Bulletin No. 2020–48

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2020–48

November 23, 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

Rev. Proc. 2020-49, page 1122.

This revenue procedure provides temporary guidance regarding the public approval requirement under § 147(f) of

the Internal Revenue Code for tax-exempt qualified private

activity bonds. Specifically, in light of the continuing Coronavirus Disease 2019 pandemic, this revenue procedure extends until September 30, 2021, the time period described

in section 4.02 of Rev. Proc. 2020-21, 2020-22 I.R.B. 872,

during which certain telephonic hearings are permitted.

EMPLOYEE PLANS

REG.-122462-20, page 1137.

The IRS is issuing temporary regulations regarding coverage

of preventive health services to implement section 3203

of the Coronavirus Aid, Relief, and Economic Security Act

(CARES Act), which shortens the timeframe under which

non-grandfathered group health plans and health insurance

issuers offering non-grandfathered group or individual health

insurance coverage must cover without cost sharing qualifying coronavirus preventive services, including recommended

COVID-19 immunizations. The IRS is issuing the temporary

regulations at the same time that the Employee Benefits Security Administration of the Department of Labor and the Office of Consumer Information and Insurance Oversight of the

Department of Health and Human Services (HHS) are issuing

substantially similar interim final rules with request for comments. The text of those temporary regulations also serves

as the text of these proposed regulations.

EMPLOYEE TAX

Rev. Proc. 2020-47, page 1121.

This revenue procedure modifies the general procedures

used by the IRS to implement the Gaming Industry Tip Com-

Finding Lists begin on page ii.

pliance Agreement (GITCA) program. The GITCA program

allows gaming industry employers to enter into voluntary

agreements with the IRS to establish minimum tip rates for

tipped employees in specified occupational categories. The

GITCA program was established by Rev. Proc. 2003-35, and

updated by Rev. Proc. 2007-32 with a new model GITCA.

This revenue procedure modifies Rev. Proc. 2007-32 by

extending the expiration and renewal term of a GITCA from

three to five years.

INCOME TAX

Rev. Rul. 2020-25, page 1109.

2020 Base Period T-Bill Rate. The “base period T-bill rate”

for the period ending September 30, 2020, is published as

required by section 995(f) of the Internal Revenue Code.

Rev. Proc. 2020-50, page 1122.

This revenue procedure provides guidance for taxpayers

wishing to apply §§ 1.168(k)-2 and 1.1502-68 of the Income

Tax Regulations, or to rely on the proposed regulations under

§ 168(k) (REG-106808-19) published in 2019 for: (1) certain

depreciable property acquired and placed in service by the

taxpayer after September 27, 2017; (2) certain plants planted or grafted by the taxpayer, as applicable, after September

27, 2017; and (3) components acquired or self-constructed

by the taxpayer after September 27, 2017, of certain larger

self-constructed property. If the taxpayer retroactively applies §§ 1.168(k)-2 and 1.1502-68, or relies on the 2019

proposed regulations, this revenue procedure also allows the

taxpayer to make a late election under § 168(k)(5), (k)(7),

or (k)(10), § 1.168(k)-2(c) of the 2020 final regulations or

the 2019 proposed regulations, or § 1.1502-68(c)(4), or to

revoke an election under § 168(k)(5), (k)(7), or (k)(10), or §

1.168(k)-2(c) of the 2019 proposed regulations.

T.D. 9919, page 1073.

Nonresident aliens and foreign corporations are taxable in

the United States on taxable income that is effectively connected with the conduct of a trade or business in the United

States. These final regulations provide rules for determining

the amount of effectively connected gain or loss recognized

by a nonresident alien individual or foreign corporation from

the sale or exchange of an interest in a partnership that is

engaged in a trade or business within the United States. TD

9919. Published November 6, 2020.

TEMPORARY REGULATION

T.D. 9931, page 1087.

The IRS is issuing temporary regulations regarding coverage

of preventive health services to implement section 3203 of the

Coronavirus Aid, Relief, and Economic Security Act (CARES

Act), which shortens the timeframe under which non-grandfathered group health plans and health insurance issuers offering non-grandfathered group or individual health insurance coverage must cover without cost sharing qualifying coronavirus

preventive services, including recommended COVID-19 immunizations. The IRS is issuing the temporary regulations at the

same time that the Employee Benefits Security Administration

of the Department of Labor and the Office of Consumer Information and Insurance Oversight of the Department of Health

and Human Services (HHS) are issuing substantially similar interim final rules with request for comments.

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

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of the tax laws, including all rulings that supersede, revoke,

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internal practices and procedures that affect the rights and

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Revenue rulings represent the conclusions of the Service

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Rulings and procedures reported in the Bulletin do not have the

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This part includes rulings and decisions based on provisions

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November 23, 2020 

Bulletin No. 2020–48

Part I

26 CFR 1.864(c)(8)-1 Gain or Loss of Foreign Persons from Sale or Exchange of Certain Partnership

Interests

T.D. 9919

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Gain or Loss of Foreign

Persons from Sale or

Exchange of Certain

Partnership Interests

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations and temporary regulations.

SUMMARY: This document contains regulations that provide guidance for certain

foreign persons that recognize gain or loss

from the sale or exchange of an interest

in a partnership that is engaged in a trade

or business within the United States. The

regulations also affect partnerships that,

directly or indirectly, have foreign persons

as partners.

DATES: Effective date: These regulations

are effective on November 6, 2020.

Applicability dates: For dates of applicability, see §§1.864(c)(8)-1(j) and 1.8977(c).

FOR FURTHER INFORMATION CONTACT: Chadwick Rowland or Ronald M.

Gootzeit, (202) 317-6937 (not a toll-free

call).

SUPPLEMENTARY INFORMATION:

Background

On December 27, 2018, the Department of the Treasury (the “Treasury

Department”) and the IRS published

proposed regulations (REG-113604-18)

Bulletin No. 2020–48

under section 864(c)(8) in the Federal

Register (83 FR 66647) (the “proposed

regulations”). Section 864(c)(8) was

added to the Internal Revenue Code (the

“Code”) by the Tax Cuts and Jobs Act,

Public Law 115-97 (2017) (the “Act”),

which was enacted on December 22,

2017. The proposed regulations provide

rules for determining the amount of gain

or loss treated as effectively connected

with the conduct of a trade or business

within the United States (“effectively

connected gain” or “effectively connected loss”) under section 864(c)(8), including certain rules that coordinate section

864(c)(8) with other relevant sections of

the Code.

The Treasury Department and the IRS

received written comments with respect

to the proposed regulations. All written

comments received in response to the proposed regulations are available at www.

regulations.gov or upon request. No public hearing on the proposed regulations

was requested or held.

The Treasury Department and the IRS

have also published proposed regulations

(REG-105476-18) in the Federal Register relating to the withholding of tax

and information reporting with respect to

certain dispositions by a foreign person

of an interest in a partnership that is engaged in the conduct of a trade or business within the United States (the “proposed withholding regulations”). See 84

FR 21198 (May 13, 2019). The Treasury

Department and the IRS plan to publish

final withholding and information reporting regulations in a later issue of the Federal Register.

Summary of Comments and

Explanation of Revisions

I. Overview

The final regulations retain the basic

approach and structure of the proposed

regulations with certain revisions. This

Summary of Comments and Explanation

of Revisions section discusses the comments received in response to the solicitation of comments in the proposed regulations and explains the revisions made in

response to those comments.

1073

II. Comments and Revisions to Proposed

§1.864(c)(8)-1

A. Determining deemed sale EC gain or

deemed sale EC loss

Section 864(c)(8)(A) provides that

gain or loss of a nonresident alien individual or foreign corporation (a “foreign

transferor”) from the sale, exchange, or

other disposition (“transfer”) of an interest in a partnership that is engaged in

any trade or business within the United

States is treated as effectively connected

gain or loss to the extent such gain or loss

does not exceed the amount determined

under section 864(c)(8)(B). In general,

section 864(c)(8)(B) limits the amount of

effectively connected gain or loss to the

portion of the foreign transferor’s distributive share of gain or loss that would have

been effectively connected if the partnership had sold all of its assets at fair market value (the deemed sale limitation).

The proposed regulations illustrate how

to determine the deemed sale limitation

described in section 864(c)(8)(B), which

the proposed regulations refer to as the

aggregate deemed sale EC (“ADSEC”)

amount. Once the ADSEC amount has

been determined for each applicable category of gain or loss, the foreign transferor’s outside gain or loss in each category

is compared to the relevant ADSEC gain

or ADSEC loss amount for that category

to determine the amount of effectively

connected gain or effectively connected

loss under section 864(c)(8). In general,

this amount is determined through a threestep process. Step one determines the

amount of gain or loss from each partnership asset as if the partnership conducted

a deemed sale of all of its assets on the

date of transfer (these amounts, deemed

sale gain or deemed sale loss). Step two

determines the amount of the deemed sale

gain or loss that would be treated as effectively connected gain or loss with respect

to each asset (these amounts are referred

to as deemed sale EC gain or deemed sale

EC loss). Finally, step three determines

the foreign transferor’s distributive share

of the deemed sale EC gain or deemed

sale EC loss amounts determined in step

two.

November 23, 2020

As noted in the preceding paragraph,

step two requires the gain or loss from the

deemed sale of each partnership asset to be

analyzed to determine if the gain or loss is

properly characterized as effectively connected gain or effectively connected loss.

Sourcing determinations are often material in determining whether gain or loss

is effectively connected with the conduct

of a trade or business within the United

States. See, for example, sections 864(c)

(2) and (3). Because the sourcing rules

in the Code and regulations are generally

fact-specific, the application of these rules

in the context of the deemed sale required

by section 864(c)(8)(B) is unclear. For

example, it is unclear how to apply the

sourcing rules and principles contained in

sections 865(e)(2)(A) and (e)(3) (and the

regulations implementing those sections)

(the U.S. office rule) to the deemed sale of

partnership property required by section

864(c)(8)(B). Specifically, the application

of the U.S. office rule depends upon factual determinations made regarding the

underlying sale; that is, whether it is attributable to an office or other fixed place

of business in the United States, and, with

respect to inventory property, whether it

is sold for use, disposition, or consumption outside the United States and whether

an office or other fixed place of business

maintained by the taxpayer in the foreign

country materially participated in the sale.

In a deemed sale, however, the required

facts are generally not determinable because a sale has not actually occurred.

Therefore, to address this lack of required

facts and provide guidance on how to

apply the sourcing provisions to deemed

sales, the proposed regulations provide

rules that serve as a proxy for the factual

determinations that apply for purposes of

sourcing deemed sale gain and loss and,

in turn, for determining deemed sale EC

gain and loss.

In general, proposed §1.864(c)(8)1(c)(2)(i) treats all deemed sale gain and

loss as attributable to an office or other

fixed place of business maintained by

the partnership in the United States, and

does not treat inventory property as sold

for use, disposition, or consumption outside the United States in a sale in which

an office or other fixed place of business maintained by the partnership in a

foreign country materially participates.

November 23, 2020

Thus, the rule in proposed §1.864(c)(8)1(c)(2)(i) provides simplifying factual

assumptions that generally treat deemed

sale gain and loss as U.S. source. An exception to this rule is provided in the proposed regulations if, during the ten-year

period ending on the date of transfer, the

asset in question produced no income or

gain that was taxable as income that was

effectively connected with the conduct

of a trade or business within the United

States by the partnership (or a predecessor), and the asset has not been used, or

held for use, in the conduct of a trade or

business within the United States by the

partnership (or a predecessor) (the “tenyear exception”). Proposed §1.864(c)(8)1(c)(2)(ii).

A comment on the interaction between section 864(c)(8) and the sourcing rules suggested that the simplifying

factual assumptions supplied by the rule

in proposed §1.864(c)(8)-1(c)(2)(i) may

overstate the amount of effectively connected gain or loss on a deemed sale of

the partnership’s assets, as compared to

an actual asset sale, by treating all gain or

loss from the deemed sale as attributable

to a U.S. office of the partnership, subject

only to the ten-year exception. As a result,

the proposed regulations would similarly

overstate the amount of the deemed sale

limitation. To address this concern, the

comment suggested that in determining

deemed sale EC gain and loss, the final

regulations should aim to provide a result

that is no better or worse than the result

that would occur upon an actual asset

sale by the partnership, but the comment

acknowledged the difficulty in achieving this objective because the underlying

source rules largely rely on fact-specific

determinations.

The Treasury Department and the IRS

generally agree with the broad principles

described in the comment regarding proposed §1.864(c)(8)-1(c)(2). While these

final regulations retain the basic framework of the proposed regulations, including the factual determinations regarding

office attribution provided in proposed

§1.864(c)(8)-1(c)(2)(i), these final regulations adjust their effects by adding rules

for sourcing gain or loss from specific

assets that may be particularly difficult to

source in a deemed sale. §1.864(c)(8)-1(c)

(2)(ii)(B) through (E).

1074

1. Ten-year exception

The final regulations provide that

deemed sale EC gain and loss is determined by applying section 864 and the regulations thereunder. §1.864(c)(8)-1(c)(2)(i)

(A). These final regulations retain the tenyear exception as an exception to the determination of deemed sale EC gain and loss

under §1.864(c)(8)-1(c)(2)(i)(A). The tenyear exception is intended to remove assets

that have no nexus to the United States

from the deemed sale EC gain and loss

determination; therefore, for these assets,

a foreign transferor does not need to apply

the rules described in §1.864(c)(8)-1(c)(2)

(ii) to determine deemed sale EC gain and

loss. One comment requested that the final

regulations clarify that the ten-year exception applies to assets that were not held by

the partnership for the full ten-year period.

As requested by the comment, these final

regulations modify the relevant testing period for the ten-year exception to account

for a partnership (including a predecessor

of the partnership) that has not existed for

at least ten years, or that has not held an

asset for at least ten years, by shortening

the relevant testing period to the lesser of

the ten-year period ending on the date of

the transfer or the period during which the

partnership (and a predecessor of the partnership) held the asset. §1.864(c)(8)-1(c)

(2)(i)(B). In addition, to ensure that the tenyear exception is properly applied, these

final regulations also modify the relevant

testing period to include any period during

which the foreign transferor (and a predecessor of the foreign transferor) held the asset. Id. Accordingly, an asset will not qualify for the ten-year exception if it generated

effectively connected income or effectively

connected gain for the foreign transferor

(or a predecessor of the foreign transferor),

or if the asset was used in the conduct of a

trade or business within the United States

by the foreign transferor (or a predecessor

of the foreign transferor), within the relevant testing period. Id.

2. Rules for Sourcing Deemed Sale Gain

and Loss for Purposes of Determining

Deemed Sale EC Gain and Loss

Proposed §1.864(c)(8)-1(c)(2)(i) treats

all gain or loss from the deemed sale of

an asset as attributable to an office or oth-

Bulletin No. 2020–48

er fixed place of business maintained by

the partnership in the United States, and

does not treat inventory property as sold

for use, disposition, or consumption outside the United States in a sale in which

an office or other fixed place of business

maintained by the partnership in a foreign

country materially participated. These

final regulations make several changes

to the general rule provided in proposed

§1.864(c)(8)-1(c)(2)(i) in response to the

comment described in section II.A of this

Summary of Comments and Explanation

of Revisions; these final regulations also

clarify the scope of this rule. First, these

final regulations clarify that the general

rule applies only for purposes of applying

section 865(e)(2)(A) to personal property

held by the partnership on the date of the

deemed sale. §1.864(c)(8)-1(c)(2)(ii)(A).

Second, these final regulations provide

additional sourcing rules for determining

the foreign source portion of deemed sale

gain and loss attributable to specific assets

included in the deemed sale. §1.864(c)

(8)-1(c)(2)(ii)(B) through (E). The specific assets are inventory, intangibles, and

depreciable personal property. Additional

sourcing rules are needed because gain

or loss from actual sales of each of these

assets would be subject to specific sourcing rules under the Code, but sourcing

deemed sale gain or loss under those rules

would generally require facts that are not

determinable in a deemed sale. These final

regulations also clarify that if the partnership does not maintain an office or other

fixed place of business in the United States

(within the meaning of section 864(c)(5)

(A) and §1.864-7), neither the U.S. office

attribution described in §1.864(c)(8)-1(c)

(2)(ii)(A), nor the additional sourcing

rules described in §1.864(c)(8)-1(c)(2)

(ii)(B) through (E), will apply. §1.864(c)

(8)-1(c)(2)(ii)(A). Finally, the final regulations reorganize the proposed regulations to account for the changes described

in this section II.A.2 of this Summary of

Comments and Explanation of Revisions,

and the phrase in proposed §1.864(c)(8)1(c)(2)(i) regarding use, disposition, or

consumption outside the United States is

removed to conform with changes made

to the general rule and the addition of a

specific inventory sourcing rule.

