Bulletin No. 2020–45
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HIGHLIGHTS
OF THIS ISSUE
Bulletin No. 2020–45
November 2, 2020
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
EMPLOYEE PLANS
INCOME TAX
Rev. Proc. 2020-43, page 991.
Announcement 2020-40, page 999.
This revenue procedure provides the inflation-adjusted maximum dollar amount that may be made newly available for
excepted benefit health reimbursement arrangements or
other account-based group health plans for plan years beginning after December 31, 2020, and before January 1, 2022.
Due to indexing methodology requiring rounding down to the
nearest $50 increment, this amount remains $1,800 for the
2021 plan year.
Rev. Proc. 2020-46, page 995.
This revenue procedure modifies and updates Rev. Proc.
2016-47, 2016-37 I.R.B. 346, which provides a list of permissible reasons for a taxpayer to self-certify eligibility for a
waiver of the 60-day rollover requirement under certain eligible retirement plans. This revenue procedure modifies that
list by adding a new reason: a distribution was made to a
state unclaimed property fund.
EMPLOYMENT PLANS
Notice 2020-77, page 988.
This notice sets forth updates on the corporate bond monthly yield curve, the corresponding spot segment rates for
October 2020 used under § 417(e)(3)(D), the 24-month average segment rates applicable for October 2020, and the
30-year Treasury rates, as reflected by the application of §
430(h)(2)(C)(iv).
Finding Lists begin on page ii.
The United States provided written notification, dated August
18, 2020, to the Government of the Hong Kong Special Administrative Region of its termination of a reciprocal agreement to exempt from income tax certain income from the
international operation of ships. The termination of the agreement takes effect on January 1, 2021, and will have effect
for taxable years beginning on or after January 1, 2021.
Rev. Proc. 2020-44, page 991.
To facilitate the market’s transition away from the London
Interbank Offered Rate and other interbank offered rates,
this revenue procedure mitigates certain potential tax consequences of adopting fallback language recommended
by the Alternative Reference Rates Committee (ARRC) and
the International Swaps and Derivatives Association (ISDA).
The revenue procedure generally provides that modifying
certain contracts to incorporate the ARRC’s and ISDA’s recommended fallback language will not result in a realization
event. In addition, the revenue procedure generally provides
that such modifications will not result in legging out of an
integrated transaction or in the disposition or termination of
either leg of a hedging transaction.
Rev. Rul. 2020-22, page 963.
Federal rates; adjusted federal rates; adjusted federal longterm rate, and the long-term tax exempt rate. For purposes
of sections 382, 1274, 1288, 7872 and other sections of
the Code, tables set forth the rates for November 2020.
Rev. Rul. 2020-24, page 965.
This revenue ruling clarifies the federal income tax withholding and reporting obligations that apply for the year a
payment is made from a qualified plan to a state unclaimed
property fund.
T.D. 9911, page 966.
The final regulations provide guidance on determining life
insurance reserves and changing the method of computing
certain insurance company reserves. The final regulations
also authorize changes to insurance company reporting requirements and contain numerous conforming changes to
other regulations. The final regulations implement legislative changes made by sections 13513 and 13517 of the
Tax Cuts and Jobs Act.
The main regulation citations are: 26 CFR 1.338-11:
Effect of section 338 election on insurance company targets; 26 CFR 1.807-1: Computation of life insurance reserves; 26 CFR 1.807-3: Reporting of reserves; 26 CFR
1.807-4: Adjustment for change in computing reserves; 26
CFR 1.816-1: Life insurance reserves; 26 CFR 1.817A-1:
Certain modified guaranteed contracts; 26 CFR 1.6012-2:
Corporations required to make returns of income; 26 CFR
301.9100-6T: Time and manner of making certain elections under the Deficit Reduction Act of 1984.
T.D. 9913, page 975.
These final regulations clarify the definition of a “qualifying
relative” for purposes of various provisions of the Internal
Revenue Code for taxable years 2018 through 2025.
T.D. 9918, page 979.
This document contains final regulations clarifying that the
following deductions allowed to an estate or non-grantor
trust are not miscellaneous itemized deductions subject to
the suspension in section 67(g): costs paid or incurred in
connection with the administration of an estate or non-grantor trust that would not have been incurred if the property
were not held in the estate or trust, the personal exemption
of an estate or non-grantor trust, the distribution deduction
for trusts distributing current income, and the distribution
deduction for estates and trusts accumulating income. The
final regulations also provide guidance on determining the
character, amount, and allocation of deductions in excess
of gross income succeeded to by a beneficiary on the termination of an estate or non-grantor trust.
The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
November 2, 2020
Bulletin No. 2020–45
Part I
Section 1274. —
Determination of Issue
Price in the Case of Certain
Debt Instruments Issued for
Property
(Also §§ 42, 280G, 382, 467, 468, 482, 483, 1288,
7520, 7872.)
Rev. Rul. 2020-22
This revenue ruling provides various
prescribed rates for federal income tax
AFR
110% AFR
120% AFR
130% AFR
AFR
110% AFR
120% AFR
130% AFR
150% AFR
175% AFR
AFR
110% AFR
120% AFR
130% AFR
Short-term adjusted AFR
Mid-term adjusted AFR
Long-term adjusted AFR
Bulletin No. 2020–45
purposes for November 2020 (the current month). Table 1 contains the shortterm, mid-term, and long-term applicable federal rates (AFR) for the current
month for purposes of section 1274(d)
of the Internal Revenue Code. Table 2
contains the short-term, mid-term, and
long-term adjusted applicable federal
rates (adjusted AFR) for the current
month for purposes of section 1288(b).
Table 3 sets forth the adjusted federal long-term rate and the long-term
tax-exempt rate described in section
382(f). Table 4 contains the appropri-
ate percentages for determining the
low-income housing credit described in
section 42(b)(1) for buildings placed in
service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service
after July 30, 2008, shall not be less
than 9%. Finally, Table 5 contains the
federal rate for determining the present
value of an annuity, an interest for life
or for a term of years, or a remainder or
a reversionary interest for purposes of
section 7520.
REV. RUL. 2020-22 TABLE 1
Applicable Federal Rates (AFR) for November 2020
Period for Compounding
Annual
Semiannual
Quarterly
Short-term
0.13%
0.13%
0.13%
0.14%
0.14%
0.14%
0.16%
0.16%
0.16%
0.17%
0.17%
0.17%
Mid-term
0.39%
0.39%
0.39%
0.43%
0.43%
0.43%
0.47%
0.47%
0.47%
0.51%
0.51%
0.51%
0.59%
0.59%
0.59%
0.68%
0.68%
0.68%
Long-term
1.17%
1.17%
1.17%
1.29%
1.29%
1.29%
1.40%
1.40%
1.40%
1.53%
1.52%
1.52%
REV. RUL. 2020-22 TABLE 2
Adjusted AFR for November 2020
Period for Compounding
Annual
Semiannual
0.10%
0.10%
0.30%
0.30%
0.89%
0.89%
963
Quarterly
0.10%
0.30%
0.89%
Monthly
0.13%
0.14%
0.16%
0.17%
0.39%
0.43%
0.47%
0.51%
0.59%
0.68%
1.17%
1.29%
1.40%
1.52%
Monthly
0.10%
0.30%
0.89%
November 2, 2020
REV. RUL. 2020-22 TABLE 3
Rates Under Section 382 for November 2020
Adjusted federal long-term rate for the current month
Long-term tax-exempt rate for ownership changes during the current month (the highest of
the adjusted federal long-term rates for the current month and the prior two months.)
.89%
.89%
REV. RUL. 2020-22 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for November 2020
Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July
30, 2008, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income housing credit
7.18%
Appropriate percentage for the 30% present value low-income housing credit
3.08%
REV. RUL. 2020-22 TABLE 5
Rate Under Section 7520 for November 2020
Applicable federal rate for determining the present value of an annuity, an interest for life or
a term of years, or a remainder or reversionary interest
Section 42.—Low-Income
Housing Credit
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
November 2020. See Rev. Rul. 2020-22, page 963.
Section 280G.—Golden
Parachute Payments
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
November 2020. See Rev. Rul. 2020-22, page 963.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and
Certain Built-In Losses
Following Ownership
Change
The adjusted applicable federal long-term rate
is set forth for the month of November 2020. See
Rev. Rul. 2020-22, page 963.
Section 467.—Certain
Payments for the Use of
Property or Services
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
November 2020. See Rev. Rul. 2020-22, page 963.
Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The applicable federal short-term rates are set
forth for the month of November 2020. See Rev.
Rul. 2020-22, page 963.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
November 2020. See Rev. Rul. 2020-22, page 963.
.4%
Section 483.—Interest on
Certain Deferred Payments
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
November 2020. See Rev. Rul. 2020-22, page 963.
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of November 2020. See Rev. Rul. 2020-22, page 963.
Section 7520.—Valuation
Tables
The applicable federal mid-term rates are set
forth for the month of November 2020. See Rev.
Rul. 2020-22, page 963.
Section 7872.—Treatment
of Loans With BelowMarket Interest Rates
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
November 2020. See Rev. Rul. 2020-22, page 963.
November 2, 2020
964
Bulletin No. 2020–45
Section 3405.—Special
Rules for Pensions,
Annuities, and Certain
Other Deferred Income
(Also, § 6047)
Rev. Rul. 2020-24
Withholding and Reporting
With Respect to Payments
From Qualified Plans to
State Unclaimed Property
Funds
ISSUES
(1) Under the facts presented, is the
payment of Individual C’s accrued benefit
from Plan X subject to federal income tax
withholding under § 3405 of the Internal
Revenue Code?
(2) Is the payment from Plan X subject
to reporting under § 6047?
FACTS
Employer M is the plan administrator
of Plan X, a qualified retirement plan under § 401(a) that does not include designated Roth accounts under § 402A, hold
employer securities, or provide benefits
described in § 104 (compensation for
injuries or sickness) or § 105 (amounts
received under accident and health
plans). Individual C, a U.S. person under
§ 7701(a)(30)(A) with a calendar year taxable year, has an accrued benefit in Plan
X with a value of $900, has not made a
withholding election under § 3405 with
respect to her benefit, and has no investment in the contract within the meaning of
§ 72 with respect to her benefit. In 2020,
Individual C’s accrued benefit (net of any
applicable withholding) is paid to the
State J unclaimed property fund, a fund
under which a claim for property may be
made by an owner.1
LAW AND ANALYSIS
(1) Withholding
Section 3405 provides federal income
tax withholding rules with respect to designated distributions. Under § 3405(d), the
payor or plan administrator shall withhold
from a designated distribution, and be liable for, payment of the tax required to be
withheld under § 3405. Under § 3405(e)
(1)(A), the term “designated distribution”
means, except as provided in § 3405(e)(1)
(B), any distribution or payment from or
under an employer deferred compensation
plan, an individual retirement plan under
§ 7701(a)(37), or a commercial annuity.
Under § 3405(e)(5), the term “employer
deferred compensation plan” includes any
pension, annuity, profit-sharing, or stock
bonus plan, or other plan deferring the receipt of compensation. A qualified retirement plan under § 401(a) is an employer
deferred compensation plan.
Section 3405(e)(1)(B)(i), (iii), and (iv)
provides exceptions to treatment as a designated distribution with respect to amounts
that are wages, amounts that are subject
to withholding on nonresident aliens and
foreign corporations,2 and distributions described in § 404(k)(2) relating to dividends
on employer securities. None of these exceptions apply under the facts presented. In
addition, § 3405(e)(1)(B)(ii) provides that
a designated distribution does not include
the portion of a distribution or payment it
is reasonable to believe is not includible
in gross income. Under the facts presented, it is not reasonable for Employer M to
believe that the payment of any portion of
Individual C’s accrued benefit from Plan X
is not includible in gross income.
Because none of the statutory exceptions
from treatment as a designated distribution
in § 3405(e)(1)(B) apply to the payment of
Individual C’s accrued benefit from Plan X,
the payment, including the amount withheld,
is a designated distribution. Accordingly, the
payment is subject to federal income tax
withholding under § 3405(d).
(2) Reporting
Section 6047(d) provides that the Secretary of the Treasury shall, by forms or
regulations, require the employer maintaining a plan from which designated distributions (as defined in § 3405(e)(1)) may
be made, or the plan administrator of that
plan, to make returns and reports regarding
the plan. However, no such return or report
may be required with respect to distributions to any person during any year unless
the distributions aggregate $10 or more.
Form 1099‑R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,
is used to satisfy the reporting obligations
under § 6047(d). Under the 2020 instructions to Form 1099‑R, a Form 1099-R
must be filed for each person to whom a
designated distribution of $10 or more has
been made, and the total amount of the distribution (before income tax or other withholding) must be reported in Box 1 of that
form. In addition, under those instructions,
the federal income tax withheld must be reported in Box 4 of the Form 1099-R.
The Plan X payment of Individual C’s
accrued benefit, including both the amount
sent to the State J unclaimed property fund
and the amount withheld, is a designated
distribution under § 3405(e)(1) that exceeds the reporting threshold. Accordingly, Employer M is required to report that
designated distribution in Box 1, and the
federal income tax withheld in Box 4, of
the Form 1099-R for 2020.
HOLDINGS
(1) The payment of Individual C’s
accrued benefit from Plan X is subject
to federal income tax withholding under
§ 3405.
(2) The payment from Plan X is subject
to reporting under § 6047.
TRANSITION RELIEF
A person will not be treated as failing to
comply with the withholding and reporting
requirements described in this revenue ruling with respect to payments made before
the earlier of January 1, 2022, or the date
it becomes reasonably practicable for the
person to comply with those requirements.
This revenue ruling does not address whether the payment to the State J unclaimed property fund otherwise complies with applicable law. For example, it does not address compliance with
any search requirements applicable under state law and does not address matters arising under Title I of the Employee Retirement Income Security Act of 1974, Pub. L. 93‑406, 88 Stat. 829,
as amended, for which the Department of Labor has subject matter jurisdiction under Reorganization Plan No. 4 of 1978, 5 U.S.C. App.
2
Under § 3405(e)(1)(B)(iii), a designated distribution does not include a payment that is subject to withholding under the withholding rules applicable to payments to nonresident aliens and
foreign corporations. See § 1441 (Withholding of tax on nonresident aliens), § 1442 (Withholding of tax on foreign corporations), and § 1.1441-4(b)(1)(ii).
1
Bulletin No. 2020–45
965
November 2, 2020
DRAFTING INFORMATION
SUPPLEMENTARY INFORMATION:
The principal author of this revenue
ruling is Angelique Carrington of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and
Employment Taxes). Ms. Carrington may
be reached at (202) 317-4148 (not a tollfree number).
Background
Section 807 — Rules for
certain reserves
26 CFR 1, 301: Computation and Reporting of Reserves for Life Insurance Companies
T.D. 9911
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
Computation and Reporting
of Reserves for Life
Insurance Companies
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations that provide guidance on
the computation of life insurance reserves
and the change in basis of computing
certain reserves of insurance companies.
These final regulations implement recent
legislative changes to the Internal Revenue Code. This document affects entities
taxable as insurance companies.
DATES: Effective date: These regulations
are effective October 13, 2020.
Applicability dates: For dates of applicability, see §§ 1.338-11(d)(7)(iii), 1.8071(c), 1.807-3(b), 1.807-4(e), 1.816-1(b),
1.817A-1(c), and 1.6012-2(l).
FOR FURTHER INFORMATION CONTACT: Ian Follansbee at (202) 317-4453
(not a toll-free number)
November 2, 2020
This document contains amendments
to 26 CFR part 1 under sections 807 and
816 of the Internal Revenue Code (Code).
Sections 807 and 816 were added to the
Code by section 211(a) of the Deficit Reduction Act of 1984, Public Law 98-369,
98 Stat. 494. Section 807 was amended by
sections 13513 and 13517 of Public Law
No. 115-97, 131 Stat. 2054, 2143, 2144
(2017), commonly referred to as the Tax
Cuts and Jobs Act (TCJA). These amendments by the TCJA apply to taxable years
beginning after December 31, 2017.
This document also amends or removes
the following regulations in 26 CFR: §§
1.338-11, 1.381(c)(22)-1, 1.801-2, 1.8015, 1.801-7, 1.801-8, 1.806-4, 1.807-1,
1.809-2, 1.809-5, 1.810-3, 1.817A-0,
1.817A-1, 1.818-2, 1.818-4, 1.848-1,
1.6012-2, and 301.9100-6T. These changes are conforming changes to regulations
that (i) relate to repealed or amended law,
(ii) reference regulations that are being removed, (iii) have no future application, or
(iv) relate to other regulations made final
by this document.
The Department of the Treasury (Treasury Department) and the IRS published
proposed regulations (REG-132529-17)
in the Federal Register (85 FR 18496)
on April 2, 2020 (proposed regulations). A
correction to the proposed regulations was
published in the Federal Register (85 FR
21129) on April 16, 2020. The Treasury
Department and the IRS received six public comments on the proposed regulations.
