interest in any manner, or by descent or otherwise, during the continuance of Trust, shall not operate as a dissolution of, nor terminate Trust, nor shall it have any effect whatever upon the trust estate, its operation or mode of business, nor shall it entitle his heirs or assigns or representatives to take any action in the courts of law or equity against the estate, its trustees or property or its business operations of any kind, all of which shall remain intact and undistributed thereby; but shall succeed only to the rights of the original Beneficiary. Article III, Section 3 provides that at the time of the death of the Beneficiary, his equitable interest in the trust estate, unless disposed of otherwise by said Beneficiary, shall pass to and vest in his heirs in accordance with the laws of descent and distribution then in force, applicable to the equitable interest of such Beneficiary in the trust estate. Section 3 further provides that the term "Beneficiary" applies not only to Son but to all of his successors to beneficial interests under Trust. Article IV, Section 3 provides that Trust will continue until the death of Son, and for twenty-one years after Son's death. At the expiration of that period, the trustee is to distribute the trust corpus among the then existing beneficiaries. Article IV, Section 4 provides that the Beneficiary may receive from time to time a portion of the net profits accruing from time to time to the trust estate, as the trustee, acting with the advice and consent of the Advisory Board, may see fit to pay over and deliver to the Beneficiary. No duty is imposed upon the trustee to make distributions of net profits, but the power is conferred upon the trustee, acting with the advice and consent of the Advisory Board. In exercising this discretion, the trustee and Advisory Board will give full consideration to the interest of both the Beneficiary and the trust estate. By order dated Date 2 (Date 2 Order), Court modified the terms of Trust and approved a completely restated trust agreement. In the Date 2 Order, Court made several significant findings and holdings with respect to Trust. Specifically, Court found that Trust expressly provides that the term "Beneficiary" applies not only to Son but to all his successors to beneficial interests under Trust. The Court further found that the heirs of Son who succeed to his equitable interest in Trust will be referred to as "Successor Beneficiaries." In addition, Court found that, (i) upon Son's death, Son's equitable interest in Trust will pass to and vest in Son's heirs in accordance with the laws of descent and distribution of State then in force, applicable to his equitable interest in Trust; (ii) upon Son's death, Trust will be divided into separate shares for each of his heirs; if Son's Spouse survives him, one-third of Trust will be allocated to a share for Son's Spouse and the other two-thirds will be divided into shares for the children and descendants of Son, in accordance with the laws of descent and distribution of State then in force; and (iii) each such share for Son's heirs will be separate, and the Successor Beneficiaries of Trust will not become common beneficiaries of an undivided trust. Consequently, the interests and powers of a Successor Beneficiary with respect to his or her share extend only to that Successor Beneficiary's respective share and not to any share held for any other Successor Beneficiary. Trust is administered by Trustee and a three-person Advisory Board. An individual serving as a trustee is also a member of the Advisory Board. In the event Trustee should fail or cease to serve, the remaining members of the Advisory Board will appoint a new member to fill the vacancy on the board. Then the Advisory Board will appoint one of its members or a Qualified Family Trust Company to serve as trustee. The Beneficiary and individuals related and subordinate to the Beneficiary within the meaning of § 672(c) of the Internal Revenue Code (Code) may serve on the Advisory Board but may not serve as a trustee. Currently, Son is married to Son's Spouse and they have five children (Grandchildren 1 through 5), sixteen Grandchildren (Great Grandchildren 1 through 16), and thirty-two Great Grandchildren (Great-Great Grandchildren 1 through 32). Under Article III, Section 3, as construed by Court (discussed below), Son is determined to possess a testamentary general power of appointment over Trust. Son intends to allow his power of appointment over Trust to lapse at his death. Further, one or more of the Successor Beneficiaries plans to irrevocably and unqualifiedly disclaim, in accordance with State Statute 1 and § 2518 of the Code, in a writing delivered to Trustee, all or an undivided portion of his or her beneficial interest in Trust no later than nine months after Son's death. A Successor Beneficiary disclaiming his or her interest in Trust will not (i) accept an interest in or any benefits from the property subject to the disclaimer; or (ii) voluntarily assign, convey, encumber, pledge or transfer the interest in property subject to the disclaimer or contract to do any of the foregoing. As a result of the disclaimer, the disclaimed interest will pass without any direction from the Successor Beneficiary disclaiming his or her interest in Trust, and the interest will pass to someone other than the Successor Beneficiary disclaiming his or her interest in Trust. Finally, a Successor Beneficiary disclaiming his or her interest in Trust will not serve on the Advisory Board or as a trustee of Trust. On Date 3, Trustee filed in Court a petition for construction and modification of terms of Trust. Trustee proposes to make certain modifications to Trust in order to facilitate the administration of Trust after the death of Son. Trust currently provides that Trust will terminate twenty-one years after Son's death and will then be distributed outright to the Successor Beneficiaries. It is represented that the amounts distributed upon termination of Trust will be substantial, and that if a Successor Beneficiary is under the age of x, it would not be in his or her best interest to receive his or her share outright. Son and the Successor Beneficiaries have consented to the proposed modifications. State Statute 1 provides that if an interest in property passes because of the death of a decedent, a disclaimer of the interest takes effect as of the time of the decedent's death, and relates back for all purposes to the time of the decedent's death. State Statute 2 provides that on the petition of a trustee or a beneficiary, a court may order that the terms of the trust be modified if, because of circumstances not known to or anticipated by the settlor, the order will further the purposes of the trust. State Statute 3 provides that the court may not take the action permitted by State Statute 2 unless all beneficiaries of the trust have consented to the order or are deemed to have consented to the order. Further, a minor, incapacitated, unborn, or unascertained beneficiary is deemed to have consented if a person representing the beneficiary's interest has consented or if a guardian ad litem appointed to represent the beneficiary's interest consents on the beneficiary's behalf. State Statute 4 provides that when distributing trust property or dividing or terminating a trust, a trustee may make distributions in divided or undivided interests, and allocate particular assets in proportionate or disproportionate shares. On Date 4, Court issued an order ("Court Order") approving the following construction and modification of Trust ("Trust Construction and Modification"), subject to a favorable private letter ruling from the Internal Revenue Service. Trust Construction In Court Order, Court ruled as follows: (1) Upon Son's death, Trust shall be divided into separate trusts (hereinafter, "Successor Trusts") for each Successor Beneficiary, and that upon the subsequent death of a Successor Beneficiary during the twenty-one year term following Son's death, the Successor Trusts of which the deceased Successor Beneficiary was an income beneficiary shall be similarly divided into separate Successor Trusts. (2) Trust grants Son a general power of appointment with respect to Trust and Successor Beneficiaries hold the same general power of appointment with respect to his or her Successor Trust. (3) After Son's death, each Successor Beneficiary will have three separate beneficial interests in his or her Successor Trust: (i) a discretionary income interest for twenty-one years after Son's death; (ii) a remainder interest which vests in possession twenty-one years after Son's death; and (iii) a general power of appointment. Each of the beneficial interests may be disclaimed independently of the others. (4) The class of a disclaiming Successor Beneficiary's descendants who are heirs of Son shall remain open to new members born to such disclaiming Successor Beneficiary during the twenty-one years after the death of Son, including descendants born to a disclaiming Successor Beneficiary who has no children or other descendants living on the death of Son. (5) Upon a Successor Beneficiary's disclaimer of a beneficial interest in his or her Successor Trust, the following will apply: (i) If a Successor Beneficiary disclaims an interest in Trust and survives Son, the disclaimed interest will pass, at Son's death, to Son's heirs (which would exclude a Successor Beneficiary's spouse) determined as though the disclaiming beneficiary did not survive Son ( i.e., to the beneficiary's descendants who survive Son). (ii) If a Successor Beneficiary disclaims an interest in Trust, survives Son but dies within twenty-one years after Son's death, the disclaimed interest will not be affected by the Successor Beneficiary's death. (iii) If a Successor Beneficiary survives Son but dies within twenty-one years after Son's death, the Successor Beneficiary's retained interest in Trust will pass to Successor Beneficiary's heirs at law, which include Successor Beneficiary's spouse. (6) Successor Trust shall be divided and funded in the following manner: (i) Where no disclaimers are made, the separate trusts created for Successor Beneficiaries will hold equal percentages of income and remainder interests and the undistributed income produced by a particular portion will be added to principal of that particular portion. (ii) Where a Successor Beneficiary disclaims an equal portion of his or her income and remainder interests, the retained and disclaimed interests would be administered similarly, and the undistributed income produced by a particular portion will be added to principal of that particular portion. (iii) Where a Successor Beneficiary disclaims a greater percentage of the remainder interest than an income interest, at least two trusts will be created for the disclaimant. Under one trust, the disclaimant will be both the income and remainder beneficiary of the trust. Under the second trust, the disclaimant will have an income interest in the trust but no remainder interest. The remainder interest in the second trust will belong to the heirs of the beneficiary immediately preceding the disclaimant in interest (that is, the "prior beneficiary") who are descendants of the disclaiming beneficiary, determined as if the disclaiming beneficiary predeceased the prior beneficiary. (7) When Trustee divides Trust into separate trusts after Son's death, or after the death of one of the Successor Beneficiaries, Trustee shall create the least number of trusts under each family branch of a particular child of Son (Grandchild 1 through 5) that can be established with only one income beneficiary of each trust. (8) If an income beneficiary of a separate trust dies within twenty-one years after Son's death with an heir at law who is already an income beneficiary of a separate trust, then such heir's share of the deceased income beneficiary's trust shall be added to his or her existing trust of which he or she is the income beneficiary in conformance with the general rule in Construction #7. (9) If, during the twenty-one year term after Son's death, a new beneficiary is born into the class of beneficiaries who are lineal descendants of the disclaimant (the "Disclaimant Class") and a trust or trusts are in existence with members of the Disclaimant Class as income beneficiaries, a new trust is created for the new beneficiary. (10) The terms "net earnings" and "net profits" as they appear in Trust are construed to mean trust "income" under State Trust Code and State law. Trust Modification In Court Order, Court modified Trust as follows: (1) A new Section 6 of Article IV of Trust is added to provide that when Trust terminates twenty-one years after the death of Son, any share distributable to a beneficiary who is then under the age of x (a "Continuing Beneficiary") shall be held in a trust (a "Continuing Trust") until such Continuing Beneficiary attains the age of x. If the Continuing Beneficiary survives Son but dies before reaching the age of x, he or she shall have a general testamentary power of appointment over his or her Continuing Trust. Any Continuing Trust shall terminate when the Continuing Beneficiary attains x years of age or dies, whichever event occurs first. At that time, the trustee shall deliver all remaining property in Continuing Trust to the Continuing Beneficiary, or if not living, as the Continuing Beneficiary may appoint by will (including to the Continuing Beneficiary's estate or the creditors of the Continuing Beneficiary or the creditors of the Continuing Beneficiary's estate). If the Continuing Beneficiary dies before reaching age x and does not exercise his or her general testamentary power of appointment, the Continuing Trust is distributed to the Continuing Beneficiary's estate. Equitable title to the property held in the Continuing Beneficiary's Continuing Trust shall be vested in the Continuing Beneficiary and shall be alienable. No power shall be exercised so as to violate any rule against perpetuities or rule against restraint against alienation. (Modification #1) (2) A new Section 7 of Article IV of Trust is added governing the succession of trustees with respect to each Continuing Trust as described under new Section 6. A Continuing Beneficiary will have the power to remove the trustee of his or her Continuing Trust and replace the trustee with a trustee of his or her choosing, other than the Continuing Beneficiary. Until a Continuing Beneficiary attains the age of eighteen, the Continuing Beneficiary's parent or legal guardian will hold this power. (Modification #2) (3) Section 10 of Article I of Trust provides that as near as possible after the close of each calendar year, Trust must have the books and records of Trust audited by a certified public accountant (the "Audit Requirement"). After Son's death, the trust estate will be divided into several Successor Trusts and the Audit Requirement will be burdensome and costly given the number of separate trusts subject to the Audit Requirement. Accordingly, Section 10 of Article I of Trust is modified to eliminate the Audit Requirement for separate trusts with assets under $A and make the Audit Requirement optional for trusts whose beneficiaries were not an adult party to the petition filed on Date 3 and with assets under $A. (Modification #3) It is represented that no actual or constructive additions within the meaning of § 26.2601-1(b) of the Generation-Skipping Transfer Tax Regulations have been made to Trust after September 25, 1985. You have requested the following rulings: 1. Trust is exempt from chapter 13 pursuant to § 2601. 2. Trust grants Son and each Successor Beneficiary of Trust a power of appointment that is a general power of appointment created before October 21, 1942, under §§ 2041(a)(1) and 2514(a), so that the lapse or complete release of the power of appointment will not subject any portion of Trust to federal estate, gift, or generation-skipping transfer (GST) tax. 3. The proposed disclaimer by any one or more of the Successor Beneficiaries of Trust will (a) be a qualified disclaimer under § 2518; (b) not result in a taxable gift by any of Successor Beneficiaries disclaiming his or her interest in Trust, and will not subject any portion of Trust to federal estate tax in the gross estate of a Successor Beneficiary disclaiming his or her interest; and (c) not result in a loss of GST exempt status with respect to any portion of Trust. 4. The assets of a Continuing Trust created pursuant to Modification #1 after Son's death will be includible in the gross estate of any Continuing Beneficiary of such Continuing Trust under § 2041(a)(2) if the Continuing Beneficiary dies before the Continuing Trust terminates. 5. Trust Construction and Modification will not cause Trust or any Successor Trust to be subject to GST tax pursuant to chapter 13. 6. Trust Construction and Modification will not result in any Successor Beneficiary of Trust making a taxable gift. 7. Trust Construction and Modification will not result in inclusion of any asset of, or interest in Trust or any Successor Trusts in the gross estate of any Successor Beneficiary whose death occurs prior to the termination of Trust under § 2036, 2037 or 2038. 8. The non-pro rata distribution of assets from Trust to one or more Successor Trusts created for the benefit of any Successor Beneficiaries will not be treated as a pro rata distribution of assets followed by a taxable sale and exchange of assets between the Successor Trusts. LAW AND ANALYSIS Ruling #1 Section 2601 imposes a tax on every generation-skipping transfer (GST) which is defined under § 2611 as a taxable distribution, taxable termination, and a direct skip. Section 1433(b)(2)(A) of the Tax Reform Act of 1986 (Act) and § 26.2601-1(b)(1) of the Generation-Skipping Transfer Tax Regulations provide that the GST tax shall not apply to any GST under a trust that was irrevocable on September 25, 1985, but shall apply to the extent that the transfer is not made out of corpus added to the trust after September 25, 1985 (or out of income attributable to corpus so added). Section 26.2601-1(b)(1)(i) provides that a trust qualifies for transitional rule relief from the provisions of chapter 13 if the trust was irrevocable on September 25, 1985, and no addition (actual or constructive) was made to the trust after that date. Section 26.2601-1(b)(1)(iv) provides that an addition made after September 25, 1985, to an irrevocable trust will subject to the provisions of chapter 13 a proportionate amount of distributions from, and terminations of interest in, property held in the trust. In this case, Trust was in existence and irrevocable prior to September 25, 1985. Additionally, it is represented that no actual or constructive additions within the meaning of § 26.2601-1(b) have been made to Trust after September 25, 1985. Therefore, based upon the facts submitted and representations made, we conclude that Trust is exempt from the application of chapter 13 pursuant to § 2601. Ruling #2 Section 2041(a)(1) provides, in part, that the value of the gross estate includes the value of all property to the extent of any property with respect to which a general power of appointment created on or before October 21, 1942, is exercised by the decedent by will; but the failure to exercise such a power or the complete release of such a power is not deemed an exercise thereof. See § 20.2041-2(d) of the Estate Tax Regulations. Section 2041(b)(1) provides that, for purposes of § 2041(a), the term "general power of appointment" means a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate. Section 20.2041-1(b) provides that a power of appointment includes all powers that are in substance and effect powers of appointment, regardless of the nomenclature used in creating the power. Section 20.2041-1(e) provides that a power of appointment created by an inter vivos instrument is considered created on the date the instrument takes effect. The power is not treated as created at a future date merely because the power is not exercisable on the date the instrument takes effect or because the identity of the powerholder is not ascertainable until a later date. Example 3 of § 20.2041-1(e) provides an illustration of the above rule. In the example, F creates an irrevocable inter vivos trust created before October 21, 1942, providing for payment of income to G for life with the remainder as G appoints by will, but in default of G's appointment, the trust will pass with income to H for life and the remainder as H shall appoint by will. If G dies after October 2, 1942, without exercising the power of appointment, H's power is considered a power created on or before October 21, 1942, even though H's power of appointment was only a contingent interest until G's death. Section 20.2041-2(d) provides that a failure to exercise a general power of appointment created on or before October 21, 1942, or a complete release of the power is not an exercise of the power. The phrase "a complete release" means a release of all powers over all or a portion of the property subject to the power of appointment, as distinguished from a reduction of a power of appointment to a lesser power. Thus, if the decedent completely relinquished all powers over one-half of the property subject to a power of appointment, the power is completely released as to that one-half. Section 2514(a) provides that an exercise of a general power of appointment created on or before October 21, 1942, is deemed a transfer of the property by the individual possessing such power for gift tax purposes, but the failure to exercise such power or the complete release of such power is not deemed an exercise thereof. Section 25.2514-2(c) of the Gift Tax Regulations provides that a failure to exercise a general power of appointment created on or before October 21, 1942, or a complete release of such power is not considered to be an exercise of a general power of appointment. The phrase "complete release" means a release of all powers over all or a portion of the property subject to the power of appointment, as distinguished from the reduction of a power of appointment to a lesser power. Thus, if the possessor completely relinquished all powers over one-half of the property subject to a power of appointment, the power is completely released as to that one-half. Section 26.2601-1(b)(1)(v)(A) provides that where any portion of a trust remains in trust after the post-September 25, 1985, release, exercise, or lapse of a power of appointment over that portion of the trust, and the release, exercise, or lapse is treated to any extent as a taxable transfer under chapter 11 or chapter 12, the value of the entire portion of the trust subject to the power that was released, exercised, or lapsed will be treated as if that portion had been withdrawn and immediately retransferred to the trust at the time of the release, exercise, or lapse. In this case, Trust was executed on a date prior to October 21, 1942. Article III, Section 3 of Trust provides that at the time of the death of the Beneficiary, his equitable interest in Trust, unless disposed of otherwise by such Beneficiary, shall pass to and vest in his heirs in accordance with the laws of descent and distribution then in force, applicable to the equitable interest of such Beneficiary in the trust estate. The language of Trust indicates that Settlors intended for Son to have the power to dispose of his equitable interest, without limitation. Further, Trust indicates that the Settlors intended each Successor Beneficiary to have the same rights with respect to his or her share of Trust as Son, including a general power of appointment over such Successor Beneficiary's interest in his or her Successor Trust. In the Court order, Court construed Trust as granting Son and Successor Beneficiaries a testamentary power of appointment to appoint such beneficiary's interest in Trust to any appointee. Trust was executed prior to October 21, 1942, hence Son's power of appointment is a power created before October 21, 1942. Successor Beneficiaries of Trust possess a general power of appointment that is contingent on surviving Son's death. As in the case of Example 3 of § 20.2041-1(e), the power of appointment held by Successor Beneficiaries is considered a power created before October 21, 1942. Accordingly, based upon the facts submitted and representations made, we conclude that Son and each Successor Beneficiary possess a general power of appointment created before October 21, 1942. Son proposes to allow his testamentary general power of appointment to lapse. Under §§ 2041(a)(1) and 2514(a), the lapse or complete release of Son's general power of appointment will not cause Son to be treated as making a taxable gift or cause any portion of Trust to be included in Son's gross estate for federal estate tax purposes. Therefore, based upon the facts submitted and representations made, we conclude that the lapse (or complete release) of Son's general power