The asset-specific rules provided in

§1.864(c)(8)-1(c)(2)(ii)(B) through (E)

Bulletin No. 2020–48

utilize available facts as a proxy for the

sourcing results, and the attendant effectively connected determinations, that

would occur in an actual sale by the

partnership of inventory, intangibles, or

depreciable personal property. These asset-specific rules use existing sourcing

rules and principles to provide fair, administrable rules that can be applied consistently. Specifically, the foreign source

portion of deemed sale gain or loss attributable to inventory property (as defined

in section 865(i)(1)) is determined using

a proxy method that is based on historical data (as suggested by the comment);

the foreign source portion of deemed

sale gain and loss attributable to intangibles (as defined in section 865(d)(2))

is determined using a proxy method that

is based on the partnership’s historic income; and the foreign source portion for

certain deemed sale gain or loss attributable to depreciable personal property (as

defined in section 865(c)(4)(A)) is determined under a recapture principle and, to

the extent applicable, a proxy method that

is also based on historical data. Additionally, these final regulations add a material

change in circumstances rule in §1.864(c)

(8)-1(c)(2)(ii)(E) that applies if, based on

a material change in circumstances, the

asset-specific rules for inventory property

or intangibles do not reach an appropriate

sourcing result.

Thus, to the extent that deemed sale

gain or loss is attributable to inventory,

intangibles, or depreciable personal property, the sourcing result for these assets is

determined by first applying §1.864(c)(8)1(c)(2)(ii)(A) and then, to the extent applicable, the asset-specific rules provided in

§1.864(c)(8)-1(c)(2)(ii)(B) through (D),

or the material change in circumstances

rule provided in §1.864(c)(8)-1(c)(2)(ii)

(E). Accordingly, the U.S. office attribution rule described in §1.864(c)(8)-1(c)(2)

(ii)(A) applies to these assets only to the

extent that the deemed sale gain or loss

exceeds the relevant foreign source portion determined under the relevant rule

provided in §1.864(c)(8)-1(c)(2)(ii)(B)

through (E).

i. Look-back rule for inventory property

The comment on the interaction between section 864(c)(8) and the sourcing

1075

rules recommended that the Treasury Department and IRS consider a separate rule

for sourcing deemed sales of inventory

based on historical data showing how inventory sales were sourced by the partnership over a specified period. The Treasury

Department and the IRS agree with the

suggestion.

Section 1.864(c)(8)-1(c)(2)(ii)(B)

provides a look-back rule for determining the foreign source portion of deemed

sale gain or loss attributable to inventory

property (as defined in section 865(i)(1),

but not including gain sourced by reference to section 865(c)(2)) that is held by

the partnership on the date of the deemed

sale. Specifically, the general rule provided in §1.864(c)(8)-1(c)(2)(ii)(A) will not

apply, and the deemed sale of inventory

property will not be treated as attributable to an office or other fixed place of

business maintained by the partnership in

the United States, to the extent of foreign

source inventory gain or loss. This amount

is determined by multiplying deemed sale

gain and loss attributable to inventory

by a fraction that determines the foreign

source inventory ratio. The numerator of

the fraction includes the gross income of

the partnership that is attributable to foreign source gain or loss from inventory

property (as determined under the rules

of sections 865(b) and 865(e)) sold within

the shorter of the period comprised of the

partnership’s three taxable years immediately preceding the date of the deemed

sale, or the existence of the partnership

(measured by partnership taxable years);

the denominator of the fraction is the total gross income of the partnership that is

attributable to inventory over that period.

This approach addresses the concerns

raised in the comment by looking to the

partnership’s past operations to determine

the relevant sourcing result for inventory property, instead of assuming that all

of the gain or loss from the deemed sale

of inventory property is attributable to a

U.S. office (unless the ten-year exception is met). That is, because sourcing the

deemed sale gain or loss attributable to

inventory property will require facts that

are not available in a deemed sale, this

approach sources the deemed sale gain

or loss by reference to the actual sourcing results from prior sales of inventory

property during the look-back period, as

November 23, 2020

evidenced by the foreign source inventory

ratio. This rule can be applied by taxpayers and administered by the government

with certainty.

ii. Look-back rule for intangibles

The comment on the interaction between section 864(c)(8) and the sourcing

rules also discussed how the simplifying factual assumptions supplied by the

rule in proposed §1.864(c)(8)-1(c)(2)(i)

may overstate the amount of effectively connected gain or loss with respect to

a deemed sale of intangibles held by the

partnership. While acknowledging the

difficulty of determining the source of

deemed sale gain and loss attributable to

intangibles, the comment described an

approach that would apply a separate rule

to determine the source of deemed sale

gain and loss attributable to intangibles

in lieu of the simplifying factual assumptions supplied by the rule in proposed

§1.864(c)(8)-1(c)(2)(i) as it applies to intangibles. The Treasury Department and

the IRS agree that it is difficult to source

deemed sale gain or loss attributable to

intangibles and that a single, administrable rule to address this issue is preferable.

To minimize the difficulty of applying the

sourcing rules to intangible property and

to provide more certainty, the final regulations provide a separate rule for intangibles (including going concern value) that

determines the foreign source portion of

deemed sale gain or loss attributable to

intangibles by using a proxy method that

is based on the source of the partnership’s

historic gross ordinary income.

Section 1.864(c)(8)-1(c)(2)(ii)(C) provides a look-back rule for determining the

foreign source portion of deemed sale gain

or loss attributable to an intangible (as

defined in section 865(d)(2)) held by the

partnership on the date of the deemed sale.

This rule is similar to the look-back rule

for inventory property because it provides

that the deemed sale of an intangible will

not be treated as attributable to an office or

other fixed place of business maintained

by the partnership in the United States

to the extent of a foreign source amount.

This amount is determined by multiplying

deemed sale gain or loss attributable to an

intangible by the foreign source intangible

ratio.

November 23, 2020

Thus, the approach for determining

the foreign source amount with respect

to intangibles employs the same general

approach provided for inventory property,

with certain modifications. Deemed sale

gain or loss attributable to intangibles,

like that attributable to inventory property, cannot be reliably sourced in a deemed

sale because an actual sale has not occurred. However, unlike inventory property, intangibles may not have relevant

historical data indicating how deemed sale

gain and loss would be sourced in an actual sale (for example, some intangibles do

not generate an identifiable income stream

on which a sourcing proxy could be

based). To address this issue, the numerator of the foreign source intangible ratio

includes the foreign source gross ordinary

income of the partnership (other than from

dispositions of depreciable or amortizable

property) during the shorter of the period comprised of the partnership’s three

taxable years preceding the date of the

deemed sale or the existence of the partnership (measured by partnership taxable

years), to the extent that such income was

not effectively connected with the conduct

of a trade or business within the United

States; the denominator includes the total

gross ordinary income of the partnership

(other than from dispositions of depreciable or amortizable property) during that

period. §1.864(c)(8)-1(c)(2)(ii)(C)(1) and

(2). This foreign source intangible ratio

looks specifically to the historic gross ordinary income of the partnership (as opposed to all the historic gross income of

the partnership) in order to more accurately reflect the partnership’s income derived

from the use of the intangibles in the ordinary course of its trade or business. This

rule does not apply to the extent of any

depreciation adjustments (as defined in

section 865(c)(4)(B)) with respect to an

amortizable intangible; instead, the rules

regarding depreciable personal property

will apply to such adjustments.

iii. Special rules for foreign source

inventory ratio and foreign source

intangible ratio

The foreign source inventory ratio

and foreign source intangible ratio may

in certain circumstances cause mathematically impossible results or unclear

1076

application if cost of goods sold exceed

gross receipts. Additional rules were

added to address these concerns. First,

the foreign source inventory ratio and the

foreign source intangible ratio cannot exceed one. §1.864(c)(8)-1(c)(2)(ii)(B) and

(C). Second, if the foreign source gross

income attributable to inventory or the

foreign gross ordinary income is not positive, then respectively the foreign source

inventory ratio or the foreign source intangible ratio is zero. Id. Third, if the foreign source gross income attributable to

inventory is positive, but the total gross

income attributable to inventory is not

positive, or if the foreign gross ordinary

income is positive, but the total gross

ordinary income is not positive, then respectively the foreign source inventory

ratio or the foreign source intangible ratio is one. Id.

iv. Depreciable personal property

Section 1.864(c)(8)-1(c)(2)(ii)(D) provides a two-part approach for determining

the foreign source portion of deemed sale

gain and loss attributable to depreciable

personal property: the first part applies a

recapture principle to the extent of depreciation adjustments taken with respect to

the property, and the second part focuses

on where the property is located to the extent the property has deemed sale gain in

excess of its depreciation adjustments or if

the property has deemed sale loss.

Section 1.864(c)(8)-1(c)(2)(ii)(D)(1)

applies a recapture principle by providing that the deemed sale of depreciable

personal property (as defined in section

865(c)(4)(A)), or the deemed sale of an

amortizable intangible (as defined in section 865(d)(2)), will not be treated as attributable to an office or other fixed place

of business maintained by the partnership in the United States to the extent the

deemed sale gain is treated as sourced outside the United States after applying section 865(c)(1) at the time of the deemed

sale. In contrast to the other sourcing rules

that could apply to assets held by the partnership on the date of the deemed sale, the

recapture rule provided in section 865(c)

(1) can be applied with certainty at the

time of the deemed sale because it is based

on data that is available at the time of the

deemed sale.

Bulletin No. 2020–48

For deemed sale gain in excess of the

depreciation adjustments with respect

to depreciable personal property (other

than an amortizable intangible), or for

deemed sale loss from depreciable personal property (other than an amortizable

intangible), §1.864(c)(8)-1(c)(2)(ii)(D)

(2) provides that the relevant sourcing

determination is made based on where

the property is located. See §1.864(c)(8)1(c)(2)(ii)(C) and section II.A.2.ii of this

Summary of Comments and Explanation

of Revisions for the rule that applies to

gain in excess of depreciation adjustments

with respect to an amortizable intangible.

Although section 865(c)(2) sources the

excess gain as if it were attributable to

inventory property, such treatment would

require further clarification for purposes

of these final regulations. Specifically, in

contrast to inventory property, depreciable

personal property may not have historical

data readily available that evidences the

location of the economic activity associated with the property or that otherwise indicates how the excess gain or loss would

be sourced in an actual sale. To address

this issue, while also providing a clear and

administrable rule, §1.864(c)(8)-1(c)(2)

(ii)(D)(2) sources the excess gain or loss

attributable to depreciable personal property based on the location of the property.

v. Material change in circumstances rule

Section 1.864(c)(8)-1(c)(2)(ii)(E) provides a material change in circumstances

rule for inventory and intangibles. If this

rule applies, the foreign source portion of

deemed sale gain or loss attributable to

inventory property or intangibles may be

determined by applying the relevant rule

of §1.864(c)(8)-1(c)(2)(ii)(B) or (C) by

reference to a modified look-back period.

The Treasury Department and the IRS

have determined that the general rule provided in §1.864(c)(8)-1(c)(2)(ii)(A) and

the asset-specific determinations provided in §1.864(c)(8)-1(c)(2)(ii)(B) and (C)

will reach an appropriate sourcing result

in most cases; that is, an actual sale of the

partnership’s assets has not occurred, so

relevant sourcing information with respect

to an actual sale of the assets on the date of

the deemed sale will not be readily determinable in most cases, and the look-back

rules use the partnership’s past operations

as a proxy for reaching a sourcing determination with respect to certain assets

included in the deemed sale. See sections

II.A.2.i and II.A.2.ii of this Summary of

Comments and Explanation of Revisions.

The Treasury Department and the IRS

realize, however, that the look-back rules

provided in §1.864(c)(8)-1(c)(2)(ii)(B)

and (C) for inventory property and intangibles could reach incorrect sourcing results in certain cases; specifically, if a material change in circumstances occurred

during the relevant look-back period described in paragraph §1.864(c)(8)-1(c)(2)

(ii)(B)(1) or §1.864(c)(8)-1(c)(2)(ii)(C)

(1), the partnership’s historical data for

the entire look-back period may not be

an accurate proxy for reaching a sourcing

determination with respect to deemed sale

gain or loss attributable to such property.

In these cases, the final regulations allow

taxpayers to use this material change in

circumstances rule to remedy an incorrect

sourcing result with respect to inventory

property and intangibles.

The application of §1.864(c)(8)-1(c)(2)

(ii)(E), therefore, is limited to situations in

which a material change in circumstances causes the look-back rule provided in

§1.864(c)(8)-1(c)(2)(ii)(B), or the lookback rule provided in §1.864(c)(8)-1(c)(2)

(ii)(C), to reach an inappropriate sourcing

result; that is, a sourcing result that is materially different from the sourcing result

that would occur if the applicable lookback period began on the date on which the

material change in circumstance occurred

and ended on the last day of the partnership’s taxable year immediately preceding

the year in which the deemed sale occurs

(the modified look-back period).1 If the

material change in circumstances rule

applies, the applicable sourcing rule for

inventory or intangibles may be applied

by reference to the modified look-back

period. §1.864(c)(8)-1(c)(2)(ii)(E). The

determination of whether a sourcing result is materially different is determined

by comparing the foreign source inventory ratio or foreign source intangible ratio

provided in §1.864(c)(8)-1(c)(2)(ii)(B) or

(C) (as applicable) with the foreign source

inventory ratio or foreign source intangible ratio if that ratio were determined by

reference to the modified look-back period. The sourcing result is not materially

different unless the percentage point difference between the two ratios described

in the preceding sentence is at least 30

percentage points. Id. See Example 2 in

§1.864(c)(8)-1(c)(2)(iii).

B. Treaty coordination

A comment questioned whether the

rules provided in proposed §1.864(c)(8)1(c) for determining a foreign transferor’s

deemed sale EC gain or deemed sale EC

loss were intended to apply in the treaty context without regard to whether the

partnership in fact had a permanent establishment in the United States under the

terms of an income tax treaty at the time

of the transfer.

These final regulations clarify that the

U.S. office attribution rule described in

§1.864(c)(8)-1(c)(2)(ii)(A) does not apply

unless the partnership maintains an office

or other fixed place of business in the United States. A partnership without a U.S. office or other fixed place of business will

also generally not have a permanent establishment in the United States. In addition,

the treaty coordination rule in §1.864(c)

(8)-1(f) takes into account an applicable

treaty when computing the amount of a

foreign transferor’s distributive share of

deemed sale EC gain and deemed sale EC

loss. As a result, for purposes of §1.864(c)

(8)-1(c)(3) (that is, the third step in the

three-step process to determine the foreign transferor’s aggregate deemed sale

EC items), gain or loss derived by the

foreign transferor attributable to assets

deemed sold that would be exempt from

tax under an applicable U.S. income tax

treaty if disposed of by the partnership are

not taken into account.

The final regulations retain the general

rule that prevents taxation of gain on assets that do not form part of a permanent

establishment, but also address certain

gains that may be taxed without regard

to whether there is a permanent establishment (for example, gains from the dispo-

The material change in circumstances rule cannot apply to a change in circumstances that occurs in the year of the deemed sale because such a change does not occur during the relevant

look-back period and, in that case, there is no modified look-back period against which to measure the results that otherwise occur under §1.864(c)(8)-1(c)(2)(ii)(B) or (C).

1

Bulletin No. 2020–48

1077

November 23, 2020

sition of certain U.S. real property interests). The final regulations also modify the

structure of proposed §1.864(c)(8)-1(f) by

consolidating proposed §1.864(c)(8)-1(f)

(1) through (3) into a single paragraph and

make three additional changes.

First, §1.864(c)(8)-1(f) clarifies that a

foreign transferor is eligible for benefits

under an income tax treaty only if the

transferor meets the requirements of a

limitation on benefits article, if any, in the

treaty between the jurisdiction in which

the foreign transferor is resident and the

United States.