Copies of the comments received are
available for public inspection at https://
www.regulations.gov or upon request. No
public hearing was requested, and none
was held.
After consideration of all of the comments received on the proposed regulations, the proposed regulations are adopted as amended by this Treasury decision
(final regulations).
Summary of Comments and
Explanation of Revisions
This section discusses the public comments received on the proposed regulations, explains the revisions adopted in
966
the final regulations in response to those
comments, and describes guidance the
Treasury Department and the IRS are providing contemporaneously with publication of the final regulations in the Federal
Register.
1. Comments and Changes Relating to §
1.807-1 of the Proposed Regulations
Section 807(d) of the Code provides
the method of computing life insurance
reserves for purposes of determining the
income of an insurance company subject
to Federal income tax under subchapter L
of chapter 1 of the Code (subchapter L).
Section 807(d)(1)(A) provides generally
that the amount of life insurance reserves
for a life insurance contract (other than a
variable contract subject to section 807(d)
(1)(B)) is the greater of (i) the net surrender value of such contract, or (ii) 92.81
percent of the reserve determined under
the tax-reserve method applicable to the
contract under section 807(d)(3).
Section 1.807-1(a) of the proposed regulations (proposed § 1.807-1(a)) provides
that no asset adequacy reserve may be
included in the amount of life insurance
reserves under section 807(d). Proposed
§ 1.807-1(a) describes an asset adequacy
reserve as “includ[ing] any reserve that
is established as an additional reserve
based upon an analysis of the adequacy
of reserves that would otherwise be established or any reserve that is not held with
respect to a particular contract.” Further,
proposed § 1.807-1(a) provides that an
asset adequacy reserve is “any reserve or
portion of a reserve that would have been
established pursuant to an asset adequacy
analysis required by the National Association of Insurance Commissioner’s Valuation Manual 30 as it existed on December
22, 2017, the date of enactment of Public
Law 115-97 . . . .”
Two commenters requested that the
first quoted provision be changed to provide that asset adequacy reserves are those
reserves established pursuant to an analysis of the adequacy of reserves only if that
analysis is pursuant to the requirements
of the National Association of Insurance
Commissioners’ (NAIC) Valuation Manual 30. Both commenters suggested the
final regulations state what an asset adequacy reserve “is” as opposed to what it
Bulletin No. 2020–45
“includes.” Moreover, both commenters
would remove the language that includes
within the definition of “asset adequacy
reserve” any reserve that is not held with
respect to a particular contract.
The final regulations generally incorporate these comments. The final regulations, however, also incorporate in the
definition of asset adequacy reserves any
reserve that is similar to an asset adequacy reserve that is determined under the
NAIC’s requirements as of the date the
reserve is determined.
With respect to the second provision
previously quoted, one commenter proposed removing the December 22, 2017,
fixed date and replacing it with a reference
to “the date the reserve is determined.”
The commenter believed that such a
change would make the provision more
consistent with section 807(d)(3), which
generally requires using the tax reserve
method that is applicable as of the date the
reserve is determined.
The final regulations do not adopt this
suggestion. Section 807(d)(3) specifically
provides that the tax reserve method (for
example, the Commissioners’ Reserve
Valuation Method (CRVM) or Commissioners’ Annuity Reserve Valuation Method (CARVM)) to be used in determining
a reserve is the tax reserve method that is
applicable when the reserve is determined.
No such rule exists with respect to asset
adequacy reserves.
The reserves determined based on the
application of those parts of the NAIC
Valuation Manual, as it existed when the
TCJA was enacted, that implement and
define CRVM and CARVM are not asset
adequacy reserves. See Staff of the Joint
Committee on Taxation, 115th Cong.,
General Explanation of Public Law 11597, 235 (Comm. Print 2018) (Bluebook)
(“Under NAIC-prescribed principle-based
reserve methodology in effect at the time
of the enactment of the provision, principle-base[d] reserves for any contract do
not include any asset adequacy reserve
component.”) (citation omitted). On the
other hand, any additional reserve required
to be set aside under Valuation Manual 30,
as it existed when the TCJA was enacted,
based on an analysis of the adequacy of
the reserves otherwise determined, constitutes an asset adequacy reserve under §
1.807-1 of the final regulations.
Bulletin No. 2020–45
One commenter proposed the addition
of a general provision explaining the significance and selection of the tax reserve
method for a contract. The final regulations include such a provision.
The commenter also proposed the addition of an example illustrating the determination of life insurance reserves under
section 807(d)(1) and the exclusion of
asset adequacy reserves from life insurance reserves. The Treasury Department
and the IRS did not include the example
in the final regulations, but the principles
illustrated by the example are explained in
this preamble.
2. Comments and Changes Relating to §
1.807-4 of the Proposed Regulations
Section 807(f)(1) of the Code provides
that if the basis for determining any item
referred to in section 807(c) as of the close
of any taxable year differs from the basis
for such determination as of the close of
the preceding taxable year, then so much
of the difference between (A) the amount
of the item at the close of the taxable year,
computed on the new basis, and (B) the
amount of the item at the close of the taxable year, computed on the old basis, as is
attributable to contracts issued before the
taxable year must be taken into account
under section 481 as adjustments attributable to a change in method of accounting
initiated by the taxpayer and made with
the consent of the Secretary.
Section 1.807-4 of the proposed regulations (proposed § 1.807-4) provides
guidance relating to both the change in
basis of computing reserves of a life insurance company and the change in basis
of computing life insurance reserves of
an insurance company other than a life
insurance company (a nonlife insurance
company). Under proposed § 1.807-4(a),
a change in basis of computing an item
referred to in section 807(c) is a change
in method of accounting for purposes of
§ 1.446-1(e), unless § 1.446-1(e) provides
otherwise. Accordingly, under proposed §
1.807-4(a), both a life insurance company
changing the basis of computing an item
referred to in section 807(c) and a nonlife
insurance company changing the basis of
computing life insurance reserves must
follow the administrative procedures prescribed by the Commissioner of Internal
967
Revenue or his delegate (Commissioner)
to obtain the consent of the Commissioner
to such a change.
A. Relationship between section 446 and
subchapter L
One commenter suggested that §
1.807-4(a) state at the outset that section
807(f) treats a change in basis of computing reserves as a change in method of
accounting. The commenter thought this
would better establish why § 1.446-1(e)
applies to the change in basis of computing reserves. The final regulations incorporate this suggestion. The amendment
of section 807(f) by the TCJA led to the
requirement in § 1.807-4(a) that changes
in basis of computing an item referred to
in section 807(c) must follow the same
administrative procedures as other changes in method of accounting. Accordingly,
this Treasury decision removes or obsoletes contrary guidance (for example, §
1.806-4 and Rev. Rul. 94-74, 1994-2 C.B.
157).
Another commenter took the position
that a change in basis of computing an
item referred to in section 807(c) is not
a change in method of accounting that
should require consent under section
446(e). The commenter believed that the
IRS’s consent should be needed under
section 481(c) only to reflect a multi-year
spread of a section 481(a) adjustment that
may result from a change in basis of computing reserves. The Treasury Department and the IRS do not agree with this
position. The computation of reserves
has always been a method of accounting. See Am. Gen. Life & Accident Ins.
Co. v. United States, 90-1 USTC (CCH) ¶
50,010 (M.D. Tenn. 1989) (“[W]hile the
government is correct in classifying the
change at issue as a change in method of
accounting, it is also more specifically a
change in the method of computing reserves.”); Rev. Rul. 94-74 (stating that “§
807(f) is a more specific application of
the general tax rules governing a change
in method of accounting”). Under the
specific provisions of former section
807(f), the general change in method of
accounting procedures did not apply to
a change in basis of computing reserves.
With the TCJA’s amendment to section
807(f), the procedures generally applica-
November 2, 2020
ble to a change in method of accounting
apply to a change in basis of computing
reserves under section 807(c). See Bluebook at 228 (stating that a company that
changes its method of computing reserves must comply with applicable IRS
procedures).
The same commenter recommended
that if the final regulations do not remove
the requirement that a change in basis of
computing reserves under section 807(f)
requires consent under section 446(e),
then the preamble to the final regulations
should clarify that section 446(b) does
not apply to the determination of insurance reserves. This recommendation
is similar to another commenter’s recommendation that the preamble should
acknowledge that the application of the
consent provisions of section 446(e) and
§ 1.446-1(e) does not affect the role of
sections 811(a) and 807(d) with respect
to the determination of section 807(c) reserves.
Except in extraordinary circumstances, section 446(b) does not affect the requirement that a life insurance company
compute its reserves for Federal income
tax purposes as required by subchapter L.
Similarly, subchapter L does not affect the
requirement under section 446(e) that an
insurance company secure the consent of
the Commissioner before changing its basis of computing reserves.
B. Examples in § 1.807-4(d)
Proposed § 1.807-4 contains four examples illustrating the principles of proposed § 1.807-4(a) through (c). One commenter suggested several clarifications to
Example 1 and Example 2 in proposed §
1.807-4(d). Additionally, the commenter
requested additional guidance on how the
standard for what constitutes a change in
basis of computing reserves applies to
frequently-encountered fact patterns involving life insurance reserves, such as
under principle-based reserve methodologies.
The final regulations do not include
what had been Example 1 and Example 2
in proposed § 1.807-4(d). The principles
illustrated in these examples are sufficiently illustrated in the remaining examples. Moreover, the Treasury Department
and the IRS are providing additional
November 2, 2020
guidance on the fact patterns that constitute a change in basis of computing life
insurance reserves in Rev. Rul. 2020-19,
2020-40 I.R.B. 611, released contemporaneously with publication of these final
regulations in the Federal Register.
C. Automatic consent procedures for
reserves of nonlife insurance companies
Currently, section 26.04 of Rev. Proc.
2019-43, 2019-48 I.R.B. 1107, provides
for automatic consent to a change in
method of accounting if that change relates to section 807(c) items (which include life insurance reserves for a nonlife
insurance company). One commenter
requested that the same treatment be extended to changes in method of accounting for the unearned premium reserves
and the unpaid loss reserves of nonlife
insurance companies.
The final regulations do not incorporate
this request, and the Treasury Department
and the IRS do not anticipate that Rev.
Proc. 2019-43 will be amended to allow
for the requested automatic consent. The
automatic consent procedures provided in
section 26.04 of Rev. Proc. 2019-43 to life
insurance companies for a change in basis
of computing reserves and to nonlife insurance companies for a change in basis of
computing life insurance reserves were a
response to the specific change in section
807(f) made by the TCJA. No such change
was made by the TCJA for unearned premium reserves or unpaid loss reserves of
nonlife insurance companies.
D. Obsoleting of revenue rulings and
notice
The preamble to the proposed regulations proposes obsoleting the following
revenue rulings because they are inconsistent with section 807(f), as amended by
the TCJA: Rev. Rul. 2002-6, 2002-1 C.B.
460, Rev. Rul. 94-74, 1994-2 C.B. 157,
Rev. Rul. 80-117, 1980-1 C.B. 143, Rev.
Rul. 80-116, 1980-1 C.B. 141, Rev. Rul.
78-354, 1978-2 C.B. 190, Rev. Rul. 77198, 1977-1 C.B. 190, Rev. Rul. 75-308,
1975-2 C.B. 264, Rev. Rul. 74-57, 1974-1
C.B. 163, Rev. Rul. 70-568, 1970-2 C.B.
140, Rev. Rul. 70-192, 1970-1 C.B. 153,
Rev. Rul. 69-444, 1969-2 C.B. 145, Rev.
Rul. 65-240, 1965-2 C.B. 236, Rev. Rul.
968
65-233, 1965-2 C.B. 228, Rev. Rul. 65143, 1965-1 C.B. 261.
One commenter believes Rev. Rul.
2002-6, Rev. Rul. 94-74, and Rev. Rul.
69-444 contain principles that provide
guidance on what constitutes a change in
basis of computing reserves and that additional guidance is needed if these revenue
rulings are obsoleted. While this Treasury
decision obsoletes those revenue rulings,
the Treasury Department and the IRS are
providing additional guidance on the fact
patterns that constitute a change in basis
of computing life insurance reserves contemporaneously with publication of the
final regulations in the Federal Register.
See Rev. Rul. 2020-19.
The preamble to the proposed regulations also proposes to obsolete Notice
2010-29, 2010-15 I.R.B. 547, which provided interim guidance relating to variable
annuity contracts as a result of the adoption by the NAIC of Actuarial Guideline
43, which describes a principle-based
reserve method. No comments were received regarding this proposed obsolescence, and this Treasury decision obsoletes Notice 2010-29.
E. Revising section 26.04 of Rev. Proc.
2019-43
The preamble to the proposed regulations describes revisions that the
Treasury Department and the IRS intend
to make to section 26.04 of Rev. Proc.
2019-43. First, section 26.04(2)(b)(ii) of
Rev. Proc. 2019-43 provides that multiple
changes during the same taxable year for
the same type of contract are considered
a single change in basis and the effects of
such changes are netted and treated as a
single section 481(a) adjustment. Section
807(f)(1), however, provides that the section 481(a) adjustment is the difference
between the amount of any item referred
to in section 807(c) computed on the
new basis and the amount of such item
computed on the old basis. Accordingly,
the Treasury Department and the IRS intend to revise section 26.04 of Rev. Proc.
2019-43 to require netting of the section
481(a) adjustments at the level of each
item referred to in section 807(c) so there
is a single section 481(a) adjustment for
each of the items referred to in section
807(c).
Bulletin No. 2020–45
Second, section 26.04(1) of Rev. Proc.
2019-43 provides that the automatic
change procedures apply to a nonlife insurance company. The Treasury Department and the IRS intend to revise section
26.04 of Rev. Proc. 2019-43 to clarify the
manner in which nonlife insurance companies implement changes to the basis of
computing life insurance reserves (as defined in section 816(b)) during a taxable
year (year of change). Specifically, the
clarification would provide that, if a nonlife insurance company changes the basis
of computing its life insurance reserves,
then for purposes of applying section
832(b)(4), (i) for the year of change, life
insurance reserves at the end of the year
of change with respect to contracts issued
before the year of change are determined
on the old basis and (ii) for the year following the year of change, life insurance
reserves at the end of the preceding taxable year with respect to contracts issued
before the year of change are determined
on the new basis. Life insurance reserves
attributable to contracts issued during the
year of change and thereafter must be
computed on the new basis.
One commenter agreed with the intended revisions.
3. Comments and Changes Relating to §
1.807-3 of the Proposed Regulations
Section 13517 of the TCJA added section 807(e)(6) to the Code, which provides
that the Secretary of the Treasury or his
delegate (Secretary) “shall require reporting (at such time and in such manner as
the Secretary shall prescribe) with respect
to the opening and closing balance of reserves and with respect to the method of
computing reserves for purposes of determining income.” In accordance with section 807(e)(6), § 1.807-3 of the proposed
regulations (proposed § 1.807-3) provides
that the IRS may require reporting on
Form 1120-L with respect to the opening and closing balances of the items described in section 807(c) and with respect
to the method of computing such items for
the purposes of determining income.
One commenter requested further consultation with the life insurance industry
before any additional reserve reporting
requirements are implemented. According
to the commenter, this consultation will
Bulletin No. 2020–45
be necessary to ensure that the information provided is useful to the government
and that providing the information is not
unduly burdensome to taxpayers relative
to the information’s utility.
The IRS understands the importance of
obtaining the life insurance industry’s input before changing the reporting requirements. Proposed § 1.807-3 is adopted as
final by this Treasury decision, and the
IRS expects to consult with the life insurance industry before making any changes
to reporting requirements. Further, as discussed in the Special Analysis section of
this preamble, any future changes to tax
return form requirements stemming from
this provision would be subject to burden analysis and public notice and comment under the Paperwork Reduction Act,
which requirements the IRS is committed
to follow.
4. Comments and Changes Relating to §
1.816-1 of the Proposed Regulations
Section 1.816-1(a) of the proposed regulations (proposed § 1.816-1(a)) provides
that a reserve (other than an asset adequacy reserve) that is computed using a tax reserve method as defined in section 807(d)
(3) and that meets the requirements of section 816(b)(1) and (b)(2) will not be disqualified as a life insurance reserve solely
because the method used to calculate the
reserve takes into account factors other
than those prescribed by section 816(b)
(1) and (b)(2). Thus, for instance, reserves
calculated using principle-based reserve
methodologies will not fail to qualify as
life insurance reserves solely because the
reserves might be calculated using certain
factors in addition to assumed rates of interest and recognized mortality or morbidity tables.
