IRB 2019-03 (Rev. 01-14-2019) - Internal Revenue Service · NOTICE 2019–03, page 350. This notice...

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

ADMINISTRATIVE

NOTICE 2019–06, page 353.This notice informs taxpayers that the Department of the Trea-sury and the Internal Revenue Service intend to propose reg-ulations addressing certain special enforcement matters undersection 6241(11). Specifically, this Notice explains that pro-posed rules will be issued that provide the IRS may determinethat the centralized partnership audit regime will not apply toadjustments to partnership-related items in certain limited cir-cumstances and that partnerships with a qualified subchapterS subsidiary (QSub) are not eligible to elect out of the central-ized partnership audit regime except by applying a rule similarto the rules for S corporations under section 6221(b)(2)(A) tothe QSub partner. This notice also requests comments regard-ing other special enforcement matters that could be the sub-ject of future proposed regulations.

REG–104352–18, page 357.Proposed regulations implementing sections 245A(e) and 267Aof the Internal Revenue Code regarding hybrid dividends andcertain amounts paid or accrued in hybrid transactions or withhybrid entities. This document also contains proposed regulationsunder: (1) sections 1503(d) and 7701 to prevent the same de-duction from being claimed under the tax laws of both the UnitedStates and a foreign country, and (2) sections 6038, 6038A, and6038C to facilitate administration of these rules.

EMPLOYEE PLANS

NOTICE 2019–03, page 350.This notice sets forth updates on the corporate bond monthlyyield curve, the corresponding spot segment rates for December2018 used under § 417(e)(3)(D), the 24-month average segmentrates applicable for December 2018, and the 30-year Treasuryrates, as reflected by the application of § 430(h)(2)(C)(iv).

EMPLOYMENT TAX

NOTICE 2019–08, page 354.This Notice provides the maximum fair market value of avehicle eligible to use the fleet-average and cents-per-milespecial valuation rules of Treas. Reg. section 1.61–21(d) and(e), respectively, for 2018. These special valuation rules maybe used to value an employee’s personal use of an employer-provided vehicle for income and employment tax purposes.

INCOME TAX

NOTICE 2019–08, page 354.This Notice provides the maximum fair market value of avehicle eligible to use the fleet-average and cents-per-milespecial valuation rules of Treas. Reg. section 1.61–21(d) and(e), respectively, for 2018. These special valuation rules maybe used to value an employee’s personal use of an employer-provided vehicle for income and employment tax purposes.

Rev. Proc. 2019–08, page 347.This revenue procedure describes how taxpayers elect toexpense under section 179(a) the cost of qualified real prop-erty and how taxpayers change their computation of depreci-ation for certain assets to the alternative depreciation systemof section 168(g), for taxable years beginning after 2017. Thisrevenue procedure also defines qualified real property undersection 179. Effective date December 21, 2018, Rev. Proc.87–57 and Rev. Proc. 2018–31 are modified.

Finding Lists begin on page ii.

Bulletin No. 2019–03January 14, 2019

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly.

It is the policy of the Service to publish in the Bulletin allsubstantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of internalmanagement are not published; however, statements of inter-nal practices and procedures that affect the rights and dutiesof taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulings totaxpayers or technical advice to Service field offices, identify-ing details and information of a confidential nature are deletedto prevent unwarranted invasions of privacy and to comply withstatutory requirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A, TaxConventions and Other Related Items, and Subpart B, Legisla-tion and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Sec-retary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

January 14, 2019 Bulletin No. 2019–03

Part III. Administrative, Procedural, and Miscellaneous26 CFR 1.179–5: Time and manner of making election.(Also Part 1, §§ 168, 446; 1.168(i)–4, 1.446–1.)

Rev. Proc. 2019–08

SECTION 1. PURPOSE

This revenue procedure provides guid-ance under §§ 13101(b), 13204(a)(3), and13205 of the Tax Cuts and Jobs Act, Pub.L. No. 115–97, 131 Stat. 2054 (Dec. 22,2017) (the “TCJA”). Section 13101(b) ofthe TCJA amended § 179 of the InternalRevenue Code by modifying the definitionof qualified real property that may be eligi-ble as § 179 property under § 179(d)(1).Section 13204(a)(3) of the TCJA amended§ 168 by (i) requiring certain property heldby an electing real property trade or busi-ness, as defined in § 163(j)(7)(B), to bedepreciated under the alternative deprecia-tion system in § 168(g), and (ii) changingthe recovery period under the alternativedepreciation system from 40 to 30 years forresidential rental property. Section 13205 ofthe TCJA amended § 168 by requiring cer-tain property held by an electing farmingbusiness, as defined in § 163(j)(7)(C), to bedepreciated under the alternative deprecia-tion system. This revenue procedure alsomodifies Rev. Proc. 87–57, 1987–2 C.B.687, to provide an optional depreciation ta-ble for residential rental property depreci-ated under the alternative depreciation sys-tem with a 30-year recovery period, andRev. Proc. 2018–31, 2018–22 I.R.B. 637,to provide guidance for calculating a§ 481(a) adjustment for a change in methodof accounting due to a change in the use ofdepreciable tangible property.

SECTION 2. BACKGROUND

.01 Modifications to § 179.(1) Section 179(a) allows a taxpayer to

elect to treat the cost (or a portion of thecost) of any § 179 property as an expensefor the taxable year in which the taxpayerplaces the property in service. Sections179(b)(1) and (2) prescribe a dollar limi-tation on the aggregate cost of § 179 prop-erty that can be treated as an expenseunder § 179(a). The dollar limitation is theamount under § 179(b)(1) (the § 179(b)(1)limitation), reduced (but not below zero)by the amount by which the cost of § 179

property placed in service during the taxableyear exceeds the amount under § 179(b)(2)(the § 179(b)(2) limitation). For taxableyears beginning after 2017, the § 179(b)(1)limitation is $1,000,000 and the § 179(b)(2)limitation is $2,500,000. Pursuant to§ 179(b)(6), these limitation amounts areadjusted for inflation for taxable years be-ginning after 2018. For taxable years begin-ning in 2019, section 3.26 of Rev. Proc.2018–57, 2018–49 I.R.B. 827, providesthat the § 179(b)(1) limitation is $1,020,000and the § 179(b)(2) limitation is $2,550,000.

(2) Section 179(b)(3)(A) provides thata taxpayer’s § 179 deduction for anytaxable year, after application of the§ 179(b)(1) and (2) limitations, is lim-ited to the taxpayer’s taxable income forthat taxable year that is derived from thetaxpayer’s active conduct of any trade orbusiness during that taxable year (tax-able income limitation). Section 179(b)(3)(B) provides that the amount of anycost of § 179 property elected to beexpensed in a taxable year that is disal-lowed as a § 179 deduction under thetaxable income limitation may be car-ried forward for an unlimited number ofyears and may be deducted under§ 179(a) in a future year, subject to thesame limitations.

(3) Section 179(c) provides the rulesfor making and revoking elections under§ 179 (“§ 179 election”). Pursuant to§ 179(c)(1), a § 179 election is made inthe manner prescribed by regulations.Section 1.179–5(c)(1) of the Income TaxRegulations provides the manner for mak-ing or revoking a § 179 election for anytaxable year beginning after 2002 and be-fore 2008. Section 1.179–5(c) was promul-gated in 2005 and has not been amended toreflect subsequent amendments to § 179(c).However, in 2017, the Treasury Departmentand the IRS issued Rev. Proc. 2017–33,2017–19 I.R.B. 1236. Section 3.02 of Rev.Proc. 2017–33 provides that for a taxableyear beginning after 2014, the taxpayer willbe permitted to make a § 179 election forany § 179 property without the Commis-sioner’s consent on an amended federal taxreturn for the taxable year in which thetaxpayer places in service the § 179 prop-erty. Section 3.02 of Rev. Proc. 2017–33further provides that until § 1.179–5(c) is

amended to incorporate this guidance, tax-payers may rely on such guidance.

(4) Section 179(d) defines the term“§ 179 property.” Prior to amendment bythe TCJA, § 179(d)(1) defined § 179 prop-erty as property that is: (A)(i) tangible prop-erty to which § 168 applies, or (ii) computersoftware, as defined in § 197(e)(3)(B), thatis described in § 197(e)(3)(A)(i) and towhich § 167 applies; (B) § 1245 property asdefined in § 1245(a)(3); and (C) acquired bypurchase for use in the active conduct of atrade or business. Prior to amendment by theTCJA, § 179(d)(1) further provided that§ 179 property does not include any prop-erty described in § 50(b).

Section 13101(b)(1) of the TCJAamended § 179(d)(1)(B) to provide thatif the taxpayer elects, § 179 propertymay include qualified real property asdefined in § 179(f). Section 13101(c) ofthe TCJA also amended the flush lan-guage in § 179(d)(1) to allow propertyused predominantly to furnish lodgingor in connection with the furnishing oflodging as described in § 50(b)(2) to be§ 179 property. These amendments ap-ply to property placed in service in tax-able years beginning after December 31,2017.

(5) Prior to amendment by the TCJA,§ 179(f)(1) provided that § 179 propertyincluded qualified real property if the tax-payer elected the application of § 179(f)for the taxable year, and § 179(f)(2) de-fined “qualified real property” as meaningqualified leasehold improvement prop-erty, qualified restaurant property, andqualified retail improvement property de-scribed in § 168(e)(6), (7), and (8), respec-tively, as in effect on the day before thedate of the enactment of the TCJA. Sec-tion 13101(b)(2) of the TCJA amended§ 179(f) by defining qualified real prop-erty as (1) any qualified improvementproperty described in § 168(e)(6) and (2)any of the following improvements tononresidential real property placed in ser-vice after the date such property was firstplaced in service: roofs; heating, ventila-tion, and air-conditioning property; fireprotection and alarm systems; and secu-rity systems. These amendments apply toproperty placed in service in taxable yearsbeginning after December 31, 2017.

Bulletin No. 2019–03 January 14, 2019347

Some taxpayers have inquired as towhether the election to treat qualified realproperty as § 179 property is made in ac-cordance with the § 179 election proceduresin § 1.179–5(c) or the procedures in Notice2013–59, 2013–40 I.R.B. 297, for electingthe application of former § 179(f)(1). Sec-tion 3 of this revenue procedure addressesthis issue.

(6) Section 401(b)(15)(A) of the Con-solidated Appropriations Act, 2018, Pub.L. No. 115–141, Div. U, Title IV, 132Stat. 348 (Mar. 23, 2018) (the “2018Act”), removed § 179(e), which providedspecial rules for qualified disaster assis-tance property, and redesignated § 179(f)as § 179(e).

.02 Modifications to § 168(g).(1) Prior to amendment by the TCJA,

§ 168(g)(1) provided that the depreciationdeduction provided by § 167(a) is deter-mined under the alternative depreciationsystem for: (A) any tangible property thatduring the taxable year is used predomi-nantly outside the United States; (B) anytax-exempt use property; (C) any tax-exempt bond financed property; (D) any im-ported property covered by an Executiveorder under § 168(g)(6); and (E) any prop-erty to which an election under § 168(g)(7)applies. Sections 13204(a)(3)(A)(i) and13205(a) of the TCJA amended § 168(g)(1)by requiring the depreciation deduction pro-vided by § 167(a) to be determined underthe alternative depreciation system for thefollowing additional property: nonresiden-tial real property, residential rental property,and qualified improvement property held byan electing real property trade or business asdefined in § 163(j)(7)(B); and any propertywith a recovery period of 10 years or morethat is held by an electing farming businessas defined in § 163(j)(7)(C). These amend-ments apply to taxable years beginning afterDecember 31, 2017, without regard to whenthe property is or was placed in service.

Some taxpayers that are electing realproperty trades or businesses or electingfarming businesses have inquired about howdepreciation is changed from the general de-preciation system under § 168(a) to the alter-native depreciation system under § 168(g) forproperty placed in service in taxable yearsbeginning before 2018. Section 4 of this rev-enue procedure addresses this issue.

(2) Prior to amendment by the TCJA,the table of recovery periods under

§ 168(g)(2)(C) provided that the recoveryperiod was 40 years for residential rentalproperty. Section 13204(a)(3)(C) of theTCJA amended that table by providingthat the recovery period is 30 years forresidential rental property. This amend-ment applies to property placed in serviceafter December 31, 2017.

Some taxpayers have inquired whetherresidential rental property placed in ser-vice before 2018 has a recovery period of30 or 40 years under the alternative de-preciation system. Section 4 of this reve-nue procedure addresses this issue.

.03 Optional depreciation table underthe alternative depreciation system forresidential rental property placed in ser-vice after 2017. Rev. Proc. 87–57 pro-vides guidance for computing deprecia-tion deductions for tangible propertyunder § 168. Sections 2–7 of Rev. Proc.87–57 prescribe the manner of computingsuch depreciation deductions. Section 8 ofRev. Proc. 87–57 contains optional depre-ciation tables that may be used by certaintaxpayers in lieu of computing deprecia-tion deductions in the manner described insections 2–7 of Rev. Proc. 87–57.

Section 8.01 of Rev. Proc. 87–57 pro-vides that the optional depreciation tablesmay be used for any item of propertyplaced in service in a taxable year. For allitems of property placed in service in ataxable year for which the optional depre-ciation tables are not used, depreciationdeductions must be computed in the man-ner prescribed in sections 2–7 of Rev.Proc. 87–57.

Section 8.02 of Rev. Proc. 87–57 pro-vides that the optional depreciation tablesspecify schedules of annual depreciationrates to be applied to the unadjusted basisof the property in each taxable year. If ataxpayer uses an optional depreciation ta-ble to compute the annual depreciationdeduction for any item of property, thetaxpayer must use the table to compute theannual depreciation deductions for the en-tire recovery period of such property.However, a taxpayer may not continue touse the table if there are any adjustmentsto the basis of such item of property forreasons other than (1) depreciation al-lowed or allowable, or (2) an addition oran improvement to such property that issubject to depreciation as a separate itemof property. Use of the optional deprecia-

tion tables to compute depreciation deduc-tions does not require the filing of anynotice with the Internal Revenue Service(IRS).

The IRS has not previously publishedan optional table for property depreciatedunder the alternative depreciation systemwith a recovery period of 30 years and themid-month convention. Some taxpayershave requested the IRS to provide an op-tional depreciation table for residentialrental property that is placed in serviceafter December 31, 2017, and depreciatedunder the alternative depreciation systemof § 168(g) using the straight-line method,the new 30-year recovery period requiredby the TCJA, and the mid-month conven-tion. This table is provided in section 4 ofthis revenue procedure.

.04 Subsequent References. Unless oth-erwise specifically stated, all references inthe subsequent sections of this revenueprocedure to § 168(g) are to § 168(g) as ineffect after the enactment of the TCJA andto § 179 are to § 179 as in effect after theenactment of the 2018 Act.

SECTION 3. QUALIFIED REALPROPERTY UNDER § 179

.01 Definition.(1) Taxable year beginning after 2017.

For property placed in service by the tax-payer in any taxable year beginning after2017, the following types of property arequalified real property that may be eligibleas § 179 property under § 179(d)(1):

(a) Qualified improvement property, asdescribed in § 168(e)(6), that is placed in ser-vice by the taxpayer. The definition of quali-fied improvement property in § 168(e)(6) isthe same definition of that term in § 168(k)(3)as in effect on the day before the date ofenactment of the TCJA. Accordingly, see sec-tion 4.02 of Rev. Proc. 2017–33 for furtherguidance on the definition of qualified im-provement property; and

(b) An improvement to nonresidentialreal property, as defined in § 168(e)(2)(B),if the improvement:

(i) Is placed in service by the taxpayerafter the date such nonresidential realproperty was first placed in service by anyperson;

(ii) Is § 1250 property; and(iii) Is:(A) A roof;


(B) Heating, ventilation, and air-conditioning property (HVAC). A centralHVAC system includes all componentsthat are in, on, or adjacent to the nonres-idential real property. See § 1.48–1(e)(2);

(C) A fire protection and alarm system;or

(D) A security system.(2) Taxable year beginning in 2017

and ending in 2018. For property placedin service by the taxpayer in a taxable yearbeginning in 2017 and ending in 2018,qualified real property is qualified lease-hold improvement property, qualifiedrestaurant property, or qualified retailimprovement property as described in§ 179(f)(1) and (2) as in effect on the daybefore the date of enactment of the TCJA.Qualified leasehold improvement prop-erty, qualified restaurant property, andqualified retail improvement property aredefined in § 168(e)(6), (e)(7), and (e)(8),

respectively, as in effect on the day beforethe date of the enactment of the TCJA.

.02 Election to Treat Qualified RealProperty as § 179 Property. A taxpayermay elect to expense under § 179(a) thecost, or a portion of the cost, of qualifiedreal property placed in service by the tax-payer during any taxable year beginningafter 2017 by filing an original oramended Federal tax return for that tax-able year in accordance with proceduressimilar to those in § 1.179–5(c)(2) andsection 3.02 of Rev. Proc. 2017–33. If ataxpayer elects or elected to expense un-der § 179(a) a portion of the cost of qual-ified real property placed in service by thetaxpayer during any taxable year begin-ning after 2017, the taxpayer is permittedto increase the portion of the cost of suchproperty expensed under § 179(a) by fil-ing an amended Federal tax return for thattaxable year. Any such increase in theamount expensed under § 179 is not

deemed to be a revocation of the priorelection for that taxable year.

SECTION 4. ALTERNATIVEDEPRECIATION SYSTEM UNDER§ 168(g)

.01 Recovery period of residentialrental property.

(1) In general. The recovery periodunder the table in § 168(g)(2)(C) is 30years for residential rental property placedin service by the taxpayer after December31, 2017, and is 40 years for residentialrental property placed in service by thetaxpayer before January 1, 2018.

(2) Optional depreciation table. Belowis the optional depreciation table for resi-dential rental property placed in service bythe taxpayer after December 31, 2017, anddepreciated by the taxpayer under the alter-native depreciation system of § 168(g) usingthe straight-line method, a 30-year recoveryperiod, and the mid-month convention.

Table—Alternative Depreciation System

Method: Straight line

Convention: Mid-month

Recovery period: 30 years

Month in the 1st recovery year the property is placed in service

1 2 3 4 5 6 7 8 9 10 11 12

Year

1 3.204% 2.926% 2.649% 2.371% 2.093% 1.815% 1.528% 1.250% 0.972% 0.694% 0.417% 0.139%

2–30 3.333% 3.333% 3.333% 3.333% 3.333% 3.333% 3.333% 3.333% 3.333% 3.333% 3.333% 3.333%

31 0.139% 0.417% 0.694% 0.972% 1.250% 1.528% 1.815% 2.093% 2.371% 2.649% 2.926% 3.204%

.02 Electing real property trade orbusiness or electing farming business.

(1) In general. Section 168(g)(1)(F)and (G) provide that the depreciation de-duction provided by § 167(a) must bedetermined in accordance with the alter-native depreciation system in § 168(g) forthe following types of MACRS property(as defined in § 1.168(b)–1(a)(2)):

(a) Any nonresidential real property (asdefined in § 168(e)(2)(B)), residential rentalproperty (as defined in § 168(e)(2)(A)), andqualified improvement property (as definedin § 168(e)(6)) held by an electing real prop-erty trade or business (as defined in§ 163(j)(7)(B) and the regulations thereun-der); and

(b) Any property with a recovery pe-riod of 10 years or more that is held by anelecting farming business (as defined in

§ 163(j)(7)(C) and the regulations there-under). For determining what MACRSproperty has a recovery period of 10 yearsor more, the recovery period is determinedin accordance with § 168(c).

(2) Changing depreciation of propertyto the alternative depreciation system.

(a) In general. For the first taxable yearfor which an electing real property trade orbusiness or an electing farming businessmakes an election under § 163(j)(7)(B) or(C), respectively, and the regulations there-under (the “election year”), that trade orbusiness must begin depreciating the prop-erties described in section 4.02(1) of thisrevenue procedure, as applicable, in accor-dance with the alternative depreciation sys-tem in § 168(g). The preceding sentenceapplies to such property placed in service bythe trade or business in taxable years begin-

ning before the election year (“existingproperty”) and such property placed in ser-vice by the trade or business in the electionyear and subsequent taxable years (“newly-acquired property”).

(b) Existing property. For existingproperty described in section 4.02(1) ofthis revenue procedure, as applicable, achange in use occurs under § 168(i)(5)and § 1.168(i)–4(d) for the election yearas a result of the election under§ 163(j)(7)(B) or (C), as applicable. Ac-cordingly, depreciation for such propertybeginning for the election year is deter-mined in accordance with § 1.168(i)–4(d).Pursuant to § 1.168(i)–4(f), a change incomputing depreciation for the electionyear for such existing property is not achange in method of accounting under§ 446(e). If any such existing property


was qualified property under § 168(k) inthe taxable year in which the trade orbusiness placed the property in service,the additional first year depreciation de-duction allowable for that property isnot redetermined. See § 1.168(k)–1(f)(6)(iv)(A).

(c) Newly-acquired property. Fornewly-acquired property described in sec-tion 4.02(1) of this revenue procedure, asapplicable, the taxpayer determines thedepreciation in accordance with the alter-native depreciation system for such prop-erty for its placed-in-service year and thesubsequent taxable years. Because suchnewly-acquired property is required to bedepreciated under the alternative depreci-ation system, the property is not qualifiedproperty for purposes of the additionalfirst year depreciation deduction under§ 168(k). See § 168(k)(2)(D).

(3) Failure to change to alternativedepreciation system.

(a) Existing property. If an electing realproperty trade or business or an electingfarming business does not depreciate anyexisting property that is described in sec-tion 4.02(1) of this revenue procedure, asapplicable, under the alternative deprecia-tion system for the election year and thesubsequent taxable year then that trade orbusiness has adopted an impermissiblemethod of accounting for that item ofMACRS property. As a result, a changefrom that impermissible method of account-ing to the straight-line method, the applica-ble recovery period, and/or the applicableconvention under the alternative deprecia-tion system for the item of MACRS prop-erty is a change in method of accountingunder § 446(e). See § 1.446–1(e)(2)(ii)(d)(2)(i). The taxpayer requests to makesuch a method change by filing Form 3115,Application for Change in AccountingMethod, in accordance with the automaticchange procedures or non-automatic changeprocedures, as applicable, in Rev. Proc.2015–13, 2015–5 I.R.B. 419 (or any succes-sor). If the taxpayer is eligible to make thismethod change under the automatic changeprocedures, the method change is describedin section 6.05 of Rev. Proc. 2018–31 (orany successor). The § 481(a) adjustment asof the first day of the year of change iscalculated as though the change in use oc-curred for the item of MACRS property inthe election year.

(b) Newly-acquired property. If anelecting real property trade or business oran electing farming business does not de-termine its depreciation under the alterna-tive depreciation system for any newly-acquired property that is described insection 4.02(1) of this revenue procedure,as applicable, for its placed-in-serviceyear and the subsequent taxable year thenthat trade or business has adopted an im-permissible method of accounting for thatitem of MACRS property. As a result, achange from that impermissible method ofaccounting to the straight-line method, theapplicable recovery period, and/or theapplicable convention under the alterna-tive depreciation system for the item ofMACRS property is a change in methodof accounting under § 446(e). See§ 1.446 –1(e)(2)(ii)(d)(2)(i). The tax-payer requests to make such a methodchange by filing Form 3115 in accor-dance with the automatic change proce-dures or non-automatic change proce-dures, as applicable, in Rev. Proc.2015–13 (or any successor). If the tax-payer is eligible to make this methodchange under the automatic change pro-cedures, the method change is describedin section 6.01 of Rev. Proc. 2018 –31(or any successor), provided none of theinapplicability provisions in section6.01(1)(c) of Rev. Proc. 2018 –31 (orany successor) apply. The § 481(a) ad-justment as of the first day of the year ofchange is calculated as though the tax-payer determined depreciation under thealternative depreciation system for theitem of MACRS property beginning forits placed-in-service year.

SECTION 5. MODIFICATION TOREV. PROC. 2018–31

Section 6.05 of Rev. Proc. 2018–31provides the procedures for obtaining au-tomatic consent to change the method ofaccounting for depreciation due to achange in the use of MACRS property.Section 6.05 of Rev. Proc. 2018–31 ismodified as follows:

.01 Section 6.05(3), (4), and (5) areredesignated as section 6.05(4), (5), and(6), respectively; and

.02 New section 6.05(3) is added toread as follows:

(3) Section 481(a) adjustment. A tax-payer changing its method of accounting

under this section 6.05 is required to cal-culate a § 481(a) adjustment as of the firstday of the year of change as if the pro-posed method of accounting had alwaysbeen used by the taxpayer beginning withthe taxable year in which the change in theuse of the MACRS property occurred bythe taxpayer.

SECTION 6. EFFECTIVE DATE

This revenue procedure is effectiveDecember 21, 2018.

SECTION 7. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 87–57 and Rev. Proc.2018–31 are modified.

SECTION 8. DRAFTINGINFORMATION

The principal author of this revenueprocedure is Charles Magee of the Officeof Associate Chief Counsel (Income Tax& Accounting). For further informationregarding this revenue procedure, contactMr. Magee at (202) 317-7005 (not a toll-free number).

Update for WeightedAverage Interest Rates,Yield Curves, and SegmentRatesNotice 2019–03

This notice provides guidance on thecorporate bond monthly yield curve, thecorresponding spot segment rates used un-der § 417(e)(3), and the 24-month averagesegment rates under § 430(h)(2) of theInternal Revenue Code. In addition, thisnotice provides guidance as to the interestrate on 30-year Treasury securities under§ 417(e)(3)(A)(ii)(II) as in effect for planyears beginning before 2008 and the 30-year Treasury weighted average rate un-der § 431(c)(6)(E)(ii)(I).

YIELD CURVE AND SEGMENTRATES

Section 430 specifies the minimumfunding requirements that apply to single-employer plans (except for CSEC plansunder § 414(y)) pursuant to § 412. Section430(h)(2) specifies the interest rates that


must be used to determine a plan’s targetnormal cost and funding target. Under thisprovision, present value is generally de-termined using three 24-month averageinterest rates (“segment rates”), each ofwhich applies to cash flows during speci-fied periods. To the extent provided under§ 430(h)(2)(C)(iv), these segment rates areadjusted by the applicable percentage of the25-year average segment rates for the periodending September 30 of the year precedingthe calendar year in which the plan yearbegins.1 However, an election may be madeunder § 430(h)(2)(D)(ii) to use the monthlyyield curve in place of the segment rates.

Notice 2007–81, 2007–44 I.R.B. 899,provides guidelines for determining themonthly corporate bond yield curve, and

the 24-month average corporate bond seg-ment rates used to compute the target nor-mal cost and the funding target. Consis-tent with the methodology specified inNotice 2007–81, the monthly corporatebond yield curve derived from November2018 data is in Table 2018–11 at the endof this notice. The spot first, second, andthird segment rates for the month of No-vember 2018 are, respectively, 3.43, 4.46,and 4.88.

The 24-month average segment rates de-termined under § 430(h)(2)(C)(i) through(iii) must be adjusted pursuant to§ 430(h)(2)(C)(iv) to be within the applica-ble minimum and maximum percentages ofthe corresponding 25-year average segmentrates. For plan years beginning before 2021,

the applicable minimum percentage is 90%and the applicable maximum percentage is110%. The 25-year average segment ratesfor plan years beginning in 2017, 2018, and2019 were published in Notice 2016–54,2016–40 I.R.B. 429, Notice 2017–50,2017–41 I.R.B. 280, and Notice 2018–73,2018–40 I.R.B. 526, respectively.

24-MONTH AVERAGE CORPORATEBOND SEGMENT RATES

The three 24-month average corporatebond segment rates applicable for Decem-ber 2018 without adjustment for the 25-year average segment rate limits are asfollows:

24-Month Average Segment Rates Without 25-Year Average Adjustment

Applicable Month First Segment Second Segment Third SegmentDecember 2018 2.50 3.92 4.50

Based on § 430(h)(2)(C)(iv), the 24-month averages applicable for December

2018, adjusted to be within the applicableminimum and maximum percentages of

the corresponding 25-year average seg-ment rates, are as follows:

Adjusted 24-Month Average Segment RatesFor Plan Years First Second Third

Beginning In Applicable Month Segment Segment Segment2017 December 2018 4.16 5.72 6.48

2018 December 2018 3.92 5.52 6.29

2019 December 2018 3.74 5.35 6.11

30-YEAR TREASURY SECURITIESINTEREST RATES

Section 431 specifies the minimumfunding requirements that apply to mul-tiemployer plans pursuant to § 412. Sec-tion 431(c)(6)(B) specifies a minimumamount for the full-funding limitation de-scribed in § 431(c)(6)(A), based on theplan’s current liability. Section 431(c)(6)(E)(ii)(I) provides that the interest rateused to calculate current liability for this

purpose must be no more than 5 percentabove and no more than 10 percent belowthe weighted average of the rates of inter-est on 30-year Treasury securities duringthe four-year period ending on the last daybefore the beginning of the plan year.Notice 88–73, 1988–2 C.B. 383, providesguidelines for determining the weightedaverage interest rate. The rate of intereston 30-year Treasury securities for No-vember 2018 is 3.36 percent. The Servicedetermined this rate as the average of the

daily determinations of yield on the 30-year Treasury bond maturing in August2048 determined each day through No-vember 6, 2018 and the yield on the 30-year Treasury bond maturing in Novem-ber 2048 determined each day for thebalance of the month. For plan years be-ginning in December 2018, the weightedaverage of the rates of interest on 30-yearTreasury securities and the permissiblerange of rates used to calculate currentliability are as follows:

Treasury Weighted Average RatesFor Plan Years

Beginning In30-Year TreasuryWeighted Average

Permissible Range90% to 105%

December 2018 2.91 2.62 to 3.06

1Pursuant to § 433(h)(3)(A), the 3rd segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amountof the full funding limitation under § 433(c)(7)(C)).


MINIMUM PRESENT VALUESEGMENT RATES

In general, the applicable interest ratesunder § 417(e)(3)(D) are segment rates

computed without regard to a 24-monthaverage. Notice 2007–81 provides guide-lines for determining the minimum pres-ent value segment rates. Pursuant to thatnotice, the minimum present value seg-

ment rates determined for November 2018are as follows:

Minimum Present Value Segment RatesMonth First Segment Second Segment Third Segment

November 2018 3.43 4.46 4.88

DRAFTING INFORMATION

The principal author of this notice isTom Morgan of the Office of the Associ-

ate Chief Counsel (Tax Exempt and Gov-ernment Entities). However, other person-nel from the IRS participated in thedevelopment of this guidance. For further

information regarding this notice, contactMr. Morgan at 202-317-6700 or PaulStern at 202-317-8702 (not toll-free calls).

Table 2018–11Monthly Yield Curve for November 2018

Derived from November 2018 DataMaturity Yield Maturity Yield Maturity Yield Maturity Yield Maturity Yield

0.5 2.90 20.5 4.77 40.5 4.89 60.5 4.93 80.5 4.96

1.0 3.08 21.0 4.78 41.0 4.89 61.0 4.93 81.0 4.96

1.5 3.24 21.5 4.78 41.5 4.89 61.5 4.94 81.5 4.96

2.0 3.37 22.0 4.79 42.0 4.90 62.0 4.94 82.0 4.96

2.5 3.46 22.5 4.79 42.5 4.90 62.5 4.94 82.5 4.96

3.0 3.53 23.0 4.80 43.0 4.90 63.0 4.94 83.0 4.96

3.5 3.59 23.5 4.80 43.5 4.90 63.5 4.94 83.5 4.96

4.0 3.64 24.0 4.80 44.0 4.90 64.0 4.94 84.0 4.96

4.5 3.69 24.5 4.81 44.5 4.90 64.5 4.94 84.5 4.96

5.0 3.75 25.0 4.81 45.0 4.90 65.0 4.94 85.0 4.96

5.5 3.81 25.5 4.82 45.5 4.91 65.5 4.94 85.5 4.96

6.0 3.87 26.0 4.82 46.0 4.91 66.0 4.94 86.0 4.96

6.5 3.94 26.5 4.82 46.5 4.91 66.5 4.94 86.5 4.96

7.0 4.00 27.0 4.83 47.0 4.91 67.0 4.94 87.0 4.96

7.5 4.07 27.5 4.83 47.5 4.91 67.5 4.94 87.5 4.96

8.0 4.13 28.0 4.83 48.0 4.91 68.0 4.94 88.0 4.96

8.5 4.19 28.5 4.84 48.5 4.91 68.5 4.94 88.5 4.96

9.0 4.25 29.0 4.84 49.0 4.91 69.0 4.94 89.0 4.96

9.5 4.30 29.5 4.84 49.5 4.91 69.5 4.95 89.5 4.96

10.0 4.36 30.0 4.84 50.0 4.92 70.0 4.95 90.0 4.96

10.5 4.40 30.5 4.85 50.5 4.92 70.5 4.95 90.5 4.96

11.0 4.45 31.0 4.85 51.0 4.92 71.0 4.95 91.0 4.96

11.5 4.49 31.5 4.85 51.5 4.92 71.5 4.95 91.5 4.96

12.0 4.52 32.0 4.86 52.0 4.92 72.0 4.95 92.0 4.96

12.5 4.55 32.5 4.86 52.5 4.92 72.5 4.95 92.5 4.96

13.0 4.58 33.0 4.86 53.0 4.92 73.0 4.95 93.0 4.96

13.5 4.61 33.5 4.86 53.5 4.92 73.5 4.95 93.5 4.97

14.0 4.63 34.0 4.87 54.0 4.92 74.0 4.95 94.0 4.97

14.5 4.65 34.5 4.87 54.5 4.92 74.5 4.95 94.5 4.97

15.0 4.67 35.0 4.87 55.0 4.93 75.0 4.95 95.0 4.97

15.5 4.68 35.5 4.87 55.5 4.93 75.5 4.95 95.5 4.97


Table 2018–11Monthly Yield Curve for November 2018

Derived from November 2018 DataMaturity Yield Maturity Yield Maturity Yield Maturity Yield Maturity Yield

16.0 4.70 36.0 4.87 56.0 4.93 76.0 4.95 96.0 4.97

16.5 4.71 36.5 4.88 56.5 4.93 76.5 4.95 96.5 4.97

17.0 4.72 37.0 4.88 57.0 4.93 77.0 4.95 97.0 4.97

17.5 4.73 37.5 4.88 57.5 4.93 77.5 4.95 97.5 4.97

18.0 4.74 38.0 4.88 58.0 4.93 78.0 4.95 98.0 4.97

18.5 4.75 38.5 4.88 58.5 4.93 78.5 4.95 98.5 4.97

19.0 4.75 39.0 4.89 59.0 4.93 79.0 4.95 99.0 4.97

19.5 4.76 39.5 4.89 59.5 4.93 79.5 4.96 99.5 4.97

20.0 4.77 40.0 4.89 60.0 4.93 80.0 4.96 100.0 4.97

Guidance on SpecialEnforcement Matters Underthe Centralized PartnershipAudit Regime

Notice 2019–06

SECTION 1. PURPOSE

This notice informs taxpayers that theDepartment of the Treasury (Treasury De-partment) and the Internal Revenue Ser-vice (IRS) intend to propose regulationsaddressing certain special enforcementmatters under section 6241(11). This no-tice also requests comments regardingother special enforcement matters thatcould be the subject of future proposedregulations.

SECTION 2. BACKGROUND

Section 206(l) of the Technical Correc-tions Act of 2018, contained in Title II ofDivision U of the Consolidated Appropri-ations Act of 2018, Public Law 115–141(TTCA), added section 6241(11) to theInternal Revenue Code (Code), regardingthe treatment of special enforcement mat-ters. Under section 6241(11), in the caseof partnership-related items involvingspecial enforcement matters, the Secretarymay prescribe regulations providing thatthe centralized partnership audit regime(or any portion thereof) does not apply tosuch items and that such items are subjectto special rules as the Secretary deter-mines to be necessary for the effective andefficient enforcement of the Code. Forpurposes of section 6241(11), the term

“special enforcement matters” means: (1)failure to comply with the requirements ofsection 6226(b)(4)(A)(ii) (regarding therequirement for a partnership-partner or Scorporation partner to furnish statementsor compute and pay an imputed underpay-ment); (2) assessments under section 6851(relating to termination assessments of in-come tax) or section 6861 (relating tojeopardy assessments of income, estate,gift, and certain excise taxes); (3) criminalinvestigations; (4) indirect methods ofproof of income; (5) foreign partners orpartnerships; and (6) other matters that theSecretary determines by regulation pres-ent special enforcement considerations.

Section 6221(a) requires that any ad-justment to a partnership-related itemshall be determined at the partnershiplevel under the centralized partnership au-dit regime, except to the extent otherwiseprovided in subchapter C of chapter 63 ofthe Code. A partnership-related item isdefined in section 6241(2) as any item oramount with respect to the partnershipwhich is relevant in determining the taxliability of any person under chapter 1 ofthe Code, including any distributive shareof such an item or amount.

Certain partnerships may elect out ofthe centralized partnership audit regimeunder section 6221(b). A partnership iseligible to make an election out if it has100 or fewer partners for the taxable year,each partner in the partnership is an eligi-ble partner, the election is timely made inthe manner prescribed by the Secretary,and the partnership notifies its partners ofthe election in the manner prescribed bythe Secretary. The number of partners is

determined by counting the number ofstatements required to be furnished by thepartnership under section 6031(b) and thenumber of statements required to be fur-nished by any S corporation partners ofthe partnership. Eligible partners are pre-scribed in section 6221(b)(1)(C) andTreas. Reg. § 301.6221(b)–1(b)(3)(i), andinclude C corporations.

A qualified subchapter S subsidiary(QSub) is defined in section 1361(b)(3) asa domestic corporation that has 100 per-cent of its stock held by an S corporationand for which an election has been madeto treat it as a QSub. Except as providedby regulation, a QSub is not treated as acorporation separate from its S corpora-tion shareholder and its assets, liabilities,and items of income, deduction and creditare treated as the assets, liabilities, anditems of its S corporation shareholder forthe taxable year. Section 1361(b)(3)(A).For purposes of the Code, a C corporationis defined under section 1361(a)(2) as acorporation which is not an S corporation.Because a QSub is not an S corporation, itis a C corporation (as defined in section1361(a)(2)). Because a QSub is a C cor-poration, it is an eligible partner undersection 6221(b).

SECTION 3. GUIDANCE TO BEISSUED

The Treasury Department and the IRSintend to propose regulations under sec-tion 6241(11)(B)(vi) regarding two mat-ters that the Secretary has determined pres-ent special enforcement considerations. Thefirst matter concerns certain situations inwhich an adjustment during an examination


of a person other than the partnership re-quires a change to a partnership-relateditem. Specifically, the regulations will allowthe IRS to effectively and efficiently focuson a single partner or a small group ofpartners with respect to a limited set ofpartnership-related items without undulyburdening the partnership and avoiding pro-cedural concerns about the appropriate levelat which such items must be examined.Consequently, the regulations will providethat the IRS may determine that the central-ized partnership audit regime does not applyto adjustments to partnership-related itemswhen the following conditions are met:

(1) The examination being conductedis of a person other than the partnership;

(2) A partnership-related item must beadjusted, or a determination regarding apartnership-related item must be made, aspart of an adjustment to a non-partnership-related item of the person whose return isbeing examined; and

(3) The treatment of the partnership-related item on the return of the partner-ship under section 6031(b) or in the part-nership’s books and records was based inwhole or in part on information providedby, or under the control of, the personwhose return is being examined.