Second, §1.864(c)(8)-1(f) modifies

proposed §1.864(c)(8)-1(f)(2), which

stated that “[t]reaty provisions applicable

to gains from the alienation of property

forming part of a permanent establishment, including gains from the alienation

of a permanent establishment in the United States, apply to the transfer by a foreign transferor of an interest in a partnership with a permanent establishment in

the United States.” The final regulations

clarify that a gains article that permits

the taxation of gain from the alienation of

property forming part of a permanent establishment or fixed place of business in

the United States also permits the taxation

of gain from the alienation of a partnership

interest, to the extent the partnership’s assets deemed sold under section 864(c)(8)

form a part of the U.S. permanent establishment or fixed place of business of the

partnership. Thus, the final regulations remove from the description of an applicable gains provision the phrase “including

gains from the alienation of a permanent

establishment,” as that phrase, as used in

certain treaties, merely illustrates one application of the underlying words and is

not a separate rule. This approach also is

consistent with the statutory framework

under section 864(c)(8), which determines

the amount of effectively connected gain

or loss of a foreign transferor based on

the amount of the transferor’s distributive

share of gain or loss that would have been

effectively connected if the partnership

had sold all of its assets at fair market value.

Finally, §1.864(c)(8)-1(f) adds a rule

coordinating these regulations with treaty provisions governing the disposition

of United States real property interests,

which allow the United States to tax gain

November 23, 2020

derived from the disposition of the United

States real property interest without regard

to whether the U.S. real property interest

forms a part of a partnership’s permanent

establishment or fixed place of business in

the United States. Under this coordination

rule, if, after applying treaty benefits in

paragraph (c)(3) of this section, the only

gains or losses that would be taken into

account are gains or losses attributable to

United States real property interests, the

foreign transferor determines its effectively connected gain and effectively connected loss pursuant to section 897 and not

under section 864(c)(8). This addition is

consistent with the approach taken in the

proposed regulations that the gain would

be computed under section 897 rather than

section 864(c)(8). See section IV of the

Explanation of Provisions section of the

preamble to the proposed regulations.

C. Partner-specific exclusions and

exceptions

A comment requested that the final

regulations more clearly address the interaction of section 864(c)(8) and §1.864(c)

(8)-1 with provisions of the Code providing for an exemption from U.S. federal

income tax. The Treasury Department

and the IRS agree with this suggestion;

accordingly, the final regulations provide

that a foreign transferor’s distributive

share of deemed sale EC gain or loss does

not include any amount that is excluded

from the foreign transferor’s gross income

or otherwise exempt from U.S. Federal income tax by reason of an applicable provision of the Code. Section 1.864(c)(8)-1(c)

(3)(i). For this purpose, the final regulations refer to sections 864(b)(2), 872(b),

and 883 as examples. Id.

Similarly, §1.864(c)(8)-1(c)(3) is modified to provide that a foreign transferor’s

distributive share of deemed sale EC gain

or deemed sale EC loss does not include

any amount to which an exception under

section 897 applies, such as section 897(k)

or section 897(l), provided that amount is

not otherwise treated as effectively connected income under a provision of the

Code. This rule, which was provided in

proposed §1.864(c)(8)-1(c)(2) as part of

the determination of a foreign transferor’s

deemed sale EC gain and deemed sale EC

loss, is moved to §1.864(c)(8)-1(c)(3) in

1078

these final regulations because the exceptions under section 897(k) and section

897(l) are specific to the foreign transferor. This modification is intended to make

the three step-process for determining the

foreign transferor’s aggregate deemed sale

EC amounts more cohesive by placing all

partner-specific adjustments in step 3.

D. Section 731 distributions

Under the proposed regulations, a foreign transferor determines the amount of

outside gain and loss recognized on the

transfer of a partnership interest under all

relevant provisions of the Code and regulations, including any applicable nonrecognition provision. Proposed §1.864(c)

(8)-1(b)(2). Although section 864(c)(8)(E)

authorizes regulations or other guidance

with respect to the application of section

864(c)(8) to nonrecognition transactions,

the proposed regulations generally do not

provide special rules that apply to nonrecognition transactions. But see proposed

§1.864(c)(8)-1(h) (the anti-stuffing rule).

However, the Treasury Department and

the IRS recognized that certain nonrecognition transactions, for example certain

section 731 distributions, may have the effect of reducing gain or loss that would be

taken into account under the rules provided

in the proposed regulations. The preamble

to the proposed regulations, therefore, requested comments regarding whether sections of the Code other than section 864(c)

(8) adequately address transactions that

rely on section 731 distributions to reduce

the scope of assets subject to U.S. federal income taxation as a result of section

864(c)(8) and proposed §1.864(c)(8)-1. A

comment identified several relevant Code

sections and analyzed the application of

these sections to transactions involving

section 731 distributions. The Treasury

Department and the IRS continue to study

this issue and will, if necessary, address it

through future rulemaking.

E. Information exchange between a

partnership and non-controlling partners

A comment requested that foreign partners that do not own a controlling interest

in a partnership be permitted to estimate

their effectively connected gain or loss

for purposes of section 864(c)(8) because

Bulletin No. 2020–48

non-controlling partners may not be able

to obtain from the partnership the information required to perform the computations under these rules. The Treasury

Department and the IRS have determined

that such a rule is not needed under section 864(c)(8) because the proposed withholding regulations address this issue.

Specifically, the proposed withholding

regulations provide rules in proposed

§1.864(c)(8)-2 that facilitate and encourage the transfer of information between

a foreign partner and a partnership for

purposes of section 864(c)(8). The information reporting requirements of the proposed withholding regulations require the

partnership to provide the foreign partner

with the information necessary to perform

the computations under these rules, even

if the foreign partner does not hold a controlling interest in the partnership. However, this comment will be considered as

part of the proposed withholding regulations, which will be finalized separately in

a later issue of the Federal Register.

F. Section 754 elections

A comment requested a special rule

for any foreign transferor that has a difference between its basis in the partnership interest and its share of the partnership’s inside basis that occurs because

no section 754 election is in effect at the

time of transfer; this special rule would,

in effect, deem a section 754 election.

Specifically, the comment indicated that

a foreign transferor may not have negotiated for the partnership to make a section

754 election upon acquisition of an interest in a partnership engaged in a trade

or business within the United States because the transferor considered Rev. Rul.

91-32, 1991-1 C.B. 107, to be incorrect.

As a result, upon a later transfer of the

acquired partnership interest, the foreign

transferor would have received a different result under the rules in the section

864(c)(8) proposed regulations than if

the partnership had instead sold all of its

assets and then liquidated. Because this

result occurs due to the failure to make a

section 754 election and the mismatches

that follow from that failure, the Treasury

Department and the IRS have determined

that it would be inappropriate to adopt a

special rule in these circumstances.

Bulletin No. 2020–48

G. Clarification of section 897

coordination rule with respect to

nonrecognition provisions

Proposed §1.864(c)(8)-1(d) coordinates the taxation of United States real

property interests under section 897(g)

with section 864(c)(8) by providing that

when a partnership holds United States

real property interests and a transfer of

an interest in that partnership is subject to

section 864(c)(8) because the partnership

is engaged in the conduct of a trade or

business within the United States without

regard to section 897, the amount of the

foreign transferor’s effectively connected gain or loss will be determined under

section 864(c)(8) and not under section

897(g). However, the proposed regulations did not provide explicit guidance on

the application of the section 897 coordination rule when a foreign transferor transfers its partnership interest in a nonrecognition transaction. The final regulations

clarify the interaction between the section

897 coordination rule and the nonrecognition provision described in §1.864(c)(8)1(b)(2)(ii). Specifically, §1.864(c)(8)-1(d)

provides that any transfer of an interest in

a partnership as part of a nonrecognition

transaction will not be subject to section

864(c)(8) to the extent that the gain or loss

on the transfer is not recognized; instead,

if the partnership owns one or more United States real property interests, section

897(g) and the regulations thereunder will

apply with respect to the unrecognized

gain or loss.

III. Applicability Dates

The proposed regulations were proposed to apply to transfers occurring on

or after November 27, 2017. Because the

provisions contained in this rulemaking

are finalized after June 22, 2019, these

regulations generally apply to transfers

occurring on or after December 26, 2018

(that is, the date on which the proposed

regulations were filed with the Federal

Register). See sections 7805(b)(1)(B) and

(b)(2) and §§1.864(c)(8)-1(j) and 1.8977(c); see also the Applicability Dates

section of the Preamble to the proposed

regulations. While not subject to these

final regulations, transfers occurring on

or after November 27, 2017, but before

1079

December 26, 2018, are subject to section

864(c)(8). In addition, these final regulations apply to amounts taken into account

on or after December 26, 2018, pursuant

to an installment sale (as defined in section 453(b)) occurring on or after November 27, 2017, and before December 26,

2018. §§1.864(c)(8)-1(j) and 1.897-7(c).

This rule is consistent with the manner in

which installment sales are treated under

existing law. See, e.g., Snell v. Commissioner, 97 F.2d 891 (5th Cir. 1938) (the tax

laws in effect for the year the installment

gain is recognized apply to the gain); see

also Estate of Kearns v. Commissioner, 73

T.C. 1223 (1980); Klein v. Commissioner, 42 T.C. 1000 (1964); Rev. Rul. 79-22,

1979-1 C.B. 275.

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.

The Treasury Department and the IRS

have assessed that the final regulations do

not establish a new collection of information nor modify an existing collection

that requires the approval of the Office of

Management and Budget under the Paperwork Reduction Act (44 U.S.C. chapter

35).

Section 864(c)(8) and the final regulations generally apply to nonresident alien

individuals and foreign corporations on

the transfer of an interest in a partnership

that is engaged in a trade or business within the United States, and not directly to the

trade or business the partnership conducts

in the United States. Under section 605 of

the Regulatory Flexibility Act (5 U.S.C.

chapter 6), the Treasury Department and

the IRS certify that the final regulations

will not have a significant economic impact on a substantial number of small

business entities. The reason is that the

final regulations generally apply to nonresident alien individuals and foreign corporations on the transfer of an interest in

a partnership and not directly to domestic

small business entities. Pursuant to section

7805(f), the notice of proposed rulemaking preceding these final regulations was

November 23, 2020

submitted to the Chief Counsel for Advocacy of the Small Business Administration

for comment on its impact on small business. No comments were received.

Drafting Information

The principal authors of these regulations are Chadwick Rowland and Ronald

M. Gootzeit, Office of the Associate Chief

Counsel (International). However, other

personnel from the Treasury Department

and the IRS participated in their development.

Statement of Availability

Revenue rulings and other guidance

cited in this document are published in the

Internal Revenue Bulletin (or Cumulative

Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC

20402, or by visiting the IRS website at

https://www.irs.gov.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding entries in numerical order to read in part as follows:

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

Section 1.864(c)(8)-1 also issued under

26 U.S.C. 864(c)(8) and 897(g).

*****

Section 1.897-7 also issued under 26

U.S.C. 897(g).

*****

Par. 2. Section 1.864(c)(8)-1 is added

to read as follows:

§1.864(c)(8)-1 Gain or loss by foreign

persons on the disposition of certain

partnership interests.

(a) Overview. This section provides

rules and definitions under section 864(c)

(8). Paragraph (b) of this section provides

the general rule treating gain or loss rec-

November 23, 2020

ognized by a nonresident alien individual

or foreign corporation from the sale or exchange of a partnership interest as effectively connected gain or effectively connected loss. Paragraph (c) of this section

provides rules for determining the limitations on the amount of effectively connected gain or effectively connected loss

under section 864(c)(8) and paragraph

(b) of this section. Paragraph (d) of this

section provides rules regarding coordination with section 897. Paragraph (e) of

this section provides rules regarding certain tiered partnerships. Paragraph (f) of

this section provides rules regarding U.S.

income tax treaties. Paragraph (g) of this

section provides definitions. Paragraph

(h) of this section provides a rule regarding certain contributions of property to a

partnership. Paragraph (i) of this section

contains examples illustrating the rules set

forth in this section. Paragraph (j) of this

section provides the applicability date.

(b) Gain or loss treated as effectively

connected gain or loss—(1) In general.

Notwithstanding any other provision of

subtitle A of the Internal Revenue Code,

if a foreign transferor owns, directly or indirectly, an interest in a partnership that is

engaged in the conduct of a trade or business within the United States, outside capital gain, outside capital loss, outside ordinary gain, or outside ordinary loss (each

as defined in paragraph (b)(2) of this section) recognized by the foreign transferor

on the transfer of all (or any portion) of the

interest is treated as effectively connected

gain or effectively connected loss, subject

to the limitations described in paragraph

(b)(3) of this section. Except as provided

in paragraph (d) of this section, this section does not apply to prevent any portion

of the gain or loss that is otherwise treated

as effectively connected gain or effectively connected loss under provisions of the

Internal Revenue Code other than section

864(c)(8) from being so treated.

(2) Determination of outside gain and

loss—(i) In general. The amount of gain

or loss recognized by the foreign transferor in connection with the transfer of its

partnership interest is determined under

all relevant provisions of the Internal Revenue Code and the regulations thereunder.

See, e.g., §§1.741-1(a) and 1.751-1(a)(2).

For purposes of this section, the amount of

gain or loss that is treated as capital gain or

1080

capital loss under sections 741 and 751 is

referred to as outside capital gain or outside capital loss, respectively. The amount

of gain or loss that is treated as ordinary

gain or ordinary loss under sections 741

and 751 is referred to as outside ordinary

gain or outside ordinary loss, respectively.

(ii) Nonrecognition provisions. A foreign transferor’s gain or loss recognized

in connection with the transfer of its partnership interest does not include gain or

loss to the extent that the gain or loss is

not recognized by reason of one or more

nonrecognition provisions of the Internal

Revenue Code.

(3) Limitations. For purposes of applying this section, this paragraph (b)(3) limits the amount of gain or loss recognized

by a foreign transferor that may be treated

as effectively connected gain or effectively connected loss.

(i) Capital gain limitation. Outside

capital gain recognized by a foreign transferor is treated as effectively connected

gain to the extent it does not exceed aggregate deemed sale EC capital gain determined under paragraph (c)(3)(ii)(B) of

this section.

(ii) Capital loss limitation. Outside

capital loss recognized by a foreign transferor is treated as effectively connected

loss to the extent it does not exceed aggregate deemed sale EC capital loss determined under paragraph (c)(3)(ii)(B) of

this section.

(iii) Ordinary gain limitation. Outside

ordinary gain recognized by a foreign

transferor is treated as effectively connected gain to the extent it does not exceed aggregate deemed sale EC ordinary

gain determined under paragraph (c)(3)(ii)

(A) of this section.

(iv) Ordinary loss limitation. Outside

ordinary loss recognized by a foreign

transferor is treated as effectively connected loss to the extent it does not exceed

aggregate deemed sale EC ordinary loss

determined under paragraph (c)(3)(ii)(A)

of this section.

(c) Amount treated as effectively connected with the conduct of a trade or

business within the United States. This

paragraph (c) describes the steps to be

followed in computing the limitations described in paragraph (b)(3) of this section.

(1) Step 1: Determine deemed sale gain

and loss. Determine the amount of gain or

Bulletin No. 2020–48

loss that the partnership would recognize

with respect to each of its assets (other

than interests in partnerships described

in paragraph (e) of this section) upon a

deemed sale of all of the partnership’s assets on the date of the transfer of the partnership interest described in paragraph (b)

(1) of this section (deemed sale). For this

purpose, a deemed sale is treated as a sale

by the partnership to an unrelated person

of each of its assets (tangible and intangible) in a fully taxable transaction for cash

in an amount equal to the fair market value

of each asset (taking into account section

7701(g)) immediately before the partner’s

transfer of the interest in the partnership.

For rules concerning the deemed sale of

certain partnership interests, see paragraph (e) of this section.

(2) Step 2: Determine deemed sale EC

gain and loss—(i) In general – (A) Effectively connected determination. With

respect to each asset deemed sold in paragraph (c)(1) of this section, determine the

amount of gain or loss from the deemed

sale that would be treated as effectively

connected gain or effectively connected

loss (including by reason of section 897).

Gain described in this paragraph (c)(2) is

referred to as deemed sale EC gain, and

loss described in this paragraph (c)(2) is

referred to as deemed sale EC loss. Section 864 and the regulations thereunder

apply for purposes of determining whether deemed sale gain or loss would be treated as effectively connected gain or loss.

See paragraph (c)(2)(ii) of this section

for sourcing rules that apply for purposes

of determining deemed sale EC gain and

deemed sale EC loss.

(B) 10-year exception. For purposes

of applying paragraph (c)(2)(i)(A) of this

section, gain or loss from the deemed sale

of an asset (other than a United States

real property interest within the meaning

of section 897(c)) will not be treated as

deemed sale EC gain or deemed sale EC

loss if—

(1) No income or gain produced by the

asset was taxable as income that was effectively connected with the conduct of a

trade or business within the United States

by the partnership (or the foreign transferor, a predecessor of the foreign transferor,

or a predecessor of the partnership) during

the lesser of the ten-year period ending on

the date of the transfer or the period for

Bulletin No. 2020–48

which the partnership (and, if applicable,

the foreign transferor, a predecessor of the

foreign transferor, and a predecessor of

the partnership) held the asset; and

(2) The asset has not been used, or

held for use, in the conduct of a trade or

business within the United States by the

partnership (or the foreign transferor, a

predecessor of the foreign transferor, or a

predecessor of the partnership) during that

same period.