of appointment will not subject any portion of Trust to federal estate or gift tax under §§ 2041(a)(1) and 2514(a). If one or more Successor Beneficiaries allow his or her power to lapse or completely releases his or her power of appointment, under §§ 2041(a)(1) and 2514(a), the lapse or complete release of a Successor Beneficiary's general power of appointment will not cause a Successor Beneficiary to be treated as making a taxable gift or cause any portion of Trust to be included in a Successor Beneficiary's gross estate for federal estate tax purposes. Therefore, based upon the facts submitted and representations made, we conclude that the lapse (or complete release) of a Successor Beneficiary's general power of appointment will not subject any portion of Trust to federal estate or gift tax under §§ 2041(a)(1) and 2514(a). Finally, in this case, Trust was irrevocable prior to September 25, 1985. It is represented that there have been no additions (actual or constructive) to Trust after September 25, 1985. The lapse or complete release of a general power of appointment by Son or a Successor Beneficiary will not be a taxable lapse or release of a general power of appointment because the power of appointment was created prior to October 21, 1942. Therefore, based upon the facts submitted and the representations made, we conclude that the lapse or complete release of a general power of appointment by Son or a Successor Beneficiary will not be treated as a constructive addition to Trust and will not result in a loss of GST exempt status with respect to any portion of the trust over which such powers lapsed or were released. Ruling #3 Section 2046 provides that for estate tax purposes, disclaimers of property interests passing upon death are treated as provided in § 2518. Section 2518(a) provides that if a person makes a qualified disclaimer with respect to any interest in property, subtitle B shall apply with respect to such interest as if the interest had never been transferred to such person. Section 2518(b) provides that the term "qualified disclaimer" means an irrevocable and unqualified refusal by a person to accept an interest in property but only if (1) the refusal is in writing; (2) the writing is received by the transferor of the interest, his legal representative, or the holder of the legal title to the property to which the interest relates not later than the date that is nine months after the later of (A) the date on which the transfer creating the interest in the person is made, or (B) the day on which the person attains age 21; (3) the person has not accepted the interest or any of its benefits; and (4) as a result of such refusal, the interest passes without any direction on the part of the person making the disclaimer and passes either (A) to the spouse of the decedent, or (B) to a person other than the person making the disclaimer. Section 2518(c)(1) provides that a disclaimer with respect to an undivided portion of an interest which meets the requirements of § 2518(b) shall be treated as a qualified disclaimer of such portion of the interest. Section 2518(c)(2) provides that a power over property is to be treated as an interest in that property. Section 25.2518-1(b) provides, in relevant part, that if a person makes a qualified disclaimer as described in § 2518(b) and § 25.2518-2, for purposes of the federal estate, gift, and GST provisions, the disclaimed interest in property is treated as if it had never been transferred to the person making the qualified disclaimer. Instead, it is considered as passing directly from the transferor of the property to the person entitled to receive the property as a result of the disclaimer. Accordingly, a person making a qualified disclaimer is not treated as making a gift. Similarly, the value of a decedent's gross estate for purposes of the federal estate tax does not include the value of property with respect to which the decedent, or the decedent's executor or administrator on behalf of the decedent, has made a qualified disclaimer. Section 25.2518-2(c)(3) provides, in relevant part, that the nine-month period for making a disclaimer generally is to be determined with reference to the transfer creating the interests in the disclaimant. With respect to inter vivos transfers, a transfer creating an interest occurs when there is a completed gift for federal gift tax purposes regardless of whether a gift tax is imposed on the completed gift. With respect to transfers made by a decedent at death or transfers that become irrevocable at death, the transfer creating the interest occurs on the date of the decedent's death, even if an estate tax is not imposed on the transfer. Section 25.2518-2(c)(3) further provides that if a person to whom an interest in property passes by reason of the exercise, release, or lapse of a general power of appointment desires to make a qualified disclaimer, the disclaimer must be made within a nine-month period after the exercise, release, or lapse regardless of whether the exercise, release, or lapse is subject to estate or gift tax. A person who receives an interest in property as the result of a qualified disclaimer of the interest must disclaim the previously disclaimed interest no later than nine months after the date of the transfer creating the interest in the preceding disclaimant. Thus, if A were to make a qualified disclaimer of a specific bequest and as a result of the qualified disclaimer the property passed as part of the residue, the beneficiary of the residue could make a qualified disclaimer no later than nine months after the date of the testator's death. Section 25.2518-3(a)(1)(i) provides that if the requirements of the section are satisfied, the disclaimer of all or an undivided portion of any separate interest in property may be a qualified disclaimer, even if the disclaimant has another interest in the same property. Under 25.2518-3(a)(1)(iii), a power of appointment with respect to property is treated as a separate interest in such property and such power of appointment with respect to all or an undivided portion of such property may be disclaimed independently from any other interests separately created by the transferor in the property. Further, a disclaimer of a power of appointment with respect to property is a qualified disclaimer only if any right to direct the beneficial enjoyment of the property which is retained by the disclaimant is limited by an ascertainable standard. Section 25.2518-3(a)(2) provides that a disclaimer of an undivided portion of an interest in a trust may be a qualified disclaimer. Under § 25.2518-3(b), the disclaimer of an undivided portion of a disclaimant's separate interest in property will be a qualified disclaimer if the undivided portion consists of a fraction or percentage of each and every substantial interest or right owned by the disclaimant in the property and extends over the entire term of the disclaimant's interest in the property. A disclaimer of some specific rights while retaining other rights with respect to an interest in property is not a qualified disclaimer of an undivided portion of the disclaimant's interest in the property. In this case, as construed by Court, Son's power of appointment under Trust was created before October 21, 1942, and is a general power of appointment as described in §§ 2041(a)(1) and 2514(a). Under the terms of Trust, Son's heirs cannot succeed to any interests in Trust until Son's death. If Son lets his power lapse at his death, as proposed, the lapse will create various interests, including a testamentary general power of appointment, in Trust for Successor Beneficiaries. See § 2518(c)(2). For purposes of § 2518, these powers will be considered as created on the date of Son's death, the date when Son's general power of appointment lapses. One or more of the Successor Beneficiaries propose to disclaim an undivided portion of or all of the interest in Trust to which he or she may be entitled to at Son's death. A disclaiming Successor Beneficiary will not accept an interest in or any benefit from the property subject to the disclaimer or voluntarily assign, convey, encumber, pledge, or transfer the interest or property subject to the disclaimer. Further, each disclaimer will be irrevocable and in writing delivered to the trustee. As a result, the proposed disclaimer will pass without any direction from the disclaiming Successor Beneficiary and the interest will pass to someone other than the disclaiming Successor Beneficiary. Finally, a disclaiming Successor Beneficiary will be prohibited from serving on the Advisory Board of Trust or as a trustee of Trust. Accordingly, based on the facts submitted and representations made, we conclude that the proposed disclaimer by any one or more Successor Beneficiary will not result in a taxable gift by the disclaimant and will not subject any portion of Trust to estate tax in the gross estate of the disclaimant. Under § 25.2518-1(b), the disclaimed interest in property is treated as if it had never been transferred to the person making the qualified disclaimer. Instead, it is considered as passing directly from the transferor of the property to the person entitled to receive the property as a result of the disclaimer. Therefore, the disclaimant is not a transferor, as defined in § 2652 and is not treated as making a constructive addition to Trust. Accordingly, we conclude that a proposed disclaimer by any one or more Successor Beneficiary will not result in Trust losing GST exempt status. Ruling #4 Section 2041(a)(2) provides that to the extent of any property with respect to which the decedent has at the time of his death a general power of appointment created after October 21, 1942, or with respect to which the decedent has at any time exercised or released such a power of appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent, such property would be includible in the decedent's gross estate under §§ 2035 to 2038, inclusive. Trust currently provides for outright distribution to the Successor Beneficiaries on Trust's termination. Under Modification #1, any share upon Trust's termination distributable to a Successor Beneficiary under the age of x is to be held in a Continuing Trust until that Continuing Beneficiary reaches the age of x. If the Continuing Beneficiary survives Son but dies before reaching age x, Continuing Trust grants the Continuing Beneficiary a general power of appointment to appoint the assets of his or her Continuing Trust to any appointee, including the Continuing Beneficiary's estate or the creditors of the Continuing Beneficiary or the creditors of the Continuing Beneficiary's estate. Thus, if the Continuing Beneficiary survives the twenty-one year term following Son's death but dies before the termination of Continuing Trust, the remaining assets in the Continuing Trust are includible in the gross estate of the Continuing Beneficiary under § 2041(a)(2). Based upon the facts submitted and representations made, we conclude that the assets of a Continuing Trust created pursuant to Modification #1 after Son's death will be includible in the gross estate for federal estate tax purposes of any Continuing Beneficiary of such Continuing Trust under § 2041(a)(2) if the Continuing Beneficiary dies before the Continuing Trust terminates. Ruling #5 Section 26.2601-1(b)(4) provides rules for determining when a modification, judicial construction, settlement agreement, or trustee action with respect to a trust that is exempt from GST tax under § 26.2601-1(b)(1), (2), or (3) will not cause the trust to lose its exempt status. The rules in § 26.2601-1(b)(4) are applicable only for purposes of determining whether an exempt trust retains its exempt status for GST purposes. The rules do not apply, for example, in determining whether the transaction results in a gift subject to gift tax, or may cause the trust to be included in the gross estate of a beneficiary, or may result in the realization of gain for purposes of § 1001. Section 26.2601-1(b)(4)(i)(C) provides that judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument will not cause an exempt trust to be subject to the provisions of chapter 13 if the judicial action involves a bona fide issue and the construction is consistent with applicable state law that would be applied by the highest court of the state. Section 26.2601-1(b)(4)(i)(D)(1) provides that a modification of the governing instrument of an exempt trust by judicial reformation, or nonjudicial reformation that is valid under applicable state law, will not cause an exempt trust to be subject to the provisions of chapter 13, if the modification does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the modification, and the modification does not extent the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. Section 26.2601-1(b)(4)(i)(D)(2) provides that a modification of an exempt trust will result in a shift in a beneficial interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a GST transfer or the creation of a new GST transfer. To determine whether a modification of an irrevocable trust will shift a beneficial interest in a trust to a beneficiary who occupies a lower generation, the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification. If the effect of the modification cannot be immediately determined, it is deemed to shift a beneficial interest in the trust to a beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the modification. A modification that is administrative in nature that only indirectly increases the amount transferred (for example, by lowering administrative costs or income taxes) will not be considered to shift a beneficial interest in the trust. Section 26.2601-1(b)(4)(i)(E), Example 10 considers the following situation. In 1980, Grantor established an irrevocable trust for the benefit of Grantor's issue, naming a bank and five other individuals as trustees. In 2002, the appropriate local court approves a modification of the trust that decreases the number of trustees which results in lower administrative costs. The modification pertains to the administration of the trust and does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the modification. In addition, the modification does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. Therefore, the trust will not be subject to the provisions of chapter 13. In this case, Trust Construction by Court resolves ambiguities in the terms of the trust instrument. The judicial action involved bona fide issues regarding whether Son and the Successor Beneficiaries possess general powers of appointment and whether such powers were created before October 21, 1942. Trust Construction is consistent with applicable state law that would be applied by the highest court of the state. Further, Modification #1 grants each beneficiary of a Continuing Trust a general power of appointment which will cause the assets of a Continuing Trust to be includible in the gross estate of such beneficiary under § 2041(a)(2). Therefore, Modification #1 does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the modification, and the modification does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. Modification #2 and #3 relate to the appointment and replacement of successor trustees in Continuing Trust and the application of the Audit Requirement after Trust is divided into separate trusts. Modifications #2 and #3 are administrative in nature and under § 26.2601-1(b)(4)(i)(D)(2), will not be considered to shift a beneficial interest to a lower generation in the trust or extend the time for vesting of any beneficial interest in the trust beyond the period provided for in Trust. See Example 10 of § 26.2601-1(b)(4)(i)(E). Therefore, based upon the facts submitted and representations made, we conclude that Trust Construction and Modification by Court will not cause Trust or any Successor Trusts to be subject to GST tax pursuant to chapter 13. Ruling #6 Section 2501 provides that a tax is imposed for each calendar year on the transfer of property by gift during such calendar year by any individual, resident or nonresident. Section 2511(a) provides that the tax imposed by § 2501 will apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible on intangible. Section 25.2511-1(c) provides that any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax. Section 2512(a) provides that if the gift is made in property, the value thereof at the date of the gift is considered the amount of the gift. Section 2512(b) provides that where property is transferred for less than adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration is deemed to be a gift and is included in computing the amount of gifts made during the calendar year. In this case, Trust Construction and Modification by Court do not change the beneficial interests in Trust. Accordingly, based upon the facts submitted and representations made, we conclude that the Trust Construction and Modification will not cause Son or any of the Successor Beneficiaries to have made a taxable gift for purposes of § 2501. Ruling #7 Section 2036(a) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death: (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom. Section 2037(a) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, if: (1) possession or enjoyment of the property can, through ownership of such interest, be obtained only by surviving the decedent, and (2) the decedent has retained a reversionary interest in the property, and the value of such reversionary interest immediately before the death of the decedent exceeds five percent of the value of such property. Section 2038(a)(1) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished during the 3-year period ending on the date of the decedent's death. In order for §§ 2036, 2037 and 2038 to apply, a decedent must have made a transfer of property of any interest therein (except in case of a bona fide sale for adequate and full consideration in money or money's worth) under which the decedent retained an interest in, or power over, the income or corpus of the transferred property. In this case, Trust Construction and Modification do not constitute transfers within the meaning of §§ 2036, 2037 and 2038. Accordingly, based upon the facts submitted and representations made, we conclude that Trust Construction and Modification by Court will not result in inclusion of any asset of, or interest in Trust or any Successor Trusts in the gross estate of any beneficiary whose death occurs prior to the termination of Trust under § 2036, 2037 or 2038. Ruling #8 Section 61(a) defines gross income as "all income from whatever source derived." Under section 61(a)(3), gross income includes "[g]ains derived from dealings in property." Section 1001(a) provides that the gain from the sale or other disposition of property is the excess of the amount realized over the adjusted basis provided in § 1011 for determining gain, and the loss is the excess of the adjusted basis provided in § 1011 for determining loss over the amount realized. Under § 1001(c), the entire amount of gain or loss must be recognized, except as otherwise provided. Section 1.1001-1(a) of the Income Tax Regulations provides that, except as otherwise provided in subtitle A of the Code, the gain or loss realized from the exchange of property for other property differing materially either in kind or in extent is treated as income or as loss sustained. Under § 1.1001-1(h), the severance of a trust, occurring on or after August 2, 2007, is not an exchange of property for other property differing materially either in kind or in extent, if (i) an applicable state statute or the governing instrument authorizes or directs the trustee to sever the trust; and (ii) any non-pro rata funding of the separate trusts resulting from the severance, whether mandatory or in the discretion of the trustee, is authorized by an applicable state statute or the governing instrument. In the present case, the Trust will be severed into multiple trusts, Successor Trusts, on a non-pro rata basis. Trustees represent that the contemplated trust severance is authorized by the agreement governing Trust. Trustee further represents that the nonpro rata funding of Successor Trusts is authorized under State Statute 4 which allows a trustee to make distributions in divided or undivided interest and to allocate assets in proportionate or disproportionate shares. The proposed transaction is consistent with the criteria set forth in § 1.1001-1(h)(1). Accordingly, based upon the facts submitted and representations made, we conclude that the severance of the Trust and non-pro rata funding of the Successor Trusts should not be treated as pro rata distributions followed by a taxable sale and exchange of assets between the Successor Trusts and, therefore, will not be subject to recognition of gain or loss from a sale or other disposition of property under § 1001. In accordance with the Powers of Attorney on file with this office, we have sent copies of this letter to your representatives. Except as expressly provided herein, we neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. The rulings contained in this letter are based upon information and representations submitted by the taxpayers accompanied by penalty of perjury statements executed by the appropriate parties. While this office has not verified the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer requesting it. Section 6100(k)(3) provides that it may not be used as precedent. Sincerely, Leslie H. Finlow _______________________________ Leslie H. Finlow Senior Technician Reviewer, Branch 4 Office of Associate Chief Counsel (Passthroughs & Special Industries) Enclosure Copy for § 6110 purposes cc:

Internal Revenue Service - Information Release IR-2022-77 For those who make estimated federal tax payments, the first quarter deadline is Monday, April 18 April 6, 2022 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 For those who make estimated federal tax payments, the first quarter deadline is Monday, April 18 IR-2022-77, April 6, 2022 WASHINGTON -- The Internal Revenue Service today reminds those who make estimated tax payments such as self-employed individuals, retirees, investors, businesses, corporations and others that the payment for the first quarter of 2022 is due Monday, April 18. The 2022 Form 1040-ES, Estimated Tax for Individuals, can help taxpayers estimate their first quarterly tax payment. Income taxes are a pay-as-you-go process. This means, by law, taxes must be paid as income is earned or received during the year. Most people pay their taxes through withholding from paychecks, pension payments, Social Security benefits or certain other government payments including unemployment compensation. Most often, those who are self-employed or in the gig economy need to make estimated tax payments. Similarly, investors, retirees and others often need to make these payments because a substantial portion of their income is not subject to withholding. Other income generally not subject to withholding includes interest, dividends, capital gains, alimony and rental income. Paying quarterly estimated taxes will usually lessen and may even eliminate any penalties. Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers and fishers, casualty and disaster victims, those who recently became disabled, recent retirees and those who receive income unevenly during the year. See Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, and its instructions for more information. How to pay estimated taxes Form 1040-ES, Estimated Tax for Individuals, includes instructions to help taxpayers figure their estimated taxes. They can also visit IRS.gov/payments to pay electronically. The best way to make a payment is through IRS Online Account. There taxpayers can see their payment history, any pending payments and other useful tax information. Taxpayers can make an estimated tax payment by using IRS Direct Pay; Debit Card, Credit Card or Digital Wallet; or the Treasury Department's Electronic Federal Tax Payment System ( EFTPS ). If paying by check, taxpayers should be sure to make the check payable to the "United States Treasury." Publication 505, Tax Withholding and Estimated Tax, has additional details, including worksheets and examples, that can be especially helpful to those who have dividend or capital gain income, owe alternative minimum tax or self-employment tax, or have other special situations. IRS.gov assistance 24/7 Tax help is available 24/7 on IRS.gov. The IRS website offers a variety of online tools to help taxpayers answer common tax questions. For example, taxpayers can search the Interactive Tax Assistant, Tax Topics and Frequently Asked Questions to get answers to common questions. The IRS is continuing to expand ways to communicate to taxpayers who prefer to get information in other languages. The IRS has posted translated tax resources in 20 other languages on IRS.gov. For more information, see We Speak Your Language.

