Bulletin No. 2023–44

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2023–44

October 30, 2023

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

INCOME TAX

REG-127391-16, page 1214.

REG-117614-14, page 1193.

This notice of proposed rulemaking modernizes regulations

regarding the sale of a taxpayer’s property that the IRS seizes

by levy. The proposed amendments would allow the IRS to

maximize sale proceeds for the benefit of the taxpayer whose

property the IRS has seized and the public fisc and would

affect all sales of property the IRS seizes by levy.

EXEMPT ORGANIZATIONS

T.D.9981, page 1174.

These final regulations under section 509(a)(3) address the

requirements for section 501(c)(3) organizations to qualify

as public charities when they are operated, supervised or

controlled by one or more supported organizations (Type I

Supporting Organizations) and when they are operated in

connection with one or more supported organizations (Type

III Supporting Organizations). These final regulations provide

rules for qualifying as functionally integrated and non-functionally integrated Type III Supporting Organizations. These final

regulations also provide rules for the prohibition on certain

contributions to Type I and Type III supporting organizations.

Finding Lists begin on page ii.

Treasury Regulation §1.367(b)-10 requires corporations

that acquire parent stock or securities in exchange for

property in connection with certain triangular reorganizations to make adjustments that have the effect of a distribution of property. The proposed regulations set forth

additional rules that apply to a subsequent inbound nonrecognition transaction in cases where those adjustments

are not made.

SPECIAL ANNOUNCEMENT

Notice 2023-71, page 1191.

This notice grants relief under § 7508A of the Internal Revenue

Code to taxpayers affected by the October 7, 2023 terrorist

attacks in the State of Israel. The notice postpones deadlines

for certain time-sensitive taxpayer and government acts for

affected taxpayers for a full year, until October 7, 2024. The

covered area receiving relief under this notice includes the

State of Israel, the West Bank and Gaza. The notice also identifies categories of affected taxpayers and provides a non-exhaustive list of the acts postponed.

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

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of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

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

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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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the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

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This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

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Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

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To the extent practicable, pertinent cross references to these

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

October 30, 2023 

Bulletin No. 2023–44

Part I

26 CFR 1.509(a)-4: Supporting Organizations

T.D. 9981

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Parts 1 and 53

Requirements for Type I

and Type III Supporting

Organizations

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains

final regulations providing guidance on

the prohibition on certain gifts or contributions to Type I and Type III supporting

organizations from persons who control

a supported organization and on certain

other requirements for Type III supporting organizations. The regulations reflect

changes to the law made by the Pension

Protection Act of 2006. The regulations

affect certain Type I and Type III supporting organizations and their supported

organizations.

DATES: Effective date: These regulations

are effective on October 16, 2023.

Applicability date: For dates of applicability, see §1.509(a)-4(I).

FOR FURTHER INFORMATION

CONTACT: Michael Gruccio at (202)

317-4541 or Don Spellmann at (202)

317-4086.

SUPPLEMENTARY INFORMATION:

Background

I. Overview

This document amends the Income Tax

Regulations (26 CFR part 1) by adding

final regulations under section 509(a) of

the Internal Revenue Code (Code). These

October 30, 2023

final regulations amend §1.509(a)-4 to provide guidance on amendments to the Code

enacted by section 1241 of the Pension

Protection Act of 2006 (PPA), Public Law

109-280, 120 Stat. 780 (August 17, 2006).

An organization described in section

501(c)(3) of the Code is classified as either

a private foundation or a public charity. To

be classified as a public charity, an organization must be described in section 509(a)

(1), (2), or (3). Organizations described in

section 509(a)(3) are known as “supporting organizations.” Supporting organizations achieve their public charity status by

providing support to one or more organizations described in section 509(a)(1) or

(2), which, in this context, are referred to

as “supported organizations.”

To be described in section 509(a)(3),

an organization must satisfy (1) an organ­

izational test, (2) an operational test, (3)

a relationship test, and (4) a disqualified

person control test. The organizational

and operational tests require that a supporting organization be organized, and at

all times thereafter operated, exclusively

for the benefit of, to perform the functions

of, or to carry out the purposes of one or

more supported organizations. The relationship test requires a supporting organization to establish one of three types of

relationships with one or more supported

organizations. A supporting organization

that is operated, supervised, or controlled

by one or more supported organizations is

known as a “Type I” supporting organization. The relationship of a Type I supporting organization with its supported

organization(s) is comparable to that of a

corporate parent-subsidiary relationship.

A supporting organization that is supervised or controlled in connection with one

or more supported organizations is known

as a “Type II” supporting organization.

The relationship of a Type II supporting

organization with its supported organization(s) involves common supervision

or control by the persons supervising or

controlling both the supporting organization and the supported organization(s). A

supporting organization that is operated

in connection with one or more supported

organizations is known as a “Type III”

supporting organization and is discussed

further in the remainder of this preamble.

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Finally, the disqualified person control test

requires that a supporting organization not

be controlled directly or indirectly by certain disqualified persons.

Sections 1241 through 1243 of the PPA

revised the requirements for supporting

organizations. These final regulations

under §1.509(a)-4 address section 1241’s

five changes to the requirements an organization must satisfy to qualify as a Type

III supporting organization.

II. PPA Changes to Type III supporting

organizations.

The PPA made the following five

changes to the requirements an organization must satisfy to qualify as a Type III

supporting organization:

(1) Section 1241(c) of the PPA removed

the ability of a charitable trust to rely on

the special rule under §1.509(a)-4(i)(2)

(iii) as then in effect, which allowed a trust

to satisfy the attentiveness requirement of

the integral part test for non-functionally

integrated Type III supporting organizations if the supported organization was

a beneficiary of the trust and state law

allowed the beneficiary to enforce the trust

and compel an accounting of the trust;

(2) Section 1241(d) of the PPA directed

the Secretary of the Treasury or her delegate (Secretary) to promulgate regulations

under section 509 that establish a new distribution requirement for Type III supporting organizations that are not “functionally

integrated” (a non-functionally integrated

(NFI) Type III supporting organization) to

ensure that a “significant amount” is paid

to supported organizations; for this purpose, the term “functionally integrated”

means a Type III supporting organization

that is not required under regulations to

make payments to supported organizations, because the supporting organization

engages in activities that relate to performing the functions of, or carrying out the

purposes of, its supported organization(s);

(3) Section 1241(b) of the PPA required

a Type III supporting organization to provide annually to each of its supported

organizations the information required by

the Department of the Treasury (Treasury

Department) and the IRS (referred to

in §1.509(a)-4(i)(2) as the notification

Bulletin No. 2023–44

requirement) to ensure that the supporting

organization is responsive to the needs or

demands of its supported organization(s);

(4) Section 1241(b) of the PPA also

prohibited a Type III supporting organization from supporting any supported

organization not organized in the United

States; and

(5) Section 1241(b) of the PPA additionally prohibited a Type I or Type III

supporting organization from accepting

any gift or contribution from a person

who, alone or together with certain related

persons, directly or indirectly controls the

governing body of a supported organization of the Type I or Type III supporting

organization.

III. Prior Rulemaking

On August 2, 2007, the Treasury

Department and the IRS published in

the Federal Register (72 FR 42335) an

advanced notice of proposed rulemaking

(ANPRM) (REG-155929-06) in response

to the PPA. The ANPRM described proposed rules to implement the changes

made by the PPA to the Type III supporting organization requirements and solicited comments regarding those proposed

rules.

On September 24, 2009, the Treasury

Department and the IRS published a

notice of proposed rulemaking (REG155929-06) in the Federal Register (74

FR 48672) proposing regulations regarding certain requirements to qualify as a

Type III supporting organization under

the PPA (2009 proposed regulations). The

2009 proposed regulations set forth those

proposed requirements in §1.509(a)-4(i).

On December 28, 2012, the Treasury

Department and the IRS published a

Treasury Decision (TD 9605) in the

Federal Register (77 FR 76382) containing final and temporary regulations under

§1.509(a)-4 regarding the requirements

to qualify as a Type III supporting organization (2012 TD). Also on December

28, 2012, the Treasury Department and

the IRS published a notice of proposed

rulemaking (REG-155929-06) in the

Federal Register (77 FR 76426) containing proposed regulations that incorporated

the text of the temporary regulations in

the 2012 TD by cross-reference. The temporary regulations in the 2012 TD made

Bulletin No. 2023–44

significant changes to the distribution

requirement for NFI Type III supporting

organizations. The 2012 TD adopted other

aspects of the 2009 proposed regulations

with some changes in response to comments and provided transition relief for

Type III supporting organizations in existence on December 28, 2012, that met and

continued to meet the test under former

§1.509(a)-4(i)(3)(ii), known as the “but

for” test, as in effect prior to December 28,

2012, treating them as functionally integrated until the first day of their second

taxable year beginning after December

28, 2012. Upon expiration of this relief

period, the 2012 TD requires these organizations to meet the same rules as all other

supporting organizations to be considered

functionally integrated. The preamble

to the 2012 TD also identified issues for

possible future rulemaking and requested

comments.

On January 6, 2014, the Treasury

Department and the IRS published Notice

2014-4, 2014-2 I.R.B. 274, to provide

additional transition relief for any Type III

supporting organization (1) supporting at

least one supported organization that is

a governmental entity to which the supporting organization is responsive (within

the meaning of §1.509(a)-4(i)(3)) and (2)

engaging in activities for or on behalf of

the governmental supported organization

that perform the functions of, or carry out

the purposes of, the governmental supported organization and that, but for the

involvement of the supporting organization, would normally be engaged in by

the governmental supported organization

itself. Notice 2014-4 stated that such an

organization will be treated as a functionally integrated Type III supporting organization until the earlier of the date final

regulations under §1.509(a)-4(i)(4)(iv) are

published in the Federal Register or the

first day of the organization’s third taxable

year beginning after December 31, 2013.

On December 23, 2015, the Treasury

Department and the IRS published a

Treasury Decision (TD 9746) in the

Federal Register (80 FR 79684) containing final regulations under §1.509(a)-4(i)

regarding the distribution requirement for

NFI Type III supporting organizations,

finalizing the rule in the 2012 proposed

and temporary regulations with very

minor changes (2015 final regulations).

1175

The preamble to the 2015 final regulations indicated that additional proposed

regulations would be forthcoming to provide additional guidance for Type III supporting organizations, including specific

rules under §1.509(a)-4(i)(4)(iv) for Type

III supporting organizations that support

governmental supported organizations;

the 2012 TD had reserved §1.509(a)-4(i)

(4)(iv). In addition, the preamble to the

2015 final regulations indicated that supporting organizations that support a governmental supported organization could

continue to rely on Notice 2014-4 until the

date of publication of the new proposed

regulations.

On February 19, 2016, the Treasury

Department and the IRS published a

notice of proposed rulemaking (REG118867-10) in the Federal Register (81

FR 8446) containing proposed regulations

under §1.509(a)-4(f) and (i) regarding

the prohibition on certain contributions

to Type I and Type III supporting organizations and the requirements for Type III

supporting organizations (2016 proposed

regulations). The 2016 proposed regulations addressed issues identified in the

preamble to the 2012 TD as well as the

comments (six in total) on the 2012 TD

and Notice 2014-4.

The Treasury Department and the IRS

received six comments in response to the

2016 proposed regulations. The comments are available for public inspection

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

request. No public hearing was requested.

After considering the comments received,

the Treasury Department and the IRS

adopt the 2016 proposed regulations

in these final regulations with certain

revisions described in the Summary of

Comments and Explanation of Revisions.

Summary of Comments and

Explanation of Revisions

I. Overview

This Summary of Comments and

Explanation of Revisions addresses the

comments that the Treasury Department

and the IRS received in response to the

2016 proposed regulations and describes

the revisions adopted in these final regulations. As described in this Summary

of Comments and Explanation of

October 30, 2023

Revisions, these final regulations define

the term “control” for purposes of section 509(f)(2), which prohibits a Type I

or Type III supporting organization

from accepting any gift or contribution

from any person who controls the governing body of the supported organization(s). These final regulations also set

forth additional rules and requirements

for Type III supporting organizations,

including (1) additional requirements to

meet the responsiveness test for all Type

III supporting organizations; (2) additional rules regarding the qualification

of an organization as a functionally integrated Type III supporting organization

under §1.509(a)-4(i)(4), including specific rules for supporting organizations

that support governmental supported

organizations; and (3) additional rules

regarding the required annual distributions under §1.509(a)-4(i)(5) by an NFI

Type III supporting organization.

II. Contributions from Controlling

Donors – Meaning of Control

Section 509(f)(2) and §1.509(a)-4(f)

(5) prohibit Type I and Type III supporting organizations from accepting

any gift or contribution from any person

(other than an organization described in

section 509(a)(1), (2), or (4)) who, alone

or together with certain related persons

(as described in §1.509(a)-4(f)(5)(i)(B)

or (C)), directly or indirectly controls

the governing body of a supported organization of the Type I or Type III supporting organization, or from persons

related to a person possessing such control. Section 509(f)(2) does not define

“directly or indirectly controls.” The

2012 TD reserved §1.509(a)-4(f)(5)(ii),

titled “Meaning of control,” for future

proposed regulations.

The 2016 proposed regulations

proposed defining “control” consistently with the definition of control in

§1.509(a)-4(j), which relates to control

by disqualified persons for purposes of

the disqualified person control test in

section 509(a)(3)(C) and §1.509(a)-4(a)

(4). In general, under the 2016 proposed

regulations, the governing body of a supported organization is considered “controlled” by a person if that person, alone

or by aggregating his or her votes or

October 30, 2023

positions of authority with certain related

persons described in §1.509(a)-4(f)(5)

(i)(B) or (C), may require the governing

body of the supported organization to

perform any act that significantly affects

its operations or may prevent the governing body of the supported organization

from performing any such act.

These final regulations adopt the definition of “control” proposed in the 2016

proposed regulations with minor changes

to add clarity. These final regulations make

clear that control exists if one or more persons described in §1.509(a)-4(f)(5)(i)(A),

(B), or (C) hold 50 percent or more of the

total voting power of the governing body

or have the right to exercise veto power

over the actions of the governing body.

These final regulations also incorporate

language from §1.509(a)-4(j)(1) to make

clear that even if persons do not have control by virtue of having 50 percent or more

of the voting power or a veto power, all

pertinent facts and circumstances will be

taken into consideration in determining

whether such persons do in fact directly or

indirectly control the governing body of a

supported organization.

One commenter stated that if a parent

supporting organization controls a supported organization, section 509(f)(2)

would prohibit Type I and Type III supporting organizations of that controlled

supported organization from accepting

any gift or contribution from the parent

supporting organization. To allow these

contributions, the commenter recommended excluding from the definition of

control the control a parent supporting

organization exercises over its supported

organizations.

Section 509(f)(2) only excepts gifts

or contributions from organizations

described in section 509(a)(1), (2), and

(4). Congress did not provide an exception for section 509(a)(3) organizations.

For this reason, the commenter’s recommendation is not consistent with section

509(f)(2), and these final regulations do

not adopt it.

III. Type III Supporting Organization

Relationship Test

Section 1.509(a)-4(i)(1) provides that,

for each taxable year, a Type III supporting

organization must satisfy (i) a notification

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requirement, (ii) a responsiveness test,

and (iii) an integral part test provided in

the regulations. The 2016 proposed regulations proposed additional rules regarding each of these requirements. These

final regulations adopt the 2016 proposed

rules with the modifications described in

this part III.

A. Notification Requirement

Section 509(f)(1)(A) provides that

an organization will not be considered a

Type III supporting organization unless

the organization provides to each supported organization, for each taxable

year, such information as the Secretary

may require to ensure that the organization is responsive to the needs or

demands of the supported organizations.