(ii) Sourcing rules for determining

deemed sale EC gain and deemed sale EC

loss—(A) In general. For purposes of applying section 865(e)(2)(A) in connection

with the determination of deemed sale EC

gain and deemed sale EC loss under this

paragraph (c)(2)(ii)(A), except to the extent provided in paragraphs (c)(2)(ii)(B)

through (E) of this section, the deemed

sale of an asset will be treated as attributable to an office or other fixed place of

business maintained by the partnership in

the United States. However, if the partnership does not maintain an office or other

fixed place of business in the United States

(within the meaning of section 864(c)(5)

(A) and §1.864-7), neither the office attribution described in this paragraph (c)

(2)(ii)(A), nor the rules of paragraphs (c)

(2)(ii)(B) through (E) of this section, will

apply.

(B) Look-back rule for sale of inventory property. The deemed sale of inventory property (as defined in section 865(i)

(1)) will not be treated as attributable to

an office or other fixed place of business

maintained by the partnership in the United States to the extent of foreign source

inventory gain or loss. Foreign source inventory gain or loss is determined by multiplying the deemed sale gain or deemed

sale loss attributable to inventory property

by the foreign source inventory ratio. The

foreign source inventory ratio cannot exceed one. If the amount in paragraph (c)

(2)(ii)(B)(1) of this section is not positive,

the foreign source inventory ratio is zero.

If the amount in paragraph (c)(2)(ii)(B)(1)

of this section is positive, but the amount

in in paragraph (c)(2)(ii)(B)(2) of this

section is not positive, the foreign source

inventory ratio is one. The foreign source

inventory ratio is—

(1) The gross income of the partnership

from sources without the United States

(as determined under sections 865(b) and

1081

865(e)(2)) that was attributable to inventory property sold during the lesser of—

(i) The period comprised of the partnership’s three taxable years immediately

preceding the date of the deemed sale, or

(ii) The period beginning on the date

the partnership (or any of its predecessors)

was formed and ending on the last day of

the partnership’s taxable year immediately preceding the date of the deemed sale;

over

(2) The total gross income of the partnership that was attributable to inventory

property sold during that same period.

(C) Look-back rule for intangibles. The

deemed sale of an intangible (as defined in

section 865(d)(2), including going concern

value) will not be treated as attributable to

an office or other fixed place of business

maintained by the partnership in the United States to the extent of foreign source

intangible gain or loss. Foreign source

intangible gain or loss is determined

by multiplying the deemed sale gain or

deemed sale loss from an intangible, without regard to any gain described in section

865(d)(4)(A), by the foreign source intangible ratio. The foreign source intangible

ratio cannot exceed one. If the amount in

paragraph (c)(2)(ii)(C)(1) of this section is

not positive, the foreign source intangible

ratio is zero. If the amount in paragraph

(c)(2)(ii)(C)(1) of this section is positive,

but the amount in in paragraph (c)(2)(ii)

(C)(2) of this section is not positive, the

foreign source inventory ratio is one. The

foreign source intangible ratio is–

(1) The gross ordinary income (other

than from dispositions of depreciable or

amortizable property) of the partnership

from sources without the United States

that was not effectively connected with

the conduct of a trade or business within

the United States, during the lesser of—

(i) The period comprised of the partnership’s three taxable years immediately

preceding the date of the deemed sale, or

(ii) The period beginning on the date

the partnership (or any of its predecessors)

is formed and ending on the last day of

the partnership’s taxable year immediately

preceding the year in which the deemed

sale occurs; over

(2) The total gross ordinary income

(other than from dispositions of depreciable or amortizable property) of the partnership during that period.

November 23, 2020

(D) Depreciable personal property—

(1) Depreciation recapture. The deemed

sale of depreciable personal property (as

defined in section 865(c)(4)(A)), including

from the sale of an amortizable intangible

(as defined in section 865(d)(2)), will not

be treated as attributable to an office or

other fixed place of business maintained

by the partnership in the United States to

the extent the deemed sale gain would be

treated as from sources outside the United

States after applying section 865(c)(1) at

the time of the deemed sale.

(2) Gain in excess of depreciation or

loss with respect to depreciable personal

property. For purposes of this section, if

the deemed sale of depreciable personal

property (other than an amortizable intangible) results in deemed sale gain in

excess of the property’s depreciation adjustments (as defined in section 865(c)(4)

(B)), or results in deemed sale loss, attribution to an office or other fixed place of

business maintained by the partnership

in the United States with respect to the

excess deemed sale gain, or deemed sale

loss, will be determined based on where

the property is located: if the property is

located outside the United States, the excess deemed sale gain, or the deemed sale

loss, will not be treated as attributable to

an office or other fixed place of business

maintained by the partnership in the United States; if the property is located within the United States, the excess deemed

sale gain, or the deemed sale loss, will be

treated as attributable to an office or other

fixed place of business maintained by the

partnership in the United States.

(E) Material change in circumstances

rule. If a material change in circumstances occurred that causes the applicable rule

provided in paragraph (c)(2)(ii)(B) or (C)

of this section to provide a sourcing result

that is materially different from the sourcing result that would occur if the applicable period described in paragraph (c)(2)

(ii)(B)(1) or (c)(2)(ii)(C)(1) of this section

began on the date on which the material change in circumstance occurred and

ended on the last day of the partnership’s

taxable year immediately preceding the

year in which the deemed sale occurs (the

modified look-back period), the applicable

rule provided in paragraph (c)(2)(ii)(B) or

(C) of this section may be applied by reference to the modified look-back period.

November 23, 2020

The difference between the sourcing results is determined by comparing the foreign source inventory ratio (as described

in paragraph (c)(2)(ii)(B) of this section)

or the foreign source intangible ratio (as

described in paragraph (c)(2)(ii)(C) of this

section), as applicable, with the foreign

source inventory ratio or foreign source

intangible ratio, as applicable, if that ratio were determined by reference to the

modified look-back period. For purposes

of this paragraph (c)(2)(ii)(E), the sourcing results will not be materially different

unless the percentage point difference between the ratios described in the preceding

sentence is at least 30 percentage points.

(iii) Examples. This paragraph (c)(2)

(iii) provides examples that illustrate the

rules of paragraph (c)(2)(ii) of this section.

Except as otherwise provided, the following facts apply for purposes of this paragraph (c)(2)(iii). FP is a foreign corporation and a partner in PRS, a partnership

that is engaged in the conduct of a trade or

business within the United States (the U.S.

Business) and a business in Country A (the

Country A Business). Both businesses

purchase inventory property and sell the

purchased inventory property to unrelated

customers; this is the only income-generating activity carried on by the businesses.

PRS maintains an office or fixed place of

business within the U.S. (within the meaning of section 864(c)(5)(A) and §1.864-7)

and, for its U.S. business, PRS sells its inventory property through its U.S. office.

For the Country A business, PRS sells its

inventory property through its Country

A office for consumption in Country A;

PRS’s Country A office materially participates in each sale. The gain or loss from

the inventory sold through PRS’s Country

A office is treated as from sources without the United States and is not effectively

connected with PRS’s U.S. Business. In

year 4, FP sells its entire interest in PRS,

thereby triggering the deemed sale described in paragraph (c)(1) of this section.

In the deemed sale, PRS recognizes $10x

of gain on the sale of its inventory property (the only asset PRS holds other than

goodwill and going concern value). The

10-year exception provided in paragraph

(c)(2)(i)(B) of this section does not apply.

(A) Example 1: Determining foreign source inventory gain–(1) Facts. Based on PRS’s sales records

for the three taxable years immediately preceding the

date of the deemed sale, PRS’s gross income from

1082

sources without the United States that is attributable

to sales of inventory property is $12x and PRS’s total

gross income attributable to sales of inventory property during that period is $30x.

(2) Analysis. To determine foreign source inventory gain or loss described in paragraph (c)(2)

(ii)(B) of this section, the $10x deemed sale gain

attributable to inventory property is multiplied by

PRS’s foreign source inventory ratio. PRS’s foreign

source inventory ratio is PRS’s gross income from

sources without the United States that are attributable to sales of inventory property within PRS’s

three taxable years preceding the date of the deemed

sale, over PRS’s total gross income attributable to

sales of inventory property during the same period.

Thus, based on PRS’s sales records from the three

taxable years preceding the date of the deemed sale,

the foreign source inventory gain for PRS’s inventory is $4x (the $10x deemed sale gain attributable to

inventory multiplied by the foreign source inventory

ratio of $12x over $30x).

(B) Example 2: Determining deemed sale EC

gain attributable to inventory property under the material change in circumstances rule—(1) Facts. The

facts are the same as in paragraph (c)(2)(iii)(A)(1) of

this section (the facts of Example 1 in this paragraph

(c)(2)(iii)), except that at the beginning of year 3

(PRS’s taxable year immediately preceding the date

of the deemed sale), PRS started a new business in

Country B (the Country B Business) to take advantage of favorable market prospects for its products in

Country B. For the Country B Business, PRS sells its

inventory property through its Country B office for

consumption in Country B; PRS’s Country B office

materially participates in each such sale. The gain or

loss from the inventory sold through PRS’s Country B office is foreign source gain or loss. Also, at

the beginning of year 3, PRS substantially reduced

its U.S. Business as a result of market factors. As a

result of these changes in year 3, 95% of PRS’s inventory property is sold in its Country A Business

and Country B Business (collectively, the Foreign

Businesses) beginning on the date in which these

changes occurred; accordingly, 5% of PRS’ inventory property is sold in its U.S. Business after these

changes. Based on PRS’s sales records for the three

taxable years preceding the date of the deemed sale,

PRS’s gross income from sources without the United

States that are attributable to sales of inventory property is $15x and PRS’s total gross income attributable to sales of inventory property during that period

is $30x; for year 3, PRS’s gross income from sources

without the United States that are attributable to sales

of inventory property is $9.5x, and PRS’s total gross

income attributable to sales of inventory property in

Year 3 is $10x.

(2) Analysis. The material change in circumstances rule described in paragraph (c)(2)(ii)(E) of

this section applies if due to a material change in circumstances, the sourcing rule provided in paragraph

(c)(2)(ii)(B) of this section provides a sourcing result

that is materially different from the sourcing result

that would occur if that sourcing rule was applied

by reference to the modified look-back period; that

is, the period beginning on the date in which a material chance in circumstances occurred and ending on

the last day of the PRS’s taxable year immediately

preceding the date of the deemed sale. For this pur-

Bulletin No. 2020–48

pose, the reduction in PRS’s U.S. business in year 3,

coupled with the creation of the Country B Business

in the same year, qualifies as a material change in

circumstances. Thus, the modified look-back period

consists of year 3; that is, the period starting at the

beginning of year 3, the date in which the material change in circumstances occurred, and ending of

the last day of year 3, the last day of PRS’s taxable

year immediately preceding the date of the deemed

sale. Based on PRS’s sales records for the three taxable years preceding the deemed sale, the foreign

source inventory ratio, expressed as a percentage,

is 50% ($15x attributable to PRS’s gross income

from sources without the United States with respect

to sales of its inventory property, over $30x attributable to PRS’s total gross income with respect to

sales of its inventory property). Due to the material

change in circumstances, however, 95% of PRS’s

inventory property is sold in its Foreign Businesses. ($9.5x attributable to PRS’s gross income from

sources without the United States with respect to

sales of its inventory property, over $10x attributable to PRS’s total gross income with respect to

sales of its inventory property.) Accordingly, if PRS

applied the sourcing rule provided in paragraph (c)

(2)(ii)(B) of this section by reference to the modified look-back period, 95% ($9.5x/$10x), or $9.5x,

of the gain would be attributable to sales for PRS’s

Foreign Businesses (gain from sources without the

United States), and only 5% ($.5x/$10x), or $0.5x,

of the gain would be attributable to sales for PRS’s

U.S. Business (gain from United States sources). The

excess of the foreign source inventory ratio determined by reference to the modified look-back period

(expressed as a percentage), over the foreign source

inventory ratio (also expressed as a percentage) is

45%; that is 95% (as determined under the modified

look-back period) minus 50% (as determined under

the foreign source inventory ratio). Accordingly, the

sourcing results are materially different because the

45 percentage point difference is greater than the 30

percentage point threshold provided in paragraph (c)

(2)(ii)(E) of this section. Thus, the material change

in circumstances rule of paragraph (c)(2)(ii)(E) of

this section applies and the foreign source inventory gain determined under paragraph (c)(2)(ii)(B) of

this section, determined by reference to the modified

look-back period, is $9.5x; that is, the deemed sale

gain attributable to inventory property ($10x), multiplied by the foreign source inventory ratio determined by reference to the modified look-back period

($9.5x/$10x).

(3) Step 3: Determine the foreign

transferor’s distributive share of deemed

sale EC gain or deemed sale EC loss—

(i) In general. A foreign transferor’s distributive share of deemed sale EC gain or

deemed sale EC loss with respect to each

asset is the amount of the deemed sale EC

gain and deemed sale EC loss determined

under paragraph (c)(2) of this section that

would have been allocated to the foreign

transferor by the partnership under all applicable Internal Revenue Code sections

(including section 704) upon the deemed

sale described in paragraph (c)(1) of this

Bulletin No. 2020–48

section, taking into account allocations of

tax items applying the principles of section 704(c), including any remedial allocations (see §1.704-3(d)), and any section

743(b) basis adjustments (see §1.743-1(j)

(3)). For this purpose, a foreign transferor’s distributive share of deemed sale EC

gain or deemed sale EC loss does not include any amount that is excluded from the

foreign transferor’s gross income or otherwise exempt from U.S. Federal income

tax by reason of an applicable provision of

the Internal Revenue Code (including, for

example, by reason of section 864(b)(2),

872(b), or 883). Similarly, a foreign transferor’s distributive share of deemed sale

EC gain or deemed sale EC loss does not

include any amount to which an exception

under section 897 applies, such as section

897(k) or section 897(l), if that amount is

not otherwise treated as effectively connected under a provision of the Code.

For rules regarding the determination of

a foreign transferor’s distributive share of

deemed sale EC gain and deemed sale EC

loss under an applicable U.S. income tax

treaty, see paragraph (f) of this section.

(ii) Aggregate deemed sale EC items—

(A) Ordinary gain or loss. A foreign

transferor’s aggregate deemed sale EC

ordinary gain (if the net aggregate of the

foreign transferor’s distributive share of

the deemed sale EC ordinary gain and

loss is a gain) or aggregate deemed sale

EC ordinary loss (if the net aggregate of

the foreign transferor’s distributive share

of the deemed sale EC ordinary gain and

loss is a loss) is determined by taking into

account—

(1) The portion of the foreign transferor’s distributive share of deemed sale

EC gain and deemed sale EC loss that is

attributable to the deemed sale of the partnership’s assets that are section 751(a)

property; and

(2) Deemed sale EC gain and deemed

sale EC loss from the deemed sale of assets that are section 751(a) property that

would be allocated to the foreign transferor with respect to interests in partnerships

that are engaged in the conduct of a trade

or business within the United States under

paragraph (e)(1)(ii) of this section upon

the deemed asset sales described in paragraph (e)(1)(i) of this section.

(B) Capital gain or loss. A foreign

transferor’s aggregate deemed sale EC

1083

capital gain (if the net aggregate of the

foreign transferor’s distributive share of

the deemed sale EC capital gain and loss

is a gain) or aggregate deemed sale EC

capital loss (if the net aggregate of the

foreign transferor’s distributive share of

the deemed sale EC capital gain and loss

is a loss) is determined by taking into account—

(1) The portion of the foreign transferor’s distributive share of deemed sale EC

gain and deemed sale EC loss that is attributable to the deemed sale of assets that

are not section 751(a) property; and

(2) Deemed sale EC gain and deemed

sale EC loss from the sale of assets that are

not section 751(a) property and that would

be allocated to the foreign transferor with

respect to all interests in partnerships that

are engaged in the conduct of a trade or

business within the United States under

paragraph (e)(1)(ii) of this section upon

the deemed asset sales described in paragraph (e)(1)(i) of this section.