The second matter concerns situationswhere a QSub is a partner in a partnership.The regulations will provide that this sit-uation presents special enforcement con-siderations because partnership structureswith QSubs as partners could have far morethan 100 ultimate partners, including manythousands, and still potentially elect out ofthe centralized partnership audit regime. Al-lowing such a large partnership to elect outof the centralized partnership audit regimewould give rise to significant enforcementconcerns for the IRS and frustrate the effi-ciencies introduced by the centralized part-nership regime. As a result, the regulationswill provide that section 6221(b) generallydoes not apply to a partnership with a QSubas a partner. The regulations will also pro-vide, however, that if a partnership meetscertain requirements as set forth in the reg-ulations, the partnership may make an elec-tion under section 6221(b). Specifically, theregulations will apply a rule similar to therules for S corporations under section6221(b)(2)(A). The regulations will alsoprovide that for purposes of determiningwhether a partnership has 100 or fewer part-

ners for the taxable year for purposes of theelection under section 6221(b), the partner-ship must include (1) the statement the part-nership is required to furnish to the QSubpartner under section 6031(b) and (2) eachstatement the S corporation that holds 100percent of the stock of the QSub partner isrequired to furnish to its shareholders undersection 6037(b).

The Treasury Department and the IRSintend to issue proposed and final regula-tions prior to eighteen months after enact-ment of the TTCA such that the intendedregulations described in this section of theNotice may be applicable to all partner-ship taxable years beginning after Decem-ber 31, 2017. Section 7805(b)(2). If finalregulations are not issued prior to eighteenmonths after enactment of the TTCA, theTreasury Department and the IRS intendthe regulations to be applicable to partner-ship taxable years beginning after Decem-ber 31, 2017 and ending after the date thisNotice is issued to the public. Section7805(b)(1)(C).

SECTION 4. REQUEST FORCOMMENTS

The Treasury Department and the IRSrequest comments on the intended regula-tions described in section 3 of this noticeand whether any other matters might pres-ent special enforcement matters undersection 6241(11). Comments must be re-ceived by February 22, 2019.

SECTION 5. ADDRESS TO SENDCOMMENTS

Taxpayers may submit comments elec-tronically via the Federal eRulemakingPortal at www.regulations.gov (type IRS–2018–0044 in the search field on theregulations.gov homepage to find this no-tice and submit comments). All recom-mendations for guidance submitted by thepublic in response to this notice will beavailable for public inspection and copy-ing in their entirety.

Alternatively, taxpayers may mailcomments to:

Internal Revenue ServiceAttn: CC:PA:LPD:PR (Notice 2019–

06)Room 5203P.O. Box 7604Ben Franklin Station

Washington, D.C. 20044

or hand deliver comments Mondaythrough Friday between the hours of 8a.m. and 4 p.m. to:

Courier’s DeskInternal Revenue ServiceAttn: CC:PA:LPD:PR (Notice 2019–

06)1111 Constitution Avenue, N.W.Washington, D.C. 20224

SECTION 6. DRAFTINGINFORMATION

The principal author of this notice isJennifer M. Black of the Office of theAssociate Chief Counsel (Procedure andAdministration). For further informationregarding this notice, contact Ms. Black at(202) 317-6834 (not a toll-free number).

Maximum Values For 2018For Use with Vehicle Cents-Per-Mile and Fleet-AverageValuation Rules

Notice 2019–08

I. PURPOSE

This notice provides the 2018 maxi-mum values for use with the vehiclecents-per-mile valuation rule under Treas.Reg. § 1.61–21(e) and the fleet-averagevaluation rule, which is an optional com-ponent of the automobile lease valuationrule under Treas. Reg. § 1.61–21(d).These values are adjusted annually forinflation. This notice also provides interimguidance on new procedures for calculat-ing the inflation adjustments to the maxi-mum values for use with the special val-uation rules under Treas. Reg. § 1.61–21(d) and (e) using section 280F(d)(7), asmodified by sections 11002 and 13202 ofthe Tax Cuts and Jobs Act, Pub. L. No.115–97 (the “Act”). The Internal RevenueService (IRS) and the Department of theTreasury (Treasury Department) antici-pate that further guidance on these issueswill be issued in the form of proposedregulations and expect that the regulationswill be consistent with the rules set forthin this notice.


BACKGROUND

If an employer provides an employeewith a vehicle that is available to the em-ployee for personal use, the value of thepersonal use generally must be included inthe employee’s income. Internal RevenueCode § 61; Treas. Reg. § 1.61–21.

For employer-provided vehicles madeavailable to employees for personal usethat meet the requirements of Treas. Reg.§ 1.61–21(e)(1), generally the value of thepersonal use may be determined under thevehicle cents-per-mile valuation rule ofTreas. Reg. § 1.61–21(e). However,Treas. Reg. § 1.61–21(e)(1)(iii)(A) pro-vides that for a vehicle first made avail-able after 1988 to any employee of theemployer for personal use, the value of thepersonal use may not be determined underthe vehicle cents-per-mile valuation rulefor a calendar year if the fair market valueof the vehicle (determined pursuant toTreas. Reg. § 1.61–21(d)(5)(i) through(iv)) on the first date the vehicle is madeavailable to the employee exceeds the sumof the maximum recovery deductions al-lowable under section 280F(a) for a five-year period for an automobile first placedin service during that calendar year, asadjusted by section 280F(d)(7). The regu-lation additionally specifies that, with re-spect to a vehicle placed in service in orafter 1989, the limitation on value consistsof a base value of $12,800 that is adjustedannually under section 280F(d)(7).

For employer-provided automobilesavailable to employees for personal usefor an entire year, generally the value ofthe personal use may be determined underthe automobile lease valuation rule ofTreas. Reg. § 1.61–21(d). Under this val-uation rule, the value of the personal use isthe Annual Lease Value. Provided the re-quirements of Treas. Reg. § 1.61–21(d)(5)(v) are met, an employer with afleet of 20 or more automobiles may use afleet-average value for purposes of calcu-lating the Annual Lease Values of theautomobiles in the employer’s fleet. Thefleet-average value is the average ofthe fair market values of all the automo-biles in the fleet. However, Treas. Reg.§ 1.61–21(d)(5)(v)(D) provides that for anautomobile first made available after 1988to an employee of the employer for per-sonal use, the value of the personal use

may not be determined under the fleet-average valuation rule for a calendar yearif the fair market value of the automobile(determined pursuant to Treas. Reg.§ 1.61–21(d)(5)(i) through (v)) on the firstdate the automobile is made available tothe employee exceeds the base value of$16,500, as adjusted annually for inflationpursuant to section 280F(d)(7).

Thus, the maximum values for apply-ing the vehicle cents-per-mile and thefleet-average valuation rules reflect theautomobile price inflation adjustment ofsection 280F(d)(7)(B). Prior to enactmentof the Act, this price inflation amount forautomobiles other than trucks and vanswas calculated using the “new car” com-ponent of the Consumer Price Index (CPI)“automobile component.” Beginning in2005, the IRS began to calculate the priceinflation adjustment for trucks and vansseparately using the “new truck” compo-nent of the CPI and continued using the“new car” component of the CPI for au-tomobiles other than trucks and vans. SeeRev. Proc. 2005–48, 2005–32 I.R.B. 271.

Section 11002(d)(8) of the Actamended section 280F(d)(7)(B) effectivefor tax years beginning after December31, 2017. Pursuant to these amendments,the price inflation amount for automobiles(including trucks and vans) is calculatedusing both the CPI automobile componentand the Chained Consumer Price Indexfor All Urban Consumers (C-CPI-U) au-tomobile component. The C-CPI-U doesnot currently have separate componentsfor new cars and new trucks.

For owners of passenger automobiles,section 280F(a), as modified by section13202(a)(1) of the Act, imposes dollarlimitations on the depreciation deductionfor the year the taxpayer places the pas-senger automobile in service and for eachsucceeding year. The amendments madeby the Act substantially increased themaximum annual dollar limitations on thedepreciation deductions for passenger au-tomobiles. The new dollar limitations arebased on the depreciation, over a five-yearrecovery period, of a passenger automo-bile with a cost of $50,000 (formerly$12,800).

II. GUIDANCE

Consistent with the substantial increasein the dollar limitations on depreciation

deductions under section 280F(a), as mod-ified by section 13202(a)(1) of the Act, theIRS and the Treasury Department intendto amend Treas. Reg. § 1.61–21(d) and (e)to incorporate a higher base value of$50,000 as the maximum value for use ofthe vehicle cents-per-mile and fleet-average valuation rules effective for the2018 calendar year. Further, the IRS andthe Treasury Department intend that theregulations will be modified to providethat this $50,000 base value will be ad-justed annually using section 280F(d)(7)for 2019 and subsequent years. Consistentwith this intention, in the interim:

(1) The maximum value of an employer-provided vehicle first made available to em-ployees for personal use in calendar year2018 for which the vehicle cents-per-milevaluation rule provided under Treas. Reg.§ 1.61–21(e) may be applicable is $50,000.

(2) The maximum value of an employer-provided automobile first made available toemployees for personal use in calendar year2018 for which the fleet-average valuationrule provided under Treas. Reg. § 1.61–21(d) may be applicable is $50,000.

For 2018 and 2019, due to the lack ofdata, the IRS and the Treasury Depart-ment will not publish separate maximumvalues for trucks and vans for use with thevehicle cents-per-mile and fleet-averagevaluation rules.

Employer-provided vehicles are non-cash fringe benefits that fall within section3501(b). Announcement 85–113, 1985–31I.R.B. 31, provides guidelines for withhold-ing, paying, and reporting employment taxon taxable noncash fringe benefits. An-nouncement 85–113 provides generally thattaxpayers may rely on the guidelines in theannouncement until the issuance of regula-tions that supersede the temporary and pro-posed regulations under section 3501(b). Noregulations have been issued under section3501(b) that supersede the announcement.Thus, Announcement 85–113 generally isapplicable to current payments of noncashfringe benefits, including vehicles.

Section 1 of Announcement 85–113allows payors of certain noncash fringebenefits to treat the benefits as paid on anyday(s) during the year so long as they treatbenefits provided in a calendar year aspaid not later than December 31 of thecalendar year. Section 5 of the announce-ment allows employers to treat certain


benefits paid during the last two months ofthe year (or any shorter period) as paidduring the subsequent calendar year.

Employers that wish to use the vehiclecents-per-mile rule or the fleet-averagevalue rule for 2018 based on the maxi-mum values set forth in this notice mayuse the rules in Announcement 85–113 orthe adjustment process under section 6413or the refund claim process under section6402 to correct any overpayment of fed-eral employment taxes on these amounts(see the regulations under these sections,Rev. Rul. 2009–39, 2009–52 I.R.B. 951,section 13 of Publication 15 (Circular E),Employer’s Tax Guide, and the Instruc-tions for Form 941-X, Adjusted Employ-er’s QUARTERLY Federal Tax Return or

Claim for Refund for information on theseadjustment and refund claim processes).

III. REQUEST FOR COMMENTS

Interested parties are invited to submitcomments on this notice by February 19,2019. Comments should include a refer-ence to Notice 2019–08. Comments maybe submitted electronically via the FederaleRulemaking Portal at www.regulations.gov (type IRS–2019–08 in the searchfield on the regulations.gov homepage tofind this notice and submit comments). Al-ternatively, submissions may be sent to CC:PA:LPD:PR (Notice 2019–08), Room5203, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washington,DC 20044. Submissions also may be hand

delivered Monday through Friday betweenthe hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2019–08), Courier’sDesk, Internal Revenue Service, 1111 Con-stitution Avenue, NW, Washington, DC20044. All comments submitted by the pub-lic in response to this notice will be avail-able for public inspection and copying intheir entirety.

IV. DRAFTING INFORMATION

The principal author of this notice isGabriel Minc of the Office of AssociateChief Counsel (Tax Exempt and Govern-ment Entities). For further information re-garding this notice contact Mr. Minc at(202) 317-4774 (not a toll-free number).


Part IV. Items of General InterestRules Regarding CertainHybrid ArrangementsNotice of ProposedRulemaking

REG–104352–18

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document containsproposed regulations implementing sec-tions 245A(e) and 267A of the InternalRevenue Code (“Code”) regarding hybriddividends and certain amounts paid or ac-crued in hybrid transactions or with hy-brid entities. Sections 245A(e) and 267Awere added to the Code by the Tax Cutsand Jobs Act, Pub. L. No. 115–97 (2017)(the “Act”), which was enacted on De-cember 22, 2017. This document also con-tains proposed regulations under sections1503(d) and 7701 to prevent the samededuction from being claimed under thetax laws of both the United States and aforeign country. Further, this documentcontains proposed regulations under sec-tions 6038, 6038A, and 6038C to facilitateadministration of certain rules in the pro-posed regulations. The proposed regula-tions affect taxpayers that would other-wise claim a deduction related to suchamounts and certain shareholders of for-eign corporations that pay or receive hy-brid dividends.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by February 26, 2019.

ADDRESSES: Send submissions to: Inter-nal Revenue Service, CC:PA:LPD:PR(REG–104352–18), Room 5203, Post Of-fice Box 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand-delivered Monday through Friday be-tween the hours of 8 a.m. and 4 p.m. toCC:PA:LPD:PR (indicate REG–104352–18), Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, N.W.,Washington, DC 20224, or sent electroni-cally, via the Federal eRulemaking Portal atwww.regulations.gov (IRS REG–104352–18).

FOR FURTHER INFORMATION CON-TACT: Concerning the proposed regula-tions, contact Tracy Villecco at (202)317-3800; concerning submissions ofcomments or requests for a public hearing,Regina L. Johnson at (202) 317-6901 (nottoll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

I. In General

This document contains proposedamendments to 26 CFR parts 1 and 301under sections 245A(e), 267A, 1503(d),6038, 6038A, 6038C, and 7701 (the “pro-posed regulations”). Added to the Code bysections 14101(a) and 14222(a) of theAct, section 245A(e) denies the dividendsreceived deduction under section 245Awith respect to hybrid dividends, and sec-tion 267A denies certain interest or roy-alty deductions involving hybrid transac-tions or hybrid entities. The proposedregulations only include rules under sec-tion 245A(e); rules addressing other as-pects of section 245A, including thegeneral eligibility requirements for thedividends received deduction under sec-tion 245A(a), will be addressed in a sep-arate notice of proposed rulemaking. Sec-tion 14101(f) of the Act provides thatsection 245A, including section 245A(e),applies to distributions made after Decem-ber 31, 2017. Section 14222(c) of the Actprovides that section 267A applies to tax-able years beginning after December 31,2017. Other provisions of the Code, suchas sections 894(c) and 1503(d), also ad-dress certain hybrid arrangements.

II. Purpose of Anti-Hybrid Rules

A cross-border transaction may betreated differently for U.S. and foreign taxpurposes because of differences in the taxlaw of each country. In general, the U.S.tax treatment of a transaction does nottake into account foreign tax law. How-ever, in specific cases, foreign tax law istaken into account – for example, in thecontext of withholdable payments to hy-brid entities for which treaty benefits areclaimed under section 894(c) and for dual

consolidated losses subject to section1503(d) – in order to address policy con-cerns resulting from the different treat-ment of the same transaction or arrange-ment under U.S. and foreign tax law.

In response to international concernsregarding hybrid arrangements used toachieve double non-taxation, Action 2 ofthe OECD’s Base Erosion and ProfitShifting (“BEPS”) project, and two finalreports thereunder, address hybrid andbranch mismatch arrangements. SeeOECD/G20, Neutralising the Effects ofHybrid Mismatch Arrangements, Action2: 2015 Final Report (October 2015) (the“Hybrid Mismatch Report”); OECD/G20,Neutralising the Effects of Branch Mis-match Arrangements, Action 2: InclusiveFramework on BEPS (July 2017) (the“Branch Mismatch Report”). The HybridMismatch Report sets forth recommenda-tions to neutralize the tax effects of hybridarrangements that exploit differences inthe tax treatment of an entity or instru-ment under the laws of two or more coun-tries (such arrangements, “hybrid mis-matches”). The Branch Mismatch Reportsets forth recommendations to neutralize thetax effects of certain arrangements involv-ing branches that result in mismatches sim-ilar to hybrid mismatches (such arrange-ments, “branch mismatches”). Given thesimilarity between hybrid mismatches andbranch mismatches, the Branch MismatchReport recommends that a jurisdictionadopting rules to address hybrid mismatchesadopt, at the same time, rules to addressbranch mismatches. See Branch MismatchReport, at p. 11, Executive Summary. Oth-erwise, taxpayers might “shift[] from hybridmismatch to branch mismatch arrangementsin order to secure the same tax advantages.”Id.

The Act’s legislative history explainsthat section 267A is intended to be “con-sistent with many of the approaches to thesame or similar problems [regarding hy-brid arrangements] taken in the Code, theOECD base erosion and profit shiftingproject (“BEPS”), bilateral income taxtreaties, and provisions or rules of othercountries.” See Senate Committee on Fi-nance, Explanation of the Bill, at 384 (No-vember 22, 2017). The types of hybridarrangements of concern are arrangements


that “exploit differences in the tax treat-ment of a transaction or entity under thelaws of two or more tax jurisdictions toachieve double non-taxation, includinglong-term deferral.” Id. Hybrid arrange-ments targeted by these provisions arethose that rely on a hybrid element toproduce such outcomes.

These concerns also arise in the con-text of section 245A as a result of theenactment of a participation exemptionsystem for taxing foreign income. Underthis system, section 245A(e) generallyprevents double non-taxation by disallow-ing the 100 percent dividends receiveddeduction for dividends received from acontrolled foreign corporation (“CFC”),or by mandating subpart F inclusions fordividends received from a CFC by anotherCFC, if there is a corresponding deductionor other tax benefit in the foreign country.

Explanation of Provisions

I. Section 245A(e) – Hybrid Dividends

A. Overview

The proposed regulations under section245A(e) address certain dividends involv-ing hybrid arrangements. The proposedregulations neutralize the double non-taxation effects of these dividends by ei-ther denying the section 245A(a) divi-dends received deduction with respect tothe dividend or requiring an inclusion un-der section 951(a) with respect to the div-idend, depending on whether the dividendis received by a domestic corporation or aCFC.

The proposed regulations provide thatif a domestic corporation that is a UnitedStates shareholder within the meaning ofsection 951(b) (“U.S. shareholder”) of aCFC receives a “hybrid dividend” fromthe CFC, then the U.S. shareholder is notallowed the section 245A(a) deduction forthe hybrid dividend, and the rules of sec-tion 245A(d) (denial of foreign tax creditsand deductions) apply. See proposed§ 1.245A(e)–1(b). In general, a dividendis a hybrid dividend if it satisfies twoconditions: (i) but for section 245A(e), thesection 245A(a) deduction would be al-lowed, and (ii) the dividend is one forwhich the CFC (or a related person) is orwas allowed a deduction or other tax ben-efit under a “relevant foreign tax law” (such

a deduction or other tax benefit, a “hybriddeduction”). See proposed § 1.245A(e)–1(b)and (d). The proposed regulations take intoaccount certain deductions or other tax ben-efits allowed to a person related to a CFC(such as a shareholder) because, for exam-ple, certain tax benefits allowed to a share-holder of a CFC are economically equiva-lent to the CFC having been allowed adeduction.

B. Relevant foreign tax law

The proposed regulations define a rel-evant foreign tax law as, with respect to aCFC, any regime of any foreign countryor possession of the United States thatimposes an income, war profits, or excessprofits tax with respect to income of theCFC, other than a foreign anti-deferralregime under which an owner of the CFCis liable to tax. See proposed § 1.245A(e)–1(f). Thus, for example, a relevant foreigntax law includes the tax law of a foreigncountry of which the CFC is a tax resi-dent, as well as the tax law applicable to aforeign branch of the CFC.

C. Deduction or other tax benefit

1. In General

Under the proposed regulations, onlydeductions or other tax benefits that are“allowed” under the relevant foreign taxlaw may constitute a hybrid deduction.See proposed § 1.245A(e)–1(d). Thus, forexample, if the relevant foreign tax lawcontains hybrid mismatch rules underwhich a CFC is denied a deduction for anamount of interest paid with respect to ahybrid instrument to prevent a deduction/no-inclusion (“D/NI”) outcome, then thepayment of the interest does not giverise to a hybrid deduction, because thededuction is not “allowed.” This pre-vents double-taxation that could arise ifa hybrid dividend were subject to bothsection 245A(e) and a hybrid mismatchrule under a relevant foreign tax law.

For a deduction or other tax benefit tobe a hybrid deduction, it must relate to orresult from an amount paid, accrued, ordistributed with respect to an instrumentof the CFC that is treated as stock for U.S.tax purposes. That is, there must be aconnection between the deduction or other

tax benefit under the relevant foreign taxlaw and the instrument that is stock forU.S. tax purposes. Thus, a hybrid deduc-tion includes an interest deduction under arelevant foreign tax law with respect to ahybrid instrument (stock for U.S. tax pur-poses, indebtedness for foreign tax pur-poses). It also includes dividends paid de-ductions and other deductions allowed onequity under a relevant foreign tax law,such as notional interest deductions(“NIDs”), which raise similar concerns astraditional hybrid instruments. However,it does not, for example, include an ex-emption provided to a CFC under its taxlaw for certain types of income (such asincome attributable to a foreign branch),because there is not a connection betweenthe tax benefit and the instrument that isstock for U.S. tax purposes.

The proposed regulations provide thatdeductions or other tax benefits allowedpursuant to certain integration or impu-tation systems do not constitute hybriddeductions. See proposed § 1.245A(e)–1(d)(2)(i)(B). However, a system thathas the effect of exempting earnings thatfund a distribution from foreign tax atboth the CFC and shareholder levelgives rise to a hybrid deduction. See id.;see also proposed § 1.245A(e)–1(g)(2),Example 2.

2. Effect of Foreign Currency Gain orLoss

The payment of an amount by a CFCmay, under a provision of foreign tax lawcomparable to section 988, give rise togain or loss to the CFC that is attributableto foreign currency. The proposed regula-tions provide that such foreign currencygain or loss recognized with respect tosuch deduction or other tax benefit istaken into account for purposes of deter-mining hybrid deductions. See proposed§ 1.245A(e)–1(d)(6); see also sectionII.K.1 of this Explanation of Provisions(requesting comments on foreign currencyrules).

D. Tiered hybrid dividends

Proposed § 1.245A(e)–1(c) sets forthrules related to hybrid dividends of tieredcorporations (“tiered hybrid dividends”),as provided under section 245A(e)(2). A


tiered hybrid dividend means an amountreceived by a CFC from another CFC to theextent that the amount would be a hybriddividend under proposed § 1.245A(e)–1(b)if the receiving CFC were a domestic cor-poration. Accordingly, the amount must betreated as a dividend under U.S. tax law tobe treated as a tiered hybrid dividend; thetreatment of the amount under the tax law inwhich the receiving CFC is a tax resident (orunder any other foreign tax law) is irrelevantfor this purpose.

If a CFC receives a tiered hybrid divi-dend from another CFC, and a domesticcorporation is a U.S. shareholder of bothCFCs, then (i) the tiered hybrid dividendis treated as subpart F income of the re-ceiving CFC, (ii) the U.S. shareholdermust include in gross income its pro ratashare of the subpart F income, and (iii) therules of section 245A(d) apply to theamount included in the U.S. shareholder’sgross income. See proposed § 1.245A(e)–1(c)(1). This treatment applies notwith-standing any other provision of the Code.Thus, for example, exceptions to subpartF income such as those provided undersection 954(c)(3) (“same country” excep-tion for income received from related per-sons) and section 954(c)(6) (look-throughrule for related CFCs) do not apply. Asadditional examples, the gross amount ofsubpart F income cannot be reduced bydeductions taken into account under sec-tion 954(b)(5) and § 1.954–1(c), and isnot subject to the current earnings andprofits limitation under section 952(c).

E. Interaction with section 959

Distributions of previously taxed earn-ings and profits (“PTEP”) attributable toamounts that have been taken into accountby a U.S. shareholder under section951(a) are, in general, excluded from thegross income of the U.S. shareholderwhen distributed under section 959(a),and under section 959(d) are not treated asa dividend (other than to reduce earningsand profits). As a result, distributions froma CFC to its U.S. shareholder out of PTEPare not eligible for the dividends receiveddeduction under section 245A(a), and sec-tion 245A(e) does not apply. Similarly,distributions of PTEP from a CFC to anupper-tier CFC are excluded from thegross income of the upper-tier CFC under

section 959(b), but only for the limitedpurpose of applying section 951(a). In ad-dition, such amounts continue to betreated as dividends because section959(d) does not apply to such amounts.Accordingly, distributions out of PTEPcould qualify as tiered hybrid dividendsthat would result in an income inclusion toa U.S. shareholder. To prevent this result,the proposed regulations provide that atiered hybrid dividend does not includeamounts described in section 959(b). Seeproposed § 1.245A(e)–1(c)(2).

F. Interaction with section 964(e)

Under section 964(e)(1), gain recog-nized by a CFC on the sale or exchange ofstock in another foreign corporation maybe treated as a dividend. In certain cases,section 964(e)(4): (i) treats the dividend assubpart F income of the selling CFC; (ii)requires a U.S. shareholder of the CFC toinclude in its gross income its pro rata shareof the subpart F income; and (iii) allows theU.S. shareholder the section 245A(a) deduc-tion for its inclusion in gross income. As isthe case with the treatment of tiered hybriddividends, the treatment of dividends undersection 964(e)(4) applies notwithstandingany other provision of the Code.

The proposed regulations coordinatethe tiered hybrid dividend rules and therules of section 964(e) by providingthat, to the extent a dividend arisingunder section 964(e)(1) is a tiered hy-brid dividend, the tiered hybrid dividendrules, rather than the rules of section964(e)(4), apply. Thus, in such a case,a U.S. shareholder that includes anamount in its gross income under thetiered hybrid dividend rule is not al-lowed the section 245A(a) deduction, orforeign tax credits or deductions, for theamount. See proposed § 1.245A(e)–1(c)(1) and (4).

G. Hybrid deduction accounts

1. In General

In some cases, the actual payment by aCFC of an amount that is treated as adividend for U.S. tax purposes will resultin a corresponding hybrid deduction. Inmany cases, however, the dividend andthe hybrid deduction may not arise pursu-

ant to the same payment and may be rec-ognized in different taxable years. Thismay occur in the case of a hybrid instru-ment for which under a relevant foreigntax law the CFC is allowed deductions foraccrued (but not yet paid) interest. In sucha case, to the extent that an actual paymenthas not yet been made on the instrument,there generally would not be a dividendfor U.S. tax purposes for which the sec-tion 245A(a) deduction could be disal-lowed under section 245A(e). Neverthe-less, because the earnings and profits ofthe CFC would not be reduced by theaccrued interest deduction, the earningsand profits may give rise to a dividendwhen subsequently distributed to the U.S.shareholder. This same result could occurin other cases, such as when a relevantforeign tax law allows deductions on eq-uity, such as NIDs.

The disallowance of the section 245A(a)deduction under section 245A(e) should notbe limited to cases in which the dividendand the hybrid deduction arise pursuant tothe same payment (or in the same taxableyear for U.S. tax purposes and for purposesof the relevant foreign tax law). Interpretingthe provision in such a manner would resultin disparate treatment for hybrid arrange-ments that produce the same D/NI outcome.Accordingly, the proposed regulations de-fine a hybrid dividend (or tiered hybrid div-idend) based, in part, on the extent of thebalance of the “hybrid deduction accounts”of the domestic corporation (or CFC)receiving the dividend. See proposed§ 1.245A(e)–1(b) and (d). This ensures thatdividends are subject to section 245A(e) re-gardless of whether the same payment givesrise to the dividend and the hybrid deduc-tion.

A hybrid deduction account must bemaintained with respect to each share ofstock of a CFC held by a person that,given its ownership of the CFC and theshare, could be subject to section 245Aupon a dividend paid by the CFC on theshare. See proposed § 1.245A(e)–1(d) and(f). The account, which is maintained inthe functional currency of the CFC, re-flects the amount of hybrid deductions ofthe CFC (allowed in taxable years begin-ning after December 31, 2017) that havebeen allocated to the share. A dividendpaid by a CFC to a shareholder that has ahybrid deduction account with respect to


the CFC is generally treated as a hybriddividend or tiered hybrid dividend to theextent of the shareholder’s balance in allof its hybrid deduction accounts with re-spect to the CFC, even if the dividend ispaid on a share that has not had any hybriddeductions allocated to it. Absent such anapproach, the purposes of section 245A(e)might be avoided by, for example, struc-turing dividend payments such that theyare generally made on shares of stock towhich a hybrid deduction has not beenallocated (rather than on shares of stock towhich a hybrid deduction has been allo-cated, such as a share that is a hybridinstrument).

Once an amount in a hybrid deductionaccount gives rise to a hybrid dividend ora tiered hybrid dividend, the account iscorrespondingly reduced. See proposed§ 1.245A(e)–1(d). The Treasury Depart-ment and the IRS request comments onwhether hybrid deductions attributable toamounts included in income under section951(a) or section 951A should not in-crease the hybrid deduction account, or,alternatively, the hybrid deduction ac-count should be reduced by distributionsof PTEP, and on whether the effect of anydeemed paid foreign tax credits associatedwith such inclusions or distributionsshould be considered.

2. Transfers of Stock

Because hybrid deduction accounts arewith respect to stock of a CFC, the pro-posed regulations include rules that take intoaccount transfers of the stock. See proposed§ 1.245A(e)–1(d)(4)(ii)(A). These rules,which are similar to the “successor” PTEPrules under section 959 (see § 1.959–1(d)),ensure that section 245A(e) properly appliesto dividends that give rise to a D/NI out-come in cases where the shareholder thatreceives the dividend is not the same share-holder that held the stock when the hybriddeduction was incurred. These rules onlyapply when the stock is transferred amongpersons that are required to keep hybriddeduction accounts. Thus, if the stock istransferred to a person that is not required tokeep a hybrid deduction account – such asan individual or a foreign corporation that isnot a CFC – the account terminates (subjectto the anti-avoidance rule, discussed in sec-tion I.H of this Explanation of Provisions).

Finally, the proposed regulations includerules that take into account certain non-recognition exchanges of the stock, such asexchanges in connection with asset reorga-nizations, recapitalizations, and liquidations,as well as transfers and exchanges that occurmid-way through a CFC’s taxable year. Seeproposed § 1.245A(e)–1(d)(4)(ii)(B) and(d)(5). The Treasury Department and theIRS request comments on these rules.

3. Dividends from Lower-Tier CFCs

The proposed regulations provide aspecial rule to address earnings and profitsof a lower-tier CFC that are included in adomestic corporation’s income as a divi-dend by virtue of section 1248(c)(2). Inthese cases, the proposed regulations treatthe domestic corporation as having certainhybrid deduction accounts with respect tothe lower-tier CFC that are held and main-tained by other CFCs. See proposed§ 1.245A(e)–1(b)(3). This ensures that, tothe extent the earnings and profits of thelower-tier CFC give rise to the dividend,hybrid deduction accounts with respect tothe lower-tier CFC are taken into accountfor purposes of the determinations undersection 245A(e), even though the accountsare held indirectly by the domestic corpo-ration. A similar rule applies with respectto gains on stock sales treated as divi-dends under section 964(e)(1). See pro-posed § 1.245A(e)–1(c)(3).

H. Anti-avoidance rule

The proposed regulations include ananti-avoidance rule. This rule providesthat appropriate adjustments are made, in-cluding adjustments that would disregarda transaction or arrangement, if a transac-tion or arrangement is engaged in with aprincipal purpose of avoiding the pur-poses of proposed § 1.245A(e)–1.

II. Section 267A – Related PartyAmounts Involving Hybrid Transactionsand Hybrid Entities

A. Overview

As indicated in the Senate FinanceCommittee’s Explanation of the Bill, hy-brid arrangements may exploit differencesunder U.S. and foreign tax law between

the tax characterization of an entity astransparent or opaque or differences in thetreatment of financial instruments or othertransactions. The proposed regulationsunder section 267A address certain pay-ments or accruals of interest or royaltiesfor U.S. tax purposes (the amount of suchinterest or royalty, a “specified payment”)that involve hybrid arrangements, or sim-ilar arrangements involving branches, thatproduce D/NI (deduction/no inclusion)outcomes or indirect D/NI outcomes. Seealso section II.J.1 of this Explanation ofProvisions (discussing certain amountsthat are treated as specified payments).The proposed regulations neutralize thedouble non-taxation effects of the ar-rangements by denying a deduction forthe specified payment to the extent of theD/NI outcome.

B. Scope

1. Disallowed Deductions

The proposed regulations generally dis-allow a deduction for a specified payment ifand only if the payment is (i) a “disqualifiedhybrid amount,” meaning that it produces aD/NI outcome as a result of a hybrid orbranch arrangement; (ii) a “disqualified im-ported mismatch amount,” meaning that itproduces an indirect D/NI outcome as aresult of the effects of an offshore hybrid orbranch arrangement being imported into theU.S. tax system; or (iii) made pursuant to atransaction a principal purpose of which isto avoid the purposes of the regulations un-der section 267A and it produces a D/NIoutcome. See proposed § 1.267A–1(b).Thus, the proposed regulations do not ad-dress D/NI outcomes that are not the resultof hybridity. See also section II.E of thisExplanation of Provisions (discussing thelink between hybridity and a D/NI out-come). In addition, the proposed regulationsdo not address double-deduction outcomes.Section 267A is intended to address D/NIoutcomes; transactions that produce double-deduction outcomes are addressed throughother provisions (or doctrines), such as thedual consolidated loss rules under section1503(d). See also section IV.A.1 of thisExplanation of Provisions (discussing thedual consolidated loss rules).


2. Parties Subject to Section 267A

The application of section 267A by itsterms is not limited to any particular cat-egory of persons. The proposed regula-tions, however, narrow the scope of sec-tion 267A so that it applies only todeductions of “specified parties.” Deduc-tions of persons other than specified par-ties are not subject to disallowance undersection 267A because the deductions ofsuch other persons generally do not havesignificant U.S. tax consequences.

A specified party means any of (i) a taxresident of the United States, (ii) a CFCfor which there is one or more UnitedStates shareholders that own (within themeaning of section 958(a)) at least tenpercent of the stock of the CFC, and (iii)a U.S. taxable branch (which includes aU.S. permanent establishment of a taxtreaty resident). See proposed § 1.267A–5(a). The term generally includes a CFCbecause, for example, a specified paymentmade by a CFC to the foreign parent ofthe CFC’s U.S. shareholder, or a specifiedpayment by the CFC to an unrelated partypursuant to a structured arrangement, mayindirectly reduce income subject to U.S.tax. Specified payments made by a CFC toother related CFCs or to U.S. shareholdersof the CFC, however, typically will not besubject to section 267A because of therules in proposed § 1.267A–3(b) that ex-empt certain payments included in incomeof a U.S. tax resident or taken into accountunder the subpart F or global intangiblelow-tax income (“GILTI”) rules. See alsosection II.F of this Explanation of Provi-sions (discussing the relatedness or struc-tured arrangement limitation); sectionII.H of this Explanation of Provisions(discussing exceptions for amounts in-cluded or includible in income). Similarly,the term includes a U.S. taxable branchbecause a payment made by the homeoffice may be allocable to and thus reduceincome subject to U.S. tax under sections871(b) or 882. See also section II.K.2 ofthis Explanation of Provisions (discussingamounts considered paid or accrued by aU.S. taxable branch for section 267A pur-poses).

The term specified party does not in-clude a partnership because a partnershipgenerally is not liable to tax and thereforeis not the person allowed a deduction.

However, a partner of a partnership maybe a specified party. For example, in thecase of a payment made by a partnership apartner of which is a domestic corpora-tion, the domestic corporation is a speci-fied party and its allocable share of thededuction for the payment is subject todisallowance under section 267A.

C. Amount of a D/NI outcome

1. In General

Proposed § 1.267A–3(a) provides rulesfor determining the “no-inclusion” aspectof a D/NI outcome – that is, the amount ofa specified payment that is or is not in-cluded in income under foreign tax law.The proposed regulations provide thatonly “tax residents” or “taxable branches”are considered to include an amount inincome. Parties other than tax residents ortaxable branches, for example, an entitythat is fiscally transparent for purposes ofthe relevant tax laws, do not include anamount in income because such partiesare not liable to tax.

In general, a tax resident or taxablebranch includes a specified payment inincome for this purpose to the extent that,under its tax law, it includes the paymentin its income or tax base at the full mar-ginal rate imposed on ordinary income,and the payment is not reduced or offsetby certain items (such as an exemption orcredit) particular to that type of payment.See proposed § 1.267A–3(a)(1).

Whether a tax resident or taxablebranch includes a specified payment inincome is determined without regard toany defensive or secondary rule in hybridmismatch rules (which generally requiresthe payee to include certain amounts inincome, if the payer is not denied a de-duction for the amount), if any, under thetax resident’s or taxable branch’s tax law.Otherwise, in cases in which such tax lawcontains a secondary response, the analy-sis of whether the specified payment isincluded in income could become circu-lar: for example, whether the UnitedStates denies a deduction under section267A may depend on whether the payeeincludes the specified payment in income,and whether the payee includes it in in-come (under a secondary response) may

depend on whether the United States de-nies the deduction.

A specified payment may be consid-ered included in income even though off-set by a generally applicable deduction orother tax attribute, such as a deduction fordepreciation or a net operating loss. Forthis purpose, a deduction may be treatedas being generally applicable even ifclosely related to the specified payment(for example, if the deduction and pay-ment are in connection with a back-to-back financing arrangement).

If a specified payment is taxed at apreferential rate, or if there is a partialreduction or offset particular to the type ofpayment, a portion of the payment is con-sidered included in income. The portionincluded in income is the amount that,taking into account the preferential rate orreduction or offset, is subject to tax at thefull marginal rate applicable to ordinaryincome. See proposed § 1.267A–3(a)(1);see also proposed § 1.267A–6(c), Exam-ple 2 and Example 7.

2. Timing Differences

Some specified payments may never beincluded in income. For example, a spec-ified payment treated as a dividend undera tax resident’s tax laws may be perma-nently excluded from its income under aparticipation exemption. Permanent ex-clusions are always treated as giving riseto a no-inclusion. See proposed § 1.267A–3(a)(1).

Other specified payments, however,may be included in income but on a de-ferred basis. Some of these timing differ-ences result from different methods of ac-counting between U.S. tax law andforeign tax law. For example, and subjectto certain limitations such as those undersections 163(e)(3) and 267(a) (generallyapplicable to payments involving relatedparties, but not to payments involvingstructured arrangements), a specified pay-ment may be deductible for U.S. tax pur-poses when accrued and later included ina foreign tax resident’s income when ac-tually paid. See also section II.K.3 of thisExplanation of Provisions (discussing thecoordination of section 267A with rulessuch as sections 163(e)(3) and 267(a)).Timing differences may also occur incases in which all or a portion of a spec-


ified payment that is treated as interest forU.S. tax purposes is treated as a return ofprincipal for purposes of the foreign taxlaw.

