Bulletin No. 2020–46

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2020–46

November 9, 2020

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

ADMINISTRATIVE, EXTATE TAX,

EXCUSE TAX, GIFT TAX, INCOME TAX

be made under adjustment procedures similar to those used

to adjust benefit amounts under § 215(i)(2)(A) of the Social

Security Act.

Rev. Proc. 2020-45, page 1016.

INCOME TAX

This procedure provides the 2021 cost-of-living adjustments

for certain items due to inflation as required by various provisions of the Code and Service guidance.

EMPLOYEE PLANS

Notice 2020-79, page 1014.

Section 415 of the Internal Revenue Code (the Code) provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that

the Secretary of the Treasury annually adjust these limits for

cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under § 415. Under § 415(d), the adjustments are to

Finding Lists begin on page ii.

T.D. 9914, page 1000.

This document contains final regulations providing guidance

on the definition of an eligible terminated S corporation and

rules relating to distributions of money by such a corporation

after the post-termination transition period. This document

also amends current regulations to extend the treatment of

distributions of money during the post-termination transition

period to all shareholders of the corporation and clarifies the

allocation of current earnings and profits to distributions of

money and other property. The final regulations affect C corporations that were formerly S corporations and the shareholders of such corporations.

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Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

Introduction

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This part includes rulings and decisions based on provisions

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November 9, 2020 

Bulletin No. 2020–46

Part I

Section 1371 —

Coordination with

subchapter C

26 CFR §§1.316-2, amended; 1.481-5 added;

1.481-6, revised 1.1362-2(a)(2)(iii) added; 1.13711, added; 1.1371-2(d), added; 1.1377-2(b), revised;

1.1377-3 revised

T.D. 9914

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Eligible Terminated S

Corporations

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This document contains final regulations providing guidance on the

definition of an eligible terminated S corporation and rules relating to distributions

of money by such a corporation after the

post-termination transition period. This

document also amends current regulations

to extend the treatment of distributions of

money during the post-termination transition period to all shareholders of the corporation and clarifies the allocation of current earnings and profits to distributions of

money and other property. The final regulations affect C corporations that were formerly S corporations and the shareholders

of such corporations.

DATES: Effective Date: These regulations are effective October 20, 2020.

Applicability Dates: For dates of applicability, see §§ 1.481-6(b), 1.1371-1(e),

1.1371-2(d), and 1.1377-3(c).

FOR FURTHER INFORMATION

CONTACT: Concerning §§ 1.481-5,

1.481-6, 1.1362‑2(a)(2)(iii), 1.1377‑2,

November 9, 2020

and 1.1377-3, Margaret Burow or Michael Gould at (202) 317-5279; concerning §§1.1371-1 and 1.1371-2, Aglaia

Ovtchinnikova at (202) 317- 6975 or Margaret Burow or Michael Gould at (202)

317-5279; concerning § 1.316-2, Aglaia

Ovtchinnikova at (202) 317-6975.

SUPPLEMENTARY INFORMATION:

Background

In the case of an S corporation, as defined in section 1361(a)(1) of the Internal

Revenue Code (Code), having accumulated earnings and profits (as described in

section 316(a)(1) of the Code (AE&P))

that makes a distribution of property to

which section 301 would otherwise apply,

section 1368(c)(1) of the Code generally

treats the amount of the distribution not

in excess of the S corporation’s accumulated adjustments account (as defined

in § 1.1368-2(a)(1) (AAA)) or the recipient shareholder’s adjusted basis in such

S corporation’s stock as excluded from

the shareholder’s gross income. Section

1368(c)(2) provides that the remaining

portion of the distribution is treated as a

dividend (as defined in section 316(a)) to

the extent of the S corporation’s AE&P.

Finally, section 1368(c)(3) provides that

any amount of the distribution in excess

of the S corporation’s AAA and AE&P

is applied against the shareholder’s remaining adjusted basis in the stock, with

any amount exceeding that adjusted basis

treated as gain from the sale or exchange

of property.

Generally, a distribution by a C corporation to its shareholders with respect

to their stock ownership is treated as a

taxable dividend to the extent of the corporation’s earnings and profits. See sections 301(c) and 316(a). However, following the termination of a corporation’s

S election made under section 1362 of

the Code (S election), section 1371(e) of

the Code allows shareholders of the resulting C corporation to benefit from the

corporation’s former status as an S corporation with respect to distributions of

money during the corporation’s post-termination transition period (PTTP),

1000

which is generally the one-year period

after the corporation terminates its S

election. Specifically, during the PTTP,

a distribution of money by the C corporation is characterized as a distribution

from the corporation’s AAA. The receipt

of such a distribution is tax-free to the

extent of the recipient shareholder’s

basis in its stock and the corporation’s

AAA balance. If the distribution exceeds

the recipient shareholder’s basis in its

stock, but not the corporation’s AAA,

then the distribution is tax-free to the extent of the recipient shareholder’s basis,

with the remainder treated as gain from

the sale of property. If the distribution

exceeds the corporation’s AAA, then the

excess is taxed as a dividend from current earnings and profits (as described

in section 316(a)(2) (CE&P)) or any

AE&P from the corporation’s previous

existence as a corporation taxed under

subchapter C. Without section 1371(e),

shareholders of the former S corporation

would be precluded from receiving distributions allocable to AAA.

Section 13543(a) and (b) of Public Law

115-97, 131 Stat. 2054, 2155 (2017), commonly referred to as the Tax Cuts and Jobs

Act (TJCA), amended the Code by adding

new sections 481(d) and 1371(f), effective

as of December 22, 2017, the date of enactment of the TCJA.

Section 481(d)(1) of the Code permits

a corporation that qualifies as an eligible terminated S corporation (ETSC) to

take into account any 481 adjustments

(as defined in part II.C of the Summary

of Comments and Explanation of Revisions) which are attributable to the revocation of an S election over the section

481(d) inclusion period, which is the

six-taxable-year-period beginning with

the year of change (as defined in part II.C

of the Summary of Comments and Explanation of Revisions). Section 481(d)

(2) defines an ETSC as a C corporation

meeting the following three requirements: (i) the corporation was an S corporation on December 21, 2017; (ii) the

S corporation revoked its election under

section 1362(a) to be an S corporation

(that is, the S election) during the twoyear period beginning on December 22,

Bulletin No. 2020–46

2017 (revocation requirement); and (iii)

the owners of the stock of the corporation, determined on the date the corporation made a revocation of its S election,

are the same owners (and own identical

proportions of the corporation’s stock) as

on December 22, 2017 (shareholder identity requirement).

Section 1371(f) extends the period

during which shareholders of an ETSC

can benefit from its AAA generated

during the corporation’s former status as

an S corporation (ETSC period) by providing that, in the case of distributions of

money following the PTTP, (i) the distributing ETSC’s AAA is allocated to a

distribution of money to which section

301 would otherwise apply (qualified

distribution), and (ii) the qualified distribution is chargeable to AE&P in the same

ratio as the amount of such AAA bears

to the amount of such AE&P. In enacting section 1371(f), Congress determined

that “it is important to provide rules to

ease the transition from S corporation to

C corporation for the affected taxpayers”

because, based on the TCJA’s revisions

to the Code, “taxpayers that previously

elected to be taxed as S corporations may

prefer instead to be taxed as C corporations.” H. Rept. 115-409, 115th Cong.,

1st Sess., at 245 (Nov. 14, 2017) (House

Report).

On November 7, 2019, the Department of the Treasury (Treasury Department) and the IRS published a notice of

proposed rulemaking (REG-131071-18)

in the Federal Register (84 FR 60011)

containing proposed regulations under

section 1371 and proposed amendments to

the Income Tax Regulations (26 CFR part

1) under sections 481 and 1377 (proposed

regulations). The Treasury Department

and the IRS received 16 written or electronic comments responding to the proposed regulations. All comments received

on the proposed regulations are available

at http://www.regulations.gov or upon

request. As no request for a public hearing was received, no hearing was held.

After full consideration of the comments

received, this Treasury decision adopts

generally the proposed regulations with

certain modifications in response to the

comments received, as described in the

Summary of Comments and Explanation

of Revisions.

Bulletin No. 2020–46

Summary of Comments and

Explanation of Revisions

I. Overview

The final regulations retain the approach and structure of the proposed

regulations, with certain revisions. This

Summary of Comments and Explanation

of Revisions discusses those revisions, as

well as the comments received in response

to the proposed regulations.

II. Comments on Qualification as an

Eligible Terminated S Corporation

A. Significance of date of revocation of S

election

To qualify as an ETSC under section

481(d)(2), a corporation must satisfy the

revocation requirement by making a revocation of its S election during the two-year

period beginning on December 22, 2017

(two-year period). See section 481(d)

(2)(A)(ii) (setting forth the revocation

requirement); proposed § 1.481-5(b)(2)

(same). In addition, the shareholder identity requirement must be satisfied by the

same shareholders owning identical proportions of the corporation’s stock on two

dates: December 22, 2017, and the date on

which the corporation made a revocation

of its S election. See section 481(d)(2)

(B) (setting forth the shareholder identity

requirement); proposed § 1.481-5(b)(3)

(same). But see proposed § 1.481-5(c)(1)

(identifying five categories of share transfers that do not result in a change in shareholder ownership for purposes of section

481(d)(2)(B)). Consequently, the date on

which a corporation makes a revocation

of its S election is critical for determining

ETSC qualification.

A corporation can allow the effective

date of its S election revocation to occur

automatically by operation of section

1362(d)(1)(C), or it can specify an effective date under section 1362(d)(1)(D). For

example, a revocation made before the

16th day of the third month of an S corporation’s taxable year generally is effective retroactively on the first day of that

taxable year. See section 1362(d)(1)(C)(i);

§ 1.1362-2(a)(2)(i). In contrast, a revocation made after the 15th day of the third

month of a corporation’s taxable year

1001

generally is effective prospectively on

the first day of the corporation’s following taxable year. See section 1362(d)(1)

(C)(ii); § 1.1362-2(a)(2)(i). Alternatively,

the corporation may specify an immediate

or prospective effective date for a revocation by expressing a date (in terms of

a stated day, month, and year) that occurs

on or after the date on which the revocation is made. See section 1362(d)(1)(D);

§ 1.1362‑2(a)(2)(ii).

1. Retroactive Effective Date of the

Revocation Determines ETSC Status

One commenter suggested that the final

regulations revise proposed § 1.481‑5(b)

(2) to confirm that, in the case of a revocation with a retroactive effective date

pursuant to section 1362(d)(1)(C)(i), the

revocation may be treated as occurring

on the retroactive effective date for purposes of ETSC qualification. Based on the

stated congressional goal of facilitating

the transition from S corporation status to

C corporation status, the commenter contended that taxpayers reasonably could

have interpreted the statute to indicate that

compliance with the shareholder identity

requirement would be tested on the retroactive revocation’s effective date. In

support of this contention, the commenter

correctly noted that, in the absence of such

an interpretation, a corporation would not

satisfy the shareholder identity requirement for qualifying as an ETSC in proposed § 1.481-5(b)(2) and (3) if the corporation (i) had the same shareholders (and

in identical proportions) on both December 22, 2017, and the retroactive effective

date of the revocation, but (ii) experienced

a change in shareholder ownership during

the period between the retroactive effective date of the revocation and the date on

which the revocation was made.

The Treasury Department and the IRS

agree with the commenter’s interpretation. Proposed § 1.481-5(b)(2) and (3)

directly address revocations with prospective effective dates, which can be

specified with significant flexibility in

the revocation. A retroactive effective

date for a revocation results solely by

operation of section 1362(d)(1)(C)(i) and

§ 1.1362-2(a)(2)(i) and, in such instance,

is always effective on the first day of the

corporation’s taxable year. To confirm

November 9, 2020

the commenter’s interpretation, § 1.4815(c)(2) of the final regulations provides

that, solely with regard to revocations

with retroactive effective dates, a revocation may be treated as having been made

on the effective date of such revocation.

Accordingly, for purposes of § 1.481‑5(b)

(2) and (3), a corporation may test compliance with the revocation requirement

and the shareholder identity requirement

on either the date the revocation was

made or, in the case of a revocation with

a retroactive effective date, the date the

revocation was effective.

2. Application of Section 7503 to a

Revocation of an S Election

As discussed in part II.A of this Summary of Comments and Explanation of

Revisions, the revocation requirement

of section 481(d)(2)(A)(ii) requires that

a corporation must make a revocation

during the two-year period to qualify as an

ETSC. Section 7503 provides that, “when

the last day prescribed under authority

of the internal revenue laws for performing any act falls on Saturday, Sunday, or

a legal holiday, the performance of such

act shall be considered timely if it is performed on the next succeeding day which

is not a Saturday, Sunday, or a legal holiday.” Because a revocation is an act made

under authority of the internal revenue

laws (that is, section 1362 of the Code),

section 7503 applies for purposes of determining whether the revocation was made

within the required two-year period. As a

result of the application of section 7503

in conjunction with section 1362 and

§ 1.1362-2(a)(2), December 23, 2019 (a

Monday), is the last day of the two-year

period. Therefore, a revocation made on

that date would be treated as made within

the two-year period. Without the application of section 7503, December 21, 2019

(a Saturday), would have been the last day

of the two-year period.

To avoid any doubt, these final regulations clarify the text of § 1.1362-2(a)

(2) to provide explicitly that section 7503

applies where the last day prescribed for

making a revocation occurs on a Saturday, Sunday, or legal holiday. Therefore,

a revocation made on December 23, 2019,

will be treated as made during the twoyear period.

November 9, 2020

B. Applicability of PTTP and ETSC

period to S corporations with no AE&P

Following the termination of an S election, section 1371(e) permits shareholders

of the resulting C corporation to benefit

from the corporation’s former status as an

S corporation with respect to distributions

of money during the corporation’s PTTP,

which generally is the one-year period after the corporation terminates its S election. Specifically, during the PTTP, a distribution of money by the C corporation

is characterized as a distribution from the

corporation’s AAA. The receipt of such a

distribution is tax-free to the extent of the

recipient shareholder’s basis in the stock

with respect to which the shareholder

received the distribution, and is taxed as

gain from the sale of property to the extent

the distribution exceeds the shareholder’s

basis in that stock. See section 1371(e)

(1). If the corporation exhausts its AAA

during the PTTP, subsequent distributions

are subject to treatment under section 301.

A commenter requested confirmation

that the rules regarding distributions made

during the PTTP, including section 1371(e)

and § 1.1377-2, apply if the corporation

did not have AE&P at the time that it terminated its S election. Section 1371(e)(1)

provides special treatment to distributions

made by a corporation during the PTTP

if such distributions (i) consist of money and (ii) are made with respect to the

corporation’s stock. Those two conditions

would be satisfied regardless of whether

the distributing corporation had AE&P.

Therefore, the Treasury Department and

the IRS agree with the commenter’s interpretation of section 1371(e) and § 1.13772, but have determined that no clarifying

revisions to the regulations are necessary

in this regard.

The commenter also requested confirmation that the rules regarding distributions made during the ETSC period would

apply if the distributing corporation did

not have AE&P as of the effective date

of the revocation. Example 1 of proposed

§ 1.1371-1(d) illustrates that, if an ETSC

has no AE&P as of the beginning of the

day on which the revocation is effective,

its historical AE&P is zero. Pursuant to

proposed § 1.1371‑1(a)(2)(ix) and (x),

such a corporation would enter its ETSC

period with a AAA ratio of 1 and an AE&P

1002

ratio of zero. Therefore, each qualified

distribution would be characterized as a

distribution of AAA. Based on the guidance provided in Example 1, as well as the

definition of the “AAA ratio” set forth in

proposed § 1.1371-1(a)(ii), the Treasury

Department and the IRS have determined

that no clarifying revisions to the regulations are necessary in this regard.

C. Application of section 481(d) to

qualified subchapter S subsidiaries

If an S corporation wholly owns the

stock of a domestic C corporation that is

not an ineligible corporation described

in section 1361(b)(2), the S corporation

may elect under section 1361(b)(3)(B)

(ii) and § 1.1361-3 to treat the C corporation as a qualified subchapter S subsidiary (QSub) such that (i) the QSub will no

longer be treated as a separate corporation

and (ii) all of the QSub’s assets, liabilities, and items of income, deduction, and

credit will be treated as assets, liabilities,

and such items (as the case may be) of the

S corporation parent. If the requirements

of section 1361(b)(3)(B) cease to be satisfied with respect to a QSub, including

by reason of the revocation of the parent’s

S election, section 1361(b)(3)(C)(i) and

§ 1.1361-5(b)(1)(i) provide that the corporation’s QSub election is terminated such

that the QSub is treated, for purposes of

the Code, as (i) a newly formed C corporation subsidiary separate from the parent

and (ii) acquiring all of its assets (and assuming all of its liabilities) from the parent through an exchange to which section

351 of the Code applies (deemed section

351 exchange).

If the taxable income of any taxpayer,

including a corporation, for the current

year (year of change) is computed under

a method of accounting that is different

from the method of accounting used by

the taxpayer in the preceding year (accounting method change), section 481

requires that the taxpayer must take into

account those adjustments that are determined to be necessary solely by reason of

the accounting method change to prevent

items of income or expense from being

duplicated or omitted (481 adjustments).

Section 481(a). The 481 adjustments are

generally taken into account in computing the taxpayer’s taxable income in the

Bulletin No. 2020–46

year of change. However, section 481(c)

permits a taxpayer, in such manner and

subject to such conditions prescribed in

regulations by the Secretary of the Treasury or his delegate (Secretary), to take

481 adjustments into account in computing taxable income for the taxable

year or years permitted under such regulations. As noted earlier, section 481(d)

(1) permits an ETSC to take into account

any 481 adjustments that are attributable

to the revocation of an S election over a

six-taxable year period beginning with

the year of change (that is, the section

481(d) inclusion period).