(iii) Partial transfers. If a foreign transferor transfers less than all of its interest in

a partnership, then for purposes of paragraph (c)(3)(i) of this section, the foreign

transferor’s distributive share of deemed

sale EC gain and deemed sale EC loss is

determined by reference to the amount of

deemed sale EC gain or deemed sale EC

loss determined under paragraph (c)(3)

(i) of this section that is attributable to the

portion of the foreign transferor’s partnership interest that was transferred.

(d) Coordination with section 897. If a

foreign transferor transfers an interest in a

partnership in a transfer that is subject to

section 864(c)(8) and the partnership owns

one or more United States real property

interests (as defined in section 897(c)),

then the foreign transferor determines its

effectively connected gain and effectively

connected loss under this section, and not

pursuant to section 897(g). Accordingly,

with respect to a transfer that is subject

to section 864(c)(8), section 864(c)(8)(C)

does not reduce the amount of gain or loss

treated as effectively connected gain or

loss under this section. For rules regarding

a transfer not subject to section 864(c)(8)

of an interest in a partnership that owns

one or more United States real property

interests, see section 897(g) and the regulations thereunder. If a foreign transferor

transfers an interest in a partnership in the

November 23, 2020

manner described in paragraph (b)(2)(ii)

of this section, the transfer is treated as not

subject to section 864(c)(8) to the extent

of the gain or loss that is not recognized;

instead, if the partnership owns one or

more United States real property interests

at the time of transfer, the rules of section

897(g) and the regulations thereunder apply to the unrecognized gain or loss.

(e) Tiered partnerships—(1) Transfers

of upper-tier partnerships. Assets sold in

a deemed sale described in paragraph (c)

(1) of this section do not include interests

in partnerships that are engaged in the

conduct of a trade or business within the

United States or interests in partnerships

that hold, directly or indirectly, partnerships that are engaged in the conduct of a

trade or business within the United States.

Rather, if a foreign transferor transfers an

interest in a partnership (upper-tier partnership) that owns, directly or indirectly,

an interest in one or more partnerships that

are engaged in the conduct of a trade or

business within the United States, then—

(i) Beginning with the lowest-tier partnership that is engaged in the conduct of a

trade or business within the United States

in a chain of partnerships and going up the

chain, each partnership that is engaged in

the conduct of a trade or business within

the United States is treated as selling its

assets in a deemed sale in accordance with

the principles of paragraph (c)(1) of this

section; and

(ii) Each partnership must determine

its deemed sale EC gain and deemed sale

EC loss in accordance with the principles

of paragraph (c)(2) of this section, and determine the distributive share of deemed

sale EC gain and deemed sale EC loss for

each partner that is either a partnership (in

which the foreign transferor is a direct or

indirect partner) or a foreign transferor,

in accordance with the principles of paragraph (c)(3)(i) of this section.

(2) Transfers by upper-tier partnerships. If a foreign transferor is a direct or

indirect partner in an upper-tier partnership

and the upper-tier partnership transfers an

interest in a partnership that is engaged in

the conduct of a trade or business within

the United States (including a partnership

held indirectly through one or more partnerships), then the principles of this section

(including paragraph (e)(1) of this section)

apply with respect to the gain or loss on

November 23, 2020

the transfer that is allocated to the foreign

transferor by the upper-tier partnership.

(3) Coordination with section 897. For

purposes of this paragraph (e), a lower-tier

partnership that holds one or more United

States real property interests is treated as

engaged in the conduct of a trade or business within the United States.

(f) Treaty coordination. This paragraph (f) describes how paragraph (c)

(3) of this section applies in the case of

a transfer of an interest in a partnership

by a foreign transferor that is eligible for

benefits under an applicable U.S. income

tax treaty. As a general matter, a foreign

transferor must satisfy the requirements

of the limitation on benefits article, if

any, in the treaty between the jurisdiction

in which the transferor is resident and

the United States to be eligible for treaty

benefits. In the case of a foreign transferor that is entitled to treaty benefits, in

determining the foreign transferor’s distributive share of deemed sale EC gain

and deemed sale EC loss, gain or loss

derived by the foreign transferor attributable to assets deemed sold that would

be exempt from tax under an applicable

U.S. income tax treaty if disposed of by

the partnership are not taken into account

under paragraph (c)(3) of this section. In

general, gain or loss on the alienation of

a partnership interest will be treated as

effectively connected gain or loss under section 864(c)(8) to the extent that

the gain or loss is either attributable to

assets forming part of a U.S. permanent

establishment or fixed place of business,

or taxable under a provision governing the disposition of United States real

property interests. Gain or loss from the

alienation of a partnership interest will

be considered gain or loss attributable to

the alienation of assets forming part of a

permanent establishment or fixed place

of business in the United States to the extent the assets deemed sold under section

864(c)(8) form a part of the U.S. permanent establishment or fixed place of business of the partnership. If, however, after applying treaty benefits in paragraph

(c)(3) of this section, the only gains or

losses that would be taken into account

are gains or losses attributable to United

States real property interests, the foreign

transferor determines its effectively connected gain and effectively connected

1084

loss pursuant to section 897 and not under this section.

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

(1) Effectively connected gain. The

term effectively connected gain means

gain that is treated as effectively connected with the conduct of a trade or business

within the United States.

(2) Effectively connected loss. The

term effectively connected loss means loss

treated as effectively connected with the

conduct of a trade or business within the

United States.

(3) Foreign transferor. The term foreign transferor means a nonresident alien

individual or foreign corporation.

(4) Section 751(a) property. The term

section 751(a) property means unrealized

receivables described in section 751(c)

and inventory items described in section

751(d).

(5) Transfer. The term transfer means

a sale, exchange, or other disposition, and

includes a distribution from a partnership

to a partner to the extent that gain or loss

is recognized on the distribution, as well

as a transfer treated as a sale or exchange

under section 707(a)(2)(B).

(h) Anti-stuffing rule. If a foreign transferor (or a person that is related to a foreign transferor within the meaning of section 267(b) or 707(b)) transfers property

(including another partnership interest) to

a partnership in a transaction with a principal purpose of reducing the amount of

gain treated as effectively connected gain,

or increasing the amount of loss treated as

effectively connected loss, under section

864(c)(8) or section 897, the transfer is

disregarded for purposes of section 864(c)

(8) or section 897, as appropriate.

(i) Examples. This paragraph (i) provides examples that illustrate the rules

of this section. Except as otherwise provided, the following facts are presumed

for purposes of this paragraph (i). FP is

a foreign corporation. USP is a domestic

corporation. PRS is a partnership that was

formed on January 1, 2018, when FP and

USP each contributed $100x in cash. PRS

has made no distributions and received no

contributions other than those described in

the preceding sentence. FP’s adjusted basis in its interest in PRS is $100x. X is a

foreign corporation that is unrelated to FP,

USP, or PRS. Upon the formation of PRS,

Bulletin No. 2020–48

FP and USP entered into an agreement

providing that all income, gain, loss, and

deduction of PRS will be allocated equally between FP and USP. PRS is engaged in

the conduct of a trade or business within

the United States (the U.S. Business) and

an unrelated business in Country A (the

U.S. Business section 1231 asset

Country A Business). In a deemed sale described in paragraph (c)(1) of this section,

gain or loss on assets of the U.S. Business

would be treated as effectively connected

gain or effectively connected loss, and

gain or loss on assets of the Country A

Business would not be so treated (includ-

ing by reason of paragraph (c)(2)(i)(B) of

this section). PRS has no liabilities.

(1) Example 1. Deemed sale limitation—(i)

Facts. On January 1, 2019, FP sells its entire interest

in PRS to X for $105x. FP does not qualify for the

benefits of an income tax treaty between the United

States and another country. Immediately before the

sale, PRS’s balance sheet appears as follows:

Adjusted Basis

Fair Market Value

$100x

$104x

Country A Business capital asset

100x

106x

Total

$200x

$210x

(ii) Analysis—(A) Outside gain or loss. FP is a

foreign transferor (within the meaning of paragraph

(g)(3) of this section) and transfers (within the meaning of paragraph (g)(5) of this section) its interest

in PRS to X. For purposes of this example, for simplicity, PRS is assumed to hold no section 751(a)

property and depreciation recapture is assumed to

be zero. FP recognizes a $5x capital gain under section 741, which is an outside capital gain within the

meaning of paragraph (b)(2)(i) of this section. Under paragraph (b)(1) of this section, FP’s $5x capital

gain is treated as effectively connected gain to the

extent that it does not exceed the limitation described

in paragraph (b)(3)(i) of this section, which is FP’s

aggregate deemed sale EC capital gain.

(B) Deemed sale. FP’s aggregate deemed sale

EC capital gain is determined according to the

three-step process set forth in paragraph (c) of this

section. First, the amount of gain or loss that PRS

would recognize with respect to each of its assets

upon a deemed sale described in paragraph (c)(1)

of this section is a $4x gain with respect to the

U.S. Business section 1231 asset and a $6x gain

with respect to the Country A Business capital asset. Second, under paragraph (c)(2) of this section,

PRS’s deemed sale EC gain is $4x. Third, under

paragraph (c)(3)(ii)(B) of this section, FP’s aggregate deemed sale EC capital gain is $2x (that is, the

aggregate of its distributive share of deemed sale

EC gain attributable to the deemed sale of assets

that are not section 751(a) property, which is 50%

of $4x).

(C) Limitation. Under paragraph (b)(3)(i) of this

section, the $5x outside capital gain recognized by

FP is treated as effectively connected gain to the

extent that it does not exceed FP’s $2x aggregate

deemed sale EC capital gain. Accordingly, FP recognizes $2x of capital gain that is treated as effectively

connected gain.

(2) Example 2. Outside gain limitation—(i)

Facts. On January 1, 2019, FP sells its entire interest

in PRS to X for $110x. FP does not qualify for the

benefits of an income tax treaty between the United

States and another country. Immediately before the

sale, PRS’s balance sheet appears as follows:

Adjusted Basis

Fair Market Value

U.S. Business section 1231 asset

$100x

$150x

Country A Business capital asset

100x

70x

Total

$200x

$220x

(ii) Analysis—(A) Outside gain or loss. FP is

a foreign transferor (within the meaning of paragraph (g)(3) of this section) and transfers (within

the meaning of paragraph (g)(5) of this section)

its interest in PRS to X. For purposes of this example, for simplicity, PRS is assumed to hold no

section 751(a) property and depreciation recapture

is assumed to be zero. FP recognizes a $10x capital

gain under section 741, which is an outside capital

gain within the meaning of paragraph (b)(2)(i) of

this section. Under paragraph (b)(1) of this section,

FP’s $10x capital gain is treated as effectively connected gain to the extent that it does not exceed the

limitation described in paragraph (b)(3)(i) of this

section, which is FP’s aggregate deemed sale EC

capital gain.

(B) Deemed sale. FP’s aggregate deemed sale

EC capital gain is determined according to the threestep process set forth in paragraph (c) of this section. First, the amount of gain or loss that PRS would

recognize with respect to each of its assets upon a

deemed sale described in paragraph (c)(1) of this

section is a $50x gain with respect to the U.S. Business section 1231 asset and a $30x loss with respect

to the Country A Business capital asset. Second, under paragraph (c)(2) of this section, PRS’s deemed

sale EC gain is $50x. Third, under paragraph (c)(3)

(ii)(B) of this section, FP’s aggregate deemed sale

EC capital gain is $25x (that is, the aggregate of its

distributive share of deemed sale EC gain attributable to the deemed sale of assets that are not section

751(a) property, which is 50% of $50x).

(C) Limitation. Under paragraph (b)(3)(i) of this

section, the $10x outside capital gain recognized

by FP is treated as effectively connected gain to the

extent that it does not exceed FP’s $25x aggregate

deemed sale EC capital gain. Accordingly, FP recognizes $10x of capital gain that is treated as effectively connected gain.

(3) Example 3. Interaction with section 751(a)—

(i) Facts. On January 1, 2019, FP sells its entire interest in PRS to X for $95x. FP does not qualify

for the benefits of an income tax treaty between the

United States and another country. Through both its

U.S. Business and its Country A Business, PRS holds

inventory items and receivables that are section 751

property (as defined in §1.751-1(a)). Immediately before the sale, PRS’s balance sheet appears as follows:

Adjusted Basis

Fair Market Value

$20x

$50x

U.S. Business inventory and receivables

30x

50x

Country A Business capital asset

100x

80x

U.S. Business section 1231 asset

Country A Business inventory

50x

10x

Total

$200x

$190x

Bulletin No. 2020–48

1085

November 23, 2020

(ii) Analysis—(A) Outside gain or loss. FP is a

foreign transferor (within the meaning of paragraph

(g)(3) of this section) and transfers (within the meaning of paragraph (g)(5) of this section) its interest in

PRS to X. Under sections 741 and 751, FP recognizes a $10x ordinary loss and a $5x capital gain.

See §1.751-1(a). Under paragraph (b)(2)(i) of this

section, FP has outside ordinary loss equal to $10x

and outside capital gain equal to $5x. Under paragraph (b)(1) of this section, FP’s outside ordinary

loss and outside capital gain are treated as effectively

connected loss and effectively connected gain to the

extent that each does not exceed the applicable limitation described in paragraph (b)(3) of this section.

In the case of FP’s outside ordinary loss, the applicable limitation is FP’s aggregate deemed sale EC

ordinary loss. In the case of FP’s outside capital gain,

the applicable limitation is FP’s aggregate deemed

sale EC capital gain.

Asset

(B) Deemed sale. FP’s aggregate deemed sale EC

ordinary loss and aggregate deemed sale EC capital

gain are determined according to the three-step process set forth in paragraph (c) of this section.

(1) Step 1. The amount of gain or loss that PRS

would recognize with respect to each of its assets

upon a deemed sale described in paragraph (c)(1) of

this section is as follows:

Gain/(Loss)

U.S. Business section 1231 asset

$30x

U.S. Business inventory and receivables

20x

Country A Business capital asset

(20x)

Country A Business inventory

(40x)

(2) Step 2. Under paragraph (c)(2) of this section,

PRS’s deemed sale EC gain and deemed sale EC loss

must be determined with respect to each asset. The

Asset

amounts determined under paragraph (c)(2) of this

section are as follows:

Deemed Sale EC Gain/(Loss)

U.S. Business section 1231 asset

$30x

U.S. Business inventory and receivables

20x

Country A Business capital asset

0

Country A Business inventory

0

(3) Step 3. Under paragraph (c)(3)(ii)(B) of this

section, FP’s aggregate deemed sale EC capital gain

is $15x (that is, the aggregate of its distributive

share of deemed sale EC gain that is attributable to

the deemed sale of assets that are not section 751(a)

property, which is 50% of $30x) and FP’s aggregate

deemed sale EC ordinary loss is $0 (that is, the aggregate of its distributive share of deemed sale EC

loss that is attributable to the deemed sale of assets

that are section 751(a) property).

U.S. Business section 1231 asset

(C) Limitation—(i) Capital gain. Under paragraph (b)(3)(i) of this section, the $5x outside capital gain recognized by FP is treated as effectively

connected gain to the extent that it does not exceed

FP’s $15x aggregate deemed sale EC capital gain.

Accordingly, the amount of FP’s capital gain that is

treated as effectively connected gain is $5x.

(ii) Ordinary loss. Under paragraph (b)(3)(iv) of

this section, the $10x outside ordinary loss recognized by FP is treated as effectively connected loss

to the extent that it does not exceed FP’s $0 aggregate deemed sale EC ordinary loss. Accordingly, the

amount of FP’s ordinary loss that is treated as effectively connected loss is $0.

(4) Example 4. Coordination with income tax

treaties—(i) Facts—(A) Sale of interest. On January

1, 2019, FP sells its entire interest in PRS to X for

$105x. Immediately before the sale, PRS’s balance

sheet appears as follows:

Adjusted Basis

Fair Market Value

$100x

$104x

Country A Business capital asset

100x

106x

Total

$200x

$210x

(B) Treaty benefits. FP is a qualified resident of

Country A under a U.S. income tax treaty between

the United States and Country A that is similar or

identical in all material respects to the 2006 U.S.

Model Income Tax Convention (the Treaty). PRS is

treated as fiscally transparent for purposes of Country A tax law. PRS does not carry on its U.S. Business through a U.S. permanent establishment (PE).

(ii) Analysis—(A) Outside gain or loss. FP is a

foreign transferor (within the meaning of paragraph

(g)(3) of this section) and transfers (within the mean-

ing of paragraph (g)(5) of this section) its interest

in PRS to X. For purposes of this example, for simplicity, PRS is assumed to hold no section 751(a)

property and depreciation recapture is assumed to

be zero. FP recognizes a $5x capital gain under section 741, which is an outside capital gain within the

meaning of paragraph (b)(2)(i) of this section. Under paragraph (b)(1) of this section, FP’s $5x capital

gain is treated as effectively connected gain to the

extent that it does not exceed the limitation described

Asset

in paragraph (b)(3)(i) of this section, which is FP’s

aggregate deemed sale EC capital gain.