One commenter requested the preamble for the final regulations state that in
some cases the use of additional factors in
computing reserves for taxable years prior
to the effective date of these final regulations is not prohibited. The commenter
did not want any negative inference that
proposed § 1.816-1 is making permissible
what was before impermissible (namely
using certain additional factors in computing reserves).
The Treasury Department and the IRS
agree that certain factors other than those
969
prescribed by section 816(b)(1) and (b)
(2) may be taken into account in determining life insurance reserves for taxable
years prior to the effective date of these
final regulations if the use of such factors
would make the calculation of the reserve
more accurate. See, e.g., Mutual Benefit
Life Insurance Co. v. Commissioner, 488
F.2d 1101, 1106 (3d Cir. 1974).
5. Comments and Changes Relating to §
1.6012-2 of the Proposed Regulations
The Conference Report to the TCJA
contemplates requiring the electronic filing of annual statements to improve reporting of insurance reserves, as necessary to carry out and enforce section 807.
H.R. Rep. No. 115-466, at 478-79 (2017)
(Conference Report). In response to the
Conference Report, the proposed regulations propose to remove § 1.6012-2(c)
(4), which prohibits an insurance company that files its Form 1120-L or Form
1120-PC electronically from attaching
its annual statement (or pro forma annual
statement) to its return.
One commenter stated that for some of
the largest groups of companies, the size
limits found in section 2.1.2 of IRS Publication 4164, Modernized e-File (MeF)
Guide to Software Developers and Transmitters, Processing Year 2020, would
likely be exceeded if the annual statement
were to be filed electronically, and for
other groups of companies, the size limit would likely be exceeded by the return
and the annual statement when combined.
The commenter suggested retaining the
existing rule that electronic filers should
not submit their annual statements with
their returns, or alternatively, changing
the requirement such that electronic filers
must only submit limited parts of the annual statement.
The final regulations retain § 1.60122(c)(4), but it now provides that electronic
filers must file their annual statement or a
portion thereof in accordance with the applicable rules in the forms or instructions.
The Treasury Department and the IRS anticipate that once the IRS has the capacity
to accept the electronic filing of annual
statements, the tax return forms and instructions will require electronic filing
of all or portions of the annual statement.
The IRS, however, expects to consult with
November 2, 2020
the insurance industry before requiring
such electronic filing.
6. Comments and Changes Relating to §
1.817A-1 of the Proposed Regulations
The proposed regulations propose to
remove parts of § 1.817A-1 that pertain
to sections 807(d)(2)(B) and 812(b)(2)
(A). Those sections were removed by the
TCJA. The notice of proposed rulemaking requested comments on whether §
1.817A-1 should continue to provide a
current market interest rate to be used in
computing reserves under section 807(c)
(3) during the temporary guarantee period
of a modified guaranteed contract (MGC)
given that the TCJA modified the flush
language of section 807(c) to provide a
specific interest rate to be used in making
section 807(c)(3) computations.
One commenter recommended that §
1.817A-1 be removed in its entirety. The
final regulations remove provisions relating to section 807(c)(3) but retain the
provision (and related definitions) that
waives section 811(d) for non-equity indexed MGCs during the temporary guarantee period, because these rules continue
to remain relevant.
7. Conforming Changes to Regulations
The proposed regulations also propose
to remove or amend the following regulatory provisions: §§ 1.338-11, 1.381(c)
(22)-1, 1.801-2, 1.801-5, 1.801-7, 1.8018, 1.806-4, 1.809-2, 1.809-5, 1.810-3,
1.817A-0, 1.818-2, 1.818-4, 1.848-1, and
301.9100-6T. These provisions were proposed to be removed or amended because
they related to repealed or amended law
or to regulations that were proposed to be
removed or amended or they had no future
application.
One commenter suggested that parts
of paragraph (a) of § 1.801-7, a provision
proposed to be removed in its entirety,
continue to remain relevant under section
817. By its terms, § 1.801-7 is not applicable to any taxable year beginning after
1962. See § 1.801-7(d). Because § 1.801-7
is not applicable to any taxable year after
1962, the commenter’s suggestion is not
adopted.
More generally, the commenter requested removal of more “deadwood”
November 2, 2020
provisions than provided for in the notice
of proposed rulemaking. The removal of
additional “deadwood” provisions is beyond the scope of this rulemaking. No
other specific comments were received
with respect to these proposed conforming changes.
8. Comments Regarding Foreign-Issued
Life Insurance and Annuity Contracts
The Code contains a statutory definition of a life insurance contract under
section 7702, rules applicable to certain
flexible premium contracts under section
101(f), distribution on death requirements
under section 72(s), and diversification
requirements under section 817(h). These
statutory requirements, which reflect Congress’s concern that the tax-favored treatment generally accorded life insurance
and annuity contracts was available to
contracts that were too investment oriented or provided for undue tax deferral, are
relevant to the tax treatment of a policyholder, annuitant, or beneficiary as well
as the entity that issues or reinsures a life
insurance or annuity contract.
In response to a request to promulgate
regulations that exempt certain contracts
from the statutory requirements of sections 72(s), 101(f), 817(h), and 7702, the
preamble to the proposed regulations asks
for comments on whether such regulations
should be promulgated. As described in
the preamble to the proposed regulations,
the requested exemption would apply to
contracts issued by a non-U.S. insurance
company and reinsured by a U.S. insurance company if (i) no policyholder, insured, annuitant, or beneficiary with respect to the contract is a U.S. person and
(ii) such contract is regulated as a life insurance or annuity contract by a foreign
regulator. The preamble to the proposed
regulations states that the Treasury Department and the IRS are evaluating the
request, including whether to address it as
part of this rulemaking, and requests comments including in respect of statutory
interpretation and implications in various
contexts and provisions outside of subchapter L.
Three comments were received. One
commenter (whose comment was endorsed by another commenter) generally
repeated the original request (but nar-
970
rowed the requested exemptions to only
sections 7702 and 72(s)) and stated that
such regulations would assist U.S. reinsurers of exempted contracts to qualify
as life insurance companies under section
816. The commenter asserted that the proposal would (i) align with domestic and
U.S. international tax policy considerations because they would be applicable
only to contracts owned by and benefitting
persons not subject to Federal income tax
and (ii) support policy goals of the TCJA
to bring profitable business operations into
the United States. The commenter further
asserted that such regulations would not
(i) affect the character, source, or separate
category basket in which income derived
from the reinsurance is included for U.S.
withholding tax or foreign tax credit purposes, (ii) alter the application of any applicable U.S. withholding tax on income
from sources within the United States
paid by a domestic insurance company
to any foreign corporation, or (iii) affect
the treatment under section 59A of any
claims and benefits or any other amounts
paid by a domestic insurance company to
a foreign related party under a reinsurance
contract. The commenter acknowledged
that it may not be possible for a U.S. insurance company to know the identity of
a contract’s underlying beneficial owners unless the beneficial owner and the
policyholder were the same person and
requested that U.S. insurance companies
be able to rely upon the Foreign Account
Tax Compliance Act beneficial ownership
rules to determine if a contract has a U.S.
person as a beneficial owner.
Another commenter stated that tax reserve deductions are already available for
failed life insurance contracts under other
provisions of section 807(c), just in a different amount than would be the case with
life insurance reserve treatment. The commenter stated that there could nevertheless
be benefits of conformity and suggested
an alternative proposal. The commenter
recommended that the Treasury Department and the IRS use their authority under sections 811(a) and 7805(a) to issue
regulations that provide that reserves held
by a U.S. reinsurer relating to indemnity
reinsurance of contracts issued by a foreign insurance company be treated as life
insurance reserves for purposes of subchapter L if: (i) the underlying contracts
Bulletin No. 2020–45
are issued by a foreign insurer, (ii) such
contracts are regulated as life insurance or
annuity contracts both under the applicable law in the foreign jurisdiction and by
the regulator of the reinsuring domestic
insurance company, (iii) the NAIC prescribes reserves for such contracts that are
computed as reserves applicable to life insurance or annuity contracts, and (iv) the
initial issuance of the insurance contract
to the policyholder was not through the
conduct of a trade or business within the
United States.
The considerations surrounding the
issuance of the requested regulations
are complex and require further study.
Accordingly, the Treasury Department
and the IRS have decided not to issue
the requested regulations as part of this
rulemaking and will continue to carefully
consider these comments.
Applicability Dates
The rules in the final regulations apply
to taxable years beginning after October
13, 2020.
A taxpayer may rely on § 1.807-4 or
1.816-1 of the proposed regulations for a
taxable year beginning after December 31,
2017, and on or before October 13, 2020.
Alternatively, a taxpayer may choose to
apply § 1.807-4, 1.816-1, or 1.817A-1(b)
of the final regulations to a taxable year
beginning after December 31, 2017, the
effective date of the revision of section
807 made by the TCJA, and on or before
October 13, 2020, provided the taxpayer
consistently applies the relevant regulation to that taxable year and all subsequent
taxable years. See section 7805(b)(7).
Effect on Other Documents
The following revenue rulings are
obsoleted for taxable years beginning after October 13, 2020: Rev. Rul. 2002-6,
2002-1 C.B. 460, Rev. Rul. 94-74, 1994-2
C.B. 157, Rev. Rul. 80-117, 1980-1 C.B.
143, Rev. Rul. 80-116, 1980-1 C.B. 141,
Rev. Rul. 78-354, 1978-2 C.B. 190, Rev.
Rul. 77-198, 1977-1 C.B. 190, Rev. Rul.
75-308, 1975-2 C.B. 264, Rev. Rul. 74-57,
1974-1 C.B. 163, Rev. Rul. 70-568, 19702 C.B. 140, Rev. Rul. 70-192, 1970-1 C.B.
153, Rev. Rul. 69-444, 1969-2 C.B. 145,
Rev. Rul. 65-240, 1965-2 C.B. 236, Rev.
Bulletin No. 2020–45
Rul. 65-233, 1965-2 C.B. 228, and Rev.
Rul. 65-143, 1965-1 C.B. 261.
Notice 2010-29 is obsoleted for taxable
years beginning after December 31, 2017.
Special Analyses
This regulation is not subject to review
under section 6(b) of Executive Order
12866 pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Treasury Department and the Office of
Management and Budget regarding review of tax regulations.
Paperwork Reduction Act
The collection of information relating
to the final regulations was submitted to
the Office of Management and Budget for
review under OMB Control Number 15450123 in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)).
In response to the Conference Report
and comments on the proposed regulations, § 1.6012-2(c)(4), as revised by
the final regulations, provides that an
insurance company should include the
insurance company’s annual statement
(as defined in § 1.6012-2(c)(5)), or a portion thereof, with an electronically filed
Federal income tax return (Form 1120-L
for a life insurance company and Form
1120-PC for a nonlife insurance company) as required by the applicable forms
or instructions. Federal income tax items
of an insurance company are determined
in part based upon the insurance company’s annual statement. Providing the annual statement, or a portion thereof, to
the IRS with an electronically filed Federal income tax return will allow the IRS
to better and more efficiently examine
an insurance company’s Federal income
tax return. However, until the applicable
forms or instructions are revised, the current rules for including the annual statement with an electronically filed Federal
income tax return continue to apply.
For purposes of the Paperwork Reduction Act, the burden for the collection of
information associated with § 1.6012-2 of
the final regulations will be reflected in the
burden on the Form 1120-L and in the burden on the Form 1120-PC (OMB Control
Number 1545-0123) when the burden for
each is revised to reflect the collection of
971
information associated with § 1.6012-2 of
the final regulations. The respondents to the
collection of information are life insurance
companies that file the Form 1120-L electronically and nonlife insurance companies
that file the Form 1120-PC electronically.
The Treasury Department and the IRS expect to consult with the life insurance industry before making any changes to these
reporting requirements.
In accordance with section 807(e)(6),
as added by the TCJA, § 1.807-3 of the
final regulations provides that the IRS
may require reporting on Form 1120-L
of the opening balance and closing balance of items described in section 807(c)
(for example, life insurance reserves) and
the method of computing such items for
purposes of determining income. Providing this information will allow the IRS
to better examine an insurance company’s Federal income tax return. However,
under § 1.807-3 of the final regulations,
this information is not required to be provided on any prescribed forms, such as
the Form 1120-L, until the relevant prescribed forms or instructions are revised
to require the reporting of such information.
For purposes of the Paperwork Reduction Act, the burden for the collection of
information associated with § 1.807-3 of
the final regulations will be reflected in
the burden on the Form 1120-L (OMB
Control Number 1545-0123) when the
burden is revised to reflect the collection
of information associated with § 1.807-3
of the final regulations. The respondents
to the collection of information are life insurance companies that file a Form 1120L. The Treasury Department and the IRS
expect to consult with the life insurance
industry before making any changes to
these reporting requirements.
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.
Regulatory Flexibility Act
It is hereby certified that the final regulations will not have a significant economic impact on a substantial number of small
entities pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6).
November 2, 2020
Section 13517 of the TCJA added section 807(e)(6) to the Code. Under section
807(e)(6), the Secretary may require reporting (at such time and in such manner
as the Secretary shall prescribe) with respect to the opening balances and the closing balances of reserves and with respect
to the method of computing reserves for
purposes of determining income. Section
1.807-3 of the final regulations allows the
IRS to require the reporting of this information on any prescribed forms, such as
the Form 1120-L.
The Conference Report provides that,
under existing authority, the Secretary
may require an insurance company to
provide its annual statement via a link,
electronic copy, or other similar means.
See Conference Report at 478-79. Section
1.6012-2(c)(4) of the final regulations provides that an insurance company should
include the insurance company’s annual
statement, or a portion thereof, with an
electronically filed Federal income tax
return (Form 1120-L for a life insurance
company and Form 1120-PC for a nonlife
insurance company) as required by the
applicable forms or instructions. Under
current procedures, an insurance company
can only electronically file a Form 1120-L
or Form 1120-PC if the insurance company is part of an affiliated group filing a
consolidated return, the parent of which
files a Form 1120. Although data are not
readily available, the Treasury Department and the IRS expect that any reporting burden associated with § 1.6012-2(c)
will fall primarily on financial and insurance firms with annual receipts greater
than $41.5 million and, therefore, will not
affect a substantial number of small entities. See 13 CFR 121.201, sector 52 (finance and insurance).
As stated in the preceding paragraph, the
rule is not expected to affect a substantial
number of small entities; however, even if
a substantial number of small entities were
affected, the economic impact of the regulation is not likely to be significant. Section
1.807-3 of the final regulations is limited in
scope to time and manner of information
reporting, and any economic impact associated with this regulation is expected to be
minimal. Further, the information reported
to the IRS is information that the insurance
company has readily available and the
Treasury Department and the IRS expect
November 2, 2020
to consult with the life insurance industry
before making any changes to the reporting
requirements. Accordingly, the Secretary
certifies that the final regulations will not
have a significant economic impact on a
substantial number of small entities.
Pursuant to section 7805(f) of the
Code, the notice of proposed rulemaking
preceding the Final Regulations 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 from the Chief Counsel for the
Office of Advocacy of the Small Business
Administration.
Drafting Information
The principal author of these regulations is Ian Follansbee, Office of Associate Chief Counsel (Financial Institutions
and Products), IRS. However, other personnel from the Treasury Department and
the IRS participated in their development.
Statement of Availability of IRS
Documents
The IRS notices, revenue procedures,
and revenue rulings cited in this preamble are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are
available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are amended as follows:
972
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding a sectional
authority for § 1.807-3 in numerical order
to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
*****
Section 1.807-3 also issued under 26
U.S.C. 807(e)(6).
*****
Par. 2. Section 1.338-11 is amended by:
1. Revising paragraph (d)(2).
2. In paragraph (d)(3)(i), removing
the language “and (d)(3)(iii)” and adding
“through (iv)” in its place.
3. Redesignating paragraph (d)(3)(iii)
as paragraph (d)(3)(iv).
4. Adding a new paragraph (d)(3)(iii).
5. Revising newly redesignated paragraph (d)(3)(iv).
6. Adding paragraph (d)(7)(iii).
The revisions and additions read as follows:
§ 1.338-11 Effect of section 338 election
on insurance company targets.
*****
(d) * * *
(2) Exception. New target is not treated as receiving additional premium under
paragraph (d)(1) of this section if it is under state receivership as of the close of the
taxable year for which the increase in reserves occurs.
(3) * * *
(iii) Increases in section 807(c) reserves. The positive amount with respect
to the items referred to in section 807(c)
other than discounted unpaid loss reserves
is the sum of the net increases in such
items that are required to be taken into account under section 807(f).
(iv) Increases in other reserves. The
positive amount with respect to reserves
other than discounted unpaid loss reserves and other items referred to in section 807(c) is the net increase of those
reserves due to changes in estimate,
methodology, or other assumptions used
to compute the reserves (including the
adoption by new target of a methodology
or assumptions different from those used
by old target).