In some cases, timing differences re-verse after a short period of time andtherefore do not provide a meaningful de-ferral benefit. The Treasury Departmentand the IRS have determined that routine,short-term deferral does not give rise tothe policy concerns that section 267A isintended to address. In addition, subject-ing such short-term deferral to section267A could give rise to administrabilityissues for both taxpayers and the IRS,because it may be challenging to deter-mine whether the taxable period in whicha specified payment is included in incomematches the taxable period in which thepayment is deductible.

Other timing differences, though, mayprovide a significant and long-term defer-ral benefit. Moreover, taxpayers maystructure transactions that exploit thesedifferences to achieve long-term deferralbenefits. Timing differences that result inlong-term deferral have an economic ef-fect similar to a permanent exclusion andtherefore give rise to policy concerns thatsection 267A is intended to address. SeeSenate Explanation, at 384 (expressingconcern with hybrid arrangements that“achieve double non-taxation, includinglong-term deferral.”). Accordingly, pro-posed § 1.267A–3(a)(1) provides thatshort-term deferral, meaning inclusionduring a taxable year that ends no morethan 36 months after the end of the spec-ified party’s taxable year, does not giverise to a D/NI outcome; inclusions outsideof the 36-month timeframe, however, aretreated as giving rise to a D/NI outcome.

D. Hybrid and branch arrangementsgiving rise to disqualified hybridamounts

1. Hybrid Transactions

Proposed § 1.267A–2(a) addresses hy-brid financial instruments and similar ar-rangements (collectively, “hybrid transac-tions”) that result in a D/NI outcome. Forexample, in the case of an instrument thatis treated as indebtedness for purposes ofthe payer’s tax law and stock for purposesof the payee’s tax law, a payment on the

instrument may constitute deductible in-terest expense of the payer and excludibledividend income of the payee (for in-stance, under a participation exemption).

In general, the proposed regulationsprovide that a specified payment is madepursuant to a hybrid transaction if there isa mismatch in the character of the instru-ment or arrangement such that the pay-ment is not treated as interest or a royalty,as applicable, under the tax law of a“specified recipient.” Examples of such aspecified payment include a payment thatis treated as interest for U.S. tax purposesbut, for purposes of a specified recipient’stax law, is treated as a distribution onequity or a return of principal. When aspecified payment is made pursuant to ahybrid transaction, it generally is a dis-qualified hybrid amount to the extent thatthe specified recipient does not include thepayment in income.

The proposed regulations broadly de-fine specified recipient as (i) any tax res-ident that under its tax law derives thespecified payment, and (ii) any taxablebranch to which under its tax law thespecified payment is attributable. See pro-posed § 1.267A–5(a)(19). In other words,a specified recipient is any party that maybe subject to tax on the specified paymentunder its tax law. There may be more thanone specified recipient of a specified pay-ment. For example, in the case of a spec-ified payment to an entity that is fiscallytransparent for purposes of the tax law ofits tax resident owners, each of the ownersis a specified recipient of a share of thepayment. In addition, if the entity is a taxresident of the country in which it is es-tablished or managed and controlled, thenthe entity is also a specified recipient.Moreover, in the case of a specified pay-ment attributable to a taxable branch, boththe taxable branch and the home office arespecified recipients.

The proposed regulations deem a spec-ified payment as made pursuant to a hy-brid transaction if there is a long-termmismatch between when the specifiedparty is allowed a deduction for the pay-ment under U.S. tax law and when a spec-ified recipient includes the payment in in-come under its tax law. This rule applies,for example, when a specified payment ismade pursuant to an instrument viewed asindebtedness under both U.S. and foreign

tax law and, due to a mismatch in taxaccounting treatment between the U.S.and foreign tax law, results in long-termdeferral. In these cases, this rule treats thelong-term deferral as giving rise to a hy-brid transaction; the rules in proposed§ 1.267A–3(a)(1) (discussed in sectionII.C.2 of this Explanation of Provisions)treat the long-term deferral as creating aD/NI outcome.

Lastly, proposed § 1.267A–2(a)(3)provides special rules to address securitieslending transactions, sale-repurchase trans-actions, and similar transactions. In thesecases, a specified payment (that is, interestconsistent with the substance of the transac-tion) might not be regarded under a foreigntax law. As a result, there might not be aspecified recipient of the specified paymentunder such foreign tax law, absent a specialrule. To address this scenario, the proposedregulations provide that the determination ofthe identity of a specified recipient under theforeign tax law is made with respect to anamount connected to the specified paymentand regarded under the foreign tax law – forexample, a dividend consistent with theform of the transaction. The Treasury De-partment and the IRS request comments onwhether similar rules should be extended toother specific transactions.

2. Disregarded Payments

Proposed § 1.267A–2(b) addresses dis-regarded payments. Disregarded pay-ments generally give rise to a D/NI out-come because they are regarded under thepayer’s tax law and are therefore availableto offset income not taxable to the payee,but are disregarded under the payee’s taxlaw and therefore are not included in in-come.

In general, the proposed regulationsdefine a disregarded payment as a speci-fied payment that, under a foreign tax law,is not regarded because, for example, it isa disregarded transaction involving a sin-gle taxpayer or between consolidatedgroup members. For example, a disre-garded payment includes a specified pay-ment made by a domestic corporation toits foreign owner if, under the foreign taxlaw, the domestic corporation is a disre-garded entity and therefore the payment isnot regarded. It also includes a specifiedpayment between related foreign corpora-


tions that are members of the same foreignconsolidated group (or can otherwiseshare income or loss) if, under the foreigntax law, payments between group mem-bers are not regarded, or give rise to adeduction or similar offset to the payermember that is available to offset the cor-responding income of the recipient mem-ber.

In general, a disregarded payment is adisqualified hybrid amount only to the ex-tent it exceeds dual inclusion income. Forexample, if a domestic corporation that forforeign tax purposes is a disregarded en-tity of its foreign owner makes a disre-garded payment to its foreign owner, thepayment is a disqualified hybrid amountonly to the extent it exceeds the net of theitems of gross income and deductible ex-pense taken into account in determiningthe domestic corporation’s income forU.S. tax purposes and the foreign owner’sincome for foreign tax purposes. This pre-vents the excess of the disregarded pay-ment over dual inclusion income from off-setting non-dual inclusion income. Suchan offset could otherwise occur, for exam-ple, through the U.S. consolidation re-gime, or a sale, merger, or similar trans-action.

A disregarded payment could also beviewed as being made pursuant to a hy-brid transaction because the payment ofinterest or royalty would not be viewed asinterest or royalty under the foreign taxlaw (since the payment is disregarded).The proposed regulations address disre-garded payments separately from hybridtransactions, however, because disre-garded payments are more likely to offsetdual inclusion income and therefore aretreated as disqualified hybrid amountsonly to the extent they offset non-dualinclusion income.

3. Deemed Branch Payments

Proposed § 1.267A–2(c) addressesdeemed branch payments. These pay-ments result in a D/NI outcome when,under an income tax treaty, a deductiblepayment is deemed to be made by a per-manent establishment to its home officeand offsets income not taxable to thehome office, but the payment is not takeninto account under the home office’s taxlaw.

In general, the proposed regulationsdefine a deemed branch payment as inter-est or royalty considered paid by a U.S.permanent establishment to its home of-fice under an income tax treaty betweenthe United States and the home officecountry. See proposed § 1.267A–2(c)(2).Thus, for example, a deemed branch pay-ment includes an amount allowed as adeduction in computing the business prof-its of a U.S. permanent establishment withrespect to the use of intellectual propertydeveloped by the home office. See, forexample, the U.S. Treasury DepartmentTechnical Explanation to the income taxconvention between the United States andBelgium, signed November 27, 2006(“[T]he OECD Transfer Pricing Guide-lines apply, by analogy, in determiningthe profits attributable to a permanent es-tablishment.”).

When a specified payment is a deemedbranch payment, it is a disqualified hybridamount if the home office’s tax law pro-vides an exclusion or exemption for in-come attributable to the branch. In thesecases, a deduction for the deemed branchpayment would offset non-dual inclusionincome and therefore give rise to a D/NIoutcome. If the home office’s tax law doesnot have an exclusion or exemption forincome attributable to the branch, then,because U.S. permanent establishmentscannot consolidate or otherwise sharelosses with U.S. taxpayers, there wouldgenerally not be an opportunity for a de-duction for the deemed branch payment tooffset non-dual inclusion income.

4. Reverse Hybrids

Proposed § 1.267A–2(d) addressespayments to reverse hybrids. In general,and as discussed below, a reverse hybridis an entity that is fiscally transparent forpurposes of the tax law of the country inwhich it is established but not for pur-poses of the tax law of its owner. Thus,payments to a reverse hybrid may result ina D/NI outcome because the reverse hy-brid is not a tax resident of the country inwhich it is established, and the owner doesnot derive the payment under its tax law.Because this D/NI outcome may occurregardless of whether the establishmentcountry is a foreign country or the UnitedStates, the proposed regulations provide

that both foreign and domestic entitiesmay be reverse hybrids. A domestic entitythat is a reverse hybrid for this purposetherefore differs from a “domestic reversehybrid entity” under § 1.894–1(d)(2)(i),which is defined as “a domestic entity thatis treated as not fiscally transparent forU.S. tax purposes and as fiscally transpar-ent under the laws of an interest holder’sjurisdiction[.]”

For an entity to be a reverse hybridunder the proposed regulations, two re-quirements must be satisfied. These re-quirements generally implement thedefinition of hybrid entity in section267A(d)(2), with certain modifications.First, the entity must be fiscally transpar-ent under the tax law of the country inwhich it is established, whether or not it isa tax resident of another country. For thispurpose, the determination of whether anentity is fiscally transparent with respectto an item of income is made using theprinciples of § 1.894–1(d)(3)(ii) (butwithout regard to whether there is an in-come tax treaty in effect between the en-tity’s jurisdiction and the United States).

Second, the entity must not be fiscallytransparent under the tax law of an “in-vestor.” An investor means a tax residentor taxable branch that directly or indi-rectly owns an interest in the entity. Forthis purpose, the determination of whetheran investor’s tax law treats the entity asfiscally transparent with respect to an itemof income is made under the principles of§ 1.894–1(d)(3)(iii) (but without regard towhether there is an income tax treaty ineffect between the investor’s jurisdictionand the United States). If an investorviews the entity as not fiscally transparent,the investor generally will not be currentlytaxed under its tax law on payments to theentity. Thus, the non-fiscally-transparentstatus of the entity is determined on aninvestor-by-investor basis, based on thetax law of each investor. In addition, a taxresident or a taxable branch may be aninvestor of a reverse hybrid even if the taxresident or taxable branch indirectly ownsthe reverse hybrid through one or moreintermediary entities that, under the taxlaw of the tax resident or taxable branch,are not fiscally transparent. In such a case,however, the investor’s no-inclusionwould not be a result of the payment beingmade to the reverse hybrid and therefore


would not be a disqualified hybridamount. See also section II.E of this Ex-planation of Provisions (explaining thatthe D/NI outcome must be a result ofhybridity); proposed § 1.267A–6(c), Ex-ample 5 (analyzing whether a D/NI out-come with respect to an upper-tier inves-tor is a result of the specified paymentbeing made to the reverse hybrid).

When a specified payment is made to areverse hybrid, it is generally a disquali-fied hybrid amount to the extent that aninvestor does not include the payment inincome. For this purpose, whether an in-vestor includes the specified payment inincome is determined without regard to asubsequent distribution by the reverse hy-brid. Although a subsequent distributionmay be included in the investor’s income,the distribution may not occur for an ex-tended period and, when it does occur, itmay be difficult to determine whether thedistribution is funded from an amountcomprising the specified payment.

In addition, if an investor takes a spec-ified payment into account under an anti-deferral regime, then the investor is con-sidered to include the payment in incometo the extent provided under the generalrules of proposed § 1.267A–3(a). See pro-posed § 1.267A–6(c), Example 5. Thus,for example, if the investor’s inclusionunder the anti-deferral regime is subject totax at a preferential rate, the investor isconsidered to include only a portion of thespecified payment in income.

5. Branch Mismatch Payments

Proposed § 1.267A–2(e) addressesbranch mismatch payments. These pay-ments give rise to a D/NI outcome due todifferences between the home office’s taxlaw and the branch’s tax law regarding theallocation of items of income or the treat-ment of the branch. This could occur, forexample, if the home office’s tax lawviews a payment as attributable to thebranch and exempts the branch’s income,but the branch’s tax law does not tax thepayment.

Under the proposed regulations, aspecified payment is a branch mismatchpayment when two requirements are sat-isfied. First, under a home office’s tax law,the specified payment is treated as attrib-utable to a branch of the home office.

Second, under the tax law of the branchcountry, either (i) the home office does nothave a taxable presence in the country, or(ii) the specified payment is treated asattributable to the home office and not thebranch. When a specified payment is abranch mismatch payment, it is generallya disqualified hybrid amount to the extentthat the home office does not include thepayment in income.

E. Link between hybridity and D/NIoutcome

Under section 267A(a), a deduction fora payment is generally disallowed if (i)the payment involves a hybrid arrange-ment, and (ii) a D/NI outcome occurs. Incertain cases, although both of these con-ditions are satisfied, the D/NI outcome isnot a result of the hybridity. For example,in the hybrid transaction context, the D/NIoutcome may be a result of the specifiedrecipient’s tax law containing a pure ter-ritorial system (and thus exempting fromtaxation all foreign source income) or nothaving a corporate income tax, or a resultof the specified recipient’s status as a tax-exempt entity under its tax law.

The proposed regulations provide thata D/NI outcome gives rise to a disquali-fied hybrid amount only to the extent thatthe D/NI outcome is a result of hybridity.See, for example, proposed § 1.267A–2(a)(1)(ii); see also Senate Explanation, at384 (“[T]he Committee believes that hy-brid arrangements exploit differences inthe tax treatment of a transaction or entityunder the laws of two or more jurisdic-tions to achieve double non-taxation . . .”)(emphasis added).

To determine whether a D/NI outcomeis a result of hybridity, the proposed reg-ulations generally apply a test based onfacts that are counter to the hybridity atissue. For example, in the hybrid transac-tion context, a specified recipient’s no-inclusion is a result of the specified pay-ment being made pursuant to the hybridtransaction to the extent that the no-inclusion would not occur were the pay-ment to be treated as interest or a royaltyfor purposes of the specified recipient’stax law.

This test also addresses cases in which,for example, a specified payment is madeto a fiscally transparent entity (such as a

partnership) and owners of the entity thatare specified recipients of the paymenteach derive only a portion of the paymentunder its tax law. The test ensures that,with respect to each specified recipient,only the no-inclusion that occurs for theportion of the specified payment that itderives may give rise to a disqualified hy-brid amount. In addition, as a result of therelatedness or structured arrangement limi-tation discussed in section II.F of this Ex-planation of Provisions, the no-inclusionwith respect to the specified recipient istaken into account under the proposed reg-ulations only if the specified recipient isrelated to the specified party or is a party toa structured arrangement pursuant to whichthe specified payment is made.

F. Relatedness or structuredarrangement limitation

In determining whether a specifiedpayment is made pursuant to a hybrid orbranch mismatch arrangement, the pro-posed regulations generally only considerthe tax laws of tax residents or taxablebranches that are related to the specifiedparty. See proposed § 1.267A–2(f). Forexample, in general, only the tax law of aspecified recipient that is related to thespecified party is taken into account forpurposes of determining whether the spec-ified payment is made pursuant to a hybridtransaction. Because a deemed branchpayment by its terms involves a relatedhome office, the relatedness limitation inproposed § 1.267A–2(f) does not apply toproposed § 1.267A–2(c).

The proposed regulations provide thatrelated status is determined under the rulesof section 954(d)(3) (involving ownershipof more than 50 percent of interests) butwithout regard to downward attribution. Seeproposed § 1.267A–5(a)(14). In addition, toensure that a tax resident may be consideredrelated to a specified party even though thetax resident is a disregarded entity for U.S.tax purposes, the proposed regulations pro-vide that such a tax resident is treated as acorporation for purposes of the relatednesstest. A similar rule applies with respect to ataxable branch.

However, the Treasury Departmentand the IRS are aware that some hybridarrangements involving unrelated partiesare designed to give rise to a D/NI out-


come and therefore present the policyconcerns underlying section 267A. Fur-thermore, it is likely that in such cases thespecified party will have, or can reason-ably obtain, the information necessary tocomply with section 267A. Accordingly,the proposed regulations generally pro-vide that the tax law of an unrelated taxresident or taxable branch is taken intoaccount for purposes of section 267A ifthe tax resident or taxable branch is aparty to a structured arrangement. See pro-posed § 1.267A–2(f). The proposed regu-lations set forth a test for when a transac-tion is a structured arrangement. Seeproposed § 1.267A–5(a)(20). In addition,the proposed regulations impute an enti-ty’s participation in a structured arrange-ment to its investors. See id. Thus, forexample, in the case of a specified pay-ment to a partnership that is a party to astructured arrangement pursuant to whichthe payment is made, a tax resident that isa partner of the partnership is also a partyto the structured arrangement, eventhough the tax resident may not have ac-tual knowledge of the structured arrange-ment.

G. Effect of inclusion in anotherjurisdiction

The proposed regulations provide thata specified payment is a disqualified hy-brid amount if a D/NI outcome occurs asa result of hybridity in any foreign juris-diction, even if the payment is included inincome in another foreign jurisdiction. Seeproposed § 1.267A–6(c), Example 1. Ab-sent such a rule, an inclusion of a specifiedpayment in income in a jurisdiction with a(generally applicable) low rate might dis-charge the application of section 267Aeven though a D/NI outcome occurs inanother jurisdiction as a result of hybrid-ity.

For example, assume FX, a tax residentof Country X, owns US1, a domestic cor-poration, and FZ, a tax resident of Coun-try Z that is fiscally transparent for Coun-try X tax purposes. Also, assume thatCountry Z has a single, low-tax rate ap-plicable to all income. Further, assumethat FX holds an instrument issued byUS1, a $100x payment with respect towhich is treated as interest for U.S. taxpurposes and an excludible dividend for

Country X tax purposes. In an attempt toavoid US1’s deduction for the $100x pay-ment being denied under the hybrid trans-action rule, FX contributes the instrumentto FZ, and, upon US1’s $100x payment,US1 asserts that, although a $100x no-inclusion occurs with respect to FX as aresult of the payment being made pursuantto the hybrid transaction, the payment isnot a disqualified hybrid amount becauseFZ fully includes the payment in income(albeit at a low-tax rate). The proposedregulations treat the payment as a disqual-ified hybrid amount.

This rule only applies for inclusionsunder the laws of foreign jurisdictions.See proposed § 1.267A–3(b), and sectionII.H of this Explanation of Provisions, forexceptions that apply when the payment isincluded or includible in a U.S. tax resi-dent’s or U.S. taxable branch’s income.

The Treasury Department and IRS re-quest comments on whether an exceptionshould apply if the specified payment isincluded in income in any foreign jurisdic-tion, taking into account accommodationtransactions involving low-tax entities.

H. Exceptions for certain amountsincluded or includible in a U.S. taxresident’s or U.S. taxable branch’sincome

Proposed § 1.267A–3(b) provides rulesthat reduce disqualified hybrid amounts tothe extent the amounts are included orincludible in a U.S. tax resident’s or U.S.taxable branch’s income. In general, theserules ensure that a specified payment isnot a disqualified hybrid amount to theextent included in the income of a taxresident of the United States or a U.S.taxable branch, or taken into account by aU.S. shareholder under the subpart F orGILTI rules.

Source-based withholding tax imposedby the United States (or any other coun-try) on disqualified hybrid amounts doesnot neutralize the D/NI outcome andtherefore does not reduce or otherwiseaffect disqualified hybrid amounts. With-holding tax policies are unrelated to thepolicies underlying hybrid arrangements –for example, withholding tax can be im-posed on non-hybrid payments – and, ac-cordingly, withholding tax is not a substi-tute for a specified payment being

included in income by a tax resident ortaxable branch. See also section II.L ofthis Explanation of Provisions (interactionwith withholding taxes and income taxtreaties). Furthermore, other jurisdictionsapplying the defensive or secondary ruleto a payment (which generally requiresthe payee to include the payment in in-come, if the payer is not denied a deduc-tion for the payment under the primaryrule) may not treat withholding taxes assatisfying the primary rule and may there-fore require the payee to include the pay-ment in income if a deduction for thepayment is not disallowed (regardless ofwhether withholding tax has been im-posed).

Thus, the proposed regulations do nottreat amounts subject to U.S. withholdingtaxes as reducing disqualified hybridamounts. Nevertheless, the Treasury De-partment and the IRS request commentson the interaction of the proposed regula-tions with withholding taxes and whether,and the extent to which, there should bespecial rules under section 267A whenwithholding taxes are imposed in connec-tion with a specified payment, taking intoaccount how such a rule could be coordi-nated with the hybrid mismatch rules ofother jurisdictions.

I. Disqualified imported mismatchamounts

Proposed § 1.267A–4 sets forth a ruleto address “imported” hybrid and brancharrangements. This rule is generally in-tended to prevent the effects of an “off-shore” hybrid arrangement (for example, ahybrid arrangement between two foreigncorporations completely outside the U.S.taxing jurisdiction) from being shifted, or“imported,” into the U.S. taxing jurisdic-tion through the use of a non-hybrid ar-rangement.

Accordingly, the proposed regulationsdisallow deductions for specified pay-ments that are “disqualified imported mis-match amounts.” In general, a disqualifiedimported mismatch amount is a specifiedpayment: (i) that is non-hybrid in nature,such as interest paid on an instrument thatis treated as indebtedness for both U.S.and foreign tax purposes, and (ii) forwhich the income attributable to the pay-ment is directly or indirectly offset by a


hybrid deduction of a foreign tax residentor taxable branch. The rule addresses “in-direct” offsets in order to take into ac-count, for example, structures involvingintermediaries where the foreign tax resi-dent that receives the specified payment isdifferent from the foreign tax resident thatincurs the hybrid deduction. See proposed§ 1.267A–6(c), Example 8, Example 9,and Example 10.

In general, a hybrid deduction for pur-poses of the imported mismatch rule is anamount for which a foreign tax resident ortaxable branch is allowed an interest orroyalty deduction under its tax law, to theextent the deduction would be disallowedif such tax law were to contain rules sub-stantially similar to the section 267A pro-posed regulations. For this purpose, it isnot relevant whether the amount is recog-nized as interest or a royalty under U.S.law, or whether the amount would be al-lowed as a deduction under U.S. law.Thus, for example, a deduction with re-spect to equity (such as a notional interestdeduction) constitutes a hybrid deductioneven though such a deduction would notbe recognized (or allowed) under U.S. taxlaw. As another example, a royalty deduc-tion under foreign tax law may constitutea hybrid deduction even though for U.S.tax purposes the royalty is viewed asmade from a disregarded entity to itsowner and therefore is not regarded.

The requirement that the deductionwould be disallowed if the foreign tax lawwere to contain rules substantially similarto those under section 267A is intended tolimit the application of the imported mis-match rule to cases in which, had theforeign-to-foreign hybrid arrangement in-stead involved a specified party, section267A would have applied to disallow thededuction. In other words, this require-ment prevents the imported mismatch rulefrom applying to arrangements outside thegeneral scope of section 267A, even if thearrangements are hybrid in nature andresult in a D/NI (or similar) outcome.For example, in the case of a deductiblepayment of a foreign tax resident to atax resident of a foreign country thatdoes not impose an income tax, the de-duction would generally not be a hybriddeduction – even though it may be madepursuant to a hybrid instrument – be-cause the D/NI outcome would not be a

result of hybridity. See section II.E ofthis Explanation of Provisions (requir-ing a link between hybridity and theD/NI outcome, for a specified paymentto be a disqualified hybrid amount).

Further, the proposed regulations in-clude “ordering” and “funding” rules todetermine the extent that a hybrid deduc-tion directly or indirectly offsets incomeattributable to a specified payment. In ad-dition, the proposed regulations providethat certain payments made by non-specified parties the tax laws of whichcontain hybrid mismatch rules are takeninto account when applying the orderingand funding rules. Together, these provi-sions are intended to coordinate proposed§ 1.267A–4 with foreign imported mis-match rules, in order to prevent the samehybrid deduction from resulting in deduc-tions for non-hybrid payments being dis-allowed under imported mismatch rules inmore than one jurisdiction.

J. Definitions of interest and royalty

1. Interest

There are no generally applicable reg-ulations or statutory provisions addressingwhen financial instruments are treated asdebt for U.S. tax purposes or when a pay-ment is interest. As a general matter, how-ever, the factors that distinguish debt fromequity are described in Notice 94–47,1994–1 C.B. 357, and interest is definedas compensation for the use or forbear-ance of money. Deputy v. Dupont, 308U.S. 488 (1940).

Using these principles, the proposedregulations define interest broadly to in-clude interest associated with conven-tional debt instruments, other amountstreated as interest under the Code, as wellas transactions that are indebtedness insubstance although not in form. See pro-posed § 1.267A–5(a)(12).

In addition, in order to address certainstructured transactions, the proposed reg-ulations apply equally to “structured pay-ments.” Proposed § 1.267A–5(b)(5) de-fines structured payments to include anumber of items such as an expense orloss predominately incurred in consider-ation of the time value of money in atransaction or series of integrated or re-lated transactions in which a taxpayer se-

cures the use of funds for a period of time.This approach is consistent with the rulestreating such payments similarly to inter-est under §§ 1.861–9T and 1.954–2.

The definitions of interest and struc-tured payments also provide for adjust-ments to the amount of interest expense orstructured payments, as applicable, to re-flect the impact of derivatives that affectthe economic yield or cost of funds of atransaction involving interest or structuredpayments. The definitions of interest andstructured payments contained in the pro-posed regulations apply only for purposesof section 267A. However, solely for pur-poses of certain other provisions, similardefinitions apply. For example, the defini-tion of interest and structured paymentsunder the proposed regulations is similarin scope to the definition of items treatedsimilarly to interest under § 1.861–9T forpurposes of allocating and apportioningdeductions under section 861 and similarto the items treated as interest expense forpurposes of section 163(j) in proposedregulations under section 163(j).

The Treasury Department and the IRSconsidered three options with respect tothe definition of interest for purposes ofsection 267A. The first option consideredwas to not provide a definition of interest,and thus rely on general tax principles andcase law to define interest for purposes ofsection 267A. While adopting this optionmight reduce complexity for some taxpay-ers, not providing an explicit definition ofinterest would create its own uncertaintyas neither taxpayers nor the IRS mighthave a clear sense of what types of pay-ments are treated as interest expense sub-ject to disallowance under section 267A.Such uncertainty could increase burdensto the IRS and taxpayers by increasing thenumber of disputes about whether partic-ular payments are interest for section267A purposes. Moreover, this optioncould be distortive as it would provide anincentive to taxpayers to engage in trans-actions generating deductions economi-cally similar to interest while assertingthat such deductions are not described byexisting principles defining interest ex-pense. If successful, such strategies couldallow taxpayers to avoid the application ofsection 267A through transactions that aresimilar to transactions involving interest.


The second option considered wouldhave been to adopt a definition of interestbut limit the scope of the definition tocover only amounts associated with con-ventional debt instruments and amountsthat are generally treated as interest for allpurposes under the Code or regulationsprior to the passage of the Act. This wouldbe equivalent to only adopting the rulethat is proposed in § 1.267A–5(a)(12)(i)without also addressing structured pay-ments, which are described in proposed§ 1.267A–5(b)(5). While this would clar-ify what would be deemed interest forpurposes of section 267A, the TreasuryDepartment and the IRS have determinedthat this approach would potentially dis-tort future financing transactions. Sometaxpayers would choose to use financialinstruments and transactions that providea similar economic result of using a con-ventional debt instrument, but wouldavoid the label of interest expense undersuch a definition, potentially enablingthese taxpayers to avoid the application ofsection 267A. As a result, under this sec-ond approach, there would still be an in-centive for taxpayers to engage in the typeof avoidance transactions discussed in thefirst alternative.

The final option considered and the oneultimately adopted in the proposed regu-lations is to provide a complete definitionof interest that addresses all transactionsthat are commonly understood to produceinterest expense, as well as structured pay-ments that may have been entered into toavoid the application of section 267A. Theproposed regulations also reduce taxpayerburden by adopting definitions of interestthat have already been developed and ad-ministered in §§ 1.861–9T and 1.954–2and that have been proposed for purposesof section 163(j). The definition of interestprovided in the proposed regulations ap-plies only for purposes of section 267Aand not for other purposes of the Code,such as section 904(d)(3).

The Treasury Department and the IRSwelcome comments on the definition ofinterest for purposes of section 267A con-tained in the proposed regulations.

2. Royalty

Section 267A does not define the termroyalty and there is no universal definition

of royalty under the Code. The TreasuryDepartment and the IRS considered pro-viding no definition for royalties. How-ever, similar to the discussion in SectionII.J.1 of this Explanation of Provisionswith respect to the definition of interest,not providing a definition for royalties andrelying instead on general tax principlescould create uncertainty as neither taxpay-ers nor the IRS might have a clear sense ofwhat types of payments are treated as roy-alties subject to disallowance under sec-tion 267A. Such uncertainty could in-crease burdens to the IRS and taxpayerswith respect to disputes about whetherparticular payments are royalties for sec-tion 267A purposes.

Instead, the Treasury Department andthe IRS have determined that providing adefinition of royalties would increase cer-tainty, and therefore the proposed regula-tions define the term royalty for purposesof section 267A to include amounts paidor accrued as consideration for the use of,or the right to use, certain intellectual prop-erty and certain information concerning in-dustrial, commercial or scientific experi-ence. See proposed § 1.267A–5(a)(16). Theterm does not include amounts paid or ac-crued for after-sales services, for servicesrendered by a seller to the purchaser under awarranty, for pure technical assistance, orfor an opinion given by an engineer, lawyeror accountant. The definition of royalty pro-vided in the proposed regulations appliesonly for purposes of section 267A and notfor other purposes of the Code, such assection 904(d)(3).

The definition of royalty is generallybased on the definition used in tax treatiesand, in particular, the definition incorpo-rated into Article 12 of the 2006 U.S.Model Income Tax Treaty. This definitionis also generally consistent with the lan-guage of section 861(a)(4). In addition,similar to the approach in the technicalexplanation to Article 12 of the 2006 U.S.Model Income Tax Treaty, the proposedregulations provide certain circumstanceswhere payments are not treated as paid oraccrued in consideration for the use ofinformation concerning industrial, com-mercial or scientific experience. By usingdefinitions that have already been devel-oped and administered in other contexts,the proposed regulations provide an ap-proach that reduces taxpayer burdens and

uncertainty. The Treasury Departmentand the IRS welcome comments on thedefinition of royalty for purposes of sec-tion 267A contained in the proposed reg-ulations.

K. Miscellaneous issues

1. Effect of Foreign Currency Gain orLoss

The proposed regulations provide thatforeign currency gain or loss recognizedunder section 988 is not separately takeninto account under section 267A. See pro-posed § 1.267A–5(b)(2). Rather, foreigncurrency gain or loss recognized with re-spect to a specified payment is taken intoaccount under section 267A only to theextent that the specified payment is inrespect of accrued interest or an accruedroyalty for which a deduction is disal-lowed under section 267A. Thus, for ex-ample, a section 988 loss recognized withrespect to a specified payment of interestis not separately taken into account undersection 267A (even though under the taxlaw of the tax resident to which the spec-ified payment is made the tax residentdoes not include in income an amountcorresponding to the section 988 loss, asthe specified payment is made in the taxresident’s functional currency).

The Treasury Department and the IRSrecognize that additional rules addressingthe effect of different foreign currenciesmay be necessary. For example, a hybriddeduction for purposes of the importedmismatch rule may be denominated in adifferent currency than a specified pay-ment, in which case a translation rule maybe necessary to determine the amount ofthe specified payment that is subject to theimported mismatch rule. The TreasuryDepartment and the IRS request com-ments on foreign currency rules, includingany rules regarding the translation ofamounts between currencies, for purposesof the proposed regulations under sections245A and 267A.

2. Payments by U.S. Taxable Branches

Certain expenses incurred by a nonres-ident alien or foreign corporation are al-lowed as deductions under sections 873(a)and 882(c) in determining that person’s


effectively connected income. To the ex-tent the deductions arise from transactionsinvolving certain hybrid or branch ar-rangements, the deductions should be dis-allowed under section 267A, as discussedin section II.B of this Explanation of Pro-visions. The proposed regulations do soby (i) treating a U.S. taxable branch(which includes a permanent establish-ment of a foreign person) as a specifiedparty, and (ii) providing rules regardinginterest or royalties considered paid oraccrued by a U.S. taxable branch, solelyfor purposes of section 267A (and thus notfor other purposes, such as chapter 3 ofthe Code). See proposed § 1.267A–5(b)(3). The effect of this approach is thatinterest or royalties considered paid oraccrued by a U.S. taxable branch are spec-ified payments that are subject to the rulesof proposed §§ 1.267A–1 through1.267A–4. See also proposed § 1.267A–6(c), Example 4.

In general, a U.S. taxable branch isconsidered to pay or accrue any interest orroyalties allocated or apportioned to effec-tively connected income of the U.S. tax-able branch. See proposed § 1.267A–5(b)(3)(i). However, if a U.S. taxablebranch constitutes a U.S. permanent es-tablishment of a treaty resident, then theU.S. permanent establishment is consid-ered to pay or accrue the interest or roy-alties deductible in computing its businessprofits. Although interest paid by a U.S.taxable branch may be subject to with-holding tax as determined under section884(f)(1)(A) and § 1.884–4, those rulesare not relevant for purposes of section267A.

The proposed regulations also providerules to identify the manner in which aspecified payment of a U.S. taxablebranch is considered made. See proposed§ 1.267A–5(b)(3)(ii). Absent such rules, itmight be difficult to determine whetherthe specified payment is made pursuant toa hybrid or branch arrangement (for ex-ample, made pursuant to a hybrid transac-tion or to a reverse hybrid). However,these rules regarding the manner in whicha specified payment is made do not applyto interest or royalties deemed paid by aU.S. permanent establishment in connec-tion with inter-branch transactions that arepermitted to be taken into account undercertain U.S. tax treaties – such payments,

by definition, constitute deemed branchpayments (subject to disallowance underproposed § 1.267A–2(c)) and are there-fore made pursuant to a branch arrange-ment.

3. Coordination with Other Provisions

Proposed § 1.267A–5(b)(1) coordi-nates the application of section 267A withother provisions of the Code and regula-tions that affect the deductibility of inter-est and royalties. This rule provides that,in general, section 267A applies after theapplication of other provisions of theCode and regulations. For example, aspecified payment is subject to section267A for the taxable year for which adeduction for the payment would other-wise be allowed. Thus, if a deduction foran accrued amount is deferred under sec-tion 267(a) (in certain cases, deferring adeduction for an amount accrued to a re-lated foreign person until paid), then thededuction is tested for disallowance undersection 267A for the taxable year in whichthe amount is paid. Absent such a rule, anaccrued amount for which a deduction isdeferred under section 267(a) could con-stitute a disqualified hybrid amount eventhough the amount will be included in thespecified recipient’s income when actu-ally paid. This coordination rule also pro-vides that section 267A applies to interestor royalties after taking into account pro-visions that could otherwise recharacter-ize such amounts, such as § 1.894–1(d)(2).

4. E&P Reduction

Proposed § 1.267A–5(b)(4) providesthat the disallowance of a deduction undersection 267A does not affect whether orwhen the amount paid or accrued thatgave rise to the deduction reduces earn-ings and profits of a corporation. Thus, acorporation’s earnings and profits maybe reduced as a result of a specifiedpayment for which a deduction is disal-lowed under section 267A. This is con-sistent with the approach in the con-text of other disallowance rules. See§ 1.312–7(b)(1) (“A loss . . . may berecognized though not allowed as a de-duction (by reason, for example, of theoperation of sections 267 and 1211 . . .)

but the mere fact that it is not alloweddoes not prevent a decrease in earningsand profits by the amount of such disal-lowed loss.”); Luckman v. Comm’r, 418F.2d 381, 383– 84 (7th Cir. 1969)(“[T]rue expenses incurred by the cor-poration reduce earnings and profits de-spite their nondeductibility from currentincome for tax purposes.”).

5. De Minimis Exception

The proposed regulations provide a deminimis exception to make the rules moreadministrable. See proposed § 1.267A–1(c). As a result of this exception, a spec-ified party is excepted from the applica-tion of section 267A for any taxable yearfor which the sum of its interest and roy-alty deductions (plus interest and royaltydeductions of any related specified par-ties) is below $50,000. This rule appliesbased on any interest or royalty deduc-tions, regardless of whether the deduc-tions would be disallowed under section267A. In addition, for purposes of thisrule, specified parties that are related aretreated as a single specified party.

The Treasury Department and the IRSwelcome comments on the de minimisexception and whether another thresholdwould be more appropriate to implementthe purposes of section 267A.

L. Interaction with withholding taxesand income tax treaties

The determination of whether a deduc-tion for a specified payment is disallowedunder section 267A is made without re-gard to whether the payment is subject towithholding under section 1441 or 1442or is eligible for a reduced rate of taxunder an income tax treaty. Since the U.S.tax characterization of the payment pre-vails in determining the treaty rate forinterest or royalties, regardless of whetherthe payment is made pursuant to a hybridtransaction, the proposed regulations willgenerally result in the disallowance of adeduction but treaty benefits may still beclaimed, as long as the recipient is thebeneficial owner of the payment and oth-erwise eligible for treaty benefits. On theother hand, if interest or royalties are paidto a fiscally transparent entity that is areverse hybrid, as defined in proposed


§ 1.267A–2(d), the payment generallywill not be deductible under the proposedregulations if the investor does not derivethe payment, and will not be eligible fortreaty benefits if the interest holder under§ 1.894–1(d) does not derive the payment.The proposed regulations will only apply,however, if the investor is related to thespecified party, whereas the reduced rateunder the treaty may be denied withoutregard to whether the interest holder isrelated to the payer of the interest or roy-alties.

Certain U.S. income tax treaties alsoaddress indirectly the branch mismatchrules under proposed § 1.267A–2(e). Spe-cial rules, generally in the limitation onbenefits articles of income tax treaties,increase the tax treaty rate for interest androyalties to 15 percent (even if otherwisenot taxable under the relevant treaty arti-cle) if the amount paid to a permanentestablishment of the treaty resident is sub-ject to minimal tax, and the foreign cor-poration that derives and beneficiallyowns the payment is a resident of a treatycountry that excludes or otherwise ex-empts from gross income the profits at-tributable to the permanent establishmentto which the payment was made.

III. Information Reporting underSections 6038, 6038A, and 6038C

Under section 6038(a)(1), U.S. personsthat control foreign business entities mustfile certain information returns with re-spect to those entities, which includes in-formation listed in section 6038(a)(1)(A)through (a)(1)(E), as well as informationthat “the Secretary determines to be ap-propriate to carry out the provisions ofthis title.” Section 6038A similarly re-quires 25-percent foreign-owned domesticcorporations (reporting corporations) tofile certain information returns with re-spect to those corporations, including in-formation related to transactions betweenthe reporting corporation and each foreignperson which is a related party to thereporting corporation. Section 6038C im-poses the same reporting requirements oncertain foreign corporations engaged in aU.S. trade or business (also, a reportingcorporation).