Internal Revenue Service - Information Release IR-2024-122 Direct File pilot officially closes after more than 140,000 taxpayers successfully use direct e-filing system in 12 states, including integration with 4 state tax systems April 26, 2024 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 Direct File pilot officially closes after more than 140,000 taxpayers successfully use direct e-filing system in 12 states, including integration with 4 state tax systems IR-2024-122, April 26, 2024 WASHINGTON -- The Internal Revenue Service announced the closure of the Direct File pilot with several hundred thousand taxpayers across 12 states signing up for Direct File accounts, and 140,803 taxpayers filing their federal tax returns using the new service. By design, the Direct File Pilot started out small, and in mid-March the IRS incrementally ramped up availability of the option. During the final days and weeks of the filing season, there was steadily increasing interest from taxpayers in pilot states using the new tool. By the final week of the filing season, Direct File processed more than 5,000 accepted returns each day, bringing the total number of returns filed to more than 140,000. Overall, for the pilot, leading states with accepted returns included California (33,328), Texas (29,099), Florida (20,840), New York (14,144) and Washington (13,954). Across the 12 pilot states, taxpayers using Direct File claimed more than $90 million in tax refunds and reported $35 million in tax balances due. The IRS saw strong interest in the Direct File option from taxpayers throughout the country. Millions of people - including many from outside of Direct File's 12 pilot states - visited the Direct File website to learn more about the new system. Over the course of the pilot, more than 3.3 million taxpayers started the eligibility checker, 423,450 taxpayers logged into Direct File and 140,803 taxpayers submitted accepted returns. In cases where a user's tax situation was out of scope of the pilot, they were directed to other options to complete their tax returns, including the separate Free File program that provides free software from the private sector. Overall, usage exceeded IRS expectations for the limited pilot and far exceeded what was necessary to provide sufficient data for the agency to evaluate. "From the very beginning of the Direct File pilot, we wanted to test new ways to give taxpayers an easy, accurate and free way to file their taxes online directly with the IRS," said IRS Commissioner Danny Werfel. "We saw a strong response from the pilot, and Direct File's users generally found it fast and easy to use. This is an important part of our effort to meet taxpayers where they are, give them options to interact with the IRS in ways that work for them and help them meet their tax obligations as easily and quickly as possible. We will be reviewing the results of the pilot and gathering feedback to help us determine our future course involving Direct File. We anticipate making an announcement about future plans later this spring." The Direct File pilot was designed to test the feasibility of building a system to allow taxpayers to file their federal income tax returns directly with the IRS for free. As part of this, the IRS needed to understand how Direct File would complement existing tax filing options, strengthen the tax filing ecosystem and fulfill transformation objectives from the Inflation Reduction Act reflected in the IRS's Strategic Operating Plan. The agency's approach to the Direct File pilot revolved around three themes: - Get it right from the start - A goal of Direct File was to help every taxpayer file an accurate return and get all of the tax benefits to which they are entitled. - Taxes are the product - Direct File was designed to improve the tax filing experience. - One option among many - While Direct File provided an additional free filing option, the IRS recognizes how taxpayers file their taxes is a personal choice. The Direct File pilot offered customer support via a live chat feature, where users communicated with IRS employees in both English and Spanish. The innovative live chat feature allowed customer support to be integrated directly into the product and didn't require taxpayers to leave Direct File to get assistance through another channel, such as the phone. Direct File customer support agents worked alongside the product team to ensure a joined-up taxpayer experience. Lessons learned and technology developed by Direct File are being shared across the IRS. User feedback A General Services Administration Touchpoints survey of more than 11,000 Direct File users found that 90% of respondents ranked their experience with Direct File as "Excellent" or "Above Average." When asked what they particularly liked, respondents most commonly cited Direct File's ease of use, trustworthiness and that it was free. Additionally, 86% of respondents said that their experience with Direct File increased their trust in the IRS, and 90% of survey respondents who used customer support responded that their experience was "Excellent" or "Above Average." Additionally, user feedback received throughout the pilot informed product updates and enhancements. "Direct File provided important lessons for us," Werfel said. "A team of experts from across government worked together - alongside private sector partners with critical expertise - to build and test Direct File. This team designed and built Direct File from the beginning with taxpayers' help, and we worked with taxpayers to refine the system throughout the pilot. We will consult a wide variety of stakeholders to understand how lessons from Direct File can help us improve the entire tax system as well as assess next steps." "The IRS was also pleased that we saw increases in use for other free options for taxpayers this tax season, including Free File and returns prepared at our VITA and TCE sites," Werfel added. Pilot costs Through the end of the pilot, the total amount spent by IRS was $24.6 million, including the Report to Congress. Direct File's operational costs - including customer service, cloud computing and user authentication - were just $2.4 million. To build and run the pilot, the IRS also engaged the U.S. Digital Service (USDS). The IRS's agreement with the U.S. Digital Service does not involve costs to IRS. Pilot for filing season 2024 The IRS launched the Direct File pilot for the 2024 filing season. The Inflation Reduction Act mandated that the IRS study interest in and feasibility of creating a direct e-filing tool taxpayers could use to prepare and file their federal income tax return. The IRS commissioned an independent study, which indicated broad interest in such a system, which the IRS detailed in a Direct File Report to Congress in May 2023. Shortly after that report, as directed by the Treasury Department, the IRS assembled a team of tax experts, technologists, engineers and strategists from across government to build the Direct File system. The IRS worked closely with the U.S. Digital Service and the General Services Administration's technology office 18F to build and test Direct File. Initial testing began in early February 2024 with a handful of federal and state government employees, followed by short open availability windows for more taxpayers to start their returns. After a round of final testing in early March, Direct File opened to all eligible taxpayers in pilot states. Starting small to get it right The IRS purposefully designed the pilot to follow best practices for launching a new technology platform - start small, make sure it works then build from there. The pilot was purposefully limited to cover relatively straightforward tax situations such as W-2 wage income; the Earned Income Tax Credit, Child Tax Credit and the Credit for Other Dependents; the standard deduction and deductions for educator expenses and student loan interest. Taxpayers had to live in the same state for the entire tax year 2023 to be eligible to use Direct File. The 12 pilot states included Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington State and Wyoming. After completing their federal returns, taxpayers in states with state-income tax - Arizona, California, Massachusetts and New York - were guided to a state-sponsored tool to complete their state filing. What comes next Since the pilot began, the IRS has been collecting and analyzing data, which we will continue analyzing in the coming weeks. In the coming days, the agency plans to release a report about the pilot's scope, technology and taxpayer experience, customer support, state integration and the costs and benefits. The report examines both the strengths of the pilot and areas that could be improved if Direct File goes forward. No decision has been made about the future of Direct File at this time. Over the next several weeks, the IRS will meet with a wide variety of partners and stakeholders to learn more about how taxpayers interacted with Direct File and what they expect from a direct e-filing system, then carefully review data from the pilot and feedback from those discussions. Based on that data and feedback, the IRS expects to announce a decision about the future of Direct File later this spring. "We will consult a wide variety of stakeholders to understand how lessons from Direct File can help us improve the entire tax system as well as assess next steps," Werfel said.

Internal Revenue Service - Fact Sheet FS-2023-23 IRS Direct File Update: Free, secure, IRS-run, electronic filing option on track to be available in 2024 as a limited pilot October 2023 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS Direct File Update: Free, secure, IRS-run, electronic filing option on track to be available in 2024 as a limited pilot FS-2023-23, October 2023 The Inflation Reduction Act of 2022 directed the IRS to study the possibility of a free, direct e-file program, commonly referred to as "Direct File." The IRS submitted the results in a report to Congress on May 16, 2023. The report found that a majority of taxpayers are interested in using a free IRS-provided tool to prepare and file taxes, and that the agency is technically capable of delivering a Direct File program. One of the goals of the IRS Strategic Operating Plan is to give taxpayers choices in how they interact with the IRS. This includes choices in how they prepare and file their taxes, whether it's through a tax professional, commercial tax software or free filing options. Direct File is one more choice to file a tax return. As directed by the Treasury Department, the IRS is taking steps to implement a limited, scaled Direct File pilot in the 2024 filing season to further assess customer support and technology needs as well as evaluate successful solutions to the potential operational challenges identified in the May report. The service will be mobile friendly, available in English and Spanish and will let taxpayers request available language and accessibility preferences for written communications from the IRS. 2024 Direct File pilot eligibility will be limited by tax scope For the 2024 filing season, Direct File will serve as a pilot with a goal to learn both about the Direct File service itself and the needs of taxpayers who use it. The tax scope for the pilot is still being finalized. Eligibility to participate in the pilot will be limited to filers with relatively simple tax returns reporting only certain types of income and claiming limited credits and deductions. The pilot scope is subject to change, but the IRS currently anticipates it will include: Income reporting - W-2 wage income - Social Security and Railroad Retirement benefits - Unemployment compensation - Interest of $1,500 or less Credits - Earned Income Tax Credit - Child Tax Credit - Credit for Other Dependents Deductions - Standard deduction - Student loan interest - Educator expenses The Direct File pilot is projected to be available to eligible taxpayers residing in Alaska, Arizona, California, Florida, Massachusetts, New Hampshire, New York, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming Eligibility to participate in the pilot will be further limited to taxpayers who reside in certain states where the pilot is available. After the release of the report to Congress PDF in May, the IRS reached out to states to discuss the 2024 Direct File pilot. Recognizing that the short window of time would likely prevent many states from being able to participate, the IRS provided as much information as possible about the pilot and had one-on-one conversations with states interested in learning more about the pilot. The IRS welcomed any state to participate in the pilot in a letter to Federation of Tax Administrators PDF. Eligible taxpayers in Arizona, California, Massachusetts and New York will be able to participate in the pilot this year as these states have chosen to partner with the IRS for the 2024 Direct File pilot. Eligible taxpayers in Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming will also be able to participate in the pilot as these states have no generally applicable state income tax. Washington has also chosen to join the integration effort as a partner for the state's application of the Working Families Tax Credit. The IRS and the Departments of Revenue in Arizona, California, Massachusetts, New York and Washington entered into separate Memorandums of Understanding in September for the purposes of collaboration on the IRS's Direct File pilot for filing season 2024. Direct File will only cover individual federal tax returns; it is not going to prepare state returns. However, once a federal return is completed and filed, Direct File will guide taxpayers in Arizona, California, Massachusetts and New York who want to file a state return to a state-supported tool that taxpayers can use to prepare and file a stand-alone state tax return, while taxpayers in Washington can apply for the Working Families Tax Credit. For this reason, participation in the 2024 pilot for people living in states with an income tax will be limited to those states that are actively partnering with the IRS on the pilot. The IRS will conduct a phased launch of the 2024 pilot Best practices demonstrate that the best way to test new technology such as Direct File is in a limited, controlled environment. As such, the number of taxpayers eligible to participate in the pilot will be limited so that the IRS can test its new service with eligible taxpayers while continuing to ensure a positive customer experience. The Direct File pilot will also be a phased pilot, in line with technological best practices. It will not be available to all eligible taxpayers immediately when the IRS begins accepting federal tax returns in early 2024. Because the IRS wants to make sure the pilot works effectively, Direct File will first be introduced to a small group of taxpayers in filing season 2024. As the filing season progresses, more and more eligible taxpayers will be able to access the service to file their 2023 tax returns. Decisions to move to subsequent phases of the 2024 pilot will be made as the IRS confirms that it is operating successfully and addressing issues related to customer support, state tax integration, fraud prevention and other operational concerns. More information about the pilot will be available at IRS.gov/directfile.

Notice 2020-35 Internal Revenue Service 2020-25 I.R.B. 948 Additional Administrative Relief with Respect to Deadlines Applicable to Employment Taxes, Employee Benefits, and Exempt Organizations Affected by the Ongoing Coronavirus Disease 2019 Pandemic Notice 2020-35 I. PURPOSE On March 13, 2020, the President of the United States issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic (Emergency Declaration). The Emergency Declaration instructed the Secretary of the Treasury "to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate, pursuant to 26 U.S.C. 7508A(a)." Pursuant to section 7508A of the Internal Revenue Code (Code), the Internal Revenue Service (IRS) is postponing deadlines for certain time-sensitive actions on account of the COVID-19 emergency. This relief is provided with respect to certain employment taxes, employee benefit plans, exempt organizations, individual retirement arrangements (IRAs), Coverdell education savings accounts, health savings accounts (HSAs), and Archer and Medicare Advantage medical saving accounts (MSAs) that, with certain exceptions, are due to be performed on or after March 30, 2020, and before July 15, 2020. In addition, pursuant to § 31.3511-1(g)(2)(ii) of the Treasury Regulations (Regulations), the IRS is providing a temporary waiver of the requirement that Certified Professional Employer Organizations (CPEOs) file certain employment tax returns and their accompanying schedules on magnetic media. The relief provided in this notice is provided on account of the ongoing COVID-19 pandemic and is in addition to the relief provided under Notice 2020-18, 2020-15 IRB 590, Notice 2020-20, 2020-16 IRB 660, and Notice 2020-23, 2020-18 IRB 742. II. BACKGROUND A. COVID-19 Disaster Relief - Prior Postponement of Certain Deadlines and Other Requirements Pursuant to Section 7508A Section 7508A provides the Secretary with the authority to postpone the time for performing certain acts under the internal revenue laws for a taxpayer determined by the Secretary to be affected by a federally declared disaster as defined in section 165(i)(5)(A). Pursuant to section 7508A(a), a period of up to one year may be disregarded in determining whether the performance of certain acts is timely under the internal revenue laws. Section 7508A(b) provides that, in the case of a pension or other employee benefit plan, or any sponsor, administrator, participant, beneficiary, or other person with respect to such a plan, affected by a federally declared disaster or a terroristic or military action described in section 7508A(a), the Secretary may specify a period of up to one year that may be disregarded in determining the date by which any action is required or permitted to be completed. If the Secretary exercises that authority, no plan will be treated as failing to be operated in accordance with its terms solely because the plan disregards any period pursuant to this relief. 1 ********* 1 Sections 518 and 4002(i) of the Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406, 88 Stat. 829 (1974), as amended (ERISA), similarly authorize the provision of relief under Titles I and IV of ERISA. ********* Following the Emergency Declaration, the Department of the Treasury (Treasury Department) and the IRS published guidance utilizing the authority provided under section 7508A for the Secretary of the Treasury or his delegate (Secretary) to postpone certain deadlines in the case of a federally declared disaster. On March 18, 2020, the Treasury Department and IRS issued Notice 2020-17, 2020-15 IRB 590, providing relief under section 7508A(a), which postponed the due date for certain federal income tax payments from April 15, 2020, until July 15, 2020. On March 20, 2020, the Treasury Department and IRS issued Notice 2020-18, which superseded Notice 2020-17 and provided expanded relief, postponing the due date for filing federal income tax returns and for making federal income tax payments from April 15, 2020, until July 15, 2020. On March 27, 2020, the Treasury Department and the IRS issued Notice 2020-20, which amplified Notice 2020-18 and provided additional relief, postponing certain federal gift (and generation-skipping transfer) tax return filings and payments from April 15, 2020, until July 15, 2020. On April 9, 2020, the Treasury Department and the IRS issued Notice 2020-23, which provided additional relief pursuant to the Emergency Declaration. Notice 2020-23 provides relief for persons with a federal tax payment obligation specified in section III.A of the notice (Specified Payment), or a federal tax return or other form filing obligation specified in section III.A of the notice (Specified Form), due to be performed (originally or pursuant to a valid extension) on or after April 1, 2020, and before July 15, 2020 (Affected Taxpayers). Notice 2020-23 also provides that the term Affected Taxpayer includes any person who performs a time-sensitive action listed in either § 301.7508A-1(c)(1)(iv) - (vi) of the Regulations or Rev. Proc. 2018-58, 2018-50 IRB 990, due to be performed (originally or pursuant to a valid extension) on or after April 1, 2020, and before July 15, 2020 (Specified Time-Sensitive Action). Thus, for example, under Notice 2020-23, Affected Taxpayers include persons described in section 7508A(b), such as sponsors or plan administrators of qualified retirement plans, due to perform a Specified Time-Sensitive Action. In addition, Affected Taxpayers include exempt organizations with a federal tax payment, federal tax return, or other form filing obligation specified in section III.A of Notice 2020-23, and exempt organizations performing time-sensitive acts listed in Rev. Proc. 2018-58, which includes the filing of Form 990 series annual information returns. B. Employment Taxes 1. Interest-free adjustments to correct employment tax reporting errors For purposes of this notice, "employment tax" means Federal Insurance Contributions Act (FICA) tax imposed on employees by sections 3101(a) and 3101(b) and on employers by sections 3111(a) and 3111(b); Railroad Retirement Tax Act (RRTA) tax imposed on employees by sections 3201(a) and 3201(b) and on employers by sections 3221(a) and 3221(b); and income tax withholding (ITW) imposed by section 3402. To the extent other types of withholding are treated as ITW under section 3402(a) (such as gambling withholding, pension withholding, and backup withholding as set forth in sections 3402(q)(7), 3405(f), and 3406(h)(10), respectively), these other types of withholding are also included in the term "employment tax." Sections 6205 and 6413 permit interest-free adjustments to correct employment tax reporting errors, and sections 31.6205-1, 31.6413(a)-1 and 31.6413(a)-2 of the Regulations provide related rules for making these adjustments. Notice 2020-23 provided relief for filing claims for credit or refund of any tax, including employment tax, due to be filed on or after April 1, 2020, and before July 15, 2020. However, Notice 2020-23 did not provide relief for employers making interest-free adjustments to correct employment tax reporting errors. 2. Electronic filing requirements for CPEOs Section 31.3511-1(g)(2) provides that CPEOs must file on magnetic media any Form 941, Employer's QUARTERLY Federal Tax Return, and Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, along with all required accompanying schedules. However, § 31.3511-1(g)(2)(ii) provides that the IRS may waive the requirements to file on magnetic media in cases of undue economic hardship. Individual requests for waivers from CPEOs must be made in accordance with applicable guidance. The term "magnetic media" generally includes electronic filing as well as other media specifically permitted under applicable guidance. C. Employee Benefits 1. Funding provisions for qualified defined benefit pension plans Section 412 provides minimum funding standards for qualified defined benefit and other pension plans. Section 412(c) provides for waivers of the minimum funding requirements in the event of temporary substantial business hardship. In order for a plan other than a multiemployer plan to receive a waiver, section 412(c)(5) provides that an application for a waiver must be submitted no later than the 15th day of the 3rd month beginning after the close of the plan year for which the waiver is sought. Section 432(b)(3)(A) provides special rules for certain multiemployer defined benefit plans. For a plan that is subject to those requirements, the plan actuary must make certain certifications each year regarding the plan's funded status. The deadline for these certifications for a plan year is the 90th day of the plan year. Under section 432(b)(3)(D), in certain circumstances, the plan sponsor is required to provide notice regarding the plan's funded status to the participants and beneficiaries, the bargaining parties, the Pension Benefit Guaranty Corporation, the Secretary of Labor and, if applicable, the Secretary of the Treasury. Section 432(c)(1) requires, for the first plan year that a multiemployer plan is in endangered status, that the plan sponsor adopt a funding improvement plan providing one or more schedules of revised benefit structures, revised contribution structures, or both, no later than 240 days following the required date for the actuarial certification of endangered status and notify the bargaining parties of the schedules within 30 days after their adoption. Section 432(c)(6) requires the plan sponsor to update the funding improvement plan and schedules annually and attach that update to the Form 5500 filed for the plan year. Section 432(e)(1)(A) and (3)(B) impose similar adoption, notification, and update requirements with respect to a rehabilitation plan for a multiemployer plan that is certified to be in critical status. Section 433 provides special funding rules for cooperative and small employer charity pension (CSEC) plans as defined under section 414(y), including rules for certification of funded status and the adoption of a funding restoration plan. Sections 302, 305 and 306 of ERISA contain provisions that are parallel to sections 412, 432 and 433 of the Code, respectively. 2. Form 5330, Return of Excise Taxes Related to Employee Benefit Plans The Form 5330 is used to report and pay a variety of excise taxes with respect to employee benefit arrangements and tax-exempt entities. See Table 1 of the Instructions for Form 5330 for a list of filing deadlines for those excise taxes. 