# Bulletin No. 2020–46

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

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.

The IRS Mission
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
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.

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

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

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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A07af0a3254e4a837. Public record. Not legal advice.