(B) Deemed sale. FP’s aggregate deemed sale EC

capital gain is determined according to the three-step

process set forth in paragraph (c) of this section by

taking into account the treaty coordination rule under

paragraph (f) of this section.

(1) Step 1. The amount of gain or loss that PRS

would recognize with respect to each of its assets

upon a deemed sale described in paragraph (c)(1) of

this section is as follows:

Gain/(Loss)

U.S. Business section 1231 asset

$4x

Country A Business capital asset

6x

November 23, 2020

1086

Bulletin No. 2020–48

(2) Step 2. Under paragraph (c)(2) of this section, PRS’s deemed sale EC gain is as follows:

Asset

Gain/(Loss)

U.S. Business section 1231 asset

$4x

Country A Business capital asset

0x

(3) Step 3. FP is eligible for benefits under the

Treaty and derives the gain on the deemed sale of

U.S. Business section 1231 asset. Under paragraph

(c)(3)(i) and paragraph (f) of this section, because

gain from the disposition of the U.S. Business section 1231 asset does not form part of a U.S. PE, the

gain is exempt from U.S. tax under the Treaty, and is

not taken into account in determining FP’s distributive share of deemed sale EC gain under paragraphs

(c)(3)(i) and paragraph (f) of this section. Therefore,

FP’s aggregate deemed sale EC capital gain is $0x

under paragraph (c)(3)(ii)(B) of this section.

(C) Limitation. Under paragraph (b)(3)(i) of this

section, the $5x outside capital gain recognized by

FP is not treated as effectively connected gain since

all of it would exceed FP’s $0x aggregate deemed

sale EC capital gain.

(j) Applicability date. This section applies to transfers occurring on or after December 26, 2018, and to amounts received

on or after December 26, 2018, pursuant

to an installment sale (as defined in section 453(b)) occurring on or after November 27, 2017.

Par. 3. Section 1.897-7 is added to read

as follows:

§1.897-7 Treatment of certain

partnership interests, trusts and estates

under section 897(g).

(a) through (b) [Reserved]. For further

guidance, see § 1.897-7T(a) through (b).

(c) Coordination with section 864(c)

(8). Except as provided in §1.864(c)(8)1, the amount of any money, and the fair

market value of any property, received

by a nonresident alien individual or foreign corporation in exchange for all or

part of its interest in a partnership, trust,

or estate will, to the extent attributable to

United States real property interests, be

considered as an amount received from

the sale or exchange in the United States

of such property. See also §1.864(c)(8)1(h) for an anti-stuffing rule that may

apply to transactions subject to section

897. This paragraph applies to transfers occurring on or after December 26,

2018, and to amounts received on or after December 26, 2018, pursuant to an

installment sale (as defined in section

Bulletin No. 2020–48

453(b)) occurring on or after November

27, 2017.

Par. 4. Section 1.897-7T is amended by

adding paragraph (c) to read as follows:

§1.897-7T Treatment of certain

partnership interests as entirely U.S. real

property interests under sections 897(g)

and 1445(e) (temporary).

*****

(c) Coordination with section 864(c)

(8). [Reserved]. For further guidance, see

§1.897-7(c).

Sunita Lough,

Deputy Commissioner for Services

and Enforcement.

Approved: September 10, 2020.

David J. Kautter,

Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on November 05, 2020, 8:45 a.m., and published in the issue of the Federal Register for November 06, 2020,

85 F.R. 70958)

26 CFR § 54.9815-2713

T.D. 9931

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 54

DEPARTMENT OF THE

TREASURY

Office of the Secretary

31 CFR Part 33

DEPARTMENT OF HEALTH

AND HUMAN SERVICES

1087

Centers for Medicare &

Medicaid Services

42 CFR Parts 410, 411,

414, 417, 433, and 510

Office of the Secretary

45 CFR Parts 147, 155

and 182

[CMS-9912-IFC]

Additional Policy and

Regulatory Revisions in

Response to the COVID-19

Public Health Emergency

AGENCY: Centers for Medicare &

Medicaid Services (CMS), Department

of Health and Human Services (HHS);

Internal Revenue Service, Department

of the Treasury; Employee Benefits Security Administration, Department of

Labor.

ACTION: Interim final rule with request

for comments.

SUMMARY: * * *

This rule also amends regulations regarding coverage of preventive health services

to implement section 3203 of the CARES

Act, which shortens the timeframe within which non-grandfathered group health

plans and health insurance issuers offering non-grandfathered group or individual health insurance coverage must begin

to cover without cost sharing qualifying

coronavirus preventive services, including recommended COVID-19 immunizations. This IFC also revises regulations to

set forth flexibilities in the public notice

requirements and post award public participation requirements for State Innovation Waivers under section 1332 of the Patient Protection and Affordable Care Act

(PPACA) during the public health emergency for COVID‑19.

November 23, 2020

DATES: Effective date: These regulations

are effective on [Insert the date of display

for public inspection at the Office of the

Federal Register], except for amendatory

instructions 36 and 37, which are effective

on January 1, 2021.

Applicability date: Except as otherwise specified in this paragraph, these

regulations are applicable from [Insert

the date of display for public inspection

at the Office of the Federal Register]

until the end of the public health emergency for COVID-19 as determined

by the HHS Secretary. The regulations

at 42 CFR 410.57, 410.152, 410.160,

411.15, 414.701, 414.707, 414.900, and

414.904 and at 42 CFR part 510 (other

than 42 CFR 510.300(a)(1)(i) and (iii))

are applicable [Insert the date of display for public inspection at the Office

of the Federal Register]. Because the

requirement at section 6008(b)(3) of the

Families First Coronavirus Response

Act (FFCRA) is not limited to the duration of the public health emergency

for COVID-19, regulations at 42 CFR

part 433, subpart G, apply from [Insert

the date of display for public inspection

at the Office of the Federal Register]

through the end of the last month of the

public health emergency for COVID-19

in accordance with section 6008(b)(3) of

the Families First Coronavirus Response

Act. Regulations at 42 CFR 510.300(a)

(1)(i) and (a)(1)(iii) are applicable October 1, 2020.

Comment date: To be assured consideration, comments must be received at one

of the addresses provided below, no later

than 5 p.m. on [Insert date 60 days after

date of display in the Federal Register].

ADDRESSES: In commenting, please refer to file code CMS‑9912‑IFC.

Comments, including mass comment

submissions, must be submitted in one of

the following three ways (please choose

only one of the ways listed):

1. Electronically. You may submit

electronic comments on this regulation to

http://www.regulations.gov. Follow the

“Submit a comment” instructions.

2. By regular mail. You may mail written comments to the following address

ONLY:

Centers for Medicare & Medicaid Services,

November 23, 2020

Department of Health and Human Services,

Attention: CMS-9912-IFC,

P.O. Box 8016,

Baltimore, MD 21244-8016.

Please allow sufficient time for mailed

comments to be received before the close

of the comment period.

3. By express or overnight mail. You

may send written comments to the following address ONLY:

Centers for Medicare & Medicaid Services,

Department of Health and Human Services,

Attention: CMS-9912-IFC,

Mail Stop C4-26-05,

7500 Security Boulevard,

Baltimore, MD 21244-1850

For information on viewing public

comments, see the beginning of the “SUPPLEMENTARY INFORMATION” section.

FOR FURTHER INFORMATION

CONTACT: * * *

Lina Rashid, (443) 902-2823, or Michelle Koltov, (301) 492-4225, Centers for

Medicare & Medicaid Services, Department of Health and Human Services, Services, Kimberly Koch, (202) 622-0854,

Department of the Treasury, for issues related to State Innovation Waivers Policy

and Regulatory Revisions in Response to

the COVID-19 Public Health Emergency

***

David Mlawsky, (410) 786–1565,

Centers for Medicare & Medicaid Services, Department of Health and Human

Services, Elizabeth Schumacher, (202)

693–8335, Employee Benefits Security

Administration, Department of Labor,

Dara Alderman, (202) 317-5500, Internal

Revenue Service, Department of the Treasury, for issues related to Rapid Coverage

of Preventive Services for Coronavirus.

***

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments: All

comments received before the close of the

comment period are available for viewing

by the public, including any personally

identifiable or confidential business information that is included in a comment.

We post all comments received before the

1088

close of the comment period on the following website as soon as possible after

they have been received: http://regulations.gov. Follow the search instructions

on that website to view public comments.

Background

The United States is responding to an

outbreak of respiratory disease caused by

a novel coronavirus that was first detected in China and has now been detected in

more than 190 countries internationally,

and all 50 States, the District of Columbia,

and U.S. territories. The virus has been

named “severe acute respiratory syndrome

coronavirus 2” (“SARS-CoV-2”) and the

disease it causes has been named “coronavirus disease 2019” (“COVID-19”).

On January 30, 2020, the International Health Regulations Emergency Committee of the World Health Organization

(WHO) declared the outbreak a “Public

Health Emergency of International Concern.” On January 31, 2020, pursuant to

section 319 of the Public Health Service

(PHS) Act (42 U.S.C. 247d), the Health

and Human Services Secretary (the Secretary) determined that a public health emergency (PHE) exists for the United States

to aid the nation’s health care community

in responding to COVID-19 (hereafter referred to as the PHE for COVID‑19). On

March 11, 2020, the WHO publicly declared COVID-19 a pandemic. On March

13, 2020, President Donald J. Trump (the

President) declared the COVID-19 pandemic a national emergency. Effective

October 23, 2020, the Secretary renewed

the January 31, 2020 determination that

was previously renewed on April 21, 2020

and July 23, 2020 that a PHE exists and

has existed since January 27, 2020.

The Administration is committed to

ensuring that Americans have access to

a COVID-19 vaccine through Operation

Warp Speed, a partnership among components of the HHS, including the Centers for Disease Control and Prevention

(CDC), the Food and Drug Administration

(FDA), the National Institutes of Health

(NIH), and the Biomedical Advanced

Research and Development Authority

(BARDA). Operation Warp Speed engages with private firms and other Federal agencies, including the Department of

Defense (DoD), Department of Agricul-

Bulletin No. 2020–48

ture, the Department of Energy, and the

Department of Veterans Affairs. Through

the work of the Federal Government and

the private sector, Operation Warp Speed

seeks to accelerate the development, manufacture, and distribution of a COVID-19

vaccine to the American people.

The CDC has reported that some people are at higher risk of severe illness from

COVID-19.1 These higher-risk categories

include:

• Older adults, with risk increasing by

age.

• People who have serious chronic

medical conditions such as:

++ Obesity.

++ Cardiovascular disease.

++ Diabetes mellitus.

++ Hypertension.

++ Chronic lung disease.

++ Neurologic/Neurodevelopmental

disability.2

++ Immunocompromised individuals.

• Residents of Long Term Care (LTC)

facilities, including nursing homes, Intermediate Care Facilities for Individuals

with Intellectual and Developmental Disabilities (ICF/IIDs), inpatient psychiatric

and substance abuse treatment facilities

including Institutions for Mental Disease (IMDs) & Psychiatric Residential

Treatment Facilities (PRTFs), assisted

living facilities, group homes for individuals with developmental disabilities and

board-and-care facilities.3

As the health care community implements and updates recommended prevention and control practices, regulatory agencies operating under appropriate

waiver authority granted by the PHE for

COVID-19 are also working to revise

and implement regulations that support

these health care community infection

prevention and treatment practices. Based

on the current and projected increases in

the incidence rate of COVID-19 in the

US, observed fatalities in the older adult

population, and the impact on health care

workers at increased risk due to treating

special populations, CMS4 is reviewing

and revising regulations, as appropriate,

to offer states, providers, suppliers, and

group health plans and health insurance

issuers additional flexibilities in furnishing and providing services to combat the

PHE for COVID-19 and to address and

minimize the unique impact of the PHE

for COVID-19 on other regulatory provisions.

CMS addressed additional policies

in three previous interim final rules with

comment period (IFCs). The “Medicare and Medicaid Programs; Policy and

Regulatory Revisions in Response to the

COVID-19 Public Health Emergency”

IFC appeared in the April 6, 2020 Federal Register (85 FR 19230) with an effective date of March 31, 2020, and the

“Medicare and Medicaid Programs, Basic

Health Program, and Exchanges; Additional Policy and Regulatory Revisions in

Response to the COVID-19 Public Health

Emergency and Delay of Certain Reporting Requirements for the Skilled Nursing

Facility Quality Reporting Program” IFC

appeared in the May 8, 2020 Federal

Register (85 FR 27550) with an effective

date of May 8, 2020. The “Medicare and

Medicaid Programs, Clinical Laboratory

Improvement Amendments, and Patient

Protection and Affordable Care Act: Additional Policy and Regulatory Revisions

in Response to the COVID-19 Public

Health Emergency” IFC appeared in the

September 2, 2020 Federal Register (85

FR 54820) with an effective date of September 2, 2020.

This IFC implements a number of measures intended to further the Administration’s commitment to ensure every American has timely access to a COVID-19

vaccine without any out-of-pocket expenses, no matter their source of coverage, or whether they are covered at all.

***

In this IFC, HHS and the Departments

of Labor and the Treasury (referred to

collectively as “the Departments”) clarify

certain aspects of coverage of preventive

services without cost sharing under the

current regulations implementing section

2713 of the Public Health Service (PHS)

Act, as added by PPACA and incorporated into the Employee Retirement Income

Security Act of 1974 (ERISA) by section

715 of ERISA and into the Internal Revenue Code (the Code) by section 9815 of

the Code. The Departments also amend

those regulations to implement the unique

requirements related to rapid coverage of

qualifying coronavirus preventive services

under section 3203 of the CARES Act.

Specifically, this IFC clarifies that plans

and issuers subject to section 2713 of the

PHS Act must cover without cost sharing

recommended immunizations as well as

the administration of such immunizations,

regardless of how the administration is

billed. This IFC also defines qualifying

coronavirus preventive services consistent with the definition provided in section

3203 of the CARES Act and clarifies that

plans and issuers subject to section 2713

of the PHS Act must cover recommended immunizations for COVID-19 that are

qualifying coronavirus preventive services, even if not listed for routine use on

the Immunization Schedules of the CDC.

Due to the urgent need to ensure coverage of and access to qualifying coronavirus preventive services, and to ensure that

participants, beneficiaries, and enrollees

can access qualifying coronavirus preventive services on the expedited basis

specified by statute, this IFC also provides

that during the PHE for COVID-19, plans

and issuers must cover, without cost sharing, qualifying coronavirus preventive

services, regardless of whether such services are delivered by an in-network or

out-of-network provider. This coverage is

required to be provided within 15 business

days after the date the United States Preventive Services Task Force (USPSTF) or

the Advisory Committee on Immunization

Practices of the CDC (ACIP) makes an

applicable recommendation relating to a

qualifying coronavirus preventive service.

***

This IFC provides for flexibilities in

the public notice requirements for a State

Innovation Waiver (also referred to as a

section 1332 waiver) described in section 1332 of PPACA that apply during

the PHE for COVID-19. Specifically, this

IFC gives the Secretary of HHS and the

https://www.cdc.gov/mmwr/volumes/69/wr/mm6915e3.htm.

https://www.cdc.gov/​mmwr/​volumes/​69/​wr/​mm6924e2.htm?​s_​cid=​mm6924e2_​w.

3

https://www.cdc.gov/​coronavirus/​2019-ncov/​cases-updates/​summary.html.

4

Throughout this IFC, unless otherwise specified, “we” and “our” refer to CMS only.

1

2

Bulletin No. 2020–48

1089

November 23, 2020

Secretary of the Treasury the authority to

modify, in part, the public notice procedures to expedite a decision on a proposed

waiver request that is submitted or would

otherwise become due during the PHE

for COVID-19. This IFC also gives these

Secretaries the authority to modify, in

part, the post-award public notice requirements for an approved waiver request that

would otherwise take place or become due

during the PHE for COVID-19.

II. Provisions of the Interim Final Rule

– Department of Health and Human

Services

***

III. Provisions of the Interim Final

Rule – Departments of the Treasury,

Labor and Health and Human Services

A. Rapid Coverage of Preventive

Services for Coronavirus

1. Background

In addition to the steps Congress took

to ensure coverage of COVID-19 diagnostic testing, in section 3203 of the CARES

Act, Congress required group health plans

and health insurance issuers offering

group or individual health insurance coverage to cover, without cost sharing, qualifying coronavirus preventive services.