Commenters have correctly observed

that section 481(a) and (d) do not apply

to an ETSC’s newly formed C corporation

subsidiary (ETSC corporate subsidiary)

that operated as a QSub prior to the revocation of its parent’s S election. Upon

such a revocation, the ETSC corporate

subsidiary is treated as acquiring all of its

assets and assuming all of its liabilities

from the ETSC in a deemed section 351

exchange. See section 1361(b)(3)(C)(i);

§ 1.1361-5(b)(1)(i). A corporation formed

for a business purpose is a taxpayer separate from its shareholder(s). See generally

Moline Properties v. Commissioner, 319

U.S. 436 (1943). As a result of the ETSC

corporate subsidiary’s status as a new

C corporation with no prior taxable year

(rather than, for example, as a successor

under section 381(a) of the Code), commenters have noted that the ETSC corporate subsidiary lacks any historical method of accounting from which to change.

Compare § 1.446-1(e)(1) (providing that

a taxpayer filing its first return may adopt

any permissible method of accounting in

computing taxable income for the taxable

year covered by such return) with section

381(c)(4) (providing that, in general, a

successor corporation must use the method of accounting used by the predecessor

corporation as of the date of the section

381(a) transaction).

Notwithstanding those observations

of the law, commenters have requested

that the final regulations extend the section 481(d) inclusion period to an accrual method ETSC corporate subsidiary

that operated as a cash method QSub

of a cash method S corporation prior to

the revocation of the parent’s S election.

These commenters highlighted that, in

Bulletin No. 2020–46

the deemed section 351 exchange required by section 1361(b)(3)(C)(i) and

§ 1.1361-5(b)(1)(i) that results from the

revocation of the parent’s S election,

the accounts receivable of a former cash

method QSub would be deemed transferred to the accrual method ETSC corporate subsidiary with a zero basis. See

generally Raich v. Commissioner, 46 T.C.

604 (1966) (holding that trade accounts

receivable of a cash method transferor

received by an accrual basis transferee in

a section 351 exchange had a zero basis).

Therefore, the ETSC corporate subsidiary would recognize income as it collects

amounts on the transferred receivables.

In the case where the ETSC corporate

subsidiary collects the entire amount of

the transferred receivables during its first

taxable year, commenters contended that

the ETSC corporate subsidiary’s inability

to include the amount received over the

six-year section 481(d) inclusion period

would inappropriately disadvantage the

former QSub as compared to its former S

corporation parent.

The Treasury Department and the IRS

understand the commenters’ concerns regarding the statutorily limited application

of section 481(d) and observe that the

commenters’ request is not unique to the

application of section 481(d), but rather

addresses the longstanding treatment of

former S corporations and QSubs under

section 481 with regard to a deemed section 351 exchange. Throughout the nearly

25‑year period since the 1996 enactment

of the QSub provisions under section

1361, section 481(a)(2) and any inclusion

period for a 481 adjustment have not applied with respect to former QSubs. See

section 1308 of the Small Business Job

Protection Act of 1996, Public Law 104188, 110 Stat. 1755, 1782-3 (August 20,

1996). See also Rev. Proc. 97-27, 19971 C.B. 680, section 5.02(3)(a) (providing

a four-year amortization period solely to

taxpayers that have a 481 adjustment);

Rev. Proc. 2015-13, 2015-5 I.R.B. 419,

section 7.03(1) (same). After considering

the commenters’ analysis and the explicit reference in section 481(d) to section

481(a)(2), the Treasury Department and

the IRS have determined that section

481(d) does not apply to ETSC corporate subsidiaries, but rather maintains the

longstanding application of section 481(a)

1003

solely to taxpayers that make an accounting method change. Accordingly, there is

no authority under section 481(d) to extend the section 481(d) inclusion period to

ETSC corporate subsidiaries.

Commenters also contended that the

Treasury Department and the IRS could

override the limited scope of section

481(d) through special QSub regulations

issued under the authority provided by

section 481(c), which, in the case of a

taxpayer making an accounting method

change, authorizes regulations permitting

a taxpayer to take any 481 adjustment into

account in computing taxable income for

the taxable year or years permitted under

such regulations. For example, commenters suggested that the final regulations

permit an accrual method ETSC corporate subsidiary to elect to treat the assets

received (and liabilities assumed) by the

ETSC corporate subsidiary in the deemed

section 351 exchange as though the subsidiary had owned such assets (and had

such liabilities) in a prior taxable year,

thereby creating an accounting method

change upon the revocation. However, this

approach contradicts the explicit text of

section 1362(b)(3)(C)(i), which provides

that, “[f]or purposes of this title” (that is,

for purposes of all of the provisions of

the Code), an ETSC corporate subsidiary

“shall be treated as a new corporation.”

In the alternative, commenters suggested that the final regulations could

permit taxpayers to treat the assets received (and liabilities assumed) by an

ETSC corporate subsidiary as though still

owned by the former S corporation on the

date on which the former S corporation

becomes an ETSC. Under this approach,

the ETSC’s 481 adjustment would be

computed as if the ETSC owned such

assets and was subject to such liabilities.

For support, these commenters highlighted anti-abuse regulations issued under section 263A of the Code (UNICAP

anti-abuse regulations) that utilized this

alternative approach. See § 1.263A-7(c)

(4)(ii) (providing an anti-abuse rule regarding the use of section 351 exchanges

to avoid application of section 263A).

However, the UNICAP anti-abuse regulations were issued under the authority of section 263A(h)(1) rather than the

authority granted the Secretary under

section 481(c). See 52 FR 10052, 10059

November 9, 2020

(March 30, 1987). Section 263A(h)(1)

requires the Secretary to “prescribe rules

to carry out the purpose of section 263A,

including regulations to prevent the use

of related parties, pass-thru entities, or

intermediaries to avoid the application of

this section.” Section 263A(j)(1).

The Treasury Department and the IRS

have considered the commenters’ suggested approaches for extending the section

481(d) inclusion period to ETSC corporate subsidiaries but have determined that

section 481(c) would not support either

approach. Section 481(c) and § 1.4811(c)(2) provide the general rule that the

481 adjustment is taken into account in

computing taxable income in the year of

change, unless the Commissioner prescribes a different taxable year or years to

take the 481 adjustment into account under

§§ 1.446-1(e)(3) and 1.481-4. Any regulations issued under section 481(c) can apply only “[i]n the case of any change described in [section 481](a)” with regard to

“adjustments required by [section 481](a)

(2).” As acknowledged by the commenters, section 481(a) does not apply to an

ETSC corporate subsidiary because such

entity is newly formed and therefore could

not have had a prior accounting method to

potentially change.

Based on the foregoing, the final regulations do not adopt either of the commenters’ alternative suggestions or provide any

inclusion period for ETSC corporate subsidiaries under section 481. The Treasury

Department and the IRS, however, note

that TCJA amendments to section 448(c)

of the Code have significantly expanded

the applicability of the cash method to

C corporations, including ETSC corporate subsidiaries. As amended by section

13102(a) of the TCJA (131 Stat. 2054,

2102-3), section 448(c) provides that a

C corporation may use the cash method if the corporation has average annual

gross receipts not exceeding $25 million

(adjusted for inflation) for its three prior

taxable years. Prior to the TCJA, the gross

receipts threshold under section 448(c)

was $5 million. As a result, fewer ETSC

corporate subsidiaries will be required to

adopt the accrual method as their permissible method of accounting for their first

tax return than if the section 448(c) gross

receipts threshold had not been increased

from $5 million to $25 million.

November 9, 2020

III. Comments Regarding the PostTermination Transition Period

The last sentence of § 1.1377-2(b), as

in effect prior to the effective date of these

final regulations (no-newcomer rule),

limited the special treatment provided

under section 1371(e)(1) (with respect to

distributions of money during a corporation’s PTTP) solely to those shareholders

who were shareholders of the corporation

at the time that it terminated or revoked

its S election (collectively, legacy shareholders). Because the rules pertaining to

the PTTP and to the ETSC period serve a

similar objective of easing the transition

from S corporation to C corporation status, the Treasury Department and the IRS

determined that the rules regarding newcomers (that is, non-legacy shareholders)

should be consistent. See preamble to

the proposed regulations, Explanation of

Provisions, part IV. Therefore, based on

the rationale for rejecting a no-newcomer

rule with respect to the ETSC period, as

set forth in part II.A of the Explanation

of Provisions of the preamble to the proposed regulations, the Treasury Department and the IRS determined that such

a rule should also not apply with respect

to the PTTP and proposed the removal of

the no-newcomer rule in § 1.1377-2(b).

See id.

A. Reliance on the § 1.1377-2(b) nonewcomer rule

One commenter expressed concern

that elimination of the no-newcomer rule

in § 1.1377-2(b) could alter bargained-for

economic results if a legacy shareholder

had transferred less than all of its shares

prior to November 7, 2019 (that is, the

publication date of the proposed regulations) or after that date but pursuant to a

binding agreement entered into before

that date. In particular, the commenter

contended that legacy shareholders who

transferred less than all of their shares

would have expected that only legacy

shareholders could receive distributions of

AAA during the PTTP, and perhaps even

during the ETSC period. According to the

commenter, this expectation would have

reduced the bargained-for price for the

transferred shares to reflect the tax benefit

of the future tax-free distributions.

1004

The commenter provided an example

in which a sole shareholder of an ETSC

sold 40 percent of its stock to a third-party. The sale price was set prior to November 7, 2019, and the parties assumed that

the no-newcomer rule would limit distributions of AAA to the legacy shareholder

during the PTTP, and that a similar rule

would apply during the ETSC period.

Under the proposed elimination of the

no-newcomer rule in § 1.1377-2(b), however, the newcomer, and not the legacy

shareholder, would be eligible to receive

40 percent of any AAA distributed during

the PTTP or ETSC period. The commenter observed that the newcomer’s

accession to a 40 percent interest in the

corporation’s AAA during the PTTP and

ETSC period amounts to a transfer of a

tax benefit from the legacy shareholder to

the newcomer for no consideration, contrary to the parties’ expectations. Therefore, the commenter recommended that

the final regulations include an additional

transition rule. Under this rule, if shares

of a former S corporation were transferred to a newcomer pursuant to a binding agreement entered into before the

applicability date of the final regulations,

then, except upon unanimous agreement

of current shareholders of a corporation

that are legacy shareholders, the no‑newcomer rule would apply during the PTTP,

and a similar rule would apply during the

ETSC period.

The Treasury Department and the IRS

understand the concern underlying the

commenter’s recommendation. However, the Treasury Department and the IRS

intended the applicability date provisions

in the proposed regulations, and as adopted in these final regulations, to afford

corporations transition flexibility in applying § 1.1377‑2(b) with regard to the

PTTP. Section 1.1377-2(b), as revised

by the final regulations to eliminate the

no-newcomer rule for special treatment

under section 1371(e)(1) of distributions

of money by a corporation with respect to

its stock during the post-termination transition period applies to a corporation’s

taxable years beginning after the date of

publication of the final regulations. In

the case of a corporation using the calendar year as its annual accounting period, newcomers are not entitled to receive

distributions of AAA before January 1,

Bulletin No. 2020–46

2021, unless the corporation chooses to

apply § 1.1377-2(b) before January 1,

2021. Corporations to which the commenter’s transition rule would have applied generally will thus have completed

their PTTPs prior to the applicability

of § 1.1377-2(b). Distributions of AAA

during those PTTPs would have been

limited to legacy shareholders. Additionally, the commenter’s proposed transition

rule would add complexity in administering these rules. Accordingly, the Treasury

Department and the IRS have determined

that the applicability date provisions, as

set forth in the proposed regulations and

adopted in these final regulations, balance appropriately the protection of legacy taxpayers’ expectations with the goal

of the Treasury Department and the IRS

to minimize complexity and administrative difficulties for S corporations, their

shareholders, and the IRS.

With regard to the ETSC period, as

discussed in part II.A of the Explanation

of Provisions of the preamble to the proposed regulations, section 1371(f) does

not contain a no-newcomer rule similar

to § 1.1377-2(b), and the Treasury Department and the IRS have concluded that it

is inappropriate to adopt one. Corporations may have applied a similar analysis

of section 1371(f) and made distributions

of AAA to newcomers during their respective ETSC periods. Providing an alternate rule in these final regulations for

the ETSC period could unexpectedly alter

taxpayers’ bargained-for economic results. Therefore, the Treasury Department

and the IRS have determined that the best

way to address this situation is to allow

but not require corporations to apply the

final regulations addressing distributions

made during the ETSC period to taxable

years beginning on or before the date that

these final regulations are published in the

Federal Register.

B. Consideration of request for an

additional 120-day PTTP

A commenter recommended that the

final regulations provide a new 120-day

PTTP that would begin on the applicability date of the final regulations. The

commenter noted that this new PTTP

would create an opportunity for any C

corporation with undistributed AAA that

Bulletin No. 2020–46

expired at the end of its PTTP to restore

and distribute such AAA pursuant to section 1371(e)(1) and § 1.1377-2. The commenter contended that the elimination of

the no-newcomer rule only for terminations that occur after the issuance of the

proposed regulations disadvantages corporations that terminated their S election

more than one year prior to issuance of the

proposed regulations, as compared to corporations that terminated their S election

after the issuance of the proposed regulations.

The Code sets forth a statutory definition of the PTTP that includes detailed

limits on its duration. Specifically, section 1377(b)(1)(A), (B), and (C) provide

three separate durations for the PTTP, the

respective applicability of which depends

upon particular events. While the Treasury

Department and the IRS acknowledge the

concerns raised by the commenter, the final regulations do not adopt the commenter’s recommendation because (i) section

1377(b) provides specific, detailed, and

unambiguous guidance on the duration of

a PTTP, and (ii) the recommended revision to § 1.1377-2 exceeds the scope of the

authority granted to prescribe regulations

under sections 1371 or 1377.

IV. Consideration of Comment Regarding

Treatment of ETSC Status and AAA as

Section 381 Items

In the case of certain asset acquisitions,

section 381(a) generally requires the acquiring corporation to succeed to and take

into account the tax items described in

section 381(c) of the distributor or transferor corporation. See section 381(a) (describing distributions to which section 332

of the Code applies and transfers to which

section 361 of the Code applies that are

carried out in connection with certain reorganizations described in section 368(a)

(1) of the Code); section 381(c) (enumerating tax items of the distributor or transferor corporation that the acquiring corporation succeeds to and takes into account

under section 381(a)).

A commenter requested that the final

regulations confirm that ETSC status and

AAA constitute tax items that an acquiring corporation would succeed to or take

into account under section 381(a). The

Treasury Department and the IRS have

1005

considered the issue raised by the commenter but have determined that further

study would be required to promulgate the

appropriate rule. In addition, the Treasury

Department and the IRS have concluded

that this issue exceeds the scope of the

final regulations because whether AAA

constitutes a tax item to which a successor

may succeed under section 381 is not limited to the ETSC context. Therefore, the

final regulations do not address the commenter’s request.

Applicability Dates

These regulations generally apply to

taxable years beginning after October

20, 2020. See §§ 1.481-6(b), 1.1371-1(e),

1.1371-2(d), and 1.1377-3(c). However,

a corporation may choose to apply the

rules set forth in §§ 1.481-5, 1.1371-1,

and 1.1371-2 in their entirety to taxable

years beginning on or before October 20,

2020. If a corporation makes the choice

described in the previous sentence, all

shareholders of the corporation must report consistently, and the corporation must

continue to apply the rules in §§ 1.481-5,

1.1371-1, and 1.1371-2 in their entirety

for the corporation’s subsequent taxable

years.

In addition, a corporation generally

may choose to not apply the no-newcomer rule in § 1.1377-2(b) to taxable years

beginning on or before October 20, 2020

and with respect to which the period described in section 6501(a) as applied to

that corporation has not expired. If a corporation makes the choice described in

the previous sentence, all shareholders of

the corporation must report consistently,

and the corporation must adopt §§ 1.4815, 1.1371-1, 1.1371-2 (if an ETSC), and

§ 1.1377-2(b) in their entirety and continue to apply those rules in their entirety

for the corporation’s subsequent taxable

years.

Special Analyses

These final regulations are not subject

to review under section 6(b) of Executive

Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the

Office of Management and Budget regarding review of tax regulations.

November 9, 2020

I. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby

certified that these final regulations will

not have a significant economic impact

on a substantial number of small entities

within the meaning of section 601(6) of

the Regulatory Flexibility Act. Notwithstanding this certification, the Treasury

Department and the IRS provided such

an analysis in the notice of proposed

rulemaking preceding these final regulations (see 84 FR 60011) and received

no comments on the impact that the proposed regulations would have on small

entities. This certification is based on the

fact that the amount of time necessary to

report the required information will be

minimal in that it requires ETSCs to provide information already required to be

collected by previously existing statutory

and regulatory requirements. Accordingly, the Secretary certifies that these regulations will not have a significant economic impact on a substantial number of

small entities.

Pursuant to section 7805(f), the notice of proposed rulemaking preceding

this regulation was submitted to the

Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small

businesses. No comments were received

from the Chief Counsel for the Office of

Advocacy of the Small Business Administration.

II. Paperwork Reduction Act

These final regulations do not require

collection of any new or additional information pursuant to the Paperwork Reduction Act (44 U.S.C. 3501 et seq.). Nevertheless, the Treasury Department and

the IRS provided such an analysis in the

notice of proposed rulemaking preceding

these final regulations. See 84 FR 60011.

III. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates

Reform Act of 1995 requires that agencies

assess anticipated costs and benefits and

take certain other actions before issuing a

final rule that includes any Federal mandate that may result in expenditures in any

November 9, 2020

one year by a state, local, or tribal government, in the aggregate, or by the private

sector, of $100 million in 1995 dollars,

updated annually for inflation. In 2020,

that threshold is approximately $156 million. This final rule does not include any

mandate that may result in expenditures

by state, local, or tribal governments,

or by the private sector in excess of that

threshold.

IV. Executive Order 13132: Federalism

Executive Order 13132 (entitled

“Federalism”) prohibits an agency from

publishing any rule that has federalism

implications if the rule either imposes

substantial, direct compliance costs on

state and local governments, and is not

required by statute, or preempts state law,

unless the agency meets the consultation

and funding requirements of section 6 of

the Executive Order. This final rule does

not have federalism implications and does

not impose substantial, direct compliance

costs on state and local governments or

preempt state law within the meaning of

the Executive Order.