To satisfy this notification requirement,

§1.509(a)–4(i)(2) requires a Type III

supporting organization to provide to

each of its supported organizations for

each taxable year: (1) A written notice

addressed to a principal officer of the

supported organization describing the

type and amount of all of the support it

provided to the supported organization

during the supporting organization’s preceding taxable year; (2) a copy of the

supporting organization’s most recently

filed Form 990, Return of Organization

Exempt from Income Tax, or other annual

information return required to be filed

under section 6033; and (3) a copy of

the supporting organization’s governing

documents, including any amendments

(unless previously provided and not subsequently amended). The 2016 proposed

regulations proposed clarifying that for

NFI Type III supporting organizations

the description of support in the written

notice must include all of the distributions described in §1.509(a)–4(i)(6) to

the supported organization. These final

regulations adopt this clarification.

Section 1.509(a)–4(i)(2)(iii) requires

that the notification be transmitted by the

last day of the fifth calendar month following the close of “that taxable year.”

Due to the lack of clarity regarding the

reference to “that taxable year,” the 2016

proposed regulations proposed amending §1.509(a)-4(i)(2) to clarify that a

supporting organization must deliver

the required documents to each of its

Bulletin No. 2023–44

supported organizations by the last day

of the fifth month of the supporting organization’s taxable year after the taxable

year in which it provided the support it is

reporting. The preamble to the 2016 proposed regulations stated that the proposed

change is intended to reduce confusion

but does not substantively change the due

date or the content of the required notification. The preamble also stated that the

date of delivery is determined by applying the general principles of section 7502.

The final regulations adopt this proposed

amendment without change.

One commenter requested clarification that the annual written notice may

summarize all the programs and services

a supporting organization performs for

its supported organization. The Treasury

Department and the IRS agree that a supporting organization may summarize its

activities directly furthering the exempt

purpose of the supported organization as

long as that summary provides sufficient

notice to the supported organization on

the character of the activity and its related

costs. The report must include a brief narrative description of the support provided

and sufficient financial detail for the recipient to identify the types and amounts of

support being reported.

B. Responsiveness Test

Section 1.509(a)-4(i)(3)(i) provides

that a supporting organization meets the

responsiveness test if it is “responsive

to the needs or demands of a supported

organization.” To meet this responsiveness test, an organization must satisfy two elements—the “relationship

requirement” and the “significant voice

requirement.” Under the relationship

requirement, described in §1.509(a)-4(i)

(3)(ii), the officers, directors, or trustees

of the organization must have one of three

specified relationships with the officers,

directors, or trustees (and in some cases

the members) of the supported organization. Under the significant voice requirement, described in §1.509(a)-4(i)(3)(iii),

the officers, directors, or trustees of the

supported organization, by reason of their

relationships described in §1.509(a)-4(i)

(3)(ii), must have a significant voice in

the investment policies of the supporting

organization, the timing of grants, the

Bulletin No. 2023–44

manner of making grants, and the selection of grant recipients by the supporting

organization, and in otherwise directing

the use of the income or assets of the supporting organization.

The preamble to the 2012 TD stated

that, in determining the appropriate distribution amount for NFI Type III supporting

organizations, the Treasury Department

and the IRS considered the required relationship between a supporting organization and its supported organizations, and

that the Treasury Department and the IRS

intended to issue proposed regulations in

the future that would amend the responsiveness test by requiring a Type III supporting organization to be responsive to

all of its supported organizations.

In response to this proposal in the preamble to the 2012 TD, one commenter

stated that a supporting organization

should not be required to be responsive to

all of its supported organizations because

the resulting administrative burden would

effectively limit the total number of organizations a supporting organization could

support. The commenter suggested alternatives under which a supporting organization would be responsive to only a

subset of its supported organizations that

would vary from year to year.

As stated in the preamble to the 2016

proposed regulations, the distinguishing characteristic of Type III supporting

organizations, and the basis for their public charity classification, is that they are

responsive to and significantly involved

in the operations of their publicly supported organizations. See §1.509(a)-4(f)

(4). Unless a Type III supporting organization is responsive to each of its supported

organizations, the supported organizations cannot exercise the requisite level

of oversight of and engagement with

the supporting organization. Limiting

the responsiveness requirement to fewer

than all of the supported organizations

may result in the necessary oversight and

accountability being present for less than

all of a supporting organization’s operations. Consistent with this view, the 2016

proposed regulations proposed revising

§1.509(a)-4(i)(3)(i) to require a supporting organization to be responsive to the

needs and demands of each of its supported organizations to meet the responsiveness test.

1177

In addition, to illustrate how concerns about potential administrative burdens may be addressed consistent with

the revised responsiveness test, the 2016

proposed regulations proposed a new

Example 3 in §1.509(a)-4(i)(3)(iv) to

demonstrate one way in which a Type III

supporting organization that supports

multiple organizations may satisfy the

responsiveness test in a manner that can

be cost-effective. The Example shows that

a supporting organization can meet the

relationship requirement in §1.509(a)-4(i)

(3)(ii) in different ways with respect to

each of its supported organizations. The

Example also shows how a supporting

organization can organize and hold regular meetings, provide information, and

encourage communication to help ensure

that its supported organizations have a

significant voice in the operations of the

supporting organization.

As noted in the preamble to the 2016

proposed regulations, another commenter in response to the preamble of the

2012 TD requested additional guidance

regarding the ability of trusts to satisfy

the significant voice requirement of the

responsiveness test. The new Example

3 in the 2016 proposed regulations provides further illustration of how Type III

supporting organizations, including charitable trusts, might satisfy the significant

voice requirement of the responsiveness

test. The Treasury Department and the

IRS note that although the examples in

the regulations relating to the responsiveness test may involve a Type III

supporting organization that is organized as either a corporation or a trust,

the applicable law and relevant regulatory provisions, as modified by the final

regulations, are applicable to all Type

III supporting organizations in the same

manner, whether they are organized as

corporations or trusts.

As the preamble to the 2016 proposed regulations stated, the Treasury

Department and the IRS anticipate that

Type III supporting organizations may be

able to demonstrate that they satisfy the

responsiveness test in a variety of ways,

and that the determination will be based

on all the facts and circumstances.

As a result of the proposed changes

to the responsiveness test, the 2016 proposed regulations also include conforming

October 30, 2023

changes to examples and other regulatory

provisions, specifically, removing references to “supported organizations to

which the supporting organization is

responsive” since the supporting organization is to be responsive to each supported organization.

Two commenters to the 2016 proposed

regulations address the responsiveness

test, agreeing with the proposed amendments to §1.509(a)-4(i)(3)(i) and the new

example in §1.509(a)-4(i)(3)(iv). Thus,

these final regulations adopt these proposed amendments without change.

C. Integral Part Test – Functionally

Integrated Type III Supporting

Organizations

Section 1.509(a)-4(i)(1)(iii) provides

that, for each taxable year, a Type III

supporting organization must satisfy the

integral part test. The integral part test

under §1.509(a)-4(i)(1)(iii) is satisfied by

maintaining significant involvement in

the operations of one or more supported

organizations and providing support on

which the supported organizations are

dependent. To satisfy this test, a Type III

supporting organization must meet the

requirements either for a functionally integrated Type III supporting organization or

for an NFI Type III supporting organization, as set forth in §1.509(a)-4(i)(4) or

(5), respectively.

One commenter to the 2016 proposed

regulations stated that the cross reference

in §1.509(a)-4(d)(4)(i)(C) to the integral

part test should be corrected to conform

to the amendments made by the 2012 TD.

The final regulations adopt this recommendation and revise §1.509(a)-4(d)(4)

(i)(C) to reference the requirements of the

integral part test set forth in §1.509(a)-4(i)

(1)(iii).

A Type III supporting organization is functionally integrated under

§1.509(a)-4(i)(4) if it (1) engages in activities substantially all of which directly

further the exempt purposes of one or

more supported organizations and otherwise meets the requirements described in

paragraph (i)(4)(ii) of that section, (2) is

the parent of each of its supported organizations as described in paragraph (i)

(4)(iii) of that section, or (3) supports a

governmental supported organization and

October 30, 2023

otherwise meets the requirements of paragraph (i)(4)(iv) of that section.

1. “Substantially All” Test

Section 1.509(a)-4(i)(4)(ii)(B) provides that all pertinent facts and circumstances will be taken into consideration

in determining whether substantially all

of a supporting organization’s activities

directly further the exempt purposes of

its supported organization(s). One commenter to the 2016 proposed regulations

requested that supporting organizations

be given the option of meeting the “substantially all” test on average over a threeor five-year period. The commenter also

recommended that transition relief be

provided if an organization does not meet

the test over the most recent three or five

years before the promulgation of final

regulations.

The 2012 TD adopted the substantially all test in §1.509(a)-4(i)(4)(ii).

The 2012 TD also provided transition

relief in §1.509(a)-4(i)(11)(ii) for existing organizations to adjust to the new

rules. The 2016 proposed regulations did

not include any substantive changes to

§1.509(a)-4(i)(4)(ii). Furthermore, the

substantially all test in §1.509(a)-4(i)(4)

(ii)(B) takes into consideration all pertinent facts and circumstances, which

allows for some consideration of yearto-year changes in activities. Finally, the

Treasury Department and the IRS note

that the commenter’s proposed multi-year

averaging test would be complex, create

uncertainty about a supporting organization’s functionally integrated status at the

close of each taxable year, and would be

difficult to administer. For these reasons,

the final regulations do not adopt this

recommendation.

2. Parent of Each Supported Organization

Under §1.509(a)-4(i)(4)(iii), a supporting organization is the parent of a supported organization, and thus is deemed

to be functionally integrated, if the supporting organization exercises a substantial degree of direction over the policies,

programs, and activities of the supported

organization and a majority of the officers, directors, or trustees of the supported

organization is appointed or elected,

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directly or indirectly, by the governing

body, members of the governing body, or

officers (acting in their official capacities)

of the supporting organization.

As the 2009 proposed regulations

noted, the classification of a parent organization as functionally integrated was

intended to “apply to supporting organizations that oversee or facilitate the

operation of an integrated system, such

as hospital systems.” To more fully

accomplish this objective, the 2016 proposed regulations proposed a revision to

§1.509(a)-4(i)(4)(iii) clarifying that for a

supporting organization to qualify as the

parent of each of its supported organizations, the supporting organization and its

supported organizations must be part of

an integrated system (such as a hospital

system), and the supporting organization

must engage in activities typical of the

parent of an integrated system. The 2016

proposed regulations stated that examples

of these activities include (but are not limited to) coordinating the activities of the

supported organizations and engaging in

overall planning, policy development,

budgeting, and resource allocation for the

supported organizations.

One commenter requested that the final

regulations provide additional examples

of integrated systems, such as private

schools and universities, continuing care

retirement communities, and residential

rehabilitation facilities. The parenthetical

in the 2016 proposed regulations—such as

a hospital system—is stated as only one

example and is not exclusive. This section of the regulations applies to any type

of integrated system of which the parent

organization and its supported organizations are a part. The test is whether

the structure is that of an integrated system and whether the requirements of

§1.509(a)-4(i)(4)(iii) are satisfied, not

whether the system is in a particular

industry. The Treasury Department and

the IRS conclude that it is unnecessary to

add other examples of industries that may

have integrated systems; doing so at this

time may indicate that any industries not

specifically mentioned in the final regulations are excluded. Accordingly, the final

regulations do not adopt the commenter’s

request to provide additional examples.

Nevertheless, in response to the comment

and to make clear that a hospital system is

Bulletin No. 2023–44

just one example of an integrated system,

the final regulations revise the parenthetical in the 2016 proposed regulations to

read as follows: (such as, for example, a

hospital system).

The commenter also recommended

including additional examples of activities

that are typical of a parent of an integrated

system and suggested that the examples

might include financial planning and forecasting, legal services, human resources,

information management, billing and collection services, marketing, and community outreach and education. The Treasury

Department and the IRS note that the list

of activities in the 2016 proposed regulations was only illustrative of how a parent

directs the overall policies, programs, and

activities of the supported organizations

within the integrated system and was not

exclusive. Thus, the absence of any particular activity, such as financial planning,

from this list is not determinative. The

final regulations clarify that a parent of

an integrated system of supported organizations must direct the overall policies,

programs, and activities of the supported

organizations (such as, for example, coordinating the activities of the supported

organizations and engaging in overall

planning, policy development, budgeting,

and resource allocation). The Treasury

Department and the IRS note that a parent

of an integrated system may also perform

system-wide administrative services, such

as the examples provided by the commenter, in conjunction with directing the

overall policies, programs, and activities

of the supported organizations. For clarity, these final regulations omit the defined

term “activities typical of a parent” in

proposed §1.509(a)-4(i)(4)(iii). The 2016

proposed regulations proposed to retain

the requirement in §1.509(a)-4(i)(4)(iii)

that the governing body, members of the

governing body, or officers of a parent

supporting organization must appoint or

elect a majority of the officers, directors,

or trustees of the supported organization.

The preamble to the 2016 proposed regulations stated that the use of the phrase

“appointed or elected, directly or indirectly” means the supporting organization

could qualify as a parent of a second-tier

(or lower) subsidiary. Thus, for example,

if the directors of supporting organization A appoint a majority of the directors

Bulletin No. 2023–44

of supported organization B, which in

turn appoints a majority of the directors

of supported organization C, the directors of supporting organization A will be

treated as appointing the majority of the

directors of both supported organization B

and supported organization C. One commenter agreed with this interpretation and

requested that it be addressed in the final

regulations. These final regulations adopt

this recommendation.

As stated in the preamble to the 2016

proposed regulations, the Treasury

Department and the IRS interpret the

existing requirement under §1.509(a)-4(i)

(4)(iii) that the parent organization have

the power to appoint or elect a majority

of the officers, directors, or trustees of

each supported organization to include the

requirement that the parent organization

also have the power to remove and replace

such officers, directors, or trustees, or otherwise have an ongoing power to appoint

or elect with reasonable frequency. One

commenter requested that language

reflecting this interpretation be specifically added to §1.509(a)-4(i)(4)(iii). The

final regulations adopt this commenter’s

recommendation.

3. Supporting a Governmental Supported

Organization

The 2012 TD reserved §1.509(a)-4(i)

(4)(iv) for future guidance on how a

Type III supporting organization can

qualify as functionally integrated by supporting a governmental entity. As interim

guidance, Notice 2014-4 provided that a

Type III supporting organization will be

treated as functionally integrated if it (i)

supports a supported organization that is

a governmental entity to which the supporting organization is responsive; and

(ii) engages in activities for or on behalf

of that governmental supported organization that perform the functions of, or

carry out the purposes of, that governmental supported organization and that,

but for the involvement of the supporting

organization, would normally be engaged

in by the governmental supported organization itself. This interim guidance was

subsequently extended by the 2015 final

regulations. The 2016 proposed regulations proposed new rules under which a

Type III supporting organization would

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qualify as functionally integrated by supporting governmental supported organizations. These final regulations adopt the

proposed §1.509(a)-4(i)(4)(iv), with the

modifications discussed in the following

paragraphs.

The 2016 proposed regulations proposed that a supporting organization that

only supports governmental supported

organizations would be considered functionally integrated if a substantial part

of its total activities directly further the

exempt purposes of its governmental supported organizations and, if the supporting

organization supports more than one governmental supported organization, all of

its governmental supported organizations

either: (1) Operate within the same geographic region (defined as a city, county,

or metropolitan area); or (2) work in close

coordination or collaboration with each

other to conduct a service, program, or

activity that the supporting organization

supports. The 2016 proposed regulations

proposed defining a governmental supported organization as a governmental

unit described in section 170(c)(1), or an

organization described in section 170(c)

(2) and (b)(1)(A) (other than in clauses

(vii) and (viii)) that is an instrumentality of

one or more governmental units described

in section 170(c)(1). To satisfy the close

coordination or collaboration requirement, the proposed regulations proposed

requiring a supporting organization to

maintain on file a letter from each of the

governmental supported organizations (or

a joint letter from all of them) describing

their coordination or collaboration efforts

with respect to the particular service,

program, or activity. The 2016 proposed

regulations proposed an exception to this

rule for certain pre-existing organizations

that support no more than one non-governmental supported organization along

with one or more governmental supported

organizations, as well as a transition rule

for pre-existing organizations that continue to meet the requirements of Notice

2014-4.