This coverage is required to be provided

“pursuant to section 2713(a) of the [PHS]

Act,” including its implementing regulations or any successor regulations.

Section 2713 of the PHS Act was added by section 1001 of PPACA and incorporated by reference into ERISA by section 715 of ERISA and into the Code by

section 9815 of the Code. Section 2713

of the PHS Act and the regulations implementing section 2713 of the PHS Act

require non-grandfathered group health

plans and health insurance issuers offering non-grandfathered group or individual

health insurance coverage to provide coverage of certain specified preventive items

and services without cost sharing. These

services include:

• Evidence-based items or services that

have in effect a rating of “A” or “B” in the

current recommendations of the USPSTF

with respect to the individual involved.

November 23, 2020

• Immunizations for routine use in children, adolescents, and adults that have in

effect a recommendation from ACIP with

respect to the individual involved. A recommendation of ACIP is considered to be

“in effect” after it has been adopted by the

Director of the CDC. A recommendation

is considered to be for “routine use” if it

appears on the Immunization Schedules of

the CDC.

• With respect to infants, children, and

adolescents, evidence-informed preventive care and screenings provided for in

the comprehensive guidelines supported

by the Health Resources and Services Administration (HRSA).

• With respect to women, preventive

care and screenings provided for in comprehensive guidelines supported by HRSA

(not otherwise addressed by the recommendations of the USPSTF), subject to

certain exemptions and accommodations

(see 45 CFR 147.131 through 147.133).

The Departments’ current regulations

(herein referred to as the 2015 Final Regulations) under section 2713 of the PHS

Act at 26 CFR 54.9815-2713; 29 CFR

2590.715-2713; and 45 CFR 147.130 require that plans and issuers provide coverage of recommended preventive services

for plan years that begin on or after September 23, 2010, or, if later, for plan years

that begin on or after the date that is one

year after the date the recommendation or

guideline is issued.

Under the 2015 Final Regulations, if a

recommended preventive service is billed

separately (or is tracked as individual encounter data separately) from an office

visit, then a plan or issuer may impose

cost-sharing requirements with respect to

the office visit. However, if a preventive

service is not billed separately (or is not

tracked as individual encounter data separately) from an office visit and the primary

purpose of the office visit is the delivery

of such an item or service, then a plan or

issuer may not impose cost-sharing requirements with respect to the office visit.

The 2015 Final Regulations generally

do not require a plan and issuer that has a

network of providers to provide benefits

for applicable preventive items or services

that are delivered by an out-of-network

provider. Moreover, the 2015 Final Regulations generally do not preclude a plan

or issuer that has a network of providers

1090

from imposing cost-sharing requirements

for preventive services that are delivered

by an out-of-network provider. However,

if a plan or issuer does not have in its network a provider who can provide a preventive service, then the plan or issuer

must cover the recommended preventive

service when performed by an out-of-network provider and may not impose cost

sharing with respect to the recommended

preventive service.

Many items and services required to

be covered under section 2713 of the PHS

Act typically are provided as part of the

usual course of preventive care, often according to regularly scheduled intervals.

Examples include immunizations provided according to schedules established

by the CDC and other annual screenings

or counseling. Therefore, the 2015 Final

Regulations require coverage without cost

sharing for applicable immunizations that

are recommended by ACIP for routine

use, and state that a recommendation is

considered to be for “routine use” if it appears on the Immunization Schedules of

the CDC.

Section 3203 of the CARES Act establishes a more accelerated timeline for

required coverage of qualifying coronavirus preventive services than other recommended preventive services under PHS

Act section 2713. As stated above, coverage of qualifying coronavirus preventive

services must be provided no later than 15

business days following an applicable recommendation. In addition, it is possible

that items, services, and immunizations

used to prevent or mitigate COVID-19

will not, in the immediate future, be recommended as part of a usual course of

preventive care, but rather for more urgent

use. As reflected by the expedited timeline for coverage Congress established

in section 3203 of the CARES Act, the

need to provide coverage of qualifying

coronavirus preventive services is urgent.

Therefore, as discussed below, this IFC

requires coverage of COVID-19 immunizations within 15 business days after the

immunization has been recommended by

ACIP and adopted by the CDC, regardless

of whether it appears on the Immunization

Schedules of the CDC for routine use.

Additionally, in light of the current

PHE for COVID-19, it is imperative that

group health plans and health insurance

Bulletin No. 2020–48

issuers provide full coverage for these

items and services, including costs for

the administration of vaccines, and ensure

timely access to coverage as Congress intended. Accordingly, in this IFC, the Departments provide certain clarifications

previously made with respect to the 2015

Final Regulations and amend those regulations to implement unique requirements

related to covering qualifying coronavirus

preventive services.5

2. Scope of Requirement to Cover

Certain Recommended Preventive

Services under Section 2713 of the Public

Health Service Act

a. Related Items and Services

In implementing section 2713 of the

PHS Act, the 2015 Final Regulations addressed whether office visit charges associated with certain recommended preventive services must be covered without

cost sharing. Specifically, Example 1 in

the 2015 Final Regulations illustrates how

the requirements apply in situations where

a provider bills a plan for an office visit

where a preventive screening for cholesterol abnormalities (which has in effect

a rating of A or B from the USPSTF) is

conducted and for the laboratory work

of the cholesterol screening test. In that

example, the plan may not impose any

cost-sharing requirements with respect

to the separately billed laboratory work

of the cholesterol screening test. Because

the office visit is billed separately from the

cholesterol screening test, the 2015 Final

Regulations provide that the plan may

impose cost-sharing requirements for the

office visit.

Prior to the publication of the 2015 Final Regulations, the Departments received

questions from stakeholders regarding

discrete coverage issues related to certain recommended preventive services. In

particular, with respect to colonoscopies,

stakeholders asked whether certain related services (such as the cost of polyp removal or anesthesia) must also be covered

without cost sharing. The Departments

clarified in subregulatory guidance that a

plan or issuer may not impose cost sharing for polyp removal during a preventive

screening colonoscopy, as such service is

an integral part of a colonoscopy, and also

stated that anesthesia provided in connection with a preventive colonoscopy must

be covered without cost sharing.6

Consistent with the examples provided

in the 2015 Final Regulations and subregulatory guidance cited in the preamble to

the rulemaking promulgating the 2015 Final Regulations, the Departments further

clarify that under the 2015 Final Regulations and this IFC, plans and issuers subject to section 2713 of the PHS Act must

cover, without cost sharing, items and

services that are integral to the furnishing

of the recommended preventive service,

regardless of whether the item or service

is billed separately. For example, several

of the recommended preventive services

involve screenings for the presence of certain health conditions, such as diabetes,

or a variety of sexually transmitted infections. These recommended screenings,

typically performed by laboratories, cannot be conducted without first collecting a

specimen. Accordingly, plans and issuers

subject to section 2713 of the PHS Act

must cover without cost sharing both the

specimen collection and the recommended preventive service, regardless of how

the specimen collection is billed. Similarly, a recommended immunization generally cannot be furnished without being

administered by a medical professional.

As qualifying coronavirus preventive services are expected to include immunizations, plans and issuers subject to section

2713 of the PHS Act must cover without

cost sharing such an immunization and

its administration, regardless of how the

administration is billed, and regardless of

whether a COVID-19 vaccine or any other

immunization requires the administration

of multiple doses in order to be considered a complete vaccination. This includes

coverage without cost sharing of the administration of a required preventive immunization in instances where a third party, such as the Federal Government, pays

for the preventive immunization. Further,

if a COVID-19 immunization is not billed

separately (or is not tracked as individual encounter data separately) from an office visit and the primary purpose of the

visit is the delivery of the recommended

COVID-19 immunization, then consistent

with the 2015 Final Regulations, the plan

or issuer may not impose cost-sharing requirements with respect to the office visit.

The Departments seek comment on this

clarification.

b. Out-of-Network Coverage During the

PHE for COVID-19

The 2015 Final Regulations permit a

group health plan or issuer that has a network of providers to omit coverage or to

impose cost-sharing requirements for recommended preventive services when such

services are provided by an out-of-network

provider, unless the plan or issuer does

not have in its network a provider who

can provide the service.7 This approach

reflects that, as noted earlier in this section

of the preamble, recommended preventive

services generally are obtained as part of a

regular course of preventive care, so participants, beneficiaries, and enrollees typically have the opportunity to seek such

care from an in-network provider. By contrast, in the immediate term, newly developed qualifying coronavirus preventive

services might be available from a narrower range of providers than other, more

established recommended preventive services. To help ensure full access to and the

widespread use of qualifying coronavirus

preventive services to mitigate the effect

The 2015 Final Regulations address the obligation to continue to provide coverage for recommended preventive services that are in effect on the first day of a plan or policy year when there

are changes in recommendations or guidelines. See 26 CFR 54.9815–2713(b)(2)(i) and (ii); 29 CFR 2590.715–2713(b)(2)(i) and (ii); 45 CFR 147.130(b)(2)(i) and (ii). Given the expedited

timeline for coverage under section 3203 of the CARES Act, this IFC amends the 2015 Final Regulations to make clear that these paragraphs apply to recommended preventive services that

are covered on the first day of the plan or policy year or, with respect to qualifying coronavirus preventive services, “as otherwise specified in paragraph (b)(3) of this section.”

6

See FAQs About Affordable Care Act Implementation Part 12, Q5 (Feb. 20, 2013), available at https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/

faqs/aca-part-xii.pdf and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs12 and FAQs About Affordable Care Act Implementation Part XXVI, Q7

(May 11, 2015), available at https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/aca-part-xxvi.pdf and https://www.cms.gov/CCIIO/Resources/FactSheets-and-FAQs/Downloads/aca_implementation_faqs26.pdf.

7

26 CFR 54.9815-2713(a)(3); 29 CFR 2590.715-2713(a)(3); 45 CFR 147.130(a)(3).

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November 23, 2020

of the PHE for COVID-19 and slow transmission of the virus, it is critical that individuals be able to receive such services

from any provider authorized to provide

the service. Therefore, this IFC amends

the 2015 Final Regulations to require that

plans and issuers subject to section 2713

of the PHS Act must cover without cost

sharing a qualifying coronavirus preventive service, regardless of whether such

service is delivered by an in-network or

out-of-network provider. This is based on

the Departments’ view that participants,

beneficiaries, and enrollees may not be

able to locate in-network providers consistently during the emergency period.

To satisfy this requirement, the Departments are of the view that plans and issuers must administer this out-of-network

coverage requirement in such a way that

makes receiving out-of-network services

for qualifying coronavirus preventive

services a meaningful benefit for participants, beneficiaries, and enrollees. To be

a meaningful benefit, the Departments are

of the view that plans and issuers must

administer this out-of-network coverage

requirement in a way that ensures that

participants, beneficiaries, and enrollees

have access to a variety of out-of-network providers for such services. To the

extent plans and issuers reimburse outof-network providers an unreasonably

low amount for qualifying coronavirus

preventive services, including for administration of a COVID-19 vaccine, this approach could severely limit the number of

such providers that are willing to provide

the service, which would contravene the

purpose of the requirement to provide outof-network coverage without cost sharing

of qualifying coronavirus preventive services. Therefore, this IFC provides that

with respect to a qualifying coronavirus

preventive service and a provider with

whom the plan or issuer does not have a

negotiated rate for such service (such as an

out-of-network provider), the plan or issuer must reimburse the provider for such

service in an amount that is reasonable,

as determined in comparison to prevailing

market rates for such service. The Departments will consider the amount of payment to be reasonable, for example, if the

plan or issuer pays the provider the amount

that would be paid under Medicare for the

item or service. In the Departments’ view,

these minimum payment standards are

necessary and appropriate because providers that participate in the CDC COVID‑19

Vaccination Program contractually agree

to administer a COVID-19 vaccine regardless of an individual’s ability to pay

and regardless of their coverage status,

and also may not seek any reimbursement,

including through balance billing, from a

vaccine recipient.

The Departments request comment on

all aspects of this approach. The Departments request comment on the issue of

network adequacy and whether and, if so,

how long provider networks are expected

to be inadequate. The Departments also

request comment on the safeguards in this

IFC to ensure that out-of-network reimbursement rates are reasonable and that

providers administering a publicly funded COVID-19 vaccine are reimbursed by

group health plans and issuers prevailing

market rates in the absence of a negotiated

rate, and whether other examples of reasonable reimbursement rates, in addition

to Medicare rates, would be useful.

3. Definition of Qualifying Coronavirus

Preventive Services

Section 3203(b)(1) of the CARES Act

defines “qualifying coronavirus preventive service” as an item, service, or immunization that is intended to prevent or

mitigate COVID-19 and that is—(A) an

evidence-based item or service that has in

effect a rating of ‘A’ or ‘B’ in the current

recommendations of the USPSTF; or (B)

an immunization that has in effect a recommendation from ACIP with respect to

the individual involved. The statutory provisions describing USPSTF and ACIP recommendations in this definition are sub-

stantively identical to the ones at section

2713(a)(1) and (2) of the PHS Act. However, as stated above, under the 2015 Final Regulations, only “immunizations for

routine use in children, adolescents, and

adults” that are recommended by ACIP

must be covered without cost sharing.8 A

recommendation is considered to be for

routine use if it is listed on the CDC’s Immunization Schedules.9

This IFC provides a definition of qualifying coronavirus preventive services

that is consistent with the statutory definition in section 3203 of the CARES Act.

However, the Departments note that unlike the other preventive service immunizations required to be covered without

cost sharing under section 2713 of the

PHS Act and the 2015 Final Regulations,

this definition and related coverage requirement are not limited to COVID-19

immunizations recommended by ACIP

for “routine use.” While other preventive

items and services may be recommended for routine use, for reasons described

elsewhere in this section of the preamble,

the PHE for COVID-19 presents unique

circumstances and qualifying coronavirus preventive services might not, in the

immediate term, be recommended for

routine use, according to specified schedules. Rather, the Departments generally

expect consumers should receive an immunization for COVID-19 as soon as it

becomes available to the general public,

or as soon as it becomes available to them

based on their status as part of a high-risk

or high-priority population, as recommended by ACIP. Plans and issuers subject to section 2713 of the PHS Act must

cover, without cost sharing, COVID-19

immunizations that are recommended

by ACIP and adopted by the Director of

CDC, even if not listed for routine use

on the CDC Immunization Schedules,

pursuant to 26 CFR 54.9815-2713T(a);

29 CFR 2590.715-2713(a); and 45 CFR

147.130(a), and subject to the additional

changes described later in this section of

the preamble.10

See 75 FR 41726, 41728 (July 19, 2010), codified at 26 CFR 54.9815-2713(a)(1)(ii); 29 CFR 2590.715-2713(a)(1)(ii); 45 CFR 147.130(a)(1)(ii).

Id.

10

HHS reminds states that the HHS Office for Civil Rights enforces applicable Federal civil rights laws as described above, as well as laws protecting the exercise of conscience and religious

freedom, including the Religious Freedom Restoration Act (42 U.S.C. 2000bb through 2000bb-4). HHS’s requirements are subject to these laws, and states may have obligations under these

laws to protect conscience, prohibit coercion, and to ensure the free exercise of religion. U.S. Department of Health & Human Services, Office for Civil Rights, Conscience and Religious

Freedom, https://www.hhs.gov/conscience/index.html (last visited Aug. 20, 2020).

8

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4. Qualifying Coronavirus Preventive

Services – Timing Requirement

Section 2713 of the PHS Act and the

2015 Final Regulations require plans and

issuers to cover recommended preventive

items and services beginning with the first

plan year (or in the individual market, policy year) that is one year after the date the

recommendation or guideline is issued.

Section 3203 of the CARES Act accelerates the timeline for coverage of qualifying coronavirus preventive services without cost sharing, requiring coverage to be

provided within 15 business days after the

date on which a recommendation is made

relating to such service. This IFC codifies these timing requirements at 26 CFR

54.9815-2713T(b)(3); 29 CFR 2590.7152713(b)(3); and 45 CFR 147.130(b)(3).

In addition, the IFC adds a sunset

provision at 26 CFR 54.9815-2713T(e);

29 CFR 2590.715-2713(e); and 45 CFR

147.130(e), under which the amendments

made to the regulations will not apply

with respect to qualifying coronavirus

preventive services furnished on or after

the expiration of the PHE for COVID-19.

The Departments note, however, that coverage under section 3203 of the CARES

Act is not limited to the duration of the

PHE for COVID-19 and therefore the statutory provisions will continue to apply.