Drafting Information

The principal authors of these final regulations are Margaret Burow and Michael

Gould of the Office of Associate Chief

Counsel (Passthroughs and Special Industries) and Aglaia Ovtchinnikova of the

Office of Associate Chief Counsel (Corporate). However, other personnel from

the Treasury Department and the IRS participated in the development of the final

regulations.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding an entry in

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numerical order for § 1.481-6 to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *

* * * * *­­

Section 1.481-6 is also issued under 26

U.S.C. 481.

* * * * *­­

§ 1.316-2 [Amended]

Par. 2. Section 1.316-2 is amended by

removing “consist only of money and”

from the second sentence of paragraph (b).

§ 1.481-5 [Redesignated as § 1.481-6]

Par. 3. Section 1.481-5 is redesignated

as § 1.481-6.

Par. 4. New § 1.481-5 is added to read

as follows:

§ 1.481-5 Eligible terminated S

corporation.

(a) Scope. Section 481(d)(2) of the

Internal Revenue Code (Code) and this

section provide rules relating to the qualification of a corporation as an eligible terminated S corporation (ETSC). Paragraph

(b) of this section sets forth the requirements a corporation must meet to qualify

as an ETSC. Paragraph (c) of this section describes certain transfers and other

events that are disregarded for purposes of

determining whether a corporation qualifies as an ETSC, as well as the treatment

of revocations for which the effective date

is the first day of the taxable year during

which the revocation is made. Paragraph

(d) of this section contains examples illustrating the rules of this section.

(b) ETSC qualification. For a C corporation to qualify as an ETSC, it must satisfy the following requirements:

(1) The corporation must have been an

S corporation on December 21, 2017;

(2) During the 2-year period beginning

on December 22, 2017, the corporation

must have made a valid revocation of its

S election under section 1362(d)(1) and

the regulatory provisions in this part under section 1362 of the Code (revocation);

and

(3) Except as provided in paragraph (c)

of this section, the owners of the shares of

stock of the corporation must be the same

(and in identical proportions) on both:

Bulletin No. 2020–46

(i) December 22, 2017; and

(ii) The day on which the revocation is

made.

(c) Special rules—(1) Certain disregarded events. The following events are

disregarded for purposes of determining

whether the requirement in paragraph (b)

(3) of this section is satisfied:

(i) Transfers of stock between a shareholder and that shareholder’s trust treated

as wholly owned by that shareholder under subpart E of subchapter J of chapter 1

of the Code;

(ii) Transfers of stock between a shareholder and an entity owned by that shareholder that is disregarded as separate from

its owner under § 301.7701-2(c)(2)(i) of

the Procedure and Administration Regulations;

(iii) An election by a shareholder trust

to be treated as part of a decedent’s estate

under section 645 of the Code or the termination of an election under that section;

(iv) A change in the status of a shareholder trust from one type of eligible S

corporation shareholder trust described

in section 1361(c)(2)(A) of the Code

to another type of eligible S corporation shareholder trust; for example, a

trust to which the shares of stock were

transferred pursuant to the terms of a

will (testamentary trust) described in

section 1361(c)(2)(A)(iii) that elects to

become an electing small business trust

described in section 1361(c)(2)(A)(v)

and (e); and

(v) A transaction that includes more

than one of the events described in this

paragraph (c)(1).

(2) Certain revocations. For purposes

of paragraphs (b)(2) and (b)(3)(ii) of this

section, a revocation with an effective

date that is the first day of the taxable year

during which the revocation is made pursuant to section 1362(d)(1)(C)(i) may be

treated as having been made on the day

the revocation was made or on the effective date of the revocation.

(d) Examples. Paragraphs (d)(1)

through (3) of this section (Examples 1

through 3) illustrate the rules of this section. For purposes of paragraphs (d)(1)

through (3) of this section (Examples 1

through 3), as of December 1, 2017, X

is a calendar year S corporation with 100

shares of stock outstanding that is owned

equally by unrelated individuals A and

Bulletin No. 2020–46

B. Pursuant to section 1362(d)(1) and

§§ 1.1362-2 and 1.1362-6, X made a valid revocation of its S election on March

15, 2019, effective on January 1, 2019.

X treats the revocation as having been

made on March 15, 2019, for purposes

of paragraphs (b)(2) and (b)(3)(ii). At all

times, X has a single class of stock outstanding. Paragraphs (d)(1) through (3) of

this section (Examples 1 through 3) describe all relevant transactions involving

the X stock from December 1, 2017, until

March 15, 2019.

(1) Example 1—(i) Facts. On June 5, 2018, A

contributed 20 of its shares of X stock to Y, a wholly

owned limited liability company that is disregarded

as an entity separate from A pursuant to § 301.77012(c)(2)(i). On June 14, 2018, A contributed all of its

interest in Y to Trust, which was a revocable trust

treated as a wholly owned grantor trust of A pursuant

to sections 671 and 676 of the Code. On December

27, 2018, B sold 10 shares of its X stock to C, an

unrelated person.

(ii) Analysis. X is an ETSC if it satisfies the requirements of paragraph (b) of this section.

(A) S corporation. X was an S corporation on

December 21, 2017. Therefore, X satisfies the requirement of paragraph (b)(1) of this section.

(B) Date of revocation. X made a valid revocation of its S election pursuant to section 1362(d)(1)

on March 15, 2019, which is during the two-year

period specified in paragraph (b)(2) of this section.

Therefore, X satisfies the requirement of paragraph

(b)(2) of this section.

(C) Ownership. For purposes of the requirement

in paragraph (b)(3) of this section, the relevant dates

are: December 22, 2017, and March 15, 2019 (the

date X made a revocation of its S corporation status).

(1) A’s ownership interest. As of December 22,

2017, A owned 50 shares of the outstanding shares

of X stock. On June 5, 2018, A contributed 20 of its

shares of X stock to Y (Transfer). On June 14, 2018,

A contributed all of its interest in Y to Trust (Contribution). Both the Transfer and the Contribution are

disregarded for purposes of determining whether the

requirement of paragraph (b)(3) of this section is satisfied. See paragraphs (c)(2) and (1) of this section,

respectively. Therefore, A owns 50 shares of the outstanding stock of X on March 15, 2019.

(2) B’s ownership interest. As of December 22,

2017, B owned 50 shares of the outstanding shares

of X stock. On December 27, 2018, B sold 10 shares

to C. Therefore, B owns 40 shares of the outstanding

stock of X on March 15, 2019.

(3) C’s ownership interest. As of December 22,

2017, C owned no shares of X stock. On December

27, 2018, C purchased 10 shares from B. Therefore,

C owns 10 shares of the outstanding stock of X on

March 15, 2019.

(4) Failure to satisfy the requirement in paragraph (b)(3) of this section. As described in paragraphs (d)(1)(ii)(C)(2) and (3) of this section, B’s and

C’s interest in X were not in the same proportions on

December 22, 2017, and March 15, 2019. Therefore,

X does not satisfy the requirement of paragraph (b)

(3) of this section and does not qualify as an ETSC.

1007

(iii) Restoration of interests prior to end of PTTP.

If C transferred its shares of X stock back to B on

February 1, 2019, then on December 22, 2017, and

March 15, 2019, A and B will have owned 50 shares

of the outstanding stock of X. Under these facts, X

satisfies the requirement of paragraph (b)(3) of this

section and qualifies as an ETSC.

(2) Example 2—(i) Facts. The facts are the same

as in paragraph (d)(1)(i) of this section, except that

B sold 10 shares of its X stock to C on December 18,

2017, in addition to the sale of 10 shares of X stock

on December 27, 2018.

(ii) Analysis. The analysis in paragraph (d)(1)

(ii)(A) and (B) of this section remains the same regarding the requirements of paragraph (b)(1) and

(2) of this section. With respect to the requirement

of paragraph (b)(3) of this section, on December 22,

2017, A owned 50%, B owned 40%, and C owned

10% of the outstanding stock of X. As in paragraph

(d)(1)(ii)(C)(1) of this section, the Transfer and the

Contribution are disregarded for purposes of determining whether the requirement of paragraph (b)

(3) of this section is satisfied. Therefore, on March

15, 2019, A owned 50% (50 shares), B owned 30%

(30 shares), and C owned 20% (20 shares) of the

outstanding shares of X. Even though A, B, and C

owned shares of X on December 22, 2017, B’s and

C’s proportionate ownership interest of X stock was

not the same on December 22, 2017, and March 15,

2019. Therefore, X does not satisfy the requirement

of paragraph (b)(3) of this section and does not

qualify as an ETSC.

(3) Example 3—(i) Facts. The facts are the same

as in paragraph (d)(1)(i) of this section, except that X

made a valid revocation of its S election on November 1, 2019, effective on January 1, 2020.

(ii) Analysis. The analysis in paragraph (d)(1)(ii)

(A) through (C) of this section remains the same regarding the requirements of paragraph (b)(1) through

(3) of this section, except that the relevant dates are:

December 22, 2017, and November 1, 2019 (the date

X made a revocation of its S corporation status). Although the effective date of X’s revocation of its S

election (January 1, 2020) occurs after the conclusion of the two-year period specified in paragraph

(b)(2) of this section, it is irrelevant for purposes of

determining whether the requirements of paragraph

(b)(2) and (3) of this section are satisfied.

Par. 5. Newly redesignated § 1.481-6 is

revised to read as follows:

§ 1.481-6 Effective dates; applicability

dates.

(a) Sections 1.481-1, 1.481-2, 1.4813, and 1.481-4 are effective for Consent

Agreements signed on or after December

27, 1994. For Consent Agreements signed

before December 27, 1994, see §§ 1.4811, 1.481-2, 1.481-3, 1.481-4, and 1.481-5

as contained in 26 CFR part 1, revised as

of April 1, 1995.

(b) Section 1.481-5 applies to taxable

years beginning after October 20, 2020.

However, a corporation may choose to ap-

November 9, 2020

ply the rules in §§ 1.481-5, 1.1371-1, and

1.1371-2 in their entirety to taxable years

beginning on or before October 20, 2020.

If a corporation makes the choice described in the previous sentence, the corporation must continue to apply the rules

in §§ 1.481-5, 1.1371-1, and 1.1371-2 in

their entirety for the corporation’s subsequent taxable years.

Par. 6. Section 1.1362-2 is amended

by adding paragraph (a)(2)(iii) to read as

follows:

§ 1.1362-2 Termination of election.

(a) * * *

(2) * * *

(iii) Applicability of section 7503. With

respect to a revocation made under paragraph (a)(2) of this section, see section

7503 (addressing time for performance

of acts where the last day occurs on a

Saturday, Sunday, or legal holiday). This

paragraph (a)(2)(iii) applies to revocations

made under paragraph (a)(2) of this section effective after October 20, 2020. A

corporation may apply this paragraph (a)

(2)(iii) retroactively to a revocation made

by the corporation under paragraph (a)(2)

of this section effective on or before October 20, 2020.

*****

Par. 6. Sections 1.1371-1 and 1.1371-2

are added to read as follows:

§ 1.1371-1 Distributions of money by

an eligible terminated S corporation.

(a) Scope and definitions—(1) Scope.

This section provides rules relating to

qualified distributions and distributions to

which section 301 of the Internal Revenue

Code (Code) applies during each taxable

year of the ETSC period, including the taxable year in which the ETSC period ends.

If an ETSC does not make any qualified

distributions during a taxable year, then no

distribution by the ETSC is governed by

section 1371(f) of the Code or this section.

Paragraph (a)(2) of this section contains

definitions that apply for purposes of this

section. Paragraph (b) of this section contains rules regarding the characterization

of a qualified distribution. Paragraph (c)

of this section contains rules regarding the

characterization of any excess qualified

distribution and non-qualified distribution

November 9, 2020

during each taxable year of the ETSC period, including the taxable year in which

the ETSC period ends. Paragraph (d) of

this section contains examples illustrating

the rules of this section. Paragraph (e) of

this section contains the applicability date

of this section.

(2) Definitions. The following definitions apply for purposes of this section—

(i) AAA. The term AAA means the accumulated adjustments account, within

the meaning of section 1368(e)(1)(A) of

the Code and § 1.1368-2(a)(1).

(ii) AAA ratio. Except as provided in

this paragraph or paragraph (b)(3)(iv) of

this section, the term AAA ratio means the

fraction of which the numerator is historical AAA and the denominator is the sum

of historical AAA and historical AE&P.

Notwithstanding the preceding sentence,

if the AE&P of the ETSC is less than or

equal to zero as of the beginning of a taxable year, then the AAA ratio is one for

such year and for all subsequent taxable

years of the ETSC period.

(iii) AE&P. The term AE&P means

earnings and profits described in section

316(a)(1) of the Code.

(iv) AE&P ratio. Except as provided in

this paragraph or paragraph (b)(3)(iv) of

this section, the term AE&P ratio means

the fraction of which the numerator is

historical AE&P, and the denominator is

the sum of historical AAA and historical

AE&P. Notwithstanding the preceding

sentence, if the AE&P of the ETSC is less

than or equal to zero as of the beginning of

a taxable year, then the AE&P ratio is zero

for such year and all subsequent taxable

years of the ETSC period.

(v) CE&P. The term CE&P means

earnings and profits that are described in

section 316(a)(2).

(vi) ETSC. The term ETSC means an

eligible terminated S corporation, within

the meaning of section 481(d) of the Code

and § 1.481-5.

(vii) ETSC period. In general, the term

ETSC period means any taxable year, or

portion thereof, of an ETSC beginning

on the first day after the post-termination period within the meaning of section

1377(b)(1)(A) of the Code and ending on

the date on which the ETSC’s AAA balance is zero. Additionally, an ETSC does

not have an ETSC period if the ETSC’s

AAA balance is not greater than zero at

1008

the end of its post-termination transition

period. See § 1.1371-2 for rules governing

the impact of a post-termination period,

within the meaning of section 1377(b)(1)

(B), on the ETSC period.

(viii) Excess qualified distribution. The

term excess qualified distribution means

the portion of a qualified distribution that

is not characterized pursuant to paragraph

(b)(2) or (3) of this section.

(ix) Historical AAA. The term historical AAA means the AAA of the ETSC as

of the beginning of the day on which the

revocation of an election under section

1362(a) of the Code is effective pursuant

to section 1362(d)(1).

(x) Historical AE&P. The term historical AE&P means the AE&P of the ETSC

as of the beginning of the day on which

the revocation of an election under section

1362(a) is effective pursuant to section

1362(d)(1). For purposes of the preceding

sentence, if the ETSC’s historical AE&P

is less than zero, then the historical AE&P

is treated as zero.

(xi) Non-qualified distribution. The

term non-qualified distribution means a

distribution that is not a qualified distribution and to which section 301 applies.

(xii) Qualified distribution. The term

qualified distribution means a distribution

of money by an ETSC during the ETSC

period to which, absent the application

of section 1371(f) and this section, section 301 would apply. However, if paragraph (d)(2)(i) of this section applies to

the ETSC, then a qualified distribution to

a non-legacy shareholder is treated as a

non-qualified distribution.

(b) Characterization of qualified distribution—(1) In general. Paragraph (b)(2)

of this section provides rules regarding the

determination of the amount of a qualified

distribution that is sourced from AAA and

the corollary effects of such a characterization. Paragraph (b)(3) of this section

provides rules regarding the determination

of the amount of a qualified distribution

that is sourced from AE&P and the corollary effects of such a characterization.

Paragraph (b)(4) of this section provides

rules regarding the characterization of an

excess qualified distribution as a separate

qualified distribution. The rules in paragraphs (b)(2) through (4) of this section

are applied before the application of paragraph (c) of this section.

Bulletin No. 2020–46

(2) Distribution of AAA—(i) Amount.

The portion of a qualified distribution that

is sourced from an ETSC’s AAA is equal

to the lesser of:

(A) The product of the qualified distribution and the AAA ratio; and

(B) The ETSC’s AAA immediately before the qualified distribution.

(ii) Reduction or elimination of ETSC’s

AAA. The ETSC’s AAA is reduced by

the amount of the distribution described

in paragraph (b)(2)(i) of this section. If,

with respect to a qualified distribution, the

amount described in paragraph (b)(2)(i)

(A) of this section equals or exceeds the

amount described in paragraph (b)(2)(i)

(B) of this section, then the rules in this

paragraph (b) do not apply to any subsequent distributions by the ETSC. Instead,

the subsequent distributions are treated in

the manner provided in paragraph (c) of

this section.

(iii) Effect on the shareholder. The

amount described in paragraph (b)(2)(i) of

this section is applied against and reduces the shareholder’s adjusted basis of the

shares of stock with respect to which the

distribution is made under the principles

of section 301(c)(2). If the application of

the amount described in paragraph (b)(2)

(i) of this section would result in a reduction of basis that exceeds the shareholder’s

adjusted basis of any share of stock with

respect to which the distribution is made,

such excess is treated as gain from the sale

or exchange of property. The reduction of

the shareholder’s basis described in this

paragraph with respect to a qualified distribution occurs prior to the application of

paragraph (c) of this section to the excess

qualified distribution, if any, with respect

to such qualified distribution.

(3) Distribution of AE&P—(i) Amount.

This paragraph (b)(3) applies if an ETSC’s AE&P ratio is greater than zero. If

this paragraph (b)(3) applies, the portion

of a qualified distribution that is sourced

from the ETSC’s AE&P is equal to the

lesser of:

(A) The product of the qualified distribution and the AE&P ratio; and

(B) The ETSC’s AE&P immediately

before the qualified distribution. For purposes of the preceding sentence, if the ETSC’s AE&P immediately before the qualified distribution is less than zero, then the

ETSC’s AE&P is treated as zero.

Bulletin No. 2020–46

(ii) Effect on ETSC’s AE&P. The ETSC’s AE&P is reduced, as described in

section 312(a)(1), by the amount of the

distribution described in paragraph (b)(3)

(i) of this section. The AE&P reduction

described in this paragraph occurs prior

to the application of paragraph (c) of this

section, even if a distribution to which

paragraph (c) of this section applies (regarding excess qualified distributions and

non-qualified distributions) occurs earlier

in time than the qualified distribution to

which this paragraph applies.

(iii) Effect on the shareholder. The

amount of the qualified distribution that

is sourced from the ETSC’s AE&P described in paragraph (b)(3)(i) of this section is included in the gross income of the

shareholder as a dividend under section

301(c)(1).