3. Certain Tax Exempt and Government Entities/Employee Plans programs a. Initial remedial amendment period for section 403(b) plans Section 21.02 of Rev. Proc. 2013-22, 2013-18 IRB 985, as modified by Rev. Proc. 2014-28, 2014-16 IRB 944, and Rev. Proc. 2015-22, 2015-11 IRB 754, and clarified by Rev. Proc. 2017-18, 2017-5 IRB 743, establishes a remedial amendment period that permits an eligible employer to retroactively correct form defects in its written section 403(b) plan by timely adopting a section 403(b) pre-approved plan or by otherwise timely amending its section 403(b) individually designed plan. Rev. Proc. 2017-18 provides that March 31, 2020, is the last day of this initial remedial amendment period. Rev. Proc. 2019-39, 2019-42 IRB 945, sets forth a system of recurring remedial amendment periods for correcting form defects in section 403(b) individually designed plans and section 403(b) pre-approved plans first occurring after the initial remedial amendment period ends, and provides a limited extension of the initial remedial amendment period for certain form defects that is based, in part, on the initial March 31, 2020, deadline. Rev. Proc. 2019-39 also provides deadlines for the adoption of plan amendments for section 403(b) individually designed plans and section 403(b) pre-approved plans with respect to a form defect first occurring after the end of the initial remedial amendment period. b. Pre-approved defined benefit plans Rev. Proc. 2016-37, 2016-29 IRB 136, provides a regular six-year remedial amendment cycle that applies for pre-approved plans. Section 15.03(1) of Rev. Proc. 2016-37 provides that the remedial amendment period for a disqualifying provision will not end before the last day of a plan's first applicable remedial amendment cycle in which an application for an opinion or advisory letter that considers the disqualifying provision may be submitted. Announcement 2018-05, 2018-13 IRB 461, provides that an adopting employer who adopts, by April 30, 2020, a master and prototype (M&P) or volume submitter (VS) defined benefit plan that was approved based on Notice 2012-76, 2012-52 IRB 775 (2012 Cumulative List), will be considered to have adopted the plan within the second six-year remedial amendment cycle. Announcement 2018-05 also provides that an adopting employer of an M&P or VS plan may apply for an individual determination letter (if otherwise eligible) during the period beginning on May 1, 2018, and ending April 30, 2020. Announcement 2018-05 further provides that April 30, 2020, is the end of the second six-year remedial amendment cycle for pre-approved defined benefit plans. Rev. Proc. 2020-10, 2020-2 IRB 295, provides that the third six-year remedial amendment cycle for pre-approved defined benefit plans begins on the following day, and ends on January 31, 2025. c. Deadlines for voluntary correction under EPCRS Rev. Proc. 2019-19, 2019-19 IRB 1086, sets forth a system of correction programs for sponsors of retirement plans that are intended to satisfy the requirements of section 401(a), 403(a), 403(b), 408(k), or 408(p). The Employee Plans Compliance Resolution System (EPCRS) permits employers sponsoring these plans to correct certain failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis. The components of EPCRS are the Self-Correction Program (SCP), the Voluntary Correction Program (VCP), and the Audit Closing Agreement Program (Audit CAP). Under VCP, a plan sponsor may, at any time before audit, pay a limited fee and receive the IRS's approval for correction of a plan failure that has been identified to the IRS, in writing, by the plan sponsor. Once agreement has been reached with the plan sponsor as to the appropriate corrective action to be undertaken, the IRS will send the plan sponsor a compliance statement specifying the corrective action required. Pursuant to section 10.06(9) of Rev. Proc. 2019-19, the plan sponsor must implement the corrective action set forth in the compliance statement within 150 days of the date of the compliance statement. In addition, if the corrective action specified in the compliance statement includes the adoption of a corrective plan amendment, the corrective amendment must be adopted no later than 150 days after the date of the compliance statement (with a later deadline in the case of a governmental plan described in section 414(d)). d. Substitute mortality tables Rev. Proc. 2017-55, 2017-43 IRB 373, provides guidance with respect to the use of a substitute mortality table in accordance with section 430(h)(3)(C). Section 4 of Rev. Proc. 2017-55 notes that, under section 430(h)(3)(C)(v)(I), a request for approval to use substitute mortality tables generally must be submitted at least 7 months before the first day of the first plan year for which the substitute mortality tables are to apply. D. Exempt organizations 1. Form 990-N electronic notice requirement for certain small exempt organizations Section 6033(i) requires organizations that are excused from filing an annual information return (Form 990 series) by reason of normally having annual gross receipts below a certain specified amount (currently $50,000) to furnish an annual electronic notification. The annual electronic notification (Form 990-N, e-Postcard) is due by the 15th day of the fifth month after the close of the organization's tax year. 2. Time for filing suit for declaratory judgment Section 7428 provides that an organization may file, within a specified period, an appropriate pleading for declaratory judgment with the United States Tax Court, the United States Court of Federal Claims, or the district court of the United States for the District of Columbia, involving the IRS's determination, or failure to make a determination, with respect to the organization's initial or continuing qualification or classification as an exempt organization described in section 501(c) or (d) and exempt from tax under section 501(a), an organization described in section 170(c)(2), a private foundation under section 509(a), a private operating foundation under section 4942(j)(3), or a cooperative described in section 521(b). Although Notice 2020-23 postponed the time to commence an action for declaratory judgment with the United States Tax Court, it did not cover similar suits filed with the Court of Federal Claims or the district court of the United States for the District of Columbia. E. Forms 5498, -ESA, -SA Form 5498, IRA Contribution Information, Form 5498-ESA, Coverdell ESA Contribution Information, and Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, must be filed with the IRS and furnished to participants and beneficiaries by the times specified in the instructions to these forms. III. RELIEF GRANTED This notice amplifies the definition of Affected Taxpayer as provided in Notice 2020-23 to include Affected Taxpayers as defined in section III.A of this notice. This notice also amplifies the definition of Specified Time-Sensitive Actions as provided in Notice 2020-23 to include the Time-Sensitive Actions described in section III.B of this notice that are due to be performed on or after March 30, 2020, and before July 15, 2020. These amplified definitions, rather than the definitions in Notice 2020-23, apply for purposes of the relief described in this section III. Pursuant to this notice, the revised deadline for an Affected Taxpayer to perform a Time-Sensitive Action described in section III.B of this notice is July 15, 2020, unless a different revised deadline is specified under section III.B.2(e) or III.B.4 of this notice. In the case of Time-Sensitive Actions with respect to provisions of the Code for which there are parallel provisions in ERISA, the relief provided under this section III also applies for purposes of those provisions under ERISA. This notice also provides a temporary waiver of the requirement under § 31.3511-1(g)(2) that CPEOs file certain employment tax returns, and their accompanying schedules, on magnetic media (including electronic filing). This temporary waiver is extended to all CPEOs; individual requests for waiver do not need to be submitted. The waiver applies only to Forms 941 filed for the second, third, and fourth quarter of 2020 and only to Forms 943 filed for calendar year 2020, and their accompanying schedules. Accordingly, CPEOs are permitted, but not required, to file a paper Form 941, and its accompanying schedules, in lieu of electronic submission for the second, third, and fourth quarters of calendar year 2020. In addition, CPEOs are permitted, but not required, to file a paper Form 943, and its accompanying schedules, in lieu of electronic submission for calendar year 2020. A. Affected Taxpayers For purposes of the relief provided with respect to Time-Sensitive Actions described in section III.B of this notice, Affected Taxpayers include: 1. With respect to employment taxes, employers who perform a Time-Sensitive Action described in section III.B.1 of this notice. 2. With respect to employee benefit plans, the plan (including a section 403(b) plan, a governmental section 457(b) plan, a SEP plan described in section 408(k), or a SIMPLE IRA plan described in section 408(p)), or any sponsor, administrator, participant, beneficiary, disqualified person, or other person with respect to such a plan who performs a Time-Sensitive Action described in section III.B.2 of this notice. 3. With respect to exempt organizations, those persons performing a Time-Sensitive Action described in section III.B.3 of this notice. 4. Filers of a Form 5498, Form 5498-SA, or 5498-ESA for whom filing the form is a Time-Sensitive Action described in section III.B.4 of this notice. B. Time-Sensitive Actions The Time-Sensitive Actions to which the relief under this section III applies are: 1. Correction of employment tax reporting errors using the interest-free adjustment process under sections 6205 and 6413 Actions to correct underpayments or overpayments pursuant to sections 6205 and 6413, respectively. 2. Qualified retirement plans a. Funding waiver Application for a funding waiver under section 412(c) for a defined benefit pension plan that is not a multiemployer plan. b. Multiemployer plan funding With respect to a multiemployer defined benefit pension plan, actions due to be performed on or before the dates described in: - Section 432(b)(3) for the certification of funded status and the notice to interested parties of that certification. - Sections 432(c)(1) and 432(e)(1) for the adoption of, and the notification to the bargaining parties of the schedules under, a funding improvement plan or rehabilitation plan. - Sections 432(c)(6) and 432(e)(3) for the annual update of a funding improvement plan and its contribution schedules, or rehabilitation plan and its contribution schedules, and the filing of those updates with the Form 5500 annual return. c. CSEC plans With respect to a CSEC plan, actions to be performed on or before the date described in: - Section 433(c)(9) for making the contribution required to be made for the plan year. - Section 433(f)(3)(B) for making required quarterly installments. - Section 433(j)(3) for the adoption of a funding restoration plan. - Section 433(j)(4) for the certification of funded status. d. Form 5330 Filing of Form 5330 and payment of the associated excise taxes. The period beginning on March 30, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest or penalty for failure to file the Form 5330 or to pay the excise tax postponed by this notice. Interest and penalties with respect to such postponed filing and payment obligations will begin to accrue on July 16, 2020. e. Tax Exempt and Government Entities Division, Employee Plans programs - Extension of initial remedial amendment period for section 403(b) plans. With respect to the remedial amendment period and plan amendment rules for section 403(b) plans described in Rev. Proc. 2017-18 and Rev. Proc. 2019-39, actions that are otherwise required to be performed on or before March 31, 2020, with respect to form defects or plan amendments. The deadline for those actions is postponed to June 30, 2020 (and "June 30, 2020" should be substituted for all references to "March 31, 2020" in Rev. Proc. 2017-18 and in Rev. Proc. 2019-39). - Pre-approved defined benefit plans. With respect to pre-approved defined benefit plans, the deadline for the following actions is postponed until July 31, 2020: o Adoption of a pre-approved defined benefit plan that was approved based on the 2012 Cumulative List; o Submission of a determination letter application under the second six-year remedial amendment cycle; and o Actions that are otherwise required to be performed with respect to disqualifying provisions during the remedial amendment period that would otherwise end on April 30, 2020. - EPCRS. With respect to a compliance statement issued under VCP, implementation of all corrective actions, including adoption of corrective amendments, required by the compliance statement. - Substitute mortality table. Request for approval of a substitute mortality table in accordance with section 430(h)(3)(C). 3. Exempt organizations a. Form 990-N electronic notice requirement for certain small exempt organizations Electronic submissions of Form 990-N under section 6033(i). b. Time for Commencing a Suit for Declaratory Judgment Pursuant to Section 7428 Filings by organizations listed in section 7428(a)(1) of an appropriate pleading for declaratory judgment with the United States Court of Federal Claims or the district court of the United States for the District of Columbia, within the period specified in section 7428(b)(3). 4. Form 5498 series With respect to the Form 5498, IRA Contribution Information, Form 5498-ESA, Coverdell ESA Contribution Information, and the Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, the due date for filing and furnishing the forms is postponed to August 31, 2020. The period beginning on the original due date of those forms and ending on August 31, 2020, will be disregarded in the calculation of any penalty for failure to file those forms. Penalties with respect to such a postponed filing will begin to accrue on September 1, 2020. IV. EFFECT ON OTHER DOCUMENTS Rev. Proc. 2017-18, Rev. Proc. 2017-55, Announcement 2018-05, Rev. Proc. 2019-19, Rev. Proc. 2019-39, and Rev. Proc. 2020-10 are modified, and Notice 2020-18, Notice 2020-20, and Notice 2020-23 are amplified. V. DRAFTING INFORMATION The principal author of this notice is Diane S. Bloom of the Office of Associate Chief Counsel, Employee Plans, Exempt Organizations, and Employment Taxes, with the participation of staff from other offices. For further information regarding the guidance related to employment taxes under this notice, please contact Lynne A. Camillo at (202) 317-4774 or Nina Roca at (202) 317-6798. For further information regarding the guidance related to qualified retirement plans under this notice, please contact Diane S. Bloom at (202) 317-6700. For further information regarding the guidance related to exempt organizations under this notice, please contact Ingrid M. Vatamanu at (202) 317-4541. These telephone calls are not toll-free.

Private Letter Ruling Number: 202201014 Internal Revenue Service October 14, 2021 Department of the Treasury Internal Revenue Service Independent Office of Appeals Number: 202201014 Release Date: 1/7/2022 Date OCT 14 2021 Person to contact: Name: Employee ID Number: Phone: Fax: Employer ID number: Uniform issue list (UIL): 0501.07-03 Certified Mail Dear *******: This is a final adverse determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (the "Code") Section 501(a) as an organization described in Section 501(c)(7) of the Code. We made the adverse determination for the following reasons: Organizations described in section 501(c)(7) of the Internal Revenue Code and exempt from tax under section 501(a) must be both organized for pleasure, recreation, and other non-profitable purposes, substantially all of which activities are for such purposes. Your organization leases your land and building facilities to the general public, which results in excessive nonmember and investment income exceeding 35 percent of your total income. Reg. 1.501(c)(7)-1(b) provides that a club which engages in business, such as making its social and recreational facilities available to the general public, or by selling real estate, timber, or other products, is not organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, and is not exempt under section 501(a). Accordingly, your organization is not organized and operated exclusively for exempt purposes within the meaning of section 501(c)(7). You're required to file federal income tax returns on Forms 1120, U.S. Corporation Income Tax Return. Mail your form to the appropriate Internal Revenue Service Center per the form's instructions. You can get forms and instructions by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). You've agreed to waive your right to contest this determination under the declaratory judgment provisions of Section 7428 of the Code. We'll make this letter and the proposed adverse determination letter available for public inspection under Section 6110 of the Code after deleting certain identifying information. We provided to you, in a separate mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in Notice 437. If you have questions, contact the person at the top of this letter. Sincerely, Enclosure Closing Agreement. cc: ISSUES Whether the ******* at ******* (the Organization or Association) qualifies for exemption under Internal Revenue Code (IRC) Section (Sec.) 501(c)(7). FACTS Formation and Purpose The ******* at ******* (the Organization or Association) was formed in the *******. The association incorporated on ******* in *******. It did not apply for exemption with an IRS form 1024 with TEGE. Article II of the Articles of Incorporation state the following: ARTICLE II The purpose of the corporation shall be for ******* and other interested persons to associate in a fraternal and social organization, and to promote the general and community welfare of its membership and their families. The Corporation shall be authorized to hold meetings of the membership, hold Board of Directors meetings, meetings of the officers and committees, conduct charitable activities, hold parties, dances or other fraternal gatherings, to lease real or personal property, to own and transfer real property for the purpose of constructing and operating a fraternal meeting hall or club house, build recreational facilities, and to do all acts not prohibited to a non-profit organization under the laws of the State of ******* or the United States of America. In addition, the Corporation shall have all powers to do all acts conferred by the laws of the State of *******, and to engage in all acts and lawful activities incidental to the foregoing purposes. There are no amendments to the organizing documents. Application and Recognition of Exempt Status The Organization did not submit Form 1024, Application for Recognition of Exemption under Section 501(a). The Organization is considered a self-declared exempt organization. Internal documents do not show an application received or a date of determination. Examination On *******, an initial Information Document Request (IDR#1) was issued with a letter to inform the Organization of selection of audit. An appointment was scheduled for *******. However, it was rescheduled and was converted to a correspondence examination. The interview took place on ******* as a teleconference. Initial Meeting On *******, Representatives and a manager of the Organization provided the following information during the initial meeting: Memberships The Organization is an ******* association of members. There was a roll of ******* reported members, but incoming fees did not match amounts reported. The reported amounts equal enough for ******* members. Activities The primary activities of the Organization are to maintain a rental hall structure and provide rental space to cellular towers. During the interview with ******* the Organization stated they had potlucks and poker nights, but this is not recorded in the documentation given to the IRS. There were no attendance sheets or a calendar of events. No publications with announcements: Lease There are two lease groupings. Most of the income for ******* comes for the daily rental of the hall to individuals for family celebrations or other organizational meeting space. There were also a few instances of donated or discounted rentals to other groups such as school or bible clubs. Minutes On *******, the organization's representative, attorney ******* provided minutes that the organization took in board meetings held on: ******* and *******. There were three Board of Directors meetings in the span of two years. Publications There was a PowerPoint showing the Ribbon Cutting dated ******* event showcasing the remodeled building and historical pictures of members. The Organization possesses a website to advertise their hall rental to the public and its members. Contracts/agreements On ******* Representatives provided written agreements that the Organization entered into during the year ******* for the rental of the hall. This is labeled as Response to IDR #2. Income & Expenses Reported on Form 990-EZ for 20** The Organization provided the following information in Part I, Revenue, Expenses and Changes In Net Assets or Fund Balances, on Form 990-EZ, Return of Organization Exempt from Income Tax. The "Program Service Revenue" is actually the rent income from hall rentals. And the "Investment Income" on the Form 990-T should also be classified as rental income from the rental of the cellular towers. Both rents are considered non-member income. Rental Income & Expenses Reported on Form 990-T for ******* The Organization reported the following gross rents, rental expenses, and gross receipts on Form 990-T. This is reported as "Investment Income" of the Form 990-EZ for *******. On the Form 990-T it is reported as "Rent income" and not "Investment income". Rents from the Space Used by Cell Towers Rents from the cell towers were labeled as investments in the accounting system and subsequently in the tax filing. Rents from use of the hall are as follows: Rents from the Use of the Hall Space Total Non-Member Income as a Percentage of Gross Receipts Membership Dues as a Percentage of Gross Receipts There were some discrepancies as to how program revenue was computed for *******, nevertheless the totals still agree at the end that membership dues are very low in comparison to non-member income. The organization tried recruiting members within their hall rental contracts. A portion of the rental was used as if the leasee was paying a portion to the association as membership dues to incentivize those leasees to join. Whether looking at gross receipts or income, most revenue or income is not coming from members. Responses to Follow-up Information Documents Request (IDR#2 & 3) On *******, IDR#2 was issued to the Organization requesting: A. Documents to verify if the Organization meets the requirements under the IRC Section 501(c)(7) which included asking for a copy of the 990/990-EZ and 990-T filings for ******* the articles of Incorporation (amendments to those if appropriate) and a copy of current bylaws. B. Documents to verify if the Organization meets the operational requirements for an IRC Sec. 501(c)(7) social club by asking for the minutes for board meetings, media publications to show activity during the exam year, schedules or calendars of activities or rental of facilities, sign-in sheets for members and detail financial data reported in 990-EZ form. C. Documents to verify if the Organization's financial records match the filed Form 990-EZ.The electronic version of financial records that were still missing including the general ledger, and workpapers to reach the reported figures on filing income tax forms. Records that showed transactions and bank statements for the Organization. On *******, Representatives of the Organization provided a fax of 239 pages including: A.(1) Form 990-EZ & Form 990-T filed for tax year ending December 31, 20** Form 8879-EO. Includes Depreciation Report. Form 990-W. Form 2220. Form 8868. A.(2) Articles of Incorporation A.(3) Amendments to Articles of Incorporation - None A.(4) Current Bylaws B.(1) Minutes for Board ******* to present B.(2) EO Publications B.(3) Activities conducted B.(4) Member sign-in sheets - BBQ, Members roster B.(5) Listing of rental contracts C.(2) Underlying accounting records C.(3)(a) Canceled checks and check register C.(3)(D) F2848 for *******, CPA Or *******, the Organization was given a transcript of the initial interview administered over a teleconference meeting between the Attorney, the CPA and *******. The Organization was asked to make comments or corrections. The Organization's POA, Representative attorney ******* was called to see if they had received the letter and was reminded the deadline was on ******* which was on a Saturday, but gave the Organization a chance to make corrections to the transcript of *******. No response was received. LAW IRC Sec. 501(c)(7) provides exemption from federal income tax for clubs that are organized for pleasure, recreation, and other non-profitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder. Treasury Regulations Sec. 1.501(c)(7) provides that, in general, the exemption extends to social and recreation clubs supported solely by membership fees, dues and assessments. However, a club that engages in a business, such as making its social and recreational facilities open to the general public, is not organized and operated exclusively for pleasure, recreation and other non-profitable purposes, and is not exempt under section 501(a). Prior to its amendment in 1976, IRC Sec. 501(c)(7) required that social clubs be operated exclusively for pleasure, recreation and other nonprofitable purposes. Public Law 94-568 amended the "exclusive" provision to read "substantially" in order to allow an IRC Sec. 501(c)(7) organization to receive up to 35 percent of its gross receipts, including investment income, from sources outside its membership without losing its tax-exempt status. The Committee Reports for Public Law 94-568 (Senate Report No. 94-1318 2d Session, 1976-2 C.B. 597) further states; (a) Within the 35 percent amount, not more than 15 percent of the gross receipts should be derived from the use of a social club's facilities or services by the general public. This means that an exempt social club may receive up to 35 percent of its gross receipts from a combination of investment income and rental income from non-members, so long as the latter do not represent more than 15 percent of total receipts. (b) Thus, a social club may receive investment income up to the full 35 percent of its gross receipts if no income is derived from non-members' use of club facilities. (c) In addition, the Committee Report states that where a club receives unusual amounts of Income, such as from the sale of its clubhouse or similar facilities, that income is not to be included in the 35 percent formula. Revenue Ruling 60-324 illustrates a club, which has a regular club dining room and a bar. The private dining room is suitable for cocktail parties, small or medium sized parties or luncheons, small wedding receptions, similar private parties and the like. By making its social facilities available to the general public, the club cannot be treated as being operated exclusively for pleasure, recreation or other non-profitable purposes. Revenue Ruling 68-149 holds a social club as not exempt as an organization described in IRC Sec. 501(c)(7) to the extent that income is derived from nonmember sources, it inures to the benefit of the members. If such activities are other than incidental, trivial, or nonrecurrent, it is considered that they are intended to produce income and are reflective of a purpose inconsistent with exemption under IRC Sec. 501(c)(7). Revenue Ruling 69-635 illustrates an automobile club whose principal activity is rendering automobile services to its members but has no significant social activities does not qualify for exemption under IRC Sec. 501(c)(7). Revenue Procedure 71-17 sets forth the guidelines for determining the effect of gross receipts derived from the general public's use of a social club's facilities on exemption under IRC Sec. 501(c)(7). Where nonmember income from the usage exceeds the standard as outlined in this Revenue procedure, the conclusion reached is that there is a non-exempt purpose and operating in this manner jeopardizes the organization's exempt status. TAXPAYER'S POSITION Taxpayer's position has not been provided. GOVERNMENT'S POSITION It's the Government's position that the Organization does not qualify for 501(c)(7) status. Under IRC Sec. 501(c)(7), there must be at least some sort of commingling of members to constitute an exempted "club". Here, the Organization is operated as an ******* and is member-supported. However, most of the income comes from the rental of the hall and rent income from cell towers on the property. The income from the hall rental is designated as income coming from "program services" and the income from the cell towers rental is designated as "Investment income" on the Form 990-EZ and as rent income on the Form 990-T. Only $ ******* is coming from member dues from actual members. Therefore, the Organization is not organized and operated for pleasure, recreation, and other non-profitable purposes of its members. It's the Government's position that the Organization's rental income, received from the rental the Organization's hall, is considered income from the general public's use of the Organization's facilities and jeopardizes its tax-exempt status Under Public Law 94-568, amendment of IRC Sec. 501(c)(7) allows an IRC Sec. 501(c)(7) organization to receive up to 35 percent of its gross receipts, including investment income, from sources outside its membership without losing its tax-exempt status. Further, within the 35 percent amount, not more than 15 percent of the gross receipts should be derived from the use of a social club's facilities or services by the general public. Here, the Organization was in the hall rental business to make profits. The hall was rented for special events and for weekend parties. The gross rents the Organization received from the renting of the hall accounted for a lot more than 15 percent of gross receipts for ******* - in the range of gross income from non-members consistently above ** %. The gross rents are considered income generated from the use of the Organization's facilities by the general public. Therefore, the Organization's rental income is considered income from the general public's use of the Organization's facilities and jeopardizes its tax-exempt status. It's the Government's position that the Organization no longer qualifies for exemption under IRC Sec. 501(c)(7). In Revenue Ruling 60-324, a social club had a regular club dining room and a bar. By making its social facilities available to the general public, the club was not operating exclusively for pleasure, recreation or other non-profitable purposes. Under Revenue Ruling 66-149, a social club was not exempt as an organization described in IRC Sec. 501(c)(7) to the extent that income is derived from nonmember sources from activities that are other than incidental, trivial, or nonrecurrent. Under Revenue Ruling 69-635, an automobile club whose principal activity is rendering automobile services to its members but has no significant social activities does not qualify for exemption under IRC Sec. 501(c)(7). Here, the Organization manages a dining place, through the rental agreement, and regularly makes it available to the general public. The service the Organization provides to its members is, through a managing agent, to maintain facilities located on a real property. Therefore, the Organization no longer qualifies for exemption under IRC Sec. 501(c)(7). CONCLUSION The Organization does not qualify for exemption under IRC Sec. 501(c)(7) for the year *******, as illustrated in the Government's position. Accordingly, the Organization's tax-exempt status should be disqualified effective *******. Should this revocation be upheld, Form 1120, U.S. Corporation Income Tax Return, must be filed starting with the tax period ending ******* and years after.