Two commenters recommended that

Type III functionally integrated supporting

organizations should not be limited to only

supporting governmental supported organizations. One commenter proposed that

a supporting organization which supports

both governmental and non-governmental

October 30, 2023

supported organizations should qualify as

functionally integrated if the supporting

organization (i) conducts activities that

perform the functions of or carry out the

purposes of its governmental supported

organization(s), (ii) its non-governmental supported organizations operate in the

same geographic region or work in close

coordination or collaboration with the

governmental supported organization(s),

and (iii) substantially all of the supporting

organization’s activities directly further

the exempt purposes of its governmental

supported organization(s).

The other commenter recommended

replacing the requirement that all supported organizations be governmental supported organizations with a new

requirement that substantially all the

activities of the supporting organization

either (i) directly further the purposes of

the governmental supported organizations, or (ii) consist of grantmaking, fundraising, or investing for governmental

supported organizations that meet either

the same geographic region or close coordination and collaboration requirements in

the 2016 proposed regulations.

A third commenter requested that,

when a supporting organization supports

more than one governmental supported

organization, the governmental supported

organizations should only be required to

work in close coordination or collaboration. The commenter requested deleting

the requirement that the governmental

supported organizations conduct a service, program, or activity that the supporting organization supports.

The 2016 proposed regulations proposed allowing certain Type III supporting

organizations that support governmental

supported organizations to be classified

as functionally integrated on the basis

that the involvement of the governmental

supported organizations in the supporting

organization’s activities would minimize

the potential for abuse. As stated in the

preamble to the 2016 proposed regulations, requiring close cooperation and collaboration on a common service, program,

or activity that the supporting organization

supports helps ensure that the governmental supported organizations will provide

sufficient input to and oversight of the

supporting organization. Moreover, the

coordination and collaboration between

October 30, 2023

the governmental supported organizations would be greatly diminished if they

engaged in different services, programs,

or activities. Furthermore, governmental

input and oversight would be diluted if

the definition of functionally integrated

were expanded to permit these supporting

organizations to support and be responsive to non-governmental supported organizations as well. Additionally, for the

reasons discussed later in this preamble,

the Treasury Department and the IRS utilize the substantial part test for supporting

governmental supported organizations

(instead of the substantially all test) but

specifically exclude grant making and

other financial activities from the definition of activities that directly further the

exempt purposes of the governmental

supported organizations. Accordingly,

these final regulations do not adopt these

recommendations. For clarity, these final

regulations omit the defined term “geographic region” contained in proposed

§1.509(a)-4(i)(4)(iv)(C).

As noted previously in this preamble,

the 2016 proposed regulations proposed

that, for simplicity and administrability,

the term “governmental supported organization” be defined using an existing

Code definition of governmental unit.

Three commenters stated their support for

this definition. Thus, the final regulations

adopt the definition in the 2016 proposed

regulations with the clarification described

in the following paragraph.

The preamble to the 2016 proposed

regulations noted that, because a governmental unit described in section 170(c)(1)

includes all of the agencies, departments,

and divisions of that governmental unit,

all such agencies, departments, and divisions will be treated as one governmental supported organization for purposes

of §1.509(a)-4(i)(4)(iv). One commenter

stated its support for this position and

requested that it be specifically written

into the regulations. These final regulations adopt this commenter’s recommendation. The final regulations specifically

state that a governmental unit includes

all of its agencies, departments, and divisions, and that they will be treated as one

governmental supported organization for

these purposes.

One commenter on the 2016 proposed regulations requested that an

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instrumentality of a governmental supported organization and the governmental supported organization with respect

to which it is an instrumentality should

be treated as one governmental supported

organization. The final regulations do

not adopt this recommendation because,

unlike an agency, department, or division

of a governmental unit, an instrumentality

described in §1.509(a)-4(i)(4)(iv)(B)(2) is

a separate legal entity.

The 2016 proposed regulations also

proposed that supporting organizations

that support only governmental supported

organizations may qualify as functionally

integrated only if a “substantial part” of

their activities directly furthers the exempt

purposes of their governmental supported

organization(s). The 2016 proposed regulations proposed using the same definition of “directly further” contained in

§1.509(a)-4(i)(4)(ii)(C), the integral part

test for functionally integrated Type III

supporting organizations, as promulgated

in the 2012 TD. This definition provides

that fundraising, making grants, and

investing and managing non-exempt-use

assets are not activities that directly further the exempt purposes of the supported

organization.

One commenter recommended that

fundraising, making grants, and investing and managing non-exempt-use assets

should be considered activities that directly

further the exempt purposes of a governmental supported organization. The

Treasury Department and the IRS determined that a Type III supporting organization should qualify as functionally

integrated only if the supporting organization itself conducts activities that perform

the functions of or carry out the purposes

of its supported organization (as distinguished from providing financial support for the activities carried out by the

supported organization). As the 2012 TD

stated, fundraising, making grants, and

investing and managing non-exempt-use

assets relate to producing and distributing

income to finance the charitable activities

directly carried out by the supported organization. The 2016 proposed regulations

did not adopt comments seeking to apply

a different definition of ‘‘directly further’’

to supporting organizations that support

governmental supported organizations.

These final regulations do not adopt the

Bulletin No. 2023–44

commenter’s proposal because using a

different definition of “directly further”

for governmental supported organizations

would undermine a fundamental distinction that §1.509(a)-4(i)(4) makes between

functionally integrated and NFI Type III

supporting organizations, i.e., directly conducting charitable activities versus financing charitable activities. The Treasury

Department and the IRS also note the

complexity and administrative difficulty of

applying different definitions of “directly

further” under the integral part test.

These final regulations adopt the

requirement in the 2016 proposed regulations that a substantial part of the supporting organization’s total activities must

directly further the exempt purposes of its

governmental supported organizations.

These final regulations also add a new

example to clarify that a supporting organization can meet this requirement and

still make grants to one of its governmental supported organizations as a substantial part of its activities. As the preamble to

the 2016 proposed regulations stated, the

“substantial part” test in §1.509(a)-4(i)(4)

(iv) allows these supporting organizations

to conduct more fundraising and other

financial activities, if certain requirements

are met, than is permitted under the “substantially all” test of §1.509(a)-4(i)(4)(ii)

that applies generally to be a functionally

integrated Type III supporting organization. One commenter requested confirmation concerning the identity of these

certain requirements that must be met.

Under §1.509(a)-4(i)(4) as promulgated

by the 2012 TD and amplified by these

final regulations in providing the rules

for supporting governmental supported

organizations, the organization must meet

the annual notification requirement in

§1.509(a)-4(i)(2) and the responsiveness

test in §1.509(a)-4(i)(3), in addition to the

specific requirements in §1.509(a)-4(i)

(4)(iv), in order to be a functionally integrated Type III supporting organization by

virtue of supporting governmental supported organizations.

One commenter recommended providing a clear definition of what constitutes

a substantial part of a supporting organization’s total activities for purposes of

meeting §1.509(a)-4(i)(4)(iv). Another

commenter recommended not adopting a

bright line rule to measure the quantity of

Bulletin No. 2023–44

activities that equal a substantial part, but

requested a statement in the final regulations that all pertinent facts and circumstances will be taken into account. This

commenter also requested more examples of activities that directly further the

exempt purpose of the governmental supported organization and clarification in

the regulations to require that a substantial

part of a supporting organization’s activities directly further the exempt purposes

of “at least one” (as opposed to all) of its

governmental supported organizations

when the governmental supported organizations share a common geographic

region.

In response to these comments,

the final regulations revise proposed

§1.509(a)-4(i)(4)(iv) to provide that, in

determining whether a substantial part of

a supporting organization’s total activities

directly further the exempt purposes of its

governmental supported organization(s),

all pertinent facts and circumstances

will be taken into consideration. This

approach is consistent with the approach

in §1.509(a)-4(i)(4)(ii)(B), which determines “substantially all” for the general

test of being functionally integrated by

considering all pertinent facts and circumstances. The final regulations also revise

proposed §1.509(a)-4(i)(4)(iv)(A) and add

a new example in §1.509(a)-4(i)(4)(v) to

make clear that a supporting organization

that supports more than one governmental supported organization as described

in §1.509(a)-4(i)(4)(iv)(A) satisfies the

substantial part test if a substantial part of

its activities directly furthers the exempt

purpose of at least one of its governmental

supported organizations.

One commenter stated that proposed

§1.509(a)-4(i)(4)(iv)(A)(1)(ii), which

uses the phrase “close coordination or

collaboration,” should be made consistent

with proposed §1.509(a)-4(i)(4)(iv)(D),

which uses the phrase “close cooperation

or coordination.” The final regulations

adopt this recommendation and make

the provisions consistent by changing the

phrasing in §1.509(a)-4(i)(4)(iv)(C) of the

final regulations to “close coordination or

collaboration.” No substantive change is

intended by this revision.

The 2016 proposed regulations proposed an exception to the general rule

for supporting organizations that support

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governmental supported organizations.

The exception would treat a Type III

supporting organization in existence on

or before February 19, 2016 (the date of

the issuance of the 2016 proposed regulations), as functionally integrated if: (1)

It supports one or more governmental

supported organizations and no more than

one supported organization that is not a

governmental supported organization; (2)

it designated each of its supported organizations as provided in §1.509(a)-4(d)

(4) on or before February 19, 2016; and

(3) a substantial part of its total activities

directly furthers the exempt purposes of its

governmental supported organization(s).

One commenter stated that the proposed

exception would allow it and similar organizations currently to qualify as functionally integrated. The final regulations adopt

the proposed exception without change.

The 2016 proposed regulations also

proposed further extending the transition relief provided in Notice 2014-4 and

extended in the preamble to the 2015 final

regulations. Under the 2016 proposed

regulations, a Type III supporting organization in existence on or before February

19, 2016, that met and continues to meet

the requirements of Notice 2014-4 would

be treated as functionally integrated until

the earlier of the first day of the organization’s first taxable year beginning after

the date final regulations are published

under §1.509(a)-4(i)(4)(iv) or the first

day of the organization’s second taxable

year beginning after February 19, 2016.

The Treasury Department and the IRS

did not receive any comments about the

transition rule or any requests to extend

the transition period in the 2016 proposed

regulations, which now has expired. The

Treasury Department and the IRS therefore conclude supporting organizations

have had sufficient time to adjust to the

new rules and further transition relief is

not necessary. Accordingly, these final

regulations do not provide a further extension of the transition relief proposed in the

2016 proposed regulations.

D. Integral Part Test – Non-Functionally

Integrated Type III Supporting

Organizations

Section 1.509(a)-4(i)(5) provides

that a supporting organization meets the

October 30, 2023

integral part test to be an NFI Type III

supporting organization if it satisfies the

distribution requirement of §1.509(a)-4(i)

(5)(ii) and the attentiveness requirement

of §1.509(a)-4(i)(5)(iii), or the pre-November 2, 1970, trust requirements of

§1.509(a)-4(i)(9). Section 1.509(a)-4(i)

(5)(ii) provides that, with respect to each

taxable year, a supporting organization

must distribute to or for the use of one or

more supported organizations an amount

equaling or exceeding its “distributable

amount.” Section 1.509(a)-4(i)(6) provides the amount of a distribution made to

a supported organization is the amount of

cash or the fair market value of the property distributed.

The 2016 proposed regulations proposed

revising

§1.509(a)-4(i)(5)(ii)

to state that a supporting organization

must make distributions as described in

§1.509(a)-4(i)(6) in a total amount equaling or exceeding the supporting organization’s distributable amount to satisfy the

distribution requirement, and proposed

revising §1.509(a)-4(i)(6) to describe in

detail what distributions count toward

satisfying the distribution requirement.

These final regulations adopt these proposed revisions, explained as follows,

without change.

1. No Reduction of Distributable Amount

for Taxes Subtitle A Imposes

Section 1.509(a)-4(i)(5)(ii)(B) provides that the distributable amount is

equal to the greater of 85 percent of an

organization’s adjusted net income for

the immediately preceding taxable year

(as determined by applying the principles of section 4942(f) of the Code and

§53.4942(a)-2(d)) or its minimum asset

amount for the immediately preceding

taxable year, reduced by the amount of

taxes imposed on the supporting organization under subtitle A of the Code (subtitle

A) during the immediately preceding taxable year.

Because the taxes under subtitle A are

imposed on a supporting organization’s

unrelated business taxable income (pursuant to section 511 of the Code) and

the activity that produces the unrelated

business taxable income does not further

the supported organization’s exempt purposes, the preamble to the 2016 proposed

October 30, 2023

regulations stated that these taxes should

not be treated as the functional equivalent

of an amount distributed to a supported

organization. The 2016 proposed regulations, therefore, proposed removing the

provision in §1.509(a)-4(i)(5)(ii)(B) that

reduces the distributable amount by the

amount of taxes subtitle A imposed on a

supporting organization during the immediately preceding taxable year.

One commenter stated that the distributable amount should be reduced by the

amount of taxes imposed on the supporting

organization’s unrelated business income,

as section 4942(d) provides for private

foundations. In advocating to retain the

reduction in the distributable amount, the

commenter suggested that only the supporting organization’s after-tax income

from unrelated business activities should

be considered available for distribution to

its supported organizations.

A supporting organization’s adjusted

net income under §1.509(a)-4(i)(5)(ii)(B)

includes gross income from all sources,

including investment income that is not

subject to tax under section 511. The 2012

TD and the 2015 final regulations, therefore, stated it was necessary to revise the

distribution requirement to ensure that

NFI Type III supporting organizations

distribute significant amounts to their supported organizations, as Congress directed

in the PPA. As stated in the 2015 final

regulations, the 85 percent of adjusted

net income test makes it more likely that

supported organizations will timely benefit from higher returns received by their

supported organizations. Reducing the

distributable amount by any taxes on the

income would be counter to this objective.

The Treasury Department and the IRS

further note that section 4942(d) only

applies to private non-operating foundations. As the preamble to the 2012 TD

recounted, a number of commenters to

the 2009 proposed regulations stated that

NFI Type III supporting organizations

should not be subject to the higher payout for private non-operating foundations

because they are distinguishable from

them. These commenters stated that NFI

Type III supporting organizations are

more similar to private operating foundations and medical research organizations

and therefore should be subject to their

lower payout requirements. The 2012 TD

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and the 2015 final regulations adopted

this recommendation, providing lower

payout requirements for NFI Type III

supporting organizations than for private

non-operating foundations. Private operating foundations and medical research

organizations are not able to reduce their

payout requirements by the taxes imposed

by subtitle A. See §1.170A-9(d)(2)(v)

(B); §53.4942(b)-1(a)(1)(ii). The Treasury

Department and the IRS conclude for the

foregoing reasons that it would be inconsistent to apply a different rule to NFI Type

III supporting organizations. Therefore,

these final regulations adopt the 2016 proposed revision to §1.509(a)-4(i)(5)(ii)(B)

without change.

2. Distributions that Count toward

Distribution Requirement

Section 1.509(a)-4(i)(6) provides

details on the distributions by a supporting organization that count toward satisfying the distribution requirement imposed

in §1.509(a)-4(i)(5)(ii). The regulations

provide that distributions include but are

not limited to: (1) Any amount paid to a

supported organization to accomplish

the supported organization’s exempt purposes; (2) any amount paid by the supporting organization to perform an activity

that directly furthers the exempt purposes

of the supported organization within the

meaning of §1.509(a)-4(i)(4)(ii), but

only to the extent such amount exceeds

any income derived by the supporting

organization from the activity; (3) any

reasonable and necessary administrative

expenses paid to accomplish the exempt

purposes of the supported organization(s),

which do not include expenses incurred in

the production of investment income; (4)

any amount paid to acquire an exempt-use

asset described in §1.509(a)-4(i)(8)(ii);

and (5) any amount set aside for a specific

project that accomplishes the exempt purposes of a supported organization to which

the supporting organization is responsive.