(iv) Adjustment to the AAA ratio and

the AE&P ratio. After the application of

paragraph (b)(3)(ii) of this section, if the

ETSC’s AE&P is zero and the ETSC’s

AAA is greater than zero, then the ETSC’s

AAA ratio is one and the ETSC’s AE&P

ratio is zero for all subsequent qualified

distributions during:

(A) That taxable year; and

(B) All subsequent taxable years of the

ETSC period.

(4) Excess qualified distribution treated as a separate qualified distribution—

(i) In general. After the application of

paragraph (b)(2)(ii) of this section with

respect to a qualified distribution, if the

ETSC has any remaining AAA, then any

amount of excess qualified distribution,

with respect to such qualified distribution,

is treated as a separate qualified distribution and is analyzed pursuant to paragraph

(b) of this section.

(ii) No change in characterization of

previously characterized portion of qualified distribution. Paragraph (b)(4)(i) will

not change the characterization of any

portion of a qualified distribution that was

previously characterized pursuant to paragraphs (b)(2) and (3) of this section and

will reflect the application of paragraphs

(b)(2) and (3) of this section to the portion

of the qualified distribution previously

characterized.

(c) Characterization of excess qualified distribution and non-qualified distributions. After the application of paragraph

(b), the excess qualified distributions, if

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any, and non-qualified distributions, if

any, are treated in the manner provided in

sections 301(c) and 316.

(d) Examples. Paragraphs (d)(1)

through (5) of this section (Examples 1

through 5) illustrate the rules of this section. For purposes of paragraphs (d)(1)

through (5) of this section (Examples 1

through 5), X is a calendar year S corporation with a single share of stock outstanding. A, an individual, purchased its share

of X stock prior to December 22, 2017,

and, except as otherwise indicated, never

contributed any amounts to X’s capital. A

remained the sole shareholder of X when

X made a valid revocation on March 15,

2018, pursuant to section 1362(d)(1) and

§§ 1.1362-2 and 1.1362-6, of its S election

and when that revocation became effective on January 1, 2018. X qualified as

an ETSC pursuant to § 1.481-5(b) and its

ETSC period began on January 1, 2019.

Additionally, X did not make any distributions during its post-termination transition period, within the meaning of section

1377(b)(1)(A). Furthermore, A remains

the sole shareholder of X at the time of the

distribution(s) described.

(1) Example 1: Historical AE&P is zero—(i)

Facts. At the beginning of January 1, 2018, X had

AAA of $100 and AE&P of $0. During 2018, X had

$300 of CE&P and made no distributions. At the beginning of January 1, 2019, X has AAA of $100 and

AE&P of $300, and A’s adjusted basis in its share of

X stock is $460. During 2019, the only distribution

that X makes is a $60 distribution of money to A on

December 27. X’s CE&P during 2019 is $150, without diminution by reason of any distributions made

during the taxable year.

(ii) Analysis—(A) Calculation of AAA ratio and

AE&P ratio. Pursuant to paragraphs (a)(2)(ix) and

(x) of this section, respectively, X’s historical AAA

and X’s historical AE&P are determined as of the beginning of January 1, 2018, the beginning of the day

on which the revocation of X’s election under section 1362(a) is effective pursuant to section 1362(d)

(1). Accordingly, X’s historical AAA is $100 and X’s

historical AE&P is $0. Therefore, X’s AAA ratio is 1

($100/($100 + $0)), and X’s AE&P ratio is zero ($0/

($100 + $0)).

(B) Characterization of distribution. Pursuant to

paragraph (a)(2)(xii) of this section, the $60 distribution on December 27, 2019, is a qualified distribution because it is a distribution of money by an ETSC

during the ETSC period to which section 301 would

apply absent the application of section 1371(f) and

this section.

(C) Analysis of qualified distribution—(1) Distribution of AAA. Pursuant to paragraph (b)(2)(i) of

this section, the portion of the qualified distribution

that is sourced from AAA is equal to the lesser of:

the product of the qualified distribution and the AAA

ratio ($60 x 1, or $60), and X’s AAA immediately

November 9, 2020

before the qualified distribution ($100). Therefore,

$60 is sourced from AAA. Pursuant to paragraph (b)

(2)(ii) of this section, after the distribution, X’s AAA

is reduced by $60 to $40. Pursuant to paragraph (b)

(2)(iii) of this section, A’s basis in its X stock is reduced by $60 to $400.

(2) Distribution of AE&P. Pursuant to paragraph

(b)(3)(i) of this section, the portion of the distribution that is sourced from AE&P is equal to the lesser

of: the product of the qualified distribution and the

AE&P ratio ($60 x 0, or $0), and X’s AE&P immediately before the qualified distribution ($300). Therefore, $0 is sourced from AE&P.

(2) Example 2: Qualified distributions with both

historical AAA and historical AE&P—(i) Facts. At

the beginning of January 1, 2018, X had AAA of

$200 and AE&P of $100. During 2018, X had $0 of

CE&P and made no distributions. At the beginning

of January 1, 2019, X has AAA of $200 and AE&P

of $100, and A’s adjusted basis in its share of X stock

is $500. During 2019, X makes a $90 distribution

of money on February 9 and a $150 distribution of

money on June 5. X’s CE&P during 2019 is $500,

without diminution by reason of any distributions

made during the taxable year.

(ii) Analysis—(A) Calculation of AAA ratio and

AE&P ratio. Pursuant to paragraphs (a)(2)(ix) and

(x) of this section, respectively, X’s historical AAA

and X’s historical AE&P are determined as of the beginning of January 1, 2018, the beginning of the day

on which the revocation of X’s election under section 1362(a) is effective pursuant to section 1362(d)

(1). Accordingly, X’s historical AAA is $200 and X’s

historical AE&P is $100. Therefore, X’s AAA ratio

is 0.67 ($200/($200 + $100)), and X’s AE&P ratio is

0.33 ($100/($200 + $100)).

(B) Characterization of distributions. Pursuant

to paragraph (a)(2)(xii) of this section, the $90 distribution on February 9, 2019, and the $150 distribution on June 5, 2019, are both qualified distributions

because they are distributions of money by an ETSC

during the ETSC period to which section 301 would

apply absent the application of section 1371(f) and

this section.

(C) Analysis of qualified distributions—(1) February 9, 2019 distribution—(i) Distribution of AAA.

Pursuant to paragraph (b)(2)(i) of this section, the

portion of the qualified distribution that is sourced

from AAA is equal to the lesser of: the product of the

qualified distribution and the AAA ratio ($90 x 0.67,

or $60), and X’s AAA immediately before the qualified distribution ($200). Therefore, $60 is sourced

from AAA. Pursuant to paragraph (b)(2)(ii) of this

section, after the distribution, X’s AAA is reduced

by $60 to $140. Pursuant to paragraph (b)(2)(iii) of

this section, A’s basis in its X stock is reduced by

$60 to $440.

(ii) Distribution of AE&P. Pursuant to paragraph

(b)(3)(i) of this section, the portion of the distribution that is sourced from AE&P is equal to the lesser

of: the product of the qualified distribution and the

AE&P ratio ($90 x 0.33, or $30), and X’s AE&P immediately before the qualified distribution ($100).

Therefore, $30 is sourced from AE&P. Pursuant to

paragraph (b)(3)(ii) of this section, after the distribution, X’s AE&P is reduced by $30 to $70. Pursuant

to paragraph (b)(3)(iii) of this section, the $30 distribution is characterized as a dividend.

November 9, 2020

(2) June 5, 2019 distribution—(i) Distribution

of AAA. Pursuant to paragraph (b)(2)(i) of this section, the portion of the qualified distribution that is

sourced from AAA is equal to the lesser of: the product of the qualified distribution and the AAA ratio

($150 x 0.67, or $100), and X’s AAA immediately

before the qualified distribution ($140). Therefore,

$100 is sourced from AAA. Pursuant to paragraph

(b)(2)(ii) of this section, after the distribution, X’s

AAA is reduced by $100 to $40. Pursuant to paragraph (b)(2)(iii) of this section, A’s basis in its X

stock is reduced by $100 to $340.

(ii) Distribution of AE&P. Pursuant to paragraph

(b)(3)(i) of this section, the portion of the distribution that is sourced from AE&P is equal to the lesser

of: the product of the qualified distribution and the

AE&P ratio ($150 x 0.33, or $50), and X’s AE&P

immediately before the qualified distribution ($70).

Therefore, $50 is sourced from AE&P. Pursuant to

paragraph (b)(3)(ii) of this section, after the distribution, X’s AE&P is reduced by $50 to $20. Pursuant

to paragraph (b)(3)(iii) of this section, the $50 distribution is characterized as a dividend.

(3) Example 3: Limitation on amount characterized as AAA—(i) Facts. At the beginning of

January 1, 2018, X had AAA of $100 and AE&P of

$300. During 2018, X had $280 of CE&P and made

no distributions. At the beginning of January 1,

2019, X has AAA of $100 and AE&P of $580, and

A’s adjusted basis in its share of X stock is $450.

During 2019, the only distribution that X makes is

a $500 distribution of money to A on October 5.

X’s CE&P during 2019 is $150, without diminution by reason of any distributions made during the

taxable year.

(ii) Analysis—(A) Calculation of AAA ratio and

AE&P ratio. Pursuant to paragraphs (a)(2)(ix) and

(x) of this section, respectively, X’s historical AAA

and X’s historical AE&P are determined as of the beginning of January 1, 2018, the beginning of the day

on which the revocation of X’s election under section 1362(a) is effective pursuant to section 1362(d)

(1). Accordingly, X’s historical AAA is $100 and X’s

historical AE&P is $300. Therefore, X’s AAA ratio

is 0.25 ($100/($100 + $300)), and X’s AE&P ratio is

0.75 ($300/($100 + $300)).

(B) Characterization of distribution. Pursuant to

paragraph (a)(2)(xii) of this section, the $500 distribution on October 5, 2019, is a qualified distribution

because it is a distribution of money by an ETSC

during the ETSC period to which section 301 would

apply absent the application of section 1371(f) and

this section.

(C) Analysis of qualified distribution—(1) Distribution of AAA. Pursuant to paragraph (b)(2)(i) of

this section, the portion of the qualified distribution

that is sourced from AAA is equal to the lesser of:

the product of the qualified distribution and the

AAA ratio ($500 x 0.25, or $125), and X’s AAA

immediately before the qualified distribution ($100).

Therefore, $100 is sourced from AAA. Pursuant to

paragraph (b)(2)(ii) of this section, after the distribution, X’s AAA is reduced by $100 to $0. Pursuant to

paragraph (b)(2)(iii) of this section, A’s basis in its X

stock is reduced by $100 to $350.

(2) Distribution of AE&P. Pursuant to paragraph

(b)(3)(i) of this section, the portion of the distribution that is sourced from AE&P is equal to the lesser

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of: the product of the qualified distribution and the

AE&P ratio ($500 x 0.75, or $375), and X’s AE&P

immediately before the qualified distribution ($580).

Therefore, $375 is sourced from AE&P. Pursuant to

paragraph (b)(3)(ii) of this section, after the distribution, X’s AE&P is reduced by $375 to $205. Pursuant

to paragraph (b)(3)(iii) of this section, the $375 distribution is characterized as a dividend.

(D) Effect of qualified distribution on ETSC period. Pursuant to paragraph (a)(2)(vii) of this section,

X’s ETSC period ends because X’s AAA balance is

zero following the October 5, 2019 distribution.

(E) Analysis of excess qualified distribution—(1)

Amount of excess qualified distribution. Pursuant to

paragraph (a)(2)(viii) of this section, the amount of

the excess qualified distribution is $25, the portion

of the qualified distribution ($500) not characterized

pursuant to paragraph (b)(2) or (3) of this section

($100 AAA distribution + $375 AE&P distribution).

(2) Characterization of excess qualified distribution. Paragraph (b)(4) of this section does not apply

to the excess qualified distribution because X’s AAA

balance is zero after the application of paragraph (b)

(2)(ii) of this section (see paragraph (d)(3)(ii)(C)

(1) of this section). Pursuant to paragraph (c) of this

section, section 301(c) applies to the excess qualified

distribution. Pursuant to sections 301(c)(1) and 316,

the $25 excess qualified distribution is sourced from

CE&P.

(iii) Subsequent contribution. The facts are the

same as paragraph (d)(3)(i) of this section, except

that at the time of the October 5, 2019 distribution,

A’s adjusted basis in its X stock is $90. Further, on

December 27, 2019, A contributes $100 to X in a

transaction described in section 351(a). The analysis in paragraph (d)(3)(ii) of this section remains the

same, except that, unlike the second to last sentence

of paragraph (d)(3)(ii)(C)(1) of this section, A’s basis

in its X stock is reduced by $90 to $0 and pursuant

to paragraph (b)(2)(iii) of this section, $10 is treated

as gain from the sale or exchange of property. Additionally, as a result of the December 27, 2019 contribution of $100, A’s basis in its X stock is increased

by $100, so that at the end of 2019, A’s basis in its X

stock is $100.

(4) Example 4: Limitation on the amount characterized as AE&P—(i) Facts. At the beginning of

January 1, 2018, X had AAA of $100 and AE&P of

$100. During 2018, X had CE&P of $(75) and made

no distributions. At the beginning of January 1, 2019,

X has AAA of $100 and AE&P of $25, and A’s adjusted basis in its share of X stock is $500. During

2019, the only distributions that X makes are a $100

distribution of money to A on July 9 and a $40 distribution of money to A on September 27. X’s CE&P

during 2019 is $20, without diminution by reason of

any distributions made during the taxable year.

(ii) Analysis—(A) Calculation of AAA ratio and

AE&P ratio. Pursuant to paragraphs (a)(2)(ix) and

(x) of this section, respectively, X’s historical AAA

and X’s historical AE&P are determined as of the beginning of January 1, 2018, the beginning of the day

on which the revocation of X’s election under section 1362(a) is effective pursuant to section 1362(d)

(1). Accordingly, X’s historical AAA is $100 and X’s

historical AE&P is $100. Therefore, X’s AAA ratio is

0.5 ($100/($100 + $100)), and X’s AE&P ratio is 0.5

($100/($100 + $100)).

Bulletin No. 2020–46

(B) Analysis of July 9, 2019 distribution—(1)

Characterization of distribution. Pursuant to paragraph (a)(2)(xii) of this section, the $100 distribution

on July 9, 2019, is a qualified distribution because

it is a distribution of money by an ETSC during the

ETSC period to which section 301 would apply absent the application of section 1371(f) and this section.

(2) Analysis of qualified distribution—(i) Distribution of AAA. Pursuant to paragraph (b)(2)(i) of this

section, the portion of the distribution that is sourced

from AAA is equal to the lesser of: the product of the

qualified distribution and the AAA ratio ($100 x 0.5,

or $50), and X’s AAA immediately before the qualified distribution ($100). Therefore, $50 is sourced

from AAA. Pursuant to paragraph (b)(2)(ii) of this

section, after the distribution, X’s AAA is reduced

by $50 to $50. Pursuant to paragraph (b)(2)(iii) of

this section, A’s basis in its X stock is reduced by

$50 to $450.

(ii) Distribution of AE&P. Pursuant to paragraph

(b)(3)(i) of this section, the portion of the distribution that is sourced from AE&P is equal to the lesser

of: the product of the qualified distribution and the

AE&P ratio ($100 x 0.5, or $50), and X’s AE&P

immediately before the qualified distribution ($25).

Therefore, $25 is sourced from AE&P. Pursuant to

paragraph (b)(3)(ii) of this section, after the distribution, X’s AE&P is reduced by $25 to $0. Pursuant to

paragraph (b)(3)(iii) of this section, $25 of the distribution is characterized as a dividend.

(3) Recalculation of AAA and AE&P ratios. Pursuant to paragraph (b)(3)(iv) of this section, because

the July 9, 2019 distribution caused X’s AE&P to be

reduced to zero, the AAA ratio is one and the AE&P

ratio is zero for all subsequent qualified distributions

during the 2019 taxable year and subsequent taxable

years of the ETSC period.

(4) Excess qualified distribution—(i) Amount of

excess qualified distribution. Pursuant to paragraph

(a)(2)(viii) of this section, the amount of the excess

qualified distribution is $25, the amount of the qualified distribution ($100) not characterized pursuant

to paragraph (b)(2) or (3) of this section ($50 AAA

distribution + $25 AE&P distribution).

(ii) Characterization of excess qualified distribution as a separate qualified distribution. Pursuant to

paragraph (b)(4) of this section, because X has AAA

remaining after characterizing the qualified distribution (see paragraph (d)(4)(ii)(B)(2)(i) of this section), the $25 excess qualified distribution is treated

as a separate qualified distribution and is analyzed

pursuant to paragraph (b) of this section.

(iii) Analysis of excess qualified distribution that

is treated as a separate qualified distribution. Pursuant to paragraph (b)(2)(i) of this section, the portion

of the distribution that is sourced from AAA is equal

to the lesser of: the product of the excess qualified

distribution and the AAA ratio ($25 x 1, or $25), and

X’s AAA immediately before the excess qualified

distribution ($50). Therefore, $25 is sourced from

AAA. Pursuant to paragraph (b)(2)(ii) of this section, after the distribution, X’s AAA is reduced by

$25 to $25. Pursuant to paragraph (b)(2)(iii) of this

section, A’s basis in its X stock is reduced by $25 to

$425. Pursuant to paragraph (b)(3)(i) of this section,

because X’s AE&P ratio is zero, paragraph (b)(3) of

this section does not apply.

Bulletin No. 2020–46

(C) Analysis of September 27, 2019 distribution—(1) Characterization of the distribution. Pursuant to paragraph (a)(2)(xii) of this section, the $40

distribution on September 27, 2019, is a qualified

distribution because it is a distribution of money by

an ETSC during the ETSC period to which section

301 would apply absent the application of section

1371(f) and this section.

(2) Analysis of qualified distribution—(i) Distribution of AAA. Pursuant to paragraph (b)(2)(i) of this

section, the portion of the distribution that is sourced

from AAA is equal to the lesser of: the product of

the qualified distribution and the AAA ratio ($40

x 1, or $40), and X’s AAA immediately before the

qualified distribution ($25) (see paragraph (d)(4)(ii)

(B)(4)(iii) of this section). Therefore, $25 is sourced

from AAA. Pursuant to paragraph (b)(2)(ii) of this

section, after the distribution, X’s AAA is reduced

by $25 to $0. Pursuant to paragraph (b)(2)(iii) of this

section, A’s basis in its X stock is reduced by $25

to $400.