*****
(7) * * *
Bulletin No. 2020–45
(iii) Application of paragraphs (d)(2)
and (3) of this section. Paragraphs (d)(2)
and (3) of this section apply to taxable
years beginning after October 13, 2020.
For taxable years beginning on or before
such date, see paragraph (d) of this section
as contained in 26 CFR part 1 revised as
of April 1, 2020.
*****
§ 1.381(c)(22)-1 [Amended]
Par. 3. In § 1.381(c)(22)-1, paragraph
(b)(6) is removed and reserved.
§ 1.801-2 [Amended]
Par. 4. Section 1.801-2 is amended in
the second sentence by removing the language “1.801-7” and adding “1.801-6” in
its place.
§ 1.801-5 [Amended]
Par. 5. In § 1.801-5, paragraph (c) is removed and reserved.
§ 1.801-7 [Removed and reserved]
Par. 6. Section 1.801-7 is removed and
reserved.
§ 1.801-8 [Amended]
Par. 7. In § 1.801-8, paragraph (e) is removed and reserved.
§ 1.806-4 [Removed]
Par. 8. Section 1.806-4 is removed.
Par. 9. Section 1.807-1 is revised to
read as follows:
§ 1.807-1 Computation of life insurance
reserves.
(a) Tax reserve method. For purposes
of determining the amount of life insurance reserves for a contract under section
807(d)(1), section 807(d)(2) requires the
determination of the amount of the reserve
for a contract using the tax reserve method
applicable to the contract. Under section
807(d)(3), the tax reserve method applicable to the contract is the Commissioners’ Reserve Valuation Method (CRVM),
the Commissioners’ Annuities Reserve
Bulletin No. 2020–45
Valuation Method (CARVM), or other reserve method prescribed by the National
Association of Insurance Commissioners
(NAIC) that applies to the contract as of
the date the reserve is determined. If the
NAIC has not prescribed a reserve method
that covers the contract, a reserve method that is consistent with the CRVM, the
CARVM, or other NAIC-prescribed method as of the date the reserve is determined
(whichever is most appropriate) must be
used.
(b) No asset adequacy reserve. The life
insurance reserve determined under section 807(d)(1) does not include any asset
adequacy reserve.
(1) An asset adequacy reserve is—
(i) Any reserve that is established as an
additional reserve based upon an analysis
of the adequacy of reserves that would
otherwise be established in accordance
with the requirements set forth in the
NAIC Valuation Manual, such as the
CRVM or CARVM as applicable, or
(ii) Any similar reserve.
(2) In determining whether a reserve
is a life insurance reserve, the label
placed on such reserve is not determinative, provided, however, any reserve or
portion of a reserve that would have been
established pursuant to an asset adequacy
analysis required by the NAIC’s Valuation Manual 30 as it existed on December 22, 2017, the date of enactment of
Public Law 115-97, is an asset adequacy
reserve.
(c) Applicability date. The rules of this
section apply to taxable years beginning
after October 13, 2020.
Par. 10. Sections 1.807-3 and 1.807-4
are added before the undesignated center
heading “Gain and Loss From Operations” to read as follows:
§ 1.807-3 Reporting of reserves.
(a) Reserve reporting. A life insurance company subject to tax under section 801 is required to make a return on
Form 1120-L, U.S. Life Insurance Company Income Tax Return. The Internal
Revenue Service may require reporting
with respect to the opening balance and
closing balance of items described in
section 807(c) and with respect to the
method of computing such items for
purposes of determining income. Such
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reporting may provide for the manner in
which separate account items are reported. (See section 6011 and § 301.6011-1
of this chapter.)
(b) Applicability date. The rules of this
section apply to taxable years beginning
after October 13, 2020.
§ 1.807-4 Adjustment for change in
computing reserves.
(a) Requirement to follow administrative procedures. Under section 807(f),
a change in basis of computing an item
referred to in section 807(c) is a change
in method of accounting. Accordingly, except as provided in § 1.446-1(e),
a change in basis of computing an item
referred to in section 807(c) is a change
in method of accounting for purposes
of § 1.446-1(e). Before computing such
item under a new basis, a life insurance
company must obtain the consent of the
Commissioner of Internal Revenue or
his delegate (Commissioner) pursuant to
administrative procedures prescribed by
the Commissioner. Similarly, an insurance company other than a life insurance
company (a nonlife insurance company)
that changes its basis of computing life
insurance reserves must obtain the consent of the Commissioner pursuant to administrative procedures prescribed by the
Commissioner.
(b) Section 481 adjustment—(1) In
general. If the basis of computing any
item referred to in section 807(c) as of
the close of any taxable year (the year of
change) differs from the basis of computing such item at the close of the preceding taxable year, then the difference
between the amount of the item at the
close of the taxable year computed on the
new basis and the amount of the item at
the close of the taxable year computed on
the old basis that is attributable to contracts issued before the taxable year, is
taken into account under section 481 and
§§ 1.481-1 through 1.481-5 as an adjustment attributable to a change in method
of accounting.
(2) Loss of company status. If for any
taxable year a taxpayer that was an insurance company for the year of change
is no longer an insurance company, then
the taxpayer must take into account in the
preceding taxable year (that is, the last
November 2, 2020
taxable year it was an insurance company) the balance of any section 481(a) adjustment determined under paragraph (b)
(1) of this section. A taxpayer that was an
insurance company for the year of change
does not accelerate the balance of any section 481(a) adjustment determined under
paragraph (b)(1) of this section merely
because it changes from a life insurance
company to a nonlife insurance company
or because it changes from a nonlife insurance company to a life insurance company.
(c) Effect on determining increase or
decrease in reserves—(1) Effect under
section 807(a) and (b). If there is a change
in basis of computing any item referred to
in section 807(c) for a taxable year, then,
for purposes of section 807(a) and (b), the
closing balance for such item for the year
of change with respect to contracts issued
before the year of change is determined
on the old basis and the opening balance
for such item for the next taxable year for
such contracts is computed on the new basis.
(2) Effect under section 832. The following rules apply for purposes of section
832(b)(4):
(i) For the year of change, life insurance reserves at the end of the year of
change with respect to contracts issued
before the year of change are determined
on the old basis.
(ii) For the taxable year following the
year of change, life insurance reserves at
the end of the preceding taxable year (that
is, the year of change) with respect to contracts issued before the year of change are
determined on the new basis.
(d) Examples. The principles of paragraphs (a) through (c) of this section are
illustrated by the following examples.
For purposes of these examples and except as otherwise provided, IC is a life insurance company within the meaning of
section 816(a) that issues life insurance
and annuity contracts. IC is required to
determine the amount of life insurance
reserves under section 807(d) and to take
net increases or decreases in the reserves
into account in computing life insurance
company taxable income. IC’s reserve
for each insurance contract at issue exceeds the net surrender value for such
contract and does not exceed the statutory reserve for such contract. IC is on an
November 2, 2020
accrual method and uses a calendar year
as its taxable year.
(1) Example 1—(i) Facts. In 2021, IC changed
the basis of computing the amount of life insurance reserves for a certain type of life insurance
contract as described in section 807(f). Both the
basis used for computing the reserves for the relevant contracts at the close of the 2020 taxable year
(old basis) and the basis of computing the reserves
for the relevant type of contract at the close of the
2021 taxable year (new basis) are consistent with
the applicable Commissioners’ Reserve Valuation
Method. IC followed the administrative procedures
prescribed by the Commissioner to obtain consent
to change the basis of computing these reserves.
IC determined that the life insurance reserves as
of December 31, 2021, for the relevant contracts
issued prior to 2021 were $110x if computed using
the old method and $120x if computed using the
new method. IC also determined that the life insurance reserves as of December 31, 2021, for the
relevant contracts issued during 2021 were $15x
using the new basis.
(ii) Analysis. IC must take into account under
section 481 and the administrative procedures prescribed by the Commissioner the $10x difference between the reserves for the relevant contracts issued
prior to 2021 computed under the old basis ($110x)
and the reserves for such contracts computed under
the new basis ($120x). For purposes of determining
any net increase or net decrease in reserves in taxable
year 2021 under section 807(a) or (b), IC’s closing
balance of life insurance reserves computed under
section 807(d) with respect to the relevant contracts
is $110x for contracts issued prior to 2021 (computed on the old basis) and $15x for contracts issued
during 2021 (computed on the new basis). IC’s opening balance in 2022 for life insurance reserves for
the relevant contracts is $135x (computed on the new
basis).
(2) Example 2—(i) Facts. The facts are the same
as in paragraph (d)(1) of this section (the facts in
Example 1), except that IC is an insurance company
that is not a life insurance company. IC is required to
compute taxable income under section 832.
(ii) Analysis. IC must take into account under
section 481 and the administrative procedures prescribed by the Commissioner the $10x difference
between the reserves for the relevant contracts issued prior to 2021 computed under the old basis
($110x) and the reserves for such contracts computed under the new basis ($120x). For purposes of
determining the premiums earned on insurance contracts during the taxable year as described in section
832(b)(4) for the year of change, the life insurance
reserves at the end of the taxable year are $110x
for contracts issued prior to 2021 (computed on
the old basis) and $15x for contracts issued during
2021 (computed on the new basis). For purposes of
determining the premiums earned on insurance contracts during the taxable year as described in section
832(b)(4) for the taxable year following the year of
change, the life insurance reserves at the end of the
preceding taxable year (the year of change) with respect to relevant contracts are $135x (computed on
the new basis).
(e) Applicability date. The rules of this
section apply to taxable years beginning
974
after October 13, 2020. However, a taxpayer may choose to apply the rules of this
section for a taxable year beginning after
December 31, 2017, the effective date
of the revision of section 807 by Public
Law 115-97, and on or before October 13,
2020, provided the taxpayer consistently
applies the rules of this section to that taxable year and all subsequent taxable years.
See section 7805(b)(7).
§ 1.809-2 [Removed and reserved]
Par. 11. Section 1.809-2 is removed and
reserved.
§ 1.809-5 [Amended]
Par. 12. Section 1.809-5 is amended by
removing the language “and § 1.810-3”
from the last sentence of paragraph (a)(5)
(iii).
§ 1.810-3 [Removed]
Par. 13. Section 1.810-3 is removed.
Par. 14. Section 1.816-1 is added before
the undesignated center heading “Miscellaneous Provisions” to read as follows:
§ 1.816-1 Life insurance reserves.
(a) Definition of life insurance reserves. Except as provided in section
816(h), a reserve that meets the requirements of section 816(b)(1) and (2) will
not be disqualified as a life insurance reserve solely because the method used to
compute the reserve takes into account
other factors, provided that the method
used to compute the reserve is a tax reserve method as defined in section 807(d)
(3) and that such reserve is not an asset
adequacy reserve as described in § 1.8071(b).
(b) Applicability date. The section applies to taxable years beginning after October 13, 2020. However, a taxpayer may
choose to apply the rules of this section for
a taxable year beginning after December
31, 2017, the effective date of the revision
of section 807 by Public Law 115-97, and
on or before October 13, 2020, provided
the taxpayer consistently applies the rules
of this section to that taxable year and
all subsequent taxable years. See section
7805(b)(7).
Bulletin No. 2020–45
§ 1.817A-0 [Removed]
Par. 15. Section 1.817A-0 is removed.
Par. 16. Section 1.817A-1 is amended
by:
1. Removing paragraphs (a)(5) and (6).
2. Revising paragraph (b).
3. Removing paragraph (c).
4. Redesignating paragraph (d) as paragraph (c).
5. Revising newly designated paragraph (c).
The revisions read as follows:
§ 1.817A-1 Certain modified
guaranteed contracts.
*****
(b) Waiver of section 811(d) for certain
non-equity-indexed modified guaranteed
contracts. Section 811(d) is waived during
the temporary guarantee period when applied to non-equity-indexed MGCs.
(c) Applicability dates. Paragraph (b)
of this section applies to taxable years beginning after October 13, 2020. However,
a taxpayer may choose to apply the rules
of paragraph (b) of this section for a taxable year beginning after December 31,
2017, the effective date of the revision of
section 807 by Public Law 115-97, and on
or before October 13, 2020, provided the
taxpayer consistently applies the rules of
paragraph (b) of this section to that taxable year and all subsequent taxable years.
See section 7805(b)(7). For taxable years
beginning on or before October 13, 2020,
see paragraph (b) of this section as contained in 26 CFR part 1 revised as of April
1, 2020.
§ 1.818-2 [Amended]
Par. 17. Section 1.818-2 is amended by
removing paragraph (c).
§ 1.818-4 [Removed and reserved]
Par. 18. Section 1.818-4 is removed and
reserved.
§ 1.848-1 [Amended]
Par. 19. Section 1.848-1 is amended in
paragraph (b)(2)(i) by removing the language “section 807(e)(4)” and adding the
language “section 807(e)(3)” in its place.
Bulletin No. 2020–45
Par. 20. Section 1.6012-2 is amended
by:
1. Revising paragraph (c)(4).
2. Revising paragraph (l).
The revisions read as follows:
§ 1.6012-2 Corporations required to
make returns of income.
*****
(c) * * *
(4) Special rule for insurance companies filing their Federal income tax
returns electronically. If an insurance
company described in paragraph (c)(1),
(2), or (3) of this section files its Federal income tax return electronically, it
must include on or with such return its
annual statement (or pro forma annual
statement), or a portion thereof, as and
to the extent required by forms or instructions. If the full annual statement
is not required to be included with the
return, such statement must be available
at all times for inspection by authorized
Internal Revenue Service officers or employees and retained for so long as such
statements may be material in the administration of any internal revenue law. See
§ 1.6001-1(e).
*****
(l) Applicability date. Paragraph (c) of
this section applies to any taxable year beginning after October 13, 2020. For taxable years beginning on or before October
13, 2020, see paragraph (c) of this section
as contained in 26 CFR part 1 in effect on
April 1, 2020.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 21. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
*****
Par. 22. Section 301.9100-6T is amended by:
1. Adding a title to the table in paragraph (a)(1).
2. Removing from the table in paragraph (a)(1) the three entries for “211”
and the entries for “216(c)(1),” “216(c)
(2),” “217(i),” and “217(l)(2)(B).”
3. Removing and reserving paragraph
(a)(2)(iii).
4. Removing paragraph (a)(3)(v).
975
5. In paragraph (a)(4):
i. Removing “211 (Code section 810(b)
(3)), 216(c) (1) and (2), 217(l),” from the
first sentence.
ii. Removing “211 (Code sections
806(d)(4), and 807(d)(4)(C)), 217(i),”
from the second sentence.
iii. Removing the last sentence.
The addition reads as follows:
§ 301.9100-6T Time and manner of
making certain elections under the
Deficit Reduction Act of 1984.
(a) * * *
(1) * * *
Table 1 to paragraph (a)(1)
*****
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
Approved September 1, 2020.
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on October 09, 2020, 8:45 a.m., and published in the issue
of the Federal Register for October 13, 2020, 85 FR
64386)
Section 152. — Dependent
defined
26 CFR 1.152-2(b), (e); 26 CFR 1.24-1: Dependent
Defined
T.D. 9913
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Dependent Defined
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
November 2, 2020
SUMMARY: This document contains final regulations that clarify the definition
of a “qualifying relative” for purposes of
various provisions of the Internal Revenue Code (Code) for taxable years 2018
through 2025. These regulations generally affect taxpayers who claim Federal income tax benefits that require a taxpayer
to have a qualifying relative.
tion 152 in years in which the exemption
amount is zero, the section 151(d) exemption amount will be the inflation-adjusted
section 152(d)(1)(B) exemption amount in
the annual revenue procedure setting forth
inflation-adjusted items that is published
in the Internal Revenue Bulletin.
individual under section 2(b)(1)(A)(ii)
includes a person who is a qualifying relative under section 152(d) if the taxpayer
is entitled to a deduction under section
151 for the person for the taxable year.
I. Exemption Amount
DATES: Effective Date: These regulations
are effective on October 13, 2020.
Generally, section 151 allows a taxpayer to claim a deduction equal to the exemption amount for each of the taxpayer
and his or her spouse, and for any dependents. Prior to the TCJA, section 151(d)
provided for an exemption amount of
$2,000 that was adjusted annually for inflation beginning with calendar year 1990.
Before the enactment of the TCJA, the
IRS had determined that the exemption
amount for taxable year 2018 was $4,150.
Rev. Proc. 2017-58, 2017-45 I.R.B. 489,
modified and superseded by Rev. Proc.
2018-18, 2018-10 I.R.B. 392.
Section 11041(a)(2) of the TCJA added section 151(d)(5) to provide special
rules for taxable years 2018 through
2025 regarding the exemption amount.