The proposed regulations provide thata specified payment for which a deduction

is disallowed under section 267A, as wellas hybrid dividends and tiered hybrid divi-dends under section 245A, must be reportedon the appropriate information reportingform in accordance with sections 6038 and6038A. See proposed §§ 1.6038–2(f)(13)and (14), 1.6038–3(g)(3), and 1.6038A–2(b)(5)(iii).

IV. Sections 1503(d) and 7701 –Application to Domestic ReverseHybrids

A. Overview

1. Dual Consolidated Loss Rules

Congress enacted section 1503(d) toprevent the “double dipping” of losses.See S. Rep. 313, 99th Cong., 2d Sess., at419–20 (1986). The Senate Report ex-plains that “losses that a corporation usesto offset foreign tax on income that theUnited States does not subject to taxshould not also be used to reduce anyother corporation’s U.S. tax.” Id. Section1503(d) and the regulations thereundergenerally provide that, subject to certainexceptions, a dual consolidated loss of acorporation cannot reduce the taxable in-come of a domestic affiliate (a “domesticuse”). See §§ 1.1503(d)–2 and 1.1503–4(b). Section 1.1503(d)–1(b)(5) defines adual consolidated loss as a net operatingloss of a dual resident corporation or thenet loss attributable to a separate unit(generally defined as either a foreignbranch or an interest in a hybrid entity).See § 1.1503(d)–1(b)(4).

The general prohibition against the do-mestic use of a dual consolidated loss doesnot apply if, pursuant to a “domestic useelection,” the taxpayer certifies that therehas not been and will not be a “foreign use”of the dual consolidated loss during a certi-fication period. See § 1.1503(d)–6(d). If aforeign use or other triggering event occursduring the certification period, the dual con-solidated loss is recaptured. A foreign useoccurs when any portion of the dual consol-idated loss is made available to offset theincome of a foreign corporation or the director indirect owner of a hybrid entity (gener-ally non-dual inclusion income). See§ 1.1503(d)–3(a)(1). Other triggering eventsinclude certain transfers of the stock or as-sets of a dual resident corporation, or the

interests in or assets of a separate unit. See§ 1.1503(d)–6(e).

The regulations include a “mirror leg-islation” rule that, in general, prevents adomestic use election when a foreign ju-risdiction has enacted legislation similarto section 1503(d) that denies any oppor-tunity for a foreign use of the dual con-solidated loss. See § 1.1503(d)–3(e). As aresult, the existence of mirror legislationmay prevent the dual consolidated loss frombeing put to a domestic use (due to thedomestic use limitation) or to a foreign use(due to the foreign “mirror legislation”)such that the loss becomes “stranded.” Insuch a case, the regulations contemplate thatthe taxpayer may enter into an agreementwith the United States and the foreign coun-try (for example, through the competent au-thorities) pursuant to which the losses areused in only one country. See § 1.1503(d)–6(b).

2. Entity Classification Rules

Sections 301.7701–1 through 301.7701–3classify a business entity with two or moremembers as either a corporation or a part-nership, and a business entity with a singleowner as either a corporation or a disre-garded entity. Certain domestic businessentities, such as limited liability compa-nies, are classified by default as partner-ships (if they have more than one mem-ber) or as disregarded entities (if theyhave only one owner) but are eligible toelect for federal tax purposes to be classi-fied as corporations. See § 301.7701–3(b)(1).

B. Domestic reverse hybrids

The Treasury Department and the IRSare aware that structures involving domes-tic reverse hybrids have been used to ob-tain double-deduction outcomes becausethey were not subject to limitation undercurrent section 1503(d) regulations. A do-mestic reverse hybrid generally refers to adomestic business entity that elects under§ 301.7701–3(c) to be treated as a corpo-ration for U.S. tax purposes, but is treatedas fiscally transparent under the tax law ofits investors. In these structures, a foreignparent corporation typically owns the ma-jority of the interests in the domestic re-verse hybrid. Domestic reverse hybrid


structures can lead to double-deductionoutcomes because, for example, deduc-tions incurred by the domestic reverse hy-brid can be used (i) under U.S. tax law tooffset income that is not subject to tax inthe foreign parent’s country, such as in-come of domestic corporations withwhich the domestic reverse hybrid files aU.S. consolidated return, and (ii) underthe foreign parent’s tax law to offset in-come not subject to U.S. tax, such asincome of the foreign parent other thanthe income (if any) of the domestic re-verse hybrid. Taxpayers take the positionthat these structures are not subject to thecurrent section 1503(d) regulations be-cause the domestic reverse hybrid is nei-ther a dual resident corporation (because itis not subject to tax on a residence basis oron its worldwide income in the foreignparent country) nor a separate unit of adomestic corporation.

A comment on regulations under sec-tion 1503(d) that were proposed in 2005asserted that this result is inconsistentwith the policies underlying section1503(d), which was adopted, in part, toensure that domestic corporations werenot put at a competitive disadvantage ascompared to foreign corporations throughthe use of certain inbound acquisitionstructures. See TD 9315. The commentsuggested that the scope of the final reg-ulations be broadened to treat such entitiesas separate units, the losses of which aresubject to the restrictions of section1503(d). Id.

In response to this comment, the pre-amble to the 2007 final dual consolidatedloss regulations stated that the TreasuryDepartment and the IRS acknowledgedthat this type of structure results in a dou-ble dip similar to that which Congressintended to prevent through the adoptionof section 1503(d). The final regulationsdid not address these structures, however,because the Treasury Department and theIRS determined at that time that a domes-tic reverse hybrid was neither a dual res-ident corporation nor a separate unit and,therefore, was not subject to section1503(d). See TD 9315. The preamblenoted, however, that the Treasury Depart-ment and the IRS would continue to studythese and similar structures.

The Treasury Department and the IRShave determined that these structures are

inconsistent with the principles of section1503(d) and, as a result, raise significantpolicy concerns. Accordingly, the pro-posed regulations include rules under sec-tions 1503(d) and 7701 to prevent the useof these structures to obtain a double-deduction outcome. The proposed regula-tions require, as a condition to a domesticentity electing to be treated as a corpora-tion under § 301.7701–3(c), that the do-mestic entity consent to be treated as adual resident corporation for purposes ofsection 1503(d) (such an entity, a “domes-tic consenting corporation”) for taxableyears in which two requirements are sat-isfied. See proposed § 301.7701–3(c)(3).The requirements are intended to restrictthe application of section 1503(d) to casesin which it is likely that losses of thedomestic consenting corporation could re-sult in a double-deduction outcome.

The requirements are satisfied if (i) a“specified foreign tax resident” (generally,a body corporate that is a tax resident of aforeign country) under its tax law derivesor incurs items of income, gain, deduc-tion, or loss of the domestic consentingcorporation, and (ii) the specified foreigntax resident is related to the domestic con-senting corporation (as determined undersection 267(b) or 707(b)). See proposed§ 1.1503(d)–1(c). For example, the re-quirements are satisfied if a specifiedforeign tax resident directly owns all theinterests in the domestic consenting cor-poration and the domestic consentingcorporation is fiscally transparent underthe specified foreign tax resident’s taxlaw. In addition, an item of the domesticconsenting corporation for a particulartaxable year is considered derived orincurred by the specified tax residentduring that year even if, under the spec-ified foreign tax resident’s tax law, theitem is recognized in, and derived orincurred by the specified foreign tax res-ident in, a different taxable year.

Further, if a domestic entity filed anelection to be treated as a corporation be-fore December 20, 2018 such that theentity was not required to consent to betreated as a dual resident corporation, thenthe entity is deemed to consent to beingtreated as a dual resident corporation as ofits first taxable year beginning on or afterthe end of a 12-month transition period.This deemed consent can be avoided if the

entity elects, effective before its first tax-able year beginning on or after the end ofthe transition period, to be treated as apartnership or disregarded entity such thatit ceases to be a corporation for U.S. taxpurposes. For purposes of such an elec-tion, the 60 month limitation under§ 301.7701–3(c)(1)(iv) is waived.

Finally, the proposed regulations pro-vide that the mirror legislation rule doesnot apply to dual consolidated losses of adomestic consenting corporation. See pro-posed § 1.1503(d)–3(e)(3). This exception isintended to minimize cases in which dualconsolidated losses could be “stranded”when, for example, the foreign parent juris-diction has adopted rules similar to the rec-ommendations in Chapter 6 of the HybridMismatch Report. The exception does notapply to dual consolidated losses attribut-able to separate units because, in such cases,the United States is the parent jurisdictionand the dual consolidated loss rules shouldneutralize the double-deduction outcome.

V. Triggering Event Exception forCompulsory Transfers

As noted in section IV.A.1 of this Ex-planation of Provisions, certain triggeringevents require a dual consolidated lossthat is subject to a domestic use election tobe recaptured and included in income. Thedual consolidated loss regulations also in-clude various exceptions to these trigger-ing events, including an exception forcompulsory transfers involving foreigngovernments. See § 1.1503(d)–6(f)(5).

A comment on the 2007 final dual con-solidated loss regulations stated that the pol-icies underlying the triggering event excep-tion for compulsory transfers involvingforeign governments apply equally to com-pulsory transfers involving the United Statesgovernment. Accordingly, the comment re-quested guidance under § 1.1503(d)–3(c)(9)to provide that the exception is not limitedto foreign governments. The comment sug-gested, as an example, that the exceptionshould apply to a divestiture of a hybridentity engaged in proprietary trading pursu-ant to the “Volcker Rule” contained in theDodd-Frank Wall Street Reform and Con-sumer Protection Act, Pub. L. No. 111–203(2010).

The Treasury Department and the IRSagree with this comment and, accordingly,


the proposed regulations modify the com-pulsory transfer triggering event excep-tion such that it will also apply with re-spect to the United States government.

VI. Disregarded Payments Made toDomestic Corporations

As discussed in sections II.D.2 and 3 ofthis Explanation of Provisions, the pro-posed regulations under section 267A ad-dress D/NI outcomes resulting from actualand deemed payments of interest and roy-alties that are regarded for U.S. tax pur-poses but disregarded for foreign tax pur-poses. The proposed regulations undersection 267A do not, however, addresssimilar structures involving payments todomestic corporations that are regardedfor foreign tax purposes but disregardedfor U.S. tax purposes.

For example, USP, a domestic corpo-ration that is the parent of a consolidatedgroup, borrows from a bank to fund theacquisition of the stock of FT, a foreigncorporation that is tax resident of CountryX. USP contributes the loan proceeds toUSS, a newly formed domestic corpora-tion that is a member of the USP consol-idated group, in exchange for all the stockof USS. USS then forms FDE, a disre-garded entity that is tax resident of Coun-try X, USS lends the loan proceeds toFDE, and FDE uses the proceeds to ac-quire the stock of FT. For U.S. tax pur-poses, USP claims a deduction for interestpaid on the bank loan, and USS does notrecognize interest income on interest pay-ments made to it from FDE because thepayments are disregarded. For Country Xtax purposes, the interest paid from FDEto USS is regarded and gives rise to a lossthat can be surrendered (or otherwiseused, such as through a consolidation re-gime) to offset the operating income ofFT.

Under the current section 1503(d) reg-ulations, the loan from USS to FDE doesnot result in a dual consolidated loss at-tributable to USS’s interest in FDE be-cause interest paid on the loan is not re-garded for U.S. tax purposes; only itemsthat are regarded for U.S. tax purposes aretaken into account for purposes of deter-mining a dual consolidated loss. See§ 1.1503(d)–5(c)(1)(ii). In addition, theregarded interest expense of USP is not

attributed to USS’s interest in FDE becauseonly regarded items of USS, the domesticowner of FDE, are taken into account forpurposes of determining a dual consolidatedloss. Id. The result would generally be thesame, however, even if USS, rather thanUSP, were the borrower on the bank loan.See § 1.1503(d)–7(c), Example 23.

The Treasury Department and the IRShave determined that these transactionsraise significant policy concerns that aresimilar to those relating to the D/NI out-comes addressed by sections 245A(e) and267A, and the double-deduction outcomesaddressed by section 1503(d). The Trea-sury Department and the IRS are studyingthese transactions and request comments.

VII. Applicability Dates

Under section 7805(b)(2), and consis-tent with the applicability date of section245A, proposed § 1.245A(e)–1 applies todistributions made after December 31,2017. Under section 7805(b)(2), proposed§§ 1.267A–1 through 1.267A–6 generallyapply to specified payments made in tax-able years beginning after December 31,2017. This applicability date is consistentwith the applicability date of section267A. The Treasury Department and theIRS therefore expect to finalize such pro-visions by June 22, 2019. See section7805(b)(2). However if such provisionsare finalized after June 22, 2019, then theTreasury Department and the IRS expectthat such provisions will apply only totaxable years ending on or after December20, 2018. See section 7805(b)(1)(B).

As provided in proposed § 1.267A–7(b), certain rules, such as the disregardedpayment and deemed branch payment rulesas well as the imported mismatch rule, applyto specified payments made in taxable yearsbeginning on or after December 20, 2018.See section 7805(b)(1)(B).

Proposed §§ 1.6038–2, 1.6038–3, and1.6038A–2, which require certain report-ing regarding deductions disallowed un-der section 267A, as well as hybrid divi-dends and tiered hybrid dividends undersection 245A, apply with respect to infor-mation for annual accounting periods ortax years, as applicable, beginning on orafter December 20, 2018. See section7805(b)(1)(B).

Proposed §§ 1.1503(d)–1 and -3, treat-ing domestic consenting corporations asdual resident corporations, apply to tax-able years ending on or after December20, 2018. See section 7805(b)(1)(B).

Proposed § 1.1503(d)–6, amending thecompulsory transfer triggering event ex-ception, applies to transfers that occur onor after December 20, 2018, but taxpayersmay apply the rules to earlier transfers.See section 7805(b)(1)(B).

Proposed § 301.7701–3(a) and (c)(3)apply to a domestic eligible entity that onor after December 20, 2018 files an elec-tion to be classified as an association (re-gardless of whether the election is effec-tive before December 20, 2018). Theseprovisions also apply to certain domesticeligible entities the interests in which aretransferred or issued on or after December20, 2018. See section 7805(b)(1)(B).

Special Analyses

I. Regulatory Planning and Review

Executive Orders 13771, 13563, and12866 direct agencies to assess costs andbenefits of available regulatory alterna-tives and, if regulation is necessary, toselect regulatory approaches that maxi-mize net benefits, including potential eco-nomic, environmental, public health andsafety effects, distributive impacts, andequity. Executive Order 13563 empha-sizes the importance of quantifying bothcosts and benefits, reducing costs, harmo-nizing rules, and promoting flexibility.The preliminary EO 13771 designationfor this proposed rulemaking is regula-tory.

The proposed regulations have beendesignated by the Office of Managementand Budget’s Office of Information andRegulatory Affairs (OIRA) as subject toreview under Executive Order 12866 pur-suant to the Memorandum of Agreement(April 11, 2018) between the TreasuryDepartment and the Office of Manage-ment and Budget regarding review of taxregulations (“MOA”). OIRA has deter-mined that the proposed rulemaking iseconomically significant and subject to re-view under EO 12866 and section 1(c) ofthe Memorandum of Agreement. Accord-ingly, the proposed regulations have beenreviewed by the Office of Managementand Budget.


A. Background

Hybrid arrangements include both “hy-brid entities” and “hybrid instruments.” Ahybrid entity is generally an entity whichis treated as a flow-through or disregardedentity for U.S. tax purposes but as a cor-poration for foreign tax purposes or viceversa. Hybrid instruments are financial in-struments that share characteristics ofboth debt and equity and are treated asdebt for U.S. tax purposes and equity inthe foreign jurisdiction or vice versa.

Before the Act, U.S. subsidiaries offoreign-based multinational enterprisescould employ cross-border hybrid ar-rangements as legal tax-avoidance tech-niques by exploiting differences in taxtreatment across jurisdictions. These ar-rangements allowed taxpayers to claimtax deductions in the United States with-out a corresponding inclusion in anotherjurisdiction.

The United States has a check-the-boxregulatory provision, under which sometaxpayers can choose whether they aretreated as corporations, where they mayface a separate entity level tax, or as part-nerships, where there is no such separateentity tax (but rather only owner-leveltax), under the U.S. tax code. This choiceallows taxpayers the ability to becomehybrid entities that are viewed as corpo-rations in one jurisdiction, but not in an-other. For example, a foreign parent couldown a domestic subsidiary limited liabil-ity partnership (LLP) that, under thecheck-the-box rules, elects to be treated asa corporation under U.S. tax law. How-ever, this subsidiary could be viewed as apartnership under foreign tax law. Theresult is that the domestic subsidiary couldbe entitled to a deduction for U.S. taxpurposes for making interest payments tothe foreign parent, but the foreign countrywould see a payment between a partner-ship and a partner, and therefore wouldnot tax the interest income. That is, thecorporate structure would enable the busi-ness entity to avoid paying U.S. tax on theinterest by allowing a deduction attribut-able to an intra-group loan, despite theinterest income never being included un-der foreign tax law.

In addition, there are hybrid instru-ments, which share characteristics of bothdebt and equity. Because of these shared

characteristics, countries may be inconsis-tent in their treatment of such instruments.One example is perpetual debt, whichmany countries treat as debt, but theUnited States treats as equity. If a foreignaffiliate of a U.S.-based multinational is-sued perpetual debt to a U.S. holder, theinterest payments would be tax deductiblein a foreign jurisdiction that treats theinstrument as debt, while the paymentsare treated as dividends in the UnitedStates and potentially eligible for a divi-dends received deduction (DRD).

The Act adds section 245A(e) to theCode to address issues of hybridity byintroducing a hybrid dividends provision,which disallows the DRD for any divi-dend received by a U.S. shareholder froma controlled foreign corporation if the div-idend is a hybrid dividend. The statutedefines a hybrid dividend as an amountreceived from a controlled foreign corpo-ration for which a deduction would beallowed under section 245A(a) and forwhich the controlled foreign corporationreceived a deduction or other tax benefitin a foreign country. Hybrid dividendsbetween controlled foreign corporationswith a common U.S. shareholder aretreated as subpart F income.

The Act also adds section 267A of theCode to deny a deduction for any disqual-ified related party amount paid or accruedas a result of a hybrid transaction or by, orto, a hybrid entity. The statute defines adisqualified related party amount as anyinterest or royalty paid or accrued to arelated party where there is no corre-sponding inclusion to the related party inthe other tax jurisdiction or the relatedparty is allowed a deduction with respectto such amount in the other tax jurisdic-tion. The statute’s definition of a hybridtransaction is any transaction where thereis a mismatch in tax treatment between theU.S. and the other foreign jurisdiction.Similarly, a hybrid entity is any entitywhich is treated as fiscally transparent forU.S. tax purposes but not for purposes ofthe foreign tax jurisdiction, or vice versa.

B. Overview

The hybrids provisions in the Act andthe proposed regulations are anti-abusemeasures. Taxpayers have been taking ag-gressive tax positions to take advantage of

tax treatment mismatches between juris-dictions in order to achieve favorable taxoutcomes at the detriment of tax revenues(see OECD/G20 Hybrid Mismatch Re-port, October 2015 and OECD/G20Branch Mismatch Report, July 2017). Thestatute and the proposed regulations serveto conform the U.S. tax system to recentlyagreed-upon international tax principles(see OECD/G20 Hybrids Mismatch Re-port, October 2015 and OECD/G20Branch Mismatch Report, July 2017),consistent with statutory intent, while pro-tecting U.S. interests and the U.S. taxbase. International tax coordination is par-ticularly advantageous in the context ofhybrids as it has the potential to greatlycurb opportunities for hybrid arrange-ments, while avoiding double taxation.The anticipated effect of the statute andproposed regulations is a reduction in taxrevenue loss due to hybrid arrangements,at the cost of an increase in complianceburden for a limited number of sophisti-cated taxpayers, as explained below.

C. Need for the proposed regulations

Because the Act introduced new sec-tions to the Code to address hybrid entitiesand hybrid instruments, a large number ofthe relevant terms and necessary calcula-tions that taxpayers are currently requiredto apply under the statute can benefit fromgreater specificity. Taxpayers will lackclarity on which types of arrangements aresubject to the statute without the addi-tional interpretive guidance and clarifica-tions contained in the proposed regula-tions. This lack of clarity could lead to ashifting of corporate income overseasthrough hybrid arrangements, furthereroding U.S. tax revenues. Without ac-companying rules to cover branches,structured arrangements, imported mis-matches, and similar structures, the statutewould be extremely easy to avoid, a path-way that is contrary to Congressional in-tent. It could also lead to otherwise similartaxpayers interpreting the statute differ-ently, distorting the equity of tax treat-ment for otherwise similarly situated tax-payers. Finally, the lack of clarity couldcause some taxpayers unnecessary com-pliance burden if they misinterpret thestatute.


D. Economic analysis

1. Baseline

The Treasury Department and the IRShave assessed the benefits and costs of theproposed regulations relative to a no-action baseline reflecting anticipated tax-related behavior and other economic be-havior in the absence of the proposedregulations.

The baseline includes the Act, whicheffectively cut the top statutory corporateincome tax rate from 35 to 21 percent.This change lowered the value of usinghybrid arrangements for multinationalcorporations, because the value of sucharrangements is proportional to the taxthey allow the corporation to avoid. Assuch, some firms with an incentive to setup hybrid arrangements prior to the Actwould no longer find it profitable tomaintain these arrangements. The Actalso modified section 163(j), and regu-lations interpreting this provision areexpected to be finalized soon, which to-gether further limit the deductibility ofinterest payments. These statutory andregulatory changes further curb the in-centive to set up and maintain hybridarrangements for multinational corpora-tions, since interest payments are a pri-mary vehicle through which hybrid ar-rangements generated deductions priorto the Act. Further, prior to the Act, theTreasury Department and the IRS issueda series of regulations that reduced oreliminated the incentive for multina-tional corporations to invert, or changetheir tax residence to avoid U.S. taxes(including setting up some hybrid ar-rangements). As a result, under the base-line, the value of hybrid arrangementsreflects the existing regulatory frame-work and the Act and its associatedsoon-to-be-finalized regulations, all ofwhich strongly affect the value of hy-brid arrangements as a tax avoidancetechnique.

2. Anticipated Costs and Benefits

i. Economic Effects

The Treasury Department has deter-mined that the discretionary non-revenueimpacts of the proposed hybrid regula-

tions will reduce U.S. Gross DomesticProduct (GDP) by less than $100 millionper year ($2018).

To evaluate this effect, the TreasuryDepartment considered the share of inter-est deductions that would be disallowedby the proposed regulations. Using Trea-sury Department models applied to confi-dential 2016 tax data, the Treasury De-partment calculated the average effectivetax rate for potentially affected taxpayersunder a range of levels of interest paymentdeductibility, including the level of de-ductibility under the Act without the pro-posed regulations. The difference betweenthe estimated effective tax rate under theAct and without the discretionary ele-ments of the proposed regulations and therange of estimated effective tax rates thatinclude the proposed regulations providesa range of estimates of the net increase inthe effective tax rate due to the discretionexercised in the proposed regulations. TheTreasury Department next applied an elas-ticity of taxable income to the range ofestimated increases in the effective taxrate to estimate the reduction in taxableincome for each of the affected taxpayersin the sample. The Treasury Departmentthen examined a range of estimates of therelationship between the change in taxableincome and the real change in economicactivity. Finally, the Treasury Departmentextrapolated the results through 2027.

The Treasury Department concludesfrom this evaluation that the discretionaryaspects of the proposed rules will reduceGDP annually by less than $100 million($2018). The projected effects reflect theproposed regulations alone and do not in-clude non-revenue economic effects stem-ming from the Act in the absence of theproposed regulations. More specifically,the analysis did not estimate the impactsof the statutory requirement that hybriddividends shall be treated as subpart Fincome of the receiving controlled foreigncorporations for purposes of section951(a)(1)(A) for the taxable year and shallnot be permitted a foreign tax credit. Seesection 245A(e).

The Treasury Department solicits com-ments on the methodology used to evalu-ate the non-revenue economic effects ofthe proposed regulations and anticipatesthat further analysis will be provided atthe final rule stage.

ii. Anticipated Costs and Benefits ofSpecific Provisions

a. Section 245A(e)

Section 245A(e) applies in certaincases in which a CFC pays a hybrid div-idend, which is a dividend paid by theCFC for which the CFC received a deduc-tion or other tax benefit under foreign taxlaw (a hybrid deduction). The proposedregulations provide rules for identifyingand tracking such hybrid deductions.These rules set forth common standardsfor identifying hybrid deductions andtherefore clarify what is deemed a hybriddividend by the statute and ensure equita-ble tax treatment of otherwise similar tax-payers.

The proposed regulations also addresstiming differences to ensure that there isparity between economically similartransactions. Absent such rules, similartransactions may be treated differentlydue to timing differences. For example, ifa CFC paid out a dividend in a giventaxable year for which it received a de-duction or other tax benefit in a priortaxable year, the taxpayer might claim thedividend is not a hybrid dividend, sincethe taxable year in which the dividend ispaid for U.S. tax purposes and the year inwhich the tax benefit is received do notoverlap. Absent rules, such as the pro-posed regulations, the purpose of section245A(e) might be avoided and economi-cally similar transactions might be treateddifferently.

Finally, these rules excuse certain tax-payers from having to track hybrid deduc-tions (namely taxpayers without a suffi-cient connection to a section 245A(a)dividends received deduction). The utilityof requiring these taxpayers to track hy-brid deductions would be outweighed bythe burdens of doing so. The proposedregulations reduce the compliance burdenon taxpayers that are not directly dealingwith hybrid dividends.

b. Section 267A

Section 267A disallows a deduction forinterest or royalties paid or accrued incertain transactions involving a hybrid ar-rangement. Congress intended this provi-sion to address cases in which the tax-


payer is provided a deduction under U.S.tax law, but the payee does not have acorresponding income inclusion underforeign tax law, dubbed a “deduction/no-inclusion outcome” (D/NI outcome). SeeSenate Explanation, at 384. This affectstaxpayers that attempt to use hybrid ar-rangements to strip income out of theUnited States taxing jurisdiction.

The proposed regulations disallow adeduction under section 267A only to theextent that the D/NI outcome is a result ofa hybrid arrangement. Note that under thestatute but without the proposed regula-tions, a deduction would be disallowedsimply if a D/NI outcome occurs and ahybrid arrangement exists (see sectionII.E of the Explanation of Provisions). Forexample, a royalty payment made to ahybrid entity in the U.K. qualifying for alow tax rate under the U.K. patent boxregime could be denied a deduction in theU.S. under the statute. However, the lowU.K. rate is a result of the lower tax rateon patent box income and not a result ofany hybrid arrangement. In this example,there is no link between hybridity and theD/NI outcome, since it is the U.K. patentbox regime that yields the D/NI outcomeand the low U.K. patent box rate is avail-able to taxpayers regardless of whetherthey are organized as hybrid entities ornot. The proposed regulations limit theapplication of section 267A to caseswhere the D/NI outcome occurs as a resultof hybrid arrangements and not due to agenerally applicable feature of the juris-diction’s tax system.

The proposed regulations also provideseveral exceptions to section 267A in or-der to refine the scope of the provision andminimize burdens on taxpayers. First, theproposed regulations generally excludefrom section 267A payments that are in-cluded in a U.S. tax resident’s or U.S.taxable branch’s income or are taken intoaccount for purposes of the subpart F orglobal intangible low-taxed income(GILTI) provisions. While the exceptionfor income taken into account for pur-poses of subpart F is in the statute, theproposed regulations expand the excep-tion to cover GILTI. This avoids potentialdouble taxation on that income. In addi-tion, as a refinement compared with thestatute, the extent to which a payment istaken into account under subpart F is de-

termined without regard to allocable de-ductions or qualified deficits. The pro-posed regulations also provide a deminimis rule that excepts small taxpayersfrom section 267A, minimizing the bur-den on small taxpayers.

Finally, the proposed regulations ad-dress a comprehensive set of transactionsthat give rise to D/NI outcomes. The stat-ute, as written, does not apply to certainhybrid arrangements, including branch ar-rangements and certain reverse hybrids, asdescribed above (see section II.D of theExplanation of Provisions). The exclusionof these arrangements could have largeeconomic and fiscal consequences due totaxpayers shifting tax planning towardsthese arrangements to avoid the new anti-abuse statute. The proposed regulationsclose off this potential avenue for addi-tional tax avoidance by applying the rulesof section 267A to branch mismatches,reverse hybrids, certain transactions withunrelated parties that are structured toachieve D/NI outcomes, certain structuredtransactions involving amounts similar tointerest, and imported mismatches.

3. Alternatives Considered

i. Addressing conduitarrangements/imported mismatches

Section 267A(e)(1) provides regula-tory authority to apply the rules of section267A to conduit arrangements and thus todisallow a deduction in cases in whichincome attributable to a payment is di-rectly or indirectly offset by an offshorehybrid deduction. The Treasury Depart-ment and the IRS considered four optionswith regards to conduit arrangement rules.

The first option was to not implementany conduit rules, and thus rely on exist-ing and established judicial doctrines(such as conduit principles and substance-over-form principles) to police thesetransactions. A second option consideredwas to address conduit arrangement con-cerns through a broad anti-abuse rule. Onthe one hand, both of these approachesmight reduce complexity by eliminatingthe need for detailed regulatory rules ad-dressing conduit arrangements. On theother hand, such approaches could createuncertainty (as neither taxpayers nor theIRS might have a clear sense of what

types of transactions might be challengedunder the judicial doctrines or anti-abuserule) and could increase burdens to theIRS (as challenging under judicial doc-trines or anti-abuse rules are generally dif-ficult and resource intensive). Signifi-cantly, such approaches could result indouble non-taxation (if judicial doctrinesor anti-abuse rules were to not be success-fully asserted) or double-taxation (if judi-cial doctrines or anti-abuse rules were tonot take into account the application offoreign tax law, such as a foreign im-ported mismatch rule).

A third option considered was to im-plement rules modeled off existing U.S.anti-conduit rules under § 1.881–3. On thepositive side, such an approach would relyon an established and existing frameworkthat taxpayers are already familiar withand thus there would be a lesser need tocreate and apply a new framework or setof rules. On the negative side, existinganti-conduit rules are limited in certainrespects as they apply only to certain fi-nancing arrangements, which exclude cer-tain stock, and they address only with-holding tax policies, which pose separateconcerns from section 267A policies(D/NI policies). Furthermore, taxpayershave implemented structures that attemptto avoid the application of the existinganti-conduit rules. Detrimental to tax eq-uity, such an approach could also lead todouble-taxation, as the existing anti-conduit rules do not take into account theapplication of foreign tax law, such as aforeign imported mismatch rule.

The final option considered was to im-plement rules that are generally consistentwith the BEPS imported mismatch rule.The first advantage of such an approach isthat it provides certainty about when adeduction will or will not be disallowedunder the rule. The second advantage ofthis approach is that it neutralizes the riskof double non-taxation, while also neutral-izing the risk of double taxation. This isbecause this option is modeled off theBEPS approach, which is being imple-mented by other countries, and also con-tains explicit rules to coordinate with for-eign tax law. Coordinating with the globaltax community reduces opportunities foreconomic distortions. Although such anapproach involves greater complexity thanthe alternatives, the Treasury Department


and IRS expect the benefits of this ap-proach’s comprehensiveness, administrabil-ity, and conduciveness to taxpayer certainty,to be substantially greater than the complex-ity burden in comparison with the availablealternative approaches. Thus, this is the ap-proach adopted in the proposed regulations.

ii. De minimis rulesThe proposed regulations provide a de

minimis exception that exempts taxpayersfrom the application of section 267A forany taxable year for which the sum of thetaxpayer’s interest and royalty deductions(plus interest and royalty deductions ofany related specified parties) is below$50,000. The exception’s $50,000 thresh-old looks to a taxpayer’s amount of inter-est or royalty deductions without regard towhether the deductions involve hybrid ar-rangements and therefore, absent the deminimis exception, would be disallowedunder section 267A.

The Treasury Department and the IRSconsidered not providing a de minimisexception because hybrid arrangementsare highly likely to be tax-motivatedstructures undertaken only by mostly so-phisticated investors. However, it is pos-sible that, in limited cases, small taxpay-ers could be subject to these rules, forexample, as a result of timing differencesor a lack of familiarity with foreign law.Furthermore, section 267A is intended tostop base erosion and tax avoidance, andin the case of small taxpayers, it is ex-pected that the revenue gains from apply-ing these rules would be minimal sincefew small taxpayers are expected to en-gage in hybrid arrangements.

The Treasury Department and IRS alsoconsidered a de minimis exception basedon a dollar threshold with respect to theamount of interest or royalties involvinghybrid arrangements. However, such anapproach would require a taxpayer to firstapply the rules of section 267A to identifyits interest or royalty deductions involvinghybrid arrangements in order to determinewhether the de minimis threshold is satis-fied and thus whether it is subject to sec-tion 267A for the taxable year. This wouldtherefore not significantly reduce burdenson taxpayers with respect to applying therules of section 267A.

Therefore, the proposed regulationsadopt a rule that looks to the overallamount of interest and royalty payments,

whether or not such payments involve hy-brid arrangements. This has the effect ofexempting, in an efficient manner, smalltaxpayers that are unlikely to engage inhybrid arrangements, and therefore suchtaxpayers do not need to consider the ap-plication of these rules.

iii. Deemed branch payments and branchmismatch payments

The proposed regulations expand theapplication of section 267A to certaintransactions involving branches. This wasnecessary in order to ensure that taxpayerscould not avoid section 267A by engagingin transactions that were economicallysimilar to the hybrid arrangements that arecovered by the statute. For example, as-sume that a related party payment is madeto a foreign entity in Country X that isowned by a parent company in Country Y.Further assume that there is a mismatchbetween how Country X views the entity(fiscally transparent) versus how CountryY views it (not fiscally transparent). Ingeneral, section 267A’s hybrid entity rulesprevent a D/NI outcome in this case.However, assume instead that the parentcompany forms a branch in Country Xinstead of a foreign entity, and Country Y(the parent company’s jurisdiction) ex-empts all branch income under its territo-rial system. On the other hand, due to amismatch in laws governing whether abranch exists, Country X does not viewthe branch as existing and therefore doesnot tax payments made to the branch. Ab-sent regulations, taxpayers could easilyavoid section 267A through use of branchstructures, which are economically similarto the foreign entity structure in the firstexample.

In the absence of the proposed regula-tions, taxpayers may have found it valu-able to engage in transactions that areeconomically similar to hybrid arrange-ments but that avoided the application of267A. Such transactions would have re-sulted in a loss in U.S. tax revenue with-out any accompanying efficiency gain.Furthermore, to the extent that these trans-actions were structured specifically toavoid the application of section 267A andwere not available to all taxpayers, theywould generally have led to an efficiency

loss in addition to the loss in U.S. taxrevenue.

iv. Exceptions for income included inU.S. tax and GILTI inclusions

Section 267A(b)(1) provides that de-ductions for interest and royalties that arepaid to a CFC and included under section951(a) in income (as subpart F income) bya United States shareholder of such CFCare not subject to disallowance under sec-tion 267A. The statute does not statewhether section 267A applies to a pay-ment that is included directly in the U.S.tax base (for example, because the pay-ment is made directly to a U.S. taxpayeror a U.S. taxable branch), or a paymentmade to a CFC that is taken into accountunder GILTI (as opposed to being in-cluded as subpart F income) by suchCFC’s United States shareholders. How-ever, the grant of regulatory authority insection 267A(e) includes a specific men-tion of exceptions in “cases which theSecretary determines do not present a riskof eroding the Federal tax base.” See sec-tion 267A(e)(7)(B).

The Treasury Department and the IRSconsidered providing no additional excep-tion for payments included in the U.S. taxbase (either directly or under GILTI),therefore the only exception availablewould be the exception provided in thestatute for payments included in the U.Stax base by subpart F inclusions. Thisapproach was rejected in the case of apayment to a U.S. taxpayer since it wouldresult in double taxation by the UnitedStates, as the United States would bothdeny a deduction for a payment as well asfully include such payment in income forU.S. tax purposes. Similarly, in the case ofhybrid payments made by one CFC toanother CFC with the same United Statesshareholders, a payment would be in-cluded in tested income of the recipientCFC and therefore taken into account un-der GILTI. If section 267A were to applyto also disallow the deduction by thepayor CFC, this could also lead to thesame amount being subject to section951A twice because the payor CFC’stested income would increase as a resultof the denial of deduction, and the payeewould have additional tested income forthe same payment.


Payments that are included directly inthe U.S. tax base or that are included inGILTI do not give rise to a D/NI outcomeand, therefore, it is consistent with thepolicy of section 267A and the grant ofauthority in section 267A(e) to exemptthem from disallowance under section267A. Therefore, the proposed regulationsprovide that such payments are not subjectto disallowance under section 267A.

v. Link between hybridity and D/NI

As discussed in section II.E of the Ex-planation of Provisions and sectionI.D.2.ii of this Special Analyses, the pro-posed regulations limit disallowance tocases in which the no-inclusion portion ofthe D/NI outcome is a result of hybridityas opposed to a different feature of foreigntax law, such as a general preference forroyalty income.

Under the language of the statute, nolink between hybridity and the no-inclusion outcome appears to be re-quired. The Treasury Department andthe IRS considered following this ap-proach, which would have resulted in adeduction being disallowed even thoughif the transaction had been a non-hybridtransaction, the same no-inclusion out-come would have resulted. However,the Treasury Department and the IRSrejected this option because it wouldlead to inconsistent and arbitrary results.In particular, such an approach wouldincentivize taxpayers to restructure toeliminate hybridity in order to avoid theapplication of section 267A in caseswhere hybridity does not cause a D/NIoutcome. Such restructuring wouldeliminate the hybridity without actuallyeliminating the D/NI outcome since thehybridity did not cause the D/NI out-come. Interpreting section 267A in amanner that incentivizes taxpayers toengage in restructurings of this typewould generally impose costs on tax-payers to retain deductions where hy-bridity is irrelevant to a D/NI outcome,without furthering the statutory purposeof section 267A to neutralize hybrid ar-rangements.

Furthermore, the policy of section267A is not to address all situations thatgive rise to no-inclusion outcomes, but toonly address a subset of such situations

where they arise due to hybrid arrange-ments. When base erosion or double non-taxation arises due to other features of theinternational tax system (such as the exis-tence of low-tax jurisdictions or preferen-tial regimes for certain types of income),there are other types of rules that arebetter suited to address these concerns (forexample, through statutory impositions ofwithholding taxes, revisions to tax trea-ties, or new statutory provisions such asthe base erosion and anti-abuse tax undersection 59A). Moreover, the legislativehistory to section 267A makes clear thatthe policy of the provision is to eliminatethe tax-motivated hybrid structures thatlead to D/NI outcomes, and was not ageneral provision for eliminating all casesof D/NI outcomes. See Senate Explana-tion, at 384 (“[T]he Committee believesthat hybrid arrangements exploit differ-ences in the tax treatment of a transactionor entity under the laws of two or morejurisdictions to achieve double non-taxation . . .”) (emphasis added). In addi-tion, to the extent that regulations limitdisallowance to those cases in which theno-inclusion portion of the D/NI outcomeis a result of hybridity, the scope ofsection 267A is limited and the burdenon taxpayers is reduced without impact-ing the core policy underlying section267A. Therefore, the proposed regula-tions provide that a deduction is disal-lowed under section 267A only to theextent that the no-inclusion portion ofthe D/NI outcome is a result of hybrid-ity.

vi. Timing differences under section245A

In some cases, there may be a timingdifference between when a CFC pays anamount constituting a dividend for U.S.tax purposes and when the CFC receives adeduction for the amount in a foreign ju-risdiction. Timing differences may raiseissues about whether a deduction is a hy-brid deduction and thus whether a divi-dend is considered a hybrid dividend. TheTreasury Department and the IRS consid-ered three options with respect to this tim-ing issue.