The list in §1.509(a)-4(i)(6) is not

exhaustive and other distributions may

count towards the distribution requirement. As stated in the preamble to the

2016 proposed regulations, the use of

a non-exclusive list creates uncertainty

for supporting organizations and the IRS

about what counts toward the distribution

Bulletin No. 2023–44

requirement. Therefore, the 2016 proposed regulations proposed revising and

clarifying the list in §1.509(a)-4(i)(6)

of what counts toward the distribution

requirement and making it an exclusive

list.

a. Reasonable and necessary

administrative expenses

Under §1.509(a)-4(i)(6), reasonable

and necessary administrative expenses

paid to accomplish the exempt purposes of supported organizations, but not

expenses incurred in the production of

investment income, count toward the distribution requirement. For example, if a

supporting organization conducts exempt

activities that are for the benefit of, perform the functions of, or carry out the purposes of its supported organization(s) and

also conducts nonexempt activities (such

as investment activities or unrelated business activities), then the supporting organization’s administrative expenses (such

as salaries, rent, utilities and other overhead expenses) must be allocated between

the exempt and nonexempt activities on a

reasonable and consistently-applied basis.

The supporting organization’s administrative expenses attributable to the exempt

activities are treated as distributions to its

supported organization(s) if such expenses

are reasonable and necessary. Conversely,

the administrative expenses and operating costs attributable to the nonexempt

activities are not treated as distributions to

the supported organization(s). The 2016

proposed regulations proposed retaining

this provision, with additional guidance

regarding fundraising expenses.

b. Fundraising expenses

Section 1.509(a)-4(i)(6) does not specifically address whether fundraising

expenses count toward the distribution

requirement. The 2016 proposed regulations addressed the issue, specifying that

reasonable and necessary administrative

expenses paid to accomplish the exempt

purposes of a supported organization generally do not include fundraising expenses

the supporting organization incurs. For

example, when a supporting organization

conducts a fundraising event for its supported organization(s) and distributes the

Bulletin No. 2023–44

proceeds of the event, net of its fundraising

expenses, to its supported organization(s),

only the amount that the supporting organization actually distributes to its supported organization(s) counts towards the

distribution requirement. Thus, under the

2016 proposed regulations, the supporting organization’s fundraising expenses

do not count towards the distribution

requirement.

If a supporting organization conducts

a fundraising event at which the supporting organization instructs donors to make

contributions directly to the supported

organization, the 2016 proposed regulations proposed that those contributions

would not count as a distribution from the

supporting organization to its supported

organization. However, in this situation

the supporting organization could count

towards the distribution requirement

the reasonable and necessary expenses

it incurs to solicit the contributions the

donors pay directly to its supported organization: (1) to the extent that the amount

of these solicitation expenses does not

exceed the amount of contributions the

supported organization actually receives;

and (2) if the supporting organization can

substantiate (as discussed later in this

preamble) that those contributions were

received as a result of the supporting organization’s solicitation activities. The 2016

proposed regulations proposed this rule

to provide consistency with the treatment

of contributions that supporting organizations receive directly and then distribute

to their supported organizations (net of

the supporting organization’s solicitation

expenses).

While commenters were generally supportive of the proposal to count as distributions the fundraising expenses incurred

to solicit contributions directly to the

supported organization, one commenter

recommended deleting the requirement

that contributions be received directly by

the supported organization for the fundraising expenses to count. Alternatively,

the commenter requested this special rule

for fundraising expenses also apply if the

contributions were received directly by an

agent of the supported organization.

Another commenter proposed that

contributions the supporting organization

received directly from the fundraising

solicitation as a matter of convenience

1183

should be treated as contributions the supported organization received directly if the

supporting organization is contractually

obligated to remit the contributions to the

supported organization and the supporting

organization actually distributes the contributions to the supported organization

within a reasonable time period. The commenter also proposed that the supporting

organization be allowed to count its fundraising solicitation expenses in the year

it incurred them so long as the supported

organization received the corresponding

contributions within a reasonable time

period following the end of that year.

In response to these comments, these

final regulations adopt the proposed rules

with certain modifications and clarifications. These final regulations provide

that expenses the supporting organization incurs to solicit contributions count

towards the distribution requirement

when the resulting contributions are

received directly by a supported organization, but only to the extent that the supporting organization’s expenses for each

solicitation do not exceed the amount of

contributions a supported organization

actually receives, and only if the supporting organization substantiates that those

contributions were received as a result of

the supporting organization’s solicitation

activities. This limitation is applied on a

solicitation-by-solicitation basis; the supporting organization may not aggregate

its expenses, or the contributions a supported organization receives, from more

than one solicitation to determine the

amount of solicitation expenses that count

towards its distribution requirement. The

Treasury Department and the IRS intend

that contributions are received directly by

the supported organization when donors

make their checks, credit card or other

payments payable to the supported organization. The Treasury Department and

the IRS also intend that when a supporting

organization receives checks or processes

credit card or other transactions that are

payable to its supported organization,

the supporting organization may count

as distributions the expenses it incurs for

soliciting those checks or credit card or

other payments, but only up to the amount

of contributions received directly by or

paid directly to the supported organization and substantiated by the supported

October 30, 2023

organization. Thus, for purposes of meeting its distribution requirement, the supporting organization may not count as

distributions from the supporting organization to the supported organization

the amount of the check and credit card

or other contributions the donors make

payable to the supported organization.

Contributions made payable to the supporting organization that are transferred

to the supported organization, however,

may be counted as distributions from the

supporting organization to the supported

organization at the time that the funds are

given by the supporting organization to

the supported organization. These final

regulations do not adopt a rule permitting

payments that are first deposited with the

supporting organization to count as contributions received directly by the supported

organization (for purposes of permitting

additional solicitation expenses related to

those contributions to count as distributions). Preventing the supporting organization from counting those amounts twice

toward satisfying the supporting organization’s annual distribution requirements

and accounting for those funds in the supporting organization’s account would be

administratively difficult.

c. Joint fundraising expenses

One commenter also requested guidance on how to allocate contributions

when the supporting organization and the

supported organization share the costs

of a solicitation event. The Treasury

Department and the IRS do not intend for

the rule for fundraising expenses to apply

with respect to a solicitation event if the

supported organization incurs more than

de minimis costs related to the same solicitation event. Section 1.509(a)-4(i)(6)(i)

permits supporting organizations to count

any amount they pay to their supported

organization as a distribution for purposes of satisfying the annual distribution

requirement described in §1.509(a)-4(i)

(5)(ii). A supporting organization can,

therefore, share the costs of a fundraiser

by distributing to the supported organization an amount equal to the supporting

organization’s share of the joint fundraising expenses. Section 1.509(a)-4(i)(6)(i)

would permit the supporting organization

to count this payment as a distribution for

October 30, 2023

purposes of §1.509(a)-4(i)(5)(ii), negating the need for a special rule in proposed

§1.509(a)-4(i)(6)(iii)(B). The Treasury

Department and the IRS note that it would

be very difficult to determine and substantiate what portion of the contributions a

supported organization receives are attributable to the supporting organization’s

expenditures. Thus, expanding the rule

to cover joint solicitation efforts as the

commenter suggests would increase the

compliance burden on supporting organizations and supported organizations and

would be difficult for the IRS to administer. These final regulations, therefore, do

not adopt this recommendation.

d. Taxable year to which fundraising

expenses are attributable

One commenter requested a clarification that contributions made to a

supported organization in response to a

supporting organization’s end-of-the-year

fundraiser that the supported organization

does not receive until the following year

may be used to determine the portion of

reasonable and necessary fundraising

expenses the supporting organization may

treat as a distribution for the year in which

the fundraiser occurred. This commenter

recommended a 90-day window in the

second year for counting such contributions. These final regulations clarify that,

for purposes of applying the limitation on

the supporting organization’s solicitation

expenses for each taxable year that count

toward its distribution requirement, any

contributions the supported organization

receives directly from donors that are

attributable to a solicitation the supporting organization conducted in a particular

taxable year includes any contributions

the supported organization receives and

substantiates in writing on or before the

due date (without regard to extensions)

of the supporting organization’s Form

990 for the year in which it conducted the

solicitation.

For example, assume a supporting organization makes a solicitation

on December 15, 2024. The supported

organization receives contributions from

donors of $1x on December 26, 2024, and

$2x on March 15, 2025, that are attributable to the solicitation made on December

15, 2024. The supported organization

1184

substantiates the total contributions of $3x

in writing prior to May 15, 2025 (the due

date without extensions of the supporting

organization’s Form 990 for 2024). The

written substantiation indicates that these

contributions were attributable to the

December 15, 2024 solicitation. Under

§1.509(a)-4(i)(6)(iii)(B), the supporting

organization may treat up to $3x of any

reasonable and necessary expenses it

incurred for the December 15, 2024 solicitation toward its distribution requirement.

A supporting organization may not take

into account the same contributions in

computing the fundraising expense limitation in more than one year or with respect

to more than one solicitation. Thus, in the

preceding example, the $2x contribution

the supported organization received on

March 15, 2025, may only be used by

the supporting organization to determine

its fundraising expense limitation for the

December 15, 2024, solicitation. The supporting organization may not use the $2x

again to determine its 2025 fundraising

expense limitation.

e. Written substantiation from supported

organization

The 2016 proposed regulations proposed requiring a supporting organization

to obtain written substantiation from the

supported organization of the amount of

contributions the supported organization

actually receives as a result of each of the

supporting organization’s solicitations.

One commenter requested that the permitted written substantiation include an email

from the supported organization that the

supporting organization maintains in its

electronic records. These final regulations

adopt this recommendation, stating that

the written substantiation may be provided by electronic media.

Another commenter requested that

a supported organization be allowed to

aggregate into a single annual written

report the substantiation of all the contributions it received from the supporting organization’s fundraising activities.

The commenter also requested that the

supported organization should only be

responsible for reporting the amount of

the contributions it received and not be

responsible for calculating the supporting

organization’s fundraising activities.

Bulletin No. 2023–44

These final regulations clarify that the

supporting organization may substantiate

the contributions provided to the supported organization by a single annual

statement in writing from the supported

organization, provided that the amount

of contributions, if any, received by the

supported organization as a result of each

solicitation is separately identified. To

satisfy §1.509(a)-4(i)(6)(iii)(B), the written substantiation must be postmarked or

electronically transmitted to the supporting organization no later than the due date

(without regard to extensions) of the supporting organization’s Form 990 for the

year of the solicitation. In addition, written

substantiation relied on by the supporting

organization (whether provided in one or

multiple reports) must separately state the

amount of contributions, if any, received

directly by the supported organization

allocable to each solicitation made by the

supporting organization that is covered in

the report. The supporting organization is

responsible for determining its solicitation expenses. The written substantiation

the supporting organization is required to

receive from the supported organization

need only provide information relevant to

the amount of contributions the supported

organization received; it does not need

to address the supporting organization’s

expenses.

foundations. Furthermore, other provisions relating to the distribution requirement, such as the availability of set-asides

and the potential for carry-forwards of

excess distributions, provide significant

flexibility for supporting organizations to

meet the current and future needs of their

supported organizations. For these reasons, these final regulations do not adopt

this recommendation.

f. Program-related investments not taken

into account

Special Analyses

Finally, one commenter requested

that program-related investments (PRIs)

count toward the distribution requirement. The preamble to the 2016 proposed

regulations stated that, for purposes of

meeting the integral part test, PRIs are

not treated as distributions to the supported organizations. As the preamble

to the 2016 proposed regulations stated,

the Treasury Department and the IRS

recognize that private foundations may

use PRIs in a variety of ways to accomplish their exempt purposes and that

PRIs thus are treated as qualifying distributions under section 4942. However,

because supporting organizations must

be operated exclusively for the benefit of, to perform the functions of, or to

carry out the purposes of their supported

organizations, they differ from private

Bulletin No. 2023–44

IV. Technical Corrections

This Treasury Decision conforms the

paragraphs throughout §1.509(a)-4 to the

Code of Federal Regulations by making

non-substantive changes, including capitalizing letters of fourth level paragraphs.

This Treasury Decision also modifies

§53.4947-1 to correct certain cross-references to §1.509(a)-4.

V. Applicability Date

These final regulations are applicable

to taxable years beginning on or after

October 16, 2023. Taxpayers may choose

to apply these final regulations to taxable

years beginning on or after February 19,

2016, and before October 16, 2023, so

long as the taxpayer applies the provisions

of these final regulations in their entirety

and in a consistent manner.

I. Regulatory Planning and Review

Pursuant to the Memorandum

of Agreement, Review of Treasury

Regulations under Executive Order 12866

(June 9, 2023), tax regulatory actions

issued by the IRS are not subject to the

requirements of section 6(b) of Executive

Order 12866, as amended. Therefore,

a regulatory impact assessment is not

required.

II. Paperwork Reduction Act

The collection of information contained in these regulations has been

reviewed and approved by the Office of

Management and Budget in accordance

with the Paperwork Reduction Act of

1995 (44 U.S.C. 3507(d)) under control

number 1545-2271.

1185

The collection of information in these

regulations is in §1.509(a)-4(i)(4)(iv)(C)

(written record of close coordination or

collaboration by certain governmental supported organizations) and §1.509(a)-4(i)

(6)(iii)(B) (written record of contributions

received by certain supported organizations). Requiring a supporting organization to collect (1) written records of its

governmental supported organizations’

close coordination or collaboration with

each other and (2) written records of the

contributions its supported organizations

directly received from donors in response

to solicitations by the supporting organization helps the IRS determine whether

the supporting organization is a functionally integrated or non-functionally integrated Type III supporting organization.

The record keepers are certain Type III

supporting organizations.

Estimated number of recordkeepers:

6,089.

Estimated average annual burden hours

per recordkeeper: 2 hours.

Estimated total annual recordkeeping

burden: 12,178 hours.

Estimated frequency of collection of

such information: Annual.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless it displays a valid control number assigned by

the Office of Management and Budget.

Books or records relating to a collection of information must be retained as

long as their contents may become material in the administration of any internal

revenue law. Generally, tax returns and

return information are confidential, as

required by 26 U.S.C. 6103.

III. Regulatory Flexibility Act

In connection with the requirements of

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

chapter 6), it is hereby certified that these

final regulations will not have a significant

economic impact on a substantial number

of small entities. This certification is based

on the fact that these final regulations will

not impact a substantial number of small

entities.

Based on IRS Statistics of Income data

for 2019, there are 1,365,744 active nonprofit charitable organizations recognized

by the IRS under section 501(c)(3), of

October 30, 2023

which only 6,089 organizations self-identified as Type III supporting organizations.

The universe of organizations that would

be affected by §1.509(a)-4(i)(4)(iv)(C)

and §1.509(a)-4(i)(6)(iii)(B) is a subset

of all Type III supporting organizations,

because those provisions apply either to

organizations seeking to qualify as functionally integrated based on support of

two or more governmental supported

organizations or to non-functionally

integrated organizations that solicit contributions that are received directly by

a supported organization (rather than

by the supporting organization). Thus,

the number of organizations that will be

affected by the collection of information

under §1.509(a)-4(i)(4)(iv)(C) and (i)(6)

(iii)(B) will not be substantial. Moreover,

the time to complete the recordkeeping

requirements is expected to be no more

than 2 hours for each organization, thus

the regulations will not have a significant

economic impact. The requirements under

§1.509(a)-4(i)(4)(iv)(C) and (i)(6)(iii)(B),

therefore, will not have a significant economic impact.

Pursuant to section 7805(f) of the

Code, this regulation was submitted to the

Chief Counsel for the Office of Advocacy

of the Small Business Administration for

comment on its impact on small business

and no comments were received.

any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and

local governments, and is not required

by statute, or preempts State law, unless

the agency meets the consultation and

funding requirements of section 6 of the

Executive order. The regulations do not

have federalism implications, impose

substantial direct compliance costs on

State and local governments, or preempt State law within the meaning of the

Executive order.