Section 151(d)(5)(A) provides that, for
a taxable year beginning after December
31, 2017, and before January 1, 2026,
the exemption amount is zero, thereby
suspending the deductions for personal
exemptions and the dependency exemption. H.R. Rep. No. 115-466, at 202-204
(2017) (Conference Report). However,
section 151(d)(5)(B) provides that the reduction of the exemption amount to zero
is not taken into account in determining
whether a deduction under section 151
is allowed or allowable to a taxpayer, or
whether a taxpayer is entitled to a deduction under section 151, for purposes
of any other provision of the Code. The
Conference Report states that this provision clarifies that the reduction of the personal exemption to zero “should not alter
the operation of those provisions of the
Code which refer to a taxpayer allowed a
deduction . . . under section 151,” including the child tax credit in section 24(a).
Id. at 203 n.16. For example, the definition of head of household in section 2(b)
(1)(A) includes the requirement that the
taxpayer maintain as his or her home a
household for a qualifying individual for
a specified period of time. A qualifying
The section 152(d)(1)(C) support test
requires that an individual receive more
than one-half of his or her support from
the taxpayer to be claimed as a qualifying relative of that taxpayer. Prior to the
TCJA, payments of alimony or separate
maintenance paid to a spouse or former
spouse were not treated as support of a
dependent provided by the payor spouse.
Additionally, alimony and separate maintenance payments were deductible by the
payor spouse and includible in income by
the recipient spouse under sections 61(a)
(8), 71(a), and 215(a) of the Code. Under section 71(c), child support payments
were not treated as alimony includible in
income.
Section 11051 of the TCJA repealed
sections 61(a)(8), 71 and 215, and, in a
conforming change, also repealed section
682 of the Code for any divorce or separation instrument executed after 2018,
and for any instrument executed before
2019 and later modified to apply the provisions of the TCJA. Consistent with prior
law, the TCJA provides that payments of
alimony or separate maintenance paid to
a spouse or former spouse are not treated
as support of a dependent provided by the
payor spouse. To conform with the repeal
of sections 71 and 682 by the TCJA, section 11051(b)(3)(B) of the TCJA amended
section 152(d)(5) of the Code regarding
the source of a qualifying relative’s support by revising the language of section
152(d)(5) to eliminate references to former sections 71 and 682.
Applicability Date: Sections 1.24-1 and
1.152-2(b) of these regulations apply to
taxable years beginning on or after October 13, 2020. Section 1.152-2(e) of these
regulations applies to taxable years ending
after August 28, 2018, the date the Department of the Treasury (Treasury Department) and the IRS issued Notice 2018-70,
2018-38 I.R.B. 441.
FOR FURTHER INFORMATION CONTACT: Victoria J. Driscoll at (202) 3174718 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) under sections 24 and 152 of the
Code relating to statutory amendments
enacted in Public Law 115-97, 131 Stat.
2054 (2017), commonly referred to as the
Tax Cuts and Jobs Act (TCJA).
Section 152(a) generally defines a
“dependent” as a “qualifying child” or a
“qualifying relative.” The definition of a
qualifying relative in section 152(d)(1) includes the requirement that the individual
have gross income for the calendar year
that is less than the “exemption amount”
as defined in section 151(d) (exemption
amount). Such an individual also must satisfy the requirement of section 152(d)(1)
(C) that the individual receive more than
one-half of his or her support from the taxpayer claiming the individual as a qualifying relative (support test). As described
in parts I through IV of this Background,
these final regulations provide that, in
determining whether an individual is a
qualifying relative for purposes of various
provisions of the Code that refer to sec-
November 2, 2020
976
II. Support Test
III. Credit for Other Dependents
Section 11022(a) of the TCJA amended section 24 of the Code to create a $500
credit for certain dependents of a taxpayer other than a qualifying child described
in section 24(c) for whom the child tax
credit is allowed. The $500 credit applies to two categories of dependents: (1)
Qualifying children for whom a child tax
credit is not allowed, and (2) qualifying
Bulletin No. 2020–45
relatives as defined in section 152(d).
Section 24(h)(4)(A) and (C). Like the
amendment to section 151(d) reducing
the exemption amount to zero, this new
credit applies for taxable years 2018
through 2025. The Conference Report
explains that “[t]he credit is further modified to temporarily provide for a $500
nonrefundable credit for qualifying dependents other than qualifying children.
The provision generally retains the present-law definition of dependent.” H.R.
Rep. No. 115-466, at 227.
IV. Administrative Action
On August 28, 2018, the Treasury Department and the IRS issued Notice 201870. This notice announced the intent to
issue proposed regulations providing that
the reduction of the exemption amount to
zero under section 151(d)(5)(A) for taxable years 2018 through 2025 will not be
taken into account in determining whether an individual meets the requirement of
section 152(d)(1)(B) to be a qualifying
relative. Notice 2018-70 also stated that,
before the issuance of the proposed regulations described in the notice, a taxpayer
may rely on the rules described in the notice.
On June 9, 2020, the Treasury Department and the IRS published a notice of
proposed rulemaking (REG-118997-19)
in the Federal Register (85 FR 35233)
proposing regulations under sections 24
and 152 (proposed regulations). Consistent with Notice 2018-70, the proposed
regulations provide that, in determining
whether an individual is a qualifying relative for purposes of various provisions
of the Code that refer to section 152 in
taxable years in which the exemption
amount is zero, the section 151(d) exemption amount will be the inflation-adjusted
section 152(d)(1)(B) exemption amount in
the annual revenue procedure setting forth
inflation-adjusted items that is published
in the Internal Revenue Bulletin. Thus, the
exemption amount to be used for this purpose is $4,150 for taxable year 2018 (section 3.24 of Rev. Proc. 2017-58, 2017-45
I.R.B. 489, modified and superseded by
Rev. Proc. 2018-18, 2018-10 I.R.B. 392);
$4,200 for taxable year 2019 (section 3.25
of Rev. Proc. 2018-57, 2018-49 I.R.B.
827); and $4,300 for taxable year 2020
Bulletin No. 2020–45
(section 3.25 of Rev. Proc. 2019-44, 201947 I.R.B. 1093).
Section 1.152-3(c)(3) and (d)(2) of the
proposed regulations were proposed as
changes to an earlier notice of proposed
rulemaking (REG-137604-07) also providing rules regarding the definition of a
dependent under section 152, which was
published in the Federal Register (82 FR
6370) on January 19, 2017 (January 2017
Proposed Regulations). Section 1.1523(d)(2) of the January 2017 Proposed
Regulations, which have not yet been finalized, originally included references to
sections 71 and 682. Accordingly, the proposed regulations withdrew §1.152-3(d)
(2) of the January 2017 Proposed Regulations and replaced it with a proposed
rule to reflect the amendments to section
152(d)(5) discussed in part II of this Background.
Summary of Comments and
Explanation of Provisions
The Treasury Department and the IRS
received three comments in response to
the proposed regulations through the Federal eRulemaking Portal. As no request for
a public hearing was received, no hearing
was held.
Although two of the comments received
did not relate to the proposed regulations,
the third comment generally asked for additional clarity regarding the definition of
a qualifying relative. As described in the
Background, these regulations implement
specific changes to the law enacted in the
TCJA, which did not modify the definition
of qualifying relative in section 152(d)
other than to make conforming changes to
section 152(d)(5) to account for the repeal
of sections 71 and 682. When the January
2017 Proposed Regulations are finalized,
they will provide additional clarity to the
regulations under section 152 and related
provisions.
The third comment also suggested
that, because the final regulations would
not be published earlier than 2020, it
was not necessary to reference the exemption amount for purposes of section
152 for taxable years 2018 and 2019.
Although these final regulations are being published in 2020, §1.152-2(e) of
these final regulations applies to taxable
years ending after August 28, 2018, the
977
date the Treasury Department and the
IRS issued Notice 2018-70, pursuant to
section 7805(b)(1)(C). Further, the Treasury Department and the IRS determined
it appropriate to clarify that, in defining
qualifying relative for purposes other
than determining the amount allowable
as a deduction under section 151(a), the
exemption amount is not zero, but is the
inflation-adjusted section 152(d)(1)(B)
exemption amount in the annual revenue
procedure setting forth inflation-adjusted items that is published in the Internal
Revenue Bulletin.
This document adopts the proposed
regulations as final regulations with no
substantive change. However, because
§1.152-3(c)(3) and 1.152-3(d)(2) of the
proposed regulations originally were
proposed as changes to provisions of
the January 2017 Proposed Regulations,
which have not yet been finalized, the
proposed regulations have been redesignated in the final regulations to coordinate with the existing regulations. Specifically, proposed §1.152-3(c)(3)(i) and (ii)
is finalized as new §1.152-2(e)(1) and (2)
and proposed §1.152-3(d)(2) is finalized
as §1.152-2(b). When the January 2017
Proposed Regulations are finalized, the
provisions again will be appropriately
redesignated.
Therefore, the provisions of the proposed regulations are adopted without
substantive change to: (1) provide that
the exemption amount, for purposes other than a deduction for a personal or dependency exemption under section 151,
is $4,150 for taxable year 2018, and for
taxable years 2019 through 2025, the exemption amount, as adjusted for inflation,
is the section 152(d)(1)(B) exemption
amount, as set forth in guidance published
in the Internal Revenue Bulletin; and
(2) describe certain payments to a payee
spouse for purposes of the support test
without references to repealed sections 71
and 682.
Finally, these regulations clarify an
issue raised regarding a statutory cross
reference in section 24(h)(4) to “a qualifying child described in subsection (c).” As
was proposed in the proposed regulations,
these regulations clarify in §1.24-1 that
the statutory cross reference is a reference
to section 24(c), rather than to section
152(c).
November 2, 2020
Applicability Date
Drafting Information
Section 7805(b)(1) of the Code generally provides that no temporary, proposed, or final regulation relating to the
internal revenue laws may apply to any
taxable period ending before the earliest
of (A) the date on which the regulation
is filed with the Federal Register, or
(B) in the case of a final regulation, the
date on which a proposed or temporary
regulation to which the final regulation
relates was filed with the Federal Register. However, section 7805(b)(1)(C)
provides that a regulation may apply to
a taxable period ending after the date on
which any notice substantially describing
the expected contents of a regulation is
issued to the public.
Accordingly, §§1.24-1 and 1.1522(b) of these regulations apply to taxable
years beginning on or after October 13,
2020. Section 1.152-2(e) of these regulations applies to taxable years ending after
August 28, 2018, the date the Treasury
Department and the IRS issued Notice
2018-70.
The principal author of the final regulations is Victoria Driscoll of the Office
of Associate Chief Counsel (Income Tax
and Accounting). However, other personnel from the Treasury Department
and the IRS participated in their development.
Special Analyses
These regulations are not subject to review under section 6(b) of Executive Order 12866, pursuant to the Memorandum
of Agreement (April 11, 2018) between
the Treasury Department and the Office
of Management and Budget, regarding the
review of tax regulations.
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is certified
that these regulations will not have a significant economic impact on a substantial number of small entities. These regulations primarily affect individuals and
therefore will not have a significant economic impact on a substantial number of
small entities. Accordingly, the Secretary
of the Treasury’s delegate certifies that the
rule will not have a significant economic
impact on a substantial number of small
entities.
Pursuant to section 7805(f), the proposed regulations preceding these regulations were submitted to the Office of 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.
November 2, 2020
Statement of Availability of IRS
Documents
IRS notices and other guidance cited
in this preamble are published in the Internal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC
20402, or by visiting the IRS website at
http://www.irs.gov.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.24-1 is added to read
as follows:
§1.24-1 Partial credit allowed for certain
other dependents.
(a) In general. For purposes of section
24(h)(4)(A), a taxpayer may be eligible to
increase the credit determined under section 24(a) by $500 for a dependent of the
taxpayer, as defined in section 152, other
than a qualifying child described in section 24(c).
(b) Applicability date. This section applies to taxable years beginning on or after
October 13, 2020.
Par. 3. Section 1.152-2, is amended by:
1. Revising paragraph (b); and
978
2. Adding paragraph (e).
The revision and addition read as follows:
§1.152-2 Rules relating to general
definition of dependent.
*****
(b)(1) A payment to a spouse (payee
spouse) of alimony or separate maintenance is not treated as a payment by the
payor spouse for the support of any dependent. Similarly, the distribution of income
of an estate or trust to a divorced or legally separated payee spouse is not treated
as a payment by the payor spouse for the
support of any dependent. The preceding
sentence will not apply, however, to the
extent that such a distribution is in satisfaction of the amount or portion of income
that, by the terms of a divorce decree, a
written separation agreement, or the trust
instrument is fixed as payable for the support of the minor children of the payor
spouse.
(2) Paragraph (b)(1) of this section applies to taxable years beginning on or after
October 13, 2020.
*****
(e)(1) In defining a qualifying relative for taxable year 2018, the exemption
amount in section 152(d)(1)(B) is $4,150.
For taxable years 2019 through 2025, the
exemption amount, as adjusted for inflation, is set forth in annual guidance published in the Internal Revenue Bulletin.
See §601.601(d)(2) of this chapter.
(2) Paragraph (e)(1) of this section applies to taxable years ending after August
28, 2018.
Sunita Lough,
Deputy Commissioner for Services
and Enforcement
Approved: September 8, 2020
David J. Kautter
Assistant Secretary of the Treasury
(Tax Policy)
(Filed by the Office of the Federal Register on October 09, 2020, 8:45 a.m., and published in the issue
of the Federal Register for October 13, 2020, 85 F.R.
64386)
Bulletin No. 2020–45
26 CFR 1.67-4; 26 CFR 1.642(h)-2
SUPPLEMENTARY INFORMATION:
T.D. 9918
Background
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Effect of Section 67(g) on
Trusts and Estates
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations clarifying that the following deductions allowed to an estate or
non-grantor trust are not miscellaneous
itemized deductions: costs paid or incurred
in connection with the administration of an
estate or non-grantor trust that would not
have been incurred if the property were not
held in the estate or trust, the personal exemption of an estate or non-grantor trust,
the distribution deduction for trusts distributing current income, and the distribution
deduction for estates and trusts accumulating income. Therefore, these deductions
are not affected by the suspension of the
deductibility of miscellaneous itemized deductions for taxable years beginning after
December 31, 2017, and before January
1, 2026. The final regulations also provide
guidance on determining the character,
amount, and allocation of deductions in
excess of gross income succeeded to by a
beneficiary on the termination of an estate
or non-grantor trust. The final regulations
affect estates, non-grantor trusts (including
the S portion of an electing small business
trust), and their beneficiaries.
DATES: Effective date: These regulations
are effective on October 19, 2020.
Applicability dates: For dates of applicability, see §§ 1.67–4(d), 1.642(h)–2(f) and
1.642(h)-5(c).
FOR FURTHER INFORMATION
CONTACT: Margaret Burow at (202)
317–5279 (not a toll-free number).
Bulletin No. 2020–45
This document contains amendments
to Income Tax Regulations (26 CFR
part 1) under sections 67 and 642 of the
Internal Revenue Code (Code). On May
11, 2020, the Department of Treasury
(Treasury Department) and the IRS published a notice of proposed rulemaking
(REG-113295-18) in the Federal Register (85 FR 27693) containing proposed
regulations under sections 67 and 642(h)
(proposed regulations). The Summary of
Comments and Explanation of Revisions
section of this preamble summarizes the
provisions of sections 67 and 642(h)
and the provisions of the proposed regulations, which are explained in greater
detail in the preamble to the proposed
regulations.
On July 17, 2020, the Treasury Department and the IRS published in the
Federal Register (85 FR 43512) a notice
of public hearing on the proposed regulations scheduled for August 12, 2020.
The Treasury Department and the IRS received no requests to speak at a hearing
in response to that notice. On August 5,
2020, the Treasury Department and the
IRS published in the Federal Register
(85 FR 47323) a cancellation of the notice
of public hearing.
The Treasury Department and the IRS
received written and electronic comments
in response to the proposed regulations.
All comments were considered and are
available at www.regulations.gov or upon
request. After full consideration of the
comments received, this Treasury decision adopts the proposed regulations with
modifications described in the Summary
of Comments and Explanation of Revisions.
Summary of Comments and
Explanation of Revisions
Most of the comments addressing the
proposed regulations are summarized in
this Summary of Comments and Explanation of Revisions. Comments merely
summarizing or interpreting the proposed
regulations or recommending statutory
revisions are not discussed in this preamble. The Treasury Department and the
979
IRS continue to study comments on issues
related to sections 67 and 642(h) that are
beyond the scope of these regulations,
which may be discussed in future guidance if guidance on those issues is published. The scope of the proposed regulations and these regulations is limited to the
effect of section 67(g) on the deductibility
of certain expenses described in section
67(b) and (e) that are incurred by estates
and non-grantor trusts and the treatment
of excess deductions on termination of an
estate or trust under section 642(h). This
Summary of Comments and Explanation
of Revisions also describes each of the final rules contained in this document.