The first option considered was to notaddress timing differences, and thus nottreat such transactions as giving rise to

hybrid dividends. Not addressing the tim-ing differences would raise policy con-cerns, since failure to treat the deductionas giving rise to a hybrid dividend wouldresult in the section 245A(a) DRD apply-ing to the dividend, allowing the amountto permanently escape both foreign tax(through the deduction) and U.S. tax(through the DRD).

The second option considered was tonot address the timing difference directlyunder section 245A(e), but instead addressit under another Code section or regime.For example, one method that would beconsistent with the BEPS Report would beto mandate an income inclusion tothe U.S. parent corporation at the time thededuction is permitted under foreign law.This would rely on a novel approach thatdeems an inclusion at a particular point intime despite the fact that the income hasotherwise not been recognized for U.S.tax purposes.

The final option was to address thetiming difference by providing rules re-quiring the establishment of hybrid deduc-tion accounts. These hybrid deduction ac-counts will be maintained across years sothat deductions that accrue in one yearwill be matched up with income arising ina different year, thus addressing the tim-ing differences issue. This approach ap-propriately addresses the timing differ-ences under section 245A of the Code.The Treasury Department and IRS expectthe benefits of this option’s comprehen-siveness and clarity to be substantiallygreater than the tax administration andcompliance costs it imposes, relative tothe alternative options. This is the ap-proach adopted by the proposed regula-tions.

vii. Timing differences under section267A

A similar timing issue arises under sec-tion 267A. Here, there is a timing differ-ence between when the deduction is oth-erwise permitted under U.S. tax law andwhen the payment is included in the pay-ee’s income under foreign tax law. Thelegislative history to section 267A indi-cates that in certain cases such timingdifferences can lead to “long term defer-ral” and that such long-term deferralshould be treated as giving rise to a D/NI


outcome. In the context of section 267A,the Treasury Department and the IRS con-sidered three options with respect to thistiming issue.

The first option considered was to notaddress timing differences, because theywill eventually reverse over time. Al-though such an approach would result in arelatively simple rule, it would raise sig-nificant policy concerns because, as indi-cated in the legislative history, long-termdeferral can be equivalent to a permanentexclusion.

The second option considered was toaddress all timing differences, becauseeven a timing difference that reverseswithin a short period of time provides atax benefit during the short term. Al-though such an approach might be con-ceptually pure, it would raise significantpractical and administrative difficulties. Itcould also lead to some double-tax, absentcomplicated rules to calibrate the disal-lowed amount to the amount of tax benefitarising from the timing mismatch.

The final option considered was to ad-dress only certain timing differences –namely, long-term timing differences,such as timing differences that do not re-verse within a 3 taxable year period. TheTreasury Department and IRS expect thatthe net benefits of this option’s compre-hensiveness, clarity, and tax administra-bility and compliance burden are substan-tially higher than those of the availablealternatives. Thus, this option is adoptedin the proposed regulations.

4. Anticipated impacts on administrativeand compliance costs

The Treasury Department and the IRSestimate that there are approximately10,000 taxpayers in the current populationof taxpayers affected by the proposed reg-ulations or about 0.5% of all corporatefilers. This is the best estimate of the num-ber of sophisticated taxpayers with capa-bilities to structure a hybrid arrangement.However, the Treasury Department andthe IRS anticipate that fewer taxpayerswould engage in hybrid arrangements go-ing forward as the statute and the pro-posed regulations would make such ar-rangements less beneficial to taxpayers.As such, the taxpayer counts provided insection II of this Special Analyses are an

upper bound of the number of affectedtaxpayers by the proposed regulations.

It is important to note that the popula-tion of taxpayers affected by section 267Aand the proposed regulations under sec-tion 267A will seldom include U.S.-basedcompanies as these companies are taxedunder the new GILTI regime as well assubpart F. Instead, section 267A and theproposed regulations apply predominantlyto foreign-headquartered companies thatemploy hybrid arrangements to strip in-come out of the U.S., undermining thecollection of U.S. tax revenue. In addition,although section 245A(e) applies primar-ily to U.S.-based companies, the amountsof dividends affected are limited becausea large portion of distributions will betreated as previously taxed earnings andprofits due to the operation of both theGILTI regime and the transition tax undersection 965, and such distributions are notsubject to section 245A(e).

II. Paperwork Reduction Act

The collections of information in theproposed regulations are in proposed§§ 1.6038–2(f)(13) and (14), 1.6038–3(g)(3), and 1.6038A–2(b)(5)(iii).

The collection of information in pro-posed § 1.6038–2(f)(13) and (14) is man-datory for every U.S. person that controlsa foreign corporation that has a deductiondisallowed under section 267A, or thatpays or receives a hybrid dividend ortiered hybrid dividend under section245A, respectively, during an annual ac-counting period and files Form 5471 forthat period (OMB control number 1545-0123, formerly, OMB control number1545-0704). The collection of informationin proposed § 1.6038–2(f)(13) is satisfiedby providing information about the disal-lowance of the deduction for any interestor royalty under section 267A for the cor-poration’s accounting period as Form5471 and its instructions may prescribe,and the collection of information in pro-posed § 1.6038–2(f)(14) is satisfied byproviding information about hybrid divi-dends or tiered hybrid dividends undersection 245A(e) for the corporation’s ac-counting period as Form 5471 and its in-structions may prescribe. For purposes ofthe PRA, the reporting burden associatedwith proposed § 1.6038–2(f)(13) and (14)

will be reflected in the IRS Form 14029,Paperwork Reduction Act Submission, as-sociated with Form 5471. As providedbelow, the estimated number of respon-dents for the reporting burden associatedwith proposed § 1.6038–2(f)(13) and (14)is 1,000 and 2,000, respectively.

The collection of information in pro-posed § 1.6038–3(g)(3) is mandatory forevery U.S. person that controls a foreignpartnership that paid or accrued any inter-est or royalty for which a deduction isdisallowed under section 267A during thepartnership tax year and files Form 8865for that period (OMB control number1545-1668). The collection of informationin proposed § 1.6038–3(g)(3) is satisfiedby providing information about the disal-lowance of the deduction for any interestor royalty under section 267A for the part-nership’s tax year as Form 8865 and itsinstructions may prescribe. For purposesof the PRA, the reporting burden associ-ated with proposed § 1.6038–3(g)(3) willbe reflected in the IRS Form 14029, Pa-perwork Reduction Act submission, asso-ciated with Form 8865. As provided be-low, the estimated number of respondentsfor the reporting burden associated withproposed § 1.6038–3(g)(3) is less than1,000.

The collection of information in pro-posed § 1.6038A–2(b)(5)(iii) is manda-tory for every reporting corporation thathas a deduction disallowed under section267A and files Form 5472 (OMB controlnumber 1545-0123, formerly, OMB con-trol number 1545-0805) for the tax year.The collection of information in proposed§ 1.6038A–2(b)(5)(iii) is satisfied by pro-viding information about the disallowanceof the reporting corporation’s deductionfor any interest or royalty under section267A for the tax year as Form 5472 andits instructions may prescribe. For pur-poses of the PRA, the reporting burdenassociated with proposed § 1.6038A–2(b)(5)(iii) will be reflected in the IRSForm 14029, Paperwork Reduction Actsubmission, associated with Form 5472.As provided below, the estimated numberof respondents for the reporting burdenassociated with proposed § 1.6038A–2(b)(5)(iii) is 7,000.

The revised tax forms are as follows:


NewRevision of existing

formNumber of respondents

(estimated, rounded to nearest 1,000)

Schedule G (Form 5471) ✓ 1,000

Schedule I (Form 5471) ✓ 2,000

Form 5472 ✓ 7,000

Form 8865 ✓ �1,000

The current status of the PaperworkReduction Act submissions related to thetax forms that will be revised as a result ofthe information collections in the pro-posed regulations is provided in the ac-companying table. As described above,the reporting burdens associated withthe information collections in proposed§§ 1.6038 –2(f)(13) and (14) and1.6038A–2(b)(5)(iii) are included in theaggregated burden estimates for OMBcontrol number 1545-0123, which rep-resents a total estimated burden time forall forms and schedules for corporationsof 3.157 billion hours and total esti-mated monetized costs of $58.148 bil-lion ($2017). The overall burden esti-mates provided in 1545-0123 are

aggregate amounts that relate to the en-tire package of forms associated withthe OMB control number and will in thefuture include but not isolate the esti-mated burden of the tax forms that willbe revised as a result of the informationcollections in the proposed regulations.These numbers are therefore unrelatedto the future calculations needed to as-sess the burden imposed by the pro-posed regulations. They are furtheridentical to numbers provided for theproposed regulations relating to foreigntax credits (83 FR 63200). The TreasuryDepartment and IRS urge readers to rec-ognize that these numbers are duplicatesand to guard against overcounting theburden that international tax provisions

imposed prior to the Act. No burden esti-mates specific to the proposed regulationsare currently available. The Treasury De-partment has not identified any burden esti-mates, including those for new informationcollections, related to the requirements un-der the proposed regulations. Those esti-mates would capture both changes made bythe Act and those that arise out of discre-tionary authority exercised in the proposedregulations. The Treasury Department andthe IRS request comments on all aspects ofinformation collection burdens related to theproposed regulations. In addition, whenavailable, drafts of IRS forms are posted forcomment at https://apps.irs.gov/app/picklist/list/draftTaxForms.htm.

Form Type of Filer OMB Number(s) Status

Form 5471 All other Filers (mainly trusts and estates) (Legacy system) 1545-0121 Approved by OMBthrough 10/30/2020.

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr�201704-1545-023

Business (NEW Model) 1545-0123 Published in the FederalRegister Notice (FRN)on 10/8/18. PublicComment period closedon 12/10/18.

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd

Individual (NEW Model) 1545-0074 Limited Scope submission(1040 only) on 10/11/18at OIRA for review.Full ICR submission(all forms) scheduledin 3/2019. 60 DayFRN not published yetfor full collection.


Form 5472 Business (NEW Model) 1545-0123 Published in the FRNon 10/8/18. PublicComment period closedon 12/10/18.



Form Type of Filer OMB Number(s) Status

Individual (NEW Model) 1545-0074 Limited Scope submission(1040 only) on 10/11/18at OIRA for review.Full ICR submissionfor all forms in 3/2019.60 Day FRN notpublished yet forfull collection.


Form 8865 All other Filers (mainly trusts and estates)(Legacy system)

1545-1668 Published in the FRNon 10/1/18. Public Com-ment period closed on11/30/18. ICR in processby Treasuryas of 10/17/18.

Link: https://www.federalregister.gov/documents/2018/10/01/2018-21288/proposed-collection-comment-request-for-regulation-project

Business (NEW Model) 1545-0123 Published in the FRN on10/8/18. PublicComment period closedon 12/10/18.


Individual (NEW Model) 1545-0074 Limited Scope submission(1040 only) on 10/11/18at OIRA for review. FullICR submission for allforms in 3/2019. 60 DayFRN not published yetfor full collection.


III. Regulatory Flexibility Act

It is hereby certified that this notice ofproposed rulemaking will not have a sig-nificant economic impact on a substantialnumber of small entities within the mean-ing of section 601(6) of the RegulatoryFlexibility Act (5 U.S.C. chapter 6).

The small entities that are subject toproposed §§ 1.6038–2(f)(13), 1.6038–3(g)(3), and 1.6038A–2(b)(5)(iii) aresmall entities that are controlling U.S.shareholders of a CFC that is disallowed adeduction under section 267A, small en-tities that are controlling fifty-percentpartners of a foreign partnership thatmakes a payment for which a deduction isdisallowed under section 267A, and smallentities that are 25 percent foreign-owneddomestic corporations and disallowed adeduction under section 267A, respec-tively. In addition, the small entities thatare subject to proposed § 1.6038–2(f)(14)are controlling U.S. shareholders of a

CFC that pays or received a hybrid divi-dend or a tiered hybrid dividend.

A controlling U.S. shareholder of aCFC is a U.S. person that owns more than50 percent of the CFC’s stock. A control-ling fifty-percent partner is a U.S. personthat owns more than a fifty-percent inter-est in the foreign partnership. A 25 per-cent foreign-owned domestic corporationis a domestic corporation at least 25 per-cent of the stock of which is owned by aforeign person.

The Treasury Department and the IRSdo not have data readily available to as-sess the number of small entities poten-tially affected by proposed §§ 1.6038 –2(f)(13) or (14), 1.6038 –3(g)(3), or1.6038A–2(b)(5)(iii). However, entitiespotentially affected by these sections aregenerally not small businesses, becausethe resources and investment necessaryfor an entity to be a controlling U.S.shareholder, a controlling fifty-percentpartner, or a 25 percent foreign-owned

domestic corporation are generally sig-nificant. Moreover, the de minimis ex-ception under section 267A exceptsmany small entities from the applicationof section 267A for any taxable year forwhich the sum of its interest and royaltydeductions (plus interest and royalty de-ductions of certain related persons) is be-low $50,000. Therefore, the Treasury De-partment and the IRS do not believe that asubstantial number of domestic small busi-ness entities will be subject to proposed§§ 1.6038–2(f)(13) or (14), 1.6038–3(g)(3),or 1.6038A–2(b)(5)(iii). Accordingly, theTreasury Department and the IRS do notbelieve that proposed §§ 1.6038–2(f)(13)or (14), 1.6038–3(g)(3), or 1.6038A–2(b)(5)(iii) will have a significant economicimpact on a substantial number of smallentities. Therefore, a Regulatory FlexibilityAnalysis under the Regulatory FlexibilityAct is not required.

The Treasury Department and the IRSdo not believe that the proposed regulations


have a significant economic impact on do-mestic small business entities. Based onpublished information from 2012 from form5472, interest and royalty amounts paid torelated foreign entities by foreign-ownedU.S. corporations over total receipts is1.6 percent. (https://www.irs.gov/statistics/soi-tax-stats-transactions-of-foreign-owned-domestic-corporations#_2, Classified by In-dustry 2012) This is substantially less thanthe 3 to 5 percent threshold for significanteconomic impact. The calculated percentageis likely to be an upper bound of the relatedparty payments affected by the proposedhybrid regulations. In particular, this is theratio of the potential income affected andnot the tax revenues, which would be lessthan half this amount. While 1.6 percent isonly for foreign-owned domestic corpora-tions with total receipts of $500 million ormore, these are entities that are more likelyto have related party payments and so thepercentage would be higher. Moreover, hy-brid arrangements are only a subset of theserelated party payments; therefore this per-centage is higher than what it would be ifonly considering hybrid arrangements.

Notwithstanding this certification, Trea-sury and IRS invite comments about theimpact this proposal may have on smallentities.

Pursuant to section 7805(f) of theCode, this notice of proposed rulemakinghas been submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business.

Comments and Requests for a PublicHearing

Before the proposed regulations are ad-opted as final regulations, considerationwill be given to any comments that aresubmitted timely to the IRS as prescribed inthis preamble under the “ADDRESSES”heading. The Treasury Department and theIRS request comments on all aspects of theproposed rules. All comments will be avail-able at www.regulations.gov or upon re-quest. A public hearing will be scheduled ifrequested in writing by any person thattimely submits written comments. If a pub-lic hearing is scheduled, notice of the date,time, and place for the public hearing will bepublished in the Federal Register.

Drafting Information

The principal authors of the proposedregulations are Shane M. McCarrick andTracy M. Villecco of the Office of Asso-ciate Chief Counsel (International). How-ever, other personnel from the TreasuryDepartment and the IRS participated inthe development of the proposed regula-tions.

Income taxes, Reporting and record-keeping requirements.

26 CFR Part 301

Employment taxes, Estate taxes, Ex-cise taxes, Gift taxes, Income taxes, Pen-alties, Reporting and recordkeeping re-quirements.

Proposed Amendments to theRegulations

Accordingly, 26 CFR parts 1 and 301are proposed to be amended as follows:

PART 1–INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by adding sectionalauthorities for §§ 1.245A(e)–1 and1.267A–1 through 1.267A–7 in numericalorder and revising the entry for§ 1.6038A–2 to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.245A(e)–1 also issued under

26 U.S.C. 245A(g).* * * * *

Sections 1.267A–1 through 1.267A–7also issued under 26 U.S.C. 267A(e).* * * * *

Section 1.6038A–2 also issued under26 U.S.C. 6038A and 6038C.* * * * *

Par. 2. Section 1.245A(e)–1 is added toread as follows:

§ 1.245A(e)–1 Special rules for hybriddividends.

(a) Overview. This section providesrules for hybrid dividends. Paragraph (b)of this section disallows the deduction un-der section 245A(a) for a hybrid dividendreceived by a United States shareholderfrom a CFC. Paragraph (c) of this sectionprovides a rule for hybrid dividends oftiered corporations. Paragraph (d) of thissection sets forth rules regarding a hybrid

deduction account. Paragraph (e) of thissection provides an anti-avoidance rule.Paragraph (f) of this section provides def-initions. Paragraph (g) of this section il-lustrates the application of the rules of thissection through examples. Paragraph (h)of this section provides the applicabilitydate.

(b) Hybrid dividends received byUnited States shareholders–(1) In gen-eral. If a United States shareholder re-ceives a hybrid dividend, then–

(i) The United States shareholder is notallowed a deduction under section 245A(a)for the hybrid dividend; and

(ii) The rules of section 245A(d) (dis-allowance of foreign tax credits and de-ductions) apply to the hybrid dividend.

(2) Definition of hybrid dividend. Theterm hybrid dividend means an amountreceived by a United States shareholderfrom a CFC for which but for section245A(e) and this section the United Statesshareholder would be allowed a deductionunder section 245A(a), to the extent of thesum of the United States shareholder’shybrid deduction accounts (as describedin paragraph (d) of this section) with re-spect to each share of stock of the CFC,determined at the close of the CFC’s tax-able year (or in accordance with para-graph (d)(5) of this section, as applicable).No other amount received by a UnitedStates shareholder from a CFC is a hybriddividend for purposes of section 245A.

(3) Special rule for certain dividendsattributable to earnings of lower-tier for-eign corporations. This paragraph (b)(3)applies if a domestic corporation sells orexchanges stock of a foreign corporationand, pursuant to section 1248, the gainrecognized on the sale or exchange is in-cluded in gross income as a dividend. Insuch a case, for purposes of this section–

(i) To the extent that earnings and prof-its of a lower-tier CFC gave rise to thedividend under section 1248(c)(2), thoseearnings and profits are treated as distrib-uted as a dividend by the lower-tier CFCdirectly to the domestic corporation underthe principles of § 1.1248–1(d); and

(ii) To the extent the domestic corpo-ration indirectly owns (within the mean-ing of section 958(a)(2)) shares of stock ofthe lower-tier CFC, the hybrid deductionaccounts with respect to those shares aretreated as hybrid deduction accounts of


the domestic corporation. Thus, for exam-ple, if a domestic corporation sells or ex-changes all the stock of an upper-tier CFCand under this paragraph (b)(3) there isconsidered to be a dividend paid directlyby the lower-tier CFC to the domesticcorporation, then the dividend is generallya hybrid dividend to the extent of the sumof the upper-tier CFC’s hybrid deductionaccounts with respect to stock of thelower-tier CFC.

(4) Ordering rule. Amounts receivedby a United States shareholder from aCFC are subject to the rules of section245A(e) and this section based on theorder in which they are received. Thus, forexample, if on different days during aCFC’s taxable year a United States share-holder receives dividends from the CFC,then the rules of section 245A(e) and thissection apply first to the dividend receivedon the earliest date (based on the sum ofthe United States shareholder’s hybrid de-duction accounts with respect to eachshare of stock of the CFC), and then to thedividend received on the next earliest date(based on the remaining sum).

(c) Hybrid dividends of tiered corpora-tions–(1) In general. If a CFC (the receiv-ing CFC) receives a tiered hybrid divi-dend from another CFC, and a domesticcorporation is a United States shareholderwith respect to both CFCs, then, notwith-standing any other provision of the Code–

(i) The tiered hybrid dividend is treatedfor purposes of section 951(a)(1)(A) assubpart F income of the receiving CFC forthe taxable year of the CFC in which thetiered hybrid dividend is received;

(ii) The United States shareholder mustinclude in gross income an amount equalto its pro rata share (determined in thesame manner as under section 951(a)(2))of the subpart F income described in para-graph (c)(1)(i) of this section; and

(iii) The rules of section 245A(d) (dis-allowance of foreign tax credit, includingfor taxes that would have been deemedpaid under section 960(a) or (b), and de-ductions) apply to the amount includedunder paragraph (c)(1)(ii) of this sectionin the United States shareholder’s grossincome.

(2) Definition of tiered hybrid dividend.The term tiered hybrid dividend means anamount received by a receiving CFC fromanother CFC to the extent that the amount

would be a hybrid dividend under para-graph (b)(2) of this section if, for purposesof section 245A and the regulations undersection 245A as contained in 26 CFR part1 (except for section 245A(e)(2) and thisparagraph (c)), the receiving CFC were adomestic corporation. A tiered hybrid div-idend does not include an amount de-scribed in section 959(b). No otheramount received by a receiving CFC fromanother CFC is a tiered hybrid dividendfor purposes of section 245A.

(3) Special rule for certain dividendsattributable to earnings of lower-tier for-eign corporations. This paragraph (c)(3)applies if a CFC sells or exchanges stockof a foreign corporation and pursuant tosection 964(e)(1) the gain recognized onthe sale or exchange is included in grossincome as a dividend. In such a case, rulessimilar to the rules of paragraph (b)(3) ofthis section apply.

(4) Interaction with rules under section964(e). To the extent a dividend describedin section 964(e)(1) (gain on certain stocksales by CFCs treated as dividends) is atiered hybrid dividend, the rules of section964(e)(4) do not apply and, therefore, theUnited States shareholder is not allowed adeduction under section 245A(a) for theamount included in gross income underparagraph (c)(1)(ii) of this section.

(d) Hybrid deduction accounts–(1) Ingeneral. A specified owner of a share ofCFC stock must maintain a hybrid deduc-tion account with respect to the share. Thehybrid deduction account with respect tothe share must reflect the amount of hy-brid deductions of the CFC allocated tothe share (as determined under paragraphs(d)(2) and (3) of this section), and must bemaintained in accordance with the rules ofparagraphs (d)(4) through (6) of this sec-tion.

(2) Hybrid deductions–(i) In general.The term hybrid deduction of a CFCmeans a deduction or other tax benefit(such as an exemption, exclusion, orcredit, to the extent equivalent to a deduc-tion) for which the requirements of para-graphs (d)(2)(i)(A) and (B) of this sectionare both satisfied.

(A) The deduction or other tax benefitis allowed to the CFC (or a person relatedto the CFC) under a relevant foreign taxlaw.

(B) The deduction or other tax benefitrelates to or results from an amount paid,accrued, or distributed with respect to aninstrument issued by the CFC and treatedas stock for U.S. tax purposes. Examplesof such a deduction or other tax benefitinclude an interest deduction, a dividendspaid deduction, and a deduction with re-spect to equity (such as a notional interestdeduction). See paragraph (g)(1) of thissection. However, a deduction or other taxbenefit relating to or resulting from a dis-tribution by the CFC with respect to aninstrument treated as stock for purposes ofthe relevant foreign tax law is considereda hybrid deduction only to the extent it hasthe effect of causing the earnings thatfunded the distribution to not be includedin income (determined under the princi-ples of § 1.267A–3(a)) or otherwise sub-ject to tax under the CFC’s tax law. Thus,for example, a refund to a shareholder ofa CFC (including through a credit), upon adistribution by the CFC to the share-holder, of taxes paid by the CFC on theearnings that funded the distribution re-sults in a hybrid deduction of the CFC, butonly to the extent that the shareholder, if atax resident of the CFC’s country, doesnot include the distribution in income un-der the CFC’s tax law or, if not a taxresident of the CFC’s country, is not sub-ject to withholding tax (as defined in sec-tion 901(k)(1)(B)) on the distribution un-der the CFC’s tax law. See paragraph(g)(2) of this section.

(ii) Application limited to items al-lowed in taxable years beginning afterDecember 31, 2017. A deduction or othertax benefit allowed to a CFC (or a personrelated to the CFC) under a relevant for-eign tax law is taken into account forpurposes of this section only if it wasallowed with respect to a taxable yearunder the relevant foreign tax law begin-ning after December 31, 2017.

(3) Allocating hybrid deductions toshares. A hybrid deduction is allocated toa share of stock of a CFC to the extent thatthe hybrid deduction (or amount equiva-lent to a deduction) relates to an amountpaid, accrued, or distributed by the CFCwith respect to the share. However, in thecase of a hybrid deduction that is a deduc-tion with respect to equity (such as a no-tional interest deduction), the deduction is


allocated to a share of stock of a CFCbased on the product of–

(i) The amount of the deduction al-lowed for all of the equity of the CFC; and

(ii) A fraction, the numerator of whichis the value of the share and the denomi-nator of which is the value of all of thestock of the CFC.

(4) Maintenance of hybrid deductionaccounts–(i) In general. A specified own-er’s hybrid deduction account with respectto a share of stock of a CFC is, as of theclose of the taxable year of the CFC, ad-justed pursuant to the following rules.

(A) First, the account is increased bythe amount of hybrid deductions of theCFC allocable to the share for the taxableyear.

(B) Second, the account is decreasedby the amount of hybrid deductions in theaccount that gave rise to a hybrid dividendor tiered hybrid dividend during the tax-able year. If a specified owner has morethan one hybrid deduction account withrespect to its stock of the CFC, then a prorata amount in each hybrid deduction ac-count is considered to have given rise tothe hybrid dividend or tiered hybrid divi-dend, based on the amounts in the ac-counts before applying this paragraph(d)(4)(i)(B).

(ii) Acquisition of account–(A) In gen-eral. The following rules apply when aperson (the acquirer) acquires a share ofstock of a CFC from another person (thetransferor).

(1) In the case of an acquirer that is aspecified owner of the share immediatelyafter the acquisition, the transferor’s hy-brid deduction account, if any, with re-spect to the share becomes the hybrid de-duction account of the acquirer.

(2) In the case of an acquirer that is nota specified owner of the share immedi-ately after the acquisition, the transferor’shybrid deduction account, if any, is elim-inated and accordingly is not thereaftertaken into account by any person.

(B) Additional rules. The followingrules apply in addition to the rules ofparagraph (d)(4)(ii)(A) of this section.

(1) Certain section 354 or 356 ex-changes. The following rules apply whena shareholder of a CFC (the CFC, thetarget CFC; the shareholder, the exchang-ing shareholder) exchanges stock of thetarget CFC for stock of another CFC (the

acquiring CFC) pursuant to an exchangedescribed in section 354 or 356 that oc-curs in connection with a transaction de-scribed in section 381(a)(2) in which thetarget CFC is the transferor corporation.

(i) In the case of an exchanging share-holder that is a specified owner of one ormore shares of stock of the acquiring CFCimmediately after the exchange, the ex-changing shareholder’s hybrid deductionaccounts with respect to the shares ofstock of the target CFC that it exchangesare attributed to the shares of stock of theacquiring CFC that it receives in the ex-change.

(ii) In the case of an exchanging share-holder that is not a specified owner of oneor more shares of stock of the acquiringCFC immediately after the exchange, theexchanging shareholder’s hybrid deduc-tion accounts with respect to its shares ofstock of the target CFC are eliminated andaccordingly are not thereafter taken intoaccount by any person.

(2) Section 332 liquidations. If a CFCis a distributor corporation in a transactiondescribed in section 381(a)(1) (the distrib-uting CFC) in which a controlled foreigncorporation is the acquiring corporation(the distributee CFC), then each hybridaccount with respect to a share of stock ofthe distributee CFC is increased pro rataby the sum of the hybrid accounts withrespect to shares of stock of the distribut-ing CFC.

(3) Recapitalizations. If a shareholderof a CFC exchanges stock of the CFCpursuant to a reorganization described insection 368(a)(1)(E) or a transaction towhich section 1036 applies, then theshareholder’s hybrid deduction accountswith respect to the stock of the CFC that itexchanges are attributed to the shares ofstock of the CFC that it receives in theexchange.

(5) Determinations and adjustmentsmade on transfer date in certain cases.This paragraph (d)(5) applies if on a dateother than the date that is the last day ofthe CFC’s taxable year a United Statesshareholder of the CFC or an upper-tierCFC with respect to the CFC directly orindirectly transfers a share of stock of theCFC, and, during the taxable year, but onor before the transfer date, the UnitedStates shareholder or upper-tier CFC re-ceives an amount from the CFC that is

subject to the rules of section 245A(e) andthis section. In such a case, as to theUnited States shareholder or upper-tierCFC and the United States shareholder’sor upper-tier CFC’s hybrid deduction ac-counts with respect to each share of stockof the CFC (regardless of whether suchshare is transferred), the determinationsand adjustments under this section thatwould otherwise be made at the close ofthe CFC’s taxable year are made at theclose of the date of the transfer. Thus, forexample, if a United States shareholder ofa CFC exchanges stock of the CFC in anexchange described in § 1.367(b)–4(b)(1)(i) and is required to include inincome as a deemed dividend the section1248 amount attributable to the stock ex-changed, the sum of the United Statesshareholder’s hybrid deduction accountswith respect to each share of stock of theCFC is determined, and the accounts areadjusted, as of the close of the date of theexchange. For this purpose, the principlesof § 1.1502–76(b)(2)(ii) apply to deter-mine amounts in hybrid deduction ac-counts at the close of the date of thetransfer.

(6) Effects of CFC functional curren-cy–(i) Maintenance of the hybrid deduc-tion account. A hybrid deduction accountwith respect to a share of CFC stock mustbe maintained in the functional currency(within the meaning of section 985) of theCFC. Thus, for example, the amount of ahybrid deduction and the adjustments de-scribed in paragraphs (d)(4)(i)(A) and (B)of this section are determined based on thefunctional currency of the CFC. In addi-tion, for purposes of this section, theamount of a deduction or other tax benefitallowed to a CFC (or a person related tothe CFC) is determined taking into ac-count foreign currency gain or loss recog-nized with respect to such deduction orother tax benefit under a provision of for-eign tax law comparable to section 988(treatment of certain foreign currencytransactions).

(ii) Determination of amount of hybriddividend. This paragraph (d)(6)(ii) appliesif a CFC’s functional currency is otherthan the functional currency of a UnitedStates shareholder or upper-tier CFC thatreceives an amount from the CFC that issubject to the rules of section 245A(e) andthis section. In such a case, the sum of the


United States shareholder’s or upper-tierCFC’s hybrid deduction accounts with re-spect to each share of stock of the CFC is,for purposes of determining the extent thata dividend is a hybrid dividend or tieredhybrid dividend, translated into the func-tional currency of the United States share-holder or upper-tier CFC based on thespot rate (within the meaning of § 1.988–1(d)) as of the date of the dividend.

(e) Anti-avoidance rule. Appropriateadjustments are made pursuant to this sec-tion, including adjustments that woulddisregard the transaction or arrangement,if a transaction or arrangement is under-taken with a principal purpose of avoidingthe purposes of this section. For example,if a specified owner of a share of CFCstock transfers the share to another person,and a principal purpose of the transfer isto shift the hybrid deduction account withrespect to the share to the other person orto cause the hybrid deduction account tobe eliminated, then for purposes of thissection the shifting or elimination of thehybrid deduction account is disregarded asto the transferor. As another example, if atransaction or arrangement is undertaken toaffirmatively fail to satisfy the holding pe-riod requirement under section 246(c)(5)with a principal purpose of avoiding thetiered hybrid dividend rules described inparagraph (c) of this section, the transactionor arrangement is disregarded for purposesof this section.

(f) Definitions. The following defini-tions apply for purposes of this section.

(1) The term controlled foreign corpo-ration (or CFC) has the meaning providedin section 957.

(2) The term person has the meaningprovided in section 7701(a)(1).

(3) The term related has the meaningprovided in this paragraph (f)(3). A personis related to a CFC if the person is arelated person within the meaning of sec-tion 954(d)(3).

(4) The term relevant foreign tax lawmeans, with respect to a CFC, any regimeof any foreign country or possession ofthe United States that imposes an income,war profits, or excess profits tax with re-spect to income of the CFC, other than aforeign anti-deferral regime under which aperson that owns an interest in the CFC isliable to tax. Thus, the term includes anyregime of a foreign country or possession

of the United States that imposes income,war profits, or excess profits tax underwhich–

(i) The CFC is liable to tax as a resi-dent;

(ii) The CFC has a branch that givesrise to a taxable presence in the foreigncountry or possession of the UnitedStates; or

(iii) A person related to the CFC isliable to tax as a resident, provided thatunder such person’s tax law the person isallowed a deduction for amounts paid oraccrued by the CFC (because, for exam-ple, the CFC is fiscally transparent underthe person’s tax law).

(5) The term specified owner means,with respect to a share of stock of a CFC,a person for which the requirements ofparagraphs (f)(5)(i) and (ii) of this sectionare satisfied.

(i) The person is a domestic corpora-tion that is a United States shareholder ofthe CFC, or is an upper-tier CFC thatwould be a United States shareholder ofthe CFC were the upper-tier CFC a do-mestic corporation.

(ii) The person owns the share directlyor indirectly through a partnership, trust,or estate. Thus, for example, if a domesticcorporation directly owns all the shares ofstock of an upper-tier CFC and the upper-tier CFC directly owns all the shares ofstock of another CFC, the domestic cor-poration is the specified owner with re-spect to each share of stock of the upper-tier CFC and the upper-tier CFC is thespecified owner with respect to each shareof stock of the other CFC.

(6) The term United States shareholderhas the meaning provided in section951(b).

(g) Examples. This paragraph (g) pro-vides examples that illustrate the applica-tion of this section. For purposes of theexamples in this paragraph (g), unless oth-erwise indicated, the following facts arepresumed. US1 is a domestic corporation.FX and FZ are CFCs formed at the begin-ning of year 1. FX is a tax resident ofCountry X and FZ is a tax resident ofCountry Z. US1 is a United States share-holder with respect to FX and FZ. Nodistributed amounts are attributable toamounts which are, or have been, in-cluded in the gross income of a UnitedStates shareholder under section 951(a).

All instruments are treated as stock forU.S. tax purposes.

(1) Example 1. Hybrid dividend resulting fromhybrid instrument–(i) Facts. US1 holds both sharesof stock of FX, which have an equal value. Oneshare is treated as indebtedness for Country X taxpurposes (“Share A”), and the other is treated asequity for Country X tax purposes (“Share B”).During year 1, under Country X tax law, FX accrues$80x of interest to US1 with respect to Share A andis allowed a deduction for the amount (the “HybridInstrument Deduction”). During year 2, FX distrib-utes $30x to US1 with respect to each of Share A andShare B. For U.S. tax purposes, each of the $30xdistributions is treated as a dividend for which, butfor section 245A(e) and this section, US1 would beallowed a deduction under section 245A(a). ForCountry X tax purposes, the $30x distribution withrespect to Share A represents a payment of interestfor which a deduction was already allowed (and thusFX is not allowed an additional deduction for theamount), and the $30x distribution with respect toShare B is treated as a dividend (for which nodeduction is allowed).

(ii) Analysis. The entire $30x of each dividendreceived by US1 from FX during year 2 is a hybriddividend, because the sum of US1’s hybrid deduc-tion accounts with respect to each of its shares of FXstock at the end of year 2 ($80x) is at least equal tothe amount of the dividends ($60x). See paragraph(b)(2) of this section. This is the case for the $30xdividend with respect to Share B even though thereare no hybrid deductions allocated to Share B. Seeid. As a result, US1 is not allowed a deduction undersection 245A(a) for the entire $60x of hybrid divi-dends and the rules of section 245A(d) (disallowanceof foreign tax credits and deductions) apply. Seeparagraph (b)(1) of this section. Paragraphs(g)(1)(ii)(A) through (D) of this section describe thedeterminations under this section.

(A) At the end of year 1, US1’s hybrid deductionaccounts with respect to Share A and Share B are$80x and $0, respectively, calculated as follows.

(1) The $80x Hybrid Instrument Deduction al-lowed to FX under Country X tax law (a relevantforeign tax law) is a hybrid deduction of FX, becausethe deduction is allowed to FX and relates to orresults from an amount accrued with respect to aninstrument issued by FX and treated as stock for U.S.tax purposes. See paragraph (d)(2)(i) of this section.Thus, FX’s hybrid deductions for year 1 are $80x.

(2) The entire $80x Hybrid Instrument Deduc-tion is allocated to Share A, because the deductionwas accrued with respect to Share A. See paragraph(d)(3) of this section. As there are no additionalhybrid deductions of FX for year 1, there are noadditional hybrid deductions to allocate to eitherShare A or Share B. Thus, there are no hybriddeductions allocated to Share B.

(3) At the end of year 1, US1’s hybrid deductionaccount with respect to Share A is increased by $80x(the amount of hybrid deductions allocated to ShareA). See paragraph (d)(4)(i)(A) of this section. Be-cause FX did not pay any dividends with respect toeither Share A or Share B during year 1 (and there-fore did not pay any hybrid dividends or tieredhybrid dividends), no further adjustments are made.See paragraph (d)(4)(i)(B) of this section. Therefore,


at the end of year 1, US1’s hybrid deduction ac-counts with respect to Share A and Share B are $80xand $0, respectively.

(B) At the end of year 2, and before the adjust-ments described in paragraph (d)(4)(i)(B) of thissection, US1’s hybrid deduction accounts with re-spect to Share A and Share B remain $80x and $0,respectively. This is because there are no hybriddeductions of FX for year 2. See paragraph(d)(4)(i)(A) of this section.

(C) Because at the end of year 2 (and before theadjustments described in paragraph (d)(4)(i)(B) ofthis section) the sum of US1’s hybrid deductionaccounts with respect to Share A and Share B ($80x,calculated as $80x plus $0) is at least equal to theaggregate $60x of year 2 dividends, the entire $60xdividend is a hybrid dividend. See paragraph (b)(2)of this section.

(D) At the end of year 2, US1’s hybrid deductionaccount with respect to Share A is decreased by$60x, the amount of the hybrid deductions in theaccount that gave rise to a hybrid dividend or tieredhybrid dividend during year 2. See paragraph(d)(4)(i)(B) of this section. Because there are nohybrid deductions in the hybrid deduction accountwith respect to Share B, no adjustments with respectto that account are made under paragraph(d)(4)(i)(B) of this section. Therefore, at the end ofyear 2 and taking into account the adjustments underparagraph (d)(4)(i)(B) of this section, US1’s hybriddeduction account with respect to Share A is $20x($80x less $60x) and with respect to Share B is $0.