IV. Unfunded Mandates Reform Act

Drafting Information

Section 202 of the Unfunded

Mandates Reform Act of 1995 (UMRA)

requires that agencies assess anticipated

costs and benefits and take certain other

actions before issuing a final rule that

includes any Federal mandate that may

result in expenditures in any one year

by a State, local, or tribal government,

in the aggregate, or by the private sector, of $100 million in 1995 dollars,

updated annually for inflation. The

regulations do not include any Federal

mandate that may result in expenditures

by State, local, or tribal governments,

or by the private sector in excess of that

threshold.

The principal authors of these regulations are Jonathan Carter and Don

Spellmann, Office of Associate Chief

Counsel (Employee Benefits, Exempt

Organizations, and Employment Taxes).

However, other personnel from the

Treasury Department and the IRS participated in their development.

V. Executive Order 13132: Federalism

Executive Order 13132 (Federalism)

prohibits an agency from publishing

October 30, 2023

VI. Congressional Review Act

Pursuant to the Congressional Review

Act (5 U.S.C. 801 et seq.), the Office

of Management and Budget’s Office of

Information and Regulatory Affairs designated this rule as not a “major rule,” as

defined by 5 U.S.C. 804(2).

Statement of Availability of IRS

Documents

Notice 2014-4 is published in the

Internal Revenue Bulletin and is available

from the Superintendent of Documents,

U.S. Government Printing Office,

Washington, DC 20402, or by visiting

the IRS website at: https://www.irs.gov/

irb/2014-02_IRB#NOT-2014-4.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 53

Excise taxes, Foundations, Investments,

Lobbying, Reporting and recordkeeping

requirements.

1186

Amendments to the Regulations

Accordingly, the Treasury Department

and the IRS amend 26 CFR parts 1 and 53

as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

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

Par. 2. Section 1.509(a)-4 is amended by:

1. In paragraph (d)(2)(i) introductory

text, removing “subdivision (iv) of this

subparagraph” and “subparagraph (1) of

this paragraph” and adding “paragraph

(d)(2)(iv) of this section” and “paragraph

(d)(1) of this section” in their places,

respectively.

2. Redesignating paragraphs (d)(2)(i)

(a) and (b) as paragraphs (d)(2)(i)(A) and

(B), respectively.

3. In newly redesignated paragraph (d)

(2)(i)(B)(1), removing “(a) of this subdivision” and adding “paragraph (d)(2)(i)

(A) of this section” in its place.

4. In newly redesignated paragraph (d)

(2)(i)(B)(2), removing “subdivision (i)(a)

or this subparagraph” and adding “paragraph (d)(2)(i)(A) of this section or this

paragraph (d)(2)(i)(B)(2)” in its place.

5. In paragraph (d)(2)(ii), removing

“subdivision (i)(a) or this subparagraph”,

“subparagraph (1) of this paragraph” and

“subparagraphs (3) (i), (ii), and (iii) and

(4)(i) (a) and (b) of this paragraph” and

adding “paragraph (d)(2)(i)(A) of this section”, “paragraph (d)(1) of this section”,

and “paragraphs (d)(3)(i) through (iii) and

(d)(4)(i)(A) and (B) of this section” in

their places, respectively.

6. In paragraph (d)(2)(iii) introductory

text, removing “subparagraph” and adding “paragraph (d)(2)” in its place.

7. Designating Examples 1 and 2 of

paragraph (d)(2)(iii) as paragraphs (d)(2)

(iii)(A) and (B), respectively.

8. In paragraph (d)(2)(iv) introductory

text, removing “subparagraph (1) of this

paragraph” and adding “paragraph (d)(1)

of this section” in its place.

9. Redesignating paragraphs (d)(2)(iv)

(a) and (b) as paragraphs (d)(2)(iv)(A)

and (B), respectively.

10. In newly redesignated paragraph

(d)(2)(iv)(A), removing “, and” and adding “; and” in its place.

Bulletin No. 2023–44

11. In paragraph (d)(3) introductory

text, removing “subparagraph (2)(i) (a) of

this paragraph” and adding “paragraph (d)

(2)(i)(A) of this section” in its place.

12. In paragraph (d)(4)(i) introductory

text, removing “subparagraph (2)(iv) of

this paragraph” and “this subparagraph”

and adding “paragraph (d)(2)(iv) of this

section” and “this paragraph (d)(4)” in

their places, respectively.

13. Redesignating paragraphs (d)(4)(i)

(a) through (c) as paragraphs (d)(4)(i)(A)

through (C), respectively.

14. Revising newly redesignated paragraph (d)(4)(i)(C).

15. In paragraph (d)(4)(ii), removing

“subdivision (i)(b) of this subparagraph”

and “subdivision (i)(b)” and adding “paragraph (d)(4)(i)(B) of this section” and

“paragraph (d)(4)(i)(B)” in their places,

respectively.

16. In paragraph (d)(4)(iii) introductory text, removing “subparagraph” and

adding “paragraph (d)(4)” in its place.

17. Designating the Example in paragraph (d)(4)(iii) as paragraph (d)(4)(iii)

(A) and adding reserved paragraph (d)(4)

(iii)(B).

18. In paragraph (e)(3) introductory

text, removing “paragraph” and adding

“paragraph (e)” in its place.

19. Designating Examples 1 through 5

of paragraph (e)(3) as paragraphs (e)(3)(i)

through (v), respectively.

20. Revising paragraph (f)(5)(ii).

21. In paragraph (g)(2) introductory

text, removing “paragraph” and adding

“paragraph (g)” in its place.

22. Designating Examples 1 through 3

of paragraph (g)(2) as paragraphs (g)(2)(i)

through (iii), respectively.

23. In newly redesignated paragraph

(g)(2)(iii), removing “subparagraph (1)(ii)

of this paragraph” and adding “paragraph

(g)(1)(ii) of this section” in its place.

24. In paragraph (h)(3) introductory

text, removing “paragraph” and adding

“paragraph (h)” in its place.

25. Designating Examples 1 through 3

of paragraph (h)(3) as paragraphs (h)(3)(i)

through (iii), respectively.

26. Revising paragraphs (i)(2)(i) introductory text, (i)(2)(i)(A), (i)(2)(iii), and (i)

(3)(i).

27. Designating Examples 1 and 2 of

paragraph (i)(3)(iv) as paragraphs (i)(3)

(iv)(A) and (B), respectively.

Bulletin No. 2023–44

28. Adding paragraph (i)(3)(iv)(C).

29. Revising paragraphs (i)(4)(ii)(A)

(1), (i)(4)(ii)(B), and (i)(4)(iii) and (iv).

30. Designating Examples 1 through 5

of paragraph (i)(4)(v) as paragraphs (i)(4)

(v)(A) through (E), respectively.

31. Adding paragraph (i)(4)(v)(F).

32. Revising paragraphs (i)(5)(ii)(A)

and (B) and (i)(5)(iii)(A).

33. Designating Examples 1 through 4

of paragraph (i)(5)(iii)(D) as paragraphs

(i)(5)(iii)(D)(1) through (4), respectively.

34. Revising newly designated paragraph (i)(5)(iii)(D)(4), the third sentence

of paragraph (i)(6) introductory text, and

paragraphs (i)(6)(iii) and (v) introductory

text.

35. In paragraph (k)(2) introductory

text, removing “paragraph” and adding

“paragraph (k)” in its place.

36. Designating the Example in paragraph (k)(2) as paragraph (k)(2)(i) and

adding reserved paragraph (k)(2)(ii).

37. Revising paragraph (l).

The revisions and additions read as

follows:

§1.509(a)-4 Supporting organizations.

*****

(d) * * *

(4) * * *

(i) * * *

(C) Permit the supporting organization

to vary the amount of its support between

different designated organizations, so long

as it meets the requirements of the integral

part test set forth in paragraph (i)(1)(iii)

of this section with respect to at least one

beneficiary organization.

*****

(f) * * *

(5) * * *

(ii) Meaning of control. For purposes

of paragraph (f)(5)(i) of this section, the

governing body of a supported organization will be considered controlled by

a person described in paragraph (f)(5)(i)

(A) of this section if that person, alone or

by aggregating the person’s votes or positions of authority with persons described

in paragraph (f)(5)(i)(B) or (C) of this section, may require the governing body of

the supported organization to perform any

act that significantly affects its operations

or may prevent the governing body of the

supported organization from performing

1187

any such act. The governing body of a

supported organization will be considered

to be controlled directly or indirectly by

one or more persons described in paragraph (f)(5)(i)(A), (B), or (C) of this section if the voting power of such persons

is 50 percent or more of the total voting

power of such governing body or if one

or more of such persons have the right

to exercise veto power over the actions

of the governing body of the supported

organization. Thus, if the governing body

of a supported organization is composed

of five members, none of whom has a

veto power over the actions of the supported organization, and no more than

two members are at any time described in

paragraph (f)(5)(i)(A), (B), or (C) of this

section, such supported organization will

not be considered to be controlled directly

or indirectly by such persons by reason

of this fact alone. However, all pertinent

facts and circumstances will be taken into

consideration in determining whether one

or more persons do in fact directly or indirectly control the governing body of a supported organization.

*****

(i) * * *

(2) * * *

(i) Annual notification. For each taxable year (Reporting Year), a Type III

supporting organization must provide the

following documents to each of its supported organizations:

(A) A written notice addressed to a

principal officer of the supported organization describing the type and amount of

all of the support (including all of the distributions described in paragraph (i)(6) of

this section, if applicable) the supporting

organization provided to the supported

organization during the supporting organization’s taxable year immediately preceding the Reporting Year (and during any

other taxable year of the supporting organization ending after December 28, 2012,

for which such support information has

not previously been provided), including

a brief narrative description of the support

provided and sufficient financial detail

for the recipient to identify the types and

amounts of support being reported;

*****

(iii) Due date. The notification documents required by this paragraph (i)

(2) must be delivered or electronically

October 30, 2023

transmitted by the last day of the fifth calendar month of the Reporting Year.

*****

(3) * * *

(i) General rule. A supporting organization meets the responsiveness test only

if it is responsive to the needs or demands

of each of its supported organizations.

Except as provided in paragraph (i)(3)(v)

of this section, in order to meet this test,

a supporting organization must satisfy the

requirements of paragraphs (i)(3)(ii) and

(iii) of this section with respect to each of

its supported organizations.

*****

(iv) * * *

(C) Example 3. Z is described in section 501(c)

(3). Z’s organizational documents provide that it

supports ten different organizations, each of which

is described in section 509(a)(1). One of the directors of S (one of the supported organizations) is a

voting member of Z’s board of directors and participates in Z’s regular board meetings. Officers

of Z hold regularly scheduled face-to-face or telephonic meetings during the year, to which officers

of all the supported organizations are invited. Z’s

meetings with the supported organizations may be

held jointly or separately. Prior to the meetings,

Z makes available to the supported organizations

(including by email) up-to-date information about

its activities, including its assets and liabilities,

receipts and distributions, and investment policies

and returns. In the meetings, officers of each of

the supported organizations have an opportunity

to ask questions and discuss with officers of Z

the projected needs of their organizations, as well

as Z’s investment and grant making policies and

practices. In addition to holding these meetings

with the supported organizations, Z provides the

contact information of one of its officers to each of

the supported organizations and encourages them

to contact that officer if they have questions, or if

they wish to schedule additional meetings to discuss the projected needs of their organization and

how Z should distribute its income and invest its

assets. Z provides the information required under

paragraph (i)(2) of this section and a copy of its

annual audited financial statements to the principal officers of the supported organizations. Z

meets the relationship requirement of paragraph

(i)(3)(ii)(B) or (C) of this section with respect

to each of its supported organizations. Based on

these facts, Z also satisfies the significant voice

requirement of paragraph (i)(3)(iii) of this section,

and therefore meets the responsiveness test of this

paragraph (i)(3) with respect to each of its ten supported organizations.

*****

(4) * * *

(ii) * * *

(A) * * *

(1) Directly further the exempt purposes of one or more supported organizations by performing the functions of,

October 30, 2023

or carrying out the purposes of, such supported organization(s); and

*****

(B) Meaning of substantially all. For

purposes of paragraph (i)(4)(ii)(A) of this

section, in determining whether substantially all of a supporting organization’s

activities directly further the exempt

purposes of one or more supported organization(s), all pertinent facts and circumstances will be taken into consideration.

*****

(iii) Parent of supported organization(s)—(A) In general. For purposes

of paragraph (i)(4)(i)(B) of this section,

in order for a supporting organization to

qualify as the parent of each of its supported organizations—

(1) The supporting organization and its

supported organizations must be part of an

integrated system (such as, for example, a

hospital system);

(2) The supporting organization must

direct the overall policies, programs, and

activities of the supported organizations

(such as, for example, coordinating the

activities of the supported organizations

and engaging in overall planning, policy

development, budgeting, and resource

allocation); and

(3) The supporting organization’s

governing body, members of the governing body, or officers (acting in their

official capacities) must appoint or elect,

directly or indirectly, a majority of the

officers, directors, or trustees of each supported organization and have the power

to remove and replace such directors,

officers, or trustees, or otherwise have an

ongoing power to appoint or elect such

directors, officers or trustees with reasonable frequency.

(B) Subsidiary organizations. A supporting organization may meet the requirements of paragraph (i)(4)(iii)(A)(3) of

this section with respect to a second-tier

(or lower) subsidiary provided that the

supporting organization, by control of

its first-tier subsidiary, has the power to

appoint or elect (as described in paragraph

(i)(4)(iii)(A)(3) of this section) a majority

of the officers, directors, or trustees of the

lower-tier subsidiary. For example, if the

board of directors of supporting organization A elects a majority of the directors of

supported organization B, and the board

of directors of B, in turn elect, by a simple

1188

majority vote, a majority of the directors

of supported organization C, the directors of supporting organization A will be

treated as electing a majority of the directors of both supported organization B and

supported organization C.

(iv) Supporting a governmental supported organization—(A) In general.

A supporting organization satisfies the

requirements of this paragraph (i)(4)(iv)

if—

(1) The supporting organization only

supports one or more governmental supported organizations;

(2) In any case in which the supporting

organization supports more than one governmental supported organization, all of

the governmental supported organizations

either—

(i) Operate within the same city, county,

or metropolitan area; or

(ii) Work in close coordination or collaboration with one another to conduct a

service, program, or activity that the supporting organization supports; and

(3) A substantial part of the supporting

organization’s total activities are activities that directly further, as defined by

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

exempt purposes of at least one governmental supported organization.

(B) Governmental supported organization defined. For purposes of paragraph

(i)(4)(iv)(A) of this section, the term governmental supported organization means

a supported organization that is:

(1) A governmental unit described

in section 170(c)(1), including all of its

agencies, departments, and divisions (all

of which will be treated as one governmental supported organization for purposes of this paragraph (i)(4)(iv)); or

(2) An organization described in section 170(c)(2) and (b)(1)(A) (other than in

clauses (vii) and (viii)) that is an instrumentality of one or more governmental

units described in section 170(c)(1).

(C) Close coordination or collaboration. To satisfy the close coordination or

collaboration requirement of paragraph (i)

(4)(iv)(A)(2) of this section, the supporting organization must maintain on file a

letter from each of the governmental supported organizations (or a joint letter from

all of them) describing their coordination

or collaboration efforts with respect to the

particular service, program, or activity.

Bulletin No. 2023–44

(D) Substantial part. For purposes of

paragraph (i)(4)(iv)(A)(3) of this section,

in determining whether a substantial part

of a supporting organization’s activities

directly further the exempt purposes of

one or more governmental supported organization(s), all pertinent facts and circumstances will be taken into consideration.

(E) Exception for organizations supporting a governmental supported organization on or before February 19, 2016. A

Type III supporting organization in existence on or before February 19, 2016, will

be treated as meeting the requirements of

this paragraph (i)(4)(iv) if it met and continues to meet the following requirements:

(1) It supports one or more governmental supported organizations described in

paragraph (i)(4)(iv)(B) of this section and

does not support more than one supported

organization that is not a governmental

supported organization;

(2) Each of the supported organizations

is designated by the supporting organization as provided in paragraph (d)(4) of this

section on or before February 19, 2016;

and

(3) A substantial part (as defined in

paragraph (i)(4)(iv)(D) of this section) of

the supporting organization’s total activities are activities that directly further (as

defined by paragraph (i)(4)(ii)(C) of this

section) the exempt purposes of its governmental supported organization(s).