(ii) Distribution of AE&P. Pursuant to paragraph

(b)(3)(i) of this section, because X’s AE&P ratio is

zero, paragraph (b)(3) of this section does not apply.

(3) Excess qualified distribution—(i) Amount of

excess qualified distribution. Pursuant to paragraph

(a)(2)(viii) of this section, the amount of the excess

qualified distribution is $15, the portion of the qualified distribution ($40) not characterized pursuant to

paragraph (b)(2) or (3) of this section ($25 AAA distribution + $0 AE&P distribution).

(ii) Excess qualified distribution not characterized as a separate qualified distribution. Pursuant to

paragraph (b)(4) of this section, because X has AAA

of $0 after characterizing the qualified distribution

(see paragraph (d)(4)(ii)(C)(2)(i) of this section), the

$15 excess qualified distribution is not treated as a

separate qualified distribution.

(iii) Analysis of excess qualified distribution that

is not treated as a separate qualified distribution.

Pursuant to paragraph (c) of this section, section

301(c) applies to the excess qualified distribution.

Pursuant to sections 301(c)(1) and 316, the $15 excess qualified distribution is sourced from CE&P.

(5) Example 5: Distributions include non-qualified distributions—(i) Facts. At the beginning of

January 1, 2018, X had AAA of $100 and AE&P of

$100. During 2018, X had $0 of CE&P and made no

distributions. At the beginning of January 1, 2019,

X has AAA of $100 and AE&P of $100, and A’s adjusted basis in its X stock is $200. During 2019, X

makes a $100 distribution of money on June 14; a

$300 distribution of property on November 9; and

a $200 distribution of money on December 18. X’s

CE&P during 2019 is $160, without diminution by

reason of any distributions made during the taxable

year.

(ii) Analysis—(A) Calculation of AAA ratio and

AE&P ratio. Pursuant to paragraphs (a)(2)(ix) and

(x) of this section, respectively, X’s historical AAA

is $100 and X’s historical AE&P is $100. Therefore,

X’s AAA ratio is 0.5 ($100/($100 + $100)), and X’s

AE&P ratio is 0.5 ($100/($100 + $100)).

(B) Characterization of distributions. Pursuant to

paragraph (a)(2)(xii) of this section, the $100 distribution on June 14, 2019, and the $200 distribution on

December 18, 2019, are both qualified distributions

because they are distributions of money by an ETSC

1011

during the ETSC period to which section 301 would

apply absent the application of section 1371(f) and

this section. Pursuant to paragraph (a)(2)(xi) of this

section, the $300 distribution of property on November 9, 2019, is a non-qualified distribution. Pursuant

to paragraph (b)(1) of this section, the rules of paragraph (b)(2) through (b)(4) of this section apply to

the qualified distributions before the rules of paragraph (c) of this section apply to the non-qualified

distribution and any excess qualified distributions.

(C) Analysis of qualified distributions—(1) June

14, 2019 distribution—(i) Distribution of AAA. Pursuant to paragraph (b)(2)(i) of this section, the portion of the distribution that is sourced from AAA is

equal to the lesser of: the product of the qualified

distribution and the AAA ratio ($100 x 0.5, or $50),

and X’s AAA immediately before the qualified distribution ($100). Therefore, $50 is sourced from AAA.

Pursuant to paragraph (b)(2)(ii) of this section, after

the distribution, X’s AAA is reduced by $50 to $50.

Pursuant to paragraph (b)(2)(iii) of this section, on

June 14, 2019, A’s basis in its X stock is reduced by

$50 to $150.

(ii) Distribution of AE&P. Pursuant to paragraph

(b)(3)(i) of this section, the portion of the distribution that is sourced from AE&P is equal to the lesser

of: the product of the qualified distribution and the

AE&P ratio ($100 x 0.5, or $50), and X’s AE&P immediately before the qualified distribution ($100).

Therefore, $50 is sourced from AE&P. Pursuant to

paragraph (b)(3)(ii) of this section, after the distribution, X’s AE&P is reduced by $50 to $50. Pursuant

to paragraph (b)(3)(iii) of this section, the $50 distribution is characterized as a dividend.

(iii) Amount of excess qualified distribution. The

amount of the excess qualified distribution is $0, the

amount of the qualified distribution ($100) not characterized pursuant to paragraph (b)(2) or (3) of this

section ($50 AAA distribution + $50 AE&P distribution).

(2) December 18, 2019 distribution—(i) Distribution of AAA. Pursuant to paragraph (b)(2)(i) of this

section, the portion of the distribution that is sourced

from AAA is equal to the lesser of: the product of the

qualified distribution and the AAA ratio ($200 x 0.5,

or $100), and X’s AAA immediately before the qualified distribution ($50). Therefore, $50 is sourced

from AAA. Pursuant to paragraph (b)(2)(ii) of this

section, after the distribution, X’s AAA is reduced

by $50 to $0. Pursuant to paragraph (b)(2)(iii) of this

section, A must determine its basis as of December

18, 2019, in order to determine the consequences

of receiving the $50 AAA distribution. Because the

non‑qualified distribution on November 9, 2019,

which precedes the December 18, 2019 qualified

distribution, could have the effect of reducing A’s

basis, any effect on A’s basis from that non-qualified

distribution must be analyzed prior to determining

the effect of the December 18, 2019 distribution of

AAA on A’s basis. See paragraphs (d)(5)(ii)(D)(3)

and (4) of this section. Pursuant to paragraph (a)(2)

(vii) of this section, X’s ETSC period ends because

X’s AAA balance is zero following the December 18,

2019 distribution.

(ii) Distribution of AE&P. Pursuant to paragraph

(b)(3)(i) of this section, the portion of the distribution that is sourced from AE&P is equal to the lesser

of: the product of the qualified distribution and the

November 9, 2020

AE&P ratio ($200 x 0.5, or $100), and X’s AE&P

immediately before the qualified distribution ($50).

Therefore, $50 is sourced from AE&P. Pursuant to

paragraph (b)(3)(ii) of this section, after the distribution, X’s AE&P is reduced by $50 to $0. Pursuant to

paragraph (b)(3)(iii) of this section, the $50 distribution is characterized as a dividend.

(iii) Amount of excess qualified distribution. The

amount of the excess qualified distribution is $100,

the amount of the qualified distribution ($200) not

characterized pursuant to paragraph (b)(2) or (3) of

this section ($50 AAA distribution + $50 AE&P distribution).

(D) Analysis of non-qualified and excess qualified

distributions—(1) In general. The $300 non-qualified distribution on November 9, 2019, and the $100

excess qualified distribution on December 18, 2019,

are treated in the manner provided in section 301(c).

(2) Allocation of CE&P. Pursuant to section 316

and § 1.316-2, X’s CE&P is allocated proportionately among the excess qualified and the non-qualified

distributions. Therefore, the portion of X’s CE&P

that is allocated to the November 9, 2019 distribution and the December 18, 2019 distribution is $120

($160 CE&P x ($300 distribution / $400 total excess qualified and non-qualified distributions during

2019) and $40 ($160 CE&P x ($100 distribution /

$400 total excess qualified and non-qualified distributions during 2019), respectively.

(3) November 9, 2019 distribution. Pursuant to

paragraph (d)(5)(ii)(D)(2) of this section, $120 of

the $300 distribution is characterized as a distribution of CE&P. Pursuant to paragraph (d)(5)(ii)(C)(2)

(ii) of this section, the amount of X’s AE&P available to allocate the November 9, 2019 distribution

is $0. Therefore, the remaining $180 is characterized

pursuant to section 301(c)(2) and (3). Pursuant to

paragraph (d)(5)(ii)(C)(1)(i) of this section, A’s basis

in its X stock prior to the November 9, 2019 distribution is $150. Therefore, $150 is applied against basis

pursuant to section 301(c)(2) (reducing A’s basis to

$0) and $30 is treated as gain from the sale or exchange of property pursuant to section 301(c)(3).

(4) December 18, 2019 distribution—(i) Consequences of AAA distribution. As of December 18,

2019, A’s basis in its X stock is $0. See paragraph

(d)(5)(ii)(D)(3) of this section. Pursuant to paragraph

(d)(5)(ii)(C)(2)(i) of this section, $50 of the distribution is characterized as a distribution of AAA. Because the amount of the distribution of AAA ($50)

exceeds A’s basis in its X stock ($0), pursuant to

paragraph (b)(2)(iii) of this section, on December

18, 2019, $50 is treated as gain from the sale or exchange of property.

(ii) Characterization of excess qualified distribution. Pursuant to paragraph (d)(5)(ii)(C)(2)(iii) of

this section, $100 of the December 18, 2019 distribution is an excess qualified distribution. Paragraph (b)

(4) of this section does not apply to the excess qualified distribution because X’s AAA balance is zero

after the application of paragraph (b)(2)(ii) of this

section (see paragraph (d)(5)(ii)(C)(2)(i) of this section. Pursuant to paragraph (c) of this section, section

301(c) applies to the excess qualified distribution.

Pursuant to paragraph (d)(5)(ii)(D)(2) of this section, $40 of the $100 excess qualified distribution is

characterized as a distribution of CE&P. Pursuant to

paragraph (d)(5)(ii)(D)(3) of this section, X’s AE&P

November 9, 2020

as the time of the December 18, 2019 distribution

is $0. Therefore, the remaining $60 is characterized

pursuant to section 301(c)(2) and (3). Pursuant to

paragraph (d)(5)(ii)(D)(4)(i) of this section, A’s basis

in its X stock prior to characterization of the excess

qualified distribution is $0. Therefore, $60 is treated

as gain from the sale or exchange of property pursuant to section 301(c)(3).

(e) Applicability date. This section applies to taxable years beginning after October 20, 2020. However, a corporation

may choose to apply the rules in §§ 1.4815, 1.1371-1, and 1.1371-2 in their entirety

to taxable years beginning on or before

October 20, 2020. If a corporation makes

the choice described in the previous sentence, all shareholders of the corporation

must report consistently, and the corporation must continue to apply the rules

in §§ 1.481-5, 1.1371-1, and 1.1371-2 in

their entirety for the corporation’s subsequent taxable years.

§ 1.1371-2 Impact of Audit PTTP on

ETSC Period.

(a) Definitions. For purposes of this section, the definitions used in § 1.1371‑1(a)

(2) are applicable. Additionally, the following definitions apply for purposes of

this section—

(1) Audit PTTP. The term audit PTTP

means a post-termination transition period

described in section 1377(b)(1)(B) of the

Internal Revenue Code (Code).

(2) Initial PTTP. The term initial PTTP

means a post-termination transition period

described in section 1377(b)(1)(A).

(3) Intervening audit PTTP. The term

intervening audit PTTP means an audit

PTTP arising during the ETSC period.

(b) In general. If an intervening audit

PTTP arises, the ETSC period immediately stops. Immediately following the end

of the intervening audit PTTP, the ETSC

period resumes if the ETSC’s AAA balance is greater than zero. Otherwise, any

subsequent distributions by the ETSC are

treated in the manner provided in section

301(c) of the Code.

(c) Examples. Paragraphs (c)(1) and (2)

of this section (Examples 1 and 2) illustrate the rules of this section. For purposes

of paragraphs (c)(1) and (2) of this section

(Examples 1 and 2), X is a calendar year

S corporation. A, an individual, purchased

all of the outstanding shares of X in a single transaction at the same price per share

1012

prior to December 22, 2017, and was the

sole shareholder of X at all times. Pursuant to section 1362(d)(1) of the Code and

§§ 1.1362-2 and 1.1362-6, X made a valid

revocation of its S election on March 15,

2019, that became effective on January 1,

2019. No amount distributed by X is an

extraordinary dividend within the meaning of section 1059.

(1) Example 1: No ETSC period following initial PTTP—(i) Facts. At the beginning of January 1,

2019, X had AAA of $49,000 and AE&P of $2,000,

and A’s adjusted basis in its shares of X stock was

$50,000. During 2019, the only distribution that X

made was a $49,000 distribution of money to A on

March 13, 2019. X’s CE&P during 2019 was $0,

without regard to any diminution by reason of any

distributions made during the taxable year.

(ii) Analysis—(A) Distribution during initial

PTTP. Pursuant to sections 1371(e) and 1377(b)(1)

(A), the $49,000 distribution of money on March 13,

2019, is characterized as a distribution of AAA because it was made during the initial PTTP.

(B) Effect on corporation. Pursuant to § 1.13682(a)(3)(iii), X’s AAA is reduced by $49,000 to $0.

Following the initial PTTP, even if X satisfies the

requirements of section 481(d)(2) of the Code and

§ 1.481-5(b) to be an ETSC, X does not have an

ETSC period because its AAA balance is zero at the

end of its initial PTTP. Therefore, section 1371(f) of

the Code and § 1.1371-1 will not apply to any subsequent distributions by X.

(C) Effect on shareholder. Pursuant to section

1371(e)(1), A reduces its basis in its X stock by

$49,000 to $1,000.

(2) Example 2: Intervening audit PTTP—(i)

Facts. The facts are the same as the facts in paragraph (c)(1) of this section. On May 20, 2020, which

is after X’s initial PTTP, the IRS begins an audit of

X’s 2018 return. During the audit it is agreed that

X overstated its advertising expense deduction by

$10,000. On July 6, 2020, A signs a closing agreement whereby X’s overstatement results in an additional tax on A’s 2018 individual return. As a result,

at the beginning of January 1, 2019, X had AAA of

$59,000 ($49,000 + $10,000) and AE&P of $2,000.

Additionally, at the beginning of January 1, 2019, A’s

adjusted basis in its shares of X stock was $60,000

($50,000 + $10,000). During 2020, the only distribution X makes is a $6,000 distribution of money to A

on September 1, 2020. X’s CE&P during 2020 was

$0, without regard to any diminution by reason of

any distributions made during the taxable year.

(ii) Analysis—(A) Analysis of March 13, 2019

distribution. The treatment of the March 13, 2019,

distribution is the same as described in paragraph (c)

(1)(ii)(A) of this section, because the amount of the

distribution ($49,000) does not exceed X’s AAA balance at the beginning of January 1, 2019 ($59,000),

and so the entirety of the $49,000 distribution is

properly characterized as a distribution of AAA.

(1) Effect on corporation. As described in paragraph (c)(1)(ii)(B) of this section, X’s AAA ($59,000

at the beginning of January 1, 2019) is reduced by

$49,000 to $10,000. At the conclusion of X’s initial

PTTP (ending on December 31, 2019), X’s AAA balance is $10,000. Pursuant to § 1.1371-1(a)(2)(vii), X

Bulletin No. 2020–46

has an ETSC period. Therefore, section 1371(f) and

§ 1.1371-1 will apply to any subsequent qualified

distributions by X.

(2) Effect on shareholder. As described in paragraph (c)(1)(ii)(C) of this section, A reduces its basis

in its X stock ($60,000 at the beginning of January 1,

2019) by $49,000 to $11,000.

(B) Intervening audit PTTP. Pursuant to section 1377(b)(1)(B), X enters an intervening audit

PTTP that begins on July 6, 2020, and ends on November 2, 2020. The application of section 1371(f)

and § 1.1371-1 to distributions during the intervening audit PTTP is stopped. Instead, sections

1371(e) and 1377(b)(1)(B) and §§ 1.1371-2 and

1.1377-2 apply for the duration of the intervening

audit PTTP. During the intervening audit PTTP, the

only distribution X made is a $6,000 distribution

of money to A on September 1, 2020. Pursuant to

sections 1371(e) and 1377(b)(1)(B), the $6,000

distribution is characterized as a distribution of

AAA because it was made during the intervening

audit PTTP.

(1) Effect on corporation. Pursuant to § 1.13682(a)(3)(iii), X’s AAA is reduced by $6,000 to

$4,000. Beginning on November 3, 2020, pursuant

to § 1.1371-1(a)(2)(vii), X’s ETSC period resumes

(after the intervening audit PTTP’s conclusion) because its AAA balance is greater than zero.

(2) Effect on shareholder. Pursuant to section

1371(e)(1), A reduces its basis in its X stock by

$6,000 to $5,000.

(C) ETSC period. Beginning on November 3, 2020, X’s ETSC period resumes, and distributions of money are subject to section 1371(f) and § 1.1371-1 until

X’s AAA balance is zero. For purposes of

calculating each of X’s AAA and AE&P

ratios, X’s historical AAA is $59,000 (at

the beginning of January 1, 2019, which

includes the $10,000 increase as a result

of the July 6, 2020, closing agreement).

Bulletin No. 2020–46

(d) Applicability date. This section applies to taxable years beginning after October 20, 2020. However, a corporation

may choose to apply the rules in §§ 1.4815, 1.1371-1, and 1.1371-2 in their entirety

to taxable years that began on or before

October 20, 2020. If a corporation makes

the choice described in the previous sentence, all shareholders of the corporation

must report consistently, and the corporation must continue to apply the rules

in §§ 1.481-5, 1.1371-1, and 1.1371-2 in

their entirety for the corporation’s subsequent taxable years.

§ 1.1377-2 [Amended]

Par. 7. Section 1.1377-2 is amended by

removing the last sentence of paragraph

(b).

Par. 8. Section 1.1377-3 is revised to

read as follows:

§ 1.1377-3 Applicability dates.

(a) In general. Except as otherwise

provided in this section, §§ 1.1377-1 and

1.1377-2 apply to taxable years of an S

corporation beginning after December 31,

1996.

(b) Certain conversions. Section

1.1377-1(a)(2)(iii) and (c)(3) (Example 3)

are applicable for taxable years beginning

on and after May 14, 2002.

(c) Special treatment of distributions of

money during post-termination transition

1013

period—(1) In general. Except as provided in paragraph (c)(2) of this section,

§ 1.1377‑2(b) applies to taxable years beginning after October 20, 2020. For taxable years beginning on or before October

20, 2020, see § 1.1377-2(b) as contained

in 26 CFR part 1, revised April 1, 2020.