(iii) Alternative facts – notional interest deduc-tions. The facts are the same as in paragraph (g)(1)(i)of this section, except that for each of year 1 and year2 FX is allowed $10x of notional interest deductionswith respect to its equity, Share B, under Country Xtax law (the “NIDs”). In addition, during year 2, FXdistributes $47.5x (rather than $30x) to US1 withrespect to each of Share A and Share B. For U.S. taxpurposes, each of the $47.5x distributions is treatedas a dividend for which, but for section 245A(e) andthis section, US1 would be allowed a deductionunder section 245A(a). For Country X tax purposes,the $47.5x distribution with respect to Share A rep-resents a payment of interest for which a deductionwas already allowed (and thus FX is not allowed anadditional deduction for the amount), and the $47.5xdistribution with respect to Share B is treated as adividend (for which no deduction is allowed). Theentire $47.5x of each dividend received by US1 fromFX during year 2 is a hybrid dividend, because thesum of US1’s hybrid deduction accounts with re-spect to each of its shares of FX stock at the end ofyear 2 ($80x plus $20x, or $100x) is at least equal tothe amount of the dividends ($95x). See paragraph(b)(2) of this section. As a result, US1 is not alloweda deduction under section 245A(a) for the $95xhybrid dividend and the rules of section 245A(d)(disallowance of foreign tax credits and deductions)apply. See paragraph (b)(1) of this section. Para-graphs (g)(1)(iii)(A) through (D) of this section de-scribe the determinations under this section.

(A) The $10x of NIDs allowed to FX underCountry X tax law in year 1 are hybrid deductions ofFX for year 1. See paragraph (d)(2)(i) of this section.The $10x of NIDs is allocated equally to each ofShare A and Share B, because the hybrid deduction

is with respect to equity and the shares have an equalvalue. See paragraph (d)(3) of this section. Thus, $5xof the NIDs is allocated to each of Share A and ShareB for year 1. For the reasons described in paragraph(g)(1)(ii)(A) of this section, the entire $80x HybridInstrument Deduction is allocated to Share A. There-fore, at the end of year 1, US1’s hybrid deductionaccounts with respect to Share A and Share B are$85x and $5x, respectively.

(B) Similarly, the $10x of NIDs allowed to FXunder Country X tax law in year 2 are hybrid deduc-tions of FX for year 2, and $5x of the NIDs isallocated to each of Share A and Share B for year 2.See paragraphs (d)(2)(i) and (d)(3) of this section.Thus, at the end of year 2 (and before the adjust-ments described in paragraph (d)(4)(i)(B) of thissection), US1’s hybrid deduction account with re-spect to Share A is $90x ($85x plus $5x) and withrespect to Share B is $10x ($5x plus $5x). Seeparagraph (d)(4)(i) of this section.

(C) Because at the end of year 2 (and before theadjustments described in paragraph (d)(4)(i)(B) ofthis section) the sum of US1’s hybrid deductionaccounts with respect to Share A and Share B($100x, calculated as $90x plus $10x) is at leastequal to the aggregate $95x of year 2 dividends, theentire $95x of dividends are hybrid dividends. Seeparagraph (b)(2) of this section.

(D) At the end of year 2, US1’s hybrid deductionaccounts with respect to Share A and Share B aredecreased by the amount of hybrid deductions in theaccounts that gave rise to a hybrid dividend or tieredhybrid dividend during year 2. See paragraph(d)(4)(i)(B) of this section. A total of $95x of hybriddeductions in the accounts gave rise to a hybriddividend during year 2. For the hybrid deductionaccount with respect to Share A, $85.5x in the ac-count is considered to have given rise to a hybriddeduction (calculated as $95x multiplied by $90x/$100x). See id. For the hybrid deduction accountwith respect to Share B, $9.5x in the account isconsidered to have given rise to a hybrid deduction(calculated as $95x multiplied by $10x/$100x). Seeid. Thus, following these adjustments, at the end ofyear 2, US1’s hybrid deduction account with respectto Share A is $4.5x ($90x less $85.5x) and withrespect to Share B is $0.5x ($10x less $9.5x).

(iv) Alternative facts – deduction in branchcountry–(A) Facts. The facts are the same as inparagraph (g)(1)(i) of this section, except that forCountry X tax purposes Share A is treated as equity(and thus the Hybrid Instrument Deduction does notexist and under Country X tax law FX is not alloweda deduction for the $30x distributed in year 2 withrespect to Share A). However, FX has a branch inCountry Z that gives rise to a taxable presence underCountry Z tax law, and for Country Z tax purposesShare A is treated as indebtedness and Share B istreated as equity. Also, during year 1, for Country Ztax purposes, FX accrues $80x of interest to US1with respect to Share A and is allowed an $80xinterest deduction with respect to its Country Zbranch income. Moreover, for Country Z tax pur-poses, the $30x distribution with respect to Share Ain year 2 represents a payment of interest for whicha deduction was already allowed (and thus FX is notallowed an additional deduction for the amount), andthe $30x distribution with respect to Share B in year

2 is treated as a dividend (for which no deduction isallowed).

(B) Analysis. The $80x interest deduction al-lowed to FX under Country Z tax law (a relevantforeign tax law) with respect to its Country Z branchincome is a hybrid deduction of FX for year 1. Seeparagraphs (d)(2)(i) and (f)(4) of this section. Forreasons similar to those discussed in paragraph(g)(1)(ii) of this section, at the end of year 2 (andbefore the adjustments described in paragraph(d)(4)(i)(B) of this section), US1’s hybrid deductionaccounts with respect to Share A and Share B are$80x and $0, respectively, and the sum of the ac-counts is $80x. Accordingly, the entire $60x of theyear 2 dividend is a hybrid dividend. See paragraph(b)(2) of this section. Further, for the reasons de-scribed in paragraph (g)(1)(ii)(D) of this section, atthe end of year 2 and taking into account the adjust-ments under paragraph (d)(4)(i)(B) of this section,US1’s hybrid deduction account with respect toShare A is $20x ($80x less $60x) and with respect toShare B is $0.

(2) Example 2. Tiered hybrid dividend rule; taxbenefit equivalent to a deduction–(i) Facts. US1holds all the stock of FX, and FX holds all 100shares of stock of FZ (the “FZ shares”), which havean equal value. The FZ shares are treated as equityfor Country Z tax purposes. During year 2, FZ dis-tributes $10x to FX with respect to each of the FZshares, for a total of $1,000x. The $1,000x is treatedas a dividend for U.S. and Country Z tax purposes,and is not deductible for Country Z tax purposes. IfFX were a domestic corporation, then, but for sec-tion 245A(e) and this section, FX would be alloweda deduction under section 245A(a) for the $1,000x.Under Country Z tax law, 75% of the corporateincome tax paid by a Country Z corporation withrespect to a dividend distribution is refunded to thecorporation’s shareholders (regardless of where suchshareholders are tax residents) upon a dividend dis-tribution by the corporation. The corporate tax rate inCountry Z is 20%. With respect to FZ’s distribu-tions, FX is allowed a refundable tax credit of$187.5x. The $187.5x refundable tax credit is calcu-lated as $1,250x (the amount of pre-tax earnings thatfunded the distribution, determined as $1,000x (theamount of the distribution) divided by 0.8 (the per-centage of pre-tax earnings that a Country Z corpo-ration retains after paying Country Z corporate tax))multiplied by 0.2 (the Country Z corporate tax rate)multiplied by 0.75 (the percentage of the Country Ztax credit). Under Country Z tax law, FX is notsubject to Country Z withholding tax (or any othertax) with respect to the $1,000x dividend distribu-tion.

(ii) Analysis. $937.5x of the $1,000x of divi-dends received by FX from FZ during year 2 is atiered hybrid dividend, because the sum of FX’shybrid deduction accounts with respect to each of itsshares of FZ stock at the end of year 2 is $937.5x.See paragraphs (b)(2) and (c)(2) of this section. As aresult, the $937.5x tiered hybrid dividend is treatedfor purposes of section 951(a)(1)(A) as subpart Fincome of FX and US1 must include in gross incomeits pro rata share of such subpart F income, which is$937.5x. See paragraph (c)(1) of this section. Inaddition, the rules of section 245A(d) (disallowanceof foreign tax credits and deductions) apply with


respect to US1’s inclusion. Id. Paragraphs(g)(2)(ii)(A) through (C) of this section describe thedeterminations under this section. The characteriza-tion of the FZ stock for Country X tax purposes (orfor purposes of any other foreign tax law) does notaffect this analysis.

(A) The $187.5x refundable tax credit allowed toFX under Country Z tax law (a relevant foreign taxlaw) is equivalent to a $937.5x deduction, calculatedas $187.5x (the amount of the credit) divided by 0.2(the Country Z corporate tax rate). The $937.5x is ahybrid deduction of FZ because it is allowed to FX(a person related to FZ), it relates to or results fromamounts distributed with respect to instruments is-sued by FZ and treated as stock for U.S. tax pur-poses, and it has the effect of causing the earningsthat funded the distributions to not be included inincome under Country Z tax law. See paragraph(d)(2)(i) of this section. $9.375x of the hybrid de-duction is allocated to each of the FZ shares, calcu-lated as $937.5x (the amount of the hybrid deduc-tion) multiplied by 1/100 (the value of each FZ sharerelative to the value of all the FZ shares). See para-graph (d)(3) of this section. The result would be thesame if FX were instead a tax resident of Country Z(and not Country X) and under Country Z tax lawFX were to not include the $1,000x in income (be-cause, for example, Country Z tax law providesCountry Z resident corporations a 100% exclusion ordividends received deduction with respect to divi-dends received from a resident corporation). Seeparagraph (d)(2)(i) of this section.

(B) Thus, at the end of year 2, and before theadjustments described in paragraph (d)(4)(i)(B) ofthis section, the sum of FX’s hybrid deduction ac-counts with respect to each of its shares of FZ stockis $937.5x, calculated as $9.375x (the amount ineach account) multiplied by 100 (the number ofaccounts). See paragraph (d)(4)(i) of this section.Accordingly, $937.5x of the $1,000x dividend re-ceived by FX from FZ during year 2 is a tieredhybrid dividend. See paragraphs (b)(2) and (c)(2) ofthis section.

(C) Lastly, at the end of year 2, each of FX’shybrid deduction accounts with respect to its sharesof FZ is decreased by the $9.375x in the account thatgave rise to a hybrid dividend or tiered hybrid div-idend during year 2. See paragraph (d)(4)(i)(B) ofthis section. Thus, following these adjustments, atthe end of year 2, each of FX’s hybrid deductionaccounts with respect to its shares of FZ stock is $0,calculated as $9.375x (the amount in the accountbefore the adjustments described in paragraph(d)(4)(i)(B) of this section) less $9.375x (the adjust-ment described in paragraph (d)(4)(i)(B) of this sec-tion with respect to the account).

(iii) Alternative facts – imputation system thattaxes shareholders. The facts are the same as inparagraph (g)(2)(i) of this section, except that underCountry Z tax law the $1,000 dividend to FX issubject to a 30% gross basis withholding tax, or$300x, and the $187.5x refundable tax credit is ap-plied against and reduces the withholding tax to$112.5x. The $187.5x refundable tax credit providedto FX is not a hybrid deduction because FX wassubject to Country Z withholding tax of $300x on the$1,000x dividend (such withholding tax being

greater than the $187.5x credit). See paragraph(d)(2)(i) of this section.

(h) Applicability date. This section ap-plies to distributions made after December31, 2017.

Par. 3. Sections 1.267A–1 through1.267A–7 are added to read as follows:

§ 1.267A–1 Disallowance of certaininterest and royalty deductions.

(a) Scope. This section and §§ 1.267A–2through 1.267A–5 provide rules regardingwhen a deduction for any interest or royaltypaid or accrued is disallowed under section267A. Section 1.267A–2 describes hybridand branch arrangements. Section 1.267A–3provides rules for determining income in-clusions and provides that certain amountsare not amounts for which a deduction isdisallowed. Section 1.267A–4 provides animported mismatch rule. Section 1.267A–5sets forth definitions and special rules thatapply for purposes of section 267A. Section1.267A–6 illustrates the application of sec-tion 267A through examples. Section1.267A–7 provides applicability dates.

(b) Disallowance of deduction. Thisparagraph (b) sets forth the exclusive cir-cumstances in which a deduction is disal-lowed under section 267A. Except as pro-vided in paragraph (c) of this section, aspecified party’s deduction for any inter-est or royalty paid or accrued (the amountpaid or accrued with respect to the speci-fied party, a specified payment) is disal-lowed under section 267A to the extentthat the specified payment is described inthis paragraph (b). See also § 1.267A–5(b)(5) (treating structured payments asspecified payments). A specified paymentis described in this paragraph (b) to theextent that it is–

(1) A disqualified hybrid amount, asdescribed in § 1.267A–2 (hybrid andbranch arrangements);

(2) A disqualified imported mismatchamount, as described in § 1.267A–4 (pay-ments offset by a hybrid deduction); or

(3) A specified payment for which therequirements of the anti-avoidance rule of§ 1.267A–5(b)(6) are satisfied.

(c) De minimis exception. Paragraph(b) of this section does not apply to aspecified party for a taxable year in whichthe sum of the specified party’s interestand royalty deductions (determined with-out regard to this section) is less than

$50,000. For purposes of this paragraph(c), specified parties that are related(within the meaning of § 1.267A–5(a)(14)) are treated as a single specifiedparty.

§ 1.267A–2 Hybrid and brancharrangements.

(a) Payments pursuant to hybrid trans-actions–(1) In general. If a specified pay-ment is made pursuant to a hybrid trans-action, then, subject to § 1.267A–3(b)(amounts included or includible in in-come), the payment is a disqualified hy-brid amount to the extent that–

(i) A specified recipient of the paymentdoes not include the payment in income,as determined under § 1.267A–3(a) (tosuch extent, a no-inclusion); and

(ii) The specified recipient’s no-inclusion is a result of the payment beingmade pursuant to the hybrid transaction. Forthis purpose, the specified recipient’s no-inclusion is a result of the specified paymentbeing made pursuant to the hybrid transac-tion to the extent that the no-inclusionwould not occur were the specified recipi-ent’s tax law to treat the payment as interestor a royalty, as applicable. See § 1.267A–6(c)(1) and (2).

(2) Definition of hybrid transaction.The term hybrid transaction means anytransaction, series of transactions, agree-ment, or instrument one or more paymentswith respect to which are treated as inter-est or royalties for U.S. tax purposes butare not so treated for purposes of the taxlaw of a specified recipient of the pay-ment. Examples of a hybrid transactioninclude an instrument a payment with re-spect to which is treated as interest forU.S. tax purposes but, for purposes of aspecified recipient’s tax law, is treated asa distribution with respect to equity or areturn of principal. In addition, a specifiedpayment is deemed to be made pursuant toa hybrid transaction if the taxable year inwhich a specified recipient recognizes thepayment under its tax law ends more than36 months after the end of the taxable yearin which the specified party would be al-lowed a deduction for the payment underU.S. tax law. See also § 1.267A–6(c)(8).Further, a specified payment is not con-sidered made pursuant to a hybrid trans-action if the payment is a disregarded pay-


ment, as described in paragraph (b)(2) ofthis section.

(3) Payments pursuant to securitieslending transactions, sale-repurchasetransactions, or similar transactions. Thisparagraph (a)(3) applies if a specified pay-ment is made pursuant to a repo transac-tion and is not regarded under a foreigntax law but another amount connected tothe payment (the connected amount) isregarded under such foreign tax law. Forthis purpose, a repo transaction means atransaction one or more payments withrespect to which are treated as interest (asdefined in § 1.267A–5(a)(12)) or a struc-tured payment (as defined in § 1.267A–5(b)(5)(ii)) for U.S. tax purposes and thatis a securities lending transaction or sale-repurchase transaction (including as de-scribed in § 1.861–2(a)(7)), or other sim-ilar transaction or series of relatedtransactions in which legal title to prop-erty is transferred and the property (orsimilar property, such as securities of thesame class and issue) is reacquired or ex-pected to be reacquired. For example, thisparagraph (a)(3) applies if a specified pay-ment arising from characterizing a repotransaction of stock in accordance with itssubstance (that is, characterizing the spec-ified payment as interest) is not regardedas such under a foreign tax law but anamount consistent with the form of thetransaction (such as a dividend) is re-garded under such foreign tax law. Whenthis paragraph (a)(3) applies, the determi-nation of the identity of a specified recip-ient of the specified payment under theforeign tax law is made with respect tothe connected amount. In addition, if thespecified recipient includes the connectedamount in income (as determined under§ 1.267A–3(a), by treating the connectedamount as the specified payment), then theamount of the specified recipient’s no-inclusion with respect to the specifiedpayment is correspondingly reduced. See§ 1.267A–6(c)(2). Further, the principlesof this paragraph (a)(3) apply to casessimilar to repo transactions in which aforeign tax law does not characterize thetransaction in accordance with its sub-stance.

(b) Disregarded payments–(1) In gen-eral. Subject to § 1.267A–3(b) (amountsincluded or includible in income), the ex-cess (if any) of the sum of a specified

party’s disregarded payments for a taxableyear over its dual inclusion income for thetaxable year is a disqualified hybridamount. See § 1.267A–6(c)(3) and (4).

(2) Definition of disregarded payment.The term disregarded payment means aspecified payment to the extent that, underthe tax law of a tax resident or taxablebranch to which the payment is made, thepayment is not regarded (for example, be-cause under such tax law it is a disre-garded transaction involving a single tax-payer or between group members) and,were the payment to be regarded (andtreated as interest or a royalty, as applica-ble) under such tax law, the tax resident ortaxable branch would include the paymentin income, as determined under § 1.267A–3(a). In addition, a disregarded paymentincludes a specified payment that, underthe tax law of a tax resident or taxablebranch to which the payment is made, is apayment that gives rise to a deduction orsimilar offset allowed to the tax residentor taxable branch (or group of entities thatinclude the tax resident or taxable branch)under a foreign consolidation, fiscal unity,group relief, loss sharing, or any similarregime. Moreover, a disregarded paymentdoes not include a deemed branch pay-ment, or a specified payment pursuant to arepo transaction or similar transaction de-scribed in paragraph (a)(3) of this section.

(3) Definition of dual inclusion income.With respect to a specified party, the termdual inclusion income means the excess, ifany, of–

(i) The sum of the specified party’sitems of income or gain for U.S. tax pur-poses, to the extent the items of income orgain are included in the income of the taxresident or taxable branch to which thedisregarded payments are made, as deter-mined under § 1.267A–3(a) (by treatingthe items of income or gain as the speci-fied payment); over

(ii) The sum of the specified party’sitems of deduction or loss for U.S. taxpurposes (other than deductions for disre-garded payments), to the extent the itemsof deduction or loss are allowable (or havebeen or will be allowable during a taxableyear that ends no more than 36 monthsafter the end of the specified party’s tax-able year) under the tax law of the taxresident or taxable branch to which thedisregarded payments are made.

(4) Payments made indirectly to a taxresident or taxable branch. A specifiedpayment made to an entity an interest ofwhich is directly or indirectly (determinedunder the rules of section 958(a) withoutregard to whether an intermediate entity isforeign or domestic) owned by a tax res-ident or taxable branch is consideredmade to the tax resident or taxable branchto the extent that, under the tax law of thetax resident or taxable branch, the entity towhich the payment is made is fiscallytransparent (and all intermediate entities,if any, are also fiscally transparent).

(c) Deemed branch payments–(1) Ingeneral. If a specified payment is adeemed branch payment, then the pay-ment is a disqualified hybrid amount if thetax law of the home office provides anexclusion or exemption for income attrib-utable to the branch. See § 1.267A–6(c)(4).

(2) Definition of deemed branch pay-ment. The term deemed branch paymentmeans, with respect to a U.S. taxablebranch that is a U.S. permanent establish-ment of a treaty resident eligible for ben-efits under an income tax treaty betweenthe United States and the treaty country,any amount of interest or royalties allow-able as a deduction in computing the busi-ness profits of the U.S. permanent estab-lishment, to the extent the amount isdeemed paid to the home office (or otherbranch of the home office) and is notregarded (or otherwise taken into account)under the home office’s tax law (or theother branch’s tax law). A deemed branchpayment may be otherwise taken into ac-count for this purpose if, for example,under the home office’s tax law a corre-sponding amount of interest or royalties isallocated and attributable to the U.S. per-manent establishment and is therefore notdeductible.

(d) Payments to reverse hybrids–(1) Ingeneral. If a specified payment is made toa reverse hybrid, then, subject to§ 1.267A–3(b) (amounts included or in-cludible in income), the payment is a dis-qualified hybrid amount to the extent that-

(i) An investor of the reverse hybriddoes not include the payment in income,as determined under § 1.267A–3(a) (tosuch extent, a no-inclusion); and

(ii) The investor’s no-inclusion is a re-sult of the payment being made to the


reverse hybrid. For this purpose, the in-vestor’s no-inclusion is a result of thespecified payment being made to the re-verse hybrid to the extent that the no-inclusion would not occur were the inves-tor’s tax law to treat the reverse hybrid asfiscally transparent (and treat the paymentas interest or a royalty, as applicable). See§ 1.267A–6(c)(5).

(2) Definition of reverse hybrid. Theterm reverse hybrid means an entity (re-gardless of whether domestic or foreign)that is fiscally transparent under the taxlaw of the country in which it is created,organized, or otherwise established butnot fiscally transparent under the tax lawof an investor of the entity.

(3) Payments made indirectly to a re-verse hybrid. A specified payment madeto an entity an interest of which is directlyor indirectly (determined under the rulesof section 958(a) without regard towhether an intermediate entity is foreignor domestic) owned by a reverse hybrid isconsidered made to the reverse hybrid tothe extent that, under the tax law of aninvestor of the reverse hybrid, the entity towhich the payment is made is fiscallytransparent (and all intermediate entities,if any, are also fiscally transparent).

(e) Branch mismatch payments–(1) Ingeneral. If a specified payment is a branchmismatch payment, then, subject to§ 1.267A–3(b) (amounts included or in-cludible in income), the payment is a dis-qualified hybrid amount to the extent that–

(i) A home office, the tax law of whichtreats the payment as income attributableto a branch of the home office, does notinclude the payment in income, as deter-mined under § 1.267A–3(a) (to such ex-tent, a no-inclusion); and

(ii) The home office’s no-inclusion is aresult of the payment being a branch mis-match payment. For this purpose, thehome office’s no-inclusion is a result ofthe specified payment being a branch mis-match payment to the extent that the no-inclusion would not occur were the homeoffice’s tax law to treat the payment asincome that is not attributable a branch ofthe home office (and treat the payment asinterest or a royalty, as applicable). See§ 1.267A–6(c)(6).

(2) Definition of branch mismatch pay-ment. The term branch mismatch payment

means a specified payment for which thefollowing requirements are satisfied:

(i) Under a home office’s tax law, thepayment is treated as income attributableto a branch of the home office; and

(ii) Either–(A) The branch is not a taxable branch;

or(B) Under the branch’s tax law, the

payment is not treated as income attribut-able to the branch.

(f) Relatedness or structured arrange-ment limitation. A specified recipient, atax resident or taxable branch to which aspecified payment is made, an investor, ora home office is taken into account forpurposes of paragraphs (a), (b), (d), and(e) of this section, respectively, only if thespecified recipient, the tax resident or tax-able branch, the investor, or the homeoffice, as applicable, is related (as definedin § 1.267A–5(a)(14)) to the specifiedparty or is a party to a structured arrange-ment (as defined in § 1.267A–5(a)(20))pursuant to which the specified payment ismade.

§ 1.267A–3 Income inclusions andamounts not treated as disqualifiedhybrid amounts.

(a) Income inclusions–(1) Generalrule. For purposes of section 267A, a taxresident or taxable branch includes in in-come a specified payment to the extentthat, under the tax law of the tax residentor taxable branch–

(i) It includes (or it will include duringa taxable year that ends no more than 36months after the end of the specified par-ty’s taxable year) the payment in its in-come or tax base at the full marginal rateimposed on ordinary income; and

(ii) The payment is not reduced or off-set by an exemption, exclusion, deduc-tion, credit (other than for withholding taximposed on the payment), or other similarrelief particular to such type of payment.Examples of such reductions or offsetsinclude a participation exemption, a divi-dends received deduction, a deduction orexclusion with respect to a particular cat-egory of income (such as income attribut-able to a branch, or royalties under a pat-ent box regime), and a credit forunderlying taxes paid by a corporationfrom which a dividend is received. A

specified payment is not considered re-duced or offset by a deduction or othersimilar relief particular to the type of pay-ment if it is offset by a generally applica-ble deduction or other tax attribute, suchas a deduction for depreciation or a netoperating loss. For this purpose, a deduc-tion may be treated as being generallyapplicable even if it is arises from a trans-action related to the specified payment(for example, if the deduction and pay-ment are in connection with a back-to-back financing arrangement).

(2) Coordination with foreign hybridmismatch rules. Whether a tax resident ortaxable branch includes in income a spec-ified payment is determined without re-gard to any defensive or secondary rulecontained in hybrid mismatch rules, ifany, under the tax law of the tax residentor taxable branch. For this purpose, a de-fensive or secondary rule means a provi-sion of hybrid mismatch rules that re-quires a tax resident or taxable branch toinclude an amount in income if a deduc-tion for the amount is not disallowed un-der applicable tax law.

(3) Inclusions with respect to reversehybrids. With respect to a tax resident ortaxable branch that is an investor of areverse hybrid, whether the investor in-cludes in income a specified paymentmade to the reverse hybrid is determinedwithout regard to a distribution from thereverse hybrid (or right to a distributionfrom the reverse hybrid triggered by thepayment).

(4) De minimis inclusions and deemedfull inclusions. A preferential rate, exemp-tion, exclusion, deduction, credit, or sim-ilar relief particular to a type of paymentthat reduces or offsets 90 percent or moreof the payment is considered to reduce oroffset 100 percent of the payment. In ad-dition, a preferential rate, exemption, ex-clusion, deduction, credit, or similar reliefparticular to a type of payment that re-duces or offsets 10 percent or less of thepayment is considered to reduce or offsetnone of the payment.

(b) Certain amounts not treated as dis-qualified hybrid amounts to extent in-cluded or includible in income–(1) In gen-eral. A specified payment, to the extentthat but for this paragraph (b) it would bea disqualified hybrid amount (suchamount, a tentative disqualified hybrid


amount), is reduced under the rules ofparagraphs (b)(2) through (4) of this sec-tion, as applicable. The tentative disqual-ified hybrid amount, as reduced undersuch rules, is the disqualified hybridamount. See § 1.267A–6(c)(3) and (7).

(2) Included in income of United Statestax resident or U.S. taxable branch. Atentative disqualified hybrid amount is re-duced to the extent that a specified recip-ient that is a tax resident of the UnitedStates or a U.S. taxable branch takes thetentative disqualified hybrid amount intoaccount in its gross income.

(3) Includible in income under section951(a)(1). A tentative disqualified hybridamount is reduced to the extent that thetentative disqualified hybrid amount is re-ceived by a CFC and includible undersection 951(a)(1) (determined without re-gard to properly allocable deductions ofthe CFC and qualified deficits under sec-tion 952(c)(1)(B)) in the gross income of aUnited States shareholder of the CFC.However, the tentative disqualified hybridamount is reduced only if the UnitedStates shareholder is a tax resident of theUnited States or, if the United Statesshareholder is not a tax resident of theUnited States, then only to the extent thata tax resident of the United States wouldtake into account the amount includibleunder section 951(a)(1) in the gross in-come of the United States shareholder.

(4) Includible in income under section951A(a). A tentative disqualified hybridamount is reduced to the extent that thetentative disqualified hybrid amount in-creases a United States shareholder’s prorata share of tested income (within themeaning of section 951A(c)(2)(A)) withrespect to a CFC, reduces the sharehold-er’s pro rata share of tested loss (withinthe meaning of section 951A(c)(2)(B)) ofthe CFC, or both. However, the tentativedisqualified hybrid amount is reducedonly if the United States shareholder is atax resident of the United States or, if theUnited States shareholder is not a tax res-ident of the United States, then only to theextent that a tax resident of the UnitedStates would take into account the amountthat increases the United States sharehold-er’s pro rata share of tested income withrespect to the CFC, reduces the sharehold-er’s pro rata share of tested loss of theCFC, or both.

§ 1.267A–4 Disqualified importedmismatch amounts.

(a) Disqualified imported mismatchamounts. A specified payment (to the ex-tent not a disqualified hybrid amount, asdescribed in § 1.267A–2) is a disqualifiedimported mismatch amount to the extentthat, under the set-off rules of paragraph(c) of this section, the income attributableto the payment is directly or indirectlyoffset by a hybrid deduction incurred by atax resident or taxable branch that is re-lated to the specified party (or that is aparty to a structured arrangement pursuantto which the payment is made). For pur-poses of this section, any specified pay-ment (to the extent not a disqualified hy-brid amount) is referred to as an importedmismatch payment; the specified party isreferred to as an imported mismatch pay-er; and a tax resident or taxable branchthat includes the imported mismatch pay-ment in income (or a tax resident or tax-able branch the tax law of which other-wise prevents the imported mismatchpayment from being a disqualified hybridamount, for example, because under suchtax law the tax resident’s no-inclusion isnot a result of hybridity) is referred to asthe imported mismatch payee. See§ 1.267A–6(c)(8), (9), and (10).

(b) Hybrid deduction. A hybrid deduc-tion means, with respect to a tax residentor taxable branch that is not a specifiedparty, a deduction allowed to the tax res-ident or taxable branch under its tax lawfor an amount paid or accrued that isinterest (including an amount that wouldbe a structured payment under the princi-ples of § 1.267A–5(b)(5)(ii)) or royaltyunder such tax law (regardless of whetheror how such amounts would be recognizedunder U.S. law), to the extent that a deduc-tion for the amount would be disallowed ifsuch tax law contained rules substantiallysimilar to those under §§ 1.267A–1 through1.267A–3 and 1.267A–5. In addition, withrespect to a tax resident that is not a speci-fied party, a hybrid deduction includes adeduction allowed to the tax resident withrespect to equity, such as a notional interestdeduction. Further, a hybrid deduction for aparticular accounting period includes a losscarryover from another accounting period,to the extent that a hybrid deduction in-curred in an accounting period beginning on

or after December 20, 2018 comprises theloss carryover.

(c) Set-off rules–(1) In general. In theorder described in paragraph (c)(2) of thissection, a hybrid deduction directly or in-directly offsets the income attributable toan imported mismatch payment to the ex-tent that, under paragraph (c)(3) of thissection, the payment directly or indirectlyfunds the hybrid deduction.

(2) Ordering rules. The following or-dering rules apply for purposes of deter-mining the extent that a hybrid deductiondirectly or indirectly offsets income attrib-utable to imported mismatch payments.

(i) First, the hybrid deduction offsetsincome attributable to a factually-relatedimported mismatch payment that directlyor indirectly funds the hybrid deduction.For this purpose, a factually-related im-ported mismatch payment means an im-ported mismatch payment that is madepursuant to a transaction, agreement, orinstrument entered into pursuant to thesame plan or series of related transactionsthat includes the transaction, agreement,or instrument pursuant to which the hy-brid deduction is incurred.

(ii) Second, to the extent remaining,the hybrid deduction offsets income at-tributable to an imported mismatch pay-ment (other than a factually-related im-ported mismatch payment) that directlyfunds the hybrid deduction.

(iii) Third, to the extent remaining, thehybrid deduction offsets income attribut-able to an imported mismatch payment(other than a factually-related importedmismatch payment) that indirectly fundsthe hybrid deduction.

(3) Funding rules. The following fund-ing rules apply for purposes of determin-ing the extent that an imported mismatchpayment directly or indirectly funds a hy-brid deduction.

(i) The imported mismatch paymentdirectly funds a hybrid deduction to theextent that the imported mismatch payeeincurs the deduction.

(ii) The imported mismatch paymentindirectly funds a hybrid deduction to theextent that the imported mismatch payeeis allocated the deduction.

(iii) The imported mismatch payee isallocated a hybrid deduction to the extentthat the imported mismatch payee directlyor indirectly makes a funded taxable pay-


ment to the tax resident or taxable branchthat incurs the hybrid deduction.

(iv) An imported mismatch payee indi-rectly makes a funded taxable payment tothe tax resident or taxable branch thatincurs a hybrid deduction to the extentthat a chain of funded taxable paymentsexists connecting the imported mismatchpayee, each intermediary tax resident ortaxable branch, and the tax resident ortaxable branch that incurs the hybrid de-duction.

(v) The term funded taxable paymentmeans, with respect to a tax resident ortaxable branch that is not a specified party,a deductible amount paid or accrued bythe tax resident or taxable branch under itstax law, other than an amount that givesrise to a hybrid deduction. However, afunded taxable payment does not includean amount deemed to be an imported mis-match payment pursuant to paragraph (f)of this section.

(vi) If, with respect to a tax resident ortaxable branch that is not a specified party,a deduction or loss that is not incurred bythe tax resident or taxable branch is di-rectly or indirectly made available to off-set income of the tax resident or taxablebranch under its tax law, then, for pur-poses of this paragraph (c), the tax resi-dent or taxable branch to which the de-duction or loss is made available and thetax resident or branch that incurs the de-duction or loss are treated as a single taxresident or taxable branch. For example, ifa deduction or loss of one tax resident ismade available to offset income of an-other tax resident under a tax consolida-tion, fiscal unity, group relief, loss shar-ing, or any similar regime, then the taxresidents are treated as a single tax resi-dent for purposes of paragraph (c) of thissection.

(d) Calculations based on aggregateamounts during accounting period. Forpurposes of this section, amounts are de-termined on an accounting period basis.Thus, for example, the amount of im-ported mismatch payments made by animported mismatch payer to a particularimported mismatch payee is equal to theaggregate amount of all such paymentsmade by the payer during the accountingperiod.

(e) Pro rata adjustments. Amounts areallocated on a pro rata basis if there would

otherwise be more than one permissiblemanner in which to allocate the amounts.Thus, for example, if multiple importedmismatch payers make an imported mis-match payment to a particular importedmismatch payee, the amount of such pay-ments exceeds the hybrid deduction in-curred by the payee, and the payments arenot factually-related imported mismatchpayments, then a pro rata portion of eachpayer’s payment is considered to directlyfund the hybrid deduction. See § 1.267A–6(c)(9).

(f) Certain amounts deemed to be im-ported mismatch payments for certainpurposes. For purposes of determining theextent that income attributable to an im-ported mismatch payment is directly orindirectly offset by a hybrid deduction, anamount paid or accrued by a tax residentor taxable branch that is not a specifiedparty is deemed to be an imported mis-match payment (and such tax resident ortaxable branch and a specified recipient ofthe amount, determined under § 1.267A–5(a)(19), by treating the amount as thespecified payment, are deemed to be animported mismatch payer and an importedmismatch payee, respectively) to the ex-tent that–

(1) The tax law of such tax resident ortaxable branch contains hybrid mismatchrules; and

(2) Under a provision of the hybridmismatch rules substantially similar tothis section, the tax resident or taxablebranch is denied a deduction for all or aportion of the amount. See § 1.267A–6(c)(10).

§ 1.267A–5 Definitions and specialrules.

(a) Definitions. For purposes of§§ 1.267A–1 through 1.267A–7 the fol-lowing definitions apply.

(1) The term accounting period meansa taxable year, or a period of similarlength over which, under a provision ofhybrid mismatch rules substantially simi-lar to § 1.267A–4, computations similarto those under that section are made undera foreign tax law.

(2) The term branch means a taxablepresence of a tax resident in a countryother than its country of residence under

either the tax resident’s tax law or suchother country’s tax law.

(3) The term branch mismatch pay-ment has the meaning provided in§ 1.267A–2(e)(2).

(4) The term controlled foreign corpo-ration (or CFC) has the meaning providedin section 957.

(5) The term deemed branch paymenthas the meaning provided in § 1.267A–2(c)(2).

(6) The term disregarded payment hasthe meaning provided in § 1.267A–2(b)(2).

(7) The term entity means any person (asdescribed in section 7701(a)(1), includingan entity that under §§ 301.7701–1 through301.7701–3 of this chapter is disregarded asan entity separate from its owner) other thanan individual.

(8) The term fiscally transparentmeans, with respect to an entity, fiscallytransparent with respect to an item of in-come as determined under the principlesof § 1.894–1(d)(3)(ii) and (iii), withoutregard to whether a tax resident (either theentity or interest holder in the entity) thatderives the item of income is a resident ofa country that has an income tax treatywith the United States.

(9) The term home office means a taxresident that has a branch.

(10) The term hybrid mismatch rulesmeans rules, regulations, or other taxguidance substantially similar to section267A, and includes rules the purpose ofwhich is to neutralize the deduction/no-inclusion outcome of hybrid and branchmismatch arrangements. Examples ofsuch rules would include rules based on,or substantially similar to, the recommen-dations contained in OECD/G-20, Neu-tralising the Effects of Hybrid MismatchArrangements, Action 2: 2015 Final Re-port (October 2015), and OECD/G-20,Neutralising the Effects of Branch Mis-match Arrangements, Action 2: InclusiveFramework on BEPS (July 2017).

(11) The term hybrid transaction hasthe meaning provided in § 1.267A–2(a)(2).

(12) The term interest means anyamount described in paragraph (a)(12)(i) or(ii) of this section (as adjusted by amountsdescribed in paragraph (a)(12)(iii) of thissection) that is paid or accrued, or treated aspaid or accrued, for the taxable year or that


is otherwise designated as interest expensein paragraph (a)(12)(i) or (ii) of this section(as adjusted by amounts described in para-graph (a)(12)(iii) of this section).

(i) In general. Interest is an amountpaid, received, or accrued as compensa-tion for the use or forbearance of moneyunder the terms of an instrument or con-tractual arrangement, including a series oftransactions, that is treated as a debt in-strument for purposes of section 1275(a)and § 1.1275–1(d), and not treated asstock under § 1.385–3, or an amount thatis treated as interest under other provi-sions of the Internal Revenue Code(Code) or the regulations under 26 CFRpart 1. Thus, for example, interest in-cludes–

(A) Original issue discount (OID);(B) Qualified stated interest, as ad-

justed by the issuer for any bond issuancepremium;

(C) OID on a synthetic debt instrumentarising from an integrated transaction un-der § 1.1275–6;

(D) Repurchase premium to the extentdeductible by the issuer under § 1.163–7(c);

(E) Deferred payments treated as inter-est under section 483;

(F) Amounts treated as interest under asection 467 rental agreement;

(G) Forgone interest under section7872;

(H) De minimis OID taken into ac-count by the issuer;

(I) Amounts paid or received in con-nection with a sale-repurchase agreementtreated as indebtedness under Federal taxprinciples; in the case of a sale-repurchaseagreement relating to tax-exempt bonds,however, the amount is not tax-exemptinterest;

(J) Redeemable ground rent treated asinterest under section 163(c); and

(K) Amounts treated as interest undersection 636.

(ii) Swaps with significant nonperiodicpayments–(A) Non-cleared swaps. Aswap that is not a cleared swap and thathas significant nonperiodic payments istreated as two separate transactions con-sisting of an on-market, level paymentswap and a loan. The loan must be ac-counted for by the parties to the contractindependently of the swap. The time valuecomponent associated with the loan, de-

termined in accordance with § 1.446–3(f)(2)(iii)(A), is recognized as interestexpense to the payor.

(B) [Reserved](C) Definition of cleared swap. The

term cleared swap means a swap that iscleared by a derivatives clearing organi-zation, as such term is defined in section1a of the Commodity Exchange Act (7U.S.C. 1a), or by a clearing agency, assuch term is defined in section 3 of theSecurities Exchange Act of 1934 (15U.S.C. 78c), that is registered as a deriv-atives clearing organization under theCommodity Exchange Act or as a clearingagency under the Securities Exchange Actof 1934, respectively, if the derivativesclearing organization or clearing agencyrequires the parties to the swap to post andcollect margin or collateral.