Revenue Procedure 2022-18 Internal Revenue Service 2022-13 I.R.B. 933 26 CFR 1.911-2: Qualified Individuals. (Also: Part I,§ 911.) Rev. Proc. 2022-18 SECTION 1. PURPOSE This revenue procedure provides information to any individual who failed to meet the eligibility requirements of section 911(d)(1) of the Internal Revenue Code (Code) for 2021 because of adverse conditions in a foreign country. SECTION 2. BACKGROUND.01 Section 911 allows a "qualified individual," as defined in section 911(d)(1), to elect to exclude from gross income the foreign earned income and to exclude or deduct the housing cost amount of such individual..02 Section 911(d)(1) of the Code defines the term "qualified individual" as an individual whose tax home is in a foreign country and who is (A) a citizen of the United States and establishes to the satisfaction of the Secretary of the Treasury that the individual has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire taxable year, or (B) a citizen or resident of the United States who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days..03 In addition, section 911(d)(4) of the Code provides that an individual will be treated as a qualified individual with respect to a period in which the individual was a bona fide resident of, or was present in, a foreign country if the individual left the country during a period for which the Secretary of the Treasury, after consultation with the Secretary of State, determines that individuals were required to leave because of war, civil unrest, or similar adverse conditions that precluded the normal conduct of business. An individual must establish that but for those conditions the individual could reasonably have been expected to meet the eligibility requirements..04 The Internal Revenue Service previously has listed countries for which the eligibility requirements of section 911(d)(1) of the Code are waived under section 911(d)(4) because of adverse conditions in those countries. See Rev. Proc. 2021-21, 2021-17 I.R.B. 1118. 1 1 In addition to Rev.Proc. 2021-21, for 2020, the Secretary of the Treasury, in consultation with the Secretary of State, determined that the global health emergency caused by the COVID-19 virus is an adverse condition that precludes the normal conduct of business, and certain relief was provided, as described in Rev.Proc. 2020-27, 2020-20 I.R.B. 803. SECTION 3. APPLICATION.01 For 2021, the Secretary of the Treasury, in consultation with the Secretary of State, has determined that war, civil unrest, or similar adverse conditions precluded the normal conduct of business in the following countries beginning on the specified date: For example, for purposes of section 911 of the Code, an individual who left Iraq on or after January 19, 2021, will be treated as a qualified individual with respect to the period during which that individual was present in, or was a bona fide resident of, Iraq if the individual establishes a reasonable expectation that he or she would have met the requirements of section 911(d) but for those conditions..02 To qualify for relief under section 911(d)(4) of the Code, an individual must have established residency, or have been physically present, in the foreign country on or before the date that the Secretary of the Treasury determines that individuals were required to leave the foreign country. For example, individuals who were first physically present or established residency in Iraq after January 19, 2021, are not eligible to qualify for the exception provided in section 911(d)(4) of the Code for 2021. SECTION 4. INQUIRIES A taxpayer who needs assistance on how to claim this exclusion, or on how to file an amended return, should consult the section under the heading Foreign Earned Income Exclusion at https://www.irs.gov/individuals/international-taxpayers/us-citizens-and-resident-aliens-abroad; consult the section under the heading How to Get Tax Help at the same web address; or contact a local IRS office. SECTION 5. DRAFTING INFORMATION The principal author of this revenue procedure is Kate Y. Hwa of the Office of Associate Chief Counsel (International). For further information regarding this revenue procedure, contact Ms. Hwa at (202) 317-5001 (not a toll-free number).

Internal Revenue Service - Information Release IR-2020-178 Working Virtually: Avoid phishing scams; Part 4 of Security Summit tips for tax professionals August 11, 2020 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 Working Virtually: Avoid phishing scams; Part 4 of Security Summit tips for tax professionals IR-2020-178, August 11, 2020 WASHINGTON -- The Internal Revenue Service and the Security Summit partners today warned tax professionals to be alert to new phishing scams that try to take advantage of COVID-19, Economic Impact Payments and increased teleworking by practitioners. The IRS, state tax agencies and the nation's tax industry urged tax firms to review and heighten their data protection plans this summer as cybercriminals step up efforts to steal client tax information. Crooks are targeting tax professionals as well as taxpayers. Avoiding phishing emails is the fourth in a five-part Security Summit series called Working Virtually: Protecting Tax Data at Home and at Work. The Security Summit initiative by the IRS, state tax agencies and private-sector tax industry spotlights basic security steps for all practitioners, but especially those working remotely in response to COVID-19. "The coronavirus has created new opportunities for cybercriminals to use email to try stealing sensitive information," said IRS Commissioner Chuck Rettig. "The vast majority of data thefts start with a phishing email trick. Identity thieves pose as trusted sources - a client, your software provider or even the IRS - to lure you into clicking on a link or attachment. Remember, don't take the bait. Learn to recognize and avoid phishing scams." Phishing emails generally have an urgent message, such as your account password expired. They direct you to an official-looking link or attachment. The link may take you to a fake site made to appear like a trusted source and request your username and password. Or, the attachment may contain malware, which secretly downloads malware that tracks keystrokes and allows thieves to eventually steal all the tax pro's passwords. This year, IRS identified a highly sophisticated attack against tax firms where thieves gained remote access either through phishing or malware and were able to enter the cloud storage accounts that held client files. In one case, thieves spent 18 months quietly downloading and accessing taxpayer information before they were discovered. The Department of Homeland Security's Cybersecurity and Infrastructure Security Agency (CISA) recently issued a warning to all organizations to educate employees, especially those teleworking, about increased activity related to phishing scams. These scams focused on COVID-19 fears by presenting themselves as providers of face masks or personally protective equipment in short supply. Thieves also used other tactics against taxpayers, impersonating the IRS and calling or emailing requests for bank account information to send the Economic Impact Payments. Tax professionals should beware of emails from criminals posing as potential clients. As people practice social distancing these days, criminals may exploit this process to try to trick tax practitioners into opening links or attachments. The Security Summit continues to urge tax professionals to create "trusted customer" policies, and contact potential clients by phone or video conference. Taxpayers and tax preparers can forward suspicious emails posing as the IRS to phishing@irs.gov. Because phishing emails are so common and successful, Summit partners urge tax professionals to educate all office personnel about the dangers and risks of opening suspicious emails - especially during the COVID-19 period. Additional resources Tax professionals also can get help with security recommendations by reviewing the recently revised IRS Publication 4557, Safeguarding Taxpayer Data (PDF), and Small Business Information Security: The Fundamentals (PDF) by the National Institute of Standards and Technology. Publication 5293, Data Security Resource Guide for Tax Professionals (PDF), provides a compilation of data theft information available on IRS.gov. Also, tax professionals should stay connected to the IRS through subscriptions to e-News for Tax Professionals and Social Media or visit Identity Theft Central at IRS.gov/identitytheft.

Private Letter Ruling Number: 202339018 Internal Revenue Service April 11, 2023 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Release Number: 202339018 Release Date: 9/29/2023 UIL Code: 501.03-00 Date: 04/11/2023 Taxpayer ID number (last 4 digits): Form: Tax periods ended: Person to contact: Name: ID number Telephone: Fax: Last day to file petition with United States Tax Court: 07/10/2023 CERTIFIED MAIL - Return Receipt Requested Dear ******: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective ******, ******. Your determination letter dated ******, ******, is revoked. Our adverse determination as to your exempt status was made for the following reasons: Organizations described in IRC Section 501(c)(3) and exempt under IRC Section 501(a) must be both organized and operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3). You have no demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3) and that no part of your net earnings inure to the benefit of private shareholders or individuals. You failed to respond to repeated reasonable requests to allow the Internal Revenue Service to examine your records regarding your receipts, expenditures, or activities as required by IRC sections 6001, 6033(a)(1) and Rev.Rul. 59-95, 1959-1 C.B. 627. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fillable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: US Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under f RC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax, problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Taxpayer Advocate Office Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies. Keep the original letter for your records. Sincerely, Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: December 12, 2022 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact information: Name: ID number: Telephone: Response due date: January 11, 2023 CERTIFIED MAIL -- Return Receipt Requested Dear ******: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, ****** for Lynn A. Brinkley Acting Director Exempt Organizations Examinations Enclosures: Form 886-A and Attachments Form 6018 Issue: Whether ****** (******) continues to qualify for exemption from Federal income tax under section 501(a) of the Internal Revenue Code (Code) as a charitable organization described in Code section 501(c)(3). Facts: ****** was incorporated in the State of ****** on ******, ******, under the state's General Laws, Chapter 180. ****** organizing document, the Articles of Organization, provides that the purpose of the corporation is to engage in the following activities: Article IV of ****** Articles of Organization further provides that the organization is organized exclusively for charitable, religious, educational, and scientific purposes under section 501(c)(3) of the Code, or corresponding section of any future federal tax code. ****** organizing document also provides for a dissolution clause intended to allow ****** to satisfy the organizational requirements for Federal exemption. ****** Articles of Organization identifies the incorporator as ******. ****** is also listed as the registered agent for the organization with a business address of ******, ******, ******, ******. The ******, ******address is also listed by ****** as the street address (PO Boxes are not accepted by the State) for its principal office in ******. In addition to serving as a Director, ****** is also listed as the President of the organization in Article VII, Part b of the organizing document. Two other individuals, ****** (Treasurer) and ****** (Secretary), are listed as initial officers and directors of the organization. Article VII, Part b requires an address for each initial officer and director that is other than a P.O. Box. An address in ****** is provided for ******. The address given for ******, which is ****** in ******, ******, corresponds to the address provided for the ****** on its Form 1023-EZ application as described in more detail below. A copy of the organizing document filed by ****** with the state was secured by the IRS examiner from the state website and appended as Exhibit A. The ******, ****** street address provided by ****** on its Articles of Organization for both its resident agent and the organization's principal office in ******, corresponds to a United Parcel Service (UPS) retail store which offers mailbox services. A copy of the pertinent website content posted by or on behalf of the UPS store is appended as Exhibit B. As described in Exhibit B, the following mailbox services are offered by UPS at its retail store located at ****** in ******, ******: - A real street address in lieu of a P.O. Box. - Package and mail receipt notifications - Mail holding and forwarding - Call-in mail check In ******, ****** filed Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, with the Internal Revenue Service (IRS). Part I of the Form 1023-EZ requires applicant organizations to list the names, titles and mailing addresses of all officers, directors, and trustees. Two of the officers/directors listed on ****** organizing document, ****** and ******, are also listed in Part I of the Form 1023-EZ. ****** and ****** are given the titles of Executive Director and Director, respectively. An individual named ****** is the third person listed in Part I in lieu of ****** who was listed on ****** organizing document. ****** is also identified as a director of the organization with an address in ******, ******. ****** furnished the following mailing address for the organization on its Form 1023-EZ: ****** address in ****** also corresponds to a UPS retail store which offers mailbox services. A copy of the pertinent website content posted by or on behalf of the UPS store located in ****** in ****** is appended as Exhibit C. In its Form 1023-EZ application, ****** attested that it is both organized and operated exclusively for charitable purposes. ****** did not furnish a copy of its Articles of Organization since the organizing document is not required to be filed with the streamlined Form 1023-EZ application. Based on representations and attestations made by ****** in its Form 1023-EZ, the IRS issued a favorable determination letter in ******, granting ****** recognition of exemption under section 501(c)(3) of the Code effective ******, ******. ****** was classified as a public charity under sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code based on its attestation regarding public support in Part IV of the Form 1023-EZ. IRS records show that ****** filed Form 990-N, Electronic Notice (e-Postcard), for the ****** and ****** calendar tax years. ****** filed Form 990-N in lieu of a Form 990 or Form 990-EZ return. The organization indicated on Form 990-N that its gross receipts are normally $ ******, ****** or less. The address reported by ****** on the Forms 990-N is the same address reported on the Form 1023 application - ******, ******, ******. In ******, the Tax Exempt and Governmental Entities (TE/GE) division of the IRS selected ****** for examination of its books and records covering the ****** calendar year. The notice of examination package, which is dated ******, ******, consists of IRS letter #6031, Form 4564, Information Document Request (IDR), Publication 1, Your Rights as a Taxpayer, Notice 609, Privacy Act Notice, and Publication 3498-A, The Examination Process (Audits by Mail). The notice of examination package was mailed to ****** at the last known address on file for the organization, which is as follows: As noted on page 1 of the 2-page IDR issued with the examination notice, the examination of ****** books and records is intended to verify that the organization: 1. Operates in accordance with section 501(c)(3) of the Code 2. Is eligible to file Form 990-N based on gross receipts, and 3. Filed all required returns including information returns. As part of standard audit procedures, the IRS examiner requested that ****** furnish certain records and information needed to determine whether the organization is operating in furtherance of charitable and other exempt purposes described in section 501(c)(3) of the Code. IDR #1 issued to ****** on ******, ******, requests copies of the following records and information covering the ****** calendar year under examination: - Chart of accounts - General ledger - Adjusted trial balance - Cash disbursements journal. - Monthly bank statements for ****** primary operating (checking) account together with canceled checks or check images furnished by the bank. - Monthly statements for all credit cards that may have been issued to ******. - Minutes of meetings held by ****** Board of Directors and committees of the Board. - Internal policies and procedures regarding the handling and recording of cash donations. - Lease agreements and other information relating to any office or other facility used by ****** to conduct activities. - Contracts and other arrangements with individuals and/or organizations which solicit and raise funds for ****** including, but not limited to, professional fundraising organizations. - The organization's website address, if any, and the identity of the party that hosts the website. If no website is maintained, ****** was requested to provide copies of records which describe the activities conducted in ******. In the absence of formal marketing and fundraising materials, ****** was asked to provide a statement describing the activities, services, programs, and events conducted by the organization in ******. - Information regarding the accounting software used by ****** for preparation of its books and records. The response due date for IDR #1 was ******, ******. ****** did not respond to the IDR or otherwise contact the IRS examiner or the group manager by the due date. In accordance with established IRS procedures, a follow-up "Delinquency Notice" letter was issued to ****** with a copy of IDR #1 on ******, ******, with a response due date of ******, ******. The delinquency notice states, in part, that if the organization does not fully respond to the IDR by the response due date, the IRS will propose revocation of ****** exempt status. The delinquency notice was not returned by the post office as undeliverable. ****** did not respond to the delinquency notice or otherwise contact the IRS examiner. Neither the IRS examiner nor the group manager subsequently received any of the requested records and information from ****** or any other officer or director of the organization. There is no evidence that ****** is an affiliate or chapter of any other exempt organization or network of charities that operate within the United States. ****** did not identify a website on Form 990-N filed for ******. A search of the online corporate database maintained by the State of ******, which provides information on the status of entities incorporated under ****** state law, shows that ****** is currently in active status and continues to file annual reports. A copy of the entity status search for ****** secured by the IRS examiner on ******, ******, is appended as Exhibit D. Applicable Law: Section 501(c)(3) of the Code provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual. Section 1.501(c)(3)-1(a)(1) of the Treasury Regulations states that to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section - charitable, religious, educational, scientific, literary, testing for public safety, or for the prevention of cruelty to children or animals. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Section 1.501(c)((3)-1(c) of the regulations describes the operational test requirements for 501(c)(3) exemption. The operational test focuses on how the organization is actually operated, regardless of whether it is properly organized for tax-exempt purposes. Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. This is referred to as the "primary activities" test. Section 1.501(c)(3)-1(c)(2) of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Section 511 of the Code imposes a tax at corporate rates under section 11 on the unrelated business taxable income of certain tax-exempt organizations. Section 6001 of the Code provides, in part, that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. Section 1.6001-1(c) of the regulations provides that in addition to such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and regulations sections 1.6033-1 through 1.6033-3. Section 1.6001-1(e) of the regulations provides that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and, shall be retained as long as the contents thereof may be material in the administration of any internal revenue law. Section 6033 of the Code provides, in general, that every organization exempt under IRC 501(a) shall file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the Internal Revenue laws as the Secretary may by forms of regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Section 6033 of the Code provides an exception to the annual filing requirement in the case of an organization described in section 501(c) (other than a private foundation or a supporting organization described in section 509(a)(3)) the gross receipts of which in each taxable year are normally not more than $50,000. See section 1.6033-2(g)(1)(iii) of the regulations. Section 1.6033-2(g)(5) of the regulations provide that an organization that is not required to file an annual return by virtue of the gross receipts exception must submit an annual electronic notice notification as described in section 6033(i) of the Code. Section 1.6033-2(i)(2) of the regulations provides that every organization which is exempt from tax, whether or not it is required to file an annual information return, shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status and administering the provisions of subchapter F (section 501 and following), chapter 1 of subtitle A of the Code and section 6033. Rev.Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Organization's Position: ****** position is unknown at this time. Government's Position: Analysis The facts indicate that ****** received recognition of exemption under section 501(c)(3) of the Code in ****** based on information presented in its Form 1023-EZ application. The TE/GE division of the IRS maintains an examination program for exempt organizations to determine whether they are complying with statutory requirements regarding their tax-exempt status, the proper filing of returns, and other tax reporting matters. ****** filed Form 990-N, an electronic notice, for the ****** calendar year. Operational Test Not Met ****** was selected for audit to ensure that the organization's activities and operations align with their approved exempt status and to verify that the filing of Form 990-N was proper based on the organization's gross receipts. Section 6001 of the Code and the regulations thereunder impose requirements on exempt organizations to keep books and records to substantiate information required under section 6033 of the Code. Although ****** filed an electronic notice in lieu of a return, the organization is nevertheless required to produce records and other information requested by the IRS to verify that it operates in furtherance of its exempt purpose. See regulations section 1.6033-2(i)(2). As part of standard audit procedures, the IRS examiner requested basic financial records including books of account, minutes of Board meetings and records and information pertaining to ****** activities. Such records and information are needed to verify whether ****** continues to be operated exclusively for one or more of the exempt purposes specified in section 501(c)(3) of the Code. ****** failed to respond to repeated reasonable requests to allow the IRS to examine its books and records including its receipts, disbursements, and other items required to be kept and maintained pursuant to sections 6001 and 6033(a)(1) of the Code. Accordingly, ****** has failed to meet the requirements of section 501(c)(3) of the Code and sections 1.501(c)(3)-1(a) and 1.501(c)(3)-1(c) of the regulations, in that the organization has not established that it is operated exclusively for exempt purposes and that no part of its net earnings inures to the benefit of private shareholders or individuals. See also Rev.Rul. 59-95. Conclusion: For the reasons stated above, the IRS has determined that ****** is no longer exempt from Federal income tax under section 501(a) of the Code as an organization described in Code section 501(c)(3). The IRS is proposing to revoke ****** 501(c)(3) tax-exempt status effective ******, ******, the first day of the ****** calendar year under examination. Please note that this Form 886-A, Explanation of Items, which is also known as the revenue agent report (RAR), constitutes an integral part of the attached 30-day letter #3618. Please refer to the attached letter #3618 for additional information including appeals rights and other options available to the organization and, the instructions for how to respond.