(2) Taxable years beginning on or before October 20, 2020. A corporation may

choose to apply § 1.1377-2(b) to taxable

years beginning on or before October 20,

2020 and with respect to which the period

described in section 6501(a) has not expired. If a corporation makes the choice

described in the previous sentence, all

shareholders of the corporation must report consistently, and the corporation must

adopt §§ 1.481-5, 1.1371-1, 1.1371-2, if

an ETSC, and 1.1377-2(b) in their entity

and continue to apply those rules in their

entirety for the corporation’s subsequent

taxable years.

Sunita Lough,

Deputy Commissioner for Services

and Enforcement.

Approved: September 9, 2020.

David J. Kautter,

Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on October 19, 2020, 8:45 a.m., and published in the issue

of the Federal Register for October 20, 2020, 85 FR

66471)

November 9, 2020

Part III

2021 Limitations Adjusted

as Provided in Section

415(d), etc.

Notice 2020-79

Section 415 of the Internal Revenue

Code (the Code) provides for dollar limitations on benefits and contributions under qualified retirement plans. Section

415(d) requires that the Secretary of the

Treasury annually adjust these limits for

cost-of-living increases. Other limitations

applicable to deferred compensation plans

are also affected by these adjustments

under § 415. Under § 415(d), the adjustments are to be made under adjustment

procedures similar to those used to adjust

benefit amounts under § 215(i)(2)(A) of

the Social Security Act.

Cost-of-Living Adjusted Limits for

2021

Effective January 1, 2021, the limitation on the annual benefit under a defined

benefit plan under § 415(b)(1)(A) remains

unchanged at $230,000.

For a participant who separated from

service before January 1, 2021, the participant’s limitation under a defined benefit

plan under § 415(b)(1)(B) is computed by

multiplying the participant’s compensation limitation, as adjusted through 2020,

by 1.0122.

The limitation for defined contribution

plans under § 415(c)(1)(A) is increased

for 2021 from $57,000 to $58,000.

The Code provides that various other

dollar amounts are to be adjusted at the

same time and in the same manner as the

dollar limitation of § 415(b)(1)(A). After

taking into account the applicable rounding rules, the amounts for 2021 are as follows:

The limitation under § 402(g)(1) on

the exclusion for elective deferrals

described in § 402(g)(3) remains unchanged at $19,500.

The annual compensation limit under

§§ 401(a)(17), 404(l), 408(k)(3)(C),

and 408(k)(6)(D)(ii) is increased from

$285,000 to $290,000.

November 9, 2020

 he dollar limitation under § 416(i)(1)

T

(A)(i) concerning the definition of “key

employee” in a top-heavy plan remains

unchanged at $185,000.

The dollar amount under § 409(o)(1)

(C)(ii) for determining the maximum

account balance in an employee stock

ownership plan subject to a 5-year

distribution period is increased from

$1,150,000 to $1,165,000, while the

dollar amount used to determine the

lengthening of the 5-year distribution

period remains unchanged at $230,000.

The limitation used in the definition of

“highly compensated employee” under

§ 414(q)(1)(B) remains unchanged at

$130,000.

The dollar limitation under § 414(v)

(2)(B)(i) for catch-up contributions to

an applicable employer plan other than

a plan described in § 401(k)(11) or

§ 408(p) for individuals aged 50 or over

remains unchanged at $6,500. The dollar limitation under § 414(v)(2)(B)(ii)

for catch-up contributions to an applicable employer plan described in § 401(k)

(11) or § 408(p) for individuals aged 50

or over remains unchanged at $3,000.

The annual compensation limitation



under § 401(a)(17) for eligible participants in certain governmental plans

that, under the plan as in effect on July

1, 1993, allowed cost-of-living adjustments to the compensation limitation

under the plan under § 401(a)(17) to be

taken into account, is increased from

$425,000 to $430,000.

The compensation amount under



§ 408(k)(2)(C) regarding simplified

employee pensions (SEPs) is increased

from $600 to $650.

The limitation under § 408(p)(2)(E) regarding SIMPLE retirement accounts

remains unchanged at $13,500.

The limitation on the aggregate amount

of length of service awards accruing

with respect to any year of service for

any bona fide volunteer under § 457(e)

(11)(B)(ii) concerning deferred compensation plans of state and local governments and tax-exempt organizations

remains unchanged at $6,000.

The limitation on deferrals under

§ 457(e)(15) concerning deferred com-

1014

pensation plans of state and local governments and tax-exempt organizations

remains unchanged at $19,500.

The limitation under § 664(g)(7) concerning the qualified gratuitous transfer of qualified employer securities to

an employee stock ownership plan remains unchanged at $50,000.

The compensation amount under



§ 1.61-21(f)(5)(i) of the Income Tax

Regulations concerning the definition

of “control employee” for fringe benefit

valuation purposes remains unchanged

at $115,000. The compensation amount

under § 1.61-21(f)(5)(iii) is increased

from $230,000 to $235,000.

The dollar limitation on premiums paid

with respect to a qualifying longevity

annuity contract under § 1.401(a)(9)-6,

A-17(b)(2)(i) of the Income Tax Regulations remains unchanged at $135,000.

The Code provides that the

$1,000,000,000 threshold used to determine whether a multiemployer plan

is a systemically important plan under

§ 432(e)(9)(H)(v)(III)(aa) is adjusted using the cost-of-living adjustment provided under § 432(e)(9)(H)(v)(III)(bb). After

taking the applicable rounding rule into

account, the threshold used to determine

whether a multiemployer plan is a systemically important plan under § 432(e)

(9)(H)(v)(III)(aa) is increased from

$1,135,000,000 to $1,176,000,000.

The Code also provides that several

retirement-related amounts are to be adjusted using the cost-of-living adjustment

under § 1(f)(3). After taking the applicable

rounding rules into account, the amounts

for 2021 are as follows:

The adjusted gross income limitation

under § 25B(b)(1)(A) for determining the retirement savings contributions credit for married taxpayers

filing a joint return is increased from

$39,000 to $39,500; the limitation under § 25B(b)(1)(B) is increased from

$42,500 to $43,000; and the limitation

under §§ 25B(b)(1)(C) and 25B(b)

(1)(D) is increased from $65,000 to

$66,000.

The adjusted gross income limitation

under § 25B(b)(1)(A) for determining

the retirement savings contributions

Bulletin No. 2020–46

credit for taxpayers filing as head of

household is increased from $29,250 to

$29,625; the limitation under § 25B(b)

(1)(B) is increased from $31,875 to

$32,250; and the limitation under

§§ 25B(b)(1)(C) and 25B(b)(1)(D) is

increased from $48,750 to $49,500.

The adjusted gross income limitation

under § 25B(b)(1)(A) for determining

the retirement savings contributions

credit for all other taxpayers is increased from $19,500 to $19,750; the

limitation under § 25B(b)(1)(B) is increased from $21,250 to $21,500; and

the limitation under §§ 25B(b)(1)(C)

and 25B(b)(1)(D) is increased from

$32,500 to $33,000.

The deductible amount under § 219(b)

(5)(A) for an individual making qualified retirement contributions remains

unchanged at $6,000.

The applicable dollar amount under

§ 219(g)(3)(B)(i) for determining the

deductible amount of an IRA contribution for taxpayers who are active

participants filing a joint return or as

a qualifying widow(er) is increased

from $104,000 to $105,000. The applicable dollar amount under § 219(g)(3)

(B)(ii) for all other taxpayers who are

active participants (other than married

taxpayers filing separate returns) is increased from $65,000 to $66,000. If an

individual or the individual’s spouse

is an active participant, the applicable

dollar amount under § 219(g)(3)(B)(iii)

for a married individual filing a separate return is not subject to an annual

cost-of-living adjustment and remains

Bulletin No. 2020–46

$0. The applicable dollar amount under § 219(g)(7)(A) for a taxpayer who

is not an active participant but whose

spouse is an active participant is increased from $196,000 to $198,000.

Accordingly, under § 219(g)(2)(A), the

deduction for taxpayers making contributions to a traditional IRA is phased

out for single individuals and heads

of household who are active participants in a qualified plan (or another

retirement plan specified in § 219(g)

(5)) and have adjusted gross incomes

(as defined in § 219(g)(3)(A)) between

$66,000 and $76,000, increased from

between $65,000 and $75,000. For

married couples filing jointly, if the

spouse who makes the IRA contribution is an active participant, the income

phase-out range is between $105,000

and $125,000, increased from between

$104,000 and $124,000. For an IRA

contributor who is not an active participant and is married to someone who

is an active participant, the deduction

is phased out if the couple’s income is

between $198,000 and $208,000, increased from between $196,000 and

$206,000. For a married individual filing a separate return who is an active

participant, the phase-out range is not

subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The adjusted gross income limitation under § 408A(c)(3)(B)(ii)(I) for determining the maximum Roth IRA contribution

for married taxpayers filing a joint return

or for taxpayers filing as a qualifying

widow(er) is increased from $196,000

1015

to $198,000. The adjusted gross income

limitation under § 408A(c)(3)(B)(ii)(II)

for all other taxpayers (other than married taxpayers filing separate returns) is

increased from $124,000 to $125,000.

The applicable dollar amount under

§ 408A(c)(3)(B)(ii)(III) for a married

individual filing a separate return is not

subject to an annual cost-of-living adjustment and remains $0.

Accordingly, under § 408A(c)(3)(A),

the adjusted gross income phase-out

range for taxpayers making contributions to a Roth IRA is $198,000 to

$208,000 for married couples filing

jointly, increased from $196,000 to

$206,000. For single individuals and

heads of household, the income phaseout range is $125,000 to $140,000,

increased from $124,000 to $139,000.

For a married individual filing a separate return, the phase-out range is not

subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Drafting Information

The principal author of this notice is

Tom Morgan of the Office of the Associate Chief Counsel (Employee Benefits,

Exempt Organizations, and Employment

Taxes). However, other personnel from

the IRS participated in the development

of this guidance. For further information

regarding this notice, contact Mr. Morgan

at 202-317-6700 or John Heil at 443-8535519 (not toll-free numbers).

November 9, 2020

26 CFR 601.602: Tax forms and instructions.

(Also Part I, §§ 1, 23, 24, 25A, 32, 36B, 42, 45R, 55, 59, 62, 63, 125, 132(f),135, 137, 146, 147, 148, 152, 179, 199A, 213, 220, 221, 448, 461, 512, 513, 642, 831,

877, 877A, 911, 1274A, 2010, 2032A, 2503, 2523, 4161, 4261, 6033, 6039F, 6323, 6334, 6601, 6651, 6652, 6695, 6698, 6699, 6721, 6722, 7345, 7430, 7702B,

9831; 1.148-5.)

Rev. Proc. 2020-45

Table of Contents

SECTION 1. PURPOSE

SECTION 2. CHANGES

SECTION 3. 2021 ADJUSTED ITEMS

.01 Tax Rate Tables

.02 Unearned Income of Minor Children

(“Kiddie Tax”)

.03 Maximum Capital Gains Rate

.04 Adoption Credit

.05 Child Tax Credit

.06 Lifetime Learning Credit

.07 Earned Income Credit

.08 Refundable Credit for Coverage Under a Qualified Health Plan

.09 Rehabilitation Expenditures Treated as Separate New Building

.10 Low-Income Housing Credit

.11 Employee Health Insurance Expense of Small Employers

.12 Exemption Amounts for Alternative Minimum Tax

.13 Alternative Minimum Tax Exemption for a Child Subject to the

“Kiddie Tax”

.14 Certain Expenses of Elementary and Secondary

School Teachers

.15 Transportation Mainline Pipeline Construction Industry Optional

Expense Substantiation Rules for Payments to Employees Under

Accountable Plans

.16 Standard Deduction

.17 Cafeteria Plans

.18 Qualified Transportation Fringe Benefit

.19 Income from United States Savings Bonds for Taxpayers Who

Pay Qualified Higher Education Expenses

.20 Adoption Assistance Programs

.21 Private Activity Bonds Volume Cap

.22 Loan Limits on Agricultural Bonds

.23 General Arbitrage Rebate Rules

.24 Safe Harbor Rules for Broker Commissions on Guaranteed

Investment Contracts or Investments Purchased for a Yield

Restricted Defeasance Escrow

.25 Gross Income Limitation for a Qualifying Relative

.26 Election to Expense Certain Depreciable Assets

.27 Qualified Business Income

.28 Eligible Long-Term Care Premiums

.29 Medical Savings Accounts

.30 Interest on Education Loans

.31 Limitation on Use of Cash Method of Accounting

.32 Threshold for Excess Business Loss

November 9, 2020

1016

Code Section

1(j)(2) (A)-(D)

1(g)

1(h)

23

24

25A

32

36B(f)(2)(B)

42(e)

42(h)

45R

55

59(j)

62(a)(2)(D)

62(c)

63

125

132(f)

135

137

146(d)

147(c)(2)

148(f)

148

152(d)(1)(B)

179

199A

213(d)(10)

220

221

448

461(l)

Bulletin No. 2020–46

.33 Treatment of Dues Paid to Agricultural or Horticultural

Organizations

.34 Insubstantial Benefit Limitations for Contributions Associated

With Charitable Fund-Raising Campaigns

.35 Special Rules for Credits and Deductions

.36 Tax on Insurance Companies Other than Life

Insurance Companies

.37 Expatriation to Avoid Tax

.38 Tax Responsibilities of Expatriation

.39 Foreign Earned Income Exclusion

.40 Debt Instruments Arising Out of Sales or Exchanges

.41 Unified Credit Against Estate Tax

.42 Valuation of Qualified Real Property in Decedent’s Gross Estate

.43 Annual Exclusion for Gifts

.44 Tax on Arrow Shafts

.45 Passenger Air Transportation Excise Tax

.46 Reporting Exception for Certain Exempt Organizations with

Nondeductible Lobbying Expenditures

.47 Notice of Large Gifts Received from Foreign Persons

.48 Persons Against Whom a Federal Tax Lien Is Not Valid

.49 Property Exempt from Levy

.50 Exempt Amount of Wages, Salary, or Other Income

.51 Interest on a Certain Portion of the Estate Tax Payable in

Installments

.52 Failure to File Tax Return

.53 Failure to File Certain Information Returns, Registration

Statements, etc.

.54 Other Assessable Penalties With Respect to the

Preparation of Tax Returns for Other Persons

.55 Failure to File Partnership Return

.56 Failure to File S Corporation Return

.57 Failure to File Correct Information Returns

.58 Failure to Furnish Correct Payee Statements

.59 Revocation or Denial of Passport in Case of Certain

Tax Delinquencies

.60 Attorney Fee Awards

.61 Periodic Payments Received Under Qualified Long-Term Care

Insurance Contracts or Under Certain Life Insurance Contracts

.62 Qualified Small Employer Health Reimbursement

Arrangement

512(d)

513(h)

642

831

877

877A

911

1274A

2010

2032A

2503; 2523

4161

4261

6033(e)(3)

6039F

6323

6334(a)

6334(d)

6601(j)

6651

6652

6695

6698

6699

6721

6722

7345

7430

7702B(d)

9831

SECTION 4. EFFECTIVE DATE

SECTION 5. DRAFTING INFORMATION

SECTION 1. PURPOSE

SECTION 2. CHANGES

This revenue procedure sets forth inflation-adjusted items for 2021 for various

provisions of the Internal Revenue Code

of 1986 (Code), as amended as of October 26, 2020. To the extent amendments

to the Code are enacted for 2021 after October 26, 2020, taxpayers should consult

additional guidance to determine whether

these adjustments remain applicable for

2021.

Section 402(b) of Div. O of the Further

Consolidated Appropriation Act, 2020,

Pub. L. 116-94, 133 Stat. 2534 (Dec. 22,

2019), increased the amount of the minimum addition to tax under § 6651(a) for

failure to file a tax return within 60 days of

the due date of such return (determined with

regard to any extensions of time for filing).

For returns the due date for which (including extensions) is after December 31, 2019,

Bulletin No. 2020–46

1017

the amount of the addition to tax shall not

be less than the lesser of $435 (increased

from $330) or 100 percent of the amount

required to be shown as tax on such returns.

Additionally, the $435 amount is adjusted

for inflation in accordance with § 6651(j).