(iii) Amounts affecting the effectivecost of borrowing that adjust the amountof interest expense. Income, deduction,gain, or loss from a derivative, as definedin section 59A(h)(4)(A), that alters a per-son’s effective cost of borrowing with re-spect to a liability of the person is treatedas an adjustment to interest expense of theperson. For example, a person that is ob-ligated to pay interest at a floating rate ona note and enters into an interest rate swapthat entitles the person to receive anamount that is equal to or that closelyapproximates the interest rate on the notein exchange for a fixed amount is, in ef-fect, paying interest expense at a fixed rateby entering into the interest rate swap.Income, deduction, gain, or loss from theswap is treated as an adjustment to interestexpense. Similarly, any gain or loss result-ing from a termination or other dispositionof the swap is an adjustment to interestexpense, with the timing of gain or losssubject to the rules of § 1.446–4.

(13) The term investor means, with re-spect to an entity, any tax resident ortaxable branch that directly or indirectly(determined under the rules of section958(a) without regard to whether an inter-mediate entity is foreign or domestic)owns an interest in the entity.

(14) The term related has the meaningprovided in this paragraph (a)(14). A taxresident or taxable branch is related to aspecified party if the tax resident or tax-able branch is a related person within themeaning of section 954(d)(3), determined

by treating the specified party as the “con-trolled foreign corporation” referred to inthat section and the tax resident or taxablebranch as the “person” referred to in thatsection. In addition, for these purposes, atax resident that under §§ 301.7701–1through 301.7701–3 of this chapter is dis-regarded as an entity separate from itsowner for U.S. tax purposes, as well as ataxable branch, is treated as a corporation.Further, for these purposes neither section318(a)(3), nor § 1.958–2(d) or the princi-ples thereof, applies to attribute stock orother interests to a tax resident, taxablebranch, or specified party.

(15) The term reverse hybrid has themeaning provided in § 1.267A–2(d)(2).

(16) The term royalty includesamounts paid or accrued as considerationfor the use of, or the right to use–

(i) Any copyright, including any copy-right of any literary, artistic, scientific orother work (including cinematographicfilms and software);

(ii) Any patent, trademark, design ormodel, plan, secret formula or process, orother similar property (including good-will); or

(iii) Any information concerning in-dustrial, commercial or scientific experi-ence, but does not include–

(A) Amounts paid or accrued for after-sales services;

(B) Amounts paid or accrued for ser-vices rendered by a seller to the purchaserunder a warranty;

(C) Amounts paid or accrued for puretechnical assistance; or

(D) Amounts paid or accrued for anopinion given by an engineer, lawyer oraccountant.

(17) The term specified party means atax resident of the United States, a CFC(other than a CFC with respect to whichthere is not a United States shareholderthat owns (within the meaning of section958(a)) at least ten percent (by vote orvalue) of the stock of the CFC), and a U.S.taxable branch. Thus, an entity that is fis-cally transparent for U.S. tax purposes isnot a specified party, though an owner ofthe entity may be a specified party. Forexample, in the case of a payment by apartnership, a domestic corporation or aCFC that is a partner of the partnership isa specified party whose deduction for its


allocable share of the payment is subjectto disallowance under section 267A.

(18) The term specified payment hasthe meaning provided in § 1.267A–1(b).

(19) The term specified recipientmeans, with respect to a specified pay-ment, any tax resident that derives thepayment under its tax law or any taxablebranch to which the payment is attribut-able under its tax law. The principles of§ 1.894–1(d)(1) apply for purposes of de-termining whether a tax resident derives aspecified payment under its tax law, with-out regard to whether the tax resident is aresident of a country that has an incometax treaty with the United States. Theremay be more than one specified recipientwith respect to a specified payment.

(20) The term structured arrangementmeans an arrangement with respect towhich one or more specified paymentswould be a disqualified hybrid amount (ora disqualified imported mismatch amount)if the specified payment were analyzedwithout regard to the relatedness limita-tion in § 1.267A–2(f) (or without regard tothe language “that is related to the speci-fied party” in § 1.267A–4(a)) (either suchoutcome, a hybrid mismatch), providedthat either paragraph (a)(20)(i) or (ii) ofthis section is satisfied. A party to a struc-tured arrangement means a tax resident ortaxable branch that participates in thestructured arrangement. For this purpose,an entity’s participation in a structuredarrangement is imputed to its investors.

(i) The hybrid mismatch is priced intothe terms of the arrangement.

(ii) Based on all the facts and circum-stances, the hybrid mismatch is a principalpurpose of the arrangement. Facts and cir-cumstances that indicate the hybrid mis-match is a principal purpose of the ar-rangement include–

(A) Marketing the arrangement as tax-advantaged where some or all of the taxadvantage derives from the hybrid mis-match;

(B) Primarily marketing the arrange-ment to tax residents of a country the taxlaw of which enables the hybrid mis-match;

(C) Features that alter the terms of thearrangement, including the return, in theevent the hybrid mismatch is no longeravailable; or

(D) A below-market return absent thetax effects or benefits resulting from thehybrid mismatch.

(21) The term tax law of a countryincludes statutes, regulations, administra-tive or judicial rulings, and treaties of thecountry. When used with respect to a taxresident or branch, tax law refers to–

(i) In the case of a tax resident, the taxlaw of the country or countries where thetax resident is resident; and

(ii) In the case of a branch, the tax lawof the country where the branch is located.

(22) The term taxable branch means abranch that has a taxable presence underits tax law.

(23) The term tax resident means eitherof the following:

(i) A body corporate or other entity orbody of persons liable to tax under the taxlaw of a country as a resident. For thispurpose, a body corporate or other entityor body of persons may be consideredliable to tax under the tax law of a countryas a resident even though such tax lawdoes not impose a corporate income tax. Abody corporate or other entity or body ofpersons may be a tax resident of morethan one country.

(ii) An individual liable to tax underthe tax law of a country as a resident. Anindividual may be a tax resident of morethan one country.

(24) The term United States share-holder has the meaning provided in sec-tion 951(b).

(25) The term U.S. taxable branchmeans a trade or business carried on in theUnited States by a tax resident of anothercountry, except that if an income taxtreaty applies, the term means a perma-nent establishment of a tax treaty residenteligible for benefits under an income taxtreaty between the United States and thetreaty country. Thus, for example, a U.S.taxable branch includes a U.S. trade orbusiness of a foreign corporation taxableunder section 882(a) or a U.S. permanentestablishment of a tax treaty resident.

(b) Special rules. For purposes of§§ 1.267A–1 through 1.267A–7, the fol-lowing special rules apply.

(1) Coordination with other provisions.Except as otherwise provided in the Codeor in regulations under 26 CFR part 1,section 267A applies to a specified pay-ment after the application of any other

applicable provisions of the Code and reg-ulations under 26 CFR part 1. Thus, thedetermination of whether a deduction fora specified payment is disallowed undersection 267A is made with respect to thetaxable year for which a deduction for thepayment would otherwise be allowed forU.S. tax purposes. See, for example, sec-tions 163(e)(3) and 267(a)(3) for rules thatmay defer the taxable year for which adeduction is allowed. See also § 1.882–5(a)(5) (providing that provisions that dis-allow interest expense apply after the ap-plication of § 1.882–5). In addition,provisions that characterize amounts paidor accrued as something other than inter-est or royalty, such as § 1.894–1(d)(2),govern the treatment of such amounts andtherefore such amounts would not betreated as specified payments.

(2) Foreign currency gain or loss. Ex-cept as set forth in this paragraph (b)(2),section 988 gain or loss is not taken intoaccount under section 267A. Foreign cur-rency gain or loss recognized with respectto a specified payment is taken into ac-count under section 267A to the extentthat a deduction for the specified paymentis disallowed under section 267A, pro-vided that the foreign currency gain orloss is described in § 1.988–2(b)(4) (re-lating to exchange gain or loss recognizedby the issuer of a debt instrument withrespect to accrued interest) or § 1.988–2(c) (relating to items of expense or grossincome or receipts which are to be paidafter the date accrued). If a deduction for aspecified payment is disallowed under sec-tion 267A, then a proportionate amount offoreign currency loss under section 988 withrespect to the specified payment is also dis-allowed, and a proportionate amount of for-eign currency gain under section 988 withrespect to the specified payment reduces theamount of the disallowance. For this pur-pose, the proportionate amount is theamount of the foreign currency gain or lossunder section 988 with respect to the spec-ified payment multiplied by the amount ofthe specified payment for which a deductionis disallowed under section 267A.

(3) U.S. taxable branch payments–(i)Amounts considered paid or accrued by aU.S. taxable branch. For purposes of sec-tion 267A, a U.S. taxable branch is con-sidered to pay or accrue an amount ofinterest or royalty equal to–


(A) The amount of interest or royaltyallocable to effectively connected incomeof the U.S. taxable branch under section873(a) or 882(c)(1), as applicable; or

(B) In the case of a U.S. taxable branchthat is a U.S. permanent establishment ofa treaty resident eligible for benefits underan income tax treaty between the UnitedStates and the treaty country, the amountof interest or royalty deductible in com-puting the business profits attributable tothe U.S. permanent establishment, if suchamounts differ from the amounts allocableunder paragraph (b)(3)(i)(A) of this sec-tion.

(ii) Treatment of U.S. taxable branchpayments–(A) Interest. Interest consid-ered paid or accrued by a U.S. taxablebranch of a foreign corporation under para-graph (b)(3)(i) of this section is treated as apayment directly to the person to which theinterest is payable, to the extent it is paid oraccrued with respect to a liability describedin § 1.882–5(a)(1)(ii)(A) (resulting in di-rectly allocable interest) or with respect to aU.S. booked liability, as defined in § 1.882–5(d)(2). If the amount of interest allocable tothe U.S. taxable branch exceeds the interestpaid or accrued on its U.S. booked liabili-ties, the excess amount is treated as paid oraccrued by the U.S. taxable branch on a pro-rata basis to the same persons and pursuantto the same terms that the home office paidor accrued interest for purposes of the cal-culations described in paragraph (b)(3)(i) ofthis section, excluding any interest treated asalready paid directly by the branch.

(B) Royalties. Royalties consideredpaid or accrued by a U.S. taxable branchunder paragraph (b)(3)(i) of this sectionare treated solely for purposes of section267A as paid or accrued on a pro-ratabasis by the U.S. taxable branch to thesame persons and pursuant to the sameterms that the home office paid or accruedsuch royalties.

(C) Permanent establishments and in-terbranch payments. If a U.S. taxablebranch is a permanent establishment in theUnited States, rules analogous to the rulesin paragraphs (b)(3)(ii)(A) and (B) of thissection apply with respect to interest androyalties allowed in computing the businessprofits of a treaty resident eligible for treatybenefits. This paragraph (b)(3)(ii)(C) doesnot apply to interbranch interest or royaltypayments allowed as deduction under cer-

tain U.S. income tax treaties (as described in§ 1.267A–2(c)(2)).

(4) Effect on earnings and profits. Thedisallowance of a deduction under section267A does not affect whether or when theamount paid or accrued that gave rise tothe deduction reduces earnings and profitsof a corporation.

(5) Application to structured paymen-ts–(i) In general. For purposes of section267A and the regulations under section267A as contained in 26 CFR part 1, astructured payment (as defined in para-graph (b)(5)(ii) of this section) is treatedas a specified payment.

(ii) Structured payment. A structuredpayment means any amount described inparagraphs (b)(5)(ii)(A) or (B) of this sec-tion (as adjusted by amounts described inparagraph (b)(5)(ii)(C) of this section).

(A) Certain payments related to thetime value of money (structured interestamounts)–(1) Substitute interest pay-ments. A substitute interest payment de-scribed in § 1.861–2(a)(7).

(2) Certain amounts labeled as fees–(i)Commitment fees. Any fees in respect of alender commitment to provide financing ifany portion of such financing is actuallyprovided.

(ii) [Reserved](3) Debt issuance costs. Any debt issu-

ance costs subject to § 1.446–5.(4) Guaranteed payments. Any guaran-

teed payments for the use of capital undersection 707(c).

(B) Amounts predominately associatedwith the time value of money. Any ex-pense or loss, to the extent deductible,incurred by a person in a transaction orseries of integrated or related transactionsin which the person secures the use offunds for a period of time, if such expenseor loss is predominately incurred in con-sideration of the time value of money.

(C) Adjustment for amounts affectingthe effective cost of funds. Income, deduc-tion, gain, or loss from a derivative, asdefined in section 59A(h)(4)(A), that al-ters a person’s effective cost of funds withrespect to a structured payment describedin paragraph (b)(5)(ii)(A) or (B) of thissection is treated as an adjustment to thestructured payment of the person.

(6) Anti-avoidance rule. A specifiedparty’s deduction for a specified payment

is disallowed to the extent that both of thefollowing requirements are satisfied:

(i) The payment (or income attribut-able to the payment) is not included in theincome of a tax resident or taxable branch,as determined under § 1.267A–3(a) (butwithout regard to the de minimis and fullinclusion rules in § 1.267A–3(a)(3)).

(ii) A principal purpose of the plan orarrangement is to avoid the purposes ofthe regulations under section 267A.

§ 1.267A–6 Examples.

(a) Scope. This section provides exam-ples that illustrate the application of§§ 1.267A–1 through 1.267A–5.

(b) Presumed facts. For purposes of theexamples in this section, unless otherwiseindicated, the following facts are pre-sumed:

(1) US1, US2, and US3 are domesticcorporations that are tax residents solelyof the United States.

(2) FW, FX, and FZ are bodies corpo-rate established in, and tax residents of,Country W, Country X, and Country Z,respectively. They are not fiscally trans-parent under the tax law of any country.

(3) Under the tax law of each country,interest and royalty payments are deduct-ible.

(4) The tax law of each country pro-vides a 100 percent participation exemp-tion for dividends received from non-resident corporations.

(5) The tax law of each country, otherthan the United States, provides an ex-emption for income attributable to abranch.

(6) Except as provided in paragraphs(b)(4) and (5) of this section, all amountsderived (determined under the principlesof § 1.894–1(d)(1)) by a tax resident, orattributable to a taxable branch, are in-cluded in income, as determined under§ 1.267A–3(a).

(7) Only the tax law of the UnitedStates contains hybrid mismatch rules.

(c) Examples–(1) Example 1. Payment pursuantto a hybrid financial instrument–(i) Facts. FX holdsall the interests of US1. FX holds an instrumentissued by US1 that is treated as equity for Country Xtax purposes and indebtedness for U.S. tax purposes(the FX-US1 instrument). On date 1, US1 pays $50xto FX pursuant to the instrument. The amount istreated as an excludible dividend for Country X taxpurposes (by reason of the Country X participationexemption) and as interest for U.S. tax purposes.


(ii) Analysis. US1 is a specified party and thus adeduction for its $50x specified payment is subject todisallowance under section 267A. As described inparagraphs (c)(1)(ii)(A) through (C) of this section,the entire $50x payment is a disqualified hybridamount under the hybrid transaction rule of§ 1.267A–2(a) and, as a result, a deduction for thepayment is disallowed under § 1.267A–1(b)(1).

(A) US1’s payment is made pursuant to a hybridtransaction because a payment with respect to theFX-US1 instrument is treated as interest for U.S. taxpurposes but not for purposes of Country X tax law(the tax law of FX, a specified recipient that isrelated to US1). See § 1.267A–2(a)(2) and (f). There-fore, § 1.267A–2(a) applies to the payment.

(B) For US1’s payment to be a disqualified hy-brid amount under § 1.267A–2(a), a no-inclusionmust occur with respect to FX. See § 1.267A–2(a)(1)(i). As a consequence of the Country X par-ticipation exemption, FX includes $0 of the paymentin income and therefore a $50x no-inclusion occurswith respect to FX. See § 1.267A–3(a)(1). The resultis the same regardless of whether, under the CountryX participation exemption, the $50x payment is sim-ply excluded from FX’s taxable income or, instead,is reduced or offset by other means, such as a $50xdividends received deduction. See id.

(C) Pursuant to § 1.267A–2(a)(1)(ii), FX’s $50xno-inclusion gives rise to a disqualified hybridamount to the extent that it is a result of US1’spayment being made pursuant to the hybrid transac-tion. FX’s $50x no-inclusion is a result of the pay-ment being made pursuant to the hybrid transactionbecause, were the payment to be treated as interestfor Country X tax purposes, FX would include $50xin income and, consequently, the no-inclusion wouldnot occur.

(iii) Alternative facts – multiple specified recip-ients. The facts are the same as in paragraph (c)(1)(i)of this section, except that FX holds all the interestsof FZ, which is fiscally transparent for Country X taxpurposes, and FZ holds all of the interests of US1.Moreover, the FX-US1 instrument is held by FZ(rather than by FX) and US1 makes its $50x pay-ment to FZ (rather than to FX); the payment isderived by FZ under its tax law and by FX under itstax law and, accordingly, both FZ and FX are spec-ified recipients of the payment. Further, the paymentis treated as interest for Country Z tax purposes andFZ includes it in income. For the reasons describedin paragraph (c)(1)(ii) of this section, FX’s no-inclusion causes the payment to be a disqualifiedhybrid amount. FZ’s inclusion in income (regardlessof whether Country Z has a low or high tax rate)does not affect the result, because the hybrid trans-action rule of § 1.267A–2(a) applies if any no-inclusion occurs with respect to a specified recipientof the payment as a result of the payment being madepursuant to the hybrid transaction.

(iv) Alternative facts – preferential rate. Thefacts are the same as in paragraph (c)(1)(i) of thissection, except that for Country X tax purposesUS1’s payment is treated as a dividend subject to a4% tax rate, whereas the marginal rate imposed onordinary income is 20%. FX includes $10x of thepayment in income, calculated as $50x multiplied by0.2 (.04, the rate at which the particular type ofpayment (a dividend for Country X tax purposes) is

subject to tax in Country X, divided by 0.2, themarginal tax rate imposed on ordinary income). See§ 1.267A–3(a)(1). Thus, a $40x no-inclusion occurswith respect to FX ($50x less $10x). The $40xno-inclusion is a result of the payment being madepursuant to the hybrid transaction because, were thepayment to be treated as interest for Country X taxpurposes, FX would include the entire $50x in in-come at the full marginal rate imposed on ordinaryincome (20%) and, consequently, the no-inclusionwould not occur. Accordingly, $40x of US1’s pay-ment is a disqualified hybrid amount.

(v) Alternative facts – no-inclusion not the resultof hybridity. The facts are the same as in paragraph(c)(1)(i) of this section, except that Country X has apure territorial regime (that is, Country X only taxesincome with a domestic source). Although US1’spayment is pursuant to a hybrid transaction and a$50x no-inclusion occurs with respect to FX, FX’sno-inclusion is not a result of the payment beingmade pursuant to the hybrid transaction. This isbecause if Country X tax law were to treat thepayment as interest, FX would include $0 in incomeand, consequently, the $50x no-inclusion would stilloccur. Accordingly, US1’s payment is not a disqual-ified hybrid amount. See § 1.267A–2(a)(1)(ii). Theresult would be the same if Country X instead didnot impose a corporate income tax.

(2) Example 2. Payment pursuant to a repotransaction–(i) Facts. FX holds all the interests ofUS1, and US1 holds all the interests of US2. On date1, US1 and FX enter into a sale and repurchasetransaction. Pursuant to the transaction, US1 trans-fers shares of preferred stock of US2 to FX in returnfor $1,000x paid from FX to US1, subject to abinding commitment of US1 to reacquire thoseshares on date 3 for an agreed price, which repre-sents a repayment of the $1,000x plus a financing ortime value of money return reduced by the amount ofany distributions paid with respect to the preferredstock between dates 1 and 3 that are retained by FX.On date 2, US2 pays a $100x dividend on its pre-ferred stock to FX. For Country X tax purposes, FXis treated as owning the US2 preferred stock andtherefore is the beneficial owner of the dividend. ForU.S. tax purposes, the transaction is treated as a loanfrom FX to US1 that is secured by the US2 preferredstock. Thus, for U.S. tax purposes, US1 is treated asowning the US2 preferred stock and is the beneficialowner of the dividend. In addition, for U.S. taxpurposes, US1 is treated as paying $100x of interestto FX (an amount corresponding to the $100x divi-dend paid by US2 to FX). Further, the marginal taxrate imposed on ordinary income under Country Xtax law is 25%. Moreover, instead of a participationexemption, Country X tax law provides its tax resi-dents a credit for underlying foreign taxes paid by anon-resident corporation from which a dividend isreceived; with respect to the $100x dividend re-ceived by FX from US2, the credit is $10x.

(ii) Analysis. US1 is a specified party and thus adeduction for its $100x specified payment is subjectto disallowance under section 267A. As described inparagraphs (c)(2)(ii)(A) through (D) of this section,$40x of the payment is a disqualified hybrid amountunder the hybrid transaction rule of § 1.267A–2(a)and, as a result, $40x of the deduction is disallowedunder § 1.267A–1(b)(1).

(A) Although US1’s $100x interest payment isnot regarded under Country X tax law, a connectedamount (US2’s dividend payment) is regarded andderived by FX under such tax law. Thus, FX isconsidered a specified recipient with respect toUS1’s interest payment. See § 1.267A–2(a)(3).

(B) US1’s payment is made pursuant to a hybridtransaction because a payment with respect to thesale and repurchase transaction is treated as interestfor U.S. tax purposes but not for purposes of CountryX tax law (the tax law of FX, a specified recipientthat is related to US1), which does not regard thepayment. See § 1.267A–2(a)(2) and (f). Therefore,§ 1.267A–2(a) applies to the payment.

(C) For US1’s payment to be a disqualified hy-brid amount under § 1.267A–2(a), a no-inclusionmust occur with respect to FX. See § 1.267A–2(a)(1)(i). As a consequence of Country X tax lawnot regarding US1’s payment, FX includes $0 of thepayment in income and therefore a $100x no-inclusion occurs with respect to FX. See § 1.267A–3(a). However, FX includes $60x of a connectedamount (US2’s dividend payment) in income, calcu-lated as $100x (the amount of the dividend) less$40x (the portion of the connected amount that is notincluded in Country X due to the foreign tax credit,determined by dividing the amount of the credit,$10x, by 0.25, the tax rate in Country X). See id.Pursuant to § 1.267A–2(a)(3), FX’s inclusion in in-come with respect to the connected amount corre-spondingly reduces the amount of its no-inclusionwith respect to US1’s payment. Therefore, for pur-poses of § 1.267A–2(a), FX’s no-inclusion with re-spect to US1’s payment is considered to be $40x($100x less $60x). See § 1.267A–2(a)(3).

(D) Pursuant to § 1.267A–2(a)(1)(ii), FX’s $40xno-inclusion gives rise to a disqualified hybridamount to the extent that FX’s no-inclusion is aresult of US1’s payment being made pursuant to thehybrid transaction. FX’s $40x no-inclusion is a resultof US1’s payment being made pursuant to the hybridtransaction because, were the sale and repurchasetransaction to be treated as a loan from FX to US1for Country X tax purposes, FX would includeUS1’s $100x interest payment in income (because itwould not be entitled to a foreign tax credit) and,consequently, the no-inclusion would not occur.

(iii) Alternative facts – structured arrangement.The facts are the same as in paragraph (c)(2)(i)of this section, except that FX is a bank that isunrelated to US1. In addition, the sale and repur-chase transaction is a structured arrangement and FXis a party to the structured arrangement. The result isthe same as in paragraph (c)(2)(ii) of this section.That is, even though FX is not related to US1, it istaken into account with respect to the determinationsunder § 1.267A–2(a) because it is a party to a struc-tured arrangement pursuant to which the payment ismade. See § 1.267A–2(f).

(3) Example 3. Disregarded payment–(i) Facts.FX holds all the interests of US1. For Country X taxpurposes, US1 is a disregarded entity of FX. Duringtaxable year 1, US1 pays $100x to FX pursuant to adebt instrument. The amount is treated as interest forU.S. tax purposes but is disregarded for Country Xtax purposes as a transaction involving a single tax-payer. During taxable year 1, US1’s only other itemsof income, gain, deduction, or loss are $125x of


gross income and a $60x item of deductible expense.The $125x item of gross income is included in FX’sincome, and the $60x item of deductible expense isallowable for Country X tax purposes.

(ii) Analysis. US1 is a specified party and thus adeduction for its $100x specified payment is subjectto disallowance under section 267A. As described inparagraphs (c)(3)(ii)(A) and (B) of this section, $35xof the payment is a disqualified hybrid amount underthe disregarded payment rule of § 1.267A–2(b) and,as a result, $35x of the deduction is disallowed under§ 1.267A–1(b)(1).

(A) US1’s $100x payment is not regarded underthe tax law of Country X (the tax law of FX, a relatedtax resident to which the payment is made) becauseunder such tax law the payment is a disregardedtransaction involving a single taxpayer. See§ 1.267A–2(b)(2) and (f). In addition, were the taxlaw of Country X to regard the payment (and treat itas interest), FX would include it in income. There-fore, the payment is a disregarded payment to which§ 1.267A–2(b) applies. See § 1.267A–2(b)(2).

(B) Under § 1.267A–2(b)(1), the excess (if any)of US1’s disregarded payments for taxable year 1($100x) over its dual inclusion income for the tax-able year is a disqualified hybrid amount. US1’s dualinclusion income for taxable year 1 is $65x, calcu-lated as $125x (the amount of US1’s gross incomethat is included in FX’s income) less $60x (theamount of US1’s deductible expenses, other thandeductions for disregarded payments, that are allow-able for Country X tax purposes). See § 1.267A–2(b)(3). Therefore, $35x is a disqualified hybridamount ($100x less $65x). See § 1.267A–2(b)(1).

(iii) Alternative facts – non-dual inclusion in-come arising from hybrid transaction. The facts arethe same as in paragraph (c)(3)(i) of this section,except that US1 holds all the interests of FZ (a CFC)and US1’s only item of income, gain, deduction, orloss during taxable year 1 (other than the $100xpayment to FX) is $80x paid to US1 by FZ pursuantto an instrument treated as indebtedness for U.S. taxpurposes and equity for Country X tax purposes (theUS1-FZ instrument). In addition, the $80x is treatedas interest for U.S. tax purposes and an excludibledividend for Country X tax purposes (by reason ofthe Country X participation exemption). Paragraphs(c)(3)(iii)(A) and (B) of this section describe theextent to which the specified payments by FZ andUS1, each of which is a specified party, are disqual-ified hybrid amounts.

(A) The hybrid transaction rule of § 1.267A–2(a)applies to FZ’s payment because such payment ismade pursuant to a hybrid transaction, as a paymentwith respect to the US1-FZ instrument is treated asinterest for U.S. tax purposes but not for purposes ofCountry X’s tax law (the tax law of FX, a specifiedrecipient that is related to FZ). As a consequence ofthe Country X participation exemption, an $80x no-inclusion occurs with respect to FX, and such no-inclusion is a result of the payment being madepursuant to the hybrid transaction. Thus, but for§ 1.267A–3(b), the entire $80x of FZ’s paymentwould be a disqualified hybrid amount. However,because US1 (a tax resident of the United States thatis also a specified recipient of the payment) takes theentire $80x payment into account in its gross in-

come, no portion of the payment is a disqualifiedhybrid amount. See § 1.267A–3(b)(2).

(B) The disregarded payment rule of § 1.267A–2(b) applies to US1’s $100x payment to FX, for thereasons described in paragraph (c)(3)(ii)(A) of thissection. In addition, US1’s dual inclusion income fortaxable year 1 is $0 because, as a result of theCountry X participation exemption, no portion ofFZ’s $80x payment to US1 (which is derived by FXunder its tax law) is included in FX’s income. See§§ 1.267A–2(b)(3) and 1.267A–3(a). Therefore, theentire $100x payment from US1 to FX is a disqual-ified hybrid amount, calculated as $100x (the amountof the payment) less $0 (the amount of dual inclusionincome). See § 1.267A–2(b)(1).

(4) Example 4. Payment allocable to a U.S. tax-able branch–(i) Facts. FX1 and FX2 are foreigncorporations that are bodies corporate established inand tax residents of Country X. FX1 holds all theinterests of FX2, and FX1 and FX2 file a consoli-dated return under Country X tax law. FX2 has aU.S. taxable branch (“USB”). During taxable year 1,FX2 pays $50x to FX1 pursuant to an instrument(the “FX1-FX2 instrument”). The amount paid pur-suant to the instrument is treated as interest for U.S.tax purposes but, as a consequence of the Country Xconsolidation regime, is treated as a disregardedtransaction between group members for Country Xtax purposes. Also during taxable year 1, FX2 pays$100x of interest to an unrelated bank that is not aparty to a structured arrangement (the instrumentpursuant to which the payment is made, the “bank-FX2 instrument”). FX2’s only other item of income,gain, deduction, or loss for taxable year 1 is $200x ofgross income. Under Country X tax law, the $200xof gross income is attributable to USB, but is notincluded in FX’s income because Country X tax lawexempts income attributable to a branch. Under U.S.tax law, the $200x of gross income is effectivelyconnected income of USB. Further, under section882, $75x of interest is, for taxable year 1, allocableto USB’s effectively connected income. USB hasneither liabilities that are directly allocable to it, asdescribed in § 1.882–5(a)(1)(ii)(A), nor booked lia-bilities, as defined in § 1.882–5(d)(2).

(ii) Analysis. USB is a specified party and thusany interest or royalty allowable as a deduction indetermining its effectively connected income is sub-ject to disallowance under section 267A. Pursuant to§ 1.267A–5(b)(3)(i)(A), USB is treated as paying$75x of interest, and such interest is thus a specifiedpayment. Of that $75x, $25x is treated as paid toFX1, calculated as $75x (the interest allocable toUSB under section 882) multiplied by 1/3 ($50x,FX2’s payment to FX1, divided by $150x, the totalinterest paid by FX2). See § 1.267A–5(b)(3)(ii)(A).As described in paragraphs (c)(4)(ii)(A) and (B) ofthis section, the $25x of the specified paymenttreated as paid by USB to FX1 is a disqualifiedhybrid amount under the disregarded payment ruleof § 1.267A–2(b) and, as a result, a deduction forthat amount is disallowed under § 1.267A–1(b)(1).

(A) USB’s $25x payment to FX1 is not regardedunder the tax law of Country X (the tax law of FX1,a related tax resident to which the payment is made)because under such tax law the payment is a disre-garded transaction between group members. See§ 1.267A–2(b)(2) and (f). In addition, were the tax

law of Country X to regard the payment (and treat itas interest), FX1 would include it in income. There-fore, the payment is a disregarded payment to which§ 1.267A–2(b) applies. See § 1.267A–2(b)(2).

(B) Under § 1.267A–2(b)(1), the excess (if any)of USB’s disregarded payments for taxable year 1($25x) over its dual inclusion income for the taxableyear is a disqualified hybrid amount. USB’s dualinclusion income for taxable year 1 is $0. This isbecause, as a result of the Country X exemption forincome attributable to a branch, no portion of USB’s$200x item of gross income is included in FX2’sincome. See § 1.267A–2(b)(3). Therefore, the entire$25x of the specified payment treated as paid byUSB to FX1 is a disqualified hybrid amount, calcu-lated as $25x (the amount of the payment) less $0(the amount of dual inclusion income). See§ 1.267A–2(b)(1).

(iii) Alternative facts – deemed branch payment.The facts are the same as in paragraph (c)(4)(i) ofthis section, except that FX2 does not pay anyamounts during taxable year 1 (thus, it does not paythe $50x to FX1 or the $100x to the bank). However,under an income tax treaty between the United Statesand Country X, USB is a U.S. permanent establish-ment and, for taxable year 1, $25x of royalties isallowable as a deduction in computing the businessprofits of USB and is deemed paid to FX2. UnderCountry X tax law, the $25x is not regarded. Ac-cordingly, the $25x is a specified payment that is adeemed branch payment. See §§ 1.267A–2(c)(2) and1.267A–5(b)(3)(i)(B). The entire $25x is a disqual-ified hybrid amount for which a deduction is disal-lowed because the tax law of Country X provides anexclusion or exemption for income attributable to abranch. See § 1.267A–2(c)(1).

(5) Example 5. Payment to a reverse hybrid–(i)Facts. FX holds all the interests of US1 and FY, andFY holds all the interests of FV. FY is an entityestablished in Country Y, and FV is an entity estab-lished in Country V. FY is fiscally transparent forCountry Y tax purposes but is not fiscally transparentfor Country X tax purposes. FV is fiscally transpar-ent for Country X tax purposes. On date 1, US1 pays$100x to FY. The amount is treated as interest forU.S. tax purposes and Country X tax purposes.

(ii) Analysis. US1 is a specified party and thus adeduction for its $100x specified payment is subjectto disallowance under section 267A. As described inparagraphs (c)(5)(ii)(A) through (C) of this section,the entire $100x payment is a disqualified hybridamount under the reverse hybrid rule of § 1.267A–2(d) and, as a result, a deduction for the payment isdisallowed under § 1.267A–1(b)(1).

(A) US1’s payment is made to a reverse hybridbecause FY is fiscally transparent under the tax lawof Country Y (the tax law of the country in which itis established) but is not fiscally transparent underthe tax law of Country X (the tax law of FX, aninvestor that is related to US1). See § 1.267A–2(d)(2) and (f). Therefore, § 1.267A–2(d) applies tothe payment. The result would be the same if thepayment were instead made to FV. See § 1.267A–2(d)(3).

(B) For US1’s payment to be a disqualified hy-brid amount under § 1.267A–2(d), a no-inclusionmust occur with respect to FX. See § 1.267A–2(d)(1)(i). Because FX does not derive the $100x


payment under Country X tax law (as FY is notfiscally transparent under such tax law), FX includes$0 of the payment in income and therefore a $100xno-inclusion occurs with respect to FX. See§ 1.267A–3(a).

(C) Pursuant to § 1.267A–2(d)(1)(ii), FX’s$100x no-inclusion gives rise to a disqualified hybridamount to the extent that it is a result of US1’spayment being made to the reverse hybrid. FX’s$100x no-inclusion is a result of the payment beingmade to the reverse hybrid because, were FY to betreated as fiscally transparent for Country X taxpurposes, FX would include $100x in income and,consequently, the no-inclusion would not occur. Theresult would be the same if Country X tax lawinstead viewed US1’s payment as a dividend, ratherthan interest. See § 1.267A–2(d)(1)(ii).

(iii) Alternative facts – inclusion under anti-deferral regime. The facts are the same as in para-graph (c)(5)(i) of this section, except that, under aCountry X anti-deferral regime, FX includes in itsincome $100x attributable to the $100x paymentreceived by FY. If under the rules of § 1.267A–3(a)FX includes the entire attributed amount in income(that is, if FX includes the amount in its income atthe full marginal rate imposed on ordinary incomeand the amount is not reduced or offset by certainrelief particular to the amount), then a no-inclusiondoes not occur with respect to FX. As a result, insuch a case, no portion of US1’s payment would bea disqualified hybrid amount under § 1.267A–2(d).

(iv) Alternative facts – multiple investors. Thefacts are the same as in paragraph (c)(5)(i) of thissection, except that FX holds all the interests of FZ,which is fiscally transparent for Country X tax pur-poses; FZ holds all the interests of FY, which isfiscally transparent for Country Z tax purposes; andFZ includes the $100x payment in income. Thus,each of FZ and FX is an investor of FY, as eachdirectly or indirectly holds an interest of FY. See§ 1.267A–5(a)(13). A no-inclusion does not occurwith respect to FZ, but a $100x no-inclusion occurswith respect to FX. FX’s no-inclusion is a result ofthe payment being made to the reverse hybrid be-cause, were FY to be treated as fiscally transparentfor Country X tax purposes, then FX would include$100x in income (as FZ is fiscally transparent forCountry X tax purposes). Accordingly, FX’s no-inclusion is a result of US1’s payment being made tothe reverse hybrid and, consequently, the entire$100x payment is a disqualified hybrid amount.

(v) Alternative facts – portion of no-inclusion notthe result of hybridity. The facts are the same as inparagraph (c)(5)(i) of this section, except that the$100x is viewed as a royalty for U.S. tax purposesand Country X tax purposes, and Country X tax lawcontains a patent box regime that provides an 80%deduction with respect to certain royalty income. Ifthe payment would qualify for the Country X patentbox deduction were FY to be treated as fiscallytransparent for Country X tax purposes, then only$20x of FX’s $100x no-inclusion would be the resultof the payment being paid to a reverse hybrid, cal-culated as $100x (the no-inclusion with respect toFX that actually occurs) less $80x (the no-inclusionwith respect to FX that would occur if FY were to betreated as fiscally transparent for Country X taxpurposes). See § 1.267A–3(a). Accordingly, in such

a case, only $20x of US1’s payment would be adisqualified hybrid amount.

(6) Example 6. Branch mismatch payment–(i)Facts. FX holds all the interests of US1 and FZ. FZowns BB, a Country B branch that gives rise to ataxable presence in Country B under Country Z taxlaw but not under Country B tax law. On date 1, US1pays $50x to FZ. The amount is treated as a royaltyfor U.S. tax purposes and Country Z tax purposes.Under Country Z tax law, the amount is treated asincome attributable to BB and, as a consequence ofCounty Z tax law exempting income attributable to abranch, is excluded from FZ’s income.

(ii) Analysis. US1 is a specified party and thus adeduction for its $50x specified payment is subject todisallowance under section 267A. As described inparagraphs (c)(6)(ii)(A) through (C) of this section,the entire $50x payment is a disqualified hybridamount under the branch mismatch rule of§ 1.267A–2(e) and, as a result, a deduction for thepayment is disallowed under § 1.267A–1(b)(1).

(A) US1’s payment is a branch mismatch pay-ment because under Country Z tax law (the tax lawof FZ, a home office that is related to US1) thepayment is treated as income attributable to BB, andBB is not a taxable branch (that is, under Country Btax law, BB does not give rise to a taxable presence).See § 1.267A–2(e)(2) and (f). Therefore, § 1.267A–2(e) applies to the payment. The result would be thesame if instead BB were a taxable branch and, underCountry B tax law, US1’s payment were treated asincome attributable to FZ and not BB. See § 1.267A–2(e)(2).

(B) For US1’s payment to be a disqualified hy-brid amount under § 1.267A–2(e), a no-inclusionmust occur with respect to FZ. See § 1.267A–2(e)(1)(i). As a consequence of the Country Z branchexemption, FZ includes $0 of the payment in incomeand therefore a $50x no-inclusion occurs with re-spect to FZ. See § 1.267A–3(a).

(C) Pursuant to § 1.267A–2(e)(1)(ii), FZ’s $50xno-inclusion gives rise to a disqualified hybridamount to the extent that it is a result of US1’spayment being a branch mismatch payment. FZ’s$50x no-inclusion is a result of the payment being abranch mismatch payment because, were the pay-ment to not be treated as income attributable to BBfor Country Z tax purposes, FZ would include $50xin income and, consequently, the no-inclusion wouldnot occur.