(F) Transition rule for supporting

organizations in existence on or before

February 19, 2016. Until the first day of

the organization’s second taxable year

beginning after February 19, 2016, a Type

III supporting organization in existence

on or before February 19, 2016, will be

treated as meeting the requirements of

this paragraph (i)(4)(iv) if it continuously

met the following requirements prior to

the first day of the organization’s second

taxable year beginning after February 19,

2016—

(1) It supported at least one supported

organization that was a governmental

entity to which the supporting organization was responsive within the meaning of

paragraph (i)(3) of this section; and

(2) It engaged in activities for or on

behalf of the governmental supported

organization described in paragraph (i)(4)

(iv)(E)(1) of this section that performed

Bulletin No. 2023–44

the functions of, or carried out the purposes of, that governmental supported

organization and that, but for the involvement of the supporting organization,

would normally have been engaged in by

the governmental supported organization

itself.

*****

(v) * * *

(F) Example 6. X, an organization described in

section 501(c)(3), is organized and operated as a

supporting organization to two organizations, City

and Park. X meets the responsiveness test described

in paragraph (i)(3) of this section with respect to

both City and Park. City and Park are both governmental units described in section 170(c)(1).

Park maintains a state park located within the same

county as City. X does not support any other organizations. X supports Park by operating an information center for visitors to Park. The information

center provides educational material and informational sessions to visitors to Park. X’s activities

related to operating the Park information center

constitute a substantial part of X’s activities. X also

makes grants directly to City to fund City’s other

programs. X’s grant making activities constitute

a substantial part of X’s activities. X meets the

requirements of paragraph (i)(4)(iv)(A)(1) of this

section because X only supports City and Park,

both of which are governmental supported organizations described in paragraph (i)(4)(iv)(B) of this

section. X meets the requirements of paragraph (i)

(4)(iv)(A)(2) of this section because City and Park

operate within the same county in accordance with

paragraph (i)(4)(iv)(A)(2)(i) of this section. Finally,

X meets the requirements of paragraph (i)(4)(iv)

(A)(3) of this section because a substantial part of

X’s activities directly further (within the meaning

of paragraph (i)(4)(ii)(C) of this section) Park’s

exempt purposes, even though X’s grants to City

are also a substantial part of X’s activities. Based

on these facts, X qualifies as functionally integrated

under paragraph (i)(4)(iv) of this section.

(5) * * *

(ii) * * *

(A) Annual distribution. With respect

to each taxable year, a supporting organization must make distributions described

in paragraph (i)(6) of this section in a

total amount equaling or exceeding the

supporting organization’s distributable

amount for the taxable year, as defined in

paragraph (i)(5)(ii)(B) of this section, on

or before the last day of the taxable year.

(B) Distributable amount. Except as

provided in paragraphs (i)(5)(ii)(D) and

(E) of this section, the distributable amount

for a taxable year is an amount equal to

the greater of 85 percent of the supporting organization’s adjusted net income (as

determined by applying the principles of

section 4942(f) and §53.4942(a)-2(d) of

1189

this chapter) for the taxable year immediately preceding the taxable year of the

required distribution (immediately preceding taxable year) or its minimum asset

amount (as defined in paragraph (i)(5)(ii)

(C) of this section) for the immediately

preceding taxable year.

*****

(iii) * * *

(A) General rule. With respect to each

taxable year, a non-functionally integrated

Type III supporting organization must

distribute one-third or more of its distributable amount to one or more supported

organizations that are attentive to the

operations of the supporting organization

(within the meaning of paragraph (i)(5)

(iii)(B) of this section).

*****

(D) * * *

(4) Example 4. O is an organization described

in section 501(c)(3). O is organized to support five

private universities, V, W, X, Y, and Z, each of

which is described in section 509(a)(1). O meets the

responsiveness test described in paragraph (i)(3) of

this section with respect to each of its supported

organizations. Each year, O distributes an aggregate amount that equals its distributable amount

described in paragraph (i)(5)(ii)(B) of this section

and distributes an equal amount to each of the five

universities. O distributes annually to each of V and

W an amount that equals more than 10 percent of

each university’s total annual support received in

its most recently completed taxable year. Based on

these facts, O meets the requirements of paragraph

(i)(5)(iii) of this section because it distributes twofifths (more than the required one-third) of its distributable amount to supported organizations that

are attentive to O.

*****

(6) * * * Distributions by the supporting organization that count toward the

distribution requirement imposed in paragraph (i)(5)(ii) of this section are limited

to—

*****

(iii) Any reasonable and necessary—

(A) Administrative expenses paid to

accomplish the exempt purposes of the

supported organization, which do not

include expenses incurred in the production of investment income or expenses

incurred in the conduct of fundraising

activities (except solicitation expenses

described in paragraph (i)(6)(iii)(B) of

this section); and

(B) Expenses incurred to solicit contributions that are received directly by a

supported organization (rather than by the

October 30, 2023

supporting organization), but only to the

extent the amount of the reasonable and

necessary expenses the supporting organization incurs for each solicitation does

not exceed the amount of contributions

that are actually received by the supported

organization directly from donors as a

result of each such solicitation, as substantiated in a written report by the supported

organization to the supporting organization that is postmarked or electronically

transmitted by the due date of the supporting organization’s Form 990 (or successor

form) for the year of the solicitation(s)

(without regard to extensions);

*****

(v) Any amount set aside for a specific

project that accomplishes the exempt purposes of a supported organization, with

such set-aside counting toward the distribution requirement for the taxable year in

which the amount is set aside but not in

the year in which it is actually paid, if at

the time of the set-aside, the supporting

organization—

*****

(l) Applicability dates. (1) Paragraphs

(a)(6), (f)(5), and (i) of this section

are applicable on December 28, 2012,

except—

(i) Paragraphs (i)(4)(ii)(C), (i)(5)(ii)(C)

and (D), (i)(6)(iv), (i)(7)(ii), and (i)(8) of

October 30, 2023

this section are applicable on December

21, 2015; and

(ii) Paragraphs (d)(4)(i)(C), (f)(5)(ii),

(i)(2)(i) and (iii), (i)(3)(i), (i)(3)(iv)(C)

(Example 3), (i)(4)(ii)(A)(1), (i)(4)(ii)(B),

(i)(4)(iii) and (iv), (i)(4)(v)(F) (Example

6), (i)(5)(ii)(A) and (B), (i)(5)(iii)(A), (i)

(5)(iii)(D)(4) (Example 4), (i)(6) introductory text, and (i)(6)(iii) and (v) of this

section are applicable to taxable years

beginning on or after October 16, 2023.

(2) Taxpayers may choose to apply the

paragraphs listed in paragraph (I)(1)(ii)

of this section to taxable years beginning

on or after February 19, 2016, and before

October 16, 2023, provided the taxpayer

applies the provisions listed in paragraph

(l)(1)(ii) of this section in their entirety

and in a consistent manner.

(3) See paragraphs (i)(5)(ii)(B) and

(C) and (i)(8) of §1.509(a)–4T contained in 26 CFR part 1, revised as of

April 1, 2015, for certain rules regarding non-functionally integrated Type III

supporting organizations effective before

December 21, 2015. See paragraphs (i)

(5)(ii)(A) and (B) and (i)(5)(iii)(D) of

§1.509(a)-4 contained in 26 CFR part 1,

revised as of April 1, 2023, for certain

rules regarding non-functionally integrated Type III supporting organizations

effective before October 16, 2023.

1190

PART 53—FOUNDATION AND

SIMILAR EXCISE TAXES

Par. 3. The authority citation for part 53

continues to read in part as follows:

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

§53.4947-1 [Amended]

Par. 4. Section 53.4947-1 is amended

in paragraph (b)(3) by removing the language “§§ 1.509(a)–4(d)(2)(iv)(a), and

1.509(a)–4(i)(1) (ii) and (iii)(c)” and “the

regulations under section 507(b)(1)” and

adding in their places “§ 1.509(a)–4(d)(2)

(iv)(A) and (i)(1)(ii) of this chapter” and

“the regulations in this part under section

507(b)(1)”, respectively.

Douglas W. O’Donnell,

Deputy Commissioner for Services and

Enforcement.

Approved: August 20, 2023.

Lily L. Batchelder,

Assistant Secretary of the Treasury (Tax

Policy).

(Filed by the Office of the Federal Register October

13, 2023, 8:45 a.m., and published in the issue of the

Federal Register for October 16, 2023, 88 FR 71287)

Bulletin No. 2023–44

Part III

Relief for Taxpayers

Affected by the Terroristic

Action in the State of Israel

Notice 2023-71

SECTION I. PURPOSE

This notice provides relief under section 7508A of the Internal Revenue Code

(Code)1 for persons that the Secretary of

the Treasury (Secretary) has determined

to be affected by the terroristic action in

the State of Israel beginning on October

7, 2023. The Department of the Treasury

and the Internal Revenue Service (IRS)

may provide additional relief in the

future.

SECTION II. BACKGROUND

Section 7508A(a) provides the

Secretary with authority to postpone the

time (up to one year) for performing certain acts under the internal revenue laws

for a taxpayer determined by the Secretary

to be affected by a terroristic or military

action as defined in section 692(c)(2).

Section 692(c)(2) defines a terroristic

action as “any terroristic activity which a

preponderance of the evidence indicates

was directed against the United States or

any of its allies.”

Section 4.01(1) of Revenue Procedure

2004-26, 2004-1 C.B. 890, provides that

prior to publishing a determination that an

event outside the United States constitutes

a terroristic action within the meaning of

section 692(c)(2), the Secretary will ascertain whether the Department of State and

the Department of Justice believe that a

preponderance of the evidence indicates

that the event resulted from terrorist activity directed against the United States or its

allies. In accordance with the procedures

described in Revenue Procedure 200426, the Secretary has determined that the

terrorist attacks beginning on October 7,

2023, against the State of Israel (October

1

7, 2023 Terrorist Attacks) constitute terroristic action within the meaning of section 692(c)(2).

SECTION III. GRANT OF RELIEF

With respect to taxpayers described

in section III.A of this notice (affected

taxpayers), this notice postpones the due

dates for the actions described in section

III.B of this notice (postponed acts) until

October 7, 2024.

A. Affected Taxpayers

Section 301.7508A-1(d)(1) describes

several types of “affected taxpayers” eligible for relief under section 7508A. The

Secretary has determined that the following types of taxpayers are affected taxpayers with respect to the October 7, 2023

Terrorist Attacks eligible for the relief

provided in this notice:

• Any individual whose principal residence, and any business entity or

sole proprietor whose principal place

of business, is located in the State of

Israel, the West Bank or Gaza (covered area);

• Any individual affiliated with a recognized government or philanthropic

organization and who is assisting

in the covered area, such as a relief

worker;

• Any individual, business entity or sole

proprietor, or estate or trust whose tax

return preparer or records necessary

to meet a deadline for postponed acts

are located in the covered area;

• Any spouse of an affected taxpayer,

solely with regard to a joint return of

two married individuals; and

• Any individual visiting the covered

area who was killed, injured, or taken

hostage as a result of the October 7,

2023 Terrorist Attacks.

The IRS automatically identifies taxpayers whose principal residence or principal

place of business is located in the covered

area based on previously filed returns

and applies relief. Affected taxpayers

whose principal residence or principal

place of business is not located in the

covered area should call the IRS disaster

hotline at (866) 562-5227 to request relief.

Alternatively, international callers may

call (267) 941-1000.

B. Postponement of Due Dates with

Respect to Certain Taxpayer Acts

Affected taxpayers have until October

7, 2024, to file tax returns, make tax payments, and perform certain time-sensitive

acts listed in § 301.7508A-1(c)(1) and

Rev. Proc. 2018-58, 2018-50 I.R.B. 990

(December 10, 2018), that are due to be

performed on or after October 7, 2023,

and before October 7, 2024. Any taxpayer

acts that are due to be performed on or

after October 7, 2023, and before October

7, 2024, are postponed until October 7,

2024. These acts include, but are not limited to:

• Filing any return of income tax, estate

tax, gift tax, generation-skipping

transfer tax, excise tax (other than

firearms tax), harbor maintenance

tax, or employment tax;

• Paying any income tax, estate tax, gift

tax, generation-skipping transfer tax,

excise tax (other than firearms tax),

harbor maintenance tax, or employment tax, or any installment of those

taxes;

• Making contributions to a qualified

retirement plan;

• Filing a petition with the Tax Court;

• Filing a claim for credit or refund of

any tax; and

• Bringing suit upon a claim for credit

or refund of any tax.

This is not an exhaustive list. For further

information, see § 301.7508A-1(c)(1) and

Rev. Proc. 2018-58.

C. Postponement of Due Dates with

Respect to Certain Government Acts

This notice also provides the IRS

with additional time to perform certain

time-sensitive actions with respect to

Unless otherwise specified, all “Section” or “§” references are to sections of the Code or the Procedure and Administration Regulations (26 CFR part 301).

Bulletin No. 2023–44

1191

October 30, 2023

affected taxpayers. Any government acts

described in § 301.7508A-1(c)(2) that are

due to be performed on or after October

7, 2023, and before October 7, 2024, are

postponed until October 7, 2024. These

acts include:

• Assessing any tax;

• Giving or making any notice or

demand for the payment of any tax,

October 30, 2023

•

•

or with respect to any liability to the

United States in respect of any tax;

Collecting by the IRS, by levy or otherwise, of the amount of any liability

in respect of any tax; and

Bringing suit by the United States, or

any officer on its behalf, in respect of

any liability in respect of any tax; and

allowing a credit or refund of any tax.

1192

SECTION IV. DRAFTING

INFORMATION

The principal author of this notice is

the Office of Associate Chief Counsel

(Procedure and Administration). For further information regarding this notice, you

may call (202) 317-3400 (not a toll-free

call).

Bulletin No. 2023–44

Part IV

Notice of Proposed

Rulemaking

Guidance under Section

367(b) Related to

Certain Triangular

Reorganizations and

Inbound Nonrecognition

Transactions

REG-117614-14

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document proposes

regulations announced and described in

Notice 2014-32 and Notice 2016-73, with

modifications. The proposed regulations

relate to the treatment of property used

to acquire parent stock or securities in

connection with certain triangular reorganizations involving one or more foreign

corporations; the consequences to persons that receive parent stock or securities

pursuant to such reorganizations; and the

treatment of certain subsequent inbound

nonrecognition transactions following

such reorganizations and certain other

transactions. The proposed regulations

affect corporations engaged in certain triangular reorganizations involving one or

more foreign corporations, certain shareholders of foreign corporations acquired

in such reorganizations, and foreign

corporations that participate in certain

inbound nonrecognition transactions.

DATES: Written or electronic comments

and requests for a public hearing must be

received by December 5, 2023. Requests

for a public hearing must be submitted

as prescribed in the “Comments and

Request for Public Hearing” section.

ADDRESSES: Commenters are strongly

encouraged to submit public comments

electronically. Submit electronic submissions via the Federal eRulemaking

Bulletin No. 2023–44

Portal at www.regulations.gov (indicate

IRS and REG-117614-14) by following the online instructions for submitting comments. Once submitted to the

Federal eRulemaking Portal, comments

cannot be edited or withdrawn. The

Department of the Treasury (Treasury

Department) and the IRS will publish for

public availability any comments submitted electronically and on paper, to its

public docket. Send paper submissions

to: CC:PA:LPD:PR (REG-117614-14),

Room 5203, Internal Revenue Service,

P.O. Box 7604, Ben Franklin Station,

Washington, DC 20044.

Treasury Department and the IRS believe

that the transactions described in each

notice raise significant policy concerns.