Internal Revenue Service - Information Release IR-2021-87 Those experiencing homelessness can get Economic Impact Payments and other tax benefits; permanent address not required April 15, 2021 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 Those experiencing homelessness can get Economic Impact Payments and other tax benefits; permanent address not required IR-2021-87, April 15, 2021 WASHINGTON -- The Internal Revenue Service today continued an ongoing effort to help those experiencing homelessness during the pandemic by reminding people who don't have a permanent address or a bank account that they may still qualify for Economic Impact Payments and other tax benefits. While Economic Impact Payments continue to be made automatically to most people, the IRS can't issue a payment to eligible Americans when information about them isn't available in the tax agency's systems. To help people experiencing homelessness, the rural poor and other historically under-served groups, the IRS urges community groups, employers and others to share information about Economic Impact Payments and help more eligible people file a tax return so they can receive everything they're entitled to. IRS.gov has a variety of information and tools to help people receive the Economic Impact Payments. "The IRS has been continuing to work directly with groups inside and outside the tax community to get information directly to people experiencing homelessness and other groups to help them receive Economic Impact Payments," said IRS Commissioner Chuck Rettig. "The IRS is working hard on this effort, enabling millions of people who don't normally file a tax return to receive these payments. But we need to do more, and we appreciate all the help we've been receiving from national and local groups to assist in this effort to reach the people who desperately need this help." Economic Impact Payments, also known as stimulus payments, are different from most other tax benefits; people can get the payments even if they have little or no income and even if they don't usually file a tax return. This is true as long as they have a Social Security number and are not being supported by someone else who can claim them as a dependent. The IRS needs information from people who don't usually file a tax return - even if they did not have any income last year or their income was not large enough to require them to file. The only way for the agency to have that information is for people to file a basic 2020 tax return with the IRS. Once that return is processed, the IRS can quickly send stimulus payments to an address selected by the eligible individual. People do not need a permanent address or a bank account. They don't need to have a job. For eligible individuals, the IRS will still issue the payment even if they haven't filed a tax return in years. People in this group can still qualify for the first two Economic Impact Payments when they file their 2020 return by claiming the Recovery Rebate Credit. There's a special section on IRS.gov that can help: Claiming the 2020 Recovery Rebate Credit if you aren't required to file a tax return. For the current third round of payments, people who are experiencing homelessness usually qualify to receive $1,400 for themselves. If they are married or have dependents, they can get an additional $1,400 for each of their family members. Filing a 2020 federal income tax return that provides very basic information about the person is something that can be done electronically using a smartphone or a computer. When the IRS receives the return, it will automatically calculate and issue the Economic Impact Payments to eligible individuals. Permanent address not required People can claim an Economic Impact Payment or other credits even if they don't have a permanent address. For example, someone experiencing homelessness may list the address of a friend, relative or trusted service provider, such as a shelter, drop-in day center or transitional housing program, on the return filed with the IRS. If they are unable to choose direct deposit, a check or debit card for the tax refund and the third Economic Impact Payment can then be mailed to this address. Individuals experiencing homelessness can receive the EITC A worker experiencing homelessness can get an Earned Income Tax Credit (EITC). To get the credit, federal law requires that a worker live in the U.S. for more than half of the year and meet other requirements. This means living in a home in any of the 50 states or the District of Columbia. Therefore, individuals experiencing homelessness, including those who reside at one or more homeless shelters, can meet that requirement. No bank account? No problem Many financial institutions will help a person lacking an account to open a low-cost or no-cost bank account. Individuals who open accounts will then have an account and routing number available when they file and claim a direct deposit of the Economic Impact Payment. Visit the Federal Deposit Insurance Corporation (FDIC) website for details, in both English and Spanish, on opening an account online. Among other things, people can also use the FDIC's BankFind tool to locate a nearby FDIC-insured bank. In addition, BankOn, American Bankers Association, Independent Community Bankers of America, and National Credit Union Administration have all compiled lists of banks and credit union that can open an account online. For veterans, see the Veterans Benefits Banking Program (VBBP) for access to financial services at participating banks. For those with a prepaid debit card, they may be able to have their refund applied to the card. Many reloadable prepaid cards or mobile payment apps have account and routing numbers that can be provided to the IRS. Individuals would need to check with the financial institution to ensure the card can be used and to obtain the routing number and account number, which may be different from the card number. File for free The fastest and easiest way to claim the 2020 Recovery Rebate Credit and Earned Income Tax Credit (EITC) or to get the third Economic Impact Payment is to file a return electronically using IRS Free File. People can use a smartphone or computer to visit IRS.gov and click the File Your Taxes for Free link. Through the Free File system, anyone who qualifies for the EITC also qualifies to use brand-name software to prepare and electronically file their return for free. The IRS urges anyone experiencing homelessness who has a smartphone or access to a computer to take advantage of this service. Get free help from IRS partners Alternatively, anyone who qualifies for the EITC or does not have a filing requirement but is filing to get an Economic Impact Payment also qualifies for free tax help from a trained community volunteer tax preparer. Through VITA (Volunteer Income Tax Assistance) and TCE (Tax Counselling for the Elderly), volunteers prepare basic tax returns at thousands of tax help sites nationwide. Please note that some VITA/TCE sites are not operating at full capacity and others are not opening this year. To find the nearest location, visit the Free Tax Return Preparation site on IRS.gov, or call 800-906-9887. VITA/TCE site availability is updated throughout the filing season, so check back if there aren't any sites listed nearby. The IRS also continues to work extensively with community groups across the country to get people to file tax returns and receive all the Economic Impact Payments and credits they're entitled to. These efforts helped lead to more than 8 million people last year to submit tax returns who normally don't file. Direct deposit speeds payments Direct deposit is the safest and fastest way to receive a refund and Economic Impact Payments. People will need to include direct deposit information on their 2020 tax return to get their payment directly deposited. Anyone with a savings, checking, or brokerage account can choose to have their refund electronically deposited in that account. Direct deposit is available even for people who file a paper tax return, but processing of paper returns takes longer. More details on the Earned Income Tax Credit For people experiencing homelessness who have a job, filing a return often carries an added bonus--getting a refund based on various tax benefits, especially the EITC for low-and moderate-income workers and working families. Like many other workers, some workers experiencing homelessness still qualify for the credit even if they earned too little income during 2020 to owe tax. For 2020, the income limit is $15,820 for singles with no children ($21,710 for couples with no children). The income limit is higher for people with children. For example, the limit is $50,594 for singles with three or more children ($56,844 for couples with three or more children). Those who make less than this amount must also meet other eligibility requirements. Because it's a refundable credit, those who qualify and claim the credit could pay less federal tax, pay no tax, or even get a tax refund. The EITC can put up to $6,660 into a worker's pocket. The amount varies depending upon the worker's income, marital status, and other factors. The IRS recognizes that eligible workers experiencing homelessness often encounter unique challenges not faced by other people. To find out if they're eligible, people can use the EITC Assistant on IRS.gov. It's available in both English and Spanish. Help spread the word Employers can help by making their employees aware of the third Economic Impact Payment, 2020 Recovery Rebate Credit and Earned Income Tax and Child Tax Credit, and by encouraging them to file for these benefits based on tax year 2020 rules. In addition, the American Rescue Plan, enacted in March 2021, expands EITC and the Child Tax Credit benefits for the 2021 tax year. Some people will be able to get advance payments of the Child Tax Credit later this year. There is nothing those who qualify need to do at this point other than file a 2020 tax return. Employers can also help by making it easy for employees to obtain or access their 2020 W-2 forms. For more information, check out the outreach material, available on IRS.gov.

Private Letter Ruling Number: 202048001 Internal Revenue Service August 31, 2020 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202048001 Release Date: 11/27/2020 Index Number: 108.00-00, 108.01-00, 108.02-00, 108.02-01, 9100.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:ITA:B04 PLR-100436-20 Date: August 31, 2020 Dear *******: This letter responds to a letter from your authorized representative requesting an extension of time under § 301.9100-3 of the Procedure and Administration Regulations for Taxpayer to make a regulatory election. Specifically, Taxpayer has requested an extension of time to make an election under § 108(b)(5) of the Internal Revenue Code and § 1.108-4(b) of the Income Tax Regulations, with respect to discharge of indebtedness income, effective for Taxpayer's Year 1 federal income tax return. This letter ruling is being issued electronically in accordance with Rev. Proc. 2020-29, 2020-21 I.R.B. 859. A paper copy will not be mailed to Taxpayer. FACTS Taxpayer, incorporated in State, files its federal income tax return reporting income on a calendar year and uses the accrual method of accounting. Taxpayer is the common parent of an affiliated group that files consolidated federal income tax returns. In Year 1, Taxpayer completed two debt restructuring transactions that Taxpayer represents resulted in cancelation of indebtedness income in the amount of x, and that it was insolvent immediately before the discharge and that the amount of the discharge did not exceed the amount by which Taxpayer was insolvent. Taxpayer did not have in-house personnel to prepare its federal and state income tax returns and engaged Accounting Firm to prepare its Year 1 federal, state, and local income tax returns. Taxpayer provided all the relevant facts relating to the income from discharge of indebtedness to Accounting Firm. Also, Accounting Firm was engaged (and continues to be engaged) to render an opinion on Taxpayer's financial statements. Accounting Firm advised Taxpayer that its federal income tax net operating loss would be the first tax attribute to be reduced unless Taxpayer made an election under § 108(b)(5) to first reduce the adjusted tax basis of its depreciable property. After considering its financial and tax projections, Taxpayer determined that it would be beneficial to preserve its net operating loss and reduce its future depreciation deductions. Taxpayer determined that this election would be made and directed Accounting Firm to prepare its Year 1 federal income tax return in a manner consistent with this election. Taxpayer timely filed its federal income tax return including extension for Year 1. The cancelation of indebtedness income was not reported on Taxpayer's Year 1 federal income tax return. However, Taxpayer's return did not include Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), which is required to make a valid election under § 108(b)(5). Nor did Taxpayer's return include any other statement setting forth the election under § 108(b)(5) to reduce the basis of depreciable property. At the beginning of Year 2, consistent with a valid § 108(b)(5) election, Taxpayer reduced the adjusted tax basis of its depreciable fixed assets by y and the adjusted tax basis of its amortizable § 197 intangibles by z, which equals x, the amount of income from cancelation of indebtedness. Taxpayer represents that it had depreciable property (including amortizable § 197 intangibles) with an adjusted tax basis, determined at the beginning of Year 2, in excess of the amount of its cancelation of indebtedness income. Additionally, Taxpayer has submitted contemporaneously prepared and maintained schedules of tax depreciation and amortization reflecting the reduction of the adjusted tax basis of its depreciable fixed assets and amortizable § 197 intangibles. Taxpayer did not reduce its net operating loss or any net operating loss carryovers to Year 1 due to the cancelation of indebtedness income in Year 1. For subsequent taxable years, Taxpayer continued to engage Accounting Firm to prepare its tax returns until a controlling interest in Taxpayer was acquired by an unrelated party. In Year 9, during a due diligence process, it was discovered that Taxpayer failed to file Form 982 to make a valid § 108(b)(5) election to reduce the basis of depreciable property. Shortly after discovering the failure to file Form 982, Taxpayer's Representative prepared a request for a ruling to grant an extension of time under §§ 301.9100-1 and 301.9100-3 to file Form 982 and to make the election under § 108(b)(5) with respect to its income from cancelation of indebtedness for Year 1. In separate affidavits, Taxpayer and Accounting Firm represent that Taxpayer had communicated its intention to make the § 108(b)(5) election to Accounting Firm, Accounting Firm was ultimately responsible for making the election, and Form 982 was inadvertently omitted by Accounting Firm from Taxpayer's Year 1 federal income tax return. The period of limitations on assessment under Code § 6501(a) is closed for at least Year 1 and Year 2. However, Taxpayer has provided a statement from an Independent Auditor as described in §301.9100-3(c)(1)(ii) confirming that the interests of the Government are not prejudiced under the standards contained in § 301.9100-3(c)(i). LAW AND ANALYSIS Section 108(a)(1)(B) provides that gross income does not include any amount that would be includible in gross income by reason of the discharge of indebtedness if the discharge occurs while the taxpayer is insolvent. Section 108(b)(1) provides, in general, that amounts excluded from gross income under § 108(a)(1) will be applied to reduce the tax attributes of the taxpayer as provided in § 108(b)(2). Section 108(b)(5)(A) permits a taxpayer to elect to apply any portion of the reduction referred to in § 108(b)(1) to the reduction under § 1017 of the basis of the depreciable property of the taxpayer in lieu of applying the order specified in § 108(b)(2). Section 108(b)(5)(B) limits the amount to which the election in § 108(b)(5)(A) applies to an amount not exceeding the aggregate adjusted basis of the depreciable property held by the taxpayer as of the beginning of the taxable year following the taxable year in which the discharge occurs. Section 108(d)(9) provides that an election under § 108(b)(5) is made on the taxpayer's return for the taxable year in which the discharge of indebtedness occurs or at such time and manner as permitted in regulations prescribed by the Secretary. Section 1.108-4(b) provides, in part, that to make an election under § 108(b)(5), a taxpayer must complete and file Form 982 together with its timely filed (including extensions) federal income tax return for the taxable year in which the taxpayer has discharge of indebtedness income that is excludable under § 108(a). Sections 301.9100-1 through 301.9100-3 provide the standards that the Service will use to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-3(a) provides that requests for extensions of time for regulatory elections (other than automatic changes covered in § 301.9100-2) will be granted when the taxpayer provides evidence (including affidavits) to establish that the taxpayer acted reasonably and in good faith, and granting relief will not prejudice the interests of the Government. Section 301.9100-3(b) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer requests relief before the failure to make the regulatory election is discovered by the Internal Revenue Service, or reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make, the election. However, a taxpayer will not be considered to have reasonably relied on a qualified tax professional if the taxpayer knew or should have known that the professional was not competent to render advice on the regulatory election or was not aware of all relevant facts. Section 301.9100-3(b)(3) provides that a taxpayer is deemed to have not acted reasonably and in good faith if the taxpayer - (i) seeks to alter a return position for which an accuracy-related penalty could be imposed under § 6662 at the time the taxpayer requests relief and the new position requires a regulatory election for which relief is requested; (ii) was fully informed of the required election and related tax consequences, but chose not to file the election; or (iii) uses hindsight in requesting relief. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Service will not ordinarily grant relief. Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable extension of time to make the regulatory election only when the interests of the Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i) provides that the interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Section 301.9100-3(c)(1)(ii) provides that the interest of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under § 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. The IRS may condition a grant of relief on the taxpayer providing the IRS with a statement from an independent auditor certifying that the interests of the Government are not prejudiced under the standards set forth in § 301.9100-3(c)(i). Under the facts submitted by Taxpayer, we conclude that Taxpayer has acted reasonably and in good faith under §301.9100-3(b). In addition, we conclude that granting relief will not prejudice the interests of the government under § 301.9100-3(c). CONCLUSION Accordingly, based solely on the facts and information submitted and the representations made in the ruling request, we grant Taxpayer an extension of 45 days from the date of this letter to file an amended return to make an election under § 108(b)(5) and § 1.108-4(b) by filing Form 982 for Year 1. The ruling granted in this letter should not have any effect on amounts reported on Taxpayer's previously filed federal income tax returns, Taxpayer should not file amended returns for such closed years to adjust any amounts and should only file an amended return for Year 1 to make the election under § 108(b)(5). CAVEATS Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter, including whether Taxpayer was, immediately prior to the discharge of its indebtedness in Year 1, insolvent by an amount exceeding the amount of indebtedness discharged and whether Taxpayer properly excluded its income from discharge of indebtedness from its gross income pursuant to §108(a). This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. In accordance with the Power of Attorney on file with this office, a copy of this letter is being faxed to your authorized representative. Sincerely, Angella L. Warren Branch Chief, Branch 4 Office of Associate Chief Counsel (Income Tax & Accounting) cc:

Private Letter Ruling Number: 20213 4 014 Internal Revenue Service April 23, 2021 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202134014 Release Date: 8/27/2021 Index Number: 2010.00-00, 2010.04-00, 9100.00-00, 9100.35-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B04 PLR-128111-20 Date: April 23, 2021 Dear *******: This letter responds to a letter dated December 1, 2020, submitted on behalf of Decedent's estate, requesting an extension of time pursuant to § 301.9100-3 of the Procedure and Administration Regulations to make an election. Decedent's estate is requesting to make an election under § 2010(c)(5)(A) of the Internal Revenue Code (a "portability" election) to allow a decedent's surviving spouse to take into account that decedent's deceased spousal unused exclusion (DSUE) amount. The information submitted for consideration is summarized below. Decedent died on Date, survived by Spouse. It is represented that based on the value of Decedent's gross estate and taking into account any taxable gifts, Decedent's estate is not required under § 6018(a) to file an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return). It is further represented that there is an unused portion of Decedent's applicable exclusion amount and that a portability election is required to allow Spouse to take into account that amount (the "DSUE" amount). A portability election is made upon the timely filing of a complete and properly prepared estate tax return, unless the requirements for opting out are satisfied. See § 20.2010-2(a)(2) of the Estate Tax Regulations. For various reasons, an estate tax return was not timely filed and a portability election was not made. After discovery of this, Decedent's estate submitted this request for an extension of time under § 301.9100-3 to make a portability election. LAW AND ANALYSIS Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2010(a) provides that a credit of the applicable credit amount shall be allowed to the estate of every decedent against the tax imposed by § 2001. Section 2010(c)(1) provides that the applicable credit amount is the amount of the tentative tax that would be determined under § 2001(c) if the amount with respect to which such tentative tax is to be computed were equal to the applicable exclusion amount. On December 17, 2010, Congress amended § 2010(c), effective for estates of decedents dying and gifts made after December 31, 2010, to allow portability of a decedent's unused applicable exclusion amount between spouses. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, § 303, 124 Stat. 3296, 3302 (2010). Section 2010(c)(2) provides that the applicable exclusion amount is the sum of the basic exclusion amount, and, in the case of a surviving spouse, the DSUE amount. Section 2010(c)(3) provides the basic exclusion amount available to the estate of every decedent, an amount to be adjusted for inflation annually after calendar year 2011. Section 2010(c)(4) defines the DSUE amount to mean the lesser of (A) the basic exclusion amount, or (B) the excess of -- (i) the applicable exclusion amount of the last deceased spouse of the surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under § 2001(b)(1) on the estate of such deceased spouse. Section 2010(c)(5)(A) provides that a DSUE amount may not be taken into account by a surviving spouse under § 2010(c)(2) unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return that such amount may be so taken into account. The election, once made, shall be irrevocable. No election may be made if such return is filed after the time prescribed by law (including extensions) for filing such return. Section 20.2010-2(a)(1) provides that the due date of an estate tax return required to elect portability is nine months after the decedent's date of death or the last day of the period covered by an extension (if an extension of time for filing has been obtained). Further, an extension of time under § 301.9100-3 to make a portability election may be granted in the case of an estate that is not required to file an estate tax return under § 6018(a), as determined solely based on the value of the gross estate and any adjusted taxable gifts (and without regard to § 20.2010-2(a)). Under § 301.9100-1(c), the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-3 provides the standards the Commissioner will use to determine whether to grant an extension of time to make an election whose due date is prescribed by a regulation (and not expressly provided by statute). Requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. In this case, based on the representation as to the value of the gross estate and any adjusted taxable gifts, the time for filing the portability election is fixed by the regulations. Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an extension of time for Decedent's estate to elect portability, provided Decedent's estate establishes it acted reasonably and in good faith, the requirements of §§ 301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government. Information, affidavits, and representations submitted on behalf of Decedent's estate explain the circumstances that resulted in the failure to timely file a valid election. Based solely on the information submitted and the representations made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Therefore, we grant an extension of time of 120 days from the date of this letter in which to make the portability election. The election should be made by filing a complete and properly prepared Form 706 and a copy of this letter, within 120 days from the date of this letter, with the Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999. For purposes of electing portability, a Form 706 filed by Decedent's estate within 120 days from the date of this letter will be considered to be timely filed. If it is later determined that, based on the value of the gross estate and taking into account any taxable gifts, Decedent's estate is required to file an estate tax return pursuant to § 6018(a), the Commissioner is without authority under § 301.9100-3 to grant an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void. See § 20.2010-2(a)(1). We neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, we express no opinion as to the DSUE amount to be potentially taken into account by Spouse. Any claimed DSUE amount will be included in the applicable exclusion amount of Spouse only to the extent that Spouse can substantiate such amount and will be subject to determination by the Director's office upon audit of relevant Federal gift or estate tax returns. See § 20.2010-3(c)(1) and (d). The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. Sincerely, Associate Chief Counsel Passthroughs & Special Industries Melissa C. Liquerman By: ____________________________ Melissa C. Liquerman Chief, Branch 4 Office of the Associate Chief Counsel (Passthroughs & Special Industries) Enclosure (2) Copy of this letter Copy for § 6110 purposes cc:

Private Letter Ruling Number: 202343034 Internal Revenue Service July 28, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202343034 Release Date: 10/27/2023 Index Number: 7701.02-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: No. Telephone Number: Refer Reply To: CC:INTL:B05 PLR-118416-22 Date: July 28, 2023 Dear ******: This is in response to your letter, dated X, as supplemented by additional information statements, requesting that the Entity (1) is not classified as a corporation pursuant to Treas.Reg. § 301.7701-2(b)(6), and (2) is not classified as a corporation pursuant to Treas.Reg. § 301.7701-2(b)(7) by reason of section 892(a)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). FACTS The General Partner represents that the facts are as follows: The Entity is a limited partnership organized on date Y pursuant to the laws of the Province in the Country. 1 The Entity has one or more members without limited liability pursuant to the Province's law and the Entity's operating agreement. The Entity will serve as an investment vehicle to hold the invested assets of Limited Partner 1, Limited Partner 2, Limited Partner 3, Limited Partner 4, Limited Partner 5, Limited Partner 6, Limited Partner 7, Limited Partner 8, Limited Partner 9, Limited Partner 10, Limited Partner 11, and Limited Partner 12 (together, the "Limited Partners"). The General Partner also will hold an interest in the Entity. The Entity has not yet made any investments. The Entity's income or loss will be divided between the Limited Partners and the General Partner (collectively, the "Partners") in proportion to their respective interests in the partnership capital, except that the General Partner will be allocated a small, capped share of partnership net income or loss for a fiscal year. 2 The Entity will take the consistent position in its U.S. tax filings and other reporting that the General Partner is a partner in the Entity for U.S. federal tax purposes. ******** 1 To provide the Investors, as defined herein, with legal certainty and economy of scale, the Manager has a strong commercial and administrative preference to use investment vehicles organized under Province law to hold the Investors' assets. 2 The General Partner will be entitled to the lesser of ****** $ or ****** % of partnership net income or loss for the fiscal year. This allocation serves, in part, to establish the Manager's interest as a general partner of the Entity under Province limited partnership law. ******** The Entity is an unincorporated organization formed to enable the Partners to join together to carry on investment activities and to divide the profits and losses therefrom. The Entity filed a Form 8832, Entity Classification Election, electing to be classified as a partnership effective as of date Y for U.S. federal tax purposes. The General Partner represents that the Entity does not constitute a governing authority and, therefore, does not constitute an integral part of the Province within the meaning of Treas.Reg. § 1.892-2T(a)(2). The General Partner is a corporation organized under Province law and is an association taxable as a corporation for U.S. federal tax purposes. It is directly wholly owned and controlled by the Manager, which the General Partner represents is a statutory corporation classified as a foreign government under Treas.Reg. § 1.892-2T(a) by reason of its relationship to the Province. Further, the General Partner represents that it is a "controlled entity" of the Province within the meaning of Treas.Reg. § 1.892-2T(a)(3), and will certify to the Entity on a Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting, indicating that it is classified as a "controlled entity" and not an "integral part" of the Province. GP Inc. 1 is a corporation organized under Province law and is an association taxable as a corporation for U.S. federal tax purposes. It is directly wholly owned and controlled by the Manager. The General Partner represents that GP Inc. 1 is a "controlled entity" of the Province within the meaning of Treas.Reg. § 1.892-2T(a)(3). GP Inc. 1 is the general partner of Limited Partner 5 and holds a nominal interest therein. Limited Partner 5 filed an entity classification election to be treated as an association taxable as a corporation for U.S. federal tax purposes effective as of its date of formation. 3 ******** 3 Limited Partner 5's check-the-box election was filed late to make it effective as of the date of Limited Partner 5's formation, so the election was filed under Revenue Procedure 2009-41 seeking late election relief. ******** GP Inc. 2 is a corporation organized under Province law and is an association taxable as a corporation for U.S. federal tax purposes. It is directly wholly owned and controlled by the Manager. The General Partner represents that GP Inc. 2 is a "controlled entity" of the Province within the meaning of Treas.Reg. § 1.892-2T(a)(3). GP Inc. 2 is the general partner of Limited Partner 11 and holds a nominal interest therein. Limited Partner 11 timely filed an entity classification election to be treated as an association taxable as a corporation for U.S. federal tax purposes effective as of its date of formation. GP Inc. 3 is a corporation organized under Province law and is an association taxable as a corporation for U.S. federal tax purposes. It is directly wholly owned and controlled by the Manager. The General Partner represents that GP Inc. 3 is a "controlled entity" of the Province within the meaning of Treas.Reg. § 1.892-2T(a)(3). GP Inc. 3 is the general partner of Limited Partner 12 and holds a nominal interest therein. Limited Partner 12 timely filed an entity classification election to be treated as an association taxable as a corporation for U.S. federal tax purposes effective as of its date of formation. Except for Limited Partner 5, Limited Partner 11, and Limited Partner 12, each of the Limited Partners is a corporation organized under Province law and is an association taxable as a corporation for U.S. federal tax purposes. The General Partner represents that each of the Limited Partners is a "controlled entity" of the Province within the meaning of Treas.Reg. § 1.892-2T(a)(3), and each of the Limited Partners will certify to the Entity on a Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting, indicating that it is classified as a "controlled entity" and not an "integral part" of the Province. In addition, the General Partner represents that each of Limited Partner 1, Limited Partner 2, Limited Partner 3, Limited Partner 4, Limited Partner 6, Limited Partner 8, and Limited Partner 10 is a "qualified foreign pension fund" under section 897(l) and a "qualified holder" within the meaning of Treas.Reg. § 1.897(l)-1(e)(11) (together, a "QFPF"). Limited Partner 1 is beneficially owned by the Limited Partner 1 Investor; Limited Partner 2 is beneficially owned by the Limited Partner 2 Investor; Limited Partner 3 is beneficially owned by the Limited Partner 3 Investor; Limited Partner 4 is beneficially owned by the Limited Partner 4 Investor; Limited Partner 5 is beneficially owned by the Limited Partner 5 Investors; Limited Partner 6 is beneficially owned by the Limited Partner 6 Investor; Limited Partner 7 is beneficially owned by the Limited Partner 7 Investor; Limited Partner 8 is beneficially owned by the Limited Partner 8 Investor; Limited Partner 9 is beneficially owned by the Limited Partner 9 Investor; Limited Partner 10 is beneficially owned by the Limited Partner 10 Investor; Limited Partner 11 is beneficially owned by the Limited Partner 11 Investors; and Limited Partner 12 is beneficially owned by the Limited Partner 12 Investors (collectively, the "Investors"). The General Partner represents that each of the Investors is classified as a foreign government under Treas.Reg. § 1.892-2T(a) by reason of its relationship to the Province. The General Partner further represents that each of Limited Partner 1 Investor, Limited Partner 2 Investor, Limited Partner 3 Investor, Limited Partner 4 Investor, Limited Partner 6 Investor, Limited Partner 8 Investor, and Limited Partner 10 Investor is also a QFPF. The Manager is an asset manager organized by the Province to invest funds on behalf of public sector clients, including the Investors, located in the Province. The Manager will make geographically disparate investments for the Investors that are managed from its headquarters in the Province. The Manager organized investment vehicles to hold the Investors' assets because the Investors commonly invest in large, complex infrastructure, private equity, and real estate transactions with complicated governance and financing arrangements. These investments historically included a significant allocation to U.S. real estate, infrastructure, and timber assets. The Entity's investment program contemplates the purchase, holding, and disposition of stock in U.S. corporations that are classified as "United States real property holding corporations" described in section 897(c)(2) and as "controlled commercial entities" described in section 892(a)(2)(B) (a "controlled USRPHC"). If the Entity were classified as an association taxable as a corporation for U.S. federal tax purposes, no gain from a controlled USRPHC that otherwise would be subject to section 897 would be eligible for exemption under section 897(l). The Investors that are QFPFs are exempt from taxation imposed by the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"), 4 which exemption would not be available to such Investors if they pooled their interests with non-QFPF Investors in a vehicle classified as an association taxable as a corporation for U.S. federal tax purposes. 5 The QFPF Investors will be eligible for the exemption from FIRPTA, however, if they pool their interests with non-QFPF Investors in an entity classified as a partnership for U.S. federal tax purposes. 6 ******** 4 Pub. L. No. 96-499, 94 Stat. 2599, 2682 (Dec. 5, 1980). 5 See Treas.Reg. § 1.897(l)-1(e)(9). 6 See Treas.Reg. § 1.897(l)-1(c)(3)(ii). ******** LAW AND ANALYSIS Issue 1 - Whether the Entity is a corporation pursuant to Treas.Reg. § 301.7701-2(b)(6). Treas.Reg. § 301.7701-2(b)(6) provides that, for U.S. federal tax purposes, the term corporation means a business entity wholly owned by a U.S. state or any political subdivision thereof, or a business entity wholly owned by a foreign government or any other entity described in Treas.Reg. § 1.892-2T. Before the promulgation of Treas.Reg. § 301.7701-2(b)(6) in 1996, the Treasury Department and the IRS were concerned that organizations wholly owned by a U.S. state that were not integral parts of that U.S. state were claiming integral part status and thereby circumventing taxation of income not excluded by section 115. 7 Section 115(1) provides that gross income does not include income derived from the exercise of any essential governmental function and accruing to a U.S. state or any political subdivision thereof. To address that concern, Treas.Reg. § 301.7701-2(b)(6) requires an organization that is wholly owned by a U.S. state and that is not an integral part of that U.S. state to be recognized as an association taxable as a corporation for U.S. federal tax purposes. The income of such an organization is exempt from U.S. federal income tax only to the extent it can, pursuant to section 115, demonstrate that such income is derived from the exercise of any essential governmental function and accrues to a U.S. state or any political subdivision thereof. ******** 7 Simplification of Entity Classification Rules, 61 Fed.Reg. 21989, 21991 (May 13, 1996). See Treas.Reg. § 301.7701-1(a)(3), which provides that an organization wholly owned by a U.S. state is not recognized as a separate entity for U.S. federal tax purposes if it is an integral part of the U.S. state. Revenue Ruling 87-2, 1987-1 C.B. 18, provides that income earned by a U.S. state, a political subdivision of a U.S. state, or an integral part of a U.S. state or of a political subdivision of a U.S. state is generally not taxable in the absence of specific statutory authorization for taxing such income. ******** Similar concerns about foreign governments taking advantage of the favorable treatment afforded to integral parts arose for purposes of section 892. 8 Treas.Reg. § 1.892-2T(a) defines the term foreign government to mean only the integral parts 9 or controlled entities 10 of a foreign sovereign. Both an integral part and a controlled entity of a foreign sovereign are eligible for the section 892 exemption. An integral part of a foreign sovereign, however, does not lose its ability to claim the exemption with respect to income not derived from commercial activities even if the integral part engages in commercial activities (within the meaning of Treas.Reg. § 1.892-4T). 11 In contrast, if a controlled entity of a foreign sovereign conducts (or is treated as conducting) commercial activities, it loses the exemption under section 892 with respect to all of its income, including any income not derived from commercial activities. 12 The exemption does not apply to income derived from the conduct of any commercial activity (whether within or outside the United States), received by or received (directly or indirectly) from a controlled commercial entity (as defined in section 892(a)(2)(B), a "CCE"), or derived from the disposition of any interest in a CCE. 13 ******** 8 T.D. 9012, 67 Fed.Reg. 49862, 49864 (Aug. 1, 2002). See Clarification of Entity Classification Rules, 66 Fed.Reg. 2854, 2856 (Jan. 12, 2001). 9 See Treas.Reg. § 1.892-2T(a)(2). 10 See Treas.Reg. § 1.892-2T(a)(3). 11 See Treas.Reg. § 1.892-5T(d)(4), Example 1(a). 12 See id., Example 1(c). 13 See section 892(a)(2)(A). ******** Before Treas.Reg. § 301.7701-2(b)(6) was amended to include a business entity wholly owned by a foreign government, it was possible for an integral part of a foreign sovereign to form a disregarded entity for U.S. federal tax purposes and claim the exemption under section 892 with respect to income not derived from commercial activities, even if the disregarded entity was conducting commercial activities. The preamble to Prop. Treas.Reg. § 301.7701-2(b)(6) published in 2001, 14 which brought foreign government entities within scope, explains that: ******** 14 Clarification of Entity Classification Rules, 66 Fed.Reg. 2854, 2856 (Jan. 12, 2001). ******** The IRS and Treasury believe that it is appropriate to treat a foreign government similarly to a [U.S.] State in this context. Thus, to achieve parallel tax treatment under the check-the-box regulations of a business entity wholly owned by a [U.S.] State or any of its political subdivisions and a business entity wholly owned by a foreign government, these proposed regulations provide that a business entity wholly owned by a foreign government cannot elect to be treated as a disregarded entity. 15 ******** 15 66 Fed.Reg. at 2855. ******** When Treas.Reg. § 301.7701-2(b)(6) was amended in 2002 to include a business entity wholly owned by a foreign government, the "parallel tax treatment under the check-the-box regulations of a business entity wholly owned by a [U.S.] State or any of its political subdivisions and a business entity wholly owned by a foreign government" was accomplished by ensuring that a business entity wholly owned by a foreign government "cannot elect to be treated as a disregarded entity" for U.S. federal tax purposes. 16 Hence, the purpose of the modification was to ensure that a business entity whose sole owner is either an integral part or a controlled entity, and which otherwise would be treated as a disregarded entity, is a corporation (and thus subject to the CCE rules). The language of Treas.Reg. § 301.7701-2(b)(6) ("wholly owned by a foreign government or any other entity described in Treas.Reg. § 1.892-2T") may be read consistently with this intent, as the reference to "other entity described in § 1.892-2T" would be unnecessary unless the drafters considered it needed in order to include a controlled entity because they used the term "foreign government" to include only an integral part. Accordingly, the phrase "business entity wholly owned by a foreign government or any other entity described in § 1.892-2T" is properly construed as a business entity that is wholly owned directly by a single controlled entity or integral part and that thus does not have two or more owners. ******** 16 Id. ******** The Treasury Department and the IRS recognized that use of partnerships by foreign governments could present concerns similar to those presented by disregarded entities but chose to address those concerns differently. Rather than providing a special entity classification rule for partnerships similar to that provided by Treas.Reg. § 301.7701-2(b)(6) for disregarded entities, the Treasury Department and the IRS chose to address concerns presented by partnerships by treating them as potentially CCEs, in a separate rule that was promulgated in 2002 together with Treas.Reg. § 301.7701-2(b)(6). 17 Treas.Reg. § 1.892-5(a)(3) provides that, for purposes of section 892(a)(2)(B) (defining a CCE), the term "entity" means and includes a corporation, a partnership, a trust (including a pension trust described in Treas.Reg. § 1.892-2T(c)) and an estate. Before this regulation was finalized in T.D. 9012 on August 1, 2002, the term "entity" did not include a partnership. 18 Thus, concerns about foreign governments using partnerships to circumvent limitations within section 892 were addressed by adding "partnerships" to the types of entities that could be a CCE, which are not eligible for the exemption under section 892, 19 rather than (as in the case of disregarded entities) classifying them as corporations. As a result, classifying a partnership as a corporation pursuant to contemporaneously issued Treas.Reg. § 301.7701-2(b)(6) was unnecessary to protect the purposes of section 892. ******** 17 T.D. 9012, 67 Fed.Reg. 49862, 49864 (Aug. 1, 2002). 18 See T.D. 8211, 53 Fed.Reg. 24060, 24064 (June 27, 1988). The flush text under former Treas.Reg. § 1.892-5T(a) stated: "For purposes of this paragraph, the term 'entity' encompasses corporations and trusts (including pension trusts described in § 1.892-2T(c)) and estates." We note that Prop. Treas.Reg. § 1.892-5(a)(1), however, states: "For purposes of section 892 and the regulations thereunder, the term entity means and includes a corporation, a partnership, a trust (including a pension trust described in § 1.892-2T(c)), and an estate, and the term controlled commercial entity means any entity (including a controlled entity as defined in § 1.892-2T(a)(3)) engaged in commercial activities (as defined in §§ 1.892-4 and 1.892-4T) (whether conducted within or outside the United States)..." 76 Fed.Reg. 68119, 68122 (Nov. 3, 2011). The purpose for which the term "entity" is defined in this proposed regulation appears to be broader than is set forth in the temporary and final regulations, but the position of the sentence within the CCE rules suggests that it was intended to apply solely for CCE purposes. 19 See Clarification of Entity Classification Rules, 66 Fed.Reg. 2854, 2855 (Jan. 12, 2001) ("To ensure that investments in the United States by a foreign government through separate juridical entities are treated similarly, these proposed regulations under § 1.892-5(a) provide that, for purposes of section 892(a)(2)(B), the term entity also includes a partnership."). This rule was finalized in T.D. 9012, 67 Fed.Reg. 49862, 49864 (Aug. 1, 2002). If the Entity were to conduct (or be treated as conducting) commercial activities within the meaning of Treas.Reg. §§ 1.892-4T or 1.892-5T, it could be a CCE. ******** Each of the Partners is an association taxable as a corporation for U.S. federal tax purposes and each will certify to the Entity on a Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting, indicating that it is classified as a "controlled entity" and not an "integral part" of the Province for purposes of section 892. Thus, the Entity has at least two owners (such that it could not be potentially classified as a disregarded entity for U.S. federal tax purposes) and hence should not be considered "wholly owned" within the meaning of Treas.Reg. § 301.7701-2(b)(6). Issue 2 - Whether the Entity is a corporation pursuant to Treas.Reg. § 301.7701-2(b)(7) by reason of section 892(a)(3). Treas.Reg. § 301.7701-2(b)(7) provides that, for U.S. federal tax purposes, the term corporation means a business entity that is taxable as a corporation under a provision of the Code other than section 7701(a)(3). Section 892(a)(3) provides that, for purposes of the Code, a foreign government shall be treated as a corporate resident of its country. 