(7) Example 7. Reduction of disqualified hybridamount for certain amounts includible in income–(i)Facts. US1 and FW hold 60% and 40%, respec-tively, of the interests of FX, and FX holds all theinterests of FZ. Each of FX and FZ is a CFC. FXholds an instrument issued by FZ that it is treated asequity for Country X tax purposes and as indebted-ness for U.S. tax purposes (the FX-FZ instrument).On date 1, FZ pays $100x to FX pursuant to theFX-FZ instrument. The amount is treated as a divi-dend for Country X tax purposes and as interest forU.S. tax purposes. In addition, pursuant to section954(c)(6), the amount is not foreign personal holdingcompany income of FX. Further, under section951A, the payment is included in FX’s tested in-come. Lastly, Country X tax law provides an 80%participation exemption for dividends received fromnonresident corporations and, as a result of such

participation exemption, FX includes $20x of FZ’spayment in income.

(ii) Analysis. FZ, a CFC, is a specified party andthus a deduction for its $100x specified payment issubject to disallowance under section 267A. But for§ 1.267A–3(b), $80x of FZ’s payment would be adisqualified hybrid amount (such amount, a “tenta-tive disqualified hybrid amount”). See §§ 1.267A–2(a) and 1.267A–3(b)(1). Pursuant to § 1.267A–3(b),the tentative disqualified hybrid amount is reducedby $48x. See § 1.267A–3(b)(4). The $48x is thetentative disqualified hybrid amount to the extentthat it increases US1’s pro rata share of tested in-come with respect to FX under section 951A (cal-culated as $80x multiplied by 60%). See id. Accord-ingly, $32x of FZ’s payment ($80x less $48x) is adisqualified hybrid amount under § 1.267A–2(a)and, as a result, $32x of the deduction is disallowedunder § 1.267A–1(b)(1).

(iii) Alternative facts – United States shareholdernot a tax resident of the United States. The facts arethe same as in paragraph (c)(7)(i) of this section,except that US1 is a domestic partnership, 90% ofthe interests of which are held by US2 and theremaining 10% of which are held by a foreign indi-vidual that is a nonresident alien (as defined insection 7701(b)(1)(B)). As is the case in paragraph(c)(7)(ii) of this section, $48x of the $80x tentativedisqualified hybrid amount increases US1’s pro ratashare of the tested income of FX. However, US1 isnot a tax resident of the United States. Thus, the$48x reduces the tentative disqualified hybridamount only to the extent that the $48x would betaken into account by a tax resident of the UnitedStates. See § 1.267A–3(b)(4). US2 (a tax resident ofthe United States) would take into account $43.2x ofsuch amount (calculated as $48x multiplied by 90%).Thus, $36.8x of FZ’s payment ($80x less $43.2x) isa disqualified hybrid amount under § 1.267A–2(a).See id.

(8) Example 8. Imported mismatch rule – directoffset–(i) Facts. FX holds all the interests of FW, andFW holds all the interests of US1. FX holds aninstrument issued by FW that is treated as equity forCountry X tax purposes and indebtedness for Coun-try W tax purposes (the FX-FW instrument). FWholds an instrument issued by US1 that is treated asindebtedness for Country W and U.S. tax purposes(the FW-US1 instrument). In accounting period 1,FW pays $100x to FX pursuant to the FX-FW in-strument. The amount is treated as an excludibledividend for Country X tax purposes (by reason ofthe Country X participation exemption) and as inter-est for Country W tax purposes. Also in accountingperiod 1, US1 pays $100x to FW pursuant to theFW-US1 instrument. The amount is treated as inter-est for Country W and U.S. tax purposes and isincluded in FW’s income. The FX-FW instrumentwas not entered into pursuant to the same plan orseries of related transactions pursuant to which theFW-US1 instrument was entered into.

(ii) Analysis. US1 is a specified party and thus adeduction for its $100x specified payment is subjectto disallowance under section 267A. The $100x pay-ment is not a disqualified hybrid amount. In addition,FW’s $100x deduction is a hybrid deduction becauseit is a deduction allowed to FW that results from anamount paid that is interest under Country W tax


law, and were Country X law to have rules substan-tially similar to those under §§ 1.267A–1 through1.267A–3 and 1.267A–5, a deduction for the pay-ment would be disallowed (because under such rulesthe payment would be pursuant to a hybrid transac-tion and FX’s no-inclusion would be a result of thehybrid transaction). See §§ 1.267A–2(a) and1.267A–4(b). Under § 1.267A–4(a), US1’s paymentis an imported mismatch payment, US1 is an im-ported mismatch payer, and FW (the tax resident thatincludes the imported mismatch payment in income)is an imported mismatch payee. The imported mis-match payment is a disqualified imported mismatchamount to the extent that the income attributable tothe payment is directly or indirectly offset by thehybrid deduction incurred by FX (a tax resident thatis related to US1). See § 1.267A–4(a). Under§ 1.267A–4(c)(1), the $100x hybrid deduction di-rectly or indirectly offsets the income attributable toUS1’s imported mismatch payment to the extent thatthe payment directly or indirectly funds the hybriddeduction. The entire $100x of US1’s payment di-rectly funds the hybrid deduction because FW (theimported mismatch payee) incurs at least thatamount of the hybrid deduction. See § 1.267A–4(c)(3)(i). Accordingly, the entire $100x payment isa disqualified imported mismatch amount under§ 1.267A–4(a) and, as a result, a deduction for thepayment is disallowed under § 1.267A–1(b)(2).

(iii) Alternative facts – long-term deferral. Thefacts are the same as in paragraph (c)(8)(i) of thissection, except that the FX-FW instrument is treatedas indebtedness for Country X and Country W taxpurposes, and FW does not pay any amounts pursu-ant to the instrument during accounting period 1. Inaddition, under Country W tax law, FW is allowed todeduct interest under the FX-FW instrument as itaccrues, whereas under Country X tax law FX doesnot recognize income under the FX-FW instrumentuntil interest is paid. Further, FW accrues $100x ofinterest during accounting period 1, and FW will notpay such amount to FX for more than 36 monthsafter the end of the accounting period. The results arethe same as in paragraph (c)(8)(ii) of this section.That is, FW’s $100x deduction is a hybrid deduction,see §§ 1.267A–2(a), 1.267A–3(a), and 1.267A–4(b),and the income attributable to US1’s $100x importedmismatch payment is offset by the hybrid deductionfor the reasons described in paragraph (c)(8)(ii) ofthis section. As a result, a deduction for the paymentis disallowed under § 1.267A–1(b)(2).

(iv) Alternative facts – notional interest deduc-tion. The facts are the same as in paragraph (c)(8)(i)of this section, except that the FX-FW instrumentdoes not exist and thus FW does not pay anyamounts to FX during accounting period 1. How-ever, during accounting period 1, FW is allowed a$100x notional interest deduction with respect to itsequity under Country W tax law. Pursuant to§ 1.267A–4(b), FW’s notional interest deduction is ahybrid deduction. The results are the same as inparagraph (c)(8)(ii) of this section. That is, the in-come attributable to US1’s $100x imported mis-match payment is offset by FW’s hybrid deductionfor the reasons described in paragraph (c)(8)(ii) ofthis section. As a result, a deduction for the paymentis disallowed under § 1.267A–1(b)(2).

(v) Alternative facts – foreign hybrid mismatchrules prevent hybrid deduction. The facts are thesame as in paragraph (c)(8)(i) of this section, exceptthat the tax law of Country W contains hybrid mis-match rules and under such rules FW is not alloweda deduction for the $100x that it pays to FX on theFX-FW instrument. The $100x paid by FW thereforedoes not give rise to a hybrid deduction. See§ 1.267A–4(b). Accordingly, because the incomeattributable to US1’s payment is not directly or in-directly offset by a hybrid deduction, the payment isnot a disqualified imported mismatch amount. There-fore, a deduction for the payment is not disallowedunder § 1.267A–2(b)(2).

(9) Example 9. Imported mismatch rule – indi-rect offsets and pro rata allocations–(i) Facts. FXholds all the interests of FZ, and FZ holds all theinterests of US1 and US2. FX has a Country Bbranch that, for Country X and Country B tax pur-poses, gives rise to a taxable presence in Country Band is therefore a taxable branch (“BB”). Under theCountry B-Country X income tax treaty, BB is apermanent establishment entitled to deduct expensesproperly attributable to BB for purposes of comput-ing its business profits under the treaty. BB isdeemed to pay a royalty to FX for the right to useintangibles developed by FX equal to cost plus y%.The deemed royalty is a deductible expense properlyattributable to BB under the Country B-Country Xincome tax treaty. For Country X tax purposes, anytransactions between BB and X are disregarded. Thedeemed royalty amount is equal to $80x during ac-counting period 1. In addition, an instrument issuedby FZ to FX is properly reflected as an asset on thebooks and records of BB (the FX-FZ instrument).The FX-FZ instrument is treated as indebtedness forCountry X, Country Z, and Country B tax purposes.In accounting period 1, FZ pays $80x pursuant to theFX-FZ instrument; the amount is treated as interestfor Country X, Country Z, and Country B tax pur-poses, and is treated as income attributable to BB forCountry X and Country B tax purposes (but, forCountry X tax purposes, is excluded from FX’sincome as a consequence of the Country X exemp-tion for income attributable to a branch). Further, inaccounting period 1, US1 and US2 pay $60x and$40x, respectively, to FZ pursuant to instrumentsthat are treated as indebtedness for Country Z andU.S. tax purposes; the amounts are treated as interestfor Country Z and U.S. tax purposes and are in-cluded in FZ’s income for Country Z tax purposes.Lastly, neither the instrument pursuant to which US1pays the $60x nor the instrument pursuant to whichUS2 pays the $40x was entered into pursuant to aplan or series of related transactions that includes thetransaction or agreement giving rise to BB’s deduc-tion for the deemed royalty.

(ii) Analysis. US1 and US2 are specified partiesand thus deductions for their specified payments aresubject to disallowance under section 267A. Neitherof the payments is a disqualified hybrid amount. Inaddition, BB’s $80x deduction for the deemed roy-alty is a hybrid deduction because it is a deductionallowed to BB that results from an amount paid thatis treated as a royalty under Country B tax law(regardless of whether a royalty deduction would beallowed under U.S. law), and were Country B taxlaw to have rules substantially similar to those under

§§ 1.267A–1 through 1.267A–3 and 1.267A–5, adeduction for the payment would be disallowed be-cause under such rules the payment would be adeemed branch payment and Country X has an ex-clusion for income attributable to a branch. See§§ 1.267A–2(c) and 1.267A–4(b). Under § 1.267A–4(a), each of US1’s and US2’s payments is an im-ported mismatch payment, US1 and US2 are im-ported mismatch payers, and FZ (the tax resident thatincludes the imported mismatch payments in in-come) is an imported mismatch payee. The importedmismatch payments are disqualified imported mis-match amounts to the extent that the income attrib-utable to the payments is directly or indirectly offsetby the hybrid deduction incurred by BB (a taxablebranch that is related to US1 and US2). See§ 1.267A–4(a). Under § 1.267A–4(c)(1), the $80xhybrid deduction directly or indirectly offsets theincome attributable to the imported mismatch pay-ments to the extent that the payments directly orindirectly fund the hybrid deduction. Paragraphs(c)(9)(ii)(A) and (B) of this section describe theextent to which the imported mismatch paymentsdirectly or indirectly fund the hybrid deduction.

(A) Neither US1’s nor US2’s payment directlyfunds the hybrid deduction because FZ (the importedmismatch payee) did not incur the hybrid deduction.See § 1.267A–4(c)(3)(i). To determine the extent towhich the payments indirectly fund the hybrid de-duction, the amount of the hybrid deduction that isallocated to FZ must be determined. See § 1.267A–4(c)(3)(ii). FZ is allocated the hybrid deduction tothe extent that it directly or indirectly makes afunded taxable payment to BB (the taxable branchthat incurs the hybrid deduction). See § 1.267A–4(c)(3)(iii). The $80x that FZ pays pursuant to theFX-FZ instrument is a funded taxable payment of FZto BB. See § 1.267A–4(c)(3)(v). Therefore, becauseFZ makes a funded taxable payment to BB that is atleast equal to the amount of the hybrid deduction, FZis allocated the entire amount of the hybrid deduc-tion. See § 1.267A–4(c)(3)(iii).

(B) But for US2’s imported mismatch payment,the entire $60x of US1’s imported mismatch pay-ment would indirectly fund the hybrid deductionbecause FZ is allocated at least that amount of thehybrid deduction. See § 1.267A–4(c)(3)(ii). Simi-larly, but for US1’s imported mismatch payment, theentire $40x of US2’s imported mismatch paymentwould indirectly fund the hybrid deduction becauseFZ is allocated at least that amount of the hybriddeduction. See id. However, because the sum ofUS1’s and US2’s imported mismatch payments toFZ ($100x) exceeds the hybrid deduction allocatedto FZ ($80x), pro rata adjustments must be made.See § 1.267A–4(e). Thus, $48x of US1’s importedmismatch payment is considered to indirectly fundthe hybrid deduction, calculated as $80x (the amountof the hybrid deduction) multiplied by 60% ($60x,the amount of US1’s imported mismatch payment toFZ, divided by $100x, the sum of the importedmismatch payments that US1 and US2 make to FZ).Similarly, $32x of US2’s imported mismatch pay-ment is considered to indirectly fund the hybriddeduction, calculated as $80x (the amount of thehybrid deduction) multiplied by 40% ($40x, theamount of US2’s imported mismatch payment to FZ,divided by $100x, the sum of the imported mismatch


payments that US1 and US2 make to FZ). Accord-ingly, $48x of US1’s imported mismatch payment,and $32x of US2’s imported mismatch payment, is adisqualified imported mismatch amount under§ 1.267A–4(a) and, as a result, a deduction for suchamounts is disallowed under § 1.267A–1(b)(2).

(iii) Alternative facts – loss made availablethrough foreign group relief regime. The facts arethe same as in paragraph (c)(9)(i) of this section,except that FZ holds all the interests in FZ2, a bodycorporate that is a tax resident of Country Z, FZ2(rather than FZ) holds all the interests of US1 andUS2, and US1 and US2 make their respective $60xand $40x payments to FZ2 (rather than to FZ).Further, in accounting period 1, a $10x loss of FZ ismade available to offset income of FZ2 through aCountry Z foreign group relief regime. Pursuant to§ 1.267A–4(c)(3)(vi), FZ and FZ2 are treated as asingle tax resident for purposes of § 1.267A–4(c)because a loss that is not incurred by FZ2 (FZ’s $10xloss) is made available to offset income of FZ2 underthe Country Z group relief regime. Accordingly, theresults are the same as in paragraph (c)(9)(ii) of thissection. That is, by treating FZ and FZ2 as a singletax resident for purposes of § 1.267A–4(c), BB’shybrid deduction offsets the income attributable toUS1’s and US2’s imported mismatch payments tothe same extent as described in paragraph (c)(9)(ii)of this section.

(10) Example 10. Imported mismatch rule – or-dering rules and rule deeming certain payments tobe imported mismatch payments–(i) Facts. FX holdsall the interests of FW, and FW holds all the interestsof US1, US2, and FZ. FZ holds all the interests ofUS3. FX advances money to FW pursuant to aninstrument that is treated as equity for Country X taxpurposes and indebtedness for Country W tax pur-poses (the FX-FW instrument). In a transaction thatis pursuant to the same plan pursuant to which theFX-FW instrument is entered into, FW advancesmoney to US1 pursuant to an instrument that istreated as indebtedness for Country W and U.S. taxpurposes (the FW-US1 instrument). In accountingperiod 1, FW pays $125x to FX pursuant to theFX-FW instrument; the amount is treated as an ex-cludible dividend for Country X tax purposes (byreason of the Country X participation exemptionregime) and as deductible interest for Country W taxpurposes. Also in accounting period 1, US1 pays$50x to FW pursuant to the FW-US1 instrument;US2 pays $50x to FW pursuant to an instrumenttreated as indebtedness for Country W and U.S. taxpurposes (the FW-US2 instrument); US3 pays $50xto FZ pursuant to an instrument treated as indebted-ness for Country Z and U.S. tax purposes (the FZ-US3 instrument); and FZ pays $50x to FW pursuantto an instrument treated as indebtedness for CountryW and Country Z tax purposes (FW-FZ instrument).The amounts paid by US1, US2, US3, and FZ aretreated as interest for purposes of the relevant taxlaws and are included in the respective specifiedrecipient’s income. Lastly, neither the FW-US2 in-strument, the FW-FZ instrument, nor the FZ-US3instrument was entered into pursuant to a plan orseries of related transactions that includes the trans-action pursuant to which the FX-FW instrument wasentered into.

(ii) Analysis. US1, US2, and US3 are specifiedparties (but FZ is not a specified party, see§ 1.267A–5(a)(17)) and thus deductions for US1’s,US2’s, and US3’s specified payments are subject todisallowance under section 267A. None of the spec-ified payments is a disqualified hybrid amount. Un-der § 1.267A–4(a), each of the payments is thus animported mismatch payment, US1, US2, and US3are imported mismatch payers, and FW and FZ (thetax residents that include the imported mismatchpayments in income) are imported mismatch payees.The imported mismatch payments are disqualifiedimported mismatch amounts to the extent that theincome attributable to the payments is directly orindirectly offset by FW’s $125x hybrid deduction.See § 1.267A–4(a) and (b). Under § 1.267A–4(c)(1),the $125x hybrid deduction directly or indirectlyoffsets the income attributable to the imported mis-match payments to the extent that the paymentsdirectly or indirectly fund the hybrid deduction.Paragraphs (c)(10)(ii)(A) through (C) of this sectiondescribe the extent to which the imported mismatchpayments directly or indirectly fund the hybrid de-duction and are therefore disqualified hybridamounts for which a deduction is disallowed under§ 1.267A–1(b)(2).

(A) First, the $125x hybrid deduction offsets theincome attributable to US1’s imported mismatchpayment, a factually-related imported mismatch pay-ment that directly funds the hybrid deduction. See§ 1.267A–4(c)(2)(i). The entire $50x of US1’s pay-ment directly funds the hybrid deduction becauseFW (the imported mismatch payee) incurs at leastthat amount of the hybrid deduction. See § 1.267A–4(c)(3)(i). Accordingly, the entire $50x of the pay-ment is a disqualified imported mismatch amountunder § 1.267A–4(a).

(B) Second, the remaining $75x hybrid deduc-tion offsets the income attributable to US2’s im-ported mismatch payment, a factually-unrelated im-ported mismatch payment that directly funds theremaining hybrid deduction. § 1.267A–4(c)(2)(ii).The entire $50x of US2’s payment directly funds theremaining hybrid deduction because FW (the im-ported mismatch payee) incurs at least that amountof the remaining hybrid deduction. See § 1.267A–4(c)(3)(i). Accordingly, the entire $50x of the pay-ment is a disqualified imported mismatch amountunder § 1.267A–4(a).

(C) Third, the $25x remaining hybrid deductionoffsets the income attributable to US3’s importedmismatch payment, a factually-unrelated importedmismatch payment that indirectly funds the remain-ing hybrid deduction. See § 1.267A–4(c)(2)(iii). Theimported mismatch payment indirectly funds the re-maining hybrid deduction to the extent that FZ (theimported mismatch payee) is allocated the remaininghybrid deduction. § 1.267A–4(c)(3)(ii). FZ is allo-cated the remaining hybrid deduction to the extentthat it directly or indirectly makes a funded taxablepayment to FW (the tax resident that incurs thehybrid deduction). § 1.267A–4(c)(3)(iii). The $50xthat FZ pays to FW pursuant to the FW-FZ instru-ment is a funded taxable payment of FZ to FW.§ 1.267A–4(c)(3)(v). Therefore, because FZ makes afunded taxable payment to FW that is at least equalto the amount of the remaining hybrid deduction, FZis allocated the remaining hybrid deduction.

§ 1.267A–4(c)(3)(iii). Accordingly, $25x of US3’spayment indirectly funds the $25x remaining hybriddeduction and, consequently, $25x of US3’s pay-ment is a disqualified imported mismatch amountunder § 1.267A–4(a).

(iii) Alternative facts – amount deemed to be animported mismatch payment. The facts are the sameas in paragraph (c)(10)(i) of this section, except thatUS1 is not a domestic corporation but instead is abody corporate that is only a tax resident of CountryE (hereinafter, “FE”) (thus, for purposes of this para-graph (c)(10)(iii), the FW-US1 instrument is insteadissued by FE and is the “FW-FE instrument”). Inaddition, the tax law of Country E contains hybridmismatch rules and, under a provision of such rulessubstantially similar to § 1.267A–4, FE is denied adeduction for the $50x it pays to FW under theFW-FE instrument. Pursuant to § 1.267A–4(f), the$50x that FE pays to FW pursuant to the FW-FEinstrument is deemed to be an imported mismatchpayment for purposes of determining the extent towhich the income attributable to US2’s and US3’simported mismatch payments is offset by FW’s hy-brid deduction. The results are the same as in para-graphs (c)(10)(ii)(B) and (C) of this section. That is,by treating the $50x that FE pays to FW as animported mismatch payment, FW’s hybrid deductionoffsets the income attributable to US2’s and US3’simported mismatch payments to the same extent asdescribed in paragraphs (c)(10)(ii)(B) and (C) of thissection.

(iv) Alternative facts – amount deemed to be animported mismatch payment not treated as a fundedtaxable payment. The facts are the same as in para-graph (c)(10)(i) of this section, except that FZ holdsits interests of US3 indirectly through FE, a bodycorporate that is only a tax resident of Country E(hereinafter, “FE”), and US3 makes its $50x pay-ment to FE (rather than to FZ); US3’s $50x paymentis treated as interest for Country E tax purposes andFE includes the payment in income. In addition,during accounting period 1, FE pays $50x of interestto FZ pursuant to an instrument and such amount isincluded in FZ’s income. Further, the tax law ofCountry E contains hybrid mismatch rules and, un-der a provision of such rules substantially similar to§ 1.267A–4, FE is denied a deduction for $25x ofthe $50x it pays to FZ, because under such provision$25x of the income attributable to FE’s payment isconsidered offset against $25x of FW’s hybrid deduc-tion. With respect to US1 and US2, the results are thesame as described in paragraphs (c)(10)(ii)(A) and (B)of this section. However, no portion of US3’s paymentis a disqualified imported mismatch amount. This isbecause the $50x that FE pays to FZ is not consideredto be a funded taxable payment, because under a pro-vision of Country E’s hybrid mismatch rules that issubstantially similar to § 1.267A–4, FE is denied adeduction for a portion of the $50x. See § 1.267A–4(c)(3)(v) and (f). Therefore, there is no chain offunded taxable payments connecting US3 (the im-ported mismatch payer) and FW (the tax resident thatincurs the hybrid deduction); as a result, US3’s pay-ment does not indirectly fund the hybrid deduction. See§ 1.267A–4(c)(3)(ii) through (iv).


§ 1.267A–7 Applicability dates.

(a) General rule. Except as provided inparagraph (b) of this section, §§ 1.267A–1through 1.267A–6 apply to taxable yearsbeginning after December 31, 2017.

(b) Special rules. Sections 1.267A–2(b), (c), (e), 1.267A–4, and 1.267A–5(b)(5) apply to taxable years beginningon or after December 20, 2018. In addi-tion, § 1.267A–5(a)(20) (defining struc-tured arrangement), as well as the portionsof §§ 1.267A–1 through 1.267A–3 thatrelate to structured arrangements and thatare not otherwise described in this para-graph (b), apply to taxable years begin-ning on or after December 20, 2018.

Par. 4 Section 1.1503(d)–1 is amendedby:

1. In paragraph (b)(2)(i), removing theword “and”.

2. In paragraph (b)(2)(ii), removing thesecond period and adding in itsplace “; and”.

3. Adding paragraph (b)(2)(iii).4. Redesignating paragraph (c) as para-

graph (d).5. Adding new paragraph (c).6. In the first sentence of newly-

redesignated paragraph (d)(2)(ii), re-moving the language “(c)(2)(i)” andadding the language “(d)(2)(i)” in itsplace.

The additions read as follows:

§ 1.1503(d)–1 Definitions and specialrules for filings under section 1503(d).

* * * * *(b) * * *(2) * * *(iii) A domestic consenting corporation

(as defined in § 301.7701–3(c)(3)(i) ofthis chapter), as provided in paragraph(c)(1) of this section. See § 1.1503(d)–7(c)(41).* * * * *

(c) Treatment of domestic consentingcorporation as a dual resident corpora-tion–(1) Rule. A domestic consenting cor-poration is treated as a dual resident cor-poration under paragraph (b)(2)(iii) of thissection for a taxable year if, on any dayduring the taxable year, the following re-quirements are satisfied:

(i) Under the tax law of a foreign coun-try where a specified foreign tax resident

is tax resident, the specified foreign taxresident derives or incurs (or would deriveor incur) items of income, gain, deduction,or loss of the domestic consenting corpo-ration (because, for example, the domesticconsenting corporation is fiscally trans-parent under such tax law).

(ii) The specified foreign tax residentbears a relationship to the domestic con-senting corporation that is described insection 267(b) or 707(b). See § 1.1503(d)–7(c)(41).

(2) Definitions. The following defini-tions apply for purposes of this paragraph(c).

(i) The term fiscally transparent means,with respect to a domestic consenting cor-poration or an intermediate entity, fiscallytransparent as determined under the princi-ples of § 1.894–1(d)(3)(ii) and (iii), withoutregard to whether a specified foreign taxresident is a resident of a country that has anincome tax treaty with the United States.

(ii) The term specified foreign tax res-ident means a body corporate or otherentity or body of persons liable to taxunder the tax law of a foreign country as aresident.* * * * *

Par. 5. Section 1.1503(d)–3 is amendedby adding the language “or (e)(3)” afterthe language “paragraph (e)(2)” in para-graph (e)(1), and adding paragraph (e)(3)to read as follows:

§ 1.1503(d)–3 Foreign use.

* * * * *(e) * * *(3) Exception for domestic consenting

corporations. Paragraph (e)(1) of this sec-tion will not apply so as to deem a foreignuse of a dual consolidated loss incurred bya domestic consenting corporation that isa dual resident corporation under§ 1.1503(d)–1(b)(2)(iii).

§ 1.1503(d)–6 [Amended]

Par. 6. Section 1.1503(d)– 6 isamended by:

1. Removing the language “a foreigngovernment” and “a foreign country” inparagraph (f)(5)(i), and adding the lan-guage “a government of a country” and“the country” in their places, respectively.

2. Removing the language “a foreigngovernment” in paragraph (f)(5)(ii), andadding the language “a government of acountry” in its place.

3. Removing the language “the foreigngovernment” in paragraph (f)(5)(iii), andadding the language “a government of acountry” in its place.

Par. 7. Section 1.1503(d)–7 is amendedby redesignating Examples 1 through 40as paragraphs (c)(1) through (40), respec-tively, and adding paragraph (c)(41) toread as follows:

§ 1.1503(d)–7 Examples.

* * * * *(c) * * *(41) Example 41. Domestic consenting corpora-

tion–treated as dual resident corporation–(i) Facts.FSZ1, a Country Z entity that is subject to CountryZ tax on its worldwide income or on a residencebasis and is classified as a foreign corporation forU.S. tax purposes, owns all the interests in DCC, adomestic eligible entity that has filed an election tobe classified as an association. Under Country Z taxlaw, DCC is fiscally transparent. For taxable year 1,DCC’s only item of income, gain, deduction, or lossis a $100x deduction and such deduction comprisesa $100x net operating loss of DCC. For Country Ztax purposes, FSZ1’s only item of income, gain,deduction, or loss, other than the $100x loss attrib-utable to DCC, is $60x of operating income.

(ii) Result. DCC is a domestic consenting corpo-ration because by electing to be classified as anassociation, it consents to be treated as a dual resi-dent corporation for purposes of section 1503(d). See§ 301.7701–3(c)(3) of this chapter. For taxable year1, DCC is treated as a dual resident corporationunder § 1.1503(d)–1(b)(2)(iii) because FSZ1 (a spec-ified foreign tax resident that bears a relationship toDCC that is described in section 267(b) or 707(b))derives or incurs items of income, gain, deduction, orloss of DCC. See § 1.1503(d)–1(c). FSZ1 derives orincurs items of income, gain, deduction, or loss ofDCC because, under Country Z tax law, DCC isfiscally transparent. Thus, DCC has a $100xdual consolidated loss for taxable year 1. See§ 1.1503(d)–1(b)(5). Because the loss is available to,and in fact does, offset income of FSZ1 under Coun-try Z tax law, there is a foreign use of the dualconsolidated loss in year 1. Accordingly, the dualconsolidated loss is subject to the domestic use lim-itation rule of § 1.1503(d)–4(b). The result would bethe same if FSZ1 were to indirectly own its DCCstock through an intermediate entity that is fiscallytransparent under Country Z tax law, or if an indi-vidual were to wholly own FSZ1 and FSZ1 were adisregarded entity. In addition, the result would bethe same if FSZ1 had no items of income, gain,deduction, or loss, other than the $100x loss attrib-utable to DCC.

(iii) Alternative facts – DCC not treated as adual resident corporation. The facts are the same asin paragraph (c)(41)(i) of this section, except that


DCC is not fiscally transparent under Country Z taxlaw and thus under Country Z tax law FSZ1 does notderive or incur items of income, gain, deduction, orloss of DCC. Accordingly, DCC is not treated as adual resident corporation under § 1.1503(d)–1(b)(2)(iii) for year 1 and, consequently, its $100xnet operating loss in that year is not a dual consoli-dated loss.

(iv) Alternative facts – mirror legislation. Thefacts are the same as in paragraph (c)(41)(i) of thissection, except that, under provisions of Country Ztax law that constitute mirror legislation under§ 1.1503(d)–3(e)(1) and that are substantially similarto the recommendations in Chapter 6 of OECD/G-20, Neutralising the Effects of Hybrid MismatchArrangements, Action 2: 2015 Final Report (October2015), Country Z tax law prohibits the $100x lossattributable to DCC from offsetting FSZ1’s incomethat is not also subject to U.S. tax. As is the case inparagraph (c)(41)(ii) of this section, DCC is treatedas a dual resident corporation under § 1.1503(d)–1(b)(2)(iii) for year 1 and its $100x net operatingloss is a dual consolidated loss. Pursuant to§ 1.1503(d)–3(e)(3), however, the dual consolidatedloss is not deemed to be put to a foreign use by virtueof the Country Z mirror legislation. Therefore, DCCis eligible to make a domestic use election for thedual consolidated loss.

Par. 8. Section 1.1503(d)–8 is amendedby removing the language “§ 1.1503(d)–1(c)” and adding in its place the language“§ 1.1503(d)–1(d)” wherever it appears inparagraphs (b)(3)(i) and (iii), and addingparagraphs (b)(6) and (7) to read as follows:

§ 1.1503(d)–8 Effective dates.

* * * * *(b) * * *(6) Rules regarding domestic consent-

ing corporations. Section 1.1503(d)–1(b)(2)(iii), (c), and (d), as well§ 1.1503(d)–3(e)(1) and (e)(3), apply todeterminations under §§ 1.1503(d)–1through 1.1503(d)–7 relating to taxableyears ending on or after December 20, 2018.For taxable years ending before December20, 2018, see §§ 1.1503(d)–1(c) (previousversion of § 1.1503(d)–1(d)) and 1.1503(d)–3(e)(1) (previous version of § 1.1503(d)–3(e)(1)) as contained in 26 CFR part 1 re-vised as of April 1, 2018.

(7) Compulsory transfer triggeringevent exception. Sections 1.1503(d)–6(f)(5)(i) through (iii) apply to transfersthat occur on or after December 20, 2018.For transfers occurring before December20, 2018, see § 1.1503(d)–6(f)(5)(i) through(iii) as contained in 26 CFR part 1 revised asof April 1, 2018. However, taxpayers mayconsistently apply § 1.1503(d)–6(f)(5)(i)

through (iii) to transfers occurring beforeDecember 20, 2018.

Par. 9. Section 1.6038–2 is amendedby adding paragraphs (f)(13) and (14) andadding a sentence at the end of paragraph(m) to read as follows:

§ 1.6038–2 Information returns requiredof United States persons with respect toannual accounting periods of certainforeign corporations beginning afterDecember 31, 1962.

* * * * *(f) * * *(13) Amounts involving hybrid trans-

actions or hybrid entities under section267A. If for the annual accounting period,the corporation pays or accrues interest orroyalties for which a deduction is disal-lowed under section 267A and the regu-lations under section 267A as contained in26 CFR part 1, then Form 5471 (or suc-cessor form) must contain such informa-tion about the disallowance in the formand manner and to the extent prescribedby the form, instruction, publication, orother guidance published in the InternalRevenue Bulletin.

(14) Hybrid dividends under section245A. If for the annual accounting period,the corporation pays or receives a hybriddividend or a tiered hybrid dividend undersection 245A and the regulations undersection 245A as contained in 26 CFR part1, then Form 5471 (or successor form)must contain such information about thehybrid dividend or tiered hybrid dividendin the form and manner and to the extentprescribed by the form, instruction, publi-cation, or other guidance published in theInternal Revenue Bulletin.* * * * *

(m) Applicability dates. * * * Para-graphs (f)(13) and (14) of this sectionapply with respect to information for an-nual accounting periods beginning on orafter December 20, 2018.

Par. 10. Section 1.6038–3 is amendedby:

1. Adding paragraph (g)(3).2. Redesignating the final paragraph (1)

of the section as paragraph (l), revising theparagraph heading for newly-designatedparagraph (l), and adding a sentence to theend of newly-designated paragraph (l).

The additions and revision read as fol-lows:

§ 1.6038–3 Information returns requiredof certain United States persons withrespect to controlled foreignpartnerships (CFPs).

* * * * *(g) * * *(3) Amounts involving hybrid transac-

tions or hybrid entities under section267A. In addition to the information re-quired pursuant to paragraphs (g)(1) and(2) of this section, if, during the partner-ship’s taxable year for which the Form8865 is being filed, the partnership paid oraccrued interest or royalties for which adeduction is disallowed under section267A and the regulations under section267A as contained in 26 CFR part 1, thecontrolling fifty-percent partners mustprovide information about the disallow-ance in the form and manner and to theextent prescribed by Form 8865 (or suc-cessor form), instruction, publication, orother guidance published in the InternalRevenue Bulletin.

(l) Applicability dates. * * * Paragraph(g)(3) of this section applies for taxableyears of a foreign partnership beginningon or after December 20, 2018.

Par. 11. Section 1.6038A–2 is amendedby adding paragraph (b)(5)(iii) and addinga sentence at the end of paragraph (g) toread as follows:

§ 1.6038A–2 Requirement of return.

(b) * * *(5) * * *(iii) If, for the taxable year, a reporting

corporation pays or accrues interest orroyalties for which a deduction is disal-lowed under section 267A and the regu-lations under section 267A as contained in26 CFR part 1, then the reporting corpo-ration must provide such informationabout the disallowance in the form andmanner and to the extent prescribed byForm 5472 (or successor form), instruc-tion, publication, or other guidance pub-lished in the Internal Revenue Bulletin.

(g) * * * Paragraph (b)(5)(iii) of thissection applies with respect to informationfor annual accounting periods beginningon or after December 20, 2018.


PART 301–PROCEDURE ANDADMINISTRATION

Paragraph 12. The authority citationfor part 301 continues to read in part asfollows:

Authority: 26 U.S.C. 7805 * * *Par. 13. Section 301.7701–3 is

amended by revising the sixth sentence ofparagraph (a) and adding paragraph (c)(3)to read as follows:

§ 301.7701–3 Classification of certainbusiness entities.

(a) In general. * * * Paragraph (c) ofthis section provides rules for making ex-press elections, including a rule underwhich a domestic eligible entity that electsto be classified as an association consentsto be subject to the dual consolidated lossrules of section 1503(d).

(c) * * *(3) Consent to be subject to section

1503(d)–(i) Rule. A domestic eligible en-tity that elects to be classified as an asso-

ciation consents to be treated as a dualresident corporation for purposes of sec-tion 1503(d) (such an entity, a domesticconsenting corporation), for any taxableyear for which it is classified as an asso-ciation and the condition set forth in§ 1.1503(d)–1(c)(1) of this chapter is sat-isfied.

(ii) Transition rule – deemed consent.If, as a result of the applicability daterelating to paragraph (c)(3)(i) of thissection, a domestic eligible entity that isclassified as an association has not con-sented to be treated as a domestic con-senting corporation pursuant to para-graph (c)(3)(i) of this section, then thedomestic eligible entity is deemed toconsent to be so treated as of its firsttaxable year beginning on or after De-cember 20, 2019. The first sentence ofthis paragraph (c)(3)(ii) does not applyif the domestic eligible entity elects, onor after December 20, 2018 and effec-tive before its first taxable year begin-ning on or after December 20, 2019, tobe classified as a partnership or disre-

garded entity such that it ceases to be adomestic eligible entity that is classifiedas an association. For purposes of theelection described in the second sen-tence of this paragraph (c)(3)(ii), thesixty month limitation under paragraph(c)(1)(iv) of this section is waived.

(iii) Applicability date. The sixth sen-tence of paragraph (a) of this section andparagraph (c)(3)(i) of this section apply toa domestic eligible entity that on or afterDecember 20, 2018 files an election to beclassified as an association (regardless ofwhether the election is effective beforeDecember 20, 2018). Paragraph (c)(3)(ii)of this section applies as of December 20,2018.

Kirsten Wielobob,Deputy Commissioner for Services and

Enforcement.

(Filed by the Office of the Federal Register on December 12,2018, 4:15 a.m., and published in the issue of the FederalRegister for December 28, 2018 83 F.R. 67612)


Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds thatthe same principle also applies to B, theearlier ruling is amplified. (Compare withmodified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the newruling does more than restate the sub-

stance of a prior ruling, a combination ofterms is used. For example, modified andsuperseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that isself contained. In this case, the previouslypublished ruling is first modified and then,as modified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear in ma-terial published in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.ER—Employer.

ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.PRS—Partnership.

PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

Bulletin No. 2019–03 January 14, 2019i

Numerical Finding List1

Bulletin 2019–3

Notices:

2019-01, 2019-02 I.R.B. 2752019-02, 2019-02 I.R.B. 2812019-03, 2019-03 I.R.B. 3502019-04, 2019-02 I.R.B. 2822019-05, 2019-02 I.R.B. 2832019-06, 2019-03 I.R.B. 3532019-08, 2019-03 I.R.B. 354

Proposed Regulations:

REG-104259-18, 2019-02 I.R.B. 300REG-104352-18, 2019-03 I.R.B. 357

Revenue Procedures:

2019-1, 2019-01 I.R.B. 12019-2, 2019-01 I.R.B. 1062019-3, 2019-01 I.R.B. 1302019-4, 2019-01 I.R.B. 1462019-5, 2019-01 I.R.B. 2302019-6, 2019-02 I.R.B. 2842019-7, 2019-01 I.R.B. 2682019-8, 2019-03 I.R.B. 3472019-9, 2019-2 I.R.B. 2932019-10, 2019-2 I.R.B. 296

Revenue Rulings:

2019-03, 2019-02 I.R.B. 272

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018–27 through 2018–52 is in Internal Revenue Bulletin2018–52, dated December 27, 2018.

January 14, 2019 Bulletin No. 2019–03ii

Finding List of Current Actions onPreviously Published Items1

Bulletin 2019–3

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018–27 through 2018–52 is in Internal Revenue Bulletin2018–52, dated December 27, 2018.

Bulletin No. 2019–03 January 14, 2019iii

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

Bulletins are available at www.irs.gov/irb/.

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