This document sets forth the regulations described in Notice 2014-32 and

Notice 2016-73, modified as discussed in

this preamble. In response to a request for

comments in Notice 2016-73, one comment was received and is discussed in this

preamble. No comments were received on

Notice 2014-32.

FOR FURTHER INFORMATION

CONTACT: Concerning the proposed

regulations, Brady Plastaras at (202) 3176937; concerning submission of comments, requests for a public hearing, and

access to a public hearing, Vivian Hayes

at (202) 317-5306 (not toll-free numbers)

or by email at publichearings@irs.gov

(preferred).

I. Overview

SUPPLEMENTARY INFORMATION:

Background

On May 19, 2011, the Treasury

Department and the IRS published final

regulations (TD 9526) in the Federal

Register (76 FR 28890) under section

367(b) that relate to the treatment of

property used to acquire parent stock or

securities in certain triangular reorganizations involving one or more foreign

corporations (the Final Regulations). On

April 25, 2014, the Treasury Department

and the IRS issued Notice 2014-32 (201420 IRB 1006), which identified transactions designed to exploit certain aspects

of the Final Regulations and announced

that regulations would be issued under

section 367 to address these transactions. On December 2, 2016, the Treasury

Department and the IRS issued Notice

2016-73 (2016-52 IRB 908), which

identified other transactions designed to

exploit the Final Regulations, as modified

by the rules announced in Notice 2014-32,

and announced that additional regulations

would be issued under section 367. The

1193

Explanation of Provisions; Summary

of Comment in Response to Notice

2016-73

A. Section 367—in general

Section 367(a)(1) provides that if, in

connection with any exchange described

in section 332, 351, 354, 356, or 361, a

United States person transfers property to

a foreign corporation, such foreign corporation shall not, for purposes of determining the extent to which gain shall be

recognized on such transfer, be considered

to be a corporation. Under section 367(a)

(5), the Secretary has broad authority to

exempt transactions from the application

of section 367(a)(1) in order to carry out

the purposes of section 367(a).

Section 367(b)(1) provides that, in the

case of any exchange described in section

332, 351, 354, 355, 356, or 361 in connection with which there is no transfer of

property described in section 367(a)(1),

a foreign corporation shall be considered

to be a corporation except to the extent

provided in regulations prescribed by the

Secretary which are necessary or appropriate to prevent the avoidance of Federal

income taxes. Section 367(b)(2) provides

that the regulations prescribed pursuant to

section 367(b)(1) shall include (but shall

not be limited to) regulations dealing with

the sale or exchange of stock or securities

in a foreign corporation by a United States

person, including regulations providing

the circumstances under which gain is recognized currently, amounts are included in

gross income as a dividend, or both; and

the extent to which adjustments are made

October 30, 2023

to earnings and profits, the basis of stock

or securities, and the basis of assets.

B. Policies of section 367(b)

Section 367(b) was enacted to help

ensure that international tax considerations are adequately addressed when the

provisions in chapter 1, subchapter C, of

subtitle A of the Internal Revenue Code

(the Code) apply to an exchange involving a foreign corporation. Thus, the regulations under section 367(b) require that

adjustments or inclusions be made to prevent the material distortions of income

that can occur when the subchapter C provisions apply to an exchange involving a

foreign corporation.

The legislative history to section

367(b) describes Congress’s particular

concern with the need “to protect against

tax avoidance . . . upon the repatriation of

previously untaxed foreign earnings” and

its intent to grant the Treasury Department

broad authority to promulgate regulations to prevent the avoidance of Federal

income taxes. H.R. Rep. No. 94-658, at

241 (1975). Moreover, Congress specifically identified “transfers constituting a

repatriation of foreign earnings” as a type

of transfer to be covered by such regulations. Id. at 245. The Final Regulations

were promulgated in part to address these

concerns. More specifically, one of the

purposes of the Final Regulations is to

require adjustments to address the avoidance of U.S. tax, including the repatriation

of foreign earnings without being subject to U.S. tax, through the separation of

earnings and profits of a corporation from

property distributed by such corporation in connection with certain triangular

reorganizations.

C. Effect of the Tax Cuts and Jobs Act

In 2017, Congress passed the Tax

Cuts and Jobs Act (TCJA) (Pub. L. No.

115-97), which added and amended a

number of international tax provisions.

One effect of these new provisions, and

in particular sections 951A and 965, was

to increase the amount of foreign earnings or income subject to immediate U.S.

taxation. Section 965 imposed a onetime transition tax on certain earnings

and profits of foreign corporations, and

October 30, 2023

section 951A subjects certain income of a

controlled foreign corporation (CFC) (as

defined in section 957(a)) to current U.S.

taxation in the hands of the CFC’s United

States shareholders (as defined in section

951(b)). The TCJA also generally retained

the existing anti-deferral rules in subpart

F of the Code (sections 951 through 965,

as amended), under which, for example, a

CFC’s passive income, subject to certain

exceptions, is similarly subject to current U.S. taxation. The combined effect

of sections 951, 951A, and 965 is that an

increased amount of foreign earnings and

profits will have been subject to U.S. tax

regardless of whether the earnings and

profits are in fact repatriated. Under section 959, such previously taxed earnings

and profits (PTEP) are not again subject to

U.S. tax upon their repatriation.

The TCJA also added section 245A

to the Code, under which certain United

States shareholders of a specified 10-percent owned foreign corporation (SFC) (as

defined in section 245A(b)(1)) generally

are entitled to a 100-percent dividends

received deduction with respect to dividends received from the SFC. As a result

of the TCJA, an increased amount of earnings and profits of foreign corporations are

thus not taxable when distributed—either

because the earnings and profits constitute

PTEP or give rise to dividends (including

deemed dividends under section 367(b))

that are eligible for the section 245A dividends received deduction.

Although as a result of the TCJA a

lesser amount of earnings and profits of

foreign corporations may give rise to taxable dividends when distributed, the Final

Regulations remain necessary to carry out

the policies of section 367(b). The adjustments required by the Final Regulations

are intended to ensure that property transfers that are in substance distributions

are treated as such, and thus give rise to

income, capital gain, or a reduction in

basis under section 301(c). Furthermore,

incentives to avoid treating property transfers as distributions remain. For example,

a taxpayer may seek to avoid distribution

treatment because the distribution would

not qualify for the section 245A dividends

received deduction due to the application

of the hybrid dividend rules under section

245A(e) or the extraordinary disposition

rules under §1.245A-5, or because the

1194

taxpayer seeks to, for example, preserve

PTEP or other earnings and profits to

cover a future distribution.

D. The Final Regulations

The Final Regulations apply to certain triangular reorganizations in which

a subsidiary (S) purchases, in connection

with the reorganization, stock or securities

of its parent corporation (P) in exchange

for property and exchanges the stock or

securities of P for the stock or property of

a target corporation (T), but only if P or

S (or both) is a foreign corporation. The

Final Regulations and this preamble refer

to such exchange of stock or securities of

P for property as the “P acquisition.” This

preamble also refers to the P acquisition

together with the related triangular reorganization as an “applicable triangular

reorganization.”

When applicable, the Final Regulations

require that adjustments be made that have

the effect of a distribution of property from

S to P under section 301 (deemed distribution), followed by a contribution from

P to S of an amount equal to the deemed

distribution (deemed contribution). The

amount of the deemed distribution is the

sum of the amount of money transferred

by S, the amount of any liabilities that are

assumed by S and constitute property, and

the fair market value of other property

that S transferred to P in the P acquisition.

The deemed distribution is treated as a

dividend to the extent of S’s earnings and

profits.

There are several exceptions to the

application of the Final Regulations. Under

§1.367(b)-10(a)(2)(iii) (the section 367(a)

priority rule), the Final Regulations do not

apply to transactions otherwise described

in the Final Regulations if the amount

of gain that T’s shareholders would recognize under section 367(a)(1) is at least

equal to the sum of the amount of the

deemed distribution that P would treat as

a dividend under section 301(c)(1) and the

amount of the deemed distribution that P

would treat as gain under section 301(c)

(3) were the Final Regulations to apply.

This preamble refers to the hypothetical

amount of gain recognized under section

367(a)(1) and the hypothetical amount

of the deemed distribution treated either

as dividend or gain under section 301(c)

Bulletin No. 2023–44

as “section 367(a) income” and “section

367(b) income,” respectively. Section

1.367(a)-3(a)(2)(iv) provides a similar

priority rule (the section 367(b) priority

rule) that turns off the application of section 367(a)(1) with respect to transactions

described in the Final Regulations if the

amount of section 367(a) income that T’s

shareholders would otherwise recognize

under section 367(a)(1) (without regard

to any exceptions thereto) is less than

the amount of section 367(b) income that

would result from the deemed distribution. In this way, the priority rules subject

an applicable triangular reorganization to

whichever section 367 regime would give

rise to the most income under section 367.

Section 1.367(b)-10(a)(2)(ii) provides

another exception to the application of the

Final Regulations. Under this exception,

the Final Regulations generally do not

apply if S is a domestic corporation and

P would not be subject to U.S. tax on a

dividend received from S. This preamble

refers to this exception as the “no-U.S.-tax

exception.”

The Final Regulations also contain a

broad anti-abuse rule under which appropriate adjustments are made if, in connection with a triangular reorganization, a

transaction is engaged in with a view to

avoid the purpose of the Final Regulations.

See §1.367(b)-10(d). The anti-abuse rule

contains an example illustrating that the

earnings and profits of S may, under certain circumstances, be deemed to include

the earnings and profits of a corporation

related to P or S for purposes of determining the consequences of the adjustments

provided for in the Final Regulations.

E. Notice 2014-32

Notice 2014-32 identified transactions

designed to exploit certain aspects of the

Final Regulations. In particular, Notice

2014-32 described transactions in which

taxpayers applied the section 367(a) and

(b) priority rules and no-U.S.-tax exception

in a manner that, contrary to their intended

operation, resulted in the taxpayer being

subject to the more favorable of the section 367(a) or (b) regimes. Notice 201432 accordingly announced that regulations

would be issued under section 367(b) to

(i) modify the priority rules such that only

section 367(b) income that would actually

Bulletin No. 2023–44

be subject to U.S. tax would be considered

and (ii) narrow the scope of the no-U.S.tax exception. Notice 2014-32 further

announced that regulations would be

issued to remove the deemed contribution

rule in §1.367(b)-10(b)(2) and clarify the

broad application of the anti-abuse rule in

§1.367(b)-10(d).

F. Notice 2016-73

Notice 2016-73 identified additional

transactions designed to exploit the

Final Regulations, as modified by the

rules announced in Notice 2014-32. The

transactions identified in Notice 2016-73

include, as one example, a two-step transaction where an applicable triangular reorganization is followed by a purportedly

unrelated inbound nonrecognition transaction to which §1.367(b)-3 applies.

In that example, USP, a domestic corporation, owns all of the stock of FP, and

FP owns all of the stock of FS. Both FP

and FS are foreign corporations. USP also

owns all of the stock of USS, a domestic corporation, and USS owns all of the

stock of FT, a foreign corporation. In step

one of the example transaction, FP, FS,

and FT engage in an applicable triangular

reorganization that is designed to result in

no section 367(b) income and only a de

minimis amount of section 367(a) income.

Specifically, FS acquires newly issued

stock of FP for property and transfers the

stock of FP to USS in exchange for all the

stock of FT in a triangular reorganization

described in section 368(a)(1)(B). In addition, USS files a gain recognition agreement with respect to its transfer of the

stock of FT. The taxpayer takes the position that the section 367(a) priority rule

applies to turn off the Final Regulations

with respect to the applicable triangular

reorganization and therefore does not treat

FP as having received a deemed distribution. Under this position, the effect of this

first step of the transaction is a transfer of

property from FS to FP without a distribution that would result in a corresponding

decrease in the earnings and profits of FS

and increase in the earnings and profits of

FP associated with that property.

In step two of the example transaction, on a later date FP transfers its assets

(including the cash, note, or other property

received from FS) to USP or a domestic

1195

corporation whose stock is owned directly

or indirectly by USP in a nonrecognition

transaction described in §1.367(b)-3. The

taxpayer asserts that USP accordingly

includes in its income a deemed dividend

of the “all earnings and profits amount”

(as described in §1.367(b)-2(d)) with

respect to its stock in FP, but, because

that amount does not take into account the

earnings and profits of lower-tier foreign

corporations, the deemed dividend does

not include the earnings and profits associated with the property that FP received

from FS in the P acquisition (because such

earnings and profits remain at FS under

the position taken by the taxpayer). The

desired effect of the overall transaction is

a repatriation of property from FS to USP

(or a domestic corporation held by USP)

without a corresponding income inclusion

attributable to untaxed earnings and profits of FS.

Notice 2016-73 announced that additional regulations would be issued under

section 367(b) to address transactions

such as these types of two-step transactions. To address step one of the transaction, the regulations would, in addition

to the modifications described in Notice

2014-32, prevent the section 367(a) priority rule from applying where T is foreign

and instead subject certain T shareholders to rules under §1.367(b)-4 that could

result in an income inclusion or gain recognition with respect to their exchange of

T stock. To address step two of the transaction, the regulations would subject any

inbound nonrecognition transaction to

a new set of “excess asset basis” (EAB)

rules to be issued under §1.367(b)-3 that,

for purposes of determining the all earnings and profits amount, would take into

account certain earnings and profits of

lower-tier foreign corporations. Step two

of the transaction was subject to the EAB

rules because a taxpayer may have completed an applicable triangular reorganization described in step one (but not yet

an inbound nonrecognition transaction

described in step two) before the issuance of Notice 2016-73. Such partially

completed transactions would go unaddressed if the regulations were limited to

modifying the section 367(a) priority rule.

Notice 2016-73 further announced that the

EAB rules would apply to any inbound

nonrecognition transaction, regardless

October 30, 2023

of whether the taxpayer had previously

engaged in an applicable triangular reorganization, out of concern that transactions other than applicable triangular

reorganizations might also position taxpayers to achieve an improper repatriation

of property through a subsequent inbound

nonrecognition transaction.

Notice 2016-73 also described a variation of the foregoing two-step transaction

where the P acquisition is between FP and

USP. In this variation of the transaction,

FP (which has no earnings and profits)

acquires stock of USP in exchange for

nonqualified preferred stock of FP, and FP

uses the stock of USP to acquire the stock

of FT in an applicable triangular reorganization. After the applicable triangular

reorganization, the taxpayer causes FP to

redeem its nonqualified preferred stock

from USP in exchange for cash or a note.

The taxpayer takes the position that (i) the

Final Regulations do not apply to FP’s

transfer of nonqualified preferred stock

to USP because nonqualified preferred

stock is not “property” under the Final

Regulations, and (ii) FP’s redemption of

the nonqualified preferred stock does not

cause USP to have an income inclusion

because FP has no earnings and profits.

The desired effect of this variation is similarly a repatriation of property from FP to

USP at no U.S. tax cost.

To address this type of transaction,

Notice 2016-73 announced that future

regulations would modify the definition

of property in §1.367(b)-10(a)(3)(ii) to

include stock of S that is nonqualified preferred stock (as defined in section 351(g)

(2)).

II. Rules Applicable to Inbound

Nonrecognition Transactions

A. §1.367(b)-3 and Notice 2016-73

Section 1.367(b)-3 generally applies

to an acquisition by a domestic corporation (the domestic acquiring corporation)

of the assets of a foreign corporation (the

foreign acquired corporation) in a liquidation described in section 332 or an asset

acquisition described in section 368(a)(1)

1

(in each case, an inbound nonrecognition

transaction). Upon an inbound nonrecognition transaction, §1.367(b)-3 requires

certain shareholders of the foreign

acquired corporation to include in income

as a deemed dividend the all earnings and

profits amount with respect to their stock

in the foreign acquired corporation.1 Under

§1.367(b)-2(d), that amount is generally

determined under the principles of section

1248 when computing the amount of earnings and profits attributable to stock, subject to certain adjustments. For example,

the all earnings and profits amount does

not take into account earnings and profits

of subsidiaries of the foreign acquired corporation notwithstanding section 1248(c)

(2). See §1.367(b)-2(d)(3)(ii).