B. Diagnostic Testing for COVID-19

Section 6001 of the FFCRA generally

requires group health plans and health insurance issuers offering group or individual health insurance coverage to provide

benefits for COVID-19 diagnostic tests

and certain items and services related to

diagnostic testing for COVID-19 when

those items or services are furnished on or

after March 18, 2020, and during the duration of the PHE for COVID-19. Under

the FFCRA, plans and issuers must provide this coverage without imposing any

cost-sharing requirements (including deductibles, copayments, and coinsurance)

or prior authorization or other medical

management requirements. Section 3201

of the CARES Act, enacted on March

27, 2020, amended section 6001 of the

FFCRA to include a broader range of diagnostic tests that plans and issuers must

cover without any cost-sharing requirements or prior authorization or other medical management requirements.

Section 3202(a) of the CARES Act

provides that a plan or issuer providing

coverage of items or services described

in section 6001(a) of the FFCRA shall

reimburse the provider of the diagnostic

testing at a rate negotiated with the provider, or if there is no negotiated rate, at an

amount that equals the cash price for such

service as listed by the provider on a public internet website. As previously articulated in guidance, the Departments interpret the requirement to provide coverage

without cost sharing in section 6001 of

the FFCRA, together with section 3202(a)

of the CARES Act, as establishing a process for setting reimbursement rates and

protecting participants, beneficiaries, and

enrollees from being balance billed for an

applicable COVID-19 test.11 These provisions help ensure consumers can be tested

for COVID-19 without barriers related to

cost, and are critical to the ability to detect

the virus and stop its spread. However,

testing efforts have continued to be hampered by challenges, such as delays in obtaining results, issues with test accuracy,

and supply shortages.12

The Departments encourage group

health plans and issuers of group or individual health insurance coverage to

consider market-driven approaches to addressing these continued challenges surrounding COVID-19 diagnostic testing.

The Departments encourage plans and

issuers to explore using payment arrangements that create incentives for providers

to reduce the time it takes to provide results for diagnostic testing for COVID-19,

while maintaining the accuracy rates of

their test results in instances where it is

within the ability of providers to address

a delay.

At certain points in this PHE, there

have been wide variations in the time it

takes providers to make test results avail-

able to consumers. These delays in obtaining test results increase the risk that

infected individuals may unknowingly infect others. These delays could be caused

by large volumes of tests to process and/

or inadequate resources. Pay-for-performance arrangements, where reimbursement rates are based on the time it takes to

make test results available, could encourage innovative approaches by providers

to reduce the turnaround time. The Departments encourage group health plans

and issuers of group or individual health

insurance coverage to consider developing such arrangements with providers,

and strongly encourage plans and issuers that do so to incorporate safeguards

to ensure that the payment arrangements

are not structured in a way that prioritizes

speed over accuracy or that result in unintended consequences, such as reduction

in access to COVID-19 diagnostic testing

or non-compliance with balance billing

restrictions.

IV. Provisions of the Interim Final

Rule Regarding State Innovation

Waivers – Department of the Treasury

and Health and Human Services

A. State Innovation Waivers Policy and

Regulatory Revisions in Response to

the PHE for COVID-19 Public Health

Emergency

1. Background

Section 1332 of the PPACA permits

states to apply for a State Innovation

Waiver (also referred to as “section 1332

waivers” or “State Relief and Empowerment Waivers”) to pursue innovative

strategies for providing their residents

with access to higher value, more affordable health coverage. The overarching

goal of section 1332 waivers is to give

all Americans the opportunity to obtain

high value and affordable health coverage regardless of income, geography,

age, sex, or health status, while simultaneously empowering states to develop

health coverage strategies that best meet

FAQs About Families First Coronavirus Response Act and Coronavirus Aid, Relief, and Economic Security Act Implementation Part 43 (June 23, 2020), available at https://www.cms.gov/

files/document/FFCRA-Part-43-FAQs.pdf and https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-43.pdf.

12

American Society for Microbiology, “Supply Shortages Impacting COVID-19 and Non-COVID Testing” (Oct. 15, 2020), available at https://asm.org/Articles/2020/September/Clinical-Microbiology-Supply-Shortage-Collecti-1.

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November 23, 2020

the needs of their residents. Section 1332

waivers provide states an opportunity to

promote a stable health insurance market that offers more choice and affordability to their residents. Under section

1332 of the PPACA, a State Innovation

Waiver can be approved by HHS and the

Department of the Treasury if it provides

access to quality health coverage that is

at least as comprehensive and affordable

as would be provided absent the waiver,

provides coverage to a comparable number of residents of the state as would be

provided coverage absent a waiver, and

does not increase the Federal deficit. To

date, HHS and the Department of the

Treasury have approved 15 state waiver

requests, 14 of which implement statebased reinsurance programs.13 As noted

in a recent data brief issued by CMS, section 1332 state-based reinsurance waivers have resulted in a statewide average

premium reduction ranging from four to

37 percent in calendar year 2020 for residents in states with approved waivers.14

Reinsurance provides a direct benefit to

consumers by paying a portion of provider claims that would otherwise be paid

by consumers through higher premiums

and lowering premiums for people in the

individual health insurance market. HHS

and the Department of the Treasury continue to encourage states to take advantage of the flexibilities available through

section 1332 waivers in order to pursue

solutions to help lower costs and increase

coverage choices for Americans faced

with unaffordable premiums and reduced

competition in the insurance market both

during and after the PHE for COVID-19.

Section 1332(a)(4)(B) of the PPACA

requires the Secretary of HHS and the

Secretary of the Treasury (the Secretaries) to issue regulations regarding procedures for State Innovation Waivers. On

March 14, 2011, HHS and the Department

of the Treasury published the “Application, Review, and Reporting Process for

Waivers for State Innovation” proposed

rule (76 FR 13553) to implement section

1332(a)(4)(B) of the PPACA.15 On February 27, 2012, HHS and the Department

of the Treasury published the “Application, Review, and Reporting Process for

Waivers for State Innovation” final rule

(77 FR 11700) (hereinafter referred to

as the “2012 Final Rule”).16 On October

24, 2018, HHS and the Department of

the Treasury issued the “State Relief and

Empowerment Waivers” guidance (83

FR 53575) (hereinafter referred to as the

“2018 Guidance”), which superseded the

previous guidance published on December 16, 2015 (80 FR 78131), and provided

additional information about the requirements that states must meet regarding

section 1332 waiver proposals, the Secretaries’ application review procedures,

pass-through funding determinations,

certain analytical requirements, and operational considerations.17, 18

Section 1332(a)(4)(B) of the PPACA

also directs HHS and the Department of

the Treasury to issue regulations that provide for state and Federal public notice and

comment sufficient to ensure a meaningful level of public input regarding a state’s

section 1332 waiver plan, both during the

application process and after a waiver is

implemented. Current regulations and

guidance address how states may apply

for a waiver, information states must include in an application, public notice and

comment requirements, and HHS’ and the

Department of the Treasury’s monitoring

and compliance activities, including state

reporting requirements (collectively referred to as public notice procedures).

The Secretaries are setting forth a process for states to request modifications

to the public notice procedures during

the PHE for COVID-19 prior to and after approval of a section 1332 waiver that

continue to meet the statutory and regulatory requirements that the public has an

opportunity to provide meaningful input.

Further the Secretaries are promulgating

this rule so that HHS and the Department

of the Treasury do not impose requirements that are unreasonable or unnecessarily burdensome regarding state compliance consistent with section 1332(a)(4)

(B)(iii) of the PPACA during the PHE for

COVID 19. This IFC promulgates rules to

establish a framework for the Secretaries

to modify some of the existing regulatory public notice procedures to expedite

a decision on a proposed waiver request

during the PHE for COVID-19 when a delay would undermine or compromise the

purpose of the proposed waiver request

and be contrary to the interests of consumers. The Secretaries will also make

available such flexibility regarding public

notice procedures should any state with an

approved section 1332 waiver request an

extension or amendment of an approved

section 1332 waiver during the PHE for

COVID-19.

Similarly, this IFC also establishes a

framework for the Secretaries to modify,

in part, post award public notice procedures for an approved waiver request that

would otherwise take place or become due

during the PHE for COVID-19. The Secretaries will also make available such flexibility for post award public notice procedures for approved waiver extensions,

amendments, or phase-out for a waiver

should those otherwise take place or become due during the PHE for COVID-19.

HHS and the Department of the Treasury

are of the view that section 1332 waivers are a critical tool for states to ensure

patients have stable access to health care

coverage, including during the PHE for

COVID-19. These interim final provisions

are effective immediately for the duration

of the PHE for COVID‑19. HHS and the

Department of the Treasury note that existing threats to consumers’ access to

health coverage or care—such as in geographic areas in which issuer participation

has been low for some time—would not

be considered emergency situations for

purposes of applying the flexibilities adopted in this rulemaking.

More information on section 1332 waivers that are approved is available online: https://www.cms.gov/CCIIO/Programs-and-Initiatives/State-Innovation-Waivers/Section_1332_State_Innovation_Waivers-.

14

CCIIO Data Brief Series: State Relief and Empowerment Waives: State-based Reinsurance Programs. June 2020. Available online: https://www.cms.gov/CCIIO/Programs-and-Initiatives/

State-Innovation-Waivers/Downloads/1332-Data-Brief-June2020.pdf.

15

https://www.govinfo.gov/content/pkg/FR-2011-03-14/pdf/2011-5583.pdf.

16

https://www.govinfo.gov/content/pkg/FR-2012-02-27/pdf/2012-4395.pdf.

17

https://www.govinfo.gov/content/pkg/FR-2018-10-24/pdf/2018-23182.pdf.

18

https://www.govinfo.gov/content/pkg/FR-2015-12-16/pdf/2015-31563.pdf.

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2. Public Notice Procedures and Approval

Processes During the PHE (31 CFR

33.118 and 45 CFR 155.1318)

Section 1332(a)(4)(B) of the PPACA

provides that the Secretary of HHS and

the Secretary of the Treasury shall issue

regulations providing a process for public

notice and comment at the state level, including public hearings, and a process for

providing public notice and comment after the application is received by the Secretaries, that are both sufficient to ensure a

meaningful level of public input. Current

regulations at §§ 33.112 and 155.1312

specify state public notice and participation requirements for proposed waiver requests, and §§ 33.116(b) and 155.1316(b)

specify the accompanying public notice

and comment period requirements under

the Federal public notice and approval

process.

Under the current regulations at

§§ 33.112 and 155.1312, states are required to provide a public notice and

comment period prior to submitting an

application for a new section 1332 waiver.

The notice must include a comprehensive

description of the section 1332 waiver

application; information about where the

application is available for public review;

where the written comments may be submitted; and the location, date, and time of

public hearings that will be convened by

the state to seek public input on the application for a section 1332 waiver.19 After

issuing the public notice and prior to submitting an application for a section 1332

waiver, the state must hold public hearings to allow the public to learn about and

comment on the state’s application, and

must publish the date, time, and location

of the hearings in a prominent location on

the state’s public website.20 As set forth

in §§ 33.112(a)(2) and 155.1312(a)(2),

as part of the public notice and comment

period, a state with one or more federally

recognized tribes must conduct a separate

process for meaningful consultation with

such tribes, if applicable. As HHS and the

Department of the Treasury explained in

the 2012 Final Rule preamble, this tribal

consultation must be conducted in accordance with Executive Order (E.O.) 13175,

and, as E.O. 13175 also applies to Medicaid, a state may use a Medicaid consultation process to satisfy the consultation

needed for a section 1332 waiver (77 FR

11700, 11706). Furthermore, the state

should include in its section 1332 waiver

application a description of issues raised

and comments received.

In addition, under section 1332(a)(4)

(B)(iii) of the PPACA and the existing

implementing regulations at §§ 33.116(b)

and 155.1316(b), the Secretary of HHS

and the Secretary of the Treasury are required to provide a Federal public notice

and comment period following their preliminary determination that a state’s section 1332 waiver application is complete.

Section 1332 waivers may vary significantly in their complexity and breadth.

The existing regulations generally provide

states and the Federal Government flexibility in determining and/or extending

the length of the comment periods. Both

the state and the Federal public notice

and comment periods must be sufficient

to ensure a meaningful level of public

input. The 2018 Guidance21 further specifies that the state comment period should

be no less than 30 days, and explains that

consistent with HHS regulations, waiver

applications must be posted online in a

manner that meets technical standards for

website accessibility similar to applicable

national standards22 to ensure access for

individuals with disabilities.

HHS and the Department of the Treasury recognize that the current section

1332 regulations regarding state and Federal public notice procedures and comment

period requirements may impose barriers

for states pursuing a proposed waiver request during the PHE for COVID-19.23 It

is the mission of HHS to enhance and protect the health and well-being of all Americans. As such, HHS and the Department

of the Treasury are issuing this guidance

to protect public health and to prevent the

spread of COVID-19 by limiting the need

for in-person gatherings related to section

1332 waivers during the PHE. Additionally, states may face uncertainty as to whether their waiver request will be approved in

time, given the state and Federal public

notice procedures or other public participation requirement associated with state

procedures that would otherwise require

an in-person gathering, to expeditiously

reform their health insurance markets and

to protect consumers from the effects of

the PHE for COVID-19. Some states may

not consider more robust changes because

they are concerned that the current section

1332 waiver application requirements are

too time-consuming or burdensome to

pursue during the PHE for COVID-19.

Therefore, HHS and the Department of

the Treasury are of the view that having

the flexibility to modify certain public notice procedures and participation requirements during the PHE for COVID-19 will

protect public health and health insurance

markets, and will increase flexibility and

31 CFR 33.112(b); 45 CFR 155.1312(b).

In response to a question from a commenter, the 2012 Final Rule states that “hearings,” as used in 31 CFR 33.112(c)(1) and 45 CFR 155.1312(c)(1), means no less than two hearings. (77 FR

11700, 11706). The HHS and the Department of Treasury continue to interpret the regulatory requirement that a State shall hold “hearings” to refer to at least two hearings, except as otherwise

provided by the amendments made in this IFC. The existing regulation does not expressly rely on the statutory requirement that the Secretaries of HHS and Treasury establish “a process for

public notice and comment at the State level, including public hearings...,” and HHS and the Department of the Treasury are of the view that language, by itself, does not require a particular

state to hold more than one hearing. Rather, the statutory language describes a process applicable across multiple states, which will, in the aggregate, necessarily involve multiple hearings.

21

83 FR 53575 (https://www.govinfo.gov/content/pkg/FR-2018-10-24/pdf/2018-23182.pdf).

22 “

National standards” refers to standards issued by the Architectural and Transportation Barriers Compliance Board (often referred to as “section 508” standards), or alternatively, the World

Wide Web Consortium’s Web Content Accessibility Guidelines (WCAG) 2.0 Level AA standards. See 83 FR 53575, 53583 (Oct. 24, 2018).

23

During the PHE for COVID-19, under the Secretaries’ discretion, HHS and the Department of the Treasury have allowed states to conduct their public forums virtually, both prior to application submission and post award. For example, following the scheduling and notice of the hearings, and in consultation with CMS, the New Hampshire Insurance Department rescheduled

planned in-person public hearings to an online webinar format in response to social distancing guidance provided by New Hampshire Governor Chris Sununu and the Federal government.

(https://www.nh.gov/insurance/lah/documents/nh-section-1332-waiver-draft.pdf). Georgia also offered public hearings virtually because of public health concerns regarding large, in-person

gatherings during the COVID-19 pandemic. In addition, as of July 13, 2020, several states with approved waivers conducted their post award forum virtually due to COVID-19, including

Alaska, Colorado, Delaware, Maine, Maryland, Minnesota, Montana, Oregon, North Dakota, Rhode Island, and Wisconsin. In this IFC, the Secretaries expand and build upon this approach

by providing more flexibility to allow HHS and the Department of the Treasury to expedite a decision on a proposed waiver request. (https://medicaid.georgia.gov/document/document/

georgia1332waiverapplicationfinal07312020vfpdf/download)

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Bulletin No. 2020–48

1095

November 23, 2020

reduce burdens for states seeking to use

section 1332 waivers as a means of innovation for providing coverage, lowering

premiums, and improving their health

care markets.

Section 1332 waivers are a critical tool

for states to ensure patients across the

country have access to health care coverage. About 10.7 million individuals on

average rely on the Exchanges to purchase

individual health insurance coverage

throughout the year.24, 25 Although recently

there have been positive premium stabilization and insurer participation trends, the

COVID-19 pandemic has introduced new

uncertainties in the individual and small

group markets

This text is long and has been trimmed here. Open the source document for the complete record.