20 The provision also provides that a foreign government shall be so treated for purposes of any income tax treaty obligation of the United States if such government grants equivalent treatment to the Government of the United States. ******** 20 Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, §§ 1012(t), 1019(a), 102 Stat. 3342 (Nov. 10, 1988); Pub. L. No. 99-514, 100 Stat. 2085 (Oct. 22, 1986). ******** The phrase "corporate resident" is not used elsewhere in the Code, but Treasury regulations have interpreted it to mean that a foreign government is treated as a foreign corporation. 21 As a corporate controlled entity generally already would enjoy treaty protection (and a partnership as a general rule would not qualify as a treaty resident because it is not liable for tax), the purpose of section 892(a)(3) appears to be to clarify the treatment of an integral part. ******** 21 See, e.g., Treas.Reg. §§ 1.884-0(a), 1.1446-1(c)(1), and 1.1446-1(c)(2)(ii)(G). These Treasury regulations, however, do not distinguish between controlled entities and integral parts. ******** Under Treas.Reg. § 1.892-2T(a)(1), a foreign government "means only the integral parts or controlled entities of a foreign sovereign." While the word "only" conveys a limiting meaning, the sentence suggests that each controlled entity is considered the foreign government for purposes of section 892, in which case each controlled entity might be considered a corporate resident of its jurisdiction by reason of section 892(a)(3). However, there is no evidence that Congress, in enacting section 892(a)(3), intended that the entity classification of a controlled entity not otherwise classified as a corporation be changed to a corporation. To the contrary, such a construction of section 892(a)(3) would be inconsistent with the section 892(a)(3) treatment of a foreign government as a treaty resident, as noted above. Thus, the term "foreign government" in section 892(a)(3) may have been intended to be read as referring only to integral parts and not to controlled entities. If that were not the case, and the term "foreign government" in section 892(a)(3) were read as including not only integral parts but also controlled entities, the issue would arise whether a partnership is included within the term "controlled entity" such that section 892(a)(3) would reclassify the partnership on that basis. Treas.Reg. § 1.892-2T(a)(3) defines the term "controlled entity" as an "entity" that meets certain conditions, including that it directly or indirectly be wholly owned and controlled, but does not include a definition of the term "entity" for its purposes. Generally, the term "entity" for U.S. federal income tax purposes does include a partnership. 22 Nevertheless, it is possible that the term has a narrower meaning in a certain context. We also note that, whether a partnership is treated as an entity (or, instead as an aggregate of its partners) for purposes of a particular provision of the Code depends on which treatment is most appropriate to carry out the purposes of that provision. 23 ******** 22 For example, the term "business entity" for entity classification purposes is generally defined in terms of an "entity" that is recognized for U.S. federal income tax purposes. Treas.Reg. § 301.7701 -2(a). Numerous Code and regulatory provisions use the term "entity" as including partnerships. 23 See H.R. CONF. REP. NO. 2543, 83rd Cong., 2d Sess. at 59 (1954); Holiday Village Shopping Center v. United States, 5 Cl. Ct. 566, 570 (1984), aff'd 773 F.2d 276 (Fed.Cir. 1985) (for purposes of section 1250); Casel v. Comm'r, 79 T.C. 424, 432-33 (1982) (for purposes of section 267). ******** With the exception of Treas.Reg. § 1.892-5(a)(3) (discussed below, defining a CCE), partnerships generally have been treated as aggregates rather than separate entities for purposes of section 892. 24 Such aggregate treatment of partnerships was evident beginning with the promulgation of the 1988 temporary regulations interpreting section 892. For example, the definition of the term "entity" for purposes of section 892(a)(2)(B) did not include partnerships until 2002. 25 A second example demonstrating the aggregate treatment of partnerships for purposes of section 892 are the rules attributing commercial activities, which treat "subsidiary controlled entities" differently than partnerships. Treas.Reg. § 1.892-5T(d)(2)(i) provides that commercial activities of a subsidiary controlled entity are not attributed to its parent, whereas Treas.Reg. § 1.892-5T(d)(3) provides that commercial activities of a partnership are attributable to its general and limited partners for purposes of section 892. 26 ******** 24 See, e.g., Treas.Reg. § 1.892-5T(d)(3) (attributing commercial activities of a partnership to its general and limited partners for purposes of section 892 but excepting therefrom partners of publicly traded partnerships). Exceptions to the general rule treating partnerships as aggregates are provided where the foreign government's relationship to the activities of the partnership supports treating the partnership as an entity. See, e.g., Prop. Treas.Reg. § 1.892-5(d)(5)(iii). 25 T.D. 9012, 67 Fed.Reg. 49862, 49864 (Aug. 1, 2002). 26 But see Income of Foreign Governments and International Organizations, 76 Fed.Reg. 68119, 68121 (Nov. 3, 2011) (proposed regulations providing that an entity that is not otherwise engaged in commercial activities will not be treated as engaged in commercial activities solely because it holds an interest as a limited partner in a limited partnership). ******** Aggregate rather than entity treatment of partnerships for purposes of Treas.Reg. § 1.892-2T(a)(3) - as for other purposes of section 892 where entity treatment of partnerships is not expressly provided - is consistent with the purpose and history of the concept of "controlled entity." That concept was developed to address uncertainty as to whether the section 892 exemption was available to entities separate from a foreign sovereign that would, but for the exemption, have been subject to U.S. tax on their income. The statutory language of section 892 generally exempts from U.S. tax certain income of foreign governments and does not expressly exempt any income of separate entities. Thus, the issue arose as to whether corporations owned by a foreign sovereign could claim exemption from U.S. tax on their income. This issue generally did not arise for partnerships owned by foreign sovereigns, because partnerships, unlike corporations, generally are not subject to U.S. tax on their income. 27 Thus, partnerships did not present the issue that the concept of a "controlled entity" was intended to address: whether an entity that otherwise would have been subject to U.S. tax on its investment income could rely on the section 892 exemption. ******** 27 See section 701, which was enacted in 1954 and states that "[a] partnership as such shall not be subject to the income tax imposed by this chapter." Section 701 refers to "this chapter" (chapter 1) while section 892(a)(1) states that certain income of foreign governments is exempt "under this subtitle." However, the taxes for which section 892 provides an exemption (section 892(a)(1)) are in fact described in chapter 1 of the subtitle. ******** Accordingly, the guidance issued by the IRS before the concept of "controlled entity" was introduced by Treasury regulations interpreting section 892 involved entities treated as corporations; that guidance considered whether a corporation wholly owned by a foreign government could qualify for the exemption under section 892. 28 The IRS issued Revenue Ruling 75-298 in the context of considering whether corporations wholly owned by a foreign government were exempt under section 892. 29 When the concept of a "controlled entity" for purposes of section 892 was introduced by proposed Treasury regulations in 1978, the preamble thereto stated that "[i]n most respects, the requirements relating to controlled entities parallel the requirements of Rev. Rul. 75-298, relating to certain organizations created by foreign governments that are eligible for the section 892 exemption." 30 ******** 28 See, e.g., S. REP. NO. 163, 87th Cong., 1st Sess. (1961), 1961-2 C.B. 351, 352-53 (describing the IRS's positions with respect to a corporation wholly owned by a foreign government). 29 Rev. Rul. 75-298, 1975-2 C.B. 290, revoking Rev. Rul. 66-73, 1966-1 C.B. 174 (examining whether an organization constitutes a corporation for purposes of section 892). 30 Income of Foreign Governments, 43 Fed.Reg. 36111, 36112 (Aug. 15, 1978). The definition of a "controlled entity" in the 1978 proposed regulations substantially mirrors that of the 1988 temporary regulations. Compare Treas.Reg. § 1.892-2T(a)(3) (not requiring, for example, that the organization not engage in the United States in commercial activities on more than a de minimis basis). ******** The addition of partnerships to the regulatory definition of the term "entity" for purposes of a CCE under section 892(a)(2)(B) was a limited departure from the treatment of partnerships as aggregates for purposes of section 892 and does not dictate the meaning of the term "entity" in the phrase "controlled entity." The change applied to a different and broader class of partnerships through which foreign governments invested and was not limited to controlled entities as defined in Treas.Reg. § 1.892-2T(a)(3). Specifically, a CCE includes any entity at least 50 percent owned by a foreign government, while only an entity that is 100 percent owned by a foreign sovereign can be a controlled entity. For purposes of section 892(a)(2)(B) only, Treas.Reg. § 1.892-5(a)(3) reflects the decision that treatment of a partnership as an entity is most appropriate for that provision. In reaching the conclusion that partnerships were not within the intended scope of "controlled entity," it is necessary to consider the reference to "partnerships" in the flush text under the definition of a "controlled entity" in Treas.Reg. § 1.892-2T(a)(3), which states: "[a] controlled entity does not include partnerships or any other entity owned and controlled by more than one foreign sovereign." Before the 1988 temporary regulations, such flush text stated only that a controlled entity "does not include any entity wholly owned and controlled by more than one foreign sovereign." 31 The 1988 temporary regulations revised this flush text to state that a controlled entity "does not include partnerships or any other entity wholly owned and controlled by more than one foreign sovereign." This reference to partnerships might be interpreted as referring only to partnerships owned by more than one foreign sovereign. In light of the analysis above that relies on the historic aggregate treatment of partnerships for purposes of section 892 and the history and purpose of the concept of "controlled entity" to construe section 892(a)(3) and interpret the regulations, however, this flush text should not be read to imply that a partnership wholly owned and controlled by a single foreign sovereign (indirectly through multiple controlled entities) is itself a "controlled entity." ******** 31 See T.D. 7707, 45 Fed.Reg. 48882, 48883 (July 22, 1980) (reciting then-Treas.Reg. § 1.892-1(b)(3)). ******** The General Partner represents that the Entity is an unincorporated organization formed to enable the Partners to join together to carry on investment activities and to divide the profits and losses therefrom. The General Partner also represents that the Entity does not constitute a governing authority and, therefore, does not constitute an integral part of the Province within the meaning of Treas.Reg. § 1.892-2T(a)(2). Moreover, the Entity filed a Form 8832, Entity Classification Election, electing to be classified as a partnership effective as of date Y for U.S. federal tax purposes. 32 Each of the Partners is an association taxable as a corporation for U.S. federal tax purposes and each of the Partners will certify to the Entity on a Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting, indicating that it is classified as a "controlled entity" and not an "integral part" of the Province for purposes of section 892. ******** 32 Treas.Reg. § 301.7701-3(a) provides, in part, that a business entity that is not classified as a corporation under any of Treas.Reg. §§ 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) (an eligible entity), can elect its entity classification for U.S. federal tax purposes. ******** RULING Based solely on the information submitted and the representations made, the Entity is not classified as a corporation pursuant to Treas.Reg. § 301.7701-2(b)(6) or pursuant to Treas.Reg. § 301.7701-2(b)(7) by reason of section 892(a)(3). CAVEATS The ruling contained in this letter is based upon information and representations submitted by the Entity, the General Partner, and the Manager, and accompanied by a penalty of perjury statement executed by an appropriate party. This office has not verified any of the material submitted in support of the ruling request, and it is subject to verification on examination. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Furthermore, except as expressly provided in the ruling, no opinion is expressed or implied concerning the entity classification for U.S. federal tax purposes of any entity or party discussed herein. No opinion is expressed or implied concerning whether the Entity is treated as an integral part under Treas.Reg. § 1.892-2T(a)(2) or whether the Partners, the Investors, GP Inc. 1, GP Inc. 2, GP Inc. 3, or the Manager are treated as integral parts or controlled entities under Treas.Reg. § 1.892-2T(a) or controlled commercial entities under section 892(a)(2)(B), or whether any such entities satisfy the definitions under section 897(l) and Treas.Reg. § 1.897(l)-1(e)(11). No opinion is expressed or implied concerning whether any income received by any party qualifies for exemption from U.S. federal income tax under section 892 or section 897, or whether any party conducted commercial activities within the meaning of Treas.Reg. § 1.892-4T. This letter ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that this letter ruling may not be used or cited as precedent. This letter ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter ruling. See Section 11 of Rev. Proc. 2023-1. If the taxpayer can demonstrate that the criteria in Section 11 of Rev. Proc. 2023-1 are satisfied, a letter ruling is not revoked or modified retroactively except in rare or unusual circumstances. A copy of this letter must be attached to any income tax return to which it is relevant. In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your authorized representatives. Sincerely, Joel S. Deuth Senior Counsel, Branch 5 Office of the Associate Chief Counsel (International) cc:

Chief Counsel Advice Number: 202233014 Internal Revenue Service July 12, 2022 Office of Chief Counsel Internal Revenue Service memorandum Number: 202233014 Release Date: 8/19/2022 CC:PSI:B04 DGespass POSTN-120392-21 UILC: 2055.12-06, 2056.00-00, 2056.08-00 date: July 12, 2022 to: Janice B. Geier Associate Area Counsel, Portland (Small Business/Self-Employed) from: Holly Porter Associate Chief Counsel (Passthroughs & Special Industries) subject: Estate tax deductions under §§ 2055 and 2056 for discretionary interests ISSUE Whether a decedent's estate is entitled to an estate tax charitable deduction under § 2055 of the Internal Revenue Code or an estate tax marital deduction under § 2056 for the value of the portion of the unitrust interest of a testamentary charitable remainder unitrust that may be distributed between charity and the decedent's spouse at the discretion of a trustee. CONCLUSION A decedent's estate is not entitled to an estate tax deduction under § 2055 or § 2056 for the portion of the unitrust interest that may be distributed either to charity or decedent's spouse at the discretion of a trustee. FACTS Decedent died, survived by Spouse, leaving a portion of his estate to a testamentary trust that is a charitable remainder unitrust described in § 664 ("CRUT"). CRUT provides for annual unitrust payments of five percent for the term of Spouse's life. CRUT provides that the trustee must distribute 25 percent of the unitrust amount (i.e., 1.25 percent of CRUT) to Spouse. The trustee may distribute the remaining 75 percent of the unitrust amount (i.e., 3.75 percent of CRUT) to either Charity or Spouse at Trustee's complete discretion. Upon Spouse's death, the trustee must distribute the remainder of CRUT to Charity. LAW AND ANALYSIS Section 2055(a) provides an estate tax charitable deduction where, for purposes of the tax imposed by § 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises, or transfers to or for the use of certain qualifying charitable organizations. Section 2055(e)(2) restricts the estate tax charitable deduction where an interest in property (other than an interest described in § 170(f)(3)(B)) passes or has passed from the decedent to a person, or for a use, described in § 2055(a) and an interest in the same property passes or has passed (for less than an adequate and full consideration in money or money's worth) from the decedent to a person, or for a use, not described in § 2055(a). In the case of a remainder interest, § 2055(e)(2)(A) provides that no deduction is allowed for such interest unless the interest is in a trust that is a charitable remainder annuity trust or a charitable remainder unitrust described in § 664 or a pooled income fund described in § 642(c)(5). In the case of any other interest, § 2055(e)(2)(B) provides that no deduction is allowed for such interest unless the interest is in the form of a guaranteed annuity or is a fixed percentage distributed yearly of the fair market value of the property (to be determined yearly). Section 20.2055-2(a) of the Estate Tax Regulations provides that if a trust is created or property is transferred for both a charitable and a private purpose, deduction may be taken of the value of the charitable beneficial interest only insofar as that interest is presently ascertainable, and hence severable from the noncharitable interest. Section 2056(a) provides an estate tax marital deduction where, for purposes of the tax imposed by § 2001, the value of the taxable estate shall, except as limited by § 2056(b), be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate. Section 2056(b)(1) provides a limitation in the case of a terminable interest, where, if on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur, an interest passing to the surviving spouse will terminate or fail, then no deduction shall be allowed under § 2056 with respect to such interest. Section 2056(b)(8) provides that if the surviving spouse of the decedent is the only beneficiary of a qualified charitable remainder trust who is not a charitable beneficiary, the terminable interest rule of § 2056(b)(1) shall not apply to any interest in such trust that passes or has passed from the decedent to such surviving spouse. Section 20.2056(b)-8(a)(1) provides that if the surviving spouse of the decedent is the only noncharitable beneficiary of a charitable remainder unitrust, the value of the unitrust interest passing to the spouse qualifies for an estate tax marital deduction under § 2056(b)(8) and the value of the remainder interest qualifies for an estate tax charitable deduction under § 2055. Section 20.2056(c)-2(a) provides, in part, that a property interest is treated as passing to the surviving spouse only if it passes to the spouse as beneficial owner. For this purpose, where a property interest passed from the decedent in trust, such interest is considered to have passed from the decedent to the surviving spouse to the extent of the surviving spouse's beneficial interest therein. In this case, the terms of CRUT create two charitable interests: a discretionary interest in a portion of the unitrust amount and a remainder interest. Decedent's estate may claim an estate tax charitable deduction for the value of the remainder interest under § 2055(a), because CRUT is a charitable remainder unitrust described in § 664. See § 2055(e)(2)(A). However, Decedent's estate may not claim an estate tax charitable deduction under § 2055(a) for the value of any portion of the unitrust interest that may be distributed to Charity in the discretion of the trustee because Charity's interest is not in the form of a fixed unitrust amount to be distributed annually and no part of the unitrust interest is ascertainable or severable from Spouse's noncharitable interest. See § 2055(e)(2)(B) and § 20.2055-2(a). With regard to the marital interests in CRUT, because the interest in the 25 percent portion of the unitrust amount must be distributed to and will be received by Spouse pursuant to the terms of CRUT, this interest is considered to pass from Decedent to Spouse as beneficial owner for purposes of § 2056(a). Under § 2056(b)(8), because Spouse is the only beneficiary of CRUT who is not a charitable beneficiary the interest in the 25 percent portion of the unitrust amount is not subject to the terminable interest rule in § 2056(b)(1). Accordingly, Decedent's estate may claim an estate tax marital deduction for the value of this interest under § 2056. In contrast, the extent of Spouse's interest in the remaining 75 percent portion of the unitrust amount cannot be established as of Decedent's date of death and, therefore, is not considered to pass from Decedent to Spouse as beneficial owner for purposes of § 2056(a). The extent of Spouse's interest cannot be established because the amount to be distributed to Spouse annually is within the sole and complete discretion of the trustee. It is not possible to ascertain as of the date of death whether spouse will receive any of the 75 percent portion of the unitrust amount each year since all of such portion of the unitrust interest may be distributed to charity. Because the interest is not treated as passing to Spouse for purposes of § 2056(a), Decedent's estate may not claim an estate tax marital deduction for the value of this interest under § 2056(a). 1 See § 20.2056(c)-2(a). See also Estate of Turner v. Commissioner, 138 T.C. 306, 316 (2012) ("property that passed to a person other than a surviving spouse cannot also be considered as passing to the surviving spouse"). ******** 1 The analysis and conclusion would be the same under § 2523 for a completed gift transfer to a CRUT with similar terms. In PLR 200813006, PLR 200832017, PLR 201117005, and PLR 201845014, this office ruled that taxpayers were entitled to an estate tax marital deduction under § 2056 or a gift tax marital deduction under § 2523 for a unitrust interest in a CRUT that can be distributed between charity and spouse at the trustee's discretion. The position in these earlier rulings no longer reflects the position of this office. ******** Section 6110(k)(3) provides that this document may not be used or cited as precedent. Please call Daniel J. Gespass (202) 317-4632 if you have any further questions. Sincerely, Associate Chief Counsel (Passthroughs & Special Industries) _________________________ By: Karlene M. Lesho Senior Technician Reviewer, Branch 4 Office of the Associate Chief Counsel (Passthroughs and Special Industries)