SECTION 3. 2021 ADJUSTED ITEMS

.01 Tax Rate Tables. For taxable years

beginning in 2021, the tax rate tables under § 1 are as follows:

November 9, 2020

TABLE 1 - Section 1(j)(2)(A) - Married Individuals Filing Joint Returns and Surviving Spouses

If Taxable Income Is:

The Tax Is:

Not over $19,900

10% of the taxable income

Over $19,900 but

not over $81,050

$1,990 plus 12% of

the excess over $19,900

Over $81,050 but

not over $172,750

$9,328 plus 22% of

the excess over $81,050

Over $172,750 but

not over $329,850

$29,502 plus 24% of

the excess over $172,750

Over $329,850 but

not over $418,850

$67,206 plus 32% of

the excess over $329,850

Over $418,850 but

not over $628,300

$95,686 plus 35% of

the excess over $418,850

Over $628,300

$168,993.50 plus 37% of

the excess over $628,300

TABLE 2 - Section 1(j)(2)(B) – Heads of Households

If Taxable Income Is:

The Tax Is:

Not over $14,200

10% of the taxable income

Over $14,200 but

not over $54,200

$1,420 plus 12% of

the excess over $14,200

Over $54,200 but

not over $86,350

$6,220 plus 22% of

the excess over $54,200

Over $86,350 but

not over $164,900

$13,293 plus 24% of

the excess over $86,350

Over $164,900 but

not over $209,400

$32,145 plus 32% of

the excess over $164,900

Over $209,400 but

not over $523,600

$46,385 plus 35% of

the excess over $209,400

Over $523,600

$156,355 plus 37% of

the excess over $523,600

November 9, 2020

1018

Bulletin No. 2020–46

TABLE 3 - Section 1(j)(2)(C) – Unmarried Individuals (other than Surviving Spouses and Heads of Households)

If Taxable Income Is:

The Tax Is:

Not over $9,950

10% of the taxable income

Over $9,950 but

not over $40,525

$995 plus 12% of

the excess over $9,950

Over $40,525 but

not over $86,375

$4,664 plus 22% of

the excess over $40,525

Over $86,375 but

not over $164,925

$14,751 plus 24% of

the excess over $86,375

Over $164,925 but

not over $209,425

$33,603 plus 32% of

the excess over $164,925

Over $209,425 but

not over $523,600

$47,843 plus 35% of

the excess over $209,425

Over $523,600

$157,804.25 plus 37% of

the excess over $523,600

TABLE 4 - Section 1(j)(2)(D) – Married Individuals Filing Separate Returns

If Taxable Income Is:

The Tax Is:

Not over $9,950

10% of the taxable income

Over $9,950 but

not over $40,525

$995 plus 12% of

the excess over $9,950

Over $40,525 but

not over $86,375

$4,664 plus 22% of

the excess over $40,525

Over $86,375 but

not over $164,925

$14,751 plus 24% of

the excess over $86,375

Over $164,925 but

not over $209,425

$33,603 plus 32% of

the excess over $164,925

Over $209,425 but

not over $314,150

$47,843 plus 35% of

the excess over $209,425

Over $314,150

$84,496.75 plus 37% of

the excess over $314,150

TABLE 5 - Section 1(j)(2)(E) – Estates and Trusts

If Taxable Income Is:

Not over $2,650

The Tax Is:

10% of the taxable income

Over $2,650 but

not over $9,550

$265 plus 24% of

the excess over $2,650

Over $9,550 but

not over $13,050

$1,921 plus 35% of

the excess over $9,550

Over $13,050

$3,146 plus 37% of

the excess over $13,050

Bulletin No. 2020–46

1019

November 9, 2020

.02 Unearned Income of Minor Children (the “Kiddie Tax”). For taxable years

beginning in 2021, the amount in § 1(g)(4)

(A)(ii)(I), which is used to reduce the net

unearned income reported on the child’s

return that is subject to the “kiddie tax,”

is $1,100. This $1,100 amount is the same

as the amount provided in § 63(c)(5)(A),

as adjusted for inflation. The same $1,100

amount is used for purposes of § 1(g)(7)

(that is, to determine whether a parent may

elect to include a child’s gross income in

the parent’s gross income and to calculate

the “kiddie tax”). For example, one of the

requirements for the parental election is

that a child’s gross income is more than

the amount referenced in § 1(g)(4)(A)(ii)

(I) but less than 10 times that amount; thus,

a child’s gross income for 2021 must be

more than $1,100 but less than $11,000.

.03 Maximum Capital Gains Rate. For

taxable years beginning in 2021, the Maximum Zero Rate Amount under § 1(h)(1)(B)

(i) is $80,800 in the case of a joint return or

surviving spouse ($40,400 in the case of a

married individual filing a separate return),

$54,100 in the case of an individual who

is a head of household (§ 2(b)), $40,400 in

the case of any other individual (other than

an estate or trust), and $2,700 in the case

of an estate or trust. The Maximum 15-per-

cent Rate Amount under § 1(h)(1)(C)(ii)(l)

is $501,600 in the case of a joint return or

surviving spouse ($250,800 in the case of a

married individual filing a separate return),

$473,750 in the case of an individual who is

the head of a household (§ 2(b)), $445,850

in the case of any other individual (other

than an estate or trust), and $13,250 in the

case of an estate or trust.

.04 Adoption Credit. For taxable years

beginning in 2021, under § 23(a)(3) the

credit allowed for an adoption of a child

with special needs is $14,440. For taxable

years beginning in 2021, under § 23(b)

(1) the maximum credit allowed for other adoptions is the amount of qualified

adoption expenses up to $14,440. The

available adoption credit begins to phase

out under § 23(b)(2)(A) for taxpayers with

modified adjusted gross income in excess

of $216,660 and is completely phased

out for taxpayers with modified adjusted

gross income of $256,660 or more. (See

section 3.20 for the adjusted items relating

to adoption assistance programs.)

.05 Child Tax Credit. For taxable years

beginning in 2021, the value used in § 24(d)

(1)(A) to determine the amount of credit under § 24 that may be refundable is $1,400.

.06 Lifetime Learning Credit. For taxable years beginning in 2021, a taxpayer’s

Item

Earned Income Amount

Maximum Amount of Credit

Threshold Phaseout Amount (Single, Surviving Spouse, or Head of

Household)

Completed Phaseout Amount (Single, Surviving Spouse, or Head of

Household)

Threshold Phaseout Amount (Married Filing Jointly)

Completed Phaseout Amount (Married Filing Jointly)

The instructions for the Form 1040 series provide tables showing the amount of

the earned income credit for each type of

taxpayer.

(2) Excessive Investment Income.

For taxable years beginning in 2021, the

November 9, 2020

Number of Qualifying Children

One

Two

Three or

None

More

$10,640

$14,950

$14,950

$7,100

$3,618

$5,980

$6,728

$543

$19,520

$19,520

$19,520

$8,880

$42,158

$47,915

$51,464

$15,980

$25,470

$48,108

$25,470

$53,865

$25,470

$57,414

$14,820

$21,920

earned income tax credit is not allowed

under § 32(i) if the aggregate amount

of certain investment income exceeds

$3,650.

.08 Refundable Credit for Coverage

Under a Qualified Health Plan. For tax-

1020

modified adjusted gross income in excess

of $59,000 ($119,000 for a joint return)

is used to determine the reduction under

§ 25A(d)(2) in the amount of the Lifetime

Learning Credit otherwise allowable under

§ 25A(a)(2). The Lifetime Learning Credit

is completely phased out for taxpayers with

modified adjusted gross income in excess

of $69,000 ($139,000 for a joint return).

.07 Earned Income Credit.

(1) In general. For taxable years beginning in 2021, the following amounts

are used to determine the earned income

credit under § 32(b). The “earned income

amount” is the amount of earned income

at or above which the maximum amount

of the earned income credit is allowed.

The “threshold phaseout amount” is the

amount of adjusted gross income (or, if

greater, earned income) above which the

maximum amount of the credit begins

to phase out. The “completed phaseout

amount” is the amount of adjusted gross

income (or, if greater, earned income) at

or above which no credit is allowed. The

threshold phaseout amounts and the completed phaseout amounts shown in the

table below for married taxpayers filing a

joint return include the increase provided

in § 32(b)(2)(B), as adjusted for inflation

for taxable years beginning in 2021.

able years beginning in 2021, the limitation on tax imposed under § 36B(f)(2)(B)

for excess advance credit payments is determined using the following table:

Bulletin No. 2020–46

If the household income

(expressed as a percent

of poverty line) is:

The limitation amount for

unmarried individuals

(other than surviving

spouses and heads of

household) is:

The limitation amount for

all other taxpayers is:

Less than 200%

At least 200% but less

than 300%

At least 300% but less

than 400%

$325

$650

$800

$1,600

$1,350

$2,700

.09 Rehabilitation Expenditures Treated as Separate New Building. For calendar year 2021, the per low-income unit

qualified basis amount under § 42(e)(3)

(A)(ii)(II) is $7,100.

.10 Low-Income Housing Credit. For

calendar year 2021, the amount used under § 42(h)(3)(C)(ii) to calculate the State

housing credit ceiling for the low-income

housing credit is the greater of (1) $2.8125

multiplied by the State population, or (2)

$3,245,625.

.11 Employee Health Insurance Expense of Small Employers. For taxable

years beginning in 2021, the dollar amount

in effect under § 45R(d)(3)(B) is $27,800.

This amount is used under § 45R(c) for

limiting the small employer health insur-

Joint Returns or Surviving Spouses

Unmarried Individuals (other than Surviving Spouses)

Married Individuals Filing Separate Returns

Estates and Trusts

For taxable years beginning in 2021,

under § 55(b)(1), the excess taxable in-

$114,600

$73,600

$57,300

$25,700

come above which the 28 percent tax rate

applies is:

Married Individuals Filing Separate Returns

Joint Returns, Unmarried Individuals (other

than surviving spouses), and Estates and Trusts

For taxable years beginning in 2021,

the amounts used under § 55(d)(2) to de-

Joint Returns or Surviving Spouses

Unmarried Individuals (other than

Surviving Spouses)

Married Individuals Filing Separate

Returns

Estates and Trusts

.13 Alternative Minimum Tax Exemption for a Child Subject to the “Kiddie

Tax.” For taxable years beginning in 2021,

for a child to whom the § 1(g) “kiddie

tax” applies, the exemption amount un-

Bulletin No. 2020–46

ance credit and under § 45R(d)(1)(B) for

determining who is an eligible small employer for purposes of the credit.

.12 Exemption Amounts for Alternative Minimum Tax. For taxable years beginning in 2021, the exemption amounts

under § 55(d)(1) are:

$99,950

$199,900

termine the phaseout of the exemption

amounts are:

Threshold

Phaseout amount

$1,047,200

$523,600

Complete

Phaseout amount

$1,505,600

$818,000

$523,600

$752,800

$85,650

$188,450

der §§ 55(d) and 59(j) for purposes of

the alternative minimum tax under § 55

may not exceed the sum of (1) the child’s

earned income for the taxable year, plus

(2) $7,950.

1021

.14 Certain Expenses of Elementary and Secondary School Teachers. For

taxable years beginning in 2021, under

§ 62(a)(2)(D) the amount of the deduction

allowed under § 162 that consists of ex-

November 9, 2020

penses paid or incurred by an eligible educator in connection with books, supplies

(other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including

related software and services) and other

equipment, and supplementary materials

used by the eligible educator in the classroom is $250.

.15 Transportation Mainline Pipeline

Construction Industry Optional Expense

Substantiation Rules for Payments to Employees Under Accountable Plans. For

calendar year 2021, an eligible employer

may pay certain welders and heavy equipment mechanics an amount up to $18

per hour for rig-related expenses that are

deemed substantiated under an accountable plan if paid in accordance with Rev.

Proc. 2002-41, 2002-1 C.B. 1098. If the

employer provides fuel or otherwise reimburses fuel expenses, an amount up to $11

per hour is deemed substantiated if paid

under Rev. Proc. 2002-41.

.16 Standard Deduction.

(1) In general. For taxable years beginning in 2021, the standard deduction

amounts under § 63(c)(2) are as follows:

Filing Status

Married Individuals Filing Joint Returns

and Surviving Spouses (§ 1(j)(2)(A))

Heads of Households (§ 1(j)(2)(B))

Unmarried Individuals (other than Surviving Spouses

and Heads of Households) (§ 1(j)(2)(C))

Married Individuals Filing Separate

Returns (§ 1(j)(2)(D))

Standard Deduction

$25,100

(2) Dependent. For taxable years beginning in 2021, the standard deduction

amount under § 63(c)(5) for an individual

who may be claimed as a dependent by

another taxpayer cannot exceed the greater of (1) $1,100, or (2) the sum of $350

and the individual’s earned income.

(3) Aged or blind. For taxable years

beginning in 2021, the additional standard

deduction amount under § 63(f) for the

aged or the blind is $1,350. The additional

standard deduction amount is increased to

$1,700 if the individual is also unmarried

and not a surviving spouse.

.17 Cafeteria Plans. For taxable years

beginning in 2021, the dollar limitation

under § 125(i) on voluntary employee salary reductions for contributions to health

flexible spending arrangements is $2,750.

If the cafeteria plan permits the carryover

of unused amounts, the maximum carryover amount is $550.

.18 Qualified Transportation Fringe

Benefit. For taxable years beginning

in 2021, the monthly limitation under

§ 132(f)(2)(A) regarding the aggregate

fringe benefit exclusion amount for transportation in a commuter highway vehicle

and any transit pass is $270. The monthly

limitation under § 132(f)(2)(B) regarding

the fringe benefit exclusion amount for

qualified parking is $270.

.19 Income from United States Savings

Bonds for Taxpayers Who Pay Qualified

Higher Education Expenses. For taxable

.21 Private Activity Bonds Volume

Cap. For calendar year 2021, the amounts

used under § 146(d) to calculate the State

ceiling for the volume cap for private

activity bonds is the greater of (1) $110

multiplied by the State population, or (2)

$324,995,000.

.22 Loan Limits on Agricultural Bonds.

For calendar year 2021, the loan limit amount on agricultural bonds under

§ 147(c)(2)(A) for first-time farmers is

$558,000.

.23 General Arbitrage Rebate Rules.

For bond years ending in 2021, the amount

of the computation credit determined under § 1.148-3(d)(4) of the Income Tax

Regulations is $1,780.

.24 Safe Harbor Rules for Broker

Commissions on Guaranteed Investment

Contracts or Investments Purchased for

a Yield Restricted Defeasance Escrow.

For calendar year 2021, under § 1.1485(e)(2)(iii)(B)(1), a broker’s commission

or similar fee for the acquisition of a

guaranteed investment contract or investments purchased for a yield restricted defeasance escrow is reasonable if (1) the

amount of the fee that the issuer treats as

a qualified administrative cost does not

exceed the lesser of (A) $42,000, and (B)

0.2 percent of the computational base (as

defined in § 1.148-5(e)(2)(iii)(B)(2)) or,

if more, $4,000; and (2) for any issue, the

issuer does not treat more than $118,000

in brokers’ commissions or similar fees

November 9, 2020

$18,800

$12,550

$12,550

years beginning in 2021, the exclusion under § 135, regarding income from United

States savings bonds for taxpayers who

pay qualified higher education expenses,

begins to phase out for modified adjusted

gross income above $124,800 for joint

returns and $83,200 for all other returns.

The exclusion is completely phased out

for modified adjusted gross income of

$154,800 or more for joint returns and

$98,200 or more for all other returns.

.20 Adoption Assistance Programs.

For taxable years beginning in 2021,

under § 137(a)(2), the amount that can

be excluded from an employee’s gross

income for the adoption of a child with

special needs is $14,440. For taxable

years beginning in 2021, under § 137(b)

(1) the maximum amount that can be

excluded from an employee’s gross income for the amounts paid or expenses

incurred by an employer for qualified

adoption expenses furnished pursuant to

an adoption assistance program for other

adoptions by the employee is $14,440.

The amount excludable from an employee’s gross income begins to phase out

under § 137(b)(2)(A) for taxpayers with

modified adjusted gross income in excess

of $216,660 and is completely phased

out for taxpayers with modified adjusted

gross income of $256,660 or more. (See

section 3.04 of this revenue procedure for

the adjusted items relating to the adoption credit.)

1022

Bulletin No. 2020–46

as qualified administrative costs for all

guaranteed investment contracts and investments for yield restricted defeasance

escrows purchased with gross proceeds

of the issue.

.25 Gross Income Limitation for a

Qualifying Relative. For taxable years beginning in 2021, the exemption amount

referenced in § 152(d)(1)(B) is $4,300.

.26 Election to Expense Certain Depreciable Assets. For taxable years beginning in 2021, under § 179(b)(1), the

aggregate cost of any § 179 property that

a taxpayer elects to treat as an expense

cannot exceed $1,050,000 and under

§ 179(b)(5)(A), the cost of any sport utility vehicle that may be taken into account

under § 179 cannot exceed $26,200. Under § 179(b)(2), the $1,050,000 limitation under section 179(b)(1) is reduced

(but not below zero) by the amount by

which the cost of § 179 property placed

in service during the 2021 taxable year

exceeds $2,620,000.

Attained Age Before the Close of the Taxable Year

40 or less

More than 40 but not more than 50

More than 50 but not more than 60

More than 60 but not more than 70

More than 70

.29 Medical Savings Accounts.

(1) Self-only coverage. For taxable

years beginning in 2021, the term “high

deductible health plan” as defined in

§ 220(c)(2)(A) means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,400 and

not more than $3,600, and under which the

annual out-of-pocket expenses required to

be paid (other than for premiums) for covered benefits do not exceed $4,800.

(2) Family coverage. For taxable years

beginning in 2021, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,800 and

not more than $7,150, and under which the

annual out-of-pocket expenses required to

be paid (other than for premiums) for covered benefits do not exceed $8,750.

.30 Interest on Education Loans. For

taxable years beginning in 2021, the

$2,500 maximum deduction for interest

paid on qualified education loans under

§ 221 begins to phase out under § 221(b)

(2)(B) for taxpayers with modified adjusted gross income in excess of $70,000

($140,000 for joint returns), and is completely phased out for taxpayers with modified adjusted gross income of $85,000 or

more ($170,000 or more for joint returns).

.31 Limitation on Use of Cash Method

of Accounting. For taxable years beginning in 2021, a corporation or partnership

meets the gross receipts test of § 448(c)

Bulletin No. 2020–46

.27 Qualified Business Income. For

taxable years beginning in 2021, the

threshold amount under § 199A(e)(2) is

$329,800 for married filing joint returns,

$164,925 for married filing separate returns, and $164,900 for all other returns.

.28 Eligible Long-Term Care Premiums. For taxable years beginning in 2021,

the limitations under § 213(d)(10), regarding eligible long-term care premiums includible in the term “medical care,” are as

follows:

Limitation on Premiums

$450

$850

$1,690

$4,520

$5,640

for any taxable year if the average annual

gross receipts of such entity for the 3-taxable-year period ending with the taxable

year which precedes such taxable year

does not exceed $26,000,000.

.32 Threshold for Excess Business

Loss. For taxable years beginning in 2021,

in determining a taxpayer’s excess business loss, the amount under § 461(l)(3)

(A)(ii)(II) is $262,000 ($524,000 for joint

returns).

.33 Treatment of Dues Paid to Agricultural or Horticultural Organizations.

For taxable years beginning in 2021, the

limitation under § 512(d)(1), regarding

the exemption of annual dues required to

be paid by a member to an agricultural or

horticultural organization, is $173.

.34 Insubstantial Benefit Limitations

for Contributions Associated with Charitable Fund-Raising Campaigns.

(1) Low cost article. For taxable years

beginning in 2021, for purposes of defining the term “unrelated trade or business”

for certain exempt organizations under

§ 513(h)(2), “low cost articles” are articles

costing $11.30 or less.

(2) Other insubstantial benefits. For

taxable years beginning in 2021, under

§ 170, the $5, $25, and $50 guidelines in

section 3 of Rev. Proc. 90-12, 1990-1 C.B.

471 (as amplified by Rev. Proc. 92-49,

1992-1 C.B. 987, and modified by Rev.