A. Section 67
Section 67(g) was added to the Code on
December 22, 2017, by section 11045(a)
of Public Law 115–97, 131 Stat. 2054,
2088 (2017), commonly referred to as the
Tax Cuts and Jobs Act (TCJA). Section
67(g) prohibits individual taxpayers from
claiming miscellaneous itemized deductions for any taxable year beginning after
December 31, 2017, and before January
1, 2026. Prior to the TCJA, miscellaneous
itemized deductions were allowable for
any taxable year only to the extent that
the sum of such deductions exceeded two
percent of adjusted gross income. See section 67(a). Section 67(b) defines miscellaneous itemized deductions as itemized deductions other than those listed in section
67(b)(1) through (12).
Section 67(e) provides that, for purposes of section 67, an estate or trust
computes its adjusted gross income in the
same manner as that of an individual, except that the following additional deductions are treated as allowable in arriving
at adjusted gross income: (1) the deductions for costs which are paid or incurred
in connection with the administration of
the estate or trust and which would not
have been incurred if the property were
not held in such estate or trust, and (2) deductions allowable under section 642(b)
(concerning the personal exemption of
an estate or non-grantor trust), section
651 (concerning the deduction for trusts
distributing current income), and section
661 (concerning the deduction for estates and trusts accumulating income).
Accordingly, section 67(e) removes the
November 2, 2020
deductions described in section 67(e)
(1) and (2) from the definition of itemized deductions under section 63(d), and
thus from the definition of miscellaneous
itemized deductions under section 67(b),
and treats them as deductions allowable
in arriving at adjusted gross income under section 62(a). Section 67(e) further
provides regulatory authority to make appropriate adjustments in the application
of part I of subchapter J of chapter 1 of
the Code to take into account the provisions of section 67.
The proposed regulations under §
1.67-4 clarify that expenses described in
section 67(e) remain deductible in determining the adjusted gross income of an
estate or non-grantor trust during the taxable years in which section 67(g) applies.
Accordingly, section 67(g) does not deny
an estate or non-grantor trust (including
the S portion of an electing small business
trust) a deduction for expenses described
in section 67(e)(1) and (2) because such
deductions are allowable in arriving at
adjusted gross income and are not miscellaneous itemized deductions under section 67(b). Commenters agreed with the
proposed amendments. These regulations
adopt the proposed regulations under §
1.67-4 without modification.
Two commenters requested that the
regulations address the treatment of deductions described in section 67(e)(1) and
(2) in determining an estate or non-grantor trust’s income for alternative minimum
tax (AMT) purposes. The commenters
suggested that such deductions are allowable as deductible in computing the AMT.
The treatment of deductions described in
section 67(e) for purposes of determining
the AMT is outside the scope of these regulations concerning the effects of section
67(g); therefore, these regulations do not
address the AMT. Further, no conclusions
should be drawn from the absence of a discussion of the AMT in these regulations
regarding the treatment of deductions described in section 67(e) for purposes of
determining the AMT.
One commenter suggested that the
Treasury Department and the IRS exercise their regulatory authority under section 67(e) to exempt cemetery trusts under
section 642(i) and qualified funeral trusts
(QFTs) under section 685 from the application of section 67(g). The commenter
November 2, 2020
stated that the primary type of expense incurred by these trusts is investment advisory expenses, the tax treatment of which
differs under the Code from management
expenses. That is, trust management expenses generally are allowable in computing adjusted gross income under section
67(e)(1), while trust investment advisory
expenses are miscellaneous itemized deductions. See § 1.67-4(b)(4). The commenter asserted that it was not the intent
of Congress to disallow investment advisory expenses incurred by cemetery and
funeral trusts when Congress enacted section 67(g).
The commenter suggested that exercising the regulatory authority under
section 67(e) in this manner would be
consistent with the exercise of regulatory
authority under section 1411 to exempt
section 642(i) cemetery perpetual care
funds and QFTs. See § 1.1411-3(b)(1)
(providing that certain types of trusts,
including section 642(i) cemetery perpetual care funds, are excepted from the
net investment income tax) and § 1.14113(b)(2) (providing a special rule for QFTs
that, for purposes of calculating any tax
under section 1411, section 1411 and
the regulations thereunder are applied to
each QFT by treating each beneficiary’s
interest in the trust as a separate trust). As
stated in the preamble to TD 9644 (78 FR
72393), the Treasury Department and the
IRS exercised their regulatory authority
under section 1411 to exclude cemetery
trusts from the net investment income tax
because, by benefiting an operating company, such trusts are considered similar
to the business trusts that are excluded
from the operation of section 1411. The
preamble also states that QFTs are not
excluded from the application of the net
income investment tax, but that the section 1411 tax is calculated consistent with
the taxation of QFTs under chapter 1. The
commenter noted that they advocated for
the treatment of each beneficiary’s interest in the QFT as a separate trust because
such treatment reduces the likelihood of
the QFT beneficiaries being subject to
the net investment income tax. The Treasury Department and the IRS continue to
consider these comments but providing
an exemption for cemetery and funeral
trusts under section 67(g) is outside the
scope of these regulations.
980
B. Section 642(h)
1. In general
Section 642(h) provides that if, on the
termination of an estate or trust, the estate
or trust has: (1) a net operating loss carryover under section 172 or a capital loss
carryover under section 1212, or (2) for
the last taxable year of the estate or trust,
deductions (other than the deductions allowed under section 642(b) (relating to
the personal exemption) or section 642(c)
(relating to charitable contributions)) in
excess of gross income for such year, then
such carryover or excess will be allowed
as a deduction, in accordance with the regulations prescribed by the Secretary of the
Treasury or his delegate (Secretary), to the
beneficiaries succeeding to the property of
the estate or trust.
Section 1.642(h)-2(a), as articulated in
the proposed regulations and these final
regulations, provides that if, on termination of an estate or trust, the estate or trust
has for its last taxable year deductions
(other than the deductions allowed under
section 642(b) or section 642(c)) in excess
of gross income, the excess deductions are
allowed under section 642(h)(2) as items
of deduction to the beneficiaries succeeding to the property of the terminated estate
or trust.
2. Character and amount of excess
deductions
Section 1.642(h)-2(b)(1) of the proposed regulations provides that each
deduction comprising the excess deductions under section 642(h)(2) retains, in
the hands of the beneficiary, its character
(specifically, as allowable in arriving at
adjusted gross income, as a non-miscellaneous itemized deduction, or as a miscellaneous itemized deduction) while in the
estate or trust. The character of these deductions does not change when succeeded
to by a beneficiary on termination of the
estate or trust. Furthermore, an item of deduction succeeded to by a beneficiary remains subject to any limitation applicable
under the Code in the computation of the
beneficiary’s tax liability.
One commenter noted that section
642(h) states that excess deductions on termination of an estate or trust are to be “al-
Bulletin No. 2020–45
lowed as a deduction, in accordance with
regulations prescribed by the Secretary”
and that there is no express authority to
treat excess deductions as miscellaneous
or non-miscellaneous itemized deductions
(or tax preference items for AMT purposes). The Treasury Department and the IRS
disagree with this comment. The characterization of these excess deductions as a
single miscellaneous itemized deduction
in the current regulations was made before the enactment of section 67(g) and
served as an administrative convenience.
Making a change to that characterization
is now appropriate to reflect the temporary
disallowance of miscellaneous itemized
deductions under section 67(g) since the
regulations were written and is a proper
exercise of the Secretary’s specific grant
of regulatory authority in section 642(h).
Another commenter requested that
non-miscellaneous itemized deductions
included in excess deductions be fully deductible by the beneficiary and not subject
to a second level of limitation applicable
on the beneficiary’s return, because the
amounts already would have been subject
to limitation on the return of the estate or
trust. The commenter provided an example of a terminated trust that paid $25,000
of state income tax, for which the trust is
limited to a $10,000 deduction under section 164(b)(6)(B) for taxable years beginning after December 31, 2017, and before
January 1, 2026. In the commenter’s example, the entire amount of the allowable
$10,000 deduction was passed through
to the beneficiary as an excess deduction
on termination of the trust. The excess of
state income tax over the $10,000 limitation ($15,000) would not pass through as
an excess deduction to the beneficiaries
in this circumstance because the excess
amount was not deductible to the trust. Excess state income tax on termination of the
estate or trust may, however, pass through
to a beneficiary if the estate or trust had
insufficient income to absorb the entire
$10,000 of state income tax deduction. In
that circumstance, the commenter opined
that the limitation under section 164(b)
(6)(B), having already been applied at the
trust level, should not again be applied at
the beneficiary level. The Treasury Department and the IRS carefully considered
the comment but determined that beneficiaries remain subject to the limitation in
Bulletin No. 2020–45
section 164(b)(6)(B). The Treasury Department and the IRS found no authority
to exempt such items from the application
of any limitations applicable to the beneficiary under the Code. The excess deductions retain their character in the hands of
the beneficiary on termination of the trust,
and all applicable limitations apply to all
of the beneficiary’s items of that character,
regardless of their origin.
One commenter noted that, under §
1.641(c)-1(j), if an electing small business
trust (ESBT) election terminates or is revoked and the S portion has a net operating loss or capital loss carryover or deductions in excess of gross income, then any
such loss, carryover or excess deductions
are allowed as a deduction, in accordance
with the regulations under section 642(h),
to the trust or to the beneficiaries succeeding to the property of the trust if the entire
trust terminates. However, the commenter
also noted that under the TCJA, section
641(c)(2)(E) was amended to provide that
ESBT charitable contributions are deductible under section 170, rather than under
section 642(c), so that, unlike other trust
charitable deductions, an ESBT’s charitable deduction could constitute part of the
excess deductions on termination of the
trust. The commenter stated that neither
the legislative history nor the explanation
of the staff of the Joint Committee on Taxation addressed whether this result was
intended. The Treasury Department and
the IRS note that charitable contribution
deductions under both sections 170 and
642(c) are non-miscellaneous itemized
deductions under sections 63(d) and 67(b)
(4) to the estate or trust and maintain that
such character is retained in the hands of
the beneficiary in these regulations. Although the Treasury Department and the
IRS continue to consider the application
of section 170 to ESBT charitable contributions under section 641(c)(2)(E), this
issue is outside the scope of these regulations.
Another commenter requested clarification of whether an excess deduction on
termination of a trust or estate that is allowed in determining the net investment
income under section 1411 of the estate
or trust remains deductible in the hands
of the beneficiary in determining the net
investment income of the beneficiary
under section 1411. These final regula-
981
tions provide that each excess deduction
retains its separate character as a section 67(e) deduction, non-miscellaneous
itemized deduction, or miscellaneous
itemized deduction in the hands of the
beneficiary. Whether a deduction retains
its character as allowable in computing
the net investment income of the beneficiary, however, is outside the scope of
these regulations.
3. Reporting of excess deductions
Section 1.642(h)-2(b)(1) of the proposed regulations provides that an item of
deduction succeeded to by a beneficiary
remains subject to any additional applicable limitation under the Code and must be
separately stated if it could be so limited,
as provided in the instructions to Form
1041, U.S. Income Tax Return for Estates
and Trusts, and the Schedule K-1 (Form
1041), Beneficiary’s Share of Income,
Deductions, Credit, etc. Commenters requested that the Treasury Department
and the IRS provide guidance on how
the excess deductions are to be reported
by both the terminated estate or trust and
by its beneficiaries. The Treasury Department and the IRS released instructions for
beneficiaries that chose to claim excess
deductions on Form 1040 in the 2019 or
2018 taxable year based on the proposed
regulations. In addition, the Treasury Department and the IRS plan to update the
instructions for Form 1041, Schedule K-1
(Form 1041), and Form 1040, U.S. Individual Income Tax Return, for the 2020
and subsequent tax years to provide for
the reporting of excess deductions that are
section 67(e) expenses or non-miscellaneous itemized deductions.
The Treasury Department and the IRS
are aware that the income tax laws of
some U.S. states do not conform to the
Code with respect to section 67(g), such
that beneficiaries may need information
on miscellaneous itemized deductions of
a terminated estate or trust. However, because miscellaneous itemized deductions
are currently not allowed for Federal income tax purposes, that information is not
needed for Federal income tax purposes.
Therefore, it would not be appropriate to
modify Federal income tax forms to require or accommodate the collection of
such information while this deduction is
November 2, 2020
suspended. Estates, trusts, and beneficiaries are advised to consult the relevant
state taxing authority for information
about deducting miscellaneous itemized
expenses on their state tax returns.
4. Determinations of deductions in year
of termination of the estate or trust
Section 1.642(h)-2(b)(2) of the proposed regulations provides that the provisions of § 1.652(b)–3 are used to allocate
each item of deduction among the classes
of income in the year of termination for
purposes of determining the character and
amount of the excess deductions under section 642(h)(2). Accordingly, the amount
of each separate deduction remaining after application of § 1.652(b)–3 comprises the excess deductions available to the
beneficiaries succeeding to the property of
the estate or trust as provided under section 642(h)(2). In addition, as previously
explained, an item of deduction succeeded
to by a beneficiary remains subject to any
additional applicable limitation under the
Code. Furthermore, § 1.642(h)-2(c) of the
proposed regulations provides that excess
deductions are allowable only in the taxable year of the beneficiary in which or
with which the estate or trust terminates.
That is, excess deductions of a terminated
estate or trust may not carry over to a subsequent year of the beneficiary.
One commenter requested that these
regulations provide an ordering rule clar
ifying whether excess deductions on ter
mination of an estate or trust allowed as
a deduction to the beneficiary are claimed
before, after, or ratably with the beneficiary’s other deductions, particularly when
the amount of the excess deductions and
other deductions exceed the beneficiary’s
gross income. These final regulations clarify that beneficiaries may claim all or part
of the excess deductions under section
642(h)(2) before, after, or together with
the same character of deductions separately allowable to the beneficiary under the
Code.
That commenter also requested that the
final regulations include an exception for
investment interest expense under section
163(d) from the general rule that excess
deductions on termination of a trust or
estate may be claimed only in the beneficiary’s taxable year during which the trust
November 2, 2020
or estate terminated. That section permits
the carryforward of investment interest
under section 163(d)(2) to the taxpayer’s
subsequent taxable years if the taxpayer
is unable to deduct the investment interest in the current taxable year. The commenter stated that the disallowance of
the carryover of section 642(h)(2) excess
deductions should not apply to those excess deductions that are no longer treated as miscellaneous itemized deductions
under the proposed regulations, and that
carryover should be permitted to the extent otherwise permitted under the Code.
The preamble to the proposed regulations
states that addressing suspended deductions under section 163(d) is beyond the
scope of the regulations and the same is
true of these final regulations.
A commenter requested that the amount
of a beneficiary’s net operating loss carryover to a later taxable year under section
172 should include all of the beneficiary’s
section 642(h)(2) excess deductions that are
section 67(e) deductions, as deductions that
are attributable to the beneficiary’s trade or
business and thus deductions attributable
to a trade or business under section 172(d)
(4). Section 642(h) makes it clear that a net
operating loss carryover under paragraph
(1) of that section is separate and distinct
from the excess deductions on termination
described in paragraph (2) of that section.
Furthermore, § 1.642(h)-2(d) provides that
a deduction based upon a net operating loss
carryover generally will not be allowed to
beneficiaries under both paragraphs (1) and
(2) of section 642(h). Therefore, an excess
deduction allowable to the beneficiary under section 642(h)(2) is not a net operating
loss carryover succeeded to by the beneficiary under section 642(h)(1) and (with one
exception) a net operating loss carryover is
not an excess deduction on termination.
Moreover, these regulations provide that
it is the character of the excess deductions
as section 67(e) deductions, non-miscellaneous itemized deductions, and miscellaneous itemized deductions, and not the
character of a deduction as attributable to
a trade or business, that is retained in the
hands of the beneficiary. Thus, whether
section 642(h)(2) excess deductions that
are section 67(e) deductions may be included in a beneficiary’s net operating loss
carryovers under section 172, separate
from those it succeeds to from a terminated
982
estate or trust, is beyond the scope of these
regulations. Because § 1.642(h)-2(a) is
clear that excess deductions on termination
of an estate or trust are not carried over to
future years and that such deductions are
separate from a net operating loss carryover from the estate or trust, the Treasury
Department and the IRS do not adopt this
comment.
5. Example 1
Section 1.642(h)-5(a), Example 1, of
the proposed regulations (Example 1)
updates an existing example illustrating computations under section 642(h)
when there is a net operating loss. Section
1.642-5(a)(2)(ii) of Example 1 explains
that the beneficiaries of the estate cannot
carry back any of the net operating loss
of the terminating estate that was made
available to them under section 642(h)(1).