Section 1.367(b)-3 is intended to ensure

the appropriate carryover of tax attributes

from the foreign acquired corporation to

the domestic acquiring corporation. The

preamble to proposed regulations issued

in 1991 describes the section 367(b) principles relevant to inbound nonrecognition

transactions and specifically identifies the

prevention of “the repatriation of earnings

and profits without tax” as one such principle. 56 FR 41993, 41996. The 1991 proposed regulations accordingly introduced

the concept of including in income the all

earnings and profits amount, which was

intended to reflect “the proper measure

of the earnings and profits [of the foreign

acquired corporation] that should be subject to tax.” Id. The preamble to final regulations issued in 2000 further explained

that the inclusion of the all earnings and

profit amount “generally ensures that

the section 381 carryover basis reflects

an after-tax amount” and describes “the

appropriate carryover of attributes from

foreign to domestic corporations” as “the

principal policy consideration of section

367(b) with respect to inbound nonrecognition transactions.” TD 8862, 65 FR

3589, 3590. Section 1.367(b)-3 therefore

ensures that when asset basis is repatriated the basis either reflects after-tax

earnings and profits or is accompanied

by an income inclusion attributable to the

untaxed earnings and profits that gave rise

to that basis.

As illustrated in Notice 2016-73 and

summarized above in Part I.F of the

Explanation of Provisions section of

this preamble, there are some circumstances where the earnings and profits of

the foreign acquired corporation do not

accurately reflect the basis in its assets.

In particular, the earnings and profits of

the foreign acquired corporation may be

insufficient to the extent that earnings

and profits that gave rise to the foreign

acquired corporation’s asset basis reside

in lower-tier foreign corporations as a

result of an applicable triangular reorganization that does not give rise to a deemed

distribution. Because the all earnings and

profits amount does not account for the

earnings and profits of lower-tier foreign

corporations, a deemed dividend of the all

earnings and profits amount will not have

the intended effect of ensuring the appropriate carryover of asset basis in such

cases.

To address this concern, Notice 201673 announced that §1.367(b)-3 would be

modified to require certain shareholders of

the foreign acquired corporation to adjust

their all earnings and profits amount upon

an inbound nonrecognition transaction.

Specifically, an exchanging shareholder

that exchanges stock in a foreign acquired

corporation with respect to which there is

EAB would increase its all earnings and

profits amount by certain earnings and

profits of lower-tier foreign corporations,

referred to in Notice 2016-73 as “specified

earnings.” Notice 2016-73 defined EAB

as the amount by which the inside asset

basis of the foreign acquired corporation

exceeded the sum of its earnings and profits, its outside stock basis, and its liabilities

assumed by the domestic acquiring corporation. The EAB concept is in furtherance

of a balanced tax-basis balance sheet. In

other words, the EAB concept recognizes

that the tax basis in a corporation’s assets

generally is derived from these three

sources, with outside stock basis serving

as a proxy for contributed capital. While

basis derived from contributed capital

reflects after-tax amounts (or, in the case

of liabilities assumed by the domestic

acquiring corporation, is expected to

Certain other shareholders of the foreign acquired corporation may be required to recognize realized gain with respect to their exchanged stock. See §1.367(b)-3(c)(2).

October 30, 2023

1196

Bulletin No. 2023–44

be satisfied by after-tax amounts of the

domestic acquiring corporation), basis

derived from a foreign corporation’s

untaxed earnings and profits might not

be subject to U.S. tax until those earnings

are repatriated. For this reason, a foreign

corporation’s untaxed earnings and profits

are subject to tax via a deemed dividend

of the all earnings and profits amount.

This deemed dividend inclusion in effect

requires that the exchanging shareholder

“pay for” the tax basis in repatriated assets

before that basis is used within the U.S.

tax system.

Specified earnings are defined in

Notice 2016-73 as the least of the following amounts: (i) the aggregate earnings

and profits of foreign subsidiaries of the

foreign acquired corporation attributable

to the exchanging shareholder, (ii) the

amount of the foreign acquired corporation’s EAB attributable to the exchanging shareholder, and (iii) the exchanging

shareholder’s built-in gain in the stock

of the foreign acquired corporation. The

addition of specified earnings to the all

earnings and profits amount is thereby

intended to correct the basis imbalance

of the foreign acquired corporation by

taking into account certain earnings and

profits residing in foreign subsidiaries

that are presumed to have given rise

to the EAB. Thus, the all earnings and

profits amount, after taking into account

specified earnings, should more accurately reflect the asset basis of the foreign

acquired corporation that is repatriated

pursuant to the inbound nonrecognition

transaction.

The proposed regulations generally

would adopt the rules described in Notice

2016-73, modified as discussed in the

remainder of this preamble. This preamble uses the term “EAB rules” to refer

collectively to the modifications that are

proposed to be made to §1.367(b)-3.

B. General scope of the EAB rules

As described in Notice 2016-73, the

EAB rules would apply to any inbound

nonrecognition transaction regardless

of whether the taxpayer had previously

engaged in an applicable triangular reorganization. This scope reflected the possibility that EAB policy concerns could arise

as a result of other transactions and that

Bulletin No. 2023–44

taxpayers may attempt to achieve similar

results through such other transactions.

The comment recommended that the

EAB rules be applied to a narrower set

of transactions, citing, among other reasons, the significant compliance burden

that would otherwise be imposed on legitimate business transactions. The comment

thus recommended that the EAB rules be

applied only to taxpayers that had completed an applicable triangular reorganization before the issuance of Notice 2016-73

that involved a foreign target corporation;

did not make adjustments that have the

effect of a distribution of property from

S to P; and engage in a future inbound

nonrecognition transaction. If narrowed in

this way, the comment further suggested

that the EAB rules apply on only a transitional basis; for example, for the 10-year

period following Notice 2016-73. The

comment asserted that a broader application of the EAB rules would be unnecessary in light of Notice 2016-73’s proposed

modification to the section 367(a) priority

rule, which, by requiring adjustments for

a deemed distribution whenever the target is a foreign corporation, should prevent taxpayers from separating basis from

earnings and profits in future transactions.

As an alternative, the comment suggested

that the EAB rules be applied only to

inbound nonrecognition transactions that

follow an applicable triangular reorganization or other specifically enumerated

transactions.

The Treasury Department and the IRS

agree that it would be appropriate to narrow the scope of the EAB rules for the reasons noted in the comment. In general, the

proposed regulations accordingly would

limit the application of the EAB rules

to those inbound nonrecognition transactions where (i) S previously acquired

stock or securities of P in exchange for

property in connection with a triangular

reorganization and (ii) adjustments were

not made that have the effect of a distribution of property from S to P under section

301. See proposed §1.367(b)-3(g)(1)(i).

However, to address avoidance situations

that would have been subject to the EAB

rules under the broad scope announced

in Notice 2016-73 (which did not predicate the application of the EAB rules on

there having been an applicable triangular

reorganization), the proposed regulations

1197

would also provide that the EAB rules

apply to inbound nonrecognition transactions where EAB was previously created

in connection with a transaction other than

a triangular reorganization if the principal

purpose of such other transaction was to

create EAB. See proposed §1.367(b)-3(g)

(1)(ii). This more limited application of

the EAB rules is anticipated to relieve taxpayers from the need to comply with the

EAB rules with respect to non-tax motivated transactions while still addressing

the policy concerns identified in Notice

2016-73.

The proposed regulations would not

adopt the comment’s suggestion to apply

the EAB rules only to situations where

an applicable triangular reorganization

involving a foreign target was completed

before the issuance of Notice 2016-73.

The Treasury Department and the IRS are

concerned that such a limitation would

prevent the application of the EAB rules

to future transactions designed to create

EAB. For example, a subsequent applicable triangular reorganization could give

rise to EAB where the target corporation

is domestic because the section 367(a) priority rule continues to apply in that context. EAB could thus arise if the section

367(a) priority rule applies to prevent the

application of the Final Regulations and

P and S are both foreign corporations. An

ongoing application of the EAB rules is

also necessary to address the case where

the target is a foreign corporation but the

taxpayer asserts that its transaction is not

subject to §1.367(b)-10 under a novel or

unforeseen theory. For this reason, the

proposed regulations also would not condition the applicability of the EAB rules

on the taxpayer having participated in

an applicable triangular reorganization.

The proposed regulations instead would

provide that the EAB rules may apply to

EAB created by any triangular reorganization (provided that the other conditions

described in the preceding paragraph are

met—that is, S acquired stock or securities of P for property in connection with

the reorganization, and adjustments were

not made that have the effect of a distribution of property from S to P under

section 301) and to EAB created in

other transactions that have a principal

purpose of creating EAB. See proposed

§1.367(b)-3(g)(1).

October 30, 2023

C. EAB reduction rule

Under Notice 2016-73, all EAB with

respect to a foreign acquired corporation

is taken into account upon an inbound

nonrecognition transaction, regardless of

how the EAB arose. However, if the taxpayer could demonstrate that EAB was

not attributable to property provided by a

foreign subsidiary, then EAB is reduced to

the extent of such EAB (the EAB reduction rule).

The comment asserted that the EAB

reduction rule amounted to a presumption that all EAB originated from the

earnings and profits of foreign subsidiaries. The comment stated that overcoming this presumption would place a

significant burden on taxpayers because

it would require a comprehensive review

of the foreign acquired corporation’s historic transactions to determine the extent

to which EAB should be reduced. The

comment therefore recommended that the

EAB rules be revised such that taxpayers

be permitted to take into account only the

EAB created by an applicable triangular

reorganization (or any other specifically

identified transaction).

The Treasury Department and the IRS

expect that the more limited scope of the

EAB rules set forth in the proposed regulations would address the concern reflected

in the comment. As proposed in these

regulations and discussed in Part II.B of

the Explanation of Provisions section of

this preamble, the EAB rules would apply

only to those inbound nonrecognition

transactions that follow certain triangular reorganizations (or other transactions

having a principal purpose of creating

EAB) as opposed to any inbound nonrecognition transaction. This narrower scope

would substantially reduce the burden of

complying with the proposed EAB rules

by eliminating the need for many taxpayers to determine whether EAB exists with

respect to a foreign acquired corporation.

This narrowed scope also would obviate the rationale for the EAB reduction

rule, which was intended to provide relief

where a taxpayer could demonstrate that

EAB was not attributable to an avoidance transaction. Such a relief measure

would not be appropriate under the proposed regulations, however, because the

proposed regulations would apply only

October 30, 2023

to tax-motivated transactions. The EAB

reduction rule would therefore be removed

with respect to transactions completed

after the issuance of the proposed regulations. But see the EAB reduction rule

in proposed §1.367(b)-3(g)(7)(ii)(C) for

certain transactions completed before the

issuance of the proposed regulations. The

proposed regulations accordingly would

provide that a taxpayer subject to the

EAB rules by reason of having engaged

in a triangular reorganization must take

into account all EAB with respect to the

foreign acquired corporation, regardless

of how that EAB arose and without the

ability to reduce EAB to the extent it is

not attributable, directly or indirectly, to

property provided by a foreign subsidiary

of the foreign acquired corporation.

D. Treatment of unrelated minority

shareholders

As discussed in Part II.A of the

Explanation of Provisions section of this

preamble, one element of the EAB computation is the amount of aggregate outside

basis in the stock of the foreign acquired

corporation. An exchanging shareholder

that would be subject to the EAB rules

would thus potentially need to identify the

outside bases of other, unrelated shareholders of the foreign acquired corporation to calculate the amounts of EAB and

specified earnings. The comment asserted

that it may not be possible for an exchanging shareholder to obtain this information

and accordingly suggested that the outside

bases of such unrelated minority shareholders be disregarded (along with any

related share of inside basis, liabilities,

and earnings and profits) when calculating

EAB and specified earnings.

The Treasury Department and the IRS

recognize that the presence of unrelated

minority shareholders may create some

uncertainty but expect that narrowing

the application of the EAB rules to only

a limited set of inbound nonrecognition

transactions would appropriately address

the concern reflected in the comment.

The transactions of which the Treasury

Department and the IRS are aware,

and which the proposed regulations are

generally intended to address, are typically internal restructurings that by their

nature are unlikely to involve unrelated

1198

shareholders. See Notice 2016-73, Section

3. Moreover, modifying the EAB rules as

the comment suggests would require additional rules to specify how an exchanging

shareholder would disregard unrelated

minority shareholders, thereby adding

complexity to the EAB calculations to

accommodate an unlikely fact pattern.

Therefore, the proposed regulations would

not adopt this suggestion.

E. Computation of specified earnings

As discussed in Part II.A of the

Explanation of Provisions section of this

preamble, the rules described in Notice

2016-73 seek to correct the basis imbalance of the foreign acquired corporation

by increasing an exchanging shareholder’s all earnings and profits amount by the

amount of “specified earnings.” Specified

earnings are limited, in part, to the sum

of the earnings and profits with respect

to each foreign subsidiary of the foreign

acquired corporation that are attributable

under section 1248(c)(2) to the stock of

the foreign acquired corporation that is

exchanged pursuant to the inbound nonrecognition transaction. Accordingly,

specified earnings under the notice are

not sourced from PTEP of foreign subsidiaries of the foreign acquired corporation

because PTEP is not included in earnings

and profits for purposes of section 1248.

See section 1248(d)(1). In other words, the

rules described in Notice 2016-73 would

not allow the foreign acquired corporation’s basis imbalance to be corrected by

a deemed distribution of lower-tier PTEP,

even though a taxpayer may have created

EAB by separating asset basis from earnings and profits that are characterized as

PTEP.

In light of the TCJA, which increased

the prevalence of PTEP, the Treasury

Department and the IRS are of the view

that the policies of the EAB rules are

better served if, instead of adjusting an

exchanging shareholder’s all earnings

and profits amount as described in Notice

2016-73, the foreign acquired corporation

is treated as receiving a deemed distribution under section 301 from its foreign

subsidiaries, and the exchanging shareholder then accounts for the effects of the

deemed distribution in the inbound nonrecognition transaction. Such a deemed

Bulletin No. 2023–44

distribution more accurately addresses the

basis imbalance of the foreign acquired

corporation because the deemed distribution may be sourced from both PTEP and

non-PTEP earnings and profits, reflecting

that the basis imbalance may be associated with either type of earnings and profits. A deemed distribution from a foreign

subsidiary to the foreign acquired corporation is also more likely to align the EAB

rules with the substance of the taxpayer’s

transaction because EAB generally arises

where a taxpayer fails to treat a property

transfer as a distribution under section

301. Furthermore, taking into account the

effects of a section 301 distribution is consistent with the Final Regulations, which

address applicable triangular reorganizations by taking into account the effects of

a deemed distribution under section 301

from S to P.

The proposed regulations accordingly

would modify the EAB rules by providing

that an exchanging shareholder of the foreign acquired corporation computes its all

earnings and profits amount after accounting for the effects of a deemed distribution from the foreign subsidiaries of the

foreign acquired corporation to the foreign acquired corporation. See proposed

§1.367(b)-3(g)(1). The deemed distribution, which occurs immediately before

the inbound nonrecognition transaction,

would be equal to the amount of “specified

earnings.” The term specified earnings

would be defined under the proposed regulations as the lesser of (i) the aggregate

earnings and profits of foreign subsidiaries

of the foreign acquired corporation (with

no exclusion for those earnings and profits characterized as PTEP) (collectively,

lower-tier earnings), and (ii) the EAB

of the foreign acquired corporation. See

proposed §1.367(b)-2(g)(2)(vii). The limitations on specified earnings described

in Notice 2016-73 and Part II.A of the

Explanation of Provisions section of this

preamble (other than the EAB limitation,

which is retained with modification) are

removed because those limitations, which

were designed in part to approximate

a reasonable allocation of EAB among

the shareholders of the foreign acquired

corporation, are not necessary where

the foreign acquired corporation’s basis

imbalance is addressed by a deemed distribu

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