Proc. 92-102, 1992-2 C.B. 579), for the

value of insubstantial benefits that may be

1023

received by a donor in return for a contribution, without causing the contribution

to fail to be fully deductible, are $11.30,

$56.50 and $113, respectively.

.35 Special Rules for Credits and Deductions. For taxable years beginning in

2021, the amount of the deduction under

§ 642(b)(2)(C)(i) is $4,300.

.36 Tax on Insurance Companies Other than Life Insurance Companies. For

taxable years beginning in 2021, under

§ 831(b)(2)(A)(i) the amount of the limit

on net written premiums or direct written premiums (whichever is greater) is

$2,400,000 to elect the alternative tax for

certain small companies under § 831(b)

(1) to be taxed only on taxable investment

income.

.37 Expatriation to Avoid Tax. For calendar year 2021, under § 877A(g)(1)(A),

unless an exception under § 877A(g)(1)

(B) applies, an individual is a covered expatriate if the individual’s “average annual

net income tax” under § 877(a)(2)(A) for

the five taxable years ending before the

expatriation date is more than $172,000.

.38 Tax Responsibilities of Expatriation. For taxable years beginning in 2021,

the amount that would be includible in

the gross income of a covered expatriate

by reason of § 877A(a)(1) is reduced (but

not below zero) by $744,000 pursuant to

§ 877A(a)(3).

.39 Foreign Earned Income Exclusion.

For taxable years beginning in 2021, the

November 9, 2020

foreign earned income exclusion amount

under § 911(b)(2)(D)(i) is $108,700.

.40 Debt Instruments Arising Out of

Sales or Exchanges. For calendar year

2021, a qualified debt instrument under

§ 1274A(b) has stated principal that does

not exceed $6,099,500, and a cash method debt instrument under § 1274A(c)(2)

has stated principal that does not exceed

$4,356,800.

.41 Unified Credit Against Estate Tax.

For an estate of any decedent dying in

calendar year 2021, the basic exclusion

amount is $11,700,000 for determining

the amount of the unified credit against

estate tax under § 2010.

.42 Valuation of Qualified Real Property in Decedent’s Gross Estate. For an

estate of a decedent dying in calendar

year 2021, if the executor elects to use

the special use valuation method under

§ 2032A for qualified real property, the

aggregate decrease in the value of qualified real property resulting from electing

to use § 2032A for purposes of the estate

tax cannot exceed $1,190,000.

.43 Annual Exclusion for Gifts.

(1) For calendar year 2021, the first

$15,000 of gifts to any person (other than

gifts of future interests in property) are

not included in the total amount of taxable

gifts under § 2503 made during that year.

(2) For calendar year 2021, the first

$159,000 of gifts to a spouse who is not

a citizen of the United States (other than

gifts of future interests in property) are

not included in the total amount of taxable

gifts under §§ 2503 and 2523(i)(2) made

during that year.

.44 Tax on Arrow Shafts. For calendar year 2021, the tax imposed under

§ 4161(b)(2)(A) on the first sale by the

manufacturer, producer, or importer of

any shaft of a type used in the manufacture of certain arrows is $0.53 per shaft.

.45 Passenger Air Transportation Excise Tax. For calendar year 2021, the tax

under § 4261(b)(1) on the amount paid

for each domestic segment of taxable air

transportation is $4.30. For calendar year

2021, the tax under § 4261(c)(1) on any

amount paid (whether within or without

the United States) for any international air

transportation, if the transportation begins

or ends in the United States, generally is

$19.10. Under § 4261(c)(3), however, a

lower rate of tax applies under § 4261(c)

(1) to a domestic segment beginning or

ending in Alaska or Hawaii, and the tax

applies only to departures. For calendar

year 2021, the rate of tax is $9.60.

.46 Reporting Exception for Certain

Exempt Organizations with Nondeductible Lobbying Expenditures. For taxable

years beginning in 2021, the annual per

person, family, or entity dues limitation

to qualify for the reporting exception under § 6033(e)(3) (and section 5.05 of Rev.

Proc. 98-19, 1998-1 C.B. 547), regarding

certain exempt organizations with nondeductible lobbying expenditures, is $120 or

less.

.47 Notice of Large Gifts Received from

Foreign Persons. For taxable years beginning in 2021, § 6039F authorizes the Treasury Department and the Internal Revenue

Service to require recipients of gifts from

certain foreign persons to report these gifts

if the aggregate value of gifts received in

the taxable year exceeds $16,815.

.48 Persons Against Whom a Federal

Tax Lien Is Not Valid. For calendar year

2021, a federal tax lien is not valid against

(1) certain purchasers under § 6323(b)

(4) who purchased personal property in

a casual sale for less than $1,640, or (2)

a mechanic’s lien or under § 6323(b)(7)

who repaired or improved certain residential property if the contract price with the

owner is not more than $8,180.

Scenario

.49 Property Exempt from Levy. For

calendar year 2021, the value of property

exempt from levy under § 6334(a)(2) (fuel,

provisions, furniture, and other household

personal effects, as well as arms for personal use, livestock, and poultry) cannot

exceed $9,790. The value of property exempt from levy under § 6334(a)(3) (books

and tools necessary for the trade, business,

or profession of the taxpayer) cannot exceed $4,890.

.50 Exempt Amount of Wages, Salary,

or Other Income. For taxable years beginning in 2021, the dollar amount used

to calculate the amount determined under

§ 6334(d)(4)(B) is $4,300.

.51 Interest on a Certain Portion of the

Estate Tax Payable in Installments. For an

estate of a decedent dying in calendar year

2021, the dollar amount used to determine

the “2-percent portion” (for purposes of

calculating interest under § 6601(j)) of the

estate tax extended as provided in § 6166

is $1,590,000.

.52 Failure to File Tax Return. In the

case of any return required to be filed in

2022, the amount of the addition to tax

under § 6651(a) for failure to file a tax return within 60 days of the due date of such

return (determined with regard to any extensions of time for filing) shall not be less

than the lesser of $435 or 100 percent of

the amount required to be shown as tax on

such returns.

.53 Failure to File Certain Information

Returns, Registration Statements, etc. For

returns required to be filed in 2022, the

penalty amounts under § 6652(c) are:

(1) for failure to file a return required

under § 6033(a)(1) (relating to returns

by exempt organization) or § 6012(a)(6)

(relating to returns by political organizations):

Organization (§ 6652(c)(1)(A))

Daily

Penalty

$20

Organization with gross receipts exceeding $1,094,500 (§ 6652(c)(1)(A))

Managers (§ 6652(c)(1)(B))

Public inspection of annual returns and reports (§ 6652(c)(1)(C))

Public inspection of applications for exemption and notice of status (§ 6652(c)(1)(D))

$105

$10

$20

$20

November 9, 2020

1024

Maximum Penalty

Lessor of $10,500 or 5% of

gross receipts of the organization for the year.

$54,500

$5,000

$10,500

No Limits

Bulletin No. 2020–46

(2) for failure to file a return required

under § 6034 (relating to returns by cer-

tain trust) or § 6043(b) (relating to terminations, etc., of exempt organizations):

Scenario

Organization or trust (§ 6652(c)(2)(A))

Managers (§ 6652(c)(2)(B))

Split-Interest Trust (§ 6652(c)(2)(C)(ii))

Any trust with gross income exceeding $273,500 (§ 6652(c)(2)(C)(ii))

Daily Penalty

$10

$10

$20

$105

Maximum Penalty

$5,000

$5,000

$10,500

$54,500

Daily Penalty

$105

$105

Maximum Penalty

$54,500

$10,500

(3) for failure to file a disclosure required under § 6033(a)(2):

Scenario

Tax–exempt entity (§ 6652(c)(3)(A))

Failure to comply with written demand (§ 6652(c)(3)(B)(ii))

.54 Other Assessable Penalties With

Respect to the Preparation of Tax Returns

for Other Persons. In the case of any failure relating to a return or claim for refund

Scenario

Failure to furnish copy to taxpayer (§ 6695(a))

Failure to sign return (§ 6695(b))

Failure to furnish identifying number (§ 6695(c))

Failure to retain copy or list (§ 6695(d))

Failure to file correct information returns (§ 6695(e))

Negotiation of check (§ 6695(f))

Failure to be diligent in determining eligibility for head of household filing status, child tax credit, American opportunity tax credit, and earned

income credit (§ 6695(g))

.55 Failure to File Partnership Return.

In the case of any return required to be

filed in 2022, the dollar amount used to

determine the amount of the penalty under

§ 6698(b)(1) is $210.

.56 Failure to File S Corporation Return. In the case of any return required to

Bulletin No. 2020–46

Per Return or Claim

for Refund

$50

$50

$50

$50

$50 per return and

item in return

$545 per check

$545 per failure

be filed in 2022, the dollar amount used to

determine the amount of the penalty under

§ 6699(b)(1) is $210.

.57 Failure to File Correct Information

Returns. In the case of any failure relating

to a return required to be filed in 2022, the

penalty amounts under § 6721 are:

Scenario

General Rule (§ 6721(a)(1))

Corrected on or before 30 days after required filing date (§ 6721(b)(1))

Corrected after 30th day but on or before August 1, 2022 (§ 6721(b)(2))

1025

filed in 2022, the penalty amounts under

§ 6695 are:

Maximum

Penalty

$27,000

$27,000

$27,000

$27,000

$27,000

No limit

No limit

(1) for persons with average annual

gross receipts for the most recent three

taxable years of more than $5,000,000, for

failure to file correct information returns:

Penalty Per Return

$280

$50

$110

Calendar Year Maximum

$3,426,000

$571,000

$1,713,000

November 9, 2020

(2) for persons with average annual

gross receipts for the most recent three

taxable years of $5,000,000 or less, for

failure to file correct information returns:

Scenario

General Rule (§ 6721(d)(1)(A))

Corrected on or before 30 days after required filing date (§ 6721(d)(1)(B))

Corrected after 30th day but on or before August 1, 2022 (§ 6721(d)(1)(C))

(3) for failure to file correct information returns due to intentional disregard of

Penalty Per Return

Calendar Year Maximum

Greater of (i) $570, or (ii) 10% of aggregate No limit

amount of items required to be reported correctly

Greater of (i) $570, or (ii) 5% of aggregate No limit

amount of items required to be reported correctly

Greater of (i) $28,550, or (ii) amount of cash re- No limit

ceived up to $114,000

Greater of (i) $570, or (ii) 10% of the value of the No limit

benefit of any contract with respect to which information is required to be included on the return

nished in 2022, the penalty amounts under

§ 6722 are:

(1) for persons with average annual

gross receipts for the most recent three

Scenario

General Rule (§ 6722(a)(1))

Corrected on or before 30 days after required filing date (§ 6722(b)(1))

Corrected after 30th day but on or before August 1, 2022 (§ 6722(b)(2))

(2) for persons with average annual

gross receipts for the most recent 3 taxable

November 9, 2020

taxable years of more than $5,000,000, for

failure to file correct information returns:

Penalty Per Return

$280

$50

$110

Calendar Year Maximum

$3,426,000

$571,000

$1,713,000

years of $5,000,000 or less, for failure to

file correct information returns:

Scenario

General Rule (§ 6722(d)(1)(A))

Corrected on or before 30 days after required filing date (§ 6722(d)(1)(B))

Corrected after 30th day but on or before August 1, 2022 (§ 6722(d)(1)(C))

(3) for failure to file correct payee

statements due to intentional disregard of

the requirement to furnish a payee state-

Calendar Year Maximum

$1,142,000

$199,500

$571,000

the filing requirement (or the correct information reporting requirement):

Scenario

Return other than a return required to be filed under §§ 6045(a), 6041A(b), 6050H, 6050I, 6050J,

6050K, or 6050L (§ 6721(e)(2)(A))

Return required to be filed under §§ 6045(a),

6050K, or 6050L (§ 6721(e)(2)(B))

Return required to be filed under § 6050I(a)

(§ 6721(e)(2)(C))

Return required to be filed under § 6050V

(§ 6721(e)(2)(D))

.58 Failure to Furnish Correct Payee

Statements. In the case of any failure relating to a statement required to be fur-

Penalty Per Return

$280

$50

$110

Penalty Per Return

$280

$50

$110

Calendar Year Maximum

$1,142,000

$199,500

$571,000

ment (or the correct information reporting

requirement):

1026

Bulletin No. 2020–46

Scenario

Statement other than a statement required under

§§ 6045(b), 6041A(e) (in respect of a return required under § 6041A(b)), 6050H(d), 6050J(e),

6050K(b), or 6050L(c) (§ 6722(e)(2)(A))

Payee statement required under §§ 6045(b),

6050K(b), or 6050L(c) (§ 6722(e)(2)(B))

.59 Revocation or Denial of Passport

in Case of Certain Tax Delinquencies. For

calendar year 2021, the amount of a serious delinquent tax debt under § 7345 is

$54,000.

.60 Attorney Fee Awards. For fees incurred in calendar year 2021, the attorney

fee award limitation under § 7430(c)(1)

(B)(iii) is $210 per hour.

.61 Periodic Payments Received Under Qualified Long-Term Care Insurance

Contracts or Under Certain Life Insurance Contracts. For calendar year 2021,

the stated dollar amount of the per diem

limitation under § 7702B(d)(4), regarding

periodic payments received under a qualified long-term care insurance contract or

periodic payments received under a life

insurance contract that are treated as paid

by reason of the death of a chronically ill

individual, is $400.

.62 Qualified Small Employer Health

Reimbursement Arrangement. For taxable years beginning in 2021, to qualify

as a qualified small employer health reimbursement arrangement under § 9831(d),

the arrangement must provide that the

total amount of payments and reimburse-

Bulletin No. 2020–46

Penalty Per Return

Calendar Year Maximum

Greater of (i) $570, or (ii) 10% of aggregate No limit

amount of items required to be reported correctly

Greater of (i) $570, or (ii) 5% of aggregate No limit

amount of items required to be reported correctly

ments for any year cannot exceed $5,300

($10,700 for family coverage).

SECTION 4. EFFECTIVE DATE

.01 General Rule. Except as provided

in section 4.02 of this revenue procedure,

this revenue procedure applies to taxable

years beginning in 2021.

.02 Calendar Year Rule. This revenue procedure applies to transactions or

events occurring in calendar year 2021

for purposes of sections 3.09 (rehabilitation expenditures treated as separate

new building), 3.10 (low-income housing credit), 3.15 (transportation mainline

pipeline construction industry optional

expense substantiation rules for payments

to employees under accountable plans),

3.21 (private activity bonds volume cap),

3.22 (loan limits on agricultural bonds),

3.23 (general arbitrage rebate rules), 3.24

(safe harbor rules for broker commissions

on guaranteed investment contracts or investments purchased for a yield restricted

defeasance escrow), 3.37 (expatriation

to avoid taxes), 3.40 (debt instruments

arising out of sales or exchanges), 3.41

1027

(unified credit against estate tax), 3.42

(valuation of qualified real property in

decedent’s gross estate), 3.43 (annual

exclusion for gifts), 3.44 (tax on arrow

shafts), 3.45 (passenger air transportation

excise tax), 3.48 (persons against whom a

federal tax lien is not valid), 3.49 (property exempt from levy), 3.51 (interest on a

certain portion of the estate tax payable in

installments), 3.59 (revocation or denial of

passport in case of certain tax delinquencies), 3.60 (attorney fee awards), and 3.61

(periodic payments received under qualified long-term care insurance contracts or

under certain life insurance contracts) of

this revenue procedure.

SECTION 5. DRAFTING

INFORMATION

The principal author of this revenue

procedure is William Ruane of the Office

of Associate Chief Counsel (Income Tax

& Accounting). For further information

regarding this revenue procedure, contact

Mr. Ruane at (202) 317-4718 (not a tollfree number).

November 9, 2020

Definition of Terms

Revenue rulings and revenue procedures

(hereinafter referred to as “rulings”) that

have an effect on previous rulings use the

following defined terms to describe the

­effect:

Amplified describes a situation where

no change is being made in a prior published position, but the prior position is

being extended to apply to a variation of

the fact situation set forth therein. Thus, if

an earlier ruling held that a principle applied to A, and the new ruling holds that

the same principle also applies to B, the

earlier ruling is amplified. (Compare with

modified, below).

Clarified is used in those instances

where the language in a prior ruling is being made clear because the language has

caused, or may cause, some confusion. It

is not used where a position in a prior ruling is being changed.

Distinguished describes a situation

where a ruling mentions a previously published ruling and points out an essential

difference between them.

Modified is used where the substance

of a previously published position is being

changed. Thus, if a prior ruling held that a

principle applied to A but not to B, and the

new ruling holds that it applies to both A

and B, the prior ruling is modified because

it corrects a published position. (Compare

with amplified and clarified, above).

Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions.

This term is most commonly used in a ruling

that lists previously published rulings that

are obsoleted because of changes in laws or

regulations. A ruling may also be obsoleted

because the substance has been included in

regulations subsequently adopted.

Revoked describes situations where the

position in the previously published ruling

is not correct and the correct position is

being stated in a new ruling.

Superseded describes a situation where

the new ruling does nothing more than

restate the substance and situation of a

previously published ruling (or rulings).

Thus, the term is used to republish under

the 1986 Code and regulations the same

position published under the 1939 Code

and regulations. The term is also used

when it is desired to republish in a single

ruling a series of situations, names, etc.,

that were previously published over a

period of time in separate rulings. If the

new ruling does more than restate the substance of a prior ruling, a combination of

terms is used. For example, modified and

superseded describes a situation where the

substance of a previously published ruling

is being changed in part and is continued

without change in part and it is desired to

restate the valid portion of the previously published ruling in a new ruling that is

self contained. In this case, the previously

published ruling is first modified and then,

as modified, is superseded.

Supplemented is used in situations in

which a list, such as a list of the names of

countries, is published in a ruling and that

list is expanded by adding further names

in subsequent rulings. After the original

ruling has been supplemented several

times, a new ruling may be published that

includes the list in the original ruling and

the additions, and supersedes all prior rulings in the series.

Suspended is used in rare situations to

show that the previous published rulings

will not be applied pending some future

action such as the issuance of new or

amended regulations, the outcome of cases in litigation, or the outcome of a Service study.

Abbreviations

The following abbreviations in current use

and formerly used will appear in material

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—E

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