Two commenters requested that Example 1 be revised to take into account
the amendments to section 172(b)(1)(D)
under sec. 2302(b) of the Coronavirus
Aid, Relief, and Economic Security Act,
Public Law 116-136, 134 Stat. 281 (2020)
(CARES Act), by allowing a beneficiary to
carry back the net operating loss carryover
the beneficiary succeeds to under section
642(h)(1) for net operating losses arising
in taxable years beginning after December 31, 2017, and before January 1, 2021.
Under section 2303 of the CARES Act, net
operating losses arising in taxable years
beginning after December 31, 2017, and
before January 1, 2021, generally may be
carried back five years before being carried
forward. One of these commenters further
requested confirmation that a beneficiary
is allowed a carryback of the net operating
loss under section 642(h)(1) for net operating losses of an estate or trust arising in taxable years ending before January 1, 2018,
to the extent the beneficiary succeeds to a
net operating loss carryover attributable to
those net operating losses on a termination
of the estate or trust between January 1,
2018, and December 31, 2020.
Unless otherwise provided under the
Code, a net operating loss incurred by a
taxpayer may only be used as a deduction
by that taxpayer and cannot be transferred
to another taxpayer for use by that other
taxpayer. Calvin v. U.S. 354 F.2d 202 (10th
Cir. 1965), Mellott v. U.S., 257 F.2d 798 (3d
Bulletin No. 2020–45
Cir. 1958). As an exception to this general
principle, section 642(h) provides that if, on
termination of an estate or trust, the estate
or trust has a net operating loss carryover
under section 172, then such carryover is
allowed as a deduction, in accordance with
the regulations prescribed by the Secretary,
to the beneficiaries succeeding to the property of the estate or trust. Section 1.642(h)1(a) provides that if, on the termination of
an estate or trust, a net operating loss carryover under section 172 would be allowable
to the estate or trust in a taxable year subsequent to the taxable year of termination but
for the termination, a carryover is allowed
under section 642(h)(1) to the beneficiaries
succeeding to the property of the estate or
trust. In addition, § 1.642(h)-1(b) provides
that the first taxable year of the beneficiary
to which the net operating loss will be carried over is the taxable year of the beneficiary in which or with which the estate or
trust terminates.
Section 642(h)(1) provides a specific
rule that allows the beneficiary to succeed
to a net operating loss carryover of the estate or trust and deduct the amount of the
net operating loss over the remaining carryover period that would have been allowable to the estate or trust but for the termination of the estate or trust. The phrase in
section 642(h)(1) “the estate or trust has a
net operating loss carryover’” means that
the estate or trust incurred a net operating
loss and either already carried it back to
the earliest allowable year under section
172 or elected to waive the carryback period under section 172(b)(3), and now is
limited to carrying over the remaining net
operating loss. Accordingly, because the
net operating loss is a carryover for the estate or trust, the beneficiary succeeding to
that net operating loss may, under section
642(h)(1), only carry it forward.
The CARES Act amendments to section 172(b) mentioned by the commenters
allow taxpayers a five-year carryback of
certain net operating losses incurred by that
taxpayer. The CARES Act amendments do
not change the result that a beneficiary succeeding to the net operating loss carryover
of a terminated estate or trust may only carryover that net operating loss in the same
manner as the terminated estate or trust,
but for the termination. Consequently, the
Treasury Department and the IRS do not
adopt these comments and add a citation to
Bulletin No. 2020–45
§ 1.642(h)-1 to reference the rule that a beneficiary that succeeds to a net operating loss
carryover of a terminated estate or trust may
only carry forward the net operating loss.
6. Example 2
Section § 1.642(h)-5(b), Example 2,
of the proposed regulations (Example 2)
demonstrates computations under section
642(h)(2). The expenses in Example 2
include rental real estate taxes in an attempt to illustrate a deduction subject to
limitation under section 164(b)(6) to the
beneficiary that must be separately stated
as provided in § 1.642(h)-2(b)(1).
Multiple commenters noted that Example 2 raises several issues that could be
potentially relevant to that example, such
as whether the decedent was in a trade or
business and the application of section 469
to estates and trusts. To avoid these issues,
which are extraneous to the point being illustrated, one commenter suggested that the
example be revised so that the entire amount
of real estate expenses on rental property
equals the amount of rental income. The
Treasury Department and the IRS did not
intend to raise such issues in the example
and consider both issues to be outside the
scope of these regulations. Accordingly, the
Treasury Department and the IRS adopt the
suggestion by the commenter and modify
Example 2 to avoid these issues by having
rental real estate expenses entirely offset
rental income with no unused deduction.
Commenters also noted that Example 2
does not properly allocate rental real estate
expenses because the example characterizes the rental real estate taxes as itemized deductions. These commenters asserted that
real estate taxes on property held for the
production of rental income are not itemized deductions but instead are allowed in
computing gross income and cited to section 62(a)(4) as providing that ordinary and
necessary expenses paid or incurred during
the taxable year for the management, conservation, or maintenance of property held
for the production of income under section
212(2) that are attributable to property held
for the production of rents are deductible
as above-the-line deductions in arriving
at adjusted gross income. One commenter
suggested that, if the goal of Example 2 is
to illustrate state and local taxes passing
through to the beneficiary, then the exam-
983
ple should include state income taxes rather
than real estate taxes on rental real estate.
The Treasury Department and the IRS have
revised this example in the final regulations
to include personal property tax paid by the
trust rather than taxes attributable to rental
real estate.
Lastly, commenters noted that Example
2 does not demonstrate the broad range of
trustee discretion in § 1.652(b)-3(b) and
(d) for deductions that are not directly attributable to a class of income, or deductions that are, but which exceed such class
of income, respectively. In response to
these comments, the Treasury Department
and the IRS have modified Example 2 to
illustrate the application of trustee discretion as found in § 1.652(b)-3(b) and (d).
C. Applicability Dates
The proposed regulations provide that
the changes to §§ 1.67-4, 1.642(h)-2, and
1.642(h)-5 apply to taxable years beginning after the date the regulations are
published as final. The preamble to the
proposed regulations explains that estates,
non-grantor trusts, and their beneficiaries
may rely on the proposed regulations under section 67 for taxable years beginning
after December 31, 2017, and on or before
the date these regulations are published as
final. Taxpayers may also rely on the proposed regulations under section 642(h) for
taxable years of beneficiaries beginning
after December 31, 2017, and on or before
the date the regulations are published as final, in which an estate or trust terminates.
One commenter requested that §
1.642(h)-2 of the proposed regulations be
applied retroactively not only to taxable
years beginning after December 31, 2017,
but to all open years. The commenter as
serted that the existing regulation treating
excess deductions on termination of an
estate or trust as a miscellaneous itemized
deduction was in error. As an example, the
commenter argues that the current regulations mistakenly describe section 67(e)
expenses as an exception to the rules applicable to miscellaneous itemized deductions, and therefore requested that the final
regulations be applicable to all open years.
The Treasury Department and the IRS have
the authority to treat an excess deduction
on termination of an estate or trust as a single miscellaneous itemized deduction. See
November 2, 2020
section 642(h). The suspension under section 67(g) of miscellaneous itemized deductions caused the Treasury Department
and the IRS to reconsider the treatment of
excess deductions under section 642(h)(2)
because the Treasury Department and the
IRS do not interpret section 67(g) as suspending such deductions allowable under
section 642(h)(2). The Treasury Department and the IRS interpret section 67(g)
as not disallowing excess deductions succeeded to beneficiaries from terminated
estates and trusts under section 642(h)(2).
Therefore, taxpayers may rely on these regulations as of the effective date of section
67(g), but not for earlier periods.
The final regulations apply to taxable
years beginning after October 19, 2020.
Pursuant to section 7805(b)(7), taxpayers
may choose to apply the amendments to §
1.67-4 and §§ 1.642(h)-2 and 1.642(h)-5
set forth in this Treasury decision to taxable years beginning after December 31,
2017, and on or before October 19, 2020.
Special Analysis
These regulations are not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum
of Agreement (April 11, 2018) between
the Treasury Department and the Office
of Management and Budget regarding review of tax regulations. Therefore, a regulatory impact assessment is not required.
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby certified that these regulations will not have a
significant economic impact on a substantial number of small entities. This certification is based on the fact that the amount
of time necessary to report the required
information will be minimal in that it requires fiduciaries of estates and trusts to
provide on the Schedule K-1 (Form 1041)
issued to beneficiaries information that
is already maintained and reported to the
IRS on Form 1041. Moreover, it should
take an estate or trust no more than 2 hours
to satisfy the information requirement in
these regulations. Accordingly, the Secretary certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking that preceded these regulations was submitted to
November 2, 2020
the Chief Counsel for the Office of Advocacy of the Small Business Administration
for comment on its impact on small businesses, and no comments were received.
Paperwork Reduction Act (PRA)
The collection of information related
to these regulations under section 642(h)
is reported on Schedule K–1 (Form
1041), Beneficiary’s Share of Income,
Deductions, Credits, etc., and has been
reviewed in accordance with the Paperwork Reduction Act (44 U.S.C. 3507)
and approved by the Office of Management and Budget under control number
1545–0092.
The collection of information in these
regulations is in § 1.642(h)–2(b)(1). The
IRS requires this information to ensure
that excess deductions on an estate’s or
trust’s termination that are subject to additional applicable limitations retain their
character when taken into account by beneficiaries on their returns. The respondents
will be estates, trusts, and their fiduciaries.
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 tax return information are confidential, as required by section 6103.
Drafting Information
The principal author of these regulations is Margaret Burow of the Office of
Associate Chief Counsel (Passthroughs
and Special Industries). Other personnel
from the Treasury Department and the
IRS, however, participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
984
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
for §§ 1.67–4, 1.642(h)–2, and 1.642(h)–
5 in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.67–4 also issued under 26
U.S.C. 67(e).
*****
Section 1.642(h)–2 also issued under
26 U.S.C. 642(h).
Section 1.642(h)–5 also issued under
26 U.S.C. 642(h).
*****
Par. 2. Section 1.67–4 is amended by
revising paragraph (a) and the heading of
paragraph (d) and adding two sentences to
the end of paragraph (d) to read as follows:
§ 1.67–4 Costs paid or incurred by
estates or non-grantor trusts.
(a) Deductions—(1) Section 67(e) deductions—(i) In general. An estate or trust
(including the S portion of an electing small
business trust) not described in § 1.67–2T(g)
(1)(i) (a non-grantor trust) must compute its
adjusted gross income in the same manner
as an individual, except that the following
deductions (section 67(e) deductions) are allowed in arriving at adjusted gross income:
(A) Costs that are paid or incurred in
connection with the administration of the
estate or trust that would not have been
incurred if the property were not held in
such estate or trust; and
(B) Deductions allowable under section 642(b) (relating to the personal exemption) and sections 651 and 661 (relating to distributions).
(ii) Not disallowed under section 67(g).
Section 67(e) deductions are not itemized
deductions under section 63(d) and are not
miscellaneous itemized deductions under
section 67(b). Therefore, section 67(e) deductions are not disallowed under section
67(g).
(2) Deductions subject to 2-percent
floor. A cost is not a section 67(e) deduction and thus is subject to both the 2-percent floor in section 67(a) and section
67(g) to the extent that it is included in the
definition of miscellaneous itemized deductions under section 67(b), is incurred
by an estate or non-grantor trust (includ-
Bulletin No. 2020–45
ing the S portion of an electing small business trust), and commonly or customarily
would be incurred by a hypothetical individual holding the same property.
*****
(d) Applicability date. * * * Paragraph
(a) of this section applies to taxable years
beginning after October 19, 2020. Taxpayers may choose to apply paragraph (a) of
this section to taxable years beginning after December 31, 2017, and on or before
October 19, 2020.
Par. 3. Section 1.642(h)–2 is amended
by:
1. Revising paragraph (a).
2. Redesignating paragraph (b) as paragraph (d) and adding a heading for newly
redesignated paragraph (d).
3. Redesignating paragraph (c) as paragraph (e) and adding a heading for newly
redesignated paragraph (e).
4. Adding new paragraphs (b) and (c)
and paragraph (f).
The revisions and additions read as follows:
§ 1.642(h)–2 Excess deductions on
termination of an estate or trust.
(a) Excess deductions—(1) In general.
If, on the termination of an estate or trust,
the estate or trust has for its last taxable year
deductions (other than the deductions allowed under section 642(b) (relating to the
personal exemption) or section 642(c) (relating to charitable contributions)) in excess
of gross income, the excess deductions as
determined under paragraph (b) of this section are allowed under section 642(h)(2) as
items of deduction to the beneficiaries succeeding to the property of the estate or trust.
(2) Treatment by beneficiary. A beneficiary may claim all or part of the amount of
the deductions provided for in paragraph (a)
of this section, as determined after application of paragraph (b) of this section, before,
after, or together with the same character of
deductions separately allowable to the beneficiary under the Internal Revenue Code
for the beneficiary’s taxable year during
which the estate or trust terminated as provided in paragraph (c) of this section.
(b) Character and amount of excess
deductions—(1) Character. The character
and amount of the excess deductions on
termination of an estate or trust will be determined as provided in this paragraph (b).
Each deduction comprising the excess deductions under section 642(h)(2) retains,
in the hands of the beneficiary, its character (specifically, as allowable in arriving at
adjusted gross income, as a non-miscellaneous itemized deduction, or as a miscellaneous itemized deduction) while in the
estate or trust. An item of deduction succeeded to by a beneficiary remains subject
to any additional applicable limitation under the Internal Revenue Code and must
be separately stated if it could be so limited, as provided in the instructions to Form
1041, U.S. Income Tax Return for Estates
and Trusts, and the Schedule K–1 (Form
1041), Beneficiary’s Share of Income, Deductions, Credit, etc., or successor forms.
(2) Amount. The amount of the excess
deductions in the final year is determined
as follows:
(i) Each deduction directly attributable to
a class of income is allocated in accordance
with the provisions in § 1.652(b)–3(a);
(ii) To the extent of any remaining income after application of paragraph (b)(2)
(i) of this section, deductions are allocated in accordance with the provisions in §
1.652(b)–3(b) and (d); and
(iii) Deductions remaining after the application of paragraph (b)(2)(i) and (ii) of
this section comprise the excess deductions
on termination of the estate or trust. These
deductions are allocated to the beneficiaries
succeeding to the property of the estate or
trust in accordance with § 1.642(h)–4.
(c) Year of termination—(1) In general.
The deductions provided for in paragraph
(a) of this section are allowable only in the
taxable year of the beneficiary in which or
with which the estate or trust terminates,
whether the year of termination of the estate or trust is of normal duration or is a
short taxable year.
(2) Example. Assume that a trust distributes all its assets to B and terminates on
December 31, Year X. As of that date, it has
excess deductions of $18,000, all characterized as allowable in arriving at adjusted
gross income under section 67(e). B, who
reports on the calendar year basis, could
claim the $18,000 as a deduction allowable
in arriving at B’s adjusted gross income for
Year X. However, if the deduction (when
added to other allowable deductions that B
claims for the year) exceeds B’s gross income, the excess may not be carried over
to any year subsequent to Year X.
(d) Net operating loss carryovers. * * *
(e) Items included in net operating loss
or capital loss carryovers. * * *
(f) Applicability date. Paragraphs (a)
through (c) of this section apply to taxable
years beginning after October 19, 2020. The
rules applicable to taxable years beginning
on or before October 19, 2020, are contained
in § 1.642(h)-2 as in effect prior to October
19, 2020 (see 26 CFR part 1 revised as of
April 1, 2020). Taxpayers may choose to apply paragraphs (a) through (c) of this section
to taxable years beginning after December
31, 2017, and on or before October 19, 2020.
Par. 4. Section 1.642(h)–5 is revised to
read as follows:
§ 1.642(h)–5 Examples.
Paragraphs (a) and (b) of this section
(Examples 1 and 2) illustrate the application of section 642(h).
(a) Example 1: Computations under
section 642(h) when an estate has a net
operating loss—(1) Facts. On January 31,
2020, A dies leaving a will that provides
for the distribution of all of A’s estate
equally to B and an existing trust for C.
The period of administration of the estate terminates on December 31, 2020, at
which time all the property of the estate
is distributed to B and the trust. For tax
purposes, B and the trust report income on
a calendar year basis. During the period of
administration, the estate has the following items of income and deductions:
Table 1 to Paragraph (a)(1)
Income
Taxable interest ……………………………………………………………………………… $2,500
Business income ……………………………………………………………………………… 3,000
Total income ……………………………………………………………………………………………………… 5,500
Bulletin No. 2020–45
985
November 2, 2020
Table 2 to Paragraph (a)(1)
Deductions
Business expenses (including administrative expense allocable to business income) ……………… 5,000
Administrative expenses not allocable to business
income that would not have been incurred if property
had not been held in a trust or estate (section 67(e) deductions) …………………………………… 9,800
Total deductions ………………………………………………………………………………………………….…. 14,800
(2) Computation of net operating loss. (i) The amount of the net operating loss carryover is computed as follows:
Table 3 to Paragraph (a)(2)(i)
Gross income ………………………………………………………………………….......... $5,500
Total deductions ……………………………………………..………… 14,800
Less adjustment under section 172(d)(4)
(allowable non-business expenses ($9,800)
limited to non-business income ($2,500)) ……………………… 7,300
Deductions as adjusted ……………………………………………………………………..… 7,500
Net operating loss ……………………………………………………………………………………………......…... 2,000
(ii) Under section 642(h)(1), B and
the trust are each allocated $1,000 of the
$2,000 unused net operating loss carryover of the terminated estate in 2020, with
the allowance of any net operating loss
carryover to B and the trust determined
under section 172. Neither B nor the trust
can carry back any of the net operating
loss of A’s estate made available to them
under section 642(h)(1). See § 1.642(h)1(b).
(3) Section 642(h)(2) excess deductions. The $7,300 of non-business deduc-
tions not taken into account in determining the net operating loss of the estate are
excess deductions on termination of the
estate under section 642(h)(2). Under §
1.642(h)–2(b)(1), such deductions retain their character as section 67(e) deductions. Under § 1.642(h)–4, B and the
trust each are allocated $3,650 of excess
deductions based on B’s and the trust’s
respective shares of the burden of each
cost.
(4) Consequences for C. The net operating loss carryover and excess deductions
are not allowable directly to C, the trust
beneficiary. To the extent the distributable
net income of the trust is reduced by the
net operating loss carryover and excess
deductions, however, C may receive an
indirect benefit from the carryover and excess deductions.
(b) Example 2: Computations under
section 642(h)(2)—(1) Facts. D dies in
2019 leaving an estate of which the residuary legatees are E (75%) and F (25%).
The estate’s income and deductions in its
final year are as follows:
Table 4 to Paragraph (b)(1)
Income
Dividends ………………………………………………………………………………... $3,000
Taxable Interest ……………………………………………………………………………... 500
Rent ……………………………………………………………………………………….. 2,000
Capital Gain ………………………………………………………………………………. 1,000
Total Income …………………………………………………….………………………………………. 6,500
November 2, 2020
986
Bulletin No. 2020–45
Table 5 to Paragraph (b)(1)
Deductions
Section 62(a)(4) deductions:
Rental real estate expenses ……………………………………………………… 2,000
Section 67(e) deductions:
Probate fees ………………………………………………………… 1,500
Estate tax preparation fees ………………………….……………… 8,000
Legal fees ……………………………………..……………………. 2,500
Total Section 67(e) deductions …………………………………….………12,000
Non-miscellaneous itemized deductions:
Personal property taxes ………………………………………………………….. 3,500
Total deductions ………………………….……………………………………………… 17,500
(2) Determination of character. Pursuant to § 1.642(h)–2(b)(2), the character
and amount of the excess deductions is
determined by allocating the deductions
among the estate’s items of income as
provided under § 1.652(b)–3. Under
§ 1.652(b)–3(a), the $2,000 of rental
real estate expenses is allocated to the
$2,000 of rental income. In the exercise
of the executor’s discretion pursuant to
§ 1.652(b)–3(b), D’s executor allocates
$3,500 of personal property taxes and
$1,000 of section 67(e) deductions to the
remaining income. As a result, the excess
deductions on termination of the estate
are $11,000, all consisting of section
67(e) deductions.
(3) Allocations among beneficiaries.
Pursuant to § 1.642(h)–4, the excess
deductions are allocated in accordance
Bulletin No. 2020–45
with E’s (75 percent) and F’s (25 percent) interests in the residuary estate. E’s
share of the excess deductions is $8,250,
all consisting of section 67(e) deductions. F’s share of the excess deductions
is $2,750, also all consisting of section
67(e) deductions.
(4) Separate statement. If the executor
instead allocated $4,500 of section 67(e)
deductions to the remaining income of
the estate, the excess deductions on termination of the estate would be $11,000,
consisting of $7,500 of section 67(e) deductions and $3,500 of personal property
taxes. The non-miscellaneous itemized
deduction for personal property taxes may
be subject to limitation on the returns of
both B and C’s trust under section 164(b)
(6)(B) and would have to be separately
stated as provided in § 1.642(h)–2(b)(1).
987
(c) Applicability date. This section is
applicable to taxable years beginning after
October 19, 2020. Taxpayers may choose
to apply this section to taxable years beginning after December 31, 2017, and on
or before October 19, 2020.
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
Approved: September 16, 2020.
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on October 16, 2020, 8:45 a.m., and published in the issue
of the Federal Register for October 19, 2020, 85 F.R.
66219)
November 2, 2020
Part III
Update for Weighted
Average Interest Rates,
Yield Curves, and Segment
Rates
Notice 2020-77
This notice provides guidance on the
corporate bond monthly yield curve, the
corresponding spot segment rates used
under § 417(e)(3), and the 24-month average segment rates under § 430(h)(2) of the
Internal Revenue Code. In addition, this
notice provides guidance as to the interest
rate on 30-year Treasury securities under
§ 417(e)(3)(A)(ii)(II) as in effect for plan
years beginning before 2008 and the 30year Treasury weighted average rate under
§ 431(c)(6)(E)(ii)(I).
YIELD CURVE AND SEGMENT
RATES
Section 430 specifies the minimum
funding requirements that apply to single-employer plans (except for CSEC
plans under § 414(y)) pursuant to § 412.
Applicable Month
tember 2020 are, respectively, 0.51, 2.31,
and 3.15.
The 24-month average segment rates
determined under § 430(h)(2)(C)(i)
through (iii) must be adjusted pursuant to
§ 430(h)(2)(C)(iv) to be within the applicable minimum and maximum percentages of the corresponding 25-year average
segment rates. For plan years beginning
before 2021, the applicable minimum percentage is 90% and the applicable maximum percentage is 110%. For plan years
beginning in 2021, the applicable minimum percentage is 85% and the applicable maximum percentage is 115%. The
25-year average segment rates for plan
years beginning in 2019, 2020, and 2021
were published in Notice 2018-73, 201840 I.R.B. 526, Notice 2019-51, 2019-41
I.R.B. 866, and Notice 2020-72, 2020-40
I.R.B. 789, respectively.
24-MONTH AVERAGE CORPORATE
BOND SEGMENT RATES
The three 24-month average corporate
bond segment rates applicable for October
2020 without adjustment for the 25-year
average segment rate limits are as follows:
24-Month Average Segment Rates Without 25-Year Average Adjustment
First Segment
Second Segment
October 2020
2.11
Based on § 430(h)(2)(C)(iv), the
24-month averages applicable for October
For Plan Years
Beginning In
Section 430(h)(2) specifies the interest rates that must be used to determine
a plan’s target normal cost and funding
target. Under this provision, present value is generally determined using three
24-month average interest rates (“segment
rates”), each of which applies to cash
flows during specified periods. To the extent provided under § 430(h)(2)(C)(iv),
these segment rates are adjusted by the applicable percentage of the 25-year average
segment rates for the period ending September 30 of the year preceding the calendar year in which the plan year begins.1
However, an election may be made under
§ 430(h)(2)(D)(ii) to use the monthly yield
curve in place of the segment rates.
Notice 2007-81, 2007-44 I.R.B. 899,
provides guidelines for determining the
monthly corporate bond yield curve, and
the 24-month average corporate bond
segment rates used to compute the target
normal cost and the funding target. Consistent with the methodology specified in
Notice 2007-81, the monthly corporate
bond yield curve derived from September
2020 data is in Table 2020-9 at the end
of this notice. The spot first, second, and
third segment rates for the month of Sep-
3.30
2020, adjusted to be within the applicable
minimum and maximum percentages of
Third Segment
3.86
the corresponding 25-year average segment rates, are as follows:
Adjusted 24-Month Average Segment Rates
Applicable
First
Second
Month
Segment
Segment
Third
Segment
2019
October 2020
3.74
5.35
6.11
2020
October 2020
3.64
5.21
5.94
2021
October 2020
3.32
4.79
5.47
30-YEAR TREASURY SECURITIES
INTEREST RATES
Section 431 specifies the minimum
funding requirements that apply to multiemployer plans pursuant to § 412. Section
431(c)(6)(B) specifies a minimum amount
for the full-funding limitation described in
§ 431(c)(6)(A), based on the plan’s current
liability. Section 431(c)(6)(E)(ii)(I) provides that the interest rate used to calculate
current liability for this purpose must be
Pursuant to § 433(h)(3)(A), the 3rd segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amount
of the full funding limitation under § 433(c)(7)(C)).
1
November 2, 2020
988
Bulletin No. 2020–45
no more than 5 percent above and no more
than 10 percent below the weighted average of the rates of interest on 30-year Treasury securities during the four-year period
ending on the last day before the beginning
of the plan year. Notice 88-73, 1988-2 C.B.
383, provides guidelines for determining
the weighted average interest rate. The rate
of interest on 30-year Treasury securities
for September 2020 is 1.42 percent. The
Service determined this rate as the average
of the daily determinations of yield on the
30-year Treasury bond maturing in August
2050. For plan years beginning in October
2020, the weighted average of the rates of
interest on 30-year Treasury securities and
the permissible range of rates used to calculate current liability are as follows:
For Plan Years
Beginning In
Treasury Weighted Average Rates
30-Year Treasury
Weighted Average
Permissible Range
90% to 105%
October 2020
2.43
2.19 to 2.55
under § 417(e)(3)(D) are segment rates
computed without regard to a 24-month
average. Notice 2007-81 provides guidelines for determining the minimum pres-
ent value segment rates. Pursuant to that
notice, the minimum present value segment rates determined for September
2020 are as follows:
MINIMUM PRESENT VALUE
SEGMENT RATES
In general, the applicable interest rates
Month
Minimum Present Value Segment Rates
First Segment
Second Segment
September 2020
DRAFTING INFORMATION
The principal author of this notice is
Tom Morgan of the Office of the Asso-
Bulletin No. 2020–45
0.51
2.31
ciate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment
Taxes). However, other personnel from
the IRS participated in the development
989
Third Segment
3.15
of this guidance. For further information
regarding this notice, contact Mr. Morgan
at 202-317-6700 or Paul Stern at 202-3178702 (not toll-free numbers).
November 2, 2020
Table 2020-9
Monthly Yield Curve for September 2020
Derived from September 2020 Data
Maturity
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0
12.5
13.0
13.5
14.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
19.0
19.5
20.0
Yield
0.16
0.28
0.39
0.47
0.52
0.55
0.59
0.64
0.71
0.80
0.91
1.03
1.16
1.30
1.44
1.58
1.72
1.85
1.97
2.08
2.19
2.29
2.37
2.45
2.53
2.59
2.64
2.69
2.74
2.77
2.80
2.83
2.86
2.88
2.90
2.91
2.93
2.94
2.95
2.96
November 2, 2020
Maturity
20.5
21.0
21.5
22.0
22.5
23.0
23.5
24.0
24.5
25.0
25.5
26.0
26.5
27.0
27.5
28.0
28.5
29.0
29.5
30.0
30.5
31.0
31.5
32.0
32.5
33.0
33.5
34.0
34.5
35.0
35.5
36.0
36.5
37.0
37.5
38.0
38.5
39.0
39.5
40.0
Yield
2.97
2.98
2.99
3.00
3.00
3.01
3.02
3.02
3.03
3.03
3.04
3.05
3.05
3.06
3.06
3.07
3.08
3.08
3.09
3.09
3.10
3.10
3.11
3.11
3.12
3.12
3.13
3.13
3.14
3.14
3.14
3.15
3.15
3.15
3.16
3.16
3.16
3.17
3.17
3.17
Maturity
40.5
41.0
41.5
42.0
42.5
43.0
43.5
44.0
44.5
45.0
45.5
46.0
46.5
47.0
47.5
48.0
48.5
49.0
49.5
50.0
50.5
51.0
51.5
52.0
52.5
53.0
53.5
54.0
54.5
55.0
55.5
56.0
56.5
57.0
57.5
58.0
58.5
59.0
59.5
60.0
Yield
3.18
3.18
3.18
3.18
3.19
3.19
3.19
3.20
3.20
3.20
3.20
3.20
3.21
3.21
3.21
3.21
3.22
3.22
3.22
3.22
3.22
3.23
3.23
3.23
3.23
3.23
3.23
3.24
3.24
3.24
3.24
3.24
3.24
3.25
3.25
3.25
3.25
3.25
3.25
3.25
990
Maturity
60.5
61.0
61.5
62.0
62.5
63.0
63.5
64.0
64.5
65.0
65.5
66.0
66.5
67.0
67.5
68.0
68.5
69.0
69.5
70.0
70.5
71.0
71.5
72.0
72.5
73.0
73.5
74.0
74.5
75.0
75.5
76.0
76.5
77.0
77.5
78.0
78.5
79.0
79.5
80.0
Yield
3.25
3.26
3.26
3.26
3.26
3.26
3.26
3.26
3.26
3.27
3.27
3.27
3.27
3.27
3.27
3.27
3.27
3.27
3.28
3.28
3.28
3.28
3.28
3.28
3.28
3.28
3.28
3.28
3.28
3.29
3.29
3.29
3.29
3.29
3.29
3.29
3.29
3.29
3.29
3.29
Maturity
80.5
81.0
81.5
82.0
82.5
83.0
83.5
84.0
84.5
85.0
85.5
86.0
86.5
87.0
87.5
88.0
88.5
89.0
89.5
90.0
90.5
91.0
91.5
92.0
92.5
93.0
93.5
94.0
94.5
95.0
95.5
96.0
96.5
97.0
97.5
98.0
98.5
99.0
99.5
100.0
Yield
3.29
3.30
3.30
3.30
3.30
3.30
3.30
3.30
3.30
3.30
3.30
3.30
3.30
3.30
3.30
3.30
3.31
3.31
3.31
3.31
3.31
3.31
3.31
3.31
3.31
3.31
3.31
3.31
3.31
3.31
3.31
3.31
3.31
3.31
3.32
3.32
3.32
3.32
3.32
3.32
Bulletin No. 2020–45
Rev. Proc. 2020-43
SECTION 1. PURPOSE AND SCOPE
This revenue procedure provides the
maximum amount allowed to be newly
made available for plan years beginning
after December 31, 2020, and before
January 1, 2022, for excepted benefit
health reimbursement arrangements provided under § 54.9831-1(c)(3)(viii). The
maximum amount indexed pursuant to
§ 54.9831-1(c)(3)(viii)(B)(1) will not
change for plan years beginning after December 31, 2020, and before January 1,
2022, and remains $1,800.
SECTION 2. BACKGROUND
Under § 54.9831-1(c)(3), certain group
health plans qualify as limited excepted benefits that are not subject to the requirements of Chapter 100 of the Internal Revenue Code. Section 54.9831-1(c)
(3)(viii) provides rules for health reimbursement arrangements (HRAs) and
other account-based group health plans
to qualify as limited excepted benefits.
Section 54.9831-1(c)(3)(viii)(B) provides
that amounts newly made available for
each plan year under the HRA or other
account-based group health plan (excepted benefit HRA) may not exceed $1,800.
For plan years beginning after December
31, 2020, the $1,800 dollar amount is
increased by an amount equal to $1,800
multiplied by the applicable cost-of-living
adjustment.
The applicable cost-of-living adjustment for plan years beginning after December 31, 2020, and before January 1,
2022, is the percentage (if any) by which
the Chained Consumer Price Index for
All Urban Consumers (C-CPI-U), as published by the Bureau of Labor Statistics of
the Department of Labor, for the preceding year exceeds the C-CPI-U for calendar
year 2019. The C-CPI-U for any calendar
year is the average of the C-CPI-U as of
the close of the 12-month period ending
on March 31 of that calendar year. Any
increase that is not a multiple of $50 is
rounded down to the next lowest multiple
of $50.
Bulletin No. 2020–45
SECTION 3. PROCEDURE
For plan years beginning after December 31, 2020, and before January 1, 2022,
the maximum amount that may be made
newly available for the plan year for an
excepted benefit HRA under § 54.98311(c)(3)(viii) is $1,800. The Department
of the Treasury and the Internal Revenue
Service intend to publish, by June 1, 2021,
the adjusted amount for plan years beginning after December 31, 2021, and before
January 1, 2023.
SECTION 4. EFFECTIVE DATE
The effective date of this revenue procedure is the date of publication of this
revenue procedure in the Internal Revenue
Bulletin.
SECTION 5. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Christopher Dellana of the
Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations,
and Employment Taxes). For further information regarding this revenue procedure, contact Mr. Dellana at (202) 3175500 (not a toll-free number).
Revenue Procedure
2020-44
SECTION 1. PURPOSE
The purpose of this revenue procedure
is to facilitate the market’s transition from
the London Interbank Offered Rate (LIBOR) and other int
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